Cadence Bank Announces First Quarter 2023 Financial Results

HOUSTON and TUPELO, Miss., April 24, 2023 /PRNewswire/ -- Cadence Bank (NYSE: CADE) (the Company), today announced financial results for the quarter ended March 31, 2023.

Highlights for the first quarter of 2023 included:

• Achieved quarterly net income available to common shareholders of $74.3 million, or $0.40 per diluted common share, and adjusted net income available to common shareholders of $124.4 million, or $0.68 per diluted common share.
• Continued to maintain strong balance sheet liquidity, with total deposit growth of $449.8 million, or 4.7% on an annualized basis, and a loan-to-deposit ratio of 79.4%.
• Generated net organic loan growth of $933.3 million for the first quarter of 2023, or 12.5% on an annualized basis.
• Maintained stability in the net interest margin at 3.29%, down 4 basis points from the prior quarter.
• Experienced low levels of net charge-offs, which totaled 0.02% of average loans and leases on an annualized basis for the quarter; results for the quarter included a provision for credit losses of $10.0 million and an ending allowance for credit losses to total loans of 1.45%, which was stable compared to December 31, 2022.
• The Company executed or announced the following as part of an ongoing effort to enhance its operating efficiency and profitability:
• Executed a balance sheet optimization transaction whereby the Company sold $1.5 billion in low-yielding available-for-sale securities during February, with financial earn-back expected by early in the fourth quarter of 2023. The first quarter results include an after-tax realized loss of approximately $39.5 million related to this transaction and it is estimated to add an incremental $10.5 million to pre-tax earnings in 2023.
• In April 2023, announced the closure or consolidation of 35 branches to occur in mid-2023 as part of in-process initiatives projected to reduce noninterest expense by approximately $15 - $20 million annually.

"Our first quarter results reflect continued strength in our balance sheet, as we continued to add quality loan growth while maintaining strong liquidity and capital, even in the midst of a unique quarter for the banking industry," remarked Dan Rollins, Chairman and Chief Executive Officer of the Company. "Additionally, our strong capital and earnings allowed us the flexibility to capitalize on the rate environment by executing a balance sheet optimization transaction that, while creating an upfront loss on the sale, will result in incremental 2023 earnings for the Company. Given the late-quarter industry volatility, we proactively added on-balance sheet liquidity in addition to our significant off-balance sheet liquidity availability. Notably, however, our core deposit base showed little change during this period, a testament to the granularity of our deposits, the diversity of our customer base by both business mix and geography, and the strength of our bankers and their continuous focus on our customers."

Earnings Summary

For the first quarter of 2023, the Company reported net income available to common shareholders of $74.3 million, or $0.40 per diluted common share, compared with $112.6 million, or $0.60 per diluted common share, for the first quarter of 2022 and $95.6 million, or $0.52 per diluted common share, for the fourth quarter of 2022. Adjusted net income available to common shareholders was $124.4 million, or $0.68 per diluted common share, for the first quarter of 2023, compared with $121.6 million, or $0.65 per diluted common share, for the first quarter of 2022 and $142.9 million, or $0.78 per diluted common share, for the fourth quarter of 2022.  Additionally, the Company reported adjusted pre-provision net revenue (PPNR) of $174.6 million, or 1.46% of average assets on an annualized basis, for the first quarter of 2023 compared to $160.4 million, or 1.36% of average assets on an annualized basis, for the first quarter of 2022 and $195.5 million, or 1.62% of average assets on an annualized basis, for the fourth quarter of 2022.

The decline in adjusted earnings and PPNR metrics for the first quarter was driven by a decline in net interest revenue, an increase in the provision for credit losses, and an increase in core operating expenses related to several factors including seasonality in compensation expense as well as increasing deposit insurance assessment expense and pension expense.  The decline in net interest revenue is a result of day count for the quarter as well as the addition of on-balance sheet liquidity in response to recent volatility in the banking industry.

Net Interest Revenue

Net interest revenue was $354.3 million for the first quarter of 2023, compared to $311.8 million for the first quarter of 2022 and $359.4 million for the fourth quarter of 2022, a decrease of $5.1 million or 1.42% from the linked quarter. The fully taxable equivalent (FTE) net interest margin was 3.29% for the first quarter of 2023, compared with 2.92% for the first quarter of 2022 and 3.33% for the fourth quarter of 2022.

Net interest revenue included accretion revenue related to acquired loans and leases of $10.0 million and $9.2 million for the first quarter of 2023 and the fourth quarter of 2022, respectively, adding approximately 9 basis points to the net interest margin in both quarters.

The decline in net interest revenue in the first quarter of 2023 of $5.1 million compared to the linked quarter was the result of a $7.9 million decline due to the lower first quarter day count, partially offset by the increase in net interest revenue due to loan growth and the balance sheet optimization transaction resulting from the sale of low-yielding securities in the quarter.

Yields on net loans, loans held for sale, and leases excluding accretion, were 5.87% for the first quarter of 2023, up 46 basis points from 5.41% for the fourth quarter of 2022, while yields on total interest earning assets were 4.88% for the first quarter of 2023, up 50 basis points from 4.38% for the fourth quarter of 2022.  The increase in earning asset yields was driven by both the impact of rising interest rates on loan portfolio repricing and new loan production, as well as a mix shift as we deployed cash flow from lower yielding securities into higher yielding loans and securities.  Approximately 21% of our total loans are floating (reprice within 30 days), and another 28% reprice within 12 months. 

The average cost of total deposits increased to 1.28% for the first quarter of 2023, compared with 0.76% for the fourth quarter of 2022, reflecting continued rising rates as well as a mix shift from noninterest bearing to interest bearing products during the quarter.   Our total deposit beta was 59% for the first quarter of 2023 and currently stands at 25% cycle-to-date.  

Total interest-bearing liabilities costs increased to 2.23% from 1.54% during the quarter, reflecting the increase in short-term borrowings in the quarter as a result of both loan growth and a proactive increase in on-balance sheet liquidity late in the quarter in response to industry volatility.

Balance Sheet Activity

Loans and leases, net of unearned income, increased $933.3 million during the first quarter, or 12.5% annualized, to $31.3 billion.  The loan growth for the quarter reflected growth primarily in the corporate banking group, including commercial real estate and renewable energy verticals, as well as in mortgage.

During the quarter, the Company initiated a balance sheet optimization transaction related to a portion of its investment securities portfolio. The Company sold $1.5 billion of available-for-sale U.S. Treasury debt securities yielding approximately 0.70% for an after-tax realized loss of approximately $39.5 million. The proceeds have been used to reinvest in higher-yielding debt securities, fund loan growth, and pay off borrowings.  The Company estimates that the loss will be recouped within approximately 7.5 months, resulting in incremental 2023 pre-tax income of approximately $10.5 million.  Total investment securities of $10.9 billion at March 31, 2023 decreased $1.1 billion during the first quarter as a net result of the sale and routine portfolio cash flows, partially offset by re-investments in the securities portfolio.  Consistent with prior quarters, all of the Company's investment securities portfolio is classified as available for sale on the balance sheet, with no investments categorized as held to maturity.

Total deposits increased $449.8 million, or 4.7% on an annualized basis, to $39.4 billion as of March 31, 2023.  The quarterly increase in deposits included approximately $1.6 billion in brokered deposits that were proactively added to the balance sheet to further enhance on-balance sheet liquidity, and a decline of approximately $0.7 billion in public funds as a result of routine seasonal activity. Excluding the impact of brokered deposits and public funds, total deposits declined approximately $400 million, or 1% of total deposits, during the quarter with a modest increase in community bank deposits partially offsetting a decline in the corporate banking group. 

The March 31, 2023 loan to deposit ratio was 79.4% and securities to total assets was 21.0%, reflecting continued strong balance sheet liquidity. Noninterest bearing deposits represented 29.2% of total deposits at the end of the first quarter of 2023, declining from 32.7% at December 31, 2022, reflecting migration from noninterest bearing products to interest bearing products. The Company's deposit base continues to be very granular, with average transaction account balances of approximately $20,000 for consumer accounts and $135,000 for commercial accounts at March 31, 2023. Additionally, approximately 98% of the Company's deposit accounts have balances less than $250,000, and nearly 70% of our deposit balances were FDIC insured or collateralized at quarter-end.

Short-term borrowings increased $2.4 billion to $5.7 billion at March 31, 2023, primarily reflecting an increase in on-balance sheet liquidity late in the quarter.  Cash, due from balances and deposits at the Federal Reserve accordingly increased $3.1 billion to $5.1 billion at March 31, 2023.

Credit Results, Provision for Credit Losses and Allowance for Credit Losses

Credit quality metrics for the first quarter of 2023 reflect continued low levels of net charge-offs, an increase in the provision for credit losses, and an increase in non-performing and classified assets.  While non-performing and classified asset levels did increase during the quarter, these metrics have been at historically low levels and continue to compare favorably to longer term normalized levels.  

Total non-performing assets as a percent of total assets were 0.33% at March 31, 2023 up from 0.31% at March 31, 2022 and 0.24% at December 31, 2022. Total non-performing loans and leases as a percent of loans were 0.53% at March 31, 2023, compared to 0.44% at March 31, 2022 and 0.36% at December 31, 2022.  Other real estate owned and other repossessed assets declined to $5.3 million at March 31, 2023 from the March 31, 2022 balance of $28.4 million and the December 31, 2022 balance of $6.7 million.  Classified loans were 2.28% of total net loans and leases at March 31, 2023, up from 1.75% at March 31, 2022 and 1.76% at December 31, 2022. 

Net charge-offs for the first quarter of 2023 were $1.9 million, or 0.02% of average net loans and leases on an annualized basis, compared with net recoveries of $0.4 million for the first quarter of 2022 and net recoveries of $5.0 million for the fourth quarter of 2022. The provision for credit losses for the first quarter of 2023 was $10.0 million, compared with no recorded provision for credit losses for first quarter of 2022 and a provision for credit losses of $6.0 million for the fourth quarter of 2022.  The first quarter of 2023 provision expense included a $15.0 million provision charge for funded loans and a $5.0 million provision reversal for unfunded commitments.  The allowance for credit losses of $453.7 million at March 31, 2023 represented 1.45% as a percent of total loans and leases, which is unchanged from the December 31, 2022 coverage.

Noninterest Revenue

Noninterest revenue was $74.1 million for the first quarter of 2023, compared with $128.4 million for the first quarter of 2022 and $114.9 million for the fourth quarter of 2022. The linked quarter decline was primarily due to a $51.3 million loss on the sale of securities.  Before the loss on securities, noninterest revenue of $125.4 million was up $9.9 million from the fourth quarter of 2022 revenue driven by  solid increases in insurance commission and mortgage banking revenue, partially offset by lower card revenues.

Insurance commission revenue was strong at $39.6 million for the first quarter of 2023, compared with $35.7 million for the first quarter of 2022 and $34.7 million for the fourth quarter of 2022. The linked quarter increase of $4.9 million is attributable to lower annual fourth quarter renewals as a result of seasonality in the scheduled renewal cycle while the increase from the first quarter of 2022 of 10.9% is a result of continued high customer retention rates and a firm pricing market.  

Credit card, debit card and merchant fee revenue was $11.9 million for the first quarter of 2023, compared with $11.3 million for the first quarter of 2022 and $15.8 million for the fourth quarter of 2022.  The linked quarter decline in card fee revenue reflected both typical seasonal declines in the first quarter as well as the impact of a fourth quarter 2022 positive vendor incentive revenue accrual adjustment of approximately $2.5 million. Deposit service charge revenue was $16.5 million for the first quarter of 2023 compared with $19.2 million for the first quarter of 2022 and $16.9 million for the fourth quarter of 2022, with the declines including increases in earnings credit rate due to the increasing rate environment.  Other noninterest revenue was $29.8 million for the first quarter of 2023, compared with $19.8 million for the first quarter of 2022 and $26.4 million for the fourth quarter of 2022.  The increase in other noninterest revenue compared to the fourth quarter of 2022 includes an increase in FHLB dividends, SBA revenue and credit related fees while the increase compared to the first quarter of 2022 is primarily driven by an increase in earnings from FHLB stock and other equity investments.

Mortgage production and servicing revenue totaled $8.4 million for the first quarter of 2023, compared with $7.7 million for the first quarter of 2022 and $5.4 million for the fourth quarter of 2022. The net mortgage servicing rights valuation adjustment was negative $2.3 million for the first quarter of 2023, compared with a positive $14.0 million for the first quarter of 2022 and a negative $2.8 million for the fourth quarter of 2022 with the variances due to continued changes in the interest rate environment. Mortgage origination volume for the first quarter of 2023 was $454.2 million, compared with $803.9 million for the first quarter of 2022 and $554.5 million for the fourth quarter of 2022.

Noninterest Expense

Noninterest expense for the first quarter of 2023 was $319.3 million, compared with $291.7 million for the first quarter of 2022 and $340.7 million for the fourth quarter of 2022. Adjusted noninterest expense for the first quarter of 2023 was $305.0 million, compared with $281.0 million for the first quarter of 2022 and $279.3 million for the fourth quarter of 2022. The adjusted efficiency ratio was 63.46% for the first quarter of 2023 compared to 58.69% for the fourth quarter of 2022. The increase in adjusted noninterest expense compared to the linked quarter was driven primarily by an increase in salaries and employee benefits expense. Salaries and benefits expense increased $11.8 million compared to the fourth quarter of 2022 due to both the impact of fourth quarter of 2022 year-end employee benefit expense reductions of approximately $7.3 million combined with first quarter of 2023 seasonal factors that elevated expense including an increase of $5.0 million in payroll tax expense resulting primarily from FICA resets. Deposit insurance assessment expense increased $2.4 million due primarily to the 2 basis point assessment increase effective in the first quarter 2023.  Additionally, excluding the impact of merger related items, other non-interest expense increased approximately $7.6 million compared to the fourth quarter of 2022.  This increase includes an increase in fraud losses of $2.4 million, which is in the process of collection over the coming quarters, a $1.7 million increase in pension costs resulting from an increase in the Company's pension discount rate and an increase in certain other volume driven costs.  Additionally, other noninterest expense for the fourth quarter of 2022 included a benefit of approximately $1.6 million related to year-end franchise tax accruals.

Adjusted noninterest expense for the first quarter of 2023 excludes $14.0 million in total merger related expenses, which includes one-time merger expense shown as a separate line item on the income statement as well as incremental merger related expenses (expenses for which the entity receives future benefit) that are included in the respective expense categories. Merger expense was $5.1 million for the first quarter of 2023, compared with $4.0 million for the first quarter of 2022 and $20.3 million for the fourth quarter of 2022. Merger expense for the first quarter of 2023 was comprised primarily of system and technology related expenses. Incremental merger related expenses for the first quarter of 2023 totaled $9.0 million and primarily included employment agreement and related compensation related expenses. These expenses declined compared to $32.7 million in the prior quarter.

The Company continues to identify strategic opportunities to improve operating efficiency, including branch optimization.  In April 2023, the Company announced 35 additional branch locations that will be closed or consolidated during mid 2023. This strategy, including other in-process initiatives, is estimated to result in annualized cost savings of approximately $15-20 million.  These branch closures and consolidations are in addition to the 17 executed in the fourth quarter of 2022.

Capital Management

Total shareholders' equity was $4.5 billion at March 31, 2023 compared with $4.6 billion at March 31, 2022 and $4.3 billion at December 31, 2022. The increase in the current quarter was comprised of net income and an improvement in accumulated other comprehensive income (loss) ("AOCI") due to improved valuation in the available-for-sale securities portfolio, partially offset by quarterly dividends. The year-over-year decline is due to a decline in AOCI resulting from an increase in unrealized losses in the available-for-sale securities portfolio due to the interest rate environment.

Estimated regulatory capital ratios at March 31, 2023 included Common Equity Tier 1 capital of 10.1%, Tier 1 capital of 10.6%, Total risk-based capital of 12.8%, and Tier 1 leverage capital of 8.4%.  During the first quarter of 2023, the Company did not repurchase shares of its common stock pursuant to its 10 million share repurchase authorization for 2023.  Outstanding common shares were 182.7 million as of March 31, 2023.

Summary

Rollins concluded, "We are pleased with how we are beginning the 2023 year. Despite the recent industry liquidity concerns, an uncertain rate environment, and questions around the broader economy and credit impact, I continue to be optimistic given the strength in our earnings, our balance sheet and our capital, as well as the differentiating stability resulting from our business, customer and geographical diversification. This diversification, combined with our great team of bankers, provides the resilient foundation we are proud of at Cadence Bank."

Non-GAAP Measures and Ratios

This news release presents certain financial measures and ratios that are not calculated in accordance with U.S. generally accepted accounting principles (GAAP). A discussion regarding these non-GAAP measures and ratios, including reconciliations of non-GAAP measures to the most directly comparable GAAP measures and definitions for non-GAAP ratios, appears under the caption "Reconciliation of Non-GAAP Measures and Other Non-GAAP Ratio Definitions" beginning on page 21 of this news release.

Conference Call and Webcast

The Company will conduct a conference call to discuss its first quarter 2023 financial results on April 25, 2023, at 10:00 a.m. (Central Time). This conference call will be an interactive session between management and analysts. Interested parties may listen to this live conference call via Internet webcast by accessing https://ir.cadencebank.com/events. The webcast will also be available in archived format at the same address.

About Cadence Bank

Cadence Bank (NYSE: CADE) is a leading regional banking franchise with approximately $50 billion in assets and more than 350 branch locations across the South and Texas. Cadence provides consumers, businesses and corporations with a full range of innovative banking and financial solutions. Services and products include consumer banking, consumer loans, mortgages, home equity lines and loans, credit cards, commercial and business banking, treasury management, specialized lending, asset-based lending, commercial real estate, equipment financing, correspondent banking, SBA lending, foreign exchange, wealth management, investment and trust services, financial planning, retirement plan management, and personal and business insurance. Cadence is committed to a culture of respect, diversity and inclusion in both its workplace and communities. Cadence Bank, Member FDIC. Equal Housing Lender.

Forward-Looking Statements

Certain statements made in this news release constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and are subject to the safe harbor under the Private Securities Litigation Reform Act of 1995 as well as the "bespeaks caution" doctrine. These statements are often, but not exclusively, made through the use of words or phrases like "assume," "believe," "budget," "contemplate," "continue," "could," "foresee," "indicate," "may," "might," "outlook," "prospect," "potential," "roadmap," "should," "target," "will," "would," the negative versions of such words, or comparable words of a future or forward-looking nature. These forward-looking statements may include, without limitation, discussions regarding general economic, interest rate, real estate market, competitive, employment, and credit market conditions, or any of the Company's comments related to topics in its risk disclosures or results of operations. Forward-looking statements are based upon management's expectations as well as certain assumptions and estimates made by, and information available to, the Company's management at the time such statements were made. Forward-looking statements are not guarantees of future results or performance and are subject to certain known and unknown risks, uncertainties and other factors that are beyond the Company's control and that may cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements.

Risks, uncertainties and other factors the Company may face include, without limitation: general economic, unemployment, credit market and real estate market conditions, including inflation, and the effect of such conditions on customers, potential customers, assets, investments and liquidity; risks arising from market and consumer reactions to the general banking environment, or to conditions or situations at specific banks; risks arising from media coverage of the banking industry; risks arising from perceived instability in the banking sector; the risks of changes in interest rates and their effects on the level, cost, and composition of, and competition for, deposits, loan demand and timing of payments, the values of loan collateral, securities, and interest sensitive assets and liabilities; the ability to attract new or retain existing deposits, to retain or grow loans or additional interest and fee income, or to control noninterest expense; the effect of pricing pressures on the Company's net interest margin; the failure of assumptions underlying the establishment of reserves for possible credit losses, fair value for loans and other real estate owned; changes in real estate values; a deterioration of the credit rating for U.S. long-term sovereign debt, actions that the U.S. government may take to avoid exceeding the debt ceiling, or uncertainties surrounding the debt ceiling and the federal budget; potential delays or other problems in implementing and executing the Company's growth, expansion and acquisition strategies, including delays in obtaining regulatory or other necessary approvals, or the failure to realize any anticipated benefits or synergies from any acquisitions or growth strategies; the ability to pay dividends or coupons on the Company's 5.5% Series A Non-Cumulative Perpetual Preferred Stock, par value $0.01 per share, or the 4.125% Fixed-to-Floating Rate Subordinated Notes due November 20, 2029; possible downgrades in the Company's credit ratings or outlook which could increase the costs or availability of funding from capital markets; the potential impact of the phase-out of the London Interbank Offered Rate ("LIBOR") or other changes involving LIBOR; changes in legal, financial, accounting, and/or regulatory requirements; the costs and expenses to comply with such changes; the enforcement efforts of federal and state bank regulators; the ability to keep pace with technological changes, including changes regarding maintaining cybersecurity; increased competition in the financial services industry, particularly from regional and national institutions; the impact of a failure in, or breach of, the Company's operational or security systems or infrastructure, or those of third parties with whom the Company does business, including as a result of cyber-attacks or an increase in the incidence or severity of fraud, illegal payments, security breaches or other illegal acts impacting the Company or the Company's customers. The Company also faces risks from natural disasters or acts of war or terrorism; international or political instability, including the impacts related to or resulting from Russia's military action in Ukraine and additional sanctions and export controls, as well as the broader impacts to financial markets and the global macroeconomic and geopolitical environments.

The Company also faces risks from: possible adverse rulings, judgments, settlements or other outcomes of pending, ongoing and future litigation, as well as governmental, administrative and investigatory matters; the impairment of the Company's goodwill or other intangible assets; losses of key employees and personnel; the diversion of management's attention from ongoing business operations and opportunities; and the combined company's success in executing its business plans and strategies, and managing the risks involved in all of the foregoing.

The foregoing factors should not be construed as exhaustive and should be read in conjunction with those factors that are set forth from time to time in the Company's periodic and current reports filed with the FDIC, including those factors included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022, particularly those under the heading "Item 1A. Risk Factors," in the Company's Quarterly Reports on Form 10-Q under the heading "Part II-Item 1A. Risk Factors" and in the Company's Current Reports on Form 8-K.

Although the Company believes that the expectations reflected in these forward-looking statements are reasonable as of the date of this news release, if one or more events related to these or other risks or uncertainties materialize, or if the Company's underlying assumptions prove to be incorrect, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. Accordingly, undue reliance should not be placed on any forward-looking statements. The forward-looking statements speak only as of the date of this news release, and the Company does not undertake any obligation to publicly update or review any forward-looking statement, except as required by applicable law. All written or oral forward-looking statements attributable to the Company are expressly qualified in their entirety by this section.