Cadence Bank Announces Second Quarter 2022 Financial Results

TUPELO, Miss. and HOUSTON , July 25, 2022 /PRNewswire/ -- Cadence Bank (NYSE: CADE) (the Company), today announced financial results for the quarter ended June 30, 2022.

Highlights for the second quarter of 2022 included (as compared to the linked quarter unless noted otherwise):

• Achieved meaningful growth in quarterly net income available to common shareholders of $124.6 million, or $0.68 per diluted common share, and adjusted net income available to common shareholders of $134.2 million, or $0.73 per diluted common share, representing quarterly increases in earnings per diluted share of 13.3% and 12.3% respectively.
• Reported $176.7 million in adjusted pre-tax pre-provision net revenue (PPNR), up 10.2% and improving to 1.51% of average assets on an annualized basis.
• Continued improvement in other profitability metrics, including an adjusted return on average tangible common equity of 19.50% for the second quarter.
• Generated net organic loan growth of $1.2 billion for the quarter, or 17.3% on an annualized basis. Year-to-date, loans have grown $1.5 billion, or 11.0% annualized. Total deposits declined $378.9 million during the quarter, but have increased $371.4 million year-to-date, or 1.9% on an annualized year-to-date basis.
• Net interest margin improved notably to 3.06%, up 14 basis points (and up 20 basis points excluding the impact of purchase accounting accretion), driven primarily by increasing new and floating loan yields, balance sheet mix changes resulting from net loan growth and minimal increases in deposit costs.
• Additional improvement in credit quality metrics included net recoveries of $1.4 million and an 11.4% decline in total non-performing assets; recorded a quarterly provision for credit losses of $1 million.
• Operating efficiency continued to improve, which is reflected in a decline in the adjusted efficiency ratio to 60.5% for the second quarter compared to 63.5% for the first quarter of 2022.

"The Company's financial results for the second quarter reflect key fundamental successes across virtually all aspects of our business, highlighted by adjusted earnings of $0.73 per diluted common share," remarked Dan Rollins, Chairman and Chief Executive Officer of the Company.  "Our bankers' efforts and the strength of our footprint resulted in quarterly net loan growth across nearly all of our markets and business lines.  As expected, given the increasing rate environment, we reported considerable improvement in our net interest margin as well as meaningful growth in our net interest income.  Credit quality continues to remain exceptionally strong as evidenced by our fifth consecutive quarter of net recoveries and additional declines in total non-performing assets."      

Rollins continued, "Our results for the quarter also reflect a decline in adjusted expense which, combined with revenue growth, resulted in the adjusted efficiency ratio declining by 300 basis points to 60.5% for the quarter.  Finally, from a capital management perspective, we repurchased 1.0 million shares of Company common stock during the quarter while continuing to maintain strong regulatory capital metrics."

Earnings Summary

Year-over-year comparisons were impacted by the merger with Cadence Bank, N.A. in the fourth quarter of 2021. See "RECENT MERGER TRANSACTIONS" in this release for more information.

The Company reported net income available to common shareholders of $124.6 million, or $0.68 per diluted common share, for the second quarter of 2022, compared with net income available to common shareholders of $73.2 million, or $0.69 per diluted common share, for the second quarter of 2021 and net income available to common shareholders of $112.6 million, or $0.60 per diluted common share, for the first quarter of 2022. Adjusted net income available to common shareholders was $134.2 million, or $0.73 per diluted common share, for the second quarter of 2022, compared with $89.2 million, or $0.84 per diluted common share, for the second quarter of 2021 and $121.6 million, or $0.65 per diluted common share, for the first quarter of 2022. 

The Company reported adjusted PPNR of $176.7 million, or 1.51% of average assets on an annualized basis, for the second quarter of 2022 compared to $118.0 million, or 1.77% of average assets on an annualized basis, for the second quarter of 2021 and $160.4 million, or 1.36% of average assets on an annualized basis, for the first quarter of 2022.

The meaningful growth in adjusted net income and PPNR during the quarter was due to a 4.2% increase in net interest revenue reflecting a higher interest rate environment, loan growth and a 2.0% decrease in non-interest expense, partially offset by a 2.5% lower noninterest revenue due to movement in net MSR valuation.

Net Interest Revenue

Net interest revenue was $324.8 million for the second quarter of 2022, compared to $180.2 million for the second quarter of 2021 and $311.8 million for the first quarter of 2022, an increase of $12.9 million or 4.2% from linked quarter. The fully taxable equivalent (FTE) net interest margin was 3.06% for the second quarter of 2022, compared with 2.99% for the second quarter of 2021 and 2.92% for the first quarter of 2022.

Net interest revenue for the second quarter of 2022 included $11.7 million in accretion revenue related to acquired loans and leases, adding approximately 11 basis points to the net interest margin.  Accretion declined $6.0 million from $17.7 million for the first quarter of 2022, which added approximately 17 basis points to the first quarter 2022 net interest margin. Excluding the impact of accretion, the linked quarter net interest margin increased by 20 basis points.

The increase in net interest revenue in the second quarter of 2022 compared to the linked quarter reflected meaningful improvement in loan and securities yields as well as continued deployment of cash and cash flow from maturing securities into loan growth.  The balance sheet remains asset sensitive, with approximately 24% of loans floating (repricing within 30 days) and another 44% of loans variable as of June 30, 2022.

Yields on net loans, loans held for sale, and leases excluding accretion, were 4.12% for the second quarter of 2022, up 16 basis points from 3.96% for the first quarter of 2022, while yields on total interest earning assets were 3.29% for the second quarter of 2022, up 19 basis points from 3.10% for the first quarter of 2022. The average cost of deposits remained well managed, increasing only 2 basis points to 0.17% for the second quarter of 2022, compared with 0.15% for the first quarter of 2022. 

Balance Sheet Activity

Loans and leases, net of unearned income, continued to reflect solid growth, increasing $1.2 billion during the second quarter, or 17.3% annualized, and $1.5 billion year-to-date, or 11.0% annualized, to $28.4 billion.  Total deposits declined $378.9 million during the second quarter to $40.8 billion, but have grown $371.4 million year-to-date, or 1.9% annualized.  Loan growth for the quarter was spread across multiple geographies and portfolios including commercial and industrial, commercial real estate, community banking and residential mortgage. The decline in deposits during the quarter was due to public fund and municipal balances that increased during the first quarter and declined in the second quarter, with the segment flat on total deposits since year-end 2021.  The second quarter of 2022 ended with a loan to deposit ratio of 70.6% and securities to total assets of 28.2%, reflecting improved mix shift while maintaining continued strong balance sheet liquidity.  Noninterest bearing deposits represented 34.9% of total deposits at the end of the second quarter of 2022, relatively stable compared to 35.6% at March 31, 2022.

Provision for Credit Losses and Allowance for Credit Losses

Credit quality metrics for the second quarter of 2022 continue to improve as reflected by the fifth consecutive quarter of net recoveries as well as successive declines in total non-performing assets.  

Total non-performing assets declined $16.8 million, or 11.4%, in the second quarter from $147.7 million at March 31, 2022 to $130.8 million at June 30, 2022.  Total non-performing loans and leases were $116.4 million at June 30, 2022, or 0.41% of total net loans and leases, representing a decline of $2.8 million or 2.4%, from the March 31, 2022 balance of $119.3 million, or 0.44% of total net loans and leases. Other real estate owned and other repossessed assets also declined to $14.4 million at June 30, 2022, a decrease of $14.0 million or 49.3% from the March 31, 2022 balance of $28.4 million.

Net recoveries for the second quarter of 2022 were $1.4 million, or 0.02% of net loans and leases on an annualized basis, compared with net recoveries of $1.8 million for the second quarter of 2021 and net recoveries of $0.4 million for the first quarter of 2022. The provision for credit losses in the second quarter of 2022 was $1 million, compared with a provision for credit losses of $11.5 million for the second quarter of 2021 and no recorded provision for the first quarter of 2022.  The $11.5 million provision for the second quarter of 2021 was primarily associated with day one accounting provision requirements for loans acquired during the quarter.  The allowance for credit losses was $440.1 million, or 1.55% of net loans and leases at June 30, 2022, compared with $438.7 million, or 1.61% of net loans and leases at March 31, 2022.

Noninterest Revenue

Noninterest revenue was $125.2 million for the second quarter of 2022, compared with $101.9 million for the second quarter of 2021 and $128.4 million for the first quarter of 2022. The linked quarter decline was driven primarily by a lower mortgage servicing rights valuation adjustment, partially offset by strong credit card, debit card, and merchant fees as well as insurance commission revenue. 

While mortgage revenue has been impacted due to the rising rate environment, our broader footprint has supported continued growth in mortgage origination volume.  Second quarter of 2022 mortgage origination was $913.0 million, up from both $906.4 million for the second quarter of 2021 and $803.9 million for the first quarter of 2022.  Mortgage production and servicing revenue totaled $6.7 million for the second quarter of 2022, compared with $11.0 million for the second quarter of 2021 and $7.7 million for the first quarter of 2022.  The mortgage servicing rights valuation adjustment was $4.7 million for the second quarter of 2022, compared with a negative $1.9 million for the second quarter of 2021 and $14.0 million for the first quarter of 2022 with the variances due to increased interest rates and a higher proportion of the asset being hedged during the second quarter of 2022.  

Insurance commission revenue again reflected strong performance at $40.0 million for the second quarter of 2022, compared with $36.1 million for the second quarter of 2021 and $35.7 million for the first quarter of 2022. The insurance pricing market has remained firm and the Company continues to experience high customer retention rates.  The Company completed the acquisition of Wall 2 Wall Benefit Services, a Houston, TX based firm specializing in insurance and employee benefit services, during the second quarter of 2022.    

Credit card, debit card and merchant fee revenue was $16.6 million for the second quarter of 2022, compared with $11.3 million for the first quarter of 2022 reflecting an annual incentive payment from our card vendor as well as an annual true-up of revenue based on improved contractual revenue share in 2022. Other noninterest revenue was $16.4 million for the second quarter of 2022, compared with $19.1 million for the first quarter of 2022 due in part to a purchase accounting adjustment associated with the day one fair value of unfunded commitments acquired in the legacy Cadence transaction.  

Noninterest Expense

Noninterest expense for the second quarter of 2022 was $285.9 million, compared with $174.0 million for the second quarter of 2021 and $291.7 million for the first quarter of 2022.  Adjusted noninterest expense for the second quarter of 2022 was $271.8 million, compared with $164.0 million for the second quarter of 2021 and $281.0 million for the first quarter of 2022.  The adjusted efficiency ratio was 60.5% for the second quarter of 2022, which represents improvement compared to the 63.5% for the first quarter of 2022.  The decline in adjusted noninterest expense compared to the linked quarter included a reduction in compensation related items including payroll taxes, 401(k) match, and health insurance expense as well as intangible amortization expense as we finalized acquired intangible asset valuations.

Adjusted noninterest expense for the second quarter of 2022 excludes $13.3 million in total merger related expenses, which includes merger expense shown as a separate line item on the income statement as well as incremental merger related expenses that are included in the respective expense categories.  Merger expenses represent costs to complete the merger with no future benefit, while incremental merger related expenses represent costs to complete the merger for which the entity receives a future benefit.  Merger expense was $7.3 million for the second quarter of 2022, compared with $10.0 million for the second quarter of 2021 and $4.0 million for the first quarter of 2022.  Merger expense for the second quarter of 2022 was comprised primarily of conversion related expenses as well as compensation related items. Incremental merger related expenses for the second quarter of 2022 totaled $6.1 million compared to $6.6 million in the prior quarter and included primarily employee retention and marketing related expenses.

Capital Management

Total shareholders' equity was $4.44 billion at June 30, 2022 compared with $3.07 billion at June 30, 2021 and $4.64 billion at March 31, 2022.  The decline in the linked quarter is primarily due to a decline in Accumulated Other Comprehensive Income (Loss) ("AOCI") resulting from an increase in unrealized losses in the available-for-sale securities portfolio, driven by increases in longer-term interest rates in the quarter. 

Estimated regulatory capital ratios remain solid at June 30, 2022 including Common Equity Tier 1 capital of 10.39%, Tier 1 capital of 10.86%, Total risk-based capital of 13.05%, and Tier 1 leverage capital of 8.35%. 

During the second quarter of 2022, the Company repurchased 1.0 million shares of its common stock pursuant to its share repurchase program.  The company has 3.9 million shares remaining on its current share repurchase authorization which will expire December 30, 2022. Outstanding company shares were 182.5 million shares as of June 30, 2022, a reduction of 5.9 million shares since December 31, 2021.

Summary

Rollins concluded, "Our financial results continue to contribute to the energy and optimism around our Company, and we are reaching milestones daily toward fully integrating our two legacy companies.  Last week, we publicly revealed several additional aspects of our branding for the new Cadence Bank, which complement our new logo released earlier this year. The branding speaks to serving our customers with capabilities and opportunities resulting from two great companies coming together.  We look forward to the full rebranding of our Company during the fourth quarter upon completion of our core systems conversion. We have a lot to be excited about at Cadence Bank, with this quarter's financial performance certainly being a significant part of that."

RECENT MERGER TRANSACTION

Cadence Bancorporation (NYSE: CADE)

On October 29, 2021, the Company completed the merger with Cadence Bancorporation, the parent company of Cadence Bank N.A., (collectively referred to as legacy Cadence), pursuant to which legacy Cadence was merged with and into the Company (the Cadence Merger).  Legacy Cadence operated 99 full-service banking offices in the southeast.  As of October 29, 2021, legacy Cadence reported total assets of $18.8 billion, total loans of $11.6 billion and total deposits of $16.3 billion.  Under the terms of the definitive merger agreement, each legacy Cadence shareholder received 0.70 shares of the Company's common stock in exchange for each share of Cadence common stock they held.  In addition, legacy Cadence paid a one-time special dividend of $1.25 per share on October 28, 2021.  In connection with the closing of the Cadence merger, the Company changed its name from "BancorpSouth Bank" to "Cadence Bank" and also changed its NYSE ticker symbol from "BXS" to "CADE".  For more information regarding the Cadence Merger, see our Current Report on Form 8-K that was filed with the Federal Deposit Insurance Corporation (FDIC) on October 29, 2021 and the 2021 Annual Report Form 10-K filed with the FDIC.  Due to the Company's evaluation of post-merger activity and the extensive information gathering and management review processes required to properly record acquired assets and liabilities, the Company considers its valuations of legacy Cadence's assets and liabilities to be provisional estimates as management continues to identify and assess information regarding the nature of these assets and liabilities for the associated valuation assumptions and methodologies used.

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 23 of this news release.

Conference Call and Webcast

The Company will conduct a conference call to discuss its second quarter 2022 financial results on July 26, 2022, 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 http://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 400 branch locations across the South, Midwest 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. 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: 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; general economic, unemployment, credit market and real estate market conditions, including inflation, and the effect of such conditions on customers, potential customers, assets, and investments; the risks of changes in interest rates and their effects on the level and composition of deposits, loan demand, 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; 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 proposed 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; 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 the adverse effects of the ongoing global COVID-19 pandemic, including the effect of actions taken to mitigate its impact on individuals or the economy broadly; 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.

Risks specifically related to the Cadence Merger include, but are not limited to: the possibility that the anticipated benefits of the merger will not be realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies, or as a result of the strength of the economy and competitive factors in the areas where the combined company does business; the possibility that the parties may be unable to achieve expected synergies and operating efficiencies within the expected timeframes, or at all, and to successfully integrate Cadence's operations and those of the Company or because such integration may be more difficult, time consuming, or costly than expected, including as a result of unexpected factors or events; the risk that revenues following the Cadence Merger may be lower than expected; the ability of the Company and Cadence to meet expectations regarding the timing, completion and accounting and tax treatments of the Cadence Merger; and the risk of potential adverse reactions or changes to business or employee relationships, including those resulting from the completion of the Cadence Merger. There are also risks of adverse outcomes for any legal proceedings that may be instituted against the Company or Cadence in respect of the Cadence Merger; the risk that any announcements relating to the Cadence Merger could have adverse effects on the market price of the capital stock of the combined company; and risks arising from the dilution caused by the Company's issuance of additional shares of its capital stock in connection with the Cadence Merger and other factors as detailed from time to time in the Company's press and news releases, periodic and current reports, and other filings the Company files with the FDIC.

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, 2021, 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.