Cadence Bank Announces Third Quarter 2022 Financial Results

HOUSTON and TUPELO, Miss., Oct. 24, 2022 /PRNewswire/ -- Cadence Bank (NYSE: CADE) (the Company), today announced financial results for the quarter ended September 30, 2022.

Highlights for the third quarter of 2022 included:

• Achieved quarterly net income available to common shareholders of $121.0 million, or $0.66 per diluted common share, and adjusted net income available to common shareholders of $143.7 million, or $0.78 per diluted common share, an increase in adjusted earnings per diluted share of 6.8% compared to the second quarter of 2022.
• Reported $189.8 million in adjusted pre-tax pre-provision net revenue (PPNR), an increase of 7.4% compared to the second quarter of 2022.
• Generated net organic loan growth of $936.0 million for the third quarter of 2022, or 13.1% on an annualized basis. Year-to-date, loans have grown $2.4 billion, or 12.0% annualized.
• Net interest margin improved to 3.28%, up 22 basis points (and up 26 basis points excluding the impact of purchase accounting accretion) from the linked quarter, driven by continued improvement in loan yields, changes to the earning asset mix resulting from net loan growth and disciplined management of deposit pricing.
• Continued stable credit quality reflected in quarterly annualized net charge-offs of 0.09% of average loans and leases as well as a 3.3% linked quarter decline in total non-performing assets; no recorded provision for credit losses for the quarter.
• Recently completed the successful core system conversion and operational integration of the legacy Cadence merger, including the re-branding of all branch locations across the Company's footprint.

"Our team is pleased to report continued positive momentum for Cadence Bank, highlighted by growth in adjusted earnings per share to $0.78 for the third quarter as well as the recent successful conversion of core systems and re-branding across our footprint," remarked Dan Rollins, Chairman and Chief Executive Officer of the Company. "We also had another good quarter in terms of loan growth, reporting total growth of $936 million, or 13% on an annualized basis.  Our net interest margin improved as we continue to benefit from rising rates and improvement in our earning asset mix.   Importantly, credit quality remains stable, which is reflected in no recorded provision for credit losses for the quarter."

Earnings Summary

The fourth quarter 2021 merger with Cadence Bancorporation impacts year-over-year comparisons. See "RECENT MERGER TRANSACTION" in this release for more information.

The Company reported net income available to common shareholders of $121.0 million, or $0.66 per diluted common share, for the third quarter of 2022, compared with net income available to common shareholders of $70.4 million, or $0.65 per diluted common share, for the third quarter of 2021 and net income available to common shareholders of $124.6 million, or $0.68 per diluted common share, for the second quarter of 2022. Adjusted net income available to common shareholders was $143.7 million, or $0.78 per diluted common share, for the third quarter of 2022, compared with $74.9 million, or $0.69 per diluted common share, for the third quarter of 2021 and $134.2 million, or $0.73 per diluted common share, for the second quarter of 2022.

The Company reported adjusted PPNR of $189.8 million, or 1.58% of average assets on an annualized basis, for the third quarter of 2022 compared to $92.1 million, or 1.32% of average assets on an annualized basis, for the third quarter of 2021 and $176.7 million, or 1.51% of average assets on an annualized basis, for the second quarter of 2022.

The growth in adjusted net income and PPNR during the quarter was primarily attributable to a significant increase in net interest revenue reflecting continued net interest margin improvement as well as loan growth, but was partially offset by an increase in salaries and employee benefits expense as well as other noninterest expense.

Net Interest Revenue

Net interest revenue was $355.4 million for the third quarter of 2022, compared to $181.5 million for the third quarter of 2021 and $324.8 million for the second quarter of 2022, an increase of $30.6 million or 9.4% from linked quarter. The fully taxable equivalent (FTE) net interest margin was 3.28% for the third quarter of 2022, compared with 2.86% for the third quarter of 2021 and 3.06% for the second quarter of 2022.

Net interest revenue for the third quarter of 2022 included $8.1 million in accretion revenue related to acquired loans and leases, adding approximately 7 basis points to the net interest margin. Accretion declined $3.6 million from $11.7 million for the second quarter of 2022, which added approximately 11 basis points to the second quarter 2022 net interest margin. Excluding the impact of accretion, the linked quarter net interest margin increased by 26 basis points.

The increase in net interest revenue in the third quarter of 2022 compared to the linked quarter reflected continued improvement in loan and securities yields as well as additional deployment of cash flow from maturing securities into loan growth. The balance sheet remains asset sensitive, with approximately 21% of loans floating (repricing within 30 days) and another 49% of loans variable as of September 30, 2022.

Yields on net loans, loans held for sale, and leases excluding accretion, were 4.70% for the third quarter of 2022, up 58 basis points from 4.12% for the second quarter of 2022, while yields on total interest earning assets were 3.74% for the third quarter of 2022, up 45 basis points from 3.29% for the second quarter of 2022. The average cost of total deposits remained well managed at 0.35% for the third quarter of 2022, compared with 0.17% for the second quarter of 2022.

Balance Sheet Activity

Loans and leases, net of unearned income, increased $936.0 million during the third quarter, or 13.1% annualized, and $2.4 billion year-to-date, or 12.0% annualized, to $29.3 billion.  Loan growth for the quarter was well diversified, with our corporate banking team contributing the largest portion of the growth. Total deposits declined $1.2 billion during the third quarter to $39.0 billion, resulting in a total year-to-date decline of $813.7 million.  The decline in deposits for the quarter included approximately $430 million in public funds and approximately $260 million in correspondent bank balances, both categories of which can vary quarter to quarter.   The third quarter of 2022 ended with a loan to deposit ratio of 75.1% and securities to total assets of 26.1%, reflecting continued improvement in earning asset mix while maintaining strong balance sheet liquidity. Noninterest bearing deposits represented 35.5% of total deposits at the end of the third quarter of 2022, increasing slightly from  34.9% at June 30, 2022.

Provision for Credit Losses and Allowance for Credit Losses

Credit quality metrics for the third quarter of 2022 reflect continued stability in overall credit quality, highlighted by low levels of net charge-offs and no provision for credit losses for the quarter.

Total non-performing assets declined $4.3 million, or 3.3%, in the third quarter from $130.8 million at June 30, 2022 to $126.5 million at September 30, 2022. Total non-performing loans and leases were $118.1 million at September 30, 2022, or 0.40% of total net loans and leases, compared to the June 30, 2022 balance of $116.4 million, or 0.41% of total net loans and leases. Other real estate owned and other repossessed assets also declined to $8.4 million at September 30, 2022, a decrease of $6.0 million or 41.8% from the June 30, 2022 balance of $14.4 million.

Net charge-offs for the third quarter of 2022 were $6.7 million, or 0.09% of net loans and leases on an annualized basis, compared with net recoveries of $2.1 million for the third quarter of 2021 and net recoveries of $1.4 million for the second quarter of 2022.  Net charge-offs for the third quarter of 2022 included one $8.0 million acquired energy credit that was classified as purchased credit deteriorated at merger.   There was no recorded provision for credit losses for the third quarter of 2022, compared with a negative provision for credit losses of $7.0 million for the third quarter of 2021 and a provision for credit losses of $1.0 million for the second quarter of 2022. The allowance for credit losses was $433.4 million, or 1.48% of net loans and leases at September 30, 2022, compared with $440.1 million, or 1.55% of net loans and leases at June 30, 2022.

Noninterest Revenue

Noninterest revenue was $124.5 million for the third quarter of 2022, compared with $84.4 million for the third quarter of 2021 and $125.2 million for the second quarter of 2022. Declines in mortgage production and servicing revenue and credit card, debit card, and merchant fees were offset by increases in deposit service charges and other miscellaneous income.

Insurance commission revenue totaled $39.9 million for the third quarter of 2022, compared with $35.8 million for the third quarter of 2021 and $40.0 million for the second quarter of 2022. Credit card, debit card and merchant fee revenue was $14.5 million for the third quarter of 2022, compared with $16.6 million for the second quarter of 2022. Second quarter 2022 results included an annual incentive payment from our card vendor as well as an annual true-up of revenue based on improved contractual revenue share. Other noninterest revenue was $21.9 million for the third quarter of 2022, compared with $16.4 million for the second quarter of 2022 due primarily to a negative purchase accounting adjustment recorded in the second quarter related to the day one fair value of unfunded commitments acquired in the legacy Cadence transaction.  In addition, other noninterest revenue for the third quarter reflects improved earnings on limited partnership investments. 

Mortgage purchase money production continues to remain active despite the rate environment.  Third quarter of 2022 mortgage origination volume was $769.9 million, compared with $788.9 million for the third quarter of 2021 and $913.0 million for the second quarter of 2022.  Mortgage production and servicing revenue totaled $4.7 million for the third quarter of 2022, compared with $11.0 million for the third quarter of 2021 and $6.8 million for the second quarter of 2022. The mortgage servicing rights valuation adjustment was $4.3 million for the third quarter of 2022, compared with $2.0 million for the third quarter of 2021 and $4.7 million for the second quarter of 2022 with the variances due to continued volatility in the interest rate environment.

Noninterest Expense

Noninterest expense for the third quarter of 2022 was $319.7 million, compared with $179.9 million for the third quarter of 2021 and $285.9 million for the second quarter of 2022. Adjusted noninterest expense for the third quarter of 2022 was $290.2 million, compared with $174.0 million for the third quarter of 2021 and $271.8 million for the second quarter of 2022. The adjusted efficiency ratio was 60.3% for the third quarter of 2022, a slight improvement from 60.5% for the second quarter of 2022. The increase in adjusted noninterest expense compared to the linked quarter was driven primarily by increases in salaries and employee benefits expense as well as other miscellaneous expense.  Salaries and benefits expense increased $9.1 million for the linked quarter, including the impact of merit increases effective July 1, 2022, an increase in incentive compensation linked to corporate performance and a decrease in deferred salaries due to lower mortgage originations this quarter.  Other noninterest expense increased $10.4 million for the linked quarter, including an approximate $7.4 million increase due to non-routine benefits favorably impacting second quarter expenses including a second quarter gain on sale in foreclosed property expense (versus a third quarter loss on same), finalization of intangible asset valuation and related amortization in the second quarter, and various timing of regulatory fees and SBA sold loan costs.  In addition, the Company experienced elevated operating and fraud losses during the third quarter of 2022.

Adjusted noninterest expense for the third quarter of 2022 excludes $26.6 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 $19.7 million for the third quarter of 2022, compared with $3.4 million for the third quarter of 2021 and $7.3 million for the second quarter of 2022. Merger expense for the third quarter of 2022 was comprised primarily of conversion related expenses as well as compensation related items. Incremental merger related expenses for the third quarter of 2022 totaled $6.9 million compared to $6.1 million in the prior quarter and included primarily employee retention, marketing, and technology related expenses.  Adjusted noninterest expense for the third quarter of 2022 also excludes a charge of $2.9 million in accordance with ASC 715 "Compensation - Retirement Benefits" to reflect the settlement accounting impact of elevated lump sum retirement pension payouts during 2022.

Capital Management

Total shareholders' equity was $4.17 billion at September 30, 2022 compared with $3.02 billion at September 30, 2021 and $4.44 billion at June 30, 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, as a result of continued increases in longer-term interest rates in the quarter.

Estimated regulatory capital ratios at September 30, 2022 included Common Equity Tier 1 capital of 10.25%, Tier 1 capital of 10.70%, Total risk-based capital of 12.84%, and Tier 1 leverage capital of 8.43%.

During the third quarter of 2022, the Company did not repurchase shares of its common stock pursuant to its share repurchase program. Outstanding company shares were 182.4 million shares as of September 30, 2022, a reduction of 5.9 million shares since December 31, 2021.

Summary

Rollins concluded, "It's really an exciting time across our Company and our footprint.  The successful completion of the core systems conversion and the rebranding of all of our locations is a historic event for our bank, and symbolizes that we now operate as one unified brand.  This accomplishment would not have been possible without the unwavering commitment and tireless work of the more than 6,500 teammates in our Company.  As we move forward, we will continue to focus on the important objectives of taking care of the customers and communities we serve and delivering value to our shareholders."

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 22 of this news release.

Conference Call and Webcast

The Company will conduct a conference call to discuss its third quarter 2022 financial results on October 25, 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 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 legacy 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 legacy 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 legacy 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.