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Cadence Bancorporation (NYSE:CADE)
Q1 2021 Earnings Call
Apr 22, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Cadence Bancorporation First Quarter 2021 Earnings Call. Well, comments are subject to the forward-looking statements disclaimer, which can be found in the press release and on Page 2 of the financial results presentation. Both of these documents can be located in the Investor Relations section at cadencebancorporation.com. [Operator Instructions]

I would now like to turn the conference over to Paul Murphy, Chairman and CEO. Please go ahead.

Paul B. Murphy, Jr. -- Director, Chairman and Chief Executive Officer

Good morning, and thank you for joining us. With me today are Valerie Toalson, Sam Tortorici, Hank Holmes and Billy Braddock. As many of you know, we hosted a call announcing our merger with BancorpSouth on April the 12th. I would encourage investors to review that presentation to learn more about our strategy and the significant opportunity we see for our overall combined companies. For our call today, we're going to be focused on first quarter results.

So with that, let me give a couple of highlights. First off, I think it's a solid quarter. Overall, I think there is three primary takeaways, first is that Cadence continues to drive solid operating results and returns, our adjusted pre-tax, pre-provision net revenue remained attractive at $86.4 million or 1.86% of assets. In my opinion, this is a nice reminder that our business model with a meaningful mix of C&I does generate nice profitability. Our loan yields, excluding hedge and accretion, declined slightly down 7 basis points in the quarter. Our cost of funds declined 6 basis points linked quarter. We earned $105 million for the quarter or 23% return on tangible common equity, which admittedly is elevated due to the reserve release. Second takeaway for the quarter is that credit continues to improve across the board. Criticized and classified assets were -- get still higher than we'd like, but they're down materially from the peak of COVID and now at the lowest level since March of 2019.

The $48 million negative provision is not a recurring item, I understand that, but I don't want to brush over it as it is really a strong indicator and a validating data point for the broad improvements we're seeing in credit, so I'd like to say that, thinking back on 2020, the year was really about Cadence and our borrowers working hard to derisk and the tone and the fetal for 2021 is much more about improving health of business activity, recovery of borrowers and operating cash flows, our broader C&I portfolio has improved to really -- as it has for most banks. Our more COVID-exposed portfolios, Restaurant and Hospitality, have improved from last year and improved in the first quarter. Nonperforming loans declined over 11% linked quarter. Our reserves as a percentage of nonperformers now stand at 250% compared to 154% at the same time last year. Criticized assets have declined for another quarter, the improvements that we're seeing here again are broad-based across all aspects of our portfolio, pulled front by 6.4% linked quarter and finished the quarter at $816 million. We're seeing improvement by upgrades and paydowns in Restaurant, Energy, Healthcare and Hospitality.

So -- and to summarize, we are pleased with the results and credit for the first quarter and we maintain a view that credit trends will continue to improve as the year progresses. So last, there's just more business confidence, increase in demand across our portfolio. Every day as the vaccination rates increase, more companies are anticipating a normal operating environment and it just sort of feels better out there. The underwriting environment has remained disciplined with regard to terms and structures. Our paydown sloped to the lowest level in over a year. And as I mentioned, really borrowers just seem more confident, we originated about $1 billion in loan fundings in the quarter, driven primarily by a great team of bankers, our C&I and CRE portfolios, where really the results that were most notable in the quarter.

So as a result of all these things, I'm increasingly confident that we will see the accelerating loan growth in the second half of the year. We're pleased with the beginning of 2021. So let me just emphasize a number of paths Cadence has to drive shareholder value. We're well capitalized, got an experienced motivated team of bankers, we operate in some of the fastest growing markets in the United States. I think, these factors are a powerful combination of factors to reflect on -- of course, very importantly, the multiple layer benefits we see, the strategic synergy that we can drive with BancorpSouth will only serve to accelerate and strengthen our ability to grow and deliver returns for shareholders. Just since the announcement, really the excitement and enthusiasm our team, our bankers, I know, it's the same at BancorpSouth, the communities we serve, our customer reaction, it's just all been really -- consistently very, very positive.

So with that, I'll pause and turn the call over to Valerie.

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

Thank you, Paul, and good morning. For the first quarter, our adjusted net income was $105 million or $0.83 per share down from the prior quarter, adjusted net income of $200 million and $1.57 per share due to accelerated hedge revenue recognized in the fourth quarter and a negative loan provision in the first quarter. The first quarter allowance reflected a provision release of $48.3 million, reflecting improvement in economic outlook and continued declines in criticized and nonperforming loans. Even with the reserve release this quarter, our allowance for credit losses remains robust at 2.49% or 2.67%, excluding PPP loans.

Turning to the balance sheet. Loans of $12.4 billion declined $354 million during the quarter or $223 million, excluding PPP loans. It is notable, however, that this quarter's net reduction in loan was about a third of what it was in the fourth quarter as we are seeing a resurgence in loan pipelines begin to pull through. Strategic reductions in the quarter included $33 million in Restaurants and $23 million in E&P paydowns. Deposits of $16.1 billion were up $77 million during the quarter with $184 million growth in core deposits, partially offset by maturing broker deposits. Our non-interest bearing deposits as a percent of total deposits increased over 34% at March 31st, up from 31% at year-end. We continued to add to our $3.9 billion securities portfolio in the quarter up $600 million. Additionally, our balance sheet liquidity remains elevated with loans to deposits of 77% and cash balances of $1.9 billion.

Net interest income decreased by $14 million in the quarter to $143 million, reflecting lower hedge revenue, fewer days in the quarter and balance sheet mix changes, partially offset by lower funding costs. It is important to remember, the significance of our balance sheet liquidity. In the first quarter, our cash balances average $2.2 billion yielded less than 15 basis points. Once we are able to effectively deploy this excess liquidity into earning assets, we do expect that to flow into interest income accordingly. Net interest margin for the quarter declined by 32 basis points to 3.22%, again largely driven by the decline in hedge revenue and excess balance sheet liquidity.

Loan yields, excluding hedge and accretion income were 3.91% in the first quarter down 7 basis points, while cost of deposits ended the quarter at another record low of 20 basis points, a decline of 5 basis points linked quarter. We also paid down $40 million of callable sub-debt in March with an annual rate of 4.91%. Adjusted non-interest income in the first quarter was $41.4 million. Excluding the fourth quarter accelerated hedge revenue, other non-interest income increased $2.2 million during the quarter as we saw nice results across the board with some linked quarter softness in mortgage and credit fees driven by volume. Adjusted non-interest expenses were $98 million, down $7.5 million compared to the prior quarter and with the adjusted efficiency ratio coming in as anticipated at 53%. Capital remains very strong with our Common Equity Tier 1 and Tier 1 ratios up 14.2% and total capital at 16.7%.

In summary, we are encouraged by our first quarter. Credit metrics reflected multiple facets of improvement, loan pipelines are active across our footprint, lending costs continue to decline and PPNR remains well above peer levels at 1.86% to total assets. Looking forward, given our excess liquidity, strong capital levels, attractive markets and motivated team, we are well positioned to capitalize on growth opportunities as the economy continues to improve.

With that, let me turn it back to the operator for questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions]

Paul B. Murphy, Jr. -- Director, Chairman and Chief Executive Officer

Well, Andrea?

Operator

Yes. Our first question is from Jennifer Demba with Truist Securities. Please go ahead.

Brandon King -- Truist Securities -- Analyst

Hey, this is Brandon King on for Jennifer. Good morning.

Paul B. Murphy, Jr. -- Director, Chairman and Chief Executive Officer

Hi, Brandon. Thanks for joining us.

Brandon King -- Truist Securities -- Analyst

Thanks. I was just curious, you briefly mentioned in your comments [Technical Issues]

Paul B. Murphy, Jr. -- Director, Chairman and Chief Executive Officer

Brandon, I'm sorry, I could not understand you.

Operator

Could you restate your question, perhaps?

Brandon King -- Truist Securities -- Analyst

Sorry, sorry, sorry. Can you hear me now?

Operator

Yes, much better.

Brandon King -- Truist Securities -- Analyst

Yes, yes. I wanted to touch on the calling blitz effort that you've mentioned previously. And I wanted to know if you're seeing any green shoots from loan growth on that and any other things you want to note about how that's going so far.

R.H. "Hank" Holmes, IV -- Executive Vice President

Hey, Brandon. Thanks. This is Hank, and I appreciate the question. So we're -- we've had a lot of success with our calling blitz, as you know, we previously announced that we were hitting the ground in the first quarter and I'm happy to tell you that we've had almost 9,000 touch points with our clients, both on the commercial side and the retail side. This has led to obviously a lot of activity, a lot of communication with our clients and prospects, and in turn, we've seen our pipelines increase and we've also seen some increase in our loan committee and through our approval process. So this blitz will continue and we're going -- we're excited about it. And actually with the announcement of the merger, it gives us another opportunity to go back and talk to our customers, again, which in my opinion drives business in our organization.

Brandon King -- Truist Securities -- Analyst

Thank you. Thank you. And this is for Paul. Paul, what do you see as most challenging part of integrating with BancorpSouth in your mind?

Paul B. Murphy, Jr. -- Director, Chairman and Chief Executive Officer

Yeah. Well thanks, Brandon. I mean, conversions are never easy, I think that will require a great deal of focus and fortunately we have two very experienced teams with a lot of conversion experience. So that will be extremely well planned and thoroughly designed and tested and it will be well executed. I've just got a lot of confidence in our team. The great thing about it is that our culture and the philosophy of both banks are so similar that it's -- it just sets up for long-term success, I think, conversions are never easy, so I'm not going to understate that but we'll get through it and we'll do well in execution of that. And then, just the more I get to know this team and the more time we spend together, it's just the better I feel about the outlook for the combination. So thank you for the question.

Brandon King -- Truist Securities -- Analyst

Thank you very much.

Operator

[Operator Instructions]

Paul B. Murphy, Jr. -- Director, Chairman and Chief Executive Officer

Well, Andrea, we sort of thought that there would be a limited number of questions. I'm just going to see if Hank has any questions, while we got...

R.H. "Hank" Holmes, IV -- Executive Vice President

No, I'm good. Got it about the quarter, so.

Paul B. Murphy, Jr. -- Director, Chairman and Chief Executive Officer

Why don't we, Andrea, just go ahead and wrap it up, and I might just kind of harken back to some of my comments in the prepared remarks about -- and tying into Brandon's question about the enthusiasm that we have around the combination with BancorpSouth. The expansion of the branch network for our customers have so -- many more branches that they can access, places like Dallas and Austin, where we had limited access and just other markets, I mean, the whole Georgia market for BancorpSouth customers is a huge opportunity and a lot of growth there. And as we said on our April 12th call, our commercial banking expertise combined with their community banking, it's just the industrial logic, just really stacks up and I think makes a lot of sense. As Dan said in our announcement call, mergers are really all about people, and I just wholeheartedly believe that at both banks we have two great teams of people and we'll very soon be all pulling together and the strength of the both organizations, just as I reflected on, it leaves me very optimistic about our future together.

With that, we stand adjourned.

Operator

[Operator Closing Remarks]

Duration: 16 minutes

Call participants:

Paul B. Murphy, Jr. -- Director, Chairman and Chief Executive Officer

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

R.H. "Hank" Holmes, IV -- Executive Vice President

Brandon King -- Truist Securities -- Analyst

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