Cadence Bank (NYSE:CADE) Q4 2023 Earnings Call Transcript

Cadence Bank (NYSE:CADE) Q4 2023 Earnings Call Transcript January 30, 2024

Cadence Bank isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the Cadence Bank Fourth Quarter 2023 Webcast and Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, today’s event is being recorded. I would now like to turn the conference over to Will Fisackerly, Director of Finance. Please go ahead.

Will Fisackerly: Good morning, and thank you for joining the Cadence Bank fourth quarter 2023 earnings conference call. We have members from our executive management team here with us this morning; Dan Rollins, Chris Bagley, Valerie Toalson, Hank Holmes, and Billy Braddock. Our speakers will be referring to prepared slides during the discussion. You can find the slides by going to our Investor Relations page at ir.cadencebank.com where you’ll find them on the link to our webcast or you can view them at the exhibit to the 8-K that we filed yesterday afternoon. These slides are also in the Presentations section of our Investor Relations website. I would remind you that the presentation, along with our earnings release, contain our customary disclosures around forward-looking statements, and any non-GAAP metrics that may be discussed.

The disclosures regarding forward-looking statements contained in those documents apply to our presentation today. And now, I’ll turn it to Dan for his opening comments.

Dan Rollins: Good morning. We appreciate your interest in Cadence Bank. I will make a few comments regarding both our fourth quarter and full year 2023 results, and then Valerie will dive into the financials in more detail. Our executive management team will be available for questions following our remarks. Oh, what a year 2023 was for our industry, and specifically for our company. I’m extremely proud of our team’s efforts throughout the year. We came into 2023 focused on improving our performance. And as we look into 2024, our goal is to build upon our accomplishments in 2023. Looking back, we set out to improve our capital ratios, improve our portfolio yield, lower our efficiency ratio by lowering our expenses, and after March, enhance our liquidity.

As we review our results, you will hear about significant progress in all of these measures, which certainly sets the stage for our continued improvement this year and beyond. As we look at strategic accomplishments, we completed the closure of 35 branches in the third quarter. We completed our voluntary retirement program in the fourth quarter, lowering our headcount, including the branch closures and excluding the sale of Cadence Insurance, by almost 500 from the beginning of the year. Finally, we unlocked the extraordinary value of Cadence Insurance. This transaction completed in November, generated additional capital for our company of approximately $620 million, including an after-tax gain of $520 million. During December, we leveraged just over half of that gain to restructure over 25% of our available-for-sale securities portfolio, allowing us to reinvest the proceeds at much higher yields and reduce wholesale deposits, all while meaningfully increasing our tangible book value and capital ratios.

Valerie will give more color in a moment on these restructuring transactions, but I’m excited about the significant positive impact this will have on our margin and core operating performance going forward. And looking specifically at our financial results for the quarter, it’s important to note that our financials are now broken out between continuing and discontinued operations. The results of our insurance business prior to the sale and the related gain from the sale are included in discontinued operations. Continuing operations includes all other financial results for the bank, including the loss on securities restructure. For a comparative purposes, we will focus on adjusted continuing operations results, which excludes the loss of the securities restructure as well as certain other non-routine items consistent with our past practice.

Valerie will, of course, provide more detail on these items in her comments in a moment. We reported GAAP net income, which includes both continued and discontinued operations, for the fourth quarter of $256.7 million, or $1.41 per common share, which results in annual net income of $532.8 million, or $2.92 per common share. We reported adjusted net income from continuing operations for the fourth quarter of $72.7 million, or $0.40 per common share, bringing annual adjusted net income from continuing operations to $401.2 million, or $2.20 per common share. From a balance sheet perspective, loan balances grew $2.1 billion or over 7% for the year, and were flat for the quarter. Our loan growth for the year was disbursed across our geographic footprint, as well as the various loan types, primarily within corporate and mortgage.

Looking into 2024, I’m confident our team of bankers will be able to win business and grow our balance sheet now that the economic stresses of ’23 are in the rearview mirror, and the economy within our footprint remains relatively strong. We had another nice quarter from a deposit growth perspective, demonstrating the strength of our community banking business, with total deposits increasing over $160 million. Excluding the planned and continued reduction in brokered deposits, we reported growth of $625 million or 6.5% annualized. About half of this growth came from core customer deposit growth, with the remainder driven by seasonal increases in public fund balances. For the full year, core deposits were essentially flat, while our growth in the community bank deposits of $1.2 billion or just over 4% offset the decline in corporate and public fund balances.

I’m confident our teams will be able to build on the momentum we experienced in the latter half of 2023. This balance sheet activity contributed to an increase in our net interest margin to 3.04% for the fourth quarter. Valerie will dive further into the details, but our earning assets, both loans and securities, continue to reprice up. In addition, pressure on deposit cost has slowed as has the migration from non-interest to interest-bearing products. So, securities repositioning, obviously, accelerates our margin improvement efforts. Given the December timing of our bond restructure, we anticipate additional positive impact from this repositioning in the first quarter margin. Moving on to credit. Our total criticized loans remained stable, another quarter, at 2.09% of net loans and leases for the quarter.

We did experience the negative migration of a handful of credits within our previously criticized population, that drove the increase in non-performing assets. This migration is reflected in an increase in credit provision to $38 million for the fourth quarter. Net charge-offs were 22 basis points for the year, in-line with our expectations and our allowance coverage ended the year at a healthy 1.44% of loans. Finally, our capital metrics improved significantly as a net result of the insurance and securities transactions. CET1 was 11.6% at year-end, and total capital was 14.3%, both of which improved over 130 basis points compared to the third quarter of ’23. This improvement provides us with tremendous flexibility with respect to capital management and deployment in 2024 and beyond.

I will now turn the call over to Valerie for her comments. Valerie?

Valerie Toalson: Thank you, Dan. I recall we promised you a noisy quarter and I think we outperformed there. But when you break it all down, we believe this was a transformative quarter in setting the stage for positive momentum into 2024. Dan described the continued and discontinued operations dynamics. We added a few slides this quarter to reconcile our GAAP earnings that combines everything to our adjusted earnings from continuing operations. Slide 5 includes these items for the full year. Slides 7 and 8 include both the current and prior quarters, as well as major variances. I will focus most of my comments this morning on the adjusted continuing operations fourth quarter results of $73 million in net income available to common, or $0.40 per share.

On a pre-tax basis, these adjusted results exclude the $385 million loss on securities restructure, as well as about $60 million in non-routine expense items as we wrapped-up some of the key activities Dan commented on. These routine expenses included a $12 million pension settlement charge driven by the early retirements, $7.5 million in incremental merger-related expense, legal expense, and $36 million for the industry-wide FDIC special assessment. The bottom of Slide 8 highlights a few additional variances that I will touch on as we move through the financials. Before we dive into the details, I would like to take a minute to summarize and add a little more color around the strategic transactions executed in the fourth quarter. To summarize, first was the sale of the insurance company on November 30th, enhancing capital by $620 million.

We then leveraged that gain by selling $3.1 billion in par value available-for-sale securities during December at an after-tax loss of $294 million. These securities, a mix of mortgage backs, agencies, and municipal bonds, were yielding 1.26% with an average duration of just over four years. As of year-end, we had reinvested $1 billion of the $2.7 billion in sales proceeds in securities, yielding an average 5.6% with the duration of approximately two years. Another $645 million was used to lower year-end broker deposits that were costing us 5.47%. With another $235 million at 5.4% reduced in January. The remaining proceeds are temporarily in cash at the Fed earning 5.4%, and we anticipate investing a portion of that in securities in the first quarter.

Finally, we were able to refinance the $3.5 billion bank term funding program borrowing from 5.15% to 4.84%, and actually 4.76% as of today. As a reminder, this spending can be repaid at any time without penalty. So, the combined effect of all of these fourth quarter efforts using static rates is an estimated annual incremental positive impact on net interest income of over $120 million, and combined with the fourth quarter results, resulted in an increase in common equity tier 1 of 130 basis points, and an improvement in tangible book value per share of 28%. All in all, great results that will benefit us in years to come. Moving onto the detailed financials for the quarter, beginning on Slide 16, we reported net interest income of $335 million for the fourth quarter, an increase of $5.6 million compared to the prior quarter.

Our net interest margin was 3.04% for the fourth quarter, up 6 basis points. Our total cost of deposits increased at the slowest pace all year, up 18 basis points to 2.32% as reflected on Slide 17. Noninterest-bearing deposit balances ended the year at 24% of total deposits, down just slightly from 25.2% at the end of the third quarter. Given the yield curve forecast in 2024, we expect pressure on deposit pricing to improve as we move through the year. Our yield on net loans, excluding accretion, was 6.43% for the fourth quarter, up 12 basis points from the prior quarter, reflective of new and renewed loans coming on the balance sheet at higher yields than the portfolio. Finally, our securities and short-term investments yield was up 41 basis points to 2.96% in the fourth quarter due to the restructuring activity in December.

Given the late fourth quarter timing of that activity, we anticipate net interest margin and net interest income to further improve in the first quarter as well as throughout 2024. Noninterest revenue, highlighted on Slide 19, was $73.1 million on an adjusted basis, which excludes the restructuring securities loss, compared to $80.6 million for the third quarter. The decline was driven by two items: one, a negative variance on our mortgage servicing rights valuation of $4.9 million, and two, an $8 million reduction in service charge fee income in the fourth quarter as a result of certain deposit service charge changes. These changes are expected to result in a decline in fees of approximately $3 million annually in 2024. Aside from these two items, all other fee revenue increased about $5.5 million, including wealth management, card fees and other categories.

Looking forward, we anticipate total revenue to increase at a mid-single-digit growth rate for 2024. Moving on to expenses. Highlighted on Slides 20 and 21, total adjusted noninterest expense was $269.8 million for the quarter, reflecting a linked-quarter increase of $5.6 million. As expected, salaries and employee benefits declined $5.7 million compared to the third quarter due to the efficiency work done in 2023. This decline was offset by increases in several other line items, including advertising and public relations, which increased $1.9 million, in-line with typical fourth quarter seasonal increases. Legal increased $2.6 million, driven by an accrual related to the settlement of a legal matter. And finally, data processing and software increased $3.9 million, primarily the result of continued focus on our product, service and technology, as well as inflationary increases in certain vendor costs with a smaller portion being timing.

As we commented last quarter, we continue to anticipate flat operating expenses for the full year 2024 compared to 2023 adjusted results. Finally, let’s take a look at credit quality on Slides 14 and 15. Importantly, our criticized and classified loan totals continue to remain stable with the criticized total declining to 2.6% of loans and classified totals remaining flat at 2.09% linked-quarter. Other credit metrics this quarter, including increased provision, net charge-offs and non-performing totals were the result of some further deterioration in a small number of credits that were identified as criticized or impaired in prior quarters. Our non-performing loans and non-performing asset totals increased linked-quarter to 0.67% of loans and 0.45% of assets, respectively.

The provision for the quarter was $38 million, bringing our allowance coverage to a solid 1.44% at year-end. Net charge-offs declined in the fourth quarter to $24 million or 29 basis points of average loans on an annualized basis, resulting in the full year net charge-offs of 22 basis points. While certain of our credit metrics for the quarter increased, our processes to timely identify issues continue to work well, and there are indications that macroenvironmental factors may be stabilizing or improving. As we look forward, based on what we see now, we’d expect our 2024 net charge-offs to be within a range relatively comparable to 2023 full year totals. Our capital is shown on Slide 22, and as Dan noted previously, the ratios all improved meaningfully, providing a strength and flexibility from a capital management standpoint.

Tangible common equity to tangible assets also improved 27% to 7.44% at year-end. There were a lot of moving parts in the fourth quarter and in all of 2023 for that matter, but all for the benefit of driving future momentum and enhancing shareholder value as we look forward. Looking back, it was just over a year ago that we converted the systems and merged the brands of BancorpSouth and Cadence Bank into one. Since then, we have further integrated our tools and technology, meaningfully refined our branch network and staffing levels, completed a transformative sale of our insurance company, executed a highly profitable restructuring of our securities portfolio, materially improved our capital and liquidity, and importantly, expanded our loans and core customer deposits.

We spoke to some of our expectations for 2024. We have also laid those out for you on Slide 4. We are energized and focused and remain excited about the future of Cadence Bank. Operator, we would like to open the call to questions, please.

See also 15 Countries that Produce the Best Software Engineers and 15 High Quality Flannel Shirts for Men.

Q&A Session

Operator: Thank you. [Operator Instructions] Today’s first question comes from Catherine Mealor with KBW. Please go ahead.

Catherine Mealor: Thanks. Good morning.

Dan Rollins: Good morning, Catherine.

Catherine Mealor: I want to start on your revenue guide, Valerie, that you talked, you said was kind of mid-single digit. And you have in your slides, it’s 4% to 6%. I noticed in the slide you say that you are following the forward curve with that. And so, just curious within that expectations of revenue growth, how much does — number one, I’m assuming the forward curve includes six cuts this year. And so, then within that…

Dan Rollins: It does.

Catherine Mealor: …how much — okay. And so, then how much of that is influencing some of that revenue growth guide? And then, if we’re actually in a scenario where we get less cuts, what would perhaps be the sensitivity to that growth?

Dan Rollins: We’ve said for a long time we like higher for longer. And certainly, the pace of the cuts and the number of cuts is higher than we would like, but we model off the forward curve.

Valerie Toalson: Yeah. That’s just something that we’ve always chosen to do because there’s so many different variations out there, particularly lately. And doing the forward curve allowed us to be consistent. And hopefully, you guys can understand better what we’re doing. But to your question, we are slightly asset-sensitive, but we’re actually closer to neutral now than we’ve really been in quite some time, plus a 100 on a short basis, is a plus 0.7%. That being said, if rates don’t decline, if they were to stay right where they were, it would impact our net interest income positively by the range of, say, $16 million, give or take a few million. So, it would be positive for us on the net interest income side if rates were to move slower perhaps than…

Dan Rollins: Than not as fast.

Valerie Toalson: Right.

Dan Rollins: Yeah. Slower, and not as far.

Catherine Mealor: Okay. That’s great. Okay, that’s helpful. And then, I know the margin has so many moving parts. But as you kind of think about where we are going into the first quarter, do you have any kind of range that you can give us on where you think we’re going to be starting the margin? I know you said up, but I mean, you had a big bond restructure and you’ve still got loans repricing up. So, just kind of curious if you could help us get a starting point for the margin in the first quarter.

Valerie Toalson: Yeah. No, definitely we’re positive not only about the first quarter, but really as we look out throughout the rest of next year. For the fourth quarter, net interest margin improved 6 basis points, and I’d say that was back-end loaded. So, for the first quarter, we would expect double to double-plus of that rate of improvement in both the net interest margin and net interest income.

Catherine Mealor: Okay. So, at least another 12 bps in the first quarter, and we’ll just see?

Valerie Toalson: I think that’s a reasonable expectation, yeah.

Catherine Mealor: Okay, great. All right, I’ll pop out of the queue, but thanks so much. Appreciate it.

Dan Rollins: Thanks, Catherine.

Operator: And our next question will come from Stephen Scouten with Piper Sandler. Please go ahead.

Stephen Scouten: Yeah, thanks. Good morning, guys. Just one clarifying question around the fees. How do we think about this service charge, the $3 million reduction and the $8 million charge this quarter? I mean, are we working off of $16 million and $17 million a quarter number or you think about it on an annual basis?

Dan Rollins: The $3 million reduction is an annual number. The $8 million is a one-time reduction from last year as we cleaned up and worked through the issues we need to deal with. But the forward look was $3 million on an annualized basis, lower fees.

Stephen Scouten: Okay. So, kind of take the $62 million for the year, and think about $3 million less?

Valerie Toalson: Yeah. Stephen, that wouldn’t be off of the $8 million reduction. $8 million is really kind a isolated item on its own.

Dan Rollins: Right.

Stephen Scouten: Got it. Perfect. Okay, great.

Dan Rollins: To be more direct, add the $8 million back, and then subtract $3 million.

Stephen Scouten: Yeah, understood. Okay. Thank you. And then, just kind of thinking about the benefit that could come throughout the year on the deposit side, are there any large CD maturities or otherwise that we should be aware of that will kind of help expedite some of that improvement that we might see when rates do decline?

Valerie Toalson: Yeah. So, we do have a solid pace of CD maturities coming, particularly in the first half of the year as well as in the third. Looking just at next quarter, we’ve got about $2 billion of CDs that are maturing.

Dan Rollins: Remember, the biggest product that we’re pushing in the field is an eight month product. And so, they roll pretty fast.

Valerie Toalson: Yeah, that’s right. And so, a portion of those, we still have a promotional rate out there for CDs, but then a large portion of those also just roll over into some of the kind of the routine levels. So, as you look at the year, we do anticipate some average improvement from those CD rollovers.

Stephen Scouten: Okay, great. And then just last thing for me, I’m curious about the share repurchase. Obviously, you built capital extremely nicely with the insurance sale. Just kind of how you think about that moving forward? If it’s kind of a total payout percentage you think about, if it’s opportunistic or just that kind of potential thoughts around capital return?