Cadence Bank (NYSE:CADE) Q1 2024 Earnings Call Transcript April 23, 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 morning and welcome to the Cadence Bank First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Will Fisackerly, Executive Vice President and Director of Finance. Please go ahead.
Will Fisackerly: Good morning and thank you for joining the Cadence Bank first quarter 2024 earnings conference call. We have members from our executive management team here with us this morning; Dan Rollins; Chris Bagley, Valerie Toalson, and Billy Braddock. Our speakers will be referring to prepared slides during the discussion. You can find those slides by going to our Investor Relations' page at ir.cadencebank.com where you'll find them on the link of 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 upon our presentation today. And now I'll turn to Dan for his opening comments.
Dan Rollins: Good morning. We appreciate everyone joining us this morning to discuss our first quarter 2024 results. I will comment on some of the key highlights and then Valerie will dive into the financials in more detail. Our executive management team will be available for your questions following our remarks. We're extremely pleased to see the efforts and hard work of teammates across our company bear fruit in the financial results we've reported this quarter. If you recall, we completed some strategic initiatives in 2023, including the sale of our insurance agency, the restructuring of our securities portfolio, the streamlining of our branch network, as well as other opportunities to improve our operating efficiency. These efforts, along with the continued focus on business development, can be seen throughout the results that we will be discussing this morning.
We reported GAAP net income for the first quarter of $114.6 million or $0.62 per common share with adjusted net income from continuing operations for the first quarter of $114.4 million also $0.62 per common share, representing considerable improvement over each of the last several quarters. From a balance sheet perspective, our active pipelines resulted in loan balances growing just over $385 million or 4.8% annualized. We saw good growth in our non-real estate and owner-occupied C&I portfolios as well as a nice pickup in residential mortgages. From a deposit perspective, we continue to strategically reduce both brokered and certain thinly priced public fund balances, which collectively declined just over $1 billion linked-quarter. Importantly, we were able to organically grow core customer deposits by approximately $400 million in the quarter, which offset much of this decline.
Our community bank continues to perform very well in the face of continued strong competition for deposits, driving the majority of the core deposit growth in the quarter. As expected, we saw a significant improvement in our net interest margin, which was up 18 basis points compared to the fourth quarter to 3.22%. The balance sheet dynamics that I mentioned and our fourth quarter securities portfolio restructuring contributed to this improvement. Valerie will discuss the moving parts more in just a moment. Our results for the quarter also reflected considerable improvement in operating efficiency. Our adjusted expenses declined by over $6 million compared with the fourth quarter of 2023, which, along with our revenue growth, drove close to a 600 basis point reduction in our adjusted quarterly efficiency ratio to 60.1%.
We anticipate additional improvement as we move throughout the remainder of 2024. From a credit quality perspective, we recorded a provision for credit losses of $22 million, while net charge-offs totaled $19.5 million or 24 basis points of average loans on an annualized basis, both of which were in line with our expectations and improved over our fourth quarter 2023 results. Finally, we repurchased just over 650,000 shares during the quarter at a weighted average price of $25.65. We were able to do that while continuing to grow our capital metrics, which is reflected in CET1 of 11.7% and total capital of 14.5% at March 31, 2024. I'll now turn the call over to Valerie for her comments. Valerie?
Valerie Toalson: Thank you, Dan. After a noisy year last year, both for the industry as well as our results, it is really nice to have a good clean quarter to discuss this morning. When looking at our first quarter 2024 performance, the results of our focus to deliver improved operating performance are clear. We showed improvement in virtually all of our financial results and operating metrics, including a 55% improvement in our adjusted EPS from continuing operations, a 26% improvement in our adjusted pre-tax pre-provision net revenue, and the nearly 600 basis point improvement in our efficiency ratio that Dan mentioned. There were no significant non-routine items in our results for the first quarter. So GAAP and adjusted net income available to common shareholders were just over $114 million or $0.62 per diluted share.
A businesswoman in a suit carrying a briefcase and walking through a busy banking hall.
Turning first to margin and net interest revenue beginning on Slide 10. We reported net interest income of $354 million for the first quarter, an increase of $19 million or 5.8% compared to the fourth quarter of 2023. Our net interest margin was 3.22% for the first quarter, up 18 basis points. The driving factor behind the net interest margin increase was the fourth quarter of 2023 securities portfolio restructuring, which resulted in a quarterly increase of 65 basis points improvement in our first quarter security portfolio yield to 3.13%. Our net interest margin also benefited from a continued slowing in the pace of deposit cost increases and deposit mix shift and improvement in our earning asset mix. The total cost of deposits increased 13 basis points to 2.45% for the quarter, representing the slowest pace in deposit cost increases since the onset of this rate cycle.
Non-interest-bearing deposit balances ended the quarter at 23.1% of total deposits, down just slightly from 24% at the end of the fourth quarter. Our yield on net loans, excluding accretion, was 6.46% for the first quarter, up 3 basis points from the prior quarter's yield. Non-interest revenue highlighted on Slide 13 was $83.8 million on an adjusted basis, an increase of $10.7 million or 14.6% compared to the fourth quarter of 2023. This increase was driven primarily by two areas; service charge revenue and mortgage banking. Service charge revenue increased $7.2 million, primarily due to the fourth quarter accrual to account for deposit service charge fee changes. Mortgage banking revenue also increased notably both production and servicing revenue as well as the MSR asset valuation.
Production and Servicing revenue increased $2.5 million as we entered into the spring selling season and the MSR asset valuation was essentially flat for the quarter compared with a negative adjustment of $5.1 million for the fourth quarter of 2023. Our fee businesses continued to perform well in the first quarter, representing 19.1% of total revenue and assets under management increased 8.5% to $23 billion. Turning to Slides 14 and 15, total adjusted non-interest expense was $263.5 million for the quarter, reflecting a linked-quarter decline of $6.3 million. This decline, along with the quarter's revenue growth contributed to material improvement in our adjusted efficiency ratio to 60.1% for the first quarter compared to 66% for the fourth quarter of 2023.
As expected, salaries and employee benefits increased $8.6 million compared to the fourth quarter, with over half of the increase as a result of first quarter reset of FICA and 401(k) plan expenses. In addition, certain of our incentive compensation accruals were higher in the first quarter as a result of strong operating performance. Data processing expense declined $2.8 million linked-quarter, impacted by seasonality and card volumes as well as other vendor expense and project timing. Advertising and public relations expense declined $3.4 million from seasonally high fourth quarter costs and legal expense also declined $2.5 million as the fourth quarter included some non-recurring accruals. Finally, other miscellaneous expense declined $4.2 million linked-quarter as a compilation of a number of factors, including a reduction in operational losses.
This first quarter improvement in non-interest expenses, combined with the revenue growth resulted in pretax pre-provision net revenue of $174.2 million, a meaningful increase over $137.9 million reported in the fourth quarter of 2023. Moving on to credit quality on Slides 8 and 9, we recorded a provision for the quarter of $22 million and net charge-offs of $19.5 million or 24 basis points of loans and leases annualized both of which represent improvement compared to our fourth quarter 2013 results. Our allowance for credit loss coverage remains flat at 1.44%. While our criticized and classified loan totals as a percent of total loans increased slightly compared to the fourth quarter of 2023, both have improved compared to the first quarter of 2023.
Our non-performing loans and non-performing asset totals increased linked-quarter to 73 basis points of loans and 51 basis points of assets, respectively. About 25% of our non-performing loans have government guarantees behind them. Factoring these out, the linked-quarter increase in non-performing loans was only $14.5 million. Overall, credit remains well managed and in line with the guidance that we provided in our year-end earnings call. Our capital is shown on Slide 16. As Dan mentioned, we opportunistically repurchased just over 650,000 shares during the first quarter under our share repurchase program. We were able to take advantage of a temporary market decline and repurchased these shares at a weighted average price of $25.65. Importantly, our strong earnings drove further improvement in our regulatory capital metrics even with our share repurchase activity, January's dividend increase and first quarter's loan growth.
Additionally, total shareholders' equity of $5.2 billion at the end of March is up $700 million or 16% compared to this time last year. Once again, indicative of our capital accretive efforts over the past year. Looking forward, we continue to be comfortable with the 2024 guidance ranges that we showed last quarter in all categories. Although it does appear that net interest income will be impacted slightly more positively than anticipated, given what appears to be a higher for longer rate environment. In closing, as Dan mentioned, our teammates have worked relentlessly on the planning and the execution of the strategic efforts that have driven the improved results we've reported this quarter. It truly is exciting and rewarding to see these efforts pay dividends for our company and our shareholders.
But of course, we are not stopping here, and we continue to work towards driving further improvement over the remainder of 2024 and beyond. Operator, we would like to open the call to questions, please.
