Cadence Bank
Q3 2017 Earnings Call Transcript

Published: 25 Oct 2017

[Operator:]

Welcome to the Cadence Bancorporation Third Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. The comments are subject to the forward-looking statement disclaimer which can be found in the press release and on Page 2 of the financial results presentation. Both of those documents can be located in the Investor Relations section at cadencebancorporation.com. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Paul Murphy, Chairman and CEO. Please go ahead.

[Paul Murphy:]

Thank you and welcome to our third quarter call. Joining me for today’s call are Sam Tortorici, Valerie Toalson, and Hank Holmes. I’m going to review our results and then Sam’s going to give you an update on deposits, Valerie will do a deeper dive into the financials, and we will of course all be available for questions. As was mentioned in the earnings release, we feel like the third quarter was a good quarter. Credit is stable, core deposit growth remains a top focus and we are showing nice results there, earnings were good and our asset sensitive portfolio was benefiting from higher rates. I'm really proud of our great team of bankers that are out making a lot of calls and our business is growing throughout the footprint, and across various lines of business. This quarter our growth took us over the $10 billion in assets threshold ending the quarter at $10.5 billion, our new loan production in the quarter was good with payoffs not as outsized as in previous quarters. The pipeline for loans and deposits are attractive and diverse and we feel good about the outlook there, expenses for the quarter are essentially flat linked quarter and well controlled; so from a high level we feel like there are a lot of positives. Let me ask you to turn your attention to Page 3 of the presentation and we will comment on a few of the highlights there. Net income of $32.6 million is a nice number and a nice increase from the prior quarter. One of the numbers we focused on internally here a lot is our pre-tax pre-provision growth at $51.8 million, that's a 35% from a year ago and up 5% linked quarter. Return on average assets of 1.29 and return on tangible at 13% are highly respectable numbers. So, taking a look at adjusted operating revenue a 108 million that's up 18% from the prior year, our NIM at 3.52 is solid and Valerie is going to go into some more detail in that in a moment and give you a little more insight as to how our balance sheet continues to benefit from increasing rates. Taking a look at loan growth, we are very pleased, we are up 11% from the prior year, we are up 4% linked quarter, this is good growth especially when you consider that energy and healthcare pay downs of over $165 million from the prior year and those pay downs from the sales of businesses in the first half of 2017, so the growth is perhaps touch more impressive when you dial those into your thinking. Our core deposit growth is a great story, we are up 14% from the prior year, we are up 7% linked quarter, obviously we are happy with these trends, our efficiency ratio at 52.2 is the nice linked quarter positive improvement, our goal have been to get into that 50% to 52% efficiency range and so now that we are there we will of course set a new goal. We've got good credit for the quarter, non performers are down mostly a result of restructuring of energy credits, we expect to see continued reduction as non performers overtime. During the quarter we experienced net charge offs of one basis points so that's pretty solid. The provision of $1.7 million for the quarter includes $2 million in reserves allocated for Harvey and Irma, Hurricanes Harvey and Irma. the lower provision is primarily result of low charge-offs for the quarter, the reductions in nonperformers, the pay-offs and pay-downs in the energy portfolio and we had a $1.3 million net recovery in the acquire loan provision for the quarter. So with that I would ask you to turn to Page six, we have a lot of good numbers to come in on here. First, we would comment on the quality of our non-performing portfolio, 94% of those loans were energy loans and 85% of those are paying in their contractual terms. So, technically accounting wise They are nonperforming, but that gives a little more insight there. Overall the originated portfolio past dues are very low at 27 basis points, we had growth and our midstream energy portfolio and I would just refresh those of you who have tracked us, we have had zero charge-off lifetime to-date in midstream. So, our midstream continues to be a bright spot. So if you can look at our overall energy reserves 2.5% we are admittedly lower than sums, but our mix is materially more favorable. With that, I’ll turn it over to Sam and ask him to comment on core deposit growth.

[Samuel Tortorici:]

Thanks, Paul. I’ll be referencing page seven, one of the things that while we are most pleased with in the quarter as Paul mentioned earlier is our core deposit growth. Our continued growth in core deposits is the result of the ongoing focus of our bankers for the past several quarters on multiple initiatives to help build our core deposit funding. We grew core deposits, define this total deposits less broker by about $409 million or 7% linked quarter and we grew core deposits $942 million or 14% versus prior year. The drivers here are expansion of commercial deposit relationships and our treasury management services along with consumer retail CD growth. Core growth has allowed us to reduce our broker deposits which declined by $358 million over the prior year bringing our broker deposits down to just 9.7% of total deposits. Our total deposit growth was 7% during the quarter, which brought our total deposits to $8.5 billion as of quarter end. Our focus continues to be on growing core customer deposits and we’ve been pleased with the results. One of the benefits of growing our core customer deposits is the resulting improvement in our deposit mix during the quarter, evidence by our noninterest bearing deposits as a percent of total deposits increasing to 24.4%, this represents the four consecutive quarterly increase in this important ratio. With that, let me turn it over to Valerie who will go through our quarterly performance in little more detail.

[Valerie Toalson:]

Thank you, Sam. If you turn to side eight, I’ll first address the net interest margin. Our NIM has improved very nicely from the same quarter a year ago, up 25 basis points to 3.52% from 3.27%. The increase is driven by the impact of short-term Fed rate increases on our assets sensitive balance sheet. As a reminder 71% of our loan portfolio is floating rate, reflective of our heavy CNI commercial business focus. Compared to the second quarter of this year, the margin did decline 19 basis point, but that was due to the incremental recovery income accretion that we received on acquired loans in the second quarter. That accounted to loans were about 22 basis points of the link quarter margin decline which is partially offset by a little underlying NIM improvement again related to the net impact of market rate increases on our balance sheet. Excluding the acquire credit impaired loans due to the second quarter volatility, all other loan yield increased 45 basis points over the prior year to 4.41% and up five basis points over the link quarter. We’ve experienced data on these loans was about 75% on a year-to-date basis. And on the deposit side our total deposit data is about 24% year-to-date, so it continues to lag the loan data significantly and we are seeing the benefit of that in our results. Our total cost of deposits was 64 basis points in the quarter, an increase of 17 basis points in the prior year and up five basis points in the prior quarter. Total cost of funds which includes the holding company debt with 84 basis points, that's 15 basis points in the prior year and up only three basis points from the prior quarter. Turning to Page nine, the non-interest income platform, the pie chart on the right is a good summary of the breadth of our non-interest income sources that we believe is a very nice complement to our overall core banking businesses. For the third quarter, adjusted non-interest income was 27 million, up 17% from the prior quarter and up 27% from the prior year. This quarter included growth across the board except with a little softer mortgage revenue as we've more on balance sheet growth in the mortgage area versus mortgages sold which drives this non-interest income. Our assets under management were steady ending the quarter at 5.6 billion. This quarter also included about a 1.5 million in valuation improvements of certain investment assets and a 1.1 million nonrecurring gain on an opportunistic sale of a small interest segment. Overall a solid and consistent quarter service fee revenue. Turning to Slide 10, this continues to be our favorite slide that quarter-over-quarter improvement in our pre-tax pre-provision net earnings continued this quarter as we saw steady growth in our revenue and expenses again remained relatively flat. All that has translated into the eighth consecutive quarter of efficiency ratio improvements which has now dropped to the record low this quarter at 52.2%. As Paul noted earlier, we did forge over the $10 billion threshold this quarter and we've included a slide with the anticipated regulatory and financial impacts of exceeding that threshold as the various facets stays in over the next period. We continue to assess these, but overall it's certainly manageable based on earnings trends and we've been comparing for this organizationally for some time now. With that, operator we would like to open it up for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Steven Alexopoulos from JP Morgan. Please go ahead.

[Steven Alexopoulos:]

Hey good morning everybody. I wanted to start on the expenses, you guys have really done a great job holding expenses flat. One, do you think you could continue to hold expenses flat? Moving forward to year end Paul referenced, I thought you set a new efficiency target goal, what is that goal?

[Paul Murphy:]

Okay Steve, this is Paul in. First off, thinking a bit further where we had set initially 50% to 52% range so we are approaching that, we haven't really hit the goal just yet, but as I think about longer term, we've a number of business lines that operate it really efficiently. And then, of course we've a retail bank component that was less able to move the efficiency ratio. So we will establish a new goal here over the next few months, but I think we can certainly be at the closer to 50% or below 50% with several quarters to work on.

[Valerie Toalson:]

Steven I would say also kind of on the expense trend, I mean we have held them remarkably flat and I think I have actually been saying for the past couple of quarters, we have kind of reached the bottom and we are expecting to see that trend up and my expectation continues to be that. I do think that as we go into the fourth quarter and into next year, that we will see some increases in the expenses again not significant, low single-digit, low to mid single-digits something along those lines just as we continue to grow and expand in supporting our business growth.

[Steven Alexopoulos:]

Okay. That’s helpful, Valerie. On the loan side, you had some really strong growth in the quarter in the general CNI, not lot of banks are seeing strength there. Can you give some color on what is driving that and do you see the sustainable here?

[Hank Holmes:]

Sure. Thanks, Steven this is Hank. I appreciate the question and we do feel its sustainable, our CNI teams are primarily out of Texas are seeing a lot of growth. After the hurricane came through, we’ve seen an increase in kind of economic activity and feels very positive with that at almost that includes the loan growth but many of the transactions we are seeing are single bank or are club transactions we are seeing meaningful ancillary business as well. So that will drive the deposit growth as well as the loan side. Specialized industries also we are seeing a lot of focus in the specialized industries group, our restaurant team and [indiscernible] team and healthcare and technology and that is kind of the outlook on that is positive. And then we’ve seen some CRE fundings as well as you know primarily construction is what we do, and we are seeing some nice advances in that portfolio at a little bit higher rate than what we saw earlier in the lifecycle.

[Steven Alexopoulos:]

Okay. Terrific. And maybe one last question for Valerie. The margin decline as expected right given less accretion in the quarter. The accretion seems pretty light looking at the excess of $23 million. Are you thinking about that in the overall margin from here? Thanks.

[Valerie Toalson:]

Yes. Sure. So, as you know in the - and it was anticipated as you mentioned given the excess amount that we had in the second quarter. In the press release, we have it in table three we breakout the accretion from the scheduled accretion and then the recovery accretion. And the scheduled accretion has a fairly consistent trend in a slight decline quarter-over-quarter, that I would expect to continue. On the recovery accretion, as you know it is bumpy, some of what we saw in the second quarter caused effectively this quarter to be lighter than usual. But, I would say on an ongoing basis maybe a little bit more than what we saw this quarter, but probably not much as we are working down that portfolio that extra recovery accretion is not going to be as large that perhaps have been in the prior years. But again quarter-to-quarter it’s a little bit hard to trend.

[Steven Alexopoulos:]

And then the overall margin expectation Valerie?

[Valerie Toalson:]

Yes. So, it’s obviously going to depend on what goes on with the rates, we are pretty dependent on that. If we get one rate increase in December, maybe somewhat flattish as we look out over the next quarter or so. We do have if you recall about $1 billion in the up CD products that reprise twice a year once in April and once in October. So, we have that coming on into the fourth quarter as we look forward.

[Steven Alexopoulos:]

Okay, great. Thanks for all the color.

[Operator:]

Our next question comes from Brady Gailey with KBW. Please go ahead.

[Brady Gailey:]

Hey, good morning guys.

[Paul Murphy:]

Thanks for joining us.

[Brady Gailey:]

Yes, anytime. So, as you look at loan growth I mean like you said it was pretty strong. I know in the past you have given guidance kind of on the high single to low double-digit range. I just wondering as we look out to 2018, do you think that’s still on appropriate loan growth rate?

[Paul Murphy:]

I do.

[Brady Gailey:]

Alright and then on the M&A front, now that you guys are few months behind the IPO, you have some excess capital, is there anything new happening in our conversations with M&A targets?

[Paul Murphy:]

Yes. Well Brady, first thing I would say is that we are going to be disciplined, we went public for two reasons, we want to have a currency to be active with M&A and we are exploring conversations here and there, but these things typically take time and I guess maybe what I would say in terms of creating an expectation, I would like to create the expectation that over time we would all could be successful, but it will pace ourselves and we will be disciplined.

[Brady Gailey:]

Okay, great. Thanks guys.

[Operator:]

Our next question comes from Jon Arfstrom with RBC Capital Markets. Please go ahead.

[Jon Arfstrom:]

Thanks. Good morning guys, good morning Valerie. I think we are all trying to look at loan growth, but the deposit growth numbers that you talked about Sam were really strong and I guess can you give us a little more color on how granular that is and maybe also a look into how the treasure management pipeline looks for potential wins there?

[Samuel Tortorici:]

Sure, I would be happy to. So as you look at our quarter-over-quarter deposit growth, the key categories for our interest bearing, non-interest bearing and retail CDs were kind of the key drivers and in terms of the retail piece that is very granular; in terms of the rest it's really the good work of our C&I teams, our commercial real estate team, our specialized industries teams, as they're mining their customer base and looking for opportunities, and our small business team is also doing a very nice job with deposit growth. We've on-boarded some fairly significant institutional deposit customers and a lot of that was driven through the strength of our treasury management platform, those are still in process of on-boarding so we still have some potential upside from that business, but I would characterize this growth as largely very granular, our treasury pipeline looks really as solid as it has since our inception. So we would expect that to continue as our portfolio and customer base matures.

[Jon Arfstrom:]

So, nothing really temporary or outside in there?

[Samuel Tortorici:]

No.

[Jon Arfstrom:]

Okay, good. One of the other surprises was that smaller provision for the hurricane $2 million and you all provided us with a lot of information right after the storms, but just the question is do you feel like you've got at all and is there also a way to maybe size what you think the hurricane cost you in terms of maybe a little bit slower growth, a little bit lower fees, a little bit higher expenses?

[Hank Holmes:]

Jon so I'll comment and then invite others. The 2 million estimate I would characterize as I think somewhat conservative in terms of clearly identifiable losses we are just not seeing that come forward. So from what it cost us from operations is really de minims.

[Valerie Toalson:]

Yes it was effectively well less of the $100,000 from fees et cetera., we had less than 25,000 and an expense of the branch repairs that had to be done. I mean truly de minims and on the reserve side as we look through it on the commercial side we actually did not put up a unique reserve related to commercial side after going through all of those customers. This was entirely on the residential side. And more related to the Harvey impacted versus the Irma impact because of the flood.

[Jon Arfstrom:]

Okay, good. That’s great. Thank you.

[Paul Murphy:]

Jon, I would just circle back on just one point as well with respect to deposits. In terms of averages, the deposit growth numbers I think are very representative. We did have a period end a client to had a disproportionately large balance that will migrate out overtime. So, I would probably look at a little bit more at the averages than I would to the period in.

[Jon Arfstrom:]

Okay. Alright. Thank you. That make sense. Thanks Paul.

[Operator:]

[Operator Instructions] And our next question comes from Michael Rose with Raymond James. Please go ahead.

[Michael Rose:]

Hey, guys. How are you?

[Valerie Toalson:]

Good morning, Michael.

[Paul Murphy:]

Hi, Michael.

[Michael Rose:]

Good morning. Just wanted to circle back on energy loan growth, it looks like you guys had some good growth in the midstream. Just wanted to gauge your appetite for growth here now than were kind of sustainably above $50 a barrel and loans are down to about a 11.5% at the book at this point. What is the risk filings at this point and would you want to see that book actually grow, are you still kind of de-emphasizing. Just looking for any sort of outlook on expectations for the energy portfolio?

[Paul Murphy:]

Yes. Sure. So, with respect to EMP, we have approved a couple of credits here in the last 90 days, approached a new activity we’ve had in probably 18 months. The borrow is higher of course, our covenant packages are tighter, leverage is lower. So we are cautiously with this higher bar open to new EMP business. As you pointed out in the midstream, it continues to just be a real bright spot for us and so they open for business as well. Also service would be a place where we just approved the new credit recently there, but smaller and more conservative. So, all lines of business are open and the underwriting today is pretty solid, pricing improve covenant packages et cetera. So, in terms of percentages we have a board approve limit of 16% and I would expect us to stay within that limit. Q - Michael Rose\ Okay. That’s helpful. And then maybe switching to be the restaurant broking, it’s been a big source of growth for you guys over the past few years. What is your appetite to that given potentially how late in the cycle, if you can just remind us types of franchises that you are lending to. My understanding is that it’s more in the fast food categories that might be a little bit more potentially recession resistant. Thanks.

[Samuel Tortorici:]

Yes. This is Sam, Michael, I’ll be happy to take that one. So, this business has been a good core business, it’s grown to become one of our larger portfolios. And we’ve employed since day one and continue to pretty conservative standard underwriting model for this industry. We focus on large branded restaurants concept be the who’s who names is the best performing, roughly half of our restaurant operating companies and other half would be top franchisees, meaning multiple stores across many geographies. We do like the QSR space right, it is proven over cycles to be much more recession resistant. So, our appetite to grow that book continues to be solid. Q - Michael Rose\ Okay. Thanks for taking my questions.

[Operator:]

[Operator Instructions] And our next question comes from Brad Milsaps with Sandler O'Neill. Please go ahead.

[Peter Ruiz:]

Good morning guys, this is actually Peter Ruiz on for Brad.

[Valerie Toalson:]

Hey Peter.

[Peter Ruiz:]

Hey, thanks for taking my questions. You guys have answered most of my questions here, but just wanted to get a little bit of color maybe around the benefit there and other fee income, I think you said was around 1.5 million, and just kind of what the driver of that is and what that kind of looks like going forward?

[Valerie Toalson:]

Sure. Yes, we've some investments, this was specifically an investment about $8 million and it's kind of on equity basis and it's actually had some write ups in its assets and as that translated into our calculation of [indiscernible] asset value it resulted in 1.5 million increase in our valuation of that asset and so that's not something that - from time-to-time it will occur, from time-to-time it could go down, from time-to-time it could go up, but that's just the nature of that investment.

[Peter Ruiz:]

Okay that’s great. And I think you highlighted this a little bit earlier, but there weren't any meaningful sort of onetime expenses related to the hurricane, any expenses in third quarter, were there?

[Valerie Toalson:]

Not anything over the negligible amount that we indicated.

[Peter Ruiz:]

Okay. That’s it from me. Thanks for taking my questions.

[Paul Murphy:]

Thanks Peter.

[Operator:]

[Operator Instructions]. There are no further questions at this time. So, I would like to turn the conference back over to Paul Murphy for any closing remarks.

[Paul Murphy:]

So in summary back in April when we went public we suggested that we thought that bank was at a bit of an inflection point and that we would be able to see some nice improvement in our operating leverage. I have to confess that really the linked quarter improvement in the efficiency ratio is probably a bit stronger than we would have anticipated, but satisfying and gratifying to see the results. So we feel good about our first three quarters as a public company. I'll have to tell you that morale is sky high at Cadence Bank, we've got a lot of motivated hardworking bankers that are out making good calls and reaching out to grow the business, we've all hands call this morning with several 100 of our bankers to announce, they are going over 10 billion and the celebration and so I think it's just a real positive buzz at Cadence these days and we are grateful for our shareholder support and with that we will adjourn the call.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.