Cadence Bancorporation (NYSE: CADE) (“Cadence”) expects to
recognize a meaningful change in the timing of recognition of hedge
revenue into current earnings as a result of a LIBOR hedge
determined to be partially ineffective under hedge accounting. The
Company is in the process of refining its related estimates, but
currently expects between $165 million and $175 million (pre-tax)
of incremental hedge revenue to be recognized in fourth quarter
2020 as discussed further in this release.
Preliminary Credit Metrics
Cadence also expects to report overall improvement in its credit
metrics for the fourth quarter of 2020, including:
- Nonperforming loans are expected to decline between $45 million
and $50 million, or approximately 25% from $189 million at
September 30, 2020.
- Criticized loans are expected to decline between $215 million
and $225 million, or approximately 20% from $1.083 billion at
September 30, 2020.
- Fourth quarter 2020 expected net charge-offs are estimated
between $20 million and $25 million.
- Projected allowance for credit losses as a percent of total
loans is not anticipated to change materially from the 2.86% ratio
at September 30, 2020.
- The fourth quarter 2020 provision for loan losses is currently
expected to be less than $10 million.
Capital Ratios and Capital
Planning
As a result of the estimated material increase in net income
from the incremental hedge revenue and preliminary projected
improvements in credit metrics, all regulatory capital ratios are
expected to increase from their already strong, well-capitalized
position. While acknowledging the ongoing COVID-19 threat and
resultant economic uncertainties, Cadence is evaluating various
capital actions including potential increased dividends, resumption
of its share repurchase program and repayment of callable and
maturing debt, all of which are subject to required Board and
regulatory approvals and/or non-objections. Management anticipates
discussing these options further during its fourth quarter earnings
announcement.
Hedge Effectiveness and Acceleration of
Income Reclassification
In February 2019, Cadence executed a five-year $4.0 billion
notional collar on one-month LIBOR loans designed to protect
earnings in a down-rate environment. On March 6, 2020, Cadence
terminated the collar, resulting in a “locked-in” gain of $261
million, initially recognized in Other Comprehensive Income
(“OCI”). Based on hedge accounting, that gain was forecast to
reclass out of OCI and into interest income over the remaining term
of the hedge based on a continuing expectation of an adequate level
of hedge-eligible loans. Hedge-eligible loans are 1-month LIBOR
loans that either have no interest rate floor or have not reached
their floor rate.
Given the extraordinary events of the past nine months related
to COVID-19 and the ensuing economic impacts, Cadence has
experienced a decline in our hedge-eligible loans such that our
forecast now anticipates a partial shortfall of hedge-eligible
loans which began in the fourth quarter of 2020 and continuing
throughout the remaining term of the hedge. The declines in
eligible loans were driven by loans reaching their floors as a
result of rate declines during the year, new loans being originated
and loans renewing at rates already at a floor, and increased loan
paydowns.
Based on the forecast shortfall (ineffectiveness), hedge
accounting requires the reclassification from OCI into current
period income of the total expected ineffective portion of the
hedge. As such, in the fourth quarter 2020, we anticipate the
reclassification of between $165 million - $175 million (pre-tax)
from OCI to Non-Interest Income, or between an estimated $126
million - $134 million after-tax. This reclassification serves to
increase retained earnings (and net income) and reduce OCI, with no
net impact to tangible capital or tangible book value per share.
Given the increase to retained earnings, however, Cadence’s
regulatory capital levels are increased accordingly. The expected
incremental hedge revenue during the fourth quarter of 2020 will
alone drive an estimated increase in the Company’s Tier 1 Risk
Based Capital ratio of between 90 and 95 basis points.
This accounting treatment does not impact the total revenue to
be recorded from the collar transaction and associated termination
gain; it simply adjusts the time period during which it is
recorded. As originally disclosed in Item 8-K issued on March 9,
2020, the total hedge revenue (inclusive of the $261 million gain)
remains unchanged at $276 million, with $10 million previously
recognized in 2019, between $226 million - $236 million now
estimated to be recognized in revenue in 2020, and the remaining
$30 million - $40 million estimated to be recognized in revenue
primarily through the end of 2021.
Preliminary Nature of
Information
Given the Company's fourth quarter ended seven days ago, the
information contained herein are projected estimates based upon
information available as of today and should be considered
preliminary and subject to change. The Company has not completed
its financial close processes for the quarter and therefore actual
amounts may differ from amounts the Company anticipates at this
date. The Company may also identify items that could require
further adjustments, which may be material, to the information
presented above. As a result, the estimates herein constitute
forward-looking information and are subject to risks and
uncertainties, including possible adjustments to these select
preliminary financial results. The Company plans to report its full
fourth quarter and full year 2020 financial results on Monday,
January 25, 2020 and will hold a conference call on that date to
discuss the results.
January 8, 2021 Conference Call related to Hedge
Ineffectiveness
Cadence will host a brief conference call to discuss the
contents of this press release on Friday, January 8, 2021 at 7:30
a.m. CT / 8:30 a.m. ET.
To access the conference call, please dial one of the following
numbers approximately 10-15 minutes prior to the start time to
allow time for registration and use the Elite Entry Number provided
below.
Dial in (toll free):
1-888-317-6003
International dial in:
1-412-317-6061
Canada (toll free):
1-866-284-3684
Participant Elite Entry Number:
9971596
For those unable to participate in the live presentation, a
replay will be available through January 15, 2021. To access the
replay, please use the following numbers:
US Toll Free:
1-877-344-7529
International Toll:
1-412-317-0088
Canada Toll Free:
1-855-669-9658
Replay Access Code:
10151156
End Date:
January 15, 2021
About Cadence Bancorporation
Cadence Bancorporation (NYSE: CADE), headquartered in Houston,
Texas, is a regional financial holding company with $18.4 billion
in total assets as of September 30, 2020. Its wholly owned
subsidiary, Cadence Bank, N.A., operates 99 branch locations in
Alabama, Florida, Georgia, Mississippi, Tennessee and Texas, and
provides corporations, middle-market companies, small businesses
and consumers with a full range of innovative banking and financial
solutions. Services and products include commercial and business
banking, treasury management, specialized lending, asset-based
lending, commercial real estate, SBA lending, foreign exchange,
wealth management, investment and trust services, financial
planning, retirement plan management, payroll and insurance
services, consumer banking, consumer loans, mortgages, home equity
lines and loans, and credit cards. Clients have access to
leading-edge online and mobile solutions, interactive teller
machines, and more than 55,000 ATMs. The Cadence team of 1,800
associates is committed to exceeding customer expectations and
helping their clients succeed financially.
Cautionary Statement Regarding Forward-Looking
Information
This communication contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995. These forward-looking statements reflect our current views
with respect to, among other things, future events and our results
of operations, financial condition and financial performance. These
statements are often, but not always, made through the use of words
or phrases such as “may,” “should,” “could,” “predict,”
“potential,” “believe,” “will likely result,” “expect,” “continue,”
“will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,”
“projection,” “would” and “outlook,” or the negative version of
those words or other comparable words of a future or
forward-looking nature. These forward-looking statements are not
historical facts, and are based on current expectations, estimates
and projections about our industry, management’s beliefs and
certain assumptions made by management, many of which, by their
nature, are inherently uncertain and beyond our control.
Accordingly, we caution you that any such forward-looking
statements are not guarantees of future performance and are subject
to risks, assumptions and uncertainties that are difficult to
predict.
Although we believe that the expectations reflected in these
forward-looking statements are reasonable as of the date made,
actual results may prove to be materially different from the
results expressed or implied by the forward-looking statements.
Such factors include, without limitation, the “Risk Factors”
referenced in our Registration Statement on Form S-3 filed with the
Securities and Exchange Commission (the “SEC”) on May 21, 2018, and
our Registration Statement on Form S-4 filed with the SEC on July
20, 2018, other risks and uncertainties listed from time to time in
our reports and documents filed with the SEC, including our Annual
Reports on Form 10-K and Quarterly Reports on Form 10-Q, and the
following factors: business and economic conditions generally and
in the financial services industry, nationally and within our
current and future geographic market areas; economic, market,
operational, liquidity, credit and interest rate risks associated
with our business; deteriorating asset quality and higher loan
charge-offs; the laws and regulations applicable to our business;
our ability to achieve organic loan and deposit growth and the
composition of such growth; increased competition in the financial
services industry, nationally, regionally or locally; our ability
to maintain our historical earnings trends; our ability to raise
additional capital to implement our business plan; material
weaknesses in our internal control over financial reporting;
systems failures or interruptions involving our information
technology and telecommunications systems or third-party servicers;
the composition of our management team and our ability to attract
and retain key personnel; the fiscal position of the U.S. federal
government and the soundness of other financial institutions; the
composition of our loan portfolio, including the identity of our
borrowers and the concentration of loans in energy-related
industries and in our specialized industries; the portion of our
loan portfolio that is comprised of participations and shared
national credits; the amount of nonperforming and classified assets
we hold; the extent of the impact of the COVID-19 pandemic on us
and our customers, counterparties, employees, and third-party
service providers, and the impacts to our business, financial
position, results of operations, and prospects; the impact on our
financial condition, results of operations, financial disclosures,
and future business strategies related to the implementation of
FASB Accounting Standards Update 2016-13, Financial Instruments –
Credit Losses, commonly referred to as CECL. Cadence can give no
assurance that any goal or plan or expectation set forth in
forward-looking statements can be achieved and readers are
cautioned not to place undue reliance on such statements. The
forward-looking statements are made as of the date of this
communication, and Cadence does not intend, and assumes no
obligation, to update any forward-looking statement to reflect
events or circumstances after the date on which the statement is
made or to reflect the occurrence of unanticipated events or
circumstances, except as required by applicable law.
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version on businesswire.com: https://www.businesswire.com/news/home/20210107005916/en/
Cadence Bancorporation
Media contact: Danielle Kernell 713-871-4051
danielle.kernell@cadencebank.com
Investor relations contact: Valerie Toalson 713-871-4103
or 800-698-7878 vtoalson@cadencebancorporation.com
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