Cadence Bancorporation (NYSE: CADE) reported Q1 EPS of $0.10, $0.06 worse than the analyst estimate of $0.16. Revenue for the quarter came in at $188.5 million versus the consensus estimate of $185.61 million.

First Quarter 2020 Highlights:

First quarter 2020 highlights (compared to the linked quarter where applicable) are as follows:

• Annualized returns on average assets and tangible common equity for the first quarter of 2020 were (9.08%) and 3.86%, respectively, compared to 1.34% and 15.54%, respectively, for the first quarter of 2019 and 1.14% and 11.82%, respectively, for the fourth quarter of 2019.
• Adjusted annualized returns on average assets(1) and adjusted tangible common equity(1) for the first quarter of 2020 were 0.28% and 3.62%, respectively, compared to 1.74% and 19.83%, respectively, for the first quarter of 2019 and 1.16% and 11.93%, respectively, for the fourth quarter of 2019.
• Adjusted pre-tax pre-provision net earnings(1) for the first quarter of 2020 was $93.0 million, a decrease of $15.5 million or 14.3% compared to the first quarter of 2019 and a decrease of $1.9 million or 2.0% compared to the fourth quarter of 2019. The linked quarter decline was driven by lower accretion income. As a percent of average assets, adjusted pre-tax pre-prevision net earnings was 2.11%, 2.50% and 2.11% for the first quarter of 2020, first quarter of 2019 and fourth quarter of 2019, respectively.
• On March 6, 2020, we terminated our $4.0 billion notional interest rate collar, realizing a gain of $261.2 million (“transaction gain”). The locked-in transaction gain, currently reflected in other comprehensive income net of deferred income taxes, will amortize over an expected four years into interest income, regardless of the interest rate environment.
• On January 1, 2020, Cadence adopted the current expected credit loss (“CECL”) accounting standard for estimating credit losses. Upon adoption, we recognized an increase of $75.9 million in our allowance for credit losses (“ACL”), increasing the ACL by 63.4% to $195.5 million or 1.50% of total loans. Note that this “Day 1” impact did not impact first quarter loan provisions, but instead only impacted the ACL, deferred taxes, and equity.
• The provision for credit losses for the first quarter 2020 was $83.4 million compared to $27.1 million in the linked quarter. Upon the adoption of CECL, the provision for credit losses includes the provision for loan losses and the provision for unfunded credit commitments. Prior to the adoption of CECL, the provision for unfunded credit commitments was included in other noninterest expenses. Our calculation for the ACL used the baseline scenario provided by a nationally recognized service released on April 4, 2020, as adjusted after considering qualitative and environmental factors.
• We continued to actively manage funding costs, with total cost of funds at 1.05% and total cost of deposits at 0.96%, representing declines of 18 basis points for each.
• We more than offset the effect of declining rates on our earning assets through the impact of our hedging and deposit cost management. While tax equivalent net interest margin (“NIM”) declined by 9 basis points to 3.80%, 11 basis points was due to lower accretion income during the quarter due in part to the implementation of CECL.
• We aggressively managed expenses, with adjusted expenses (see Table 10) declining $7.0 million and realized an adjusted efficiency ratio(1) of 49.9%.
• Capital remained very strong with CET1 at 11.4%, and we ended the quarter with a well-positioned, diverse balance sheet reflecting strong liquidity and a robust capital base.

“There are several positive points about our first quarter results that should be mentioned. Our adjusted pre-tax, pre-provision earnings of $93 million or 2.11% as a percent of average assets is relatively stable compared to the linked quarter. Our loan loss reserves more than doubled to 1.83% of loans in part due to CECL implementation as well as the impact of COVID-19. Importantly, our capital ratios and liquidity are strong and our tangible book value per share increased from $14.65 to $15.65 linked quarter, up 6.7%. Our team has seen numerous cycles and we are cautiously and prudently preparing for an extended period of stress. Our bankers, while largely working remotely and safely, are actively and effectively meeting the needs of our customers and communities. Cadence, as an existing SBA preferred lender, has been active in the Paycheck Protection Program (“PPP”), and we have secured approximately $1 billion in these PPP loans for our customers. This is a particularly difficult time for restaurants, energy companies and their banks. COVID-19, coupled with historically low oil prices, has taken a toll on these industries in which we have an active banking presence. Our exposure to these industries contributed to the significant drop in our share price, which was a primary trigger of the goodwill impairment charge that impacted our first quarter earnings. This non-cash goodwill charge does not adversely affect our strong capital ratios or liquidity, and we remain confident in our ability to deal with any additional pressures we may experience in the quarters ahead. In light of the higher level of stress, our Board declared a second quarter dividend of $0.05 cents per share, down from $0.175 in previous quarter. This prudent step is consistent with our historical conservative approach to capital management,” stated Paul B. Murphy, Jr., Chairman and Chief Executive Officer of Cadence Bancorporation.

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