Cadence Bank (NYSE:CADE) has recently garnered attention from financial analysts due to its mixed performance in the third quarter of 2024. The regional bank, which operates primarily in the southern United States, has shown resilience in some areas while facing challenges in others. According to InvestingPro data, CADE has demonstrated strong momentum with a 36% price return over the past six months, significantly outperforming many regional banking peers. This comprehensive analysis will delve into the bank's recent financial results, market position, and future prospects.
Financial Performance
Cadence Bank reported a strong third-quarter core earnings per share (EPS) of $0.73, surpassing the consensus estimate of $0.63. This performance reflects solid core trends and effective expense control. Analysts have adjusted their EPS estimates for the coming years, with projections for 2024 and 2025 increased to $2.72 and $2.78, respectively. A new estimate for 2026 has been initiated at $3.00 per share.
The bank's market capitalization stands at approximately $6.2 billion, indicating its significant presence in the regional banking sector. Despite the positive earnings surprise, Cadence Bank's stock performance has been subject to varying assessments from analysts, with price targets ranging from $34 to $37.
Loan and Deposit Trends
One of the key areas of focus for Cadence Bank has been its loan and deposit growth. In the third quarter of 2024, loan balances remained flat, with paydowns offsetting new production. This stagnation has led analysts to revise their loan growth expectations for fiscal year 2024 to low to mid-single digits.
On a more positive note, core deposit growth has been strong, with a 10.4% annualized increase in the last quarter. This growth, while partly influenced by temporary overnight customer sweep activity, indicates healthy liquidity for the bank. The robust deposit base provides Cadence Bank with a stable funding source for future lending activities.
Credit Quality
Credit quality metrics for Cadence Bank have shown mixed signals. Net charge-offs (NCOs) slightly decreased to 0.26%, suggesting some stability in asset quality. However, there was an increase in nonaccrual loans due to the migration of criticized credits. This rise in nonperforming assets could be a potential concern for investors and may require close monitoring in the coming quarters.
The bank's allowance for credit losses (ACL) remained steady at 1.38% of total loans. This level of provisioning indicates that management believes the current reserves are adequate to cover potential loan losses, but it also suggests caution regarding the overall credit environment.
Expense Management
Cadence Bank has demonstrated a focus on expense management, which has been well-received by analysts. Despite recent increases in expenses due to merit raises and one-time costs, the bank has revised its expense guidance for fiscal year 2024 downward. The new guidance projects a decline in expenses of 1% to 3%, reflecting management's commitment to operational efficiency.
This improved expense outlook is expected to contribute positively to the bank's profitability in the coming quarters. Analysts view this as a sign of strong execution by Cadence Bank's management team.
Future Outlook
Looking ahead, Cadence Bank's prospects appear mixed but generally positive. The bank is expected to benefit from loan repricing tailwinds, which should lead to higher net interest income in upcoming quarters. Additionally, the strong net interest margin (NIM) outlook suggests potential for increased profitability from lending activities.
Analysts anticipate an improvement in loan growth by 2025, which could drive revenue higher. However, the conservative revenue guidance provided by the company indicates that there might be some underlying challenges in achieving higher growth rates in the near term.
The active loan pipelines reported by the bank are seen as a positive indicator for future growth. Combined with the potential for margin improvement and effective expense management, these factors contribute to a cautiously optimistic outlook for Cadence Bank.
Bear Case
How might flat loan balances impact Cadence Bank's growth?
The flat loan balances observed in the third quarter of 2024 could pose a significant challenge to Cadence Bank's growth trajectory. Loan growth is a key driver of revenue for banks, and stagnation in this area may lead to limited expansion of the bank's interest income. If this trend persists, it could result in slower overall growth and potentially impact the bank's ability to meet or exceed market expectations.
Furthermore, flat loan balances may indicate a lack of demand in Cadence Bank's primary markets or increased competition from other lenders. This situation could force the bank to either accept lower-quality loans to drive growth or maintain stringent lending standards at the cost of market share. Either scenario presents risks to the bank's long-term performance and profitability.
What risks does the increase in nonaccrual loans pose?
The reported increase in nonaccrual loans at Cadence Bank is a concerning development that warrants careful consideration. Nonaccrual loans are those for which the bank has ceased to accrue interest due to doubts about the borrower's ability to make payments. An uptick in these loans could signal deteriorating credit quality within the bank's loan portfolio.
This trend may lead to several negative outcomes:
1. Increased loan loss provisions, which would directly impact the bank's profitability.
2. Higher capital requirements to cushion against potential losses, potentially limiting the bank's ability to grow or return capital to shareholders.
3. Regulatory scrutiny, which could result in additional compliance costs or restrictions on the bank's operations.
4. Reputational risk, as investors and depositors may become wary of the bank's asset quality.
If the increase in nonaccrual loans is not effectively managed or if it represents the beginning of a broader trend, it could significantly impact Cadence Bank's financial health and market valuation.
Bull Case
How could strong core deposit growth benefit Cadence Bank?
The robust core deposit growth of 10.4% annualized in the last quarter presents several potential benefits for Cadence Bank:
1. Stable funding source: Core deposits provide a reliable and typically low-cost source of funding for the bank's lending activities. This stability can help Cadence Bank maintain attractive net interest margins.
2. Reduced reliance on wholesale funding: Strong deposit growth reduces the need for more expensive wholesale funding sources, potentially lowering the bank's overall cost of funds.
3. Customer relationships: Growth in core deposits often indicates strong customer relationships, which can lead to cross-selling opportunities for other banking products and services.
4. Liquidity buffer: A strong deposit base provides a liquidity cushion, allowing the bank to better weather economic downturns or periods of market stress.
5. Competitive advantage: In a rising rate environment, banks with strong core deposit bases may be better positioned to expand their lending activities without significantly increasing their funding costs.
If Cadence Bank can sustain this deposit growth trend, it could lead to improved profitability and a stronger competitive position in its markets.
What impact could the improving expense outlook have on profitability?
Cadence Bank's revised expense guidance, projecting a decline of 1% to 3% for fiscal year 2024, could significantly enhance the bank's profitability:
1. Improved efficiency ratio: Lower expenses relative to revenue would result in a better efficiency ratio, a key metric for bank performance.
2. Enhanced earnings: Cost savings directly contribute to the bottom line, potentially allowing Cadence Bank to exceed earnings expectations.
3. Competitive positioning: Improved cost management could allow the bank to offer more competitive rates on loans and deposits, potentially driving market share growth.
4. Investor confidence: Demonstrating effective expense control may boost investor confidence in management's ability to navigate challenging economic conditions.
5. Capital allocation flexibility: Lower expenses could free up capital for other strategic initiatives, such as technology investments, acquisitions, or increased shareholder returns.
If Cadence Bank can achieve or exceed its expense reduction targets while maintaining revenue growth, it could lead to a significant improvement in overall profitability and shareholder value.
SWOT Analysis
Strengths:
- Strong core deposit growth indicating healthy liquidity
- Solid expense control and improving expense outlook
- Better-than-expected earnings performance
- Effective management execution driving favorable trends
Weaknesses:
- Flat loan balances potentially signaling stagnation in core business growth
- Increase in nonaccrual loans pointing towards potential future credit issues
- Conservative revenue guidance suggesting challenges in achieving higher growth rates
Opportunities:
- Potential for loan growth improvement, particularly by 2025
- Strong net interest margin (NIM) outlook
- Loan repricing tailwinds expected to lead to higher net interest income
- Active loan pipelines indicating potential for future revenue growth
Threats:
- Potential deterioration in credit quality if nonaccrual loan trends continue
- Competitive pressures in lending markets affecting loan growth and pricing
- Macroeconomic uncertainties that could impact borrower creditworthiness
- Regulatory changes that may affect banking operations or capital requirements
Analysts Targets
- Barclays (LON:BARC): $37.00 (October 23rd, 2024)
- RBC (TSX:RY) Capital Markets: $36.00 (October 23rd, 2024)
- Piper Sandler: $34.00 (October 23rd, 2024)
This analysis is based on information available up to October 23, 2024.
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