Cadence Bank (NYSE:CADE) has recently garnered attention from financial analysts due to its mixed performance in the third quarter of 2024. The bank, which operates in a competitive financial services landscape, has demonstrated both strengths and challenges that warrant a closer examination for investors considering its stock.
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 indicates solid core operations and has led analysts to revise their EPS estimates upward. For the fiscal year 2024, EPS projections have been increased to $2.72, up from previous estimates. Looking further ahead, analysts forecast EPS of $2.78 for 2025 and have initiated a 2026 EPS estimate of $3.00.
The bank's financial results reflect a complex operating environment. While core earnings have exceeded expectations, other metrics present a more nuanced picture of Cadence Bank's current position and future prospects.
Loan Growth and Credit Quality
One area of concern for Cadence Bank has been its loan portfolio performance. In the third quarter of 2024, loan balances remained flat, with paydowns offsetting new production. As a result, analysts have revised their loan growth expectations for the fiscal year 2024 to low to mid-single digits, indicating a more conservative outlook for this key revenue driver.
Credit quality indicators have shown mixed signals. On a positive note, net charge-offs slightly decreased to 0.26%, suggesting some stability in asset quality. However, nonaccrual loans increased due to the migration of criticized credits, which could signal potential future credit issues. The allowance for credit losses (ACL) remained steady at 1.38%, indicating that the bank maintains a consistent approach to risk management despite these fluctuations.
Deposit Trends
In contrast to the flat loan growth, Cadence Bank has demonstrated strength in its deposit base. Core deposit growth was robust, showing a 10.4% increase on a linked-quarter annualized basis. While this growth was partly influenced by temporary overnight customer sweep activity, it nonetheless indicates healthy liquidity and customer confidence in the bank.
The strong deposit growth is particularly noteworthy in the current banking environment, where competition for deposits remains fierce. This trend could provide Cadence Bank with a stable funding source and potentially support future lending activities as economic conditions evolve.
Expense Management
Expense control has emerged as a key focus area for Cadence Bank. The bank reported an increase in expenses due to merit raises and one-time costs in the third quarter. However, management has revised its expense guidance for fiscal year 2024, now projecting a decline of 1% to 3%. This adjustment suggests a commitment to operational efficiency and cost containment.
Analysts view this revised expense outlook positively, as it could contribute to improved profitability in the coming quarters. The bank's ability to manage costs effectively while maintaining service quality will be crucial for its competitive positioning and financial performance.
Future Outlook
Looking ahead, Cadence Bank's prospects appear mixed but with several potential growth drivers. Analysts anticipate an improvement in loan growth by 2025, which could help offset the current stagnation in this area. Additionally, the bank is expected to benefit from loan repricing tailwinds, potentially leading to higher net interest income in upcoming quarters.
The Net Interest Margin (NIM) outlook for Cadence Bank is strong, suggesting that profitability from lending activities is expected to remain robust. This positive NIM trajectory, combined with the bank's solid deposit base and cost control measures, could provide a foundation for improved financial performance in the medium term.
However, the conservative revenue guidance provided by the company indicates that management may be cautious about near-term growth prospects. This conservative stance could reflect underlying challenges in achieving higher growth rates or uncertainty in the broader economic environment.
Bear Case
How might flat loan balances impact Cadence Bank's growth prospects?
The stagnation in loan balances poses a significant challenge for Cadence Bank's growth trajectory. Loans are a primary source of revenue for banks, and flat growth in this area could constrain the bank's ability to expand its interest income. If this trend persists, it may lead to slower overall revenue growth and potentially impact profitability. The bank will need to find alternative ways to stimulate loan demand or diversify its revenue streams to maintain growth momentum.
What risks does the increase in nonaccrual loans pose to the bank's financial health?
The rise in nonaccrual loans is a concerning development for Cadence Bank. An increase in these non-performing assets could signal deteriorating credit quality within the loan portfolio. This trend may necessitate higher loan loss provisions, which would directly impact the bank's profitability. Moreover, if the trend continues, it could lead to increased regulatory scrutiny and potentially affect the bank's capital adequacy ratios. Managing this credit risk will be crucial for maintaining investor confidence and ensuring long-term financial stability.
Bull Case
How could strong core deposit growth benefit Cadence Bank's future performance?
The robust core deposit growth observed at Cadence Bank presents a significant opportunity for future performance enhancement. Strong deposit growth provides a stable and cost-effective funding source, which can improve the bank's net interest margin. This liquidity position allows the bank to fund loan growth when demand increases without relying heavily on more expensive wholesale funding. Additionally, a growing deposit base often indicates customer trust and can provide cross-selling opportunities for other banking products, potentially boosting non-interest income.
What potential does the improving NIM outlook offer for the bank's profitability?
An improving Net Interest Margin (NIM) outlook is a positive indicator for Cadence Bank's future profitability. A higher NIM suggests that the bank is effectively managing its interest-earning assets and interest-bearing liabilities. This efficiency can lead to increased net interest income, a key component of a bank's revenue. As interest rates stabilize or potentially rise, Cadence Bank may be well-positioned to benefit from the repricing of its loan portfolio. This could result in expanded margins and, consequently, improved overall profitability, assuming the bank can maintain its cost structure and credit quality.
SWOT Analysis
Strengths:
- Strong core deposit growth indicating customer confidence
- Solid expense management with revised guidance for cost reduction
- Better-than-expected earnings performance in recent quarters
Weaknesses:
- Flat loan balances limiting revenue growth potential
- Increase in nonaccrual loans signaling potential credit quality issues
Opportunities:
- Improving Net Interest Margin (NIM) outlook for enhanced profitability
- Potential for loan growth improvement by 2025
- Loan repricing tailwinds expected to boost net interest income
Threats:
- Potential future credit issues if nonaccrual loan trends continue
- Conservative revenue guidance suggesting caution about near-term growth
- Competitive banking environment pressuring margins and growth
Analysts Targets
- Barclays: $37.00 (October 23rd, 2024)
- RBC Capital Markets: $36.00 (October 23rd, 2024)
- Piper Sandler: $34.00 (October 23rd, 2024)
- RBC Capital Markets: $35.00 (July 24th, 2024)
- Barclays: $33.00 (July 24th, 2024)
Cadence Bank presents a complex investment case with both promising aspects and areas of concern. While the bank has demonstrated strength in deposit growth and expense management, challenges in loan growth and credit quality warrant careful consideration. Investors will need to weigh these factors against the broader economic backdrop and the bank's strategic initiatives to assess its long-term value proposition.
This analysis is based on information available up to October 24, 2024.
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