Merger With FCB Will Expand Savannah Market Presence And Provide Operational Efficiencies

Key Takeaways

• The merger with FCB Financial Corporation expands market presence, fostering revenue growth through new customer segments and cross-selling opportunities.
  
• Strategic cost savings, technology upgrades, and deposit management enhance efficiency, potentially boosting net margins and future earnings.
  
• Mergers, competitive loan pricing, and economic fluctuations pose challenges to earnings, deposit growth, and revenue stability for Cadence Bank.

Catalysts

Provides commercial banking and financial services.

• The merger with FCB Financial Corporation is expected to expand Cadence Bank's presence in the diverse Savannah market, which could lead to increased revenue growth through access to new customer segments and cross-selling opportunities.
  
• The estimated cost savings of approximately 25% of FCB's noninterest expense base from the merger can strengthen net margins by reducing operating costs and improving overall efficiency.
  
• Cadence Bank anticipates continued low to mid-single-digit organic growth in loans and core customer deposits, which can drive higher revenue and support future earnings.
  
• Projected improvements in net interest margin due to strategic deposit management and loan portfolio adjustments are expected to enhance earnings in 2025.
  
• Cadence Bank's focus on technology upgrades and improved operational leverage has positioned it for continued efficiency improvements, which can lessen expenses and positively impact net margins.

Cadence Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cadence Bank's revenue will grow by 8.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 29.9% today to 28.2% in 3 years time.
• Analysts expect earnings to reach $615.0 million (and earnings per share of $3.28) by about January 2028, up from $514.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.8x on those 2028 earnings, up from 12.5x today. This future PE is greater than the current PE for the US Banks industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 0.75% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Cadence Bank Future Earnings Per Share Growth

Risks

• The merger with FCB Financial Corporation and its expected regulatory approval could present uncertainties or delays that might impact earnings projections, especially if synergies are not realized as planned. This could potentially affect revenue and profit margins.
  
• Competitive pressure on loan pricing, including spread compression on high-quality loans, may limit interest income growth, impacting net interest margins and overall earnings.
  
• A significant portion of future deposit growth is expected from interest-bearing products, which might increase funding costs and compress net interest margins, affecting profitability.
  
• Economic downturns or fluctuations in interest rates could impact projected loan and deposit growth, ultimately affecting both top-line revenue growth and earnings estimates.
  
• The presence of non-bank competitors and fluctuating utilization rates in the construction lending segment may introduce volatility in balance sheet growth, impacting the bank’s revenue and earnings stability.

Valuation

• The analysts have a consensus price target of $40.91 for Cadence Bank based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $46.0, and the most bearish reporting a price target of just $38.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.2 billion, earnings will come to $615.0 million, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $35.14, the analyst's price target of $40.91 is 14.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.