Book value

Cadence Bank Stock: Higher Interest Rates Are Eroding Tangible Book Value

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Cadence bank (NYSE: CADE) is one of the few banks on my shortlist that has seen its share price rise in recent months. I wanted to take a closer look its financial performance to see if there is a good reason for Cadence to go against the grain.

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Q2 results were okay, but what about rising interest rates?

Banks tend to be in an excellent position to take advantage of rising interest rates, but in the current economic environment it will be important to ensure that it does not also lead to a large increase in defaults. payment and overdue loans.

Cadence Bank saw its net interest income increase by around 4% in the second quarter compared to the first quarter performance thanks to a higher net interest margin and a slightly higher asset base.

Evolution of the net interest margin

Cadence Bank Investor Relations

Net interest income was just under $325 million, which is the highest level on record (although it is difficult to compare this to the pre-acquisition period which was finalized in the second half of last year). The bank also reported just over $125 million in non-interest income and about $286 million in non-interest expense, which translated into pre-tax income of $164 million. and before provisions for loan losses.

income statement

Cadence Bank Investor Relations

The provision for loan losses was low, very low: Cadence Bank only had to set aside $1 million after not recording a single dollar of additional provisions in the previous quarter.

This ultimately resulted in pre-tax income of $163 million and net income of just under $127 million. Since the bank also has preferred shares outstanding (see below), Cadence’s net income attributable to common shareholders was approximately $124.6 million, representing EPS of $0.68. A sharp increase from EPS of $0.60 in the first quarter of the year, as higher net interest expense provided a nice boost to earnings.

The main issue with Cadence Bank is the impact of rising market interest rates on the value of available-for-sale securities. Unfortunately this has had a negative impact in recent quarters and after recording a loss of $525 million on these securities in the first quarter of this year, on the statement of comprehensive income it looks like an additional $400 million have evaporated. As long as interest rates continue to rise, the value of available-for-sale securities will continue to be impacted.

Preferred shares are still attractive

In the previous article, I also briefly discussed bank preferred stock as Cadence Bank also has a non-cumulative preferred stock outstanding as (NYSE:CADE.PA). This preferred stock has a preferred dividend yield of 5.50%. Since preferred dividends require less than 2% of net income and the $172 million of outstanding preferred stock (6.9 million shares) is greater than the $3 billion of tangible common stock, the Preferred stock could be a good option for an income-oriented company. investor.

While common stock prices have risen over the past 2.5 months, preferred stock prices have actually fallen as interest rates rise (putting pressure on fixed income securities). Over the past 10 weeks or so, the price of preferred shares has fallen more than 10% to the current level of $20.86.

Cadence Preferred Stock Chart

Looking for Alpha

Preferred dividends obviously remain unchanged at 5.50% based on $25 capital, which means that the $1.375 in annual preferred dividends translates to a current yield of around 6.6%. Not the highest in the banking industry, but given that Cadence Bank needs less than 1.5% of net income to cover preferred dividend payments and there is over $2.5 billion in capital own tangible assets ranked below preferred stock, an investment in preferred stock could be an option for investors who are primarily looking for income.

Investment thesis

Despite posting decent profits, Cadence Bank saw its net worth decline by around $600 million in the first half of the year. This eroded the book value from $26.98 to $23.41 per share and the tangible book value fell from $18.45 to $14.73. It’s not something to really get excited about, but fortunately the bank’s earnings profile remains strong, as it reported earnings totaling $1.28/share in the first half and on an adjusted basis, EPS was $1.38, which is obviously pretty good (and the only reason the [tangible] the book value per share has not fallen even more than that).

I think the worst may be behind us on the book value erosion (although I expect the third quarter to show further weakness) but I’m not sure I’m ready to pay nearly 2 times the tangible book value at this indicate. While it is encouraging that the TBV is being built at a rate of $1.5-1.75/share per year (the difference between earnings and dividends paid), it would take the company about 6 years to bridge the gap between the TBV and the current stock. the price.

Income-oriented investors may be interested in the 6.6% yield preferred shares, but they will miss out on potential capital gains in the price of common shares. I currently have no position in either.