Cadence Bank is humming a happy tune. Their Q1 2024 earnings call was a victory lap, brimming with positivity about loan growth, deposit stability, and a beautifully timed securities portfolio restructure. But beneath the surface of their polished performance, a lingering question remains: are they downplaying the potential risks associated with their non-interest-bearing deposit (NIB) decline?

Cadence projects a precipitous drop in NIB, forecasting a decline to 20% of total deposits by year-end. That's a significant drop from their current 23.1%, and it seemingly flies in the face of their core deposit growth of $400 million during the quarter. While they attribute this decline to conservative treasury management and the natural migration of funds in a high-rate environment, the magnitude of the projected decline raises a red flag.

Here's why. Cadence's deposit base is heavily influenced by its community banking legacy, a direct result of the 2021 merger with BancorpSouth. This merger significantly expanded their footprint across the Southern US, inheriting a customer base deeply embedded in community banking practices.

But community banking, known for its relationship-driven approach and loyalty, is traditionally associated with stable NIB balances. So why is Cadence forecasting such a drastic shift away from this core strength?

Could this be a deliberate strategy to underpromise and overdeliver, a classic move to manage expectations and then dazzle with a better-than-expected outcome? Possibly. After all, exceeding expectations can send stock prices soaring.

However, a closer look at their historical data reveals a more intriguing possibility. Prior to the merger, BancorpSouth consistently boasted a higher NIB ratio than Cadence. In their final quarter before the merger, BancorpSouth's NIB stood at a robust 31.7%, compared to Cadence's 29.3%.

This suggests that the BancorpSouth legacy, instead of bolstering NIB stability, might be dragging Cadence's overall NIB ratio down. It's plausible that the inherited customer base, accustomed to BancorpSouth's lower rates and fee structures, is proving more sensitive to the allure of higher-yielding products in the current environment.

If this is the case, Cadence's projected 20% NIB ratio might be far from conservative. In fact, it could be overly optimistic. Let's explore the potential implications.

Assuming Cadence's total deposits remain stable at $40 billion, their NIB balances would decrease by $1.24 billion if the ratio falls to 20%. Assuming a conservative average cost of alternative funding at 4%, this shift would translate to an additional $50 million in annual interest expense.

This isn't insignificant. It represents a 14% reduction in their Q1 net interest income. And while they are confident in their ability to continue growing core customer deposits, attracting new deposits in a competitive environment comes at a cost, potentially further pressuring their margin and eroding their rosy NII outlook.

Furthermore, this potential billion-dollar drain on NIB has broader implications for their capital management strategy. Their Q1 earnings call emphasized their tremendous capital flexibility, hinting at opportunistic share repurchases and continued dividend growth. But managing a significant deposit shift requires a careful balancing act.

Deploying capital too aggressively while navigating a potential funding gap could leave them vulnerable to liquidity pressures, particularly if loan demand continues to strengthen in their high-growth markets.

Non-Interest Bearing Deposit Trends

Source: Cadence Bank (CADE) Q1 2024 Earnings Call Transcript

So, is Cadence hiding a billion-dollar secret? The answer lies in the dynamics of their inherited BancorpSouth customer base. While they remain bullish about their ability to manage deposit migration, their NIB projections seem overly optimistic.

The true test lies ahead. Will their community banking legacy prove a boon or a burden in the face of relentless deposit competition? The coming quarters will reveal the answer and determine whether their happy tune becomes a cautionary tale.

"Fun Fact: The combined Cadence Bank now has over 300 branches across the Southern US, making it a major player in the region's community banking landscape."