Business Overview and History: Cadence Bank traces its roots back to the Bank of Tupelo, founded in 1886 in Tupelo, Mississippi. The company has grown significantly over the years through a series of mergers and acquisitions, expanding its presence across the southern United States. In 2009, Cadence Bancorp, LLC, the predecessor to Cadence Bancorporation, was formed through the acquisition of Encore Bancshares, Inc., which helped expand the bank's footprint into Texas. In 2016, Cadence Bancorp, LLC converted to a Delaware corporation and became Cadence Bancorporation.
The bank faced significant challenges during the 2008 financial crisis, experiencing higher levels of nonperforming assets and credit losses. However, the company worked diligently to strengthen its balance sheet and enhance its risk management practices in the aftermath of the crisis. This experience has contributed to Cadence's reputation for strong credit quality and conservative risk management.
Today, Cadence Bank operates as a regional banking franchise with approximately $50 billion in assets and over 350 branch locations across the South and Texas. The company has built a strong focus on serving the banking needs of middle-market commercial customers, high-net-worth individuals, and business owners across its footprint. Cadence provides a comprehensive range of consumer and commercial banking services, including deposit products, loans, wealth management, and other financial services.
Financial Performance and Soundness: Cadence's financial performance has shown consistent strength and improvement. For the fiscal year 2023, the company reported revenue of $1.24 billion, net income of $542.3 million, operating cash flow of $555.9 million, and free cash flow of $457.6 million. In the most recent quarter (Q3 2024), Cadence achieved revenue of $733.6 million, net income of $134.1 million, operating cash flow of $183.3 million, and free cash flow of $169.8 million.
The bank's performance has been particularly impressive in recent quarters. In Q3 2024, Cadence reported adjusted earnings per share (EPS) from continuing operations of $0.73, representing a 6% increase from the previous quarter and a 37% increase year-over-year. The company's net interest margin improved by 4 basis points to 3.31% in Q3 2024, marking a 33 basis point increase compared to Q3 2023. Net interest income grew by 10% compared to the same quarter last year, while adjusted non-interest revenue also saw a 10% year-over-year increase.
Cadence's balance sheet remains well-capitalized, with a debt-to-equity ratio of 0.76x as of the latest reporting period. The bank's liquidity position is strong, with $4.23 billion in cash and cash equivalents and an additional $1 billion available under its Federal Home Loan Bank (FHLB) facility. However, it's worth noting that the current ratio and quick ratio both stand at 0.13x, which may indicate some potential short-term liquidity challenges.
Liquidity: Cadence Bank maintains a strong liquidity position, which is crucial for its ability to meet customer deposit withdrawals, fund loan growth, and manage unexpected financial obligations. The bank's liquidity is supported by its diverse funding sources, including a stable core deposit base, access to wholesale funding markets, and available borrowing capacity from the Federal Home Loan Bank and Federal Reserve discount window. The company's robust cash position of $4.23 billion and the additional $1 billion available credit line provide significant financial flexibility.
Diversified Revenue Streams and Strategic Initiatives: Cadence's revenue model is well-diversified, operating through three main business segments: Banking, Financial Services, and Corporate. The Banking segment, which represented approximately 94% of Cadence's total revenues for the six months ended June 30, 2021, consists of three main lines of business: Commercial Banking, Retail Banking, and Private Banking.
The Commercial Banking line focuses on select specialized industries, including franchise restaurant, healthcare, and technology. Energy lending is also a significant part of the Commercial Banking business, leveraging the bank's expertise and long-standing industry relationships, particularly in the Texas market.
The Retail Banking business line offers a broad range of banking services through Cadence's branch network to serve the needs of consumers and small businesses. The Private Banking business line caters to affluent clients and business owners, providing specialized banking services, deposit services, and residential mortgage lending.
The Financial Services segment includes Cadence's Trust, Retail Brokerage, and Investment Services businesses, which primarily generate non-banking service fee income. The Corporate segment reflects parent-only activities, including debt and capital raising, and intercompany eliminations.
To further enhance its competitive position, Cadence has prioritized several strategic initiatives. The bank has invested heavily in technology and digital capabilities to improve the customer experience and drive operational efficiency. Additionally, Cadence has focused on expanding its presence in high-growth markets, such as Texas and the Southeast, through targeted hiring and organic growth initiatives.
Outlook and Risks: As the economy continues to recover from the COVID-19 pandemic, Cadence is well-positioned to capitalize on emerging opportunities. The bank's diverse geographic footprint, disciplined risk management, and focus on specialized industries provide a solid foundation for growth and resilience.
Looking ahead, Cadence has provided guidance for the full year 2024, expecting adjusted expenses to range from a 1% to 3% decrease compared to 2023. The company anticipates continued improvement in net interest margin in the near term, even with expectations of interest rate reductions. Additionally, Cadence expects mortgage revenue to increase on the production side as rates decline.
For 2025, while specific targets were not provided, the bank expects to resume a more normalized expense growth rate. In the near term, Cadence plans to call $215 million in subordinated debt in November, which will create a temporary dip in Tier 2 capital. However, the company expects to replace this through ongoing earnings growth.
Despite these positive outlooks, Cadence faces several risks. The company's performance is closely tied to economic conditions in its core markets, and any prolonged weakness or uncertainty could impact lending activities and credit quality. The ongoing low-interest-rate environment and intense competition in the banking industry could compress net interest margins and profitability. Additionally, regulatory changes and compliance requirements pose ongoing challenges for Cadence, as the bank must navigate an evolving regulatory landscape while maintaining strong internal controls and risk management practices.
Conclusion: Cadence Bank has demonstrated its ability to navigate challenging economic environments and deliver consistent financial performance. The company's diversified revenue streams, strategic initiatives, and prudent risk management have positioned it well for continued success. With a strong presence in the southern United States and Texas, a focus on specialized industries, and a commitment to technological innovation, Cadence is well-equipped to capitalize on growth opportunities while maintaining its strong credit quality and financial discipline. As the banking industry continues to evolve, Cadence's adaptability and strong market position should serve it well in the face of ongoing economic uncertainties and competitive pressures.