In my opinion, one of the most attractive sectors for investors right now is banking. Shares in many of these companies have yet to fully recover after being slammed earlier this year by the associated fallout from Silicon Valley Bank and other financial institutions that eventually collapsed. A good example can be seen by looking at Cadence Bank (NYSE:CADE). After CADE stock fell 34.8% from the end of February until it hit its lowest point during the crisis, you'd expect new data showing stability to be welcomed by a stock surge. But as of today, the stock is still trading 22.7% below where it was at the end of the second month of the year. It would be understandable if the fundamentals of the business were seriously deteriorating. But when you dig under the hood, the company is in pretty solid shape right now. Because of this, and because of how cheap the stock is right now, I have no problem rating it a Buy at the moment.
Learn about Rhythm Bank
According to Cadence Bank's management team, the company was originally chartered in 1876. Since then, it has grown into a sizeable regional commercial bank and financial services company, operating more than 400 commercial banking, mortgage and insurance locations across the country. It also has a location in Illinois and a loan production office in Oklahoma. Over the years, the company has grown to offer a variety of services. For example, through its business lending business, it provides business loan services such as term loans, lines of credit, equipment and receivables financing solutions, among others. The company provides residential consumer lending solutions, such as its origination of fixed and adjustable rate home mortgages. Through its nonresidential consumer lending business, the company also provides loans for cars, RVs, boats and more.
From 2020 to 2022, the value of loans on the company's books roughly doubled, climbing from $15 billion to $30.3 billion. Much of this growth was driven by mergers, including three completed in 2021. Its loan book grew further to $31.3 billion by the first quarter of fiscal 2023. About 43% of its loans by value involve commercial and industrial loans. Its largest exposure in this regard is in the energy sector, with 5% of its total loan value earmarked for that market. Rents and leases of real estate also accounted for around 5%, or $1.4 billion. Other major categories of commercial and industrial space include restaurants, retail companies, the healthcare sector, and financial and insurance companies.
In addition to the commercial and industrial loans the company offers, it also has a sizeable commercial real estate footprint. About $9.1 billion of its loans, or 29% of the total, were in commercial real estate at the end of the most recent quarter. From what I understand, many investors are currently concerned about office properties and the impact that high occupancy rates and potential defaults may have on the banking sector. The good news is that only $695 million, or about 2%, of the loans on the company's books fall into this category. Its greatest exposure in commercial real estate is in the multifamily housing segment, followed by the retail market. Finally, the remaining 28% of loans fall into the consumer category, with the vast majority involving residential mortgages.
Notably, 28% of the value of its loan portfolio is fixed loans. 21% comes in the form of a floating loan that reprices every 30 days. 51% of loans are variable in nature. This is very solid as it suggests that rising interest rates should be good for companies as it allows businesses to collect more money from customers in this environment. The downside of this, of course, is that rising interest rates increase the risk of default. But so far, it hasn't been a big deal. Only 0.33% of loans were non-performing at the end of the most recent quarter.
Even more important than the loan picture is the deposit picture. After all, it was the great fear that deposit outflows would drain some banks that started the crisis. The good news is that the company's overall deposits continue to grow from the end of 2022 through the first quarter of this year. They expanded from just under $39 billion to $39.4 billion. But not all deposits are created equal. The real problem is the uninsured deposit amount. The number did drop from the end of last year to the end of the first quarter of this year. It fell from $19.4 billion to $17.7 billion. Although if we take out those mortgage deposits, we'll see it drop from about $12.5 billion to $11.7 billion. As of the end of the most recent quarter, 44.9% of the deposits on the company's books were uninsured. That's a pretty high number. But again, if we remove those collaterals from the equation, it goes down to a more comfortable 28.9%.
That makes the company look pretty solid in the grand scheme of things. To make things even better, we have the fact that the company's adjusted tangible book value per share continues to grow as well. The same goes for overall book value per share. In one quarter, it increased from $22.72 to $23.67, while adjusted tangible book value per share rose slightly from $20.69 to $20.91. To put that in perspective, the stock is trading at just $20.10 today. Indeed, tangible book value per share was lower at $14.99 on an unadjusted basis. But the difference between that figure and the adjusted figure is accumulated other comprehensive income, which includes fluctuations in the value of loans classified as available for sale.
Management has done an excellent job with the financial performance of the business over the past few years. Net interest income expanded from $601.9 million in 2020 to $1.34 billion in 2022. Again, much of this was driven by the aforementioned merger. During the period, noninterest income increased from $336.5 million to $493 million, while the company's net income rose from $218.6 million to $453.7 million. You can see in the chart below how the business's revenue continues to grow in the first quarter of 2023, compared to the same period last year. But in terms of non-interest income and net profit, we've seen a pullback. The company's noninterest expense rose 9.5% year-over-year due to an expanded organization. In fact, this growth was lower than the 10.4% increase in net interest income. So the real pain for the company on the bottom line is largely related to the fact that it recorded $51.3 million in security losses, compared to the $1.1 million it reported a year earlier. Management attributed this to a $15.7 million decrease in mortgage banking-related revenue, as well as initiatives aimed at optimizing the company's balance sheet. More likely, this should be considered a one-time event.
Aside from a rough bottom line in the first quarter of 2023, the only negative I can see about the company is its gross borrowings. At the end of the most recent quarter, the company owed nearly $6.2 billion to lenders. This is up from the $3.6 billion reported for the end of 2022. The good news is that the company has $18.2 billion worth of liquidity. Of that, $5.1 billion was balance sheet cash and another $6.5 billion was unsecured securities. So while management may not want to give up some capital on its books, it has the ability to reduce this debt fairly quickly if needed.
take away
All that said, I believe Cadence Bank is a solid company. Businesses have a stable deposit base, and their total uninsured deposits are reasonable if mortgage deposits are included. The company trades around tangible book value, and using 2022 figures, it trades at just 8.1. All of these factors combine to make me think the company should offer some decent upside potential. As such, I've decided to rate it a Buy at this time.