Industry Bancshares Inc.'s bond portfolio, which has an average maturity far longer than the industry norm, initially scared off Cadence Bank as an acquirer prior to the deal the two companies announced April 25.
Texas-based Industry Bancshares' planned sale to Cadence Bank will help the company come out from under four straight years of negative tangible common equity due to outsized interest rate risk. The company had extensive exposure to longer-dated securities, which moved deeply underwater after interest rates rose. As of the first quarter, 70.8% of Industry Bancshares' securities portfolio was set to mature or reprice in more than 15 years, compared to 3.1% for all US banks and 6.6% for all US banks with less than $10 billion in assets, according to S&P Global Market Intelligence data.
Interest rate risk contributed to Cadence Bank passing on a deal with the bank when Industry Bancshares ran a process to consider a sale in 2023, Cadence Bank CEO Dan Rollins said in an interview. Cadence's sentiment around an acquisition changed as the interest rate environment improved, and none of the management team that made the interest rate risk decisions behind the long maturities remain at Industry Bancshares today, Rollins said.
The 2025 deal's purchase accounting will mark some of Industry Bancshares' long-term maturity investments to market, making the combination more attractive, Rollins said. But if interest rates begin to spike, Cadence Bank has protections in place in the merger agreement around interest rate risk, he said.
"It was the interest rate risk that was the scary part at the time that caused us to say, 'now it's just not a good time for us,'" Rollins said. "Now you fast forward 1.5 years, we get to the spring of 2025 ... I think we feel like we can manage the interest rate risk."
Deal timeline
The deal had a roughly six-week negotiation period between the letter of intent from Cadence Bank, which was sent in the second week of March, to the deal's announcement at the end of April. Negotiations between banks looking to combine can sometimes take months or years, depending on the circumstances, so the six-week span between the letter of intent and deal announcement hints at some urgency surrounding Industry Bancshares' need to find a partner, financial advisers familiar with the bank said in interviews.
Industry Bancshares' August 2024 $195 million capital raise announcement expired unsuccessfully in March 2025. The executive team and board of directors had many "tough conversations" about what the bank's future would look like after the capital raise expired, Chief Risk Officer Michelle Hodge said in an interview. The team had to choose between finding another large lead investor or marketing the institution, she said.
The deal was announced on a Friday after markets closed. Friday announcements are unusual for bank M&A deals, which in combination with the speed at which the parties came together after the capital raise failed, point to a "shotgun wedding," but one that is additive for both parties, a financial adviser said.
Despite the timeline of the deal negotiations, Cadence Bank was not urged by regulators to step in and buy Industry Bancshares, Rollins said. He only spoke with Industry Bancshares' financial advisers at Hovde Group LLC prior to submitting the letter of intent, he said.
Capital issues
Even though Industry Bancshares has a subpar bond portfolio that is dragging down its tangible common equity, the bank and its six subsidiary banks remain compliant with regulatory capital ratios, Rollins said.
The company has reported negative 5.44% return on average equity, negative 0.7% return on average assets and negative $185 million in tangible equity as of March 23. But the bank's strong asset quality, deposit base and lack of deposit outflows are buoying its capital ratios, financial advisers said.
The bank's $4.49 billion in deposits as of March 23 have stayed put throughout the bank's rocky performance, a good sign that the bank's depositors are loyal, Rollins said. Profiles by The Wall Street Journal outlining the bank's financial shortcomings in December 2023 and November 2024 even failed to deter depositors from standing by their community bank, he said.
"The fact that the bank could be on The Wall Street Journal as a potential problem and fast forward 1.5 years and they've been able to maintain those deposit relationships with those customers, that's a very strong signal that they have very good relationships in the communities they serve with the depositors that they serve," Rollins said.
Regulators
Financial advisers familiar with Industry Bancshares said its regulators were patient with the bank when it came to fixing its capital issues.
In November 2024, Industry Bancshares received an enforcement action from the US Federal Reserve Board for deficiencies in its operations and ability to support its subsidiary banks, and three of its subsidiary banks received cease and desist orders from the Office of the Comptroller of the Currency related to the banks' long-term maturity and interest rate risk.
As long as Industry Bancshares did not experience deposit outflow or a run on the bank, regulators would likely not choose to fail the bank, financial advisers said. But it most likely had to scramble to find a solution, and regulators could have given the company a deadline to solve its capital issues.
Industry Bancshares' communication with its regulators has been frequent and open-ended for a long time, and the deal with Cadence Bank was driven by the bank's board "wanting to have clarity for the future for the organization," Hodge said.
Cadence is a proven acquirer, and regulators would likely be comfortable with the bank's ability to handle the capital deficiencies at Industry Bancshares, which cannot be said of many other institutions, financial advisers said.
"It's just noise, the consent orders [are] just noise, the interest rate risk is noise that can kill the transaction if interest rates move the wrong way, but it's just noise that we can absorb," Rollins said. "The 'why' is the deposit base, the communities and the people that are there every day taking care of customers. ... The other pieces of it are just noise that I think our size and our risk management processes allow us to manage in a way that doesn't bring outsized risk to us."
