CADENCE BANK General
The following discussion and analysis presents our results of operations and financial condition on a consolidated basis. This discussion should be read in conjunction with the consolidated financial statements, accompanying notes and supplemental financial data included herein. Because we conduct our material business operations through our bank subsidiary,Cadence Bank, N.A ., the discussion and analysis relate to activities primarily conducted by the Bank. We generate most of our revenue from interest on loans and investments and fee-based revenues. Our primary source of funding for our loans is deposits. Our largest expenses are interest on these deposits and salaries and related employee benefits. We measure our performance primarily through our net income, pre-tax and pre-loan provision earnings, net interest margin, efficiency ratio, ratio of allowance for credit losses to total loans, return on average assets and return on average equity, among other metrics, while maintaining appropriate regulatory capital ratios. This Report on Form 10-K ("Annual Report") contains forward-looking statements. These forward-looking statements reflect our current views with respect to, among other things, future events and our results of operations, financial condition and financial performance. These statements are often, but not always, made through the use of words or phrases such as "may," "should," "could," "predict," "potential," "believe," "will likely result," "expect," "continue," "will," "anticipate," "seek," "estimate," "intend," "plan," "projection," "would" and "outlook," or the negative version of those words or other comparable words of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.
There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following:
• business and economic conditions generally and in the financial services
industry, nationally and within our current and future geographic market
areas;
• economic, market, operational, liquidity, credit and interest rate risks
associated with our business;
• deteriorating asset quality and higher loan charge-offs;
• the laws and regulations applicable to our business;
• our ability to achieve organic loan and deposit growth and the composition
of such growth;
• increased competition in the financial services industry;
• our ability to maintain our historical earnings trends;
• our ability to raise additional capital to implement our business plan;
• material weaknesses in our internal control over financial reporting;
• systems failures or interruptions involving our information technology and
telecommunications systems or third-party servicers;
• the composition of our management team and our ability to attract and
retain key personnel;
• our ability to monitor our lending relationships;
• the composition of our loan portfolio, including the identity of our
borrowers and the concentration of loans in energy-related industries and
in our specialized industries;
• the portion of our loan portfolio that is comprised of participations and
shared national credits;
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• the amount of nonperforming and criticized assets we hold;
• our ability to identify potential candidates for, consummate, and achieve
synergies resulting from, potential future acquisitions;
• any interruption or breach of security resulting in failures or disruptions
in customer account management, general ledger, deposit, loan, or other
systems;
• environmental liability associated with our lending activities;
• the geographic concentration of our markets in
• the commencement and outcome of litigation and other legal proceedings
against us or to which we may become subject;
• changes in legislation, regulation, policies, or administrative practices,
whether by judicial, governmental, or legislative action, including, but
not limited to, the Dodd-Frank Wall Street Reform and Consumer Protection
Act ("Dodd-Frank Act"), and other changes pertaining to banking,
securities, taxation, rent regulation and housing, financial accounting and
reporting, environmental protection, and the ability to comply with such
changes in a timely manner;
• changes in the monetary and fiscal policies of the
including policies of the
Reserve Board;
• requirements to remediate adverse examination findings;
• changes in the scope and cost of FDIC deposit insurance premiums;
• implementation of regulatory initiatives regarding regulatory capital
requirements that may require heightened capital;
• changes in accounting principles, policies, practices, or guidelines;
• our success at managing the risks involved in the foregoing items;
• our modeling estimates related to an increased interest rate environment;
• natural disasters, war, or terrorist activities; and
• other economic, competitive, governmental, regulatory, technological, and
geopolitical factors affecting our operations, pricing, and services.
The foregoing factors should not be construed as exhaustive and should be read
together with the other cautionary statements included in this Report. If one or
more events related to these or other risks or uncertainties materialize, or if
our underlying assumptions prove to be incorrect, actual results may differ
materially from what we anticipate. Accordingly, you should not place undue
reliance on any such forward-looking statements. Any forward-looking statement
speaks only as of the date on which it is made, and we do not undertake any
obligation to publicly update or review any forward-looking statement, whether
as a result of new information, future developments or otherwise. New factors
emerge from time to time, and it is not possible for us to predict which will
arise. In addition, we cannot assess the impact of each factor on our business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements.
Overview
Cadence Bancorporation is a financial holding company and a Delaware corporation
headquartered in Houston, Texas , and is the parent company of Cadence Bank,
National Association . With $17.8 billion in assets, $13.0 billion in total loans
(net of unearned discounts and fees), $14.7 billion in deposits and $2.5 billion
in shareholders' equity as of December 31, 2019 , we operate a network of 98
branch locations across Texas , Alabama , Florida , Georgia , Mississippi , and
Tennessee . We focus on middle-market commercial lending, complemented by retail
banking and wealth management services, and provide a broad range of banking
services to businesses, high net worth individuals and business owners.
On January 1, 2019 , we acquired all the outstanding stock of State Bank
Financial Corporation ("State Bank "), headquartered in Atlanta, Georgia , the
bank holding company for State Bank and Trust Company . State Bank shareholders
received 1.271 shares of the Company's Class A common stock in exchange for each
share of State Bank common stock, resulting in the issuance of 49.2 million
shares of our Class A common stock resulting in a total purchase price of $826.4
million . The primary reasons for the transaction were to expand our market
presence into Georgia , create a more diverse business mix, enhance our funding
base and leverage operating costs through economies of scale. The acquisition
added $3.5 billion in loans and $4.1 billion in deposits as well as 32 branch
locations throughout Georgia to our portfolio (see "Note 2 - Business
Combinations" to the Consolidated Financial Statements).
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On July 1, 2019 , the Bank's wholly owned subsidiary, Linscomb & Williams, Inc. ,
acquired certain assets and assumed certain liabilities of Wealth and Pension
Services Group, Inc. , a fee-based investment advisory firm with its principal
office in Atlanta, Georgia . The total purchase consideration paid was $8.0
million . During the third quarter of 2019, we recorded provisional identifiable
intangible assets with an estimated fair value of $5.1 million , comprised
primarily of customer relationships and noncompete agreements and goodwill of
$2.6 million (see "Note 2 - Business Combination" to the Consolidated Financial
Statements).
We operate Cadence Bancorporation through three operating segments: Banking,
Financial Services and Corporate. Our Banking Segment, which represented
approximately 97% of our total revenues for the three years in the period ended
December 31, 2019 , consists of our Commercial Banking, Retail Banking and
Private Banking lines of business. Our Commercial Banking activities focus on
commercial and industrial ("C&I"), community banking, business banking and
commercial real estate lending and treasury management services. Within our
Commercial Banking line of business, we focus on select industries, which we
refer to as our "specialized industries," in which we believe we have
specialized experience and service capabilities. These industries include
franchise restaurant, healthcare, and technology. Energy lending is also an
important part of our business as energy production and energy related
industries are meaningful contributors to the economy in our primary markets. In
our Retail Banking business line, we offer a broad range of banking services
through our branch network to serve the needs of consumers and small businesses.
In our Private Banking business line, we offer banking services, such as deposit
services and residential mortgage lending, to affluent clients and business
owners. Our Financial Services Segment includes our Trust, Retail Brokerage and
Investment Services. These businesses offer products independently to their own
customers as well as to Banking Segment clients. Investment Services operates
through the "Linscomb & Williams" name. The products offered by the businesses
in our Financial Services Segment primarily generate non-banking service fee
income. Our Corporate Segment reflects parent-only activities, including debt
and capital raising, and intercompany eliminations.
We are focused on organic growth and expanding our position in our markets. We
believe that our franchise is positioned for continued growth as a result of
prudent lending in our markets through experienced relationship managers and a
client-centered, relationship-driven banking model, and our focus and
capabilities in serving specialized industries. We believe our continued growth
is supported by (i) our attractive geographic footprint, (ii) the stable and
cost-efficient deposit funding provided by our acquired franchises (each of
which was a long-standing institution with an established customer network),
(iii) our veteran board of directors and management team, (iv) our capital
position, and (v) our credit quality and risk management processes.
Key Factors Affecting Our Business and Financial StatementsWe believe our business and results of operations will be impacted in the future by various trends and conditions, including the following:
Interest rates: Based on our asset sensitivity over the past few years, our interest income has increased incrementally more than interest expense required to maintain and grow our deposits and funding sources. Recently, our balance sheet has become slightly liability sensitive. While historical trends in rising and falling rate environments can be used as a potential indicator for the necessity and pace of asset and deposit repricing, asset and deposit repricing may vary from historical trends and result in unexpected speeds than would have been experienced historically. Banking laws and regulations: The banking industry continues to experience intense regulatory focus, and continual revision of rules and regulations. We anticipate that this environment of heightened scrutiny will continue for the industry and forCadence Bank specifically, since we exceeded$10.0 billion in assets during the quarter endedSeptember 30, 2017 , which is included in the "mid-sized" bank category for supervision purposes. Above$10.0 billion in assets,Cadence Bank is subject to additional regulations, including regulation by theCFPB and being subject to the Durbin Amendment. Asset quality: As our originated loan portfolio has grown and seasoned, our asset quality indicators have matured, including some recent negative trending within certain segments of our portfolio. We believe our underwriting practices are prudent and we strive to maintain long-term credit quality metrics that are favorable to peers. Cost efficiency: Since 2011, we have invested significantly in our infrastructure, including our management, lending teams, systems and integration. As a result, our ratio of expenses to revenue was historically greater than that experienced by many of our peer financial institutions. The pace of normalized expense growth has increased at a slower rate than our revenue growth, which resulted in a meaningful declining trend in our efficiency ratio (as defined in "Non-GAAP Financial Measures") since 2013. Given costs associated with the company's growth trends and ongoing technology spend, this declining ratio trend may be slowed, reversed or not continue over a longer term. Competition: The industry and businesses in which we operate are highly competitive, and as the economy continues to show strength, we anticipate that competition will continue to remain robust and potentially increase. We may see increased 49
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competition in different areas including market rates, underwriting, products
and structure. While we seek to maintain an appropriate risk-adjusted spread on
our business, we anticipate that we may experience continued pressure on our net
interest margins as we operate in this competitive environment.
Acquired loan accretion and costs: As a result of our acquisitions, we have
recognized accretion in our interest income as a result of the accretable
difference on our acquired credit-impaired ("ACI") loan portfolio. Total
scheduled accretion reflected in interest income was approximately $30 million ,
$20 million and $23 million for the years ended December 31, 2019 , 2018 and
2017, respectively. The increase in 2019 is related to the merger with State
Bank . As these acquired portfolios are reduced through payoffs, paydowns,
foreclosures or charge-offs, the scheduled accretion declines. (In addition to
scheduled accretion, a portion of our accretion recognized in a period
represents recovery income on non-pooled loans from higher cash flows received
than were expected or received sooner than expected. These cash flows vary and
are difficult to estimate.) Accordingly, we expect the proportion of our
revenues attributable to scheduled accretion to continue to decline as the
related assets are reduced and for the recovery income to trend downward in
addition to the effects of the adoption on January 1, 2020 of ASU No. 2016-13,
Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments (referred to as "CECL"). Conversely, we expect the
proportion of our revenues attributable to our organically originated portfolio
will continue to increase. Total of credit loss provision related to the
acquired loan portfolios (both ACI and ANCI) was $8.0 million in the year ended
December 31, 2019 with a reversal of $(1.4) million and $(1.8) million for the
years ended December 31, 2018 and 2017, respectively.
CECL: In June 2016 , the FASB issued ASU No. 2016-13, Financial
Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments (referred to as "CECL"). The effective date for CECL is January 1,
2020 and it will replace the current incurred loss accounting model with an
expected loss approach and requires the measurement of all expected credit
losses for financial assets held at the reporting date based on historical
experience, current conditions, and reasonable and supportable forecasts. The
ASU also eliminates existing guidance for ACI loans and requires recognition of
the nonaccretable difference as an increase to the allowance for expected credit
losses on financial assets purchased with more than insignificant credit
deterioration since origination, which will be offset by an increase in the
amortized cost of the related loans. For ACI loans accounted for under ASC
310-30 prior to adoption, the guidance in this amendment for purchase credit
deteriorated assets will be prospectively applied. (see "Note 1 - Summary of
Accounting Policies - Pending Accounting Policies" to the Consolidated Financial
Statements).
We formed a cross-functional CECL implementation team that consists of
representatives from finance, credit, and risk management. The team has
progressed through its detailed project plan and timeline that has included
limited parallel CECL runs in 2019. We are in the last stages of finalizing our
key accounting policies, credit loss models, processes and the associated data
requirements needed to meet the standard. We completed validation of the credit
loss models in 2019.
We expect that the allowance related to our loans and commitments will increase
as it is an estimate of credit losses over the full remaining expected life of
the portfolio. Cadence intends to estimate losses through various models that
include selected forecasted macroeconomic variables produced in a baseline
macroeconomic scenario forecast provided by an external party. Based on current
expectations of future economic conditions and the results from our models, we
believe our allowance for credit losses on loans will increase up to 65% from
our allowance for credit losses as of December 31, 2019 , as disclosed in our
consolidated financial statements. Approximately 68% of this increase is
attributable to our originated portfolios with C&I and CRE at 38% and consumer
at 30%. Our ACI and ANCI portfolios comprise approximately 32% of the increase.
The initial impact to regulatory capital is expected to be minimal; we plan to
elect the transition provisions provided by the banking agencies and will
phase-in the "Day One" regulatory capital effects resulting from adoption of
CECL over the three-year period beginning January 1, 2020 . The final impact
depends on the characteristics of the portfolio as well as the macroeconomic
conditions and forecasts upon adoption and other management judgments.
Capital
We manage capital to comply with our internal planning targets and regulatory
capital standards. We monitor capital levels on an ongoing basis, perform
periodic evaluations under stress scenarios and project capital levels in
connection with our growth plans to ensure appropriate capital levels. We
evaluate several capital ratios, including Tier 1 capital to total adjusted
assets (the leverage ratio), Tier 1 capital and Common Equity Tier 1 capital to
risk-weighted assets, and our tangible common equity ratio.
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Summary of Results of Operations
Net income for 2019 totaled $202.0 million , a $35.7 million or 21.5% increase
compared to $166.3 million for 2018. The primary drivers of the net increase
included a $263.4 million increase in net interest income offset by a $98.3
million increase in provision expense and a $150.5 million increase in
noninterest expense. The resulting earnings per diluted common share for 2019
was $1.56 compared to $1.97 for 2018.
The years 2019 and 2018 included non-routine revenues and expenses, primarily
consisting of merger related expenses, specially designated bonuses, secondary
offering expenses, gains and losses on sales of certain loans, insurance assets,
and securities, and other items. These non-routine revenues and expenses
resulted in adjusted net income(1) of $222.4 million for 2019, and $174.7
million for 2018. Adjusted diluted earnings per share(1) was $1.72 for 2019 and
$2.07 for 2018.
Returns on average assets, common equity and tangible common equity(1) for 2019
were 1.14%, 8.51%, and 12.40%, respectively, compared to 1.45%, 12.07%, and
15.93%(1), respectively, for 2018. Adjusted returns(1) on average assets, common
equity, and tangible common equity for 2019 were 1.26%, 9.40%, and 13.60%,
respectively, and exclude the impact of the non-routine items noted above.
Net interest income was $651.2 million for 2019, a $263.4 million , or 67.9%,
increase compared to 2018. Our net interest spread increased to 3.48% for 2019
compared to 3.17% for 2018, and the net interest margin increased 39 basis
points to 4.00% from 3.61%. The increase in net interest margin primarily
resulted from an increase in our earning assets from the merger with State Bank
combined with changes in our balance sheet mix, derivative activities, funding
costs, and accretion income.
Provision for credit losses increased $98.3 million to $111.0 million in 2019,
compared to $12.7 million in 2018 (see "-Provision for Credit Losses" and
"-Asset Quality"). The increase resulted primarily from increased charge-offs
and adverse credit migration. Net charge-offs were 0.63% and 0.06% of average
loans during 2019 and 2018, respectively.
Noninterest expense for 2019 increased $150.5 million or 58.3% to $408.8 million
compared to $258.3 million during 2018. The increase from 2018 was largely due
to the merger with State Bank . The majority of the increase were salaries and
employee benefits, merger related expenses, premises and equipment, and
intangible asset amortization. Noninterest expense in 2019 also included
non-routine expenses of $28.5 million in merger related expenses and $1.2
million in pension plan termination expense. Noninterest expense in 2018
included $20.8 million in non-routine expenses including a specially designated
bonus of $9.8 million , secondary offering expenses of $4.6 million , legal costs
of $2.3 million related to a legacy bank litigation settlement, $1.1 million in
expenses related to the sale of the assets of our insurance company, and $3.0
million in merger related expenses.
Our efficiency ratio(1) was 52.27% for 2019, an improvement over the 53.55% efficiency ratio for 2018. Our adjusted efficiency ratio(1) was 48.64% for 2019, an improvement over the 49.56% adjusted efficiency ratio for 2018. Adjusted efficiency ratios exclude the impact of the non-routine items.
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(1) Considered a non-GAAP financial measure. See "Non-GAAP Financial Measures"
for a reconciliation of our non-GAAP financial measures to the most directly
comparable GAAP financial measure.
Summary of Financial Condition
Our total loans, net of unearned income, increased $2.9 billion or 29.1% from
December 31, 2018 to $13.0 billion at December 31, 2019 , which was driven by the
merger with State Bank adding $3.3 billion . The increase from the merger was
offset by a decrease of $387.3 million in loans.
Total nonperforming assets ("NPAs") as a percent of total loans, OREO and other
NPAs increased to 0.97% compared to 0.82% as of December 31, 2018 . NPAs totaled
$125.5 million and $82.4 million as of December 31, 2019 and 2018, respectively.
Our allowance for credit losses increased $25.3 million or 26.8%, to $119.6
million at December 31, 2019 and represented approximately 0.92% and 0.94% of
total loans at December 31, 2019 and 2018, respectively.
Total deposits increased $4.0 billion or 37.7% to $14.7 billion at December 31,
2019 . Over the same period, noninterest-bearing deposits increased $1.4 billion
or 56.2% and comprised 26.0% and 22.9% of total deposits at December 31, 2019
and 2018, respectively. Interest-bearing deposits increased $2.7 billion or
32.2% and comprised 74.0% and 77.1% of total deposits at December 31, 2019 and
2018, respectively. There was a decrease of $842.3 million in brokered deposits
from December 31, 2018 .
Our Tier 1 leverage ratio increased 26 basis points, total risk-based capital
ratio increased 193 basis points and Tier 1 risk-based capital ratio increased
138 basis points from December 31, 2018 . We met all capital adequacy
requirements and both
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Cadence and the Bank exceeded the requirements to be considered well-capitalized
under regulatory guidelines as of
Business Segments
We operate
Our Banking Segment includes our Commercial Banking, Retail Banking and Private
Banking lines of business. Our Commercial Banking line of business includes a
general business services component primarily focusing on commercial and
industrial ("C&I"), community banking, business banking and commercial real
estate lending and treasury management services to clients in our geographic
footprint in Texas and the southeast United States . In addition, our Commercial
Banking line of business includes within C&I a separate component that focuses
on select industries (which we refer to as our "specialized industries") in
which we believe we have specialized experience and service capabilities,
including restaurant industry, healthcare and technology. We serve clients in
these specialized industries both within our geographic footprint and throughout
the United States as a result of the national orientation of many of these
businesses. Energy lending is also an important part of our business as energy
production and energy related industries are meaningful contributors to the
economy in certain of our primary markets. Our Retail Banking line of business
offers a broad range of retail banking services including mortgage services
through our branch network to serve the needs of consumer and small businesses
in our geographic footprint. Our Private Banking line of business offers banking
services and loan products tailored to the needs of our high-net worth clients
in our geographic footprint.
Our Financial Services Segment includes our Trust, Retail Brokerage, and
Investment Services. These businesses offer products independently to their own
customers as well as to Banking Segment clients. Investment Services operates
through the "Linscomb & Williams" name. The products offered by the businesses
in our Financial Services Segment primarily generate non-banking service fee
income. Our Corporate Segment reflects parent-only activities, including debt
and capital raising, and intercompany eliminations.
While this section reviews financial performance from a business segment
perspective, it should be read in conjunction with the discussion of Results of
Operations, and our consolidated financial statements and notes thereto for a
full understanding of our consolidated financial performance.
Business segment results are determined based upon our management reporting
process, which assigns balance sheet and income statement items to each of the
business segments. The process is based on our organizational and management
structure and, accordingly, the results derived are not necessarily comparable
with similar information published by other financial institutions and the
results are not necessarily prepared in accordance with generally accepted
accounting principles.
The following table presents the operating results of our segments for the
periods presented:
Year Ended December 31, 2019
Financial
(In thousands) Banking Services Corporate Consolidated
Net interest income (expense) $ 669,878 $ (2,156 ) $ (16,549 ) $ 651,173
Provision for credit losses 111,027 - - 111,027
Noninterest income 88,098 41,580 1,247 130,925
Noninterest expense 361,874 34,281 12,615 408,770
Income tax expense (benefit) 66,090 714 (6,461 ) 60,343
Net income (loss) $ 218,985 $ 4,429 $ (21,456 ) $ 201,958
For the Year Ended December 30, 2018
Financial
(In thousands) Banking Services Corporate Consolidated
Net interest income (expense) $ 407,674 $ (2,307 ) $ (17,626 ) $ 387,741
Provision for credit losses 12,700 - - 12,700
Noninterest income 47,316 46,805 517 94,638
Noninterest expense 215,574 35,679 7,048 258,301
Income tax expense (benefit) 52,464 3,979 (11,326 ) 45,117
Net income (loss) $ 174,252 $ 4,840 $ (12,831 ) $ 166,261
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For the Year Ended December 31, 2017
Financial
(In thousands) Banking Services Corporate Consolidated
Net interest income (expense) $ 344,987 $ (1,347 ) $ (17,424 ) $ 326,216
Provision for credit losses 9,735 - - 9,735
Noninterest income 51,286 47,956 632 99,874
Noninterest expense 194,212 36,178 2,966 233,356
Income tax expense (benefit) 88,417 2,000 (9,771 ) 80,646
Net income (loss) $ 103,909 $ 8,431 $ (9,987 ) $ 102,353
Banking Segment
Our Banking Segment is our largest business segment and generates most of our
net income. Net income for the Banking Segment was $219.0 million , $174.3
million , and $103.9 million for the years ended December 31, 2019 , 2018, and
2017, respectively.
Our Banking Segment's net income is composed of net interest earned on our loan
and investment portfolios, in addition to service fees and revenue from our
deposit and loan customers. The Banking Segment expense includes all interest
expense on our deposit accounts and other bank liabilities, operational and
administrative expenses related to the business conducted in this segment, and
the provision for credit losses on our loan portfolio. All these income and
expense components, including noninterest expense, are discussed in greater
detail elsewhere in this section.
Financial Services Segment
Our Financial Services Segment primarily generates non-banking fee revenue from trust services, insurance, investment and retail brokerage services. Net income for the Financial Services Segment was$4.4 million ,$4.8 million and$8.4 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. The decline in net income from 2017 to 2018 is related to the sale of the assets of our insurance subsidiary in the second quarter of 2018. For additional discussion, please see "-Noninterest income" and "-Noninterest expense."
Corporate Segment
The loss in our Corporate Segment is primarily driven by the interest expense on our corporate senior and subordinated debt. Net loss for the Corporate Segment was$21.5 million ,$12.8 million , and$10.0 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. For additional discussion, please refer to "-Net interest income" and "-Borrowing." Results of Operations
Earnings
Our net income for 2019 totaled
• Excluding non-routine items, adjusted net income(2) was
2019, up
• Net income per diluted share was
share or 20.8% as compared to
diluted earnings per share(2) for 2019 was
• Returns on average assets, common equity and tangible common equity(2) for
2019 were 1.14%, 8.51% and 12.40%, respectively, as compared to 1.45%,
12.07% and 15.93%, respectively, for the prior year. Excluding total
non-routine items, returns on average assets and average tangible common
equity(2) were 1.26%(2) and 13.60%(2), respectively, for 2019.
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The following table presents key earnings data for the periods indicated:
Table 1 - Key Earnings Data
For the Years Ended December 31,
(In thousands, except per share data) 2019 2018 2017
Net income $ 201,958 $ 166,261 $ 102,353
Net income per common share
- basic 1.56 1.99 1.26
- diluted (1) 1.56 1.97 1.25
Dividends declared per share 0.70 0.55 -
Dividend payout ratio 44.87 % 27.64 % - %
Net interest margin 4.00 3.61 3.57
Net interest spread 3.48 3.17 3.27
Return on average assets 1.14 1.45 1.02
Return on average equity 8.51 12.07 8.16
Return on average tangible common equity (2) 12.40 15.73 11.08
(1) Includes common stock equivalents of 103,637, 813,180, and 532,070 for 2019,
2018, and 2017, respectively.
(2) Considered a non-GAAP financial measure. See "Non-GAAP Financial Measures"
for a reconciliation of our non-GAAP measures to the most directly comparable
GAAP financial measure.
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Net Interest Income
The largest component of our net income is net interest income, which is the
difference between the income earned on interest earning assets and interest
paid on deposits and borrowings. We manage our interest-earning assets and
funding sources to maximize our net interest margin. (See "-Quantitative and
Qualitative Disclosures about Market Risk" for a discussion regarding our
interest rate risk). Net interest income is determined by the rates earned on
our interest-earning assets, rates paid on our interest-bearing liabilities, the
relative amounts of interest-earning assets and interest-bearing liabilities,
the degree of mismatch and the maturity and re-pricing characteristics of our
interest-earning assets and interest-bearing liabilities. Net interest income
divided by average interest-earning assets represents our net interest margin.
The yield on our net earning assets less the yield on our interest-bearing
liabilities represents our net interest spread.
Interest earned on our loan portfolio is the largest component of our interest
income. Our originated and acquired non-credit impaired loans ("ANCI")
portfolios are presented at the principal amount outstanding net of deferred
origination fees and unamortized discounts and premiums. Interest income is
recognized based on the principal balance outstanding and the stated rate of the
loan. Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield on the related loan. ANCI loans
acquired through our acquisitions are initially recorded at fair value.
Discounts or premiums created when the loans were recorded at their estimated
fair values at acquisition are being accreted or amortized over the remaining
term of the loan as an adjustment to the related loan's yield (see "Note
2-Business Combinations" to our consolidated financial statements for additional
information related to the State Bank acquisition).
The performance of loans within our ACI portfolio impacts interest income as the
remaining discounts and proceeds received in excess of expected cash flow are
realized in interest income when these loans are closed through payoff, charge
off, workout, sale or foreclosure. At acquisition, the expected shortfall in
future cash flows on our ACI portfolio, as compared to the contractual amount
due, was recognized as a non-accretable discount. Any excess of expected cash
flows over the acquisition date fair value is known as the accretable discount
and is recognized as accretion income over the life of each pool or individual
ACI loan. Expected cash flows over the acquisition date fair value are
re-estimated quarterly utilizing the same cash flow methodology used at the time
of acquisition. Any subsequent decreases to the expected cash flows will
generally result in a provision for credit losses charge in the consolidated
statements of income. Conversely, subsequent increases in expected cash flows
result in a transfer from the non-accretable discount to the accretable
discount, which has a positive impact on accretion income prospectively.
The following table summarizes the amount of interest income related to our ACI portfolio for the periods presented:
Table 2 - ACI Interest Income
For the Year Ended December 31,
(In thousands) 2019 2018 2017
Scheduled accretion for the period $ 29,927 $ 19,813 $ 23,303
Recovery income for the period 4,632 2,247 8,148
Total interest realized on the ACI portfolio
$ 31,451 Yield on ACI Portfolio Scheduled accretion for the period 10.93 % 8.47 % 8.02 % Recovery income for the period 1.69 0.96
2.80
Total yield on the ACI portfolio 12.62 % 9.43 % 10.82 %
55
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As of
The following table is a rollforward of the accretable difference on our ACI portfolio for the periods indicated:
Table 3 - Accretable Difference Rollforward
For the Year Ended December 31,
(In thousands) 2019 2018 2017
Balance at beginning of period $ 67,405 $ 78,422 $ 98,728
Additions (1) 10,053 - -
Accretion (29,927 ) (19,813 ) (23,303 )
Reclass from nonaccretable difference due to
increases in expected cash flow 14,298 16,765 14,075
Other changes, net (2,282 ) (7,969 ) (11,078 )
Balance at end of period $ 59,547 $ 67,405 $ 78,422 (1) See "Note 2-Business Combinations" to our consolidated financial statements
for additional information related to the
Years Ended
Our net interest income, fully-tax equivalent ("FTE"), for 2019 and 2018 was
$652.9 million and $390.3 million , respectively, an increase of $262.6 million .
Our net interest margin for 2019 and 2018 was 4.00% and 3.61%, respectively, an
increase of 39 basis points. The yield on our total loan portfolio increased 65
basis points to 5.81% for 2019 compared to 5.16% for 2018 due to an increase in
the rate and volume. The following table sets forth the components of our FTE
net interest income with the effect that the varying levels of interest-earning
assets and interest-bearing liabilities and the applicable rates have had on
changes in net interest income for 2019 and 2018.
Table 4 - Rate/Volume Analysis
Net Interest Income Increase Changes Due To (1)
(In thousands) 2019 2018 (Decrease) Rate Volume
Increase (decrease) in:
Income from interest-earning
assets:
Interest and fees on loans:
Originated loans $ 542,543 $ 435,007 $ 107,536 $ 32,367 $ 75,169
ANCI portfolio 219,183 13,077 206,106 3,870 202,236
ACI portfolio 34,559 22,060 12,499 8,301 4,198
Interest on securities:
Taxable 42,450 23,793 18,657 250 18,407
Tax-exempt (2) 7,983 12,077 (4,094 ) (815 ) (3,279 )
Interest on fed funds and
short-term investments 12,762 6,930 5,832 994 4,838
Interest on other investments 2,274 2,259 15 (551 ) 566
Total interest income 861,754 515,203 346,551 44,416 302,135
Expense from interest-bearing
liabilities:
Interest on demand deposits 117,462 57,795 59,667 18,408 41,259
Interest on savings deposits 1,066 560 506 241 265
Interest on time deposits 69,550 42,093 27,457 8,656 18,801
Interest on other borrowings 8,704 14,678 (5,974 ) (98 ) (5,876 )
Interest on subordinated debentures 12,121 9,799 2,322 (734 ) 3,056
Total interest expense 208,903 124,925 83,978 26,473 57,505
Net interest income $ 652,851 $ 390,278 $ 262,573 $ 17,943 $ 244,630 (1) The change in interest income due to both rate and volume has been allocated
to rate and volume changes in proportion to the relationship of the absolute
dollar amounts of the changes in each.
(2) Interest income is presented on a tax equivalent basis using the Federal tax
rate of 21% on our state, county and municipal investment portfolios.
56
-------------------------------------------------------------------------------- Our FTE total interest income for 2019 totaled$861.8 million compared to$515.2 million for 2018. This increase is primarily the result of the loans acquired in theState Bank acquisition resulting in increased volume of interest income and accretion of purchase accounting discounts. Additionally, we experienced an increase in the average volume and yield of our originated loans as well, which reflects the impact of LIBOR and other index rates on our loan portfolio during the periods, partially mitigated by the effect of ourFebruary 2019 purchase of a$4.0 billion notional interest rate collar. The lower FTE yield on our tax-exempt securities reflects the decrease in average tax-exempt securities which began during the second quarter of 2018. This was offset by a higher volume of average investments in taxable securities. The yield on our ACI portfolio fluctuates due to the volume and timing of cash flows received or expected to be received. The yield on our ACI portfolio for 2019 was 12.62% compared to 9.44% for 2018. During 2019, interest income on the ACI portfolio included$4.6 million in discount and recovery income compared to$2.2 million for 2018. These amounts were realized on certain individual loans that were settled before expected, or where we received amounts above our estimates. Excluding these amounts, the yield on our ACI loans would have been 10.93% for 2019 compared to 8.47% for 2018. Our total loan yield, excluding this recovery income, would have been 5.77% and 5.13% for 2019 and 2018, respectively. Our interest expense for 2019 and 2018 was$208.9 million and$124.9 million , respectively, an increase of$84.0 million . This increase is primarily related to the increased volume in interest-bearing deposits assumed in theState Bank acquisition as well as organic growth in 2019. The increased expense also reflected the impact of higher index rates on our interest-bearing demand accounts and time deposits. Our cost of interest-bearing deposits increased to 1.68% for 2019 compared to 1.38% for 2018. Our cost of borrowings increased to 4.76% from 4.33% reflecting an increase in interest rates from the prior period but was more than offset by a net decrease of 22.7% in average borrowings. We were able to decrease average borrowings and brokered deposits through increased levels of average non-brokered deposits which included an increase of average demand deposits to 23.5% of total deposits compared to 22.7% in 2018. The following table presents our average balance sheet and our average FTE yields on assets and average costs of liabilities for the years presented. Average FTE yields are calculated by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been calculated on a daily basis, except for ACI loans, which is a monthly average. 57
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Table 5 - Average Balances, Net Interest Income and Interest Yields/Rates
For the Years Ended December 31,
2019 2018
Average Income/ Yield/ Average Income/ Yield/
(In thousands) Balance Expense Rate Balance Expense Rate
ASSETS
Interest-earning assets:
Loans, net of unearned
income (1)
Originated loans $ 10,053,507 $ 542,543 5.40 % $ 8,632,284 $ 435,007 5.04 %
ANCI portfolio 3,387,367 219,183 6.47 250,522 13,077 5.22
ACI portfolio 273,857 34,559 12.62 233,796 22,060 9.43
Total loans 13,714,731 796,285 5.81 9,116,602 470,144 5.16
Investment securities
Taxable 1,568,599 42,450 2.71 888,341 23,793 2.68
Tax-exempt (2) 208,090 7,983 3.84 292,282 12,077 4.13
Total investment
securities 1,776,689 50,433 2.84 1,180,623 35,870 3.04
Federal funds sold and
short-term investments 759,026 12,762 1.68 465,554 6,930 1.49
Other investments 70,127 2,274 3.24 54,538 2,259 4.14
Total interest-earning
assets 16,320,573 861,754 5.28 10,817,317 515,203 4.76
Noninterest-earning
assets:
Cash and due from banks 115,268 79,560
Premises and equipment 128,448 62,841
Accrued interest and other
assets 1,239,093 629,108
Allowance for credit
losses (114,256 ) (90,813 )
Total assets $ 17,689,126 $ 11,498,013
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing
liabilities:
Demand deposits $ 7,983,237 $ 117,462 1.47 % $ 4,983,113 $ 57,795 1.16 %
Savings deposits 253,170 1,066 0.42 181,194 560 0.31
Time deposits 2,960,921 69,550 2.35 2,119,543 42,093 1.99
Total interest-bearing
deposits 11,197,328 188,078 1.68 7,283,850 100,448 1.38
Other borrowings 256,815 8,704 3.39 430,159 14,678 3.41
Subordinated debentures 180,371 12,121 6.72 135,499 9,799 7.23
Total interest-bearing
liabilities 11,634,514 208,903 1.80 7,849,508 124,925 1.59
Noninterest-bearing
liabilities:
Demand deposits 3,431,300 2,137,953
Accrued interest and other
liabilities 249,456 133,081
Total liabilities 15,315,270 10,120,542
Shareholders' equity 2,373,856 1,377,471
Total liabilities and
shareholders' equity $ 17,689,126 $ 11,498,013
Net interest income/net
interest spread 652,851 3.48 % 390,278 3.17 %
Net yield on earning
assets/net interest margin 4.00 % 3.61 %
Taxable equivalent
adjustment:
Investment securities (1,678 ) (2,537 )
Net interest income $ 651,173 $ 387,741
_____________________
(1) Nonaccrual loans are included in loans, net of unearned income. No adjustment
has been made for these loans in the calculation of yields.
(2) Interest income and yields are presented on an FTE basis using the Federal
tax rate of 21% on our state, county, and municipal investment portfolios.
58
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Years Ended
Our FTE net interest income for 2018 and 2017 was$390.3 million and$333.4 million , respectively, an increase of$56.9 million . Our net interest margin for 2018 and 2017 was 3.61% and 3.57%, respectively, an increase of 4 basis points. The yield on our total loan portfolio increased 57 basis points to 5.16% for 2018 compared to 4.59% for 2017 due to an increase in the rate and volume of our originated portfolio. The following table sets forth the components of our FTE net interest income with the effect that the varying levels of interest-earning assets and interest-bearing liabilities and the applicable rates have had on changes in FTE net interest income for 2018 and 2017: Years Ended December 31, 2018 vs. 2017 Net Interest Income Increase Changes Due To (1) (In thousands) 2018 2017 (Decrease) Rate Volume Increase (decrease) in: Income from interest-earning assets: Interest and fees on loans: Originated and ANCI loans$ 448,084 $ 327,857 $ 120,227 $ 56,509 $ 63,718 ACI portfolio 22,060 31,451 (9,391 ) (3,706 ) (5,685 ) Interest on securities: Taxable 23,793 18,089 5,704 1,916 3,788 Tax-exempt (2) 12,078 20,554 (8,476 ) (3,276 ) (5,201 ) Interest on fed funds and short-term investments 6,930 3,336 3,594 1,638 1,956 Interest on other investments 2,258 2,774 (516 ) (761 ) 246 Total interest income 515,203 404,061 111,142 52,320 58,822 Expense from interest-bearing liabilities: Interest on demand deposits 57,795 27,030 30,765 26,430 4,335 Interest on savings deposits 560 456 104 105 (1 ) Interest on time deposits 42,093 22,213 19,880 13,118 6,762 Interest on other borrowings 14,678 11,644 3,034 599 2,436 Interest on subordinated debentures 9,799 9,308 491 440 51 Total interest expense 124,925 70,651 54,274 40,692 13,583 Net interest income$ 390,278 $ 333,410 $ 56,868 $ 11,628 $ 45,239
(1) The change in interest income due to both rate and volume has been allocated
to rate and volume changes in proportion to the relationship of the absolute
dollar amounts of the changes in each.
(2) Interest income is presented on an FTE basis using Federal tax rates of 21%
and 35% for 2018 and 2017, respectively, on our state, county and municipal
investment portfolios.
Our total FTE interest income for 2018 totaled$515.2 million compared to$404.1 million in 2017. This increase is primarily the result of an increase in the volume and yield of our originated loans. The yield on our originated loan portfolio reflects an increase in LIBOR and other index rates used in our loan portfolio. The lower FTE yield on our tax-exempts securities reflects the lower income tax rate of 21% in 2018 compared to 35% in 2017. In addition, the volume of our securities decreased during 2018 compared to 2017 due to the rebalancing of the municipal securities portfolio which occurred in the second quarter of 2018. The yield on our ACI portfolio fluctuates due to the volume and timing of cash flows received or expected to be received. The yield on our ACI portfolio for 2018 was 9.44% compared to 10.82% for 2017. During 2018, interest income on the ACI portfolio included$2.2 million in discount and recovery income, compared to$8.1 million for 2017. These amounts were realized on certain individual loans that were settled before expected, or where we received amounts above our estimates. Excluding these recovery income amounts, the yield on our ACI loans would have been 8.47% for 2018 compared to 8.02% for 2017. Our total loan yield excluding these amounts would have been 5.13 % and 4.49% for 2018 and 2017. Our interest expense for 2018 and 2017 was$124.9 million and$70.7 million , respectively, an increase of$54.3 million . This increase is primarily related to higher market rates on our interest-bearing demand accounts and time deposits. Our cost of interest-bearing deposits increased to 1.38% for 2018 compared to 0.80% for 2017. Our cost of borrowings increased to 4.33% from 4.25% reflecting an increase in interest rates from the prior year and a higher volume of short-term FHLB advances. 59
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The following table presents our average balance sheet and our average FTE
yields on assets and average costs of liabilities for the years presented.
Average FTE yields are calculated by dividing income or expense by the average
balance of the corresponding assets or liabilities. Average balances have been
calculated on a daily basis, except for ACI loans, which is a monthly average.
Years Ended December 31,
2018 2017
Income / Income /
Average Balance Expense Yield / Rate Average Balance Expense Yield / Rate
ASSETS
Interest-earning assets:
Loans, net of unearned income(1)
Originated and ANCI loans $ 8,882,806 $ 448,084 5.04 % $ 7,535,099 $ 327,857 4.35 %
ACI portfolio 233,796 22,060 9.44 290,664 31,451 10.82
Total loans 9,116,602 470,144 5.16 7,825,763 359,308 4.59
Investment securities
Taxable 888,341 23,793 2.68 747,590 18,089 2.42
Tax-exempt (2) 292,282 12,077 4.13 408,229 20,554 5.03
Total investment securities 1,180,623 35,870 3.04 1,155,819 38,643 3.34
Federal funds sold and short-term
investments 465,554 6,930 1.49 313,683 3,336 1.06
Other investments 54,538 2,259 4.14 49,781 2,774 5.57
Total interest-earning assets 10,817,317 515,203 4.76 9,345,046 404,061 4.32Noninterest-earning assets: Cash and due from banks 79,560 60,108 Premises and equipment 62,841 65,428 Accrued interest and other assets 629,108 640,075 Allowance for credit losses (90,813 ) (90,621 ) Total assets$ 11,498,013 $ 10,020,036 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Demand deposits$ 4,983,113 57,795 1.16$ 4,360,252 27,030 0.62 Savings deposits 181,194 560 0.31 181,500 456 0.25 Time deposits 2,119,543 42,093 1.99 1,679,959 22,213 1.32 Total interest-bearing deposits 7,283,850 100,448 1.38 6,221,711 49,699 0.80 Other borrowings 430,159 14,678 3.41 358,413 11,644 3.25 Subordinated debentures 135,499 9,799 7.23 134,783 9,308 6.91 Total interest-bearing liabilities 7,849,508 124,925 1.59 6,714,907 70,651 1.05 Noninterest-bearing liabilities: Demand deposits 2,137,953 1,965,070 Accrued interest and other liabilities 133,081 86,198 Total liabilities 10,120,542 8,766,175 Shareholders' equity 1,377,471 1,253,861 Total liabilities and shareholders' equity$ 11,498,013 $ 10,020,036 Net interest income/net interest spread 390,278 3.17 % 333,410 3.27 % Net yield on earning assets/net interest margin 3.61 % 3.57 % Taxable equivalent adjustment: Investment securities (2,537 ) (7,194 ) Net interest income$ 387,741 $ 326,216
(1) Nonaccrual loans are included in loans, net of unearned income. No adjustment
has been made for these loans in the calculation of yields.
(2) Interest income and yields are presented on an FTE basis using Federal tax
rates of 21% and 35% for 2018 and 2017, respectively, on our state, county,
and municipal investment portfolios.
60
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Provision for Credit Losses
The provision for credit losses is based on management's quarterly assessment of the adequacy of our ACL which, in turn, is based on such factors as the composition of our loan portfolio and its inherent risk characteristics, the level of nonperforming loans and net charge-offs, historical loss data, local economic and credit conditions, the direction of collateral values, and regulatory guidelines. The provision for credit losses is charged against earnings in order to maintain our ACL, which reflects management's best estimate of probable losses inherent in our loan portfolio at the balance sheet dates (see "-Allowance for Credit Losses"). Under accounting standards for business combinations, acquired loans are recorded at fair value with no credit loss allowance on the date of acquisition. A provision for credit losses is recorded in periods after the date of acquisition for the emergence of new probable and estimable losses on ANCI loans. A provision for credit losses is recognized on our ACI loans after the date of acquisition based on the re-estimation of expected cash flows. See "-Asset Quality" and "-Critical Accounting Policies and Estimates." The provision for credit losses totaled$111.0 million for 2019 compared to$12.7 million and$9.7 million for 2018 and 2017, respectively. Approximately 77.2% of the 2019 provision related to loans incurring a charge-off during the year. Net charge-offs were$85.8 million or 0.63% of average loans for 2019 compared to$5.9 million or 0.06% for 2018. The 2019 charge-offs included:$44.0 million related to six General C&I non-SNC credits,$21.0 million related to five Restaurant credits; and$13.0 million related to three Energy credits.
The following is a summary of our provision for credit losses for the periods indicated presented by originated, ANCI and ACI portfolios:
Table 7 - Provision for Credit Losses
Year Ended December 31,
(In thousands) 2019 2018 2017
Originated Loans
Commercial and industrial $ 94,170 $ 16,306 $ 5,273
Commercial real estate 3,209 (1,113 ) 2,623
Consumer 3,155 (1,062 ) 3,044
Small business 2,474 (72 ) 568
Total originated loans 103,008 14,059 11,508
ANCI Loans
Commercial and industrial 1,250 (645 ) 613
Commercial real estate 1,060 (201 ) (139 )
Consumer 255 458 126
Small business 1,069 (199 ) (199 )
Total ANCI 3,634 (587 ) 401
ACI Loans
Commercial and industrial 1,249 47 (3 )
Commercial real estate 3,287 (523 ) (747 )
Consumer (151 ) (296 ) (1,424 )
Total ACI 4,385 (772 ) (2,174 )
Total Loans
Commercial and industrial 96,669 15,708 5,883
Commercial real estate 7,556 (1,837 ) 1,737
Consumer 3,259 (900 ) 1,746
Small business 3,543 (271 ) 369
Total provision for credit losses
Our originated and ANCI loan portfolios are divided into commercial and consumer segments. The commercial allowance estimate is driven by loan level risk ratings. The consumer allowance estimate uses pool level historical loss rates based on certain credit attributes. The primary driver of the ACL is the underlying credit quality of the loans, which have seen certain credit risk migration trends in 2019. The 2019 provision includes a$103.0 million provision related to the originated portfolio and$4.4 million related to the ANCI portfolio. Compared to 2018, the 2019 provision included increases in the commercial segments primarily in the General C&I, Restaurant and Energy portfolios. 61 -------------------------------------------------------------------------------- Currently, Restaurant and certain leveraged loans in our commercial portfolios have elevated risk. However, we have taken steps to attempt to manage our risk in these categories. Our exposure to leveraged loans without moderators and to the Restaurant portfolio have declined since 2018. Our Energy portfolio is predominantly Midstream and we believe the risks in this segment of the portfolio are lower than other Energy segments. Our E&P portfolio underwritten post-2014 has also performed well and our Energy impaired loans are approximately$11.0 million . The increase in criticized and classified assets may have slowed relative to the increases we had in the third quarter of 2019. We also believe that criticized and classified loans may have the opportunity to decline during 2020 with potential credit upgrades due to operating performance as well as potential pay downs from refinancing exceeding new migration into the criticized and classified loan categories. However, these reductions may be offset by any future negative migration of current pass rated loans. We recognized$12.7 million in provision during 2018, which included$14.1 million provision related to the originated portfolio. The originated loan provision for 2018 is primarily attributable to robust loan growth, some credit migration within the General C&I and Restaurant portfolios, as well as some changes seen in the qualitative factors related to economic conditions such as oil prices and market volatility.
We recognized
The provision for credit losses (impairment reversal) on our ACI portfolio was$4.4 million for 2019 compared to$(0.8) million for 2018 and$(2.2) million for 2017. The 2019 provision resulted primarily from two commercial credits where there were reductions in estimated expected cash flows or cash received in settlement of the debt. The provision reversals in prior years are primarily related to changes in credit quality and payments received in excess of expected cash flows in the commercial real estate portfolio in 2018 and the residential real estate portfolio in 2017. Noninterest Income
Noninterest income is a component of our revenue and is comprised primarily of income generated from the services we provide our customers.
Year Ended
Noninterest income totaled$130.9 million for 2019 compared to$94.6 million for 2018. This increase in revenue is primarily attributable to theState Bank merger which provided additional markets for our products and services as well as two new revenue sources, SBA income and payroll processing revenue.
The following table compares noninterest income for 2019 and 2018:
Table 8 - Noninterest Income
Year Ended December 31,
(In thousands) 2019 2018 % Change
Investment advisory revenue $ 24,890 $ 21,347 16.6 %
Trust services revenue 18,066 17,760 1.7
Service charges on deposit accounts 20,503 15,432 32.9
Credit related fees 21,265 16,124 31.9
Bankcard fees 8,486 5,951 42.6
Payroll processing revenue 5,149 - NM
SBA income 7,232 - NM
Other service fees 7,412 5,345 38.7
Securities gain (losses), net 2,018 (1,853 ) NM
Other 15,904 14,532 9.4
Total noninterest income $ 130,925 $ 94,638 38.3 %
NM-not meaningful.
62
-------------------------------------------------------------------------------- Investment Advisory Revenue. Our investment advisory revenue is comprised largely of investment management and financial planning revenues generated through our subsidiary L&W. Investment advisory revenue grew 16.6% during 2019 primarily due to an increase of 28.2% in assets under management supplemented by theJuly 2019 acquisition of a fee-based investments advisory firm based inAtlanta, Georgia .
Trust Services Revenue. We earn fees from our customers for trust services. Trust fees for 2019 were essentially unchanged from 2018.
Service Charges on Deposit Accounts. We earn fees from our customers for deposit-related services. For 2019, service charges and fees increased by$5.1 million . This 32.9% increase was largely due to the increased number of deposit accounts and customers resulting from theState Bank merger. Credit-Related Fees. Our credit-related fees include fees related to credit advisory services, unfunded commitment fees, asset-based lending and letter of credit fees. For 2019, credit-related fees increased by 31.9% primarily from loan arrangement and other credit advisory fees due to increased volume, asset-based lending fees which is a new line of business resulting from theState Bank acquisition, and to the recognition of the purchase accounting mark related to unfunded commitments when those commitments expire without being drawn upon. Bankcard Fees. Our bankcard fees are comprised of automated teller machine ("ATM") network fees and debit card revenue. Our bankcard fees of$8.5 million for 2019 increased 42.6% compared to 2018 primarily due to theState Bank acquisition. This increase was partially mitigated by the limit on interchange fees imposed by the Durbin Amendment which became effective for us in the third quarter of 2018.
Payroll Processing Revenue. Payroll processing revenue represents a new source
of revenue for us which we acquired in the
SBA Income.Small Business Administration ("SBA") income also represents a new source of revenue for us through theState Bank acquisition. This revenue consists of gains on sales of SBA loans, servicing fees, and other miscellaneous fees. Other Service Fees. Our other service fees include retail services fees. For 2019 and 2018, other service fees totaled$7.4 million and$5.3 million , respectively. The 2019 increase resulted primarily from additional foreign exchange fees due to increased trading volume. Other fees increased across the board due to theState Bank acquisition. Other Noninterest Income. Other noninterest income increased by$1.4 million in 2019 primarily as a result of increased volume resulting from theState Bank acquisition. We also experienced increases in mortgage banking income, income from bank-owned life insurance, and gains on sales of commercial loans. These increases were partially offset by decreased insurance revenue from the sale of the insurance subsidiary assets in second quarter 2018 and the revaluation of the receivable related to that sale.
Year Ended
Noninterest income totaled$94.6 million for 2018 compared to$99.9 million for 2017. This decrease in revenue is attributable to insurance revenue and bankcard fees.
The following table compares noninterest income for 2018 and 2017:
Year Ended December 31,
(In thousands) 2018 2017 % Change
Investment advisory revenue $ 21,347 $ 20,517 4.0 %
Trust services revenue 17,760 19,264 (7.8 )
Service charges on deposit accounts 15,432 15,272 1.0
Credit related fees 16,124 12,166 32.5
Insurance revenue 2,677 7,378 (63.7 )
Bankcard fees 5,951 7,310 (18.6 )
Mortgage banking income 2,372 3,731 (36.4 )
Other service fees 5,345 4,414 21.1
Securities losses, net (1,853 ) (146 ) NM
Other 9,483 9,968 (4.9 )
Total noninterest income $ 94,638 $ 99,874 (5.2 )%
63
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NM-not meaningful.
Investment Advisory Revenue. Our investment advisory revenue is comprised largely of investment management and financial planning revenues generated through our subsidiary L&W. Investment advisory revenue increased 4% for 2018 primarily due to growth in assets under management due to both new customer origination and portfolio/market improvements.
Trust Services Revenue. During 2018, trust fees declined by 7.8% primarily due to the transfer of certain deposit relationships from trust to treasury management. Additionally, the volatility in the equity markets and estate tax reform slowed the pace of personal trust growth. Credit-Related Fees. Our credit-related fees primarily include fees related to credit advisory services and unfunded commitment fees. For 2018, credit-related fees increased by 32.5% primarily as a result of an increase in unfunded commitment and letter of credit fees resulting from growth in our commercial lending.
Insurance Revenue. The decrease of 63.7% in insurance revenue is the result of
the sale of the assets of
Bankcard Fees. Our bankcard fees are comprised of ATM network fees and debit card revenue. Our bankcard fees of$6.0 million for 2018 decreased 18.6% compared to 2017 primarily due to decreased interchange fee rates resulting from the imposition of the Durbin Amendment which limits these fees. The Durbin Amendment became effective for us in the third quarter of 2018 as a result of regulations associated with exceeding$10 billion in total assets.
Noninterest Expenses
Year Ended
Noninterest expense was$408.8 million for 2019 compared to$258.3 million for 2018. The increase of$150.5 million or 58.3% for 2019 was driven by increases in salaries and benefits, merger related expenses, intangible asset amortizable, and other expenses related to organic growth of our business and growth from theState Bank merger.
The following table compares noninterest expense for 2019 and 2018:
Table 9 - Noninterest Expense
Year Ended December 31,
(In thousands) 2019 2018 % Change
Salaries and employee benefits $ 213,874 $ 154,905 38.1 %
Premises and equipment 44,637 30,478 46.5
Merger related expenses 28,497 2,983 NM
Intangible asset amortization 23,862 2,755 NM
Data processing expense 13,013 8,775 48.3
Software amortization 13,352 5,929 125.2
Consulting and professional fees 10,301 13,285 (22.5 ) Loan related expenses
2,383 3,145 (24.2 )
FDIC insurance 5,394 4,645 16.1
Communications 5,116 2,773 84.5
Advertising and public relations 5,017 2,523 98.8
Legal expenses 1,608 3,732 (56.9 )
Other 41,716 22,373 86.5
Total Noninterest Expense $ 408,770 $ 258,301 58.3 %
Salaries and Employee Benefits. Salaries and employee benefit costs are the
largest component of noninterest expense and include employee salaries and
commissions, incentive compensation, health insurance, benefit plans, and
payroll taxes. Salaries and employee benefits increased $59.0 million or 38.1%
for 2019, compared to 2018, largely due to the acquisition of State Bank and the
resulting 58% increase in full-time equivalent employees. This increase in
salaries and benefits was partially offset by lower incentive compensation
impacted by lower results from performance targets in 2019. The following table
provides additional detail of our salaries and employee benefits expense for the
periods presented:
64
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Year Ended December 31,
(In thousands) 2019 2018 % Change
Salaries and employee benefits
Regular compensation $ 136,312 $ 85,084 60.2 %
Incentive compensation 45,174 50,932 (11.3 )
Taxes and employee benefits 32,388 18,889 71.5 %
Total salaries and employee benefits $ 213,874 $ 154,905 38.1 %
Premises and Equipment. Rent expense, depreciation, and maintenance costs
comprise most of this expense. The 2019 increase of 46.5% resulted from
additional facilities and equipment from the acquisition of
Merger Related Expenses. In 2019, the Company incurred acquisition costs related
to the acquisition of
Intangible Asset Amortization. In connection with the acquisition ofState Bank , we recorded core deposit and other intangible assets of approximately$117.0 million which are being amortized over a ten-year period for the core deposit intangibles and a ten to twenty-year period for the other intangibles. The third quarter 2019 acquisition of W&P resulted in additional other intangible assets of$5.1 million .
Data Processing. Data processing expense for our operating systems totaled
Consulting and Professional Services. For 2019, our consulting and professional
services decreased
FDIC Insurance . TheFDIC insurance expense increased 16.1% due to the acquisition ofState Bank and resulting increase to our balance sheet and risk profile under the Large Bank Pricing Rule. During the third and fourth quarters of 2019 we received total credits of$3.5 million from theFDIC related to assessments paid prior to reaching$10 billion in total assets which partially mitigated this increase. TheFDIC assessment will vary between reporting periods as it is determined on various risk factors including credit, liquidity, composition of balance sheet, loan concentration, and regulatory ratings. Communications. Communications expenses include all forms of communications such as telecommunications, as well as data communications. The 84.5% increase in 2019 resulted primarily from increased data communications costs due to our expanded footprint and facilities from theState Bank acquisition. Advertising and Public Relations. Advertising and public relations expenses include costs to create marketing campaigns, purchase the various media space or time, conduct market research, and various sponsorships in our expanded markets. The acquisition ofState Bank expanded Cadence into several of the largestGeorgia markets which resulted in the 2019 increase of 98.8%. Legal Expenses. Our legal expenses include fees paid to outside counsel related to general legal matters as well as loan resolutions. Legal expenses decreased 56.9% due to 2018 fees of$2.2 million associated with litigation related to a pre-acquisition matter of a legacy acquired bank. This matter was fully resolved in the first quarter of 2018.
Other Noninterest Expenses. These expenses include costs for insurance,
supplies, travel education and training, and other operational expenses. Other
noninterest expenses increased 86.5% with the increase occurring across all
categories due to the acquisition of
Year Ended
Noninterest expense was$258.3 million for 2018 compared to$233.4 million for 2017. The increase of$24.9 million or 10.7% for 2017 compared to 2016 reflects increases in our growth while maintaining our broad efforts to manage expenses. 65
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The following table compares noninterest expense for 2018 and 2017:
Year Ended December 31,
(In thousands) 2018 2017 % Change
Salaries and employee benefits $ 154,905 $ 139,118 11.3 %
Premises and equipment 30,478 28,921 5.4
Merger expenses 2,983 - NM
Intangible asset amortization 2,755 4,652 (40.8 ) Data processing expense
8,775 7,590 15.6
Software amortization 5,929 6,635 (10.6 )
Consulting and professional fees 13,285 9,090 46.1
Loan related expenses 3,145 2,379 32.2
FDIC Insurance 4,645 4,275 8.7
Communications 2,773 2,837 (2.3 )
Advertising and public relations 2,523 2,048 23.2
Legal expenses 3,732 4,274 (12.7 )
Other 22,373 21,537 3.9
Total Noninterest Expense $ 258,301 $ 233,356 10.7 %
Salaries and Employee Benefits. Salaries and employee benefit costs are the
largest component of noninterest expense and include employee payroll expense,
incentive compensation, health insurance, benefit plans and payroll taxes.
Salaries and employee benefits increased $15.8 million or 11.3% for 2018
compared to 2017, largely due to short and long-term incentive costs as salary
expense remained relatively level. The increase in long-term incentive costs is
related to achieving higher levels of performance targets and higher corporate
valuation; the short-term incentive is related to business growth. The $9.8
million specially designated bonuses were granted by the Board of Directors
after the Compensation Committee consulted with an independent compensation
consultant who identified a strategy for a normalized approach to performance
pay programs in comparison to peers and to enhance retention and continuity of
senior management. Further, the specially designated bonuses recognized the
multi-year performance of management and addressed a design feature of the 2016
performance stock unit awards that caused the awards to not vest despite
management's achievement of performance objectives underlying the awards. The
following table provides additional detail of our salaries and employee benefits
expense for the periods presented:
Year Ended December 31,
(In thousands) 2018 2017 % Change
Salaries and employee benefits
Regular compensation $ 85,084 $ 82,475 3.2 %
Incentive compensation 50,932 38,696 31.6 %
Taxes and employee benefits 18,889 17,947 5.2 %
Total salaries and employee benefits $ 154,905 $ 139,118 11.3 %
Merger Related Expenses. In 2018, the Company incurred acquisition costs related
to the then-pending merger with
Premises and Equipment. Rent, depreciation and maintenance costs comprise most of the occupancy and equipment expenses, which increased 5.4% for 2018.
Intangible Asset Amortization. In connection with our acquisitions, we recorded
core deposit and other customer intangible assets of approximately
Data Processing. Data processing expense for our operating systems totaled
Consulting and Professional Services. For 2018, our consulting and professional services increased by$4.2 million or 46.1%, compared to 2017 as a result of the costs of secondary stock offerings and the engagement of outside consultants related to regulatory compliance and additional costs of being a public company.FDIC Insurance . For 2018 and 2017,FDIC insurance expense totaled$4.6 million and$4.3 , respectively. In the third quarter of 2018, we became subject to the Large Bank Pricing Rule for calculation of our insurance assessments due to reaching$10 billion in total assets. 66
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Other Noninterest Expenses. Other noninterest expense categories remained consistent with modest increases in loan related expenses, advertising and public relations, offset by decreases in software amortization and legal expenses.
Income Tax Expense
Income tax expense for 2019 was
The effective tax rate was 23.0% for 2019 compared to 21.3% and 44.1% for 2018 and 2017, respectively. The increase in the effective tax rate for 2019 compared to 2018 was due to an increase in state tax expense, a decrease in tax exempt interest, and a one-time bad debt deduction on a legacy loan portfolio that occurred in 2018. The decrease in the effective tax rate for 2018 compared to 2017 was due to the decrease in theU.S. federal statutory income tax rate from 35% to 21% which became effectiveJanuary 1, 2018 , as a result of the Tax Cut and Jobs Act ("Tax Reform") enacted onDecember 22, 2017 . See Note 12 to the Consolidated Financial Statements and "- Critical Accounting Policies and Estimates" for additional disclosures and discussion regarding income taxes. Our effective tax rate is impacted by pre-tax income, tax-exempt income, and the increase in the cash surrender value of bank-owned life insurance. The effective tax rate is also affected by discrete items that may occur in any given period, but are not consistent from period to period, which may impact the comparability of the effective tax rate between periods. AtDecember 31, 2019 , we had a net deferred income tax liability of$25.0 million compared to a net deferred asset of$33.2 million atDecember 31, 2018 . The decrease in the net deferred asset was primarily due to certain purchase accounting adjustments recorded during theState Bank acquisition, changes in market conditions that impacted the mark to market deferred tax adjustments on securities available-for-sale and on cash flow hedges including the interest rate collar. Financial Condition The following table summarizes selected components of our balance sheet as of the periods indicated. Our acquisition ofState Bank onJanuary 1, 2019 had a significant impact on our balance sheet. See "Note 2-Business Combinations" to our consolidated financial statements for additional information related to theState Bank acquisition. Table 10 - Financial Condition Average Balance for the Year Ended As of December 31, December 31, (In thousands) 2019 2018 2017 2019 2018 2017 Total assets$ 17,800,229 $ 12,730,285 $ 10,948,926 $ 17,689,126 $ 11,498,013 $ 10,020,036 Total interest-earning assets 16,254,827 11,899,165 10,120,137 16,320,573 10,817,317 9,345,046 Total interest-bearing liabilities 11,281,263 8,726,443 7,239,564 11,634,514 7,849,508 6,714,907 Short-term and other investments 813,069 592,690 542,113 759,026 465,554 363,464 Securities available for sale 2,368,592 1,187,252 1,257,063 1,776,689 1,180,623 1,155,819 Loans, net of unearned income 12,983,655 10,053,923 8,253,427 13,714,731 9,116,602 7,825,763 Goodwill 485,336 307,083 317,817 484,003 311,494 317,817 Noninterest-bearing deposits 3,833,704 2,454,016 2,242,765 3,431,300 2,137,953 1,965,070 Interest-bearing deposits 10,909,090 8,254,673 6,768,750 11,197,328 7,283,850 6,221,711 Borrowings and subordinated debentures 372,173 471,770 470,814 437,186 565,658 493,196 Shareholders' equity 2,460,846 1,438,274 1,359,056 2,373,856 1,377,471 1,253,861 Investment Portfolio Our securities available-for-sale portfolio increased by$1.2 billion or 99.5% during 2019. Approximately$393.7 million of securities available-for-sale were sold during 2019 and$352.5 million of securities matured or paid down. We purchased$1.2 billion in securities during 2019 with$800.0 million in the fourth quarter as a result of strong deposit growth combined with lower loan balances. Additionally, during 2019 we acquired$667.9 million in securities from theState Bank acquisition. AtDecember 31, 2019 , our securities portfolio was 14.6% of our total interest-earning assets and produced an average taxable equivalent yield of 2.84% for 2019 compared to 3.04% and 3.34% for 2018 and 2017, respectively. 67
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The following table sets forth the fair value of the securities available-for-sale at the dates indicated:
Table 11 - Securities Available-for-Sale Portfolio
As of December 31, Percent Change
(In thousands) 2019 2018 2017 2019 vs 2018 2018 vs 2017
Securities available-for-sale:
U.S. Treasury securities $ - $ 96,785 $ 96,844 (100.0 ) % (0.1 ) %
Obligations of U.S. government
agencies 69,106 61,007 81,224 13.3 (24.9 )
Mortgage-backed securities
("MBS") issued or guaranteed
by U.S. agencies:
Residential pass-through:
Guaranteed by GNMA 99,082 83,105 106,027 19.2 (21.6 )
Issued by FNMA and FHLMC 1,435,497 585,201 430,422 145.3 36.0
Collateralized mortgage
obligations 295,832 35,169 46,392 741.2 (24.2 )
Commercial MBS 275,958 109,415 72,195 152.2 51.6
Total MBS 2,106,369 812,890 655,036 159.1 24.1
Obligations of states and
municipal subdivisions 193,117 216,570 423,959 (10.8 ) (48.9 )
Total securities
available-for-sale $ 2,368,592 $ 1,187,252 $ 1,257,063 99.5 % (5.6 ) %
See "-Maturity Distribution of
The following table summarizes the investment securities with unrealized losses determined to be temporarily impaired atDecember 31, 2019 by aggregated major security type and length of time in a continuous unrealized loss position: Table 12 - Investment Securities with Unrealized Losses Unrealized Loss Analysis Losses < 12 Months Losses > 12 Months Total Gross Gross Gross Estimated Unrealized Estimated Unrealized Estimated Unrealized (In thousands) Fair Value Losses Fair Value Losses Fair Value Losses December 31, 2019 U.S. Treasury securities $ - $ - $ - $ - $ - $ - Obligations ofU.S. government agencies 33,053 209 13,703 206 46,756 415 Mortgage-backed securities 708,991 4,466 61,506 588 770,497 5,054 Obligations of states and municipal subdivisions - - - - - - Total$ 742,044 $ 4,675 $ 75,209 $ 794 $ 817,253 $ 5,469 None of the unrealized losses relate to the marketability of the securities or the issuer's ability to honor redemption of the obligations. We have adequate liquidity, no plans to sell securities and the ability and intent to hold securities to maturity resulting in full recovery of the indicated impairment. Accordingly, the unrealized losses on these securities have been determined to be temporary. Loan Portfolio We originate commercial and industrial loans, commercial real estate loans (including construction loans), residential mortgages and other consumer loans. A strong emphasis is placed on the commercial portfolio, consisting of commercial and industrial and commercial real estate loan types, with 74% and 75% of the portfolio residing in these loan types as ofDecember 31, 2019 and 2018, respectively. Our commercial portfolio is further diversified by industry concentration and includes loans to clients in specialized industries, including restaurant, healthcare and technology. Additional commercial lending activities include energy, construction, general corporate loans, business banking and community banking loans. Also, with the acquisition ofState Bank , we have added asset-based lending, lender finance, andSmall Business Administration ("SBA") lending. Mortgage, wealth management and retail make up the majority of the consumer portfolio. 68 -------------------------------------------------------------------------------- Total loans increased$3.0 billion or 29.4% fromDecember 31, 2018 . The merger withState Bank added approximately$3.3 billion in held for investment loan balances. The increase from the merger was primarily offset by a decrease in our specialized lending. See "Note 2-Business Combinations" to our audited consolidated financial statements for additional information related to theState Bank acquisition. The following table presents total loans outstanding by portfolio segment and class of financing receivable. Total loan balances include originated loans, ANCI loans, and ACI loans.The State Bank merger significantly increased the ANCI portfolio balances and to a lesser degree, the ACI portfolio. The subsequent tables present the ANCI and ACI loans separately. Table 13 - Loan Portfolio Total Loans as of December 31, (In thousands) 2019 2018 2017 2016 2015 Commercial and Industrial General C&I$ 3,979,193 $ 3,275,362 $ 2,746,454 $ 2,416,665 $ 2,383,348 Energy sector 1,427,832 1,285,775 935,371 939,369 1,067,990 Restaurant industry 993,397 1,096,366 1,035,538 864,085 626,197 Healthcare 472,307 539,839 416,423 445,103 461,903 Total commercial and industrial 6,872,729 6,197,342 5,133,786 4,665,222 4,539,438Commercial Real Estate Income producing 2,517,707 1,266,791 1,082,929 1,001,703 831,362 Land and development 254,965 63,948 75,472 71,004 64,546 Total commercial real estate 2,772,672 1,330,739 1,158,401 1,072,707 895,908 Consumer Residential real estate 2,584,810 2,227,653 1,690,814 1,457,170 1,256,850 Other 93,175 67,100 74,922 68,689 93,293 Total consumer 2,677,985 2,294,753 1,765,736 1,525,859 1,350,143 Small Business Lending 734,237 266,283 221,855 193,641 151,342 Total (Gross of Unearned Discount and Fees) 13,057,623 10,089,117 8,279,778 7,457,429 6,936,831 Unearned Discount and Fees (73,968 ) (35,194 ) (26,351 ) (24,718 ) (20,311 ) Total (Net of Unearned Discount and Fees)$ 12,983,655 $ 10,053,923 $ 8,253,427 $ 7,432,711 $ 6,916,520 ANCI Loans as of December 31, (In thousands) 2019 2018 2017 2016 2015 Commercial and Industrial General C&I$ 848,417 $ 49,517 $ 57,166 $ 47,592 $ 55,320 Energy sector 900 - - - - Restaurant industry 27,464 - - - - Healthcare 21,252 953 1,609 4,102 8,396 Total commercial and industrial 898,033 50,470 58,775 51,694 63,716Commercial Real Estate Income producing 1,083,628 7,100 14,503 18,354 27,185 Land and development 92,974 707 1,423 1,952 2,726 Total commercial real estate 1,176,602 7,807 15,926 20,306 29,911 Consumer Residential real estate 367,927 280,995 112,669 145,747 190,794 Other 43,477 1,319 2,270 7,180 5,947 Total consumer 411,404 282,314 114,939 152,927 196,741 Small Business Lending 374,231 8,741 11,641 9,158 11,295 Total ANCI Loans$ 2,860,270 $ 349,332 $ 201,281 $ 234,085 $ 301,663 As a % of Total Loans 21.90 % 3.46 % 2.43 % 3.14 % 4.35 % 69
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ACI Loans as of December 31,
(In thousands) 2019 2018 2017 2016 2015
Commercial and Industrial
General C&I $ 31,801 $ 16,807 $ 23,428 $ 31,709 $ 55,278
Restaurant industry 2,534 - - - -
Healthcare - - 6,149 6,338 6,715
Total commercial and industrial 34,335 16,807 29,577 38,047 61,993
Commercial Real Estate
Income producing 66,775 65,427 79,861 96,673 129,914
Land and development 12,201 - - 1,497 4,581
Total commercial real estate 78,976 65,427 79,861 98,170 134,495
Consumer
Residential real estate 100,133 120,495 149,942 186,375 235,131
Other 826 546 1,180 1,690 2,525
Total consumer 100,959 121,041 151,122 188,065 237,656
Small Business Lending 14,364 - - - -
Total ACI Loans $ 228,634 $ 203,275 $ 260,560 $ 324,282 $ 434,144
As a % of Total Loans 1.75 % 2.01 % 3.15 % 4.35 % 6.26 %
Commercial and Industrial. Total C&I loans increased by $675.4 million or 10.9%
during 2019 and represented 52.6% of the total loan portfolio at December 31,
2019 , compared to 61.4% of total loans at December 31, 2018 . The increase
resulted from our merger with State Bank .
General C&I. As of December 31, 2019 , our general C&I category included
loans to the following industries: finance and insurance, professional services,
durable manufacturing, commodities excluding energy, contractors, consumer
services, and other. Generally, C&I loans typically provide working capital,
equipment financing, and financing for expansion and are generally secured by
assignments of corporate assets including accounts receivable, inventory, and/or
equipment.
Energy. Our energy team is comprised of experienced lenders with significant
product expertise and long-standing relationships. Additionally, energy
production and energy related industries are substantial contributors to the
economies in the Houston metropolitan area and the state of Texas . We strive for
a rigorous and thorough approach to energy underwriting and credit monitoring.
The allowance for credit losses was $12.7 million for our energy loans or 0.89%
of the energy portfolio as of December 31, 2019 compared to $7.3 million or
0.57% as of December 31, 2018 (see "-Provision for Credit Losses" and
"-Allowance for Credit Losses"). As of December 31, 2019 , we had $9.8 million of
nonperforming energy credits compared to $20.7 million of nonperforming energy
credits as of December 31, 2018 . In addition, 6.7% of the energy portfolio was
criticized as of December 31, 2019 compared to 2.5% at December 31, 2018 . As
presented in the following table, our energy lending business is comprised of
three areas: Exploration and Production ("E&P"), Midstream, and Energy Services.
70
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Table 14 - Energy Loan Portfolio
As of December 31, As of December 31, 2019
Unfunded
(In thousands) 2019 2018 2017 2016 2015 Commitments Criticized
Outstanding Balance
E&P $ 358,552 $ 366,973 $ 278,171 $ 371,870 $ 520,798 $ 118,580 $ 24,618
Midstream 886,748 738,535 557,800 472,053 414,720 619,942 69,393
Energy services 182,532 180,267 99,400 95,446 132,472 115,732 1,417
Total energy sector $ 1,427,832 $ 1,285,775 $ 935,371 $ 939,369 $ 1,067,990 $ 854,254 $ 95,428
As a % of total loans 10.93 % 12.74 % 11.30 % 12.60 % 15.40 %
Allocated ACL
E&P $ 3,728 $ 2,195 $ 12,892 $ 13,018 $ 22,218
Midstream 7,845 4,091 1,582 5,878 2,402
Energy services 1,168 1,051 2,509 5,657 2,481
Total allocated ACL $ 12,741 $ 7,337 $ 16,983 $ 24,553 $ 27,101
ACL as a % of
Outstanding Balance
E&P 1.04 % 0.60 % 4.63 % 3.50 % 4.27 %
Midstream 0.88 0.55 0.28 1.25 0.58
Energy services 0.64 0.58 2.52 5.93 1.87
Total energy sector 0.89 % 0.57 % 1.82 % 2.61 % 2.54 %
E&P loans outstanding comprised approximately 25.1% of outstanding energy loans
as of December 31, 2019 compared to 28.5% of outstanding energy loans as of
December 31, 2018 . E&P customers are primarily businesses that derive a majority
of their revenues from the sale of oil and gas and whose credit needs require
technical evaluation of oil and gas reserves. Emphasis for E&P is on high
quality, independent producers with proven track records. Our E&P credit
underwriting includes a combination of well-by-well analyses, frequent updates
to our pricing decks and engaging energy engineers to actively monitor the
portfolio and provide credit redeterminations, at a minimum, every six months.
At least quarterly, and potentially more frequent during periods of higher
commodity price volatility, we adjust the base and sensitivity price decks on
which we value our clients' oil and gas reserves. Generally, we seek to follow
the shape of the NYMEX strips for oil and natural gas but at a discount to the
strip. In periods of higher commodity prices, our discount from the strip is
higher whereas in lower price periods our discount is lower. Borrowing base
redeterminations occur every spring and fall, with the spring redeterminations
completed prior to the end of the second quarter and fall determinations
completed prior to the end of the fourth quarter.
Midstream loans outstanding comprised 62.1% of outstanding energy loans as of
December 31, 2019 compared to 57.4% of outstanding energy loans as of
December 31, 2018 . Midstream lending is generally to customers who handle the
gathering, treating and processing, storage or transportation of oil and gas.
These customers' businesses are generally less price sensitive than other energy
segments given the nature of their fee-based revenue streams. Underwriting
guidelines for the Midstream portfolio generally require a first lien on all
assets as collateral.
Energy Services loans outstanding comprised 12.8% of outstanding energy loans as
of December 31, 2019 compared to 14.0% of outstanding energy loans as of
December 31, 2018 . Energy Services lending targets oilfield service companies
that provide equipment and services used in the exploration for and extraction
of oil and natural gas. Customers consist of a wide variety of businesses,
including production equipment manufacturers, chemical sales, water transfer,
rig equipment, and other early and late stage services companies.
Specialized Lending. The following table presents our originated specialized lending portfolio by category.
Table 15 - Originated Specialized Lending Portfolio
Unfunded
Commitments as
Amounts Outstanding as of December 31, of
December 31,
(In thousands) 2019 2018 2017 2016 2015 2019
Restaurant $ 963,399 $ 1,096,366 $ 1,035,538 $ 864,085 $ 626,197 $ 306,615
Healthcare 451,055 538,886 408,665 434,663 446,792 140,809
Technology 369,160 459,502 411,050 218,162 145,944 82,692
Total specialized
lending $ 1,783,614 $ 2,094,754 $ 1,855,253 $ 1,516,910 $ 1,218,933 $ 530,116
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Restaurant, healthcare, and technology are the components of our specialized lending. For these industries, we focus on larger corporate clients who are typically well-known within the industry. The client coverage for these components is national in scope, given the size and capital needs of the majority of the clients. Given these customer profiles, we frequently participate in such credits with two or more banks through syndication.
Restaurant loans outstanding decreased by 12.1% compared toDecember 31, 2018 . In the restaurant sector, we focus on major franchisees and the operating companies of "branded" restaurant concepts. Our restaurant group focuses on top tier operators in restaurant operating companies and franchisee restaurants in nationwide markets. The Restaurant sector has experienced increases in nonperforming loans and charge-offs during 2019 as certain customers have faced difficulties dealing with market pressures on employee compensation and increased competition among other issues. Healthcare loans outstanding decreased by 16.3% and comprised 25.3% of total specialized lending atDecember 31, 2019 compared to 25.7% atDecember 31, 2018 . Our healthcare portfolio focuses on middle market healthcare providers generally with a diversified payer mix. Technology loans outstanding decreased by 19.7% and comprised 20.7% of total specialized lending atDecember 31, 2019 compared to 21.9% atDecember 31, 2018 . Our technology portfolio focuses on the technology sub-segments of software and services, network and communications infrastructure, and internet and mobility applications.Commercial Real Estate . Commercial real estate ("CRE") loans increased by$1.4 billion or 108.4% sinceDecember 31, 2018 . CRE loans represented 21.2% of our total loan portfolio atDecember 31, 2019 , compared to 13.2% of total loans atDecember 31, 2018 . The increase resulted from our merger withState Bank . Income Producing CRE includes non-owner occupied loans secured by commercial real estate, regardless of the phase of the loan (construction versus completed). Commercial construction loans are primarily included in Income Producing CRE. Additionally, all real estate investment trust and income producing loans are included in the Income Producing CRE segment. Land, lots, and homebuilder loans are included in the land and development segment. All owner occupied CRE loans reside in the various C&I segments in which the underlying risk exists. Our CRE lending team is a group of experienced relationship managers focusing on construction and income producing property lending which generally have property or sponsors located in our geographic footprint. CRE loans are secured by a variety of property types, including multi-family dwellings, office buildings, industrial properties, and retail facilities. Consumer. Consumer loans increased by$383.2 million or 16.7% sinceDecember 31, 2018 with a significant portion of the increase attributable to the merger withState Bank . Consumer loans represent 20.5% of total loans atDecember 31, 2019 , compared to 22.7% of total loans atDecember 31, 2018 . We originate residential real estate mortgages that are held for investment as well as held for sale in the secondary market. Approximately 19.1% of the consumer portfolio relates to acquired portfolios, compared to 17.6% a year ago. Our originated consumer loan portfolio totaled$2.2 billion as ofDecember 31, 2019 , an increase of$274.2 million from year end 2018. Small Business. Small business loans increased by$468.0 million or 175.7% sinceDecember 31, 2018 . The majority of the increase is attributable to the merger withState Bank . Small business loans represent 5.6% of the total loan portfolio atDecember 31, 2019 , compared to 2.6% of total loans atDecember 31, 2018 . The small business category is defined as all commercial loans with a transactional exposure of$1.5 million or less and relationship exposure of$2.0 million or less that were underwritten in our centralized loan center. Additionally, it includes any acquired loans that we believe would have been underwritten in our centralized loan center had they been part of Cadence at origination. These loans are primarily centrally underwritten using defined underwriting standards that are applied consistently throughout the category. Concentrations of Credit. We closely and consistently monitor our concentrations of credit. Individual concentration limits are assessed and established, as needed, on a quarterly basis and measured as a percentage of risk-based capital. All concentrations greater than 25% of risk-based capital require a concentration limit, which is monitored and reported to the Board of Directors on at least a quarterly basis. In addition to the specialized industries, energy, and CRE segments in the loan portfolio, we manage concentration limits for other loans, such as, construction, multifamily, office building, leveraged loans, technology loans, specialty chemical, and non-specialized enterprise value loans. We evaluate the appropriateness of our underwriting standards in response to changes in national and regional economic conditions, including energy prices, interest rates, real estate values, and employment levels. Underwriting standards and credit monitoring activities are assessed and enhanced in response to changes in these conditions. Shared National Credits. The federal banking agencies define a shared national credit ("SNC") as any loan(s) extended to a borrower by a supervised institution or any of its subsidiaries and affiliates which aggregates$100 million or more and is shared by three or more institutions under a formal lending agreement or a portion of which is sold to two or more institutions, with the purchasing institutions assuming its pro rata share of the credit risk. As a commercial focused relationship bank, we often participate in syndicated loan offerings as a result of the size of the customers and nature of industries we serve. 72 -------------------------------------------------------------------------------- Our SNC loans are spread across our commercial products with many falling within our specialized industries and are focused on customers where we have ancillary business or believe we can develop such business. Our management team, relationship managers, and credit risk management team have extensive experience in the underwriting, due diligence, and monitoring of SNC credits. We evaluate SNC loans using the same credit standards we apply in underwriting all our loans. The following table presents our SNC portfolio by portfolio segment and class of financing receivable. December 31, 2019 December 31, 2018 Amount % of SNC Amount % of SNC (In thousands) Outstanding Portfolio Outstanding Portfolio Commercial and Industrial General C&I$ 997,021 38.2 %$ 818,986 31.0 % Energy sector 903,501 34.7 864,868 32.7 Restaurant industry 468,298 18.0 593,074 22.4 Healthcare 31,436 1.2 81,394 3.1 Total commercial and industrial 2,400,256 92.1 2,358,322 89.2Commercial Real Estate Income producing 192,234 7.4 263,075 9.9 Land and development 14,294 0.5 23,868 0.9 Total commercial real estate 206,528 7.9 286,943 10.8 Total Shared National Credits$ 2,606,784 100.0 %$ 2,645,265 100.0 % As a % of Total Loans 20.0 % 26.2 % Asset Quality
We focus on asset quality strength through robust underwriting, proactive monitoring and reporting of the loan portfolio and collaboration between the lines of business, credit risk and enterprise risk management.
Credit risk is governed and reported up through the Board of Directors primarily
through our Senior Credit Risk Management Committee ("SCRMC"). The SCRMC reviews
credit portfolio management information such as problem loans, delinquencies,
concentrations of credit, asset quality trends, portfolio analysis, exception
management, policy updates and changes, and other relevant information. Further,
both the Senior Loan Committee and Credit Transition Committee , the primary
channels for credit approvals, report up through SCRMC. The Senior Loan
Committee generally approves all loans with relationship exposure greater than
$5 million . Dual signature authority between the business unit and the credit
officer is utilized for loan approvals below the $5 million threshold.
Additionally, the Credit Transition Committee manages all material credit
actions for classified credits greater than $5 million . Our Board of Directors
receives information concerning asset quality measurements and trends on at
least a quarterly basis if not more frequently.
Credit policies have been established for each type of lending activity in which
we engage, with a particular focus given to the commercial side of the Bank.
Policies are evaluated and updated as needed based on changes in guidance and
regulations as well as business needs of the Bank.
Each loan's creditworthiness is assessed and assigned a risk rating, based on
both the borrower strength (probability of default) as well as the collateral
protection of the loan (loss given default). Risk rating accuracy and reporting
are critical tools for monitoring the portfolio as well as determining the
allowance for credit losses. Assigned risk ratings are periodically reviewed for
accuracy and adjusted as appropriate for all relationships greater than
$2.5 million and Pass rated. Relationships rated Pass, Watch, or worse and $1
million or more are reviewed quarterly.
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Acquired Loans
Loans acquired in acquisitions are initially recorded at fair value with no carryover of the related ACL. The fair value of the loans is determined using market participant assumptions in estimating the amount and timing of principal and interest cash flows initially expected to be collected on the loans and discounting those cash flows at an appropriate market rate of interest. Under the accounting model for ACI loans, the excess of cash flows expected to be collected over the carrying amount of the loans, referred to as the "accretable yield," is accreted into interest income over the life of the loans using the effective yield method. Accordingly, ACI loans are not subject to classification as nonaccrual in the same manner as originated loans. Rather, acquired loans are considered to be accruing loans because their interest income relates to the accretable yield recognized and not to contractual interest payments. However, if the timing or amount of the expected cash flows cannot be reasonably estimated an ACI loan may be placed in nonaccruing status. The excess of an ACI loan's contractually required payments over the cash flows expected to be collected is the nonaccretable difference. As such, charge-offs on ACI loans are first applied to the nonaccretable difference and then to any related ACL recognized subsequent to the acquisition. A decrease in expected cash flows in subsequent periods may indicate that the ACI loan pool or specifically reviewed loan is impaired, which would require the establishment of an allowance for credit losses by a charge to the provision for credit losses.
Select asset quality metrics presented below distinguish between the originated, ANCI and ACI portfolios.
Nonperforming Assets
Nonperforming assets ("NPA") primarily consist of nonperforming loans ("NPL")
and other assets acquired through any means in full or partial satisfaction of a
debt previously contracted. The following table presents all nonperforming
assets and additional asset quality data for the dates indicated.
Table 16 - Nonperforming Assets
As of December 31,
(Recorded investment in
thousands) 2019 2018 2017 2016 2015
Nonperforming loans
Commercial and industrial $ 106,803 $ 71,353 $ 43,085 $ 122,416 $ 63,234
Commercial real estate 1,127 - 225 2,186 2,922
Consumer 7,289 2,555 3,741 3,530 2,845
Small business 4,337 333 642 805 834
Total nonperforming loans 119,556 74,241 47,693 128,937 69,835
Foreclosed OREO and other NPA 5,958 8,185 22,965 37,231 32,972
Total nonperforming assets $ 125,514 $ 82,426 $ 70,658 $ 166,168 $ 102,807
NPL as a percentage of total
loans 0.92 % 0.74 % 0.58 % 1.73 % 1.01 %
NPA as a percentage of loans plus
OREO/other 0.97 % 0.82 % 0.85 % 2.22 % 1.48 %
NPA as a percentage of total
assets 0.71 % 0.65 % 0.65 % 1.74 % 1.17 %
Accruing loans 90 days or more
past due
Originated and ANCI loans $ 946 $ 760 $ 827 $ 586 $ 1,446
ACI loans 22,418 5,480 16,988 18,364 24,655
Total accruing loans 90 days or
more past due $ 23,364 $ 6,240 $ 17,815 Nonperforming Loans. Commercial loans, including small business loans, are generally placed on nonaccrual status when principal or interest is past due 90 days or more unless the loan is well secured and in the process of collection, or when the loan is specifically determined to be impaired. When a commercial loan is placed on nonaccrual status, interest accrued but not received is generally reversed against interest income. Consumer loans, including residential first and second lien loans secured by real estate, are generally placed on nonaccrual status when they are 120 or more days past due. When a consumer loan is placed on nonaccrual status, interest accrued but not received is generally reversed against interest income. Generally, cash receipts on nonperforming loans are used to reduce principal rather than recorded as interest income. Past due status is determined based upon contractual terms. A nonaccrual loan may be returned to accrual status when repayment is reasonably assured under the terms of the loan or, if applicable, under the terms of the restructured loan. Approximately$16.3 million ,$8.5 million , and$7.3 million of contractual interest accrued on nonperforming loans was not recognized in earnings during the years endedDecember 31, 2019 , 2018, and 2017, respectively. For the year endedDecember 31, 2019 , an immaterial amount of contractual interest paid was recognized on the cash basis compared to$1.7 million and$1.5 million for the same periods in 2018 and 2017, respectively. 74 -------------------------------------------------------------------------------- Our nonperforming loans have increased to 0.92% of our loan portfolio as ofDecember 31, 2019 compared to 0.74% of our loan portfolio as ofDecember 31, 2018 , with the increase primarily due to six credits in the General C&I segment, five credits in the Restaurant segment, and one credit each in the Healthcare and E&P segments within our originated portfolio. The following table includes our originated nonperforming assets for the periods presented. Table 17 - Originated Nonperforming Assets As ofDecember 31 ,
(Recorded investment in thousands) 2019 2018 2017
2016 2015 Nonperforming loans Commercial and industrial General C&I$ 43,630 $ 24,103 $ 263 $ 7,089 $ 7,215 Energy sector E&P 5,206 14,485 36,896 95,453 36,361 Midstream 3,159 6,227 - 10,689 1,580 Energy services 1,417 - 5,926 7,242 9,818 Restaurant industry 45,032 22,042 - - - Healthcare 3,770 4,496 - - - Commercial real estate - - - - 66 Consumer 3,307 1,218 1,519 798 108 Small business 1,395 104 199 132 90 Total nonperforming loans 106,916 72,675 44,803 121,403 55,238 E&P - net profits interests 4,330 5,779 15,833 19,425 - Foreclosed OREO - 22 140 - - Total nonperforming assets$ 111,246 $ 78,476 $ 60,776 $ 140,828 $ 55,238 NPL as a percentage of total loans 0.82 % 0.72 % 0.54 %
1.63 % 0.80 %
Other Real Estate Owned. Other real estate owned consists of properties acquired through foreclosure and unutilized bank-owned properties. These properties, as held for sale properties, are initially recorded at fair value, less estimated costs to sell, on the date of foreclosure (establishing a new cost basis for the property). Subsequent to the foreclosure date, the OREO is maintained at the lower of cost or fair value. Any write-down to fair value required at the time of foreclosure is charged to the allowance for credit losses. Subsequent gains or losses on other real estate owned resulting from either the sale of the property or additional valuation allowances required due to further declines in fair value are reported in other noninterest expense. The balance of foreclosed OREO was$1.6 million as ofDecember 31, 2019 and consisted of eight properties compared to$2.4 million and 19 properties as ofDecember 31, 2018 , with approximately 96% related to foreclosures resulting from our ACI loan portfolio. There were no additions to OREO resulting from foreclosure or repossession from a shared national credit during the three years endedDecember 31, 2019 . In 2016, we received net profits interests ("NPIs") in certain oil and gas reserves related to two energy credit bankruptcies that were charged-off in 2016. We recorded the NPIs at estimated fair value using a discounted cash flow analysis applied to the expected cash flows from the producing developed wells. We sold one NPI during 2018. The remaining NPI balance was$4.3 million as ofDecember 31, 2019 compared to$5.8 million as ofDecember 31, 2018 . The following tables provide additional detail of our OREO and other nonperforming assets. The first table presents total balances including OREO related to foreclosures resulting from originated loans, ANCI loans, and ACI loans. The subsequent table presents the ACI OREO separately. 75 -------------------------------------------------------------------------------- Table 18 - OREO and Other Nonperforming Assets
As of December 31,
(In thousands) 2019 2018 2017 2016 2015
Acquired through foreclosure
Land $ 397 $ 36 $ 1,393 $ 10,183 $ 7,469
Residential property 151 970 2,696 5,138 13,763
Commercial property 1,080 1,400 3,043 2,582 11,740
Total foreclosed OREO 1,628 2,406 7,132 17,903 32,972
Unutilized bank-owned property
Land - - 473 756 -
Commercial property - - - 216 3,012
Total unutilized bank-owned
property - - 473 972 3,012
Total OREO 1,628 2,406 7,605 18,875 35,984
Other nonperforming assets 4,330 5,779 15,833 19,425 -
Total OREO and other
nonperforming assets $ 5,958 $ 8,185 $ 23,438 $ 38,300 $ 35,984
As of December 31,
(In thousands) 2019 2018 2017 2016 2015
Acquired through foreclosure
Land $ 397 $ 36 $ 1,393 $ 10,183 $ 7,282
Residential property 79 925 2,392 4,937 12,429
Commercial property 1,080 1,400 3,020
2,559 11,717
Total foreclosed OREO from ACI loans
Past Due 90 Days and Accruing. We classify certain loans with principal or interest past due 90 days or more as accruing loans if those loans are well secured and in the process of collection or are specifically determined to be impaired as accruing loans. The bulk of the accruing 90 days or more past due loans reside in the ACI portfolio. These loans are monitored on a monthly basis by both the lines of business and credit administration. As ofDecember 31, 2019 , there was one SNC that is an ACI loan with a balance of$11.7 million that was 90 days or more past due and accruing. Troubled Debt Restructuring. We attempt to work with borrowers when necessary to extend or modify loan terms to better align with the borrower's ability to repay. Extensions and modifications to loans are made in accordance with internal policies and guidelines which conform to regulatory guidance. Each occurrence is unique to the borrower and is evaluated separately. The Bank considers regulatory guidelines when restructuring loans to ensure that prudent lending practices are followed. Qualifying criteria and payment terms are structured by the borrower's current and prospective ability to comply with the modified terms of the loan. A modification is classified as a troubled debt restructuring ("TDR") if the borrower is experiencing financial difficulty and it is determined that we have granted a concession to the borrower. We may determine that a borrower is experiencing financial difficulty if the borrower is currently in default on any of its debt, or if it is probable that a borrower may default in the foreseeable future without the modification. Concessions could include reductions of interest rates at a rate lower than the current market rate for a new loan with similar risk, extension of the maturity date, reduction of accrued interest, principal forgiveness, forbearance, or other concessions. The assessments of whether a borrower is experiencing or will likely experience financial difficulty and whether a concession has been granted is highly subjective in nature, and management's judgment is required when determining whether a modification is classified as a TDR. All TDRs are reported as impaired. An impaired classification may be removed if the borrower demonstrates compliance with the modified terms and the restructuring agreement specifies an interest rate equal to that which would be provided to a borrower with similar credit at the time of restructuring. Nonperforming loans and impaired loans have unique definitions. Some loans may be included in both categories, whereas other loans may only be included in one category. As ofDecember 31, 2019 , there were SNCs totaling$7.7 million designated as TDRs compared to$24.7 million as ofDecember 31, 2018 .
Originated and ANCI Loans Modified into TDRs. The following table provides information regarding loans that were modified into TDRs in the originated and ANCI portfolios for the periods indicated.
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Table 19 - Originated and ANCI Loans Modified into TDRs
For the Year Ended December 31,
2019 2018 2017 2016 2015
Number of Recorded Number of Recorded Number of Recorded Number of Recorded Number of Recorded (Dollars in thousands) TDRs Investment TDRs
Investment TDRs Investment TDRs Investment TDRs Investment
Commercial and Industrial
General C&I 4 $ 9,692 - $ - 2 $ 5,010 1 $ 5,496 3 $ 9,840
Energy sector 1 5,442 1 14,486 - - 5 38,113 2 16,619
Restaurant industry 4 20,934 2 11,262 1 11,017 - - - -
Healthcare - - 1 4,496 - - - - - -
Total C&I 9 36,068 4 30,244 3 16,027 6 43,609 5 26,459
Consumer
Residential real estate - - - - 1 460 1 334 5 273
Other - - - - 1 279 1 200 1 306
Total consumer - - - - 2 739 2 534 6 579
Small Business Lending - - 2 141 1 138 1 552 - -
Total 9 $ 36,068 6 $ 30,385 6 $ 16,904 9 $ 44,695 11 $ 27,038
During the year ended December 31, 2019 , approximately $49.7 million in
charge-offs were taken related to commercial and industrial loans that were
modified into TDRs during the same 12-month period. For the year ended December
31, 2018 , there was one commercial specialized lending customer with a combined
recorded investment of $11.8 million which experienced payment default in the
year of modification. There were no TDRs modified during 2017 and 2016 that
experienced payment default during the year of modification. For the year ended
December 31, 2015 , there were two small business lending loans with a combined
recorded investment of $0.5 million which experienced payment default during the
year of modification. Default is defined as the earlier of the troubled debt
restructuring being placed on non-accrual status or obtaining 90 day past due
status with respect to principal and/or interest payments.
ACI Loans Modified into TDRs. There was one ACI loan modified into a TDR during
the year ended December 31, 2019 with a recorded investment of $1.5 million that
was sold prior to year-end. There were no ACI loans modified into a TDR during
the years ended December 31, 2018 and 2017. During the year ended December 31,
2016 , there was one ACI loan modified into a TDR with a recorded investment of
$1.0 million in income producing commercial real estate. During the year ended
December 31, 2015 , there was one ACI loan modified into a TDR with a recorded
investment of $0.6 million in income producing commercial real estate. There
were no ACI TDRs modified during the three years ended December 31, 2019 that
experienced payment default during the year of modification.
Potential Problem Loans. Potential problem loans represent loans that are
currently performing, but for which available information about possible credit
problems of the related borrowers causes management to have doubts as to the
ability of such borrowers to comply with the repayment terms in the future and
which may result in the classification of such loans as nonperforming at some
time in the future. These loans are not included in the amounts of nonaccrual or
restructured loans presented above. We cannot predict the extent to which
economic conditions or other factors may impact borrowers and the potential
problem loans. Accordingly, there can be no assurance that other loans will not
become 90 days or more past due, be placed on nonaccrual status, become
restructured, or require increased allowance coverage and provision for credit
losses. We have identified $47 million in credits as potential problem loans at
December 31, 2019 with the majority of the balances in E&P ($18 million ),
General C&I ($12 million ), Restaurant ($10 million ) and CRE ($4 million ). Of the
$47 million , approximately $29 million is in our originated portfolio and $18
million in the acquired portfolio. Any potential problem loans would be assessed
for loss exposure consistent with the methods described in Notes 1 and 4 to our
Consolidated Financial Statements.
We expect the levels of nonperforming assets and potential problem loans to fluctuate in response to changing economic and market conditions, and the relative sizes of the respective loan portfolios, along with our degree of success in resolving problem assets. We seek to take a proactive approach with respect to the identification and resolution of problem loans.
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Allowance for Credit Losses
The allowance for credit losses ("ACL") is maintained at a level that management
believes is adequate to absorb all probable losses on loans inherent in the loan
portfolio as of the reporting date. Events that are not within the Company's
control, such as changes in economic factors, could change subsequent to the
reporting date and could cause increases or decreases to the ACL. The amount of
the allowance is affected by loan charge-offs, which decrease the allowance;
recoveries on loans previously charged off, which increase the allowance; and
the provision for credit losses charged to earnings, which increases the
allowance. In determining the provision for credit losses, management monitors
fluctuations in the ACL resulting from actual charge-offs and recoveries and
reviews the size and composition of the loan portfolio in light of current and
anticipated economic conditions (see Notes 1 and 4 to the Consolidated Financial
Statements). This evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information becomes
available or as events change.
Total ACL as of December 31, 2019 was $119.6 million or 0.92% of total loans
(net of unearned discounts and fees) of $13.0 billion . This compares with $94.4
million on loans of $10.1 billion or 0.94% at December 31, 2018 . The following
tables present the allocation of the allowance for credit losses and the
percentage of these loans to total loans. The allocation below is neither
indicative of the specific amounts or the loan categories in which future
charge-offs may occur, nor is it an indicator of any future loss trends. The
allocation of the allowance to each category does not restrict the use of the
allowance to absorb any losses in any category.
Table 20 - Allocation of Allowance for Credit Losses
Allowance for Credit Losses Percent of Loans in Each Category to Total Loans
As of December 31, As of December 31,
(In thousands) 2019 2018 2017 2016 2015 2019 2018 2017 2016 2015
Originated Loans
Commercial and industrial $ 82,675 $ 65,965 $ 55,050 $ 54,213 $ 53,169 45.49 % 60.76 % 60.94 % 61.35 % 63.63 %
Commercial real estate 11,909 8,758 9,850 7,205 4,825 11.62 12.46 12.83 12.80 10.55
Consumer 8,623 6,937 8,389 5,687 4,325 16.59 18.75 18.11 15.89 13.20
Small business 5,652 3,742 4,367 3,907 2,067 2.65 2.55 2.54 2.47 2.02
Total originated ACL 108,859 85,402 77,656 71,012 64,386 76.34 94.52 94.42 92.51 89.39
ANCI Loans
Commercial and industrial 462 293 864 299 425 6.88 0.50 0.71 0.69 0.92
Commercial real estate 70 53 130 243 227 9.01 0.08 0.19 0.27 0.43
Consumer 697 541 85 131 105 3.15 2.80 1.39 2.05 2.84
Small business 197 165 317 305 306 2.87 0.09 0.14 0.12 0.16
Total ANCI ACL 1,426 1,052 1,396 978 1,063 21.90 3.46 2.43 3.14 4.35
ACI Loans
Commercial and industrial 1,172 58 5 176 2,230 0.26 0.17 0.36 0.51 0.89
Commercial real estate 2,114 1,641 2,010 2,655 3,084 0.60 0.65 0.96 1.32 1.94
Consumer 6,072 6,225 6,509 7,447 9,020 0.77 1.20 1.83 2.52 3.43
Small business - - - - - 0.11 - - - -
Total ACI ACL 9,358 7,924 8,524 10,278 14,334 1.75 2.01 3.15 4.35 6.26
Total Loans
Commercial and industrial 84,309 66,316 55,919 54,688 55,824 52.63 61.43 62.00 62.56 65.44
Commercial real estate 14,093 10,452 11,990 10,103 8,136 21.23 13.19 13.99 14.38 12.92
Consumer 15,392 13,703 14,983 13,265 13,450 20.51 22.74 21.33 20.46 19.46
Small business 5,849 3,907 4,684 4,212 2,373 5.62 2.64 2.68 2.60 2.18
Total ACL$ 119,643 $ 94,378 $ 87,576 $
82,268
Originated ACL. The ACL on our originated loan portfolio totaled$108.9 million or 1.09% on loans of$10.0 billion as ofDecember 31, 2019 compared to$85.4 million or 0.90% on loans of$9.5 billion as ofDecember 31, 2018 . The primary driver of the originated ACL is the net new loan growth as well as the underlying credit quality of the loans. Our originated and ANCI loan portfolios are divided into commercial and consumer segments for allowance estimation purposes. The commercial allowance estimate is driven by loan level risk ratings. The consumer allowance estimate uses pool level historical loss rates assigned based on certain credit attributes. As ofDecember 31, 2019 ,$82.7 million or 75.9% of our originated ACL is attributable to our C&I loan segment compared to$66.0 million or 77.2% as ofDecember 31, 2018 . The ACL as a percentage of the C&I portfolio was 1.39% as ofDecember 31, 2019 compared to 1.08% as ofDecember 31, 2018 . This increase in the level of ACL on the C&I portfolio as ofDecember 31, 2019 fromDecember 31, 2018 includes additional provision of approximately$84 million on specific credits primarily within the Energy, Restaurant and General C&I segments, offset by charge-offs of approximately$78 million , as well as credit migration (see "-Provision for Credit Losses"). 78
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The level of criticized loans in the originated C&I portfolio is presented in the following tables.
Table 21 - Originated Criticized C&I Loans
As of December 31 , 2019
(Recorded investment in thousands) Special Mention Substandard Doubtful Total Criticized General C&I $ 67,422$ 171,386 $ 7,232 $ 246,040 Energy sector 66,235 26,439 2,754 95,428 Restaurant industry 45,058 57,992 4,697 107,747 Healthcare 22,414 3,770 - 26,184
Total originated C&I loans $ 201,129
14,683 $ 475,399
As of December 31, 2018
(Recorded investment in
thousands) Special Mention Substandard Doubtful Total Criticized
General C&I $ 74,592 $ 76,056 $ - $ 150,648
Energy sector 11,812 6,227 14,486 32,525
Restaurant industry 24,449 26,171 - 50,620
Healthcare - 4,496 - 4,496
Total originated C&I loans $ 110,853
14,486 $ 238,289
As of December 31, 2017
(Recorded investment in
thousands) Special Mention Substandard Doubtful Total Criticized
General C&I $ 80,550 $ 41,309 $ - $ 121,859
Energy sector - 99,979 7,634 107,613
Restaurant industry 4,536 12,505 - 17,041
Healthcare - 71 - 71
Total originated C&I loans $ 85,086
7,634 $ 246,584
As of December 31, 2016
(Recorded investment in
thousands) Special Mention Substandard Doubtful Total Criticized
General C&I $ 36,419 $ 26,968 $ - $ 63,387
Energy sector 30,433 239,457 789 270,679
Restaurant industry 16,169 - - 16,169
Healthcare 9,479 - - 9,479
Total originated C&I loans $ 92,500
789 $ 359,714
As of December 31, 2015
(Recorded investment in
thousands) Special Mention Substandard Doubtful Total Criticized
General C&I $ 14,056 $ 42,705 $ - $ 56,761
Energy sector 104,781 241,032 - 345,813
Restaurant industry 25,313 - - 25,313
Healthcare 212 5,097 - 5,309
Total originated C&I loans $ 144,362
- $ 433,196
The increase in the General C&I criticized and classified assets does not represent any specific industry within General C&I. Energy criticized and classified loans includes one E&P credit totaling$18 million and four Midstream credits totaling$66 million . The Restaurant criticized assets include eight credits totaling$99 million of which approximately$90 million are in the Quick Service (QSR) sector, while Healthcare includes three credits totaling$26 million . As ofDecember 31, 2019 ,$11.9 million or 10.9% of our originated ACL is attributable to the CRE loan segment compared to$8.8 million or 10.3% as ofDecember 31, 2018 . The ACL as a percentage of the CRE portfolio has increased to 0.78% as ofDecember 31, 2019 from 0.70% as ofDecember 31, 2018 due to growth in the portfolio as well as a slight increase in criticized credits. In addition to quantitative elements, certain qualitative and environmental factors are also considered at management's discretion, which are generally based on a combination of internal and external factors and trends. AtDecember 31, 2019 , these factors totaled$16.7 million and accounted for approximately 15.3% of the originated ACL compared to$19.7 million or 23.1% as ofDecember 31, 2018 . The factors related to higher criticized loan levels and certain macroeconomic trends accounted for the highest portion of these factors as ofDecember 31, 2019 . AtDecember 31, 2019 , the qualitative factors were allocated to various segments of the portfolio as follows: approximately$1.7 million to CRE,$10.4 million to C&I, and$4.6 million to Consumer. 79 -------------------------------------------------------------------------------- As ofDecember 31, 2019 , approximately$32.0 million or 29.4% of the total originated ACL was attributable to SNC loans compared to$21.1 million or 24.7% as ofDecember 31, 2018 . During 2019, we recorded gross charge-offs of$22.7 million on five SNC credits within the Energy and Restaurant portfolios. During 2018, we recorded gross charge-offs of a single Energy portfolio SNC credit totaling$6.2 million . The ACL is estimated based on the underlying credit quality of the loan, primarily based on its probability of default and loss given default. This methodology is consistent whether or not a loan is a SNC.
The following table includes the charge-off and recoveries on our originated portfolio for the periods presented.
Table 22 - Originated Charge-offs and Recoveries
Year Ended December 31,
(In thousands) 2019 2018 2017 2016 2015
Charge-offs
Commercial and industrial General C&I$ 44,450 $ -$ 250 $ 1,268 $ - Energy sector E&P 10,605 6,709 4,882 32,893 3,200 Midstream 2,178 - - - 617 Energy services - - - - 4,699 Restaurant industry 20,811 - - - - Healthcare - - - 12,207 - Commercial real estate 64 2 - - 123 Consumer 1,541 564 457 634 936 Small business 601 619 157 841 - Total charge-offs 80,250 7,894 5,746 47,843 9,575 Recoveries
Commercial and industrial 583 1,319 695 1,386
-
Commercial real estate 6 21 23 3 -
Consumer 74 176 114 225 220
Small business 36 65 50 - -
Total recoveries 699 1,581 882 1,614 220
Net charge-offs $ 79,551 $ 6,313 $ 4,864 $ 46,229 $ 9,355
ANCI ACL. The ACL on our ANCI loan portfolio totaled $1.4 million or 0.05% on
loans of $2.9 billion at December 31, 2019 compared to $1.1 million or 0.30% on
$349.3 million in loans at December 31, 2018 . ANCI loans were recorded at fair
value at the date of each acquisition and are pooled for ACL assessment based on
risk segment. The State Bank merger added approximately $3.2 billion in loan
balances to the ANCI portfolio (see Table 13). Any net deficiency of credit mark
indicates the need for an allowance on that segment of loans with certain loans
individually reviewed for specific impairment.
ACI ACL. The ACL on our ACI loan portfolio totaled $9.4 million or 4.09% on
loans of $228.6 million at December 31, 2019 compared to $7.9 million or 3.90%
on $203.3 million in loans at December 31, 2018 . At the time of our
acquisitions, we estimated the fair value of the total ACI loan portfolio by
segregating the portfolio into loan pools with similar characteristics and
certain specifically reviewed non-homogeneous loans. Our recent merger with
State Bank added approximately $78 million in ACI loans to our portfolio (see
"Note 2 - Business Combinations" to the audited consolidated financial
statements).
Expected cash flows are re-estimated quarterly utilizing the same cash flow
methodology used at the time of each acquisition. Any subsequent decreases to
the expected cash flows generally result in a provision for credit losses.
Conversely, subsequent increases in expected cash flows result first in the
reversal of any impairment, then in a transfer from the non-accretable discount
to the accretable discount, which would have a positive impact on accretion
income prospectively. These cash flow evaluations are inherently subjective, as
they require material estimates, all of which may be susceptible to significant
change.
The largest component of our ACI ACL is attributable to our consumer category,
primarily first and second-lien residential loans, that represents 64.9% of the
ACI ACL at December 31, 2019 compared to 78.6% at December 31, 2018 . This
component of the ACL has remained relatively stable at $6.1 million compared to
$6.2 million at December 31, 2018 .
The commercial real estate component comprises 22.6% of the ACI ACL at December
31, 2019 compared to 20.7% at December 31, 2018 . This component of the ACL has
increased $0.5 million to $2.1 million since December 31, 2018 due to revised
cash flow estimates. The commercial and industrial component comprises 12.5% of
the ACI ACL at December 31, 2019 .
The following table summarizes certain information with respect to our ACL on
the total loan portfolio and the composition of charge-offs and recoveries for
the periods indicated. Subsequent tables present this information separately for
the originated, ANCI, and ACI loan portfolios.
80
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Table 23 - Allowance for Credit Losses Rollforward
Total Loans
Year Ended December 31,
(In thousands) 2019 2018 2017 2016 2015
ACL at beginning of period $ 94,378 $ 87,576 $ 82,268 $ 79,783 $ 53,520
Provision for credit losses 111,027 12,700 9,735 49,348 35,984
Charge-offs (87,001 ) (8,045 ) (6,871 ) (49,302 ) (10,734 )
Recoveries 1,239 2,147 2,444 2,439 1,013
ACL at end of period $ 119,643 $ 94,378 $ 87,576 $ 82,268 $ 79,783
Loans at end of period, net of
unearned income $ 12,983,655 $ 10,053,923 $ 8,253,427 $ 7,432,711 $ 6,916,520
Average loans, net of unearned
income 13,714,731 9,116,602 7,825,763 7,186,635 6,488,071
Ratio of ending allowance to ending
loans 0.92 % 0.94 % 1.06 % 1.11 % 1.15 %
Ratio of net charge-offs to average
loans 0.63 0.06 0.06 0.65 0.15
Net charge-offs as a percentage of:
Provision for credit losses 77.24 46.44 45.48 94.96 27.01
Allowance for credit losses 71.68 6.25 5.06 56.96 12.18
ACL as a percentage of NPL 100.07 127.12 183.62 63.80 114.25
Originated Loans
Year Ended December 31,
(In thousands) 2019 2018 2017 2016 2015
ACL at beginning of period $ 85,402 $ 77,656 $ 71,012 $ 64,386 $ 32,242
Provision for credit losses 103,008 14,059 11,508 52,855 41,499
Charge-offs (80,250 ) (7,894 ) (5,746 ) (47,843 ) (9,575 )
Recoveries 699 1,581 882 1,614 220
ACL at end of period $ 108,859 $ 85,402 $ 77,656 $ 71,012 $ 64,386
Loans at end of period, net of
unearned income $ 9,940,554 $ 9,503,685 $ 7,794,943 $ 6,878,645 $ 6,186,465
Ratio of ending allowance to ending
loans 1.10 % 0.90 % 1.00 % 1.03 % 1.04 %
Net charge-offs as a percentage of:
Provision for credit losses 77.23 44.90 42.27 87.46 22.54
Allowance for credit losses 73.08 7.39 6.26 65.10 14.53
ACL as a percentage of NPL 101.82 117.51 173.33 58.49 116.56
ANCI Loans
Year Ended December 31,
(In thousands) 2019 2018 2017 2016 2015
ACL at beginning of period $ 1,052 $ 1,396 $ 978 $ 1,063 $ 1,475
Provision for credit losses 3,634 (587 ) 401 (39 ) 385
Charge-offs (3,799 ) (151 ) (618 ) (367 ) (1,001 )
Recoveries 540 394 635 321 204
ACL at end of period $ 1,427 $ 1,052 $ 1,396 $ 978 $ 1,063
Loans at end of period, net of
unearned income $ 2,814,467 $ 346,963 $ 197,924 $ 229,784 $ 295,911
Ratio of ending allowance to ending
loans 0.05 % 0.30 % 0.71 % 0.43 % 0.36 %
Net charge-offs as a percentage of:
Provision for credit losses 89.68 41.40 (4.24 ) (117.95 ) 207.01
Allowance for credit losses 228.38 (23.10 ) (1.22 ) 4.70 74.98
ACL as a percentage of NPL 12.47 67.18 52.38 25.29 30.16
81
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ACI Loans
Year Ended December 31,
(In thousands) 2019 2018 2017 2016 2015
ACL at beginning of period $ 7,924 $ 8,524 $ 10,278 $ 14,334 $ 19,803
Provision for credit losses 4,385 (772 ) (2,174 ) (3,468 ) (5,900 )
Charge-offs (2,952 ) - (507 ) (1,092 ) (158 )
Recoveries - 172 927 504 589
ACL at end of period $ 9,357 $ 7,924 $ 8,524 Loans at end of period, net of unearned income$ 228,634 $ 203,275 $ 260,560 $ 324,282 $ 434,144 Ratio of ending allowance to ending loans 4.09 % 3.90 % 3.27 % 3.17 % 3.30 % Net charge-offs as a percentage of: Provision for credit losses 67.32 22.28 19.32 (16.96 ) 7.31 Allowance for credit losses 31.55 (2.17 ) (4.93 ) 5.72 (3.01 ) ACL as a percentage of NPL 781.05 NM NM 280.59 129.53 Deposits. Deposits atDecember 31, 2019 totaled$14.7 billion as compared to$10.7 billion and$9.0 billion atDecember 31, 2018 and 2017, respectively. The increase in deposits is primarily due to$4.1 billion of deposits acquired fromState Bank . ExcludingState Bank , core deposits (total deposits less brokered deposits) increased$779.7 million , or 8.1% fromDecember 31, 2018 , while brokered deposits decreased$842.3 million , or 81.2%. We categorize deposits as brokered and non-brokered consistent with the banking industry. Our strategy is to fund asset growth primarily with customer deposits in order to maintain a stable liquidity profile and a more competitive cost of funds. All customer deposits are non-brokered. The following table illustrates the growth in our deposits during the periods indicated: Table 24 - Deposits As of December 31, Percent to Total Percentage Change (In thousands) 2019 2018 2017 2019 2018 2017 2019 vs 2018 2018 vs 2017 Noninterest-bearing demand$ 3,833,704 $ 2,454,016 $ 2,242,765 26.0 % 22.9 % 24.9 % 56.2 % 9.4 % Interest-bearing demand 8,076,735 5,727,026 4,675,109 54.8 53.4 51.9 41.0 22.5 Savings 268,848 170,910 177,304 1.8 1.6 2.0 57.3 (3.6 ) Time deposits less than$100,000 973,329 1,119,270 869,783 6.6 10.5 9.6 (13.0 ) 28.7 Time deposits greater than$100,000 1,590,178 1,237,467 1,046,554 10.8 11.6 11.6 28.5 18.2 Total deposits$ 14,742,794 $ 10,708,689 $ 9,011,515 100.0 % 100.0 % 100.0 % 37.7 % 18.8 % Total brokered deposits$ 195,194 $ 1,037,474 $ 796,734 1.3 % 9.7 % 8.8 % (81.2 )% 30.2 % 82
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Domestic time deposits of
The following table sets forth our average deposits and the average rates expensed for the periods indicated:
For the Year ended December 31,
2019 2018 2017
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
(In thousands) Outstanding Paid Outstanding Paid Outstanding Paid
Noninterest-bearing demand $ 3,431,300 - % $ 2,137,953 - % $ 1,965,070 - %
Interest-bearing deposits:
Interest-bearing demand 7,983,237 1.47 4,983,113 1.16 4,360,252 0.62
Savings 253,170 0.42 181,194 0.31 181,500 0.25
Time deposits 2,960,921 2.35 2,119,543 1.99 1,679,959 1.32 Total interest-bearing deposits 11,197,328 1.68 7,283,850 1.38 6,221,711 0.80 Total average deposits
$ 14,628,628 1.29 %$ 9,421,803 1.07 %$ 8,186,781 0.61 % Borrowings
The following is a summary of our borrowings for the periods indicated:
Table 25 - Borrowings
As of December 31,
(In thousands) 2019 2018
Securities sold under repurchase agreements $ -
100,000 150,000
Senior debt 49,938 184,801
Subordinated debt 182,712 98,910
Junior subordinated debentures 37,445 36,953
Notes Payable 2,078 -
Total borrowings $ 372,173 $ 471,770
Average total borrowings $ 437,186 $ 565,658 At
InJune 2014 , we completed a$245 million unregistered multi-tranche debt transaction, and inMarch 2015 , we completed an unregistered$50 million debt transaction ($10 million senior;$40 million subordinated). InJune 2019 , we completed a registered public offering of$85 million aggregate principal amount of 4.75% fixed to floating rate subordinated notes due 2029, the net proceeds of which, along with holding company cash, were used to redeem our 4.875% senior notes dueJune 28, 2019 . These transactions enhanced our liquidity and the Bank's regulatory capital levels to support balance sheet growth. Details of the debt transactions are as follows (in thousands): 83 --------------------------------------------------------------------------------
Table 26 - Senior and Subordinated Debt
December 31,
(In thousands) 2019 2018
Cadence Bancorporation :
4.875% senior notes, due June 28, 2019 $ - $ 145,000
5.375% senior notes, dueJune 28, 2021 50,000
50,000
7.250% subordinated notes, dueJune 28, 2029 , 35,000
35,000
callable in 2024 6.500% subordinated notes, dueMarch 2025 , callable 40,000
40,000
in 2020 4.750% subordinated notes, dueJune 2029 , callable 85,000
-
in 2024 Total -Cadence Bancorporation 210,000
270,000
Cadence Bank : 6.250% subordinated notes, dueJune 28, 2029 , 25,000
25,000
callable in 2024 Debt issue costs and unamortized premium (2,350 ) (1,211 ) Purchased 4.875% senior notes, due June 28, 2019 - (10,078 ) Total senior and subordinated debt$ 232,650 $ 283,711 The senior transactions were structured with four- and seven-year maturities to provide holding company liquidity and to stagger our debt maturity profile. The$35 million and$25 million subordinated debt transactions were structured with a fifteen-year maturity, ten-year call options, and fixed-to-floating interest rates. The$85 million subordinated debt transaction was structured with a ten-year maturity, a five-year call option, and a fixed-to-floating interest rate. The$40 million subordinated debt transaction has a five-year call option. These subordinated debt structures were designed to achieve full Tier 2 capital treatment for 10 years. OnMarch 29, 2019 , we entered into a credit agreement for a revolving loan facility in the amount of$100 million with a maturity date ofMarch 29, 2020 . The proceeds of the revolving line of credit can be used to finance general corporate purposes. There were no amounts outstanding under this line of credit atDecember 31, 2019 . Although the credit facility is unsecured, we agreed not to sell, pledge or transfer any part of our right, title or interest in our subsidiary bank while the agreement is in place. In conjunction with our acquisitions of Cadence and Encore, we assumed certain junior subordinated debentures, which were marked to their fair value as of the acquisition dates. The related mark is being amortized over the remaining terms. The following is a list of our junior subordinated debt as of the dates indicated: Table 27 - Junior Subordinated Debentures As of December 31, 2019 2018 (In thousands) Junior Subordinated Debentures 3-month LIBOR plus 2.85% junior subordinated debentures, due 2033$ 30,000 $
30,000
3-month LIBOR plus 2.95% junior subordinated debentures, due 2033 5,155
5,155
3-month LIBOR plus 1.75% junior subordinated debentures, due 2037 15,464
15,464
Total par value 50,619
50,619
Purchase accounting adjustment, net of amortization (13,174 )
(13,666 ) Total junior subordinated debentures$ 37,445 $ 36,953 Shareholders' Equity As ofDecember 31, 2019 , our ratio of shareholders' equity to total assets was 13.82%, as compared to 11.30% and 12.41% as ofDecember 31, 2018 and 2017, respectively, and we had tangible equity ratios of 10.9% and 9.1%, respectively. Our shareholders' equity increased by$1.0 billion in 2019 primarily as a result of issuance of common stock of$826.1 million related to the merger withState Bank ,$202.0 million in net income, and an increase of$157.6 million in accumulated other comprehensive income primarily related to an interest rate collar hedge entered into during 2019. These increases to shareholders' equity were offset by cash dividends on common stock of$90.1 million along with repurchases of 4.3 million common shares totaling$79.1 million pursuant to share repurchase programs authorized by the Board of Directors inJuly 2019 and inDecember 2018 . 84
--------------------------------------------------------------------------------Regulatory Capital . We are required to comply with regulatory capital requirements established by federal banking agencies. These regulatory capital requirements involve quantitative measures of the Company's assets, liabilities and selected off-balance sheet items, and qualitative judgments by the regulators. Failure to meet minimum capital requirements can subject us to a series of increasingly restrictive regulatory actions. Failure to meet well capitalized capital levels (as defined) can result in restrictions on our operations. Additionally, the regulatory capital requirements impose a capital conservation buffer designed to absorb losses during periods of economic stress. The capital conservation buffer is on top of minimum risk-weighted asset ratios and is equal to the lowest difference between the three risk-based capital ratios less the applicable minimum required ratio. As ofJanuary 1, 2019 , the capital conservation buffer was fully phased in and is 2.5% of common equity Tier 1 capital to risk-weighted assets. Banking institutions with ratios that are above the minimum but below the combined capital conservation buffer face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall and the institution's eligible retained income ("ERI"). ERI is compiled using the past four quarter trailing net income, net of distributions and tax effects not reflected in net income.
Our regulatory capital amounts and ratios at
Table 28 - Regulatory Capital Amounts and Ratios
Consolidated Company Bank
(In thousands) Amount Ratio Amount Ratio
December 31, 2019
Tier 1 leverage $ 1,784,664 10.3 % $ 1,953,008 11.3 %
Common equity tier 1 capital 1,784,664 11.5 1,903,008 12.3
Tier 1 risk-based capital 1,784,664 11.5 1,953,008 12.6
Total risk-based capital 2,120,571 13.7 2,099,146 13.6
Minimum requirement:
Tier 1 leverage 690,213 4.0 689,881 4.0
Common equity tier 1 capital 697,089 4.5 696,755 4.5
Tier 1 risk-based capital 929,453 6.0 929,007 6.0
Total risk-based capital 1,239,270 8.0 1,238,676 8.0
Well capitalized requirement:
Tier 1 leverage N/A N/A 862,351 5.0
Common equity tier 1 capital N/A N/A 1,006,425 6.5
Tier 1 risk-based capital 929,453 6.0 1,238,676 8.0
Total risk-based capital 1,549,088 10.0 1,548,345 10.0
Consolidated Company Bank
(In thousands) Amount Ratio Amount Ratio
December 31, 2018
Tier 1 leverage $ 1,209,407 10.1 % $ 1,327,974 11.1 %
Common equity tier 1 capital 1,172,454 9.8 1,277,974 10.7
Tier 1 risk-based capital 1,209,407 10.1 1,327,974 11.1
Total risk-based capital 1,403,311 11.8 1,447,719 12.1
Minimum requirement:
Tier 1 leverage 479,940 4.0 479,667 4.0
Common equity tier 1 capital 536,930 4.5 536,285 4.5
Tier 1 risk-based capital 715,907 6.0 715,047 6.0
Total risk-based capital 954,542 8.0 953,396 8.0
Well capitalized requirement:
Tier 1 leverage N/A N/A 599,584 5.0
Common equity tier 1 capital N/A N/A 774,634 6.5
Tier 1 risk-based capital 715,907 6.0 953,396 8.0
Total risk-based capital 1,193,178 10.0 1,191,745 10.0
85
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LiquidityOverview
We measure and seek to manage liquidity risk by a variety of processes, including monitoring the composition of our funding mix; monitoring financial ratios specifically designed to measure liquidity risk; maintaining a minimum liquidity cushion; and performing forward cash flow gap forecasts in various liquidity stress testing scenarios designed to simulate possible stressed liquidity environments. We attempt to limit our liquidity risk by setting board-approved concentration limits on sources of funds and limits on liquidity ratios used to measure liquidity risk and maintaining adequate levels of on-hand liquidity. We use the following ratios to monitor and analyze our liquidity:
• Total Loans to Total Deposits-the ratio of our outstanding loans to total
deposits.
• Non-Brokered Deposits to Total Deposits-the ratio of our deposits that are
organically originated through commercial and branch activity to total
deposits.
• Brokered Deposits to Total Deposits-the ratio of our deposits generated
through wholesale sources to total deposits.
• Highly Liquid Assets to Uninsured Large Depositors-the ratio of cash and
highly liquid assets to uninsured deposits with a current depository
relationship greater than $10 million .
• Wholesale Funds Usage-the ratio of our current borrowings and brokered
deposits to all available wholesale sources with potential maturities
greater than one day.
• Wholesale Funds to Total Assets-the ratio of current outstanding wholesale
funding to assets.
As of
The goal of liquidity management is to ensure that we maintain adequate funds to meet changes in loan demand or any deposit withdrawals. Additionally, we strive to maximize our earnings by investing our excess funds in securities and other assets. To meet our short-term liquidity needs, we seek to maintain a targeted cash position and have borrowing capacity through many wholesale sources including the FHLB, correspondent banks, and theFederal Reserve Bank . To meet long-term liquidity needs, we additionally depend on the repayment of loans, sales of loans, term wholesale borrowings, brokered deposits, and the maturity or sale of investment securities. See "-Maturity Distribution ofInvestment Securities " and "-Selected Loan Maturity and Interest Rate Sensitivity."
Maturity Distribution of
The following table shows the scheduled contractual maturities and average book yields (not tax-equivalent) of our investment securities held atDecember 31, 2019 . Within our investment securities portfolio, expected maturities will differ from contractual maturities because issuers have the right to call or prepay obligations without call or prepayment penalties in certain instances. During the year endedDecember 31, 2019 , we received cash proceeds from calls/maturities and paydowns on our investment securities portfolio totaling approximately$352.5 million . Table 29 - Contractual Maturity of Investment Securities Contractual Maturity After Five After One but Within but Within Within Ten After (In thousands) One Year Five Years Years Ten Years Total Investment securities U.S. agency securities$ 14,567 $ 1,310 $ 28,429 $ 25,158 $ 69,464 Mortgage-backed securities 4 10,357 171,575 1,908,510 2,090,446 State, county and municipal securities 1,200 - 204 184,477 185,881 Total amortized cost$ 15,771 $ 11,667 $ 200,208 $ 2,118,145 $ 2,345,791 Yield on investment securities 2.63 % 3.04 % 2.79 % 2.81 % 2.81 % 86
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Selected Loan Maturity
Loan repayments are a source of long-term liquidity for us. The following table sets forth our loans by category maturing within specified intervals as ofDecember 31, 2019 . The information presented is based on the contractual maturities of the individual loans, including loans that may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon their maturity. Consequently, management believes this treatment presents fairly the maturity and re-pricing of the loan portfolio. Table 30 - Contractual Maturity of Loans Rate Structure for Loans Maturing Over One Year Over One Year Fixed Floating or One Year through Five Over Five Interest Adjustable (In thousands) or Less Years Years Total Rate Rate Commercial and Industrial General C&I$ 810,247 $ 2,568,440 $ 600,506 $ 3,979,193 $ 342,458 $ 2,826,488 Energy sector 398,949 952,565 76,318 1,427,832 27,169 1,001,714 Restaurant industry 295,443 589,983 107,971 993,397 11,093 686,861 Healthcare 96,574 302,317 73,416 472,307 41,203 334,530 Total commercial and industrial 1,601,213 4,413,305 858,211 6,872,729 421,923 4,849,593Commercial Real Estate Income producing 922,460 1,095,659 499,588 2,517,707 314,301 1,280,946 Land and development 182,900 29,265 42,800 254,965 31,756 40,309 Total commercial real estate 1,105,360 1,124,924 542,388 2,772,672 346,057 1,321,255 Consumer Residential real estate 449,355 498,306 1,637,149 2,584,810 1,591,134 544,321 Other 27,685 19,812 45,678 93,175 32,996 32,494 Total consumer 477,040 518,118 1,682,827 2,677,985 1,624,130 576,815 Small Business Lending 288,739 168,155 277,343 734,237 332,029 113,469 Total loans$ 3,472,352 $ 6,224,502 $ 3,360,769 $ 13,057,623 $ 2,724,139 $ 6,861,132 Maturities of Time Deposits The aggregate amount of time deposits in denominations of$100,000 or more as ofDecember 31, 2019 , 2018, and 2017 was$1.59 billion ,$1.24 billion , and$1.05 billion , respectively.
At
Table 31 - Contractual Maturity of Time Deposits Greater than $100,000
December 31, 2019
(In thousands) Amount Average Interest Rate
Under 3 months $ 364,596 2.31 %
3 to 6 months 495,445 2.36
6 to 12 months 563,968 1.97
12 to 24 months 137,318 1.97
24 to 36 months 18,386 2.01
36 to 48 months 3,579 1.88
Over 48 months 6,887 0.96
Total $ 1,590,179 2.19 %
87
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Cash Flow AnalysisCash and cash equivalents
AtDecember 31, 2019 , we had$988.8 million of cash and cash equivalents on hand, an increase of 26.9% over our cash and cash equivalents of$779.3 million atDecember 31, 2018 . AtDecember 31, 2019 , our cash and cash equivalents comprised 5.6% of total assets compared to 6.1% atDecember 31, 2018 . We monitor our liquidity position and increase or decrease our short-term liquid assets as necessary. The higher balance in cash and cash equivalents atDecember 31, 2019 is due the acquisition ofState Bank , strong organic deposits growth, and moderate loan growth.
Year Ended
As shown in the Consolidated Statements of Cash Flows, operating activities provided$306.1 million for 2019 compared to$191.2 million for 2018. The increase in operating funds during 2019 was due primarily to an increase in net income, a decrease in origination of loans held for sale, and an increase in proceeds from sales of loans held for sale. The increases were offset by the purchase of the interest rate collar. Investing activities during 2019 provided$265.4 million of net funds, compared to a net use of$1.8 billion for 2018. The 2019 activity resulted from cash received in acquisitions of$409.1 million , proceeds from sales and maturities of securities available-for-sale of$746.2 million , and a net decrease in loans of$287.6 million . These items were mitigated by purchases of securities available-for-sale of$1.2 billion . Financing activities during 2019 used net funds of$362.0 million , due to a decrease of$150.0 million in short-term borrowings partially offset by a net increase of$48.6 million in long-term borrowings which included the pay-off of$134.9 million in senior debt and issuance of$83.5 million in subordinated debt. Net financing activities also included the repurchase of common stock of$79.1 million and cash dividends of$90.1 million . This compares to financing activities during 2018 providing net funds of$1.6 billion , resulting from an increase in deposits of$1.7 billion .
Year Ended
As shown in the Consolidated Statements of Cash Flows, operating activities provided$191.2 million in 2018 compared to$144.7 million in 2017. The increase in operating funds during 2018 was due primarily to an increase in net income and an increase in proceeds from sales of loans held for sale. Investing activities during 2018 used$1.8 billion of net funds, due to net loan funding of$1.8 billion and the purchase of available-for-sale securities as compared to investing activities during 2017 using$951.1 million of net funds, due to net loan funding of$847.4 million . Financing activities during 2018 provided net funds of$1.6 billion , due to an increase of$1.7 billion in deposits. This compares to financing activities during 2017 providing net funds of$1.3 billion , resulting from an increase of$994.8 million in deposits and an increase of$150.0 million in advances from the FHLB. Contractual Cash Obligations We have entered into certain contractual obligations and commercial commitments in the normal course of business that involve elements of credit risk, interest rate risk and liquidity risk. 88
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The following tables summarize these relationships as of
Table 32 - Contractual Cash Obligations
Payments Due by Period
Less than One to
One Three Four to After Five
(In thousands) Total Year Years Five Years YearsContractual Cash Obligations FHLB advance$ 100,000 $ - $ - $ -$ 100,000 Senior debt 50,000 - 50,000 - - Subordinated debt 185,000 - - - 185,000 Junior subordinated debentures 50,619 - - - 50,619 Notes Payable 2,078 - - 2,078 - Operating leases(1) 77,382 7,801 14,805 11,567 43,209 Limited partnership investments(2) 44,944 44,376 293 87 188 Total contractual cash obligations$ 510,023 $ 52,177 $ 65,098 $ 13,732 $ 379,016
(1) See Note 8 to our 2019 Consolidated Financial Statements. The above includes
rent and other costs due under the lease such as property taxes.
(2) Includes remaining capital commitments to certain limited partnership
investments.
The following table includes our commitments to extend credit including home equity lines, overdraft protection lines, and letters of credit as ofDecember 31, 2019 . Table 33 - Commitments to Extend Credit Commitments by Period Less than One to Three Four to After Five (In thousands) Total One Year Years Five Years Years Commitments to extend credit$ 4,667,360 $ 948,804 $ 1,975,234 $ 1,365,781 $ 377,541 Commitments to grant loans 292,199 292,199 - - - Standby letters of credit 213,548 117,728 54,163 35,657 6,000 Performance letters of credit 27,985 7,343 8,511 11,972 159 Commercial letters of credit 15,587 1,704 3,931 8,249 1,703 Total$ 5,216,679 $ 1,367,778 $ 2,041,839 $ 1,421,659 $ 385,403 Such financial instruments are recorded when they are funded and not on the date of entry into the obligation to extend credit. Commitments to extend credit and letters of credit include some exposure to credit loss in the event of default by the customer and exposure to liquidity risk during economic downturns. See "Risk Factors-Risks Relating to Our Business." The borrowing needs of our clients may increase, especially during a challenging economic environment, which could result in increased borrowing against our contractual obligations to extend credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit policies and procedures for such commitments are the same as those used for lending activities. Because these instruments have fixed maturity dates and because a number expire without being drawn upon, they generally do not present significant liquidity risk in a normal operating environment. No significant losses on commitments were incurred during the three years in the period endedDecember 31, 2019 . We do not currently anticipate any significant future losses as a result of these transactions. 89
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