CADENCE BANK General
The following discussion and analysis presents our results of operations and financial condition on a consolidated basis for the three and six months endedJune 30, 2020 . This discussion should be read in conjunction with the unaudited consolidated financial statements, accompanying notes, and supplemental financial data included herein. The emphasis of this discussion will be amounts as ofJune 30, 2020 compared toDecember 31, 2019 for the balance sheets and the three and six months endedJune 30, 2020 compared toJune 30, 2019 for the statements of operations. Because we conduct our material business operations through our bank subsidiary,Cadence Bank, N.A ., the discussion and analysis relates 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 leverage and risk-based capital ratios. This Quarterly Report on Form 10-Q 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 our energy-related industries
and specialized industries;
• the portion of our loan portfolio that is comprised of participations and
shared national credits;
• the amount of nonperforming and classified 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 ordisruptions 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;
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• 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 bank capital
requirements that may require heightened capital;
• the obligations associated with being a public company;
• changes in accounting principles, policies, practices, or guidelines;
• the discontinuation of the London Interbank Offered Rate ("LIBOR") and
other reference rates;
• 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; a pandemic, or the
outbreak of COVID-19 or similar outbreak;
• adverse effects due to COVID-19 on us and our customers, counterparties,
employees, and third-party service providers, and the adverse impacts to
our business, financial position, results of operations, and prospects; or
• 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, N.A .
With $18.9 billion in assets, $13.7 billion in total loans (net of unearned
discounts and fees), $16.1 billion in deposits and $2.0 billion in shareholders'
equity as of June 30, 2020 , we currently operate a network of 98 locations
across Texas , Georgia , Alabama , Florida , 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.
During the first six months of 2020, the global economy experienced a downturn
related to the impacts of the COVID-19 global pandemic ("COVID-19"). Such
impacts included significant volatility in the global stock markets, a
150-basis-point reduction in the target federal funds rate, the enactment of the
Coronavirus Aid, Relief, and Economic Security ("CARES Act"), including the
Paycheck Protection Program ("PPP") administered by the Small Business
Administration , and a variety of rulings from our banking regulators.
We continue to actively monitor developments related to COVID-19 and its impact
to our business, customers, employees, counterparties, vendors, and service
providers. During the first half of 2020, the most notable financial impacts to
the our results of operations included a non-cash goodwill impairment charge and
higher provision for credit losses primarily as a result of deterioration in
macroeconomic variables such as unemployment, GDP and real estate prices, which
are incorporated into our economic forecasts utilized to calculate our allowance
for credit losses.
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-------------------------------------------------------------------------------- In response to the COVID-19 pandemic, we have taken several actions to offer various forms of support to our customers, employees, and communities that have experienced impacts from this development. We are actively working with customers impacted by the economic downturn, offering payment deferrals and other loan modifications. As ofJune 30, 2020 , we have outstanding balances of$1.9 billion in total COVID-19 related modifications, including$1.4 billion or 10% of loans representing active payment deferrals and$0.5 billion representing non-payment deferral loan modifications. The$1.4 billion of active payment deferrals included$295 million inResidential Real Estate ;$307 million in Restaurant Industry;$230 million in General C&I;$226 inCRE-Industrial , Retail, and Other; and$108 million in Hospitality, with the remainder spread throughout other portfolios. As ofJuly 31, 2020 , the amount of loans with active payment deferrals declined to$671 million , of which$187 million are second deferrals (generally 90-day) and$484 million are first deferrals. The$671 million of active payment deferrals atJuly 31, 2020 included$128 million inResidential Real Estate ;$114 million in Hospitality;$105 million in General C&I;$108 million inCRE-Industrial , Retail and Other; and$65 million in Restaurant Industry, with the remainder spread throughout other portfolios. The remaining first payment deferrals expire primarily in the third quarter of 2020. The vast majority of these loans are currently eligible for exemption from the accounting guidance for TDRs (see Note 4 to the consolidated financial statements and "- Asset Quality - Loan Modifications Related to COVID-19"). Additionally, throughJune 30, 2020 , we have originated$1.0 billion to approximately 4,100 customers under the PPP of which the majority have been to customers in general C&I and Restaurant portfolios. (See Table 17 - Paycheck Protection Program). Considering the volatility in the capital markets and economic disruptions, we continue to carefully monitor our capital and liquidity positions, both of which have continued to reflect excess balances and capital levels well over regulatory requirements. InMarch 2020 , theU.S. banking agencies issued an interim final rule that provides banking organizations with an alternative option to delay for two years an estimate of CECL's effect on regulatory capital, relative to the incurred loss methodology's effect on regulatory capital, followed by a three-year transition period. We elected this alternative option instead of the one described in theDecember 2018 rule previously issued by banking agencies. We operateCadence Bancorporation through three operating segments: Banking, Financial Services and Corporate. Our Banking Segment, which represented approximately 96% of our total revenues for the six months endedJune 30, 2020 , consists of our Commercial Banking, Retail Banking and Private Banking lines of business. Considering the economic conditions resulting from the COVID-19 pandemic, we conducted an interim goodwill impairment test as ofMarch 31, 2020 . The 2020 interim test indicated a goodwill impairment of$443.7 million within the Bank reporting unit resulting in the Company recording an impairment charge of the same amount in the Banking segment for the first quarter of 2020. The primary causes of the goodwill impairment in the Bank reporting unit were economic and industry conditions resulting from COVID-19 that caused volatility and reductions in our market capitalization and our peer banks, increased loan provision estimates, increased discount rates and other changes in variables driven by the uncertain macro-environment that resulted in the estimated fair value of the reporting unit being less than the reporting unit's carrying value. 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 ourTexas market. 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. 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 believe that our franchise is positioned for success as a result of prudent lending in our markets through experienced relationship managers and a client-centered, relationship-driven banking model. We believe our success is supported by (i) our attractive geographic footprint, (ii) our stable and 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. Selected Financial Data The following table summarizes certain selected consolidated financial data for the periods presented. The historical consolidated financial information presented below contains financial measures that are not presented in accordance withU.S. GAAP and which have not been audited. See "Table 29 - Non-GAAP Financial Measures." 49
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Table 1 - Selected Financial Data
As of and for
As of and for the Three Months Asof and for the Six Months Ended the Year Ended
Ended June 30, June 30, December 31,
(In thousands, except share 2020 2019 2020 2019
and per share data) 2019
Statement of Income Data:
Net (loss) income $ (56,114 ) $ 48,346 $ (455,425 ) $ 106,547 $ 201,958
Net interest income 154,714 160,787 308,182 330,076 651,173
Noninterest income 29,950 31,722 65,019 62,386 130,925
Noninterest expense (3) 88,620 100,529 626,273 213,969 408,770
Provision for credit losses 158,811 28,927 242,240 40,137 111,027
Efficiency ratio (1) 47.99 % 52.22 % 167.81 % 54.52 % 52.27 %
Adjusted efficiency ratio (1) 47.93 % 49.97 % 48.92 % 48.05 % 48.64 %
Per Share Data:
(Loss) earnings - basic $ (0.45 ) $ 0.37 $ (3.61 ) $ 0.82 $ 1.56
(Loss) earnings - diluted (0.45 ) 0.37 (3.61 ) 0.82 1.56
Book value per common share 16.24 18.84 16.24 18.84 19.29
Tangible book value (1) 15.15 14.21 15.15 14.21 14.65
Weighted average common
shares outstanding
Basic 125,924,652 128,791,933 126,277,549 129,634,049 128,913,962
Diluted 125,924,652 129,035,553 126,277,549 129,787,758 129,017,599
Cash dividends declared $ 0.050 $ 0.175 $ 0.225 $ 0.350 $ 0.700
Dividend payout ratio (11.11 ) % 47.30 % (6.23 ) % 42.68 % 44.87 %
Performance Ratios:
Return on average common
equity (2) (10.65 ) % 8.32 % (40.12 ) % 9.39 % 8.51 %
Return on average tangible
common equity (1)(2) (10.56 ) 12.23 (3.57 ) 13.83 12.40
Return on average assets (2) (1.22 ) 1.10 (5.06 ) 1.22 1.14
Net interest margin (2) 3.51 3.97 3.67 4.09 4.00
Period-End Balance Sheet
Data:
Investment securities,
available-for-sale $ 2,661,433 $ 1,684,847 $
2,661,433
13,699,097 13,627,934 13,699,097 13,627,934 12,983,655
Allowance for credit losses
("ACL") 370,901 115,345 370,901 115,345 119,643
Total assets 18,857,753 17,504,005 18,857,753 17,504,005 17,800,229
Total deposits 16,069,282 14,487,821 16,069,282 14,487,821 14,742,794
Total shareholders' equity 2,045,480 2,426,072 2,045,480 2,426,072 2,460,846
Asset Quality Ratios:
Total nonperforming assets
("NPA") to total loans and
OREO and other NPA 1.74 % 0.85 % 1.74 % 0.85 % 0.97 %
Total ACL to total loans 2.71 0.85 2.71 0.85 0.92
ACL to total nonperforming
loans ("NPLs") 165.30 106.08 165.30 106.08 100.07
Net charge-offs to average
loans (2) 0.94 0.54 0.97 0.28 0.63
Capital Ratios:
Total shareholders' equity to
assets 10.8 % 13.9 % 10.8 % 13.9 % 13.8 %
Tangible common equity to
tangible assets (1) 10.2 10.8 10.2 10.8 10.9
Common equity tier 1 (CET1) 11.7 10.9 11.7 10.9 11.5
Tier 1 leverage capital 9.5 10.3 9.5 10.3 10.3
Tier 1 risk-based capital 11.7 10.9 11.7 10.9 11.5
Total risk-based capital 14.3 12.9 14.3 12.9 13.7
(1) Considered a non-GAAP financial measure. See "Table 29 - Non-GAAP Financial
Measures" for a reconciliation of our non-GAAP measures to the most directly
comparable GAAP financial measure.
(2) Annualized.
(3) The first six months of 2020 includes the non-cash goodwill impairment
charge of
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Summary of Results of Operations - Three and Six months ended
Net (loss) income for the three months endedJune 30, 2020 totaled($56.1) million compared to$48.3 million for the same period in 2019. The second quarter net decrease resulted from an increase in provision for credit losses as a result from degradation of economic forecasts, depressed energy markets and COVID-19 driven stress. The resulting (loss) earnings per diluted common share for the three months endedJune 30, 2020 were ($0.45 ) compared to$0.37 for the same period in 2019. Net (loss) income for the six months endedJune 30, 2020 totaled($455.4) million , a$562.0 million or 527.4% decrease compared to$106.5 million for the same period in 2019. The primary drivers of the decrease included a non-cash goodwill impairment charge of$412.9 million , net of tax, that was incurred in the first quarter of 2020. Diluted (loss) earnings per common share for the six months endedJune 30, 2020 were ($3.61 ) compared to$0.82 for the same period in 2019. The second quarter and year-to-date periods of 2020 and 2019 included non-routine revenues and expenses, primarily consisting of the non-cash goodwill impairment charge, merger related expenses, and expenses related to COVID-19. Excluding these non-routine expenses adjusted net (loss) income(1) was($56.9) million , or ($0.45 ) per share, and($44.5) million , or ($0.35 ) per share, for the three and six months endedJune 30, 2020 , and$51.3 million , or$0.40 per share, and$126.7 million , or$0.98 per share, for the comparable periods of 2019. Annualized returns on average assets, common equity and tangible common equity(1) for the second quarter of 2020 were (1.22)%, (10.65)%, and (10.56)%(1) compared to 1.10%, 8.32%, and 12.23%(1) for the same period of 2019, respectively. Annualized returns on average assets, common equity and tangible common equity(1) for the six months endedJune 30, 2020 were (5.06)%, (40.12)% and (3.57)% compared to 1.22%, 9.39% and 13.83% for the comparable period of 2019, respectively. Adjusted returns(1) on average assets, common equity, and tangible common equity for the second quarter of 2020 were (1.24)%, (10.81)%, and (10.73)% compared to 1.17%, 8.86%, and 12.96% for the same period of 2019, respectively. Adjusted returns on average assets, common equity, and tangible common equity exclude the impact of the non-routine items noted above. Adjusted annualized returns on average assets, common equity, and tangible common equity(1) for the six months endedJune 30, 2020 were (0.49)%, (3.92)%, and (3.77)% compared to 1.45%, 11.21%, and 16.29% for the comparable period of 2019, respectively. Net interest income was$154.7 million for the three months endedJune 30, 2020 , a$6.1 million or 3.8% decrease compared to the same period of 2019. Our net interest spread decreased to 3.23% for the three months endedJune 30, 2020 compared to 3.45% for the same period in 2019. Our fully tax-equivalent net interest margin ("NIM") for the second quarter of 2020 was 3.51% as compared to 3.97% for the second quarter of 2019. The decrease in NIM reflects the impact of lower interest rates, lower yielding PPP loans and securities, and lower accretion income on acquired loans. The gain on our collar transaction and our deposit cost management continue to provide a strong foundation to our NIM. Net interest income was$308.2 million for the six months endedJune 30, 2020 , a$21.9 million or 6.6% decrease compared to the same period of 2019. Our net interest spread decreased to 3.29% for the six months endedJune 30, 2020 compared to 3.58% for the same period in 2019, and the net interest margin on an annualized basis decreased 42 basis points to 3.67% from 4.09%. Provision for credit losses increased$129.9 million to$158.8 million in the three months endedJune 30, 2020 , compared to$28.9 million in the same period in 2019. Provision for credit losses increased$202.1 million for the six months endedJune 30, 2020 compared to the same period of 2019 (see "-Provision for Credit Losses" and "-Asset Quality"). Both the three and six -month provision amounts reflect the forecasted effects of COVID-19 on the various loan segments due to higher unemployment, lower GDP, market value, energy prices, and real estate prices. The second quarter 2020 provision was affected by credit migration as well as a negative shift in the outlook for commercial real estate and a slower expected recovery. Our calculation for the ACL in the 2020 periods was impacted by the adoption of CECL, and used the baseline economic scenario provided by a nationally recognized service, as adjusted for qualitative and environmental factors. Annualized net charge-offs were 0.94% and 0.54% of average loans for the three months endedJune 30, 2020 and 2019, respectively, and 0.97% and 0.28% for the six months endedJune 30, 2020 and 2019, respectively. Noninterest expense for the three months endedJune 30, 2020 was$88.6 million , a decrease of$11.9 million or 11.8% from the same period in 2019 and a decrease of$5.3 million or 5.7% from the first quarter of 2020. Adjusted noninterest expense(1), which excludes the impact of non-routine items(1), was$87.4 million , a decrease of$8.6 million or 8.9% from the same period in 2019 and excluding goodwill impairment change, down$4.4 million or 13.8% from the first quarter of 2020. The year over year declines were driven by lower intangible amortization and lower incentive accruals. Noninterest expense excluding goodwill impairment charge for the six months endedJune 30, 2020 was$182.6 million , a decrease of$31.4 million or 14.7% from the same period in 2019. Adjusted noninterest expense(1), which excludes the impact of non-routine items(1), was$180.0 million , down$7.4 million or 4.0% from the same period in 2019. Our efficiency ratio(1) was 47.99% for the three months endedJune 30, 2020 , compared to 52.22% efficiency ratio for that same period of 2019. For the six months endedJune 30, 2020 , our efficiency ratio, excluding the goodwill impairment charge, was 48.92% compared to 54.52% for the same period of 2019. 51 -------------------------------------------------------------------------------- Our adjusted efficiency ratio(1) was 47.93% for the three months endedJune 30, 2020 , compared to 49.97% for the same period of 2019. Our adjusted efficiency ratio(1) was 48.92% for the six months endedJune 30, 2020 , compared to 48.05% for the same period of 2019. Adjusted efficiency ratios exclude the impact of the non-routine items. (1) Considered a non-GAAP financial measure. See "Table 29 - Non-GAAP Financial Measures" for a reconciliation of our non-GAAP measures to the most directly comparable GAAP financial measure. Summary of Financial Condition as ofJune 30, 2020 Our cash and cash equivalents atJune 30, 2020 totaled$1.9 billion as compared to$0.8 billion atJune 30, 2019 and compared to$0.6 billion atMarch 31, 2020 . The$1.3 billion increase in the second quarter of 2020 resulted from the increase of$1.6 billion in deposits during this quarter. Our total loans, net of unearned income, increased$715.4 million or 5.5%, fromDecember 31, 2019 to$13.7 billion atJune 30, 2020 . The increases in loan balances during the first six months of 2020 was driven by$1.0 billion in Paycheck Protection Program ("PPP") loan originations partially offset by payoffs and paydowns. The average amount of each originated PPP loan was approximately$251,000 . The declines were driven by reductions in the C&I segment, including paydowns of defensive draws taken in March, and strategic declines in the restaurant, energy and leveraged loan sectors as we work to reduce select exposures. Shrinkage in the C&I loan segment may continue due to softer demand resulting from the economic conditions caused by the COVID-19 pandemic. Total nonperforming assets ("NPA") as a percent of total loans, OREO and other NPA increased to 1.74% compared to 0.97% as ofDecember 31, 2019 . NPA totaled$238.3 million as ofJune 30, 2020 , compared to$125.5 million as ofDecember 31, 2019 . The adoption of CECL resulted in additional NPL in the purchased credit deteriorated ("PCD") population that were previously considered performing when accounted for in a pool under prior accounting methodology versus individually under CECL. Had CECL been in place atDecember 31, 2019 , the amount of these PCD loans would have been$43.0 million . Our allowance for credit losses ("ACL") increased$251.3 million , or 210.0%, to$370.9 million atJune 30, 2020 , and represented approximately 2.71% of total loans atJune 30, 2020 and 0.92% atDecember 31, 2019 . Excluding PPP loans, our ACL was 2.93% of total loans atJune 30, 2020 . Upon our adoption of CECL onJanuary 1, 2020 , we recorded an increase of$76.2 million or 63.4% to our ACL and reserve for unfunded commitments. Total deposits increased$1.3 billion , or 9.0%, to$16.1 billion atJune 30, 2020 , from$14.7 billion atDecember 31, 2019 . Over the same period, noninterest-bearing deposits increased$1.39 billion , or 36.2%, and comprised 32.5% and 26.0% of total deposits atJune 30, 2020 andDecember 31, 2019 , respectively. During the first six months of 2020, core deposit increases reflect customers maintaining additional liquidity in the current environment and broader impacts of fiscal stimulus. There was an increase in brokered deposits of$392.4 million fromDecember 31, 2019 bringing the ratio of brokered deposits to total deposits to 3.7%. Our Tier 1 leverage ratio decreased 83 basis points, Tier 1 risk-based capital increased 15 basis points, and total risk-based capital ratio increased 61 basis points fromDecember 31, 2019 . We met all capital adequacy requirements and the Bank continued to exceed the requirements to be considered well-capitalized under regulatory guidelines as ofJune 30, 2020 . Results of Operations
Earnings
For the three and six months ended
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Table 2 - Key Earnings Data
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands, except per share
data) 2020 2019 2020 2019
Net (loss) income$ (56,114 ) $ 48,346 $ (455,425 ) $ 106,547 Net (loss) income per common share - Basic (0.45 ) 0.37 (3.61 ) 0.82 - Diluted (1) (0.45 ) 0.37 (3.61 ) 0.82 Dividends declared per share 0.050 0.175 0.225 0.350 Dividend payout ratio (11.11 ) % 47.30 % (6.23 ) % 42.68 % Net interest margin (2) 3.51 3.97 3.67 4.09 Net interest spread (2) 3.23 3.45 3.29 3.58 Return on average assets (2) (1.22 ) 1.10 (5.06 ) 1.22 Return on average common equity (2) (10.65 ) 8.32 (40.12 ) 9.39 Return on average tangible common equity (2)(3) (10.56 ) 12.23
(3.57 ) 13.83
(1) For three and six months endedJune 30, 2020 , there were no common stock equivalents as these were anti-dilutive. As of three and six months endedJune 30, 2019 , common stock equivalents of 243,620 and 153,709, respectively, were included. (2) Annualized. (3) Considered a non-GAAP financial measure. See "Table 29 - Non-GAAP Financial Measures" for a reconciliation of the non-GAAP measures to the most directly comparable GAAP financial measure. 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 theState Bank acquisition). With the adoption of CECL, we measured the Day 1 amortized cost of our current Purchased Credit Deteriorated ("PCD") assets by adding the Day 1 estimate of expected credit losses under the CECL impairment model to the loans' Day 1 carrying value (or initial remaining purchase price). Because the initial estimate for expected credit losses for PCD loans is added to the carrying value to establish the Day 1 amortized cost, PCD accounting is commonly referred to as a "gross-up" approach. There was no capital impact recognized Day 1 on our PCD loans, rather the "gross-up" was offset by the establishment of the initial allowance. Under CECL, interest income for a PCD asset is recognized using the effective interest rate ("EIR") calculated at initial measurement. This EIR is determined by equating the amortized cost basis of the instrument to its contractual cash flows, consistent with ANCI loans. Noncredit-related discount or premium on the PCD loans is accreted or amortized, using the EIR. Interest earned on PCD loans is reflected through interest income where it was previously considered in ACI loan accretion based on expected cash flows. The prior period numbers in Table 3 have been revised to be comparable to the 2020 presentation (the total interest income on PCD loans has not changed.). The yield on our PCD portfolio for the three months endedJune 30, 2020 , excluding accretion was 6.30% compared to 3.84% for the three months endedJune 30, 2019 . The yield on our PCD portfolio for the six months endedJune 30, 2020 , excluding accretion was 5.96% compared to 4.32% for the six months endedJune 30, 2019 . This increase is related to certain PCD loans that were previously accounted for within pools before the adoption of CECL returning to an individual accruing status. 53
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The following table summarizes the amount of interest income related to our originated, ANCI, and PCD portfolios for the periods presented:
Table 3 - Interest Income on Loan Portfolios
For the Three Months Ended For the Six Months Ended
June 30, June 30,
(In thousands) 2020 2019 June 30, 2020 June 30, 2019
Interest Income Detail
Originated loans $ 125,922 $ 135,946 $ 255,324 $ 271,761
ANCI loans: interest
income 26,264 49,095 59,205 100,204
ANCI loans: accretion 6,703 6,171 14,413 18,649
PCD loans: interest
income (1) 3,111 2,781 6,150 6,343
PCD loans: accretion (1) 854 8,017 2,897 10,805
Total loan interest
income $ 162,854 $ 202,011 $ 337,988 $ 407,762
Yields
Originated loans 4.53 % 5.43 % 4.80 % 5.52 %
ANCI loans without
discount accretion 4.20 5.49 4.54 5.55
ANCI loans discount
accretion 1.08 0.69 1.11 1.04
PCD loans without
discount accretion 6.30 3.84 5.96 4.32
PCD loans discount
accretion 1.73 11.06 2.81 7.36
Total loan yield 4.72 % 5.82 % 5.03 % 5.93 %
(1) For the individual components, prior quarter PCD amounts have been revised
to be comparable to the current quarter presentation. The total amount for
PCD loans has not changed. Interest income for PCD loans represents
contractual interest.
Three Months Ended
Our net interest income, fully-tax equivalent ("FTE"), for the three months
ended June 30, 2020 and 2019 was $155.1 million and $161.2 million ,
respectively, a decrease of $6.1 million . Our net interest margin for the three
months ended June 30, 2020 and 2019 was 3.51% and 3.97%, respectively, a
decrease of 46 basis points. The net interest margin for the three months ended
June 30, 2020 was impacted by the addition of PPP loans averaging $663.6 million
at an annualized yield of 2.37%. 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 the three months ended
June 30, 2020 :
54
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Table 4 - Rate/Volume Analysis
Three Months Ended June 30,
Net Interest Income Increase Changes Due To (1)
(In thousands) 2020 2019 (Decrease) Rate Volume
Increase (decrease) in:
Income from interest-earning assets:
Interest and fees on loans:
Originated loans $ 125,922 $ 135,946 $ (10,024 ) $ (24,088 ) $ 14,064
ANCI portfolio 32,967 55,266 (22,299 ) (7,310 ) (14,989 )
PCD portfolio (3) 3,965 10,799 (6,834 ) (4,052 ) (2,782 )
Interest on securities:
Taxable 12,207 10,298 1,909 (2,534 ) 4,443
Tax-exempt (2) 1,948 2,061 (113 ) (139 ) 26
Interest on fed funds and short-term
investments 328 2,667 (2,339 ) (3,867 ) 1,528
Interest on other investments 247 520 (273 ) (342 ) 69
Total interest income 177,584 217,557 (39,973 ) (42,332 ) 2,359
Expense from interest-bearing
liabilities:
Interest on demand deposits 7,511 30,195 (22,684 ) (24,966 ) 2,282
Interest on savings deposits 179 245 (66 ) (101 ) 35
Interest on time deposits 10,451 20,298 (9,847 ) (5,425 ) (4,422 )
Interest on other borrowings 937 3,051 (2,114 ) (914 ) (1,200 )
Interest on subordinated debentures 3,383 2,548 835 (454 ) 1,289
Total interest expense 22,461 56,337 (33,876 ) (31,860 ) (2,016 )
Net interest income $ 155,123 $ 161,220 $ (6,097 ) $ (10,472 ) $ 4,375
(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 a Federal tax rate of 21% on our state, county and municipal investment portfolios.
(3) Prior to the adoption of CECL on
Our FTE total interest income for the three months endedJune 30, 2020 totaled$177.6 million compared to$217.6 million for the three months endedJune 30, 2019 . This decrease is primarily the result of a decrease in interest income on loans slightly offset by an increase in interest income on securities. The decrease in interest income on loans resulted from the decline in LIBOR from second quarter of 2019 to the second quarter of 2020. We recognized$17.7 million in hedge income in the second quarter of 2020 which partially offset the decline in rates. OnMarch 6, 2020 , we terminated our$4.0 billion notional interest rate collar, realizing a gain of$261.2 million ("transaction gain"). The value received in exchange for the termination assumed an average 1-month LIBOR rate of 0.5785% over the next four years. The locked-in transaction gain, currently reflected in other comprehensive income net of deferred income taxes, will amortize over an expected four years into interest income, regardless of the interest rate environment. Based on our current interest rate forecast,$77.2 million of deferred income on derivatives in other comprehensive income atJune 30, 2020 is estimated to be reclassified into net interest income during the next twelve months. Future changes to interest rates or the amount of outstanding hedged loans may significantly change actual amounts reclassified to income. Our interest expense for the three months endedJune 30, 2020 and 2019 was$22.5 million and$56.3 million , respectively, a decrease of$33.9 million . This decrease is primarily related to strategic decisions to reduce higher cost deposit rates. Our cost of interest-bearing deposits decreased to 0.65% for the three months endedJune 30, 2020 compared to 1.79% for the three months endedJune 30, 2019 . Our total cost of borrowings for the three months endedJune 30, 2020 and 2019 was 4.66% and 5.09%, respectively. The following table presents for the three months endedJune 30, 2020 and 2019, on an FTE basis, our average balance sheet and our annualized average yields on assets and annualized average costs of liabilities. Average 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. 55
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Table 5 - Average Balances, Net Interest Income and Interest Yields/Rates
For the Three Months Ended June 30,
2020 2019
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 $ 11,173,408 $ 125,922 4.53 % $ 10,044,825 $ 135,946 5.43 %
ANCI portfolio 2,512,163 32,967 5.28 3,586,344 55,266 6.18
PCD portfolio (3) 198,649 3,965 8.03 290,704 10,799 14.90
Total loans 13,884,220 162,854 4.72 13,921,873 202,011 5.82
Investment securities
Taxable 2,269,017 12,207 2.16 1,500,971 10,298 2.75
Tax-exempt (2) 218,450 1,948 3.59 215,579 2,061 3.83
Total investment
securities 2,487,467 14,155 2.29 1,716,550 12,359 2.89
Federal funds sold and
short-term investments 1,342,779 328 0.10 597,988 2,667 1.79
Other investments 77,337 247 1.28 67,124 520 3.11
Total interest-earning
assets 17,791,803 177,584 4.01 16,303,535 217,557 5.35
Noninterest-earning
assets:
Cash and due from banks 176,716 111,337
Premises and equipment 127,413 128,067
Accrued interest and other
assets 672,132 1,217,228
Allowance for credit
losses (267,464 ) (106,656 )
Total assets $ 18,500,600 $ 17,653,511
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing
liabilities:
Demand deposits $ 8,368,151 $ 7,511 0.36 % $ 7,732,568 $ 30,195 1.57 %
Savings deposits 291,874 179 0.25 251,270 245 0.39
Time deposits 2,527,090 10,451 1.66 3,379,889 20,298 2.41
Total interest-bearing
deposits 11,187,115 18,141 0.65 11,363,727 50,738 1.79
Other borrowings 149,973 937 2.51 300,897 3,051 4.07
Subordinated debentures 222,574 3,383 6.11 140,722 2,548 7.26
Total interest-bearing
liabilities 11,559,662 22,461 0.78 11,805,346 56,337 1.91
Noninterest-bearing
liabilities:
Demand deposits 4,587,673 3,281,383
Accrued interest and other liabilities 234,469 234,927 Total liabilities 16,381,804 15,321,656 Shareholders' equity 2,118,796 2,331,855 Total liabilities and shareholders' equity$ 18,500,600 $ 17,653,511 Net interest income/net interest spread 155,123 3.23 % 161,220 3.45 % Net yield on earning assets/net interest margin 3.51 % 3.97 % Taxable equivalent adjustment: Investment securities (409 ) (433 ) Net interest income$ 154,714 $ 160,787
_____________________
(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 a taxable equivalent basis using a tax rate of 21%.
(3) Prior to the adoption of CECL on
56
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Six months ended
Our FTE net interest income for the six months endedJune 30, 2020 and 2019 was$309.0 million and$331.0 million , respectively, a decrease of$22.0 million . Our net interest margin for the six months endedJune 30, 2020 and 2019 was 3.67% and 4.09%, respectively, a decrease of 42 basis points. The net interest margin for the six months endedJune 30, 2020 was impacted by the addition of PPP loans averaging$333.3 million and an annualized yield of 2.37%. The following table sets forth, on an FTE basis, the components of our net interest income with the effect that the varying levels of interest earning assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the six months endedJune 30, 2020 and 2019: Net Interest Income Increase Changes Due To (1) (In thousands) 2020 2019 (Decrease) Rate Volume Increase (decrease) in: Income from interest-earning assets: Interest and fees on loans: Originated loans$ 255,324 $ 271,761 $ (16,437 ) $ (63,345 ) $ 46,908 ANCI portfolio 73,617 118,853 (45,236 ) (15,370 ) (29,866 ) PCD portfolio (3) 9,047 17,148 (8,101 ) (3,678 ) (4,423 ) Interest on securities: Taxable 26,222 21,094 5,128 (8,819 ) 13,947 Tax-exempt (2) 3,757 4,261 (504 ) (358 ) (146 ) Interest on fed funds and short-term investments 2,112 5,949 (3,837 ) (9,165 ) 5,328 Interest on other investments 641 1,138 (497 ) (1,145 ) 648 Total interest income 370,720 440,204 (69,484 ) (101,880 ) 32,396 Expense from interest-bearing liabilities: Interest on demand deposits 29,180 59,454 (30,274 ) (38,253 ) 7,979 Interest on savings deposits 496 471 25 (77 ) 102 Interest on time deposits 23,194 37,484 (14,290 ) (7,389 ) (6,901 ) Interest on other borrowings 2,044 6,746 (4,702 ) (2,142 ) (2,560 ) Interest on subordinated debentures 6,833 5,078 1,755 (2,289 ) 4,044 Total interest expense 61,747 109,233 (47,486 ) (50,150 ) 2,664 Net interest income$ 308,973 $ 330,971 $
(21,998 )
(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 a Federal tax rate of 21% on our state, county and municipal investment portfolios.
(3) Prior to the adoption of CECL on
Our FTE total interest income for the six months endedJune 30, 2020 totaled$370.7 million compared to$440.2 million for the six months endedJune 30, 2019 . This decrease is primarily the result of a decrease in interest income on loans slightly offset by an increase in interest income on securities. We recognized$25.6 million in hedge income year-to-date in 2020 which partially offset the decline in rates. Our interest expense for the six months endedJune 30, 2020 and 2019 was$61.7 million and$109.2 million , respectively, a decrease of$47.5 million . This decrease is primarily related to strategic decisions to reduce higher cost deposit rates given the decline in Federal funds rates during the period. Our cost of interest-bearing deposits was 0.96% for the six months endedJune 30, 2020 compared to 1.74% for the six months endedJune 30, 2019 . Our total cost of borrowings for the six months endedJune 30, 2020 and 2019 was 2.19% and 4.79%, respectively. The following table presents for the six months endedJune 30, 2020 and 2019, our average balance sheet and our average yields on assets and annualized average costs of liabilities. Average 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. 57 --------------------------------------------------------------------------------
For the Six Months Ended June 30,
2020 2019
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 $ 10,693,627 $ 255,324 4.80 % $ 9,928,967 $ 271,761 5.52 %
ANCI portfolio 2,621,701 73,617 5.65 3,635,352 118,853 6.59
PCD portfolio (3) 207,467 9,047 8.77 296,152 17,148 11.68
Total loans 13,522,795 337,988 5.03 13,860,471 407,762 5.93
Investment securities
Taxable 2,233,773 26,222 2.36 1,516,158 21,094 2.81
Tax-exempt (2) 208,599 3,757 3.62 216,385 4,261 3.97
Total investment
securities 2,442,372 29,979 2.47 1,732,543 25,355 2.95
Federal funds sold and
short-term investments 985,832 2,112 0.43 680,337 5,949 1.76
Other investments 78,755 641 1.64 62,656 1,138 3.66
Total interest-earning
assets 17,029,754 370,720 4.38 16,336,007 440,204 5.43
Noninterest-earning
assets:
Cash and due from banks 213,760 115,064
Premises and equipment 127,613 128,526
Accrued interest and other
assets 960,808 1,166,232
Allowance for credit
losses (234,625 ) (101,886 )
Total assets $ 18,097,310 $ 17,643,943
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing
liabilities:
Demand deposits $ 8,244,896 $ 29,180 0.71 % $ 7,871,015 $ 59,454 1.52 %
Savings deposits 282,159 496 0.35 249,968 471 0.38
Time deposits 2,524,504 23,194 1.85 3,183,894 37,484 2.37
Total interest-bearing
deposits 11,051,559 52,870 0.96 11,304,877 97,409 1.74
Other borrowings 183,668 2,044 2.24 359,298 6,746 3.79
Subordinated debentures 222,454 6,833 6.18 138,341 5,078 7.40
Total interest-bearing
liabilities 11,457,681 61,747 1.08 11,802,516 109,233 1.87
Noninterest-bearing
liabilities:
Demand deposits 4,123,143 3,307,745
Accrued interest and other liabilities 233,683 246,679 Total liabilities 15,814,507 15,356,940 Shareholders' equity 2,282,803 2,287,003 Total liabilities and shareholders' equity$ 18,097,310 $ 17,643,943 Net interest income/net interest spread 308,973 3.29 % 330,971 3.58 % Net yield on earning assets/net interest margin 3.67 % 4.09 % Taxable equivalent adjustment: Investment securities (791 ) (895 ) Net interest income$ 308,182 $ 330,076
_____________________
(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 a taxable equivalent basis using a tax rate of 21%.
(3) Prior to the adoption of CECL on
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Provision for Credit Losses
OnJanuary 1, 2020 , we adopted the current expected credit loss ("CECL") accounting standard for estimating credit losses (see Note 1 to the consolidated financial statements). CECL replaces 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. In addition, the provision for credit losses includes the provision for loan losses and the provision for unfunded credit commitments. Prior to the adoption of CECL, the provision for unfunded credit commitments was included in other noninterest expenses. Prior periods are not required to be restated and, therefore, total provision for credit losses for the three and six months endedJune 30, 2019 does not include the provision for unfunded commitments. Under accounting standards for business combinations, acquired loans are recorded at fair value with no credit loss allowance on the date of acquisition. CECL eliminates existing guidance for acquired credit impaired ("ACI") loans and requires recognition of the nonaccretable difference as an increase to the ACL 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. After initial recognition, the accounting for a PCD asset will generally follow the credit loss model that applies to that type of asset. For ACI loans accounted for under ASC 310-30 prior to adoption, the guidance in this amendment for PCD assets will be prospectively applied. The provision for credit losses totaled$158.8 million and$242.2 million , respectively, for the three and six months endedJune 30, 2020 , compared to$28.9 million and$40.1 million , respectively, for the three and six months endedJune 30, 2019 . The provision for the three and six months endedJune 30, 2020 reflects the forecasted effects of COVID-19 on the various loan segments due to higher unemployment, lower GDP, market value, energy prices, and real estate prices. The second quarter 2020 provision was affected by credit migration as well as a negative shift in the outlook for commercial real estate and a slower expected recovery. Second quarter credit migration and portfolio balance changes contributed approximately 40% to our provision while approximately 60% was related primarily to changes in economic forecasts. Our ACL estimate used the baseline scenario provided by a nationally recognized service, as adjusted for certain qualitative and environmental factors (see "-Allowance for Credit Losses"). Net charge-offs were$32.6 million or 0.94% annualized of average loans for the three months endedJune 30, 2020 compared to$18.6 million or 0.54% for the three months endedJune 30, 2019 . Net charge-offs were$65.0 million or 0.97% annualized of average loans for the six months endedJune 30, 2020 compared to$19.1 million or 0.28% for the six months endedJune 30, 2019 . Loan charge-offs recognized during the three months endedJune 30, 2020 and six months endedJune 30, 2020 are higher compared the same periods of 2019 as a result of credit migration that has occurred primarily in the restaurant, energy, and general C&I classes and significantly impacted by the effects of COVID. We recognized$28.9 million and$40.1 million in provision during the three and six months endedJune 30, 2019 , respectively, which included$27.0 million and$38.6 million provision related to the originated portfolio. The C&I originated portfolio provision of$24.0 million and$33.4 million for the three and six months endedJune 30, 2019 included provisions related to overall growth and migration within the portfolios, including increases in NPL and classified loans.
The following is a summary of our provision for credit losses by portfolio segment for the periods indicated:
Table 6 - Provision for Credit Losses
Three Months Ended June 30, Six Months Ended June 30,
(in thousands) 2020 2019 2020 2019
Funded Loans
Commercial and industrial $ 95,325 $ 24,653 $ 159,008 $ 33,952
Commercial real estate 59,359 3,201 77,158 3,303
Consumer 3,522 240 4,278 1,446
Small business(1) - 833 - 1,436
Total provision for funded
loans 158,206 28,927 240,444 40,137
Unfunded commitments 605 - 1,796 -
Total provision for credit
losses $ 158,811 $ 28,927 $
242,240
(1) After the implementation of CECL, provision expense related to Small Business loans is included in Commercial and industrial and Commercial real estate. Prior period provision is presented as previously reported and may not be comparable by segment to the current period presentation.
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Noninterest Income
Noninterest income is a component of our revenue and is comprised primarily of income generated from the services we provide our customers.
Noninterest income totaled$30.0 million and$65.0 million for the three and six months endedJune 30, 2020 , compared to$31.7 million and$62.4 million for the three and six months endedJune 30, 2019 , respectively. The decrease for the three months endedJune 30, 2020 is primarily attributable to decreases in bankcard fees, other service fees, credit related fees, and other noninterest income affected by COVID-19 impacts on customer behavior. The increase for the six months endedJune 30, 2020 is primarily due to service charges on deposits, SBA income and security gains.
The following table compares noninterest income for the three and six months
ended
Table 7 - Noninterest Income
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2020 2019 % Change 2020 2019 % Change
Investment
advisory revenue $ 6,505 $ 5,797 12.2 % $ 12,111 $ 11,439 5.9 %
Trust services
revenue 4,092 4,578 (10.6 ) 8,908 8,913 (0.1 )
Service charges
on deposit
accounts 4,852 4,730 2.6 11,268 9,860 14.3
Credit related
fees 4,401 5,341 (17.6 ) 10,384 10,211 1.7
Bankcard fees 1,716 2,279 (24.7 ) 3,674 4,492 (18.2 )
Payroll
processing
revenue 1,143 1,161 (1.6 ) 2,510 2,580 NM
SBA income 1,335 1,415 (5.7 ) 3,243 2,864 NM
Other service
fees 1,528 1,907 (19.9 ) 3,440 4,011 (14.2 )
Securities gains,
net 2,286 938 NM 5,280 926 NM
Other 2,092 3,576 (41.5 ) 4,201 7,090 (40.7 )
Total
noninterest
income $ 29,950 $ 31,722 (5.6 ) % $ 65,019 $ 62,386 4.2 %
Investment Advisory Revenue. Our investment advisory revenue is comprised
largely of investment management and financial planning revenues generated
through our subsidiary Linscomb & Williams, Inc. ("L&W"). For the three months
ended June 30, 2020 , investment advisory revenue had an increase of $0.7 million
or 12.2% from the same period of 2019. For the six months ended June 30, 2020 ,
investment advisory revenue increased to $12.1 million , or 5.9%, from the six
months ended June 30, 2019 . Assets under management increased by 17.9% as of
June 30, 2020 compared to June 30, 2019 .
Trust Services Revenue. We earn fees from our customers for trust services. For
the three months ended June 30, 2020 and 2019, trust fees totaled $4.1 million
and $4.6 million respectively, a decrease of $0.5 million , or 10.6%. For the six
months ended June 30, 2020 and 2019, trust fees totaled $8.9 million . Assets
under management increased by 8.6% as of June 30, 2020 compared to June 30,
2019 .
Service Charges on Deposit Accounts. We earn fees from our customers for
deposit-related services. For the three and six months ended June 30, 2020 ,
service charges on deposits had an increase of $0.1 million and $1.4 million ,
respectively. For the six months ended June 30, 2020 , the 14.3% increase was
largely due to increased number of deposit accounts and customers from the State
Bank acquisition were not subject to our deposit fees until the second quarter
of 2019. Additionally, the earnings credit on certain commercial accounts
decreased in the first quarter of 2020 resulting in increased fees on these
accounts.
Credit-Related Fees. Our credit-related fees include fees related to credit
advisory services, unfunded commitment fees and letter of credit fees. For the
three and six months ended June 30, 2020 , credit-related fees had a decrease of
17.6% and an increase of 1.7% to $4.4 million and $10.4 million compared to $5.3
million and $10.2 million for the three and six months ended June 30, 2019 ,
respectively. The current quarter's decrease was primarily related to decreased
loan activity resulting from corporate reductions of debt and strategic declines
in certain sectors as we work to reduce select exposures. This decrease was
partially mitigated by an increase of $0.6 million in fees from derivatives and
swaps.
Bankcard Fees. Our bankcard fees are comprised of automated teller machine
("ATM") network fees and debit card revenue. Our bankcard fees were $1.7 million
and $3.7 million for the three and six months ended June 30, 2020 , respectively.
The decreases of 24.7% and 18.2% for the three and six months ended June 30,
2020 , respectively, were related to a decrease in card usage resulting from the
economic slowdown associated with COVID-19.
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SBA Income. Small Business Administration ("SBA") income consists of gains on
sales of SBA loans, servicing fees, and other miscellaneous fees. SBA income was
$1.3 million and $3.2 million for the three and six months ended June 30, 2020
compared to $1.4 million and $2.9 million for the three and six months ended
June 30, 2019 , respectively. For the three months ended June 30, 2020 , SBA
income remained relatively flat due to SBA personnel being redirected and
focused on PPP loan generation during the period. For the six months ended June
30,2020 , the increase was largely driven by an increase of 12.8% in gain on sale
of SBA loans and an increase of 18.5% in SBA serving fees related to the
expanded focus on SBA lending after the unit was acquired with the State Bank
acquisition.
Securities Gains. During the first quarter and second quarters of 2020, we sold
and purchased investment securities through routine portfolio rebalancing for
balance sheet management. For the three and six months ended June 30, 2020 , the
net gain was $2.3 million and $5.3 million , respectively.
Other Service Fees. Our other service fees include retail services fees. For the
three months ended June 30, 2020 and 2019, other service fees totaled $1.5
million and $1.9 million , respectively. For the six months ended June 30, 2020
and 2019, other service fees totaled $3.4 million and $4.0 million ,
respectively. The second quarter and first half of 2020 decrease resulted
primarily from a decrease in foreign exchange fees and wires transfer related
fees.
Other Income. Other income for the three and six months ended June 30, 2020
compared to the same periods of 2019 decreased by $1.5 million , or 41.5%, and
decreased $2.9 million , or 40.7%, respectively. For the three months ended June
30, 2020 the decrease resulted from a write down of $2.0 million on investments
in limited partnerships and $0.7 million in foreign exchange settlement fees
partially offset by an increase of $1.3 million in mortgage income banking. For
the six months ended June 30, 2020 the decrease resulted from a $2.8 million
decline in earnings on limited partnerships (including a write down of $2.0
million on one investment), losses of $0.5 million in equity securities, and a
loss on sale of fixed assets of $0.6 million , decrease of $0.5 million in
foreign exchange transactions, and a loss of $0.5 million on net profits
interests. These items were partially offset by an increase of $1.9 million in
mortgage banking income and the 2019 revaluation charge of $2.0 million on a
receivable related to the sale of our insurance company assets.
Noninterest Expenses
The following table compares noninterest expense for the three and six months
ended
Table 8 - Noninterest Expense
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2020 2019 % Change 2020 2019 % Change
Salaries and employee benefits $ 47,158 $ 53,660 (12.1 ) % $ 95,965 $ 107,131 (10.4 )%
Premises and equipment 10,634 11,148 (4.6 ) 21,443 22,106 (3.0 )
Merger related expenses - 4,562 (100.0 ) 1,281 26,562 (95.2 )
Goodwill impairment charge - - NM 443,695 - NM
Intangible asset amortization 5,472 5,888 (7.1 ) 11,065 11,961 (7.5 )
Data processing expense 3,084 3,435 (10.2 ) 6,436 6,029 6.8
Software amortization 4,036 3,184 26.8 7,583 6,519 16.3Consulting and professional fees 3,009 1,899 58.5
5,715 4,128 38.4
Loan related expenses 735 1,740 (57.8 ) 1,495 2,650 (43.6 )
FDIC insurance 3,939 1,870 110.6 6,374 3,622 76.0
Communications 1,002 1,457 (31.2 ) 2,158 2,455 (12.1 )
Advertising and public relations 920 1,104 (16.7 ) 2,384 1,885 26.5
Legal expenses 579 645 (10.2 ) 991 803 23.4
Other 8,052 9,937 (19.0 ) 19,688 18,118 8.7
Total Noninterest Expense $ 88,620 $ 100,529 (11.8 ) % $ 626,273 $ 213,969 192.7 %
Noninterest expense was $88.6 million and $626.3 million for the three and six
months ended June 30, 2020 compared to $100.5 million and $214.0 million for the
three and six months ended June 30, 2019 , respectively. The decrease of $11.9
million for the three months ended June 30, 2020 was a result of decreases in
merger expenses and salary and employee benefits related expenses. The increase
of $412.3 million for the six months ended June 30, 2020 , was driven by a
non-cash goodwill impairment charge of $443.7 million incurred during the first
quarter of 2020. Excluding the goodwill impairment charge, noninterest expense
for the first six months of 2020 was $182.6 million , a decrease of $31.4 million
or 14.7% from the same period in 2019 largely driven by a decrease in merger
related expenses.
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Salaries and Employee Benefits
Excluding goodwill impairment charge, 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. The decrease of$6.5 million and$11.2 million , or 12.1% and 10.4% for the three and six months endedJune 30, 2020 compared to the same periods of 2019, respectively, was primarily due to a reduction in incentive compensation due to lower earnings and other compensation accruals. The decrease in the second quarter of 2020 also included an additional$2.2 million in expense deferrals resulting from the origination of the PPP loans. Regular compensation makes up the majority of the total salaries and employee benefits category and remained flat for the three months endedJune 30, 2020 compared to the 2019 period. For the six months endedJune 30, 2020 , regular compensation increased 5.4% compare to the same period of 2019. This increase is primarily related to build out and support of theState Bank acquisition, including C&I lending, technology, operations and risk areas, as well as the full period impact of the W&P acquisition.
The following table provides additional detail of our salaries and employee benefits expense for the periods presented:
Table 9 - Salaries and Employee Benefits Expense
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2020 2019 2020 2019
Salaries and employee benefits
Regular compensation $ 32,704 $ 32,813 $ 68,840 $ 65,327
Incentive compensation 7,640 13,772 10,459 25,123
Taxes and employee benefits 6,814 7,075 16,666 16,681
Total salaries and employee benefits
62
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Premises and Equipment. Rent, depreciation and maintenance costs comprise most
of premises and equipment expense. It decreased $0.5 million , or 4.6%, and
decreased $0.7 million , or 3.0%, essentially unchanged for the three and six
months ended June 30, 2020 , respectively, compared to the same periods as of
2019.
Merger Related Expenses. For the three months ended June 30, 2020 , merger
related expenses decreased $4.6 million to zero. For the six months ended June
30, 2020 , merger related expense decreased $25.3 million to $1.3 million . Merger
related expenses in 2019 were primarily related to the acquisition of State
Bank .
Goodwill Impairment Charge. Considering the recent economic conditions resulting
from COVID-19, we conducted an interim goodwill impairment test as of March 31,
2020 . The 2020 interim test indicated a goodwill impairment of $443.7 million
within the Bank reporting unit resulting in the Company recording an impairment
charge of the same amount in the first quarter of 2020. The primary causes of
the goodwill impairment in the Bank reporting unit were economic and industry
conditions resulting from COVID-19 that caused volatility and reductions in our
market capitalization and our peer banks, increased loan provision estimates,
increased discount rates and other changes in variables driven by the uncertain
macro-environment that resulted in the estimated fair value of the reporting
unit being less than the reporting unit's carrying value.
We have $43.1 million in goodwill remaining in our separate reporting units of
Trust and Registered Investment Advisor businesses for which the Company's
assessments did not indicate potential impairment. The fair values of the
reporting units are based upon management's estimates and assumptions. Although
management has used the estimates and assumptions it believes to be most
appropriate in the circumstances, it should be noted that even relatively minor
changes in certain assumptions used in management's calculations could result in
significant differences in the results of the impairment tests.
Intangible Asset Amortization. The company has recorded core deposit and other
intangible assets related to acquisitions in prior years with the majority
related to the State Bank acquisition. The core deposits intangibles are being
amortized on an accelerated basis over a ten-year period and the other
intangibles on a ten to twenty-year period, therefore the expense recorded will
decline over the remaining lives of the assets.
Data Processing. Data processing expense for our operating systems totaled $3.1
million , a decrease of 10.2%, for the three months ended June 30, 2020 compared
to the same period in 2019. For the six months ended June 30, 2020 , data
processing expense for our operating systems totaled $6.4 million , an increase
of 6.8%, compared to the same period in 2019. These decreases occurred as a
result of new contracts executed at lower costs for treasury management and
Internet banking. Additionally, we have consolidated certain services in 2020
for which we were paying two vendors in the first half of 2019 after the State
Bank merger
Consulting and Professional Services. For the three months ended June 30, 2020 ,
our consulting and professional services increased $1.1 million or 58.5%
compared to that same period in 2019. Consulting and professional services for
the six months ended June 30, 2020 were $5.7 million , an increase of 38.4%,
compared to the same period in 2019. A portion of our consulting and
professional fees in 2019 were reported as merger related expenses as they were
directly related to the State Bank acquisition.
FDIC Insurance . For the three and six months ended June 30, 2020 , FDIC insurance
expense had an increase of $2.1 million and $2.8 million , respectively. Our FDIC
assessment will vary between reported periods as it is determined on various
risk factors including earnings, credit, liquidity, composition of our balance
sheet, loan concentration and regulatory ratings. The increase for the three
months ended June 20, 2020 resulted, in part, from the net loss recorded in the
first quarter of 2020 and the growth in deposits during the quarter.
Advertising and Public Relations. Advertising and public relations expenses,
which include costs to create marketing campaigns, purchase the various media
space or time, conduct market research, and various sponsorships in our expanded
markets, had a decrease of $0.2 million or 16.7%, and an increase of $0.5
million or 26.5% for the three and six months ended June 30, 2020 , respectively.
The increase for the six-month period was primarily associated with expanded
advertising and public relations in our Georgia markets.
Other. Other expenses include costs for insurance, supplies, education and
training, and other operational expenses. For the three and six months ended
June 30, 2020 , other noninterest expenses decreased by 19.0% and increased 8.7%
compared to the same periods in 2019, respectively. The change for the three
months ended June 30, 2020 , was primarily due to a decline in employee travel
and business development expenses. The change for the six months as of June 30,
2020 , was primarily due to increases in special asset expenses of $1.1 million .
Income Tax (Benefit) Expense
Income tax (benefit) expense for the three and six months ended
The effective tax rate on our pretax (loss) income of($62.8) million and($495.3) million was 10.6% and 8.1% for the three and six months endedJune 30, 2020 compared to 23.3% and 23.0% on pre-tax income for the same periods in 2019, respectively. For the three and six months endedJune 30, 2020 , the change in the effective tax rate was driven by the decrease in income before income taxes. 63 -------------------------------------------------------------------------------- The effective tax rate is primarily affected by the amount of pre-tax income, and to a lesser extent, tax-exempt interest income, and the increase in 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. AtJune 30, 2020 , we had a net deferred tax asset of$65.9 million compared to a net deferred tax liability of$25.0 million atDecember 31, 2019 . The increase in the net deferred asset was primarily due to the tax effect of the CECL transition (see Notes 1 and 4 to the consolidated financial statements), increased provision for credit losses, reduction of deferred tax liabilities related to tax deductible goodwill, and the termination of the interest rate collar (see Note 6 to the consolidated financial statements). Financial Condition
The following table summarizes selected components of our balance sheet as of the periods indicated.
Table 10 - Selected Balance Sheet Data
As of Average Balances
Three Months Six Months Year Ended
December 31, Ended June 30, Ended June 30, December 31,
(In thousands) June 30, 2020 2019 2020 2020 2019
Total assets $ 18,857,753 $ 17,800,229 $ 18,500,600 $ 18,097,310 $ 17,689,126
Total interest-earning
assets 18,191,732 16,254,827 17,791,803 17,029,754 16,320,573
Total interest-bearing
liabilities 11,221,395 11,281,263 11,559,662 11,457,681 11,634,514
Short-term and other
investments 1,790,808 813,069 1,420,116 1,064,587 829,153
Securities
available-for-sale 2,661,433 2,368,592 2,487,467 2,442,372 1,776,689 Loans, net of unearned income 13,699,097 12,983,655 13,884,220 13,522,795 13,714,731 Goodwill 43,061 485,336 43,061 262,004 484,003
Noninterest-bearing deposits 5,220,109 3,833,704 4,587,673 4,123,143 3,431,300 Interest-bearing deposits
10,849,173 10,909,090 11,187,115 11,051,559 11,197,328
Borrowings and subordinated
debentures 372,222 372,173 372,547 406,122 437,186
Shareholders' equity 2,045,480 2,460,846 2,118,796 2,282,803 2,373,856
Investment Portfolio
Our available-for-sale securities portfolio increased $292.8 million or 12.4%,
to $2.7 billion at June 30, 2020 , from $2.4 billion at December 31, 2019 . During
the six months ended June 30, 2020 , approximately $180.6 million of securities
available-for-sale were sold and $638.0 million of securities available-for-sale
were purchased. In addition, $227.9 million of securities matured or were paid
down. The increase in securities is a result of substantial growth in deposits
and lower loan originations outside of the PPP loans. Securities acquired
include primarily investment grade municipal bonds and agency-backed mortgages.
At June 30, 2020 , our investment securities portfolio was 14.6% of our total
interest-earning assets and produced an average taxable equivalent yield of
2.29% and 2.47% as of the three and six months ended June 30, 2020 ,
respectively, compared to 2.89% and 2.95% for the three and six months ended
June 30, 2019 , respectively.
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The following table sets forth the fair value of the available-for-sale securities at the dates indicated:
Table 11 - Investment Portfolio
As of Percent Change
(In thousands) June 30, 2020 December 31, 2019 2020 vs 2019
Securities available-for-sale:
Obligations of U.S. government
agencies $ 105,504 $ 69,106 52.7 %
Mortgage-backed securities
("MBS") issued or guaranteed by
U.S. agencies:
Residential pass-through:
Guaranteed by GNMA 115,312 99,082 16.4
Issued by FNMA and FHLMC 1,647,852 1,435,497 14.8
Collateralized mortgage
obligations 237,535 295,832 (19.7 )
Commercial MBS 314,136 275,958 13.8
Total MBS 2,314,835 2,106,369 9.9
Obligations of states and
municipal subdivisions 241,094 193,117 24.8
Total securities
available-for-sale $ 2,661,433 $ 2,368,592 12.4 %
The net unrealized gain on our available-for-sale securities portfolio was $87.2
million and $22.8 million at June 30, 2020 and December 31, 2019 , respectively.
The following tables summarize the investment securities with unrealized losses
at June 30, 2020 and December 31, 2019 by aggregated major security type and
length of time in a continuous unrealized loss position:
Table 12 - Unrealized Losses in the Investment Portfolio
Unrealized Loss Analysis
Losses < 12 Months Losses > 12 Months
Gross Gross
Estimated Unrealized Estimated Unrealized
(In thousands) Fair Value Losses Fair Value Losses
June 30, 2020
Obligations of U.S.
government agencies $ 48,760 $ 401 $ 12,074 $ 211
Mortgage-backed securities 84,554 350 276 2
Obligations of states and
municipal subdivisions 9,844 82 - -
Total $ 143,158 $ 833 $ 12,350 $ 213
Unrealized Loss Analysis
Losses < 12 Months Losses > 12 Months
Gross Gross
Estimated Unrealized Estimated Unrealized
(In thousands) Fair Value Losses Fair Value Losses
December 31, 2019
Obligations of U.S.
government agencies $ 33,053 $ 209 $ 13,703 $ 206
Mortgage-backed securities 708,991 4,466 61,506 588
Obligations of states and
municipal subdivisions - - - -
Total $ 742,044 $ 4,675 $ 75,209 $ 794
As of June 30, 2020 , the unrealized losses were not deemed to be caused by
credit-related issues. We define credit loss as the difference between the
present value of the cash flows expected to be collected and the amortized cost
basis. Non-credit related impairments are recognized in other comprehensive
income, net of applicable taxes. Additionally, none of the unrealized losses
relate to the marketability of the securities or the issuer's ability to honor
redemption of the obligations. As of June 30, 2020 , we did not recognize any
allowance for credit losses related to available-for-sale securities since
decline in fair value did not result from credit-related issues. We have
adequate liquidity and, therefore, do not plan to sell and, more likely than
not, will not be required to sell these securities before recovery of the
indicated impairment. Accordingly, the unrealized losses on these securities
have been determined to be temporary.
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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 approximately 81% and 74% of the portfolio residing in these loan types as ofJune 30, 2020 andDecember 31, 2019 , 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 added asset-based lending andSmall Business Administration ("SBA") lending. Mortgage, wealth management and retail make up most of the consumer portfolio. Total loans increased by$715.4 million fromDecember 31, 2019 . The increases in loan balances included the origination of$1.0 billion in PPP loans (Table 17), partially offset by loan paydowns and payoffs. The declines were driven by corporate reductions of debt in the C&I segment, and strategic declines in the restaurant, energy and leveraged loan sectors as we work to reduce select exposures. The following table presents total loans outstanding by portfolio segment and class of financing receivable as ofJune 30, 2020 andDecember 31, 2019 . TheJune 30, 2020 presentation has been conformed to theDecember 31, 2019 portfolio segment and class of financing receivable to provide comparability to previous public filings with the exception of the Small Business Lending portfolio segment of which approximately$505 million was reclassified to C&I and$229 million was reclassified to CRE to reflect alignment with CECL categorizations. Table 13 - Loan Portfolio Total Loans as of Change June 30, December 31, (In thousands) 2020(1) 2019 Amount Percent Commercial and industrial General C&I$ 4,860,127 $ 3,979,193 $ 880,934 22.1 % Energy sector 1,449,274 1,427,832 21,442 1.5 Restaurant industry 1,146,785 993,397 153,388 15.4 Healthcare 561,743 472,307 89,436 18.9 Total commercial and industrial 8,017,929 6,872,729 1,145,200 16.7 Commercial real estate Income producing 2,811,695 2,517,707 293,988 11.7 Land and development 251,528 254,965 (3,437 ) (1.3 ) Total commercial real estate 3,063,223 2,772,672 290,551 10.5
Consumer
Residential real estate 2,537,765 2,584,810 (47,045 ) (1.8 ) Other 80,180 93,175 (12,995 ) (13.9 ) Total consumer 2,617,945 2,677,985 (60,040 ) (2.2 ) Small business lending - 734,237 (734,237 ) NM Total (gross of unearned discount and fees) 13,699,097 13,057,623 641,474 4.9 Unearned discount and fees - (73,968 ) 73,968 NM Total (net of unearned discount and fees)$ 13,699,097 $ 12,983,655 $ 715,442 5.5 %
(1) Amounts represent total net loans. Under CECL, loan balances are stated at amortized cost, which is net of unearned income and are not directly comparable to prior periods.
Commercial and Industrial. Total C&I loans increased by$1.1 billion or 16.7% sinceDecember 31, 2019 and represented 58.5% of the total loan portfolio atJune 30, 2020 , compared to 52.6% of total loans atDecember 31, 2019 . As noted above, a significant portion of this change resulted from$1.0 billion in PPP loans as detailed in Table 17 below, offset by the reclassification of loans within the Small Business Lending segment to the C&I segment as noted above. General C&I. As ofJune 30, 2020 , 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. There were$717.2 million in PPP loans outstanding in General C&I portfolio as ofJune 30, 2020 . 66
-------------------------------------------------------------------------------- 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 theHouston metropolitan area and the state ofTexas . We strive for a rigorous and thorough approach to energy underwriting and credit monitoring. The allowance for credit losses atJune 30, 2020 was$37.4 million for our energy loans or 2.58% of the energy portfolio compared to$12.7 million or 0.89% as ofDecember 31, 2019 (see "-Provision for Credit Losses" and "-Allowance for Credit Losses"). As ofJune 30, 2020 , we had$41.9 million of nonperforming energy credits compared to$9.8 million of nonperforming energy credits as ofDecember 31, 2019 . In addition, 19.4% of the energy portfolio was criticized as ofJune 30, 2020 compared to 6.7% atDecember 31, 2019 . As ofJune 30, 2020 , there were approximately$79.0 million in PPP loans outstanding in the Energy portfolio as follows:$53 million in Energy Services,$16 million in Midstream, and$9 million in E&P. As presented in the following table our energy lending business is comprised of three areas: Exploration and Production ("E&P"), Midstream, and Energy Services. Table 14 - Energy Loan Portfolio As of As of June 30, 2020 Unfunded (In thousands) June 30, 2020 December 31, 2019 Commitments Criticized Outstanding balance(1) E&P $ 325,843 $ 358,552$ 50,617 $ 146,916 Midstream 902,434 886,748 531,034 91,201 Energy services 220,997 182,532 76,088 42,445 Total energy sector$ 1,449,274 $ 1,427,832 $ 657,739 $ 280,562 As a % of total loans 10.58 % 10.93 % Allocated ACL E&P $ 11,201 $ 3,728 Midstream 20,622 7,845 Energy services 5,585 1,168 Total allocated ACL $ 37,408 $ 12,741 ACL as a % of outstanding balance E&P 3.44 % 1.04 % Midstream 2.29 0.88 Energy services 2.53 0.64 Total energy sector 2.58 % 0.89 % (1) Loan balances as ofJune 30, 2020 are stated at amortized cost, which is net of unearned discount and fees and are not directly comparable to the prior period. Loan balances as ofDecember 31, 2019 are presented as previously reported, gross of unearned discount and fees. E&P loans outstanding comprised approximately 22.5% of outstanding energy loans as ofJune 30, 2020 compared to 25.1% of outstanding energy loans as ofDecember 31, 2019 . We have strategically reduced our exposure to this category of energy lending over time, down from 51.7% of our outstanding energy loans as ofDecember 31, 2014 . Our 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 more frequently as needed 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. The price decks utilized in our engineering analysis are ratified by our Senior Credit Risk Management Committee. 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. Approximately 77% of the committed E&P loans are secured by properties primarily producing oil and the remaining 23% are secured by natural gas. It is expected that our E&P portfolio will experience additional stress, although the level of stress will depend on the duration of the crisis and the level of commodity prices. We are working with our clients to manage through this difficult period, as most are focused on maximizing cash flow and downside protection by restructuring and optimizing their hedge strategies where appropriate. Our clients have a material amount of hedges in place which is an important mitigating factor, but not a static situation. We expect manageable near-term results and carefully monitor duration risk as the major factor. 67 -------------------------------------------------------------------------------- Midstream loans outstanding comprised 62.3% of outstanding energy loans as ofJune 30, 2020 compared to 62.1% of outstanding energy loans as ofDecember 31, 2019 . We have strategically increased Midstream lending as a percent of our total energy lending over time, up from 30.8% as ofDecember 31, 2014 . 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 commodity price sensitive than other energy segments given the nature of their fee-based revenue streams. The majority of the portfolio was impacted by some level of reduced volumes from shut-ins in April and May; however, almost all of these volumes have come back on-line in June and July and stress on borrower covenants has been minimal, thus far. The majority of the portfolio is backed by large energy focused PE funds and operated by highly experienced management teams with long term relationships and track records with Cadence Midstream bankers. Underwriting guidelines for the Midstream portfolio generally require a first lien on all assets as collateral. The average debt to capital of this portfolio is at approximately 37%. Of our borrowers, the average outstanding is approximately$11.0 million . Energy Services loans outstanding comprised 15.2% of outstanding energy as ofJune 30, 2020 compared to 12.8% of outstanding energy loans as ofDecember 31, 2019 . This category of lending has remained a low percent of our total energy lending over time, down slightly from 17.5% as ofDecember 31, 2014 . 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. However, the majority of this portfolio is more production-oriented, so management believes there will be some "shut-ins" or production halts, but, over time, production is expected to resume.
Specialized lending. The following table presents our specialized lending portfolio by category as of the dates presented.
Table 15 - Specialized Lending Portfolio
Unfunded
Amounts Outstanding as of(1) Commitments as of
(In thousands) June 30, 2020 December 31, 2019(2) June 30, 2020
Restaurant $ 1,146,785 $ 963,399 $ 156,997
Healthcare 561,743 451,055 90,181
Technology 481,167 369,160 82,923
Total specialized lending $ 2,189,695 $ 1,783,614 $ 330,101
(1) Loan balances as of June 30, 2020 are stated at amortized cost, which is net of unearned discount and fees and
are not directly comparable to the prior period. Loan balances as of December 31, 2019 are presented as previously
reported, gross of unearned discount and fees.
(2) Prior period balances are presented as previously reported (originated C&I loans only) and may not be
comparable to the current period presentation which represents the entire C&I loan portfolio.
Restaurant, healthcare, and technology are the components of our specialized
industries. 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 increased by 19.0% compared to December 31, 2019
due primarily to the second quarter origination of $141 million in PPP loans. 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 portfolio includes 68% to Quick Service Restaurants
("QSRs"), 7% to Fast Casual, 20% to Full Service and 5% to Other. The Restaurant
sector has experienced increases in nonperforming loans and charge-offs during
2020 and 2019 as certain customers have faced difficulties dealing with market
pressures on employee compensation and increased competition, and more recently,
the effects of COVID-19. Dining room closures have required restaurants to
adjust their business and labor models accordingly, although many of our QSR
customers (68% of our portfolio) are experiencing meaningful drive-through and
pick-up business. Our Full Service portfolio is the most stressed segment of the
portfolio with continued uncertainty and inconsistencies with dining-room
closures and/or partial re-openings across the country.
Healthcare loans outstanding increased by 24.5% with the majority of this
increase due to $94.6 million in PPP loans and comprised 25.7% of total
specialized lending at June 30, 2020 compared to 25.3% at December 31, 2019 . Our
healthcare portfolio focuses on middle market healthcare providers generally
with a diversified payer mix.
Technology loans outstanding increased by 30.3% due in part to $20.2 million in
PPP loans and comprised 22.0% of total specialized lending at June 30, 2020
compared to 20.7% at December 31, 2019 . Our technology portfolio focuses on the
technology sub-segments of software and services, network and communications
infrastructure, and internet and mobility applications.
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Commercial Real Estate . Commercial real estate ("CRE") loans increased by $290.6
million or 10.5% since December 31, 2019 . CRE loans represented 22.4% of the
total loan portfolio as of June 30, 2020 , compared to 21.2% of total loans as of
December 31, 2019 . As noted above, a significant portion of this change resulted
from the reclassification of loans within the Small Business Lending segment to
the CRE segment in connection with CECL classifications. 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 decreased by $60.0 million or 2.2% from December 31,
2019 . Consumer loans represented 19.1% of total loans at June 30, 2020 , compared
to 20.5% of total loans at December 31, 2019 . We originate residential real
estate mortgages that are held for investment as well as held for sale in the
secondary market. Approximately 16.9% of the consumer portfolio relates to
acquired portfolios, compared to 19.1% as of December 31, 2019 . Our originated
consumer loan portfolio totaled $2.2 billion as of June 30, 2020 , consistent
with year-end 2019.
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 are 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.
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.
Table 16 - Shared National Credits
June 30, 2020 December 31, 2019
Amount % of SNC Amount % of SNC
(In thousands) Outstanding(1) Portfolio Outstanding(1) Portfolio
Commercial and industrial
General C&I $ 993,329 38.3 % $ 997,021 38.2 %
Energy sector 885,991 34.2 903,501 34.7
Restaurant industry 466,477 18.0 468,298 18.0
Healthcare 30,004 1.2 31,436 1.2
Total commercial and industrial 2,375,801 91.7 2,400,256 92.1
Commercial real estate
Income producing 206,061 8.0 192,234 7.4
Land and development 9,081 0.3 14,294 0.5
Total commercial real estate 215,142 8.3 206,528 7.9
Total shared national credits $ 2,590,943 100.0 % $ 2,606,784 100.0 %
As a % of total loans 18.9 % 20.0 %
(1) Loan balances as of June 30, 2020 are stated at amortized cost, which is net of unearned discount and fees and are not
directly comparable to the prior period. Loan balances as of December 31, 2019 are presented as previously reported, gross
of unearned discount and fees.
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Paycheck Protection Program. The CARES Act created the PPP to provide certain
small businesses with liquidity to support their operations during the COVID-19
pandemic. Entities must meet certain eligibility requirements to receive PPP
loans, and they must maintain specified levels of payroll and employment to have
the loans forgiven. The conditions are subject to audit by the U.S. government,
but entities that borrow less than $2 million (together with any affiliates)
will be deemed to have made the required certification concerning the necessity
of the loan in good faith.
Under the PPP, eligible small businesses can apply to an SBA-approved lender for
a loan that does not require collateral or personal guarantees. The loans have a
1% fixed interest rate. Loans issued prior to June 5 mature in two years unless
otherwise modified and loans issued after June 5 mature in five years. However,
they are eligible for forgiveness (in full or in part, including any accrued
interest) under certain conditions. For loans (or parts of loans) that are
forgiven, the lender will collect the forgiven amount from the U.S. government.
In response to the COVID-19 pandemic, we have taken several actions to offer
various forms of support to our customers, employees, and communities that have
experienced impacts from this development. We are actively working with
customers impacted by the economic downturn, including securing loans for our
customers under the PPP.
The following table presents our PPP loans by portfolio segment and class of
financing receivable as of June 30, 2020 . The June 30, 2020 presentation has
been conformed to the December 31, 2019 portfolio segment and class of financing
receivable to provide comparability to the other loan disclosures in MD&A.
Table 17 - Paycheck Protection Program
(In thousands) Amortized Cost % of PPP Portfolio
Commercial and industrial
General C&I $ 717,155 69.5 %
Energy sector
E&P 9,318 0.9
Midstream 16,307 1.5
Energy services 53,409 5.2
Restaurant industry 141,218 13.7
Healthcare 94,591 9.2
Total PPP loans $ 1,031,998 100.0 %
As a % of total loans 7.5 %
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 approval of our
Senior Loan Committee is generally required for relationships in an amount
greater than $5.0 million . For loans in an amount greater than $5 million that
are risk rated 10 or worse, approval of the Credit Transition Committee is
generally required. There is a credit executive assigned to each line of
business who holds the primary responsibility for the approval process outside
of the loan approval committees. Our Board of Directors receives information
concerning asset quality measurements and trends on a monthly basis. See Note 4
to the consolidated financial statements for additional disclosure regarding our
credit risk management.
Our credit policy requires that key risks be identified and measured, documented
and mitigated, to the extent possible, and requires various levels of internal
approvals based on the characteristics of the loans, including the size of the
exposure. We also have specialized underwriting guidelines for loans in our
specialized industries that we believe reflects the unique characteristics of
these industries.
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Under our dual credit risk rating ("DCRR") system, it is our policy to assign
risk ratings to all commercial loan (C&I and CRE) exposures using our internal
credit risk rating system. The assignment of loan risk ratings is the primary
responsibility of the lending officer concurrent with approval from the credit
officer reviewing and recommending approval of the credit. The assignment of
commercial risk ratings is completed on a transactional basis using scorecards.
The Company uses a total of nine different scorecards that accommodate various
areas of lending. Each scorecard contains two main components: probability of
default ("PD") and loss given default ("LGD"). The PD rating is used as the
Company's risk grade of record. Loans with PD ratings of 1 through 8 are loans
that the Company rates internally as "Pass." Loans with PD ratings of 9 through
13 are rated internally as "Criticized" and represent loans for which one or
more potential or defined weaknesses exists. Loans with PD ratings of 10 through
13 are also considered "Classified" and represent loans for which one or more
defined weaknesses exist. These classifications are consistent with regulatory
guidelines.
Consumer purpose loan risk classification is assigned in accordance with the Uniform Retail Credit Classification, based on delinquency and accrual status.
An important aspect of our assessment of risk is the ongoing completion of periodic risk rating reviews. As part of these reviews, we seek to review the risk ratings of each facility within a customer relationship and may recommend an upgrade or downgrade to the risk ratings. Our policy is to review two times per year all customer relationships with an aggregate exposure of$10.0 million or greater as well as all SNC. Additionally, all customer relationships with an aggregate exposure of$2.5 million to$10.0 million are reviewed annually. Further, customer relationships with an aggregate exposure of$2.5 million and greater with pass/watch (defined as a borderline risk credit representing the weakest pass risk rating) or criticized risk ratings are reviewed quarterly. Certain relationships are exempt from review, such as relationships where our exposure is cash-secured. An updated risk rating scorecard is required during each risk review as well as with any credit event that requires credit approval.
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 18 - Nonperforming Assets
December 31,
(In thousands) June 30, 2020 2019
Nonperforming loans(1)
Commercial and industrial $ 182,839 $ 106,803
Commercial real estate 25,261 1,127
Consumer 16,284 7,289
Small business(2) - 4,337
Total nonperforming loans 224,384 119,556
Foreclosed OREO and other NPA 13,949 5,958
Total nonperforming assets$ 238,333 $
125,514
NPL as a percentage of total loans 1.64 % 0.92 % NPA as a percentage of loans plus OREO/other 1.74 % 0.97 % NPA as a percentage of total assets 1.26 % 0.71 % Total accruing loans 90 days or more past due $ 3,123 $
23,364
(1) Amounts are not comparable due to our adoption of CECL onJanuary 1, 2020 . Prior to this date, pools of individual ACI loans were excluded because they continued to earn interest income from the accretable yield at the pool level. With the adoption of CECL, the pools were discontinued, and performance is based on contractual terms for individual loans. Had CECL been in place atDecember 31, 2019 , the amount of these PCD loans would have been approximately$43.0 million . Additionally, prior toJanuary 1, 2020 , we used recorded investment in this table. With the adoption of CECL we now use amortized cost. (2) As ofJune 30, 2020 , formerly Small Business balances are included in Commercial and Industrial andCommercial Real Estate . Prior period balances are presented as previously reported and may not be comparable by segment to the current period presentation. 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. Of the total nonperforming loans atJune 30, 2020 , approximately 64% are current on their contractual payments. 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. 71 -------------------------------------------------------------------------------- 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. For the three and six months endedJune 30, 2020 and 2019, an immaterial amount of contractual interest paid was recognized on the cash basis. Our nonperforming loans have increased to 1.64% of our loan portfolio as ofJune 30, 2020 compared to 0.92% of our loan portfolio as ofDecember 31, 2019 . As noted above, the adoption of CECL resulted in additional NPL in the PCD population that were previously considered performing when evaluated as a pool under prior accounting methodology versus individually under CECL. Had CECL been in place atDecember 31, 2019 , the amount of these PCD loans would have been$43.0 million . Our NPL in the originated population were 1.32% as ofJune 30, 2020 compared to 0.82% as ofDecember 31, 2019 . The following table includes our originated nonperforming assets for the periods presented. Table 19 - Originated Nonperforming Assets December 31, (In thousands) June 30, 2020 2019 Nonperforming loans(1) Commercial and industrial General C&I $ 44,442 $ 43,630 Energy sector E&P 3,820 5,206 Midstream 37,107 3,159 Energy services 957 1,417 Restaurant industry 67,674 45,032 Healthcare 2,183 3,770 Commercial real estate 19,324 - Consumer 4,697 3,307 Small business(2) - 1,395 Total nonperforming loans 180,204 106,916 E&P - net profits interests 3,733 4,330 Repossessed assets 8,610 - Foreclosed OREO - - Total nonperforming assets$ 192,547 $ 111,246 Originated NPL as a percentage of total loans 1.32 % 0.82 % (1) Amounts are not comparable due to our adoption of CECL onJanuary 1, 2020 . Prior to this date, we used recorded investment in this table. With the adoption of CECL we now use amortized cost. (2) As ofJune 30, 2020 , formerly Small Business balances are included in Commercial and Industrial andCommercial Real Estate . Prior period balances are presented as previously reported and may not be comparable by segment to the current period presentation. Other Real Estate Owned and Other NPA. 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 ofJune 30, 2020 and consisted of nine properties compared to$1.6 million and eight properties as ofDecember 31, 2019 , with the majority related to foreclosures within our acquired loan portfolio. There were no additions to OREO resulting from foreclosure or repossession from a SNC during the three and six months endedJune 30, 2020 and 2019. In 2016, we received net profits interests ("NPI") in certain oil and gas reserves related to two energy credit bankruptcies that were charged-off in 2016. We recorded the NPI 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$3.7 million as ofJune 30, 2020 compared to$4.3 million as ofDecember 31, 2019 . In addition, during the first quarter of 2020, we received assets of$4.3 million in the form of limited partnerships units related to two SNC energy credit bankruptcies and$6.3 million in inventory in a general C&I bankruptcy. During the three months endedJune 30, 2020 , we charged off$2.0 million of these limited partnership assets, leaving a balance of$8.6 million in repossessed assets. 72 -------------------------------------------------------------------------------- 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 atDecember 31, 2019 reside in the ACI portfolio prior to the adoption of CECL. As ofJune 30, 2020 , the majority of these loans are within the acquired residential portfolio. These loans are monitored on a monthly basis by both the lines of business and credit administration. 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 ofJune 30, 2020 , there were SNCs totaling$2.2 million designated as TDRs compared to$7.7 million as ofDecember 31, 2019 .
The following table provides information regarding loans that were modified into TDRs for the periods indicated.
Table 20 - Loans Modified into TDRs
For the
Three Months Ended
2020 2019
Number of Amortized Number of
(Dollars in thousands) TDRs Cost(1) TDRs Amortized Cost
Commercial and industrial
General C&I - $ - 2 $ 7,647
Energy - - 1 11,717
Commercial real estate
Industrial, retail, and other - - 1 1,455
Total - $ - 4 $ 20,819 (1) There was no net accrued interest receivable recorded on the loan balances above as of
For the Six Months Ended June 30,
2020 2019
Number of Amortized Number of
(Dollars in thousands) TDRs Cost(1) TDRs Amortized Cost
Commercial and industrial
General C&I 3 $ 19,366 3 $ 28,913
Energy 1 8,140 1 11,717
Restaurant 2 24,246 - -
Commercial real estate
Industrial, retail, and other - - 1 1,455
Total 6 $ 51,752 5 $ 42,085 (1) Less than
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We monitor loan payments on an on-going basis to determine if a loan is
considered to have a payment default. Determination of payment default involves
analyzing the economic conditions that exist for each customer and their ability
to generate positive cash flows during the loan term. Default is defined as the
earlier of the troubled debt restructuring being placed on non-accrual status or
obtaining 90 days past due status with respect to principal and/or interest
payments.
For the three- and six-month periods ended June 30, 2020 and June 30, 2019 , we
had no TDRs for which there was a payment default within the 12 months following
the restructure date. During the three and six months ended June 30, 2020 ,
approximately $12.5 million and $19.3 million , respectively, in charge-offs were
taken related to one general C&I loan that was modified into a TDR during the
same period. During the three and six months ended June 30, 2019 , approximately
$17.8 million in charge-offs were taken related to commercial and industrial
loans modified into TDRs during the same period.
Loan Modifications Related to COVID-19. Affected companies may experience cash
flow challenges as a result of disruptions in their operations, higher operating
costs or lost revenues. They may need to obtain additional financing, amend the
terms of existing debt agreements or obtain waivers if they no longer satisfy
debt covenants.
Financial institutions may elect to apply Section 4013 of the CARES Act and
suspend TDR accounting and reporting requirements for certain loan modifications
that are related to COVID-19 (i.e. forbearance, interest rate modifications,
repayment plans or any other similar arrangements that defer or delay payment).
The modifications must be made during the period beginning on March 1, 2020 and
ending on the earlier of December 31, 2020 or 60 days after the national
emergency is lifted, and the borrowers must have been less than 30 days past due
on December 31, 2019 .
Lenders that determine that a modification is not eligible for the relief from
TDR accounting under Section 4013 of the CARES Act or elect not to apply it can
consider the interagency statement issued by the federal and state banking
regulators in March 2020 and revised in April 2020 . The statement provides
guidance on accounting for loan modifications related to COVID-19.
The guidance in the statement, which was developed in consultation with the FASB
staff, indicates that short-term loan modifications (e.g., deferral of payments)
made to help borrowers that are current on existing loans, either individually
or as part of a program for creditworthy borrowers who are experiencing
short-term financial or operational problems as a result of COVID-19, generally
would not be considered TDRs.
For the three-month period ended June 30, 2020 , the Company had approximately
2,500 cumulative loan modifications (including payment deferrals and non-payment
deferrals) totaling $2.5 billion and the vast majority of these loans are
currently eligible for exemption from the accounting guidance for TDRs. As of
June 30, 2020 , active COVID loan modifications declined to $1.9 billion , of
which $1.4 billion represented payment deferrals (generally 90-day) and $0.5
billion represented non-payment deferral modifications. The Company believes
additional loans may be restructured because of COVID-19 before the end of the
year that will not be identified as TDRs in accordance with this law or
interagency statement (see "- Overview" for additional information).
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 but there is a reasonable possibility that
they may become nonperforming before the end of the second quarter 2020. 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 approximately $53
million in credits as potential problem loans at June 30, 2020 . 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 expected credit losses on loans in the loan
portfolio as of the reporting date. On January 1, 2020 we adopted CECL which
replaces the 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. Events that are not within our control,
such as changes in economic factors, could change after 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 (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 June 30, 2020 was $370.9 million or 2.71% of total loans (net of
unearned discounts and fees) of $13.7 billion . Excluding PPP loans, the ACL was
2.93% of total loans at June 30, 2020 . This compares with $119.6 million on
loans of $13.0 billion or 0.92% of total loans at December 31, 2019 . The
adoption of the CECL accounting standard on January 1, 2020 increased the ACL by
$75.9 million . The ACL was increased an additional $158.2 million and $242.2
million in provision for the second quarter and year-to-date 2020, respectively,
which reflects the forecasted effects of COVID-19 on the various loan segments
due to higher unemployment, lower GDP, market value, energy prices, and real
estate prices. The second quarter 2020 provision was affected by credit
migration as well as a negative shift in the outlook for commercial real estate
and a slower expected recovery. Our estimate of the ACL used the baseline
scenario provided by a nationally recognized service, as adjusted for
consideration of certain qualitative and environmental factors. These
adjustments consider, among other factors, risk attributes of each portfolio,
relevant third-party research, and loss data collected from previous recessions.
Loan charge-offs recognized during 2020 are higher than 2019 as a result of
credit migration that has occurred primarily in the Restaurant, Energy and
General C&I classes with the most significant impact being COVID related.
The following table presents the allocation of the ACL 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.
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Table 21 - Allocation of Allowance for Credit Losses
Percent of ACL to Each Percent of Loans in Each
Allowance for Credit Losses(1) Category of Loans(1) Category to Total Loans(1)
December December 31,
(In thousands) June 30, 2020 December 31, 2019 June 30, 2020 31, 2019 June 30, 2020 2019
Commercial and
industrial $ 217,796 $ 84,309 2.69 % 1.23 % 59.16 % 52.63 %
Commercial real estate 112,480 14,093 3.78 % 0.51 % 21.73 % 21.23 %
Consumer 40,625 15,392 1.55 % 0.57 % 19.11 % 20.51 %
Small business - 5,849 0.00 % 0.80 % 0.00 % 5.62 %
Total allowance for
credit losses 370,901 119,643 2.71 % 0.92 % 100.00 % 100.00 %
Reserve for unfunded
commitments(2) 3,827 1,699
Total $ 374,728 $ 121,342
(1) As of June 30, 2020 , formerly Small Business balances are included in Commercial and Industrial and Commercial Real Estate . Prior period balances are presented as
previously reported and may not be comparable by segment to the current period presentation.
(2) The reserve for unfunded commitments is recorded in other liabilities in the consolidated balance sheets.
As of June 30, 2020 , $217.8 million or 58.7% of our ACL is attributable to our
C&I loan segment compared to $84.3 million or 70.5% as of December 31, 2019 . The
ACL as a percentage of the C&I portfolio was 2.69% as of June 30, 2020 compared
to 1.23% as of December 31, 2019 . As of June 30, 2020 , $112.5 million or 30.3%
of our ACL is attributable to the CRE loan segment compared to $14.1 million or
11.8% as of December 31, 2019 . The ACL as a percentage of the CRE portfolio has
increased to 3.78% as of June 30, 2020 from 0.51% as of December 31, 2019 . As of
June 30, 2020 , $40.6 million or 11.0% of our ACL is attributable to the Consumer
loan segment compared to $15.4 million or 12.9% as of December 31, 2019 . The ACL
as a percentage of the Consumer portfolio has increased to 1.55% as of June 30,
2020 from 0.57% as of December 31, 2019 . These increases reflect the adoption of
CECL and the effects of COVID-19. As of June 30, 2020 , $76.1 million or 20.5% of
the total ACL was attributable to SNC loans compared to $32.0 million or 26.7%
as of December 31, 2019 . The ACL methodology is consistent whether or not a loan
is a SNC.
During the three and six months ended as of June 30, 2020 , we recorded net
charge-offs of $32.6 million , or 0.94% annualized, and $65.0 million , or 0.97%
annualized, of average loans compared to $18.6 million , or 0.54% annualized, and
$19.2 million , or 0.28% annualized for the three and six months ended June 30,
2019 , respectively. The current quarter charge-offs included $12.5 million in
one general C&I credit, $4.0 million in one restaurant credit, and $14.2 million
in one energy credit. The current year-to-date charge-offs included $33.1
million in three general C&I credits, $13.4 million in three restaurant credits,
and $15.1 million in two energy credits. Of these charge-offs, $45.7 million
were SNC credits within the Energy and general C&I portfolios.
The following tables summarize certain information with respect to our ACL on
the total loan portfolio and the composition of charge-offs and recoveries for
the periods indicated.
Table 22 - Allowance for Credit Losses Rollforward
For the Three Months Ended June 30, 2020
Total
Commercial and Commercial Allowance for
(In thousands) Industrial Real Estate Consumer Credit Losses
As of March 31, 2020 $ 154,585 $ 53,418 $ 37,243 $ 245,246
Provision for loan losses 95,325 59,359 3,522 158,206
Charge-offs (32,816 ) (327 ) (309 ) (33,452 )
Recoveries 702 30 169 901
As of June 30, 2020 $ 217,796 $ 112,480 $ 40,625 $ 370,901
Loans at end of period, net of
unearned income $ 13,699,097
Average loans, net of unearned income 13,884,220
Ratio of ending allowance to ending
loans 2.71 %
Ratio of net charge-offs to average
loans(1) 0.94
Net charge-offs as a percentage of:
Provision for credit losses 20.58
Allowance for credit losses(1) 35.30
ACL as a percentage of NPL 165.30
(1) Annualized.
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For the Six Months Ended June 30, 2020
Total
Commercial and Commercial Allowance for
(In thousands) Industrial Real Estate Consumer Credit Losses
As of December 31, 2019 $ 89,796 $ 15,319 $ 14,528 $ 119,643
Cumulative effect of the adoption of
CECL 32,951 20,599 22,300 75,850
As of January 1, 2020 122,747 35,918 36,828 195,493
Provision for loan losses 159,008 77,158 4,278 240,444
Charge-offs (64,803 ) (806 ) (941 ) (66,550 )
Recoveries 844 210 460 1,514
As of June 30, 2020 $ 217,796 $ 112,480 $ 40,625 $ 370,901
Loans at end of period, net of
unearned income $ 13,699,097
Average loans, net of unearned income 13,522,795
Ratio of ending allowance to ending
loans 2.71 %
Ratio of net charge-offs to average
loans(1) 0.97
Net charge-offs as a percentage of:
Provision for credit losses 27.05
Allowance for credit losses(1) 35.26
ACL as a percentage of NPL 165.30
(1) Annualized.
For the Three Months Ended June 30, 2019
Total
Commercial and Commercial Allowance for
(In thousands) Industrial Real Estate Consumer Small Business Credit Losses
As of March 31, 2019 $ 75,526 $ 10,469 $ 14,690 $ 4,353 $ 105,038
Provision for credit losses 24,652 3,201 240 834 28,927
Charge-offs (18,001 ) (253 ) (534 ) (193 ) (18,981 )
Recoveries 269 - 68 24 361
As of June 30, 2019 $ 82,446 $ 13,417 $ 14,464 $ 5,018 $ 115,345
Loans at end of period, net of
unearned income $ 13,627,934
Average loans, net of unearned
income 13,921,873
Ratio of ending allowance to
ending loans 0.85 %
Ratio of net charge-offs to
average loans(1) 0.54
Net charge-offs as a percentage
of:
Provision for credit losses 64.37
Allowance for credit losses(1) 64.75
ACL as a percentage of NPL 106.06
(1) Annualized.
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For the Six Months Ended June 30, 2019
Total
Commercial and Commercial Allowance for
(In thousands) Industrial Real Estate Consumer Small Business Credit Losses
As of December 31, 2018 $ 66,316 $ 10,452 $ 13,703 $ 3,907 $ 94,378
Provision for credit losses 33,951 3,303 1,446 1,437 40,137
Charge-offs (18,462 ) (338 ) (768 ) (351 ) (19,919 )
Recoveries 641 - 83 25 749
As of June 30, 2019 $ 82,446 $ 13,417 $ 14,464 $ 5,018 $ 115,345
Loans at end of period, net of
unearned income $ 13,627,934
Average loans, net of unearned
income 13,860,471
Ratio of ending allowance to
ending loans 0.85 %
Ratio of net charge-offs to
average loans(1) 0.28
Net charge-offs as a percentage
of:
Provision for credit losses 47.76
Allowance for credit losses(1) 33.51
ACL as a percentage of NPL 106.06
(1) Annualized.
Total criticized loans at June 30, 2020 were $1.0 billion or 7.37% of total
loans as compared to $605.1 million or 4.66% at December 31, 2019 . The increase
included net downgrades predominantly in Restaurant and Energy and to a lesser
extent CRE credits, partially mitigated by net reductions in general C&I
credits. This migration reflects those sectors of the economy that have been
most acutely affected by COVID-19 and reflects the elevated risk in the current
macroeconomic environment. The migration in the Restaurant segment is
predominantly in the Non-QSR space as on-premise, family and casual sectors have
been much more severely impacted by the economic shutdown. The majority of the
migration in Energy is in the E&P sector due to lower commodity prices and CRE
is almost exclusively hospitality. The level of criticized loans in the loan
portfolio is presented in the following tables as of June 30, 2020 and December
31, 2019 .
Table 23 - Criticized Loans
As of June 30, 2020(1)
(Amortized cost in
thousands) Special Mention Substandard Doubtful Total Criticized
Commercial and
Industrial
General C&I $ 45,512 $ 146,333 $ 10,237 $ 202,082
Energy 155,735 114,080 10,747 280,562
Restaurant 171,722 158,596 7,596 337,914
Healthcare 18,250 47,398 - 65,648
Total commercial and
industrial 391,219 466,407 28,580 886,206
Commercial Real Estate
Industrial, retail, and
other 60,819 40,351 534 101,704
Multifamily 91 714 - 805
Office 346 1,005 - 1,351
Total commercial real
estate 61,256 42,070 534 103,860
Consumer
Residential - 19,172 - 19,172
Other - 39 - 39
Total consumer - 19,211 - 19,211
Total $ 452,475 $ 527,688 $ 29,114 $ 1,009,277 (1) As of
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As of December 31, 2019(1)
(Recorded investment in
thousands) Special Mention Substandard Doubtful Total Criticized
Commercial and
Industrial
General C&I $ 70,058 $ 204,087 $ 8,191 $ 282,336
Energy sector 66,235 26,439 2,754 95,428
Restaurant industry 45,456 58,559 4,697 108,712
Healthcare 22,414 3,984 - 26,398
Total commercial and
industrial 204,163 293,069 15,642 512,874
Commercial Real Estate
Income producing 36,205 7,125 - 43,330
Land and development 8,997 2,350 - 11,347
Total commercial real
estate 45,202 9,475 - 54,677
Consumer
Residential real estate 152 11,603 - 11,755
Other - 81 - 81
Total consumer 152 11,684 - 11,836
Small Business Lending 6,573 19,126 - 25,699
Total $ 256,090 $ 333,354 $ 15,642 $ 605,086
(1) As of
Deposits. Deposits atJune 30, 2020 totaled$16.1 billion as compared to$14.7 billion atDecember 31, 2019 . Our core deposits have increased due to corporate customer increases in liquidity in the current environment and broader impacts of fiscal stimulus in the second quarter. We aggressively lowered our interest rates on deposits resulting in costs of total deposits of 0.46% for the three months endedJune 30, 2020 compared to 1.39% for the same period of 2019. For the six months endedJune 30, 2020 the cost of total deposits lowered to 0.70% from 1.34% from the same period in 2019. Additionally, noninterest-bearing deposits as a percent of total deposits increased significantly to 32.5% from 26.0%. Our strategy is to fund asset growth primarily with customer deposits in order to maintain a stable liquidity profile and a more competitive cost of funds. We categorize deposits as brokered and non-brokered consistent with the banking industry. The following table illustrates the growth in our deposits during the periods indicated: Table 24 - Deposits Percent to Total Percentage December 31, December 31, (In thousands) June 30, 2020 2019 June 30, 2020 2019 Change Noninterest-bearing demand$ 5,220,109 $ 3,833,704 32.5 % 26.0 % 36.2 % Interest-bearing demand 8,095,519 8,076,735 50.4 54.8 0.2 Savings 302,344 268,848 1.9 1.8 12.5 Time deposits less than$100,000 1,098,150 973,329 6.8 6.6 12.8 Time deposits greater than$100,000 1,353,160 1,590,178 8.4 10.8 (14.9 ) Total deposits$ 16,069,282 $ 14,742,794 100.0 % 100.0 % 9.0 % Total brokered deposits$ 587,566 $ 195,194 3.7 % 1.3 % 201.0 % Domestic time deposits$250,000 and over were$503.6 million and$644.1 million atJune 30, 2020 andDecember 31, 2019 , respectively, which represented 3.1% and 4.4% of total deposits atJune 30, 2020 and atDecember 31, 2019 , respectively. 79
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The following tables set forth our average deposits and the average rates expensed for the periods indicated:
Table 25 - Average Deposits/Rates
Three Months Ended June 30,
2020 2019
Average Average Average Average
Amount Rate Amount Rate
(In thousands) Outstanding Paid Outstanding Paid
Noninterest-bearing demand $ 4,587,673 - % $ 3,281,383 - %
Interest-bearing deposits:
Interest-bearing demand 8,368,151 0.36 7,732,568 1.57
Savings 291,874 0.25 251,270 0.39
Time deposits 2,527,090 1.66 3,379,889 2.41
Total interest-bearing deposits 11,187,115 0.65 % 11,363,727 1.79 %
Total average deposits $ 15,774,788 0.46 % $ 14,645,110 1.39 %
Six Months Ended June 30,
2020 2019
Average Average Average Average
Amount Rate Amount Rate
(In thousands) Outstanding Paid Outstanding Paid
Noninterest-bearing demand $ 4,123,143 - % $ 3,307,745 - %
Interest-bearing deposits:
Interest-bearing demand 8,244,896 0.71 7,871,015 1.52
Savings 282,159 0.35 249,968 0.38
Time deposits 2,524,504 1.85 3,183,894 2.37
Total interest-bearing deposits 11,051,559 0.96 % 11,304,877 1.74 %
Total average deposits $ 15,174,702 0.70 % $ 14,612,622 1.34 %
Borrowings
The following is a summary of our borrowings for the periods indicated:
Table 26 - Borrowings
(In thousands) June 30, 2020 December 31, 2019
Advances from FHLB $ 100,000 $ 100,000
Senior debt 49,969 49,938
Subordinated debt 183,142 182,712
Junior subordinated debentures 37,448 37,445
Notes payable 1,663 2,078
Total borrowings $ 372,222 $ 372,173
Average total borrowings - YTD $ 406,122 $ 437,185
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 , the Company 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 its 4.875% senior notes totaling$145 million dueJune 28, 2019 . 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. 80
-------------------------------------------------------------------------------- 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 . OnMarch 29, 2020 , the Company renewed the credit agreement with a maturity date ofMarch 29, 2021 . There were no amounts outstanding under this line of credit atJune 30, 2020 . Subsequent toJune 30, 2020 we cancelled this facility. Shareholders' Equity As ofJune 30, 2020 andDecember 31, 2019 , our ratio of shareholders' equity to total assets was 10.85% and 13.82%, respectively, and we had tangible common equity ratios of 10.19% and 10.87%, respectively. Shareholders' equity was$2.0 billion atJune 30, 2020 , a decrease of$415.4 million fromDecember 31, 2019 . The decrease resulted from the net loss for the six months of$455.4 million combined with the cumulative effect of adopting CECL of$62.8 million , dividends of$28.4 million , and the purchase of$30.0 million of common shares under our common stock repurchase program. These items were partially offset by an increase of$158.8 million of other comprehensive income which was due to increases in the fair value of our investment securities portfolio and interest rate collar. AtJune 30, 2020 , approximately$100 million remains in our authorized share repurchase program, however we do not currently anticipate additional repurchases in the near future.
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. The capital conservation buffer 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.
On March 27, 2020 , the federal banking agencies issued an interim final rule to
delay the estimated impact on regulatory capital stemming from the adoption of
CECL. The agencies granted this relief to allow institutions to focus on lending
to customers in light of recent strains on the U.S economy due to COVID-19,
while also maintaining the quality of regulatory capital. Under the interim
rule, 100% of the Day-1 impact of the adoption of CECL and 25% of subsequent
provisions for credit losses ("Day 2 impacts") will be deferred over a two-year
year period ending January 1, 2022 . At that point, the amount will be phased
into regulatory capital on a pro rata basis over a three-year period ending
January 1, 2025 .
At June 30, 2020 , our capital ratios exceeded the requirements discussed above.
Our actual regulatory capital amounts and ratios at June 30, 2020 are presented
in the following table:
Table 27 - Regulatory Capital Amounts/Ratios
Consolidated Company Bank
(In thousands) Amount Ratio Amount Ratio
June 30, 2020
Tier 1 leverage $ 1,751,651 9.5 % $ 1,837,580 10.0 %
Common equity tier 1 capital 1,751,651 11.7 1,787,580 11.9
Tier 1 risk-based capital 1,751,651 11.7 1,837,580 12.2
Total risk-based capital 2,147,055 14.3 2,050,896 13.7
Minimum requirement:
Tier 1 leverage 736,486 4.0 736,981 4.0
Common equity tier 1 capital 676,118 4.5 676,097 4.5
Tier 1 risk-based capital 901,490 6.0 901,463 6.0
Total risk-based capital 1,201,987 8.0 1,201,951 8.0
Well capitalized requirement:
Tier 1 leverage N/A N/A 921,227 5.0
Common equity tier 1 capital N/A N/A 976,585 6.5
Tier 1 risk-based capital 901,490 6.0 1,201,951 8.0
Total risk-based capital 1,502,484 10.0 1,502,438 10.0
81
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Regulatory Requirements Affecting Dividends
Under regulations controlling national banks, the payment of any dividends by a bank without prior approval of the OCC is limited to the current year's net profits (as defined by the OCC) and retained net profits of the two preceding years. Due to the effects to the Bank's retained profits of the recognition of the non-cash goodwill impairment charge in the first quarter of 2020 and the net loss in the second quarter of 2020, the Bank is currently required to seek prior approval of the OCC to pay dividends to the holding company. The holding company had$147.0 million in cash on hand as ofJune 30, 2020 , representing approximately 6.3 times its annual routine operating costs and debt interest payments, excluding dividends and debt maturities. The holding company has$50 million in senior debt that matures inJune 2021 . While the holding company cash level is currently significant, the holding company does not generate income on a stand-alone basis, and other than raising cash from capital or debt markets, the holding company's future cash level is dependent upon receiving dividends from the bank. Additionally, onJuly 24, 2020 , theFederal Reserve amended its supervisory guidance and regulations addressing dividends from bank holding companies to require consultation with theFederal Reserve prior to paying a dividend that exceeds earnings for the period for which the dividend is being paid. Liquidity Overview 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
• 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. As a result of the current environment with the increase in deposits and the decline in our core loans we experienced elevated levels of liquidity. We anticipate these elevated levels to continue in the near future until we reach a more normalized environment. Maturities of Time Deposits
The aggregate amount of time deposits in denominations of
At
82
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Table 28 - Time Deposit Maturity Schedule
June 30, 2020
(In thousands) Amount Average Interest Rate
Under 3 months $ 386,467 1.91 %
3 to 6 months 480,377 1.44
6 to 12 months 319,909 1.29
12 to 24 months 148,866 1.36
24 to 36 months 7,980 1.32
36 to 48 months 2,436 1.74
Over 48 months 7,125 0.79
Total $ 1,353,160 1.52 %
Cash Flow Analysis
Cash and cash equivalents
At June 30, 2020 , we had $1.9 billion in cash and cash equivalents on hand, an
increase of $910.6 million or 92.1% from our cash and cash equivalents of $988.8
million at December 31, 2019 . At June 30, 2020 , our cash and cash equivalents
comprised 10.1% of total assets compared to 5.6% at December 31, 2019 . We
monitor our liquidity position and increase or decrease our short-term liquid
assets as necessary. As a result of the current environment with the increase in
deposits and the decline in our core loans we experienced elevated levels of
liquidity. We anticipate these elevated levels to continue in the near future
until we reach a more normalized environment.
2020 vs 2019
As shown in the Condensed Consolidated Statements of Cash Flows, operating activities provided$464.6 million in the six months endedJune 30, 2020 compared to providing$132.1 million in the six months endedJune 30, 2019 . The increase in operating funds during the six months endedJune 30, 2020 was due to$368.6 million from the termination of the interest rate collar and$307.9 million from proceeds from paydowns and sales of loans held for sale offset by$315.2 million from origination of loans held for sale. Investing activities during the six months endedJune 30, 2020 used net funds of$822.0 million , primarily due to$758.9 million in net loan funding and$505.7 million in purchases of available-for-sale securities. This was offset by$227.9 million from proceeds from maturities, calls, and paydowns of securities available-for-sale,$180.6 million from proceeds from sales of securities available-for-sale, and$47.0 million from proceeds from sale of loans held for sale. This compares to investing activities during the six months endedJune 30, 2019 provided$398.0 million of net funds, primarily due to net cash received in business acquisitions of$414.3 million and net cash received from sales, maturities, and paydown of available-for-sale securities of$392.5 million . It was offset by net loan funding of$228.8 million and the purchase of available for sale securities of$169.3 million . Financing activities during the six months endedJune 30, 2020 provided$1.3 billion due to the net increase of$1.3 billion in deposits and slightly offset by the purchase of$30.0 million in our common stock and dividends of$28.4 million . This compares to financing activities during the six months endedJune 30, 2019 that used$543.1 million in funds primarily due to a decrease in deposits of$319.2 million , purchase of$58.8 million in our common stock, dividends of$45.3 million , and repayment of senior debt of$134.9 million . 83 -------------------------------------------------------------------------------- NON-GAAP FINANCIAL MEASURES We identify "efficiency ratio," "adjusted efficiency ratio," "adjusted noninterest expense," "adjusted noninterest income," "adjusted operating revenue," "tangible common equity," "tangible common equity ratio," "return on average tangible common equity," "adjusted return on average tangible common equity," "tangible book value per share," "adjusted return on average assets," "adjusted net income," "adjusted net income allocated to common stock," "tangible net income," "adjusted tangible net income," "adjusted diluted earnings per share" and "adjusted pre-tax pre-provision net earnings" as "non-GAAP financial measures." In accordance with theSEC's rules, we identify certain financial measures as non-GAAP financial measures if such financial measures exclude or include amounts in the most directly comparable measures calculated and presented in accordance with generally accepted accounting principles ("GAAP") in effect inthe United States in our statements of operations, balance sheet or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures, ratios or statistical measures calculated using exclusively financial measures calculated in accordance with GAAP. The non-GAAP financial measures that we discuss herein should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate these non-GAAP financial measures may differ from that of other companies reporting measures with similar names, and, therefore, may not be comparable to our non-GAAP financial measures. Efficiency ratio is defined as noninterest expenses divided by operating revenue, which is equal to net interest income plus noninterest income. Adjusted efficiency ratio is defined as adjusted noninterest expenses divided by adjusted operating revenue, which is equal to net interest income plus noninterest income, excluding certain non-routine income and expenses. We believe that these measures are important to many investors in the marketplace who wish to assess our performance versus that of our peers. Our adjusted noninterest expenses represent total noninterest expenses net of any merger, restructuring or other non-routine expense items. Our adjusted operating revenue is equal to net interest income plus noninterest income excluding gains and losses on sales of securities and other non-routine revenue items. In our judgment, the adjustments made to noninterest expense and operating revenue allow management and investors to better assess our performance by removing the volatility that is associated with certain other discrete items that are unrelated to our core business. Tangible common equity is defined as total shareholders' equity less goodwill and other intangible assets. We believe that this measure is important to many investors in the marketplace who are interested in changes from period to period in common shareholders' equity exclusive of changes in intangible assets.Goodwill , an intangible asset that is recorded in a purchase business combination, has the effect of increasing both common equity and assets while not increasing our tangible common equity or tangible assets. The tangible common equity ratio is defined as the ratio of tangible common equity divided by total assets less goodwill and other intangible assets. We believe that this measure is important to many investors in the marketplace who are interested in relative changes from period to period in common equity and total assets, each exclusive of changes in intangible assets. We believe that the most directly comparable GAAP financial measure is total shareholders' equity to total assets. Return on average tangible common equity is defined as tangible net income divided by average tangible common equity. Adjusted return on average tangible common equity is defined as adjusted tangible net income divided by average tangible common equity. We believe the most directly comparable GAAP financial measure is the return on average common equity. Tangible net income is defined as net income plus goodwill impairment and intangible asset amortization, net of tax. Adjusted tangible net income is defined as net income plus goodwill impairment and intangible asset amortization, net of tax, plus non-routine item, net of tax. Non-routine items include merger related expenses, net securities gains, and other non-routine expenses. Adjusted net income is defined as net income plus goodwill impairment, net of tax, and plus or minus total non-routine items, net of tax. Non-routine items include merger related expenses, gain on acquired loans, net securities gains, and other non-routine income and expenses. We believe the most directly comparable GAAP financial measure is net income. Tangible book value per share is defined as book value, excluding the impact of goodwill and other intangible assets, if any, divided by shares of our common stock outstanding. Adjusted return on average assets is defined as adjusted net income divided by average assets. We believe the most directly comparable GAAP financial measure is the return on average assets. Adjusted net income allocated to common stock is defined as net income allocated to common stock plus goodwill impairment, net of tax, and plus total non-routine items. We believe the most directly comparable GAAP financial measure is net income allocated to common stock. Adjusted diluted earnings per share is defined as adjusted net income allocated to common stock divided by diluted weighted average common shares outstanding. We believe the most directly comparable GAAP financial measure is diluted earnings per share. 84 -------------------------------------------------------------------------------- Adjusted pre-tax, pre-provision net earnings is defined as income before taxes, provision for credit losses, goodwill impairment, and non-routine items. We believe the most directly comparable GAAP financial measure is income before taxes.
The following table is a reconciliation of our non-GAAP measures to the most directly comparable GAAP financial measure.
Table 29 - Non-GAAP Financial Measures
As of and for the As of and for the As of and for the
Three Months Ended Six Months Ended Year Ended
(In thousands, except share June 30, June 30, June 30, June 30,
and per share data) 2020 2019 2020 2019 December 31, 2019
Efficiency ratio
Noninterest expenses
(numerator) $ 88,620 $ 100,529 $ 626,273 $ 213,969 $ 408,770
Net interest income $ 154,714 $ 160,787 $ 308,182 $ 330,076 $ 651,173
Noninterest income 29,950 31,722 65,019 62,386 130,925
Operating revenue
(denominator) $ 184,664 $ 192,509 $ 373,201 $ 392,462 $ 782,098
Efficiency ratio 47.99 % 52.22 % 167.81 % 54.52 % 52.27 %
Adjusted efficiency ratio
Noninterest expenses
408,770
Less: non-cash goodwill
impairment charge - - 443,695 - -
Less: merger related
expenses - 4,562 1,282 26,562 28,497
Less: pension plan
termination expense - - - - 1,225
Less: expenses related to
COVID-19 pandemic 1,205 - 1,327 - -
Adjusted noninterest
expenses (numerator)
379,048
Net interest income $ 154,714 $ 160,787 $ 308,182 $ 330,076 $ 651,173
Noninterest income 29,950 31,722 65,019 62,386 130,925
Plus: revaluation of
receivable from sale of
insurance assets - 2,000 - 2,000 2,000
Less: gain on sale of
acquired loans - 1,514 - 1,514 2,777
Less: securities gains, net 2,286 938 5,280 926 2,018
Adjusted noninterest income 27,664 31,270 59,739 59,946 128,130
Adjusted operating revenue
(denominator) $ 182,378 $ 192,057 $ 367,921 $ 390,022 $ 779,303
Adjusted efficiency ratio 47.93 % 49.97 % 48.92 % 48.05 % 48.64 %
Tangible common equity
ratio
Shareholders' equity $ 2,045,480 $ 2,426,072 $ 2,045,480 $ 2,426,072 $ 2,460,846
Less: goodwill and other
intangible assets, net (137,318 ) (595,605 ) (137,318 ) (595,605 ) (590,949 )
Tangible common
shareholders' equity 1,908,162 1,830,467 1,908,162 1,830,467 1,869,897
Total assets 18,857,753 17,504,005 18,857,753 17,504,005 17,800,229
Less: goodwill and other
intangible assets, net (137,318 ) (595,605 ) (137,318 ) (595,605 ) (590,949 )
Tangible assets $ 18,720,435 $ 16,908,400 $ 18,720,435 $ 16,908,400 $ 17,209,280
Tangible common equity
ratio 10.19 % 10.83 % 10.19 % 10.83 % 10.87 %
Tangible book value per
share
Shareholders' equity $ 2,045,480 $ 2,426,072 $ 2,045,480 $ 2,426,072 $ 2,460,846
Less: goodwill and other
intangible assets, net (137,318 ) (595,605 ) (137,318 ) (595,605 ) (590,949 )
Tangible common
shareholders' equity
127,597,569
Tangible book value per
share $ 15.15 $ 14.21 $ 15.15 $ 14.21 $ 14.65
85
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As of and
As of and for the As of and for the for the
Three Months Ended Six Months Ended Year Ended
(In thousands, except June 30, June 30, June 30, June 30, December
share and per share data) 2020 2019 2020 2019 31, 2019
Return on average tangible
common equity
Average common equity $2,118,796 $2,331,855 $2,282,803 $2,287,003 $2,373,856
Less: average intangible
assets (140,847) (597,772) (362,680) (600,096) (598,546)
Average tangible common
shareholders' equity $1,977,949 $1,734,083 $1,920,123 $1,686,907 $1,775,310
Net (loss) income $(56,114) $48,346 $(455,425) $106,547 $201,958
Plus: non-cash goodwill
impairment charge, net of
tax - - 412,918 - -
Plus: intangible asset
amortization, net of tax 4,174 4,515 8,435 9,172 18,240
Tangible (loss) net income $(51,940) $52,861 $(34,072) $115,719 $220,198
Return on average tangible
common equity(1) (10.56)% 12.23% (3.57)% 13.83% 12.40%
Adjusted return on average
tangible common equity
Average tangible common
shareholders' equity $1,977,949 $1,734,083 $1,920,123 $1,686,907 $1,775,310
Tangible (loss) net income $(51,940) $52,861 $(34,072) $115,719 $220,198
Non-routine items:
Plus: merger related
expenses - 4,562 1,282 26,562 28,497
Plus: pension plan
termination expense - - - - 1,225
Plus: expenses related to
COVID-19 pandemic 1,205 - 1,327 - -
Plus: revaluation of
receivable from sale of
insurance assets - 2,000 - 2,000 2,000
Less: gain on sale of
acquired loans - 1,514 - 1,514 2,777
Less: securities gains
(losses), net 2,286 938 5,280 926 2,018
Less: income tax effect of
tax deductible non-routine
items (256) 958 (720) 5,558 5,756
Total non-routine items,
after tax (825) 3,152 (1,951) 20,564 21,171
Adjusted tangible (loss)
net income $(52,765) $56,012 $(36,023) $136,283 $241,369
Adjusted return on average
tangible common equity(1) (10.73)% 12.96% (3.77)% 16.29% 13.60%
Adjusted return on average
assets
Average assets $18,500,600 $17,653,511 $18,097,309 $17,643,943 $17,689,126
Net (loss) income $(56,114) $48,346 $(455,425) $106,547 $201,958
Return on average assets (1.22)% 1.10% (5.06)% 1.22% 1.14%
Net (loss) income $(56,114) $48,346 $(455,425) $106,547 $201,958
Plus: non-cash goodwill
impairment charge, net of
tax - - 412,918 - -
Total non-routine items,
after tax (825) 3,152 (1,951) 20,564 21,171
Adjusted (loss) net income $(56,939) $51,497 $(44,458) $127,111 $223,129
Adjusted return on average
assets(1) (1.24)% 1.17% (0.49)% 1.45% 1.26%
Adjusted diluted earnings
per share
Diluted weighted average
common shares outstanding 125,924,652 129,035,553 126,277,549 129,787,758 129,017,599
Net (loss) income
allocated to common stock $(56,114) $48,176 $(455,425) $106,146 $201,275
Plus: non-cash goodwill
impairment, net of tax - - 412,918 - -
Total non-routine items, (825) 3,152 (1,951) 20,564 21,171
after tax
Adjusted (loss) net income
allocated to common stock $(56,939) $51,328 $(44,458) $126,710 $222,446
Adjusted diluted (loss)
earnings per share $(0.45) $0.40 $(0.35) $0.98 $1.72
Adjusted pre-tax,
pre-provision net revenue
(Loss) income before taxes $(62,767) $63,053 $(495,312) $138,356 $262,301
Plus: Provision for credit
losses 158,811 28,927 242,240 40,137 111,027
Plus: non-cash goodwill
impairment - - 443,695 - -
Plus: Total non-routine
items before taxes (1,081) 4,110 (2,671) 26,122 26,927
Adjusted pre-tax,
pre-provision net revenue $94,963 $96,090 $187,952 $204,615 $400,255 (1) Annualized for the three and six months ended
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