HANCOCK WHITNEY CORPORATION The purpose of this discussion and analysis is to focus on significant changes and events in the financial condition and results of operations ofHancock Whitney Corporation and subsidiaries during the year endedDecember 31, 2019 and selected prior periods. This discussion and analysis is intended to highlight and supplement financial and operating data and information presented elsewhere in this report, including the consolidated financial statements and related notes. The discussion contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, our actual results may differ from those expressed or implied by the forward-looking statements. See Forward-Looking Statements in Part I of this Annual Report. Non-GAAP Financial Measures Management's Discussion and Analysis of Financial Condition and Results of Operations include non-GAAP measures used to describe our performance. A reconciliation of those measures to GAAP measures are provided in Item 6. "Selected Financial Data." The following is an overview of the non-GAAP measures used and the reasons why management believes they are useful and important in understanding the Company's financial condition and results of operations are included below. Consistent with Securities and Exchange Commission Industry Guide 3, we present net interest income, net interest margin and efficiency ratios on a fully taxable equivalent ("te") basis. The te basis adjusts for the tax-favored status of net interest income from certain loans and investments using the statutory federal tax rate (21% for 2019 and 2018 and 35% for all other periods presented) to increase tax-exempt interest income to a taxable-equivalent basis. We believe this measure to be the preferred industry measurement of net interest income and it enhances comparability of net interest income arising from taxable and tax-exempt sources. We present certain additional non-GAAP financial measures to assist the reader with a better understanding of the Company's performance period over period, as well as to provide investors with assistance in understanding the success management has experienced in executing its strategic initiatives. We use the term "operating" to describe a financial measure that excludes income or expense considered to be nonoperating in nature. Items identified as nonoperating are those that, when excluded from a reported financial measure, provide management or the reader with a measure that may be more indicative of forward-looking trends in the Company's business. However, these non-GAAP financial measures have inherent limitations and should not be considered in isolation or as a substitute for analysis of results or capital position underU.S. GAAP. We define Operating Revenue as net interest income (te) and noninterest income less nonoperating revenue. We define Operating Pre-Provision Net Revenue as operating revenue (te) less noninterest expense, excluding nonoperating items. Management believes that operating pre-provision net revenue is a useful financial measure because it enables investors and others to assess the company's ability to generate capital to cover credit losses through a credit cycle. We define Operating Earnings as reported net income excluding nonoperating items net of income tax. We define Operating Earnings per Share as operating earnings expressed as an amount available to each common shareholder on a diluted basis. EXECUTIVE OVERVIEW Our 2019 results reflect another year of growth and strong performance as year-over-year earnings increased, assets exceeded$30 billion , and both commercial criticized and total nonperforming loans declined. Capital remains strong with our tangible common equity ratio up 43 bps for the year to 8.45%. Loans atDecember 31, 2019 totaled$21.2 billion , up$1.2 billion or 6%, in line with guidance and net of a strategic reduction in energy lending. Deposits totaled$23.8 billion , up$653.4 million or 3% for the year. Our net interest margin for 2019 was up 6 bps to 3.44%, as management focused on improving loan yields and reducing deposit costs. We have invested in technology that enhanced digital platforms for both online and mobile banking, aimed at improving client retention and sales efficiencies. We remain focused on building upon the positive momentum from 2019 while also looking to capitalize on opportunities in our markets. Acquisitions and Divestiture OnSeptember 21, 2019 , we completed the acquisition of MidSouth Bancorp, Inc. ("MidSouth") (NYSE: MSL), parent company ofMidSouth Bank , N.A, with simultaneous operational conversion. We acquired net assets of approximately$130 million , including loans totaling$788 million , net of a$42 million discount; cash, short-term investments and securities available for sale totaling$581 million ; and deposits of$1.3 billion , which includes$390 million of noninterest-bearing deposits. In consideration for the net assets acquired, each outstanding share of MidSouth common stock converted to 0.2952 shares of our common stock. As such, we issued approximately 5.0 million shares resulting in a transaction value of approximately$194 million . 37
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The transaction resulted in goodwill of$63 million . Upon acquisition, we closed or consolidated 20 MidSouth branches. The Company incurred acquisition-related expenses of$33 million , or$0.29 per diluted share. The transaction was accretive to income beginning in the fourth quarter of 2019. The transaction provides the opportunity for both enhanced growth in several of our current markets, such as MidSouth's home market ofLafayette, Louisiana , as well as opportunities for expansion into new markets inLouisiana andTexas . OnJuly 13, 2018 , we completed the acquisition of the trust and asset management business fromCapital One, National Association ("Capital One"). The combination increased our assets under administration at the merger date to$26 billion and our assets under management to$10 billion . In addition, we assumed approximately$217 million of customer deposit liabilities.
On
For additional information on these transactions, refer to Note 2 - Acquisitions and Divestitures in Item 8. "Financial Statements and Supplementary Data."
Current Economic Environment and Near Term Outlook
Most of our market areas experienced a modest to moderate expansion in economic activity during 2019, according to theFederal Reserve's Summary of Commentary on Current Economic Conditions ("Beige Book"). Manufacturing reported moderate to decelerating demand, however, optimism for the future increased. The demand for commercial real estate was strong to steady during 2019 in most of our footprint. Most of our sectors experienced positive metrics as rents continued to grow and vacancies trended downward at a modest pace, however, activity in the office market inHouston was mixed. Activity in the energy sector expanded at the beginning of the year, began to slow during the year, and ended the year with a slight uptick. The industry remains distressed, and access to capital is limited, especially for smaller firms, and bankruptcies are likely to rise. However,U.S. crude oil production is projected to grow in 2020. The Company continues to proactively reduce its energy exposure in light of current conditions.
The residential real estate market experienced growth during 2019, with lower mortgage rates during the year driving increases in demand, firm price appreciation, and higher single-family sales than the previous year.
Retail sales and consumer spending activity for 2019 ended somewhat positive in most of our footprint, with an increase in retail sales and flat to improving auto sales. Online sales continue to dominate overall sales activity. Tourism was strong over the holiday season and the outlook remains positive with healthy advance bookings. Overall, the retail outlook improved towards the end of the year.
Financial services in our markets reported healthy loan demand and overall improving asset quality, consistent with trends in most of our portfolios. Reduced uncertainty related to tariffs and trade generally increased optimism for the future. We believe we are positioned for continued growth in 2020.
Highlights of 2019 Financial Results
Net income for the year ended
• Net income increased
included
million for 2018 included merger related expenses of $6.2 million and
$23.3 of other nonoperating items
• Earnings per diluted common share was
excluding nonoperating items, earnings per diluted common share was $4.01
for 2019 and $3.99 for 2018
• Operating pre-provision net revenue was up
in operating revenue (te) of
in operating expense of
• Net interest margin for 2019 was 3.44%, an increase of 6 bps from 2018
• Tangible common equity ratio was up 43 bps to 8.45%, compared to 8.02% at
year-end 2018
• Loans totaled
guidance; deposits totaled
• Criticized commercial loans declined
loans declined by
• Total assets at
8%, from
• Completed the acquisition of Midsouth Bancorp, Inc. ("MSL") on September
21, 2019, with a simultaneous systems conversion
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• Board approved increased buyback authorization to 5.5 million shares and
executed an accelerated share repurchase agreement in October 2019
RESULTS OF OPERATIONS
The following is a discussion of results from operations for the year ended
Net Interest Income Net interest income was$895 million for the year endedDecember 31, 2019 , up from$849 million in 2018. Net interest income is the primary component of our earnings and represents the difference, or spread, between revenue generated from interest-earning assets and the interest expense related to funding those assets. For analytical purposes, net interest income is adjusted to a taxable equivalent basis (te) using the statutory federal tax rate (21% for both 2019 and 2018, and 35% for 2017) on tax exempt items (primarily interest on municipal securities and loans). Net interest income (te) for 2019 totaled$910 million , a$45 million , or 5%, increase from 2018. The increase in 2019 net interest income was largely volume driven, with a$0.9 billion , or 3%, increase in average earning assets partially offset by a$0.7 billion , or 4%, increase in interest-bearing liabilities, and also reflects an improved net interest margin. The net interest margin is the ratio of net interest income (te) to average earning assets. The net interest margin increased 6 basis points (bps) to 3.44% in 2019 from 3.38% in 2018, primarily due to an improving mix in average earning assets, with a higher level of loans to earnings assets and a proactive strategy to remix our loan book towards more granular higher-yielding production, as well as the late 2018 sale of lower-yielding securities available for sale as part of an investment portfolio restructure. The improving margin also reflects our efforts to control deposit costs. Further, net interest recoveries increased$2.2 million in 2019, improving the net interest margin by 1 bp. The discussions of Asset/Liability Management and Net Interest Income at Risk in this item provide additional information regarding our management of interest rate risk and the potential impact from changes in interest rates, respectively The overall yield on earning assets was 4.31% in 2019, up 23 bps from 2018, driven primarily by a 23 bps increase in loan yield to 4.81% in 2019. The tax-equivalent yield on the investment securities portfolio increased 9 bps from 2018 to 2.62%. The securities yield reflects a continued shift in the mix of the portfolio to a higher concentration of higher-yielding commercial mortgage-backed securities. Average commercial mortgage-backed securities totaled approximately$1.6 billion for the year endedDecember 31, 2019 compared to$1.1 billion in 2018. The cost of funding earning assets increased 17 bps to 0.87% in 2019 from 0.70% in 2018 due largely to theFederal Reserve interest rate increases during 2018, and to a lesser extent, promotional pricing campaigns aimed at attracting and retaining deposits. However, the cost of funding earning assets began to decrease during the second half of 2019 as theFederal Reserve lowered rates three times during that period. Total borrowing costs decreased 2 bps to 1.96% in 2019 with increased use of promotional rate federal home loan bank borrowings. Interest-free funding sources, including noninterest-bearing deposits, funded 35% of average earning assets in 2019, down from 36% in 2018. 39
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TABLE 1. Summary of Average Balances, Interest and Rates (te) (a)
Years Ended December 31,
2019 2018 2017
($ in millions) Average Balance Interest (d) Rate Average Balance Interest (d) Rate Average Balance Interest (d) Rate
Assets
Interest-Earnings Assets:
Commercial & real estate loans (te) (a) $ 15,289.6 $ 739.0 4.83 % $ 14,487.3 $ 655.0 4.52 % $ 13,751.0 $ 584.6 4.25 %
Residential mortgage loans 2,974.1 121.7 4.09 2,794.8 114.5 4.10 2,445.8 95.0 3.89
Consumer loans 2,116.3 121.5 5.74 2,096.3 117.4 5.60 2,084.1 115.1 5.52
Loan fees & late charges - (1.2 ) 0.0 - 1.3 0.0 - (0.4 ) 0.0
Loans (te) (b) 20,380.0 981.0 4.81 19,378.4 888.2 4.58 18,280.9 794.3 4.35
Loans held for sale 41.7 1.9 4.50 25.7 0.9 3.68 21.9 0.9 3.88
Investment securities:
U.S. Treasury and government
agency securities 134.1 3.1 2.30 142.6 3.2 2.22 128.1 2.7 2.11Mortgage-backed securities and
collateralized mortgage obligations 4,821.6 122.3 2.54 4,927.2 119.1 2.42 4,327.8 96.2 2.22 Municipals (te) 904.4 28.2 3.12 947.6 30.1 3.18 968.1 37.0 3.82 Other securities 4.1 0.1 3.79 3.6 0.1 2.62 18.8 0.4 1.92 Total investment securities (te) (c) 5,864.2 153.7 2.62 6,021.0 152.5 2.53 5,442.8 136.3 2.50 Short-term investments 191.0 4.0 2.07 163.3 2.8 1.70 363.1 3.5 0.95 Total earning assets (te) 26,476.9 1,140.6 4.31 % 25,588.4 1,044.4 4.08 % 24,108.7 935.0 3.88 % Nonearning assets: Other assets 2,844.6 2,381.9 2,355.5 Allowance for loan losses (196.1 ) (214.5 ) (223.4 ) Total assets $ 29,125.4 $ 27,755.8 $ 26,240.8 Liabilities and Stockholders' Equity Interest-bearing Liabilities: Interest-bearing transaction and savings deposits $ 8,274.6 $ 60.1 0.73 % $ 7,946.8 $ 41.7 0.52 % $ 7,746.2 $ 29.4 0.38 % Time deposits 3,690.8 73.7 2.00 3,275.7 51.9 1.59 2,642.8 28.0 1.06 Public funds 3,078.0 54.2 1.76 2,849.3 37.1 1.30 2,664.9 19.2 0.72 Total interest-bearing deposits 15,043.4 188.0 1.25 14,071.8 130.7 0.93 13,053.9 76.6 0.59 Repurchase agreements 493.3 2.6 0.52 456.0 1.1 0.23 501.7 0.6 0.12 Other short-term borrowings 1,448.9 28.6 1.98 1,734.8 35.0 2.02 1,505.2 15.1 1.01 Long-term debt 233.5 11.4 4.87 266.9 12.6 4.73 384.1 16.0 4.16 Total interest-bearing liabilities 17,219.1 230.6 1.34 % 16,529.5 179.4 1.09 % 15,444.9 108.3 0.70 % Noninterest-bearing: Noninterest-bearing deposits 8,255.9 8,095.2 7,777.7 Other liabilities 347.8 198.9 211.3 Stockholders' equity 3,302.6 2,932.2 2,806.9
Total liabilities and stockholders'
equity $ 29,125.4 $ 27,755.8 $ 26,240.8 Net interest income (te) and margin $ 910.0 3.44 $ 865.0 3.38 $ 826.7 3.43 Net earning assets and spread $ 9,257.8 2.97 $ 9,058.9 3.00 $ 8,663.8 3.18 Interest cost of funding earning assets 0.87 % 0.70 % 0.45 %
(a) Taxable equivalent (te) amounts are calculated using federal income tax rate
of 21% for 2019 and 2018 and 35% for 2017.
(b) Includes nonaccrual loans.
(c) Average securities do not include unrealized holding gains or losses on
available for sale securities.
(d) Included in interest income is net purchase accounting accretion of
million,
2018, and 2017, respectively.
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TABLE 2. Summary of Changes in Net Interest Income (te) (a) (b)
2019 Compared to 2018 2018 Compared to 2017
Due to Total Due to Total
Change in Increase Change in Increase
(in thousands) Volume Rate (Decrease) Volume Rate (Decrease)
Interest Income (te)
Commercial & real estate
loans (te) (a) $ 37,389 $ 46,643 $ 84,032 $ 32,215 $ 38,107 $ 70,322
Residential mortgage loans 7,337 (197 ) 7,140 14,101 5,430 19,531
Consumer loans (174 ) 4,292 4,118 (14,823 ) 17,108 2,285
Loan fees & late charges - (2,502 ) (2,502 ) - 1,626 1,626
Loans (te) (c) 44,552 48,236 92,788 31,493 62,271 93,764
Loans held for sale 683 247 930 142 (47 ) 95
Investment securities:
U.S. Treasury and
government
agency securities (59 ) (20 ) (79 ) 318 152 470
Mortgage-backed securities
and
collateralized mortgage
obligations (1,628 ) 4,806 3,178 14,010 8,906 22,916
Municipals (1,357 ) (590 ) (1,947 ) (676 ) (6,150 ) (6,826 )
Other securities 16 46 62 (367 ) 98 (269 )
Total investment in
securities (te) (d) (3,028 ) 4,242 1,214 13,285 3,006 16,291
Short-term investments 515 664 1,179 (2,515 ) 1,838 (677 )
Total earning assets (te) 42,722 53,389 96,111 42,405 67,068 109,473
Interest-bearing
transaction and
savings deposits 1,784 16,587 18,371 778 11,565 12,343
Time deposits 7,142 14,683 21,825 7,785 16,165 23,950
Public funds 3,173 13,904 17,077 1,414 16,462 17,876
Total interest-bearing
deposits 12,099 45,174 57,273 9,977 44,192 54,169
Repurchase agreements 95 1,405 1,500 (59 ) 539 480
Other interest-bearing
liabilities (5,610 ) (790 ) (6,400 ) 2,665 17,215 19,880
Long-term debt (1,615 ) 378 (1,237 ) (5,339 ) 1,971 (3,368 )
Total interest expense 4,969 46,167 51,136 7,244 63,917 71,161
Net interest income (te)
variance $ 37,753 $ 7,222 $ 44,975 $ 35,161 $ 3,151 $ 38,312 (a) Taxable equivalent (te) amounts are calculated using a federal income tax
rate of 21% for 2019 and 2018 and 35% for 2017.
(b) Amounts shown as due to changes in either volume or rate includes an
allocation of the amount that reflects the interaction of volume and rate
changes. This allocation is based on the absolute dollar amounts of change
due solely to changes in volume or rate.
(c) Includes nonaccrual loans.
(d) Average securities do not include unrealized holding gains or losses on
available for sale securities.
Provision for Credit Losses
The provision for credit losses was $48 million in 2019 compared to $36 million
in 2018. The 2019 provision includes net charge-offs of $47 million , or 0.23% of
average loans outstanding, and a build of a $4 million reserve for unfunded
lending commitments, partially offset by a $3 million release of the allowance
for funded loan losses. The provision in 2018 was comprised of net charge-offs
of $52 million , or 0.27% of average loans outstanding, partially offset by a
reduction in the allowance for loan losses, primarily related to the reserve for
energy-related loans. The $5 million year over year decrease in net charge-offs
is primarily attributable to an $8 million decrease in energy net charge-offs.
Non-energy net charge-offs increased $3 million from the prior period, including
a $9 million fraud-related net charge-off of a lease financing facility in 2019.
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations-Balance Sheet Analysis-Allowance for Credit Losses" provides
additional information on changes in the allowance for credit losses and general
credit quality.
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Table of Contents Noninterest Income Noninterest income for 2019 totaled$316 million , a$31 million , or 11%, increase from 2018. Nearly all noninterest income categories experienced increases in 2019, with significant increases in income from derivatives, bank card fees, trust fees, and secondary mortgage fees. There was no nonoperating income in 2019. Nonoperating income for 2018 included a$1.1 million loss on the disposition of our consumer finance business and the net impact of a portfolio restructure that included a$33.2 million gain on the sale of Visa Class B common shares, offset by losses on sales of lower yielding securities of$25.5 million and loans of$7.1 million . Nonoperating income for 2017 included$4.4 million gain on the sale of selected Hancock Horizon funds. Table 3 presents, for each of the three years endedDecember 31, 2019 , 2018 and 2017, the components of noninterest income, along with the percentage changes between years. Table 4 presents nonoperating income by component for the years endedDecember 31, 2018 and 2017. TABLE 3. Noninterest Income ($ in thousands) 2019 % Change 2018 % Change 2017 Service charges on deposit accounts$ 86,364 1 %$ 85,272 3 %$ 83,166 Trust fees 61,609 11 55,488 25 44,538 Bank card and ATM fees 66,976 11 60,440 12 53,779 Investment and annuity fees and insurance commissions 26,574 5 25,348 7 23,741 Secondary mortgage market operations 19,853 27 15,632 3 15,209 Net gains on sale of assets 593 (98 ) 24,654 230 7,478 Securities transactions - 100 (25,480 ) n/m - Income from bank-owned life insurance 14,946 20 12,424 8 11,473 Credit-related fees 11,399 3 11,065 (1 ) 11,140 Income from derivatives 12,958 141 5,368 (9 ) 5,870 Other miscellaneous income 14,635 (2 ) 14,929 31 11,387 Total noninterest income 315,907 11 285,140 6 267,781 n/m = not meaningful TABLE 4. Nonoperating Income (in thousands) 2019 2018 2017
Gain (loss) on portfolio restructure Gain on sale of Visa Class B common shares $ - 33,229 - Loss on sale of investment securities
- (25,480) -
Loss on sale of loans - (7,145) -
Total net gain on portfolio restructure - 604 - Gain (loss) on sale of assets
- (1,145) 4,352
Total nonoperating noninterest income $ - (541) 4,352
Service charges on deposit accounts were up$1.1 million , or 1%, from 2018 with increases in both business service charges and consumer overdrafts, primarily due to the impact of MidSouth. Trust fees totaled$61.6 million in 2019, a$6.1 million , or 11%, increase from 2018. The increase in trust fees is primarily due to the acquisition of the trust and asset management business onJuly 13, 2018 , partially offset by changes in market conditions. Trust assets under management totaled$9.4 billion atDecember 31, 2019 , compared to$8.6 billion atDecember 31, 2018 . Bank card and ATM fees totaled$67.0 million in 2019, up$6.5 million , or 11%, compared to 2018. Bank card and ATM fees include income from credit card, debit card and ATM transactions, and merchant service fees. The growth over 2018 is the result of increased card activity during 2019, due in part to the MidSouth acquisition late in the third quarter. Investment and annuity fees and insurance commissions totaled$26.6 million in 2019 compared to$25.3 million in 2018. The$1.2 million , or 5%, increase is primarily due to increased investment sales, partially offset by a decrease in annuity sales. Income from secondary mortgage operations totaled$19.9 million in 2019, up$4.2 million , or 27%, from a year earlier. Mortgage loan production increased by approximately 7% in 2019 compared to 2018, and the percentage of loan production sold in the secondary market increased 28%. We offer a full range of mortgage products to our customers and sell those that do not fit the rate and liquidity risk profile of our held for investment portfolio. We typically sell longer-term fixed rate loans while retaining the 42
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majority of adjustable rate loans, as well as loans generated through programs to support customer relationships, including programs for high net worth individuals and non-builder construction loans. The ultimate amount of loans sold in the secondary market relative to the amount retained by the Company is a management decision made as part of the ALCO process. Net gains on sales of assets were$0.6 million in 2019 compared to net gains of$24.7 million in 2018. Gains on sales of assets in 2018 included a gain of$33.2 million on the sale of Visa B shares, partially offset by a loss of$7.1 million on the sale of lower-yielding loans. We had no net losses on securities transactions in 2019 compared to a loss of$25.5 million in 2018 on the sale of lower-yielding securities as part of our securities portfolio restructure. Income from bank-owned life insurance ("BOLI") increased$2.5 million , or 20%, to$14.9 million . The increase was mainly due to the income earned from a$37.9 million year-over-year increase in the average balance of insurance contracts outstanding, as well as an increase in mortality benefits. Income from our customer interest rate derivative program totaled$13.0 million in 2019, compared to$5.4 million in 2018. Increased derivative income reflects increased customer interest rate swap sales due to the low rate environment. Derivative income can be volatile and is dependent upon the composition of the portfolio, customer sales activity and market value adjustments due to market interest rate movement. Other miscellaneous income was$14.6 million in 2019, down$0.3 million , or 2%, compared to 2018. Other miscellaneous income is comprised of various items, including$4.7 million of income from small business investment companies and FHLB stock dividends, and syndication fees of$1.4 million .
Noninterest Expense
Noninterest expense for 2019 totaled$771 million , up$55 million , or 8%, compared to 2018. The largest individual components of the increase in operating expense were personnel expense, data processing and other miscellaneous expense. These increases were partially offset by a decrease in deposit insurance and regulatory fees. Explanations of the variances are discussed in more detail below. Noninterest expense for 2019 includes$32.7 million in nonoperating expenses associated with the MidSouth acquisition. Noninterest expense for 2018 includes$28.9 million in nonoperating expenses, including$12.0 million in brand consolidation expenses,$6.2 million related to the trust and asset management acquisition,$3.3 million related to a bank-owned life insurance restructure and a$3.5 million one-time incentive bonus. Table 5 presents, for each of the three years endedDecember 31, 2019 , 2018 and 2017, noninterest expense, along with the percentage changes between years. Table 6 presents nonoperating expenses, included in noninterest expense (Table 5) by component for the same periods. TABLE 5. Noninterest Expense ($ in thousands) 2019 % Change 2018 % Change 2017 Compensation expense$ 362,083 9 %$ 330,968 3 %$ 320,096 Employee benefits 77,796 6 73,727 3 71,817 Personnel expense 439,879 9 404,695 3 391,913 Net occupancy expense 50,936 7 47,795 (0 ) 47,869 Equipment expense 18,393 12 16,367 10 14,841 Data processing expense 82,981 12 74,129 12 66,385 Professional services expense 45,007 8 41,579 3 40,235 Amortization of intangibles 20,844 (5 ) 22,050 (2 ) 22,417 Deposit insurance and regulatory fees 19,512 (38 ) 31,423 6 29,627 Other real estate and foreclosed assets (income) expense 671 (122 ) (2,985 ) 12 (2,669 ) Advertising 15,251 24 12,334 (18 ) 15,031 Corporate value and franchise taxes 15,949 17 13,595 6 12,797 Entertainment and contributions 10,777 (5 ) 11,359 38 8,260 Telecommunications and postage 14,588 - 14,659 - 14,686 Printing and supplies 4,947 (11 ) 5,548 8 5,138 Travel expenses 5,278 (1 ) 5,338 6 5,043 Tax credit investment amortization 4,943 (4 ) 5,166 7 4,850 Other retirement expense (16,561 ) (11 ) (18,661 ) 22 (15,249 ) Other miscellaneous expense 37,282 19 31,355 (1 ) 31,517 Total noninterest expense$ 770,677 8$ 715,746 3$ 692,691 43
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Table of Contents TABLE 6. Nonoperating Expense (in thousands) 2019 2018 2017 Personnel expense$ 7,506 $ 5,413 $ 3,662 Net occupancy expense 789 1,172 452 Equipment expense 675 1,782 325 Data processing expense 1,092 3,572 974 Professional services expense 7,075 7,236 9,681 Other real estate (income) expense 130 2 (1,511 ) Advertising 2,581 756 1,389 Printing and supplies 538 1,184 183 Other expense: Loss on restructuring of bank-owned life insurance contracts - 3,302 - Write-down related to termination ofFDIC loss share agreement - - 6,603 Other miscellaneous 12,280 4,523 6,715 Total other expenses 12,280 7,825 13,318 Total nonoperating expense$ 32,666 $ 28,943 $ 28,473 Total personnel expense was up$35.2 million , or 9%, in 2019 compared to 2018 primarily due to merit increases, higher production incentives, and additional operating and nonoperating personnel expense from the MidSouth acquisition and a full year of the trust and asset management business that was acquired onJuly 13, 2018 .
Total occupancy and equipment expenses increased
Data processing expense in 2019 was up$8.9 million , or 12%, from 2018. Excluding nonoperating items, data processing expense was up$11.3 million , or 16%, primarily related to cost associated with new technology investments and higher card transaction processing costs resulting from increased card activity and expenses related to MidSouth.
Professional services expense increased
Amortization of intangibles in 2019 totaled$20.8 million , a$1.2 million , or 5%, decrease from 2018 as a result of the accelerated amortization methods used, offset by$1.0 million of core deposit intangible amortization related to the MidSouth acquisition and$0.9 million of customer intangibles related to a full year of the wealth and asset management business acquiredJuly 13, 2018 . Deposit insurance and regulatory fees decreased$11.9 million , or 38%, from 2018 mainly due to a reduction in the risk-based deposit insurance assessment fees and the elimination of the quarterly deposit insurance fund surcharge fees beginning with the fourth quarter of 2018.
Other real estate and foreclosed asset expense was
Business development-related expenses (including advertising, travel,
entertainment and contributions) were up
Corporate value and franchise taxes were up
Noninterest expense in both 2019 and 2018 was reduced by a net credit in other
retirement expense. The net credit was
All other expenses increased$5.0 million , or 9%, from 2018 primarily due to costs associated with the acquisition of MidSouth, partially offset by higher 2018 losses of$3.3 million associated with the restructure of bank-owned life insurance contracts. 44
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Table of Contents Income Taxes We recorded income tax expense at an effective rate of 16.6% in 2019 and 15.3% in 2018. The effective tax rate in 2019 compared to 2018 was higher because 2018 included a$9.9 million income tax benefit from return to provision adjustments associated with various tax reform related initiatives. We are currently forecasting an effective tax rate for both the first quarter and full year 2020 of approximately 18%-19%. Our effective tax rate has historically varied from the federal statutory rate primarily due to tax-exempt income and tax credits. Interest income on bonds issued by or loans to state and municipal governments and authorities, and earnings from the life insurance contract program are the major components of tax-exempt income. Table 7 reconciles reported income tax expense to that computed at the statutory tax rate of 21% for the years endedDecember 31, 2019 and 2018, and 35% for the year endedDecember 31, 2017 . TABLE 7. Income Taxes Years Ended December 31, (in thousands) 2019 2018 2017 Taxes computed at statutory rate$ 82,475 $ 80,244 $ 107,952 Tax credits: QZAB/QSCB (2,840 ) (3,038 ) (2,570 ) NMTC - Federal and State (6,953 ) (7,941 ) (6,716 ) LIHTC and other tax credits (500 ) (365 ) - Total tax credits (10,293 ) (11,344 ) (9,286 ) State income taxes, net of federal income tax benefit 7,204 8,770 4,288 Tax-exempt interest (10,435 ) (10,803 ) (18,870 ) Life insurance contracts (3,901 ) (2,019 ) (5,360 ) Employee share-based compensation (842 ) (1,380 ) (5,824 ) FDIC assessment disallowance 1,895 2,818 - Return to provision adjustment (1,459 ) (9,942 ) (120 ) Impact of deferred tax asset re-measurement - - 19,520 Other, net 715 2,002 502 Income tax expense$ 65,359 $ 58,346 $ 92,802 The main source of tax credits has been investments in tax-advantage securities and tax credit projects. These investments are made primarily in the markets we serve and directed at tax credits issued under the Qualified Zone Academy Bonds ("QZAB"), Qualified School Construction Bonds ("QSCB"), as well as Federal and State New Market Tax Credit ("NMTC") and Low-Income Housing Tax Credit ("LIHTC") programs. The investments generate tax credits which reduce current and future taxes and are recognized when earned as a benefit in the provision for income taxes. The Tax Act repealed the provisions related to tax credit bonds effective for bonds issued afterDecember 31, 2017 .
We have invested in NMTC projects through investments in our own CDEs, as well as other unrelated CDEs. Federal tax credits from NMTC investments are recognized over a seven-year period, while recognition of the benefits from state tax credits varies from three to five years.
Based only on tax credit investments that have been made through 2019, we expect to realize benefits from federal and state tax credits over the next three years totaling$7.5 million ,$7.8 million and$8.6 million for 2020, 2021 and 2022, respectively. We intend to continue making investments in tax credit projects. However, our ability to access new credits will depend upon, among other factors, federal and state tax policies and the level of competition for such credits. AtDecember 31, 2019 , we had a net deferred tax liability of$38 million , which is comprised of$148 million of deferred tax liabilities offset against$110 million in deferred tax assets (net of state valuation allowance). Several factors are considered in determining the recoverability of the deferred tax asset components, such as the history of taxable earnings, reversal of taxable temporary differences, future taxable income and tax planning strategies. Based on our review of these factors, we have established a$1.4 million valuation allowance for state net operating losses. 45
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Table of Contents BALANCE SHEET ANALYSISInvestment Securities Our investment in securities was$6.2 billion atDecember 31, 2019 , compared to$5.7 billion atDecember 31, 2018 . The investment securities portfolio is managed by ALCO to assist in the management of interest rate risk and liquidity while providing an acceptable rate of return. AtDecember 31, 2019 , the amortized cost of securities available for sale totaled$4.6 billion and securities held to maturity totaled$1.6 billion , compared to$2.8 billion and$3.0 billion , respectively, atDecember 31, 2018 . During the fourth quarter of 2019, we adopted Accounting Standards Update 2019-04 which permits, among other things, a one-time reclassification of debt securities eligible to be hedged under the last-of-layer-method from held to maturity to available for sale. Upon adoption, we transferred investment securities with an amortized cost of approximately$1.2 billion from the held to maturity portfolio to available for sale portfolio. With this change, the investment portfolio allocation is 75% available for sale and 25% held to maturity. Our securities portfolio consists mainly of residential and commercial mortgage-backed securities and collateralized mortgage-backed securities that are issued or guaranteed byU.S. government agencies. We invest only in high quality investment grade securities and manage the investment portfolio duration generally between two and five and a half years. AtDecember 31, 2019 , the average expected maturity of the portfolio was 5.47 years with an effective duration of 4.16 years and a nominal weighted-average yield of 2.49%. Management simulations indicate that the effective duration would increase to 4.32 years with a 100 bp increase in the yield curve and increase to 4.47 years with a 200 bp increase. AtDecember 31, 2018 , the average expected maturity of the portfolio was 5.67 years with an effective duration of 4.67 years and a nominal weighted-average yield of 2.75%. The change in expected maturity, effective duration, and nominal weighted-average yield is primarily related to reinvestment of securities portfolio cash flow and growth during 2019. During 2019, we invested approximately$470 million in fixed rate commercial mortgage backed securities and simultaneously entered into last-of-layer swaps on these assets. There were no investments in securities of a single issuer, other thanU.S. Treasury andU.S. government agency securities and mortgage-backed securities issued or guaranteed byU.S. government agencies that exceeded 10% of stockholders' equity. We do not invest in subprime or "Alt A" home mortgage-backed securities. Investments classified as available for sale are carried at fair value, while held to maturity securities are carried at amortized cost. Unrealized holding gains (losses) on available for sale securities are excluded from net income and are recognized, net of tax, in other comprehensive income and in AOCI, a separate component of stockholders' equity.
The amortized cost of securities at
TABLE 8.
December 31,
(in thousands) 2019 2018
Available for sale securities
U.S. Treasury and government agency securities $ 98,320 $ 74,339
Municipal obligations 242,016 246,713
Residential mortgage-backed securities 1,910,909
1,468,912
Commercial mortgage-backed securities 1,570,765
799,060
Collateralized mortgage obligations 807,600 163,282
Corporate debt securities 8,000 3,500
$ 4,637,610 $ 2,755,806
Held to maturity securities
U.S. Treasury and government agency securities $ 50,000 $ 50,000
Municipal obligations 641,019 688,201
Residential mortgage-backed securities 29,687
640,393
Commercial mortgage-backed securities 539,371
357,175
Collateralized mortgage obligations 307,932 1,243,778
$ 1,568,009 $ 2,979,547
The amortized cost, fair value and yield of debt securities at December 31,
2019 , by final contractual maturity, are presented in the table
below. Securities are classified according to their final contractual maturities
without consideration of scheduled and unscheduled principal amortization,
potential prepayments or call options. Accordingly, actual maturities will
differ from their reported contractual maturities. The expected average maturity
years presented in the tables includes scheduled principal payments and
assumptions for prepayments.
The following table presents debt securities maturities by type at
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TABLE 9. Debt Securities Maturities by Type
Contractual Maturity
Over One Over Five Expected
Year Years Over Weighted Average
One Year Through Through Ten Fair Average Maturity
(in thousands) or Less Five Years Ten Years Years Total Value Yield (te) Years
Available for sale
U.S. Treasury and government
agency securities $ - $ - $ - $ 98,320 $ 98,320 $ 98,672 2.54 % 6.6
Municipal obligations - 1,817 33,168 207,031 242,016 249,805 3.09 % 6.0
Residential mortgage-backed
securities 356 48,155 470,631 1,391,767 1,910,909 1,924,157 2.50 % 4.9
Commercial mortgage-backed
securities - 98,399 1,222,068 250,298 1,570,765 1,586,467 2.58 % 7.5
Collateralized mortgage
obligations - - 33,908 773,692 807,600 808,215 2.01 % 2.7
Other debt securities - 3,500 4,500 - 8,000 7,988 4.32 % 3.4
Total debt securities $ 356 $ 151,871 $ 1,764,275 $ 2,721,108 $ 4,637,610 $ 4,675,304 2.48 % 5.5
Fair Value $ 363 $ 154,646 $ 1,778,398 $ 2,741,897 $ 4,675,304
Weighted Average Yield 3.65 % 2.79 % 2.41 % 2.51 % 2.48 %
Held to maturity
U.S. Treasury and government
agency securities $ 50,000 $ - $ - $ - $ 50,000 $ 50,003 1.68 % 0.1
Municipal obligations - 37,908 221,556 381,555 641,019 668,096 3.15 % 5.8
Residential mortgage-backed
securities - - - 29,687 29,687 30,570 3.22 % 4.7
Commercial mortgage-backed
securities - 102,101 437,270 - 539,371 551,264 2.70 % 7.2
Collateralized mortgage
obligations - - 13,268 294,664 307,932 311,071 2.86 % 2.8
Total debt securities $ 50,000 $ 140,009 $ 672,094 $ 705,906 $ 1,568,009 $ 1,611,004 2.89 % 5.5
Fair Value $ 50,003 141,929 694,992 724,080 $ 1,611,004
Weighted Average Yield 1.68 % 2.67 % 2.87 % 3.04 % 2.89 %
Loan Portfolio
Total loans at December 31, 2019 were $21.2 billion , compared to $20.0 billion
at December 31, 2018 . The $1.2 billion , or 6%, increase is primarily
attributable to the MidSouth transaction, as well as organic growth. We saw a
$164 million decrease in legacy energy loans during 2019 and have targeted a
continued reduction of our energy portfolio to a range of 2% to 4% of our total
loan portfolio, with a focus on retaining our full relationship clients.
Management expects full year end of period growth percentage for 2020 to be in
the mid-single digits.
The composition of our loan portfolio was as follows:
TABLE 10. Loans Outstanding by Type
December 31,
(in thousands) 2019 2018 2017 2016 2015
Total loans:
Commercial non-real estate $ 9,166,947 $ 8,620,601 $ 8,297,937 $ 7,613,917 $ 6,995,824
Commercial real estate - owner
occupied 2,738,460 2,457,748 2,142,439 1,906,821 1,859,469
Total commercial & industrial 11,905,407 11,078,349 10,440,376 9,520,738 8,855,293
Commercial real estate - income
producing 2,994,448 2,341,779 2,384,599 2,013,890 1,553,082
Construction and land
development 1,157,451 1,548,335 1,373,421 1,010,879 1,151,950
Residential mortgages 2,990,631 2,910,081 2,690,472 2,146,713 2,049,524
Consumer 2,164,818 2,147,867 2,115,295 2,059,931 2,093,465
Total loans $ 21,212,755 $ 20,026,411 $ 19,004,163 $ 16,752,151 $ 15,703,314
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The commercial and industrial ("C&I") loan portfolio includes both commercial
non-real estate and commercial real estate - owner occupied loans. C&I loans
totaled $11.9 billion , or 56% of the total loan portfolio, at December 31, 2019 ,
an increase of $0.8 billion from December 31, 2018 . Approximately half of the
growth is related to the MidSouth transaction, with the remaining growth across
the entire footprint and in most specialty lines.
Our commercial and industrial customer base is diversified over a range of
industries, including wholesale and retail trade in various durable and
nondurable products and the manufacture of such products, marine transportation
and maritime construction, energy, healthcare, financial and professional
services, and agricultural production. We lend mainly to middle-market and
smaller commercial entities, although we do participate in larger shared-credit
loan facilities with businesses well known to the relationship officers and
generally operating in our market areas. Shared national credits funded at
December 31, 2019 totaled approximately $2.2 billion , or 10% of total loans.
Approximately $475 million of our shared national credits at December 31, 2019
were with energy-related borrowers.
Loans outstanding to customers in energy-related industries totaled $1.0 billion
at December 31, 2019 , or 4.5% of total loans, down $96 million compared to $1.1
billion at December 31, 2018 . The decrease in energy-related loans resulted from
net payoffs and charge-offs, partially offset by new originations and $69
million of MidSouth acquired loans that are mostly comprised of customers in the
support service sector. At December 31, 2019 , approximately $467 million , or
48%, of the energy portfolio was comprised of customers engaged in exploration
and production, transportation and storage activities. The remaining $496
million , or 52%, of the portfolio was comprised of customers engaged in onshore
and offshore services and products to support exploration and production
activities. As noted previously, we expect to continue to reduce our energy
portfolio and have targeted a concentration level between 2% and 4% of the total
loan portfolio. The reduction in the energy portfolio is expected to be offset
with organic growth across our entire footprint and in other specialty lines of
business.
Commercial real estate - income producing loans totaled $3.0 billion at December
31, 2019 , an increase of $652.7 million , or 28%, from December 31, 2018 . The
increase reflects construction loans converting to permanent financing, coupled
with $171 million loans from the MidSouth acquisition, as well as organic
growth. The increase was partially offset by approximately $595 million in
paydowns.
Construction and land development loans totaled approximately $1.2 billion at
December 31, 2019 , compared to $1.5 billion at December 31, 2018 , a decrease of
$390.9 million , or 25%. The decrease was primarily due to construction and land
development loans converting to permanent financing.
Residential mortgages were up $80.6 million , or 3%, from December 31, 2018 . The
increase in mortgage loans is due primarily to the transfer of loans from
construction and land development, as well as the addition of approximately $35
million in MidSouth loans. The increase was partially offset by increased
paydowns and $45 million in loan sales during second quarter of 2019. Consumer
loans totaled $2.2 billion at December 31, 2019 , an increase of $17.0 million ,
or 1%, compared to December 31, 2018 .
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The following tables provide detail of the more significant industry concentrations for our commercial and industrial loan portfolio, which is based on NAICS codes, and property type concentrations of our commercial real estate - income producing portfolios.
TABLE 11. Commercial & Industrial Loans by Industry Concentration
December 31,
2019 2018
Pct of Pct of
($ in thousands) Balance Total Balance Total
Commercial & industrial loans:
Real estate and rental and leasing $ 1,420,736 12 % $ 1,326,146 12 %
Health care and social assistance 1,144,369 10 1,120,799 10
Retail trade (a) 1,098,787 9 937,971 8
Manufacturing (a) 1,008,904 8 877,950 8
Mining, quarrying, and oil and gas
extraction (a) 842,644 7 1,016,870 9
Transportation and warehousing (a) 833,739 7 717,746 7
Public administration 774,401 7 814,442 7
Wholesale trade (a) 754,547 6 602,052 6
Construction 724,646 6 643,932 6
Finance and insurance 677,500 6 605,663 6
Professional, scientific, and
technical services (a) 520,990 4 462,984 4
Accommodation and food services 456,141 4 385,958 3
Other services (except public
administration) 452,702 4 436,390 4
Educational services 342,544 3 359,997 3
Other (a) 852,757 7 769,449 7
Total commercial & industrial loans $ 11,905,407 100 % $ 11,078,349 100 %
(a) The Company's energy-related lending portfolio includes loans within each of
these selected industry categories as the definition is based on source of
revenue. The energy-related lending portfolio totaled
billion at December 31, 2019 and 2018, respectively.
TABLE 12. Commercial Real Estate - Income Producing by Property Type
Concentration
December 31,
2019 2018
Pct of Pct of
($ in thousands) Balance Total Balance Total
Commercial real estate - income
producing loans:
Retail $ 670,042 22 % $ 507,129 22 %
Office 533,569 18 444,973 19
Industrial 430,517 14 311,933 13
Multifamily 407,068 14 332,145 14
Hotel/motel 374,350 13 374,430 16
Other 578,902 19 371,169 16
Total commercial real estate - income
producing loans $ 2,994,448 100 % $ 2,341,779 100 %
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The following table shows average loans by category for each of the prior three years and the effective taxable equivalent yield the percentage of total loans:
TABLE 13. Average Loans
Years Ended December 31,
2019 2018 2017
Yield Pct of Yield Pct of Yield Pct of
($ in thousands) Balance (te) Total Balance (te) Total Balance (te) Total
Total loans:
Commercial & real estate loans $ 15,289,645 4.83 % 75 % $ 14,487,335 4.52 % 75 % $ 13,751,022 4.25 % 75 %
Residential mortgages 2,974,094 4.09 15 2,794,804 4.10 14 2,445,787 3.89 13
Consumer 2,116,288 5.74 10 2,096,289 5.60 11 2,084,076 5.52 12
Total loans $ 20,380,027 4.81 % 100
%
The following table sets forth, for the periods indicated, the approximate contractual maturity by type of the loan portfolio.
TABLE 14. Loan Maturities by Type
December 31, 2019 Maturity Range
After One
Within Through After Five
(in thousands) One Year Five Years Years Total
Total loans:
Commercial non-real estate $ 2,341,282 $ 4,816,513 $ 2,009,152 $ 9,166,947
Commercial real estate - owner occupied 198,623 991,857 1,547,980 2,738,460
Total commercial & industrial 2,539,905 5,808,370 3,557,132 11,905,407
Commercial real estate - income producing 502,113 1,741,356 750,979 2,994,448
Construction and land development 274,357 409,377 473,717 1,157,451
Residential mortgages 63,699 43,613 2,883,319 2,990,631
Consumer 131,832 643,938 1,389,048 2,164,818
Total loans $ 3,511,906 $ 8,646,654 $ 9,054,195 $ 21,212,755 The sensitivity to interest rate changes for the portion of our loan portfolio that matures after one year is shown below.
TABLE 15. Loan Sensitivity to Changes in Interest Rates
December 31, 2019
(in thousands) Fixed Rate Floating Rate Total
Total loans:
Commercial non-real estate $ 3,018,102 $ 3,807,563 $ 6,825,665
Commercial real estate - owner occupied 1,751,380 788,457 2,539,837
Total commercial & industrial 4,769,482 4,596,020 9,365,502
Commercial real estate - income producing 940,142 1,552,193 2,492,335
Construction and land development 470,121 412,973 883,094
Residential mortgages 1,855,098 1,071,834 2,926,932
Consumer 811,633 1,221,353 2,032,986
Total loans $ 8,846,476 $ 8,854,373 $ 17,700,849
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Table of Contents Nonperforming Assets
The following table sets forth nonperforming assets by type for the periods indicated, consisting of nonaccrual loans, troubled debt restructurings and other real estate owned (ORE) and foreclosed assets. Loans past due 90 days or more and still accruing are also disclosed.
TABLE 16. Nonperforming Assets
December 31,
(in thousands) 2019 2018 2017 2016 2015
Loans accounted for on a
nonaccrual basis: (a)
Commercial non-real estate loans $ 49,628 $ 26,617 $ 63,387 $ 170,703 $ 83,677
Commercial non-real estate loans -
restructured 129,050 84,036 89,476 78,334 5,066
Total commercial non-real estate
loans 178,678 110,653 152,863 249,037 88,743
Commercial real estate - owner
occupied 7,413 16,682 23,549 13,433 8,841
Commercial real estate - owner
occupied -
restructured 295 213 2,440 981 1,160
Total commercial real estate -
owner occupied loans 7,708 16,895 25,989 14,414 10,001
Commercial real estate - income
producing loans 2,489 4,991 9,054 13,147 10,225
Commercial real estate - income
producing loans -
restructured 105 - 5,520 807 590
Total commercial real estate -
income producing
loans 2,594 4,991 14,574 13,954 10,815
Construction and land development
loans 1,051 2,134 3,791 3,651 15,993
Construction and land development
loans -
restructured 166 12 16 898 1,301
Total construction and land
development loans 1,217 2,146 3,807 4,549 17,294
Residential mortgage loans 36,638 34,594 38,703 22,815 23,082
Residential mortgage loans -
restructured 2,624 1,272 1,777 851 717
Total residential mortgage loans 39,262 35,866 40,480 23,666 23,799
Consumer loans 16,159 16,744 15,087 12,350 9,061
Consumer loans -restructured 215 - - - -
Total consumer loans 16,374 16,744 15,087 12,350 9,061
Total nonaccrual loans $ 245,833 $ 187,295 $ 252,800 $ 317,970 $ 159,713
Restructured loans - still
accruing:
Commercial non-real estate loans $ 59,136 $ 130,075 $ 114,224 $ 32,887 $ -
Commercial real estate loans -
owner occupied - 7,286 1,578 493 1,638
Commercial real estate loans -
income producing 373 398 3,827 5,939 2,473
Construction and land development
loans 111 9 - - 20
Residential mortgage loans 514 546 480 259 106
Consumer loans 1,131 728 384 240 60
Total restructured loans - still
accruing 61,265 139,042 120,493 39,818 4,297
Total nonperforming loans 307,098 326,337 373,293 357,788 164,010
ORE and foreclosed assets 30,405 26,270 27,542 18,943 27,133
Total nonperforming assets (b)
400,835$ 376,731 $ 191,143 Loans 90 days past due still accruing (c)$ 6,582 $ 5,589 $ 27,766 $ 3,039 $ 7,653 Total restructured loans$ 193,720 $ 224,575 $ 219,722 $ 121,689 $ 13,131 Ratios: Nonperforming assets to loans plus ORE and foreclosed assets 1.59 % 1.76 % 2.11 % 2.25 % 1.22 % Allowance for loan losses to nonperforming loans and accruing loans 90 days past due 60.97 % 58.60 % 54.18 % 63.58 % 105.54 % Loans 90 days past due still accruing to loans 0.03 % 0.03 % 0.15 % 0.02 % 0.05 %
(a) Nonaccrual loans and accruing loans past due 90 days or more do not include
purchased credit-impaired loans which were written down to fair value upon
acquisition and accrete interest income the remaining life of the loan.
(b) Includes total nonaccrual loans, total restructured loans-still accruing and
ORE and foreclosed assets.
(c) Excludes 90+ accruing troubled debt restructured loans already reflected in
total nonperforming loans of $8.7 million at December 31, 2018 .
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Nonperforming assets decreased$15.1 million , or 4%, in 2019 to$337.5 million atDecember 31, 2019 . Nonperforming loans, which include nonaccrual loans and TDRs still accruing, decreased$19.2 million fromDecember 31, 2018 . The decrease was primarily due to a reduction in restructured accruing loans as a result of several paydowns of energy-related loans, partially offset by the downgrades of few large energy-related and other non-energy C&I loans to nonaccrual status. Loans modified in TDRs totaled$193.7 million atDecember 31, 2019 compared to$224.6 million atDecember 31, 2018 , including$132.5 million and$85.5 million , respectively, of loans reported in nonaccrual loans. TDRs arise when a borrower is experiencing, or is expected to experience, financial difficulties in the near-term and, consequently, a modification that would otherwise not be considered is granted to the borrower. Certain loans modified in a TDR may continue to accrue interest when the individual facts and circumstances of the borrower indicate that we will collect all amounts due. Accruing TDRs totaled$61.3 million , or 20% of nonperforming loans atDecember 31, 2019 , down from$139.0 million , or 43% of nonperforming loans atDecember 31, 2018 . The$77.8 million decrease is mainly attributable to paydowns of energy-related loans. Nonenergy-related nonperforming loans totaling$149.2 million atDecember 31, 2019 are spread across industries and geographies and do not indicate any systemic risk in our portfolios. Our energy-related nonperforming loans totaled$157.9 million atDecember 31, 2019 . We continue to make progress in working through our problem credits in both our energy and nonenergy portfolios and expect that improvement to continue into 2020, assuming no significant changes in economic conditions. Allowance for Credit Losses The allowance for credit losses represents management's estimate of probable credit losses inherent in the loan and lease portfolios and related unfunded lending exposures at period end. We determine the allowance in accordance with applicable accounting literature as well as regulatory guidance related to receivables and contingencies. Management, with Board of Directors oversight, is responsible for ensuring the adequacy of the allowance. The allowance is evaluated for adequacy on at least a quarterly basis. For a discussion of this process, see Note 1 to the consolidated financial statements located in Item 8. "Financial Statements and Supplementary Data." AtDecember 31, 2019 , the allowance for credit losses was$195.2 million , consisting of$191.3 million in funded allowance for loan losses and a$4.0 million reserve for unfunded lending commitments, compared to$194.5 million atDecember 31, 2018 . The$0.7 million increase compared toDecember 31, 2019 is attributable to a$4.0 million increase in the reserve for unfunded lending commitments in 2019 related to impaired reserves on letter of credit exposures, largely offset by a decrease in the funded allowance for loan losses. The energy-related allowance for credit losses increased$5.9 million to$39.1 million atDecember 31, 2019 , with the allowance for loan losses comprising 3.3% of energy loans outstanding up from 3.1% at the prior year end. The increase in energy reserves is due largely to impaired reserves on a few reserve-based lending credits. The non-energy allowance for credit losses decreased$5.2 million to$156.1 million in 2019. The decline in the non-energy allowance is due in part to improving credit metrics and continued strong credit performance in the construction and residential mortgage portfolios. Criticized commercial loans totaled$580.7 million atDecember 31, 2019 , down$44.9 million , or 7%, compared toDecember 31, 2018 , which is net of a$29.8 million of the increase attributable to MidSouth loans which are covered by the purchased discount. The decrease in commercial criticized loans includes$25.5 million attributable to the commercial nonenergy portfolio (net of$28.9 million increase from MidSouth), and$19.4 million attributable to the energy portfolio (net of$0.9 million increase from MidSouth). Criticized loans are defined as those having potential weaknesses that deserve management's close attention (risk-rated special mention, substandard and doubtful), including both accruing and nonaccruing loans. Our commercial nonenergy criticized portfolio, totaling$320.6 million atDecember 31, 2019 is comprised of loans that are diversified as to both industry and geography. Commercial nonenergy criticized loans comprised 2.12% of that portfolio atDecember 31, 2019 , down from 2.49% atDecember 31, 2018 . AtDecember 31, 2019 , criticized loans in the energy portfolio were$260 million , or approximately 27% of that portfolio. Energy-related loans delinquent for more than 30 days, including accrual and nonaccrual loans, totaled$60.1 million , or 6%, of the energy portfolio atDecember 31, 2019 . The ratio of the allowance for loan losses as a percentage of period-end loans was 0.90% atDecember 31, 2019 , compared to 0.97% atDecember 31, 2018 . The reduction in coverage is due in part to the addition of the acquired MidSouth loans with no carryover allowance. The allowance coverage excluding the impact of MidSouth loans totaled 0.93% atDecember 31, 2019 . The remaining decline in coverage year-over-year is due largely to the sizable reduction in energy loan levels that are carried at a higher coverage than the nonenergy portfolio along with overall improving credit metrics across both portfolios. Management believes the coverage levels are consistent with the risk inherent in the portfolios. Should economic conditions and/or our resolution strategies change, the level of reserves may need to be adjusted accordingly. Net charge-offs during 2019 were$47.0 million , or 0.23%, of average total loans down from charge-offs of$52.3 million , or 0.27% of average total loans, for the year endedDecember 31, 2018 . Net charge-offs in 2019 included a$9.0 million net fraud related charge for an equipment finance credit. Energy net charge-offs contributed$10.1 million , and$18.2 million to total losses for the years endedDecember 31, 2019 and 2018, respectively. Commercial nonenergy net charge-offs increased$4.9 million during 2019 to$21.7 million , due primarily to the fraud-related equipment finance charge. Residential mortgage net charge-offs were$0.4 million 53
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compared to a net recovery in 2018 of$1.6 million . Consumer net charge-offs were down$3.9 million in 2019 to$14.8 million . Net losses from the consumer finance subsidiary sold in 2018 contributed$1.5 million to the reduction compared to the prior year.
The following table sets forth activity in the allowance for loan losses for the periods indicated:
TABLE 17. Summary of Activity in the Allowance for Credit Losses
December 31,
(in thousands) 2019 2018 2017 2016 2015
Provision and Allowance for Credit
Losses
Allowance for Loan Losses:
Allowance for loan losses at
beginning of period $ 194,514 $ 217,308 $ 229,418 $ 181,179 $ 128,762
Loans charged-off:
Commercial non real estate 39,600 40,069 51,479 42,620 8,361
Commercial real estate - owner
occupied 137 8,059 558 1,847 1,392
Total commercial & industrial 39,737 48,128 52,037 44,467 9,753
Commercial real estate - income
producing 32 1,633 259 347 2,833
Construction and land development 7 334 696 982 2,834
Total Commercial 39,776 50,095 52,992 45,796 15,420
Residential mortgages 846 614 2,839 1,363 2,407
Consumer 18,455 23,913 31,430 26,107 16,831
Total charge-offs 59,077 74,622 87,261 73,266 34,658
Recoveries of loans previously
charged-off:
Commercial non real estate 6,940 14,385 7,526 4,084 5,046
Commercial real estate - owner
occupied 306 317 848 749 2,634
Total commercial & industrial 7,246 14,702 8,374 4,833 7,680
Commercial real estate - income
producing 569 221 988 991 763
Construction and land development 140 96 1,603 2,086 3,089
Total commercial 7,955 15,019 10,965 7,910 11,532
Residential mortgages 480 2,179 1,064 895 771
Consumer 3,645 5,162 6,680 5,998 4,534
Total recoveries 12,080 22,360 18,709 14,803 16,837
Total net charge-offs 46,997 52,262 68,552 58,463 17,821
Provision for loan losses 43,734 36,116 58,968 110,659 73,038
Decrease in allowance as a result
of sale of subsidiary - (6,648 ) - - -
Decrease in FDIC loss share
receivable - - (2,526 ) (3,957 ) (2,800 )
Allowance for loan losses at end
of period $ 191,251 $ 194,514 $ 217,308 $ 229,418 $ 181,179
Reserve for Unfunded Lending
Commitments:
Reserve for unfunded lending
commitments at beginning of period - - - - -
Provision for losses on unfunded
lending commitments 3,974 - - - -
Reserve for unfunded lending
commitments at end of period $ 3,974 $ - $ - $ - $ -
Total Allowance for Credit Losses $ 195,225 $ 194,514 $ 217,308 $ 229,418 $ 181,179
Total Provision for Credit Losses $ 47,708 $ 36,116 $ 58,968 $ 110,659 $ 73,038
Ratios:
Gross charge-offs to average loans 0.29 % 0.39 % 0.47 % 0.45 % 0.20 %
Recoveries to average loans 0.06 % 0.12 % 0.10 % 0.09 % 0.09 %
Net charge-offs to average loans 0.23 % 0.27 % 0.38 % 0.37 % 0.11 %
Allowance for loan losses to
period-end loans 0.90 % 0.97 % 1.14 % 1.37 % 1.15 %
An allocation of the loan loss allowance by major loan category is set forth in the following table.
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TABLE 18. Allocation of Allowance for Loan Losses by Category
December 31,
2019 2018 2017 2016 2015
Allowance Allowance Allowance Allowance Allowance
for Loan % of Total for Loan % of Total for Loan % of Total for Loan % of Total for Loan % of Total
($ in thousands) Losses Allowance Losses Allowance Losses Allowance Losses
Allowance Losses Allowance
Commercial non-real estate $ 106,432 55 $ 97,752 50 $ 127,918 59 $ 147,052 64 $ 109,428 60
Commercial real estate -
owner occupied 10,977 6 13,757 7 12,962 6 11,083 5 9,858 6 Total commercial & industrial 117,409 61 111,509 57 140,880 65 158,135 69 119,286 66
Commercial real estate -
income producing 20,869 11 17,638 9 13,709 6 13,509 6 6,041 3
Construction and land
development 9,350 5 15,647 8 7,372 4 6,271 3 5,642 3 Residential mortgages 20,331 11 23,782 12 24,844 11 25,361 11 25,353 14 Consumer 23,292 12 25,938 14 30,503 14 26,142 11 24,857 14 Total$ 191,251 100$ 194,514 100$ 217,308 100$ 229,418 100$ 181,179 100 EffectiveJanuary 1, 2020 , the Company was required to and has adopted Accounting Standards Update 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," commonly referred to as Current Expected Credit Losses or CECL, that changed the approach to recognizing credit losses from an incurred loss methodology to one that recognizes the full amount of expected credit losses for the lifetime of the financial assets, based on historical experience, current conditions and reasonable and supportable forecasts. We expect the adoption of this guidance, pending final approval through our governance process, to result in a$76.7 million increase in allowance for credit losses onJanuary 1, 2020 , comprised of increases in the ALLL of$49.4 million and the reserve for unfunded lending commitments of$27.3 million , with$19.8 million of the ALLL increase reclassified from the fair value mark for acquired impaired loans considered purchased credit deteriorated under the new guidance, and resulting in a cumulative-effect adjustment to retained earnings (net of tax) of$44.1 million . For further discussion on the standard and our methodology, see Note 1 - Summary of Significant Accounting Policies and Recent Accounting Pronouncements in Item 8 - "Financial Statements and Supplementary Data" of this document. Short-Term Investments Short-term liquidity investments, including interest-bearing bank deposits and federal funds sold, decreased$0.9 million fromDecember 31, 2018 to a total of$110.2 million atDecember 31, 2019 . Average short-term investments for 2019 totaled$191.0 million , a$27.7 million , or 17%, increase from 2018. Short-term liquidity assets are held to ensure funds are available to meet the cash flow needs of both borrowers and depositors.
Deposits
Total deposits were$23.8 billion atDecember 31, 2019 , up$653.4 million , or 3%, fromDecember 31, 2018 , which included the impact of approximately$1.3 billion of deposits assumed from the MidSouth acquisition. Average deposits in 2019 of$23.3 billion were up$1.1 billion , or 5% over 2018. AtDecember 31, 2019 , noninterest-bearing demand deposits were$8.8 billion , up$276.6 million , or 3%, fromDecember 31, 2018 which includes$390 million of noninterest-bearing demand deposits assumed in the MidSouth acquisition. Noninterest-bearing demand deposits comprised 37% of total deposits atDecember 31, 2019 and 2018. Interest-bearing transaction and savings accounts of$8.8 billion atDecember 31, 2019 increased$845.0 million , or 11%, fromDecember 31, 2018 , with increase mainly attributable to deposits from the MidSouth acquisition. Interest-bearing public fund deposits totaled$3.4 billion atDecember 31, 2019 , up$357.9 million , or 12%, fromDecember 31, 2018 . Year-end public fund account balances are subject to annual fluctuations dependent upon a number of factors, including the timing of tax collections. Seasonal cash inflows from public entities in the fourth quarter of each year typically results in higher balances than at other times during the year with subsequent reductions in the first quarter of the following year. Time deposits other than public funds totaled$2.8 billion atDecember 31, 2019 , down$826.1 million , or 23%, fromDecember 31, 2018 . The decrease is driven primarily by a$1.1 billion decrease in brokered certificates of deposit, partially offset by an increase in retail certificates of deposits. As part of our portfolio management, we replaced higher cost brokered certificates of deposit with lower cost FHLB advances. 55
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Table of Contents Table 19 sets forth average balances and weighted-average rates paid on deposits for each year in the three-year period endedDecember 31, 2019 , as well as the percentage of total deposits for each category. Table 20 sets forth the maturities of time certificates of deposit greater than$250,000 atDecember 31, 2019 . TABLE 19. Average Deposits 2019 2018 2017 ($ in millions) Balance Rate Mix Balance Rate Mix Balance Rate Mix Interest-bearing deposits: Interest-bearing transaction deposits$ 1,999.5 0.62 % 8.6 %$ 1,666.4 0.38 % 7.5 %$ 1,651.4 0.25 % 7.9 % Money market deposits 4,487.8 1.05 19.3 4,520.1 0.77 20.4 4,338.9 0.57 20.8 Savings deposits 1,796.1 0.02 7.7 1,770.9 0.02 8.0 1,765.8 0.03 8.6 Time deposits 3,682.0 2.00 15.8 3,265.1 1.59 14.7 2,632.9 1.06 12.6 Public Funds 3,078.1 1.76 13.2 2,849.3 1.30 12.9 2,664.9 0.72 12.8
Total interest-bearing deposits 15,043.5 1.25 % 64.6
14,071.8 0.93 % 63.5 13,053.9 0.59 % 62.7
Noninterest bearing demand
deposits 8,255.9 35.4 8,095.2 36.5 7,777.7 37.3
Total deposits $ 23,299.4 100.0 % $ 22,167.0 100.0 % $ 20,831.6 100.0 %
TABLE 20. Maturity of Time Certificates of Deposit greater than or equal to
$250,000 *
December 31,
(in thousands) 2019
Three months $ 382,665 Over three months through six months 427,192 Over six months through one year
428,645
Over one year 133,024
Total $ 1,371,526
* Includes public fund time deposits
Short-Term Borrowings
Short-term borrowings totaled$2.7 billion atDecember 31, 2019 , up$1.1 billion fromDecember 31, 2018 . Average short-term borrowings for 2019 totaled$1.9 billion , down$248.6 million compared to 2018. Short-term borrowings are a core portion of the Company's funding strategy and can fluctuate depending on our funding needs and the sources utilized. Table 21 sets forth balances of short-term borrowings for each of the past three years. Short-term borrowings consist of federal funds purchased, securities sold under agreements to repurchase and borrowings from the FHLB. Customer repurchase agreements are a source of customer funding. These agreements are offered mainly to commercial customers to assist them with their ongoing cash management strategies or to provide a temporary investment vehicle for their excess liquidity pending redeployment for corporate or investment purposes. While customer repurchase agreements provide a recurring source of funds to the Bank, the amounts available over time will vary. 56
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TABLE 21. Short-Term Borrowings
Years Ended December 31,
($ in thousands) 2019 2018 2017
Federal funds purchased:
Amount outstanding at period end $ 195,450 $ 425 $ 140,754
Average amount outstanding during period 49,297 39,968 27,063
Maximum amount at any month end during period 202,933 100,925 140,754
Weighted-average interest at period end 1.60 % 2.00 % 1.00 %
Weighted-average interest rate during period 2.30 % 2.11 % 1.37 %
Securities sold under agreements to repurchase:
Amount outstanding at period end $ 484,422 $ 428,599 $ 430,569
Average amount outstanding during period 493,344 456,000 501,719
Maximum amount at any month end during period 518,042 500,345 587,569
Weighted-average interest at period end 0.54 % 0.32 % 0.17 %
Weighted-average interest rate during period 0.52 % 0.23 % 0.12 %
FHLB borrowings:
Amount outstanding at period end $ 2,035,000 $ 1,160,104 $ 1,132,567
Average amount outstanding during period 1,399,503 1,694,804 1,478,114
Maximum amount at any month end during period 1,941,774 2,410,258 2,061,652
Weighted-average interest at period end 1.17 % 2.48 % 1.35 %
Weighted-average interest rate during period 1.96 % 2.02 % 1.00 %
The $2.0 billion of FHLB borrowings at December 31, 2019 consists of two notes,
one fixed and one variable rate, totaling $775 million that mature in 2020;
three fixed rate non-amortizing puttable notes totaling $800 million that mature
in 2034 which are classified as short-term as the FHLB has the option to put
(terminate) the advance prior to maturity; and four variable rate notes totaling
$460 million that mature in 2025 to 2026. These four variable rate notes reset
either monthly or quarterly and may be repaid at our option either in whole or
in part at par on any reset date, subject to advanced notice of no less than two
days before the reset date and therefore are included in short-term borrowings.
Long-Term Debt
Long-term debt at December 31, 2019 includes $150 million of 30-year
subordinated notes at a fixed rate of 5.95% maturing on June 15, 2045 . Subject
to prior approval by the Federal Reserve , we may redeem the notes in whole or in
part on any interest payment date on or after June 15, 2020 . This debt qualifies
as Tier 2 capital in the calculation of certain regulatory capital ratios.
Other long-term debt consists primarily of borrowings associated with tax credit
fund activities. Although these borrowings have indicated maturities through
2053, each is expected to be satisfied at the end of the seven-year compliance
period for the related tax credit investments.
Operating Leases
Effective January 1, 2019 , the Company adopted the amended provisions of
Financial Accounting Standards Codification Topic 842, "Leases," using the
modified retrospective approach, impacting the reporting and disclosures for
operating leases. The core principle of Topic 842 is that a lessee should
recognize in the statement of financial position a liability representing the
present value of future lease payments (the lease liability) and a right-of-use
asset representing its right to use the underlying asset over the lease term, as
well as the disclosure of key information about operating leasing arrangements.
Upon adoption, the Company recorded a gross-up of assets and liabilities in its
consolidated balance sheet, with approximately $116 million for right-of-use
assets and $131 million of lease payment obligations offset by the elimination
of $15 million of existing lease incentive and other deferred rent liabilities.
At December 31, 2019 , the right of use assets was $110.0 million , net of $12.2
million in accumulated amortization, and the lease liability was $127.7 million .
Accounting for leases in accordance with Topic 842 has not had a material impact
upon our consolidated results of operations, and is not expected to in future
periods. Refer to Note 6 - Operating Leases for further information related to
the operating lease accounting policy, practical expedient elections for
adoption and operating leasing information at adoption.
Loan Commitments and Letters of Credit
In the normal course of business, the Bank enters into financial instruments,
such as commitments to extend credit and letters of credit, to meet the
financing needs of their customers. Such instruments are not reflected in the
accompanying consolidated financial statements until they are funded, although
they expose the Bank to varying degrees of credit risk and interest rate risk in
much the same way as funded loans.
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Table of Contents Commitments to extend credit totaled$7.5 billion atDecember 31, 2019 , of which$458.8 million represents commitments to extend credit to energy-related borrowers. Commitments to lend include revolving commercial credit lines, non-revolving loan commitments issued mainly to finance the acquisition and development of construction of real property or equipment, and credit card and personal credit lines. The availability of funds under commercial credit lines and loan commitments generally depends on whether the borrower continues to meet credit standards established in the underlying contract, which may include the maintenance of sufficient collateral coverage levels, payment and financial performance, and compliance with other contractual conditions. Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower. Credit card and personal credit lines are generally subject to adjustment or cancellation if the borrower's credit quality deteriorates. A number of commercial and personal credit lines are used only partially or, in some cases, not at all before they expire, and the total commitment amounts do not necessarily represent our future cash requirements. Letters of credit totaled$393.3 million atDecember 31, 2019 , of which approximately$62.0 million are to energy-related borrowers. A substantial majority of the letters of credit are standby agreements that obligate the Bank to fulfill a customer's financial commitments to a third party if the customer is unable to perform. The Bank issues standby letters of credit primarily to provide credit enhancement to customers' other commercial or public financing arrangements and to help them demonstrate financial capacity to vendors of essential goods and services. The contract amounts of these instruments reflect our exposure to credit risk. The Bank undertakes the same credit evaluation in making loan commitments and assuming conditional obligations as it does for on-balance sheet instruments and may require collateral or other credit support. As ofDecember 31, 2019 , the Company has a reserve for unfunded lending commitments of$4.0 million .
The following table shows the commitments to extend credit and letters of credit
at
TABLE 22. Loan Commitments and Letters of Credit
Expiration Date
Less Than 1-3 3-5 More Than
(in thousands) Total 1 Year Years Years 5 Years
December 31, 2019
Commitments to extend credit $ 7,530,143 $ 3,316,431 $ 1,811,564 $ 1,491,367 $ 910,781
Letters of credit 393,284 314,425 35,086 43,773 -
Total $ 7,923,427 $ 3,630,856 $ 1,846,650 $ 1,535,140 $ 910,781
Expiration Date
Less Than 1-3 3-5 More Than
(in thousands) Total 1 Year Years Years 5 Years
December 31, 2018
Commitments to extend credit $ 7,234,528 $ 3,297,301 $ 1,485,363 $ 1,542,817 $ 909,047
Letters of credit 365,498 280,114 36,633 48,751 -
Total $ 7,600,026 $ 3,577,415 $ 1,521,996 $ 1,591,568 $ 909,047
ENTERPRISE RISK MANAGEMENT
We proactively manage risks to capture opportunities and maximize shareholder
value. We balance revenue generation and profitability with the inherent risks
of our business activities. Enterprise risk management helps protect shareholder
value by assessing, monitoring, and managing the risks associated with our
businesses. Strong risk management practices enhance decision-making, facilitate
successful implementation of new initiatives, and where appropriate, support
undertaking greater levels of well-managed risk to drive growth and achieve
strategic objectives. Our risk management culture integrates a board-approved
risk appetite with senior management direction and governance to facilitate the
execution of the Company's strategic plan. This integration ensures the daily
management of risks by product types and continuous corporate monitoring of the
levels of risk across the Company. We make changes to our enterprise risk
management program and risk governance framework as described here at the
direction of senior management and the Board of Directors to capture
opportunities and to respond to changes in strategic, business, and operational
environments.
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Risk Categories and Definitions
Consistent with other participants in the financial services industry, the primary risk exposures of the Company are credit, market, liquidity, operational, legal, reputational, and strategic. We have adopted these seven risk categories as outlined by theFederal Reserve Board and other bank regulators to govern the risk management of banks and bank holding companies. Oversight responsibility for these categories is assigned within our risk committee governance structure.
• Credit risk arises from the potential that a borrower or counterparty will
fail to perform on an obligation.
• Market risk is a financial institution's condition resulting from adverse
movements in market rates or prices, such as interest rates, foreign
exchange rates, or equity prices.
• Liquidity risk is the potential that an institution will be unable to meet
its obligations as they come due because of an inability to liquidate
assets or obtain adequate funding (referred to as "funding liquidity
risk") or that it cannot easily unwind or offset specific exposures
without significantly lowering market prices because of inadequate market
depth or market disruptions ("market liquidity risk").
• Operational risk is the potential that inadequate information systems,
operational problems, breaches in internal controls, breaches in customer
data, fraud, or unforeseen catastrophes will result in unexpected losses.
Consistently and interchangeably for the Company, Basel II defines this
risk as the risk of loss resulting from inadequate or failed internal
processes, people and systems, or from external events. The Company
assesses compliance risk, the risk to current or anticipated earnings or
capital arising from violations of laws, rules or regulations, or from
non-conformance with prescribed practices, internal policies and
procedures or ethical standards, as a subcategory of operational risk.
• Legal risk is the potential that unenforceable contracts, lawsuits, or
adverse judgments can disrupt or otherwise negatively affect the
operations or condition of a banking organization.
• Reputational risk is the potential that negative publicity regarding an
institution's business practices, whether true or not, will cause a
decline in the customer base, costly litigation, or revenue reductions.
The Company also recognizes its reputation with shareholders and
associates is an important factor of reputational risk.
• Strategic risk is the risk to current or anticipated earnings, capital, or
franchise or enterprise value arising from adverse business decisions,
poor implementation of business decisions, or lack of responsiveness to
changes in the competitive landscape of banking and financial services
industries and operating environment.
Risk Committee Governance Structure
Effective risk management governance requires active oversight, participation, and interaction by senior management and the Board of Directors. Our enterprise risk management framework uses a tiered risk/reward committee structure to facilitate the timely discussion of significant risks, issues and risk mitigation strategies to inform management and the Board's decision making. Additionally, the committee structure provides ongoing oversight and facilitates escalation within assigned risk committees. Following is a summary of our risk governance structure and related responsibilities:
• Board risk committees. The Company's Board of Directors has established a
Board Risk Committee and Credit Risk Management Subcommittee of the Board
Risk Committee to oversee the effective establishment of a risk governance
framework, provide for an independent Credit Review assurance function,
ensure the overall corporate risk profile is within its risk appetite, and
direct changes or make recommendations to the Board of Directors when
determined necessary. Additionally, the Board of Directors has established
an Audit Committee to provide independent oversight on the effectiveness
of these matters and the Company's internal control environment. The Board
Risk Committee is chaired by an independent director. The Board has
designated Ms. Joan Teofilo , an independent director who serves on the
Board Risk Committee, as its risk management expert.
• Governance committees. The Capital Committee (CAPCO) of the Company serves
as the senior level management risk/reward committee and oversees the
business strategy, organizational structure, capital planning, and
liquidity strategies for the Company. CAPCO directly oversees the
strategic and reputation risk categories, which include litigation
strategy and the development of capital stress testing within the
Company's risk governance framework. CAPCO drives business strategydevelopment and execution, provides corporate financial oversight, and is
responsible for portfolio risk committee oversight. CAPCO provides
oversight of the portfolio risk/reward committees to ensure tactics to
address business strategy changes are properly vetted and adopted, and
protect the Company's reputation.
• Portfolio committees. The Company has three portfolio risk/reward
committees focusing on credit (CREDCO), market and liquidity (ALCO), and
operational, legal and compliance (OPCO) risk categories. These committees
review and monitor the risk categories in a portfolio context ensuring
risk assessment and management processes are being effectively executed to
identify and manage risk and direct changes and escalate issues to CAPCO
and Board Risk Committees when needed. The committees also monitor the
risk portfolios for changes to the Company's risk profile as well as
ensure the risk portfolio is performing within the board-approved risk
appetite. Portfolio committees report to CAPCO.
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The risk management function of the Company, which includes the Chief Risk Officer, is led by the President ofHancock Whitney Bank . The Chief Risk Officer provides overall vision, direction and leadership regarding our enterprise risk management program. The Chief Risk Officer exercises independent judgment and reporting of risk through a direct working relationship with the Board Risk Committee, and the Chief Credit Officer has the same role with the Credit Risk Management Subcommittee. The functional areas reporting to the Chief Risk Officer are the enterprise risk management program office, operational risk management, model validation, regulatory relations, corporate insurance and the enterprise-wide compliance program. The Chief Risk Officer also works closely with the Chief Internal Auditor to provide assurance to the Board and senior management regarding risk management controls and their effectiveness. The Chief Internal Auditor reports to the Board's Audit Committee to assure independence of the internal audit function. Other risk management functions reporting to the President include the Chief Credit Officer and Bank Secrecy Act (BSA) Officer. Credit Risk The Bank's primary lending focus is to provide commercial, consumer, and real estate loans to consumers, to small and middle market businesses, to larger corporate clients in their respective market areas, and to state, county, and municipal government entities. Diversification in the loan portfolio is a means to reduce the risks associated with economic fluctuations. The Bank has no significant concentrations of loans to individual borrowers or foreign entities. Approximately 4.5% of the Bank's loan portfolio consists of commercial non-real estate loans to the energy and energy-related sectors. These energy-based loans are actively reviewed, reported and managed. This level of lending to the energy sector is expected given our footprint and is an area of specialization and core competency of our organization. Managing collateral is an essential component of managing the Bank's energy-related credit risk exposure. Collateral valuations are obtained at the time of origination, and updated if it is determined that the collateral value has deteriorated or if the loan is deemed to be a problem loan. In light of the current pressure on the energy sector, we continue to manage our exposure, improve our cross industry diversification, and proactively manage potential impacts to earnings. Real estate loan levels are monitored throughout the year and the bank currently does not have a commercial real estate concentration as defined by interagency guidelines. Managing collateral is also an essential component of managing the Bank's real estate-related credit risk exposure. For real estate-secured loans, third party valuations are obtained at the time of origination, and updated if it is determined that the collateral value has deteriorated or if the loan is deemed to be a problem loan. Property valuations are ordered through, and reviewed by, the Bank's appraisal department. The property valuation, along with anticipated selling costs, are used to determine if there is loan impairment, leading to a recommendation for partial charge off or appropriate allowance allocation. The Bank maintains an active Credit Review function, whose Credit Review Manager reports to the Credit Risk Management Subcommittee, a subcommittee of the Board Risk Committee, to help ensure that developing credit concerns are identified and addressed in a timely manner. Further, an active watch list review process is in place as part of the Bank's problem loan management strategy, and a list of loans 90 days past due and still accruing is reviewed with management (including the Chief Credit Officer) at least monthly. Recommendations flow from all of the above activities with the goal of recognizing nonperforming loans and determining the appropriate accrual status. Asset/Liability Management Asset liability management consists of quantifying, analyzing and controlling interest rate risk (IRR) to maintain stability in net interest income under varying interest rate environments. The principal objective of asset liability management is to maximize net interest income while operating within acceptable risk limits established for interest rate risk and maintaining adequate levels of liquidity. Our net earnings are materially dependent on our net interest income. IRR on the Company's balance sheet consists of reprice, option, yield curve, and basis risks. Reprice risk results from differences in the maturity or repricing of asset and liability portfolios. Option risk arises from "embedded options" present in many financial instruments such as loan prepayment options, deposit early withdrawal options and interest rate options. These options allow customers opportunities to benefit when market interest rates change, which typically results in higher costs or lower revenue for the Company. Yield curve risk refers to the risk resulting from unequal changes in the spread between two or more rates for different maturities for the same instrument. Basis risk refers to the potential for changes in the underlying relationship between market rates and indices, which subsequently result in changes to the profit spread on an earning asset or liability. Basis risk is also present in administered rate liabilities, such as savings accounts, negotiable order of withdrawal accounts, and money market accounts where historical pricing relationships to market rates may change due to the level or directional change in market interest rates. 60
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ALCO manages our IRR exposures through pro-active measurement, monitoring, and management actions. ALCO is responsible for maintaining levels of IRR within limits approved by the Board of Directors through a risk management policy that is designed to promote a stable net interest margin in periods of interest rate fluctuation. Accordingly, the Company's interest rate sensitivity and liquidity are monitored on an ongoing basis by its ALCO, which oversees market risk management and establishes risk measures, limits and policy guidelines for managing the amount of interest rate risk and its effect on net interest income and capital. A variety of measures are used to provide for a comprehensive view of the magnitude of interest rate risk, the distribution of risk, the level of risk over time and the exposure to changes in certain interest rate relationships. The Company utilizes an asset/liability model as the primary quantitative tool in measuring the amount of IRR associated with changing market rates. The model is used to perform net interest income, economic value of equity, and gap analyses. The model quantifies the effects of various interest rate scenarios on projected net interest income and net income over the next twelve-month and 24-month periods. The model measures the impact on net interest income relative to a base case scenario of hypothetical fluctuations in interest rates over the next 24 months. These simulations incorporate assumptions regarding balance sheet growth and mix, pricing and the repricing and maturity characteristics of the existing and projected balance sheet. The impact of interest rate derivatives, such as interest rate swaps, caps and floors, is also included in the model. Other interest rate-related risks such as prepayment, basis and option risk are also considered.
Net Interest Income at Risk
Our primary market risk is interest rate risk that stems from uncertainty with respect to the absolute and relative levels of future market interest rates that affect our financial products and services. In an attempt to manage our exposure to interest rate risk, management measures the sensitivity of our net interest income and cash flows under various market interest rate scenarios, establishes interest rate risk management policies and implements asset/liability management strategies designed to promote a relatively stable net interest margin under varying rate environments. The following table presents an analysis of our interest rate risk as measured by the estimated changes in net interest income resulting from an instantaneous and sustained parallel shift in rates atDecember 31, 2019 . Shifts are measured in 100 basis point increments in a range from -500 to +500 basis points from base case, with -100 through +300 basis points presented in Table 23. Our interest rate sensitivity modeling incorporates a number of assumptions including loan and deposit repricing characteristics, the rate of loan prepayments and other factors. The base scenario assumes that the current interest rate environment is held constant over a 24-month forecast period and is the scenario to which all others are compared in order to measure the change in net interest income. Policy limits on the change in net interest income under a variety of interest rate scenarios are approved by the Board of Directors. All policy scenarios assume a static volume forecast where the balance sheet is held constant, although other scenarios are modeled.
TABLE 23. Net Interest Income (te) at Risk
Estimated Increase
(Decrease) in NII
Change in Interest Rates Year 1 Year 2
(basis points)
- 100 (3.22 ) % (4.50 ) %
+ 100 3.13 % 3.98 %
+ 200 5.92 % 7.35 %
+ 300 8.58 % 10.48 %
The results indicate a general asset sensitivity across most scenarios driven
primarily by repricing in variable rate loans and a funding mix which is
composed of material volumes of non-interest bearing and lower rate sensitive
deposits. When deemed prudent, management has taken actions to mitigate exposure
to interest rate risk with on- or off-balance sheet financial instruments and
intends to do so in the future. Possible actions include, but are not limited
to, changes in the pricing of loan and deposit products, modifying the
composition of earning assets and interest-bearing liabilities, and adding to,
modifying or terminating existing interest rate swap agreements or other
financial instruments used for interest rate risk management purposes.
Even if interest rates change in the designated amounts, there can be no
assurance that our assets and liabilities would perform as anticipated.
Additionally, a change in the U.S. Treasury rates in the designated amounts
accompanied by a change in the shape of the U.S. Treasury yield curve would
cause significantly different changes to net interest income than indicated
above. Strategic management of our balance sheet and earnings is fluid and would
be adjusted to accommodate these movements. As with any method of measuring
interest rate risk, certain shortcomings are inherent in the methods of analysis
presented above. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Certain assets such as adjustable-rate loans have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
Also, the ability of many
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borrowers to service their debt may decrease in the event of an interest rate increase. All of these factors are considered in monitoring exposure to interest rate risk. InJuly 2017 , theUnited Kingdom Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. AtDecember 31, 2019 , approximately 31% of our loan portfolio consisted of variable rate loans tied to LIBOR, along with related derivatives and other financial instruments. During the third quarter of 2019, the Company began transition activities by modifying documents to include pre-cessation fallback trigger language in all new and renewed loan and derivative transactions that reference LIBOR. Our LIBOR transition team is continuing to monitor developments and is taking steps to ensure readiness when the LIBOR benchmark rate is discontinued. Liquidity Liquidity management is focused on ensuring that funds are available to meet the cash flow requirements of our depositors and borrowers, while also meeting the operating, capital and strategic cash flow needs of the Company, the Bank and other subsidiaries. As part of the overall asset and liability management process, liquidity management strategies and measurements have been developed to manage and monitor liquidity risk. TABLE 24. Liquidity Metrics 2019 2018 2017 Free securities / total securities 47.27 % 41.39 % 44.15 % Core deposits / total deposits 93.54 % 90.47 % 93.03 % Wholesale funds / core deposits 13.99 % 14.53 % 13.76 % Average loans / average deposits 87.47 % 87.42 % 87.76 % The asset portion of the balance sheet provides liquidity primarily through loan principal repayments, maturities and repayments of investment securities and occasional sales of various assets. Short-term investments such as federal funds sold, securities purchased under agreements to resell and interest-bearing deposits with theFederal Reserve Bank or with other commercial banks are additional sources of liquidity to meet cash flow requirements. Free securities represent unpledged securities that can be sold or used as collateral for borrowings, and include unpledged securities assigned to short-term dealer repurchase agreements or to theFederal Reserve Bank discount window. Management has established an internal target for the ratio of free securities to total securities to be 20% or more. As shown in Table 24 above, our ratios of free securities to total securities were 47.27% and 41.39%, respectively, atDecember 31, 2019 and 2018. Securities and FHLB letters of credit are pledged as collateral related to public funds and repurchase agreements. The total pledged securities atDecember 31, 2019 were down$13 million compared toDecember 31, 2018 . The liability portion of the balance sheet provides liquidity mainly through the Company's ability to use cash sourced from various customers' interest-bearing and noninterest-bearing deposit accounts and sweep accounts. AtDecember 31, 2019 , deposits totaled$23.8 billion , an increase of$0.7 billion , or 3%, fromDecember 31, 2018 . This increase was due largely to$1.3 billion in deposits from the MidSouth transaction. Core deposits represent total deposits excluding certificates of deposits ("CDs") of$250,000 or more and brokered deposits. The ratio of core deposits to total deposits was 93.54% atDecember 31, 2019 , compared to 90.47% toDecember 31, 2018 . Core deposits totaled$22.3 billion atDecember 31, 2019 , an increase of$1.3 billion fromDecember 31, 2018 . Brokered deposits totaled$0.2 billion as ofDecember 31, 2019 compared to$1.2 billion atDecember 31, 2018 . Maturing brokered deposits in the fourth quarter of 2019 were replaced with lower cost, short-term FHLB advances. Use of brokered deposits as a funding source is subject to strict parameters regarding the amount, term, and interest rate. Purchases of federal funds, securities sold under agreements to repurchase and other short-term borrowings from customers provide additional sources of liquidity to meet short-term funding requirements. In addition to funding from customer sources, the Bank has a line of credit with the FHLB that is secured by blanket pledges of certain mortgage loans. AtDecember 31, 2019 , the Bank had borrowed$2.0 billion from the FHLB and had approximately$2.2 billion remaining available under this line. The Bank also has unused borrowing capacity at theFederal Reserve's discount window of approximately$2.6 billion . There were no outstanding borrowings with theFederal Reserve atDecember 31, 2019 andDecember 31, 2018 . Wholesale funds, comprised of short-term borrowings, long-term debt and brokered deposits were 13.99% of core deposits atDecember 31, 2019 and 14.53% atDecember 31, 2018 . Wholesale funds totaled$3.1 billion atDecember 31, 2019 , an increase of$71.2 million fromDecember 31, 2018 . As previously discussed, core deposits atDecember 31, 2019 increased$1.3 billion compared toDecember 31, 2018 . The Company has established an internal target for wholesale funds to be less than 25% of core deposits. Another key measure the Company uses to monitor its liquidity position is the loan to deposit ratio (average loans outstanding for the reporting period divided by average deposits outstanding). The loan-to-deposit ratio measures the amount of funds the Company lends for each dollar of deposits on hand. Our average loan-to-deposit ratio was 87.47% for 2019 compared to 87.42% in 2018. Management has established a target range for the loan to deposit ratio of 87% to 89%, which could be exceeded under certain circumstances. 62
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Table of Contents Dividends received from the Bank have been the primary source of funds available to the Parent Company for the payment of dividends to our stockholders and for servicing its debt. The liquidity management process takes into account the various regulatory provisions that can limit the amount of dividends that the Bank can distribute to the Parent Company, as described in Note 12 to the consolidated financial statements, "Stockholders' Equity." The Parent targets cash and other liquid assets to provide liquidity in an amount sufficient to fund approximately four quarters of anticipated common stockholder dividends, but will temporarily operate below that level if a return to the target can be achieved in the near-term. OnSeptember 23, 2019 , the Bank declared a special dividend of$150 million to the Parent to assist in the completion of the MidSouth acquisition and provide additional liquidity for approved share buyback program and other activity of the Parent.
Operational Risk Management
Operational risk is the risk of loss resulting from inadequate or failed internal controls and processes, people and systems, or from external events, including fraud, litigation and breaches in data security. We depend on the ability of our employees and systems to process, record and monitor a large number of transactions on an on-going basis. As operational risk remains elevated and as customer and regulatory expectations regarding information security have increased, the Company continues to enhance its controls, processes and systems in order to protect the Company's networks, computers, software and data from attack, damage or unauthorized access. Cybersecurity is a significant operational risk for financial institutions as a result of increases in the number of incidents and the sophistication of cyber-attacks. Cyber-attacks include computer hacking, acts of vandalism or theft, malware, computer viruses or other malicious codes, credential validation, denial of service, phishing, and employee malfeasance, each utilized to disrupt the operations of a financial institution, which in certain instances have resulted in unauthorized access to confidential, proprietary or other information, including customer account information. The Board Risk Committee has primary responsibility for the oversight of operational risk. In this capacity, the Board Risk Committee oversees the Company's processes for identifying, assessing, monitoring and managing cybersecurity risk. The Chief Information Security Officer (CISO), a member of management, supports the information security risk oversight responsibilities of the Board and its committees and involves the appropriate personnel in information risk management. The CISO attends Board Risk Committee meetings on a quarterly basis and sits in executive session with the Board Risk Committee members twice each year. The CISO annually provides an Information Security Program Summary report to the Board, outlining the overall status of our Information Security Program and the Company's compliance with regulatory guidelines. In addition, individual business lines have direct and primary responsibility and accountability for identifying, controlling, and monitoring operational risks embedded in their business activities. The CISO is also responsible for managing the day-to-day cybersecurity operations and leads the IT Risk Governance Subcommittee, a management level committee, whose objective is to protect the integrity, security, safety and resiliency of our corporate information systems and assets. This committee meets regularly to review the development of our Information Security Program. Our Information Security Program is comprised of a collection of policies, guidelines and procedures, which are regularly updated and approved by appropriate management committees. As part of our Information Security Program, we have adopted a Comprehensive Information Security Policy and an Incident Response Plan. The Incident Response Plan is intended to proceed on parallel paths in the event of an incident, including implementation of (i) a forensic and containment, eradication and remediation plan, and (ii) a line of business response plan (including legal, compliance, business, insurance and communications). We contract with outside vendors on an annual basis to conduct vulnerability/penetration tests against the Company's network. We have also contracted with third parties to assist in cyber incident response, forensics and communications. Any third party service provider or vendor utilized as part of the Company's cybersecurity framework is required to comply with the Company's policies regarding non-public personal information and information security. In addition, information security training programs are in place for all new associates, as well as required annual training for all associates. Internal policies and procedures have been adopted to encourage the reporting of potential security attacks or risks. To date, the Company has not experienced an attack that has significantly impacted its results of operations, financial condition and cash flows. Addressing cybersecurity risks is a priority for the Company, and the Company is committed to enhancing its systems of internal controls and business continuity and disaster recovery plans. See Item 1A. "Risk Factors" for further discussion of the risks associated with an interruption or breach in our information systems or infrastructure. CONTRACTUAL OBLIGATIONS The following table summarizes all significant contractual obligations as ofDecember 31, 2019 , according to payments due by period. Obligations under deposit contracts and short-term borrowings are not included. The maturities of time deposits in amounts greater than$250,000 are presented in Table 20. Purchase obligations represent legal and binding contracts to purchase services and goods that cannot be settled or terminated without paying substantially all of the contractual amounts. 63
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TABLE 25. Contractual Obligations
Payment due by period
Less Than 1-3 3-5 More Than
(in thousands) Total 1 Year Years Years 5 Years
Long-term debt obligations $ 472,554 $ 35,286 35,367 26,876 375,025
Operating lease obligations 163,407 16,382 31,498 25,850 89,677
Purchase obligations 128,629 77,487 39,723 11,419 -
Total $ 764,590 $ 129,155 $ 106,588 $ 64,145 $ 464,702
CAPITAL RESOURCES
The Company currently has a strong capital position which is vital to continued
profitability, promotes depositor and investor confidence, and provides a solid
foundation for future growth and flexibility in addressing strategic
opportunities. Stockholders' equity totaled $3.5 billion at December 31, 2019
compared to $3.1 billion at December 31, 2018 . The $386 million increase
resulted primarily from net income for the year of $327.4 million and a $126.0
million decrease in other comprehensive loss largely related to the market
adjustment on the available for sale securities portfolio and cash flow hedges,
partially offset by $94.9 million in dividends paid. On September 21, 2019 , the
Company issued approximately 5.0 million shares of common stock at $38.42 per
share as consideration in its acquisition of MidSouth. Refer to Note 2 -
Acquisitions and Divestiture for more information regarding this
transaction. Shares issued as a part of the MidSouth acquisition were largely
offset by shares repurchased through the accelerated share repurchase agreement
discussed below.
Our tangible common equity ratio was 8.45% at December 31, 2019 , compared to
8.02% at December 31, 2018 . The increase in the tangible common equity ratio
primarily due to net tangible retained earnings and net gains included in other
accumulated comprehensive loss, partially offset by growth in tangible assets.
Management has established an internal target for the tangible equity ratio of
at least 8.00%; however, management will allow the tangible common equity ratio
to drop below 8.00% on a temporary basis if it believes that the shortfall can
be replenished through normal operations with a short timeframe.
The primary quantitative measures that regulators use to gauge capital adequacy
are the ratios of total, tier 1 and common equity tier 1 regulatory capital to
risk-weighted assets (risk-based capital ratios) and the ratio of Tier 1 capital
to average total assets (leverage ratio). The Federal Reserve Board's final rule
implementing the Basel III regulatory capital framework and related Dodd-Frank
Act changes was effective for the Company on January 1, 2015 . The final rule
strengthened the definition of regulatory capital, increased risk-based capital
requirements, and made selected changes to the calculation of risk-weighted
assets. The rule sets the Basel III minimum regulatory capital requirements for
all organizations. It includes a common equity Tier 1 ratio of 4.5% of
risk-weighted assets, raises the minimum Tier 1 capital ratio from 4.0% to 6.0%
of risk-weighted assets and sets a conservation buffer of 2.5% of risk-weighted
assets; however, the rule allows for transition periods for certain changes,
including the conservation buffer. Based on capital ratios as of December 31,
2019 using Basel III definitions, the Company and the Bank exceeded all capital
requirements of the new rule, including the fully phased-in conservation buffer.
The Company and the Bank have established internal targets for its total
risk-based capital ratio, Tier 1 risk-based capital ratio and leverage ratio of
11.5%, 9.5% and 7.0%, respectively.
At December 31, 2019 , our regulatory capital ratios were well in excess of
current regulatory minimum requirements. Additionally, both the Company and the
Bank were considered "well capitalized" by regulatory agencies. The following
table shows the Company's capital ratios for the past five years. Note 12 -
Stockholders' Equity to the consolidated financial statements provides
additional information about the Bank's regulatory capital ratios.
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TABLE 26.
(in thousands) 2019 2018 2017 2016 2015 Common equity tier 1 capital$ 2,584,162 $ 2,391,762
- - - - -
Tier 1 capital 2,584,162 2,391,762 2,214,723 2,184,812 1,844,992
Tier 2 capital 345,225 344,514 367,308 379,418 350,921
Total capital $ 2,929,387 $ 2,736,276 $ 2,582,031 $ 2,564,230 $ 2,195,913
Risk-weighted assets $ 24,611,706 $ 22,814,154 $ 21,695,628 $ 19,404,265 $ 18,515,904
Ratios
Leverage (Tier 1 capital to average
assets) 8.76 % 8.67 % 8.43 % 9.56 % 8.55 %
Common equity tier 1 capital to
risk-weighted assets 10.50 % 10.48 % 10.21 % 11.26 % 9.96 %
Tier 1 capital to risk-weighted assets 10.50 % 10.48 % 10.21 % 11.26 % 9.96 %
Total capital to risk-weighted assets 11.90 % 11.99 % 11.90 % 13.21 % 11.86 %
Common stockholders' equity to total
assets 11.33 % 10.91 % 10.55 % 11.34 % 10.57 %
Tangible common equity to total assets 8.45 % 8.02 % 7.73 % 8.64 % 7.62 %
In December 2018 , the federal banking agencies issued a joint final rule to
revise their regulatory capital rules to address the implementation of CECL,
which was effective January 1, 2020 for the Bank and Company. The final rule
allows for an optional three-year phase-in period for the day-one adverse
regulatory capital effects that banking organizations are expected to experience
upon adopting CECL. The Company has elected to use the optional three-year phase
in method and has sufficient capital to cover the day one impact of CECL. Based
on the current expected impact of CECL as of January 1, 2020 , and using the
phase-in, the Company's day one leverage and common tier 1 equity capital ratios
are reduced by 4 bps, with no impact to total risk-based capital as the
increased allowance for credit loss available for Tier 2 covers the reduction in
equity. The Company's tangible common equity ratio is reduced by 14 bps. See
further discussion of CECL and the impact of adoption in Note 1 - Summary of
Significant Accounting Policies and Recent Accounting Pronouncements in Item 8 -
"Financial Statements and Supplementary Data" of this document.
The Company paid quarterly dividends
STOCK REPURCHASE PROGRAM OnSeptember 23, 2019 , the Company's board of directors approved a stock buyback program that authorizes the Company to repurchase up to 5.5 million shares of its common stock through the expiration date ofDecember 31, 2020 . The program allows the Company to repurchase its common shares in the open market, by block purchase, through accelerated share repurchase programs, in privately negotiated transactions, or as otherwise determined by the Company in one or more transactions. The Company is not obligated to purchase any shares under this program, and the board of directors may terminate or amend the program at any time prior to the expiration date. OnOctober 18, 2019 , the company entered into an accelerated share repurchase ("ASR") agreement withMorgan Stanley & Co. LLC ("Morgan Stanley") to repurchase$185 million of the Company's common stock. Pursuant to the ASR agreement, the Company made a$185 million payment to Morgan Stanley onOctober 21, 2019 , and received from Morgan Stanley on the same day an initial delivery of approximately 3.6 million shares of the Company's common stock, which represents approximately 75% of the estimated total number of shares to be repurchased under the ASR agreement based on theOctober 18, 2019 closing price of the Company's common stock. The final number of shares to be repurchased will be based generally on the volume-weighted average price per share of the Company's common stock during the term of the ASR agreement, less a discount, and subject to possible adjustments in accordance with the terms of the ASR agreement. Final settlement of the ASR agreement is scheduled to occur not later than the third quarter of 2020.
Subsequent to
The Company had a prior Board-approved stock buyback program in place fromMay 2018 toSeptember 2019 . During the fourth quarter of 2018, the Company repurchased 200,000 shares of its common stock at an average price of$41.30 per share.
See Item 5. "Market for the Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of
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Table of Contents FOURTH QUARTER RESULTS Net income for the fourth quarter of 2019 was$92.1 million , or$1.03 per diluted common share, compared to$67.8 million , or$0.77 , in the third quarter of 2019 and$96.2 million , or$1.10 , in the fourth quarter of 2018. The fourth quarter of 2019 included$3.9 million ($.03 per share after-tax impact) of nonoperating expenses related to the MidSouth acquisition. The third quarter of 2019 included$28.8 million ($.26 per share impact) of nonoperating merger related costs and the fourth quarter of 2018 included$1.9 million ($.02 per share impact) of nonoperating items.
Highlights of our fourth quarter of 2019 results (compared to third quarter 2019):
• Net income increased
• Excluding nonoperating merger costs of
the fourth and third quarters of 2019, respectively, earnings per share
were up $.03 to $1.06 per share
• Pre-tax pre-provision net revenue increased
• Energy loans decreased
• Criticized commercial loans declined
$21 million and nonenergy down$58 million • Net interest margin (te) improved by 2 bps to 3.43%
• Tangible common equity ratio was down 37 bps to 8.45%, with the decrease
related to the accelerated share repurchase agreement announced October
21, 2019
Total loans at
Total deposits atDecember 31, 2019 were$23.8 billion , down$398 million , or 2%, fromSeptember 30, 2019 . The primary driver of the fourth quarter decrease is a paydown of brokered deposits. Noninterest-bearing deposits totaled$8.8 billion atDecember 31, 2019 , up$89 million , or 1%, fromSeptember 30, 2019 and comprised 37% of total deposits atDecember 31, 2019 . Interest-bearing transaction and savings deposits totaled$8.8 billion at year-end 2019, up$86 million , or 1%, compared toSeptember 30, 2019 . Time deposits of$2.8 billion decreased$983 million , or 26%, fromSeptember 30, 2019 . The decrease in time deposits reflects a decrease in brokered time deposits of$876 million and a decrease in retail CDs of$106 million . As part of our portfolio management, we replaced brokered time deposits at a rate of 2.40% with FHLB advances at a cost of 1.68%. Interest-bearing public fund deposits increased$409 million , or 14%, to$3.4 billion atDecember 31, 2019 . The increase in public funds is seasonal and primarily related to year-end tax payments collected by local municipalities. Typically, these balances begin to runoff in the first quarter of each year.
The provision for loan losses recorded in the fourth quarter of 2019 was
Net interest income (te) for the fourth quarter of 2019 was$236.7 million , up$10.1 million from the third quarter of 2019. The increase is a result of a higher level of average earning assets in the quarter, mainly due to the MidSouth acquisition, and a lower cost of funds. The net interest margin (te) improved by 2 bps to 3.43% for the fourth quarter, driven by a full quarter of MidSouth and a change in the borrowing mix, partially offset by lower interest recoveries and a change in the earning asset mix. Noninterest income totaled$82.9 million for the fourth quarter of 2019, down$0.3 million , or less than 1%, from the third quarter of 2019. Service charges and bank card and ATM fees were up primarily due to the impact of MidSouth. Fees from secondary mortgage operations were up, primarily from the low rate environment. Trust fees were up$0.4 million , or 3%, while insurance and investment commissions and annuity fees were down$0.6 million , or 9%. Other noninterest income was down from the third quarter, primarily due to declines in specialty income. 66
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Noninterest expense of$197.9 million , declined$15.7 million from the third quarter of 2019. Total expense for the fourth quarter of 2019 included$3.9 million of merger costs related to the acquisition of MidSouth, compared to$28.8 million of merger costs in the third quarter of 2019. Excluding merger costs, operating expense totaled$194.0 million , up$9.3 million , or 5%, from the third quarter of 2019. The increase was primarily related to the impact of MidSouth operations. The effective income tax rate for the fourth quarter of 2018 was 16%. Management expects the tax rate in the first quarter of 2020 to approximate 18-19%. The effective income tax rate continues to be less than the statutory rate due primarily to tax-exempt income and tax credits.
The summary of quarterly financial information appearing in Item 8. "Financial Statements and Supplementary Data" provides selected comparative financial information for each of the four quarters of 2019 and 2018.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
The accounting principles we follow and the methods for applying these principles conform to accounting principles generally accepted inthe United States of America and general practices followed by the banking industry. The significant accounting principles and practices we follow are described in Note 1 to the consolidated financial statements. These principles and practices require management to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying notes. Management evaluates the estimates and assumptions made on an ongoing basis to help ensure the resulting reported amounts reflect management's best estimates and judgments given current facts and circumstances. The following discusses certain critical accounting policies that involve a higher degree of management judgment and complexity in producing estimates that may significantly affect amounts reported in the consolidated financial statements and notes thereto.
Acquisition Accounting
Acquisitions are accounted for under the purchase method of accounting.
Purchased assets, including identifiable intangible assets, and assumed
liabilities are recorded at their respective acquisition date fair values.
Management applies various valuation methodologies to these assets and
liabilities which often involve a significant degree of judgment, particularly
when liquid markets do not exist for the particular item being valued. Examples
of such items include loans, deposits, identifiable intangible assets and
certain other assets and liabilities acquired or assumed in business
combinations. Management uses significant estimates and assumptions to value
such items, including, among others, projected cash flows, repayment rates,
default rates and losses assuming default, discount rates, and realizable
collateral values. The valuation of other identifiable assets, including core
deposit and customer list intangibles, requires significant assumptions such as
projected attrition rates, expected revenue and costs, discount rates and other
forward-looking factors. The purchase date valuations and any subsequent
adjustments also determine the amount of goodwill or bargain purchase gain
recognized in connection with the business combination. Certain assumptions and
estimates must be updated regularly in connection with the ongoing accounting
for purchased loans. Valuation assumptions and estimates may also have to be
revisited in connection with periodic assessments of possible value impairment,
including impairment of goodwill, intangible assets and certain other long-lived
assets. The use of different assumptions could produce significantly different
valuation results, which could have material positive or negative effects on our
results of operations.
Allowance for Credit Losses
The allowance for credit losses ("ACL") is comprised of allowance for loan and
lease losses (ALLL), a valuation account available to absorb losses on loans and
leases, and the reserve for unfunded lending commitments, a liability
established to absorb credit losses on off-balance sheet exposure. The ACL is
established and maintained at an amount that in management's estimation is
sufficient to cover the estimated credit losses inherent in the loan and lease
portfolios and off-balance sheet exposures of the Company as of the date of the
determination. Credit losses arise not only from credit risk, but also from
other risks inherent in the lending process including, but not limited to,
collateral risk, operational risk, concentration risk, and economic risk. As
such, all related risks of lending are considered when assessing the adequacy of
the allowance for loan and lease losses. Quarterly, management estimates
inherent losses in the portfolio based on a number of factors, including the
Company's past loan loss and delinquency experience, known and inherent risks in
the portfolio, adverse situations that may affect the borrowers' ability to
repay, the estimated value of any underlying collateral and current economic
conditions.
The analysis and methodology for estimating the ACL for the originated and acquired performing portfolios include two primary elements. A loss rate analysis that incorporates a historical loss rate as updated for current conditions is used for credits collectively evaluated for impairment, and a specific reserve analysis is used for credits individually evaluated for impairment.
The loss rate analysis includes several subjective inputs including portfolio
segmentation, portfolio risk ratings, historical look-back and loss emergence
periods. Management considers the appropriateness of these critical assumptions
as part of its allowance review. The loss rate analysis is supplemented by a
review of qualitative factors that considers whether current conditions differ
from those existing during the historical-based loss rate analysis. Such factors
include, but are not limited to, problem loan trends, changes in loan
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profiles and volumes, changes in lending policies and procedures, current economic and business conditions and credit concentrations. While qualitative data related for these factors is used where available, there is a high level of judgment applied assumptions that are susceptible to significant change. The qualitative component comprised 24% of the total ACL as ofDecember 31, 2019 . The qualitative component of the ACL continues to reflect the prolonged stress in the energy industry and as well as the continued benign credit environment that results in lower quantitative loss calculations. While we believe the level of allowance is sufficient to absorb losses inherent in the portfolio today, actual results could differ significantly depending on the depth and duration of the energy cycle and the overall impact to the portfolio, which remains uncertain. For impaired credits that are individually evaluated, a specific allowance is calculated as the shortfall between the credit's value and the bank's exposure. The loan's value is measured by either the loan's observable market price, the fair value of the collateral of the loan (less liquidation costs) if it is collateral dependent, or by the present value of expected future cash flows discounted at the loan's effective interest rate. Values for impaired credits are highly subjective and based on information available at the time of valuation and the current resolution strategy. Actual results could differ from these estimates.
Accounting for Retirement Benefits
Management makes a variety of assumptions in applying principles that govern the accounting for benefits under the Company's defined benefit pension plans and other postretirement benefit plans. These assumptions are essential to the actuarial valuation that determines the amounts recognized and certain disclosures it makes in the consolidated financial statements related to the operation of these plans. Two of the more significant assumptions concern the expected long-term rate of return on plan assets and the rate needed to discount projected benefits to their present value. Changes in these assumptions impact the cost of retirement benefits recognized in net income and comprehensive income. Certain assumptions are closely tied to current conditions and are generally revised at each measurement date. For example, the discount rate is reset annually with reference to market yields on high quality fixed-income investments. Other assumptions, such as the rate of return on assets, are determined, in part, with reference to historical and expected conditions over time and are not as susceptible to frequent revision. Holding other factors constant, the cost of retirement benefits will move opposite to changes in either the discount rate or the rate of return on assets. Item 8. "Financial Statements and Supplementary Data-Note 17" provides further discussion on the accounting for retirement and employee benefit plans and the estimates used in determining the actuarial present value of the benefit obligations and the net periodic benefit expense.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 to our consolidated financial statements that appears in Item 8. "Financial Statements and Supplementary Data."
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