Cadence Bancorporation 10-Q 2018 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition period from to

Commission File Number 001-38058

Cadence Bancorporation

(Exact name of registrant as specified in its charter)

Delaware	47-1329858
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2800 Post Oak Boulevard, Suite 3800

Houston, Texas 77056

(Address of principal executive offices) (Zip Code)

(713)-871-4000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ☒  Yes    ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definitions of “accelerated filer”, “large accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

☐	Large accelerated filer	☐	Accelerated filer
☒	Non-accelerated filer	☐	Smaller reporting company
		☒	Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes    ☒  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Class A Common Stock, $0.01 Par Value	83,625,000
Class	Outstanding as of November 14, 2018

Cadence Bancorporation

FORM 10-Q

For the Quarter Ended September 30, 2018

INDEX

PART I: FINANCIAL INFORMATION		3
ITEM 1.	FINANCIAL STATEMENTS	3
	Consolidated Balance Sheets as of September 30, 2018 (Unaudited) and December 31, 2017	3
	Unaudited Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017	4
	Unaudited Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017	5
	Unaudited Consolidated Statement of Changes in Shareholders' Equity for the nine months ended September 30, 2018	6
	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017	7
	Notes to Unaudited Consolidated Financial Statements	8
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	43
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	83
ITEM 4.	CONTROLS AND PROCEDURES	85
PART II: OTHER INFORMATION		86
ITEM 1.	LEGAL PROCEEDINGS	86
ITEM 1A.	RISK FACTORS	86
ITEM 2.	UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS	86
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	86
ITEM 4.	MINE SAFETY DISCLOSURES	86
ITEM 5.	OTHER INFORMATION	86
ITEM 6.	EXHIBITS	86

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PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CADENCE BANCORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30, 2018			December 31, 2017
(In thousands, except share data)	(Unaudited)
ASSETS
Cash and due from banks	$	125,220		$	238,707
Interest-bearing deposits with banks		273,404			482,568
Federal funds sold		249			9,536
Total cash and cash equivalents		398,873			730,811
Securities available-for-sale		1,200,464			1,257,063
Securities held-to-maturity  (estimated fair value of $311 at December 31, 2017)		—			290
Equity securities with readily determinable fair values not held for trading		5,923			5,885
Other securities - FRB and FHLB stock		58,783			50,009
Loans held for sale		46,787			61,359
Loans		9,443,819			8,253,427
Less: allowance for credit losses		(86,151	)		(87,576	)
Net loans		9,357,668			8,165,851
Interest receivable		56,026			47,793
Premises and equipment, net		61,436			63,432
Other real estate owned		3,355			7,605
Cash surrender value of life insurance		109,167			108,148
Net deferred tax asset		45,570			30,774
Goodwill		307,083			317,817
Other intangible assets, net		7,915			10,223
Other assets		100,787			91,866
Total Assets	$	11,759,837		$	10,948,926
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Noninterest-bearing deposits	$	2,094,856		$	2,242,765
Interest-bearing deposits		7,463,420			6,768,750
Total deposits		9,558,276			9,011,515
Securities sold under agreements to repurchase		2,191			1,026
Federal Home Loan Bank advances		340,000			150,000
Senior debt		184,778			184,629
Subordinated debt		98,856			98,687
Junior subordinated debentures		36,833			36,472
Other liabilities		124,077			107,541
Total liabilities		10,345,011			9,589,870
Shareholders' Equity:
Common Stock $0.01 par value, authorized 300,000,000 shares; 83,625,000 shares issued and outstanding at September 30, 2018 and December 31, 2017		836			836
Additional paid-in capital		1,040,038			1,037,040
Retained earnings		441,611			340,213
Accumulated other comprehensive loss ("OCI")		(67,659	)		(19,033	)
Total shareholders' equity		1,414,826			1,359,056
Total Liabilities and Shareholders' Equity	$	11,759,837		$	10,948,926

See accompanying notes to the unaudited consolidated financial statements.

3

CADENCE BANCORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended September 30,					Nine Months Ended September 30,
(In thousands, except per share data)	2018			2017		2018			2017
INTEREST INCOME
Interest and fees on loans	$	121,057		$	90,161	$	337,588		$	261,400
Interest and dividends on securities:
Taxable		6,248			4,610		16,884			13,089
Tax-exempt		1,734			3,280		7,802			10,079
Other interest income		2,714			1,452		6,535			3,929
Total interest income		131,753			99,503		368,809			288,497
INTEREST EXPENSE
Interest on time deposits		10,312			5,665		28,300			15,084
Interest on other deposits		17,196			7,413		38,168			19,530
Interest on borrowed funds		6,145			5,262		17,746			15,578
Total interest expense		33,653			18,340		84,214			50,192
Net interest income		98,100			81,163		284,595			238,305
Provision for credit losses		(1,365	)		1,723		4,278			14,210
Net interest income after provision for credit losses		99,465			79,440		280,317			224,095
NONINTEREST INCOME
Service charges on deposit accounts		3,813			3,920		11,576			11,519
Other service fees		1,319			1,174		3,998			3,217
Credit related fees		3,549			3,306		10,933			8,794
Trust services revenue		4,449			4,613		13,578			14,428
Mortgage banking income		747			965		1,974			3,044
Investment advisory revenue		5,535			5,283		16,177			15,260
Securities gains (losses), net		2			1		(1,799	)		(162	)
Other income		4,562			7,862		17,194			18,118
Total noninterest income		23,976			27,124		73,631			74,218
NONINTEREST EXPENSE
Salaries and employee benefits		35,811			35,007		111,432			103,956
Premises and equipment		7,561			7,419		22,283			21,292
Intangible asset amortization		650			1,136		2,157			3,567
Other expense		17,209			12,968		49,733			38,170
Total noninterest expense		61,231			56,530		185,605			166,985
Income before income taxes		62,210			50,034		168,343			131,328
Income tax expense		15,074			17,457		34,408			43,666
Net income	$	47,136		$	32,577	$	133,935		$	87,662
Weighted average common shares outstanding (Basic)		83,625,000			83,625,000		83,625,000			80,212,912
Weighted average common shares outstanding (Diluted)		84,660,256			83,955,685		84,709,240			80,558,337
Earnings per common share (Basic)	$	0.56		$	0.39	$	1.60		$	1.09
Earnings per common share (Diluted)	$	0.56		$	0.39	$	1.58		$	1.09

See accompanying notes to the unaudited consolidated financial statements.

4

CADENCE BANCORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2018			2017			2018			2017
Net income	$	47,136		$	32,577		$	133,935		$	87,662
Other comprehensive loss, net of tax:
Net unrealized (losses) gains on securities available-for-sale:
Net unrealized (losses) gains arising during the period (net of $2,881, $(2,153), $11,441 and $(8,844) tax effect, respectively)		(9,582	)		3,745			(38,064	)		15,308
Reclassification adjustments for (gains) losses realized in net income (net of $0, $0, $(416), $(60) tax effect, respectively)		(2	)		(1	)		1,383			102
Net unrealized (losses) gains on securities available-for-sale		(9,584	)		3,744			(36,681	)		15,410
Unrealized losses on derivative instruments designated as cash flow hedges:
Net unrealized (losses) gains arising during the period (net of $835, $(202), $4,311 and $(1,427) tax effect, respectively)		(2,781	)		344			(14,345	)		2,445
Reclassification adjustments for losses (gains) realized in net income (net of $(371), $151, $(721) and $1,269 tax effect, respectively)		1,237			(258	)		2,400			(2,173	)
Net change in unrealized (losses) gains on derivative instruments		(1,544	)		86			(11,945	)		272
Other comprehensive (losses) gains, net of tax		(11,128	)		3,830			(48,626	)		15,682
Comprehensive income	$	36,008		$	36,407		$	85,309		$	103,344

See accompanying notes to the unaudited consolidated financial statements.

5

CADENCE BANCORPORATION AND SUBSIDIARIES

UNAUDITED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

			Additional								Total
	Common		Paid-in		Retained			Accumulated			Shareholders'
(In thousands)	Stock		Capital		Earnings			OCI			Equity
Balance, December 31, 2017	$	836	$	1,037,040	$	340,213		$	(19,033	)	$	1,359,056
Equity-based compensation cost		—		2,998		—			—			2,998
Net income		—		—		133,935			—			133,935
Cash dividends declared year to date ($0.40 per common share)		—		—		(33,450	)		—			(33,450	)
Dividend equivalents on restricted stock units (Note 18)		—		—		(87	)		—			(87	)
Cumulative effect of adoption of new accounting principle		—		—		1,000			—			1,000
Other comprehensive loss		—		—		—			(48,626	)		(48,626	)
Balance, September 30, 2018	$	836	$	1,040,038	$	441,611		$	(67,659	)	$	1,414,826

See accompanying notes to the unaudited consolidated financial statements.

6

CADENCE BANCORPORATION AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months Ended September 30,
(In thousands)	2018			2017
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES	$	149,727		$	149,841
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale		(337,921	)		(278,339	)
Proceeds from sales of securities available-for-sale		264,231			152,256
Proceeds from maturities, calls and paydowns of securities available-for-sale		80,473			72,137
Proceeds from sale of commercial loans held for sale		17,031			—
Increase in loans, net		(1,214,163	)		(613,993	)
Proceeds from sale of insurance subsidiary		14,039			—
Purchase of premises and equipment		(6,958	)		(5,734	)
Proceeds from disposition of foreclosed property		6,858			6,721
Other, net		(9,694	)		(22,430	)
Net cash used in investing activities		(1,186,104	)		(689,382	)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits, net		546,761			484,365
Net change in securities sold under agreements to repurchase		1,165			(348	)
Advances from FHLB		190,000			250,000
Repayment of senior debt		—			(9,600	)
Cash dividends paid on common stock		(33,487	)		—
Proceeds from issuance of common stock		—			155,581
Net cash provided by financing activities		704,439			879,998
Net (decrease) increase in cash and cash equivalents		(331,938	)		340,457
Cash and cash equivalents at beginning of period		730,811			248,925
Cash and cash equivalents at end of period	$	398,873		$	589,382

See accompanying notes to the unaudited consolidated financial statements.

7

CADENCE BANCORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Cadence Bancorporation (the “Company”) is a Delaware corporation and a bank holding company whose primary asset is its investment in its wholly owned subsidiary bank, Cadence Bank, N.A., a national banking association (the “Bank”).

Note 1—Summary of Accounting Policies

Basis of Presentation and Consolidation

The accompanying unaudited consolidated financial statements for the Company have been prepared in accordance with instructions to the SEC Form 10-Q and Article 10 of Regulation S-X; therefore, they do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, comprehensive income, and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). All adjustments consisting of normally recurring accruals that, in the opinion of management, are necessary for a fair presentation of the consolidated financial position and results of operations for the periods covered by this report have been included. These interim financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2017. Operating results for the period ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

The Company and its subsidiaries follow GAAP including, where applicable, general practices within the banking industry. The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. The assessment of whether or not the Company has a controlling interest (i.e., the primary beneficiary) in a variable-interest entity (“VIE”) is performed on an on-going basis. All equity investments in non-consolidated VIEs are included in “other assets” in the Company’s consolidated balance sheets (Note 20).

Certain amounts reported in prior years have been reclassified to conform to the 2018 presentation.  These reclassifications did not materially impact the Company’s consolidated balance sheets or consolidated statements of income.  

Nature of Operations

The Company’s subsidiaries include:

• Town & Country Insurance Agency, Inc., dba Cadence Insurance—full service insurance agency (See “Sale of Subsidiary”)

• The Bank

The Bank operates under a national bank charter and is subject to regulation by the Office of the Comptroller of the Currency (OCC). The Bank provides lending services in Georgia and full banking services in five southern states: Alabama, Florida, Mississippi, Tennessee, and Texas.

The Bank’s subsidiaries include:

• Linscomb & Williams Inc. —financial advisory firm; and

• Cadence Investment Services, Inc.—provides investment and insurance products,

The Company and the Bank also have certain other non-operating and immaterial subsidiaries.  

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are susceptible to significant change in the near term are the allowance for credit losses, valuation of and accounting for acquired credit impaired loans, valuation of goodwill, intangible assets and deferred income taxes.

8

Proposed merger with State Bank Financial Corporation (“State Bank”)

On May 11, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with State Bank Financial Corporation, a Georgia corporation (“State Bank”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, State Bank will merge with and into Cadence (the “Merger”), with the Company surviving the Merger. Immediately following the Merger, State Bank’s wholly owned bank subsidiary, State Bank and Trust Company, will merge with and into the Bank (the “Bank Merger”). The Bank will be the surviving entity in the Bank Merger. The Merger Agreement was unanimously approved by the Board of Directors of each of the Company and State Bank.

Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), State Bank shareholders will have the right to receive 1.160 shares (the “Exchange Ratio”) of Class A common stock, par value $0.01 per share, of the Company (“Cadence Common Stock”) for each share of common stock, par value $0.01 per share, of State Bank (“State Bank Common Stock”). Each State Bank restricted stock award will vest and be cancelled and converted automatically at the Effective Time into the right to receive 1.160 shares of Cadence Common Stock in respect of each share of State Bank Common Stock underlying such award. Each State Bank warrant will be converted automatically at the Effective Time into a warrant to purchase shares of Cadence Common Stock, with the number of underlying shares and per share exercise price adjusted to reflect the Exchange Ratio.  

Based on the number of shares of Cadence Class A common stock and State Bank common stock outstanding as of May 11, 2018, the last trading day before public announcement of the merger, it is expected that Cadence stockholders will hold approximately 65%, and State Bank shareholders will hold approximately 35%, of the shares of the combined company outstanding immediately after the merger.

The Company has filed a registration statement on Form S-4 with the Securities and Exchange Commission with respect to the issuance of its common stock in connection with the Merger, which registration statement was declared effective by the Securities and Exchange Commission on July 24, 2018. State Bank held a special meeting of shareholders on Tuesday, September 18, 2018 in Atlanta, Georgia, related to its pending merger with the Company. State Bank’s shareholders approved the Merger Agreement pursuant to which State Bank will merge with and into the Company, with the Company continuing as the surviving corporation. The Merger is expected to close in the fourth quarter of 2018.

Sale of Subsidiary

On May 31, 2018 the Company completed the sale of the assets of its subsidiary, Town & Country Insurance Agency, Inc. (“T&C”) to an unrelated third party, selling$11.1 million in net assets, including $10.9 million in goodwill and intangibles. This transaction resulted in an pre-tax gain of $4.9 million recorded in noninterest income, offset by $1.1 million in sale related expenses recorded in noninterest expenses during the second quarter of 2018.

Recently Adopted Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” (ASU 2014-09), which is intended to improve and converge the financial reporting requirements for revenue contracts with customers. Previous accounting guidance comprised broad revenue recognition concepts along with numerous industry-specific requirements. The new guidance establishes a five-step model which entities must follow to recognize revenue and removes inconsistencies and weaknesses in existing guidance. Our major sources of revenue are from financial instruments that have been excluded from the scope of the new standard (including loans, derivatives, debt and equity securities, etc.). The standard required us to change how we recognize certain recurring revenue streams within insurance commissions and fees and other categories of noninterest income. The adoption at January 1, 2018 of ASU 2014-09 did not have a material effect on the Company’s financial statements.    

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.”  ASU 2016-1, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheets, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheets or the accompanying notes to the financial statements and (viii) clarifies that an entity should evaluate the need for a valuation

9

allowance on a deferred tax asset related to available-for-sale. The adoption at January 1, 2018 of ASU 2016-01 resulted in an adjustment to retained earnings of $1.0 million at January 1, 2018 related to fair value measurement changes to equity securities and certain limited partnership investments (See Notes 2, 16 and 20).    

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”, to reduce current diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.  The adoption at January 1, 2018 of ASU 2016-15 did not have a material effect on the Company’s financial statements.

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”, which introduces amendments that are intended to clarify the definition of a business to assist companies and other reporting organizations with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments are intended to narrow the current interpretation of a business.  The adoption at January 1, 2018 of ASU No. 2017-01 did not have a material effect on the Company’s financial statements.

In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715):  Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs,” to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost.  The amendments require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period.  The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented.  The amendments also allow only the service cost component to be eligible for capitalization when applicable.  The Company adopted the standard effective January 1, 2018, which did not have a material impact on the Company’s financial statements.

In May 2017, the FASB issued ASU 2017-09, “Stock Compensation (Topic 718): Scope of Modification Accounting”, which clarifies when modification accounting should be applied to changes in terms or conditions of share-based payment awards. The amendments narrow the scope of modification accounting by clarifying that modification accounting should be applied to awards if the change affects the fair value, vesting conditions, or classification of the award. The amendments do not impact current disclosure requirements for modifications, regardless of whether modification accounting is required under the new guidance. The adoption of ASU 2017-09 at January 1, 2018 did not have a material effect on the Company’s financial statements. 

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 amends the hedge accounting recognition and presentation requirements in ASC 815 to improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities to better align the entity’s financial reporting for hedging relationships with those risk management activities and to reduce the complexity of and simplify the application of hedge accounting. The Company elected to early adopt the provisions of ASU 2017-12 at January 1, 2018 which did not have a material effect on the Company’s financial statements.

Pending Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, “Leases”. This ASU requires lessees to recognize lease assets and lease liabilities generated by contracts longer than a year on their balance sheets. The ASU also requires companies to disclose in the footnotes to their financial statements information about the amount, timing, and uncertainty for the payments they make for the lease agreements. ASU 2016-02 will be effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. The Company is evaluating the effect of adopting this new accounting guidance.

In June 2016, the FASB has issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The guidance is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments. The guidance will replace the current incurred loss accounting model with an expected loss approach and requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The guidance requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is evaluating the effect of adopting this new accounting guidance.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test.  Therefore, any carrying amount which exceeds the reporting unit’s fair value (up to the amount of goodwill recorded) will be recognized as an impairment loss.  ASU No. 2017-04 will be effective for annual reporting periods beginning after December 15, 2019, including interim reporting periods within those periods.  The amendments will be applied prospectively on or after the effective date.  Early adoption is permitted for interim or annual goodwill impairment tests performed

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on testing dates after January 1, 2017.  Based on recent goodwill impairments tests, which did not require the application of Step 2, the Company does not expect the adoption of this ASU to have an immediate impact.

In March 2017, the FASB issued ASU No. 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities”, which will shorten the amortization period for callable debt securities held at a premium to the earliest call date instead of the maturity date. The amendments do not require an accounting change for securities held at a discount, which will continue to be amortized to the maturity date. ASU No. 2017-08 will be effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within those periods. The amendments should be applied using a modified-retrospective transition method as of the beginning of the period of adoption. Early adoption is permitted, including adoption in an interim period. The Company is currently assessing this pronouncement and it is not expected to have a material impact on the Company’s financial condition or results of operations.

Note 2—Securities

A summary of amortized cost and estimated fair value of securities, excluding equity securities with readily determinable fair values not held for trading, at September 30, 2018 and December 31, 2017 is as follows:  

(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
September 30, 2018
Securities available-for-sale:
U.S. Treasury securities	$	100,453	$	—	$	5,055	$	95,398
Obligations of U.S. government agencies		63,538		—		740		62,798
Mortgage-backed securities issued or guaranteed by U.S. agencies (MBS)
Residential pass-through:
Guaranteed by GNMA		90,112		160		3,027		87,245
Issued by FNMA and FHLMC		614,032		319		17,259		597,092
Other residential mortgage-backed securities		38,709		3		1,912		36,800
Commercial mortgage-backed securities		116,150		90		6,993		109,247
Total MBS		859,003		572		29,191		830,384
Obligations of states and municipal subdivisions		230,677		43		18,836		211,884
Total securities available-for-sale	$	1,253,671	$	615	$	53,822	$	1,200,464

(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
December 31, 2017
Securities available-for-sale:
U.S. Treasury securities	$	100,575	$	—	$	3,731	$	96,844
Obligations of U.S. government agencies		80,552		738		66		81,224
Mortgage-backed securities issued or guaranteed by U.S. agencies (MBS)
Residential pass-through:
Guaranteed by GNMA		106,461		676		1,110		106,027
Issued by FNMA and FHLMC		431,409		1,284		2,271		430,422
Other residential mortgage-backed securities		47,379		97		1,084		46,392
Commercial mortgage-backed securities		76,201		63		4,069		72,195
Total MBS		661,450		2,120		8,534		655,036
Obligations of states and municipal subdivisions		420,111		7,539		3,691		423,959
Total securities available-for-sale	$	1,262,688	$	10,397	$	16,022	$	1,257,063
Securities held-to-maturity:
Obligations of states and municipal subdivisions	$	290	$	21	$	—	$	311

The Company elected to reclassify the one held-to-maturity security as of December 31, 2017 to available-for-sale in the first quarter under the transition election guidance in ASC Topic 815.  

11

The adoption of ASU 2016-01 resulted in a classification change of equity securities from securities available-for-sale to equity securities with readily determinable fair values not held for trading.  The Company recorded an adjustment of $95 thousand to retained earnings for the adoption of the accounting principle.  

The scheduled contractual maturities of securities available-for-sale and securities held-to-maturity at September 30, 2018 were as follows:

	Available-for-Sale
	Amortized		Estimated
(In thousands)	Cost		Fair Value
Due in one year or less	$	1,490	$	1,490
Due after one year through five years		107,470		102,357
Due after five years through ten years		47,867		47,293
Due after ten years		237,841		218,940
Mortgage-backed securities		859,003		830,384
Total	$	1,253,671	$	1,200,464

Gross gains and gross losses on sales of securities available for sale for the three and nine months ended September 30, 2018 and 2017 are presented below. There were no other-than-temporary impairment charges included in gross realized losses for the three and nine months ended September 30, 2018 and 2017.

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(In thousands)	2018		2017		2018			2017
Gross realized gains	$	2	$	1	$	814		$	151
Gross realized losses		—		—		(2,613	)		(313	)
Realized gains (losses) on sale of securities available for sale, net	$	2	$	1	$	(1,799	)	$	(162	)

Securities with a carrying value of $493.2 million and $507.3 million at September 30, 2018 and December 31, 2017, respectively, were pledged to secure public deposits, FHLB borrowings, repurchase agreements and for other purposes as required or permitted by law.

The detail concerning securities classified as available-for-sale with unrealized losses as of September 30, 2018 and December 31, 2017 was as follows:

	Unrealized loss analysis
	Losses < 12 Months				Losses > 12 Months
			Gross				Gross
	Estimated		Unrealized		Estimated		Unrealized
(In thousands)	Fair Value		Losses		Fair Value		Losses
September 30, 2018
U.S. Treasury securities	$	—	$	—	$	95,398	$	5,055
Obligations of U.S. government agencies		52,984		637		9,814		103
Mortgage-backed securities		566,645		13,235		234,984		15,956
Obligations of states and municipal subdivisions		82,993		4,556		121,176		14,280
Total	$	702,622	$	18,428	$	461,372	$	35,394

12

	Unrealized loss analysis
	Losses < 12 Months				Losses > 12 Months
			Gross				Gross
	Estimated		Unrealized		Estimated		Unrealized
(In thousands)	Fair Value		Losses		Fair Value		Losses
December 31, 2017
U.S. Treasury securities	$	—	$	—	$	96,844	$	3,731
Obligations of U.S. government agencies		1,577		9		14,323		57
Mortgage-backed securities		306,274		1,490		172,324		7,044
Obligations of states and municipal subdivisions		2,601		22		134,870		3,669
Total	$	310,452	$	1,521	$	418,361	$	14,501

There were no securities classified as held-to-maturity with unrealized losses as of September 30, 2018  and December 31, 2017.

As of September 30, 2018 and December 31, 2017, approximately 97% and 58%, respectively, of the fair value of securities in the investment portfolio reflected an unrealized loss. As of September 30, 2018, there were 98 securities that had been in a loss position for more than twelve months, and 138 securities that had been in a loss position for less than 12 months. None of the unrealized losses relate to the marketability of the securities or the issuer’s ability to honor redemption of the obligations. The Company has adequate liquidity and, therefore, does not plan to sell and, more likely than not, will not be required to sell these securities before recovery of the indicated impairment. Accordingly, the unrealized losses on these securities have been determined to be temporary. In the second quarter of 2018, we sold approximately $187.8 million of available-for-sale investment securities as part of an effort to rebalance the portfolio reducing our target concentration of tax free municipal securities. In the third quarter of 2018, we purchased approximately $198.0 million in agency MBS.

Note 3—Loans and Allowance for Credit Losses

The following table presents total loans outstanding by portfolio segment and class of financing receivable as of September 30, 2018 and December 31, 2017. Outstanding balances also include Acquired Noncredit Impaired (“ANCI”) loans, originated loans and Acquired Credit Impaired (“ACI”) loans net of any remaining purchase accounting adjustments. Information about ACI loans is presented separately in the “Acquired Credit-Impaired Loans” section of this Note.

	As of
(In thousands)	September 30, 2018			December 31, 2017
Commercial and Industrial
General C&I	$	3,190,756		$	2,746,454
Restaurant industry		1,102,065			1,035,538
Energy sector		1,057,069			935,371
Healthcare		499,906			416,423
Total commercial and industrial		5,849,796			5,133,786
Commercial Real Estate
Income producing		1,158,258			1,082,929
Land and development		67,918			75,472
Total commercial real estate		1,226,176			1,158,401
Consumer
Residential real estate		2,090,069			1,690,814
Other		62,336			74,922
Total consumer		2,152,405			1,765,736
Small Business Lending		247,978			221,855
Total (Gross of unearned discount and fees)		9,476,355			8,279,778
Unearned discount and fees		(32,536	)		(26,351	)
Total (Net of unearned discount and fees)	$	9,443,819		$	8,253,427

13

During the three months ended September 30, 2018 and June 30, 2018, the Company purchased $112.0 million and $32.5 million of consumer residential real estate loans, respectively, at a premium of approximately 6.3%. These loans were evaluated and determined not to be credit impaired before purchase and are classified as ANCI as of September 30, 2018.    

Allowance for Credit Losses (“ACL”)

The ACL is management’s estimate of credit losses inherent in the loan portfolio at the balance sheet date. The Company has an established process to determine the adequacy of the ACL that assesses the losses inherent in our portfolio. While management attributes portions of the ACL to specific portfolio segments, the entire ACL is available to absorb credit losses inherent in the total loan portfolio.

The ACL process involves procedures that appropriately consider the unique risk characteristics of the loan portfolio segments based on management’s assessment of the underlying risks and cash flows. For each portfolio segment, losses are estimated collectively for groups of loans with similar characteristics, individually for impaired loans or, for ACI loans, based on the changes in cash flows expected to be collected on a pool or individual basis.

The level of the ACL is influenced by loan volumes, risk rating migration, historic loss experience influencing loss factors, and other conditions influencing loss expectations, such as economic conditions. The primary indicator of credit quality for the portfolio segments is its internal risk ratings. The assignment of loan risk ratings is the primary responsibility of the lending officer and is subject to independent review by internal credit review, which also performs ongoing, independent review of the risk management process. Credit review is centralized and independent of the lending function. The credit review results are reported to senior management and the Board of Directors.

A summary of the activity in the ACL for the three and nine months ended September 30, 2018 and 2017:

	For the Three Months Ended September 30, 2018
(In thousands)	Commercial and Industrial			Commercial Real Estate			Consumer			Small Business			Total
As of June 30, 2018	$	59,620		$	11,470		$	14,703		$	4,827		$	90,620
Provision for loan losses		2,434			(1,586	)		(995	)		(1,218	)		(1,365	)
Charge-offs		(3,177	)		(2	)		(86	)		—			(3,265	)
Recoveries		40			70			51			—			161
As of September 30, 2018	$	58,917		$	9,952		$	13,673		$	3,609		$	86,151

	For the Nine Months Ended September 30, 2018
(In thousands)	Commercial and Industrial				Commercial Real Estate			Consumer			Small Business			Total
As of December 31, 2017	$	55,919			$	11,990		$	14,983		$	4,684		$	87,576
Provision for loan losses		8,249				(2,323	)		(944	)		(704	)		4,278
Charge-offs		(6,642	)			(2	)		(602	)		(481	)		(7,727	)
Recoveries		1,391				287			236			110			2,024
As of September 30, 2018	$	58,917		��	$	9,952		$	13,673		$	3,609		$	86,151
Allocation of ending ACL
Loans collectively evaluated for impairment	$	56,414			$	9,951		$	13,443		$	3,538		$	83,346
Loans individually evaluated for impairment		2,503				1			230			71			2,805
ACL as of September 30, 2018	$	58,917			$	9,952		$	13,673		$	3,609		$	86,151
Loans
Loans collectively evaluated for impairment	$	5,790,651			$	1,218,566		$	2,150,282		$	247,479		$	9,406,978
Loans individually evaluated for impairment		59,145				7,610			2,123			499			69,377
Loans as of September 30, 2018	$	5,849,796			$	1,226,176		$	2,152,405		$	247,978		$	9,476,355

14

	For the Three Months Ended September 30, 2017
(In thousands)	Commercial and Industrial			Commercial Real Estate			Consumer			Small Business		Total
As of June 30, 2017	$	62,235		$	13,260		$	13,385		$	4,335	$	93,215
Provision for loan losses		(123	)		(384	)		2,190			40		1,723
Charge-offs		(440	)		—			(141	)		—		(581	)
Recoveries		71			76			196			65		408
As of September 30, 2017	$	61,743		$	12,952		$	15,630		$	4,440	$	94,765

	For the Nine Months Ended September 30, 2017
(In thousands)	Commercial and Industrial			Commercial Real Estate		Consumer			Small Business			Total
As of December 31, 2016	$	54,688		$	10,103	$	13,265		$	4,212		$	82,268
Provision for loan losses		9,390			2,645		2,071			104			14,210
Charge-offs		(3,301	)		—		(543	)		(167	)		(4,011	)
Recoveries		966			204		837			291			2,298
As of September 30, 2017	$	61,743		$	12,952	$	15,630		$	4,440		$	94,765
Allocation of ending ACL
Loans collectively evaluated for impairment	$	50,730		$	12,946	$	15,374		$	4,405		$	83,455
Loans individually evaluated for impairment		11,013			6		256			35			11,310
ACL as of September 30, 2017	$	61,743		$	12,952	$	15,630		$	4,440		$	94,765

15

Loans Held-for-sale

The Company had held-for-sale (“HFS”) loans totaling $46.8 million as of September 30, 2018 consisting of $42.5 million in commercial loans and $4.3 million in mortgage loans.  

Impaired Originated and ANCI Loans Including TDRs

The following includes certain key information about individually impaired originated and ANCI loans as of September 30, 2018 and December 31, 2017 and for the three and nine months ended September 30, 2018 and 2017.

Originated and ANCI Loans Identified as Impaired

	As of September 30, 2018
(In thousands)	Recorded Investment in Impaired Loans (1)		Unpaid Principal Balance		Related Specific Allowance		Nonaccrual Loans Included in Impaired Loans		Undisbursed Commitments
With no related allowance for credit losses
Commercial and Industrial
Energy sector	$	22,531	$	34,819	$	—	$	22,531	$	4,539
Total commercial and industrial		22,531		34,819		—		22,531		4,539
Consumer
Residential real estate		1,550		1,553		—		—		—
Total consumer		1,550		1,553		—		—		—
Total	$	24,082	$	36,371	$	—	$	22,531	$	4,539
With allowance for credit losses recorded
Commercial and Industrial
General C&I	$	4,819	$	4,812	$	39	$	180	$	—
Restaurant industry		21,624		21,971		2,495		21,624		3,079
Total commercial and industrial		26,443		26,783		2,534		21,804		3,079
Consumer
Other		263		262		24		—		—
Total consumer		263		262		24		—		—
Small Business Lending		500		1,268		119		251		10
Total	$	27,206	$	28,313	$	2,677	$	22,055	$	3,089

16

	As of December 31, 2017
(In thousands)	Recorded Investment in Impaired Loans (1)		Unpaid Principal Balance		Related Specific Allowance		Nonaccrual Loans Included in Impaired Loans		Undisbursed Commitments
With no related allowance for credit losses
Commercial and Industrial
General C&I	$	5,010	$	4,994	$	—	$	192	$	—
Energy sector		14,822		23,307		—		14,822		387
Total commercial and industrial		19,832		28,301		—		15,014		387
Consumer
Residential real estate		1,093		1,097		—		35		—
Other		416		415		—		—		—
Total consumer		1,509		1,512		—		35		—
Small Business Lending		249		695		—		249		—
Total	$	21,590	$	30,508	$	—	$	15,298	$	387
With allowance for credit losses recorded
Commercial and Industrial
Energy sector	$	39,857	$	43,416	$	8,353	$	28,000	$	402
Restaurant industry		11,017		10,969		106		—		2,500
Total commercial and industrial		50,874		54,385		8,459		28,000		2,902
Consumer
Residential real estate		496		494		36		—		—
Small Business Lending		650		921		27		60		—
Total	$	52,020	$	55,800	$	8,522	$	28,060	$	2,902

(1) The recorded investment of a loan also includes any interest receivable, net unearned discount or fees, and unamortized premium or discount.

The related amount of interest income recognized for impaired loans was $92 thousand and $265 thousand for the three and nine months ended September 30, 2018 compared to $301 thousand and $926 thousand for the same periods in 2017.  

Generally, cash receipts on nonperforming loans are used to reduce principal rather than recorded as interest income. Past due status is determined based upon contractual terms. A nonaccrual loan may be returned to accrual status when repayment is reasonably assured and there has been demonstrated performance under the terms of the loan or, if applicable, under the terms of the restructured loan. Approximately $0.1 million and $1.7 million of contractual interest paid was recognized on the cash basis for the three and nine months ended September 30, 2018 compared to $0.4 million and $1.4 million for same periods in 2017.

Average Recorded Investment in Impaired Originated and ANCI Loans

	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2018		2017		2018		2017
Commercial and Industrial
General C&I	$	4,851	$	6,506	$	4,915	$	9,480
Energy sector		23,710		103,580		35,839		122,269
Restaurant industry		16,194		—		13,594		—
Total commercial and industrial		44,755		110,086		54,348		131,749
Consumer
Residential real estate		1,557		1,606		1,570		1,385
Other		308		369		353		378
Total consumer		1,865		1,975		1,923		1,763
Small Business Lending		516		983		526		956
Total	$	47,136	$	113,044	$	56,797	$	134,468

17

Included in impaired loans are loans considered to be TDRs. The Company attempts to work with borrowers when necessary to extend or modify loan terms to better align with the borrower’s ability to repay. Extensions and modifications to loans are made in accordance with internal policies and guidelines which conform to regulatory guidance. Each occurrence is unique to the borrower and is evaluated separately. The Bank considers regulatory guidelines when restructuring loans to ensure that prudent lending practices are followed. Qualifying criteria and payment terms are structured by the borrower’s current and prospective ability to comply with the modified terms of the loan.

A modification is classified as a TDR if the borrower is experiencing financial difficulty and it is determined that the Company has granted a concession to the borrower. The Company may determine that a borrower is experiencing financial difficulty if the borrower is currently in default on any of its debt, or if it is probable that a borrower may default in the foreseeable future without the modification. Concessions could include reductions of interest rates at a rate lower than current market rate for a new loan with similar risk, extension of the maturity date, reduction of accrued interest, principal forgiveness, forbearance, or other concessions. The assessments of whether a borrower is experiencing or will likely experience financial difficulty and whether a concession has been granted is highly subjective in nature, and management’s judgment is required when determining whether a modification is classified as a TDR. Current amendments to the accounting guidance preclude a creditor from using the effective interest rate test in the debtor’s guidance on restructuring of payables (ASC 470-60-55-10) when evaluating whether a restructuring constitutes a TDR.

All TDRs are reported as impaired. Impaired classification may be removed if the borrower demonstrates compliance with the modified terms and the restructuring agreement specifies an interest rate equal to that which would be provided to a borrower with similar credit at the time of restructuring. The majority of TDRs are classified as impaired loans for the remaining life of the loan. Nonperforming loans and impaired loans are defined differently. Some loans may be included in both categories, whereas other loans may only be included in one category.

Originated and ANCI Loans that were modified into TDRs

	For the Three Months Ended September 30,
	2018				2017
(In thousands)	Number of TDRs		Recorded Investment		Number of TDRs		Recorded Investment
Commercial and Industrial		2	$	15,726		—	$	—
Consumer		—		—		1		285
Total		2	$	15,726		1	$	285

	For the Nine Months Ended September,
	2018				2017
(In thousands)	Number of TDRs		Recorded Investment		Number of TDRs		Recorded Investment
Commercial and Industrial		2	$	15,726		1	$	193
Consumer		—		—		2		747
Small Business Lending		2		134		1		145
Total		4	$	15,860		4	$	1,085

There were no TDRs experiencing payment default during the three and nine months ended September 30, 2018 and 2017.  

	For the Three Months Ended September 30,
	2018				2017
	Number of Loans Modified by:
	Rate Concession		Modified Terms and/ or Other Concessions		Rate Concession		Modified Terms and/ or Other Concessions
Commercial and Industrial		—		2		—		—
Consumer		—		—		—		1
Total		—		2		—		1

18

	For the Nine Months Ended September 30,
	2018				2017
	Number of Loans Modified by:
	Rate Concession		Modified Terms and/ or Other Concessions		Rate Concession		Modified Terms and/ or Other Concessions
Commercial and Industrial		—		2		1		—
Consumer		—		—		—		2
Small Business Lending		2		—		1		—
Total		2		2		2		2

Residential Mortgage Loans in Process of Foreclosure

Included in loans are $2.6 million and $4.4 million of consumer loans secured by single family residential real estate that are in process of foreclosure at September 30, 2018 and December 31, 2017, respectively. Loans in process of foreclosure include those for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction.  In addition to the single family residential real estate loans in process of foreclosure, the Company also held $1.3 million of foreclosed single family residential properties in other real estate owned as of September 30, 2018 and $2.7 million as of December 31, 2017.

Credit Exposure in the Originated and ANCI Loan Portfolios

The following provides information regarding the credit exposure by portfolio segment and class of receivable as of September 30, 2018 and December 31, 2017:

	As of September 30, 2018
(Recorded Investment in thousands)	Special Mention		Substandard		Doubtful		Total Criticized / Classified
Commercial and Industrial
General C&I	$	81,855	$	49,575	$	—	$	131,430
Restaurant industry		40,250		34,160		—		74,410
Energy sector		20,683		6,806		15,726		43,215
Healthcare		4,951		67		—		5,018
Total commercial and industrial		147,739		90,608		15,726		254,073
Commercial Real Estate
Land and development		—		177		—		177
Total commercial real estate		—		177		—		177
Consumer (1)
Residential real estate		—		2,902		—		2,902
Total consumer		—		2,902		—		2,902
Small Business Lending		1,692		2,115		20		3,827
Total	$	149,431	$	95,802	$	15,746	$	260,979

(1) During the third quarter of 2018, the Company began determining the risk rating classification for its consumer portfolio based on delinquency and nonaccrual status in accordance with the Uniform Retail Credit Classification guidance, which contributed to the lower amount of criticized and classified loans from the previous periods.

19

	As of December 31, 2017
(Recorded Investment in thousands)	Special Mention		Substandard		Doubtful		Total Criticized / Classified
Commercial and Industrial
General C&I	$	80,550	$	47,324	$	—	$	127,874
Restaurant industry		4,536		12,506		—		17,042
Energy sector		—		99,979		7,634		107,613
Healthcare		—		71		—		71
Total commercial and industrial		85,086		159,880		7,634		252,600
Commercial Real Estate
Income producing		—		26		—		26
Land and development		20		—		—		20
Total commercial real estate		20		26		—		46
Consumer
Residential real estate		7,610		12,416		—		20,026
Other		673		356		4		1,033
Total consumer		8,283		12,772		4		21,059
Small Business Lending		3,480		1,375		27		4,882
Total	$	96,869	$	174,053	$	7,665	$	278,587

The following provides an aging of past due originated and ANCI loans by portfolio segment and class of receivable as of September 30, 2018 and December 31, 2017:

Aging of Past due Originated and ANCI Loans

	As of September 30, 2018
	Accruing Loans						Non-Accruing Loans
(Recorded Investment in thousands)	30-59 DPD		60-89 DPD		90+DPD		0-29 DPD		30-59 DPD		60-89 DPD		90+DPD
Commercial and Industrial
General C&I	$	—	$	—	$	—	$	—	$	180	$	—	$	—
Restaurant industry		—		—		—		11,797		—		9,827		—
Energy sector		—		—		—		22,516		—		—		—
Healthcare		—		—		—		—		—		67		—
Total commercial and industrial		—		—		—		34,314		180		9,894		—
Consumer
Residential real estate		3,161		1,136		488		—		295		482		1,638
Other		21		3		—		—		—		—		—
Total consumer		3,181		1,139		488		—		295		482		1,638
Small Business Lending		176		105		—		273		20		37		54
Total	$	3,357	$	1,244	$	488	$	34,587	$	495	$	10,412	$	1,693

20

	As of December 31, 2017
	Accruing Loans						Non-Accruing Loans
(Recorded Investment in thousands)	30-59 DPD		60-89 DPD		90+DPD		0-29 DPD		30-59 DPD		60-89 DPD		90+DPD
Commercial and Industrial
General C&I	$	59	$	—	$	476	$	—	$	192	$	—	$	—
Energy sector		—		—		—		32,315		—		—		10,507
Healthcare		—		—		—		—		71		—		—
Total commercial and industrial		59		—		476		32,315		263		—		10,507
Commercial Real Estate
Income producing		—		—		26		—		—		—		—
Land and development		55		—		—		—		—		—		—
Total commercial real estate		55		—		26		—		—		—		—
Consumer
Residential real estate		3,191		1,030		325		1,070		173		293		2,205
Other		532		3		—		—		—		—		—
Total consumer		3,723		1,033		325		1,070		173		293		2,205
Small Business Lending		931		328		—		110		38		—		494
Total	$	4,768	$	1,361	$	827	$	33,495	$	474	$	293	$	13,206

Acquired Credit Impaired (“ACI”) Loans

The following table presents total ACI loans outstanding by portfolio segment and class of financing receivable as of September 30, 2018 and December 31, 2017.

	As of
(In thousands)	September 30, 2018		December 31, 2017
Commercial and Industrial
General C&I	$	20,431	$	23,428
Healthcare		5,840		6,149
Total commercial and industrial		26,271		29,577
Commercial Real Estate
Income producing		70,691		79,861
Total commercial real estate		70,691		79,861
Consumer
Residential real estate		127,771		149,942
Other		616		1,180
Total consumer		128,387		151,122
Total	$	225,349	$	260,560

The excess of cash flows expected to be collected over the carrying value of ACI loans is referred to as the accretable yield and is recognized in interest income using an effective yield method over the remaining life of the loan, or pools of loans. The accretable yield is affected by:

• Changes in interest rate indices for variable rate ACI loans—Expected future cash flows are based on the variable rates in effect at the time of the regular evaluations of cash flows expected to be collected;

• Changes in prepayment assumptions—Prepayments affect the estimated life of ACI loans which may change the amount of interest income, and possibly principal, expected to be collected; and

• Changes in the expected principal and interest payments over the estimated life—Updates to expected cash flows are driven by the credit outlook and actions taken with borrowers.

21

Changes in the amount of accretable discount for ACI loans for the nine months ended September 30, 2018 and 2017 were as follows:

Changes in Accretable Yield on ACI Loans

	For the Nine Months Ended September 30,
(In thousands)	2018			2017
Balance at beginning of period	$	78,422		$	98,728
Maturities/payoff		(5,232	)		(8,137	)
Charge-offs		(63	)		(98	)
Foreclosure		(434	)		(1,056	)
Accretion		(15,089	)		(17,955	)
Reclass from nonaccretable difference due to increases in expected cash flow		12,188			10,617
Balance at end of period	$	69,792		$	82,099

Impaired ACI Loans and Pools Including TDRs

The following includes certain key information about individually impaired ACI loans and pooled ACI loans as of September 30, 2018 and December 31, 2017 and for the three and nine months ended September 30, 2018 and 2017.

ACI Loans / Pools Identified as Impaired

	As of September 30, 2018
	ACI Loans / Pools Identified as Impaired
(In thousands)	Recorded Investment in Impaired Loans(1)		Unpaid Principal Balance		Related Specific Allowance		Nonaccrual Loans Included in Impaired Loans		Undisbursed Commitments
Commercial and Industrial	$	11,843	$	12,644	$	20	$	—	$	—
Commercial Real Estate		80,190		105,590		1,929		—		—
Consumer		19,127		19,495		6,247		—		—
Total	$	111,160	$	137,729	$	8,196	$	—	$	—

	As of December 31, 2017
	ACI Loans / Pools Identified as Impaired
(In thousands)	Recorded Investment in Impaired Loans(1)		Unpaid Principal Balance		Related Specific Allowance		Nonaccrual Loans Included in Impaired Loans		Undisbursed Commitments
Commercial and Industrial	$	13,541	$	17,630	$	5	$	—	$	—
Commercial Real Estate		82,856		112,330		2,010		225		—
Consumer		18,603		22,064		6,509		—		—
Total	$	115,000	$	152,024	$	8,524	$	225	$	—

(1)  The recorded investment of a loan also includes any interest receivable, net unearned discount or fees, and unamortized premium or discount.

ACI Loans that Were Modified into TDRs

There were no ACI loans modified into a TDR for the nine months ended September 30, 2018 and 2017.  There were no ACI TDRs experiencing payment default during the three and nine months ended September 30, 2018 and 2017.  

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Credit Exposure in the ACI Portfolio

The following provides information regarding the credit exposure by portfolio segment and class of receivable as of September 30, 2018 and December 31, 2017:

ACI Loans by Risk Rating / Delinquency Stratification

Commercial credit exposure on ACI loans, based on internal risk rating:

	As of
	September 30, 2018						December 31, 2017
(Recorded Investment in thousands)	Special Mention		Substandard		Doubtful		Special Mention		Substandard		Doubtful
Commercial and Industrial
General C&I	$	563	$	1,453	$	39	$	737	$	1,173	$	37
Healthcare		—		5,857		—		—		6,148		—
Total commercial and industrial		563		7,310		39		737		7,321		37
Commercial Real Estate
Income producing		1,625		5,150		—		2,179		6,515		—
Total	$	2,188	$	12,460	$	39	$	2,916	$	13,836	$	37

Consumer credit exposure on ACI loans, based on past due status:

	As of
	September 30, 2018				December 31, 2017
(Recorded Investment in thousands)	Residential Real Estate		Other		Residential Real Estate		Other
0 – 29 Days Past Due	$	119,816	$	894	$	139,662	$	1,356
30 – 59 Days Past Due		3,182		86		2,299		120
60 – 89 Days Past Due		1,067		32		2,496		62
90 – 119 Days Past Due		1,950		—		399		—
120 + Days Past Due		3,893		—		7,480		45
Total	$	129,908	$	1,012	$	152,336	$	1,583

Note 4—Goodwill and Other Intangible Assets

The following table summarizes the Company’s goodwill and other intangible assets at September 30, 2018 and December 31, 2017:

(In thousands)	September 30, 2018		December 31, 2017
Goodwill	$	307,083	$	317,817
Core deposit intangible, net of accumulated amortization of $39,140 and $38,091, respectively		546		1,595
Customer lists, net of accumulated amortization of $19,205 and $18,097, respectively		7,345		8,604
Trademarks		24		24
Total goodwill and intangible assets	$	314,998	$	328,040

23

The decline in goodwill is related to the sale of the insurance subsidiary in the second quarter of 2018. (See “Sale of Subsidiary” in Note 1).

Note 5—Derivatives

The Company primarily uses derivatives to manage exposure to market risk, including interest rate risk, credit risk and foreign currency risk, and to assist customers with their risk management objectives. Management will designate certain derivatives as hedging instruments in a qualifying hedge accounting relationship. The Company’s remaining derivatives consist of economic hedges that do not qualify for hedge accounting and derivatives held for customer accommodation, or other purposes.

The fair value of derivative positions outstanding is included in Other Assets and Other Liabilities in the accompanying consolidated balance sheets and in the net change in each of these financial statement line items in the accompanying consolidated statements of cash flows. For derivatives not designated as hedging instruments, gains and losses due to changes in fair value are included in noninterest income and the operating section of the consolidated statement of cash flows. For derivatives designated as hedging instruments, the effective portion of the gain or loss related to the derivative instrument is recognized as a component of other comprehensive income and subsequently reclassified as interest income when the forecasted transaction affects income.  The ineffective portion of the gain or loss is recognized immediately as noninterest income.  The notional amounts and estimated fair values as of September 30, 2018 and December 31, 2017 were as follows:

	September 30, 2018						December 31, 2017
			Fair Value						Fair Value
(In thousands)	Notional Amount		Other Assets		Other Liabilities		Notional Amount		Other Assets		Other Liabilities
Derivatives designated as hedging instruments (cash flow hedges):
Commercial loan interest rate swaps	$	1,032,000	$	—	$	37,181	$	1,032,000	$	—	$	21,394
Derivatives not designated as hedging instruments:
Commercial loan interest rate swaps		880,475		2,712		3,002		737,533		2,056		2,056
Commercial loan interest rate caps		97,180		387		387		186,290		153		153
Commercial loan interest rate floors		536,633		4,271		4,271		330,764		1,054		1,054
Mortgage loan held for sale interest rate lock commitments		7,078		72		—		6,119		50		—
Mortgage loan forward sale commitments		2,067		—		—		4,565		10		—
Mortgage loan held for sale floating commitments		34,884		—		—		11,800		—		—
Foreign exchange contracts		42,990		334		328		41,688		635		623
Total derivatives not designated as hedging instruments		1,601,307		7,776		7,988		1,318,759		3,958		3,886
Total derivatives	$	2,633,307	$	7,776	$	45,169	$	2,350,759	$	3,958	$	25,280

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The Company is party to collateral support agreements with certain derivative counterparties. Such agreements require that the Company maintain collateral based on the fair values of derivative transactions. In the event of default by the Company, the counterparty would be entitled to the collateral.  At September 30, 2018 and December 31, 2017, the Company was required to post $32.4 million and $20.2 million, respectively, in cash or securities as collateral for its derivative transactions, which are included in “interest-bearing deposits in banks” on the Company’s consolidated balance sheets. The Company’s master agreements represent written, legally enforceable bilateral agreements that (1) create a single legal obligation for all individual transactions covered by the master agreement and (2) in the event of default, provide the non-defaulting counterparty the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to promptly liquidate or set-off collateral posted by the defaulting counterparty. As permitted by U.S. GAAP, the Company does not offset fair value amounts for the right to reclaim cash collateral or the obligation to return cash collateral against fair value amounts of derivatives executed with the same counterparty under the master agreement.

Gain (loss) included in the consolidated statements of income related to derivative instruments for the three and nine months ended September 30, 2018 and 2017 were as follows:

	For the Three Months Ended September 30,
	2018									2017
(In thousands)	OCI			Reclassified from AOCI to interest income			Noninterest income			OCI		Reclassified from AOCI to interest income		Noninterest income
Derivatives designated as hedging instruments    (cash flow hedges):
Commercial loan interest rate swaps	$	(3,616	)	$	(1,608	)	$	—		$	546	$	409	$	—
Derivatives not designated as hedging instruments:
Mortgage loan held for sale interest rate lock    commitments	$	—		$	—		$	(54	)	$	—	$	—	$	(44	)
Foreign exchange contracts		—			—			552			—		—		631

	For the Nine Months Ended September 30,
	2018								2017
(In thousands)	OCI			Reclassified from AOCI to interest income			Noninterest income		OCI		Reclassified from AOCI to interest income		Noninterest income
Derivatives designated as hedging instruments    (cash flow hedges):
Commercial loan interest rate swaps	$	(18,656	)	$	(3,121	)	$	—	$	3,872	$	3,442	$	—
Derivatives not designated as hedging instruments:
Mortgage loan held for sale interest rate lock    commitments	$	—		$	—		$	10	$	—	$	—	$	35
Foreign exchange contracts		—			—			1,575		—		—		1,652

Interest Rate Swap and Cap Agreements not designated as hedging derivatives

The Company enters into certain interest rate swap, floor and cap agreements on commercial loans that are not designated as hedging instruments. These derivative contracts relate to transactions in which the Company enters into an interest rate swap, floor or cap with a loan customer while at the same time entering into an offsetting interest rate swap or cap with another financial institution. In connection with each swap transaction, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The interest rate swap transaction allows the Company’s customer to effectively convert a variable rate loan to a fixed rate. The interest rate cap transaction allows the Company’s customer to minimize interest rate risk exposure to rising interest rates. Because the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact the Company’s consolidated statements of income. The Company is exposed to credit loss in the event of nonperformance by the parties to the interest rate swap and cap agreements. However, the Company does not anticipate nonperformance by the counterparties. The estimated fair value has been recorded as an asset and a corresponding liability in the accompanying consolidated balance sheets as of September 30, 2018 and December 31, 2017.

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Cash Flow Hedges

Cash flow hedge relationships mitigate exposure to the variability of future cash flows or other forecasted transactions. The Company uses interest rate swaps to manage overall cash flow changes related to interest rate risk exposure on benchmark interest rate loans.  In June 2015 and March 2016, the Company entered into the following interest rate swap agreements to manage overall cash flow changes related to interest rate risk exposure on benchmark interest rate loans.  

Effective Date	Maturity Date	Notional Amount (In Thousands)		Fixed Rate			Variable Rate
June 15, 2015	December 17, 2018	$	382,000		1.3250	%	1 Month LIBOR
June 30, 2015	December 31, 2019		300,000		1.5120		1 Month LIBOR
March 8, 2016	February 27, 2026		175,000		1.5995		1 Month LIBOR
March 8, 2016	February 27, 2026		175,000		1.5890		1 Month LIBOR

Based on our current interest rate forecast, $9.1 million of deferred net loss on derivatives in OCI at September 30, 2018 is estimated to be reclassified into net interest income during the next twelve months. Future changes to interest rates may significantly change actual amounts reclassified to income. There were no reclassifications into income during the nine months ended September 30, 2018 and 2017 as a result of any discontinuance of cash flow hedges because the forecasted transaction was no longer probable. The maximum length of time over which the Company is hedging a portion of its exposure to the variability in future cash flows for forecasted transactions is approximately 7.4 years as of September 30, 2018.

Note 6—Deposits

Domestic time deposits $250,000 and over were $444.2 million and $382.4 million at September 30, 2018 and December 31, 2017, respectively.  There were no foreign time deposits at either September 30, 2018 or December 31, 2017.

Note 7—Borrowed Funds

Repurchase Agreements

Securities sold under agreements to repurchase generally mature within one to seven days from the transaction date. Securities underlying the repurchase agreements remain under the control of the Company.

Information concerning the Company’s securities sold under agreements to repurchase as of September 30, 2018 and December 31, 2017 is summarized as follows:

(In thousands)	September 30, 2018			December 31, 2017
Balance at period end	$	2,191		$	1,026
Average balance during the period		1,526			3,371
Average interest rate during the period		0.25	%		0.25	%
Maximum month-end balance during the period	$	2,191		$	6,286

Repurchase agreements are treated as collateralized financing obligations and are reflected as a liability in the consolidated balance sheets.

26

Senior and Subordinated Debt

In June 2014, the Company and the Bank completed an unregistered $245 million multi-tranche debt transaction and in March 2015, the Company completed an unregistered $50 million debt transaction. These transactions enhanced our liquidity and the Bank’s capital levels to support balance sheet growth.  Details of the debt transactions are as follows:

(In thousands)	September 30, 2018			December 31, 2017
Cadence Bancorporation:
4.875% senior notes, due June 28, 2019	$	145,000		$	145,000
5.375% senior notes, due June 28, 2021		50,000			50,000
7.250% subordinated notes, due June 28, 2029, callable in 2024		35,000			35,000
6.500% subordinated notes, due March 2025, callable in 2020		40,000			40,000
Total long-term debt—Cadence Bancorporation		270,000			270,000
Cadence Bank:
6.250% subordinated notes, due June 28, 2029, callable in 2024		25,000			25,000
Debt issue cost and unamortized premium		(1,288	)		(1,606	)
Purchased		(10,078	)		(10,078	)
Total long-term debt	$	283,634		$	283,316

The senior transactions were structured with 4 and 7 year maturities to provide holding company liquidity and to stagger the Company’s debt maturity profile. The $35 million and $25 million subordinated debt transactions were structured with a 15 year maturity, 10 year call options, and fixed-to-floating interest rates in order to maximize regulatory capital treatment. These subordinated debt structures were designed to achieve full Tier 2 capital treatment for 10 years. The $40 million subordinated debt transaction has a 5 year call option.

The Company’s senior notes are unsecured, unsubordinated obligations and are equal in right of payment to all of the Company’s other unsecured debt. The Company’s subordinated notes are unsecured obligations and will be subordinated in right of payment to all of the Company’s senior indebtedness and general creditors and to depositors at the Bank. The Company’s senior notes and subordinated notes are not guaranteed by any subsidiary of the Company, including the Bank.

The Bank’s subordinated notes are unsecured obligations and are subordinated in right of payment to all of the Bank’s senior indebtedness and general creditors and to depositors of the Bank. The Bank’s subordinated notes are not guaranteed by the Company or any subsidiary of the Bank.

Payment of principal on the Company’s and Bank’s subordinated notes may be accelerated by holders of such subordinated notes only in the case of certain insolvency events. There is no right of acceleration under the subordinated notes in the case of default. The Company and/or the Bank may be required to obtain the prior written approval of the Federal Reserve, and, in the case of the Bank, the OCC, before it may repay the subordinated notes issued thereby upon acceleration or otherwise.

Junior Subordinated Debentures

In conjunction with the Company’s acquisition of Cadence Financial Corporation and Encore Bank, N.A., the junior subordinated debentures were marked to their fair value as of their respective acquisition dates. The related mark is being amortized over the remaining term of the junior subordinated debentures.  The following is a list of junior subordinated debt:

(In thousands)	September 30, 2018			December 31, 2017
Junior subordinated debentures, 3 month LIBOR plus 2.85%, due 2033	$	30,000		$	30,000
Junior subordinated debentures, 3 month LIBOR plus 2.95%, due 2033		5,155			5,155
Junior subordinated debentures, 3 month LIBOR plus 1.75%, due 2037		15,464			15,464
Total par value		50,619			50,619
Purchase accounting adjustment, net of amortization		(13,786	)		(14,147	)
Total junior subordinated debentures	$	36,833		$	36,472

27

Advances from FHLB and Borrowings from FRB

FHLB advances are collateralized by FHLB stock and loans. FHLB advances were $340 million and $150 million as of September 30, 2018 and December 31, 2017, respectively. The advances as of September 30, 2018 include $150 million that are fixed rate and $190 million that are daily rate credits. The advances as of December 31, 2017 matured in January 2018. Any advances are collateralized by $1.7 billion of commercial and residential real estate loans pledged under a blanket lien arrangement as of September 30, 2018.  

As of September 30, 2018 and December 31, 2017, the FHLB has issued for the benefit of the Bank irrevocable letters of credit totaling $585.0 million and $386.5 million, respectively. Included in the FHLB letters of credit are $50 million and $35 million of irrevocable letters of credit in favor of the State of Alabama SAFE Program to secure certain deposits of the State of Alabama. These letters expire September 30, 2019 and September 28, 2020, respectively. Also included is a $350 million irrevocable letter of credit to secure a large treasury management deposit that will expire May 26, 2021.  The remaining $150 million letter of credit for the same large treasury management deposit expired on October 1, 2018.  

There were no borrowings from the FRB discount window as of September 30, 2018 and December 31, 2017.  Any borrowings from the FRB will be collateralized by $746.7 million in commercial loans pledged under a borrower-in-custody arrangement.  

Note 8—Other Noninterest Income and Other Noninterest Expense

The detail of the other noninterest income and other noninterest expense captions presented in the consolidated statements of income is as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2018		2017		2018		2017
Other noninterest income
Insurance revenue	$	—	$	1,950	$	2,677	$	5,908
Bankcard fees		1,078		1,803		4,877		5,477
Income from bank owned life insurance policies		913		724		2,758		2,550
Other		2,571		3,385		6,882		4,183
Total other noninterest income	$	4,562	$	7,862	$	17,194	$	18,118

	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2018		2017		2018		2017
Other noninterest expenses
Net cost of operation of other real estate owned		398		453		458		1,175
Data processing expense		1,989		1,688		6,666		5,086
Consulting and professional fees		4,335		2,069		9,815		4,710
Loan related expenses		821		532		1,721		1,569
FDIC Insurance		1,237		889		3,415		3,336
Communications		682		650		2,089		1,980
Advertising and public relations		679		521		1,595		1,365
Legal expenses		242		614		3,337		1,593
Other		6,826		5,552		20,637		17,356
Total other noninterest expenses	$	17,209	$	12,968	$	49,733	$	38,170

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Note 9—Income Taxes

Income tax expense for the three and nine months ended September 30, 2018 was $15.1 million and $34.4 million compared to $17.5 million and $43.7 million for the same periods in 2017. The effective tax rate was 24.2% and 20.4% for the three and nine months ended September 30, 2018 compared to 34.9% and 33.3% for the same periods in 2017. The decrease in the effective tax rate for the three and nine months ended September 30, 2018 compared to the same periods in 2017 was primarily driven by the decrease in the statutory Federal tax rate established by The Tax Cuts and Jobs Act (“Tax Reform”) enacted on December 22, 2017and a one-time bad debt deduction related to the legacy loan portfolio.  

The effective tax rate is primarily affected by the amount of pre-tax income, tax-exempt interest income, and the increase in cash surrender value of bank-owned life insurance.  The effective tax rate is also affected by discrete items that may occur in any given period but are not consistent from period-to-period, which may impact the comparability of the effective tax rate between periods.

As a result of Tax Reform enacted on December 22, 2017, deferred taxes are based on the newly enacted U.S. federal statutory income tax rate of 21%.  Deferred taxes as of September 30, 2017 are based on the previously enacted U.S. statutory federal income tax rate of 35%.  The provisional amount recorded related to the remeasurement of the Company’s deferred tax asset was $19.0 million, which was recorded in the fourth quarter of 2017 as income tax expense. Based on the information available and our current interpretation of Tax Reform, the Company has made reasonable estimates of the impact from the reduction in the U.S. federal statutory rate on the remeasurement of the deferred tax asset.  However, the Company’s deferred tax asset will continue to be evaluated in the context of Tax Reform, and may change as a result of evolving management interpretations, elections, and assumptions, as well as new guidance that may be issued by the Internal Revenue Service. Management expects to complete its analysis within the measurement period in accordance with SAB 118.  Nonetheless, there has been no change to the provisional net tax benefit we recorded in the fourth quarter of 2017.

Note 10—Earnings Per Common Share

Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period including certain participating securities that contain rights to common stock dividend distributions. Diluted earnings per share includes the dilutive effect of additional potential common shares from stock compensation awards. There were no anti-dilutive securities excluded from the computation of earnings per share in the periods presented. The following table displays a reconciliation of the information used in calculating basic and diluted earnings per common share for the three and nine months ended September 30, 2018 and 2017. See Note 18 – Equity-based Compensation for more information related to participating securities and dilutive shares.  

	Three Months Ended September 30,					Nine Months Ended September 30,
(In thousands, except per share data)	2018			2017		2018			2017
Net income per consolidated statements of income	$	47,136		$	32,577	$	133,935		$	87,662
Net income allocated to participating securities		(56	)		—		(162	)		—
Net income allocated to common stock	$	47,080		$	32,577	$	133,773		$	87,662
Weighted average common shares outstanding (Basic)		83,625,000			83,625,000		83,625,000			80,212,912
Weighted average dilutive restricted stock units		1,035,256			330,685		1,084,240			345,425
Weighted average common shares outstanding (Diluted)		84,660,256			83,955,685		84,709,240			80,558,337
Earnings per common share (Basic)	$	0.56		$	0.39	$	1.60		$	1.09
Earnings per common share (Diluted)	$	0.56		$	0.39	$	1.58		$	1.09

29

Note 11—Related Party Transactions

In the normal course of business, loans are made to directors and executive officers and to companies in which they have a significant ownership interest. In the opinion of management, these loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other parties, are consistent with sound banking practices, and are within applicable regulatory and lending limitations. The aggregate balances of related party loans and deposits as of September 30, 2018 and December 31, 2017 were insignificant.

Note 12—Regulatory Matters

The Bank is subject to the capital adequacy requirements of the OCC. The Company, as a bank holding company, is subject to the capital adequacy requirements of the Federal Reserve. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgment by regulators about components, risk weightings, and other related factors.

The risk-based capital requirements of the Federal Reserve and the OCC define capital and establish minimum capital requirements in relation to assets and off-balance sheet exposure, adjusted for credit risk. The risk-based capital standards currently in effect are designed to make regulatory capital requirements sensitive to differences in risk profiles among bank holding companies and banks, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate relative risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.

The Federal Reserve, the FDIC and the OCC have issued guidelines governing the levels of capital that banks must maintain. The bank guidelines for the period as of September 30, 2018 specify capital tiers, which include the following classifications:

Capital Tiers	Tier 1 Capital to Average Assets (Leverage)	CommonEquity Tier 1 to Risk - Weighted Assets (CET1)	Tier 1 Capital to Risk – Weighted Assets	Total Capital to Risk – Weighted Assets
Well capitalized	5% or above	6.5% or above	8% or above	10% or above
Adequately capitalized	4% or above	4.5% or above	6% or above	8% or above
Undercapitalized	Less than 4%	Less than 4.5%	Less than 6%	Less than 8%
Significantly undercapitalized	Less than 3%	Less than 3%	Less than 4%	Less than 6%
Critically undercapitalized		Tangible Equity / Total Assets less than 2%

30

The most recent notification from the OCC categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action (the prompt corrective action requirements are not applicable to the Company). The actual capital amounts and ratios for the Company and the bank as of September 30, 2018 and December 31, 2017 are presented in the following table and as shown, are above the thresholds necessary to be considered “well-capitalized”. Management believes there are no conditions or events that would change that classification in the foreseeable future.

	Consolidated Company					Bank
(In thousands)	Amount		Ratio			Amount		Ratio
September 30, 2018
Tier 1 leverage	$	1,209,051		10.7	%	$	1,306,355		11.6	%
Common equity tier 1 capital		1,172,218		10.4			1,256,355		11.1
Tier 1 risk-based capital		1,209,051		10.7			1,306,355		11.6
Total risk-based capital		1,394,667		12.4			1,417,856		12.6
The minimum amounts of capital and ratios established by banking regulators are as follows:
Tier 1 leverage	$	452,745		4.0	%	$	452,359		4.0	%
Common equity tier 1 capital		507,387		4.5			507,071		4.5
Tier 1 risk-based capital		676,516		6.0			676,095		6.0
Total risk-based capital		902,021		8.0			901,460		8.0
Well capitalized requirement:
Tier 1 leverage	N/A		N/A			$	565,448		5.0	%
Common equity tier 1 capital	N/A		N/A				732,437		6.5
Tier 1 risk-based capital		676,516		6.0			901,460		8.0
Total risk-based capital		1,127,526		10.0			1,126,825		10.0

	Consolidated Company					Bank
(In thousands)	Amount		Amount			Amount		Ratio
December 31, 2017
Tier 1 leverage	$	1,096,438		10.7	%	$	1,198,234		11.7	%
Common equity tier 1 (transitional)		1,058,888		10.6			1,149,181		11.5
Tier 1 risk-based capital		1,096,438		10.9			1,198,234		12.0
Total risk-based capital		1,283,561		12.8			1,311,376		13.1
The minimum amounts of capital and ratios established by banking regulators are as follows:
Tier 1 leverage	$	410,770		4.0	%	$	410,743		4.0	%
Common equity tier 1 (transitional)		450,951		4.5			450,874		4.5
Tier 1 risk-based capital		601,269		6.0			601,165		6.0
Total risk-based capital		801,691		8.0			801,553		8.0
Well capitalized requirement:
Tier 1 leverage	N/A		N/A			$	513,429		5.0	%
Common equity tier 1 (transitional)	N/A		N/A				651,262		6.5
Tier 1 risk-based capital	$	601,269		6.0			801,553		8.0
Total risk-based capital		1,002,114		10.0			1,001,941		10.0

Under regulations controlling national banks, the payment of any dividends by a bank without prior approval of the OCC is limited to the current year’s net profits (as defined by the OCC) and retained net profits of the two preceding years. The Federal Reserve, as primary regulator for bank holding companies, has also stated that all common stock dividends should be paid out of current income. As the Company does not generate income on a stand-alone basis, it does not have the capability to pay common stock dividends without receiving dividends from the Bank.

The Bank is required to maintain average reserve balances in the form of cash or deposits with the Federal Reserve Bank. The reserve balance varies depending upon the types and amounts of deposits. At September 30, 2018 and December 31, 2017, the required reserve balance with the Federal Reserve Bank was approximately $148.2 million and $70.9 million, respectively.

31

Note 13—Commitments and Contingent Liabilities

The consolidated financial statements do not reflect various commitments and contingent liabilities which arise in the normal course of banking business and which involve elements of credit risk, interest rate risk, and liquidity risk. The commitments and contingent liabilities are commitments to extend credit, home equity lines, overdraft protection lines, and standby letters of credit. Such financial instruments are recorded when they are funded. A summary of commitments and contingent liabilities at September 30, 2018 and December 31, 2017 is as follows:

(In thousands)	September 30, 2018		December 31, 2017
Commitments to extend credit	$	3,773,479	$	3,270,097
Commitments to grant loans		228,732		522,967
Standby letters of credit		138,120		101,718
Performance letters of credit		31,593		17,638
Commercial letters of credit		9,562		11,790

Commitments to extend credit and letters of credit include some exposure to credit loss in the event of nonperformance of the customer. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit policies and procedures for such commitments are the same as those used for lending activities. Because these instruments have fixed maturity dates and because a number expire without being drawn upon, they generally do not present any significant liquidity risk. No significant losses on commitments were incurred during the three and nine months ended September 30, 2018 and 2017. The Company does not anticipate any significant future losses as a result of these transactions.

The Company makes investments in limited partnerships, including certain low income housing partnerships for which tax credits are received. As of September 30, 2018 and December 31, 2017, unfunded capital commitments totaled $37.2 million and $20.3 million, respectively.

The Company and the Bank are defendants in various pending and threatened legal actions arising in the normal course of business. In the opinion of management, based upon the advice of legal counsel, the ultimate disposition of all pending and threatened legal action will not have a material effect on the Company’s consolidated financial statements.

Note 14—Concentrations of Credit

Most of the loans, commitments and letters of credit involve customers or sponsors in the Company’s market areas. Investments in state and municipal securities also involve governmental entities within the Company’s market areas. General concentrations of credit by type of loan are set forth in Note 3 of these consolidated financial statements. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Letters of credit were granted primarily to commercial borrowers.

Note 15—Supplemental Cash Flow Information

	For the Nine Months Ended September 30,
(In thousands)	2018		2017
Cash paid during the year for:
Interest	$	79,771	$	47,048
Income taxes, net of refunds		36,334		29,105
Non-cash investing activities (at fair value):
Transfers of loans to other real estate		2,936		6,922
Transfers of commercial loans to loans held for sale		17,031		9,397

32

Note 16—Disclosure About Fair Values of Financial Instruments

The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. This hierarchy requires the Company to maximize the use of observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. Each fair value measurement is placed into the proper level based on the lowest level of significant input. These levels are:

• Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets.

• Level 2—Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

• Level 3—Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models, and similar techniques.

Transfers between fair value levels are recognized at the end of the fiscal quarter in which the associated change in inputs occurs.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis categorized by the level of inputs used in the valuation of each asset at September 30, 2018 and December 31, 2017:    

(In thousands)	Carrying Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2018
Investment securities available-for-sale:
U.S. Treasury securities	$	95,398	$	—	$	95,398	$	—
Obligations of U.S. government agencies		62,798		—		62,798		—
Mortgage-backed securities issued or guaranteed by U.S. agencies (MBS)
Residential pass-through:
Guaranteed by GNMA		87,245		—		87,245		—
Issued by FNMA and FHLMC		597,092		—		597,092		—
Other residential mortgage-backed securities		36,800		—		36,800		—
Commercial mortgage-backed securities		109,247		—		109,247		—
Total MBS		830,384		—		830,384		—
Obligations of states and municipal subdivisions		211,884		—		211,884		—
Total investment securities available-for-sale		1,200,464		—		1,200,464		—
Equity securities with readily determinable fair values not held for trading		5,923		5,923		—		—
Derivative assets		7,776		—		7,776		—
Net profits interests		12,272		—		—		12,272
Investments in limited partnerships		10,508		—		—		10,508
Total recurring basis measured assets	$	1,236,943	$	5,923	$	1,208,240	$	22,780
Derivative liabilities	$	45,169	$	—	$	45,169	$	—
Total recurring basis measured liabilities	$	45,169	$	—	$	45,169	$	—

33

(In thousands)	Carrying Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2017
Investment securities available-for-sale:
U.S. Treasury securities	$	96,844	$	—	$	96,844	$	—
Obligations of U.S. government agencies		81,224		—		81,224		—
Mortgage-backed securities issued or guaranteed by    U.S. agencies (MBS)
Residential pass-through:
Guaranteed by GNMA		106,027		—		106,027		—
Issued by FNMA and FHLMC		430,422		—		430,422		—
Other residential mortgage-backed securities		46,392		—		46,392		—
Commercial mortgage-backed securities		72,195		—		72,195		—
Total MBS		655,036		—		655,036		—
Obligations of states and municipal subdivisions		423,959		—		423,959		—
Total investment securities available-for-sale		1,257,063		—		1,257,063		—
Equity securities with readily determinable fair values not held for trading		5,885		5,885		—		—
Derivative assets		3,958		—		3,958		—
Net profits interests		15,833		—		—		15,833
Total recurring basis measured assets	$	1,282,739	$	5,885	$	1,261,021	$	15,833
Derivative liabilities	$	25,280	$	—	$	25,280	$	—
Total recurring basis measured liabilities	$	25,280	$	—	$	25,280	$	—

There were no transfers between the Level 1 and Level 2 fair value categories during the three and nine months ended September 30, 2018 and 2017.

Changes in Level 3 Fair Value Measurements

 The tables below include a roll-forward of the condensed consolidated balance sheet amounts for the three and nine months ended September 30, 2018 and 2017 for changes in the fair value of financial instruments within Level 3 of the valuation hierarchy that are recorded on a recurring basis. Level 3 financial instruments typically include unobservable components, but may also include some observable components that may be validated to external sources. The gains or (losses) in the following table may include changes to fair value due in part to observable factors that may be part of the valuation methodology:

Level 3 Assets Measured at Fair Value on a Recurring Basis

	For the Three Months Ended September 30,
	2018			2017			2018			2017
(In thousands)	Net Profits Interests						Investments in Limited Partnerships
Beginning Balance	$	12,839		$	16,405		$	8,852		$	—
Net gains included in earnings		210			105			547	��		—
Contributions paid		—			—			1,296			—
Distributions received		(777	)		(317	)		(187	)		—
Ending Balance at September 30, 2018	$	12,272		$	16,193		$	10,508		$	—
Net unrealized gains included in earnings relating to assets held at the end of the period	$	210		$	105		$	547		$	—

34

	For the Nine Months Ended September 30,
	2018			2017			2018			2017
(In thousands)	Net Profits Interests						Investments in Limited Partnerships
Beginning Balance	$	15,833		$	19,425		$	—		$	—
Transfers in due to adoption of ASU 2016-01		—			—			5,518			—
Adjustment recorded in retained earnings due to adoption of ASU 2016-01		—			—			1,201			—
Net (losses) gains included in earnings		(1,992	)		(2,427	)		1,942			—
Contributions paid		—			—			2,404			—
Distributions received		(1,569	)		(805	)		(557	)		—
Ending Balance at September 30, 2018	$	12,272		$	16,193		$	10,508		$	—
Net unrealized (losses) gains included in earnings relating to assets held at the end of the period	$	(1,992	)	$	(2,427	)	$	1,942		$	—

The fair value of the net profits interests in oil and gas reserves was estimated using discounted cash flow analyses applied to the expected cash flows from producing developed wells.  Expected cash flows are derived from reports prepared by consulting engineers under established professional standards for the industry. These expected cash flow projections contain significant unobservable inputs regarding the net recoverable oil and gas reserves and forward-looking commodity prices discounted at a rate of 10%. Therefore, the fair value is subject to change based on these commodity markets. An increase of 5% in the discount rate would not produce a material change in the fair value of the net profits interests.

The adoption of ASU 2016-01 on January 1, 2018 resulted in certain investments in limited partnerships being estimated using the net asset value “NAV” practical expedient provided by the partnership as allowed by ASC 820 for an equity security without a readily determinable fair value.  These investments are within Level 3 of the valuation hierarchy and are measured on a recurring basis.  Prior to the adoption of the accounting standard, these investments were accounted for under the cost method.  On January 1, 2018, an adjustment of $1.2 million was recorded to retained earnings to account for the adoption of the accounting principle.  

Assets Recorded at Fair Value on a Nonrecurring Basis

From time to time, the Company may be required to measure certain other financial assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis which were still held on the balance sheets at September 30, 2018 and December 31, 2017, the following tables provide the level of valuation assumptions used to determine each adjustment and the related carrying value:

(In thousands)	Carrying Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2018
Loans held for sale	$	46,787		—	$	46,787	$	—
Impaired loans, net of specific allowance		48,610		—		—		48,610
Other real estate		3,355		—		—		3,355
Total assets measured on a nonrecurring basis	$	98,752	$	—	$	46,787	$	51,965

(In thousands)	Carrying Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2017
Loans held for sale	$	61,359	$	—	$	61,359	$	—
Impaired loans, net of specific allowance		65,087		—		—		65,087
Other real estate		7,605		—		—		7,605
Total assets measured on a nonrecurring basis	$	134,051	$	—	$	61,359	$	72,692

35

The fair value of collateral-dependent impaired loans and OREO and the related fair value adjustments are generally based on unadjusted third-party appraisals.  Appraisals that are not based on observable inputs or that require significant adjustments or fair value measurements that are not based on third-party appraisals are considered to be based on significant unobservable inputs.

Nonrecurring fair value measurements of collateral dependent loans secured by oil and gas reserves and mineral rights are generally based on borrower provided or third-party reserve reports (which are reviewed by the Company’s engineering team) that utilize projected cash flows under current market conditions and include significant unobservable inputs. Projected cash flows are discounted according to risk characteristics of the underlying oil and gas properties. Assets are evaluated to demonstrate with reasonable certainty that crude oil, natural gas and natural gas liquids can be recovered from known oil and gas reservoirs under existing economic and operating conditions at current prices with existing conventional equipment, operating methods and costs. The significant unobservable inputs used in these valuations have been developed through our contacts with oil and gas industry participants, asset management and workout professionals and approved by senior management.

Significant unobservable inputs used in Level 3 fair value measurements for financial assets measured at fair value on a nonrecurring basis at September 30, 2018 and December 31, 2017 are summarized below:

	Quantitative Information about Level 3 Fair Value Measurements
(In thousands)	Carrying Value		Valuation Methods	Unobservable Inputs	Range
September 30, 2018
Impaired loans, net of specific allowance	$	48,611	Appraised value, as adjusted	Discount to fair value	0% - 20%
			Discounted cash flow	Net recoverable oil and gas reserves and forward-looking commodity prices. Discount rate - 10%	0% - 17%(1)
			Discounted cash flow	Discount rates - 2.9% to 8.7%	0% - 20%(1)
			Enterprise value	Exit multiples	0 - 15%(1)
				Estimated closing costs	10%
Other real estate		3,355	Appraised value, as adjusted	Discount to fair value	0% - 20%
				Estimated closing costs	10%
(1) - Represents difference of unpaid balance to fair value.

	Quantitative Information about Level 3 Fair Value Measurements
(In thousands)	Carrying Value		Valuation Methods	Unobservable Inputs	Range
December 31, 2017
Impaired loans, net of specific allowance	$	65,087	Appraised value, as adjusted	Discount to fair value	0% - 50%
			Discounted cash flow	Net recoverable oil and gas reserves and forward-looking commodity prices. Discount rate - 9%	0% - 29%(1)
			Discounted cash flow	Discount rates - 3.6% to 8.0%	0% - 1%(1)
				Estimated closing costs	10%
Other real estate		7,605	Appraised value, as adjusted	Discount of fair value	0%-20%
				Estimated closing costs	10%
(1) - Represents fair value as a percent of the unpaid principal balance.

36

Determination of Fair Values

In accordance with ASC 820-10-35, fair values are based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following describes the assumptions and methodologies used to estimate the fair value of financial instruments recorded at fair value in the consolidated balance sheets and for estimating the fair value of financial instruments for which fair value is disclosed under ASC 825-10-50.

Investment Securities.    When quoted prices are available in an active market, securities are classified as Level 1. For securities reported at fair value utilizing Level 2 inputs, the Company obtains fair value measurements from an independent pricing service. These fair value measurements consider observable market data that may include benchmark yield curves, reported trades, broker/dealer quotes, issuer spreads and credit information, among other inputs.

Loans Held for Sale.    Loans held for sale are recorded at the lower of aggregate cost or fair value. Fair value is generally based on quoted market prices of similar loans and is considered to be Level 2.

Net Loans.    Loans are valued on an individual basis, with consideration given to the loans’ underlying characteristics, including account types, remaining terms, annual interest rates or coupons, interest types, accrual basis, timing of principal and interest payments, current market rates, and remaining balances.  A discounted cash flow model is used to estimate the fair value of the loans using assumptions for the coupon rates, remaining maturities, prepayment speeds, projected default probabilities by risk grade, and estimates of prevailing discount rates.  The discounted cash flow approach models the projected cash flows, applying various assumptions regarding interest and payment risks for the loans based on the loan types, payment types and fixed or variable classifications.  For variable rate loans, forward interest rate curves are integrated into the projection of cash flows.  The forward curves are index specific and obtained from a leading third-party provider.  Future coupon payments are determined based upon the applicable forward curve, spread, next repricing date, and repricing frequency.

Derivative Financial Instruments.    Derivative financial instruments are measured at fair value based on modeling that utilizes observable market inputs for various interest rates published by leading third-party financial news and data providers. This is observable data that represents the rates used by market participants for instruments entered into at that date; however, they are not based on actual transactions so they are classified as Level 2.

Net profits interests.    The fair value of the net profits interests in oil and gas reserves was estimated using discounted cash flow analyses applied to the expected cash flows from producing developed wells.  Expected cash flows are derived from reports prepared by consulting engineers under established professional standards for the industry.  

Investments in Limited Partnerships.  The fair value of certain investments in limited partnerships was estimated using the net asset value practical expedient provided by the partnership as allowed by ASC 820 for an equity security without a readily determinable fair value. Certain other limited partnerships without readily determinable fair values that do not qualify for the practical expedient are accounted for at cost minus impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The investments in affordable housing projects are carried at amortized costs which approximates fair value (Note 20).

Deposits.    The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). Fair values for CDs are estimated using a discounted cash flow calculation that applies interest rate spreads to current Treasury yields.

FHLBAdvances.    The fair value of the FHLB advance approximates its book value.  

Security Sold Under Agreements to Repurchase.    The carrying amount of security repurchase agreements approximates their fair values.

Senior Debt.    The fair value of senior debt was estimated by obtaining broker indications that compared the Company’s senior debt to other comparable financial institutions.

Subordinated Debt.    The fair value of subordinated debentures was estimated by obtaining broker indications that compared the Company’s subordinated debentures to other comparable financial institutions.

Junior Subordinated Debentures.    The fair value of junior subordinated debentures was estimated by obtaining broker indications that compared the Company’s junior subordinated debentures to other comparable financial institutions.

37

Limitations.    The following fair value estimates are determined as of a specific point in time utilizing various assumptions and estimates. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial instruments, will likely reduce the comparability of fair value disclosures between financial institutions. The fair values for loans involve the use of significant internally-developed pricing assumptions due to market-illiquidity for loans net of unearned income and loans held for sale as of September 30, 2018 and December 31, 2017. These assumptions are considered to reflect inputs that market participants would use in transactions involving these instruments as of the measurement date. This table only includes financial instruments of the Company, and, accordingly, the total of the fair value amounts does not represent, and should not be construed to represent, the underlying value of the Company.

The estimated fair values of the Company’s financial instruments are as follows:

	September 30, 2018
(In thousands)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	125,220	$	125,220	$	125,220	$	—	$	—
Interest-bearing deposits in other banks		273,404		273,404		273,404		—		—
Federal funds sold		249		249		249		—		—
Securities available-for-sale		1,200,464		1,200,464		—		1,200,464		—
Equity securities with readily determinable fair values not held for trading		5,923		5,923		5,923		—		—
Loans held for sale		46,787		46,787		—		46,787		—
Net loans		9,357,668		9,166,511		—		—		9,166,511
Derivative assets		7,776		7,776		—		7,776		—
Net profits interests		12,272		12,272		—		—		12,272
Investments in limited partnerships		10,508		10,508		—		—		10,508
Financial Liabilities:
Deposits		9,558,276		9,548,632		—		9,548,632		—
Advances from FHLB		340,000		340,000		—		340,000		—
Securities sold under agreements to repurchase		2,191		2,191		—		2,191		—
Senior debt		184,778		194,593		—		194,593		—
Subordinated debt		98,856		97,424		—		97,424		—
Junior subordinated debentures		36,833		48,898		—		48,898		—
Derivative liabilities		45,169		45,169		—		45,169		—

	December 31, 2017
(In thousands)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	238,707	$	238,707	$	238,707	$	—	$	—
Interest-bearing deposits in other banks		482,568		482,568		482,568		—		—
Federal funds sold		9,536		9,536		9,536		—		—
Securities available-for-sale		1,257,063		1,257,063		—		1,257,063		—
Securities held-to-maturity		290		311		—		311		—
Equity securities with readily determinable fair values not held for trading		5,885		5,885		5,885		—		—
Loans held for sale		61,359		61,359		—		61,359		—
Net loans		8,165,851		8,134,903		—		—		8,134,903
Derivative assets		3,958		3,958		—		3,958		—
Net profits interests		15,833		15,833		—		—		15,833
Financial Liabilities:
Deposits		9,011,515		9,006,890		—		9,006,890		—
Advances from FHLB		150,000		150,000		—		150,000		—
Securities sold under agreements to repurchase		1,026		1,026		—		1,026		—
Senior debt		184,629		194,484		—		194,484		—
Subordinated debt		98,687		94,724		—		94,724		—
Junior subordinated debentures		36,472		49,161		—		49,161		—
Derivative liabilities		25,280		25,280		—		25,280		—

38

Note 17—Segment Reporting

The Company determines reportable segments based on the services offered, the significance of the services offered, the significance of those services to the Company’s financial condition and operating results and management’s regular review of the operating results of those services. The Company operates through three operating segments: Banking, Financial Services and Corporate.

The Banking Segment includes the Commercial Banking, Retail Banking and Private Banking lines of business. The Commercial Banking line of business includes a general business services component primarily focusing on commercial & industrial (C&I), community banking, business banking and commercial real estate lending to clients in the geographic footprint in Texas and the southeast United States. In addition, the Commercial Banking line of business includes within C&I a separate component that focuses on select industries (which is referred to as the “specialized industries”) in which the Company believes it has specialized experience and service capabilities, including energy, healthcare, restaurant industry, and technology. The Company serves clients in these specialized industries both within the geographic footprint and throughout the United States as a result of the national orientation of many of these businesses. The Retail Banking line of business offers a broad range of retail banking services including mortgage services through the branch network to serve the needs of consumer and small businesses in the geographic footprint. The Private Banking line of business offers banking services and loan products tailored to the needs of the high-net worth clients in the geographic footprint.

The Financial Services Segment includes the Trust, Retail Brokerage, Investment Services and Insurance businesses. These businesses offer products independently to their own customers as well as to Banking Segment clients. Investment Services operates through the “Linscomb & Williams” name and prior to sale of the insurance business, Insurance operated though the “Cadence Insurance” name. (See “Sale of Subsidiary” in Note 1). The products offered by the businesses in the Financial Services Segment primarily generate non-banking service fee income. The Corporate Segment reflects parent-only activities and intercompany eliminations.

Business segment results are determined based upon the management reporting system, which assigns balance sheet and income statement items to each of the business segments. The process is designed around the organizational and management structure and, accordingly, the results derived are not necessarily comparable with similar information published by other financial institutions or in accordance with generally accepted accounting principles.

The Company evaluates performance and allocates resources based on profit or loss from operations. There are no material inter-segment sales or transfers. The accounting policies used by each reportable segment are the same as those discussed in Note 1. All costs, except corporate administration and income taxes, have been allocated to the reportable segments. Therefore, combined amounts agree to the consolidated totals.

The following tables present the operating results of the segments as of and for the three and nine months ended September 30, 2018 and 2017:

	Three Months Ended September 30, 2018
(In thousands)	Banking			Financial Services			Corporate			Consolidated
Net interest income	$	102,940		$	(429	)	$	(4,411	)	$	98,100
Provision for credit losses		(1,365	)		—			—			(1,365	)
Noninterest income		13,741			10,105			130			23,976
Noninterest expense		50,612			7,904			2,715			61,231
Income tax expense (benefit)		15,669			270			(865	)		15,074
Net income	$	51,765		$	1,502		$	(6,131	)	$	47,136

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	Three Months Ended September 30, 2017
(In thousands)	Banking		Financial Services			Corporate			Consolidated
Net interest income	$	87,123	$	(2,340	)	$	(3,620	)	$	81,163
Provision for credit losses		1,723		—			—			1,723
Noninterest income		13,967		12,798			359			27,124
Noninterest expense		46,785		9,087			658			56,530
Income tax expense (benefit)		18,404		480			(1,427	)		17,457
Net income	$	34,178	$	891		$	(2,492	)	$	32,577

	Nine Months Ended September 30, 2018
(In thousands)	Banking		Financial Services			Corporate			Consolidated
Net interest income	$	299,555	$	(1,736	)	$	(13,224	)	$	284,595
Provision for credit losses		4,278		—			—			4,278
Noninterest income		35,499		37,443			689			73,631
Noninterest expense		151,179		27,696			6,730			185,605
Income tax expense (benefit)		41,595		3,817			(11,004	)		34,408
Net income	$	138,002	$	4,194		$	(8,261	)	$	133,935
Total assets	$	11,660,234	$	93,721		$	5,882		$	11,759,837

	Nine Months Ended September 30, 2017
(In thousands)	Banking		Financial Services			Corporate			Consolidated
Net interest income	$	252,240	$	(873	)	$	(13,062	)	$	238,305
Provision for credit losses		14,210		—			—			14,210
Noninterest income		37,178		36,517			523			74,218
Noninterest expense		139,239		26,361			1,385			166,985
Income tax expense (benefit)		47,589		3,249			(7,172	)		43,666
Net income	$	88,380	$	6,034		$	(6,752	)	$	87,662

Note 18—Equity-based Compensation

The Company administers a long-term incentive compensation plan that permits the granting of incentive awards in the form of stock options, restricted stock, restricted stock units, performance units, stock appreciation rights, or other stock-based awards. The terms of all awards issued under these plans are determined by the Compensation Committee of the Board of Directors.

The Amended and Restated 2015 Omnibus Incentive Plan (the “Plan”) permits the Company to grant to employees and directors various forms of incentive compensation. The principal purposes of this plan are to focus directors, officers and other employees and consultants on business performance that creates shareholder value, to encourage innovative approaches to the business of the Company, and to encourage ownership of the Company’s stock. The Plan authorizes 7,500,000 common share equivalents available for grant, where grants of full value awards (e.g., shares of restricted stock, restricted stock units and performance stock units) count as one share equivalent. The number of remaining share equivalents available for future issuance under the Plan was 6,557,711 at September 30, 2018 assuming applicable performance goals are satisfied at target levels.

On April 2, 2018, the Company granted 270,105 shares of stock-based awards in the form of restricted stock units pursuant to and subject to the provisions of the Plan.  While the grant specifies a stated target number of units, the determination of the actual settlement in shares will be based in part on the achievement of certain financial performance measures of the Company over the three years ended December 31, 2020. For half of the units granted, these performance conditions will determine the actual units vested on March 31, 2021 and can be in the range of zero to two times the units granted.  The remaining half of the restricted stock units vest equally on March 31 of each of the next three years.  These grants include rights as a shareholder in the form of dividend equivalents. Dividend equivalents for time vested restricted stock units will be paid on each dividend payment date for the Company; dividend equivalents for the performance vesting restricted stock will be accrued and paid on the vested number of shares once the performance is achieved and the shares are issued.  

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On June 1, 2018, the Company commenced the 2018 Employee Stock Purchase Plan (“ESPP”) whereby employees may purchase the Company’s Class A Common Stock (“Common Stock”) at a discount of 15% of the fair market value of a share of Class A Common Stock, defined as the closing price of Common Stock on the stock exchange for the first and last days of the purchase period (as defined). The total amount of the Company’s Common Stock on which options may be granted under the ESPP shall not exceed 500,000 shares. Shares of Common Stock subject to any unexercised portion of a terminated, canceled or expired option granted under the ESPP may again be used for options under the ESPP. No participating employee shall have any rights as a shareholder until the issuance of a stock certificate to the employee. There have been 32,917 shares issued under the ESPP in 2018 which resulted in compensation expense of $106 thousand and $135 thousand for the three and nine months ended September 30, 2018, respectively.

As of September 30, 2018, there were 942,289 outstanding non-vested restricted stock units with a weighted average grant date fair value of $11.25.  There were no forfeitures for the nine months ended September 30, 2017.   The following table is a summary of the restricted stock unit activity for the nine months ended September 30, 2018:

	For the Nine Months Ended September 30, 2018
	Number of Shares			Fair Value per Unit at Award Date
Non-vested at beginning of period		672,750		$	5.14
Forfeited during the period		(566	)		26.50
Granted during the period		270,105			26.50
Non-vested at end of period		942,289		$	11.25

The Company recorded $1.3 million and $2.8 million equity-based compensation expense for the outstanding restricted stock units for the three and nine months ended September 30, 2018, respectively, compared to $0.4 million and $1.2 million for the same periods in 2017.  The remaining expense related to unvested restricted stock units is $7.4 million as of September 30, 2018 and will be recognized over the next 30 months.  

Note 19—Accumulated Other Comprehensive Loss

Activity within the balances in accumulated other comprehensive loss is shown in the following tables for the nine months ended September 30, 2018.

(In thousands)	Unrealized gains (losses) on securities available for sale			Unrealized gains (losses) on defined benefit pension plans			Unrealized gains (losses) on derivative instruments designated as cash flow hedges			Accumulated other comprehensive gain (loss)
Balance at December 31, 2017	$	(2,160	)	$	(531	)	$	(16,342	)	$	(19,033	)
Net change		(36,681	)		—			(11,945	)		(48,626	)
Balance at September 30, 2018	$	(38,841	)	$	(531	)	$	(28,287	)	$	(67,659	)

Note 20—Variable Interest Entities and Other Investments

Under ASC 810-10-65, the Company is deemed to be the primary beneficiary and required to consolidate a variable interest entity (“VIE”) if it has a variable interest in the VIE that provides it with a controlling financial interest. For such purposes, the determination of whether a controlling financial interest exists is based on whether a single party has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb the losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. ASC 810-10-65, as amended, requires continual reconsideration of conclusions reached regarding which interest holder is a VIE’s primary beneficiary.

The Bank has invested in several affordable housing projects as a limited partner. The partnerships have qualified to receive annual affordable housing federal tax credits that are recognized as a reduction of current tax expense. The Company has determined that these structures meet the definition of VIE’s under Topic ASC 810 but that consolidation is not required, as the Bank is not the primary beneficiary. At September 30, 2018 and December 31, 2017, the Bank’s maximum exposure to loss associated with these limited partnerships was limited to the Bank’s investment. The Company accounts for these investments and

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the related tax credits using either the effective yield method or the proportional amortization method, depending upon the date of the investment. Under the effective yield method, the Bank recognizes the tax credits as they are allocated and amortizes the initial costs of the investments to provide a constant effective yield over the period that the tax credits are allocated. Under the proportional amortization method, the Bank amortizes the cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense. At September 30, 2018 and December 31, 2017, the Company had recorded investments in other assets on its consolidated balance sheets of approximately $8.1 million and $7.9 million, respectively related to these investments.

Additionally, the Company invests in other certain limited partnerships accounted for under the fair value practical expedient of net asset value totaling $10.5 million as of September 30, 2018.  The company recognized a $0.5 million and $1.9 million gain for the three and nine months ended September 30, 2018 related to these assets recorded at fair value through net income.  Certain other limited partnerships without readily determinable fair values that do not qualify for the practical expedient are accounted for at its cost minus impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. These investments totaled $8.4 million as of September 30, 2018. Other limited partnerships are accounted for under the equity method totaling $9.3 million as of September 30, 2018. As of December 31, 2017 and prior to the adoption of ASU 2016-01, certain limited partnerships were accounted for under the cost method totaling $14.0 million and the equity method totaling $8.8 million

The following table presents a summary of the Company’s investments in limited partnerships subsequent to the adoption of ASU 2016-01 and as of September 30, 2018:

(In thousands)	As of September 30, 2018
Affordable housing projects (amortized cost)	$	8,089
Limited partnerships accounted for under the fair value practical expedient of NAV		10,508
Limited partnerships without readily determinable fair values that do not qualify for the practical expedient of NAV accounted for under the cost method		8,412
Limited partnerships required to be accounted for under the equity method		9,309
Total investments in limited partnerships	$	36,318

During 2016, the Bank received net profits interests in oil and gas reserves, in connection with the reorganization under bankruptcy of two loan customers. The Company has determined that these contracts meet the definition of VIE’s under Topic ASC 810, but that consolidation is not required as the Bank is not the primary beneficiary. The net profits interests are financial instruments and recorded at estimated fair value, which was $12.3 million and $15.8 million at September 30, 2018 and December 31, 2017, respectively, representing the maximum exposure to loss as of that date.

The Company has established a rabbi trust related to the deferred compensation plan offered to certain of its employees. The Company contributes employee cash compensation deferrals to the trust. The assets of the trust are available to creditors of the Company only in the event the Company becomes insolvent. This trust is considered a VIE because either there is no equity at risk in the trust or because the Company provided the equity interest to its employees in exchange for services rendered. The Company is considered the primary beneficiary of the rabbi trust as it has the ability to select the underlying investments made by the trust, the activities that most significantly impact the economic performance of the rabbi trust. The Company includes the assets of the rabbi trust as a component of other assets and a corresponding liability for the associated benefit obligation in other liabilities in its consolidated balance sheets. At September 30, 2018 and December 31, 2017, the amount of rabbi trust assets and benefit obligation was $3.9 million and $3.6 million, respectively.

Note 21—Subsequent Events

On October 19, 2018, the Board of Directors of the Company declared a quarterly cash dividend in the amount of $0.15 per share of common stock, representing an annualized dividend of $0.60 per share.  The dividend will be paid on December 17, 2018 to holders of record of the Class A common stock on December 3, 2018.  

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

The following discussion and analysis presents our results of operations and financial condition on a consolidated basis for the three and nine months ended September 30, 2018.  This discussion should be read in conjunction with the unaudited consolidated financial statements, accompanying footnotes and supplemental financial data included herein. The emphasis of this discussion will be amounts as of September 30, 2018 compared to December 31, 2017 for the balance sheets and the three and nine months ended September 30, 2018 compared to September 30, 2017 for the statements of income.

Because we conduct our material business operations through our bank subsidiary, Cadence Bank, N.A., the discussion and analysis relates to activities primarily conducted by the Bank. We generate most of our revenue from interest on loans and investments and fee-based revenues. Our primary source of funding for our loans is deposits. Our largest expenses are interest on these deposits and salaries and related employee benefits. We measure our performance primarily through our net income, pre-tax and pre-loan provision earnings, net interest margin, efficiency ratio, ratio of allowance for credit losses to total loans, return on average assets and return on average equity, among other metrics, while maintaining appropriate regulatory leverage and risk-based capital ratios.

This Quarterly Report on Form 10-Q contains forward-looking statements. These forward-looking statements reflect our current views with respect to, among other things, future events and our results of operations, financial condition and financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” or the negative version of those words or other comparable words of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following:

• business and economic conditions generally and in the financial services industry, nationally and within our current and future geographic market areas;

• economic, market, operational, liquidity, credit and interest rate risks associated with our business;

• lack of seasoning in our loan portfolio;

• deteriorating asset quality and higher loan charge-offs;

• the laws and regulations applicable to our business;

• our ability to achieve organic loan and deposit growth and the composition of such growth;

• increased competition in the financial services industry, nationally, regionally or locally;

• our ability to maintain our historical earnings trends;

• our ability to raise additional capital to implement our business plan;

• material weaknesses in our internal control over financial reporting;

• systems failures or interruptions involving our information technology and telecommunications systems or third-party servicers;

• the composition of our management team and our ability to attract and retain key personnel;

• the fiscal position of the U.S. federal government and the soundness of other financial institutions;

• our ability to monitor our lending relationships;

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• the composition of our loan portfolio, including the identity of our borrowers and the concentration of loans in energy-related industries and in our specialized industries;

• the portion of our loan portfolio that is comprised of participations and shared national credits;

• the amount of nonperforming and classified assets we hold;

• time and effort necessary to resolve nonperforming assets;

• our ability to identify potential candidates for, consummate, and achieve synergies resulting from, potential future acquisitions;

• our limited operating history as an integrated company and our recent acquisitions;

• environmental liability associated with our lending activities;

• the geographic concentration of our markets in Texas and the southeast United States;

• the commencement and outcome of litigation and other legal proceedings against us or to which we may become subject;

• the impact of recent and future legislative and regulatory changes, including changes in banking, securities and tax laws and regulations, such as the Dodd-Frank Act, and their application by our regulators, and the impact if potential expected changes do not occur;

• requirements to remediate adverse examination findings;

• changes in the scope and cost of FDIC deposit insurance premiums;

• implementation of regulatory initiatives regarding bank capital requirements that may require heightened capital;

• the obligations associated with being a public company;

• our success at managing the risks involved in the foregoing items;

• our modeling estimates related to an increased interest rate environment;

• our ability to achieve the cost savings and efficiencies in connection with branch closures; and

• our estimates as to our expected operational leverage and the expected additional loan capacity of our relationship managers.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Report. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Overview

Cadence Bancorporation is a bank holding company and a Delaware corporation headquartered in Houston, Texas, and is the parent company of Cadence Bank, National Association (N.A.). With $11.8 billion in assets, $9.4 billion in total loans (net of unearned discounts and fees), $9.6 billion in deposits and $1.4 billion in shareholders’ equity as of September 30, 2018, we currently operate a network of 66 locations across Texas, Alabama, Florida, Mississippi and Tennessee. We focus on middle-market commercial lending, complemented by retail banking and wealth management services, and provide a broad range of banking services to businesses, high net worth individuals and business owners.

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We operate Cadence Bancorporation through three operating segments: Banking, Financial Services and Corporate. Our Banking Segment, which represented approximately 90% of our total revenues for the nine months ended September 30, 2018, consists of our Commercial Banking, Retail Banking and Private Banking lines of business. Our Commercial Banking activities focus on commercial and industrial (“C&I”), community banking, business banking and commercial real estate lending and treasury management services to clients in our geographic footprint in Texas and the southeast United States. Within our Commercial Banking line of business, we focus on select industries, which we refer to as our “specialized industries,” in which we believe we have specialized experience and service capabilities. These industries include franchise restaurant, healthcare and technology. Energy lending is also an important part of our business as energy production and energy related industries are meaningful contributors to the economy in our Texas market. In our Retail Banking business line, we offer a broad range of banking services through our branch network to serve the needs of consumers and small businesses. In our Private Banking business line, we offer banking services, such as deposit services and residential mortgage lending, to affluent clients and business owners.

We are focused on organic growth and expanding our position in our markets. We believe that our franchise is positioned for continued growth as a result of prudent lending both in our markets and nationally through our specialized industries units, experienced relationship managers and a client-centered, relationship-driven banking model. We believe our continued growth is supported by (i) our attractive geographic footprint, (ii) our stable and cost efficient deposit funding, (iii) our veteran board of directors and management team, (iv) our capital position and (v) our credit quality and risk management processes.

Proposed Merger with State Bank Financial Corporation (“State Bank”)

On May 11, 2018, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with State Bank Financial Corporation, a Georgia corporation (“State Bank”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, State Bank will merge with and into Cadence (the “Merger”), with Cadence surviving the Merger. Immediately following the Merger, State Bank’s wholly owned bank subsidiary, State Bank and Trust Company, will merge with and into the Bank (the “Bank Merger”). The Bank will be the surviving entity in the Bank Merger. The Merger Agreement was unanimously approved by the Board of Directors of each of Cadence and State Bank.

Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), State Bank shareholders will have the right to receive 1.160 shares (the “Exchange Ratio”) of Class A common stock, par value $0.01 per share, of Cadence (“Cadence Common Stock”) for each share of common stock, par value $0.01 per share, of State Bank (“State Bank Common Stock”). Each State Bank restricted stock award will vest and be cancelled and converted automatically at the Effective Time into the right to receive 1.160 shares of Cadence Common Stock in respect of each share of State Bank Common Stock underlying such award. Each State Bank warrant will be converted automatically at the Effective Time into a warrant to purchase shares of Cadence Common Stock, with the number of underlying shares and per share exercise price adjusted to reflect the Exchange Ratio.  

Based on the number of shares of Cadence Class A common stock and State Bank common stock outstanding as of May 11, 2018, the last trading day before public announcement of the merger, it is expected that Cadence stockholders will hold approximately 65%, and State Bank shareholders will hold approximately 35%, of the shares of the combined company outstanding immediately after the merger.

We have filed a registration statement on Form S-4 with the Securities and Exchange Commission with respect to the issuance of its common stock in connection with the Merger, which registration statement was declared effective by the Securities and Exchange Commission on July 24, 2018. State Bank held a special meeting of shareholders on Tuesday, September 18, 2018 in Atlanta, Georgia, related to its pending merger with Cadence. State Bank’s shareholders approved the Merger Agreement pursuant to which State Bank will merge with and into Cadence, with Cadence continuing as the surviving corporation. The Merger is expected to close in the fourth quarter of 2018.

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Selected Financial Data

The following table summarizes certain selected consolidated financial data for the periods presented. The historical consolidated financial information presented below contains financial measures that are not presented in accordance with U.S. GAAP and which have not been audited. See “Table 31 - Non-GAAP Financial Measures.”

Table 1 – Selected Financial Data

	As of and for the Three Months Ended September 30,						As of and for the Nine Months Ended September 30,						As of and for the Year Ended December 31,
(In thousands, except per share data)	2018			2017			2018			2017			2017
Statement of Income Data:
Net income	$	47,136		$	32,577		$	133,935		$	87,662		$	102,353
Net interest income		98,100			81,163			284,595			238,305			326,216
Noninterest income  - service fees and revenue		20,490			23,014			65,790			67,647			90,052
Noninterest expense		61,231			56,530			185,605			166,985			233,356
Provision for credit losses		(1,365	)		1,723			4,278			14,210			9,735
Efficiency ratio (1)		50.16			52.20			51.81			54.08			54.77
Adjusted efficiency ratio (1)		48.36			52.74			49.75			53.59			54.12
Period-End Balance Sheet Data:
Investment securities, available-for-sale	$	1,200,464		$	1,198,032		$	1,200,464		$	1,198,032		$	1,257,063
Total loans, net of unearned income		9,443,819			8,028,938			9,443,819			8,028,938			8,253,427
Allowance for credit losses ("ACL")		86,151			94,765			86,151			94,765			87,576
Total assets		11,759,837			10,502,261			11,759,837			10,502,261			10,948,926
Total deposits		9,558,276			8,501,102			9,558,276			8,501,102			9,011,515
Total shareholders’ equity		1,414,826			1,340,848			1,414,826			1,340,848			1,359,056
Asset Quality Ratios:
Total nonperforming assets ("NPAs") to total loans and OREO and other NPAs		0.66	%		1.51	%		0.66	%		1.51	%		0.85	%
Total ACL to total loans		0.91			1.18			0.91			1.18			1.06
ACL to total nonperforming loans ("NPLs")		182.52			122.66			182.52			122.66			183.62
Net charge-offs to average loans (2)		0.13			0.01			0.09			0.01			0.06
Capital Ratios:
Total shareholders’ equity to assets		12.0	%		12.8	%		12.0	%		12.8	%		12.4	%
Tangible common equity to tangible assets (1)		9.6			10.0			9.6			10.0			9.7
Common equity tier 1 (CET1)		10.4			10.8			10.4			10.8			10.8
Tier 1 leverage capital		10.7			11.1			10.7			11.1			11.1
Tier 1 risk-based capital		10.8			11.2			10.8			11.2			11.2
Total risk-based capital		12.4			13.2			12.4			13.2			13.4
_____________________
(1) - Considered a non-GAAP financial measure. See Table 31 "Reconciliation of Non-GAAP Financial Measures" for a reconciliation
of our non-GAAP measures to the most directly comparable GAAP financial measure.
(2) - Annualized for the three and nine months ended September 30, 2018 and 2017.

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Summary of Results of Operations - Three and Nine Months Ended September 30, 2018

Net income for the three months ended September 30, 2018 totaled $47.1 million, a $14.6 million or 44.7% increase, compared to $32.6 million for the same period in 2017. The primary drivers of the net $14.6 million increase included a $16.9 million increase in net interest income, a $3.1 million decrease in the provision for credit losses, and a $2.4 million decrease in income taxes, offset by an increase in noninterest expense of $4.7 million. Diluted earnings per common share for the three months ended September 30, 2018, were $0.56 compared to $0.39 for the same period in 2017.

Net income for the nine months ended September 30, 2018 totaled $133.9 million, a $46.3 million, or 52.8%, increase compared to $87.7 million for the same period in 2017. The primary drivers of the net increase included a $46.3 million increase in net interest income, a $9.9 million decreased in the provision for credit losses, and a $9.3 million decrease in income taxes. The resulting earnings per diluted common share for the three and nine months ended September 30, 2018 were $0.56 and $1.58, compared to $0.39 and $1.09 for the same periods of 2017. Diluted earnings per common share for the nine months ended September 30, 2018, were $1.58 compared to $1.09 for the same period in 2017.

The third quarter and year-to-date periods of 2018 and 2017 included non-routine revenues and expenses, primarily consisting of secondary offering expenses, merger related expenses, gain and expenses related to the sale of the assets of our insurance company, securities losses, and other items. These non-routine revenues and expenses resulted in adjusted net income⁽¹⁾ of $49.3 million and $133.6 million for the three months and nine months ended September 30, 2018, respectively, and adjusted net income of $31.9 million and $87.1 million for the comparable periods of 2017. Adjusted diluted earnings per share⁽¹⁾ was $0.58 and $1.57 for the three and nine months ended September 30, 2018, respectively, and $0.38 and $1.08 for the comparable periods of 2017.

Annualized returns on average assets, common equity and tangible common equity for the third quarter of 2018 were 1.61%, 13.40%, and 17.32%, respectively, compared to 1.29%, 9.78%, and 13.04%⁽¹⁾, respectively, for the third quarter of 2017. Adjusted annualized returns⁽¹⁾ on average assets, common equity, and tangible common equity for the nine months ended September 30, 2018, were 1.59%, 13.64%, and 17.11%, respectively, compared to 1.04%, 9.53%, and 13.07% for the nine months ended September 30, 2017. Adjusted annualized returns⁽¹⁾ on average assets, common equity, and tangible common equity reflect the impact of the non-routine items noted above.  

Net interest income was $98.1 million for the three months ended September 30, 2018, a $16.9 million, or 20.9%, an increase compared to the same period of 2017. Our net interest spread decreased to 3.11% for the three months ended September 30, 2018 compared to 3.20% for the same period in 2017, and the net interest margin on an annualized basis increased 6 basis points to 3.58% from 3.52%. Yields on loans increased while the yield on securities decreased due to a rebalancing of the municipal securities portfolio in the second quarter of 2018. At the same time, deposit costs in the third quarter of 2018 continued to be impacted by federal funds rates increases in March, June, and September. The decline in spread and 6 basis point increase in margin were due to accelerated timing of recovery accretion income on acquired credit impaired loans in the 2017 periods.  Recovery income was $0.4 million and $1.4 million for the three and nine months ended September 30, 2018, and $0.3 million and $5.4 million for the three and nine months ended September 30, 2017, respectively.

Net interest income was $284.6 million for the nine months ended September 30, 2018, a $46.3 million, or 19.4%, increase compared to the same period of 2017. Our net interest spread decreased to 3.22% for the nine months ended September 30, 2018 compared to 3.28% for the same period in 2017, and the net interest margin on an annualized basis increased 7 basis points to 3.63% from 3.56%. The increases in net interest margin are primarily a result of our asset sensitive balance sheet and strong growth in our earning assets, partially offset by timing of recovery accretion income discussed above.

Service fees and revenue were $20.5 million in the three months ended September 30, 2018, a decrease of $2.5 million, or 11.0%, from the same period in 2017. The period-over-period decrease is due to the decrease in insurance revenue due to the sale of the assets of the insurance company in the second quarter of 2018 and to a $0.8 million decrease in interchange fees limited by the Durbin Amendment. The third quarter of 2018 is the first quarter in which the Durbin Amendment applied to the Company’s interchange fees.  

Service fees and revenue were $65.8 million in the nine months ended September 30, 2018, a decrease of $1.9 million, or 2.7%, from the same period in 2017. The period-over-period decrease resulted from the decrease in insurance revenue after the sale of the assets of the insurance company in the second quarter of 2018 along with a 35.2% decrease in mortgage banking income. These decreases were partially offset by increases in in investment advisory revenue, credit related fees and other service fees.

(1) - Considered a non-GAAP financial measure. See Table 31 "Reconciliation of Non-GAAP Financial Measures" for a reconciliation

        of our non-GAAP measures to the most directly comparable GAAP financial measure.

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Noninterest expense for the three months ended September 30, 2018 increased $4.7 million, or 8.3%, to $61.2 million compared to $56.5 million during the same period of 2017.  The three months ended September 30, 2018 included an increase of $1.9 million in consulting and professional fees related to secondary offerings, an increase of $0.4 million in FDIC insurance, and an increase of $1.3 million in other noninterest expenses due to broad-based business growth.  

Noninterest expense for nine months ended September 30, 2018 increased $18.6 million, 11.2%, to $185.6 million compared to $167.0 million during the same period of 2017. The nine months ended September 30, 2018 included higher salary and benefits expenses driven by business growth and related incentives, expenses related to the secondary offerings of $4.6 million, legal costs of $2.3 million related to litigation settlement of a pre-acquisition matter of a legacy acquired bank, $1.1 million in expenses related to the sale of the assets of our insurance company and $0.9 million in other expenses specific to acquisition related costs, partially offset by lower intangible amortization, and net cost of operation of other real estate owned.

Our efficiency ratio was 50.16% for the three months ended September 30, 2018, an improvement over the 52.20% efficiency ratio for the same period of 2017. Our efficiency ratio was 51.81% for the nine months ended September 30, 2018, an improvement over the 53.43% efficiency ratio for the same period of 2017. Our adjusted efficiency ratio⁽¹⁾ was 48.36% for the three months ended September 30, 2018, an improvement over the 52.74% adjusted efficiency ratio for the same period of 2017. Our adjusted efficiency ratio was 49.75% for the nine months ended September 30, 2018, an improvement over the 53.6% efficiency ratio for the same period of 2017. Adjusted efficiency ratios reflect the impact of the non-routine items.  

Provision for credit losses decreased $3.1 million, or 179.2%, to ($1.4) million in the three months ended September 30, 2018, compared to $1.7 million in the same period of 2017.  Provision for credit losses decreased $9.9 million, or 69.9%, to $4.3 million in the nine months ended September 30, 2018, compared to $14.2 million in the same period of 2017.  (See “—Provision for Credit Losses” and “—Asset Quality”). The lower provision for credit losses in 2018 was primarily related to continued improvement in the energy sector and that impact on the performance of our energy portfolio, as well as refinement of our portfolio loss rates amid an overall stable credit backdrop. These factors more than offset loan provisions associated with the 2018 loan growth. Annualized net charge-offs were 0.13% of average loans during the three months ended September 30, 2018 compared to 0.01% of average loans during the same period of 2017.

Summary of Financial Condition as of September 30, 2018

Our total loans, net of unearned income, increased $1.19 billion, or 14.4%, from December 31, 2017 to $9.44 billion on at September 30, 2018, which was driven by originated loan growth of $1.12 billion, partially offset by a decrease of $67.2 million in the acquired loan portfolio. Our organic loan growth reflects increases in general C&I, commercial real estate and residential portfolios.

From an asset quality perspective, total nonperforming assets (“NPAs”) decreased $7.8 million, or 11.1%, compared to December 31, 2017. The decrease in NPAs from December 31, 2017 is primarily related to pay downs and resolutions within the energy portfolio. (See “—Asset Quality). Our total allowance for credit losses decreased $1.4 million, or 1.6%, from $87.6 million at December 31, 2017 to $86.2 million at September 30, 2018, and represented approximately 0.9% of total loans at both September 30, 2018and December 31, 2017.

Total deposits increased $546.8 million, or 6.1%, to $9.56 billion, at September 30, 2018, from $9.01 billion at December 31, 2017.  Over the same period, noninterest-bearing deposits decreased $147.9 million, or 6.6%, and comprised 21.9% and 24.9% of total deposits at September 30, 2018 and December 31, 2017, respectively. Interest-bearing deposits increased $694.7 million, or 10.3%, and comprised 78.1% and 75.1% of total deposits at September 30, 2018 and December 31, 2017, respectively.  There was a decrease in brokered deposits of $70.4 million from December 31, 2017.

Overall, our Tier 1 leverage ratio increased 1 basis points, total risk-based capital ratio decreased 43 basis points and Tier 1 risk-based capital ratio decreased 21 basis points from December 31, 2017. We met all capital adequacy requirements and the Bank continued to exceed the minimum requirements to be considered well-capitalized under regulatory guidelines as of September 30, 2018.

(1) - Considered a non-GAAP financial measure. See Table 31 "Reconciliation of Non-GAAP Financial Measures" for a reconciliation

        of our non-GAAP measures to the most directly comparable GAAP financial measure.

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Results of Operations

Earnings

We reported net income for the three and nine months ended September 30, 2018 of $47.1 million and $133.9 million, respectively, compared to $32.6 million and $87.7 million for the three and nine months ended September 30, 2017, respectively. The following table presents key earnings data for the periods indicated:

Table 2 – Key Earnings Data

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In thousands, except per share data)	2018			2017			2018			2017
Net income	$	47,136		$	32,577		$	133,935		$	87,662
Net income per common share
- basic  (1)		0.56			0.39			1.60			1.09
- diluted (1)(4)		0.56			0.39			1.58			1.09
Dividends declared per share		0.15			—			0.40			—
Dividend payout ratio		26.79	%		—	%		25.00	%		—	%
Net interest margin		3.58			3.52			3.63			3.56
Net interest spread		3.11			3.20			3.22			3.28
Return on average assets(2)		1.61			1.29			1.59			1.19
Return on average equity(2)		13.40			9.78			13.11			9.59
Return on average tangible common equity(2)(3)		17.32			13.04			17.16			13.16

(1) As of the completion of the in-kind distribution on September 10, 2018, 58 of our outstanding shares are owned by Cadence Bancorp, LLC, down from 34,175,000 shares as of June 30, 2018 and 64,075,000 shares as of September 30, 2017.  

(2) Annualized for the three and nine months ended September 30, 2018 and 2017.

(3) Considered a non-GAAP financial measure.  See “Table 31 - Non-GAAP Financial Measures” for a reconciliation of our non-GAAP measures to the most directly comparable GAAP financial measure.

(4) Includes common stock equivalents (“CSE”) of 1,167,657 and 32,389 for the three months ended September 30, 2018 and 2017, and 1,108,732 and 352,795 for the nine months ended September 30, 2018 and 2017.

Net Interest Income

The largest component of our net income is net interest income, which is the difference between the income earned on interest-earning assets and interest paid on deposits and borrowings. We manage our interest-earning assets and funding sources to maximize our net interest margin. (See “—Quantitative and Qualitative Disclosures about Market Risk” for a discussion regarding our interest rate risk). Net interest income is determined by the rates earned on our interest-earning assets, rates paid on our interest-bearing liabilities, the relative amounts of interest-earning assets and interest-bearing liabilities, the degree of mismatch and the maturity and re-pricing characteristics of our interest-earning assets and interest-bearing liabilities. Net interest income divided by average interest-earning assets represents our net interest margin. The yield on our net earning assets less the yield on our interest-bearing liabilities represents our net interest spread.

Interest earned on our loan portfolio is the largest component of our interest income. Our originated and acquired noncredit impaired loan (“ANCI”) portfolios are presented at the principal amount outstanding net of deferred origination fees and unamortized discounts and premiums. Interest income is recognized based on the principal balance outstanding and the stated rate of the loan. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield on the related loan. ANCI loans acquired through our acquisitions were initially recorded at fair value. Discounts or premiums created when the loans were recorded at their estimated fair values at acquisition are being accreted over the remaining term of the loan as an adjustment to the related loan’s yield.

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The performance of loans within our acquired credit impaired (“ACI”) portfolio impacts interest income as the remaining discounts and proceeds received in excess of expected cash flows are realized in interest income when these loans are closed through payoff, charge off, workout, sale or foreclosure. At acquisition, the expected shortfall in future cash flows on our ACI portfolio, as compared to the contractual amount due, was recognized as a non-accretable discount. Any excess of expected cash flows over the acquisition date fair value is known as the accretable discount and is recognized as accretion income over the life of each pool or individual ACI loan. Expected cash flows over the acquisition date fair value are re-estimated quarterly utilizing the same cash flow methodology used at the time of acquisition. Any subsequent decreases to the expected cash flows will generally result in a provision for credit losses charge in the consolidated statements of income. Conversely, subsequent increases in expected cash flows result in a transfer from the non-accretable discount to the accretable discount, which has a positive impact on accretion income prospectively. The following table summarizes the amount of interest income related to our ACI portfolio for the periods presented:

 Table 3 – ACI Interest Income

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In thousands)	2018			2017			2018			2017
Scheduled accretion for the period	$	4,881		$	5,550		$	15,089		$	17,955
Recovery income for the period		362			290			1,387			5,350
Total interest realized on the ACI portfolio	$	5,243		$	5,840		$	16,476		$	23,305
Yield on ACI Portfolio
Scheduled accretion for the period		8.45	%		7.86	%		8.35	%		8.02	%
Recovery income for the period		0.63			0.41			0.77			2.39
Total yield on the ACI portfolio		9.08	%		8.27	%		9.12	%		10.41	%

 The following table is a rollforward of the accretable difference on our ACI portfolio for the periods indicated:

Table 4 - Accretable Difference Rollforward

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In thousands)	2018			2017			2018			2017
Balance at beginning of period	$	72,289		$	85,788		$	78,422		$	98,728
Decreases from accretion, maturities/payoffs, foreclosures and charge-offs		(6,614	)		(7,937	)		(20,818	)		(27,246	)
Reclass from nonaccretable difference		4,117			4,248			12,188			10,617
Balance at end of period	$	69,792		$	82,099		$	69,792		$	82,099

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Three Months Ended September 30, 2018 and 2017

Our net interest income, fully-tax equivalent (FTE), for the three months ended September 30, 2018 and 2017 was $98.6 million and $82.9 million, respectively, an increase of $15.6 million. Our net interest margin for the three months ended September 30, 2018 and 2017 was 3.58% and 3.52%, respectively, an increase of 6 basis points. The yield on our total loan portfolio increased 63 basis points to 5.18% for the three months ended September 30, 2018 compared to 4.55% for the three months ended September 30, 2017 due to an increase in the rate and volume of our originated portfolio. The following table sets forth, on a tax equivalent basis, the components of our net interest income with the effect that the varying levels of interest-earning assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the three months ended September 30, 2018:

Table 5- Rate/Volume Analysis

	Three Months Ended September 30,
	2018 vs. 2017
	Net Interest Income				Increase			Changes Due To (1)
(In thousands)	2018		2017		(Decrease)			Rate			Volume
Increase (decrease) in:
Income from interest-earning assets:
Interest and fees on loans:
Originated and ANCI loans	$	115,814	$	84,321	$	31,493		$	13,954		$	17,539
ACI portfolio		5,243		5,840		(597	)		527			(1,124	)
Interest on securities:
Taxable		6,248		4,610		1,638			537			1,101
Tax-exempt (2)		2,195		5,046		(2,851	)		(739	)		(2,112	)
Interest on fed funds and short-term investments		2,039		1,072		967			126			841
Interest on other investments		675		380		295			252			43
Total interest income		132,214		101,269		30,945			14,657			16,288
Expense from interest-bearing liabilities:
Interest on demand deposits		17,046		7,300		9,746			8,089			1,657
Interest on savings deposits		149		113		36			35			1
Interest on time deposits		10,312		5,665		4,647			3,356			1,291
Interest on other borrowings		3,673		2,926		747			45			702
Interest on subordinated debentures		2,473		2,336		137			125			12
Total interest expense		33,653		18,340		15,313			11,650			3,663
Net interest income	$	98,561	$	82,929	$	15,632		$	3,007		$	12,625

(1) The change in interest income due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the changes in each.

(2) Interest income and yields are presented on a tax equivalent basis using a Federal tax rate of 21% and 35% for the three months ended September 30, 2018 and 2017, respectively, on our state, county and municipal investment portfolios.

Our total interest income (FTE) for the three months ended September 30, 2018 totaled $132.2 million compared to $101.3 million in the three months ended September 30, 2017. This increase is primarily the result of an increase in the volume and yield of our originated loans. The yield on our originated loan portfolio reflects an increase in LIBOR rates in our loan portfolio. The lower FTE yield on our tax-exempt securities reflects the second quarter 2018 rebalancing of the municipal securities portfolio and the lower Federal tax rate of 21% in 2018 compared to 35% in 2017.

The yield on our ACI portfolio fluctuates due to the volume and timing of cash flows received or expected to be received. The yield on our ACI portfolio for the three months ended September 30, 2018 was 9.08% compared to 8.27% for the three months ended September 30, 2017. The decrease in interest income on our ACI portfolio was due to a decline in volume. During the three months ended September 30, 2018, interest income on the ACI portfolio included $0.4 million in recovery income, compared to $0.3 million in the three months ended September 30, 2017. These amounts were realized on certain individual loans that were settled before expected, or where we received amounts above our estimates. Excluding these amounts, as shown in Table 3, the yield on our ACI loans would have been 8.45% for the three months ended September 30, 2018 compared to 7.86% for the three months ended September 30, 2017. Our total loan yield, excluding these amounts, would have been 5.17% and 4.53% for the three months ended September 30, 2018 and 2017, respectively.

Our interest expense for the three months ended September 30, 2018 and 2017 was $33.7 million and $18.3 million, respectively, an increase of $15.3 million. This increase is primarily related to the impact of higher market rates on our interest-bearing demand accounts and time deposits. Our cost of interest bearing deposits increased to 1.50% for the three months ended

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September 30, 2018 compared to 0.85% for the three months ended September 30, 2017.  Our total cost of borrowings for the three months ended September 30, 2018 and 2017 was 4.29% and 4.31%, respectively.

The following table presents, on a tax equivalent basis, for the three months ended September 30, 2018 and 2017, our average balance sheet and our average yields on assets and average costs of liabilities. Average yields are calculated by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been calculated on a daily basis, except for ACI loans, which is a monthly average.

Table 6 – Average Balances, Net Interest Income and Interest Yields/Rates

	Three Months Ended September 30,
	2018									2017
	Average			Income/			Yield/			Average			Income/			Yield/
(In thousands)	Balance			Expense			Rate			Balance			Expense			Rate
ASSETS
Interest-earning assets:
Loans, net of unearned income(1)
Originated and ANCI loans	$	9,036,566		$	115,814			5.08	%	$	7,587,556		$	84,321			4.41	%
ACI portfolio		229,188			5,243			9.08			280,238			5,840			8.27
Total loans		9,265,754			121,057			5.18			7,867,794			90,161			4.55
Investment securities
Taxable		928,275			6,248			2.67			760,269			4,610			2.41
Tax-exempt (2)		213,429			2,195			4.08			408,913			5,046			4.90
Total investment securities		1,141,704			8,443			2.93			1,169,182			9,656			3.28
Federal funds sold and short-term investments		458,491			2,039			1.76			267,684			1,072			1.59
Other investments		54,762			675			4.89			49,661			380			3.04
Total interest-earning assets		10,920,711			132,214			4.80			9,354,321			101,269			4.30
Noninterest-earning assets:
Cash and due from banks		71,777									60,760
Premises and equipment		62,422									65,308
Accrued interest and other assets		623,842									639,188
Allowance for credit losses		(92,783	)								(94,706	)
Total assets	$	11,585,969								$	10,024,871
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits	$	5,175,915		$	17,046			1.31	%	$	4,329,086		$	7,300			0.67	%
Savings deposits		181,449			149			0.33			180,099			113			0.25
Time deposits		1,978,807			10,312			2.07			1,648,000			5,665			1.36
Total interest-bearing deposits		7,336,171			27,507			1.49			6,157,185			13,078			0.84
Other borrowings		432,279			3,673			3.37			349,925			2,926			3.32
Subordinated debentures		135,585			2,473			7.24			134,873			2,336			6.87
Total interest-bearing liabilities		7,904,035			33,653			1.69			6,641,983			18,340			1.10
Noninterest-bearing liabilities:
Demand deposits		2,153,097									1,982,784
Accrued interest and other liabilities		133,776									79,220
Total liabilities		10,190,908									8,703,987
Shareholders' equity		1,395,061									1,320,884
Total liabilities and shareholders' equity	$	11,585,969								$	10,024,871
Net interest income/net interest spread					98,561			3.11	%					82,929			3.20	%
Net yield on earning assets/net interest margin								3.58	%								3.52	%
Taxable equivalent adjustment:
Investment securities					(461	)								(1,766	)
Net interest income				$	98,100								$	81,163

(1) Nonaccrual loans are included in loans, net of unearned income. No adjustment has been made for these loans in the calculation of yields.

(2) Interest income and yields are presented on a taxable equivalent basis using a tax rate of 21% and 35% for the three months ended September 30, 2018 and 2017, respectively.

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Nine months ended September 30, 2018 and 2017

Our net interest income, fully-tax equivalent (FTE), for the nine months ended September 30, 2018 and 2017 was $286.7 million and $243.7 million, respectively, an increase of $42.9 million. Our net interest margin for the nine months ended September 30, 2018 and 2017 was 3.63% and 3.56%, respectively, an increase of 7 basis points. The yield on our total loan portfolio increased 56 basis points to 5.10% for the nine months ended September 30, 2018 compared to 4.54% for the nine months ended September 30, 2017 due to an increase in the rate and volume of our originated portfolio. The following table sets forth, on a tax equivalent basis, the components of our net interest income with the effect that the varying levels of interest-earning assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the nine months ended September 30, 2018:

	Nine Months Ended September 30,
	2018 vs. 2017
	Net Interest Income				Increase			Changes Due To (1)
(In thousands)	2018		2017		(Decrease)			Rate			Volume
Increase (decrease) in:
Income from interest-earning assets:
Interest and fees on loans:
Originated and ANCI loans	$	321,112	$	238,095	$	83,017		$	40,222		$	42,797
ACI portfolio		16,476		23,305		(6,829	)		(2,676	)		(4,153	)
Interest on securities:
Taxable		16,884		13,089		3,795			1,089			2,706
Tax-exempt (2)		9,876		15,506		(5,630	)		(2,661	)		(2,970	)
Interest on fed funds and short-term investments		4,838		2,184		2,654			820			1,834
Interest on other investments		1,697		1,745		(48	)		(236	)		189
Total interest income		370,883		293,924		76,959			36,558			40,403
Expense from interest-bearing liabilities:
Interest on demand deposits		37,771		19,186		18,585			(13,792	)		32,377
Interest on savings deposits		397		344		53			52			1
Interest on time deposits		28,300		15,084		13,216			8,799			4,417
Interest on other borrowings		10,414		8,623		1,791			639			1,152
Interest on subordinated debentures		7,332		6,955		377			342			37
Total interest expense		84,214		50,192		34,022			(3,960	)		37,984
Net interest income	$	286,669	$	243,732	$	42,937		$	40,518		$	2,419

(1) The change in interest income due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the changes in each.

(2) Interest income and yields are presented on a tax equivalent basis using a Federal tax rate of 21% and 35% for the nine months ended September 30, 2018 and 2017, respectively, on our state, county and municipal investment portfolios.

Our total interest income (FTE) for the nine months ended September 30, 2018 totaled $370.9 million compared to $293.9 million in the nine months ended September 30, 2017. This increase is primarily the result of an increase in the volume and yield of our originated loans. The yield on our originated loan portfolio reflects an increase in LIBOR rates in our loan portfolio. The lower FTE yield on our tax-exempt securities reflects the lower Federal tax rate of 21% in 2018 compared to 35% in 2017.

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The yield on our ACI portfolio fluctuates due to the volume and timing of cash flows received or expected to be received. The yield on our ACI portfolio for the nine months ended September 30, 2018 was 9.12% compared to 10.41% for the nine months ended September 30, 2017. During the nine months ended September 30, 2018, interest income on the ACI portfolio included $1.4 million in recovery income, compared to $5.4 million in the nine months ended September 30, 2017. These amounts were realized on certain individual loans that were settled before expected, or where we received amounts above our estimates. Excluding these amounts, the yield on our ACI loans would have been 8.35% for the nine months ended September 30, 2018 compared to 8.02% for the nine months ended September 30, 2017. Our total loan yield, excluding these amounts, would have been 5.08% and 4.45% for the nine months ended September 30, 2018 and 2017, respectively.

Our interest expense for the nine months ended September 30, 2018 and 2017 was $84.2 million and $50.2 million, respectively, an increase of $34.0 million. This increase is primarily related to the impact of higher market rates on our interest-bearing demand accounts and time deposits. Our cost of interest bearing deposits increased to 1.89% for the nine months ended September 30, 2018 compared to 1.14% for the nine months ended September 30, 2017.  Our total cost of borrowings for the nine months ended September 30, 2018 and 2017 was 4.42% and 4.25%, respectively, and is primarily related to an increase in LIBOR rates from the prior period and the level of advances from the FHLB.

The following table presents, on a tax equivalent basis, for the nine months ended September 30, 2018 and 2017, our average balance sheet and our average yields on assets and average costs of liabilities. Average yields are calculated by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been calculated on a daily basis, except for ACI loans, which is a monthly average.

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	Nine Months Ended September 30,
	2018									2017
	Average			Income/			Yield/			Average			Income/			Yield/
(In thousands)	Balance			Expense			Rate			Balance			Expense			Rate
ASSETS
Interest-earning assets:
Loans, net of unearned income(1)
Originated and ANCI loans	$	8,614,239		$	321,112			4.98	%	$	7,391,626		$	238,095			4.31	%
ACI portfolio		241,643			16,476			9.12			299,172			23,305			10.41
Total loans		8,855,882			337,588			5.10			7,690,798			261,400			4.54
Investment securities
Taxable		865,152			16,884			2.61			723,871			13,089			2.42
Tax-exempt (2)		320,838			9,876			4.12			407,511			15,506			5.09
Total investment securities		1,185,990			26,760			3.02			1,131,382			28,595			3.38
Federal funds sold and short-term investments		474,987			4,838			1.36			281,454			2,184			1.04
Other investments		53,240			1,697			4.26			49,263			1,745			4.74
Total interest-earning assets		10,570,099			370,883			4.69			9,152,897			293,924			4.29
Noninterest-earning assets:
Cash and due from banks		81,474									57,837
Premises and equipment		62,700									65,663
Accrued interest and other assets		622,146									641,331
Allowance for credit losses		(91,762	)								(89,156	)
Total assets	$	11,244,657								$	9,828,572
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits	$	4,895,838		$	37,771			1.03	%	$	4,338,645		$	19,186			0.59	%
Savings deposits		183,566			397			0.29			182,877			344			0.25
Time deposits		2,021,276			28,300			1.87			1,618,298			15,084			1.25
Total interest-bearing deposits		7,100,680			66,468			1.25			6,139,820			34,614			0.75
Other borrowings		400,877			10,414			3.47			355,393			8,623			3.24
Subordinated debentures		135,410			7,332			7.24			134,692			6,955			6.90
Total interest-bearing liabilities		7,636,967			84,214			1.47			6,629,905			50,192			1.01
Noninterest-bearing liabilities:
Demand deposits		2,113,406									1,895,754
Accrued interest and other liabilities		128,666									81,068
Total liabilities		9,879,039									8,606,727
Shareholders' equity		1,365,618									1,221,845
Total liabilities and shareholders' equity	$	11,244,657								$	9,828,572
Net interest income/net interest spread					286,669			3.22	%					243,732			3.28	%
Net yield on earning assets/net interest margin								3.63	%								3.56	%
Taxable equivalent adjustment:
Investment securities					(2,074	)								(5,427	)
Net interest income				$	284,595								$	238,305

(1) Nonaccrual loans are included in loans, net of unearned income. No adjustment has been made for these loans in the calculation of yields.

(2) Interest income and yields are presented on a taxable equivalent basis using a tax rate of 21% and 35% for the nine months ended September 30, 2018 and 2017, respectively.

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Provision for Credit Losses

The provision for credit losses is based on management’s quarterly assessment of the adequacy of our ACL which, in turn, is based on such factors as the composition of our loan portfolio and its inherent risk characteristics, the level of nonperforming loans and net charge-offs, both current and historic, local economic and credit conditions, the direction of collateral values, and regulatory guidelines. The provision for credit losses is charged against earnings in order to maintain our allowance for credit losses, which reflects management’s best estimate of probable losses inherent in our loan portfolio at the balance sheet date. (See “—Allowance for Credit Losses”).

Under accounting standards for business combinations, acquired loans are recorded at fair value with no credit loss allowance on the date of acquisition. A provision for credit losses is recorded in periods after the date of acquisition for the emergence of new probable and estimable losses on ANCI loans. A provision for credit losses is recognized on our ACI loans after the date of acquisition based on the re-estimation of expected cash flows. See “—Asset Quality”.

The provision for credit losses totaled ($1.4) million and $4.3 million for the three and nine months ended September 30, 2018, compared to $1.7 million $14.2 million for the three and nine months ended September 30, 2017. The following is a summary of our provision for credit losses for the periods indicated presented by originated, ANCI and ACI portfolios:

Table 7 – Provision for Credit Losses

	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2018			2017			2018			2017
Originated Loans
Commercial and industrial	$	2,894		$	(432	)	$	8,890		$	8,656
Commercial real estate		(1,660	)		811			(1,877	)		3,564
Consumer		(1,215	)		2,689			(953	)		3,633
Small business		(1,200	)		109			(513	)		328
Total originated loans		(1,181	)		3,177			5,547			16,181
ANCI Loans
Commercial and industrial		(481	)		31			(651	)		639
Commercial real estate		(68	)		—			(220	)		(42	)
Consumer		242			(154	)		281			(146	)
Small business		(18	)		(69	)		(191	)		(224	)
Total ANCI		(325	)		(192	)		(781	)		227
ACI Loans
Commercial and industrial		21			278			10			95
Commercial real estate		142			(1,195	)		(226	)		(877	)
Consumer		(22	)		(345	)		(272	)		(1,416	)
Small business		—			—			—			—
Total ACI		141			(1,262	)		(488	)		(2,198	)
Total Loans
Commercial and industrial		2,434			(123	)		8,249			9,390
Commercial real estate		(1,586	)		(384	)		(2,323	)		2,645
Consumer		(995	)		2,190			(944	)		2,071
Small business		(1,218	)		40			(704	)		104
Total provision for credit losses	$	(1,365	)	$	1,723		$	4,278		$	14,210

Our originated and ANCI loan portfolios are divided into commercial and consumer segments. The commercial allowance estimate is driven by loan level risk ratings. The consumer allowance estimate uses pool level historical loss rates based on certain credit attributes. The primary driver of the originated ACL is the underlying credit quality of the loans, which have seen credit risk migration trends as the portfolio has become more seasoned. We recognized ($1.4) million and $4.3 million in provision during the three and nine months ended September 30, 2018, respectively, which included ($1.3) million and $5.5 million provision related to the originated portfolio. The C&I portfolio provision of $2.9 million and $8.9 million for the three and nine months ended September 30, 2018, respectively, was primarily related to loan growth.  The decrease in other segments of the originated loan provision for the three and nine months ended September 30, 2018 compared to the same periods in 2017 is primarily attributable to stable credit quality and the refinement of our portfolio loss rates.

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Noninterest Income

Noninterest income is a component of our revenue and is comprised primarily of income generated from the services we provide our customers.

Noninterest income totaled $24.0 million and $73.6 million for the three and nine months ended September 30, 2018, compared to $27.1 million and $74.2 million for the three and nine months ended September 30, 2017.  The decrease in our service fees and revenue for the nine months ended September 30, 2018 compared to the same period in 2017 is primarily attributable to the sale of the assets of our insurance company, decreased trust services revenue and decreased mortgage banking income.

The following table compares noninterest income for the three and nine months ended September 30, 2018 and 2017:

Table 8 – Noninterest Income

	Three Months Ended September 30,							Nine Months Ended September 30,
(In thousands)	2018		2017		% Change			2018			2017			% Change
Investment advisory revenue	$	5,535	$	5,283		4.8	%	$	16,177		$	15,260			6.0	%
Trust services revenue		4,449		4,613		(3.6	)		13,578			14,428			(5.9	)
Service charges on deposit accounts		3,813		3,920		(2.7	)		11,576			11,519			0.5
Credit related fees		3,549		3,306		7.4			10,933			8,794			24.3
Insurance revenue		—		1,950		(100.0	)		2,677			5,908			(54.7	)
Bankcard fees		1,078		1,803		(40.2	)		4,877			5,477			(11.0	)
Mortgage banking income		747		965		(22.6	)		1,974			3,044			(35.2	)
Other service fees		1,319		1,174		12.4			3,998			3,217			24.3
Total service fees and revenue		20,490		23,014		(11.0	)		65,790			67,647			(2.7	)
Securities gain (losses), net		2		1	NM				(1,799	)		(162	)	NM
Other		3,484		4,109		(15.2	)		9,640			6,733			43.2
Total other noninterest income		3,486		4,110		(15.2	)		7,841			6,571			19.3
Total noninterest income	$	23,976	$	27,124		(11.6	)%	$	73,631		$	74,218			(0.8	)%

NM – Not Meaningful

Investment Advisory Revenue. Our investment advisory revenue is comprised largely of investment management and financial planning revenues generated through our subsidiary Linscomb & Williams, Inc. (“L&W”). The 4.8% and 6.0% increase in investment advisory revenue for the three and nine months ended September 30, 2018 to $5.5 million and $16.2 million was primarily due to growth in assets under management due to both new customer origination and market improvements.

Trust Services Revenue. We earn fees from our customers for trust services. For the three months ended September 30, 2018 and 2017, trust fees totaled $4.4 million and $4.6 million, respectively, a decrease of $0.2 million, or 3.6%. For the nine months ended September 30, 2018 and 2017, trust fees totaled $13.6 million and $14.4 million, respectively, a decrease of $0.9 million, or 5.9%. The decrease was primarily due to the transfer of certain deposit relationships from trust to treasury management. Additionally, the relatively flat market and estate tax reform have slowed the pace of personal trust growth.

Service Charges on Deposit Accounts. We earn fees from our customers for deposit-related services. For the three months ended September 30, 2018 and 2017, service charges and fees totaled $3.8 million and $3.9 million, which is a decrease of 2.7%.  For the nine months ended September 30, 2018 and 2017, service charges and fees totaled $11.6 million and $11.5 million, which is an increase of 0.5%.  The increase was largely due to an increase in account analysis fees.

Credit-Related Fees. Our credit-related fees include fees related to credit advisory services, unfunded commitment fees and letter of credit fees. For the three and nine months ended September 30, 2018, credit-related fees increased 7.4% and 24.3%, respectively, to $3.5 million and $10.9 million, respectively, compared to $3.3 million and $8.8 million for the three and nine months ended September 30, 2017, primarily as a result of an increase in unfunded commitment and letter of credit fees.

Insurance Revenue. Our insurance revenue was zero and $2.7 million for the three and nine months ended September 30, 2018, compared to $2.0 million and $5.9 million for the same periods in 2017.  The decreases of $2.0 million and $3.2 million for the three and nine months ended September 30, 2018 results from the sale of the assets of Cadence Insurance in the second quarter of 2018.

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Bankcard Fees. Our bankcard fees are comprised of automated teller machine (“ATM”) network fees and debit card revenue. Our bankcard fees were $1.1 million and $4.9 million for the three and nine months ended September 30, 2018, respectively.  The decrease of 40.2% and 11.0% for three and nine months ended September 30, 2018 was primarily due to the limit on interchange fees imposed by the Durbin Amendment. The third quarter of 2018 is the first quarter in which the Durbin Amendment applied to the Company’s interchange fees.

Mortgage Banking Revenue. Our mortgage banking revenue is comprised of mortgage loan sales and servicing income. The decreases of $0.2 million and $1.1 million, or 22.6% and 35.2%, for the three and nine months ended September 30, 2018, respectively, were mostly due to lower gains related to decreased volumes originated and sold in the secondary market.

Other Service Fees. Our other service fees include retail services fees. For the three and nine months ended September 30, 2018, other service fees totaled $1.3 million and $4.0 million, respectively. The third quarter 2018 amount is essentially the same as prior quarter while the year-to-date 2018 amount increased over the prior year-to-date period largely due to an increase in sweep account income.

Other Income. The increase in other income for the nine months ended September 30, 2018 compared to 2017 resulted from the gain on sale of our insurance subsidiary and a gain on sale of a nonmortgage loan partially offset by the decline in the estimated fair value of a net profits interest in oil and gas reserves due to lower forecasted production.  

Noninterest Expenses

The following table compares noninterest expense for the three and nine months ended September 30, 2018 and 2017:

Table 9 – Noninterest Expense

	Three Months Ended September 30,							Nine Months Ended September 30,
(In thousands)	2018		2017		% Change			2018		2017		% Change
Salaries and employee benefits	$	35,811	$	35,007		2.3	%	$	111,432	$	103,956		7.2	%
Premises and equipment		7,561		7,419		1.9			22,283		21,292		4.7
Intangible asset amortization		650		1,136		(42.8	)		2,157		3,567		(39.5	)
Net cost of operation of other real estate owned		398		453		(12.1	)		458		1,175		(61.0	)
Data processing expense		1,989		1,688		17.8			6,666		5,086		31.1
Consulting and professional fees		4,335		2,069		109.5			9,815		4,710		108.4
Loan related expenses		821		532		54.3			1,721		1,569		9.7
FDIC Insurance		1,237		889		39.1			3,415		3,336		2.4
Communications		682		650		4.9			2,089		1,980		5.5
Advertising and public relations		679		521		30.3			1,595		1,365		16.8
Legal expenses		242		614		(60.6	)		3,337		1,593		109.5
Other		6,826		5,552		22.9			20,637		17,356		18.9
Total Noninterest Expense	$	61,231	$	56,530		8.3	%	$	185,605	$	166,985		11.2	%

Noninterest expense was $61.2 million and $185.6 million for the three and nine months ended September 30, 2018, compared to $56.5 million and $167.0 million for the three and nine months ended September 30, 2017.  The increase of $4.7 million and $18.6 million, or 8.3% and 11.2%, respectively, for the three and nine months ended September 30, 2018, compared to the same periods in 2017 was driven by increases in salaries and benefits, premises and equipment, data processing, consulting and professional fees and legal fees.

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Salaries and Employee Benefits. Salaries and employee benefit costs are the largest component of noninterest expense and include employee payroll expense, incentive compensation, health insurance, benefit plans and payroll taxes. Salaries and employee benefits increased $0.8 million and $7.5 million, or 2.3% and 7.2%, for the three and nine months ended September 30, 2018 compared to 2017, respectively, driven by business growth and related incentives. Regular compensation makes up the majority of the total salaries and employee benefits category.  Regular compensation increased 3.2% for the nine months ended September 30, 2018 compared to 2017, respectively.  The following table provides additional detail of our salaries and employee benefits expense for the periods presented:

Table 10 – Salaries and Employee Benefits Expense

	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2018		2017		2018		2017
Salaries and employee benefits
Regular compensation	$	20,537	$	20,495	$	63,710	$	61,754
Incentive compensation		10,653		10,354		31,751		27,623
Taxes and employee benefits		4,621		4,158		15,971		14,579
Total salaries and employee benefits	$	35,811	$	35,007	$	111,432	$	103,956

Premises and Equipment. Rent, depreciation and maintenance costs comprise the majority of premises and equipment expenses, which increased 1.9% and 4.7% for the three and nine months ended September 30, 2018.  This increase includes the increase in certain maintenance costs and new equipment.

Intangible Asset Amortization. In conjunction with our previous acquisitions, we recorded core deposit and other customer intangible assets of approximately $66.0 million, which are being amortized on an accelerated basis over a seven- to ten-year period.

Net Cost of Operation of Other Real Estate Owned. Net cost of operation of other real estate owned primarily represents our gains (losses) on other real estate owned resulting from the sale or write-down of foreclosed property. During the three and nine months ended September 30, 2018, we had net losses from the sale/write-down of foreclosed properties totaling $0.3 million and $0.2 million compared to net losses of $0.1 million and $0.4 million for the same periods in 2017. Our other costs of operations continue to decline as the volume and complexity of these properties diminishes. See “—Nonperforming Assets” for detail of foreclosed properties as of September 30, 2018.

Data Processing. Data processing expense for our operating systems totaled $2.0 million and $6.7 million for the three and nine months ended September 30, 2018, respectively, compared to $1.7 million and $5.1 million for the same periods in 2017, an increase of 17.8% and 31.1%, respectively. The increases reflect growth in our business as well as cost related to a trust system upgrade and outsourcing.    

Consulting and Professional Services. Consulting and professional services expenses include consulting, audit and professional fees paid to external parties. For the three and nine months ended September 30, 2018, our consulting and professional services increased $2.3 million and $5.1 million, respectively, or 109.5% and 108.4%, respectively compared to the same periods in 2017.  The increases are related to the secondary offerings costs of $2.0 million and $4.6 million for the three and nine months ended September 30, 2018, respectively.  

Loan-Related Expenses. Loan-related expenses include costs related to maintaining our various loan portfolios. For the three and nine months ended September 30, 2018, our loan-related expenses totaled $0.8 million and $1.7 million, respectively, compared to $0.5 million and $1.6 million, respectively, for the same periods in 2017. The quarterly increase is related to mortgage loan costs on serviced loans. The year over year increase results from an increase in costs associated with problem mortgage loans serviced partially offset by a decrease in insurance and closing costs.

FDIC Insurance. For the three and nine months ended September 30, 2018, FDIC insurance expense increased $0.3 million and $0.1 million, respectively. Effective with the third quarter of 2018, our FDIC assessment is calculated under the Large Bank Pricing Rule. Our FDIC assessment will vary between reported periods as it is determined on various risk factors including regulatory rating, credit, liquidity and the composition of our balance sheet.

Communications. Communications expenses include expenses related to both voice and data communications. During the three and nine months ended September 30, 2018, our communications expenses increased slightly to $0.7 million and $2.1 million, respectively, from $0.7 million and $2.0 million for the same periods in 2017.  

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Advertising and Public Relations. Advertising and public relations expenses for the three and nine months ended September 30, 2018 increased $158 thousand and $230 thousand, respectively, or 30.3% and 16.8%, respectively.  The increases were driven by overall business growth.  Our advertising and public relations expenses are seasonal and can fluctuate between quarters.

Legal Expenses. Our legal expenses include fees paid to outside counsel related to general legal matters as well as loan resolutions. For the three months ended September 30, 2018, our legal fees decreased $372 thousand compared to the same period in 2017.  Legal fees increased $1.7 million, or 109.5%, compared to the nine months ended September 30, 2017. Legal fees for the 2018 period included $2.2 million in legal costs associated with litigation related to a pre-acquisition matter of a legacy acquired bank.  This matter was fully resolved in the first quarter of 2018.

Other. These expenses include costs for merger related expenses, insurance, supplies, education and training, and other operational expenses. For the three and nine months ended September 30, 2018, other noninterest expenses increased 22.9% and 18.9%, respectively, compared to the same periods in 2017.  The increases include merger related expenses of $0.2 million and $0.9 million for the three and nine months ended September 30, 2018.

Income Tax Expense

Income tax expense for the three and nine months ended September 30, 2018 was $15.1 million and $34.4 million, respectively, compared to $17.5 million and $43.7 million for the same periods in 2017.  

The effective tax rate was 24.2% and 20.4% for the three and nine months ended September 30, 2018, respectively, compared to 34.9% and 33.3% for the same periods in 2017. The decrease in the effective tax rate for the three and nine months ended September 30, 2018 compared to the same periods in 2017 was driven by the decrease in the statutory Federal tax rate established by The Tax Cuts and Jobs Act (“Tax Reform”) enacted in December 2017 as well as a $6.0 million benefit in the second quarter of 2018 due to timing of bad debt deductions related to legacy acquired loans.

The effective tax rate is primarily affected by the amount of pre-tax income, tax-exempt interest income, and the increase in cash surrender value of bank-owned life insurance.  The effective tax rate is also affected by discrete items that may occur in any given period but are not consistent from period-to-period, which may impact the comparability of the effective tax rate between periods.

As a result of Tax Reform enacted on December 22, 2017, deferred taxes are based on the newly enacted U.S. federal statutory income tax rate of 21%.  Deferred taxes as of September 30, 2017 are based on the previously enacted U.S. statutory federal income tax rate of 35%.  The provisional amount recorded related to the remeasurement of our deferred tax asset was $19.0 million, which was recorded in the fourth quarter of 2017 as income tax expense. Based on the information available and our current interpretation of Tax Reform, we made reasonable estimates of the impact from the reduction in the U.S. federal statutory rate on the remeasurement of the deferred tax asset.  However, our deferred tax asset will continue to be evaluated in the context of Tax Reform and may change as a result of evolving management interpretations, elections, and assumptions, as well as new guidance that may be issued by the Internal Revenue Service. Management expects to complete its analysis within the measurement period in accordance with SAB 118.  Nonetheless, there has been no change to the provisional net tax benefit we recorded in the fourth quarter of 2017.

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Financial Condition

The following table summarizes selected components of our balance sheet as of the periods indicated.

Table 11 – Selected Balance Sheet Data

	As of				Average Balance
(In thousands)	September 30, 2018		December 31, 2017		Three Months Ended September 30,2018		Nine Months Ended September 30,2018		Year Ended December 31, 2017
Total assets	$	11,759,837	$	10,948,926	$	11,585,969	$	11,244,657	$	10,020,036
Total interest-earning assets		11,029,429		10,120,137		10,920,711		10,570,099		9,345,046
Total interest-bearing liabilities		8,126,078		7,239,564		7,904,035		7,636,967		6,714,907
Short-term and other investments		332,436		542,113		513,253		528,227		363,464
Securities available for sale		1,200,464		1,257,063		1,135,848		1,180,059		1,155,819
Loans, net of unearned income		9,443,819		8,253,427		9,265,754		8,855,882		7,825,763
Goodwill		307,083		317,817		307,083		312,981		317,817
Noninterest-bearing deposits		2,094,856		2,242,765		2,153,097		2,113,406		1,965,070
Interest-bearing deposits		7,463,420		6,768,750		7,336,171		7,100,680		6,221,711
Borrowings and subordinated debentures		662,658		470,814		567,864		536,287		493,196
Shareholders' equity		1,414,826		1,359,056		1,395,061		1,365,618		1,253,861

Investment Portfolio

Our available-for-sale securities portfolio decreased $56.6 million, or 4.5%, to $1.20 billion at September 30, 2018, from $1.26 billion at December 31, 2017. In the second quarter of 2018, we sold approximately $187.8 million of available-for-sale investment securities as part of an effort to rebalance the portfolio and reduce our target concentration of tax free municipal securities.  At September 30, 2018, our investment securities portfolio was 9.9% of our total interest-earning assets and produced an average taxable equivalent yield of 2.93% and 3.02% for the three and nine months ended September 30, 2018, respectively.

The following table sets forth the fair value of the available-for-sale securities at the dates indicated:

Table 12 –Investment Portfolio

	As of
(In thousands)	September 30, 2018		December 31, 2017		Percent Change 2018 vs 2017
Investment securities available for sale:
U.S. Treasury securities	$	95,398	$	96,844		(1.5	)%
Obligations of U.S. government agencies		62,798		81,224		(22.7	)
Mortgage-backed securities issued or guaranteed by    U.S. agencies (MBS):
Residential pass-through:
Guaranteed by GNMA		87,245		106,027		(17.7	)
Issued by FNMA and FHLMC		597,092		430,422		38.7
Other residential mortgage-backed securities		36,800		46,392		(20.7	)
Commercial mortgage-backed securities		109,247		72,195		51.3
Total MBS		830,384		655,036		26.8
Obligations of states and municipal subdivisions		211,884		423,959		(50.0	)
Total investment securities available for sale	$	1,200,464	$	1,257,063		(4.5	)%

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The following table summarizes the investment securities with unrealized losses at September 30, 2018 by aggregated major security type and length of time in a continuous unrealized loss position:

Table 13 –Unrealized Losses in the Investment Portfolio

	September 30, 2018
	Less than 12 Months				More than 12 Months				Total
(In thousands)	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
Temporarily Impaired
U.S. Treasury securities	$	—	$	—	$	95,398	$	5,055	$	95,398	$	5,055
Obligations of U.S. government agencies		52,984		637		9,814		103		62,798		740
Mortgage-backed securities:
Residential pass-through		500,706		11,428		163,141		8,858		663,847		20,286
Other residential mortgage-backed securities		20,984		643		14,423		1,269		35,407		1,912
Commercial mortgage-backed securities		44,955		1,164		57,420		5,829		102,375		6,993
Total MBS		566,645		13,235		234,984		15,956		801,629		29,191
Obligations of states and municipal subdivisions		82,993		4,556		121,176		14,280		204,169		18,836
Total temporarily impaired securities	$	702,622	$	18,428	$	461,372	$	35,394	$	1,163,994	$	53,822

None of the unrealized losses relate to the marketability of the securities or the issuer’s ability to honor redemption of the obligations. We have adequate liquidity, no plans to sell securities and the ability and intent to hold securities to maturity resulting in full recovery of the indicated impairment. Accordingly, the unrealized losses on these securities have been determined to be temporary.

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Loan Portfolio

We originate commercial and industrial loans, commercial real estate loans (including construction loans), residential mortgages and other consumer loans. A strong emphasis is placed on the commercial portfolio, consisting of commercial and industrial and commercial real estate loan types, with over 74% of the portfolio residing in these loan types as of September 30, 2018. Our commercial portfolio is further diversified by industry concentration and includes loans to clients in specialized industries, including restaurant, healthcare and technology. Additional commercial lending activities include energy, construction, general corporate loans, business banking and community banking loans. Mortgage, wealth management and retail make up the majority of the consumer portfolio.

The following tables present total loans outstanding by portfolio component and class of financing receivable as of September 30, 2018 and December 31, 2017. The tables below are presented using a risk-based perspective of the loan portfolio. Total loan balances include ANCI loans, originated loans and ACI loans combined.

Table 14 –Loan Portfolio

	Total Loans						Change
(In thousands)	September 30, 2018			December 31, 2017			2018 vs 2017			Percent
Commercial and Industrial
General C&I	$	3,190,756		$	2,746,454		$	444,302			16.2	%
Restaurant industry		1,102,065			1,035,538			66,527			6.4
Energy sector		1,057,069			935,371			121,698			13.0
Healthcare		499,906			416,423			83,483			20.1
Total commercial and industrial		5,849,796			5,133,786			716,010			14.0
Commercial Real Estate
Income producing		1,158,258			1,082,929			75,329			7.0
Land and development		67,918			75,472			(7,554	)		(10.0	)
Total commercial real estate		1,226,176			1,158,401			67,775			5.9
Consumer							��
Residential real estate		2,090,069			1,690,814			399,255			23.6
Other		62,336			74,922			(12,586	)		(16.8	)
Total consumer		2,152,405			1,765,736			386,669			21.9
Small Business Lending		247,978			221,855			26,123			11.8
Total (Gross of Unearned Discount and Fees)		9,476,355			8,279,778			1,196,577			14.5
Unearned Discount and Fees		(32,536	)		(26,351	)		(6,185	)		23.5
Total (Net of Unearned Discount and Fees)	$	9,443,819		$	8,253,427		$	1,190,392			14.4	%

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Commercial and Industrial. Commercial and Industrial (“C&I”) loans increased by $716.0 million, or 14.0%, since December 31, 2017 and represented 61.7% of our total loan portfolio at September 30, 2018, compared to 62.0% of total loans at December 31, 2017. Approximately 27.1% of the originated commercial loan portfolio (combining C&I and CRE) consists of shared national credits, which vary by industry and geography. As of September 30, 2018, 88.4% of the shared national credit portfolio, or $2.27 billion, resides in the commercial and industrial segment of the loan portfolio, on a loan balance basis. As of September 30, 2018, the largest category of shared national credits is the Energy sector, representing 28.1% of the shared national credits portfolio, or $719.9 million as of September 30, 2018 compared to 23.9% of the shared national credits portfolio, or $715.9 million as of December 31, 2017.  The next largest category of shared national credits is the Restaurant industry at 25.9% of all shared national credits, or $663.1 million, compared to 24.4% and $731.2 million as of December 31, 2017. The remaining amount of the shared national credit portfolio can be found in the services, technology, healthcare and other categories and, to a lesser amount, the CRE segment of the loan portfolio. Additionally, all shared national credits are part of the originated loan portfolio.

Our C&I loan growth reflects our strategic focus on this broad loan category. We seek further diversification within C&I loans by industry to mitigate concentration risk in any one industry and/or risk type. Our specialized industries are significant drivers of the growth and diversification of this portion of our loan portfolio. Energy and specialized industries lending have experienced teams with extensive knowledge in their industry, allowing for quality underwriting and relationship-based lending.

General C&I. As of September 30, 2018, our general C&I category included the following types of loans: finance and insurance, professional services, commodities excluding energy, manufacturing, contractors, transportation, media and telecom and other. C&I loans typically provide working capital, equipment financing and financing for expansion, and are generally secured by assignments of corporate assets including accounts receivable, inventory and/or equipment.

Energy. Energy lending is an important part of our business and our energy team is comprised of experienced lenders with significant product expertise and long-standing relationships. Additionally, energy production and energy related industries are substantial contributors to the economies in the Houston metropolitan area and the state of Texas. As of September 30, 2018, energy loans outstanding totaled $1.06 billion, or 11.2% of total loans compared to $935.4 million, or 11.3% as of December 31, 2017. We strive for a rigorous and thorough approach to energy underwriting and credit monitoring. As of September 30, 2018, we had an allowance for credit losses of $6.4 million for our energy loans, or 0.61% of the energy portfolio compared to $17.0 million, or 1.82% as of December 31, 2017. (See “—Provision for Credit Losses” and “—Allowance for Credit Losses”). As of September 30, 2018, we had $22.5 million of nonperforming energy credits compared to $42.8 million of nonperforming energy credits as of December 31, 2017.  In addition, 4.1% of the energy portfolio was criticized or classified as of September 30, 2018 compared to 11.5% at December 31, 2017. We recorded net charge-offs of approximately $5.4 million on our energy portfolio during the nine months ended September 30, 2018, which included a $6.6 million gross charge-off of a shared national credit, which was fully reserved, and a $1.2 million recovery of another energy credit. As presented in the following table our energy lending business is comprised of three areas: Exploration and Production (“E&P”), Midstream and Energy Services:

Table 15 –Energy Loan Portfolio

	Energy Sector						As of September 30, 2018
(In thousands)	September 30, 2018			December 31, 2017			Unfunded Commitments		Criticized/ Classified
Outstanding Balance
E&P	$	291,478		$	278,171		$	141,014	$	36,409
Midstream		622,163			557,800			515,317		6,806
Energy Services		143,428			99,400			163,172		—
Total energy sector	$	1,057,069		$	935,371		$	819,503	$	43,215
Percent to total loans		11.2	%		11.3	%
Allocated ACL
E&P	$	3,060		$	12,892
Midstream		2,523			1,582
Energy Services		837			2,509
Total allocated ACL	$	6,420		$	16,983
ACL as a Percentage of Outstanding Balances
E&P		1.05	%		4.63	%
Midstream		0.41			0.28
Energy Services		0.58			2.52
Total percentage		0.61	%		1.82	%

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E&P loans outstanding totaled $291.5 million and comprised approximately 27.6% of outstanding energy loans as of September 30, 2018 compared to $278.2 million, or 29.7%, of outstanding energy loans as of December 31, 2017. E&P customers are primarily businesses that derive a majority of their revenues from the sale of oil and gas and whose credit needs require technical evaluation of oil and gas reserves. Emphasis for E&P is on high quality, independent producers with proven track records. Our E&P credit underwriting includes a combination of well-by-well analyses, frequent updates to our pricing decks and engaging energy engineers to actively monitor the portfolio and provide credit redeterminations, at a minimum, every six months. At least quarterly, and more frequently during periods of higher commodity price volatility, we adjust the base and sensitivity price decks on which we value our clients’ oil and gas reserves. Generally, we seek to follow the shape of the NYMEX strips for oil and natural gas, but at a discount to the strip. In periods of higher commodity prices, our discount from the strip is higher whereas in lower price periods our discount is lower. The price decks utilized in our engineering analysis are reported to our senior credit risk management committee. Borrowing base redeterminations occur every spring and fall, with the spring redeterminations completed prior to the end of the second quarter and fall determinations completed prior to the end of the fourth quarter.

Midstream loans outstanding totaled $622.2 million and comprised approximately 58.9% of outstanding energy loans as of September 30, 2018 compared to $557.8 million, or approximately 59.6% of outstanding energy loans as of December 31, 2017. Midstream lending is generally to customers who handle the gathering, treating and processing, storage or transportation of oil and gas. These customers’ businesses are typically less price sensitive than other energy segments given the nature of their fee-based revenue streams. Underwriting guidelines for the Midstream portfolio generally require a first lien on all assets as collateral.

Energy Services loans outstandingtotaled $143.4 million and comprised approximately 13.6% of outstanding energy as of September 30, 2018 compared to $99.4 million, or approximately 10.6% of outstanding energy loans, as of December 31, 2017. Energy Services lending targets oilfield service companies that provide equipment and services used in the exploration for and extraction of oil and natural gas. Customers consist of a wide variety of businesses, including production equipment manufacturers, chemical sales, water transfer, rig equipment and other early and late stage services companies.  

Specialized lending. The following table includes our specialized lending portfolio as of the dates presented:

Table 16 –Specialized Lending Portfolio

	Originated C&I Loans - Specialized Lending
	As of
(In thousands)	September 30, 2018		December 31, 2017		Unfunded Commitments as of September 30, 2018
Specialized Industries
Restaurant industry	$	1,102,065	$	1,035,538	$	311,266
Healthcare		492,170		408,665		235,191
Technology		483,090		411,050		118,933
Total specialized industries	$	2,077,325	$	1,855,253	$	665,390

Restaurant industry, technology and healthcare are the components of our specialized industries. For these industries we focus on larger corporate clients, who are typically well-known within the industry. The client coverage for both of these components is national in scope, given the size and capital needs of the majority of the clients. Additionally, in the restaurant sector we focus on major franchisees and the operating companies of “branded” restaurant concepts. Our healthcare portfolio focuses on middle market healthcare providers with diversified payer mix, while our technology portfolio focuses on the technology sub-segments of software and services, network and communications infrastructure, and internet and mobility applications. Given these customer profiles, we frequently participate in such credits with two or more banks through syndication.

Commercial Real Estate. Commercial real estate (“CRE”) loans increased by $67.8 million, or 5.9%, since December 31, 2017. CRE loans represented 12.9% of our total loan portfolio as of September 30, 2018, compared to 14.0% of total loans as of December 31, 2017. Income Producing CRE includes non-owner occupied loans secured by commercial real estate, regardless of the phase of the loan (construction versus completed). Commercial construction loans are primarily included in Income Producing CRE. Additionally, all real estate investment trust and income producing loans are included in the Income Producing CRE segment. Land, lots and homebuilder loans are included in the land and development segment. All owner occupied CRE loans reside in the various C&I segments in which the underlying risk exists.  Our CRE lending team is a group of experienced relationship managers focusing on construction and income producing property lending which generally have property or sponsors located in our geographic footprint. CRE loans are secured by a variety of property types, including multi-family dwellings, office buildings, industrial properties and retail facilities.

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Consumer.Consumer loans increased by $386.7 million, or 21.9%, from December 31, 2017 to September 30, 2018. Consumer loans represented 22.7% of total loans at September 30, 2018, compared to 21.4% of total loans at December 31, 2017. We originate residential real estate mortgages that are held for investment as well as held for sale in the secondary market. Approximately 17.2% of the consumer portfolio relates to acquired portfolios compared to 15.1% as of December 31, 2017. During  2018, we have purchased, as a complement to our originations,  $144.5 million of Community Reinvestment Act (“CRA”) qualified consumer residential real estate loans at a premium of approximately 6.3%. These loans were evaluated and determined not to be credit impaired before purchase and are classified as ANCI as of September 30, 2018.  Our originated consumer loan portfolio totaled $1.78 billion as of September 30, 2018, an increase of $282.6 million, or 18.8% from December 31, 2017.

Small Business. Small Business loans increased by $26.1 million, or 11.8% from December 31, 2017 to September 30, 2018. Small business loans represented 2.6% of the total loan portfolio at September 30, 2018 and December 31, 2017. The small business category is defined as all commercial loans with a transactional exposure of $1.5 million or less and relationship exposure of $2.0 million or less.

Concentrations of Credit. Our concentrations of credit are closely and consistently monitored by the Company. Individual concentration limits are assessed and established, as needed, on a quarterly basis and measured as a percentage of risk-based capital. All concentrations greater than 25% of risk-based capital require a concentration limit, which are monitored and reported to the board of directors on at least a quarterly basis. In addition to the specialized industries, energy, and CRE segments in the loan portfolio, we manage concentration limits for other loans, such as, construction, multifamily, office building, leveraged loans, technology loans, specialty chemical, and non-specialized enterprise value loans.

We evaluate the appropriateness of our underwriting standards in response to changes in national and regional economic conditions, including energy prices, interest rates, real estate values, and employment levels. Underwriting standards and credit monitoring activities are assessed and enhanced in response to changes in these conditions.

Asset Quality

We focus on asset quality strength through robust underwriting, proactive monitoring and reporting of the loan portfolio and collaboration between the lines of business, credit administration and risk management.

Credit risk is governed and reported up to the board of directors primarily through our senior credit risk management committee. The senior credit risk management committee reviews credit portfolio management information such as problem loans, delinquencies, concentrations of credit, asset quality trends, portfolio analysis, policy updates and changes, and other relevant information. Further, both senior loan committee and credit transition committee, the primary channels for credit approvals, report up through senior credit risk management committee. The senior loan committee generally approves all loans with relationship exposure greater than $5 million. Dual signature authority is utilized for loan approvals below the $5 million threshold. Additionally, the credit transition committee manages all material credit actions for classified credits greater than $5 million. Our board of directors receives information concerning asset quality measurements and trends on at least a quarterly basis if not more frequently.

Credit policies have been established for each type of lending activity in which we engage, with a particular focus given to the commercial side of the Bank. Policies are evaluated and updated as needed based on changes in guidance and regulations as well as business needs of the Bank.

Each loan’s creditworthiness is assessed and assigned a risk rating, based on both the borrower strength (probability of default) as well as the collateral protection (loss given default) of the loan. Risk rating accuracy and reporting are critical tools for monitoring the portfolio as well as determining the allowance for credit losses. Assigned risk ratings are periodically reviewed for accuracy and adjusted as appropriate for all relationships greater than $2.5 million.

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Select asset quality metrics presented below distinguish between the originated, ANCI and ACI portfolios.

Nonperforming Assets. Nonperforming assets (“NPAs”) primarily consist of nonperforming loans and property acquired through foreclosures or repossession (which we refer to as other real estate owned or “OREO”). The following tables present nonperforming assets and additional asset quality data for the dates indicated:

Table 17 –Nonperforming Assets

	As of September 30, 2018
(Recorded Investment in thousands)	Originated			ANCI			ACI			Total
Nonperforming loans ("NPLs"):
Commercial and industrial	$	44,387		$	—		$	—		$	44,387
Commercial real estate		—			—			—			—
Consumer		1,321			1,094			—			2,415
Small business		133			251			—			384
Total NPLs		45,841			1,345			—			47,186
Foreclosed OREO and other NPAs		12,344			24			3,257			15,625
Total nonperforming assets ("NPAs")	$	58,185		$	1,369		$	3,257		$	62,811
NPLs as a percentage of  total loans		0.49	%		0.01	%		0.00	%		0.50	%
NPLs as a percentage of  portfolio		0.51	%		0.45	%		0.00	%
NPAs as a percentage of loans plus OREO/other NPAs		0.62	%		0.01	%		0.03	%		0.66	%
NPAs as a percentage of portfolio plus OREO/other NPAs		0.65	%		0.46	%		1.42	%
NPAs as a percentage of total assets		0.49	%		0.01	%		0.03	%		0.53	%
Accruing 90 days or more past due	$	202		$	286		$	13,573		$	14,061

	As of December 31, 2017
(Recorded Investment in thousands)	Originated			ANCI			ACI			Total
Nonperforming loans ("NPLs"):
Commercial and industrial	$	43,085		$	—		$	—		$	43,085
Commercial real estate		—			—			225			225
Consumer		1,519			2,222			—			3,741
Small business		199			443			—			642
Total NPLs		44,803			2,665			225			47,693
Foreclosed OREO and other NPAs		15,973			187			6,805			22,965
Total nonperforming assets ("NPAs")	$	60,776		$	2,852		$	7,030		$	70,658
NPLs as a percentage of  total loans		0.54	%		0.03	%		0.00	%		0.58	%
NPLs as a percentage of  portfolio		0.57	%		1.35	%		0.09	%
NPAs as a percentage of loans plus OREO/other NPAs		0.73	%		0.03	%		0.08	%		0.85	%
NPAs as a percentage of portfolio plus OREO/other NPAs		0.78	%		1.44	%		2.63	%
NPAs as a percentage of total assets		0.56	%		0.03	%		0.06	%		0.65	%
Accruing 90 days or more past due	$	773		$	54		$	16,988		$	17,815

Nonperforming Loans. Commercial loans, including small business loans, are generally placed on nonaccrual status when principal or interest is past due 90 days or more unless the loan is well secured and in the process of collection, or when the loan is specifically determined to be impaired. When a commercial loan is placed on nonaccrual status, interest accrued but not received is generally reversed against interest income.

Consumer loans, including residential first and second lien loans secured by real estate, are generally placed on nonaccrual status when they are 120 or more days past due. When a consumer loan is placed on nonaccrual status, interest accrued but not received is generally reversed against interest income.

Generally, cash receipts on nonperforming loans are used to reduce principal rather than recorded as interest income. Past due status is determined based upon contractual terms. A nonaccrual loan may be returned to accrual status when repayment is reasonably assured and there has been demonstrated performance under the terms of the loan or, if applicable, under the terms of the restructured loan. For the three and nine months ended September 30, 2018, approximately $1.3 million and $3.7 million,

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respectively, of contractual interest accrued on nonperforming loans was not recognized in earnings; however, approximately $0.1 million and $1.7 million, respectively, of contractual interest paid was recognized on the cash basis.

Our nonperforming loans were 0.50% of our loan portfolio as of September 30, 2018 compared to 0.58% of our loan portfolio as of December 31, 2017, with the decrease primarily due to continued resolutions within the energy portfolio. As of September 30, 2018, we had $24.9 million in energy credits considered nonperforming, of which $22.3 million are shared national credits. The majority of the remaining balance of nonperforming loans resides primarily in the restaurant sector.

The following table includes our originated nonperforming loans and assets for the periods presented.

Table 18 – Originated Nonperforming Assets

	As of
(Recorded Investment in thousands)	September 30, 2018			December 31, 2017
Nonperforming loans ("NPLs"):
Commercial and industrial
Energy- E&P	$	15,726		$	36,896
- Midstream		6,791			—
- Energy Services		—			5,926
Restaurant industry		21,624			—
Other commercial		246			263
Commercial real estate		—			—
Consumer		1,321			1,519
Small business		133			199
Total NPLs - originated portfolio		45,841			44,803
E&P - net profits interests		12,272			15,833
Foreclosed OREO		72			140
Total net profits interest and other nonperforming    assets ("NPAs") - originated portfolio		12,344			15,973
Total nonperforming assets ("NPAs") -    originated portfolio	$	58,185		$	60,776
NPLs as a percentage of  total loans		0.49	%		0.54	%

Other Real Estate Owned. Other real estate owned (“OREO”) consists of properties acquired through foreclosure and unutilized bank-owned properties. These properties, as held for sale properties, are initially recorded at fair value, less estimated costs to sell, on the date of foreclosure (establishing a new cost basis for the property). Subsequent to the foreclosure date the OREO is maintained at the lower of cost or fair value. Any write-down to fair value required at the time of foreclosure is charged to the allowance for credit losses. Subsequent gains or losses on other real estate owned resulting from either the sale of the property or additional valuation allowances, are reported in other noninterest expense.

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The balance of foreclosed OREO was $3.4 million as of September 30, 2018, compared to $7.6 million as of December 31, 2017, with over 95% related to foreclosures resulting from our ACI loan portfolio. As of September 30, 2018 and December 31, 2017, there had been no additions to OREO resulting from foreclosure or repossession from a shared national credit. In the second and fourth quarters of 2016, we received net profits interests (“NPIs”) in certain oil and gas reserves related to energy credit bankruptcies related to two energy portfolio shared national credits that were charged-off in 2016. These NPIs are considered financial instruments and recorded at fair value and are subject to the volatility of oil and gas prices and other operational factors outside of our control.  The balance of the NPIs was $12.1 million as of September 30, 2018 compared to $15.8 million as of December 31, 2017.  The decrease was primarily attributable to a decline in the estimated fair value due to lower production forecasts for one of the NPIs. The following tables present the balances of our OREO and NPIs as of the dates indicated:

Table 19 – OREO and Other Assets

	As of September 30, 2018
(In thousands)	Originated		ANCI		ACI		Other		Total
Acquired through foreclosure
Land	$	—	$	—	$	395	$	—	$	395
Residential property		72		24		1,210		—		1,306
Commercial property		—		—		1,652		—		1,652
Total foreclosed OREO		72		24		3,257		—		3,353
Total OREO		72		24		3,257		—		3,353
Other assets - net profits interests		12,272		—		—		—		12,272
Total OREO and other assets	$	12,344	$	24	$	3,257	$	—	$	15,625

	As of December 31, 2017
(In thousands)	Originated		ANCI		ACI		Other		Total
Acquired through foreclosure
Land	$	—	$	—	$	1,393	$	—	$	1,393
Residential property		140		164		2,392		—		2,696
Commercial property		—		23		3,020		—		3,043
Total foreclosed OREO		140		187		6,805		—		7,132
Unutilized bank-owned properties
Land		—		—		—		473		473
Total unutilized bank owned property		—		—		—		473		473
Total OREO		140		187		6,805		473		7,605
Other assets - net profits interests		15,833		—		—		—		15,833
Total OREO and other assets	$	15,973	$	187	$	6,805	$	473	$	23,438

Past Due 90 Days and Accruing. We classify certain loans with principal or interest past due 90 days or more as accruing loans if those loans are well secured and in the process of collection. The bulk of the accruing 90 days or more past due loans reside in the ACI portfolio, of which approximately half consists of single family residential loans, the bulk of which are located in Florida and Alabama, with the remainder consisting of one healthcare loan and commercial real estate loans. These loans are monitored on a bi-weekly basis by both the lines of business and credit administration. As of September 30, 2018, there were no shared national credits that were 90 days or more past due and accruing.

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Troubled Debt Restructuring. We attempt to work with borrowers when necessary to extend or modify loan terms to better align with the borrower’s ability to repay. Extensions and modifications to loans are made in accordance with internal policies and guidelines which conform to regulatory guidance. Each occurrence is unique to the borrower and is evaluated separately. The Bank considers regulatory guidelines when restructuring loans to ensure that prudent lending practices are followed. Qualifying criteria and payment terms are structured by the borrower’s current and prospective ability to comply with the modified terms of the loan.

A modification is classified as a troubled debt restructuring (a “TDR”) if the borrower is experiencing financial difficulty and it is determined that we have granted a concession to the borrower. We may determine that a borrower is experiencing financial difficulty if the borrower is currently in default on any of its debt, or if it is probable that a borrower may default in the foreseeable future without the modification. Concessions could include reductions of interest rates at a rate lower than the current market rate for a new loan with similar risk, extension of the maturity date, reduction of accrued interest, principal forgiveness, forbearance, or other concessions. The assessments of whether a borrower is experiencing or will likely experience financial difficulty and whether a concession has been granted is highly subjective in nature, and management’s judgment is required when determining whether a modification is classified as a TDR.

All TDRs are reported as impaired. An impaired classification may be removed if the borrower demonstrates compliance with the modified terms and the restructuring agreement specifies an interest rate equal to that which would be provided to a borrower with similar credit at the time of restructuring. Nonperforming loans and impaired loans have unique definitions. Some loans may be included in both categories, whereas other loans may only be included in one category. As of September 30, 2018, there was one shared national credit totaling $15.7 million designated as a TDRs.

Table 20 - ANCI Loans and Originated Loans that were modified into TDRs

	For the Three Months Ended September 30,
	2018				2017
(In thousands)	Number of TDRs		Recorded Investment		Number of TDRs		Recorded Investment
Commercial and Industrial		2	$	15,726		—	$	—
Consumer		—		—		1		285
Total		2	$	15,726		1	$	285

	For the Nine Months Ended September,
	2018				2017
(In thousands)	Number of TDRs		Recorded Investment		Number of TDRs		Recorded Investment
Commercial and Industrial		2	$	15,726		1	$	193
Consumer		—		—		2		747
Small Business Lending		2		134		1		145
Total		4	$	15,860		4	$	1,085

There were no TDRs experiencing payment default during the three and nine months ended September 30, 2018 and 2017.

ACI Loans that were modified into TDRs. There were no ACI loans modified in a TDR for the three and nine months ended September 30, 2018 or 2017.  

Potential Problem Loans. Potential problem loans represent loans that are currently performing, but for which known information about possible credit problems of the related borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as nonperforming at some time in the future. These loans are not included in the amounts of nonaccrual or restructured loans presented above. We cannot predict the extent to which economic conditions or other factors may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual status, become restructured, or require increased allowance coverage and provision for credit losses. We have identified no credits as a potential problem loan at September 30, 2018. Any potential problem loans are assessed for loss exposure consistent with the methods described in Notes 1 and 3 to our Consolidated Financial Statements.

We expect the levels of nonperforming assets and potential problem loans to fluctuate in response to changing economic and market conditions, and the relative sizes of the respective loan portfolios, along with our degree of success in resolving problem assets. We seek to take a proactive approach with respect to the identification and resolution of problem loans.

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Allowance for Credit Losses

The allowance for credit losses is maintained at a level that management believes is adequate to absorb all probable losses inherent in the loan portfolio as of the reporting date. Events that are not within our control, such as changes in economic factors, could change subsequent to the reporting date and could cause increases or decreases to the ACL. The amount of the allowance is affected by loan charge-offs, which decrease the allowance; recoveries on loans previously charged off, which increase the allowance; and the provision for credit losses charged to earnings, which increases the allowance. In determining the provision for credit losses, management monitors fluctuations in the ACL resulting from actual charge-offs and recoveries and reviews the size and composition of the loan portfolio in light of current and anticipated economic conditions (see Notes 1 and 3 to the Consolidated Financial Statements). This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as events change.  

Total ACL for the period ending September 30, 2018 was $86.2 million, or 0.91% of total loans (net of unearned discounts and fees) of $9.44 billion. This compares with $87.6 million, or 1.06% of total loans of $8.25 billion at December 31, 2017. The following tables present the allocation of the allowance for credit losses and the percentage of these loans to total loans. The allocation below is neither indicative of the specific amounts or the loan categories in which future charge-offs may occur, nor is it an indicator of any future loss trends. The allocation of the allowance to each category does not restrict the use of the allowance to absorb any losses in any category.

Table 21 –Allocation of the ACL

	Allowance for Credit Losses				Percent of ACL to Each Category of Loans						Percent of Loans in Each Category to Total Loans
(In thousands)	September 30, 2018		December 31, 2017		September 30, 2018			December 31, 2017			September 30, 2018			December 31, 2017
Originated Loans
Commercial and industrial	$	58,633	$	55,050		1.02	%		1.10	%		60.95	%		60.94	%
Commercial real estate		7,989		9,850		0.69			0.93			12.14			12.83
Consumer		7,080		8,389		0.40			0.56			18.81			18.11
Small business		3,436		4,367		1.43			2.08			2.53			2.54
Total originated loans		77,138		77,656		0.86			1.00			94.43			94.42
ANCI Loans
Commercial and industrial		264		864		0.55			1.47			0.51			0.71
Commercial real estate		34		130		0.63			0.82			0.06			0.19
Consumer		346		85		0.14			0.08			2.55			1.39
Small business		173		317		2.21			2.72			0.08			0.14
Total ANCI		817		1,396		0.27			0.71			3.20			2.43
ACI Loans
Commercial and industrial		20		5		0.08			0.02			0.28			0.36
Commercial real estate		1,929		2,010		2.73			2.52			0.75			0.96
Consumer		6,247		6,509		4.87			4.31			1.35			1.83
Small business		—		—		—			—			—			—
Total ACI		8,196		8,524		3.64			3.27			2.38			3.15
Total Loans
Commercial and industrial		58,917		55,919		1.01			1.09			61.73			62.01
Commercial real estate		9,952		11,990		0.81			1.04			12.94			13.98
Consumer		13,673		14,983		0.64			0.85			22.71			21.33
Small business		3,609		4,684		1.46			2.11			2.62			2.68
Total allowance for credit losses	$	86,151	$	87,576		0.91	%		1.06	%		100.00	%		100.00	%

Originated ACL. The ACL on our originated loan portfolio totaled $77.1 million, or 0.86% on loans of $8.92 billion as of September 30, 2018 compared to $77.7 million, or 1.00% on loans of $7.79 billion on loans of as of December 31, 2017. The primary driver of the originated ACL is the net new loan growth as well as the underlying credit quality of the loans. Our originated and ANCI loan portfolios are divided into commercial and consumer segments for allowance estimation purposes. The commercial allowance estimate is driven by loan level risk ratings. The consumer allowance estimate uses pool level historical loss rates assigned based on certain credit attributes. As September 30, 2018, $58.6 million, or 76.0% of our originated ACL is attributable to our C&I loan segment compared to $55.1 million, or 70.9%, as December 31, 2017. The ACL as a percentage of the C&I portfolio has remained steady at 1.0%, with a slight increase of $3.0 million as of September 30, 2018 since December 31,

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2017. The increase in the level of ACL on the C&I portfolio as of September 30, 2018 from December 31, 2017 is the result of loan growth in the C&I portfolio.

The level of criticized and classified loans in the C&I portfolio is presented in the following tables.

Table 22 –Criticized and Classified C&I Loans

	As of September 30, 2018
(Recorded Investment in thousands)	Special Mention		Substandard		Doubtful		Total Criticized / Classified
Originated Loans
Commercial and Industrial
General C&I	$	81,855	$	45,817	$	—	$	127,672
Energy Sector		20,683		6,806		15,726		43,215
Restaurant industry		40,250		34,160		—		74,410
Healthcare		4,951		67		—		5,018
Total	$	147,739	$	86,850	$	15,726	$	250,315

	As of December 31, 2017
(Recorded Investment in thousands)	Special Mention		Substandard		Doubtful		Total Criticized / Classified
Originated Loans
Commercial and Industrial
General C&I	$	80,550	$	41,309	$	—	$	121,859
Energy Sector		—		99,979		7,634		107,613
Restaurant industry		4,536		12,505		—		17,041
Healthcare		—		71		—		71
Total	$	85,086	$	153,864	$	7,634	$	246,584

As of September 30, 2018, $8.0 million, or 10.4% of our originated ACL is attributable to the CRE loan segment compared to $9.9 million, or 12.7%, as of December 31, 2017. The ACL as a percentage of the CRE portfolio has decreased to 0.69% as of September 30, 2018 from 0.93% as of December 31, 2017, primarily as a result of improving qualitative considerations surrounding macroeconomic and concentration risk.  

In addition to quantitative elements, certain qualitative and environmental factors are also considered at management’s discretion, which are generally based on a combination of internal and external factors and trends. At September 30, 2018, these totaled $16.7 million and accounted for approximately 21.6% of the originated ACL compared to $7.6 million, or 9.8%, as of December 31, 2017, with the most significant considerations being additional qualitative adjustments in C&I related tocertain attributes; these additional qualitative adjustments were partially offset by decreases in the energy qualitative adjustments that were the result of improving conditions in the energy portfolio and industry. Approximately $2.5 million and $4.5 million as of September 30, 2018 and December 31, 2017, respectively, of these qualitative reserves were allocated to the energy portfolio.

As of September 30, 2018, and December 31, 2017, $20.7 million, or 26.8% and $34.6 million, or 44.6%, respectively of the total originated ACL, was attributable to shared national credits. The commercial ACL is estimated based on the underlying credit quality of the loan, driven by loan level risk ratings. This methodology is consistent whether or not a loan is a shared national credit.

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The following table includes the charge-off and recoveries on our originated portfolio for the periods presented:

Table 23 – Originated Charge-offs and Recoveries

	Originated Charge-offs and Recoveries
	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2018		2017		2018		2017
Charge-offs:
Commercial and industrial	$	3,177	$	—	$	6,642	$	2,789
Commercial real estate		2		—		2		—
Consumer		86		132		463		383
Small business		—		—		482		120
Total charge-offs		3,265		132		7,589		3,292
Recoveries:
Commercial and industrial		29		44		1,340		677
Commercial real estate		5		11		15		18
Consumer		32		29		106		85
Small business		—		—		63		44
Total recoveries		66		84		1,524		824
Net charge-offs	$	3,199	$	48	$	6,065	$	2,468

ANCI ACL. The ACL on our ANCI loans totaled $0.9 million on $300.3 million in loans, or 0.30%, compared to $1.4 million on $197.9 million in loans, or 0.71%, at September 30, 2018 and December 31, 2017, respectively. ANCI loans were recorded at fair value at the date of each acquisition and are pooled for ACL assessment based on risk segment, with the majority of the ANCI loans within the consumer residential category. Any net shortage of credit mark indicates the need for an allowance on that segment of loans with certain loans individually reviewed for specific impairment.

ACI ACL. The ACL on our ACI loans totaled $8.2 million on $225.3 million in loans, or 3.64%, at September 30, 2018, compared to $8.5 million on $260.6 million in loans, or 3.27% at December 31, 2017. At the time of our acquisitions, we estimated the fair value of the total ACI loan portfolio by segregating the portfolio into loan pools with similar characteristics and certain specifically-reviewed non-homogeneous loans.

Since the acquisition dates, the expected cash flows have been re-estimated quarterly utilizing the same cash flow methodology used at the time of each acquisition. Any subsequent decreases to the expected cash flows generally result in a provision for credit losses. Conversely, subsequent increases in expected cash flows result first in the reversal of any impairment, then in a transfer from the non-accretable discount to the accretable discount, which would have a positive impact on accretion income prospectively. These cash flow evaluations are inherently subjective, as they require material estimates, all of which may be susceptible to significant change.

The largest component of our ACI ACL is attributable to our consumer category, primarily first and second-lien residential loans, that represents 76.2% of the ACI ACL at September 30, 2018 compared to 76.4% of the ACI ACL at December 31, 2017. This component of the ACL has declined $0.3 million to $6.2 million since December 31, 2017 due to impairment reversals largely driven by loan pay-offs.

The commercial real estate component comprises 23.5% of the ACI ACL at September 30, 2018 and has decreased $0.1 million to $1.9 million since December 31, 2017.

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The following table summarizes certain information with respect to our ACL on the total loan portfolio and the composition of charge-offs and recoveries for the periods indicated. Subsequent tables present this information separately for the originated, ANCI and ACI portfolios:

Table 24 – Allowance for Credit Losses Loans Roll-forward

	Total Loans
	Three Months Ended September 30,						Nine Months Ended September 30,						Year Ended December 31,
(In thousands)	2018			2017			2018			2017			2017
Allowance for credit losses at beginning of period	$	90,620		$	93,215		$	87,576		$	82,268		$	82,268
Charge-offs		(3,265	)		(581	)		(7,727	)		(4,011	)		(6,871	)
Recoveries		161			408			2,024			2,298			2,444
Provision for credit losses		(1,365	)		1,723			4,278			14,210			9,735
Allowance for credit losses at end of period	$	86,151		$	94,765		$	86,151		$	94,765		$	87,576
Loans at end of period, net of unearned income	$	9,443,819		$	8,028,938		$	9,443,819		$	8,028,938		$	8,253,427
Average loans, net of unearned income		9,265,754			7,867,794			8,855,882			7,690,798			7,825,763
Ratio of ending allowance to ending loans		0.91	%		1.18	%		0.91	%		1.18	%		1.06	%
Ratio of net charge-offs to average loans(1)		0.13			0.01			0.09			0.03			0.06
Net charge-offs as a percentage of:
Provision for credit losses		(227.40	)		10.04			133.31			12.05			45.48
Allowance for credit losses(1)		14.29			0.72			8.85			2.42			5.06
Allowance for credit losses as a percentage of nonperforming loans		182.58			122.66			182.58			122.66			183.62

(1) Annualized for the three and nine months ended September 30, 2018 and 2017.

	Originated Loans
	Three Months Ended September 30,						Nine Months Ended September 30,						Year Ended December 31,
(In thousands)	2018			2017			2018			2017			2017
Allowance for credit losses at beginning of period	$	81,518		$	81,596		$	77,656		$	71,012		$	71,012
Charge-offs		(3,265	)		(132	)		(7,589	)		(3,292	)		(5,746	)
Recoveries		66			84			1,524			824			882
Provision for credit losses		(1,181	)		3,177			5,547			16,181			11,508
Allowance for credit losses at end of period		77,138		$	84,725			77,138		$	84,725		$	77,656
Loans at end of period, net of unearned income	$	8,918,172		$	7,556,135		$	8,918,172		$	7,556,135		$	7,794,943
Ratio of ending allowance to ending loans		0.86	%		1.12	%		0.86	%		1.12	%		1.00	%
Net charge-offs as a percentage of:
Provision for credit losses		(270.87	)		1.51			109.34			15.25			42.27
Allowance for credit losses(1)		16.45			0.22			10.51			3.89			6.26
Allowance for credit losses as a percentage of    nonperforming loans		168.27			115.07			168.27			115.07			173.33

(1) Annualized for the three and nine months ended September 30, 2018 and 2017.

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	ANCI Loans
	Three Months Ended September 30,						Nine Months Ended September 30,						Year Ended December 31,
(In thousands)	2018			2017			2018			2017			2017
Allowance for credit losses at beginning of period	$	1,110		$	1,468		$	1,396		$	978		$	978
Charge-offs		—			(74	)		(138	)		(305	)		(618	)
Recoveries		32			256			340			558			635
Provision for credit losses		(325	)		(192	)		(781	)		227			401
Allowance for credit losses at end of period	$	817		$	1,458		$	817		$	1,458		$	1,396
Loans at end of period, net of unearned income	$	300,298		$	198,797		$	300,298		$	198,797		$	197,924
Ratio of ending allowance to ending loans		0.27	%		0.73	%		0.27	%		0.73	%		0.71	%
Net charge-offs (recoveries) as a percentage of:
Provision for credit losses		9.85			94.79			25.86			(111.01	)		(4.24	)
Allowance for credit losses		(15.54	)		(49.52	)		(33.06	)		(23.11	)		(1.22	)
Allowance for credit losses as a percentage of    nonperforming loans		60.74			42.86			60.74			42.86			52.38

(1) Annualized for the three and nine months ended September 30, 2018 and 2017.

	ACI Loans
	Three Months Ended September 30,						Nine Months Ended September 30,						Year Ended December 31,
(In thousands)	2018			2017			2018			2017			2017
Allowance for credit losses at beginning of period	$	7,992		$	10,151		$	8,524		$	10,278		$	10,278
Charge-offs		—			(375	)		—			(414	)		(507	)
Recoveries	63			68				160			916			927
Provision for credit losses		141			(1,262	)		(488	)		(2,198	)		(2,174	)
Allowance for credit losses at end of period	$	8,196		$	8,582		$	8,196		$	8,582		$	8,524
Loans at end of period, net of unearned income	$	225,349		$	274,006		$	225,349		$	274,006		$	260,560
Ratio of ending allowance to ending loans		3.64	%		3.13	%		3.64	%		3.13	%		3.27	%
Net charge-offs (recoveries) as a percentage of:
Provision for credit losses		(44.68	)		(24.33	)		32.79			22.84			19.32
Allowance for credit losses		(3.05	)		14.19			(2.61	)		(7.82	)		(4.93	)
Allowance for credit losses as a percentage of    nonperforming loans	NM			NM			NM			NM			NM

(1) Annualized for the three and nine months ended September 30, 2018 and 2017.

NM – Not Meaningful

Deposits. Our strategy is to fund asset growth primarily with customer deposits in order to maintain a stable liquidity profile and a more competitive cost of funds. We categorize deposits as brokered and non-brokered consistent with the banking industry. The following table illustrates the growth in our deposits during the periods indicated:

Table 25 –Deposits

					Percent to Total						Percentage Change
(In thousands)	September 30, 2018		December 31, 2017		September 30, 2018			December 31, 2017			2018 vs 2017
Noninterest-bearing demand	$	2,094,856	$	2,242,765		21.9	%		24.9	%		(6.6	)%
Interest-bearing demand		5,251,139		4,675,109		55.0			51.9			12.3
Savings		178,174		177,304		1.9			2.0			0.5
Time deposits less than $100,000		864,171		869,783		9.0			9.6			(0.7	)
Time deposits greater than $100,000		1,169,936		1,046,554		12.2			11.6			11.8
Total deposits (including brokered)	$	9,558,276	$	9,011,515		100.0	%		100.0	%		6.1	%
Total brokered deposits	$	724,327	$	796,734		7.6	%		8.8	%		(9.1	)%

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Domestic time deposits $250,000 and over were $444.2 million and $382.4 million at September 30, 2018, and December 31, 2017, respectively, which represented 4.6% and 4.2% of total deposits at September 30, 2018, and December 31, 2017, respectively.

The following tables set forth our average deposits and the average rates expensed for the periods indicated:

Table 26 –Average Deposits/Rates

	Three Months Ended September 30,
	2018					2017
	Average		Average			Average		Average
	Amount		Rate			Amount		Rate
(In thousands)	Outstanding		Paid			Outstanding		Paid
Noninterest-bearing demand	$	2,153,097		—	%	$	1,982,784		—	%
Interest-bearing deposits
Interest-bearing demand		5,175,915		1.31			4,329,086		0.67
Savings		181,449		0.33			180,099		0.25
Time deposits		1,978,807		2.07			1,648,000		1.36
Total interest bearing deposits		7,336,171		1.49			6,157,185		0.84
Total  average deposits	$	9,489,268		1.15	%	$	8,139,969		0.64	%

	Nine Months Ended September 30,
	2018					2017
	Average		Average			Average		Average
	Amount		Rate			Amount		Rate
(In thousands)	Outstanding		Paid			Outstanding		Paid
Noninterest-bearing demand	$	2,113,406		—	%	$	1,895,754		—	%
Interest-bearing deposits
Interest-bearing demand		4,895,838		1.03			4,338,645		0.59
Savings		183,566		0.29			182,877		0.25
Time deposits		2,021,276		1.87			1,618,298		1.25
Total interest bearing deposits		7,100,680		1.25			6,139,820		0.75
Total  average deposits	$	9,214,086		0.96	%	$	8,035,574		0.58	%

Borrowings

The following is a summary of our borrowings for the periods indicated:

Table 27 –Borrowings

(In thousands)	September 30, 2018		December 31, 2017
Securities sold under repurchase agreements	$	2,191	$	1,026
Advances from FHLB		340,000		150,000
Senior debt		184,778		184,629
Subordinated debt		98,856		98,687
Junior subordinated debentures		36,833		36,472
Total borrowings	$	662,658	$	470,814
Average total borrowings - YTD	$	536,287	$	493,196

The advances from the FHLB as of September 30, 2018 are short term fixed rate and daily rate credits.  The advances from the FHLB as of December 31, 2017 matured in January 2018.  At September 30, 2018, we had borrowing availability of $587.1 million from the FHLB (see Note 7 to the unaudited consolidated financial statements).

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Shareholders’ Equity

Tangible Common Equity

As of September 30, 2018 and December 31, 2017, our ratio of shareholders’ equity to total assets was 12.29% and 12.41%, respectively, and we had tangible common equity ratios of 9.61% and 9.71%, respectively. Tangible common equity ratio is a non-GAAP financial measure.  We believe that this non-GAAP financial measure provides investors with information useful in understanding our financial performance and, specifically, our capital position. The tangible common equity ratio is calculated as tangible common shareholders’ equity divided by tangible assets. Tangible common equity is calculated as total shareholders’ equity less goodwill and other intangible assets, net, and tangible assets are total assets less goodwill and other intangible assets, net. The following table provides a reconciliation of tangible common equity to GAAP total common shareholders’ equity and tangible assets to GAAP total assets:

Table 28 –Tangible Assets / Tangible Common Equity

(In thousands)	September 30, 2018			December 31, 2017
Shareholders’ equity	$	1,414,826		$	1,359,056
Less: Goodwill and other intangible assets, net		(314,998	)		(328,040	)
Tangible common shareholders’ equity		1,099,828			1,031,016
Total assets		11,759,837			10,948,926
Less: Goodwill and other intangible assets, net		(314,998	)		(328,040	)
Tangible assets	$	11,444,839		$	10,620,886
Tangible common equity ratio		9.61	%		9.71	%

Regulatory Capital

We are subject to regulatory capital requirements that require us to maintain certain minimum common equity Tier 1 capital, Tier 1 leverage, Tier 1 risk-based, and total risk-based ratios. At September 30, 2018, our capital ratios exceeded these requirements. Our actual regulatory capital amounts and ratios at September 30, 2018 are presented in the following table:

Table 29 – Regulatory Capital Amounts/Ratios

	Consolidated Company					Bank
(In thousands)	Amount		Ratio			Amount		Ratio
September 30, 2018
Tier 1 leverage	$	1,209,051		10.7	%	$	1,306,355		11.6	%
Common equity tier 1 capital		1,172,218		10.4			1,256,355		11.1
Tier 1 risk-based capital		1,209,051		10.7			1,306,355		11.6
Total risk-based capital		1,394,667		12.4			1,417,856		12.6
The minimum amounts of capital and ratios established by banking regulators are as follows:
Tier 1 leverage	$	452,745		4.0	%	$	452,359		4.0	%
Common equity tier 1 capital		507,387		4.5			507,071		4.5
Tier 1 risk-based capital		676,516		6.0			676,095		6.0
Total risk-based capital		902,021		8.0			901,460		8.0
Well capitalized requirement:
Tier 1 leverage	N/A		N/A			$	565,448		5.0	%
Common equity tier 1 capital	N/A		N/A				732,437		6.5
Tier 1 risk-based capital		676,516		6.0			901,460		8.0
Total risk-based capital		1,127,526		10.0			1,126,825		10.0

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Liquidity and Capital Resources

Overview

We measure and seek to manage liquidity risk by a variety of processes, including monitoring the composition of our funding mix; monitoring financial ratios specifically designed to measure liquidity risk; maintaining a minimum liquidity cushion; and performing forward cash flow gap forecasts in various liquidity stress testing scenarios designed to simulate possible stressed liquidity environments. We attempt to limit our liquidity risk by setting board-approved concentration limits on sources of funds and limits on liquidity ratios used to measure liquidity risk, and maintaining adequate levels of on-hand liquidity. We use the following ratios to monitor and analyze our liquidity:

• Total Loans to Total Deposits—the ratio of our outstanding loans to total deposits.

• Non-Brokered Deposits to Total Deposits—the ratio of our deposits that are organically originated through commercial and branch activity to total deposits.

• Brokered Deposits to Total Deposits—the ratio of our deposits generated through wholesale sources to total deposits.

• Highly Liquid Assets to Uninsured Large Depositors—the ratio of cash and highly liquid assets to uninsured deposits with a current depository relationship greater than $10,000,000.

• Wholesale Funds Usage—the ratio of our current borrowings to all available wholesale sources with potential maturities greater than one day.

• Wholesale Funds to Total Assets—the ratio of current outstanding wholesale funding to assets.

As of September 30, 2018, all of our liquidity measures were within our established guidelines.

The goal of liquidity management is to ensure that we maintain adequate funds to meet changes in loan demand or any deposit withdrawals. Additionally, we strive to maximize our earnings by investing our excess funds in securities and other assets. To meet our short-term liquidity needs, we seek to maintain a targeted cash position and have borrowing capacity through many wholesale sources including correspondent banks, the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank. To meet long-term liquidity needs, we additionally depend on the repayment of loans, sales of loans, term wholesale borrowings, brokered deposits and the maturity or sale of investment securities.

Maturities of Time Deposits

The aggregate amount of time deposits in denominations of $100,000 or more as of September 30, 2018 and December 31, 2017, was $1.12 billion and $1.05 billion, respectively.

At September 30, 2018, the weighted average maturity of time deposits greater than $100,000 was 10.6 months and scheduled maturities of time deposits greater than $100,000 were as follows:

Table 30 – Time Deposit Maturity Schedule

	September 30, 2018
(In thousands)	Amount		Average Interest Rate
Under 3 months	$	168,572		2.01	%
3 to 6 months		187,933		2.08
6 to 12 months		417,403		2.27
12 to 24 months		327,935		2.10
24 to 36 months		58,127		2.43
36 to 48 months		6,313		1.26
Over 48 months		3,653		1.92
Total	$	1,169,936		2.16	%

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Cash Flow Analysis

Cash and cash equivalents

At September 30, 2018, we had $398.9 million cash and cash equivalents on hand, a decrease of $331.9 million, or 45.4%, over our cash and cash equivalents of $730.8 million at December 31, 2017. At September 30, 2018 our cash and cash equivalents comprised 3.4% of total assets compared to 6.7% at December 31, 2017. We monitor our liquidity position and increase or decrease our short-term liquid assets as necessary. The lower balance in cash and cash equivalents at September 30, 2018 is due to timing of net loan fundings and customer deposits at the end of the quarter.

2018 vs. 2017

As shown in the Condensed Consolidated Statements of Cash Flows, operating activities provided $149.7 million in the nine months ended September 30, 2018 compared to $149.8 million in the nine months ended September 30, 2017. The slight decrease in operating funds during the nine months ended September 30, 2018 was due primarily to an increase in originations of held for sale loans, offset by increases in net income and proceeds from the sale of held for sale loans.

Investing activities during the nine months ended September 30, 2018 used $1.19 billion of net funds, primarily due to net loan fundings of $1.21 billion and purchases of securities of $337.9 million, partially offset by sales and other cash flows from available for sale securities. This compares to investing activities during the nine months ended September 30, 2017 using $689.3 million of net funds, primarily due to net loan fundings of $614.0 million and the purchase of available for sale securities of $278.3 million, partially offset by sales of securities available for sale of $152.3 million.  

Financing activities during the nine months ended September 30, 2018 provided net funds of $704.4 million, due to an increase in deposits of $546.8 million, increase in short-term FHLB borrowings of $190 million, offset by dividends of $33.5 million. This compares to financing activities during the nine months ended September 30, 2017 providing net funds of $880.0 million, resulting from an issuance of common stock in an initial public offering of $155.7 million, an increase in short-term FHLB borrowings of $250.0 million, offset by a decrease in deposits of $484.4 million.  

NON-GAAP FINANCIAL MEASURES

We identify “efficiency ratio,” “adjusted efficiency ratio”, “adjusted noninterest expense,” “adjusted noninterest income,” “adjusted operating revenue,” “tangible common equity,” “tangible common equity ratio,” “return on average tangible common equity,” “adjusted return on average tangible common equity,” “tangible book value per share,” “adjusted return on average assets,” “adjusted net income,” “adjusted net income allocated to common stock,” “adjusted diluted earnings per share” and “pre-tax pre-provision net earnings” as “non-GAAP financial measures.” In accordance with the SEC’s rules, we identify certain financial measures as non-GAAP financial measures if such financial measures exclude or include amounts in the most directly comparable measures calculated and presented in accordance with generally accepted accounting principles (“GAAP”) in effect in the United States in our statements of income, balance sheet or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures, ratios or statistical measures calculated using exclusively financial measures calculated in accordance with GAAP.

The non-GAAP financial measures that we discuss herein should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate these non-GAAP financial measures may differ from that of other companies reporting measures with similar names, and, therefore, may not be comparable to our non-GAAP financial measures.

Efficiency ratio is defined as noninterest expenses divided by operating revenue, which is equal to net interest income plus noninterest income. Adjusted efficiency ratio is defined as adjusted noninterest expenses divided by adjusted operating revenue, which is equal to net interest income plus noninterest income, excluding certain non-routine income and expenses.  We believe that these measures are important to many investors in the marketplace who wish to assess our performance versus that of our peers.

Our adjusted noninterest expenses represent total noninterest expenses net of any merger, restructuring, branch closing costs or other non-routine expense items. Our adjusted operating revenue is equal to net interest income plus noninterest income excluding gains and losses on sales of securities and other non-routine revenue items. In our judgment, the adjustments made to noninterest expense and operating revenue allow management and investors to better assess our performance by removing the volatility that is associated with certain other discrete items that are unrelated to our core business.

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Tangible common equity is defined as total shareholders’ equity, excluding preferred stock, less goodwill and other intangible assets. We believe that this measure is important to many investors in the marketplace who are interested in changes from period to period in common shareholders’ equity exclusive of changes in intangible assets. Goodwill, an intangible asset that is recorded in a purchase business combination, has the effect of increasing both common equity and assets while not increasing our tangible common equity or tangible assets.

The tangible common equity ratio is defined as the ratio of tangible common equity divided by total assets less goodwill and other intangible assets. We believe that this measure is important to many investors in the marketplace who are interested in relative changes from period to period in common equity and total assets, each exclusive of changes in intangible assets. We believe that the most directly comparable GAAP financial measure is total shareholders’ equity to total assets.

Return on average tangible common equity is defined as net income divided by average tangible common equity. Adjusted return on average tangible common equity is defined as adjusted net income divided by average tangible common equity. We believe the most directly comparable GAAP financial measure is the return on average common equity.

Adjusted net income is defined as net income plus or minus total non-routine items, net of tax.  Non-routine items include merger related expenses, secondary offering expenses, gain on sale of insurance assets, net securities gains, one-time tax charge related to Tax Reform, benefit of legacy loan bad debt deduction for tax and other non-routine expenses. We believe the most directly comparable GAAP financial measure is net income.

Tangible book value per share is defined as book value, excluding the impact of goodwill and other intangible assets, if any, divided by shares of our common stock outstanding.

Adjusted return on average assets is defined as adjusted net income divided by average assets.  We believe the most directly comparable GAAP financial measure is the return on average assets.  

Adjusted net income allocated to common stock is defined as net income allocated to common stock plus total non-routine items.  We believe the most directly comparable GAAP financial measure is net income allocated to common stock.

Adjusted diluted earnings per share is defined as adjusted net income allocated to common stock divided by diluted weighted average common shares outstanding. We believe the most directly comparable GAAP financial measure is diluted earnings per share.

Pre-tax, pre-provision net earnings is defined as income before taxes and provision for credit losses. We believe the most directly comparable GAAP financial measure is income before taxes.

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Table 31 – Non-GAAP Financial Measures

	As of and for the Three Months Ended September 30,						As of and for the Nine Months Ended September 30,						As of and for the Year Ended December 31,
(In thousands)	2018			2017			2018			2017			2017
Efficiency ratio
Noninterest expenses (numerator)	$	61,231		$	56,530		$	185,605		$	166,985		$	233,356
Net interest income	$	98,100		$	81,163		$	284,595		$	238,305		$	326,216
Noninterest income		23,976			27,124			73,631			74,218			99,874
Operating revenue (denominator)	$	122,076		$	108,287		$	358,226		$	312,523		$	426,090
Efficiency ratio		50.16	%		52.20	%		51.81	%		53.43	%		54.77	%
Adjusted efficiency ratio
Noninterest expenses	$	61,231		$	56,530		$	185,605		$	166,985		$	233,356
Less: Merger related expenses		178			—			934			—			—
Less: Secondary offerings expenses		2,022			—			4,552			—			1,302
Less: Other non-routine expenses(1)		—			—			3,423			—			1,964
Adjusted noninterest expenses (numerator)	$	59,031		$	56,530		$	176,696		$	166,985		$	230,090
Net interest income	$	98,100		$	81,163		$	284,595		$	238,305		$	326,216
Noninterest income		23,976			27,124			73,631			74,218			99,874
Less: Gain on sale of insurance assets		—			1,093			4,871			1,093			1,093
Less: Securities gains (losses), net		2			1			(1,799	)		(162	)		(146	)
Adjusted noninterest income		23,974			26,030			70,559			73,287			98,927
Adjusted operating revenue (denominator)	$	122,074		$	107,193		$	355,154		$	311,592		$	425,143
Adjusted efficiency ratio		48.36	%		52.74	%		49.75	%		53.59	%		54.12	%
Tangible common equity ratio
Shareholders’ equity	$	1,414,826		$	1,340,848		$	1,414,826		$	1,340,848		$	1,359,056
Less: Goodwill and other intangible assets, net		(314,998	)		(329,124	)		(314,998	)		(329,124	)		(328,040	)
Tangible common shareholders’ equity		1,099,828			1,011,724			1,099,828			1,011,724			1,031,016
Total assets		11,759,837			10,502,261			11,759,837			10,502,261			10,948,926
Less: Goodwill and other intangible assets, net		(314,998	)		(329,124	)		(314,998	)		(329,124	)		(328,040	)
Tangible assets	$	11,444,839		$	10,173,137		$	11,444,839		$	10,173,137		$	10,620,886
Tangible common equity ratio		9.61	%		9.95	%		9.61	%		9.95	%		9.71	%
Tangible book value per share
Shareholders’ equity	$	1,414,826		$	1,340,848		$	1,414,826		$	1,340,848		$	1,359,056
Less: Goodwill and other intangible assets, net		(314,998	)		(329,124	)		(314,998	)		(329,124	)		(328,040	)
Tangible common shareholders’ equity	$	1,099,828		$	1,011,724		$	1,099,828		$	1,011,724		$	1,031,016
Common shares issued		83,625,000			83,625,000			83,625,000			83,625,000			83,625,000
Tangible book value per share	$	13.15		$	12.10		$	13.15		$	12.10		$	12.33

___________________

(1) For the nine months ended September 30, 2018, $3.4 million of other non-routine expenses included $1.1 million of expenses related to the sale of the assets of our insurance company and $2.3 million of legal costs associated with litigation related to a pre-acquisition matter of a legacy acquired bank that has been resolved.  There were other non-routine expenses of $2.0 million for the same pre-acquisition legal matter for the year ended December 31, 2017.                  

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	As of and for the Three Months Ended September 30,						As of and for the Nine Months Ended September 30,						As of and for the Year Ended December 31,
(In thousands)	2018			2017			2018			2017			2017
Return on average tangible common equity
Average common equity	$	1,395,061		$	1,320,884		$	1,365,618		$	1,221,845		$	1,253,861
Less: Average intangible assets		(315,382	)		(329,816	)		(322,076	)		(330,989	)		(330,411	)
Average tangible common shareholders’ equity	$	1,079,679		$	991,068		$	1,043,542		$	890,856		$	923,450
Net income	$	47,136		$	32,577		$	133,935		$	87,662		$	102,353
Return on average tangible common equity(2)		17.32	%		13.04	%		17.16	%		13.16	%		11.08	%
Adjusted return on average tangible common equity
Average tangible common shareholders’ equity	$	1,079,679		$	991,068		$	1,043,542		$	890,856		$	923,450
Net income	$	47,136		$	32,577		$	133,935		$	87,662		$	102,353
Non-routine items:
Plus: Merger related expenses		178			—			934			—			—
Plus: Secondary offerings expenses		2,022			—			4,552			—			1,302
Plus: Other non-routine expenses(1)		—			—			3,423			—			1,964
Less: Gain on sale of insurance assets		—			1,093			4,871			1,093			1,093
Less: Securities gains (losses), net		2			1			(1,799	)		(162	)		(146	)
Tax expense:
Plus: One-time tax charge related to Tax Reform		—			—			—			—			—
Less: Benefit of legacy loan bad debt deduction for tax		—			—			5,991			—			—
Less: Income tax effect of tax deductible non-routine items		41			(405	)		218			(344	)		376
Total non-routine items, after tax		2,157			(689	)		(372	)		(587	)		1,943
Adjusted net income	$	49,293		$	31,888		$	133,563		$	87,075		$	104,296
Adjusted return on average tangible common equity(2)		18.11	%		12.77	%		17.11	%		13.07	%		11.29	%
Adjusted return on average assets
Average assets	$	11,585,969		$	10,024,871		$	11,244,657		$	9,829,224		$	10,020,036
Adjusted net income	$	49,293		$	31,888		$	133,563		$	87,075		$	104,296
Adjusted return on average assets(2)		1.69	%		1.26	%		1.59	%		1.04	%		1.04	%
Adjusted diluted earnings per share
Diluted weighted average common shares outstanding		84,660,256			83,955,685			84,709,240			80,558,337			81,605,015
Net income allocated to common stock	$	47,080		$	32,577		$	133,773		$	87,662		$	102,353
Total non-routine items		2,157			(689	)		(372	)		(587	)		1,943
Adjusted net income allocated to common stock	$	49,237		$	31,888		$	133,401		$	87,075		$	104,296
Adjusted diluted earnings per share(2)	$	0.58		$	0.38		$	1.57		$	1.08		$	1.28
Pre-tax, pre-provision net earnings
Income before taxes	$	62,210		$	50,034		$	168,343		$	131,328		$	182,999
Plus: Provision for credit losses		(1,365	)		1,723			4,278			14,210			9,735
Pre-tax, pre-provision net earnings	$	60,845		$	51,757		$	172,621		$	145,538		$	192,374

___________________

(1) For the nine months ended September 30, 2018, $3.4 million of other non-routine expenses included $1.1 million of expenses related to the sale of the assets of our insurance company and $2.3 million of legal costs associated with litigation related to a pre-acquisition matter of a legacy acquired bank that has been resolved.  There were other non-routine expenses of $2.0 million for the same pre-acquisition legal matter for the year ended December 31, 2017.    

(2) Annualized for the three and nine months ended September 30, 2018 and 2017.       

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the exposure to unanticipated changes in net interest earnings or changes in the fair value of financial instruments due to fluctuations in interest rates, exchange rates and equity prices. Our primary market risk is interest rate risk.

Interest Rate Risk (“IRR”) is the risk that changing market interest rates may lead to an unexpected decline in the Bank’s earnings or capital. The main causes of interest rate risk are the differing structural characteristics of the balance sheet’s assets, liabilities and off balance sheet obligations and their cumulative net reaction to changing interest rates. These structural characteristics include timing differences in maturity or repricing and the effect of embedded options such as loan prepayments, securities prepayments and calls, interest rate caps and floors, and deposit withdrawal options. In addition to these sources of interest rate risk, basis risk results from differences in the spreads between various market interest rates and changes in the slope of the yield curve which can contribute to additional interest rate risk.

We evaluate interest rate risk and develop guidelines regarding balance sheet composition and re-pricing, funding sources and pricing, and off-balance sheet commitments that aim to moderate interest rate risk. We use computer simulations that reflect various interest rate scenarios and the related impact on net interest income over specified periods of time. We refer to this process as asset/liability management, or “ALM”.

The primary objective of ALM is to seek to manage interest rate risk and desired risk tolerance for potential fluctuations in net interest income (“NII”) throughout interest rate cycles, which we aim to achieve by maintaining a balance of interest rate sensitive earning assets and liabilities. In general, we seek to maintain a desired risk tolerance with asset and liability balances within maturity and repricing categories to limit our exposure to earnings volatility and changes in the value of assets and liabilities as interest rates fluctuate over time. Adjustments to maturity categories can be accomplished either by lengthening or shortening the duration of either an individual asset or liability category, or externally with interest rate contracts, such as interest rate swaps, caps and floors. See “—Interest Rate Exposures” for a more detailed discussion of our various derivative positions.

Our asset and liability management strategy is formulated and monitored by our Asset/Liability Management Committee (“ALCO”) in accordance with policies approved by the board of directors. The ALCO meets regularly to review, among other things, the sensitivity of our assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, recent purchase and sale activity, maturities of investments and borrowings, and projected future transactions. The ALCO also establishes and approves pricing and funding decisions with respect to overall asset and liability composition. The ALCO reports regularly to our board of directors.

Financial simulation models are the primary tools we use to measure interest rate risk exposures. By examining a range of hypothetical deterministic interest rate scenarios, these models provide management with information regarding the potential impact on NII and Economic Value of Equity (“EVE”) caused by changes in interest rates.

The models simulate the cash flows and accounting accruals generated by the financial instruments on our balance sheet at a given month-end, as well as the cash flows generated by the new business we anticipate over a 36-month forecast horizon. Numerous assumptions are made in the modeling process, including balance sheet composition, the pricing, re-pricing and maturity characteristics of existing business and new business. Additionally, loan and investment prepayment, administered rate account elasticity and other option risks are considered as well as the uncertainty surrounding future customer behavior. Because of the limitations inherent in any approach used to measure interest rate risk and because the Bank’s loan portfolio will be actively managed in the event of a change in interest rates, simulation results, including those discussed in “—Interest Rate Exposures” immediately below, are not intended as a forecast of the actual effect of a change in market interest rates on our net interest income or results of operations or indicative of management’s expectations of actual results in the event of a fluctuation in market interest rates.

Interest Rate Exposures

The Bank’s net interest income simulation model projects that net interest income over a 12-month horizon will increase, relative to the base model, on an annual basis by 6.04%, or approximately $25.8 million, assuming an instant increase in interest rates of 100 basis points Assuming an instant increase in interest rates of 200 basis points of 11.98%, or approximately $51.3 million and a decrease of 6.25% or approximately $26.8 million, assuming an instant decrease in interest rates of 100 basis points. Based upon the current interest rate environment as of September 30, 2018, our sensitivity to interest rate risk was as follows:

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Table 32- Interest Rate Sensitivity

	Increase(Decrease)
(in millions)	Net Interest Income							Economic Value of Equity
Change (in Basis Points) in Interest Rates (12-Month Projection)	Amount			Percent				Amount			Percent
+ 200 BP	$	51.3			11.98		%	$	445.4			19.86		%
+ 100 BP		25.8			6.04				246.2			10.98
-  100 BP		(26.8	)		(6.25	)			(315.4	)		(14.06	)
-  200 BP		(58.0	)		(13.55	)			(734.2	)		(32.73	)

Based upon the current interest rate environment as of September 30, 2018, the following table reflects our sensitivity to a gradual increase or decrease in interest rates over a twelve-month period:

	Increase(Decrease)
(in millions)	Net Interest Income
Change (in Basis Points) in Interest Rates (12-Month Projection)	Amount			Percent
+ 200 BP	$	45.1			10.54		%
+ 100 BP		22.7			5.31
-  100 BP		(23.5	)		(5.49	)
-  200 BP		(49.2	)		(11.49	)

Both the NII and EVE simulations include assumptions regarding balances, asset prepayment speeds, deposit repricing and runoff and interest rate relationships among balances that management believes to be reasonable for the various interest rate environments. Differences in actual occurrences from these assumptions, as well as non-parallel changes in the yield curve, may change our market risk exposure.

Derivative Positions

Overview. Our board of directors has authorized the ALCO to utilize financial futures, forward sales, options, interest rate swaps, caps and floors, and other instruments to the extent appropriate, in accordance with regulations and our internal policy. We expect to use interest rate swaps, caps and floors as macro hedges against inherent rate sensitivity in our securities portfolio, our loan portfolio and our liabilities.

Positions for hedging purposes are undertaken primarily as a mitigation of three main areas of risk exposure: (1) mismatches between assets and liabilities; (2) prepayment and other option-type risks embedded in our assets, liabilities and off-balance sheet instruments; and (3) the mismatched commitments for mortgages and funding sources.

We currently intend to engage in only the following types of hedges: (1) those which synthetically alter the maturities or re-pricing characteristics of assets or liabilities to reduce imbalances; (2) those which enable us to transfer the interest rate risk exposure involved in our daily business activities; and (3) those which serve to alter the market risk inherent in our investment portfolio, mortgage pipeline, or liabilities and thus help us to match the effective maturities of the assets and liabilities.

Cash Flow Hedges. Cash flow hedge relationships mitigate exposure to the variability of future cash flows or other forecasted transactions. We use interest rate swaps to manage overall cash flow changes related to interest rate risk exposure on benchmark interest rate loans (1-Month LIBOR). In June 2015 and March 2016, we entered into interest rate swap agreements with notional values totaling $982 million and $350 million, respectively, to manage overall cash flow changes related to interest rate risk exposure on the 1-Month LIBOR rate indexed loans. The following is a detail of our cash flow hedges as of September 30, 2018:

Table 33 –Summary of Cash Flow Hedges

Effective Date	Maturity Date	Notional Amount (In Thousands)		Fixed Rate			Variable Rate
June 15, 2015	December 17, 2018	$	382,000		1.33	%	1 Month LIBOR
June 30, 2015	December 31, 2019		300,000		1.51		1 Month LIBOR
March 8, 2016	February 27, 2026		175,000		1.60		1 Month LIBOR
March 8, 2016	February 27, 2026		175,000		1.59		1 Month LIBOR

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The following summarizes all derivative positions as of September 30, 2018:

Table 34 –Derivative Positions

	September 30, 2018
			Fair Value
(In thousands)	Notional Amount		Other Assets		Other Liabilities
Derivatives designated as hedging instruments (cash flow hedges):
Commercial loan interest rate swaps	$	1,032,000	$	—	$	37,181
Derivatives not designated as hedging instruments:
Commercial loan interest rate swaps		880,475		2,712		3,002
Commercial loan interest rate caps		97,180		387		387
Commercial loan interest rate floors		536,633		4,271		4,271
Mortgage loan held for sale interest rate lock commitments		7,078		72		—
Mortgage loan forward sale commitments		2,067		—		—
Mortgage loan held for sale floating commitments		34,884		—		—
Foreign exchange contracts		42,990		334		328
Total derivatives not designated as hedging instruments		1,601,307		7,776		7,988
Total derivatives	$	2,633,307	$	7,776	$	45,169

Counterparty Credit Risk

Derivative contracts involve the risk of dealing with both bank customers and institutional derivative counterparties and their ability to meet contractual terms. Our policies require that institutional counterparties must be approved by our ALCO and all positions over and above the minimum transfer amounts are secured by marketable securities or cash.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

The Company’s management, including the Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and are also designed to ensure that the information required to be disclosed in the reports filed or submitted under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

(b) Internal Control Over Financial Reporting

Changes in internal control over financial reporting

There have been no changes in the Company’s internal control over financial reporting during the period ended September 30, 2018that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.Any control system, no matter how well conceived and operated, can provide only reasonable assurance that its objectives are achieved. The design of a control system inherently has limitations, including the controls’ cost relative to their benefits. Additionally, controls can be circumvented. No cost-effective control system can provide absolute assurance that all control issues and instances of fraud, if any, will be detected.

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PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

The Company and its subsidiaries are from time to time subject to claims and litigation arising in the ordinary course of business.  At this time, in the opinion of management, the likelihood is remote that the impact of such proceedings, either individually or in the aggregate, would have a material adverse effect on our consolidated results of operations, financial condition or cash flows.  However, one or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect for the period in which they are resolved.  In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention and may materially adversely affect our reputation, even if resolved in our favor.

ITEM 1A. RISK FACTORS.

There have been no material changes to our risk factors previously disclosed under Item 1.A. of our Annual Report on Form 10-K for the year ended December 31, 2017.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

Exhibit Number	Description of Exhibit
2.1	Agreement and Plan of Merger, dated as of May 11, 2018, by and between Cadence Bancorporation and State Bank Financial Corporation (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by the Company on May 14, 2018)
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1	Certification of the Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002
32.2	Certification of the Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002
101	Interactive Financial Data

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Cadence Bancorporation (Registrant)
Date: November 14, 2018	/s/ Paul B. Murphy
	Paul B. Murphy
	Chairman and Chief Executive Officer
Date: November 14, 2018	/s/ Valerie C. Toalson
	Valerie C. Toalson
	Executive Vice President and Chief Financial Officer

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