Paul Murphy Jr. is still trying to recover from a recent spike in credit hits at Cadence Bancorp.
The Houston company’s stock is down nearly 25% since April. Much of that decline could be linked to increased charge-offs, especially in the second and third quarters after an issue with a big commercial relationship surfaced.
While that loan accounted for 40% of Cadence’s 2019 charge-offs through Sept. 30, the $18 billion-asset company also reported weakness in the restaurant, supply management and energy industries.
Murphy, Cadence’s chairman and CEO, takes full responsibility for the “unacceptable” and “disappointing” setback, noting that the $50 million charged off in the first nine months of the year exceeded the $35 million baked into its business model.
“I totally own it,” he said, though he noted that Cadence’s three-year average charge-off numbers still look good. “It’s something we have to work through. … It’s painful, but we’re not closing up shop.”
While he cautions that more banks will like have similar challenges with credit in 2020, Murphy said he believes those issues should be manageable.
“I look out at things and still see a favorable environment,” he said.
Murphy continues to see opportunity in the new year in markets like Houston and Dallas. He is also optimistic about Atlanta, a city that Cadence entered earlier this year when it bought State Bank Financial for $835 million.
Cadence’s early-stage credit issues, along with its opportunity to make a mark in several growing markets, are among the reasons Murphy is one of American Banker’s community bankers to watch in 2020. The other bankers will be revealed in coming days.
Here is an edited transcript of a recent conversation with Murphy.
Cadence had elevated charge-offs this year. Where are things are headed?
PAUL MURPHY: Any credit losses are disappointing. But if you look at our portfolio, in our model, we can afford 25 to 30 basis points of charge-offs in a year. So that’s $35 million. In the first nine months [of 2019] we’ve charged off $50 million. That’s unacceptable.
It’s higher than our plan, but it’s not a runaway train. It’s really one deal that went south on us that had a very high severity of loss and is hugely disappointing. I totally own it. I’m accountable for it. I’m not saying it’s a black swan. But I would say if you look at the two previous years, and you roll up the three-year average charge-off number, it’s still acceptable. It’s something we have to work through. It’s painful, but we’re not closing up shop.
What about credit quality for the banking industry?
You’re seeing [more charge-offs] … so it could be that we’re returning to more normalized levels. I think it’s a reasonable conclusion that we’re in that phase now. I think from a long-term perspective, that’s acceptable. We do manage risk. We’re not in the business to make bad loans, but there’s risk in any portfolio.
The downward shift on interest rates was significant in the second half of 2019. What are your expectations for 2020?
I think we’re likely to be at the end of the Fed rate reductions. I think employment numbers, labor participation numbers, really almost anything you look at, all looks strong. [Federal Reserve Chairman] Jerome Powell said they’re going to pause. It is of course data dependent, but my gut feel is that we’ll be stable and are much less likely to see cuts next year.
Do you think stable, at this level, is a good thing?
I do. Eventually, of course, you’d like to see them increase a little bit. But I don’t think there’s any rush on that. … There’s a whole lot of fuss about an inverted yield curve, but to me that’s not a real big deal.
What are commercial clients saying about next year?
I think there’s a lot more caution out there these days because of the China trade negotiations, even among people who don’t do business with China. It’s just making people nervous, and when you’re nervous you’re less willing to spend and invest.
Did nervousness impact loan demand in 2019?
Demand definitely softened up a bit. We had a great year [in 2018] with double-digit loan growth, but this year we’re looking at more like mid single digits. Part of it is sentiment, but part of it is nonbank lenders. There’s a lot of them out there that are active, and they’re taking some business.
What’s your view of the operating environment for banks?
Broadly speaking, the economy is stable and good. There’s more caution from business operators, as I said. But still, from an operating standpoint, I think we have a positive outlook for 2020 and beyond.
How would you assess competition?
It’s more aggressive, with nonbank lenders less concerned about leverage than banks are typically. They charge higher rates, but they have more debt. … I worry because companies’ trajectories don’t go up forever. If they have a couple of bad quarters, is the nonbank lender going to get nervous immediately? Are they going to stick with them?
There’s a lot to be said for the commercial banks. We’re steady. We’re stable. We offer a lot of consistency helping companies manage through growth, contraction and all phases of the business cycle.
How’s the health of your major markets, such as Houston?
In Houston you definitely see softness with the energy clientele. I’d say the energy capital markets are closed. It’s maybe the worst it’s ever been, because people just don’t want to touch it. Prices have improved, and there’s a lot of focus on cash flow, and appropriately so. We’re about 8% energy — about 60% of that is midstream, which has been good for us. We’re not closed for energy, but there’s an extraordinarily high bar for anything on the energy front.
The good news for Houston is we’re adding jobs, and the [negative] ripple effect from energy, that really hasn’t been too great. Beyond energy, things look really good. We have a nice pipeline of loans coming our way.
Dallas is an expansion market for us. We have a small team there, but they’re getting a lot of traction. It is one of the best markets in the world right now. The economy is really diverse, and there’s a lot of growth. It’s hard to find something about Dallas to not like.
We’re also in Atlanta, coming up on the one-year mark of the State Bank Financial deal. We’re very pleased with the team there, and several new commercial lending hires, so we’re really building up in Atlanta. It will be an important part of our growth.
I also need to mention Tampa — I love what’s happening in Florida. A lot of people moving to Florida — the weather, the low taxes.
So those are the big four markets for us, and things overall are still quite good.
What is your appetite for M&A going into 2020?
We’re taking a breather. Our stock is at a low multiple, and when your currency is where ours is, it’s pretty tough to try to talk to potential partners about valuations they would find attractive. We’re kind of in a self-imposed timeout for now. We’ll see what happens later next year. At some point in the future we could be interested … but right now I’m not on fire about M&A. We’re focused on core growth and having a good year ahead organically.
