Cadence Bank
Q3 2018 Earnings Call Transcript

Published: 22 Oct 2018

[Operator:]

Good afternoon. Welcome to the Cadence Bancorporation Third Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. The comments are subject to the forward-looking statement disclaimer, which can be found in the press release and on page two of the financial results presentation. Both of those documents can be located in the Investor Relations section at cadencebancorporation.com. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Paul Murphy, Chairman and CEO. Please go ahead.

[Paul Murphy:]

Thank you. And welcome to our third quarter call. Joining me for today’s call are Sam Tortorici, Valerie Toalson, and Hank Holmes. I’d like to first start off and just solute the dedicated hardworking bankers at Cadence who continue to drive what I believe is really impressive operating results. Our main differentiator from our competitors is our team of motivated bankers who I call the Navy SEALs of banking. Our bankers are thriving and they’re fueling Cadence solid growth store that we’re pleased to report more to you on here today. As you will see, when we review the performance of the Company, we have numerous business units who are contributing to our growth. It’s a good time to be a C&I bank operating in attractive markets. Also, the improved regulatory environment and healthy economy give us reasons to be really quite optimistic about our future. I believe that our results will create meaningful value for shareholders as we go forward. Third quarter loan and deposit growth are very good, further evidence of the healthy regional economic environments in which we operate. I’m especially proud of our credit story, which reflects a disciplined approach by a very experienced team. We have an attractive loan pipeline, which means we can afford to be selective. Our key focus is always on credit. And just as a reminder, we have low levels of authority in the field. We’re relying on a centralized credit approval process that I would describe as thorough and rigorous. We have a dual risk rating system that’s considered best practice in the industry. We require extensive due diligence prior to time a loan is made and during the time alone is outstanding. This philosophy flows throughout the bank from the Board, to the senior management team and to relationship managers. So, in summary, I’d say, we maintain a rigorous process, a disciplined underwriting, and we are not sacrificing on structure or term for the sake of growth. Our partners at State Bank also continued to produce solid operating performance, just tracking in line with our expectations. Their third quarter results include some significant M&A costs, but adjusted for that, their earnings were quite good. Their cost of funds increased 4 basis points linked quarter to 75 basis points. Non-interest expenses have decline for the third straight quarter and their credit metrics are good. Their charge-offs are 3 basis points for the quarter. This is the fourth straight quarter of single-digit charge-offs at State Bank. Like Cadence, they have a strong credit culture, and it shows in their results. Their charge-offs have been very low over a longer period of time. Their granular low cost, low beta, core deposit franchise will be a nice funding source for the combined company. As was previously reported, we’ve received the OCC approval for the State Bank merger in October, and we are waiting final regulatory approval. In September, we completed the last of the Cadence Bancorp, LCC secondary offerings. At the IPO in April of ‘17, we indicated our attention for -- to reduce the ownership of the original investors over a period of time. And we have now completed that process, which results in 100% of Cadence stock now in public float. I’d like to ask you to turn your attention to page three of the presentation and let’s review a few of the highlights of the quarter. Net income $47.1 million was $0.56 a share. That generates a return on average assets of 1.61% and return on tangible of 17.3%. I tend to focus on the operating revenue, it’s a good indicator of our organic growth. At $122 million for the third quarter, it’s up 13% from the prior year. We’ve now recorded 11 consecutive quarters of revenue growth, which again, I’ll give credit to our great team of bankers for this very consistent effort. NIM of 3.58% increases 6 basis points from a year ago, that’s due to our asset-sensitive balance sheet, but we did see some pressure linked quarter, and Valerie is going to have more details on that for you here shortly. Loan growth of $1.4 billion, up 18% prior year, up 5% linked quarter. Just really strong business development efforts by our bankers puts us in a fortunate position with attractive pipeline going into the fourth quarter and 2019. We continue to experience nice success in expanding the commercial deposit relationships and treasury management services. Core deposits increased $1.2 billion or 15% from prior year, really an exceptional job of the team. The third quarter period end deposits were up to $227 million, compared to the second quarter. Sam’s going to give you more color on our deposit gathering initiatives as well here soon. Reflecting back to the IPO, we said that we thought we were offering our shares to the public at just the time when the operating leverage would be evident in our results. Said another way, a key aspect of our investment thesis has been increasing operating leverage and delivering attractive returns. So, our strong organic growth has been a plus. But, I suggest to you that having a growth and also having a consistent focus on expense discipline is the best combination. Our adjusted efficiency ratio of 48.4% in the third quarter is a number I’m really pleased and proud to report. As I look to the future, we’d like to see this ratio continue to improve. Those of you who’ve followed us for a while now, know that once we hit a goal, we reset it at the next level. We’re pretty competitive and we’re never satisfied. Over last year, our credit numbers are improving as non-performers have decline from 1.5% to 0.7%. This is evidenced by a very active credit management and monitoring. Net charge-offs through the first nine months were running about 9 basis points. When I think back on the energy industry’s challenges that began in 2015, I think it’s fair to say that we managed a significant level of stress fairly well. We’re comfortable with the energy portfolio at 11%, 57% of that is midstream where our charge-off lifetime to date remain at zero. And of course, increase in the oil price is having a positive fact really on all aspects of the business. So, continuing with the point I made earlier. We do need to stretch or venture into new areas where we don’t have a track record of banking. In other words, we see plenty of opportunity in industries where we have track record and expertise. Asset quality feels stable from here for me. However, we’re never relaxed; we’re always diligent. On slide five, I’m pleased to point out the adjusted net income and EPS continue to trend nicely. 1.69% ROA and 18.1% return on tangible equity are also numbers that we’re pretty proud of. Next and looking at page six, my favorite slide. I think this best tells the story of the last few years, especially the last two years, really consistent, well-managed growth. These numbers further validate our investment thesis. Our relationship-based middle market bank can generate attractive returns on capital for its shareholders. I tend to first look at the expenses on the bar on right hand side in comparison to the total revenue chart. Notice, in 2017 expenses were in that $55 million, $56 million range, and now trailing fourth quarter which also runs higher. This year, after going over 10 million [ph] impact its facing and some normal growth and expenses, we’re running at $58 million, $59 million. So, while revenue has grown from $95 million in the fourth quarter to $122 million and net interest income, the major driver of our revenue growth is going from $72 million to $98 million or up $26 million, 36%. So, this is the point I hope all investors would take note of and have some appreciation for strong revenue growth and disciplined expense control to generate nice returns for shareholders. We’re really proud of these numbers. So, page seven is another reflection of our loan growth. Reminder, commercial loans are 75% of our loans. And again, I think the slide points out that we’re continuing to grow our customer base as new clients are moving to Cadence. So, in summary, we’re pleased with our core operating performance. Our credit metrics are good. The core deposit growth, our top focus showing solid results. Earnings are very good. And we continue to enjoy a healthy NIM. I’ll pause and turn it over Sam and ask him to go into more detail on our core deposit growth.

[Sam Tortorici:]

Thanks, Paul. One of the top focus areas in our industry, given the increase in short-term rates has been growing core deposits. This has been our team’s top focus for the past few years. And we’ve been pleased with the efforts that have led to growth in core funding to support our organic growth. Page nine of the presentation highlights our deposit trends. We grew core deposits, which excludes brokered deposits, by $1.2 billion or 15% of the prior year and we grew core deposits linked quarter by $252 million or 3%. Core growth has allowed us to reduce our brokered deposits, which came down $98 million or 12% over last year, bringing our brokered deposits down to 8% of total deposits. Our deposit mix also continues to be solid, evidenced by our non-interest bearing deposits as a percent of total deposits at 22% for the quarter, consistent with recent quarters. Core deposit growth reflects the ongoing focus of our bankers on multiple initiatives to build core deposit funding. We have been successful in expanding commercial deposit relationships, growing treasury management services and adding deposits to our new financial institutions group. Organic retail growth has continued to be a solid contributor, and we are excited and pleased to announce the grand opening last month of our new Village at Palm Center branch in Houston. Also, the high quality franchises State Bank will be very additive to the overall Cadence franchise, certainly from a funding standpoint. State Bank brings additional core, low cost deposit funding as well as attractive commercial opportunities throughout Georgia and Metro Atlanta. As I mentioned on our last quarter’s call, I have been spending the vast majority of my time in the Georgia market with integration planning. We said when we announced the State Bank merger, how pleased we were, and I would say in our time invested since, we are even more pleased. In fact, our partnership has continued to strengthen. We very recently had a senior leadership meeting in Atlanta, and I couldn’t be any happier about the chemistry and team building that we were able to accomplish in just a few days. I truly believe the successful execution of our merger will be a result of this important step in integration our cultures and working together to combine two great companies. With that, let me turn it over to Valerie to go through a little more of our quarterly performance.

[Valerie Toalson:]

Thanks, Sam. As Paul mentioned, our revenue and net interest income growth trends have shown consistent growth. Underlying this consistent performance is our organic loan growth and our asset-sensitive balance sheet. Our average earning assets increased $381 million in the third quarter of 2018 and $1.6 billion over the last year. And as Sam pointed out, this growth has been funded by core deposits with declines in brokered deposits. At the same time, over the last year, our net interest margin has increased 6 basis points. And since the third quarter of 2015, this interest rate cycle-to-date, our net margin has increased 39 basis points. Our NIM did decline 8 basis points during this third quarter to 3.58%. The decline was largely a result of a couple of key factors, with the first being the contraction of the LIBOR spread to Fed funds during the quarter. Given so much of our loan portfolio is tied to one month LIBOR, this contraction resulted in less benefit from our loan yields than we had in the second quarter. This dynamic resulted in the quarter’s NIM being positively impacted by our originated loan yields less. So, a positive impact of 11 basis points during the third quarter of 2018 as compared to the 30 basis points during the second quarter of 2018. We’ve shown the NIM roll forward on slide 10. Fortunately, the LIBOR to fed fund spreads seems to be fairly stable right now. So, that goes positively for the fourth quarter, particularly if LIBOR moves more in line with this typical behavior in advance of a rate move. The other key factor impacting NIM was of course deposit costs. Although it was actually a positive impact in the quarter-over-quarter comparison of the change in NIM, with deposits impacting our net interest margin by a negative 15 basis points in the third quarter of 2018, which was less than the 19 basis-point impact in the second quarter of 2018. This lower impact, as a result of lower deposit cost increases in the third quarter is compared to the second quarter, with the third quarter of 2018 cost up 17 basis points during the quarter as compared to the 23 basis-point increase in the second quarter. When you step back from the quarterly fluctuations and as a highlight on the asset sensitivity of our balance sheet. Our cycle-to-date, total deposit costs have increased 76 basis points since the third quarter of 2015, as compared to the 154 basis-point, cycle-to-date increase in our originated loan yields. In other words, our originated loan yields have increased at 2 times to pace of deposit cost. This, along with our strong earning assets growth is what has driven the consistency in our performance. The asset sensitivity is also evidenced by our cycle-to-date betas shown on slide 11 with our cumulative originated loan beta at 83% or 1.9 times greater than our cumulative total deposit beta of 43%. The slower pace of deposit costs in the third quarter of ‘18 was reflected in the decline in our quarterly deposit beta to 80% and was in line with our expectations and modeling. Our originated loan beta for the quarter was 31%, a result primarily of timing of the loan resets versus LIBOR moves during the quarter. As index don’t always move in tandem and short-term disconnects are fact of life, we believe the longer term betas are more relevant and representative. So, the year-to-date of 2018, our total deposit beta is 64% and originated loan beta is 90%. Turning to slide 12. For the third quarter, total noninterest income was $24 million, down slightly from the prior quarter’s revenue of $24.7 million and the prior year’s quarter of $27.1 million. The third quarter of 2018 was the first quarter for the Durbin Amendment impact to be in effect for Cadence, resulting in lower card transaction fees of approximately 800,000 compared to the linked and the prior year quarters. Other revenues, particularly compared to the prior year were also impacted by the sale of the insurance company assets in the second quarter of 2018. Slide 13 is a nice recap of the consistent performance you have seen for Cadence. Our quality growth combined with our ongoing assets and for the balance sheet has resulted in adjusted operating revenues improving quarter-over-quarter. Our continued focus on efficiency, working smarter and having a profitability focused team has supported low levels of expense growth, while at the same time expanding our business. And when this expense base is combined with consistent revenue growth, it has resulted in an efficiency ratio of 48.4% that we believe is poised for further improvement after the State Bank integration. Layering our solid credit performance and you get to this quarter’s adjusted ROA of 1.69% and adjusted return on tangible common of 18.11%. Finally, we would note that our Board has authorized a share repurchase program of up to $50 million as an additional tool in our capital management strategy. Operator, we’d now like to open the line for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And today’s first question comes from Steven Alexopoulos of J.P. Morgan. Please go ahead.

[Steven Alexopoulos:]

Hi, everybody.

[Paul Murphy:]

Good morning, Steven.

[Steven Alexopoulos:]

I was hoping you could start on the deposit side and maybe could you give some color on the linked quarter decline in the noninterest bearing deposits and talk about if there was migration into interest bearing?

[Valerie Toalson:]

Yes. It’s really a little bit more the nature of our growth in the quarter. We’re not seeing significant movement out of noninterest bearing. Most of the growth that we had actually in the quarter came from our financial institutions group as well as our commercial and wealth areas, were big drivers of the actual deposit growth. And a lot of those have tended to be non-interest bearing -- or excuse me, have tended to be interest bearing versus non-interest bearing.

[Steven Alexopoulos:]

Okay. Valerie, in terms of the interest bearing checking, why are we seeing such a large increase in the rates paid on those?

[Valerie Toalson:]

So, that’s a great question, Steve. And that category was really the driver of the deposit cost increase for the most part during the quarter. Included in that category is the category that Sam mentioned, our new financial institutions group, we brought on correspondent banker, and she’s been really successful at bringing on some really solid deposits for us long-term relationships. In fact, of the 17 basis-point increase that we see in our overall cost of funds, a little over a third of that is really driven just directly by that financial institution group. And that was going from a zero base in the second quarter, about $2 million. And it’s now -- oh, gosh, on average, it was over $250 million for the quarter. And so, that’s really been a significant driver of that cost increase. The other areas, again, we were seeing a little bit of increases, maybe 4 or 5 basis points is in the commercial side, or C&I business as they’re bringing over commercial customers, as well as our wealth customers. And so, a number of those, both retention and new customers tend to be at a little bit higher rate than where we saw them in the past.

[Steven Alexopoulos:]

So, when we think about the growth, particularly this new group pushing up deposit costs, how do we think of a reasonable range for how much deposit costs could increase in 4Q?

[Valerie Toalson:]

If we look at it, we actually, in our modeling, are forecasting less of an increase than what we saw this quarter. Part of it is because you don’t have that quarter-over-quarter increase in the financial institution group. They’ll steady growth, but it’s not going to be monumental. So, when you look at it from a quarter-to-quarter, third quarter to fourth quarter, we don’t anticipate the same increase that we saw from that group’s deposits. The other thing that I would see is, we do have a number of CDs that are rolling off as we go through the end of the year. And most of them tend to be Up CD product, which is a higher rate. And so, as they roll over into a money market product, those are coming on it a little bit lower rate. So, absent other factors, we’re pleased [ph] to take that deposit. We do have that Up CD repricing that does occur in October. And so that will be about 800 million of deposits that will price up 50 basis points. But again, that population goes down to about 600 million by the end of the year. I would say, there are -- some of our deposits, we’ve got about -- well, of our deposits that are tied to Fed funds that LIBOR directly, we’ve got about $2.1 billion in overall total deposits that are linked to those indexes. And so, that does obviously have an impact in a rising rate environment.

[Steven Alexopoulos:]

And Valerie, when you put all this together, how do you think about the trajectory of the core NIM moving forward?

[Valerie Toalson:]

Yes. So, when you put all that together, and then if we look at, as we mentioned, one of the big factors impacting our C&I, but particularly, because of the tied to LIBOR, was the lower LIBOR increases that we saw in this quarter, and kind of the timing, most of those loans were reset at the beginning of the month or the end of the month. And so, since we really didn’t see movement in that till September, we’ll hope to get some boost there as we go into the fourth quarter. So, when you combine all of that, we’re actually -- we have a positive outlook on our NIM as we go into the fourth quarter and into next year with forecasted rates that we see the market having.

[Paul Murphy:]

Yes. So, Steven, just adding to Valarie’s comment, when you add all that up, the models call for a slight increase in NIM in the fourth quarter.

[Steven Alexopoulos:]

Okay. And Paul, do you think that could keep moving forward, maybe modest increase through 2019?

[Paul Murphy:]

In the rising rate environment, I would say, yes.

[Steven Alexopoulos:]

Okay. Terrific. Thanks. What was that?

[Valerie Toalson:]

Yes. That’s one of the reasons why we shared so much information about kind of what we look like cycle-to-date, as well as just year-over-year. Yes. The deposit costs are lagging. They come in at a lag. We talked about our 55% deposit beta. And it comes in at a lag. So, quarter-over-quarter. And so, yes, we’re seeing that coming over a shorter period, and that bodes positively.

[Paul Murphy:]

I think, the long-term point is that as C&I bank with the floating rate asset mix, can afford to pay at slightly higher rates on deposits, still have an acceptable NIM. And I think that’s where we stand.

[Steven Alexopoulos:]

I guess, where I’m struggling with is we didn’t see the NIM expansion, obviously this quarter and we’re seeing a fairly sizable increase in deposit cost again quarter-over-quarter. So, just trying to really understand, has the story changed here or are we going to get back to seeing sustainable NIM expansion moving forward?

[Paul Murphy:]

[Indiscernible].

[Operator:]

And the next question today comes from Ryan Nash with Goldman Sachs. Please go ahead.

[Ryan Nash:]

I guess, maybe starting with loan growth. You’ve been able to pluck, the trend in the obviously seeing slow loan growth. Paul, you mentioned you have an attractive pipeline. Can you just talk about the sustainability of loan growth at these type of levels? Fully understanding that when State comes onboard, the growth will be slower, but just in terms of core cadence. How do you think about the potential loan growth, both into 4Q and as we look into 2019?

[Paul Murphy:]

Ryan, I’m just forever humble. But, I would say I just really think this new business pipeline is a great testimony to our bankers. And we’ve got a great team, and I’m so proud of their results, and we have a very senior team that has a lot of great credit managers that are part of a loan production process and experienced and conservative. So, to answer your question, we think our loan growth will down as a percentage. I mean it’s just a banner [ph] year for us, but we do see, as you mentioned, with State coming in, I mean, they had a good quarter in the third quarter loan growth, but their growth is going to be a bit slower than ours. So, on a combined basis, we would look for next year or two, especially as a percentage, come down notably. But, in real dollars, still a good pipeline for us to look at.

[Ryan Nash:]

Got it. And then, I guess, Paul, you put up a 48.3% efficiency this quarter coming in better than the target you guys had laid out. And you mentioned that you think that could continue to improve. I guess, where do you think over an intermediate timeframe you could take the efficiency ratio to?

[Paul Murphy:]

So, much of it depends on business mix. So, for example, our business services, C&I teams can operate at a 25%, 30% efficiency ratio. We need the retail bank to help us fund partially over time, we could rely less on retail deposits as a mature C&I bank would be self funding. So, I would think that 45% efficiency ratio is achievable. I mean, that would need some time to get there. But, I mean if you look at the chart, as we kind of walk through, it’s been a pretty steady trend. We know fourth quarter expenses typically run a little bit higher. So, I would -- as you saw with last year fourth quarter, we saw higher expenses. So, we’ll probably not be able to continue to trend linked quarter. But next year, we’re looking for modest expense growth and nice new business development growth.

[Valerie Toalson:]

And I think the integration of State Bank, when you factor that in and our cost saves that we’re continuing to anticipate there, that gives us a little more confidence on being able to dip down a little further than where we are today.

[Ryan Nash:]

Got it. And if I could just sneak one last quick one in. Valerie, when I look at the originated loan yield, they were up just 4 bps quarter-over-quarter. I heard what you said about the LIBOR IOER spread and the fact that LIBOR really didn’t start to move until September, so you lost two of the months in the quarter. However, it does seem like the move for you guys was a bit more extreme than some of the others, given that 70% of your loans do float. I guess, was there anything else that impacted the loan yield swaps or anything that come to mind. And I guess, second if we are to see a more normal movement in LIBOR this quarter as it seems we’re experiencing, what would you expect for the changes in loan yields on an average quarter going forward? Thanks.

[Valerie Toalson:]

So, I’ll take your first question. There were actually a few other things. When you look at it over quarter-over-quarter and break it down, the loan fees, we actually had a couple basis points less impacting the loan yield this quarter than last quarter of loan fees. A lot of that’s just timing related to pay-offs et cetera. But, that did impact it by a couple basis points this quarter. The other thing was, as you mentioned the hedge, did impact it by a couple basis points more this quarter. On that hedge, I would also mention just as a reminder, we have got about a billion left or so, little over that of our overall hedges. And of that $380 million rolls off at the end of 2018. So, if you draw it down, we had about a $700,000 negative interest income impact from that individual hedge, it’s going to be rolling off at the end of the year. So, we’ll still get that impact of the fourth quarter and that will ease up for us.

[Ryan Nash:]

Thanks for all the color. Sorry. Go ahead.

[Valerie Toalson:]

Yes. One of the things that I don’t know if you saw that I might refer to you as far as what could happen with loan yield, is here is actually a charge that State partners announced on Friday. It is really nice, it -- pay us the average one month LIBOR to the change in one month LIBOR and he actually puts forward a projection for the fourth quarter; it’s interesting. So, we’ll wait and see. I do think that there should be certainly some pickup in our loan yields as a result of the dynamic that he laid out there.

[Paul Murphy:]

And specifically, I mean what he points out is that the banks that lagged a little bit in the third quarter could benefit as a result of that reality.

[Valerie Toalson:]

Yes, absolutely.

[Ryan Nash:]

Got it. We’ve got some forecast. I appreciate it. Thank you.

[Paul Murphy:]

Thanks Ryan.

[Operator:]

And our next question today comes from Ken Zerbe of Morgan Stanley. Please go ahead.

[Ken Zerbe:]

Can you just remind us, the other -- sorry, the other non-interest income line, I think it was like $3 million, $3.5 million, what is included in there and how sustainable is that line? Thanks.

[Valerie Toalson:]

Yes. There are several key items. Securities gains and losses flow into there. We do have net profits interests that reflect really some -- kind of it’s another category of OREO that reflects some energy credits that we have some assets there. And then, the final key category is some of our alternative investments income. Some of those alternative investments, FDIC investments et cetera are basically fair value driven quarter-to-quarter. So, they can move around a little bit. But those are all sustainable categories, obviously, except for the securities gains or losses; that’s not something that we typically see on a regular basis. There are some other things, income, but those are the key items.

[Ken Zerbe:]

Got it, okay. That helps. And then, I guess just in terms of the loan to deposit ratio, sort of going back to the deposit funding side of it. I think you guys are around 99%, it’s up call 3 percentage points sequentially. Mike, how does the funding model change, if at all? There is just something that as you get towards that 100% number, like I would imagine that your loan growth remains, again, very, very solid. And then again, I’m trying to strip out State from the discussion because I understand that does change things a little bit, or maybe that is the answer. I’m just trying to think of like how you think about raising deposits, given higher deposit betas, given diverse loan growth that you have?

[Paul Murphy:]

Yes, Ken. So, yes, at 99%, I mean, we’re near the top end of the range and where we’re comfortable. And so, we do have other wholesale funding options available, brokered that’s come down a bit, we could manage that up a notch. And yes, State is a very elegant, timely sort of opportunity for us to merge with their low beta, low cost, granular core deposit franchise. But overall a longer period of time, we will continue really a very intense focus on growing core deposits. And Sam has done a great job of leading those efforts. And we’ve generated $1.2 billion in core deposits in the last 12 months. And we see a nice pipeline there. We think we can continue.

[Valerie Toalson:]

Yes. And I’d just say that we still continue, as Paul mentioned, the pipeline on the deposit, prospects continues to be very robust. And Sam, I don’t know if you want to comment a little bit further kind of on the deposit growth cost. I would also just mention, the addition of our financial institutions group. It is a little higher costs but it certainly is another avenue. So, as we look at all the different ways to bring in deposits, we’re really working to maximize kind of all those channels.

[Sam Tortorici:]

Valerie, I’ll just say that as you as you look at our history, we’ve had a really quite a number of quarters of pretty solid loan growth, and deposit growth has continued to keep pace. And why is that? Well, the loan growth is a precursor to the deposit growth. It takes 3 to 6 months typically to fully onboard of a new commercial client’s treasury business. And so that just our loan growth in and of itself is one of the contributors. But to Valerie’s point, we have a number of initiatives, including the financial institutions group that we continue to work every week, every month that has generated results, and we expect it to continue.

[Operator:]

And our next question today comes from Brady Gailey of KBW. Please go ahead.

[Brady Gailey:]

Hey. Good afternoon, guys.

[Paul Murphy:]

Thanks for joining us.

[Brady Gailey:]

Maybe I’ll just start with the buyback. I mean, your stock, I mean, we’re almost back to the IPO price here. But, how aggressive are you going to be on the buyback front? Is that something that’s put in place that you plan to take action with or is it more just something that is a tool that is going to be out there and you don’t plan on buying back stock?

[Paul Murphy:]

Well, Brady, I mean, we -- that is kind of depends on facts and circumstances at the time. I mean, we don’t have a goal of this quarter or a specific predetermined runway. But, we’ll get this authorization done and we will play by it.

[Valerie Toalson:]

We believe it’s something just to kind of have another tool. And to your point where stock prices are right now, probably even more important to have a tool.

[Brady Gailey:]

And then, you talk about loan growth coming back in terms of a percentage with State in there, especially after such a strong first three quarters of this year. I know kind of longer term you’ve talked about the 9% to 11% loan growth guidance. I mean, do you think -- I mean you’ve been almost double that year-to-date? So, clearly, you’ve been doing better than that? But, do you think with State in there and as we look to 2019 that 9% to 11% is still a good figure or do you think that you could grow at a faster pace than that?

[Paul Murphy:]

I don’t think it’s going to be closer to 9%. It’s just the law of large numbers. I mean, it’s on a bigger base. And so in absolute dollars, the growth is still attractive, but as a percentage, it’s going to be smaller.

[Brady Gailey:]

And then, lastly for me, I mean, you mentioned on the State Bank side, their expenses have been shrinking. You haven’t even put cost saves on top of that. But did you all know that was going to happen or their expenses coming in better? And as you look at the combined company, do you think the overall expense base will be a little better than you were thinking when you announced the deal initially?

[Paul Murphy:]

I think, first, it’s just a well-managed company. And I think that what we’ve seen is just a little bit of attrition for people who are recognized that they’re not have a spot in the new world and they’re moving on to their next opportunity. But third quarter for State Bank is a rock solid quarter.

[Valerie Toalson:]

I think we’re still pretty comfortable with our metrics that we laid out at the acquisition.

[Operator:]

And our next question today comes from Michael Rose with Raymond James. Please go ahead.

[Michael Rose:]

I just wanted to dig into the near-term comments on expenses. It looks like you guys obviously won’t have any more secondary offerings. So, it was a pretty big swing quarter-to-quarter. So, you probably did mention that expense is probably up in the fourth quarter. I guess what’s the offset there? Is it investments in the franchise, is it kind of one of the categories and how should we think about it? Thanks.

[Paul Murphy:]

I don’t expect a big ramp-up in expenses. But fourth quarter, it’s just not unusual, it’s kind of everybody cleans out everything that humanly possible, expense reports, et cetera and get all those in. So, I expect a well-managed expense environment in the fourth quarter and next year. The way I think about it, Michael, is we really haven’t added a lot of people. And if my memory is correct, we’re about 30 people below plan based on our results through the first 9 months of the year. So, our expense is nicely below plan, should continue. And as we’re now getting deep into the budgeting process, we’ll be looking at it more and more closely. But, we do of course want to a balance. Some expense growth is good. As we are growing, we’ll be adding so far more early career bankers to kind of help our senior folks manage the portfolios. And there is a reality that at some point this same group of people can’t do this much volume, they’ll just need some help. And I think that’s something we’ll be looking at more closely with the 2019 budget. So, in a perfect world, what we would do is have more expense growth, but an improved efficiency ratio along the way as the revenue would more than cover.

[Ken Zerbe:]

That’s very helpful. Maybe just a follow-up. Paul, I love your comments just generally on the general C&I outlook. A lot of talk this quarter on non-bank competitors, pay-downs et cetera. It looks like a lot of the growth this quarter was resi real estate. What are your kind of overarching views on just general C&I growth, given that you guys have been there for a long time? Thanks.

[Paul Murphy:]

We are definitely seeing pay-downs; we’re seeing the BDCs; we’re seeing more leverage for certain clients. Again, I’d just come back to we’ve got a great team and our pipeline, we have enough to look at. When we get some pay offs that we’re able to replace it with good growth that we feel comfortable and satisfied to have. I know there is some concerns out there about late cycle. And so, we have that high in our mind on every credit that we underwrite. But, just got a great team.

[Hank Holmes:]

Let me add a little bit to that. Michael, this is Hank. When we have the pipeline where we are today, we can be much more selective and disciplined, and so we’re not chasing the lower priced transactions or those terms than you are seeing loosen in some of the non-bank transaction. So, I think we find ourselves in a pretty good spot, being really disciplined and having some diversity throughout the footprint.

[Ken Zerbe:]

That’s great color. Maybe just one more for me for Valerie. Any updated expectations on what you’d expect for accretion, at least scheduled accretion? And then if you have any read on what the State Bank could add to that quarterly accretion number? Thanks.

[Valerie Toalson:]

Yes, sure. We actually have a table, I think it’s a table four in the press release -- table three, excuse me that I’d refer you to that has -- that breaks out schedules in every accretion for the quarter. Our schedule was 4.9 million compared to 5 million last, or 2 million the before. So, it’s been defining 150,000, couple of hundred thousand on a quarter-over-quarter basis. And absent any significant changes, I think that that’s probably a reasonable expectation. And then, when we consider State Bank, when we took their accretion and basically backed it out of the forecast and then put in our accretion, there was about a net differential over the long-term of $7 million. So, it really wasn’t significant on an ongoing basis. Now, of course, that was our modeling May and we’ll be doing all those updates as we go and have closing et cetera. And so, that will shake it out. But that was based on the analysis that we did and it shouldn’t be significantly impactful to their stream that they have right now.

[Ken Zerbe:]

Exactly what I was asking. Thanks Valerie. I appreciate it.

[Valerie Toalson:]

Thanks.

[Operator:]

And our next question today comes from Jon Arfstrom of RBC Capital Markets. Please go ahead.

[Jon Arfstrom:]

Hey. Thanks. Good afternoon. Sam, one of the comments you made about loan growth preceding deposit growth with treasury management clients. Can you talk a little bit more about that and what kind of expectations you have and what type of deposit growth that would be? Is it generally lower cost deposits?

[Sam Tortorici:]

Yes. Jon, it is typically lower cost deposits. And if you’ll notice, our non-interest bearing as a percent of total has stayed pretty steady, even despite the pretty significant growth that we’ve had in deposits. That shows you that we’re adding core customer transaction accounts, quarter after quarter after quarter. And so, we would really expect hopefully that non-interest bearing as a percent of total to slightly increase over time as our treasury platform expands. But yes, it’s really more core transaction and maybe a little bit of interest bearing money market.

[Jon Arfstrom:]

Okay. That was my next question actually, non-interest bearing percentages, It’s ticked down a little bit but I guess the big question is, can that keep pace with the rest of the loan book?

[Sam Tortorici:]

We feel it can, and that’s really driven on our treasury pipeline.

[Jon Arfstrom:]

Okay, good. And then, maybe quick question on loan growth, the slide seven, there is two categories at general C&I, one is up and one is down. Can you just help us understand a little bit the ebbs and flows in the mix of what’s driving the general C&I growth?

[Valerie Toalson:]

So…

[Jon Arfstrom:]

Services is the one that’s down.

[Valerie Toalson:]

Yes, all right. Hank, you may want to comment on that. We had $15 million decline in services, $44 million decline in really all other general C&I.

[Hank Holmes:]

Yes. It’s really -- it’s really just a function of payoffs. And as you know, we do a lot of sponsor backed transactions, and there’ll be some harvesting there. And it’s really diversified. And the growth for the fourth quarter kind of as it’s been in the fourth quarters as far as the pipeline is good. So, I think that’s more of a timing.

[Operator:]

And our next question today comes from Brett Rabatin of Pipper Jaffray, Please go ahead.

[Brett Rabatin:]

I wanted to ask on the reserve and the linked quarter change, was that all related to energy or were there other factors in the portfolio from a qualitative perspective that caused the provision to be what it was in 3Q?

[Valerie Toalson:]

So, it was -- I mean, really there are several things that happened in the third quarter. Obviously, the energy was significant piece where obviously the pricing right now is very good, and that helps the overall portfolio. And so, we did bring that down. The other thing that happened in the quarter is we updated our loss rate estimates from 2011 base from Moody’s to 2018 base, and that included a revision in our consumer loss models that relies on homogenous loss rates. So, all of that activity was about another $1.5 million reduction in those loan provisions; we had $1.5 million from energy, a $1.5 in that. And then, those really just served to offset a very stable credit environment, a net impact of the new loan growth less payoff.

[Brett Rabatin:]

Okay. That’s good color. And then, the other thing I want to make sure I understood was just -- we’re thinking about non-interest bearing DDA. If I look at year-over-year trends and thinking about your platform, whether it’d be treasury management or other things that you’re doing to grow core deposits. If we’re thinking about one, the past year, how much is liquidity drain from customers masked the growth of what you have done in terms of those platforms? And then secondly, how we think about like the total mix going forward? I mean can you grow DDA or is it just that tough in this environment to have growth in non-interest bearing deposits?

[Valerie Toalson:]

Yes. I think, to Sam’s point, a lot of the commercial customers we do believe that we’re building, some of that. I mean, to your point, there is some clear -- there’s some migration in this environment. And so, that’s why we’ve been working hard to really kind of maintain the percent for now. After the rate environment kind of stops moving, we do hope that we’ll be able to move that ratio higher than -- in the interim, I think it’s probably a realistic expectation that there will be some migration out while we’re working aggressively to bring in the customer base and also add to it.

[Operator:]

And our next question today comes from Jennifer Demba of SunTrust. Please go ahead.

[Jennifer Demba:]

Energy loans now 11% of loans, I think they were north of 20% at one time. Paul, what’s your comfort in terms of exposure there over the long term?

[Paul Murphy:]

Sure. Yes. Jennifer, I think your memory is good. I think we peaked right at about 19%, so not quite to the 20%. And our comfort is improving. I mean, again, looking back going through that cycle, 100 borrowers, really only one major setback, pretty good outcome. And so today with over -- right at 57% being midstream, see losses there, lifetime to-date, we feel really good about where we are. We have a very high bar with respect to E&P. We’ve looked at a lot of deals and only approved 2 or 3, one just last week and really attractive new E&P relationship. So, high bar on the E&P side and same for oilfield service. I mean the Permian and Eagle Ford, service companies there are doing just fine. That part of businesses cyclical and especially termed as hard to do for oilfield service companies. So, more working capital revolvers and things of that nature. But, our policy limit is 16%. Again, the vast majority of that is midstream, and really like our midstream track record.

[Operator:]

[Operator Instructions] Today’s next question comes from Matt Olney of Stephens. Please go ahead.

[Matt Olney:]

Going back to Brady’s question on the expense base from State, since we’re already seeing some attrition that you noted, how do we think about the 30% cost save number? And then, secondly, I guess, in light of the sales and mortgage business, are we actually going see the contact number above that 30%?

[Paul Murphy:]

Yes, Matt. So, I think that it’s probably for today’s purposes, safe to say that 30% number seems very achievable. And you’re right, for those of you on the call that hadn’t noticed, State announced a reduction in their mortgage business, a migration of a team away to another platform, which we have observed -- and they’re running the bank but we observed and applauded. And so, yes, sure, there’s a chance it could be a little better, but I wouldn’t really go to put that in the model just yet.

[Matt Olney:]

Okay. And then, going back to the discussion on loan yields, I think you pretty much highlighted three items that contributed to the loan yields being a little bit softer this quarter, the LIBOR issue, the lower loan fees and the negative hedge impact. It seems like there could be a few more issues that play but curious kind of what your thought is. First, the loan mix shift. It looks like there was a lots of loan growth this quarter from the single family production. And then, just two general competition. Other banks have been talking about more and more pressure from the competitors out there. So, did those two items impact loan yield at all in the third quarter? And what is the outlook for those two sort of things going forward?

[Valerie Toalson:]

Great question. On our growth, we actually did see a little bit of yield compression in our mortgage portfolio, just with the environment with mortgages et cetera. A portion of the growth that that group saw this quarter was actually some loan purchases that we made for CRE purposes and just kind of on a routine basis there. So, that is impacting a little bit of the yield change. Yields were up quarter-over-quarter in all the other business lines that emerged.

[Matt Olney:]

And what about just general competitive pressures within some of your core businesses, are you seeing spreads compress at all within your general C&I businesses?

[Paul Murphy:]

Matt, this is Paul and I’m going to invite Sam or Hank to add to this. Where we sit today with really attractive pipelines, we’re firm on loan pricing. To support the growth, obviously we need to fund it with a good hopefully granular low cost deposits. And so, long-term customer relationships are important to us. We’re competitive. But, if it’s just about rate, then, we’re not going to win. I mean, we’re here to have a fair rate and all-in relationship that generates nice return for shareholders. And so, we’re I guess fair to say kind of holding firm on rate these days.

[Matt Olney:]

And then, last question for me. You’ve received the OCC approval on the State Bank deal, here we are in the fourth quarter. At this point, what’s your best guess on the timing of the closing of State Bank?

[Paul Murphy:]

Matt, pending Federal Reserve approval, they’re in their process. I think, it’s most likely that we will get that approval this quarter and be able to close this quarter.

[Operator:]

And ladies and gentlemen, this concludes our question-and-answer session. I’d like to turn the conference back over to Paul Murphy for any closing remarks.

[Paul Murphy:]

Thanks, Rocco. So, in closing, third quarter in my opinion is really good quarter. We’re at one of those unusual times where there’s a pretty big disconnect between our operating performance and our spot price. We understand these things happen, and I think we have a good understanding of the key issues. Obviously credit is a number one issues. I remain confident in our team and our underwriting, and this is the way we go through this business. I would point again to the recent energy cycle as a good proof point of managing a challenging cycle really relatively well. And then, next is NIM. And I think Valerie gave several specific reasons why it’s appropriate for us to feel good about fourth quarter NIM improvement and beyond. So, we’re focused on all of these things. And I believe that our shareholders who stick with us will be pleased in the long run. With that, Rocco, the call is adjourned.

[Operator:]

Thank you, sir. Today’s conference has not concluded, and we thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.