Cadence Bancorporation (NYSE: CADE)Q3 2018 Earnings Conference CallOct. 22, 2018, 1:00 p.m. ET
Contents:
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- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good afternoon. Welcome to the Cadence Bancorporation Third Quarter 2018 Earnings Conference Call. All participants will be in a 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.
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Paul Murphy — Chairman and Chief Executive Officer
Well, 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 salute 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 a Cadence solid growth story that we’re pleased to report more to you on here today.
As you’ll 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 rely 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 the time a loan is made and during the time a loan is outstanding. This philosophy flows throughout the bank from the board to the senior management team and to the relationship managers. 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 that’s tracking in line with our expectations. Their third quarter results include some significant M&A costs, but adjusting for that, their earnings were quite good. Their cost of funds increased four basis points linked quarter to 75 basis points. Non-interest expenses have declined for the third straight quarter, and their credit metrics are good. Their charge-offs are three 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 2017, we indicated our intentions were 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 of $47.1 million was $0.56 a share. That generates a return on average assets of 1.61% and a 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% increased to six 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’s gonna 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 an 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 by the team. The third quarter period end deposits were up $227 million compared to the second quarter. Sam’s going to be giving 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 the 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 the last year, our credit numbers were improving, as non-performers have decline from 1.5% to 0.7%. This is evidenced by our very active credit management and monitoring. Net charge-offs through the first nine months were running about nine 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’ve 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-offs lifetime-to-date remain at zero. And of course, the increase in the oil prices is having a positive effect really on all aspects of the business.
So, continuing with the point I made earlier, we do not 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 the right-hand side in comparison to the total revenue chart. Notice in 2017, expenses were in that $55 million, $56 million range, and not counting fourth quarter, which also runs higher. This year, after going over $10 billion impact is phasing in, 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, has gone 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. A 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 — President; Chief Executive Officer and Director, Cadence Bank
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% over 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 noninterest 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 franchise at 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 last quarter’s call, I’ve 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 integrating 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 — Executive Vice President and Chief Financial Officer
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 six 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 eight 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 show the NIM roll-forward on slide 10. Fortunately, the LIBOR to fed fund spread seems to be fairly stable right now, so that bodes positively for the fourth quarter, particularly if LIBOR moves more in line with its 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 as compared to the second quarter, with the third quarter of 2018 costs 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 two times the pace of the deposit costs. 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 2018 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 indexes 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. For 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 $800,000.00 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 from Cadence. Our quality growth, combined with our ongoing asset-sensitive 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. Layer in 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.
Questions and Answers:
Operator
Thank you. We will now begin the question and answer session. To ask a question, you may press * then 1 on your touchtone phone. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press * then 2. At this time, we will pause momentarily to assemble our roster.
And today’s first question comes from Steven Alexopoulos of J.P. Morgan. Please go ahead.
Steven Alexopoulos — J.P. Morgan — Analyst
Hi, everybody.
Paul Murphy — Chairman and Chief Executive Officer
Good morning, Steven.
Steven Alexopoulos — J.P. Morgan — Analyst
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 — Executive Vice President and Chief Financial Officer
Yeah. 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 noninterest bearing — or excuse me, have tended to be interest bearing versus noninterest bearing.
Steven Alexopoulos — J.P. Morgan — Analyst
Okay. And Valerie, in terms of the interest bearing in checking, why are we seeing such a large increase in the rates paid on those?
Valerie Toalson — Executive Vice President and Chief Financial Officer
Yeah. 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 a 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 a $2 million base. 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, where we’re seeing a little bit of increases, maybe four or five basis points, is in the commercial side, our 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 — J.P. Morgan — Analyst
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 — Executive Vice President and Chief Financial Officer
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 have 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 say 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 our UP CD product, which is a higher rate. And so, as they roll over into a money market product, those are coming on at a little bit lower rate.
So, absent other factors, we think 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 priced 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 of 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 — J.P. Morgan — Analyst
And Valerie, when you put all this together, how do you think about the trajectory of the core NIM moving forward?
Valerie Toalson — Executive Vice President and Chief Financial Officer
Yeah. 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 tie to LIBOR, was the lower LIBOR increases that we saw in this quarter, and kind of the timing. Most of those loans will 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 — Chairman and Chief Executive Officer
Yeah. So, Steven, just adding to Valerie’s comment, when you add all that up, the models call for a slight increase in NIM in the fourth quarter.
Steven Alexopoulos — J.P. Morgan — Analyst
Okay. And Paul, do you think that could keep moving forward, maybe a modest increase through 2019?
Paul Murphy — Chairman and Chief Executive Officer
In the rising rate environment, I would say yes.
Steven Alexopoulos — J.P. Morgan — Analyst
Okay. That’s terrific. Thanks for — what was that?
Valerie Toalson — Executive Vice President and Chief Financial Officer
Yeah. 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, yeah, we’re seeing that come in over a shorter period, and that bodes positively.
Paul Murphy — Chairman and Chief Executive Officer
Steve, I think the long-term point is that if C&I bank with the floating rate asset mix can afford to pay slightly higher rates on deposits and still have an acceptable NIM.
Steven Alexopoulos — J.P. Morgan — Analyst
Right.
Paul Murphy — Chairman and Chief Executive Officer
And I think that’s where we stand.
Steven Alexopoulos — J.P. Morgan — Analyst
I guess what we’re 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 gonna get back to seeing sustainable NIM expansion moving forward?
Valerie Toalson — Executive Vice President and Chief Financial Officer
We think the fundamentals are still in place.
Steven Alexopoulos — J.P. Morgan — Analyst
Yeah. Okay, thanks for all the color.
Operator
And our next question today comes from Ryan Nash with Goldman Sachs. Please go ahead.
Ryan Nash — Goldman Sachs — Analyst
Thank you. Good afternoon, guys.
Paul Murphy — Chairman and Chief Executive Officer
How you doing?
Ryan Nash — Goldman Sachs — Analyst
How you doing, Paul? I guess maybe starting with loan growth. You’ve been able to buck the trend. The industry’s 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 levels? Fully understand 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 — Chairman and Chief Executive Officer
Yeah. 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 the loan production process, and experienced, and conservative. So, to answer your question, we think our loan growth will come down as a percentage. I mean it’s just a banner 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 gonna be a bit slower than ours. So, on a combined basis, we would look for the 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 — Goldman Sachs — Analyst
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 — Chairman and Chief Executive Officer
Yeah. 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 that 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 the trend linked quarter. But next year, we’re looking for modest expense growth and nice new business development growth.
Valerie Toalson — Executive Vice President and Chief Financial Officer
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 — Goldman Sachs — Analyst
Got it. And if I could just sneak one last quick one in. Valerie, when I looked at the originated loan yields, they were up just four 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 comes 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 — Executive Vice President and Chief Financial Officer
Yeah. So, I’ll take your first question. There were actually a few other things. When you look at it quarter-over-quarter and break it down, for loan fees, we actually had a couple basis points less impacting the loan yield this quarter than last quarter on loan fees. A lot of times, that’s just timing related to payoffs, etc. 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’ve got about a billion left or so, a 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 $700,000.00 negative interest income impact from that individual hedge that’s gonna be rolling off at the end of the year. So, we’ll still get that impact in the fourth quarter, and then that’ll ease up for us.
Ryan Nash — Goldman Sachs — Analyst
Thanks for all the color. Sorry. Go ahead.
Valerie Toalson — Executive Vice President and Chief Financial Officer
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, there’s actually a chart that State Partners’ Chris Marinac put out on Friday that is really nice. Payers, 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. But I do think that there should be certainly some pickup in our loan yields as a result of the dynamic that he lays out there.
Paul Murphy — Chairman and Chief Executive Officer
Well, 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 — Executive Vice President and Chief Financial Officer
Yeah, absolutely.
Paul Murphy — Chairman and Chief Executive Officer
Yeah.
Ryan Nash — Goldman Sachs — Analyst
Got it. Yeah, we’ve got some forecast too. I appreciate it. Take care.
Paul Murphy — Chairman and Chief Executive Officer
Thanks, Ryan.
Operator
And our next question today comes from Ken Zerbe of Morgan Stanley. Please go ahead.
Ken Zerbe — Morgan Stanley — Analyst
Great, thanks. Good morning — or good afternoon, I guess, at this point.
Valerie Toalson — Executive Vice President and Chief Financial Officer
Good morning. Good afternoon, right.
Ken Zerbe — Morgan Stanley — Analyst
Can you just remind us, the other noninterest income line, I think it was like $3, $3.5 million, what is included in there, and how sustainable is that line? Thanks.
Valerie Toalson — Executive Vice President and Chief Financial Officer
Yeah. There are several key items. Securities gains and losses flow into there. We do have some net profits interests that reflect really some — 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, etc., 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, like rolling income, but those are the key items.
Ken Zerbe — Morgan Stanley — Analyst
Gotcha, OK. All right. Tat 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 it three percentage points sequentially. Like, how does the funding model change, if at all? Right? I mean, just, I’m thinking as you get toward that 100% number, 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 how you think about raising deposits, given higher deposit betas, given the very strong loan growth that you have?
Paul Murphy — Chairman and Chief Executive Officer
Yeah, Ken. So, yeah, 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 yeah, State is a very elegant, timely sort of opportunity for us to kind of merge with their low beta, low-cost, granular core deposit franchise. But over 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 — Executive Vice President and Chief Financial Officer
Yeah. 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 at a little higher cost, 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 — President; Chief Executive Officer and Director, Cadence Bank
Yeah, Valerie. I would just add that as you as you look at our history, we’ve had 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 three to six months, typically, to fully onboard a new commercial client’s treasury business. And so, 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.
Ken Zerbe — Morgan Stanley — Analyst
All right, perfect. Thank you very much.
Paul Murphy — Chairman and Chief Executive Officer
Thanks again.
Operator
And our next question today comes from Brady Gailey of KBW. Please go ahead.
Brady Gailey — KBW — Analyst
Hey. Good afternoon, guys.
Paul Murphy — Chairman and Chief Executive Officer
Thanks for joining us.
Brady Gailey — KBW — Analyst
So, 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 gonna be on the buyback front? Is that something that’s put in place that you plan to take action with, or is that more just something that is a tool that is gonna be out there, and you don’t plan on buying back the stock?
Paul Murphy — Chairman and Chief Executive Officer
Well, Brady, I mean, we — that just 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’ll play it by ear.
Valerie Toalson — Executive Vice President and Chief Financial Officer
Yeah. We believe it’s healthy to just kind of have another tool. And to your point, where stock prices are right now, probably even more important to have another tool.
Brady Gailey — KBW — Analyst
All right. 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 — Chairman and Chief Executive Officer
I 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 gonna be smaller.
Brady Gailey — KBW — Analyst
All right. 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 gonna happen, or are 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 — Chairman and Chief Executive Officer
Well, 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 gonna have a spot in the new world, and they’re moving on to their next opportunity, so. But third quarter for State Bank is a rock solid quarter.
Valerie Toalson — Executive Vice President and Chief Financial Officer
And I think we’re still pretty comfortable with our metrics that we laid out at the acquisition.
Brady Gailey — KBW — Analyst
Great. Thanks, guys.
Operator
And our next question today comes from Michael Rose with Raymond James. Please go ahead.
Michael Rose — Raymond James — Analyst
Hey, guys. Thanks for taking my questions. 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, Paul, you 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 what are the categories, and how should we think about it? Thanks.
Paul Murphy — Chairman and Chief Executive Officer
Yeah. 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’s humanly possible, expense reports, etc., 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 nine months of the year. So, our expense is nicely below plan, and 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 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 their 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 kind of perfect world, what we would do is have more expense growth, but an improved efficiency ratio along the way, as the revenue growth would more than cover it.
Michael Rose — Raymond James — Analyst
That’s very helpful. Maybe just a follow-up. Paul, I love your comments just generally on the general C&I kind of outlook. A lot of talk this quarter on non-bank competitors, pay-downs, etc. 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 — Chairman and Chief Executive Officer
Right. 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 that when we get some payoffs, that we’re able to replace it with good growth that we feel comfortable and satisfied to have. I know there’s some concerns out there about late cycle. And so, we have that high in our mind on every credit that we underwrite. But we’ve just got a great team.
Hank Holmes — Executive Vice President; President, Cadence Bank
Well, let me add a little bit to that, Michael. This is Hank. When we have the pipelines 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 that you are seeing loosen in some of the non-bank transactions. So, I think we find ourselves in a pretty good spot, being able to be disciplined and having some diversity throughout the footprint.
Michael Rose — Raymond James — Analyst
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 — Executive Vice President and Chief Financial Officer
Yeah, sure. We actually have a table, I think it’s table four in the press release — or 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 quarter before. So, it’s been declining $150,000.00, a couple 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 in May, and we’ll be doing all those updates as we go and have the closing, etc. And so, that’ll shake it out. But that was based on the analysis that we did, that it shouldn’t be significantly impactful to their stream that they have right now.
Michael Rose — Raymond James — Analyst
Exactly what I was asking. Thanks, Valerie. Appreciate it.
Valerie Toalson — Executive Vice President and Chief Financial Officer
Thanks.
Operator
And our next question today comes from Jon Arfstrom of RBC Capital Markets. Please go ahead.
Jon Arfstrom — RBC Capital Markets — Analyst
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 — President; Chief Executive Officer and Director, Cadence Bank
Yes, Jon, it is typically lower cost deposits. And if you’ll notice, our noninterest 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 are adding core customer transaction accounts quarter after quarter after quarter. And so, we would really expect, hopefully, that noninterest bearing as a percent of total to slightly increase over time as our treasury platform expands. But yeah, it’s really a more core transaction and maybe a little bit of interest bearing money market.
Jon Arfstrom — RBC Capital Markets — Analyst
Okay. That was my next question actually, noninterest 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 — President; Chief Executive Officer and Director, Cadence Bank
We feel it can, and that’s really driven on our treasury pipeline.
Jon Arfstrom — RBC Capital Markets — Analyst
Okay, good. And then maybe a quick question on loan growth. Slide seven, there’s two categories of 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 — Executive Vice President and Chief Financial Officer
Yeah. So . . .
Jon Arfstrom — RBC Capital Markets — Analyst
Services is the one that’s down.
Valerie Toalson — Executive Vice President and Chief Financial Officer
Yeah, all right. And Hank, you may want to comment on that. We had a $15 million decline in services; $44 million decline in really all other general C&I.
Hank Holmes — Executive Vice President; President, Cadence Bank
Yeah. 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 quarter as far as the pipeline is good. So, I think that’s more of a timing . . .
Jon Arfstrom — RBC Capital Markets — Analyst
Okay, got it. Thanks.
Paul Murphy — Chairman and Chief Executive Officer
Thanks, Jon.
Operator
And our next question today comes from Brett Rabatin of Pipper Jaffray, Please go ahead.
Brett Rabatin — Piper Jaffray — Analyst
Hey, good afternoon, everyone.
Paul Murphy — Chairman and Chief Executive Officer
Thanks for joining us, Brett.
Brett Rabatin — Piper Jaffray — Analyst
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 — Executive Vice President and Chief Financial Officer
Yeah. So, it was — I mean, really, there are several things that happened in the third quarter. Obviously, the energy was a 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 a 2011 base from Moody’s to a 2018 base, and that included a revision in our consumer loss models that relied on homogenous loss rates. And 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 and kind of the net impact of the new loan growth less payoff.
Brett Rabatin — Piper Jaffray — Analyst
Okay. That’s good color. And then the other thing I wanted to make sure I understood was just, thinking about noninterest bearing DDA, if I look at year-over-year trends and thinking about your platform, whether it 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 has 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 noninterest bearing deposits?
Valerie Toalson — Executive Vice President and Chief Financial Officer
Yeah. 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. But 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.
Brett Rabatin — Piper Jaffray — Analyst
Okay. Great. Appreciate the color.
Operator
And our next question today comes from Jennifer Demba of SunTrust. Please go ahead.
Jennifer Demba — SunTrust — Analyst
Thank you. Good afternoon.
Paul Murphy — Chairman and Chief Executive Officer
Hi, Jennifer.
Jennifer Demba — SunTrust — Analyst
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 — Chairman and Chief Executive Officer
Sure. Yeah, Jennifer, I think your memory’s good. I think we peaked right at about 19%, so not quite to 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 — we’re right at 57% being midstream, zero 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 two or three, one just last week — a really attractive new E&P relationship. So, a high bar on the E&P side, and the same for oilfield service. I mean, the Permian and Eagle Ford, the service companies there are doing just fine. That part of the business us cyclical, and especially term debt is 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.
Jennifer Demba — SunTrust — Analyst
Thanks so much.
Operator
And ladies and gentlemen, as a reminder, if you’d like to ask a question, please press * then 1. Today’s next question comes from Matt Olney of Stephens. Please go ahead.
Matt Olney — Stephens — Analyst
Hey, thanks, guys. Good afternoon.
Paul Murphy — Chairman and Chief Executive Officer
Hi, Matt.
Matt Olney — Stephens — Analyst
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 gonna see the cost save number above that 30%?
Paul Murphy — Chairman and Chief Executive Officer
Yeah, Matt. So, I think that it’s probably, for today’s purposes, safe to say the 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 observed. And they’re running the bank, but we observed and applauded. And so, yeah, 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 — Stephens — Analyst
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 at play, but I’m curious kind of what your thought is. First, the loan mix shift. It looks like there was lots of loan growth this quarter from the single-family production. And then just two, just 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 specific things going forward?
Valerie Toalson — Executive Vice President and Chief Financial Officer
Yeah, no. 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, etc. 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 went up quarter-over-quarter in all the other business lines that emerged.
Matt Olney — Stephens — Analyst
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 — Chairman and Chief Executive Officer
Matt, this is Paul, and I’m gonna invite Sam or Hank to add to this. I mean, where we sit today with really attractive pipelines, we’re holding firm on loan pricing. To support the growth, obviously, we need to fund it with good, hopefully granular low-cost deposits. And so, look, I mean, long-term customer relationships are important to us. We’re competitive. But if it’s just about rate, then we’re not gonna win. I mean, we’re here to have a fair rate and an all-in relationship that generates nice return for shareholders. And so, we’re, I guess it’s fair to say, kind of holding firm on rate these days, so.
Matt Olney — Stephens — Analyst
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 — Chairman and Chief Executive Officer
Yeah, Matt. We’re pending Federal Reserve approval. They are in their process. And I think it’s most likely that we will get that approval this quarter and be able to close this quarter.
Matt Olney — Stephens — Analyst
Okay, very good. Thank you guys.
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 — Chairman and Chief Executive Officer
Thanks, Rocco. So, in closing, third quarter in my opinion was a really good quarter. We’re at one of those unusual times where there’s a pretty big disconnect between our operating performance and our stock price. We understand these things happen, and I think we have a good understanding of the key issues. Obviously, credit is the number one issue. I remain confident in our team and our underwriting, and just 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 us 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 now concluded, and we thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.
Duration: 54 minutes
Call participants:
Paul Murphy — Chairman and Chief Executive Officer
Sam Tortorici — President; Chief Executive Officer and Director, Cadence Bank
Valerie Toalson — Executive Vice President and Chief Financial Officer
Hank Holmes — Executive Vice President; President, Cadence Bank
Steven Alexopoulos — J.P. Morgan — Analyst
Ryan Nash — Goldman Sachs — Analyst
Ken Zerbe — Morgan Stanley — Analyst
Brady Gailey — KBW — Analyst
Michael Rose — Raymond James — Analyst
Jon Arfstrom — RBC Capital Markets — Analyst
Brett Rabatin — Piper Jaffray — Analyst
Jennifer Demba — SunTrust — Analyst
Matt Olney — Stephens — Analyst
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