Paul Murphy - Chairman and CEO Sam Tortorici - President Valerie Toalson - CFO Hank Holmes - EVP.

Steven Alexopoulos - J.P. Morgan Ryan Nash - Goldman Sachs Jennifer Demba - SunTrust Brady Gailey - KBW Michael Rose - Raymond James Brad Milsaps - Sandler O’Neill Jon Arfstrom - RBC Capital Markets Matt Olney - Stephens Brett Rabatin - Piper Jaffray.

Welcome to the Cadence Bancorporation Second 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..

Thank you. And welcome to our second quarter call. Joining for today’s call are Sam Tortorici, Valerie Toalson, and Hank Holmes. For starters, I’d just say, we are pleased to report another quarter of strong organic growth and record earnings.

Our loan and deposit growth really continues to exceed the expectations, and we have seen credit improve this quarter. We feel like it’s a good time to be a Cadence banker and nice to have some positive momentum. It feels like we are well positioned for the second half of the year.

I’ll comment that I have been really pretty impressed with the vibrant markets that we operate in. One of our directors, Dick Fredericks shared some information with me recently that I thought might be of interest to the investment community.

Federal Reserve data indicates that nationally at all banks, C&I loans are about one-third of their business and C&I loans are up 4.6% over the last year and up 2.7% linked quarter, second quarter. Our loan growth is up 16% versus last year and 5% linked quarter. And we are closer to a two-thirds C&I bank.

So, I guess you could say, it reflects, it’s a good time to be a C&I banker, and I think this will continue to be the case. Just broadly speaking, we look at our clients, they are growing, they are reinvesting in their business. I think that tax reform is a major factor.

But, more importantly, I would credit our team of motivated bankers who are out doing a great job for clients. And I think this intense focus on customer service and on C&I banking is a key driver of our growth. As a reminder, we say often, it matters who you choose to be your banker.

And I believe we’ve got the right team focused on the best part of the banking business today. So, our partnership with State Bank continues to strengthen. I’m even more excited about the merger today than when it was announced back in May. We’ve partnered with an extraordinarily talented team of bankers.

And like our prospects in Georgia and the Atlanta Metro markets, I believe this strategically compelling deal, compounding these two great companies will really add to our attractive story in the future. Let’s turn to page three of presentation and take a look at a few of the highlights there.

Net income of $48 million $0.57 a share, a several nonrecurring items this quarter we will go into a bit more detail. So, $0.50 sort of adjusted earnings. I like to look at the adjusted revenue as kind of a good indicator of our organic growth, at up at $117 million in the second quarter, it’s up 11% from the prior year.

So, NIM of 3.66% continues to move up a bit, reflecting our asset-sensitive balance sheet and our yield on earning assets are just outpacing the cost of funds a bit this quarter. Valerie is going to go into more details on that in a moment. As I mentioned, loan growth, up $1.3 billion or 16%.

On an average basis, loan growth in the second quarter was even stronger than our standout first quarter. So, average loans in the second quarter increased more than $400 million or 5%, which is some great quarter.

Core deposits, another great story, up $1.5 billion from prior year 21%, for the second quarter period end deposits were up $282 million with non-interest-bearing deposits increasing almost $100 million or 5% linked quarter. Sam is going to go into some more detail on deposits here in a moment.

Our entire team continues to be actively focused on expense management. Excluding $3.1 million of non-routine costs in the quarter, the adjusted efficiency ratio would have been 50.7. So, this is near the lower end of our previously announced goal of -- to get in that 50% to 52% range. So nice progress there. We are proud of our credit numbers.

The trends have improved. Nonperformers have declined from 1.8% to 0.6%, down about 60% linked year, mostly result of the active credit resolutions of energy credits and good underwriting. Our team stays focused on maintaining our rigorous process, and we are not sacrificing on structure or terms for the sake of growth.

On page five, first, let me apologize. Regrettably, our initial press release and slides had an error in the non-routine income tax adjustment item. This has been updated and corrected. So, depending on which version you have -- if you an early version, you may have an error; if you have the later version, then, you’re fine.

But, this page shows that adjusted for non-routine items, we are starting to generate the profitability metrics that are in line with our desired targets. Adjusted return on assets were at 1.5% and adjusted return on tangible common 16.3%. As I mentioned, adjusted EPS $0.50. On page six, I’d just comment really continued improvement.

It’s a nice slide and shows good trends there. With another record quarter, we announced a 20% increase in our quarterly dividend to $0.15 per share, representing an annual dividend of $0.60. And as we stated previously, we plan on increasing the annual dividend to $0.70 following the close of the State Bank merger.

Page seven is my favorite slide, showing our strong growth and profitability trends. I think, the numbers support our suggestion that relationship-based middle-market banking can generate attractive return on capital for its shareholders.

I’d like to look at the bottom right hand slide -- part of the slide, the expenses and sort of in comparison to the pretax pre-provision on the bottom left of the slide and I think reading those together is attractive story and that’s what of course drives the improvement in the efficiency ratio that you see in the middle of that -- bottom of that page.

Page eight, a lot of consistency in our loan growth, commercial loans if you include the C&I and the commercial CRE loans are about 76% of loans. Page nine, credit improvement, a result of a lot of hard work from our team. Net charge-offs 10 basis points for the quarter. Overall, I would say, asset quality feels stable here.

Cleanup in the energy portfolio is very manageable. We’re comfortable with energy at 11% of total loans. As a reminder, 57% of the energy portfolio is midstream where we’ve had zero charge-offs -- zero net charge-off at Cadence. And of course, the increase in oil prices is having a positive effect on that part of the business.

I see our bankers maintaining solid underwriting standards with attractive pipelines, do not need to stretch, nor do we need to venture into any areas where we don’t have a track record. So, in other words, we’re seeing plenty of opportunities in industries where we have track record and expertise.

And a footnote, our lenders have on average 20 years experience, which of course is a big plus. So, in summary, I am pleased with our core operating performance, the credit metrics, deposit growth, a top focus showing some of the results.

Earnings are good and a positive trend there, continue to enjoy a healthy NIM, just really proud of our great team of bankers that are not making a lot of calls and growing throughout the footprint really across all lines of business. So, with that I’ll turn it over to Sam..

Thanks, Paul. I’ll be referencing page 10 of the presentation. Our core deposit positive growth continues to be an area that we’ve been pleased with, not only this quarter but really over the past year. Our team’s focus and efforts have provided solid core funding to support our strong loan growth.

In this rising rate environment, our success in expanding full wallet commercial deposits and increasing core retail customer base has helped strengthen our funding sources.

We are also looking forward to our merger with State Bank, which will bring expanded core, low-cost deposit funding as well as attractive new commercial opportunities in metro Atlanta and other solid -- in a number of other solid Georgia markets.

We grew core deposits, which excludes our broker deposits by $1.5 billion or 21% over the prior year and we grew core deposits linked quarter by $451 million or 5%. Core growth has allowed us to reduce our brokered deposits, which came down $282 million since the end of the first quarter, bringing our brokered deposits down to 7% of total deposits.

Core deposit growth continues to reflect the ongoing focus of our bankers on multiple initiatives to build core deposit funding. The primary drivers of this are expansion of our commercial deposit relationships, our treasury management platform as well as growth in our branches.

Our deposit mix also demonstrates its improvement, evidenced by our non-interest-bearing deposits as a percent of total deposits at 23%. I mentioned, our State Bank merger earlier.

Since the merger announcement in early May, I’ve been spending considerable time in the Georgia market, meeting the extended team and getting to know whole State Bank group better. As Paul mentioned earlier, we really felt good about the State Bank deal when it was announced in May, and I would say we feel even better about it today.

The is a high quality deposit franchise that will be very additive to the overall Cadence franchise, certainly from a funding standpoint. So with that, let me turn it over to Valerie to go through a little more of our quarterly performance..

Thank you, Sam. If you would turn to slide 11, our net interest margin continues to reflect benefit from our inherent asset sensitivity. Our net interest margin improved 2 basis points during the quarter to 3.66%.

Our earnings asset yield increase 24 basis points during the second quarter, driven by strong new loan growth that we mentioned coming in at higher yields as well as the overall impact of rising rates on our floating rate loan portfolio. Total funding cost increased 27 basis points in the quarter. Looking at it more specifically.

Our originated loan yield for the second quarter of ‘18 was 5.04%, up 23 basis points during the quarter and up 68 basis points from the prior year’s quarter.

The loan yield increase is not only a reflection of the rising rates on our over 70% floating rate loan portfolio but also again the significance of our new loan volume, over $400 million on average in the second quarter and over a $1.2 billion in the last year. Turning to cost of deposits.

Our total cost of deposits was 98 basis points in the second quarter of ‘18, up 23 basis points from the prior quarter and up 39 basis points from the prior year’s quarter. The second quarter of ‘18 deposit costs included a couple of things that I will point out.

First, this quarter’s total deposit costs included an 8 basis-point bump from time deposits due to the semiannual reset effective beginning of April of our Up CD product where about a $1.2 billion increased 50 basis points based on Fed fund changes, during that reset period.

You might note that by the end of this year, about half of this specific product will have matured or rolled over to a non-floating rate product. The second factor I would note impacting the total cost of deposits is an increase of 12 basis points from our interest-bearing deposits excluding time during this quarter.

This includes 6 basis points from consumer and money market -- excuse me, consumer and business money market, 2 basis points from public fund accounts, 2 basis points from brokered accounts and then 2 basis points from other.

These increases were due to really a combination of index rate changes, seasonal mix changes as well as maintaining competitive rates for some key customers relationships. If you would turn to slide 12. We continue to be asset-sensitive with a projected increase in our net interest income of nearly 11% in a plus 200 basis-point shock scenario.

The top left graph on this slide is really important in understanding how our balance sheet has reacted to the rising rate environment with our cycle to date originated loan beta, the dark green bars of 83%, moreover twice that of the cycle to date deposit beta of 35%.

While the quarterly deposit beta was higher due to couple of specific items that I noted previously, quarterly betas are going to be a little bumpy, simply due to the timing of rate and product pricing movements. We do continue to forecast and expect our long-term total deposit betas at approximately 55%. If you would turn to slide 13.

For the second quarter, our total non-interest income was $24.7 million, down slightly from the prior quarter’s revenue of $25 million and up from the prior year’s quarter of $23 million.

Looking at total service fees and revenue in the second quarter of ‘18, they were $21.4 million, down about $2.5 million from the prior quarter, primarily as a results of lower insurance revenue due to the previously reported sale of the insurance subsidiary during the second quarter, as well as softer trust revenue -- trust services revenue, driven by lower assets under management.

Other non-interest income during the second quarter of 2018 included a couple of unique items as well, including a $4.9 million gain from the sale of the insurance subsidiary, as well as a $1.8 million in securities losses related to a rebalancing of a securities portfolio.

Slide 14 highlights our pretax pre-provision net earnings where we achieved record results of $57.6 million for the second quarter, up $3.5 million or 6% over the linked quarter and up $8.4 million or 17% from the prior year’s quarter.

On the right, adjusted noninterest expenses of $59.4 million for the second quarter of ‘18 remained well-managed, particularly relative to our balance sheet growth, increasing 2% or a $1.1 million linked quarter and 6% or $3.2 million from the prior year’s quarter, which is well in line with our expectations.

These figures exclude the non-routine costs, as detailed in table eight of our press release that include $3.1 million in the 2018 second quarter of non-routine costs related to the acquisition of State Bank, the disposition of the insurance subsidiary and a secondary offering.

Our continued strong performance resulted in the adjusted efficiency ratio of 50.7% for the second quarter, nicely improved from 53.2% in the prior year’s second quarter. As Paul noted, we are very pleased with this quarter’s results. And we would now like to open the line for questions..

[Operator Instructions] And our first questioner today will be Steven Alexopoulos with J.P. Morgan. Please go ahead..

Hi, everybody. I wanted to start on the loan side and follow up on the really strong growth you guys had, the general C&I.

Can you give us some color, some market color on what markets are driving that growth? Is this all share gains or the market is just that vibrant?.

Steven, this is Hank. How are you doing? We appreciate the question. I would say, we are seeing nice growth throughout our footprint. Depending on the markets, there is some market share being taken, but in certain markets, specifically the Texas market, we are seeing continued growth. So, I would say, it’s a little bit of combination of both.

Overall, pipelines are good and we like where we are in the cycle..

So, I think, if you look at the pipeline, do you think that growth is sustainable at this pace for general C&I?.

Currently, the pipelines, both the loans and deposit side look very good. So, I am optimistic that throughout the second quarter that we’re going to continue this level of growth..

So, Steven, I would say, I mean, obviously shorter -- near term visibility is higher and just agree with Hank’s perspective, yes, looks good. You have to think longer term or to things slow down, this is a pretty hot pace, and that seems long term not sustainable, although short term….

I’d just add a little bit to that. As we’ve mentioned before, we do get some lumpiness in the payoffs, and we saw fewer payoffs in the second quarter than we did in the first quarter. It wasn’t hard to predict, but I feel confident that our pipelines are in good shape..

I guess, when we think about this year, your 16% growth at the midpoint, I mean, is there any reason to think this is not at least this year a mid-teens growth here, for Cadence?.

I think it’s hard to argue that that’s not a reasonable trajectory..

And then, on the deposit side, if we look at the Up CD product, and Valerie, you mentioned that $600 million maturity at year-end. I didn’t follow exactly.

Do those roll over into a different product, is that what happens when they mature?.

Yes. Basically, a rollover into a fixed rate product, basically flat at the level at which they mature..

Okay.

And the other $600 million, when do those mature?.

It’s spread out really over I believe that the next couple of years, the biggest lump is coming up by this year. Otherwise, it’s a little bit more, equitable over some of these following quarters..

And then, finally, loan to deposit ratio did drift up a little bit.

As we think about funding loan growth with deposit growth, what’s the incremental cost of new money deposits being raised today, blended?.

It’s going to be 2%, I mean the marginal cost….

I was going to give a range of 1.50% to right at 2%. We have some initiatives that whether it’s HOA and the bank institution, [ph] correspondent banking that have very positive outlooks..

And I would say, that’s related to the interest bearing. However, obviously, we are bringing in, non-interest bearing accounts at the same time and had growth in that in the period-to-period basis. So, that’s for back trade off….

Treasury management pipeline and our efficiency have been able to bring those clients on, has improved over the last quarters..

And our next questioner today will be Ryan Nash with Goldman Sachs. Please go ahead..

So, Valerie, maybe I could follow-up on the last question regarding the deposit costs. If I look at the rising deposit costs, ex the Up CD product, it was still up over 20 basis points.

So, I was just wondering, of the categories that you gave us, can you talk about your expectations for the rising costs in those buckets to continue and what was maybe one time in nature?.

Yes. I do think that in the second quarter, we kind of caught up a little bit on some of these. If you recall, in the first quarter, I think we had overall 6 basis points of deposit increase. And just given the environment, that was a little light.

So, again, when I speak about kind of some of the timing of the increases, there was a bucket of money market increases that increased 30 basis points early in the quarter, just a variety of different things. So, I do think that we had some reflection of catch-up, if you will, in the second quarter.

Back to the point that both Paul and Sam made is, as we bring on new money, it is of that caught out level, if you will. And so it is coming on at a little bit higher rate. But, I don’t -- I feel like that we’re in a pretty good shape from a competitive standpoint.

And I think we saw from a number of different banks, increases this quarter from that competitive pressure. And so, we will see what happens, but my hope is that second quarter reflected a good bit of some of the competitive pressure in some of these deposits..

Got it. And if I could, maybe a question for Paul, just on deposits. In the press release, you guys referenced expanding commercial deposit relationships and treasury management services. Hank talked about a very good pipeline in deposits.

Can you just talk about this initiative that the firm is doing right now, any metric to size for us, how big of an opportunity this to could be over the next two to three years in terms of expanding the commercial deposit growth?.

Yes. So, Ryan, I mean, I think, just as we’ve done historically, building relationships with clients often times begins with a loan relationship and is followed up with deposits, as a key part of the relationship.

We have a treasury management team that focuses on non-borrowing clients and they’ve great success, great track record over the years with those initiatives.

So, I guess, if I’m tracking with you fully, I mean, I think that what we have been doing, $1.5 billion deposit growth in the last 12 months is -- that’s the target is to continue to grow those levels in line with the loan growth. Sam pointed out, we kind of pulled down a bit on the broker part of the portfolio.

It is -- really one of the beautiful things about State Bank is that they have such an attractive, granular, loan beta, lower cost deposit franchise. It’s going to feed us perfectly as we look to optimize the balance sheets of the two companies, once we’re together.

And so, I don’t know if I’m going to the heart of your question or not, or Sam, I invite you to chime in on this. We certainly want to be as specific as we can..

I guess, one -- the only thing I would add, Paul, you made all very good points, but when you think about our robust loan growth and the pipeline that’s ahead of us, what we’ve seen is a continual three to six, sometimes nine-month lag in onboarding the core transaction accounts of these commercial customers.

And so, that’s why you’ve seen our non-interest-bearing to total continue to stay and actually grow slightly in certain quarters, which is obviously going to be a benefit to -- in a rising deposit cost environment..

At the risk of being redundant, I think, really page 12 tells the story, Valerie touched on it. But our assets reprice faster than our liabilities. We think deposit betas clearly have increased, we still manage to get some NIM expansion. So, I guess, we think are well positioned to deal with it, to live it..

Got it. That’s helpful. And I guess, just given the continued strong efficiency progression, you’re at 50.7 this quarter; you’ve talked about 50 to 52.

Just given how strong the revenue environment has been for Cadence, can just talk about where you think the efficiency can go ex State, over the next four to six quarters?.

Ryan, well, back to my favorite, page seven, I like the expense outlook. Our objective is to keep expenses flat, that’s with some growth, a bit of a stretch. And going over 10, there is some impact there.

But if we can continue to grow pretax, pre-provision, linked quarter as loan and deposit portfolio, the bank grows, we would have ambitious plans over time for the efficiency ratio. Certainly with State Bank, once the expense consolidations ran, we should be in the 40s.

And give me some time, but I -- certainly banks out there in the 46 or 47 range that or similar to their structure and balance sheet as we will be. So that would be a goal and a target that seems, again, with some time achievable..

And our next questioner today will be Jennifer Demba with SunTrust. Please go ahead..

My question is on what you are seeing in the State Bank footprint, Sam? Could you just talk about what you think the C&I opportunities are in Georgia? And where you are in terms of a pipeline for maybe hiring bankers once the transaction closes?.

So, obviously, most of the effort around State Bank today is just really on merger, integration, staying -- keeping the team together and focus, which fortunately they very much are because there is essentially no overlap.

So, the customer-facing teams I think have a certain amount of excitement about being a part of a larger organization with a bigger balance sheet with more product capabilities. So, they are pretty energized and we’ve actually worked on several deals together. So, I’m encouraged by that.

In terms of the other build out of C&I, the Georgia, market particularly metro Atlanta’s one the most vibrant in the country. And we -- you and I have talked about this before, we are really excited about the potential, we’re it is still pretty early on here. So the recruiting efforts really haven’t fully cranked up yet..

One more question on the loan growth you had in the second quarter.

Was there any concentration in any certain industries in that C&I loan growth, or was it fairly broad based?.

Extremely broad based..

And our next questioner today will be Brady Gailey with KBW. Please go ahead..

Last quarter, I think, in the 10-Q, you all disclosed that there was an uptick in the classifieds for the restaurant franchise financer.

But, I was just wondering if you could maybe give us an update on what there is this quarter and just an overall update on that loan book?.

Yes. We will have updated disclosures on these in the Q, but I’ll let guys address the portfolio here..

Sure, I’d say -- and its Hank. I’m sorry. They’ve done a good job of managing that portfolio. As you pointed out, we did see an uptick. We’re working through some of the issues that arise but feel confident that we will work through those in a positive way..

We have one nonperformer and that has gone bankruptcy, working in a positive direction. Yes..

And then, so, it sounds like loan growth for this year will likely be in the teens level. I think previously you have talked about loan growth kind of in the 9% to 11% range.

As you look forward beyond this year and ‘19 and beyond, do you think this mid teens growth rate will stick or on a longer term basis, are you still more comfortable with the 9% to 11% guidance?.

We are comfortable with the 9% to 11% guidance. As Paul mentioned earlier, it’s easier to predict on the short-term. So, long-term, I’d think the 9% 11% is a good number..

Particularly as our balance sheet growth, I mean as they get consolidated with Sate, that’s much more reasonable growth rate expectation..

And the next questioner today will be Michael Rose with Raymond James. Please go ahead..

Just a follow-up question on expenses. You guys did sell the insurance business this quarter. How much in expenses could we expect to come out of the run rate? And then, separately, State Bank has a payroll and insurance business as well I think it’s called Altera.

Any color on what you might do with that business?.

Yes. I’ll take the first question. The insurance business had about really on a net basis, less than a $1 million on a pretax basis. So, it was $5 million, $6 million or so in expenses on an annualized basis that’ll come out. So, it’s not actually significant.

It wasn’t really a core part of our business, and it made economic sense based on inquiries that we were getting. And I’ll let the others address the Altera question..

The Altera business model is really far different than this insurance agency that we had, and it’s a great business. It’s something that we’re excited about, continuing to invest in, and growing, like kind of focused on smaller companies but got really neat niche. And we’re enthused about seeing that grow as part of the Cadence organization..

So, if I understand it right, Valerie, it’s maybe somewhere in the neighborhood of $500,000 in incremental expenses will come out for the insurance biz in the third quarter?.

The expense base is closer to 6 million and the profitability….

On an annualized basis..

Annualized basis, yes, sorry. And the...

Yes..

Yes. So, $1.5 a quarter..

And then, just one final question for me. Valerie did mention that you did a little securities portfolio restructuring.

Is that in anticipation of the State Bank deal closing? And if so, would you expect to do anymore?.

Yes. I think we’re pretty materially through. And really, it was primarily in our municipal securities portfolio. And just as we kind of looked at our overall portfolio and the rebalancing of where we like to maintain that, didn’t have to do with the State Bank acquisition; it was really separate from that..

And our next questioner today will be Brad Milsaps with Sandler O’Neill. Please go ahead..

You guys have addressed most of my questions, but did want to follow up on NIM. You had 16 basis points of core expansion in the first quarter, a couple of this quarter, due to lot of moving parts that Valerie discussed.

Just kind of curious with each move in LIBOR or move from the Fed, what do you think you guys will capture kind of going forward? Just trying to get a sense of kind of where do you think banks will line up in the third and fourth quarters in terms of NIM.

Do you think it’s course of what we saw this quarter or it could be something little better, given all the catch-up you did on the deposit side this quarter?.

Brad, I’ll comment and then invite others. For me, the asset side just where we have a great feel and confidence, you see the betas there. The question on my mind is whether from an industry perspective deposit betas have caught all the way up and will move in lockstep at this point or whether there’s more of a lag that’s going to happen.

And I think that’s to be determined. I don’t have clarity around how this is going to go. I mean, certainly C&I loan growth is good for us and around other banks that are in that business. And so that would seem to be a driver of higher cost but -- and there are lot of banks out there that have a lot of money and don’t really pay much for deposits.

So, it’s some -- I don’t know. It depends on what happens with deposits, I think is really the key to our NIM going forward..

And I think part of what Paul is talking about is definitely, I agree whole heartedly with and it’s why I spoke to that it can be a little bit bumpy.

But, I do think that in the longer term that our asset sensitive balance sheet is certainly positive in this rising rate environment, but there may be a quarter here or there, just like we had this quarter where we do have some catch up. We are still below a cycle to date we’re at 35%ish on the deposit beta. We’re modeling at 55%.

Whether we get to that level or not, I don’t know. But to the extent that between here and there, there could be some bumping quarters..

The other perspective is, because of our loan has been so strong, we’re showing more rate to attract new deposits than many other banks. Once State Bank arrives and we get merged, we will be a bit more stingy on that front, as we try to optimize NIM. But we’re showing some attractive rates to attract new deposits..

Thanks, Paul. And just to follow up on that, you guys also have had great asset betas and being able to pass along that to your borrowers and still get great loan growth.

Do you think we’re getting close to an inflection point where you’re not going to be able to pass on the higher rates? Can you talk a bit about the competitive environment in terms of what your clients are willing to bear at this point?.

I guess, to be determined..

I agree..

I think that inherently, and if there is a little bit of movement there, just remembering that 71% of our balance of our loan portfolio being floating rate is a differentiator for us and we will continue to get benefit..

And the next questioner will be from Jon Arfstrom with RBC Capital Markets. Please go ahead..

I guess, talk a little bit more about the non-interest-bearing growth.

And I think, Sam, you’d mentioned earlier about maybe 30 days up to nine months lag in terms of onboarding some of the commercial clients, and could you maybe touch on what the pipeline looks like for that as well?.

Yes. So, Jon, it’s just kind of the nature of the beast. We bring in new commercial lending relationships and it just takes a little bit of time to onboard, to convert treasury systems, and consolidate their deposit relationships.

And as Hank mentioned earlier, our deposit pipelines in the general C&I, as well as specialized industries, et cetera continue to be a really solid. And so, as we still have a bunch of -- from the second quarter that is close that our new relationships and we haven’t fully on board yet. So that’s just give us some natural tailwind.

And then the pipeline looks solid enough for the rest of the year that we are encouraged. Our treasury revenue pipeline is also probably at historical high for us. So, that’s a good foreshadowing of non-interest-bearing deposit growth..

The non-interest-bearing at almost 25% of total deposits.

Is that a level you feel like you can hold, meaning 25% of this is non-interest-bearing over time and you can match the loan growth?.

Well, Jon, I will comment and then invite others too. To be honest, in a more mature commercial portfolio, we would expect non-interest-bearing to actually be higher than where it is today. So, we’re actually -- we are okay with where we are today, but our expectation is that would be much higher..

That’s the way I was thinking about it as well..

I think you kind of see your stock today and you understand what’s going on as people are wondering how are you going to find your growth, and that’s the reason for those questions. But, you’re saying longer term you feel like that non-interest-bearing percentage can go up..

Yes..

Yes, absolutely. If you look at some of the other banks that have more significant C&I portfolios, similar to level that we have, you will see non-interest-bearing deposits as a percent of total deposits, far north of 30%, some of them even closer to 40%. And so, that’s the level where we are.

We have got significant room to grow there as we continue to grow out the C&I deposits..

Any update on energy? Paul, you touched on it earlier, but you had a little bit of an increase in services. I know, it’s a small amount, but give us an idea of your appetite there and what the environment is like..

Jon, we have improved a few new deals, couple of E&P deals. So, still a high bar for us. I mean, those things are better, especially as it relates to the oil prices. But natural gas prices have not much improved. And so, we have maintained a high degree of caution there. Service companies -- I mean, anybody working in the Permian is doing rather well.

And so, that is a positive..

I’d just add. We still are active in the midstream business and we like that business. Obviously during the downturn, it performed well.

And to kind of go back to the services side, we really are on the shorter term, lower risk accounts receivable financing working capital versus term or taking any kind of additional longer-term risk in that portfolio..

So, there is a possibility we could see midstream pick up a bit in terms of the growth rate?.

I wouldn’t say on a growth rate percentage, but we will continue to be active. You do see that market, a lot of sales that happen and some consolidation, but we are still in the market and we like the business..

Jon, the problem we have with midstream is they pay us all. So, our team -- we don’t lose business to other people but there is a lot of consolidation happening there..

And our next questioner today will be Matt Olney with Stephens. Please go ahead..

I was looking for some commentary on the health care loan portfolio. I know, it’s a smaller part of your overall balance as we’ve seen some of your peers report some credit challenges.

So, anymore -- because you can give us as far as what types of health [ph] selling you guys do? And then, on the growth side in healthcare, it looks like that portfolio was a little bit stagnant over the last few years, but it seems more -- recent uptick over the last few quarters.

So, what types of credit are you adding to that portfolio over the last few months?.

This is Sam. I’ll take that one. So, you are correct. Our healthcare book has been a little stagnant over the last, say, couple of years, almost, really until the beginning of this year. And that was driven by a couple of things. One, there were some things in the market that we saw that we just really didn’t like.

We saw some non-bank lenders come in with some very aggressive terms. And because of the rest of the robust loan growth we have around the Company, there was no need for us to stretch. And so, we’ve actually seen the market become a little bit more rational in the spaces where we play.

Plus, we added a key banking resource to the team that also helped us with originations and with new relationships. So, that’s the big -- two of the key drivers of why you’re seeing that portfolio start to pick up.

In terms of what we focused on there? We really focused primarily on sponsor-backed healthcare services companies that typically have a certain level of insulation from reimbursement risk. So, you will see us really like good sponsor-backed deals with strong capital stacks.

Actually, the single largest concentration in our healthcare book is our healthcare REITs. And those will be very large REITs, very diversified portfolios, both by geography and by property type..

And any general commentary on how would the credit trends look like in the healthcare portfolio in the second quarter?.

Healthcare portfolio trends again continue to be very stable..

And Matt, I know there have been a couple of blowups. We were not -- and those most recent situations, and I think -- yes, in summary, stable. And our healthcare lending team has got 20 plus years experience and very careful and thorough. And underwriting reimbursement risk is key part of that business.

And so, we’re kind of confident with where we stand today..

And just to go back to the strategy of funding future loan growth with core deposits, it looks like in the second quarter, you leaned more heavily on some of these wholesale borrowings, at least from the average balance side.

So, I’m just trying to understand, is this a timing issue that Sam talked about, as far as waiting to onboard some of these treasury clients or is this timing issue as far as waiting for the State Bank deal to close? Help me on what we saw in 2Q versus what we could see over the next few quarters?.

Yes.

So, Matt, there was a little bit of difference between the ending balances and the averages during the second quarter, and most of that had to do with really timing movements associated with some of our corporate and municipal clients associated with really tax season and some of the things that they encounter in the first quarter as well as the second quarter, and that’s really what impacted those averages.

And then, you see the growth coming on really toward the end of the quarter, so, as those kind of replenished in the normal course. So that’s a little bit of what you saw from that aspect..

[Operator Instructions] And our next questioner today will be from Brett Rabatin with Piper Jaffray. Please go ahead..

I wanted to -- you talked about a little bit, but just wanted to follow up on the whole competition and origination rate conversation. You basically have had lockstep increases in origination yields with rates.

And we’ve this quarter in particular had a lot of banks complaining about non-bank competition and maybe given some covenants and terms and what not. But it doesn’t seem like you’re experiencing that same pressure.

Could you maybe just give us a little bit of additional color, if possible on -- are you seeing out that out there in the market and you’re just able to avoid it or what’s driving your ability to not experience the same type of headwinds?.

So, Brett, I would start with this ideal. And I just think we have a lot of really hard working, very experienced lenders who have been in the market along time. And they get a lot of looks at good companies because they have a great reputation for hustling and take care of their clients, and they are good. And so, we see all that.

We’ve got non-bank lenders, we’ve got all sorts of things. But when we started several years ago, nobody had heard of Cadence Bank. And now, we are not exactly household name, but there is some reputation that’s been developed. And so, we do a good job for clients.

You may have heard me comment on this before, but most banks tend to overreact to bad news. A good company has two bad quarters, workout group in Chicago or whatever, Baghdad, you name it. And so, we don’t take that approach.

We -- good company has two bad quarters, we have to understand it, we have to look at capitalization, covenant, waivers, et cetera. But that’s one of the things that really hurts a lot of long-term relationships as this kind of kneejerk on any sort of credit issues that happens, not at our place, but at many others.

So, I would say that I think we’ve got one of the best teams in the business and that you take with our treasury management capabilities and kind of a total solution, we just -- nice thing about my job is that I get the letters and phone calls and the clients testimonials face-to-face about things like I’ve never been at a bank this good before, I mean, you guys really have a comprehensive approach.

So, it’s one of the key things that gives me confidence about the future is that the team that we have here and I’m really grateful to them for all the hard work. .

Okay. And then, just thinking about commercial real estate specifically, that’s an area where there’s been particular competition, as you get ready to close State with you guys and watching either your portfolio or theirs in just terms of potential payoffs and how that might impact, how you manage the balance sheet..

We have seen some increasing competition; for a while there, we were seeing rates kind of move up in the real estate portfolio. Having said that, some of that tapered off some, but having said that, we’re still seeing a number of looks.

We concentrate primarily in the construction side of real estate with a lot of equity averaging 35 plus percent in equity. We line up nicely with our partners at State Bank. Certainly, we’ll work through that as we get closer to closing.

But I’m optimistic, we’ve run pretty low compared to some of the regulatory requirements in real estate, and that will be the case post-merger as well. And so, we continue to be active in the CRE market..

And there look to be no further questions at this time. So, this will conclude our question-and-answer session. I would like to turn the conference back over to Paul Murphy for any closing comments..

Thank you, William. And thank all of you for joining us. As we mentioned at the outset of the call, we feel good about the quarter and the team and where we’re positioned and look forward to continuing this journey together. Thanks for all your support. With that, we’re adjourned. .

And the conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines..