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[00:00:08] Welcome to the Kennedy Space Corporation, third quarter twenty twenty earnings call comments are subject to the forward looking statements 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 at Cadence Bank Corp. dot com. All participants will be in listen only mode after management's opening remarks. 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.
[00:00:43] Well, good morning, all. Thank you for joining us for our call. Joining me today in person are Valerie, Sam, Hank and David. I'm going to begin our call with a summary of results. We're going to talk about some operating highlights and some some key wins and just developments throughout the quarter. Of course, I'll comment on credit and then turn over to Valerie for details on our financials. I'm pretty pleased that Kate has had another strong quarter as our partner was ninety five million, up slightly from the prior quarter. This resulted in a really solid pre-tax pre provision, ROIC of two point six percent. These results were driven by our naoum strength, up three basis points linked quarter, excluding PPP. The highlight here is 14 basis points. Linked quarter drop and deposit costs were down about 100 basis points from the prior year. As many of you will recall. Previously, we had sort of been a high cost of deposits relative to peer and now we are very much in line. We continue to execute on our expense management plan and our adjusted efficiency ratio was forty nine point five percent touching on credit trends in the quarter. We're encouraged by the significant reduction in deferrals throughout the quarter. And as of October 16th, we stand at about one point five percent of loans, both non-performing and net charge offs, decline late quarter criticizing classified loans did increase from last quarter, but by materially lower amount than in the second quarter.
[00:02:12] We completed our third party loan review of the CRM and CNI portfolios and pleased to report that the review did not result in any downgrades or further or changes to our grading process. But quite the contrary. I think it did validate that our processes are working well. And so this review was very similar to what we did in the second quarter for restaurants, energy, hospitality and health care, turning to loan growth, as is being reported widely around the industry, soft there. We're down about two hundred million linked quarter. Of course, part of this is intentional as we're proactively risking some portfolios and we are just seeing lower demand consistent with the current economic environment. Overall, liquidity looks good, with the loan deposit ratio stable at eighty six percent. We're seeing some green shoots of demand across our borrowers and in various markets believe the bank will be very well positioned to grow when broader economic picture becomes more favorable. Just to give you a little highlight on color from our markets, over one hundred million new commitments in both Dallas and Atlanta markets this last quarter, roughly seventy five million Florida. So deal flow is broad based and demand from industries ranging from semiconductors to highway infrastructure. Over the quarter, we won the banking business for one of Texas largest municipalities, a county adjacent to Harris County.
[00:03:42] Our SBA business, we've just notified, moved up six spots this last year to be the forty third largest in the country, something we're proud of. Our wealth management teams are active with new business coming in at that higher than normal levels, record levels. And our mortgage team is doing a great job, well ahead of plan on profitability and great results there. So overall, we're certainly very cautious, but in general, the world just feels a whole lot better than it did six months ago. The last development I would mention is our plans to shift back to to the office of our roughly seventeen hundred and fifty employees. We had a little over a thousand working from home and we're pleased to launch Phase one return to the office beginning on November the 9th. In the third quarter, all four capital metrics improved sequentially. So looking at our solid capital, our operating performance, improved credit profile, these things drove our decision to increase the quarterly dividend to seven and a half cents. This is an initial step and we believe the balance sheet is in good shape for additional capital return as economic uncertainty continues to live. So, in summary, so good. There are a lot of good things happening and the core earnings, fundamentals and capital position continues to strengthen at Cadence.
[00:05:04] Let me hit a few more things on credit before I turn it over to Valerie. As I mentioned, we are pleased to see some improvement. We are all spending a lot of time on talent. This is a major strategic focus and I'm sorry to spend a lot of time on credit is a major strategic focus for for all of us. Net charge offs of 20 million for the quarter is down. Lync quarter is the lowest level in the last five quarters. The charge of composition this quarter is less broad based than previously. Seventy five percent of the charge offs this quarter in the restaurant category. For those who are interested, I call your attention to page twenty seven in the slide deck and let's review the three most stressed segments of the portfolio. First is hospitality. Two hundred and seventy one million. We've got five main and non performers there. We have a forty two million dollar reserve, roughly 15 percent. This is a smaller portfolio force, but it's one that is experiencing material stress in this environment. And this portfolio drove much of the quarter increase in our loan loss reserve. So similar to other books, we're working hard with borrowers to address the portfolio and believe we believe we've taken conservative actions with our reserves here. I would point out that the portfolio of both those stressed a positive note is that the deferral mix at June 30th was one hundred and eight million and deferrals down to thirty two million at 10 16.
[00:06:36] Second is the restaurant portfolio. This portfolio declined by fifty six million late quarter, excluding PBP loans, nonperformance or fifty nine million and the reserve is sixty two million or six and a half percent of the portfolio. The risk profile continues to improve. This book is now down to nine hundred fifty million from a peak of one point twenty five billion. The portfolio is 70 percent QSR, which is showing strong performance. Casual family dining now stands at one hundred and seventy eight million for one point three percent of loans. The most stress part of that portfolio. Turning to our one point four billion energy portfolio. We had a million nine and charge offs this quarter. Reserves today are thirty four million non-performing. Forty nine million. We've got a couple of credits there that are on the watch list for upgrades, the upgrade. But that will take some time. As many of you recall, energy portfolios about sixty four percent midstream. We still like the dynamics in that part of the business. And our DMP and service portfolios have declined and benefited a tad from a little bit of improvement in prices on gas prices here of late. With that, I'll turn the call over to Valerie.
[00:07:55] Great, thank you both. As Paul mentioned, our adjusted pre-tax reprovision net revenue continues to be strong and stable at ninety five million, reflecting strength in our revenue and expense management. Our our robust capital position and allowance for credit losses at two point eighty six percent continue to provide strength in this uncertain environment. The third quarter adjusted net income was fifty one point four million, or 40 cents per share of one hundred and eight million from the prior quarters. Net loss due to a significant reduction in loan provisions. The third quarter loan provision of 33 million benefited from the slowed credit migration and stabilization in the broader economic environment during the quarter. While the provision was materially lower than the prior quarter, our allowance, excluding tippity loans, increased this quarter to three point one one percent at September 30, up from two point nine three percent last quarter. And loan balances declined in the quarter by two hundred thirty four million to thirteen point five billion, as net pay downs continue to exceed loan originations and fundings of eight hundred seventy five million. What we are seeing some more production activity in our markets. We do think it's likely that loan pay downs will continue to exceed new volume in the next quarter or two. During the quarter, we did use some of our excess liquidity to add to our securities book increasing securities by 427 million to three point one billion. Now, 17 percent of earning assets. We also work to strategically lower certain higher cost deposits, resulting in total deposits, declining two hundred eighty three million to fifteen point eight billion.
[00:09:34] But at the same time, meaningfully lowering total deposit costs by 30 percent during the third quarter alone. Largely due to this funding cost decline, excluding the impact of the PRP program, net interest margin actually improved by three basis points to three point six four percent from the comparable three point sixty one percent in the linked quarter. While core low yields continue to decline in the third quarter to largely to residual impacts from the second quarter, Linebaugh declines. These were more than offset by the significantly lower deposit costs, the quarterly color income and the reinvestment of the cash into securities during the quarter, all in including the PBB program, Namaz reported with three point four nine percent for the third quarter, down only two basis points from three point five one percent last quarter. Our total funding costs declined by 15 basis points to 41 basis points this quarter, a 27 percent decline. Interest bearing deposit costs declined by 19 basis points, 47 basis points this quarter, and non-interest-bearing deposits were 32 percent of total. And as mentioned before, total deposit costs declined by 14 basis points to thirty two in the quarter. As you know, we've been aggressively working our funding costs during the year and are pleased with the positive impact this has had on our hands. We have remaining another seven hundred seventy five million in higher cost time deposit maturities coming in the last quarter of this year. So we do expect deposit costs to continue to come down a bit by the end of the year. Net interest income was relatively stable at one hundred fifty four million, down just slightly from one hundred fifty four point seven million in the prior quarter as a result of the 160 million decline in average earning assets from lower loan balances coupled with the net or with a stable net interest margin type loan interest income was six point two million in the third quarter, up from four million during the second quarter.
[00:11:31] Total net deferred fees associated with these loans was thirteen and a half million at September 30, which is amortized over the remaining the remainder of that the two year life, but will be brought forward into earnings when these loans are forgiven. We are currently anticipating the majority of these loans to be forgiven during the first quarter of 2021. Not interesting, Kemba rebounded nicely during this quarter to thirty two point six million at two point six million or nine percent from the last quarter, the third quarter increase reflected an increase of a million seven and SBA income as this group generated more traditional SBA lending this quarter versus that keep focus last quarter. We realized strong mortgage banking revenue, a million and a half as the low rate environment continues to drive high volumes of new originations and refinancing. Service charges also increased a million, largely driven by lowered earnings, credit rates, driving more fees during the quarter, investment advisory trust and limited partnership earnings also traded positively during the quarter. Our adjusted efficiency ratio continue to reflect our longstanding expense management culture, coming in at forty nine and a half percent for the third quarter, adjusted expenses increased five point one million in the quarter to ninety two point five million, due largely to compensation costs, including two point six million in lower deferred salaries as a result of the second quarter PPY loan originations and a three point two million increase in incentive expense as a result of improved corporate performance in the quarter.
[00:13:08] These were partially offset by a reduction of FDIC insurance by million four due to additional second quarter accruals, reflecting the impact of lower earnings on the assessment. Turning to capital, as Paul mentioned, all of our capital ratios increase this quarter over what we're already strong capital levels, given the balance sheet mix shifts are risk weighted assets declined in the quarter. And in September 30, our common equity tier one and two and ratios were up to twelve point one percent and total capital was up to fourteen point eight percent. The leverage ratio ended the quarter at nine point nine percent and our tangible equity to tangible assets increased further to ten point six percent. These robust capital levels, significance of our allowance for loan losses, our strong balance sheet liquidity, our stable net interest margin and meaningful pre tax provision earnings power all combined to provide a ready springboard. Once this period of economic uncertainty starts to show, signs of consistent improvement in our credit metrics begin to normalize in spite of what has been an unusually sure, to say the least. We remain highly optimistic about our platform and strategy and the opportunities that lie ahead as we start to look forward into twenty, twenty one and beyond. With that, let me turn it back to the operator for your questions.
[00:14:26] We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone, if you are using a speakerphone, please pick up your handset before pressing the keys to withdraw from the question queue, please. Press star then to.
[00:14:44] Our first question is from John Aastrom of RBC Capital Markets, please go ahead. Hey, thanks.
[00:14:50] Good morning.
[00:14:52] Thanks for joining us.
[00:14:53] Thanks. Nice job and a couple of questions here just on credit, obviously much better from a provision point of view, but still sitting at, you know, over three percent reserves, which maybe signal some some pain on the horizon. But I guess stepping back, how do you want us to think about peak reserves? Are we at peak reserves for the company? And then how do you want us to think about the provision going forward is just just something where the provision stays low unless things change materially.
[00:15:28] Yeah, John, I really good questions. I mean, there's a lot of uncertainty out there. I wish I had perfect visibility on what the provision is going to be in future quarters. We've been proactive, obviously. And so, you know, all things considered, you know, we're we're appropriately reserved, I believe. You know, it depends on on what happens in the future as to whether provision levels will stay elevated or sort of a normal level. I tend to be optimistic. I feel like the worst is behind us, but I just would emphasize the uncertain environment that we're operating in.
[00:16:14] Ok, let me ask it another way. Paul criticized and classified numbers, they moved around a little bit, but they're up a bit. Just curious from a big picture, are you being surprised at all from a credit point of view, or do you feel like you've been through the portfolio enough to understand exactly where the problems are?
[00:16:35] I think we've been through it enough to understand I remain aware that negative surprises are possible in the future. You know, we're just in an environment where I'll be surprised if we don't get some bad news in the fourth quarter that we don't have today. You know, it's just sort of that type of world in which we live. I think we'll get some good news, too, that will offset maybe more, maybe overwhelmed the bad news. So, you know, hopefully. But I don't know. It's just kind of a hard question to answer, really.
[00:17:09] Ok. And then just one more remind us of the third party review, the extent of that. And you said you didn't have any differences, but just curious on the extent of it.
[00:17:20] Right. So, yeah, this quarter we focused on commercial real estate and and I it was a biased sample, in other words, to start with all the partially graded loans or anything that had been downgraded and just put more of a review to be sure that the downgrades were complete and adequate and the risk in the portfolio was being properly identified. So it was a healthy process and a good outcome.
[00:17:47] Ok, thanks, I'll step back in the queue. Thank you.
[00:17:52] The next question is from Stephen Alexopoulos of J.P. Morgan. Please go ahead.
[00:17:58] Hey, good morning, everybody. Morency, I want to start on pre-tax reprovision income, which has been fairly stable the past few quarters, expect that to remain flattish or how are you thinking about potentially growing that off these levels?
[00:18:17] Steve, thanks for thanks for joining us. We've been really pleased with how our partner has remained stable. It's something that I think is just key to the business that we have. And we've talked about it for a number of periods. As far as being kind of that springboard that will have once credit stabilizes is being able to maintain that in a relative basis. We do sound or we do believe that there's relative stability as we go forward. I do think that as we get into next year, there could be a little bit of pressure on it, but really in the small single digit percentages. So a little bit of pressure. But but overall, we feel very good about our our core net interest margin and the stability there. Right now, we are seeing a little bit of a decline in our earning assets. But again, over the next couple of quarters, once we look beyond that, anticipate that to continue to grow our fee income is doing really well. And in this environment, expect that to continue as well. And of course, we're always focused on our expenses. So all of that really supports of maintaining a very strong piece in our and particularly as a percent of our of our total assets.
[00:19:40] That's helpful, and then Paul and the dividend, it was nice to see the bump up this quarter, you know, what do you need to see to further increase the dividend? And do you think it'll be these smaller, incremental steps, as you, you know, eventually restore?
[00:19:54] Yes, Steve, I think just economic uncertainty as that lifts the further we go with things returning to normal, then we would look at future increases over time. I would like to see it get back to the prior levels, but we'll be patient with that, as we've always been fairly conservative with capital management issues.
[00:20:18] Ok, thank you. And then final question on the restaurant portfolio. Can you give us some more color on that segment as news articles about how many restaurants are expected to close? I don't know if you're seeing any close at this point, but maybe some color there. What are you seeing from a cash flow? Few of you, et cetera. Thanks.
[00:20:38] Hey, Steve, this is Sam of good morning. Yeah, I mean, it's the resilience of the of the industry is has been a pleasant surprise. We've seen it in prior downturns. But, you know, I think the where we take comfort again, there's the stress in the portfolio, no question. But, you know, we back 20 of the top 40 franchises that have an average of three hundred and fifty stores. These are big operators that have sound capital. And we're tracking, obviously, liquidity for those that had significant sales drops. And, you know, really what we're seeing is some really resilient operators. Again, we also take comfort that seventy four percent of ours is is quicksort. And those have been just really strong. Half of our portfolio is, you know, what we call the big fishable Wendy's, Burger King, Pizza Hut, KFC. And so those exposures have really, really shown. Well, what we've seen in recent months is, you know, obviously in April we saw a huge trough of same store sales across really the whole whole segment. Quicksort rebounded very quickly and the more full service concepts were down as much as six between 60 and 90 percent. And really in the past past month, we've seen those down now only 15 to about 30 percent. So, again, they've adjusted their cost models and that's allowed them to really our operators to be at cash flow break even or better.
[00:22:05] Terrific. Thanks for the call, appreciate it.
[00:22:11] The next question is from Jennifer Demba of Truth Security. Please go ahead.
[00:22:18] Thank you, good morning.
[00:22:21] Manager. Paul, question for you, if you were to look forward several quarters. What is the company's ideal mix in your mind when you look at energy or restaurant exposure from our national average loans, restaurants or other loans you might want to call out? Well, what would you like to see the portfolio look like eventually? Thanks.,
[00:22:52] Thanks, Jennifer. Where we would like to see the restaurant portfolio come down to around seven hundred and fifty million level. And we would like to see the mix of that portfolio continue to increase towards the QSR type of restaurants energy. I'm pretty happy with where we are and has been declining. I think that will continue to come down as as pay downs and boring basis contract that midstream. I'm very happy with the level of midstream activity. We're going to have some payoff. There are some companies that are being sold, but we, I think, have some additional opportunities. So hopefully we stay flat with midstream and then also service much smaller. It'll probably drift down a bit further. As you know, activity there is contracting a bit. So the CNR core portfolio is where we would like to have the most growth, and that's where most of our bankers are focused. We do have some room in our portfolio to have some growth there. We you know, it's a construction portfolio primarily, and I think there'll be some opportunities to do so many firms there with properties that we get construction loans on and developers where we have strong relationships. So we're a bit under allocated on commercial real estate and very pleased with our our credit results in that segment. So, I mean, not really big changes in the portfolio mix, but just sort of some pruning and trimming here and there.
[00:24:27] Right, and, you know, you mentioned you've got some more higher cost deposit pricing in the fourth quarter, having more basis points of deposit cost improvement. Could you see for kadence in the next couple of quarters?
[00:24:45] Yeah, you know, I think that, you know, as we look out into 2021 and see kind of where is our where is our bottom? I think that we can probably see, you know, lower, low to mid 20s for total deposit cost, low to mid 30s for interest bearing deposit costs. We'll get some of that in the fourth quarter, but it'll continue to trickle into the new year.
[00:25:15] Thank you.
[00:25:19] The next question is from Brad Millsap's of Piper Sandler. Please go ahead.
[00:25:25] Hey, good morning, guys. More, Brad. Pause, if you could maybe provide a little bit more color around loan growth, I think last quarter you commented that you wouldn't be surprised to see maybe five or 10 percent shrinkage over the back half of the year. It sounds like you still expect some shrinkage, but maybe you're a little bit more positive now than you were then. Just kind of want to think about that originated loan book, you know, relative to total loans. Is it kind of something you could see sort of running in place or, you know, kind of what's the magnitude of the decline that you expect?
[00:26:04] Yeah, Brad, I think that five to 10 percent comment was actually first quarter and I felt a whole lot better by the time second quarter rolled around as we didn't see as much drop as I might have anticipated. And so I'd say the trend for my expectations is as positive. You know, we still a great deal of uncertainty. I mean, we have a lot of borrowers who are are paying off debt or selling non-essential assets to reduce debt. Just, you know, covid risk off is a prevalent idea throughout the portfolio. But we are starting to see some some green shoots. And and so it's just I wish I had perfect visibility. I can give you a tight answer to your question. It's not that I don't want to answer it. It's just a hard question to answer. I'll give you this perspective. Take a step back and let us get another couple of quarters down the road. I mean, Cadence has had a long track record of good internal loan growth. We got a great team of bankers were out knocking on doors. We do a terrific job for clients. We're very responsive and our technology sells well. So eventually at some point and I think the not too distant future, we will be able to return to, you know, nice mid single digit loan growth just once. The inflection point is the harder sort of question to answer for me. But I kind of know your perspective.
[00:27:27] Thanks. Appreciate it, Brad. Thanks for the question is the same. And I would echo Paul's comment. I mean, the teams we have in place historically have seen some nice, nice growth that will turn. I think it's going to take a couple of quarters before we see that. We are seeing some nice volumes in senior committee, nice volumes out of our business banking, our community banking portfolios as well. And I do think the market is accepting lower leverage points than where we were just a 12 to 18 months ago. So I agree with Paul and obviously with the team that we have in place, the retention efforts that we have in place really optimistic about turning.
[00:28:06] Got it, that's helpful. And then maybe this is a follow up to that on the on the loans that you are seeing new or renewed, what what type of rates are you seeing on those loans? I guess the originated book, the yield was down maybe 16 basis points in that quarter. Do you feel like you're sort of, you know, kind of at a final reset there and that can kind of stabilize from here? Or do you think there's maybe more pressure to come on on those loan deals?
[00:28:31] Brad, this is Valerie, I'll take that question. Yeah, we do believe that we've got the biggest impact or actually the remaining impact of the labor declines in the third quarter on our portfolio. And actually, if you take a look at the new originations, it compares really well to the total portfolio. Our total portfolio, excluding the accretion and hedge was three seventy five. And actually in the third quarter we generated CNI loans averaging three ninety seven. About 50 percent of our originations were in CNI. The total new loans in the third quarter average three point seven one percent. So really. You know, based on that type of volume and that result, looking at at some pretty stable, low volume, it's just to say from the front line, I would agree with that.
[00:29:26] We also are seeing some stable pricing in serious formation where construction lenders will be funding. So we have a pretty good view of what the pricing looks like as well. So I would confirm what Valerie is saying.
[00:29:39] And we're increasingly able to get lot floors and that's that's great. Real solid, solid prop up for our loan yields.
[00:29:48] Great, thanks, guys, really appreciate all the color.
[00:29:53] The next question is from Ken Darby of Morgan Stanley. Please go ahead.
[00:29:57] Ok, thanks. I actually just want to stay on that topic if I heard what you said. Three seventy one for your new loan yields in 3Q. But normally we would generally consider higher loan yields with higher risk portfolios. And because I think the three seventy would probably be a lot higher than what your competitors are actually lending at. How are you able to get such a high loan yields on those those new loans?
[00:30:26] But Ken, this is Paul, you know, I think it's representative of the mix of the portfolio is Valerie elaborated to see and I was at three ninety seven. It's it's what we do. I don't think it's reflects a disproportionately high level of risk. I think it's mainstream for our portfolio.
[00:30:50] And I see that we're being selective on what we're doing. I mean, you can see that in our net and loan shrinkage is we're not taking every deal out there. There's there's a lot more activity than certainly what we're putting on our books. And so it is something that we're being very cognizant about, very cautious on. And I think you're seeing that come through it. And what we saw in the third quarter in our loan.
[00:31:12] You agree with that? I'm sorry. We're also seeing something lower leverage within within basically all industries.
[00:31:24] And just so I'm aware, like but the three ninety seven on Cianni, is that is that where the industry is at? I mean, is that sort of the average yield that all banks can get on CNN loans? Or is there something special about your portfolio specifically, maybe it's customer type or sheer geography? I have no idea. But as I was asking.
[00:31:44] Well, I think it depends on the mix of the portfolio. I mean, there are some banks that will accept much lower yields, bigger credits. I mean, it's it's sort of like, is that an average car? I mean, cars come in all different shapes, sizes and descriptions. But but I think for our portfolio, I think it's appropriate.
[00:32:07] All right. OK, great. Thank you very much.
[00:32:12] The next question is from Brad Daley of KBW. Please go ahead.
[00:32:17] Hey, it's pretty good morning, guys. Good morning.
[00:32:23] I wanted to follow up on the dividend increase, and it's great to it's great to see that. But I wonder, I mean, given your stock is still trading at 70 percent of tangible, I wonder if if you're going to give capital back to shareholders, it would be better spent and buybacks. So I wanted to get an update on how you guys were thinking about buybacks from here.
[00:32:47] That's, of course, always on the radar screen and a consideration that we will look at in future periods. Know, the first step for us was to increase the dividend. A future step would be to look at buybacks.
[00:33:04] One of the things that that I think is notable is the strength of our capital ratios and the excess capital that we have on our balance sheet today. And so at some point when there is less uncertainty in the future and things become a little more stable, we expect that we can be proactive on the capital management front. And that may mean buybacks. That may mean dividends. That may mean other opportunities. But we believe that we've got ourselves in a very nice position where things normalize.
[00:33:35] But it sounds like given the current backdrop and continued uncertainty, you're probably not going to be buying back stock in the near term.
[00:33:43] That's a fair statement, yes.
[00:33:48] All right, then, moving on to the margin, I know if you look at the margin, there's a ton of moving pieces with what you're doing with the Bond book and Liquidity and PPC. I mean, maybe if you look at spread income dollars, how do you expect that to trend from here? Do you think that you can keep spread income relatively stable with the 3Q level, or do you think there's some downside?
[00:34:14] You know, I think, you know, when you look at kind of a normalized excluding, obviously the PPC loans, we do feel very comfortable in our spread income and the ability to keep that stable. We do have, as we mentioned before, the deposit costs coming down a little bit. We believe that we've reached a pretty much stable level in our impact on our loan portfolio related to life. Or, you know, I say the only caveat there is we do tend to see municipal deposits and the like fund up in the fourth quarter. That could result in some excess cash balances. That could weigh on the margin slightly. But but overall, we feel we feel very good about our net interest margin. So we just as we have in the past.
[00:35:00] And then finally, for me, you know, so classified ones are eight percent of total, you guys have a lot of capital, you have a lot of reserves. I don't know. Paul, I've asked you about the idea of selling assets in the past and you've shied away from it. Is that still the right way to think about cadences, interest in any sort of sale? That's really not something that is very likely for cadence, correct?
[00:35:29] Where you believe that the portfolios that we have, we will manage ourselves. Never say never, but that's not something we're actively pursuing.
[00:35:39] Ok, great, thanks. Yes. Thank you.
[00:35:44] Again, if you have a question, please, press star, then one, the next question comes from Michael Rose of Raymond James. Please go ahead.
[00:35:52] Hey, good morning, everyone. Most of my questions have been asked and answered, but I did want to get a sense from you guys, how do you think about operating efficiency from here, you know, on a core basis. So, you know, a little under 50 percent, you know, as you face some some revenue headwinds, you know, as mortgage subsides at some point, you know, is there ways and efforts on going to the kind of level set, you know, expenses? And how should we think about kind of the ability to maintain, you know, around a 50 percent efficiency ratio as you move through what is going to be a challenging revenue year next year? Thanks.
[00:36:33] Yeah, Michael. So I'll comment and Valerie may want to add her perspective. So we had a long track record of really demonstrating the nice operating leverage in the model. We saw good double digit or high single digit revenue growth for many years and low single digit expense growth and the efficiency ratio improved from low 60s to the low 50s or forty nine point five percent. So I look forward to resuming that that leverage, seeing that the whole covid pause that is put on that progress, how long will that pause be before we can get back to that? This is kind of like the loan inflection point question. Really hard to answer with certainty. But but that will be our intentions and our objective, as long term is to see operating revenue grow faster than expenses and see some improvement there. I would think probably mid next year before we'll be in a position to to demonstrate that on a quarterly basis, but to be determined to.
[00:37:39] So I would agree with everything, the politics of our country and our strength really helps us continue to maintain a very competitive low.
[00:37:48] I understood it, maybe just one more question on credit, I assume this quarter's results include the impact of the SNEEK exam. Were there any forced down grades? And, you know, there was some migration and energy and, you know, another bank, yours in Texas competitor noted that, you know, energy is kind of still the portfolio they're concerned about the most. I know you're constructor's, a little bit different, but just any updated thoughts there would be helpful. Thanks.
[00:38:14] Yes, you're right, I mean, the the exam results are all baked into the results for the quarter and nothing material out of that, pleased overall with our grading system and and and all the third parties that look at it every quarter.
[00:38:33] Ok, thanks for taking my questions.
[00:38:36] Thanks, Michael.
[00:38:39] The next question is from Matt O'Neill Stephens.
[00:38:41] Please go ahead. I just went back on that last question from Michael on the energy portfolio in the prepared remarks. It sounds like there's some potential for upgrades in that portfolio. Just want to see if you can expand on that potential and let us know kind of what that depends upon. Thanks.
[00:39:01] Yeah, Matt, there's just a couple of energy nonperformance that are trending positively that have the potential for a great and future periods to be determined.
[00:39:15] Ok, and then switching gears on the hospitality portfolio, it sounds like the reserves there, or I think you disclosed 42 million dollars or 14 percent of the balance. I think the allowance ratio is much, much higher than other portfolios that are stress, whether it's energy or restaurants. So is it fair for us to assume that the hospitality portfolio could have the largest severity of losses within the Cadence book, given how much larger its reserve ratio is?
[00:39:47] Exactly, yes.
[00:39:50] Ok, and just just lastly, Valerie, you mentioned the security's balance move higher in the third quarter and it's now 17 percent earning assets. Do you think this is going to continue to grind higher over the next few quarters as loan balances continue to decline?
[00:40:09] Yeah, and you hit the nail on the head, there really is the dynamic of loan balances, cash balances, etc., It could go a little higher. I don't anticipate it getting above 20 percent of earning assets in this rate environment. We're going to pretty much cap it at that level.
[00:40:27] Ok, great. Thank you, guys.
[00:40:30] Thank you.
[00:40:33] This concludes our question and answer session, I would like to turn the conference back over to Paul Murphy for closing remarks.
[00:40:40] So great, I'll close this just with a couple of quick thoughts, just really proud of our great team of bankers working hard through this, just a challenge very focused on doing a good job for clients. A key reminder on our board and management team are very focused on creating value for shareholders. And I'm confident that we've got the team in place to do exactly that. With that, we stand adjourned.
[00:41:05] The conference has now concluded. Thank you for attending today's presentation, you may now disconnect.