Q3 2020 Cadence Bancorp Earnings Call
Welcome to the cadence Bank Corporation third quarter 2020 earnings call.
Comments are subject to the forward looking statements disclaimer, which can be found in the press release and on page two.
Financial results presentation.
Documents can be located in the Investor Relations section.
Kenya's Bancorporation dotcom, 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.
Well good morning, all thank you for joining us for coal I'm, joining me today in person or Bauer Sam.
David I'm going to begin our call with a summary of our results were 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 it over to Valerie for details on our financials.
Pretty pleased that cadence had another strong quarter as our P.P. on or was $95 million up slightly from the prior quarter.
Resulted in a really solid pretax pre provision ROI up 2.6%.
These results were driven by our Nam shrink up three basis points linked quarter. Excluding PPP highlight here is 14 basis points linked quarter drop in deposit costs were down about a 100 basis points from the prior year.
Many of you will recall previously we had sort of been a high cost of deposits rollup to appear and now we are very much in line.
We continue to execute on expense management plan and our adjusted efficiency ratio was 49.5%.
Touching on credit trends in the quarter were encouraged by the significant reduction in deferrals.
We're out the quarter and as of October 16th we stand at about 1.5% of loans, both nonperforming and that charge offs declined linked quarter criticized and classified loans did increase from last quarter, but by materially lower amount than in the second quarter. We completed our third party loan review of the CRM.
And second our portfolios I'm pleased to report that the review did not result in any downgrades or further or changes to our grading process, but quite.
But quite the contrary I think that validates 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 [noise].
Turning to loan growth as has been reported widely around the industry soft there were down about 200 million linked quarter of course part of Das is intentional. That's we're proactively just risk a de 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 86%.
We're seeing some green shoots up demand across our borrowers and in various markets leave the bank will be very well positioned to grow when you have a broader economic picture becomes more favorable just to give you a little highlight on color from our markets over 100 million, a new commitments and Dallas and Atlanta markets. This last quarter, roughly 75 million floor.
So deal flow is broad based and man from industries, ranging from semiconductors to highway infrastructure over.
Over the quarter, we won the banking business for one up Texas largest.
Municipalities, a county adjacent to Harris County.
Our SP a business. We're just notified moved up six spots. This last year to be the 43rd largest in the country something we're proud of our wealth management teams are active with new business coming in it at higher than normal levels record levels enter our mortgage team is doing a great job well ahead of plan only profitable.
Early and Doug 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 mentioned as our plans to shift back to the to the office of our roughly 1700 50 employees, we had a little over a thousand working from home and we're pleased to launch phase one were turned to the office beginning on November the nine.
In the third quarter, all four capital metrics improve 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 in when we believe the balance sheet is in good shape for additional capital Rick.
Current as economic uncertainty continues to live so.
So in summary, I feel good there are a lot of good things happening in the core earnings fundamentals and capital position continues to strengthen cadence.
Let me hit a few more things on credit before turn it over to Valerie.
As I mentioned were pleased to see some improvement.
We are all spending a lot of time and talent. This is a major strategic focus I'm, sorry spend a lot of time on credit. It's a major strategic focus for all of US net charge offs of 20 million for the quarter is down linked quarter as the lowest level in the last five quarters. The charge off composition. This quarter is less broad based upon.
Previously now 75% of the charge offs this quarter in the restaurant category.
For those who are interested I call your attention to page 27 in the slide deck and let's review the three most stressed segments of the portfolio.
First is hospitality 271 million, we've got 5 million and non performers there we have a $42 million or roughly 15%. 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 linked quarter increase in our loan.
A loss reserve so similar to other books, we're working hard with borrowers to de risk the portfolio and believe we believe we've taken conservative actions with our reserves here.
I would point out that the portfolio of Salto stressed.
A positive note is that the deferral mix at June Thirtyth was $108 million in deferrals down to $32 million at 10 16.
Second is the restaurant portfolio.
Pete this portfolio declined by 56 million linked quarter, excluding PPP loans.
Nonperformers are 59 million in the reserve is 62 million or 6.5% of the portfolio.
This profile continues to improve this book is now down to 950 million from a peak of 1.25 billion. The portfolio is 70% QSR, which is showing strong performance.
Casual family dining now stands at $178 million or 1.3% of loans. The most stressed part of that portfolio.
Turning to our 1.4 billion energy portfolio, we had a million nine and charge offs. This quarter reserves today are 34 million Nonperformers 49 million. We've got a couple of credits there that are on the watch list for upgrade upgrade but that will take some time.
As many of you recall energy portfolio is about 64% midstream, we still like the dynamics in that part of the of the business and our DMP and service portfolios have declined and benefited a tad from a little bit of improvement in prices low gas prices here of like with that I'll turn the call.
Now over to Valerie.
Great. Thank you Paul as Paul mentioned, our adjusted pre tax pre provision net revenue continues to be strong and stable at 95 million, reflecting strength in our revenue and expense management.
PPNR robust capital position and allowance for credit losses at 2.86% continued to provide strength in this uncertain environment.
Third quarter adjusted net income was 51.4 million or 40 cents per share up 108 million from the prior quarters net loss due to a significant reduction in loan provisions.
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 PPP loans increased this quarter to 3.11% at September 30 up from 2.93% last quarter end.
Loan balances declined in the quarter by 234 million to 13.5 billion of net pay downs continue to exceed loan originations and fundings of 875 million well be.
Well, 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 do some of our excess liquidity to add to our securities book, increasing securities by 427 million 3.1 billion now 17% of earning assets. We also.
We also work to strategically lower certain higher cost deposits, resulting in total deposits declining $283 million to 15.8 billion.
The same time meaningfully lowering total deposit cost 30% during the third quarter.
Largely due to this funding costs decline, excluding the impact of the PPD program net interest margin actually improved by three basis points to 3.64% on a comparable 3.61% in it.
And then linked quarter, while core loan yields continued to decline in the third quarter due largely to residual impacts from that second quarter LIBOR decline. These were my.
These were more than offset by the significantly lower deposit costs that accordingly color in Canada, and the reinvestment of the cash into securities during the quarter.
All in including the PPD program NIM as reported was 3.49% for the third quarter down only two basis points from 3.51% last quarter.
Our total funding costs declined by 15 basis points to 41 basis points. This quarter, a 27% decline interest bearing deposit costs declined by 19 basis points 47 basis points this quarter and non interest bearing deposits were 32% of total.
And as mentioned before total deposit costs declined by 14 basis points to 32 in the quarter.
As you know we've been aggressively working our funding costs during the year and are pleased with the positive impact that has had an idea. We have remaining another 775 million in higher cost time deposit maturities coming in.
Having in the last quarter of this year. So we do expect deposit cost to continue to come down a bit by the end of the year.
Net interest income was relatively stable at $154 million down just slightly from $154.7 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 that's a stable net interest margin.
TPP loan interest income was 6.2 million in the third quarter up from 4 million during the second quarter total net deferred fees associated with these loans was 13 and a half million at September 30, which is amortized over the remaining the remainder of that to your life that will be brought forward into earnings when these loans are forgiven.
We're currently anticipating the majority of these loans to be forgiven during the first quarter of 2020 wells.
Non interest income rebounded nicely during this quarter to 32.6 million up 2.6 million or 9% from the last quarter.
The third quarter increase reflected an increase of 1 million seven in FDIC income as this group generated more traditional SPX lending this quarter versus that TPP focus last quarter.
We realized strong mortgage banking revenue at 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 rate striving more fees during the quarter.
Thats, an advisory Trust and limited partnership earnings also trying to positively during the quarter.
Our adjusted efficiency ratio continue to reflect our long standing expense management culture, having it at 49.5% for the third quarter.
Adjusted expenses increased $5.1 million in the quarter to $92.5 million due largely to compensation costs, including 2.6 million and lower deferred salaries.
As a result of the second quarter PPP loan originations and a 3.2 million increase instead of expenses as a result of the fruit corporate performance in the quarter.
These were partially offset by a reduction in FDIC insurance by knowing for due to additional second quarter accruals, reflecting the impact of lower earnings on the OSAT.
Turning to capital as Paul mentioned, all of our capital ratios increased this quarter over what we're already strong capital levels given.
Given the balance sheet mix shifts our risk weighted assets declined in the quarter and at September 30, our common equity tier one and tier one ratios for up to 12.1% and total capital was up to 14.8%.
Our leverage ratio ended the quarter at 9.9% and our tangible common equity to tangible assets increased further to 10.6%.
These robust capital level significance of our allowance for loan losses, our strong balance sheet liquidity are stable net interest margin and meaningful pre tax pre 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 began 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 2021 and beyond with that.
With that let me turn it back to the operator for your questions.
We will now begin the question and answer session.
Chuck a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw from the question queue. Please press Star then too.
Our first question is from Jon Arfstrom of RBC capital markets. Please go ahead.
Thanks, Good morning.
Mark John Thanks for joining us thanks, nice job couple of questions here just on credit.
Obviously, much better from a provision point of view, but still sitting at over 3% reserves, which maybe signals from 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 this just something where the provisions stays low unless things change materially.
Yes, John I, you know really good questions I mean.
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.
It depends on what happens in the future as to whether you know provision levels will stay elevated or resumed 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 were up.
The environment that we're operating in.
Okay, Let me.
Let me ask it another way Paul criticized and classified numbers, they moved around a little bit, but they're they're up a bit.
Just curious from a big picture do you are you been 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.
I think we've been through it enough to understand I remain aware that negative surprises or possible in the future.
You know, we're just in an environment, where I'd be surprised if we don't get some bad news in the fourth quarter that we don't have today.
It's just sort of that type a 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 okay. And then just one more remind us of the third party review the expenses that yes.
And you said you didn't have any differences, but just curious on the extent of it.
Right. So yes. This quarter, we focused on commercial real estate and see and I. It was a biased sample in other words talk part with all the partially graded loans or anything that had been downgraded and just a more of a review to be sure that the downgrades were complete and adequate and the risk in the in the portfolio was.
As being properly.
Identified so it was a healthy process and a good outcome.
Okay. Thanks, I'll step back in the queue. Thank you.
The next question is from Steven Alexopoulos of JP Morgan. Please go ahead.
Hey, good morning, everybody.
Good morning sales.
To start on pre tax pre provision income, which has been fairly stable. The past few quarters do you expect that to remain flattish or how you're thinking about potentially growing that off these levels.
Yes, hi, Steve Thanks for thanks for joining US yeah, we've been really pleased with how our PPNR has remained.
Stable, it's something that I think it's just teaching the businesses that we have and.
We've talked about for a number of periods as far as being kind of that framework that will have watch credit stabilize is being able to maintain that in a relative basis.
We do sales and we do believe that there is relative stability as we go forward I do think that as we get into.
Get into next year, there could be a little bit of pressure on it but it really in the.
And small single digit percentages.
So a little bit of pressure, but overall, we feel very good about our our core net interest margin and the stability there right now.
Right now we are seeing a little bit of decline in our earning assets, but again.
Again over the next couple of quarters, you know once we look beyond that I anticipate that continue to grow.
Our fee income is doing really well and in this environment I expect that to continue as well and of course, we're always focused on our expenses. So all of that really supports is maintaining a very strong people in our metrics.
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Okay.
That's helpful and.
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 will be the smaller incremental steps as you know eventually restore.
Yes, Steve I think just economic uncertainty us that lifts. The further we go where things are returning to normal then we would look at future increases.
Yes 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.
Okay.
Thank you and then final question on the restaurant portfolio could you give 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.
Hey, Steve This is Sam good morning, all.
Yeah, I mean, it's the resilience of the of the industry is its been a pleasant surprise, we've seen it in prior downturns, but you know I think that we're where we take comfort again, there's there's stress in the portfolio. No question, but you know we banked 20 of the top 40 franchisees that have an average of 350 stores. These are big operators that have sound capital.
And you know we were tracking obviously liquidity for those that had significant sales drops and really what we're seeing is some up really resilient operations again, we also take comfort that 74% of ours is quick serve and those have been just really strong half of our portfolio as you know too.
We call that the other big thing.
Wendys Burger King Pizza hut, KFC and so those exposures are really really show what we've seen in recent months is obviously in April we saw huge trough of same store sales across really the whole whole segment quick serve rebounded very quickly and the more full service concepts.
We're down as much as six between 60 and 90%.
And really in the past past month, we've seen those down now only 15 took about 30%. So again, they've adjusted their cost models and that's allowed them to do really well many of our operators to.
Many of our operators to be cash flow breakeven or better.
Terrific. Thanks for all the color I appreciate it.
The next question is from Jennifer Demba of true Securities. Please go ahead.
Thank you good morning.
Good morning.
Paul question for you if you were to look for several quarters.
Well the company inside the overall mix in your mind when you look at.
Energy owns a restaurant exposure.
Shared national credits leveraged loans restaurants, or other loans, you might want to call out well what would you like to see the Teva.
The cadence loan portfolio look like eventually thanks.
Sure. Thanks, Jennifer.
Where we would like to see the restaurant portfolio come down to around $750 million level, and we would like to see the mix of that portfolio continue to increase towards the QSR.
Type of.
Type of restaurants.
Energy I'm pretty happy with where we are in P. has been declining I think that will continue to come down as as paydowns and borrowing bases contract, but midstream and I'm very happy with the level of midstream activity, we're going to have some payoffs. There are some companies that are will be be sold but.
But we don't think have some additional opportunities. So hopefully we stay flat with midstream and then all full service much smaller it will probably drift down a bit further as act.
Activity there is contracting a bit so the the sea in our core portfolio is where we would like to have the most growth and thats, where most of our bankers are focused we do have some room in our CRT portfolio to have some growth. There. We as you know it's a construction portfolio, primarily and I think there'll be some opportunities.
To do so many perms there with properties that we do 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 credit results in that segment. So I mean, not really big changes in the portfolio mix, but just sort of some pruning and trimming.
Hi, there.
Right and.
And you know are you mentioned, you've got some more higher cost deposits repricing in the fourth quarter how many.
How many more basis points of our deposit cost improvement could you see for cadence in the next couple of quarters.
[noise].
Thanks for that.
As we look out into 20 to 21 and see kind of where is our whereas our bottom line.
I think that we could probably see.
Lower low to mid Twentys for total deposit costs low to mid thirtys or interest bearing deposit cost.
Well get some of that in the fourth quarter, but it will continue to.
We will continue to trickle into yes.
Thank you.
The next question is from Brad Milsaps of Piper Sandler. Please go ahead.
Hey, good morning, guys.
More Brad.
Paul I was wondering if you could maybe provide a little bit more color around loan growth I think.
I think last quarter, you commented that you wouldn't be surprised to see maybe five or 10% shrinkage over the back half the year it sounds like you.
You still expect some shrinkage, but maybe a little bit more positive now than you were then just.
Just kind of want to think about that originated loan book.
Relative to total loans that you are kind of something you could see sort of running in place or kind of whats the magnitude of the of the decline that you expect.
Yes, Brad I think that 5% to 10% comment was actually first quarter and I felt a whole lot better by the time second quarter rolled around as we didnt see as much drop as I might have dissipated and and so I'd say my so the trend for my expectations as positive.
Still a great deal of uncertainty I mean, we have lot of borrowers who are are paying off debt or selling non essential assets to reduce that just.
Cobot risk off because its a prevalent idea throughout the portfolio.
But we are starting to see some some green shoots and and so it's just well I wish I had perfect visibility I could give you a tight to answer to your question. It's not that I don't want to answer it as 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've 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 sales will so eventually or at some point and I think the not too distant.
In future, we will be able to return to you know.
Nice mid single digit loan growth just Wednesday inflection point is the harder sort of question to answer for me, but I kind of know your perspective baseball appreciated Brad. Thanks for the question is sake, and I would echo Paul's comment I mean, the teams we have in place historically have seen some nice nice growth that will.
And I think it's going to take a couple of quarters, where we see that we are seeing some nice volumes in senior loan 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 say 12 to 18 months ago. So I agree with Paul and.
Obviously with the team that we have in place the retention efforts. So we haven't placed on them fairly.
Fairly optimistic about a turn in the future.
Got it no. That's that's helpful. And then maybe just as a follow up to that on that on the loans that you are seeing.
New or renewed what kind of what type of rates are you seeing on those loans I guess the originated book yield was down maybe 16 basis points linked quarter do you feel like you are sort of.
I kind of at a final reset there and that can kind of stabilize from here or do you.
Do you think there's maybe more pressure to come on on those loans yields.
Hey, Brad this is Valerie I'll take that question, yes, we do believe that we've got the biggest impact or actually the remaining impact like were declines in the third quarter on our portfolio.
Actually if you take a look at the new originations that compares really well to the total portfolio, our total portfolio, excluding the accretion hedge.
Well 375.
And actually in the third quarter, we generated.
Hi loans, averaging 397 about 50% of our originations were in C. and I.
Total new loans in the third quarter.
Average, 3.71% so really.
You know based on that type of volume and that result, looking at at some pretty stable loan volumes and revenue.
It's just so is that kind of the frontline I would agree with that we also are seeing some steel pricing in serious or mentioned, where construction lenders. So those will be funding we have a pretty good view into what does that pricing looks like as well so I would confirm with Valerie say Mary.
We are increasingly able to get LIBOR floors, and that's that's great quite real solid solid crop up for our loan yields.
Great. Thanks, guys I appreciate all the color.
The next question is from Ken Zerbe of Morgan Stanley. Please go ahead.
Okay. Thanks.
Valerie I should just want to stay on that topic. If I heard right. You said 371 for your new loan yields in Threeq, but normally we would generally consider higher loan yields with higher risk portfolios and because I think the 371 would probably be a lot higher than what your competitors you're actually lending at.
How are you able to get such a high loan yields on those those new loans.
Ken This is Paul I.
You know I think its a representative of the mix of the portfolio is Valerie elaborated to see an EIS.
397.
Which is what we do I don't think it's a reflects a disproportionately high level of risk I think it's.
Mainstream for our portfolio.
And I said it were being selective on what we're doing I mean, you can see that in our net loan shrinkage is we're not taking every deal that 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 and what we saw in the third quarter and our loan yields.
Got it that's so there's also.
So we're also seeing accepting lower leverage within within basically all industries.
God forbid bid and just so I am aware like but the 397 on Sienna is that is that where the industry is that I mean, as I sort of the average yield that all banks can get on C.N.I. loans.
Or is there something special about your portfolio specifically.
Hey, maybe just customer type or is there a geography I have no idea, but that's what I was asking.
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 sort of like is that an average car I mean cars are coming all different shapes sizes and description, but but I think for our portfolio I think it's appropriate.
Appropriate.
All right Okay, great. Thank you very much.
The next question is from Brad Gailey of KBW. Please go ahead.
Yeah, Hey, it's Brady good morning, guys.
Good morning.
Well I wanted to follow up on the dividend increase that's great. It's great to see that but I wonder given your stock is still trading that 70% of tangible I wonder if if you're going to tap.
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.
Buybacks from here.
Sure that's of course, all waste on the radar screen and I can.
Consideration that we will look at in future periods. You know the first step for US was to increase the dividend at a future step would be to look at buybacks.
One of the things that I think is notable.
Notable is the strength of our capital ratios and the excess capital that we have on our balance sheet today.
So at some point when there is less certainty 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 need other opportunities, but we believe that we've got ourselves in a very nice position when things normalize.
Uh huh.
Sounds like given the current backdrop and continued uncertainty you're probably not going to be buying back stock in the near term.
That's a fair statement yes.
All right and then moving on to the margin I know if you look at them.
And then there's a ton of moving pieces with.
What you're doing with the bond book and liquidity in PBC and then maybe if you looked at spread income dollars. How do you expect that to trend from here do you think that you can keep a spread and calm relatively stable with the three Q level or do you think there are some downside.
Yeah, I think you know.
You know when you look at kind of a normalized excluding obviously the PPC loan.
We just don't theory comfortable in our spread.
Income and the ability to keep that stable Oh, we do have as we've mentioned before the deposit cost coming down a little bit. We believed that we reached a pretty much stable level in our.
Passed on our loan portfolio related to life for you I think the only caveat. There is we do tend to see municipal deposits and alike fund up in the fourth quarter results, some excess cash balances that could weigh on the margin.
Likely but.
But overall, we feel we feel very good about our net interest margin and going forward just as we have now.
All right and then finally for me.
So classified loans were 8% of total.
You guys have a lot of capital you have a lot of reserves I know Paul I've asked you about the idea of bulk selling assets on the pass on you.
Shied away from it is that still the right way to think about cadences interest in any sort of bulk sales that's really not something the is very likely pirquitas.
Correct, where you know believed that the portfolios that we have we will manage ourselves never say never but that's not something that we're actively pursuing.
Okay, great. Thanks, guys.
Thank you.
Okay do you have a question. Please press Star then one the next question comes from Michael Rose of Raymond James. Please go ahead.
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.
Operating efficiency from here, you know on a core basis, though.
Little under 50%.
As you face some some revenue headwinds it was mortgage subsides at some point.
Is there ways and efforts ongoing so it's a kind of level set you know expenses and how should we think about kind of the ability to maintain.
Maintain around 50% efficiency ratio as you move through a well is going to be a challenging revenue year next year. Thanks.
Yeah, Michael So I'll comment Valerie might 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 efficiency ratio improved from low sixtys.
The low fiftys or 49.5%.
So I look forward to.
Resuming bat that leverage saying that the whole co bid pause that is put on that progress.
How long will that pause to 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 objectives long term is to see a operating revenue grow faster than expenses and to 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 so.
Yes, I agree with everything to profit.
Our peak in our strength really helped us continue.
Continue to make that a very competitive low.
Yep understood and maybe just one more question on credit I assume this quarters results include the impact of the Snick exam were there any force downgrades and you know there was some migration in energy had another back yours in Texas, a competitor noted that energy is kind of still the portfolio, they're concerned about the most I know.
Your cost structure is a little bit different but just any updated thoughts there would be helpful. Thanks.
Yes, you're right I mean, the the exam results were all baked into the results for the quarter and nothing material I shook out of that I'm pleased overall with our grading system and and and all the third party. So look at it every each quarter.
Okay. Thanks for taking my questions.
Thanks, Michael.
The next question is from Matt Olney of Stephens. Please go ahead.
Hey did just circling back on that last question from Michael on the energy portfolio and their prepared remarks, it sounds like there's some potential for upgrades and that portfolio. Just wanted to see if you can expand on that potential and let us know kind of what that's dependent upon thanks.
Yeah, Matt there just a couple of the energy Nonperformers that are trending positively, but have the potential for upgrade in future periods to be determined.
[music].
Okay.
And then switching gears on the hospitality portfolio. It sounds like the reserves. There are I think you disclosed $42 million or.
14% at the balance.
Think the allowance ratio is much much higher than other portfolios that are stressed whether its 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, but given how much larger its reserve ratio is.
Exactly yes.
Okay, and just just lastly, Valerie you mentioned the security balances move higher in the third quarter and is now 17% of running assets.
Do you think this is going to continue to grind higher over the next few quarters as.
Loan balances continue to decline.
[music].
Yeah, and you hit the nail on the head there. It really is the dynamic of loan balances cash balances et cetera.
It could go a little higher I don't anticipate it getting about 20% of earning assets in this rate environment, we're going to have pretty much kept at that level.
Okay, great. Thank you guys.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Paul Murphy for closing remarks.
So great I'll close this was just with a couple of quick thoughts just really proud of our great team of bankers working hard through this just cobot challenge I'm very focused on doing a good job for clients.
Keep in mind, our board 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.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.