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Cadence Bancorporation (NYSE:CADE)
Q3 2019 Earnings Call
Oct 23, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Cadence Bancorporation Third Quarter 2019 Earnings Conference Call. [Operator Instructions]

The comments are subject to the forward-looking statement disclaimer, which can be found on 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

[Operator Instructions].

I would now like to turn the conference over to Paul Murphy, Chairman and CEO. Please go ahead.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Well. Good morning and thank you all for joining our Third Quarter 2019 Earnings Conference Call. With me today on the call today are Valerie, Sam, Hank and David. As we reported in our release, on an adjusted basis we earned $44 million or $0.34 a share, this is 10.5 return on tangible common equity right at 1% return on assets, and our efficiency ratio improved 200 basis points linked quarter to 48.1%. Before I discuss the quarter, I'd like to first take a moment and thank our investors and analysts for the candid feedback we received since our last quarterly call, internal management team and Board of Directors are listening very carefully, and I want you to know that you were heard. I expect you'll see a number of your suggestions incorporated into our communications going forward.

This quarter for example, we've included some additional disclosure in our earnings release and slides on credit migration. And you'll hear more color on the makeup of our Charles will also provide some context about how we think about managing credit over time. And most importantly, how we ultimately generate returns for shareholders. I'd like to emphasize the point that I have strong conviction we have strong conviction in our strategy. By no means are we satisfied with recent results, but we're remain competent on our team and our ability to generate attractive returns. I'd also like to ensure investors that we are aligned with them.

To illustrate this conviction and alignment, I think it's important to point out that our Board and senior management team collectively own approximately 4.4 million shares or $75-plus million worth of Cadence stock. In 2019, members of our Board and executive management team have acquired over 6 million shares of common stock, additionally in the third quarter, we completed repurchase of roughly $10 million worth of shares, which was part of our previously announced share repurchase authorization. So simply put, we are investing alongside you, and we believe Cadence is an attractive investment.

Now turning to our third quarter results as many of you have seen in our press release, we experienced another quarter of elevated charge-offs, and we've taken provisions higher as a result of some pressure we're seeing in certain pockets of our portfolio. I think it's significant to note that the predominance of our elevated credit calls stand from a few loans that hit us really hard opposed to a broad-based deterioration. In the third quarter, charge-offs totaled $31 million, and provision was $44 million. Of the $31 million in charge-offs in the quarter, $15 million came from one non-SNC C&I credit.

Of the $50 million charge-offs year-to-date, $20 million was from the same C&I non-SNC loan. This credit resulted in a very high severity of loss driven by a complex set of reasons, which we'll talk more about in a moment. I'd like to reiterate my comments from last quarter, which is that we're not seeing a weakening economy. That said, I would like to provide some detail about what we see on the ground in sectors where there has been some negative credit migration. The good place to start for this discussion is with the disclosure that I noted earlier. As you can see in our press release and earnings deck, we have had an uptick in criticized and classifieds assets.

This drove approximately half of our loan loss provision for the third quarter. These increases were primarily from General C&I and Energy. Specifically our classified assets rose linked quarter, but are in line with prior periods, criticized assets also rose and are also in line. The increase in special maintenance is partially offset by a decrease in doubtful credits. Of course, I ask myself that these increases suggest that the recession is coming, or is this more of a return to a normal level of criticized and classified loans typical of our portfolio like ours. At this point, I think it's the latter.

And of course, I'll continue to study this and report back to you and monitor further in the future, but for now, let's talk about the pockets in our portfolio where we are experiencing some pressure. First, let's discuss our restaurant business, which stood at $1.050 billion outstanding, 8% of loans at quarter end. By the way, this is down from a peak 12% of loans several quarters ago. Within the restaurant business, the underlying consumer demand seems to be pretty good, I wouldn't say strong, but solid.

Now of course, it generally be our major concern for the sector, where we entered recessionary environment. So if it's not the consumer than what's pressuring our borrowers? It's really 3 factors: oversupply, wage inflation and delivery. So first we would note that casual dining is clearly the most at risk of this portfolio, and we're pleased to report that's only about 14% of our book. 75% of the portfolio is quick service restaurants, QSR and fast casual, which historically has been more resilient over time. Second, as we noted on the last call, we have slowed our originations in restaurant overall, and we're monitoring and keeping a very close eye on all the dynamics impacting each of our borrowers. We raised the bar on new credits and we're closely monitoring existing relationships.

On a positive note, we are seeing several operators have effective cost reduction strategies that have been implemented and are improving results, but in summary, the restaurant portfolio risk remains elevated. We had one restaurant SNC charge-off of $4.4 million in the third quarter. We have one credit that was upgraded to pass. Other nonperformers' progress is mix. Couple moving toward upgrade. Others are in various stages of restructuring to improve operating performance while others are considering a sale of all parts of their business. I think it's going to take 6 to 24 months for the $52 million classified credit portfolio to be resolved.

Additionally, refresh the memory, we have $58 million in special mention credits that we're monitoring closely. Our restaurant team has been through stress periods in the past, and they are really good bankers. However, I think it's fair to say that the stress this time might be a bit more challenging. I know the team is working very hard to collect every loans, and resolutions are progressing. I would not be surprised to see other credits added to the NPA list in the future, but that's not necessarily a given. Now let me turn our attention to our energy loan category. The majority of our exposure there has been midstream, which has performed well through recent energy downturns and not been as susceptible to impact by energy prices. This stream loans are $946 million or 63% of our portfolio.

We have seen an increase in criticized and classified loans in Energy, and let me give you a little bit more color especially on the E&P portfolio. In 2014, we felt that terms and conditions were beyond what we were comfortable with, and we elected to change and tighten our underwriting parameters. Our E&P portfolio went from $590 million down to $275 million over the next 3 years. We exited numerous credits, we restructured others to meet our post-2014 underwriting standards. The value that E&P portfolio is roughly $380 million outstanding. We have one energy charge-off in the quarter of $5.3 million. Lifetime today, all of our E&P charge-offs had been pre-2014 originations.

We have remaining 3 pre-2014 credits on the books today that are slided to exit and they total $29 million. While the post-2014 energy portfolio has done very well so far, I would say that energy capital markets are very constrained. I'm comfortable with our book today, but we're not relaxed. With respect to any new energy loans, we are highly cautious, it's a very high bar, we must clear for any new -- excuse me, any new energy originations. Our intent is to keep the portfolio flat or see it reduced over the near term. Next, let's talk about the migration across the General C&I categories. As I mentioned on numerous occasions in the past, our view of our leveraged loan portfolio without moderators as one of the higher risk categories in the bank.

This portfolio peaked at $840 million back in June and has declined at the end of September to $782 million. Debt and moderation is an acceptable part of the business plan, and we believe this portfolio has been well underwritten, and we continue to be cautious with respect to new loans there. However, we are looking to reduce risk on this portfolio, and what I mean by that is that we are actively managing anything that is at the high end of the leveraged spectrum. We're looking to see higher leveraged companies come down to a more moderate risk profile. We have 63 credits and 109 facilities in this portfolio. The credits are diversified by industry and by geography.

Refreshing quickly on our private bank consumer mortgage portfolio, $2.6 billion outstanding continues to report pristine credit results plus charge-offs originated on these residential loans over the last 5 years has been less than $0.5 million. Cadence legacy $1.2 billion, CRE portfolio continues to report exemplary credit statistics, no charge-offs, no nonperformers, no substandard -- excuse me, no substandard credits in the last 5 years. Legacy Cadence CRE portfolio numbers are very good also. This portfolio has performed better than expected when we did our due diligence 18 months ago. Our healthcare and technology portfolios are generally stable with modest migrations, risk profile of these 2 businesses is pretty much in line with expectations.

So in summary, leveraged lending and restaurants are the portfolios we're working most actively. With respect to energy, we are highly cautious. The rest of the bank is business as usual and steady in the boat. Going back to the one large C&I charge-off, and what was the reason the loss severity was so high as the company experienced some materially negative operating results caused by an expansion strategy that quite simply failed. The company had liquidity pressure that required a costly restructuring process that ultimately ended with the highly distressed sale. The remaining exposure on this credit was paid off yesterday. There are several unique elements to this credit that are not found in other existing Cadence loans today. In other words, we don't have a portfolio of some other credits we have to work through.

To be fair, we are seeing sector specific factors that are pressuring credit in more general way and that led to some of the provisioning that you saw in the quarter, but I really want to distinguish that the potential loss content from these sector -- specific factors are going to look a lot less severe than what we experienced in the outlier scenario. We're not, for this one, outsized credits impacting our last 2 quarters, our charge-offs and provision numbers would be up from prior years, but would be in a normal range. But since we are in light stage resolution of this group of credits previously mentioned, we are confident that our reserves for these credits reflect the risk accurately. As you expect, last two quarters' credit results have resulted in a reduction in the management bonus pool approval.

Last topic I'd like to discuss on credit before moving on is about returns. And I say that's really not in defense of the loans that are not performed to our underwriting standards, but it's fair to say that our focus is on our ultimate performance and returns on the entire loan portfolio especially for the risk that we are taking. But for example, our restaurant portfolio we seen an uptick in criticized assets layer, they've originated about $2.5 billion in loans in the last 8 years they've been with us. Their lifetime to-date charge-offs are $6 million or roughly 3 basis points. So as I mentioned, the next 24 months would be a stressful period, but I fully expect the returns over time are going to be attractive. Same with C&I, our charge-offs have been acceptable.

We previously mentioned that we anticipate 25, 30 basis points charge-offs for portfolios over time, 2017 and '18, we were unusually low at 6 basis points, and 2019 is going to be at the other end of the spectrum. So while we are no -- by no means happy with elevated credit cost for the past two quarters, we believe that this is not indicative of our overall portfolio quality. Before I turn the call over to Sam, let me touch on a couple of highlights in the quarter. First, we showed nice growth in our pre-tax pre-provision earnings to go from $96.1 million to $100.8 million, up $4.7 million roughly 5%, nice quarter. Second, our timely interest rate collar has insulated the bank well from the lower rate environments and just a high-level summary or a reminder, we have about $9.5 billion in floating rate loans at the end of the quarter.

We have a $4 billion 5-year hedge that we put on back in February this year. We have $2.3 billion in deposits that are index, so this leaves really $3.2 billion floating rate loans that are not perfectly hedged, so to speak. Our deposits are a little higher priced than most. So in the falling rate environment, we expect to see our deposit costs come down, perhaps, more than some others, specifically linked quarter total funding costs came down 9 basis points, and our cost of deposits came down 7. So when you look at all of those -- these variables and kind of reflect on the implications, they may suggest they'll have more stable NIM outlook for the foreseeable future.

Next, I comment just quickly on expense growth. We had a good quarter with noninterest expenses declining from $96 million to $93.3 million, and as I mentioned, efficiency ratio improved to 48.1%. We have a good expense culture and a good focus on continuing to manage expenses tightly. And looking back at State, the merger really has exceeded our expectations. We've achieved our cost-saving goals, and we're pleased with the growth opportunities. And the quality of the deposit franchise has really -- had a wonderful impact on the balance sheet overall. San Felipe, Atlanta and middle market hiring and opportunities that we see there should really feel a nice growth for the company in the future.

So last for making nice progress on our core deposits funding, and I'm going to ask Sam to take it from here and tell you more about that.

Samuel M. Tortorici -- Chief Executive Officer, Director and President

Thanks, Paul. For the last several quarters, we've commented on the pretty solid deposit performance, but we are particularly pleased with our deposit performance for the third quarter. Core deposits excluding brokered were $14.3 billion, up $658 million or almost 5% versus the second quarter. Notably, noninterest-bearing deposits grew $306 million or 9.3% linked quarter. This growth just continues to be the result of motivated bankers, our banking teams really focused on deepening customer relationships, all of our branch associates and further penetration of our treasury management services.

The increase in our deposits has led to meaningful reductions in brokered and wholesale funding with our brokered deposits declining to 3% of total deposits at quarter end. So the improved non-interest-bearing mix, wholesale reduction and overall reductions in deposit rates led to a 7 basis point linked quarter decline in deposit cost, as Paul mentioned earlier. Our loan to deposit ratio also dropped to 92% in the quarter, down from 94% in the second, and this is again the result of our core deposit growth and our moderated loan growth. Our new loan originations in the quarter continued to be solid, but it has been largely offset by higher payoffs.

We're continuing to expect mid-single digit loan growth for full year 2020. Paul talked about State Bank, and I just want to reiterate how pleased we are with the merger and the opportunity this presents for Cadence in Atlanta and throughout the state of Georgia. Our retention of Georgia clients and key customer facing bankers has been solid, and we've made some strategic hires to launch our commercial middle-market and wealth efforts, and we've really been pleased with the early results and some exciting new customer conversions. We believe, back in May of last year, when we announced the merger, there was a strong strategic rationale, and I can share that after being in Atlanta for a year, I feel even better that this merger is a meaningful enhancement to our franchise.

So with that, let me turn over to Valerie to give you few other details on the quarter.

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

Great. Thank you, Sam. As noted previously, we are very pleased with the 5% linked quarter growth in our pre-tax, pre-loan provisions net earnings and all the business drivers behind that growth. The solid operating revenue up 1.2% from the prior quarter as well as the reduction in total expenses down 6% from the prior quarter. Speaking to the revenue increase, net interest income for the third quarter was relatively flat at $160 million, down less than 1% linked quarter driven by a modest decline in average earning assets combined with the 3 basis points decline in our net interest margin.

The decline in the linked quarter earning asset was largely driven by the second quarter sale of about $130 million in loans very late in that quarter, another pay downs in acquired loans exceeding the new moderated loan growth. The 3 basis point decline in the net interest margin was the impact of a lagging deposit beta on our now maturely neutral interest rate position of our balance sheet. Noninterest income increased nicely in the third quarter, up $2.9 million or over 9%, driven by increased service fees across many of our business lines due to increased volume associated with broad business growth post-merger.

Additionally, adjusted noninterest expenses of $93.3 million came down $2.7 million or 3% from the prior quarter due to lower comp and benefit expenses as we align our incentives and other accruals with performance, deferral of acquired loan cost previously expense and lower FDIC insurances assessments this quarter. The combination of the revenue and noninterest expense dynamics drove our adjusted efficiency ratio back down to 48.1%, right in line with our expectations. Lastly, let me give you an update on CECL as we continue to prepare for that adoption.

In summary, the day 1 phase in capital impact is expected to be minimal at less than 10 basis points of total capital. Regarding the estimated reserves, based on third quarter '19 data, we would expect a 35% to 45% increase in our reserves levels for our originated portfolio with the greatest percent increase from our consumer portfolio where the life of the loan under CECL is much longer than the current loss emergence period. As you know, CECL requires establishing a reserve for acquired loans even if they were recently marked as our State Bank acquired portfolio was, resulting in an effective double count. So accordingly, including our acquired portfolios, we currently expect the total reserves to increase between 55% and 65%.

So with that, I think, operator, we would like to turn it over to questions.

Questions and Answers:

Operator

[Operator Instructions] First question will come from Brady Gailey of KBW.

Brady Gailey -- KBW -- Analyst

Hey good morning guys.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Hi Brady.

Brady Gailey -- KBW -- Analyst

So why don't we start I mean, criticized were up 40% linked quarter on annualized. Now a little over 4% alone. What just talk about some of the inflows into criticized on a linked quarter basis.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Yes, Brady. Page 24, for those of you who have it in front of you, might be a helpful reference point. You're right. The linked quarter increase is noteworthy. Some historical perspective, criticized has been as high as 4.4% back at the time of the IPO. So we're 2.3% today I'm sorry, just to classify that is. And totals have gone from 5.8% back prior periods to 4.2%. Your question about the linked quarter increases, David, let me ask you to comment on that.

David F. Black -- Chief Risk Officer and Executive Vice President

Be happy to, Paul. Brady, I'm going to point you to Page 21 where you have got the mix of that quarter-over-quarter wall. So thinking about, first, I'll tell you what it's not. That's CRE and RESI. Consumer book holds is holding up really well. Commercial real estate book is performing above expectations. It really really pleased with how that portfolio is performing. So it is driven by C&I, looking at the components of that, so the first being Energy. So at a $35 million increase on a linked quarter basis, this movement was really centered in midstream and is primarily into the special mention category. We think this as a very different risk profile than the E&P, particularly E&P pre-2014 credits, the one that drove the charge-off this quarter.

So --but we feel comfortable with kind of the underlying outlook for those midstream credits. Next in the healthcare, we have a $24 million increase on the linked quarter basis there. The majority of that exposure is actually covered by significant real estate collateral, so again we feel good about severity of healthcare involved should we need that carry going forward, but again healthcare into the special mention not substandard or doubtful. And lastly, General C&I, as Paul mentioned some of this in the prepared remarks, there is really a number of larger denomination credits by diversified industry sectors, geography and originating groups, I really wouldn't expect to see correlated movement within these legal credits. So kind of collectively we feel better about the outlook for these credits, and really the underlying loss given the fault profile relative to the credits that drove the outsized net charge-offs for the quarter.

Brady Gailey -- KBW -- Analyst

Okay. All right. Maybe another on credits. I mean the second quarter of a fairly elevated provision from you guys, but when do you think the provision will normalize loan rate. Is that something that you think we could see happen in 2020? Or is there so much uncertainty, it's just hard to say when the provision lies net provision will normalize for the quarter?

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Brady, just trying to predict it on the quarter-to-quarter basis is tough, and I understand your question is what about next year. Yes, I think it depends on what happens with restaurant, and if we see any of the high leveraged credits high-leveraged moderators deteriorate further. And so at this point, I don't have the visibility that there's significant problems with either of those books, but the restaurant portfolio is one that it's going to take us some time to work through that and so I guess, fundamentally I feel good about our current outlook, but I have to put asterisk unless there are somethings that shake out of either of those 2 portfolios that become more challenging than what we have visibility on as of today.

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

Brady, this is Valerie. I would just add to that. About half of our loan provisions this quarter were associated with the credits that we charged-off, and those loans are either resolved or in the process of resolution, and we believe that the reserves are established for those and they are last and final. And so, that's a big chunk of the provisioning this quarter that we don't anticipate having a go-forward aspect to it.

Brady Gailey -- KBW -- Analyst

All right, great. And then my last question is just on margin. I'm used to thinking of Cadence as a fairly asset-sensitive company, but I know you got the collar, which really limits that asset sensitivity. Valerie, I heard you say you think about Cadence as somewhat neutral to rates going forward. I mean with the Fed continuing to cut here, do you think the NIM can be stable? Or do you think we will see some downside?

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

Yes. No, I think once I think we may see another quarter or so of a little bit of a lag in our deposit cost coming down. It came down very nicely this quarter. Total funding costs down 9 basis points, deposit cost down 7 basis points, we expect that will accelerate in the fourth quarter, and once that gets to kind of our fully modeled level of 50% beta, I think that on a core basis, we're going to have a pretty flat margin. And that is absolutely driven by the impact of the collar that we put in place combined with the fact that half of the interest rates lock that we have on the book will be rolling off at the end of this year so the combination of those two really sets us up very nicely for 2020.

Brady Gailey -- KBW -- Analyst

That collar was well-timed. Thanks for the color.

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

Thanks Brady.

Operator

The next question will come from Steven Alexopoulos of JPMorgan.

Steven Alexopoulos -- JPMorgan -- Analyst

Hi, good morning, everybody.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Good morning.

Steven Alexopoulos -- JPMorgan -- Analyst

To follow-up on credit, so regarding the provision in net charge-offs taken this quarter, which are basically for problem credits identified last quarter. What changed so dramatically between the two quarters that you've taken the disposal value down by so much?

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Well. On the one large credit, as was mentioned and it went through a distressed sales process that was completed during the quarter that had an outcome that was materially negative, worse than anticipated. So that's the biggest part of it right there. And as Valerie just mentioned, the provisions related to the increase in criticized and classifieds is about half of the provision for the quarter and so really those 2 things.

Steven Alexopoulos -- JPMorgan -- Analyst

So is that one large credit covenant like alone?

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

No.

Steven Alexopoulos -- JPMorgan -- Analyst

It seems odd that you know more collateral protection on the credit.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

It's credit that we deeply regret.

Steven Alexopoulos -- JPMorgan -- Analyst

Okay. And then, just from a big picture view, I mean credit is not an issue really anywhere else, but you're seeing credit negative credit migration again this quarter? Did you guys change anything internally? Is there a scrubbing of the portfolio, something that's causing these problems to come to the surface now?

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

No, Steve. I mean, we every quarter go through the portfolio and scrub it and look for changes and this is a period where more than average number of credits will look to [Indecipherable]

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

Steve, I would also just follow-up on the larger credit that Paul mentioned, we have done really a scrub of portfolio evaluating and feel comfortable that there are no other credits that have the makeup of that credit and so again, believe that it is somewhat unique in its characteristics and unique in its loss severity.

Steven Alexopoulos -- JPMorgan -- Analyst

Okay. I guess every shareholder on this call really wants to know one thing, is this in terms of the negative credit migration or is this now going to become a quarterly event where we're reporting problems coming out of leveraged, problems coming out of restaurant. How do you think about that? Is this going to become a recurring event going forward?

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Well. Steve, I guess what I'm thinking about is that over time, the returns on our portfolio are going to be attractive. On a quarter-over-quarter basis, it can be lumpy, this one outlier credit is not something the severity of loss on that is not something that we would expect to experience again, and the vast majority of the bank's loan portfolio is performing great. It's really sort of an isolated thing, but there is stress in restaurant, and we're watching that leveraged with that moderating portfolio like a hawk and looking for every opportunity to improve the risk profile there. So I think next year's going to be much better year for credit.

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

I would just also we spoke recently about the broader view of our portfolio that with a 25 to 30 basis points expectations for net charge-offs. Now clearly, the last couple of quarters are higher than that, the last couple of years prior to this was lower than that, so it does sometimes have a lumpy effect to it. But on a broad basis, we still feel very comfortable with that 25 to 30 basis points performance for the portfolio, and we may be getting into a time period where that would be on a more consistent basis than the years that we had in 2017 and 2018, but at that level, the returns of the organization can provide, which is evidenced by our pre-tax pre-provision earnings this quarter. We believe that it's a very attractive result.

Steven Alexopoulos -- JPMorgan -- Analyst

Okay, thanks for taking my questions.

Operator

The next question will come from Ryan Nash of Goldman Sachs.

Ryan Nash -- Goldman Sachs -- Analyst

Hey, good morning, guys.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Good morning.

Ryan Nash -- Goldman Sachs -- Analyst

So maybe a follow-up to Steve's question. I guess were there any factors contributing to the rising criticized outside of your control such as the SNC exam? And maybe of the $160 million to $165 million of the increased criticized, you have any sense of the breakdown of between SNC and non-SNC and maybe just what percentage of those loans were you actually the lead-on?

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Yes, so Ryan. You are correct, the SNC exam results are included in this quarter's results, and I'm going to pause for a second to see if we can may be best answer the percentage question there.

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

I don't know if we have exact percentage of that, but I would say that there's probably at least a decent chunk of them that are shared national credits, but we don't have a specific number for you. I don't know, David, if you have any other color on for those.

Ryan Nash -- Goldman Sachs -- Analyst

Okay. Paul, if I take a step back, the strategy of the bank has been to recruit bankers from larger institutions. You guys run with a higher hold limits because those are lot of clients that the bank that your bankers historically bank. I guess given where we are in the cycle, is does that strategy still make sense at this point in time, are you guys considering making any changes to the overall underwriting the whole limits, the strategy of the credit portfolio at this point in time?

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Right. Yes, Ryan. You make a good point, and I guess the way I would summarize is that we did raise a $1 billion to start with, we are our legal loan limit is north of $300 million, we have an in-house limit of $25 million. When we merged with State Bank, we really didn't change the in-house hold limit. We sort of tweaked it a little bit here and there.

And so, I think it's fair to say that we did start with a higher hold limit than per dollar capital than may be some other banks but that we are sticking with it as we grow and not seeing it increase. I would say the plan is working, I mean notwithstanding these 2 quarters, the fundamental credit performance of the company over 8 years has been very good, and we're sticking with the plan.

Ryan Nash -- Goldman Sachs -- Analyst

Got it. I guess one last follow up, if I can sneak one last one in. I guess Sam mentioned mid-single digit growth. I understand you guys need to continue to grow the business, but given all the credit issues that you are experiencing, I guess does it make sense given where we are in the cycle, given your client base to continue to grow at that pace until a much more thorough review of the portfolio has been done or at least until a lot of these Energy, restaurant and leveraged credits have been worked out?

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Well, I would say that mid-single digits is a material change in the trajectory of our growth from prior years, and it's appropriate and it's largely by design. Again the way you mentioned the credit situation, I mean it's really one outlier credit that's materially impacting our year. If it were not for that, the rest of the credit charge-offs would be in the normal range. And so we are focused on the long-term returns and managing the portfolio over time and feeling like we're going forward with some confidence.

Samuel M. Tortorici -- Chief Executive Officer, Director and President

Ryan, this is Sam. As Paul pointed out, this is a pretty material deviation from our growth trajectory and a part of that is we are certainly being cautious. We have some portfolios that we're managing in different directions such as restaurant, our underwriting standards are, I think, are appropriate and tight, but you also have the growth factor opportunity here at Atlanta. We have a brand-new middle-market team on the ground that has already started to get traction, that's going to be growing on the base of 0. So that's going to really impact our trajectory.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

I might just add a little bit color on that. We our pipelines are good. We're down from the peak, but they are good. We're seeing nice volumes in senior loan committee and as many already stated, we are slowing down in some areas, however, the community banking, business banking and private banking areas are still seeing nice volumes. There we had a bit of Fed bringing in a lot of deposits in as well and our CRE teams, the existing team in this still State Bank team are seeing activity in their respective areas.

Sam mentioned Atlanta, but I also would like to mention Dallas. We are pretty through with the process of putting that team together and excited about the opportunities. They've seen some nice growth over the last couple of quarters, but as Sam said, we're starting from a zero-point in Dallas as well and in Atlanta, so good focus on those areas.

Ryan Nash -- Goldman Sachs -- Analyst

Thanks for the call guys.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

I try.

Operator

The next question will come from Jennifer Demba of SunTrust.

Jennifer Demba -- SunTrust -- Analyst

Thank you, Good morning. Few questions. What was Of the total loan production you had in the third quarter, how much of it came from Atlanta, if you know?

Samuel M. Tortorici -- Chief Executive Officer, Director and President

Jennifer, this is Sam, I don't know if we really have that broken down per se. I know that our Atlanta real estate group was very active in the quarter, and continues to have really solid momentum. The middle-market team has just gotten under way and has just put to cup, a handful of nice new relationships.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

It's early days, early in Atlanta C&I team, and it takes time to build that business, and as you know the sale cycle is long in banking. So Jennifer, I know you heard me say that our focus is building it right, not building it fast. And we're going to invest some time and see that business grow over the next several years.

Jennifer Demba -- SunTrust -- Analyst

Okay. Back to credit for a second, can you give us a sense of what your largest nonperforming loans are in terms of size or industry at this point if you have the data?

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

In other words [Speech Overlap] NPL book at this point. Yes. We'll see what we can provide you on that. I would say that it's pretty consistent with our averages in the book on an overall basis. You know our credits do tend to be at least on this population on the C&I side $10 million to $12 million kind of on average. I mean what David kind of expanded on that, but as a whole, that's what you might expect.

David F. Black -- Chief Risk Officer and Executive Vice President

Yes, Jennifer, this is David. So there would be from non-accruals at $930 million there will be five credits that will be north of $10 million, but nothing larger than $12 million. And then it gets pretty granular down from that.

Jennifer Demba -- SunTrust -- Analyst

Okay. And my final question, Paul, you mentioned the investor and analyst survey on the top of the call, any major surprises out of that work for you and the management team?

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

I mean for the most part, I would say that investors have shared with us directly in face-to-face meetings and no major surprises.

Jennifer Demba -- SunTrust -- Analyst

Okay, thank you.

Operator

The next question will come from Michael Rose of Raymond James.

Michael Rose -- Raymond James -- Analyst

Hey, guys, I thought I would ask a non-credit question. So the deposit mix and efforts you have continued to make have continued to improve the mix of the portfolio. Just as we think about that from here, is the goal eventually to kind of get rid of all the brokered deposits as you fund what seems to be slower than your typically grown core loan growth, and then what efforts are you making to continue to further reduce cost?

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

Yes. So I'll start with that one. So basically, we use I think I said before, we use brokered deposits as really just a tool a funding tool. And at this point, we're down below peer level. And so it may go down a bit, but it'll probably hover around this area, really just kind of as we manage quarter-to-quarter liquidity. But yes, you're right, we have had the nice opportunity of being able to bring that down, and when you look at our quarter-over-quarter deposits, while the deposits in total may not be of a significantly because we significantly decline brokered.

Same on the average side, the average core deposits increased substantially while the brokered came down. As far as what we're doing on the cost, we are working actively to reduce our cost, what are the benefits that we have, as Paul mentioned, as we've got about $2.3 billion that are indexed base and those come down naturally. And that really will help our assuming that we get the rate cuts this month, and then in December, significantly help our deposit cost.

We're actually looking at also a number of our CDs that mature in December, we've got, oh gosh, between 15% or 20% of our CD book that's maturing in December and, you know that will come back on at probably 50 basis points lower than the rolling off. So that'll be a positive. In addition to that, we're working actively with all the relationship managers on the customer accounts and ensuring that we're proactive and not reactive to rate changes and expect some material improvement on our deposit costs continuing in the fourth quarter.

Michael Rose -- Raymond James -- Analyst

All right. So that's all reflected in your margin outlook, correct?

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

Certainly. Yes.

Michael Rose -- Raymond James -- Analyst

Okay. And maybe for Sam, maybe back to Ryan's question. Can we impact the loan growth a little bit, I guess if I look at it, Energy is probably not going to grow materially from here as you work through some credits, restaurants have been kind of flattish, healthcare. You are not really growing, CRE impacted by the higher level of pay downs. How do you get to the 5%, I guess, I mean what are the drivers and maybe what are the detractors as we look forward?

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

You pretty much hit on the detractors. I mean we expect restaurant to not just be flat, but probably down sequentially and the Energy probably in the flattish range. I think we will see some growth in real estate over time. And our originations there has been solid, much of that is construction lending, and so that will fund up over time. But back to Hank's point about Dallas starting from base of 0 in Atlanta, again same thing. I think in just our general saying is we're operating some great markets, Tampa team is doing great. Houston is just a fantastic economy, and then we got other Dallas and Atlanta new opportunities. I think all in, that will drive us to that mid-single digit guidance.

Michael Rose -- Raymond James -- Analyst

Maybe one final one for me. Paul, previously, you talked about a 44%, 46% efficiency target, I know it's still early, but any thoughts on how that may shake out next year?

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Michael, we still kind of remain optimistic about the efficiency ratio improving over time, but I would have to say I think we need a little bit more time to get to that level. I could see we had a good quarter this quarter. Our expenses with I can see next year being closer to flat to the 48% of efficiency ratio and you know, let us continue to let some of these offensive hires that have been put in place, their business is developing mature, but I mean there's still good operating leverage in this model, and we're still working hard on expenses all day every day to work both sides. I think you'll see sorry, it's a long way of answering your question, I think you'll see improvement over time, but not as fast as what we've seen in the last couple of years.

Michael Rose -- Raymond James -- Analyst

Understood. Thanks for taking my questions, guys.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Thank you.

Operator

The next question will come from Brad Milsaps from Sandler O'Neill.

Brad Milsaps -- Sandler O'Neill -- Analyst

Hey, good morning.

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

Morning.

Brad Milsaps -- Sandler O'Neill -- Analyst

Paul, I appreciate all the color and background on credit. I wanted to maybe follow-up on the restaurant book and specifically the charge-offs you had this quarter in the restaurants portfolio. It sounds like frequency may pick up there in terms of a few more NPAs or criticized assets coming on. Just curious, the severity of the loan that you did charge off this quarter, and kind of how that would compare to what you typically see with other restaurant credits?

Samuel M. Tortorici -- Chief Executive Officer, Director and President

This is Sam. The restaurant charge-off has been a long identified problem for the past several quarters. It was a bankruptcy situation, and we've got it fully resolved for the quarter. In terms of other material losses in the book, I think we've got the book right appropriately. Our clients are really doing a great job in restructuring and cutting costs, ejecting capital, personal guarantees, selling assets. And so we feel good about the mode of our clients and again expect clients' activity. That's how we built this book in the first place is we bank top-tier operators that have operated through cycles.

And so we're seeing some incremental improvement there, and we're seeing incremental improvement in top line sales, same-store sales growth. So don't mean to be painting overly optimistic picture as it's still a stressful industry for sure, but I think we're in that that was a casual dining and that's, as Paul pointed out earlier, our loss for this quarter that is one that is very much area of stress. Again, I want to point out that the significant portion of our restaurant book is quick serve and quick serve has been very resilient through cycles.

Brad Milsaps -- Sandler O'Neill -- Analyst

That's great. I guess I was just trying to get the sense of severity on that specific case that went to bankruptcy and then in terms of kind of how that would it would be overlay with other loans that might go that way or to take the other side, this would've been the most severe case that you might see out of that book.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

I think the way I would answer your question is this would be the most severe case. It's the first one to go into the bank, I think it's the worst one. We anticipate it will be the worst one.

Brad Milsaps -- Sandler O'Neill -- Analyst

Okay, great. And then maybe just one follow-up. Now that you guys are through this SNC exam, you've gone up somewhat thorough review of the book, you look like you're going to build capital based on your loan growth guidance, might you got get more aggressive with the share repurchase, just kind of curious, kind of how you're thinking about today maybe versus a quarter or 2 ago in terms of what you might buy back?

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Yes. We're probably unchanged from prior periods in terms of how we think about it, it's something we will revisit from time to time. We have authorized the $50 million as you heard us say we purchased $10 million. So we'll just continue to visit. I would expect that over time we'll probably be in a pretty conservative place on it.

Brad Milsaps -- Sandler O'Neill -- Analyst

Okay, great, thank you.

Operator

The next question will come from Ken Zerbe of Morgan Stanley.

Ken Zerbe -- Morgan Stanley -- Analyst

Great, thanks.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Hi Ken.

Ken Zerbe -- Morgan Stanley -- Analyst

I'll just stick to the loan growth topic. I guess when you first announced State. Your target, if I'm not mistaken, was sort of 9%-ish growth and now it's mid-single digits for 2020. I became more curious just in terms of why. Is it because you're pulling back in restaurant, leveraged and Energy, which I totally understand, and that's way the loan growth is declining. Is it because of the payoffs that you mentioned were elevated in fourth Q? Do you expect those to continue? Is it more intentional in terms of the other categories? I mean just trying to figure out the driver of why loan growth expectations are coming down so much?

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Ken, I mean I think you really hit it. You first off, I would say it's intentional. Second, the law of large numbers just with state, their growth was a little slower than ours, on a combined basis, it would be slower. We're really working leveraged portfolio hard, you saw that come down linked quarter, $60 million. Restaurant flat-to-down. So net-net, we're moving toward a lower risk place in the portfolio, and we feel good about it. We think it still will be nice growth and still provide some operating leverage, and as we mentioned several times it's really all about long-term return on tangible common equity and building a quality, possible portfolio.

Ken Zerbe -- Morgan Stanley -- Analyst

Okay, understood. And then I guess in terms of the problem credits you guys have with this restaurant or leveraged etc.. Is there a market for you to actually try to sell any of these loans into like or is that just you would take such a huge loss of those that it's just not worth it?

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Again, I can there are always people interested in talking about buying participation, reallocating portfolios, things of that nature. What we're focused on is managing the book we have with a team that we have and staying focused on doing a good job for customers, being responsive. So I mean you would never say never, of course, but you heard us say on the call, I mean we manage the energy E&P book from $590 million down to $275 million, now back up to $380 million through a very challenging cycle. So that would be for the ordinary course of business the way we do things and still managing restaurant down a bit given the stress in that sector. I would think that there'd probably be a day not too far from now where we'll be looking to grow that business, but right now, down is good direction.

Ken Zerbe -- Morgan Stanley -- Analyst

Got it. Understood. I would just imagine I think reducing the balance sheet risk will probably do a lot positive things for your multiple on the stock. I guess maybe just a third person if I might. In terms of the restaurant loans, you talked about how they are trending lower every time. What's the normal duration of a restaurant loan, like how fast do they actually run off?

Samuel M. Tortorici -- Chief Executive Officer, Director and President

Ken, this is Sam. In the restaurant space, you are typically doing term lending, 5-year term with an amortization of anywhere from 7 to 12 years. And so, you'll generally see the restaurant everything just amortizes as as steady at least half over the 5-year period. Most of those deals really get redone retraded in a couple of years as they do acquisitions or other changes happen, and that could give us the opportunity to actually and we have, exited some credits where we did not like the trends.

Ken Zerbe -- Morgan Stanley -- Analyst

Alright, perfect. Thank you very much.

Operator

[Operator Instructions] The next question will come from Jon Arfstrom of RBC.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Thanks. Good morning.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Morning Jon.

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

Morning Jon.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Couple of more credit questions. On your NPLs balances, how much of that is related to the 3 other credits that you talk about that are in the final stages of resolution and also, maybe the bigger credit, it sounds that was moved out as of today or yesterday.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Let me try to understand, your question is how much of the nonperforming loans today are related to the 3 Energy exit E&P exit credit?

Jon Arfstrom -- RBC Capital Markets -- Analyst

You've got 4 credits that you are highlighting as bigger credits and I'm just curious at $930 million. How much of the NPL balance is included? How much of those how much of the NPL balances are those credits?

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

Yes. I would say, go ahead.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Jon, it's just over $20 million associated with those 4, is remaining at $930 million.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Remaining at $930 million. Okay. And you're saying that the 3 credits you have these 3 credits, this is on slide eight are in the final stages of resolution, can you just talk through that a bit with us. I mean the question is are you can you get out of those without any more pain?

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

Yes. The expectation is that the provisioning that we provided in the third quarter is all that will be required to complete that resolution and given the nearness that we have to the situation and kind of the end of the story if you will feel pretty confident about that.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Should be done.

Samuel M. Tortorici -- Chief Executive Officer, Director and President

Yes. I agree with that.

Jon Arfstrom -- RBC Capital Markets -- Analyst

That helps. And then in terms of the criticized increase, you talked a little bit about SNC impact. You probably did a little bit of the deeper dive is my guess, and you're saying maybe it's back to normal levels or it goes up and down. Are you you are not signaling that there is a wave of further increases coming in the criticized bucket or are you?

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

We're not signaling that.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay. Good. That's helpful. And then in terms of the provision, you talked about half of the provision is from the specifically identified charge-offs, so that's $23 million. You have a little more coming from the criticized increase as well. So is the message on the provision that it could potentially be back in that $15 million or below type range?

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

So Jon, I think that's a fair way to think about it, and a reasonable comment. And my only asterisk is that if something happens in restaurant or highly leveraged that I don't have visibility, about today if something happens there, than it would be north of that.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay. All right. So big picture message and I know we're all nervous about credit, but you're saying criticized is not going to spike potential for NPLs to come down and potential for loan loss with the way we sit today, potential for that provision to go back to some sense of normalcy with some caution in terms of you can't 100% predict the future. Is that fair?

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

I think that the increase in criticized and classifieds are not terribly alarming, and they would not generate outsized provisions or charge-offs in the future. I think it's more ordinary course of business to what comes to mind, maybe it's something little different than that, but it's an ebb and flow, and what happens with the credit portfolio, and it's in line with historical levels, and they are slightly north up here but not out of control. So my outlook for credit for next year is improving and positive.

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

And again we would just kind of go back to the I hate to keep perping on it but kind of the broader view of the 25, 30 basis points net charge-offs expectations is what outliers used that, but that is our expectations. We've been better than that previously, but we that's what we kind of expect as we look forward.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay. All right. Thanks for the help. I appreciate it.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Thank you, Jon.

Operator

And this concludes our question-and-answer session. I would now like to turn the conference back over to Paul Murphy for any closing remarks.

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Okay. Well, thank you all for joining us. Just to summarize, pre-provision earnings were up sequentially, and this will drive solid returns on return on equity and return on assets over time. Assuming these charge-offs of 25, 30 basis points, our goal and expectation is that our bank will be able to achieve return on assets in that 1.6% range and return on equity in the 17% range.

We're protected from lower interest rates by virtue of the hedge that we have in place and our ability to bring down deposit rates. So it's really fortunate that our strong deposit growth and slower loan growth has helped reduce our depend on the brokered deposits, and it's really put us in a strong liquidity in a strong capital position. So in closing, I think we got a great franchise, we're in some really attractive markets, terrific team of bankers working very hard to do a good job for our clients. And I think we have a rock solid strategy, and I remain confident that we're going to generate attractive returns over time.

With that, we're adjourned.

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Paul B. Murphy, Jr. -- Chairman and Chief Executive Officer

Samuel M. Tortorici -- Chief Executive Officer, Director and President

Valerie C. Toalson -- Executive Vice President and Chief Financial Officer

David F. Black -- Chief Risk Officer and Executive Vice President

Brady Gailey -- KBW -- Analyst

Steven Alexopoulos -- JPMorgan -- Analyst

Ryan Nash -- Goldman Sachs -- Analyst

Jennifer Demba -- SunTrust -- Analyst

Michael Rose -- Raymond James -- Analyst

Brad Milsaps -- Sandler O'Neill -- Analyst

Ken Zerbe -- Morgan Stanley -- Analyst

Jon Arfstrom -- RBC Capital Markets -- Analyst

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