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Cadence Bancorporation (CADE)
Q3Â 2020 Earnings Call
Oct 21, 2020, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Welcome to the Cadence Bancorporation 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 2 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 -- Chairman and Chief Executive Officer, Director
Good morning, all. Thank you for joining us for our call. Joining me today in person are Valerie, Sam, Hank and David. I'm going to begin our call with a summary of results. We're going to talk about some operating highlights and some 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.
I'm pretty pleased that Cadence had another strong quarter as our PPNR was $95 million, up slightly from the prior quarter. This resulted in a really solid pre-tax pre-provision ROA of 2.06%. These results were driven by our NIM strength, up three basis points linked-quarter, excluding PPP. The highlight here is 14 basis points linked-quarter drop and deposit costs were down about 100 basis points from the prior year. As many of you will recall, previously, we had sort of been a high cost of deposits relative to peer, and now we are very much in line. We continue to execute on our expense management plan, and our adjusted efficiency ratio was 49.5%.
Touching on credit trends in the quarter, we're encouraged by the significant reduction in deferrals throughout the quarter. And as of October 16, we stand at about 1.5% of loans. Both non-performing and net charge-offs declined linked-quarter. Criticized and classified loans did increase from last quarter by a materially lower amount than in the second quarter. We completed our third-party loan review of the CRE and C&I portfolios, and pleased to report that the review did not result in any downgrades or further -- or changes to our grading process, but quite contrary, I think it did validate that our processes are working well. And so this review was very similar to what we did in the second quarter for restaurants, energy, hospitality and healthcare.
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 this is intentional as we're proactively derisking some portfolios and we are just seeing lower demand consistent with the current economic environment. Overall, liquidity looks good with the loan and deposit ratio stable at 86%. We are seeing some green shoots of demand across our borrowers and in various markets. I believe the bank will be very well positioned to grow when broader economic picture becomes more favorable. Just to give you a little highlight on color from our markets, over $100 million in new commitments in both Dallas and Atlanta markets this last quarter, roughly $75 million in Florida. So deal flow is broad-based and demand from industry is ranging from semiconductors to highway infrastructure.
Over the quarter, we won the banking business for one of Texas' largest municipalities accounting adjacent to Harris County. Our SBA business, we've 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 at higher than normal levels, record levels, and our mortgage team is doing a great job, well ahead of plan on profitability and great results there. So overall, we are certainly very cautious, but in general, the world just feels a whole lot better than it did six months ago.
The last development I would mention is our plans to shift back to the office. Of our roughly 1,750 employees, we had a little over 1,000 working from home, and we're pleased to launch Phase 1 return to the office beginning on November the 9th. In the third quarter, all four capital metrics improved sequentially. So looking at our solid capital, our operating performance, the improved credit profile, these things drove our decision to increase the quarterly dividend to $0.075. This is an initial step, and we believe the balance sheet is in good shape for additional capital return as economic uncertainty continues to lift. So in summary, I feel good. There are a lot of good things happening and the core earnings fundamentals and capital position continues to strengthen at Cadence.
Let me hit a few more things on credit before I turn it over to Valerie. As I mentioned, pleased to see some improvement. We are all spending a lot of time on talent. This is a major strategic focus -- I'm sorry. Spend a lot of time on credit. This is a major strategic focus for all of us. Net charge-offs of $20 million for the quarter is down linked-quarter, it's the lowest level in the last five quarters. The charge-off composition this quarter is less broad-based than previously. 75% of the charge-offs this quarter are 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 in non-performers there. We have a $42 million reserve, roughly 15%. This was a smaller portfolio for us, 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 loss reserve. So similar to other books, we're working hard with borrowers to derisk the portfolio and believe -- we believe we've taken conservative actions with our reserves here. I would point out that the portfolio, although stressed, a positive note is that the deferral mix at June 30 was $108 million in deferrals, down to $32 million at 10/16.
Second is the restaurant portfolio. This portfolio declined by $56 million linked-quarter, excluding PPP loans. Non-performers are $59 million and the reserve is $62 million or 6.5% of the portfolio. The risk 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 $1.9 million in charge-offs this quarter. Reserves today are $34 million. Non-performers $49 million. We've got a couple of credits there that are on the watchlist for 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 business. And our E&P and service portfolios have declined and benefited a tad from a little bit of improvement in prices, oil and gas prices here of late.
With that, I'll turn the call over to Valerie.
Valerie C. Toalson -- Executive Vice President, Chief Financial Officer, Cadence Bancorporation and Cadence Bank, N.A.
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 strengths in our revenue and expense management. Our PPNR robust capital position and allowance for credit losses at 2.86% continue to provide strength in this uncertain environment.
The third quarter adjusted net income was $51.4 million or $0.40 per share, up $108 million from the prior quarter's net loss due to a significant reduction in loan provisions. The third quarter loan provision of $33 million benefited from the slowed credit migration and stabilization in the broader economic environment during the quarter. While the provision was materially lower than the prior quarter, our allowance, excluding 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 as net pay downs continue to exceed loan originations and fundings of $875 million. While we are seeing some more production activity in our markets, we do think it's likely that loan pay downs will continue to exceed new volume in the next quarter or two.
During the quarter, we did use some of our excess liquidity to add to our securities book, increasing securities by $427 million to $3.1 billion, now 17% of earning assets. We also work to strategically lower certain higher cost deposits, resulting in total deposits declining $283 million to $15.8 billion, but at the same time, meaningfully lowering total deposit costs by 30% during the third quarter alone.
Largely due to this funding cost decline, excluding the impact of the PPP program, net interest margin actually improved by three basis points to 3.64% from a comparable 3.61% in the linked-quarter. While core loan yields continue to decline in the third quarter due largely to residual impacts from the second quarter LIBOR declines, these were more than offset by the significantly lower deposit costs, the quarterly collar income and the reinvestment of the cash into securities during the quarter. All in, including the PPP 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 to 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 this has had on our NIM. We have remaining another $775 million in higher cost time deposit maturities coming in the last quarter of this year. So we do expect deposit costs to continue to come down a bit by the end of the year.
Net interest income was relatively stable at $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 services' stable net interest margin. PPP 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 $13.5 million at September 30, which is amortized over the remaining -- the remainder of the two year life that will be brought forward into earnings when these loans are forgiven. We are currently anticipating the majority of these loans to be forgiven during the first quarter of 2021.
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 $1.7 million in SBA income as this group generated more traditional SBA lending this quarter versus the PPP focus last quarter. We realized strong mortgage banking revenue, up $1.5 million as the low rate environment continues to drive high volumes of new originations and refinancing. Service charges also increased $1 million, largely driven by lowered earnings credit rates driving more fees during the quarter. Investment advisory trust and limited partnership earnings also trended positively during the quarter.
Our adjusted efficiency ratio continued to reflect our long-standing expense management culture, coming in 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 in lower deferred salaries as a result of the second quarter PPP loan originations and a $3.2 million increase in incentive expense as a result of improved corporate performance in the quarter. These were partially offset by a reduction of FDIC insurance by $1.4 million due to additional second quarter accruals, reflecting the impact of lower earnings from the assessment.
Turning to capital. As Paul mentioned, all of our capital ratios increased this quarter over what were already strong capital levels. Given the balance sheet mix shifts, our risk weighted assets declined in the quarter. And at September 30, our common equity Tier 1 and Tier 1 ratios were up to 12.1% and total capital was up to 14.8%. The leverage ratio ended the quarter at 9.9% and our tangible common equity to tangible assets increased further to 10.6%. These robust capital levels, significance of our allowance for loan losses, our strong balance sheet liquidity, our stable net interest margin and meaningful pre-tax pre-provision earnings power all combine to provide a ready springboard once this period of economic uncertainty starts to show signs of consistent improvement and our credit metrics begin to normalize. In spite of what has been an unusually share 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, let me turn it back to the operator for your questions.
Questions and Answers:
Operator
[Operator Instructions] Our first question is from Jon Arfstrom of RBC Capital Markets. Please go ahead.
Jon Arfstrom -- RBC Capital Markets -- Analyst
Hey, thanks. Good morning.
Paul B. Murphy -- Chairman and Chief Executive Officer, Director
Good morning, Jon.
Samuel M. Tortorici -- Chief Executive Officer and Director, Cadence Bank, N.A. and President, Cadence Bancorporation
Good morning. Thanks for joining us.
Jon Arfstrom -- RBC Capital Markets -- Analyst
Thanks. Nice job. And a couple of questions here just on credit. Obviously, much better from a provision point of view, but still sitting at over 3% reserves, which may be signal 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 provision stays low unless things change materially?
Paul B. Murphy -- Chairman and Chief Executive Officer, Director
Yeah. Jon, really good questions. I mean there is a lot of uncertainty out there. I wish I had perfect visibility on what the provision is going to be in future quarters. I think we've been proactive obviously. And so all things considered, we're appropriately reserved, I believe. It depends on what happens in the future as to whether provision levels will stay elevated or resume sort of a normal level. I tend to be optimistic. I feel like the worst is behind us. But I just would emphasize the uncertain environment that we're operating in.
Jon Arfstrom -- RBC Capital Markets -- Analyst
Okay. Let me ask it another way, Paul. The criticized and classified numbers, they moved around a little bit, but they're up a bit. Just curious, from a big picture, are you being surprised at all from a credit point of view or do you feel like you've been through the portfolio enough to understand exactly where the problems are?
Paul B. Murphy -- Chairman and Chief Executive Officer, Director
I think we've been through it enough to understand. I remain aware that negative surprises are possible in the future. We're just in an environment where I'll be surprised if we don't get some bad news in the fourth quarter that we don't have today. It's just sort of that type of world in which we live. I think we'll get some good news too that will offset maybe more -- maybe overwhelm the bad news, hopefully. But I don't know, it's just kind of a hard question to answer really.
Jon Arfstrom -- RBC Capital Markets -- Analyst
Okay. And then just one more. Remind us of the third-party review, the extent of that? And you said, you didn't have any differences, but just curious on the extent of it?
Paul B. Murphy -- Chairman and Chief Executive Officer, Director
Right. So yeah, this quarter we focused on commercial real estate and C&I. It was a biased sample. In other words, with all the partially graded loans or anything that have been downgraded and just more of a review to be sure that the downgrades were complete and adequate and the risk in the portfolio is being properly identified. So it was a healthy process and a good outcome.
Jon Arfstrom -- RBC Capital Markets -- Analyst
Okay, thanks. I'll step back in the queue. Thank you.
Operator
The next question is from Steven Alexopoulos of J.P. Morgan. Please go ahead.
Steven Alexopoulos -- J.P. Morgan -- Analyst
Hey, good morning, everybody.
Paul B. Murphy -- Chairman and Chief Executive Officer, Director
Good morning, Steve.
Steven Alexopoulos -- J.P. Morgan -- Analyst
I want 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 are you thinking about potentially growing that off these levels?
Valerie C. Toalson -- Executive Vice President, Chief Financial Officer, Cadence Bancorporation and Cadence Bank, N.A.
Yeah. Hi, Steve, and 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 key to the businesses that we have. And we've talked about it for a number of periods as far as being kind of that framework that we'll have once credit stabilizes as being able to maintain that in a relative basis. We do sound or we do believe that there is relative stability as we go forward. I do think that as we get into next year, there could be a little bit of pressure on it, but really in the small single-digit percentages.
So a little bit of pressure. But overall, we feel very good about our core net interest margin and the stability there. Right now we are seeing a little bit of decline in our earning assets. But again, over the next couple of quarters, once we look beyond that, anticipate that to continue to grow. Our fee income is doing really well. And in this environment, expect that to continue as well. And of course, we're always focused on our expenses. So all of that really supports us maintaining a very strong PPNR, particularly as a percent of our total assets.
Steven Alexopoulos -- J.P. Morgan -- Analyst
Okay, that's helpful. And then, Paul, on the dividend, it was nice to see the bump up this quarter. What do you need to see to further increase the dividend? And do you think it will be the smaller incremental steps as you eventually restore?
Paul B. Murphy -- Chairman and Chief Executive Officer, Director
Yeah, Steve. I think just economic uncertainty, as that lifts, the further we go with things returning to normal then we would look at future increases. Yeah, over time, I would like to see it get back to prior levels, but we'll be patient with that as we've always been fairly conservative with capital management issues.
Steven Alexopoulos -- J.P. Morgan -- Analyst
Okay. Thank you. And then final question. On the restaurant portfolio, can you give us some more color on that segment as news articles about how many restaurants are expected to close? I don't know if you're seeing any close at this point, but maybe some color there. What are you seeing from a cash flow view, etc.? Thanks.
Samuel M. Tortorici -- Chief Executive Officer and Director, Cadence Bank, N.A. and President, Cadence Bancorporation
Hey, Steve. This is Sam. Good morning. Yeah, I mean, the resilience of the industry is there has been a pleasant surprise. We've seen it in prior downturns. But I think where we take comfort -- again, there is stress in the portfolio, no question. But we bank 20 of the top 40 franchisees that have an average of 350 stores. These are big operators that have sound capital, and we're tracking obviously liquidity for those that had significant sales drops. And really what we're seeing is some really resilient operators. Again, we also take comfort that 74% of ours is quick-serve, and those who have been just really strong. Half of our portfolio is what we call the big guy; Taco Bell, Wendy's, Burger King, Pizza Hut, KFC. And so those exposures have really shown well.
What we've seen in recent months is obviously in April, we saw a huge trough of same-store sales across really the whole segment. Quick-serve rebounded very quickly, and the more full-service concepts were down as much as between 60% and 90%. And really in the past month, we've seen those down now only 15% to about 30%. So again, they've adjusted their cost models and that's allowed them to really -- made our operators to be at cash flow breakeven or better.
Steven Alexopoulos -- J.P. Morgan -- Analyst
Terrific. Thanks for all the color. I appreciate it.
Operator
The next question is from Jennifer Demba of Truist Securities. Please go ahead.
Jennifer Demba -- Truist Securities -- Analyst
Thank you. Good morning.
Valerie C. Toalson -- Executive Vice President, Chief Financial Officer, Cadence Bancorporation and Cadence Bank, N.A.
Good morning, Jennifer.
Jennifer Demba -- Truist Securities -- Analyst
Paul, a question for you. If you were to look forward several quarters, what is the company by the overall mix in your mind when you look at energy exposure, restaurant exposure, shared national credits, leverage loans, restaurants or other loans you might want to call out? What would you like to see the Cadence loan portfolio look like eventually? Thanks.
Paul B. Murphy -- Chairman and Chief Executive Officer, Director
Thanks, Jennifer. 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 toward the QSR type of restaurants. Energy, I'm pretty happy with where we are. E&P has been declining. I think that will continue to come down as pay downs and borrowing bases contract. But midstream, I'm very happy with the level of midstream activity. We're going to have some pay-offs there from companies that will be sold. But we will I think have some additional opportunities. So hopefully, we stay flat with midstream. And then also service much smaller, but it will probably drift down a bit further as activity there is contracting a bit.
So the C&I our core portfolio is where we would like to have the most growth, and that's where most of our bankers are focused. We do have some room in our CRE portfolio to have some growth there. As you know, it's a construction portfolio, primarily. And I think there'll be some opportunities to do. So many firms there with properties that we did 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 here and there.
Jennifer Demba -- Truist Securities -- Analyst
Great. And you -- Valerie, you mentioned you've got some more higher cost deposit repricing in the fourth quarter. How many more basis points of deposit cost improvement could you see for Cadence in the next couple of quarters?
Valerie C. Toalson -- Executive Vice President, Chief Financial Officer, Cadence Bancorporation and Cadence Bank, N.A.
Yeah. I think that as we look out into 2021 and kind of where is our bottom, I think that we can probably see lower -- low-to-mid-20s for total deposit costs, low-to-mid-30s for interest-bearing deposit costs. We'll get some of that in the fourth quarter, but it will continue to trickle into the new year.
Jennifer Demba -- Truist Securities -- Analyst
Thank you.
Valerie C. Toalson -- Executive Vice President, Chief Financial Officer, Cadence Bancorporation and Cadence Bank, N.A.
You bet.
Operator
The next question is from Brad Milsaps of Piper Sandler. Please go ahead.
Brad Milsaps -- Piper Sandler & Co. -- Analyst
Hey, good morning, guys.
Paul B. Murphy -- Chairman and Chief Executive Officer, Director
Good morning, Brad.
Valerie C. Toalson -- Executive Vice President, Chief Financial Officer, Cadence Bancorporation and Cadence Bank, N.A.
Good morning.
Brad Milsaps -- Piper Sandler & Co. -- Analyst
Paul, I was wondering if you could maybe provide a little bit more color around loan growth. I think last quarter you commented that you wouldn't be surprised to see maybe 5% or 10% shrinkage over the back half of the year. It sounds like you still expect some shrinkage, but maybe a little bit more positive now than you were then. Just kind of what you think about that originated loan book relative to total loans. Is it kind of something you could see sort of running in place or kind of what's the magnitude of the decline that you expect?
Paul B. Murphy -- Chairman and Chief Executive Officer, Director
Yeah, 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 didn't see as much drop as I might have anticipated. And so I'd say, the trend for my expectations is positive. Still a great deal of uncertainty. I mean, we have a lot of borrowers who are paying off debt or selling non-essential assets to reduce debt. Just COVID risk-off is a prevalent idea throughout the portfolio, but we are starting to see some green shoots. And so it's just -- I wish I had perfect visibility, I can give you a tight answer to your question. It's not that I don't want to answer it, it's just a hard question to answer.
I'll give you this perspective. Take a step back and let us get another couple of quarters down the road. I mean, Cadence has had a long track record of good internal loan growth. We've got a great team of bankers. We're out knocking on doors. We do a terrific job for clients. We're very responsive. And our technology sells well. So eventually, at some point, and I think in not-too-distant future, we will be able to return to nice mid-single-digit loan growth. Just when is the inflection point is the harder sort of question to answer for me. But Hank, I want to know your perspective.
R.H. Hank Holmes -- President, Cadence Bank, N.A., and Executive Vice President, Cadence Bancorporation
Thanks, Paul. I appreciate it. And Brad, thanks for the question. This is Hank in. And I would echo Paul's comment, I mean, the teams we have in place historically had seen some nice growth. That will turn. I think it's going to take a couple of quarters before we see that. We are seeing some nice volumes in senior 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 that we have in place, I'm fairly optimistic about a turn in future.
Brad Milsaps -- Piper Sandler & Co. -- Analyst
Got it. No, that's helpful. And then maybe just as a follow-up to 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, the yield was down maybe 16 basis points linked-quarter. Do you feel like you're sort of at kind of at a final reset there and that can kind of stabilize from here or do you think there is maybe more pressure to come on those loan yields?
Valerie C. Toalson -- Executive Vice President, Chief Financial Officer, Cadence Bancorporation and Cadence Bank, N.A.
Hi, Brad. This is Valerie. I'll take that question. Yeah, we do believe that we've got the biggest impact or actually the remaining impact of the LIBOR declines in the third quarter on our portfolio. And actually, if you take a look at the new originations that compares really well to the total portfolio, our total portfolio, excluding the accretion in hedge, was 3.75. And actually in the third quarter, we generated C&I loans averaging 3.97. About 50% of our originations were in C&I. The total new loans in the third quarter averaged 3.71%. So really, based on that type of volume and that result, looking at some pretty stable loan volumes or loan yields, excuse me.
R.H. Hank Holmes -- President, Cadence Bank, N.A., and Executive Vice President, Cadence Bancorporation
It's just -- this is Hank up. From the kind of the frontline, I would agree with that. We also are seeing some stable pricing in CRE, as Paul mentioned, we're construction lenders, so those will be fundings. We have a pretty good view what that pricing looks like as well. So I would confirm what Valerie is saying.
Paul B. Murphy -- Chairman and Chief Executive Officer, Director
And we're increasingly able to get LIBOR floors, and that's a real solid prop up for our loan yields.
Brad Milsaps -- Piper Sandler & Co. -- Analyst
Great, Thanks, guys. I really appreciate all the color.
Operator
The next question is from Ken Zerbe of Morgan Stanley. Please go ahead.
Ken Zerbe -- Morgan Stanley -- Analyst
Hey, thanks. Valerie, I actually just want to stay on that topic. If I heard right, you said 3.71 for you new loan yields in 3Q, but normally we would generally consider higher loan yields with higher risk portfolios. And because I think the 3.71 will probably be a lot higher than what your competitors are actually lending at, how are you able to guess such a high loan yield on those new loans?
Paul B. Murphy -- Chairman and Chief Executive Officer, Director
Ken, this is Paul. I think it's a representative of the mix of the portfolio, as Valerie elaborated. The C&I is at 3.97. It's 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.
Valerie C. Toalson -- Executive Vice President, Chief Financial Officer, Cadence Bancorporation and Cadence Bank, N.A.
And I think that we're being selective on what we are doing. I mean, you can see that in our net loan shrinkage is we're not taking every deal that's out there. There is a lot more activity than certainly what we're bidding 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 in what we saw in the third quarter in our loan yields.
Ken Zerbe -- Morgan Stanley -- Analyst
Got it.
Paul B. Murphy -- Chairman and Chief Executive Officer, Director
[Speech Overlap] accepting lower leverage within basically all industries.
Ken Zerbe -- Morgan Stanley -- Analyst
Got it. And just so I'm aware, the 3.97 on the C&I, is that where the industry is at? I mean, is that sort of the average yield that all banks can get on C&I loans or is there something special about your portfolio specifically? Maybe it's customer type or is there a geography, I have no idea, that's why I was asking?
Paul B. Murphy -- Chairman and Chief Executive Officer, Director
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 come in all different shapes, sizes and description. But I think for our portfolio, I think it's appropriate.
Ken Zerbe -- Morgan Stanley -- Analyst
All right. Okay, great. Thank you very much.
Operator
The next question is from Brad Gailey of KBW. Please go ahead.
Brady Gailey -- Keefe, Bruyette & Woods -- Analyst
Yeah. Hey, it's Brady. Good morning, guys.
Paul B. Murphy -- Chairman and Chief Executive Officer, Director
Good morning.
Brady Gailey -- Keefe, Bruyette & Woods -- Analyst
I wanted to follow-up on the dividend increase, and it's great to that. But I wonder, I mean, given your stock is still trading at 70% of tangible, I wonder if you're going to give capital back to shareholders, it would be better spent in buybacks? So I wanted to get an update on how you guys were thinking about buybacks from here?
Paul B. Murphy -- Chairman and Chief Executive Officer, Director
Sure. That's of course always on the radar screen and a consideration that we will look at in future periods. The first step for us was to increase the dividend. Our future step will be to look at buybacks.
Valerie C. Toalson -- Executive Vice President, Chief Financial Officer, Cadence Bancorporation and Cadence Bank, N.A.
One of the things that I think is notable is the strength of our capital ratios and the excess capital that we have on our balance sheet today. And so at some point, when there is less uncertainty in the future and things are kind of 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 be in other opportunities. But we believe that we have got ourselves in a very nice position when things normalize.
Brady Gailey -- Keefe, Bruyette & Woods -- Analyst
Okay. But it sounds like given the current backdrop and continued uncertainty, you're probably not going to be buying back stock in the near-term?
Paul B. Murphy -- Chairman and Chief Executive Officer, Director
That's a fair statement. Yes.
Brady Gailey -- Keefe, Bruyette & Woods -- Analyst
All right. And then moving on to the margin, I know if you look at the margin, there is a ton of moving pieces with what you're doing with the bond book and liquidity and PPP. I mean, maybe if you look at spread income dollars, how do you expect that to trend from here? Do you think that you can keep spread income relatively stable with the 3Q level or do you think there is some downside?
Valerie C. Toalson -- Executive Vice President, Chief Financial Officer, Cadence Bancorporation and Cadence Bank, N.A.
I think when you look at kind of a normalized, excluding obviously the PPP loans, we do feel very comfortable in our spread income and the ability to keep that stable. We do have, as we mentioned before, deposit costs coming down a little bit. We believe that we have reached a pretty much stable level in our impact on our loan portfolio related to LIBOR. I think the only caveat there is, we do tend to see municipal deposits and the like fund up in the fourth quarter with excess results with excess cash balances that could weigh on the margin slightly. But overall, we feel very good about our net interest margin in fourth quarter, just as we have in the past.
Brady Gailey -- Keefe, Bruyette & Woods -- Analyst
All right. And then finally for me. So classified loans are 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 in the past and you've shied away from it. Is that still the right way to think about Cadence's interest in any sort of bulk sales that's really not something that is very likely for Cadence?
Paul B. Murphy -- Chairman and Chief Executive Officer, Director
Correct. We believe that the portfolios we have, we will manage ourselves. Never say never, but that's not something that we're actively pursuing.
Brady Gailey -- Keefe, Bruyette & Woods -- Analyst
Okay, great. Thanks, guys.
Valerie C. Toalson -- Executive Vice President, Chief Financial Officer, Cadence Bancorporation and Cadence Bank, N.A.
Thank you.
Operator
[Operator Instructions] The next question comes from Michael Rose of Raymond James. Please go ahead.
Michael Rose -- Raymond James -- Analyst
Hey, good morning, everyone. Most of my questions have been asked and answered, but I did want to get a sense from you guys is how do you think about operating efficiency from here on a core basis, still a little under 50%. As you face some revenue headwinds, as mortgage subsides at some point, is there ways and efforts ongoing to kind of level set expenses? And how should we think about kind of the ability to maintain around a 50% efficiency ratio as we move through what's going to be a challenging revenue year next year? Thanks.
Paul B. Murphy -- Chairman and Chief Executive Officer, Director
Yeah, Michael. So I'll comment and Valerie may want to add her perspective. So we had a long track record of really demonstrating the nice operating leverage in the model. We saw good double-digit or high-single-digit revenue growth for many years and low-single-digit expense growth and the efficiency ratio improved from low-60s to low-50s or 49.5%. So I look forward to resuming that leverage seeing that the whole COVID pause that is put on that progress, how long will that pause be before we can get back to that. It's kind of like the loan inflection point question, really hard to answer with certainty. But that would be our intentions and our objectives long-term as to see operating revenue grow faster than expenses and see some improvement there. I would think probably mid next year before we'll be in a position to demonstrate that on a quarterly basis, but to be determined.
Valerie C. Toalson -- Executive Vice President, Chief Financial Officer, Cadence Bancorporation and Cadence Bank, N.A.
Yeah. I would agree with everything that Paul said. So our strength really helps us continue to remain at very competitive level.
Michael Rose -- Raymond James -- Analyst
Yeah, understood. And maybe just one more question on credit. I assume this quarter's results include the impact of the SNEC exam, were there any force downgrades? And there was migration in energy in another bank of yours in Texas, a competitor noted that energy is kind of still the portfolio they're concerned about the most. I know your construct is a little bit different, but just any updated thoughts there would be helpful? Thanks.
Paul B. Murphy -- Chairman and Chief Executive Officer, Director
Yes, you're right, I mean, the exam results were all baked into the results for the quarter and nothing material. I shook out of that. And I'm pleased overall with our grading system and all the third-parties to look at it each quarter.
Michael Rose -- Raymond James -- Analyst
Okay. Thanks for taking my questions.
Paul B. Murphy -- Chairman and Chief Executive Officer, Director
Thanks, Michael.
Operator
The next question is from Matt Olney of Stephens. Please go ahead.
Matt Olney -- Stephens Inc. -- Analyst
Hey, just circling back on that last question from Michael on the energy portfolio. In the prepared remarks, it sounds like there is some potential for upgrades in 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.
Paul B. Murphy -- Chairman and Chief Executive Officer, Director
Yeah, Matt. There is just a couple of energy non-performers that are trending positively that have the potential for upgrade in future periods to be determined.
Matt Olney -- Stephens Inc. -- Analyst
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. I think that allowance ratio is much, much higher than other portfolios that are stressed, whether it's energy or restaurants. So is it fair for us to assume that the hospitality portfolio could have the largest severity of losses within the Cadence book given how much larger its reserve ratio is?
Paul B. Murphy -- Chairman and Chief Executive Officer, Director
Exactly, yes.
Matt Olney -- Stephens Inc. -- Analyst
Okay. And just lastly. Valerie, you mentioned the securities balance move higher in the third quarter, and it's now 17% of earning assets. Do you think this is going to continue to grind higher over the next few quarters as loan balances continue to decline?
Valerie C. Toalson -- Executive Vice President, Chief Financial Officer, Cadence Bancorporation and Cadence Bank, N.A.
Yeah, and you hit the nail on the head there. It really is the dynamic of loan balances, cash balances, etc. It could go a little higher. I don't anticipate it getting above 20% of earning assets in this rate environment. We're going to have pretty much cap at that level.
Matt Olney -- Stephens Inc. -- Analyst
Okay, great. Thank you, guys.
Valerie C. Toalson -- Executive Vice President, Chief Financial Officer, Cadence Bancorporation and Cadence Bank, N.A.
Thank you.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Paul Murphy for closing remarks.
Paul B. Murphy -- Chairman and Chief Executive Officer, Director
Great. I'll close this just with a couple of quick thoughts. Just really proud of our great team of bankers working hard through this COVID challenge, very focused on doing a good job for clients. Key reminder, our board and management team are very focused on creating value for shareholders. And I'm confident that we've got the team in place to do exactly that. With that, we stand adjourned.
Operator
[Operator Closing Remarks]
Duration: 41 minutes
Call participants:
Paul B. Murphy -- Chairman and Chief Executive Officer, Director
Valerie C. Toalson -- Executive Vice President, Chief Financial Officer, Cadence Bancorporation and Cadence Bank, N.A.
Samuel M. Tortorici -- Chief Executive Officer and Director, Cadence Bank, N.A. and President, Cadence Bancorporation
R.H. Hank Holmes -- President, Cadence Bank, N.A., and Executive Vice President, Cadence Bancorporation
Jon Arfstrom -- RBC Capital Markets -- Analyst
Steven Alexopoulos -- J.P. Morgan -- Analyst
Jennifer Demba -- Truist Securities -- Analyst
Brad Milsaps -- Piper Sandler & Co. -- Analyst
Ken Zerbe -- Morgan Stanley -- Analyst
Brady Gailey -- Keefe, Bruyette & Woods -- Analyst
Michael Rose -- Raymond James -- Analyst
Matt Olney -- Stephens Inc. -- Analyst
