Q2 2020 Cullen/Frost Bankers Inc Earnings Call
Excuse me, ladies and gentlemen that 50, operator today's conference is scheduled to begin momentarily.
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[music].
[noise], ladies and gentlemen, thank you for standing by and weapons. So the Colin for US second quarter earnings Conference call.
At this time all participants are in a listen only mode.
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I would now like Santa conference over to your speaker today.
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Your Vice President and director of Investor Relations. Thank you. Please go ahead sorry.
Thanks Jessica.
This motorist garbage goal will be led by Phil Green, Chairman and CEO and Jerry Salinas Group Executive Vice President and CFO.
Turning to call Liberty, Phil and Jerry I need to take a moment to address the same safe Harbor provisions.
So the remarks made today will constitute forward looking statements are defined in the private Securities Litigation Reform Act of 1995 as amended.
We intend to such statements to be covered by the safe Harbor provisions for forward looking statements contained in the private Securities Litigation Reform Act 1995 as amended.
Last page attached in this morning's earnings release for additional information about the risk factors associated with these forward looking statements [laughter] needed a copy of new building on our website or by calling Investor relations.
210 to 205234.
This time I'll turn the call over to Phil.
[noise] actually be and good morning, everybody. Thanks for joining US today I'll review second quarter results, calling for Austin, Our Chief Financial Officer, Jerry Salinas will also provide additional comments and then we'll open it up for questions.
And second quarter call across your nine 3.1 billion dollar.
<unk> dollar 47 cents per share compared with earnings of $109.6 million.72 per share the same quarter last year.
And 47.2 million or 75 cents a share in the first quarter of this year.
Beyond the financials to second quarter was an extraordinary one for frost.
Throughout our response to the covert 19 pandemic.
We've been continuing serving customers with appointments and our bank lobby through our motor banks with our online and mobile banking service grew around the clock telecom customer service and at our network of more than 1200 ATM.
I will talk in more detail about our Houston expansion and our Paycheck protection program launch.
But for now I'd like to point out that we have been completing our organic growth initiatives and still achieving the same award winning level of customer service across is known for despite having more than two thirds of our employees working remotely in fact during the second quarter. We learned at Frost had achieved its highest ever net promoter score.
With the jump from 82 to 87.
And that's the score that would be the envy of many well known brands and it's a testament to our core values in our ability to consistently take care of our customers need, especially during try and times.
More recently, we learned a frost is among the banks that Greenwich Associates has identified a standout and their response to the pandemic based on customer service. In fact Frost is one of only two banks to be named a standout in both the small business banking and middle market banking categories.
I mentioned, a paycheck protection program.
As of June Thirtyth front PPP loan applications were initially scheduled again, we had helped nearly 18300 of our customers get PPP loans totaling more than 3.2 billion.
And the state of Texas process number three in PPP lending with five personal loans in San Antonio Fort Worth Corpus Christi process number one in terms of PPP loans approved and in San Antonio We had more PPP loans and bank of America Chase and Wells Fargo combined.
We did well helping businesses of all sizes, but I'm, particularly pleased at more than three quarters of our PPP loans were per $150000 a loss.
Close to 90%.
Were for 350000 or less PPP applications have been extended into August and we're still taking anywhere from a few to 50 applications per day.
Through July we've taken entered an additional 500 applications for over $22 million or an average size of about $45000.
Meanwhile, we're setting up processes to help borrowers get their loans forgiven.
We've heard many many messages thanks from our customers, whose businesses were aided by PPP and the efforts of Frost bankers as helped save hundreds of thousands of jobs.
Those results are more reflective our of our culture and our philosophy than even the numbers were reporting today for the second quarter.
Average deposits in the second quarter were 31.3 billion up by more than 20% from the 26 billion in the second quarter last year and the highest quarterly average deposits in our history.
We are grateful for the confidence our customers, placing us during these times.
Average loans in the second quarter was $17.5 billion up by more than 20% from the 14.4 billion and the second quarter last year that includes our strong showing in PPP loans about our loan total would've been up approximately 5% even without PPP.
And the second quarter, our return on average assets was 0.99% compared to 1.4% in the second quarter last year.
Our credit loss expense was $32 million in the second quarter compared to 175.2 million tons first quarter of 2000 26.4 million in the second quarter 2019.
At first quarter provision was significantly influenced by our energy portfolio stress scenario of oil at $9 per barrel for the remainder of 2020.
Oil prices since stabilizes levels, well above that assumption and the energy and energy borrowing base Redeterminations are 95% complete.
Net charge offs for the second quarter were $49.1 million compared with 38.6 million in the first quarter and 7.8 million in the second quarter last year.
Annualized net charge offs for the second quarter were 0.94% of average loans.
Second quarter charge offs were related to energy borrowers that have been discussed for several quarters.
Nonperforming assets were 85.2 million at the end of the second quarter compared to 67.5 at the end of the first quarter and 76.4 it in the second quarter last year.
At their current level nonperforming assets represent only 22 basis points of assets, which is well within our tolerance level.
And our level lower than our average nonperforming assets over the past nine quarters.
Overall delinquencies for accruing loans at the end of the second quarter were 91 million for 51 basis points. The period end loans those numbers remain within our standards in comparable to what we've experienced in the last past several years.
The payment deferrals, we have extended to customers due to the pandemic related slowdown I've had some impact on delinquencies.
Through the end of the second quarter.
We granted 90 day deferrals totaling $2.2 billion.
The whole loans, whose deferral period has now ended which is about 1.1 billion only $72 million worth have requested the second deferral.
Total problem loans, which we define as risk rate 10, and higher were 674 million at the end of the second quarter compared to 582 million at the end of the first quarter.
Which happened to be a multiyear love.
A subset of total problem loans, those loans, Grady 11, and worse, which is synonymous with the regulatory definition of classified totaled $355 million for only 12% of tier one capital.
Energy related problem loans were 176.8 million at the end of the second quarter compared to 141.7 million for the previous quarter and 93.6 million in the first quarter last year.
To put that into perspective, the year end 2016, total problem energy loans totaled nearly $600 million.
Energy loans in general represented 9.6% of our non PPP portfolio at the end of the second quarter. If you include PPP loans energy loans were 7.9%.
As a reminder, the peak was 16% back in 2015, and we continue to diversify our loan portfolio and to moderate our company's exposure to the energy segment.
As expected and as we discussed in the first quarter call. The Pandemics economic impacts on our portfolio have been negative but manageable.
During our last conference call, we discussed portfolio segments that have had increased impact from economic dislocations brought on by the pandemic.
Sides energy, we've narrowed these down to restaurants hotels aviation entertainment and sports and retail.
The total of these portfolio segments, excluding PPP loans represented almost $1.6 billion at the end of the second quarter.
Like the energy portfolio.
We continually review these specific segments and we have frequent conversations with those borrowers to assess how their handling current issues combined with our risk assessments. These conversations influenced our loan loss reserve for these segments, which is 2.52% at the end of the second quarter.
Overall, our focus for commercial loans continues to be consistent balanced growth, including both core.
Loan component, which we define as lending relationships under $10 million in size as well as larger relationships, while maintaining our quality students.
We're hearing from customers in all segments about economic impact of the pandemic.
As well as the uncertainty ahead.
Those factors have had an impact on our results.
New relationships are up by about 28% compared with this time last year, largely because of our strong efforts in helping small businesses get PPP loans. When we asked these businesses why they came to frost 340 of them told us that PPP was a key factor.
The dollar amount of new loan commitments booked through June drop by about 3% compared to the prior year.
Regarding new loan commitments booked.
The balance between these relationships went from 57% larger and 43% core at the end of the first quarter to 53% larger and 47% core so far in 2020 and Thats about where it was this time last year.
The market remains competitive.
For instance, the percentage of deals lost to structure increased from 61%. This time last year to 75% this year.
Our weighted current active loan pipeline in the second quarter was up 24% compared with the end of the first quarter. The first quarter numbers were low and reflected the uncertainty about the pandemics effect.
On the consumer side, we continue to see solid growth in deposits and loans. Despite the impact from the pandemic and the reduction in customer visits to our financial centers overall net new consumer customer growth rate for the second quarter was 2.2% compared to the second quarter 2019.
Same store sales however, as measured by account openings were down by 30% through the end of the second quarter as lobbies were opened only for by appointment only and through driving tellers for the second quarter, 59% of our account openings came from our online.
Line, Chen which includes our Frost bank mobile App.
Online account openings in total were 72% higher compared to the second quarter 2019.
The consumer loan portfolio was 1.8 billion at the end of the second quarter and it increased by 4.3% compared to last year.
Overall frost bankers have risen to the unique challenges presented by the pandemic and its resulting shutdowns with this mix of keeping our standards and sticking to our strategies along with a truly remarkable amount of flexibility and adaptability.
Our Houston expansion continues on pace.
For new financial centers opened in the second quarter and two more opened already in the third quarter for a total of 17 of the 25 planned new financial centres those new financial centres include our location in the third award were customer response has been enthusiastic even though our lobbies are open for appointment only.
Our employees manage those new financial center openings, while most of them are working remotely do that pandemic and also while non stop working nonstop to help our business customers stay afloat, PPP loans and that commitment and dedication to across philosophy and culture. It's all about.
As I mentioned earlier, we've gained a lot of new business relationships through our PPP efforts customers that are new to us or learning what a longtime customer as always known that process a source of strength for customers and our communities and also a source and force for good and People's everyday lives.
I've told our team that their efforts, our historic and our ROIC.
And I'm extraordinarily proud of our company and.
We've been able to help so many small businesses get through these extraordinary times, it's clear that many pandemic challenges remain.
Particularly here in Texas, we're seeing the spirit dedication of Frost employees live our philosophy and culture everyday gives me optimism that we will help our customers find a way through this situation.
Come out stronger.
And now I'll turn the call over to our Chief Financial Officer, Jerry Salinas for some additional comments.
Thank you Phil I wanted to start out by getting some additional financial information on our PDP loan portfolio as Phil mentioned, we generated over 3.2 billion in PPP loans during the quarter, our average fee on that portfolio with about 3.2% and translates into about 100.
$4 million.
Our direct origination costs associated with these loans totaled about 7.4 million, resulting in net deferred fees of about 97 million.
About 20% of the net fees were accreted into interest income during the second quarter.
Looking at our net interest margin, our net interest margin percentage for the second quarter was 3.13% down 43 basis points from the 356% reported last quarter, excluding the impact of our PDP.
Net interest margin would have been 3.5%.
The 43 basis point decrease in our reported net interest margin percentage, primarily resulted from lower yields on loans and balances at the fed as well as an increase in the proportion of balances at the fed as a percentage of earning assets, partially offset by lower funding costs.
The taxable equivalent loan yield for the second quarter was 3.95% down 70 basis points from the previous quarter impacted by lower rate environment with the March fed rate cuts and decreases in LIBOR during the quarter.
The yield on the PPP loan portfolio during the quarter was 4.13% and had a favorable three basis point impact on the overall loan yields for the quarter.
Looking at our investment portfolio. The total investment portfolio averaged 12.5 billion during the second quarter down about 463 million from the first quarter average of 13 billion.
The taxable equivalent yield on the investment portfolio was 3.53% in the second quarter up seven basis points from the first quarter.
Our municipal portfolio averaged about 8.5 billion during the second quarter last at the first quarter with the taxable equivalent yield also flat with the first quarter at 4.07%.
At the end of the second quarter over 70% and municipal portfolio was pre refunded or PSS insured.
The duration of the investment portfolio into the second quarter was 4.4 years compared to 4.6 years last quarter.
Looking at our funding sources the cost of total deposits for the second quarter was eight basis points down 16 basis points from the first quarter the cost to combine bed fed funds purchased and repurchase agreements, which consists primarily of customer repos decreased 80 basis points to 52.15%.
For the second quarter from 0.95% in the previous quarter.
Those balances averaged about 1.3 billion during the second quarter about 36 million from the previous quarter.
Moving to non interest expense total noninterest expense for the second quarter decreased approximately 3.5 million or 1.7% compared to the second quarter last year.
Expense decrease was impacted by the 7.4 million in PPP loan origination costs that were deferred and netted against the PPP processing fee, which are amortized into interest income and the yield adjustment over the life of those PPP loans, excluding the favorable impact of deferring those origination fee.
Related to PPP loans total noninterest expenses would have been up 3.8 million or 1.9% compared to second quarter last year.
In addition to the reduced expense run rate during the second quarter due to the Pandemics effect on the business environment. We continue to focus on managing our discretionary spending and looking for ways to operate more efficiently as we look out for the full year, adding back to 7.4 million in deferred expenses related to the PDP.
As I mentioned previously we currently expect annual expense growth of something around 6%, which is down two and a half percentage point, the 8.5% growth guidance, we gave last quarter.
Regarding income tax expense, we did recognize a 2.6 million one time discrete tax benefit during the quarter related to an asset contribution to a charitable trust during the second quarter, excluding the impact of that item our effective tax rate on a year to date earnings would have been about 3.1%.
With that I'll turn the call over back over to fill for questions.
Thanks, Jerry Okay, we'll open up the call for questions.
At this time, making really good question, Hi, Hi, one on your telephone.
Well Pos is just a moment actually couple other roster.
Your first question comes from the line of Brady greatly at KBW.
Yes. Thanks, good morning, guys its Brady gailey.
Ready monitoring so I was little surprised to hear that 20% of the PPP fees were captured in the second quarter that seems a little higher than what some of the other banks have disclosed any color around that.
How you're able to capture that amount of fees before any sort of forgiveness.
Really what we're assuming we look at those loans Grady on a on a pool basis and so we're really just looking at it over the expected to terminate those loans, we expect a big portion of those to pay off later this year. So when I look out I think our current expectations is that we'll learn about 60% of that fee.
2020 in about 40% of it in 21.
Okay.
And then.
Your comments on that.
The issues with the tax rate.
Lower price actually negative for the quarter, but can you just go over that again.
Anything else.
That's driving this tax rate could be lower than normal.
Well.
Fortunately earnings are lower in and we've got a pretty big.
Just couple portfolio, and obviously that higher tax exempt income drives down that.
The tax rate and we would have had a low.
Give tax rate for the quarter had we've not had that $2.6 million credit.
But it would have been a tax expense, but with that that brought us into negative territory. So no. There's nothing unusual other that other than the $2.6 million discrete item that is going through the second quarter.
Okay.
And then finally from me I know on last quarter's call we've talked about the full year.
Net interest margin for you guys being a little above 3% right now there were one more quarter end of year I mean does that does that still feel like the right level.
And I think the guidance, we gave the Brady was X PPP. That's the guidance you guys as foreign and yes, im still comfortable with that.
Okay, great. Thank you.
Certainly.
Your next question comes from the line of Dave Rochester Compass point.
Hey, good morning, guys. Good morning, good morning.
Definitely appreciated the reserve on the more at risk. What you guys gave was just wondering what's your energy reserve was following the charge offs this quarter.
Thanks.
C.
Thanks.
Our energy reserve is about 40.8 million.
So that's about a 2.86% coverage that's down from the 6.58 that we had in the in the second quarter, Phil mentioned, we had about $35 million.
In charge offs related to energy in the quarter and then also obviously with the Cecil allowance calculation that we did if you recall any Phil mentioned in his comments when we did this the allowance calculation last quarter, we were looking at oil at $9. In obviously, we've got a huge improvement during the quarter.
Right. So I guess I had that at a little over 100 million last quarter.
So with the 35 million charge offs.
You effectively release, I guess, what 28 million roughly.
Right.
That'd be roughly about right, yes exactly okay.
Got you appreciate that and then what do you guys seeing for new loan yields overall and securities purchase yields at this point in the quarter, just with lower rates and everything is just curious where where you're seeing those yields come in.
Yes. Unfortunately, the security side, there is not a whole lot out there I think we get purchase about 200 million during the quarter above mortgage backs I think and we were about a 151, so nothing right, but certainly better than the 10 basis points, we were earning at the fed.
And our loan yields.
Pretty consistent with previous quarters. So.
We are seeing less usage of LIBOR, which is good given its going away but.
And we're seeing a little bit of an increase in that in the fixed component with people taking advantage of the current rate environment, but I'd say, they're fairly consistent.
Okay, if I back out the DPP fees from this quarter.
Probably be closer to where the average is going forward effectively are you looking for any more loan yield pressure.
Okay.
Given what you're seeing in the market pricing.
[music].
You I'm sorry, what did you ask about PPP a good here Oh.
Oh sure I was just saying excluding TPP.
Given loan yields this quarter and what Youre seeing currently in the market are you expecting anymore loan yield pressure going forward or you are you expecting that yields to be relatively stable from here.
Excluding PPP.
No I think it depends on what you have inventory days versus the fixed versus what is being back off being put back on that.
No it's not a topic that we're talking about lot I don't expect to see a lot of compression there.
I think the interesting things going to thing is going to be what we're seeing as the replacement for lack of risk.
Continue to move forward through 21.
Okay. Thanks.
Okay, and maybe just one last one on the fee side.
I'm curious how much fee waivers impacted service charges and the other charge lines and with the outlook on that is going forward.
The the fee waivers actually weren't a huge part of the the second quarter run rate really that they were in the.
In the tail into the first quarter and maybe the first month for the second quarter, we did see higher levels, but really what we saw in the quarter was just really a lower run rate what I will say as if we looked at those on a monthly basis I will say that June and into July or are stronger than we had seen in April and may So I'm feeling a little positive there.
The uncertainty of course is everything it's going on with the pandemic seems to be more pressure.
The masks in the stay at home, but.
For what we saw in June it was certainly strong stronger than April and May in early into July even a little bit better there.
Okay, great. Thanks.
Sure.
Thank you.
Your next question comes from the line of Steven Alexopoulos JP Morgan.
Hey, good morning, everybody.
Good morning.
Just a follow on the energy reserve. So you said you are assuming $9 in the prior quarter what level, you're assuming now.
I will.
Okay.
Well I can say, which we did use so what happened obviously as you recall that prices will change so much the ended the quarter. The first quarter, Moody's really couldn't keep up and so we ended up doing our own internal stress test I think in in the case of.
This quarter, what we did was we used the Moody's price was $26 per barrel for the second quarter of 2020, and then moving up to up to $32 for the through the fourth quarter of this year than 42 wanting to 21.
Got you okay.
Im curious so the reserve decline this quarter.
Using some of the energy reserve in changing that how did the economic forecast component of the reserve change in the quarter.
Well, obviously the from the standpoint.
What were the expectations you don't have the specific changes I think that we use the moody's consensus scenario and so that one if you recall as one that talks about GDP going down 23.5% in the second quarter, we bounce in the third quarter unemployment rate about 60% of the second quarter.
Or improving to about 10.
By the fourth quarter, and then I think Texas, Texas is a little bit better there.
So really so so if you want to go through the specifics of it I guess the.
The net decrease in the allowance of 9 million.
I think a lot of it was an increase in the.
Yes, so that was kind of what was happening from an economic standpoint, I think the economy was better I think that one thing that was different this time.
For us was really on the.
Commercial real estate portfolio.
The commercial real estate portfolio for us really.
We ended up being a lot more sensitive to the volatility in the forecasted, Texas unemployment rate and the forecast at USA.
Pete and so the model right.
Our our commercial real estate portfolio at about 170% higher.
The model racing Rcs portfolio.
And we tend to believe that the loss rate for our owner occupied commercial real estate and NRC and I should be similar both are underwritten with the assumption the primary require repayment sources that if the cash flow from the.
Operations of the borrower so that's probably the one area where where the model.
In of itself request with was requiring a higher reserve and then based on the specifics of how our owner occupied real estate perform real estate portfolio performance, we didn't make a reduction there.
Answers your question for that path that's helpful.
And then.
It looks like the cobot sensitive loan exposures came down nicely quarter over quarter. Thank you called out 1.6 billion last quarter, you gave us the breakout of that in terms of energy restaurant hotel et cetera could be could you give us that breakdown.
The 1.6 billion.
Yes, and 1.6 billion does not include.
Energy.
But what I'm showing is.
A retail to about 783 million.
Okay, and lodging about 261 million.
Restaurants, a 225 million.
The Asian, 194 million and entertainment 120 million.
They haven't combined allocated allowance of 2.52% at the end of June.
Just give you a little more detail on allowance by sector. So the.
Reserved for the restaurant component was a 4.34%.
On the hotels, it's 1.21%.
The reserve on sports and entertainment is 4.58%.
Reserve on aviation was 2.8%.
Well.
And then the reserve on total retail combined.
It was 2.06%.
Okay, that's actually really helpful. If I could squeeze one more in.
Just following up on the tax rate, what's your outlook for the tax rate for the second half. Thanks, Yes.
Sure.
I think that adjusted at 3.1% that I gave that would have been the that year to date rate without that discrete item in the quarter that I think it's something in that range obviously.
It's pretty low now I don't expect it to go any lower so I'd say that 3% to 5% range.
Okay. Thanks for taking my questions.
Thank you.
Your next question or comment comes from the line Jennifer Demba.
Okay.
Thank you good morning.
Good morning.
Your your net charge off levels have been more elevated than than is typical for color over the last couple of quarters are you anticipating that will remain the case.
Over the next two or three quarters.
I'm not anticipating it I mean, the thing that drove the the charge off 80% of it or so this quarter was.
Really a resolution of those loans I've been talking about that have been move into the snake.
Actually has been a couple of years, maybe even three and so in one of the cases.
Finally got them to were one was completely sold off the others a down to a level that.
We feel pretty good about getting.
The remaining balance back and it's under $10 billion, so not pretty but those those have been resolved.
The other credit that I've been talking about for the last several quarters is the largest one that other than the ones that were on non accrual at that time, when I began talking about it and you might recall was that was.
A company that really needed to sell assets in order for its business model to work and they were trying to do that in a situation more capital has left the the energy.
Industry. So it's very difficult for them to do that and then whenever you you'd laid on top of that the impacts it happened with co bid. It was very very difficult form. So they ended up we ended up having a charge off on that credit, but I believe down to levels that again are very manageable. So I feel good about those with the three.
Largest.
Credits that we had to deal with that there were the most seriously impacted.
So those have been taken care of their their problem. There are couple more that just as a result of them the new environment and energy that are out there, but they're not they're not that big a deal so I expect to see.
Energy charge offs not being the same level as they were in the second quarter.
Well I look forward on energy I mean, I think we're going to seek increases in in problem loans, which we define as risk grade 10 in higher.
Thanks.
The biggest impact that in the second half is probably going to be in the service area service isn't really a big area for us to about $200 million in round numbers and so.
If you take those credits that are related more to the drilling component of it.
With that still hasn't come back even with a with a low four to surprise. So I think thats, where you probably see the the increase in problem loans, which have seen with regard to if they're charge offs. There good thing about it as the people that we'd banks have.
Have generally been through multiple cycles.
And.
And recalls service component of our our component to the last downturn 14 through 16 actually performed better than the production side, which was surprised me going on so anyway thats along the way to say I don't expect.
The charge offs to be the same level based upon.
The fact that so many of those were those legacy energy credit said, we cleaned up but you know Jennifer we're going to have to see what happens with.
The pandemic see robotic close things down again, thats, nobody really knows the answer going forward, but that's that's why I feel right now.
Thank you.
Yes.
74 million.
In those greater risk sectors.
How much of that.
Energy restaurant.
Entertainment and retail.
I think the 674 might be the retail part of that piece.
The total of all the credits in those segments that we named excluding energy was I think 1.6 billion.
But I guess I'm sorry.
So of your 674 million problem.
Right.
Yes.
George.
In those sectors the engine.
Let me take a quick look and see if I can.
Okay.
Thanks.
Thanks.
Thanks.
Actually Jennifer.
At this point no.
No I mean, I'm I'm just looking at the problem loans are these would be.
On commitments.
Those sectors.
So if you look at problems in restaurants be in these your round numbers around 23 million.
So on hotels or.
8 million problems on.
Sports and entertainment.
Around seven problems on aviation 44 excuse me.
About six sorry.
Problems on retail.
All total.
Look like around say just under 40.
Problems on.
And that's pretty much it so.
Third the problems were spread around you know in different areas in there.
Yes, I think we said that the energy problem loans are about 177, yes, you at all that together compared to 600 major you're going to get a good portion of it but I wouldn't call. It. The vast majority are you use your term.
Another thing I wanted to give a little clarity on what is our management overlay on energy. So our price deck just to get that out there for 2020 oil. It's $30 for 21 is 36 for 22 is 40 in for 23 is 45 and then we stressed that at 75% is how we came up with our management overlay in energy.
And juniper just to be clear I think problems are going to increase name just as things. If we go deeper into this pandemic anda.
Okay.
I was don't necessarily.
Equal losses them in a problem and you get your risk rate 10 for example, take hotels I expect to see some some increases in hotel problems.
Mainly because there are couple of those those if you look at that segment I think we've got in round numbers 21, as I recall 21, a deferred.
Properties, and seven where construction say third were construction and.
A couple of then moved out from construction into operation, We'll we'll move those problems until we see how they go there probably not going to open until you can be confident say a 15% occupancy number that's what we're finding that hotels are opening.
They could cover overhead around 35.
Again, producing some cash flow at 15%.
So as those come into out of construction, we're going to immediately move goes the problem status that doesn't necessarily adobe.
Issues, but there and our view date should be considered problems as we look at how they're doing and the only part of their operating status. So.
That's just one example, restaurants were going to see how that continues to go I think you know the.
Mhm, Jerry said I think that the problems, they're going to be ones, which are fine dining where you have to sit down you know the.
The premium casual and and then probably be other this the small places.
Got a 100 million of that kind of thing.
Again restaurant problems havent been that large, but we continue to see those problems continue to increases as and then it goes longer and longer so.
Want to be pollyanna about any of this thing we do expect problems increase but really we really do think are manageable.
And as I've said many times.
It's kind of important once you do during the crisis.
But it's not nearly as important as what you do before the crisis and.
I feel good about the disciplines that we've had in place not that we won't make mistakes I mean, you see the energy numbers.
We reported were trying to make mistakes, so having data, but I feel really good about the way that we've done our business going into this cycle, because it's really hard to get your way out of it. If you had on your work go ahead.
Thanks.
Thank you.
Your next question comes from the line of Ken Zerbe at Morgan Stanley.
Thanks, Good morning.
Okay.
I wanted to ask about the PPP fees. The end at 20% I think most banks that we look at basically would expect to accelerate the PPP fees when they actually get paid off which I agree with you likely in fourth quarter two good chunk of them.
If you're recognizing 20% fees this quarter and presumably 20 over the next two quarters two tier 60 does that imply that when the loan is for given that you would see zero accelerated amortization of those PPP fees.
Yes, it would have to be pretty significant to affect that because it's going to be pretty ratable, we'd kind of assume an average life of up 24 months.
Kind of it and so we'll be looking at it monthly to see if that is really accelerating well, we do expect a big chunk of it you pay off in the third late third and into the fourth quarter of this year. So we expect those balances to go down quite a bit.
But yeah I think that.
We wouldn't necessarily see a huge peak.
Even though in the recognition.
Because of a huge amount of forgiveness, if you will but it could be accelerated if they if they if all of sudden the average life that we're assuming which is is.
24 months that were a lot shorter yen then that could be accelerated I. Currently don't expect that to happen. There's a lot of unknowns, obviously out there associated with this with the portfolio. We do expect that big part of the forgiveness will happen after that 24 week period.
But again as Phil mentioned in his comments I mean, we are working on on helping the customers to that forgiveness process, but I have to be honest some of the things that I've seen for others to me it's been all across the board how people are recognizing those fees in my mind ours was it really wasn't more aggressive than others and in fact is less aggressive than in some of the ones I saw that.
We see we feel good about what we're at.
Got it and then is it right to assume that you'll recognize another 20% in each of Threeq fourq.
I think our yeah I think our current assumption is something close to that yes.
Got it because I think what I mentioned was yes, our expectation is 60%. This year. So yes, that's an easy way to get there.
Okay, and heaven forbid, but if those loans actually don't get forgiven.
And they get pushed out what happens to the piece because it seems like you would have recognized all the revenues upfront.
Or before yes.
Yes, Heaven forbid as you said, yes, I mean, yes, we have we are recognized in the fees as we go alone.
Okay.
Hi differ question in terms of expenses the 6%.
New growth rate year over year, it's just getting back of the envelope numbers it looks like.
Put your expenses I think back the.
Hi, my numbers right.
Coffee too.
Any range.
Sure I got this like a few 25 to 30 range is that kind of what you're thinking about for next couple of quarters.
No.
I think that.
Yes, yes, it's pretty simple math, you wouldn't be too far off from that number given that given the guidance would get.
Perfect. Thank you.
Right.
Your next question comes from the line of Ebrahim Poonawala of Bank of America.
Good morning.
Yes.
Good morning, I guess.
I'd say just quick follow up on the margin.
I guess I heard you see we expect the full year margin to be slightly over 2%.
All the things TPP.
But could you tell us the amount of securities that are coming up.
Mature deal with the back half of the.
And I'm assuming that.
Selling gas.
Then.
And.
And what it.
It seems like the margin the humming.
Thanks Wendy.
Less pressure beyond that so just wanted to make sure we got to that good okay.
Yes, I think that we've got.
I think.
A big part of it is is here in the in the third quarter.
If we look at our cash flow from we had some agencies at four maturing in July.
So I'm thinking more around.
600, 750 million between now and the end of the.
Got it.
Is there any component of the deposits that came in.
Thank you expect.
The bank, which may be beneficial to the margin in terms of excess liquidity, leaving.
Yes, I always say were a little bit of an unprecedented time here some of it we do expect some of the increase we do think is associated with them with those PPP loans and and although it appears that some of its getting Mark you would expect that that some of that will get spent out our modeling assumptions indicate that we do see some of it going on we're not comfort.
We will disclose how much but.
This point, but really it to be honest with you.
It's tough to tell they continue to continue to grow.
When we look at the 12 month look back on deposit really about 85% of our growth at both on the consumer side and the commercial side is really from our own customer augmentation and we continue had good growth from new customers about 15%.
At this point, it's really just so I think there's just a lot of uncertainty people are being obviously more careful with their money.
And we Havent really didnt really see a big.
Decrease in front related to tax payments or anything that I've seen at this point, but obviously with the pushback we'd expected some movement down in July So I think it's still a little bit hard to tell I think we're all kind of trying to grapple with what's been going with deposits to we've never been one to shy away from except the deposit obviously like the fact that a lot of the new relationships that Phil mentioned.
And in some cases are going to start with deposits, but I think our growth from a standpoint compared to the second quarter last year in about I phone breakfast, 70% of it is really commercial DTA.
Which we're not paying any interest.
Got it and I guess, if I could ask one question then just don't I guess is tied to credit, but when you look at the environment today across your markets in Texas, just talk to us at all.
You have a sense of confidence when things get better like did you see.
Can you go to inter quarter I'd like some of the corporate guessing can use indexes.
How do you see this may wrong.
Hi, this is actually outperformed quite nicely given what's missing recorded.
We ended the second just give us a big picture view on how to think about the economy me out over the next Denmark.
Well, just so I think the view the economy over the last last 12.
Now I'd say that itself.
The economies in all the other half economy.
Are there some parts of it that are doing well.
The.
You talked to.
Boat dealers talk to the customer there we've got large both dealer been around since the seventies have there.
There are best month for their history and May.
Automobile dealers has been around for generations best.
Month in history in May.
Don distributors up 25% and may year over year.
There are number of areas like that you looked at the heavy equipment dealer that.
Has.
If you look at the parts of their business that are not related to energy. There's there are still positive there's lots of road work going on there is lost construction going on.
On the other hand.
You've got anything related to the energy piece is pretty much debt, there's that relates to sort of the service fracking piece. So you've got that you've got good pipelines from our customers as we talked to them on the construction side through November.
On the other hand, there is concern that.
With the municipal in the fiscal situations at state and local levels that you may see reductions in construction road work and those kind of things because of the focus on basic services. So the pipelines going into 21, there's there's some concern on that.
You're seeing now.
You've got the energy piece, which we've been talking about which as his improved greatly to $40 or so.
North of that only other Han you're really not CGD drilling right now since service so it's going to weeks so.
And it's going to depend I think just being a participant in Texas right now sort of how the authorities decided to handle.
The situation with kit with cases, increasing.
I think theres a lot of activity people are using mass them and you go into grocery store or I'd say three or four weeks ago, maybe two thirds of people have mask on you go to place today is almost never see anyone without one.
And so some of the local authorities that.
Talk to here.
Realize that our hand has been dealt over the last three weeks or so.
Passed for more and then also passed memorial day, because of what happened with infections without a mandatory mask situation, but now that people have been more careful there is hope, but thats going to help the situation going forward. So.
I think that the next six months are going to be that probably the heavy lifting on just grinding through the general economic impacts on the portfolio and hopefully we won't be sitting here in the same situation.
At the end of the first quarter, having done this because I think some of these these businesses is smaller businesses that separate going to run out of state without.
Without.
So kind of continued fiscal stimulus so I know thats not.
Yes.
That's not definitive answer trees, there's nobody knows but there are some positive things going on now.
But on the other hand, there there are negative things that we're all going on with I think ended the day. This really relates to some kind of medical solution either through really affected therapeutics or through some kind of vaccine and then thats where were all.
Good thanks.
Your next question comes from the line of Peter Winter at Wedbush Securities.
Hi, good morning.
I was wondering on this Houston branch expansion.
In the past you said it takes about 27 month.
Like even you lose about.
One of them a half million before breakeven, but I'm just wondering in this type of environment that we're in.
How that impacts those two metrics.
Well the NIM.
Those are average numbers.
As we went into the to the program I'll tell you. It maybe the best thing for me to do just give you an update on how the Houston expansions going.
With regard to our pro forma which we would have base those numbers on.
We are a 143% ahead on relationships a couple 150.
Percent ahead of target on relationships.
Were slightly below target on total deposits were about 83% of target on deposits today, but the momentum as is positive going forward.
And then on loans were 200% loss of our target on on the lending side. So I think we're ahead of those numbers that we were assuming that we gave when we entered into the program and things have been going better than we expected.
No.
One thing I'll point out is that half of the new relationships that we are experiencing in Houston market are related to the expansion effort.
And new relationship growth in Houston year over year is up 40%.
I also think that Houston was the only market we have ever loan opportunities are positive versus a year ago and so.
Not only R&D.
The branches performing better, but I think theres, some overall impact and the entire market. That's it's benefiting from the from the effort. So.
I say and sometimes in the heat of battle with Hogwarts, It's hard to.
The focus on you know what are you doing right for the long term I'm very excited and pleased with that with the expansion strategy and.
Yeah, I think these numbers are showing that we're going to reach those breakeven numbers faster and the impact is going to be less than we anticipated.
That's very helpful.
R&D expenses.
Yes, we keep flowing.
That expense guidance and your last quarter.
More focus on discretionary expenses and hiring and then the benefit with the.
Stay at home restriction.
Some of the drivers.
You are able to lower that expense growth target.
Again this quarter.
No I think this forward into some of what we're dealing with you and you hit the nail on had a big part of it obviously the run rate as much lower and without knowing how that turns around or when it turns around and we just thought it made sense below our guidance, but I think if I looked at.
Travel meals entertainment that sort of stuff.
Compared to the second quarter last year, I was probably down 3 million.
Marketing expenses this quarter were down quite a bit we do expect that those will go up in the second quarter, we kind of slowed down some of the things we're doing but we want to continue to have our name out there Phil talked a little bit about our net promoter scores and were very sensitive to what's going on in Houston. So I am vision will spend some dollars there there's some disk.
Aggression, Harry stuff that we get to that.
That we can do associated with with performance, obviously, it's not not great year.
So thats coming into the to the reduction that we're projecting here.
And I'm really just looking for ways to be efficient theres a lot of things that we learned.
Phil talked about our success on the PPP programs.
A lot of that we couldn't have done without really improving some of our back office.
Processes and that team really through I T into our operations area put a lot of processes in place to automate a lot of things. So our expectations are that we'll be able to do continue to do some improvement there, but we're really being careful I mean I think the team overall is really sensitive to the revenue challenge that we're in so.
We are taking a look at every position if somebody leaves a retires.
We're asking ourselves for that position needs to be.
Needs to be replaced and really just asking everybody take two question every dollar that they spend to be quite honest with you in and.
But again there are some discretionary incentive sort of type costs in there that are also affecting those dollars.
Thanks for taking my question.
Sure.
Your next question comes from the line of Michael Rose Raymond James.
Hey, Thanks for taking my question.
We think about loan growth as we move forward with the energy.
And kind of that.
Obviously, you get some momentum in Houston, but how should we think about loan growth.
Forward. Thanks.
Well go it's hard to say on loan growth Weve.
We are it seems like we just spend a PPC business for the last.
[music] months.
Although we have seen some growth I think our pipeline.
As I mentioned.
Was up somewhat in the in the in the third quarter, you know going to ended the third quarter, although thats some of those deals that.
What.
We're push forward in that quarter.
If you look at sea.
Let me just one second.
Sure.
Yes, I think that.
We could see some we can see some growth and.
The third, but it's really hard to get this builds on what is going to be after that because we just don't know what kind of.
You know activity businesses are going to undertake until they get some more visibility on the health issues. So.
I think high single digits has always been our goal for loan growth I'm expecting is going to be lower than that until we get some some visibility on what's going to happen medically and what's going on the economy.
Okay got it better answer for you, but we're still now still large now.
I understand.
We're in challenging times.
We are rethink about the reserve at this point, we had a lot of banks talk about.
The heavy reserve going being done.
How do you guys think about that looks like the reserve was down X.
A couple of basis points, how should we think about reserve levels one thanks.
Michael We think what we did which doesn't surprise me its.
No. It's been it's been my experience. This is what we do we hit really hard.
Really early so if you look at the first quarter I mean, we had $175 million reserve build numbers up.
We.
Yeah, we added.
A much smaller mountain second quarter really because of if you look at the first half a year and look at the numbers that we that we provided I think that we were in a representative of.
People, who are doing their business the right way.
Well I feel good about that.
Good question is going to be what happens going forward.
It's going to depend on on the health situation I think anda.
I think we're going to see some increases in problems, but.
Now.
Hello, I can tell it I don't know how seasonal thing has gone up is going to play out in the units.
Yes. It is what it is.
It's also creates uncertainty on what's what a model going to say that protocol case is going to be.
I feel pretty good about where we are at about where our situation.
Is with the reserve Im not going to say it won't increase if things get worse and.
No. We can see provisions go way down of the models in though and the situation indication things are continuing to improve so.
It's kind of like longer if I wish I had a better answer but there's so much uncertainty right during any thoughts on though.
Cecil No I mean, I think you hit the nail it I think right now obviously, we feel good about what wrapped up and it just depends on what the second half a year looks like I think you think or to turn for a ticket turn for the worst obviously, we didn't have expectation to that think would increase by that that reserve would increase but right now we feel good about a lot of work is done.
Both on the commercial real estate side, we've got to credit guide meeting with our relationship managers weekly just like they do on the energy portfolio. So we're trying to stay ahead of all of that but we can't really control what happens to the economy related to that to the endemic effect something happens there we could see some challenges I think Jerry made really good point there.
Now we've established I mean again, it's not our first rodeo.
So we put in place councils and energy Council that reviews.
I think we're reviewing all basically 90% of all the.
Energy relationships on the production side any 590% probably hard now service side meets every week just to be for three hours, it's down to where it's probably half that time now we've established a commercial real estate council as well.
Thats doing the same thing on a weekly basis going through the credits you. The relationship managers are responsible for communicating with customers communicating back on terms of what they're saying.
Turning to understand the sustainability of their cash flow, we understand their plans in the effectiveness, they're adding on executing those plans, there's just a tremendous amount.
Oh of work being done communicating with customers and understanding our situation.
I'll tell you that.
I sit in all those I'd like to monitor those as much as I can add.
Hi, I'm always encouraged going away from it just if the ability of our customers to executing a willingness to add the at our relationship managers their ability to understand and have these relationships with customers I'll tell you. Another thing that I feel good about just anecdotally is.
As you talk to people about credits and listened to people explain what's going on our credit.
Sure I'm glad that we put as much focus as we do on.
On guarantees structures on those deals it makes a big difference when you're really never item you get to the yen.
It is guaranteed and.
People that are supporting it that's what I mean, but it's really important the decisions you make going into the crisis more so than what you do during the crisis, because now we're going to but.
But I feel good about the way we're handling the credits where people are operating and I feel good about how our customers are performing yes, not that we won't have problems and they want to increase but I feel that we did a good job of handling things Frost bank way going into this.
I appreciate the color one last question.
So if I look at pre tax.
Pre provision earnings.
The lower margin I mean, when when do you guys. Thank you will stabilize and I know you didn't give the typical.
Yes guidance range side very wide point.
Pretax pre provision rate I mean, when do you think we.
Kind of bottom.
The next quarter or two and then can you grow obviously that it's any investment you Stan.
Anything that's going on.
It's different from a guy perspective, and when do you think we hit the bottom. Thanks.
Hey, we ended the bottom when we got to handle the medical situation I know that.
Yes.
Businesses are able to move forward I mean, there that's really I mean, there's there's some political uncertainty because it's an election year.
So we can't forget about that but I mean, the big deal. This is co branded and it's.
It's the impact on the economy, I don't know people and that's it.
It's all intended so so I don't know to answer your question.
Alright, Thanks for taking my question.
Your next question comes from the line of John asked some of RBC capital.
Thanks, Good morning, everyone.
Joe Good morning, Josh.
A couple of follow ups.
For all numbers you gave.
It sounds like you have a billion one left.
Any reason to thanks.
Second deferral requests will be different.
That second half.
Deferred.
Joe we don't have any indication that it will be right now.
So no I mean, I'm, not saying won't be but.
That's not something that we've seen a spike up from where it was I think its.
Sort of on site.
Like one comments you made quite a few but.
How does the pipeline compare.
Say, where you were.
Seems to me like it's it's an okay pipeline, but maybe a little narrower.
Just kind of thinking about where you work.
No.
If you look on versus a year ago I happen to have that handy.
The pipeline.
Okay.
The gross product line was up 8% now that's not weighted.
But.
Okay.
Oh.
And as a as I've mentioned, it's up on linked quarter basis.
24%, but versus last year, it's up 23%.
And is it fair target with some construction projects just is it never orders and start.
You know if you look at.
The pipeline.
Commercial industrial is weaker.
You'd expect that.
It's it's flat to down 10% growth in the pipeline is in commercial real estate and also consumer and consumer instead, our consumer I'm really talking about much by consumer pipeline as is up 58% all linked quarter basis, it's up a 138%.
From last year now those aren't huge numbers are about that growth is about 10% of what you see in the commercial or where the consumer commercial real estate.
Side, so thats a positive.
But.
So quite a bit narrower probably.
And right now, it's more oriented towards commercial real estate and consumer consumers thing.
And we're not going to see much pipeline in the energy space because we're we're moderating our exposure there as we've talked about for long term.
I'm, just wondering how maybe more big picture, but.
In an odd way it seems like this environment, it's actually.
Good for you in terms of.
Market share and business development.
You are taking share.
Just kind of curious what your approach is.
Right now for calling on new business.
Kind of plans you have in place for getting people back out in the field.
Yes.
Right now.
We're working on calls we assume little clumsy as you know.
30 days out of a year in this call on customers and I've had I guess for maybe five days of Pat team I'm sorry.
Sorry, Keith you said, Jim when you say they are more security assumes kind of generic I can mandated.
All right so our expertise Microsoft teams.
Right and.
No they're not terrible their little awkward you know, sometimes you have technology issues in all but you still got to see people.
But we're getting used to it.
But.
We're kind of bump on our way along I think the thing that really gave us the biggest push was just PPP no.
You can say boy, but how much you pvp loans for customers. How are you getting behind customers. It ended ammonia deeper so frustrated with some of the experiences that they have had and we've got we got a lot of good reputationally in order to Pelephone.
On the experienced people had but obviously I mean, it's been great I mean.
Our numbers of new relationships, we report them every week.
And.
We've seen them go from probably 30 ish to 100 ish a week and over the last seven eight weeks and that's that's definitely notable at a lock in a big percentage of those are related to TPP. So yes. So that's good.
You know it so.
I will say this.
It's amazing to me how competitive.
It still is.
Just give you an example take commercial real estate lending.
We lost I gave you the total deals that we lost a structure, but if you looked at just see our heat.
So we lost in 2019, 68% of the deals that we lost we lost a structure and 20 this year, 92% of the deals we've lost we've lost a structure.
So it's amazing to me that you're still seeing some aggressiveness in structure in this market.
So.
As far as the competitive situation it really hasn't cleared up yet, but I think I think that we are.
This is kind of the time, that's it's good for US we tend to be a stable force.
In terms of providing capital we don't move in it in and out too much we kind of stay and that will people no doubt about us in our reputation on PPP has been great.
I think.
It's really helped us down in Houston, where we've been growing so that's that's been good. So I think there's some I agree with you. There's some positives in this market for us taking share, but theres a lot of work and we got it. Thank you get there and I will say one other thing we've talked about I think it's harder to move business over.
In this in this situation because people are just kind of hunkered down and.
So that may.
It may make that a little bit more difficult.
But that's the lay lamrite competitively.
Okay.
Thanks, guys.
And your final question comes from Matt I'll only as Steven.
Yes. Thank you just wanted to follow up on the investment securities portfolio the yield.
Take a little bit hiring twoq you on a surprising given your commentary around the upcoming maturities.
Sounds like you're saying that security deals could see material decline I think in the back half year is that right and then if so how should we think about the magnitude declined the security deal.
Yes, I haven't really address the significance of the of the decline of I don't know that I've gotten funding of what coming off at what rate.
Improvement really up between the first in the second quarter some of it.
Was really we had some some maturities of.
Some taxable securities that were below brag as we had the sale to us and securities that were below the average yield so that kind of pumped up the yield than in the second quarter compared to the first.
I think that and that obviously for anything that that's maturing right now yeah, it's really difficult to find any sort of anything out there along the yield curve. So it's just going to be our guys. Just continuing to look to see we can look at we will spend some of our liquidity I think I said, we spent about 200 million of it in the second quarter.
Got a great rate there them at a 1.5%, but we're going to take a look at that and we'll probably spend a little bit more in the.
In Atlanta Tampa of of the year.
Jerry are there any larger chunky maturity that you see happening.
No I think that they're all pretty ratable, we did have a if I've got the yield on this here.
I guess we had.
Yes.
Well the offsetting bear with me, let me get my notes here.
So I guess we had.
In the first quarter, we had quite a bit of that we'd like we talked about a maturity in sales and the treasuries portfolio in the second quarter. You know really there wasn't I don't have any sort of size associated with I think we had really matched our sales in our purchase is pretty evenly I think we had.
200 million maturing in the second quarter replace it with 200 million.
The yield so on the munitions for example, about 50 million of it was muni and that was coming off at about a 279. So yes. There's nowhere we can find anything like that right now but that to 79 is really the only comparable I can give you that that.
Matured in the second quarter.
Okay, great. Thank you.
Yeah.
Hi, there no further questions. Thank you you have any closing remarks.
Okay. Thanks, everybody for their participation today.
And we'll be a churn.
Thank you for your participation ladies and gentlemen, you may now disconnect.