Q3 2020 Cullen/Frost Bankers Inc Earnings Call
Ladies and gentlemen, this is Dol breeder put a squad threed is scheduled to begin momentarily.
To that point your lunch backend things on hold.
Thank you for your patience.
Okay. Today's conference is scheduled to begin momentarily.
So I feel like smoking. Please oh, thank you for your beach.
[music].
Ladies and gentlemen, thank you for standing by and welcome to call. It was Q3 earnings results.
Like all parties I'm, sorry, any simponi mode, author disbursements and thanks, Yes, there will be question and answer session. That's a question you will need to press star one on topical.
Required to protect ourselves.
Please press star zero, and all like the clock for sovereignty our speaker for today.
Colin Watts director Investor Relations, Mr., <unk>, but that's pretty sports or.
Thanks drew.
This afternoons conference call will be led by Phil Green, Chairman and CEO, and Jerry Salinas Group Executive Vice President and CFO.
Before I turn the call over to Phil and Jerry I need to take a moment to address the safe Harbor provisions.
Some of the remarks made today will constitute forward looking statements as defined in the private Securities Litigation Reform Act of 1995 as amended we.
We intend such statements to be covered by the safe Harbor provisions for forward looking statements contained in the private Securities Litigation Reform Act of 90 95 as amended.
Please see the last page of text in this mornings earnings release for additional information about the risk factors associated with these forward looking statements if needed a copy of the release is available on our website or by calling the Investor Relations Department at 210 to 205234 at this time I'll turn the call over to Phil.
Okay maybe.
Good afternoon, everyone and thanks for joining us.
Today, I'll review third quarter results for calling Frost and our Chief Financial Officer, Jerry Salinas will also provide additional comments before we open it up to your questions.
In the third quarter, Colin Ross turn $95.1 million or $1.50 cents per share compared with earnings of 100, and 809.8 million were $1.73 per share reported in the same quarter last year, and 93.1 million or $1.47 cents per share in the second quarter.
This year.
Overall average loans in the third quarter were 18.1 billion up by 25% from 14.5 billion in the third quarter of last year, which included the impact from BPP loans.
However, even excluding this impact loans managed to 3.3% increase from a year earlier.
We're $10.2 million down sharply from the $41 million in the second quarter and included no energy charge offs.
Annualized net charge offs for the third quarter were 22 basis points of average loans.
Nonperforming assets were 96 $4 million at the end of the third quarter compared to $85 2 million at the end of the second quarter and $105 million at the end of the third quarter last year. The third quarter increase resulted primarily from the addition of energy service company.
Overall delinquencies for accruing loans at the end of the third quarter for $133 million or 73 basis points a period in loans.
Those numbers remain within our standards and comparable to what we've experienced in the past several years.
Regarding payment deferrals in total we granted 90 data for rules to more than 2500 borrowers for loans totaling $2.2 billion at the end of the third quarter, there were around 300 loans totaling $157 million and deferment or about 1%.
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Total problem loans, which redefined as risk right 10, and higher or $803 million at the end of the third quarter compared to $674 million at the end of the second quarter.
Energy related problem loans were $203 $5 million at the end of the third quarter compared to 176 $8 million for the previous quarter and 87 $2 million for the third quarter last year.
To put that in perspective.
The year end 2016, total problem energy loans totaled nearly $600 million.
Energy loans continue to decline as a percentage of our portfolio following to 9.1% of our non Pvp portfolio at the end of the third quarter as.
As a reminder, the peak was 16% back in 2015.
Oil prices have stabilised from volatile level levels that we saw earlier in the year and we continue to moderate our company's exposure to the energy energy segment.
Through the first nine months of this year, the pandemic economic impacts on our portfolio have been negative but manageable.
During our last two conference calls we discussed the non energy portfolio segments that have had an increased impact from the economic dislocations brought on by the pandemic, namely.
The name of your restaurants hotels entertainment and sports and retail.
The total of these portfolio segments, excluding PPP loans represented $154 billion at the end of the third quarter.
And our loan loss reserve for these segments was 337%.
New relationships are up by 38% compared with this time last year, largely because of our strong efforts and reputation for success in helping small businesses get PPP loans.
The dollar amount a new loan commitments booked through September is up by about 2% compared to the prior year.
Regarding new loan commitments booked the balance between these relationships have stayed steady at 53% large and 47% core so far in 2020.
The market remains competitive and in fact seems to be getting more so.
For instance, the percentage of deals loss to structure increased from 61%. This time last year to 70% this year.
It was good to see that in this environment are weighted current active loan pipeline in the third quarter was up 11% compared with the second quarter of this year.
Consumer banking continues to see growth, although it slowed somewhat by the effect of the pandemic.
Overall, net new customer growth for.
For the third quarter was down 13% compared to the third quarter of 2019 for consumers.
Same store sales as measured by account openings were down by 15, 5% through the end of the third quarter when compared with the third quarter of 2019.
And the third quarter, 52% of our account openings came from our online channel, which includes our Frost Bank mobile App.
An online account openings with 73% higher compared to the third quarter of 2019.
Or investments and enhancing our mobile an online experience proved timely during the quarantine.
The consumer loan portfolio was one $8 billion at the end of the third quarter of by six 7% compared to the third quarter of last year.
Our growth is being driven primarily by consumer real estate loans.
Or Houston expansion continues on pace with five new financial centers opened in the third quarter for a total of 20 of the 25 plan new financial centers.
We expect open to more in this quarter with the remaining three opening in early 2021.
The fact that we've been able to continue our expansion plans through the pandemic and see very promising results.
Is due to the dedication and skill across bankers.
When they have done the miraculous what merely seems extraordinary tends to be taken for granted but I want to acknowledge the commitment to the frost philosophy and culture that our people have maintained during what has been a very unusual year.
Of course, we realize the pressures impacting the banking industry in light of the current and projected economic and interest rate environment and.
And the importance of operating as efficiently as possible, while providing the level of world class customer service Ross is known for.
I'm proud of our efforts over time and in particular, what we've accomplished this year, which Jerry Salinas has been reporting on as we move through 2020.
Next year will be no different and we're committed to improving our operating efficiency further.
In that regard I will note that our executive team is committed to reduce our own salaries by 10% effective January 1st as well as reducing my teams bonus targets by 5% in mind by 10% for the coming year.
We're taking these actions despite the recognised success crosses had managing through the pandemic and supporting our customers and communities.
They represent management's desire to contribute to the current future long term well being of the company and reflect our commitment to our unique culture.
All of us at Frost and all our lines of business will face these challenges together and our company as always will emerge stronger than ever.
Now I'll turn the call over to our Chief Financial Officer, Jerry Salinas, Some additional comments.
Thank you Phil.
Looking first at our net interest margin Arnett interest margin percentage for the third quarter was $2, 95% down 18 basis points from the 313% reported last quarter.
The decrease primarily resulted from lower yields on loans, which had a negative impact of approximately 11 basis points on the net interest margin and a lower yield on securities, which had at three basis points negative impact on.
Combined with an increase in the proportion of balances at the fed has a percentage of earning asset which had about seven basis point negative impact on the NIM compared to the previous quarter.
Lower interest costs in the quarter reduce these negatives by about two basis points.
The taxable equivalent loan yield for the third quarter was 373% down 22 basis points from the previous quarter the.
The decrease in yield was impacted by decreases in LIBOR during the quarter as about two thirds of our loan portfolio. Excluding PPP is made up of floating rate loans and about 60% of our floating rate loans are tied to LIBOR.
The PPP loan portfolio also had a negative effect on our loan yield as compared to the second quarter. During the third quarter. We extended the expected term of the PPP portfolio somewhat which results in a yields and Ah yields on the PPP portfolio of 365% during the third quarter.
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Looking at our investment portfolio. The total investment portfolio average 12 $7 billion during the third quarter of about $180 million from the second quarter average of $12.5 billion.
The taxable equivalent yields on the investment portfolio with 344% in the third quarter down nine basis points from the second quarter.
The decrease in the portfolio yield was driven by a decrease in the yield on our taxable portfolio the yields on that portfolio, which averaged $4.2 billion. During the quarter was down 10 basis points from the second quarter 222, 1% as a result of higher premium amortization associated with our agency.
MBS securities given faster prepayment speeds and lower yields associated with recent purchases.
Our municipal portfolio averaged about $8.5 billion during the third quarter flat with the second quarter with a taxable equivalent yields a 4.08% up one basis point from the prior quarter at.
At the end of the third quarter, 78% of the municipal portfolio was pre refunded or psf insured.
The duration of the investment portfolio at the end of the third quarter was four five years up slightly from four four years last quarter.
Regarding noninterest expense for the third quarter, how point out that the salaries line item includes about four 5 million and reductions in salary expense associated with chewing up our incentive plans based on current expectations are projected payouts for the year.
As Phil mentioned in this environment, we continue to focus on managing our discretionary spending and looking for ways to operate more efficient more efficiently.
Looking at the full year 2020, our previous guidance on expenses with it adding back to deferred expenses related to PPP loans.
We expected an annual expense growth of something around 6% are current expectations would reduce that to something around the 3% range with that I will now turn the call back over to fill for questions.
Thank you Jerry.
We will now open it up for questions.
Thanks.
At this time I would like to do my head.
Question. Please.
One on there.
Again.
On your telephone keypad.
And your first question comes from the lineup guidance.
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Airlines now okay.
It's pretty good afternoon guys.
Great.
Yeah, I wanted to start with.
Dynamics of the Pvp loans, I know last quarter I believe I remember you recognized about 20% of those PPP fees. It sounds like if you've extended.
Assume duration of that portfolio, maybe it was less than that in the third quarter of about how much was true.
And the third quarter of the P. P. P O.
I think the number was pretty comparable we did put some additional loans on during the during the third quarter and we did extend the the.
Expected of life, there just a little bit more than we expected originally but I think that.
The amount that we recognized in the second quarter associated with that fee within the $21 million range.
So really pretty comparable with the with the second quarter.
Okay.
And I know you guys have been talking about the full year NIM.
X PPP coming in a little above 3%.
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Three quarters of the way through so we're getting close is that still the right way to think about the full near yet full year NIM for you guys.
Yeah, I think at this point, that's kind of where we're at based on.
What we're saying so far.
I think the third quarter, probably gives you a pretty good feel kind of the projection for the for the rest of the year given just that we've got one quarter left.
And that will get us I think kind of the range that we've guidance that we've given for the for the quarter excuse me for the year.
Okay.
Finally for me we have seen some.
Companies, especially some smaller banks there in Texas.
Re engage in the buyback.
Sad as deferrals come down and maybe you guys feel a little more comfortable is that something that you are thinking about doing re engaging in this year repurchase plan.
Right right now.
It's not something that's on our radar screen immediately as you know it has been over time and I suspect at some point it will we will re engage but.
Right now in the in the environment, we're focused on dividend protecting that providing capital for the growth that we're seeing so.
At some point, yeah, it'll come back.
Okay got it thanks guys.
Igloo.
Your next sequence John Constable My line of neat.
Okay Your lines, Alabama.
Hey, good afternoon guidance.
How're you doing hey, good good on the expense guide that the 3% growth that's from the $835 million reported in 2019 is that right less the seven and a half roughly in deferred expenses you mentioned.
Yeah sure on the.
It's from the reported 19 number right and so we're adding back the $7 million in deferrals that we talked about in the second quarter Yep, two or 2020 number. So yes, I think you're thinking about it right dates gotcha. Okay. I just want to make sure there and then on a NIM is the thinking that effectively the NIM will probably continue to just drift lower from here X the <unk>.
Asian, assuming the curb persists, maybe even through next year is loans and securities continue to re price and then what does that ultimately mean for the NII trend over time do you guys think that you can grow NII with with that kind of a NIM headwind.
And I think as far as.
Your view of the name I mean, that's good really kind of where we're at right now obviously, there's not a lot of opportunities to invest we've got.
I think between six and $7 billion at the fed on any given day, earning 10 basis points and there's just not a lot of opportunities out on the yield curve right. Now we continue to say, we're going to be opportunistic and and we pay attention, but you've got to we've got quite a bit of liquidity and that's probably true for a lot of our competitors, but just not ready to stick our toes in the water as of yet.
So there would be some potential there filled mentioned.
That loan pricing is still obviously competitive as a structure. So I think your view that it's going to be a tough road, especially in 2021, given this sort of a right environment.
I think that I would have to agree with you. There is some potential to grow the net interest income like we said to the extent that we decided to invest some of that liquidity yep.
Where are you seeing reinvestment rates today I know you mentioned they were there were lower than that makes perfect sense.
Just curious where they are right now.
Man.
I'm almost I'm almost embarrassed to grab my files to be quite honest with.
I think the mortgage back so I'll go to the Mbs's that we purchased during the quarter just to give you a range there are.
Bear with me a second here.
So I think we were buying.
Mortgage backs are let's see here the agencies that we thought were at a 153.
I don't think we could get that today to be quite honest with you and and as you heard me say.
They are prepaying pretty quickly I think on the Muni side, we were looking at some 10 year stuff.
Probably in the 139 135 P E sort of range.
So.
So that's not too.
Yeah, No I hear Ya I mean is there is there a thought to just keep the securities book stable from here or maybe grow it a little bit over time, just to support NII, a little bit to the extent that maybe loan growth doesn't come roaring back.
Yeah, I think that's kind of the view that were taken again, we keep saying that we're going to be opportunistic we wish that we had other opportunities, but you're right. I mean, we will we will do something will kind of hold our nose. If you will and decided to spend some of it but we really don't feel like it's a place we want to be in right now to be quite honest with you yeah.
Switching to the loan pipeline that's.
Positive to hear that was up 11% since last quarter, where you guys seeing the the increase in activity there.
And then.
Again mentioned the pickup and competition was just wondering in which areas you're seeing competitive pressures. The most and if you are actually seeing spreads compressing.
Yeah, well if you look at the.
At 11% owner linked quarter basis, not annualize it spread pretty evenly commercial real estate activities up 19% in terms of pipeline.
And commercial CNI is up by 8% the dollar amount of both of those.
It's pretty comparable.
And so.
That's really where we're seeing in terms of competition and competition.
You are seeing pricing.
Pressure return, we're not losing a lot to pricing because we once we get to a customer do we think meets all our criteria that we will not have a long term relationship where will we don't want to lose it for a few basis points.
It's one real interesting area to me that we've seen is the increase in deals that we've lost to structure.
You look at.
I'll give you two numbers one is if you look at large C&I loans, which we define large is over $10 million, 92% of the deals we've lost have been to structure.
And if you look at commercial real estate.
Deals to prospects.
We were losing of the deals were losing we're losing 92% interesting Lee the same number 92% to structure there as well.
So no I think it's been.
A bit of a.
A turnaround quarter force from the second quarter I'm, obviously, there was a really tough quarter, but to see the 11% growth in pipeline was good also another thing we look at is what we call. Our look to book an R ratio. There if you look year to date.
Compared to last year, we've looked at about 6% more deals that as we've had opportunities to.
To look at alone request, an actual request.
We're up in terms of booking by 11%. So we're doing a pretty good job of booking the deals that we're seeing so.
It's a tough market anytime you see that much loss to structure makes you worry a little bit and it's mainly guarantees advanced rates San Jose can periods, all those kinds of things, but even with all that I'm pretty happy with our success rate and we're having.
Hi, Thanks for all the details guys appreciate it.
Absolutely. Thank you.
And your next question that's on the line or any pain.
Our lifestyle open.
Hey, good afternoon.
Okay.
Hi, I just wanted to phone off one on just expenses and investments.
J I T.
Guidance.
<unk> expenses go back that one $225 million plus or minus in the fourth quarter.
Talk to us in films off.
We need to look at the investment that you have ongoing in terms of the financial centers.
I'll just need the.
On the Palm side, how do you how should we think about expenses going into next year, when you're going to continue to have the margin Fisher.
What's the best way to think about it internally management thinking about that.
Sure I think that Phil gave you a little bit of a view of how management and just looking at it.
I'll defer to him a little bit let him talking he'll follow up after after his conversation yes.
I gave the example, where are.
Our management teams decided to cut our salaries back 10% the bonuses.
Target levels, what I mentioned.
No we did that is.
Because we recognize that.
We need to be it would take a leadership position with regard to efficiencies. There's there's work really the industry needs to do we certainly need to do.
On top of what we've done already and we.
And that's just the beginning of the process. We're beginning are planning for next year for the budget and this is one of the early decisions that we're making I think it was really interesting and I was really proud by the way I should mention this of.
Yesterday, and a board meeting.
I mentioned that to the board that that was our decision and their time when they have on at the end of every meeting where they have their private session. They decided.
Unilaterally to decrease their cash compensation by 10% to which I thought was a really frosts thing to do so.
You're seeing the.
Leadership at the top.
Including our board and our commitment to to see increased efficiencies.
No. That's commendable I guess, maybe asked distantly do I think you mentioned focus on positive operating never due to the efficiency ratio can actually improve and this bad job or do you think that's gonna be challenging.
I missed the part where you said.
At the very end your question you said.
Thank you.
Do you think they are so you can see the issue can improve from your in.
In the cutting background.
Yeah, I mean, I think I still mentioned.
We are starting our process and obviously, we've had a lot of conversations and so.
We know what we've committed to the board and so we've got a lot of work to do there.
We don't have all the plans in place I'd feel a little uncomfortable, giving too much guidance will give more color. Obviously in January we want all of you to know is we're taking it all very seriously and we understand the revenue pressure that we're under and we're looking for all the efficiencies that we can and some tough decisions will be made and we will have to make them in.
We'll just continue to move forward there as far as what we're doing in Houston.
Committed to doing that Phil Phil has said that all along and and we're making significant progress there.
They are performing better than expected so.
We will continue to move there we won't we're not going to slow that down at all we may open a couple of locations here and there, but we're obviously going to be very very prudent and what we do from that standpoint, there's going to be costs that we have to spend whether that from a technology standpoint, whether it's infrastructure, whether it's security related to.
Technology. So we know we have some cost to spend there, but we also understand that in order to do that we've got to do things more efficiently and that's the sort of conversations that the executive team is in the middle of right now.
Got it and I give just shifting to fill.
Give us a sense I'll see you talked about and ignored pipelines. Some yeah, sometimes things look encouraging just give us a sense of what's the <unk> in terms of economic outlook.
Once you get to the elections next week and you think about next year.
More optimistic today in terms of what goes could look like anything.
Did the headlines that can be C. R.
Are you more cautious.
I would respond two ways with two items to that question. One is I think that.
That the election getting it behind everyone is going to be a real positive whichever way. It goes it's just going to add more clarity and the calls we've done with customers, there's been more uncertainty around that and anything else and so.
I think once we can get past that I think attitudes will will.
We will steal themselves and we'll move forward.
I think the most the thing that makes me most optimistic going forward is that.
I don't want to.
Blow pass that number too fast and we seen new relationships up by 38% almost 39% compared to where it was last year I mean, we go along at about.
Oh, I'm going to guess something like 450, a quarter and the commercial side.
For the last two quarters, they've been in the high 70, seventies and well.
Well all those not all of those relationships by far or borrowing money because there's lots of uncertainty today, whether it's from politics, whether it's from elections, whether it's from.
Covid for sure on the health situation, I mean, those relationships or what generate growth for us going forward and so that's the thing that makes me most positive another thing I'm positive about.
Is.
Just when you look at Houston again, we've been spending money and our shareholders have been patient.
So long term strategy and all but when I look at our loan pipeline are active pipeline.
Houston market is 50% higher and their loan pipeline in any of our other markets and the other markets aren't doing bad so it's just.
We're just seeing pay off for that investment in that market and I'm encouraged about that as well, we'll we'll finish up that plan for that first 25, we'd hope to be through by the end of this year.
Two or three you're going to bleed over into the early next year, but it's understandable given the covid environment and everything else. It's so we'll be through that we've had some great people and I'm just really excited about what's going on there. So.
I'm optimistic I am optimistic about our prospects going forward I mean look rates are terrible and.
We're we're big we've got a big investment portfolio lots of liquidity can't do anything about that but as far as the part we can do something about.
I am optimistic on how things are going right now now that said.
The virus has got too.
We've got to win on the virus.
Nations World, we've got to win on it.
<unk>.
If it gets worse or they shut things down things will get worse, hopefully we won't see that.
And we will be able to move past that next year. If we can do that though I am optimistic so the coming year.
But it and I'm sorry, you say missed it soon did you mention who you are using these notes to on structure I think that the banks are are these non-bank fanaticism was stepping in.
Abraham I haven't heard that it's Nonbanks I mean, there's some of those out there.
Usually when I've heard reports on this it's every everywhere right. It could be small banks large banks banks are size it could be private equity.
I haven't heard anything different so I think it's pretty broadly based people are starving for yield and.
It doesn't surprise me that it's getting more competitive.
Got it thanks for taking all my questions.
You're welcome.
Your next class.
From the line of January right down your lifestyle fan.
And can you can afternoon.
Hey, Jennifer and Jennifer Alright.
<unk> please.
Second corner do you think.
<unk> have a good run right going forward and.
Would you expect pretty healthy growth again in the fourth quarter.
Where do you think that that.
That incremental improvement with cancelling them.
And I think that yes, we were glad I think in the second quarter call. We said that we were starting to see in July that some of those accounts, especially as it related to service charges on deposits were a big component of that is.
Oh D NSF and then the interchange fees and debit card fees their worst trending up and we did continue to see improvement there in.
In the third quarter a lot of it is Phil mentioned really it's going to depend on what happens from from an economic standpoint, with the pandemic I think the numbers that were saying.
October a little bit softer than the growth that we've been seeing in the third quarter. So.
Yeah, it'll be interesting to see how it plays out the numbers are better but again, we're not seeing that same sort of accelerated accelerated rate that we saw during the second quarter.
Alright, thanks, so much.
Sure.
Your next.
The line.
Into your line Taliban.
Thanks have a good afternoon.
You can get it.
You guys had just.
Just a small addition to reserves I was just wondering if you could talk about what throw the increase reserves and do you think it this morning.
You're done.
At least on buildings.
<unk>.
I think that that really the increase in reserves a big portion of it I think was related to the energy book.
The models indicated that we needed some additional dollars there and then also some of the work we did in management overlays in the oil field services.
Side of the of the book showed some increases there. So I think our specific reserves and energy for example.
Like $2 $3 million in the second quarter up to eight $4 million. So I think that's where we saw the bulk of the increase and it was really related like I said to specific work associated I think with primarily with the oilfield services.
And would you say you're you're done you think at this point.
Uh-huh.
I think that obviously that really has a lot to do with with kind of what happens, but I will say that obviously, we feel very comfortable with where we're at today.
We.
When you looked at our provisions you can see that were down from the second quarter. You saw they charge offs were down to $10 million, that's 22 basis points on average loans, that's much closer to our normalized levels that we typically like to run.
So I think we're certainly feeling positive about it but still cautious to be honest I think anybody that that didn't say, they're cautious in this environment would be somewhat misleading. So we feel good obviously, we're of where we are but continue to be cautiously optimistic going forward fill any other color you want a outgrew Jerry.
The weakness I think we're seeing in the energy sector is around service because it's so there's not a lot of activity there.
The weakness is.
The rate that.
That rate of that weakness has slowed the equipment utilization number.
Is.
Is down, but it's not down by near as much as what it was before but still you got service people that are that are under pressure.
By and large and historically performed pretty well and service and really thought that big a.
Part of our portfolio, it's under $200 million, probably under $170 million, but it is something that we're watching.
The bottom line is kind of what we've been saying what Jerry said earlier, it's it's.
It's what's going to what's demand going to do.
And what's covid going to do to demand we ended up.
Walk in the place down again, and you're going to see demand numbers go down and you'll see price prices reduced and you can see problems increase but.
We've been able to manage is fair amount of stability recently and we're in.
And I feel good about the people that we think that our structures in the work that our people are doing.
Working with our customers. So we'll just have to see how it goes from now Unfortunately like everything else I think it's some level at all still.
Revolves around the virus and how we do there.
Okay.
That's very helpful. And then if I could just follow up on expenses you guys have come in better.
An extensive now two quarters in a row.
And then the guidance that we do need some clients that can be a big jump.
In the fourth quarter can can you just talk about what's what's driving.
The increase I know you mentioned the point 5 million.
<unk>.
On the incentive accruals, what's flying that right.
All right yeah. So there are certain things that happened in the fourth quarter for some stock compensation awards that occur.
Tober that vast immediately and so we deal with those expenses in the fourth quarter. So we're dealing with that we've also got some decisions that need to be made as it relates to marketing expenses for example related to advertising and how much do we do we want to do we want to be sensitive to that even while managing expenses. Obviously, we think that we.
We want to be.
Beautiful intelligent and how we spend those dollars we've had a lot of success in Houston. So we want to make sure that we do what we need to do so some of those decisions are still being made as we talked about the.
The executive team is looking at a lot at open positions that that.
That would be filled in the fourth quarter and whether those need to be filled in so those projects that projection is really based on our best information, but we continue to spend time not only on on looking at how we can be more efficient in the four and 2021 some of that of going to the fourth quarter of this year also but right now.
The guidance, we have given is based on the best information we have.
We're going to do things that we need to do obviously we've.
We've talked about.
Many others have about branch locations do we need to make decisions about closing branches that may be not as.
As.
Profitable are necessary.
Building new branches, obviously in Houston and have others in the plan and so we just want to make sure that things that we do make sense to us organizationally. So we'll do what we need to do and and some of the work that we're doing will affect the fourth quarter, but at this point, we don't have those commitments Titus.
Okay, that's really helpful. Thanks.
Your next question comes from the line is Steven.
<unk> your lifestyle fan.
Buddy.
Casey.
So first I had a big picture question. So when I think about Colin Frost I've always thought about you guys have the company of plays a long game right you invest in the franchise take great care of your employees or customers et cetera, I am somewhat surprised by the expense initiative can you talk about what prompted that.
Which initiative are you talking about Steve and you're talking just generally you tell them that something specific I will make sure I'm answering your direct question no I mean, well you've talked about reducing your own salaries right improving efficiency for next year I mean, we've been through periods before where you've had revenue.
Pressure and I don't recall a message like this before it seems somewhat new and I'm curious what prompted I don't have to.
From yourself from the board like what prompted this it seems to be a bit of a shift strategically.
Yeah.
I wouldn't I wouldn't.
Don't think of it that way first of all it didn't come from the board.
This is coming from our management team.
Like I said.
I'll talk to the board about it yesterday I could visit is the right thing to do and they came back in and reduce their own. So we're all of one mind on this.
One of the things that's different about let's take away alright.
Oh wait we had the financial crisis, we were not in mortgage we had the opportunity because we had liquidity. We had earnings we had taxable income we had the ability to go into the to the municipal market, which was not a part of QE at that time.
And get some incredible.
<unk> and investments during that period of time and really through the.
Eight plus years after that.
10 years or so after that those kind of of opportunities are not available. We see this as a longer period of time for the banking industry.
Where <unk> got not just love short term rates, which is that in the past, but you've got low long term rates and then you've got the the covid environment and the uncertainty around all of that and.
We just.
We're just doing our job.
We are.
Protecting our earnings stream, we are doing what we're asking our customers to do which is make sure that your your business is running efficiently you're able to take care of your obligations. So.
It's just part of our culture.
It's a part of integrity carrying an excellent we do what is necessary.
To play the long game and believe me this is a long game.
It's it's so long [laughter].
Remember back to the 19 eighties. So when you go back there you look at some of the things that we had to do.
This is nothing compared to that I was essentially CFO during that period of time and my job was to sell everything to wouldn't tied down that could generate any capital because there was a big red line drawn around Texas and there was no capital for no body in this state and Dick Evans in the lending guys. His job was work out loans overtime. So.
As I recall I think I've got one raised in six years back during that period of time so.
So it's.
You go back to the.
The great depression, or the money panic of the early 19 hundreds you name. It of this organization has responded and done what we need to do so our view on this is.
It's consistent with what we've done over the long term and it's also consistent with the long term view of the company.
Because we need to show we need.
As an industry to continue to be more efficient to apply the lessons that we learned in the things that we have been able to do some of them on the fly that have made us very efficient we need to make sure that we're applying those lessons going forward and.
Look it's as part of our culture to do the right thing.
To not just say what to do with health lead it.
<unk>.
If you're not able to <unk>.
<unk> with your actions, what you mean and it's really just empty words. So that's what this is.
Okay.
That's helpful and when you think about next year, what's the right measure that you're after is to actually improve the efficiency ratio year over year.
Pre pre growth how how are you going to measure how much needs to get done.
It's directional and what we're seeing is jerry's talked about as we're seeing pressure on revenues.
And so if your revenues are under pressure and if the feds, telling you that they could be for some time than what you need to do is you need to make sure that you rationalize your expenses around those revenues and that's what we're doing and it's a directional process and it's beginning and it's it's something that we're always careful on on expenses as we talked about.
Culturally careful on that we've got a conservative.
Corporate culture.
But.
We just we are in a situation where.
Revenues, we think will be under pressure for the industry for Ya.
Possibly a couple of years and we.
Hopes not a strategy.
That's very helpful and just finally, we've seen other banks undertake.
Efficiency initiatives quite a few of them have done it with the help of outside consultants are you, bringing somebody in from the outside to help out with this.
Oh Heck no.
We've.
And about 40 years here that we've done that before.
Experienced with those has been there.
Very short term in nature.
Are they are expensive to shareholders and the end up telling you taking your watch and telling you what what time. It is what we're talking about doing is really doing deep.
Thinking.
We're going to be smart about our business, we want to do the right thing do things that are lasting long term.
<unk>.
With a view and all this.
To make it.
To keep and improve the customer experience that we're not interested in doing anything that devalues, our value proposition and our customer experience because that's really what it's so key to our growth and success. So.
And my experience with consultant seas around expenses don't have that same view.
Yeah, I've had the same experience.
Thanks for taking my questions.
Absolutely.
Our next question.
On the line.
Your life Nowadays.
Hey, Thanks for taking the follow up cause I just wanted to ask.
We'll see what happens, but by then is leading in the polls right now he's talking about increasing the corporate tax rate from 21% to 28%.
If that pans out you have any idea what the impact would be.
Colon colon frost tax rate at a 28% corporate tax rate.
Very of course, all of that is going to be dependent on what taxable income is right. The simple way to do it. If you are modeling it for us. It's it's really pretty simple. It's just a third increase if you think it's going to be 9% you'd raise it by a 3rd% to 12%.
It's really almost as simple as that but obviously, it's going to be dependent on what the forecast is for protection.
Okay, great. Thanks, guys.
Sure.
There are no further questions at this point you may continue.
Okay, well, we want to thank everybody for your participation in the call today and.
And we will be adjourn.
HM HM HM.
Thanks for calling in and now disconnect Sanders standby.
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