Q4 2020 Cullen/Frost Bankers Inc Earnings Call
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Ladies and gentlemen, this stop hating today's conference is scheduled to begin momentarily until that time your lines will again be placed on hold.
Kansas Star Peter Today's conference is scheduled to begin momentarily until that time your lines will again be placed on hold thank you for your patience.
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Ladies and gentlemen, thank you for standing by and welcome to the Cohen from Q4 earnings results Conference call.
This time, all participants are in a listen only mode.
After the Speakers' presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one on your telephone.
Do you require any further assistance please press star zero.
I would now like to hand, the conference over to Mr. <unk> <unk> director of Investor Relations. Please go ahead.
Thanks Ashley.
Mornings 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 1095 as amended.
Intend to such statements to be covered by the Safe Harbor provisions for forward looking statements contained in the private Securities Litigation Reform Act of 1095 as amended.
Please see the last page of text in this morning's 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 Investor Relations at 210 220 5234.
At this time I'll turn the call over to Phil.
Thanks Savi.
Good afternoon, everyone and thanks for joining us.
Today ill review fourth quarter results for Cullen Frost, and our Chief Financial Officer, Jerry Salinas.
He will also provide additional comments before we open it up to your questions.
In the fourth quarter Cullen Frost earned $88 $3 million or $1 38, a share compared with earnings of $101 7 million or $1 60, a share reported in the same quarter last year, and $95 1 million or $1 50, a share in the third quarter of 2020.
For the full year of 2020, Cullen Frost earned $323 6 million on.
$5.10, a share compared with earnings of $435 5 million or $6 84, a share reported for 2019.
Our team continues to manage expenses went on at the same time pursuing the expansion of market share and investing for long term growth.
Overall average loans in the fourth quarter were $17 $9 billion, an increase of 22% compared with $14 7 billion in the fourth quarter of last year, but excluding PPP loans fourth quarter average loans of 15 billion represented a two three <unk>.
Percentage increase compared to the fourth quarter of 2019.
Average deposits in the fourth quarter were $34 billion, an increase of 25% compared with the 27 billion in the fourth quarter of last year.
On the second consecutive quarter, we've seen the highest quarterly average deposits in our history.
This growth reflects it for US has always been a safe haven for customers in times of uncertainty and also our success in building new relationships.
Our return on average assets on average common equity in the fourth quarter.
It was 86 basis points, an 855% respectively.
We saw a reduction in our credit loss expense to $13 $8 million in the fourth quarter down from $20 3 million in the third quarter of 2020, and this compared to $8 $4 million in the fourth quarter of last year.
Net charge offs for the fourth quarter were $13 6 million.
Compared with $10 2 million in the third quarter.
Annualized net charge offs for the fourth quarter were 30 basis points of average loans.
Nonperforming assets were only $62 $3 million at year end down.
Down 35% from the $96 4 million at the end of the third quarter.
Year ago, Nonperformer stood at $109 5 million.
Overall delinquencies for accruing loans at the end of the fourth quarter were $103 million.
Or 59 basis points of period end loans.
Those numbers from remain within our standards and comparable to what we've experienced in the last several years.
Regarding payment deferrals in total we've granted 90 day deferrals to more than 2500 customers for loans totaling $2 $2 billion and at the end of the fourth quarter only about 46 million remained in deferment.
Total problem loans, which we define as risk grade 10 and higher.
Or $812 million at the end of the fourth quarter in line with the $803 million at the end of the third.
Energy related problem loans were $133 5 million at the end of the fourth quarter.
Compared to $203 7 million for the previous quarter.
And $132 4 million for the fourth quarter of last year to put that in perspective total problem energy loans peaked at nearly $600 million.
Early in 2016.
Energy loans continue to decline as a percentage of our portfolio.
To eight 2% of our non PPP portfolio at the end of the fourth quarter.
As a reminder.
Figure was nine 1% at the end of the third quarter and the peak was 16% back in 2015.
We continue to work hard to rationalize our company's exposure to the energy segment to appropriate levels.
Throughout 2020, the Pandemics economic impacts on our portfolio were negative but manageable.
And our overall outlook for credit quality as stable to improving.
In the second half of 2020, we discussed the non energy portfolio segments that have had an increased impact from the economic dislocations brought on by the pandemic.
Restaurants hotels entertainment and sports and retail.
The total of these portfolio segments, excluding PPP loans.
It represented just under $1 6 billion at the end of the fourth quarter and our loan loss reserve for these segments was 455%.
We saw the largest reserve increases in hotels, and restaurants, where our allocated allowances as a percentage of the outstanding balances are now nine 1% and seven 4% respectively.
We continue to monitor credit in these areas closely and we will have a good and we have a good handle on a risk.
And as a reminder, hotels and lodging represent approximately one 9% on our total loans and restaurants represent approximately one 8% on.
Of our total loans.
To me a really bright spot is the growth on our commercial relationships in 2020.
They were up by 31% compared to a year ago.
We're great at building relationships, it's what we do et.
It's in our mission statement.
But clearly cross national recognition from rich success on going above and beyond to obtain PPP loans for its customers had a positive impact in the market.
In addition, our Houston expansion is also contributing to our success here.
New commercial relationships in Houston grew 49% in 2020 and represented 39% of the new commercial relationships companywide during the year.
For the year on.
Our loan commitments booked were down 6% compared to the prior year and reflected the impact of the pandemic.
Regarding new loan commitments booked the balance between these relationships has stayed steady at 53% larger and 47% core at the end of $2 20.
2020.
The market remains very competitive the percentage of deals lost to structure increased from 61%. This time last year to 67% this year.
Our weighted current active loan pipeline in the fourth quarter.
Dropped by about 2%.
Paired with the end of the third quarter.
Reflecting the continued impact of the pandemic on business activity.
Consumer banking continues to see good growth.
Overall, our net new customer growth.
For the fourth quarter was up 57% compared to the pre COVID-19 fourth quarter of 2019.
Same store sales as measured by account openings from branches opened less than a year were up by two 2% through the end of the fourth quarter when compared to the fourth quarter of 2019.
And up eight 2% compared to the prior quarter.
Here again, our Houston expansion is helping this growth.
For example.
Despite currently representing only about 16% of our total consumer households.
Houston contributed 34% of fourth quarter total company consumer household growth.
In the fourth quarter, 41% of our account openings came from our online channel, including our Frost mobile App.
Online account openings were $39, 5% higher compared to the fourth quarter of 2019.
The consumer loan portfolio was up $1 $8 billion at the end of the fourth quarter up by seven 2% compared to the fourth quarter last year.
Our Houston expansion is nearing completion with two new financial centers opened in the fourth quarter for a total of 20 to 25 planned new financial centers.
Covid has had an impact on our rollout, but we expect to open the remaining three in the first half of this year.
Overall, the new financial centers are exceeding our expectations and the new locations, we are well placed and well timed to leverage our success in obtaining PPP loans from the market.
The fourth quarter also saw the opening of our New financial Center in College station with a second financial center to open in nearby Brian later this quarter.
So far in January our newest location in Dallas Redbird Financial Center location also opened for business.
We remain committed to consistent sustainable above average organic growth.
We also remain committed to managing costs and operating as efficiently as possible.
This month, we took the difficult step of eliminating 68 positions across the company for business needs have changed where technology can be better utilized.
We're responsibilities could be consolidated.
This along with broadly successful efforts to improve efficiency, which Jerry will discuss positioned us well as we move into 2021.
I talk often about the dedication and skill of frost bankers and about their commitment to the frost philosophy and culture.
Throughout a difficult 2020, and now into a new year that promises to be challenging in its own way.
People of Frost have been and will be ready to provide the level of world class customer service Frost is known for.
I'm thankful for them.
I'm proud of what we've accomplished and I'm optimistic about the long term well being of the company and the communities we serve.
Now I'll turn the call over to our Chief Financial Officer, Jerry Salinas for some additional comments.
Thank you Phil.
Looking first at our net interest margin our net interest margin percentage for the fourth quarter was $2 eight 2% down 13 basis points from the $2, 95% reported last quarter.
The decrease was almost all a result of a higher proportion of earning assets being invested in lower yielding balances at the fed in the fourth quarter as compared to the third quarter interest bearing deposits at the fed, earning 10 basis points averaged seven 7 billion or 20% of our earning assets in the fourth quarter up from.
$5 9 billion or 16% of earning assets in the third quarter.
The taxable equivalent loan yield for the fourth quarter was 374% up one basis point from the previous quarter.
Average loan volumes in the fourth quarter of $17 9 billion were down $205 million from the third quarter average of $18 1 billion.
The decrease was driven by a decrease of $296 million and average PPP loans as a result of those balances being forgiven.
Excluding PPP loans average loans in the fourth quarter were up about $92 million or two 4% on an annualized basis from last quarter.
Looking at our investment portfolio. The total investment portfolio average $12 6 billion during the fourth quarter down about $98 million from the third quarter average of $12 7 billion.
The taxable equivalent yield on the investment portfolio was 341% in the fourth quarter down three basis points from the third quarter.
The lower portfolio yield was driven by a decrease in the yield in our taxable portfolio.
The yield on that portfolio, which averaged $4 $2 billion during the quarter was down nine basis points from the third quarter to $2, one 2% 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 4 billion during the fourth quarter down $95 million from the third quarter with the taxable equivalent yield of four 9% up one basis point from the prior quarter.
At the end of the fourth quarter, 78% of the municipal portfolio was pre refunded or psf insured.
The duration of the investment portfolio at the end of the fourth quarter was $4 four years compared to $4 five years last quarter.
During the fourth quarter, our investment purchases were less than 100 million and consisted primarily of MBS securities.
As we look out into 2021, we currently are not expecting to make a significant amount of investment purchases in this market.
We are currently only expecting to make purchases in the neighborhood of about $1 billion, which will help to offset a portion of our maturities and expected prepayments and calls.
Regarding noninterest expense.
For the fourth quarter I'll point out that noninterest expense includes about $7 1 million in one time restructuring costs with $5 $2 million of that related to severance impacted by the eliminated positions filled noted.
As we mentioned last quarter and as Phil mentioned in his comment in this environment. We continue to focus on managing our discretionary spending and looking for ways to operate more efficiently. We have worked and continue to work in a collaborative manner across our organization to look for ways to operate more efficiently without affecting our.
<unk> experience, we challenged ourselves to eliminate open positions, where possible and reorganized operating areas, including using technology, where it makes sense to further automate processes, we used a thoughtful process to reorganize positions, where the business needs have changed where technology can be better utilized and we're risk.
Sponsor abilities could be consolidated.
We asked our teammates to question discretionary spending and visited with vendor relationships to reduce costs, where we could all of this was done without losing sight of our core values of integrity caring and excellent.
We believe that we have always been prudent.
And managing expenses, but in this zero rate environment. Our approach has become even more focused we get we began this process in the second quarter of last year as we began to deal with the challenges of the pandemic and a zero interest rate environment.
Our initial guidance for expense growth for 2020 was around 10, 5% and we actually ended up with a growth rate of under 2% on reported noninterest expenses to 2020 over 2019.
Obviously, the changes, resulting from the operating environment and lower incentives affected the decrease somewhat.
But overall it shows our team's commitment to managing expenses in this environment.
Now looking forward into 2021, we expect an annual expense growth of something around the four to four 5% range growth off of our 2020 total reported noninterest expenses.
Regarding income taxes, we currently expect our effective tax rate for 2021 to be a little higher than our 2020 effective tax rate of five 7%.
Just as a reminder reminder, 2020 income tax expense included a discrete one time credit of $2 6 million.
Regarding the estimates for full year 2021 earnings. We currently believe that the current mean of analyst estimates of $4 72.
Is a little low.
This assumes a steady operating environment with no unexpected credit event with that I'll now turn the call back over to Phil for questions.
Thank you Jerry and we will now open up the call for questions.
As a reminder to ask a question you will need to press star one on your telephone.
Good question.
Yes.
Your first question comes from the line of Green.
Thank you Doug.
Your line is now open.
Hey, Thank you good afternoon guys.
Yeah Brady.
I wanted to start with the PPP loans.
Some of those got forgiven in the fourth quarter.
Was the dollar amount of spread income spread income impact from.
On the P P P and the fourth quarter.
Yes give me a second here I will say that the fee portion I know was around let me grab it here just so I don't have to.
Give you any any false information it was about $19 million.
Okay.
And I know you guys were pretty successful in round one of the PPP is over $100 million of earnings if I remember right.
What about round two I know, it's early but any idea.
How big that could be at Frost round two of PPP.
Brady, we're seeing really good volume.
Our people worked around the clock once the SBA gave us the information about how.
How we'd be integrating with them and it was it was a new system front end.
I think we had about 10 days to stand up our portal and and our processes and it was.
We have so far gotten.
Well, let's see it's the piece of paper I have right now has over 7000 applications I think earlier today I've got one maybe 7500 or so.
And we got a round two.
2500 applications approved by the SBA back to us. So the process is working really well, it's an automated process we've seen good application volume.
This number that I was looking at that I told you about.
Let's see the 27.
And PPP years used to be on.
E on but let's let's say it's pretty good.
And that was close to $1 billion worth of volume, So we're seeing a little bit lower.
On average loan size than we did in the first round and I think our first round had a number that was.
Oh, well, let's say 180000 ish number this time so far it's been about 144000 average size I will say that.
We've seen a volume slow more recently.
It looks like the people that.
Needed. This money, we're lined up to really get in line and we've seen that 90%.
90% of the numbers that are coming in or from first time <unk> <unk> excuse me second time PPP borrowers. So some good activity there.
Alright Thats good color then finally from me.
It's uncommon this year about Cullen frost going through layoffs I think the last time you all did that might have been a couple of decades ago.
On our times are tough, especially with this yield curve.
Net.
Those layoffs I think there are about one and a half or so to your staff your debt is that on.
One and done.
Will you continue to look not just at the workforce, but.
Elsewhere as far as expense reductions this year.
Yes.
Youre right. It was tough thing to do and it was.
On the first thing we started with it really was the last thing.
<unk>.
As Gerry has kind of been reporting.
He has modestly been trimming that 10% number he guided you to the first of the year down to think.
I think it was under 1% or so about 1% to 2%.
For the year, so that was so many different things that we did.
We got on a fair amount of visibility when we as an executive team, we cut our salaries 10%.
And our last quarter call I told you about how our board was.
They immediately and their private session decided to cut their compensation 10%.
Just a very frost things do.
So we started with those kind of things and and everything that's discretionary when we got down to the end of it.
We didn't need to reduce some of these physicians because it was the right thing to do we didn't we didn't take out.
And Mike.
The reductions they were.
Very thoughtful I think one thing, though that we decided to do is.
<unk> reduced the amount of open positions I mean, we'd much rather reduce a position for someone we don't know and have it higher yet in doing that for someone we have hired and so there were.
Many more positions that were open that were reduced.
Then there were.
Reducer current staff so.
No it's not.
It's not something that we're planning on doing.
And it's it's not on our outlook right now.
It's also true that all banks have been reducing expenses.
On staffing related to business activity for years right I mean, I can go back and look at.
I think it was pre <unk>.
Financial crisis, I was looking at our average assets per employee and was something around $3 million. Each and then I think if you just go back a couple of years ago. It was it was literally double that level. So we've been using technology more effectively and efficiently I think we're using it smarter.
And we're giving better customer experiences with it and so that will have an impact on on our growth and people. We sure wanted to and expect that to be the case, but no we're not anticipating.
On anything similar to what we did in.
In January.
Greg This is Gerry the one thing I will say, though is that we're not shifting our focus away from expense management.
I think Phil is right.
The layoffs were tough to do and we're the last thing to do but we continue to work with the executive team and really the whole organization.
Looking to them to continue to participate in trying to save expenses, where we can to be smarter about the things, we do and try to find more efficiency. So hopefully in this environment, that's something that our staff will continue to hear us talking about it and hopefully continue to focus on.
Okay got it thanks guys.
Thank you.
Your next question comes from the line of <unk> Abraham from Noah <unk> with Bank of America.
Your line is now open.
Good afternoon.
Abraham.
Yes.
Just a quick follow up Jay on PPP.
Yeah.
Questions on the model.
And this all day.
Our balance was of PPP loans at the end of the year and how much of fees our net to be approved.
<unk> one.
Sure Theres about $39 million left.
To be earned and we expect all of that to be earned in 2021.
And at the end of the year, our PPP balance was $2 4 billion down from $3 2 billion at the end of September.
And do you expect the vast majority of debt to come through on the first quarter I think.
You expect the debt last earnings call.
I think that what we've seen and we had $800 million roughly I'm going to say I don't have the number right in front of me, but I think it is right between that paid off.
Or that was forgiven if you will between September and December.
It really seems to have slowed down towards the last part of December and into January.
Would expect right now based on the best information, we have is that it'll be a bleed into the second quarter as well.
So a little bit slower than we expected here in January.
Got it and it gives you saw on.
Another question around me.
I appreciate what you're trying to do in terms of making the franchise more efficient I guess nothing wrong with that.
But just talk to us in terms of growth outlook. One of your competitors had a call yesterday and talked about on.
On the great things happening in Texas, we are seeing corporate headquarters being more folks moving from the coast to Texas.
Given that crosses Lovely day largest Texas bank.
What does this mean for earnings growth volume growth for the bank was that debt and in terms on.
What are you doing in terms of actually hiding in putting more investments on the technology side.
Personnel.
Hey, Ebrahim on well with regard to Texas, and Texas growth I mean, I would agree with them.
People have been moving here for a long time, we've seen a step up and growth it's amazing to see the relocations coming from other markets.
Some of the some of the brokers that we have business relationships and these are very successful brokers I remember one telling me.
And Austin that it used to be 80% of the relocations that they saw from out of state were from California now its.
About half Californian half.
Mid east.
East.
Midwest East Coast and so it's I think it's.
It's gaining more momentum.
Trying to understand the long term impact of it particularly at Austin I mean, it's.
There has been.
That consistency to this kind of thing, but the rate of growth and momentum in the Austin market has really been remarkable over the last several months from we're trying to understand.
The longer term impact.
For that in that market and then.
What it means to us in terms of capital allocation and how we approach that market. So I think that's that's literally developing as we all read the headlines and.
An experienced growth.
As far as our expectations on loan growth I mean things still are really driven by the pandemic and.
Impacts we're seeing there I mean you saw.
Heard me talk about new relationship growth I mean, I think is remarkable to have that kind of relationship growth.
And the pandemic situation, where you really can't get out and visit customers. The same way you used to be able to do it and so.
That's really positive at the same time, our pipeline's pipeline is down.
And it's.
And I really believe that's related to the pandemic and.
We're just going to have to see the general level of business confidence increase in.
And get healthy before we see that debt go up I think we try we try to shoot for high single digit loan growth year on we expect to do that without the PPP loans I don't expect us to do that and I expect us to be.
Below that I mean, we will work hard to beat it, but it's a tough environment, but nothing's changed in.
In terms of the fundamental outlook.
For the for Texas and for our company.
Sure.
We are.
<unk> successful, but I think we're taking market share and we're and the investments, we're making that I know were hard for our shareholders.
When we were expanding current operating earnings from for Houston.
I really see them paying off as we continue to move forward.
And we're going to continue to do that kind of thing so I'm really I'm optimistic about the future, but this year, it's going to continue to be under pressure from COVID-19.
Got it thanks for taking the questions.
Alright.
Thank you.
Your next question comes from the line of Ken Zerbe with Morgan.
Line is now open.
Alright, great. Thanks.
Phil You mentioned, if I got the numbers right something like 40% of your new account openings were through the digital channels.
Where are those customers are located.
I'm trying to understand if those customers are if they live in the same pounds is your existing branches or are they coming from outside of your existing footprint. Thanks.
Ken.
Found.
Number that I thought was interesting.
Let's take Houston for example.
60% of the accounts that were opened online where within a five minute drive.
And existing cross location, so I think.
I think there are a number of factors at work I believe people more and more it's been our experience more and more doing their research on line.
Which is a positive for us because youll see really.
Take the time to research to see very positive.
Views and reactions to us and then they are.
I think the fact that say Houston on a reported how it's an outsized percentage.
Of our growth not the only growth, we're having but it is.
It's an outsized percentage.
We're seeing new locations, where they live and they are they are opening.
They're opening up and just.
We just had a lot of success online so I would say that they tend to be.
They've tended to be in market.
Markets that we're in and they tend to be.
Proximate to locations that we have.
But as I, just said, 60% were within a five minute drive of our locations in Houston, and so that means 40% work so.
So there is some visibility.
Yes that is an interesting statistic.
More.
Taking a little bit more broadly.
Does that imply because I know a lot of the banks are obviously, focusing very heavily on digital but does that imply that to continues to grow your new customer base banks also would have to continue to open new branches to extend their potential customers who would.
Apply online.
Okay.
I hate to make that broad statement, but I can tell you that.
Just looking directly at our expansion in Houston, right, where it was almost a doubling of our locations and youre seeing the account growth.
We've talked about in the commercial side on the consumer side.
I mean, it's certainly helpful and it's additive to the process.
It's.
One thing I always like to point out.
About our strategy, though in Houston, because its fun to talk mainly about consumer because I think we all relate to that as individuals.
The biggest revenue piece of that strategy has to do with.
Small and midsized businesses.
You look at our company overall.
Or is it 90% or so of our of our loan.
Book in round numbers. It comes from the commercial side commercial real estate commercial C&I lending.
Our deposit basis, 55% at least last time I looked at it was about 55% commercial so what we're doing is really trying to replicate our business model in these markets and that means it's a very.
Strong small to midsize commercial banking market.
So.
One other thing that I've mentioned before is.
Yes.
What I could do customer calls.
The faces in back in 2019.
A number of times I was with people that were doing live rfps for new banks and 75% of those cases that one of the elements of the RFP was what's what's the nearest location so.
So I'd like to keep that in mind, there's very much of a commercial focus there as well and we've seen really good growth on our commercial relationships.
Alright, perfect. Thank you very much thank.
Thank you.
Your next question comes from the line of Jonathan Atkin.
Okay.
Okay.
Thank you and good afternoon.
Hey, Jennifer.
Talk about what's driving your expense growth for this year.
In terms of your guidance and.
You've talked about.
Gross debt Austin. This thing will you be putting more branches at market.
Regarding the expenses, Jennifer a couple of things I'll mentioned that.
As I mentioned in my comments you know obviously there was some benefit if you will in 2020 expenses related to the fact that a lot of incentives werent paid right. We werent meeting the targets that we needed to meet and so our projections for 2021 do represent that we will have some increases there.
We also have the impact of the Houston expansion, we talked about that we had planned on.
That they would all be opened by the end of 2020.
That process has been a little bit slower than we expected and so we still actually have three more branches to open.
And we opened quite a few on the latter part of 2020, so theyre, having a full year impact on 2021 I'm going to say those are primarily the big things that are affecting the growth between 2020 in 2021.
And Jennifer with regard to Austin, Yes, I think.
When I talked about we are evaluating.
What the really dramatic growth Austin, you're seeing at least on the headlines but more than that.
Looking at the numbers with the fed job growth, it's pretty remarkable what they have been able to recently.
When we say we are looking.
To understand the impact of that yes, it could it could result in us.
I think it will result in us at some point of adding to locations there.
Maybe above what we otherwise would have done but I think there is some work that needs to be done on understanding it because it's changing pretty rapidly, but it's an opportunity I believe.
Thank you.
Mhm.
Your next question comes from the line of Dave Rochester with Compass point. Your line is now.
Hey, good afternoon guys.
Hey, Dave.
On the margin you guys hit your guide for the level just above 3% for 2020.
How are you guys thinking about that trend from that 282 <unk> are the NII going forward whatever is easier.
<unk>.
Giving you your maybe due to the loan growth at least.
At this point in the year in that.
For new loan.
Right now.
What are your thoughts on the timing of that $1 billion in securities purchases talking about.
Let me see if I got all the pieces you are on the NIM I think you were asking about ex PPP.
As I mentioned in my comments right now, we're really not projecting a lot of investment purchases, we've only I.
I think our modeling a $1 billion.
We've got.
North.
$7 billion to $8 billion, even 9 billion some day at the fed and so obviously that net interest margin percentage is going to be reacting to that but there's definitely pressure obviously on the net interest margin.
Right now on the guidance I would give is if I look at that fourth quarter NIM I would expect that we will probably see high single digit movement downward there.
Just given some of the.
The roll off of the loans that are that are maturing and being replaced by lower yielding loans and kind of the same thing on the investment portfolio and then again the.
The net interest margin.
Just having such a big impact from from the level of deposits.
We've got I was looking at it we've got I think.
This morning, we had north of nine maybe $9 5 billion at the fed and we were kind of looking at it and said well.
To understand for ourselves the impact of debt.
Debt that is having on our on our percentage in.
It's just interesting that a $5 billion walked away that's only earning.
10 basis points, so it's not going to be huge hit two day interest to interest income, but it probably moves youre Nam about 40 basis points of percentage itself. So right now a lot of that NIM percentage is being impacted by the level of liquidity that we're carrying in and we're just not willing to bet right now in today's market don't like.
What we see and so we like the Optionality that we have by sitting a little bit on the sidelines there.
Yes.
Makes sense what is the differential now on the front book back book on on the law.
Loan book at this point.
And I guess.
Sure, Yes, I guess I'll, just say on if I'm looking at probably the most pressure we're seeing I'm going to say is then in the C&I book I was looking at it is probably about 40 basis points. If I look at the new book just being the stuff that we put in put on in the in the fourth quarter versus everything before that and I was kind of surprised it on the commercial real.
Estate, where we're seeing most of the demand the information I was looking at it as that.
It's not really.
That much that much lower maybe a little north of 10 bps 10 to 15 bps slower.
Mhm.
Just given your commentary on loan growth and the fact that.
I would think you would still see some deposit growth this year.
I would imagine it's still expect to see NII growth.
From the <unk> level, you might see more on NIM.
That's fair.
I think the thing with as far as NII growth is concerned it's really don't forget that we do have PPP in there and we really I guess I should say that the guidance that we gave him really doesn't include PPP.
That was almost intentional on our part we still need to see kind of what sort of volume as we get in there and we've had conversations internal internally, obviously, there could be some impact on our on our projections for loan growth by this PPP round 2.0, if you will.
And in 2020, we recognized about <unk>.
$20 million, a quarter and PPP fee income in.
In each of those last three quarters of the year and we.
We've got about I think I said right under $39 million to $40 million left to earn that I expect will learn by the first couple of quarters of next year. So we will feel some pressure of that ex this new PPP fees, but if you layer those back on yes, we still havent havent really brought that all into our model and looked at.
What we think will happen to our modest loan growth.
Okay great.
Great. Thanks, guys.
Thank you.
Your last question comes from Steven.
Paul.
J P. Morgan your line is now.
Hi, everybody.
Steve.
I wanted to start so where you indicated that consensus of $4 72 for 2021 is a little low I had imagined consensus includes an assumption from reserve releases.
<unk> assume reserve releases and your comment that EPS for 2021 is low.
No we do not.
We're not that's not part of what we're assuming at this point and any guidance that we've given.
Okay.
That's helpful and then unexpected I'm honestly a bit confused over the message on expenses last quarter, you talked about a need to get more efficient given the revenue headwinds right you were cutting senior management base salaries, but now youre guiding to four to four 5% in 2021, which I've always considered a fairly normal year is the intense <unk>.
On expenses continuing in 2021.
Or was that really.
One <unk> event.
No I mean, the thing that.
It was asked earlier, we are being impacted again, we're projecting a more normalized a year as far as revenues.
Revenues in <unk>.
And income growth and so there were some incentives obviously they didn't get didnt get paid out in 2020 that we're projecting to increase.
So basically if you get back on if you will in 2021.
As I also mentioned Houston expansion is really more expensive to us.
In 2021 than it was in 2020, it probably is a little north of a 1% impact on our expense growth guidance.
But no the focus the focus on expenses continues thats, what I was saying in my comments, we'll continue to do that but we're not going to cut.
Technology costs. For example, that's just not going to happen in this environment and so we will continue to focus on is ensuring that from a people standpoint that we're doing what we need to do and that we really question all of the open positions or all the request for for new positions within the organization, but I think for us opening those shoes.
And branches and having them come all online as we think into 2021, it's going to have an obviously an impact on on our growth in expenses versus what we had in 2020.
Okay.
That's helpful. And then final question you guys have always been the standout bank in your markets from a client satisfaction view, but as we listen to all of your local competitors are all investing in technology you seem to be more focused on client experience are you seeing tougher competition in the market is more general.
Are you can you be little more specific are you talking about commercial deals or are you talking about.
All of the above I mean, when you talk to just about every bank right. There investing in technology. They are investing in digital they're focused on friction points for a client experience and you guys have had the highest client satisfaction score in your markets and I'm wondering if you are in the <unk>.
You talked about losing deals primarily over price and structure, but are you starting to lose more deals because other banks are just doing a much better job and thats commercial and consumer.
Oh Heck no.
No I would not say that at all.
Sure.
You know, it's kind of a broad question, but I mean.
If you look at the.
Really has to do with.
It starts with culture, and it's a combination of technology and people and our technology.
As elegant and it's you know it's.
Branded it's up.
It's very user friendly it's smart.
And we were I.
I was looking at some numbers on account opening online from a peer.
But I can't talk about because it's.
Got it confidentiality green, but one of the top banks.
A large group of banks in terms of the account openings on line. So we're starting from a good place.
And.
So I feel like the changes that we're able to implement and have been in plumbing minting and technology.
We still are able to we're still able.
To move beyond the competition, they can spend money and we are too.
And we're all competing but I'll just give an example, we put up dark mode on our on our iPhone App.
And.
Chapter net dark mode.
And now the too big to fail have dark mode. I can go down the list so.
No.
They are chasing a moving target is what I would say about that and then the second thing I would say is.
As far as commercial competition and everything absolutely.
Bad and it's getting worse.
I saw I think I said in my comments, we went up from.
67% lost deals from structure it was 61%.
I think people are hurting for volumes, they're stretching for deals they wanted to do.
<unk>.
And so yes.
Worse, we are losing more to that kind of thing, but I will tell you I am prepared to lose deals.
For bad structure. There is there is no greener pasture.
Across the fence of good credit quality, there is nothing there, but a wasteland.
And don't intend to go over there so yes it is complicated.
It's complicated, but it's also a competitive and.
We're ready to compete in.
I'll take my team and compete with anybody in this market.
Great. Thank you for the color that was really helpful.
Absolutely.
And I have a question from Michael Ross.
Good evening.
Your line is now open.
Hey, Thanks for taking my question.
Are you guys doing anything on any of your fee businesses, making any sort of targeted investments.
Maybe you can give us an update.
On the trust business and insurance business and then just just quickly was there anything.
That drove the increase sequentially in other fee income.
Well first of all broadly I mean in our.
And our fee based businesses, we've been investing in those two the one that comes to mind as we head on.
A major system upgrade and conversion.
In our trust business.
Which can tell you how long you've been working on that but.
But it was.
It's been a positive to us.
And when just flawlessly.
So proud of the team how they were able to do it and it did from home during Covid.
If you look at the.
Our Treasury management systems, we've upgraded both of those.
We got really great scores from Greenwich Associates.
For Treasury management and for years still do but for years, we did it with our system net.
We were using a partner that.
We felt we could do better and we knew we could do better and there was features that we were frustrated we werent able to bring on the table.
And we really got those marks because of the quality of service our people give now we have our systems, which we have.
Put in place to upgrade which has increased the mobile capability et cetera for both the.
Larger more sophisticated customers and then also for the smaller customers as well. So we are attacking the market there with a much better.
Our product offering on the technology side, there and one thing I'll say about the major customers in the implementation of that new system, we did not lose.
Any customers to attrition as a result of that system conversion I've never heard of that as it relates to a treasury management system conversion, usually what happens is if that happens.
You really go after those companies that are having to go through that because if they are going through a conversion day modest will convert your system, but for us to not have <unk>.
Really any.
Krishan for that system.
Speak to the quality of the service that our people have been providing and also I think the quality of the system. So.
So we've been putting some money there and Jerry I think you had some questions.
Regarding the linked quarter. Other income yes, most of that is related to some debit card incentives.
We recognized in the fourth quarter so from.
From a compared to the fourth quarter, a year ago, you don't see that sort of variability, but in the linked third to fourth quarter Youll see that there and then we also had a good month in our trading activity was higher in the fourth quarter as compared to the third and our public finance underwriting group had a strong quarter. So those things impacted the variability on a linked quarter basis.
Got it I appreciate all the color. Thank you.
Sure.
Once again, if you would like to ask a question. Please press star one on your telephone.
There are no further questions at this time you may continue.
Alright, well, thank you very much for everyone's participation and interest and we will be a journey.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
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