Cullen/Frost Bankers Inc (CFR) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Cullen/Frost Q4 Earnings Results Conference call. (Operator Instructions)

I would now like to hand the conference over to Mr. A.B. Mendez, Director of Investor Relations. Please go ahead.

Thanks, Ashley. This morning's 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 intend such statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, 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, A.B. Good afternoon, everyone, and thanks for joining us. Today, I'll review fourth quarter results for Cullen/Frost; and Our Chief Financial Officer, Jerry Salinas, 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 2020, Cullen/Frost earned $323.6 million or $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, while 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 2.3% 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. For the second consecutive quarter, we've seen the highest quarterly average deposits in our history. This growth reflects that Frost 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 and average common equity in the fourth quarter was 86 basis points and 8.55%, 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 35% from the $96.4 million at the end of the third quarter. A 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 remain within our standards, incomparable to what we've experienced in the last several years. Regarding payment deferrals. In total, we've granted 90-day deferrals to more than 2,500 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 were $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, falling to 8.2% of our non-PPP portfolio at the end of the fourth quarter. As a reminder, that figure was 9.1% 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 pandemic's economic impacts on our portfolio were negative but manageable, and our overall outlook for credit quality is stable to improving.

In the second half of 2020, we discussed the nonenergy 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, represented just under $1.6 billion at the end of the fourth quarter, and our loan loss reserve for these segments was 4.55%. We saw the largest reserve increases in hotels and restaurants, where our allocated allowances as a percentage of outstanding balances are now 9.1% and 7.4%, respectively.

We continue to monitor credit in these areas closely, and we will have a good -- and we have a good handle on our risk. And as a reminder, hotels and lodging represent approximately 1.9% of our total loans and restaurants represent approximately 1.8% of our total loans. To me, a really bright spot is the growth in 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. It's in our mission statement. But clearly, Frost's national recognition for its success in 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 company-wide during the year. For the year, 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 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% compared 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 fourth quarter of 2019. Same-store sales is measured by account openings for branches opened less than a year, were up by 2.2% through the end of the fourth quarter when compared to the fourth quarter 2019 and up 8.2% 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 7.2% compared to the fourth quarter last year. Our Houston expansion is nearing completion with 2 new financial centers opened in the fourth quarter for a total of 22 of the 25 planned new financial centers. COVID has had an impact on our rollout, but we expect to open the remaining 3 in the first half of this year. Overall, the new financial centers are exceeding our expectations and the new locations were well placed and well-timed to leverage our success in obtaining PPP loans for 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 Bryan later this quarter. So far, in January, our newest location in Dallas, the Red Bird 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 where business needs have changed where technology could be better utilized and where 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 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, the 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 2.82%, 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 $7.7 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 3.74%, up 1 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 in 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 2.4% on an annualized basis from last quarter.

Looking at our investment portfolio. The total investment portfolio averaged $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 3.41% in the fourth quarter, down 3 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 9 basis points from the third quarter to 2.12% 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 a taxable equivalent yield of 4.09%, up 1 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 4.4 years compared to 4.5 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 onetime restructuring costs with $5.2 million of that related to severance impacted by the eliminated positions Phil noted. As we mentioned last quarter and as Phil mentioned in his comments, 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 customer 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 use a thoughtful process to reorganize positions where the business needs have changed, where technology could be better utilized and where responsibilities could be consolidated. We asked our teammates to question discretionary spending and visited with vendor relationships to reduce costs where we could. All this was done without losing sight of our core values of integrity, caring and excellence. We believe that we have always been prudent in managing expenses.

But in this 0-rate environment, our approach has become even more focused. 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 4% to 4.5% 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 5.7%. Just as a reminder, 2020 income tax expense included a discrete onetime 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'll now open up the call for questions.

(Operator Instructions) Your first question comes from the line of Brady Gailey with KBW.

So I wanted to start with the PPP loans. I know some of those got forgiven in the fourth quarter. What was the dollar amount of spread income impact from PPP in the fourth quarter?

Yes, give me a second here. I'll say that the fee portion, I know, was around -- let me grab it here just so I don't have to give you any false information. It was about $19 million.

Okay. And I know you guys were pretty successful in round 1 of the PPP. There's over $100 million of earnings, if I remember right. What about round 2? I know it's early, but any idea how big that could be at Frost round 2 of PPP?

Brady, we're seeing really good volume. Our people worked around the clock once the SBA gave us the information about how we'd be integrating with them. And it was a new system front end. I think we have about 10 days to stand up our portal and our processes. And it was -- we have so far gotten well, let's see -- the piece of paper I have right now has over 7,000 applications.

I think earlier today, I got one, maybe 7,500 or so. And we got around 2,500 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. The -- this number that I was looking at that I told you about was, let's see, the 27, which -- yes, in PPP years used to be an eon, but 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 average loan size than we did in the first round. I think our first round had a number that was, let's say, $180,000-ish number. This time so far, it's been about 144,000 average size.

I will say that we've seen a volume slow more recently. It looks like the people that needed this money were lined up to really get in line and we've seen that 90% of the numbers that are coming in are from first-time PPP -- excuse me, second-time PPP borrowers. So we're seeing good activity there.

Right. That's good color. And then finally for me, it's uncommon to hear about Cullen/Frost going through a layoff. I think the last time you all did that might have been a couple of decades ago. I know times are tough, especially with this yield curve. Those layoffs -- I think you're about 1.5% of your staff. Is that a one-and-done deal? Or will you continue to look, not just at lower force, but elsewhere as far as expense reductions this year?

Yes, Brady, you're right. It was tough thing to do. And it was -- when the first thing we started with really was the last thing. And as Jerry has kind of been reporting, he's modestly been trimming that 10% number he guided you to -- the first of the year down to, 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 a fair amount of visibility when we -- as an executive team, we cut our salaries 10%. In our last quarter call, I told you about how our Board was -- they immediately, in their private session, decided to cut their compensation 10%, just a very frost things do.

It's -- so we started with those kind of things and everything that's discretionary, when we got down to the end of it, we did need to reduce some of these positions because it was the right thing to do. We didn't take out, hatch it and make the reductions. They were very thoughtful. I think one thing, though, that we decided to do is reduce the amount of open positions.

I mean, we'd much rather reduce a position for someone we don't know and haven't hired yet than doing that for someone we have hired. And so there were many more positions that were open that were reduced than there were reduced for current staff. So no, it's not something that we're planning on doing. And it's not in 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-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 to couple of years ago, 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 our growth in people. We sure wanted to and expect that to be the case. But no, we're not anticipating anything similar to what we did in January.

Great. This is Jerry. The one thing I will say, though, is that we're not shifting our focus away from expense management. So I think Phil's right that the layoffs were tough to do, and were 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 efficiencies. So hopefully, in this environment, that's something that our staff will continue to hear us talking about it and hopefully continue focus on.

Your next question comes from the line of Ebrahim Poonawala with the Bank of America Securities.

I guess, just first, if I could follow up, Jerry, on PPP, a couple of the questions around the model. Could you remind us what the balance was of PPP loans at the end of the year? And how much of fees are left to be accrued tied to PPP 1?

Sure. There's 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 that to come through in the first quarter? I think you expected that last earnings call.

No. I think that what we've seen, 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's right between -- the 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. I would expect right now, based on the best information we have is it will be bleed into the second quarter as well. So a little bit slower than we expected here in January.

Got it. And I guess, Phil, another question around -- 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. I mean one of your competitors had a call yesterday and talked about all the great things happening in Texas. We are seeing corporate headquarters being moved, folks moving from the coast to Texas.

Given that Frost is probably the largest sort of Texas bank, what does this mean for earnings growth, loan growth for the bank? Like talk to us that there? And in terms of what are you doing in terms of actually hiring and putting more investments on the technology of front-line personnel.

Ebrahim, well, with regard to Texas and Texas growth, I mean, I would agree with them. The people who have been moving here for a long time. We've seen a step-up in growth. It's amazing to see the relocations coming from other markets, some of the brokers that we have business relationships, and these are very successful brokers. I remember one telling me in Austin that it used to be 80% of the relocations that they saw for out-of-state were from California. Now it's about half California and half Mid and East, Midwest, East Coast. And so it's -- I think it's gaining more momentum. I think we're trying to understand the long-term impact of it, particularly in Austin.

I mean, it's -- there's been a 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. And 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 literally developing as we all read the headlines and experience the 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 -- you heard me talk about new relationship growth. I mean, I think it was remarkable to have that kind of relationship growth in a 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 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 and get healthy before we see that go up. I think we try to ship high single-digit loan growth in the year.

I don't expect us to do that. Without the PPP loans, I don't expect us to do that. 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 terms of the fundamental outlook for the -- for Texas and for our company. I mean we're being successful. I think we're taking market share. And we're -- and the investments we're making that I know are hard for our shareholders to when we were spending 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.

Your next question comes from the line of Ken Zerbe with Morgan Stanley.

Phil, you mentioned, I forgot the numbers right, something like 40% of your new account openings were through the digital channels. Where were those customers located? Because I'm trying to understand if those customers are -- if they live in the same towns as your existing branches? Or are they coming from outside of your existing footprint?

Ken, we found a number that I thought was interesting is let's take Houston, for example, 60% of the accounts that were opened online were within a 5-minute drive of an existing Frost location. So I think there are a number of factors that work. I believe people more and more. It's been our experience more and more doing their research online, which is a positive for us because you'll see, really -- if you take the time to research, you'll see very positive reviews and reactions to us. And then they are -- I think the fact, let's take, Houston, I reported how it's an outsized percentage of our growth, not the only growth we're having, but it's an outsized percentage.

People are seeing new locations where they live and they're opening up. And just -- we just had a lot of success online. So I would say that they tend to be -- they tended to be in market, in the markets that we're in, and they tend to be approximate to locations we have but as I just said, 60% were within a 5-minute drive of our locations in Houston. And so that means 40% weren't. So there is...

Yes, that is an interesting statistic. I guess 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 continue to grow your new customer base, banks also would have to continue to open new branches to expand their potential customers who would apply online?

I hate to make that broader 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 you're seeing the account growth that I've talked about in the commercial side and the consumer side, I mean, it's certainly helpful, and it's added to the process. I mean, it's -- one thing I always like to point out about our strategy though, in Houston because it's 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 mid-sized businesses. If you look at our company overall, what is it, 90% or so of our loan book and round numbers comes from the commercial side, commercial real estate, commercial C&I lending. And our deposit base is 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 mid-sized commercial banking market. So one other thing that I've mentioned before is back when I could do customer calls and face-to-faces 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 the nearest location. 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 in our commercial relationships in Houston.

Your next question comes from the line of Jennifer Demba with Truist Securities.

Can you just talk about what's driving your expense growth for this year in terms of your guidance. And you talked about the main growth that Austin is seeing. Will you be putting more branches in that market?

Regarding the expenses, Jennifer, a couple of things I'll mention that, as I mentioned in my comments, obviously, there was some benefit, if you will, in 2020 expenses related to the fact that a lot of incentives weren't paid, right? We weren't meeting the targets that we needed to meet. And so our projections for 2021 do represent that we'll have some increases there.

We also have the impact of the Houston expansion. We talked about that. We have 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 3 more branches to open, and we opened quite a few in the latter part of 2020. So they're 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 and 2021.

And Jennifer, with regard to Austin, yes, I think when I talk about we're evaluating what the really dramatic growth Austin is seeing, at least in the headlines, but more than that, I was looking at the numbers with the Fed job growth, it was pretty remarkable what they've been able to do recently.

When we say we're looking to understand the impact of that, yes, it could result in us -- I think it will result in us at some point of adding to locations there and maybe above what we otherwise would have done. But I think there's some work that needs to be done, understanding it because it's changing pretty rapidly. But it's an opportunity, I believe.

Your next question comes from the line of David Rochester with Compass Point.

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 in 4Q or the NII going forward, your ex PPP, given you're maybe muted about the loan growth, at this point in the year. And then what are you seeing for new loans and

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right now and what are your thoughts on the timing of that $1 billion in securities purchases that you're talking about?

Let me see if I got all the pieces here. 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 think, are modeling a $1 billion. We've got north of $7 million and $8 billion, even $9 billion some days 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, the guidance I would give is, if I look at that fourth quarter NIM, I would expect that we'll probably see high single-digit movement downward there, just given some of the roll-off of the loans that are maturing and being replaced by lower-yielding loans and kind of the same thing on the investment portfolio.

And then again, the net interest margin is -- we're just having such a big impact from the level of deposits that we've got. I was looking at it. We've got -- I think this morning, we had north of $9 billion, maybe $9.5 billion at the Fed, and we were kind of looking at it and said, well, just to understand for ourselves, the impact of -- that that's having on our percentage.

And it's just interesting that a $5 billion walked away, that's only earning 10 basis points. So it's not going to be a huge hit to interest income, but it probably moves your NIM 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. 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. That makes sense. What is the differential now in the front book, back book on the loan book at this point?

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 in the C&I book. I was looking at it's probably about 40 basis points. If I look at the new book just being the stuff that we put in -- put on in the fourth quarter versus everything before that. And I was kind of surprised that on the commercial real estate, where we're seeing most of the demand, the information I was looking at is that it's not really that much lower, maybe a little north of 10 bps -- 10 to 15 bps lower.

So I guess, 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, still expect to see NII growth from the 4Q level, you might see more NIM. Is that fair?

Well, I think the thing with -- as far as NII growth is concerned is 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 really doesn't include PPP. That was almost intentional on our part. We still need to see kind of what sort of volumes we get in there, and we've had conversations internally.

Obviously, there could be some impact on our projections for the loan growth by this PPP Round 2.0, if you will. So in the -- in 2020, we recognized about $20 million a quarter in PPP fee income, in each of those last 3 quarters of the year. And we've got about, I think I said right under $39 million to $40 million left to earn that I expect we'll earn by the first couple of quarters of next year. So we'll feel some pressure of that ex this new PPP fees. But if you layer those back on, yes, we still haven't really brought that all into our model and looked at what we think will happen to our modeled loan growth.

Your last question comes from Steven Alexopoulos with JPMorgan.

I want to start. So when you indicated that consensus of $472 million for 2021 is a little low, I'd imagine consensus includes an assumption for reserve releases. Do you assume reserve releases in 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 any guidance that we've given.

Okay. That's helpful. And then on expenses. I'm honestly a bit confused over the message on expenses. Last quarter, you talked that you need to get more efficient given the revenue headwinds, you were cutting senior management based salaries. But now you're guiding to 4% to 4.5% in 2021, which I've always considered a fairly normal year. Is the intense focus on expenses continuing in 2021? Or is that really a 4Q event?

No. I mean, the thing that was asked earlier is, we are being impacted again. We're projecting a more normalized year as far as revenues and income growth. And so there were some incentives, obviously, that didn't get paid out in 2020 that we're projecting to increase, so basically, to 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 on expenses continues. That's 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 what we'll 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 the open positions or all the requests for new positions within the organization. But I think for us, opening those Houston branches and having them come all online as we think into 2021, it's going to have obviously an impact 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, they're all investing in technology, you seem to be more focused on client experience. Are you seeing tougher competition in the markets more general?

Are you talking -- can you be a little more specific? Are you talking about commercial deals? Are you talking about...

Yes, all of the above. I mean, when you talk to -- it's just about every bank, right? They're investing in technology. They're investing in digital. They're focused on friction points, right, client experience. And you guys have had the highest client satisfaction score in your markets.

And I'm wondering if you -- in the past, 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 that's commercial and consumer, both.

Oh, heck, no. No, I would not say that at all. I mean we've -- it's kind of a broad question. But I mean, if you look at the -- it really has to do with -- it starts with culture, and it's a combination of technology and people. I mean, our technology is elegant, and it's branded. It's very user friendly, it's smart. And we were obviously looking at some numbers on account opening online from a peer that I can't talk about because it's got a confidentiality agreement, but we're one of the top banks of a large group of banks in terms of the account openings online.

So we're starting from a good place. And so I feel like the changes that we're able to implement and have been implementing in technology 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 you an example. We put out dark mode on our iPhone app and Chime didn't have dark mode at that time. Another two big failed to have dark mode. I can go down the list. I mean so they are chasing a moving target is what I would say about that.

And then second thing I would say is, as far as commercial competition and everything, absolutely, it's bad and it's getting worse. I saw -- I think I've read said in my comments, we went up from 67% loss deals, from structure it was 61%. I think people are hurting for volumes. They're stretching for deals they want to do. And so yes, it's worse. We're losing more to that kind of thing. But I'll tell you, I'm prepared to lose deals for bad structure. 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's complicated -- I mean it's complicated, but it's also competitive. And -- but we're ready to compete. And I'll take my team and compete with anybody in this market.

We have a question from Michael Rose with Raymond James.

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 the insurance business. And then just quickly, was there anything that drove the increase sequentially in other fee income?

Well, first of all, broadly, I mean, in our fee-based businesses, yes, we've been investing in those 2. The one that comes to mind is we had a major system upgrade and conversion in our Trust business, which can tell you how long they've been working on that. But the -- but it was -- it's been a positive to us and went just flawlessly. So proud of the team how they were able to do it and they did it 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 and Associates for treasury management and -- for years, still do. But for years, we did it with a system that 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 where we weren't able to bring to the table. And we really got those higher marks because of the quality of service our people give. Now we have 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're attacking the market there with a much better product offering on the technology side there.

And one thing I'll say about the major customers and 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're going through a conversion, they might as well convert your system.

But for us to not have really any attrition for that system just speaks to the quality of the service that our people have been providing, and also, I think, the quality of the system. So yes, we've been putting some money there. And Jerry, I think he had some questions...

Regarding the linked quarter other income. Yes, most of that is related to some debit card incentives that we recognized in the fourth quarter. So from -- compared to the fourth quarter a year ago, you don't see that sort of variability. But in the linked third to fourth quarter, you'll see that there. And then we also had a good month and 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 the linked-quarter basis.

(Operator Instructions) There are no further questions at this time. You may continue.

All right. Well, thank you very much for everyone's participation and interest and we'll be adjourned.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.