Prosperity Bancshares Inc Q3 FY2020 Earnings Call

Good day, and welcome to the Prosperity Bancshares, Inc. Third Quarter 2020 Earnings Conference Call. I would now like to turn the conference over to Charlotte Rasche. Please proceed.

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' third quarter 2020 earnings conference call. This call is being broadcast live over the Internet at prosperitybankusa.com and will be available for replay at the same location for the next few weeks. I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares; and here with me today is David Zalman, Senior Chairman and Chief Executive Officer; H.E. Tim Timanus Jr., Chairman; Asylbek Osmonov, Chief Financial Officer; Eddie Safady, Vice Chairman; Kevin Hanigan, President and Chief Operating Officer; Randy Hester, Chief Lending Officer; Merle Karnes, Chief Credit Officer; Mays Davenport, Director of Corporate Strategy; and Bob Dowdell, Executive Vice President. David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by Asylbek Osmonov who will review some of our recent financial statistics and Tim Timanus, who will discuss our lending activities, including asset quality. Finally, we will open the call for questions. During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, Grant. Before we begin, let me make the usual disclaimers. Certain matters discussed in this presentation may constitute forward-looking statements for purposes of the federal securities laws, and as such may involve known and unknown risks, uncertainties and other factors, which may cause the actual results or performance of Prosperity Bancshares to be materially different from future results or performance expressed or implied by such forward-looking statements. Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including Forms 10-Q and 10-K and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now, let me turn the call over to David Zalman.

Thank you, Charlotte. I would like to welcome and thank everyone listening to our third quarter 2020 conference call. I'm excited to announce that because of the confidence in our company, our strong capital position and our continued success in increasing earnings, as well as showing annualized returns of 19% on average tangible equity and 1.58% on average assets, our Board of Directors voted to increase the fourth-quarter dividend to $0.49, a 6.5% increase. The bank continues to do well and we want to share that success with our shareholders. As stock prices experienced significant declines late in the third quarter, Prosperity Bank repurchased 98,000 shares of its common stock at a weighted price of $49.99. Our net income was $130.1 million in the third quarter 2020 compared with $81.8 million for the same period in 2019, an increase of $48.3 million or 59%. Our diluted earnings per share was $1.40 for the third quarter 2020 compared to $1.19 for the same period in 2019, an increase of 17.6%. Net income was $391 million for the nine months ended September 30, 2020 compared with $246 million for the same period in 2019, an increase of $145 million or 59%. The earnings per diluted common share was $4.20 for the nine months ended September 30, 2020 compared with $3.55 for the same period in 2019, an increase of 18.3%. Loans at September 30, 2020 were $20,796,000,000, an increase of $10,122,000,000 or 94.8% compared with $10,673,000,000 at September 30, 2019. Our linked quarter loans decreased $229 million or 1.1% from $21,025,000,000 at June 30, 2020. At September 30, 2020, the company had $1,394,000,000 of Paycheck Protection Program, also known as PPP loans. Obviously, the increase year-over-year in total loans is attributable to the Legacy merger. Our deposits at September 30, 2020 were $26,459,000,000 an increase of $9,529,000,000 or 56% compared with $16,930,000,000 at September 30, 2019. Our linked-quarter deposits increased $306 million or 1.2%, 4.7% annualized from the $26,153,000,000 at June 30, 2020. We are starting to see people spending more money and generating more account activity than earlier this year. Our asset quality remains sound with nonperforming assets at $69.5 million or 24 basis points of average interest-earning assets. Our total non-performing assets decreased $8.4 million, compared with the second quarter of 2020. Our net charge-offs were $10.6 million for the three months ended September 30, 2020 and were primarily due to $8.6 million in resolved PCD loans. These PCD loans have specific reserves of $15.7 million, of which $8.6 million was allocated to the charge-offs and $7.1 million was moved to the general reserve. In addition, $6.1 million of specific reserves was released into the general reserve for resolved PCD loans with no charge-offs. This represents a total of $13.2 million moved to the general reserve this quarter. Loans on forbearance decreased from $3,625,000,000 or 17.2% of total loans as of June 30, 2020 to $231 million or 1.1% of total loans as of October 26, 2020. Our allowance for credit losses as a percent of total loans is higher than any time in my banking career and equates to a coverage ratio of 5.6 times our nonperforming loans. While there have been some merger announcements recently in conversations with other bankers regarding potential acquisition opportunities, M&A activity overall is reduced. We believe that the M&A activity will start to pick up as economic activity continues to increase. We remain to enter into conversations and negotiations when it is right for all parties and is appropriately accretive to our existing shareholders. We are starting to see green shoots in the economy, with consumers and businesses feeling more confident. The unemployment numbers are better than predicted, and we believe third-quarter GDP will also be higher than predicted. Thanks again for your support of our company. Let me turn over our discussion to Asylbek, our Chief Financial Officer to discuss some of the specific financial results we achieved. Asylbek?

Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended September 30, 2020 was $258 million compared to $154 million for the same period in 2019, an increase of $104.1 million or 67.6%. The increase was primarily due to the merger with Legacy and loan discount accretion of $22.5 million in the third quarter 2020. The net interest margin on a tax equivalent basis was 3.57% for the three months ended September 30, 2020, compared to 3.16% for the same period in 2019 and 3.69% for the quarter ended June 30, 2020. Excluding purchase accounting adjustments, the core net interest margin for the quarter ended September 30, 2020 was 3.25% compared to 3.14% for the same period in 2019 and 3.33% for the quarter ended June 30, 2020. The current interest rate environment combined with our excess deposit liquidity continues to impact that net interest margin. This quarter, the excess liquidity negatively impacted the core net interest margin by approximately 45 basis points. Non-interest income was $34.9 million for the three months ended September 30, 2020 compared to $30.7 million for the same period in 2019 and $25.7 million for the quarter ended June 30, 2020. In the third quarter, we saw improvements in service fees and mortgage income due to the improving economy compared to the second quarter. Non-interest expense for the three months ended September 30, 2020 was $117.9 million compared to $80.7 million for the same period in 2019. The increase was primarily due to the merger with Legacy. On a linked quarter basis, non-interest expense decreased $16.4 million due to the efficiency gain from the core system conversion and operational integration and the decrease in merger-related expenses. For the fourth quarter of 2020, we expect non-interest expense of $117 million to $119 million. The efficiency ratio was 40.2% for the three months ended September 30, 2020 compared to 43.7% for the same period in 2019 and 46.6% for the three months ended June 30, 2020. The efficiency ratio was impacted by the merger cost savings and higher than anticipated loan fair value income during the third quarter. We estimate loan fair value income for the fourth quarter to be around $9 million to $12 million based on the current fair value discount for each loan amortized over its remaining loan life. This does not account for additional discount accretion income that may occur due to early loan paydowns or payoffs, which we can’t accurately estimate. The bond portfolio metrics at 9/30/2020 showed a weighted average life of 2.68 years and projected annual cash flows of approximately $2.25 billion. And with that let me turn over the presentation to Tim Timanus for some detail on loans and asset quality. Tim?

Thank you, Asylbek. Our nonperforming assets at quarter end September 30, 2020 totaled $69,542,000 or 33 basis points of loans and other real estate, compared to $77,942,000 or 37 basis points at June 30, 2020. This represents approximately an 11% decline. The September 30, 2020, nonperforming asset total was made up of $57,874,000 in loans, a $120,000 in repossessed assets and $11,548,000 in other real estate. Of the $69,542,000 in nonperforming assets, $11,761,000 or 17% are energy credits, all of which are service company credits. Since September 30, 2020, $5,134,000 in nonperforming assets have been put under contract for sale. This represents 7.4% of the nonperforming dollars. Net charge-offs for the three months ended September 30, 2020 were $10,570,000 compared to $13,001,000 for the quarter ended June 30, 2020. $10 million was added to the allowance for credit losses during the quarter ended September 30, 2020. The average monthly new loan production for the quarter ended September 30, 2020 was $449 million. Loans outstanding at September 30, 2020 were $20.8 billion, which includes $1,394,000,000 in PPP loans, out of the original $1,430,000,000 booked. The September 30, 2020 loan total is made up of 39% fixed-rate loans, 36% floating-rate loans and 25% that reset at specific intervals. I'll now turn it over to Charlotte Rasche.

Thank you, Tim. At this time, we are prepared to answer your questions. Grant, can you please assist us with questions?

Our first question today will come from Jennifer Demba with Trust. Please go ahead.

Thank you. Good morning.

Good morning.

Good morning.

I'm wondering about fee income. Wondering what you're thinking about the mortgage banking outlook and also the sustainability of the other line items in the fee income going forward. Will you see more business activity and consumer activity improvement in those line items? Thanks.

Yes, I think net interest income improved this quarter due to the recovering economy. Our NSF fee increased and is returning to the normalized levels we saw before COVID. We expect continued improvement in this area. Regarding mortgage income, activity has been strong lately, and I anticipate that fee income will remain stable or even grow. Overall, we are seeing a rebound in fee income, along with various one-off income sources, such as syndication activities we undertook this quarter. We are optimistic about the ongoing improvement in fee income in the near future.

Yes, I would like to add that we are seeing our fee income recover due to increased activity, which is reflected in higher NSF fees. I believe we will likely see further increases. We also experienced higher mortgage fees, although that may stabilize over time. Additionally, we had strong trust fees, and as Asylbek mentioned earlier, the Legacy team managed a $275 million syndication that generated approximately $1 million. They are continuing to provide services that we did not offer previously. While the income may vary, Kevin might want to elaborate, but we will continue to see returns and income from those services. We also charge fees for servicing at the same time.

David, are you starting to get more incoming calls from potential merger partners interested in having discussions at this point?

I would say no. We've always had a list of potential partners we would like to engage with, and we continue to monitor and communicate with them. However, currently, the activity level is more subdued compared to the period before COVID and the significant drop in stock prices, when it was common to be busy with those discussions. There is some activity now, but I believe it will increase as we navigate through the COVID situation and the economy recovers. Nonetheless, we remain focused on the same partners we've been pursuing and are looking to work on deals with them at some point.

Okay. Thank you so much.

Our next question will come from Brett Rabatin with Hovde Group. Please go ahead.

Hey, good morning, everyone.

Good morning.

Good morning.

I wanted to first ask David about the challenges many are facing with payoffs, especially considering the $449 million in loan production this month. The commercial real estate sector continues to experience macro fees. Do you have any insight into what payoffs might look like in the next few quarters, especially in relation to the rates associated with those loans? Additionally, I realize it's early to discuss a budget for 2021, but I'm curious about your outlook for balance sheet growth, excluding PPP, as it eventually contracts. How are you planning to manage the balance sheet in the coming year from a growth standpoint?

We had a management committee meeting where we observed that different regions of the state performed variably over the period. The Houston and Central Texas markets showed significant growth, while East Texas had some increase, but the Dallas, South Texas, and West Texas markets declined. Additionally, we need to consider that we have over $400 million in loans categorized as PCD loans that we are still working to exit. I believe about $200 million of those loans are still outstanding. We also experienced a decrease in our commercial real estate loan portfolio, which declined by approximately $398 million. It's not an ideal time for us to heavily invest in structured commercial real estate loans due to these paydowns and reductions. While some markets showed growth, others faced challenges, and there are reasons for both. Moving forward, we need to manage the remaining PCD loans, which will create some pressure on our loan portfolio. We'll assess how much we want to re-enter the structured CRE loans market. Many of these challenges depend significantly on the broader economy. Recent news and political events have stirred emotions, with public sentiment fluctuating greatly. If asked to project or budget for next year, I would typically aim for a growth rate of about 5% under normal conditions.

Okay. That's good...

Kevin, you may answer that.

That's accurate. David, I think that the PCD loans are down a little bit below the 200 mark, maybe 175 or 180 is a number I recently saw, but we still have to work through those of the former legacy portfolio.

Okay. That's helpful. And then maybe Asylbek on the margin, it seems like we should be getting close to a core here I guess depending on how you think about core versus stated. Asylbek, any outlook on the margin from your view and what if any, can you do to continue to lower the funding cost. It seems like we're getting close to a core?

I'll focus on the core basis since predicting fair value can be challenging due to its fluctuations each quarter. In the near term, predicting the net interest margin (NIM) is difficult because there are various factors at play. As shown, our core margin decreased by 8 basis points this quarter, with about 45 basis points attributed to the liquidity on our balance sheet. We anticipate maintaining this liquidity, and in the fourth quarter, we expect to gain additional liquidity from public funds, primarily due to increased tax payments, resulting in around $400 million in new deposits from public funds and others. We're addressing this by investing in loans and placing emphasis on our bond portfolio, using a mix of variable and fixed bonds to hedge against potential rate increases. Additionally, we are navigating the Paycheck Protection Program (PPP) forgiveness situation, where we have $1.4 billion in loans, some of which have already been applied for forgiveness, yielding smaller amounts that have been forgiven. The future dynamics of the PPP loans will influence our fee income and, consequently, our margin. On managing deposit costs, we've implemented cuts, including one in the third quarter and more planned for the fourth quarter. Furthermore, we will be paying off $125 million in subordinated debt in early December, which should benefit our margin. Given all these moving parts, providing precise NIM guidance is challenging. To clarify, the 8 basis points decline we experienced is primarily due to liquidity. If conditions remain stable, I foresee our NIM might decrease by a few basis points on a core basis as we move into the fourth quarter. I realize that was a lengthy response, but I hope it helps.

Not at all.

Come on, Brett. The bottom line is that, normally we don't do this, but we had over $1 billion in overnight investments at 10 basis points. With interest rates being so low, we didn't want to rush into a decision and invest hastily. We are hopeful to get that investment made this quarter, and we are pushing to make it happen. Regarding the other deal that Asylbek mentioned, we have more liquidity coming in, and when those loans are repaid, it could complicate things a bit. Aside from those factors, I believe we will still see a 2 to 3 basis points change in core performance, once we remove the impacts of the PPP and liquidity issues, on a normalized basis.

Okay. Just one quick item around the margin, and you mentioned the $2.5 billion of cash flow in the securities portfolio. Any idea of how much that's coming off at and then what you're reinvesting or expecting to reinvest at?

So I think right now, if you get a fixed, I think $1 billion and $1.1 billion, $1.25 billion, I think on the variable you might get 50 basis points right now.

Okay. Thanks, appreciate all the color.

Our next question will come from Brady Gailey with KBW. Please go ahead.

Yes, hi. Thanks, good morning guys. The mortgage warehouse had another great quarter. I think, was up about 25% linked quarter to $2.3 billion and that's a big number. I know that can be hard to predict, but how do you think about the stability of the warehouse into the seasonally soft 4Q? And then as you look out to 2021?

Let Kevin take that.

Yes, it's difficult to predict anything beyond six weeks. Within that timeframe, we can analyze mortgage applications, and typically six weeks later we see a strong correlation with our mortgage warehouse line. As mentioned for the quarter, our average balances were $2.28 billion compared to $1.84 billion last quarter, showing an increase of $436 million on average. We ended the quarter very strong, reaching a record high of $2.73 billion. This strong balance at the end of September carried into October, which is proving to be an even better month. So far in October, our average balance has increased by over $250 million compared to Q3, indicating a great start. I anticipate some moderation as we approach the fourth quarter. According to the Mortgage Bankers Association, their recent forecast predicts a little over a 4% decrease in originations for the fourth quarter, although it doesn’t feel that way currently. The refinancing surge continues, which leads me to believe the fourth quarter will remain strong. Predicting the first quarter of next year is more challenging; however, the MBA's forecast suggests an overall volume decrease of about 23% for next year, with a hefty 48% drop in refis, and a slight increase of about 5% in purchase volume. Most of the projected decline is in the latter half of the year. The MBA expects the first couple of quarters to remain strong based on their data, which, while they have more data than anyone else, they don't always get it right. From the last quarter, I was pleased to see our weighted average coupon increased from 3.10% to 3.18%, which hasn't happened in a while. In terms of volume, we had 51% purchase loans and 49% refis, similar to last quarter. Our portfolio's turnover time was 15 days, slightly slower than the all-time low of 14 days last quarter, but better than the typical 17 days. Overall, things look positive, and I expect strong performance this quarter.

Kevin, would it be safe to say even though mortgage lending may be leveling off to some degree and you may see a decrease, we took on a couple of additional customers that may help to keep our balances more than it was...

That is safe to say, David. If I look at the pipeline, I think we have three or four new clients that have taken too long to onboard, and we have three more scheduled between now and the end of the year, probably by early December. Those take about six weeks to complete the onboarding process, including due diligence and testing to ensure the systems are functioning properly before moving forward with the client. However, I do believe we’ll add a couple of hundred million dollars in new commitments, which will help our volumes remain somewhat above the MBA forecast.

Right. All right, that's helpful. And then you reengaged on buybacks just barely in the third quarter, not a huge amount, but as you think about buybacks going forward, do you think you'll be active here? I mean the stocks at one-nine of tangible, which is a discount versus where you guys normally trade. So should we expect continued buybacks and size here or no?

We initially had a buyback plan, but when COVID started and we faced $3.6 billion in forbearance loans, we decided to reassess our situation. The regulators didn't explicitly tell us not to proceed, but they indicated that we should be careful with our capital expenditures. As a result, we were cautious at the start of the year. In the third quarter, we aimed to conserve our resources to pay off the $125 million in debt from Legacy, which carries an interest rate of 5% or 6% and could save us $5 million to $6 million annually. However, when the stock price fell significantly, we felt compelled to act. Currently, we're more optimistic about the market situation, as we're seeing just 1% to 1.1% of our loans on deferral and a reduction in nonperforming loans, which gives us some confidence about our asset quality. If the stock price drops again, we would likely consider reentering the market.

Okay. And then finally for me, I just wanted to touch on M&A, again. Yes, David, what needs to happen for you to get very comfortable, either the impact in the M&A game?

I would say we are very comfortable and ready. A lot of it has to do with the other side, as their stock prices have dropped by around 25% to 30% compared to their highs. Even though they could argue that our stock is also down, there seems to be a reluctance to sell in the market. People prefer to wait for better conditions. That said, I believe that all banks are experiencing fluctuations during this deal, and nobody really knew what would happen with the pandemic. I think you'll start to see more discussions now, possibly three or four deals being talked about in the market. By the beginning of the year, I expect to see some significant deals emerging again.

Our next question will come from Michael Rose with Raymond James. Please go ahead.

Good morning. Thank you for taking my questions. I want to clarify something. It seems that average monthly bond production has decreased significantly. Could you provide some insight on that and what we might expect moving forward? I'm trying to connect your comments on core expectations for next year, which seem to be around mid-single digits. Thank you.

Okay. This is Tim, Michael. The average monthly production for the current quarter was $449 million. In the first quarter of this year, it was $476 million, and in the last quarter of 2019, it was $496 million, with Legacy only with us for two months, November and December. I intentionally excluded the quarter ended June 2020 because it included many PPP loans that skewed the data. The quarter ended December 31, 2019, also had $496 million, then it dropped to $476 million, and now it's at $449 million. I believe these changes are directly tied to COVID and the oil and gas challenges in Texas and Oklahoma. Things seem to be stabilizing now, but there are no guarantees. I don’t expect significant deterioration from our current position, and we hope to see growth. We plan to budget for loan growth as we move forward, adapting to the economic environment we’re in. David has already mentioned some of the pay down issues, and our burn rate has been quite significant due to certain PCD loans we wanted to exit. Overall, I believe stability will be achieved moving forward, and I hope that addresses your question.

Yes. Yes, I was trying to get a sense for the drop sequentially.

Yes. I mean if you take out those numbers divided by the rate you're talking about $25 million at difference a quarter, so it's $100 million a year. So I don't think that shouldn't jump out at anybody and I again, I do think there still be more pressure with this COVID-19 probably through the end of the year. So I don't know that you see a lot of growth, especially with the loans we're still trying to work out of Legacy. But, I think to me go into what we've gone through and you've only seen the $25 million down for the core. I actually think that's pretty good.

Yes, I don't think it's bad given the circumstances. One could easily have predicted a worse situation. We're still saying...

Got it. Okay, maybe as a follow-up. Can you just remind us where you are on the cost savings from the legacy deal? I know the systems conversion is now gone in past, and just how much more would you expect to get and any changes to the target and might have the environment? Thanks.

Yes, we have realized most of the cost savings from the acquisition. There may be a few small items we are currently evaluating. While we may save a bit more, we are also reinvesting in technology, which accounts for one of our highest costs. Therefore, although we will have savings in one area, we will allocate some of that toward other expenses. That's why I provided guidance of $117 million to $119 million for the next quarter, taking these variables into account. Overall, we have successfully achieved our cost savings from the legacy merger.

Okay. Thanks for taking my question.

Thank you.

Our next question will come from Brad Milsaps with Piper Sandler. Please go ahead.

Good morning, guys. David, you commented that your reserve is the largest, it's really ever been in your career. It seems like most of the charge offs that you took this quarter related to the PCD book. Just kind of curious kind of the drivers behind the provision you took, maybe kind of what you're doing, kind of to review the existing portfolio and kind of what that means for provisioning as you kind of look out over the next several quarters. Do you think at some point, you're going to start maybe releasing some of that reserve based on what you see or kind of how are you thinking about that?

If you look back, you'll see that the charge-offs primarily come from the PCD loans. That amount has been added back into the general reserve. Having 5.1 times coverage on nonperforming assets is significant. While we are required to follow a specific formula that has highs, lows, and a median, there may have been an opportunity to adjust our position. However, at this point, I felt it was wise to allocate $10 million into the reserve. Based on our model, we have some flexibility, and while I want to proceed cautiously, we can adjust within that range. I wouldn’t generally advise withdrawing from the reserve, but I believe we may not need to contribute additional funds for some time unless there is a significant change in our circumstances.

Great, that's helpful. And then, just to kind of follow up on the liquidity discussion. How are you guys thinking about PPP internally as those loans to get forgiven? Are you guys operating on the assumption that a lot of that liquidity will leave the bank or are you preparing for getting that money back from the SBA and some of that deposit money sticking around? Just trying to get a sense of sort of how you're thinking about. I won't call it a liquidity problem, but just putting all of that cash to work as you kind of think about it internally and trying to size it.

I'll start off, if you want to you want to get just an overall where we're at on the PPP, Eddiee, and then though we could the liquidity issue what I think is.

Sure. We're still at about $1.4 billion, a little bit under on the balances. We started to get some of the payoffs from the SBA, largely on loans under $50,000, about 400 loans today have been paid off, but it's only represented about $13 million or $14 million so far. We have several thousand more that are in the process, should be in submitted and what's sad to see how long that takes a lot of people waiting to see if that threshold on the paperwork would be reduced for loans under $150,000, so far that has still only been effective for those at $50,000. Just to give you an idea, about 60% of the number of loans that we have all fall under $50,000, but that only represents about 10% of the total dollars.

Yes. So that's kind of an overview, my personal opinion, this is an opinion that I think customers have a lot of money and I think that a good portion of the liquidity that we have will stay with us. I think it will be there. I think businessmen for sure want to keep additional money if any time you may see them if they have some loans, I only want to pay down person that I don't see the liquidity was the postures have gone away, really. In fact, I think you can only grow.

David, I might comment I agree with you, if you look at who we made these loans to, the vast majority of the loans went to what I would call our core customer base. There are people that have banked with us for many years in most cases. So I would be surprised if that money just automatically went somewhere else. I don't see that.

Well, the thing I noticed is that a lot of the money that is in their account they didn't spend.

That's true in some cases. Yes.

They didn't spend it, where else they use or other funds and or scared that maybe the government wasn't going to really give it back to them, and maybe they were saving just in case to pay it. In case they were lied to, but for the most part, a lot of, we didn't. I just, they're still savers from what I can tell.

Great. Thanks for the color, I appreciate it.

Our next question will come from Peter Winter with Wedbush Securities. Please go ahead.

Good morning. I wanted to ask about the core margin beyond the fourth quarter. It just seems that there'll be ongoing pressure on the core margin just with the reinvestment on the fixed-rate loans and the securities cash flow of over $2 billion. I'm just wondering if you could talk about some of what you're seeing on the core margin beyond the fourth quarter.

Yes. Beyond the fourth quarter, it's very hard to tell. I mean it's PPP loans, I know we're having forgiveness now, but I think most of the PPP we're expecting more, Eddie with first and second quarter of next year. So, I mean, in with the current economic environment and with the election coming up, it is so hard to give a guidance, so I don't think it will be prudent to give any guidance at this moment.

Yes, Peter. The bottom line is that there may be some downward pressure of 2 to 3 basis points on the core margin, but many factors could influence that. Recently, we reduced some rates, which should provide a slight benefit. We also have $1 billion in liquidity that currently isn’t earning much interest. Our focus remains on building loans rather than reducing them, and these factors can change the dynamics. We don’t rely on the current situation alone; we aim for steady, consistent results, and so far, we haven’t seen any dramatic changes. We want to be transparent, and while I would share my thoughts on next year's net interest margin, many variables make it difficult to provide accurate guidance. It could swing either way, likely leaning toward a decrease in the core margin by 2 to 3 basis points, but there's potential for upside. For example, if we receive back the PPP money, that could increase income by $40 million, completely altering our outlook. There are many dynamic factors at play, and with the economy and loan rates fluctuating, it’s a complex situation.

Okay. The reason I ask is, I think about expense management for you guys. So it's always been a strength of the company. And I'm just wondering with more customers utilizing digital banking, is there any plans to maybe reevaluate the branch network or looking to reduce some of the office square footage with this work-from-home?

I don't have plans to shift locations unless we make a deal with another bank that has many nearby locations. I can say that when we needed more space at our corporate office in Houston, we considered buying or building another office. However, with more people working from home, that situation has become more manageable. This might help reduce costs from rising significantly in the future, but I don't anticipate cutting costs at our current locations. Our customers appreciate that they can find our banks almost anywhere in Texas, whether their children are in school or they're retiring in the suburbs, which is a significant advantage for us. As we open new banks, we will likely design them with smaller footprints and a more digital focus, but we will continue to have physical branches, even if there are fewer staff members, while still providing services. Our approach sets us apart from many competitors who have closed branches in areas like Victoria while we opened a new location there, which surprisingly raised $30 million or $40 million quickly. For us, this strategy works. As long as we maintain our efficiency ratio and manage expenses effectively, I don't foresee a large number of location closures. We are also discussing some deals to reduce office costs, which could save us a couple million dollars annually.

Yes.

Yes, Peter, this is Asylbek. We examine our expenses and strive to reduce them, but I want to highlight that we see potential for additional savings while also investing in technology. We prioritize technology as it represents the future of the bank. Therefore, all the savings we generate are directed towards technological investments, and we have been actively doing this. The merger with Legacy was advantageous because both banks had strong technology platforms. When consolidating, we assess each IT system to select the best one, which may involve higher costs but ultimately benefits our customers. We have been investing significantly in technology recently, which may offset some of the cost savings we could achieve. Overall, I believe we will maintain our current position.

But net, something that I've looked at, I think sometimes you see that. Okay. You can have a reduction in staff or you can have a smaller deal, and you save money there. But then when I look at what we spend on technology it takes that and some...

Let me emphasize a couple of things that have just been said. David mentioned the fact that we picked up some additional customers because some of our competitors closed down their locations. That's primarily been as David mentioned, Wells Fargo and Bank of America. And granted it's been in some of our smaller communities, but in essence those banks have vacated those communities and it has benefited us quite a bit very significantly. So in those communities themselves. And while there's a clear direction toward technology and banking, which we understand, we embraced and we intend to continue with and even improve what we offer in that regard, we still have many, many customers that come to the banks, come to the motor banks, come to the lobbies, we don't see any indication at all that our customers don't want to use the brick and mortar. So I would suspect, we're going to hold our place.

So you can see the policy through deposits we grew this quarter, I mean when I'll walk through the lobby of the bank that I sit in and I see two or three people who count other banks that are closed. Why don't you get an appointment? I think they like the service.

I have customers mention to me all the time, how much they appreciate our network of banking facilities that they can actually go to, if they have a need to do so. I think it gives us a real edge and it's important.

Well, I think you not only have the edge that can go there, but then I'd have to say our call centers have really been great too with the technology. So we offer both really.

That's great color. I really appreciate that. Thank you.

This will conclude our question-and-answer session. I'd like to turn the conference back over to Charlotte Rasche for any closing remarks.

Thank you, Grant. Thank you, ladies and gentlemen, for taking the time to participate in our call today. We appreciate the support that we get for our company, and we will continue to work on building shareholder value.

The conference has now concluded. Thank you for attending the presentation. You may now disconnect.