executives said thebank is close to achieving double-digit return on equity as the company engagesin a program to cut expenses.
Thebank has faced activist investor pressureto boost returns or consider a sale. In announcing its second-quarterresults on July 19,the company also unveiled an efficiency initiative, called GEAR Up, that envisionsa 9% reduction in the bank's workforce and the consolidation of 40 bankingcenters. All told, the company expects the initiative will produce anadditional $230 million in pretax income by year-end 2018. Management spentmuch of the company's second-quarter earnings call defending the assumptions asconservative.
"Wereally looked at using very conservative assumptions. We have the loan growthremaining very similar to this year. … We've built in continued, albeitdeclining, [net interest margin] pressure from loans," said CFO DavidDuprey.
Providingsome additional detail, management said the banking center closures would bespread across the company's footprint and would not disproportionately affectany single market. And executives said the projected benefits to the bottom linerequired no additional leverage from current levels.
Althoughmanagement said they expect the GEAR Up program will push the company'sefficiency ratio under 60% by year-end 2018, Duprey said he was most focused onrevenue.
"I'mmore focused on achieving the revenue and expense [projections]. The efficiencynumber is the efficiency number. As I've said, as we built the walk to get usbelow 60%, we were incredibly conservative," he said.
Higherrates would help the bank get to double-digit returns much quicker. Managementsaid they estimate the Federal Reserve's December 2015 rate increase shouldcontribute $90 million to the company's full-year results this year.
Creditquality remained a topic of discussion on the call given the bank's exposure tothe energy industry. Peter Guilfoile, chief credit officer for the bank, saidthere has been some minor credit deterioration in commercial real estate"but nothing significant." He said the portfolio has held up tostringent stress tests and that the rest of the bank's holdings appear solid.
"Therest of the book outside of commercial real estate — middle markets, smallbusiness — [is] holding up exceptionally well," Guilfoile said. "Zerocharge-offs in Houston this quarter, so credit quality remains very strong."