Q3 2019 Earnings Call
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time Airlines will again be placed on music cold. Thank you for your patience.
Ladies and gentlemen, thank you for standing by and welcome to the Cohen <unk> third quarter earnings Conference call. At this time, all participants are they listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you would need to press star one onto telephone.
If you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker for today director of Investor Relations AB Mendez. Thank you. Please go ahead.
Thanks, Stephanie this morning's conference call will be led by Phil Green, Chairman and CEO , 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 provision.
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 to such statements to be covered by the safe Harbor provisions for the forward looking statements contained in the private Securities Litigation Reform Act of 1995 as amended please see the last page of this morning's earnings release for additional information about the risk factors associated with these forward looking statements if needed a copy of the releases available on our website or by color.
The Investor Relations Department, that's 210 to 205234.
At this time I'll turn the call over to Phil.
Actually be.
Good morning, everyone and thanks for joining us.
Today I'll review, the third quarter results, calling for office to hit our Chief Financial Officer, Jerry Salinas will also provide additional comments before we open it up your questions [laughter] third quarter, calling for Australia, and $109.8 million or 1.73 cents per diluted common share.
Paired with earnings of $115.8 million or $1.78 cents, a share reporting the same quarter last year.
A return on average assets was 1.35% for the quarter compared to 1.49% in the third quarter last year.
Average deposits in the third quarter, we're up to 26.4 billion compared to 26.2 billion in the third quarter last year.
Average loans in the third quarter.
$14.5 billion.
5.8% from the third quarters last year.
We continued to see growth NRC, and I see Ari and consumer segments.
Our provision for loan losses was $8 million in the third quarter compared to $6.4 million in second quarter of 29 team.
In $2.7 million and the third quarter 2080.
Net charge offs for the third quarter were $6.4 million compared with $15.3 million for the third quarter last year.
Third quarter annualized net charge offs were only 17 basis points of average loans.
Nonperforming assets $105 million at the end of third quarter compared to 76.4 million in second quarter of 2019, and 86.4 million in the third quarter of last year.
The increase in the third quarter related to a single energy credit, which had been included in problem energy loans since early 2016.
[noise] overall delinquencies for accruing loans at the end of the third quarter were $100 million were 69 basis points of period end loans.
Those numbers remain well within our standards and comparable to what we have experienced in the past several years.
Our overall credit quality remains good.
Total problem loans, which we define as risk rate 10 and higher.
For 487 million at the end of the third quarter compared to 457 million in the second quarter, this year and $504 million for the third quarter last year.
Energy related problem loans declined to $87.2 million at the end of the third quarter.
Compared to 93.6 million at the yen second quarter.
$138.8 million in the third quarter last year.
Energy loans in general represented 10.5% of our portfolio at the end of the third quarter.
Below our peak of more than 16% in 2015.
Our focus for commercial loans continues to be on consistent balance growth.
Including both the core component, which we define as lending relationships under $10 million in size.
As well as larger relationships, while maintaining our quality standards.
New relationships increased 5% versus third quarter a year ago.
The dollar amount of new loan commitments book during the third quarter dropped by 14% compared to the prior year with decreases in CNS, <unk> public finance and energy, but a slight increase in C.R.E. commitments.
Similar to what we discussed last quarter, we're looking at lots of deals.
But our booking ratio was down particularly in commercial real estate.
And the current quarter, our booking ratio for see Ari was 24%.
Versus 32% and the prior year.
Overall in the third quarter, we so our percentage of deals lost to structure increase from 56% to 61%.
Versus a year ago.
I was pleased to see our weighted current active loan pipeline in the third quarter was up by about 30% compared with the ended the second quarter.
Due to higher levels of see an eye opportunities. So we're seeing good activity.
And I'm expecting some good growth in the fourth quarter.
And consumer banking, our value proposition and award winning service and technology continue to attract customers.
The fourth fifth and sixth of the 25, new financial centers planned over the next two years in Houston.
Opened in the third quarter.
And we've already opened the seven so far in the fourth quarter with more to come before the end of this year.
Overall, net new consumer customer growth for the third quarter was up by 48% compared with a year ago.
So far this year same store sales as measured by account openings increased 14% compared to a year ago.
In the third quarter, just under 30% of our account openings came from our online channel, which includes our Frost Bank mobile App.
This channel continues to grow in.
In fact online account openings were 56% higher during the quarter compared to the previous year.
The consumer loan portfolio averaged 1.7 billion in the third quarter, increasing by 1.9% compared to the third quarter of last year.
I continue to be extremely proud of our banking insurance and wealth advisory staff executing our strategy of organic growth consistent with our strong culture.
The interest rate environment presents challenges to our industry.
We continue to focus on the fundamentals and growing our lines of business inline with our quality standards.
Selma.
Ross has received highest ranking and customer satisfaction in Texas in JD power is us retail banking satisfaction study for 10 years in a row.
We have received more Greenwich Excellence Best brand awards for small business middle market banking than any other bank nationwide for three consecutive years.
And we once again been named the Best Bank in Texas by Monday Magazine.
You don't do that without great people dedicated to providing to kind of service that makes people's lives better.
Now I'll turn the call over to our Chief Financial Officer, Jerry Salinas for some additional comments.
Thank you Phil I'll make a few comments about the Texas economy before providing some additional information about our financial performance for the quarter and I'll close with our guidance for full year 2019.
Regarding the economy, Texas unemployment remained at historically low level of 3.4% for the fifth month in a row in September .
Next is job growth continued at a healthy pace, but decelerated during the third quarter coming in at 3% in July 1.8% in August and 0.9% in September compared to the 2.3% growth seen in the first six months of the year.
The Dallas Fed currently estimate, Texas job growth at 2.1% for full year 2019.
In terms of employment growth by industry construction has been especially strong growing at 6% year to date, followed by manufacturing job growth at 2.7%.
Energy industry job growth this weekend and now stands at 1.6% year to date, however, energy job growth with negative in the third quarter.
Looking at individual markets Houston economic growth was slightly ahead of historical trends in the third quarter. The fed Houston business cycle index slowed to a 3.9% growth rate in September but remains above its historical average of 3.5% year.
Year to date, Houston employment is up 2% with third quarter growth slightly better at 2.2%.
The construction sector saw 7.3% job growth in the nine month through September .
Strongest growth of any sector in the Houston economy, Houston unemployment rate fell slightly to 3.6% in September .
The Dallas business cycle index expanded a 4.4% annual rate in the third quarter, while the Fort worth business cycle indexed expanded at a 3.5% annual rate.
In September the unemployment rate fell to 3.1% in Dallas and 3.2% in Fort worth.
The Austin economy also remained healthy in August the Austin business cycle Index grew it at a 7.8% annualized rate.
Austin's unemployment rate stood at 2.7%.
The information sector sought by far the fastest job creation and Austin in the year to date period with job growth of 23% over the prior year period.
Growth in the San Antonio economy accelerated in September the San Antonio business cycle Index expanded its fastest pace since 2016 growing at 3.8% rate in September well above its long term trend of 2.9%.
San Antonio's unemployment rate decreased slightly to 3% as of September .
The Permian basin economy showed year to date job growth the 0.2% through September with unemployment of 2.3% remaining well below the state's overall, 3.4%.
Looking at our net interest margin, our net interest margin percentage for the third quarter was 3.76% down nine basis points from the 385, 3.85% reported last quarter.
The decrease primarily resulted from lower yields on loans and balances at the fed partially offset by lower funding costs. The taxable equivalent loan yield for the third quarter was 5.16% down 18 basis points from the second quarter.
Looking at our investment portfolio. The total investment portfolio averaged $13.4 billion during the third quarter up about 122 million from the second quarter average up 13.3 billion the taxable equivalent yield on the investment portfolio with 3.43% in the third quarter up one basis point from the second quarter.
Municipal portfolio averaged about $8.2 billion during the third quarter flat with the second.
During the third quarter, we purchased about 100 million an agency mortgage backed securities, yielding 2.63% and about 260 million in municipal securities with the yields at 3.31%.
The municipal portfolio had a taxable equivalent yield for the.
For the third quarter of 4.08% up two basis points from the previous quarter.
At the end of the third quarter about two thirds of the municipal portfolio with BSF insured.
The duration of the investment portfolio at the end of the quarter was 4.3 years flat with the previous quarter.
Looking at our funding sources the cost of total deposits for the third quarter was 39 basis points down two basis points from the second quarter.
The cost the cost of combined fed funds purchased and repurchase agreements, which consists primarily of customer repos decreased 16 basis points to 1.53% for the third quarter from 1.69% and the SEC in the previous quarter.
Those balances averaged about 1.29 billion during the third quarter up about 49 million from the previous quarter.
Moving to noninterest expenses total noninterest expense for the quarter increased approximately 15.2 million or 7.8% compared to the third quarter last year.
Excluding the impact of the Houston expansion and the increased operating cost associated with our headquarters move in downtown San Antonio noninterest expense growth would've been approximately 4.3%.
Regarding the estimates for full year 2019 reported earnings. We currently believe that the mean of analysts estimates of $6.81 is reasonable with that I'll now turn the call back over to fill for questions.
Thanks, Jerry will open up to call to questions.
At this time do you would like to ask your question. Please press Star then the number one on your telephone keypad again that starts in the number one to ask your question. Our first question comes from the line of Brady Gailey with KBW.
Hey, good morning, guys, they're very good morning.
Maybe we can just start with loan growth.
You are losing more CRT deals it feels like the structure, where these deals going are they going to some of your peer banks are they going to non bank lenders.
Thank you Theres a combination of all those will.
Then on the deal it can be.
I think in which is less than it was we seem to go small banks.
Smaller communities, we seem to go to large banks, we seem to go to private equity.
Just a lot of competition, we're with CRT.
Okay, and it's great to hear you a little more upbeat on loan growth in the fourth quarter. Phil what is what is driving that optimism I think I've heard you say something about seeing what's driving the more positive tone there.
No.
It's hard to say, we were disappointed with the seeing growth that we had in the third quarter.
In terms of book commitments and it.
Talk to to our folks around it seemed like there was a little bit of a pause with.
On the CNOSS side on customer side on the prospects side and maybe that was just an anomaly and timing it looks like it's picked up more strongly.
In the fourth quarter, so as we look at our weighted pipeline.
It's increased and I'm not sure there is anything I can really specifically related to but.
But it is it's definitely better than it was in the third quarter.
All right and then finally from me one for Jerry I know last quarter, you talked about a full year net interest margin of 375 for this year.
It seems like you're running at about 380.
On average for the first three quarters.
Now that we just got the last rate cut out what's your updated thoughts on kind of how the NIM.
Reacts from here.
Hey, Brady I think the guidance I gave you are right was a 375 for the full year and our assumption last quarter did include rate cuts in July and October and at this point, we're still comfortable with that 375 kind of a full year NIM is our is kind of what we're thinking.
Alright, great. Thanks, guys.
Thank you.
Your next question comes from the line of ROE Potty deal with Evercore ISI.
Thank you just going back to the NIM question.
Just wondering looking beyond the fourth quarter.
Assuming no additional swelling Scott do you expect pressure on asset yields.
Competitive pressures to more than offset any benefit that youre seeing on the downward pricing deposits.
Or do you anticipate the men to kind of inflect at some point in 2020.
The benefit from deposit pricing actions.
I think our you know there obviously, there's going to be pressure on the NIM.
And a lot of it will be dependent on what happens to any further rate cuts right.
So at this point I think what we're projecting is continued pressure on the NIM.
You know from an investment portfolio standpoint yields aren't what they used to be so we're struggling a little bit there were talking about potentially adding some duration, there, but will help which will help the portfolio, but you know from a deposit standpoint to we'd kind of race deposits as we were going up and we've kind of done the same thing coming down.
We're still very competitive our debt on our did price deposit pricing.
But for our deposit betas I think we've been let me see here on total deposits our beta was about 25%.
And now related to the October cut so there's there's a there's definitely going to be pressure on the NIM I can't sit here and say that given what's happening with rate.
Given what's happening in the loan portfolio I think Phil has said before that we're going to be more competitive on pricing.
There's no reason for us to lose a deal with long term relationship over five or 10 basis points. So we're going to be more competitive.
With pricing even in this lower rate environment. So at this point, what I'm seeing if I look forward I still continued pressure and kind of a downward trend on that NIM into 2020.
Got it and then the the deposit growth looks pretty strong this quarter, particularly on an opinion basis.
Was there anything seasonal that was sort of unique to this quarter that you expect to fill out in fourth quarter.
Yes for historically for us the third in the fourth quarter are the strongest quarters. It was good to see the sort of growth that we had on our even on average basis I think linked quarter, we were up annualize 5.5%.
We had seen some pressures we talked about on the DTA, especially early part of the year you'd have to the fed raise rates in December .
There was quite a move out is I think CFO isn't treasures that the the interest rates at that point were so high that.
It's an opportunity cost base it to just keep it in their checking account and so we started seeing some outflows in those commercial demand deposit accounts, we started to see some some settling in there we're doing some things on our end to be more competitive and yes. So I think that it was good to see I don't think there's anything unusual that that caught our attention we've had good.
Growth in in the CD categories, and and the M&A, obviously, but it was good to see the demand deposits growing also.
Got it and just one last could you quantified the the distressed energy loan exposure, which is sort of the the residuals from the previous energy downturn.
16 that you are still kind of working through right now versus any new distressed energy credits that just kind of materialized over the recent weeks.
Okay well on the.
Let me see what I can do for you hang on second.
The.
As we mentioned the increase in Nonperformers was related to.
And energy credit that had been a part of problem loans for goodwill.
The.
Our.
Let's see.
You look at.
Energy loans, we classify as problems.
At the end of the.
Third quarter, we're about $87 million in round numbers.
And the mud Big majority vast majority of that two credits that are non performers.
One is a 34 million dollar credit ones 33 million, we've been living with those.
As we said moving through the snake for long time.
And they're just trying to generate liquidity.
And it's a tougher environment as you all know.
With less capital moving in those markets for people, who want to to sell anything and need to selling so you've got discount rates on the reserves it used to be PV nines.
15, 20, sometimes 25% so thats reduced.
Collateral values.
Relation values so.
That's really what's happening there.
As far as our outlook there I feel good about the portfolio that doesn't mean, we don't don't have any risk.
The.
The.
If you've got if you got somebody who's intending to sell assets, that's what I worry about.
We've got.
There is we've got to.
Credit Thats.
$50 million to us that it's not it's not a problem loan, but I know, they're looking to sell assets and I'm not very optimistic about.
The environment to do that so we'll just see how that works out but thats other than that one.
As far as what we've got we.
We.
I feel good about it we've got about a billion five outstanding and energy the weighted average risk rated that portfolios is 613 compared to the overall portfolio of 6.44, so aside from a few larger credits.
That were either been working to have been snake or or that I've got my eye on out of the snake.
I think I feel really good about portfolio.
Got it thank you.
Your next question is from the line of Jennifer Demba with Suntrust.
Thank you good morning.
Good morning.
On the two energy credits you just mentioned, Phil 34 million 33 million.
Holidays.
What kind of reserve is on those loans and what kind of.
Loss are you thinking could happen.
Yeah, I think that.
Reserves specific reserve wise, we have 10 million roughly associated with each of those credits so 20 million total between the two.
Okay.
Okay, Jennifer just it just depends on how things work out until.
That's what it will ultimately be we don't know, it's kind of a fluid situation I think.
In the markets with regard to what the value. These assets are particularly if its.
No if its gas related or is outside of the Permian still that same situation.
On expenses.
You just moved into the new headquarters.
A few months ago.
Still.
Going through the Houston expansion I mean should we expect a bit more expense growth next year in 2020.
Then we're seeing this year this year, it's been around 6% year to date.
Yeah, I think Thats a.
Yes logical question I think that.
I was putting together model, what I would say, yes, we've only been in this building since June of this year. So those additional cost or it's only going to be partial year. This year and it'll be a full impact for next year. So that obviously well have an impact on 2020 growth and then as far as the Houston expansion is concerned.
We talked about what our plan was originally which we said was about one a month.
For 25 month.
We're running a little bit behind schedule. This year I think we've opened six through the end of September the seventh just got opened in October so running a little bit behind schedule on the opening up of those locations I think from the hiring standpoint, everything I hear is that we're doing pretty well and and so hiring has been better than expected at.
And so those are probably going just maybe just a little bit slower on the hiring but I think still really keeping pace over the last numbers I looked at versus pro forma we were slightly better on expenses, but not a whole lot I mean, the numbers just aren't.
For the first couple of quarters weren't that significant but if you remember we talked about a 19 cents impact on 2019, and we talk a little bit about the profitability model of of those branches I will just as a reminder, what we had done as we went back and looked at on average our new branches had performed I think over a 10 year period I think we look.
Hi, good.
40 branches, if I remember correctly and what we said on average was it those locations.
Tended to breakeven about month 27.
And so really for for the 19 cents guidance, a big chunk of that was really expense related right because those locations have to open you've got to get the deposit you've got to get the loans, but the cost start really pretty quickly and so you know the way I would look at it is we were planning to open 12 that was going to cost as 19 cents and they don't break.
Evan you know until the month 27, and if 2020 has kind of that same sort of concept.
My starting point would be kind of like a 19 cents impact from the new.
Locations opened in 2020, but still a drag from the locations that we opened in 19. So yeah. Your thought process. There is correct that there is going to be a bigger brag a bigger drag on 20 than there was on 19.
Thank you.
Your next question is from the line of Brent Robertson with Piper Jaffray.
Hey, guys good morning, and Brent good morning.
Two housekeeping issues are items, one do you what do you happen to have interest expense for the quarter and then the ending period securities portfolio.
[noise] sure here what was your first question I'm, sorry interest interest expense you guys have the total net interest income, but you don't break out the interest expense I sure. Yeah, just real quick here for you wanted it for the quarter right.
33.3 million.
Okay.
And then they getting ending period securities portfolio size.
Be grab my 10-Q, that's probably the best place for me to go.
Okay.
All right.
And we'll be filing that later today, so any securities we had a a.
Billion owed to one and I held to maturity and 12 or 20 in the available for sale.
So run Okay 13 for 40.
Okay.
Great.
And then just wanted to go back to expenses and how I guess, one was how much was incentive comp related to the third quarter increase and and personnel.
Take a look there.
You know the.
Really the incentive comp year over year, I'm, not seeing a real big impact obviously, there's some from a could be some from a higher commissions.
On the insurance agency side is there commissions were up compared to the third as era. There, yes, theres transmission were up there might be some additional up.
Commission income that the brokers might earned but other than that really the increases have to do primarily with our typical married and market increases promotions that we give but also the increase in head count. It's also impacted by the by the Houston expansion.
Okay.
And then just thinking about going back to expenses you know just thinking about the bigger picture you got the branch built out is there any reason to think that core expense growth and 20 would be different than the going on a four four and a half range now.
I think it might be.
Just because I haven't seen detailed numbers my gut tells me with what we're spending on additional cost and technology.
Strictly cyber security and then also we've got some technical debt we've been.
Dealing with and so and I mentioned last quarter I think it was we had a number of positions.
We needed to be filling in the in operation side, So we're making some headway on that.
We need to so.
Technology is always a.
Something that's going to be a big expense category to every business. It is ours too and so I think thats going to be a little bit outsized. We're while I don't know that in of itself is going to.
They are drive the number.
Materially, but will drive it some and then I. Just think also my gut tells me that just costs for labor is getting tougher.
Not just for us, but for everyone and just what you have to pay to bring in good people keep good people is just have to stay up on top of that stay stay on top of the benefits you're providing so.
No just as we run the business those are things I know, we've got to be dealing with.
And we.
Can't be asleep switch on it so.
Thats why I tend to thank you may be a little bit higher I think thats right, Phil and you mentioned during the previous call. The open positions that we had in the technology area and what our focus was so as we hire those people in the third and fourth quarter alone would be in our run rate for part of the year. So yes, that's going to.
Full impact on 2020.
Okay and.
And then maybe just one last one any thoughts on Cecil and have you guys.
Can you give us out of your range, if you're not ready to give a more definitive number.
Yes, we're going to be disclosing in our 10-Q that based on our September pair parallel run. We currently expect that to the combined impact on the related to loans and unfunded commitment is about 15% to 25% higher than our allowance at the end of September .
Okay, Great appreciate not gone up yeah and of course all of the impact on thesis.
We need to say a lot of its going to be dependent on what sort of economic forecast. We have at the ended at the end of the year, what our loan portfolio looks like and any refinements that we have made to the credit models by then but we do have a disclosure in there I think the team has done a really good job moving us forward.
Okay, great. Thanks, guys.
Your next question comes from the light of Peter Winter, where the Wedbush Securities.
Good morning.
Morning.
Sure I heard your comments on the margin.
Initially into 2020, but there'll be some pressure I guess as you guys compete.
On loan pricing, but.
Just looking out longer term for the margin assuming the fed is on holders.
No just directionally, what what do you think the margin does because I know, there's a lot puts and takes on I'm not looking for specific guidance.
Okay.
I think that certainly.
The positives if you will are going to be loan growth.
If we've got a loan growth kind of consistent with where we've been in and Phil mentioned, he felt better about our outlook for the fourth quarters. Obviously loan growth is going to have a we'll have a positive impact there.
As far as our net interest income is concerned.
Talked a little bit about on the investment portfolio you. Unfortunately today, there's just not a lot of opportunities and so what we're talking about now is potentially looking at adding duration. So decisions that we make there could potentially have a positive impact on our up on our net interest margin percentage from a deposit sort of standpoint, I think I told you that.
And at that we view.
Think we've been pretty aggressive on our our deposit pricing, we were aggressive going up and we're aggressive coming down, but we're going to continue to keep our eye on out what the what our competitors are doing.
Even though we have a low loan to deposit ratio from a deposit standpoint, you know as well enough to know that we're concerned about the relationships that we want to make sure that we're treating our customers fairly.
We see any weakness as there will react accordingly, so I think that that.
To say right now that they would there be upward.
I could push with an upward guidance I think thats tough right now I think that where we are right now is we can't make.
We we can't make miracles happened. So right now you not fast I think we can do is kind of stay flattish.
But thats really a challenge that we have moving forward.
Okay.
And then.
You are confirmed the full year guidance at 61.
You beat guidance, a little bit third quarter. So it does imply.
Pretty significant drop in the earnings from Threeq to Fourq you.
I'm, just wondering where the commercial points are coming I mean.
Confirming.
Margin, then you're looking for a little bit better loan growth.
All right.
I think the thing that I would talk about as you know.
The guidance that we gave on full year that I gave on for your expenses during the last call I think we said net of the.
The Houston expansion and net of the additional operating cost.
Associated with our move downtown we said would be in the fourth 4.5% range and.
We still I still feel comfortable there. So that obviously would that infers is that there is a a ramp up in expenses in the in the fourth quarter and if you go back and just look historically, we do have a higher salaries expense in the fourth quarter typically on a lot of the incentive plans are kind of trued up there based on performance and I'm looking here I just said.
Third quarter fourth quarter of last year.
I'm seeing that salaries by themselves went up from.
Gosh.
Little North of 3 million. So you know what we'll expect that there and then now we're also adding the people related to the Houston expansion. Phil mentioned also that we're doing hiring in the technology area until those people that came in the third quarter would have come in either late in the third quarter are starting in the fourth quarter. So we'll see some additional pressures there.
I think that that's probably the thing that kind of moves the needle. If you will will be expenses in that fourth quarter.
That are like I said there were impacted.
By the on a reported basis impacted by the Houston expansion and also the top.
And then just my last question just going back to Jennifer's question about the expense growth for next year, I mean, and the comments that core expense growth could move up a little bit I mean is it unreasonable.
To assume like 8% type growth.
Expense growth next year.
Is that help me what are you talking about core reported reported.
Just yet.
Yeah, I think it could be north of that.
Got it.
Could you give the and the thing go ahead.
Could you give a range.
We wouldn't give any so if we typically don't give any guidance really about ranges and if we did that anyway that chip that conversation wouldn't happen until till our fourth quarter call.
Got it but I will say as far as the fourth quarter expenses. The third quarter was also light on advertising costs. Those can really swing the Neil and they have during other quarters and and I have some of the projections that I've seen have us increasing those advertising dollars pretty significant advertising and promotions pretty significantly in the fourth quarter compared to the third.
Great.
Thanks Jerry.
Sure.
Your next question comes from the line of Ken Zerbe with Morgan Stanley .
Great. Thanks, good morning.
I guess just had a question youre talking about losing deals to or deals lost to structure.
Just to clarify I believe that is only related to see or EBIT correct me if I'm wrong, but the question is also like do you envision that continuing are you still seeing that in October .
And then in is having a material impact is that could be in one of the reasons for the slower loan growth in threeq.
Thanks.
Well the.
Lost to structure comment relates to the entire portfolio.
I don't have in front of me what the real estate number is broken out, but I can just tell you would be higher on real estate because if you looked at the amount. This year to date number for example, which is what our mainly focused on.
In this what we call we'll look to book area.
But no real estate loans, we looked at 34% more.
Deals.
So we look at a little over 6 billion.
34% from the quarter.
Full year, a year ago year to date third quarter.
And we booked.
13 million more only 1% more.
Billion for 58, so I mean, I think Thats, where you really see it when I said earlier I think I mentioned it was a quarterly number on that success rate going from 20 to 32 to 24 as a year to date number but.
Thats really what.
Where you see that are actually are seeing I do have a year to date number on.
On our success rate for that definitely down 1%, so see an a or look to book ratio was 41% last year year to date.
And then it's 40% this year, so you don't see it as badly.
In the CNS more relationship based.
Based on the factory you increase in there some but I think it's really mainly related to.
Commercial real estate has luck guarantees as lots to do with Vance rates.
Burn down arms that you'd just just everything.
Okay do you see that.
Trends slowing in fourth quarter has it sounds like you're a little more optimistic around loan growth and fourth unit.
Im optimistic there because we've seen our pipeline increase our weighted pipeline and in the and Cnine piece is what's driving a lot of them weighted pipeline. There. So that's that's really cause for most of my optimism nor do I expect it to get better or worse.
Probably worse.
Pretty bad now, but you know.
Things slow you might see people.
You know rain and little bit the less aggressive.
But right now I don't expect to be any better.
I think as didn't you occur yes.
No.
There's there's less and less opportunity there people are looking for spread.
Got it okay. Thank you.
Okay.
Stephanie do have you.
Our next question comes from the line of Jon Arfstrom with RBC capital markets.
Hey, good morning, guys and good morning.
The couple of follow ups maybe.
Just economic health, we can follow up on more camels, asking about but but the job growth numbers that you guys talked about.
Maybe just obvious maybe its energy, but can you maybe.
Put a finger on or give us an idea of what you think is driving that slower job growth.
I think some of it.
Some of its energy.
But I think one thing.
That.
People that we've talked to have pointed out to those consistently is a tighter.
It gets as far as the lower the unemployment rate gets.
The bigger impact it's got on the ability to grow jobs and so I think thats also factor but.
You are seeing some reduction related to energy employment. So I think those two things obviously for the things that I would put my finger on.
Okay.
Bigger picture you set aside energy, you're just you don't feel like you're seeing slowing in Texas at all.
No no not really mean energy business slowing a bit and is not bad but it slow and it's still strong the Permian to the numbers. If you look at the.
Hotel rigs out there.
We have gone down which is something to look at I think they had the highest rate state, but still a year over year growth and employment year over year growth.
You know the economic numbers sales tax and all those kind of things are still positive.
So.
But she but it is slower than it was and it was quite hot before maybe it's it's only red Hot now.
That.
That's what we're seeing.
Okay.
Net new customer growth of 48% year over year, that's one of the.
And I'm, assuming that's consumer that's just the it's a bit is number.
It is and then consumer loans up about 2% year over year.
Curious on the 40% on what's driving that and do you think.
At some point that leads to faster consumer group for the company overall.
Consumer skew the consumer loan growth, yes, what you really need to know.
You know were.
We're measuring this on consumer deposit.
Relationships. So yes, I think it's reasonable to assume that I think what one of things you're seeing them and consumer side is.
You know if you look at the.
The unsecured plc.
To the business, it's been slowing we've been more careful there over the last few quarters and so that's that sort of our downward pressure, but we still seeing good growth in commercial excuse me, a consumer real estate and and other kinds of real estate products. So.
I think once we get some.
Rationalization of the.
The growth rate on them.
Plc.
You will see some increase in the growth rate on the consumer.
Loan side, the as far as what's driving it.
You know, it's just I mean sounds corny, but we got a great value proposition a tremendous brand I mean, we've been spending money to get that out and to make that more well known our technology is.
Is good I mean, I think getting looked at.
At some of these awards that we get into our composite of different things and.
Can't mention I'm not sure I can mention which once all alone, but it's not unusual for us our mobile app to end up.
Number one and the category so.
Yeah, and we're getting better.
And were pretty good and getting better at how we are interacting engaging the prospects.
You know if you look at broadcast advertising is probably.
Maybe I guess is less than 15% of what we do.
It's really more.
Engaging the prospect at the property on the web and.
And that's helping us in this that people are doing their research online and course, you can look at the.
The awards, so we get we looked pretty good in that regard. So and then the service level that you. Good is great here is it just great and that comes out and word of mouth. So you get a lot of people that are willing to.
You know refer you. So I mean, you know I.
I think it's a really important number to look at it we had like I say the third quarter last year. We we had net new customers, that's new and net close we had net new customers not accounts, but customers 2756.
This quarter, we had 4065, so we went over the 4000 number.
First off I remember that but.
Anyway, I'm just really.
I feel good about it and it and it's not any one thing its result of a lot of hard work overall.
Okay. Good.
And then just one one more last follow up on the energy credit for the new NPL.
Any guess on a resolution timeline on that and then the other two that you identified I think you're saying the room there in your slide in them for us, but there isn't anything new on those two because they've been around for one or is it fair.
Well the two nonperformers.
One of them, they're nonperformer for a long I don't really know of anything specific going on there I mean, there's still trying to work some liquidity, but thats a tough game right now.
The one that came in new.
Is.
They did.
The bar were just changed their their strategy in terms of providing capital that type of thing there were some changes there.
And that really caused that when they go nonperformer next in the early stages of working that out I'm not I'm not look for a quick growth resolution there.
You never know, but I don't look for what I think one thing we've already about the large energy credits in this cycle is you're not in the Permian basin with oil it's hard to get is harder to.
To workout of of a large problem just takes time the other one that I mentioned, it's not a problem, but it's just it's just.
A credit that I'm aware of wants to create some liquidity I know thats hard to do and so.
The good they're good operators, they've got they support the credit with.
Certain amount of guarantees they've got other assets I mean.
All that but on the and it is I'm just being realistic.
Tough.
Market and.
And it's about $50 million deal to us so.
But to a point I guess, there is that other than that.
I'm really not aware of anything that concerns me at all in and I think which we showed that.
The problem energy loans were actually down so I'll now I'd love to get rid of these nonperformers, but just can take some time.
Okay.
Thanks for the help appreciate it.
Okay.
Your next question comes from the line of Steven Alexopoulos with JP Morgan.
Hi, everybody.
The first.
I wanted to follow up on the commentary regarding the pace of branch openings in Houston coming in at a slower pace and then lease originally outlined how many branches do you now think you'll have opened by the end of this year and how many will do you think of open by the end of 2020.
I think that our current projection is 10 and 90 and I think we're still a shootings or try to get all 25 open through 2020.
Okay. So you plan to accelerate the pace a bit right and 21.
Exactly and some of it or those openings are somewhat not completely on under our control units were working on a least location we've got to work with landlords and such and lease documents go back and forth and and then also excuse me getting a building permits in Houston.
Could also affect the timing of that so a little bit slower this year, but really are working to catch up by the end of next year.
Bob.
Are you thinking will be relatively even through the year or should we expect most of these to come on pretty late in 2020.
No I think that Mirek I don't have any information in front of me My recollection was that it was more skewed.
Towards the towards the latter part of the year, but again I think a lot of its just dependent on what we can accomplish I think the people like us that are being hired I think we feel good about that.
In some places where bookings were able to book loans, even before the location to open right. If those if the lenders that we hire the relationship managers that we hire have relationships, but you know I think right now, it's kind of lumpy and really hard to predict and.
But our overall goal is is to try to get 10 units last number that I saw that's obviously a little bit easy to gauge 19 is twentys, a little bit more difficult for us given some of what we've mentioned yes.
And then looking at the branches that you've opened already is the one and half million dollar cumulative loss per branch still a good assumption.
Do you guys originally outlined.
Until breakeven you know.
I'd say, probably I mean, I don't really know.
I don't have that.
In front of me now, but mean that was it was a fairly.
Representative number for 40 branches that we had done I don't think and we've done is such that it's dramatically different from that.
So I.
I really see probably say I don't know, but I don't know its worsening.
And then finally I'm just looking at some of the expense details why are the benefits costs running up so much like for like 14% year over year and do you see those continuing into double digit pace any color would be helpful. Thanks sure.
On the on the benefit side, yeah. There's obviously some benefits that are that are going to get impacted just by the numbers of employees.
In the case of of the third quarter.
We really saw an increase had been seeing an increase through the.
Through really most of 2019 related to our medical.
Claims so we're self insured so there was a pretty good increase in medical.
Reserve contributions if you will in the third quarter. So.
Hopefully we're doing some things there to manage that but can tend to be lumpy. We obviously looks at our self insured we do have a stop loss limit but.
We can swing quite a bit depending on what's happening there.
We also one of the negatives I guess or is is related to our retirement plan I think if you compare that third quarter. This year to the third quarter last year were up about 600000, and so that's really just based on what happened last year as it relates to return on Plath plant assets and and even though I think those have performed pretty well the discount rate.
If I remember.
Correctly, when down and Saar assumptions related to returns and what the actual discount rate is affecting that so.
Some of the numbers I've seen kind of don't see that is having a big impact.
20 versus 19 related to the pension plans, but 18 versus 19. They did the other things are really primarily a you know as you would expect it's going to be things like a payroll taxes for one k. contributions those you're going to be more normalized with employee employee count. So I think that there are some unusual things the medical I.
I think is lumpier in the third quarter than it would otherwise be and then compare to the third quarter last year. The benefit the retirement plan expense is higher this year than last we really won't know.
What that expenses for 20 until the discount rate gets determined at the end of the year, but from what I've seen we should be pretty in pretty good shape from a keeping them relatively flat.
Okay. Thanks for taking my questions sure.
And your next question comes from Ebrahim, Poonawala, where the bank of America.
Good morning.
They were him.
Sure.
Just following up on sort of there being a bunch of questions I don't expense an expense growth.
Make sure.
It is there anything any reported number from the first three quarters of we should be excluding or although reported numbers a good base in terms of how we think about expense growth next year.
Yeah. She now first three quarters.
Yes, I think that.
Yeah, that's a tough when I don't think that off the top of my head as I think about it I don't really recall.
Anything significant that we had we may have had some move costs that were associated with our move here in downtown San Antonio and then we also had a move in our corpus location. Those costs are in this number in this year's numbers, but they're not what I would consider.
Material to the to the run rate if you will.
Ebrahim I nothing comes to mind that I could tell pointed out to you that that.
It was unusual during the quarters.
Okay. That's helpful. Then, yes, I think if you take a step back more.
I guess philosophically the Steve Mcculley.
Hopefully we can talk about just.
I appreciate your making investments with the longer term view, but.
Ken If you can talk about just I'll put all creating leverage how do you think about that in terms of may want to manage the bank from an efficiency standpoint, and because it seems like we should see that tie it over the course of the next year given your investment plans, so would love to get touched on that.
Couple of how you end up the management team thinks about it.
Well we.
Thanks, Ben Locke.
Yeah, we recognize and I'm going back two years when.
When.
You know that the.
The Senate Bill to change the cut line on.
Go into that significant.
Financial institution from 50 million. Thank you went from that to 250 or so and then another lot of discussion about will that be a lot of acquisition activity that happens and we you know you heard us talk about it in a position was it.
What we didn't want to do a rollup strategy in that case, we really.
Instead investing with our balance sheet make expensive roll up acquisitions, we're going to invest operating leverage.
That was improving at that time because of higher interest rates more consistent loan growth and so we're pretty clear that that was our that was our view at our plan and what's what we've been doing.
I realize.
It is costing us money.
And we you know.
We could ostensibly be making more money.
Today, if we were not investing in Houston like we are and 2019 and like we are.
Are going to do in 2020.
We know what the impact of that is we've been pretty open about what it was this year a 19 cents. Thank a herd Jerry say is going to be more like twice that next year.
In that range in terms of just the math operating go through so we know it's increasing and.
And there's nothing I can do buy because that's that's what it takes to execute a strategy like that.
Absolutely confident is going to be positive for the long term and.
And that's that's the view we have.
I wish it was deferred.
What I wish that we had higher interest rates and civil wage rates going down.
So I would be able to excess.
Able to invest some excess operating leverage but we just don't have that right now, but but I don't think that no change in that strategy.
Just because of some some movements and short term rates is really the thing to do I've said before we're not we're not planning corner plant trees. Most trees are going to grow and they're going to really be a benefit to us.
In the long term and I'm also really proud of how we're doing in Houston market. If you look somewhere or better volumes were they are in the Houston market and it's not just related to branches because those things are pretty new but a lot of its around I think the.
The recognition and Bose.
That we're creating in that market doing what we're doing so that's what we're.
That's what we're thinking about our you know I don't have a.
Decimal points.
Oriented.
Number on what we will go to on efficiency ratio or that kind of thing it's more of a strategic overall view of how we want the company moving forward.
In the meantime, we're doing the best we can.
On expenses.
We do incur today, we all we've always been careful on expenses.
And I think we've shown over time that thats that we have been.
You got to recognize I know you do that we have a high service models. So we're not we're not going to have a lowest efficiency ratio on the block or going to be very profitable and we are going to have good good growth overtime and that's really what we're focused on doing.
So.
I'm, sorry, but it's costing us money.
To expand but I really believe it's the right thing for US one thing for paving the way for good returns going forward.
Okay. Thank you for that in Vegas, Moody's and we saw it all makes complete sense. So all but thanks for going to that and just one follow up Jane doubled the margin guidance. So it sounds like.
I'm not sure if you actually give that number but how they can get another 10 basis points a drop in the fourth quarter is that reasonable.
I think that we're going to stick with our guidance Abraham if we think full year will be 375.
I think that obviously, we'll see a drop there you're right. We saw nine basis point drop between second and third.
You know again will be dependent on what happens on some of the loan pricing, but I wouldn't be surprised if that drop somewhat higher than that.
On the net entre smart on the percentage.
Okay, Hi, hi, Thanks for taking my questions I'm sure.
There are no additional questions at this time I'll turn it back over to management for closing remarks.
Well that will.
The end of our color appreciate your support thanks for joining us merger.
Thank you. This concludes today's conference you may now disconnect.