Q1 2021 Cullen/Frost Bankers Inc Earnings Call
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Good day, and thank you for standing by and welcome to the calling from Q1 earnings results call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
To ask a question because a day session you will need to press one on your telephone keypad.
Require any further assistance please press star zero.
Now I'd like to hand, the conference call with your host Mr. A b Mendez of calling party pays off Investor Relations. Sir. Please go ahead.
Thanks Christian this mornings conference call will be led by Phil Green, Chairman and CEO and Jerry Salinas Group Executive Vice President and CFO.
Before I turn the call over to Phil and Jerry I need to take a moment to address the safe Harbor provisions.
Some of the remarks made today will constitute forward looking statements as defined in the private Securities Litigation Reform Act of 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 Department at 2102205234.
At this time I'll turn the call over to Phil.
Thanks, Debbie good afternoon, everyone and thanks for joining US today I'll review first quarter results for Cullen Frost, and our Chief Financial Officer, Jerry Salinas will.
Provide some additional comments before we open it up to your questions from them.
First quarter Cullen Frost earned $113 $9 million or $1 77, a share compared with earnings of $47 2 million or 75 cents per share reported in the same quarter last year, and 88 3 million per $1 38, a share in the fourth quarter of 2020.
In a very challenging economic environment, our team not only continued to execute on our strategies.
But also achieve some extraordinary accomplishments that I'll discuss in detail as we go through the call.
Economic impacts of the pandemic continued to affect loan demand overall average loans from the first quarter were $17 7 billion, an increase of 18% compared with $15 billion in the first quarter of last year, but excluding PPP loans first quarter average loans of $14.
9 billion represented a decline of just over 1% compared to the first quarter of 2020.
Average deposits from the first quarter were $35 4 billion and they were Inc. They were an increase of <unk> 30 per cent compared to $27 4 billion in the first quarter of last year, obviously macroeconomic factors.
Last year of impact of our deposit growth.
But it's also been our experience over there our history that are.
Ah Frost debt, so we're safe Haven for customers in times of uncertainty.
Our return on average assets and average common equity in the first quarter were one 9% and 11, 3% respectively.
We did not record a credit loss expense related to loans in the first quarter.
After recording a credit loss expenses of $13 3 million in the fourth quarter.
Our asset quality outlook is stable and experienced a meaningful improvement during the first quarter.
In general <unk>.
From assets are declining number and new problems have dropped significantly.
<unk> at pre pandemic levels.
Net charge offs for the first quarter dropped sharply to one $9 million.
$13 6 million in the fourth quarter.
Annualized net charge offs for the first quarter were just four basis points of average loans.
Nonperforming assets were 51 7 million at the end of the first quarter down 17% from the $62 3 million at the end of the fourth quarter.
And a year ago Nonperformer stood at 67 5 million.
Overall delinquencies for accruing loans at the end of the first quarter were $106 million or 59 basis points of period end loans.
Stable when compared to the end of 2020.
Comparable to what we've experienced the past several years.
From the $2 $2 billion in 90 day deferrals granted to borrowers that we've discussed on previous calls.
Only about $11 million remain in deferment at the end of the first quarter.
Total problem loans, which we define as risk grade 10 and higher.
For $774 million at the end of the first quarter compared with $812 million at the end of the fourth quarter.
Energy related problem loans continue to decline and were $108 $6 million at the end of the first quarter.
Per to 133, and a half million dollars from the previous quarter to put that in perspective total problem energy loans peaked at nearly $600 million.
Early in 2016.
In general energy loans continued to decline as a percentage of our portfolio falling to seven 5% of our non PPP portfolio at the end of the first quarter. As a reminder, that figure was eight 2% at the end of the fourth 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.
Overall, we found if credit quality is improving.
When the pandemic started last year, we assembled teams to analyze the non energy portfolio segments, we considered the most at risk.
Included restaurants hotels entertainment sports and retail.
The total of these portfolio segments, excluding PPP loans represented just $1 6 billion at the end of the first quarter.
And our loan loss reserve for these segments was four 9%.
Credit quality as individual credits in these segments is mostly stable or better compared to the end of the fourth quarter and the outlook is improving.
Although macroeconomic trends impacting some segments will take time to fully digest.
Hotel segment, where we have $286 million outstanding remains our most at risk category. However, we believe our exposure to any significant loss is minimal.
I'm very proud of our team's ability to build relationships with new customers in challenging times, particularly when so much effort was put into helping existing small business customers get PPP loans.
During the first quarter, we added 55% more new commercial relationships than we did in the first quarter of last year.
A good portion of those mentioned PPP is a reason they came to frost, but even more of them were just from the continued hard work by our bankers and the level of service that we provide.
New loan commitments booked during the first quarter, excluding PPP loans were down by 16% compared to the first quarter of 2020.
Which was before the economic impact of the pandemic had been felt so this comparison clearly shows the impact of the pandemic on loan demand.
Regarding new loan commitments booked the balance between these relationships was nearly even.
With 49% larger 50.
51% core at the end of the first quarter we.
We will continue to keep this balance in mind.
In total the percentage of deals lost to structure with.
With 70% and it was fairly consistent with the 73%. We saw this time last year. However.
However, keep in mind, we believe that's a higher number.
Illustrates the competition out there through underwriting.
Yeah.
Our weighted current active loan pipeline in the first quarter was up about 1% compared with the end of the fourth quarter. So the modest it was good to see some improvement.
Consumer banking also continues to see outstanding growth.
Overall, our net new consumer customer growth rate for the first quarter was up 255% compared to the first quarter of 2020.
255%.
Same store sales as measured by account openings were up by 18%.
Through the end of the first quarter when compared to the first quarter of 2020.
And up a non annualized 11% on a linked quarter basis.
In the first quarter.
36% of our account openings came from our online channels, including our Frost mobile App.
We believe this compares very well to the industry.
Online account openings were 35% higher when compared to the first quarter of 2020.
The consumer loan portfolio was $1 8 billion at the end of the first quarter up about one 4% compared to the first quarter of last year.
We're nearing the completion of our previously announced Houston expansion.
We opened 21.
We opened the two third of the planned 25, new financial centers in April.
And the remaining two.
We opened in the coming weeks.
Overall, the new financial centers are exceeding our expectations.
This is one of the extraordinary accomplishments that I mentioned earlier, our team's performance of keeping the momentum going into Houston.
Fight the pandemic and all the work we put into PPP is a true credit to our outstanding staff.
Now, let me share with you, where we stand with the expansion as of March for the 22 locations. We had opened at that time.
And it excludes PPP loans.
Our numbers of new households were 144% of target.
And represents over 8700, new individuals and businesses.
Our loan volumes were 212% of target.
And represented $263 million in Outstandings.
Let's look at the mix of this portfolio.
About 85% represent commercial credits with about 15% consumer.
They represent just under half C&I loans.
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15% consumer.
And around 10% nonprofit and public finance.
Finally.
With only three loans over $10 million.
Over 80% are core loans.
Now, let's look at deposits.
At $343 million, they represent 114% of target.
They represent about two thirds commercial and one third consumer.
We've seen increasing momentum over the last year, when we were about 68% of our target.
What I hope this demonstrates and what's important to understand is that the character of the business. We are generating through the expansion is very consistent with the overall company. It's just what we do.
And you can see that its profitability will be driven by small and midsized businesses.
I'm extremely proud of what our organization has been able to do in Houston.
And I believe you should be too.
We've built a platform that will add to shareholder value for years to come.
And that's why I'm happy to share that we will be taking the lessons and skills. We've learned in the Houston market to a very similar opportunity we have before us in Dallas early next year.
With 25, new locations over a 30 month period. This will put us on a path to triple our number of locations and that dynamic market over that time.
Turning now to PPP, our team was ready to respond when SBA reopened the application process in January to date, we've taken in about 12400, new loan applications in the second round of PPP with over $1 $3 billion funded.
Combined with our total from the first round last year, we funded more than 31000 loans or $4 6 billion.
Just amazing.
We've also been working hard to help those borrowers get loans forgiven, we've invited all of the round, one borrowers who apply for forgiveness and we've submitted 70% of those loan balances to the SBA and we receive forgiveness on about 50% already.
Because this process is vital to our borrowers were doing all the work in house with Frost bankers, we haven't outsource any of these efforts.
We're excited to announce that on April 15, we launched a new feature for our consumer customers called 100 dollar overdraft Grace.
This feature is an investment in our organic growth strategy.
And at the same time, we believe it will make a difference in our customers' lives.
It clearly sets us apart from both traditional bank competitors and neo banks.
As a result, we expect it to further increase the rate of new customer growth and are already growing consumer bank.
Also this month, we received some good news from third party organizations that are SaaS or customer service.
The Greenwich Excellence Awards, where Frost has had the highest scores for superior service and advice and performance to small business and middle market banking clients for four consecutive years.
Let us know that our already high overall satisfaction and net promoter scores.
It up even higher over 2020, while many of our competitors saw declines.
And I'm very pleased to let you know the J D power and associates just this week announced at Frost. Once again received the highest ranking in customer satisfaction in Texas in the retail banking satisfaction study.
That's the 12th consecutive year, we've had the highest scores in Texas.
When you put it all together.
Solid financial results, the healthy numbers in deposits and loans.
All the new relationships.
The goodwill from our PPP efforts here.
The Houston expansion.
Customer service accolades.
It shows that when we care about customers and work to be a force for good in their everyday lives will be rewarded.
And I don't just mean rewarded in a financial sense. So I mean, the sense that people recognize that we're doing something important and we're doing it better than just about anyone else.
2020 was a tough year in 2021 hasn't been easy so far but things are looking up.
And thats due to everything that our employees have been doing for our company.
And our customers in these difficult times and I'm very optimistic about our outlook.
I appreciate all their hard work.
And I'm proud of them and I'm proud to be at Frost now I will 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 first quarter was 272% down 10 basis points from the $2 eight 2% reported last quarter.
The decrease was impacted by a higher proportion of earning assets being invested in lower yielding balances at the fed in the first quarter as compared to the fourth quarter, partially offset by the positive impact of the PPP loan portfolio.
Interest bearing deposits at the fed, earning 10 basis points average $9 9 billion or 25% of our earning assets in the first quarter up from seven $7 billion or 20% of earning assets in the prior quarter excluding.
Excluding the impact of PPP loans, our net interest margin percentage would have been $2 five 9% in the first quarter down from an adjusted $2, 75% for the fourth quarter.
The taxable equivalent loan yield for the first quarter was 387% up 13 basis points from the previous quarter.
Excluding the impact of PPP loans, the taxable equivalent loan yield would have been 377% basically flat with the prior quarter.
Average loan volumes in the first quarter of $17 7 billion were down $260 million from the fourth quarter average of $17 9 billion, excluding PPP loans average loans in the first quarter were down about $184 million or one 2% from the fourth quarter with about three quarters.
Orders of that decrease related to energy loans.
To add some additional color on our PPP loans as Phil mentioned, we funded over $1 3 billion of Brown to PPP loans during the first quarter.
This was offset by approximately $580 million and forgiveness payments during the quarter on wound round, one loans, bringing our total round one forgiveness payments to approximately $1 4 billion.
At the end of the first quarter, we had approximately 73 million in net deferred fees remaining to be recognized with about one third of this related to round one loans.
With respect to around two loans given the smaller dollar size of the loans and changes in the forgiveness process. We expect this portfolio to have a shorter average life.
The round one portfolio as a result, we currently expect about 90% of the remaining net deferred fees to be recognized this year.
Looking at our investment portfolio. The total investment portfolio average $12 2 billion during the first quarter down about $335 million from the fourth quarter average of $12 6 billion.
The taxable equivalent yield on the investment portfolio was 341% in the first quarter flat with the fourth quarter.
The yield on the taxable portfolio, which average 4 billion was 2.06% down six basis points from the fourth quarter as a result of higher premium amortization associated with our agency mortgage backed securities given faster prepayment speeds and to a lesser extent lower yields associated with recent purchases.
Our municipal portfolio averaged about $8 $2 billion during the first quarter down $154 million from the fourth quarter with a taxable equivalent yield of four 9% flat with the prior quarter.
At the end of the first quarter, 78% of the municipal portfolio was pre refunded or psf insured.
Investment purchases during the first quarter were approximately $500 million and consistent about of about 200 million each in treasuries and mortgage backed securities respectively, with the remainder being municipals.
Our current projections only assume that we make investment purchases of about $1 4 billion for the year, which will help us to offset a portion of our maturities and expected prepayments and calls.
Regarding noninterest expenses looking at the full year 2021, we currently expect an annual expense growth is something around the three 5% to 4% range from our 2020 total reported noninterest expenses.
And regarding the estimates for full year 2021 earnings given our first quarter results and our assumption of similar to improving credit metrics to those we saw in the first quarter. We currently believe that the current mean of analyst estimates of $5 42.
Is too low.
With that I'll now turn the call back over to Phil for questions.
Gerry will now open it up for questions.
Ladies and gentlemen, if you have a question at this time. Please press star and then number one on your telephone keypad again that is part one.
Pause for just a moment to compile the Q&A roster.
Your first question is from Ken Zerbe from Morgan Stanley.
Alright, great. Thank you.
I guess first question in terms of the allowance for credit losses ex PPP.
It looks like in your press release, you said it went up two basis points I believe to 177% can you just talk about why it went up I mean, just given the context that most of the banks are materially releasing reserves. Thank you.
Sure Ken obviously.
Frost, you've followed us for a long time, obviously very conservative we continue to be concerned about what's going on in certain industries commercial real estate debt for example, and just given where we are and the expectation of what could still come whether that'd be very and.
Whether that be issues associated with our office buildings, and whether employees come back to work, whether thats related to hotels and lodging I think we just felt like it was too early in the process to release reserves are.
Our modeling results in the commercial real estate category would actually have we would have required if you will from a modeling standpoint.
That we have a lower reserve associated with them, but really in our evaluation.
Created a management overlay just given the challenges that we potentially see out there and some of those COVID-19 impacted industries and so I think Phil mentioned, the COVID-19 impacted industries there.
They are still out there at a 115 billion, we've got a reserve associated with them at four nine so I think part of it is just we're not we're not out of the woods and don't feel like we're out of the woods and so now it didn't really feel the need and debt for certainly felt like we could substantiate the allowance that we've got on our books and obviously through the rest of the year.
We will continue to look at that.
We didn't book.
Credit expense in the first quarter.
Given where we are where we're seeing today I don't expect to have a provision to be quite honest with you assuming the same sort of credit metrics that we saw in the first quarter, but again a lot of it will be just dependent on what our credit.
Credit quality people are doing our special assets people are doing and what they're seeing in the marketplace, but at this point, given where we what we were saying and what we were feeling we felt like keeping our reserve basically flat is the way I looked at it as you go from 175 to $1 77 base.
Basically fill out I thought was a good place for us to be a you did note that we only had $2 million and net charge offs. During the quarter. We were helped by a pretty strong recoveries, we actually had recoveries of $4 million. So again I think we were comfortable with where we're at and certainly are looking towards the rest of the year and hoping that.
Things continue to improve and as we go through each of the quarters will continue to evaluate our allowance it and react accordingly.
Okay. It makes certainly makes sense.
And then just my follow up question sort of a two part question I guess in terms of expenses.
Looks like expenses came in.
Noticeably lower than probably offs in consensus we're expecting so first question is what drove the lower expenses this quarter, but the second part is can you just talk about the incremental expenses related to the Dallas expansion and when do they start are they already part of your 'twenty one.
Estimate are you sure your guidance that you gave thank you.
Sure.
Regarding the Dallas expansion I think Phil noted that we really wouldnt start that until next year, and we don't give any sort of guidance on 'twenty two if youre looking for any sort of an impact what I would suggest you do is go back to kind of what we said about the Houston expansion.
I think at that point, we had talked about the first year results was like a 19.
Negative impact given the fact that expenses start before before the operations and I think in that case, we were talking about 25 branches in two years. This one we're talking about a little bit longer extended period. I think we said for over 30 months, but I think thats the sort of color and work that I would do if I was on your end if you were.
Trying to put some dollars into your 2022 estimates as far as expenses for the quarter. Just a reminder, we did have.
Some deferred fees associated with the.
With the origination of the PPP loans.
I think that number was I was trying to get at here.
If I remember correctly. It was like $4 8 million that we that was actually capitalize and gets netted against the fees and accreted into interest. So that's that's obviously, having an impact but in addition to that we continue.
Had our processes in place and our program in place to reduce expenses last year I think the team did a good job you heard us talking about that so I think we're seeing some of that impact as well in the first quarter.
And so we will continue to keep our eyes focused on expenses.
So that's really I guess, all I'd say did you have another question there I cant remember the third part of it.
No you actually you address both parts of my expense question. Okay. I'm all right. So thank you very right sure.
Your next question is from Jennifer Denver from True Securities. Your line is open.
Alright. Thank you in terms of the Dallas branch expansion.
What kind of loans and deposit growth would you expect from from those offices would it be materially different from the Houston expansion or are roughly the same.
Jennifer Almond.
To say, it's going to be roughly the same and our view right now.
Given how competitive our Dallas and Houston markets are I can imagine our Dallas Dallas.
Our cohorts from Houston.
Now shot them there so I think it'll be pretty pretty much the same Dallas is really.
A tremendous market for per business.
Small and mid sized business and I think it's going to be really.
Great expansion for Us I think it'll be in my opinion I think it would be at least as good as our dialysis.
Our Houston expansion.
And any lessons learned from the Houston expansion that you will bring forward for the Dallas one.
That you picked up over the last couple of years as the world has shifted a little bit.
Yes.
I think.
One the one lesson lesson you learn.
And it's basic it's about people.
As the number one thing you want to hire people that are consistent with your culture.
Who are excited about being part of an organization like ours and if you do the right job arent people in these submarkets.
They can really be successful with everything that we bring to the table supporting them I think.
Ben.
The best thing.
To learn another thing we've learned is we're getting pretty good at bringing them on and I want to emphasize every time that we're not bringing on teams, we're not lifting teams out and putting them in these.
Organization, we're talking to individuals and people that believe in what we're doing and want to be a part of it.
And we're also finding debt when you do that well.
Debt you began to get follow on from people and the organizations that have come over and say Hey. This is what we thought it would be and I know this person or that person who would be really great with this and so youre not you.
When you have a little bit more certainty.
About who you are bringing on and the fit.
As you move along through the strategy I think that's what we've seen in Houston will continue to expand in Houston are there are some submarkets that we.
Want to be in that we didn't pick up on the first time and just and just do a regular.
Just growing our business, we're going to want to continue to expand there and I think that we've got good momentum there and we've got.
Good follow on like I talked about that market. So I feel like that's going to be successful, but that that's one thing I think that we've learned and the only thing I would say Jennifer is.
Man, it's really important too.
Go through the steps don't skip steps, we know what we need to do to develop a market.
We know that we need to be there early with a community leader like six months early.
Before we open up the branch, we surround them with a team.
We get them involved.
If you have a market, where you where we I think one of our really early one in Houston, we have someone leave earlier weren't able that we werent able to close on bringing in a community leader and net branch was.
It suffered.
Early on because you couldnt do all the steps that you needed. So we're really focused on bringing the.
People on.
And while Jerry.
You mentioned correctly that there wont really be much of an impact this year of that expansion, we hope to open our first location.
In January of next year in Dallas.
There's a lot of effort that we've been undertaking to understand the submarkets, we want to be on and four.
And there'll be even more effort about bringing all of the right people from those markets.
And there's a whole lot of spade work that has to happen before you actually execute this stuff I am so excited about doing it though.
I'm really looking forward to what is going to be force.
Thank you.
Youre welcome.
Your next question is from Steven Index of pools from JP Morgan.
Hi, everybody.
Okay.
Wanted to first follow up on the increase in new commercial relationships that you cited for the first quarter are these customers coming from banks of all sizes or is there one cohort struggling more than others now to retain customers and maybe can you included your response what is the friction point that these customers are signing when they're moving over to frost.
Well you know.
The.
The main source of these relationships are not the only but the main source is what ill call the too big to fail.
The big three let's say.
Hesitate to say that there's any one day.
Net.
<unk> is providing.
A much greater share than any other.
We choose to compete against those three banks in the Texas market.
And it's not an accident and weak.
Be honest, we compete very well with them and we're not afraid of competing with them and so that's it makes sense to me that Thats, where we would see most of our of our new relationships.
And then <unk>.
And part of your question I'm, sorry, it was what what's the friction point like when they move over it's such a big increase that youre seeing in the year and I'm just curious what are they citing in terms of.
It's a bigger deal to move our commercial relationships and consumer so we're in the moving at what sort of the straw that broke the camel's back wide now Theyre moving are you seeing more customers move to you now.
I'd say it's PPP.
<unk>.
More than anything else.
It's.
It matters, where you back.
Like the woman debt.
I wish you didn't realize 13 years ago, where she opened a checking account would be an existential decision from her business, whether she could get a PPP loan when she needed it and.
Debt that really is I think the biggest outs outsized reason.
We're seeing we've got a number in here somewhere about how many of these relationships were from PPP.
Phil if I could chime in just a bit and the other thing we've heard in the case of the PPP loans is that in some cases, it's some of our customers that had successful PPP experiences with us referring some of their friends and prospects and in other cases people had such a bad experience at Burbank with PPP and have heard the successes, we've had and how we do.
It was to get it done with US we've seen them come in that way and the other thing that I've heard mention also as far as them moving over is really in some cases some of those are too big to fail as Phil mentioned are really referring some of these customers more to call centers. So they don't necessarily have that same relationship manager that they could call and look at the shape.
And with their go to lunch with sort of thing and so because of their size in some cases, they are being deferred more to call centers. We've heard that has come up as well.
Good that's helpful.
To shift gears, so looking at the new program from our overdraft, which is interesting when you say with that program that customers need to make a deposit after the overdraft you say as soon as possible.
What exactly does that mean.
All of your peers that have launched that give 24 hours, but what does that mean as soon as possible.
Well first of all that that's not our program.
Our program is.
That if you're if you've got a direct deposit with us.
Deposits at least $500 a month.
We'll pay your overdraft.
$100 or less and we won't charge a fee.
Okay. Okay, I thought I saw in there, making a deposit it might've been referencing something else.
I think it was yes, the direct indirect and direct yes, you have to have a direct the direct deposit as soon as in order to qualify.
The direct deposit to qualify for the program and so once you once you make once you establish a direct deposit.
Apart from the program and the reason.
That's how we would define the relationship that way right. If you've got a direct deposit you've got a relationship.
And you get that.
Got you and then just finally on this program, what's the anticipated reduction in service charge revenue from the program. Thanks.
Yes, I think the number that we're projecting is a.
I think we looked at this first quarter and we saw that debt or consumer NSF OD fees would be down about $1 million. So I think that's about 17% of what we saw in the quarter, obviously going forward a lot of it will be dependent on the sort of activity, we have but thats. What we saw the impact in the first quarter would have been in the first quarter.
Okay, So what share.
What's the full year impact just over a full year revenue impact.
I guess I would say that it's going to be dependent on the volume right. So if it's $1 million for a quarter. Then then yes, it could potentially be less than that just just depending on the less or more depending on the activity.
Non material okay.
I don't think I don't think its going to be significant.
Thanks.
You've got two things going on when you look at the overdraft line as activity picks up you're going to see you're going to see overdraft activity pick up anyway.
So.
Really what we're doing is we're investing what some of that increase would have been and I think we'll be we could be sort of flattish versus 2020 on overdraft fees, we'll see how it happens.
It's a new program, we'll see how it goes.
But I think it's a really good opportunity to differentiate ourselves.
Terrific. Thanks for taking my questions.
Sure.
Your next question is from Brad Gailey from PWB.
It's pretty range.
Got it.
We all know we know who you are Brady that's true.
Yeah I wanted to start just with the amount of cash sitting on your sitting on $10 billion of cash.
It's clear, earning zero I mean, that's a huge lever for you all to pull at some point.
You have to start to move those funds into the bond book, whereas obviously the yield is a lot higher.
Maybe just talk about how you think about when is the right time, Inc.
Pull that lever.
Yeah.
If you look at the yield curve today, and it's up but it's still not great. So.
Do we start to see that today or do you wait for rates to go a little higher.
Hey, Brady.
Let me just talk a bit about it I think the short answer is we're going to wait a little longer.
I believe debt.
You know.
Well it could be wrong, but are good as that.
We're seeing rates increase I mean, we made this decision in August last year. When the 10 year was 80 basis points or so it's paid off for US we're not you know we're.
Were not great bond traders, we just believe that.
With the economy opening up with amount of fiscal stimulus sits in there the monetary stimulus. It just makes sense that we're going to see this impact and we just don't want to bet.
We're going to be employing shareholders' monies won't be smart about doing it I would think it's going to be later in this year.
Yes, maybe later third quarter, but it could be later.
I think we.
Our bad is it we're going to see some increase.
Increased rates, it's just things open up and things improve and I think the fed's willing to accept that and.
So we're going to.
That's the way we're going to lean.
I really feel one of the things that.
I'm really proud of the organization for Purdue is with the reduction in expenses.
We talked about last quarter, where we had.
Basically $70 million in 2020 run rate 50 million follow on in 2021.
That's about $120 million worth of expenses.
It really gave us the ability I think to.
Maintaining this optionality.
We've got the.
It provided to some operating leverage to frankly take wait and see and it's paying off for us.
And.
I'd say Brady that.
I'm really optimistic about.
Outlook I think fees.
The view, we've got for the next several years for the business and we could be wrong and Im like I say there is.
I think it was George Foreman and modest sit everyone's got a plan until you get hit in the mouth.
We did some heavy lifting with expenses.
Give us the ability to wait on this on this liquidity Bill we've got this liquidity build that's there Jerry what's our current number now.
At 12 billion, Phil around 12 billion now and the fed.
<unk>.
I think we employ this later this year that.
That'll help us some this year, but it's also going to help us as we move into 2022, I don't I'm not very optimistic on loan growth.
Through the rest of this year, we could see some but I mean business is got tons of liquidity and I'd love to see some but I'm not going to.
Net on it but I think later in the year I think we could see it I think in 2022, we're going to see it.
And I think that could could build some momentum in 2022 going into 2023.
The fed has said debt.
We will begin increasing rates in 2023.
Maybe they can wait that long, but let's say they do I think that's going to give us some tremendous.
<unk> as far as that develops and then as we move.
Past that now moving into $2023 24, and so we've got these are these investments that we've made in.
In the Houston market that'll be mature at that point and we'll be getting just will be beginning to see some.
Maturity in some of the Dallas investments so.
Really feel.
In my opinion things set up very well for us if that's the scenario that we get and Thats, what im hoping we will see.
That makes sense and then longer term I mean, if you are.
In the first quarter.
Cash to average, earning assets was 25% it sounds like it's even higher than that as of today.
Where would you like to keep that longer term I think pre COVID-19 that was running about 5% to 7% of average earning assets is that does that feel like a more normalized level of cash to earning assets.
Brady I think we'd been running just a little bit above that we werent, we werent in the double digits. So I would've if you'd asked me that I thought we were in the 8% range typically.
The thing I'll say I'm sorry.
No go ahead.
No I was going to say, yes for us. It just we've always been a little bit different right. We typically have more liquidity than most but yeah. Right. Now. We're at is is really a way up there and not something that we would expect to have lot longer term and I think something in the mid tier two.
High single digits, that's where we'd be.
Okay.
Then Phil Congrats on on the Houston expansion.
And it's exciting to hear about Dallas, you could have you.
You could have bought a bank in Houston, but you Didnt and you could have bought a bank in Dallas, but your debt.
You know a lot of people are talking about.
Texas.
Fairly active geography for M&A.
Frost kind of out of the M&A game at this point and more pursuing our organic de novo strategy from here out.
I think the short answer to that is yes.
You can never say never on an acquisition.
And I've said, many times that an acquisition that would.
The only kind of acquisition that would make sense for a company like ours is one that gives you the ability to execute on organic strategy and in a place.
Creating a platform that you've worked before and I've always given the example that north Texas at 98 was a great example that with over time, but.
You know, there's there's no better market that I can think of.
In the Texas market right now economically and I think from banking standpoint from what we do with business small business at all.
And.
So it's.
And we've you know.
I'll give you an example brady on.
Talking about consumer growth rate well.
I want to talk about net new checking households, right now this is organic growth.
If you look I'm looking at a piece of paper. If you go back to 2018, so I'm looking at a little over three years, Okay three years in a quarter.
<unk> thousand 500.
Net new checking households.
And a month, one basically one time.
Prior to <unk>.
September of 2020, Okay. So from January of 2018. The September of 2020, we hit 500, net net new checking households, one time, Inc.
If you look at October through March.
We've hit that one.
1234 times and one of that Inc. We had.
February free so let's shut everything down we didn't do it there, but I've got 15. So you got October 1500 34.
December 851 January 2178, and March 3178.
That is.
That's why we're focused on organic growth and.
And Houston has been a help for that.
And.
And that growth and the things that we're doing with regard to.
I don't like the overdraft 100 dollar overdraft Grace.
That's going to catch People's attention, we've gotten good at digital marketing.
And.
So that's why don't you know.
That's why I don't want to be spending a lot of.
Our shareholders' money too.
To throw the long ball and hope something good happens I'm really I'm confident of what we're doing.
And.
I'm excited about our prospects.
Yes.
That makes sense and clearly it's working for you guys. So keep it up thanks for the color.
Thank you.
Your next question is from Ebrahim <unk> from Bank of America.
Hey, good afternoon guys.
Great.
Well first day, it's good to see a bank.
Organically investing and being proud of those investments that you're going to see you do debt I guess one question Phil.
We come to the end of earning season.
Just said that you are not optimistic of loan growth picking up.
This year given by the liquidity that businesses are sitting on which is a little bit of a contrast to what we've heard from I would say its 75% 80% of your peers talked about a pickup in the middle of D. R.
Talk to us and them the value being overly conservative in menu messaging this or do you think some of your peers might be a little ahead of themselves.
We're expecting a non growth rebounds in the summer.
Ebrahim it's.
You know I'm, a frost bankers, so I'm going to be a little conservative but.
We are seeing some pickup in commercial real estate I will see that but the CNS, Phil we really haven't seen it.
You know our.
We have since we called look to book you know how many looks are we getting what are we booking.
<unk>.
Community banking was down about 12% well about 6% on what they booked.
A lot of our declines year over year in terms of booking we had a 70% decline in public finance, because we had a great year last year had a couple of really large deals, but we had a 40% decline in energy and that's on purpose. So we're just trying to rationalize our.
Our position there so.
Some of them some of it is.
Some of its energy.
Like I say, so much public finance I still think that businesses are being careful with expansion.
<unk>.
I think the supply chain issues R.
Our real.
Might be.
Keeping people from doing something they would have otherwise done.
And so.
I'm just I'm just.
We have a higher percentage of C&I loans, and most people and since we haven't seen that come back right now kind of.
I am not bullish on.
On debt for the risk the year I could be wrong by the end of the year it could be it could be better but.
That's just the way I'm seeing it right now.
Got it understood and then just one follow up Jay on expenses.
I guess your guidance implies a ramp up in expenses back to like the $220 million to $25 million range.
Just remind us of the drivers that could be.
I just wondered how your expenses higher from <unk> levels.
Sure I'll grab some information here.
The one thing I will say is.
One of the things that is impacting growth of course is the Houston expansion. So the Houston expansion by itself is growing noninterest expenses about $10 million. So that is part of it yes, we mentioned.
The branch openings came on a little bit slower than we expected, but just looking forward I guess, you know the things that it could affect us going forward. Some of it is commission revenues of course associated with the with certain pieces of the revenue businesses that are that where revenues are tied with commissions. So I think we could see.
Some impact there typically the first quarter is our softest quarter intentionally on advertising and marketing. So we will see some of that continue to pick up it's an area that we've really been extremely cautious about even as we were managing our expenses. It wasn't an area that we wanted to go in and slash and burn the marketing budgets.
We think it's important to continue grow customer growth. So youll see some some increases there and.
And I think those are probably the two big areas that I would point out.
And we're going to continue to spend continue to spend I'm sorry on the first quarter to first quarter, you saw an increasing and technology furniture and equipment and that's just something that we're going to continue to see increases in and it's built into our numbers.
And Jerry earlier, you talked about like a $4 8 million PPP and in Asia.
Was that the PPP expense, that's running through the expense line, if you don't mind clarifying that sure.
No those are so under.
Accounting guidance, you capitalize the origination cost and so they were $4 $8 million net origination costs basically come out of expenses and get netted against the fees and that gets accreted into income so other things being equal expenses would've been if we did not have those PPP loans expenses would have been $4 $8 million higher.
That's helpful. Thanks for taking my questions sure.
Your next question is from Dave Rochester from Compass point Your line is open.
Hey, good afternoon guys.
Hey, Jay.
Back on the expense guidance real quick just on the Dallas piece.
If we go back in the late 2018 2019 take a look at annual expense growth. It was around mid to high single digits.
Would you kind of.
You think thats generally in the ballpark of what you guys are expecting at this point without trying to pin you down to an exact number.
Yes.
We're really kind of hesitant on giving any sort of guidance I mean, it's really our policy not to give guidance into that anything beyond the current year. So I guess I was really kind of just trying to give you. Some some guidance of thoughts that you might consider going forward.
Looking back at the Houston.
I'm, good jewelry jewelry pointed that out too.
One of the things, we've thought about and we've talked to.
Investors about talks from you about us is debt.
Really what we're doing right now is we're almost running.
Two companies.
It's one company one culture, but we have what I'll call the.
Sort of a core piece of the business, which is our very profitable.
Very efficient.
Runs very well and then we've got an expansion piece, where we are.
Yes.
Investing capital investing operating leverage into markets, where for us to grow and Thats like any business, you invest debt and whether it's a technology business or whether it's any other kind of business.
When you're when you're starting something new it's got a burn rate associated with it and.
And if we kind of Cluj together, the expansion piece and the and the core piece it kind of it kind of confuses it a little bit sometimes it's helpful to us to look at the business on a core basis, and then look at it on the expansion basis, because I think both are doing exactly what it was.
<unk>.
We intend for them to do in fact.
As we pointed out maybe better than we originally intended.
But when you bring them all together.
It confuses whats really going on with the operations of the company for example, when Jerry mentioned or.
When we started what was at the beginning of 2020.
You know, we had a 10% increase of 10% growth rate in expenses, but a fair amount of that was.
The expansion and so we don't want to give the wrong impression net.
We're spending money around here were actually pretty tight about it but.
But a good part of that will be over time its expansion.
Yeah, Okay I appreciate that.
Moving back on the question on Securities appreciated your thoughts there on maybe putting some more cash to work around <unk> or <unk>.
After that it sounds like youre sort of expecting higher rates.
Later this year.
So I was just curious is it a certain level of the 10 year Youre looking at is the 2% plus.
Is it higher muni rates any kind of a benchmark to look at to know that you guys are right, there and starting to put money to work in.
And the other parameters there we can look at.
You know I listen to Paul talk yesterday, and he was kind.
Talks about substantial words like substantial improvement that type of thing.
I think we'll know it when we see it I think directionally, we just expect to see it move up.
<unk>.
The timing will be right for us later in the year.
You have to be dead wrong, but.
I think we will see $1 75 up to something in that range over the next several months.
And.
So if we don't have to pull the trigger.
We won't.
But I think I expect that we probably will begin moving into the market late third quarter, maybe fourth quarter sometime I hate to pin ourselves down, but so far it's worked knock on wood and.
And it is our conviction that it will continue to move that way.
Okay, Okay, and maybe one last one just on loan pricing have you guys hit general parity at this point on where new loan yields coming in versus where the book yield is X all the P P fees and whatnot.
No I would say that debt.
I'll answer it in two ways, what I was really impressed with was from the third quarter the fourth quarter.
Our pricing has really stayed.
Fairly consistent and been pretty strong and in fact been able to do that even if as the LIBOR LIBOR continues to go down a couple a few basis points. It seems like every quarter, but when I was looking at the back book versus the current book I'm still seeing overall about 30 basis points lower on the new book versus the back.
Okay.
Alright, great. Thanks, guys.
Thank you. Thank you.
Your next question is from John Armstrong from RBC capital markets.
Thanks, Good afternoon.
Sean.
Okay.
Jerry.
What would you say is like.
Like a median or average branch size.
For your company in terms of deposits.
I'm going to Gosh, let me see if I have got anything here. We are on average John typically tend to be bigger.
Than most.
So let me here.
As you're thinking through it let me, let me ask share pushing any reason why the.
Houston, and Dallas branches can't get to your corporate average.
How long does it take to get there.
Hey, John what I would do when you look at debt I mean.
You can do this with the FDIC database.
<unk>.
I would say, yes, there is a reason why they probably wouldnt be the average of our branches because.
Any headquarters branch in a city tends to be really outsized large so whenever we look at what we what we're doing and where we are in the marketplace. We tend to take out any locations that for any any competitor and ourselves that are that's $500 million.
Or more okay, and then we look at that as sort of normalized.
Branches, not including headquarters effects.
I think if you do that I don't think there's any reason why these locations shouldn't be.
In line with our other ones.
Okay.
I was just kind of looking for like a median as maybe a way to go.
You get to that.
Type of number.
Yes, let me see if I can find anything here.
Okay.
So it looks like it's yeah, again, and I'll ask <unk> to kind of verify with you I'm kind of going through my tableau step here pretty quickly but.
Maybe something in the.
$200 million.
Okay.
Okay.
But well I'll get a b to verify that with you, but that's what I'm, saying based on the report I'm looking at tableau, but we'll make sure we confirm that with you, but I think what the exercise.
Phil mentioned, there's really kind of what we typically do if we're looking at any sort of a comparison, we will take out the big downtown centers, and then I'll come up with an average that way.
Okay.
And it's a strategy to put branches in areas that are faster growing I mean from the outside we don't hear about this tremendous growth in Texas, but does that is that the general strategy is to put branches in places.
That are growing quickly where you just don't have the presence.
You know I'd say it depends.
There are certainly some that are we tend to look at.
I guess I shouldn't.
So I had all the secret sauce, but.
Let me just say that we look for areas that are growing.
There may be different.
Levels of growth when we look for consistent growth in the markets.
We like to look at places, where obviously, we're not located we think there is tremendous value in that.
So okay with us if there are a lot of.
Too big to fail competitors, there too because thats, what we are.
That's who we compete with.
So things like that.
There are a lot more but there is some of the things we look at.
Okay.
Two more questions here, you need to be larger in Austin.
As well over time.
Yes.
I think so I think so I think the.
You know what we are.
I think I mentioned this last time, Austin's really intriguing to us given what's happening with that market and just the growth interest.
Just explosive really.
But remember.
The strategy that we're employing as a business centric.
Small and midsized business strategy.
That's where the profitability is driven.
Austin is.
There's a lot of rooftops growth there theres some theres a lot of in migration of centers like with Facebook or.
Indeed, or Google or whatever Tesla.
What we need to see us follow on of small business right. We don't want to just go there with just our real estate strategy or just a consumer strategy, it's harder to be profitable with the locations. If you just got a consumer strategy.
I'm confident we're going to see it it's just that I'm more confident that those are already there.
In vast numbers in Dallas, and we'll just we'll just have to decide.
Say that.
You know Dallas is growing faster.
And and Austin is growing faster.
Given what's going on with Houston.
The energy slowdown for a while.
I would say comparable to Houston.
Jerry might have some different thoughts but.
The thing that's great about San Antonio is it doesn't seem to have the highest value low lows and that's all I was going to say exactly it's very stable. It creates lots of cash flow and lots of capital always has for us to expand in other markets to great margin.
It's great to have on the market share that we have here, we don't intend to give it up so.
So even if it were a little bit slower it is more stable and it has a lot of benefits in that regard.
The conversation, we had with the with the debt.
Dallas Fed economists, we San Antonio kind of popped out a little bit and this is just more more current data right. We were looking at March and April information, but the surprising thing there was how strong San Antonio had performed relatively speaking.
I think that debt that was a common theme was making that he thought that San Antonia had rebounded quicker.
But as Phil said, yes, San Antonio typically doesn't happen to hide or the lows that let's say Dallas or Houston kind of just.
Can't see chug, along a little bit more and more of the road that recently on what we were hearing was we'd performed better than expected.
Alright.
Alright, thanks for all the thoughts I appreciate it.
And one last thing on the branch thing that the number that I gave you around 200000.
Accuse me $200 million gets you pretty close so.
Okay. Thank you alright.
I'm showing no further question at this time I will now turn the call back to Mr. Phil Green for closing.
Okay, well, we thank everybody for your participation on the call today and your interest and all your all your questions. So thank you for that and we.
It will be a journey.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
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