Q2 2021 Cullen/Frost Bankers Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the calling for second quarter earnings results call.
All participants are in a listen only.
Only mode. After the speaker's presentation, there will be a question and answer session to ask the question. During the session you will need the press star 1 on your telephone and he's the advice that the these conference maybe recorded.
Any further assistance. Please press star zero. Thank you I would now like to hand, the conference over the of course, the speaker today Mr.
Colin Powell director of Investor Relations. Please go ahead.
Thanks Joanna.
This mornings conference call will be led by Phil Green, Chairman and CEO and Jerry Salinas Group Executive Vice President and CFO of <unk>.
I turn the call over to Phil and Jerry I need to take a moment to address the safe Harbor provisions.
Some of the.
The remarks made today will constitute forward looking statements of defined in the private Securities Litigation Reform Act of 1995 of the amendment.
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 the Investor Relations Department at 210220 of 5234.
At this time I will turn the call over to Phil.
Thank you Debbie and good afternoon, everybody thanks for joining us.
Today, I'll review second quarter results for Cullen Frost, and our Chief Financial Officer, Jerry Salinas.
Also provide additional comments before you open it up to you for your questions.
In second quarter Cullen Frost earned $116.4 million for a dollar of 80 cents a share compared with earnings of $93.1.
For $1.47, a share reported in the same quarter last year.
And compared with $113.9 million for $1.77, a share.
In the first quarter.
Excuse me.
Yes.
1 of the current environment, our companies of strong position to benefit from the rebound in economic activity.
And we will continue our organic growth strategy, while taking steps to enhance cross experience for our customers and our employees.
As expected.
And conditions have continued to weigh on conventional loan demand.
Overall average loans in the second quarter for $17.2 billion, a decrease of 1.7% compared to $17.5 billion in the second quarter of last year.
Excluding PPP loans.
Economic quarter average loans of $14.6 billion.
It represented a decline of 3% compared to second quarter of 2020.
However.
We're seeing evidence of loan growth beginning to materialize.
The non PPP loans trended up in the month of June.
Second net upward trend has continued into July.
Average deposits in the second quarter for $38.3 billion, an increase of more than 22% compared with $31.3 billion in the second quarter of last year.
Our return on average assets.
And average common equity in the second quarter of 1 point O, 2%, an 11.18% respectively.
We did not report of credit loss expense for the second quarter.
Our asset quality outlook is stable.
And in general problem assets are.
Lining of number.
New problems have dropped significantly and are at pre pandemic levels.
Net charge offs for the second quarter totaled of $11.6 million compared with $1.9 million in the first quarter.
Annualized net charge offs for the second quarter.
<unk> for 4 basis points of average loans.
Non accrual loans were $57.3 million at the end of the second quarter of.
The slight increase from $51 million at the end of the first quarter and primarily represented the addition of 3 smaller energy loans, which had previously been.
Slide there's problems.
A year ago, non accrual loans stood at $79.5 million.
Overall delinquencies for accruing loans at the end of the second quarter for $97.3 million for.
For 59 basis points of period end loans.
Generally manageable pre pandemic levels.
We've discussed in the past.
$2.2 billion and 90 day deferrals granted to borrowers earlier in the pandemic as at the end of the second quarter. There were no active deferrals.
Total problem loans.
And which we define as risk rate 10, and higher were $666 million at the end of the second quarter.
Paired with $774 million at the end of the first quarter.
I will point out the energy loans declined as a percentage of our portfolio.
Following the <unk>.
Loans were 9.8% of our non PPP portfolio at the end of the second quarter.
As we continued to make progress toward a mid single digit concentration level this portfolio over time.
Our teams continue to analyze the non energy portfolio of segments that.
6 <unk> most at risk from the pandemic impacts.
As of the second quarter, those segments of restaurants hotels and entertainment and sports.
Those.
Of these portfolio of segments. The total excluding PPP loans represented.
$675.1 billion at the end of the second quarter and our loan loss reserve for these segments was 8.6%.
The credit quality of these individual credits in these segments.
Currently mostly stable for <unk>.
<unk> compared to the end of the first quarter.
We also continue to add to our customer base.
Through the midpoint of this year, we added 7% more new commercial relationships than we did in 2020.
Which included the outsized second quarter of 2020, when PPP activity was.
Carl.
Looking at recent trends, our new commercial relationships for 511 in the fourth quarter of 2020.
550 for in the first quarter of this year and.
643, and our most recent quarter so we're seeing.
So some momentum in this area.
We're also seeing good momentum in the insurance business, particularly in the benefits and property and casualty segment.
We're up about 6% in both of those in terms of new customers and also as many others. We're seeing good growth in wealth management.
The good assets under management with these good markets, but have also seen an increase of around 3% and new customers.
And the time since we began our PPP efforts just under 1000, new commercial relationships identified our assistance in the PPP process.
From a significant reason for moving to Frost.
New loan commitments book during the second quarter, excluding PPP loans.
We're up by 9% compared to the second quarter last year.
And up by 45% on a linked quarter basis.
Our current weighted pipeline is 12% higher than 1 year ago.
17% higher than last quarter.
And 38% higher than the same time in 2019.
The increases are mostly due to C&I.
Our current.
Weighted pipeline is as high as it's ever been so we hope this points for a good third quarter for booking new loans.
At the same time it has to be said that competition is intense.
In total the percentage of deals lost to structure.
Of 56%.
Was down from the 75% we saw this time last year.
But that's really more of a factor of the increase in price competition.
Rather than more market discipline around structure.
We were extremely proud to have completed our.
<unk> 5 branch Houston expansion initiatives in the second quarter, and we continue to be very pleased with the results.
It represents a tremendous achievement for our outstanding staff.
Let me update you, where we stand through the second quarter and it excludes.
Our 2000 PPP loans.
Our numbers of new households were 141% of target.
And represents almost 11000, new individuals and businesses.
Our loan volumes were 215% of target and represented.
$300 million $310 million in Outstandings.
And about 80% represented commercial credits with about 20% consumer.
Regarding deposits at $433 million, they represent 116% of target.
And.
And they represent about 2 thirds of commercial and 1 third consumer.
Once again I hope that we've shown that the character of the business. We're generating through the expansion is very consistent with the overall company and its profitability is weighted towards small and mid sized businesses.
<unk> and complemented by consumer as well as other lines of business, including wealth management and insurance.
Consumer banking also continues to see outstanding growth.
In just the first 6 months of this.
This year.
We've already surpassed our all time annual growth for new customer relationships.
This represents about 13500 net new checking customers our previous high was 12007.
100 for full year 2019.
And it's all organic growth.
We worked hard to lower barriers to entry for potential customers with improved product offerings.
And our geographic expansion.
Houston accounts for about 1 third of this relationship growth.
Their annual growth rate for consumer customers is up over 13%.
That compares the 4% in 2018 before we started the expansion.
We were excited to announce this month that we launched a new feature called early pay day, which gives customers access to direct deposits up to 2 days before the money arrives in their account.
And we put this in place in time for customers to see the effect from the IRS child tax credit payments.
And we've already heard great comments from customers who've used early pay day to pay bills.
This makes a difference in the lives of people, who live paycheck to paycheck and that was on top of our $100 overdraft Grace feature that we rolled out in April.
Also.
For this month.
We reached an ATM branding partnership with Cardtronics that will result in us having more than 1000.
725, Atms and our network across Texas.
That is by far the largest ATM.
Earlier in the state, but just as important it gives us the largest ATM network in the Dallas Fort Worth region as we began our expansion in Dallas early next year.
I mentioned PPP earlier, and how our efforts help thousands of small business.
<unk> closed out the second round of PPP with more than 13000 loans for $1.4 billion and combined with the first round that gives us the PPP program total of more than 32000 loans of $4.7 billion in deposits for 7 billion in Outstandings.
The historic.
Effort, the frost bankers put into helping borrowers get PPP loans has now shifted to the forgiveness process.
Because borrowers for the first round of approaching payment dates if they don't apply for forgiveness, we've increased our communication to them and worked on ways to make the forgiveness application process simpler we of all.
Already submitted.
21000, forgiveness applications and received approval of nearly 19100 of them.
For the $3 billion.
It's close to the entire first round total.
We continue to be optimistic about the economy and what lies ahead.
We have the best team in the financial services industry and thanks to them, we will continue to grow and extend our unique value proposition to more customers.
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 second quarter was 265% down 7 basis points from the $2, 72% reported last quarter. The decrease was impacted by a higher proportion of earning assets being invested in lower yielding.
The fed in the second quarter as compared to the first quarter, partially offset by the positive impact of the PPP loan portfolio.
Interest bearing deposits at the fed averaged $13.3 billion or 31% of our earning assets in the second quarter up from $9.9 billion.
The 25% of earning assets in the prior quarter.
Excluding the impact of PPP loans, our net interest margin percentage would have been 237% in the second quarter down from an adjusted to 5.9% for the first quarter with all of the decrease resulting from the higher level of.
Balances at the fed in the second quarter.
The taxable equivalent loan yield for the second quarter was $4.2 8% of 41 basis points from the previous quarter and was impacted by an acceleration of PPP forgiveness during the quarter, which accelerated the recognition of the associated deferred fees.
Excluding the impact of PPP loans, the taxable equivalent loan yield would have been 380% up 3 basis points from the prior quarter.
To add some additional color on our PPP loans for giving us payments received accelerated during the quarter totaling $1.3.
$3 billion compared to the $580 million received in the prior quarter.
As a result of the accelerated forgiveness interest income, including fees on PPP loans totaled about $45 million in the second quarter up significantly from the approximately $30 million recorded in the first quarter.
Given our current projections on the speed of forgiveness of the remainder of our PPP loans. We currently expect that the interest income on PPP loans recognized in the third quarter would be less than 1 half of the $45 million recorded in the second quarter.
Total forgiveness payments through the second quarter were approximately $2.7.
Billion and.
In total PPP loans at the end of June were $1.9 billion down from the $3.1 billion at the end of March.
At the end of the second quarter, we had approximately 38 million in net deferred fees remaining to be recognized and we currently expect of little over 70% of that to be recognized this year.
Year.
Looking at our investment portfolio. The total investment portfolio average $12.3 billion during the second quarter of about $46 million from the first quarter the taxable equivalent yield on the investment portfolio was 336% in the second quarter down 5 basis points from the first quarter.
The yield on the tax taxable portfolio, which average $4.2 billion was 2.1% down 5 basis points from the first quarter as a result of hybrid higher premium amortization associated with our agency MBS securities given faster prepayments.
Our municipal portfolio.
So average is about $8.1 billion during the second quarter down of $104 million from the first quarter with the taxable equivalent yield of 4.9% flat with the prior quarter.
At the end of the second quarter, 78% of the municipal portfolio was pre refunded or psf insured.
The duration of the investment.
Investment portfolio at the end of the second quarter was for 4 years in line with the first quarter.
Investment purchases during the quarter were approximately $680 million and consisted of about $400 million in municipal securities with the Te yield of about 2.3% and about 190 million.
The 20 year treasuries with the remainder in MBS Securities.
Regarding noninterest expense looking at the full year 2021, we currently expect an annual expense growth rate of around 3% from our 2020 total expect total reported noninterest expenses.
And regarding income tax expense the effective tax rate for the quarter was 11, 3% up from the 6.4% reported in the first quarter as a result of higher earnings, but also impacted by lower tax benefits realized from employee stock option activity in the second quarter as compared to the first.
We currently are projecting of full year 2021 effective tax rate in the range of 9 to 9.5%.
Regarding the estimates for full year 2021 earnings.
Given our second quarter results and recognition of lower PPP fee of <unk> accretion for the remainder of the year. We currently believe.
The current mean of analyst estimates of $6.33 is reasonable with that I'll now turn the call back over to Phil for questions. Thank you Jerry we're now open it up for questions.
Thank you, ladies and gentlemen, if you would like to ask the question you May press sorry, the net number 1 on your telephone keypad.
Once.
In the press Star 1 to ask the question, who standby while the compile the Q&A roster.
Your first question comes from the line of Jennifer Dunbar from Julie's Securities. Your line is open.
Thank you good afternoon.
Hey, Jennifer.
I'm just wondering if you could talk about.
The branch expansion and kind of the deposits and loan balances and the new offices at this point in Houston and how many offices you expect to open in Dallas and over what time frame.
Okay well the.
As I mentioned the.
Character of the of the business that we're generating the branches looks pretty pretty close to what we do and the overall company.
It is about 2 thirds of commercial at this point on deposits about a third consumer.
That's a little bit higher than our debt our bank total zone.
Commercial consumer mix would probably somewhere from $55, 60% on the commercial if you look for the total company, but I think that's pretty close.
If you look at.
No loans, 80% commercial.
Hmm.
20% consumer if you looked at the 80% commercial number think the biggest component of that is going to be traditional C&I loans second largest would be owner occupied real estate of that type of thing.
I can tell you Jennifer that we've been seeing the.
The.
And size of loan that we're doing in the expansion branches has been increasing but it's still deeply core.
The latest numbers I saw is the only had like 3 relationships.
That had loans of $10 million and more.
So this is really good core business for us and I think the last.
So I saw as the average loan size of about $1.2 million.
And if you go back several months debt with Britain been probably more like 3 quarters of the million dollars in really round numbers. So we're seeing those numbers.
A little bit larger, but not we're not elephant hunting.
And I think thats, good for us and I think that it really shows the 2.
2 things 1 I think the economy is improving so you get a little bit more demand.
But I also think that of that the new bankers are becoming accustomed to our systems and our underwriting and our offerings.
In.
No Brian also being more successful prospecting.
That's what we're seeing the on the loan side there.
<unk>.
I will tell you that in Dallas.
Really believe thats going to be very consistent.
With what we see in the Houston market you can't argue that.
Dallas might have even.
And the more diversified economy, the in Houston because of the impact of energy on the Houston market Dallas I think is known for.
In General business I think it's got over 10000 corporate headquarters there from an old number that I remember hearing and I think that our kind of.
The little bit of business banking is going to resonate very well there.
As already I think dialysis, but have a pretty good year. So I think we will see pretty much. The same kind of impact now is really glad for us to be able to get the opportunity to to Cree.
Create that number 1.
Net work and the DFW market that has been as good as our network has been in the state I think we might have been number 3 before 2 or 3.
We were probably 4 or so maybe 5 ish in terms of ATM network in DFW, particularly Dallas and this really.
<unk> makes that barrier to entry off the table and I think puts us in a really strong position.
As we move forward net market beginning in January.
So what are you seeing in terms of wage pressure right now.
And 1.
What are you seeing in terms of.
It seems to be a war for talent out there. So I'm just wondering what you guys are experiencing.
We are experiencing it.
I keep going back to this conversation I had with our director of HR.
This is Ben.
10 of at least the month ago now but.
But she came in and we were talking about.
Telephone customer service operators I think she said, we got about 50 applications of week typically for that position and I think she said that as of last week, we got 3.
It just shows you how.
How much competition there is.
Not just from other businesses, but at that point in time, there was the government benefits, which are also frankly of the cup competitive factor.
So.
We're seeing.
We're seeing from our customers everyone. We talked to you talks about.
Wage pressure and talk about the inability to hire people.
<unk>.
That's on top of the supply chain issues that are out there. So we're.
<unk> it.
So a little bit worse in some markets.
But it's bad and all of them.
Maybe a little bit worse in Dallas Austin, but.
But again.
It's bad and all of them. So it's it's tough.
Thank you.
Welcome.
Your next question is from the line of Steven Alexopoulos of Jpmorgan. Your line is open.
Hey, Dan if you're on mute. Please UN mute on mute your line is now open.
Hi, Thank you I have to move the line of Stephen If you can hear US you May press Star 1 again to ask the question. Your next question is from the.
The line of Brady Gailey of <unk>. Your line is open.
Hey, Thanks, good afternoon guys.
Hey, Barry.
So.
Cash as a percentage of the average earning assets just keep just keeps going up for you guys and it's now 31%.
Earlier this.
We had talked about.
You know frost potentially using some of that cash to.
To deploy into the bond book, but as we've seen you know the long into the curve is has gone down here, but maybe just updated thoughts on.
When you feel is the rate time to start putting.
Sure that cash to work kind of higher earning assets.
Greg I think we've been pretty consistent what we said last quarter was that our plan was to to make any major purchases until late in the third quarter or early in the fourth quarter.
Order.
Currently our expectations of obviously, we'll keep an eye on the market and we do every day, it's something we're talking about all the time.
But.
We did some purchases of municipals as I mentioned during the quarter, we were somewhat opportunistic those yields have been coming down and we saw the ability to get in.
They're early so we did accelerate a couple of hundred millions of purchases there, but at this point. We're just we're more focused on late into the third and I'm really thinking early in the fourth as we began to see the.
The deferred fees associated with the Pvp start coming off the books as we said they are accelerated.
<unk> in there.
We saw a big chunk of them this quarter and they'll continue to pay off through the rest of this year. So that's our current thought process. Obviously, we'll keep an eye on the market if something comes up if we have an opportunity.
I'll jump in.
Did we like the market 45 of the yields 45 days ago better than we do today, most certainly but I think.
Given what we see in our expectations, we still believe that inflation.
<unk> is out there it's not the temporary sort of conversation that's going on as Phil mentioned, even on the salary side that we talk about.
So we're we're being consistent at this point I Havent seen anything Thats made us change R.
Our thought process too much but again, we'll be conscious of when it's time to pull the trigger as to what it makes sense to do.
Alright, and then what do you think about the magnitude.
Of these purchases as you mentioned your bond book is around $12 billion.
How much growth could.
At the.
Beginning this year and into next year is it going to be significant or is it just going to be modest.
Well you mentioned the kind of looking at.
Cash as a percent of earning assets and even cash as a percentage of total assets and obviously, we're way above any level that we've been here.
Within the recent past.
We will you know us and you followed us for a long time, we're pretty conservative and have been on the amount of balances that we typically have at the fed but given the fact that I think this morning, we had $14 billion in balances there.
Looking to make significant purchases, it's not going to be all at once obviously.
But the thought process today is that we would we would utilize the significant amount of that liquidity in 'twenty 1 into 'twenty 2 as well.
Okay, and then I'll ask the question just on the deposit side.
Deposit growth has been amazing the 27% last year first half of this.
Year, Youre still at over 20% annualized pace.
Do you think that eventually some of these deposits will move back out of the bank how do you think about.
Sustaining all of this node while deposit growth, we've seen over the last year or so.
Yes.
It was.
The admit I was amazed looking even at the linked quarter growth. If you looked at it annualized was even stronger than the year ago growth.
I think Phil talked a lot about our focus on new relationships and we continue to do well when we look at our 12 month Rolling average of what's going on with.
Our deposit base, we still see obviously that augmentation of our existing customers is I think something north of 70% of say, 72%, but we're still getting growth from new customers, which is about 28%, which is still a good chunk, but what we've also seen is we're seeing a lot of our larger commercial accounts.
Increasing their deposit balances as well and the embedded some of the higher level.
I think that given the rate environment that we're in right now given what youre seeing out there as far as investment is concerned I think it's really hard to gauge of when we might see those deposits leave at this point we continue to.
To feel like the deposit level that we saw through the end of the second quarter. It was pretty consistent in July that sort of level of growth. So we haven't really seen any sort of runoff.
And our projections right now don't really have us growing a lot more from here and a lot of it is really more due to the uncertainty of you said so if we have been really.
Really impressed with where we're at and the growth that we've seen both from existing customers and from our new relationships, but youre right Theres still a lot of uncertainty out there are a lot of liquidity out there and hopefully as the as some of the economy starts to take off you would expect that some of those dollars both on the consumer side and on the commercial side we'll.
We'll probably be spent and probably would be a good sign for the economy and for what's going on but at this point, we're not projecting it to grow much from here, but I haven't seen any indication as.
As of today that would indicate they're moving.
Got it thanks guys.
Yes.
Your next question is from the line of Steven.
The next couple of lines of Jpmorgan. Your line is open.
2 can you guys hear me.
Yes, Okay, I don't know what happened before.
First I just wanted to drill down a little further into the commentary around deposits.
Guys look at the non PPP loans of you said trended nice up in June.
In an up so far in July for those customers that are starting to draw on their lines on the commercial side are they working of their deposits down at all first or are they just concurrently bringing deposits for you and then also drawing on their lines further.
No Steve.
Good question and it just depends.
Sure.
I see so many anecdotal stories youre not talk to customers, who have just had gain.
Game changing experiences with PPP or the.
Grants I mean.
That's complete reduction of debt on balance sheets.
We just thought we've all got stories that we see there so.
There.
I think 1 thing that we're seeing is we've got probably we've got C&I opportunities, but we've got.
Got a fair amount of CRE opportunities the CRE probably of different deal.
Then the scenario you described I think of what you are talking about is mainly seats.
And I am ready to C&I lending.
So.
And it's just hard it's just hard to pinpoint a.
A dramatic trend either way.
I just think it depends on the business you know a lot of businesses just didn't get any PPP loans. So there.
They've really been dependent upon.
What they're seeing in the economy and RMC in activity and are they willing to expand so I think that's probably driving most of that.
At the same time as I said there've been some really game changing.
<unk>.
Balance sheet changes that have happened for some companies with regard to their liquidity and debt loads and also.
I wish I had a good answer for you I just don't know the bit perplexing.
Yeah, Stephen the 1 thing I will say as you know early on and you are probably aware of this of lot of us were saying that.
When PPP for started last year the.
Deposits.
The loans would be made in the deposits would stay right. The money wasn't spent immediately until a lot of the conversation was around.
The inflation and the deposits if you will with just the fact that debt.
Customers got a PPP loan and then just part of the money.
We're not really seeing that being the case, we've seen movement of the most of those and again you can't tell.
<unk> that specific.
PPP loan 2 of deposit and then just day be able to follow it completely but when we looked at the activity within those accounts and it really looks like those dollars were spent so it doesn't look.
Like we are in that same situation that we were say 9 to 12 months ago.
Got you okay.
And then I wanted to drill down on the 13500, new net checking accounts, we opened in the quarter.
What's the base in other words, what's the growth rate.
Yes, so if you.
Look at our customer growth overall, that's about a 6.2% growth.
Annualized growth.
Thinking.
Round numbers 400400.500000, but.
We can divide the but I mean.
Thats.
I mean.
Debt to me is amazing honestly, we've had we have had goals to grow that number I think our goal was to maybe get the 4% 1 day, because you're talking about of large base, there and for us to be at over 6% now on the entire base.
I'm just.
I'm really excited about that.
And that's not an accident that can't be an accident.
What portion of those are coming through digital channels versus the traditional branch and does it very much in Houston, just given your opening new branches there.
Yeah.
No.
I'm thinking that 35 ish percent.
It comes through digital.
But.
And I saw that number 2 hours ago.
Just don't have it here, Andy, but but but.
Significant amount of well maybe not.
Just.
Uh huh.
I would say about 30 ish percent in round numbers looks like not a bad debt number okay and the very.
The impressive okay. Thanks for taking my questions.
You bet.
Yes.
Okay.
Your next question is from the line of Ebrahim from the lineup of Bank of America. Your line is open.
Hey, good afternoon.
And then I guess just.
I wanted to clarify.
Hi.
Jay you had on <unk>.
<unk> numbers, you mentioned about $45 million sitting in the second quarter $30 million and 1 kilo that implies an NII of about $235 million quarterly for the first half just wondering it sounds like you're managing the securities book the can I on the NII outlook.
Is that Gordon <unk> 35 of the right way to think about where you might be in the back half of the year and where you would look to grow from liquidity deploy cash into securities.
I do think that it looks like.
The NIH percentage might have hit the floor.
For there.
But again a lot of it is going to be dependent on when.
If and when we pull the trigger on the investment portfolio purchases of you said, so that's obviously a big driver of it.
So and again the level of deposits, we really don't know what's happened the.
The level of growth that we've had has really been a lot more.
For obviously than we expected and keeping that liquidity at the fed has really had a downward pressure on that NIM percentage. So it's going to be dependent on those things you are right, but I think at this point I think youre thinking about it right, we kind of feel like we're at the bottom of that it was nice to see the loan yields up a little bit even on a linked quarter basis.
PPP.
But I am going to tell you that theres a lot a lot of pricing pressure a lot of competition there and obviously, we've said and we continue to say the relationship banking, we don't want to lose relationships for a few basis points. So we're really.
Saying that we want to be competitive there so we could.
Could feel a little bit of pressure there.
We will continue to feel pressure there I shouldnt say that we won't because we will and it's going to continue from everything that I hear so we'll see we'll feel some pressure on that loan yield, but I think knock on wood.
Given all things being equal I think we may have hit bottom there.
Okay.
The cash deployment into securities is that more of a function of winter Inc.
For today's call. It is it a function of how quickly the Pvp runs off I think what's the bigger driver of all.
You talked about.
Cash.
It's not really related to the PPP runoff I mean, obviously, we're aware of it so it's not like we can look in our financial.
In the not realize it but now that's not really not going to be the thing that pulls the trigger I mean, we'd already been talking about.
For the acceleration of the forgiveness of.
That we were talking I think Phil mentioned in the call last quarter that we were talking about late third most likely early for it.
Well again.
We don't like the market.
We.
Have the right to not pull the trigger if we don't think it's it's where we want to be but you know where we're headed.
The process at this point.
That's helpful and I guess, just a separate question.
Phil.
You have talked about this in the.
You introduced.
Produce the early PD, the $100 Green screen. It on deposits just talk to us in terms of the retail side of the bank.
Sure.
Scott what are you seeing in terms of cost type of behavior.
How about the cladding clients and all of the 13000 checking accounts that you've talked about.
What percentage of truly the translating into cash.
The U T J maxx.
The ones there.
You might come attached on the or just talk to us in terms of how many of these total intelligent type of con.
The account.
Okay.
Keep them from a relationship for for Us.
Okay. Ebrahim, you were breaking up I apologize a bit but let me let me.
And for what I think I heard your question.
Of the.
Of the 13000.
500, you know I think you ask about accounts, how many of your relationships with Ross just.
Point of of clarification those are not accounts those those are new relationships, so and we don't count it of a relationship unless we get a.
Checking account okay. So so these are not.
<unk>.
We could go on and advertise high rates on Cds of higher rates on money market deposit accounts.
<unk>.
Bring in a bunch of.
Rate shoppers or whatever.
These are relationships the.
Account number is consistent but.
Just 1 of them. So I really believe that all of these represent solid relationships from us and you know.
The other thing we keep an eye on and you have keeping the island is what is the attrition look like and.
And all of our attrition.
Year over year has been really good I think our.
Our closed accounts were up only.
Half a percent.
Year over year quarter in the second quarter. So.
We're doing a good job there I mean.
And when you look at the value proposition.
I mean.
We've.
At the.
Uh huh of really great comparison with our.
You know with our with our new overdraft Grace and with our.
You know the early pay day.
And.
<unk> got another in the keep in mind is.
About 70% of our customers are.
We're the primary relationship where we have direct deposits. So I think that's that's also speaks well of what are the.
How sticky and how deep these relationships.
But I I apologize again, there was some breakup when you were answering the question.
If I Miss something please please guidance, where I should be going.
No I think that yes.
I'm sorry about that.
Of course.
Chip.
Your next question is from Ken Zerbe of Morgan Stanley. Your line is open.
Alright, thank you.
Just wanted to clarify real quick in terms of the 3% expense growth.
Is the base that you're looking at the full $849 million from last year I know there were some 1 time.
I'm items and results late last year.
Yes, Im just going off the reported number of that 840 non youre right.
Got it okay perfect and then in terms of provision expense, obviously, a couple of quarters in a row of zero.
Is it fair to assume that youre going to try to stay at zero on a go forward basis.
Thank you I know other banks of obviously been of releasing a lot more reserves based on the <unk> model, but theres also some subjectivity to see some modeling thanks.
Yeah.
Right, Yes, I think youre right at this point, we havent recorded any provision for the year.
And of a big part of us of our.
The calculation.
Need if you will is associated with the overlays right because of the models themselves.
We will release, our 10-Q this afternoon, and we get quite of bit of detail on how the how that seasonal work the models did actually.
We calculate if you will are lower.
Allow reserve requirement.
But what we've said is given all of the uncertainty that we continue to see associated with the with the pandemic and the effects. It has on certain parts of the economy and again given all of the uncertainty that we've seen here recently with the Varian.
But it really was not the time to.
Any reserves, we obviously feel real comfortable about our reserve coverage, but the thought there was too much uncertainty in the market for us to release reserves at the end of the day, we've got to look at it every quarter and see where we're at I know theres. Some thoughts that the September October timeframe, we will.
<unk> given that you've got a lot of employers requiring of requesting employees to get back to work after labor day, you'll have the kids back in school.
Obviously, the Varian conversation that's going on currently is starting to highlight other issues with the math again, so we think that concept.
B, Inc. Cobra I think it'll be interesting to see where we're at I.
I don't expect the and then maybe this is of given I don't expect us to have provisions for the rest of the year, given where we're at but as far as any discussion about would be releasing of reserves that will really be dependent on what we're seeing at the end of the third.
Third quarter at the end of the fourth quarter.
Right now I think there was just too much uncertainty given what we were saying to release reserves.
Got it that makes sense and I certainly understand the variability around the delta variant.
I guess, if the economy does get better, let's say of the Moody's models get better in <unk>.
Timber.
But there is still a concern I mean do you have enough flexibility that debt.
That you can continue to add to the qualitative reserves like for the next couple of quarters I'm. Just wondering if there's a limit to where you are unable to just to keep adding qualitative if that makes sense.
<unk> does end.
Obviously, the the thought process there is I think the.
My take on it would be the more.
The bigger percentage of your allowance that is related to overlays of qualitative factors the.
More.
Quantitative those qualitative factor.
You'll have to be if that makes sense. It's not the it's can't I can't I'm not going to be at a point, where I can say you know the end.
We would never be the case, but I can't even have an extreme work the.
The models with bad needed $10 million, let's say and I had a $90 million overlay to give me the $100 million reserve, that's never going to be the case and so.
Again, I think given where we're at I think.
Factor for Les Youll see whats significant compared to the models this quarter, we feel comfortable with that but I think too.
The answer that question is could.
Could we not or could we grow our qualitative reserve as a percentage of the total allowance for the rest of the quarters I think thats a difficult.
Our older the answer.
If we did let's say, we got to that point I think what you'd find is that the support for that would be a lot more quantitative in nature, even if it's a qualitative adjustment if that makes sense.
It does alright, thank you very much.
Sure.
Your next question is from.
Question the line of Rochester from Conference Call, Inc. Your line is open.
Hey, good afternoon guys.
Good day.
Back on your expense guidance it seems like that would imply a pretty decent step up in the expense run rate in the back half of the year, maybe to that $2.25 level of quarterly.
To hit that 3%.
From the roughly any color as to what lines you are expecting will drive that.
Sure well I'll just.
It was about a couple of things there.
Really I think I've said this last time, and we were having a meeting with the the head of our marketing group, we've really been of light.
For the first half of the year on marketing expenses. So we are we are projecting.
<unk> pretty big increase in marketing related expenses, especially in the fourth quarter. So that's going to take a big bite out of that increase.
In addition to that we're going to have additional expenses with that Houston expansion in the second half.
Because as we've got more and more settled there youll see that rise and as we've talked about we're going to do future.
King of banks in there and also the Dallas expansion, we'll see a little bit of that you won't see a lot of it is going to run through through our numbers here.
We also have incentives that get paid in the fourth quarter debt of 1 time hits in our discrete for that quarter. So that's also going to affect the line items there Phil.
It's been some salary pressures we continue to have that and then also really we've got open positions that we're trying to fill.
There is a lot of request for for a lot of the desire for some talent that is not that easy to find and so we're projecting that we can fill those positions, but its taking us longer to do that than we had expected.
Mentioned and so and then generally I think just in the other expense category, it's been a little bit slower starting out of the year.
I think now that we've started cranking up and people are in the office and we're starting to visit with with customers again, you'll see just the.
The increase if you will in the general sort of meals and entertainment sort of category.
I'll be of items than.
And then we've had in the first part of half of the year I will say that we continue to focus on expenses I'm going to tell you. If we are able to beat that 3% growth I'm going to be happy about it.
But at this point, given what I'm, saying, that's what it looks like right now and there are some specific things like I mentioned that I can put my finger on that are going to drive.
<unk>.
Okay, Great appreciate all of the color there.
Maybe the switching to the margin you mentioned the loan pricing pressure of bid on the call. The just curious what the front book back book differential is now on new loan yields versus the roll off rate at this point.
So the what I saw was 20.
Of that 80 basis points.
On the weighted for commercial portfolio.
Decrease on the new business in the quarter versus the back book.
Okay.
And then you guys mentioned still feeling comfortable about making the securities purchases of few months from now.
Was just wondering if the curve.
28 at that point it looks like it does today.
Are you still okay with that and would you still plan to accelerate those purchases.
No.
It's hard to say.
Just.
Thank you everybody hates this market and few people understand what the 10.
For Sean when inflation is growing like gangbusters.
And it continues to go down so I mean, we will do what we have to do I mean.
We said for a long time really all year long.
Debt we look.
At the late third fourth quarter to be when we thought we'd be pulling the trigger on the stuff.
Obviously, we felt.
Our debt point in time inflation would of reared its head in the market would have responded well.
Of that happen inflation as well.
For more than its head and the.
And the market Hasnt really responded on it. We also said during that time that we might Miss the peak and.
It's the half at least at this point.
But there were still going from 10 or 15 basis points to 125, or so of 100 basis point. So theres still a lot of operating leverage that will bring to the 2 of the party when we decided to do it.
I would.
And we have we'd love to see.
Clearly there has been volatility in the market as it relates to yields.
<unk>.
We've got some time based on our timeframe to see that play out in the marketplace I'd love to see some variability happening happen and be able to take advantage of some of it on the on the high side.
We will see I know thats not definitive but no one's got the answer the question right now.
Great and maybe 1 last 1 on capital those ratios continued to grow just in general CET, 1 ratios engine of <unk>.
14%, how do you think about that.
Do you expect those to continue to grow from here are you thinking about buying back some shares and stabilize that any thoughts there would be great.
We've said repeatedly and you saw us increase our dividend. This quarter you know our focus is really on the.
Ensuring we can pay that dividend thats what.
Mary focuses on.
Sure you saw on our balance sheet debt and we talked about earlier in the call I mean assets are growing like crazy given the all the deposit growth that we're seeing in and.
If you look at our leverage ratio, we're probably a little low compared to peers and we have been coming down there. So we keep an eye on that but so really day right.
Of our prime I'd say that we're more focused on ensuring that we pay the dividend more than we are on the stock buyback.
Okay, great. Thanks, guys.
Sure. Thank you.
Again, if you would like to ask the question you May Press Star then the number 1 on your telephone keypad.
Okay.
Hey, guys I'm no longer seeing any questions I would like to turn the call back to Phil for closing remarks.
Well. Thank you, we appreciate everybody's interest and for being on the call today and with that we will be of churn.
Yeah.
Now thank you so much ladies and gentlemen. This concludes today's conference call. Thank you all for joining you may now disconnect.
Okay.
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