Q1 2022 Cullen/Frost Bankers Inc Earnings Call
Ladies and gentlemen, thank you for standing by our conference will begin in just a couple of minutes. Once again. Thank you for standing by our conference will begin in just a couple of minutes.
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Ladies and gentlemen, thanks for standing by our conference will begin momentarily once again, thank you for standing by our conference will begin momentarily.
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Greetings and welcome to the colon Frost bankers first quarter 2022 earnings conference call.
At this time all participants are in a listen only mode.
And answer session will follow the formal presentation.
What you require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I would now like to turn the call over to a B Mendez Senior Vice President and director of Investor Relations. Thank you you may begin.
Thanks, Darryl are covered our conference call today 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 our remarks today will constitute forward looking statements as defined in the private Securities Litigation Reform Act of 1995 as amended we.
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.
At 2102205234.
At this time I'll turn the call over to Phil.
Thanks, Toby and good afternoon, everybody. Thanks for joining us today I will review the first quarter results for calling Frost.
And our CFO , Jerry Salinas will provide additional comments and then we're going to open it up for your questions is not a normal practice.
In the first quarter Cullen Frost turned $97 $4 million or $1 50 per share compared with earnings of $113 9 million or $1.77 cents a share reported in the same quarter last year.
And 90 $944 million or $1.54 a share in the fourth quarter of 2021.
Our return on average assets and average common equity in the first quarter.
We're 79 basis points.
And 9.58%.
Respectively.
And I'm happy with these results to start the year and I'm optimistic about the prospects for our sustainable organic growth strategy as business activity continues to return to normal and we move farther into a rising interest rate environment.
Average deposits in the first quarter were $43 billion that was an increase of more than 21%.
Compared with $35 4 billion in the first quarter of last year.
This is outstanding grow and Jerry will talk more about this growth in his comments.
But I believe at its core it reflects our commitment to strong value propositions centered around world class customer service investments into our business for both physical expansion in employee compensation and account features.
And also a commitment to a square deal with our customers, which is the basis of any healthy long term relationship.
Loan growth was also outstanding.
Average loans, excluding PPP in the first quarter were $16 1 billion.
8.3% ahead of it.
The same time last year.
On a linked quarter basis, we saw average loans, excluding P. P. P increase over the fourth quarter and an annualized 4.5%, helping support our expectations for full year average loan growth in the high single digits.
I'm very pleased with the success of our commercial lending segment.
We booked $1.73 billion in new commitments in the first quarter up 51% from new loan commitments, the first quarter of last year.
The gains were strong in all segments.
New commitments booked in the first quarter tend to be seasonally lower than the fourth quarter and that was true. This first quarter as well as we saw first quarter commitments down 29%.
My Records Monster fourth quarter level.
However.
Our gross new loan opportunities at the end of the first quarter.
Our AUM by 29% compared to the fourth quarter.
And our weighted pipeline at the end of the first quarter increased by 9% from the fourth quarter.
And all of this is to say that the outlook for loan growth continues to be good.
A few other things I found interesting about our lending activity.
In the first quarter compared to a year ago, we looked at 19% more deals.
But we booked 42% more deals.
That improvement was driven by the C&I component.
It went from a 29% booking rate last year to a 41% in the first quarter. So we're having more success.
We're seeing more activity from customers as they begin expanding their businesses. So we of course would expect a higher success rate there.
Our advance rate on commercial working capital lines increased from 32.5% at year end to 34, 8% at the end of the first quarter.
Still below a more normalized 38% to 40% level.
New customer acquisition continues to be key.
Our number show that 40% of our linked quarter growth in outstanding loan balances.
Came from customers added over the last 12 months.
Our expansion efforts are becoming more accretive to growth.
As an example.
Our year over year loan growth of 8.3% would've been six 8% without the expansion volume.
Our consumer business continues to be strong.
In the first quarter total customer consumer checking households grew over seven 2%.
Pair to last year, which aligns with the record growth we saw in 2021.
Same store sales for checking accounts increased 17%.
Consumer deposits grew nearly $1 billion in the quarter, giving us a 20% year over year increase.
And loan demand has picked up on the consumer side, helping.
Helping us grow loan balances by a little over 7% year over year.
And helping to set the stage for the launch of our mortgage product later this year.
We believe our value proposition is resonating and we can continue to grow this business, especially in our expansion markets.
In Houston, we see the momentum continuing to build as the newly opened branches, they're mature at the end of the first quarter. We stood at 110% of our deposit go 125% of our new household goal and 181% of our long ago.
And we've had a very successful start to our Dallas region expansion as well.
But the two locations that opened so far this year.
Along with the Redbird financial center that opened in 2021 .
Our numbers are early.
But they do represent 130% of deposits go.
Hundred and 83% of long ago.
And 245%.
Of our household goal.
Despite the macroeconomic challenges, we continue to be up I'm optimistic about growth in this economy.
The third new location in our 28, French Dallas expansion project is scheduled to open in the second quarter.
Additionally, we will continue to expand in Houston, adding another eight locations over the course of 'twenty, two and 'twenty three.
Credit continues to be good total problem loans, which we define as risk grade 10, and higher totaled 447 million at the end of the first quarter down from $540 million at the end of the previous quarter.
During the first quarter newly identified outstanding problem loans totaled $14 million.
During 2021, the average edition to problem loans was about $54 million.
The increase during the first quarter was one of the smallest in several years.
The resolution of problems via pay offs payments and upgrades in the first quarter totaled $104 million.
The short story here is if the favorable rate of resolutions continued through the first quarter of 2022.
The March 31 total for delinquency was the lowest in several years.
Once again, we did not report a credit loss expense.
In the first quarter and our net charge offs for the first quarter were $6 $3 million in those compared with $2 8 million in the fourth quarter.
Annualized net charge offs for the first quarter.
Were 16 basis points of average loans.
And below our typical long term level.
Non accrual loans are only $49 million at the end of the first quarter a decrease from 53 7 million at the end of the fourth quarter last year.
In the first quarter, we continued making progress toward our goal of a mid single digit concentration level and the energy portfolio overtime.
With energy loans, representing six point to 7% of loans at the end of the quarter.
And over the last 12 months energy loans are down by 16%.
After two years of working with business customers on P. P. P loans were almost across the finish line with forgiveness complete for 97% of our borrowers.
Putting in the extra effort to help PPP borrowers wasn't easy.
But it was the right thing to do.
And the same goes for our decision late last year to raise our minimum pay to $20 an hour.
Then in the first quarter after the federal reserve increased interest rates, we made the decision to pass some of that increase along to our depositors.
And it wasn't easy and it wasn't inexpensive but it was the right thing to do for our customers.
Steps like these show our commitment to our communities.
Immunities and being a force for good in People's everyday lives and that's reflected in the third party recognition that Frost received.
We learned in the first quarter that once again and.
And for the sixth year in a row, we've received the highest number of Greenwich Excellence and Best brand Awards of any bank in the nation.
A Greenwich awards are given for providing superior service advice and performance to small business and middle market banking clients.
Also earlier this month, we learned that once again at this time it was the 13th year in a row, we received the highest ranking in customer satisfaction by J D power U S retail banking satisfaction study for Texas.
Over the past few years, we've talked to you about all the steps we've taken to enhance our value proposition and our competitive advantage things like organic expansion projects overdraft Grace early pay day States biggest ATM network.
Keep in mind. This growth is taking place during the pandemic when many of our employees were working remotely as well.
Our financial centers, we're taking extraordinary measures to keep people safe.
So there's a lot, but I can't say it often enough I'm, so proud of our company and our employees.
And everything we've accomplished together knowing what our team can do is what makes me so optimistic about cross success in the future.
Now I'll turn the call over to our Chief Financial Officer, Jerry Salinas for some additional color.
Thank you Phil.
Looking first at our net interest margin our net interest margin percentage for the first quarter was $2 three 3% up two basis points from the 2.31% reported last quarter, excluding the impact of PPP loans, our net interest margin percentage would have been 232% in the first quarter up seven basis points.
From an adjusted 2.25% for the fourth quarter.
The increase was a result of some positive items, partially offset by some items with a negative impact.
Lower relative percentage of earning assets held at the fed down from 34% in the fourth quarter to 29% in the first quarter as we deployed some liquidity into our investment portfolio had the largest positive impact higher volumes have securities and loans also had a positive impact on the net interest.
Margin percentage, while lower yields on securities and loans had a negative impact.
The taxable equivalent loan yield for the first quarter was $3 seven 4% down 15 basis points from the previous quarter, excluding the impact of the P. P. P loans, the taxable equivalent loan yield would have been $3 73 down six basis points from the prior quarter.
And just to finish up on P. P. P. As Phil talked about our total PPP loans at the end of March were only $208 million down 221 million from 429 million at the end of December as such we don't expect P. P. P to have any material impact on our 2022 results.
Looking at our investment portfolio. The total investment portfolio averaged $17 2 billion during the first quarter up about $2 7 billion from the fourth quarter average as we continue to deploy some of our excess liquidity during the first quarter.
We've made investment purchases during the quarter of approximately $3 4 billion, which included about $1 8 billion in agency MBS securities with a yield of about 2.58% and about $1 5 billion in treasuries, yielding about 1.25%.
Included in the one 5 billion in Treasury Securities purchased in the first quarter. If they win a 1 billion dollar purchase of two year treasuries that we purchased in late January with a yield up one point or 2% we.
We purchased those short duration treasuries as a defensive measure given the uncertainty in the market, resulting from the potential invasion at that time of Ukraine by Russia, and its potential market implications.
In addition to the three 4 billion in purchases, we made in the investment portfolio in the first quarter. Our current expectation is that we would invest an additional 5 billion of our excess liquidity into the into investment purchases through the remainder of the year.
The taxable equivalent yield on the total investment portfolio was 2.88% in the first quarter down 20 basis points from the fourth quarter.
The yield on the taxable portfolio, which averaged 9 billion and was up $2 9 billion from the prior quarter was 1.90% up four basis points from the fourth quarter.
Our tax exempt municipal portfolio averaged about $8 2 billion during the first quarter down about $200 million from the fourth quarter with a taxable equivalent yield of four point out 3% up two basis points from the prior quarter.
At the end of the first quarter, 78% of the municipal portfolio was pre refunded or psf insured.
The duration of the investment portfolio at the end of the first quarter was 5.2 years up from four four years at the end of the fourth quarter, primarily related to the extended duration on lower coupon mortgage backed securities.
Average deposits for the quarter were 43 billion up 7.6 billion or 21% from the first quarter last year the growth in noninterest bearing deposits was up $2 7 billion or 17% while interest bearing deposits grew 4.9 billion or 24% looking at a 12 month look back of deposit.
Wrote about 32% of our growth over the past year has come from new relationships on a linked quarter basis deposits were up 1.9 billion or four 7% on a non annualized basis in the linked quarter comparison. The growth has come primarily from growth in interest bearing deposits the cost of <unk>.
Just bearing deposits in the first quarter was eight basis points up one basis point from the previous quarter.
Looking at a couple of linked quarter income statement statement comparisons and noninterest income regarding insurance commissions and fees I'll point out the strong linked quarter growth of $4 9 million or 42% just as a reminder, the first quarter is always our strongest quarter for insurance commissions and fees due to our NAV.
<unk> business cycle of higher renewals in that quarter and also the impact of contingent commissions that are typically received in the first quarter. I'll also note that typically the second quarter is our weakest quarter for insurance commissions.
Looking at linked quarter total noninterest expenses I'll note that the first quarter total expenses were right in line with our projections from one quarter ago. However.
However, given the continued increase in salary pressures in this current environment I mean, I am increasing our expectation for noninterest expense growth for the full year.
Last quarter I stated that we expected total noninterest expense for 2022 to grow at a high single digit growth rate over 2021 reported noninterest expense.
Given recent activity primarily related to higher than previously projected increases in salary levels given the competition for talent in this environment. We now expect total noninterest expenses for the full year to increase at a percentage rate in the low double digits over 2021 reported levels.
In addition to continued market salary pressures our projected growth in noninterest expenses is also impacted by our expansion efforts the impact of our Houston and Dallas expansion is responsible for about 2% of the growth costs associated with reintroducing our residential mortgage product adds about 1% an increase.
Our minimum wage from $15 per hour to $20 per hour in December as a result of salary pressures across the state is responsible for about 2% of the projected growth in non interest expenses in 2022.
Looking at our effective tax rate the effective tax rate for the first quarter was 11, 3% and our current expectation is that our full year effective tax rate should be in the range of 11% to 12%, but that can be affected by discrete items during the year.
Regarding the estimates for full year 2022 earnings our current projections assume 50 basis.
I am 50 basis point fed rate increases in both May and June .
<unk> by 25 basis point fed rate increases in September and December .
With those rate assumptions and the expected 'twenty two expense growth that I. Previously mentioned, we currently believe that the current mean of analyst estimates of $7 29 for 2022 is low with that I'll now turn the call back over to Phil for questions.
Alright, Thank you Gerry.
Okay, well open it up for questions now.
Thank you we will now be conducting a question and answer session.
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Okay.
Our first questions come from the line of Michael Rose with Raymond James. Please proceed with your questions.
Hey, good morning, Good afternoon, guys how are you.
Good luck great. Thank you.
Good.
So it looks like the amount of securities that you're gonna repurchase is clearly higher than I think the 7 billion that you talked about last quarter, obviously the rate hikes appear to be coming a little bit more intense.
A little faster than expected.
Can you just talk about maybe what outside of that maybe is driving that decision or is that kind of it just higher rates quicker than <unk>.
And things like that.
Well I guess one of the things that I did point out was the $1 billion in and no short term or the two year treasuries that we purchased in January that was really something that we did more as a defensive measure really wasn't part of our original plan given that short duration, you know it'll be back investable and a couple of years here.
I kind of took that 7 billion I'd say the 8 billion with just a in addition, you know again, given what was going on in the in the current.
Current environment at that time, and I really deposits have been a little bit stronger than we expected I think I've mentioned in last quarter's call that given some of the past history that we had I thought the first quarter deposits might be a little bit softer, but they've continued to.
To perform well I I know that when we had the call a quarter ago, our balances at the fed where 14 billion I looked this morning, and we're at $13 5 billion. So that gives you a good feel that you know we spent quite a bit already in and yet we still have a significant amount of liquidity. So that that's a long winded way of bands.
During your question hopefully I gave you what you need.
Yeah Yeah.
Perfect. Thank you so much and then the loan growth this quarter, obviously very strong.
It looks like you guys are really hitting their stride.
Here, but you reiterated the.
The outlook for for growth for the year.
To me it seems a little little Conservative can you just kind of walk through kind of the puts and takes I know probably broadly speaking theres theres. Some concern on the economy as we move into the back half of the year, but clearly taxes.
If you look at the Moody's expectations for growth over the next couple of years for Texas looks very strong. So you can just talk about the puts and takes to that outlook.
Hey, Michael.
First of all you're right, we do expect it to be.
And we do see the outlook is really good.
You know we've got a good pipeline as I mentioned, just the opportunities up 29% from yes.
As of quarter end at the end of the year.
We are seeing some pay downs or hearing about hospitals as pay downs in that.
In the commercial real estate side as people are concerned about higher cap rates I don't think we've seen much movement in cap rates, yet, but theres concern there.
Obviously, you've seen some higher interest rates.
I think there could be some of that.
But that's probably the biggest headwind and then also you know we have been continuing to watch our energy portfolio, and we're almost down to where that.
You know mid single digit number is I really want to get a five handle on that and I think probably we.
We have a good chance sometime during next this quarter I guess, the second quarter to get there.
We're still being real careful with that so that's a bit of a headwind and that's what I would say.
What would be the things that would make it more conservative.
But I I I feel more and more confident about the the highest single digit number that we had talked about earlier this year.
Great. Thanks for taking all my questions.
Welcome.
Thank you. Our next question is coming from the line of Brady Gailey with <unk>. Please proceed with your questions.
Hey, Thanks, good afternoon guys.
Hey, good afternoon Brady.
I heard the comments in your prepared remarks about how you guys have already passed along some of the fed increase to your depositors or I remember you guys doing this the last fed tightening cycle as well, but how do you know how how much of the peninsula five basis points did you pass along and then how.
How are you thinking about that as we head into you know the fed continuing to aggressively hike rates from here.
Yeah Brady so the first hike I think that we were about if you look at interest bearing I'd say in the 28%.
Beda.
In that first hike I think as we look through the rest of the year and again I guess I should start by saying, we you've always heard us talking about the fact that we're going to do what we need to do from a market standpoint. So these are current assumptions based on what we saw back in the I'm going to say that the time period.
The 2000, and I'm Gonna go 18 or 19.
What we were doing there and if you recall, we were a little slow I think as an industry, we waited and our and we waited until our rates had gone up 100 basis points before we move materially and we said we didn't want to do that so this time. So for that first time, we're at about a 28% I'm going to say I'm looking at kind of where we're going.
From here is that we probably taught me talking something closer.
Two a.
Two a 20%.
Data.
On and let me get read my notes you just to make sure that I'm.
I'm, giving you the right information.
But again I think what we want to do is we wanted to make sure that we are were consistent with our with where where the market is going to be at that point.
Hold on here.
Alright so.
We're looking at on the interest bearing side, we're looking at something pretty consistent with that what we did in the first quarter. So all in I'm looking through the rest most of the hikes that we have for this year, we'd be at about a 30% beta on interest bearing 20% overall when I go back in and looked at what we did for <unk>.
<unk> 2016 and 2018.
It's pretty comparable to that so again, we'll see what the market does but that's what we've got in our current expectations right now.
Okay, Alright, and then this is I think your fifth or sixth consecutive quarter of having a zero provision.
Yeah the reserve.
So roughly 150 basis points.
Could it be years until we see.
You know a number in that provision line with like you still have your reserves. It seems like you could bleed down that percentage as you book loan growth. There just there to be much provision needed for for you know a ways out from this is that for I think about it.
You know what I would say is that if you look at our our disclosures in the 10-K s and the 10-Q s I think we've been pretty descriptive of what we're doing.
And what we're finding is that from our standpoint. The model is really a truly arent reflective of what we see out there and so from our analysis, you'll see that a significant part of the reserve need is based on overlays to those models. Yeah. This quarter, given some of the considerations and concerns about.
A a potential recession, even that sort of a discussion was really what was painting a what was going on in our minds. As we are as we finalized our allowance calculation you know I guess, what I'd say is you know when I look at at R. R.
Our projected loan growth that fill kind of quoted there I look at the credit quality that we've got and knock on wood it's.
Bill <unk>, our chief credit officer, keep saying it can't be any better but it continues to be really good and so as I look at at projected loan growth. If there's not a whole lot of changes in the environment that we're operating in you know I think that you know, having a provision at and no provision or minimal provision.
Is kind of probably where we'd be where I'd be thinking for the full year, but you know theres a lot of ifs and are out there, but again you know everything looks so good you know loan growth is you know it's at a high single digits. In my mind is an unreasonable I'm you know Phil was talking about 20% loan growth or something like.
That I, you know I'd be answering that question differently, but.
Basically looking at where our projections are the sort of asset quality, we have what we're seeing in the outlook from a projection standpoint.
Yeah.
It's going to all come down to what the model say in what what our analysis says at the end of each quarter, but where I sit right now it's hard as you said looking back for the last few quarters and not seeing a whole lot of provision yeah, it's kind of hard to figure that there'd be a much of a provision going forward through the next couple of quarters, all things being equal.
Okay, great. Thanks for the color.
Thank you our next questions come from the line of Abraham who in a wallet with Bank of America. Please proceed with your questions.
Yeah.
Hey, good afternoon.
I guess I just wanted to follow up on loan growth and just in terms of the outlook maybe Phil.
I guess, though when you think about the back half of the year. The concern obviously is fed hikes and whatnot.
Implications it caddy for customers in both businesses and consumers.
And their ability to absorb that just talk to us like new deals with your customers and what you're hearing from them.
What affect funds of 3% means is it enough to really hurt demand and potentially push the economy into a recession would love to hear your thoughts.
Yeah.
Ebrahim, we're not seeing a lot of impact at this point, we're doing a lot with our officers too.
Really sensitize them about the impact of inflation can have on businesses.
You know some of US older guys. We know we know what it's like.
Back when Volcker was doing his thing shutting things down, but most people I'd say most lenders in the financial services industry haven't been through a period of any meaningful inflation and so we're doing our job to help our people understand how to contact and ask questions and I understand the.
Pact that inflation could have on our business and for us to understand that.
That said, we haven't seen that impact at this point I think that are the most direct impact would probably be in the commercial real estate.
Just in terms of liability.
<unk>.
We haven't seen a big impact on that at this point.
But you know if you look at actual real rates I think are still pretty negative. So that's got a way to go.
Given inflation and other things too.
You know too.
Just to tightened things up and slow things down so right now not not seeing too much of it except as it relates to worry in the commercial real estate area.
Got it.
So one question for you Gary.
I'm, sorry, if I missed it but do you mind doesn't come they've got Alex that's what deposit growth from here, yes there.
Do you expect any outflows resonates move higher I know you talked about them.
Deposit beta of India taught buses there but.
What do you think about deposit growth.
Any perspective, you can chat and what do you think that revenue growth could look like given the rate assumptions that you outlined earlier.
Sure Yeah. We did if you look at our numbers you can we can see that commercial.
Commercial DDA is softer.
It's still growing but it's not growing at the pace that we've seen to me I think that's still a positive I'll say back in the you know the previous cycle, we really didn't see a whole lot of movement for the first 100 basis points.
I'm going to say that we're much more aware and much more sensitive to what's going on.
And certainly try to be as reactive as we can.
I think that that.
Deposits.
We're still projecting growth I don't think we would we'd be foolish to projected 20% growth year over year, Although I, probably said that last year and we still had 20%.
But I do think that our current projections based on what we're seeing with the growth that growth that we're getting from our new customers and the success that we've had with our expansion I still expect that we'll see some upside this year and I don't expect that it'll be you know are in the double digits, but I think that we've got a good opportunity to you know to be at least high single digit.
Deposit growth as we move forward.
And we're gonna be competitive on rates is as you've heard us say.
Got it and any sense on what spread revenue growth could look like.
I think we talked a little bit about you know in the quarter last year's quarter that you know in our COO.
E basis full year outgrowth, you know I think it would be you know in the the high you know.
Higher than the mid teens, but not 20% sort of range is kind of what I'm thinking given on our current assumptions with the rate hikes. Obviously the December hike doesn't do much for us at all.
But you know I think that's kind of what we're seeing right. Now obviously, we don't have and the only thing I guess I'd want to be sensitive to is that.
Let me make sure that Oh, no PPP was such a big piece of our of our financials. You know we did such a our team did such a great job and in getting those PPP loans booked and now forgiving, but now you know I think you know I think I'm pretty comfortable with that number you know would be something some at least.
On our current projections are her on betas.
It would be something north of the mid teens.
Does that help.
No that's very helpful and thanks for taking my questions.
Sure.
Thank you. Our next question is coming from the line of Jennifer demo with true Securities. Please proceed with your question.
Jennifer you out with the check are you on mute.
So I'll get off.
Yes.
I'm just wondering pops this about.
What do you think you are in terms of future branch expansion in Austin.
Right.
Do you think you could go back and do more in Houston, and Dallas Fort worth.
Move on to Austin.
Any thoughts there.
Jennifer I think will be.
We'll probably have a little bit left to do in Dallas, you know I'll follow on 24. So we'll do some of that and we could you know just like we had Houston 2.0, you know where we came back with about another third of the new locations for new new branches there.
We could see some expansion in Dallas you know three.
Three years from now I really believe this is gonna be an ongoing.
Yeah.
And ongoing.
Activity for us as we develop these markets like Houston Dallas.
I keep saying the thing that is so amazing about those two markets as each one of them is 50% <unk>.
Larger in deposits then either.
Date of Arizona, where the state of Colorado. So these are massive markets.
Just another thing it's I think it's interesting if you look at our farthest northwest location use them to our farther south east.
I think it's the same distances between San Antonio and Austin.
Yeah, that's that's a big city.
Obviously Austin has got some you know some opportunity there and I think that will.
We'll be looking at that over time, but you know Jennifer one thing that might seem like a little deal for you, but this is something I saw just.
Yesterday.
I am really excited about and this is a.
A branch location that we opened in San Antonio.
No. It was in its been a good growth market, there really hadn't been in.
For various reasons, so on the west side of San Antonio.
It's called Alamo rash.
And that branch opened around Thanksgiving.
So it's and it's been open about four months.
A lot of those months really bad months for banking in terms of opening up accounts.
But looking at those numbers.
And four months, we've got $17 million.
In deposits.
And we have 603, new relationships and four months. This is a market we've got it.
<unk>, 527% market share.
Uh huh.
Let me put that in perspective, I said, well tell me what was the best branch we had in Houston.
And we said well, it's gotta be Cinco ranch and Kt in terms of speed of.
Growth.
So I'll compare that to Cinco ranch and Cinco ranch after four months.
Had three and a half million dollars in deposits that compares to $17 million of San Antonio location.
It had 180 households.
Paired to 603 in San Antonio I mean, what that tells me.
Is that and you pick the right markets with the right brand recognition with our value proposition and our weight ways of engaging that market, we're going to be successful.
And look it's not because we hard you know Mr. Alamo rash in terms of who knew the market brought all the business is.
As I recall, the personally hard and run it as from Kansas City.
So Oh man this is really encouraging and I think it's instructive for us.
The value of putting properly placed properly managed new locations.
All around the state so.
You know I really believe this jennifer that.
The best two words, I can say about our organic growth strategy.
Is that it is durable.
And it's scalable I really believe that we're going to be doing this for a long time.
Thank you Phil that's helpful.
Well.
Thank you our next questions come from the line of Steven Alexopoulos with Jpmorgan. Please proceed with your questions.
Hi, everyone.
C C.
Jerry I was hoping you could help out with this so if we look at the yields that you called out on the taxable and tax exempt securities.
Is it.
Interest rates rise can you help us think about a securities beta if you will or how responsive should those be I'm, assuming it's probably three to five year part of the curve, we should be looking at for both of those probably a long run for the munis, but how responsive if you look at cash flows coming off do reinvestment rates how should.
We think about those resetting.
As interest rates move higher.
Well, let me help you a little bit.
With kind of what we're thinking about with the 5 billion that I said, we still have to purchase and Youre right. I mean right now what we're thinking is that about 70% of that is going to be in in treasuries.
And we're probably we're thinking that it would be five years and shorter is what we're doing and so that really only leaves you know another 15% and mortgage backs and another 15% in munis.
I guess, if you looked at the five year today, we're at a 288 I think we were this morning, I mean I'm trying to look here at what we've got rolling off.
I think that.
You know.
That's the kind of comparison I would make is more of the fact that because we're really increasing the portfolio from the standpoint of using our excess liquidity 2022 .
It's really not a significant year for our for our projected Muni calls are our maturities and so I don't I think mostly the what you will be doing is we'll be reinvesting primarily out of our excess liquidity, so and a lot of ways.
Whatever assumption you make on what we're investing is going to be a you know a pretty.
You can pick up now if I look at kind of some of the calls I'm trying to see if I got some of that information here with me.
For the first quarter, we really didn't have a whole lot of coming off I think we had just 300 million.
And you know most of those are tended to be munis, and I think that the blended rate. There was a $3 55 as I look at kind of what we're going to see through the rest of the year.
And I don't see any really.
So no significant maturities that I would feel that we would want to call out I mean, I think our current projections. For example, you know August and February are the big calls on our Muni portfolio and both of those are you know less than they are in the 200 to 300 200 to 300 million.
And each of those time periods. So you know from our maturities.
If you include prepayments and there again I mean, we're just not you know I'm looking at a 12 month forward. So I got a little bit of 'twenty, two and a little bit of 23 included here, but it is only $1 seven and that's combined both maturities and prepayments.
Yeah. So you know and a lot of ways I think a lot of it is gonna be a good upside that we're picking up are investing out of balances that are at the fed.
No I think if we put anything on it is going to be and especially in the near term, it's probably going to be if you are replacing a security it's going to be at a lower yield.
In today's environment.
Against we had what we've got on the books.
And then so if we look at all of the liquidity or sitting on today.
Ooh rates do they get to a certain point and you're like okay. Like we can go back to where we used to be in terms of cash to assets ratio, which was I guess about a third of where you are now or is there. Some reason that from a structural you'd need to hold more liquidity than in the past.
No I don't I don't think so.
And in some ways I would argue that we have more access.
You know the funding if we needed it that we've had and then we've had in the past so no I don't see any sort of structural reason you know that we'd want to invest where you're not what youll see us doing as we go through the rest of 'twenty, two and and you know what I would expect it through 'twenty three is a much more.
You know.
Averaging sort of dollar for dollar.
Cost averaging if you will purchases you know we're going to try to avoid making any significant purchases now if for some reason we saw something really unusual happened in the market might we jump in and do something we.
We might but I think right now what we're projecting is projecting that it's going to be Oh, we're expecting rates youre going to go up and so we're just going to continue to you know over the next year for the rest of the year, let's say for the next nine months, we're just going to make some ratable purchases each month I'm expecting that we're in.
Never going to be able to time the market exactly but if we kind of make a purchase.
Purchases during the remaining months, we're going to we're going to catch some good balances there and we may Miss one like we did in the case of the two year that we bought at 1%.
So we're just going to average it and I would expect that's what what we would do as we get into 2023, I mean, a lot of it is going to be dependent on what happens with deposits right. We've been really fortunate like I said you know when we look at the balances at the fed we're making a lot of investment purchases, but at the same time, you know that balance doesn't really.
Seem to move a lot. So we've been unfortunate there and obviously if that continues we might find ourselves in a position where we'd be willing to invest more but we're not looking to invest you know all our oh, our dry powder in 22, okay.
Okay.
And then.
Final one going back to Abrahams question on deposit growth loan to deposit ratio is fairly low but you have all these.
New markets and an issue that's really driving nice deposit growth should should we think the loan to deposit ratio could stay fairly stable at these levels or should we be thinking about loan growth is faster than deposit growth so that trends lower say through 2022 2023.
You know I think that Brian and I will let Phil give his thoughts on it. The challenge is that you know we've got such a big base of deposits and we've been so fortunate to be able to grow that base.
With the top quality service that our employees are providing the fair pricing that we're giving and so you know when deposits or more than more than twice the size of our loan book.
If they're growing at that you know even if they grew at 6% and the loans grew at the high single digits its going to be a while before we make a significant dent on that ratio and.
Where are we certainly love deposits, we love the relationships that come with them, we think that a lot of our success is based on our R&R core funding.
That's my thought so I'll turn it to Phil Yeah, I think that.
The math of it.
Is gonna be we're gonna have low loan to deposit ratio for some time, but I would also say that that's a high class problem.
And I think the more important thing is is the company growing right.
And so.
So I think it'll take a while to eat into that ratio. The only thing I'll say about growing deposits is.
No we have such a high level of transaction accounts because of our relational business model backed up.
Thank you, we're probably I don't know 60% maybe.
It was two thirds or transaction accounts. If you look at you know consumer checking accounts from commercial checking accounts.
You know that.
And any kind of normalization.
Interest rates, you know, let's say a 2% fed funds rate for example, I mean, the spread that you make on those deposits being in liquidity.
It's what you might make on you know some old LIBOR based loans I mean, it's nothing to sneeze at some point when when you're.
When your interest rates for movements, so I'm feeling very very comfortable about the fact that yeah, we're probably going to have a fairly low loan to deposit ratio.
Certainly lower than peer.
Sure.
Pretty good period of time.
Okay.
Thanks for taking my questions you.
You bet.
Yeah.
Thank you art.
Our next questions come from the line of Jon <unk> with RBC capital markets. Please proceed with your question. Thanks Good afternoon.
Hey, John .
Steve Alexopoulos as a smart guy so that was the question I had for you, but I do have a couple of others.
Phil you, usually give us some color on the competitive environment in terms of loans that you passed on due.
Due to structure and pricing could you just give us a 30000 foot view on what the environment's like.
Yeah.
I think the environment is.
It gets a little bit worse every quarter.
I think that it's it continues to show up.
In.
Commercial real estate, where people are.
Struggling to underwrite in a market where prices are increasing so fast.
And were.
You know most of US have these sensitize analyses that okay, well will your project cash flow.
X percent based upon our you know X percent interest rate you know those are harder to to justify their harder to underwrite.
You know its hard to underwrite well how much.
How much rent growth are you willing to underwrite into deals okay.
As an important factor when prices are going up like they are.
Ah I think people are asking for longer terms.
And Oh at the front end and they're looking for.
You know ways to extend with really out with really not much.
Required of them.
And you know that's a.
I mean, I'm not telling you anything you don't know I mean, all of this stuff is just what's out there in the marketplace I think some people are.
We're seeing maybe a little bit of a trend of people underwriting to a debt yield.
And whereas you might have underwritten to a 10% debt yield maybe they're backing off that number and maybe you'd see an 8% number I think there's just.
Creativity being utilized by underwriters in the market too.
So you know justify and bring deals across a lot.
I'm sure that's not exhaustive, but it's just an example of some of the things we're saying.
Okay got it.
A question on your mortgage expectations I'm just.
And a couple of quarters ago, you talked about it and it just seemed like more of a rifle shot approach, but I was just thinking of your Alamo Ranch example, in some of the consumer.
Checking account growth that youre seeing any change in the expectations, there and kind of what are your expectations for the mortgage contribution.
You know I think you make an excellent point John I mean, its one of the things we were talking about I mean.
Just take that example, I think our loans, they're like I don't know a million and a half which is not bad.
Four months, but.
And you look at what is in this case it is a more consumer oriented more of a house top.
Location, whereas we typically tend to go to a more.
Where you've got a lot more.
Concentration businesses since that's you know more wheelhouse.
But I think.
That.
The addition of the mortgage product into our product mix into some of these markets like this one here.
And there are tons of these I think around the state it makes it more viable from a generation of assets.
Assets and.
So I think it helps us net add in terms of the viability of locations. There that we can go into and remember we're not a we're not.
Approaching this as a refinance strategy on mortgages, we are looking to do deals where you're no there.
Their purchase money mortgages.
Where we can provide to provide great service and help customers with significant financial transaction in their lives. So.
We're going to have to see we're not gonna be offering our first one until you know later this year like you know I'd say fourth quarter sometime but I'm really optimistic on the quality experience that we're gonna give and.
And how successful we're gonna be with that asset class over time, and I just can't wait to get after this this market. So in a prudent way of course, but to get after this market with that customer experience I think it's going to be great.
Yeah Okay.
I think through that is.
It's maybe one solution to your loan to deposit question, if you'd portfolio. Some of this and you've seen some peer banks do that as well, but clearly yeah.
That's a fair point.
It is our plan currently that we would portfolio those mortgages.
Okay. Okay, just just last one non quantitative but how do you think the frostban resident resonates with new residents.
This.
Is this market share you're taking from other banks in Texas from existing people or do you feel like the brand resonates with somebody you know you hear about people moving from California to Texas as it is is that part of this growth as well. Thanks.
Yep.
You know I can't tell you that I have.
Definitive information on.
You know what.
But our penetration is for.
Californians are.
People from Illinois or in Texas.
Here's what I think though.
Our growth numbers have been so good the sale of the consumer side.
But I think that is.
I think that it is pretty we're having good success I mean, the way most people shop.
Our.
Research says you know youre going to go.
Go into a market.
I would just stay with your own look at your own Oh back, but you're going to still look to see where the nearest branch location is that.
Our research shows that still the number one.
Factor someone considers.
And then you're gonna look online at what kind of.
You know reputation in those kind of things and Youre going to look at you go do your research.
And if you do that I mean, our numbers, we're just going to be in the game you know in fact, obviously with our customer service numbers I think that.
You know, we'll be ahead of the pack.
Most of the time so.
And there is so much in migration into these cities and our growth is good but it just tells me that I think we are.
Sure.
What we're doing resonates with a fair number of people that are moving out.
And you know the thing is were of a size. We don't have to get everyone. We just got to get you know.
Our share of plus on that and we'll do really well.
Yeah.
Yeah, Okay. Thanks, guys I appreciate it.
Sure.
Yeah.
Thank you we ask that you please limit yourself to one question and reenter the queue. So that we have time to take questions from all of the remaining participants.
Our next questions come from the line of Bill <unk> with Wolfe Research. Please proceed with your question.
Thank you good luck.
Phil Phil and Jerry.
Just wanted to follow up on some of your comments around the deposit franchise and the strength of the deposit base and in particular, some have raised the concept of surge deposits and the possibility that there could be some outflow as the fed starts to drain liquidity from the system. It sounds like you think your deposits are sticky.
And that's not something that you're worried about but perhaps if you could just frame. How you think about that and lastly, if I could squeeze in you mentioned that consensus EPS looks low, but I was hoping you could perhaps share your thoughts on what you think about consensus net interest income growth.
So does that also looked like it's perhaps a bit light I would appreciate your thoughts. Thank you.
Thank you well I'll, just say that you know with regard to deposits and what the levels are I mean.
I think what you're hearing us.
And what are you hearing Jerry say is it working.
We're careful and conservative we expect these growth rates are going to slow alright, we've been growing at 20% for gosh I think the last two years and we think they'll slow.
Do I do we do we still see augmentation in our deposit balances as opposed to new COO.
Customers, who have probably what is the jury about augmentations 68, 68%. So see you know call. It two thirds of our growth is augmentation right now at least for the last quarter third from new customers.
We could see some drop and if we see diminishment of account balances we could see some drop on that but my gut tells me and we saw this back in 99 whenever the fed.
Reacted to the tech bubble and push rates down too low.
You know you can see the pot deposits flatten, but but I think once they do they probably reach of what I'll call it dynamic equilibrium where.
You've got maybe deposit balance.
For current customers diminishing, but youre still bringing on that account growth that we're.
Showing in what we're reporting on them you've got these expansion. So I tend to think it would be more of a flattening then.
Then an absolute reduction of surge deposits as you call but.
You know our hope is not a plan and I'll tell you that one part of the reason we have that $13 billion of liquidity. There is because you provide for those kinds of eventualities.
So.
We are prepare regardless of which way it goes I'll, let jerry speak to the margin.
Yeah, I think the number that I see out there is it a b is sharing with me.
Is that still.
Billion.
One <unk>.
50, 149, something like that is is kind of where where it looks like consensus is that in and I. You know I'll go back to and I would I don't know, whether that's a T E number or not I will say that if it's a T E number.
And so I gave was one would infer a higher number than that one is concern.
If I look at.
I'm trying to see if ive got the non T E number yeah.
If it's a non T E number.
Say that yeah, I mean, it's it's in the ballpark a little Oh, what I would say, maybe a little shy of where we're at.
But again I'm I'm, just I'm going off a billion $1 49 number you know our projections both on a T E basis, obviously on a <unk> basis much higher than that on a non <unk> basis.
Still higher but with certainly within the range.
Super helpful. Thank you for taking my question.
Sure.
Thank you. Our next question comes from the line of Dave Rochester with Compass point. Please proceed with your question.
Hey, good afternoon, guys just back on the NII discussion.
Appreciated the update there and in your thought that you just talked about in terms of what you're seeing versus consensus I guess when I take a step back and you talk about maybe things should be a little bit stronger than your prior guide which is mid teen.
Back in January you guys were only factoring in 25 basis point hike in May July and December and now we're talking 50 and 50 in Q2 alone. It just seems like the updated guide.
Conservative, especially just given the the message on deposit betas, as well, which I think improved from your prior thoughts in January .
As well, but it just seems like is it a case of maybe you're you're factoring in a little conservative as men here or.
It feels like 20% plus might be more in the ballpark of.
What's your Youre looking at.
Any updated thoughts there yeah.
Yeah, I think that you know part of that discussion is going to be the the betas that come in especially on the hikes I'm you know after this this.
Hopefully this may high I think that's some of it I think also the assumption you know what what gets assumed on investment purchases going forward right and the timing of those and I think a lot of it's just going to be dependent on timing and what assumptions you make on on the rates that will be we'll be purchasing at on the investment securities.
Is that going to be a big part of the driver here.
We're probably a little conservative on deposit betas as well on what we want to ensure that.
We do what we say, we're going to do which is.
Make sure that we are competitive in the marketplace against all the peers.
Not just the too big to fail.
So I think there is probably some of that as well.
Yeah, Theres going to be you know there'll be some pressure on loan pricing as well I mean, we did see a drop on a linked quarter as well. So we'll feel some of that as well, but no I mean, I think I've given you about all the color that I can give you and I think a lot of it is just going to be dependent on your assumptions.
Okay, I appreciate that and <unk> 5 billion in Securities purchases you were talking about that purchase is not growth right. So you are expecting maybe another three or 4 billion in securities growth for the rest of the year is that fair.
Yeah that'd be fair.
Okay.
That's just that $5 billion just purchases.
Gotcha, Alright, maybe I can just sneak in one more was just curious to you.
You guys gave some pretty positive a color on the percentage of your goals that you're achieving in Houston and Dallas is just curious.
Houston had been around for a while now.
Update us on what the loan to deposit balances look like in terms of dollars that'd be great. Thank you guys.
Yeah.
Yeah.
Yeah.
Thank you.
Yeah.
Yeah.
And one thing I'll say about Dallas that even though it's early.
You know it's running about.
Two thirds.
Commercial on the deposit side, one third consumer so I think it's it's uncanny how the character of the business that we're generating and and the Dallas market is consistent with Houston.
Yeah.
Yeah.
Yeah. So looking at the loan to deposit ratio you were asking for the expansion that's running about a 71% right now.
Well in terms of the dollar amounts of loans and deposits do you have in Houston.
Right.
I'm just the expansion branches is all is all I'm sharing with you.
What we've been able to accomplish there is that what you were asking.
Well I was just curious how much in the way of loans and deposits you Havent used sure sure sure. Yeah. So we had we had.
Deposits of 725 million.
Call it an allowance of a little bit shy of $5 15.
Alright, great. Thanks, guys.
Sure.
Thank you. Our next question will come from the line of Peter Winter with Wedbush Securities. Please proceed with your question.
Thanks.
I hate to beat this to a dead horse just net interest income if I could try it one more time.
Jerry the guidance that you gave.
North of mid teens is that on a reported basis off 2020 or does that exclude P. P. P income.
That's a so so the guidance that I'm, giving is T. E. Net interest income full year 'twenty two just reported over a full year 'twenty, one and Youre right 21 does include a P. P. P. P P quite a bit more PPP then we've got so I'm, saying that we'd have a little bit.
North of mid teen growth is what we're projecting currently over the reported 2021.
On a reported basis got it yes, okay.
That's helpful and then.
Overdraft and NSF fees.
Has become a hot topic for the banks and you've seen a number of banks.
I'm just curious what your thoughts are on an overdraft NSF fees and how much that is on a quarterly basis for you guys.
Sure you know the.
Things that we're talking about now.
As you know we implemented I think Phil May have mentioned it in his comments overdraft Grace.
In April I think it was of last year.
Which basically allows customers that have at least a $500 and direct deposit to be able to incur a $100 overdraft.
With no fee.
The current conversation that we're having is that we would expand that to.
To include all customers all consumer customers. So even if you didn't have the direct deposit and and that probably cost us about a $2 million a year when we pulled that trigger which will be sometime later this year.
Great. Thanks Chuck.
Peter as you know, we've we continue to them.
Monitor that program and just as we've been doing it for years.
The other thing that's becoming mainstream as is our elimination of what's called NSF.
Fees and.
Yeah.
In the middle of working towards that it's just it's just the systems programming issue that you've got it.
Got to put in place.
But just to have that done in the next few months.
I'd have to give me an idea, yes, that's probably somewhere around 350 to 400000 a quarter.
Okay. Thank you, but all of those are considered in my guidance.
Thank you there are no further questions at this time I'd like to turn the call back over to management for any closing comments.
Alright, well, we thank you for the questions today and for everybody's interest and.
It will be a journey now thank you.
Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect your lines at this time.
Enjoy the rest of your day.