Q2 2022 Cullen/Frost Bankers Inc Earnings Call
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Ladies and gentlemen, thank you for standing by while we will be starting shortly once again, ladies and gentlemen, we thank you for standing by and we will be starting shortly.
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Greetings and welcome to the Cullen Frost Bankers, Inc. Second quarter earnings Conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
Yeah.
I will now turn the conference over to your host director of Investor Relations a b Mendez. Thank you you may begin.
Thanks, Alex 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 the remarks made today will constitute forward looking statements as defined in the private Securities Litigation Reform Act of 1995 as amended.
Intend to 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 mornings 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 2102205234.
At this time I'll turn the call over to Phil.
Thanks Sandy.
Good afternoon, everybody and thanks for joining us today.
I'll review the second quarter results for calling for Austin, Our Chief Financial Officer, Jerry Salinas will provide additional comments and then we'll open it up to your questions.
Second quarter, calling for all its turned $117 $4 million or $1 81, a share compared with earnings of $116 4 million.
$1 80, a share reported in the same quarter last year and $97 $4 million $4 50, a share in the first quarter of this year.
Our return on average assets and average common equity in the second quarter was 492% and 13.88% respectively.
These results and our overall gross show that our company is well positioned to succeed in what's been an unusual any and evolving.
And environment.
Our loan growth was strong average loans, excluding PPP in second quarter were $16 $5 billion.
Or a 13.2% higher than the average loans of 14, one $6 billion in the second quarter of 2021.
It was good to see our growth exceeded our typical goal of high single digit increases.
In the second quarter, we booked 28% more loan commitments in the same period last year, all segments were strong with C&I up 25% CRE up 37% and consumer up 31%.
In addition, we saw new loan opportunities continue to increase.
They increased 10% from a year ago.
And increased at an annualized 9% on a linked quarter basis. So the overall flow.
Is good.
Looking at our weighted 90 day pipeline.
It was up 9% from a year ago.
On a linked quarter basis, its fairly flat down 2% as increases in commercial and consumer segments offset a reduction in the near term pipeline for commercial real estate.
Average deposits in the second quarter were $44 7 billion, an increase of 16, 9% compared with the second quarter of last year.
And as much as we focus on long growth, we were very pleased with our growth in deposits.
Because it's through deposits.
We build long term relationships as we offer attractive value propositions that customers can trust.
Growth in our consumer business continues to be strong.
Our net addition of 7242 consumer households in the second quarter was an all time high for US and represented an 8% increase from the same period a year ago.
Consumer loan growth was also strong.
On a linked quarter annualized basis.
Average consumer loans grew by 26%.
Led by increases in consumer real estate.
Our success here was driven by our HELOC.
Home equity and home improvement products.
Also our pipeline for these loans continues at record levels.
Now regarding our expansion efforts.
In Houston.
We see the momentum continuing.
As newly opened branches mature.
At the end of the second quarter, we stood at 109% of deposit goal.
122% of New household go.
And 185% of our logo.
Our Dallas expansion is admittedly in its very early innings.
However, I'm encourage that the preliminary results are similar to our Houston success.
It was 165% of deposit go.
220% of long ago.
And 235% of new household goal.
We're making excellent progress towards launching our mortgage product.
And we expect to begin a pilot program toward the end of this year.
As you know we are designing the entire process from start to finish to originate and service mortgage loans.
Keeping with the great Frost customer experience.
Despite uncertainty about the broader economy, we have seen no signs of increasing loan delinquency.
Our overall credit quality remains good.
The June 30 total for delinquencies excluding P. P. P was 61 4 million or 37 basis points of total loans.
Total problem loans, which we define as risk grade 10 and higher.
Total $429 million at the end of the second quarter and that was down from $447 million at the end of the previous quarter.
Once again, we did not report a credit loss expense in the second quarter.
Net charge offs for the second quarter were $2 $8 million compared with $6 3 million in the first quarter.
Annualized net charge offs for the second quarter were seven basis points of average loans and below our typical long term level.
Nonaccrual loans were $35 1 million at the end of the second quarter, a decrease from $49 million at the end of the first quarter.
I was glad to see the great work of our energy team rationalizing our concentration and our energy portfolio.
Energy loans represented five 9% of loans at the end of the second quarter and I'm happy to declare that we've reached mid single digits.
Finally, after more than two years of working with over 32000, PPP borrowers, we've helped better than 98% of them are forgiveness.
Our teams worked on the last few hundred PPP borrowers, who haven't yet begun the process and we're committed to helping every one of them get across the finish line.
Couldn't be more proud of our team and the efforts that they made in helping our customers in the business.
You May remember that I've described our efforts in this area is historic and heroic and while I hope we don't ever encounter another historic challenge like that anytime soon.
I mentioned earlier, we've got strategies and systems in place to allow us to succeed in all economic environments.
And I should point out the cross employees do here real needs every day.
I continue to hear from customers, who get help from our bankers and sorting out there for now and answers after a spouse passed away here.
Who got financial planning that enable their kids to go to college, who simply just had a pleasant interaction with a banker, while they were having and otherwise a lousy day.
Whereas those interactions are just doing our jobs in accordance with Frost philosophy to our customers those are heroic acts.
Like to thank our people being a force for good in People's everyday lives.
Now I'll 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 2.56% up 23 basis points from the 2.33% reported last quarter.
Yields on both loans and balances held at the fed had the largest positive impact on our net interest margin percentage increase was also positively impacted to a lesser extent by higher volumes of investment securities and loans and lower relative percentage of earning assets invested in balances at the fed as compared to the prior quarter.
These positive impacts were partially offset by higher deposit costs.
Looking at our investment portfolio. The total investment portfolio averaged $18 1 billion during the second quarter up $964 million from the first quarter average as we continue to deploy some of our excess liquidity during the quarter.
We made investment purchases during the quarter of approximately $1 8 billion, which included about 1 billion in treasuries, yielding about 3% 400 million in agency MBS securities with a yield of about 4% and about 400 million in municipal securities with a taxable equivalent yield of about four points.
7%.
Our current expectation is that we would invest an additional $3 2 billion of our excess liquidity into investment purchases through the remainder of the year.
The taxable equivalent yield on the total investment portfolio was 2.87% in the second quarter down one basis point from the first quarter.
The taxable portfolio, which averaged $10 3 billion up $1 3 billion from the prior quarter at a yield of 2.04% up 14 basis points from the first quarter, our tax exempt municipal portfolio averaged about seven 8 billion during the second quarter down about $363 million from the first quarter and.
Had a taxable yields.
4.04% up one basis point from the prior quarter.
At the end of the second quarter, 76% of the municipal portfolio was pre refunded or psf insured.
The duration of the investment portfolio at the end of the second quarter was five six years up from $5. Two years at the end of the first quarter, primarily related to the extended duration on lower coupon mortgage backed securities looking.
Looking at loans average loans for the quarter were $16 7 billion up 288 million from the first quarter or one 8%, excluding the impact of PPP loans. The average growth from the prior quarter would have been $446 million or two 8%.
The taxable equivalent loan yield for the second quarter was 4.04% up 30 basis points from the previous quarter.
Looking at deposits on a linked quarter basis average deposits were up $1 8 billion or four 1%.
Public fund balances, which can be seasonal had a negative effect on the linked quarter growth as those average balances were down $400 million. The linked quarter growth has come primarily from growth in average interest bearing deposits, which were up $1 4 billion or five 5%.
The cost of interest bearing deposits for the quarter was 22 basis points up 14 basis points from the first quarter.
Regarding regarding total noninterest expenses, we continue to expect total noninterest expense for the full year 2022 to increase at a percentage rate in the low double digits over 2021 reported levels, increasing our minimum wage to $20 per hour in December of last year combined with continued market salary.
Pressures, our expansion efforts in Dallas, and Houston and expenses associated with the rollout of our announced residential mortgage products are the primary drivers of the growth in noninterest expense.
The effective tax rate for the second quarter was 14, 8% and our current expectation is our full year effective tax rate should be in the range of about 13% to 14%, but that can be affected by discrete items during the year.
Regarding the estimates for full year 2022 earnings our current projections include a 50 basis point fed rate increase in September.
Rose by 25 basis point increase in November .
With those rate assumptions. We currently believe that the current mean of analyst estimates of $7 85 for 2022 is low with that I'll now turn the call back over to Phil for questions. Okay. Jerry. Thanks, So much we'll open the call up for questions now.
Thank you.
At this time, we will be conducting a question and answer session.
You'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line you have a question for you.
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Our first question comes from the line of Steven Alexopoulos with Jpmorgan. Please proceed with your question.
Hi, everybody.
So you may see.
I wanted to start so given such a low loan to deposit ratio and plenty of liquidity to fund loan growth.
The thought behind driving such strong growth in interest bearing deposits in the quarter or were these primarily just coming from new markets.
Stephen It's <unk>.
As much as anything it's just there.
Cultural decision and and it's one that's based on experience to me.
We've.
A big part of our value proposition really I mean, it rests on three things you know that everyone's significantly frost.
That would give a square deal that'll give you excellence at a fair price and where it's safe sound place to do business for employees and customers.
As corny as it sounds, we're just giving our customers a square deal and as we've seen interest rates move up.
Hum.
It just makes sense for us to.
To recognize that if we're going to have a value proposition that customers can trust like I mentioned earlier in my comments and we saw this happen you know back in 2017, when we saw the fed raise rates 100 basis points back then we were focused on the too big to fail pricing, because that's who we compete with.
Anybody else.
It moved at all and you know we just we just got behind and we started to see some movement in deposits at that time and you know interestingly that was kind of when we sort of cracked the code on more consistent core loan growth.
And it just wasn't the right time number one just for our balance sheet to show that the other thing is I just really felt like we were losing trust for the industry was loose some trust when they just sat there.
And people read that interest rates are going up all the time, so I'm not saying we couldn't.
Have a lower rate.
Oh and get away with it if you will just not the way to do business and so it's really just focusing on being a fair.
Fair with customers and you know, we just feel like the value of those deposits are.
Our continuing to increase and certainly the relationships are going to make your money on a long term basis Gerry any thoughts there on your pricing no I think you've got it Phil I mean, that's that's exactly what we're doing I think you're right. If we don't have to increase and I'll put that in air quotes, but I think we certainly believe it's the right thing from a culture standpoint to be increasing these deposits and as Phil said in 2000.
17, we were a little slow and raising rates, we kind of fell behind and certainly felt like by mid July when the fed raise rates 100 basis points that we were behind and actually we're starting to see some of our deposits, leaving the banking and as we all know it's a lot more expensive to bring the new deposits on so we just felt like this time will be a little bit more.
Ratable as we move along as rates increase.
Got you know Steven the thing is to say I.
I mean look.
You can read the newspaper in both and we can believe we know what's happening because that's what everyone's saying, but we don't know where rates are going we don't know where it's inflation said it you know what it's been doing truth be told me probably don't either but.
But.
If we just turned our business do it the right way as we go along we're not gonna have to go into any big dislocations like we did in 2017. When we you know that was a pretty tough for our shareholders for us to have a choke all that down and one time and we just you know it's all about just.
And disciplined as we move along.
It's interesting because many peers are allowing deposits run off this quarter.
And their loan to deposit ratios are going up fairly materially so here, you're holding it pretty steady. So if we follow that strategy forward, how should we think about deposit betas through the cycle versus where you were the last time rates moving higher.
David I think what we said last quarter and I would say the same thing today going back to the last cycle say 16 through 18, our betas were about a 30% on interest bearing and say, 20% on total and that's sort of what we're assuming right now for full year 2022.
We've got that same sort of beta we don't have that today, given the increases were a little bit lighter than that but in our projections. That's why we felt that.
Okay. Thanks, and then final question.
It's good to hear the new markets continue to trend well above goal, particularly for loans in new households in Dallas was the goal too low.
That is why you're coming in so far ahead of the goal.
Yeah, well when we started the program and we are.
Sure.
Can we talk to our board about it and talk to each other about it I mean, our goal was based upon what we had achieved for the 40 locations that we had opened prior to starting that strategy went back 88 eight years excuse me eight years.
And we said look this is what we've done on average and we said if we can do that you know that strategy was.
Successful and we said if we can do that that will be successful. It will result in a great return for our shareholders. So we've set that up as sort of.
That's what we want to do it.
And I kind of wanted to keep it the same as we are.
As we moved into Dallas, because I think it kind of gears.
Our contacts for the performance in those in those markets and so.
You know it could we could.
Could we use a different number yeah, we could but we know what this one means we know where it came from.
And we're going to we're going to go there I will say soon.
Yeah.
Honestly I don't think there's any reason why dallas shouldn't be better than Houston in terms of its success because the you know as you know.
Two thirds to 70% of this business and these profile and.
The business in the pro forma is commercial business.
You know Dallas has as good a commercial market that is really well diversified and full of middle market and small business with.
With a little bit less energy cost.
<unk> S Houston and its greatest Houston is I think the Denver, the business demographics around Dallas could be even better.
Hmm.
Okay I appreciate all the color. Thanks.
Thank you.
Our next question comes from the line of Michael Rose with Raymond James. Please proceed with your question.
Hey, good afternoon, and thanks for taking my questions just wanted to touch on expenses I think if I'm doing the math right. If I annualize the first half of the year it looks like you're growing at about 10%. So it would imply a deceleration in the back half of the year.
Understanding that a lot of expenses.
To Dallas have been occurred and obviously wage inflation and stuff like that but is that kind of the right way to think about is that the expense growth should kind of slow as they move into the back half of the year.
You know I think Thats right I think a lot of the dollars that we put in our are built into the base, but you know we.
Moved our increases for most of the organization to May so really even in the second quarter. You don't have the full effect of all of our increases.
So you know I think that for us the fourth quarter is typically the highest yet and it's unusually high given we.
We pay a lot of our incentives in that quarter and so there's a lot of true up that's going on obviously the volumes that where we're seeing this year had been pretty strong and so I would envision that you know as we go through the year, we're continuing to increase those incentives. So I think that if if I were you I would stick with my full year guidance and then just kind of take the next few quarter.
Orders, but.
Really don't wanted to slice of cheese Tuesday, and it all just kind of stick to that full year guidance. It says just look at 'twenty, one and grow that you know on a on a low double digit growth and I think you'll you'll kind of be kind of what we're projecting currently based on what we're seeing.
Okay.
Helpful. And then maybe just as a follow up.
I think at the outset, you mentioned that the pipelines are down.
About 2% sequentially.
Sequentially.
And it looks like the period end X P. P growth slowed a little bit this quarter versus versus last quarter.
Any rationale for that is is it a function of paydowns as the customers.
Little less active combination of both and I think you had previously talked about kind of a high single digit ex PPP average growth for the year is that still.
In the realm of expectations. Thanks.
Yeah.
Well you know I don't I don't.
We don't want to read too much into the weighted pipeline number you know that was fairly flat down 2% because if you look at the C&I piece of that.
And this is on a non annualized basis. It was up 4% on a linked quarter basis right. So you know if we multiply it times, 4% to 16%. So I don't know if you want to do that or not but I mean, it's this positive the consumer.
Weighted pipeline is up on non annualized 62% and it was really the fact that it was commercial real estate that was down a non annualized 13%.
So you.
And we closed so many commitments you know we were.
Hum.
Our our commitments were up 27% on a linked quarter basis non annualized.
You know I mean, that's.
That's that's putting a lot through the pipeline and so if it if it goes down you know some works a little weaker and really it's mainly in the commercial real estate.
I'd like to believe it's more because we're reloading on that and as I look at the.
Opportunities you know that I'll talk about I.
I think I talked about them.
They're up like.
9%, that's that's an annualized on a linked quarter basis were up 10% on a year over year. It tells me that we're still on a gross basis seeing deals and we're seeing seeing growth in that so we're going to keep our eye on it but.
You know the tone that again, Michael from our officers as that itself is still good and we're still seeing lots of opportunity.
You know youre seeing some.
Some.
I'd say.
Uh huh.
I want to be careful the words I used you know you look at REIT real estate, particularly some kinds of real estate with the higher rates and.
And uncertainty in some areas you can see still.
Still good deal flow, but some beginning to slow some and I'd say you know obviously office for sure.
Maybe a little bit of industrial on the investor side.
I think single family housing is it's not us it's not slowing really much but its I think we expect it to I think our borrowers expect it too, but they're also saying thats probably good because they can really not keep up with the pace. Today that you are still seeing really good growth in multifamily for really good.
Cannot make reasons you are seeing really good growth in retail.
You know just for example, you've seen some good growth in owner occupied so.
The tone is still good but.
You know the other thing I'll say is you know things would change in fed to try to slow things down and.
And I think in Texas that we are a.
You know, we're a little different in terms of the activity. We're seeing in terms of in migration with individuals and businesses. So I'd like to believe we can be a little bit more.
You know a little bit better than the general economy.
But.
Anyway, I've rambled too much on that but that's kind of what we're seeing.
Alright, I appreciate all the color. Thanks.
Our next question comes from the line of Ebrahim <unk> with Bank of America. Please proceed with your question.
Hey, good afternoon.
Hey, Ebrahim.
Hey, just first question maybe around Covid.
It means obviously.
And it's not an issue, but just wanted to get a sense of how far down do you think the loan losses. Those can go before you begin provisioning and just give us a perspective of where.
They're using the steady state to this elevation looks like if we start seeing some signs of.
A slowdown or even a potential recession over the next year.
Well, what I'd say is that and we had this last quarter. We have it again this quarter and there should be quite a bit of color in the in the 10-Q, but you are part of our assumption you know as were working our seasonal model is the probability of a recession and so included in our overlays are is an assumption.
30% assumption that there might be a recession and so we stress our portfolio Accordingly, and thats kind of what are you know we're at a $1 44, a reserve coverage right now, which I think is pretty strong and when you look at that that discussion in the 10-Q, I think youll see kind of what we're alluding to as Phil mentioned, there's a lot of.
Nuances going on in the economy right now a lot of uncertainty, but really what's happening in our cases, giving some sort of a probability to a recession.
You know I don't I don't foresee that we bring our reserve coverage all things being equal then credit quality being great I don't see the reserve ending at 1%.
But I think for now we certainly feel extremely comfortable with.
With where we're at from a reserve level.
Should the economy and all of a sudden we get through this and feel like things are improved continuing to prove I could see that that reserve coverage.
Coverage continue to continuing to decrease.
But it gives just a separate question JD I wanted to one confirm $3 2 billion dollar number for securities was a net number.
Two girls and just talk to US means that then your yield is now at 69.
Who knows how much further the fed has to go talk to us on the other side of this if we do get into a period of fed rate cuts next year. How are you thinking about protecting the margin.
Yeah, what I'll say for now is that.
We're looking at and it's something that we visit about all the time right and right now, we're staying pretty consistent or purchases. We've said would be 70% treasuries and 15% are municipals and and MBS securities and we've been pretty consistent with that we've moved around a little bit we might accelerate things.
But it's something that we're continually talk continually talking about it.
What we're doing is really buying in the three to five year, that's really what we're looking for.
Where we saw the most value and where we made the bulk of our purchases.
We'll continue to have those conversations and we will look at risk and reward and see what makes sense. If we think that it makes sense to add duration. If we think that rates might go down and we want to protect some of that we could we could do that obviously, we still have plenty of liquidity I think this morning, we were close to 13 billion still even after.
All of the purchases that we've made so.
So we'll just it's something that we continually visit with and.
I think that we've been pretty transparent and we're continuing to look at derivative products. We haven't done anything yet, we'll look and see if something makes sense for us we've done in the past, but at this point, we haven't put our toe in the water and we'll just continue to do that I will say that you know given the conversation earlier on deposit rates you know our deposit rates are much.
Higher than most right and so in an environment, where you see rates going down.
We've proven that we can bring rates down as well right. We've been through a throw a long rate cycle, you've followed our performance through a pretty low long period of zero interest rates. So we've proven we can take our rates down and.
You don't give them through the our value proposition to our customers. You know, we really havent lost deposits during that sort of time period. So we do have that as well, which you know some of our peers would not have if theyre not raising rates.
That's fair thank you.
Our next question comes from the line of Brady Gailey with <unk>. Please proceed with your question.
Thank you good afternoon.
Hey, Brady.
So if you look at cash to average earning assets.
<unk> finished the quarter at about 27%.
Yeah, you put another $3 2 billion of cash and the bonds. It feels like by the end of the year it could be closer to 20 or so percent.
Longer term, where would you like to run cash assets does that get down to 5%.
Or is that too low you look longer term what level of cash would you like.
On the balance sheet.
I'm looking to fill and I'm kind of laughing because every time, our our balances at the fed decreased from 13 billion to $12 five or something he's calling me and asking me whats going on.
In all seriousness, you've followed us for a while we've been intended to be a more conservative our levels of cash, which we've been all over the board and obviously, we feel very comfortable and confident and alternative sources that we would have available to us I think that you know off the cuff. If you said, 5% feels kind of low to us right now.
But so I would say something in that five to 10 is where we think about it and.
Just see where we go from there.
Okay, and then I know last quarter, we talked about.
Spread income ex PPP potentially growing up on a high teens basis, but I mean after you look at the increase in margin and spread income that you guys enjoyed in the second quarter.
It feels like that.
That's too low.
Easily percent Boston any refresh on how you're thinking about <unk> year over year.
Yes, I guess I would what I would say is yeah. You know the environment today is no different than where we were you know.
Quarter ago, I think our assumption at that point the rates that we have in there now given the rate hikes that we've seen in June and July .
Our assumption I think rates are ended up the year higher 125 basis points. So, yes, certainly given what given that sort of an environment Yeah I E.
Mid teens sort of growth and in that in net interest income as it would be would be too low.
Yeah.
And just finally on deposit balances.
We've seen a lot of deposits a lot of deposits shrink this quarter for some of your peers, but you all saw some nice growth I know you increased deposit rates, but do you think that you'll see any sort of deposit outflows.
The next year or so or are you guys, you know really hoping to keep growing the core deposit base.
I hope it keeps growing I mean, that's really what we've been focused on and I was.
Just thinking about the question that Oh.
Jerry answered and got asked about.
Interest rates and protection against interest rates I mean.
And I think we've done a pretty decent job over time of.
Of coming up with ways to manage that.
But we really don't want to be defined by that you know, what we're more and more defining ourselves as a company that is focused on growth.
And if we're accessing great markets and we are.
Where we're making the investments to grow in those markets and.
We get any kind of rates at all.
No.
It could cut rates, but maybe they send them to zero, maybe not but.
You know, we think that our job is pretty clear it just to continue to grow the business that means growing deposits, which is really where the value of anybody from franchise is growing asset classes.
The opportunity to do that and with products. We've got we've got the new mortgage product that we're gonna be bring it out at the end of the year.
You know the direction of rates are important but as Jerry said, we've got some flexibility because we have been diligent in moving rates, along with movements up and but but.
I've just tend to think that the more important thing for us to be focused on is can we continue to show this organic growth.
Accessing these markets and proven that we can we can take share.
Yes that makes sense thanks, guys.
Thank you.
Our next question comes from the line of Dave Rochester with Compass point. Please proceed with your question.
Hey, good afternoon guys.
Hello.
Just wanted to go back to the NII Guide.
Are you guys thinking high teens, now or possibly low twenty's in terms of growth year over year.
Yes, I would definitely be in the 22 I wouldn't guide you more to the 20th the.
Hi.
Okay, Perfect and then do you happen to have the spot rate for interest bearing deposit cost at quarter end.
You know I don't have it on me right now I think <unk> also will have him reach out to Dave with that number I don't have it on us.
That's totally fine I appreciate that and then just a clarifying point the $3 2 billion in securities purchases do you have for the rest of the year.
That's gross purchases right so growth would be somewhere $2 billion $2 5 billion. If you haven't had the maturities for the back half that'd be great, but absolutely probably got yes.
We've probably got another 700 700 million that would that would be flowing back to us so that number's growth yeah, you're somewhere in the in the two and a half range.
And then I guess for deposit trends those were very solid this quarter was very impressive I was just curious if you had the the <unk>.
Component of that growth that came from Houston, and Dallas versus the rest of the franchise and I know you'd mentioned expecting high single digit deposit growth of 22 are you still thinking in that range or do you think that maybe you could do a little bit better just given the better first half results.
You know I'm still there are you know I think Phil Phil are you heard Bill talk I think we were optimistic that it can be better given continued new growth I think that as rates go up one there'll be more and more pressure, obviously on us, especially on some of those larger deposit balances.
So yeah I mean, that's what we're we're we're we're.
We're projecting if it can be higher than that will definitely be happy, but I do think it's riskier the higher rates go up, especially on those larger accounts and Dave what was your other question with regard to the expansion I think Oh, yeah on the expansion. So one thing that I'll give you a year over year I'll say they contribute to contributed 1% of the growth in average deposits.
Okay.
And 2% on loans, you I'll say that as well so they they are you know they are.
We're going to move the needle, especially on that loan side.
Right.
Awesome, maybe just one last one on credit just given you guys aren't seeing any signs.
Of anything.
It kind of feels like a zero provision that's still a good at least through the end of this year is that kind of how you're thinking about it.
You know everything that I'm, saying, I'll, let Phil talk to but everything that I'm seeing and hearing and sitting in our seasonal meetings.
Really where I'm at right now and obviously, it's something that we cant project that far out we continue we're talking to our people and in the credit area. All the time, but at this point I'm not hearing anything that gives me pause.
Seasonal seasonal but it's hard to envision.
I need right now based on everything we know.
Yeah that makes sense alright, guys. Thanks appreciate it.
Thank you. Thank you.
Our next question is a follow up from Ebrahim <unk> with Bank of America. Please proceed with your question.
Yes.
Thanks.
One follow up question, Phil I guess.
Outside of it.
Things that you are doing and then the strength in the market. How are you seeing competitive competitors behave one in terms of <unk>.
Just a dentist appetite are you seeing competitors, losing the underwriting box and then you mentioned, obviously go head to head with the largest banks in your market have you seen.
But the bigger banks.
Got pulled back a little bit given some of the capital constraints that you're facing.
Ebrahim.
You know in talking with our people in preparation for the call.
There may be some marginal.
Improvement and structure competition, not much but I did I did hear one of our teams mentioned and how they they had won a deal on on our traditional underwriting.
Which you know.
They seem surprised to do I mean, we do that all the time, but I mean, this particular instance, it seemed like they were pleased to see that.
Uh huh.
So I'd say, it's beginning to be a little bit more structurally sound, but that's not pervasive.
Probably here as many stories are more stories of where you're seeing competition continue to.
To increase.
Maybe beginning to see a little bit more competition on the C&I side as opposed to just the commercial real estate side, but.
It's still competitive but.
But but things are slowing a bit I think in the.
And the you know the real estate side.
I remember some conversations we had with with builders, who you know and.
Some of these really hot markets, we're expecting to see a 10%.
Price.
Change or reduction really by the end of the year and in certain residential markets.
And the point I made is that's fine.
It may be slowing that will help us catch our breath. We've had I think times to Bill go from 120 days to 210 or something like that and they've also got such wide margins you know historically high margins, they've got plenty of room to fade that.
And so I don't think it would be.
Unwelcome in some ways to see a little bit of moderation in that market, but we've heard that as well.
Got it thanks for the color. Thank you. Thank you.
Our next question comes from the line of John Armstrong with RBC Capital markets. Please proceed with your question.
Hey, Thanks, good afternoon.
Hey, John Hey, John .
Jerry can you.
Give us a little bit of help on the.
Trust and investment management and deposit service charges, what Youre thinking there they are a little better than I thought it would be but just give us some thinking on what you see there for an outlook.
I'm sure I guess for the quarter on the I'll be honest on the trust and investment management fees.
I was pleasantly surprised that.
We ended up where we did and what we saw was that we had a good month and or excuse me a good quarter in oil and gas fees. They were up about a million eight a quarter over quarter. So.
Compared to the second quarter last year. So they really were able to offset a decrease that we saw in investment fees, which were down $1 million and I think our states excuse me, yes about $1 million of safety is down another $1 million.
So I don't I would expect that given all the volatility and what's going on in the markets that will see some pressure on that.
Investment line item, we have continued to grow our managed accounts in that business I think we're up 5% and numbers of accounts compared to the second quarter last year. So I know, there's a lot of focus on trying to grow the business, but we will see we are feeling some pressure given the volatility in the market.
On deposit service charges.
Interesting we've made.
In my opinion, some some changes that have really been a I think made a lot of sense for us and for our customers on overdraft fees, when we instituted overdraft Grace.
And then here recently and in June what we did was previously to get that free 100 dollar overdraft you had to have a direct deposit of at least $500 a month.
And after our retail team did some work we felt like that was a punitive to some of our customers given the fact that not every employer pace of direct deposit and so we lifted that in June and we're saying, that's probably going to cost us $2 million. So we haven't seen the impact of that you know this.
I'll change that we made and then we've also eliminated our hum.
NSF fees, which were about 1 million and a half if I remember correctly. So we'll see where that line item is going to see some pressure going forward, but really a lot of our growth as Phil talked about the number of new accounts that we visit that.
We've been able to bring on.
We expected some of those some pressure on that line item, it's really been offset by increases of numbers of transactions just given the increases in the number of customers.
Okay.
Second with my next question just that the 7200 and.
The new households, all time high is that.
How are you doing in your legacy markets on that end.
How do you know how much of that is driven by the new markets.
John One thing I guess I'd offer up to you is.
If you look at.
Just account openings from traditional branches.
You can include everything which is mostly legacy right.
Account growth year over year.
From traditional branches was.
Nine 2%.
So I'd say, we're doing pretty good.
And I think it all.
Revolves around.
You know a lot of things that are working for US I think you know our value proposition solid we give people square deal and great service I mean.
You don't know.
You always have to be looking over your shoulder and of G. O. One of them are banks paying me thing or are they paying anything I'll just pass it to me.
We put in a lot of work every week you know Jerry is looking at the market, where you've got we're talking to our lines of business were trying to figure out what's fair.
No.
It's just a lot of things working for us and our branch experience.
You know it is.
I think it's unparalleled in terms of what we do.
The the way people are treated and.
Dealt with but she noticed the physical facilities are beautiful.
And.
They just create a great experience so.
The other thing I've talked about this last last time.
I really think it was interesting what happened with this location that we opened up in.
And the west part of San Antonio That's a legacy market. If there ever was one we've been here 154 years.
And.
You know the growth we've seen in that particular location was literally multiples.
Of what we did in our best Houston location.
And in the first six months lets say its.
Its life.
It's already at 24.
Yeah, it's already at $24 million.
And deposits and you know six seven months or.
So.
And that's just that's just the legacy market, where you opened a location. So there is there something going on that I hope, we can continue to to leverage and.
I feel I feel good I feel good about the way the whole business is operating and how we're moving forward.
Just running a business.
Okay.
This is my last earnings call in the quarter and I think I might be left in the queue. So maybe ill.
In the quarter.
But you you used the term unusual and evolving.
In your opening comments and let you know.
I've asked this on other calls, but there seems to be a disconnect between credit quality that we're seeing from the banks.
And then what we see them.
See and read about every day.
Mhm, what's your take on where we're evolving to.
Are you worried about it as Texas different.
It sounds like Youre, not seeing erosion in your loan book, but just.
Any big picture thoughts on whether whether the market is right or you're right are we going.
I think it's a great question, John and I'll tell you.
I'll tell you a disconnect that we are sort of seeing is.
When we talk to customers.
On main street.
I mean, there's not a lot of talk about slowing.
There's not a lot of talk about recession, there's talk about.
Where am I going to get the next person to hire.
What on Earth am I gonna have to pay them.
And what's what's the next bubble in the supply chain and how can I get the capacity to the warehouse what I can get so that I'm ready to move forward when it can't get the other parts of the you know the supply chain that I need.
I think main street is those are the things that they're dealing with and.
And how they feel about their business.
Is different than when they go home at night and sit on the couch and watch the news and hear discussions about the economy at least in the markets that we're operating in.
Now there are some that admittedly are slowing if you. If you were dependent on developing a deal. That's two years away from being finished and you don't know what rates are going to be or what.
Economies are going to be you know there is some slow there there's some slowing more circumspection there but.
The economy is strong here and.
You know I.
I'm not too worried about.
Its direction right now, but it is but it is unusual and evolving because if edge increasing rates 75 basis points at a time and we will see what impact that has over time.
Okay Alright.
Alright, Thanks, guys I appreciate it.
Thank you.
Thank you ladies and gentlemen, we have reached the end of our question and answer session. I will now turn the call back over to Phil Green for closing remarks.
Okay. Thanks to everybody for your participation today and will be a journey.
Thank you. This concludes today's conference you may disconnect. Your lines at this time, we thank you for your participation.
Yeah.
Okay.
[music].
Okay.