Q3 2022 Cullen/Frost Bankers Inc Earnings Call

Thank you for your patience to conference call at the beginning and just a few minutes again, we want to thank you for your patience.

[music].

Greetings welcome to call them Frost bankers incorporated third quarter earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the form of opinion sensation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone.

Pat. Please note this conference is being recorded.

I'd now like to turn the conference over to Eva Mendes Senior Vice President and director of Investor Relations. Thank you you may begin.

Thanks, Gerry 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 I mentioned, we intend such statements to be covered by the safe Harbor provisions for forward looking statements contained in the private Securities Litigation Reform Act of 1995 as amended.

Please see the last page of text in this morning's earnings release for additional information about the risk factors associated with these forward looking statements.

If needed a copy of the release is available on our website or by calling the Investor Relations Department.

2102205234.

At this time I'll turn the call over to Phil.

Thanks, Amy and good afternoon, everyone and thanks for joining us.

Today, I'll review third quarter results for Cullen Frost, and our Chief Financial Officer, Jerry Salinas is it going to provide additional comments before we open it up to your questions.

In the third quarter Cullen Frost earned $168 $1 million for $2.59, a share and that compared with earnings of $106 3 million or one.

Dollars 65, a share reported in the same quarter last year.

$117 4 million.

$4.81 a share in the second quarter of this year.

Our return on average assets and average common equity in the third quarter.

One point to 7% and 21, 3% respectively.

These results and our overall growth shows that our investments in our strategy of sustainable organic growth are paying off.

And that our company is well positioned to succeed.

Loan growth continued to be strong and above our long term expectation of high single digit annual growth.

Average loans, excluding PPP in the third quarter were $16.75 billion or.

Or a 13% higher level than the average loans.

2000, 14.82 billion in the third quarter of 2021.

On an annualized linked quarter basis loans, excluding P. P. P increased by a little over 5%.

Year over year growth in the portfolio was broad based with about a third coming from our CNI component.

Half coming from commercial real estate.

And the remainder coming from consumer real estate.

[laughter].

We booked about 2.04 billion in new commercial commitments in the third quarter and this was up 12% from a year ago and down 7% from the second quarter.

Drop was mainly from larger deals as core commitments were more in line with the previous quarter.

Looking at our pipeline gross pipeline is basically flat from the last quarter down, 0.9% and on a weighted basis, it's down 15%.

Overall deposit growth was strong and we invested in our depositor relationships by doing the right thing and allowing increased interest rates to flow through to our customers.

Average deposits in the third quarter were $45 $8 billion, an increase of 17% compared to the third quarter of last year and up.

9.6% on an annualized basis over the previous quarter.

We continue to see great growth in our consumer banking business.

Average consumer loans were $2 1 billion in the third quarter up by 15.9% over the third quarter last year, and up and an annualized 6.9% compared to the previous quarter.

This is primarily from our consumer real estate products of HELOC home equity and home improvement.

The outlook for these loans continues to be good and credit straw.

Growth in new households continues in the third quarter, we put on 6773, new households that was 4% higher than the same quarter a year ago.

Our total household count of over 405000 in the third quarter was seven 1% over the record level in 2021.

All organic.

Regarding our branch expansion efforts, our Houston expansion branches have produced right at $1 billion of deposits with loans of $765 million.

And over 18000 new households.

And they continue to exceed pro forma.

In Dallas, we opened the sixth of our planned new locations earlier this month and we expect to open four more new locations before the end of this year.

We are very encouraged by the preliminary results of the new sites.

We should have achieved 356% of deposit goals.

290% loan goals.

And 250% of new households goals.

Now before anyone asks yes, we did set meaningful goals for our new location.

As we've said before those goals are based on the average of what we had achieved with the 40 locations that we had opened in the eight years prior to our Houston expansion strategy.

As I mentioned, the new Houston locations or above goal.

And the new Dallas branches are performing even better than that.

Yeah.

Our team that is building our new mortgage loan process is preparing to launch its pilot program with an eye on rolling out our new mortgage loans on a wider basis in stages beginning.

Late this year.

And early next year.

It has been exciting to watch as we create an entire process to originate and service mortgage loans in keeping with the frost philosophy, and our core values of integrity caring and excellence.

Overall credit quality remains good.

The September 30th number for total delinquencies excluding P. P. P was $85 million or 48 basis points of total loans.

Total problem loan level, which we define as risk grade 10, and higher totaled $387 million at the end of the third quarter down from $429 million at the end of the second quarter.

The favorable rate a problem resolutions that we began seeing late last year via payoffs payments and upgrades continued through the third quarter totaling $381 million to date.

Once again, we did not report a credit loss expense in the third quarter and net charge offs for the quarter were $2 $9 million.

Which compares favorably with the $2 8 million in the second quarter.

Annualized net charge offs for the third quarter remained at seven basis points of average loans, which is below our typical long term level.

Non accrual loans were $29 9 million at the end of the third quarter and that represented a decrease from $35 1 million at the end of the second quarter.

You may remember that in our second quarter conference call I reported that we had achieved our goal of mid single digit concentration level and the energy portfolio and are happy to report that we stuck to our goal with energy loans.

Excluding P. P P representing five 4% of loans at the end of the third quarter and speaking of PPP loans, we knew that when that process began helping our customers get their loans forgiven would be as important as helping them get their applications approved and our teams done a magnificent job on both ends of the process.

And more than 99% of our borrowers are through the process now.

And the way that we help borrowers get emergency loans stay in business and then get through the PPP forgiveness process.

Is going to pay dividends for our customer relationships for many many years.

All of this together demonstrates that we have strategies and systems in place to allow us to succeed in all economic environments. We believe in doing the right thing for our customers and it isn't just words, it's backed up by the investments in time resources and personnel that we make with things.

Our industry, leading rates on deposit accounts and building a world class mortgage loan process from start to finish providing overdraft Grace early pay day 24 hour.

Customer assistance seven days, a week and expanding our presence so that we can extend the frost value proposition to people across Texas all of that takes hard work and I'd like to thank our people for being a force for good in everyday lives and now I'll turn the call over to our CFO Jerry Salinas for some additional.

Comments.

Thank you Phil.

Looking first at our net interest margin our net interest margin percentage for the third quarter was three point out, 1% or 45 basis points from the two 5%, 6% reported last quarter.

Our yields on both balances held at the fed and loans had the largest positive impact on our net interest margin percentage.

The increase was also positively impacted to a much lesser extent by a higher yield on investment securities and by higher volumes of both investment securities and loans. These positive impacts were partially offset by higher costs on deposits and repurchase agreements.

Looking at our investment portfolio. The total investment portfolio averaged 19 4 billion during the third quarter up 1.3 billion from the second quarter average as we continued to deploy some of our excess liquidity during the quarter.

Made investment purchases during the quarter of approximately $2 2 billion, which included about $790 million in treasury, yielding at about a 3.15% $840 million in agency MBS securities with a yield of about $4 six 2% and about 520 million in municipal securities with the tax law.

Equivalent yield of about 4.85%.

Our current expectation is that we would invest an additional $1 2 billion of our excess liquidity into investment purchases in the fourth quarter or about 1 billion net of projected inflows.

The taxable equivalent yield on the total investment portfolio was 294% in the third quarter up seven basis points from the second quarter.

Textbook portfolio, which averaged 11 5 billion.

Up $1 2 billion from the prior quarter at a yield of 2.28% up 16 basis points from the prior quarter.

Our tax exempt municipal portfolio averaged about seven 9 billion during the third quarter of about $113 million in the second quarter. It had a taxable equivalent yield of 4.09% up five basis points from the prior quarter.

At the end of the third quarter, approximately 70%, 76% of the municipal portfolio was pre refunded or psf psf insured.

The duration of the investment portfolio at the end of the third quarter was $5 three years down from five six years at the end of the second quarter.

Looking at deposits on a linked quarter basis average deposits were up $1 1 billion or nine 6% on an annualized basis.

Average total noninterest bearing deposits were up 156 million or three 4% on an annualized basis from the second quarter exclude.

Excluding public funds those deposits would have been up 250 million or five 6% on an annualized basis.

The linked quarter growth in deposits has come primarily from growth in average interest bearing deposits, which were up $921 million or 14% on an annualized basis. The cost of interest bearing deposits for the quarter was 62 basis points or 40 basis points from the second quarter.

Looking at noninterest income on a linked quarter basis service charges on deposit accounts were down 910000, or three 8% primarily as a result of lower commercial service charges, primarily resulting from a higher earnings credit rate on Atlanta on analyze balances.

Insurance commissions and fees were up $1 4 million or 11, 7% from the second quarter as our route as a result of higher life insurance commissions, which were up 600000, and also impacted by our normal business cycle, which results in higher commissions on both P&C and group benefits in the third quarter versus the <unk>.

Second.

Other charges commissions and fees were up $1 2 million or 12, 2% from the second quarter commit.

Commitment fees on unused lines of credit and money market income were both up over 500000 compared to the second quarter.

Regarding total noninterest expenses total noninterest expense was up $11 6 million or four 7% compared to the second quarter.

The primary driver with salaries and wages up $10 3 million or eight 8% primarily impacted by higher accrued incentives and an increase in the number of employees as we continue to grow our business and to a lesser extent the impact of merit market increases which were effective in may.

Looking at our projections for full year total noninterest expenses, we now expect total noninterest expense for the full year 2022 to increase at a percentage rate in the mid teens over our 2021 reported levels.

Yeah.

The effective tax rate for the third quarter was 14% and our current expectation is that 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 remainder of the year.

The estimates for the fourth quarter of 2022 earnings.

Our current projections include a 75 basis point fed rate increase in November followed by a 50 basis point increase in December .

Given those rate assumptions. We currently believe that the current mean of analyst estimates for the fourth quarter of $2 50 is too low and we believe that even the highest estimate that I see at $2 72 for the fourth quarter is low.

With that I'll now turn the call back over to Phil questions.

Okay. Thank you Jerry we will open it up for questions now.

Thank you as he would like to ask a question. Please press star one on your telephone keypad.

Information tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up the handset before pressing the star key.

Our first question is from Steven Alexopoulos with J P. Morgan. Please proceed.

Hi, everybody.

Hey.

I wanted to start so frost is one of the few banks that saw growth of noninterest bearing deposits in the quarter came more color of what drove that and are not youre not seeing the same underlying trend most banks are saying, where they're seeing outflows into higher yielding alternatives.

Yeah.

You know yeah, I think even if you remember the last.

Last quarter, I said, you're going to one of my concerns with it we might see some softness there I'm going to say I continue to be somewhat concerned, especially about the larger balances.

We're seeing some movement there, but so far had been able to offset that sort of a reduction in balances. So knock on wood I think we you know we are in our projections part of our beat was that we had more liquidity than we expected part of it being from deposits being a being stronger. So I think that we continue to analyze those I think there is.

L a little little bit of risk, especially on those higher balances of accounts.

But you know I think as Phil mentioned, our goal is to you know to try to continue to provide top quality service. We continue to build new relationships. So we're obviously, adding deposits. There are when we look back at kind of the 12 month look back at what our deposits where that growth is coming from about 55% of it is from augmentation of our existing.

Customers, but 45% of the growth was coming from new customers. So you know I think it's a good place to be but you know I continue to be concerned, especially like I said about those higher balance.

Got you okay.

I'm, hoping we could drill a little bit I got many questions on the OCI Mark in the TCE ratio falling below 4% can you talk about where do you see that bottoming and when you look at the securities payoff schedule, what's the timing of what we should start to see tangible book and P. C ratio start to turn up given the payoff schedule.

I think obviously most of that is going to be driven by what happens with with interest rates more than payoffs to be quite honest with you you know if we.

If you believe kind of what the fed is saying about interest rates starting to decline in the next year or two if you will you know I think you'll see some of that come back we're aware of what's out there from a TCE basis, we are moving our new muni purchases to the held to maturity category, we're not doing a lot there, but we're sensitive.

Through it we.

We don't spend a lot of time to be quite honest with you worrying about it with liquidity as you know I think this morning, we were still north of $12 billion.

I've got we've got a loan to deposit ratio that's pretty low so we're not in the same situation as other banks are so it's something that we're aware of but don't really spend a lot of time worrying about it we may do some things within with new purchases, but to the extent of what we're discussing that's really about it.

Steven.

From a business point of view.

Notwithstanding a situation where somebody would have to.

You know monetize those unrealized losses and that would really be a situation I think where you had a liquidity issue or something like that.

You know that's.

That's not that's not on our radar obviously in terms of.

There's so much liquidity, we have now I am a frost banker and liquidity is always on my radar, so I will say that.

But the economic reality is we run a business to me and I think this is one of the things that the fed considered when they change those rules several years ago about about this mark to market is there are tremendous.

Natural hedges that exist in the balance sheets of regional banks.

With their with their non maturity deposit basis, and the accounting industry doesn't even try to recognize those values and I and I think as you look at.

As you look at how balances net interest margins operate where banks have these these natural hedges.

You know I think from an economic standpoint, it's not something that is of concern to us.

That said I recognize that you know you.

If the bank doesn't have liquidity to hold these things then there might be in a different situation, but it is not keeping us up at night.

Okay, Yeah, and just to give you a little bit of color to answer your question specifically on our 2023 right now I'm I'm projecting about 1 billion four.

And maturities and payoffs.

And as you go into 2024 and such.

The Muni is really start to accelerate we are only expecting about 400 million next year, but after that you are probably in the range of 1 billion to two 1 billion.

Next couple of years.

Got you.

Okay, Thanks, and if I could sneak one more in so the backdrop of what we're hearing this quarter as most banks are only raising the rates on deposits basically when they're forced to to fund loan growth.

It's been the customer reception in your markets like at the ground level to you guys offering higher rates and you're seeing a material acceleration of client acquisition because of that thanks.

Okay.

What I would say about client acquisition that has continued to stay up.

I was looking at our retail numbers recently and I and our.

I think I might have said that our retail numbers were up by seven 1% in terms of total customer numbers.

And then we also saw an increase of 4% from the third quarter of 2021 in terms of the net new customers that we had so those were you know really record numbers in 'twenty 'twenty. One I don't know if you remember, but we were I think we beat our all time high before that year by 210%.

So that's that's kept up.

And I think we've continued to see growth as you said earlier in deposits and.

And I believe we're seeing some more growth in interest bearing deposits.

Opposed to.

Sparing.

Hey, Jerry Yes, correct total so I think it's reflecting.

And in those numbers and the and the character of the deposits are raising.

I think it's been.

It's been understood by.

People in the marketplace, we're trying to make it better understood by improving our marketing I think we can do a better job there and we're hard at work trying to do that and we will do that.

And.

You know Steve it's.

I don't think we've been defensive in these races. I think what you know our attitude has been it's more offensive than it is defensive and so if you see increases in our deposit betas, it's because.

No we've got the ability to do it we've got the operating leverage to do it.

We're making that investment in those customers.

And I think it just makes our our our franchise stronger and the trust factor greater so that that's what you're seeing today when you.

You see those betas are it's not really a factor of you know we're worried is that this is kind of our time and we really want to be.

We don't Wanna be asleep at the switch we want to continue to be putting on the pressure.

And our increasing market share.

Yeah. The one last thing I'll say and it's it's really tough to analyze it.

Not like we're saying you know from the work that we've done significant percentages of those deposits are.

If you're looking at the growth in M&A. For example, it's not that money is coming out of our our DDA or IOC accounts. So it maybe 10 or 15% of the increases you know some dish or mediate disintermediation between our own noninterest bearing to interest bearing so it's not like we're seeing big percentages of movements there.

Got it thanks for thanks for all the color.

Sure.

Our next question is from Dave Rochester with Compass point. Please proceed.

Hey, good afternoon, guys nice quarter.

Thank you Jay.

Was wondering if you could just give an update on your expectations. Following the stronger trends. This quarter and then if you can just talk about how youre thinking about the NIM trajectory into <unk> in the beginning of next year. If you think you'll still have some.

All of the expansion opportunity to go there that'd be great.

Yes, David I'll speak in Generalities, you know as I said, you know, we're still assuming that the next whatever it is five days or such.

The fed is going to raise rates 75 basis points and then again 50 in December with so with that sort of a trajectory I certainly.

I would expect that our NIM and our net interest income will both increase into the in the fourth quarter.

We don't give guidance on 2023 until January but I'll say that given the given what were saying I don't I don't see without some dramatic change in redemption rates. If you will I don't see the fourth quarter being the peak on the NIM I don't expect the same sort of growth.

In the normal percentage of dollars that we had between third and fourth excuse me second and third to occur third and fourth and going forward, but I do expect you know from a trend standpoint that those would continue in food.

Yeah that makes sense I think you've talked about at least being up.

Over the the low twenty's in NII this year it.

It seems like that she got a decently higher what are you guys thinking there now.

Yeah, I would say so I think that you'll just see that if you guys kind of put that out there project very wise youre going to see that that.

So I'm, giving you guidance that that I would expect the fourth quarter to increase it really blows that 20, low 20% growth out of the water.

Yeah, Yeah that sounds good and how are you guys thinking about deposit beta through the cycle at this point I think you had mentioned.

Getting a 20% total deposit beta through 'twenty, two youre expecting 75, and 50 coming up here how are you.

Thinking about that through the cycle now.

We really haven't changed our thought process is very much there I mean, I think we're kind of on the same place we might be a little bit light right now not much.

But as I look at 22 right now that's kind of what we're expecting that we'll be doing through the rest of the year.

Yeah Okay.

Maybe just switching to deposits a great growth this quarter. It was great to see really bucked the trend for the industry.

As you guys talked about before.

Was curious what the contribution was from Houston and Dallas I know you mentioned the billion dollar Mark for Houston, Congrats on that I'm. Just curious if you had a starting and finishing balances for both of those markets.

That'd be great.

Yes.

Yeah. The one thing I do remember top of mind I'll, just quote that right now because I think Phil mentioned the year over year.

Growth in deposits, so I think they.

Look at I think we reported 17% growth year over year, and I think you know without the expansion we would've been at 16%.

And then if you look at the loan side I think that they actually provided a lounge.

Or had grown.

Let me see if I've got it here.

They've had provided 2% of the growth in.

In that category. So I think we were up and this is excluding PPP, obviously, if you're excluding PPP worried if we were up 13% and I think the expansion provide a little over 2% of that growth. So we would've been in the 11 range without.

As far as the numbers period, and I don't think I've got those well I can give it to you here pretty quickly you know from a deposit standpoint, we're close to $1 billion as Phil said.

Just usage here.

Both combined both combined right.

And our loan balances would be about $700 million both combined.

Yeah.

Yeah.

And our next question is from John Kerry with Evercore ISI. Please proceed.

Good afternoon.

Hi, John .

On the back on the deposit side deposit growth overall came in better than expected this quarter and I know you gave some good color on the noninterest bearing dynamics.

As you look at fourth quarter and into 2023.

How are you thinking about.

That growth trajectory from here or do you think.

What's the level of growth do you think is achievable in trimble can enter into 2023, specifically.

Well I guess, what I would say is that you know if I looked at the linked quarter growth if I remember correctly here and I'll just grab that.

I think that we've been saying that we expect it to get softer and it has gotten softer our linked quarter growth was an annualized 10% if I look at your year ago quarter, Oh, we're closer to 17. So we are seeing softness obviously compared to where it had been historically I think your expansion.

It is obviously, helping I think that you know our deposit rates are obviously contributing to that as well, but I'll continue to say that you know, especially for larger customers, they're just gonna be more options out there.

Customers with higher balances that we won't be able to compete with them and may not want to compete with right because they're going to be some rates that that don't make sense for us to say so.

I would think that you know if I was looking at it I would think that I believe a little bit more towards the the linked quarter growth and maybe even a little softer there, but again, we were wrong in the third quarter.

A lot stronger than we expected, but I think the fourth the second or third linked quarter growth is kind of would be my start up all things being equal.

Got it okay. Thanks, that's helpful and then on the efficiency.

Your efficiency ratio clearly given some of your top line trends getting better than expected this quarter as well I guess.

54% range on a core basis, how do you see that.

If you look at 2023, what do you think is a reasonable longer term bubble or particularly for 'twenty three and then and then separately comp expense came in a little higher this quarter, how much of that was revenue driven.

Count not where our branch investment.

Okay.

Well, you know I would say with regard to efficiency and I know I know.

Gerry gets uncomfortable.

Providing guidance 'twenty 'twenty three because we just don't do it until our January call. So you guys are getting a little bit more than you would have normally got anyway, but I.

I will say that.

You know.

Look.

Earnings are good I mean, a certain amount of this is arithmetic, okay and it's.

You can guess, earning assets you see the Nam you see the impact that.

The increase in rates has I mean, that's that's not hard to figure out and you guys have been doing it John I know you've been doing it for a long long time.

So are.

You know, we expect to see the revenue piece increase I think that bodes well for efficiency ratios are at the same time.

Reason I jumped in and is that we're going to continue to invest in the business and I'm not we are obsessing over that ratio, we're going to continue to invest in you know I'd say at least three thing, let's say for really right now we're going to invest in our people and we've been doing that and you've seen.

The numbers on salaries are reporting them there.

They're pretty dramatic and and they're necessary in order to keep the best group of people here and and bring new ones. Yet. So there's that we're going to invest in technology. We've been doing a lot of that we've been getting better and our technology is improving all the time and then customer experience related to it it's great.

We're going to continue to invest in our physical footprint in the markets that we've decided and then we've disclosed and we will look at other markets as we continue to move forward and the other thing that we're going to do is we're going to invest in our marketing I think we need to have with the value propositions. We've got we can make it.

Our voices as loud as it should be in the marketplace and so those things are going to continue to be investments and and you know that.

That will be on top of just any inflationary pressures. So you know what we're really looking to do is jewelry and I look at the businesses expand and grow it profitably make it stronger so.

And so the efficiency ratio will be I think are a derivative of all of that together.

Thanks, that's helpful and thanks for the reminder, that I'm done I'm old.

Yeah, well were there together.

Our next question is from Brady Gailey with.

<unk>. Please proceed.

Yeah, it's pretty good afternoon guys.

Hey, Brian .

It looks like you know the last three quarters, you've been growing bonds on a net basis pretty consistently a little.

Around like 1 billion, maybe a little on top of 1 billion per quarter. It sounds like that's going to be the same in the fourth quarter.

No.

<unk> still has a lot of cash as a percentage of average our average earning assets or does it seem like as we look to next year.

The Bond addition should be potentially about the same where you add about $1 billion a quarter next year.

I think Brady, it's kind of funny, Phil says I was getting hitting fellow over here because he said that I was giving more sort of 'twenty three.

Sort of visual if you will forward looking I said, yeah more than the former CFO .

What I would say is that.

That's a good starting point, that's what I would do if I were you part about our sensitivity, obviously about giving too much guidance as we're still in the planning process communications were still having internally you heard us talking a little bit about our liquidity. When we got asked the question about tangible capital. So we want to think about all of those things.

Yeah and take a look also again as you know make sure that we were comfortable with what sort of prepayment and maturity assumptions. We've got included in there, but I think that's a really good place to start.

And what I would say is in the fourth quarter, one thing thats, a little bit different we had been buying a treasury.

Treasury Securities and right now we're more focused on a.

Mortgage backs and municipals, we feel like that's a better place for US right now from a risk reward standpoint, I mean, those yields are in the third quarter of what we purchase was a little bit better than the yields we'd assumed obviously that helps part of our beat as well and so we're seeing yields in the in the fourth.

Quarter North of 5% in those products. So you know that.

That's kind of what we're thinking about it and as we go into 'twenty 'twenty. Three then we'll revisit what are sort of our investment program. We put together, but I think that you started up a $1 billion a quarter is a good place to be.

Okay.

And then I wanted to circle back on the tangible common equity ratio of 385, you know it seems like you guys are not concerned about it at that level is there a level a P.

You see that would be concerning to you guys. I think you know the F.

Shelby has some restrictions if you go below a certain level I know some public funds accounts also has some restrictions if you trip a certain level. So it is there any TCE ratio.

Would be concerning or Judah stock here and you've got almost 13% common equity tier one so T C just doesn't matter.

I don't think there's any operational concern over that number right.

Okay.

Alright, and then my last question is just on the provision I think you guys are pad.

Coming up on two years of a zero provision.

The reserve ratio or percentage has been coming down.

With the economic uncertainty out there do you think we start to see some provisioning costs in the near term do you think that that reserve has room to potentially go lower and the zero provision can continue.

Yes, Brady I think that's a great question I mean, that's the sort of conversations we're having right now you're right. We haven't booked a provision for a while I think if we found ourselves in a situation where you know we thought a couple of things if we thought or if we saw actual loan growth.

A bit higher than maybe we had this quarter.

You combine that with maybe a more concerning sort of a rate environment and a more concerning sort of lending environment.

We could find ourselves with provisions I don't think we're.

I think it's the sort of conversation that we'll we'll be having throughout the quarter I don't think it's a slam dunk either way.

You know all things being equal if we did record a provision of neat need a provision in the fourth quarter I couldnt see that it would be anything that you know really material.

But you're right I think that the conversations are continue to be a good with the ex Cecil execution Committee, we're having a lot of good conversations and I wouldn't be completely surprised either way to be honest with you for recorded zero or if we recorded some are.

Small provision of a couple of million dollars I wouldn't be surprised in a lot of it's going to depend on how we see the environment over the next quarter.

Okay, great. Thanks, guys.

Yeah.

Our next question is from Jennifer Gamba, what's truly securities. Please proceed.

Yeah.

Jennifer Please check and see if your line is muted.

Thank you.

Afternoon, just curious about what youre seeing within your.

Asset quality trends are you seeing any weakness underneath the covers and any areas that are worth noting at this point.

Jennifer.

The short answer is really no.

You know we talk about you know what are we seeing I mean there.

Inflation is a lot of people haven't gone through that Kid of John that you know some of the analysts have been doing this a long time, obviously survive and we've been through we've been through inflationary cycles before a lot of people haven't ever in business today.

We're careful to make sure that.

We're asking the right questions and our loan officers are particularly ones that are not lived in an increasing rate environment inflationary environment environment, you know understand what to ask them the things that.

Can be happening to businesses.

I think the things to watch our commercial real estate.

Deals and probably it was not so much.

Credit.

Substantial credit issues as opposed to you know are they going to be able to meet certain covenants. If you've got covenants in there where you have to be able to cash flow X times, you know debt service and you assume some kind of fandom that service number I mean those numbers are.

It's pretty hard I don't think that they will really happen.

Much like I say central impact on on things, but you could see some risk rates move as a result of that.

I think we're seeing.

You know.

You know you're seeing cap rates beginning to rise, particularly on deals that have don't have the opportunity to increase rents you know like you're not seeing you're not seeing cap rates move so much on multifamily where you get an opportunity change those rents in relation to inflation, whereas you might see you might see.

C N industrial deal with a single tenant very high credit quality tenants, but those are long term leases, you're not going to get the opportunity to increase those cash flows from from rental rate increases. So you know youre seeing cap rates move up all knows.

You know you could.

You ask yourself is that going to affect these deals at all.

You know the.

So, but you know you look at US we saw problem loans decline. This quarter. We saw non performers declined this quarter. So it's still it's still hard to see it anywhere.

But.

If you look at the you know the real estate here area you look at deals.

Being more you know, they're pausing certain deals are going back to the drawing board on certain deals and you know so things are are slowing somewhat I think interest rates are a factor there.

We're just trying to you know.

Slow things down and I think they're being somewhat successful there.

And I think usually anytime you have a large election, I think business owners tend to pause a little bit and see what happens if there's any great change that might occur one way or the other or not I think we're probably feeling a little bit of that so yeah.

So no.

No cracks right now credit still looks really good and we'll just have to see what the economy does from here.

Thanks, Phil.

Welcome.

And our final question is from Ebrahim <unk> with Bank of America. Please proceed.

Good afternoon.

Abraham.

Just had a couple of quick follow up questions. One in terms of some.

Our branch expansion could you remind us after the end of the year, how many more branches.

Remaining in terms of as you think about opening in 2020.

I would guess in round numbers, we've got about 15 to do and in Dallas, and probably four ish or so four five.

And Houston for our two Dato expansion. So you know, let's say in round numbers around 20.

Got it.

And anything just given the environment.

Better or worse that would make you want to do.

Uh huh.

<unk> additions or maybe open more branches than these or what you had initially planned given the success that you've had and any new markets that youre looking at fill in terms of how you might deploy.

Deploy the same strategy over the next year or two.

No.

I think the thing that.

We will do is we'll continue to look at attractive markets in the state you know, we're not we're not done with that.

We've you know we've we've talked about for years now about understanding the Austin market and you know how.

How that may or may not be different from some of the larger strategies, we've used in Dallas and Houston and we're continuing to do that.

You know I think you've heard us talk on the calls last couple of calls.

You know we've had some some in some new locations.

And what I'll call or more consumer oriented markets Theyre more rooftops and then they are.

What I'll call a premier business is there and you know that about two thirds, 70% of the profitability of this strategy has been always based on the commercial middle market piece.

But some of the returns and some of the performance. We've had in these more consumer centric now admittedly higher income consumer centric markets has been pretty remarkable.

And.

It results in two things.

One is your mix of.

Hum assets.

Leans a little harder on the consumer side, if you look at our Dallas early numbers again Dallas is early in the game, but it's interesting that half of our loans, our consumer loans and the Dallas market and half.

Commercial as opposed to let's say take Houston.

Which is like 80% commercial 20% consumer.

And so the reason I mentioned that is that I think it.

It gives some opportunity in that market in those markets.

That might be more house top oriented.

And the other thing about those markets tend to be a little bit smaller so they don't have to be as big.

And if it turns out that that what we're seeing in these markets has legs and I think it could open up some new opportunities for us in markets that we've already been in which might've been which might've screened a little bit more consumer centric.

And I think it also might help us as we evaluate some of these new markets, we might go into new geographies and state it might be a little bit more.

Consumer centric.

Than commercial it could be that those might actually be viable markets for us as well. So I think what we've been seeing recently.

To me it makes me a little bit more optimistic on our ability to continue to expand the strategy.

And like I say, youre, not going to say more and more I think the strategy is.

Used two words about it I believe that it is scalable and I believe it's durable.

And I believe that we'll be doing this a long time.

Got it that's helpful and I guess, one follow up for you Judy if I heard you correctly did you say you were adding mostly mortgage backed securities right now.

Muni and mortgage backs.

And I guess the question is as we think about that other banks were trying to hedge their margins.

To prevent if needs to begin to go do it at some point over the next few years.

Anything that you are doing.

Synthetically in terms of defending the margin against lower rates and how do you think and I guess the mortgage securities. It does increase prepayment to ask if and when rates go lower.

Just wanted to get your thought process around managing the margin against lower rates.

Yeah. So.

Obviously, if we continue to have those conversations I think the.

Part of the conversation obviously, it's all the liquidity that we have you know some of the analysis. We do is of course, if we thought rates were going down we could make a bigger bets right with all of that liquidity in hand, which certainly would help protect the margin.

During a period of decreasing rates so up.

You know I think that that's one of the things that's out there and and you.

I think the other thing that we've talked about and this is outside of the investment portfolio. Obviously is that given our deposit rates. We've got a lot more room than most due to bring deposit rates down I mean, we've proven that we will and we can in the low rate environment. We did it when we started raising rates in 17 when rates came down.

In 19, and 20, we were moving our rates down so we've got that opportunity as well I mean, it's not something that we would want to do but we're certainly not afraid to do it and could do it to protect the margin but again.

So analyzing where those purchases could be we could make I'll call them bullet type purchases of significant amounts of liquidity. If we decided we wanted to do that.

Thanks for taking my questions.

You have reached the end of.

A question and answer session I would like to turn the conference back over to sell for closing comments.

Alright, Thank you Omar and thank you for your just based on the call today and for your interest in our company. Thank you will be a journey.

Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.

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