Q4 2022 Cullen/Frost Bankers Inc Earnings Call
Ladies and gentlemen, thank you for your patience and please remain on the line today's teleconference will be starting shortly but again, we do thank you for your patience and ask that you. Please remain on the line today's Cullen Frost bankers conference well be beginning shortly.
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Yeah.
Greetings, ladies and gentlemen, and welcome to the Cullen Frost Bankers, Inc. Fourth quarter earnings Conference call. At this time all participants are on a listen only mode. A brief 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.
As a reminder, this conference is being recorded it.
It is now my pleasure to introduce your host Mr. A b Mendez senior Vice President and director of Investor Relations. Thank you. Please go ahead.
Okay.
Thanks Donna.
Earnings Conference call will be led by Phil Green, Chairman, and CEO , and Jerry Salinas Group Executive Vice President and CFO .
Before I turn the call over to Phil and Jerry I need to take a moment to address the safe Harbor provision.
Some of the remarks made today will constitute forward looking statements as defined in the private Securities Litigation Reform Act of 1995 as amended.
We intend such statements to be covered by the safe Harbor provisions for forward looking statements contained in the private Securities Litigation Reform Act of 1995 as amended.
Please see the last page of text in this morning's earnings release.
For additional information about the risk factors associated with these forward looking statements if needed a copy of the release is available on our website or by calling the Investor Relations Department at 2102205234 at this time I'll turn the call over to Phil.
Thanks, Avi and good afternoon, everybody. Thanks for joining US today I'll review the fourth quarter results were calling for Austin, Our Chief Financial Officer, Jerry Salinas will provide additional comments before you open it up for your questions.
Well in the fourth quarter, calling bras earn $189 $5 million or $2.91 a share.
Compared with earnings of $99 4 million or $1 54, a share reported in the same quarter of last year.
That represented an increase of 90%.
You don't get to say that very often.
Our return on average assets and average common equity in the fourth quarter were 1.44% and 27.1 and 6% respectively.
Compares with 0.81% and $9 two 6% for the same period last year.
These are very strong results and along with our strategy of sustainable organic growth they position us well heading into 2023.
I've taken a closer look at the quarter.
Loan growth was solid and above our long term expectation of high single digits annual growth.
Average loans, excluding PPP in the fourth quarter were just over $17 billion compared with average loans of $15 4 billion in the fourth quarter of 2021.
And increased 10, 6%.
For the full year 2022 average total loans excluding P. P. P were up 11, 3%.
Our growth in loan balances for the fourth quarter versus the third quarter represented approximately two thirds C&I growth.
And one third consumer.
CRE balances were basically flat.
We booked $2.2 billion of new commercial commitments in the fourth quarter.
And this is up by a non annualized 9% from the third quarter and demonstrated our staff success from our calling and prospecting efforts earlier in the year.
That said I believe it's clear that the Feds program of interest rate increases is having an impact on economic activity, especially in the commercial real estate sector as more borrowers evaluates the impact of the current environment on their projects.
For example.
It's interesting to look at our weighted 90 day pipeline at year end.
It's down 14% from the previous quarter.
However, the prospect component of that pipeline is up 19%.
Well the customer segment of that pipeline is down 32%.
So as we continue to see potential deals come in from prospects as our strong available liquidity and our consistent underwriting shine through our current customer base reflects the overall softening of the commercial real estate market.
Yeah.
Average deposits in the fourth quarter were $44 eight building 1 billion, an increase of more than 9% compared with the 41 billion in the fourth quarter of last year.
For the full year 2022 average total deposits were $44 6 billion up 15, 9% over 2021.
Jerry will talk more about recent deposit trends in his comments.
We continued to see great growth in our consumer banking business.
Average consumer loans were $2 $3 billion in the fourth quarter.
By 22, 6% over the fourth quarter last year.
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 is strong.
In fact, the consumer loan growth in 2022 was 283% of our previous best year.
The sharp increase in mortgage rates created the perfect environment for our secured consumer real estate loans, such as home improvement home equity and HELOC.
Credit quality is outstanding in this portfolio and our average credit score is 754.
I'm also pleased that we recently began funding loans and our mortgage program.
Our team has created a new mortgage loan process from the ground up to originate and service mortgage loans in keeping with the Frost philosophy.
And we've created a great digital and mobile experience around it.
Once we complete this pilot program will roll out mortgage lending to customers on a more limited basis with the goal of opening it up to everyone. Later this year.
Growth in new households continues.
For the year, we added almost 26000 new households.
About six 6% higher than the number of customers. We had at the end of last year.
Well, we believe this represents best in class organic growth. It was down slightly from last year's all time high of almost 27000 customers and thats related to the lower net number of branches that we opened in 2021.
Given the increase in openings. Since then we expect to achieve all time high number of new customers in 2023.
In addition, our frost wealth advisers has seen a record amount of new business.
Regarding our branch expansion efforts the original 25, Houston expansion branches have surpassed $1 billion of deposits.
And they continue to exceed pro forma.
Loans totaled totals $727 million at year end.
Including the additional branches we've opened in what we call Houston expansion two dot O at year end, we stood at 114% of our household go.
<unk> hundred 70% of our long ago, and 104% of our deposit goals.
And we will continue to add new locations and strong areas around the region.
In Dallas, we are very encouraged by the early results of the new sites, which youre doing even better than what Houston had achieved in the same timeframe.
229% of the new household go 275% of long ago.
And 372% of our deposit go.
We added new financial centers at a rapid pace in the fourth quarter and soon will be up to 13 locations under the program.
Yeah.
Overall credit quality remains good.
Problem loans, which we define as risk grade 10, and higher totaled $322 million at the end of the fourth quarter compared with $387 million at the end of the previous quarter and $691 million a year ago.
We reported a $3 million credit loss expense in the fourth quarter net charge offs for the fourth quarter were $3 $8 million compared with $2 eight in the fourth quarter of 2021.
Annualized net charge offs for the fourth quarter were nine basis points of period end loans.
Non accrual loans were 37 $8 million at the end of the fourth quarter, an increase from the $29 9 million at the end of the third.
Which was the result of two small credits.
With regard to the current economic environment. There are potential risks on the horizon that could result from higher interest rates, continuing high inflation and pockets of supply chain disruption.
Overall investor commercial real estate loan metrics remained stable and indicative of above average project operating performance across all portfolio asset types.
While acceptable debt service coverage ratios are still reported for office multifamily office warehouse and retail asset types.
Our year over year decline is observed at fourth quarter 22, primarily due to the impact of rising interest rates higher operating expenses for multifamily and the inclusion of now completed construction projects that remain in lease up.
Regarding specifically the office portfolio, our optimism around this asset class stems from one character and experience of the sponsors.
Two the predominantly class a nature of most portfolio office projects.
Three tenant quality lease duration, and four strong existing office portfolio metrics, including low loan to value at an average number of 56%.
And weighted average debt service coverage ratio of 1.59 times for the current stabilized office assets.
Office buildings outstanding at year end were $1 $8 billion and of this amount half was owner occupied and half represented investor projects.
Our energy loan portfolio concentrations remains in the single digits at five 4% of loans, excluding PPP at the end of the fourth quarter.
Our energy borrowers as a whole have advance rates and leverage ratios that are the lowest we've experienced in many years.
As borrowers have continued our program of deleveraging and returning more to shareholders.
Current oil and gas price environment continues to be favorable for them.
And our borrowers generally have a bullish outlook for prices near and intermediate term.
Ross will continue to offer energy lending with prudent structures.
<unk> appropriate advance rates and hedging structures to minimize risk.
We've done a great job with closing out the PPP forgiveness process I don't want to say I remain proud of our team that worked so hard and the relationships that we've built and strengthened with customers when they need to help most.
We say this often that we've got a lot going on at Frost, we're expanding in the new areas with beautiful new financial centers, we are enhancing our consumer offerings with all new mortgage loans.
Strengthening our communities and growing our brand awareness with exciting new sponsorship opportunities that will pay dividends for many years and best of all we can are continuing with our strategy of sustainable organic growth. It has kept our company strong and positioned us well for whatever the future holds.
They in a day at our employees do all this while in hearing to our core values of integrity carrying an excellence.
And by providing industry, leading customer service.
Frost to truly work hard to be 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 fourth quarter was 331% up 30 basis points from the three 1% reported last quarter.
Yields on both balances held at the fed and loans had the largest positive impact on our net interest margin percentage the.
The increase was also positively impacted to a much lesser extent by a higher yields on investment securities and by higher volumes of both investment securities and loans.
These positive impacts were partially offset by higher cost on deposits and both higher volumes and cost of repurchase agreements looking.
Looking at our investment portfolio. The total investment portfolio averaged $21 billion during the fourth quarter up $727 million from the third 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 2 billion, which included $735 million in agency MBS securities with a yield of 543% and $470 million in municipal securities with the taxable equivalent yield of about 538%.
For 2023, our current expectation is that we would invest an additional 4 billion of our excess liquidity into investment purchases during the year or about $2 2 billion net of projected inflows during the year.
The taxable equivalent yield on the total investment portfolio in the fourth quarter was three 9% up 15 basis points from the third quarter.
The taxable portfolio, which averaged 12 billion up approximately $534 million from the prior quarter had a yield of 2.41% up 21 basis points from the prior quarter impacted by the higher yields on recently purchased agency MBS Securities.
Our tax exempt municipal portfolio averaged about $8 1 billion during the fourth quarter up about $193 million from the third quarter and had a taxable equivalent yield of 417% up eight basis points from the prior quarter.
At the end of the fourth quarter, approximately 76% of the municipal portfolio was pre refunded or psf insured.
The duration of the investment portfolio at the end of the fourth quarter was five eight years up from five three years at the end of the third quarter impacted by the extended duration of our agency MBS securities in this higher rate environment.
Looking at deposits on a linked quarter basis average deposits were down $1 billion or two 3% with about half of the decrease coming from demand deposits and half coming from interest bearing deposits customer repos for the fourth quarter averaged $3 6 billion up $1 6 billion from the $2 billion average.
In the third quarter, we have seen some deposit flows into our repo product during the quarter.
Total combined deposits and customer repos in the fourth quarter averaged $48 3 billion up $571 million from the prior quarter the COO.
Cost of interest bearing deposits for the quarter was $1, 106% up 54 basis points from the third quarter.
Regarding credit loss expense during the fourth quarter credit loss expense of $3 million, which represents the first quarter, we booked a credit loss expense this year.
Credit loss expense was driven by growth in unfunded commitments unfunded commitments grew $698 million during the quarter ending at $12 5 billion at the end of the year.
Looking at non interest income on a linked quarter basis Trust and investment management fees were up $1 1 billion or 3% as increases in estate fees of $1 6 million investment fees of 860000 and real estate fees of 529000 were partly offset by a decrease in oil and gas fees.
Down $2 million due to lower commodity prices.
Service charges on deposit accounts were down 639000, or two 8% primarily as a result of lower commercial service charges down $1 5 million largely resulting from a higher earnings credit rate on annualized balances.
Partially offsetting this decrease was a 756000 increase in combined consumer and commercial overdraft charges.
Insurance commissions and fees were down $1 5 million or 11, 2% from the third quarter as a result of lower life insurance commissions, which were down 706000, and also impacted by our normal business cycle.
Other income was up $7 1 million, primarily due to a $5 $1 million distribution received from an SP I see investment.
Regarding total noninterest expenses.
Total noninterest expense was up $23 4 million or nine 1% compared to the third quarter. The primary drivers were salaries and wages up $9 5 million or seven 5% and other expenses up $13 3 million or 29, 2% compared to the third quarter.
The increase in salary wage and wages was impacted by a $6 $4 million increase in stock compensation as those stock awards are made in October of every year and some by their nature are expensed immediately.
Additionally, accrued incentives were up $1 million from the prior quarter.
The increase in other noninterest expense of $13 3 million was impacted by higher fraud related losses up $4 $7 million $4 million related to our licensing negotiation and marketing and advertising up $2 7 million, which is typically higher in the fourth quarter.
Looking at our projection of full year 2023, total noninterest expenses.
We expect total noninterest expense for the full year 2023 to increase at a percentage rate in the mid teens over our 2022 reported level.
Our continued expansion in Houston, and Dallas, and the introduction of our mortgage product accounts for about 2.5% of that projected growth.
Also impacting the projected growth rate a significant investments that we will be making in information technology for both people and infrastructure.
Investments in marketing in both advertising and people as we focus on expanding the kingdom communication of our value proposition and expense growth is also impacted by costs associated with continued support of our staff.
Yeah.
The effective tax rate for the fourth quarter was 13% or about 13, 8% excluding discrete items. Our current expectation is that our full year effective tax rate for 2023 should be in the range of about 14, and a half to 15, 5%, but that can be affected by discrete items during the year.
Regarding the estimates for full year 2023 earnings. Our current projections include a 25 basis point fed rate increase in February followed by a 25 basis point decrease in July .
Given those rate assumptions in the 2023 noninterest expense growth of mid teens. We currently believe that the current mean of analyst estimates of $10 89 is reasonable.
With that I'll now turn the call back over to Phil for questions.
Thank you Jerry will open it up for questions now.
Thank you the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time.
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The first question today is coming from Abraham kind of one of those bank of America. Please go ahead.
Hey, good afternoon.
Hey, Brian .
First wanted to follow up on <unk> remarks.
Hello around commercial real estate.
Two things one you mentioned the impact from rate hikes was having an impact on the pipeline cooling off.
But at the same time, we talked about the strength of your book, but this is like how do you see this playing out if interest rates don't get caught one.
And maybe this may not play out at first but do you see that.
<unk> been in this sector at across your markets can manifest themselves over the next 12 months across multifamily office, and and and and and how do you think that sound place to impacting cash flow for your customers may be it is a pressure on <unk> as you look out what would love some color.
Around that and just your thought process at all but the risk for the market and how it may come back in 10-K, it though in terms of risk too fast.
Okay.
Okay. Thanks Ebrahim.
You know, where we are seeing some tightening on debt service coverage ratios as I mentioned, but we.
We don't expect let's say multifamily for example to be under water on those.
The word that I got from our credit people was.
So we feel pretty good about it.
If you look at I think I gave you what our loan to value on our offices was about 56%. If you look at our.
Loan to value on multifamily it's 58%.
About half of our deals or will.
Will be completed in 23 of the other half from 24, So I don't think there's a lot of <unk>.
Pressure today as it relates to our portfolio while also.
Here from our people that rents are keeping up.
For now so that's that's helping things but costs are also increasing.
I think in this market.
If you have issues.
It's been kind of what everyone has been hearing it's going to be the lower class a office buildings, where you've got.
Youre, losing tenants and and you've got some risk some risk around that but.
I didn't want to give I don't want to get the feeling that we've got you know problems I just want to make sure I'm being honest the things are tightening up if you took a look at our portfolio I was asking about I guess the office portfolio I think we have.
$44 million.
Of what might be problem credits.
What is the portfolio, it's a prop.
Probably.
Over 1 billion right. So you don't really have much better issues and theyre kind of specific.
But.
So again I don't want to give the impression things are too.
Or are too negative, but I didn't want to give any impression things are not as good as they were I would also say that.
You know property taxes is a big problem around here and they've seen a big increase so when you combine that with interest rates.
And then also operating costs on our apartments multifamily you know, it's going to create some pressure but.
At this point not so much again, all offices are probably the biggest concern I'd say generally in the market because I don't think anybody has figured out what's going to happen with offices over the next couple of years, where we're still trying to figure it out as a business. So I'm, sorry, I don't have any better clarity on that but.
That's what we're seeing any brain.
And then one day you mentioned about the earnings outlook for the <unk> give us a sense of what do you expect in terms of net interest income growth for the year and how you see that trending do you expect and I continues to grow given just what do you expect in terms of loan and deposit growth or do you see Oh.
Could you keep it and I declined quarterly at some point in 'twenty.
<unk>.
Yeah sure I think that you know I said last quarter, we got a little bit into 2023, and we were talking about the NIM percentage.
That where currently we don't expect that you know the fourth quarter was our peak I still think that obviously, we had a nice increase between the third and fourth quarter 30 basis points I don't see that sort of a growth.
Into the into the first quarter, but certainly we do see a do you expect some some improvement and I in my mind I think given our assumptions that we will see a rate increase in in February and then a decrease in July I would expect that our our NIM is probably a given our assumptions probably peaks in the third quarter.
As far as you know.
We're not going to give specific percentage growth on a on net interest income, but it's a year over year I think we grew between 'twenty, one and 'twenty two say, 30% I don't think we'll be there based on kind of what I'm, saying, but.
I think we're going to have strong growth this year compared to last.
Got it thank you.
Sure.
Yeah.
Thank you. The next question is coming from Steven Alexopoulos of Jpmorgan. Please go ahead.
Hi, everybody.
Hey, Steve I wanted to start on the deposit side, so the outflows of noninterest bearing where a fairly sharp it a bit more than we were looking for and I know you mentioned repos, but could you give a little bit more color. What you saw in the quarter or what you might still see a risk of moving out of noninterest bearing.
T that mixed stabilized.
Yeah on the noninterest bearing I think what I said on the noninterest bearing as you know that's really been kind of the area that I've been concerned about that.
We had some exposure there and I continue to think that's really the area, where we have the most exposure.
Yeah.
With rates, where they're at today and we all know there's some pretty nice rates out there I think that it really is compelling a lot of treasurers and cfos to make sure that they are managing a managing their liquidity well in and looking for for alternatives I think that certainly we can be competitive in.
A lot of situations, but theres, probably going to be cases, where we're going to see some some deposit outflow on especially on some of the larger balances, especially I think that's where most of the risk is you know I don't think it's anywhere unique to anybody I think that from a deposit rate standpoint, you know our our rates I think our competitor.
Live with banks I think the challenge becomes you know trying to compete with some alternative sources.
But I do I do expect that the commercial side on the commercial DDA is probably the most at risk in my mind.
Got it okay. The journey in terms of the loan to deposit ratio moved up slightly through 2022, I hear what you're saying I'm, putting liquidity to work in the securities book, but should we expect a similar trend through 2023, just basically funding loan growth with deposit growth.
Yeah, I think that for 2023, I think that the.
Probably the bigger unknown in my mind, it's more what happens on the deposit side.
Then what happens on the loan side I think phil's given some good color of what we're seeing in loans are I think without knowing exactly what happens in the economy, there might be a little uncertainty there, but I think we feel we feel pretty confident because that deposit side. So you could you know because we've always said the loan to deposit ratio from our standpoint.
It's really a results in fact, right because we're really out to grow both deposit.
From a relation standpoint relationship standpoint and loans so.
So I think that you know.
Given that I don't project that we will have the sort of increase in deposits that we've had the last couple of years I expect that to be much more muted.
2023, you may get some improvement in that ratio just simply because the denominator decreases got it okay. And then finally on the expense side. So you reported mid teens expense growth 2022, basically in line with what you had guided for the year now guiding mid teens for 2023 more investments.
So you'll have to make when you guys take a longer term view do you think for a period of time. We just you know you'd be on 2023, we stay in this mid teens range or do you see this as sort of a two year scenario and then we get back to something more normal after that.
<unk>.
Steve It's a good question I think that.
I think the.
Simple answer is 2023 is an unusual year for us.
I expect to see our run rate on expense growth to go down in 2024, and Jerry mentioned.
You mentioned, the I T investments mentioned marketing.
And as I've talked to investors over the last couple of years have been pretty open that there you know there are some things we're going to invest here, we're going to invest in physical distribution.
Hope by now we've proved to everyone that that's that's a pay off for shareholders are going to continue to be we're going to continue to do that that's we sort of set that aside okay. So.
But we're also going to invest in people.
And you saw those numbers on salaries, I mean, they're pretty sobering, but we were competing in the marketplace. I think we're being successful there I think we've reached a place where we're touching bottom and I was looking at our turnover rates are rates.
You know last year. It was in 2021, our turnover was.
26 call it 23%.
This year.
It was excuse me in 2022, it was 14% it was down from 23% in 'twenty. One. So that tells me that we are hitting the right balance of what we need to be paying people.
Not a lot.
All benefits, making sure that we have comparative and really top quality benefits in areas in health care and retirement those kind of things. So we're really focused on that.
We said that we're going to invest and in marketing that that was one area that.
We really hadn't done.
One of the key areas that we hadn't done we needed to and we've we've hired some great talent there.
Did that last year and we are so we've got those costs, but we've also got some additional media that we're gonna be investing in and we need to.
Look I think we've been winning.
On account growth and growing the business and I think we've done it without you know kind of what was sort of a marketing hand tied behind our back I think we get that out from behind her back it's going to really help us I'm I'm optimistic about that and then the third one on the fourth one that we said we're going to be investing in it and cyber.
And that's the big that's the big number that Jerry.
<unk> is talking about you know because we are.
As we looked at this and did our planning for this year.
You know, we really call this a generational.
Investment.
And it's really I'd say around five.
You're interested I'd break it down to say three areas one is customer experiences in growth, which really revolve around digital mobile for the consumer and commercial businesses, where we are almost doubling our number of digital agile teams were growing six to 11 two.
All of them in the commercial area.
We're speeding up modernization on certain core systems.
Sure.
There are three of them, we needed a new loan system.
We need to invest in real time payments, which is developing competitive issue and we need to take care of our check processing system, which is at end of life, where a big correspondent bank provider. So check your checks are going away, but they are not gone and we process a lot of them. So that's.
35% in terms of that core modernization and then we need to continue to.
Expand our efforts on I'll call information security and fraud mitigation thats, probably the other 15%.
And.
That's a big percentage increase we've increased I T.
So let's see we've been.
11%.
For 19 in 2020 two it was up 8% and 21, we really backed down expenses all over the bank that year, but in 2023, we're looking for 24% increase in IP related expenses.
And that's a that's a general what generational.
The estimate.
And necessary I T.
And I'll say, it's necessary because remember our success competing.
And I believe we're winning at the organic growth competition is from an empathetic customer service experience and from Great technology, and we can't sleep on that technology piece now having said all of that.
I don't believe those are investments that we're gonna have to make at the same level.
As we look into next year in 2024 so.
It is it's a big number we hate spending money, we hate waste and even worse and so.
I don't think we're doing that but we do need to do this to compete where we are and I think we'll see that run rate to go down as we hit 2024 and beyond.
Got it thanks for all that color really appreciate it well.
Well.
Thank you. The next question is coming from Dave Rochester of Compass point. Please go ahead.
Hey, good afternoon, guys just a quick one on the NII Guide was curious what the impact as you see from the rate hike in February and then the rate cut in July with the NIM sensitivity is for those moves that youre baking in and it sounded like youre, assuming a positive, but maybe more muted deposit growth trend for the year was wondering if you could.
Given update on the the total deposit beta assumption, you're not baking in to that.
Right I guess I'll just start with the deposit betas. So I mean, I think we ended up the year kind of where we expected we would be.
We'd said that we'd be about 30% on our interest bearing at about a 20% 20% to 25% on total and that's really kind of where we ended up so I think for we were higher in the fourth quarter.
I said it in the third quarter that I thought we have to be a little bit more aggressive than we were but we ended up accumulating cumulative Lee exactly where we expected in.
In the fourth quarter as far as betas for for next year or this year excuse me I think basically what we're assuming is that we would have the same sort of increase that we had in the.
First quarter in February is kind of where we'd go back I think we're assuming a little bit more aggressive betas.
Betas say, what we read about it.
30% on interest bearing I think we're probably assuming right now that we'd be somewhere closer to the 33% to 35% and then our assumptions are that we would take all of that back in July but we'll just have to see I think we said all along is we want to see kind of where the market is but those are our current assumptions.
Hey.
And I think you had one other question on.
Yeah. It does.
Our activity to the rate moves that you guys are looking at the hike in February and then the cut in July how much that we think will move the NIM.
Okay.
Yeah.
Our NIM standpoint, I don't think it's gonna have a significant impact on the percentage itself like I said I don't want to be careful we don't really give all that sort of level of detailed guidance, but what I have said is I do think that percentage will peak in the third quarter I'm just right before our projected decrease.
And I think that you know, we're we're feeling good about where we're at a lot of it'll be dependent on what happens on on those deposits.
Said.
Yeah, we do I feel like it's a little bit more muted.
In 2023 than it was in 2022, yeah. Most certainly I mean, I think we saw some of that just in the linked quarter.
Move my although a lot of it was moving into repo and so we had certain customers coming out of the money market account and choosing to move into the repo accounts.
Because of some sort of.
Operational processes and money flow issues that they that they liked more than the repo and also the fact that that product is is collateralized. So we did see some movement. There. So I tend to have less concerns, although it's still going to be relatively soft it's going to be softer than we saw this year on the interest bearing side, but most of the risk is.
On the on the commercial DDA in my opinion as far as what we think a 25 basis point hike gives us it gives us about on a pretax basis, a little over $3 million a quarter.
Okay, Great and maybe just one last quick one on the 159 debt service coverage ratio you gave on the office book, that's an updated figure for today's rates is that right.
Yes, that's where we stand on average today.
Okay, great. Thanks, guys Hey.
Hey, Dave did I I, just want to make sure when I said that around a little over three that's on an after tax basis I couldn't remember if I said pre tax or after tax.
Okay. Thanks, Alright.
Sure.
Thank you. The next question is coming from Brady Gailey of <unk>. Please go ahead.
Hey, Thanks, good afternoon guys.
Hey, Barry.
I wanted to start with your comment about we're all on the bond portfolio I think on a net basis of about $2 2 billion in 2023.
If you look at the amount of cash.
<unk> still has you know at least on an average basis in the fourth quarter was 24% of average earning assets. So it feels like you could do potentially more than the 2 billion, adding to the bond book, especially.
The rates are are more attractive today.
Is there some possible upside to the amount of bonds that youll consider adding in 'twenty three.
Okay.
You know I think that yes, that's a possibility obviously you know right now what we're really concerned with is it's just making sure we understand exactly what's going on with with deposits.
You know I.
I guess, what I'd say is that it's something that we're talking about you know should.
Should we get the opportunity if we think something we get an opportunity.
Opportunity on the yield side with with some sort of a market correction, we could jump in but so there is that possibility, but I think right. Now we're really you know the numbers that we're giving is really kind of the way we're modeling.
Like I said, it I never say never sort of thing, but I would go with our projections.
Don't expect let's not forget that you know and.
In 2022, we spent 886 billion I think growth in that year, we only had a little over eight.
$8 6 billion, we only had a little bit over a million in inflow. So net we spent seven and a half. So we've moved the needle quite a bit.
And so we've made some purchases already in the in January of this year at $1 billion I think roughly so you know could we yeah I don't see that as a high probability at this point, but yes, that's always a possibility given what happens in the market.
Okay.
And my second question is on mortgage as the relatively new unit gets up and running for you guys. I think that's an originated key model not an originated sell model.
As that business continues to mature do you think that that you know.
We'll push the loan growth outlook.
On the high single digit just because you'll have that new lever off loan growth as you keep those mortgages.
Good question Brady.
Don't know if it goes you know high.
High single digits, but it will be additive to it I don't have it in my mind enough to know how much.
And how much that would move the needle, but it's going to be.
A significant part of the portfolio the way I hope it turns out.
If you look five years out.
<unk>.
Now 10 ish percent of the portfolio back when we used to have them on the book before I think were around that that are.
You know 10, 12% of the portfolio so.
I, just think directionally would be in that same level. So if you kind of took what would that be what kind of volumes with that you could sort of pencil out.
How much that might add to growth.
Okay, great. Thanks, guys.
Okay.
Thank you. The next question is coming from Manav <unk> Morgan Stanley . Please go ahead.
Hi, good afternoon.
I had a quick follow up on on the on the expense side.
These expenses that you have pretty much set in stone for 2023 or <unk>.
Do you have some flexibility depending on which way the overall environment goes.
And then I also had a clarification.
On your comments that the run rate moving lower.
Do you think that basically the gorilla III moves lower off of the new expense base in 2023 as you go into 2024 or do you think as you get the new.
Loan system, and check processing system et cetera, we're running and the old one rolls off at the actual dollars can stabilize or come down as you go into 'twenty one.
Well my comments really werent intended to indicate that the dollars would come down because you know obviously, we're growing company, we're going to continue to.
Invest my point is I don't see us investing at the same level with with some of these I mean for example, I didn't mention it but take mortgage.
Bootstrap that operation.
We spent some serious money doing it fantastic products is going to be a tremendous product for us going forward, but we don't have to rebuild that.
You know next year so.
We're going to have that same level of cost.
Structure, and it'll be higher because of inflation and growth that kind of thing, but we're not gonna have to bootstrap. It so.
That's really what I'm pointing out I think we're making a lot of these generational investments that were really going to be trying to harvest and I will be dealing more with an increasing expense base, but just not increasing at the same level that we have.
That's my hope, that's what we're going to try to manage to.
Got it alright perfect.
And then a follow up on the prior questions on the Securities book I guess, even if you don't get a market correction opportunity to make larger purchases E. R.
Given that we've come off the highs and yields.
What would change your strategy to maybe accelerate some of the investments are in that Securities book.
Yeah, I think that if we felt like there was a correction.
You know that that was significant that got our attention I think that we would accelerate that.
Got it and any thoughts on what.
Once once the fed.
Begins to cut rates, what's your cash position should look like and as a percentage of earning assets.
You know, it's really not we've kind of been all over the board you know I think the the thing is today, we've got it you're right. We've got more liquidity than we had have had I think that we feel comfortable being able to bring that down.
To something much more normalized but we don't have a number out there are a lot of it's going to be dependent on what we're saying.
I think if you know if you've got say something in the as far as earning assets are concerned something in the in the range of 10% or lower I mean, I think we could be somewhere in that range.
Got it thank you.
Mhm.
Once again, ladies and gentlemen, Thats Star one to register any questions. At this time. The next question is coming from Peter Winter of D. A Davidson. Please go ahead.
Thanks, Good afternoon.
So you guys are sitting on.
He's sitting on very strong.
Capital ratios low credit risk I was just curious what your thought is on share buybacks I know, it's not a focus but.
What are your thoughts on share buybacks here.
Yeah, it's really not something that's top of mind to be quite honest with you I think that.
Now, we really don't even have one in place.
You know I think our we had $100 million one that expired.
We expect that we will bring that back into the toolbox here in the near future, but we get we had one for all of 2022, we didnt utilize it we've got primarily to ensure that if we did see some market correction on our stock that we'd be in a position to take a take advantage of that but right now it's a.
I think from a multiple standpoint, I think we feel.
You know that capital is better served with through organic growth and.
I think there were some concerns that not that we were concerned but I think the market has some concerns about tangible capital and given that concern some of the questions. We were getting my COO.
Can't see that we are we've pulled the trigger anytime soon.
Okay.
And then just on office space.
Phil I heard your comments.
Most of your exposures to the a.
Type properties, but I was just wondering if you could comment what you're seeing on the B and C properties and like Houston and Dallas.
Okay.
You know just.
There really arent many that have come to my radar portfolio wise.
No.
Yeah, that's going to cause that's been well known sponsorship guarantees.
Equity all of those kinds of things right. So.
I can just tell you that you know.
What youre seeing all over the country.
Is that the P&C properties just.
Are you know hard to get people into them and I can imagine there are some issues out there it's.
I.
We don't have anything that's.
You know more complex and that just recognition that.
People aren't using as much office space and it better be nice if you're going to try to get employees to go into it.
Got it.
Thanks.
Uh huh.
Thank you. The next question is coming from Jon <unk> of RBC capital markets. Please go ahead.
Hey, good afternoon guys.
Hey, John .
You've gotta be nice to get people back that's a good comment.
Just most of my questions were scratched off computer just took one of them, but you made a comment earlier, Phil about the prospect pipeline.
Versus your own pipeline and the difference between the two.
Can you just talk about that a little bit more and maybe that's more of a competitive environment question, but.
Help us understand that a little bit more.
Yeah, you know.
We are getting lots of calls for deals right because we've got liquidity, we've got consistent underwriting people know what we do in the marketplace, you know and as far as that goes you know underwriting tightening tightening up its coming our way.
You know as far as guarantees and equity and all that kind of stuff, but my point was.
And I should also say that you know we know.
We're not looking to do all those deals we think people not things right and we bank relationships, but there might be some relationships that we've been wanting to have that we'll see the opportunity to do okay, and we're always on a look out for that and now the phone rings more so so we see prospect.
Activity to me is more.
It's more of an advantage of us having a balance sheet that we do in and reputation we do.
On on our customers to me, it's kind of like same store sales I know, it's not that but I mean, you already have the customers and youre going to and the and the deals you have in the pipeline for them or the deals that are looking to do their new deals. We're looking to do right, they're not necessarily deals that are out there that already been papered already been.
Yeah.
That are in the marketplace that you'd like to see what the prospect.
My point is as I looked at it to me it was like Okay. Our customers. We've got their business. If we're not seeing new deals from them its because theyre not doing new deals.
And or their or their slower on them, but but we are still seeing good prospect.
Deals that are out there in the marketplace.
Just because of the advantages that we have is that maybe I'm off on that but that's not that's what it meant to me.
Okay. Okay.
Good that's helpful. And then just one other thing on the on the step up in it.
Security expenses.
Are you, saying that that's a permanent step up or it's just kind of modernization in core.
Spending related just for 'twenty three are we talking about a growth rate in expenses slowing in 'twenty, four or your expenses kind of flattening out and coming down to 24.
Yeah, John it's growth rate the growth rates coming down I mean, once once we bake.
As soon as you are and you know to our.
Base.
Expense flowed I mean, its staying in there you know and there'll be some growth on it you know because inflation all those kind of things, but it's.
But we won't be having to do the same thing again are our growth rate.
Four out of the last five years.
Three out of the last four years.
Before this year has been 11% so.
And it is a is a cost that is.
You know I used to be health care was the out of control costs I think it's clearly I T. These days and.
We will need to get it back down to those historical levels.
Okay, Alright, thanks, guys.
Hmm.
Thank you, we're showing no additional questions in queue at this time I would like to turn the floor back over to Mr. Green for closing comments.
Alright, well, we want to thank everyone for participating today and thank you for your questions and for your interest will be a journey.
Ladies and gentlemen, thank you for your participation and interest in Cullen Frost bankers. This concludes today's teleconference. You may disconnect your lines of log off the webcast at this time and enjoy the rest of your day.
Okay.
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Yeah.
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Okay.