Q2 2023 Cullen/Frost Bankers Inc Earnings Call
[music].
Greetings and welcome to today's.
Cullen Frost Bankers, Inc. Second quarter earnings Conference call.
At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host a b Mendez senior Vice President and director of Investor Relations.
Thank you. Please go ahead.
Thanks Donna.
This afternoon's 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 provisions.
Some of the remarks made today will constitute forward looking statements as defined in the private Securities Litigation Reform Act of 1995 is a method.
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 this morning's earnings press 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, a b.
Good afternoon, everyone and thanks for joining us.
We are.
Our hearing to review second quarter results and our Chief Financial Officer, Jerry Salinas is going to provide some additional comments before we open it up to your questions.
And then in the second quarter coming Frost earned $164 million or 2447 cents per share compared with earnings of $117 $4 million or $1.81 a share reported in the same quarter last year.
That represents a 36.6% increase over last year's level.
Our return on average assets and average common equity in the second quarter were $1, three zero percent and 19.36%, respectively and that compares with a 492% and 13.88% for the same period last year.
Once again I'm proud of the solid performance turned in by our outstanding staff in this unusual economic environment.
The continued rate increases by the federal reserve in their fight against inflation have had their intended effect by slow on some segments of the market.
In addition, increasing rates continue to raise the opportunity cost for businesses holding cash in liquid deposits. These impacts are to be expected through the rate cycle and we will continue to play themselves out during this period and Jerry will provide some great insight into their near term effects.
As we said last time.
During the second quarter Cullen Frost did not take on any federal home loan bank advances participate in any special liquidity facility or government borrowing at.
Access any broker deposits or utilize any reciprocal insurance arrangements to build insured deposit percentages.
But notwithstanding all that we believe the most important thing for us to focus on at this time is that we are successfully executing our mission to grow and prosper building long term relationships.
Just on top quality service high ethical standards and safe sound assets and I believe the results for this quarter show, we're doing just that and I am excited about our prospects and let me give you a few examples.
Yeah.
Looking at our commercial.
And private banking business, we had the best quarter ever for new customer relationships, which were up 33% from last year and were up 53% from the previous quarter that was 1145 new relationships.
I think it's also significant that almost half of those new relationships, 45% came from the largest banks, we affectionately know as too big to fail.
No I normally wouldn't go into this level of detail, but I'm going to read to you the an annualized linked quarter growth rates and new relationships by region, because I think it's fascinating.
And tells me that it's not an isolated occurrence in one specific market.
Houston led all regions with 333, new net new relationships, which was up 63% from the previous quarter.
Dallas produced 262, net new relationships, which was up 32%.
San Antonio produced 172, net new relationships, which was up 107%.
Fort worth produced 156, net new relationships, which was up 20%.
Boston produced 117, net new relationships, which was up 102%.
The Gulf Coast, and Victoria regions produced 68, net new relationships, which is up by 48% in the Permian Basin produce 37 net new relationship.
Which was up about 28% remember these numbers are not annualized to me. This is that we are winning competitively.
Looking at our commercial lending business, we saw an increase in activity related to new opportunities.
19% and an increase in our probability weighted pipeline by 27% from the first quarter. So we're seeing deal flow.
In fact, we looked at 20% more deals in the first quarter, but that said book deals were down 8%, because we declined more and more deals were withdrawn by the customer.
We're obviously being more careful in this environment, but I think the increases in opportunities as notable.
I'll also say that unlike the previous quarter, we saw more opportunities from our customers and prospects prospect opportunities were up 7% for the first quarter from the first quarter, but customers were up 34%.
Looking at our consumer business in the second quarter, we set an all time high for net new relationships at 8529. This beat our previous all time high which was achieved in the first quarter by an unanue.
<unk>, 6%.
Our Houston market, where we have the most mature expansion effort leads the way here with 2600, net new relationships, while Dallas and San Antonio produced about 1500 each.
Consumer loans ended the quarter at $2 $6 billion or 27% increase from the second quarter of last year and continues to be driven by consumer real estate is our home improvement and home equity products continue to provide the right product at the right time for customers with low rate mortgages.
And great credit scores.
Included in those numbers were over $12 million in mortgage loans as a part of our measured rollout of this product beginning in the Dallas market.
Towards the end of the second quarter, we announced our upcoming expansion into the Austin region, which will build upon the momentum from our Houston and Dallas expansions, we plan to double the number of locations. We have in the Austin area from 17 to 34 Austin is Texas.
Third largest deposits deposit market and we already ranked fourth in deposit share.
These locations will have a strong legacy to build on.
Our Houston expansion, including the 25 original locations plus the additional ones, which we call Houston 2.0.
The most recent of which just opened in Friendswood last week.
Expansion branches there are at 121% of household goal of 164% of our loan goal.
And the 108% of our deposit goal.
Expansion in Houston now represents 1.2 dollars 7 billion in deposits and about $850 million in loans.
For our Dallas expansion, although it's early we stand at 226% of New household goal, 315% of our long ago, 377% of our deposit goal.
Expansion Dallas currently represents $261 million in deposits and $217 million in loans.
So all told we have about one $5 billion in deposits from the expansion and about $1 billion of over $1 billion in loans.
Credit quality continues to be good by historical standards.
Loans, which we define as risk rate 10, or higher total 400.
$41 million at the end of the second quarter, and that's up from $348 million at the end of the first quarter and $429 million from this time last year.
Nonperforming loans totaled $68 5 million at the end of the second quarter compared with $39 1 billion at the end of the first quarter. The result of two credits.
The second quarter figure represents just 39 basis points of total loans and 14 basis points of total assets.
Net charge offs for the second quarter were $9 $8 million up from $8 8 million at the end of the first quarter and annualized net charge offs for the second quarter, representing a 22 basis points of average loans and year to date charge offs or 21 basis points of loans, which is below our historic average.
Regarding commercial real estate, our overall portfolio remains stable with steady operating performance across asset types and acceptable debt service coverage ratios and loan to values.
Within this portfolio, what we'd consider to be the major categories of Investor CRE.
There are comprised for example of office multifamily retail and industrial and <unk>.
As examples.
<unk> totaled $3 $5 billion of Outstandings are about 40% of commercial real estate loans outstanding in total.
Our investor commercial real estate portfolio has held up well exhibiting an overall average loan to value of about 54% and loan to cost of about 60% and acceptable reported debt service coverage ratios are.
Higher interest rates have certainly led to some decline in coverage ratios compared to original underwriting pro forma as.
But we've actually seen some improvement in coverage ratios quarter over quarter for the already stabilized properties in our portfolio. For example, 85% of our Investor office portfolio is stabilized and average debt service coverage ratios increased from 1.3.
Eight to 142 this quarter and.
And we saw a similar trend in the stabilized portion of the multifamily portfolio.
The Investor Office portfolio, which is still top of mind was relatively flat quarter over quarter with $927 million outstanding. It exhibited an average loan to value of 52% and an average debt service coverage ratio of 142 at current interest rates starting from strong.
Position with a cushion for potential value declines.
Our comfort level with the office portfolio continues to be based on the character and experience of our borrowers and sponsors that predominantly class a nature of our office buildings and the fact that 85% of the exposures associated with stabilized well performing projects. It also helps to be operating in Texas.
We did have an $18 billion office building loans that we've been watching migrate to non accrual during the quarter, but overall the office portfolio and really entire investor CRE portfolio.
Did not experiencing identification of anything material in terms of weak or underperforming critics or projects that we were not already watching.
So to conclude as I said earlier I'm proud of our performance and what our bankers have been able to accomplish as well as the competitive success. We continue to exhibit in our markets and now I will turn the call over to our Chief Financial Officer, Jerry Salinas for some additional comments.
Thank you Phil.
I wanted to start off first by talking a little bit about our Houston 1.0 expansion results. As a reminder, the last of those branches was opened in 2021. So these branches are still in what I call. The development stage as Phil mentioned, we've been very pleased with the volumes, we've been able to achieve looking.
Looking at the second quarter linked quarter annualized growth in average balances for these locations was 31% for deposits and 17% for loans and for the second quarter Houston, One no contributed five cents to <unk>.
Orderly earnings per share.
Now moving to our net interest margin.
Our net interest margin percentage for the second quarter was 345% down two basis points from the 3.47% reported last quarter.
The decrease included some positives that were more than offset by some negatives on the positive side higher yields on loans and balances at the fed combined with higher loan volumes were more than offset by higher cost of deposits and customer repos and lower deposit levels at the fed compared to the first quarter.
Looking at our investment portfolio. The total investment portfolio averaged $21 3 billion during the second quarter down 466 million from the first quarter during the quarter, we did not make any material investment purchases.
During the quarter, we sold about 360 million in municipal Securities as we took advantage of market dislocations, which allowed us to improve interest income going forward. We recognized a net gain of about 33000 on those transactions.
The net unrealized loss on the available for sale portfolio at the end of the quarter was $1 six 1 billion, an increase of $207 million from the $1 4 billion reported at the end of the first quarter.
The net unrealized loss on the held to maturity portfolio at the end of the quarter was $148 million up $37 million from the first quarter.
The taxable equivalent yield on the total investment portfolio in the second quarter with $3, two 4% flat with the first quarter the.
The taxable portfolio, which averaged $13 8 billion approximate up approximately $439 million from the prior quarter at a yield of 271% up four basis points from the prior quarter.
Our tax exempt municipal portfolio averaged about $7 5 billion during the second quarter down about $905 million from the first quarter and had a taxable equivalent yield of 4.27% up four basis points from the prior quarter.
At the end of the second quarter, approximately 72% 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 two years down from five five years at the end of the first quarter.
Looking at deposits on a linked quarter basis average deposits were down $1 8 billion or four 1% with about 80% of the decrease coming from noninterest bearing deposits I wanted to talk a little bit more about our noninterest bearing deposits, which totaled $14 9 billion at the end of the quarter with 96% of that.
Being commercial demand deposits.
During the individual months of the second quarter, we did see the average balance in the noninterest bearing accounts began to stabilize.
During last quarter's call, we said that we expected deposits due to continued to decline as this has historically been our seasonal trend that deposits peaked in the fourth quarter and reached their LOE in the second quarter before beginning to grow in the second half of the year I.
I also noted that April noninterest bearing deposits were down $492 million from March and that we expected that April average decline given the anticipated impact of seasonality, including tax payments.
April noninterest bearing noninterest.
Noninterest bearing balances decreased 587 million from March almost $100 million more on average than at the time of our call.
These average balances decreased 441 million in may with the average effected by tax payments in April and then decreased 108 million in June and month to date through yesterday July average balances are down $202 million from the June average.
The June and July average balances have seen the pace of outflow began to slow down and we are anticipating that slower pace of outflows to continue but.
But with interest rates at these levels there continues to be uncertainty with these customer balances customers have attractive risk reward options in this rate cycle that didn't necessarily present themselves in the last cycle, which provides them with multiple options for the utilization of these bonds.
Looking at total interest bearing deposits they've been relatively stable during the period average interest bearing deposits were $25 8 billion during the quarter down $345 million or one 3% from the first quarter we.
We do continue to see a shift in the mix to a higher cost Cds from the lower cost savings IOC and MMA.
The cost of interest bearing deposits in the second quarter was 187% up 35 basis points from 152% in the first quarter.
Customer repos for the second quarter averaged $3 7 billion down $492 million from the $4 2 billion average in the first quarter as we saw some flows out of our repo product, including for tax payments during the quarter.
The cost of customer repos for the quarter was $3 five 2% up 32 basis points from the first quarter.
Looking at noninterest income on a linked quarter basis I just wanted to point out a couple of items Trust and investment management fees were up $3 2 million or 9% compared to the first quarter driven by increases in estate fees of $1 6 million real estate fees of 751000 and investment fees.
463000, a state fees and real estate fees can fluctuate based on the number of our states settled a property sold respectively.
Insurance commissions and fees were down 6 million or 32% from the first quarter driven by lower P&C contingent bonuses down $3 1 million benefit commissions down $4 8 million and life commissions down 867000 <unk>.
Partly offsetting these unfavorable variances was a 3 million dollar increase in P&C commissions when compared to the first quarter. As a reminder, the first quarter is typically our strongest quarter for insurance revenues given we typically recognize contingent income in that quarter and are also impacted by our natural business cycle the second quarter.
It is typically our weakest quarter for insurance revenues again impacted by our normal renewal business volumes.
Looking at our projection of full year 2023, total noninterest expenses as I mentioned last quarter. We currently expect total noninterest expense for the full year 2023 to increase at a percentage rate in the mid teens over our 2022 reported levels. This does not include the potential impact of the S.
Yeah, I see special assessment, which has not yet been finalized.
Yeah.
The effective tax rate for the first six months of the year was 16% or about 16, 2% excluding discrete items. Our current expectation is that our full year effective tax rate for 2023 should approximate 16%, but that can be affected by discrete items during the rest of the year.
Regarding our stock buyback I want to mention that during the second quarter, we utilized about 20 $28 million of our $100 million approved share repurchase plan to buyback approximately 280000 shares at an average price of $96 <unk>.
Regarding the estimate for full year 2023 earnings.
Our current projections don't include any additional changes to the fed funds rate through the rest of 2023.
Given that rate assumption and our expectation of 2023 noninterest expense growth of mid teens, which does not include the impact of the FDIC Special assessment. We currently believe that the current mean of analyst estimates of $9 63.
Is a little high with that I'll now turn the call back over to Phil for questions Alright, Thanks, Gerry and now we will open it up for your questions.
Thank you the floor is now open for questions.
He would like to ask a question. Please press star one on your telephone keypad at this time a confirmation 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 for participants using speaker equipment. It may be necessary to pick up the handset before pressing the starkey once again Thats star one just about to start.
Questions at this time.
Today's first question is coming from Brady Gailey of <unk>. Please go ahead.
Hey, Thanks, good afternoon guys.
Hey, Greg.
So your net interest margin has held in very well, especially relative to the industry, which saw NIM slippage.
By a decent amount this quarter for most of your peers.
Do you expect the net interest margin to continue to hold in relatively well or do you think that at some point you will see some real downside there.
You know what I'd say Brady.
Thought that are you know last quarter I said, it was going to be relatively stable I think I'd stick with that except that I would say that there is a downward bias.
When I talked about the two basis point decrease that we had between the first and the second quarter. All of those are positive and negatives are still you know kind of affecting us going forward. So.
Say kind of stable, but again with probably more towards a little bit negative bias, but I don't see it changing significantly not based on anything I am saying.
Okay, and then I know in the past you guys had talked about some of the financial impacts of expanding into a new market like Austin I don't think they've moved the numbers a ton, but any guess on the financial impact of the Austin expansion over the next year or two.
Brady, we would we will talk about that in January we really would give some guidance on and obviously, it's going to be primarily expense base at the beginning as you know.
We start putting those a locations together I don't expect for 2023 that they'll have a significant impact so any impactful will start feeling next year and what kind of give some color at the beginning of the year.
I'd just might add Brady that.
Just the scope of its a little bit smaller just by its nature than Dallas or Houston.
The expansions that we've had there so.
Pound for pound it'll be about the same but the scope of its just a little bit small.
Okay, and then finally for me.
Or are there still at a very low level, but I think I heard you mentioned two credits move into the NPA bucket one was <unk> 18.
The $18 million office loan what was the other NPA that went into that bucket this quarter.
Yeah. It was in the in the pre owned auto sale dealership and the higher interest rates really impacted its carry costs and also the performance of some of the paper that it carries.
And so we thought it was appropriate to to recognize that so it wasn't real estate related but it was it was in the automobile area.
Yes.
Okay, Alright, great. Thank you guys.
Thank you. Thank you.
Thank you. The next question is coming from Steven Alexopoulos of Jpmorgan. Please go ahead hi.
Everybody.
Steven.
Start some of the non interest bearing deposits last quarter, you guys thought it would come down in <unk>, and then stabilize and we're seeing continued outflows I'm just curious what's taking customers. So long reach that amount of operating cash that they need to find hard to believe with every move there like digging deeper and deeper I would've thought.
Pretty much can be done by now.
I think Steven it's.
As I've said in my comments I think the rate environment that we're in is so unique and so different there's a lot more opportunities for them to invest that money, it's I'm really impressive rates and so even though I said that in my mind, a couple of hundred million dollars is certainly better than the $500 million.
600 million decreases that we were saying, but I do think that there continues to be volatility. There I think there's just too many options for for them to utilize that funds those funds, whether it's to pay off any debt that they might have or decided to invest it.
And investment could certainly be and we've seen some dollars obviously flow into our off balance sheet, either trust areas or treasury areas.
So I think you know.
Now I'm with you I kind of thought most of it was gone, but I think in the in the environment, we're going to continue to see some pressure there I think the upside for US is as Phil mentioned, we really feel very positive about all the new relationships that we're bringing in.
Or see some pretty impressive deposit wins and in some cases, those commercial wins take a little bit longer to get on the books and get them closed but.
I think in this rate environment, we're just going to continue to be cautious and.
I think everybody is going to have to make the decision on how they want to invest those funds and all we can really do is to continue to focus on growing the business and adding new customers.
Okay.
And then on the balance sheet, you guys had good loan growth in the quarter or more or less fund it with securities. If you just look at the movements on the asset side as we think about the back half Jerry as maybe these noninterest bearing outflows subsided a bit do you think we'll see net balance sheet growth in the second half or will you just continue to fund loan growth with.
Other assets that run off.
You know I think that that we're projecting.
Checking some small growth on the funding side at this point nothing really material again, given the uncertainty that we've got on the commercial side.
Our projections are really do have some growth, but its not its not anything that I would say it's significant.
Okay.
And then final one so Phil I appreciate all the line items that you ran through by market in terms of customers that you guys are picking up I'm curious so youre. Your services consistently good peers are consistently not as good what is it about this environment that you're seeing so many customers.
Thanks. Thanks.
Yeah.
Yeah.
I think it's a couple of things primarily when you look at our.
And our movement in terms of growth in new relationships.
Spansion no doubt has a really big ifs.
On that I think it's really paying off in terms of <unk>.
Growing.
Growing those relationships overall, we've also been spending more and focus more on marketing I think we're doing a better job on marketing.
And then.
<unk>.
Just to be honest, we've got a great reputation and reputation for great service. So.
It's been it's been pretty exciting as we've moved into some of these markets. Some cases, we want.
I was thinking about when we opened up and I think as Dallas just recently.
The closest Frost Bank was 15 miles away and the growth has just been tremendous so as it's.
I think it's really simple I think we are investing in our business, we're growing our distribution and fantastic markets. We've got a great value proposition for service and.
And it's just and we're marketing and investing in marketing and technology I think its just all working together to win and I apologize for giving so much granularity on that but that just shows that that's really what we're focused on is new relationships. It's part of our mission statement that's called out.
And we're gonna go through rate cycles up and down and you know, we're gonna see movements of noninterest bearing deposits out and all that stuff that's going to happen, but we just focus on growing the business growing the relationships and great markets, we're going to do fine.
Okay. Thanks, and I appreciate all the detail for what it's worth thanks for taking my questions Alright. Thank you.
Thank you. The next question is coming from Dave Rochester of Compass point. Please go ahead.
Hey, good afternoon guys.
Hey, Dave.
Just going back to your EPS outlook comment for 'twenty three I know you mentioned the stable NIM with a downward bias to that that was helpful to hear what's just wondering how you're expecting that to translate into NII trends for the back half of the year. At this point are you thinking stable NIM and stable funding what you just mentioned.
Would she gets you to stable listen I or how are you thinking about that at this point as you look at your EPS outlook.
Yes, I guess the thing that I would focus on is it's kind of where we ended the quarter on the deposit side.
I've mentioned to Stephen that we're not projecting a whole lot of growth from there for the rest of the year and so that that obviously will have some impact on net interest income. So I think that's really where the pressure is.
Okay.
And then regarding deposit trends.
You said earlier it sounded like you're baking in marginal deposit growth or marginal funding growth I guess in the back half.
Are you assuming that DTA continues to decline through that period as well I know you mentioned that the run off it's subsided a bit but.
Is that the general expectation now you can see that mix shift through the end of the year.
Yeah, and again, we're projecting growth, but you know I think that on an annualized basis I think we're at a 2% or something like that that we're projecting what's interesting is one 1% of that is our legacy banking and 1% is coming from our expansion. So obviously, they're having an impact on our and our.
Our growth.
But that that aside I think that that gives you some perspective on the side of the size of the.
Deposit side that we're projecting in and I think the mix I would expect that it's probably will not change a whole lot, but if there is a movement I would expect the pressure continues to be more on the on the noninterest bearing side than on the interest bearing side and on the interest bearing side I think we're starting to see some settlement there on rates, but with this rate hike will actually all the.
You react to that but I think you'll still see some movement of mix.
But it appears to everything stabilizing certainly a lot more than we saw just a quarter ago.
Yeah, Okay, and then just given where we are in the rate cycle have you guys been reducing asset sensitivity at all on this in the past quarter or do you have any plans to do that in the back half of the year, just some swaps or anything else.
You know I think right now were really kind of sitting tight.
Obviously, you're looking at a lot of opportunities and things that we can do but at this point I wouldn't envision that we're doing anything very drastic obviously asset sensitivity is.
Diminishing as the balances that we're holding at the fatter diminishing as as you were saying that the decreases in our noninterest bearing deposits, but other than that I'm not doing anything actively.
Okay, and then maybe just one last one on expenses.
Preceded the reiterated guide there it seems like just given where we are in the first half you were looking for a pretty steep ramp up in the second half is that kind of what you guys are looking at at this point is that likely to see that kind of a ramp up.
Yeah, that's that's kind of what we're saying you know we are we obviously review our projections are monthly in and talking to our lines of business and you know what.
The thing that we're seeing certainly is pointing us in that direction.
Okay. Thanks, guys.
Thank you. The next question is coming from <unk> of Morgan Stanley . Please go ahead.
Hey, good afternoon.
I wanted to ask about.
The liquidity and the cash balance at the quarter I know.
The average was about 7 billion, which was I.
I think sort of in line with where you had indicated balances war back in April so.
Is it fair to say that you didn't utilize any of that through the quarter and now that the environment has stabilized.
Do you plan to continue or would you use cash to support loan growth and deposit outflow or just given where fed rates or does it sort of makes sense to keep cash at 5% and continue to let the securities level come down.
Yeah, that's really where we are right now I think that's the sort of guidance. We gave last quarter and you heard me say, we didn't make any investment purchases.
Deposit balances. So at this point I think we're pretty comfortable with that as you said looking at the $5 40 that were earning now we're.
We're not looking to make any active moves on the investment portfolio at this point.
So can you remind us how much the securities portfolio.
How much of that should mature every quarter for the next year or so.
I think for the rest of the year I think we're at 720000 excuse me million.
Say 715, with really $250 million of it so a third of it say a little bit more in the third on the last day of the month so.
The last part of 'twenty three the second half of 'twenty three is up but I would call a no.
A normal amount as we look at 'twenty four we're probably talking something in the neighborhood of $3 billion for the year.
Got it thank you.
Sure.
Yeah.
Thank you. The next question is coming from Peter Winter of D. A Davidson. Please go ahead.
Hi, Thanks, I was curious what's the outlook.
What's the outlook for the deposit beta I think the original four accounts was 32% and then secondly, do you think that there'll be pressure on this deposit beta next year as were in kind of a higher for longer.
Environment and your interest rates on deposits, a little bit lower than peers.
Our cumulative beta through well on interest bearing deposits through the second quarter was 37% up from 33 in the first quarter on total deposits that translates to 23% at the end of the second quarter versus 20 <unk>.
I would expect we would go up to somewhere by the end of the year say in the 39% given this last rate hike that we're dealing with.
I think thats comparable to what we've looked at what we've done historically say the average of the last two cycles. So.
But looking at 2024, not really in this environment not expecting Peter that we'd have to do much again, it'll be interesting to see where we're at come January and what our expectations are but I don't envision we've kept up with the deposit pricing and tried to be fair and obviously have gone out early.
To provide our customers with a a fair deal. So I don't expect that once if the fed has stopped hiking I don't expect it we're going to have to do a lot of continuing.
Continuing to increase our our betas, if you will or increase our deposit rates. After the hike stop so no I don't I don't really expect much change we'll have to see obviously, we're going to want to make sure that we continue to be competitive with our peers. That's the one thing that we want to make sure but at this point if I, if I had a crystal ball I I'm not seeing a lot of pressure.
They are at this point.
Okay.
And then I just wanted to ask a big picture.
A little bit surprised that maybe.
The deposit outlook is not a little bit stronger I mean, I realize but the environment is like.
Every quarter you guys keep having this record new account growth both on the commercial bank the consumer bank the success with the.
Our branch Buildout expansion and that's starting to take hold and I'm. Just wondering why the deposit outlook is just not a little bit stronger with all this growth.
Well I think one thing.
Or is that.
That we need to consider as we answered your question.
Thanks.
So a broad perspective, I can't say exactly why but one thing I can say is that you tend to have a lot more.
Operational <unk>.
<unk> actual accounts demand deposit accounts.
Taking accounts than here and I think those are more susceptible to opportunities to Jerry has talked about so I think we've got to work our way through that and then I think once we touch bottom you'll get to see.
<unk> movement up I'm confident that we're going to see.
Traction from these new relationships you know one thing we saw early in the Houston expansion.
What was that.
When we looked at our.
Performance versus goal on deposits, we were we were better on relationships, while we were under our goal.
Commercial deposits as far as balance and one thing we learned was.
Getting the relationship is one thing, but they've got this on the commercial side, you've got to go through getting your customers to assume their payments to a different place. There. So there's just a lot of operational things that have to happen before you as a business see the full effect of being the primary checking account take place.
And so I think that's that's part of it.
And but what we've seen is as we've grown.
And relationships historically, we'll see.
We will see more and more of that company's business go through there.
We're going to see that.
Got it.
Remember.
We don't count our relationship unless we get the primary checking account.
We will do business with people, we get different you know different aspects of their business, but you don't get counted as relationship unless you get the primary checking.
Yeah.
Got it thank you.
Yeah.
Thank you. The next question is coming from Brandon King of Trust Securities. Please go ahead.
Yeah.
Hey, good afternoon, thanks for taking my questions.
Brian .
So I wanted to talk about the $80 million office mode and could you. Please provide us with some details as far as what potentially makes that loan or property different from the rest of your office CRE portfolio.
Okay.
And in the case of this one particular.
Asset, it's one that lost it.
Major tenants.
And and it was one that has a a newer relationship for us and that it came on right before Covid came over I think it was in January of 2020, and so there's not the same type of history.
Good good reputation or our group, but they're not the same kind of history of the us and as they lost their tenants and then their debt service coverage.
Numbers suffered as a result.
We felt like they needed to rightsize it to a certain extent they didn't agree with it and they were willing to do a smaller amount. So it's been restructured and Scott you know.
It will perform for the next year, but.
And not to the level that we think it should and so we've got better on a on a non accrual and it was basically you just had a disagreement between the parties on what they should do as far as right sizing the project in terms of the asset itself. It.
It is an office building loan, but we.
We worked it out.
Amount of the underlying real estate and it is a tremendous piece of real estate in a very dynamic area of Houston, and so I'm not concerned about that.
<unk> losses of any significance, but.
But because of where we are in because it does cash flow to these to the place that we feel it needs to be we put it on non accrual and as far as what's different I mean.
You know I mean look rates are higher and we've got a tremendous amount of projects and they're not all going to be perfect and you could end up you know I think we've talked before me as I recall, you could have a property that is.
Industrial property with a.
You know fortune 500 credit tenant.
Long term lease and you know underwritten before.
Covid or the current increases in rates.
Great right, but at the present value of that lease stream today is less and so equity suffers in the project and those types of things that they have they've got to get worked out and we'll just see how it goes just see how they work out do we think there'll be significant impact on loss no, but we're watching credits that looked like that.
You know you might have a senior housing property that it was kind of a different deal, but you know I mean again this is lending business or all kinds of things that happen and so it's a risk business, but you know there are.
There are lots of properties that are being impacted and the main thing that we're doing is we're relying on the underwriting that we did go into any of the people that are that are backing it up the vast majority of which have been long term customers. So are we going to see some dislocation here there sure. We are but you know these things.
Got it very helpful.
They might have a follow up question is on the share repurchases in the quarter.
Just kind of what led to that decision and kind of what kind of appetite you have for the rest of the year.
Are we really just at the price like I said, we were at $96 and we just.
Thought it was a deal that we really couldn't pass up obviously, we didnt spend all of it we just thought given given where the price was we thought it was a great a great value for us and we took advantage of that at.
At this point out we'll be opportunistic.
Well, just if something like that happens again, we may take advantage, but at this point nothing flying.
Yeah, Jerry is a great example of those people using those demand deposit.
Yeah.
Thanks for taking my questions.
Brian .
Yeah.
Thank you. The next question is coming from Brody Preston of UBS. Please go ahead.
Hey, good afternoon, everyone.
Hey, Brian .
I was I was hoping to follow up just on the on the Securities question I just wanted to confirm what you said.
And then it was $750 million was that through the rest of the year with the large chunk at the like Unlike 12 31, and then 3 billion next year am I am I hearing that correctly.
Sure you got it exactly.
Alright, great.
It happened to know what the what the yield on.
On the Securities that's rolling off is.
We I can tell you something right off the top of my head, we bought $1 billion. We've talked about this we bought $1 billion in.
Treasury Securities are two years ago, I guess, a year and a half now.
When there was conversation about Russia invading Ukraine and.
And we put it we made that purchase as a defensive posture obviously.
I wouldn't make it wouldn't have made it a week today, we did that at 1%. So that first $250 million comes off at the end of the year and it's at 1% 102, I think it is and then the next 750 of that.
That's those proceeds come in within the first few weeks of January again at that same one or 2%.
Got it Okay, and I think you said earlier that you werent being too aggressive on new purchases.
In terms of adding to the size of the book, but is it safe to assume that you would look to replace.
That $3 75 billion over the next 18 months would you just look to kind of replace that or you're trying to move into.
Size of the securities portfolio lower.
Yes, I think all things being equal.
And by that you know again, we're talking about deposits a lot today and assuming that we've reached some sort of stabilization and start to grow I think that the quick response would be yes, we would look to replace it but I think until we get to that point in time, we'll have to see what else is going on in the balance sheet and make our decision at that point, but obviously, that's a grip could be a great positive.
<unk>.
It will be a great positive impact to NIM and net interest income and 24.
Even if we kept it at the fed.
Got it and then is there any is there any bias towards any type of security I know you have a lot of the.
The muni bonds.
In Texas I, just didn't know if you would look to kind of replace treasury with treasury or it was.
Thank you.
More complex than that.
Yeah, I think we would really evaluate at that point with our investment Committee what made sense you know what where we saw the most value. So we don't have anything we'd say oh, we're necessarily going to replace the treasury with the treasury, we're going to see where we think theres more value most valued in the market.
Once again that is star one for any additional questions. Today. The next question is coming from John Armstrong with RBC capital markets. Please go ahead.
Thanks, Good afternoon.
Hey, John .
A few random ones here.
On the credit question.
Pillar Gerry what what should we expect.
Non performers.
I know these two kind of feel like.
Random and very different credits, but.
What do you guys see in terms of stress in the portfolio.
Maybe it's obvious but we do we just expect it to continue to rise.
Sean I think realistically it will.
Some of these were watching a lot of credits.
And we've got good eyes on everything and you know if rates stay.
Higher longer I think I think we'll see some more nonperformance.
And in real estate, but do I think there's much loss there Oh adult.
And.
And you know we might get Lucky and you know our board some of them, but they're just some properties that are under stress and I'm with Ross banker and so I'm going to take.
Take a conservative view and I think non performers will increase but.
There is so low right now you know it's a.
It's really hard for them to for us to expect them to be.
At the same level.
Now going through a cycle like this you know indefinitely. So I mean, I'm not trying to paint a bleak picture I'm just trying to be realistic.
Yeah.
We're gonna have to be patient.
As we work with these work with these customers.
The main thing you want to see is people doing the right thing that you've banked and working.
Working with you and.
You know Oh.
Restructuring deals.
Doing their part to contribute to make make it right and you know we've got some some deals that we're seeing this theyre going to need that we're having conversations with that and I'm expecting everyone to perform the way they should and I think can be fun and.
But realistically not everyone is going to do what you want them to do and I don't have any specific expectations, there except that I've just been in this business a long time and you know some of that's going to happen.
That to me is not the big worry right now it's up to me.
Look I don't want you to think we're not we don't have all eyes on credit we do I mean, but to me that's going to work its way out I've got faith in the underwriting and the relationships that we've been doing for the last few years again it doesn't matter what you do today really what matters is what you've done over the last few years and I've got a lot of faith in that the thing that.
I want to see us continuing to do is win competitively, we are winning competitively and and I'm really excited about the opportunity in Austin I think.
No I think it's got every chance to be as good as we've seen in other places, we'll see but you know.
That's what we're focused on is growing the business and winning competitively where we see some outperformers increase update we will.
Okay.
Okay.
It kind of reminds me of energy seven or eight years ago.
Some ways.
The.
Jerry for you the Houston, one point, though you talked about a five.
EPS impact so.
Call it 2% of EPS, maybe crude math, but 4% of Fourteens.
How long does it take Houston, one point out of reach like corporate wide profitability and returns.
You know, let me see if I can grab my put my hands on some of that information what was interesting is that and Phil and I really haven't talked about this but for the quarter. It was interesting that.
One point no.
Profitable so they could start paying for some of those and I'd say so.
What we said was it takes about.
Before Houston to point out is contributing okay. It's not the size of one point out, but we've got some of that same expense are frontloading.
Okay.
And just on 1.0.
For it to reach.
Call it.
Similar returns and profitability profile of the rest of the company is that is that a year away.
Yeah, I think that's probably right.
We kind of have to take a little bit closer look at it sharpen our pencil, but I don't think it's too far from that again I don't have in front of me what their projections are for the rest of the year, but like we said they had a 30% linked quarter growth on deposits with that.
That's sort of a growth horizon.
That we wouldn't be too far, but I have to be honest I don't have that sort of a projection in front of me and happy to be able to talk about it at some future point when we get together.
John It's inching question.
Just kind of overall as we look at these branches and we are pro forma it out we tend to use.
When we began all of this with a five year.
Horizon for the branch to kind of reach maturity, you know and that was.
That was I guess that would be similar profitability to what we were overall.
But honestly, it's also true we don't talk a lot about it but it's also true that in year six through 10, I think we've seen really more growth than we see you know and.
And in the in that first five years as those things mature we see some really significant growth. So I think ultimately these locations.
And with better profitability than the total profitability of the company just because they're more efficient and more focused on our book of business and a defined market and a defined structure. So.
I think that you know we're not at five years for all of them and it'll take a little bit even for one point over to get there, but and then certainly to point I was going to take.
Some time before all of those are five year mature, but you never.
Don't count out continued growth in those markets from the expansion of your six through 10 historically has looked at those 40 branches that we had done you know before we started the expansion of some of the growth in year six through 10 was really Cigna, that's really where the powers.
Yeah. Okay. Yeah. So we're just we're just kind of just getting there.
So okay, alright, I could go on and on of questions, but I'll just leave it there I appreciate it guys.
Thanks, Sean.
Thank you at this time I'd like to turn the floor back over to Mr. Green for closing comments.
Alright. It was always we appreciate all of your interest and we thank you for your questions and will now be a journey.
Yeah.
Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect. Your lines at this time and enjoy the rest of your day.
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Okay.
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