Q3 2023 Cullen/Frost Bankers Inc Earnings Call

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Thank you for your patience the conference hopping, starting momentarily again, we would like to thank you for your patience conference well be getting momentarily.

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Greetings welcome to call them Frost bankers incorporated third quarter earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star zero.

And you kind of phone keypad. Please note. This conference is being recorded I will now turn the conference over to Eva Mendes Senior Vice President Director of Investor Relations. Thank you you may begin.

Okay.

Thanks Jerry.

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 as I mentioned.

We intend such statements to be covered by the safe Harbor provisions for forward looking statements contained in the private Securities Litigation Reform Act of 1995 as amended.

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

If needed a copy of the release is available on our website or by calling the Investor Relations Department at 2102205234.

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

Thanks Amy.

Good afternoon, everyone and thanks for joining us today I'll review, the third quarter results for Cullen Frost.

Jerry is going to make some additional comments and then we're going to open it up for your questions.

In the third quarter, Cullen Frost earned $154 million or $2.38, a share compared with earnings of 168 1 million or $2.59 a share reported in the same quarter last year.

Return on average assets and average common equity in the third quarter were 1.25% and 18.93%, respectively and that compares with one point to 7% and 21, 3% for the same period last year. This solid performance can be attributed to the execution of our sustained.

<unk> organic growth strategy and the commitment to our culture that develops deep customer relationships and provides world class customer service and all of this happens because of the hard work and dedication of our Frost Bank staff.

As in the past our balance sheet and our liquidity levels remain strong.

As an example at quarter end, our cash liquidity, the fed equaled 17% of our deposit base.

During the quarter, calling frost did not take on any federal home loan bank advances participate in any special liquidity facility. Your government borrowing access any broker deposits or utilize any reciprocal deposit arrangements to build insured deposit percentages.

Let me also say our available for sale portfolio represents 82% of our portfolio at quarter end. So in short basically with our balance sheet. What you see is what you get.

Our average deposits were stable in the third quarter at $48 billion less than a percent change from the previous quarter average.

Average loans grew to 18 billion in the third quarter compared with 17 seven day in the second quarter, an annualized growth rate of six 8%.

As I mentioned, we're laser focused on our efforts to achieve organic growth and I'm very pleased with our results for example.

To update you on our physical expansion efforts for our combined Houston expansions, we stand at 107% of deposit goal.

162% of long ago.

And 127% of our new household goal.

As of quarter end.

Expansion loans represented 22% and deposits represented 18% of our total Houston market presence.

For the Dallas market, we stand at 292% of deposit goal, 273% of long ago, and 216% of our new household goal.

While still relatively early in this effort expansion loans and deposits represent approximately 9% respectively of Dallas market totals.

And we're excited about our new Austin expansion effort, which has opened the first of 17 planned locations.

Our presence in that market.

But beyond these overall numbers I wanted to take a little deeper into the character of the expansion business for.

For example in Houston, we stand at $1.4 billion in deposits and a $1 billion in loans.

Our deposit mix is 53% commercial and 47% consumer Sn.

Essentially mirroring our company profile.

Two thirds of the deposit relationships are under $1 billion.

And only four are over $10 million.

Loans are 73% commercial.

27% consumer and only eight customers have over $10 million.

Similarly in Dallas.

Of our $325 million in deposits, 53%, our consumer versus 47% commercial and.

72% of those deposits were under a million no relationships over 10 million.

Our $258 million in loans are 62% consumer.

And 38% commercial which I think is remarkable.

The reason I labored through that detail is to show you that the kind of business. We've been successful generating in our expansion is core stable grass roots business, which I believe will generate tremendous value over an extended period of time.

I'm very pleased with results of these efforts and I believe that this strategy is both scalable and durable and I'm convinced we'll be doing this for a long time.

Looking at our consumer banking business, we continue to see outstanding organic growth.

We added 6220, net new checking households in the quarter, bringing the year to date total to 22800% to 12% improvement on 2022 year to date results.

To give a perspective of the power and durability of our organic growth, let me point out that in the past 36 months. We've added 80000 net new consumer checking households.

This means we grew our core customer base by 23% in just three years.

We believe these are industry, leading numbers and represents tangible evidence that the customer experience, we offer and the reputation we've built set us up to be successfully competitive.

As we look at these new households, we see that the quality of the growth is also high a high percentage of the accounts are active balances are healthy and the growth is balanced across all the segments we serve.

These factors are evidence that the growth is sustainable and beneficial.

Consumer loan balances outstanding were two 8 billion at the end of the quarter growing 26% year over year.

In the third quarter alone balances increased $181 million or 7% from the second quarter. This robust growth was driven by our home equity products in a market, where it's becoming increasingly expensive to buy many families are deciding to stay in except their home.

And we've got the right products and services and relationships to help at this time.

We have a long history of credit quality in the consumer bank similar to what you're used to hearing about on the commercial side and the weighted average credit score in the portfolio is 754.

Delinquencies are low and stable at about 80 basis points charge offs were also low and stable at 19 basis points for the year.

Also as we've noted we're excited about the prospects for new mortgage product, which is in its very early stages, but just recently opened up to all of our markets in the state.

Now looking at our commercial business I think it's an interesting story.

Our new opportunities for the quarter were strong, but they were down 17% from the second quarter.

However that was because our second quarter, new opportunities, where an all time high after the dislocations brought on by the S V situation.

And as you would expect our declines for deals were also high and were almost two and a half times our quarterly average.

Now looking at the third quarter.

Focusing on our weighted pipeline.

That weighted pipeline is up 22% from last quarter.

And it's our highest of all time.

At 1 billion 918.

Our previous high was during the second quarter of 2022 at 1 billion 832.

The increase comes from all categories, both customers up 18% and prospects up 25%.

Both core.

Which we define as relationships under 10 million and large.

Core up 26% large up 20%.

And both the C&I.

Up 23%.

In CRE up 24%.

Credit quality continues to be good by historical standards with classified and non accrual assets flat and net charge offs down quarter over quarter.

Non accrual loans totaled 67 million at the end of the third quarter compared with $68 million at the end of the second quarter essentially flat for the quarter.

The third quarter figure represents just 37 basis points of total loans and 14 basis points total assets.

Problem loans, which we define as risk rate 10, or higher totaled $513 million at the end of the third quarter. That's up from 441 million at the end of the second quarter and 387 million. This time last year.

Virtually all of the linked quarter growth was in the O E M risk category or grade 10.

Net charge offs for the third quarter were $5 million and they were down from nine 8 million in the second quarter annualized net charge offs for the third quarter represent a 11 basis points of average loans and year to date annualized net charge offs or 18 basis points of average loans, which is below his.

Stork averages.

Regarding commercial real estate, our overall portfolio remains stable with steady operating performance across all 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.

It is office multifamily retail and industrial example.

Total three and a half billion or 40% of CRE loans outstanding and are flat quarter over quarter.

Our investor CRE portfolio has held up well with the average performance metrics remaining essentially unchanged quarter over quarter and exhibiting an overall loan to value of about 54% loan to cost of about 60% and acceptable reported debt service coverage ratios.

Higher interest rates continue to be a challenge for our CRE borrowers and have impacted performance of some project as compared to original pro forma however on average we're comfortable with the quality of the portfolio.

As an example.

The Investor office portfolio, which has been top of mind since the pandemic at a balance of $950 million at quarter end and exhibited an average loan to value of 52%.

And average debt service coverage ratio of 146 up slightly from last quarter.

Yeah.

83% of this portfolio has stabilized with healthy coverage levels and less than 5% of the portfolio is considered spec with even these few projects being in strong submarkets with good leasing dynamics.

<unk> experienced developers.

Our comfort level with our office portfolio continues to be based on the character and experience of our borrowers and sponsors and the predominantly class a nature of our office building projects and again, we're glad to be operating in Texas.

So in closing we remain optimistic for what lies ahead for <unk>.

Capitalizing on opportunities and I'm proud of all our bankers as they accomplish all of this across all our communities.

Now I'll 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 more about our Houston now 1.0 expansion results. It's.

Unknown Executive: Thank you for your patience. The conference will be starting momentarily. Again, we would like to thank you for your patience.

As Phil mentioned, we've been very pleased with the volumes, we've been able to achieve looking at the third quarter linked quarter annualized growth in average balances for these locations was 46% for deposits that is 170 million, both linked quarter and on loans at 52% annualized growth or $133 million.

Unknown Executive: Conference will be beginning momentarily The conference will be starting momentarily.

Quarter over quarter for loans I'm, sorry, the 46 was for deposits and.

And for the third quarter Houston, one point out contributed six cents to our quarterly EPS.

Now moving to our net interest margin our net interest margin percentage for the third quarter was three 4% down only one basis point from the 345 reported last quarter. Some positives for the quarter included higher yields on loans and balances at the fed combined with higher loan volumes. These positives were primarily offset by <unk>.

Higher cost of deposits and customer repos compared to the second quarter.

Looking at our investment portfolio the investment portfolio averaged 26 billion during the third quarter down 721 million from the second quarter. During the quarter, we did not make any material investment purchases and sold about $361 million in municipal securities at a small net gain as we took advantage of market.

Dislocations, which allowed us to improve interest income going forward.

The net unrealized loss on the available for sale portfolio at the end of the quarter was $2 2 billion, an increase of $600 million from the $1 6 billion reported at the end of the second quarter.

The taxable equivalent yield on the total investment portfolio in the third quarter was three point to 4% flat with the second quarter.

The taxable portfolio, which averaged $13 6 billion down approximately 216 million from the prior quarter at a yield of 276% up five basis points from the prior quarter.

Unknown Executive: Greetings.

Unknown Executive: Welcome to Cullen for us, Bankers Inc, third quarter earnings conference call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.

Our tax exempt municipal portfolio averaged about 7 billion during the third quarter down $505 million from the second quarter and had a taxable equivalent yield of 4.26% down one basis point from the prior quarter.

Unknown Executive: If anyone wants to require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded.

At the end of the third quarter, approximately 71% of the municipal portfolio was pre refunded or psf insured.

AB Menendez: I will now turn the conference over to AB Menendez Senior Vice President Director of Investor Relations. Thank you.

The duration of the investment portfolio at the end of the third quarter was $5 seven years up from $5. Two years at the end of the second quarter impacted by duration extension in both our municipal and MBS agency portfolios.

Phil Green: You may begin. Thanks, Jerry.

Phil Green: 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 as amended. We intend such statements will be covered by the safe harbor provisions for forward-looking statements contained in the private securities litigation reform act of 1995 as amended.

Looking at deposits on a linked quarter basis average deposits of $40 8 billion were basically flat with the previous quarter as they were only down 179 million or 4%.

We did continue to see a mix shift during the quarter as noninterest bearing demand deposits decreased $408 million or two 7%, while interest bearing deposits increased $229 million or 9% when compared to the previous quarter.

Phil Green: Please see the last page of text in this morning's earnings release, traditional 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 210-220-5234.

Based on third quarter average balances non interest bearing deposits as a percentage of total deposits were 36, 3% compared to 37, 1% in the second quarter.

Noninterest bearing deposits totaled $14 8 billion at the end of the quarter with 96% of that amount being commercial demand deposits.

Phil Green: At this time, I'll turn the call over to Phil. Thanks, AB. Good afternoon, everyone, and thanks for joining us. Today I'll review the third quarter results for Cullen Frost. Jerry's going to make some additional comments and then we're going to open it up for your questions.

During the individual months of the third quarter, we did see the average balances in the noninterest bearing accounts begin to stabilize during last quarters call. I noted that july's average balance was down $202 million from the June average the full month to date average for July was 14.84 billion down only.

Phil Green: In the third quarter Cullen Frost earned $154 million or $2.38 since the share compared with earnings of $168.1 million or $2.59 since the share reported in the same quarter last year. Our return on average assets and average common equity in the third quarter were 1.25% and 18.93% respectively and that compares with 1.27% and 20.13% for the same period last year. This solid performance can be attributed to the execution of our sustainable organic growth strategy and the commitment to our culture that develops deep customer relationships and provides world-class customer service and all this happens because of the hard work and dedication of our frost bank staff.

$173 million from the June average our August average was flat with July and September average was down only $60 million to $14 seven 8 billion.

For October month to date through yesterday, the average noninterest bearing deposit balance is $14 five 2 billion down $259 million from the September average.

Looking at total interest bearing deposits they've been relatively stable during the period average interest bearing deposits were 26.0 billion during the quarter up 229 million or 9% from the second quarter for October month to date average the balance of interest bearing deposits through yesterday was 20.

$6 3 billion up $102 million from our September average we.

Phil Green: As in the past, our balance sheet and our liquidity levels remain strong. As an example, at quarter end, our cash liquidity at the Fed equals 17% of our deposit base. Also during the quarter, Cullen Frost did not take on any federal home loan bank advances, participate in any special liquidity facility or government borrowing, access any broker deposits, or utilize any reciprocal deposit arrangements to build insured deposit percentages. Let me also say our available for sale portfolio represents 82% of our portfolio at quarter end.

We do continue to see a shift in the mix in interest bearing deposits higher cost Cds from lower cost savings IOC and MMA.

The cost of interest bearing deposits in the third quarter was $2, one 2% up 25 basis points from 187% in the second quarter.

Customer repos for the third quarter averaged $3 5 billion down 183 million from the $3 7 billion averaged in the second quarter the cost of customer repos for the quarter was $3 six 7% up 15 basis points from the second quarter.

Looking at our noninterest income on a linked quarter basis I just wanted to point out a couple of items that.

Phil Green: So in short, basically with our balance sheet, what you see is what you get. Our average deposits were stable in third quarter at 40.8 billion dollars, less than a percent change from the previous quarter. Average loans grew to 18 billion in the third quarter compared to 17.7 billion in the second quarter and annualized growth rate of 6.8%. As I mentioned, we're laser focused on our efforts to achieve organic growth, and I'm very pleased with our results.

Trust and investment management fees were down $1 8 million or four 5% compared to the second quarter driven by decreases in estate fees of $1 1 million real estate fees of 673000 and tax fees of 413000, partly offset by an increase in investment fees of 750000.

Our state fees and real estate fees can fluctuate based on the number of our states settled our property sold respectively. While tax piece by their nature are typically higher in the second quarter.

Other charges commissions and fees were up 1.0 million or eight 6% compared to the second quarter impacted by increases in various accounts, including money market income up 282000 letter of credit fees up 155000, and annuity income up 121000.

Phil Green: For example, to update you on our physical expansion efforts for our combined Houston expansions, we stand at 107% of deposit goal, 162% of loan goal, and 127% of our new household goal. As of quarter end, expansion loans represented 22% and deposits represented 18% of our total Houston market presence. For the Dallas market, we stand at 292% of deposit goal, 273% of loan goal, and 216% of our new household goal. While still relatively early in this effort, expansion loans and deposits represent approximately 9% respectively of Dallas market totals.

Other income was up 3.0 million or 29% when compared to the second quarter impacted by higher public finance underwriting fees up $1 6 million and higher combined derivative and foreign exchange income up $1.8 million.

Looking at our projection of full year 2023, total noninterest expenses, we continue to expect our total noninterest expense for the full year 'twenty three to increase at a percentage rate in the mid teens over our 2022 reported levels. This does not include the potential impact of the FDIC special assessment, which.

Has not yet been finalized.

The effective tax rate for the first nine months of the year was 16, 3%. Our current expectation is that our full year effective tax rate for 2023 should approximate 16.5% to 17%, but that can be affected by discrete items. During this fourth quarter.

Phil Green: And we're excited about our new Austin expansion effort, which is opened the first of 17 planned locations to double our presence in that market. But beyond these overall numbers, I wanted to take you a little deeper into the character of the expansion business. For example, in Houston, we stand at $1.4 billion in deposits and $1 billion in loans. Our deposit mixes 53% commercial and 47% consumer, essentially mirroring our company profile. $1 billion and only 4 are over $10 million.

Phil Green: Loans are 73% commercial, 27% consumer and only 8 customers have over $10 million. Similarly, in Dallas, of our $325 million in deposits, 53% are consumer versus 47% commercial and 72% of those deposits were under a million. No relationships over 10 million. Our $258 million in loans are 62% consumer and 38% commercial which I think is remarkable. The reason I labored through that detail is to show you that the kind of business we've been successful generating in our expansion is core, stable, grassroots business which I believe will generate tremendous value over an extended period of time.

Regarding your estimates for full year 2023 earnings our current projections don't include any additional changes to the fed funds rate through the rest of the year 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 and given our strong performance. This quarter well, we believe that the current mean of analyst estimates of $9.22 is too low and with that I'll turn the call back over to Phil for questions.

Thanks, Gerry and we'll open it up for questions now. Thank you. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line. This is the question.

You May press star two if he would like to remove here right in the Q and for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star.

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

Hi, everyone.

Hey, Steve.

Wanted to start on the deposit side, Jerry to follow up where you just left off with that noninterest bearing that 14.9 billion and $14 8 billion, it's pretty stable in the fourth quarter, we typically see some window dressing right from companies that it picks up a bit can we safely say that we're now at a bottom.

The non interest bearing deposits.

Yeah, Steven I think that certainly when I look at it I feel today versus three months ago feel a lot more comfortable with where they're at.

Phil Green: I'm very pleased with results of these efforts and I believe that this strategy is both scalable and durable and I'm convinced we'll be doing this for a long time. Looking at our consumer banking business, we continue to see outstanding organic growth. We added 6,220 net new checking households in the quarter, bringing the year-to-date total to 22,800, a 12% improvement on 2022 year-to-date results. To give a perspective of the power and durability of our organic growth, let me point out that in the past 36 months, we added 80,000 net new consumer checking households.

Obviously, you've seen it and I kind of tried to give that sort of color in my in my commentary, we are seeing a little downward tick, but it's really been stable you know in my mind that those those small 100 million $200 million decreases I had been relatively stable as you've said and we've seen historically in the fourth quarter is the best quarter right as companies try to do so.

Window dressing. So you know I don't know that I can confidently say that we're at the bottom, but I certainly feel a whole lot better today than I did a quarter ago.

Got it okay.

On the loan side I didn't I haven't been able to piece together all the color you gave on consumer and commercial but there's no doubt loan growth picked up this quarter could you give us you know drill down why is it just these new markets coming online when you look at the growth and it sounds like you're pretty optimistic you think its sustainable this improvement you're seeing.

Phil Green: This means we grew our core customer base by 23% in just three years. We believe these are industry leading numbers and represent tangible evidence that the customer experience we offer and the reputation we've built set us up to be successfully competitive. As we look at these new households, we see that the quality of the growth is also high. A high percentage of the accounts are active, the balances are healthy, and the growth is balanced across all the segments we serve.

No Stephen.

With all of that it's still I think a you know high single digits number and you know that's kind of what our sustainable target has been for a while so it so.

I would hope that it is it would be our goal, but it is.

You know we've looked hard at where it's coming from like I said.

With that really.

The big Spike in the second quarter.

You know, we talked about where it came from and it was.

By and large a lot of good credits it just didn't meet our structure that what we you know what we wanted to do maybe maybe we were full in a category and didn't want to reach out in one particular area.

Phil Green: These factors are evidence that the growth is sustainable and beneficial. Consumer loan balances, outstanding were 2.8 billion at the end of the quarter growing 26% year-over-year. In the third quarter alone, balance has increased $181 million or 7% from the second quarter. This robust growth was driven by our home equity products. In a market where it's becoming increasingly expensive to buy, many families are deciding to stay and fix up their home. And we've got the right products and services and relationships to help at this time.

And I, thank them and just talking to our people a lot of banks, they just put their pencils down.

And Oh, we have liquidity P. People know that you know, we're not always the place where people like to go to get.

No.

Little idea structure on a deal, but we're consistent you know through the good times and bad times, I think people realize that and I think that.

We got a lot of phone calls and lot of opportunities to do stuff and Anna and I mentioned, how many we decline because I didn't want people thinking that Oh, well look column for us got some loan growth they must be just taking other people's problems you know that's not what's happening.

Phil Green: The credit quality and the consumer bank similar to what you're used to hearing about on the commercial side and the weighted average credit score on the portfolio is 754. The link with these are low and stable at about 80 basis points and charge costs are also low and stable at 19 basis points for the year.

And.

We're just seeing a lot of good opportunity I think part of it is well it's a lot of things, it's a reputation for strength and stability in times like these but yeah. Our people are great.

That's sales and calling and developing relationships, they're held accountable to it.

Phil Green: Also, as we've noted, we're excited about the prospects for our new mortgage product, which is in its very early stages, but just recently opened up to all our markets in the state.

They're doing a good job you know when you have a balance sheet like ours. It puts you in a good place to take advantage of opportunities in.

That's what we've been seeing it.

Phil Green: Now, looking at our commercial business, I think it's an interesting story. Our new opportunities for the quarter were strong, but they were down 17% from the second quarter. However, that was because our second quarter new opportunities were all time high after the dislocations brought on by the SVB situation.

It's it's hard to pin down on any one particular thing because I think it's been pretty.

Pretty consistent might speak a little bit more about it.

Just had a recent conversation about the.

No the expansion growth right I gave me is try to give you some feel for you know.

It's pretty granular in terms of the of what's coming on but I had a conversation about well what what kind of deals are we seeing and a lot of it is its owner it's owner businesses right. They have you know.

Phil Green: And as you would expect, our declines for deals were also high and we're almost two and a half times our quarterly average. Now, looking at the third quarter and focusing on our weighted pipeline, that weighted pipeline is up 22% from last quarter and it's our highest of all time at 1 billion 918. Our previous high was during the second quarter of 2022 at 1 billion 832. The increase comes from all categories, both customers of 18% and prospects of 25%, both core, which we define as relationships under 10 million and large, core of 26% large of 20%.

Business or business to consumer model, you know theyre, not really sexy business as you know, but in a sense, but they're just good stable long term businesses that are a result of hiring community bankers in these communities we've gone in and it's so it is very diverse.

There's you know the commercial real estate that we see there is mainly because someone wants to not pay rent anymore, they want to own their own bit building for their business.

It's slowed down some because rates are so high but that's still going to be the art I think of of the kind of business, we're doing it and when I hear that it makes me feel really good about just tell us how core and how stable. It is because that's really our wheel house.

Phil Green: And both C and I, up 23% and CRE, up 24%. Credit quality continues to be good by historical standards, with classified and non accrual assets flat and net charge all stand on quarter over quarter. Not accrual loans total 67 million at the end of the third quarter from paper 68 million at the end of the second quarter essentially flat for the quarter. The third quarter figure represents just 37 basis points of total loans and 14 basis points of total assets.

Yeah.

So if I could ask one final one so as we're probably I don't know two thirds through earning season, what we're hearing from the industry, particularly the larger regionals because most of them are on this R. W. A it was that big diet right. There just shrinking assets, they're almost all tightening unexpected write a lot of them are guiding to flattish expenses for 2020.

Four and to be quite Frank I don't know how to think about calling frost for 2024, and I'm not looking for like a number but I'm wondering how you're thinking about it because in many ways. This is gonna be a great market for you to take bankers right. I mean as everybody is sort of on the sidelines, which you mentioned so you know you're I don't know I think numbers for.

Phil Green: Problem loans, if we define as risk rate 10 or higher total 513 million at the end of the third quarter, that's up from 441 million at the end of the second quarter and 387 million this time last year. Virtually all the link quarter growth was in the OEM risk category for grade 10. Net Chargers for the third quarter were $5 million, they were down from $9.8 million in the second quarter. Annualized Net Chargers for the third quarter represent 11 basis points of average loans. And your to date, annualized Net Chargers are 18 basis points of average loans, which is below historic averages.

14% year over year.

Do you think about Hey, this is a year that we're going to continue to expand that maybe expense growth stays at that rate or you share. Some of your other Ceos like no we need to tighten also.

Just because the environment is a little more challenging how do you think about that.

Well, what we're thinking is that we've got a great.

Opportunity to expand and we have plans in place you know if we're doubling.

We started the process of doubling Austin Midland Tripling Dallas, We think these are great opportunities.

Phil Green: Regarding commercial real estate, our overall portfolio remains stable with steady operating performance across all 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's CRE that is office, multifamily, retail, and industrial example. Total 3.5 billion or 40% of CRE loans outstanding in our flat quarter over quarter. Our investor CRE portfolio is held up well with the average performance metrics remaining essentially unchanged quarter over quarter and exhibiting an overall loan to value of about 54% and loan to cost of about 60% and acceptable reported debt service coverage ratios.

And.

We are getting good good.

But you know applicant flow and you put it that way.

And in these markets. So it's not like we're going Oh, we need to hire more bankers because you've got opportunity for this or that I mean, we were.

Times of bankers I was a part of this expansion and you know that there's plenty of work to go around there. So.

So we are hiring when it's a part of our strategy we've put in place already.

We're having good success there.

Where are we are not.

Backing off and saying Oh look we need to cut expenses now because I don't know because whatever.

We are we're winning competitively I'll, just say it Ed and now's the time for us to keep moving forward now.

Phil Green: Higher interest rates continue to be a challenge for our CRE borrowers and have impacted performance of some project as compared to original performance. However, on average, we're comfortable with the quality of the portfolio. As an example, the investor office portfolio, which has been top of mind since the pandemic, had a balance of $950 million at quarter end and it exhibited a average loan to value of 52% and an average debt service coverage ratio of 1.46 up slightly from last quarter.

Do Jerry and I talk with the.

Folks about you know what they're spending and what the trend is we want it to be lower next year.

Just because you know there's a limit to what you can you.

You can do.

Overtime, and we want to be prudent about all this stuff, but no we were not in them and.

Retrenchment mode at all Jerry will talk some about expenses.

No I mean, I think Phil said, it and we've been very focused as you said and Stephen you know was our focus on on expenses continues certainly when you look at the percentage.

Phil Green: 83% of this portfolio is stabilized with healthy coverage levels and less than 5% of the portfolio is considered spec with even these few projects being in strong submarkets with good leasing dynamics and strong experience developers. Our comfort level with our office portfolio continues to be based on the character and experience of our borrowers and sponsors and the predominantly class A nature of our office building projects and again we're glad to be operating in Texas.

Someone may roll their eyes, but obviously, we've talked about the things that we're doing to grow the business go our product selection and expand our market and again. If you think those have all been and improve our technology. Those have all been smart things that we're doing and as he said you know our guidance for our team has really been that.

We are we've kind of given our given guidance to this mid teens sort of growth. This year, but certainly would expect that you know when we talk in January.

That's not the sort of growth will be giving from a target standpoint.

Phil Green: So in closing, we remain optimistic for what lies ahead. We're capitalizing on opportunities and I'm proud of all our bankers as they accomplish all of this across all our communities.

Okay. Thanks for all the color.

Okay.

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

Hey, good afternoon, guys nice quarter.

Jerry Salinas: Now I'll turn the call over to our chief financial officer Jerry Selenis for some additional comments. Thank you Phil. I wanted to start off first by talking a little bit about more about our Houston 1.0 expansion results. Phil mentioned we've been very pleased with the volumes we've been able to achieve looking at the third quarter link quarter annualized growth and average balances for these locations was 46% for deposits that's 170 million growth link quarter and on loans of 52% annualized growth or 133 million quarter over quarter for loans, and for the third quarter Houston 1.0 contributed 6 cents to our quarterly EPS.

Thank you.

On your outlook for higher EPS versus consensus are you guys, assuming you've reached a bottom now and NIM and NII given your rate outlook, we've been pretty stable here for a couple of quarters. Now are you thinking that trend continues and then when do you think you could get back to NII growth.

Yeah, I think that and I think I've been pretty consistent the fourth quarter for US I think is gonna be a little bit weaker you know I don't think it's and it's not significant the guidance I gave last quarter was I thought they'd be flattish and I could even still say that with a downward bias.

We're down one basis point.

Between these quarters, so I'm kind of feeling that same pressure I think that as I look out into 'twenty four and we'll give more color in January as I said, but I think we've talked a couple of times that we have some opportunities with some reinvestment of some proceeds.

Jerry Salinas: Now moving to our net interest margin, our net interest margin percentage for the third quarter was 3.4% down only one basis point from the 3.45 reported last quarter. Some positives for the quarter included higher yields on loans and balances that the Fed combined with higher loan volumes. These positives were primarily offset by higher cost of deposits and customer repose compared to the second quarter. Looking at our investment portfolio, the investment portfolio average 20.6 billion during the third quarter down 721 million from the second quarter.

They're going to be coming to us pretty early in 2024 from a maturity of our investment portfolio and even though we haven't really decided.

You know what sort of an investment plan will put in place just putting it on our our in balances at the fed would be a significant improvement I think we've made no secret of the fact that we bought $1 billion in Treasury securities that mature I think the first the first tranche say first $250 million is on December.

Jerry Salinas: During the quarter, we did not make any material investment purchases and sold about 361 million in municipal securities at a small net gain as we took advantage of market dislocations, which allowed us to improve interest income going forward. The net unrealized loss on the available for sale portfolio at the end of the quarter. With 2.2 billion, an increase of 600 million from the 1.6 billion reported at the end of the second quarter.

31st So I really say basically they're all up in early 'twenty, four and instead of 1%. So that's sort of a pick up that we're kind of projecting for.

For most of 'twenty for us as those securities I've, yet to be reinvested in you know a lot of it will be dependent on.

What our assumptions are for or lower rates.

If that's the case in 2024, when we get to that forecasting period in January but right now I do think that the same guidance I gave last quarter about you know kind of flattish to a little bit downward bias is kind of where I am on for this fourth quarter.

Jerry Salinas: The taxable equivalent yield on the total investment portfolio in the third quarter was 3.24% flat with the second quarter. The taxable portfolio, which averaged 13.6 billion down approximately 216 million from the prior quarter, had a yield of 2.76% of 5 basis points from the prior quarter. Our tax exempt municipal portfolio averaged about 7 billion during the third quarter down 505 million from the second quarter and had a taxable equivalent yield of 4.26% down one basis point from the prior quarter.

Okay. Appreciate that and then I'm going back to the stats you were talking about on the non interest bearing it sounded like October was down if I heard this right maybe 260 million ish on the September average I know that'll bounce around is this just wondering if you had isolated what are what drove that pick up in the run off here this month.

No not to be honest with you you know there's so many accounts in there and there's a lots of positives and negatives and a lot of volatility that goes with those accounts in and to be honest with you from my end when I see a movement like that in a month I tend to think it's pretty flattish and yeah. We hope so.

Jerry Salinas: At the end of the third quarter, approximately 71% of the municipal portfolio was pre refunded or PSF insured. The duration of the investment portfolio at the end of the third quarter was 5.7 years up from 5.2 years at the end of the second quarter, impacted by duration extension and both our municipal and MBS agency portfolios. Looking at deposits on a link quarter basis average deposits of 40.8 billion were basically flat with the previous quarter as they were only down 179 million or 0.4%.

Certainly that we've seen the the.

They dropped the bottom as we said Phil talked about the new relationships that we're adding you know on the commercial side. It typically takes us a few months from three months to six months to get those commercial deposits on so we continue to be a pretty optimistic about it and hope that the worst is behind us.

Jerry Salinas: We did continue to see a mix shift during the quarter as non-interest bearing demand deposits decreased 408 million or 2.7% while interest bearing deposits increased 229 million or 0.9% when compared to the previous quarter. Based on third quarter average balances, non-interest bearing deposits as a percentage of total deposits were 36.3% compared to 37.1% in the second quarter. Non-interest bearing deposits total 14.8 billion at the end of the quarter with 96% of that amount being commercial demand deposits.

Okay, maybe one last one just on expenses.

You mentioned the mid teens growth guide.

And that implies a little bit of a wider range I guess since we only have one quarter left.

And it seems like the midpoint would imply a little bit of a step up in expense growth in <unk> are you thinking maybe more at the bottom end of that range. At this point since you came in a little bit lower this quarter yeah.

I was joking a little bit earlier to yeah, I was joking a little bit earlier, if what is mid teens mean right because in my mind, that's one number and it could be a different number in your case, yeah, I will say, David that I'm fit that my expectation today versus where we were a quarter ago as it will be lower we had a really we beat it.

Jerry Salinas: During the individual months of the third quarter, we did see the average balances and the non-interest bearing accounts began to stabilize. During last quarter's call, I noted that July's average balance was down 202 million from the June average. The full month-to-date average for July was 14.84 billion down only 173 million from the June average. Our August average was flat with July and the September average was down only 60 million to 14.78 billion.

For the quarter and some of it was on the expense side coming in lower than we had expected and we do a lot of settlements on incentives and kind of look and see where all of those incentive plans command some of our incentive payments all of that's in the end are issued invest in the fourth quarter. So there's a little bit of uncertainty there but.

If youre looking at where I was a quarter ago versus where I am today, yeah, I certainly feel like it will be a little bit lighter than I thought we would be.

Jerry Salinas: For October month-to-date through yesterday, the average non-interest bearing deposit balance is 14.52 billion down 259 million from the September average. Looking at total interest bearing deposits, they've been relatively stable during the period. Average interest bearing deposits were 26.0 billion during the quarter, up 229 million or 0.9% from the second quarter. For October and month to date average, the balance and interest bearing deposits through yesterday was 26.3 billion, up 102 million from our September average.

Yeah, well when I saw the growth.

At the slower rate this quarter versus what we expected I figured that that was going to be a response I. Appreciate it. Thank you guys.

Sure.

Our next question is from Ebrahim pillar.

With Bank of America. Please proceed.

Hey, good afternoon.

Hey, Ebrahim.

Hey, So you talked about a growth maybe somewhat slowing as we look into next year.

Just give us a sense of how customers are holding up.

Jerry Salinas: We do continue to shift in the mix and interest bearing deposits to higher cost CDs from lower cost savings, IOC and MMA. The cost of interest bearing deposits in the third quarter was 2.12% up 25 basis points from 1.87% in the second quarter. Customer repost for the third quarter averaged 3.5 billion, down 183 million from the 3.7 billion averaged in the second quarter. The cost of customer repost for the quarter was 3.67% of 15 basis points from the second quarter.

When you think about this lag effect of the fed rate hikes, maybe consumer demand slowing down a bit I'm not sure whether or not that's happening.

In your markets, but give us a sense of just resiliency of the customer base, where if any place, but you're seeing softness from a credit quality perspective, and then it may not be evident cross loan book, but just in the market that you're seeing some softness.

Yeah.

Ebrahim I think the.

No.

They're pretty well known right it's.

Jerry Salinas: Looking at our non-interest income on a link quarter basis, I just wanted to point out a couple of items. Trust and investment management fees were down 1.8 million or 4.5% compared to the second quarter, driven by a decreases in a state fees of 1.1 million, real estate fees of 673 thousand, and tax fees of 413 thousand, partly offfit by an increase in investment fees of 750 thousand. A state fees and real estate fees can fluctuate based on the number of estate settled or property sold respectively, while tax fees by their nature are typically higher in the second quarter.

Deals that were underwritten that you have seen on a floating basis that have seen the higher rates.

And and operating cost are up.

You know there are.

Yeah.

Honestly, I mean, I don't pay a lot attention to other banks, but I mean, I know our credit as our credit numbers are really strong.

Uh huh.

I don't get the sense, we've had a tremendous problem here in the state.

We're glad we're operating in Texas, we really are I think it makes a huge difference.

Jerry Salinas: Other charges, commissions and fees were up 1.0 million or 8.6% compared to the second quarter impacted by increases in various accounts including money market income up 282 thousand that are credits fees up 155 thousand and ununity income up 121 thousand. Other income was up 3.0 million or 29% compared to the second quarter impacted by higher public finance underwriting fees, up 1.6 million, and higher combined derivative and foreign exchange income up 1.8 million.

I don't see things you mentioned and I said it was you know a slower next year I don't remember that Ah I don't feel like it's going to be that much lower.

I talk to customers, it's kind of funny. When you go out and talk to them I was I was with a construction guy and he looked at me. So I'm really interested in how you see the economy and I.

Well I always embarrassed, saying it I said I don't I don't think it's that bad and he looked at me said, that's hard I think to where almost felt embarrassed for each other that we that we set up we'd like we're gonna get canceled or something because Uh huh.

Jerry Salinas: Looking at our projection of full year 2023 total non-interest expenses, we continue to expect total non-interest expense for the full year 23 to increase at a percentage rate in the mid teens over our 2022 reported levels. This does not include the potential impact of the FDIC special assessment which has not yet been finalized. The effective tax rate for the first nine months of the year was 16.3%. Our current expectation is that our full year effective tax rate for 2023 should approximate 16.5 to 17% but that can be affected by discrete items during this fourth quarter.

Yeah there's.

I guess, if you watch too much T V. You think it's supposed to be bad.

I think it's more worry about.

Then there is actual problems today and I'm not trying to be Pollyanna is just you know most people when you talk about their business and their there's problems here or there.

You know we've got we've talked about some increase in AR.

And our risk grade tens I mean.

So theres some issues.

But it's not bad I, if I had to pick let's say, okay. Let me see so I would say probably you know you buy here pay here your used car. It's got some pressure because they they are rate sensitive business and.

Jerry Salinas: Regarding estimates for full year 2023 earnings, our current projections don't include any additional changes to the Fed funds rate through the rest of the year through the rest of 2023. Given that rate assumption and our expectation of 2023 non-interest expense growth of mid teens which does not include the impact of the FDIC special assessment and given our strong performance this quarter, we believe that the current meat of annual estimates of $9.22 is too low.

So that's probably some issues I mean, you've got a office building that's refi now and then.

You don't have the capacity or the willingness to rightsize it there could be some issues there.

And.

And then there's just the one off thing that's just business you know that we see.

Phil Green: With that, I'll turn the call back over to Phil for next year and we'll open up for questions. Thank you.

We've seen some things in.

Let's say contractors are there was a big electrical contractor, but they had.

Unknown Executive: If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your line from the queue.

Government work, which is always little bit dicey.

For our experience, but they're.

They're working hard to right that ship, but you know if you if you didnt bid the right way and cost went up you've got fixed rate deal fixed costs deal that could be some issues. So you know those are the kinds of things, we're seeing but no.

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Steven Alexopoulos: Our first question is from Steven Alexopoulos with JP Morgan, please proceed. Hi, everyone. Thank you. I want to start on the deposits I Jerry to follow up where you just left off with the not interest bearing that 14.9 billion, 14.8 billion. It's pretty stable. In fourth quarter we typically see some window dressing right from companies that it picks up a bit.

Like we said on our on our prepared comments.

They're holding in there and.

And look I'll I'll say.

It looks like multifamily.

You know they were underwritten at two years ago, two and half years ago.

Yes, it's in construction you know, they're gonna have to if rates they'll go down, but I have to rightsize some of the stuff that they know that we've been talking to them about that.

Jerry Salinas: Can we safely say that we're now at a bottom of the not interfering deposits? You know, Steven, I think that you know, certainly when I look at it, I feel today versus three months ago feel a lot more comfortable with whether that. Obviously you've seen and I kind of tried to give that sort of color in my commentary. We are seeing little downward ticks, but it's really been stable, you know, in my mind that those small a hundred million two hundred million dollar decreases have been relatively stable.

Jerry Salinas: And as you said, and we've seen historically, the fourth quarter is the best quarter, right, as companies try to do some window dressing. So, you know, I don't know that I can confidently say that we're at the bottom, but I certainly feel a whole lot better today than I did a quarter ago. Got it. Okay.

And and if batteries, who you're doing business with and who your sponsors are and so that's something that we're really worried about it.

At this point and I think most of that stuff.

Tours, you know or has to be dealt with in 'twenty five 'twenty six there's very little of it I think it was 17.

17% in 'twenty.

For yeah and.

I'll give you one other thing that's.

That cause maybe think I'm whistling past the graveyard.

There was a there was a multifamily deal where we're up in north, Texas our customer.

Steven Alexopoulos: And then on the low side, I didn't, I've been able to piece together all the color you gave on consumer and commercial, but there's a doubt. Long growth picked up this quarter.

Yeah.

It was right at one times coverage okay.

And that thing sold at a four and a half.

<unk> cap.

Phil Green: Can you give us, you know, drill down why is it just these new markets coming online when you look at the growth? And it sounds like you're improving your seat. Just to you. And with all of that, it's still, I think, you know, high single digits number. And you know, that's kind of what our sustainable target has been for a while, so I would hope that it is. It would be our goal that it is.

And again, you know and again to the borrower.

So you know just because.

I mean, it tells me theres still a lot of demand for that out there.

You know, even though you might not be making a debt service coverage ratio somewhere in the <unk>.

If you're in the right asset class there still.

So demand for what you've got.

So I know I didn't answer it very specifically, but I think things are still hanging in there pretty well right now and in the US final thing I'll say is.

Phil Green: You know, we've looked hard at where it's coming from. Like I said, with that really big spike in the second quarter, you know, we talked about where it came from. And it was, you know, it was a fine large, a lot of good credits. It just didn't need our structure. That what we, you know, what we wanted to do, maybe we were full in a category and didn't want to reach out in one particular area.

As it relates to the consumer they still got a job you know that if.

In Texas, the unemployment numbers look pretty good and as long as they've got a job, even though maybe spending down their savings.

Hang in there.

Spend money.

But that is good color, thanks, Phil and Mike.

Apologies if I missed it but can you remind us in terms of new branch of store openings over the next year like what's Oh in the pipeline beat in Austin or Dallas.

Phil Green: And, you know, I think in just talking to our people, a lot of banks have just put their pencils down. And, you know, we have liquidity. People know that, you know, we're not always the place where people like to go to get, you know, the luckiest structure on a deal, but we're consistent, you know, through the good times and bad times. I think, you know, people realize that. And I think that we've got a lot of phone calls and a lot of opportunities to do stuff.

Oh, that's a good question I'm going to.

I have to guess a little bit here, but I'm going to guess.

15 ish.

Before so locations.

I think some of it is going to be dependent yeah. We're having some conversations earlier this week I'm, especially when you talk about a market like Austin, where we've got a you know the permitting process is different with different if we're having to deal with different municipalities insights. So that can kind of effect are you know certainly you know the number that we're talking.

Phil Green: And I mentioned how many we declined because I didn't want people thinking that, oh, well, look, Colin Frost got some loan growth. They must be just taking other people's problems, you know. That's not what's happening. And we're just seeing a lot of good opportunity. I think part of it is what's a lot of things. It's our reputation for strength and stability and times like these. But, man, our people are great at sales and calling and developing relationships.

Thing about but I think that the last number I saw combined in 'twenty four.

It was around 15 I think.

Across all three markets.

I think it makes sense.

But at 15, combined and how would that compare to what we did this year in 'twenty two.

Phil Green: They're held accountable to it. They've been doing a good job. When you have a balance sheet like ours, it puts you in a good place to take advantage of opportunities. And I think that's what we've been seeing. It's hard to pin down on any one particular thing because I think it's been pretty consistent.

I think it would be right now a little bit lower than where we were in 'twenty three.

Understood.

Thank you for taking my questions.

Yeah.

Our next question is from Manan <unk> with Morgan Stanley. Please proceed.

Phil Green: I might speak a little bit more about it, because I just had a recent conversation about the expansion throughout I gave you some feel for, you know, it's pretty granular in terms of what's coming on. But I had a conversation about, well, what kind of deals are we seeing? And a lot of it is it's owner, it's owner businesses, right? They have a, you know, a business, a business consumer model. You know, they're not really sexy businesses, you know, but in a sense, but they're just good, stable, long term businesses that are a result of hiring community bankers and these communities we've gone in.

Hey, good afternoon.

I wanted to check in on our deposit data has you spoke about seeing a mix shift from lower cost higher cost deposits again this quarter.

Can you help us think through peak deposit betas are in 2024.

As rates stayed higher for longer just given and and also give some color on the competition that you are saying.

Yeah. So right now for I guess I'll talk a little bit about twenty-three yeah. So for the third quarter I think cumulatively on on this cycle were up 2%. We were at on interest bearing we were at 37% in the second quarter were at 39% at the end of the third quarter I'd expect that same sort of.

Phil Green: And so it is very diverse. There's, you know, the commercial real estate that we see there is mainly because someone wants to not pay rent anymore. They want to own their own building for their business. Now, you know, that's slow down some because right or so high, but that's still going to be the arc, I think, of the kind of business we're doing. And when I hear that, it makes me feel really good about just how core and how stable it is because that's really our real house. Yeah.

It'll flip between the third and the fourth quarter.

Non interest bearing and on St.

Same sort of move in on total deposits I think we increased from 23% I'd say, 25% through the end of the third quarter.

Right now from a competitive standpoint, we're really we try to keep an eye on we do keep an eye on our competitors really at all levels. We don't feel like we need to be the top but we do want to be competitive in and we look at rates of weekly.

I think we've seen more competitive pressure today and in the last couple of recent weeks, it's been more on the <unk> side I think so that's really what you know a large consumers and our commercial customers are looking for as you know kind of what the CD rates are to keep it at the bank and so that's where we're seeing most of the pressure.

Phil Green: Well, if I could ask, but find a one. So as we're probably, I don't know, two thirds through earning season, what we're hearing from the industry, particularly the larger regionals, because most of them are on this RWA ozemic diet, right? They're just shrinking assets. They're almost all tightening on expenses, right? A lot of them are guiding to flatish expenses for 2024. And to be quite frank, I don't know how to think about Colin Frost for 2024.

We tend to price, we keep an eye on what the comparable Treasury security is doing.

Determine our pricing there.

Phil Green: And I'm not looking for like a number, but I want to know how you're thinking about it because in many ways this is going to be a great market for you to take bankers, right? I mean, is everybody's sort of on the sidelines, which you mentioned. So, you know, you're, I don't know, I think numbers 14% year over year. Are you thinking about, hey, this is a year that we're going to continue to expand and maybe expense growth stays at that rate?

So I think we're really pretty competitive and feel.

Feel good about where we're at.

Got it.

And maybe a follow up on unexpected says I know you noted the expense growth rate would likely come down next year.

But at the start of this year when you guided to the mid teens expense grows I think you'd mentioned you'd be investing in some I T and cyber projects upgrading a couple of core systems and I think he also noted that the timing of several large projects were just coinciding in 2023. So should we think about some of these one time costs coming out.

Phil Green: Are you sharing some of your other CEOs like, no, we need to tighten also just because the environment's a little more challenging. How do you think about that? Well, what we're thinking is that we've got a great opportunity to expand. And we have plans in place, you know, we're doubling, you know, we started the process doubling Austin, you know, in middle of tripling Dallas. We think these are great opportunities, and we are getting good applicant flow and put it that way in these markets.

Phil Green: So it's not like we're going, oh, we need to hire more bankers because we've got an opportunity to produce with that. I mean, we are hiring tons of bankers as a part of this expansion. And you know, there's plenty of work to go around there. So we are hiring but it's a part of our strategy we've put in place already. We're having good success there. We are not backing off and saying, oh, look, we need to cut expenses now because I don't know because we're winning competitively, I'll just say it.

Next year or are these multiyear investments that youre, making in the business.

Yeah, I think most of the things that we're talking about our multi year investments. Most of these are going to be either you know positions that we hired from new staff are projects that'll get capitalized.

Thank you know what we've seen is that some of this has moved into later parts of <unk> 23, a little bit and so feeling a little bit of a sum.

Some of the upside that we probably are saying when you we talked about earning our expense guidance being a little bit lighter than where we originally thought I had a little bit to do with some of that timing.

So we're not really I'm not thinking anything that comes to mind immediately a one time sort of expenses that were driving that that expense growth. This year. It was more of that more people in and capitalized projects and like I said, we have a little bit that's moving into next year, but as Phil said, we don't expect certainly that our expense growth for in <unk>.

<unk> year, we'll be in the double digits at that mid teens that ive been discussing for this year.

Phil Green: And now is the time for us to keep moving forward. Now, do Jerry and I talk with the folks about, you know, what they're spending and what the trend is and we want it to be lower next year just because, you know, there's a limit to what you can, you can do over time. And we want to be prudent about all this stuff. No, we're not in a retrenchment mode at all.

Does that helps it doesn't sound like there's a large chunk.

So there are investments that are getting delayed and moving from this year into next year.

Yeah, I think that'd be a good conclusion.

Thank you.

Our next question is from Brady Gailey with <unk>. Please proceed.

Hey, Thank you good afternoon guys.

Jerry Salinas: Jerry won't talk some bank expenses. No, I mean, I think Phil said it and, you know, we've been very focused as he said and Steven, you know us, our focus on expenses continues. Certainly when you look at the percentage, you might someone may roll their eyes, but obviously we've talked about the things that we're doing to grow the business, grow our product selection and expand our marketing. I think those have all been and improve our technology.

Hey, Brian It's Ray.

But maybe just to ask the expense question a little differently.

I look over the last I don't know three or four years.

Made a big investment in Houston Big investment in Dallas, now a big investment in Austin.

That was a big piece of the abnormally high expense growth as you think about it going forward or are there still markets out there where you want to make a substantial new investment or do you think with these three you know you're kind of in the.

Jerry Salinas: Those have all been smart things that we're doing. And as he said, you know, our guidance for our team has really been that, you know, we are we've kind of given a given guidance to this mid-teen sort of growth this year, but certainly would expect that, you know, when we talk in January, that that's not the sort of growth we'll be giving from a target standpoint. Okay, thanks for all the color.

Three big spots are in Texas with these three are you kind of done making these large investments in a new market.

Yeah.

Yeah.

Really I mean.

Look we've got we got a lot of first of all we have a lot of work left to do okay. So we got to finish up in Dallas, We were just starting Austin.

Dave Rochester: Our next question is from Dave Rochester, what cut this point? Please proceed. Hey, good afternoon, guys. Nice quarter. Thank you. On your outlook for higher EPS versus consensus, are you guys assuming you've reached the bottom now and NIM and NII giving your rate outlook? You've been pretty stable here for a couple quarters now. Are you thinking that trend continues? And then when do you think you could get back to NII growth?

And.

And you know, where we got a pretty big network that we're going to continue to deal with and continue to grow in the normal course of business right.

And.

But.

Uh huh.

I I don't want to be too far out in front of that but look we're gonna be like I said earlier, we're going to be doing this for a long time I mean, there are great markets to be M.

Dave Rochester: Yeah, I think that and I think I've been pretty consistent. The fourth quarter for us, I think, is going to be a little bit weaker. You know, I don't think it's and it's not significant. The guidance I gave last quarter was, I thought they'd be flattish and I could even still say that with a downward bias. I mean, we were down one basis point, you know, between these quarters. So I'm kind of feeling that same pressure.

And the state they're great markets to be out of this state I'm looking way down the road I mean, I'm, just saying I don't think there's anything about our business model that.

And when we get through doing 17 branches in Austin.

Dave Rochester: I think that as I look out into 24 and we'll get more color in January, as I said, but I think we've talked a couple of times that we have some opportunities with some reinvestment of some proceeds that are going to be coming to us pretty early in 2024 from maturity to our investment portfolio. And even though we haven't really decided what sort of an investment plan will put in place, just putting it on our imbalances at the Fed would be a significant improvement.

And so maybe to answer your question another way.

So the way to think about our company is probably that we've got this legacy part of our company that.

Operates very efficiently and very profitably and.

It's got a lot of control in terms of expenses that kind of thing and then we have this expansion.

Dave Rochester: I think we've made no secret of the fact that, you know, we bought a billion dollars in Treasury securities that mature, I think the first tran, say, first 250 million is on December 31st, so I really say basically they're all in early 24 and it's at a 1%. So that's sort of a pick-up that we're kind of projecting for most of 24 as those securities get to be reinvested. You know, a lot of it will be dependent, you know, what our assumptions are for lower rates if that's the case in 2024 when we get to that forecasting period in January.

Element of our company that is a growth an expansion component and that has higher growth rates. Just you know, it's the nature of that kind of business.

And.

Well, what we believe is the combination of those two.

And they they do two different things right. There was a legacy kind of piece and there's you know there's this new expansion piece.

Maybe we will probably always be you know as long as we're doing a little bit higher on average than others.

But but another way to think of it too is a lot of these expansion assets are going to be creating the the money in the revenue to fund future expansion soon so.

Dave Rochester: But right now, I do think that the same guidance I gave last quarter about, you know, kind of flatish to a little bit downward bias is kind of where I'm for this fourth quarter. Okay, appreciate that. And then, going back to the stats you were talking about on the non-enthusiiring. It sounded like October was down, if I heard this right, maybe 260 millionish from the September average. I know that'll bounce around.

That's not a borough specific answer, but it's sort of how we think about the business right now.

Yeah that helps.

We've seen some of your peers do a partial.

Partial bond restructuring.

Dave Rochester: It's just wondering if you had isolated what drove that pickup and the runoff here this month. Now to be honest with you, there's so many accounts in there and there's a lot of positives and negatives and a lot of volatility that goes in with those accounts. And to be honest with you, from my end, when I see a movement like that in a month, I tend to think it's pretty philetic. And we hope certainly that we've seen the drop the bottom as we said.

Yours bond yield is around three and a quarter. So you know if if you mark to market that barnyard, you'd probably be picking up at least a couple of hundred basis points. How do you all think about.

Restructuring and a piece of the bond book and your TCE is in the mid 4% range like does that matter I know common equity tier one was a lot higher but does the TCE matter when you consider a possible bond restructuring.

Dave Rochester: Phil talked about the new relationships that we're adding on the commercial side. It typically takes us a few months from three months to six months to get those to commercial deposits on. So, we continue to be pretty optimistic about it and hope the worst is behind us.

Yeah.

Brady I will say that we have not discussed.

Any sort of a bond restructuring.

You know I think that we've we've got obviously, we've got these securities and available for sale. We think it gives us the most amount of flexibility and we liked the transparency that it provides through equity and you know I think from a tangible capital standpoint, we don't spend a lot of time thinking about it.

Dave Rochester: Good, maybe one last one just on expenses. You mentioned the mid-teens growth guide. And that implies a little bit of a wider range. I guess we only have one quarter left. And it seems like a mid-point would imply a little bit of a step up in expense growth and 4Q. Are you thinking maybe more at the bottom end of that range at this point, because you came in a little bit lower this quarter?

Were obviously aware of it.

As we said earlier, we haven't made any investment purchases. This year I think if we do put a program in place will certainly whatever program. We put in place we will certainly consider the potential implications of the new capital regime. That's out there for banks that are 100 billion.

Dave Rochester: Yeah, I was joking a little bit earlier today. Yeah, I was joking a little bit earlier. What does mid-teens mean? In my mind, that's one number and it could be a different number in your case. I will say that my expectation today versus where we were a quarter ago is it will be lower. We had a really, we beat it for the quarter and some of it was on the expense that had come in lower than we had expected.

That would have to include OCI. So we're not it's nothing that we're not aware of.

It's more that at this point it has not been really something that's been part of our conversation.

Dave Rochester: We do a lot of settlements on incentives and kind of look and see where all those incentive plans come in. Some of our incentive payments all best and in our issued invest in the fourth quarter. So there's a little bit uncertainty there, but if you're looking at where I was a quarter ago versus where I am today, yeah, I certainly feel like it will be a little bit lighter than I thought we would be. Yeah, when I saw the growth at the slower rate this quarter versus what we expected, I figured that was going to be a response. I appreciate it. Thank you guys. Sure.

Yeah, So anyway anything else I would say I would kind of make it up but it's not something that we've really talked about going forward.

Okay, and then finally for me it looks like it looks like the share count went down just modestly in the third quarter relative to the second quarter. So maybe a modest amount of share buybacks.

Stock was at a year to date low I know, it's up pretty nicely today, but you know, it's still relatively cheap versus where you all have been trading earlier. This year. So how do you think about a share buyback with the stock at this level.

Ebrahim Poonawala: Our next question is from Ibrahim Phuwala with Bank of America, please proceed. Good afternoon. Hey, Brian. Hey, so Phil, you talked about growth, maybe somewhat slowing as we look into next year. Give us a sense of how customers are holding up. When we think about this lag defect of the Fed rate, hi, maybe consumer demand slowing down a bit. I'm not sure whether or not that's happening in your markets, but give us a sense of just resiliency of the customer base where if any place where using softness from a credit quality perspective.

Yeah, I think we spent we didn't spend a lot of money, but we got in earlier than I would've liked in retrospect I think I don't have the numbers right in front of me, but I think it was around $11 million that we spent in the quarter.

It's just something that that we'll talk about them. You know there is on one side you know we're having the conversation like you said about how much are people paying attention to tangible capital and on the other.

Sat out I'm talking about what a great bargain our stock is even before today's before today, especially.

So it's just a conversation we'll continue to have it won't have big implications I think at this point, we're probably we've got $100 million program.

Ebrahim Poonawala: And it may not be if it didn't cross Sloan book, but just in the market where you're seeing some softness. We became, I think that, you know, they're pretty well known, right? It's, it feels that we're underwritten that, you know, I've seen the on a floating base that have seen the higher rate, and operating cost are up. You know, there are, honestly, I mean, I don't pay a lot of attention to other banks, but I mean, I know our credit is, credit numbers are really strong.

Aspires in January we've probably utilized $30 million of it if I remember correctly. So it won't have huge impacts, but it's something that we considered continue to discuss but again, it's not going to have a big impact.

Okay. Thanks for the color guys.

Our next question is from Michael Rose with Raymond James. Please proceed.

Hey, good afternoon, thanks for taking my questions.

So I noticed your comments about you know optimism.

Around home equity and you know just looking at the average balances we don't have them for this quarter excuse that out but just over the past quarter couple of quarters. It seems like that's over half the average loan growth.

Ebrahim Poonawala: I don't get the sense we've had a tremendous, you know, problem here in the state. We said we're glad to operate in Texas. We really are. I think it makes a huge difference. I don't see things. You mentioned I said it was, you know, slower next year. I don't remember that. I don't feel like it's going to be that much slower. I talked to customers. It's kind of funny. When you go out and talk to them, I was with a construction guy and he looked at me, so I'm really interested in how you see the economy.

Just wanted to kind of size the opportunity you know as we move forward and particularly as you rollout the mortgage product. Thanks.

I'm sorry, Michael you asked me the outlook for that or what would you say I mean I agree with your you know your numbers, but what were you asking.

Just if you could size the opportunity as we move forward because you did sound fairly optimistic going forward and then as you layer in mortgage.

Your mortgage I know the market is not great, but you're in Texas, just just trying to get a sense for you know.

Ebrahim Poonawala: And I said, well, I almost embarrassed saying it. I said, I don't, I don't think it's that bad. And he looked at me, said, that's how I think too. And we're almost felt embarrassed for each other that we said it. We'd like, we're going to get canceled or something. Because, you know, there's, yes, if you watch too much TV, you think it's supposed to be bad, but I think there's more worry about then there is actual problems today.

What the growth opportunity is and I think that home equity consumer line is about 12, 5% of the portfolio, just where do you think that could get to over time. Thanks.

Yeah.

Oh, well the mortgage portfolio.

Has is a great asset class for us I think over time. This is back a year ago. When we started talking about it I think he said I can't remember exactly what we said it but the impression we wanted to give you was that hey, this could be.

Ebrahim Poonawala: And I'm not trying to be polyanna. It's just, you know, most people, when you talk about their business, and there's problems here and there. You know, we, you know, we got, I talked about some increase in our risk rate tens. I mean, you know, so there's some issues, but it's not bad. If I had to pick, let's say, okay, let me see. So I would say probably, you know, you're by your pay here, you know, use cars.

Mortgage itself overtime could be what they are.

Consumer real estate portfolio. It wasn't at that time or just by itself and so that's we still think it's good you know this is a long term product long term relationships. So we feel really good about it.

And remember we're not doing a refi program. So I don't care of the refi markets down in fact, I love it because it's allowed us to get.

Ebrahim Poonawala: It's got some pressure because they're rates sensitive business. And so that's probably some issues. I mean, if you've got an office building that's refying now, and you don't have the capacity or the willingness to rightsize it, there could be some issues there. And, you know, and then there's just the one off thing that's just business, you know, that we see. Yeah, we've seen some things in, let's say contractors. There was a big electrical contractor, but they had government work, which is always a little bit dicey for our experience, but, but they're working hard to write that shift.

No what 90 people or so that we were able to bring in great great mortgage professionals.

That you know that infrastructure over the last year. So we're all about putting people in homes and that's a I think we're going to have a chance to do that for a long time.

I think that.

I saw a number Michael with the percentage of people that had a.

What was it a 3% mortgage was like over 60%.

Amazing and if you looked at the people that had under our.

Five.

Ebrahim Poonawala: But you know, if you, if you didn't bid the right way and cost went up, you got to fix, fix rate deal, fix cost deal, that could be some issues. So, you know, those are the kind of things we're seeing, but, you know, like we said on our, on our prepared comments, it's, they're holding in there. And, and, and look, I'll say, let's take multi-family. You know, they were underwritten it two years ago, two and a half years ago.

It was like 90 something percent of the mortgages so.

You know.

If you want to.

I mean people are not moving right. So I think that this home equity product.

It's got legs as home improvement products, it's got legs for a while the rate of growth has been so high.

Twenty's mid Twenty's sometimes.

I think that just by its nature it.

The law the law of numbers. It has to go down in terms of percentage, but I still think the volume should be pretty good.

Ebrahim Poonawala: It's it's in construction, you know, they're going to have to, if rates don't go down, I have to write some of the stuff, but they know that. We've been talking to them about that. And, and it matters who you're doing business with and who your sponsors are. And so, it's not something that we're really worried about. And at this point, and I think most of that stuff, matures, you know, or has to be dealt with in 25 and 26.

Because it just fills a gap that people need right now.

Great I appreciate the color and just one final for me so the.

The potential problem loans were up about 16% Q on Q any any any notable trends in there and anything to read in that or is this more you know kind of a normalization of credit off of a very low base.

Ebrahim Poonawala: There's very little of it. I think there's seven. 17% and 24% yeah, and I'll give you one other thing that's that because maybe you think I'm with some plastic graveyard, there was a there was a multi-family deal we're aware of and more Texas a customer, it was right at one times coverage, okay, and that thing sold at a four and a half percent cap, and a gain, you know, and a gain to the borrower, so, you know, just because, I mean it told me there's still a lot of demand for that out there, and so even though you might not be making a debt service coverage ratio, somewhere that if you're in the right asset class, there's still some demand for what you've got, so I know I'm good at answering it very specifically, but I think things are still hanging in there pretty well right now, and finally I'll say is it's a release of the consumer, they still got a job, you know, that if the in taxes that the unemployment numbers look pretty good, and as long as they've got a job even though maybe spending down their savings, they're able to hang in there, spend money.

Yeah, the numbers Ive looked at where the I think where I saw the change was was in the risk grade tens.

Really there well I think there are four credits that made up the vast majority of that and they were like different businesses. As you know there are a couple of there are a couple of real estate properties. They were at actually they were smaller office buildings.

You know that had kind of idiosyncratic things and we don't feel bad about them, but you know we felt they remember this is OEM. This is a a lighter classification, but.

And then there was something of a midstream.

Energy trading company, you know that.

It's a business kind of thing I mean, we filed I think and then we've got what was the other one.

Oh I think it was up I think it was a buy here.

Hey here.

Outfit I think that's what that was and so a kind of an interest sensitive business.

We've seen some of that that was the kind of thing you didn't give me a lot of heartburn. It's just it's.

Just reflective of the environment we're in.

But I didn't think it said anything in particular about how are you doing we're doing things in fact I think it is.

Phil Green: God, that was good color, thanks Phil, and apologies if I missed it, but can you remind us in terms of new branch of store openings over the next year, like what's in the pipeline beat in Austin, no Dallas? That's a good question, I'm going to, I'm going to have to guess a little bit here, but I'm going to guess 15-ish, or so locations. Yeah, I think some of it's going to be dependent, you know, we're having some conversations earlier this week, especially when you talk about a market like Austin, you know, where we've got a, you know, the permitting process is different, we're different, we're having to deal with different municipalities and such, so that can kind of affect, you know, certainly, you know, the number that we're talking about, but I think that the last number I saw combined in 24 was around 15, I think, across all three markets. Got it, 15 combined, and how would that compare Jerry to what we did this year in 23? I think it would be right now a little bit lower than where we were in 23. Understood.

It shows that we were doing our business pretty well and.

So again offset since the beginning of this that it's a risk business and while we see some hiccups here and there of course, we will.

I feel really good about how we've done things I feel really good about them.

Phil Green: All right, thank you for taking my questions.

No the customers not every one of them has performed like we want but most of them have.

I feel pretty comfortable with it.

Great I appreciate the color. Thank you.

Okay.

And our final question is from Brody Preston with UBS. Please proceed.

Hello, everyone.

Hello, Hey.

I was just wondering I wanted to follow up on an office Ah I was wondering if you happen to have what the reserve against the office portfolio is and how you think about that moving forward just given some of the larger banks are putting up pretty hefty reserves against their office.

Yes.

Yeah.

Yeah.

Uh huh.

We have here.

Yeah.

Yeah.

Yeah.

Yeah.

Manan Gosalia: Our next question is from Manangasalya with Morgan Stanley, please proceed. Hey, good afternoon. I wanted to check in on deposit data as you spoke about seeing a shift from lower cost to higher cost deposits, again, this quarter.

Okay.

Yeah.

Yeah, I'm looking at what I've got I've only got.

The commercial real estate as a group I don't I'm, what I'm looking at roadie I don't have the office, but.

Certainly I think.

That number if I'm looking at this correctly here.

Is 1.45 on on all commercial real estate and certainly if you get with a with a fee. We can certainly provide you that detail I don't think I've got it here.

Jerry Salinas: Can you help us think through peak deposit betas in 2024, as rates stay higher for longer, just given, and also give some color on the competition that you're seeing? Yeah, you know, so right now for August, I'll talk a little bit about 23. You know, so I, for the third quarter, I think, humanatively on this cycle, we're up 37 percent in the second quarter, we're at 39 percent at the end of the third quarter.

Okay, Great I'll follow up.

I will say that I'm not going to do anything just goes to large banks or done something just so you know.

Got it.

I did also Gary I'm, sorry to go back to expenses.

Yeah, sure, Hey, Brody I'm getting I'm getting a chat real quick its I'm, saying that our reserve is a 2.2% on office.

Jerry Salinas: I'd expect that same sort of a little clip between the third and the fourth quarter on interest bearing, and on same sort of move and on total deposits, I think we increased from 23 percent to 25 percent to the end of the third quarter. You know, right now from a competitive standpoint, you know, we're really, you know, we try to keep an eye, and we do keep an eye on our competitors, really at all levels.

Okay, great. Thank you very much for that sure.

I did just wanted to touch on expenses.

Jeremy.

A couple of quarters ago, you said you thought of the long term kind of expense growth rate for the bank is high single digits.

I just wanted to ask you know what would it be fair to say that Austin Austin build out will be mildly additive to that kind of long term growth rate you know when you think about planning for next year.

Jerry Salinas: We don't feel like we need to be the top, but we do want to be competitive, and we look at rates weekly. I think we've seen more competitive pressure today, in the last couple of recent weeks, has been more on the CD side. I think, though, that's really what, you know, large consumers and commercial customers are looking for is, you know, kind of what the CD rates are to keep it at the bank.

You know I think that the way we tend to look at it is and again its going to be dependent on how sort of how big an expansion. We really are typically would've originate but when I gave that sort of guidance that was inclusive would be inclusive of what we were doing.

Jerry Salinas: And so that's where we're seeing most of the pressure, and we tend to price, you know, we keep an eye on what the comparable Treasury security is doing to determine our pricing there. So, I think we're really pretty competitive and you know, feel good about where we're at. Got it.

Okay got it that's helpful. And then the last one that I had was I'm sorry, if you said it earlier and I missed it do you happen to have you know for the fixed rate portion of the loan portfolio you know what what's coming due over the next 12 months.

And what the yield pick up on that would be.

Jerry Salinas: And maybe you follow up on an expenses. I know you noted the expense growth rate would likely come down next year. But at the start of this year, when you got it to the mid-teens expense growth, I think you mentioned you'd be investing in some IT and cyber projects, upgrading a couple of core systems. And I think you also noted that the timing of several large projects would just go inciting in 2023.

Yeah.

Okay.

No I don't think I've got that handy with me Brody, but again I think that's something certainly.

Amy can get it to you.

Okay, maybe if I.

To ask one more.

Sure of course.

Do you happen to have a what what excuse me.

The percent of the portfolio that snacks.

Jerry Salinas: So, should we think about some of these one-time costs coming out next year, or are these multi-year investments that you're making in the business? Yeah, I think most of the things that we're talking about are multi-year investments. Most of these are going to be either positions that we hired from new IT staff or projects that will get capitalized. I think you know what we've seen is that some of this has moved into later parts of 23 a little bit.

Yes.

Yeah, I think it's 4%, let me double check that but that's my recollection.

Oh hold on just a second.

Yeah.

Yeah at the end of at the end of September that portfolio was the snake portfolio was $789 million or a four 3% of period end loans.

Awesome. Thank you very much I appreciate it.

Jerry Salinas: And so, feeling a little bit of some of the upside that we probably are seeing when we talked about the earning expense guidance, being a little bit lighter than where we originally thought I had a little bit to do with some of that timing. So, we're not really, I'm not thinking anything that comes to mind immediately of one-time sort of expenses that we're driving that expense growth this year. It was more the more people and capitalized projects.

Sure.

We have reached the end of our question answer session I would like to turn the conference back over for closing remarks.

Thanks, everyone. We appreciate your participation today and your interest will be a journey.

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

Okay.

[music].

Jerry Salinas: And like I said, we have a little bit that's moving into next year, but as Phil said, we don't expect certainly that our expense growth for next year will be in the double digits that the mid-teens that I've been discussing for this year. Does that help? It doesn't sound like there's a lot chunk of investments that are getting delayed and moving from this year to next year. Yeah, I think that'd be a good conclusion. Thank you.

Okay.

[music].

Phil Green: Our next question is from Brady Gellie with KBW, please proceed. Hey, thank you. Good afternoon, guys. Hey, Brady. But maybe just to ask the expense question a little differently, you know, as I look over the last three or four years, you made a big investment in Houston, big investment in Dallas, now a big investment in Austin. I know that was a big piece of the abnormally high expense growth. As you think about it going forward, are there still markets out there where you want to make a substantial new investment? Or do you think with these three, and you're kind of in the three big spots there in Texas, with these three, are you kind of done making these large investments in a new market?

Okay.

[music].

Phil Green: Brady, I mean, look, we've got a lot of, first of all, we have a lot of work left to do. Okay, so we've got to finish up Dallas. We were just starting Austin. And, you know, we've got a pretty big network that we're going to continue to deal with and continue to grow in the normal course of business, right? And, but... I don't want to be too far out in front of that, but look, we're going to be doing this for a long time.

Yeah.

[music].

Okay.

Yeah.

[music].

Okay.

Okay.

Yeah.

[music].

Phil Green: I mean, there are great markets to be in in this state, there are great markets to be in out of this state. I'm looking way down the road. I mean, I'm just saying I don't think there's anything about our business model that ends when we get through doing 17 branches in Austin. And so, maybe to answer your question another way, the way to think about our company is probably that we've got this legacy part of our company that operates very efficiently and very properly, and it's got a lot of control in terms of expenses and that kind of thing.

Okay.

Yeah.

Okay.

Yeah.

Yeah.

Okay.

Okay.

Yeah.

Okay.

[music].

Phil Green: And then we have this expansion element of our company that is a growth and expansion component, and that has higher growth rates just, you know, the nature of that kind of business. And what we believe is the combination of those two, and they do two different things, right, there's a legacy kind of piece and there's this new expansion piece. Maybe we'll probably always be, as long as we're doing it a little bit higher on average than others.

Hum.

[music].

Okay.

Yeah.

Okay.

[music].

Phil Green: But another way to think of it too is a lot of these expansion assets are going to be creating the money and the revenue to fund future expansions too. So, that's not a burl specific answer, but it's sort of how we think about the business right now.

Brady Gailey: Yeah, that helps.

Brady Gailey: And then we've seen some of your peers do a partial bond restructuring. I know y'all is bond yield is around three and a quarter. So, you know, if you mark to market that bond yield, you probably be picking up at least a couple hundred basis points. How do y'all think about, you know, restructuring a piece of the bond book and, you know, your TCE is in the mid four percent range, like does that matter?

Brady Gailey: I know comment actually through ones a lot higher, but does the TCE matter when you consider a possible bond restructuring? Brady, I'll say that, you know, we have not discussed any sort of a bond restructuring. You know, I think that we've got, obviously, we've got the securities in available for sale. We think it's, you know, gives us the most amount of flexibility. We like the transparency that it provides through equity. And, you know, I think from a tangible capital standpoint, we don't spend a lot of time thinking about it.

Brady Gailey: You know, we're obviously aware of it. As we said earlier, we haven't made any investment purchases this year. You know, I think if we do put a program in place, we'll certainly, whatever program we put in place, we will certainly consider the potential implications of the new capital regime that's out there for banks that are a hundred billion. You know, that would have to include OCI. So we're not, you know, it's nothing that we're not aware of.

Brady Gailey: It's more that at this point, you know, it's not been really something that's been part of our conversation. Anyway, anything else I would say, I kind of make it up, but it's not something that we really talked about going forward.

Brady Gailey: Okay, and then finally for me, it looks like the sheer count went down just modestly in the third quarter relative to the second quarter, so maybe a modest amount of sheer buyback. So your stock was at a year to date low, I know it's up pretty nicely today, but you know it's still relatively cheap versus where you all have been trading earlier this year. How do you think about a sheer buyback with the stock at this level?

Brady Gailey: Yeah, I think we spent, we didn't spend a lot of money, but we got in earlier than I would have liked in retrospect. I think I don't have the numbers right in front of me, but I think it was around $11 million that we spent in the quarter. It's just something that we'll talk about, you know, there is, you know, on one side, you know, you're having the conversation like you said about, you know, how much are people paying attention to pet tangible capital.

Brady Gailey: And on the other side, you know, I'm talking about what a great bargain our stock is even before today, especially. So it's just a conversation we'll continue to have, it won't have big implications. I think at this point, we're probably, we've got $100 million program that expires in January, we've probably utilized 30 million of it if I remember correctly. So it won't have huge impact, but it's something that we consider to continue to discuss, but again, it's not going to have a big impact.

Michael Rose: Okay, thanks for the color guys.

Phil Green: Our next question is from Michael Rose with Raymond James, please proceed. Hey, good afternoon. Thanks for taking my questions. Phil, I noticed your comments about, you know, optimism around home equity. And, you know, just looking at the average balances, we don't have them for this quarter to accuse that out, but just over the past quarter. Couple quarters, it seems like that's over half the average loan growth. Just wanted to, you know, kind of size the opportunity, you know, as we move forward, and particularly as you roll out the mortgage product. Thanks.

Phil Green: I'm sorry, Michael, did you ask me the outlook for that or what would you say? I mean, I agree with your, you know, your numbers, but what were you asking? Just if you could size the opportunities to move forward, because you did sound, you know, fairly optimistic. Oh, I saw it forward, and then as you layer in mortgage, you know, consumer mortgage, I know the market's not great, but your index is just trying to get a sense for, you know, what the growth opportunity is.

Phil Green: And I think that home equity consumer line is, you know, about 12 and a half percent of the portfolio. Just where do you think that could get you over time? Thanks. Yeah. Well, the mortgage portfolio has is a great asset class for us. I think over time, you know, this is back a year ago when we started talking about it. I think we said, I can't remember exactly what we said, but the impression we wanted to give you was that, hey, this could be, you know, mortgage itself.

Phil Green: Over time could be what the consumer real estate portfolio was at that time, you're just by itself. And so that's, we still think it's good. You know, this is a long-term product, long-term relationship, so it's really good about it, and remember, we're not doing a REFI program, so I don't care that the REFI markets down. In fact, I love it because it's allowed us to get, I don't know, what, 90 people or so that we were able to bring in great, great mortgage professionals, you know, to build that, you know, that infrastructure over the last year.

Phil Green: So we're all about putting people in homes and that's, I think we're going to have a chance to do that for a long time. I think that, you know, I saw a number, Michael, at the percentage of people that had a, what was it, a 3% mortgage was like over 60% was amazing. And if you looked at the people that had under, I think it was like 5%, it was like 90% of the mortgages so, you know, if you want to, I mean, people are not moving, right?

Phil Green: And so I think that this home equity product has got legs, this home improvement product has got legs for a while. The rate of growth has been so high, you know, 20s, mid 20s sometimes. I think that just by its nature, the law, you know, the law of numbers, it has to go down in terms of percentage, but I still think the volume should be pretty good because it just fills a gap that people need right now. Great.

Phil Green: I appreciate the color and just one final for me. So the, I guess the potential problem loans were up, you know, about 16%. If you want to do any, any, any notable trends in there and anything to read in that or just more, you know, kind of normalization of credit off of a very low base. Thanks. You know, the numbers I've looked at were the, I think to where I saw the change was, was in the risk rate tens.

Phil Green: Really, they're about, I think there were four credits that made up the vast majority of that and they were like different businesses. You know, there are a couple of, there are a couple of real estate properties. They were actually, they were smaller office buildings. You know, they had kind of idiosyncratic things and we don't feel that bad about them, but, you know, we felt a, remember, this is OEM. This is a lighter classification.

Phil Green: But, and then there was something a midstream energy trading company, you know, that it's just a business kind of thing. I mean, we find a thing and then we got almost the other one. Oh, I think it was, I think it was a buy here, take your outfit. I think that's what that was. And so, kind of an interest into the business. You know, you've, we've seen some of that. That was the kind of thing.

Phil Green: It didn't give me a lot of heartburn. It's just, it's just reflective of the environment we're in, but I didn't think it said anything particular about how we doing. Again, we're doing things. In fact, I think it, it shows that we, we're doing our business pretty well. And then again, off to the beginning of this, that it's a risk business. And when we see some hiccups here there, of course, we will.

Phil Green: But I feel really good about how we've done things. I feel really good about. You know, the customer's not every one of them has performed like we want, but most of them have. You know, feel pretty comfortable with it. Right, I appreciate the color, thanks.

Jerry Salinas: What the reserve against the office portfolio is, and how you think about that moving forward, just just given some of the larger banks are putting up pretty hefty reserves against their office portfolios. Let's see what we have here. Yeah, I'm looking at what I've got. I've only got commercial real estate as a group. I don't know what I'm looking at. Brodie, I don't have office, but certainly I think that number, if I'm looking at this correctly here, is 1.45 on all commercial real estate.

Jerry Salinas: And certainly if you get with with AB, we certainly provide you that detail. I don't think I've got it here. Okay, great. I'll follow up. I will say that I'm not going to do anything just because the large banks are doing something just so you know. Got it.

Jerry Salinas: I did also, Jerry, I'm sorry to go back to expenses and be there more. I'm getting a chat real quick. It's saying that our reserve is 2.2% on office. Okay, great. Thank you very much for that.

Jerry Salinas: I did just want to touch on expenses. A couple quarters ago, you said you thought of like a long term kind of expense, grow three for the bank as high single digit. I just wanted to ask, you know, would it be fair to say that Austin, the Austin build out will be mildly additive to that kind of long term growth rate, you know, when you think about planning for next year. You know, I think that the way we tend to look at it is, and again, it's going to be dependent on how big an expansion we really typically would originate. But when I gave that sort of guidance, that was inclusive, would be inclusive of what we were doing. Okay, got it. That's helpful.

Broderick Preston: And then the last one that I had was, I'm sorry if you said it earlier, and I missed it. Do you happen to have, you know, for the fixed rate portion alone portfolio, you know, what's coming to do over the next 12 months? And what the yield pickup on that would be? No, I don't think I've got that handy with me, Brody, but again, I think that's something, certainly. And we can get it to you.

Broderick Preston: Okay, maybe if you'd like me to ask one more. Sure, of course. Yeah, I think it's 4%. Let me double-check that, but that's my recollection. Hold on, just a sec. Yeah, at the end of September, that portfolio was, the stick portfolio was $789 million or 4.3% of the period end months. Awesome. Thank you very much. I appreciate it. Sure.

Unknown Executive: We have reached the end of our question and answer session.

Phil Green: I would like to turn the conference back over to Phil for closing remarks. Thanks everyone. We appreciate your participation today in your interest.

Unknown Executive: We'll be adjourned. Thank you, this will conclude today's conference.

Unknown Executive: You may disconnect your lines at this time and thank you for your participation. .