Q4 2023 Cullen/Frost Bankers Inc Earnings Call
Ladies and gentlemen, thank you for standing by the conference will be be kidney in just a few moments once again, thank you for standing by and we will be beginning in a few moments.
[music].
Greetings and welcome to call them Frost Bankers, Inc, fourth quarter and full year 2023 results 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.
Phone keypad. Please note. This conference is being recorded I will now turn the conference over to Eva Mendes Senior Vice President and director of Investor Relations. Thank you you may begin.
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, because 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 minutes.
Please see the last page of text in this morning's earnings release for additional information about the risk factors associated with these forward looking statements.
If needed a copy of the release is available on our website or by calling the Investor Relations Department and 2102205234.
At this time I'll turn the call over to Phil.
Thank you Amy.
Good afternoon, everybody and thanks for joining US today I'll review fourth quarter results for call them Frost, and our Chief Financial Officer, Jerry Salinas will provide additional comments before we open it up for your questions.
In the fourth quarter, calling frost earned $100.9 million were $1 55 per share compared with earnings of $189 5 million or $2.91 a share reported in the same quarter last year now.
Now these results were affected by $51.5 million, one time, FDIC insurance surcharge associated with the bank failures that happen early in 2023.
Our return on assets and a common equity for the fourth quarter were 82 basis points, and 13, 45, 1%, respectively and that compares with 1.44% and 27, 6% for the same quarter same period last year.
For full year 2023 of the company's annual net income available to common shareholders was $591.3 million, that's an increase of three 3%.
Compared to 2022 earnings available to common shareholders of <unk>.
$572 5 million on a per share basis 2023 full year earnings were $9.10 a share compared to $8.81 a share reported in 2022.
As we mentioned in this morning's press release suggests for the one time FDIC insurance surcharge, our yearly earnings would have been up by approximately 10% over 20.
'twenty two.
Okay.
The solid fourth quarter and full year performance is due to the continued strong execution of our organic growth strategy about frost bankers, who provide our customers with top quality service and experiences that make people's lives better.
Our balance sheet and our liquidity levels remain consistently strong frost remains very well capitalized and it has a 45% loan to deposit ratio also as was the case in previous quarters Cullen Frost did not take on any home loan advances participate in any special liquid.
<unk> facility your government borrowing.
Access and broker deposits or utilize any reciprocal deposit arrangements to build insured deposit percentages.
And Additionally, our available for sale securities portfolio represented more than 80% of our portfolio total at quarter end.
Yes.
Our average deposits grew in the fourth quarter to $41 $2 billion up an annualized 3.5% from $48 billion in the previous quarter.
Average loans also grew in the fourth quarter to $18 6 billion compared with 18 billion in the third quarter that was an annualized increase of 14, 3%.
We continue to see excellent results from our organic growth program.
For example, our original Houston expansion location stand at 103% of original deposit goal, 155% long ago, and 122% of our new household goal.
But what we call our Houston, two dot O locations.
The last of which will open this year, we stand at 297% of deposit go 351% of long ago, and 185% of New household go.
As of quarter end expansion loans and deposits represented a park, approximately 24% and 19% respectively of our total Houston market presence.
For the Dallas market expansion, we stand at 217% of deposit gold, 269% of long ago, and 198% of our new household goal, while still relatively early in this effort expansion loans represent approximately.
12% and deposits represented approximately 10% of Dallas market totals, we've opened up almost two thirds of our planned locations in the Dallas market and we look forward to their growth as these locations mature past the startup phase.
And we're also excited about our new Austin expansion effort, where we plan to open 17 locations to double our presence in that market as we've mentioned before in the first of those opened in 2023 and the next is scheduled to open in April.
Keep in mind that we've been successful generating core stable grass roots business in our expansions and that will generate significant value over the long term.
At year end, our overall expansion efforts had generated $1.9 billion in deposits and $1 $4 billion in loans, even though many of these locations are still early in their development.
Looking at our consumer banking business, we continue to see outstanding organic growth and we ended 2023 with a record net new household growth of 28632 households.
Again, that's net growth and it's 12% higher than last year's net household growth.
In the past three years, we've added 81000 net new consumer checking households, that's two six times more than the three years before that.
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And that's [laughter] excuse me and that shows that our organic growth strategy combined with our customer experience from reputation is key to our success.
We have the right products and services and relationships to help customers in our markets.
Also as we've noted we're excited about the prospects for our new mortgage products. We completed the product rollout in December the last of our regions, which was the Houston region and in the fourth quarter, we approached the milestone of originating our first 100 mortgages and we expect faster growth in 2024.
Looking at our commercial business, our weighted pipeline is at 1.1 dollars $75 billion and that was down from the record that we set.
19191, 8 billion in the third quarter.
In the fourth quarter, we brought in 960, new relationships, that's the third highest quarterly amount ever up in an annualized eight 7% over the third quarter and up 21% over the fourth quarter last year. This shows me.
Our success in growing our business organically includes not only our consumer but also commercial business as well.
For the full year, new commercial relationships added $806 million in new loan balances and $800 million in new deposits.
Credit quality continues to be good by historical standards with nonaccrual loans down from the previous quarter and net charge offs at healthy levels.
Problem loans, which we define as risk rate 10, or higher totaled 571 million at the end of the fourth quarter.
Was up from the $513 million at the end of the second quarter and $320 million. This time last year.
This growth in the fourth quarter was evenly split between loans and the OE E M.
Classified categories.
Otherwise sand risk rate 10, and risk rate 11.
Categories.
Nonperforming assets totaled $62 million at the end of the fourth quarter, compared with 68 million last quarter and $39 million a year ago. The year end figure represents just 32 basis points of period end loans and 12 basis points of total assets.
Net charge offs for the fourth quarter were $10 $9 million compared to $5 2 million last quarter and $3 $8 million a year ago.
Annualized net charge offs for the fourth quarter represent 23 basis points of average loans in full year charge offs were 18 basis points of loans.
Regarding commercial real estate lending our overall portfolio folio remained stable with steady operating performance across all asset types and acceptable debt service coverage ratios and loan to values.
Within this portfolio, what we would consider to be the major categories of Investor CRE that is office multifamily retail and industrial as examples.
Totaled $3 9 billion or 44% of total CRE loans outstanding.
Our investor CRE portfolio has held up well.
With the average performance metrics slightly improved quarter over quarter.
Exhibiting an overall average loan to value of about 53% and weighted average debt service coverage ratio of about 1.44.
The Investor office portfolio in particular had a balance of $891 million a quarter in which was down from $959 million the prior quarter.
That portfolio exhibited an average loan to value of 49% and an average debt service coverage ratio of 1.54 and healthy occupancy levels, all of which improved from the prior quarter.
Our comfort level with our office portfolio continues to be based on the character and ex expertise and experience of our borrowers and sponsors as well as with the predominantly class a nature of our office building projects and again, we're glad to be operating in Texas.
More than 90% of our office portfolio projects are in <unk> markets, which are Texas major metropolitan areas. We continue to see good economic growth and strong levels of in migration of both people and businesses.
I also wanted to note that from September 30 to December 31st total Investor off office Outstandings decreased 7% from the linked quarter and total commitments decreased by 9%.
Finally, I'll point out that we just rolled out rolled out a new frost marketing campaign and brand refresh designed to emphasize the great customer experiences we provide in order to differentiate our voice in a crowded banking marketplace.
We've been talking for some time about the need to invest in marketing capabilities to complement the organic success, we've been achieving and we're optimistic about the impact this will make and customer acquisition.
So in closing we remain optimistic for what lies ahead, we're capitalizing on opportunities, we're enhancing and expanding our brand and I'm proud of everything that our frost teams are accomplishing across our communities and now I'll turn the call over to our Chief Financial Officer, Jerry Salinas for some additional comments.
So Phil.
Let me start off by giving some additional color on our Houston expansion results.
As Phil mentioned, we've been very pleased with the volumes, we've been able to achieve.
Looking at the fourth quarter linked quarter growth in average loans and deposits were 52 million and $78 million, respectively, each representing approximately 24% annualized growth.
And for the fourth quarter, Houston 1.0 contributed seven cents to our quarterly earnings per share.
Now moving to our net interest margin our net interest margin percentage for the fourth quarter was $3 four 1% down three basis points from the three 4% reported last quarter.
Some positives for the quarter included higher yields and volumes of both loans and balances at the fed these.
These positives were primarily offset by higher cost and volume of deposits and customer repos compared to the third quarter.
Looking at our investment portfolio. The total investment portfolio averaged $19 8 billion during the fourth quarter down $723 million from the third quarter.
During the quarter, we did not make any material investment purchases.
The net unrealized loss on the available for sale portfolio at the end of the quarter was $1. Three 9 billion a decrease of $825 million from the $2 2 billion reported at the end of the third quarter.
The taxable equivalent yield on the total investment portfolio in the fourth quarter was $3 two 4% flat with the third quarter.
The taxable portfolio, which averaged $13 1 billion down approximately $471 million from the prior quarter had a yield of 275% down one basis point from the prior quarter.
Our tax exempt municipal portfolio averaged about $6 7 billion during the fourth quarter down about 252 million from the third quarter and had a taxable equivalent yield of 4.26% flat with the prior quarter.
At the end of the fourth quarter, approximately 71% of the municipal portfolio was pre refunded or psf insured.
The duration of the investment portfolio at the end of the fourth quarter was 5.0 years down from five seven years at the end of the third quarter.
Looking at deposits on a linked quarter basis average deposits of $41 2 billion were up 356 million or three 5% on an annualized basis from the previous quarter.
We did continue to see a mix shift during the quarter as average noninterest bearing demand deposits decreased $126 million or <unk>, 9%, while interest bearing deposits increased $482 million or one 9% when compared to the previous quarter.
Based on the fourth quarter average balances noninterest bearing deposits as a percentage of total deposits were 35, 7% compared to 36, 3% in the third quarter.
Looking at January month to date averages for total deposits through yesterday, they were basically flat with our fourth quarter average of $41 2 billion.
For January month to date through yesterday, the average noninterest bearing deposit balance was $14 three 9 billion down $309 million from the fourth quarter average affected by seasonality as those deposits tend to peak in the fourth quarter and softened in the first half of the year.
For January month to date average interest bearing deposits through yesterday were $26 8 billion up $309 million from our fourth quarter average.
In the January month to date average, we do continue to see a shift in the mix and interest bearing deposits to higher cost Cds from lower cost products.
The cost of interest bearing deposits in the fourth quarter was $2 two 7% up 15 basis points from $2, one 2% in the third quarter.
Customer repos for the fourth quarter averaged $3 8 billion up 225 million from the $3 5 billion average in the third quarter.
The cost of customer repos for the quarter was 375% abate up eight basis points from the third quarter the.
The month to date January average for customer Repos was basically flat with the fourth quarter.
Looking at noninterest income and expense on a linked quarter basis, I'll just point out a couple of items.
The other noninterest income category included a $3 5 million recovery of a fraud related loss accrual that we recognized in the fourth quarter last year.
Salaries and wages included approximately $8 8 million in higher stock compensation compared to the third quarter. As a reminder, our stock awards are granted in October of each year and some awards by their nature require immediate expense recognition.
The other noninterest expense category included a donation to our Frost charitable foundation up $3 5 million.
Regarding estimates for full year 2024.
Our current projections include 525 basis point cuts for the fed funds rate over the course of 2024.
For the full year of 2024, we currently expect.
Full year average loan growth in the mid to high single digits.
Full year average deposit growth in the range of 1% to 3%.
Net interest income growth in the range of 2% to 4%.
With the net interest margin percentage expected to be slightly higher for full year 'twenty. Four then the 345% we reported for 2023.
Noninterest income could be relatively flat given the pressure facing the industry on interchange revenues and O D NSF fees.
Noninterest expense growth in the range of 6% to 8% on a reported basis.
Regarding net charge offs, we do expect those to go up in 2024 to a more normalized historical level of 25 to 30 basis points of average loans given the unusually low level, we've seen in the last few years.
Regarding taxes, our effective tax rate for the full year of 2023 was 16, 1% and we currently expect our comparable effective tax rate in 2024.
Going forward given the wide range of analysts' estimates and the results and impact on the mean of estimates we do not plan to comment on consensus EPS as we have in the past and will instead provide our outlook for the major building blocks building blocks of our.
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With that I'll now turn the call back over to Phil for questions. Thank you Gerry.
Now we will open up the call for questions.
If he 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 to remove your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.
Our first question is from Ebrahim.
From Bank of America. Please proceed.
Good afternoon.
Hey, Brian I guess, maybe first question for Jay.
Your outlook for the five need cuts for NII growth.
You mentioned about 2% to 4% just give us a sense off.
The sensitivity.
My my understanding is the balance sheet is still asset sensitive so first whether that site at all and then as the year progresses do you expect and I to give lower or do we build from fourth quarter levels and are you just outrunning they'd cut impact because of balance sheet growth.
And fixed rate assets you're facing.
Oh, that's a lot.
Well, let me, let me first say that.
You know, yes, we still are asset sensitive.
I think we've talked about this in the past I was just kind of go through some of the pieces of it and in fill in as you know as I can remember your question, but what are the upsides that we talked about was that we've got a projected about $3 million in proceeds from our investment portfolio.
And Ah.
About a billion for fiber remember correctly as in the first quarter. So it a big chunk of it comes in and the yields that that portfolio has I think we've talked in the past about some specific treasury securities that we had purchased I think $750 million of that is going to mature here this month and our yield on that.
Folio or was a little 102 I think it was so some of what we're seeing is the pickup that we're going to we're going to get just from the even if we don't reinvest in investment securities even in that rate environment. We've discussed it would still be favorable to our our net interest margin percentage.
We've also seen some improvements I was noting in our fourth quarter loan spreads that we booked him you know it's.
Not huge but there are some improvements during the quarter I think that's going to be a positive to us as well.
So no I mean, I think overall, we're feeling good about our net interest income and net interest margin based on where we're at I mentioned that we continue to see a mix change, but the changes that we're seeing at this point in my mind aren't really material I think especially in a rate environment, where we've been for a while now and if you even if even if you said it was flat.
I think the bulk of the rate competition for the most part is gone.
We still continue to see especially smaller banks smaller local and regional banks B, what I think is really.
Putting out some some unrealistic deposit rates that were not going to match I think we've always said due to the community that we don't intend.
To be the highest rate in the market, but we do want to be competitive.
In a in a rate environment as we portrayed it I think we find ourselves being able to be more competitive on money market funds because our betas typically have been you know of a range will take the money market had been like 60%.
The rate environment that we're talking about some of those shorter duration investments that those funds would be making.
They'd have a 100% beta if you will so I think we'll find ourselves in a much more competitive situation. You heard me say, we're not projecting a huge growth in deposits I think that we feel really excited about the level of loans and deposits that are coming from our expansion branches. I think we're really excited about that we've also talked about our continuous.
About the nice growth that we've had and commercial relationships as we've said in the past those relationships take a little bit longer.
To get the all the accounts moved over and signatures.
Cards done et cetera, So I think overall, we're not too aggressive on and on deposits I think it's still to be seen we saw a little bit of a of a downtick is as I said in January.
On the commercial DDA, but that as we look at our trends, that's really pretty normal for us. So no I think we're still feeling good about all that and still feel like we've got some room to improve on the NIM percentage and net interest income you know, we're not talking on net interest income.
I gave guidance on 2% to four.
<unk> percent and that's given the rate environment that we're talking about if you were if we were talking about a flat environment just to give you some perspective I'd probably be talking about increasing those percentage stay one percentages say one 5%.
Another thing, we would say a little bit nicer natural improvement in our in our name in that situation.
That is good color so thank for patients with a J and maybe a question just on loan growth and I look at the period end balance.
It would equate to about 5% growth starting out for the year. So.
Suggest that you don't expect as much momentum on loan growth looking forward. So maybe you can give us some perspective around customer sentiment and whether you are seeing that slow down play out and get.
Given that we're going into the inside of an election cycle do you expect loan growth to be weighed down by that as well.
Yeah. It's a good question neighbor Ebrahim I think that.
With regard to sentiment I believe that things are slowing some with regard to that and I think some of it is what you mentioned that typically happens with the election year people are wanting to know what the.
The regulatory environment's going to look like so I think theres some of that.
I think there's just a general.
Slow down in.
And some other things that interest sensitive areas say like a.
Obviously real estate commercial real estate deals some interest sensitive areas like let's say.
Used cars for example, if you're looking at a specific segment. So there is some of that.
And I looked at our pipelines also you know our new loan commitments were up about 9%.
Linked quarter annualized. So you know recent activity has been good but when I look at our opportunities are.
There are down a little bit from where they were last year, they're down about 7%.
On a linked quarter basis, theyre down about seven team, depending on whether you're looking at a customer or prospect prospects were down about 26%. So that just shows what's kind of going into the hopper. If you will says to me that we're slowing.
In terms of what's available.
And what we're seeing I should point out that if you did look at our core loans, which are those alone relationships under $10 million that.
If you look versus last year, those were actually up 28%. So we've seen most of the slowdown year over year to be in larger deals and I think that represents that you know that expansion.
<unk> strategy you know it is a very core business centric strategy and we've had really good growth. There. So I think thats probably in that up so yeah, I would agree that things look a little bit slower.
Not bad at all as I said Gerry has guided us to you know high single digits loan growth and I think that's a realistic number for us.
And we'll get through the election, and see where that takes us.
Alright, Thank you both.
Mhm.
Our next question is from Steven Alexopoulos with J.
J P. Morgan. Please proceed.
Hi, Phil Hey, Gerry.
Let's see.
To start so on expenses. So Jerry is the guidance was off reported expenses. So if I take the FDIC charge out I.
At the midpoint at 12% expense growth something like that for 2024.
I'm curious because you guys used to be a mid to high single digit expense grower, but you're having this really great success with all the expansion how do we think about expenses beyond 'twenty four right do you go to the next market or deeper in existing and expansion continues like should we think about prices being up low double digit expense bank.
While you continue for the next several years on expansion or does it throttled down at some point.
Well, Steve I'll, I'll talk broadly a little bit of an injury might throw in some color.
I think there are two frost right I mean, there is what I'll call legacy for us.
Which which is our business that we've built up over the 155 years and then there is expansion for us, which as you know a company that has really come into its own with its ability to grow organically in markets and build households.
And accounts.
And we're gonna keep leaning into that in R. R.
Our experience shows that it's it's great. It's worthwhile to shareholder I mean, it used to be 25% represented by expansion. That's a I think that's pretty remarkable and I think it shows it will will take share in this game.
So that'll be that'll be higher I would like to believe though if we go past 'twenty.
Past this year.
That even though we're going to continue to be expanding I'd like to see our expense growth.
Growth rate be a little bit less because we have made.
Speaker Change: We talked about the generational investments that we made earlier.
Earlier this year I think it was we talked about it we've.
We've talked about you know the marketing expenses that we've we've built up which you know we really need to build that infrastructure and so some of this is building things up that I hope we don't have to continue to do so.
Our expense rate will be elevated from what it was historically, but mainly because of our our growth strategy and our expansion strategy, but when you look at the legacy part of the bank and how we operate on a regular basis I think we're still pretty pretty tight and.
And I will all be proud of our expense management on that basis Gerry.
Yeah, I agree with everything Phil said, Steven I would say that.
Even in this environment.
We won't go into a lot of details, but I will tell you that we.
We continue to make sure that we're looking at for any looking very closely at any request.
For additional capitalized bill items are for new Ftes, and we're really focused on that so it's not like the doors open and everything is getting approved and so I'm very much in the campus. Phil says that we would we need and we will try to continue to control expenses I think he talked about a couple of <unk>.
But just to give a little bit more.
But a little bit more meat on it some of the things that we've talked about from technology and from marketing to give the two examples that he that he mentioned werent really in our full run rate.
For all of our all of 'twenty three so some of the lift that we're seeing is just trying to get the full year impact of some of those expenses. Some of the people have word tired until late in the year. For example, whether it's in the I T area or in the marketing area and some of those programs hadn't started so some of it is just trying to get that into.
Our run rate. So you know I agree with Phil I would expect that going forward I don't see us going back to a 3% to 4% growth given you know where our organic expansion strategy, but I would hope that that he's operating at these higher levels is certainly not our current expectation based on what we're seeing and of course in this environment. We did continue to use them.
Things for our employees, where we've we've done I think a great job of taking on some additional cost corporate wide that had previously been covered by the employees.
An example, we cover more of the medical that we get historically and again some of those things just trying to to to be more competitive and at the same time treating our employees with grace and knowing what our competitive market that we're operating in so long winded answer to say I agree with Phil I don't think it will be operating at this level past this.
This year that we're talking about and we continue to be focused on trying to manage those expenses.
Stephen I'd also point out that.
With regard to the expansion I mean, you know the numbers are the numbers and we're proud of what we're able to do but I'll just throw a couple of things out there too that we're looking at and.
No.
You might be interested in if.
Stephen: When someone comes here, we will survey.
<unk> group of people, who are new customers will ask them are you know what influenced you most in choosing Frost is your bank.
And.
The number one.
Responses convenient locations.
And number two a close second is recommendation from a friend and it drops off by about one third being but you know by a third being 24 seven live customer support and then it drops off about that by about say, 15% to convenient ATM network and then it goes to other than a lot of different things, but it's it shows.
And what we ask our customers how and what are the things that brought you here and remember the growth we've had.
Growth in households, and those are the responses are customers are giving us and the other thing I'll point out and we said this before and I'll I'll update this and give a little bit more color.
If you look at our Houston expansion, which still we still got some some developing you know new branches, there, which arent fully you know we only had one I think in the five year anniversary, which but that was recently, but if you look at those.
The relationships and new accounts that are opened in Houston.
85% of the Houston expansion, New accounts are opened within a look within five miles of a Frost financial center.
And 44% of the Houston expansion, New accounts are located within two miles.
So.
You know again, we're not trying to process transactions at these locations we are projecting our brand into these communities and we're leveraging our value proposition and you heard me say that the number too.
Reason was referencing referrals from a friend so.
I like to look at it as a virtuous cycle of what we're doing how it's all working together. So we're going to continue to lean into that and will it cause some expense money, yes. It will we're being careful with it but we really believe it's generating success for the long term.
That's great color.
I wanted to ask about commercial real estate. It was funny this quarter in particular I feel that a ton of questions from investors that they want to buy your stock here, they like where its trading the level of these expansion metrics.
Real estate concentrations the thing that's keeping them nervous and I'm sure you've seen the articles to fill the vacancy rates almost 20% for office in Dallas Houston Austin. So my question to you is what's your perspective on the commercial real estate market. Like you you see these markets from the ground level is this exaggerated you know when you look at your portfolio.
I don't think he was to have vacancy rates anywhere near that but can you give us some color on your exposure in those markets you didn't see how we're overly concerned, but maybe we could flush that out for the investors on the call.
Yeah.
What I would say Steven is that.
First of all I read that Wall Street Journal article late in the year about you know the.
Vacancy rate in Texas, Let me tell you what that vacancy rate in Texas is going to be high for a long long time and you know why its downtown.
Downtown real estate some of those buildings. This is my opinion some of those buildings.
You know I don't know if they'll ever be filled some of them probably from the 1980 or 90 or so you know.
You've got that.
You've got that now.
I'll recognize austin's got new buildings, there and they've got significant vacancy so I'm not trying to whistle pass the graveyard I'm just trying to say there is some element of that vacancy that you know is it's different than other vacancies. Okay. Then I'll not all created equal.
But.
What I would say about commercial real estate is.
We saw an increase you heard me say, we have we saw an increase in problem loans. This quarter, that's risk rate 10 or higher.
But it really wasn't from commercial real estate at all in.
In fact, if you look at.
You know what happened, let's take commercial office, we had three pay downs.
Of Investor office that total $95 million.
You know one of them that they paid off a cash loan came due paid it off for cash is a significant deal in downtown major market.
The one we had one that was and a medical center of a major market.
Putting lots of cash in it and refinance the rest.
We had another one that we sold it was.
Lately performing loan, but the the owner had some other problems other places and it was in Austin and we we said look we've got a really good bid for that loan we sold it we took them.
I think it was a 7% discount on it to do it but those are those are three examples of Investor office.
<unk>.
Texas, where we're operating where it.
You worked out okay, because you've got the right structure, the right locations and the right sponsors with these things I mean, none of these things with guaranteed and so.
Yeah.
The increase in problem credits this quarter was really more related to just.
Banking business, you know where you are.
Got you.
<unk> got someone there was one credit that.
Came up late they've got an inventory write down they notified us about I think.
Now, we're still looking into exactly why it happened they are too I think it probably relates to an accounting at least something accounting system perpetual inventory system. They put in but what we will see but I forgot they basically.
Yeah, no and operating.
With a with an understated cost of goods sold I have to write down some some inventory. So that's that's an unusual thing that happens in business at times doesn't have anything to do with interest rates are or office building.
You know vacancy rates right there was another that well.
Liquor distributor that lost a supplier.
And they've got to cut some overhead there'll be fine but.
It's those kind of basic banking things that are the reason, we saw the increase in and and risk rate 10, and higher and it wasn't because of real estate at all affect that sort of improved.
So.
You know and.
The other thing I'll say is.
We're not <unk>.
Stopping.
Doing business in.
In the Texas market, I mean granted where in the Texas market and thank goodness.
I'd put it up against any markets that are in the U S and.
We're still seeing opportunities there are fewer of them in.
Yeah.
My my worry right now isn't really commercial.
Real estate I mean, we've been working on it for Ali how long 18 months or whatever.
But what.
What I've been saying, let's look take these payoffs we talked about and we also have one that was a risk rate 11 last year. It was I didn't even mention it was $41 million deal, it's not in office buildings and industrial deal that.
There was a hole in it you know it was great great piece of property for credit tenant, but you know if rates go up Theres a hole in it you know.
He's the one ourselves if he brings cash to the table. So you know.
That's not really.
It's been performing the way I think we hoped it would will there be some issues I'm sure. There will be have been a few I think we've got one nonperforming office building, we talked about a few quarters ago.
But.
You know it is not a train wreck and in the markets we're in and the.
And the relationships that were in commercial real estate and we're watching it and we'll keep talking to people.
I'll keep going on with this answer but I mean, these are things that need to be said.
Our multifamily.
And it's.
Because the debt service coverage ratios of those things improved a little bit, but there is still not where they will need to be to get them re five or go to permanent financing, but when you look at that.
So I think only 6% of those.
Come due and this year.
I think 75% of them come due in 26 or later and then when you look at the people behind them and I'm not going to name names here, but if you look at the people we do business with they understand this business, it's just not like somebody who thought Gee, let's.
You know what.
Let's look let's get into the multifamily business and you know a banker level backup I mean these are people who've been doing this a long time.
And I feel really good about the relationships and how they take care of their business again, I'm not saying, we can't have problems, but this is how life is on a day to day basis around here.
So anyway that's.
No that's great color and thanks for taking the time to flush that out because it is a major concern and you know most of US just read these articles that we don't know what's in your portfolio like you do Phil. So it's nice to hear you walk through to that you're confident things could happen, but you feel pretty good on your exposure. So thanks for taking I do yes.
Thanks.
Our next question is from Dave Rochester with Compass point. Please proceed.
Hey, good afternoon guys.
Alright.
Hoping you hey.
Was hoping you guys could talk about what's your NII guide means for the NIM trajectory, you've got the low rate securities Rolling off this month and then you've got the rate cuts coming in later in the year. So is the thought that you get some expansion here in the first half of the year than maybe that turned south in the back half of the year and then what does that mean for the exit NIM by the end of the year or is that going to.
Higher than where you were this quarter or are you thinking that might be lower and then.
You mentioned deposit betas earlier.
Just wondering what your guys thoughts were on how fast you can do those deposit costs down since you were very focused on being proactive I know on the way up or you're thinking you can bring those down just as fast basically assumed the same type of beta on the way down.
Yeah.
Yeah, I guess I'll start with that last question first.
I think the thought process is that that we could be go down just as fast.
But at the same time I'll say that we are we don't ignore the market I said earlier, we're not going to feel like we need to lead the market.
But we're going to be competitive. So you know I would answer the question that by saying that yes, we were up fast I think we've kept up all along with all the hikes in and I feel like we can be pretty aggressive going down, but we're not going to keep our head in the sand and if the market is not moving down as quickly as as we thought it might it might well we'll see.
As far as the the NIM I guess, what I'd say is that yeah, we are relatively flat a.
Flattish all year and so yeah, I think you said, if we really kind of take a step up.
In the first quarter as a current expectation.
We do have in our projections a cut in March.
So we do take a hike up in the NIM net first quarter, and then really kind of given the conversation that we had earlier, we and a lot of it will be dependent on on liquidity right and what happens with deposits how much were keeping at the fed et cetera.
But right now our guidance I would give is it once we are in in the first quarter. The rest of the quarters will be relatively flat. So we get a lot of the health in that first quarter.
Okay. What are you guys assuming for the either the NII or NIM impact from a single rate cut at this point.
The answer I'd give you is about a million dollars a month.
And again I think that's one where it.
It'll be dependent on what happens with how much liquidity, we've got at the time it happens could be more if it if there was more liquidity on the balance sheet.
So how are you guys thinking about managing the securities book through the year I know you've got you didn't purchase anything this past quarter, you've got the securities Rolling off this quarter is the thought to just.
Let that run off.
This year plowing any kind of cash flow into loans or paying down borrowings that kind of thing or are you going to be replacing some of that along the way.
Our current expectation is that I think I've said earlier that.
Our.
We're projecting about a $3 billion in cash flow from that portfolio.
Right now we're projecting that.
I'm sorry.
Okay, now, we're projecting that a billion and a half to $2 billion is what we would be invest more likely closer to that to the lower end.
We're really just kind of saying you know we've got our investment guys, who really are paying attention to the market and we will just look where there is value and we will continue to try to be opportunistic I think we've been successful.
And a lot of cases and.
So we'll just have to see what's happening, but that's what our current expectation is that we'd spend about half of that liquidity.
We feel good about deposits like I said, but you know.
But now that's our guidance, we will spend about half of it and I have the run off about half of the runoff right half of the beta and a half of the three 3 billion that we expect.
Got it and maybe just one last one where are you seeing a securities yields at this point I know they'll change through the year, but curious Scott.
Yes, we're not buying anything.
All right.
I think that you know the last time, we talked and we were looking at mortgage backs and I think they were.
A little bit yeah, almost hesitated to say, yeah, we really haven't been spending a lot of time within our investment guys are we haven't made any purchases are.
For two quarters, now, but certainly north of five and nothing has really enticed us. We're really just kind of wanted to see how this first quarter plays out, but if we do see something where were.
Where we think there's real value. The good thing about an organization like ours is that the group that makes those sorts of decisions is works very closely together, we're meeting all the time and certainly could make a decision really at the snap of a finger. So our guys are keeping their pulse on the market, but at this point really haven't felt a lot of pressure that.
That we need to do something today.
Okay. Thanks, guys.
Sure.
Our next question is from Manan <unk> with Morgan Stanley. Please proceed.
Hey, good afternoon.
Follow up to that to the question on <unk>.
Liquidity.
I guess, if if rates come down in line with the five ways got yourself that you're estimating noninterest.
Noninterest bearing deposits stabilize.
Can you deploy more of that those high levels of liquidity that you are keeping on your balance sheet.
I know that.
The deposit radio forecasting is lower than the long rather you felt kind of thing. So presumably you will use some of that but can you bring that 14.
2014, and 15% of assets and cash down meaningfully as we exit 2024.
I think it depends on what meaningful means.
We're never going to see us running with $1 billion at the Fed for example, and that's just not the way the way we operate but could we make some decisions that had us potentially especially if we felt good.
The economy, we felt good about what was going on with deposit growth and such could we find ourselves in a position where we were deploying more of that liquidity I would say, yes, but there's going to be dependent on a lot of factors, what's going on in the economy those sorts of things.
Stephen: Got it.
And then given your comments on expenses earlier.
And you know there is some one time or temporary nature of some of the expenses that you mentioned.
I mean at what point do you get back to positive operating leverage. So you know I know, there's a bit of noise in the revenue line. This year with the with the base effect of rising rates in 2023, and then the rate cuts in 2024, but if ranch should stabilize from there how quickly do you think you can return to positive operating leverage.
Yeah.
You know, it's a math question I honestly don't know the answer to but here's what I do know.
That.
That.
The success, we're having developing these markets as expensive as it is.
We will create significant positive shareholder value now does that manifest itself in a positive operating leverage you know trend.
Probably but honestly I'm not close enough to the math would tell you when it would happen.
It is.
Some level its just basic business and it's just a.
Recognizing of.
What we're developing and understanding the process the basic profitability of.
Of a regional <unk>.
Community Middle market focused bank, because that's really what we're creating in these markets, we're creating a footprint. So basically look like Frost bank and so you know whatever that that profitability is for a bank like that that's what we're generating and I think that's gonna be that will be positive for a long time.
I am confident we will get back to.
Yeah.
Operating leverage.
Physicians that reflect that now again.
We talked about earlier.
Yeah as long as we're continuing to do this and finding markets, where it makes sense to grow.
Develop this for shareholders.
And how much we do in any one particular year can affect operating leverage on a particular year, but I think it would be wise for us to also look at.
What is the operating leverage of the.
The what I would call the legacy company the legacy Bank what is that doing as were expanding in these markets.
Worth looking into awesome.
Yeah.
Have some disclosure.
Disclosure on that if it's available.
You for those comments.
Yes.
Thank you.
Our next question is from Peter Winter with D. A Davidson. Please proceed.
Hi, good afternoon.
Terry.
You gave a little bit of a cautious outlook on fee income being relatively flat you talked about the regulatory environment with <unk>.
Overdraft fees and interchange or are you guys taking action on this now ahead of any regulation or you just think it's going to be coming down the road this year.
Well I'll talk about two pieces of it you know the.
Thing for us on.
The.
Overdraft fees is something that you know, it's not going to be a growth product for US right. The reason those revenues are growing is because we've had a consistent.
<unk> growth, we continue to do products do.
Changes to the product to ensure that that you know that we're doing what we need to do from a fairness standpoint, and making sure we're serving our customers with Grace and so we're doing a lot of things.
Beginning in 'twenty three that you know those impacts aren't haven't run completely through the <unk>. The annual financials for 'twenty three and then we've got some additional items that we're considering doing to tweak the product they're going to tell them that are telling me that.
All things being equal are we we're not going to expect to see a lot of growth in the in those overdraft fees on the interchange that's really going to just be dependent our projections right now have those changes going into effect in the latter part of the year. So just based on the proposal that was out there. So we're not you know on the OE.
Side, we're doing things that were affecting that revenue ourselves.
By making some changes to the product that we're delivering to the customer because it's going to reduce our revenue in the case of interchange.
It's really based on the.
Anticipated one third reduction in those fees later this year.
Okay. So those are the headwinds that we're dealing with.
Got it thank you and then separately.
The earnings accretion from the Houston expansion.
It's been really taking hold and becoming more accretive.
Do you think that the Dallas expansion starts to become accretive to earnings this year and then and then secondly.
Are there opportunities maybe to close some underperforming legacy branches.
To defray some of the cost with the new branch build out.
I'm going to step back a second on your comp question on noninterest income the other thing thats affecting us and I mentioned just a <unk>.
One item in the quarter.
On the sundry income we did have some nice sundry income throughout the year that we don't really project those sorts of items into our financials. So there's three and a half million dollar recovery of a fraudulent wire that we had in the fourth quarter. Obviously, we've got items like that that go through our noninterest income that we don't forecast and so that obviously has a downward effect.
Two on our on our forecast going forward.
As far as the Dallas is concerned.
Our expectation is you know we're still opening locations in Dallas and so as you know are the most expensive part of this.
All of this expansion effort is just starting up those locations and as Phil said the first one in Houston just reached its five years and so you know as I talk about that profitability, we really happy with where we're at and.
When I look at the individual pieces of it and we're not ready to disclose overall kind of how we're doing but the plan was and it's working this way is that as those Houston locations begin to mature more and more they're going to start to offset the losses that we have them associated with the expansions that have started more recently so.
It's getting to a point, where you know where Houston scanner carry more of the expansion cost of the Houston 2.0 in the Dallas.
But Dallas now to answer your question I don't see them being profitable. This year, just because we still have locations that were opening in and there's not a lot of maturity yet although as Phil said man they performed really really well so as far as our our projections to our our performance to our goals, we've done really well but.
No no we're not in a point, where we say Dallas is going to be a profitable next year.
We are saying that Houston is paying more and more of the expansion that we're doing and so it's really working as we planned as those branches mature.
Really helping us pay for future expansions.
Great. Thanks.
Thanks Jerry.
Sure.
Our next question is from Brady Gailey with <unk>. Please proceed.
Hey, Thanks, good afternoon guys.
Great.
But I just wanted to circle back to the loan growth guidance to make sure we're understanding that right.
Mid to high single digits are you, saying that's on an average basis full year over full year.
Because everybody in between.
So you are I mean, if you didn't grow loans a single dollar you would already be up 5% on an average year over year.
So on an end of period basis of your period end of period in that.
That loan growth will take you know a decent step back from the 10% you did last year.
I guess, what I would say is that are you know obviously, we tend to rely more on on the averages and we do on the period ends but the guidance that we've got we're certainly well will review that as we get through the through the quarter.
And as we get through the year, but right now I feel like the that sort of guidance is really a very realistic based on what we saw I think this year. If I went back if I'm remembering correctly I think that full year average of 24 excuse me 23 over 22 was a little under 8%.
So really we're guiding towards something that that in that arena, maybe a little bit better than that without knowing exactly what sort of.
Environment will be and so.
I think that we're sticking with it.
If we can do better than that that'll be great and we continue to.
We have plenty of liquidity, we're not holding back but at the same time you know all the deals that we're doing has to make sense to us and I think we've been it's been really good about our.
Growing relationships that we want to grow.
We talked last quarter I think it was about an unusual amount of opportunities that have come our way just given the from the stability that we have and the liquidity that we have available, but we're just not going to say, yes to every deal that we get right, we're going to be very selective in on and make sure that it's used as a quality sort of relationships that we want to continue to develop but we will certainly continue.
You gave up where we will give guidance and if it's upward on loan on loan growth will certainly support that but at this point. This is kind of what we're comfortable with.
Tag onto what Jerry was saying about them.
You know looking at deals and making sure they work for us.
If you look at the third quarter.
And then compared to the fourth quarter, we saw a sharp uptick in the number.
Or the percentage of deals that were lost to structure versus pricing, we lost 66% of the deals in the third quarter two.
Two structure.
And that compared to 76% of deals lost to structure and the fourth quarter and a lot of that in the I'd say the majority of that would be in the CRE space. So it's still competitive out there and I think this shows that we're not just going to do whatever deal comes our way, we're still gonna be careful.
Sure.
It's it's quality stuff and at Starwood.
Understood and then my last question is just on the share repurchase I saw the new $150 million of authorization I think you bought back about $40 million of stock last year and 23.
We expect <unk> to be active on the buyback in 'twenty four.
You know I wouldn't yeah.
I think that certainly we like to have it available we liked it to have that tool in our toolbox should the opportunity arise.
You know I wouldn't count on us being a significant buyers of our stock unless we really felt like there was an opportunity something happened.
We'd hate to be in a position, where we thought we had a great value and we didn't have a program in place. So for US is just making sure that if there is some sort of market dislocation and we think theres a great value for us. So we're able to take advantage of that without having to jump through a lot of things.
Okay. Thanks, guys.
Our next question is from Brandon King with truly Securities. Please proceed.
Hey, good afternoon.
Hey, Brian.
So.
Philosophically the expectation of the fed cutting this year, how you're thinking about managing deposit costs lower you know compared to your peers you a little more proactive.
With the rates on the on the way up and I just wanted to know just your insight on how you plan on managing that on the way down certain account types exception pricing things of that nature.
Brandon we don't we.
We do very minimal exception pricing, we do some but it's not a big part of our business. So let me start with saying that.
You know I think we said earlier as you know when we went up.
We went up pretty fast we reacted very quickly thought that that was the right thing to do for our customers.
Well just really look at.
I said earlier I would expect that the betas that we utilized going up will be kind of the first reaction that we have on a on a down cycle.
But at the same time, we're not going to have our head in the sand and and if there is the competition that that we feel we're competing against.
He is really pricing a lot more aggressive than we are than we may have to react. We don't think we have to be the highest we're not the highest today I think we're fortunate in that having won the J D Power Award.
For 14 consecutive years I'm looking at fill I think 14 or 15 and the head of our consumer it's going to get Mad at me if I missed it but that's based on <unk>.
Customer satisfaction. So it's not all in the right we realize that a lot of it is on customer service and how what we do to take care of the customer both on the commercial and the consumer side, but more on the consumer and we've got a great.
<unk> mobile App that I think we get a lot of credit for them that we really try to stay on top of and make sure that we're keeping that.
At the forefront and so I don't feel like we have to be the highest and we've proven that in a relatively stable deposit volumes, but we do have to be competitive and that's what we're really keep an eye on the most is making sure that we're offering our customers a square.
Yeah, Brian as you probably know better than I do but I mean.
You know money market funds are probably going to have to be there.
Gonna be buying a lot of them.
Market instruments on dosing is going to be going down.
Pretty consistent with you know.
Declines in rates at least in the short and so.
You know I I think is partly our expectation there their movement in rates will be sort of inexorable.
And there were a lot of competition news right now anyway. So okay.
That'll give us some ability to compete better against those.
<unk> products.
And.
I think as Jerry said if were.
Competing straight up against the bank.
We'll compete pretty well just being close on rate wont have to be the highest in the money.
Got it that's helpful. And then I wanted to give more insight into your marketing plan and brand refresh. So what are the things that you're planning to do in 2024 that you weren't doing in 2023, and then could you talk about kind of the potential and scale of what you.
Could envision that looking like maybe beyond 2024.
Well as it relates to the marketing plan.
We've really focused on just the look and feel.
Of our brand how it looks in the marketplace and trying to differentiate it from sort of the sea of sameness that's out there.
And really trying to reduce the.
For sure the lack of awareness about our brand.
If you are aware, we really want to reduce in difference to the brand and.
So we're trying to utilize things that you know just visually help us there. We're also we've put out some new.
That you know sort of reflect who we are and some of the amazing stories of customer service that we're going to have and we do that with a little bit of humor in in wave.
Typical across bank and so.
So I think that the.
A campaign that was going to be really good enough, but if you look at it all the you know under.
Under the Hood.
I think we've done a lot better job I know, we have bringing in partners that are helping us do a better job with digital marketing and effectiveness and our digital offerings.
And and really that even translates into some of the direct mail pieces that we do and a lot of it in connection with some of these branches that.
We are open in these new markets, making sure that our response rates or battery improving so we've seen some interesting results in that with our new partners and I expect that to be.
And that helps drive.
Drive customer acquisition going forward. So we'll see right. It's I've learned everyone's a marketing expert.
If this works.
Got it yeah I was just trying to make is just trying to get a sense of this is not kind of a herculean effort and just kind of more incremental on the margins.
I think so I think it's I think it's we built our infrastructure in terms of our.
Internal marketing resources and capabilities. So that is something that was apart really a part of what the expense base growth was last year.
By and large there'll be some follow on as those things annualize to a full year of 2024.
But.
A lot of it is just utilizing the market spend that that we have been spending but doing it in a more effective way so.
But it's not a it's not the same level of it.
I go back to the generational.
The investment that we did in I T.
It's generational for marketing, but it's not the same size of that investment as it evolves.
Great. Thanks for taking my questions.
Thank you.
In the interest of time, we are going to ask that analysts. Please limit yourself to one question asking you proceed. Our next question is from John P. Carey with Evercore ISI. Please proceed.
Yeah.
John Your line is live.
Yeah.
Okay and our next question will be from Brody Preston with UBS. Please proceed.
Hey, everyone I'm, just going to I'm going to wrap up wrap a few into my one here. If you don't mind sure they're all they're all on NII Jerry So.
Copper, Idaho meetings here I know, you're relying a little bit more on the averages when you're out of the period end, but if I am working on the off the period and.
It looks like the loans and the deposits and kind of you know the deposit should fund the loans and then you're going to reinvest half of that $3 billion.
You got about one 5 billion of cash flows a leftover from the Securities book naturally I'm wondering if that's going to go into just kind of pushing off the remaining you know repurchase agreements that you have onboard and then.
Lee I was wondering if you all would provide us with what the period end savings and interest bearing.
Checking.
And money market accounts look like just because it's a you know it's a little over a week until we get the K and we got an update models in the interim.
There.
Yeah, Youre, saying just the period end rates.
Now the period end balances.
The period end balances.
Yeah, we can get them here for you but.
And if we don't get them to you Avi can certainly give those to you.
Offline, if you want to do that.
Okay.
I'm sorry.
Forgot your first question that you're right.
That's okay.
I'm trying to get at I'm sorry.
I was I was saying if I look at if I look at the guidance and looking at like the implied period and I know you're relying more on the averages.
I'm wondering you know it looks like the deposits can fund the loan growth that you got I'm wondering what you're going to do with the additional 1 billion and a half yeah I'll start, yes, I'm, sorry, I apologize yeah.
Yeah.
You mentioned repo so for us customer repos is really a these these customers for the most part are really long term customers and there is a feature within that product that we make available to them that allows them to utilize the product and so even though it's a.
Fully collateralized, they do take a haircut versus the respective MMA rate and we may do a little bit of exception pricing there, but for the most part its really a very successful product for us that there are some trade transactional pieces of it that worked to their benefit and they want to be in that product, but this isn't hot money in any way. These are these are long.
Term customers a lot of them have other deposits have deposit relationships as well significant deposit relationships. So you know from our and we've got a significant amount of collateral at really a it's a it's a good operating business for us and we don't have any intention of reducing that sort of a.
Our product.
But what do you do from that standpoint, 1 billion that what do you do with the additional billions of absolute cash flows then because if you're pocketing, yes. So at this point, what we what we would probably do and what we're modeling is that we would continue to keep those balances to the fed I think I started early on earlier, we just kind of want to see what happens as far as our deposits are concerned deposit flows.
And so from our assumptions today, we're really just increasing our balances at the fed.
Understood. Thank you very much.
Sure.
And our final question is from Jon <unk> RBC capital markets. Please proceed.
Hey, thanks for the opportunity I am going to tease Brody, but that's just cruel to box them into one question.
[laughter] I'm kidding Brody anyway, just on mortgage how material do you expect it to be in 2024.
You said, you're all built on and I'm just curious on your willingness to holding on the balance sheet, how big could it be and do you expect to sell any of their production.
Well I can answer the last part of it as we don't we don't.
So any other production so it's really.
Sure.
<unk>.
But it's not going to be as much.
It's ramping up right and so I think what we said early on you started this is we expect in five years you would be you know.
The same as the rest of the consumer portfolios. So that's at that point I think it was around $2 billion estimate what it would be and so we're beginning to ramp up its the worst market than when we started right in terms of what's available out there housing wise, but.
I would say it would be.
I would.
Let me venture a guess 200 million ish.
Okay.
So most of our mortgage department might have just fallen down when I said that.
Okay Alright.
Alright, so not not terribly material, but all I know its not its not huge its not.
Well I can the dog, but it is going to be just solid growth to continue to.
Develop that product.
Yeah.
Okay. Thanks.
Guys I appreciate it Terry. Thank you Should've said consensus is a little bit low my calc is it's a little bit lower not by much but that's that's my comment.
I appreciate your inputs. Thank you Jeff Thank you.
We have reached the end of our question and answer session I would like to turn the conference back over to Mr. Green for closing remarks.
Okay, everybody. Thanks again for your interest in our company and will be a journey. Thank you.
Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Okay.
Yes.
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