Q1 2024 Cullen/Frost Bankers Inc Earnings Call

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Operator: Greetings. Welcome to Cullen-Frost Bankers Incorporated's First Quarter 2024 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 on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to AV Mendez, Senior Vice President and Director of Investor Relations. Thank you. You may begin.

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AV Mendez: 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 provision. Some of the remarks made today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 as amended. We intend such statements to be covered by the Safe Harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 as amended.

Speaker Change: Greetings and welcome to call them Frost bankers incorporated first quarter 'twenty 'twenty four earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.

Speaker Change: Anyone should require operator assistance during the conference. Please press star zero on your telephone 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.

AV Mendez: Please see the last page of text in this morning's earnings release for additional information about the risk factors associated with these forward-looking statements. If needed, a copy of the release is available on our website or by calling the Investor Relations Department at 210-220-5234. At this time, I'll turn the call over to Phil.

Eva Mendes: Thanks Jerry.

Eva Mendes: This afternoon's conference call will be led by Phil Green, Chairman and CEO, and Jerry Salinas Group Executive Vice President and CFO.

Eva Mendes: Before I turn the call over to Phil and Jerry I need to take a moment to address the safe Harbor provisions.

Eva Mendes: The remarks made today will constitute forward looking statements as defined in the private Securities Litigation Reform Act of 1995 as amended we intend to such statements to be covered by the safe Harbor provisions.

Phillip D. Green: Thanks, A.B. Good afternoon, everyone.

Phillip D. Green: Thanks for joining us. Today, I'll review the first quarter results for Cullen Frost, and our Chief Financial Officer, Jerry Salinas, will provide additional comments before we open it up to your questions. In the first quarter, Cullen Frost earned $134 million, or $2.06 per share, compared with earnings of $176 million, or $2.70 a share, reported in the same quarter last year. The first quarter results were affected by an additional FDIC insurance surcharge accrual of $7.7 million, or $0.09 a share, associated with the bank failures that happened in early 2023.

Eva Mendes: All forward looking statements contained in the private Securities Litigation Reform Act of 1995 as amended please see the last page of text in this morning's earnings release for additional information about the risk factors associated with these forward looking statements.

If needed a copy of the release is available on our website or by calling the Investor Relations Department at 210220234.

Eva Mendes: At this time I will turn the call over to Phil.

Yeah.

Phillip D. Green: Thanks, Mike Beech and good afternoon, everyone. Thanks for joining us.

Phil: Today I'll review, the first quarter results for Cullen Frost, and our Chief Financial Officer, Jerry So long as it will provide additional comments before we open it up to your questions.

Phillip D. Green: First quarter call them false earned $134 million or $2 six per share compared with earnings of 176 million or $2 70, a share reported in the same quarter last year.

Phillip D. Green: Our return on average assets and average common equity in the first quarter were 1.09% and 15.22%, respectively, and that compared with 1.39% and 22.59% in the same period last year. Our solid earnings from the first quarter demonstrate the success of our organic growth strategy and the hard work of our bankers. Our strength and stability, combined with our core values and strong corporate culture, allow us to continue providing world-class service to our customers, which results in sustained long-term growth.

Phillip D. Green: First quarter results were affected by an additional FDIC insurance surcharge are cool.

Phil: $7.7 million or nine cents, a share associated with the bank failures that happen in early 2023.

Phil: Our return on average assets and average common equity in the first quarter, 109% and 15, 2%, respectively and that compared with 1.39% and two two point and 20, 259%.

Phillip D. Green: Our balance sheet and our liquidity levels remain consistently strong. Also, as was the case in previous quarters, 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 uninsured deposit percentages, and additionally are available to sell securities representing more than 80% of our portfolio at quarter end.

Phil: Same period last year.

Phil: Solid earnings from the first quarter demonstrates the success of our organic growth strategy and the hard work of our bankers, our strength and stability combined with our core values and strong corporate culture allow us to continue providing world class service.

Phil: To our customers, which results in sustained long term growth.

Phil: Our balance sheet and our liquidity levels remain consistently strong.

Phillip D. Green: Average deposits in the first quarter were $40.7 billion, down 4.8% from the $42.8 billion in the first quarter of last year. Average loans grew 10.4% to $19.1 billion in the first quarter, compared with $17.3 billion in the quarter a year ago. We continue to see excellent results in our organic growth program.

Phil: Also as was the case in previous quarters call and cross not take on any federal home loan bank advances participated in any special liquidity facility or government borrowing access any broker deposits or utilize any of these cyclical pause in arrangements to build uninsured deposit percentages and additionally are available.

Phil: The sale of securities represented more than 80% of our portfolio.

Phil: At quarter end.

Phillip D. Green: We combined our Houston locations from the expansion. They stand at 104% of the deposit goal, 164% of the loan goal, and 122% of our new household goal. For the Dallas market expansion, we stand at 174% of the deposit goal, 212% of the loan goal, and 185% of our new household goal. Additionally, just after the first quarter closed, we opened the second new location on our 17-site Austin expansion project. Our next new Austin Region location will open just after Memorial Day.

Phil: Average deposits in the first quarter were 47 billion down four 8% from $42 8 billion in the first quarter last year.

Phil: Loans grew 10, 4% to $19 1 billion in the first quarter compared with $17 3 billion in the quarter and year.

Phil: Yeah.

Phil: We continue to see excellent results in our organic growth.

Phil: Graham.

Phil: For example.

Phil: We combined our Houston locations expansion they stand at 104% deposit goal.

Phil: 64% of long ago, and 122% of our new.

Phillip D. Green: At the end of the first quarter, our overall expansion efforts had generated $2 billion in deposits, $1.5 billion in loans, and added over 46,000 new households. And it helps me to put this in perspective when I remember that the largest acquisition in our history was a company with $1.4 billion in deposits. Our consumer banking business continues to build momentum from 2023's record net new household growth. And we added 6,600 net new checking accounts, or households, to the quarter, and we had an annual growth rate there of 6.5%, which we believe continues to put us among the top growing banks in the country.

Phil: New household would go with the Dallas market expansion, we stand at 174% of deposit go 212% of long ago, and 185% of our new household goal.

Phil: Just after the first quarter close we opened our second new location in our 17 site Austin expansion project.

Phil: Our new our next new Austin region location will open just after memorial day.

Phil: At the end of the first quarter, our overall expansion efforts have generated $2 billion in deposits.

Phil: $5 billion in loans.

Phil: Added over 46000 new households.

Phil: And it helps me to put this in perspective, when I remember that the largest acquisition in our history as a company with one $4 billion in deposits.

Phillip D. Green: Average consumer loans saw steady growth in the first quarter, increasing an annualized 13% on a linked quarter basis, and hit a milestone of $3 billion, and the average balance is outstanding. We remain excited about the prospects for a new mortgage product, which is approaching 200 loans, with about half coming in the first quarter.

Phil: Our consumer banking business continues to build momentum from the 2020 Three's record net new household growth.

Phil: We added 6006 hundred net new checking accounts households to the quarter and we had an annual growth rate there of six 5%, which we believe continues to put us among the top growing banks in the country.

Phil: Average consumer loans saw a steady growth in the first quarter, increasing an annualized 13% on a linked quarter basis and hit a milestone of $3 billion in average balances outstanding.

Phillip D. Green: Looking at our commercial business, on a linked quarter basis, average loan balances increased an annualized 10.5% to CNI and 13.4% to CRE. While new commitments booked in the first quarter were 24% less than the level booked in the first quarter of 2023, our new commercial relationships were up 10% year-over-year and, at 825, represented our highest level of first quarter relationships. This coincided with us achieving our highest level ever for calling activity in the first quarter.

Phil: We remain excited about the prospects for a new mortgage product, which is approaching 200 loans with about half coming in the first quarter.

Phil: Yeah.

Phil: Okay.

Phil: Looking at our commercial business on a linked quarter basis average loan balances increased an annualized 10.5% C&I.

Phil: And 13, 4% increase the CRE.

Phil: While new commitments booked in the first quarter were 24% less than the level booked in the first quarter of 2023.

Phillip D. Green: New loan opportunities in our pipeline were up 15 percent year-over-year and were second only to last year's spike after SVD's failure. Our weighted average pipeline stood at $1.46 billion, up by 24% from the fourth quarter and by 17.5% from the first quarter last year.

Phil: Our new commercial relationships were up 10% year over year and at 825 represented our highest level of first quarter relationships.

Phil: This coincided with us achieving our highest level ever for calling activity in the first quarter.

Phil: New loan opportunities in our pipeline were up 15% year over year and were second only to the last year's Spike after spv's failure.

Phillip D. Green: And regarding those 825 new relationships in the first quarter that I mentioned, about half of those continue to come from the too-big-to-fail bank. We continue to use discretion as we look at our new loan opportunities, and as an example, I point out that in the first quarter, our deals lost were up by 24% year-over-year, and 82% of those deals lost were due to structure. Credit quality is good by historical standards, with net charge-offs and net.., and new non-accrual loans at healthy levels.

Phil: Our weighted average pipeline stood at $146 billion up by 24% from the fourth quarter and by 17, 5% from the first quarter last year.

Phil: And regarding the 825, new relationships in the first quarter that I mentioned about half of those continue to come from the too big to fail banks.

Phil: We continue to use discretion as we look at our new loan opportunities and as an example, I would point out that in the first quarter. Our deals lost were up by 24% year over year and 82% of those deals lost would be destruction.

Phillip D. Green: We're seeing some normalizations in credit risk ratings as we come off the historic lows and problems experienced in the years immediately following the pandemic. And looking at some of the details, net charge-offs for the first quarter were $7.4 million compared to $10.9 million last quarter and $8.8 million a year ago. Annualized net charge-offs for the first quarter represented 15 basis points, the period in line. Non-performing assets totaled $72 million at the end of the first quarter compared to $62 million last quarter and $39 million a year ago.

Phil: Okay.

Phil: Credit quality is good buying store standards with net charge offs in that.

Phil: And non accrual loans at healthy levels were seeing some normalization in credit risk ratings and we can come.

Phil: The historic lows in problems experienced in the years immediately following the pandemic.

Phil: And looking at some of the details net charge offs for the first quarter were $7 $4 million compared to $10 9 million last quarter, and $8 8 million a year ago.

Phil: Your lives net charge offs for the first quarter represented 15 basis points you read in loans.

Phillip D. Green: The quarter-end figure represents just 37 basis points of period in loans and 15 basis points of total assets. Problem loans, which we define as risk grade 10 or OAEM. Total $809 million at the end of the first quarter. And that's up from $571 million at the end of the fourth quarter and $347 million at this same time last year. Three-quarters of the increase was due to company-specific C&I loans, with the remainder being CRE credits of various types.

Phil: Nonperforming assets totaled $72 million at the end of the first quarter compared to $62 million last quarter, and 39 million a year ago quarter in figure represents a 37 basis points of period end loans and 15 basis points of total assets.

Phil: Problem loans, which we define as risk grade 10, four O E M.

Phil: Total 890 million at the end of the first quarter.

Phil: And that's up from 571 million at the end of the fourth quarter and $347 million.

Phillip D. Green: This growth in the first quarter was fairly evenly split between loans in the OAEM or risk grade 10 and classified or risk grade 11 categories and is mainly attributable to a few larger credits, some of which we expect relatively quick resolutions for. Less than 20% of our problem loans overall are tied to investor commercial real estate. About 50% are related to C&I credits, with most of the balance in owner-occupied real estate, which is closely related to C&I loans.

Phil: Same time last year.

Phil: Three quarters of the increase was due to companies pursue specific C&I loans with the remainder being CRE credits of various types.

Phil: And this growth in first quarter was fairly evenly split between loans and the O N E.

Phil: Risk grade 10, and classified a risk rate 11 categories and was mainly attributable to a few larger credits some of which we expect relatively quick resolution score.

Phillip D. Green: Regarding commercial real estate lending, our overall portfolio remains stable with steady operating performance across all asset types and acceptable debt service coverage ratios and loan-to-values. Within this portfolio, what we consider to be the major categories of investor CREs, office, multifamily, retail, and industrial, for example, total about four billion dollars or 46 percent of total CRE loans outstanding. Our investor CRE portfolio has held up well, with the average performance metrics stable quarter-over-quarter, exhibiting an overall average loan-to-value and underwriting of about 53 percent, and an average weighted debt service coverage ratio of about 1.47

Phil: Less than 20% of our problem loans overall are tied to investor commercial real estate.

Phil: About 50% are related to C&I credits with most of the balanced and owner occupied real estate, which are plus related to C&I loans.

Phil: Regarding commercial real estate lending.

Phil: Overall portfolio remained stable with steady operating performance across all asset types and acceptable debt service coverage ratios and loan to values.

Phil: Within this portfolio, what we consider to be the major categories of Investor CRE.

Phil: Office multifamily retail and industrial for example, totaling about $4 billion or 46% of total CRE loans outstanding.

Phil: Our investor CRE portfolio has held up well.

Phil: The average performance metrics stable quarter over quarter exhibiting an overall average loans.

Phillip D. Green: The investor office portfolio specifically had a balance of $983 million at the end of the quarter, and that portfolio exhibited an average loan to value of 53 percent, healthy occupancy levels, and an average debt service coverage ratio of 1.53, which was slightly improved for the second consecutive quarter.

Phil: Loan to value and underwriting.

Phil: About 53% and average weighted debt service coverage ratio of about one point or so.

Phil: The Investor office portfolio, specifically at a balance of $983 million a quarter in that portfolio exhibited an average loan to value of 53% healthy occupancy levels and the average debt service coverage ratio of 153.

Phillip D. Green: Our comfort level with the 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 project. In our last conference call, I mentioned that we had just introduced a new Frost Bank marketing campaign and brand refresh designed to emphasize our great customer experience. We saw the proof points of that in the first quarter when Frost achieved the highest scores nationwide in the Greenwich Excellence Award for the eighth consecutive year and the highest ranking for banking customer satisfaction in Texas in J.D.

Phil: <unk>, which is slightly improved for the second consecutive quarter.

Phil: Our comfort level with the office portfolio continues to be based on the character and experience of our borrowers and sponsors and the predominantly class eight nature of our office building projects.

Phil: In our last conference call I mentioned that we adjust introduced a new prospect marketing campaign and brand refresh designed to emphasize our great customer experiences.

Phil: The proof points of that in the first quarter when frost achieved the highest scores.

Phillip D. Green: Power's Retail Banking Satisfaction Study for the 15th consecutive year. These are unprecedented achievements. No other bank can say those things, and I hope no other bank ever will. But when you think about it, that level of service is what our customers have come to expect from Frost. That's what we deliver on a daily basis, and it's what we mean when we talk in the new campaign about real-life examples of extraordinary customer service with a description exactly what you expect.

Phil: And why in the Greenwich Excellence award for the eighth consecutive year.

Phil: And the highest ranking for banking customer satisfaction in Texas in J D. Power's retail banking satisfaction study for the 15th consecutive year.

Speaker Change: These are unprecedented achievements no other bank can say those things and I hope no. Other bank are for will.

Speaker Change: When you think about it that level of service is what our customers have come to expect from for us.

Speaker Change: That's what we deliver on a daily basis, and that's what we mean when we talk in the new campaign about real life examples of extraordinary customer service with the description exactly what you unexpected.

Phillip D. Green: And none of this is possible without the dedication of our employees across Texas, their commitment to our culture, and their optimistic spirit making all of our success possible. And I'm proud of everything that our Frost teams are accomplishing across all our communities. Now I turn the call over to our Chief Financial Officer, Jerry Salinas, for some additional comments.

Phil: None of this is possible without the dedication of our employees across Texas.

Phil: Amendment to our culture and they're optimistic spirit all of our success is possible and I'm proud of everything that our frost teams are accomplishing across all our communities and now I'll turn the call over to our Chief Financial Officer, Jerry Salinas for some additional comments.

Jerry Salinas: Thank you Bill.

Jerry Salinas: Let me start off by giving some additional color on our overall expansion results. As Phil mentioned, we continue to be very pleased with the volumes we've been able to achieve.

Jerry Salinas: Let me start off by giving some additional color on our overall expansion results.

Jerry Salinas: Paul mentioned, we continue to be very pleased with the volume we've been able to achieve.

Jerry Salinas: Looking at the first quarter, growth in both average loans and deposits was approximately 9% when compared to the previous quarter. And for the first quarter, the profitability of the Houston expansion offset the cost associated with the additional expansion efforts in Dallas and Austin. Now moving to our net interest margin, our net interest margin percentage for the first quarter was 3.48%, up 7 basis points from the 3.41% reported last quarter. Some positives for the quarter include higher volumes of both loans and balances at the Fed, and higher yields on loans and investment securities.

Jerry Salinas: Looking at the first quarter growth in both average loans and deposits with approximately 9% when compared to the previous quarter.

Jerry Salinas: And for the first quarter the profitability of the Houston expansion offset the costs associated with the additional expansion efforts in Dallas and Austin.

Jerry Salinas: Now moving to our net interest margin our net interest margin percentage for the first quarter was $3 four 8% up seven basis points from the 341% reported last quarter.

Jerry Salinas: Some positives for the quarter include higher volumes of both loans and balances at the fed and higher yields on loans and investment Securities. These positives were partially offset by higher cost of interest bearing deposits compared to the fourth quarter.

Jerry Salinas: These positives were partially offset by higher costs of interest-bearing deposits compared to the fourth quarter. Looking at our investment portfolio, the total investment portfolio averaged $19.3 billion during the first quarter, down $510 million from the fourth quarter. During the first quarter, investment purchases totaled $187 million, with $112 million of that being agency MBS securities and $75 million in municipal. The net unrealized loss on the available-for-sale portfolio at the end of the quarter was $1.59 billion, an increase of $199 million from the $1.39 billion reported at the end of the quarter.

Jerry Salinas: Looking at our investment portfolio total investment portfolio averaged $19 3 billion during the first quarter down $510 million from the fourth quarter. During the first quarter investment purchases totaled $187 million with $112 million of that being agency MBS security and 75 million.

Jerry Salinas: Municipals.

Jerry Salinas: The net unrealized loss on the available for sale portfolio at the end of the quarter was $1 five 9 billion, an increase of $199 million from the 139 billion reported at the end of the fourth quarter.

Jerry Salinas: The taxable equivalent yield on the total investment portfolio in the first quarter was 3.32%, up 8 basis points from the fourth quarter. The taxable portfolio, which averaged $12.5 billion, down approximately $582 million from the prior quarter, had a yield of 2.83%, up 8 basis points from the prior quarter. Our tax-exempt municipal portfolio averaged about $6.8 billion during the first quarter, up about $73 billion from the fourth quarter, and had a taxable equivalent yield of 4.27%, up one basis point from the prior quarter.

Jerry Salinas: Taxable equivalent yield on the total investment portfolio in the first quarter was 332% but up.

Phil: Up eight basis points from the fourth quarter.

Phil: The taxable portfolio, which averaged $12 5 billion down approximately $582 million from the prior quarter at a yield of 288% up eight basis points from the prior quarter.

Phil: Our tax exempt municipal portfolio averaged about $6 8 billion during the first quarter up about $73 million from the fourth quarter and had a taxable equivalent yield of four 7% up one basis point from the prior quarter.

Jerry Salinas: At the end of the first quarter, approximately 70% of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of the first quarter was 5.5 years, up from 5 years at the end of the fourth quarter.

Phil: At the end of the first quarter, approximately 70% of municipal portfolio was pre refunded or psf insured.

Phil: The duration of the investment portfolio at the end of the first quarter was five five years up from five years at the end of the fourth quarter.

Jerry Salinas: Looking at deposits on a lean quarter basis, average total deposits of $40.7 billion were down $459 million, or 1.1 percent, from the previous quarter. However, we did continue to see a mix shift during the first quarter, as average non-interest bearing demand deposits decreased $720 million, or 4.9 percent, while interest-bearing deposits increased $261 million, or 1 percent, when compared to the previous quarter. Based on first quarter average balances, non-interest bearing deposits as a percentage of total deposits were 34.3% compared to 35.7% in the fourth quarter.

Phil: Looking at deposits on a linked quarter basis average total deposits of $40 7 billion were down $459 million or one 1% from the previous quarter.

Phil: We did continue to see a shift a mix shift during the first quarter as average noninterest bearing demand deposits decreased $720 million or four 9%, while interest bearing deposits increased $261 million or 1% when compared to the previous quarter.

Phil: Based on first quarter average balances non interest bearing deposits as a percentage of total deposits was 34, 3% compared to 35, 7% in the fourth quarter.

Jerry Salinas: The cost of interest-bearing deposits in the first quarter was 2.34%, up 7 basis points from 2.27% in the fourth quarter. Looking at April month-to-date averages for total deposits through yesterday, they are up about $134 million from our first quarter average of $40.7 billion, with interest-bearing up $332 million and non-interest-bearing down $198 million month-to-date. Customer repos for the first quarter averaged $3.8 billion, basically flat with the fourth quarter. The cost of customer repos for the quarter was 3.76%, up one basis point from the fourth quarter. The month-to-date April average balance for customer repos was down approximately $42 million from the first quarter average.

Phil: Cost of interest bearing deposits in the first quarter was $2 three 4% up 77 basis points from two 7% in the fourth quarter.

Phil: Looking at April month to date averages for total deposits through yesterday.

Phil: About $134 million from our first quarter average of $40 7 billion with interest bearing up $332 million and noninterest bearing down 190 $198 million month to date.

Phil: Customer repos for the first quarter averaged $3 8 billion basically flat with the fourth quarter.

Phil: Cost of customer repos for the quarter was 376% up one basis point from the fourth quarter the.

Phil: Month to date April average balance per customer repos was down approximately $42 million from the first quarter average.

Jerry Salinas: Looking at non-interest income expense on a linked quarter basis, I'll point out a couple of items. Trust and investment management fees were down $1.1 million, or 2.7%, impacted by lower estate fees, down $1.5 million. Estate fees can be lumpy as they are based on the value and number of estates settled.

Phil: Looking at noninterest income expense on a linked quarter basis ill point out a couple of items.

Phil: In investment management fees were down $1 1 million or two 7% impacted by lower safety down $1 5 million.

Phil: State fees can be lumpy is there based on the value and number of its state settle.

Jerry Salinas: Insurance commissions and fees were up $5.6 million, or 44%. Property and Casualty and Benefit Company bonuses, which are typically received in the first quarter, contributed $3.4 million to the increase. Benefit commissions were up $2.1 million, as the first quarter is typically the strongest quarter for those commissions.

Phil: Insurance commissions and fees were up $5 6 million or 44%.

Phil: Property and casualty and benefit company bonuses, which are typically received in the first quarter contributed $3 4 million to the increase.

Phil: Commissions were up $2 1 million as the first quarter is typically the strongest quarter for those commissions.

Jerry Salinas: As a reminder, the second quarter is typically the weakest quarter for insurance commissions and fees given our typical yearly renewal cycle. The other non-interest income category was down $6.9 million, primarily related to $4.4 million in card-related incentives, as those incentives are received in the fourth quarter each year, and a $3.5 million fourth quarter recovery of a previous loss accrual. Salaries and wages were up $1.4 million as increased salaries and higher incentive accruals were mostly offset by stock compensation expense, which was lowered by $8.2 million. As a reminder, our stock awards are granted in October of each year, and some awards, by their nature, require immediate expense recognition.

Phil: As a reminder, the second quarter is typically the weakest quarter for insurance commissions and fees given our typical yearly renewal cycle.

Phil: The other noninterest income category was down $6 9 million, primarily related to $4 4 million and card related incentives as those incentives are received in the fourth quarter, each year, and a $3 5 million fourth quarter recovery of a previous lots of cool.

Phil: Salaries and wages were up $1 4 million as increased salaries and higher incentive accruals were mostly offset by stock compensation expense, which was lower by $8 2 million.

Phil: As a reminder, our stock awards are granted in October of each year and some awards by their nature require immediate expense recognition.

Jerry Salinas: Benefits expense was up $7.9 million, impacted by higher payroll taxes and 401k expenses related to annual bonuses paid during the first quarter, and impacted by the normal trend for FICA taxes and 401k limits reset at the beginning of the year. Other non-interest expense was down $6.4 million, or 9.6%. The decrease was driven primarily by donations expense, which was down $3.5 million, and professional services, which was down $2.9 million.

Phil: Benefits expense was up $7 9 million impacted by higher payroll taxes, and 401K expenses related to annual bonuses paid during the first quarter and impacted by the normal trend for FICA taxes, and 401K limits reset at the beginning of the year.

Phil: Other noninterest expense was down $6 4 million or nine 6%. The decrease was driven primarily by donations expense, which was down $8 5 million and professional services down $2 9 million.

Jerry Salinas: Regarding our guidance for full year 2024, our current projections include two 25 basis point cuts for the Fed Funds Rate for the remainder of 2024, with one cut in September and another one in November. This is down from five cuts in our January guidance. For the full year of 24, we currently expect full-year average loan growth in the high single digits. That's up from our previous guidance of growth in the mid to high single digits.

Phil: Regarding our guidance for full year 2024, our current projections include 225 basis point cuts for the fed funds rate over the remainder of 2024 with one patent September and another one in November this is down from five pads in our January guidance.

Phil: For the full year of 24, we currently expect full year average loan growth in the high single digits, that's up from our previous guidance of growth in the mid to high single digits.

Jerry Salinas: Full-year average deposit growth in the range of flat to 2%. That's down from our previous guidance of growth in the range of 1% to 3%. Net interest income growth in the range of 2 to 4 percent, that has not changed from our previous guidance, with the net interest margin percentage expected to trend slightly upward each quarter for the remainder of the year. Non-interest income could be flat to up 1%, impacted by the pressure facing the industry on interchange revenues and OD fees, and also impacted by our high level of sundry income in 2023.

Phil: Full year average deposit growth in the range of flat to 2% that's down from our previous guidance of growth in the range of 1% to 3%.

Phil: Net interest income growth in the range of 2% to 4% that has not changed from our previous guidance with the net interest margin percentage is expected to trend slightly upward each quarter for the remainder of the year.

Phil: Noninterest income could be flat to up 1% impacted by the pressure facing the industry on interchange revenues I know D feeds and also impacted by our high level of sundry income in 2023 that represents a slight improvement from our previous guidance are basically flat.

Jerry Salinas: That represents a slight improvement from our previous guidance of basically flat. Non-interest expense growth in the range of 6% to 8% on a recorded basis; this has not changed from our previous guidance. Regarding net charge-offs, we still expect those to go up to a more normalized historical level of 25 to 30 basis points of average loan. Regarding taxes, our effective tax rate for the full year of 2023 was 16.1%, and we currently expect a comparable effective rate in 2024. No change to this guidance. With that, I'll now turn the call back over to Phil for questions.

Phil: Noninterest expense growth in the range of 6% to 8% on a reported basis. This has not changed from our previous guidance.

Phil: Regarding net charge offs, we still expect those to go up to a more normalized historical level of 25 to 30 basis points of average loans.

Phil: Regarding taxes, our effective tax rate for the full year of 23 was 16, 1% and we currently expect that comparable effective rate in 2024, no change to this guidance with that I'll now turn the call back over to Phil for questions.

Phillip D. Green: Thanks Jerry.

Phillip D. Green: We'll now open up the call for questions. Thank you.

Phillip D. Green: Now open up the call for questions. Thank you.

Operator: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Casey Hare with Jeffries. Please proceed.

Phillip D. Green: 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 he would like to remove your question from Mike Hill for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

Phillip D. Green: Our first question is from Casey Haire with Jefferies. Please proceed.

Casey Haire: Yeah, thanks. Good afternoon, everyone.

Casey Haire: Yeah. Thanks good.

Casey Haire: Good afternoon, everyone.

Casey Haire: I guess I'll start off with the NII guide. So you guys are leaving it intact, despite, you know, you're getting less, less cuts, the loan growth sounds like it's coming in a little bit stronger than then even your revised high single-digit guide. So I guess it's just the higher the higher funding cost pressure that that's keeping it intact, just a little more color on the NII done.

Casey Haire: I guess starting off with the NII guide.

Casey Haire: So you guys are leaving intact. Despite you know youre getting less less cuts the loan growth sounds like it's coming in a little bit stronger than than even your revised high single digit guide.

Casey Haire: So I guess, it's just it's the higher the higher funding cost pressure that that's keeping it intact, just a little more color on the NII dynamics.

Jerry Salinas: Yeah, that's certainly some of that. And also, you know, we're talking about higher rates for longer. As we've talked about the competitive field out here for deposits, I think the higher that the longer that rates stay higher, I think we'll continue to see more pressure on deposits. We've been talking obviously for a while now about customers looking for higher yield, and I think that pressure will just continue. We continue to see that, especially on the non-interest bearing side, where people are continuing to move their deposits. You know, we continue to see a little bit of a downward trend there. And I think just the uncertainty there is going to make us just stay with our original guidance even given the cuts, the reduction of a couple of cuts

Casey Haire: Yes, that's certainly some of that and also we're talking about higher for longer.

Casey Haire: As we've talked about the competitive.

Casey Haire: Feels out here for deposits I think the higher that the longer that rates stayed higher I think we'll continue to see more pressure on deposit.

Casey Haire: We've been talking obviously for a while now about.

Casey Haire: Customers are looking for higher yields and I think that pressure will just continue we continue to see that especially in the noninterest bearing side, where people are continuing to move their deposits.

Casey Haire: Continue to see a little bit downward trend there and I think just the uncertainty there is going to make a sustained with our original guidance even given the cuts.

Casey Haire: The reduction of a couple of thoughts.

Casey Haire: Okay, great. And maybe just...

Speaker Change: Okay, Great and maybe just.

Jerry Salinas: Following up on that, so what is your NII guide assumes in terms of the DDA mix? I believe it fell to 34%, and then what about betas from here?

Speaker Change: Following up on that so what is your NII guide assume in terms of DDA mix I believe it's it fell to 34% and then.

Speaker Change: What about the.

Speaker Change: Betas from here.

Jerry Salinas: Yeah, the beta is really, at this point, you know, we're not assuming, because we don't have any rate hikes in them, we're not assuming any significant movements in the beta. I think our cumulative beta moved up, you know, from, if I remember correctly, we were at a 42, and we moved up to a 43. I'd expect that we'd have that sort of potential pressure. We're not seeing a lot of movement in the... interest-bearing non-TIME accounts. We've tweaked it downward a little bit.

Speaker Change: Yes, the payers really at this point, we're not assuming.

Speaker Change: Because we don't have any rate hikes, and then we're not assuming any significant movements in the beta I think our cumulative beta moved up.

Speaker Change: If I remember correctly you were at a 42 and we moved up to 43.

Speaker Change: I'd expect that we'd have that sort of potential pressure, we're not seeing a lot of movement.

Speaker Change: And the.

Speaker Change: Interest bearing non time accounts, we tweaked some downward actually a little bit.

Jerry Salinas: So at this point, you may see that same sort of increase of 1% quarter over quarter, but I don't expect that to change drastically. Of course, we'll continue to keep an eye on what's going on in the market. I don't hear nearly as much crazy CD pricing as we heard, call it four or five, six months ago, but there's still some stuff out there going on. So from that standpoint, you know, I expect some pressure on the data, but I don't expect it to change significantly.

Speaker Change: So at this point you may see that same sort of.

Speaker Change: Increase of 1% quarter over quarter, but I don't expect that to change drastically of course, we will continue to keep an eye on what's going on in the market I don't hear nearly as much.

Speaker Change: Crazy CD pricing as we burn call it 456 months ago.

Speaker Change: Some stuff out there going on.

Casey Haire: So from that standpoint, I expect some pressure on the base, but I don't expect it to change significantly.

Jerry Salinas: Okay, and the DDA mix at 34 sounds like there's more pressure. Just wondering how much more?

Casey Haire: Okay, and then the DDA mix at 34, it sounds like there's more pressure just wondering how much I would think that yeah. Yeah. I would think they will continue to be pressure. There I don't expect it to I expect that it would move down a little bit, but I wouldn't expect a drastic change at this point you've kind of heard that.

Jerry Salinas: I would think that, yeah, yeah, I would think there'll continue to be pressure there. I don't expect it to, I expect that it would move down a little bit, but I don't expect a drastic change at this point. You kind of heard the movement that we have in that category was down a couple of hundred million year-to-date. And as a reminder for us, the first half of the year, historically, and maybe these are not historical times, but historically, the first half of the year is always off the course on DDA, and so that's not really unusual to us.

Casey Haire: Movement that we have in that category was down a couple of hundred million year to date and as a reminder for us. The first half of the year are historically and may even if youre not historical times, but historically.

Casey Haire: First half of the year is always softer fourth on DDA and so so that's not really unusual to us I think I've mentioned in the January call, we were already seeing DDA down.

Jerry Salinas: I think I mentioned in the January call that we were already seeing DDA down probably 400 million between the time of the call compared to the fourth quarter average. I think what we continue to do is we just continue to be focused on growing relationships. I think we really feel very comfortable with what we're doing, the successes that are being reported out there, and we'll just continue to keep plugging along with that.

Casey Haire: So call it $400 million between the time of the call compared to the fourth quarter average I think what we continue to view as we get continue to be focused on growing relationships.

Casey Haire: I think we really feel very comfortable with what we're doing the successes that are being reported out there and we'll just continue to keep plugging along with that there's not a lot. We can do customers are looking for higher averages and we're going to do what we can but I would expect back to your question I would expect that might be a little bit of pressure, but that could go down.

Jerry Salinas: There's not a lot we can do. Customers are looking for higher averages, and we're going to do what we can, but I would expect, back to your question, there might be a little bit of pressure for that to go down a little bit as well. Thank you.

Casey Haire: A little bit as well.

Speaker Change: Thank you.

Steven A. Alexopoulos: Our next question is from Steven Alexopoulos with J.P. Morgan. Please proceed. Hi everyone.

Casey Haire: Our next question is from Steven Alexopoulos with Jpmorgan. Please proceed.

Steven A. Alexopoulos: Hi, everyone.

Casey Haire: Steven.

Steven A. Alexopoulos: Maybe to start, so to follow up on Casey's question on NII, Jerry, last quarter I thought you said that NII was up 2-4%, I was assuming 5 rate cuts, but if we didn't get any cuts, we would add like 1.5% to that increase. Is that still the same? If we get no cuts this year, do you think at a percent and a half above or has that potential improvement lessened now

Steven A. Alexopoulos: Maybe to start so to follow up on Casey's question on NII.

Steven A. Alexopoulos: Last quarter I thought you said that.

Steven A. Alexopoulos: 2% to 4% that was assuming five rate cuts, but if we didn't get any cuts we would add like one 5%.

Steven A. Alexopoulos: To that.

Steven A. Alexopoulos: The increase is it still the same if we get no cuts this year.

Steven A. Alexopoulos: Person they have above or has that potential.

Steven A. Alexopoulos: Improvement lesson now.

Steven A. Alexopoulos: And you know, it's probably lessened a little bit now and part of it again as you know when we're talking this whole conversation is about the.

Jerry Salinas: And, you know, it probably lessens a little bit now. And, you know, part of it again is, you know, when we're talking, this whole conversation is about non-interest bearing deposits.

Steven A. Alexopoulos: The noninterest bearing deposits and obviously, that's a big impact on on that number so.

Steven A. Alexopoulos: So given the pressure that we saw there a little bit more than we expected in the first quarter.

Jerry Salinas: And, obviously, that's a big impact on that number. So, you know, given the pressure that we saw there, a little bit more than we expected in the first quarter. And, you know, as I responded to the previous question, I'm not really ready to increase our guidance. It's really more related to what happens there. And I think that'll really drive a lot of it. The month of April, like I said, doesn't look unusually bad.

Steven A. Alexopoulos: And as I responded on the previous question not really ready to do it.

Steven A. Alexopoulos: <unk> our guidance its really more related what happens there.

Steven A. Alexopoulos: I think that will really drive a lot of it.

Steven A. Alexopoulos: Of April like I said doesn't look unusually bad and you know, it's a little tough to really address all of this because for us from a cyclical standpoint. This is where we would typically be we'd be a little bit softer and we've kind of said that for a while now that the first half of the year would be softer.

Steven A. Alexopoulos: So yeah at this point, we're just kind of have to see where it plays out but yes, I think the big swing factor is what happens with those DDA volumes got it. Okay. And then thank you on the loan growth side. So you guys had solid loan growth and really in a quarter, where the industry has not much loan growth to speak of at all.

Jerry Salinas: And, you know, it's a little tough to really address all of this because, for us, from a cyclical standpoint, this is where we would typically be. You know, we'd be a little bit softer, and we've kind of said that for a while now that the first half of the year would be softer. So, yeah, at this point, we'll just kind of have to see where it plays out. But, yeah, I think the big swing factor is what happens with those DDA bonds.

Steven A. Alexopoulos: How much of the loan growth is coming from current customers borrowing more really a sign of the health of the markets versus just pure market share gains.

Steven A. Alexopoulos: Like new customers to the bank.

Steven A. Alexopoulos: You know Stephen.

Stephen: I don't have that number at hand, I can tell you what some of the new customers that demand to loan growth Gerry can help me out with that.

Steven A. Alexopoulos: Okay, and then, thank you, on the loan growth side, so you guys had solid loan growth, and really, in a quarter where the industry didn't have much loan growth to speak of at all, how much of the loan growth is coming from current customers borrowing more, really a sign of the health of the markets, versus just pure market share gains, like new customers to the bank.

Speaker Change: Just just to talk a little bit about it.

Stephen: It is interesting that a lot of the activity. We saw in pipeline increase was was customer related.

Stephen: And as opposed to prosper so thought that was interesting.

Stephen: And.

Phillip D. Green: You know, Steven, um... I don't have that number at hand. But I can tell you what some of the new customers have done to Long Grove. Jerry can help me out with that.

Stephen: And I think also an area that we saw is that core loan growth.

Stephen: Under 10 million relationships.

Stephen: I think as you have activity there was better than the large loan deals and I think that reflects our expansion.

Jerry Salinas: Just to talk a little bit about it, it was interesting that a lot of the activity we saw in the pipeline increase was customer-related, as opposed to prospects. I thought that was interesting. And I think also an area that we saw is that core loan growth, the under $10 million, you know, relationships. I think, you know, the activity there was better than the large loan deals. And I think that reflects our expansion growth, and so it's pretty broadly based, and... So that's what we're seeing.

Stephen: Yeah.

Stephen: So.

Stephen: Okay.

Stephen: It's pretty broadly based and.

Stephen: So that's what we see.

Stephen: Second half unfavorable okay.

Stephen: Some info.

Stephen: These relationships Act.

Stephen: I guess, what I'd say from the numbers that I'm looking at it looks like maybe about a.

Stephen: Beth let's talk about the period end growth between December and March.

Stephen: About a quarter of it I'm going to say is it is a.

Stephen: Related to new customers.

Speaker Change: Got it okay.

Beth: Uh huh.

Speaker Change: Okay.

Stephen: She just did.

Stephen: What I was looking for in the first quarter, we added $145 million in new loan balances and 100 million in deposits from new relationships over the last 12 months.

Stephen: Okay.

Stephen: That's about it about a corridor.

Stephen: Quarter, Yes, part of the reason I ask.

Phillip D. Green: In one second, I might be able to give you some info on the... Relationship impact.

Stephen: The industry has fairly modest growth this quarter quite a few banks are coming up pretty bullish as seeing pipelines build and you guys are already up low double digit in terms of year over year on loan growth.

Jerry Salinas: I guess what I'd say is, from the numbers that I'm looking at, it looks like maybe about a, you know, let's talk about the period end growth between December and March, about a quarter of it, I'm going to say, is related to

Stephen: So you said high single digits, but if you are seeing the same pipeline build it would seem that puts you in a pretty good position to maybe even do better than high single digit.

Phillip D. Green: And, well, there's a lot here. Steve, I just did find what I was looking for. In the first quarter, we added $145 million in new loan balances and $100 million in deposits from new relationships over the last 12 months.

Speaker Change: Just wanted to be conservative here.

Speaker Change: I think you know I guess, if you're asking could it move up too.

Stephen: Yes.

Stephen: The low double digits I think what we're hearing and some of it is.

Stephen: We could obviously, but just hearing some of the conversations with the regional President I mean, there is a little bit of slowness going out there saw this growth is coming from our commitments that were originated.

Phillip D. Green: That's about a quarter.

Phillip D. Green: About a quarter. Yeah, part of the reason I ask is even though the industry had fairly modest growth this quarter, quite a few banks are coming out pretty bullish, just seeing pipelines build, and you guys already have double-digit growth in terms of year-over-year loan growth, and Jerry, I know you said high single-digit, but if you're seeing the same pipeline build, it would seem that puts you in a pretty good position to maybe even do better than Do you just want to be conservative here?

Stephen: Last year, so although everybody is still pretty bullish there is a little bit still of <unk>.

Stephen: Insert about what happens to the rest of the year. So you know could it happen yeah. I mean, the numbers are trending really well both on a linked quarter and a year over year. I think we worked both of them were north of 10%. So we can kind of tweak up into you know instead of a nine could we be at 10% or 10 and a half certainly.

Jerry Salinas: You know, I think, you know, I guess if you're asking, could it move up to, you know, the low double digits? You know, I think what we're hearing in some of it is that we could, obviously, but, you know, just hearing some of the conversations with the regional presidents, I mean, there is a little bit of slowness going out there. Some of this growth is coming from commitments that were originated last year.

Stephen: But again you know we are getting we are hearing a little bit about word of caution from some of our guys out in the fleet.

Stephen: But I'd say there are a couple of.

Stephen: Of course as you know are there a few forces that Earl I was inside some of the negative you know I'll just talk to some of our people.

Alex: Alex how it looks.

Stephen: <unk> done some calls yesterday, it got back from them and their their opinion was that they're seeing good activity.

Stephen: And.

Stephen: There is kind of a bifurcation of the.

Jerry Salinas: So, although everybody's still pretty bullish, there's a little bit still of, you know, concern about what happens during the rest of the year. So, you know, could it happen? Yeah. I mean, the numbers are trending really well, both on a link order and year over year. I think we were both of them were north of ten percent. So we could kind of tweak it up into, you know, instead of a, you know, a nine, could we be ten percent or ten and a half? Certainly. But again, we are getting, and we are hearing a little bit of a word of caution from some of our guys out in the field. No, I've seen a couple here.

Stephen: High end of the market is doing really well and some of the low end is under some pressure.

Stephen: So those offset them.

Stephen: Themselves a little bit but.

Stephen: Activity is good but we're also being careful on.

Stephen: On what we're seeing in structure like I said, we lost 82% of deals lost were from structure. So I think as we see some of the banks getting back in the game.

Stephen: <unk>.

Stephen: And they're getting back to where they were before I guess I'm, a little bit more aggressive than we'd like to be so that'll be a little bit of a limiter on us if the market gets out of hand.

Stephen: But.

Stephen: Overall I think it's a.

Phillip D. Green: Forces. You know, are there a few forces that are on the positive side, some on the negative? You know, I just talked to some of our people about how it looks. We just did some calls yesterday, got back from them, and their opinion was that they're seeing good activity. [inaudible] There's kind of a bifurcation between the high end of the markets doing really well, and some of the low end is under some pressure.

Stephen: I think it's got a good outlook in what has been one of the reasons is because.

Stephen: You know that pipeline information that I showed you.

Stephen: <unk> mentioned, a few minutes ago just the.

Stephen: The growth in the linked quarter pipeline with strong number.

Stephen: The relationships are strong so.

Stephen: So we're doing well competitively and I think the market in Texas is still reasonably good I think jerry's right. Some people are.

Stephen: Continue to be a little bit.

Stephen: Circumspect around the election, probably might impact, but some people are willing to do something to get the lay of the land regulatory what theyre going to be looking at but.

Phillip D. Green: But, you know, so those all set themselves a little bit, but... You know, activity is good, but we're also being careful on what we're seeing in structure. Like I said, we lost 82% of the deals lost with Instructure. I think we will see some of the banks getting back in the game.

Stephen: I.

Stephen: Probably felt that.

Stephen: A little bit more cautious last quarter and interestingly.

Stephen: But I've heard recently has been pretty good.

Stephen: Right.

Speaker Change: Sounds good thanks for all the color.

Stephen: Thanks.

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

Phillip D. Green: You know, they're getting back to where they were before, I guess, and a little bit more aggressive than we'd like to be, so that'll be a little bit of a limiter on us if the market gets out of hand.

David Patrick Rochester: Good afternoon guys.

David Patrick Rochester: Back on the NII Guide was just wondering what your assumptions are for liquidity trends, you're baking into that it sounds like you made some securities purchases. This quarter is the plan to grow that book some from here to reduce some of that cash and take some of the asset sensitivity off the table.

Phillip D. Green: Overall, I think it's got a good outlook and one of the reasons is because... You know, that pipeline information that I showed you, I mentioned a few minutes ago, just the growth in the link quarter pipeline was strong. The number of blue relationships is strong, so we're doing well competitively, and I think the market in Texas is still reasonably good. I think Jerry's right. Some people are, you know, continue to be a little bit circumspect around the election probably might impact what some people are willing to do until we get the regulatory lay of the land on what they're going to be looking at, but you know I probably felt that a little bit more cautious last quarter, but interestingly, what I've heard recently has been pretty good.

David Patrick Rochester: And if you have those purchase yields.

David Patrick Rochester: On on those different segments would be great.

Speaker Change: Sure Yeah on the let me give you those purchase yields first.

Speaker Change: That feels right here so in the the agencies, we bought at a $5 49.

Speaker Change: And the municipals that are 518 p/e.

Speaker Change: What we're doing right now is I don't see liquidity.

Speaker Change: Moving very much during the year.

Speaker Change: <unk>.

Speaker Change: Loan growth has obviously been better than we expected.

Speaker Change: We had been targeting investment purchases of about a billion six is I think the guidance that I've given that you know 5 billion six for the year.

David Patrick Rochester: We're talking about scaling that back somewhat part of it is we just want to continue to be opportunistic.

David Patrick Rochester: In this environment and so you'll probably see us I don't know they don't affect the liquidity number much but I'm thinking that we probably won't reach that number this year will probably be a few hundred million shy of that.

Steven A. Alexopoulos: Sounds good. Thanks for all the color.

David Patrick Rochester: Like I said loan growth has been better deposits.

David Patrick Rochester: Our next question is from Dave Rochester with Compass Point. Please proceed.

David Patrick Rochester: I said, a little bit softer than we expected even in that that are on the noninterest bearing side. So all things being equal I think the net net of it is you won't see a whole lot of change.

David Patrick Rochester: Hey, good afternoon guys. Back on the NII guide, I was just wondering what your assumptions are for liquidity trends you're baking into that. It sounds like you made some securities purchases this quarter. Is the plan to grow that book some from here to reduce some of that cash and take some of the asset sensitivity off the table? And if you have those purchase yields on those different segments, that'd be great.

David Patrick Rochester: The liquidity and if there's a bias, it's probably a small bias to two increasing that somewhat.

David Patrick Rochester: Okay.

Speaker Change: And then just on your comment of less NII upside and are higher for longer type of scenario was just curious where that NII sensitivity is now on delaying cut I think last quarter, you mentioned something like roughly a $1 million benefit each months, what does that now roughly.

Jerry Salinas: Sure, yeah, let me give you those purchase yields first, and I've got those right here. So in the agencies, we bought at 549, and the Municipals at 518 T.E.

Speaker Change: Yeah, I think a lot of it depends on timing when we look at it.

Speaker Change: The cuts that we've got in our models or you know in the second part of the year and.

Speaker Change: So again, depending on what's happening with the.

Jerry Salinas: Uh, you know, what we're doing right now is, um, you know, I don't see liquidity moving very much during the year. However, loan growth has obviously been better than we expected. We have been targeting investment purchases of about $1.6 billion, as I think the guidance that I've given, $1.5 billion, $1.6 billion for the year. We're talking about scaling that back somewhat. Part of it is that we just want to continue to be opportunistic in this environment.

David Patrick Rochester: With balances at the fed I would say that number's, probably and again, assuming they happened later in the year is probably closer to two 1 million for a month benefit.

David Patrick Rochester: Okay.

David Patrick Rochester: Such space.

David Patrick Rochester: Okay.

Speaker Change: Great and then on just credit you mentioned, maybe if I heard this right a few larger credits impacting the problem loan trends. This quarter was just hoping to get some detail on those and then where are you on your office reserve ratio at this point.

Speaker Change: Okay, well, let me take the.

Speaker Change: A question with regard to the increased problems lungs, which risk rate 10 and higher.

Speaker Change: As I said, it was andrew's industry or company specific.

Jerry Salinas: And so you'll probably see us, I don't know that it'll affect the liquidity number much, but I think that we probably won't reach that number this year. Uh, you know, like I said, loan growth's been better, deposits, um, you know, like I said, a little bit softer than we expected, even on the, uh, non-interest-bearing side. So all things being equal, I think the net net of it is you won't see a whole lot of change in the liquidity. And if there's a bias, it's probably a small bias to increase that somewhat.

Speaker Change: Related there was.

Speaker Change: And I've talked about some of these before theres, a large construction company that missing.

Speaker Change: Miss some bids in one segment. They are looking for active even looking for refinance now, but we need to recognize that a risk grade 10 in the interim period.

Speaker Change: There was a factoring company that.

Speaker Change: We increased risk rate 10.

Speaker Change: Because of some perspective on borrowing base computation.

Speaker Change: Et cetera.

Speaker Change: We decided were not all on the same page.

Speaker Change: That was one of them.

Speaker Change: There was a truck hauler.

Speaker Change: We saw have some issues with regard to volume there was a company that moved into a brand new facility.

David Patrick Rochester: Okay, and then just on your comment of less NII upside and a higher for longer type of scenario, I was just curious where that NII sensitivity is now on delaying a cut. I think last quarter you mentioned something like roughly a million dollars of benefit each month. What is that now, roughly?

Speaker Change: Fairly significant facility they are getting used to that they had an operating loss in the near term as they move that over so I need to recognize that until they turn that around.

Speaker Change: Those are the things there.

Speaker Change: Theyre more but like I say company specific they are not really so much a straight related except for the <unk>.

Speaker Change: Things relate to.

Jerry Salinas: Yeah, I think a lot of it depends on timing. When we look at it, you know, again, the cuts that we've got in our models are, you know, in the second part of the year. And so, again, depending on what's happening with balances at the Fed, I'd say that number's probably, and again, assuming they happen later in the year, it's probably closer to $1.4 million.

Speaker Change: Used cars, primarily buy here pay here.

Speaker Change: <unk> dealers.

Speaker Change: That's true.

Speaker Change: Consumer on the car side and also on the trucking side. That's the closest thing to an interest rate impact that we've seen.

Speaker Change: Some of that but that's not new for us we've been talking about that for the last few quarters.

Speaker Change: But that's the kind of thing that we're seeing.

Speaker Change: I appreciate the color and then just on the office reserve ratio at this point.

David Patrick Rochester: Okay, and maybe switch, yep, pre-tech, okay. Great, and then on just credit, you mentioned, if I heard this right, a few larger credits impacting the problem loan trends this quarter. I was just hoping to get some detail on those. And then where are you on your office reserve ratio at this point?

Speaker Change: Or is there any update there sure yeah, what youll split yeah, what youll see in the 10-Qs we don't give a very detailed view there I think the commercial real estate.

Speaker Change: <unk> coverage is like at a $1 48.

Speaker Change: But some of what we do with the overlay is just to give you a little bit of inside baseball there is that.

Speaker Change: And this is for non owner occupied and construction office with office buildings under construction. So you know the the highest or the best with it.

Jerry Salinas: Okay, well, let me check the... Question with regard to the increased problems, along with the risk-rate tenant hire. You know, as I said, it was industry or company-specific. There were, And I've talked about some of these before.

Speaker Change: First I guess I should say past great credits that we give them a 5%, Missouri. So.

Speaker Change: And then anything worse than that so if you start getting into.

Speaker Change: <unk> nine which is a watch and.

Jerry Salinas: There's, you know, a large construction company that missed some bids in one segment. They're actively looking for refinance now, but we need to recognize that at risk rate 10 in the interim period. There was a factoring company that we increased risk grade 10 just because of some perspective on bar and base computation, etc. We decided we're not all on the same page, and that was one of them.

Speaker Change: Worse, they actually get a 10% reserve.

Speaker Change: So as I look at these numbers on a combined basis that brings the and this again. This is only investor office and any any office buildings under construction that combined reserve would be at 370 twos function.

Speaker Change: Great Alright, thanks for all the color guys I appreciate it.

Speaker Change: Okay.

Speaker Change: Our next question is from Peter Winter with D. A Davidson. Please proceed.

Peter J. Winter: Hi, Thanks, good afternoon.

Jerry Salinas: There was a truck hauler we saw have some issues with regard to volume. There was a company that moved into a brand new facility, a fairly significant facility. They are getting used to that. They had an operating loss in the near term as they moved that over, so we need to recognize that until they turn that around. Those are the things they are... They're more, like I said, company specific. They're not really so much interest rate related, except for the things that relate to, you know, used cars primarily, you know, buy here, pay here, dealers. That's true of both, https://www.frostbankersinc.com, But that's the kind of thing that we're seeing.

Peter J. Winter: I just wanted to so if I could follow up on the problem loan discussion.

Peter J. Winter: We're in this.

Peter J. Winter: Higher for longer rate environment, because I heard your comments that.

Speaker Change: These arent.

Speaker Change: Interest rate related yet, but the longer that we're in this higher relate higher for longer rate environment to U C.

Speaker Change: More pressure on like C&I loans and continued increases in the problem loans sector.

Speaker Change: Sure.

Speaker Change: I don't see anything that's.

Speaker Change: Significant or a trend.

Speaker Change: So the higher for longer on the C&I piece.

Speaker Change: To be honest one of things that are.

Speaker Change: Again with the exception of some of the auto dealers that I've talked about who were running portfolios credit.

David Patrick Rochester: I appreciate the color. And then just on the office reserve ratio at this point.

Speaker Change: Having some issues there.

Speaker Change: I don't really see that so much I think the impact is going to be more.

Jerry Salinas: What you'll see in the 10-Q is, we don't give a very detailed view there. I think the commercial real estate reserve coverage is about 148, but some of what we do with the overlays, just to give you a little bit of the inside baseball there, is that for, and this is for non-owner occupied and construction office buildings that are under construction. For the highest, or the best, or the worst, I guess I should say, pass-grade credits, we give them a 5% reserve, and then anything worse than that, so if you start getting into a 9, which is a watch, a 9, and worse, they actually get a 10% reserve.

Speaker Change: On real estate.

Speaker Change: Commercial real estate and what people.

Speaker Change: No.

Speaker Change: Let's say, we're financing it before and where they are today and those things are going to have to be solved by.

Speaker Change: But borrowers and sponsors coming in and supporting their projects.

Speaker Change: When they come.

Speaker Change: Come to maturity and so far we've had really good experience and really good.

Speaker Change: Performance by our borrowers but.

Speaker Change: Yeah, we can create scenarios, where interest rates went higher and created more pressure, but we're not seeing that right now.

Speaker Change: Okay.

Speaker Change: And then just separately.

Speaker Change: The insurance commissions it had really nice growth in 'twenty three it was up almost 10%, but the first quarter year over year. It was down three 5% is there.

Jerry Salinas: So as I look at these numbers on a combined basis, that brings the, and again, this is only investor office space, and any office buildings under construction, that combined reserve would be at 372. That's what I'm showing.

Speaker Change: Anything unusual this quarter or just how are you looking at that on a full year basis.

Speaker Change: Yes, the one thing I'll say on the comparison to a year ago. So the first quarter last year had a very strong life insurance commissions.

David Patrick Rochester: Great. All right. Thanks for all the calls, guys. Appreciate it.

Speaker Change: So we were probably unfavorable this quarter and that comparison by about $1 million, one and the commissions on those policies.

Peter J. Winter: Our next question is from Peter Winter with D.A. Davison. Please proceed. Thanks, good afternoon.

Speaker Change: Just one time, you're in a one time fee, it's not like a benefit commissions or or a property and casualty they tend to be a little bit more of an annuity. So that was a little bit lumpy that was probably the biggest thing that affect us affected us negatively compared to the first quarter last year, although I will say that the benefits commissions with socket.

Peter J. Winter: Thanks. Good afternoon. I just wanted to follow up on the problem loan discussion just if we're in this higher-for-longer rate environment, because I heard your comments that these aren't interest rate-related yet, but the longer that we're in this higher-for-longer rate environment, do you see more pressure on, like, C&I loans and continued increases in the problem loans?

Speaker Change: And I expect that as well.

Speaker Change: Okay. Thanks.

Speaker Change: Thanks, Charlie.

Speaker Change: Sure.

Phillip D. Green: I don't see anything that's... significant or a trend? for the Hire for Longer on the CNIP. To be honest, I think that, again, with the exception of some of the auto dealers that I talked about who are running portfolios, credit, and having some issues there. I don't really see that so much.

Speaker Change: Our next question is from Catherine Mealor with <unk>. Please proceed.

Catherine Mealor: Thanks, Good afternoon.

Catherine Mealor: Hey, Catherine.

Catherine Mealor: A question on expenses I know that you are lesser extent guidance unchanged.

Catherine Mealor: 8% growth rate here for here curious I know you mentioned that FICA taxes, and some kind of <unk> seasonality trends of higher expenses this quarter.

Phillip D. Green: I think, you know, the impact is going to be more on real estate, commercial real estate, and what people, you know, what they were financing before and where they are today. And those things are going to have to be solved by borrowers and sponsors coming in and supporting the projects. You know, when they come to maturity. And so far, we've had really good experiences, really good performance by our borrowers. But, you know, we could create scenarios where interest rates went higher and created more pressure, but we're not seeing that right now.

Catherine Mealor: Should we assume that we kind of fall back from this first quarter level as we go into second quarter, and then grow from there.

Catherine Mealor: Do you still think you grow from there.

Catherine Mealor: Run rate.

Catherine Mealor: This quarter.

Speaker Change: Yeah, I think a couple of things I'll say is that we did get the additional surcharge of $7 7 million from the FDIC that we didn't know anything about when we gave the guidance in January and we've been really trying to run a tight ship here in this first quarter on expenses.

Speaker Change: Again, we are certainly impacted by the expansion that we're doing and so we kept our guidance. The same even though we were basically saw an additional almost $8 million in expenses that we hadn't expected.

Phillip D. Green: And then just separately, the insurance commissions, it had really nice growth in 23, it was up almost 10%. But the first quarter, year over year, it was down three and a half percent. Is there anything unusual this quarter, or just how are you looking at that on a full year basis? Yeah, the one thing I'll say on the comparison.

Speaker Change: And I got here.

Speaker Change: A quick question was a little muffled, but I think I heard you say that maybe the first quarter was was higher from the benefits maybe.

Speaker Change: I think benefits.

Jerry Salinas: Yeah, the one thing I'll say on the comparison to a year ago, so the first quarter of last year had a very strong life insurance commission, so we were probably unfavorable this quarter in that comparison by about $1.1 million. And the commissions on those policies are just one-time, you know; you earn a one-time fee. It's not like, you know, benefit commissions or property and casualty insurance that tend to be a little bit more of an annuity, so that was a little bit lumpy. That was probably the biggest thing that affected us negatively compared to the first quarter last year. Although I'll say that benefits commissions were softer than I expected as well.

Speaker Change: Tends to go down during the year a lot of it has to do with things.

Speaker Change: Things like 401, K contributions matches that we have to make or payroll tax matches.

Speaker Change: In certain cases employees, especially on the 401K side may reach that limit pretty quickly intentionally or unintentionally.

Speaker Change: And so then are we.

Speaker Change: We match up to 6% if they reached that level then the Mac stops and same thing for for the FICO. After they reach a certain level of course, there's no more.

Speaker Change: What contribution there.

Speaker Change: So it is a bench.

Speaker Change: Benefits will go down certainly just just trend wise I don't see the.

Catherine Miller: Our next question is from Catherine Miller with KBW. Please proceed.

Catherine Miller: A question on expenses. I know that you left your expense guidance unchanged at the 6% to 8% growth rate year-over-year. I'm curious, I know you mentioned that FICA taxes and some kind of one-cue seasonality drove the higher expenses this quarter. Should we assume that we kind of fall back from this first quarter level as we go into the second quarter and then grow from there? Or do you still think you can grow from this run rate into next quarter?

Speaker Change: The trajectory that we have you.

Speaker Change: You know other than take if you take the 7 million out I would expect that you'll see a little bit of growth quarter over quarter.

Speaker Change: Inexpensive on a based on what we're seeing today.

Speaker Change: But like I said I feel good about where we're at I think we've done a good job this first quarter and continuing to try to do that but.

Speaker Change: But I would expect that they will continue to grow up just a little bit quarter over quarter.

Speaker Change: Yeah that's helpful.

Speaker Change: That's 6% to 8% includes the $7 million FDIC assessment.

Jerry Salinas: Yeah, I think a couple of things I'll say is that, you know, we did get the additional surcharge of $7.7 million, right, from the FDIC that we didn't know anything about when we gave the guidance in January. And we've been really trying to run a tight ship here in this first quarter on expenses. You know, again, we are certainly impacted by the expansion that we're doing. And so we kept our guidance the same, even though, you know, we basically saw an additional almost $8 million in expenses that we hadn't expected.

Speaker Change: Exactly yeah, we just said we assumed its operating if you will for those purposes.

Speaker Change: So the $51 million is in the number in 2023.

Speaker Change: And because it's on an as reported and a 7 million dollar number is.

Speaker Change: These included in them and our 24 numbers.

Speaker Change: Okay great.

Speaker Change: And the next question on fees service charges.

Speaker Change: Seasonally also is usually lower in the first quarter, but I know you've talked about interchange and other things being softer in the first cornerstone would you expect that to also.

Jerry Salinas: And your question was a little muffled, but I think I heard you say, you know, that maybe the first quarter was higher in benefits, maybe. I think benefits, you know, tend to go down during the year. A lot of it has to do with things like 401k contributions, matches that we have to make, or payroll tax matches. In certain cases, employees, especially on the 401k side, may reach that limit pretty quickly, intentionally or unintentionally. And so then we match up to 6%. If they reach that level, then, you know, the match is over. The same thing applies for the FICA.

Speaker Change: Rent.

Speaker Change: Kris I think go into the next couple of quarters or is this also a kind of a lower run rate for service charges.

Kris: Yes, I think that the thing with service charges the upside to it has been in the commercial service charges. In some cases, you know it works against you right because in some cases customers make whole decided to pay more for for services through a hard dollar charges rather than keeping the balances. So some of that some of it and so that's been a.

Speaker Change: Impacting the growth but.

Speaker Change: We've done a lot of things I will say in favor of the customer as it relates to especially on the consumer side on the OE fees and we continue to see good growth there, but a lot of it as Phil mentioned, we're just growing those accounts are pretty significantly and you know I really kind of try to say that I don't expect those are going to grow in and obviously there's.

Jerry Salinas: After they reach a certain level, of course, there's no more contribution there, but so benefits will go down, certainly just in terms of trend-wise. I don't see the, you know, the trajectory that we have, other than, you know, if you take the $7 million out, I would expect that, you know, you'll see a little bit of growth quarter over quarter in expenses based on what we're seeing today. But like I said, I feel good about where we're at. I think we did a good job this first quarter and will continue to try to do that. But I would expect that they will continue to grow up just a little bit quarter over quarter.

Speaker Change: Some guidance out there potentially a lot of pressure on that on those fees.

Speaker Change: So we've really been.

Speaker Change: I will say in some ways pleasantly surprised but I don't see that having a lot of growth from where we are today you know I think it will just be continue to be pressure.

Catherine Mealor: In that category for the rest of 'twenty for US is kind of the numbers that I'm seeing right now.

Catherine Miller: Yeah, that's helpful. And to be clear, that six to eight percent includes the $7 million FDIC assessment.

Catherine Mealor: Okay.

Speaker Change: Very helpful. Thank you.

Catherine Mealor: Okay.

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

Jerry Salinas: Exactly, yeah, we just assumed it's operating, if you will, for those purposes. So the $51 million is in the number in 2023 because it's on an as-reported basis, and the $7 million number is included in our 24 numbers.

Manan: Hey, good afternoon.

Manan: I wanted to ask about deposit pressure and you know most banks spoke about how deposit pressure eased in the first quarter.

Manan: Do you think there's something.

Manan: Related to our specific customer mix or the fact that you are accelerating growth in new markets.

Catherine Miller: And the next question on fees, service charges, are seasonalally also usually lower in the first quarter, but I know you've talked about interchanges and other things being softer in the first quarter. So would you expect that to also increase as we go into the next couple of quarters, or is this also a good kind of lower run rate for service charges? Yeah, I think that the thing with service...

Manan: What do you think is driving that.

Manan: That incremental pressure on deposit cost for you guys relative to what we're seeing in the broader market.

Manan: From a cost standpoint, I will say that we're really not feeling you know from a market standpoint, not feeling a lot of pressure on the deposit cost side, we need to be competitive and we are I think we've got you know we've decided we're competing primarily on the 90 day C D.

Jerry Salinas: Yeah, I think that the thing with service charges, the upside to it has been the commercial service charges. In some cases, you know, it works against you, right?

Manan: And it's really more of the pressure is coming on the noninterest bearing and I think it really just continues to be the scenario where.

Jerry Salinas: Because in some cases, customers may decide to pay more for services through hard dollar charges rather than through keeping the balances. So some of that's some of it. And so that's been an impact on growth. But, you know, we've done a lot of things, I will say, in favor of the customer as it relates to, especially on the consumer side, on OD fees.

Manan: Rates at these higher levels continues to put pressure both on commercial customers and consumer customers.

Manan: Looking for for balances.

Manan: We'll say that when we look at the at the balances, especially on the interest bearing side.

Catherine Mealor: And it's true I think both in consumer and commercial is that we have seen increases in the.

Jerry Salinas: And we continue to see good growth there. But a lot of it, as Phil mentioned, you know, we're just blowing those accounts pretty significantly. And, you know, I really kind of try to say that I don't expect those fees are going to grow. And obviously, there's some guidance out there, potentially, a lot of pressure on that, on those fees. So, you know, we've really been, I will say, in some ways pleasantly surprised.

Catherine Mealor: From February to March small increases in Denmark to April as well.

Catherine Mealor: Net interest bearing side, so I think competitively pricing wise I think things are going right I think historically like I said, our balances just tend to be softer in this first quarter, but we're going to compete on the pricing.

Catherine Mealor: We're not going to be the highest we'd never intended to be the highest but we do keep an eye on what's going on there we make decisions obviously on on where we want to compete but as I said earlier, we're not seeing a lot of press.

Jerry Salinas: But I don't see that having a lot of growth from where we are today. You know, I think it'll just be continued pressure in that category for the rest of 24s. It's kind of the numbers that I'm seeing right now.

Catherine Mealor: Pressure on what I'll call the interest bearing but non Cds, if you will so the MMA that specifically.

Catherine Mealor: I'm not seeing a lot of pressure there yet competitively. So we really haven't moved those rates.

Catherine Mealor: For a while now.

Manan Gosalia: Our next question is from Manan Gosalia with Morgan Stanley. Please proceed.

Speaker Change: Got it.

Speaker Change: And then maybe on the loan side are you spoke about the deals lost being up because of structure.

Manan Gosalia: Hi, good afternoon. Most banks spoke about how deposit pressure eased in the first quarter. Do you think it's something related to your specific customer mix or the fact that you are accelerating growth in new markets? What do you think is driving that incremental pressure on deposit costs for you guys relative to what we're seeing in the broader market?

Speaker Change: Where are you seeing this competition coming from is it is it private credit is it other banks and <unk>.

Speaker Change: It's part of the reason for maybe the weakness and then because you are skewing to higher quality and lower yielding loans right now.

Speaker Change:

Speaker Change: Well first part of your question I'd say, it's mainly banks that were seeing.

Jerry Salinas: From a cost standpoint, I will say that, you know, we're really not feeling, from a market standpoint, a lot of pressure on the deposit cost. We need to be competitive, and we are. I think we've got to, you know, we've decided we're competing primarily on the 90-day CD.

Speaker Change: Structure.

Catherine Mealor: Single story, it's guarantees.

Catherine Mealor: The loan to values.

Catherine Mealor: No.

Catherine Mealor: Terms.

Catherine Mealor: So.

Catherine Mealor: So theres some of that I don't know.

Catherine Mealor: Sure.

Catherine Mealor: It could be.

Catherine Mealor: Certainly vis vis private credit.

Catherine Mealor: We're getting lower yields than that they are able to achieve but albeit with a risk on their case.

Jerry Salinas: It's really more pressure is coming on the non-interest bearing. And I think it really just continues to be the scenario where, you know, rates at these higher levels continue to put pressure both on commercial customers and consumer customers looking for balances. I will say that, you know, when we look at the balances, especially on the interest-bearing side, and it's true, I think, both in consumer and commercial, that, you know, we have seen increases from February to March, small increases, and then March to April as well on that interest-bearing side.

Catherine Mealor: Uh huh.

Catherine Mealor: Yes, youre, probably going to see that you've got a little bit lower eagle on average, but not by a lot because we tend to be in.

Catherine Mealor: The higher.

Catherine Mealor: Quality is critical.

Speaker Change: Got it okay, and if I could just have a clarification on one of your comments on the security side I think you said.

Catherine Mealor: The rationale of that book was up.

Catherine Mealor: Half a year to five five years.

Catherine Mealor: Is that entirely from the move up in rates or are you taking on a little bit more duration to lock in the.

Catherine Mealor: The benefits of pirate.

Speaker Change: Now like I said, we really didn't do a lot of purchases in the first quarter and some of it was that we had about $1 billion.

Jerry Salinas: So, competitively, pricing-wise, I think, you know, things are going right. I think, you know, historically, like I said, our balances just tend to be softer in this first quarter, but, you know, we're going to compete on price. We're not going to be the highest. We never intended to be the highest, but we do keep an eye on what's going on there, and we make decisions, obviously, on where we want to compete.

Catherine Mealor: In treasuries that were at the end of the at the end of the year, let's say call it $750 million of it that that were maturing first few days.

Catherine Mealor: Of January so that was affecting it.

Catherine Mealor: And I think that might there might be a little bit more extended duration of the mortgage backs, but we havent added a whole lot of duration with anything that we've done in the first quarter.

Speaker Change: Great. Thank you.

Catherine Mealor: Our next question is from John Armstrong with RBC capital markets. Please proceed.

Jerry Salinas: But as I said earlier, we're not seeing a lot of pressure on what I'll call the interest-bearing non-CDs, if you will. So the MMA specifically, not seeing a lot of pressure there yet competitively. So we really haven't moved those rates, you know, for a while now.

John Armstrong: Thanks, Good afternoon guys.

John Armstrong: Couple of questions.

John Armstrong: Phil should we should we expect a potential problem loans to continue to migrate higher or is that not necessarily true.

John Armstrong: Yes, John.

Catherine Mealor: Yeah.

Phillip D. Green: First of all I'll say problem loans potential problem loans.

Douglas Goldstein: Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host.

Catherine Mealor: A category that we don't use any more of them the risk rate 10, and higher should we expect to increase.

Phillip D. Green: Well, the first part of your question, I'd say it's mainly banks that we're seeing structure, and it's a single story. You know, it's guarantees. So, there's some of that. I don't know, you know, we're, It could be, you know, certainly vis-a-vis private credit, we're getting lower yields than they're able to achieve, albeit at a higher risk in your case. Yeah, you're probably going to see that we've got a little bit lower yield on average, but not by a lot, because we tend to be on the higher...

Speaker Change: I would say.

Speaker Change: Maybe.

Speaker Change: The reason I say that is because.

Speaker Change: We were at such low levels really the industry unsustainably low levels.

Speaker Change: Coming out of the pandemic.

Speaker Change: For credit quality right and so.

Speaker Change: We're still not where we are I would say normal.

Speaker Change: And so but we are seeing some what I would call. Some some reversion to mean, so that would tell me, yes, we probably ought to expect it to go up some.

Speaker Change: Same time.

Speaker Change: Some of these that we've added.

Jerry Salinas: Got it. Okay, and if I could just have a clarification on one of your comments on the security side, I think you said the duration of that book was up about half a year to 5.5 years. Is that entirely from the move up in rates, or are you taking on a little bit more duration to lock in the benefits of higher rates? Now, like I said, we really do...

Speaker Change: We were looking for some reasonably quick turnarounds on it I mean, we just try to be realistic with these risk rates that we're adding.

Speaker Change: You know, it's not a death sentence or anything it's just recognizing that we proceed some elevated risk.

Speaker Change: But we do work on them and work to get to correct. When the companies work to correctly. So I'm hopeful that with some of these that we brought on this time, we will see them move out, but we could also see some more move in because again, we were really coming off really unsustainably low levels. So.

Jerry Salinas: No, like I said, we really didn't do a lot of purchases in the first quarter. I think some of it was that we had about a billion dollars in treasuries that were, you know, at the end of the year, let's say, call it 750 million of them, that were maturing in the first few days of January. So that was affecting it. And I think there might have been, there might be a little bit more extended duration on the mortgage back. We haven't added a whole lot of duration to anything that we've done in the first quarter.

Speaker Change: That's why I say maybe.

Speaker Change: I'm not concerned with the with credit quality, I mean, I know them.

Speaker Change: <unk> cross banker and so I guess, there's that pardon me, that's always going to be concerned with it but.

Speaker Change: You know I think credit quality is good out of room spend a lot of time looking at our commercial real estate portfolio.

Speaker Change: You know very granular level.

Speaker Change: Yeah.

Speaker Change: Ill tell you that [laughter].

Jon Glenn Arfstrom: Our next question is from John Arfstrom with RBC Capital Markets. Please proceed. Hey, thanks. Good afternoon, guys.

Speaker Change: You know probably if somebody said Austin office building you know they would run for the tables, but I would tell you I think our Austin office building portfolio is solid band.

Jon Glenn Arfstrom: Hey, thanks. Good afternoon, guys. A couple of questions. Phil, should we expect the potential problem loans to continue to migrate higher, or is that not necessarily true?

Speaker Change: And you know I've looked at I've looked at the multifamily deals people will say Oh man Austin, It's Scott.

Speaker Change: That reduction in the interest rates you know the housing prices come off 11%.

Phillip D. Green: Yeah, John, the, um... First of all, I'll say problem loans, right? The old potential problem loans are a category that we don't use anymore, but the risk rating of 10 and higher, should we expect an increase? I would say... Maybe.

Speaker Change: And I've got a lot of supply coming on et cetera, et cetera, but I look at our multifamily in the us market I feel great about it.

Speaker Change: And.

Speaker Change: So it depends on the deal it depends on your sponsors how they're operating.

Phillip D. Green: And the reason I say that is because, uh, we were at such low levels really; the industry was at unsustainably low levels of everything you know coming out of the pandemic for credit quality, right, and so we're still not where we are, I would say, normally. And so we are seeing some, what I would call, some reversion to mean. So that would tell me that we probably ought to expect it to go up some.

Speaker Change: As far as the Austin house prices being down 11% there are 50% up to two years before that right. So.

Speaker Change: I mean.

Speaker Change: Theres this headline stuff and then if you really look below it and you spend time on it.

Speaker Change: About the commercial real estate portfolio.

Speaker Change: Our people have done a heck of a job of underwriting it and part of it part of the reason I feel great is the same reason that we lost 82% of the deals to structure this quarter.

Phillip D. Green: At the same time, some of these that we've added, you know, we're looking for some, you know, reasonably quick turnarounds on them. I mean, we just try to be realistic with these risk rates that we're adding. And, you know, it's not a death sentence or anything.

Speaker Change: We are.

Speaker Change: Our folks know how to book these things so that doesn't mean, we won't have problems and I'll talk to you about something that popped up at all but.

Speaker Change: It's not something that.

Speaker Change: Gives me any worry I think it's interesting what's happening with the you know the.

Phillip D. Green: It's just recognizing that we perceive some elevated risk. But we do work on them and work to get to correct them, and the companies work to correct them. So I'm hopeful that with some of these that we brought in this time, we'll see them move out. But we could also see some more move in because, again, we're really coming off at a really unsustainable level. So... That's why I say maybe.

Speaker Change: The company specific stuff on the C&I side, we're going to have to see whether or not we continue to see things pop up there and some of these guys may not be able to solve their problems.

Speaker Change: But.

Speaker Change: Most of them well, but that's just banking, it's a risk business and.

Speaker Change: I really think we have a handle on it.

Speaker Change: Anywhere there's felt the need to say that.

Speaker Change: Okay.

Speaker Change: So does it doesn't.

Speaker Change: Sounds like you guys feel the need to build reserves from here.

Phillip D. Green: I'm not concerned with credit quality. I mean, I know I'm a notorious frost banker. And so I guess there's that part of me that's always going to be concerned with it. But, you know, I think credit quality is good. I mean, we spent a lot of time looking at our commercial real estate portfolio at a very granular level. And, you know, I'll just tell you that probably if somebody said Austin office building, they would run for the hills.

Speaker Change: I hear your charge off guidance and I respect that but.

Speaker Change: It doesn't feel like you.

Speaker Change: Do you have more pressure coming at least in your mind in terms of.

Speaker Change: Credit.

Speaker Change: Yeah, I don't feel that way now.

Speaker Change: Yes.

Speaker Change: Can we can we see it get worse sure sure can Jerry can speak to the formula that better than I can but I think we feel really good about where the reserve is today.

Jerry Salinas: I think another thing I might say about the reserves you might recall, we built it up.

Jerry Salinas: Now during the Covid period, and we never took it out and so.

Jerry Salinas: Yeah, I think that's a little bit different than others.

Phillip D. Green: But I'm going to tell you, I think our Austin office building portfolio is solid, man. You know, I've looked at the... And you know, I've looked at the multifamily deals, people would say, Oh, man, Austin, you know, it's got, it's got a reduction in interest rates, you know, the housing prices have come off 11%. You know, got a lot of supply coming on, etc, etc. But I look at our multifamily in the Austin market, and I feel great about it. So, it depends on the deal, it depends on your sponsors, how they're operating. As far as Austin house prices being down 11%, they were up 50% over the two years before that, right?

Speaker Change: We pretty much stayed there and we really haven't if you look at our reserve coverage percentage it really hasn't moved around very much.

Speaker Change: Wouldn't expect that it will.

Speaker Change: It's going to move.

Speaker Change: A couple of basis points here and there, but I don't envision at this point any significant reason that you'd see that reserve number is increasing again.

Speaker Change: Assuming a pretty normal.

Speaker Change: Sort of credit quality environment.

Speaker Change: Yep Okay.

Speaker Change: Jerry as long as you have the Mike.

Jerry Salinas: <unk> you.

Jerry Salinas: Change the presentation of the expansion contribution for the quarter.

Jerry Salinas: What if you can share what kind of contribution did Houston, one point I'll have this quarter.

Jerry Salinas: Yes, I think it was last time, we rounded to seven let me make sure I was going to say I think.

Jerry Salinas: Rounded three six this quarter, but.

Jerry Salinas: Let me just check yes, that's exactly right. They were seven last quarters six this quarter.

Phillip D. Green: I mean, there's this headline stuff, and then if you really look below it, and you spend time on it, I mean, I feel great about the commercial real estate portfolio. Our people have done a heck of a job underwriting it. And part of the reason I feel great is the same reason that we lost 82% of the deals to structure this quarter.

Jerry Salinas: Okay.

Jerry Salinas: And the.

Jerry Salinas: When you say Houston is funding Dallas and Austin that's.

Jerry Salinas: One point I want to point out is that right together.

Speaker Change: Correct, Yeah, I would just netted the two of them.

Jerry Salinas: Trying to keep it simple maybe I confused yeah, Houston together is funding the other expansion that was really as we had talked about this in planning it out that was certainly the way we hope things will kind of work out. There is these are financial centers began to mature they will begin to pay for future expansions. It certainly worked out that way.

Phillip D. Green: You know, we, our folks know how to book these things. That doesn't mean we won't have problems, and I'll talk to you about some that have popped up and all but, It's not something that... Please see the complete disclaimer at www.google.com or at www.google.com/policies.

Speaker Change: Yeah, that's great that's great numbers. So okay. Thank you I appreciate it.

Phillip D. Green: Anyway, I just felt the need to say that. Okay. Yep. Yep. So it does.

Speaker Change: Yeah.

Jon Glenn Arfstrom: Okay, yep, yep. So it doesn't sound like you guys feel the need to build reserves from here? I mean, I hear your charge-off guidance, and I respect that, but it... It doesn't feel like you have more pressure coming, at least in your mind, in terms of

Speaker Change: One comment I'll make that Catherine Kathryn had act asked about expenses and one thing I wanted to clarify and I made a comment in my comments about the linked quarter.

Speaker Change: And salaries so for US a lot of the stock awards are given.

Phillip D. Green: Yeah, I don't feel that way now. I mean, uh... You know, can we, can we see it get worse? Sure, sure can. Jerry can speak to the formula better than I can.

Speaker Change: In October and so they do affect the fourth quarter and so typically a salad rates for us are are higher in that fourth quarter and because by their nature a lot of these stock.

Phillip D. Green: But I think we feel really good about where the reserve is today. I think another thing I might say about the reserves. You might recall, you know, we built them up during that COVID period, and we never took them out. Yeah, I think that's a little bit different than others. Yeah, we pretty much stayed there. We really haven't, if you look at our reserve coverage percentage, it really hasn't moved around very much.

Speaker Change: Stock Awards immediately baths and as a result, our immediately expand so I think if you looked at the growth in salaries expense between the.

Speaker Change: Between the third quarter and fourth quarter last year, Youll get some sort of a yet sort of expectation wise, what you might expect to see between the third and fourth quarter in fourth quarter next year.

Speaker Change: Just to give a little bit of a better color there.

Phillip D. Green: And, you know, I wouldn't expect that it'll, you know, it's going to move, you know, a couple of basis points here and there, but I don't anticipate at this point any significant reason that we'd see that reserve number increasing. Again, you know, assuming a pretty normal sort of credit quality.

Speaker Change: Yeah.

Speaker Change: In the interest of time, we're going to ask that you. Please limit to one question and one follow up question. Our next question is from Ebrahim <unk> with Bank of America. Please proceed.

Ebrahim: Hey, good afternoon.

Ebrahim: Just wondering if we could.

Ebrahim: Quick one J D for you around the Securities book, Sorry, if I missed this.

Jon Glenn Arfstrom: Yep, okay. Jerry, as long as you have the mic.

Ebrahim: Should we expect one the security.

Ebrahim: The securities portfolio to grow from one to average levels or stay flat and second.

Jerry Salinas: You changed the presentation of the expansion contribution for the quarter. What, if you can share it, what kind of contribution did Houston 1.0 have this quarter?

Ebrahim: Could you confirm I think you mentioned you have another $1 billion of securities or do you expect to buy what the pickup in the yield is on the investment versus what's rolling off Thank you.

Jerry Salinas: Yeah, I think it was. Last time we rounded to seven, let me make sure I was going to say, I think we rounded to six this quarter, but let me just check. Yeah, that's exactly right. They were seven cents last quarter and six this quarter.

Speaker Change: Sure.

Speaker Change: Yes, I would expect all things being equal we may be down a little bit, but it's going to be relatively flat.

Speaker Change: We're expecting cash flow I think of about 1 billion too.

Speaker Change: And the weighted yield of those are about a $2 26.

Jon Glenn Arfstrom: mm-hmm okay, and in the when you say Houston is funding Dallas and Austin, that's... 1.0 and 2.0, is that right, together?

Speaker Change: And that's impacted somewhat we've got $500 million.

Speaker Change: It doesn't mature until the fourth quarter and those are some treasury securities at 96 basis points.

Jerry Salinas: Correct. Yeah, I was just netted the two, and I was trying to keep it simple. Maybe I confused them.

Speaker Change: Right now I think you know some of you heard kind of what we're buying.

Speaker Change: I would expect that if you're talking about something in the five and a half versus that round. It to 225 years, you've got some nice pickup potential there.

Jon Glenn Arfstrom: Yeah, Houston together is funding the other expansions. That was really, as we had talked about this and planned it out, that was certainly the way we hoped things were going to work out, that if these financial centers began to mature, they would begin to pay for future expansions. And it certainly worked out that way.

Speaker Change: So does that imply JD that NII should keep growing from the first quarter levels as we move through the year and fourth quarter, we'll probably see it.

Speaker Change: Again from the securities yield going higher.

JD: Yes, that's kind of what I would expect the net interest income is on a little bit of a positive trajectory I think for us, though the low was probably last last year sometime in the I would say the second first second or third quarter.

Jerry Salinas: Yeah, well, that's great. Those are great numbers.

Jon Glenn Arfstrom: So, okay. Thank you. I appreciate it.

Jerry Salinas: One comment I'll make that Catherine asked about expenses, and one thing I wanted to clarify, and I made a comment in my comments about the link order of salaries. So for us, a lot of the stock awards are given in October, and so they do affect the fourth quarter, and so typically, salaries for us are higher in that fourth quarter. And because, by their nature, a lot of these stock awards immediately expire, and as a result, they're immediately expensed.

Speaker Change: Perfect. Thank you.

JD: Kind of expecting a small pickups for the rest of the quarters moving forward.

Speaker Change: Got it thank you.

JD: Mhm.

JD: Reached the end of our question and answer session I would like to turn the conference back over to Phil for closing remarks.

Phillip D. Green: Okay, well, we thank everyone for their interest and churn. Thank you.

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

Jerry Salinas: So I think if you looked at the growth in salaries expense between the third quarter and fourth quarter last year, you'd get some sort of expectation-wise what you might expect to see between the third quarter and fourth quarter this year. Just to give a little bit of a better color there.

Phillip D. Green: Okay.

Phillip D. Green: [music].

Phillip D. Green: Uh huh.

Phillip D. Green: Okay.

Phillip D. Green: [music].

Ebrahim Huseini Poonawala: In the interest of time, we're going to ask that you please limit yourself to one question and one follow-up question. Our next question is from Ebrahim Poonawala with Bank of America. Please proceed. Say good afternoon.

Phillip D. Green: Yeah.

JD: Yeah.

JD: Yeah.

JD: [music].

Ebrahim Huseini Poonawala: Just one very quick... Quick one, Jerry, for you, around the securities book, sorry if I missed this. Should we expect, one, the security..., www.frostbankersinc.com Could you confirm, I think you mentioned you have another billion dollars of securities that you expect to buy, what the pickup in the yield is on reinvestment versus what's rolling off?

Jerry Salinas: Yeah, I would expect all things to be equal. We may be down a little bit, but it's going to be relatively flat.

JD: Yeah.

JD: [music].

JD: Okay.

Ebrahim Huseini Poonawala: We're expecting cash flow, I think, of about a billion, too, and the weighted yield of those is about 2.26. And that's affected somewhat. We've got $500 million that doesn't mature until the fourth quarter, and those are some Treasury securities at 96 basis points. And right now, I think you heard kind of what we were buying. I would expect that if you're talking about something in the $5.50 range versus that round to $2.25, you've got some nice pickup potential there.

JD: Okay.

JD: Okay.

JD: [music].

Jerry Salinas: So does that imply, Jerry, that NII should keep growing from the first quarter levels as we move through the year, and in the fourth quarter, we'll probably see a lift again from the securities yield going higher?

JD: Okay.

JD: [music].

Jerry Salinas: Yeah, that's kind of what I would expect. Yeah, the net interest income is on a little bit of a positive trajectory. I think for us, the low was probably last year sometime in the second or third quarter. Perfect, thank you. We should, we're kind of expecting small pickups for the rest of the quarters, moving forward.

JD: Yeah.

JD: Yes.

JD: [music].

JD: Yeah.

JD: [music].

Phillip D. Green: We have reached the end of our question and answer session. I would like to turn the conference back over to Phil for his closing remarks.

Phillip D. Green: Okay, well, we thank everyone for their interest, and we adjourn. Thank you. Thank you. This will conclude today's conference. You may disconnect your lines.

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

Background Music: Copyright 2020 Mooji Media Ltd. All Rights Reserved. No part of this recording may be reproduced without Mooji Media Ltd.'s express consent. [inaudible] Go to Beadaholique.com for all of your beading supply needs!

JD: Yes.

JD: [music].