Q2 2024 Cullen/Frost Bankers Inc Earnings Call
Thank you for your patience and for joining US today the conference will be starting in just a few minutes, but again, we want to thank you for your patience and for joining US today, we will be starting in just a few minutes.
[music].
Okay.
So welcome to call them Frost Bankers, Inc. Second quarter 2024 earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn the call over to a B Mendez Senior Vice President and director of Investor Relations. Thank you you May go ahead.
Thanks Jerry.
This afternoon's conference call will be led by Phil Green, Chairman and CEO, and Jerry Salinas Group Executive Vice President and CFO.
Before I turn the call over to Phil and Jerry I need to take a moment to address the safe Harbor provisions.
Our remarks made today will constitute forward looking statements as defined in the private Securities Litigation Reform Act of 1995 elements, we intend such statements to be covered by the safe Harbor provisions for forward looking statements contained in the private Securities Litigation Reform Act of 1995 as amended please see the last page of text in this morning's earnings.
For additional information about the risk factors associated with these forward looking statements.
If needed a copy of the release is available on our website or by calling the Investor Relations Department at 2102205234 at this time I will turn the call over to Phil.
Thanks, Amy and good afternoon, everyone and thanks for joining US today I'll review second quarter results for calling for us and I am a company on the call by our CFO, Jerry Salinas, and Dan get US who will offer additional comments.
Before I discuss the quarter I'm sure you all saw our recent announcement of Jerry's retirement as of the end of the year. After a brilliant career of almost 40 years Frost.
Throughout that time, Jerry has been a part of virtually every major initiatives that we've undertaken.
And I've been blessed to work with him during that entire time and he will be missed.
And rest assured we plan on squeezing as much work out of him as possible before his well deserved retirement.
Jerry will be succeeded as CFO by day.
Dan get us who joins us on the call today.
Dan has broad experience over his 25 years at Frost, having served in the credit function.
And in our commercial real estate Division and Houston successfully executing our initial organic expansion strategy in Houston, one Dot O.
And then leading the San Antonio headquarters market as regional President overseeing all our commercial activities there.
In the second quarter, Cullen Frost earned $143 $8 million or $2.21, a share compared with earnings of $164 million or $2 47 per share reported in the same quarter last year.
Our return on average assets and average common equity in the second quarter or 1.18% and 17.08%.
Respectively.
And that compares with one 3% and $19 three 6% for the same period last year.
These results are due to our frost bankers and are continuing to execute on our organic growth strategy.
Average deposits in the second quarter were $45 billion down one 2% from $41 billion in the second quarter last year.
As was the case in previous quarters Cullen Frost Didnt utilize any federal home loan bank advances brokered deposits, our reciprocal deposit arrangements to build insured deposit percentages.
Average loans grew by more than 11% to $19 $7 billion in the second quarter and that compared with $17 7 billion.
In the second quarter of last year.
I'll now call on Dan get Us to review the results from our expansion programs.
Thank you Phil I Echo your sentiments about Gerry is will be very big shoes to fill and I look forward to leveraging his institutional knowledge as we move through this transition period.
We continue to see excellent results in our organic growth program.
Our Houston expansion on a combined basis, what we call Houston, one danone and.
We stand at 102% of deposit of 142% of logo and 119% of our new household goal.
Breaking out the two Houston, one that stands at 97% of the <unk>.
<unk>, having recently experienced similar commercial deposit trends as the legacy company.
142% of logo and 117% of new households, built here.
And two data, which we expect to complete later this year or early in 2025, we stand at 205% of deposit goal of 142% of logo and the 158% of our new household goal.
For the Dallas market expansion, we stand at a 141% of deposit goal of 187% of logo and 178% of our new household goal.
We have the first three locations in our Austin expansion project opened with several more planned to open before the end of this year.
At the end of the second quarter. Our overall expansion efforts have generated $2 2 billion in deposits $1 5 billion in loans and added 50783, new households, as Phil and Jerry had mentioned in the past for perspective, the largest acquisition in our history.
When the company with $1 4 billion in deposits.
In addition, the successes of the earlier expansion projects basically our funding the current expansion, we expect the Houston expansion to fund the Dallas and Houston expansions in 2025 with 2026 being the year that three expansion efforts are accretive to earnings.
Since we began the expansion five years ago, we have added 58 locations to our branch network and the expansion regions or about one new location every month for the last five years. Those 58 locations now represent 30% of our entire branch network across Texas.
The expansion branches are growing at an impressive rate and becoming a more meaningful part of calling frost for the second quarter growth in average loans and deposits and the expansion branches were up in an annualized 9% linked quarter and both average loans and deposits were up 47.
Percent year over year.
The expansion now represents seven 6% of total loans and five 4% of total deposits for our entire company.
For perspective at the same time last year. The expansion represented five 8% of loans and three 6% of deposits of our company.
For the respective regions of Houston, and Dallas, the expansion represents 23% of Huston loans and 21% of deposits for Dallas. The expansion is already at 14% of loans and 14% of deposits and now I'll turn the call back over to Phil.
Thanks, Dan.
In our consumer bank, we continue to see excellent growth across the board.
Average balances and consumer loans were up more than 22%.
For $571 million year over year.
This excellent loan growth was driven by record consumer real estate lending, which is comprised of both second lien home equity loans.
As well as our new mortgage products.
Mortgage loan fundings were $76 million in the quarter, which is over three times, our first quarter fundings. So we're gaining momentum as this product matures.
At quarter end, our mortgage portfolio stood at $132 $4 million.
And I should also mention how proud we are that C. N N underscored recently rated frost as the best mortgage lender in Texas.
This is going to be a great asset class for us.
Average balances in consumer deposits have returned to positive growth territory with a year over year increase of one 4%.
Our $253 million.
Finally, we continue to see high quality industry, leading checking household growth.
Five 8%.
We do not offer any of the cash incentives to become a customer that have become so commonplace in the industry.
Because people are choosing frost based on our reputation for outstanding service, which has been recognized by J D power 15 years in a row.
Our investments in our organic expansions in Houston, Dallas, and Austin as well as our investments in marketing are driving these stellar results in our consumer bank and we expect this to continue.
Looking at our commercial business on a linked quarter basis.
Average loan balances increased an annualized rate of eight 7% for C&I.
And 10% for CRE.
And the second quarter, we brought in 977, new commercial relationships relationships, an increase of 19% on a linked quarter basis, which represented the second highest quarterly increase ever.
This coincided with us achieving our second highest level of quarterly calling activity within 1% of the record high that we set in the first quarter.
New loan commitments totaled $198 billion in the second quarter, an increase of 58% compared with the first quarter and an increase of 29% compared to the second quarter last year.
The split of commitments booked in the second quarter was about 54% larger.
It was about 54% for larger credits and 46% for core credit so good balance there.
Credit is good by historical standards with net charge offs and non accrual loans both at healthy levels. We continue to see some normalization in credit terms of risk rating migrations in the portfolio as we've come off historic lows and problem loans.
But we've not experienced higher credit losses, as our borrowers in the Texas economy overall has so far proven to be resilient.
Net charge offs for the first quarter, and nine $7 million compared to $7 4 million and $9 8 million a year ago.
Annualized net charge offs for the second quarter represented 19 basis points of period end loans.
Nonperforming assets totaled 75 million at the end of the second quarter, compared with 72 million last quarter and $69 million a year ago.
In figure represents just 38 basis points of period end loans.
And 15 basis points of total assets.
Problem loans, which we define as risk grade 10 or higher.
Some refer to this as two two this is a M O E M loans.
Total $986 million at the end of the second quarter.
That's up from $810 million at the end of the first quarter and 442 million. This time last year.
The growth in the quarter was mainly due to a few larger C&I credits, mostly in the classified sub standard category.
About 22% of our problem loans overall.
Tied to Investor commercial real estate.
Slightly less than 50% are related to C&I credits with most of the rest and owner occupied real estate loans, which are closely related to C&I loans.
Regarding commercial real estate lending our overall portfolio remained stable with steady operating performance across all asset types and acceptable debt service coverage ratios and loans to value.
Within this category, but we would consider to be the major categories of Investor CRE.
Office multifamily retail and industrial as examples totaled four 1 billion or 46% of CRE loans outstanding.
Our investor CRE portfolio has held up well with the average performance metrics stable to slightly improved quarter over quarter exhibiting an overall average loan to value at underwriting of about 52% and average.
Weighted debt service coverage ratio of about 1.55.
The Investor office portfolio, specifically had a balance of $981 million at quarter end and that portfolio exhibited an average loan to value.
52%.
Healthy occupancy levels and an average debt service coverage ratio of 157, which has slightly improved for the third consecutive quarter.
Our comfort level with our office portfolio continues to be based on the character and expertise of our borrowers and sponsors and to predominantly class a nature of our office building projects and with that I'll turn it over to Gerry.
Thank you Phil.
Before I begin with my prepared remarks about the quarter I did want to say that as I head into these last few months of my career here at Frost I want to say that I'm deeply honored and humbled to have had the opportunity to work for such a remarkable company without outstanding culture for over 38 years.
All of which I've spent working for film.
I feel truly blessed to have had this opportunity, including serving as CFO for the past 10 years.
While I look forward to the next chapter I will truly miss by incredible teammates who have made this journey so special.
I know that Dan will do an outstanding job in his new role as CFO.
Looking at our net interest margin, our net interest margin percentage for the second quarter was 354% up six basis points from the 348% reported last quarter. The increase was primarily driven by higher volumes of loans, along with higher yields on loans and investment securities. These positive.
This was partially offset by higher cost of interest bearing deposits and to a lesser extent lower balances at the fed compared to the first quarter.
Looking at our investment portfolio, the total investment portfolio averaged $18 $6 billion during the second quarter down $696 million from the first quarter during.
During the second quarter investment purchases totaled $337 million with $235 million of that being agency MBS securities, yielding 569% and $102 million in municipals with a taxable equivalent yield of $5 50.
The net unrealized loss on the available for sale portfolio at the end of the quarter was $1 six 3 billion, an increase of $42 million from the $1 $5 9 billion reported at the end of the first quarter.
<unk> equivalent yields on the total investment portfolio in the second quarter was 338% up six basis points from the first quarter.
The taxable portfolio, which averaged 12 billion down approximately $489 million from the prior quarter at a yield of 292% up nine basis points from the prior quarter.
Our tax exempt municipal portfolio averaged $6 6 billion during the second quarter down $207 million from the first quarter and had a taxable equivalent yield of four 3% up three basis points from the prior quarter at the end of the second quarter approximately 71% of the municipal portfolio was pre <unk>.
Refunded or psf insured.
Duration of the investment portfolio at the end of the second quarter was $5 five years flat with the first quarter.
Looking at deposits on a linked quarter basis average total deposits of $40 5 billion were down $215 million or 5% from the previous quarter.
We did continue to see a mix shift during the second quarter as average noninterest bearing demand deposits decreased $298 million or two 1%, while interest bearing deposits increased $83 million or 3% when compared to the previous quarter.
Based on second quarter average balances noninterest bearing deposits as a percentage of total deposits were 33, 8% compared to 34, 3% in the first quarter.
The cost of interest bearing deposits in the second quarter was $2 three 9% up five basis points from the 234% in the first quarter.
Looking at July month to date averages for total deposits through yesterday, they're down about $140 million from our second quarter average of 45 billion with interest bearing being down $60 million and noninterest bearing down $80 million month to date.
Customer repos for the second quarter averaged $3 8 billion basically flat with the first quarter the cost of customer repos for the quarter was 375% down one basis point from the first quarter.
The month to date July average balance for customer repos was down approximately $120 million from the second quarter average.
Looking at noninterest income and expense on a linked quarter basis, I'll just point out a couple of items.
Insurance commissions and fees were down $4 4 million or 23, 9% as I've mentioned in previous quarters property and casualty and benefit company bonuses are typically received in the first quarter.
These bonuses contributed about $3 1 million of the decrease when compared to the first quarter.
In terms of noninterest expenses on a linked quarter basis benefits expense was down $7 2 million or almost 20% impacted by lower payroll taxes, and 401 pay expenses related to annual bonuses paid during the first quarter.
Deposit insurance was down $6 3 million as we recognized $1 2 million in special FDIC assessments in the second quarter compared to $7 7 million related to the special assessment in the first quarter.
Looking at capital during the second quarter, we did buy back $30 million of our stock that translates into a little over 300000 shares at an average price of 99.
Regarding our guidance for full year 'twenty four.
Our current projections include 225 basis point cuts for the fed funds rate over the remainder of 2024 with one cut in September and another one in November that is consistent with our previous guidance.
Looking at loans on a year to date average basis loans were up 10, 8% compared to last year to date, we now expect full year average loan growth in the range of high single digits to low double digits, a little higher than our previous guidance.
Looking at deposits. The current year to date average is down 3% compared to last year to date, we now expect full year average deposits to be flat to down 2%.
That is down from our previous guidance of flat to growth of 2%.
We expect net interest income growth in the range of 2% to 3%.
The upper end of our guidance is down from our previous guidance of growth in the range of 2% to 4%.
The net interest margin percentage is still expected to trend slightly upward each quarter for the remainder of the year.
Based on year to date growth in current projections, we are projecting growth in noninterest income in the range of two 3% up from our previous guidance of flat to up 1%.
Based on year to date results and current projections, we are projecting noninterest expense growth in the range of 6% to 7% on a reported basis that is down from the 6% to 8% previous guidance I will say, however that we continue to be focused on bringing that expense growth percentage down.
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.
And regarding taxes, our effective tax rate for the full year 2023 was 16, 1% and we continued currently expect a flat to slightly higher effective rate in 2024 with that I'll now turn the call back over to Phil for questions. Thank you Gerry.
Well now open up the call for questions.
Thank you if you would like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.
Our first question is from Steven Alexopoulos with Jpmorgan. Please proceed.
Hi, everybody.
Thanks, David.
Let me start so you guys had good commercial loan growth can you talk about what you saw from our line utilization trend that is that what drove the loan growth or is this all share gains.
No it wasn't line utilization Steve It was.
It was growth I don't know if I didn't think of in terms of share gains but.
I guess, we did do pretty well relative to the market, but it was a it was just good activity.
It was mainly if you look at new commitments that we had which I realize youre not balances, but they are the basis of those balances new commitments for the quarter.
Were up strongly about 80% of it was from C&I and energy, we had a really good quarter on energy this time.
Some really well.
Well underwritten deals good structures and good relationships so.
It was just good activity our people are working hard and I think I said, we had our second highest.
Quarter of calls.
In the second quarter and.
You know things are just going well be honest.
And then fill in the commercial real estate side, you guys had good growth there, it's an area, where many peers continue to pull away from or you're just being opportunistic stepping in where others are stepping back and should that be a continued driver of loan growth in the back half.
Speaker Change: Well I think the balanced growth in C&I is really driven mainly by <unk> projects that have been.
Put in place in the past and Youre seeing those fund up.
Yeah, I don't I don't see that being a developing driver.
<unk>.
Balanced growth going forward I mean, there will be some and we are being opportunistic.
And a number of different areas. I mean, you may think I'm crazy, but we did an office building loan in San Antonio in the quarter and.
Great sponsor Great project.
Great metrics.
It sectors. So it was mainly though about great people, we wanted to bank and had relationships with so.
We continue to bank people not things and.
And we are taking advantage.
Okay.
Our business as it presents itself from this what we wanted to do.
Okay. Thank you and then just finally.
I wanted to ask you about your deposit strategy, if you will because when the fed started raising rates.
You guys were one of the first banks that started raising deposit rates for your customers I think on the call. You said you were going to share the benefit with them and that was while many peers, we're not raising rates and then there was a big lag for the industry, which you guys really didn't see but with the fed looking like they are about to cut now what's your strategy do you.
Take that benefit back more quickly do you see what the competitive environment does first like how are you thinking about it at this stage.
Stephen you're exactly right with the history. There are current expectations is that we would move in the same manner that we went up we would kind of move back down in that same sort of manner. Obviously I always give that caveat. It will continue to look at what competitors are doing.
We were quick to go up and expect that we'd be able to make those same sorted decreases on the way down.
Hey.
Perfect. Thanks for taking my questions.
Speaker Change: Thank you.
Our next question is from Dave Rochester with Compass point. Please proceed.
Hey, good afternoon, guys on the NII guide I appreciated all the color on your assumptions for rate cuts there.
I think last quarter, you mentioned, you get roughly $1 4 million.
And I hit on a monthly basis for each 25 basis point rate cut correct me if that's wrong.
Speaker Change: But is that the same today and then just given what you just said in terms of moving deposit costs down in a similar pace as is.
The increase on the way up.
Thats, how youre thinking about it from the first cut or is there a little delay.
Yeah, no right from the first cut is what we're currently thinking but I'll continue to say, we'll continue we'll look at what the market is doing but our current thought process is we'll move immediately.
As far as what the cost of the or the benefit if you will or the cost of the <unk>.
The hike or cut it is probably a little bit higher than that a lot of it that that is going to be dependent on how much liquidity, we have and so that can move today I would probably tell you. If you said it was $1 million before I tell you it might be in the range of $1 586, so not too far different but its really going to be dependent on how much liquidity we have at the fed.
Okay and Thats per month as you said on a pretax basis, Yeah got it alright, and then just following on the loan growth discussion it sounded like.
You saw a decent amount of strength in C&I, you mentioned energy with any other areas, where youre seeing particular bright spots there.
No I wouldn't say, there's anything that stands out the energy I think was most.
Unusual in terms of its growth during the quarter.
But no I think its just been good growth overall, we've been seeing lots of good opportunities in <unk> and.
And taken advantage of them.
Yeah.
Okay and on the credit side, you talked about the problem loan increase some of that it sounded like it was on the C&I front any patterns there or any color just on the industries, where you saw a little bit of weakness.
Yeah, I would say it was driven by two industries, one that we've talked about on both really over the last few quarters as we've had the interest rate increases it would be in.
It would be in contractors.
Speaker Change: There were a couple of large contractors that we move to the classified position based on their situation.
And then we've had a couple of automobile dealers. One was a used car dealer home was a new car.
<unk> in the South Texas area and car dealers have impressed by certainly the used car dealers have been impressed by the increase in interest rates higher floorplan cost.
If they are financing with buy here pay here.
Speaker Change: Their credit losses have been higher.
They've had sort of had a perfect storm and they've had some dislocations in that industry and we've talked about those over the last several quarters. The contractors are.
Are ones that we are we'd like to believe that a path forward.
In the not too distant future, but we'll just have to see.
But but it is it's not commercial real estate I will say there were a couple of our multifamily deals that we did move to risk grade 10, and really that was because they had come upon there.
Uh huh.
Their covenant.
Covenants and their loan agreements.
It had.
Had been introduced at that time and that agreement after say about a three year period and they were below their covenants and they are working to move those back either through operations of the property or through a sale or refinancing of it and we think those will both be just fine, but because of the situation with the covenant.
I'd like to move that to risk rate 10, and I think we will see more go into that I think we'll see some of these flow out and we'll see new ones go in but I'm really not concerned with the.
With the multifamily situation and the debt service covenant ratios that might cause them to be in a risk grade 10 at any one point in time.
Alright, great appreciate it guys. Thanks.
Yes.
Our next question is from Ebrahim <unk> with Bank of America. Please proceed.
Hey, good afternoon.
Even.
So I guess the first Jay and then congratulations to each of you on the retirement and the neutral I know you have a few months and I am glad Phil is going to extract the last bit out a few days so.
Yeah.
But maybe I think I heard this earlier just big picture question I think when he said the stats about the new benches.
And it sounded like as you fast forward to 2026 all see.
Pension sort of markets would be breakeven. So two questions on that one what's the JAK two openings that it turns to be because of this investment spend and I'm just trying to get to what operating leverage that we should expect.
How do we think about how do we how do we once we get to 'twenty six and.
And then is there more appetite or need to.
Add a similar number of branches over the next five years. Once this is done.
Yeah.
Okay.
Yeah, well they are.
Let me answer the second part.
This is our strategy and I hope that they'll continue to be really good opportunities and the state of Texas for us to continue to expand weeks. We expect that they are we're doing some work now on identifying those places and trying to see where the puck is going to go.
Not get behind behind that.
In 2020, as Dan said and as <unk> said before.
We expect basically breakeven now we're gonna be adding on several locations in Austin. So I think we'll be basically breakeven next year and other things equal that's when you'd see some significant accretion I think from that.
Program and continuing to move forward from there.
Yep.
But we've got to remember that you know and that's a couple of years from now, but we got to remember that if we do have opportunities to expand into very attractive markets, we're going to do it.
Because as I've said many times. This this strategy is durable and it is scalable and and it's been very successful and we're building great long term value here.
Got it and maybe I guess, Dave for you just said and I think I heard you.
Expect NIM to move higher third and fourth quarter.
Just as you think about rate cuts in the world, where we get a series of rate cuts.
One is does that continue or are the actions that you might take outside of deposits on the asset side at some point to change the complexion of the balance sheet or.
There is no such sort of a plan to do anything.
Yeah.
As I mentioned, what are what our rate scenario, which we do have two rate cuts in there and don't forget I did say slightly higher.
And the next couple of quarters. So we're not talking about the sort of growth that we had it between the first and second quarter, which really are.
With a nice size growth I think for us the opportunities are really as we've talked about before.
<unk> opportunities coming out of that portfolio, especially this year as we talk about the latter half of the year I think we've talked about the fact that we've got I think it's like $500 million just in the Nova in the fourth quarter, it's under 1% right at 96 basis points. So we will see some uptick there.
From a fixed.
Loans standpoint, the size of the portfolio that we have that are bullish sort of fixed rate loans are probably not as significant but if you throw in amortizing fixed rate loans youll, probably get proceeds of about of about.
<unk> 500 million through the rest of the year and then north of 1 billion next year.
So we will have opportunities there as well to reprice those at even higher rates than where we would be even if if the rate environment was lower so I think we do have those sorts of opportunities going forward.
We'll continue to see what we do on the on the asset side, we continually.
Speaker Change: He is looking at that but right now I think those and the ability to price down on the deposit side are probably things that we're focusing on.
Got it and just one quick follow up is it safe for us given how you've talked about the investment spend how expense growth. The second this year that as we look into next year, most likely that expense stood diesel rates as opposed to activate as compared to 24.
From an expense growth standpoint, I mean, I think that's what we've been saying, Rob just said the plan would be that the expense growth would.
It would not be at the same level of the growth that we had projected what I will say is that we're running a pretty tight ship right. Now we're doing a lot of things that we need to do we guided down on that expense growth and Dan is going to be the new sheriff in town.
Well, we're still trying to get the growth down.
This year, but there will be some things that we have to do that we know we have to do so I've said before I don't expect that our growth rate will be back in that.
3% to 4% to 5%.
I still think that we're probably talking about growth in the higher single digits and that's all going to be refined and would be discussed at the at the January at the January call.
Got it thank you.
Yes.
Our next question is from Peter Winter with D. A Davidson. Please proceed.
Thanks, Good afternoon.
I could just follow up on expenses.
I hear you that you lowered the top end of the range for expenses for this year, but it does imply.
Imply a pretty steep ramp in the second half of the year.
And that's on top of core expenses coming down this quarter, if I exclude FDIC. So could you just talk about what type of expense initiatives you have in the second half of this year, that's driving that yes, one of the things that we have every year in the in the fourth quarter R. R.
Our restricted stock awards, and there's quite a few of them that by their nature that best immediately some of them are age based and given some of those awards youll see that expense growth and if you look at our historical trends on expenses, you will see that that the fourth quarter goes up pretty significantly and Thats. The main driver that comes to me.
And again, we're continuing to put these initiatives in place so our run rate and naturally its growing but as I said, we are looking and trying to ensure that if we do if we are approving expenses that there are things that we really absolutely need to do but I think what you are looking at is primarily driven by increases in AR.
Compensation associated with true ups of of incentive plans and then the issuance of the restricted stock is probably the biggest piece of it.
Got it.
Please ask a big picture question, if I think about the branch expense expansion.
It's really starting to pay some strong dividends and you've got this long runway for growth as you open up more branches.
Are there opportunities maybe to close some underperforming branches or consolidate branches that are kind of close to one another to kind of help manage the expense and offset some of these costs.
Yes, Peter I think there are in a number of cases and we are closing older locations in these markets and we're moving them to two new locations I don't know that we count those in the <unk> and the expansion numbers, but.
That is happening and so rest assured we are looking at locations that are.
Underperforming and we don't need I think we've had good luck to not having a lot of those because frankly, we were under branched.
Speaker Change: If you look at the various competitors.
The state so we didn't have a lot to make up there.
Phil.
As far as closures go so yeah, we do that and it's not unusual for us to close an old one.
Get it in a new location that we think has better growth prospects.
Got it thanks Bill.
Sure.
Our next question is from Ana <unk> with Morgan Stanley. Please proceed.
Hey, good afternoon.
I wanted to come back to the loan and deposit guide so loans up high single to low double digits deposits flat to down 2%, that's cash come down to what what what makes up the difference.
I ask because you highlighted your plan to.
Got deposit rates as fed rates come down, but loan growth feels really strong here. So just trying to see where the offset is and what the appetite is to allow deposits to run down a little if you need to.
Yeah, no real appetite to run down deposits.
We really are a relationship bank, we are really focused on deposits and with a loan to deposit ratio at 50%.
Loan growth at 12% really doesn't scare me.
As Phil said, we're going after great opportunities and we're glad that we have those opportunities can be growing today, the thing that will probably be more.
A handle that we can move if you will would be the investment portfolio purchases.
<unk> started the year I think at $1 six is what we thought we would purchase.
Last quarter I said, we brought that down to a 1 billion too, we're probably closer to $900 million right now and we bought maybe half a billion of that a year to date and so just have projected maybe another 400000 didn't make so so at this point that's really the mechanism that we've used.
That scenario, where deposits might be a little bit softer than we'd really don't we are.
Our projections are pretty light in the second half, we do see some growth in those could obviously be better, but we just really don't feel any conviction at this point and.
Felt like that's the right thing to do and so from an investment portfolio standpoint, that's the one that it's really easy for us right now.
Just put the brakes on given where rates are today.
Went out and invest it in some cases, we might earn a little bit less than where we're at today I think the purchases that we made were slightly better but that's really the what we would move more than anything else is what we would do in the investment portfolio.
Jerry's right on that.
Your question really I think brings up something that we need to keep in mind and it is that our loan growth is good but our.
Jerry: What it really uses relationship growth because we don't make any loans that we don't get the deposit relationship.
Jerry: And so in this environment.
You've got you've got good loan growth here, but youre getting those deposit relationships underneath that because of where rates are today and the efficiency that businesses are employing with their deposits and your cash youre not seeing as much deposits. Following on as I think we will see in the future as these things normally.
And as the rates normalize so while you may not see the deposit growth now I'm encouraged that youll see it in the future.
Yes, and just something to add to that is.
When we're out in the marketplace, having the ability to provide capital in this market puts us at a competitive advantage in looking at the impact of new relationships and our year to date loan balance growth, 38% of that is from new relationships and we're able to get 200.
Third $49 million in new relationship deposits.
A lot of that is because we can our pencils art now we are open for business and so we're able to bring in new relationships with these loans.
Thanks, Dan.
Got it.
That's great color.
Maybe the second part of the question is yes.
<unk> are saying that they expect a pretty sizable pickup in loan growth as rates come down.
Is that something you expect as well, let me loans, you're already growing growing 11% year on year for the first six months could you see an acceleration from you have rates come down.
No.
Okay.
No not necessarily I don't think we're thinking of it that way I mean, what we're doing is where we're making calls we're developing relationships.
And I don't think it would move US one word one way or another I think.
And what we might see is.
If we get some clarity and Neil Lection the political process. It is clear to me that just from talking from our loan officers and relationship managers that there were a number of companies that are.
As is typical they're waiting to see which way the political winds blow and based upon what they see them give them. Some some visibility in terms of what kind of primarily what kind of regulation they might see and once that clears up and they understand where they are.
Youll see businesses that might be holding off today move forward at least that's what we've heard from a lot of our.
A lot of people thought I've heard less talk about once rates go down.
Then ive heard about once the environment gets more clarity with regard to what.
Kind of administration, we might have making the regulatory decisions.
Got it thanks, very much and J all the way back then Dan looking forward to working with you.
Thank you.
Our next question is from Brandon <unk> with <unk> Securities. Please proceed.
Hey, good afternoon.
Hey, Brian.
So just following up on the last line of questioning and just could you speak broadly as far as what you're seeing from a competitive standpoint in your markets.
Remember last call you mentioned some limits were kind of getting back in the game, but could you just speak as far as what you're seeing today.
I think.
I think it is getting more competitive I think where we had let's take commercial real estate.
I think we're seeing people move back in I think we were hopeful that you would see more people requiring guarantees I think there are a lot of players that are not doing that and so.
I think it was.
We're seeing it slide a little bit back to where it was before but as some people that have been out of the market pencils down as they say.
Say for coming back and Youre seeing some more competition I think we're seeing maybe in the real estate side, a little more competition from the smaller banks.
Just an observation but.
But that's kind of what we're seeing there and any thoughts on Europe.
Yes.
I see kind of this second half we had a really strong second quarter in terms of closings.
With what Phil mentioned about just the uncertainty in the environment.
I see that.
It being a little a little slower just in looking at our weighted pipeline.
Speaker Change: But in terms of competition from the other other banks and lenders in the marketplace.
We certainly can see it from.
The community banks in the markets that we're in we will see it from some regionals or some regionals that decided to get into our markets and so we're seeing some new players.
Who are coming into our markets over.
Over the last kind of six months to a year. So I can see the competition picking up.
Got it got it and how has that impacted pricing discipline right.
Sure My uncle Guy. So I assume you are getting the right pricing, but has there been any pressure there.
Oh, yeah, yeah, there's always pricing pressure, but.
Actually if you look at the deals that we've lost.
Three quarters of the deals that we've lost have been due to structure.
And that's the thing that concerns us most you know with our cost of deposits and our cost of funding I'd argue that we're one of the low cost producers in the marketplaces in regards.
The cost of funding and therefore, we can be very competitive on pricing and remember we're booking we are banking relationships first and so if someone passes the test to be a frost customer.
And they're willing to live within our structures shoe, we don't want to lose that after all of that development for a few basis points. So we'll be very competitive on price.
Structure is a different deal.
We.
We are.
We have been and will be.
Disciplined as it relates to structure and so that's where we're seeing more and more of our losses.
Got it thanks for taking my questions.
Thank you. Thank you.
Our next question is from Catherine Mealor with <unk>. Please proceed.
Thanks, Good afternoon.
Hey, Catherine.
We will follow up to the margin.
Speaker Change: As we think about that.
NII for.
For the year do you think.
Speaker Change: A little bit of a follow up we've already answered but.
Do you think you'll continue to see an expansion there.
There was a back half of the year kind of equal to the pace <unk> seen or does that expansion start to moderate in the back half of the year, but maybe the efforts that <unk> kind of moderate to maybe even grows a little bit.
Think about the balance between us.
Yeah, No I think the rate of growth would be quicker than that or higher in the first half of the year and slower in the second half of the year.
Yes again.
That's still an upward and upward trending margin you think exactly yeah.
Yes.
And then the pricing.
Yeah.
And then as we start to price cuts in the back half of the year or as we get into 'twenty five whenever that comes.
What is your outlook on how the margin kind of initially react when we start to see.
Yeah again, it depends on timing, but I think based on our current.
<unk> starting in September.
What my guidance was based on so we still see some upticks again that kind of slows down the growth but.
But we do we do continue to see that sort of growth.
Projected out through the rest of this year.
Great is it still net expansion, but just let me get to that kind of narrowing in the half that you were talking about.
Right Yeah, I mean, that's the thing we do also like I said, we do have some investments as I mentioned is a big part of it is the $500 million.
You're reinvesting stop that that 500 million in treasuries that is at 96, bips, but even the rest of the fundings are probably in the three handles on them at our high twos and so all of those will provide you with some upside and again given what happens with the fixed rate loans that repriced, we will have some pick up there as well.
And then T J.
Any color on just the new question, new loans Youre, putting on new deposits, you're putting on what would you say those two rates are new loan yields and then new deposit costs today, that's spread well the new deposit costs are going to be the same right, they're really going to mirror.
Whatever's going on in the existing <unk> portfolio, we do very minimal.
Exception pricing on the loan on the loan excuse me on the deposit side.
So you have some but youre not going to have a lot of that and as far as the back book and we're probably right now in the weighted average rate of say, a 670 or something in that range.
It's the back book and current stuff going on north of eight.
Alright. Thank you appreciate it.
Sure.
Our next question is from John Armstrong with RBC capital markets. Please proceed.
Thanks, Good afternoon, Hey.
Hey, John John.
Little bit of cleanup here, but Phil you talked about the mortgage business opportunity earlier in the call.
It looks like those volumes are really picked up can.
Can you talk a little bit about the driver of that and where this can all go.
When it shows up in a material way.
John I go back to when we had.
Announced that efforts.
Just over a year ago.
And I believe we said we expected that the mortgage book could be in excess of the <unk>.
Consumer book that we had at that time.
And so over a five year period. So I don't I don't think we have come off of that.
It's just it's it's a new thing and we're getting our people used to making recommendations on it you're hitting the realtor community.
Understanding what it is.
And we've got just great service and.
I think I think it's just going to be a great asset class for us.
Just another thing to add is that 30% of our mortgage borrowers are new to the bank. So this opens up an opportunity to bring in new customers through this incredible product and an incredible experience.
Okay.
Yeah.
Question for maybe Phil or Dan.
What is the significance of the plan when you talk about the performance of the new branches itself. It looks like all of our.
Either on plan or ahead of plan, but.
As an outsider what does that really mean.
The benchmark that we can use there.
Well, what we when.
When we started John you might recall we.
We started this strategy and we looked at the performance of the 40 branches, we opened up over the last eight years prior to that time.
And we said that we looked at the average of that and we said if we can do the average of that in the markets.
Going to be and we felt like we would have a really successful strategy for our shareholders and so that's what we based it on.
Speaker Change: And then we begin measuring what our performance was.
First is that we kept it fairly consistent although I know that we've changed that some day.
Dan you might talk to talk about that.
We've tweaked it.
Dallas.
We learned a lot from Houston one.
And as much as it pains me Dallas is outperforming Houston at the same time period that it goes back to our Blue book of continuous improvement and so we learned.
What would work that we do better in Dallas is just doing a great job as you can see from their performance and so I would expect.
The same from from Austin as well.
Okay.
That helps.
John I would say it's fairly consistent.
We will move it up dependent upon a particular market.
No.
But we want to keep it somewhat consistent because we want to be able to compare just like Dan did and he was.
Only half joking.
Dallas is a Dallas is outperforming Houston, so it makes me mad but.
But we can have a consistent comparison in these markets and I think that that's helpful to us and.
It's a well we'll try and keep it that way again, making adjustments for the markets that we're in but we'll sort of keep it fairly consistent and similar.
Those adjustments or the timing will be.
We learned in Houston, as the timing of when loans and deposits and new households, So we've looked at those trends to make sure that again that we're being consistent with being fair.
Speaker Change: Okay.
The growth numbers are great.
Speaker Change: That's impressive.
Yeah.
Jerry.
10 years, its probably 40 earnings calls so thank you for everything.
And I was just going to say I'm wondering what the 40 year retirement gift Cullen Frost is still get your belt buckle, her boots or a watch or.
Well have to see I would like to know John.
Thanks for bringing it up to them.
Yeah.
Speaker Change: Alright, thanks for everything.
Thank you Sean.
We have reached the end of our question and answer session I would like to turn the conference back over to management for closing remarks.
Alright, well thanks, everyone for your support and for your questions and interest and we'll be adjourned.
Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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