Q3 2024 Cullen/Frost Bankers Inc Earnings Call
Thank you for your patience, the conference will be beginning in just a few minutes.
[music]
Thank you very much.
Greetings. Welcome to Coal & Frost Bankers, Inc. 3rd Quarter 2024 Earnings Conference Call.
Speaker Change: 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, please press star zero on your telephone keypad.
As a reminder, this conference is being recorded. It is now my pleasure to introduce A.B. Mendez, Senior Vice President and Director of Investor Relations. Thank you.
Thanks Jerry. This afternoon's conference call will be led by Phil Green, Chairman and CEO, Jerry Salinas, Group Executive Vice President and CFO, and Den Geddes, our incoming CFO.
Before I turn the call over to Phil, Jerry, and Dan, I need to take a moment to address the Safe Harbor provisions.
Some of the remarks made today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 as amended.
We intend such statements 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 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.
Thanks, A.B. Good afternoon, everyone. Thanks for joining us. Today I'll review third quarter results for Cullen Frost, and I'm accompanied on the call by Jerry Salinas and Dan Geddes, who've been working together in anticipation of Jerry's upcoming retirement as CFO, and they'll provide additional commentary.
Speaker Change: In the third quarter, Colin Frost earned $144.8 million, or $2.24 a share.
Speaker Change: compared with earnings of $154 million or $238 million a share reported in the same quarter last year.
for this same period last year.
Average deposits in the third quarter were $40.7 billion, down just 20 basis points from $40.8 billion in the third quarter of last year.
Average loans grew by 11.8% to $20.1 billion in the third quarter compared with $18 billion in the third quarter of last year.
We continue to see solid results resulting from the hard work of our Frost bankers in the extension of our organic growth strategy.
As was the case in previous quarters, Colin Frost didn't utilize any FHLB advances, broker deposits or reciprocal deposit arrangements to build insured deposit percentages or to fund liquidity. So, again, as you look at our balance sheet, what you see is what you get.
Speaker Change: We continue to see excellent results in our organic growth program.
For our Houston expansion, on a combined basis, what we call Houston 1.0 and 2.0, we stand at 99% of our deposit goal, 139% of our loan goal, and 118% of our new household goal.
For the Dallas market expansion, we stand at 119% of deposit goal, 195% of loan goal, and 170% of our new household goal.
Speaker Change: We have the first three of our new Austin expansion project open, first three locations, with three more planned open before the end of this year. And early results there continue to be very encouraging and in line with the other expansion markets.
Speaker Change: At the end of the third quarter, our overall expansion efforts continue to grow.
Speaker Change: and had generated 2.3 billion dollars in deposits, 1.6 billion dollars in loans and added more than 55,000 new households.
As we've mentioned, the success of the earlier expansion projects are funding the current expansion, and we expect the overall expansion project will be accretive to earnings beginning in 2026.
Speaker Change: At our consumer business, we had our best quarter of the year in customer growth, adding over 7,300 net new checking households.
Speaker Change: We believe checking household growth remains industry-leading at 6% year-over-year in an extremely competitive deposit environment.
That growth has been achieved without the use of direct cash incentive programs in use by many of our competitors. Our focus instead has been on top quality service, great technology, and a convenient, expanding network of locations.
Speaker Change: Consumer deposits overall continue to recover and finish the quarter with a 2.5% year-over-year increase for $464 million.
This exceptional loan growth comes primarily from our second lien home equity and home improvement products as well as our new mortgage product.
Speaker Change: The investments we've made in organic expansion, new products, marketing, technology, and our employees are helping drive this outstanding growth across our consumer business.
Speaker Change: We funded 55 million dollars in mortgage loans in the third quarter and at quarter end our total mortgage portfolio stood at a hundred and seventy nine million dollars
Looking at our commercial business, average loan balances in the third quarter increased 10.1% versus the same quarter last year.
Speaker Change: CRE balances grew by 13.7%, energy balances grew by 10.2%, and CNI balances increased by 4.8%.
Our growth in new commercial relationships in the third quarter was strong, increasing 8% over the same quarter last year.
New loan commitments total $1.62 billion in the third quarter. That was up 3% from the third quarter of last year.
Speaker Change: The increase came from a 2% increase in both CRE and C&I loans, and a 37% increase in energy, albeit on a much smaller base.
We saw some improvement in credit quality during the third quarter in terms of problem loan resolutions.
Total problem loans, which we define as risk rate 10 or higher, total $839 million at the end of the third quarter, down 15% from the $986 million at the end of the second quarter.
Speaker Change: Credit quality is good by historical standards with net charge-offs and non-accrual loans, both at healthy levels. Net charge-offs for the third quarter were $9.6 million compared to $9.7 million last quarter and $5 million a year ago.
annualizing that charge-offs for the third quarter, representing 19 basis points of period end loans.
Non-performing assets totaled $106 million at the end of the third quarter, and that compared with $76 million last quarter and $68 million a year ago. And the quarter-end figure increase
got us to 53 basis points of period end loans and 21 basis points of total assets.
Speaker Change: and the increase was primarily due to one $20 million credit moving to non-accrual, which was previously identified on our problem loan list.
Speaker Change: About 24% of our problem loans overall are tied to investor commercial real estate. Slightly less than 40% are related to C&I credits, and most of the balance is in owner-occupied real estate, which is closely related to C&I loans.
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 at levels similar to what we've reported in prior quarters.
Investor CRE loans totaled $4.3 billion, or 44% of total CRE loans outstanding. And the Investor CRE portfolio exhibited an overall average loan-to-value at underwriting of about 53%.
average weighted debt service at that time of 1.42 percent.
I continue to be encouraged by our outlook and the consistent success of our strategy for organic growth and what I believe are the best banking markets in the U.S. And with that, I'll turn it over to Dan.
Dan: Thank you, Phil. I would like to first thank Jerry for being gracious with his time during the transition process. I wish him the best in this next chapter and will enjoy these next two months working with him until his retirement at year end. He has truly set a high bar in this role for me to strive for.
Regarding the net interest margin, our net interest margin percentage for the third quarter was 3.56 percent, up two basis points from the 3.54 percent reported last quarter.
The increase was primarily driven by both higher volumes and yields on loans.
Looking at our investment portfolio, the total investment portfolio averaged $18.9 billion during the third quarter, up $269 million from the second quarter, primarily due to an increase in fair value of our available-for-sale portfolio.
During the third quarter, investment purchases totaled just $51 million, with $49 million of the total being municipals, with a taxable equivalent yield of 5.42%.
Dan: The net unrealized loss on available-for-sale portfolio at the end of the quarter was $1.13 billion, a decrease of $498 million from the $1.63 billion reported at the end of the second quarter.
The taxable equivalent yield on the total investment portfolio in the third quarter was 3.40%, up two basis points from the second quarter.
The taxable portfolio, which averaged $12.3 billion, up approximately $258 million from the prior quarter, had a yield of 2.94 percent, up two basis points from the prior quarter.
Our tax-exempt municipal portfolio averaged $6.6 billion during the third quarter, flat with the second quarter, and had a taxable equivalent yield of 4.32%, up two basis points from the prior quarter.
At the end of the third quarter, approximately 70% of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of the third quarter was 5.4 years, down from 5.5 years in the second quarter.
Looking at funding sources, on a linked quarter basis, average total deposits of $40.7 billion were up $223 million, or 0.6% from the previous quarter.
Speaker Change: Average non-interest bearing demand deposits were essentially flat with the second quarter down 20 million while interest bearing deposits increased 243 million or 0.9 percent when compared to the previous quarter.
Based on third quarter average balances, non-interest bearing deposits as a percentage of total deposits were 33.5% compared to 33.8% in the second quarter.
Speaker Change: The cost of interest bearing deposits in the third quarter was 2.41%, up two basis points from 2.39% in the second quarter.
While rates on interest bearing deposits decreased slightly compared to the second quarter, we saw a continued mixed shift into higher yielding depository accounts, primarily CDs, being the primary driver of the two basis point increase.
Speaker Change: Thus far in October, month-to-date average deposits are up about $600 million above the third quarter average, a positive trend to start the fourth quarter, with that split about one-third in non-interest-bearing deposits and two-thirds being interest-bearing deposits.
Customer repos for the third quarter averaged $3.8 billion, basically flat with the second quarter.
Speaker Change: The cost of customer repos for the quarter was 3.72%, down three basis points from the second quarter. The month-to-date October average balance for customer repos as of October 29th was essentially flat with a third quarter average.
Next, looking at net non-interest income and expense on a link quarter basis.
I'll point out a couple items regarding non-interest income. Service charges on deposits were up about $1.3 million or 5% unannualized, driven primarily by our organic growth of consumer and commercial accounts.
Speaker Change: In terms of non-interest expense, salaries and wages expense was up 5.4 million, or 3.6 percent, impacted primarily by higher headcount and incentive accruals.
Speaker Change: Thank you.
Speaker Change: Looking at capital, during the third quarter, we did buy back $20 million of our stock. For the year, we now have purchased approximately 490,000 shares at an average price of $101.98.
Speaker Change: I'll now turn the call over to Jerry for commentary on our full year guidance.
Thank you, Dan, and thank you for those nice words.
Jerry: Regarding our guidance for full year 2024, our current projections include two 25-basis point cuts for the Fed Funds Rate over the remainder of 2024 with a cut in November and December.
Speaker Change: For net interest income, we continue to expect net interest income growth for the full year in the range of 2 to 3 percent.
Looking at loans on a year-to-date average basis, loans are up 11.1% compared to last year to date. We expect full year average loan growth in the low double digits slightly better than our previous guidance of high single digits to low double digits growth.
Speaker Change: Looking at deposits, the current year-to-date average is down 2.1% compared to last year-to-date.
We expect full-year average deposits to be down between 1 and 2 percent. That represents a decrease from our previous guidance of flat to down 2 percent.
Based on year-to-date growth and current projections, we are projecting growth in non-interest income in the range of 4 to 5 percent, up from our previous guidance of growth of 2 to 3 percent.
Based on our year-to-date results and current projections, we are projecting full-year non-interest expense growth in the range of 6 to 6.5 percent on a reported basis. That is down from the 6 to 7 percent previous guidance.
Regarding net charge-offs, on a year-to-date basis they represent an annualized 18 basis points of average loans. We expect the full year to be in the range of 18 to 22 basis points of average loans. That is down from our previous guidance of 25 to 30 basis points of average loans.
And regarding taxes, our effective tax rate for the year-to-date of 2024 was 16.5%, and we currently expect the full year to come in at that level or slightly lower. That's in line with previous guidance. With that, I'll now turn the call back over to Phil for questions.
Well, thank you. We'll open it up for questions now.
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.
and for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for questions.
Our first question is from Peter Winter with DA Davidson. Please proceed.
Speaker Change: Thanks.
Peter Winter: I was wondering, could you just talk about maybe the trajectory of the margins as the Fed forward curve is suggesting additional rate cuts?
Peter Winter: I would assume less rate cuts and or more gradual rate cuts and a steeper yield curve is kind of an ideal environment for you.
Peter, thank you. I think you're right that you know what what we're seeing is some push and pulls here is you know we feel
like there's going to be opportunity to reprice our investment portfolio and our fixed rate portfolio.
The unknown is going to be, as rates go down, what will deposits...
do. And we're
that lowering of our yield on our floating rate portfolio.
and what we're holding at the Fed. So yeah I mean I think you can you can see you know really for the fourth quarter you know I think you can see just probably some steadiness. I don't see it moving around much that fourth quarter.
I'm not asking for specific guidance, but can you see that even with the Fed cutting rates into next year, that the margin could increase just with the repricing benefit on the earning assets and ability to lower deposit costs?
Yeah, I think it's...
There is that opportunity, because we do have quite a bit of our securities portfolio maturing or repaying into next year.
and we have about a billion dollars of our fixed rate loan portfolio in terms of expected payoffs.
in terms of amortizations and maturity. So there will be opportunities if you look at, if you do look at our kind of back book of both our investment portfolio and our fixed rate portfolio, we're gonna be able to pick up some yield there.
One more question, just on loan growth. The loan growth has been better than peers.
You move the guidance to the upper end of the range. You know, obviously, the branch expansion, build out new client growth is contributing.
Do you think that there's this pent-up loan demand also as we get past the election and rates move lower that it could lead to even stronger loan growth next year?
Speaker Change: You know, Peter, I honestly think there is some pent-up demand. As we've canvassed our people, as we do every quarter, and as I've visited branches and talked to our relationship managers, as I do every year, look over every location,
Speaker Change: I think that's the most consistent theme that I have heard, is there's...
There is a hesitancy for people to move forward on some fronts, not on every front, but that's the single most
repeated area of why are we seeing things maybe be a little bit slower, why might somebody be hesitating? I think it's definitely the election.
I think, regardless of which way it goes, I think the fact that it's over will just clear up uncertainty and people will be moving forward. But, you know, as I looked at the current quarter,
Peter Winter: You know, I looked at, you know, new commitments were...
from last year about...
Speaker Change: What is it, about 3%?
Thank you.
I think they were down a little bit from the second quarter. Now the second quarter was really strong. I looked at new relationships. It's up 8%. It was a little flattish compared to the previous quarter, the pipeline.
Peter Winter: for 90 days was, in my view, a little flattish compared to the previous quarter, and even new opportunities were a little flattish. And another thing that we saw
was that if you look at
Peter Winter: Advances Under Revolving Lines of Credit. They went from like 37.2, I think, the last quarter to 36%, so it's just this sort of eerie
Peter Winter: I think once we get past the election that you're going to see underlying fundamentals continue to kick in. And as I read comments from people,
who talked to customers, and these were notes about them.
Peter Winter: pretty much in all the cases when they say, well things are slowing because of the election, it was like, well they expected once we got past that, that you'd return to to good levels. So I think you're right, there is some pent up demand, I can't tell you how much, but I just think it's absorbing.
Way too much of her box of bandwidth right now.
Speaker Change: Thanks, sir. It's been very helpful. Appreciate it.
Speaker Change: Our next question is from Dave Rochester with Compass Point. Please proceed.
Hey, good afternoon, guys.
Appreciate the update on the outlook. Was wondering for the NII guide, what are you seeing in terms of your early experience on the downrate deposit data following the September cut? And can you just remind us what your expectation is on that front as we go through the cycle?
Sure, so our overall expectations is, you know, we were one of the first to go up when int rates went up, and so we're going to be mindful of competition, but our expectations is that you'll see a similar beta going down.
Right now, our...
The beta going up is around 45 basis points.
and I think you'd expect to see it on the way down, but it may take a little bit of time to work through just because our mix this time around has a little bit more CDs.
And 80% of our CDs are in 90 days, so it's just going to take a quarter for that to work its way through to lower yielding CD rates. So I think you can expect it to be similar, but it's just due to the mix of our interest-bearing deposits.
Speaker Change: That makes sense and then just giving your comments about the NIM for next year if you're thinking about maybe the potential for for NIM stability or expansion next year with cuts
I would think that would mean some decent NII growth, with growth in the balance sheet. Is that how you're seeing it?
Speaker Change: We're not going to give guidance until next quarter. That's the tradition that Jerry's held, and so we'll maintain that. I will just kind of give you just a little bit for the remainder of this year. We do have $714 million of our investment portfolio expected to either mature...
Speaker Change: or with prepay, and those are yielding 1.77% right now. So that's an opportunity. Whether we'll use that to...
Speaker Change: Stay at the Fed or go into our loan portfolio, we'll just have to see. Again, I mentioned about $2.1 billion in 2025. Those are yielding three.
Speaker Change: 3.20 approximately, so maybe not as much of a pickup in 25.
Okay, great. And then just switching to expenses.
You mentioned you tightened that expense guide to that 6.5% range.
which is a bit better. As you look out into the fourth quarter and you've given some preliminary thoughts on how you thought about next year, is there any reason why that growth rate would accelerate? And do you see any opportunities for that growth to actually decelerate into next year, just given your plans on the expansion strategy? Thanks.
I don't see it decelerating.
Speaker Change: We're not going to give guidance for next year, but we're going to continue to invest in our people, our technology, and with the customer experience.
I think that's how I would answer that question. I don't know if anyone... Billy, any comments there? You know, our expansion is still going to be strong. We've got to finish up Dallas. We've got to lean hard into Austin next year. So you'll have that.
Technology is an area that everyone is seeing.
Speaker Change: you know, increases in. I don't think we, you know, are going to see a lot of back off from that.
Speaker Change: And, you know, we're growing, we're in great markets, so we're going to be continuing to lean into that.
Speaker Change: You know, as we said over the years and as you followed us, we're pretty tight on expenses. I mean, you got to, the three people in this room got to sign off on something before you hire anybody or have much of a capital expenditure. So we're pretty requiring, but we also know that we're investing right now.
Speaker Change: It's paying off. I think this organic growth that we've had is just remarkable. Now's not the time for us to do that. But at the same time we're mindful of what we're spending, we're trying to be as careful as we can, but I think right now...
Speaker Change: I'm not expecting that we're going to be slowing down in terms of our investment into our business with expenses. But I promise you, we're not being lazy with it and we're not being, you know, we're not going overboard with anything. It's stuff that we think works for us and has a really important reason.
Speaker Change: Thank you.
Appreciate that. Maybe one last one on credit. You mentioned the big improvement in problem loans this quarter. I was just wondering what the driver was for the the bump up in the reserve ratio given that if those were just specific reserves on NPAs and you talked about the growth you had there or did something in the economic outlook worsen a bit for you?
Speaker Change: It was an economic outlook. It was primarily that one loan that Phil had mentioned drove that and just our, you know, we did have strong loan growth.
Speaker Change: Thank you.
Speaker Change: Thank you.
Got it. Thanks guys and Jerry good luck in retirement.
Thank you, Dave. Appreciate it.
Speaker Change: Our next question is from Ibrahim Poonawalla with Bank of America. Please proceed.
Speaker Change: A good afternoon.
Thank you. Thank you.
I want to follow up, Phil, I think in your opening remarks you talked about deposit growth.
Speaker Change: or just pure checking account opening. I mean, I'm assuming it's a function of the branches and the investments you've made, but give us a sense of what's driving that client acquisition that's translating into core deposit growth.
Speaker Change: Yeah
Well, Ibrahim, I think...
It's a lot of things, you know, we mentioned, you know, I think I mentioned in my comments that...
Speaker Change: First of all, the expansion is making a big difference for us.
Speaker Change: Just look at deposit growth, I think of the percentage growth we had, I think 2% of that growth was for expansion.
You know if you look at let's look at client acquisition and the channels, you know, we're still we're now We're 55 percent
of our client acquisition of those household acquisitions is coming through the physical plant, coming through the physical locations as opposed to online. We've still got great online, you know, throughput for new customers.
You know, so the expansion is very solid, and that's
Speaker Change: No doubt about it that that's helping with this outsized growth rate.
The other thing though is, you know, our customer service is world-class. I mean, it just is.
Speaker Change: And so word of mouth is a big reason driving growth. As we look at the factors...
We rank order, gosh, I think it's at least 10 factors for why customers have, you know, come to us and we'll do our best to get that information as they sign up. You know, interestingly, this is on the consumer side.
The number one factor still is convenient location, but the second factor, as I recall, is fairly soon after, fairly close to that, is a recommendation from somebody.
family or friends, and that speaks to the customer service focus that we've got and I'll add two other things to that, you know, our app last time I looked was the highest rated financial app in the App Store.
Speaker Change: for Apple, and so, you know, you've got to have great technology. And one thing that we did, I think you might remember us talking about the last few years is...
Speaker Change: You know, we really hadn't leaned hard into the marketing dollars, we'd done pretty much everything else.
Speaker Change: But marketing was an area that we really needed to build, you know, our infrastructure and our expertise really. And we've made a lot of investment in that. That's part of some of this expense growth you see. And I think we've gotten better and better at targeting
customers at the right time, and that's really helping our growth.
It's not any one thing, it really is all those things together. And then I'll also say that we're in great markets, and we've picked...
the best sub-markets we can.
Speaker Change: we can come up with in these.
you know, like Houston and Dallas and Austin, these really growing markets. And so.
Speaker Change: We're getting better at it as we continue to learn from our previous expansion efforts. So I'm really optimistic for it. It's not any one thing, it's just discipline and hard work and our people are doing a great job.
Speaker Change: That's helpful. And I guess, Phil, on the lending side...
Give us a sense, I mean it's been a good year in terms of loan growth, sounds like you're relatively upbeat even as we come out of I guess elections next week, but give us a sense of the competitive landscape, some of the regional banks have had a time to repair their balance sheets.
prevalent three, four, five years ago and your bankers are now having to compete against.
Yeah, I would say the competition is heating up.
Speaker Change: We are
You know we're seeing more proposals on deals. I think that
Let's just look at CRE, I think you've got more players there.
Some of the structures that we're seeing are, you know, they're just, there's not ones that will do. I mean, it's the same old stuff, right? We've seen this movie so many times before, but it's not...
as bad as it was, I would say, you know, pre-COVID, but it's...
But it's loosening up, and there are more players that are willing to play now. I think a year ago, too, there was a lot of people who were kind of running out of money and were on the sidelines for some of these deals, particularly commercial real estate. And so now as you see quality deals in particular, you know, you see some structures that
We just don't think it makes sense as far as
you know, permanent financing, you really can't sell very efficiently, so...
But it's all you got to do is get to that point and people are releasing it's just you know Just taking longer and so private equity might be a good solution for that person to get to that point and once they get there You know, there's a lot of liquidity Available for these stabilized projects. So I'm seeing that a little bit
Thank you. Thank you.
Speaker Change: And I guess that's sort of the lay of the land. I don't think that the consumer...
side, I don't think competition there is kind of out of whack. I mean we're
Speaker Change: We are, um...
Speaker Change: Thank you. Thank you.
We've had great growth, you know, I come across Banker and when I say we've grown 20% in any one category for nine consecutive quarters.
Speaker Change: It otherwise would make me nervous, but that's just the product of this time. It's the right place at the right time. We've got people who will not give up their 3% or 2% mortgages, and if they're going to get access capital in their house or in their home, they're going to have to pay for it.
Expand their house. They're going to do it through a home equity or home improvement or something like that. So
Speaker Change: And like I said, I think I said in my comments, if I didn't, I intended to, that our average credit score is there, like a 754. So credits feel good. That just happens to be the right place at the right time with that product. And then mortgages is new.
Speaker Change: Executive, Phillip Green, Jerry Salinas
Speaker Change: General comments on the market.
We appreciate the call. Thanks, Phil. And good luck, Jerry.
Thank you, Ibrahim.
Our next question is from Catherine Miller with KBW. Please proceed.
Thanks. Good afternoon. Good afternoon.
I wanted just to first circle back on expenses. I know that the fourth quarter typically has some higher expenses just related to the restricted stock awards.
Just wanted to see if you could remind us on typically, you know, what that looks like and so maybe what a better kind of run rate is to go into as we start next year's growth rate.
Yeah, I guess I would answer and start that and let Dan add any color. I would almost send you back to...
Speaker Change: the trend in last year's third to fourth quarter.
Speaker Change: I kind of look at that. I think that gives you some good perspective. As you noted in your comments, we do have some awards that by their nature get expensed immediately. So I think if you look at that, that kind of gives you a feel for kind of what those sort of things do to our expense run rate.
Yeah, I don't have anything else to add. I think that's it. You nailed it.
Okay, great. And then maybe one other follow-up on the margin, just the securities maturities you talked about. You've got a billion dollars in fixed rate loan repricing and amortization. On the securities piece, remind us your annual securities majorities that we should see next year?
Speaker Change: Sure, and let me just go to that, but it was...
Speaker Change: around $2.1 billion.
next year, and again,
that had a yield
Speaker Change: Thank you.
Speaker Change: EDITED-BBD-CGR-MGN-DQ
Speaker Change: I think it was some mid-30s.
Speaker Change: Mid threes, okay.
And you mentioned that your purchases slowed a little bit this quarter. Would it be your intention to see that?
kind of similar pace over the next couple of quarters or how are you thinking about the balance of
of maybe the size of the Bond book.
to the balance sheet really for the last few quarters. I think it's paid off for us.
I don't think anyone knows exactly how things are going to go. I'm kind of like my customers now. Let's get past the election. Let's see how the markets respond.
We'll have some optionality and decide where the value is in the market. We might decide to begin utilizing some of that.
That makes sense. I think we're all excited to get past next week.
Speaker Change: Discussion around opportunities you're seeing there that may improve as we move into 25 and 26.
Speaker Change: You know, I think it's really driven by our organic growth. So I think you're seeing that our feed growth is really a function of volume.
a factor to the downside, so just something to keep in mind that we will as well. But again, I think it's primarily a volume for the fourth quarter. And just to give you clarity into that yield, it was around 3.2%.
Okay, great, so $2.1 billion next year, I'm ensuring it's 3.2%.
Our next question is from Ben Gerlinger with Citi. Please proceed.
Ben Gerlinger: Good afternoon.
Oh, yeah, I mean...
Speaker Change: Thank you for watching!
I know you're not going to give guidance for 25, but when you think of just kind of the bigger picture here of the investment spend, I know that you have done Houston one, two, Dallas, you have Austin, and you're also focusing on technology.
Speaker Change: I think earlier this year, maybe it was late last year, you said kind of the 5%-ish is kind of table stakes for not only just the Texas franchise, but when that kind of leans into innovation. But when you think about the...
I hate to say non-core, because expansion is core, but when you think about after Austin, is there more branch build-out penciled in, or just kind of thinking for a 26-longer term strategy, 10,000 foot view kind of answer?
Yeah, you know, I think that this is a...
This kind of expansion, I'll put it that way, is going to be a part of our strategy, and I call that strategy, it's scalable, it's durable. And what I see as we finish up Dallas and we finish up Austin, you know, and you're probably looking at, let's just say, 24 months for that.
I mean, just think about it, I mean, what we'll be doing is doubling down back into these markets that we've made these investments. I mean, you know, I think about it sometimes that let's go a couple of years forward, finishing up Dallas, we're finishing up Austin.
You know, by that time, the Houston expansion, the original 1.0, will be eight years old.
continuing to expand in those great markets, particularly Dallas and Houston.
But we're going to be able, instead of filling in large chunks of the market where we just weren't present, I think it's allowing us to go where the puck is going and go to those areas where growth is.
has been, let's take Houston over that eight-year period, but also go where the growth is currently going. It allows to be in some of these location markets earlier. And I think
I think that will be helpful to us. So I see us continuing to do that for the foreseeable future, and I really expect us to be doing it in these major markets in Texas.
Gotcha, that's very helpful.
I mean with Texas being the backdrop of in-migration of both people and companies, is it, when you think about just kind of loan growth across the United States, Texas has obviously been better on average.
So if Loomverse starts to accelerate, do you think pricing competition gets a little bit even more competitive within Texas because it already has the growth and people want to double down there? I'm thinking just more like a competitive standpoint. It follows up on Ibrahim's question, but...
Speaker Change: If long growth accelerates from here, does pricing competition get even more intensified?
Speaker Change: Um...
I do think that, you know, as markets heat up, yeah, I think it'll get worse around the margins, but...
But we've dealt with that, man, for so long. I mean, and through these cycles and new competitors coming in, that I really don't see it really impeding anything that we're doing. We are... One of the things I...
with regard to price competition.
I mean, if you look at our balance sheet and our cost of deposits, I'd really argue that we're one of the low-cost producers on input as it relates to funding. So we're able to compete on price very effectively. The thing that we don't like to compete on and we're willing to lose deals on, I guess two-thirds, three-quarters of the deals we lose.
We like to get paid back, right?
That's where you will probably see it heat up most, and that's probably where it will affect us most, is because we won't...
There are certain kind of deals that we just won't do and there are certain...
People, for whatever reason, that will do certain deals a certain way, and we've learned over the years.
There's no money in that long term.
All right, that's helpful. Appreciate it. Thank you.
Speaker Change: Our next question is from Anand Gosala with Morgan Stanley. Please proceed.
Thank you. Bye.
Speaker Change: Hi, good afternoon.
Thank you. Thank you.
Speaker Change: Sorry if I missed this, but I thought I heard the opportunity for securities repricing for this year and next year, the $1 billion of loans this year, but can you talk about what the repricing opportunity is for fixed rate loans next year and what rate the loans are rolling off at and what rates loans are coming on at right now?
Sure, again I think our back book is around 5% and so we're able to reprice those fixed-rate loans at around seven and a quarter.
Speaker Change: and so it's around 250 million for the fourth quarter and then a billion into 25 so just to make sure I was clear on that.
Speaker Change: Got it. Sorry I missed that
We've had some banks talk about capital markets opening up and some paydowns coming through on the CRE side. Is that something that you're seeing in your book too? I know the belly of the curve is back up, but did you see any elevated paydowns while rates were lower?
Speaker Change: With regards to CRE
I mean, as long as the project's stabilized and, you know, on the occupancy side, yeah, there's a lot of money available.
Speaker Change: You know we've seen
I'm mainly talking about multifamily right now, but some really, really strong cap rates. I talked about one last quarter that was...
That was a big success for the developer-builder.
Thank you very much.
Speaker Change: Again, I'm talking multifamily mainly because supply has been so strong, but people are taking these units down.
Speaker Change: It's you're just seeing in some cases less rent growth than you underwrote You're you're seeing more concessions that kind of thing But you are getting getting projects leased up and once you get there, there's we're seeing that there's capital available
Speaker Change: And I think that's where private credit...
has a place. It's kind of serving as, I'll call it kind of a bridge, if a project needs 12, 18, 24 months. And so it's a, you know, it's a higher price, higher yielding, maybe less structure, but it's serving its purpose of providing capital in the market.
Speaker Change: So it sounds like you're able to get much stronger loan growth despite some of those factors weighing on overall loan growth in the balance sheet. So is the velocity of loans up a little bit more than before now?
Speaker Change: No, I mean...
There are a lot of things at work, so we did a great job.
Speaker Change: They've been performing well. They've been funding up, you know, because we're probably the last in the capital stack. And so a number of those projects are still being built. So you've got some of that, and that's true.
Multifamily, limited amount in an office, and then industrial, that kind of thing, retail, been a lot of it.
So, you know, I think that's one thing that's happening.
As I said, our consumer growth has been really strong.
Thank you.
It's going to be interesting to see what happens going forward. I mean, you know, the C&I piece, I think, has been a little weaker the last...
You know...
eight weeks maybe, you know.
Speaker Change: And I think, I really believe it has a fair amount to do with the election and the...
Speaker Change: and Jerry Salinas, and I think we have a lot of uncertainty there. I think that will clear up. I hope to see that continue to grow. I think commercial real estate balances
We'll have some pressure just because we're going to be paying down, you know, refinancing, some of these projects are going to be sold.
We haven't built up a lot of pipeline for some of the projects, like multi-family, for example. I don't think we've done but maybe one over the last year. So there'll be a little pressure there as those things fund up and then pay off.
Speaker Change: I think...
Speaker Change: I think overall our outlook, you know, post-election is pretty positive.
sets us apart, and 54% of our year-to-date increase in loan balance is coming from new customers that we've acquired in the last 12 months.
Speaker Change: And I think that's an important differentiator that we're able to, with this organic growth strategy, to grow, specifically in our loan portfolio.
Speaker Change: Great, thank you. That's very helpful, and Jerry, all the very best.
Speaker Change: Thank you.
Speaker Change: for joining us.
Speaker Change: Our final question is from John Armstrong with RBC Capital Markets. Please proceed.
Hey, thanks. Good afternoon.
Speaker Change: Hey, John. Hey, John. Congrats, Jerry.
John Armstrong: You flagged a seasonal deposit change in the fourth quarter, and Dan, you gave us some of the numbers. But what's a typical seasonal deposit change? And it feels like the mix is similar to what you have on the balance sheet right now in terms of non-interest bearing and interest bearing.
Is that right?
Speaker Change: Yes, yeah, what we're saying is similar.
Speaker Change: Yeah, historically, I guess we've probably had bigger increases in the
Speaker Change: Non-interest bearing just because we've got you know
Speaker Change: you know, so much movement, and with rates going down, we think that there will be...
Speaker Change: and I think that we're thinking that deposit growth will be even better. I think we'll be able to compete more against the money market funds given the fact that some of them will have 100% betas. But I think, from a seasonal standpoint, as Dan quoted, we are moving in that direction, so we still feel very strongly that the trend will continue. There's just some uncertainty about how much of it is going to happen.
Really will happen, but we're feeling good about it at this point
Yes, okay. And if the interest bearing costs are going down, the next incremental dollar and interest bearing is generally down? Yes.
Speaker Change: Thank you.
Thank you. Bye-bye.
Speaker Change: Any changes to how you guys manage the balance sheet in terms of more active hedging, assuming the Fed continues to cut rates?
Speaker Change: Not really. I mean, we've got so much cash, I think the most efficient thing for us has been use cash markets when we have conviction. I think that
There have been a lot of companies that didn't have that kind of liquidity, so the most efficient thing for them is to use non-cash markets.
There's a premium that they're paying, so it doesn't make sense for us to pay the premium others have to when we've got the liquidity, when we get conviction on it. So no, we really haven't seen that there's value. I mean, they look at it all the time, but we really haven't seen that there's value right now in those positions as opposed to using cash markets.
Speaker Change: I think it is a driver of just us bringing on new customers, and so our growth in number of customers is driving that fee income growth.
will we, so we should see as we grow into Dallas.
and into Austin. Again, just our ability to grow customers will help that.
Whether that's at a 5% non-annualized pace, that may be high.
With no further questions at this time, I would like to turn the conference back over to Phil for closing remarks.
Alright, we appreciate everybody's participation today. Jerry, we appreciate your 38 years of service here and I'll congratulate you on your last earnings conference call. Great job. Thank you, Phillip.
All right. With that, we'll be adjourned. Thank you.
Speaker Change: Thank you. This does conclude today's conference. You may disconnect at this time. And thank you for your participation.
Speaker Change: [music]