Q4 2024 Cullen/Frost Bankers Inc Earnings Call
Operator: Welcome to Cullen-Frost Bankers' fourth quarter and full year 2024 results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.
Greetings welcome to Colin for Us bankers fourth quarter and full year 'twenty 'twenty four results conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. Please press star zero on your telephone.
Pat.
As a reminder, this conference is being recorded.
Operator: It is now my pleasure to introduce A.B.
Speaker Change: My pleasure to introduce a B Mendez senior Vice President and director of Investor Relations. Thank you you may begin.
Operator: Mendez, Senior Vice President and Director of Investment Relations. Thank you. You may begin.
Operator: Thanks, Sherry.
Thanks Jerry.
Unknown Executive: This afternoon's conference call will be led by Phil Green, Chairman and CEO, and Dan Geddes, Group Executive Vice President and CFO. Before I turn the call over to Phil and Dan, 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. 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.
This afternoon's conference call will be led by Phil Green, Chairman and CEO and Dan get US group Executive Vice President and CFO.
Speaker Change: Before I turn the call over to Phil and Dan I need to take a moment to address the safe Harbor provisions.
Speaker Change: Some of the remarks made today will constitute forward looking statements as defined in the private Securities Litigation Reform Act of 1995 as amended.
Speaker Change: 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.
Unknown Executive: If needed, a copy of the release is available on our website or by calling the Investor Relations Department at 210-220-5234.
Speaker Change: If needed a copy of the release is available on our website or by calling the Investor Relations Department at 2102205234.
Phil Green: At this time, I'll turn the call over to Phil. Good afternoon, everyone, and thanks for joining us. Today, we'll review our fourth quarter and full year 2024 results for Cullen Frost, and our Chief Financial Officer, Dan Geddes, will provide additional commentary and guidance before we take your questions. In the fourth quarter, Cullen Frost earned $153.2 million, or $2.36 a share, compared with earnings of $100.9 million, or $1.55 per share, reported in the same quarter last year. And for the full year 2024, the company's net income available to common shareholders was $575.9 million, and that compared with 2023 earnings available to common shareholders of $591.3 million.
Phil: At this time I'll turn the call over to Phil.
Phil: Good afternoon, everyone and thanks for joining US today, we will review our fourth quarter and full year 2024 results for Cullen Frost and our Chief Financial Officer, Dan get US, we will provide additional commentary and guidance before we take your questions.
Phil: In the fourth quarter, Cullen Frost earned $153 $2 million or $2.36, a share compared with earnings of $109 million or $1 55 per share reported in the same quarter last year and for the full year 2024, the company's net income available to common shareholders was.
Phil: $575 $9 million.
Phil: That compared with 2023 earnings available to common shareholders.
Phil: $591 $3 million on a per share basis 2020 for full year earnings were $8 87 per share compared with $9 10 per share reported for the full year 2023.
Phil Green: On a per share basis, 2024 full year earnings were $8.87 per share, compared with $9.10 per share reported for the full year 2023. Our return on average assets and average common equity in the fourth quarter were 1.19% and 15.58% respectively. That compares with 0.82% and 13.51% for the same period last year. Average deposits in the fourth quarter were $41.9 billion, up from $41.2 billion in the fourth quarter last year. Average loans grew by 9% to $20.3 billion in the fourth quarter, compared with $18.6 billion in the fourth quarter last year. We continue to see solid results driven by the hard work of our Frost Bankers and the expansion effort that we have going.
Phil: Our return on average assets and average common equity in the fourth quarter for one 9% and $15 five 8% respectively.
Phil: That compares with eight 2% and $13 five 1% for the same period last year.
Phil: Average deposits in the fourth quarter were $41 9 billion up from $41 2 billion in the fourth quarter last year.
Phil: Average loans grew by 9% and $23 billion in the fourth quarter compared with 18 $6 billion in the fourth quarter last year.
Phil: We continue to see solid results driven by the hard work of our Frost bankers and the expansion effort that we have going today.
Phil Green: As was the case in previous quarters, Cullen-Frost didn't utilize any FHLB advances or broker deposits or reciprocal deposit arrangements to build insured deposit percentages or to fund liquidity. So the way I continue to like to say it is, when you look at our balance sheet, what you see is what you get. We continue to see excellent results with our organic growth strategy. We launched it at the end of 2018. When we did, Frost had 131 financial centers across Texas.
Phil: As was the case in previous quarters column for us didn't utilize any FH S. H <unk> advances or broker deposits, a reciprocal deposit arrangements to build insured deposit percentages or to fund liquidity. So the way I continue to like to say it is and when you look at our balance sheet, what you see.
Phil: <unk> is what you get.
Phil: We continue to see excellent results with our organic growth strategy, we launched it at the end of 2018 than we did at Frost had a 131 financial centers across Texas.
Phil Green: Around the midpoint of this year, we'll open up our 200th location, and we'll keep going from there by identifying strong markets where our value proposition will make an impact. At the end of the fourth quarter, our overall expansion efforts continued to grow and had generated $2.4 billion in deposits. $1.8 billion in loans and added more than 59,000 new house for Deposits, Loans, and Households. These represent 101%, 151%, and 130% of gold respectively. Our Houston and Dallas efforts continue to perform consistent with what we've reported in the past. We opened our sixth location in the Austin region.
Phil: Around the midpoint of this year, we will open up our 200 location and we'll keep going from there by identifying strong markets, where our value proposition will make an impact.
Phil: At the end of the fourth quarter, our overall expansion efforts continue to grow.
It had generated $2 4 billion in deposits $1 8 billion in loans and added more than 59000 new households.
Phil: For deposits loans and households.
Phil: These represent 101%, 151% and 130% of goal respectively.
Phil: Our Houston and Dallas efforts continue to perform consistent with what we've reported in the past.
Phil: We opened our sixth location in the Austin region.
Phil: In the fourth quarter and were now approximately one third to that effort.
Phil Green: Early results continue to be very encouraging and in line with the other expansions. As we mentioned before, the successes of the earlier expansion locations are now funding the current expansion efforts.
Early results continue to be very encouraging and in line with the other expansion markets.
Phil: As we've mentioned before the successes of the earlier expansion locations are now funding the current expansion effort and.
Phil Green: We expect the overall effort will be accretive to earnings beginning in 2026. Proverbs says there's a time to sow and a time to reap. We're getting near reaping. And as I've said many times, this strategy is both durable and scalable. The investments we've made in organic expansion, new products, marketing, technology, and our employees are driving outstanding growth throughout our consumer business. We've had record consumer growth for the year, with a $610 million increase in average outstanding balances for consumer growth. This represents a 21% annual growth rate in our 3rd consecutive year of high quality consumer loan growth over 20%.
Phil: And we expect the overall effort will be accretive to earnings beginning in 2026.
Phil: And as a proverb says there is a time to sow and a time to re we're getting near recent.
Phil: And as I've said many times this strategy is both durable and scalable.
Phil: The investments we've made inorganic expansion new products marketing technology, and our employees are driving outstanding growth throughout our consumer business.
Phil: We've had record consumer growth for the year with a $610 million increase in average outstanding balances.
Phil: For consumer loans.
Phil: This represents a 21% annual growth rate and our third consecutive year of high quality consumer loan growth over 20%.
Phil Green: Two-thirds of the growth comes from our second lien home equity product. The other third comes from our new mortgage program that has been nationally recognized for its excellence in customer experience. funded $75 million in mortgage loans in the fourth quarter. And at the end of 2024, our total one to four mortgage portfolios stood at $259 million. Consumer Checking Household Growth, our measure of customer Continued its four-year, industry-leading run of 6% or greater growth. Consumer Deposits, which make up 47% of our company's total deposit base, grew 3.2% for the year. We consider this to be excellent deposit growth in an environment of intense competition.
Phil: Two thirds of the growth comes from our second lien home equity products and the other third comes from our new mortgage program that has been nationally recognized for its excellence in customer experience, we funded $75 million in mortgage loans in the fourth quarter and at the end of 2012.
Phil: For our total 1% to four mortgage portfolio stood at $259 million.
Consumer checking household growth our measure of customer growth continued its four year industry, leading run of 6% or greater growth.
Phil: Consumer deposits, which make up 47% of our company's total deposit base grew three 2% for the year.
Phil: We consider this to be excellent deposit growth in an environment of intense competition for deposits.
Phil Green: Consumer Deposits are now 51% higher than our 2019 pre-COVID balance. Total increase of $6.5 billion over that period. All together, this represents an 8.6% compound annual growth rate over the past 5 years, with all of it organic growth. I'm very excited to see the consistency and sustainability of our results over multiple years and we're working hard to continue on this trajectory.
Phil: And consumer deposits are now 51% higher than our 2019 pre COVID-19 balances.
Phil: A total increase of $6 5 billion over that period.
Phil: Altogether. This represents an eight 6% compound annual growth rate over the past five years with all of it organic growth.
Phil: I'm very excited to see the consistency and sustainability of our results over multiple years and we're working hard to continue on this trajectory.
Phil Green: Overall, our investments in organic expansion, as well as new products, marketing, technology, and our employees are helping drive this outstanding growth across the consumer business. Now looking at our commercial business, period end loan balances grew by $1.3 billion, or 8.3% year over year. CRE balances grew by 11%, energy balances grew by 20%. C&I balance has increased by 2.4%. New commercial relationships in 2024 were the highest annual level ever. Even beating the Silicon Valley impact at 2023 level by one. Expansion accounted for 20% of new commercial relationships in 2020. And half of our total new commercial relationships are coming from what we call New loan commitments totaled $2 billion in the 4th quarter and were up 24% from the 3rd Finally, new loan opportunities were up 35% from the same quarter a year ago and represented our highest fourth quarter level ever.
Phil: Overall, our investments in organic expansion as well as new products marketing technology, and our employees are helping drive this outstanding growth across the consumer business.
Phil: Now looking at looking at our commercial business period end loan balances grew by $1 3 billion or eight 3% year over year.
Phil: CRE balances grew by 11% energy balances grew by 20% and C&I balances increased by two 4%.
Phil: New commercial relationships in 2024 were the highest annual level ever.
Phil: Even beating the Silicon valley impacted 2023 level by 1%.
Phil: For the year the expansion accounted for 20% of new commercial relationships in 2024.
Phil: And half of our total new commercial relationships are coming from what we call the too big to fail banks.
Phil: New loan commitments totaled $2 billion in the fourth quarter and were up 24% from the third quarter.
Phil: Finally, new loan opportunities were up 35% from the same quarter, a year ago and represented our highest fourth quarter level ever.
Phil Green: Our overall credit quality remains good by historical standards with net charge-offs and non-accruals both at healthy levels. Non-performing assets totaled $93 million at the end of the fourth quarter, compared with $106 million last quarter. $62,000,000 in the fourth quarter. Quarter-End Figure Represents 45 Basis Points of Period End Loans and 18 Basis Points of Total Assets. Net charge-offs for the quarter were $14 million, compared with $9.6 million last quarter and $10.9 million a year ago. And annualized net charge-offs for the fourth quarter represented 27 basis points of average Total Problem Loans, which we define as risk rate 10, OAEM, or higher.
Phil: Our overall credit quality remains good by historical standards with net charge offs and non accruals both at healthy levels.
Phil: Nonperforming assets totaled $93 million at the end of the fourth quarter compared with $106 million last quarter and $62 million in the fourth quarter of 2023.
Phil: The quarter end figure represents 45 basis points of period end loans, and 18 basis points of total assets.
Phil: Net charge offs for the quarter were $14 million compared with $9 6 million last quarter, and $10 9 million a year ago and annualized net charge offs for the fourth quarter represented 27 basis points of average loans total problem loans, which we define as risk grade 10.
Dan.
Phil: Our higher.
Phil Green: Total $943 million at the end of the fourth quarter compared with $839 million at the end of the third quarter. Our overall commercial real estate lending portfolio remains stable. Steady operating performance across all types and acceptable debt service coverage ratios. Our loan-to-value levels are similar to what we reported in prior quarters.
Phil: Total $943 million at the end of the fourth quarter compared with $839 million at the end of the third quarter.
Phil: Our overall commercial real estate lending portfolio remains stable with steady operating performance across all types and acceptable debt service coverage ratios our loan to value levels are similar to what we reported in prior quarters.
Phil Green: We put all that together, these results demonstrate what happens when you combine Frost values with the right strategies in the best banking markets in the United States and provide the best customer experience. with the best team anywhere.
Phil: When you put all that together these results demonstrate what happens when you combine frost values with the right strategies and the best banking markets in the United States and provide the best customer experiences with the best team anywhere.
Phil Green: We are very well positioned to move ahead into 2025 and to extend the Frost value proposition to more customers around the state.
Phil: We are very well positioned to move ahead into 2025 and to extend the frost value proposition to more customers around the state.
Phil Green: And with that, I'll turn it over.
Phil: With that I'll turn it over to Dan.
Dan Geddes: Thank you, Phil. Let me start off by giving some additional color on our expansion results. As Phil mentioned, we continue to be pleased with the volumes we've been able to achieve. Looking at the fourth quarter, link quarter growth and expansion average loans and deposits were $130 million and $128 million respectively. representing 32% and 22% annualized growth.
Dan: Thank you Phil let me start off by giving some additional color on our expansion results as Phil mentioned, we continue to be pleased with the volumes that we've been able to achieve looking at the fourth quarter linked quarter growth and expansion average loans and deposits were $130 million and $128 million respectively.
Dan: Representing 32% and 22% annualized growth.
Dan Geddes: Now, moving to the fourth quarter financial performance for the company. Regarding Net Interest Margin, through fourth quarter, Net Interest Income was up $9,000,000 or 2.3% on a link quarter basis. Our Net Interest Margin percentage was down 3 basis points to 3.53% from the 3.56% reported last quarter. Our net interest margin percentage was negatively impacted by lower rates on balances held at the Fed and loans and offset by higher volumes of balances at the Fed and loans together with lower rates on deposits. Looking at our investment portfolio, the total investment portfolio averaged $18.6 billion during the fourth quarter, down $257 million from the prior quarter.
Dan: Now moving to the fourth quarter financial performance for the company.
Dan: Regarding the NIM net interest margin, 3% fourth quarter net interest income was up $9 million or two 3% on a linked quarter basis. Our net interest margin percentage was down three basis points to 353% from the 356% reported last quarter.
Dan: Our net interest margin percentage was negatively impacted by lower rates on balances held at the fed and loans and offset by higher volumes of balances at the fed and loans together with lower rates on deposits.
Dan: Looking at our investment portfolio.
Dan: The total investment portfolio averaged $18 6 billion during the fourth quarter down $257 million from the prior quarter during the fourth quarter investment purchases totaled $840 million with $754 million being agency MBS securities, yielding five 8% and 64.
Dan Geddes: During the fourth quarter, investment purchases totaled $840 million, with $754 million being agency MBS securities, yielding 5.8%, and $64 million being municipals, with a taxable equivalent yield of 5.35%. I'll note that approximately $500 million of the agency MBS yielding 5.91% that were purchased did not settle until January 21, 2025. During the quarter, we had 500 million of treasuries mature at an average yield of 0.96%. The net unrealized loss on the available for sale portfolio at the end of the quarter was $1.56 billion, an increase of $429 million from the $1.13 billion reported at the end of the third quarter.
Dan: Being municipals with a taxable equivalent yield of five 3% 535%.
Dan: I'll note that approximately $500 million of the agency MBS, yielding 591% that were purchased did not settle until January 21 of 2025.
Dan: During the quarter, we had $500 million of treasuries mature at an average yield of zero point, 96%.
Dan: The net unrealized loss on the available for sale portfolio at the end of the quarter was $1 $5 6 billion, an increase of 4% and $29 million from the <unk>. One 3 billion reported at the end of the third quarter.
Dan Geddes: The taxable equivalent yield on the total investment portfolio during the quarter was 3.44% up four basis points from the third quarter. The taxable portfolio, which averaged $12.1 billion, down approximately $149 million from the prior quarter, had a yield of 2.99% up five basis points from the prior quarter. Our tax-exempt municipal portfolio averaged $6.5 billion during the fourth quarter, down $108 million from the third quarter, and had a taxable equivalent yield of 4.33% up one basis point from the prior quarter. At the end of the fourth quarter, approximately 69% of the municipal portfolio was pre-refunded or PSF insured.
Dan: The taxable equivalent yield on the total investment portfolio during the quarter was 344% up four basis points from the third quarter, the taxable portfolio, which averaged $12 1 billion down approximately $149 million from the prior quarter had a yield of 299% up five basis.
Dan: Points from the prior quarter.
Dan: Our tax exempt municipal portfolio averaged $6 $5 billion during the fourth quarter down $108 million from the third quarter and had a taxable equivalent yield of 433% up one basis point from the prior quarter.
Dan: At the end of the fourth quarter, approximately 69% of the municipal portfolio was pre refunded or psf insured.
Dan Geddes: The duration of the investment portfolio at the end of the fourth quarter was 5.7 years up from 5.4 years in the third quarter.
Dan: The duration of the investment portfolio at the end of the fourth quarter was five seven years up from five four years in the third quarter.
Dan Geddes: Looking at funding sources, on a linked quarter basis, average total deposits of $41.9 billion were up $1.2 billion from the previous quarter. The linked quarter growth was roughly half in money markets, a third in non-interest bearing accounts, with the remainder being savings and IOC accounts. Average non-interest bearing demand deposits were up $393 million, or 2.9% over the third quarter, while interest bearing deposits increased $759 million, or 2.8% when compared to the previous quarter. The cost of interest bearing deposits in the fourth quarter was 2.14%, down 27 basis points from 2.41% in the third quarter. Thus far in January, both current and month-to-date average deposits are in line with fourth quarter averages.
Dan: Looking at funding sources on a linked quarter basis average total deposits of $41 9 billion were up 1.1 point 2 billion from the previous quarter. The linked quarter growth was roughly half in money markets a third in noninterest bearing accounts with the remainder being savings in Iot accounts.
Dan: Average noninterest bearing demand deposits were up $393 million or two 9% over the third quarter, while interest bearing deposits increased $759 million or two 8% when compared to the previous quarter.
Dan: The cost of interest bearing deposits in the fourth quarter was $2, one 4% down 27 basis points from 241% in the third quarter.
Dan: Thus far in January both current and month to date average deposits are in line with fourth quarter averages customer repos for the fourth quarter averaged $3 9 billion up $168 million from the third quarter the cost of customer repos for the quarter was 334% down 38 basis points from the third quarter.
Dan Geddes: Customer repos for the fourth quarter averaged $3.9 billion, up $168 million from the third quarter. The cost of customer repos for the quarter was 3.34 percent, down 38 basis points from the third quarter.
Dan Geddes: Looking at non-interest income and expense, I'll point out a couple of seasonal items impacting the linked quarter results. Regarding other non-interest income, as in years past, we received our normal annual visa bonus during the fourth quarter totaling $4.6 million. Salaries and wages included approximately $8 million in higher stock compensation compared to the third quarter. As a reminder, our stock awards are granted in October of each year, and some awards, by their nature, require immediate expense recognition.
Dan: Looking at noninterest income and expense I will point out a couple of seasonal items impacting the linked quarter results.
Dan: Regarding other noninterest income as in years past, we've received our normal annual visa bonus during the fourth quarter totaling $4 6 million.
Dan: Salaries and wages, including approximate included approximately $8 million and higher stock compensation compared to the third quarter. As a reminder, our stock awards are granted in October of each year and some awards by their nature require immediate expense recognition.
Dan Geddes: Regarding our guidance for full year 2025, our current outlook includes two 25 basis point cuts for the Fed Funds Rate in 2025 with a cut in June and September. Given that, we expect net interest income growth for the full year in the range of 4 to 6%. For net interest margin, we expect an improvement around 10 basis points compared to our net interest margin of 3.53% for 2024. Looking at loans and deposits, we expect full-year average loan growth to be in the mid-high single digits and expect full-year average deposits to be up between 2 and 3 percent.
Dan: Regarding our guidance for full year 2025, our current outlook includes 225 basis point cuts for the fed funds rate in 2025 with a cut in June and September.
Dan: Given that we expect net interest income growth for the full year in the range of 4% to 6% for.
Dan: Net interest margin, we expect an improvement around 10 basis points compared to our net interest margin of three 5% to 3% for 2024 looks.
Dan: Looking at loans and deposits, we expect full year average loan growth to be in the mid high single digits and expect full year average deposits to be up between 2% and 3%.
Dan Geddes: Based on current projections, we are projecting growth in non-interest income in the range of 1 to 2 percent and non-interest expense to be in the high single digits. Regarding net charge-offs, we expect full year 2025 to be similar to 2024 and in the range of 20 to 25 basis points of average loans. Regarding taxes, we currently expect the full year 2025 to come in between 15 and 16 percent.
Dan: Based on current projections, we are projecting growth in noninterest income in the range of 1% to 2% and noninterest expense to be in the high single digits regarding net charge offs. We expect full year 2025 to be similar to 2024, and then the range of 20% to 25 basis points of average loans regarding taxes. We currently expect.
Dan: The full year 2025 to come in between 15, and 16% with that I'll turn the call over to Phil for questions.
Phil Green: With that, I'll turn the call over to Phil for questions. Thank you, Dan, and we'll open the call up now for questions. Thank you.
Phil: Thank you Dan He will open the call up now for questions.
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Phil: If you would like to ask a question. Please press star one on your telephone keypad.
Phil: For me to tell will indicate your line is in the question queue.
Phil: May press Star two if he would like to remove your question from they can.
Operator: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Phil: Participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.
Manan Gosalia: Our first question is from Manan Gosalia with Morgan Stanley. Please proceed. Hi, good afternoon. Good afternoon. I wanted to start on loan growth. The guide for mid to high single-digit loan growth, it implies a little bit of a slowdown from last year. But judging by your comments, they were all fairly positive in terms of new commercial relationships, new loan commitments. So I wanted to get a sense of if there's any conservatism baked in there, or are we just growing off of a higher base, which is driving that slowdown?
Moderator: Our first question is from Manan <unk> with Morgan Stanley. Please proceed.
Phil: Hi, good afternoon.
Speaker Change: Good afternoon.
Speaker Change: I wanted to start on loan growth the guide for.
Speaker Change: Mid to high single digit loan growth it implies a little bit of.
Speaker Change: Slowdown from last year, but.
Speaker Change: Judging by your comments they were all fairly positive in terms of new.
Speaker Change: New commercial relationships new loan commitments, so wanted to get a sense. If there's any conservatism baked in there or are we just growing off a higher base, which is driving that slowdown to any any thoughts you can share there would be great.
Phil Green: Any thoughts you can share that would be great. Yeah, thanks. You know, I would say without You know, getting too granular about it, overall, I would expect really good consumer loan growth to continue. You know, that's to the point where it's, you know, a little over 15% of our portfolio and the growth there is, you know, I think we've had 20% plus growth for nine quarters in a row. I think C&I growth has been interesting in terms of what we've seen there. And I think that's going to continue to be good, especially based on what we've seen in new opportunities.
Speaker Change: Yes, Thanks, I would say without.
Speaker Change: Getting too granular about it overall I would expect really good consumer loan growth to continue.
Speaker Change: As to the point, where it's a little over 15% of our portfolio and the growth. There has been I think we've been 20% plus growth for nine quarters in a row.
Speaker Change: C&I growth has been interesting in terms of.
Speaker Change: What we've seen there.
Speaker Change: And I think thats going to continue to be good.
Speaker Change: Especially based on what we've seen in new opportunities and I think the <unk>.
Dan Geddes: And I think the slowdown, if it happens, would be with CRE, where you've got, you know, You know, we haven't had the same velocity of new deals, particularly in multifamily and personal office, and what you're seeing with a lot of the growth we've had over the last several quarters has been really funding of deals that were put in place. And are there any pay downs being factored in on that CRE side or is it just a function of the value of the curve is higher and therefore you expect lower demand there? I think it's going to be more of a factor of expected paydowns, that we have some projects, as Phil mentioned, that have funded up, and just by their very nature, we're primarily an interim construction lender.
Speaker Change: Slow down if it happens would be with CRE, where you've got.
Speaker Change: We haven't had the same velocity of new deals, particularly in multifamily and of course, all offers and what youre seeing with a lot of the growth we've had over the last.
Speaker Change: Several quarters has been really funding of deals that were put in place.
Speaker Change: Really a couple of years ago.
Speaker Change: So that I expect to slow a little bit of a headwind I think maybe you see that in the single digit low single digit area.
Speaker Change: That's really all I would say I think we're really expecting to have a pretty good year with regard to loan growth and absent this slowdown with the CRE.
Speaker Change: Our fundings that youll see it should be pretty good.
Speaker Change: And are there any pay downs being factored in on that CRE side or.
Speaker Change: Is it just a function of the belly of the curve is higher and therefore, you expect lower demand there.
Speaker Change: I think it's going to be more of a factor of expected pay downs that we.
Speaker Change: We have some projects as Phil mentioned that is funded up and just by their very nature were primarily a interim construction lender. We we help you get the projects built and stabilized and now they're likely ready to be either sold or moved into a permanent loans. So that's really just a factor and then.
Dan Geddes: We help you get the projects built and stabilized, and now they're likely ready to be either sold or moved into a permanent loan. So that's really just the factor. And then, what Phil mentioned earlier, we're looking at a fair amount of commercial real estate loans, but we're just not booking at the same rate. With interest rates higher for longer, they're a little harder to pen out. And we're not going to compromise our credit quality.
Speaker Change: <unk>.
What Phil mentioned earlier as we're looking at.
Speaker Change: A fair amount of commercial real estate loans, but.
Speaker Change: Were just not booking at the same rate there just with interest rates higher for longer they're a little harder to pan out.
Speaker Change: And we're not going to optimize our credit quality either.
Manan Gosalia: Appreciate it.
Will Jones: Thank you. Our next question is from Will Jones with KBW. Please proceed. Yeah, hey guys, thanks for the question. Subbing in for Catherine Mealor this afternoon. I just wanted to keep on up on that balance sheet growth conversation. It sounds like, you know, with the outlook for loan growth, you know, maybe outpacing what you expect on the deposit side. Do you feel like, you know, the investment portfolio really will hold more flat? Like, in other terms, you don't expect to be a net purchaser of securities in 2025?
Speaker Change: I appreciate it thank you.
Speaker Change: Our next question is from will Jones with <unk>. Please proceed.
Speaker Change: Yeah, Hey, guys. Thanks for the question Covenant for Catherine Mealor. This afternoon.
Speaker Change: Just wanted to keep on up on that balance sheet growth conversation. It sounds like with the outlook for loan growth may be outpacing what you expect on those deposit side.
Speaker Change: Do you feel like this.
Speaker Change: The investment portfolio, it really will hold more flat rate and other terms you don't expect to be a net purchaser of securities in 2025.
Dan Geddes: You know, right now we've had this This I'll call it kind of optionality with our balance sheet with our liquidity rates being close to 20 percent and so we're going to look to invest some of that liquidity in the first quarter and so you can look for our purchases to accelerate here in the first quarter of securities. We feel like we can utilize some of that liquidity to both support loan growth as you mentioned but also take advantage of what the yield curve is giving us right now with it being more positively sloped. Yeah, okay.
Speaker Change: Yes.
Speaker Change: Right now leaf and we've had this.
Speaker Change: This I'll call it kind of optionality with our balance sheet with our liquidity rates.
Speaker Change: Rates being close to 20%.
Speaker Change: You said, we're going to look to invest some of that liquidity in the first quarter and so you can look for our purchases to accelerate here in the first quarter of securities we feel like we can.
Speaker Change: We can utilize some of that liquidity to both support loan growth as you mentioned.
Speaker Change: But also take advantage of what the yield curve is giving us right now and with it being more positively sloping.
Dan Geddes: And any any way to quantify, you know, how you know, aggressive you guys may Yeah, so we're looking at about a little over 2 billion in securities that will either mature or expected to be called or for prepayments. And so, you know, we'll have that available to use. And so we're looking at around a $4 billion investment purchase strategy in 2025 with, you know, utilizing about half of that in the first quarter.
Speaker Change: Yeah, Okay, and any any way to quantify how aggressive you guys maybe in kind of ticking down from your liquidity.
Speaker Change: Yes. So we are looking at about a little over $2 billion in securities that will either mature or expected to be called or prepay.
Speaker Change: Prepayments.
Speaker Change: So, yes, we will have that.
Speaker Change: Available to us and so we're looking at around a $4 billion investment purchase strategy in 2025 with utilizing.
Speaker Change: About half of that in the first quarter.
Speaker Change: Okay great.
Will Jones: Thank you for that. And just switching over to the margin and NII guidance, just in terms of deposit betas, I know last quarter we had, you know, kind of talked about landing in the 45% range, full cycle, just really kind of matching what you're able to do on the up cycle. But if you look at where deposit costs came in this quarter, I mean, you've already really, you know, nearly matched that beta. So I guess the question is, did you kind of view that more as... But do you see, like maybe you pulled forward a little bit of that beta this quarter, and you kind of see that stabilize?
Speaker Change: Awesome color. Thank you for that and just switching over to the margin and NII guidance just in terms of deposit betas I know last quarter, we had.
Speaker Change: <unk> kind of talked about landing in the 45% range full cycle, just really kind of matching what whats youre able to do on the up cycle.
Speaker Change: But if you look at where deposit costs came in this quarter I mean, you've already really nearly matched that beta.
Speaker Change: So again I guess the question is did you kind of view that more as.
Speaker Change: Morris.
Speaker Change: For the bedroom I know, we've talked about maybe a little bit of a lag effect.
Speaker Change: But do you see.
Speaker Change: Like maybe you pulled forward a little bit of that beta this quarter and you kind of see that stabilize.
Dan Geddes: growth picks up for the industry next year and deposit competition is a little more fierce or I feel like that beta has a little bit more staying power and you could even outperform on deposit costs. You know, I do think that that deposit beta will be in that 45% range on a cumulative So, I don't think we're too far off, and we're going to listen to the customers and competition and see what we need to do in terms of pricing for our deposit products, but right now, we feel good about, we treated customers fairly on the way up, and we're kind of continuing that trend on the way down.
Speaker Change: Growth picks up for the industry next year and deposit qualification is little more fears or.
Speaker Change: Did you feel like that Meda has a little bit more staying power and you could even outperform on deposit costs as we move through this year.
Speaker Change: I do think that that deposit beta will be in that 45% range on a cumulative basis.
Speaker Change: So I don't think we're too far off and we're going to listen to the customers and competition and see what we need to do in terms of pricing for our deposit products that.
Speaker Change: Right now we feel good about.
Speaker Change: We treated customers fairly on the way up and we're we're kind of continuing that trend on the way down.
Will Jones: Yeah, okay.
Will Jones: And then, Graydon, just lastly for me, I know we've talked historically, you know, in terms of, you know, each cut, you know, having about a million dollar a month impact to NII. Do you guys still see it the same way? Is that still how we should kind of think about, you know, how rates, you know, have initial impact to Yeah, I think it's, it's around about a million seven, that's, that's kind of where we plan for that, that cut promotion. That's great. All right.
Speaker Change: Yes, okay great.
Speaker Change: Lastly from me and I know, we've talked historically in terms of each cut about $1 million a month impact NII.
Speaker Change: Did you guys still see it the same way is that still how we should kind of think about rates.
Speaker Change: Rates in there.
Speaker Change: This will impact to us.
Speaker Change: The income statement.
Speaker Change: Yes, I think it's around about $1 million seven.
Speaker Change: That's kind of where we land for that kept promote.
Speaker Change: Yeah, Okay, that's great all right. Thanks for the question guys.
Phil Green: Thanks for the question, guys. Yeah, I'm just saying, you know, that's an other-things-equal number there, so be careful with that. What else happened? Yeah, noted. Great point, Phil. Thank you.
Speaker Change: Yes, and just say that said other.
Speaker Change: Other things equal.
Speaker Change: Number there so should be careful with that.
Speaker Change: <unk> seen what happens with deposits positive or negative with all of that so.
Speaker Change: While the number is accurate it is what it is it's pretty linear in terms of the arithmetic.
Speaker Change: What else happens in the balance sheet and around all that.
Speaker Change: Remains to be seen just always need to say that.
Speaker Change: Yes, great point so thank you.
Speaker Change: Sure.
Ben Gerlinger: Our next question is from Ben Gerlinger with Citi. Please proceed. Hi, good afternoon. Good afternoon, Ben.
Our next question is from Ben <unk> with Citi. Please proceed.
Speaker Change: Hi, good afternoon.
Speaker Change: Hey, good afternoon.
Ben Gerlinger: I think you guys said you opened your sixth branch in Austin, and then you have probably another dozen more to go, and then 26 is failing. How to year when you think about just kind of growth and expenses, do you think kind of, I know you're not going to get 26, guys, you just get 25. But we should see this year should be kind of replicated again, young growth and then expenses in 26. Or is there something that's being pulled forward in the expense space to get to the highest single digits you reference? You know, when I when I'm looking at 25, you know, we're, we're continuing to invest in technology and a lot of it's replacing legacy systems that will continue to do 25 and find a 26.
Speaker Change: Thank you guys.
Speaker Change: Openings are six branch Austin.
Speaker Change: Probably another dozen more to go.
Speaker Change: And then 'twenty six to fill in.
Speaker Change: Yeah.
Speaker Change: On a year when you think about just kind of growth in expenses do you think kind of I know you're not going to get 26 25.
Speaker Change: We should see this year should we kind of replicated again on growth in expenses in 'twenty six or is there something thats being pulled forward in the expense base to get to the high single digits you referenced.
Speaker Change: When I'm looking at 25, we're we're continuing to invest in technology and a lot of it's replacing a legacy systems that will continue to do.
Speaker Change: 25, and 5% to 26 and then.
Phil Green: And then also just in terms of, of compliance, cybersecurity, and then the people, and then our continued expansion. So I think in terms of, we've done a lot of the heavy lifting, I would say in terms of a lot of the people component. And so you know, that, that pace of growth, in terms of us building out that, that infrastructure, especially in IT, and then you'll see growth relative to our growth in the expansion in terms of people. But I think we feel good about that we've, we've, we're compensating people fairly and competitively and our benefits are, are in line with the market and are actually really, really strong.
Speaker Change: Also just in terms of of compliance cyber security.
Speaker Change: And then the.
Speaker Change: The people and then our continued expansion. So I think in terms of we've done a lot of the heavy lifting I would say in terms of a lot of the people.
Speaker Change: Component and so that that pace of growth in terms of us building out that that infrastructure, especially.
Speaker Change: And and.
Speaker Change: And then youll see growth relative to our growth and the expansion in terms of people.
Speaker Change: I think we feel good about that.
Speaker Change: We are compensating people fairly and competitively in our benefits are.
Speaker Change: In line with the market and actually really really strong so it's a great value proposition.
Phil Green: So it's a it's a great value proposition to have. And we experienced kind of lower attrition than the industry. So that investment is paying off.
Speaker Change: To have and we experienced kind of lower attrition than the industry. So that investment is paying off but if that gives you enough color for 25 I hope it does.
Ben Gerlinger: But if that gives you enough color for 25, I hope it does. Yeah, no, I totally understand. You guys are in growth mode. So it makes sense that you're investing.
Speaker Change: Yeah, No I totally understand you guys are in growth mode.
Speaker Change: It makes sense that you are investing.
Phil Green: And then Phil or whoever wants to field the question, when you think about competition in the market, some of the banks that have seen a better pace of growth, whether it be footprint extension or expansion, or just a faster growth in general, kind of cited People or other banks, or frankly, non-banks, more aggressive in the space. I'm just kind of curious, is it largely just rates that isn't, or is there something beyond that where the competition is increasing? I know you're not going to change your box on credit or payments, but. Have you seen an increased pace of competition over the past 60, 90 days?
Speaker Change: And then bill or whoever wants to field. The question do you think about the competition in the market some of the base.
A better pace of growth, whether it be footprint extension or expansion.
Speaker Change: Or just faster growth in general is kind of cited.
Speaker Change: People are other banks are frankly, non banks more aggressive in this space.
Speaker Change: Kind of curious is it largely just rates that isn't or is there something beyond that.
Speaker Change: The competition is increasing I know, you're not going to change your box on credit covenants, but.
Speaker Change: Have you seen an increased pace of competition over the past 60 to 90 days.
Phil Green: I would say the short answer is yes, we have and You know, a few things going on. Some is from banks and some is from non-banks. Banks, I think really represents from banks that had sort of put their pencils down on Let's just say the commercial real estate side. You're seeing a, you know, at least from anecdotally, what I've seen on some of the deals we've lost, there's been sort of a drifting back to some of these pre-COVID underwriting methodologies, which, you know, is kind of So that's one thing. I think the other thing that's a little bit different over the last...
Speaker Change: I would say the short answer is yes, we have.
Speaker Change: And.
You know a few things going on some films from banks and summer is from Nonbanks.
The banks I think really represents from banks that had sort of put their pencils down on.
Speaker Change: Let's say the commercial real estate side.
Speaker Change: For the good deals that Youre seeing.
Speaker Change: Youre seeing.
Speaker Change: At least from anecdotally, what I've seen with some of the deals we've lost theres been sort of a drifting back to some of these pre COVID-19 underwriting methodologies, which is kind of.
Speaker Change: Basically more money longer terms no no guarantees kind of thing in pricing.
Lower.
Speaker Change: It's always going to be the case and that will come in in waves and then we'll receive common receipt.
Speaker Change: That's one thing I think the other thing thats, a little bit different over the last.
Phil Green: Unknown Executive, Manan Gosalia, Jerry Salinas, Cullen have engaged in the marketplace. The main place that we've seen that, and actually it's been kind of a good thing in the short term, has been private equity around real estate, commercial real estate, bridge financing, and mostly seeing that in the multi-family projects. You know, the value proposition they typically give is, you know, the rate's not all that different, really, a little bit higher. They don't have the same... Regulus Criteria, at least the ones I've seen on debt service coverage ratios, maybe amortization or interest only, you know, it's really, it's in there to get that project.
Speaker Change: Three months from what I've seen is <unk> seen more private equity.
Speaker Change: Engaged in the marketplace. The main place that we've seen that.
Speaker Change: It's been kind of a good thing in the short term has been.
Speaker Change: Private equity around real estate commercial real estate bridge financing.
Speaker Change: Mostly seeing that in the multifamily.
Speaker Change: Lee.
Speaker Change: <unk>.
Speaker Change: And.
Speaker Change: The value proposition they typically give us.
Speaker Change: Yeah.
Speaker Change: The rates are not all that different relieve a little bit higher.
Speaker Change: Yeah.
Speaker Change: They don't have the same rig.
Speaker Change: Rigorous criteria at least the ones I've seen on debt service coverage ratios, maybe amortization or interest only.
Speaker Change: It's really it's in there to get that project from where it is today to a stabilized situation. Once you get to stabilization and then you can see agency lender maybe a traditional.
Speaker Change: No.
Phil Green: Permanent Lender come in, that kind of thing, so a lot of options, or sale, cap rates are still really good for the multi-families, but, you know, That asset class has, you know, got well-known headwinds that it's been up against, whether it's been higher rates, higher operating costs, more supply, which means slower lease-up, and now they've got, you know, they're actually leasing up, but they're using more free rent, and all those things put pressure on the traditional bank metrics of debt service, coverage ratio, et cetera. But if you just get to that stabilization, just get to that, you know, break-even or a little bit higher on the coverage and the cash, man, there are lots of options available.
Speaker Change: Permanent lender come in that kind of thing so a lot of options or sale cap rates are still really good for the multifamily but.
Speaker Change: Yes.
Speaker Change: That asset class has.
Speaker Change: Got well known headwinds that its been up against whether it's been higher rates, our operating costs more supply, which means slower lease up and now they've got they're actually leasing up but they are using more free rent or all those things put pressure on the traditional bank metrics of debt service coverage ratio et cetera, but if.
Speaker Change: You just get to that stabilization, just get to that breakeven or a little bit higher on the.
Speaker Change: Coverage in the cash and then there are lots of options available. So that's a positive that we've seen I think as we've asked ourselves okay.
Phil Green: So that's a positive that we've seen.
Phil Green: I think as we've asked ourselves, okay, well, where is this going? What might we be sorry about? Private Equity Inference You know three years from now. It's probably that you're beginning to see them show up on some of the more what I'll call traditional construction lending, development lending. And so there's a lot of money in that. Private Equity in Multifamilies for us and for the lenders right now, and the borrowers. Gotcha.
Speaker Change: Where is this going.
Speaker Change: Mike sorry about with the private equity entrance.
Speaker Change: Three years from now.
Speaker Change: We attribute beginning to see them.
Speaker Change: Show up on some of the more what I'll call traditional.
Speaker Change: Construction lending development lending.
Speaker Change: And so there's a lot of money in that.
Speaker Change: In that industry and they are looking for things to do and I think we'll see them more.
Speaker Change: Overtime, but right now that's.
Speaker Change: Kind of what we see competitively.
Speaker Change: I sit in the case of them.
Speaker Change: <unk> equity in multifamily is a good thing for us and for the lenders right now.
Speaker Change: New borrowers.
Phil Green: That's helpful, Culler. Appreciate the time, guys.
Speaker Change: Gotcha, that's helpful color I appreciate the time guys.
Peter Winter: Our next question is from Peter Winter with D.A. Davidson. Please proceed. Hi, good afternoon. I wanted to ask about the capital strategies going forward. Obviously, top priority is organic growth, but you did announce a share buyback. I'm just curious how active you plan to be with the buyback. And secondly, if there's any thought of maybe retiring some of the preferred securities as a use of capital. here. You know, I would say right now. Our focus is really plain vanilla. It's maintaining the dividend, keeping that solid. I think we've increased it for 31 years, and Jerry Salinas just retired at the beginning of the year, and his parting words were, keep the dividends strong.
Speaker Change: Our next question is from Peter Winter with D. A Davidson. Please proceed.
Peter Winter: Hi, good afternoon.
Peter Winter: Hey, I wanted to ask about the.
Peter Winter: Capital.
Peter Winter: Strategy is going forward, obviously top priority is organic growth.
Peter Winter: We did announce a share buyback I'm just curious how active.
Speaker Change: You plan to be with the buyback and secondly, there was any thought of maybe retiring some of the preferred.
Peter Winter: Securities as a use of capital.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: You know I would say right now.
Speaker Change: Our focus is really plain vanilla, it's maintained the dividend keeping that solid.
Speaker Change: I think we have increased for 31 years and Jerry Salinas just retired at the beginning of the year and as parting words, we keep the dividend.
Phil Green: So if he was in the car right now, he would be... You'd be banging the table, but, you know, so it's that, we want, you know, we want to make sure they've got plenty of room for growth, and as far as other things, like you mentioned the buyback, it's totally opportunistic. We utilize about, what was it Dan, 50 million? That's right. You know, I think we bought in around $100 or so, and so it's been good for shareholders, but frankly, I hope not to have the opportunity to buy low on the stock, really. And then with regard to the preferred You know, you just have to look at it and see what the numbers said.
Speaker Change: So if you listen on the call right now.
Speaker Change: He'd be banging the table, but.
Speaker Change: So with that we will.
Speaker Change: We will make sure they've got plenty room for growth and then as far as other things like you mentioned the buyback it's totally opportunistic.
Speaker Change: We utilized about obviously beyond $50 million that's right.
Speaker Change: You know I think we bought it at around $100 or so and so it's been good for shareholders, but frankly, I hope not to have the opportunity to buy low on the office really hum.
Uh huh.
Speaker Change: And then just with regard to the preferred.
Speaker Change: You just have to look at it and see what.
Speaker Change: What the numbers yet.
Phil Green: I'll just be honest, we haven't really talked about it.
Speaker Change: Just be honest, we haven't really talked about it but since you asked we will look at it but.
Phil Green: But since you asked, we'll look at it.
Peter Winter: Thanks for the And then we could just go back to expenses. I hear you about the investments that you're making with the branch build-out and the investments in technology. I'm just Surprise, it's probably a little bit higher than what I was expecting, you know, just thinking that was going to moderate more than what we've seen the last few years, and it's still pretty elevated. Just wondering, you know, just the outlook with expenses, when we should see it kind of moderate from these type of levels. You know, the way the way we look at this is that these are, you know, investments that are going to set us set us up on this path of growth that we're on.
Speaker Change: Thanks for the.
Speaker Change: Thanks for the heads up on it.
Speaker Change: Sure.
Speaker Change: And then.
Speaker Change: If we could just go back to expenses.
Right.
Speaker Change: I hear you about the investments that you're making with the branch build out.
Speaker Change: The investments in technology I'm just.
Speaker Change: Surprised that it's probably a little bit higher than what I was expecting.
Speaker Change: Thinking that was going to moderate more than what we've seen the last two years and it's still pretty elevated.
Speaker Change: Just wondering.
Speaker Change: Yes.
Outlook with expenses, when we should see it kind of moderate some.
Speaker Change: These type of levels.
Speaker Change: The way the way we look at this is that these are investments that are going to set us.
Speaker Change: Set us up on this path of growth that we're on.
Speaker Change: And so certainly were.
Phil Green: And, and so certainly, we're going to look at, you know, 2026 as a time when we could see some abatement in that growth. And, you know, I had, I look back and kind of look at our expense growth over the last four years. And, you know, if I take out the FDIC limit from 21 to 22 is 16%, and then 15%, and then 10%. And then now we're guiding kind of high single digits. So it's trending in the right direction. But, you know, we're, and we're certainly mindful of expenses, we're not, you know, just everything that any new FTE or CapEx over $100,000 still goes by my desk and fills for approval.
Speaker Change: Look at two.
Speaker Change: 2026, as a time when we could see some abatement.
Speaker Change: Abatement in that growth and I had I look back and kind of looked at our expense growth over the last four years.
Speaker Change: If I take out the FDIC limit from 'twenty, one to 'twenty, two is 16% and 15% and then 10% and then now were guiding kind of high single digits. So it's trending in the right direction, but.
Speaker Change: And we're certainly.
Speaker Change: Mindful of expenses, we're not.
Speaker Change: Everything that any new FTE or Capex over 100000 still goes by my desk and fills for approval. So we're we're watching expenses, where we can but we're certainly.
Phil Green: So we're, we're, we're watching expenses where we can, but we're certainly there's, there's certainly a risk of not making these investments as well. And so we're We're well on our way to replacing these legacy systems that if we didn't, we would regret it in the future. Yeah, you know, Peter, we're a pretty conservative group and It kind of makes the hair stand up on the back of your neck when you look at how much money we're spending. I mean, just to be perfectly honest, but I mean, everything that we look at, there's a lot of...
Speaker Change: There is certainly a risk of not making these investments as well and so.
Speaker Change: Where are we.
Speaker Change: Well on our way to replacing these legacy systems that if we didn't we would regret it in the in the future.
Peter Winter: Peter It's got it.
Speaker Change: We're pretty conservative group and.
Peter Winter: <unk>.
Peter Winter: It kind of makes the hair stand up on the vacuum Nick when you look at how much money, we're spending I mean, just to be perfectly honest, but I mean everything that we look at there's a lot of.
Phil Green: Accountability with it and we're Certainly, it's helping us get better. It's helping us grow. It's helping us reduce risk and so And, you know, as someone said earlier, we're in a growth mode, and we are. So, and we've been building that up, right? So there's been some foundational things that we've done. Dan and I and the management team spend a lot of time talking about it. We're not happy with this level of expense growth. But I don't think we're doing anything wrong with it. It's just we'd like to see it moderated. You know, like we said, you know, like I said in my comments, you know, there's time for We're sowing in time for reaping, and we really are looking forward to getting to that point, that reaping point, and to do that...
Peter Winter: Accountability with it and we are.
Peter Winter: Certainly its helping us get better it's helping us grow it is helping us reduce risk and so.
Peter Winter: And as someone said earlier, we're in a growth mode and we are.
Peter Winter: So.
Peter Winter: And we've been building that up right. So theres been some foundational things that we've done.
Peter Winter: Yeah.
Speaker Change: Dan and I and the management team spent a lot of time talking about it we're not happy with this level of expense growth.
Peter Winter: But I don't think were doing anything wrong with it it's just we'd like to see it moderate some because.
Speaker Change: Like we said you know like I said.
Peter Winter: In my comments, you know there's time for.
Speaker Change: Pursuing in time for repo and we really are looking forward to getting to that point that reaping point and to do that.
Phil Green: most effectively, we're going to have to bring those expenses down to, you know, more moderate level, you know, I don't think that we're going to be in the mode of just cutting expenses or, you know, just growing at inflation because we are growing. And I like that, you know, we want... But as far as where we are right now, I mean, our sense is that... We're kind of We're kind of choking down what we've had to do to this point, but we're really looking forward to getting returns on these investments, and we'll do that, our team and our company.
Speaker Change: Most effectively we're going to have to bring those expenses down too.
Hum.
Speaker Change: A more moderate level.
Speaker Change: I don't think that were going to be in the mode of you know.
Speaker Change: Just cutting expenses or <unk>.
Speaker Change: Just growing at inflation, because we are growing.
Speaker Change: And I like that and we want to do that but as far as where we are right now I mean, our sense is that.
Speaker Change: We're kind of we're kind of children that what we've had to do to this point, but we're really looking forward to.
Speaker Change: Getting returns on these investments and we will do that our team and our company will do that.
Dan Geddes: Just looking at where we're spending money, we have our investments in technology, it's kind of the digital experience, modernization and transformation, we're looking as I mentioned security fraud and compliance risk management, and then as Phil mentioned, we're a growing company and we're adding more branches, more people, and more products with our mortgage product.
Speaker Change: And just looking at where we're spending money we have our investments in technology, it's kind of the digital experience.
Speaker Change: <unk> and transformation.
Speaker Change: We're looking at as I mentioned security fraud, and compliance risk management and then as Phil mentioned, we're just we're a growing company and we're adding more branches more people and more products with our mortgage product.
Speaker Change: Okay.
Peter Winter: That's perfect. And just to be clear, the expense growth of high single digit is on a gap basis for 24. Is that correct? Yes. Okay.
Speaker Change: Perfect and just just to.
Speaker Change: I'll be clear.
Speaker Change: Expense growth high single digit is on a GAAP basis for 'twenty four is that correct.
Speaker Change: Yes.
Peter Winter: Thank you.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: It's Peter.
John Arfstrom: Our next question is from John Arfstrom with RBC Capital Markets. Please proceed. Thanks. Good afternoon. Question back on loan growth. You've got some pretty strong pipeline growth, and I'm just curious.
Speaker Change: Our next question is from Jon <unk> with RBC capital markets. Please proceed thanks good afternoon.
Speaker Change: Okay.
Speaker Change: Question back on loan growth, you've got some pretty strong pipeline growth and I'm just curious.
Speaker Change: What's your thinking on what would bring in at the lower end of the range what would take you to the higher end of the range.
Speaker Change: Okay.
Phil Green: Ahhh I'm just going to throw out payoffs in commercial real estate, you know, I mean, there are a lot of people looking to utilize some of this private equity bridge financing. You know, some people sell them things if they can, but I'd say it's mainly payoffs. For example, let's take this quarter, I think we moved... I have multi-family deals to risk-rate 10, okay? So that's a problem loan category, but I'm not worried about any of them because most of them, 60% of them are multi-family. in the process of working with private equity to pay it off.
Speaker Change: Wow.
Speaker Change: Yeah.
Speaker Change: I'm just going to throw out.
Speaker Change: Pay offs in commercial real estate.
Speaker Change: There are a lot of people looking to utilize some of this private equity bridge financing.
Speaker Change: <unk>.
Speaker Change: Some people selling things if they can but I'd say, it's mainly pay offs.
Speaker Change: We.
Speaker Change: For example, let's take this this quarter I think we moved.
Speaker Change: Five multifamily deals to risk rate 10, okay. So that's a problem loan category, but I'm not worried about any of them because.
Speaker Change: Most of them are <unk>.
Speaker Change: 60% of them are.
Speaker Change: And in the process of working with private equity to pay it off.
Phil Green: You know, there are. You know, they're going to work out, but you know, part of them working out is, you know, those balances are going to leave, right? So if we had those five left, that probably would be, I'm going to guess, around numbers $150 million, you know? So. So if we see a lot of that, that could be sort of a one-time push down. That would be my main. bringing it to low end. The high end is, you know, who knows, I think that the economy... has been. really picked up, you know, and activities really picked up after the election, you know.
Speaker Change: There are.
Speaker Change: Yeah.
Speaker Change: Going to work out, but part of them working out as those balances are going to leave right. So if we had.
Speaker Change: There is five left that probably be I'm going to guess in round numbers $150 million. So.
Speaker Change: So if we see a lot of that that can be sort of a onetime push down.
Speaker Change: That would be my main.
Speaker Change: Things that I can see we're bringing at the low end the high end as you know who knows I think that the economy.
Speaker Change: Has been.
Speaker Change: Really picked up.
And activity has really picked up after the election.
Speaker Change: And.
Phil Green: You've eliminated some of that uncertainty that, you know, where we've seen C&I loans go down for, I think, four months in a row. Leading up to the election, I think they're up every month since. So... That's just beginning. And we'll see where that takes us.
You eliminate some of that uncertainty that we assume Sheila we think C&I loans go down for I think four months in a row.
Speaker Change: Hang up the election, I think theyre up every month since.
Speaker Change: And so.
Speaker Change: That's just beginning.
Speaker Change: And we will see where that takes us.
Phil Green: I don't think anybody knows right now, but I think we do get just more activity and you get I hate to use the word animal spirits, but those find their way into people doing projects and that's a real. We can see it maybe a little higher. I guess you might see energy. You know, grow a little bit there. It's been pretty, it's grown a little bit in the near term. That always moves around a bit, our borrower. You know, stuff like that. I think it would just be, in general, the water level would go up.
Speaker Change: I don't think anybody knows right now, but I think we do get.
Speaker Change: Just more activity in <unk> and you get.
Speaker Change: I hate to use the word animal spirits with those found their way into people do in projects.
Speaker Change: That's a real thing.
Speaker Change: We could see maybe a little higher I guess you might see energy.
Speaker Change: <unk> grew a little bit there, it's been pretty it's grown a little bit.
Speaker Change: In the near term.
Speaker Change: That always moves around a bit depending on what.
Speaker Change: Our borrowers are doing but you know stuff like that I think it would just be in general the water level would go up that would be it.
Phil Green: When you guys say mid to high, you're... saying five to nine, basically. That's a good range. and to use full year average or period end. I know we're getting picky. That's full year average.
Speaker Change: When you guys say mid to high <unk>.
Speaker Change: Youre, saying five to nine basically in.
Speaker Change: Maybe it's safe to be in the middle I don't want to pin you down, but that's the way I'm thinking about it.
Speaker Change: That's a good range.
Speaker Change: And to use pull your average your period end I know, we're getting ticky-tacky, but.
Speaker Change: That's full year average for your average Okay, and then on noninterest income.
Phil Green: And then on non-interest income, you guys had a strong year.
Speaker Change: Had a strong year and you pulled back the growth rate a little bit anything you would call out.
Speaker Change: And the 24 growth rates in the big categories Trust and investment management.
Phil Green: Categories, Trust Investors. Anything you would call it is unsustainable. Seems like he could do a little better.
Speaker Change: Sure. Its interchange anything you would call out is unsustainable. It just seems like you could do a little better than I am just curious on your guidance.
Dan Geddes: I guess one thing I'll point out is capital markets had a tremendous year in 24, and so we're not necessarily expecting to duplicate that. We underwrote a lot of bond offerings here in Texas, and so they had a great year. That's one notable.
Speaker Change: I guess, one thing I'll point out is our capital markets had a tremendous year in 'twenty four and so we're not necessarily expecting to duplicate that.
Speaker Change: We underwrote a lot of our bond offerings here in Texas, and so they had a great year.
Speaker Change: That's one notable.
Dan Geddes: The other is just a little bit of unknown of interchange and overdraft regulation and when that kicks in. So we have that baked into our 25 growth as well.
Speaker Change: The other is just a little bit of unknown of interchange and overdraft.
Speaker Change: Regulation and when that kicks in and so we have that baked into our 25 growth as well.
Ebrahim Poonawala: Thanks guys, I appreciate it.
Speaker Change: Alright, Thanks, guys I appreciate it.
Speaker Change: Sure.
Ebrahim Poonawala: Our next question is from Ebrahim Poonawala with Bank of America. Please proceed. Hey, good afternoon.
Unidentified Moderator: Our next question is from Ebrahim <unk> with Bank of America. Please proceed.
Ebrahim: Hey, good afternoon.
Ebrahim Poonawala: Hey, Phil, just one follow-up. So I heard you on Money vs. Soul, getting some, I guess, payoff from all these investments. But just talk about, you talked about 200 branches this year, 131 in 2019. Based on, I'm sure the work y'all have done, is that enough? Or is there a point two years from now where you could go from 200 to 215? Just would love to hear your thoughts about how much you maxed the market opportunity with this branch expansion. And is there more to go? And is there a reason why you're not doing that today versus down the road?
Speaker Change: Hey, just one follow up if I heard you on.
Ebrahim: So.
Ebrahim: Getting some I guess being also.
Ebrahim: From all these investments.
Speaker Change: Just talk about you talked about 200 branches. This year 131 in 2019.
Ebrahim: Based on I'm sure you all have done.
Speaker Change: Is that enough or is that a point.
Ebrahim: Nowadays would go from 215.
Ebrahim: Just would love to hear you talk about how much you Mac the market opportunity the branch expansion.
Ebrahim: Is there more to go and is that the reason why you're not doing that today, but.
Ebrahim: Down the road.
Ebrahim: Yes.
Phil Green: Abraham, we're going to continue to do it. So you're going to see You know, a A regular cadence, I believe. in our identification of and our You know, developing great markets in the state. And a way to think about it, as we've talked about it, you know, let's say, in the next two years, we're done with Dallas, and we're done with Austin. Okay, well, at that time, that will be, you know, the Houston 1.0 expansion will be seven or eight years, it gets to be eight years old. And so if you look at Houston, it has grown a tremendous amount over the last eight years.
Ebrahim: Ebrahim.
Speaker Change: We can continue to do it so youre going to see.
Speaker Change: You know a a.
Speaker Change: Regular cadence I believe.
Speaker Change: In our identification of an R.
Speaker Change: Developing great markets.
Speaker Change: The state.
Speaker Change: And the way to think about it as we've talked about it.
Speaker Change: Let's say in the next two years.
Speaker Change: Done with Dallas and were done with Austin.
Speaker Change: Well at that time that will be the Houston, one auto expansion will be seven or eight years, I guess be eight years old right and so if you look at Houston has grown a tremendous email.
Speaker Change: Over the last eight years, so theres going to be the opportunity for us to take advantage of where the market is gone.
Phil Green: So there's going to be the opportunity for us to take advantage of where the market's gone. Instead of plugging really big holes within the city, like we did with 1.0 and 2.0, we're going to have the opportunity to move into markets where you're growing, for example, it's growing really strongly west. We finally got to Katy, and now that we're in Katy, Texas, everyone's saying, well, how about the communities west of that? You can say the same thing in Dallas and in other markets. I think what we'll be doing is identifying. where are those where the where we didn't get to take advantage the first time, you know, in the expansion in those markets, and then also going to where where that market is growing.
Speaker Change: And instead of.
Speaker Change: Instead of plugging really big holes within the city like we did with one <unk> and two in auto.
Speaker Change: To have the opportunity to move into markets, where youre growing for example, its growing really strongly west. We finally got to Katie and now that we're in Katy, Texas, everyone, saying well how about the communities west of that for example, you can.
See the same thing in Dallas in other markets. So.
Speaker Change: I think what we will be doing is identifying.
Speaker Change: Where are those where the.
Speaker Change: We didn't get to take advantage of the first time.
Speaker Change: And the expansion in those markets and then also going to wear.
Speaker Change: Where that market is growing.
Phil Green: One of the things that I You know, ask our team to do over the last year or so is, just to be honest, is look where the puck's going. You know, it's... The state's growing and I want to have locations that we have warehoused in what we believe will be great markets as they develop and have those in our hip pockets so that we can bring those out and not take a year or a year and a half to scramble and find something in a market that's really starting to take off. So that's why I say I think this is durable and scalable.
Speaker Change: One of the things that I have.
Speaker Change: Ask our team to do over the last year or so.
Speaker Change: Just to be honest is just look where the puck is going.
Speaker Change:
Speaker Change: The state's growing and I don't want to have locations that we have warehoused and what we believe will be great markets as they develop and have those in our hip pocket. So that we can bring those out and not be not take a year or year and a half to scramble and find something in a market that's really starting to take off so.
Speaker Change: That's fair.
Speaker Change: Why I say I think this durable and scalable I think we will continue to be doing this.
Phil Green: I think we'll continue to be doing this. You know, for a good period of time.
Speaker Change: For a good period of time.
Phil Green: One thing to keep in mind, Ebrahim, and I know you, you know, we've been with you on this a long time, let's talk about it. One thing to think about is, is the longer we do it, The higher and higher percentage of our market locations that are new. and that that are not so legacy that there's, you know, there's no development left, no growth in it, you know, and so And so, if we continue to do... And so, I think the... We'll continue to do it. But I think that the impact of it is going to be relatively less on on, you know, as we continue to grow.
Speaker Change: One thing to keep in mind, Ebrahim and I know you.
Speaker Change: We've been with you on this a long time.
Speaker Change: Let's talk about it but.
Speaker Change: But.
Speaker Change: One thing to think about is the longer we do at.
Speaker Change: The higher the higher and higher percentage of our market locations that are new.
Speaker Change: And that that are not so legacy that there's you know.
Speaker Change: There is no development left little growth.
Speaker Change: And so.
Speaker Change: And so if we continue to do.
Speaker Change: Let's see.
Speaker Change: $10 15, and I'm, just throwing numbers out of locations a year.
Speaker Change: That number will be a smaller and smaller percentage.
Speaker Change: <unk> of our current.
Speaker Change: Our balance sheet.
Speaker Change: And so.
I think the.
Speaker Change: We will continue to do it but.
Speaker Change: But I think that the impact of it is going to be relatively less.
Speaker Change: As we continue to grow and then there's a really good thing as well.
Phil Green: And then and then the really good thing is, you know, as we talk about so on and re I have to give Dan credit for that one, and he thought... is that We're finally going to get to see, our shareholders are finally going to get to see some payoffs. That's going to be in place. The two markets that we're in, Houston and Dallas, in June of this year we had a 2.5% market share in Houston and just over 1% market share in Dallas, so just in those two markets there's plenty of room for us.
Speaker Change: Talk about someone in refinish.
Uh huh.
Speaker Change: Dan for edit for that one any thoughts.
Speaker Change: Is that.
Speaker Change: It's.
We're finally going to get to see our shareholders finally get to see some payoff for this bank.
Speaker Change: It's going to be in place for a long time.
Speaker Change: And the Mark to markets that were in Houston and Dallas in June of this year, we had a two 5% market share in Houston, and just over 1% market share in Dallas. So there's just in those two markets. There is plenty of room for us to grow there right.
Ebrahim Poonawala: That's helpful. That was great, Carlos.
Speaker Change: That's helpful that was great color. Thank you both.
Ebrahim Poonawala: Thank you both.
Speaker Change: Thanks.
Peter Winter: As a reminder to star 1 on your telephone keypad if you would like to ask a question. We do have a follow-up question from Peter Winter with D.A. Davidson. Please proceed. Thanks. Sorry about this.
Unidentified Moderator: As a reminder, the star one on your telephone keypad, if he would like to ask a question. We do have a follow up question from Peter Winter with D. A Davidson. Please proceed.
Speaker Change: Thanks, sorry about that just Dan can I just.
Dan Geddes: Dan, can I just clarify the point on the fee income outlook with the overdraft fees? You're assuming that some change to the way overdraft fees are calculated get reduced, and I'm just wondering if that's baked into the guidance and how much of an impact that is. It is baked in there towards the back half of the year, and then interchange as well. Just, and again, that may or may not happen, but we have it in there. We hope it does. Yes. But yeah, especially on the overdraft, our overdrafts have been basically growing as we've been growing customers.
Unidentified Moderator: Clarify the point on the fee income outlook with the <unk>.
Overdraft fees Youre assuming.
Speaker Change: That some.
Some change to the way overdraft fees are calculated.
Speaker Change: Get reduced.
Speaker Change: I'm just wondering if that's baked into the guidance and how much of an impact that is.
Speaker Change: It is baked in there.
Speaker Change: Towards the back half of the year.
Speaker Change: And then interchange as well just any weekend that may or may not happen.
Speaker Change: But we have it in there we hope it doesn't.
Speaker Change: But yes it is.
Speaker Change: I think I got it, especially on the overdraft or overdrafts have been basically growing as we've been drilling customers. We've been trying to do what we can do.
Dan Geddes: We've been trying to do what we can to, I mean, that's not something that is going to make our dreams come true is overdraft fees, so we offer overdraft grace and other products to help. But you've seen just the consumer kind of spend the excess money that they received during the post-pandemic era, so you've seen that kind of tick up a little bit and go back towards, closer towards pre-pandemic kind of per-customer rates. But if that's changed, then we may not, that may not be something that we can expect to get the same amount of fee income.
Speaker Change: That's something that is going to make our dreams come true as overdraft fees and so we offer overdraft Grace and other other products to help but <unk> seen just the consumer kind of spend the the excess.
Speaker Change: The money that they receive during the post pandemic era, so you've seen that kind of tick up a little bit.
And go back towards closer towards pre pandemic kind of per customer rates, but if that's changed and we.
Speaker Change: May not that may not be something that we can expect to get the same amount of fee income from.
Dan Geddes: Can you quantify how much you earned in 24 and what type of level you expect in 25? So, and just in looking at, just in terms of what we did and In higher fee income, retail, this is from 23 to 24, it was about a $5.5 million component of that growth that we had. And so we have that basically kind of, we have that limited in 25. And we are reducing about a million a month, starting in July. That's great. Thank you, Tim.
Speaker Change: Can you quantify like.
Speaker Change: How much you earned in 'twenty, four and what type of level, you expect in <unk> and 'twenty five.
Speaker Change: Yes.
Speaker Change: So and just in looking at.
Just in terms of what we did.
Speaker Change: And higher.
Speaker Change: Higher fee income.
Speaker Change: Retail, but this is from 23 to 24. It was it was about a $5 $5 million component of that growth that we had and so we have that basically kind of if we have that limited in 'twenty five.
Speaker Change: Okay.
Speaker Change: We are reducing it about 1 million a month starting in July.
Speaker Change: That's great.
Speaker Change: Thanks, Tim.
Speaker Change: Thanks, Steve.
Operator: We have reached the end of our question and answer session.
Speaker Change: We have reached the end of our question and answer session I would like to turn the conference back over itself for closing remarks.
Phil Green: I would like to turn the conference back over to Phil for closing remarks. All right, everybody, we thank you for your interest and for participating with us in this call today. Thank you.
Speaker Change: Alright, everybody. We thank you for your interest in <unk> and for participating with US on this call today and with that in the future and thank you.
Operator: This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.
Speaker Change: Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Speaker Change: Yeah.
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