Q2 2019 Earnings Call
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The Oh join us if I can.
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Ladies and gentlemen, this is the operator todays conference is scheduled to begin momentarily until that time your lines will again be placed on music hold thank you for your patience.
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At this time, all participants have been placed any listen only mode and the floor will be open for your questions. Following the presentation.
If you would like to ask a question at that time. Please press star one on your Touchtone phone if at any point. Your question has been answered you may remove yourself from the queue by pressing the pound key we ask that while you pose your question that you. Please pick up your hands that to allow optimal sound quality. It is now my pleasure to turn the floor over to Abby Mendez Senior Vice President and director of Investor Relations to begin.
Thanks Laurie.
This morning's conference call will be led by Phil Green, Chairman and CEO , and Jerry Salinas Group Executive Vice President and CFO .
Before I turn the call over to Phil and Jerry I need to take a moment to address the safe Harbor provisions.
Some of the remarks made today will constitute forward looking statements as defined in the private Securities Litigation Reform Act of 1995 as amended.
We intend to 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 mornings 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 to 205234.
At this time I'll turn the call over to Phil.
Thanks Avi.
Good morning, everyone and thanks for joining US today I'll review second quarter results for Colin Frost, and our Chief Financial Officer, Jerry Salinas will also provide some additional comments and then open it up for your questions.
The second quarter current roster and 109 million once it out or $9.6 million.
$1.72 cents per share.
Which represented 2.4% increase compared with $1.68 per share.
Reported in the same quarter last year.
Our return on average assets was 1.4% second quarter compared to 1.43% in the second quarter of last year.
Average deposits in the second quarter were 26 billion basically flat compared to the $26.1 billion in the second quarter last year.
Average loans in the second quarter were 14.4 billion. This represents an increase of 6% to 6.2% versus the second quarter last year and growth was broad base across all categories.
[laughter].
Our provision for loan losses was $6.4 million in the second quarter compared to $11 billion in the first quarter of 2019 and $8.3 million in the second quarter of 2018.
Net charge offs in the second quarter were $7.8 million.
Compared to $6.8 million in the first quarter.
$7.9 million in second quarter of last year.
Second quarter annualized net charge offs were only 22 basis points of average loans.
Nonperforming assets were down $21 million to seven point $76.4 million in the second quarter.
Compared with $97.4 million in the first quarter of 2019.
And $122.8 million in the second quarter of last year.
Overall delinquencies for accruing loans at the end of the second quarter were $87.1 million or 60 basis points of period end loans.
And those numbers are well within our standards.
Comparable to what we've experienced in the past three years.
Our overall credit quality remains good.
Total problem loans, which we defined as risk rate 10 and higher.
Total $457 million.
Approximately 27% lower compared to the second quarter a year ago.
Energy related problem loans continue to move in the right direction, they totaled $93.6 million at the end of the second quarter compared to $119.3 million for the first quarter and 100 $995.4 million.
In the second quarter of last year.
Problem energy loans peaked more than three years ago and they're at manageable levels at this time.
Energy loans in general represented 10.2% of our portfolio at the end of the second quarter.
And are well below our peak of more than 16% in 2015.
Our focus for commercial loans is on consistent balanced growth.
Including the core loan component.
While maintaining our quality standards.
New relationships increased 6% versus second quarter a year ago.
New loan commitments in the second quarter were off about 2% compared to the second quarter last year.
But the total remain roughly balanced between core and large deals.
Similar to what we've seen in recent quarters, the commercial real estate market.
Has become more transactional compared to cnine.
Of the deals we're losing in CRT.
Most are lost too aggressive structures that don't fit our standards.
As an example.
For year to date 2019, we've looked.
At 4% more seeing ideals.
And we booked 4% more deals.
However.
On commercial real estate, we've looked at about 50% more deals.
And Weve booked.
About the same number of deals as last year in dollar terms.
Our weighted current active pipeline in the second quarter was up by about 23% compared with the first quarter.
Due to higher levels of both Sienna and CRT.
In consumer banking.
Our value proposition and award winning service and technology continued to attract customers.
The second and third of the 25, new financial centers planned over the next two years in the Houston area opened in the second quarter and the pace of openings will accelerate in the third quarter.
Overall.
Net new customer growth for the second quarter was up by 39%.
Compared with a year ago.
Same store sales increase.
By 6.9%.
Compared to a year ago.
In the second quarter about 27% of our account openings came from our online channel.
Which includes our Frost bank mobile App.
That's up from 22% a year ago.
It also represents a 24% year over year increase in the total number of online openings.
So they are growing both in number and in the proportion of overall account openings.
The consumer loan portfolio averaged $1.68 billion in the second quarter.
Increasing by 4.9%.
Compared to the second quarter last year.
We've been focused on a lot of developments across.
With the expansion in the Houston region.
That I mentioned.
As well as the move to our new corporate headquarters in San Antonio.
And our ongoing up for optimism initiatives.
All of which are raising awareness of frost among prospective customers.
I think it's important to pay attention to some of the things that happen.
Ross.
Than we might otherwise take for granted like receiving the highest ranking in customer satisfaction in Texas in JD powers us retail banking satisfaction survey for the 10th year in a row.
Thats something no other bank say.
Or receiving more Graenitz Greenwich Excellence Awards, and Best brand awards for the small business and middle market banking.
Than any other bank nationwide.
For the third consecutive year.
We're expanding by opening beautiful new locations.
And that includes a financial center opening later this year in Victoria, Texas, which is a new market for Frost.
At the same time.
We continue to make improvements to our top quality digital services.
All while focusing our spending on investments and making our business better.
And moving forward in a manner consistent with our culture.
Those things.
Together with the people that we put in place to execute our strategy.
ER Frost competitive advantage.
That has kept frost growing from 150 years now.
And we'll keep Ross growing.
In the years ahead.
Now I'll turn the call over to our Chief Financial Officer, Jerry Salinas for some additional comments.
Thank you Phil I'll make a few comments about the Texas economy before providing some additional information about our financial performance for the quarter and I'll close with our guidance for full year 2019.
Regarding the economy, Texas unemployment hit a new low for the second month in a row in June falling to 3.4% from 3.5% in May and 3.7% at the end of 2018.
June 3.4% level is the lowest level seen in employment statistics going back to 1976.
Texas employment grew an annualized 3.9% in June .
Following upwardly revised growth of 2.5% in May and the Dallas Fed has increased their estimate of full year job growth from 2.3% to 2.5%.
Employment growth in June , which spread across most sectors and year to date, Texas employment has expanded at a healthy 2.7% pace.
According to the Dallas fed surveyed activity in the Texas manufacturing and services sectors accelerated in June while energy industry activity was flattish from Q1 to Q2 after three years of growth.
Looking at individual markets.
Houston economic growth remains strong with the business cycle index growing 6%.
Over the three months ending in May driven by strong employment data. This represents an acceleration from the 4.8% growth rate seen in Houston in the second half of 2018.
Year to date, Houston employment is up 3.3% up from a 2% rate in the three months through February .
All of the major sectors have increased year over year.
Houston's unemployment rate held steady in may at a record low at 3.5%.
The Dallas business cycle index maintained by the Dallas Fed expanded approximately a 5% annual rate in the second quarter, while the Fort worth business cycle index expanded at about a 2% annual rate.
DFW area unemployment stood at 3.1% in June just slightly above the 3% range rate seen in May which was the lowest level since 1999.
The often economy also remained healthy in may the Austin business cycle index accelerated to a robust annualized rate of 8.2% the strongest expansion since November 2015.
Austin unemployment rate declined from 2.6% in April two 2.5% in May.
The Austin Metro saw a 3.3, 0.3% annualized gain in jobs during the three months ending in May growth was broad based across multiple sectors.
The San Antonio economy expanded at a steady but subdued pace in may.
San Antonios economy expanded at a 3.1% annualized rate in may slightly above the long term average of 3%.
San Antonio's unemployment rate decreased slightly for the fourth consecutive month to 2.8% in may.
The Permian Basin economy continued its robust year to date performance employment growth as mosque moderated in recent months, but the June unemployment rate of 2.2% remained near historical lows and well below the state figure of 3.4%.
Looking at our net interest margin, our net interest margin percentage for the second quarter was 3.85% up six basis points from the 3.79% reported last quarter factors driving this increase include higher loan volumes and higher rates for loans and securities combined with a lower proportion of earning assets related to balances at the fed.
The tax equivalent yield loan yield for the second quarter was 534 up one basis point from the first quarter.
Looking at our investment portfolio. The total investment portfolio averaged $13.3 billion during the second quarter up about $550 million from the first quarter average of $12.8 billion.
The tax equivalent yield on the investment portfolio was 3.42% in the second quarter up five basis points from the first quarter.
Our municipal portfolio averaged about $8.2 billion during the second quarter flat with the first quarter.
During the second quarter, we purchased at about $1.1 billion in agency mortgage backed securities yielding at rate of 3.35%.
Additionally, during the quarter, we sold approximately $550 million of treasuries with an average yield of 1.71%.
The municipal portfolio had a taxable equivalent yield for the second quarter of 4.06% up three basis points from the previous quarter at the end of the second quarter about two thirds of the municipal portfolio with PFF insured.
The duration of the investment portfolio at the end of the quarter was 4.3 years down slightly from 4.4 years the previous quarter.
Looking at our funding sources the cost of total deposits for the second quarter was 41 basis points down one basis point from the first quarter.
The cost of combined fed funds purchased and repurchase agreements, which consists primarily of customer repos decreased to 1.69% for the second quarter from 1.72% in the previous quarter.
Those balances averaged about $1.2 billion during the second quarter up about $62 million from the previous quarter.
Regarding the outlook for 2019.
Our current expectations for the interest rate environment for the remainder of 2019 have changed since our previous quarters guidance.
We were previously projecting flat rates for the remainder of 2019.
Our revised projections now assume a lower rate environment, we are projecting two fed rate cuts for the remainder of 2019, one cut at the end of July and one cut at the end of October .
Looking at the current range of analysts' estimates for 2019, we see a range of $6.84 to $7 in two cents.
As a result of the changes in our assumptions related to the interest rate environment for the remainder of 2019, we are most more comfortable with the lower end of the current range of analysts' estimates with that ill now turn the call back over to Phil for questions. Thank you Jerry We're now open up the call for questions.
Thank you at this time I would like to remind everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad.
If your question has been answered and you wish to remove yourself from the queue press the pound key.
Our first question comes from the line of Rohit Patel of Evercore ISI.
Hi.
So just loan growth moderated quite a bit.
This quarter, 5% year over year.
Last couple of quarters. It was in the 70% range and then lastly, it was 10% could you discuss the drivers behind this motivation is it because of conservative lending by trust bankers or a motor function off.
Reduced loan demand in your markets and then I realize you have talked about expectations for high single digit loan growth could you maybe also give an update on that front.
Okay. Thank you.
I think the main thing right now is competition it's.
Yes, the market is still strong it's moderating a little bit, but I mean, there's still plenty of.
Activity out there.
And it really has to do a lot with that what I pointed out in my comments about structure and I think real estates. The the Best example, when you look at 50% more deals that's a billion and a half dollars more deals.
And then you book about the same amount of deals you did last year that gives you an indication of.
Our ability to participate in some of those some of those things. So I'd say that that's one thing.
Our consumer growth is down a little bit it's still positive things run running around 4% year over year. So it's a little below what our AR.
Goals are.
A lot of what we're seeing there is just reduced utilization.
On the personal lines of credit I think look like for like 41% to 38, and we're also reducing some of the commitments.
There's we sort of.
Make sure we're doing our work keeping those things at reasonable levels and keeping an eye on the economy and.
In the future, so, but I would say the biggest thing right. Now is is competition as much as the biggest part of that is structure.
For example, the deals we lost a year to date.
This year.
62% have been lost due to structure, 38% during price.
38% from price.
We will have.
It's more price competitive as well.
Well, we are more willing to compete on price than we are on structure and.
So anyway, I'd say that that's what is.
Driving these numbers and as far as what are our goals or.
You know high single digit loan growth and that would be our goal or we're not we have we're not posting that so far.
This year, but we are in the solid single digits.
But given where we are I mean look unit posted in the low number reward.
As long as you don't care about again paid back and so we are.
We are focused on.
Doing deals that meet with our risk.
Parameters and it's a little harder to do right now, we'll just have to see how that breaks going forward.
Got it.
And then.
Since the NIM came in better than what we were expecting and I believe last quarter. You had indicated that NIM should be relatively stable in coming quarters that was assuming no change in the fed funds rate.
Could you maybe talk about the trajectory and the drivers of the NIM wishes to 385 number this quarter if the fed does countries.
Assuming two rate cuts in the back half of this year.
Yes, you're correct that's exactly what we did assume so in this.
Rate environment I guess, what we did was we reported a 385 in the second quarter as I look out for full year given the current rate assumption, we're assuming that that the NIM would probably be closer to a 375 for the full year.
So obviously that assumes some reduced.
Rate there going forward and again, we're getting the even though fed the fed funds rate hasn't gone down in interest rates have gone down I'm not telling you anything you don't know, but we've continued to see decreases in the yield curve. A LIBOR has continued to go down so.
From our projected standpoint, we don't really know what to expect to be quite honest with you, but we are expecting to go down going forward. We've seen some good increases in our in our loan yield Phil mentioned that from a pricing standpoint, it's still very competitive. So we're going to have pressures. There I think that in today's environment from a investment security standpoint, there's pressure on finding the yields there also so.
The driver is going to have to be our ability to adjust to find good loan growth with price reasonably find investment alternatives and be able to manage our deposit costs you did see that even though the fed didnt cut rates. We did have a decrease in our cost of total deposits saw a decrease in our customer repo.
Yeah cost. So that's just something that we'll continue to look at we said we're going to be competitive.
But we're not afraid to decrease rates if we need.
All right that's very helpful.
And then maybe if I could please.
Squeeze one more in I know last last October .
You announced your Houston expansion plans.
Cited 1.5 million of cumulative loss before a new branch breakeven on average and that breakeven point on average comes at just after this maybe over two years. After the branch openings given that the rate environment and the outlook is quite different today could you talk about your updated thoughts on new branch profitability and the breakeven timeframe.
Amid lower rates and.
Assuming fed rate cuts.
Well if you go back to your initial comments about.
Branch locations, we had looked at the 40 locations that we'd open over a period of.
So over 10 years.
And.
When branch reach when branches reach profitability.
Historically on average the rate environment today.
Most of that period was in was was actually lower than it is today. So I don't think it's made a material impact on it.
Okay. Thank you.
Thank you.
Your next question comes from the line of Jennifer Demba of Suntrust.
Thank you good morning.
Hey, Jennifer good morning.
Question on the loan yield was there anything unusual in there.
This core no.
No I didn't see anything that was unusual that would have caused that to to have an impact on loan yields.
Okay and can you just talk about.
Good expense run rate in the quarter.
Let me see if I can give you some color I was looking at some of our expense numbers unit preparing for the call and.
I was looking at kind of what we did in 2018 versus 17.
If you recall, though just to make sure that those comparisons were apples to apples in 2018, the network cost associated with the interchange fees actually moved up as a as a reduction of noninterest income. So if you bring it was $12 million for US an 18 that moved out of expansion into income. So if you bought that expense back into that 18% to 17 apples to apples, we were up about four to four and a half right around there.
And looking at our projections for 2019.
We've given some clear guidance on on our Houston expectations on the 19 cents impact and we're still comfortable with that for for our this years impact, but if I exclude the Houston expansion and exclude the impact of the.
Of the move to our new headquarters here in San Antonio, We're really projecting to grow just about at that same rate four to four and a half and from the lease expense standpoint, we moved in in June So our recurrent run rate only includes one month of expenses.
Im going to gauge those roughly at about $1 million a month.
So hopefully that kind of gives you some color of what we're talking about.
Okay. Thank you.
Sure.
Your next question comes from the line of Brady Gailey of KBW.
Hey, so just to close the loop on the new headquarters to is this a $1 million a month you only have one month than they are for Twoq. You. So as we look to Threeq you there should be about $2 million of incremental upward pressure related to the new headquarter building.
Yes, that's right great.
Okay.
All right and then.
It's good to see the buyback authorization.
I was looking at I know you don't call it out but your period end share count went down a little bit in the second quarter.
Maybe just comment on if you repurchase any stock into Q and then your appetite on repurchasing stock.
In the back half of the year.
Yes, we did we purchased that we did spend the last 50 million that we had available. We had spent 100 million in the fourth quarter of 18, and so we spent the remaining $50 million bought about 500000 shares in the second quarter and that's a decrease that you are saying.
What we said is.
We are and so we believe it's important from a governance Dan pointed out good housekeeping standpoint to always have a buyback available.
Certainly we'll continue to look at it what we said in the past is is we want to be opportunistic.
I like to say I wish I had a crystal ball, because I might have waited a little bit on.
On the buyback, but we will continue to be opportunistic I think for us. It's a it's a good way to manage capital. It's a good way to manage the shares outstanding we went back and looked over a 10 year period from 2008 to 2018, and we roughly issue about 750000 shares a year are related to compensation type plans. So our goal would be to at least try to offset those through the buyback program.
All right and then finally for me it looks like other fee income was a little light this quarter I know, there's various things that can go in and out of that bucket, but.
Was there anything driving that number to be a little lower than normal.
What I would say and I was looking for a summary here, but can't find it but what I would say is that it really relates more to what we saw in the second quarter last year.
If I remember correctly, we had a.
We were in an FDIC and we got to a payment of over $1 million in the quarter last year, we had building gains in the second quarter last year, we don't have anything.
This quarter and then we also had an unusual amount of of recoveries of things that we'd previously written off I think over $2 million.
All right. Thank you so it's more driven by yes.
Balances in 2000.
18.
Got it thank you.
Your next question comes from the line of Ebrahim Poonawala of Bank of America.
Good morning, guys.
Good morning.
Hi, So first question Phil just wanted to go back to your comments around the competitive dynamics in the CSD market.
If you could elaborate on that in terms of is this competition coming from your peer banks or is it the non banks, where you are seeing this and I'm just thinking of it in terms of what does this mean in terms of the loosening in credit and the downside risk if we actually have some slowdown in the economy.
How do you assess dead just from your seat when you look at.
So this behavior from the competitors.
Yes.
As you think about the head of the back half of the year, if I heard your goal of high single digits.
But when when and when we sort of look at.
I think you mentioned in your prepared remarks that the pipelines are up 22% quarter over quarter does that imply yes.
As a function of the increase in the pipelines, we should see a pick up in loan growth in the third quarter relative to what you've seen in second.
You had to guess I would say.
The third quarter would be pretty consistent with the second.
I mean, it's been.
We're pretty much a month into it now we've shown some growth.
So I mean, it's it's a tougher road like I've described competitively but.
I think right now if I had to guess I'd say it'd be.
Sort of in line with the second.
Understood and.
Just moving jetting until the for your comments that on.
The margin outlook.
To date.
If I can can you give us a sense and just in terms of how to best think about water cuts mean for the margin.
Given.
Your view on how quickly you can reduce deposit cost of just how you're thinking about that.
Yes, you're right a lot of its going to be dependent on what happens I think that.
In a roundabout way I guess, what we the way we think about it is.
If you've got a 25 basis point basis point cut I mean, it cost us probably somewhere in the range of 1 million to 2 million three among the items you add leave you mentioned a million dollars per month.
Well going forward as well as.
Im guessing about 100 to 200 basis points summit indexing is tied to the Houston expansion.
Gets you to about 6% to 7% does that kind of that I agree to think about it.
Yes, I would I would say, that's probably right I think that the number.
As I think about it.
Probably is closer to that to that 7% range that you're talking about I kind of think of seven.
North of seven really dependent on some other things that are going on but you are not too far off there thats why we tend to think about it.
Yes, there is.
Theres pressure on expenses around years pointed out a number of things I mean, no thing to keep in mind is just it costs are continuing to increase.
You spend a lot of money on additional cyber capability.
And really also it's tough to higher IP talent, we are behind the curve on that it's one of the things I'm focused on right now.
I'd tell you we're 50 people behind.
If I could wave a magic wand up I think I would and bring a man.
And we just we just got to be.
Aggressive and bring that in because it's just tough to find talent and you don't want to let your technical debt grow too high. So yes, there there are pressures on expenses.
I wish we could do I wish we could.
Just be in an environment, where we've got wind at our back and not wind in our face now, but we're going to do the things we need to keep the company moving forward.
Regardless of where rates happen to be but so I agree with jerry's it'll be more the higher side of that in my estimation.
And that's off the 775 base, we had last year just to make sure.
Looking at the starting point correctly.
Yeah, whatever the whatever the reported expenses, where that's that's the way we look at it my previous conversation really just had to do with trying to make the 17 18 comparison apples to apples.
18 to 19 should be fine just as reported.
On the funnel thankful to color appreciate it.
Thank you.
Your next question comes from the line of Brett Robertson of Piper Jaffray.
Hi, good morning, everyone.
Good morning.
Wanted to talk about credit quality.
He managed npis lower and charge offs were fairly reasonable.
But a lot of people have been talking about energy and just some difficulties that that space is seeing can you talk maybe about energy a little bit and what you're seeing in that space and.
Hi, how you manage that portfolio.
Yes, I think that.
The portfolios doing doing well I mean, we keep saying we've got.
Credits that are moving through the snake.
Awfully long snake.
For some of those credits, but energy loans for the quarter were down by about 5% on a period end basis.
Thats not annualized obviously annualized a higher number than that it's down about.
Billion for 81.
The.
You know we saw some.
Some improvements.
Payoffs in the portfolio of problem loans, we saw probably about.
Over $50 million of.
What we call problems, which risk rate 10, or higher and and we saw some.
Some deterioration in a couple one it's been there for a really long time, another that was moved on.
And it had to do that one has to do with natural gas.
It was a Permian deal, but it was a gas deal so that was the weakness there so.
I mean, it's it continues to improve.
I feel good about our underwriting I feel really good about how services performed.
Throughout this whole cycle and it continues to we've seen some reductions in servicing and the in the quarter terms of problems but.
But that's but that's tight so.
I know you are seeing some layoffs.
With even the big players in the servicing side.
So it's something we keep our eye on I think the but overall I think it's going well, we continue to manage that exposure down.
And my guess it will probably continue to go down some as a percentage.
But.
I'm not I'm not really worried about we're focused on at this auction values lastly.
Okay.
And then the other thing I wanted to talk about was this the securities portfolio and mentioned the purchases you did during the quarter. What are you guys thinking about the back half of the year and I know, it's partly market rate driven but are used to plenty of additional purchases in the back half of the year in the Securities book and then.
Maybe just how you want to manage that portfolio where rates are.
Yes, certainly we wish there were more opportunities there I think last time I looked at our projections I think were still up.
Projecting that we would buy another $1 billion in securities roughly.
We're still I think I've mentioned before we've got a significant amount in treasury that are maturing primarily close to the end of the year, but think that number's, probably about a billion and a half.
So some of this is would replace some of that.
And but we're talking about.
Splitting it between treasuries and agencies you saw that I mentioned that we we did a big chunk of agencies there a billion dollars.
We kind of figured that given our outlook on rate being flat to down that it made sense to go ahead and get a little ahead of that so we did do that and I wish we could have done more of it given today's rate.
So we'll continue to try to be up opportunistic, but we do have about a $1 billion plan I expect we'll have purchased some muni. We've got some some room there will continue to purchase agencies and probably treasuries at current expectation again, a lot of it will be dependent on on what makes sense for us given the yield curve and what rates are available.
Okay, Jerry and clarify that does that mean, so you're purchasing a billion or you plan to how much of that is going to be quote.
Replacing existing.
Well securities that are that are maturing versus.
Adding net new portfolio.
I guess I'm just thinking through the numbers in my head since we've got I can easily say, we've got a billion and a half in in.
In treasuries that are maturing towards the end of the year. So if I'm only replacing a billion of it we still have some we're going to we continually look every month, obviously and what our investment plan is so right now I would say given the things that are maturing, we're replacing a big chunk of it but haven't completely.
I included all of that into our projections as far as replacing the old maid and a half.
Got it okay. So.
So you could actually see a net reduction in the securities book in the back half of the year.
We could but again, it's something that we just continue to look at it is going to be dependent on what kind of.
Investment alternatives that are out there to be quite honest with you in the case of the <unk> billion dollars in agencies, we just decided it made sense to do that we sold those.
Treasury Securities that they were at a lower yield than we found an opportunity to be able to to replace those at a higher yield.
We sold some units also during the time during the quarter I think it was around $500 million roughly.
That were yielding on a t. basis.
Less than the overnight rate so were just continuing to reevaluate our portfolio doing what we need to do.
It is just continue to add up to add value to the company from the.
The investment portfolio.
Okay, Great appreciate all the color.
Thank you.
Your next question comes from the line of Steven Alexopoulos of Jpmorgan.
Hey, good morning, everybody.
Good morning.
I wanted to first follow up on the comment.
You guys did you bring him. His question. When you said you would lose 1.2 to 1.3 million cost per month for 25 basis point cut what was the deposit beta youre assuming there.
It's about.
About 20% beta overall, I think thats kind of what we've done historically.
But again, what we've always said is that it's really dependent on what we're seeing in the market.
Why don't we we've continued to say we want to be competitive.
I certainly think that when we look at rate.
Across our markets in aggregate across the competitors.
We are not the highest rate.
But we are certainly very competitive, but we just have to make sure that we're looking at that but it assumes that sort of a.
Total beta if you will.
Okay.
And then thank you and then on the money market deposit accounts the balances came off linked quarter and the rate also came down.
Give some color on what happened there.
I think that.
What we see is up from the on the rate standpoint, you really were just trying to to be competitive. What we said is if there's room. We were we were quick to increase our rates.
We started in July of 17, so we were higher than we were quicker and higher than most but was what we said on these calls is that where we are going to react we're not going to be afraid to increase rates or decrease rates. If we have to so we just saw an opportunity from a competitive standpoint.
To make some movements there I think on the money market I think that generally what we're saying is we're just continuing to see we continue to bring new customer growth and but we just can't there is a diminishment from the current customer base is what we see but we're glad that we continue to see good growth and and really in a lot of cases that money market, which includes both the commercial and consumer the commercial customers really can tend to use that.
You know in a manner is to just in and out with some of their excess on so I would assume that some of that is related primarily to the commercial side.
Okay.
Thanks, and just one final one it's helpful commentary around commercial real estate in the deals you're losing structure first price how does that compare to see an eye in terms of losing deals on structure versus price. Thanks.
Yes.
You know, it's just a different ballgame domain.
Commercial real estate is looking for.
For capital in terms and.
Yes, and it centers mainly around.
Guarantees burn downs and.
You know.
Interest only periods all those almost structure things when you're dealing with the cnine credit it's much more of a relational situation and we see less of those times.
Issues, there just by its nature.
So.
I think thats just its just.
And just what it is.
It's interesting how you are you also seeing something I think that.
Private equity.
Limited partners.
Really I think putting pressure on developers to avoid guarantees they don't they don't want to be in a position where they have to step in and all of a sudden there.
They're liable on these things so I mean.
And that's a little bit new angle that weve seen so you've got a lot of competing forces there in the in the commercial real estate World, where as you know I used to be a CFO for 19 years or whatever.
No.
I would say the lessening of one of these change my banking relationship of it in half two and then have to do it on a few basis points are.
Or small structure things really wouldnt move need to move that relationship. It's it's got to be a deeper thing that.
Just my historical perspective on it.
Okay. Thanks for taking my questions.
Your next question comes from the line of Michael Rose of Raymond James.
Hey, guys just wanted to get an update on.
The.
The deposit growth that you've seen out of the Houston expansion so far.
If you have any expectations for what that could generate over the next couple of years. Thanks.
Well we haven't.
It's it's early on Ryan so manner.
I don't have numbers at the tip of my fingers. If it did it wouldn't be impressive to hear because really there really new.
And I think the main thing I would say is that we don't see anything in the locations that we've opened up.
That have caused us to believe they're going to be anything different on average than what weve seen okay. We're happy with that.
With how it's going.
Okay.
Maybe one follow up question on the insurance business.
I would have thought given kind of the relative strength in the market that.
You would have done a little bit better year on year.
Any sort of color there too.
What happened and.
What the outlook is thanks.
Yeah, the big driver in the second quarter was really primarily related to employee benefits that was really where we saw the weakness and it really we had some impacts from some of our existing client base were.
Some of the employee counts were reduced their which results in a significant reductions.
Which effects than our our commission and then also we saw lower life commissions in the quarter compared to the second quarter last year.
We really had a strong first quarter first quarter as you typically our strongest quarter second quarters actually typically our weakest quarter, but that employee benefits was a little bit of a surprise to us but.
They had a great year in 2018 and were kind of projecting them to continue to have a good growth going forward.
Okay. Thanks for taking my questions.
Your next question comes from the line of Jon Arfstrom of RBC capital markets.
Thanks, Good morning.
Good morning, a couple of follow ups.
Back to commercial real estate, Phil one of the things you said early on as you've looked at 50% more deals.
And compared them on I think you said, 4.6% for seeing what what drives that 50% is it just more flow.
Are you looking more for attractive commercial real estate, what im curious on them.
You know that it's.
Again, it has been kind of the nature of the Beast commercial real estate deals are in the market now and there.
Whereas people who were.
People, who are running businesses are not out there trying to change their bag right. So yes, there is a long sales cycle on that.
And it's.
You've got to develop relationships. So we're seeing.
We're seeing good activity I mean, there's there's activity with the people were bank and first of all we're banking people not things right and so the people that we're banking I've got some great opportunities.
And so we're we're seeing those but it's just that.
Yes, it just structure wise, we're just not able do as many as we.
As we look at by Longshot So.
No in between Texas got great job growth I mean, it's still growing I mean, you look at the North Texas market extremely strong.
Usten I mean really it's not there's not a weak market. So.
There are opportunities and we've got a great people in our commercial real estate.
People that are your best and state. So they have great relationships will get to see lots of deals and so when there is lots of activity will get to see a lot. It's just that we're not getting to do as many as we'd like to just because structures.
Just just isn't fitting our risk parameters right now.
Okay mix placements, yes makes sense and then the commercial pipeline the flip side of it.
Up 23% my assumption is that more cnine.
Driven.
Right.
Actually the that pipeline is.
Is fairly.
Well spread out I mean, you know see it I mean, its up 23%.
And Sienna is up 20% commercial real estate is up 24.
And then can you know consumer and consumer real estate is up a lot higher percentage, which is it's a pretty small number so.
I think this I think is pretty good if you look at the.
Public finance pipeline is up they have been a little bit weak recently, that's a 50%.
And the energy pipeline is is down about 17.
So.
So the so it looks pretty broad based.
Okay.
And then Jerry one for you back on the margin I think you talked about a 375 full year margin.
I heard that correctly is that right.
Oh, Yeah, I think thats what we.
Well, let's let me go back to my answer to the margin page here for a second to make sure I don't give you some bad information will launch.
So yes, so we had not yet were 385 in the second quarter and given the.
Given our expectations on rates and what we are saying, yes, I think that our current projections would have is right at 375 full years, obviously trending down for the remaining quarters of the year, Okay and I just if you make a linear you look at your first quarter 379, you.
Draw a line you exit the year at about a 365.
Is the way my model works on Im just.
A question on this last quarter I don't really want to push you on this too much but anything else you guys can do to defend the margin.
When you look out to 2020 or is that just simply a product of the environment.
I think it's.
I think.
If we can definitive we got to do with the cash market.
All right I, just don't think that.
Derivative wise you're seeing.
Youre seeing value there that would pay off for our shareholders do it I could be wrong on that real quick you go but.
So I think it has been the cash market and would have to be in my opinion.
Pre investing some of the stuff that's coming off the problem is.
Jerry said earlier I mean, the yield curve is just it's down what is it 50 basis points, where we were last quarter.
So it's just it's just tough it's hard to.
To buy groceries on what the yield curve is given your right now.
So.
They are given where rates are units. It's if these rate.
Numbers happen the way Weve.
Principal amount it will be rough patch for a while I mean its.
You know I mean.
Used to work for you know <expletive> Evans, I mean, when I used to say, we'll work hard to were not magicians right.
And we have to and we are in a we're in a business where our commodities money in the price of monies it looks like it's going down.
But you know the way.
Thought about the business and what does that mean for us fundamentally and I really hope that you've seen that we've got a lot of good things going for US you know commercial customer growth rate is up 4% are a number of consumer.
Customers is.
3.2% last year, so by two.
Three point, you don't sound like a lot, but that's that's in the top quartile I'd say for sure.
Banks are doing you saw what I said about.
The growth in checking accounts in checking accounts.
Our 40% higher this quarter than they were.
A year ago in terms of new checking accounts, who we did right under 3600 this quarter, we had 2600.
Last quarter.
So the thing I'm focused on is.
Is is the are the fundamentals of our various business is doing well okay.
Is the consumer business.
Growing do you see those kind of fundamentals with regard to account growth.
Market awareness consideration in the market both of which are up they were up 10% last quarter I've seen these numbers, but.
Net promoter scores over 80% right now if you look at the commercial business you saw the increases that we had new relationships of 6%, we've got a decent pipeline going.
Yes, do we have pressure on commercial deposits.
Yes in a diminishment continues to be an issue as rates are higher people use of money diminishment is down about 10% from what was the quarter before so I'm hopeful that thats at slowing but still there, but but if you look at the fundamentals on are we growing customers.
And are we watching credit.
And not doing stupid best we can.
Then then to me I'll take that I mean, the business is doing well.
And I hate to be spending money.
No.
On some things, but you know you just got to and the things we're spending on.
Really have improved our business and yes, I mean in retrospect.
You know that with the headquarters was like that almost six years. This thing started the project in China.
It's been great. If we Didnt did move in when the feds about cut rates Thats just the way.
As to where it goes but but it's good for us and it's a great building iconic this increase and helped our brand here and I think will help brand statewide things we've done with the Spurs have really helped our.
Our.
Awareness things, we know the rockets really helped our awareness in Houston rock.
The Houston market so.
No.
Yes rates are what they are it will be a bit of a rough patch, but what we're focused on is are we still doing this so that will continue to drive the business forward and I'm convinced that we are and you know you've been around as long of John know that.
There are really two things that continue to.
B the.
The untapped operating leverage for our company that that's normal if interest rates and that's that's more efficient balance sheet in terms of loan to deposit ratio.
We still got both of those things that we can bring to bear we were hopeful of being able to take advantage of them.
Oh the rate movements continue to get some wind at our back that it happened it looks like it's not going to happen and.
But we still got to one day, we will and then also we're going to make progress on loan to deposit so I feel good about.
The company and our fundamental outlook over the long term and.
We're just Scott to World and what we're doing right now.
Yes, Okay, yes, I agree you're controlling what you can appreciate the time.
Yes. Thank you.
Thank you I will now return the call to Phil Green for any additional or closing comment.
Okay, well I think those were my closing comments. Thanks.
We just want to thank everyone for their participation and interest.
Thank you Roger.
Thank you for participating and the Cullen Frost Bank second quarter 2019 earnings Conference call you may now disconnect.