Cullen/Frost Bankers Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 27, 2023

Key Takeaways

  • CullenFrost delivered an 80% increase in Q1 earnings, reporting $176 million or $2.70 per share, with return on average assets of 1.39% and return on average common equity of 22.59%.
  • The bank entered March with 20% of its deposit base held in a Federal Reserve checking account, avoided Federal Home Loan Bank advances and wholesale funding, and fully benefited from Fed rate hikes.
  • Organic expansion remains on track as the original 25-branch Houston 1.0 network turned profitable (29% LQA deposit growth; 30% LQA loan growth; $1.4 million pretax in March) and Dallas openings have reached 228% of new household and 282% of loan goals.
  • Net interest margin rose 16 basis points to 3.47% in Q1, bolstered by higher Fed and loan yields and incremental investment purchases (e.g., $1.7 billion of Agency MBS at a 5.02% yield).
  • Credit quality remains strong with nonperforming loans down 22.9% year-over-year, problem loans down 22.4%, and a commercial real estate portfolio averaging a 55% loan-to-value across major categories.
AI Generated. May Contain Errors.
Earnings Conference Call
Cullen/Frost Bankers Q1 2023
00:00 / 00:00

There are 11 speakers on the call.

Operator

Greetings, and welcome to the CullenFrost Bankers, Inc. 1st Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.

Operator

It is now my pleasure to introduce your host, Aby Mendez, Senior Vice President and Director of Investor Relations. Thank you. Please go ahead.

Speaker 1

Thanks, Donna. This afternoon's conference call will be led by Phil Green, Chairman and CEO and Jerry Salinas, Group Executive Vice President and CFO. Before I turn the call over to Phil and Jerry, I need to take a moment to address the Safe Harbor provisions. Some of the remarks Made today will constitute forward looking statements as defined in the Private Securities Litigation Reform Act of 1995 as amended. We intend such statements to be covered by the Safe Harbor provisions for forward looking statements contained in the Private Securities Litigation Reform Act of 1995 as amended.

Speaker 1

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

Speaker 2

Thanks, A. B, and good afternoon, everyone. Thanks for joining us. Today, I'll review Q1 results for CullenFrost and our Chief Financial Officer, Jerry Salinas, will provide additional comments and then we're going to open it up for your questions. In the Q1, Conefrost earned $176,000,000 or $2.70 per share compared with earnings of $97,400,000 or 1 point $50 per share reported in the same quarter last year.

Speaker 2

That represents an increase of 80%, that's 8 0% over last year's level. Our return on average assets and average common equity in the Q1 were 1.39% And 22.59 percent respectively, and that compares with 0.79% and point Excuse me, and 9.58 percent for the same period last year. I'm extremely proud of this performance and I believe that it helps Demonstrate the value of Frost's culture, the excellence of our people and the soundness of our institution. These results are a product of our commitment to our philosophy, which our late former Chairman, Tom Frost, captured years ago In our 21 word mission statement, which reads, we will grow and prosper building long term relationships Based on top quality service, high ethical standards and safe sound assets, Never have those words rung Truer. Our commitment to this mission produces tangible results like we just reported, And it is reflected in factors such as our commitment to sound liquidity, which resulted in Going into March with 20% of our deposit base held in a checking account at the Federal Reserve.

Speaker 2

This not only serves to protect depositors, it also allowed us to take direct benefit from Federal Reserve interest rate increases I'm convinced we built not only balances, but also trust with our deposit customers. Have the level of bank deposits generally been impacted by these higher rates and the Fed's quantitative tightening? Of course, they have. Remember, our deposits peaked in August of last year. Did most banks see movement by some nervous Frost did not take on any federal home loan bank advances.

Speaker 2

We did not participate in any special liquidity facility For government borrowing, we did not access any wholesale funding and we did not utilize any reciprocal insurance arrangements To build insured deposit percentages. And while lending out only 41.5% of our deposit base at quarter end, We continue to provide consistent capital to our customers and communities by growing our average loan portfolio over the year By 7.5% in line with our high single digits target. We also continued To successfully execute our focus on organic expansion in major Texas markets. For example, Our Houston expansion, including the original 25 location build out, plus the partial completion of 3 additional locations in What we call Houston 2.0 continue to mature and exceed pro formas with 115% of our household goal, 169 percent of our loan goal and 102 percent of our deposit goal. I'll add that in a moment, Jerry will share some insights into the financial impact from the maturing Houston expansion.

Speaker 2

In addition, our Dallas expansion just reached the halfway mark this week and currently stands At 228% of our new household goal, 282% of our loan goal And 3 18 percent of our deposit goal. Now taking a closer look at the quarter, Our consumer business continues to perform extremely well. In fact, the first Quarter represented an all time high for net new customers, up 26% From the Q1 of last year. Even more impressive to me was the fact that for the month of March, We exceeded our previous all time monthly record for net new consumer customers by 33%. That's over 1,000 more customers than our previous record.

Speaker 2

Our bankers are busy. Looking at this increase in new customer growth, it was led by Dallas and Houston, our 2 expansion markets, Which accounted for 75% of this household growth. Houston was up 33% And Dallas was up 133%. And even our headquarters market of San Antonio Saw net new household growth in March of 14%. Average consumer deposit balances For the Q1 declined 1.4% from the Q4 of last year as customers continued to spend excess balances and take advantage of significantly higher rate opportunities.

Speaker 2

Most of that decline was in our consumer checking balances, which was partially offset by increases in consumer CD balances as customers took advantage of our highest available rates. But I think it's important to note that looking at the period March 10th to April 14th, consumer checking balances We're actually up 1.3%. Consumer loan growth ended the quarter At $2,450,000,000 or 28% higher than the Q1 of last year, Driven by consumer real estate as our home improvement and home equity products continue to be the right product at the right time For customers with low rate first mortgages, credit continues to be excellent with average credit scores Our new mortgage pilot program continued to originate loans for employees And we're very pleased with the experience we've been able to provide. We look forward to rolling the product out to the market when we begin offering it initially in our Dallas region later in the second quarter. Looking at our commercial business, it's clear that even as our volumes increased 4.1% from the same quarter a year ago, The increases in interest rates by the Fed are having their intended effect of slowing the rate of growth for commercial activity, particularly In the commercial real estate sector, I'm pleased with our prospecting efforts in the market as we increased our number of calls By 24% over the 4th quarter.

Speaker 2

That resulted in a linked quarter 25% increase And the dollar amount of prospect deals we looked at and we actually booked 50% more prospect dollars for this same period. However, we saw the dollars of customer deals we looked at and booked Both fall by around 35% for this same period. And this was reflected particularly in a 52% In the dollar value of customer CRE deals booked, it shouldn't be a surprise that commercial real estate activity is moderating in this rate environment. Looking forward, our dollar volume of total new opportunities in our pipeline The gross pipeline is up 17% from year end. But when probability weighted by our loan officers, it looks pretty flat.

Speaker 2

So I'd have to say I'm seeing some mixed signals in the tea leaves and we'll just have to see how it turns out. What I can say definitively is that between March April, average loans are up $192,000,000 So to this point, we're still seeing decent growth. Credit quality continues to be strong by historical standards. Problem loans, which we define as risk grade 10 or higher were $347,000,000 at quarterend, down $100,000,000 or 22.4 percent from the Q1 of last year and up $25,000,000 from our year end level. Non performing loans were 39 point $1,000,000 at quarter end, down 22.9% from a year ago and flat from the previous quarter.

Speaker 2

Charge offs for the quarter were $8,800,000 up $2,500,000 from the Q1 of last year and represented an annualized 21 basis points of average loans. Now regarding commercial real estate, as we noted last quarter, overall, our commercial real estate portfolio metrics Continue to indicate good operating performance across all asset types with acceptable debt service coverage ratios And loan to values. Total CRE commitments were $10,900,000,000 at quarter end with 8 point 3,000,000,000 funded and outstanding. Within this portfolio, what we would consider to be the major categories of investor CRE, things like office, multifamily, retail and industrial as examples, Total $4,700,000,000 or 43 percent of CRE commitments. Our investor CRE portfolio has held up Well, exhibiting an overall average loan to value of about 55% and loan to cost of about 61% and acceptable reported debt service coverage ratios.

Speaker 2

Higher interest rates have certainly led to some decline in coverage ratios and will probably lead to some valuation declines, We're starting from a strong position with good cushion. Specifically, in the office building Folio, which is top of mind in the current environment and including medical office, we have about $2,400,000,000 committed and 2 point $2,000,000,000 outstanding with about half of that being owner occupied buildings. We consider owner occupied properties to have a lower risk profile due to reliance on our C and I borrowers operating cash flow rather than income generated from underlying real estate. And borrowers in our C and R portfolio have held up very well as we operate in some of Strongest markets in the United States. The investor office portfolio exhibited an average loan to value of 55 Again, starting from a strong position with cushion for potential valuation declines.

Speaker 2

Our comfort level with our office portfolio continues to be based on the character and experience of our borrowers and sponsors, The predominantly Class A nature of our office building projects and the fact that 83% of the exposure is associated with stabilized projects that are 87% leased. It also helps to be operating in Texas. Finally, I'm happy to report we learned in the Q1 that for the 7th year in a row, Frost had received the highest number of Greenwich Excellence and Best Brand Awards of any bank in the nation. The Greenwich Awards are given for providing superior service, advice and performance Small Business and Middle Market Banking clients. In addition, we learned that for the 14th year in a row, Frosted received the highest ranking in customer satisfaction in the J.

Speaker 2

D. Power U. S. Retail Banking Satisfaction Study for Texas. None of these accomplishments would be possible without our outstanding staff always striving to go above and beyond to make people's lives better.

Speaker 2

They made it all happen, and I'm immensely proud of them and our great company. Now I'll turn the call over to our Chief Financial Officer, Jerry Salinas, for some additional comments.

Speaker 3

Thank you, Phil. I wanted to start off first by talking a little bit about our Houston expansion results. As a reminder, we announced our planned initial 25 branch expansion in Houston in 2018. The last of those branches, which we refer to as Houston 1.0 was opened in 2021. So these branches are still in what I would call the development stage.

Speaker 3

We've been very pleased with the volumes we've been able to achieve as we've mentioned previously in some of these calls. Looking at the Q1, linked quarter annualized growth in average balances for these locations With 29% for deposits and 30% for loans. Also, I'm happy to say The Houston 1.0 is now profitable as those branches earned approximately $1,400,000 pretax In the month of March or $0.02 a share after tax and we would expect that their performance will continue to improve. Now moving to our net interest margin. Our net interest margin percentage for the Q1 was 3.47 percent, up 16 basis points from the 3.31 percent reported last quarter.

Speaker 3

Higher yields on both balances held at the Fed End loans had the largest positive impact on our net interest margin percentage. The increase was also positively impacted to a much lesser extent By a higher yield on investment securities, these positive impacts were partially offset by higher costs on both deposits and repurchase agreements and the impact of lower balances held at the Fed. Looking at our investment portfolio, the total investment portfolio averaged $21,700,000,000 during the Q1, up $1,600,000,000 from the 4th quarter average as we continue to deploy some of our excess liquidity During the quarter, we made investment purchases during the quarter of approximately $2,100,000,000 which included $1,700,000,000 in Agency MBS with a yield of 5.02 percent $390,000,000 in municipal securities with a taxable equivalent yield of about 5.01%. During the Q1, we sold about $1,200,000,000 in investment securities, about $900,000,000 in municipal And about $300,000,000 in Agency MBS securities as we took advantage of market dislocations, which allowed us to improve interest income going forward. We recognized a net gain of about $21,000 on those transactions.

Speaker 3

The net unrealized loss on the available for sale portfolio at the end Quarter was $1,400,000,000 an improvement of $260,000,000 from the $1,700,000,000 reported at year end. The net unrealized loss on the held to maturity portfolio at the end of the quarter was $110,000,000 down $61,000,000 from year end. The taxable equivalent yield on the total investment portfolio in the Q1 was 3.24%, up 15 basis points from the 4th quarter. The taxable portfolio, which averaged $13,300,000,000 up approximately $1,300,000,000 from the prior quarter, At a yield of 2.67 percent, up 26 basis points from the prior quarter, impacted by the higher yields on recently purchased Agency MBS Securities. Our tax exempt municipal portfolio averaged about $8,400,000,000 during the first quarter, Up about $293,000,000 for the 4th quarter and had a taxable equivalent yield of 4.23%, up 6 basis points from the prior quarter.

Speaker 3

At the end of the Q1, approximately 73% of the municipal portfolio was pre refunded or PSF insured. The duration of the investment portfolio at the end of the Q1 was 5.5 years, down from 5.8 years at the end of the 4th quarter. Looking at deposits, on a linked quarter basis, average deposits were down $2,000,000,000 or 4.5 percent With about 2 thirds of the decrease coming from non interest bearing deposits and 1 third coming from interest bearing deposits. I want to talk a little bit more about our non interest bearing deposits, which totaled $16,000,000,000 at the end of the quarter With 96% of that amount being commercial demand deposits. Related to these commercial DDAs, I have mentioned previously that this category was the most at risk given the high interest rates as commercial treasurers and CFOs We're beginning to focus on those balances as any balances above amounts needed for normal transactional operational amounts were not earning any interest.

Speaker 3

When rates were at or near 0, that was not a big deal. But as rates started to go up, we had seen some reduction in our DDA balances That began in the September, October timeframe and we mentioned those balances were the most at risk and we suspected that those balances Would continue to decrease, which they have. These decreases did not accelerate after the bank failures in March, The decrease in the monthly average balance from January to February was $538,000,000 The average balance Sand decreased $301,000,000 between February March and into April, the average balance is down $492,000,000 from the March average. These decreases have not been unusual and were not unexpected. Looking at total interest bearing deposits, They've been pretty stable during the period.

Speaker 3

At the end of December, they stood at $26,400,000,000 and decreased 167 $1,000,000 to end the quarter at $26,200,000,000 The average balance for both the month of March And April month to date is $26,100,000,000 so basically flat during this time period. Customer repos for the Q1 averaged $4,200,000,000 up $636,000,000 from the $3,600,000,000 average in the 4th quarter As we saw some deposit flows into our repo product during the quarter. The cost of interest bearing deposits Looking at non interest income on a lean quarter basis, I just wanted to point out a couple of items. Trust and investment management fees were down 3,600,000 Or 8.9%, driven by decreases in estate fees of $2,100,000 real estate fees of $667,000 And oil and gas fees down $449,000 Estate fees and real estate fees can fluctuate based on the number of estates settled or properties sold, respectively. Insurance commissions and fees were up $7,300,000 or 62% from the 4th quarter, Driven by higher property and casualty contingent bonuses up $3,100,000 benefits commissions up $2,800,000 And live commissions up $1,200,000 which those live commissions can tend to be kind of choppy.

Speaker 3

As a reminder, the Q1 is typically our strongest quarter for insurance revenues given we typically recognize contingent income in that quarter and also impacted by our natural business cycle. The Q2 is typically our weakest quarter for insurance revenues, again impacted by our normal renewal business volumes. Other income was down $4,900,000 from the 4th quarter, primarily due to a $5,100,000 distribution Received from an SBIC Investment in the Q4 last year. Regarding 2023 expenses, Looking at our full year projection of expenses for 2023, as we mentioned last quarter, we currently expect total non interest expense For the full year 2023, we increased at a percentage rate in the mid teens over our 2022 reported levels. The effective tax rate for the Q1 was 15.7% or about 15.9% excluding discrete items.

Speaker 3

Our current expectation is that our full year effective tax rate for 2023 should be in the range of about 15% to 16%, but that can be affected by discrete items during the year. Regarding the estimates for full year 2023 earnings, Our current projections include a 25 basis point Fed rate increase in May, followed by a 25 basis point decrease in September, November December. Given those rate assumptions and our expectation of 2023 non interest expense growth, We currently believe that the current mean of analysts' estimates of $9.79 is reasonable. With that, I'll now turn the call back over to Phil for questions.

Speaker 2

Thank you, Jerry. And we'll open it up for questions now.

Operator

Thank you. Ladies and gentlemen, the floor is now open for questions. Today's first question is coming from Steven Alexopoulos of JPMorgan. Please go ahead.

Speaker 4

Hi, everybody.

Speaker 3

Good morning, Steven. Good morning, Steven. Good afternoon. Good afternoon.

Speaker 4

I wanted to dig a bit deeper into the decline in noninterest And period end deposits. Can you help us understand how those trended? It sounds like it was pretty normal, but I just want to dive a little bit more into this. How those trended Through what we saw from Silicon Valley Bank at Signature, what do you guys see in that aftermath where most banks saw a fairly substantial Reduction in the uninsured deposits.

Speaker 3

Really from a fluctuation standpoint, Those balances as you would expect and as I talked about, we've kind of seen a downward trend Starting back in September, October. And I don't think that during those days With SVB that I would have said, hey, it really looks more unusual than it had the week before, let's say. We were already on that downward sort of trend. Obviously, we were paying a lot of attention to it and you can tell by the averages, they were down. But yes, I'm not going to say I'm sure there was some concern.

Speaker 3

So it's not like we have Are ahead in the sand. But I don't think it's been anything significant. Like I said, when I mentioned the average balances, That's really what I was trying to give a little bit of color that really in March and as you would expect that was pretty early on at 10th let's say so that was the 1st 3rd of the month And the balances between February March weren't that much lower. We've seen them continue to decrease in April, like I said, and Some of that obviously can get affected by tax payments as well. And I'll take a little step back and say, pre COVID for us, Typically what would happen is that our deposits would tend to peak in December.

Speaker 3

A lot of the corporate Customers would do window dressing as we called it. So those balances would tend to decrease excuse me, increase In December and then as we went into the Q1, those balances would begin to decrease into the Q1 and in through April And with tax payments and such and then would pick up in the tail end of the year. So some of it is natural trend based on What some of the corporate customers have done historically, but I wouldn't say that we saw a significant I'm sure there were some downward movements, But just quoting the numbers I mentioned regarding average balances, I don't think it was really anything that caught a lot of our attention. Obviously, we were paying attention. There were a lot of conversations going on between our customers and our bankers.

Speaker 3

Customers were reaching out to them And we were having good conversations, but I don't think it was anything that I would say, gosh, on day X, those deposits were down $3,000,000,000 or something Nothing like that. We never saw any sort of a decrease that I would say was beyond a reasonable band.

Speaker 2

Yes, Steve. I might just add that really seeing anybody that looked like they were CERN of any size was notable and there were so little of it. I'd say less than one hand That I heard about and I think our experience was that When you talk to people, they were okay. I think it's indicative of our relationship model and that Our customers didn't really consult social media, they consulted our bankers. And we had lots of calls.

Speaker 2

And I think early We were calling customers more than we were getting calls. So I agree with Jerry. It was It's certainly a time everyone was paying attention and you were wanting to make sure you're communicating, that your people had the best information and that if you saw anything that was Sort of not quite right reported that you could address it and then everybody would be equipped. But I was really proud of our customer base. I think it was really indicative of the relationships and really trust that people had in Frost.

Speaker 4

You're one of the few banks that didn't see substantial outflows on that Monday, Tuesday, Wednesday after SIBB. So kudos to you guys on that front.

Speaker 3

Thank you.

Speaker 4

On the net interest margin, Jerry, I thought

Speaker 2

you said

Speaker 4

last quarter, it was also assuming that rates I think one more and then there were several cuts you said you thought the NIM would peak in the Q3. I'm curious if the Fed goes 1 or 2

Speaker 3

Yes. I think some of it some of the moving pieces as we continue to talk about is what happens to this commercial DDA. I think our expectations there, let me start with that is that, I mentioned that the April volume is down from March. And so we expect based on what we're seeing and conversations with those customers that we'll begin to really settle into the low point in the second quarter and start to see in the going forward an increase. And I'm not talking about significant increases, maybe stabilization might be a better word than increases, starting in the second half of the year.

Speaker 3

So if in your scenario, I guess I'll stop it in a second and say so. One thing that is not affecting us today as much Is that we have for modeling purposes have assumed that we won't make any more investment purchases this year. And the reason we took that out of the model was more, given all the noise and concerns about liquidity, and all the questions that were coming up, We just appreciated the flexibility we could give ourselves if we took that out of the assumptions. Now I'm not saying we won't buy anything, but it's good to have that into Built into our base that should we see something opportunistically, we can take advantage. So we're going to be under in a higher rate environment, We're going to be in a little bit of a lower sort of operating performance standpoint because we're not going to be investing at what you might expect Might be higher rates.

Speaker 3

And again, some of it's going to be dependent also on deposit betas. I think we right now Feel pretty good on our deposit costs, what we're paying our depositors. We're being a little bit more aggressive on our CDs. It's something that we really want to make sure that we're helping our customers make one decision and the decision being that they want to bank with Frost And so being a little bit more aggressive there. So I think those are the 2 things that potentially could have An impact on the net interest margin.

Speaker 3

So in our scenario, we project 1, a NIM that's relatively flat for the rest of the year. Again, a lot of it's going to be dependent on what happens with those demand deposits. But in a scenario where I've got one rate increase, I think you said No cuts, but maybe another increase after that. I think what we project is for any 25 basis point increase We would expect about $1,300,000 pretax improvement in net interest income, If that kind of helps you out there.

Speaker 4

Yes. That's very helpful. If I could sneak one last one in. Just on liquidity, where did Cash level then on a period end basis. And how do you think about that balance moving forward?

Speaker 4

Thank you.

Speaker 3

Yes, we were I think Phil may have said in his comments at the end of the quarter, we were 20% of deposits is kind of where we ended up. And The number, I'll give it to you as of today. I think we were at little shy of 6,900,000

Speaker 2

Got it.

Speaker 3

$1,000,000,000 excuse me, yes, dollars 6,900,000,000 And

Speaker 4

do you think you'll see further reductions in that level moving forward?

Speaker 3

Yes, I guess it's going to that's the big question is deposit flows. Right now, we don't have any assumptions for investment purchases. We'll certainly expect that we'd get some cash flow from the investment portfolio, which is maturities and such. And I think loan growth, as Phil said, we expect loan growth to be at that high single digit. So that's not going to have a big impact On cash balances, we yes, I think all things being equal, we could be in this ballpark for the rest of the year.

Speaker 4

I appreciate all the color.

Speaker 2

Sure.

Operator

Thank you. The next question is coming from Peter Winter of D. A. Davidson. Please go ahead.

Speaker 5

Thanks. I was wondering, can you talk about some of the strategies to reduce some of the asset sensitivity In light of the forward curve and your outlook for some rate cuts.

Speaker 2

Well, I think before, if we just talk about asset sensitivity and reducing it, We said for some time that there are really three things that we look at as providing some measure of Protection. No, we are asset sensitive. And so that's we can't obviate that totally. But the three things are if we were willing to lock in some of the rates by extending on the yield curve out from The daily Fed balance that we're maintaining, so that's one thing. And the second thing is that because we've done so much work Increasing our deposit rates over time, really beginning with the cycle of rate increases.

Speaker 2

We've got Built in capacity to respond to rate reductions in the event they happen, we can lower those down, so that helps. And then the third thing that we've got really in our business is what our business volume is going to do. And are we able to continue to grow organically And post good numbers there. The outlook looks good, but we'll just have to see what happens there. And so that's the 3rd piece of it.

Speaker 2

And there I will say that with regard to hedging program, that type of thing, we continue to look at those For opportunities, it's been our position that those have been we really didn't see value in there visavis Cash markets or other things, and so we really haven't availed ourselves of that, but we continue to look at that and they may be a part of what we do if we feel like There's opportunity there for the company and for shareholders. So that's really our perspective on it.

Speaker 5

Got it. And You mentioned that you're still comfortable with the high single digit loan growth. But I'm just wondering, in this environment, we've been hearing that certain lenders Are pulling back or tightening underwriting standards. You think there's going to be opportunities for you guys to take market share just given the strength of your balance

Speaker 2

Peter, that's a great question. We were actually talking about it this morning. That's a little bit of a wildcard. I would say, well, I don't see it definitively in our pipeline numbers yet. I hear about it anecdotally and I'm aware of some deals where banks were not able to complete A transaction that they had offered on the same terms and we ended up getting some of those.

Speaker 2

My gut tells me that's going to happen more. What we're going to have to do though is we're going to have to be prudent and careful in the deals that we're seeing, particularly in the commercial real estate space, because Developers and our customers tell us that it's easier to get equity than it is to get debt capital these days. And so you can imagine, cell phones ring a lot. And we don't do transactions. We bank people and we have long term relationships.

Speaker 2

So We got to be really prudent in taking advantage of that. I think you'll probably a little maybe a little bit less of that in the C and I space. I hope not. I really would love to expand the C and I business because it's so long term. It's got a long sales cycle, but it's very profitable.

Speaker 2

And so let's hope. I think that is the wildcard right now as we move through the rest of this year. If we see banks that Or pulling in their horns because of liquidity issues, we could see a little bit of growth there.

Speaker 5

Great. Thanks, Phil.

Speaker 2

You bet.

Operator

Thank you. The next question is coming from Brady Gailey of KBW. Please go ahead.

Speaker 6

Thanks. Good afternoon, guys.

Speaker 2

Hi, Brady. Hi, Brady.

Speaker 6

So expense growth has been mid teens for the last Well, it was last year, you're expecting it to be this year. I know some of that is driven by what has happened in Dallas and in Houston. When you think about longer term expense growth, what is the right level there? I'm guessing it's somewhere back in the Mid eye single digit level?

Speaker 3

Yes. Just as a reminder, I think it was driven Primarily, by what you mentioned, we're obviously introducing our new mortgage product and the impact of the expansions. But in addition, we talked last quarter about the fact that we were making a significant investment in IT this year. So just as a reminder on kind of what's driving the expense growth. Yes, I would say that in a more normalized environment as we're expecting for next year, I would think that your comment about a high single digits is what I would expect at this point.

Speaker 6

Okay. And then, Jerry, just to clarify, your comment about a kind of flat net interest margin from here, that's based off The Q1 level that's $347,000,000 NIM?

Speaker 3

Right.

Speaker 6

Okay. All right, great. Thank you, guys.

Speaker 2

Sure. Thank you.

Operator

Thank you. The next question is coming from Ebrahim Poonawala of Bank of America.

Speaker 7

Hey, Jerry. Maybe I missed it. Did you Give a number for where DDS or non interest bearing deposits ended the quarter and Give us a sense of your expectations around that mix given as you said, you expected these customers to move excess funds out. If we get the last rate hike next week, is it fair to assume that a lot of these customers who had to reprice and move out of that Deposit bucket have already done so, so we are at a point where your non interest bearing balances should begin to stabilize or is that not the right way to think about

Speaker 3

No, I think, Ebrahim, that's kind of where we're at. We kind of expect that those balances, I think that The people that had excess balances in those DDAs, have really put a time and a lot of time and effort in getting those balances Moved out of there, being more efficient in their managing their cash positions. But I do expect that we'll still see some of that in the second quarter. And as I mentioned, I think this hopefully is a low point for us the Q2. We're not projecting currently that we see a huge increase, But we are expecting stabilization and slight movements up through the rest of the year.

Speaker 3

I think when I looked at the percentage here, we were down below 40%. We've Above 41%, but I think we're at the end of the quarter. I think it was 39% or 39%, something like that. I don't expect that it'll change a whole lot at this point. We're feeling downward pressure through the Q2 and hopefully after that we begin to see stabilization.

Speaker 3

To the extent we see increases in interest bearing, which we're going to be happy to see, we could see some decline. Obviously, the percentage that we had Of non interest bearing to interest bearing was inflated the last few years starting with COVID as those commercial balances Really increased significantly starting with some of those PPP balances in 2020. So I think we're getting back Somewhat of a more normalized percentage between non interest bearing and interest bearing.

Speaker 7

Got it. And just as a separate question, I think Phil you mentioned Based on surveys internally, mixed signals and tea leaves, how are you like how do you think this shakes out in terms of Whether or not we see a deeper downturn over the next few months quarters as opposed to skirting a meaningful recession, just give us a sense of What do you think will be the driving factors in terms of which way the economy plays out? And is that is any of that changing your outlook around investments, Expansion in Kudal has any of those plans.

Speaker 2

Well, Ebrahim, I wish I knew. I wish I was smart to know What the view would be, I mean, I really think things are still good in the areas that we operate. Now I realize we operate only in Texas, but it's pretty good environment. Certainly, commercial real estate is slowing. I don't and it's really not because we're not getting people coming in.

Speaker 2

I was talking Not long ago, I had a meeting with the governor, with the group and actually I think also I heard it later from State control, there's a 1,000 people a day moving into the state. So it's not that We aren't having growth. It's been the arithmetic of the commercial real estate transactions just don't work For the returns, and so that's really what's happened. That's the thing that's slowest. Everything else seems to be Pretty good.

Speaker 2

The biggest complaint I still hear is lack of availability of skilled labor. It's not so much all labor. It's now kind of shifted to skilled labor. So there's still a great job, Mark, and looking to hire people. So I don't think it's worth what you pay for it, but I don't think we're going to see Much of a recession, if one, in Texas in terms of where we operate.

Speaker 2

As far as what it means for us, As far as expanding, it's not going to impact us at all. You saw those numbers. I mean, It's not hurting our growth. And as far as one thing I think is interesting, if you look at the Expansion numbers. And we don't get every source of new customer, right?

Speaker 2

I mean, we but we do collect like where did you come Where were you banking before? And I saw about a 20% Sample size of new accounts, we're getting 2 thirds of our business is coming from the, what I'll call, the too big to fail. I'm not going to name names, you can guess who they are. And so, it tells me that you hear a lot of narrative that well, can regionals compete with them, etcetera. We can and we have been.

Speaker 2

And remember, March was our biggest month by far. So I think the dynamics are all good. And I think that we just continue to look at other places that make sense For us to employ this strategy within the state. So no, it would not impact our expansion plans.

Speaker 7

And how many branches, Phil, do we have planned for the rest of the year in Dallas?

Speaker 2

Let me see. What is it, April? I think we were going to do, I would say, oh man, I'm going to guess 6 more and say I'm within 25% right Either way on that.

Speaker 3

Yes. I think what we were saying was through April, we'd open 6, 3 in Dallas And then 2 in 3 in Dallas in the Q1 and then 2 in April and 1 in Houston in the quarter. And I think we're expecting to open another 4 locations In Dallas and 2 in Houston by the end of the year. Okay.

Speaker 7

And will that be it or where is that relative to The endpoint you want to be at least for now?

Speaker 2

Well, Dallas was going to be 30 30 months. I think we're pretty

Speaker 3

much on Yes. I think it'll still take us into next year. So I think that's the current plan is that we would Right around midyear, I think it's kind of the original thought that we'd be done with the Dallas expansion, if I remember correctly.

Speaker 2

Okay. Got it.

Speaker 7

Thank you.

Speaker 2

Welcome.

Operator

Thank you. The next question is coming from Manan Goslia of Morgan Stanley. Please go ahead.

Speaker 8

Hi, good afternoon. Hi. I wanted to ask around CRE office and any thoughts about your comments earlier on some of the metrics in the CRE portfolio were helpful. But I was wondering if some of the what are the maturities that are coming up in 2023 2024? And just given the pressure on CRE pricing, any thoughts Where LTVs are coming out at after reappraisal?

Speaker 2

Okay. That's a mouthful. Let's see. Give me just a minute to look here. Okay.

Speaker 2

This is investor office. I'm sorry, I'm stumbling here, but I want to try and see if I can find it. We have 36% of the office Matures in less than a year.

Speaker 4

Okay.

Speaker 2

So, there's I might be able to pull something out, as we continue to talk. I apologize. I don't have anything more than that. But right now, that's a number that I'm able to see. Thanks,

Speaker 8

Jeff. Okay. A separate question, Just given your comments earlier on competitors pulling back, is that helping spreads on new loans at all? And How do you expect those spreads to trend as we go through the year?

Speaker 2

I think it's helping some on spreads. I think it's helping on structure. I think it's adding about, let's say, in round numbers, 5% On average, more equity into deals and it's probably helping with guarantees and support that type of thing. I would say the really good projects though, it's still competitive. And we tend to not be looking at institutional deals there.

Speaker 2

I'll call them smaller. I mean, it's still a fair amount of money, But less institutional and that means that there are a lot of banks trying to get that. And so I would I have seen less spread relief I've seen structure relief recently, but I think there's probably been a little bit of spread relief.

Speaker 3

Yes. I think if we just look at the new and renewed business, just linked quarter is the best I've got. But on the loans that are Prime based, yes, we can see some nice improvement there. And the same on AmeriCorps. And I'm going to say the sulfur price loans Look to be relatively flat, maybe down a little bit.

Speaker 3

So yes, I think overall the spread looks better.

Speaker 8

Okay, great. Thank you.

Operator

Thank you. The next question is coming from Brody Preston of UBS. Please go ahead.

Speaker 9

Hey, good afternoon, everyone. Thanks for taking my questions. Sure. I wanted to just follow-up on I think you told Steve the cash balances earlier. I just wanted to clarify, did you say that cash balances at quarter end were 6,900,000,000

Speaker 3

And that was today's balance.

Speaker 9

Okay.

Speaker 3

Yes. At the end of the quarter, At the end of the quarter, we were 8.6.

Speaker 9

8.6.

Speaker 2

Okay.

Speaker 9

All right. That's very helpful. And then, Could you give us a sense around the cadence of borrowing utilization through the Q1? How did it move Throughout the quarter, particularly in February March. And then where did total borrowing stand at quarter end?

Speaker 3

Hey, can I come back? I'm sorry, I'm second guessing myself what answer I gave you. So we're at about right under 6.9 today And we were at 8.6 at March.

Speaker 5

Yes.

Speaker 3

I want to make sure I didn't get those numbers. Okay, perfect. Sorry, go ahead.

Speaker 9

No, you had it right the first time, but I appreciate you following up. And then the second question that I had was just could you give us a sense around the cadence of borrowing utilization In the Q1, how did it move in the last month of the quarter? And then, where did you wind up at quarter end for period end borrowing balances?

Speaker 3

You're talking on commercial loans or help me with your question, I'm sorry.

Speaker 9

No. Your usage of repurchase agreements is really

Speaker 2

what So those are

Speaker 3

yes, I'm sorry. So the repo balances Really, repo balances with our customers where they put deposits with us that are fully collateralized. That's what we were talking about. And it's really at the customer's discretion. Are you asking how those moved?

Speaker 3

I'm sorry, I

Speaker 9

wasn't following up with that. Yes, I want to know how No, it's okay. I wanted to ask how those moved and where you ended the quarter on those balances?

Speaker 3

Sure. At the end of the quarter, Let me see here. We were at $4,200,000,000 We started the quarter. At the end of the year, we were $4,700,000,000 Yes. I think if I look at it today, just to give you an idea of that balance, Today's month to date balance would be around, it looks like 4,000,000,000

Speaker 9

Okay. Got it. And then within your NIM guidance that you gave,

Speaker 3

could Could you give us

Speaker 9

a sense for what the interest bearing deposit beta that you're using is?

Speaker 3

Yes. We're I think we've kind of stuck with a cumulative beta. I think a little north of 31%, I'm going to say it's about 32%, pretty consistent with where we've been. That's kind of the expectation.

Speaker 9

Got it. The last question I had was just around the securities purchases and I'm sorry if I missed it, but did you happen to give What the new yields are that you're putting on? And then did you restate what the expected maturities are going forward?

Speaker 3

Well, our duration went from 5.8 years for the total portfolio is the only thing we give down to 5.5 years. And we bought about $900,000,000 in municipals. Hold on a second, I'm sorry. So we bought a 1.7 in agency at a 502 and 390 in municipals at a 501. So basically Putting stuff on and the 501 is a TE yield, so putting stuff on basically at 5%.

Speaker 9

Got it. Thank you very much for taking my questions, everyone. I appreciate it.

Speaker 3

Sure. No problem. No problem.

Speaker 2

This is Phil. So I wanted to Respond to that question about the office terms, just took me a while to find it. As I said, the investor office that is a term of within 12 months is 27%. 12 months to 36 months is 19%, 36 months to 59 months is 21% And greater than 60 months is 33%. So sorry, I wasn't able to pull that up earlier.

Operator

Thank you. The next question is coming from Jon Arfstrom of RBC Capital. Please go ahead.

Speaker 10

Hey, thanks. Good afternoon.

Speaker 3

Hey, John. Hey, John.

Speaker 10

Jerry, on the provision this quarter, would you was that growth driven or was it just driven by the charge off?

Speaker 4

The charge offs really were

Speaker 3

where we saw most of that type.

Speaker 10

Okay. So what is the message on the provision? How do you want us to think about that?

Speaker 3

Yes. I think that really as it turned out, I would expect that that's not going to be too far off our current expectations based on the Sort of loan guidance that you heard from Phil and based on some relative based on really Good credit quality, but also making sure considerations about what we're seeing in the economy and the possibility Of a recession even if it's mild, I would assume that that's not too bad of a run rate going forward for the next couple of quarters.

Speaker 10

Okay. Good. That helps. Just a couple of other clarifications. You guys Talked a little bit about the I think it was the dollar volume of new opportunities in the pipeline was up something like 20% year to date, but the probability weight Was flat?

Speaker 10

Yes. What drives that difference? What drives that lower probabilities is just saying These opportunities won't meet your standards or why that gap?

Speaker 2

No, it's mainly An opportunity is just you're aware of a deal, you're sort of engaged on it, but Customer may not decide to go forward. It could be that you don't think that the current structure meets your standard. It could be a lot of things. It might be I believe that they're just locked in to another institution. And so our officer just feels like his odds are Maybe not as good as what they should be.

Speaker 2

It's definitely art and not science. And It's really good. It's whenever you have again, we're talking about it this morning, when you have a Pretty good increase in opportunities like I mentioned and you mentioned just now. When there are a lot of them that go in, the lenders tend to not have as high a probability. You just got a lot of deals and you're sorting out.

Speaker 2

But it doesn't sound very scientific, but it makes an impact. I tend to look at What the weighted pipeline is and I think it tells a little bit of a story on how our people see things.

Speaker 10

Okay. All right. And then just last one as well or last one here. You talked about the record new consumer account activity and you flagged Houston and Dallas. Any idea What percentage of these would be like a what you would call primary household relationship or primary banking relationship?

Speaker 10

Do you track that?

Speaker 2

I don't think we do on the consumer side.

Speaker 10

Ash, what does your gut tell you on that?

Speaker 2

I would tell you that we are mostly primary. There are numbers which We on the commercial side, which compare the top It compares market share, okay. I've seen it by market share segment. And so let's look at Customers with sales under $100,000,000 okay, in the markets we serve. And if you look at which of the banks, let's say the top, let's say the top 6, 7 banks, which of the banks As the highest percentage of primary relationship, okay, is us.

Speaker 2

All right. So and that's just because of our relationship model. I mean, we're going to bank you. We're going to want to have your what we call your funnel account, Your core account and so and we don't even count it as a relationship unless we get that that account. So So my gut's going to tell me it's going to be pretty high, maybe you know.

Speaker 3

Yes, I think that I was here trying to get some information and talking to our Head of Retail. I think that he thinks that it's about 70% of it It is really that we're picking up as primary household.

Speaker 10

Yes, that's great. So it's moving market share. Yes, okay. All right, guys. That's all I had.

Speaker 10

Thank you.

Speaker 2

Okay. Thanks. Thank you.

Operator

Thank you. Ladies and gentlemen, unfortunately, we have run out of time for questions. I would like to turn the floor back over to Mr. Green for closing comments.

Speaker 2

Well, I'll just say, if anybody wants to ask a question, we're here. It's our job. So are there any more questions in the queue?

Operator

I'm not showing any questions at this time.

Speaker 2

All right. Fair enough. Okay. Well, we thank everybody for their interest and their And we'll be adjourned. Thank you.

Operator

Ladies and gentlemen, thank you for your participation. This concludes

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