Cullen/Frost Bankers Q2 2023 Earnings Call Transcript

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Provided by Quartr
July 27, 2023

Key Takeaways

  • Q2 earnings rose to $160.4 million or $2.07 per share, a 36.6% year-over-year increase, with return on assets of 1.30% and return on equity of 19.6%.
  • Commercial banking saw a record quarter for new customer relationships—up 33% year-over-year and 53% quarter-over-quarter—driven by broad-based wins across Texas markets.
  • Consumer segment set an all-time high with 8,529 net new relationships, fueling 27% year-over-year growth in consumer loans to $2.6 billion, and plans to double Austin branches from 17 to 34.
  • Deposit trends were impacted by seasonal outflows, with noninterest-bearing balances down 4.1% quarter-over-quarter, yet net interest margin held at 3.45% despite higher funding costs.
  • Credit quality remains strong: nonperforming loans at 39 basis points of total loans, annualized net charge-offs at 22 basis points, and a stable commercial real estate portfolio with average loan-to-value near 40–60% and solid debt service coverage ratios.
AI Generated. May Contain Errors.
Earnings Conference Call
Cullen/Frost Bankers Q2 2023
00:00 / 00:00

There are 12 speakers on the call.

Operator

Greetings, and welcome to today's CullenFrost 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. It is now my pleasure to introduce your host, Aby Mendez, Senior Vice President and Director of Investor Relations.

Operator

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 this morning's earnings press 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. Good afternoon, everyone, and thanks for joining us. We

Speaker 3

We are here to review the

Speaker 2

2nd quarter results and our Chief Financial Officer, Jerry Salinas is going to provide some additional comments before we open it up to your questions. And in the Q2, CullenFrost earned $160,400,000 or $0.027 per share compared with earnings of $117,400,000 or $1.81 a share reported in the same quarter last year. That represents a 36.6% increase over last year's level. Our return on average assets and average common equity in the 2nd quarter were 1.30% 19 point 6% respectively and that compares with a 0.92% and 13.88% for the same period last year. Once again, I'm proud of the solid performance turned in by our outstanding staff in this unusual economic environment.

Speaker 2

The continued rate increases by the Federal Reserve and their Fight against inflation have had their intended effect by slowing some segments of the market. In addition, increasing rates continue to raise costs for businesses holding cash and liquid deposits. These impacts are to be expected through the rate cycle and will continue to play themselves out during this period and Jerry will provide some great insight into their near term effects. As we said last time, during the Q2, CullenFrost did not take on any Federal Home Loan Bank Advances, Participate in any special liquidity facility or government borrowing, access any broker deposits or utilize any reciprocal insurance arrangements to build insured deposit percentages. But notwithstanding all that, we believe the most important thing for us to focus on at this time is that we are successfully executing our mission to grow and prosper building long term relationships Based on top quality service, high ethical standards and safe sound assets.

Speaker 2

And I believe the results for this quarter So we are doing just that and I am excited about our prospects. And let me give you a few examples. Looking at our Commercial and Private Banking business, we had the best quarter ever For new customer relationships, which were up 33% from last year and were up 53% from the previous quarter. That was 11.45 new relationships. I think it's also significant that almost half of those new relationships, 45%, came from the largest banks we affectionately know as too big to fail.

Speaker 2

Now I normally wouldn't go into this level of Detail. But I'm going to read to you the un annualized linked quarter growth rates in new relationships by region, because I think it's fascinating and tells me that it's not an isolated occurrence in one specific market. Houston led all regions with 333 net new relationships, which was up 63% from the previous quarter. Dallas produced 262 net new relationships, which was up 32%. San Antonio produced 172 net new relationships, which was up 107%.

Speaker 2

Fort Worth produced 156 net new relationships, which was up 20%. Austin produced 117 net new relationships, which was up 102%. The Gulf Coast and Victoria regions produced 68 net new relationships, which is up by 48% And the Permian Basin produced 37 net new relationship, which was up by 28%. Remember, these numbers are not annualized. To me, this says that we are winning competitively.

Speaker 2

Looking at our commercial lending business, we saw an increase in related to new opportunities, up 19% and an increase in our probability weighted pipeline by 27% from the Q1, so we're seeing deal flow. In fact, we looked at 20% more deals than the first quarter. But that said, book deals were down 8% because we declined more and more deals were withdrawn by the customer. We're obviously being more careful in this environment, but I think the increases in opportunities is notable. I'll also say that unlike the previous quarter, we saw more opportunities from our customers than prospects.

Speaker 2

Prospect opportunities were up 7% for the Q1 from the Q1, but customers were up 34%. Looking at our consumer business, in the Q2, we set an all time high for net new relationships at 8,529. This beat our previous all time high, which was achieved in the 1st quarter by an unannualized 6%. Our Houston market, where we have the most mature expansion effort, Leads the way here with 2,600 net new relationships, while Dallas and San Antonio produced about $1500,000,000 each. Consumer loans ended the quarter at $2,600,000,000 27% increase from the Q2 of last year and continues to be driven by consumer real estate as our home improvement and home equity products Included in those numbers were over $12,000,000 in mortgage loans as a part of our measured rollout of this product beginning in the Dallas market.

Speaker 2

Toward the end of the second quarter, we announced our upcoming expansion into the Austin region, which will build upon momentum from our Houston and Dallas expansions. We plan to double the number of locations we have in the Austin area from 17 to 34. Austin is Texas' 3rd largest deposit market and we already rank 4th and deposit share. These locations will have a strong legacy to build on. Our Houston expansion, Including the 25 original locations plus the additional ones which we call Houston 2.0, the most recent of which Just opened in Friendswood last week.

Speaker 2

Our expansion branches there are at 121% of household goals, 164 percent of our loan goal and 108 percent of our deposit goal, Expansion in Houston now represents $1,270,000,000 in deposits and about $850,000,000 in loans. For our Dallas expansion, although it's early, we stand at 226 percent of new household goal, 315 percent of our loan goal and 3.77 percent of our deposit goal. Expansion Dallas currently represents 2 $61,000,000 in deposits and $217,000,000 in loans. So all told, we have about $1,500,000,000 in deposits from the expansion and about $1,000,000,000 a little over $1,000,000,000 in loans. Credit quality continues to be good by historical standards.

Speaker 2

Problem loans, which we Risk rate 10 or higher totaled $441,000,000 at the end of the second quarter and that's up from $348,000,000 at the end of the first quarter $429,000,000 from this time last year. Non performing loans totaled $68,500,000 at the end of the second quarter compared with $39,100,000 at the end of the first quarter, the result of 2 credits. The 2nd quarter figure represents just 39 basis points of total loans and 14 basis points of total assets. Net charge offs for the 2nd quarter were $9,800,000 up from $8,800,000 at the end of the first quarter And annualized net charge offs for the 2nd quarter represented 22 basis points of average loans and year to date charge offs are 21 basis points of loans, which is below our historic average. Regarding commercial real estate, Our overall portfolio remains stable with steady operating performance across asset types and acceptable debt service coverage ratios and loan to values.

Speaker 2

Within this portfolio, what we'd to be the major categories of investor CRE. They're comprised, for example, of office, multifamily, retail and Industrial and as examples, we totaled $3,500,000,000 of outstandings or about 40% of commercial real estate loans Our investor commercial real estate portfolio was held up well exhibiting an overall average loan to value of about 4% and loan to cost of about 60% and acceptable reported debt service coverage ratios. Higher interest rates have certainly led to some decline in coverage ratios compared to original underwriting pro formas. We've actually seen some improvement in coverage ratios quarter over quarter for the already stabilized properties in our portfolio. For example, 85 percent of our investor office portfolio is stabilized and average debt service coverage ratios increased from 1.38 to 1.42 this quarter and we saw a similar trend in the stabilized portion of the multifamily portfolio.

Speaker 2

The investor office portfolio, which is still top of mind, was relatively flat quarter over quarter with $927,000,000 outstanding. It exhibited an average loan to value of 52% and an average debt service coverage ratio of 1 point or 2 at current interest rates starting from strong position with a cushion for potential value declines. Our comfort level with the office portfolio continues to be based on the character and experience of our borrowers and sponsors, the predominantly Class A nature of our office buildings and the fact that 85% of the exposure is associated with stabilized well performing projects. It also helps to be operating in Texas. We did have an $18,000,000 office building loan that we've been watching migrate to non accrual during the quarter.

Speaker 2

But overall, the office portfolio and really entire investors CRE portfolio did not experience any identification of anything in terms of weak or underperforming credits or projects that we were not already watching. So to conclude, as I said earlier, I'm proud of our performance and what our bankers have been able to accomplish as well as the competitive success we continue to exhibit in our markets. Now I'll turn the call over to our Chief Financial Officer, Jerry Salinas for some additional comments.

Speaker 4

Thank you, Phil. I wanted to start off first by talking a little bit about our Houston 1.0 expansion results. As a reminder, the last of those branches was opened in 2021, So these branches are still in what I call the development stage. As Phil mentioned, we've been very pleased with the volumes we've been able to achieve. Looking at the Q2, lean quarter annualized growth in average balances for these locations was 31% for deposits and 17% for loans.

Speaker 4

And for the Q2, Houston 1.0 contributed $0.05 to our quarterly earnings per share. Now moving to our net interest margin. Our net interest margin percentage for the 2nd quarter was 3.45%, down 2 basis from the 3.47% reported last quarter. The decrease included some positives that were more than offset by some negatives. On the positive side, higher yields on loans and balances at the Fed, combined with higher loan volumes, were more than offset by higher cost of deposits and customer repos and lower deposit levels at the Fed compared to the Q1.

Speaker 4

Looking at our investment portfolio, the total investment portfolio averaged $21,300,000,000 during the 2nd quarter, down $466,000,000 from the Q1. During the quarter, we did not make any material investment purchases. During the quarter, we sold about $360,000,000 in municipal securities as we took advantage of market dislocations, which allowed us to improve interest income going forward. We recognized a net gain of about $33,000 on those transactions. The net unrealized loss on the available for sale portfolio at the end of the quarter was 1,610,000,000 an increase of $207,000,000 from the $1,400,000,000 reported at the end of the first quarter.

Speaker 4

The net unrealized loss on the held to maturity portfolio the end of the quarter was $148,000,000 up $37,000,000 from the 1st quarter. The taxable equivalent yield on the total investment The tax rate in the 2nd quarter was 3.24 percent, flat with the Q1. The taxable portfolio, which averaged 13,800,000,000 Up approximately $439,000,000 from the prior quarter had a yield of 2.71 percent, up 4 basis points from the prior quarter. Our tax exempt municipal portfolio averaged about $7,500,000,000 during the 2nd quarter, down about $905,000,000 from the Q1 and had a taxable equivalent yield of 4.27%, up 4 basis points from the prior quarter. At the end of the second quarter, approximately 72% of the municipal portfolio was pre refunded or PSF insured.

Speaker 4

The duration of the investment portfolio at the end of the second quarter was 5.2 years, down from 5.5 years at the end of the Q1. Looking at deposits on a linked quarter basis, average deposits were down $1,800,000,000 4.1 percent with about 80% of the decrease coming from non interest bearing deposits. I want to talk a little bit more about our non interest bearing deposits, which totaled $14,900,000,000 at the end of the quarter with 96% of that amount being commercial demand deposits. During the individual months of the Q2, we did see the average balance in the non interest bearing accounts begin to stabilize. During last quarter's call, we said that we expected deposits to continue to decline as this has historically been Our seasonal trend that deposits peak in the 4th quarter and reach their low in the second quarter before beginning to grow in the second half of the year.

Speaker 4

I also noted that April non interest bearing deposits were down $492,000,000 from March and that we expected that April average to decline given the anticipated impact of seasonality, including tax payments. April non interest bearing Balances decreased $587,000,000 from March, almost $100,000,000 more on average than at the time of our call. These average balances then decreased $441,000,000 in May with the average affected by tax payments in April and then decreased $108,000,000 in June and month to date through yesterday, July average balances are down $202,000,000 from the June average. The June July average balances have seen the pace of outflow begin to slow down and we are anticipating that slower pace of outflows to continue. But with interest rates at these levels, there continues to be uncertainty with these customer balances.

Speaker 4

Customers have attractive risk reward options in this rate cycle that didn't necessarily present themselves in the last cycle, which provides them with multiple options for the utilization of these funds. Looking at total interest bearing deposits, they've been relatively stable during the period. Average interest bearing deposits were $25,800,000,000 during the quarter, down $345,000,000 or 1.3 percent from the Q1. We do continue to see a shift in the mix to higher cost CDs from the lower cost savings, IOC and MMA. The cost of interest bearing deposits in the 2nd quarter was 1.87%, up 35 basis points from 1.52 percent in the Q1.

Speaker 4

Customer repos for the 2nd quarter averaged $3,700,000,000 Down $492,000,000 from the $4,200,000,000 average in the Q1 as we saw some flows out of our repo product, including for tax payments during the quarter. The cost of customer repos for the quarter was 3.52%, up 32 basis points from the Q1. Looking at non interest income on a linked quarter basis, I just wanted to point out a couple of items. Trust and investment management fees were up $3,200,000 or 9% compared to the Q1, driven by increases in estate fees of 1,600,000 Real estate fees of $751,000 and investment fees of $463,000 Estate fees and real estate fees can fluctuate based on the number of estates settled or properties sold respectively. Insurance commissions and fees were down $6,000,000 or 32% from the Q1, Driven by lower P and C contingent bonuses down $3,100,000 benefit commissions down $4,800,000 and life commissions down $867,000 Partly offsetting these unfavorable variances was a $3,000,000 increase in P and C commissions when compared to the Q1.

Speaker 4

As a reminder, the Q1 is typically our strongest quarter for insurance revenues given we typically recognize contingent income in that quarter and are also impacted by our natural business cycle. The 2nd quarter is typically our weakest quarter for insurance revenues, again impacted by our normal renewal business volumes. Looking at our projection of full year 2023 total non interest expenses, As I mentioned last quarter, we currently expect total non interest expense for the full year 2023 to increase at a percentage rate in the mid teens over our 2022 reported levels. This does not include the potential impact of the FDIC special assessment, which has not yet been finalized. The effective tax rate for the 1st 6 months of the year was 16% or about 16.2% excluding discrete items.

Speaker 4

Our current expectation is that our full year effective tax rate for 2023 should approximate 16%, But that can be affected by discrete items during the rest of the year. Regarding our stock buyback, I want to mention that during the Q2, we utilized about $28,000,000 of our $100,000,000 approved share repurchase plan to buy back approximately 280,000 shares at an average price of $96.02 Regarding the estimate for full year 2023 earnings, our current projections don't include Any additional changes to the Fed funds rate through the rest of 2023, given that rate assumption and our expectation of 2023 non interest expense growth of mid teens, which does not include the impact of the FDIC special assessment, We currently believe that the current mean of analysts' estimates of $9.63 is a little high. With that, I'll now turn the call back over to Phil for questions.

Speaker 2

All right. Thanks, Jerry. And now we'll open it up for your questions.

Operator

Thank you. The floor is now open for questions. Today's first question is coming from Brady Gailey of KBW. Please go ahead.

Speaker 5

Hey, thanks. Good afternoon, guys.

Speaker 4

Hey, Brady. Hey, Brady.

Speaker 5

So your net interest margin has held in very well, especially relative to the industry, which saw NIM slippage By a decent amount this quarter for most of your peers. Do you expect the net interest margin to continue To hold in relatively well or do you think that at some point you will see some real downside there?

Speaker 4

You know what I'd say, Brady, I thought that last quarter I said it was going to be relatively stable. I think I'd Stick with that except that I would say that there's a downward bias. When I talked about the 2 basis point decrease that we had Between the 1st and the second quarter, all those positive and negatives are still kind of affecting us going forward. I'd say kind of stable, but again with probably more towards a little bit negative bias, but I don't see it changing significantly, not based on anything I'm seeing.

Speaker 5

Okay. And then I know in the past you guys have talked about some of the financial impacts of expanding into a new market like Austin. I don't think they've moved the numbers a ton, but any guess on the financial impact of the Austin expansion over the next year or 2?

Speaker 4

Brady, we'll talk about that in January. We really would give some guidance. And obviously, it's going to be primarily Expense based at the beginning, as you know, as we start putting those locations together. I don't expect for 2023 that they'll have a significant impact. So any impact we'll start feeling next year and we'll kind of give some color at the beginning of the year.

Speaker 2

Yes. I just might add, Brady, that Just the scope of it's a little bit smaller just by its nature than Dallas or Houston, The expansions that we've had there. So pound for pound, it'll be about the same, but the scope of it just a little bit smaller.

Speaker 5

Okay. And then finally for me, NPAs are up, they're still at a very low level. But I think I heard you mentioned 2 credits move into the NPA bucket. 1 was a $18,000,000 office loan. What was The other NPA that went into that bucket this quarter?

Speaker 2

Yes. It was in the pre owned auto sale Dealership and the higher interest rates really impacted its carry costs and also the performance of some of the paper that it carries. And so we thought it was appropriate to recognize that. So it wasn't real estate related, But it was in the automobiles area.

Operator

Thank you. The next question is coming from Steven Alexopoulos of JPMorgan. Please go ahead.

Speaker 6

Hi, everybody.

Speaker 2

Hi, Stephen.

Speaker 6

I want to start. So the non interest bearing deposits last quarter you guys thought would come down in 2Q and then stabilize and we're Continued outflows. I'm just curious, what's taking customers so long to just reach that amount of operating cash that they need? It's hard to believe with every move they're like digging deeper and deeper. I would have thought it would pretty much be done by now.

Speaker 4

I think, Stephen, it's as I've said in my comments, I think the rate environment that we're in It's so unique and so different. There's a lot more opportunities for them to invest that money. It's really impressive rates. And So even though I said that in my mind a couple of $100,000,000 is certainly better than the $500,000,000 $600,000,000 decreases that we were seeing. But I do think that there continues to be volatility there.

Speaker 4

I think there's just too many options for them to utilize that fund those funds, Whether it's to pay off any debt that they might have or decide to invest it, and investment could certainly be and we've seen some dollars obviously flow into our Off balance sheet, either trust areas or treasury areas. So I think I'm with you, I kind of thought most of it was gone. But I think in the environment, We're going to continue to see some pressure there. I think the upside for us is, as Phil mentioned, we really feel very positive All the new relationships that we're bringing in, we're see some pretty impressive deposit wins. And in some cases, those Commercial wins take a little bit longer to get on the books and get them closed.

Speaker 4

But I think in this rate environment, We're just going to continue to be cautious. And I think everybody's going to have to make the decision on how they want to invest those funds. And all we can really do Is to continue to focus on growing the business and adding new customers.

Speaker 6

Okay. And then on the balance sheet, you guys had good loan growth in the quarter, more or less funded with securities, if you just look at the movements on the asset side. As we think about the back half, Jury is maybe these non interest bearing outflows subside a bit. Do you think we'll see net balance sheet growth in the second half? Will you just continue to fund loan growth with other assets that run off?

Speaker 4

I think that we're projecting some small growth On the funding side at this point, nothing really material. Again, given the uncertainty that we've got on the commercial side, Our projections are really do have some growth, but it's not anything that I would say is significant.

Speaker 6

Okay. Thanks. And then final one. So Phil, I appreciate all of the line items that you ran through by market in terms of customers that you guys are picking up. I'm curious, so your service is consistently good, peers are consistently not as good.

Speaker 6

What is it about this environment that you're seeing so many customers Move banks. Thanks.

Speaker 2

Yes. Mr. Steven, I think it's a couple of things primarily. When you look at our In our movement in terms of growth in new relationships, The expansion no doubt has a really big effect on that. I think it's really paying off in terms of Growing those relationships overall.

Speaker 2

We've also been spending more and focused more on marketing. I think we're doing a better job on marketing. And then reputationally, just to be honest, we've got a great reputation and reputation for great service. So It's been pretty exciting as we've moved into some of these markets. Some cases, we won't I was thinking about one we opened up and I think it's Dallas just recently.

Speaker 2

I think the closest Frost Bank was 15 miles away and the growth has just been tremendous. So it's I think it's really simple. I think we are investing in our business. We're growing our distribution in fantastic markets. We've got a great value proposition for service And it's just and we're marketing and investing in marketing and technology.

Speaker 2

I think it's just all working together to win. I apologize for giving so much granularity on that, but it just shows that that's really what we're focused on is new relationships. It's part of our mission statement that's called out. And we're going to go through rate cycles up and down and We're going to see movements of non interest bearing deposits out and all that stuff, that's going to happen. But if we just focus on Growing the business, growing the relationships in great markets, we're going to do fine.

Speaker 6

Okay. Thanks and I appreciate all the details for what it's worth.

Operator

The next question is coming from Dave Rochester of Compass Point. Please go ahead.

Speaker 7

Hey, good afternoon guys.

Speaker 4

Hey, Dave. Hello.

Speaker 7

Just going back to your EPS outlook comment For 2023, I know you mentioned the stable NIM with a downward bias. So that was helpful to hear. I was just wondering how you're expecting That to translate into NII trends for the back half of the year at this point. Are you thinking stable ish NIM and stable funding, What you just mentioned would get you to stable as an NII or how are you thinking about that at this point as you look at your EPS outlook?

Speaker 4

Yes. I guess the thing that I would focus on is kind of where we ended the quarter on the deposit side. I've mentioned to Stephen that we're not projecting a whole lot of growth from there for the rest of the year. And so That obviously will have some impact on net interest income. So I think that's really where the pressure is.

Speaker 4

Okay.

Speaker 7

And then regarding deposit trends, you said earlier, it sounded like you're baking in marginal deposit growth or Marginal funding growth, I guess, in the back half. Are you assuming that DDA continues to decline through that period as well? I know you mentioned that the runoff had subsided a bit, but is that the general expectation now you continue to have mix shift through the end of the year?

Speaker 4

Yes. And again, we're projecting growth, but I think that on an annualized basis, I think we're at 2% or something like that that Projecting, what's interesting is 1% of that is our legacy bank and 1% is coming from our expansion. So obviously, They're having an impact on our growth. But that aside, I think that gives you some perspective on the size of the Deposit side that we're projecting. And I think the mix, I would expect that it probably will not change a whole lot.

Speaker 4

But if there is a movement, I would expect the pressure continues to be more on the non interest bearing side than on the interest bearing side. And on the interest bearing side, think we're starting to see some settlement there on rates, but with this rate hike, we'll actually obviously react to that. But I think you'll still see some movement of mix. But it appears everything is stabilizing, certainly a lot more than we saw just a quarter ago. Yes.

Speaker 4

Okay. And then just

Speaker 7

given where we are in The rate cycle. Have you guys been reducing asset sensitivity at all in the past quarter? Or do you have any plans to do that in the back half of the year just with swaps or anything else?

Speaker 4

I think right now we're really kind of sitting tight. We're obviously looking at a lot of And things that we can do, but at this point, I wouldn't envision that we're doing anything very drastic. Obviously, asset sensitivity is diminishing as the The balances that we're holding at the Fed are diminishing as we're seeing the decreases in non interest bearing deposits. But other than that, not doing anything actively.

Speaker 7

Okay. And then maybe just one last one on expenses. I appreciated the reiterated guide there. It seems like just given where we are in the first half, you're looking for a pretty deep ramp up in the second half. Is that What you guys are looking at this point?

Speaker 7

Is that likely to see that kind of a ramp up?

Speaker 4

Yes, that's kind of what we're saying. We obviously review our projections And talking to our lines of business and everything that we're seeing certainly is pointing us in that direction. Okay. Thanks guys.

Operator

Thank you. The next question is coming from Munan Goslia of Morgan Stanley, please go ahead.

Speaker 8

Hey, good afternoon. I wanted to ask about the liquidity and the cash balance for the quarter. I know the average was about $7,000,000,000 which was, I think sort of in line with where you had indicated balances were back in April. So, is it fair to say that you didn't utilize any That through the quarter. And now that the environment has stabilized, do you plan to continue Would you use cash to support loan growth and deposit outflow?

Speaker 8

Or just given where Fed rates are, does it sort of make sense to keep cash at 5 to send and continue to let the securities level come down?

Speaker 4

Yes, that's really where we are right now. I think that's the sort of guidance we gave last And you heard me say we didn't make any investment purchases. I think at this point, any decrease that we've seen in the cash Balances at the fair, I think we were at the end of the quarter, we were down to $6,300,000,000 little under 16% of our Deposit balances. So at this point, I think we're pretty comfortable with that. As you said, looking at the $540,000,000 that we're earning now, we're not looking to make any active moves on the Investment portfolio at this point.

Speaker 8

So can you remind us how much the securities portfolio, How much of that should mature every quarter for the next year or so?

Speaker 4

I think for the rest of the year, I think we're at 720,000 $1,000,000 say $715,000,000 with really $250,000,000 of it, so a third of it, say a little bit more than a third on the last day of the month. So The last part of 'twenty three second half of 'twenty three is what I'd call a normal amount. As we look at 2024, we're probably talking something in the neighborhood of $3,000,000,000 for the year.

Speaker 9

Got it. Thank you. Sure.

Operator

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

Speaker 9

Thanks. I was curious, what's the outlook for the deposit bid? I think the original forecast was 32%. And then secondly, do you think that there'll be pressure on this deposit beta next year as we're in kind of a higher for longer Rate environment and your interest rates on deposits are a little bit lower than peers.

Speaker 4

Our cumulative beta through on interest bearing deposits through the 2nd quarter was 37%, up from 33% in the 1st quarter. On total deposits, that translates to 23% at the end of the second quarter versus 20%. I would expect we would go up to somewhere by the end of the year, Say in the 39%, given this last rate hike that we're dealing with. I think that's comparable to what we've looked at, what we've done So the average of the last two cycles. But looking at 2024, not really in this environment, not expecting, Peter, that we'd have to do much.

Speaker 4

Again, it'll be interesting to see where we're at come January and what our expectations are. But I don't envision we've kept up with the deposit pricing and tried to be fair and obviously have gone out early to provide our customers with a fair deal. So I don't expect that once if the Fed has stopped hiking, I don't expect that we're going to have to do a lot of continuing to increase Our betas, if you will, increase our deposit rates after the hike stop. So now I don't really expect much change. We'll have to see, obviously.

Speaker 4

We're going to want to make sure that we continue to be competitive with our peers. That's the one thing that we want to make sure. But at this point, if I had a crystal ball, I'm not seeing a lot

Speaker 9

Okay. And then I just want to ask big picture, I'm just a little bit surprised that maybe The deposit outlook is not a little bit stronger. I mean, I realized what the environment is like, but every quarter you guys keep having this Record new account growth, both on the commercial bank, the consumer bank, the success with the branch build out expansion and that's starting to take hold. I'm just wondering why the deposit outlook is just not a little bit stronger with all this growth?

Speaker 2

Well, I think one thing, Peter, that we need to consider as we answer the question. I'd say from From a broad perspective, I can't say exactly why, but one thing I can say is that we tend to have a lot more Operational transactional accounts, demand deposit accounts, checking accounts Then peers and I think those are more susceptible to opportunities that Jerry has talked about. So, I think we got to work our way through that. And then I think once we touch bottom, you'll get to see movement up. I'm confident that we're going to see Traction from these new relationships.

Speaker 2

One thing we saw early in the Houston expansion was that When we looked at our performance versus goal on deposits, We were better on relationships, but we were under our goal in commercial deposits as far as balance. One thing that we learned was getting the relationship is one thing, but they've got to under and this is on the commercial side, you've got to go through Getting your customers to send their payments to a different place, there's just a lot of operational things that have to happen Before you as a business see the full effect of being the primary checking account take place. And so, I think that's part of it. And but what we've seen is as we've grown And relationships historically, we'll see more and more of that company's business go through there and I'm confident Remember, we don't count a relationship unless we get the primary checking account. We'll do business with people, we get different aspects of their business, but you don't get to count it as a relationship

Operator

Thank you. The next question is coming from Brandon King of Truist Securities. Please go ahead.

Speaker 3

Hey, good afternoon. Thanks for taking my questions.

Speaker 4

Brent?

Speaker 3

So I wanted to talk about the $18,000,000 office loan. And could you please provide us with some details as far as what Potentially makes that loan or property different from the rest of your office CRE portfolio. Okay.

Speaker 2

Well, in the case of this one particular asset, it's one that lost a major tenant. And it was one that is a newer relationship for us and that it came on right before COVID came over, I think it's in January of 2020. And so, there's not that same type of history, a good reputational Group, but not the same kind of history with us. And as they lost that tenant and then their debt service coverage Numbers suffered as a result. We felt like they needed to right size it to a certain extent.

Speaker 2

They didn't agree with it And they were willing to do a smaller amount. So it's been restructured and it's got it'll perform for the next year, but Not to the level that we think it should. And so we've got that on a non accrual. And it was basically you just had a disagreement between the parties On what they should do as far as rightsizing the project. In terms of the asset itself, It is an office building loan, but we've booked it at the amount of the underlying real estate and it is a tremendous piece Real estate in a very dynamic area of Houston.

Speaker 2

And so I'm not concerned about valuation losses of any significance, But because of where we are and because it does cash flow to the place that we feel it needs to be, we put it on non accrual. And as far as what's different, I mean, look, rates are higher and we've got Tremendous amount of projects and they're not all going to be perfect and you could end up I think we've talked before maybe As I recall, you could have a property that is an industrial property with Fortune 500 credit tenant, long term lease And underwritten before COVID or the current increases in rates, that looks great, right? But at the present value of that lease Today is less. And so equity suffers in the project and those types of things and they have got to get worked out. And we'll just see how they work out.

Speaker 2

Do we think there'll be significant impact on loss? No, but we're watching credits that look like that. You might have a senior housing property that is kind of a different deal, but again, this is a lending business. There are all kinds of things that happened. So It's a risk business,

Speaker 9

but

Speaker 2

there are lots of properties that are Being impacted and the main thing that we're doing is we're relying on the underwriting that we did going in and the people that are backing it up, The vast majority of which have been long term customers. So are we going to see some dislocation here and there? Sure we are. But do things look good Today on a historical basis and are we happy with the underwriting that we've done over time? I am.

Speaker 2

And we'll just see how it goes out over the cycle.

Speaker 3

Got it. Very helpful. And then my follow-up question is on the share repurchases in the quarter. Just kind of what led to that decision and kind of what kind of appetite do you have for the rest of the year?

Speaker 4

We really just at the price, like I said, we were at $96 and we just thought it was a deal that we really couldn't pass up. Obviously, We didn't spend all of it. We just thought given where the price was, we thought it was a great value for us and we took advantage of that. At this point, we'll be opportunistic. We'll just if something like that happens again, we may take advantage.

Speaker 4

But at this point, nothing planned. Yes, Jerry

Speaker 2

is a great example of those people using those demand deposit balances.

Speaker 3

Thanks for taking my questions.

Speaker 4

Hey, Brandon.

Operator

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

Speaker 10

Hey, good afternoon, everyone.

Speaker 6

Hey, Brody.

Speaker 10

I was hoping to follow-up just on the securities question. I just wanted to confirm What you said, that it was $750,000,000 Was that through the rest of the year with the large chunk At the like on like twelvethirty one and then $3,000,000,000 next year. Am I hearing that correctly?

Speaker 4

Yes, sir. You got it. Exactly.

Speaker 10

All right, great. Do you happen to know what the yield on the securities that's rolling off is?

Speaker 4

I can tell you something right off the top of my head. We bought $1,000,000,000 we've talked about this. We bought $1,000,000,000 in Treasury Securities, 2 years ago, I guess, 1.5 years now, when, there was conversation about, Russia invading Ukraine. And we could it that we made that purchase as a defensive posture, obviously, I wouldn't make it wouldn't have made it. We today, We did that at 1%.

Speaker 4

So that first $250,000,000 comes off at the end of the year and it's at 1%, 102,000,000 I think it is. And then the next $750,000,000 of that, those proceeds come in within the 1st few weeks of January, Again, at that same 102%.

Speaker 10

Got it. Okay. And I think you said Earlier that you weren't being too aggressive on new purchases, but in terms of adding to the size of the book, but Is it safe to assume that you would look to replace that $3,750,000,000 over the next 18 months? Would you just look to kind of Replace that? Are you trying to move the size of the securities portfolio lower?

Speaker 4

Yes, I think all things being equal, and by that, again, we're talking about deposits a lot today and assuming that we've reached some sort of stabilization and start to grow, I think the quick response would be, yes, we would look to replace it. But I think until we get to that point in time, we'll have to see what else is going on in the balance sheet And make our decision at that point. But obviously, that's a could be a great positive or will be a great positive impact To NIM and to net interest income in 2024, just even if we kept it at the Fed.

Speaker 10

Got it. And is there any bias towards Any type of security? I know you have a lot of the muni bonds in Texas. I just didn't know if you would look to kind of replace treasury with treasury or it was anything more complex than that?

Speaker 4

I think we would really evaluate at that point with our investment committee what made sense, what where we saw the most value. So we don't have anything we'd say, oh, we're necessarily going Replace the treasury with the treasury. We're going to see where we think there's more value most value in the market.

Speaker 10

Okay, got it. That's all I have for questions. Thank you very much.

Speaker 4

Thank you.

Operator

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

Speaker 11

Thanks. Good afternoon.

Speaker 4

Hey, John.

Speaker 11

Just a few random ones here. On the credit question, Phil or Jerry, what should we expect On non performers. I know these 2 kind of feel like random and very different credits, but What do you guys see in terms of stress in the portfolio? And do we maybe it's obvious, but do we just expect it to continue to rise?

Speaker 2

John, I think realistically it will. Some of these we're watching a lot of Credits and we've got good eyes on everything. And if rates stay up And higher, longer, I think we'll see some more non performers and in real estate. But do I think there's Much lost there. No, I don't.

Speaker 2

And we might get lucky and avoid some of them. But there are just some properties Under stress and I'm a Frost Banker. And so I'm going to take a conservative view and I think non performers will increase, but They're so low right now. It's really hard for them to for us to expect them to be at the same level Going through a cycle like this indefinitely. So I mean, I'm not trying to paint a bleak picture.

Speaker 2

I'm just trying to be realistic. And we're going to have to be patient as we work with these customers. The main thing you want to see is people doing the right thing that you've banked and working with you and On restructuring deals, doing their part to contribute to make it right. And we've got Some deals that we're seeing that they're going to need that. We're having conversations with that.

Speaker 2

And I'm expecting everyone to Perform the way they should and I think it'd be fine. And but realistically, not everyone is going to do What you want them to do and I don't have any specific expectations there except I've just been in this business a long time and some of that's going to happen. That to me is not the big worry right now. It's to me Look, and I don't want you to think we're not we don't have all eyes on credit. We do, I mean, but to me, That's going to work its way out.

Speaker 2

I've got faith in the underwriting and the relationships that we've been doing for the last few years. Again, it doesn't matter what you do today, Really, what matters is what you've done over the last few years and I've got a lot of faith in that. The thing that I want to see us continuing to do Is win competitively. We are winning competitively and I'm really excited about the opportunity in Austin. I think it's got every chance to be as good as we've seen in other places and we'll see.

Speaker 2

But That's what we're focused on, is growing the business and winning competitively. Will we see some non performers increase? I bet we will.

Speaker 11

Yes. Okay. Yes, it kind of reminds me of Energy 7 or 8 years ago, in some ways. The Jerry, for you, the Houston 1.0, you talked about a $0.05 EPS impact. So Call it 2% of EPS, maybe crude math, but 4% of footings.

Speaker 11

How long does it take Houston 1.0 to reach like corporate wide profitability and returns.

Speaker 4

Let me see if I can grab my put my hands on some of that information. What was interesting is that, and Phil and I really haven't talked about this, but for the quarter, it was interesting that How well Houston paid that now at this point they're starting to pay for more of the expansion. It's kind of what we had been talking about when all this started was the plan was to make them to make 1.0 Profitable, so they could start paying for some of those. And I'd say so what we said was it takes about 27 months to breakeven is kind of what we kind of project. And so at this point, I think that Houston 2.0 It's probably a couple of years away just from the standpoint that remember early on it's all expense loaded.

Speaker 4

And so at this point, it's still going to be a couple of years before Houston 2.0 is contributing. Okay. It's not the size of 1.0, But we've got some of that same expense front loading.

Speaker 11

Okay. And just on 1.0 For it to reach, call it, similar returns and profitability profile of the rest of the company, Is that a year away?

Speaker 4

Yes, I think that's probably right. We'd kind of take a little bit closer look at it, sharpen our pencil, but I don't think it's too far from that. Again, I don't have in front of me what their projections are for the rest of the year. But Like we said, they had a 30% linked quarter growth on deposits. With that sort of a growth horizon, We wouldn't be too far, but I have to be honest, I don't have that sort of a projection in front of me and happy to be able to talk about it at some future point when we get together.

Speaker 2

John, it's an interesting question. Just kind of overall, as we look at these branches and We pro form a ed out. We tend to use when we began all this a 5 year horizon for the branch To kind of reach maturity and that was I guess that would be similar profitability to what we were overall. But honestly, it's also true, we don't talk a lot about it, but it's also true that in years 6 through 10, I think we've seen really more growth than we see in that first five years as those things mature, we see some really Growth. So I think ultimately these locations End up with better profitability than the total profitability of the company just because they're more efficient And more focused on a book of business in a defined market, in a defined structure.

Speaker 2

I think that we're not at 5 years for all of them and it will take a little bit even for 1.0 to get there. But and then certainly 2.0 is going to take some time before all of those are 5 year mature. But Don't count out continued growth in those markets from the expansion in year 6 through 10. Historically, as we looked at those 40 branches that we have done before we started the expansion. Some of the growth in years 6 through 10 was really significant.

Speaker 4

Yes, that's really where the power is.

Speaker 11

Yes. Okay. Yes. So we're just kind of just getting there. I think so.

Speaker 11

Okay. All right. I could go on and on with questions, but I'll just leave it there. I appreciate it, guys.

Speaker 4

Thanks, John. Thanks, John.

Operator

Thank you. At this time, I'd like to turn the floor back over to Mr. Green for closing comments.

Speaker 2

All right. As always, we appreciate all of your interest and we thank you for your questions and we'll now be adjourned.

Operator

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time and enjoy the rest of your day.

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