Cullen/Frost Bankers, Inc.

Greetings. Welcome to Cullen Frost Bankers Inc. Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce A.B. Mendez, Senior Vice President and Director of Investor Relations. Thank you. You may begin.

Thanks, Jerry. This afternoon's conference call will be led by Phil Green, Chairman and CEO, Jerry Salinas, Group Executive Vice President and CFO, and Dan Geddes, our incoming CFO. Before I turn the call over to Phil, Jerry, and Dan, I need to take a moment to address the safe harbor provisions. Some of the remarks made today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 as amended. We intend such statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 as amended. Please see the last page of text in this morning's earnings release for additional information about the risk factors associated with these forward-looking statements. If needed, a copy of the release is available on our website or by calling the Investor Relations Department at 210-220-5234. At this time, I'll turn the call over to Phil.

Thanks, AB. Good afternoon, everyone. Thanks for joining us. Today I'll review third quarter results for Cullen Frost, and I'm accompanied on the call by Jerry Salinas and Dan Geddes, who have been working together in anticipation of Jerry's upcoming retirement as CFO, and they'll provide additional commentary. In the third quarter, Cullen Frost earned $144.8 million, or $2.24 a share, compared with earnings of 154 million or 238 a share reported in the same quarter last year. Our return on average assets and average common equity in the third quarter were 1.16% and 15.48% respectively, and that compares with a 125 and 18.93% for the same period last year. Average deposits in the third quarter were $40.7 billion, down just 20 basis points from $40.8 billion in the third quarter of last year. Average loans grew by 11.8% to $20.1 billion in the third quarter, compared with $18 billion in the third quarter of last year. We continue to see solid results resulting from the hard work of our Frost bankers and the extension of our organic growth strategy. As was the case in previous quarters, Colin Frost didn't utilize any FHLB advances, broker deposits, or reciprocal deposit arrangements to build insured deposit percentages or to fund liquidity. So again, as you look at our balance sheet, what you see is what you get. We continue to see excellent results in our organic growth program. For our Houston expansion, on a combined basis, what we call Houston 1.0 and 2.0, we stand at 99% of our deposit goal, 139% of our loan goal, and 118% of our new household goal. For the Dallas market expansion, we stand at 119% of deposit goal, 195% of loan goal, and 170% of our new household goal. We have the first three of our new Austin expansion project open, first three locations, with three more planned open before the end of this year. And early results there continue to be very encouraging. and in line with the other expansion markets. At the end of the third quarter, our overall expansion efforts continued to grow and had generated $2.3 billion in deposits, $1.6 billion in loans, and added more than 55,000 new households. As we've mentioned, the success of the earlier expansion projects are funding the current expansion and we expect the overall expansion project will be accretive to earnings beginning in 2026. In our consumer business, we had our best quarter of the year in customer growth, adding over 7,300 net new checking households. We believe checking household growth remains industry leading at 6% year over year in an extremely competitive deposit environment. That growth has been achieved without the use of direct cash incentive programs in use by many of our competitors. Our focus instead has been on top quality service, great technology, and a convenient expanding network of locations. Consumer deposits overall continue to recover and finish the quarter with a 2.5% year-over-year increase or $464 million. Finally, in the area of consumer, average consumer loans grew $574 million, or 21% year-over-year, making this the ninth consecutive quarter with an annual growth rate of over 20%. This exceptional loan growth comes primarily from our second lien home equity and home improvement products as well as our new mortgage product. The investments we've made in organic expansion, new products, marketing, technology, and our employees are helping drive this outstanding growth across our consumer business. We funded $55 million in mortgage loans in the third quarter, and at quarter end, our total mortgage portfolio stood at $179 million. Looking at our commercial business, average loan balances in the third quarter increased 10.1% versus the same quarter last year. CRE balances grew by 13.7%, energy balances grew by 10.2%, and CNI balances increased by 4.8%. Our growth in new commercial relationships in the third quarter was strong, increasing 8% over the same quarter last year. New loan commitments totaled $1.62 billion in the third quarter, and that was up 3% from the third quarter of last year. The increase came from a 2% increase in both CRE and CNI loans and a 37% increase in energy, albeit on a much smaller base. We saw some improvement in credit quality during the third quarter in terms of problem loan resolutions. Total problem loans, which we define as risk grade 10 or higher, total $839 million at the end of the third quarter, down 15% from the $986 million at the end of the second quarter. Credit quality is good by historical standards with net charge-offs and non-accrual loans, both at healthy levels. Net charge-offs for the third quarter were 9.6 million compared to 9.7 million last quarter and 5 million a year ago. Annualized net charge-offs for the third quarter represent 19 basis points of period and loans. Non-performing assets totaled 106 million at the end of the third quarter, And that compared with $76 million last quarter and $68 million a year ago. And the quarter end figure increase got us to 53 basis points of period end loans and 21 basis points of total assets. And the increase was primarily due to one $20 million credit moving to non-accrual, which was previously identified on our problem loan list. About 24% of our problem loans overall are tied to investor commercial real estate. Slightly less than 40% are related to C&I credits, and most of the balance is in owner-occupied real estate, which is closely related to C&I loans. Regarding commercial real estate lending, our overall portfolio remains stable with steady operating performance across all asset types, and acceptable debt service coverage ratios and loan-to-values at levels similar to what we've reported in prior quarters. Investor CRE loans totaled $4.3 billion, or 44% of total CRE loans outstanding, and the investor CRE portfolio exhibited an overall average loan-to-value at underwriting of about 53% and average weighted debt service at that time of 1.42%. I continue to be encouraged by our outlook and the consistent success of our strategy for organic growth and what I believe are the best banking markets in the U.S. And with that, I'll turn it over to Dan.

Thank you, Phil. I would like to first thank Jerry for being gracious with his time during the transition process. I wish him the best in this next chapter and will enjoy these next two months working with him until his retirement at year end. He has truly set a high bar in this role for me to strive for. Regarding net interest margin, our net interest margin percentage for the third quarter was 3.56%, up two basis points from the 3.54% reported last quarter. The increase was primarily driven by both higher volumes and yields on loans. Looking at our investment portfolio, The total investment portfolio averaged $18.9 billion during the third quarter, up $269 million from the second quarter, primarily due to an increase in fair value of our available-for-sale portfolio. During the third quarter, investment purchases totaled just $51 million, with $49 million of the total being municipals, with a taxable equivalent yield of 5.42%. The net unrealized loss on available for sale portfolio at the end of the quarter was $1.13 billion, a decrease of $498 million from the $1.63 billion reported at the end of the second quarter. The taxable equivalent yield on the total investment portfolio in the third quarter was 3.40%, up two basis points from the second quarter. The taxable portfolio, which averaged $12.3 billion, up approximately $258 million from the prior quarter, had a yield of 2.94%, up two basis points from the prior quarter. Our tax exempt municipal portfolio averaged $6.6 billion during the third quarter, flat with the second quarter, and had a taxable equivalent yield of 4.32%, up two basis points from the prior quarter. At the end of the third quarter, approximately 70% of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of the third quarter was 5.4 years, down from 5.5 years in the second quarter. Looking at funding sources, on a linked quarter basis, average total deposits of $40.7 billion were were up $223 million or 0.6% from the previous quarter. Average non-interest-bearing demand deposits were essentially flat with the second quarter, down $20 million, while interest-bearing deposits increased $243 million or 0.9% when compared to the previous quarter. Based on third quarter average balances, non-interest-bearing deposits as a percentage of total deposits were 33.5% compared to 33.8% in the second quarter. The cost of interest-bearing deposits in the third quarter was 2.41%, up two basis points from 2.39% in the second quarter. While rates on interest-bearing deposits decreased slightly compared to the second quarter, we saw a continued mixed shift into higher-yielding depository accounts, primarily CDs, being the primary driver of the two basis point increase. Thus far in October, Month-to-date average deposits are up about $600 million above the third quarter average, a positive trend to start the fourth quarter. With that split, about one-third in non-interest-bearing deposits and two-thirds being interest-bearing deposits. Customer repos for the third quarter averaged $3.8 billion, basically flat with the second quarter. The cost of customer repos for the quarter was 3.72%, down three basis points from the second quarter. The month-to-date October Average balance for customer repos as of October 29th was essentially flat with the third quarter average. Next, looking at net non-interest income and expense on a linked quarter basis. I'll point out a couple items. Regarding non-interest income, service charges on deposits were up about 1.3 million or 5% unannualized, driven primarily by our organic growth of consumer and commercial accounts. In terms of non-interest expense, salaries and wages expense was up $5.4 million, or 3.6%, impacted primarily by higher headcount and incentive accruals. Looking at capital, during the third quarter, we did buy back $20 million of our stock. For the year, we now have purchased approximately 490,000 shares at an average price of $101.98. I'll now turn the call over to Jerry for commentary on our full year guidance.

Thank you, Dan, and thank you for those nice words. Regarding our guidance for full year 2024, our current projections include two 25 basis point cuts for the Fed funds rate over the remainder of 2024 with a cut in November and December. For net interest income, we continue to expect net interest income growth for the full year in the range of 2% to 3%. Looking at loans on a year-to-date average basis, loans are up 11.1% compared to last year-to-date. We expect full-year average loan growth in the low double digits slightly better than our previous guidance of high single digits to low double digits growth. Looking at deposits, the current year-to-date average is down 2.1% compared to last year-to-date. We expect full-year average deposits to be down between 1% and 2%. That represents a decrease from our previous guidance of flat to down 2%. Based on year-to-date growth and current projections, we are projecting growth in non-interest income in the range of 4% to 5% up from our previous guidance of growth of 2% to 3%. Based on our year-to-date results and current projections, we are projecting full-year non-interest expense growth in the range of 6% to 6.5% on a reported basis. That is down from the 6% to 7% previous guidance. Regarding net charge-offs, on a year-to-date basis, they represent an annualized 18 basis points of average loans. We expect the full year to be in the range of 18 to 22 basis points of average loans. That is down from our previous guidance of 25 to 30 basis points of average loans. And regarding taxes, Our effective tax rate for the year-to-date of 2024 was 16.5%, and we currently expect the full year to come in at that level or slightly lower. That's in line with previous guidance. With that, I'll now turn the call back over to Bill for questions.

Well, thank you. We'll open it up for questions now.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question is from Peter Winter with DA Davidson. Please proceed.

Thanks. I was wondering, could you just talk about maybe the trajectory of the margin as the Fed forward curve is suggesting additional rate cuts. And I would assume less rate cuts and or more gradual rate cuts and a steeper yield curve is kind of an ideal environment for you.

Peter, thank you. I think you're right that what we're seeing is some push and pulls here is we feel like there's going to be opportunity to reprice our investment portfolio and our fixed rate portfolio. The unknown is going to be as rates go down, what will deposits do? And we're hopeful we'll see continued growth in deposits. And so we think there's some opportunity there. But with such a, you know, we do have an asset sensitive balance sheet. So as rates go down, we will see that lowering of our yield on our floating rate portfolio and what we're holding at the Fed. I think you can see really for the fourth quarter, I think you can see just probably some steadiness. I don't see it moving around much that fourth quarter.

And do you think, I'm not asking for specific guidance, but can you see even with the Fed cutting rates into next year that the margin could increase just with the repricing benefit on the earning assets and ability to lower deposit costs?

Yeah, I think there is that opportunity because we do have quite a bit of our securities portfolio maturing or repaying into next year. And we have about a billion dollars of our fixed rate loan portfolio in terms of expected payoffs, in terms of amortizations and maturity. So there will be opportunities if you do look at our kind of back book of both our investment portfolio and our fixed rate portfolio, we're going to be able to pick up some yield there.

All right. Interesting. One more question, just loan growth. The loan growth has been better than peers. You moved the guidance to the upper end of the range. You know, obviously the branch expansion, build out new client growth is contributing. Do you think that there's this pent up loan demand also as we get past the election and rates move lower, that it could lead to even stronger loan growth next year?

You know, Peter, I honestly think there is some pent-up demand. As we've canvassed our people, as we do every quarter, and as I've visited branches and talked to our relationship managers, as I do every year, look over every location, I think that's the most consistent theme that I have heard, is there is a hesitancy for people to move forward on some fronts, not on every front, But it's the single most repeated area of why are we seeing things maybe be a little bit slower? Why might somebody be hesitating? I think it's definitely the election. I think regardless of which way it goes, I think the fact that it's over will just clear up uncertainty and people will be moving forward. But as I looked at the current quarter, You know, I looked at, you know, new commitments were up from last year about, what did I say, about 3%. But they were down a little bit from the second quarter. Now, second quarter was really strong. But I looked at new relationships. It was up 8%. It was a little flattish compared to the previous quarter. The pipeline for 90 days was, you know, in my view, a little flattish compared to the previous quarter. And even new opportunities were a little flattish. And another thing that we saw was that if you look at advances under revolving lines of credit, they went from like 37.2, I think, the last quarter to 36%. So it's just this sort of eerie pause, I think. I think once we get past the election that you're going to see underlying fundamentals continue to kick in. And as I read comments from people who talked to customers, and these were notes about them. Pretty much in all the cases when they said, well, things are slowing because of the election, it was like, well, they expected once we got past that that you'd return to good levels. So I think you're right. There is some pent-up demand. I can't tell you how much, but I just think it's absorbing way too much of our bandwidth right now.

Got it. Thanks, Tom. That was very helpful. I appreciate that.

You're welcome. Thanks. Our next question is from Dave Rochester with CompassPoint. Please proceed.

Hey, good afternoon, guys. Appreciate the update on the outlook. Was wondering for the NII Guide, what are you seeing in terms of your early experience on the down rate deposit data following the September cut? And can you just remind us what your expectation is on that front as we go through the cycle?

Sure. So our overall expectations is we were one of the first to go up when rates went up, and so we're going to be mindful of competition, but our expectations is that you'll see a similar beta going down. Right now, the beta going up is around 45 basis points, and I think you'd expect to see it on the way down, but it may take a little bit of time to work through just because our mix this time around has a little bit more CDs, and the 80% of our CDs are in 90 days, so it's just gonna take a quarter for that to work its way through to lower yielding CD rates. So I think you can expect it to be similar, but it's just due to the mix of our interest-bearing deposits.

Yep, that makes sense. And then just given your comments about The NIM for next year, if you're thinking about maybe the potential for NIM stability or expansion next year with cuts, I would think that would mean some decent NII growth with growth in the balance sheet. Is that how you're seeing it?

You know, we're not going to give guidance until next quarter. That's the tradition that Jerry's held, and so we'll maintain that. You know, I will just kind of give you just a little bit for the remainder of this year We do have $714 million of our investment portfolio expected to either mature or with prepay, and those are yielding 1.77% right now. So that's an opportunity. Whether we'll use that to stay at the Fed or go into our loan portfolio, we'll just have to see. Again, I mentioned about $2.1 billion in 2025. Those are yielding 320 approximately, so maybe not as much of a pickup in 25.

Okay, great. And then just switching to expenses, you mentioned you tightened that expense guide to that 6% to 6.5% range, which is a bit better. As you look out into the fourth quarter and you've given some preliminary thoughts on how you thought about next year, Is there any reason why that growth rate would accelerate? And do you see any opportunities for that growth to actually decelerate into next year, just given your plans on the expansion strategy? Thanks.

You know, I don't see it decelerating. But what I would say is, again, we're not going to give guidance for next year, but we're going to continue to invest in our people and our technology, and with the customer experience. So I think that's how I would answer that question. I don't know if anyone, Billy, any comments there?

You know, our expansion is still going to be strong. We've got to finish up Dallas, got to, you know, lean hard into Austin next year. So you'll have that. Technology is an area that everyone is seeing improvement you know, increases in. I don't think we, you know, are going to see a lot of back off from that. And, you know, we're growing. We're in great markets. So we're going to be continuing to lean into that. You know, as we said over the years and as you followed us, we're pretty tight on expenses. I mean, you got to, the three people in this room got to sign off on something before you hire anybody or have much of a capital expenditure. So we're pretty requiring, but we also know that we're investing right now. It's paying off. I think this organic growth that we've had is just remarkable. And now's not the time for us to do that. But at the same time, we're mindful of what we're spending. We're trying to be as careful as we can. But I think right now, I'm not expecting that we're going to be slowing down in terms of our investment into our business with expenses. But I promise you, we're not being lazy with it, and we're not being You know, we're not going overboard with anything. It's just stuff that we think works for us and has a really important reason.

Appreciate that. Maybe one last one on credit. You mentioned the big improvement in problem loans this quarter. I was just wondering what the driver was for the bump up in the reserve ratio, given that if those were just specific reserves on NPAs and you talked about the growth you had there, or did something in the economic outlook worsen a bit for you?

It was an economic outlook. It was primarily that one loan that Phil had mentioned drove that. And just our, you know, we did have strong loan growth.

Got it. Thanks, guys. And, Jerry, good luck in retirement.

Thank you, Dave.

Appreciate it.

Our next question is from Abraham Punawala with Bank of America. Please proceed.

Good afternoon. I want to follow up, Phil. I think in your opening remarks, you talked about deposit growth and that was coming without having to do promotional strategies and pay upfront marketing dollars to bring in deposits. If you don't mind, spend some time in terms of what are the big avenues in terms of deposit acquisition today? Is this tied to lending or just pure checking account opening? I'm assuming it's a function of the branches and the investments you've made, but give us a sense of what's driving that client acquisition that's translating into core deposit growth.

Yeah. Well, Ibrahim, I think it's a lot of things. I mentioned in my comments that, first of all, the expansion is making a big difference for us. Just look at deposit growth. I think of the percentage growth we had, I think 2% of that growth was for expansion. And, you know, if you look at, let's look at client acquisition and then channels. You know, we're still, we're now, we're 55% of our client acquisition of those household acquisitions is coming through the physical plant, coming through the physical locations as opposed to online. We've still got great online acquisitions. you know, throughput for new customers. So, you know, so the expansion is very solid. And that's, no doubt about it, that that's helping with this outsized growth rate. The other thing, though, is, you know, our customer service is world class. I mean, it just is. And so word of mouth is a big reason driving growth. As we look at the factors, we rank order, gosh, I think it's at least 10 factors for why customers have come to us, and we'll do our best to get that information as they sign up. Interestingly, this is on the consumer side. The number one factor still is convenient location, but the second factor, as I recall, is fairly soon after, fairly close to that, is a recommendation from somebody, family or friends, and that speaks to the customer service focus that we've got. And I'll add two other things to that. You know, our app last time I looked was the highest-rated financial app in the App Store for Apple. And so, you know, you've got to have great technology. And one thing that we did, I think you might remember us talking about the last few years, is, you know, we really hadn't leaned hard into the marketing dollars. We'd done pretty much everything else. But marketing was an area that we really... needed to build our infrastructure and our expertise, really. And we've made a lot of investment in that. That's part of some of this expense growth you see. And I think we've gotten better and better at targeting customers at the right time. And that's really helping our growth. So it's not any one thing. It really is all those things together. And then I'll also say that you were in great markets. And we picked the best sub-markets we can come up with in these, you know, like Houston and Dallas and Austin, these really growing markets. And so it's hitting on all cylinders. And I think we're getting better at it as we continue to learn from our previous expansion efforts. And so I'm really optimistic for it. It's not any one thing. It's just discipline and hard work, and our people are doing a great job.

That's helpful. And I guess, Phil, on the lending side, it's been a good year in terms of loan growth. Sounds like you're relatively upbeat even as we come out of, I guess, elections next week. But give us a sense of the competitive landscape. Some of the regional banks have had a time to repair their balance sheets. Great markets, but intense competition, I believe. So what are you seeing from the regional banks or the big banks in terms of just the nature of competition and And in any of your lending, are you coming across direct lenders, private credit that weren't prevalent three, four, five years ago and your bankers are now having to compete against?

Yeah. I would say the competition is heating up. We are, you know, we're seeing more proposals on deals. I think that, you know, let's just look at CRE. I think, you know, you've got more players there. Some of the structures that we're seeing are, you know, they're just not ones that will do. I mean, it's the same old stuff, right? We've seen this movie so many times before. But it's not as bad as it was, I would say, you know, pre-COVID. But it's loosening up, and there are more players that are willing to play now. I think a year ago, too. there was a lot of people who were kind of running out of money and were on the sidelines for some of these deals, particularly commercial real estate. And so now as you see quality deals in particular, you see some structures that we just don't think make sense. As far as other players, we are seeing private equity be a part of the market. I would say the places that I see it anecdotally are more People considering it on, let's say, a multifamily loan is coming up to maturity. It's not at stabilization yet in terms of its occupancy numbers, so it really can't do permanent financing. It really can't sell very efficiently. But all you've got to do is get to that point. If people are releasing, it's just taking longer. And so private equity might be a good solution for that person to get to that point. And once they get there, there's a lot of liquidity available for these stabilized projects. So I'm seeing that a little bit. And I guess that's sort of the lay of the land. I don't think that the consumer side, I don't think competition there is kind of out of whack. I mean, we are... We've had great growth. You know, I come across Banker, and when I say we've grown 20% in any one category for nine consecutive quarters, it otherwise would make me nervous, but that's just a product whose time is, it's the right place at the right time. You've got people who will not give up their 3% or 2% mortgages, and if they're going to get access capital in their house or expand their house, they're going to do it through a home equity or home improvement or something like that. So, and like I said, I think I said in my comments, if I didn't, I intended to, that our average credit score is there like a 754. So credit's still good. That just happens to be the right place at the right time with that product. And then mortgage is new, but it's being successful. And it's, you know, we're only just around $200 million now, but it's going to continue to grow, so it'll be good. I hope that helped in general comments on the market.

No, I appreciate the call. Thanks, Phil. And good luck, Jerry.

Thank you, Abraham.

Our next question is from Catherine Miller with KBW. Please proceed.

Thanks. Good afternoon. Good afternoon. I wanted just to first circle back on expenses. I know that the fourth quarter typically has some higher expenses just related to the Restricted Stock Awards. Just wanted to see if you could remind us on typically, you know, what that looks like. And so maybe what a better kind of run rate is to go into as we start next year's growth rate.

Yeah, I guess I would answer and start that and let Dan add any color. I would almost send you back to the trend in last year's third to fourth quarter. I'd kind of look at that. I think that gives you some good perspective. As you noted in your comments, we do have some awards that by their nature get expensed immediately. So I think if you look at that, that kind of gives you a feel for kind of what those – sort of vestings due to our expense run rate.

Yeah, I don't have anything else to add. I think that's it. You nailed it.

Okay. Okay, great. And then maybe one other follow-up on the margin, just the securities maturities you talked about. You've got a billion dollars in fixed-rate loan repricing and amortization. On the securities piece, remind us your annual securities maturities that we should see next year.

Sure. And Let me just go to that. But it was around $2.1 billion next year. And again, that had a yield.

Some mid-threes. Mid-threes, yeah.

Mid-threes, okay. And you mentioned that your purchases slowed a little bit this quarter. Would it be your intention to see that kind of similar pace over the next couple of quarters, or how are you thinking about the balance of maybe the size of the bond book?

I think it's just going to depend. You know, what we've been doing is building optionality into the – to the balance sheet really for the last few quarters. I think it's paid off for us. I mean, I don't think anyone knows exactly how things are going to go. I'm kind of like my customers now. Let's get past the election. Let's see how the markets respond. And I think that we'll have some optionality and decide where the value is in the market. And we might decide to begin utilizing some of that.

That makes sense. I think we're all excited to get past next week. And then maybe one last one just on fees. Fees were really strong this quarter and your guide moved up a little bit. Can you just give us some color on what you're seeing there? And then I know you're not giving guidance for next year, but it feels like there's probably some fee momentum just given in your expansion markets and just any kind of discussion around opportunities you're seeing there that may improve as we move into 25 and 26.

I think it's really driven by our organic growth. So I think you're seeing that our fee growth is really a function of volume. Looking into next year, there could be interchange regulation that comes down that could be a factor to the downside. So just something to keep in mind that we will as well. But again, I think it's primarily a volume for the fourth quarter. And just to give you clarity into that yield, it was around 3.2%. Okay, great.

So $2.1 billion next year, maturing at 3.2%. Okay. Great. Very helpful. Thank you. Great quarter.

Thank you.

Our next question is from Ben Gerlinger with Citi. Please proceed.

Hi.

Good afternoon. Good afternoon.

I know you're not going to give guidance for 25, but when you think of just kind of the bigger picture here of the investment spend, I know that you have done Houston one, two, Dallas, you have Austin, and you're also focusing on technology. I think earlier this year, I remember it was late last year, you said kind of the 5%-ish is kind of table stakes for not only just the Texas franchise, but one that kind of leans into innovation. But when you think about the I hate to say non-core, because expansion is core, but when you think about after Austin, is there more branch build-out penciled in, or just kind of thinking for a 26 longer-term strategy, 10,000-foot view kind of answer?

Yeah, you know, I think that this kind of expansion, I'll put it that way, is going to be a part of our strategy, and I call that strategy, it's scalable and it's durable. And What I see is we finish up Dallas and we finish up Austin, you know, and you're probably looking at, let's just say, 24 months for that. I mean, just think about it. I mean, what we'll be doing is doubling down back into these markets that we've made these investments. I mean, you know, I think about it sometimes that let's go a couple of years forward, finishing up Dallas, we're finishing up Austin. You know, by that time, The Houston expansion, the original 1.0, will be eight years old in terms of when we first began doing that. Well, Houston's grown a ton in the last eight years, and you can say the same thing about what's been going on in Dallas, et cetera. So what I think we'll be doing is we'll be continuing to expand in those great markets, particularly Dallas and Houston, but we're going to be able, instead of filling in large chunks of the market where we just weren't present, I think it's allowing us to go where the puck is going and go to those areas where growth has been. Let's take Houston over that eight-year period, but also go where the growth is currently going. It allows us to be in some of these location markets and I think that'll be helpful to us. So I see us continuing to do that for the foreseeable future, and I really expect us to be doing it in these major markets in Texas.

Gotcha. That's very helpful. I mean, with Texas being the backdrop of immigration of both people and companies, is it When you think about just kind of loan growth across the United States, Texas has obviously been better on average. So if loan growth starts to accelerate, do you think pricing competition gets a little bit even more competitive within Texas because it already has the growth and people want to double down there? I'm thinking just more of like a competitive standpoint. You followed up on Abraham's question, but if loan growth accelerates from here, does pricing competition get even more intensified?

I do think that, you know, as markets heat up, yeah, I think it'll get worse around the margins. But we've dealt with that, man, for so long. I mean, and through these cycles and new competitors coming in, I really don't see it really impeding anything that we're doing. We are – one of the things I – with regard to price competition – I mean, if you look at our balance sheet and our cost of deposits, I'll really argue that we're one of the low-cost producers on input as it relates to funding. So we're able to compete on price very effectively. The thing that we don't like to compete on and we're willing to lose deals on, I guess two-thirds, three-quarters of the deals we lose, is structure. We like to get paid back, right? And so... That's where you will probably see it heat up most, and that's probably where it will affect us most, is because we won't, there's certain kind of deals that we just won't do, and there's certain people, for whatever reason, that will do certain deals a certain way, and we've learned over the years, there's no money in that long term.

Yes, all right, that's helpful, appreciate it.

Our next question is from Manon Gosella with Morgan Stanley. Please proceed.

Hi, good afternoon. Sorry if I missed this, but I thought I heard the opportunity for securities repricing for this year and next year, the $1 billion of loans this year. But can you talk about what the repricing opportunity is for fixed-rate loans next year? And, you know, what rate the loans are rolling off at and what rates loans are coming on at right now?

Sure. Again, I think our back book is around 5%. And so we're able to reprice those fixed rate loans at around seven and a quarter. And so it's around 250 million for the fourth quarter and then a billion into 25. So just to make sure I was clear on that.

Got it. Sorry, I missed that. And then we've had some banks talk about capital markets opening up and some paydowns coming through on the CRE side. Is that something that you're seeing in your book too? You know, I know the belly of the curve is back up, but did you see any elevated paydowns while rates were lower?

Well, with regard to CRE, I mean, as long as the project's stabilized and, you know, on the occupancy side, yeah, there's a lot of money available. And, you know, You know, we've seen really strong cap rates. I'm mainly talking about multifamily right now, but we've seen really strong cap rates. I talked about one last quarter. That was a big success for the developer builder. We've seen sub-6% long-term rates available in the market. Yeah, there's capital available. Once a project reached stabilization, that's really a challenge. When you do see challenges, that's the challenge that you've got is lease up has been slower because just, again, I'm talking multifamily mainly because supply has been so strong. But people are taking these units down. You're just seeing, in some cases, less rent growth than you underwrote. you're seeing more concessions, that kind of thing. But you are getting projects leased up. And once you get there, we're seeing that there's capital available.

And I think that's where private credit has a place. It's kind of serving as I'll call it kind of a bridge if a project needs 12, 18, 24 months. And so it's a higher priced Higher yielding, maybe less structure, but it's serving its purpose of providing capital in the market.

So it sounds like you're able to get much stronger loan growth despite some of those factors weighing on overall loan growth and the balance sheet. So is the velocity of loans up a little bit more than before now?

No, I mean... You know, there are a lot of things that work, okay? So we did a great job building our CRE portfolio with great sponsors and great projects over the last three years. They've been performing well. They've been funding up, you know, because we're probably the last in the capital stack. And so a number of those projects are still being built. So you've got some of that. And that's true in multifamily projects. limited amount in an office, and then industrial, that kind of thing, retail, been a lot of it. So, you know, I think that's one thing that's happening. As I said, our consumer growth has been really strong. It's going to be interesting to see what happens going forward. I mean, you know, the CNI piece I think has been a little weaker the last, you know, Eight weeks maybe, and I really believe it has a fair amount to do with the election and the uncertainty there. I think that will clear up. I hope to see that continue to grow. I think commercial real estate balances will have some pressure just because we're going to be paying down, refinancing, some of these projects are going to be sold. And we haven't built up a lot of pipeline for some of the projects, like multifamily, for example. I don't think we've done but maybe one over the last year. So there'll be a little pressure there as those things fund up and then pay off. But we've had other successes that are still under construction, still be funding up. So it's going to be interesting to see. But I think... I think overall our outlook post-election is pretty positive.

And just to support that, I think our ability to bring in new relationships sets us apart. And 54% of our year-to-date increase in loan balance is coming from new customers that we've acquired in the last 12 months. And I think that's an important differentiator that we're able to, with this organic growth strategy, to grow, specifically in our loan portfolio.

Great. Thank you. That's very helpful. And, Jerry, all the very best.

Thank you. Our final question is from John Armstrong with RBC Capital Markets. Please proceed.

Hey, thanks. Good afternoon.

Hey, John. Hey, John.

Thank you. Yep. You flagged a seasonal deposit change in the fourth quarter, and, Dan, you gave us some of the numbers. But what's a typical seasonal deposit change? And it feels like the mix is similar to what you have on the balance sheet right now in terms of non-interest-bearing and interest-bearing. Is that right?

Yes. Yeah, what we're seeing is similar.

Yeah, historically, I guess we probably had bigger increases in the – non-interest bearing, just because we've got some of the larger customers trying to strengthen their balance sheets. But I'd say that there's almost nothing that I would say at this point that has really been consistent. There's been so much movement. And with rates going down, we're thinking that deposit growth will be even better. I think we'll be able to compete more against the money market funds, given the fact that some of them will have a 100% betas, but I think from a seasonal standpoint, as Dan quoted, we are moving in that direction, so we still feel very strongly that the trend will continue. There's just some uncertainty about how much of it really will happen, but we're feeling good about it at this point.

Yeah, okay. And the interest-bearing costs are going down? The next incremental dollar in interest-bearing is generally down?

Yes.

Okay. Any changes to how you guys manage the balance sheet in terms of more active hedging if the Fed, assuming the Fed continues to cut rates?

Not really. I mean, we've got so much cash. I think the most efficient thing for us has been used cash markets when we have conviction. I think that, you know, there have been a lot of people who, you know, a lot of companies that didn't have that kind of liquidity. So the most efficient thing for them is to use non-cash markets. But I think you've you know, there's a premium that they're paying. So it doesn't make sense for us to pay the premium others have to when we've got the liquidity, when we get conviction on it. So no, we really haven't seen that there's value. I mean, they look at it all the time, but we really haven't seen that there's value right now in those positions as opposed to using cash markets.

Okay. Okay. And then on service charge revenue, do you feel like that growth rate is accelerating? It just, I know you called out a few things in the quarter, but Are the new branches starting to generate fee income and is that accelerating or am I reading too much into that?

I think it is a driver of just us bringing on new customers. And so our growth in number of customers is driving that fee income growth. So we should see as we grow into Dallas, And into Austin, again, just our ability to grow customers will help that. Whether that's at a 5% non-annualized pace, that may be high.

Yeah, okay. All right. Okay, thank you. Appreciate it.

With no further questions at this time, I would like to turn the conference back over to Phil for closing remarks.

All right, well, we appreciate everybody's participation today. Jerry, we appreciate your 38 years of service here, and I'll congratulate you on your last earnings conference call. Great job. Thank you, Phil. All right, with that, we'll be adjourned. Thank you.

Thank you. This does conclude today's conference. You may disconnect at this time. And thank you for your participation.