Cullen/Frost Bankers Inc
NYSE:CFR
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Cullen/Frost Bankers Inc
Earnings Call Analysis
Q2-2024 Analysis
Cullen/Frost Bankers Inc
The conference call began with the announcement of CFO Jerry Salinas' retirement after almost 40 years at the company. He has played a pivotal role in Cullen/Frost’s key initiatives. Dan Geddes, with 25 years of experience at the company, will succeed Jerry as CFO. This transition highlights the company's commitment to continuity and experienced leadership.
For the second quarter, Cullen/Frost reported earnings of $143.8 million or $2.21 per share, a decrease from last year's $160.4 million or $2.47 per share. The return on average assets and common equity stood at 1.18% and 17.08%, respectively, compared to 1.3% and 19.36% in the prior year. Average deposits were slightly down by 1.2% to $40.5 billion, but average loans saw an impressive growth of over 11%, reaching $19.7 billion.
The company’s expansion efforts, particularly in Houston and Dallas, are exceeding expectations. Houston's expansion reached 205% of its deposit goal and 142% of its loan goal. Similarly, Dallas attained 141% of its deposit goal and 187% of its loan goal. The Austin expansion project saw the opening of three locations, contributing to $2.2 billion in deposits, $1.5 billion in loans, and 50,783 new households across expansions.
Cullen/Frost saw a 22% increase in consumer loan balances, driven by consumer real estate lending and new mortgage products, with mortgage loan fundings tripling from the first quarter. This momentum is supported by Frost’s reputation, rated by CNN as the best mortgage lender in Texas. The consumer deposits also returned to positive growth territory, increasing by 1.4% year-over-year.
Commercial banking experienced growth, with average loan balances increasing at annualized rates of 8.7% for C&I and 10% for CRE. The bank brought in 977 new commercial relationships, marking a 19% increase from the previous quarter. New loan commitments also saw significant growth, totaling $1.98 billion in the second quarter.
Noninterest expenses saw a decrease in several areas. Benefit expenses dropped by 20% due to lower payroll taxes and 401(k) expenses. Deposit insurance expenses also fell notably. The company conducted a stock buyback totaling $30 million, amounting to over 300,000 shares at an average price of $99.50.
For the full year 2024, the company anticipates high single-digit to low double-digit growth in average loans, up from previous guidance. However, average deposits are expected to be flat to down 2%, a revision from earlier expectations of flat to 2% growth. Net interest income is projected to grow in the 2% to 3% range, slightly down from previous guidance. Noninterest income growth is now expected to be 2% to 3%, an improvement from earlier flat to 1% guidance. Noninterest expense growth is projected to be 6% to 7%, down from 6% to 8% previously.
During the Q&A session, management confirmed that commercial loan growth was not driven by line utilization but new commitments, particularly in energy. The company plans to lower deposit rates gradually in line with expected Fed cuts and emphasized a consistent approach to managing deposit and loan portfolios.
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Greetings. Welcome to Cullen/Frost Bankers Inc. Second Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to A.B. Mendez, Senior Vice President and Director of Investor Relations. Thank you. You may go ahead.
Thanks, Sherry. 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. 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, A.B. Good afternoon, everyone, and thanks for joining us. Today, I'll review second quarter results for Cullen/Frost and I'm accompanied on the call by our CFO, Jerry Salinas, and Dan Geddes, who will offer additional comments.
Before I discuss the quarter, I'm sure you all saw our recent announcement of Jerry's retirement as of the end of the year after a brilliant career of almost 40 years with Frost. Throughout that time, Jerry has been a part of virtually every major initiative that we've undertaken, and I've been blessed to work with him during that entire time and he will be missed. And rest assured, we plan on squeezing as much work out of him as possible before his well-deserved retirement.
Jerry will be succeeded as CFO by Dan Geddes, who joins us on the call today, Dan has broad experience over his 25 years at Frost having served in the credit function, headed our commercial real estate division in Houston, successfully executing our initial organic expansion strategy in Houston 1.0 and in leading the San Antonio headquarters market as regional President overseeing all our commercial activities there.
In the second quarter, Cullen/Frost earned $143.8 million or $2.21 a share compared with earnings of $160.4 million or $2.47 per share reported in the same quarter last year. Our return on average assets and average common equity in the second quarter were 1.18% and 17.08%, respectively, and that compares with 1.3% and 19.36% for the same period last year.
These results are due to our Frost bankers and are continuing to execute on our organic growth strategy. Average deposits in the second quarter were $40.5 billion down 1.2% from $41 billion in the second quarter last year. As was the case in previous quarters, Cullen/Frost didn't utilize any Federal Home Loan Bank advances, brokered deposits or reciprocal deposit arrangements to build insured deposit percentages. Average loans grew by more than 11% to $19.7 billion in the second quarter and that compared with $17.7 billion in the second quarter of last year.
I'll now call on Dan Geddes to review the results from our expansion programs.
Thank you, Phil. I echo your sentiments about Jerry, his will be very big shoes to fill, and I look forward to leveraging his institutional knowledge as we move through this transition period. We continue to see excellent results in our organic growth program, where our Houston expansion on a combined basis, what we call Houston 1.0 and 2.0 we stand at 102% of deposit goal, 142% of loan goal and 119% of our new household goal.
Breaking out the 2, Houston 1.0 stands at 97% of the deposit goal having recently experienced similar commercial deposit trends as the legacy company. 142% of loan goal and 117% of new household goal. Houston 2.0, which we expect to complete later this year or early in 2025, we stand at 205% of deposit goal, 142% of loan goal and 158% of our new household goal.
For the Dallas market expansion, we stand at 141% of deposit goal, 187% of loan goal and 178% of our new household goal. We have the first 3 locations in our Austin expansion project open with several more planned to open before the end of this year. At the end of the second quarter, our overall expansion efforts have generated $2.2 billion in deposits, $1.5 billion in loans and added 50,783 new households.
As Phil and Jerry have mentioned in the past, for perspective, the largest acquisition in our history was a company with $1.4 billion in deposits. In addition, the successes of the earlier expansion projects basically are funding the current expansion. We expect the Houston expansion to fund the Dallas and Houston expansions in 2025 with 2026 being the year that 3 expansion efforts are accretive to earnings. Since we began the expansion 5 years ago, we have added 58 locations to our branch network in the expansion regions or about 1 new location every month for the last 5 years. Those 58 locations now represent 30% of our entire branch network across Texas. The expansion branches are growing at an impressive rate and becoming a more meaningful part of Cullen/Frost.
For the second quarter, growth in average loans and deposits in the expansion branches were up an unannualized 9% linked quarter, and both average loans and deposits were up 47% year-over-year. The expansion now represents 7.6% of total loans and 5.4% of total deposits for our entire company. For perspective, at the same time last year, the expansion represented 5.8% of loans and 3.6% of deposits of our company. For the respective regions of Houston and Dallas, the expansion represents 23% of Houston's loans and 21% of deposits. For Dallas, the expansion is already at 14% of loans and 14% of deposits.
And now I'll turn the call back over to Phil.
Thanks, Dan. In our consumer bank, we continue to see excellent growth across the board. Average balances in consumer loans were up more than 22% for $571 million year-over-year. This excellent loan growth was driven by record consumer real estate lending, which is comprised of both second lien home equity loans as well as our new mortgage products.
Mortgage loan fundings were $76 million in the quarter, which is over 3x our first quarter fundings. So we're gaining momentum as this product matures. At quarter end, our mortgage portfolio stood at $132.4 million. And I should also mention how proud we are that CNN underscored recently rated Frost as the best mortgage lender in Texas. This is going to be a great asset class for us. Average balances in consumer deposits have returned to positive growth territory with a year-over-year increase of 1.4% or $253 million.
Finally, we continue to see high-quality industry-leading checking household growth of 5.8%. We do not offer any of the cash incentives to become a customer that have become so commonplace in the industry because people are choosing Frost based on our reputation for outstanding service, which has been recognized by J.D. Power 15 years in a row. Our investments in our organic expansions in Houston, Dallas and Austin, as well as our investments in marketing are driving these stellar results in our Consumer Bank, and we expect this to continue. Looking at our commercial business. On a linked quarter basis, average loan balances increased an annualized rate of 8.7% for C&I and 10% for CRE.
In the second quarter, we brought in 977 new commercial relationships an increase of 19% on a linked quarter basis, which represented the second highest quarterly increase ever. This coincided with us achieving our second highest level quarterly calling activity within 1% of the record high that we set in the first quarter.
New loan commitments totaled $1.98 billion in the second quarter an increase of 58% compared with the first quarter and an increase of 29% compared to the second quarter last year. The split of commitments booked in the second quarter was about 54% larger -- was about 54% for larger credits and 46% for core credit, so good balance there. Credit is good by historical standards with net charge-offs and nonaccrual loans, both at healthy levels. We continue to see some normalization in credit terms of risk rating migrations in the portfolio as we come off historic lows in problem loans but we've not experienced higher credit losses as our borrowers and the Texas economy overall has so far proven to be resilient. Net charge-offs for the first quarter were $9.7 million compared to $7.4 million and $9.8 million a year ago. Annualized net charge-offs for the second quarter represented 19 basis points of period-end loans.
Nonperforming assets totaled $75 million at the end of the second quarter compared with $72 million last quarter and $69 million a year ago. The quarter end figure represents just 38 basis points of period-end loans and 15 basis points of total assets. Problem loans, which we define as risk grade 10 or higher. Some refer to this as OAEM loans totaled $986 million at the end of the second quarter. That's up from $810 million at the end of the first quarter and $442 million this time last year.
The growth in the quarter was mainly due to a few larger C&I credits, mostly in the classified substandard category. About 22% of our problem loans overall are tied to investor commercial real estate. Slightly less than 50% are related to C&I credits, with most of the rest in owner-occupied real estate loans, which are 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 loans to value.
Within this category, what we would consider to be the major categories of investor CRE, office, multifamily, retail and industrial, as examples, totaled $4.1 billion or 46% of CRE loans outstanding. Our investor CRE portfolio has held up well with the average performance metrics stable to slightly improved quarter-over-quarter, exhibiting an overall average loan-to-value at underwriting of about 52% and average weighted debt service coverage ratio of about 1.55. The investor office portfolio, specifically had a balance of $981 million at quarter end, and that portfolio exhibited an average loan to value of 52%, healthy occupancy levels and an average debt service coverage ratio of 1.57, which has slightly improved for the third consecutive quarter. Our comfort level with our office portfolio continues to be based on the character and expertise of our borrowers and sponsors and a predominantly Class A nature of our office building projects.
And with that, I'll turn it over to Jerry.
Thank you, Phil. Before I begin with my prepared remarks about the quarter, I did want to say that as I head into these last few months of my career here at Frost, I want to say that I am deeply honored and humbled to have had the opportunity to work for such a remarkable company with an outstanding culture for over 38 years, all of which I've spent working for Phil. I feel truly blessed to have had this opportunity including serving as CFO for the past 10 years. While I look forward to the next chapter, I will truly miss my incredible teammates who have made this journey so special.
I know that Dan will do an outstanding job in his new role as CFO. Looking at our net interest margin. Our net interest margin percentage for the second quarter was 3.54%, up 6 basis points from the 3.48% reported last quarter. The increase was primarily driven by higher volumes of loans along with higher yields on loans and investment securities. These positives were partially offset by higher cost of interest-bearing deposits and to a lesser extent, lower balances at the Fed compared to the first quarter.
Looking at our investment portfolio. The total investment portfolio averaged $18.6 billion during the second quarter, down $696 million from the first quarter. During the second quarter, investment purchases totaled $337 million with $235 million of that being Agency MBS securities, yielding 5.69% and $102 million in municipals with a taxable equivalent yield of 5.50%. The net unrealized loss on the available-for-sale portfolio at the end of the quarter was $1.63 billion, an increase of $42 million from the $1.59 billion reported at the end of the first quarter. The taxable equivalent yield on the total investment portfolio in the second quarter was 3.38%, up 6 basis points from the first quarter. The taxable portfolio, which averaged $12 billion down approximately $489 million from the prior quarter at a yield of 2.92%, up 9 basis points from the prior quarter.
Our tax-exempt municipal portfolio averaged $6.6 billion during the second quarter, down $207 million from the first quarter and had a taxable equivalent yield of 4.30%, up 3 basis points from the prior quarter. At the end of the second quarter, approximately 71% of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of the second quarter was 5.5 years flat with the first quarter.
Looking at deposits. On a linked-quarter basis, average total deposits of $40.5 billion were down $215 million or 0.5% from the previous quarter. We did continue to see a mix shift during the second quarter as average noninterest-bearing demand deposits decreased $298 million or 2.1%, while interest-bearing deposits increased $83 million or 0.3% when compared to the previous quarter.
Based on second quarter average balances, noninterest-bearing deposits as a percentage of total deposits were 33.8% compared to 34.3% in the first quarter. The cost of interest-bearing deposits in the second quarter was 2.39%, up 5 basis points from the 2.34% in the first quarter.
Looking at July month-to-date averages for total deposits through yesterday, they're down about $140 million from our second quarter average of $40.5 billion. With interest-bearing being down $60 million and noninterest bearing down $80 million month-to-date. Customer repos for the second quarter averaged $3.8 billion, basically flat with the first quarter. The cost of customer repos for the quarter was 3.75%, down 1 basis point from the first quarter. The month-to-date July average balance for customer repos was down approximately $120 million from the second quarter average. Looking at noninterest income and expense on a linked quarter basis, I'll just point out a couple of items.
Insurance commissions and fees were down $4.4 million or 23.9%. As I've mentioned in previous quarters, Property & Casualty and benefit company bonuses are typically received in the first quarter. These bonuses contributed about $3.1 million of the decrease when compared to the first quarter. In terms of noninterest expenses on a linked quarter basis, benefit expense was down $7.2 million or almost 20% impacted by lower payroll taxes and 401(k) expenses related to annual bonuses paid during the first quarter. Deposit insurance was down $6.3 million as we recognized $1.2 million in special FDIC assessments in the second quarter compared to $7.7 million related to the special assessment in the first quarter.
Looking at capital. During the second quarter, we did buy back $30 million of our stock that translates into a little over 300,000 shares at an average price of $99.50. Regarding our guidance for full year '24. Our current projections include 225 basis point cuts for the Fed funds rate over the remainder of 2024 with one cut in September and another one in November. That is consistent with our previous guidance. Looking at loans. On a year-to-date average basis, loans are up 10.8% compared to last year-to-date. We now expect full year average loan growth in the range of high single digits to low double digits, a little higher than our previous guidance.
Looking at deposits. The current year-to-date average is down 3% compared to last year-to-date. We now expect full year average deposits to be flat to down 2%. That is down from our previous guidance of flat to growth of 2%. We expect net interest income growth in the range of 2% to 3%. The upper end of our guidance is down from our previous guidance of growth in the range of 2% to 4%.
The net interest margin percentage is still expected to trend slightly upward each quarter for the remainder of the year. Based on year-to-date growth and current projections, we are projecting growth in noninterest income in the range of 2% to 3%, up from our previous guidance of flat to up 1%. Based on year-to-date results and current projections, we are projecting noninterest expense growth in the range of 6% to 7% on a reported basis. That is down from the 6% to 8% previous guidance. I will say, however, that we continue to be focused on bringing that expense growth percentage down.
Regarding net charge-offs, we still expect those to go up to a more normalized historical level of 25 to 30 basis points of average loans. And regarding taxes, our effective tax rate for the full year 2023 was 16.1%, and we continue to currently expect a flat to slightly higher effective rate in 2024.
With that, I'll now turn the call back over to Phil for questions.
Thank you, Jerry. We'll now open up the call for questions.
[Operator Instructions] Our first question is from Steven Alexopoulos with JPMorgan.
Let me start. So you guys had good commercial loan growth. Can you talk about what you saw from a line utilization trend? Is that what drove the loan growth? Or is this all share gains?
No. It wasn't line utilization, Steve. It was -- it was growth. I don't know if I didn't think up in terms of share gains, but I guess we did do pretty well relative to the market. But it was just good activity. It was mainly -- if you look at new commitments that we had, which I realize they're not balances, but they are the basis of those balances, new commitments for the quarter were up strongly. About 80% of it was from C&I and energy, we had a really good quarter on energy this time, some really well underwritten deals, good structures and good relationships. So it was just good activity. Our people are working hard. And I think I said we had our second highest quarter of calls in the second quarter and things are just going well, to be honest.
Phil, on the commercial real estate side, you guys had good growth there. It's an area where many peers continue to pull away from. Are you just being opportunistic stepping in where others are stepping back? And should that be a continued driver of loan growth in the back half?
Well, I think the balanced growth in C&I is really driven mainly by projects that have been put in place in the past and you're seeing those fund up. I don't see that being a developing driver of balanced growth going forward. I mean there will be some, and we are being opportunistic in a number of different areas. I mean, you may think I'm crazy, but we did an office building loan in San Antonio in the quarter. And a great sponsor, great project, great metrics and et cetera. So it was mainly though, about great people we wanted to bank and had relationships with. So we continue to bank people, not things. And we are taking advantage of businesses as it presents itself and it's what we want to do.
Okay. And then just finally, I want to ask you about your deposit strategy, if you will, because when the Fed started raising rates, I remember you guys were one of the first banks that started raising deposit rates for your customers. I think on the call, you said you were going to share the benefit with them. And that was while many peers were not raising rates and then there was a big lag for the industry, which you guys really didn't see. But with the Fed looking like they're about to cut now what's your strategy? Do you take that benefit back more quickly? Do you see what the competitive environment does first? Like how are you thinking about it at this stage?
No, Steven, you're exactly right with the history there. Our current expectations is that we would move in the same manner that we went up, we would kind of move back down in that same sort of manner. Obviously, I always give that caveat. We'll continue to look at what competitors are doing, but we were quick to go up and expect that we'd be able to make those same sort of decreases on the way down.
Our next question is from Dave Rochester with Compass Point.
On the NII guide, I appreciated all the color on your assumptions for rate cuts there. I think last quarter, you mentioned you get roughly $1.4 million and a hit on a monthly basis for each 25 basis point rate cut, correct me if that's wrong. But is that about the same today? And then just given what you just said in terms of moving deposit costs down at a similar pace as the increase on the way up. That's how you're thinking about it from the first cut? Or is there a little delay?
Yes. No, right from the first cut is what we're currently thinking. But I'll continue to say we'll continue -- we'll look at what the market is doing, but our current thought process is we will move immediately. As far as what the cost or the benefit, if you will, or the cost of the hike or cut, it is probably a little bit higher, and a lot of that is going to be dependent on how much liquidity we have. So that can move. Today, I'd probably tell you if you said it was $1.4 million, I tell you it might be in the range of $1.5 million to $1.6 million. So not too far different, but it's really going to be dependent on how much liquidity we have at the Fed. And that's from per month, as you said, on a pretax basis.
Yes. Got it. All right. And then just following on the loan growth discussion, it sounded like you saw a decent amount of strength in C&I. You mentioned energy. Are there any other areas where you're seeing particular bright spots there?
No, I wouldn't say there's anything that stands out. The energy, I think, was most unusual in terms of its growth during the quarter. But no, I think it's just been good growth overall. We've been seeing lots of good opportunities and taking advantage of them.
Yes. Okay. And on the credit side, you talked about the problem loan increase. Some of that, it sounded like it was on the C&I front. Any patterns there or any color just on the industries where you saw a little bit of weakness?
Yes. I would say it was driven by 2 industries, one that we've -- and I've talked about them both really over the last few quarters as we've had the interest rate increases. It would be in it would be in contractors. There were a couple of large contractors that we moved to the classified position based on their situation. And then we've had a couple of automobile dealers. One was a used car dealer almost a new car dealer in the South Texas area, and car dealers have been pressed by -- certainly the used car dealers have been pressed by the increase in interest rates, higher floor plan costs, if they're financing with Buy Here Pay Here, their credit losses have been higher.
They've sort of had a perfect storm and they've had some dislocations in that industry, and we've talked about those over the last several quarters. The contractors are ones that we'd like to believe they have a path forward in the not-too-distant future, but we'll just have to see, but it's not commercial real estate. I will say there were a couple of multifamily deals that we did move to risk grade 10 and really that was because they had come upon their covenants and their loan agreements had been introduced at that time in that agreement after, say, about a 3-year period. And they were below their covenants and they are working to move those back either through operations of the property or through a sale or refinancing of it, and we think those will both be just fine.
But because of the situation with the covenant, we elected to move that to risk rate 10. And I think we'll see more go into that. I think we'll see some of these flow out and we'll see new ones go in. But I'm really not concerned with the multifamily situation and the debt service covenant ratios that might cause them to be in a risk grade 10 at any one point in time.
Our next question is from Ebrahim Poonawala with Bank of America.
So I guess, first, Jerry, and then congratulations to each of you on the retirement and the new role. I know you have a few months. And I'm glad Phil is going to extract the last bit out of your, Jerry. But maybe I think I heard this earlier, just big picture question, I think when you shared the stats about the new branches and it sounded like as we fast forward to 2026, all 3 expansion for the markets would be breakeven. So 2 questions on that. One, what's the drag to earnings or returns today because of this investment spend. And I'm just trying to get to what operating leverage that we should expect as we think about ROA, ROE once we get to '26? And -- is -- and is there more appetite or need to add a similar number of branches over the next 5 years once this is done?
Yes. Well, the -- let me answer the second part. This is our strategy, and I hope that they'll continue to be really good opportunities in the state of Texas for us to continue to expand. We expect that they are. We're doing some work now on identifying those places and trying to see where the puck is going to go and not get behind that. In 2026, I think as Dan said and as Jerry has said before, we expect -- it's basically breakeven now. We're going to be adding on several locations in Austin, so I think we'll be basically breakeven next year. And other things equal, that's when you'd see some significant accretion, I think, from that program and continuing to move forward from there.
And -- but we've got to remember that -- and that's a couple of years from now, but we've got to remember that if we do have opportunities to expand into very attractive markets, we're going to do it because, as I've said many times, this strategy is durable and it is scalable, and it's been very successful, and we're building great long-term value here.
Got it. And maybe, I guess, Jerry, for you just around -- and I think I heard you expect NIM to move higher third and fourth quarter. Just as we think about rate cuts in the world where we get a series of rate cuts, one, does that drag continue? Or are there actions that you may take outside of deposits on the asset side at some point to change the complexion of the balance sheet? Or there is no such sort of plan to do anything?
Yes. And the -- as I mentioned, what our rate scenario is, we do have 2 rate cuts in there. And don't forget, I did say slightly higher in the next couple of quarters. So we're not talking about the sort of growth that we had between the first and second quarter, which really was a nice size growth. I think for us, the opportunities are really, as we've talked about before, investment opportunities coming out of that portfolio. Especially this year, as we talk about the latter half of the year, I think we talked about the fact that we've got -- I think it's like $500 million just in the fourth quarter, it's under 1% right, 96 basis points. So we'll see some uptick there.
From a fixed loan standpoint, the size of the portfolio that we have that our bullet sort of fixed rate loans are probably not as significant. But if you throw in amortizing fixed rate loans, you probably get proceeds of about $500 million through the rest of the year and then north of $1 billion next year. So we'll have opportunities there as well.to reprice those at even higher rates than where we would be even if the rate environment was lower. So I think we do have those sorts of opportunities going forward. We'll continue to see what we do on the asset side. We continue to -- we're always looking at that. But right now, I think those -- and the ability to price down on the deposit side are probably things that we're focusing on.
And just one quick follow-up. Is it safe for us, given how you've talked about the investment spend, how expense growth is tracking this year that as we look into next year, most likely that expense growth decelerates as opposed to accelerates compared to '24?
I -- from an expense growth standpoint, I mean, I think that's what we've been saying, right, is that the plan would be that the expense growth would not be at the same level of the growth that we had projected. What I will say is that we're running a pretty tight ship right now. We're doing a lot of things that we need to do. We guided down on that expense growth. And Dan is going to be the new sheriff in town. So we're still trying to get the growth down this year. But there will be some things that we have to do that we know we have to do. So I've said before, I don't expect that our growth rate will be back in that 3% to 4% to 5%. I still think that we're probably talking about growth in the higher single digits. And that's all going to be refined and would be discussed at the January call.
Our next question is from Peter Winter with D.A. Davidson.
If I could just follow up on expenses. I hear you that you lowered the top end of the range for expenses for this year, but it does imply a pretty steep ramp in the second half of the year. And that's on top of core expenses coming down this quarter, if I exclude FDIC. So could you just talk about what type of expense initiatives you have in the second half of this year that's driving that?
Yes. One of the things that we have every year in the fourth quarter are restricted stock awards. And there's quite a few of them that by their nature that vest immediately. Some of them are age-based. And given some of those awards, you'll see that expense growth. And if you look at our historical trends, on expenses, you'll see that the fourth quarter goes up pretty significantly. That's the main driver that comes to mind.
Again, we're continuing to put these initiatives in place. So our run rate naturally is growing. But as I said, we are looking and trying to ensure that if we do -- if we are approving expenses, there are things that we really absolutely need to do. But I think what you're looking at is primarily driven by increases in compensation associated with true-ups of incentive plans and then the issuance of the restricted stock is probably the biggest piece of it.
Got it. And then can I just ask a big picture question. If I think about the branch expansion, it's really starting to pay some strong dividends, and you've got this long runway for growth as you open up more branches. Are there opportunities maybe to close some underperforming branches or consolidate branches that are kind of close to one another to kind of help manage the expense and offset some of these costs?
Peter, I think there are. In a number of cases, and we are closing older locations in these markets, and we're moving them to new locations. I don't know that we count those in the expansion numbers, but that is happening. And so rest assured, we are looking at locations that are underperforming and that we don't need. I think we've had good luck and not having a lot of those because, frankly, we were under branched if you look at the various competitors in the state. So we didn't have a lot to make up their backfill as far as closures go. So yes, we do that, and it's not unusual for us to close an old one and get it in a new location that we think has better growth prospects.
Our next question is from Manan Gosalia with Morgan Stanley.
I wanted to come back to the loan and deposit guide. So loans up high single to low double digits, deposits flat to down 2%. Does cash come down? What makes up the difference? I asked because you highlighted your plan to cut deposit rates as Fed rates come down, but loan growth feels really strong here. So just trying to see where the offset is. And what the appetite is to allow deposits to run down a little if you need to?
Yes. No real appetite to run down deposits. We really are a relationship bank. We're really focused on deposits and with a loan-to-deposit ratio at 50%. Loan growth at 12% really doesn't scare me. I mean we're -- as Phil said, we're going after great opportunities, and we're glad that we have those opportunities to be growing today. The thing that will probably be more of a handle that we can move, if you will, would be the investment portfolio purchases. We had started the year, I think, at $1.6 billion is what we thought we would purchase. Last quarter, I said we brought that down to $1.2 billion. We're probably closer to $900 million right now. And we bought maybe $0.5 billion of that year-to-date. And so just have projected maybe another $400,000 to make. So at this point, that's really the mechanism that we've used in that scenario where deposits might be a little bit softer.
And we really don't -- we -- our projections are pretty light in the second half. We do see some growth and those could obviously be better, but we just really don't feel any conviction at this point and felt like that's the right thing to do. And so from an investment portfolio standpoint, that's the one that's really easy for us right now. to just put the brakes on, given where rates are today. If we went out and invested in some cases, we might earn a little bit less than where we're at today. I think the purchases that we made were slightly better, but that's really what we would move more than anything else is what we would do in the investment portfolio.
I think Jerry is right on that. And your question really I think, brings up something that we need to keep in mind, and it is that our loan growth is good, but our -- what it really is, is relationship growth because we don't make any loans that we don't get the deposit relationship. And so in this environment, you've got good loan growth here. But you're getting those deposit relationships underneath that, that because of where rates are today. And the efficiency that businesses are employing with their deposits and their cash, you're not seeing as much deposits following on is I think we will see in the future as these things normalize and as the rates normalize. So while you may not see the deposit growth now, I'm encouraged that you'll see it in the future.
Yes. And just something to add to that is when we're out in the marketplace, having the ability to provide capital in this market puts us at a competitive advantage in looking at the impact of new relationships and our year-to-date loan balance growth, 38% of that is from new relationships. And we're able to get $249 million in new relationship deposits. And a lot of that is because we can -- our pencils aren't down. We are open for business. And so we're able to bring in new relationships with these ones.
Got it. That's great color. Maybe the second part of the question is peers are saying that they expect a pretty sizable pickup in loan growth as rates come down. Is that something you expect as well? I mean, loans are already growing 11% year-on-year for the first 6 months. Could you see an acceleration from here if rates come down?
No. Not necessarily. I don't think we're thinking of it that way. I mean, what we're doing is we're making calls. We're developing relationships. And I don't think it would move us one way or another. I think what we might see is if we get some clarity in the election, the political process, it's clear to me that just from talking from our loan officers, relationship managers. there are a number of companies that are as is typical. They're waiting to see which way the political winds blow, and based upon what they see, it will give them some visibility in terms of what kind of -- primarily what kind of regulation they might see.
And once that clears up and they understand where they are, I think you'll see businesses that might be holding off today move forward, at least that's what we've heard from a lot of our people. So I've heard less talk about once rates go down, than I've heard about once the environment gets more clarity with regard to what kind of administration we might have making the regulatory decisions.
Our next question is from Brandon King with Truist Securities.
So just following up kind of on the last line of questioning. And just could you speak broadly as far as what you're seeing from a competitive standpoint in your markets. Remember, last call, you mentioned now some lenders were kind of came back in the game. But could you just speak as far as what you're seeing today?
I think it's getting more competitive. I think where we had -- let's take commercial real estate I think we're seeing people move back in. I think we were hopeful that you'd see more people requiring guarantees. I think there are a lot of players that are not doing that. And so I think we we're seeing it slide a little bit back to where it was before.
But as some people that have been out of the market, pencils down, as they say are coming back and you're seeing some more competition. I think we're seeing maybe in the real estate side, a little more competition from the smaller banks just an observation, but that's kind of what we're seeing. Dan, any thoughts from you.
It's -- I see kind of this second half, we had a really strong second quarter in terms of closings. And with what Phil mentioned about just the uncertainty in the environment. I see that it being a little slower, just looking at our weighted pipeline. But in terms of competition from the other banks and lenders in the marketplace, we certainly kind of see it from the community banks in the markets that we're in, we'll see it from some regionals or some regionals that decide to get into our markets. And so we're seeing some new players who are coming into our markets in over the last kind of 6 months to a year. So I could see the competition picking up.
Got it. Got it. And how has that impacted pricing discipline, right? You've increased your loan growth guide. So I assume you're getting the right pricing, but has there been any pressure there?
Yes, there's always pricing pressure. But actually, if you look at the deals that we've lost about 3/4 of the deals that we've lost have been due to structure. And that's the thing that concerns us most. With our cost of deposits and our cost of funding, I'd argue that we're one of the low-cost producers in the marketplace in regards the cost of funding. And therefore, we can be very competitive on pricing. And remember, we're booking or we are banking relationships first.
And so if someone passes the test to be a Frost customer and they're willing to live within our structures, we don't want to lose that after all that development for a few basis points. So we'll be very competitive on price, but structure is a different deal. We have been and will be disciplined as it relates to structure. And so that's where we're seeing more of our losses.
Our next question is from Catherine Mealor with KBW.
One more follow-up to the margin. As we think about the NII guide towards for the year, do you think -- and just a little bit of follow-up you've already answered, but do you think you'll continue to see NIM expansion through the back half of the year kind of equal to the pace we've seen? Or does that expansion start to moderate in the back half of the year, but maybe the average earning asset growth kind of moderates or maybe even grows a little bit. How do we think about the balance between those 2 things?
Yes. No, I think the rate of growth would be quicker in the -- or higher in the first half of the year and slower in the second half of the year. Yes. We're -- again, we're...
But still an upward trending margin, you think?
Exactly. Yes. Yes.
And then on the price in, as we start to price in cuts in the back half of the year or as we get into '25, whenever that comes, what is your outlook on how the margin kind of initially reacts when we start to see that cut?
Again, it depends on timing. But I think based on our current assumptions starting in September, that's really what my guidance was based on. So we still see some upticks. Again, that kind of slows down the growth. But we do continue to see that sort of growth projected out through the rest of this year.
Great. Is it still NIM expansion, but just less as we get cut to that kind of $1.5 million that you were talking about?
Right. Yes. I mean that's the thing. We do -- like I said, we do have some investments, as I mentioned, the big part of it is the $500 million. So if you're reinvesting stuff, that $500 million treasuries is at 96 bps. But even the rest of the fundings are probably in the 3 handles on them or high 2s. And so all those will provide you with some upside. And again, given what happens with the fixed rate loans that reprice, we'll have some pickup there as well.
And then any color on just the new growth, the new loans you're putting on relative to new deposits you're putting on, what would you say those 2 rates are, so new loan yields and the new deposit costs today, that spread?
Well, the new deposit costs are going to be the same, right? They're really going to mirror whatever is going on in the existing portfolio. We did very minimal exception pricing on the loan -- excuse me, on the deposit side. So you have some, but you're not going to have a lot of that. And as far as the back book, and we're probably right now in the weighted average rate of, say, a 6.70% or something in that range, is the back book at current stuff going on north of 8.
Our next question is from Jon Arfstrom with RBC Capital Markets.
A little bit of cleanup here. But Phil, you talked about the mortgage business opportunity earlier in the call. And it looks like those volumes have really picked up. Can you talk a little bit about the driver of that and where this can all go and when it shows up in a material way?
Jon, I go back to when we announced that effort actually just over a year ago. And I believe we said we expected that the mortgage book would be in excess of the consumer book that we had at that time and so over a 5-year period. So I don't think we have come off of that. And it's just -- it's a new thing, and we're getting our people used to making recommendations on it. We're getting the realtor community understanding what it is. And -- and we've got just great service. And I think it's just going to be a great asset class for us.
Just another thing to add is that 30% of our mortgage borrowers are new to the bank. So this opens up an opportunity to bring in new customers through this incredible product and then incredible experience.
Okay. Question for maybe Phil or Dan. What is the significance of the plan when you talk about the performance of the new branches? It looks like all are either on plan or ahead of plan, but as an outsider, what does that really mean? And what's the benchmark that we can use there?
Well, what we -- when we started, Jon, you might recall, we started this strategy and we looked at the performance of the 40 branches that we have opened up over the last 8 years prior to that time. And we said that -- we looked at the average of that, and we said if we could do the average of that in the markets that we were going to be in, we felt like we would have a really successful strategy for our shareholders. And so that's what we based it on. And then we began measuring what our performance was versus that. We kept it fairly consistent, although I know that we've changed that sum. Dan, you might talk about that.
Yes. I mean we've tweaked it with Dallas. We learned a lot from Houston 1.0 and as much as it pains me, Dallas is outperforming Houston at the same time period, but it goes back to our blue book of continuous improvement. And so we learned what work could we do better and Dallas is just doing a great job as you can see from their performance. And so I would expect the same from Austin as well.
Okay. That helps.
Jon, I would say it's fairly consistent. I mean we'll move it up in a particular market but we want to keep it somewhat consistent because we want to be able to compare just like Dan did, and he was -- he's kind of only half joking that Dallas is outperforming Houston, so that makes me mad but the -- but we can have a consistent comparison in these markets. And I think that's helpful to us. And it's -- we'll try and keep it that way. Again, making adjustments for the markets that we're in, but we'll sort of keep it fairly consistent.
And some of those adjustments are the timing. What we learned in Houston is the timing of when loans and deposits and new households. So we've looked at those trends to make sure that, again, that we're being consistent, but we're being fair.
Okay. Well, the growth numbers are great. So that's impressive. Jerry, 10 years, it's probably 40 earnings calls, so thank you for everything. And I was just going to say, I'm wondering what the 40-year retirement gift is like at Cullen/Frost, they'll still get you a belt buckle or boots or a watch or?
We'll have to see. I'll let you know, Jon. Thanks for bringing it up to them.
We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.
All right. Well, thanks, everyone, for your support and for your questions and interest, and we'll be adjourned. Thank you.
Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.