Cullen/Frost Bankers, Inc. (CFR) Q2 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Cullen/Frost Bank Second Quarter 2019 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to A.B. Mendez, Senior Vice President and Director of Investor Relations, to begin.

Thanks, Laurie. This morning's conference call will be led by Phil Green, Chairman and CEO; and Jerry Salinas, Group Executive Vice President and CFO. Before I turn the call over to Phil and Jerry, I need to take a moment to address the Safe Harbor provisions. Some of the remarks made today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, as amended. We intend 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 morning, everyone and thanks for joining us. Today, I'll review second quarter results for Cullen/Frost. And our Chief Financial Officer, Jerry Salinas, will also provide some additional comments and then we're going to open it up for your questions. In the second quarter, Cullen/Frost earned $109.6 million, or $1.72 per share, which represented 2.4% increase compared with $1.68 per share reported in the same quarter last year. Our return on average assets was 1.4% in the second quarter and compared to 1.43% in the second quarter of last year. Average deposits in the second quarter were $26 billion, basically flat, compared to the $26.1 billion in the second quarter last year. Average loans in the second quarter were $14.4 billion, this represents an increase of 6.2% versus the second quarter last year and growth was broad-based across all categories. Our provision for loan losses was $6.4 million in the second quarter, compared to $11 million in first quarter of 2019 and $8.3 million in the second quarter of 2018. Net charge-offs in the second quarter were $7.8 million compared with $6.8 million in the first quarter, $7.9 million in the second quarter of last year. Second quarter annualized net charge-offs were only 22 basis points of average loans. Non-performing assets were down $21 million to $76.4 million in the second quarter, compared with $97.4 million in the first quarter of 2019 and $122.8 million in the second quarter of last year. Overall, delinquencies for accruing loans at the end of the second quarter were $87.1 million or 60 basis points of period end loans and those numbers are well within our standards and comparable to what we've experienced in the past three years. Our overall credit quality remains good. Total problem loans, which we define as risk grade 10 and higher, totaled $457 million, approximately 27% lower compared to the second quarter a year ago. Energy-related problem loans continue to move in the right direction, they totaled $93.6 million at the end of the second quarter, compared to $119.3 million for the first quarter and $195.4 million in the second quarter of last year. Program energy loans peaked more than three years ago and they're at manageable levels at this time. Energy loans in general represented 10.2% of our portfolio at the end of the second quarter and are well below our peak of more then 16% in 2015. Our focus for commercial loans is on consistent balanced growth, including the core loan component, while maintaining our quality standards. New relationships increased 6% versus second quarter a year ago. New loan commitments in the second quarter were off by 2% compared to the second quarter last year, but the total remained roughly balanced between core and large deals. Similar to what we have seen in recent quarters, the commercial real estate market has become more transactional compared to C&I. Of the deals we're losing in CRE, most were lost to aggressive structures that don't fit our standards. As an example, for year-to-date 2019, we've looked at 4% more C&I deals and we've booked 4% more deals. However, on commercial real estate, we've looked at about 50% more deals and we booked about the same number of deals as last year in dollar terms. Our weighted current active pipeline in the second quarter was up by about 23% compared with the first quarter, due to higher levels on both C&I and CRE. In consumer banking, our value proposition and award-winning service and technology continued to attract customers. The second and third of the 25 new financial centers planned over the next two years in the Houston area opened in the second quarter and the pace of openings will accelerate in the third quarter. Overall, net new customer growth for the second quarter was up by 39% compared with a year ago. Same-store sales increased by 6.9% compared to a year ago. In the second quarter, about 27% of our account openings came from our online channel which includes our Frost Bank mobile app, that's up from 22% a year ago. It also represents a 24% year-over-year increase in the total number of online openings, so they're growing both in number and in the proportion of overall account openings. The consumer loan portfolio averaged $1.68 billion in the second quarter, increasing by 4.9% compared to the second quarter of this year. We've been focused a lot of developments with Frost. With the expansion in Houston region, that I mentioned, as well as the move to our new corporate headquarters in San Antonio and our ongoing Opt For Optimism initiative, all of which are raising awareness at Frost among prospective customers. I think it's important to pay attention to some of the things that happened at Frost that we might otherwise take for granted like receiving the highest-ranking at customer satisfaction in Texas, in J.D. Power's U.S. Retail Banking Satisfaction Survey for the 10th year in a row. It's something no other bank can say. We're receiving more Greenwich Excellence Awards and best brand awards with the small business and middle market banking than any other bank nationwide for the third consecutive year. We are expanding by opening beautiful new locations and that includes a financial center opening later this year in Victoria, Texas which is a new market for Frost. At the same time, we continue to make improvements to our top-quality digital services all while focusing our spending on investments in making our business better and moving forward in a manner consistent with our culture. Those things together with the people that we put in place to execute our strategy for Frost's competitive advantage. That has kept Frost growing for more than a 150 years now and we'll keep Frost growing in the years ahead. Now, I'll turn the call over to our Chief Financial Officer, Jerry Salinas, for some additional comments.

Thank you, Phil. I'll make a few comments about the Texas economy before providing some additional information about our financial performance for the quarter and I'll close with our guidance for full year 2019. Regarding the economy, Texas unemployment hit a new low for the second month in a row in June, falling to 3.4% from the 3.5% in May, and 3.7% at the end of 2018. June's 3.4% level is the lowest level seen in employment statistics going back to 1976. Texas employment grew an annualized 3.9% in June, following upwardly revised growth of 2.5% in May. And the Dallas Fed has increased their estimate of full year job growth from 2.3% to 2.5%. Employment growth in June was spread across most sectors and year-to-date Texas employment has expanded at a healthy 2.7% pace. According to the Dallas Fed surveys, activities in the Texas manufacturing and services sectors accelerated in June while energy industry activity was flattish from Q1 to Q2 after three years of growth. Looking at individual markets, Houston economic growth remains strong with the business cycle index growing 6% over the three months ending in May, driven by strong employment data. This represents an acceleration from the 4.8% growth rate seen in Houston in the second half of 2018. Year-to-date, Houston employment is up 3.3%, up from a 2% rate in the three months through February. All of the major sectors have increased year-over-year. Houston's unemployment rate held steady in May at a record low at 3.5%. The Dallas business cycle index maintained by the Dallas Fed expanded approximately at 5% annual rate in the second quarter while the Fort Worth business cycle index expanded at about 2% annual rate. DFW area unemployment stood at 3.1% in June, just slightly above the 3% range -- rate seen in May, which was the lowest level since 1999. The Austin economy also remained healthy in May. The Austin business cycle index accelerated to a robust annualized rate of 8.2%, the strongest expansion since November 2015. Austin's unemployment rate declined from 2.6% in April to 2.5% in May. The Austin metro saw a 3.3% annualized gain in jobs during the three months ending in May growth was broad-based across multiple sectors. The San Antonio economy expanded at a steady but subdued pace in May. San Antonio's economy expanded at a 3.1% annualized rate in May, slightly above the long-term average of 3%. San Antonio's unemployment rate decreased slightly for the fourth consecutive month to 2.8% in May. The Permian Basin economy continued its robust year-to-date performance. Employment growth has moderated in recent months, but the June unemployment rate of 2.2% remained near historical lows and well below the state figure of 3.4%. Looking at our net interest margin. Our net interest margin percentage for the second quarter was 3.85%, up six basis points from the 3.79% reported last quarter. Factors driving this increase include higher loan volumes and higher rates for loans and securities combined with a lower proportion of earning assets related to balances at the Fed. The taxable equivalent loan yield for the second quarter was 5.34%, up one basis point from the first quarter. Looking at our investment portfolio, the total investment portfolio averaged $13.3 billion during the second quarter, up about $550 million from the first quarter average of $12.8 billion. The tax equivalent yield on the investment portfolio was 3.42% in the second quarter, up five basis points from the first quarter. Our municipal portfolio averaged about $8.2 billion during the second quarter flat with the first quarter. During the second quarter, we purchased about $1.1 billion in agency mortgage-backed securities yielding a rate of 3.35%. Additionally during the quarter, we sold approximately $550 million of treasuries with an average yield of 1.71%. The municipal portfolio had a taxable equivalent yield for the second quarter of 4.06%, up three basis points from the previous quarter. At the end of the second quarter, about two-thirds of the municipal portfolio was PSF insured. The duration of the investment portfolio at the end of the quarter was 4.3 years, down slightly from 4.4 years the previous quarter. Looking at our funding sources. The cost of total deposits for the second quarter was 41 basis points, down one basis point from the first quarter. The cost of combined Fed funds purchase and repurchase agreements, which consist primarily of customer repos, decreased to 1.69% for the second quarter from 1.72% in the previous quarter. Those balances averaged about $1.2 billion during the second quarter, up about $62 million from the previous quarter. Regarding the outlook for 2019. Our current expectations for the interest rate environment for the remainder of 2019 have changed since our previous quarter's guidance. We were previously projecting flat rates for the remainder of 2019 have changed, since our previous quarter's guidance. We were previously projecting flat rates for the remainder of 2019. Our revised projections now assume a lower rate environment. We are projecting two Fed rate cuts for the remainder of 2019 one cut at the end of July and one cut at the end of October. Looking at the current range of analyst estimates for 2019, we see a range of $6.84 to $7.02. As a result of the changes in our assumptions related to the interest rate environment for the remainder of 2019, we are most -- more comfortable with the lower end of the current range of analyst estimates. With that, I'll now turn the call back over to Phil for questions.

Thanks, Jerry. We'll now open up the call for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Rahul Patil with Evercore ISI.

Hi. So just loan growth moderated quite a bit this quarter 5% year-over-year last couple of quarters it was in the 7% to 8% range and then last year it was 10%. Could you discuss the drivers behind this moderation? Is it because of conservative lending by Frost bankers? Or a more function of reduced loan demand in your markets? And then, I realized you've talked about expectations for high single-digit loan growth, could you maybe also give an update on that front?

Okay. Thank you. I think the main thing right now is competition. It's -- the market is still strong. It's moderating a little bit, but I mean, there's still plenty of activity out there. And it really has to do a lot with what I pointed out in my comments about structure. And I think real estate is the best example. When you look at 50% more deals that's $1.5 billion more deals and then you book about the same amount of deals you did last year that gives you an indication of our ability to participate in some of those things. So I'd say that's one thing. Our consumer growth is down a little bit. It's still positive. I think it's running around 4% year-over-year. So it's a little below what our goals are. A lot of what we're seeing is just reduced utilization on personal lines of credit. I think we went from like 41% to 38% and we're also reducing some of the commitments there as we sort of make sure we're doing our work, keeping those things at reasonable levels and keeping an eye on the economy in the future. So -- but I would say the biggest thing right now is competition and it's -- the biggest part of that is structure. For example, the deals we lost year-to-date this year, 62% have been lost due to structure, 38% during price -- 38% they are price. We'll -- it's more price competitive as well, but we're more willing to compete on price than we are on structure. And -- so anyway, I'd say that's what is driving these numbers. And as far as what our goals are high single-digit loan growth and that would be our goal. We're not posting that so far this year, but we are in solid single-digits. But given where we are -- I mean look you can post any loan number you want as long as you don't care about getting paid back and -- so we are focused on doing deals that meet with our risk parameters. And it's a little harder to do right now. We'll just have to see how that breaks going forward.

Got it. And then -- so the NIM came in better than what we were expecting and I believe last quarter you indicated that the NIM should be relatively stable in coming quarters that was assuming no change in the Fed funds rate. Could you may be talk about the trajectory and the drivers of the NIM versus the 3.85% number this quarter, if the Fed does cut rates assuming two rate cuts this -- in the back half of this year?

Yes. You are correct that's exactly what we did assume. So in this rate environment I guess what we did was we reported at 3.85% in the second quarter. As I look out for full year given the current rate assumption, we're assuming that the NIM would probably closer to a 3.75% for the full year. So obviously, that assumes some reduced rate there going forward. And again we're getting -- even though Fed funds rate hasn't gone down and interest rates haven't gone down I'm not telling anything you don't know, but we've continued to see decreases in the yield curve LIBOR continue to go down. So from our projected standpoint, we don't really know what to expect to be quite honest with you. But we are expecting them to go down. Going forward, we'll be seeing some good increases in our loan yields. Phil mentioned that from a pricing standpoint, it's still very competitive. So we're going to have pressures there. I think that in today's environment from an investment security standpoint there's pressure on finding the yields there also. So the drivers' going to have to be our ability to just -- to find a good loan growth with price reasonably find investment alternatives and be able to manage our deposit costs. You did see that even though the Fed didn't cut current rates, we did have a decrease in our cost of total deposits, saw a decrease in our customer repo cost. So that's just something that we'll continue to look at. We said we're going to be competitive, but we are not afraid to decrease rates if we need to.

All right. That's very helpful. And then maybe if I can just squeeze one more in. Last October when you announced your Houston expansion plans, you had cited $1.5 million of cumulative loss before a new branch breakeven on average and that breakeven point on average comes in just after -- just maybe over two years after the branch opening. Given that the rate environment and the outlook is quite different today, could you talk about your updated thoughts on new branch profitability and breakeven timeframe amid lower rates and assuming Fed rate cuts?

Well if you go back to our initial comments about branch locations, we had looked at the 40 locations that we'd open over a period of -- gosh it's over 10 years. And when branch reach -- when branches reached profitability historically, on average the rate environment -- that most of that period was in was actually lower than it is today. So I don't think it's made a material impact on it.

Okay. Thank you.

Your next question comes from the line of Jennifer Demba of SunTrust.

Thank you. Good morning.

Hey Jennifer. Good morning.

Question on the loan yield, is there anything unusual in there this quarter?

No. I didn't see anything that was unusual that would have caused that to have an impact on the loan yields.

Okay. And can you just talk about a good expense run rate in the quarter?

Let's see, if I can give you some color. I was looking at some of our expense numbers preparing for the call. I was looking at kind of what we did in 2018 versus 2017. If you recall though, just to make sure that those comparisons were apples-to-apples. In 2018 the network cost associated with the interchange fees actually moved up as a reduction of non-interest income. So if you -- it was $12 million for us in 2018 that moved out of expansion into income. So if you brought that expense back and did 2018 to 2017 apples-to-apples we were up about 4.2% 4.5% right around there. And looking at our projections for 2019, we've given some clear guidance on our Houston expectations on the $0.19 impact. And we're still comfortable with that for our this year's impact, but if I exclude the Houston expansion and I exclude the impact of the move to our new headquarters here in San Antonio, we're really projecting to grow just about at that same rate 4% to 4.5%. And from a lease expense standpoint we moved in June, so our current run rate only includes one month of expenses. I'm going to gauge those roughly at about $1 million a month. So hopefully that kind of gives you some color of what we're talking about.

Okay. Thank you.

Your next question comes from the line of Brady Gailey of KBW.

So just to close the loop on the new headquarters, it's $1 million a month you only have one month in there for 2Q. So as we look to 3Q there should be about $2 million of incremental upward pressure related to the new headquarter building?

Yes that's right Brady.

Okay. All right. And then it's good to see the buyback authorization. I was looking at -- I know you all don't call it out, but your period-end share count went down a little bit in the second quarter. Maybe just comment on if you repurchase any stock in 2Q? And then your appetite on repurchasing stock in the back half of the year?

Yeah. We did. We purchased -- we did spend the last $50 million that we had available. We had spent $100 million in the fourth quarter of 2018. And so, we spent remaining $50 million, bought about 500,000 shares in the second quarter and that's a decrease that you're saying. What we've said is we're -- and so, we believe it's important from a governance standpoint and a good housekeeping standpoint to always have a buyback available. Certainly, we'll continue to look at it what we said in the past is we want to be opportunistic. I like to say I wish I had a crystal ball, because I might have waited a little bit on the buyback. But we will continue to be opportunistic. I think for us it's a good way to manage capital. It's a good way to manage the shares outstanding. We went back and looked over at 10-year period from 2008 to 2018, and we roughly issue about 750,000 shares a year related to compensation type plans. So our goal will be to at least try to offset those through the buyback program.

All right. And then finally for me, it looks like other fee income was a little light this quarter? I know there's various things that can go in and out of that bucket, but was anything driving that number to be a little lower than normal?

What I would say, and I was looking for summer here, but can't find it. But what I would say is that it really relates more to what we saw in the second quarter last year. If I remember correctly, we had a -- we were in an FBIC and we got a payment of over $1 million in the quarter last year. We had building gains in the second quarter last year. We don't have anything in this quarter. And then we also had an unusual amount of recoveries of things that we had previously written off, I think over $2 million.

All right. Thank you.

So, it's more driven by, yeah, the balances in 2018.

Got it. Thank you.

Your next question comes from the line of Ebrahim Poonawala of Bank of America.

Good morning, guys.

Good morning.

Just first question, Phil. Just wanted to go back to your comments around the comparative dynamics in CRE market. If you could elaborate on that in terms of -- is this competition coming from your peer banks? Or is it the non-banks where you're seeing this? And I'm just thinking of it in terms of what does this mean in terms of the loosening in credit and the downside risk if we actually have some slowdown in the economy? Like, how do you assess that just from your seat when you look at this behavior from the competitors?

Ebrahim, it's everywhere, really. I mean, I look at list of the deals we lose and whether it's pricing restructure and -- you'll see -- I see small community banks in small Texas towns. I see too big to fail banks. I see regional competitors. And -- so it's everywhere. I don't think I can -- and they'll probably point a finger to me, right? But it's just everywhere.

Got it. And as you think about the sort of the back half of the year, so I heard your goal of high single-digits. But when -- and when we sort of look at the -- I think you mentioned in your prepared remarks that the pipelines were up 23% quarter-over-quarter. Does that imply just as a function of the increase in the pipelines we should see a pickup in loan growth in the third quarter relative to what we've seen in second?

If I had to guess I would say that the third quarter would be pretty consistent with the second. I mean, it's been -- we're pretty much a month into it now. We've seen some growth. So, I mean, it's a tougher road like I described competitively, but I think, right now, if I had to guess, I'd say it'd be sort of in line with the second.

Understood. And just moving, Jerry, in terms of your comments around the margin outlook and with the two rate cuts. Can you give us a sense just in terms of how to best think about what a rate cut means for the margin, given your view on how quickly you can reduce deposit costs? Just how you're thinking about that?

Yeah, you are right. A lot of it's going to be dependent on what happens. I think that in a roundabout way I guess what we – the way we think about it is, if you've got a 25 basis point cut, I mean, it cost us probably somewhere in the range of $1.2 million to $1.3 million a month all things being equal. Of course, there has been some volatility just as we said on the yield curve when LIBOR has been moving down, but roughly that's kind of the way we think about it.

Got it. And just one last question around the expense growth. So you talked about 4% 4.5% excluding the couple of items you add the lease you mentioned $1 million per month going forward as well as I'm guessing about 100 to 200 basis points somewhere in that range tied to the Houston expansion. It gets you to about 6% to 7% is that kind of the right way to think about it?

Yeah. I would say that's probably right. I think the number as I think about it probably is closer to that 7% range that you're talking about. I kind of think of 7%, north of 7% really dependent on some other things that are going on. But yeah, you're not too far off there. That's the way that we tend to think about it.

You know, there is pressure on expenses around. Jerry pointed out a number of things. I mean, another thing to keep in mind is just IT costs are continuing to increase. We've spent a lot of money on additional cyber capability. And really also it's tough to higher IT talent. We are behind the curve on that. It's one of the things I'm focused on right now. I'll probably tell you we're 50 people behind. If I can wave a magic wand, I think I would and bring them in. And we just got to be aggressive and bring that in, because it's just tough to find talent. And you don't want to let your technical debt grow too high. So yeah there are pressures on expenses. I wish we could do – I wish we could be in an environment where we've got wind at our back and not wind at our face now, but we're going to do the things we need to keep the company moving forward regardless of where race happened to be. But I agree with Jerry. It will be more on the higher side of that in my estimation.

And that's of the 7.75% base we had last year just to make sure we're looking at the starting point correctly?

Yeah whatever the reported expenses were that's the way we look at it. My previous conversation really just had to do with trying to make the 2017 to 2018 comparison apples-to-apples, but 2018 to 2019 should be fine just as reported.

Understood. Thanks for all the color. Appreciate it. Thank you,

Your next question comes from the line of Brett Rabatin of Piper Jaffray.

Hi. Good morning, everyone.

Good morning.

Good morning, Brett.

Wanted to talk about credit quality, you managed NPAs lower and charge-offs were fairly reasonable, but a lot of people have been talking about energy and just some difficulties at that space is seen. Can you talk maybe about energy a little bit? And what you're seeing in that space? And how you manage that portfolio?

Yeah, I think that the portfolio is doing well. I mean, we keep saying, we got credits that are moving through the snake, it's awfully long snake for some of those credits. But energy loans for the quarter were down by about 5% on a period-end basis that's not annualized, so obviously annualized to higher number than that. It's down about $1.481 billion. We saw some improvements payoffs in the portfolio of some problem loans. We saw probably about over $50 million of what we call problems which are risk grade 10 or higher. And we saw some deterioration in a couple. One, it's been there for a really long time. Another that was moved on and it had to – that one has to do with natural gas. It was a Permian deal, but it was a gas deal, so that was the weakness there. So, I mean, it continues to improve. I feel good about our underwriting. I feel really good about how servicing has performed throughout this whole cycle, and it continues to. We've seen some reductions in servicing in the quarter in terms of problems. But that's tight. And so I know you're seeing some layoffs with even the big players on the servicing side. So it's something we keep our eye on. I think the – but overall, I think it's going well. We continue to manage that exposure down, and my guess it will probably continue to go down some as a percentage. But I'm not really worried about. We're focused on it. But it's not something I'll lose my sleep on.

Okay. And then the other thing I wanted to talk about was just the securities portfolio and mentioning the purchases you did during the quarter, what are you guys thinking about in the back half of the year. I know it's partly market rate driven. But are you planning additional purchases in the back half of the year in the securities book? And then, maybe just how you want to manage that portfolio, with where the rates are?

Yeah. Like certainly we wish there were more opportunities there. I think last time I looked at our projections I think we're still projecting that we would buy another $1 billion in securities roughly. And we're still -- I think I've mentioned before, we've got a significant amount of treasuries that are maturing primarily close to the end of the year. But I think that number's probably about $1.5 billion. So some of this would replace some of that, but we're talking about it splitting it between treasuries and agencies. You saw as I mentioned that we did a big chunk of agencies there $1 billion. We kind of figured that given our outlook on rate being flat to down that it makes sense to go ahead and get a little ahead of that. So we did do that. And wish we could have done more but given today's rate. So we'll continue to try to be opportunistic. But we do have about $1 billion planned. I expect we'll purchase some munis. We've got some room there. We'll continue to purchase agencies and probably treasuries at current expectation. Again a lot of it will be dependent on what makes sense for us given the yield curve and what rates are available.

Okay, Jerry. And to clarify that does that does that mean -- so you're purchasing a $1 billion or your plan to? How much of that is going to be cope replacing existing securities that are maturing versus adding net new portfolio?

I guess I'm just thinking through the numbers in my head. Since we've got -- I can easily say we've got $1.5 billion in treasuries that are maturing towards the end of the year. So, if I am only replacing $1 billion. We still have some -- we're going to -- we continually look every month obviously at what our investment plan is. So right now I would say, given the things that are maturing, we're replacing a big chunk of it, but haven't completely included all of that into our projections as far as replacing the full $1.5 million -- $1.5 billion.

Okay. So you could actually see a net reduction in securities book in the back half of the year?

We could. But again it's something that we just continue to look at. It's going to be dependent on what kind of investment alternatives there are out there to be quite honest with you. In the case of $1 billion in agency we just decided it makes sense to do that. We sold those treasury securities. They were at a lower yield. And we find an opportunity to be able to replace those at a higher yield. We sold some munis also during the time -- during the quarter. I think it was around $500 million roughly, that we're yielding on a TE basis, less than the overnight rate. So we're just continuing to reevaluate our portfolio doing what we need to do. Just continue to add value to the company from the investment portfolio group.

Okay, great. I appreciate all the color.

Thank you.

Your next question comes from the line of Steven Alexopoulos from JP Morgan.

Hey, good morning, everybody.

Good morning.

I want to first follow-up on the comment you gave to Ebrahim's question when you said you would lose $1.2 million to $1.3 million cost per month for a 25 basis point cut. What was the deposit beta, you were assuming there?

It's about 20% beta overall. I think that's kind of what we've done historically. But again, what we've always said is that, it's really dependent on what we're seeing on the market. We continue to say we want to be competitive. I certainly think that, when we look at rate across our markets and I guess across the competitors, we're not the highest rate but we're certainly very competitive. But we'll just have to make sure that we're looking at that. But it assumes that sort of a total beta if you well.

Okay. And then, thank you and then on the money market deposit accounts the balances came off linked quarter and the rate also came down. Give us some color on what happened there?

I think that what we've see is from the rate standpoint really we're just trying to be competitive. What we've said is if there is room, we were quick to increase our rates. We started in July of 2017, so we were higher -- we were quicker and higher than most. But what we said on these calls is that we're going to react. We are not going to be afraid to increase rates or decrease rates if we have to. So, we just saw an opportunity from a competitive standpoint to make some movements there. I think on the money market I think that generally what we're seeing is we're just continuing to see -- we continue to bring new customer growth in, but we just -- there is diminishment from the current customer base is what we see. But we're glad that we continue to see good growth. And really in a lot of cases that money market which includes both commercial and consumer, the commercial customers really can tend to use that in manners to just in and out with some of their excess funds, so I would assume that some of that is related primarily to the commercial side.

Okay. Thanks. And just one final one. It's helpful commentary around commercial real estate, the deals you're losing structure versus price. How does that compare to C&I in terms of losing deals on structure versus price? Thanks.

Yes, it's a different ballgame. I mean commercial real estate is looking for capital in terms and it centers mainly around guarantees and burns downs, interest-only periods, all those structure things. When you're dealing with a C&I credit, it's much more relational situation and we see less of those kinds of issues there despite its nature. So, I think that's just -- it's just what it is. It's interesting how you -- you're also seeing something I think that private equity limited partners are really I think putting pressure on developers to avoid guarantees. They don't want to be in a position where they have to step in and all of a sudden they're liable on these things. So, I mean -- and that's a little bit new angle that we're seeing, so you got a lot of competing forces there in the commercial real estate world. Whereas -- I used to be a CFO for 19 years or whatever, I would -- the last thing I want to do is change my banking relationship if I didn't have to. And to do it on a few basis points or some small structure things, really wouldn't move me to move that relationship. It's going to be a deeper thing than that. So, just my historical perspective on it.

Thanks for taking my questions.

Your next question comes from the line of Michael Rose of Raymond James.

Hey guys. Just wanted to get an update on the deposit growth that you've seen out of the Houston expansion so far? And if you have any expectations for what that could generate over the next couple of years? Thanks.

Well, we have it's -- so it's early on, right? So, I mean I don't have numbers at the tip of my fingers. If I did it wouldn't be impressive to you because really they're really new. And I think the main thing I would say is that we don't see anything in the locations that we've opened up that have caused us to believe they are going to be anything different on average than what we've seen historically. And so we look to be reaching those profitability levels say around two and a half-year plus or minus period of time. And -- so nothing new there. We're all happy with that. We're happy with how it's going.

Okay. Maybe one follow-up question on the insurance business. I would have thought given kind of the relative strength in the market that you would have done a little better year-on-year. Any sort of color there as to what happened? And what the outlook is? Thanks.

Yes. The big driver in the second quarter was really primarily related to employee benefit that was really where we saw the weakness. And really we had some impacts from some of our existing client base where some of the employee counts were reduced there which results in a significant reductions which affects then our commission. And then also we saw lower life commissions in the quarter compared to the second quarter last year. You know we really had a strong first quarter. First quarter is typically our strongest quarter. Second quarter is actually typically our weakest quarter. But that employee benefit was a little bit of a surprise to us, but they had a great year in 2018 and we're kind of projecting them to continue to have a good growth going forward.

Okay. Thanks for taking my questions.

Your next question comes from the line of Jon Arfstrom of RBC Capital Markets.

Thanks. Good morning.

Good morning, Jon

A couple of follow-ups. Back to commercial real estate Phil one of the things you said early on is you've looked at 50% more deals compared to about I think you said 4% for C&I. What drives that 50%? Is it just more flow? Are you looking more for attractive commercial real estate? What -- I'm curious on that.

It's -- again it has to be kind of the nature of the deals. Commercial real estate deals are in the market and they are -- whereas people who run businesses are not out there trying to change their bank right? So that's a long sales cycle on that and it's -- you've got to develop relationship. So we're seeing good activity. I mean there is activity with the people. We're banking -- first of all we're banking people not things right? And so -- now the people that we are banking they've got some great opportunities and so we're seeing those. But it's just that. It's just structure wise we're just not able to do as many as we look at by a long shot. So -- but Texas has got a great job growth. I mean it's still growing. I mean if you look at the North Texas market it's extremely strong. Houston and then really there's not a weak market so there are opportunities. So we got great people in our commercial real estate. People are arguably the best in the state. And so they have great relationships. We'll get to see a lot of deals. And so when there's lots of activity we'll get to see a lot. It's just we're not really getting to do as many as we'd like to just because the structure is -- just isn't fitting our risk parameters right now. Make sense?

Yes. Makes sense. And then the commercial pipeline the flip side of it up 23%. My assumption is that's more C&I driven is that right?

Actually that pipeline is fairly well spread out. I mean C&I I mean it's up 23%. And C&I is up 20%. Commercial real estate is up 24%. And then consumer and consumer real estate is up a lot higher percentage but it's a pretty small number. So I think it's pretty good. If you look at the -- public finance pipeline is up. They have been a little bit weak recently but it's up to 50%. And the energy pipeline is down about 17%. So this looks pretty broad-based right?

Okay. And then Jerry one for you back on the margin. I think you talked about a 3.75% full year margin I heard that correctly, is that right?

Yes. I think that's what we -- well let me go back to my margin page here for a second.

Sure. A - Jerry Salinas Make sure I don't give you some bad information. Hold on. So yes, so we had a -- yes we're at 3.85% in the second quarter. And given our expectations on rates and what we're seeing yes, I think that our current projections will have us right at a 3.75% full year. So obviously trending down for the remainder quarters of the year.

Okay. And just if you make it linear your look at your first quarter at 3.79% you draw a line you exit the year at about 3.65% is the way my model works. And I'm just -- I pushed you on this last quarter I don't really want to push you on this too much. But anything else you guys can do to defend that margin when you look out to 2020? Or is it just simply a product of the environment?

I think it's -- I think if we can defend it we got to do it in the cash market right? I just don't think that derivative wise you're seeing value there that would payoff where our shareholders do it. I could be wrong on that – we think you could go. But -- so I think it didn't have to be in the cash market it would have to be in my opinion pre-investing some of the stuff that's coming off. The problem is like Jerry said earlier I mean the yield curve is just -- it's down. What is it 50 basis points from where we were last quarter. So it's just tough. It's hard to buy groceries on what the yield curve is giving you right now. So again where rates are it's -- if these rate numbers happen the way we pencil them out, it'll be a rough patch for a while. And it's -- I mean a guy used to work for Dick Evans. I mean when I used to say, we work hard. We're not magicians, right? And we are in a business where our commodity is money and the product of money, it looks like is going down. But the way I thought about the business and what does that mean for us fundamentally, and really I hope that you've seen that we've got a lot of good things going forward. Commercial customer growth rate is up 4%. Our number of consumer -- customers is up by 3.2%. Last year, it's up by 2%. 3.2% doesn't sound like a lot, but that's in the top quartile, I'd say for sure of what banks are doing. You saw what I said about the growth in checking accounts. Checking accounts are 40% higher this quarter than they were a year ago in terms of new checking accounts. Here we did right under 3,600 this quarter. We had 2,600 last quarter. So the thing I'm focused on is -- are the fundamentals of our various businesses doing well, okay. Is the consumer business is growing? Do you see those kind of fundamentals with regard to account growth, market awareness, consideration in the market both of which were up. They were up 10% last quarter. I haven't seen these numbers, but our Net Promoter Score is over 80% right now. You look at the commercial business you saw the increases that we've had in new relationships up 6%. We got a decent pipeline going. Do we have pressure on commercial deposits? Yes. Diminishment continues to be an issue as rates are higher. People are using money. Diminishment is down about 10% from what it was a quarter before. So I'm hopeful that that's slow, but it's still there. But if you look at the fundamentals on are we growing customers? And are we watching credit? And not doing anything stupid best we can. Then to me, I'll take that. I mean the business is doing well, and I hate to be spending money on some things, but you know you just got to. And the things we are spending on really have improved our business. And yeah, I mean in retrospect, the headquarters is like, it's been almost six years this thing started. The project, it'd be great if we didn't move in when the Fed's about to cut rates, but that just the way it goes. But it's good for us. And it's a great building iconic that's increased and helped our brand here. And I think it will help the brand state-wide. And things we've done with the Spurs have really helped our awareness. Things we've done with the Rockets have really helped our awareness in Houston Rockets -- in the Houston market, so rates are what they are. It will be a bit of a rough patch, but what we're focused on is are we still doing the stuff that will continue to drive the business forward. And I am convinced that we are. And you've been around us long enough, Jon know that there are really two things that continue to be the untapped operating leverage for our company: that's normalized interest rates and that's more efficient balance sheet in terms of loan to deposit ratio. We still got both of those things that we can bring to bear. We were hopeful of being able to take advantage of the rate movements continue to get some wind at our back. That didn’t happen. It looks like it's not going to happen. And -- but we still got -- one day we will, and then also we're going to make progress on loan to deposits. So, I feel good about the company and our fundamental outlook over the long-term. And we're just -- just got to worry that what we're doing right now.

Yeah. Okay. Yeah, I agree you're controlling what you can. I appreciate the time.

Yeah. Thank you.

Thank you. I will now return the call to Phil Green for any additional or closing comments.

Okay. Well, I think those were my closing comments. And I thank -- we just want to thank everyone for their participation and interest in the company. Thank you. We're adjourned.

Thank you for participating in the Cullen/Frost Bank second quarter 2019 earnings conference call. You may now disconnect.