Cullen/Frost Bankers, Inc. (CFR) Q1 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Cullen/Frost Q1 Earnings Results call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your host, Mr. A.B. Mendez of Cullen/Frost, Director of Investor Relations. Sir, please go ahead.

Thanks, Christian. 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 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 first quarter results for Cullen/Frost and our Chief Financial Officer, Jerry Salinas, will provide some additional comments before we open it up to your questions. In the first quarter, Cullen/Frost earned $113.9 million or $1.77 a share compared with earnings of $47.2 million or $0.75 a share reported in the same quarter last year and $88.3 million or $1.38 a share in the fourth quarter of 2020. In a very challenging economic environment, our team not only continued to execute on our strategies, but also achieved some extraordinary accomplishments that I'll discuss in detail as we go through the call. Economic impacts of the pandemic continue to affect loan demand. Overall, average loans in the first quarter were $17.7 billion, an increase of 18% compared with $15 billion in the first quarter of last year. But excluding PPP loans first quarter average loans of $14.9 billion represented a decline of just over 1% compared to the first quarter of 2020. Average deposits in the first quarter were $35.4 billion and they were an increase of 30% compared to $27.4 billion in the first quarter of last year. Obviously, macroeconomic factors over the past year have impacted our deposit growth but it's also been our experience over our history that our frost that we're safe haven for customers and times of uncertainty. Our return on average assets and average common equity in the first quarter were 1.09% and 11.13%, respectively. We did not record a credit loss expense related to loans in the first quarter after recording a credit loss expense of $13.3 million in the fourth quarter. Our asset quality outlook is stable and experienced a meaningful improvement during the first quarter. In general, problem assets are declining in number and new problems have dropped significantly and are at pre-pandemic levels. Net charge-offs for the first quarter dropped sharply to $1.9 million from $13.6 million in the fourth quarter. Annualized net charge-offs, for the first quarter, were just 4 basis points of average loans. Nonperforming assets were $51.7 million at the end of the first quarter, down 17% from the $62.3 million at the end of the fourth quarter. And a year ago, nonperformers stood at $67.5 million. Overall, delinquencies for accruing loans at the end of the first quarter were $106 million or 59 basis points of period-end loans at stable when compared to the end of 2020 and comparable to what we have experienced in the past several years. Of the $2.2 billion in 90-day deferrals granted to borrowers that we've discussed on previous calls, only about $11 million remain in deferment at the end of the first quarter. Total problem loans, which we define as risk grade 10 and higher were $774 million at the end of the first quarter compared with $812 million at the end of the fourth quarter. Energy-related problem loans continued to decline and were $108.6 million at the end of the first quarter compared to $133.5 million for the previous quarter. To put that in perspective, total problem energy loans peaked at nearly $600 million early in 2016. In general, energy loans continued to decline as a percentage of our portfolio falling to 7.5% of our non-PPP portfolio at the end of the first quarter. As a reminder, that figure was 8.2% at the end of the fourth quarter and the peak was 16% back in 2015. We continue to work hard to rationalize our company's exposure to the energy segment to appropriate levels. Overall, we find that credit quality is improving. When the pandemic started last year, we assembled teams to analyze the non-energy portfolio segments that we considered the most at risk which included restaurants, hotels, entertainment, sports and retail. The total of these portfolio segments, excluding PPP loans, represented just $1.6 billion at the end of the first quarter. And our loan loss reserve for these segments was 4.9%. The credit quality of individual credits in these segments is mostly stable or better compared to the end of the fourth quarter, and the outlook is improving although macroeconomic trends impacting some segments will take time to fully digest. The Hotel segment, where we have $286 million outstanding remains our most at risk category. However, we believe our exposure to any significant loss is minimal. I'm very proud of our team's ability to build relationships with new customers in challenging times. Particularly when so much effort was put into helping existing small business customers get PPP loans. During the first quarter, we added 55% more new commercial relationships than we did in the first quarter of last year. A good portion of those mentioned PPP is the reason they came to frost, but even more of them we're just from the continued hard work by our bankers and the level of service that we provide. New loan commitments booked during the first quarter, excluding PPP loans, were down by 16% compared to the first quarter of 2020, which was before the economic impact of the pandemic had been felt. So this comparison clearly shows the impact of the pandemic on loan demand. Regarding new loan commitments booked, the balance between these relationships was nearly even with 49% larger and 51% core at the end of the first quarter. We will continue to keep this balance in mind. In total, the percentage of deals lost to structure was 70%, and it was fairly consistent with the 73% we saw this time last year. However, keep in mind, we believe that's a high number, and it illustrates the competition out there through underwriting. Our weighted current active loan pipeline in the first quarter was up about 1% compared with the end of the fourth quarter. So though modest, it was good to see some improvement. Consumer banking also continues to see outstanding growth. Overall, our net new consumer customer growth rate for the first quarter was up 255% compared to the first quarter of 2020, 255%. Same-store sales, as measured by account openings were up by 18% and through the end of the first quarter when compared to the first quarter of 2020, and up a non-annualized 11% on a linked-quarter basis. In the first quarter, 36% of our account openings came from our online channels, including our Frost mobile app. We believe this compares very well to the industry. Online account openings were 35% higher when compared to the first quarter of 2020. Consumer loan portfolio was $1.8 billion at the end of the first quarter, up by 1.4% compared to the first quarter of last year. We're nearing the completion of our previously announced Houston expansion. We opened the 23rd of the planned 25 new financial centers in April, and the remaining two will be opened in the coming weeks. Overall, the new financial centers are exceeding our expectations. This is one of the extraordinary accomplishments that I mentioned earlier. Our team's performance of keeping the momentum going in Houston despite the pandemic and all the work we put into PPP is a true credit to our outstanding staff. Now let me share with you where we stand with the expansion as of March for the 22 locations we had opened at that time and it excludes PPP loans. Our numbers of new households were 144% of target and represent over 8,700 new individuals and businesses. Our loan volumes were 212% of target and represented $263 million in outstandings. Let's look at the mix of this portfolio. About 85% represent commercial credits with about 15% consumer. They represent just under half C&I loans, about 1/4 investor real estate, 15% consumer and around 10% nonprofit in public finance. Finally, with only three loans over $10 million, over 80% are core loans. Now let's look at deposits. At $343 million, they represent 114% of target. They represent about two-third commercial and one-third consumer. We've seen increasing momentum over the last year when we were about 68% of our target. What I hope this demonstrates and what's important to understand is that the character of the business we are generating through the expansion is very consistent with the overall company. It's just what we do. And you can see that its profitability will be driven by small and midsized businesses. I'm extremely proud of what our organization has been able to do in Houston, and I believe you should be, too. We've built a platform that will add to shareholder value for years to come. And that's why I'm happy to share that we will be taking the lessons and skills we've learned in the Houston market to a very similar opportunity we have before us in Dallas early next year with 25 new locations over a 30-month period. This will put us on a path to triple our number of locations in that dynamic market over that time. Turning now to PPP. Our team was ready to respond when SBA reopened the application process in January. To date, we've taken in about 12,400 new loan applications in the second round of PPP with over $1.3 billion funded. Combined with our total from the first round last year, we funded more than 31,000 loans or $4.6 billion, just amazing. We've also been working hard to help those borrowers get loans forgiven. We've invited all of the round one borrowers to apply for forgiveness, and we've submitted 70% of those loan balances to the SBA, and we've received forgiveness on about 50% already. Because this process is vital to our borrowers, we're doing all the work in-house with frost bankers. We haven't outsourced any of these efforts. We're excited to announce that on April 15, we've launched a new feature for our consumer customers called $100 overdraft grace. This feature is an investment in our organic growth strategy. And at the same time, we believe it will make a difference in our customers' lives. It clearly sets us apart from both traditional bank competitors and neo banks. As a result, we expect it to further increase the rate of new customer growth and our already growing consumer bank. Also this month, we received some good news from third-party organizations that assess our customer service. The Greenwich Excellence awards or frost has had the highest scores for superior service, advice and performance to small business and middle market banking clients for four consecutive years. Let us know that our already high overall satisfaction and Net Promoter scores went up even higher over 2020, while many of our competitors saw declines. And I'm very pleased to let you know that J.D. Power and Associates, just this week announced at Frost once again received the highest ranking in customer satisfaction in Texas in the retail banking satisfaction study. That's the 12th consecutive year we've had the highest scores in Texas. When you put it all together, the solid financial results, the healthy numbers in deposits and loans, all the new relationships, the goodwill from our PPP efforts, the Houston expansion and the customer service accolades it shows that when we care about customers and work to be a force for good and their everyday lives will be rewarded. And I don't just mean rewarded in a financial sense. I mean the sense that people recognize that we're doing something important and we're doing it better than just about anyone else. 2020 was a tough year in 2021, hasn't been easy so far, but things are looking up. And that's due to everything that our employees have been doing for our company and our customers in these difficult times, and I'm very optimistic about our outlook. I appreciate all their hard work. And I'm proud of them, and I'm proud to be at frost. Now I'll turn the call over to our Chief Financial Officer, Jerry Salinas, for some additional comments.

Thank you, Phil. Looking first at our net interest margin. Our net interest margin percentage for the first quarter was 2.72%, down 10 basis points from the 2.82% reported last quarter. The decrease was impacted by a higher proportion of earning assets being invested in lower-yielding balances at the Fed in the first quarter as compared to the fourth quarter, partially offset by the positive impact of the PPP loan portfolio. Interest-bearing deposits at the Fed earning 10 basis points averaged $9.9 billion or 25% of our earning assets in the first quarter, up from $7.7 billion or 20% of earning assets in the prior quarter. Excluding the impact of PPP loans, our net interest margin percentage would have been 2.59% in the first quarter, down from an adjusted 2.75% for the fourth quarter. The taxable equivalent loan yield for the first quarter was 3.87%, up 13 basis points from the previous quarter. Excluding the impact of PPP loans, the taxable equivalent loan yield would have been 3.77%, basically flat with the prior quarter. Average loan volumes in the first quarter of 17.7 billion were down 260 million from the fourth quarter average of 17.9 billion. Excluding PPP loans, average loans in the first quarter were down about 184 million, or 1.2% from the fourth quarter, with about three quarters of that decrease related to energy loans. To add some additional color on our PPP loans, as Phil mentioned, we funded over 1.3 billion of round two PPP loans during the first quarter. This was offset by approximately 580 million and forgiveness payments during the quarter on round one loan, bringing our total round one forgiveness payments to approximately 1.4 billion. At the end of the first quarter we had approximately 73 million in net deferred fees remaining to be recognized with about one third of this related to round one loans. With respect to round two loans given the smaller dollar size of the loans and changes in the forgiveness process, we expect this portfolio to have a shorter average life and the round one portfolio. As a result, we currently expect about 90% of the remaining net defer fees to be recognized this year. Looking at our investment portfolio, the total investment portfolio averaged 12.2 billion during the first quarter, down about 335 million from the fourth quarter average of 12.6 billion. The taxable equivalent yield on the investment portfolio was 3.41% in the first quarter, flat with the fourth quarter. The yield on the taxable portfolio, which averaged 4 billion was 2.06% down 6 basis points from the fourth quarter as a result of higher premium amortization associated with our agency mortgage backed security given faster prepayment speed, and to a lesser extent, lower yields associated with recent purchases. Our municipal portfolio averaged about 8.2 billion during the first quarter, down 154 million from the fourth quarter with a taxable equivalent yield of 4.09% flat with the prior quarter. At the end of the first quarter 78% of the municipal portfolio was pre-refunded, or PSF insured. Investment purchases during the first quarter were approximately 500 million and consistent about 200 million each in treasuries and mortgage backed securities respectively with the remainder being municipal. Our current projections only assumed that we make investment purchases of about 1.4 billion for the year, which will help us to offset a portion of our maturities and expected prepayments and calls. Regarding non-interest expense looking at the full year 2021, we currently expect an annual expense growth of something around the 3.5% to 4% range from our 2020 total reported non-interest expenses. And regarding the estimates for full year 2021 earnings, given our first quarter results, in our assumption of similar to improving credit metrics to those we saw in the first quarter. We currently believe that the current mean of analysts' estimates of $5.42 is too low. With that, I'll now turn the call back over to Phil for questions.

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

[Operator Instructions] Your first question is from Ken Zerbe from Morgan Stanley.

I guess first question in terms of the allowance for credit losses ex-PPP. It looks like in your press release you said it went up 2 basis points, so I believe to 1.77%. Can you talk about why it went up? I mean, just think given the context that most of the banks are materially releasing reserves? Thank you.

Sure, Ken. Obviously, you know, Frost, you follow us for a long time, obviously very conservative. We continue to be concerned about what's going on in certain industries, commercial real estate, for example. And just given where we are and the expectation of what could still come whether that be variant, whether that be issues associated with office buildings and whether employees come back to work, whether that's related to hotels and lodging. I think we just felt like it was too early in the process to release reserves. Our modeling results in the commercial real estate category would actually have, we would have required if you will, from a modeling standpoint, that we have a lower reserve associated with them, but really in our evaluation, we created management overlays, just given the challenges that we potentially see out there in some of those COVID impacted industries. And so, I think Phil mentioned the COVID impacted industries there, they are still out there at 1.5 billion. We've got a reserve associated with them at 4.9. So I think part of it is just, we're not out of the woods and don't feel like we're out of the woods. And so now didn't really feel the need. And for certainly felt like we could substantiate the allowance that we've got on our books, and obviously, through the rest of the year, we'll continue to look at that, we didn't book a credit expense in the first quarter, given what we're seeing today. I don't expect to have a provision to be quite honest with you assuming the same sort of credit metrics that we saw on the first quarter. But again, a lot of it'll just depends on what our credit quality people are doing, our special assets people are doing and what they're seeing in the marketplace. But at this point, given where what we were seeing and what we were feeling, we felt like keeping our reserve, basically, flat is the way I looked at it to go from $175 million to $177 million basically solid I thought was a good place for us to be. You did note that we only had $2 million in net charge-offs during the quarter. We were helped by a pretty strong recovery. We actually had recoveries of $4 million. So again, I think we're comfortable with where we're at and certainly are looking towards the rest of the year and hoping that things continue to improve. And as we go through each of the quarters, we'll continue to evaluate our allowance and react accordingly.

Certainly makes sense. And then just my follow-up questions sort of a two-part question. I guess, in terms of expenses, it looks like expenses came in noticeably lower than probably us in consensus we're expecting. So first question is what drove the lower expenses this quarter? But the second part is, can you just talk about the incremental expenses related to the Dallas expansion? And when do they start? Are they already part of your 21 estimate? Or is there your guidance that you gave?

Sure. Regarding the Dallas expansion, I think Phil noted that we really wouldn't start that until next year and we don't give any sort of guidance on '22. If you're looking for any sort of an impact, what I would suggest you do is go back to kind of what we said about the Houston expansion. I think at that point, we had talked about the first year results was like a $0.19 negative impact given the fact that expenses start before the operations. And I think in that case, we were talking about 25 branches in two years. This one, we're talking about a little bit longer extended period, I think we said for over 30 months. But I think that's a sort of a color and work that I would do if I was on your end, if you were trying to put some dollars into your 2022 estimates. As far as expenses for the quarter, just a reminder, we did have some deferred fees associated with the origination of the PPP loans. I think that number was -- I was trying to get it here. If I remember correctly, it was like $4.8 million. That was actually capitalized and gets netted against the fees and accreted into interest. So that's obviously having an impact but in addition to that, we continue -- we had our processes in place and our program in place to reduce expenses last year. I think the team did a good job. You heard us talking about that. So I think we're seeing some of that impact as well in the first quarter. And so, we'll continue to keep our eyes focused on expenses. So that's really -- I guess how I'd say. Do you have another question there? I can't remember the third part of it.

No, you addressed both parts of my expense question. I am okay. So thank you very much.

The next question is coming from Jennifer Demba from Truist Securities. Your line is open.

In terms of the Dallas branch expansion, what kind of loan-to-deposit growth would you expect from those offices? Would it be materially different from the Houston expansion or roughly the same?

Jennifer, I want to say it's going to be roughly the same in our view right now. Given how competitive our Dallas and Houston markets are, I can't imagine our Dallas cohorts would let Houston now shot them there. So I think it will be pretty much the same. Dallas is really a tremendous market for business, particularly small and midsized business, and I think it's going to be really a great expansion for us. I think it will be -- in my opinion, I think it will be at least as good as our Dallas mentioned. I mean our Houston expansion.

Any lessons learned from the Houston expansion that you'll bring forward for the Dallas in that you picked up over the last couple of years, as the world has shifted a little bit?

Yes. I think the one lesson you learn. And it's basic -- it's about people. That's an onboard thing you want to hire people that are consistent with your culture who are excited about being part of an organization like ours. And if you do the right job hiring people in these submarkets, they can really be successful with everything that we bring to the table supporting them. I think that's been the best thing to learn. The other thing we've learned is we're getting pretty good at bringing them on. And I want to emphasize every time that we're not bringing on teams. We're not lifting teams out and putting them in these -- in our organization, we're talking to individuals and people that believe in what we're doing and want to be a part of it. And we're also finding that when you do that well, that you begin to get follow-on from people in the organizations that have come over and said, hey, this is what we thought it would be. And I know this person or that person who'd be really great with this. And so you're not -- you have a little bit more certainty about who you're bringing on and the fit as you move along through the strategy, I think that's what we've seen in Houston. And we'll continue to expand in Houston. There are some submarkets that we want to be in that we didn't pick up on the first time. And just through a regular -- just growing our business, we're going to want to continue to expand there and I think that we've got good momentum there, and we've got good follow-on, like I talked about in that market. So I feel like that's going to be successful. But that's one thing, I think, that we've learned. And those thing I see Jennifer is, it's really important to go through the steps. Don't skip steps. We know what we need to do to develop a market. We know that we need to be there early with the community leader, like six months early. Before we open up the branch, we surround them with a team. We get them involved, and if you have a market for you where I think one of our really early one in Houston, we had someone leave earlier. We weren't able to close on bringing in a community leader and that branch was it suffered early on because you couldn't do all the steps that you needed. So, we're really focused on bringing the people on. And while Jerry, as mentioned correctly, that there won't really be much of an impact this year of that expansion, we hope to open our first location in January of next year in Dallas. There's a lot of effort that we've been undertaking to understand the sub markets we want to be in and for, and there'll be even more effort about bringing on the right people for those markets. And there's a whole lot of spade work that has to happen before you actually execute this stuff. I am so excited about doing it though. I'm really looking forward to what it's going to do for us.

Your next question is from Steven Alexopoulos from JPMorgan.

I wanted to first follow up on the increase in new commercial relationships that you cited for the first quarter. Are these customers coming from banks of all sizes? Or is there one cohort struggling more than others now to retain customers and maybe can you include in your response, what is the friction point that these customers are citing when they're moving over to Frost?

Well, the main source of these relationships, not the only, but the main source is what I call the too big to fail, the big three, let's say. And I hesitate to say that there's any one that is providing a much greater share than any other. We choose to compete against those three banks in the Texas market, and it's not an accident. And we can -- be honest, we compete very well with them, and we're not afraid of competing with them. And so that's -- it makes sense to me that, that's where we'd see most of our new relationships. And then your second part of your question, I'm sorry, Steven?

It was -- what's the friction point? Like when they move over -- it's such a big increase that you're seeing in the year. And I'm just curious, what are they citing in terms of -- it's a bigger deal to move a commercial relationship than consumer so the moving it, what sort of the straw that broke the candles back? Why now they're moving -- are you seeing more customers move to you now?

I'd say it's PPP, I mean, more than anything else. You know it matters where you bank. It's like the woman that only she didn't realize 13 years ago that were she open a check an account would be an existential decision for her business whether she could get a PPP on it when she needed it. And that really is, I think, the biggest outsized reason we're seeing. I've got a number in here somewhere about how many of these relationships were PPP.

Yes. Phil, if I can chime in just a bit. The other thing we've heard in the case of the PPP loans is that in some cases, it's some of our customers that had successful PPP experiences with us, referring some of their friends and prospects and in other cases, people had such a bad experience at their bank with PPP and have heard the successes we've had and how easy it was to get it done with us that we've seen them come in that way. And the other thing that I've heard mention also as far as them moving over is really, in some cases, some of those two big de fail as Phil mentioned, are really referring some of these customers more to call centers. So they don't necessarily have that same relationship manager that they could call and look at the eye, shake hands with her go to lunch with sort of thing and so because of their size, in some cases, they're being deferred more to call centers. We've heard that come up as well.

That's helpful. To shift gears. So looking at the new program for overdraft, which is interesting, when you say with that program that customers need to make a deposit after the overdraft, you say as soon as possible? What exactly does that be? The couple of your peers that have launched that gives 24 hours, but what does that mean as soon as possible?

Well, first of all, that's not our program. Our program is that if you've got a direct deposit with us, that gives the deposits at least $500 a month. We'll pay your overdraft of $100 or less, we won't charge a fee.

Okay. Okay. But I saw there making a deposit that might have been referencing something else.

I think that was...

Yes, that was direct deposit.

Yes. That was direct deposit.

You have to have a direct deposit in order to qualify

You have to direct deposit as soon as possible.

Yes, as direct deposits to qualify for the program.

Yes. And so once you make -- once you establish a direct deposit, you qualify for the program. And the reason, that's how we would define a relationship that way, right? If you've got a direct deposit, you've got a relationship. And you get that benefit.

Got you. And then just finally, on this program, what's the anticipated reduction in service charge revenue from the program?

Yes. I think the number that we're projecting is I think we looked at this first quarter, and we saw that our consumer NSFOD fees would be down about $1 million. So I think that's about 17% of what we saw in the quarter. Obviously, going forward, a lot of it will be dependent on the sort of activity we have, but that's what we saw the impact in the first quarter. It would have been in the first quarter.

Okay. So Jerry, what's the full year impact, just the full year revenue impact?

Well, I guess I would say that it's going to be dependent on the volumes, right? So if it's $1 million for a quarter then, yes, it could potentially be less than that, just depending on -- less or more, depending on the activity.

Not material, okay.

I don't think it's going to be significant. I think that the -- you've got two things going on. When you look at the overdraft line, as activity picks up, you're going to see overdraft activity pick up anyway. And so really what we're doing is we're investing what some of that increase would have been. But I think we'll be -- we could be sort of flattish versus 2020 on over graph fees. We'll see how it happens. It's a new program. We'll see how it goes and but I think it's a really good opportunity to differentiate ourselves.

Your next question is from Brad Gailey from KWB.

I wanted to start just with the amount of cash that you all are sitting on. You're seeing on $10 billion of cash that's basically earning sewell, I mean that's a huge lever for you all to pull at some point to start to move those funds into the bond book, where obviously, the yield is a lot higher. Maybe just talk about how you think about when is the right time to pull that lever. And if you look at the yield curve today, and it's off, but it's still not great. So do we start to see that today? Or do you wait for rates to go a little higher?

Brady, let me just talk a bit about it. I think the short answer is we're going to wait a little longer. I believe that we could be wrong, but our guide is that we're seeing rates increase. I mean, we made this decision in August last year when the 10-year was 80 basis points or so. And it's paid off for us. We're not we're not great bond traders. We just believe that with the economy opening up with the amount of fiscal stimulus that's in there, the monetary stimulus. It just makes sense that we're going to see this impact, and we just don't want to bet we're going to be employing shareholders' money. We want to be smart about doing it. I would think it's going to be later in this year. I would guess maybe later third quarter, but it could be later. I think we're our bet is that we're going to see some increase increased rates as just things open up and things improve. And I think the Fed is willing to accept that. And I so we're going to -- that's the way we're going to lean. I really feel -- one of the things that I'm really proud of the organization for doing it is with the reduction in expenses that we talked about last quarter, where we had basically $70 million in 2020's run rate, $50 million follow-on in 2021, that's about $120 million worth of expenses. It really gave us the ability, I think, to maintain this optionality. We've got the provided us some operating leverage to frankly take wait and see, and it's paying off for us. And I'd say, Brady, that I'm really optimistic about our outlook. I think the view we've got for the next several years for the business, and we could be wrong. And like I said, there's I think it was George Forman that might have said, everyone's got a plan until you get hit in the mouth. But the -- we did some heavy lifting with expenses. It gave us the ability to wait on this liquidity build. We've got this liquidity build that's there. Jerry, what's our

We're at $12 billion, Phil.

Around $12 billion now in the Fed, and I think we employ this later this year. That will help us some this year, but it's also going to help us as we move into 2022. I don't -- I'm not very optimistic on loan growth. Through the rest of this year, we could see some, but I mean, business has got tons of liquidity, and I'd love to see some, but I'm not going to bet on it. But I think later in the year, I think we could see it. I think in 2022, we're going to see it. And I think that could build some momentum in 2022 going into 2023. The Fed has said that we'll begin increasing rates in 2023. And maybe they can wait that long, but let's say they do. I think that's going to give us some tremendous tailwinds as far as that develops. And then as we move past that, now we'll be in the '20, '23, 2024. And so we've got these investments that we've made in the Houston market that will be mature at that point. And we'll be beginning to see some maturity in some of the balance investments. So I really feel, in my opinion, things set up very well for us if that's the scenario that we get, and that's what I'm hoping we'll see.

Yes, that makes sense. And longer term, I mean, if you look in the first quarter, cash to average earning assets was 25%. It sounds like it's even higher than that as of today. But where would you like to keep that longer term? I think pre-COVID that was running about 5% to 7% of average earning assets. Does that feel like a more normalized level of cash to earning assets?

Yes. Brady, I think we've been running just a little bit above that. We weren't in the double digits. So I would have -- if you would ask me, I thought we were in the 8% range typically. The thing I'll say -- I'm sorry?

Go ahead.

No, I was going to say, yes, for us, it's just -- we've always been a little bit different, right? We typically have more liquidity than most. But yes, right now, where we're at is is really way up there. And yes, not something that we would expect to have longer term, and I think something in the mid- to high single digits, it's where we'd be.

Okay. And then Phil, congrats on the Houston expansion, and it's exciting to hear about Dallas. You could have bought a bank in Houston, but you didn't and you could have bought a bank in Dallas, but you didn't. A lot of people are talking about Texas being a fairly active geography for M&A. Is Frost kind of out of the M&A game at this point and more pursuing organic de novo strategy from here out?

I think the short answer to that is yes. You never say never on an acquisition. And I've said many times that an acquisition that would -- the only kind of acquisition that would make sense for a company like ours is one that gives you the ability to execute on organic strategy in a place, creating a platform that you weren't before. And I've always given the example that North Texas in '98 was a great example of that with Overton. But there's no better market that I can think of than the Texas market right now economically. And I think from a banking standpoint for what we do with business, small business and all. And so it's -- and we've I'll give you an example, Brady, on I was talking about consumer growth, right? Well, I'm going to talk about net new checking households. I know this is organic growth. If you look -- I'm looking at a piece of paper, if you go back to 2018, so I'm looking at a little over three years, okay, three years in a quarter, we hit 1,500 net new checking households in a month, one -- basically one-time prior to September 2020, okay? So from January of 2018, September of 2020, we hit 1,500 net new checking households onetime. If you look at October through March, we've hit that one, two, three, four times. And one of that -- we had the February freeze, so that shut everything down. We didn't do it there. But I've got 15 -- so you got October, 1,534, December 1851, January 2,178, and March 3,178. That is -- that's why we're focused on organic growth. And Houston has been a help for that in that growth. And the things that we're doing with regard to like the overdraft, $100 overdraft grace. That's going to catch people's attention. We've gotten good at digital marketing. And so that's why I don't -- that's why I don't want to be spent and a lot of our shareholders' money to throw the long ball and hope something good happens. I'm really confident of what we're doing and I am excited about our prospects.

Yes. That makes sense and clearly it's working for you guys. Keep it up and thanks for the color.

Thank you.

And your next question is from Ebrahim Poonawala from Bank of America.

First, yes, it's good to see a bank organically investing and being proud of those investments. So it's good to see you do that. I guess one question, Phil, as we come to the end of earnings season. You just said that you're not optimistic of loan growth picking up in this year, driven by the liquidity that businesses are sitting on, which is a little bit of a contrast to what we've heard from, I would say, 75%, 80% of your peers who've talked about a pickup in the middle of the year. Talk to us in terms of are you being overly conservative in when you're messaging this? Or do you think some of your peers might be a little ahead of themselves in expecting a loan growth rebound in the summer?

Ebrahim, I'm a Frost bankers, so I'm going to be a little conservative. But we are seeing some pickup in commercial real estate. I will say that but the C&I still -- we really haven't seen it. Our -- we have something we call look to book. How many looks are we getting? What are we booking? And community banking was down about 12% -- well, about 6% on what they've booked. A lot of our declines year-over-year in terms of booking I had a 70% decline in public finance because we had a great year last year and had a couple of really large deals, but we had a 40% decline in energy, and that's on purpose. So we're just trying to rationalize our position there. So some of it is we're -- some of it's energy. I like to say, so much public finance. I still think that businesses are being careful with expansion and I think the supply chain issues are real. It might be keeping people from doing something they would have otherwise done. And so I'm just -- if we have a higher percentage of C&I loans in most people. And since we haven't seen that come back right now, I'm not that bullish on that for the rest of the year. I could be wrong. By the end of the year, it could be better, but that's just the way I'm seeing it right now.

Got it. Understood. And then just one follow-up, Jerry, on expenses. I guess your guidance implies a ramp-up in expenses back to like the $220 million, $225 million range. Just remind us of the drivers that we -- that's going to drive expenses higher from 1Q levels?

Sure. Let me grab some information here. One thing I will say is one of the things that is impacting growth, of course, is the Houston expansion. So the Houston expansion by itself is growing noninterest expenses, about $10 million. So that is part of it. As we mentioned, the branch openings came on a little bit slower than we expected. But just looking forward, I guess the things that could affect us going forward. Some of it is commission revenues, of course, associated with certain pieces of the revenue businesses that are that -- where revenues our softest quarter intentionally on advertising and marketing. So we'll see some of that continue to pick up. It's an area that we've really been extremely cautious about even as we were managing our expenses, it wasn't an area that we wanted to go and slash and burn the marketing budget. We think it's important to continue grow customer growth. So you'll see some increases there. And I think those are probably the two big areas that I would point out. And we're going to continue to expand the continued spend -- I'm sorry, on the first quarter, first quarter, you saw an increase in technology, furniture and equipment, and that's just something that we're going to continue to see increases in, and it's built into our numbers.

Got it. And Jerry, earlier, you talked about like a $4.8 million PPP related. Was that a PPP expense that's running through the expense line, if you don't mind clarifying that?

Sure. No, those are -- so under accounting guidance, you capitalize the origination costs. And so there were $4.8 million in origination costs that basically come out of expenses and get netted against the fee and that gets accreted into income. So other things being equal, expenses would have been -- if you -- if we did not have those PPP loans, expenses would have been $4.8 million higher.

Your next question is from Dave Rochester from Compass Point. Your line is open.

Just back on the expense guide real quick, just on the Dallas piece. If we go back to like 2018, 2019, take a look at annual expense growth, it was around mid- to high single digits. Would you kind of -- you think that's generally in the ballpark of what you guys are expecting at this point without trying to pin you down to an exact number.

I -- we're really kind of hesitant on giving any sort of guidance. I mean, it's really our policy not to give guidance into the -- anything beyond the current year. So I guess I was really kind of just trying to give you some guidance of thoughts that you might consider going forward if you kind of look back into Houston.

Yes. Jerry pointed that out, too. Because one of the things we've thought about, and we've talked to investors about talk to you about is that really, what we're doing right now is we're almost running two companies. It's one company, one culture, but we have what I'll call the sort of the core piece of the business, which is our very profitable. It's very efficient, runs very well. And then we've got an expansion piece where we are investing capital, investing operating leverage into markets for us to grow in that, like any business you invest at and whether it's a technology business or whether it's any other kind of business, when you're starting something new, it's got a burn rate associated with it. And -- and if we kind of close together the expansion piece in the and the core piece, it kind of confused it a little bit. Sometimes it's helpful to us to look at the business on a core basis and then look at it on the expansion basis because I think both are doing exactly what we intend for them to do. In fact, as we pointed out, maybe better than we originally intended to do. But when you bring them all together, it confuses what's really going on with the operations as a company. For example, when Jerry mentioned when we started what was at the beginning of 2020, we had a 10% increase, 10% growth rate in expenses, but a fair amount of that was in the expansion. And so, we don't want to give the wrong impression that we're loose with spending money around here, we're actually pretty tight about it but a good part of that will be, over time, this expansion.

Yes. Okay. I appreciate that. And maybe back on the question on securities. Appreciated your thoughts there on maybe putting some more cash to work around 3Q or after that. It sounds like you're sort of expecting higher rates later this year. So I was just curious, is it a certain level of the tenure you're looking at? Is it 2% plus? Is it higher meeting rates, any kind of benchmark to look at to know that you guys are right there and starting to put money to work? Any other parameters there we can look at?

I listened to Powell talk yesterday, and he's kind of talked about substantial -- words like substantial improvement that type of thing. I think we'll know it when we see it. I think directionally, we just expect to see it move up. And I think that the timing will be right for us later in the year. I mean, I personally have be dead wrong, but I think we'll see 175 to 2 in, something in that range over the next several months. And so if we don't have to pull the trigger, we won't. But I think -- I expect that we probably will begin moving into the market. Late third quarter, maybe fourth quarter sometime, I hate to pin ourselves down. But so far, it's worked, knock on wood. And it's our conviction, but it will continue to move that way.

Okay. And maybe one last one just on loan pricing. Have you guys hit general parity at this point on where new loan yields are coming in versus where the book yield is ex all the PPPs and whatnot?

No. I would say that -- I'll answer it in two ways. What I was really impressed with was from the third quarter to the fourth quarter, our pricing has really stayed fairly consistent and been pretty strong and, in fact, been able to do that even as the LIBOR continues to go down a couple of few basis points. It seems like every quarter. But when I was looking at the back book versus the current book, I'm still seeing overall about 30 basis points lower on the new book versus the back.

Next question is from Jon Arfstrom from RBC Capital Markets.

Jerry, what would you say is like a median or average branch size for your company in terms of deposits?

I'm going to -- gosh, let me see if I've got anything here. We are, on average, Jon, typically tend to be bigger than most. So let me hear it, hold on.

As you're thinking through it, let me ask this question. Any reason why the Houston and Dallas branches can't get to your corporate average? And how long does it take to get there?

Jon, what I would do when you look at that, I mean, you can do this with the FDIC database is I would say, yes, there's a reason why there probably wouldn't be the average of our branches because any headquarters branch in a city tends to be really outsized large so whenever we look at what we -- what we're doing and where we are in the marketplace, we tend to take out any locations that for any competitor and ourselves that are -- that's $500 million or more, okay? And then we look at that as sort of normalized branches, not including headquarters effects. And I think if you do that, I don't think there's any reason why these locations should be in line with our other ones over time.

Okay. I was just kind of looking for like a median is maybe a way to get to that type of number?

Yes. Let me see if I can find anything here. It looks like it's -- yes, again, and I'll ask A.B. to kind of verify with you, I'm kind of going through my tableau stuff here pretty quickly, but maybe something in the $200 million. But we'll -- I'll get A. B. to verify that with you, but that's what I'm saying, based on the report I'm looking at in tableau but. We'll make sure we confirm that with you. But I think what the exercise that Phil mentioned is really kind of what we typically do, if we're looking at any sort of a comparison. We'll take out the big downtown centers and then come up with an average that way.

And is the strategy to put branches in areas that are faster growing, I mean, from the outside, we all hear about this tremendous growth in Texas. But is that the general strategy is to put branches in places that are growing quickly, where you just don't have the presence?

I'd say it depends. There are certainly some that are. We tend to look at without I guess I shouldn't go out all the secret sauce. But let me just say that we look for areas that are growing, there may be different levels of growth but we look for consistent growth in the markets. We like to look at places where, obviously, we're not located. We think there's tremendous value in that. And it's okay with us, if there are a lot of too big to fail competitors there too because that's who we compete with. And so things like that. There are a lot more, but those are some of the things we look at.

Two more questions here. Do you need to be larger in Austin as well over time?

Yes. I think so -- I think so. I think what we're -- I think I mentioned this last time, Austin is really intriguing to us, given what's happening with that market and just the growth. It's just explosive really. But remember, the strategy that we're employing is a business centric, small and mid-sized business strategy. That's where the profitability is driven. Austin is -- there's a lot of rooftops going there. There's some -- there's a lot of in migration of centers like with Facebook or Indeed or Google or whatever, Tesla. What we need to see is follow-on of small businesses, right? We don't want to just go there with just a real estate strategy. Or just a consumer strategy, it's harder to be profitable with the locations if you've just got a consumer strategy. I'm confident we're going to see it. It's just that I'm more confident that those are already there in vast numbers in Dallas. And we'll just have to decide what the payoff will be of a branch expansion strategy in AWS. And we're going to continue expanding the market, but for us to do something, say, like we've done in Houston or Dallas. I think Jerry is still a little bit out on that one.

Okay. Last question. How would you compare San Antonio in terms of growth against, say, Dallas or Houston? How does it stack up?

I would say that Dallas is growing faster. And Austin is growing faster. Given what's going on with Houston and the energy slowdown for a while, I would say we're comparable to Houston. Jerry might have some different thoughts. But the thing that's great about San Antonio is it doesn't seem to have the high highs or the low lows.

That's not all I was going to see yes, exactly.

It's very stable. It creates lots of cash flow and lots of capital. It always has for us to expand in other markets. It's a great market to be in. It's great having the market share that we have here, and we don't intend to give it up. So even if it were a little bit slower, it is more stable and it has a lot of benefits in that regard.

The conversation we had with the Dallas fed, economists, we -- San Antonio kind of popped out a little bit. And this is just more current data, right? We were looking at March and April information. But the surprising thing there was how strong San Antonio had performed relatively speaking. I think that, that was a comment he was making that he thought that San Antonio had rebounded quicker. But as Phil said, yes, San Antonio typically doesn't have the high or the low, let's say, a Dallas or a Houston I kind of just tends to chug along a little bit more of the road. But recently, what we were hearing was we performed better than expected.

All right. Thanks for all the fun. I appreciated.

Yes. And one last thing on the branch thing, the number that I gave you around $200,000 -- excuse me, $200 million gets you pretty close.

Yes, thank you.

All right.

I'm following no further questions at this time. I'll now turn the call back to Mr. Phil Green for closing.

Okay. Well, we thank everybody for your participation on the call today and your interest and all your questions. So thanks for that and we'll be adjourned.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.