Cullen/Frost Bankers, Inc. (CFR) Q2 2022 Earnings Report, Transcript and Summary

Greetings. Welcome to the Cullen/Frost Bankers Inc. Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Director of Investor Relations, A.B. Mendez. Thank you. You may begin.

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

Thanks, A.B. Good afternoon, everybody, and thanks for joining us today. I’ll review the second quarter results for Cullen/Frost and our Chief Financial Officer, Jerry Salinas will provide additional comments, and then we’ll open it up to your questions. In the second quarter, Cullen/Frost earned $117.4 million or $1.81 a share compared with earnings of $116.4 million or $1.80 a share reported in the same quarter last year and $97.4 million or $1.50 a share in the first quarter of this year. Our return on average assets and average common equity in the second quarter was 0.92% and 13.88% respectively. These results and our overall growth show that our company is well-positioned to succeed in what’s been an unusual and evolving environment. Our loan growth is strong. Average loans, excluding PPP in the second quarter were $16.5 billion or 13.2% higher than the average loans of $14.6 billion in the second quarter of 2021. It was good to see our growth exceeded our typical goal of high single-digit increases. In the second quarter, we booked 28% more loan commitments in the same period last year. All segments were strong with C&I up 25%, CRE up 37% and consumer up 31%. In addition, we saw new loan opportunities continue to increase. They increased 10% from a year ago and increased an unannualized 9% on a linked quarter basis. So the overall flow is good. Looking at our weighted 90-day pipeline, it was up 9% from a year ago. On a linked quarter basis, it’s fairly flat, down 2% as increases in commercial and consumer segments offset a reduction in the near-term pipeline for commercial real estate. Average deposits in the second quarter were $44.7 billion, an increase of 16.9% compared with the second quarter of last year. And as much as we focus on loan growth, we were very pleased with our growth in deposits because it’s through deposits that we build long-term relationships as we offer attractive value propositions that customers can trust. Growth in our consumer business continues to be strong. Our net addition of 7,242 consumer households in the second quarter was an all-time high for us and represented an 8% increase on the same period a year ago. Consumer loan growth was also strong on a linked quarter annualized basis, average consumer loans grew by 20.6% led by increases in consumer real estate. Our success here was driven by our HELOC, home equity and home improvement products. Also, our pipeline for these loans continues at record levels. Now regarding our expansion efforts in Houston, we see the momentum continuing as newly opened branches mature. At the end of the second quarter, we stood at 109% of deposit goal, 122% of new household goal and 185% of our loan goal. Our Dallas expansion is admittedly in its very early innings. However, I’m encouraged that the preliminary results are similar to our Houston success with 165% of deposit goal, 220% of loan goal and 235% of new household goal. We’re making excellent progress towards launching our mortgage product, and we expect to begin a pilot program toward the end of this year. And as you know, we are designing the entire process and start to finish to originate and service mortgage loans and keeping with the great Frost customer experience. Despite uncertainty about the broader economy, we have seen no signs of increasing loan delinquency. Our overall credit quality remains good. The June 30 total for delinquencies, excluding PPP was $61.4 million or 37 basis points of total loans. Total problem loans, which we define as risk grade tenant higher, totaled $429 million at the end of the second quarter, and that was down from $447 million at the end of the previous quarter. Once again, we did not report a credit loss expense in the second quarter, and net charge-offs for the second quarter were $2.8 million, compared with $6.3 million in the first quarter. Annualized net charge-offs for the second quarter were 7 basis points of average loans and below our typical long-term level. Non-accrual loans were $35.1 million at the end of the second quarter, a decrease from $49 million at the end of the first quarter. I was glad to see the great work of our energy team rationalizing our concentration in our energy portfolio. Energy loans represented 5.9% of loans at the end of the second quarter, and I’m happy to declare that we’ve reached mid-single digits. Finally, after more than two years of working with over 32,000 PPP borrowers, we’ve helped better than 98% of them with forgiveness. Our teams worked on the last few hundred PPP borrowers who haven’t yet begun the process, and we’re committed to helping every one of them get across the finish line. And I couldn’t be more proud of our team and the efforts that they made in helping our customers in the business. You may remember that I’ve described our efforts in this area as historic and heroic. And well, I hope we don’t ever encounter another historic challenge like that anytime soon. As I mentioned earlier, we’ve got strategies and systems in place to allow us to succeed in all economic environments. And I should point out that Frost employees do heroic deeds every day. I continue to hear from customers who get help from our bankers and sorting out their finances after a spouse passed away or who got financial planning that enabled their kids to go to college or who simply just had a pleasant interaction with the banker or they were having an otherwise lousy day. For us, those interactions are just doing our jobs in accordance with Frost velocity to our customers, those are heroic act. I’d like to thank our people being a force for good in people’s everyday lives. 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 second quarter was 2.56%, up 23 basis points from the 2.33% reported last quarter. Higher yields on both loans and balances held at the Fed had the largest positive impact on our net interest margin percentage. The increase was also positively impacted, to a lesser extent by higher volumes of investment securities and loans and a lower relative percentage of earning assets invested in balances at the Fed as compared to the prior quarter. These positive impacts were partially offset by higher deposit costs. Looking at our investment portfolio. The total investment portfolio averaged $18.1 billion during the second quarter, up $964 million from the first quarter average as we continue to deploy some of our excess liquidity during the quarter. We made investment purchases during the quarter of approximately $1.8 billion, which included about $1 billion in treasury, yielding about 3%, $400 million in agency MBS securities with a yield of about 4% and about $400 million in municipal securities with a taxable equivalent yield of about 4.7%. Our current expectation is that we would invest an additional $3.2 billion of our excess liquidity into investment purchases through the remainder of the year. The taxable equivalent yield on the total investment portfolio was 2.87% in the second quarter, down 1 basis point from the first quarter. The taxable portfolio, which averaged $10.3 billion, up $1.3 billion from the prior quarter at a yield of 2.04%, up 14 basis points from the first quarter. Our tax-exempt municipal portfolio averaged about $7.8 billion during the second quarter, down about $363 million from the first quarter and had a taxable yield of 4.04%, up 1 basis point from the prior quarter. At the end of the second quarter, 76% of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of the second quarter was 5.6 years, up from 5.2 years at the end of the first quarter, primarily related to the extended duration on lower coupon mortgage-backed securities. Looking at loans. Average loans for the quarter were $16.7 billion, up $288 million from the first quarter or 1.8%. Excluding the impact of PPP loans, the average growth in the prior quarter would have been $446 million or 2.8%. The taxable equivalent loan yield for the second quarter was 4.04%, up 30 basis points from the previous quarter. Looking at deposits. On a linked-quarter basis, average deposits were up $1.8 billion or 4.1%. Public fund balances, which can be seasonal, had a negative effect on the linked quarter growth as those average balances were down $400 million. The linked quarter growth has come primarily from growth in average interest-bearing deposits which were up $1.4 billion or 5.5%. The cost of interest-bearing deposits for the quarter was 22 basis points, up 14 basis points from the first quarter. Regarding total non-interest expenses, we continue to expect total non-interest expense for the full year 2022 to increase at a percentage rate in the low double digits over 2021 reported levels. Increasing our minimum wage to $20 per hour in December of last year, combined with continued market salary pressures, our expansion efforts in Dallas and Houston and expenses associated with the rollout of our announced residential mortgage product are the primary drivers of the growth in non-interest expenses. The effective tax rate for the second quarter was 14.8% and our current expectation is our full year effective tax rate should be in the range of about 13% to 14%, but that can be affected by discrete items during the year. Regarding the estimates for full year 2022 earnings, our current projections include a 50 basis point Fed rate increase in September, followed by a 25 basis point increase in November. With those rate assumptions, we currently believe that the current mean of analyst estimates of $7.85 for 2022 is low. With that, I’ll now turn the call back over to Phil for questions.

Okay, Jerry. Thanks so much. We’ll open the call up for questions now.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Steven Alexopoulos with JPMorgan. Please proceed with your question.

Hi, everybody.

Hey, Steve.

Hey, Steve.

I wanted to start, so given such a low loan-to-deposit ratio and plenty of liquidity to fund loan growth, what was the thought behind driving such strong growth in interest-bearing deposits in the quarter or were these primarily just coming from new markets?

Steven, it’s as much as anything, this is a cultural decision and it’s one that’s based on experience to mean we – a big part of our value proposition really. I mean rest on three things that everyone’s significant Frost that will give a square deal that will give you excellence at a fair price and we say sound place to do business for employees and customers. And as corny as it sounds, we’re just giving our customers a square deal. As we’ve seen interest rates move up it just makes sense for us to recognize that if we’re going to have a value proposition that customers can trust, like I mentioned earlier in my comments, and we saw this happen back in 2017, where we saw the Fed raise rates 100 basis points back then. We were focused on the two big to fail pricing because that’s who we compete with more anybody else, they haven’t moved at all. And we just got behind. We started to see some movement in deposits at that time. And interestingly, that was kind of when we sort of cracked the code on more consistent core loan growth, and it just wasn’t the right time, number one, for our balance sheet to show that. Another thing is – I just really felt like we were losing trust. The industry was losing trust when they just sat there as – and people read that interest rates are going up all the time. So I’m not saying we couldn’t have a lower rate and get away with it, if you will, but just is not the way to do business. And so – it’s really just focusing on being fair with customers. And we just feel like the value of those deposits are continuing to increase. And certainly, the relationships are going to make you money on a long-term basis. Jerry, any thoughts there on your price.

No, I think you got it, Phil. I mean that’s exactly what we’re doing. I think you’re right – we don’t have to increase, and I’ll put that in air quotes, but I think we certainly believe that it’s the right thing from a culture standpoint to be increasing these deposits. And as Phil said, in 2017, we were a little slow in raising rates. We kind of fell behind and certainly felt like by mid-July on the Fed raise rates 100 basis points that we were behind. And actually, we’re starting to see some of our deposits leaving the bank. And as we all know, it’s a lot more expensive to bring the new deposits on. So we just felt like this time will be a little bit more ratable as we move along as rates increase.

Steven, the thing is too that, I mean, look, you can read the newspaper and we can believe we know what’s happening because that’s what everyone is saying. But we don’t know where rates are going. We don’t know where it’s inflation is headed or what the Fed’s going to do [indiscernible] don’t either. But if we just tend our business, do it the right way as we go along, we’re not going to have to go into any big dislocations like we did in 2017 when we – that was – it was pretty tough for our shareholders supposed to have to choke all that down at one time. And we just – it’s all about just the disciplines we move along.

It’s interesting because many peers are allowing deposits to run off this quarter, right? And their loan-to-deposit ratios are going up fairly materially. So here, you’re holding it pretty steady – so if we follow that strategy forward, how should we think about deposit betas through the cycle versus where you were the last time rates are moving higher?

Steven, I think what we said last quarter and I would say the same thing today. Going back to the last cycle, say 2016 through 2018, our betas were about 30% on interest-bearing and say 20% on total. And that’s sort of what we’re assuming right now for full year 2022. We’ve got that same sort of beta. We don’t have that today. Given the increases. We’re a little bit lighter than that. But in our projections, that’s what we’ve built in.

Okay. Then final question. It’s good to hear the new markets continue to trend well above goal, particularly for loans in new households in Dallas, was the goal too low? I’m curious why you’re coming in so far ahead of the goal? Thanks.

Yes. When we started the program and we talked to our Board about it and talk to each other about it. I mean our goal was based upon what we had achieved for the 40 locations that we had opened prior to starting that strategy. We went back eight years – excuse me, eight years – and we said, look, this is what we’ve done on average. And we said, if we can do that, that strategy was successful. And we said, if we can do that, that will be successful. It will result under a great return for our shareholders. So we’ve set that up as sort of that’s what we want to do. And I kind of wanted to keep it the same as we move into Dallas because I think it kind of gives a context for the performance in those markets. And so could we use a different number? Yes, we could, but we know what this one means. We know where it came from, and we’re going to go there. I will say, Steven, that honestly, I don’t think there’s any reason why Dallas shouldn’t be better than Houston. In terms of its success because the – as you know, two-thirds to 70% of this business and the – of the business in the pro forma is commercial business and Dallas has as good a commercial market that is really well diversified and full of middle market and small business with a little bit less energy concentration as Houston. And as great as Houston is, I think that the business demographics around Dallas could be even better.

Okay. I appreciate all the color. Thanks.

Thank you.

Our next question comes from the line of Michael Rose with Raymond James. Please proceed with your question.

Hey good afternoon and thanks for taking my questions. Just wanted to touch on expenses. I think if I’m doing the math right, if I annualize the first half of the year, it looks like you’ve grown at about 10%. So would imply a deceleration in the back half of the year. Understanding that a lot of expenses related to Dallas have been incurred and obviously wage inflation, stuff like that. But is that kind of the right way to think about it is that the expense growth should kind of slow as we move into the back half of the year?

I think that’s right. I think a lot of the dollars that we put in are built into the base. But we moved our increases for most of the organization to May -- so really, even in the second quarter, you don’t have the full effect of all of our increases. So, I think that for us, the fourth quarter is typically the highest and it’s unusually high given we pay a lot of our incentives in that quarter. And so there’s a lot of true-up that’s going on. Obviously, the volumes that we’re seeing this year have been pretty strong. And so I would envision that as we go through the year, we’re continuing to increase those incentives. So, I think that if I were you, I would stick with my full year guidance and then just kind of take the next two quarters, but really don’t want the slide to cheese too thin, and I’ll just kind of speak to that full year guidance, it says just look at 2021 and grow that on a low double-digit growth, and I think you’ll kind of be kind of what we’re projecting currently based on what we’re seeing.

Very helpful. And then maybe just as a follow-up, I think at the outset, you mentioned that the pipelines were down about 2% sequentially. It looks like the period end ex PPP growth slowed a little bit this quarter versus last quarter. Any rationale to that? Is it a function of pay downs? Is it customers being a little less active, the combination of both? And I think you had previously talked about kind of a high single-digit ex PPP average growth for the year. Is that still kind of in the realm of expectations? Thanks.

Yes. Well, I don’t -- we don’t want to read too much into the weighted pipeline number that was fairly flat, down 2% because if you look at the C&I piece of that, and this is on a non-annualized basis, it was up 4% on a linked quarter basis, right? So, we’re [indiscernible], 16%. So, I don’t know if you want to do that or not. But I mean, it’s this positive. The consumer weighted pipeline is up a non-annualized 62% and it was really the fact that it was commercial real estate that was down a non-annualized 13%. So -- and we closed so many commitments. We were, our commitments were up 27% on a linked quarter basis, non-annualized. I mean that’s putting a lot through the pipeline. And so if it -- if it goes down, somewhere it’s a little weaker and really, it’s mainly in the commercial real estate, I’d like to believe it’s more because we’re reloading on that. And as I look at the opportunities that I talk about. I think, I talked about them, they’re up like 9%. That’s unannualized on a linked quarter basis, we’re up 10% on a year-over-year. That tells me that we’re still on a gross basis, seeing deals, and we’re seeing growth in that. So, we’re going to keep our eye on it, but the tone that I get, Michael, from our officers is that it’s still good, and we’re still seeing lots of opportunity you’re seeing some, I’d say, I want to be careful the words I use. You look at real estate, particularly some kinds of real estate with the higher rates and uncertainty in some areas, you can see still good deal flow, but some beginning to slow some, and I’d say, obviously, office for sure, we’re maybe a little bit of industrial on the investor side. I think single-family housing is not – it’s not slowing really much, but it’s -- I think we expect it to. I think our borrowers expect it to, but they’re also saying that’s probably good because they can really not keep up with the pace today, but you’re still seeing really good growth in multifamily for really good economic reasons. We’re seeing really good growth in retail. Just for example, you’re seeing some good growth in owner-occupied. So the tone is still good. But the other thing I’ll say is things are changing, Feds trying to slow things down. And I think in Texas that we are a little different in terms of the activity we’re seeing in terms of in-migration with individuals and businesses. So, I’d like to believe we can be a little bit more a little bit better than the general economy. But anyway, I’ve rambled too much on that, but that’s kind of what we’re seeing.

All right. Appreciate all the colors. Thanks.

Thanks.

Our next question comes from the line of Ebrahim Poonawala with Bank of America. Please proceed with your questions.

Good afternoon.

Hey, Ebrahim.

Hey. Just first question maybe around credit. Credit is -- obviously credit is not an issue, but just wanted to get a sense of how far down do you think the loan loss reserve can go before begin provisioning and just give us a perspective of where you think the steady state reserve ratio looks like if we start seeing some signs of a slowdown or even a potential recession over the next year?

Well, what I’d say is that -- and we had this last quarter, we have it again this quarter, and there’s quite a bit of color in the 10-Q. But part of our assumption as we work in our CECL model is the probability of a recession. And so included in our overlays are is an assumption, a 30% assumption that there might be a recession. So, we stress our portfolio accordingly. And that’s kind of what we’re at a 144 reserve coverage right now, which I think is pretty strong. And when you look at that discussion in the 10-Q, I think you’ll see kind of what we’re alluding to. I mean, as Phil mentioned, there’s a lot of nuances going on in the economy right now, a lot of uncertainty. But really what’s happening in our case is giving some sort of probability to a recession. Where can it go? I guess it’s CECL. When CECL was adopted, we were probably at 1%. I don’t foresee that we bring our reserve coverage, all things being equal and credit quality being great. I don’t see the reserve ending at 1%, but I think for now, we certainly feel extremely comfortable with where we’re at from a reserve level. Should the economy -- all of a sudden, we get through this and feel like things are continuing to improve. I could see that, that reserve coverage continuing to decrease.

Got it. And I guess just a separate question, Jerry. I wanted to, one, confirm the $3.2 billion number for securities was a net number as opposed to gross. And just talk to us, the 10-year yield is now at 269. Who knows whether or how much further the Fed has to go. Talk us on the other side of this, if we do get into a period of Fed rate cuts next year, how are you thinking about protecting the margin?

Yes. What I’ll say for now is that what we’re looking at, and it’s something that we visit about all the time, right now, we’re staying pretty consistent. Our purchases, we’ve said, would be 70% treasuries and 15% municipals and MBS securities. And we’ve been pretty consistent with that. We’ve moved around a little bit. We might accelerate things. But it’s something that we’re continually talking about. And what we’re doing is really buying in the three years to five years. That’s really what we’re looking. It’s where we saw the most value and where we’ve made the bulk of our purchases. We’ll continue to have those conversations, and we’ll look at risk and reward and see what makes sense if we think that it makes sense to add duration if we think that rates might go down, and we want to protect some of that. We could do that. Obviously, we still have plenty of liquidity. I think this morning, we were close to $13 billion still even after all the purchases that we’ve made. So we’ll just -- it’s something that we continually visit with. And I think that we’ve been pretty transparent. And we’re continuing to look at derivative products. We haven’t done anything yet. We’ll look and see if something makes sense for us. We’ve done it in the past. But at this point, we haven’t put our toe in the water. And we’ll just continue to do that. I will say that given the conversation earlier, on deposit rates, our deposit rates are much higher than most, right? And so in an environment where you see rates going down we’ve proven that we can bring rates down as well. We’ve been through a long rate cycle, you’ve followed our performance through a pretty low, long period of zero interest rates. So we’ve proven we can take our rates down and given through our value proposition to our customers, we really haven’t lost deposits during that sort of time period. So we do have that as well, which some of our peers would not have if they’re not raising rates.

That’s fair. Thank you.

Thank you.

Our next question comes from the line of Brady Gailey with KBW. Please proceed with your question.

Thank you. Good afternoon.

Hey Brady.

So if you look at cash to average earning assets, it finished the quarter at about 27%, you put another $3.2 billion of cash in the bonds it feels like by the end of the year, it could be closer to 20% or so. Longer-term, where would you like to run cash to assets? Does that get down to 5% or is that too low, longer-term, what level of cash would you like to have on the balance sheet?

I’m looking at Phil. I’m kind of laughing because every time our balance is at the FA, decreased from $13 billion to $12.5 billion or something, he’s calling me and asking me what’s going on. In all seriousness, you followed us for a while. We’ve been tended to be more conservative on our levels of cash, but we’ve been all over the board. And obviously we feel very comfortable and confident in alternative sources that we would have available to us. I think that, off the cuff, if you said 5% feels kind of low to us right now. But – so I would say something in that 5% to 10%-ish where we think about it and just see where we go from there.

Okay. And then on the last quarter, we talked about spread income ex-PPP potentially growing on a high-teens basis. But I mean, after you look at the increase in margin and spread income that you guys enjoyed in the second quarter, it feels like that’s too low. It feels like they’ll easily be percent plus, any refresh on how you’re thinking about spread income year-over-year.

Yeah. I guess I would, what I would say is, yeah the environment today is different than where we were a quarter ago. I think our assumption at that point, the rates that we have in there now, given the rate hikes that we’ve seen in June and July our assumption are, I think rates are end up the year higher 125 basis points. So yeah, certainly given what – given that sort of an environment yeah a mid-teen sort of growth in net interest income is, would be too low.

Yeah. And then just finally on deposit balances, you’ve seen a lot of deposits shrink this quarter for some of your peers, but you all saw some nice growth. I know you increased deposit rates, but, do you think that you’ll see any sort of deposit outflows the next year or so, or you guys really hoping to keep growing the core deposit base?

I hope to keep growing. I mean, that’s really what we’ve been focused on. I was just thinking about the question that that Jerry answered and got asked about, interest rates and protection against interest rates. I mean, I think we’ve done a pretty decent job over time of coming up with ways to manage that, but we really don’t want to be defined by that. What, we’re more and more defining ourselves as is a company that is focused on growth. And if we’re accessing great markets and we’re making the investments to grow in those markets. And we get any kind of rates at all. I mean, first could cut rates, but maybe they cut them to zero, maybe not. But we think that our job is pretty clear. It’s just to continue to grow the business. That means growing deposits and which is really where the value of any banking franchise is growing asset classes. And we’ve got the opportunity to do that. And with products we’ve got, we’ve got the new mortgage product that we’re going to be bringing out at the end of the year. Direction of rates are important, but as Jerry said, we’ve got some flexibility because we have been diligent in moving rates along with move movements up, but I just tend to think that the more important thing for us to be focused on is can we continue to show this organic growth by accessing these markets and proving that we can take share.

Yep. That makes sense. Thanks guys.

Thank you.

Our next question comes in the line of Dave Rochester with Compass Point. Please proceed with your question.

Hey, good afternoon guys.

Hello. Hey, Dave

Just wanted to go back on to the NII guide. So are you guys thinking high teens now or possibly low twenties in terms of growth year-over-year?

Yeah, I would definitely be in the 22%. I wouldn’t, I’d guide you more to the twenties than the low, the high teens.

Low twenties. Okay, perfect. And then do you ever have a spot rate for interest bearing deposit costs at quarter end?

I don’t have it on me right now. I think A.B. is on, so we’ll have him reach out to you today with that number. I don’t have it on.

Yeah. That’s all right. That’s totally fine. I appreciate that. And then just a clarifying point, the $3.2 billion in securities purchase that you have for the rest of the year, that’s gross purchases. So growth would be, I don’t know, somewhere $2 billion, $2.5 billion, if you haven’t had the majorities for the back half, that’d be great…

So we probably got, yeah, we probably got another $700 million that would be falling back to us. So that number’s gross. So yeah, you’re somewhere in the $2.5 billion range.

Perfect. And then I guess for the deposit trends, those were very solid this quarter. I was very impressive. Was just curious if you had the component of that growth that came from Houston and Dallas versus the rest of the franchise. And then I know you’d mentioned expecting high single digit deposit growth for 2022. Are you still thinking in that range or do you think that maybe you could do a little bit better just given the better first half results?

I’m still there. I think Phil, you heard Phil talk. I think we we’re optimistic that it can be better given continued new growth. I think that as rates go up, there’ll be more and more pressure obviously on us especially on some of those larger deposit balances. So yeah, I mean, that’s what we’re projecting, if it can be higher than that, we’ll all definitely be happy. But I do think it’s riskier the higher rates go, especially on those larger accounts. And Dave, what was your other question?

With regard to the expansion? I think.

On the expansion. So one thing that I’ll give you year-over-year, I’ll say they contributed 1% of the growth in average deposits.

And about loans?

And 2% on loans. Yeah. I’ll say that as well. So they are starting to move the needle, especially on that loan side.

Great. Awesome. Maybe just one last one on credit. Given you guys aren’t seeing any signs of anything it kind of feels like a zero provision is still good, at least at the end of this year. Is that kind of how you’re thinking about it?

Everything that I’m seeing, I’ll let Phil talk to, but everything that I’m seeing and hearing and sitting in our CECL meetings that’s really where I’m at right now. And obviously it’s something that we can’t project that far out. We continue, we’re talking to our people in the credit area all the time, but at this point I’m not hearing anything that gives me calls.

Yeah. I mean, CECL is, it is hard to envision a need right now based on everything we know.

Yeah. That makes sense. All right, guys. Thanks. Appreciate it.

Thank you.

Thank you.

Our next question is a follow up from Ebrahim Poonawala with Bank of America. Please proceed with your question.

Thanks. Just one follow-up question, Phil, I guess outside of things that you are doing and then the strength in the market, how are you seeing competitors behave? One in terms of just the risk appetite, are you seeing competitors losing the underwriting box? And then you mentioned, you obviously go head-to-head with the largest banks in your markets. Have you seen the bigger banks pull back a little bit, given some of the capital constraints they’re facing?

Ebrahim, you know, in talking with our people in preparation for the call, there may be some marginal improvement in structure competition, not much, but I did hear one of our teams mention how they had won a deal on our traditional underwriting which they seem surprised to do. I mean, we do that all the time, but I mean, this particular instance, it seemed like they were pleased to see that. So I’d say it’s beginning to be a little bit more structurally sound, but that’s not pervasive. I probably hear as many stories or more stories of where you’re seeing competition continue to increase. Maybe beginning to see a little bit more competition on the C&I side as opposed to just the commercial real estate side, but it’s still competitive, but things are slowing a bit, I think, in the real estate side. I remember some conversations we had with builders who – and some of these really hot markets are expecting to see a 10% price change or reduction really by the end of the year in certain residential markets. And the point they made is that’s fine. It may be a slowing that will help us catch our breath. We’ve had, I think, times to bill go from 120 days to 210 or something like that. And they’ve also got such wide margins, historically high margins. They’ve got plenty of room to fade that. And so I don’t think it’d be unwelcome in some ways to see a little bit of moderation in that market, but we’ve heard that as well.

Got it. Thanks for the color. Thank you.

Thank you.

Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please proceed with your question.

Hey, thanks good afternoon.

Hey, Jon.

Hi Jerry, can you give us a little bit of help on the trust and investment management and deposit service charges, what you’re thinking there. They’re a little better than I thought it would be, but just give us some thinking on what you see there for an outlook.

Sure. I guess yes for the quarter, I’ll be honest on the trust and investment management fees. I was pleasantly surprised that we ended up where we did. And what we saw was that – we had a good month and – excuse me, a good quarter in oil and gas fees. They were up about $1.8 million quarter-over-quarter. So compared to second quarter last year. They really were able to offset a decrease that we saw in investment fees, which were down $1 million. And I think our state fee – excuse me, yes, about $1 million of state fee is down another $1 million. So I don’t – I would expect that given all the volatility and what’s going on in the markets, that we’ll see some pressure on that investment line item. We have continued to grow our managed accounts in that business. I think we’re up 5% in numbers of accounts compared to the second quarter last year. So I know there’s a lot of focus on trying to grow the business, but we will – we are feeling some pressure given the volatility in the market. On deposit service charges, it’s interesting. We’ve made, in my opinion, some changes that have really been, I think, made a lot of sense for us and for our customers on overdraft fees when we instituted overdraft grace. And then here recently, in June, what we did was previously to get that free $100 overdraft, you had to have a direct deposit of at least $500 a month. And after our retail team did some work, we felt like that was punitive to some of our customers, given the fact that not every employer pays via direct deposit. And so we lifted that in June and we’re saying that’s probably going to cost us $2 million. So we haven’t seen the impact of that, this additional change that we made. And then we’ve also eliminated our NSF fees, of which were about $1.5 million, if I remember correctly. So we – that line item is going to see some pressure going forward. But really, a lot of our growth, as Phil has talked about the number of new accounts that we’ve issued that, that we’ve been able to bring on where we expected some of those – some pressure on that line item. It’s really been offset by increases in numbers of transactions just given the increases in the number of customers.

That kind of segues to my next question. Just the 7,200 in the new households, all-time high. Is that – how are you doing in your legacy markets on that? And how much of that is driven by the new markets?

Jon, one thing I guess I’d offer up to you is if you look at just account openings from traditional branches, which is going to include everything, which is mostly legacy, right. Account growth year-over-year from traditional branches was 9.2%. So I think we’re doing pretty good. And I think, it all revolves around a lot of things that are working for us. I think our value proposition is solid, we give people Square deal and great service. I mean, you don’t always have to be looking over your shoulder, one of them by banks paying me or are they paying anything on this deposit to me. We’ve put in a lot of work every week. Jerry is looking at the, the market where we’re talking to our lines of business. We’re trying to figure out what’s fair. It’s just a lot of things working for us. And our branch experience is I think is unparalleled in terms of what we do, not just the way people are treated and dealt with, which knows the physical facilities are beautiful. And they just create a great experience. So the other thing I talked about this last time, I really think it was interesting what happened with this location that we opened up in the West part of San Antonio, and that’s a legacy market there ever was one. We’ve been here 154 years. And the growth we’ve seen in that particular location was literally multiples of what we did in our best Houston location in the first six months; let’s say of its life. Yes, it’s already $24 million in deposits in six, seven months. I mean, so – and that’s just a legacy market where you open a location. So there’s something going on that I hope we can continue to leverage and good I feel good about the way the whole business is operating and how we’re moving forward just running a business.

Okay. This is my last earnings call in the quarter, and I think I might be last in the queue, so maybe I’ll end the quarter. But you used the terms unusual and evolving in your opening comments. And I’ve asked this on other calls, but there seems to be a disconnect between credit quality that we’re seeing from the banks and then, what we see on the see and read about every day. And what’s your take on where we’re evolving to? Are you worried about it? Is Texas different? It sounds like you’re not seeing erosion in your loan book, but just any big picture thoughts on whether the market is right or you’re right or where are we going?

I think it’s a great question, Jon. And I’ll tell you a disconnect that we are sort of seeing is – when we talk to customers on Main Street, I mean there’s not a lot of talk about slowing. There’s not a lot of talk about recession. There is talk about where am I going to get the next person to hire, what on earth am I going to have to pay them and across the next bubble in the supply chain and how can I get the capacity to warehouse, what I can get so that I’m ready to move forward when I can get the other parts of the supply chain that I need. I mean, I think Main Street is – those are the things that they are dealing with and how they feel about their business is different than when they go home at night and sit on the couch and watch the news and hear discussions about the economy, at least in the markets that we’re operating in. There are some that admittedly are slowing. If you’re dependent on developing a deal that’s two years away from being finished and you don’t know what rates are going to be or what the economy is going to be. There’s some slow there. There’s some slowing, more circumspection there. But the economy is strong here. And I’m not too worried about, its direction right now. But it is unusual in evolving because hedge as increasing rates 75 basis points at a time, and we’ll see what impact that has over them.

All right. Thanks guys. Appreciated.

Okay, Jon. Thank you.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call back over to Phil Green for closing remarks.

Okay. Thanks, everybody, for your participation today, and we’ll be adjourned.

Thank you. This concludes today’s conference, and you may disconnect your lines at this time. We thank you for your participation.