Greetings, and welcome to the Cullen/Frost Bankers Fourth Quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to A.B. Mendez, Senior Vice President and Director of Investor Relations. Thank you. You may begin.
Thanks, Daryl. 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, AB. Good afternoon, everyone, and thanks for joining us. Today, I'll review fourth quarter and full year results for Cullen/Frost, and our chief financial officer, Jerry Salinas, will also provide additional comments before we open it up to your questions. In the fourth quarter, Cullen/Frost earned $99.4 million, or $1.54 a share, compared with earnings of $88.3 million or $1.38 a share reported in the same quarter last year, and $106.3 million or $1.65 a share in the third quarter of 2021.
For the full year of 2021, Cullen/Frost earned $435.9 million or $6.76 a share compared to earnings of $323.6 million or $5.10 a share reported for 2020. Our return on average assets and average common equity in the fourth quarter were 0.81% and 9.26%, respectively. I am very pleased with our company's results, and I'm optimistic about the prospects for our organic growth strategy. Average deposits in the fourth quarter were $41 billion, an increase of more than 20% compared with $34.1 billion in the fourth quarter of last year. This continued outstanding deposit growth reflects our success in developing new relationships and expanding current ones.
It reflects well on our expansion efforts, our value proposition enhancements, and our world-class level of customer service. Jerry will talk more about our deposit growth in a few moments. I was very pleased with our success in our commercial lending segment, where we booked $2.4 billion in new commitments in the fourth quarter, up 64% from the first quarter last year and up an unannualized 37% on a linked quarter basis. I'm morally certain that's our highest level ever. The growth was geographically diverse. Compared to last year, fourth quarter C&I commitments were up 73%, while CRE was up 121%. On a linked quarter unannualized basis, C&I commitments were up 27%, while CRE commitments increased 55%. Jerry will talk more about outstanding loan balances in his comments.
As we book these commitments, our weighted pipeline declined 13% from the third quarter. I might point out that in Texas, the confluence in the fourth quarter of football season, hunting season, and the holidays combines so that it's rare that our year-end pipeline would exceed the third quarter. Just saying. However, our year-end weighted pipeline was 24% higher than last year's and was our highest fourth quarter ever. Turning to our consumer business, I am extremely pleased with our progress. In 2021, we brought in almost 27,000 net new checking households. That was 210% of our previous full-year household growth record in 2019. Here's some additional context. In 2016, we added 1,897 net new consumer checking households. Our compound annual growth in net household addition for that five year period is 70%.
Houston is not the only reason, but it's helping. It added 413% more checking households in 2021 than we did in 2018, right before our expansion began. We reported in our release good Trust and Wealth Management numbers, but one other data point of growth I might offer is that our number of customers for our Community Wealth Advisors were up by 28% from a year ago. As far as the Houston expansion is concerned, we see the momentum continuing to build as the branches mature. The metrics we measure show bankers we hired and onboarded are executing our relationship banking strategy. At year-end, we stood at 128% of our new household goal. We were 178% of our loan goal, and we were 113% of our deposit goal.
For the year 2021, we added 6,858 new households, which was nearly the same amount of new households we added for the first two years of the expansion. Over the last six months, new households grew by 30% unannualized, demonstrating the ability to add new customers while the branches mature in these communities. Loan growth for the year was $218 million or 97% growth. For the last six months of 2021, loan growth was an unannualized 42%. Loan portfolio is a mix of 80% commercial loans and 20% consumer loans. Our focus has been on core loan relationships or small businesses in the communities that we are entering. There are only three loans over $10 million in balances that represent less than 10% of the total loan portfolio.
The mix of loans is reflective of our overall loan portfolio with 40% CRE, 40% C&I, and 20% consumer. We're building a strong foundation of core relationships that will position us to grow with them as their businesses grow and we meet their needs. Deposit growth for the year was $390 million or 167% from December of 2020. Over the past six months of 2021, growth continues to be strong at an unannualized 44% rate. Our deposit mix is two-thirds commercial and one-third consumer, nearly identical to what we had projected to be the mix three years ago. We continue to be optimistic about growth in this economy. Our 28 branch expansion project in the Dallas region officially got underway this month with the opening of our first new location, the Frost Medical District Financial Center.
We will continue the process, nearly tripling our size in Dallas into 2024. The Dallas expansion will follow our Houston model, and we will employ the lessons learned during our team's successful rollout. Additionally, we will continue our expansion in Houston, adding another eight locations over the course of 2022 and into 2023. Credit continues to be good. We did not report a credit loss expense for the fourth quarter. Our asset quality outlook is stable, and in general, problem assets are declining in number. New problems have dropped to pre-pandemic levels. The net charge-offs for the fourth quarter were $2.8 million, compared with $2.1 million in the third quarter. Annualized net charge-offs for the fourth quarter were 7 basis points of average loans.
Non-accrual loans were $53.7 million at the end of the fourth quarter, a decrease from $57.1 million at the end of the third. Overall delinquencies for accruing loans at the end of the fourth quarter were only $121 million or 74 basis points for period-end loans. Excluding PPP, delinquencies were only $97 million. These are manageable pre-pandemic levels. Total problem loans, which we define as risk grade 10 and higher, total $540 million at the end of the fourth quarter, compared with $635 million at the end of the previous quarter. In the fourth quarter, we continued to make progress toward our goal of mid-single-digit concentration levels in the energy loan portfolio over time. With energy loans representing 6.6% of loans at the end of the quarter.
Our teams continue to analyze the non-energy portfolio segments that we considered most at risk from the pandemic impacts. As of the end of the fourth quarter, the total problem loans from hotels and office buildings represented $178 million. Risk is moderate and stable in these areas, and the asset quality outlook improved significantly during 2021. We've made good progress toward adding residential mortgages to our suite of consumer real estate products later this year. This will complement our portfolio currently consisting of home equity, HELOC, home improvement, and purchase money second loans, which has steadily grown to more than $1.4 billion. Utilizing best-in-class technology will allow us to provide Frost level of world-class service as we build this portfolio over time in response to customer demand.
After almost two years of working with business customers on PPP loans, we are finally nearing completion with the forgiveness process complete for more than 93% of our customers. Our team continues to work to get the last of the borrowers through the process, and I wanna commend everyone at Frost who's worked so hard on this. Our team took a situation that in the beginning looked difficult and maybe even impossible, and turned it into a huge success for our customers and for our company. At the same time, we're working to ensure that we're not only taking care of our customers, but our employees and our communities as well. In the fourth quarter, Frost was a founding member of the Corporate Partners for Racial Equity here in San Antonio, state, and statewide, we announced that we had raised our minimum pay to $20 per hour.
Steps like these show our commitment to our communities and being a force for good in people's everyday lives. That's possible only because of our dedicated employees. Whether they're asked to tackle historic and heroic tasks like handling more than 32,000 PPP loans, doubling or even tripling the number of locations we have in a region over a couple of years, creating a mortgage lending process from scratch, or simply being the best at serving customers around the clock, our team at Frost is our true competitive advantage, and I'm proud of them for all their accomplishments despite the difficulties of the past two years, and I'd like to thank them for contributing every day to our company's success. 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 fourth quarter was 2.31%, down 16 basis points from the 2.47% reported last quarter. The decrease was primarily the result of the impact of lower PPP loan volumes and their related yields compared to the prior quarter. Excluding the impact of PPP loans, our net interest margin percentage would have been 2.25% in the fourth quarter, down two basis points from an adjusted 2.27% from the third quarter, with the decrease resulting primarily from lower yields in the investment portfolio, partially offset by higher volumes of investment securities and non-PPP loans. The taxable equivalent loan yield for the fourth quarter was 3.89%, down 27 basis points from the previous quarter.
Excluding the impact of PPP loans, the taxable equivalent loan yield would have been 3.79%, up 5 basis points from the prior quarter, with about 3 basis points of the increase resulting from non-recurring fees. To add some additional color on our PPP loans, our total PPP loans at the end of December were $429 million, down almost $400 million from the $828 million at the end of September. At the end of the fourth quarter, we had only about $2.8 million in net deferred fees remaining to be recognized. As such, we don't expect PPP to have any material impact on our 2022 results.
Looking at our investment portfolio, the total investment portfolio averaged $14.4 billion during the fourth quarter, up about $1.9 billion from the third quarter average as we deployed some of our excess liquidity during the fourth quarter. We made investment purchases during the quarter of approximately $2.9 billion, consisting of about $1.7 billion in agency MBS securities with a yield of about 2.05%, about $1 billion in treasuries yielding 1.27%, and about $150 million in municipal securities with a TE yield of about 2.34%. The taxable equivalent yield on the total investment portfolio was 3.08% in the fourth quarter, down 27 basis points from the third quarter.
The yield on the taxable portfolio, which averaged $6.1 billion, was 1.86%, down 17 basis points from the third quarter. Our tax-exempt municipal portfolio averaged about $8.4 billion during the fourth quarter, flat with the third quarter, with a taxable equivalent yield of 4.01%, down 3 basis points from the prior quarter. At the end of the fourth quarter, 78% of our municipal portfolio was pre-refunded or PS F- insured. The duration of the investment portfolio at the end of the fourth quarter was 4.4 years, down slightly from the 4.5 years at the end of the third quarter. Regarding our non-interest expense outlook for 2022.
Our projected expense growth in 2022 over our 2021 full year reported non-interest expenses is in the high single digits, impacted by our expansion efforts and salary pressures. The impact of our Houston and Dallas expansions is responsible for about 2% of the growth. Costs associated with reintroducing our residential mortgage product adds about 0.5% and increasing our minimum wage from $15 per hour to $20 per hour in December as a result of salary pressures across the state, is responsible for about 2% of the projected growth in non-interest expenses in 2022. Just to talk a little bit about current loan and deposit volumes. As you've seen in our press release, and as Phil mentioned, we saw really good, strong loan growth, excluding PPP in the fourth quarter, both on an average and period-end basis.
As we've moved into January, I just wanna confirm that that strong growth has continued both on average and on a period-end basis. On the deposit side, we also saw strong deposit growth in the fourth quarter on an average and period-end basis, and the growth came both from demand deposits and interest-bearing deposits. I was expecting that we might see a seasonal drop in deposits in January, but up to this point, that has not occurred. Regarding the estimates for full year 2022 earnings, our current projections assume three 25 basis point Fed rate increases this year, with one in May, one in July, and the last one in December, and thus having no material impact, that last one, on our projected net interest income in 2022.
With those rate assumptions and the expected 2022 expense growth that I previously mentioned, we currently believe that the current mean of analyst estimates of $5.88 for 2022 is low. With that, I'll now turn the call back over to Phil for questions.
Okay, thanks, Jerry. We'll now open the call up for questions.
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for your questions. Our first questions come from the line of Brady Gailey with KBW. Please proceed with your questions.
Hey, thank you. Good afternoon, guys.
Hey, Brady.
Hey, Brady.
If I back out the PPP loan shrinkage, you know, I see period-end loan growth just in the fourth quarter of over 20%, linked quarter annualized. A very, very strong level. Maybe just some commentary about, you know, where you saw a lot of that loan growth happen.
Yeah, it's.
It's really, yeah, it's really across the board, Brady, to be quite honest with you. You know, we're seeing good growth both in C&I, CRE is good. You know, really all categories are good. We did see some increase in energy as well. That's impacting it. If I looked at that annualized growth, energy added about 1%, but not materially, not material to that annualized number that you mentioned. It's pretty much across the board.
Okay. All right. I think last quarter, you guys had about $13 million of PPP fees left. You're now saying it's three. Is it safe to assume that in the fourth quarter, you realized PPP fees of about $10 million in fourth quarter?
Yeah, let me grab that real quick here. Yeah, it's about. I'm seeing a number just on the fee side, it's about $8 million. So if you included the interest on it's probably in that $9 million range. But I'm showing about $8.4 million in the quarter related to those fees.
Okay. All right. You know, we saw the bond portfolio expand in the fourth quarter. You know, if you look at the ten-year bond yield, it's now 180 basis points, so it's even higher than where it was then. How should we think about the possibility of Frost continuing to grow the bond book this year in 2022?
Yeah. You know, what we've said, Brady, all along is that, you know, it was our intent, you know, to continue to invest. We like to be opportunistic. I'm gonna be honest, you know, with the deposit growth that we saw, I mean, it's just really been incredible. You know, I kind of expected that the fourth quarter might be a little bit softer. I probably said that in the third quarter as well. We've been able to make a lot of these investment purchases that we made in 2021 without really having a significant impact on our balances at the Fed. This morning, I think when I got an update, I think we're north of $14 billion still today, after the purchases that I talked about, so still pretty strong.
I think from a projection standpoint, we're assuming that we probably have purchases in the neighborhood of half of that 14, if you will. Again, we're gonna be opportunistic, but that's the current thought.
Right. Those are just purchases. You'll have obviously bonds that are rolling off. That's just on the purchase side is what you're saying?
That's right.
Right. Okay.
Yeah, I was gonna see if I had the maturities here. I think what I'm seeing is that we've got about $2 billion scheduled in maturities and assumptions on prepayments for the year.
Okay. Half of $14 billion is $7 billion. You take away $2 billion that's gonna be rolling off, so maybe think about, you know, the bond book growing roughly $5 billion in 2022. Does that seem fair?
Yeah, I don't think you're off base. Again, you know, what we've said is we're gonna look at what's going on in the market. You know, we'll take a look at what's going on in deposits. If these deposits continue to stick, you know, we could be more opportunistic, but that's kind of where I'm thinking right now. We're early in the year. Obviously, the ALCO group meets monthly, so we'll just decide from there. I don't think you're too far off base with that.
Okay. Great. Thank you, guys.
Sure.
Thank you.
Thank you. Our next question comes from the line of Jennifer Demba with Truist. Please proceed with your questions.
Hey, Jennifer.
Hey, Jennifer.
Hi, good afternoon. How much of your loan growth this year do you think is gonna come from the expansion in Houston and Dallas? Do you think, if you know, you've raised the Houston branch count more than I think originally projected, you could do the same for Dallas at some point?
Well, let's see. Jerry might have some, you know, a feel on the loan growth from the Houston. I mean, it's. I think I gave the numbers, and I may be able to pull up in a second, you know, where we stood at the end of the year. I think loans were just a little under $500 million. Deposits were a little under $700 million, really round numbers. You know, I think Dallas is gonna be solid. I don't have any reason to believe that it will perform worse than Houston. You know, Look, it's early. We opened our first branch there.
I should say we opened up a location, you know, before that we had begun working on before we announced the strategy. We call our Redbird locations in the southern sector of Dallas. It's been really successful. You know, that's the first, you know, example I have of, you know, boots on the ground there and how we do with the new location. That's been really good. I just think the character of Dallas is such that it is a very much of a, you know, business-centric market. I think once upon a time, someone told me there were 10,000 corporate headquarters there. It's not nearly as energy-centric as the Houston market.
That can be a good thing and a bad thing, but it is, I think it is just a more diverse market in many ways. You know, I've always been excited about the prospects for Frost Bank in Dallas because, you know, middle market, small business commercial is our wheelhouse, and man, that is a target-rich environment. If we just do the right things, learn the lessons that we learned from Houston, I'm I have no reason to believe we won't be successful in the Dallas market.
Jennifer, I can quantify some sort of numbers just to give you perspective. You know, fourth quarter to fourth quarter, I don't have the link in front of me. You know, if we excluded PPP loans were up about 2.4%, so it's about $350 million. About a little north of 1% of that actually came from the Houston expansion. Again, they're starting from small numbers, but if they're contributing, you know, that sort of growth on the change, if you will, they were responsible for a significant part of the growth.
Thanks so much.
Sure.
Thank you. Our next question has come from the line of Dave Rochester with Compass Point. Please proceed with your questions.
Hey, good afternoon, guys.
Hey, Dave.
Hey.
Just wanted to start on NII. You talked, you know, about a lot of moving parts with rate hikes, and you've got cash deployment and securities that you're expecting, and that sounds like that's gonna be pretty meaningful this year. Can you just remind us first maybe what is the impact on on NIM or NII from each 25 basis point rate hike that you're looking at this year? Then just bigger picture, what you're thinking on the total NII trends versus 2021. That'd be great.
Sure. So maybe an easier way to say it is, you know, the impact of the net interest of the rate hike, each 25 basis point rate hike is about $1.4 million a month, for the first 25. Because of some of the floors, they'll come into play. They don't come, you know, they're impacting that growth in the first hike. By the second hike, that number, most of them are eliminated. I would say that number is closer to $1.7 million, say, a month. That'll give you some perspective there.
Just overall for NII growth in 2022 versus 2021.
Yeah. I mean, you know, yeah, we're projecting. Obviously, we've got a lot of positive things going for us. You know, you've got to take out PPP, of course, because if you include PPP.
Yeah.
You know, we're gonna find some pressure there. I'd say. Let me hold on, grab my notes here real quick.
Sure.
Yeah, it could be pretty substantial, just given, as you said, the assumptions that we're talking about. Some of it's gonna be impacted by the timing. As you heard, I said our first assumption for a rate hike is in May. If it happens sooner, that'll help us. We're talking, you know, with a certainly double-digit sort of mid-teen potential growth for us on a TE basis, year-over-year.
Yep. That's factoring in, again, the net $5 billion in growth in securities and then what you're expecting on the loan side.
That's everything. Yeah. Exactly.
That's all in. Good.
Yeah.
What are you guys factoring in for deposit growth for this year? Because that, I guess, will drive. Or maybe it won't drive that much because you've got enough cash to deploy in securities. I was just curious what you're thinking on the deposit growth side.
Yeah. To be honest, we're... It's been interesting. You know, I've kind of expected that the deposits might slow down some of their growth, as I've said. It's been pretty solid in the, you know, the last couple of quarters. You know, our growth assumptions are that that's somewhat softer in 2022. I can envision that, and again, I might be eating my words a year from now, but at this point, I don't envision that we'll be seeing a 20%, or we're not assuming we'll see a 20% year-over-year average growth in deposits. If we do, it'll be great. As Phil mentioned, you know, we're doing a lot to enhance new customer relationships.
The one thing I was really happy to see on the deposit side, continue to be happy to see, is we do our 12-month look back on deposit growth. For the last 12 months, about 1/3 of our growth is coming from new relationships with 2/3 of that then coming from customer augmentation. That number is really the split between new and existing augmentation is really skewing slowly more and more to the new relationship. You know, we continue to be happy about that, and that could impact the growth. At this point, you know, on a full year average, I'm thinking, you know, we're gonna be much softer than where we were in 2022.
Yeah, that makes sense. Maybe just one last one on the non-interest income side. You had some good growth in 2021. I was just curious what your thoughts are, if you're expecting sort of a similar pace of growth on a core basis or if it should accelerate for any reason.
Yeah. I think I'll go through the pressures first. The pressure we're having is on the deposit service charge. You know, we put in the overdraft grace product, as we've talked about quite a bit. Really happy with that product. There continues to be, obviously, things that we're doing to continue to look at OD fees and what makes sense and what doesn't make sense. I don't expect that we'll see a potential for a lot of growth there. Some pressure there. On the insurance side, I think the pressures that I see there are more on the contingent income side.
We have a pretty big and you can see in our numbers, I don't have them in front of me, but a good piece of our business there is contingent income associated with how those policies perform. Let me see if I can grab it here in front of me. I'm expecting that that's gonna be softer. We had about $3.2 million in 2021. If you recall, we had a freeze here in Texas in February that which pretty much stopped the state for a few days. There were quite a few claims there. I'm expecting there'll be quite a bit of pressure on that contingent income line item in 2022. We are excited about our trust area. They had good growth there.
Obviously, the markets have helped us. We had good growth in oil and gas fees, which, you know, are dependent on what happens in oil prices. You know, we're optimistic, especially, you know, as we add new customers. I think there's a good potential there. I don't think we-
Yeah.
You know, it'd be great if the market expectations in or the market returns in 2022 look like 2021, but, you know, that's kinda not making sense right now. It might be a little bit pressure there as well.
Yeah. Okay. All right. Thanks, guys. Appreciate it.
Sure.
Thank you.
Thank you. Our next question comes from the line of Peter Winter with Wedbush Securities. Please proceed with the question.
Great. Thank you. I was curious if the rates come in higher than what you're expecting, so for instance, if we get a rate hike in March, you know, and that would lead to higher net interest income, the question is: Would you let most of the benefit fall to the bottom line, or would there be any type of plan to maybe accelerate some of your branch expansion investments as kind of like a partial offset?
No, not really. You know, the timing of the branches, there's a lot involved in that, right? Because we need to make sure that we find the locations. You've got to hire the right people. That's such an important part of the success as we know. In some ways, we really wouldn't be able to accelerate that expansion. What I would say is that, regarding our deposit betas, you know, we're pretty conservative, I'll say, in our assumptions on deposit betas on the interest-bearing side. I think the last numbers I saw, we had deposit betas of, say, 50% in our assumptions. Historically, when we went back and looked at, you know, cycles in, you know, 2017-2019, for example, we were probably closer to 30%-35%.
It'll be interesting to see what happens. What we've said is that we always wanna make sure that we're offering a square deal to our customers. We'll be looking at market rates, you know, not only against the too big to fail, but who our competitors are. We'll react on the deposit side. If the industry as a whole, you know, doesn't raise rates, you know, we could have bigger benefits then, you know. Over time, you know, we're gonna see increases in deposit costs just given where the market takes us.
You know, just on that point, if I think back to the last cycle, you guys actually moved ahead of peers in terms of
Right.
Raising deposit rates. I'm just curious, just given so much deposits that you have today, what's the thought of that type of strategy this time around?
You know, Peter. I guess you know us and you know us well. I mean, we're really all about the customer relationship. We wanna make sure that we provide our customers with a square deal. We wanna make sure that the rates that we're offering are competitive. To the extent that there are rates that we feel, you know, we need to move, even with a loan-to-deposit ratio under 40%, you know, we're gonna raise those rates because we think it's fair. It's important for us to try to continue to build those relationships and make sure that we're offering our customers a square deal.
You know, Peter, last time in 2017, you saw the Fed rate move up in rates 100 basis points. The thing that happened to us is we focused so much on competing with the too big to fail here in these markets that, you know, our eyes were squarely on what they were doing competitively, and they really didn't move at all at that point. We sort of decided to break away from it at that time. I'll say this time around, we have learned from that, you know, experience. Jerry and his team and our deposit teams have really been very diligent, I think, in paying attention to what rates are irregardless of what some of the larger competitors might be doing.
I think we've done a nice job. I know we have on the CD rates, for example. There really hasn't been much movement in the non-maturity, you know, portfolio rates, but we've moved some on that. I feel really good about where we are. I think we got a much better start going into this rate cycle moving up than we had in 2017. We're not really playing, you know, from behind the curve right now. I feel pretty good about it. You know, like I say, I think we learned from our experience back in 2017.
Right. Just two quick housekeeping questions. Other income, if I take out the branch sale gain, it was still pretty elevated relative to the third quarter. I'm just wondering if anything unusual in other income?
Compared to which quarter? I'm sorry, Peter.
The third quarter.
Compared to the third quarter?
Yeah.
Let me grab that. Yeah, we did have some incentives related to our debit card that were paid to us in the fourth quarter, and usually arrive in the fourth quarter and are recognized in the fourth quarter. That's really the only other major item affecting the linked quarter comparison.
Got it. Just the tax rate that we should use for 2022?
I think on a discrete basis, we're probably around 9% would be my guess at this point.
Okay. Thanks for taking my questions.
Sure.
Thank you.
Thank you. Our next question has come from the line of Steven Alexopoulos with JP Morgan. Please proceed with your questions.
Hi, everyone.
Hey, Steven.
I wanted to start, Jerry, to follow up on the high single-digit expense growth guide for 2022. Just given where wage pressure and inflation's been trending for everyone, do you think at least at this stage, it looks like that would be maybe at the upper end of a high single-digit range?
Does it help if I say I hope it is? No. I'm gonna say that just to be clear, we continue to see salary pressure. You know, we're out to get and keep, you know, attract and keep, you know, the best people that we can. We're gonna do what we need to do to be competitive. It probably would be a little bit premature for me to say that. I will say that I don't wanna mislead you. We continue to feel salary pressure. We're having conversations all the time, to be quite honest with you. Yeah, it would be flippant of me to say yeah, we've taken care of the problem because, you know, it's something that we're facing every day.
Yep. Okay. That's fair. On the loan side, with every bank, right, sitting on a ton of liquidity, just like you guys, everybody's focused on loans. Can you give us a sense how competitive is the lending environment today? Are you walking away from even more loan opportunities over structure? What is the loan outlook for 2022?
You know, I wouldn't say, Steven, it's more competitive. It's really competitive and has been. You know, I think that if you look at what was lost to structure, I'm trying to look here. Three months ago versus now, so we lost 64% of the deals this quarter, the fourth quarter, to structure. The prior quarter, we lost 68% of the deals to structure. So it's actually been fairly consistent. You know, if you look a year ago, though, we lost 56% of the deals to structure, 44% to rate. So, you know, we're competing aggressively on price, and I think that's the right thing for us to do.
By the time someone passes our credit criteria and relationship, and character and all those elements that go into underwriting it, you know, it's given the cost of, you know, good core-related deposits, which I'll argue for us are as low as anybody I know about, there's no reason for us to be losing business over a few basis points. I want us to be competitive on that. Let's engage with somebody and have a long-term relationship. I think it works out for us very well. But it's, man, it's been competitive. It continues to be. You know, I saw I was asking our people about, you know, in the real estate markets, what's going on? You're seeing interest rates go up some.
You know, you look at cap rates, they haven't moved in some cases. For some credits, they've gone down. There's tons of capital still available, looking for high quality, low risk deals. You know, it's not been great, but it's the same. I'm proud of the way that our people are competing and the kind of customer relationships we have and the kind of deal flow that we're bringing in. So I think we're doing a good job competing, but we're also you know, I've said a million times, there's no green pasture on the other side of the fence of great credit quality. It might look good, but it is a wasteland out there. We're still focused on maintaining our disciplines and we'll be competitive.
We'll try not to be stupid about it. How about that?
Mm-hmm. When you think about 2022, is this a high single digit year for loan growth? Is that what you're thinking? I don't wanna put words in your mouth.
No, I think those are my words. I feel good about high single-digit growth this year.
Okay.
Everybody's fighting this thing, Steven, on commercial real estate payoffs, right? Because, you know, with re-rates beginning to move up, you're seeing some people accessing, you know, the long-term markets, maybe sooner than they would. I talked about cap rates. The people are worried about them going up. They might be, you know, taking advantage of prices out there, so you could see some deals, you know, payoffs more than you've seen. But the other thing is, you know, our advance rates on, you know, liquidity lines, working capital lines is up a little bit. It was up a little bit from the previous quarter. I think we were, like, around 32.5% this quarter.
You know, it used to be around a little over 38. You know, there's room there if supply chain things clear up some, and maybe that offsets some of that. You know, we're just competing well, and we're seeing relationships grow. You know, we've got what's going on in Houston. You know, Dallas will take a little while to move the needle, but it's going to. I'm just optimistic about how it's going.
Okay. Thanks. Maybe just one final question. Even though many in our industry think the branch is dead, how important has it been having a physical branch in your new markets to those growth metrics and consumer checking accounts you mentioned? And could you have pulled that off without a physical branch, just with direct, you know, digital advertising, et cetera? Thanks.
Yeah. I'll give you a number, Steven. 87% of the account growth or the relationship growth we've had in Houston has come within five miles of a branch.
Mm-hmm.
I'd say it matters.
Perfect. Thanks for all the color.
You bet.
Thank you. Our next questions come from the line of Jon Arfstrom with RBC. Please proceed with your questions.
Thanks. Good afternoon, everyone.
Hey, Jon.
Hey, Jon.
Just one quick follow-up on expenses. You know, you gave us the components of Houston, Dallas, residential, and then minimum wage. Is the rest of it just compensation, or is there anything else in there to call out in terms of the increases?
I would say that really it's related to the base in 2021. Some of the things that we're doing, you know, as it relates to starting to meet more with customers. Now I'm seeing increases in things that you would expect, like meals, travel, and entertainment, as we start continuing to do some of that prospecting face-to-face. I saw some good size increases in advertising marketing as well, you know, as we continue to make sure that we're doing what we need to be doing there. We're obviously gonna feel, as you're saying, some continued salary pressures. I would say those, in my mind, are the major components.
Okay. Kind of a follow-up on Peter's question, are there areas where you would like to spend more in the business?
You know, you're talking to a couple of tightwads, I guess. We don't like to spend more, you know? But we do. We sure do. I'll tell you the things that we're doing. You're gonna... You know, as it relates to the legacy business, we're pretty careful on expenses. I mean, Jerry has pointed that out. I think if you peel back all the, you know, PPP and you peel back expansion, you peel back our mortgage expansion, our number's pretty conservative there. You know, I wouldn't say we like to spend money. That's not exactly what you said, but I wouldn't say we like to do that.
Yep.
We will spend money, and we will invest. We're gonna continue to do this, and everyone needs to know it. We'll continue to invest in expanding our business. If you look at, you know, things that we'll invest with, and we're gonna continue expanding on this organic growth strategy. There's a great payoff in it. You know, it comes closer and closer to that harvesting phase of these new locations every year. We're gonna do that. We're gonna continue to invest in our people. Jerry talked about what we've been seeing there. I talked to you about how we went to a $20 minimum wage. You know, we're investing in our people. There's a lot of other things like that. We're paying a lot bigger share of our medical premiums than we were a year ago.
We're gonna continue to invest in technology. I really am extremely proud of our technology and what we're able to do and our strategy that we're, you know, that we've employed there. You know, if you look at our apps, our rating is really high. You know, as you know, we do our own web development. We do our own digital development. We have lots of flexibility and ability to have a great customer experience and a branded experience there. I don't feel, because we've been willing to do this, we're playing from behind the curve in technology. Yes, it's a ton of money, and we spend more there, it seems like, than we spend any other place. But we're not playing from behind the curve.
You know, the things that we're doing, I think, are moving us forward, and it's really exciting to see.
Okay, good. One more thing. You mentioned Houston and energy a couple of times. Can you just touch on your appetite for energy lending in general?
It's. We've got an appetite for it, but it's kind of like that going on a keto diet. You know, you wanna get down to that weight loss level, and then once you get there, you know, you can normalize your diet. We said we wanna get down to mid-single digits. We're almost there. We're 6.6%. What I wanna point out is that's still a really big part of our portfolio. It's, you know, one of the top, you know, segments of the portfolio. You know, we're not moving out of that business. We're just getting to where, you know, we need to be on a prudent level.
The thing I'm really proud of our people for doing is that we're, you know, on the deals that we are engaging in now and prospecting, we're doing it on the basis that we've always underwritten things, you know. We're being disciplined about it, and that's good. You know, it doesn't work for everyone, but it works for the right kind of customer. You know, the way I think about that business is, I've always thought about it kinda like a multifamily construction business, right? I mean, we can do as much multifamily construction lending as we want it to. We could take that loan-to-deposit ratio and get it wherever you want it over the next year, right? That's not the right thing for us to do.
It is an important asset class to us, but we do it a certain way, and we do it with people that we are familiar with and have had great relationships with or have wanted to have great relationships with. Does it work for every deal for everyone? No, it doesn't. Those customers that do business with us, they know what we'll do, and they know what works with us, and they like to do business with us. We're not gonna do every deal for everybody, but we do a lot of deals for them. I see that being the same thing and same approach we take in the energy business.
Won't work for everyone the way we do it, but we're gonna do it in such a way that when energy prices move down, and they will, it's a commodity business, we don't want our shareholders losing sleep about it. I sure don't wanna lose sleep about it. We're gonna be underwritten in a way that we feel good about it. There are ways you can do that well, and that's what we're focused on. It's not gonna be such a large level that Cullen/Frost becomes the next easy short when energy prices start moving down.
Yep. Okay. Thank you. Well, that makes sense.
Thank you.
Thank you. There are no further questions at this time. I would like to turn the call back over to Phil Green for any closing comments.
Okay. Well, thanks everyone for your interest, and we will be adjourned. Thank you.
Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.