Earnings Call: Q3 2019

Oct 31, 2019

Ladies and gentlemen, thank you for standing by, and welcome to the CullenFrost Third Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. I would now like to hand the conference over to your speaker for today, Director of Investor Relations, A. B. Mendez. Thank you. Please go ahead. Thanks, Stephanie. 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 the forward looking statements contained in the Private Securities Litigation Reform Act of 1995 as amended. Please see the last page of this morning's earnings release for additional information about the risk factors associated with these forward looking statements. If needed, a copy of the release is available on our website or by calling the Investor Relations department at 210-220-5234. At this time, I'll turn the call over to Phil. Thanks, A. B. Good morning, everyone, and thanks for joining us. Today, I'll review the Q3 results for Colin Frost and our Chief Financial Officer, Jerry Salinas, will also provide additional comments before we open it up to your questions. In the Q3, Cullen Frost earned $109,800,000 or $0.0173 per diluted common share compared with earnings of $115,800,000 or 1 0.78 dollars a share reported in the same quarter of last year. Our return on average assets was 1.35% for the quarter compared to 1.49% in the Q3 last year. Average deposits in the 3rd quarter were up to $26,400,000,000 compared to the $26,200,000,000 in the Q3 of last year. Average loans in the 3rd quarter were $14,500,000,000 up 5.8% from the Q3 of last year. We continue to see growth in our C and I, CRE and consumer segments. Our provision for loan losses was $8,000,000 in the 3rd quarter compared to $6,400,000 in the Q2 of 2019 and $2,700,000 in the Q3 of 2018. Net charge offs for the Q3 were $6,400,000 compared with $15,300,000 for the Q3 of last year. 3rd quarter annualized net charge offs were only 17 basis points of average loans. Non performing assets were $105,000,000 at the end of the 3rd quarter compared to $76,400,000 in the Q2 of 2019 $86,400,000 in the Q3 of last year. The increase in the Q3 related to a single energy credit, which had been included in problem energy loans since early 20 16. Overall delinquencies for accruing loans at the end of the 3rd quarter were $100,000,000 or 69 basis points of period end loans. Those numbers remain well within our standards and comparable to what we have experienced in the past several years. Our overall credit quality remains good. Total problem loans, which we define as risk grade 10 and higher, were $487,000,000 at the end of the Q3 compared to $457,000,000 in the Q2 of this year and $504,000,000 for the Q3 of last year. Energy related problem loans declined to $87,200,000 at the end of the 3rd quarter compared to $93,600,000 at the end of the Q2 and $138,800,000 in the Q3 of last year. Energy loans in general represented 10.5% of our portfolio at the end of the 3rd quarter, well below our peak of more than 16% in 2015. Our focus for commercial loans continues to be on consistent, balanced growth, including both the core component, which we define as lending relationships under $10,000,000 in size as well as larger relationships while maintaining our quality standards. New relationships increased 5% versus the Q3 a year ago. The dollar amount of new loan commitments booked during the Q3 dropped by 14% compared to the prior year with decreases in C and I, public finance and energy, but a slight increase in CRE commitments. Similar to what we discussed last quarter, we're looking at lots of deals, but our booking ratio is down, particularly in commercial real estate. In the current quarter, our booking ratio for CRE was 24% versus 32% in the prior year. Overall, in the Q3, we saw our percentage of deals lost to structure increase from 56% to 61% versus a year ago. I was pleased to see our weighted current active loan pipeline in the 3rd quarter was up by about 30% compared with the end of the second quarter due to higher levels of C and I opportunities. So we're seeing good activity, and I'm expecting some good growth in the 4th quarter. In Consumer Banking, our value proposition and award winning service and technology continue to attract customers. The 4th, 5th and 6th of the 25 new financial centers planned over the next 2 years in Houston opened in the 3rd quarter. And we've already opened the 7th so far in the 4th quarter with more to come before the end of this year. Overall, net new consumer customer growth for the 3rd quarter was up by 48% compared with a year ago. So far this year, same store sales as measured by account openings increased by 14% compared to a year ago. In the 3rd quarter, just under 30% of our account openings came from our online channel, which includes our Frost Bank mobile app. This channel continues to grow. In fact, online account openings were 56% higher during the quarter compared to the previous year. The consumer loan portfolio averaged $1,700,000,000 in the 3rd quarter, increasing by 1.9% compared to the Q3 of last year. I continue to be extremely proud of our banking, insurance and wealth advisory staff executing our strategy of organic growth consistent with our strong culture. The interest rate environment presents challenges to our industry, but we continue to focus on the fundamentals and growing our lines of business in line with our quality standards. To sum up, Frost has received the highest ranking in customer satisfaction in Texas in J. D. Power's U. S. Retail Banking Satisfaction Study for 10 years in a row. We've received more Greenwich Excellence and Best Brand Awards for Small Business and Middle Market Banking than any other bank nationwide for 3 consecutive years. And we've once again been named the best bank in Texas by Money Magazine. You don't do that without great people dedicated to providing the kind of service that makes people's lives better. Now I'll turn the call over to our Chief Financial Officer, Jerry Salinas for some additional comments. Thank you, Phil. I'll make a few comments about the Texas economy before providing some additional information about our financial performance for the quarter and I'll close with our guidance for full year 2019. Regarding the economy, Texas unemployment remained at the historically low level of 3.4% for the 5th month in a row in September. Texas job growth continued at a healthy pace, but decelerated during the Q3 coming in at 3% in July, 1.8% in August and 0.9% in September compared to the 2.3% growth seen in the 1st 6 months of the year. The Dallas Fed currently estimates Texas job growth at 2.1% for full year 2019. In terms of employment growth by industry, construction has been especially strong growing at 6% year to date followed by manufacturing job growth at 2.7%. Energy industry job growth has weakened and now stands at 1.6% year to date. However, energy job growth was negative in the Q3. Looking at individual markets, Houston economic growth was slightly ahead of historical trends in the Q3. The Fed's Houston Business Cycle Index slowed to a 3.9% growth rate in September, but remains above its historical average of 3.5%. Year to date, Houston employment is up 2% with 3rd quarter growth slightly better at 2.2%. The construction sector saw 7.3% job growth in the 9 months through September, the strongest growth of any sector in the Houston economy. Houston's unemployment rate fell slightly to 3.6% in September. The Dallas business cycle index expanded at a 4.4% annual rate in the 3rd quarter, while the Fort Worth business cycle index expanded at a 3.5% annual rate. In September, the unemployment rate fell to 3.1% in Dallas and 3.2% in Fort Worth. The Austin economy also remained healthy in August. The Austin business cycle index grew at a 7.8% annualized rate. Austin's unemployment rate stood at 2.7%. The information sector saw by far the fastest job creation in Austin in the year to date period with job growth of 23% over the prior year period. Growth in the San Antonio economy accelerated in September. The San Antonio business cycle index expanded at its fastest pace since 2016 growing at a 3.8% rate in September, well above its long term trend of 2.9%. San Antonio's unemployment rate decreased slightly to 3% as of September. The Permian Basin economy showed year to date job growth of 0.2% through September with unemployment of 2.3%, remaining well below the state's overall 3.4%. Looking at our net interest margin, our net interest margin percentage for the 3rd quarter was 3.76 percent, down 9 basis points from the 3.85 reported last quarter. The decrease primarily resulted from lower yields on loans and balances at the Fed, partially offset by lower funding costs. The taxable equivalent loan yield for the 3rd quarter was 5.16%, down 18 basis points from the 2nd quarter. Looking at our investment portfolio, the total investment portfolio averaged $13,400,000,000 during the Q3, up about $122,000,000 from the 2nd quarter average of $13,300,000,000 The taxable equivalent yield on the investment portfolio was 3.43% in the 3rd quarter, up one basis point from the 2nd quarter. Our municipal portfolio averaged about $8,200,000,000 during the Q3, flat with the 2nd quarter. During the Q3, we purchased about $100,000,000 in agency mortgage backed securities yielding 2.63% and about $260,000,000 in municipal securities with a TE yields at 3.31%. The municipal portfolio had a taxable equivalent yield for the Q3 of 4.08 percent, up 2 basis points from the previous quarter. At the end of the 3rd quarter, about thirds of the municipal portfolio was PSF insured. The duration of the investment portfolio at the end of the quarter was 4.3 years flat with the previous quarter. Looking at our funding sources, the cost of total deposits for the 3rd quarter was 39 basis points, down 2 basis points from the 2nd quarter. The cost of combined Fed funds purchased and repurchase agreements, which consist primarily of customer repos, decreased 16 basis points to 1.53 percent for the 3rd quarter from 1.69% in the previous quarter. Those balances averaged about $1,290,000,000 during the Q3, up about $49,000,000 from the previous quarter. Moving to non interest expenses. Total non interest expense for the quarter increased approximately 15,200,000 dollars or 7.8 percent compared to the Q3 last year. Excluding the impact of the Houston expansion and the increased operating costs associated with our headquarters move in downtown San Antonio, non interest expense growth would have been approximately 4.3%. Regarding the estimates for full year 2019 reported earnings, we currently believe that the mean of analyst estimates of $6.81 is reasonable. With that, I'll now turn the call back over to Phil for questions. Thanks, Jerry. Now I'll open up the call to questions. Our first question comes from the line of Brady Gailey with KBW. Hey, good morning guys. Hey, Brady. Good morning. Maybe we can just start with loan growth. You're losing more CRE deals, it feels like the structure. Where are these deals going? Are they going to some of your peer banks or are they going to non bank lenders? I think there's a combination of all those. We'll depend on the deal, it could be I think I mentioned this last time, it was we've seen to go to small banks and smaller communities. We've seen to go to large banks. We seen to go to private equity. Just a lot of competition for CRE. Okay. And it's great to hear you a little more upbeat on loan growth in the Q4, Phil. What is driving that optimism? I think I heard you say something about C and I, what's driving the more positive tone there? It's hard to say. We were a little disappointed with the C and I growth that we had in the Q3 in terms of book commitments. And as I talk to our folks around, it seemed like there was a little bit of a pause with on the C and I side, on customer side, on the prospect side. And maybe that was just an anomaly in timing. It looks like it's picked up more strongly in the Q4. So as we look at our weighted pipeline, it's increased. And I'm not sure there's anything I can really specifically relate it to. But it is it's definitely better than it was in the Q3. All right. And then finally for me, one for Jerry. I know last quarter you talked about a full year net interest margin of 3.75% for this year. It seems like you're running about 3.80% on average for the 1st three quarters. Now that we just got the last rate cut, what's your updated thoughts on kind of how the NIM reacts from here? Brady, I think the guidance I gave you right was at 3.75% for the full year. And our assumption last quarter did include rate cuts in July October. And at this point, we're still comfortable with that 3.75 percent kind of a full year NIM is kind of what we're thinking. All right, great. Thanks guys. Thank you. Your next question comes from the line of Raul Patel with Evercore ISI. Thank you. Just going back to the NIM question, just wondering looking beyond the Q4, assuming no additional cuts following yesterday's cut, do you expect pressure on asset yields given competitive pressures to more than offset any benefit that you're seeing on the downward pricing of deposits? Or do you anticipate the NIM to kind of inflect at some point in 2020 as you see the benefit from deposit pricing actions? I think our obviously there's going to be pressure on the NIM and a lot of it will be dependent on what happens to any further rate cuts, right? So at this point, I think what we're projecting is continued pressure on the NIM. From an investment portfolio standpoint, yields aren't what they used to be. So we're struggling a little bit there. We're talking about potentially adding some duration there, which will help the portfolio. But from a deposit standpoint, we kind of raised deposits as we were going up and we've kind of done the same thing coming down. We're still very competitive on our deposit pricing. But for our deposit betas, I think we've been let me see here, on total deposits, our beta was about 25% and related to the October cut. So there's definitely going to be pressure on the NIM. I can't sit here and say that given what's happening with rate, given what's happening in the loan portfolio, I think Phil has said before that we're going to be more competitive on pricing. There's no reason for us to lose a deal with a long term relationship over 5 or 10 basis points. So we're going to be more competitive with pricing even in this lower rate environment. So at this point, what I'm seeing if I look forward is still continued pressure and kind of a downward trend on that NIM into 2020. Got it. And then the deposit growth was pretty strong this quarter, particularly on an in a period basis. Was there anything seasonal that was sort of unique to this quarter that you expect to flow out in 4th quarter? Historically for us, the 3rd and the 4th quarter are the strongest quarters. It was good to see the sort of growth that we had on even on average basis. I think linked quarter we were up annualized 5.5%. We had seen some pressures we talked about on the DDA, especially early part of the year after the Fed raised rates in December, there was quite a move out. I think CFOs and treasurers that the interest rates at that point were so high that it was an opportunity cost basis to just keep it in their checking accounts. And so we started seeing some outflows in those commercial demand deposit accounts. We started to see some settling in there. We're doing some things on our end to be more competitive. And yes, so I think that it was good to see. I don't think there's anything unusual that caught our attention. We've had good growth in the CD categories and the MMA obviously, but it was good to see the demand deposits growing also. Got it. And just one last, could you quantify the distressed energy loan exposure, which is sort of the residual from the previous energy downturn in 2016 that you are still kind of working through right now versus any new distressed energy credits that just kind of materialized over the recent weeks? Okay. Well, on the let me see what I can do for you. Hang on a second. As we mentioned, an increase in non performers was related to an energy credit that had been a part of problem loans for a good while. Our let's see. You look at energy loans that we classify as problems. At the end of Q3, it was about $87,000,000 in round numbers. And the big majority, vast majority of that is 2 credits that are non performers. One is a $34,000,000 credit, one is $33,000,000 We've been living with those, as we said, moving through the snake for a long time. And they're just trying to generate liquidity. And it's a tougher environment, as you all know, with less capital moving in those markets for people who want to sell anything and need to sell anything, you've got discount rates on the reserves. It used to be PV9, it's be 15%, 20%, sometimes 25%. So that's reduced collateral values and liquidation values. So I mean that's really what's happening there. As far as our outlook there, I feel good about the portfolio. It doesn't mean we don't have any risk. The if you've got somebody who's intending to sell assets, that's what I worry about. We've got a credit that's a $50,000,000 to us. It's not a problem loan, but I know they're looking to sell assets and I'm not very optimistic about the environment to do that. So we'll just have to see how that works out. But that's other than that one, as far as what we've got, we I think feel good about it. We've got about $1,500,000,000 outstanding in energy. The weighted average risk rate of that portfolio is 6.13 compared to the overall portfolio of 6.44. So aside from a few larger credits that we're either been working through it in snake or that I've got my eye on out of the snake. I think I feel really good about the portfolio. Got it. Thank you. You bet. Your next question is from the line of Jennifer Dembe with SunTrust. Thank you. Good morning. Good morning. On the 2 energy credits you just mentioned, Phil, dollars 34,000,000 dollars on NPL. What kind of reserve is on those loans and what kind of loss are you thinking could happen? Yes, I think that reserve specific reserve wise, we have $10,000,000 roughly associated with each of those credits. So 20,000,000 dollars total between the 2. Okay. Jennifer, it just depends on how things work out until as far as what it will ultimately be, we don't know. It's kind of a fluid situation, I think, in the markets with regard to what the value of these assets are, particularly if it's gas related or if it's outside of the Permian, it's still that same situation. On expenses, you just moved into the new headquarters a few months ago, still going through the Houston expansion. I mean, should we expect a bit more expense growth next year in 2020 than we're seeing this year? This year, it's been around 6% year to date? Yes, I think that's a logical question. I think that if I was putting together a model, what I would say is, yes, we've only been in this building since June of this year. So those additional costs are it's only going to be partial year this year and it'll be a full impact for next year. So that obviously will have an impact on 2020 growth. And then as far as the Houston expansion is concerned, we talked about what our plan was originally, which we said was about 1 a month for 25 months. We're running a little bit behind schedule this year. I think we've opened 6 through the end of September. 7th just got opened in October. So running a little bit behind schedule on the opening of those locations. I think from the hiring standpoint, everything I hear is that we're doing pretty well. And so hiring has been better than expected. And so those are probably going just maybe just a little bit slower on the hiring, but I think still really keeping pace. The last numbers I looked at versus pro form a, we were slightly better on expenses, but not a whole lot. I mean, the numbers just aren't from the 1st couple of quarters weren't that significant. But if you remember, we talked about a $0.19 impact on 2019 and we talked a little bit about the profitability model of those branches. Just as a reminder, what we had done is we went back and looked at on average how our new branches had performed, I think over a 10 year period. I think we looked like at 40 branches, if I remember correctly. And what we said on average was that those locations tended to breakeven about month 27. And so really for the $0.19 guidance, a big chunk of that was really expense related, right, because those locations have to open, you've got to get the deposit, you've got to get the loans, but the costs start really pretty quickly. And so the way I would look at it is, we were planning to open 12, that was going to cost us $0.19 and they don't breakeven until the month 'twenty seven. And if 2020 has kind of that same sort of concept, my starting point would be kind of like a $0.19 impact from the new locations opened in 2020, plus still a drag from the locations that we opened in 2019. So yes, your thought process there is correct that there is going to be a bigger drag on 2020 than there was on 2019. Thank you. Your next question is from the line of Brett Rabatin with Piper Jaffray. Hey guys, good morning. Hey Brett. Good morning. 2 housekeeping issues or items. One, do you would you happen to have interest expense for the quarter and then the ending period securities portfolio? Sure, here. What was your first question? I'm sorry. Interest expense? Interest expense, you guys have the total net interest income, but you don't break out the interest expense. Okay, sure. Yes, just real quick here. You wanted it for the quarter? Right. $33,300,000 Okay. And then the ending period securities portfolio size? You grab my 10 Q, that's probably the best place for me to go. Okay. All right. And we'll be filing that later today. So ending securities, we had a $1,021,000,000 in a held to maturity and $12,000,000 or $20,000,000 in the available for sale. So roughly $13,000,000 for $40,000,000 Okay, great. And then just wanted to go back to expenses and how much I guess one was how much was incentive comp related to the 3rd quarter increase in personnel? Take a look there. Really the incentive comp year over year, I'm not seeing a real big impact. Obviously, there's some from could be some from higher commissions. On the insurance agency side, if their commissions were up compared to the 3rd as their yes, their insurance commissions were up. There might be some additional commission income that the brokers might earn. But other than that, really the increases have to do primarily with our typical merit and market increases, promotions that we give, but also the increase in headcount. It's also impacted by the Houston expansion. Okay. And then just thinking about going back to expenses, just thinking about the bigger picture, you've got the branch build out. Is there any reason to think that core expense growth in 2020 would be different than the kind of 4%, 4.5% range now? I think it might be just because and I haven't seen detailed numbers, my gut tells me with what we're spending on additional cost and technology, particularly cybersecurity and then also we've got some technical debt that we've been dealing with and some, and I mentioned last quarter, I think it was, we had a number of positions that we needed to be filling in the IT and operations side. So we're making some headway on that and we need to. So technology is always something that's going to be a big expense category to every business. It is ours too. And so I think that's going to be a little bit outsized for a while. I don't know that in and of itself is going to drive the number materially, but it will drive it some. And then I just think also my gut is telling me that just cost for labor is getting tougher, not just for us, but for everyone and just what you have to pay to bring in good people, keep good people is you just have to stay up on top of that, stay on top of the benefits you're providing. So just as we run the business, those are things I know we've got to be dealing with and we can't be asleep to switch on it. So that's why I tend to think it may be a little bit higher. Yes, I think that's right, Phil. And you mentioned during the previous call the open positions that we had in the technology area and what our focus was. So as we hire those people in the 3rd Q4, they'll only be in our run rate for part of the year. So yes, that's going to have full impact on 2020. Okay. And then maybe just one last one. Any thoughts on CECL? And have you guys can you give us maybe a range if you're not ready to give a more definitive number? Yes, we're going to be disclosing in our 10 Q that based on our September parallel run, we currently expect that the combined impact on the related to loans and unfunded commitments is about 15% to 25% higher than our allowance at the end of September. Okay, great. Appreciate all the color. Yes. And of course, all of the impact on seasonal, we need to say, a lot of it's going to be dependent on what sort of economic forecast we have at the end of the year, what our loan portfolio looks like and any refinements that we have made to the credit models by then. But we do have a disclosure in there. I think the team has done a really good job moving this forward. Okay, great. Thanks guys. Your next question comes from the line of Peter Winter with Wedbush Securities. Good morning. Jerry, I heard your comments on the margin initially into 2020 that there'll be some pressure, I guess, as you guys compete on loan pricing. But just looking out longer term for the margin, assuming the Fed is on hold, just directionally, what do you think the margin does? Because I know there's a lot of puts and takes. I'm not looking for specific guidance. I think that certainly the positives, if you will, are going to be loan growth. If we've got loan growth kind of consistent with where we've been and Phil mentioned he felt better about our outlook for the Q4. Obviously, loan growth is going to have a positive impact there as far as our net interest income is concerned. I talked a little bit about on the investment portfolio. Unfortunately today, there's just not a lot of opportunities. And so what we're talking about now is potentially looking at adding duration. So decisions that we make there could potentially have a positive impact on our net interest margin percentage. From a deposit sort of standpoint, I think I told you the betas that we've used. I think we've been pretty aggressive on our deposit pricing. We were aggressive going up and we're aggressive coming down. But we're going to continue to keep our eye on what our competitors are doing. Even though we have a low loan to deposit ratio from a deposit standpoint, you know as well enough to know that we're concerned about the relationships. So we want to make sure that we're treating our customers fairly. If we see any weaknesses there, we'll react accordingly. So I think that to say right now that there would be upward that I could push you with an upward guidance, I think that's tough right now. I think that where we are right now is we can't make we can't make miracles happen. So right now, at best, I think we could do is kind of stay flattish. But that's really a challenge that we have moving forward. Okay. And then you confirmed the full year guidance at 681 and you beat guidance a little bit in the Q3. So it does imply a pretty significant drop in earnings from 3Q to 4Q. I'm just wondering where the pressure points are coming. I mean, you reconfirm margin and you're looking for a little bit better loan growth. All right. I think the thing that I would talk about is, the guidance that we gave on full year that I gave on full year expenses during the last call, I think we said net of the Houston expansion and net of the additional operating costs associated with our move downtown, we said would be in the 4%, 4.5% range. And we still I still feel comfortable there. So obviously what that infers is that there is a ramp up in expenses in the Q4. And if you go back and just look historically, we do have higher salaries expense in the Q4 typically. A lot of the incentive plans are kind of trued up there based on performance. And if I'm looking here just at Q3 to Q4 of last year, I'm seeing that salaries by themselves went up from, gosh, a little north of $3,000,000 So we'll expect that there. And then now we're also adding the people related to the Houston expansion. Phil mentioned also that we're doing hirings in the technology area. And so those people that came in the Q3 would have come in either late in the third quarter or starting in the 4th quarter. So we'll see some additional pressures there. I think that that's probably the thing that kind of moves the needle, if you will, will be expenses in that 4th quarter that are like I said, they were impacted by the on a reported basis impacted by the Houston expansion and also the Tahoe. And then just my last question. Just going back to Jennifer's question about the expense growth for next year, I mean, and the comments that core expense growth could move up a little bit. I mean is it unreasonable to assume like 8% type growth expense growth next year? Is that help me, are you talking about core, reported? Reported. Yes, I think it could be north of that. Got it. And the thing go ahead. Could you give a range? We wouldn't give any sort of we typically don't give any guidance really about ranges. If we did that anyway, that conversation wouldn't happen until our Q4 call. Got it. But I will say as far as the Q4 expenses, the 3rd quarter was also light on advertising costs. Those can really swing the needle and they have during other quarters. And some of the projections that I've seen have us increasing those advertising dollars, pretty significant advertising and promotions pretty significantly in the 4th quarter compared to the 3rd. Your next question comes from the line of Ken Zerbe with Morgan Stanley. Great. Thanks. Good morning. Good morning. I guess just I had a question. You were talking about losing deals to or deals lost to structure. Just to clarify, I believe that is only related to CRE, but correct me if I'm wrong. But the question is also like do you envision that continuing? Are you still seeing that in October? And is it having a material impact? Is that could be one of the reasons for the slower loan growth in 3Q? Thanks. Well, the loss to structure comment relates to the entire portfolio. I don't have in front of me what the real estate number is broken out, but I can just tell you it'd be higher on real estate because if you looked at the amount, this is a year to date number for example, which is what I mainly focus on in this what we call the look to book area. But real estate loans, we looked at 34% more deals. So we look at a little over $6,000,000,000 It's up 34% from the quarter or the full year a year ago, year to date Q3 and we booked $13,000,000 more, only 1% more, dollars 4.58 billion. So I mean, I think that's where you really see it. And when I said earlier, I think I mentioned it was a quarterly number on that success rate going from 32% to 24%. That's a year to date number, but that's really what where you see that. Actually our C and I, I do have a year to date number our success rate for that. That's only down 1%. So C and I, our look to book ratio was 41% last year year to date and then it's 40% this year. So you don't see it as badly in the C and I. It's more relationship based based on the factors, it creeps in there some, but I think it's really mainly related to commercial real estate, has a lot to do with guarantees, has a lot to do with advance rates, burn downs, just everything. Got it. But do you see that trend slowing in Q4? Because it sounds like you were a little more optimistic around loan growth in Q4? Yes, I'm optimistic there because we've seen our pipeline increase, our weighted pipeline and the C and I piece is what's driving a lot of that weighted pipeline there. So that's really caused for most of my optimism. Do I expect it to get better or worse? Probably worse. It's pretty bad now. But if things slow, you might see people rein in a little bit and be less aggressive. But right now, I don't expect it to be any better. I think as the yield curve gets there's less and less opportunity there, people are looking for spread. Got it. Okay. Thank you. Okay. Stephanie, do we have you? Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Hey, good morning guys. Hey, John. Good morning. Hey. Just a couple of follow ups maybe, just economic health, we can follow-up on what Ken was asking about. But the job growth numbers that you guys talked about, maybe it's just obvious, maybe it's energy, but can you maybe put a finger on or give us an idea of what you think is driving that slower job growth? I think some of it's energy. But I think one thing that the people that we've talked to have pointed out to us consistently is the tighter it gets as far as the lower the unemployment rate gets, the bigger impact it's got on the ability to grow jobs. And so I think that's also a factor. But you are seeing some reduction related to energy employment. So I think those 2 things are the things that I would put my finger on. Okay. Bigger picture, you set aside energy. You're just you don't feel like you're seeing slowing in Texas at all? No, not really. I mean the energy business is slowing a bit and it's not bad, but it's slowing. I mean it's still strong in the Permian. The numbers, if you look at the hotel rates out there have gone down, which is something to look at. I think they had the highest rates in the state, but still year over year growth in employment, year over year growth in the economic number of sales, tax and all those kind of things are still positive. So but it is slower than it was and it was quite hot before, maybe it's only red hot now. But that's what we're seeing. Okay. Net new customer growth of 48% year over year, that's one of the and I'm assuming that's consumer, that's just it's a big number. It is. And then consumer loans up about 2% year over year. Curious on the 48% and what's driving that? And do you think at some point that leads to faster consumer growth for the company overall? Consumer loan growth, is that what you're relating to? Yes. We're measuring this on consumer deposit relationships. So yes, I think it's reasonable to assume that. I think one of the things you're seeing in the consumer side is, if you look at the unsecured PLC part of the business, it's been slowing. We've been more careful there over the last few quarters. And so that's sort of our downward pressure. But we're still seeing good growth in commercial consumer real estate and other kinds of real estate products. So I think once we get some rationalization of the growth rate on the PLCs, you'll see some increase in the growth rate on the consumer loan side. As far as what's driving it, it's just mean it sounds corny, but we've got a great value proposition, a tremendous brand. I mean we've been spending money to get that out and to make that more well known. Our technology is good. I mean, I think you can look at some of these awards that we get and they're a composite of different things and I can't mention I'm not sure I can mention which ones I won't. But it's not unusual for us on our mobile app to end up number 1 in the category. So and we're getting better and we're pretty good in getting better at how we are interacting, engaging the prospects. If you look at broadcast advertisings, probably, I don't know, maybe I'm going to guess it's less than 15% of what we do. It's really more engaging the prospect at the proper time on the web and that's helping us. And then as people are doing their research online and of course, you can look at the awards and stuff that we get, we look pretty good in that regard. So and then the service level that you get is great here. It's just great. And that comes out in word-of-mouth. So you get a lot of people that are willing to refer you. So I mean, I think it's a really important number to look at it. We had, like I say, at the Q3 last year, we had net new customers, that's new and net closed. We had net new customers, not accounts, but customers 2,756. This quarter, we had 4,065. So we went over the 4,000 number. It's the first time I remember that. But anyway, I'm just really feel good about it. And it's not any one thing. It's a result of a lot of hard work over a long time. Okay. Good. And then just one more last follow-up on the energy credit. The new NPL, any guess on a resolution timeline on that? And then the other 2 that you identified, I think you're saying they're in there and you're sizing them for us, but there isn't anything new on those 2 because they've been around for a while. Is that fair? Well, the 2 non performers, one of them has been non performer for a long time. I don't really know of anything specific going on there. I mean, they're still trying to work some liquidity, but that's a tough game right now. The one that came in new is the borrower just changed their strategy in terms of providing capital that type of thing. There were some changes there and that really caused that when you go non performer. And that's in the early stages of working that out. I'm not looking for a quick resolution there. You never know, but I don't look for 1. I think one thing we've learned about the large energy credits in this cycle is just you're not in the Permian Basin with oil, it's hard to get it's hard to work out of a large problem, just takes time. The other one that I mentioned, it's not a problem, but it's just a credit that I'm aware of, wants to create some liquidity and I know that's hard to do. And so they're good operators. They've got they support the credit with certain amount of guarantees. They've got other assets. I mean, all that, but I mean, it is I'm just being realistic. It's a tough market and it's about $50,000,000 deal to us. So, but my point I guess there is that other than that, I'm really not aware of anything that concerns me at all. And I think we showed that the problem energy loans were actually down. So I'd love to get rid of these non performers, but just going to take some time. Okay. All right. Thanks for the help. Appreciate it. You bet. Your next question comes from the line of Steven Alexopoulos with JPMorgan. Hi, everybody. Hi, Steven. I wanted to follow-up on the commentary regarding the pace of branch openings in Houston coming in at a slower pace than Elyse originally outlined, how many branches do you now think you'll have opened by the end of this year? And how many do you think you'll have opened by the end of 2020? I think that our current projection is 10 in 2019. And I think we're still shootings. We're trying to get all 25 open through 2020. Okay. So you plan to accelerate the pace a bit in 2020? Right. Exactly. And some of it, those openings are somewhat not completely under our control. If we're working on a leased location, we've got to work with landlords and such and lease documents go back and forth. And then also getting building permits in Houston could also affect the timing of that. So a little bit slower this year, but really are working to catch up by the end of next year is the current call. Do you think it will be relatively even through the year or should we expect most these to come on pretty late in 2020? I think that my rec I don't have any information in front of me. My recollection was that it was more skewed towards the latter part of the year. But again, I think a lot of it's just dependent on what we can accomplish. I think the people, like I said, are being hired. I think we feel good about that. In some places, we're booking we're able to book loans even before the location to open, right, if those if the lenders that we hire, the relationship managers that we hire have relationships. But I think right now it's kind of lumpy and really hard to predict. But our overall goal is to try to get $10,000,000 and the last number that I saw, that's obviously a little bit easy to gauge. 2019 is 20 is a little bit more difficult for us given some of what we've mentioned. Yes. And then looking at the branches that you've opened already, is the $1,500,000 cumulative loss per branch still a good assumption you guys originally outlined until breakeven? I'd say probably. I mean, I don't really know. I don't have that in front of me now, but I mean, that was a fairly representative number for 40 branches that we had done. I don't think anything we've done is such that it's dramatically different from that. So I really should probably say I don't know, but I don't know it's worse either. And then finally, just looking at some of the expense details, why are the benefits costs running up so much? I think they're like 14% year over year. And do you see those continuing at a double digit pace? Any color would be helpful. Thanks. Sure. On the benefit side, yes, there's obviously some benefits that are going to get impacted just by the numbers of employees. In the case of the Q3, we really saw an increase, had been seeing an increase through really most of 2019 related to our medical claims. So we're self insured. So there was a a pretty good increase in medical reserve contributions, if you will, in the Q3. So hopefully we're doing some things there to manage that, but it can tend to be lumpy. We obviously, like I said, are self insured. We do have a stop loss limit, but we can swing quite a bit depending on what's happening there. We also one of the negatives, I guess, is related to our retirement plan. I think if you compare the Q3 this year to the Q3 last year, we're up about 600,000. And so that's really just based on what happened last year, as it relates to return on plant assets. And even though I think those have performed pretty well, the discount rate, if I remember correctly, went down. And so our assumptions related to returns and what the actual discount rate is affecting that. So some of the numbers I've seen kind of don't rate is affecting that. So some of the numbers I've seen kind of don't see that as having a big impact of 2020 versus 2019 related to the pension plans, but 2018 versus 2019 they did. The other things are really primarily as you would expect, it's going to be things like payroll taxes, 401 contributions. Those are going to be more normalized with employee count. So I think there are some unusual things. The medical I think is lumpier in the Q3 than it would otherwise be. And then compared to the Q3 last year, the benefit, the retirement plan expense is higher this year than last. We really won't know what that expense is for 2020 until the discount rate gets determined at the end of the year. But from what I've seen, we should be in pretty good shape from keeping them relatively flat. Okay. Thanks for taking my questions. Sure. And your next question comes from Ebrahim Poonawala with Bank of America. Good morning. Hey, Ebrahim. So, Jerry, just following up on sort of there have been a bunch of questions around expense and expense growth. To make sure, is there anything in your reported numbers from the 1st 3 quarters that we should be excluding? Or are the reported numbers a good base in terms of how we think about expense growth next year? Yes, 1st 3 quarters, I think that's a tough one. I don't think that off the top of my head and as I think about it, I don't really recall anything significant that we had. We may have had some move costs that were associated with our move here in downtown San Antonio. And then we also had a move in our Corpus location. Those costs are in this number in this year's numbers, but they're not what I would consider material to the run rate, if you will. Ebrahim, nothing comes to mind that I could point out to you that was unusual during the quarters. That's helpful. And just I think if you take a step back more, I guess, philosophically or strategically, if you can talk about just I appreciate you're making investments with a longer term view. But Phil, if you can talk about just outlook for operating leverage, how do you think about that in terms of where you want to manage the bank from an efficiency standpoint? And because it seems like we should see that drift higher over the course of the next year given your investment plans. So I would love to get thoughts around that in terms of how you and the management team thinks about it? Well, we think about a lot. We recognize and I'm going back 2 years when the Senate bill that changed the cut line on going to that significant financial institution from $50,000,000 I think it went from down to $250,000,000 or so. I mean there are a lot of discussion about will that be a lot of acquisition activity that happens. And we you heard us talk about it. Our position was that what we didn't want to do in a roll up strategy in that case, we really instead investing with our balance sheet to make expensive roll up acquisitions. We were going to invest operating leverage that was improving at that time because of higher interest rates and more consistent loan growth. And so we were pretty clear that was our view and our plan and that's what we've been doing. I realize that it is costing us money and we could ostensibly be making more money today if we were not investing in Houston like we are in 2019 and like we are going to do in 2020. We know what the impact of that is. We've been pretty open about what it was this year, dollars 0.19 I think I heard Jerry say it's going to be more like twice that next year or in that range in terms of just the math I heard him go through. So we know it's increasing and there's nothing I can do about it because that's what it takes to execute a strategy like that. I'm absolutely confident it's going to be positive for the long term And that's the view we have and I wish it was different. What I wish that we had higher interest rates and civil rates going down, so I would be able to excess I would be able to invest some excess operating leverage, but we just don't have that right now. But I don't think that change in that strategy just because of some movements and short term rates really the thing to do. I've said before, we're not planting corn, we're planting trees and those trees are going to grow and they're going to really be a benefit to us in the long term. And I'm also really proud of how we're doing in the Houston market. If you look at some of our better volumes, we're they are in the Houston market. And it's not just related to branches because those things are pretty new, but a lot of it's around, I think, the recognition and buzz that we're creating in that market doing what we're doing. So that's what we're thinking about. I don't have a decimal point oriented number on what we will go to on ratio or that kind of thing. It's more of a strategic overall view of how we want the company to move forward. In the meantime, we're doing the best we can on expenses that we do incur today. We have always been careful on expenses And I think we've shown over time that that's that we have been You got to recognize, I know you do that we have a high service model. So we're not going to have the lowest efficiency ratio on the block. Are going to be very profitable and we are going to have good growth over time. And that's really what we're focused on doing. So I'm sorry that it's costing us money to expand, but I really believe it's the right thing for us to do. We think we're paving the way for good returns going forward. Thank you for that. I mean, I guess no reason to be sorry. It all makes complete sense. So, but thanks for going through that. And just one follow-up Jerry, in terms of the margin guidance, so it sounds like and I'm not sure if you actually gave that number, but it sounds like we'll get another 10 basis points drop in the 4th quarter. Is that reasonable? I think that we're going to stick with our guidance. Ebrahim, We think full year will be 3.75%. I think that obviously we'll see a drop there. You're right. We saw a 9 basis point drop between 2nd and third. Again, it will be dependent on what happens on some of the loan pricing, but I wouldn't be surprised if that drop was somewhat higher than that on the net interest margin on the percentage. On the percentage. Okay, got it. Thanks for taking my questions. Sure. There are no additional questions at this time. I will turn it back over to management for closing remarks. Well, that will be the end of our call. We appreciate your support. Thanks for joining us. We are adjourned. Thank you. This concludes today's conference. You may now disconnect.