Greetings. Welcome to the Cullen/Frost Bankers, Inc. Second Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Director of Investor Relations, AB Mendez. Thank you. You may begin.
Thanks, Alex. Our conference call today will be led by Phil Green, Chairman and CEO, and Jerry Salinas, Group Executive Vice President and CFO. Before I turn the call over to Phil and Jerry, I need to take a moment to address the safe harbor provisions. Some of the remarks made today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 as amended. We intend such statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 as amended. Please see the last page of text in this morning's earnings release for additional information about the risk factors associated with these forward-looking statements. If needed, a copy of the release is available on our website or by calling the investor relations department at 210-220-5234. At this time, I'll turn the call over to Phil.
Thanks, AB. Good afternoon, everybody, and thanks for joining us today. I'll review the second quarter results for Cullen/Frost Bankers and our Chief Financial Officer, Jerry Salinas, will provide additional comments, and then we'll open it up to your questions. In the second quarter, Cullen/Frost earned $117.4 million or $1.81 a share compared with earnings of $116.4 million or $1.80 a share reported in the same quarter last year, and $97.4 million or $1.50 a share in the first quarter of this year. Our return on average assets and average common equity in the second quarter was 0.92% and 13.88% respectively.
These results in our overall growth show that our company is well-positioned to succeed in what's been an unusual and evolving environment. Our loan growth is strong. Average loans excluding PPP in the second quarter were $16.5 billion or 13.2% higher than the average loans of $14.6 billion in the second quarter of 2021. It was good to see our growth exceeded our typical goal of high single-digit increases. In the second quarter, we booked 28% more loan commitments than the same period last year. All segments were strong, with C&I up 25%, CRE up 37%, and consumer up 31%. In addition, we saw new loan opportunities continue to increase. They increased 10% from a year ago and increased an unannualized 9% on a linked quarter basis, so the overall flow is good.
Looking at our weighted 90-day pipeline, it was up 9% from a year ago. On a linked quarter basis, it's fairly flat, down 2% as increases in commercial and consumer segments offset a reduction in the near-term pipeline for commercial real estate. Average deposits in the second quarter were $44.7 billion, an increase of 16.9% compared with the second quarter of last year. As much as we focus on loan growth, we were very pleased with our growth in deposits because it's through deposits that we build long-term relationships as we offer attractive value propositions that customers can trust. Growth in our consumer business continues to be strong.
Our net addition of 7,242 consumer households in the second quarter was an all-time high for us and represented an 8% increase from the same period a year ago. Consumer loan growth was also strong. On a linked quarter annualized basis, average consumer loans grew by 20.6%, led by increases in consumer real estate. Our success here was driven by our HELOC, home equity, and home improvement products. Also, our pipeline for these loans continues at record levels. Now, regarding our expansion efforts, in Houston, we see the momentum continuing as newly opened branches mature. At the end of the second quarter, we stood at 109% of deposit goal, 122% of new household goal, and 185% of our loan goal.
Our Dallas expansion is admittedly in its very early innings. However, I'm encouraged that the preliminary results are similar to our Houston success with 165% of deposit goal, 220% of loan goal, and 235% of new household goal. We're making excellent progress towards launching our mortgage product, and we expect to begin a pilot program toward the end of this year. As you know, we're designing the entire process from start to finish to originate and service mortgage loans in keeping with the great Frost customer experience. Despite uncertainty about the broader economy, we have seen no signs of increasing loan delinquency. Our overall credit quality remains good. The June 30th total for delinquencies, excluding PPP, was $61.4 million or 37 basis points of total loans.
Total problem loans, which we define as risk grade ten and higher, totaled $429 million at the end of the second quarter, and that was down from $447 million at the end of the previous quarter. Once again, we did not report a credit loss expense in the second quarter, and net charge-offs for the second quarter were $2.8 million compared with $6.3 million in the first quarter. Annualized net charge-offs for the second quarter were 7 basis points of average loans and below our typical long-term level. Non-accrual loans were $35.1 million at the end of the second quarter, a decrease from $49 million at the end of the first quarter. I was glad to see the great work of our energy team rationalizing our concentration in our energy portfolio.
Energy loans represented 5.9% of loans at the end of the second quarter, and I'm happy to declare that we've reached mid-single digits. Finally, after more than two years of working with over 32,000 PPP borrowers, we've helped better than 98% of them with forgiveness. Our teams worked on the last few hundred PPP borrowers who haven't yet begun the process, and we're committed to helping every one of them get across the finish line. I couldn't be more proud of our team and the effort that they made in helping our customers in the business. You may remember that I've described our efforts in this area as historic and heroic.
While I hope we don't ever encounter another historic challenge like that anytime soon, as I mentioned earlier, we've got strategies and systems in place to allow us to succeed in all economic environments. I should point out that Frost employees do heroic deeds every day. I continue to hear from customers who get help from our bankers in sorting out their finances after a spouse passed away, or who got financial planning that enabled their kids to go to college, or who simply just had a pleasant interaction with a banker while they were having an otherwise lousy day. For us, those interactions are just doing our jobs in accordance with Frost's philosophy, but to our customers, those are heroic acts. I'd like to thank our people for being a force for good in people's everyday lives. Now I'll turn the call over to our Chief Financial Officer, Jerry Salinas, for some additional comments.
Thank you, Phil. Looking first at our net interest margin. Our net interest margin percentage for the second quarter was 2.56%, up 23 basis points from the 2.33% reported last quarter. Higher yields on both loans and balances held at the Fed had the largest positive impact on our net interest margin percentage. The increase was also positively impacted, to a lesser extent, by higher volumes of investment securities and loans and a lower relative percentage of earning assets invested in balances at the Fed as compared to the prior quarter. These positive impacts were partially offset by higher deposit costs. Looking at our investment portfolio.
The total investment portfolio averaged $18.1 billion during the second quarter, up $964 million from the first quarter average as we continued to deploy some of our excess liquidity during the quarter. We made investment purchases during the quarter of approximately $1.8 billion, which included about $1 billion in treasuries yielding about 3%, $400 million in agency MBS securities with a yield of about 4%, and about $400 million in municipal securities with a taxable equivalent yield of about 4.7%. Our current expectation is that we would invest an additional $3.2 billion of our excess liquidity into investment purchases through the remainder of the year. The taxable equivalent yield on the total investment portfolio was 2.87% in the second quarter, down 1 basis point from the first quarter.
The taxable portfolio, which averaged $10.3 billion, up $1.3 billion from the prior quarter, had a yield of 2.04%, up 14 basis points from the first quarter. Our tax-exempt municipal portfolio averaged about $7.8 billion during the second quarter, down about $363 million from the first quarter, and had a taxable yield of 4.04%, up 1 basis point from the prior quarter. At the end of the second quarter, 76% of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of the second quarter was 5.6 years, up from 5.2 years at the end of the first quarter, primarily related to the extended duration on lower coupon mortgage-backed securities. Looking at loans.
Average loans for the quarter were $16.7 billion, up $288 million from the first quarter, or 1.8%. Excluding the impact of PPP loans, the average growth from the prior quarter would have been $446 million or 2.8%. The taxable equivalent loan yield for the second quarter was 4.04%, up 30 basis points from the previous quarter. Looking at deposits on a linked-quarter basis, average deposits were up $1.8 billion or 4.1%. Public fund balances, which can be seasonal, had a negative effect on the linked quarter growth as those average balances were down $400 million. The linked quarter growth has come primarily from growth in average interest-bearing deposits, which were up $1.4 billion or 5.5%.
The cost of interest-bearing deposits for the quarter was 22 basis points, up 14 basis points from the first quarter. Regarding total non-interest expenses, we continue to expect total non-interest expense for the full year 2022 to increase at a percentage rate in the low double digits over 2021 reported levels. Increasing our minimum wage to $20 per hour in December of last year, combined with continued market salary pressures, our expansion efforts in Dallas and Houston, and expenses associated with the rollout of our announced residential mortgage product are the primary drivers of the growth in non-interest expenses. The effective tax rate for the second quarter was 14.8%, and our current expectation is our full year effective tax rate should be in the range of about 13%-14%, but that can be affected by discrete items during the year.
Regarding the estimates for full year 2022 earnings, our current projections include a 50 basis point Fed rate increase in September, followed by a 25 basis point increase in November. With those rate assumptions, we currently believe that the current mean of analyst estimates of $7.85 for 2022 is low. With that, I'll now turn the call back over to Phil for questions.
Okay, Jerry. Thanks so much. We'll open the call up for questions now.
Thank you. At this time, we will be conducting a question-and-answer session. 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'd 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. Our first question comes from the line of Steven Alexopoulos with JPMorgan. Please proceed with your question.
Hi, everybody.
Hey, Steven.
Hey, Steve.
I wanted to start. Given such a low loan-to-deposit ratio and plenty of liquidity to fund loan growth, what was the thought behind driving such strong growth in interest-bearing deposits in the quarter, or were these primarily just coming from new markets?
You know, Steven, it's as much as anything, it's just a cultural decision, and it's one that's based on experience, too. I mean, a big part of our value proposition really, I mean, it rests on three things. You know that everyone's significant for us. That we give a square deal, that we give you excellence at a fair price, and we're a safe, sound place to do business for employees and customers. As corny as it sounds, we're just giving our customers a square deal. You know, as we've seen interest rates move up, it just makes sense for us to recognize that if we're gonna have a value proposition that customers can trust, like I mentioned earlier in my comments.
We saw this happen, you know, back in 2017 when we saw the Fed raise rates 100 basis points back then. We were focused on the too-big-to-fail pricing because that's who we compete with more than anybody else. They hadn't moved at all and, you know, we just got behind. We started to see some movement in deposits at that time. You know, interestingly, that was kind of when we sort of cracked the code on more consistent core loan growth. It just wasn't the right time, number one, just for our balance sheet to show that. Another thing is I just really felt like we were losing trust, or the industry was losing trust when they just sat there and people read that interest rates are going up all the time. I'm not saying we couldn't have a lower rate, you know, and get away with it, if you will, but just that's not the way to do business. It's really just focusing on being fair with customers. You know, we just feel like the value of those deposits are, you know, continuing to increase, and certainly, the relationships are gonna make you money on a long-term basis. Jerry, any thoughts there on your pricing?
No, I think you've got it, Phil. I mean, that's exactly what we're doing. I think you're right. If we don't have to increase, and I'll put that in air quotes, but I think we certainly believe that it's the right thing from a culture standpoint to be increasing these deposits. As Phil said, in 2017, we were a little slow in raising rates. We kind of fell behind and certainly felt like by mid-July when the Fed had raised rates 100 basis points, that we were behind and actually were starting to see some of our deposits leaving the bank. As we all know, it's a lot more expensive to bring the new deposits on. We just felt like this time will be a little bit more ratable as we move along as rates increase.
Got it.
You know, Steven, the thing is too that, I mean, look, you can read the newspaper and we can believe we know what's happening because that's what everyone's saying. You know, we don't know where rates are going, and we don't know where inflation's headed and we, you know, or what the Fed's gonna do. Truth be told, they probably don't either. You know, if we just tend our business and do it the right way as we go along, we're not gonna have to go into any big dislocations like we did in 2017 when we, you know. It was pretty tough for our shareholders for us to have to choke all that down at one time. We just, you know, it's all about just being disciplined as we move along.
It's interesting because many peers are allowing deposits to run off this quarter, right? Their loan to depositor ratios are going up fairly materially. Here you're holding it pretty steady. If we follow that strategy forward, how should we think about deposit betas through this cycle versus where you were the last time rates were moving higher?
Steven, I think we're what we said last quarter, and I would say the same thing today. Going back to the last cycle, say, 2016 through 2018, our betas were about a 30% on interest-bearing and, say, 20% on total. That's sort of what we're assuming right now for full year, 2022. We've got that same sort of beta. We don't have that today. Given the increases, we're a little bit lighter than that. In our projections, that's what we've built in.
Got it. Okay. Thanks. Final question, and it's good to hear the new markets continue to trend well above goal, particularly for loans to new households in Dallas. Was the goal too low? I'm curious why you're coming in so far ahead of the goal. Thanks.
Yeah. Well, when we started the program and we talked to our board about it and talked to each other about it, I mean, our goal was based upon what we had achieved for the 40 locations that we had opened prior to starting that strategy. You know, we went back eight years, and we said, "Look, this is what we've done on average." We said, if we can do that, you know, that strategy was successful, and we said, "If we can do that will be successful. It'll result in a great return for our shareholders." We've set that up as sort of, hey, that's what we want to do.
I kind of wanted to keep it the same as we moved into Dallas, because I think it kind of gives a context for the performance in those markets. You know, could we use a different number? Yeah, we could, but we know what this one means. We know where it came from, and we're gonna go there. I will say, Steven, that honestly, I don't think there's any reason why Dallas shouldn't be better than Houston in terms of its success because, you know, as you know, 2/3 to 70% of this business and these proformas and of the business in the proformas is commercial business.
You know, Dallas has as good a commercial market that is really well diversified and full of middle market and small business with a little bit less energy concentration as Houston. As great as Houston is, I think the business demographics around Dallas could be even better.
Okay. I appreciate all the color. Thanks.
Thank you.
Our next question comes from the line of Michael Rose with Raymond James. Please proceed with your question.
Hey, good afternoon, and thanks for taking my questions. Just wanted to touch on expenses. I think if I'm doing the math right, if I annualize the first half of the year, it looks like you've grown at about 10%, so it would imply a deceleration in the back half of the year. You understand that you know a lot of expenses related to Dallas have been incurred and obviously wage inflation, stuff like that. But is that kind of the right way to think about it, is that the expense growth should kind of slow as we move to the back half of the year?
You know, I think that's right. I think a lot of the dollars that we put in are built into the base. You know, we moved our increases for most of the organization to May. Really, even in the second quarter, you don't have the full effect of all of our increases. You know, I think that for us, the fourth quarter is typically the highest, and it's unusually high, given, you know, we pay a lot of our incentives in that quarter. There's a lot of true up that's going on. Obviously, the volumes that we're seeing this year have been pretty strong. I would envision that, you know, as we go through the year, we're continuing to increase those incentives.
You know, I think that if I were you, I would stick with my full year guidance and then just kind of take the next two quarters. You know, really don't want to slice the cheese too thin. I'll just kind of stick to that full year guidance that says, just look at 2021 and grow that, you know, on a low double-digit growth. I think you'll kind of be kind of what we're projecting currently based on what we're seeing.
Very helpful. Then maybe just as a follow-up, you know, I think at the outset you mentioned that the pipelines were down about 2%, sequentially. It looks like the period-end ex-PPP growth slowed a little bit this quarter versus last quarter. Any rationale to that? Is it a function of paydowns? Is it customers, you know, being a little less active, a combination of both? I think you'd previously talked about kind of a high single-digit ex-PPP average growth for the year. Is that still kind of in the realm of expectations? Thanks.
Yeah. Well, you know, I don't want to read too much into the weighted pipeline number, you know, that was fairly flat down 2% because if you look at the C&I piece of that, and this is on a non-annualized basis, it was up 4% on a linked quarter basis, right? So, you know, if we multiply times four, it's 16%. So I don't know if you want to do that or not, but I mean, it's positive. The consumer weighted pipeline is up a non-annualized 62%. It was really the fact that it was commercial real estate that was down a non-annualized 13%. So, you know, we closed so many commitments. You know, our commitments were up 27% on a linked quarter basis, non-annualized.
You know, I mean, that's putting a lot through the pipeline. If it goes down, you know, somewhere, it's a little weaker, and really it's mainly in the commercial real estate. I'd like to believe it's more because we're reloading on that. As I look at the opportunities, you know, that I talk about, I think I talked about them. You know, they're up like 9%. That's unannualized on a linked quarter basis. We're up 10% on a year-over-year. That tells me that we're still on a gross basis seeing deals, and we're seeing growth in that. So we're gonna keep our eye on it. You know, the tone that I get, Michael, from our officers is that it's still good, and we're still seeing lots of opportunity.
You know, you're seeing some. I'd say, I wanna be careful the words I use. You know, you look at real estate, particularly some kinds of real estate with the higher rates and uncertainty in some areas, you can see still good deal flow, but some beginning to slow. I'd say, you know, obviously office for sure, maybe a little bit of industrial on the investor side. I think single family housing is, it's not slowing really much, but I think we expect it to. I think our borrowers expect it to, but they're also saying that's probably good because they can't really keep up with the pace today. You're still seeing really good growth in multifamily for really good economic reasons. You're seeing really good growth in retail.
You know, just for example, you're seeing some good growth in owner-occupied. The tone is still good. You know, the other thing I'll say is, you know, things are changing. The Fed's trying to slow things down. I think in Texas that we are, you know, we're a little different, in terms of the activity we're seeing in terms of in-migration with individuals and businesses. I'd like to believe we can be a little bit more, you know, a little bit better than the general economy. Anyway, I've rambled too much on that, but that's kind of what we're seeing.
All right. I appreciate all the color. Thanks.
Thanks.
Our next question comes from the line of Ebrahim Poonawala with Bank of America. Please proceed with your question.
Hey, good afternoon.
Ebrahim.
Hey, Ebrahim.
Hey. Just first question maybe around credit. Meaning obviously credit's not an issue, but just wanted to get a sense of how far down do you think the loan loss reserve can go before we begin provisioning? Just give us a perspective of where you think the steady-state reserve ratio looks like if we start seeing some signs of a slowdown or even a potential recession over the next year.
Well, what I'd say is that we had this last quarter and we have it again this quarter, and there'll be quite a bit of color in the 10-Q. Yeah, part of our assumption, you know, as we work in our CECL model is the probability of a recession. Included in our overlays is an assumption, you know, a 30% assumption that there might be a recession. We stress our portfolio accordingly. That's kind of what, you know, we're at a 144 reserve coverage right now, which I think is pretty strong. When you look at that discussion in the 10-Q, I think you'll see kind of what we're alluding to.
I mean, as Phil mentioned, there's a lot of nuances going on in the economy right now, a lot of uncertainty. Really what's happening in our case is giving some sort of probability to a recession. Where can it go? You know, I guess at CECL, when CECL was adopted, we were probably at 1%. You know, I don't foresee that we'd, you know, bring our reserve coverage, all things being equal and credit quality being great. I don't see the reserve ending at 1%. I think for now, you know, we certainly feel extremely comfortable with where we're at from a reserve level. You know, should the economy, you know, all of a sudden we get through this and feel like things are continuing to improve, I could see that reserve coverage continuing to decrease.
Got it. I guess just a separate question, Jerry. I wanted to, one, confirm the $3.2 billion number for securities was a net number as opposed to gross. Just talk to us, because the 10-year yield is now at 2.69%. Who knows how much further the Fed has to go. Talk to us on the other side of this. If we do get into a period of Fed rate cuts next year, how are you thinking about protecting the margin?
Yeah. What I'll say for now is that and what we're looking at, and it's something that we visit about all the time, right? Right now we're staying pretty consistent. Our purchases, we've said, would be 70% Treasuries and 15% municipals and MBS securities. We've been pretty consistent with that. We've moved around a little bit. We might accelerate things. It's something that we're continually talking about. What we're doing is really buying in the 3- 5 year. That's really where we're looking. It's where we saw the most value and where we've made the bulk of our purchases. We'll continue to have those conversations and we'll look at risk and reward and see what makes sense.
If we think that rates might go down and we want to protect some of that, we could do that. Obviously, we still have plenty of liquidity. I think this morning we were close to $13 billion still, even after all the purchases that we've made. It's something that we continually visit with and, you know, I think that we've been pretty transparent and we're continuing to look at derivative products. We haven't done anything yet. We'll look and see if something makes sense for us. We've done it in the past, but at this point, we haven't put our toe in the water and, you know, we'll just continue to do that.
I will say that, you know, given the conversation earlier, you know, on deposit rates, you know, our deposit rates are much higher than most, right? In an environment where you see rates going down, we've proven, you know, that we can bring rates down as well, right? We've been through a long rate cycle. You followed our performance through a pretty low, long period of zero interest rates. We've proven we can take our rates down and, you know, that, you know, given our value proposition to our customers, you know, we really haven't lost deposits during that sort of time period. We do have that as well, which, you know, some of our peers would not have if they're not raising rates.
That's fair. Thank you.
Mm-hmm.
Thank you.
Our next question comes from the line of Brady Gailey with KBW. Please proceed with your question.
Thank you. Good afternoon.
Hey, Brady.
If you look at cash to average earning assets, it finished the quarter at about 27%. You know, you put another $3.2 billion of cash into bonds, it feels like by the end of the year it could be closer to 20% or so. You know, longer term, where would you like to run cash to assets? You know, does that get down to 5%, you know, or is that too low? You know, longer term, what level of cash would you like to have on the balance sheet?
I'm looking at Phil and I'm kind of laughing because every time our balances at the Fed, you know, decrease from $13 billion - $12.5 billion or something, he's calling me and asking me what's going on. You know, in all seriousness, you know, you've followed us for a while. We've tended to be more conservative on our levels of cash, but we've been all over the board and obviously we feel very comfortable and confident in alternative sources that we would have available to us. I think that, you know, off the cuff, if you said 5% feels kind of low to us right now. But you know, I would say something in that 5%-10% is where we think about and, you know, just see where we go from there.
Okay. I know last quarter we talked about spread income ex -PPP potentially growing on a high teens basis. I mean, after you look at the increase in margin and spread income that you guys enjoyed in the second quarter, it feels like that's too low. You know, it feels like they'll easily be 20% +. Any refresh on how you're thinking about spread income year-over-year?
Yeah, what I would say is, yeah, you know, the environment today is, you know, different than where we were, you know, a quarter ago. I think our assumption at that point, you know, the rates that we have in there now, given the rate hikes that we've seen in June and July, our assumption, I think rates end of the year higher 125 basis points. Yeah, certainly given that sort of an environment, yeah, a mid-teen sort of growth in that in net interest income would be too low.
Yeah. Just finally on deposit balances. You know, we've seen a lot of deposits shrink this quarter for some of your peers, but y'all saw some nice growth. I know you increased deposit rates, but you know, do you think that you'll see any sort of deposit outflows the next year or so, or are you guys, you know, really hoping to keep growing the core deposit base?
I hope we keep growing. I mean, that's really what we've been focused on. You know, I was just thinking about the question that Jerry answered and got asked about, you know, interest rates and protection against interest rates. I mean, you know, I think we've done a pretty decent job over time of coming up with ways to manage that. But we really don't want to be defined by that. You know, what we're more and more defining ourselves as is a company that is focused on growth. If we're accessing great markets and we are, we're making the investments to grow in those markets and we get any kind of rates at all, you know, I mean, Fed could cut rates, but maybe they cut them to zero, maybe not.
You know, we think that our job is pretty clear. It's just to continue to grow the business. That means growing deposits, which is really where the value of any banking franchise is, growing asset classes. We've got the opportunity to do that. With products we've got, we've got the new mortgage product that we're going to be bringing out at the end of the year. You know, direction of rates are important, but as Jerry said, we've got some flexibility because we have been diligent in moving rates along with movements up. But I just tend to think that the more important thing for us to be focused on is can we continue to show this organic growth by accessing these markets and proving that we can take share.
Yep, that makes sense. Thanks, guys.
Thank you.
Thank you.
Our next question comes from the line of Dave Rochester with Compass Point. Please proceed with your question.
Hey, good afternoon, guys.
Hello.
Hey, Dave.
Just wanted to go back on to the NII guide. Are you guys thinking high- teens now or possibly low 20s in terms of growth year-over-year?
Yeah, it would definitely be in the 22. I'd guide you more to the 20s than the low, the high teens.
Low 20s. Okay, perfect. Do you happen to have the spot rate for interest-bearing deposit costs at quarter end?
You know, I don't have it on me right now. I think AB's on, so we'll have him reach out to you, Dave, with that number.
Okay.
I don't have it on me.
Yeah.
All right.
That's totally fine. I appreciate that. Just a clarifying point, the $3.2 billion in securities purchase that you have for the rest of the year, that's gross purchases, right? Growth would be, I don't know, somewhere $2 billion-$2.5 billion. If you happen to have the maturities for the back half, that'd be great.
We probably got another $700 million that would
Okay.
That would be flowing back to us. That number's gross. Yeah, you're somewhere in the 2.5 range.
Perfect.
Yeah.
I guess for deposit trends, those were very solid this quarter. It was very impressive. Was just curious if you had the component of that growth that came from Houston and Dallas versus the rest of the franchise. I know you'd mentioned expecting, you know, high single digit deposit growth for 2022. Are you still thinking in that range? Or do you think that maybe you could do a little bit better just given the better first half results?
You know, I'm still there. You know, I think Phil, you heard Phil talk. I think we're optimistic that it can be better given, you know, continued new growth. I think that as rates go up, there'll be more and more pressure obviously on us, especially on some of those larger deposit balances. So, yeah, I mean, that's what we're projecting. If it can be higher than that, we'll all definitely be happy. But I do think it's riskier the higher rates go, especially on those larger accounts. Dave, what was your other question?
With regard to the expansion, I think.
Oh, yeah, on the expansion. One thing that I'll give you year-over-year, I'll say they contributed 1% of the growth in average deposits.
And about-
Okay.
2% on loans.
2% on loans. Yeah, I'll say that as well. They are starting to move the needle, especially on that loan side.
Great. Awesome. Maybe just one last one on credit.
Sure.
Given you guys aren't seeing any signs of anything, it kind of feels like a zero provision is still good, at least through the end of this year. Is that kind of how you're thinking about it?
You know, everything that I'm seeing. I'll let Phil talk too, but everything that I'm seeing and hearing and sitting in our CECL meetings, you know, that's really where I'm at right now. Obviously.
Got it.
It's something that we can't project that far out. We're talking to our people in the credit area all the time. At this point, I'm not hearing anything that gives me pause.
Yeah. I mean, CECL is CECL, but, you know, it's hard to envision a need right now based on everything we know.
Yeah, that makes sense. All right, guys. Thanks. Appreciate it.
Thank you.
Thank you.
Our next question is a follow-up from Ebrahim Poonawala with Bank of America. Please proceed with your question.
Yes, thanks. Just one follow-up question, Phil. I guess, outside of things that you are doing and to strengthen the market, how are you seeing competitors behave, one, in terms of just the risk appetite? Are you seeing competitors loosen the underwriting box? And then you mentioned you obviously go head-to-head with the largest banks in your markets. Have you seen the bigger banks pull back a little bit given some of the capital constraints they're facing?
Ebrahim, you know, in talking with our people in preparation for the call, there may be some marginal improvement in structured competition, not much. I did hear one of our teams mention how they had won a deal on our traditional underwriting, which, you know, they seem surprised to do. I mean, we do that all the time, but I mean, this particular instance, it seemed like they were pleased to see that. So I'd say it's beginning to be a little bit more structurally sound, but that's not pervasive. You know, I probably hear as many stories or more stories of where you're seeing competition continue to increase. Maybe beginning to see a little bit more competition on the C&I side as opposed to just the commercial real estate side.
It's still competitive. Things are slowing a bit, I think, in the, you know, the real estate side. You know, I remember some conversations we had with builders who, you know, in some of these really hot markets are expecting to see a 10% price change or, you know, reduction really by the end of the year in certain residential markets. The point they made is that's fine. You know, it may be a slowing that will help us catch our breath. You know, we've had, I think, times to build go from 120- 210 days or something like that. They've also got such wide margins, you know, historically high margins. They've got plenty of room to fade that. I don't think it would be, you know, unwelcome in some ways to see a little bit of moderation in that market. We've heard that as well.
Got it. Thanks for the color. Thank you.
Thank you.
Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please proceed with your question.
Hey, thanks. Good afternoon.
Hey, Jon.
Hey, Jon.
Hey. Jerry, can you give us a little bit of help on the Trust and Investment Management and deposit service charges? What you're thinking there. They're a little better than I thought it would be, but just give us some thinking on what you see there for an outlook.
Sure. I guess, yeah, for the quarter on the Trust and Investment Management fees, I was pleasantly surprised that, you know, we ended up where we did. What we saw was that we had a good quarter in oil and gas fees. They were up about $1.8 million quarter-over-quarter, compared to second quarter last year. They really were able to offset a decrease that we saw in investment fees, which were down $1 million. I think our estate fee, excuse me. Yeah, about $1 million. Estate fee is down another $1 million.
I would expect that, you know, given all the volatility and what's going on in the markets, that we'll see some pressure on that investment line item. We have continued to grow our managed accounts in that business. I think we're up 5% in numbers of accounts compared to the second quarter last year. I know there's a lot of focus on trying to grow the business, but we will see. We are feeling some pressure given the volatility in the market. On deposit service charges, you know, it's interesting. You know, we've made, in my opinion, some changes that have really been, I think made a lot of sense for us and for our customers on overdraft fees, when we instituted overdraft grace.
Here recently in June, what we did was previously, to get that free $100 overdraft, you had to have a direct deposit of at least $500 a month. After our retail team did some work, we felt like that was punitive to some of our customers, given the fact that not every employer pays via direct deposit. We lifted that in June, and we're saying that's probably going to cost us $2 million. We haven't seen the impact of that, you know, this additional change that we made. We've also eliminated our NSF fees, which were about $1.5 million, if I remember correctly. That line item is going to see some pressure going forward. Really a lot of our growth, as Phil's talked about the number of new accounts that we've been able to bring on, you know, where we expected some of those some pressure on that line item, it's really been offset by increases of numbers of transactions just given the increases in the number of customers.
Good. That kind of segues to my next question. Just the 7,200 in the new households all-time high. Is that how are you doing in your legacy markets on that? You know, how much of that is driven by the new markets?
Jon, one thing I guess I'd offer up to you is if you look at just account openings from traditional branches, you know, which you can include everything, which is mostly legacy, right? Account growth year-over-year from traditional branches was 9.2%. You know? I'd say we're doing pretty good. I think it all revolves around, you know, a lot of things that are working for us. I think, you know, our value proposition is solid. We give people a square deal and great service. I mean, you don't always have to be looking over your shoulder. Oh, gee, I wonder what my bank's paying me, or are they paying me anything on this deposit to me? You know, we put in a lot of work every week.
You know, Jerry's looking at the market. We're talking to our lines of business. We're trying to figure out what's fair. You know, it's just a lot of things working for us. You know, our branch experience, you know, is unparalleled in terms of what we do. Not just the way people are treated and dealt with, but you know, just the physical facilities are beautiful. They just create a great experience. You know, the other thing, I talked about this last time, I really think it was interesting what happened with this location that we opened up in the west part of San Antonio. You know, that's a legacy market if there ever was one. We've been here 154 years.
You know, the growth we've seen in that particular location was literally multiples of what we did in our best Houston location, you know, in the first six months, let's say, of its life, you know. It's already at $24 million in deposits in, you know, 6-7 months. I mean, that's just the legacy market where you open a location. There's something going on that I hope we can continue to leverage. I feel good about the way the whole business is operating and how we're moving forward, just running a business.
Okay. This is my last earnings call of the quarter, and I think I might be last in the queue, so maybe I'll ask this one on the quarter. You used the terms unusual and evolving in your-
Yeah
... opening comments. You know, I've asked this on other calls, but there seems to be a disconnect between credit quality that we're seeing from the banks and then what we see and read about every day.
Mm-hmm
What's your take on where we're evolving to? Are you worried about it? Is Texas different? It sounds like you're not seeing erosion in your loan book, but just any big picture thoughts on, you know, whether the market's right or you're right or where are we going?
I think it's a great question, Jon, and I'll tell you. I tell you a disconnect that we are sort of seeing is, you know, when we talk to customers on Main Street, I mean, there's not a lot of talk about slowing. You know, there's not a lot of talk about recession. There's talk about, "Where am I gonna get the next person to hire? What on earth am I gonna have to pay them? And what's the next bubble in the supply chain, and how can I get the, you know, capacity to warehouse what I can get so that I'm ready to move forward when I can get the other parts of the, you know, the supply chain that I need?" I mean, I think Main Street is.
Those are the things that they are dealing with, and how they feel about their business is different than when they go home at night and sit on the couch and watch the news and hear discussions about the economy, at least in the markets that we're operating in. Now there are some that admittedly are slowing. If you're dependent on developing a deal that's two years away from being finished and you don't know what rates are gonna be or what you know the economy is gonna be. You know, there's some slow there. There's some slowing. More circumspection there, but the economy is strong here and you know, I'm not too worried about its direction right now. It is unusual and evolving 'cause the Fed's increasing rates 75 basis points at a time, and we'll see what impact that has over time.
Yep. Okay. All right. Thanks, guys. I appreciate it.
Okay, Jon. Thank you.
Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call back over to Phil Green for closing remarks.
Okay. Thanks everybody for your participation today, and we'll be adjourned.
Thank you. This concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation.