Cullen/Frost Bankers, Inc. Q4 FY2022 Earnings Call

Greetings, ladies and gentlemen, and welcome to the Cullen/Frost Bankers Inc. Fourth Quarter Earnings Conference Call. At this time, all participants are on a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. A.B. Mendez, Senior Vice President and Director of Investor Relations. Thank you. Please go ahead.

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

Thanks, A.B., and good afternoon, everybody. Thanks for joining us. Today, I'll review the fourth quarter results for Cullen/Frost and our Chief Financial Officer, Jerry Salinas, will provide additional comments before we open it up for your questions. Well, in the fourth quarter, Cullen/Frost earned $189.5 million or $2.91 a share compared with earnings of $99.4 million or $1.54 a share reported in the same quarter of last year. That represented an increase of 90%. You don't get to say that very often. Our return on average assets and average common equity in the fourth quarter were 1.44% and 27.16%, respectively, that compares with 0.81% and 9.26% for the same period last year. These are very strong results and along with our strategy of sustainable organic growth, they position us well heading into 2023. Now taking a closer look at the quarter, loan growth was solid and above our long-term expectation of high single-digit annual growth, average loans, excluding PPP in the fourth quarter were just over $17 billion compared with average loans of $15.4 billion in the fourth quarter of 2021, an increase of 10.6%. For the full year 2022 average total loans, excluding PPP were up 11.3%. Our growth in loan balances for the fourth quarter versus the third quarter represented approximately two-thirds C&I growth and one-third consumer. CRE balances were basically flat. We booked $2.2 billion in new commercial commitments in the fourth quarter and this is up by a non-annualized 9% from the third quarter and demonstrated our staff's success from our calling and prospecting efforts earlier in the year. That said, I believe it's clear that the Fed's program of interest rate increases is having an impact on economic activity, especially in the commercial real estate sector as more borrowers evaluate the impact of the current environment on their projects. For example, I think it's interesting to look at our weighted 90-day pipeline at year-end. It's down 14% from the previous quarter. However, the prospect component of that pipeline is up 19%, while the customer segment of that pipeline is down 32%. So as we continue to see potential deals come in from prospects as our strong available liquidity and our consistent underwriting shine through, our current customer base reflects the overall softening of the commercial real estate market. Average deposits in the fourth quarter were $44.8 billion, an increase of more than 9% compared with the $41 billion in the fourth quarter of last year. And for the full year 2022, average total deposits were $44.6 billion, up 15.9% over 2021, and Jerry will talk more about recent deposit trends in his comments. We continue to see great growth in our consumer banking business. Average consumer loans were $2.3 billion in the fourth quarter, up by 22.6% over the fourth quarter last year. This is primarily from our consumer real estate products of HELOC, home equity and home improvement. The outlook for these loans continues to be good and credit strong. In fact, the consumer loan growth in 2022 was 283% of our previous best year. The sharp increase in mortgage rates created the perfect environment for our secured consumer real estate loans, such as home improvement, home equity, and HELOC. Credit quality is outstanding in this portfolio, and our average credit score is 754. I'm also pleased that we recently began funding loans in our mortgage program. Our team has created a new mortgage loan process from the ground up to originate and service mortgage loans in keeping with the Frost philosophy, and we've created a great digital and mobile experience around it. Once we complete this pilot program, we'll roll out mortgage lending to customers on a limited basis with the goal of opening it up to everyone later this year. Growth in new households continues. For the year, we added almost 26,000 new households, about 6.6% higher than the number of customers we had at the end of last year. While we believe this represents best-in-class organic growth, it was down slightly from last year's all-time high of almost 27,000 customers and that's related to the lower net number of branches that we opened in 2021. Given the increase in openings since then, we expect to achieve an all-time high number of new customers in 2023. In addition, our Frost Wealth Advisors have seen a record amount of new business. Regarding our branch expansion efforts, the original 25 Houston expansion branches have surpassed $1 billion of deposits, and they continue to exceed pro formas. Loans totaled $727 million at year-end, including the additional branches we've opened in what we call Houston Expansion 2.0. At year-end, we stood at 114% of our household goal, 170% of our loan goal, and 104% of our deposit goals, and we'll continue to add new locations in strong areas around the region. In Dallas, we are very encouraged by the early results of the new sites, which are doing even better than what Houston had achieved in the same time frame, 229% of the new household goal, 275% of loan goal, and 372% of our deposit goal. We added new financial centers at a rapid pace in the fourth quarter and soon we'll be up to 13 locations under the program. Overall, credit quality remains good. Problem loans, which we define as risk grade 10 and higher, totaled $322 million at the end of the fourth quarter compared with $387 million at the end of the previous quarter and $691 million a year ago. We reported a $3 million credit loss expense in the fourth quarter. Net charge-offs for the fourth quarter were $3.8 million compared with $2.8 million in the fourth quarter of 2021. Annualized net charge-offs for the fourth quarter were nine basis points of period-end loans. Non-accrual loans were $37.8 million at the end of the fourth quarter, an increase from the $29.9 million at the end of the third, which was the result of two small credits. With regard to the current economic environment, there are potential risks on the horizon that could result from higher interest rates, continuing high inflation, and pockets of supply chain disruption. Overall, investor commercial real estate loan metrics remain stable and indicative of above-average project operating performance across all portfolio asset types. While acceptable debt service coverage ratios are still reported for office, multifamily, office warehouse, and retail asset types, a year-over-year decline is observed at fourth quarter '22, primarily due to the impact of rising interest rates, higher operating expenses for multifamily and the inclusion of now completed construction projects that remain in lease-up. Regarding specifically the office portfolio, our optimism around this asset class stems from, one, the character and experience of the sponsors; two, the predominantly Class A nature of most portfolio office projects; three, tenant quality and lease duration; and four, strong existing office portfolio metrics, including low loan-to-value at an average number of 56% and weighted average debt service coverage ratio of 1.59 times for the current stabilized office assets. Office buildings outstanding at year-end were $1.8 billion, and of this amount, half was owner-occupied and half represented investor projects. Our energy loan portfolio concentrations remain in the single digits at 5.4% of loans excluding PPP at the end of the fourth quarter. Our energy borrowers as a whole have advanced rates and leverage ratios that are the lowest we've experienced in many years, as borrowers have continued a program of deleveraging and returning more to shareholders. The current oil and gas price environment continues to be favorable for them, and our borrowers generally have a bullish outlook for prices for the near and intermediate term. Frost will continue to offer energy lending with prudent structures including appropriate advance rates and hedging structures to minimize risk. We've done a great job closing out the PPP forgiveness process. So I want to say I remain proud of our team for working so hard and the relationships that we've built and strengthened with customers when they needed help the most. We say this often that we've got a lot going on for us. We're expanding into new areas with beautiful new financial centers. We're enhancing our consumer offerings with all new mortgage loans. We're strengthening our communities and growing our brand awareness with exciting new sponsorship opportunities that will pay dividends for many years. And best of all, we are continuing with our strategy of sustainable organic growth. It's kept our company strong and positioned us well for whatever the future holds. Day in and day out, our employees do all this while adhering to our core values of integrity, caring, and excellence and by providing industry-leading customer service. At Frost, we truly work hard to be 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 fourth quarter was 3.31%, up 30 basis points from the 3.01% reported last quarter. Higher yields on both balances held at the Fed and loans had the largest positive impact on our net interest margin percentage. The increase was also positively impacted to a much lesser extent by a higher yield on investment securities and by higher volumes of both investment securities and loans. These positive impacts were partially offset by higher costs on deposits and both higher volumes and cost of repurchase agreements. Looking at our investment portfolio. The total investment portfolio averaged $20.1 billion during the fourth quarter, up $727 million from the third quarter average as we continue to deploy some of our excess liquidity during the quarter. We made investment purchases during the quarter of approximately $1.2 billion, which included $735 million in Agency MBS securities with a yield of 5.43% and $470 million in municipal securities with a taxable equivalent yield of about 5.38%. For 2023, our current expectation is that we would invest an additional $4 billion of our excess liquidity into investment purchases during the year or about $2.2 billion net of projected inflows during the year. The taxable equivalent yield on the total investment portfolio in the fourth quarter was 3.09% up 15 basis points from the third quarter. The taxable portfolio, which averaged $12 billion, was up approximately $534 million from the prior quarter and had a yield of 2.41% up 21 basis points from the prior quarter, impacted by the higher yields on recently purchased Agency MBS securities. Our tax-exempt municipal portfolio averaged about $8.1 billion during the fourth quarter, up about $193 million from the third quarter and had a taxable equivalent yield of 4.17%, up eight basis points from the prior quarter. At the end of the fourth quarter, approximately 76% of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of the fourth quarter was 5.8 years, up from 5.3 years at the end of the third quarter impacted by the extended duration of our Agency MBS securities in this higher rate environment. Looking at deposits. On a linked-quarter basis, average deposits were down $1 billion or 2.3% with about half of the decrease coming from demand deposits and half coming from interest-bearing deposits. Customer repos for the fourth quarter averaged $3.6 billion, up $1.6 billion from the $2 billion average in the third quarter. We have seen some deposit flows into our repo product during the quarter. Total combined deposits and customer repos in the fourth quarter averaged $48.3 billion, up $571 million from the prior quarter. The cost of interest-bearing deposits for the quarter was 1.16%, up 54 basis points from the third quarter. Regarding credit loss expense, during the fourth quarter, we booked a credit loss expense of $3 million, which represents the first quarter we booked a credit loss expense this year. The credit loss expense was driven by growth in unfunded commitments. Unfunded commitments grew $698 million during the quarter, ending at $12.5 billion at the end of the year. Looking at non-interest income on a linked-quarter basis. Trust and investment management fees were up $1.1 billion or 3% as increases in estate fees of $1.6 million, investment fees of $860,000 and real estate fees of $529,000 were partly offset by a decrease in oil and gas fees, down $2 million due to lower commodity prices. Service charges on deposit accounts were down $639,000 or 2.8% primarily as a result of lower commercial service charges, down $1.5 million, largely resulting from a higher earnings credit rate on annualized balances. Partially offsetting this decrease was a $756,000 increase in combined consumer and commercial overdraft charges. Insurance commissions and fees were down $1.5 million or 11.2% from the third quarter as a result of lower life insurance commissions, which were down $706,000 and also impacted by our normal business cycle. Other income was up $7.1 million, primarily due to a $5.1 million distribution received from an SBIC investment. Regarding total non-interest expenses, total non-interest expense was up $23.4 million or 9.1% compared to the third quarter. The primary drivers were salaries and wages up $9.5 million or 7.5% and other expenses up $13.3 million or 29.2% compared to the third quarter. The increase in salaries and wages was impacted by a $6.4 million increase in stock compensation as those stock awards are made in October of every year and some by their nature are expensed immediately. Additionally, accrued incentives were up $1 million from the prior quarter. The increase in other non-interest expense of $13.3 million was impacted by higher fraud-related losses up $4.7 million, $4 million related to a licensing negotiation and marketing and advertising up $2.7 million, which is typically higher in the fourth quarter. Looking at our projection of full year 2023 total noninterest expenses, we expect total non-interest expense for the full year 2023 to increase at a percentage rate in the mid-teens over our 2022 reported level. Our continued expansion in Houston and Dallas and the introduction of our mortgage product accounts for about 2.5% of that projected growth. Also impacting the projected growth rate is significant investments that we will be making in information technology for both people and infrastructure. Investments in marketing in both advertising and people as we focus on expanding the communication of our value proposition and expense growth is also impacted by costs associated with continued support of our staff. The effective tax rate for the fourth quarter was 13% or about 13.8%, excluding discrete items. Our current expectation is that our full year effective tax rate for 2023 should be in the range of about 14.5% to 15.5%, but that can be affected by discrete items during the year. Regarding the estimates for full year 2023 earnings, our current projections include a 25 basis point Fed rate increase in February, followed by a 25 basis point decrease in July. Given those rate assumptions and the 2023 non-interest expense growth of mid-teens, we currently believe that the current mean of analyst estimates of $10.89 is reasonable. With that, I'll now turn the call back over to Phil for questions.

Jerry, we'll open it up for questions now.

Thank you. The floor is now open for questions. The first question today is coming from Ebrahim Poonawala of Bank of America. Please go ahead.

Hey, good afternoon.

Hey, Ebrahim.

I wanted to follow up on your comments about commercial real estate, Phil. You mentioned that rate hikes are cooling off the pipeline, but also discussed the strength of your book. How do you see this developing if interest rates remain unchanged? Additionally, do you expect credit issues in the sector across your markets to emerge over the next year, particularly in multifamily and office spaces? How might this affect your customers' cash flows and potentially pressure rent rolls? I would appreciate your insights on the market risks and their implications for Frost. Thank you.

Thanks, Ebrahim. We're experiencing some tightening in debt service coverage ratios. However, we don't anticipate multifamily properties to face major issues. Our credit team feels optimistic about this. Currently, our loan-to-value ratio for offices is around 56%, and for multifamily, it's 58%. About half of our deals will finalize in 2023 and the other half in 2024, so I don’t believe there’s significant pressure on our portfolio right now. Reports suggest that rents are stable for the time being, which is beneficial, although costs are rising. Generally, challenges seem to be arising in lower-class office buildings where tenant retention is a concern. I want to clarify that while things are tightening, I don't want to give the impression that we have serious problems. In our office portfolio, we identified approximately $44 million in potentially problematic credits within a portfolio exceeding $1 billion, indicating that issues are limited and rather specific. So, it's not all negative, but things aren't as strong as they once were. Additionally, property tax increases are a major issue here, and combined with rising interest rates and operating costs in multifamily, this could create some pressure, though it’s manageable at this point. Our main concern lies with the office sector, as the future direction over the next couple of years remains uncertain for everyone in the industry, including us. I apologize for not providing clearer insights, but that summarizes our current observations, Ebrahim.

No. That's helpful color. And then one, Jerry, you mentioned about the earnings outlook for the year. Give us a sense of what you expect in terms of net interest income growth for the year? And how you see that trending, do you expect NII continues to grow given just what you expect in terms of loan and deposit growth or do you see some trajectory where NII declines quarterly at some point in '23?

Yes, sure. I think that I said last quarter, we got a little bit into 2023, and we were talking about the NIM percentage. I think that we're currently, I don't expect that the fourth quarter was our peak. I still think that, obviously, we had a nice increase between the third and fourth quarter, 30 basis points, I don't see that sort of a growth coming into the first quarter. But certainly, we do expect some improvement. And in my mind, I think given our assumptions that we'll see a rate increase in February and then a decrease in July. I would expect that our NIM is probably given our assumptions, probably peaks in the third quarter. As far as we're not going to give specific percentage growth on net interest income. But it's year-over-year, I think we grew between '21 and '22, say, 30%. I don't think we'll be there based on kind of what I'm seeing. But I think we're going to have strong growth this year compared to last.

Got it. Thank you.

Sure.

Thank you. The next question is coming from Steven Alexopoulos of JPMorgan. Please go ahead.

Hi everybody.

Hi, Steven.

I wanted to start on the deposit side. So the outflows of non-interest-bearing were fairly sharp a bit more than we were looking for. And I know you mentioned repos, but could you give a little bit more color on what you saw in the quarter, what you might still see at risk moving out of non-interest bearing. And where do you see that mix stabilizing?

Yes, the non-interest-bearing. I think what I said on the non-interest-bearing is that's really been kind of the area that I've been concerned about that we had some exposure there. And I continue to think that's really the area where we have the most exposure. With rates where they're at today, and we all know there's some pretty nice rates out there. I think that it really is compelling a lot of treasurers and CFOs to make sure that they're managing their liquidity well and looking for alternatives. I think that certainly, we can be competitive in a lot of situations, but there's probably going to be cases where we're going to see some deposit outflow, especially on some of the larger balances, especially, I think that's where most of the risk is. I don't think it's anywhere unique to anybody. I think that from a deposit rate standpoint, our rates, I think, are competitive with banks. I think the challenge becomes trying to compete with some alternative sources. But I do expect that the commercial side on the commercial DDA is probably the most at risk in my mind.

Got it. Okay. And then, Jerry, in terms of the loan-to-deposit ratio moved up slightly through 2022. I hear what you're saying I'm putting liquidity to work in the securities book. But should we expect a similar trend through 2023, just basically funding loan growth with deposit growth?

I think that for 2023, I think probably the bigger unknown in my mind, is more what happens on the deposit side than what happens on the loan side. I think Phil given some good color of what we're seeing in loans. I think without knowing exactly what happens in the economy, there might be a little uncertainty there. But I think we feel pretty confident, I think it's that deposit side. So you could because we've always said the loan-to-deposit ratio from our standpoint is really a results in fact, right, because we're really out to grow both deposits from a relationship standpoint and loans. So I think that given that I don't project that we'll have the sort of increase in deposits that we've had the last couple of years, I expect that to be much more muted in 2023. You may get some improvement in that ratio just simply because the denominator decreases.

Got it. Okay. And then, finally, on the expense side, so you reported mid-teens expense growth in 2022, basically in line with what you had guided for the year, now guiding mid-teens for 2023, more investments that you'll have to make. When you guys take a longer-term view, do you think for a period of time, beyond 2023, we stay in this mid-teens range or do you see this as sort of a two-year scenario, and then we get back to something more normal after that? Thanks.

It's a good question. This year is quite unique for us. I anticipate that our expense growth rate will decrease in 2024. As Jerry highlighted, we are making significant IT investments and marketing efforts. Over the past couple of years, I've been transparent with investors about our planned investments in areas like physical distribution, which I'm confident will benefit our shareholders moving forward. We're also investing in our workforce, as you saw from the salary figures, which are significant but necessary to remain competitive in the market. Our turnover rates indicate we're finding the right compensation balance. In 2021, our turnover was around 23%, which improved to 14% in 2022. We've made considerable enhancements in our benefits to offer top-notch healthcare and retirement options. We also committed to increasing our marketing investment, an area we hadn't focused on enough, but we hired talented individuals last year and will continue investing in media as well. I believe our recent account growth demonstrates our success despite previous marketing constraints, and lifting those limitations will be beneficial for us moving forward. Additionally, we're heavily investing in IT and cybersecurity, which Jerry mentioned as a significant factor. This year, our planning reflects a generational investment in IT, emphasizing three primary areas: enhancing customer experiences through digital and mobile improvements, modernization of core systems including a new loan system, and bolstering information security and fraud mitigation efforts. We aim for a 24% increase in IT expenses this year, a necessary investment to maintain our competitive edge. I believe our strength in organic growth stems from providing a customer-centric service aided by strong technology. While these investments are vital now, we won't need to maintain the same level of spending in 2024 and beyond, which I expect will lead to a decrease in our expense growth rate.

Got it. Thanks for all that color. Really appreciate it.

You're welcome.

Thank you. The next question is coming from Dave Rochester of Compass Point. Please go ahead.

Hey, good afternoon guys. Just a quick one on the NII guide. I was curious what the impact is you see for the rate hike in February and then the rate cut in July, what the NIM sensitivity is for those moves that you're baking in? And it sounded like you're assuming a positive, but maybe more muted deposit growth trend for the year. I was just wondering if you could give an update on the total deposit beta assumption, you're not baking into that? Thanks.

I’ll start with the deposit betas. We finished the year pretty much where we expected, with interest-bearing deposits around 30% and total deposits between 20% and 25%. For the fourth quarter, we were slightly higher. I mentioned in the third quarter that we might need to be a bit more aggressive, but we ended up right where we anticipated. For this year, we're planning for a similar increase to what we saw in the first quarter in February. We're expecting slightly higher betas, likely in the range of 33% to 35%, compared to our earlier estimate of around 30%. We assume we'll address this in July, but we need to monitor market conditions to see how it unfolds. Those are our current assumptions.

The sensitivity to the right moves that you guys are looking at, the hike in February, and then the cut in July, how much of that we think will move the NIM?

Yes. From a NIM standpoint, I don't think it's going to have a significant impact on the percentage itself. Like I said, we want to be careful. We don't really give all that sort of level detailed guidance. But what I have said is, I do think the percentage will peak in the third quarter just right before our projected decrease. And I think that we're feeling good about where we're at. A lot of it will be dependent on what happens on those deposits. As I've said, yes, do I feel like it's a little bit more muted in 2023 than it was in 2022? Yes, most certainly. I mean, I think we saw some of that just in the linked-quarter movement, although a lot of it was moving into repo. And so we had certain customers coming out of the money market account and choosing to move into the repo account because of some sort of operational processes and money flow issues that they liked more in the repo. And also the fact that, that product is collateralized. So we did see some movement there. So I tend to have less concerns, although it's still going to be relatively soft, it's going to be softer than we saw this year on the interest-bearing side, but most of the risk is on the commercial DDA in my opinion. As far as what we think a 25 basis point hike gives us, it gives us about on a pretax basis, a little over $3 million a quarter.

Okay. Great. And maybe just one last quick one. On the 1.59-debt service coverage ratio you gave on the office book, that's an updated figure for today's rates. Is that right?

Yes, that's where we stand on average today.

Okay. Great. Thanks guys.

Hey Dave. I just want to make sure when I said around a little over 3%, that's on an after-tax basis. I couldn't remember if I said pretax or after tax.

Okay. Thanks.

All right. Sure.

Thank you. The next question is coming from Brady Gailey of KBW. Please go ahead.

Hey, thanks. Good afternoon guys.

Hey, Brady.

I wanted to start with your comment about growing the bond portfolio. I think on a net basis of about $2.2 billion in 2023. If you look at the amount of cash that Frost still has at least on an average basis in the fourth quarter, it was 24% of average earning assets. It feels like you could do potentially more than the $2 billion adding to the bond book, especially as the rates are more attractive today. Is there some possible upside to the amount of bonds that you'll consider adding in '23?

I think that's a possibility, but right now, our main concern is understanding what's happening with deposits. We're discussing the potential for opportunities, especially in terms of yield if there's a market correction. There is a chance we could take advantage of that, but presently, our projections remain our focus. In 2022, we spent $8.6 billion but only saw a bit over $1 million in inflows, resulting in a net expenditure of $7.5 million. We've already made some purchases this January of approximately $1 billion. While it's possible we could take further action, it doesn't seem likely at this moment, but it remains a possibility depending on market conditions.

Okay. And then my second question is on mortgage. Is that relatively new unit gets up and running for you guys, I think that's an originated keep model, not an originated sell model. So as that business continues to mature, do you think that that will push the loan growth outlook beyond the high single-digits just because you'll have that new lever of loan growth as you keep those mortgages?

Good question, Brady. I don't know if it goes above high single-digits, but it will be additive to it. I don't really have it in my mind enough to know how much that would move the needle. But it's going to be a significant part of the portfolio. The way I hope it turns out is, if you look five years out, it'd be the 10-ish percent of the portfolio back when we used to have them on the book before, I think we're around that area, 10%, 12% of the portfolio. So I just think directionally, we'd be in that same level. So if you kind of took what would that be and what kind of volumes would that be, you could sort of pencil out how much that might add to growth.

Okay. Great. Thanks guys.

Okay.

Thank you. The next question is coming from Manan Gosalia of Morgan Stanley. Please go ahead.

Hi. Good afternoon. I had a quick follow-up on the expense side. Are these expenses that you have pretty much set in stone for 2023? Or do you have some flexibility depending on which way the overall environment goes? And then, I also had a clarification on your comments on the run rate moving lower. Do you think that basically the growth rate moves lower off of the new expense base in 2023 as you go into 2024, or do you think as you get the new loan system and check processing system, et cetera, running and the old one rolls off, that the actual dollars can stabilize or come down as you go into '24? Thanks.

Well, my comments really weren't intended to indicate that the dollars would come down because, obviously, we're growing company. We're going to continue to invest. My point is that I don't see us investing at the same level with some of these. I mean, for example, I didn't mention it, but take mortgage, we have bootstrapped that operation. We spent some serious money doing it. It's a fantastic product. It's going to be a tremendous product for us going forward, but we don't have to rebuild that next year. So we're going to have that same level of cost structure and it will be higher because of inflation and growth, that kind of thing. But we're not going to have to bootstrap it. So that's really what I'm pointing out. I think we're making a lot of these generational investments that we're really going to be trying to harvest and we'll be dealing more with an increasing expense base, but just not increasing at the same level that we have been that's my hope. That's what we're going to try to manage to.

Got it. All right. Perfect. And then, a follow-up on the prior questions on the securities book. I guess even if you don't get a market correction opportunity to make larger purchases you are, given that we've come off the highs in yields, what would change your strategy to maybe accelerate some of the investments in that securities book?

Yes. I think that if we felt like there was a correction that was significant that got our attention. I think that we would accelerate that.

Got it. Do you have any thoughts on what your cash position should look like as a percentage of earning assets once the Fed begins to cut rates?

You know what, it's really not. We've kind of been all over the board. I think the thing is today, you're right, we've got more liquidity than we have had. I think that we feel comfortable being able to bring that down to something much more normalized. But we don't have a number out there. A lot of it is going to be dependent on what we're seeing. I think if you've got, say, something as far as earning assets are concerned, something in the range of 10% or lower, I mean, I think we could be somewhere in that range.

Thank you. The next question is coming from Peter Winter of D.A. Davidson. Please go ahead.

Thanks. Good afternoon. So, you guys are always sitting on very strong capital ratios, low credit risk. I was just curious what your thought is on share buybacks. I know it's not a focus, but what are your thoughts on share buybacks here?

Yes. It's really not something that's top of mind to be quite honest with you. I think that right now, we really don't even have one in place. I think we had $100 million one that expired. We expect that we'll bring that back into the toolbox here in the near future. But we had one for all of 2022, we didn't utilize it. We've got it primarily to ensure that if we did see some market correction on our stock that we'd be in a position to take advantage of that. But right now I think from a multiple standpoint, I think we feel that capital is better served through organic growth. And I think there were some concerns, not that we were concerned, but I think the market had some concerns about tangible capital. And given that concern some of the questions we were getting, I can't see that we pulled the trigger any time soon.

Okay. And then just on office space. Phil, I heard your comments, most of your exposures to the A-type properties. But I was just wondering if you could comment what you're seeing on the B and C properties like Houston and Dallas?

There really aren't many that have come to my radar portfolio wise that I know of because that's going to depend on sponsorship, guarantees, equity, all those kinds of things, right? So but I can just tell you that what you're seeing all over the country is that the B and C properties just hard to get people into and I can imagine there are some issues out there. I don't have anything that's more complex than that, just recognition that people aren't using as much office space, and it better be nice if you're going to try to get employees to go into it.

Thank you. The next question is coming from Jon Arfstrom of RBC Capital Markets. Please go ahead.

Hey, good afternoon, guys.

Hey, Jon.

I agree, you've got to be nice to get people back. That's a good comment. Most of my questions were scratched off and Peter just took one of them. But you made a comment earlier, Phil, about the prospect pipeline versus your own pipeline and the difference between the two? Can you just talk about that a little bit more and maybe that's more of a competitive environment question, but help us understand that a little bit more? Thanks.

Yes. We are getting lots of calls for deals, right, because we've got liquidity, we've got consistent underwriting. People know what we do in the marketplace. As far as that goes, underwriting is tightening up. It's coming our way as far as guarantees and equity and all that kind of stuff. But my point was, and I should also say that we're not looking to do all those deals. We bank people, not things, right? We bank relationships. So but there might be some relationships that we've been wanting to have that we'll see the opportunity to do, okay? And we're always on the lookout for that. And now the phone rings more. So we see prospect activity, to me, it's more the advantage of us having the balance sheet that we do and reputation we do. But my point on our customers, to me, it's kind of like same-store sales. I know it's not that. But I mean you already have the customers and the deals you have in the pipeline for them are the deals they're looking to do, they're new deals are looking to do, right? They're not necessarily deals that are out there that already have been papered already that are in the marketplace that you might see with the prospect. So my point is, as I looked at it, to me, it was like, okay, our customers, we've got their business. If we're not seeing new deals from them, it's because they're not doing new deals or they're slower on them. But we are still seeing good prospect deals that are out there in the marketplace just because of the advantages that we have. Maybe I'm awful on that, but that's what it meant to me.

Okay, that's helpful. I wanted to ask about the increase in IT and security expenses. Do you see this as a permanent change, or is it mainly due to modernization and core spending for 2023? Should we expect a slowdown in expense growth for 2024, or will expenses flatten out and decrease in 2024? Thanks.

Yes, Jon, our growth rate is decreasing. Once we incorporate this into our base expense load, it will remain stable. There will still be some growth due to inflation and other factors, but we won't have to repeat the same actions. Our growth rate has been 11% for four out of the last five years, with three of the last four years before this one also at 11%. Currently, IT has become the significant cost factor, similar to how healthcare costs were managed previously. Our goal is to bring it back down to more historical levels.

Okay. All right. Thanks guys.

Thank you. We're showing no additional questions in queue at this time. I would like to turn the floor back over to Mr. Green for closing comments.

All right. Well, we want to thank everyone for participating today. And thank you for your questions and for your interest. We'll be adjourned.

Ladies and gentlemen, thank you for your participation and interest in Cullen/Frost Bankers. This concludes today's teleconference. You may disconnect your lines and log off the webcast at this time and enjoy the rest of your day.