Earnings Call Transcript - CFR Q3 2021

Operator, Operator

Greetings and welcome to Cullen/Frost Bankers, Inc. Third Quarter 2021 Earnings Conference Call. It is now my pleasure to introduce your host, A.B. Mendez, Senior Vice President and Director of Investor Relations. Thank you. You may begin.

A.B. Mendez, Senior Vice President and Director of Investor Relations

Thanks, Rob. 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.

Phillip Green, Chairman and CEO

Thanks, A.B. Good afternoon, everyone, and thanks for joining us. Today, I'll review third quarter results for Cullen/Frost and our Chief Financial Officer, Jerry Salinas, will also provide additional comments before we open it up to your questions. In the third quarter, Cullen/Frost earned $106.3 million or $1.65 per share compared with earnings of $95.1 million or $1.50 per share reported in the same quarter of last year. And this compared with $116.4 million or $1.80 per share in the second quarter. We continue to focus on our organic strategy while the economy works to move past supply chain issues and other lingering effects of the pandemic. Average deposits continued their strong increase in the third quarter and were $39.1 billion, an increase of 19% compared with $32.9 billion in the third quarter of last year. Overall, average loans in the third quarter were $16.2 billion compared with $18.1 billion in the third quarter of 2020, but this included the impact of PPP loans. Excluding PPP loans, third quarter average loans of $14.8 billion were essentially flat from a year ago but up an annualized 6% on a linked quarter basis. And looking forward, we're very encouraged about the outlook for loan growth. New loan commitments booked through the third quarter excluding PPP loans were up by 11% compared to the first 9 months of last year. For the quarter, new loan commitments were up by 6% on a linked quarter basis. We were especially pleased that the linked quarter increase was due primarily to C&I commitments, which were up 30%. Our current weighted pipeline is 41% higher than 1 year ago and 22% higher than last quarter. The increases are in both C&I, up 22%; and CRE, up 28%. The market continues to be very competitive. In the third quarter, 69% of the deals we lost were due to structure compared to 50% in the quarter before. We also continue to add to our commercial customer base, and we recorded 619 new commercial relationships during the quarter. And while this was down from the same quarter a year ago when we were experiencing incredible PPP success, it is 2/3 higher than the quarter immediately before the PPP program. As with the second quarter, we did not report a credit loss expense in the third quarter. Our asset quality outlook is stable and in general, problem assets are declining in number. New problems have dropped to pre-pandemic levels. Net charge-offs for the third quarter totaled $2.1 million compared with $1.6 million in the second quarter. Annualized net charge-offs for the third quarter were 5 basis points of average loans. Nonaccrual loans were $57.1 million at the end of the third quarter, a slight decrease from the $57.3 million at the end of the second quarter. Overall, delinquencies for accruing loans at the end of the third quarter were $95.3 million or 60 basis points of period-end loans, and these are manageable pre-pandemic levels. What started out as $2.2 billion in 90-day deferrals granted to borrowers early in the pandemic were completely gone as of the end of the third quarter. Total problem loans, which we define as risk grade 10 and higher, were down slightly to $635 million at the end of the third quarter compared with $666 million at the end of the second quarter. In the third quarter, we continued making progress toward our goal of mid-single-digit concentration level in the energy portfolio over time, with energy loans falling to 6.5% of our non-PPP portfolio at the end of the quarter. Our teams continue to analyze the non-energy portfolio segments that we consider the most at risk from pandemic impacts. As of the third quarter, those segments are represented by restaurants, hotels, and entertainment and sports. The total of these portfolio segments excluding PPP loans represented $695 million at the end of the third quarter, and our loan loss reserve for these segments was 8.8%. The credit quality of individual credits in these segments is currently mostly stable or better compared to the end of the second quarter. We reported in the second quarter that we had completed our 25-branch Houston expansion initiative, and we're very pleased with the results. We've identified 8 more locations to open in the coming months, and that process is underway. Let me update you on where we stand through the third quarter with the Houston expansion excluding PPP loans. Our numbers of new households were 134% of target and represented more than 12,200 new individuals and businesses. Our loan volumes were 177% of target and represented $371.4 million in outstandings, and about 80% of this represents commercial credits with about 20% consumer. Deposits surpassed $0.5 billion and were 111% of target. Commercial deposits accounted for 2/3 of the total. In the meantime, we're also preparing for our upcoming 28-branch expansion project in the Dallas region, which will kick off with the first new financial center opening early next year and continuing into 2024. The Dallas expansion will follow our Houston model, and we will employ the lessons learned during our team's successful rollout. I'll continue to emphasize that the business we are generating through our expansion strategy is consistent with the overall company. Its profitability is weighted towards small and midsized businesses, but it also has complemented wealth management, insurance, and of course, consumer banking, which continues to see tremendous growth. For example, through the first 6 months of this year, we had already surpassed consumer banking's all-time annual growth for new customer relationships, which was 12,700 in 2019. At the end of the third quarter this year, this had risen to 19,974 net new checking customers. That's already more than 150% of our previous annual record. We've worked hard to lower barriers to entry for potential customers with improved product offerings and physical distribution. For example, besides overdraft grace which we introduced in April and Early Pay Day which we announced in July, we also recently established an ATM branding partnership with Cardtronics resulting in us having the largest ATM network in the state. In addition, after over 2 years of study, we've begun the process of putting in place the infrastructure to add residential mortgages to our suite of consumer real estate products in late 2022. This will complement our portfolio currently consisting of home equity, HELOC, home improvement, and purchase money second loans, which has steadily grown to in excess of $1.3 billion. Utilizing best-in-class technology will allow us to provide a Frost level of world-class customer service as we build this portfolio over time in response to customer demand. Finally, I want to commend our team working on PPP loans. Nearly 90% of the 32,500 loans or $4.7 billion have already been helped with the loan forgiveness process. That includes upwards of 97% of the first-round loans from 2020. Our team continues to put in outstanding work to execute our strategies, whether it's PPP, our expansion projects, or the enhancements we've made to our customer experience. And I'd like to thank everyone at Frost. I believe we've got the best team in the financial services industry. They are why I continue to be optimistic about our company and our prospects for success. Now I'll turn the call over to our Chief Financial Officer, Jerry Salinas, for some additional comments.

Jerry Salinas, Chief Financial Officer

Thank you, Phil. Looking first at our net interest margin. Our net interest margin percentage for the third quarter was 2.47%, down 18 basis points from 2.65% reported last quarter. The decrease was primarily the result of a higher proportion of earning assets being invested in lower-yielding balances at the Fed in the third quarter compared to the second quarter, and to a lesser extent, the impact of lower PPP loan volumes and their related yields compared to the prior quarter. Interest-bearing deposits at the Fed averaged $15.3 billion or about 35% of our average earning assets in the third quarter, up from $13.3 billion or 31% of average earning assets in the prior quarter. Excluding the impact of PPP loans, our net interest margin percentage would have been 2.27% in the third quarter, down from an adjusted 2.37% for the second quarter, with all of the decrease resulting from the higher level of balances at the Fed in the third quarter. The taxable equivalent loan yield for the third quarter was 4.16%, down 12 basis points from the previous quarter. Excluding the impact of PPP loans, the taxable equivalent loan yield would have been 3.74%, down 6 basis points from the prior quarter. To add some additional color on our PPP loans, total PPP loans at the end of September were $828 million, down from $1.9 billion at the end of June. Forgiveness payments received during the third quarter were higher than we had projected, resulting in an acceleration in the recognition of the net deferred fees during the quarter. At the end of the third quarter, we had only about $11.5 million in net deferred fees remaining to be recognized, and we currently expect about 75% of that to be recognized in the fourth quarter. Looking at our investment portfolio, the total investment portfolio averaged $12.5 billion during the third quarter, up about $209 million from the second quarter. The taxable equivalent yield on the investment portfolio was 3.35% in the third quarter, down 1 basis point from the second quarter. The yield on the taxable portfolio, which averaged $4.1 billion, was 2.03%, up 2 basis points from the second quarter. Our municipal portfolio averaged about $8.4 billion during the third quarter, up $230 million from the second quarter, with a taxable equivalent yield of 4.04%, down 5 basis points from the prior quarter. At the end of the third quarter, 78% of the municipal portfolio was pre-refunded or PSF-insured. The duration of the investment portfolio at the end of the third quarter was 4.5 years, up slightly from 4.4 years in the second quarter. We made investment purchases towards the end of September of approximately $1.5 billion, consisting of about $900 million in MBS agency securities with a yield of about 2%, about $500 million in treasuries yielding 1.07%, with the remainder in municipal securities. Regarding noninterest expense, looking at the full year 2021, we currently expect an annual expense growth rate of around 3% over our 2020 total reported noninterest expenses, which is consistent with our previous guidance. Regarding the estimates for full year 2021 earnings, given our third quarter results and the recognition of lower PPP fee accretion for the fourth quarter, we currently believe that the current mean of analyst estimates of $6.48 is reasonable. With that, I'll turn the call back over to Phil for questions.

Phillip Green, Chairman and CEO

Thank you, Jerry. Okay. We'll open it up for questions now.

Operator, Operator

Our first question comes from Brady Gailey with KBW.

Brady Gailey, Analyst

I just wanted to start with mortgage. I remember you guys got out of the mortgage business. I think it's been a couple of decades ago. And now you're getting back in it. Maybe just 2 things here. Is this an originate-and-sell model or is this an originate-and-keep-it-at-Frost model? And then if it's originate and sell, how big of an investment do you think you're going to make? Like will this be a meaningful fee income contributor?

Phillip Green, Chairman and CEO

Brady, this will not be a sell model. We're aiming to strengthen relationships, and our intention is to retain all these loans on the balance sheet. It won't be primarily fee-based; instead, it will be more of a portfolio model. We will oversee the entire customer experience, including servicing. Our goal is to create a world-class customer experience with our products, similar to what we currently offer with consumer real estate products like home equity and home improvement. I'm genuinely excited about this opportunity. It's crucial to note that we were previously known for exiting the mortgage business before the financial crisis. We are not returning to the commission-based sales structure we used before, which relied heavily on technology for scale. Instead, this will involve Frost bankers delivering the service in response to customer demand through our expanding branch network in key markets. Importantly, the technology available today is far more accessible and scalable at a reasonable level, with lower entry and support costs thanks to cloud and SaaS providers. Ultimately, it's about providing an excellent customer experience in this area, and I believe we have a significant opportunity ahead of us.

Brady Gailey, Analyst

And Phil, how big would you like residential mortgage to be over time, like as a percent of total loans at Frost?

Phillip Green, Chairman and CEO

Our consumer real estate is currently around $1.3 billion, making up slightly less than 10% of the portfolio. I believe that residential mortgage could reach that size or even larger within the next five years. Achieving this wouldn't require an enormous volume; if we could manage just under two loans per month per branch, that would be a reasonable goal for us. Given the markets we operate in, that should lead to significant volume over time.

Brady Gailey, Analyst

All right. And then my second question is just more about deploying cash into the bond book. I mean the pile of cash you guys are sitting on just keeps growing. It's now 35% of average earning assets. We've seen the long end of the curve move a little bit from 90 days. I mean the 10-year bond yield's now at almost 1.60%. So how do you think about the timing on when you start putting more of this cash to use in the bond portfolio?

Jerry Salinas, Chief Financial Officer

From my perspective, as we look ahead to the fourth quarter, I anticipate an additional $0.75 billion being spent this year. We already invested $1.5 billion in September, and I expect us to potentially spend another $0.75 billion. We won't rush into this; we are carefully analyzing the marketplace and yields, as you mentioned. We appreciate the flexibility we have and will wait for the right moment. If the yields become favorable, we will act, but there's no urgency at this point. We believe that when the timing is right, we will proceed. We're open to making purchases but don't think the current environment is ideal for that right now.

Operator, Operator

Our next question comes from the line of Ebrahim Poonawala with Bank of America.

Ebrahim Poonawala, Analyst

Just one follow-up, Jerry, on the PPP fees. Sorry if I missed it. What was the PPP fees in the third quarter?

Jerry Salinas, Chief Financial Officer

The fee itself or do you want all the interest income?

Ebrahim Poonawala, Analyst

All the interest income.

Jerry Salinas, Chief Financial Officer

Yes. So the total interest income associated with PPP loans was $30 million.

Ebrahim Poonawala, Analyst

$30 million.

Jerry Salinas, Chief Financial Officer

That was down from $45.5 million in the second quarter.

Ebrahim Poonawala, Analyst

$45.5 million. And you mentioned that there's $11.5 to go plus whatever the 1% on the rest of the loan balances?

Jerry Salinas, Chief Financial Officer

Correct.

Ebrahim Poonawala, Analyst

Understood. So if I x out the $30 million, NII would be about, whatever, for the third quarter around $240 million? Is that a good base? Like do you think NII should grow from there?

Jerry Salinas, Chief Financial Officer

Are you referring to net interest income or something else?

Ebrahim Poonawala, Analyst

Yes, net interest income. When you look at it from an ex-PPP basis, should that be paid off?

Jerry Salinas, Chief Financial Officer

Yes, let me take a look at my information. On a non-PPP basis in the third quarter, I believe that considering the purchases we made late in the third quarter is important. That run rate is likely the bottom. We will see a bit of PPP in the fourth quarter, but if you exclude that, I think going forward, especially with the loan growth we experienced in the third quarter and a positive pipeline, it looks promising. Additionally, the purchases we made in September did not have an impact in the third quarter, so I believe that we have reached the lowest point regarding net interest income dollars.

Ebrahim Poonawala, Analyst

That's helpful. Going back to the mortgage discussion, Phil, you announced a partnership with Blend in mid-October. Can you share what this partnership means for you in terms of consumer benefits beyond just mortgages? Additionally, what other initiatives are you exploring? You've been proactive in managing overdraft fees and providing early payment options for employment checks. Please provide some insights regarding the Blend partnership and any other fintech partnerships you're considering.

Phillip Green, Chairman and CEO

Blend has been a product we've been using for over a year, even before COVID. This is an expansion of that usage. As we consider other segments, we are focusing on best-in-class software for applications, decision-making, and servicing. These last two segments could potentially involve one or two providers. It's exciting because in this business, we often don’t have the flexibility to select the technology we want due to legacy systems. This allows us, along with the collaboration with Infosys, to establish the best workflow and customer experience with top software. I believe we will integrate the software we've used for the mortgage experience into our existing workflow for our large portfolio of consumer real estate, which presents significant advantages we can look forward to.

Ebrahim Poonawala, Analyst

Understood. And just one more question. You sounded quite optimistic about loan growth. Could you clarify if that growth is based on your belief that supply chain issues will improve and customer sentiment will get better? Or are you actually noticing clear signs of increased activity levels, leading you to believe that the fourth quarter and at least the first half of next year will show substantial loan growth?

Phillip Green, Chairman and CEO

In conversations with our team, there's a sense of optimism. Our look-to-book ratio has shown significant improvement compared to last year, with both our look numbers and bookings increasing by 33%. This consistency is encouraging. It's important to note that as we refine our energy portfolio, the latest quarter saw a 6% increase in new commitments, albeit with a 58% decrease in energy commitments. We are still addressing our concentration in that area and aiming for mid-single digit levels, which remain significant. Additionally, focusing on our pipeline, the outlook over the next 90 days shows a 41% increase from last year and a 22% rise from the previous quarter. This weighted pipeline reflects what our team anticipates, indicating a level of optimism about our execution capabilities. Moreover, we've noticed increased utilization of lines of credit, especially in the commercial sector, which has rebounded from a low in May. Specifically, the utilization of working capital lines for commercial and industrial was about 28.7% earlier and has now risen to around 31% by the end of the third quarter. This improvement has contributed to volume growth, particularly as we've seen positive results in commercial real estate projects, which are still in their early stages. As these projects develop, we expect further funding opportunities. Overall, the current conditions reflect our experiences over recent months, rather than a belief that supply chains are improving—since, frankly, I don't see any signs of improvement there, nor in labor conditions. Thus, seeing this positive momentum in such an environment is encouraging.

Operator, Operator

Our next question comes from Jennifer Demba with Truist Securities.

Jennifer Demba, Analyst

Phil, you said you're going to kind of employ some lessons learned from the Houston expansion with the future branch adds in Dallas and the rest of them in Houston. Can you just talk about what you have learned over the past 2 or 3 years with this branch expansion?

Phillip Green, Chairman and CEO

I don't want to disclose any proprietary information, but it really comes down to people. It's about finding the right individuals and engaging them early, before launching new locations, to ensure they align with the company's culture and mission. As I've mentioned, we focus on individuals rather than teams; each person needs to decide that Frost is where they want to be. The success of our strategy in Houston stemmed from our targeted commitment of resources and talented individuals driving the initiative, along with selecting the right team members who executed effectively to achieve our goals. It's important to note that the current market is likely tougher than it was three years ago when we started in Houston, due to ongoing supply chain challenges and hiring difficulties. Nonetheless, we've seen good results so far. We're applying the same approach and focus in our future expansions, including those in Dallas, and I'm confident in our ability to implement this strategy successfully.

Jennifer Demba, Analyst

Can you talk about the excess liquidity? How long do you think it will take to deploy Cullen's excess liquidity? You have significantly more than many of your peers.

Jerry Salinas, Chief Financial Officer

Yes, Jennifer, I would say that we usually maintain more liquidity than many others. While we won't hold 35% of our earning assets in cash, we tend to keep a slightly higher level. We won't dive in all at once, and I believe it will take most of 2022 to make a significant impact.

Phillip Green, Chairman and CEO

Yes, Jennifer, currently the loan-to-deposit ratio is around 40%, which is similar to the last historical low point for our company. Achieving a rate in the high 70s to 80% took a significant amount of time. In the past, when we experienced a decline in the loan-to-deposit ratio, it dropped into the 50s during the Great Recession, and it took us about five years to return to a more normalized figure. I anticipate it will take at least that long again, as we have a high-class problem thanks to our ability to grow deposits. This provides us with ample liquidity and allows us to secure funding at competitive rates due to a strong demand for low-cost deposits. My main concern is ensuring our loan growth and new relationship development remain robust, along with the success of our organic growth strategies. I believe earnings will follow suit. We will continue to be opportunistic in deploying our liquidity in the bond market or deciding not to invest there. The optionality that Jerry mentions is crucial, especially considering inflation trends, labor costs, and potential volatility in the short end of the market compared to the long end over the next year. We're positioned to monitor and assess these situations as they develop.

Operator, Operator

Our next question comes from the line of Steven Alexopoulos with JPMorgan.

Anthony Elian, Analyst

This is Anthony Elian on for Steve. Phil, you mentioned that you've had close to 20,000 net new checking accounts added so far this year. Are you able to parse out how much of these new customers are choosing Frost because of services you offer, including Early Pay Day and overdraft grace, that not many banks offer?

Phillip Green, Chairman and CEO

I can't tell you that because they don't tell us why they're joining us. I can tell you, though, that Early Pay Day was, see July, the big overdraft grace in April. And so we broke the record for our all-time annual number in June. So you'd basically see no impact there for Early Pay Day and pretty limited impact from overdraft grace. I think one of the things that's really helping us, aside from just reputationally what our service and Net Promoter Score tells us about how people think about us, is, I mean, the Houston expansion strategy has been a really big contributor to growth, and so there's that. And they are really helping us see increases there. And then secondly, we've done a great job of developing our capability and marketing for online. I think 41% of the accounts that we've opened this year have been opened online. So doing a good job in both those areas, in the digital side and then expanding on the physical side and the geographic distribution. Both of those things, I think, have really helped us get to a new level in terms of consumer growth.

Anthony Elian, Analyst

Okay. Great. And then my follow-up, you mentioned in the prepared remarks you plan to open 8 more Houston locations in the coming months. Any more details you can provide on this in terms of the expense run rate beyond 4Q as you build these branches?

Jerry Salinas, Chief Financial Officer

What I'd say to that is I think we've provided some of this guidance before. We do have our planned expansion in Dallas that Phil discussed and we are also expanding our existing locations in Houston. The original guidance we shared when we announced the Houston plan indicated it would cost us about $0.19 in the first year. Based on what I'm seeing, I believe we are going to be pretty close to that figure right now, although some of it will depend on the timing of the locations and the hiring of staff. I expect we'd be around $0.19 in 2022. Additionally, I want to clarify that the Houston expansions will occur over a 2-year period, while Dallas will be over a 2.5-year period. So, these will be rolled out over time.

Operator, Operator

Our next question comes from Jon Arfstrom with RBC Capital Markets.

Jon Arfstrom, Analyst

Phil, one of your comments earlier about the competitive environment and 69% loss to structure versus 50% in the prior quarter. What's changed? And do you expect competition to get even tougher from here?

Phillip Green, Chairman and CEO

I spoke with our team last week about their observations, and it seems to be mostly the same: burndown rates, guarantees, terms, loan-to-cost, and so on. One noticeable difference on the permanent side is a trend towards interest-only deals for 5 and 10 years, which is somewhat new for us. I haven't encountered much of this before. Overall, it appears that the competition is becoming more intense. I recall one instance where a broker was working on a permanent deal for a client and mentioned, "I don't know what else I can ask for. They said yes to everything." This illustrates how accommodating the markets have become. Nevertheless, our team remains optimistic about securing deals, and we maintain strong relationships with key customers. You might expect more pessimism given the increasing competition, but we know how to be competitive while upholding our standards. Overall, we seem to be managing well.

Jon Arfstrom, Analyst

Yes. Yes, the new commercial relationship numbers are certainly good and same with consumer as well. And I guess that's what you control, right, is activity?

Phillip Green, Chairman and CEO

Exactly.

Jon Arfstrom, Analyst

Yes. And I guess back on the loan-to-deposit question. I know it's not the most critical ratio out there. But it seems to me that maybe the excessive deposit growth is starting to abate a bit, and you're seeing a bottoming in loans. And perhaps over the next couple of quarters, that starts to reverse itself and climb back up again. Is that a fair way to think about it?

Jerry Salinas, Chief Financial Officer

I think that certainly deposit growth was a little bit softer in the third quarter. It was still 9% on an annualized basis. So still strong, but it's not the double digits that we've been seeing, the high teens. So from that standpoint, you're right. I mean, if anything, at that level with loan growth continuing or starting to improve now that, that number could get better. But at the end of the day, we're all about relationships, as Phil said. And if those deposits keep coming in, we want them, right? And so to the extent that those deposits ticked up again, we'd certainly be happy about that. So I think, theoretically, you're right. If deposit growth slows down and loan picks up, yes, that will kind of take care of itself. But we're still adding new locations. We continue to offer top-quality service. We're still interested in opening new accounts. When I look at a 12-month rollback, looking backwards about where our growth came from in a rolling 12 months in the deposit side, 70% of it was augmentation from our existing customers, and 30% of it was from new customers. And that's a little bit higher than we've been seeing. We've been seeing like a 75-25. So it's good to see that. So yes, I think you're right. But we'd love to continue to see deposits growing.

Jon Arfstrom, Analyst

Okay. Yes, that was one of my next questions. I was curious about the 70-30 split. Additionally, Phil, you mentioned Houston in your initial comments regarding some numbers. Could you elaborate on what you're observing from the new branches regarding fees and fee generation?

Phillip Green, Chairman and CEO

Jon, honestly, I don't have that breakdown with me in terms of that for the expansion branches. I can't tell, and I'll ask Jerry to talk a little bit about fee income. We've really had a nice year at this point in wealth management and wealth advisers, a little bit tougher in the insurance, but still holding our own there. Jerry, you want to talk a little bit about the noninterest?

Jerry Salinas, Chief Financial Officer

Yes. I think Phil mentioned that we had a solid quarter regarding noninterest income. The trust side of the business experienced good growth, with investment fees increasing by 13%. Additionally, we saw strong oil and gas revenues, benefiting from higher commodity prices compared to the third quarter last year. There continues to be growth in new accounts. On deposit service charges, despite overdraft grace, I believe combined NSF and OD charges might have decreased by $100,000 compared to last year’s third quarter. However, we did experience good growth in commercial service charges due to higher billable services, and interchange fees were notably strong, increasing by nearly $1 million, partly due to a new commercial account that accounts for about half of that increase. It's also interesting to note that the number of transactions and debit card usage has significantly risen, as well as the dollar amount of those transactions. Overall, I feel we had a solid quarter, with notable activity in customer derivatives across other categories. Overall, it was a good quarter, although a bit softer on the insurance side, as we've faced some challenges in acquiring net new customers in that area.

Operator, Operator

Our next question comes from the line of Ken Zerbe with Morgan Stanley.

Kenneth Zerbe, Analyst

I have a couple of questions regarding expenses. I heard that you expect expenses to rise by 3% for the year. What range are you anticipating around that 3%? If we were to apply exactly 3%, it suggests a significant increase in fourth quarter expenses, over $230 million. I just want to ensure that I'm considering this correctly.

Jerry Salinas, Chief Financial Officer

Yes, that's a fair question, Ken. I looked into it this morning. One thing I want to highlight is our historical growth between the third and fourth quarters. If you review last year's data, it's quite similar. We have some incentive awards that are distributed in the fourth quarter. Due to the nature of these awards and the age of the recipients, some are recognized immediately, which means they'll impact salaries in October. Additionally, we've historically seen strong marketing expenses in the fourth quarter, and I expect that trend to continue. So I agree that the numbers seem high, but when we consider our history and current projections, we're in line with expectations. While I'd prefer it to be lower, I believe this is the reality we're facing. The main pressure points are in the salaries category and other expenses.

Kenneth Zerbe, Analyst

Got it. I understand. Okay, and I have a follow-up regarding 2022 expenses. I appreciate the $0.19; that makes total sense. But what is the base? Should we assume that if there's a 3% growth in '21, we grow another 3% on top of that, and then we add $0.19? I'm just trying to clarify what we're discussing.

Jerry Salinas, Chief Financial Officer

We are not providing any guidance for 2022 yet, as we are still in the planning phase and a lot of work is ongoing. Phil mentioned the inflation we are experiencing, particularly wage inflation. I noticed some comments from the Dallas Fed regarding the Texas economy, highlighting that the lack of applicants remains a significant hiring constraint, while demands for higher pay are becoming a growing concern. Additionally, the average hourly wage in Texas is rising faster than the national average. We are addressing these challenges but will not discuss our expense guidance for 2022 at this time. However, based on your understanding of the starting point for 2022, I want to point out that the Houston expansion 2.0 and our Dallas expansion will likely add approximately $0.19 to our more normalized run rate.

Operator, Operator

We've reached the end of the question-and-answer session. At this time, I'd like to turn the call over to Phil Green for closing comments.

Phillip Green, Chairman and CEO

Okay. Well, thanks, everyone, for your continued interest and your great questions. And with that, we will be adjourned. Thank you.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.