Earnings Call Transcript - CFR Q4 2024

Operator, Operator

Greetings. Welcome to Cullen/Frost Bankers Fourth Quarter and Full Year 2024 Results Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce 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, Sherry. This afternoon's conference call will be led by Phil Green, Chairman and CEO; and Dan Geddes, Group Executive Vice President and CFO. Before I turn the call over to Phil and Dan, 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.

Phil Green, Chairman and CEO

Good afternoon, everyone, and thank you for being with us today. We will go over our fourth quarter and full year 2024 results for Cullen/Frost. Our Chief Financial Officer, Dan Geddes, will share further insights and guidance before we open the floor for questions. In the fourth quarter, Cullen/Frost reported earnings of $153.2 million, or $2.36 per share, compared to $100.9 million, or $1.55 per share, in the same quarter last year. For the full year 2024, the net income available to common shareholders was $575.9 million, a decrease from the $591.3 million reported for 2023. On a per share basis, our earnings for 2024 were $8.87 compared to $9.10 for the entire year of 2023. Our return on average assets and average common equity for the fourth quarter were 1.19% and 15.58%, respectively, compared to 0.82% and 13.51% for the same quarter last year. Average deposits for the fourth quarter were $41.9 billion, up from $41.2 billion a year ago. Average loans increased by 9% to $20.3 billion in the fourth quarter, compared to $18.6 billion during the same time last year. We are seeing strong results, thanks to the dedication of our Frost bankers and our ongoing expansion efforts. As in previous quarters, Cullen/Frost did not rely on any FHLB advances, broker deposits, or reciprocal arrangements to enhance our insured deposit levels or to secure liquidity. Our balance sheet reflects our position honestly. Our organic growth strategy, launched at the end of 2018, continues to yield excellent results. At that time, Frost had 131 financial centers in Texas. By the middle of this year, we plan to open our 200th location, and we will keep expanding by identifying promising markets where we can add value. By the end of the fourth quarter, our expansion efforts had produced $2.4 billion in deposits, $1.8 billion in loans, and attracted over 59,000 new households, exceeding our goals for deposits, loans, and households at 101%, 151%, and 130%, respectively. Our initiatives in Houston and Dallas are performing as we have previously reported. We opened our sixth location in the Austin area during the fourth quarter and are about one-third through that expansion. Early results are very promising and align with other markets we’ve expanded into. The successes from earlier expansion sites are now supporting our current growth efforts, and we anticipate these initiatives will enhance earnings starting in 2026. As the saying goes, there is a right time for planting and a right time for harvesting, and we are now in our harvesting phase. I have frequently mentioned that this strategy is sustainable and scalable. Our investments in organic expansion, new products, marketing, technology, and our workforce are driving remarkable growth in our consumer business. We achieved record consumer growth this year with a $610 million rise in average outstanding balances for consumer loans, reflecting a 21% annual growth rate for the third consecutive year, maintaining over 20% growth quality in consumer loans. Two-thirds of this growth is from our second lien home equity products, while the remaining third comes from our highly acclaimed new mortgage program focused on exceptional customer experience. In the fourth quarter, we funded $75 million in mortgage loans, and by the end of 2024, our total mortgage portfolio for one to four units reached $259 million. Our consumer checking household growth, an indicator of customer growth, has maintained an impressive four-year streak of over 6% annual growth. Consumer deposits, comprising 47% of our total deposit base, expanded by 3.2% this year, which we consider a strong performance amid fierce competition for deposits. Our consumer deposits have now surpassed pre-COVID levels from 2019 by 51%, representing a total increase of $6.5 billion during that time. This amounts to an 8.6% compound annual growth rate over the past five years, all achieved through organic growth. I am thrilled by the consistency and sustainability of our results across multiple years, and we are diligently working to continue this positive momentum. Our investments in organic expansion, alongside new products, marketing, technology, and personnel, are significantly contributing to this remarkable growth in the consumer sector. Looking at our commercial business, total loan balances at the end of the period rose by $1.3 billion, marking an 8.3% increase year-over-year. Our commercial real estate balances grew by 11%, energy balances rose by 20%, and commercial and industrial balances increased by 2.4%. In 2024, we achieved a record number of new commercial relationships, surpassing even the records set during the Silicon Valley challenges in 2023 by 1%. Our expansion accounted for 20% of the new commercial relationships established in 2024, with half of these coming from what we refer to as too big to fail banks. New loan commitments reached $2 billion in the fourth quarter, reflecting a 24% increase from the third quarter. Additionally, new loan opportunities were up 35% from the same quarter a year earlier, representing our highest level ever in the fourth quarter. Our overall credit quality continues to be strong by historical standards, with net charge-offs and nonaccruals remaining at healthy levels. Nonperforming assets totaled $93 million at the end of the fourth quarter, down from $106 million last quarter and up from $62 million in the fourth quarter of the prior year. This quarter-end figure corresponds to 45 basis points of period-end loans and 18 basis points of total assets. Net charge-offs for the quarter were $14 million, an increase from $9.6 million last quarter and $10.9 million a year ago, with annualized net charge-offs for the fourth quarter at 27 basis points of average loans. Total problem loans, which we categorize as risk grade 10 or higher, stood at $943 million at the end of the fourth quarter, compared to $839 million at the close of the third quarter. Our commercial real estate lending portfolio remains stable, showing consistent operating performance across all sectors with acceptable debt service coverage ratios, and our loan-to-value ratios are consistent with what we've reported in previous quarters. These results reflect the strength of combining Frost values with effective strategies and the best banking markets in the United States, delivering superior customer experiences with our exceptional team. We are well-positioned to advance into 2025 and to extend the Frost value proposition to a broader customer base across the state. Now, I'll hand it over to Dan.

Dan Geddes, Group Executive Vice President and CFO

Thank you, Phil. Let me start off by giving some additional color on our expansion results. As Phil mentioned, we continue to be pleased with the volumes we've been able to achieve. Looking at the fourth quarter, Linked quarter growth in expansion average loans and deposits were $130 million and $128 million, respectively, representing 32% and 22% annualized growth. Now moving to the fourth quarter financial performance for the company. Regarding the net interest margin, through the fourth quarter, net interest income was up $9 million or 2.3% on a linked-quarter basis. Our net interest margin percentage was down three basis points to 3.53% from the 3.56% reported last quarter. Our net interest margin percentage was negatively impacted by lower rates on balances held at the Fed in loans and offset by higher volumes of balances at the Fed and loans, together with lower rates on deposits. Looking at our investment portfolio, the total investment portfolio averaged $18.6 billion during the fourth quarter, down $257 million from the prior quarter. During the fourth quarter, investment purchases totaled $840 million with $754 million being Agency MBS securities yielding 5.8% and $64 million being municipals with a taxable equivalent yield of 5.35%. I'll note that approximately $500 million of the Agency MBS yielding 5.91% that we purchased did not settle until January 21, 2025. During the quarter, we had $500 million of treasuries mature at an average yield of 0.96%. The net unrealized loss on the available-for-sale portfolio at the end of the quarter was $1.56 billion, an increase of $429 million from the $1.13 billion reported at the end of the third quarter. The tax flow equivalent yield on the total investment portfolio during the quarter was 3.44%, up four basis points from the third quarter. The taxable portfolio, which averaged $12.1 billion, down approximately $149 million from the prior quarter at a yield of 2.99%, up five basis points from the prior quarter. Our tax-exempt municipal portfolio averaged $6.5 billion during the fourth quarter down $108 million from the third quarter and had a taxable equivalent yield of 4.33%, up 1 basis point from the prior quarter. At the end of the fourth quarter, approximately 69% of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of the fourth quarter was 5.7 years, up from 5.4 years in the third quarter. Looking at funding sources, on a linked-quarter basis, average total deposits of $41.9 billion were up $1.2 billion from the previous quarter. The linked quarter growth was roughly half in money markets, one-third in noninterest-bearing accounts with the remainder being savings in IOC accounts. Average noninterest-bearing demand deposits were up $393 million or 2.9% over the third quarter while interest-bearing deposits increased $759 million or 2.8% when compared to the previous quarter. The cost of interest-bearing deposits in the fourth quarter was 2.14%, down 27 basis points from 2.41% in the third quarter. Thus far in January, both current and month-to-date average deposits are in line with fourth quarter averages. Customer repos for the fourth quarter averaged $3.9 billion, up $168 million from the third quarter. The cost of customer repos for the quarter was 3.34%, down 38 basis points from the third quarter. Looking at noninterest income and expense, I'll point out a couple of seasonal items impacting the linked quarter results. Regarding other noninterest income, as in years past, we received our normal annual Visa bonus during the fourth quarter totaling $4.6 million. Salaries and wages, including approximately $8 million in higher stock compensation compared to the third quarter. As a reminder, our stock awards are granted in October of each year and some awards by their nature require immediate expense recognition. Regarding our guidance for full year 2025, our current outlook includes 225 basis point cuts for the Fed funds rate in 2025 with a cut in June and September. Given that, we expect net interest income growth for the full year in the range of 4% to 6%. For net interest margin, we expect an improvement of around 10 basis points compared to our net interest margin of 3.53% for 2024. Looking at loans and deposits, we expect full year average loan growth to be in the mid to high single digits and expect full year average deposits to be up between 2% and 3%. Based on current projections, we are projecting growth in noninterest income in the range of 1% to 2% and noninterest expense to be in the high single digits. Regarding net charge-offs, we expect full year 2025 to be similar to 2024 and in the range of 20 to 25 basis points of average loans. Regarding taxes, we currently expect the full year 2025 to come in between 15% and 16%. With that, I'll turn the call over to Phil for questions.

Phil Green, Chairman and CEO

Thank you, Dan. We'll open the call up now for questions.

Operator, Operator

Our first question is from Manan Gosalia with Morgan Stanley. Please proceed.

Manan Gosalia, Analyst

Hi, good afternoon. I wanted to start on loan growth. The guide for mid- to high single-digit loan growth implies a little bit of a slowdown from last year. But judging by your comments, they were all fairly positive in terms of new commercial relationships, new loan commitments. So, I wanted to get a sense if there's any conservatism baked in there? Or are we just growing off of a higher base, which is driving that slowdown? Any thoughts you can share there would be great?

Phil Green, Chairman and CEO

Thanks. Overall, I would expect strong consumer loan growth to persist. It currently represents a little over 15% of our portfolio, and we've seen over 20% growth for nine consecutive quarters. The growth in Commercial and Industrial loans has also been noteworthy, and I believe this will continue, especially with new opportunities on the horizon. However, if there is a slowdown, it may occur with Commercial Real Estate, where we haven't experienced the same pace of new deals, particularly in multifamily and office segments. Much of our recent growth has been in funding deals established a couple of years ago, so I anticipate a slight slowdown in that area, potentially resulting in low single-digit growth. Overall, despite the expected slowdown in CRE, we are optimistic about having a solid year in terms of loan growth.

Manan Gosalia, Analyst

And are there any paydowns being factored in on that CRE side? Or is it just a function of the value of the curve being higher, and therefore, you expect lower demand there?

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

I believe that the expected paydowns will be influenced by some projects that have been funded. As Phil mentioned, we mainly act as an interim construction lender, assisting in getting projects built and stabilized, which are now likely ready to be sold or transitioned into permanent loans. That's the main consideration. Additionally, as Phil pointed out earlier, we are examining a significant number of commercial real estate loans, but we're not processing them at the same pace due to higher interest rates making them more challenging to secure.

Operator, Operator

Our next question is from Will Jones with KBW. Please proceed.

William Jones, Analyst

Yeah, hey guys, thanks for the question. Subbing in for Catherine Miller this afternoon. Just wanted to keep a follow-up on that balance sheet growth conversation. It sounds like with the outlook for loan growth maybe outpacing what you expect on the deposit side. Do you feel like the investment portfolio really will hold more flat? Like in other terms, you don't expect to be a net purchaser of securities in 2025?

Phil Green, Chairman and CEO

Right now, we've had this, I'll call it, kind of optionality with our balance sheet, with our liquidity rates being close to 20%. So, we're going to look to invest some of that in the first quarter. And so you can look for our purchases to accelerate here in the first quarter of securities. We feel like we can utilize some of that liquidity to both support loan growth, as you mentioned, but also take advantage of what the yield curve is giving us right now with it being more positively sloping.

William Jones, Analyst

Yes. Okay. And any way to quantify how aggressive you guys may be and kind of taking down from your liquidity?

Phil Green, Chairman and CEO

Yes. So we're looking at about a little over $2 billion in securities that will either mature or expect to be called for prepayments. And so we'll have that available to use. And so we're looking at around a $4 billion investment purchase strategy in 2025, utilizing about half of that in the first quarter.

William Jones, Analyst

Okay, that's great information. Now, regarding the margin and net interest income guidance, last quarter we mentioned that we expected to land in the 45% range for deposit betas, aligning with what can be achieved in an economic cycle. However, looking at this quarter's deposit costs, it seems you've almost matched that beta. So, I'm curious if you see this as a pull forward in that bid. We discussed a potential lag effect before, but do you think you may have advanced some of that beta this quarter, and will it stabilize as industry growth ramps up next year, with a tougher environment for deposit costs? Or do you believe that beta might be more sustainable, allowing you to possibly outperform on deposit costs as we move through this year?

Phil Green, Chairman and CEO

I believe the deposit beta will stay around 45% on a cumulative basis, so I don't think we're too far off. We'll pay attention to our customers and the competition to determine any necessary adjustments in pricing for our deposit products. Currently, we feel positive about how we've treated customers fairly during this period, and we intend to maintain that approach moving forward.

William Jones, Analyst

Yes. Okay. And then, just lastly for me. I know when we talked historically in terms of each cut, it has about $1 million a month impact on NII. Do you guys still see it the same way? Is that still how we should kind of think about how rates have an initial impact on the income statement?

Phil Green, Chairman and CEO

Yes. I think it's around about $1.7 million. That's kind of where we plan for that cut for one.

Dan Geddes, Group Executive Vice President and CFO

Yes. I'd just say that's an other-things-equal number there. So be careful with that. It remains to be seen what happens with deposits, positive or negative with all of that. So, yes. Well, the number is accurate. It is what it is. It's pretty linear in terms of the arithmetic. What else happens in the balance sheet and around all that remains to be seen. Just always need to say that.

Operator, Operator

Our next question is from Ben Gerlinger with Citi. Please proceed.

Benjamin Gerlinger, Analyst

Hi, good afternoon. I think you mentioned that you opened your sixth branch in Austin. You probably have about a dozen more to go. The filing year is 2026. When you consider growth in expenses, do you think what we see this year will be similar to growth and expenses in 2026, or is there something being advanced in expenses to achieve the high single-digit targets?

Dan Geddes, Group Executive Vice President and CFO

When I look ahead to 2025, we will continue investing in technology, particularly to replace legacy systems, a process that will carry on into 2026. Additionally, we are focused on compliance, cybersecurity, and our ongoing expansion. We have made significant progress in terms of our workforce, and the pace of growth will reflect the development of our infrastructure, especially in IT. We are also seeing growth related to our team expansion. We feel confident that we are compensating our employees fairly and competitively, with benefits that align well with the market and are actually quite strong. This creates a great value proposition, and we have experienced lower attrition than the industry average. This investment is proving to be worthwhile. I hope this provides sufficient insight for 2025.

Benjamin Gerlinger, Analyst

Yes, I want to clarify that you are in growth mode, which justifies your investments. Phil or whoever wants to address the question, when considering competition in the market, some banks that have experienced a more rapid growth—whether through expanding their reach or overall growth—have pointed to other banks or nonbanks being more aggressive in the sector. I’m curious to know if it’s mainly about interest rates, or if there are other factors contributing to the increasing competition. I understand you haven't changed your credit criteria, but have you noticed a rise in competition over the last 60 to 90 days?

Phil Green, Chairman and CEO

Yes, we have experienced some changes. There are different factors at play, coming from both banks and nonbank institutions. The banks that had previously stepped back from commercial real estate are now re-engaging, especially with some of the better deals. We're noticing a trend where they are revisiting some of the underwriting practices from before COVID, which often involve longer-term financing options without guarantees at lower prices. This situation will also influence wages, leading to more opportunities for us. Additionally, in the past three months, we've observed increased involvement from private equity in the marketplace, particularly in commercial real estate bridge financing, mainly within multifamily projects. The private equity firms typically offer rates that are slightly higher but with less stringent criteria compared to traditional lenders, such as debt service coverage ratios and amortization terms. Their focus is more on getting projects to stabilization. Once stabilization is achieved, conventional lenders may step in, providing more financing options. Currently, cap rates for multifamily properties remain attractive despite facing challenges like higher interest rates, increased operating costs, and rising supply, which have all contributed to slower lease-up periods. While some properties are leasing with the incentive of free rent, these factors can stress traditional lending metrics. However, if projects reach a stabilized state or exceed break-even points, many financing options become available. Looking ahead, we are curious about the long-term implications of private equity's entry into the market. We might see them becoming more involved in traditional construction and development lending as they seek out investment opportunities. Overall, the recent trends suggest our competitive landscape is shifting positively, particularly with regard to private equity's impact on multifamily lending.

Operator, Operator

Our next question is from Peter Winter with D.A. Davidson. Please proceed.

Peter Winter, Analyst

Hi, good afternoon. I wanted to ask about the capital strategies going forward? Obviously, the top priority is organic growth, but you did announce a share buyback. I'm just curious how active you plan to be with the buyback? And secondly, if there's any thought of maybe retiring some of the preferred securities as a use of capital?

Phil Green, Chairman and CEO

Our current focus is straightforward. We are committed to maintaining a solid dividend, which we've increased for 31 consecutive years. With Jerry Salinas having retired at the beginning of the year, his final message was to ensure the dividend remains strong. If he were on this call, he would be emphasizing that point. We aim to allow ample room for growth. Regarding the buyback, our approach is entirely opportunistic, and we have utilized approximately $50 million for that purpose.

Dan Geddes, Group Executive Vice President and CFO

That's right.

Phil Green, Chairman and CEO

I think we bought in around $100 or so. And so it's been good for shareholders. But frankly, I hope not to have the opportunity to buy low on the stock, really. And then with regard to the preferred, you just have to look at it and see what the numbers sit. I'm just to be honest, we haven't really talked about it. But since you asked, we'll look at it. But thanks for the heads up on it.

Peter Winter, Analyst

And then if we could just go back to expenses. I hear you about the investments that you're making with the branch build-out and the investments in technology. I'm just surprised it’s probably a little bit higher than what I was expecting, just thinking that was going to moderate more than what we've seen the last few years, and it's still pretty elevated. I'm just wondering, just outlook with expenses, when we should see it kind of moderate from these types of levels.

Dan Geddes, Group Executive Vice President and CFO

We see these as investments that will facilitate our growth trajectory. We expect that by 2026, we may experience a slowdown in that growth. Looking back at our expense growth over the past four years, if I exclude the FDIC limit from 2021 to 2022, we had 16%, then 15%, followed by 10%, and now we project high single digits. This indicates a positive trend. However, we are very conscious of our expenses. Any new full-time employee or capital expenditure over $100,000 requires my and Phil's approval. We are monitoring costs as best as we can, but we also recognize the importance of making these investments. We are in the process of updating outdated systems, and failing to do so would be a mistake in the long run.

Phil Green, Chairman and CEO

Peter, we are a cautious group, and it can be unsettling to see how much we are spending. To be completely upfront, we approach everything with a high level of accountability, and we believe this spending is contributing to our improvement, growth, and risk reduction. As someone mentioned earlier, we are in a growth phase and have been building toward that. We have laid some foundational groundwork. However, Dan, the management team, and I have discussed our concerns over the current pace of expense growth. While we don't believe our spending is misguided, we would prefer it to slow down a bit. As I mentioned earlier, there are times to invest and times to benefit from those investments, and we are eager to reach that point of reaping rewards. To do this effectively, we need to bring our expenses down to a more sustainable level. We don’t plan on merely cutting costs or growing in line with inflation since we are currently experiencing growth, which we appreciate and want to continue. At this stage, we feel we have made necessary decisions, and we look forward to seeing returns on these investments, which our team and company are committed to achieving.

Dan Geddes, Group Executive Vice President and CFO

We are focused on our investments in technology, particularly in the areas of digital experience, modernization, and transformation. As I mentioned, we're also prioritizing security, fraud prevention, and compliance risk management. Additionally, as Phil pointed out, we are a growing company, expanding our branches, workforce, and mortgage product offerings.

Peter Winter, Analyst

That's perfect. And just to be clear, the expense growth of high single digit is on a GAAP basis for '24. Is that correct?

Dan Geddes, Group Executive Vice President and CFO

Yes.

Operator, Operator

Okay. Our next question is from Jon Arfstrom with RBC Capital Markets.

Jon Arfstrom, Analyst

Question back on loan growth. You got some pretty strong pipeline growth, and I'm just curious what you're thinking on what would bring you in at the lower end of the range, what would take you to the higher end of the range?

Phil Green, Chairman and CEO

I'm going to mention payoffs in commercial real estate. Many are looking to use private equity bridge financing, and some might sell properties if they can't manage it. But I would say it primarily involves payoffs. For instance, in this quarter, we moved multifamily deals to a problem loan category, but I'm not concerned about them because 60% are working with private equity to pay off. They are likely to resolve, but part of the resolution means those balances will decrease. If we have five left, I'd estimate around $150 million. If we see a lot of payoffs, that could lead to a one-time reduction. That’s the main factor I see influencing the lower range. On the higher end, the economy has notably improved, and activity has increased since the election, reducing prior uncertainty. I think C&I loans declined for about four months leading up to the election but have risen every month since then. This is just starting, and we’ll see how it unfolds. Currently, there's growing activity, and while I hesitate to use the term "animal spirits," it does play a role in motivating people to undertake projects. We might see some increase, and energy levels are improving slightly, although they can fluctuate depending on our borrowers. In general, I believe overall activity will increase.

Jon Arfstrom, Analyst

When you guys say mid to high, you're saying 5% to 9% basically. And maybe it's safe to be in the middle. I don't want to pin you down, but that's the way I'm thinking about it?

Dan Geddes, Group Executive Vice President and CFO

That's a good range.

Jon Arfstrom, Analyst

Okay. And to use full year average or period end, I know we're getting ticky-tacky, but?

Dan Geddes, Group Executive Vice President and CFO

That's full year average.

Jon Arfstrom, Analyst

Full year average, okay. And then on noninterest income, you guys had a strong year, and you pulled back the growth rate a little bit. But anything you would call out in the '24 growth rates in the big categories, trust, investment management, insurance, interchange. Anything you would call out as unsustainable? It just seems like you could do a little better than I'm just curious on your guide?

Dan Geddes, Group Executive Vice President and CFO

I guess one thing I'll point out is Capital Markets had a tremendous year in '24. And so we're not necessarily expecting to duplicate that. We underwrote a lot of bond offerings here in Texas. And so they had a great year. That's one notable. The other is just a little bit of unknown of interchange and overdraft regulation and when that kicks in. And so we have that baked into our '25 growth as well.

Operator, Operator

Our next question is from Ebrahim Poonawala with Bank of America. Please proceed.

Ebrahim Poonawala, Analyst

Thank you. Good afternoon. I have a follow-up question. I heard your comments about the returns from recent investments. You mentioned plans for 200 branches this year and 131 in 2019, which reflects the work your team has done. Do you think 200 branches is sufficient? Is it possible that in two years you could expand from 200 to 250 branches? I would like to know your perspective on how you are maximizing the market opportunity with this branch expansion. Is there potential for further growth, and why might you choose not to pursue that growth now instead of later?

Phil Green, Chairman and CEO

Yes, Ebrahim, we're going to keep moving forward with this strategy. You'll notice a consistent approach in how we identify and develop strong markets in the state. Looking ahead, we expect to complete our work in Dallas and Austin within the next two years. By that time, our Houston 1.0 expansion will be around eight years old, and the city has already seen significant growth during this period. This gives us the chance to capitalize on the market's development. Unlike our initial expansions, where we focused on filling large gaps, we will now target areas experiencing growth. For instance, after establishing in Katy, Texas, interest is rising for developing communities to the west. The same pattern is observable in Dallas and other regions. Our goal is to pinpoint opportunities we missed during our first expansion phase and identify growing markets. I've encouraged our team to remain forward-thinking about where the market is headed. As the state expands, I want us to secure locations with warehouses in promising markets, ensuring we aren't scrambling to find opportunities as they arise. This approach should be sustainable and scalable for the foreseeable future. It's worth noting, Ebrahim, that as we continue with this strategy, the proportion of our market locations that are new compared to older, less developed sites will increase. If we maintain a consistent pace of opening new locations each year, these new sites will represent a smaller percentage of our overall balance sheet. However, we will keep pushing forward. The bright side is that our shareholders will start seeing returns on these investments soon, and I believe this positive trajectory will remain for a long time.

Dan Geddes, Group Executive Vice President and CFO

And the two markets that we're in, Houston and Dallas. In June of this year, we had a 2.5% market share in Houston and just over 1% market share in Dallas. So there's just in those two markets, there's plenty of room for us to grow there.

Operator, Operator

We do have a follow-up question from Peter Winter with D.A. Davidson. Please proceed.

Peter Winter, Analyst

Sorry about this. Just Dan, can I just clarify the point on the fee income outlook with the overdraft fees? You're assuming that some change to the way overdraft fees are calculated gets reduced? And I'm just wondering if that's baked into the guidance and how much of an impact that is?

Dan Geddes, Group Executive Vice President and CFO

It is included in the projections for the latter part of the year, along with interchange. Just to emphasize, that may or may not happen, but we have it factored in.

Phil Green, Chairman and CEO

We hope it doesn't.

Dan Geddes, Group Executive Vice President and CFO

Yes, especially with overdrafts as they have been increasing alongside our customer growth. We are taking steps to manage this, as these overdraft fees aren't crucial to our long-term goals. We provide overdraft grace and additional services to assist customers, but we've observed that consumers are spending the extra money they received after the pandemic, which has led to an uptick in overdraft occurrences, returning to levels more reflective of pre-pandemic spending per customer. If this trend changes, we might not achieve the same level of fee income.

Peter Winter, Analyst

Can you quantify how much you earned in '24 and what type of level you expect in '25?

Dan Geddes, Group Executive Vice President and CFO

Yes. In terms of our higher fee income, we experienced approximately $5.5 million in growth from '23 to '24. Looking ahead to '25, we anticipate that this will be limited. Additionally, we will begin reducing about $1 million a month starting in July.

Operator, Operator

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Phil for closing remarks.

Phil Green, Chairman and CEO

Everybody, we thank you for your interest and for participating in this call today. And with that, it will be adjourned. Thank you.

Operator, Operator

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