Earnings Call Transcript
CULLEN/FROST BANKERS, INC. (CFR)
Earnings Call Transcript - CFR Q2 2024
Operator, Operator
Greetings. Welcome to Cullen/Frost Bankers Inc. Second Quarter 2024 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the call over to A.B. Mendez, Senior Vice President and Director of Investor Relations. Thank you. You may go ahead.
A.B. Mendez, Senior Vice President, Director of Investor Relations
Thanks, Jerry. This afternoon'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.
Phil Green, Chairman and CEO
Thanks, A.B. Good afternoon, everyone and thanks for joining us. Today, I'll review second quarter results for Cullen/Frost, and I'm accompanied on the call by our CFO, Jerry Salinas and Dan Geddes, who will offer additional comments. Before I discuss the quarter, I'm sure you all saw our recent announcement of Jerry's retirement at the end of the year after a brilliant career of almost 40 years with Frost. Throughout that time, Jerry has been a part of virtually every major initiative that we've undertaken and I've been blessed to work with him during that entire time, and he will be missed. And rest assured, we plan on maximizing his contributions before his well-deserved retirement. Jerry will be succeeded as CFO by Dan Geddes, who joins us on the call today. Dan has broad experience over his 25 years at Frost, having served in the credit function, headed our Commercial Real Estate division in Houston, successfully executing our initial organic expansion strategy in Houston 1.0 and in leading the San Antonio headquarters market as Regional President overseeing all our commercial activities there. In the second quarter, Cullen/Frost earned $143.8 million or $2.21 a share compared with earnings of $160.4 million or $2.47 per share reported in the same quarter last year. Our return on average assets and average common equity in the second quarter were 1.18% and 17.08% respectively, compared with 1.3% and 19.36% for the same period last year. These results are due to our Frost Bankers continuing to execute our organic growth strategy. Average deposits in the second quarter were $40.5 billion, down 1.2% from $41 billion in the second quarter last year. As was the case in previous quarters, Cullen/Frost didn't utilize any Federal Home Loan Bank advances, brokered deposits or reciprocal deposit arrangements to build insured deposit percentages. Average loans grew by more than 11% to $19.7 billion in the second quarter, compared to $17.7 billion in the second quarter of last year. I'll now call on Dan Geddes to review the results from our expansion programs.
Dan Geddes, CFO
Thank you, Phil. I echo your sentiments about Jerry; he will be very big shoes to fill, and I look forward to leveraging his institutional knowledge as we move through this transition period. We continue to see excellent results in our organic growth program, where our Houston expansion on a combined basis, what we call Houston 1.0 and 2.0, stands at 102% of deposit goal, 142% of loan goal and 119% of our new household goal. Breaking out the two, Houston 1.0 stands at 97% of the deposit goal having recently experienced similar commercial deposit trends as the legacy company, 142% of loan goal and 117% of new household goal. Houston 2.0, which we expect to complete later this year or early in 2025, stands at 205% of deposit goal, 142% of loan goal and 158% of our new household goal. For the Dallas market expansion, we stand at 141% of deposit goal, 187% of loan goal and 178% of our new household goal. We have the first three locations in our Austin expansion project open with several more planned to open before the end of this year. At the end of the second quarter, our overall expansion efforts have generated $2.2 billion in deposits, $1.5 billion in loans and added 50,783 new households. As Phil and Jerry have mentioned in the past, for perspective, the largest acquisition in our history was a company with $1.4 billion in deposits. In addition, the successes of the earlier expansion projects are mainly funding the current expansion. We expect the Houston expansion to fund the Dallas and Houston expansions in 2025, with 2026 being the year that all three expansion efforts are accretive to earnings. Since we began the expansion five years ago, we have added 58 locations to our branch network in the expansion regions, or about one new location every month for the last five years. Those 58 locations now represent 30% of our entire branch network across Texas. The expansion branches are growing at an impressive rate and becoming a more meaningful part of Cullen/Frost. For the second quarter, growth in average loans and deposits in the expansion branches were up an unannualized 9% linked-quarter, and both average loans and deposits were up 47% year-over-year. The expansion now represents 7.6% of total loans and 5.4% of total deposits for our entire company. For perspective, at the same time last year, the expansion represented 5.8% of loans and 3.6% of deposits of our company. For the respective regions of Houston and Dallas, the expansion represents 23% of Houston's loans and 21% of deposits. For Dallas, the expansion is already at 14% of loans and 14% of deposits. And now, I'll turn the call back over to Phil.
Phil Green, Chairman and CEO
Thanks, Dan. In our consumer bank, we continue to see excellent growth across the board. Average balances in consumer loans were up more than 22% to $571 million year-over-year. This excellent loan growth was driven by record consumer real estate lending, which includes both second lien home equity loans and our new mortgage products. Mortgage loan fundings were $76 million in the quarter, which is over three times our first quarter fundings. So we're gaining momentum as this product matures. At quarter end, our mortgage portfolio stood at $132.4 million. And I should also mention how proud we are that CNN recently rated Frost as the best mortgage lender in Texas. This will be a great asset class for us. Average balances in consumer deposits have returned to positive growth territory, with a year-over-year increase of 1.4% or $253 million. Finally, we continue to see high-quality industry-leading checking household growth of 5.8%. We do not offer any cash incentives to become a customer, which have become so commonplace in the industry, because people are choosing Frost based on our reputation for outstanding service, recognized by J.D. Power for 15 years in a row. Our investments in our organic expansions in Houston, Dallas and Austin, as well as our investments in marketing are driving these stellar results in our Consumer Bank, and we expect this to continue. Looking at our commercial business, on a linked quarter basis, average loan balances increased at an annualized rate of 8.7% for C&I and 10% for CRE. In the second quarter, we brought in 977 new commercial relationships, an increase of 19% on a linked quarter basis, representing the second highest quarterly increase ever. This coincided with us achieving our second highest level of quarterly calling activity, within 1% of the record high set in the first quarter. New loan commitments totaled $1.98 billion in the second quarter, an increase of 58% compared to the first quarter and an increase of 29% compared to the second quarter last year. The split of commitments booked in the second quarter was about 54% for larger credits and 46% for core credit; so good balance there. Credit is good by historical standards, with net charge-offs and non-accrual loans both at healthy levels. We continue to see some normalization in credit terms and risk rating migrations in the portfolio as we come off historic lows in problem loans, but we haven't experienced higher credit losses as our borrowers and the Texas economy overall have so far proven to be resilient. Net charge-offs for the first quarter were $9.7 million compared to $7.4 million and $9.8 million a year ago. Annualized net charge-offs for the second quarter represented 19 basis points of period-end loans. Non-performing assets totaled $75 million at the end of the second quarter, compared with $72 million last quarter and $69 million a year ago. The quarter-end figure represents just 38 basis points of period-end loans and 15 basis points of total assets. Problem loans, which we define as risk grade 10 or higher, totaled $986 million at the end of the second quarter. That's up from $810 million at the end of the first quarter and $442 million this time last year. The growth in the quarter was mainly due to a few larger C&I credits, mostly in the classified substandard category. About 22% of our problem loans overall are tied to investor commercial real estate. Slightly less than 50% are related to C&I credits, with most of the rest in owner-occupied real estate loans which are closely related to C&I loans. Regarding commercial real estate lending, our overall portfolio remains stable with steady operating performance across all asset types and acceptable debt service coverage ratios and loans to value. Within this category, what we consider to be the major categories of investor CRE, office, multifamily, retail and industrial as examples, totaled $4.1 billion or 46% of CRE loans outstanding. Our investor CRE portfolio has held up well with the average performance metrics stable to slightly improved quarter-over-quarter, exhibiting an overall average loan-to-value at underwriting of about 52% and average weighted debt service coverage ratio of about 1.55. The investor office portfolio specifically had a balance of $981 million at quarter-end and exhibited an average loan-to-value of 52%, healthy occupancy levels and an average debt service coverage ratio of 1.57, which has slightly improved for the third consecutive quarter. Our confidence in our office portfolio continues to be based on the character and expertise of our borrowers and sponsors and a predominantly Class A nature of our office building projects. And with that, I'll turn it over to Jerry.
Jerry Salinas, Group Executive Vice President, CFO
Thank you, Phil. Before I begin with my prepared remarks about the quarter, I want to say that as I head into these last few months of my career here at Frost, I feel deeply honored and humbled to have had the opportunity to work for such a remarkable company with an outstanding culture for over 38 years, all of which I've spent working for Phil. I feel truly blessed to have had this opportunity, including serving as CFO for the past 10 years. While I look forward to the next chapter, I will truly miss my incredible teammates who have made this journey so special. I know that Dan will do an outstanding job in his new role as CFO. Looking at our net interest margin, it was 3.54% for the second quarter, up six basis points from the 3.48% reported last quarter. The increase was primarily driven by higher volumes of loans along with higher yields on loans and investment securities. These positives were partially offset by higher costs of interest-bearing deposits and to a lesser extent lower balances at the Fed compared to the first quarter. Looking at our investment portfolio, the total investment portfolio averaged $18.6 billion during the second quarter, down $696 million from the first quarter. During the second quarter, investment purchases totaled $337 million, with $235 million of that being Agency MBS securities, yielding 5.69%, and $102 million in municipals with a taxable equivalent yield of 5.50. The net unrealized loss on the available-for-sale portfolio at the end of the quarter was $1.63 billion, an increase of $42 million from the $1.59 billion reported at the end of the first quarter. The taxable equivalent yield on the total investment portfolio in the second quarter was 3.38%, up six basis points from the first quarter. The taxable portfolio, which averaged $12 billion, was down approximately $489 million from the prior quarter with a yield of 2.92%, up nine basis points from the prior quarter. Our tax-exempt municipal portfolio averaged $6.6 billion during the second quarter, down $207 million from the first quarter and had a taxable equivalent yield of 4.30%, up three basis points from the prior quarter. At the end of the second quarter, approximately 71% of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of the second quarter was 5.5 years, flat with the first quarter. Looking at deposits, average total deposits of $40.5 billion were down $215 million, or 0.5% from the previous quarter. We did continue to see a mix shift during the second quarter as average noninterest-bearing demand deposits decreased $298 million or 2.1%, while interest-bearing deposits increased $83 million or 0.3% compared to the previous quarter. Based on second quarter average balances, noninterest-bearing deposits as a percentage of total deposits were 33.8% compared to 34.3% in the first quarter. The cost of interest-bearing deposits in the second quarter was 2.39%, up five basis points from 2.34% in the first quarter. Looking at July, month-to-date averages for total deposits through yesterday are down about $140 million from our second quarter average of $40.5 billion, with interest-bearing being down $60 million and noninterest-bearing down $80 million month-to-date. Customer repos for the second quarter averaged $3.8 billion, basically flat with the first quarter. The cost of customer repos for the quarter was 3.75%, down one basis point from the first quarter. The month-to-date July average balance for customer repos was down approximately $120 million from the second quarter average. Looking at noninterest income and expense on a linked quarter basis, I'll just point out a couple of items. Insurance commissions and fees were down $4.4 million or 23.9%. As I've mentioned in previous quarters, Property & Casualty and benefit company bonuses are typically received in the first quarter, contributing about $3.1 million of the decrease compared to the first quarter. In terms of non-interest expenses on a linked quarter basis, benefit expense was down $7.2 million or almost 20%, impacted by lower payroll taxes and 401 pay expenses related to annual bonuses paid during the first quarter. Deposit insurance was down $6.3 million as we recognized $1.2 million in special FDIC assessments in the second quarter compared to $7.7 million related to the special assessment in the first quarter. Looking at capital, during the second quarter, we bought back $30 million of our stock, translating into a little over 300,000 shares at an average price of $99.50. Regarding our guidance for full year 2024, our current projections include 225 basis point cuts for the Fed funds rate over the remainder of 2024 with one cut in September and another in November, which is consistent with our previous guidance. Looking at loans, on a year-to-date average basis, loans are up 10.8% compared to last year-to-date. We now expect full year average loan growth in the range of high single digits to low double digits, a little higher than our previous guidance. Looking at deposits, the current year-to-date average is down 3% compared to last year-to-date. We now expect full year average deposits to be flat to down 2%, down from our previous guidance of flat to growth of 2%. We expect net interest income growth in the range of 2% to 3%, down from our previous guidance of growth in the range of 2% to 4%. The net interest margin percentage is still expected to trend slightly upward each quarter for the remainder of the year. Based on year-to-date growth and current projections, we project growth in non-interest income in the range of 2% to 3%, up from our previous guidance of flat to up 1%. Based on year-to-date results and current projections, we are projecting non-interest expense growth in the range of 6% to 7% on a reported basis, down from the 6% to 8% previous guidance. I will say, however, that we continue to be focused on bringing that expense growth percentage down. Regarding net charge-offs, we still expect those to rise to a more normalized historical level of 25 basis points to 30 basis points of average loans. And regarding taxes, our effective tax rate for the full year 2023 was 16.1%, and we currently expect a flat to slightly higher effective rate in 2024. With that, I'll now turn the call back over to Phil for questions.
Phil Green, Chairman and CEO
Thank you, Jerry. We'll now open up the call for questions.
Operator, Operator
Thank you. Our first question is from Steven Alexopoulos with JPMorgan. Please proceed.
Steven Alexopoulos, Analyst
Hi, everybody.
Phil Green, Chairman and CEO
Hey, Steven.
Jerry Salinas, Group Executive Vice President, CFO
Hey, Steven.
Steven Alexopoulos, Analyst
Let me start. So you guys had good commercial loan growth. Can you talk about what you saw from a line utilization trend? Is that what drove the loan growth? Or is this all share gains?
Phil Green, Chairman and CEO
No, it wasn't line utilization, Steve. It was growth. I don't know if I framed it in terms of share gains, but I guess we did do pretty well relative to the market. But it was just good activity. It was mainly if you look at new commitments that we had, which I realize they are not balances but they are the basis of those balances; new commitments for the quarter were up strongly. About 80% of it was from C&I and energy; we had a really good quarter on energy this time, some really well underwritten deals, good structures, and good relationships. So it was just good activity. Our people are working hard. And I think I said we had our second highest quarter of calls in the second quarter and things are just going well, to be honest.
Steven Alexopoulos, Analyst
And Phil on the commercial real estate side, you guys had good growth there. It's an area where many peers continue to pull away from. Are you just being opportunistic stepping in where others are stepping back? And should that be a continued driver of loan growth in the back half?
Phil Green, Chairman and CEO
Well, I think balanced growth in C&I is primarily driven by projects that have been put in place in the past and you're seeing those fund up. I don't see that being a developing driver of balanced growth going forward. I mean, there will be some, and we are being opportunistic in several areas. I mean, you may think I'm crazy, but we did an office building loan in San Antonio in the quarter. With a great sponsor, great project, great metrics, etc. So it was mainly about great people we wanted to bank, and had relationships with. So we continue to bank people, not things. And we are taking advantage of business as it presents itself, and it's what we want to do.
Steven Alexopoulos, Analyst
Okay. Thank you. And then just finally, I want to ask you about your deposit strategy because when the Fed started raising rates, I remember you guys were one of the first banks that started raising deposit rates for your customers. I think on the call you said you were going to share the benefit with them. That was while many peers were not raising rates, and then there was a big lag for the industry, which you guys really didn't see. But with the Fed looking like they're about to cut now, what's your strategy? Do you take that benefit back more quickly? Do you see what the competitive environment does first? How are you thinking about it at this stage?
Jerry Salinas, Group Executive Vice President, CFO
No, Steven, you're exactly right with the history there. Our current expectations are that we would move in the same manner we went up; we would move back down in that same sort of manner. Obviously, I always give that caveat. We'll continue to look at what competitors are doing, but we were quick to go up and expect that we'd be able to make those same sort of decreases on the way down.
Steven Alexopoulos, Analyst
Okay. Perfect. Thanks for taking my questions.
Jerry Salinas, Group Executive Vice President, CFO
Thank you.
Operator, Operator
Our next question is from Dave Rochester with Compass Point. Please proceed.
Dave Rochester, Analyst
Hey, good afternoon guys. On the NII guide, I appreciated all the color on your assumptions for rate cuts there. I think last quarter you mentioned you get roughly $1.4 million and a hit on a monthly basis for each 25 basis point rate cut, correct me if that's wrong. But is that about the same today? And then just given what you just said in terms of moving deposit costs down at a similar pace as the increase on the way up, that's how you're thinking about it from the first cut? Or is there a little delay? Thanks.
Jerry Salinas, Group Executive Vice President, CFO
Yes. No right from the first cut is what we're currently thinking. But I'll continue to say we'll look at what the market is doing, but our current thought process is we will move immediately. As far as what the cost or the benefit if you will or the cost of the hike or cut, it is probably a little bit higher and a lot of that is going to be dependent on how much liquidity we have. So that can move. Today I'd probably tell you, if you said it was $1.4 million, I think it might be in the range of $1.5 million to $1.6 million. So not too far different, but it's really going to be dependent on how much liquidity we have at the Fed. And that's from a per month basis, as you said, on a pre-tax basis.
Dave Rochester, Analyst
Yes. Got it. All right. And then just following on the loan growth discussion, it sounded like you saw a decent amount of strength in C&I. You mentioned energy. Are there any other areas where you're seeing particular bright spots there?
Phil Green, Chairman and CEO
No, I wouldn't say there's anything that stands out. The energy growth was unusual in terms of its strength during the quarter. But no, I think it's just been good growth overall. We've been seeing lots of good opportunities and taking advantage of them.
Dave Rochester, Analyst
Yes. Okay. And on the credit side, you talked about the problem loan increase. Some of that, it sounded like it was on the C&I front. Any patterns there or any color just on the industries where you saw a little bit of weakness?
Phil Green, Chairman and CEO
Yes. I would say it was driven by two industries that we've talked about over the last few quarters as we've had the interest rate increases. It would be in contractors. There were a couple of large contractors that we moved to the classified position based on their situation. And then we've had a couple of automobile dealers. One was a used car dealer and almost a new car dealer in the South Texas area. Car dealers have been pressed. Certainly, the used car dealers have been pressed by the increase in interest rates, higher floor plan costs, if they're financing with 'buy your pay here,' their credit losses have been higher. They've had a perfect storm and some dislocations in that industry. We've talked about those over the last several quarters. The contractors are ones that we'd like to believe have a path forward in the not-too-distant future, but we'll just have to see. But it's not commercial real estate. I will mention there were a couple of multifamily deals that we did move to risk grade 10, and really, that was because they had come upon their covenant and their loan agreements had been introduced at that time in that agreement after a three-year period. They were below their covenants and are working to move those back either through operations of the property or through a sale or refinancing, and we think those will both be just fine. But because of that situation with the covenant, we elected to move that to risk rate 10. I think we'll see more flow in and out of that. I think some of these will flow out, and we will see new ones come in. But I'm really not concerned with the multifamily situation and the debt service covenant ratios that could cause them to be in a risk grade 10 at any one point in time.
Dave Rochester, Analyst
All right, great. Appreciate it guys. Thanks.
Operator, Operator
Our next question is from Ebrahim Poonawala with Bank of America. Please proceed.
Ebrahim Poonawala, Analyst
Hey, good afternoon. So I guess first Jerry and then congratulations to each of you on the retirement and the new role. I know you have a few months. I'm glad Phil is going to extract the last bit out of you, Jerry. But maybe I think I heard this earlier just big picture question; I think when you shared the stats about the new branches, it sounded like as we fast forward to 2026 all three expansion for the markets would be breakeven. So two questions on that. One, what's the exact earnings or returns today because of this investment spend, and I'm just trying to get to what operating leverage that we should expect as we think about ROA and ROE once we get to '26? And is there more appetite or need to add a similar number of branches over the next five years once this is done?
Phil Green, Chairman and CEO
Yes. Well, let me answer the second part. This is our strategy, and I hope that they'll continue to be really good opportunities in the state of Texas for us to continue to expand. We expect that they are. We're doing some work now to identify those places and trying to see where the puck is going to go and not get behind that. In 2026, I think as Dan and Jerry have mentioned before, we expect it to be basically breakeven. We're going to be adding several locations in Austin, so I think we'll be basically breakeven next year. And all things equal, that's when you'd see some significant accretion from that program and continuing to move forward from there. But we've got to remember that if we have opportunities to expand into very attractive markets, we're going to do it because, as I've said many times, this strategy is durable, scalable, and has been very successful in building great long-term value.
Ebrahim Poonawala, Analyst
Got it. Jerry, I believe you mentioned that you expect net interest margin to increase in the third and fourth quarter. As we consider potential rate cuts, will that trend continue? Are there any measures you might take beyond managing deposits on the asset side to alter the balance sheet, or is there no plan for such actions?
Jerry Salinas, Group Executive Vice President, CFO
Yes. As I mentioned, what our rate scenario is, we do have two rate cuts in there. And don't forget, I did say slightly higher in the next couple of quarters. So, we're not talking about the kind of growth we had between the first and second quarter, which was significant growth. I think for us, the opportunities are what we've talked about before, investment opportunities coming out of that portfolio. Especially this year, as we talk about the latter half of the year, I think we mentioned we have about $500 million just in the fourth quarter under 1%, right, at 96 basis points. So we'll see some uptick there. From a fixed loan standpoint, the size of the portfolio that we have, our bullet sort of fixed-rate loans are probably not as significant. But if you throw in amortizing fixed-rate loans, you could probably get proceeds of about $500 million through the rest of the year and then north of $1 billion next year. So we will have opportunities to reprice those at even higher rates than where we would be even if the rate environment was lower. So I think we do have those opportunities going forward; we'll continue to see what we do on the asset side.
Ebrahim Poonawala, Analyst
And just one quick follow-up. Is it safe for us, given how you've talked about the investment spend how expense growth is tracking this year, that as we look into next year, most likely that expense growth decelerates as opposed to accelerating compared to 2024?
Jerry Salinas, Group Executive Vice President, CFO
From an expense growth standpoint, I mean I think that's what we've been saying, right? The plan would be that the expense growth would not be at the same level of growth that we projected. What I will say is that we're running a pretty tight ship right now. We're doing a lot of things that we need to do. We guided down on that expense growth, and Dan is going to be the new sheriff in town, so we're still trying to get the growth down this year. But there will be some things that we have to do that we know we have to do. So, I've said before, I don't expect our growth rate to be back in that 3% to 4% to 5%. I still think we're probably talking about growth in the higher single digits. And that's all going to be refined and discussed at the January call.
Ebrahim Poonawala, Analyst
Got it. Thank you.
Operator, Operator
Our next question is from Peter Winter with D.A. Davidson. Please proceed.
Peter Winter, Analyst
Thanks. Good afternoon. If I could just follow-up on expenses. I hear you that you lowered the top end of the range for expenses for this year, but it does imply a pretty steep ramp in the second half of the year, and that's on top of core expenses coming down this quarter if I exclude FDIC. Could you just talk about what type of expense initiatives you have in the second half of this year that's driving that?
Jerry Salinas, Group Executive Vice President, CFO
Yes. One of the things we have every year in the fourth quarter are restricted stock awards. There are quite a few of them that vest immediately by their nature. Some of them are age-based. Given some of those awards, you'll see that expense growth. And if you look at our historical trends on expenses, you'll see that the fourth quarter goes up pretty significantly. That's the main driver that comes to mind. Again we're continuing to put these initiatives in place. Our run rate naturally is growing. But as I said, we are looking and trying to ensure that if we are approving expenses, they're things that we really absolutely need to do. I think what you're looking at is primarily driven by increases in compensation associated with true-ups of incentive plans, and then the issuance of the restricted stock is probably the biggest piece of it.
Peter Winter, Analyst
Got it. And then can I just ask a big picture question? If I think about the branch expansion, it's really starting to pay some strong dividends and you've got this long runway for growth as you open up more branches. Are there opportunities maybe to close some underperforming branches or consolidate branches that are close to one another to help manage the expense and offset some of these costs?
Phil Green, Chairman and CEO
Peter, I think there are. In a number of cases, we are closing older locations in these markets and moving them to new locations. I don't know if we count those in the expansion numbers, but that is happening. So rest assured we are looking at locations that are underperforming and that we don't need. We've had good luck and not having a lot of those because we were under-branched. If you look at various competitors in the state, we didn't have a lot to make up there. So yes, we do that and it's not unusual for us to close an old one and get it in a new location that has better growth prospects.
Peter Winter, Analyst
Got it. Thanks, Phil.
Operator, Operator
Our next question is from Manan Gosalia with Morgan Stanley. Please proceed.
Manan Gosalia, Analyst
Hey. Good afternoon.
Phil Green, Chairman and CEO
Good afternoon.
Manan Gosalia, Analyst
I wanted to come back to the loan and deposit guide. So loans up high single to low double digits deposits flat to down 2%. Does cash come down? What makes up the difference? I ask because you highlighted your plan to cut deposit rates as Fed rates come down, but loan growth feels really strong here. So just trying to see where the offset is. And what the appetite is to allow deposits to run down a little if you need to?
Jerry Salinas, Group Executive Vice President, CFO
There's no real interest in reducing deposits. We are a relationship bank focused on deposits, with a loan-to-deposit ratio at 50%. A loan growth of 12% is not a concern for me. We are pursuing valuable opportunities, and we're pleased to be growing at this time. The investment portfolio purchases are likely more manageable. We initially planned to purchase about $1.6 billion this year, then revised it down to $1.2 billion last quarter, and we're now closer to $900 million, having acquired about $0.5 billion year-to-date. This approach is how we’re handling a situation where deposits might be slightly lower. At this moment, we don't have strong convictions, but we believe this is the right strategy. From an investment portfolio perspective, we can more easily slow down our purchases based on current interest rates.
Phil Green, Chairman and CEO
I think Jerry is right on that. Your question highlights something we need to keep in mind: our loan growth is good, but it's really relationship growth because we don't make loans without securing the deposit relationships. In this environment, we've got good loan growth, but we're not seeing as many deposits following on as I think we will see in the future as these things normalize and as rates normalize. So while you may not see the deposit growth now, I'm encouraged that you'll see it in the future.
A.B. Mendez, Senior Vice President, Director of Investor Relations
Yes. To add to that, our ability to provide capital gives us a competitive edge when establishing new relationships in the marketplace. Year-to-date, 38% of our loan balance growth comes from these new relationships, resulting in $249 million in new relationship deposits. This is largely because we are actively engaged and ready for business.
Manan Gosalia, Analyst
Got it. That's great color. Maybe the second part of the question is peers are saying that they expect a sizable pickup in loan growth as rates come down. Is that something you expect as well? I mean loans are already growing 11% year-on-year for the first six months. Could you see an acceleration from here?
Phil Green, Chairman and CEO
No, not necessarily. I don't think we're thinking of it that way. What we're doing is making calls and developing relationships, and I don't think it would move us one way or another. What we might see is if we get some clarity in the political process. It's clear to me that from talking to our loan officers and relationship managers, there are a number of companies that are, as is typical, waiting to see which way the political winds blow, and based upon that visibility, we could see businesses that might be holding off today moving forward. That's what we've heard from a lot of our people. So I've heard less talk about once rates go down than I've heard about once the environment gets more clarity with regard to what kind of administration we might have making the regulatory decisions.
Manan Gosalia, Analyst
Got it. Thanks very much, and Jerry, all the very best and Dan, looking forward to working with you.
Operator, Operator
Our next question is from Brandon King with Truist Securities. Please proceed.
Brandon King, Analyst
Hey, good afternoon. So just following up kind of on the last line of questioning. Could you speak broadly about what you're seeing from a competitive standpoint in your markets? Remember, last call, you mentioned now some lenders were kind of coming back. But could you just speak as far as what you're seeing today?
Phil Green, Chairman and CEO
I believe the competition is increasing. In commercial real estate, we are noticing that people are returning to the market. We had hoped for more demand for guarantees, but many players are not offering them. It seems we're reverting to previous conditions. However, some participants who were absent are now re-entering, which is intensifying competition. Additionally, I've noticed some increased competition from smaller banks in the real estate sector. Dan, what are your thoughts?
Dan Geddes, CFO
Yeah. In the second half, we had a really strong second quarter in terms of closings. With what Phil mentioned about just the uncertainty in the environment, I see it being a little slower, just looking at our weighted pipeline. But in terms of competition from banks and lenders in the marketplace, we've certainly seen it from community banks in the markets that we're in, and we've also seen some regionals decide to enter our markets. So I could see competition picking up.
Brandon King, Analyst
Got it. And how has that impacted pricing discipline, right? You've increased your loan growth guide. So I assume you're getting the right pricing, but has there been any pressure there?
Phil Green, Chairman and CEO
Yeah, there's always pricing pressure. But actually, if you look at the deals we've lost, about three-quarters of those have been due to structure, which concerns us most. With our cost of deposits and funding, we're one of the lower-cost producers in the marketplace, regarding cost of funding. Therefore, we can be very competitive on pricing. Remember, we bank relationships first. If someone passes the test to be a Frost customer and is willing to live within our structures, we don't want to lose that after all that development for a few basis points.
Brandon King, Analyst
All right. Thanks for taking my questions.
Phil Green, Chairman and CEO
Thank you.
Operator, Operator
Our next question is from Catherine Mealor with KBW. Please proceed.
Catherine Mealor, Analyst
Thanks. Good afternoon. As we consider the NII guidance for the year, do you expect to see continued NIM expansion in the second half of the year at a pace similar to what we've experienced so far? Or do you anticipate that the expansion might begin to slow down in the latter half of the year, potentially alongside a moderation in average earning asset growth, or perhaps even a slight increase? How should we approach the relationship between these two factors?
Jerry Salinas, Group Executive Vice President, CFO
Yes. I think the rate of growth will be quicker in the first half and slower in the second half.
Phil Green, Chairman and CEO
Yes, I think the rate of growth will be quicker in the first half and slower in the second half.
Catherine Mealor, Analyst
But still an upward trending margin you think?
Phil Green, Chairman and CEO
Exactly. Yes.
Catherine Mealor, Analyst
And then as we start to price in cuts in the back half of the year or as we get into 2025 whenever that comes, what is your outlook on how the margin initially reacts when we start to see that cut?
Jerry Salinas, Group Executive Vice President, CFO
Again, it depends on timing. But I think based on our current assumptions starting in September, that's really what my guidance was based on. So we still see some upticks. Again that slows down the growth. But we do continue to see that sort of growth projected out through the rest of this year.
Catherine Mealor, Analyst
Great. Is it still an expansion but just the last as we get cuts to that kind of $1.5 million that you were talking about?
Jerry Salinas, Group Executive Vice President, CFO
Yes, we have some investments, with the significant portion being the $500 million. If we're reinvesting, that $500 million in treasuries is yielding 96 basis points. The remainder of the funding is likely in the low three or high two percent range. All of these should offer some upside. Additionally, as fixed-rate loans get repriced, we expect to see an increase there as well.
Catherine Mealor, Analyst
And then any color on just the new growth. The new loans you're putting on relative to new deposits you're putting on, what would you say those two rates are so new loan yields and the new deposit costs today that spread?
Jerry Salinas, Group Executive Vice President, CFO
The new deposit costs will be similar, reflecting the current conditions of the existing portfolio. We use very little exception pricing for deposits, so while there is some, it won’t be significant. Regarding the back book, we are currently looking at a weighted average rate of around 670, while the current market rates are above 8.
Catherine Mealor, Analyst
All right. Thank you. Appreciate it.
Jerry Salinas, Group Executive Vice President, CFO
Sure.
Operator, Operator
Our next question is from Jon Arfstrom with RBC Capital Markets. Please proceed.
Jon Arfstrom, Analyst
Thanks. Good afternoon.
Phil Green, Chairman and CEO
Hey, Jon.
Jerry Salinas, Group Executive Vice President, CFO
Hey, Jon.
Jon Arfstrom, Analyst
A little bit of cleanup here. But Phil, you talked about the mortgage business opportunity earlier in the call. It looks like those volumes have really picked up. Can you talk a little bit about the driver of that and where this can all go and when it shows up in a material way?
Phil Green, Chairman and CEO
Jon, I go back to when we announced that effort actually just over a year ago. We expected that the mortgage book would exceed the consumer book that we had at that time and so over a five-year period. I don't think we have come off of that. It's just a new thing, and we're getting our people used to making recommendations on it. You're getting the realtor community to understand what it is. And we've just got great service. I think it's just going to be a great asset class for us. Just another thing to add is that 30% of our mortgage borrowers are new to the bank. This opens up an opportunity to bring in new customers through this incredible product and then the incredible experience.
Jon Arfstrom, Analyst
Okay. Question for maybe Phil or Dan, what is the significance of the plan when you talk about the performance of the new branches? It looks like all are either on plan or ahead of plan, but as an outsider, what does that really mean? And what's the benchmark that we can use there?
Phil Green, Chairman and CEO
When we started, you might recall, we looked at the performance of the 40 branches we had opened up over the last eight years prior to that time. We averaged that and said if we could match that in the markets we were going to be in, we felt we would have a really successful strategy for our shareholders. So that's what we based it on. We've been measuring what our performance was versus that. We kept it fairly consistent, although I know we've changed that somewhat. Dan, you might talk about that.
Dan Geddes, CFO
We've tweaked it with Dallas; we learned a lot from Houston 1.0 and, as much as it pains me, Dallas is outperforming Houston for the same time period. It goes back to our blue book of continuous improvement. We learned what work we could do better, and Dallas is just doing a great job as you can see from their performance. I would expect the same from Austin as well.
Jon Arfstrom, Analyst
Okay. That helps.
Phil Green, Chairman and CEO
I'd say it's fairly consistent. We'll move it up in a particular market, but we want to keep it somewhat consistent to facilitate comparison, just like Dan did; he's only half joking, but Dallas is outperforming Houston, and that makes a bad... We can have a consistent comparison in these markets, which is helpful to us. We'll try and keep it that way. Making adjustments for the markets that we're in, but we want to keep it somewhat consistent.
Dan Geddes, CFO
Some adjustments are based on timing; what we learned in Houston is the timing of loans, deposits, and new households. We've looked at those trends to ensure we are being consistent but fair.
Jon Arfstrom, Analyst
Yeah. Okay. Well, the growth numbers are great. So that's impressive. Jerry, 10 years is probably 40 earnings calls, so thank you for everything. I was just wondering what the 40-year retirement gift is like at Cullen/Frost; does it still get you a belt buckle or boots or a watch or?
Jerry Salinas, Group Executive Vice President, CFO
We'll have to see. I'll let you know, Jon. Thanks for bringing it up.
Jon Arfstrom, Analyst
All right. Thanks for everything.
Dan Geddes, CFO
Thank you.
Jerry Salinas, Group Executive Vice President, CFO
Sure.
Operator, Operator
We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.
Phil Green, Chairman and CEO
All right. Well thanks everyone for your support and for your questions and interest, and we'll be adjourned.
Operator, Operator
Thank you. This will conclude today's conference. You may disconnect your lines at this time. And thank you for your participation.