Earnings Call Transcript - CFR Q1 2025

Operator, Operator

Greetings, and welcome to the Cullen/Frost Bankers, Incorporated First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. 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. Please go ahead.

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

Thank you, A.B. Good afternoon, everyone, and thanks for joining us. Today, we'll review the first quarter 2025 results for Cullen/Frost. Our Chief Financial Officer, Dan Geddes, will provide additional commentary and guidance before we take your questions. In the first quarter of 2025, Cullen/Frost earned $149.3 million or $2.3 a share compared with earnings of $134 million or $2.06 a share reported in the same quarter last year. Our return on average assets and average common equity in the first quarter were 1.19% and 15.54%, respectively, and that compared with 1.09%, and 15.22% in the same quarter last year. Average deposits in the first quarter were $41.7 billion, an increase of 2.3% over the $40.7 billion in the first quarter last year. Average loans grew to $20.8 billion in the first quarter, an increase of 8.8% compared with $19.1 billion in the first quarter last year. We continue to see solid results driven by the hard work of our Frost bankers and the extension of our organic growth strategy. In just a couple of weeks, we'll open another new financial center in the Austin region and that will be our 200th location. At the time we started this strategy in late 2018, we had around 130 financial centers, which means we've increased that number by more than 50% since that time. And we continue to identify Texas locations for extending our value proposition to more customers. At the end of the first quarter, our overall expansion efforts had generated $2.64 billion in deposits, $1.9 billion in loans and 64,000 new households. Deposits were within 1% of goal, while loans and households exceeded goal by 40% and 27%, respectively. As we've mentioned, the successes of the earlier expansion locations are now funding the current expansion effort and we expect the overall effort will be accretive to earnings beginning in 2026. And as I've said many times, this strategy is both durable and scalable. Strategy continues to drive outstanding growth in our consumer banking business. Average consumer deposits, which make up 47% of our deposit base, grew 3.8% compared with the first quarter last year. Average consumer loan balances grew by 20.5% over a year ago. In our consumer bank, we continue to be driven by delivering a level of customer experience that is unexpected in today's world. These are not just words; this is part of our culture. And you can see the evidence in the back that JD Power recently named Frost number one in Texas for consumer banking satisfaction for the 16th year in a row. This customer experience excellence underlies our ability to deliver consistently strong organic growth that is balanced and durable. Year-over-year consumer checking customer growth continued to be industry-leading at 5.7% in an environment that continues to be extremely competitive for low-cost deposits. The deposit growth in the quarter showed good balance across categories. After several quarters of being weighted towards certificates of deposit. Average balances in the consumer loan were up $611 million, year-over-year making this the 11th consecutive quarter where our consumer loan growth hit 20%. This excellent growth was driven by consumer real estate lending, which is comprised of both second lien home equity loans as well as our new mortgage products. Our second lien home equity products grew $61 million in the first quarter, while our mortgage fundings were $39 million and ended the quarter at $297 million. People are choosing us based on our reputation for outstanding service, our investments in our organic expansion in Houston, Dallas and Austin, as well as our investments in marketing and technology. All these are helping fund and fuel stellar results in our consumer bank, and I expect to see this continue. Looking at our commercial business, average loan balances grew by $1.1 billion or 6.6% year-over-year. CRE balances grew at 8.9%. Energy balances increased 19.8%, and C&I balances increased by 1%. New loan commitments totaled $1.28 billion in the first quarter, up 1.5% from the $1.260 billion in the first quarter of 2024. I think it's interesting and frankly encouraging to look deeper into the dynamics of our commercial business. The first quarter represented an all-time record for calls made by our officers during a quarter at over 54,000 with almost two-thirds of those to customers. That helped us identify a record number for any quarter of new opportunities in our gross pipeline during the first quarter, almost $6.2 billion. That helped our 90-day weighted pipeline increase 27% over the fourth quarter. Customer opportunities were up 38% versus prospects 9%. Of that activity, CRE opportunities over $10 million showed the highest growth. What all this says to me is that our organization and our people are successfully executing the skill sets of a high-performing sales organization, and that makes me optimistic as we move forward. We recorded 972 new commercial relationships in the first quarter, an 18% increase over the first quarter last year and our largest first quarter total ever. Half of the new commercial relationships in the first quarter this year continue to come from what we call the too big to fail banks. Our overall credit quality remains good by historical standards with net charge-offs and non-accrual loans both at healthy levels. Non-performing assets declined to $85 million at the end of the first quarter compared to $93 million at year end. The quarter-end figure represents 41 basis points of period-end loans and 16 basis points of total assets. Net charge-offs for the first quarter were $9.7 million compared to $14 million last quarter and $7.3 million a year ago. Annualized net charge-offs for the first quarter represent 19 basis points of average loans. Total problem loans, which we define as risk grade 10, some people call that OAEM or higher, totaled $890 million at the end of the first quarter, down from $943 million at the end of the year. Our overall commercial real estate lending portfolio remains stable with steady operating performance across all asset types and acceptable debt service coverage ratios. Our loan-to-value levels are similar to what we reported in prior quarters. Finally, I'd like to thank our Frost employees for helping us win that sixteenth consecutive JD Power Retail Banking satisfaction study in Texas. And I also remember that they've only conducted that survey for 16 years, and Frost has been on top for all 16 of them, thanks to our great staff. Those awards, these quarterly results, 50% increase in Frost locations from our expansion efforts, and the strong deposit and loan growth combined with the continued strength and stability of our balance sheet and our 32 consecutive years of dividend increases demonstrate that Frost is built solidly and is well-positioned to succeed in a variety of business environments. When I talk with customers around the state, I often remark that one of the advantages of being at a 157-year-old institution is that we have been through all kinds of things, whether it's high or low interest rates, high or low unemployment, recessions, expansions, pandemics, or changes in economic policy for us have grown and prospered through it all. We take that seriously, which is why we also focus on our core values of integrity, caring, and excellence, and we always strive to provide top quality customer service from the best bankers anywhere, all the while committing to holding safe, sound assets. And with that, I'll turn 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 year-over-year growth, expansion average loans and deposits increased $511 million and $586 million respectively, representing growth of 38% and 30%. The expansion now represents 96% of total loans and deposits using average March month-to-date balances. This compares to 7% of loans and 5% of total deposits at March 2024. Now moving to first quarter financial performance for the company. Regarding net interest margin, our net interest margin percentage was up seven basis points to 3.6% from 3.53% reported last quarter. Our net interest margin percentage was positively impacted by increased volumes of higher yielding taxable securities and loans combined with lower cost of interest-bearing deposits. These positives were offset somewhat by lower volumes and yields of balances held at the Fed. Looking at our investment portfolio, the total investment portfolio averaged $19.4 billion during the first quarter, up $743 million from the prior quarter. During the first quarter, investment purchases totaled $2.1 billion with $1.7 billion being Agency MBS securities yielding 5.82% and $414 million being municipals with a taxable equivalent yield of 5.55%. During the quarter, we had $299 million of municipals roll off at an average tax equivalent yield of 3.86%. The net unrealized loss on the available for sale portfolio at the end of the quarter was $1.4 billion, a decrease of $156 million from the $1.56 billion reported at the end of the fourth quarter. The taxable equivalent yield on the total investment portfolio during the quarter was 3.63%, up 19 basis points from the fourth quarter. The taxable portfolio, which averaged $12.9 billion, up approximately $754 million from the prior quarter, had a yield of 3.29%, up 30 basis points from the prior quarter. Our tax exempt municipal portfolio averaged $6.5 billion during the first quarter, flat with the fourth quarter and had a taxable equivalent yield of 4.38%, up 5 basis points from the prior quarter. At the end of the first quarter, approximately 69% of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of the first quarter was 5.5 years, down from 5.7 years in the fourth quarter. Looking at funding sources. On a linked quarter basis, average total deposits of $41.7 billion were down $228 million from the previous quarter. The linked quarter decrease was driven primarily by lower non-interest bearing accounts. This decrease is in line with normal seasonal trends. The cost of interest-bearing deposits in the first quarter was 1.94%, down 20 basis points from 2.14% in the fourth quarter. Thus far in April, months to date average deposit balances have rebounded. As a reminder, we tend to see weaker deposit flows in the first half of the year and stronger flows in the back half of the year, and the majority of that seasonality is driven by commercial non-interest bearing deposits. Customer repos for the fourth quarter averaged $4.1 billion, up $201 million from the fourth quarter. The cost of customer repos for the quarter was 3.13%, down 21 basis points from the fourth quarter. Looking at non-interest income and expense, I'll point out a couple of seasonal items impacting the linked quarter results. Regarding non-interest income, insurance commissions and fees were up $6.8 million. Remember, the first quarter is typically our strongest quarter for group benefit renewals and annual bonus payments received. On the expense side, employee benefits were up $13.5 million and were impacted primarily by increased payroll taxes and 401(k) matching expense. These were impacted by our annual incentive payments that are paid during the first quarter. Regarding our guidance for full year 2025, our current outlook includes 425 basis point cuts for the fed funds rate in 2025 with cuts in June, July, September, and October. We have added the July and October cuts from our prior guidance. Despite the updated expectation of four rate cuts, we are seeing benefits of our Q4 and Q1 securities purchases as well as the decrease in our cost of deposits and now expect interest income growth for the full year to fall in the range of 5% to 7% compared to our prior guidance of 4% to 6% growth. For net interest margin, we expect an improvement of about 12 to 15 basis points over our net interest margin of 3.53% for 2024, up from our prior guidance of a 10 basis point improvement. 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 our current projections, we are projecting growth in non-interest income in the range of 2% to 3%, which is an increase from our prior guidance range of 1% to 2% growth. And we expect non-interest expense growth to be in the high single-digits. Regarding net charge-offs, we expect full year 2025 to be similar to 2024 and in a range of 20 to 25 basis points of average loans. Regarding taxes, we currently expect the full year 2025 to be between 16% and 17%, up from our prior guidance of between 15% and 16%. With that, I'll turn the call back over to Phil for questions.

Phil Green, Chairman and CEO

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

Operator, Operator

Our first question is from Jared Shaw with Barclays.

Jared Shaw, Analyst

Maybe starting on the deposit side, you had good benefits from lower deposit pricing this quarter. How should we think about the deposit beta on interest bearing deposits as we sort of move through your rate cut assumptions?

Dan Geddes, Group Executive Vice President and CFO

Jared, right now our cumulative beta is about 47%. Spot beta is around 50%, if that helps. And as the rate cuts, if they occur and depending on how quickly they go down, we should expect to see that hold up until as they get if they just continue to go further than what we have as our guidance.

Jared Shaw, Analyst

Okay. All right. So that level of beta should be able to be sustainable as we see the extra two cuts?

Dan Geddes, Group Executive Vice President and CFO

Yes. I mean, we're going to look on a competitive basis, but we expected to and we kind of have tried to keep the same beta on the way down as we did on the way up.

Jared Shaw, Analyst

Okay, great. Thanks. And then on the expenses, as we look at the guide for the full year, how should we think about sort of the trajectory through the year? And are there any additional tech initiatives, technology initiatives that are going to be coming on? Or how should we think about sort of the investment in technology with that backdrop?

Dan Geddes, Group Executive Vice President and CFO

I think just overall, you're going to see this quarter was somewhat impacted by the first quarter of ‘24 having that FDIC special assessment. So if you took that out, it would be in the high single digits, and that's kind of where I would kind of land for the next three quarters.

Phil Green, Chairman and CEO

Jared, I'd say with technology, I mean, there's not a big increase for anything specific. Technology costs have been going up really for everyone. It's becoming a higher percentage of our non-interest expenses and we track that over time. And I think we sort of peaked in 2023 as far as in our really large, what we call a generational investment there. Numbers are still high, they'll continue to be high, but they have come down from that level. And what we're hoping is that as we continue to move through some of these foundational things that we're doing for all kinds of things, whether or not, it's cybersecurity, whether or not it's legacy systems, it's where there’s growth initiatives that we'll be able to see that begin to move down. I'm hopeful some in 2026. And but still technology expenses are the new used to be healthcare, right? Healthcare expenses were out of control, not controllable. That's for some time now it's been technology expenses that's been the largest, the biggest growth area in our expense space in every place really.

Jared Shaw, Analyst

Okay. Good color on that. Thanks.

Dan Geddes, Group Executive Vice President and CFO

Just to clarify that beta is on interest bearing deposits.

Jared Shaw, Analyst

Yes. Okay. Thanks. And if I could just take the last one and just what sort of the conversations like with commercial customers over the last month or so, with the economic backdrop, are you seeing any of those customers waiting to defer any investments or what's sort of the broader sentiment?

Phil Green, Chairman and CEO

I would say some are waiting. What they're really looking for in most cases is clarity, so they can make decisions. I think they'll be they're looking forward to getting some trade deals done, so they know what the tariffs will be, and we'll know the impact on their cost structure and supply chain. I'll say one thing that was interesting to me looking at the responses from our various regions, from our various loan officers who talk to customers and they provide synopses of those conversations to us in preparations for these calls and other things is there was no apoplexy in the customer base about the tariff situation. I would say the thing that I learned in reading, and this is admittedly about 30 days ago, was that fairly high level of confidence from a lot of people on their ability to pass the costs along. They had pricing capacity with customers in market. In other cases, there were some great anecdotal examples of where there was a sharing of whatever that cost was and working that out. In other cases, there are buyers that are saying, no, it's too early, you're not going to pass that on. So they're fighting to have to not have those costs passed along to them. So they're not having to deal with it right now, although they know they will at some point. So that's just to say there's a lot of different variations. I don't think there's a lot of pessimism. I think there's some concern because they don't have clarity on what the answer is right now. But I think from what I've seen, a higher degree of confidence that businesses will be able to move through it similar to what they did back with the tariffs in 1.0, we're still going to 2.0 now. But that's what I've heard from customers.

Operator, Operator

Our next question is from Casey Haire with Autonomous Research.

Casey Haire, Analyst

Yes, thanks. Good afternoon, guys. Question on the loan growth outlook. If I heard you right, it sounds like the pipeline is up almost 30% quarter-to-quarter. You guys kept the loan growth guide in place, which implies there's not a lot of growth. Just wondering why we didn't see the loan growth go up given a strong pipeline?

Dan Geddes, Group Executive Vice President and CFO

I think what we're seeing is some headwind from CRE payoffs that's giving us just I think we're just looking at what we expect to get paid off and what we received in payoffs in the first quarter related to large multifamily projects that are just ready to move on to either be sold or refinanced. Some of them may be behind in terms of there were construction delays during the pandemic and then lease up has been slower than anticipated. So we've had several that have paid off through these I would say private credit has stepped in and provided some bridge financing. So that's probably the biggest piece that keeps loan growth where we have it in terms of guidance because we are seeing because when I look at the weighted pipeline and it's all starts, as Phil mentioned, with the calling efforts that our officers are making. And to me, that's us doing our jobs and getting out in front. Two-thirds of those calls are to customers. And so that means that during this time of a little bit of uncertainty, we're out and we're hearing from our customers, understanding their needs, how do we help them navigate through it. And so I think that's helped generate the top of the funnel, those new opportunities. And looking through the numbers, you see a lot of them are those large CRE opportunities. But we've lost our more than we typically experience. I think our loss to pricing and structure is up 65%. And what that tells me is we're maintaining our discipline in terms of structure and pricing as well. And but with large CRE, those are developers, and we'll see we'll continue to see opportunities and feel like we'll get our fair share of those throughout the year.

Casey Haire, Analyst

Okay, great. Thank you. Can you quantify what the CRE payoffs were this quarter and how they've been trending relative to the past?

Dan Geddes, Group Executive Vice President and CFO

Let me I don't have that number off the top of my head. Let me try to get that number and I'll get back to you.

Casey Haire, Analyst

Okay. And just last one for me, switching to capital management. Just wondering, you guys were active last year and share prices lower than where it is today. Just wondering some updated thoughts on share buyback appetite.

Phil Green, Chairman and CEO

We continue to be opportunistic. We're mainly focused on the dividend as we said many times. We did increase the dividend in this quarter, which was just three quarters from the previous increase. So we were a little more aggressive with the dividend. I think that will be one of the areas that we continue to focus on.

Operator, Operator

Our next question is from Catherine Mealor with KBW.

Catherine Mealor, Analyst

Hi. Just want to follow up back into the margin on just the bond book. Can you give us a little bit of color as to how you're thinking about the size of the bond book and then further reinvestment in your cash flows, especially as we have more cuts throughout the back half of the year?

Dan Geddes, Group Executive Vice President and CFO

On behalf of you, Catherine. So we're looking at either maturities or expected pay downs of just under $2 billion for the rest of the year. And that is going to roll off, and I'm just pulling up the exact numbers here at around 340 yield. And we've already purchased we've increased our total for the year from about $2 billion in purchases to $4 billion. And I'm going to now our, what we've purchased so far. But we plan on I would just say for the rest of the year, we're going to look to reinvest. I'm going to get the exact numbers. We have about $850 million yet to be purchased this year. So we'll reinvest some of that, but also build some of our liquidity and fund loan growth.

Catherine Mealor, Analyst

Got it. Okay. So most of the purchases you're saying have mostly already happened. And so that should kind of trail off in the back half of the year. Okay. And then this quarter since so much of it was yes, okay, got it. And so because so much of that happened this quarter, what would you say the full impact of that was on bond yield? Like the whole quarter was a 3.63% bond yield, but I'm assuming that is likely moving higher when you get the full quarter's impact for it?

Dan Geddes, Group Executive Vice President and CFO

We had approximately 1.7 at a yield of around 5.82, and our municipal bonds had about a 5.55 yield on a tax-equivalent basis. This will contribute to the growth of our net interest margin as we progress through the second and third quarters. Additionally, more than half of the $2 billion maturing includes treasuries, with $675 million maturing in May.

Catherine Mealor, Analyst

Yes. No, it does. So, it feels like the increase in your NII outlook is really more what's happening in the bond portfolio more than really anything else. Is that fair?

Dan Geddes, Group Executive Vice President and CFO

Between that and the lower deposit costs, those are the two bigger drivers and then just some loan growth in there.

Operator, Operator

Our next question is from Manan Gosalia with Morgan Stanley.

Manan Gosalia, Analyst

Phil, you noted that many commercial clients are confident in their ability to pass on some of the higher costs to their customers. And I know that part of your loan growth success has also come on the consumer side in addition to commercial. So how sensitive is the consumer client base in your footprint to inflation and the broader macroeconomic trends?

Phil Green, Chairman and CEO

I don't think there's much more sensitivity than in other regions. We continue to see consumer spending, and they are still borrowing against home equity. Our mortgage numbers remain strong. There might be a slight slowdown due to some uncertainty, but it's interesting to note that the confidence numbers I see don't perfectly align with the spending figures or other areas. So far, I don't think we've experienced a significant drop in consumer activity. A key factor is job availability, which is growing. In Texas, the unemployment rate is lower, and job growth is higher. As long as people have jobs, I believe they will continue to remain fairly stable.

Manan Gosalia, Analyst

Got it. And then maybe on the NII outlook 5% to 7%, I think you noted four cuts are baked into that guide. So if we get fewer rate cuts this year, how are you thinking about that NII outlook from here? And also like what portion of the curve are you most sensitive to? So if we get the belly of the curve maybe staying where it is, but short end of the curve moving down, does that change where you come in at in your NII range?

Dan Geddes, Group Executive Vice President and CFO

The impact from the cuts is approximately $1.7 million to $1.8 million each month. If those cuts do not occur, it would positively affect our figures by that amount. This figure could potentially rise to around $2 million, approaching $4 million by year-end, if we consider it within that range. Regarding the yield curve, if there are fewer cuts on the short end and rates remain elevated, that will benefit a significant portion of our portfolio. The long end will have a lesser effect; our asset sensitivity suggests the short end will be more impactful.

Operator, Operator

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

Peter Winter, Analyst

Thanks, Phil. Just given this increased uncertainty, are there any loan portfolios maybe you're watching more closely and or maybe any portfolios that are causing you to tighten underwriting standards a little bit more?

Phil Green, Chairman and CEO

Peter, I don't think we're tightening anything as a result of uncertainty really. We tend to be middle of the fairway. We're a little bit more of a conservative underwriter. If you looked at, say, energy, for example, we changed the price deck recently. We now got a five panel on that price deck. I think it starts at 58 for several years. I think we lowered our price deck on gas. I think it was $3.25 and it's down to $3 now. So you could argue that's tightening things up, but that's normally how that goes. But I really feel though that where we stand is good. Our credit, we had some really large improvements last quarter. A couple of years ago, we talked about a trailer manufacturer that had an inventory problem with an system and had some serious problems, but they paid that off in its entirety. That was a $70 million problem credit. We saw that this time. This time, we sold an office building that we had foreclosed. We talked about one in the Houston area that we've taken on. It was that one that we did that deal right before COVID literally the month before COVID hit. We had it on the books through 12. We sold it to 14 change. So and then if you look at the energy portfolio, we were just talking about that recently. I think we're at our lowest level in history with regard to leverage for cash flow. I think our debt to EBITDA is under 1% now. That number was, what was it, 3% the regulators didn't want to see over that. I remember back what it was back in 2016 and those periods are a lot higher. So that's historically low. Our advance rates against collateral really are historically low. And if you look at, say, hedging, we require 50% of production to be hedged anywhere between one and two years. So, I would and then I looked at problems because you're seeing problems that get solved and seeing problems come in. The problems that are coming in are just the same things that we've been seeing. They might be a construction firm, might be an equipment dealer, it might be an office building, but they're just they're one-off deals that is to me is just banking. It's really not any wave, I mean anything in particular that we're seeing. So at this point, no.

Peter Winter, Analyst

Got it. That's helpful. And then just with the insurance commissions, which Dan you talked about, I know there's the seasonal increase, in the first quarter, but year-over-year was incredibly strong also, up 15%. I'm just wondering what's driving the growth year-over-year and how you may be thinking about the growth rate going forward.

Dan Geddes, Group Executive Vice President and CFO

We were really encouraged by that growth as well. One quarter doesn't establish a trend, but it could be the beginning of one. We've made a change to align the insurance with our commercial banking group, and we've noticed an increase in the number of commercial bankers obtaining their insurance licenses. This has led to more referral activity to our insurance agency, indicating better alignment. I also inquired about how much of this 15% increase comes from higher policy rates. Many people experience this if they've renewed their homeowner's or car insurance, or if they have a teenage driver, but upon investigation, we found that 80% of the growth stems from new business or gaining market share. This is an encouraging start, and we hope it continues. Additionally, in the first quarter of 2025, we saw over $430 million in payoffs, compared to just over $150 million in the first quarter of the previous year.

Operator, Operator

Our next question is from Michael Rose with Raymond James.

Michael Rose, Analyst

Hey, good afternoon. Thanks for taking my questions. Just wanted to get a better sense for what drove the reduction in problem loans this quarter. It looks like they were down about 5.5%, but you did build the reserve I think two basis points. So just trying to kind of reconcile that.

Phil Green, Chairman and CEO

Yes. I think the if you look at problem loan payoffs and resolutions for the quarter, and you look at say the deals that were $10 million and higher, okay, well, two of them I talked about, one was that manufacturer of trailers and one of them was that office building vehicle close. But then another was almost a $100 million apartment project that was refinancing paid off to a private credit facility on a bridge on a bridge arrangement. So it's just people doing business. We're that would be what I would say would be the most interesting of that. We're always working problem credits to get them better and rehabilitated. So that's never going to change. And like I said, you did see new things coming in. But as I mentioned, they were really just what we've seen before, nothing new one trend in particular. So anyways, Michael, that's really what we're seeing.

Dan Geddes, Group Executive Vice President and CFO

And we did build our allowance and that's driven by we made some tweaks to really account for tariffs, risk of recession, and so that's we just felt like that was prudent to do.

Michael Rose, Analyst

Great. Yes, that's going to be my follow-up. Okay, great. And then maybe just on the paydown assumptions, if we don't get four cuts, let's say we get one or two, I'd assume that would be a positive to the loan growth outlook. But what's the sensitivity there in terms of your assumptions around paydowns?

Dan Geddes, Group Executive Vice President and CFO

I believe that the difference between getting four rate cuts compared to two is significant. If we only see two cuts, it likely indicates that the economy is performing well, which could lead to stronger loan growth. In contrast, if we receive four cuts, it might suggest a shift towards more favorable commercial real estate opportunities, making them more attractive than those already on our books. Furthermore, if the expectation is for rates to remain low, we could anticipate increased activity in new commercial real estate, though funding for these projects may not materialize until 2026 or 2027.

Michael Rose, Analyst

Got it. Okay, helpful. Maybe just one last one for me just on the mortgage business. It looks like balances are up about 15% Q-on-Q, but some of the more recent industry mortgage numbers haven't been great. I know it's a new business for you guys. Does the backdrop change any assumptions kind of in the intermediate term as it relates to the business or is it just you're growing from a small base and won't be subject to the same headwinds that the larger more established players will be?

Phil Green, Chairman and CEO

Yes. I believe part of the increase is due to a small base, but it's mainly connected to the referrals we receive through our system, particularly from internal referrals. We've been focused on this area and ensuring that our bankers provide great responses since our product is arguably the best in the market in terms of pricing and experience. I think we can bring people in and sell to them, so that explains some of what we're experiencing. I'm aware that there have been some recent slowdowns; for example, one of the builders mentioned layoffs in their mortgage operations and asked if we were looking to hire, which I found interesting. However, we're primarily focused on helping people buy homes, and we don’t have significant refinance activity. Things have been quite stable, and as long as we continue to receive referrals from our bankers while also building our network of realtors since we are still new in that area, I believe we will be fine. I genuinely think we can achieve our goal for the year, which is to reach $500 million by the end of the year. We will see how it goes.

Dan Geddes, Group Executive Vice President and CFO

Just a reminder on those, 30% of those mortgage loans so far have been to brand new customers of the bank. So it's also been a nice lead in product as over 500,000 people are moving to Texas in the last year. So it gives us this opportunity to deliver a great experience to somebody that may be new to one of our cities here in Texas.

Operator, Operator

Our final question is from Jon Arfstrom with RBC Capital Markets.

Jon Arfstrom, Analyst

Few cleanup questions. What's the reason you guys are adding the two more cuts to your guidance? Is that is it yield curve driven or do you think the economy needs four cuts, it doesn't feel like it, but is it just the forward curve?

Dan Geddes, Group Executive Vice President and CFO

It's we're really trying to stay a little bit more conservative than the market or the curve. So I don't think we want to get out ahead of ourselves one way or the other. And that's kind of where we see it right now. I think your guess is probably as good as mine as to where we'll be in 60 days or 90 days.

Jon Arfstrom, Analyst

Yes. Okay. Phil, maybe for you, you guys didn't change your loan growth guide and I understand that, but do you feel better about the loan growth outlook now than maybe you did a month or six weeks ago when a lot of the tariff noise was higher?

Phil Green, Chairman and CEO

I don't feel a lot different, Jon. I think there's two things that are working. One is as long as there's uncertainty, businesses tend to stay away from things, okay. They don't tend to lean into uncertainty very hard. And I still think we have some of that we need to work through that. So that's a little bit on the negative side. But on the positive side going back to what I pointed out in my comments, our people are just doing a great job of attacking the market. And our expansion efforts are adding more and more bankers in these communities that are working hard in that as well. So we've got a lot of stuff. It's still a great market in Texas, right? There's still a ton of market share that we want to have. And as long as we do our job of going through the work, going through the steps of developing business and as long as our value proposition is as good as what it is, I think I'm pretty optimistic about it.

Jon Arfstrom, Analyst

Okay. Thank you for that. And then maybe one more for you, Dan. You talked a little bit about insurance and mortgage, but anything else holding back your expectations on non-interest income growth? I know you bumped it up, but it feels like you're doing a little bit better than the guide.

Dan Geddes, Group Executive Vice President and CFO

I think one is just volume of our driven through interchange or some service charges that I would expect maybe to the upside as we just continue to build new relationships across the state, whether that's commercial or consumer. I think you heard some industry-leading consumer growth, most new relationships in the first quarter. So those would pretend for some optimistic non-interest income growth. There's I think it's just doing what we do every day and going into new communities with our organic growth strategy or taking care of our customers, listening to their needs. And so I just think it's just the blocking and tackling of what we do. And I will say, we've added in the expansion over 90 relationship managers or calling officers into these 70 now almost 70 locations that we've added. That's going to make a difference.

Operator, Operator

There are no further questions at this time. I would like to turn the conference back over to Phil Green for closing remarks.

Phil Green, Chairman and CEO

Thank you, everyone. We appreciate your continued interest and we will be adjourned.

Operator, Operator

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