Earnings Call Transcript - CFR Q3 2024

Operator, Operator

Greetings. Welcome to Cullen/Frost Bankers, Inc. Third Quarter 2024 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. Thank you. You may begin.

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

Thanks, Jerry. This afternoon's conference call will be led by Phil Green, Chairman and CEO; Jerry Salinas, Group Executive Vice President and CFO; and Dan Geddes, our incoming CFO. Before I turn the call over to Phil, Jerry, 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

Thanks, A.B. Good afternoon, everyone. Thanks for joining us. Today, I'll review third quarter results for Cullen/Frost, and I'm accompanied on the call by Jerry Salinas and Dan Geddes, who have been working together in anticipation of Jerry's upcoming retirement as CFO, and they'll provide additional commentary. In the third quarter, Cullen/Frost earned $144.8 million or $2.24 a share compared with earnings of $154 million or $2.38 a share reported in the same quarter last year. Our return on average assets and average common equity in the third quarter were 1.16% and 15.48%, respectively, and that compares with 1.25% and 18.93% for the same period last year. Average deposits in the third quarter were $40.7 billion, down just 20 basis points from $40.8 billion in the third quarter of last year. Average loans grew by 11.8% to $20.1 billion in the third quarter compared with $18 billion in the third quarter of last year. We continue to see solid results resulting from the hard work of our Frost bankers and the extension of our organic growth strategy. As was the case in previous quarters, Cullen/Frost didn't utilize any FHLB advances, broker deposits, or reciprocal deposit arrangements to build insured deposit percentages or to fund liquidity. So again, as you look at our balance sheet, what you see is what you get. We continue to see excellent results in our organic growth program. For our Houston expansion, on a combined basis, what we call Houston 1.0 and 2.0, we stand at 99% of our deposit goal, 139% of our loan goal, and 118% of our new household goal. For the Dallas market expansion, we stand at 119% of the deposit goal, 196% of the loan goal, and 170% of our new household goal. We have the first three of our new Austin expansion project opened with three more planned to open before the end of this year, and early results there continue to be very encouraging and in line with the other expansion markets. At the end of the third quarter, our overall expansion efforts continued to grow and had generated $2.3 billion in deposits, $1.6 billion in loans, and added more than 55,000 new households. As we've mentioned, the success of the earlier expansion projects is funding the current expansion, and we expect the overall expansion project will be accretive to earnings beginning in 2026. In our consumer business, we had our best quarter of the year in customer growth, adding over 7,300 net new checking households. We believe checking household growth remains industry-leading at 6% year-over-year in an extremely competitive deposit environment. That growth has been achieved without the use of direct cash incentive programs in use by many of our competitors. Our focus instead has been on top-quality service, great technology, and a convenient expanding network of locations. Consumer deposits overall continued to recover and finished the quarter with a 2.5% year-over-year increase or $464 million. Finally, in the area of consumer, average consumer loans grew $574 million or 21% year-over-year, making this the ninth consecutive quarter with an annual growth rate of over 20%. This exceptional loan growth comes primarily from our second lien home equity and home improvement products as well as our new mortgage product. The investments we've made in organic expansion, new products, marketing, technology, and our employees are helping drive this outstanding growth across our consumer business. We funded $55 million in mortgage loans in the third quarter, and at quarter end, our total mortgage portfolio stood at $179 million. Looking at our commercial business, average loan balances in the third quarter increased 10.1% versus the same quarter last year. CRE balances grew by 13.7%, energy balances grew by 10.2%, and C&I balances increased by 4.8%. Our growth in new commercial relationships in the third quarter was strong, increasing 8% over the same quarter last year. New loan commitments totaled $1.62 billion in the third quarter and that was up 3% from the third quarter of last year. The increase came from a 2% increase in both CRE and C&I loans and a 37% increase in energy, albeit on a much smaller base. We saw some improvement in credit quality during the third quarter in terms of problem loan resolutions. Total problem loans, which we define as risk grade 10 or higher, totaled $839 million at the end of the third quarter, down 15% from the $986 million at the end of the second quarter. Credit quality is good by historical standards with net charge-offs and non-accrual loans both at healthy levels. Net charge-offs for the third quarter were $9.6 million compared to $9.7 million last quarter and $5 million a year ago. Annualized net charge-offs for the third quarter represent 19 basis points of period-end loans. Non-performing assets totaled $106 million at the end of the third quarter compared to $76 million last quarter and $68 million a year ago, and the quarter-end figure increase got us to 53 basis points of period-end loans and 21 basis points of total assets. The increase was primarily due to one loan moving to non-accrual, which was previously identified on our problem loan list. About 24% of our problem loans overall are tied to investor commercial real estate, slightly less than 40% are related to C&I credits, and most of the balance is in owner-occupied real estate, which is closely related to C&I loans. Regarding commercial real estate lending, our overall portfolio remained stable with steady operating performance across all asset types and acceptable debt service coverage ratios and loan-to-values at levels similar to what we've reported in prior quarters. Investor CRE loans totaled $4.3 billion or 44% of total CRE loans outstanding and the investor CRE portfolio exhibited an overall average loan-to-value at underwriting of about 53% and have average weighted debt service at that time of 1.42%. I continue to be encouraged by our outlook and the consistent success of our strategy for organic growth and what I believe are the best banking markets in the U.S. And with that, I'll turn it over to Dan.

Dan Geddes, Incoming CFO

Thank you, Phil. I would like to first thank Jerry for being gracious with his time during the transition process. I wish him the best in this next chapter and will enjoy these next two months working with him until his retirement at year-end. He has truly set a high bar in this role for me to strive for. Regarding net interest margin, our net interest margin percentage for the third quarter was 3.56%, up 2 basis points from the 3.54% reported last quarter. The increase was primarily driven by both higher volumes and yields on loans. Looking at our investment portfolio, the total investment portfolio averaged $18.9 billion during the third quarter, up $269 million from the second quarter, primarily due to an increase in the fair value of our available-for-sale portfolio. During the third quarter, investment purchases totaled just $51 million with $49 million of the total being municipals with a taxable equivalent yield of 5.42%. The net unrealized loss on available-for-sale portfolio at the end of the quarter was $1.13 billion, a decrease of $498 million from the $1.63 billion reported at the end of the second quarter. The taxable equivalent yield on the total investment portfolio in the third quarter was 3.40%, up 2 basis points from the second quarter. The taxable portfolio, which averaged $12.3 billion, increased approximately $258 million from the prior quarter at a yield of 2.94%, up 2 basis points from the prior quarter. Our tax-exempt municipal portfolio averaged $6.6 billion during the third quarter, flat with the second quarter, and had a taxable equivalent yield of 4.32%, up 2 basis points from the prior quarter. At the end of the third quarter, approximately 70% of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of the third quarter was 5.4 years, down from 5.5 years in the second quarter. Looking at funding sources, on a linked quarter basis, average total deposits of $40.7 billion were up $223 million or 0.6% from the previous quarter. Average non-interest bearing demand deposits were essentially flat with the second quarter, down $20 million while interest-bearing deposits increased $243 million or 0.9% when compared to the previous quarter. Based on third quarter average balances, non-interest bearing deposits as a percentage of total deposits were 33.5% compared to 33.8% in the second quarter. The cost of interest-bearing deposits in the third quarter was 2.41%, up 2 basis points from 2.39% in the second quarter. While rates on interest-bearing deposits decreased slightly compared to the second quarter, we saw a continued mix shift into higher-yielding depository accounts, primarily CDs being the primary driver of the 2 basis point increase. Thus far in October, month-to-date average deposits are up about $600 million above the third quarter average, a positive trend to start the fourth quarter. With that split about one-third in non-interest bearing deposits and two-thirds being interest-bearing deposits. Customer repos for the third quarter averaged $3.8 billion, basically flat with the second quarter. The cost of customer repos for the quarter was 3.72%, down 3 basis points from the second quarter. The month-to-date October average balance for customer repos as of October 29th was essentially flat with the third quarter average. Next, looking at non-interest income and expense on a linked quarter basis. I'll point out a couple of items regarding non-interest income. Service charges on deposits were up about $1.3 million or 5% unannualized driven primarily by our organic growth of consumer and commercial accounts. In terms of non-interest expense, salaries and wages expense were up $5.4 million or 3.6%, impacted primarily by higher headcount and incentive accruals. Looking at capital, during the third quarter, we did buy back $20 million of our stock. For the year, we now have purchased approximately 490,000 shares at an average price of $101.98. I'll now turn the call over to Jerry for commentary on our full-year guidance.

Jerry Salinas, Group Executive Vice President and CFO

Thank you, Dan, and thank you for those nice words. Regarding our guidance for full year 2024, our current projections include two 25 basis point cuts for the Fed funds rate over the remainder of 2024 with a cut in November and December. For net interest income, we continue to expect net interest income growth for the full year in the range of 2% to 3%. Looking at loans on a year-to-date average basis, loans are up 11.1% compared to last year-to-date. We expect full year average loan growth in the low double digits, slightly better than our previous guidance of high single digits to low double digits growth. Looking at deposits, the current year-to-date average is down 2.1% compared to last year-to-date. We expect full year average deposits to be down between 1% and 2%. That represents a decrease from our previous guidance of flat to down 2%. Based on year-to-date growth and current projections, we are projecting growth in non-interest income in the range of 4% to 5%, up from our previous guidance of growth of 2% to 3%. Based on our year-to-date results and current projections, we are projecting full year non-interest expense growth in the range of 6% to 6.5% on a reported basis that is down from the 6% to 7% previous guidance. Regarding net charge-offs, on a year-to-date basis, they represent an annualized 18 basis points of average loans. We expect the full year to be in the range of 18 to 22 basis points of average loans. That is down from our previous guidance of 25 to 30 basis points of average loans. And regarding taxes, our effective tax rate for the year-to-date of 2024 was 16.5% and we currently expect the full year to come in at that level or slightly lower. That's in line with previous guidance. With that, I'll now turn the call back over to Phil for questions.

Phil Green, Chairman and CEO

Well, thank you. We'll open it up for questions now.

Operator, Operator

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

Peter Winter, Analyst

I was wondering, could you just talk about maybe the trajectory of the margin as the Fed forward curve is suggesting additional rate cuts? And I would assume less rate cuts and/or more gradual rate cuts and a steeper yield curve is kind of an ideal environment for you?

Dan Geddes, Incoming CFO

Peter, I think you're right that what we're seeing is some push and pulls here, as we feel like there's going to be an opportunity to reprice our investment portfolio and our fixed rate portfolio. The unknown is going to be, as rates go down, what will deposits do. And we're hopeful we'll see continued growth in deposits. And so we think there's some opportunity there. But, we do have an asset-sensitive balance sheet. So as rates go down, we will see that lowering of our yield on our floating-rate portfolio, and we're holding that to the Fed. So yes, I mean, I think you can see really for the fourth quarter, just probably some steadiness. I don't see it moving around much that fourth quarter.

Peter Winter, Analyst

Do you think that even with the Fed cutting rates into next year, the margin could increase due to the repricing benefit on earning assets and the ability to lower deposit costs?

Dan Geddes, Incoming CFO

I believe there is an opportunity because a significant portion of our securities portfolio is maturing or repaying next year. We also expect around $1 billion in payoffs from our fixed-rate loan portfolio, including both amortizations and maturities. This will create opportunities. If you examine our investment portfolio and fixed-rate portfolio, we will have the chance to increase our yield.

Peter Winter, Analyst

And just one more question, just on loan growth. The loan growth has been better than peers. You moved the guidance to the upper end of the range. Obviously, the branch expansion, build out, new client growth is contributing. Do you think there’s this pent-up loan demand also as we get past the election and rates move lower, that it could lead to even stronger loan growth next year?

Phil Green, Chairman and CEO

Peter, I honestly think there is some pent-up demand. As we've canvassed our people, as we do every quarter, as I visited branches and talked to our relationship managers, as I do every year, looking over every location. I think that's the most consistent theme that I have heard is there is a hesitancy for people to move forward on some fronts, not on every front. But it's the single most repeated area of why are we seeing things maybe be a little bit slower, why might somebody be hesitating. I think it's definitely the election. I think regardless of which way it goes, I think the fact that it's over will just clear up uncertainty and people will be moving forward. But as I looked at the current quarter, we looked at new commitments were up from last year by about 3%, but they were down a little bit from the second quarter. Now, the second quarter was really strong. But looking at new relationships, we were up 8%, it's a little flattish compared to the previous quarter, and even new opportunities were a little flattish. And another thing that we saw was that, if you look at advances under revolving lines of credit, they went from like 37.2%, I think, last quarter to 36%. So it's just the sort of eerie pause, I think. I think once we get past the election that you're going to see underlying fundamentals continue to kick in. And as I read comments from people who talked to customers and these were notes about them, pretty much in all the cases when they said, well, things are slowing because of the election. It was like, well, they expected once we got past that that it will return to good levels. So I think you're right. There is some pent-up demand. I can't tell you how much. But I just think it's absorbing way too much of everybody's bandwidth right now.

Operator, Operator

Our next question is from Dave Rochester with Compass Point.

Dave Rochester, Analyst

I appreciate the update on the outlook. I was wondering for the NII guide. What are you seeing in terms of your early experience on the down rate deposit beta following the September cut? And can you just remind us what your expectation is on that front as we go through the cycle?

Dan Geddes, Incoming CFO

So our overall expectations is we were one of the first to go up when rates went up. And so we're going to be mindful of the competition, but our expectations is that you'll see a similar beta going down. Right now, the beta going up is around 45 basis points and I think you'd expect to see it on the way down. But it may take a little bit of time to work through just because our mix this time around has a little bit more CDs and 80% of our CDs are in 90 days. So it's just going to take a quarter for that to work its way through to lower yielding CD rates. So I think you can expect it to be similar but it's just due to the mix of our interest-bearing deposits.

Dave Rochester, Analyst

And then just given your comments about the NIM for next year, if you're thinking about maybe the potential for NIM stability or expansion next year with cuts, I would think that would mean some decent NII growth with growth in the balance sheet. Is that how you're seeing it?

Dan Geddes, Incoming CFO

We will not provide guidance until next quarter, which is a tradition we will uphold. I want to share that for the remainder of this year, we anticipate $714 million from our investment portfolio to either mature or be prepaid, currently yielding 1.77%. This presents an opportunity, and we will evaluate whether to maintain that at the Fed or allocate it to our loan portfolio. Additionally, I mentioned approximately $2.1 billion in 2025, which is yielding around 3.20%, indicating that the potential for growth in 2025 may not be as significant.

Dave Rochester, Analyst

And then just switching to expenses. You mentioned you tightened that expense guide to that 6% to 6.5% range, which is a bit better. As you look out into the fourth quarter, and just you've given some preliminary thoughts on how you thought about next year. Is there any reason why that growth rate would accelerate? And do you see any opportunities for that growth to actually decelerate into next year just given your plans on the expansion strategy?

Dan Geddes, Incoming CFO

I don't see it decelerating. However, I want to emphasize that we are not providing guidance for next year. We will continue to invest in our employees, our technology, and the customer experience. That’s how I would respond to that question. I'm not sure if anyone has any comments on that.

Jerry Salinas, Group Executive Vice President and CFO

Our expansion is set to remain strong. We're about to complete our work in Dallas and will focus heavily on Austin next year. Technology is an area where everyone is experiencing growth, and I don't foresee any significant pullback in that sector. We're growing and operating in excellent markets, so we will continue to invest in that direction. As we've mentioned over the years and as you've noticed, we are quite disciplined with our expenses. Each decision to hire or make any substantial capital expenditure requires approval from the three of us in this room. While we are cautious, we also recognize that our current investments are yielding positive results. The organic growth we've experienced is impressive, and now is not the time to slow down. However, we are being mindful of our spending and striving to be as prudent as possible. At this moment, I don't anticipate any reduction in our investments related to business expenses. I assure you, we are being diligent with our spending and not exceeding necessary limits. We are focusing on initiatives that we believe will benefit us significantly.

Dave Rochester, Analyst

Maybe one last one on credit. You mentioned the big improvement in problem loans this quarter. I was just wondering what the driver was for the bump up in the reserve ratio given that if those were just specific reserves on NPAs, and you talked about the growth you had there or is it something in the economic outlook worsened a bit for you?

Dan Geddes, Incoming CFO

It wasn't related to the economic outlook; it was mainly the one loan that Phil mentioned that influenced that result, and we did experience strong loan growth.

Operator, Operator

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

Ebrahim Poonawala, Analyst

I wanted to follow up, Phil. I think in your opening remarks, you talked about deposit growth and that was coming without having to do promotional strategies and the upfront marketing dollars to bring in deposits. Just if you don't mind, spend some time in terms of what are the big avenues in terms of deposit acquisition today? Is this tied to lending or just pure checking account opening? I mean I'm assuming it's a function of the branches and the investments you made. But give us a sense of what's driving the client acquisition that's translating into core deposit growth?

Phil Green, Chairman and CEO

I believe there are several factors contributing to our success. First, the expansion is significantly impacting us, with approximately 2% of our deposit growth attributed to it. When we analyze client acquisition, we see that 55% of new household acquisitions are coming from our physical locations rather than online, though our online services remain strong. The expansion is definitely playing a key role in our impressive growth rate. Additionally, our customer service is exceptional, and word of mouth has become a major driver of this growth. We can identify numerous reasons behind customer interest in our services, with convenient locations being the top factor, followed closely by recommendations from friends and family, highlighting our focus on customer service. Furthermore, our app is currently the highest-rated financial app in the Apple App Store, emphasizing the importance of great technology. We've also realized that we needed to improve our marketing efforts, and we've invested in building our infrastructure and expertise in this area, which has enhanced our ability to target customers effectively. Overall, it’s a combination of various aspects working together. We're operating in strong markets like Houston, Dallas, and Austin, which are experiencing growth. As we learn from our expansion efforts, we're getting better at executing our strategies. The success is not due to any single factor but rather disciplined hard work from our talented team.

Ebrahim Poonawala, Analyst

Phil, regarding lending, it has been a strong year for loan growth. You seem quite positive as we head into the elections next week. Could you provide an overview of the competitive landscape? Some regional banks have had the opportunity to strengthen their balance sheets, which has created strong markets but also increased competition. What are you observing from regional versus big banks in terms of competition? Additionally, in your lending activities, are you encountering direct lenders or private credit sources that were more common three to five years ago, making it more challenging for your bankers to compete?

Phil Green, Chairman and CEO

The competition is definitely intensifying. We are noticing an increase in deal proposals. Looking at commercial real estate, there are now more players involved, but it's the same familiar situation we've seen in the past. While things are not as challenging as they were before COVID, the market is opening up, with more participants willing to engage. A year ago, many were holding back due to financial constraints, especially in commercial real estate sectors. Now, with quality deals emerging, we're encountering some structures that seem impractical. In terms of other market players, private equity is making its presence felt. I’ve observed this particularly with multifamily loans approaching maturity that aren’t yet stabilized in terms of occupancy. These properties struggle to secure permanent financing or efficient sales. However, once they reach stabilization and begin leasing, liquidity becomes available for these projects. On the consumer side, I don’t perceive the competition as overly aggressive. We're experiencing remarkable growth at Cullen/Frost Bankers, with a 20% increase in categories for nine consecutive quarters. This level of growth usually raises concerns, but it's indicative of timing and the right product. Many consumers are reluctant to part with their low-rate mortgages and are opting for home equity or improvement loans instead. Our average credit score remains high at around 754, reflecting healthy credit conditions. The mortgage sector, although new, is performing well at about $200 million and is expected to expand further. I trust these insights provide a clearer picture of the market landscape.

Operator, Operator

Our next question is from Catherine Mealor with KBW.

Catherine Mealor, Analyst

I wanted just to first circle back on expenses. I know that the fourth quarter typically has some higher expenses just related to the restricted stock awards. Just wondered if you could remind us on typically what that looks like. And so maybe what a better kind of run rate is to go into as we start next year's growth rate?

Jerry Salinas, Group Executive Vice President and CFO

I guess I would answer and start that and let Dan add any color. I would almost send you back to the trend in last year's third to fourth quarter. I kind of look at that. I think that gives you some good perspective. As you noted in your comments, we do have some awards by their nature get expensed immediately. So I think if you look at that, that kind of give you a feel for kind of what those sort of best things do to our expense run rate.

Catherine Mealor, Analyst

And then maybe one other follow-up on the margin. Regarding the securities maturities you mentioned, you have $1 billion in fixed rate loan repricing and amortization. What are your annual securities maturities that we should anticipate next year?

Dan Geddes, Incoming CFO

And let me just go to that. It was around $2.1 billion next year and again, that had a yield, it’s mid 3s…

Catherine Mealor, Analyst

And you've mentioned that your purchases slowed a little bit this quarter. Would it be your intention to see that kind of similar pace over the next couple of quarters or how are you thinking about the balance of maybe the size of the bond book?

Phil Green, Chairman and CEO

I think it's just going to depend. What we've been doing is building optionality into the balance sheet. Really for the last few quarters, I think it's paid off for us. I mean, I don't think anyone knows exactly how things are going to go. I kind of like my customers now; let's get past the election, let's see how the markets respond. And I think that we'll have some optionality and decide where the value is in the market, and we might decide to begin utilizing some of that.

Catherine Mealor, Analyst

I think we're all excited to get past next week. And then maybe one last one just on fees. Fees were really strong this quarter and your guide moved up a little bit. Can you just give us some color around what you're seeing there? And then I know you're not giving guidance for next year. But it feels like there's probably some fee momentum just given in your expansion markets and just any kind of discussion around opportunities you're seeing there that may improve as we move into '25 and '26?

Dan Geddes, Incoming CFO

I think it's really driven by our organic growth. So I think you're seeing that our fee growth is really a function of volume. Looking into next year, there could be interchange regulation that comes down that could be a factor to the downside. So just something to keep in mind that we will as well. But again, I think it's primarily a volume for the fourth quarter. And just to give you clarity into that yield, it was around 3.2%.

Catherine Mealor, Analyst

So $2.1 billion next year maturing at 3.2%.

Operator, Operator

Our next question is from Ben Gerlinger with Citi.

Ben Gerlinger, Analyst

I understand that you won't provide guidance for 2025. However, as you consider the broader picture of your investment expenditures, I know you've made progress in Houston and Dallas, and you're also focusing on Austin and technology. Earlier this year, or possibly late last year, you mentioned that around 5% is essential for innovation, particularly regarding the Texas franchise. Looking beyond Austin, are there plans for further branch expansions or considerations for a longer-term strategy in 2026?

Jerry Salinas, Group Executive Vice President and CFO

Yes, I believe this type of expansion will be integral to our strategy, which I consider to be both scalable and sustainable. As we complete our projects in Dallas and Austin—approximately within the next 24 months—I foresee us increasing our presence in these markets where we've made our investments. If we look a couple of years ahead, by the time we finish in Dallas and Austin, the initial Houston expansion will have been underway for eight years. Houston has significantly grown during that time, and we can say the same for Dallas. Our focus will be on further expanding in these promising markets, especially Dallas and Houston. Rather than just filling in large gaps in the market where we've had no presence, we will be moving into areas experiencing growth, allowing us to establish a foothold in these promising markets sooner. I expect us to continue this approach in the near future, particularly in major Texas markets.

Ben Gerlinger, Analyst

With Texas being a focal point for immigration of both individuals and businesses, when considering loan growth across the United States, Texas has certainly outperformed on average. If loan growth begins to pick up, do you anticipate that pricing competition will become even more intense in Texas, given its growth and the interest from others to invest there? I'm approaching this from a competitive perspective. Additionally, following up on Ebrahim's question, if loan growth increases from this point, will pricing competition escalate further?

Phil Green, Chairman and CEO

I believe that as markets become more active, it may worsen slightly at the margins, but we have managed this for quite some time. Throughout various cycles and with new competitors entering the scene, I do not foresee it hindering our efforts significantly. Regarding price competition, when you examine our balance sheet and the costs associated with our deposits, I would argue that we are among the low-cost producers in terms of funding. This allows us to compete effectively on price. However, we prefer not to compete on structure, and we are willing to forfeit deals based on that; I would estimate that we lose about two-thirds to three-quarters of those deals. We prioritize repayment, so that’s likely where we will experience the most heat, as there are specific deals we simply will not pursue. Certain entities may engage in those deals for various reasons, but we have learned over time that they do not yield long-term profitability.

Operator, Operator

Our next question is from Manan Gosalia with Morgan Stanley.

Manan Gosalia, Analyst

Sorry if I missed this, but I thought I had the opportunity for securities repricing for this year and next year, the $1 billion of loans this year. But can you talk about what the repricing opportunity is for fixed-rate loans next year? And what rate loans are rolling off at and what rates loans are coming on at right now?

Dan Geddes, Incoming CFO

Again, I think our back book is around 5%. And so we're able to reprice those fixed rate loans at around 7.25%. And so it's around $250 million for the fourth quarter and then $1 billion into '25. So just to make sure I was clear on that.

Manan Gosalia, Analyst

And we've had some banks talk about capital markets opening up and some paydowns coming through on the CRE side. Is that something that you're seeing in your book, too? I know the belly of the curve is back up, but did you see any elevated paydowns while rates were lower?

Phil Green, Chairman and CEO

Well, with regards to CRE, I mean, as long as projects stabilized and on the occupancy side, yes, there's a lot of money available, and we've seen really strong cap rates. I'm mainly talking about multifamily right now, but we've seen really strong cap rates. I talked about one last quarter that was a big success for the developer-builder. We've seen sub-6% long-term rates available in the market. So there's capital available. Once the project reaches utilization, that's really a challenge. And when you do see challenges, that's the challenge that you've got; if lease-up has been slower because just again, I'm talking multifamily mainly because supply has been so strong, but people are taking these units down. It's you're just seeing, in some cases, less rent growth than you underwrote, you're seeing more concessions, that kind of thing, but you are getting projects leased up. And once you get there, we're seeing that there's capital available.

Dan Geddes, Incoming CFO

And I think that's where private credit has a place. It's kind of serving as, I'll call it, a bridge if a project needs 12, 18, 24 months. And so it's a higher price, higher yielding, maybe less structure, but it's serving its purpose of providing capital in the market.

Manan Gosalia, Analyst

So it sounds like you're able to get much stronger loan growth despite some of those factors weighing on overall loan growth in the balance sheet. So, is the velocity of loans up a little bit more than before now?

Phil Green, Chairman and CEO

No, I mean, there are a lot of factors at play. We’ve done a great job building our commercial real estate portfolio with excellent sponsors and projects over the past three years. These have been performing well and getting funded, as we are likely to be last in the capital stack. Many of these projects are still under construction. This holds true for multifamily, with limited activity in office, and some in industrial and retail sectors. I think that's one thing we’re seeing. Our consumer growth has been very strong, and it will be interesting to see what unfolds going forward. The commercial and industrial segment has been a bit weaker over the past eight weeks, which I believe is largely due to the election and the associated uncertainty. I expect that situation to improve and hope to see continued growth. I anticipate some pressures on commercial real estate balances due to refinancing costs and the sale of some projects. We haven't built up much of a pipeline for projects like multifamily; in fact, I think we’ve only completed one in the last year. So, we may experience some pressure as those projects are funded and paid off. However, we have other successes still under construction and receiving funding, so it will be interesting to watch. Overall, I feel quite positive about our outlook following the election.

Dan Geddes, Incoming CFO

And just to support that, I think our ability to bring in new relationships sets us apart. And 54% of our year-to-date increase in loan balances coming from new customers that we've acquired in the last 12 months. And I think that's an important differentiator that we're able to, with this organic growth strategy, to grow, specifically in our loan portfolio.

Operator, Operator

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

Jon Arfstrom, Analyst

You flagged the seasonal deposit change in the fourth quarter and Dan, you gave us some of the numbers, but what's the typical seasonal deposit change? And it feels like the mix is similar to what you have on the balance sheet right now in terms of noninterest bearing and interest bearing. Is that right?

Dan Geddes, Incoming CFO

Yes. What we're seeing is similar.

Jerry Salinas, Group Executive Vice President and CFO

Historically, we have seen larger increases in noninterest bearing deposits due to some of our bigger customers trying to strengthen their balance sheets. However, I would say that there hasn’t been much consistency lately as there has been a lot of movement. With rates declining, we believe deposit growth could improve even further. We expect to compete more effectively against some money market funds since they might have full betas. From a seasonal perspective, as Dan mentioned, we are moving in a positive direction. We remain optimistic that this trend will continue, though there’s some uncertainty about the extent of this growth. Overall, we feel positive about the situation at this time.

Jon Arfstrom, Analyst

And the interest-bearing costs are going down, the next incremental dollar in interest-bearing is generally down?

Dan Geddes, Incoming CFO

Yes.

Jon Arfstrom, Analyst

Are you considering changes to how you manage the balance sheet in terms of more active hedging if the Federal Reserve continues to cut rates?

Phil Green, Chairman and CEO

Not really. We have a significant amount of cash, and using cash markets when we have confidence has been the most efficient approach for us. Many companies lack that kind of liquidity, so they have to rely on noncash markets, which comes with a premium. It doesn't make sense for us to pay the extra costs that others face when we have the liquidity to act on our convictions. We haven't identified any value at this moment in those positions compared to using cash markets.

Jon Arfstrom, Analyst

Regarding service charge revenue, do you believe the growth rate is accelerating? I understand you mentioned a few points during the quarter. Are the new branches beginning to generate fee income, and is that growth picking up speed, or am I overanalyzing the situation?

Dan Geddes, Incoming CFO

I believe the increase in our customer base is contributing to our fee income growth. As we expand into Dallas and Austin, our ability to attract new customers will support that growth, although a 5% non-annualized rate might be optimistic.

Operator, Operator

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

Phil Green, Chairman and CEO

All right. We appreciate everybody's participation today. Jerry, we appreciate your 38 years of service here, and I congratulate you on your last earnings conference call. Great job.

Jerry Salinas, Group Executive Vice President and CFO

Thank you, Phil.

Phil Green, Chairman and CEO

All right. With that, we'll be adjourned. Thank you.

Operator, Operator

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