Earnings Call Transcript - CFR Q3 2023

Operator, Operator

Greetings. Welcome to Cullen/Frost Bankers Incorporated Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to A.B. Mendez, Senior Vice President, Director of Investor Relations. Thank you. You may begin.

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 the third quarter results for Cullen/Frost, Jerry is going to make some additional comments, and then we’re going to open it up for your questions. In the third quarter, Cullen/Frost earned $154 million or $2.38 per share compared with earnings of $168.1 million or $2.59 per share reported in the same quarter last year. Our return on average assets and average common equity in the third quarter were 1.25% and 18.93%, respectively, and that compares with 1.27% and 20.13% for the same period last year. This solid performance can be attributed to the execution of our sustainable organic growth strategy and the commitment to our culture that develops deep customer relationships and provides world-class customer service. All this happens because of the hard work and dedication of our Frost Bank staff. As in the past, our balance sheet and liquidity levels remain strong. At quarter-end, our cash liquidity at the Fed equals 17% of our deposit base. During the quarter, Cullen/Frost did not take on any Federal Home Loan Bank advances, participate in any special liquidity facility or government borrowing, access any broker deposits or utilize any reciprocal deposit arrangements to build insured deposit percentages. Our available-for-sale portfolio represents 82% of our portfolio at quarter end. Our average deposits were stable in the third quarter at $40.8 billion, less than a percent change from the previous quarter. Average loans grew to $18 billion in the third quarter compared to $17.7 billion in the second quarter, an annualized growth rate of 6.8%. We’re laser-focused on our efforts to achieve organic growth and I’m very pleased with our results. To update you on our physical expansion efforts for our combined Houston expansions, we stand at 107% of deposit goal, 162% of loan goal, and 127% of our new household goal. As of quarter end, expansion loans represented 22% and deposits represented 18% of our total Houston market presence. For the Dallas market, we stand at 292% of deposit goal, 273% of loan goal, and 216% of our new household goal. Although still relatively early in this effort, expansion loans and deposits represent approximately 9% respectively of Dallas market totals. We’re excited about our new Austin expansion effort, which has opened the first of 17 planned locations to double our presence in that market. Beyond these overall numbers, I wanted to take you a little deeper into the character of the expansion business. In Houston, we stand at $1.4 billion in deposits and $1 billion in loans. Our deposit mix is 53% commercial and 47% consumer, essentially mirroring our company profile. Two-thirds of the deposit relationships are under $1 million and only four are over $10 million. Loans are 73% commercial, 27% consumer, with only 8 customers having over $10 million. In Dallas, our $325 million in deposits show 53% as consumer versus 47% commercial, with 72% of those deposits under $1 million and no relationships over $10 million. Our $258 million in loans are 62% consumer and 38% commercial. The reason I provided that detail is to show you that the kind of business we’ve been successfully generating in our expansion is core, stable, grassroots business, which I believe will generate tremendous value over an extended period of time. I’m very pleased with these results, and I believe that the strategy is both scalable and durable, and I’m convinced we’ll be doing this for a long time. In consumer banking, we continue to see outstanding organic growth. We added 6,220 net new checking households in the quarter, bringing the year-to-date total to 22,800, a 12% improvement on 2022 year-to-date results. Over the past 36 months, we’ve added 80,000 net new consumer checking households, which means we grew our core customer base by 23% in just 3 years. We believe these are industry-leading numbers and represent tangible evidence that the customer experience we offer and the reputation we’ve built set us up to be successfully competitive. As we look at these new households, we see that the quality of the growth is also high. A high percentage of the accounts are active, the balances are healthy, and the growth is balanced across all the segments we serve. These factors are evidence that the growth is sustainable and beneficial. Consumer loan balances outstanding were $2.8 billion at the end of the quarter, growing 26% year-over-year. In the third quarter alone, balances increased to $181 million, or 7% from the second quarter. This robust growth was driven by our home equity products. In a market where it’s becoming increasingly expensive to buy, many families are deciding to stay and improve their homes. We have a long history of credit quality in the consumer banks similar to what you’re used to hearing about on the commercial side. The weighted average credit score on the portfolio is 754. Delinquencies are low and stable at about 80 basis points, while charge-offs are also low and stable at 19 basis points for the year. We’re also excited about the prospects for our new mortgage product, which is in its very early stages, but just recently opened up to all our markets in the state. Looking at our commercial business, our new opportunities for the quarter were strong, but they were down 17% from the second quarter due to our previous high during that quarter after the dislocations brought on by the SVB situation. Our declines for deals were also high, almost 2.5 times our quarterly average. In the third quarter, and focusing on our weighted pipeline, that pipeline is up 22% from last quarter and it’s our highest of all time at $1.918 billion. Our previous high was during the second quarter of 2022 at $1.832 billion. The increase comes from all categories, both customers of 18% and prospects of 25%. The commercial and industrial categories showed an increase of 23% and the commercial real estate, 24%. Credit quality continues to be good by historical standards, with classified and non-accrual assets flat and net charge-offs down quarter-over-quarter. Non-accrual loans totaled $67 million at the end of the third quarter compared with $68 million at the end of the second quarter, essentially flat for the quarter. The third quarter figure represents just 37 basis points of total loans and 14 basis points of total assets. Problem loans, defined as risk-grade 10 or higher, totaled $513 million at the end of the third quarter, that’s up from $441 million at the end of the second quarter. Virtually all the linked quarter growth was in the OAEM risk category or grade 10. Net charge-offs for the third quarter were $5 million, down from $9.8 million in the second quarter. Annualized net charge-offs for the third quarter represented 11 basis points of average loans and year-to-date annualized net charge-offs are 18 basis points of average loans, which is below historic averages. Regarding commercial real estate, our overall portfolio remains stable, with steady operating performance across all types and acceptable debt service coverage ratios and loan-to-values. Within this portfolio, what we’d consider to be the major categories of investor CRE, including office, multifamily, retail, and industrial, totaled $3.5 billion, representing 40% of CRE loans outstanding, and flat quarter-over-quarter. Our investor CRE portfolio has held up well, with average performance metrics remaining essentially unchanged quarter-over-quarter, exhibiting an overall loan-to-value of about 54%, loan-to-cost of about 60%, and acceptable reported debt service coverage ratios. Higher interest rates continue to be a challenge for our CRE borrowers and have impacted performance of some projects compared to original performance. On average, we’re comfortable with the quality of the portfolio. The investor office portfolio, which has been a significant topic since the pandemic, had a balance of $950 million at quarter end, exhibiting an average loan-to-value of 52% and an average debt service coverage ratio of 1.46, slightly improved from last quarter. 83% of this portfolio is stabilized with healthy coverage levels, and less than 5% of the portfolio is considered speculative, with even these few projects located in strong sub-markets with good leasing dynamics and strong experienced developers. We are comfortable with our office portfolio, based on the character and experience of our borrowers and sponsors, and the predominantly Class A nature of our office building projects. We’re glad to be operating in Texas. In closing, we remain optimistic for what lies ahead. We’re capitalizing on opportunities and I’m proud of all our bankers for accomplishing this across all our communities. Now, I’ll turn the call over to our Chief Financial Officer, Jerry Salinas, for some additional comments.

Jerry Salinas, Group Executive Vice President and CFO

Thank you, Phil. I wanted to start off first by talking more about our Houston 1.0 expansion results. As Phil mentioned, we’ve been very pleased with the volumes we’ve been able to achieve. Looking at the third quarter, linked quarter annualized growth in average balances for these locations was 46% for deposits, that’s $170 million growth linked quarter and on loans of 52% annualized growth, or $133 million quarter-over-quarter for loans. For the third quarter, Houston 1.0 contributed $0.06 to our quarterly EPS. Moving to our net interest margin, our net interest margin percentage for the third quarter was 3.4%, down only 1 basis point from the 3.45% reported last quarter. Some positives for the quarter included higher yields on loans and balances at the Fed combined with higher loan volumes. These positives were primarily offset by higher cost of deposits and customer repos compared to the second quarter. Our investment portfolio averaged $20.6 billion during the third quarter, down $721 million from the second quarter. During the quarter, we did not make any material investment purchases and sold about $361 million in municipal securities at a small net gain as we took advantage of market dislocations, which allowed us to improve interest income going forward. The net unrealized loss on the available-for-sale portfolio at the end of the quarter was $2.2 billion, an increase of $600 million from the $1.6 billion reported at the end of the second quarter. The taxable equivalent yield on the total investment portfolio in the third quarter was 3.24%, flat with the second quarter. The taxable portfolio averaged $13.6 billion, down approximately $216 million from the prior quarter and had a yield of 2.76%, up 5 basis points from the prior quarter. Our tax-exempt municipal portfolio averaged about $7 billion during the third quarter, down $505 million from the second quarter and had a taxable equivalent yield of 4.26%, down 1 basis point from the prior quarter. Approximately 71% of the municipal portfolio was pre-refunded or PSF insured at the end of the third quarter. The duration of the investment portfolio at the end of the third quarter was 5.7 years, up from 5.2 years at the end of the second quarter, impacted by duration extension in both our municipal and MBS agency portfolios. Looking at deposits, on a linked quarter basis, average deposits of $40.8 billion were basically flat with the previous quarter as they were only down $179 million or 0.4%. We did continue to see a mixed shift during the quarter as noninterest-bearing demand deposits decreased $408 million or 2.7%, while interest-bearing deposits increased $229 million or 0.9% when compared to the previous quarter. Based on third-quarter average balances, noninterest-bearing deposits as a percentage of total deposits were 36.3% compared to 37.1% in the second quarter. Noninterest-bearing deposits totaled $14.8 billion at the end of the quarter, with 96% of that amount being commercial demand deposits. During the individual months of the third quarter, we did see the average balances in the noninterest-bearing accounts begin to stabilize. During last quarter’s call, I noted that July’s average balance was down $202 million from the June average. The full month-to-date average for July was $14.84 billion, down only $173 million from the June average. Our August average was flat with July, and the September average was down only $60 million to $14.78 billion. For October month-to-date through yesterday, the average non-interest-bearing deposit balance is $14.52 billion, down $259 million from the September average. Looking at total interest-bearing deposits, they’ve been relatively stable during the period. Average interest-bearing deposits were $26.0 billion during the quarter, up $229 million or 0.9% from the second quarter. For October month-to-date average, the balance in interest-bearing deposits through yesterday was $26.3 billion, up $102 million from our September average. We do continue to see a shift in the mix of interest-bearing deposits to higher-cost CDs from lower-cost savings, IOs, and MMAs. The cost of interest-bearing deposits in the third quarter was 2.12%, up 25 basis points from 1.87% in the second quarter. Customer repos for the third quarter averaged $3.5 billion, down $183 million from the $3.7 billion averaged in the second quarter. The cost of customer repos for the quarter was 3.67%, up 15 basis points from the second quarter. Looking at our noninterest income on a linked quarter basis, I wanted to point out a couple of items. Trust and investment management fees were down $1.8 million or 4.5% compared to the second quarter, driven by decreases in estate fees of $1.1 million, real estate fees of $673,000, and tax fees of $413,000, partly offset by an increase in investment fees of $750,000. Other charges, commissions, and fees were up $1.0 million or 8.6% compared to the second quarter, impacted by increases in various accounts, including money market income up $282,000, letter of credit fees up $155,000, and annuity income up $121,000. Other income was up $3.0 million or 29% when compared to the second quarter, impacted by higher public finance underwriting fees up $1.6 million, and higher combined derivative and foreign exchange income up $1.8 million. Looking at our projection of full-year 2023 total noninterest expenses, we continue to expect total noninterest expense for the full year 2023 to increase at a percentage rate in the mid-teens over our 2022 reported levels. This does not include the potential impact of the SBIC special assessment, which has not yet been finalized. The effective tax rate for the first nine months of the year was 16.3%. Our current expectation is that our full-year effective tax rate for 2023 should approximate 16.5% to 17%. However, that can be affected by discrete items during this fourth quarter. Regarding the estimates for full-year 2023 earnings, our current projections don’t include any additional changes to the Fed funds rate through the rest of the year. Given that rate assumption and our expectation of 2023 noninterest expense growth in the mid-teens, which does not include the impact of the SBIC special assessment, and given our strong performance this quarter, we believe that the current needs of analysts’ estimates of $9.22 is too low. With that, I’ll turn the call back over to Phil for questions.

Phil Green, Chairman and CEO

Thanks, Jerry. And we’ll open it up for questions now.

Operator, Operator

Thank you. Our first question is from Steven Alexopoulos with JPMorgan. Please proceed.

Steven Alexopoulos, Analyst

Hi, everyone. I want to start, so on the deposit side, Jerry, to follow-up, where you just left off with the noninterest-bearing, that $14.9 billion – $14.8 billion. It’s pretty stable. In the fourth quarter, we typically see some window dressing from companies that it picks up a bit. Can we safely say that we’re now at a bottom for the noninterest-bearing deposits?

Jerry Salinas, Group Executive Vice President and CFO

Steven, I think that certainly when I look at it, I feel today versus 3 months ago a lot more comfortable with where they’re at. Obviously, you’ve seen, and I kind of tried to give that color in my commentary. We are seeing little downward ticks, but it’s really been stable. In my mind, those small $100 million, $200 million decreases have been relatively stable as you’ve said, and we’ve seen historically the fourth quarter is the best quarter, as companies try to do some window dressing. I don’t know that I can confidently say that we’re at the bottom, but I certainly feel a whole lot better today than I did a quarter ago.

Steven Alexopoulos, Analyst

Got it. Okay. And then on the loan side, I didn’t – I mean, it will be pieced together all the color you gave on consumer and commercial, but there’s no doubt loan growth picked up this quarter. Can you give us – drill down why is it just these new markets coming online when you look at the growth? And it sounds like you’re pretty optimistic. You think it’s sustainable, this improvement you’re seeing.

Phil Green, Chairman and CEO

No, Steven, with all of that, it’s still, I think, high-single-digits number. And that’s kind of what our sustainable target has been for a while. So I would hope that it is. It would be our goal that it is. We’ve looked hard at where it’s coming from, like I said, with that really big spike in the second quarter. We talked about where it came from, and it was largely a lot of good credits. It just didn’t meet our structure that what we wanted to do, maybe we were full in a category and didn’t want to reach out in one particular area. A lot of banks have just put their pencils down. We have liquidity; people know that we’re not always the place where people like to go to get the leggiest structure on a deal. But we’re consistent through good times and bad, and I think people realize that. We got a lot of phone calls and a lot of opportunities to do stuff. I mentioned how many we declined because I didn’t want people thinking that Cullen/Frost got some loan growth; they must be just taking other people’s problems. That’s not what’s happening. We’re just seeing a lot of good opportunity. It’s hard to pin down any one particular thing because it’s been pretty consistent. A lot of it is owner businesses, business-to-consumer models. They’re stable long-term businesses, the result of hiring community bankers in the communities we’ve gone into. The commercial real estate we see there is mainly because someone wants to own their own building instead of renting. That’s slowed some, because rates are so high, but that’s still going to be the arc of the kind of business we’re doing. That makes me feel really good about how core and stable it is because that’s really our wheelhouse.

Steven Alexopoulos, Analyst

So if I could ask, but final one, so as we’re probably two-thirds through earning season, what we’re hearing from the industry, particularly the larger regionals, because most of them are on this RWA Ozempic diet, they’re just shrinking assets. They’re almost all tightening on expenses, a lot of them are guiding to flattish expenses for 2024. And to be quite frank, I don’t know how to think about Cullen/Frost for 2024. I’m not looking for a number, but I want to know how you’re thinking about it because in many ways, this is going to be a great market for you to take bankers, right? So I don’t know, I think the number’s 14% year-over-year. Are you thinking about, “Hey, this is a year that we’re going to continue to expand and maybe expense growth stays at that rate? Or are you sharing some of your other CEOs like, no, we need to tighten also just because the environment’s a little more challenging?” How do you think about that?

Phil Green, Chairman and CEO

What we’re thinking is that we’ve got a great opportunity to expand. We have plans in place. We started the process of doubling Austin, and we’re in the middle of tripling Dallas. We think these are great opportunities. We’ve got good applicant flow there. We are hiring tons of bankers as part of our expansion. It’s not like we’re saying, 'Oh, we need to cut expenses now, for whatever reason.' We’re winning competitively, and now is the time for us to keep moving forward. We talked with the folks about what they’re spending, and we want it to be lower next year because there’s a limit to what you can do over time and we want to be prudent about this stuff. But we’re not in a retrenchment mode at all. Jerry, do you want to talk something about expenses?

Jerry Salinas, Group Executive Vice President and CFO

I think Phil said it. We’ve been very focused, as he said. Our guidance for our team has been that we’ve kind of given guidance to this mid-teen sort of growth this year. But we certainly would expect that when we talk in January, that’s not the sort of growth we’ll be giving from a target standpoint.

Operator, Operator

Our next question is from Dave Rochester with Compass Point. Please proceed.

David Rochester, Analyst

Hey, good afternoon, guys. Nice quarter.

Phil Green, Chairman and CEO

Thank you.

Jerry Salinas, Group Executive Vice President and CFO

Thank you.

David Rochester, Analyst

On your outlook for higher EPS versus consensus, are you guys assuming you’ve reached a bottom now in NIM and NII giving your rate outlook? You’ve been pretty stable here for a couple quarters now. Are you thinking that trend continues? And then when do you think you could get back to NII growth?

Jerry Salinas, Group Executive Vice President and CFO

I think that – and I’ve been pretty consistent. The fourth quarter for us is going to be a little bit weaker. It’s not significant. The guidance I gave last quarter was I thought they’d be flattish, and I could even still say that with a downward bias. I mean, we were down 1 basis point between these quarters. As I look out into 2024, we have some opportunities for reinvestments that we’ll be making pretty early in the year from maturities on our investment portfolio. If rates don’t go down, we’ll have to be cautious in our planning. But right now, I do think that the same guidance I gave last quarter about kind of flattish to a little bit downward bias is where I’m at for this fourth quarter.

David Rochester, Analyst

Okay. I appreciate that. And then going back to the stats you were talking about on the noninterest-bearing. It sounded like October was down. If I heard this right, maybe $260 million-ish from the September average. I know that’ll bounce around. I was just wondering if you had isolated what drove that pickup in the runoff this month.

Jerry Salinas, Group Executive Vice President and CFO

To be honest with you, there are so many accounts in there, lots of positives and negatives and a lot of volatility that goes with those accounts. From my end, when I see a movement like that in a month, I tend to think it’s pretty flat. We hope we’ve seen the drop at the bottom, as Phil said, and we’ll continue to be pretty optimistic about it.

David Rochester, Analyst

Good. Maybe one last one just on expenses. You mentioned the mid-teens growth guide. And that implies a little bit of a wider range since we only have one quarter left. And it seems like a midpoint would imply a little bit of a step up in expense growth in 4Q. Are you thinking maybe more at the bottom end of that range at this point, that you came in a little bit lower this quarter?

Jerry Salinas, Group Executive Vice President and CFO

I will say, David, that my expectation today versus where we were a quarter ago is that we’ll be lower. We had a solid quarter, and some of it was on the expense side coming in lower than we had expected. There’s a little uncertainty about incentive payments vesting in the fourth quarter. But if you’re looking at where I was a quarter ago versus where I am today, I feel that it will be a little bit lighter than I thought.

Operator, Operator

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

Ebrahim Poonawala, Analyst

Good afternoon.

Jerry Salinas, Group Executive Vice President and CFO

Hey, Ebrahim.

Ebrahim Poonawala, Analyst

Hey, so Phil, you talked about growth possibly slowing as we look into next year. Just give us a sense of how customers are holding up when we think about this lagged effect of the Fed rate hikes, maybe consumer demand slowing down a bit. What’s the resiliency of your customer base?

Phil Green, Chairman and CEO

Ebrahim, those deals that have seen on a floating basis, along with rising operating costs, are known. I know our credit numbers are really strong. I don’t see a significant problem here in the state. We’re glad to be operating in Texas. I don’t feel like it’s going to be slower. I talked to customers, and it’s interesting. Most people, when you talk about their business, say, they’re not seeing significant problems. You might think it’s supposed to be bad if you watch too much TV. There’s worry about than actual problems today. Some sectors are under pressure like those sensitive to rates. We’ve seen issues in contractors and some businesses are working to adjust. But we’ve also seen demand for good quality properties.

Ebrahim Poonawala, Analyst

Got it. That was good color. Thanks, Phil. And apologies if I missed it, but can you remind us in terms of new branch openings over the next year? What’s in the pipeline in Austin or Dallas?

Phil Green, Chairman and CEO

I’m going to guess around 15 locations. Some of it is going to depend on conversations we’re having about the permitting process and municipalities. But I think the last number I saw combined in 2024 was around 15 across all three markets.

Ebrahim Poonawala, Analyst

Got it. 15 combined. And how would that compare, Jerry, to what we did this year in 2023?

Jerry Salinas, Group Executive Vice President and CFO

I think it would be a little bit lower than where we were in 2023.

Ebrahim Poonawala, Analyst

Understood. All right. Thank you for taking my questions.

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 check in on deposit beta. You spoke about seeing a shift from lower-cost to higher-cost deposits. Can you help us think through peak deposit betas in 2024 as rates stay higher for longer, and also give some color on the competition that you’re seeing?

Jerry Salinas, Group Executive Vice President and CFO

So for the third quarter, cumulatively in this cycle we were up 2%. On interest-bearing, we were at 37% in the second quarter. We’re at 39% at the end of the third quarter. I’d expect that same sort of a little clip between the third and the fourth quarter on interest-bearing and a similar movement on total deposits. From a competitive standpoint, we do keep an eye on our competitors at all levels. We want to be competitive, looking at rates weekly. More competitive pressure on the CD side recently. That’s what large consumers and commercial customers need to keep their business at the bank.

Manan Gosalia, Analyst

Got it. And maybe a follow-up on expenses. I know you noted the expense growth rate would likely come down next year. But at the start of this year, when you guided to mid-teens expense growth, you mentioned investing in IT and cyber projects and upgrading core systems. Should we think about some of these one-time costs coming out next year? Or are these multi-year investments?

Jerry Salinas, Group Executive Vice President and CFO

Most of the things we’re talking about are multi-year investments. Projects will get capitalized. Some of this has moved into the latter parts of 2023. Most of these are people and capitalized projects. We’re not really thinking about any one-time expenses driving that expense growth this year. It’s more about the investments we've made and will continue to make in the business.

Operator, Operator

Our next question is from Brady Gailey with KBW. Please proceed.

Brady Gailey, Analyst

Hey, thank you. Good afternoon, guys.

Jerry Salinas, Group Executive Vice President and CFO

Hey, Brady.

Phil Green, Chairman and CEO

Hey, Brady.

Brady Gailey, Analyst

But maybe just to ask the expense question a little differently. As I look over the last 3 or 4 years, you made a big investment in Houston, Dallas, and now Austin. As you think about it going forward, are there still markets out there where you want to make a substantial new investment? Or do you think with these three, you’re done making these large investments in a new market?

Phil Green, Chairman and CEO

Brady, we’ve got a lot of work left to do. We’ve got to finish up Dallas, we’re just starting Austin, and we’ve got a pretty big network that we’re going to continue to deal with and grow in the normal course of business. I can’t predict anything about future expansions too much right now, but I don’t think our business model ends when we finish 17 branches in Austin. We’ll always have a legacy part of our company that operates efficiently and profitably and a growth expansion component that has high growth rates.

Brady Gailey, Analyst

That helps. And then we’ve seen some of your peers do a partial bond restructuring. I know your bond yield is around 3.25. If you mark-to-market that bond yield, you’d be picking up a couple of hundred basis points. How do you think about restructuring a piece of the bond book?

Jerry Salinas, Group Executive Vice President and CFO

We haven’t discussed any sort of bond restructuring. We like the flexibility of our securities and available for sale. We’re aware of the implications of the new capital regime, but we haven’t made any investment purchases this year.

Brady Gailey, Analyst

Okay. And then finally for me, it looks like the share count went down just modestly in the third quarter relative to the second quarter. So maybe a modest amount of share buybacks. Your stock was at a year-to-date low. How do you think about a share buyback with the stock at this level?

Jerry Salinas, Group Executive Vice President and CFO

We didn’t spend a lot, but we got in earlier than I would have liked. I think it was around $11 million that we spent in the quarter. It’s something we’ll talk about as we continue these discussions.

Operator, Operator

Our next question is from Michael Rose with Raymond James. Please proceed.

Michael Rose, Analyst

Hey, good afternoon. Thanks for taking my questions. Phil, I noticed your comments about optimism around home equity. Looking back over the past couple of quarters, it seems like that’s over half the average loan growth. Just wanted to size the opportunity moving forward, and particularly as you roll out the mortgage product. Thanks.

Phil Green, Chairman and CEO

The mortgage portfolio is a great asset class for us. Over time, this could be very beneficial. Remember, we’re not doing a refi program, we’re focused on putting people in homes. The home equity product has room to grow as people are not moving.

Michael Rose, Analyst

Great. I appreciate the color. And just one final for me, so I guess the potential problem loans were up about 16% quarter-over-quarter. Any notable trends in there, anything to read into that, or just more normalization of credit off of a very low base? Thanks.

Phil Green, Chairman and CEO

The changes were mainly in the risk-grade 10s. About four credits contributed significantly, but we don’t feel bad about those. We’re doing well overall, and while we’ve seen some hiccups here and there, we feel confident about our support for the vast majority of our customers.

Brody Preston, Analyst

Hello, everyone.

Phil Green, Chairman and CEO

Hello.

Jerry Salinas, Group Executive Vice President and CFO

Hey.

Brody Preston, Analyst

I wanted to follow up on office. I was wondering if you happen to have what the reserve against the office portfolio is and how you think about that moving forward just given some of the larger banks are putting up pretty hefty reserves against their office portfolios.

Jerry Salinas, Group Executive Vice President and CFO

I’m looking at our commercial real estate as a group. I think the reserve is 2.2% on office. If you need more information, we can provide you with that detail.

Brody Preston, Analyst

Okay. Great. I’ll follow up. I did also – Jerry, I’m sorry to go back to expenses and be the... Do you happen to have for the fixed-rate portion of the loan portfolio what’s coming due over the next 12 months and what the yield pickup on that would be?

Phil Green, Chairman and CEO

No, I don’t think I’ve got that handy, but we can get it to you.

Brody Preston, Analyst

Okay. Maybe if I can ask one more.

Phil Green, Chairman and CEO

Sure, of course.

Brody Preston, Analyst

Do you happen to have what the percent of the portfolio that SNC is?

Jerry Salinas, Group Executive Vice President and CFO

At the end of September, the SNC portfolio was 4.3% of the period-end loans.

Brody Preston, Analyst

Awesome. Thank you very much. I appreciate it.

Operator, Operator

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

Phil Green, Chairman and CEO

Thanks, everyone. We appreciate your participation today and your interest. 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 time.