Earnings Call Transcript
CULLEN/FROST BANKERS, INC. (CFR)
Earnings Call Transcript - CFR Q2 2023
Operator, Operator
Greetings and welcome to today's Cullen/Frost Bankers Inc., Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, A.B. Mendez, Senior Vice President and Director of Investor Relations. Thank you. Please go ahead.
A.B. Mendez, Senior Vice President and Director of Investor Relations
Thanks, Donna. 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 this morning's earnings press 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 thank you for joining us. We are here to discuss the second quarter results, and our Chief Financial Officer, Jerry Salinas, will provide some additional comments before we take your questions. In the second quarter, Cullen/Frost earned $160.4 million, or $2.47 per share, compared to earnings of $117.4 million, or $1.81 per share from the same quarter last year, which is a 36.6% increase over last year's figures. Our return on average assets and average common equity for the second quarter were 1.30% and 19.36%, respectively, compared to 0.92% and 13.88% for the same period last year. I am proud of the strong performance by our exceptional team in this challenging economic environment. The Federal Reserve's ongoing rate increases and efforts to combat inflation have successfully slowed certain market segments. Higher rates are also increasing the opportunity costs for businesses holding cash in liquid deposits. We expect these impacts to continue throughout the rate cycle, and Jerry will share insights on their near-term effects. As we mentioned last quarter, Cullen/Frost did not utilize any federal home loan bank advances, participate in any special liquidity facilities or government borrowing, or access brokered deposits or reciprocal insurance arrangements to build insured deposit percentages. Despite this, we believe the most crucial focus now is on our successful mission to grow and prosper by fostering long-term relationships based on exceptional service, high ethical standards, and sound assets. The results for this quarter reflect our success in that regard. I am enthusiastic about our future. In our commercial and private banking segment, we achieved our best quarter ever for new customer relationships, increasing by 33% year-over-year and 53% from the previous quarter, totaling 1,145 new relationships. Notably, nearly half of these new relationships, or 45%, came from the largest banks, often referred to as too big to fail. While I usually wouldn't delve into these details, I want to share the unannualized linked quarter growth rates in new relationships by region, as I find this data compelling and indicative of a broader trend. Houston led all regions with 333 net new relationships, a 63% increase from the previous quarter. Dallas generated 262 net new relationships, an increase of 32%. San Antonio recorded 172 new relationships, up 107%; Fort Worth, 156 new relationships, up 20%; and Austin, 117 new relationships, up 102%. The Gulf Coast and Victoria regions combined for 68 new relationships, an increase of 48%, with the Permian Basin contributing 37 new relationships, up 28%. These figures reflect our competitive success. In our commercial lending sector, we experienced a 19% rise in activity related to new opportunities and a 27% increase in our probability-weighted pipeline from the first quarter. Deal flow is increasing, with 20% more deals than in the first quarter. However, booked deals decreased by 8% as we declined more proposals, and more customers withdrew from negotiations. We are being cautious in this environment, but the rise in opportunities is noteworthy. Unlike in the previous quarter, we saw more leads from our existing customers compared to new prospects. Opportunities from customers increased by 34%, while prospect opportunities rose by 7% in the first quarter. In our consumer business, we set a record for net new relationships this quarter with 8,529, surpassing our previous high from the first quarter by 6% unannualized. Our most established expansion efforts in Houston led the way with 2,600 new relationships, while Dallas and San Antonio each added about 1,500. Consumer loans reached $2.6 billion by the end of the quarter, representing a 27% increase from the second quarter last year, primarily driven by consumer real estate, as our home improvement and home equity products meet the needs of customers with low-rate mortgages and strong credit scores. Included in those figures were over $12 million in mortgage loans included in our measured rollout of this product starting in the Dallas market. Towards the end of the second quarter, we announced plans to expand into the Austin region, building on the progress from our Houston and Dallas expansions. We intend to double our locations in Austin from 17 to 34. Austin is Texas's third-largest deposit market, and we already hold the fourth position in deposit share. These new locations will have a substantial foundation to build upon. Our Houston expansion includes 25 original locations plus additional ones we call Houston 2.0, with the latest location opening in Princewood last week. Our expanded branches in Houston are performing at 121% of household goals, 164% of loan goals, and 108% of deposit goals. Overall, our Houston expansion has contributed $1.27 billion in deposits and approximately $850 million in loans. In Dallas, while still early, we are at 226% of new household goals, 315% of loan goals, and 377% of deposit goals, with deposits currently at $261 million and loans at $217 million. In total, our expansions have garnered about $1.5 billion in deposits and over $1 billion in loans. Credit quality remains strong by historical standards. Problem loans, defined as risk grade 10 or higher, totaled $441 million at the end of the second quarter, up from $348 million at the end of the first quarter and $429 million from a year ago. Non-performing loans were $68.5 million at the quarter's end, compared to $39.1 million at the end of the first quarter, impacted by two borrowers. This equates to just 39 basis points of total loans and 14 basis points of total assets. Net charge-offs for the quarter were $9.8 million, up from $8.8 million in the first quarter, with annualized net charge-offs at 22 basis points of average loans and year-to-date charge-offs at 21 basis points, which is below our historical average. In terms of commercial real estate, our portfolio remains stable, demonstrating consistent operating performance across different asset types, with acceptable debt service coverage ratios and loan-to-value ratios. We have a total of $3.5 billion in outstanding loans for investor commercial real estate, which constitutes about 40% of our total commercial real estate loan portfolio. This segment is performing well, showing an average loan-to-value of around 54% and a loan-to-cost of about 60%, alongside acceptable debt service coverage ratios. While interest rate changes may have somewhat affected coverage ratios compared to initial underwriting pro formas, we have observed a quarter-over-quarter improvement in coverage ratios for stabilized properties in our portfolio. For instance, 85% of our investor office portfolio is stabilized, and average debt service coverage ratios improved from $1.38 to $1.42 this quarter. We witnessed a similar trend within the stabilized portion of our multi-family portfolio. The investor office portfolio remains a focal point, steady quarter-over-quarter with $927 million outstanding, averaging a loan-to-value of 52% and a debt service coverage ratio of 1.42 at current interest rates, starting from a solid position with a buffer against potential value declines. Our comfort with this office portfolio is reinforced by the quality and experience of our borrowers and sponsors, the predominantly Class A nature of our office buildings, and the fact that 85% of our exposure pertains to stabilized, well-performing projects. Our operational base in Texas is also advantageous. We did observe an $18 million office building loan transitioning to non-accrual during the quarter. Ultimately, the office portfolio and our entire investor commercial real estate portfolio have not revealed any significant signs of weakness or underperforming credits or projects outside of our monitoring. In conclusion, I reiterate my pride in our performance and what our team has achieved, as well as the competitive success we continue to demonstrate in our markets. Now, I'll turn the call over to our Chief Financial Officer, Jerry Salinas, for further comments.
Jerry Salinas, Group Executive Vice President and CFO
Thank you, Phil. I wanted to start off first by talking a little bit about our Houston 1.0 expansion results. As a reminder, the last of those branches was opened in 2021. So, these branches are still in what I call the development stage. As Phil mentioned, we've been very pleased with the volumes we've been able to achieve. Looking at the second quarter, linked quarter annualized growth in average balances for these locations was 31% for deposits and 17% for loans. For the second quarter, Houston 1.0 contributed $0.05 to our quarterly earnings per share. Now, moving to our net interest margin. Our net interest margin percentage for the second quarter was 3.45%, down 2 basis points from the 3.47% reported last quarter. The decrease included some positives that were more than offset by some negatives. On the positive side, higher yields on loans and balances at the fed, combined with higher loan volumes were more than offset by higher cost of deposits and customer repos, and lower deposit levels at the fed compared to the first quarter. Looking at our investment portfolio, the total investment portfolio averaged $21.3 billion during the second quarter, down $466 million from the first quarter. During the quarter, we did not make any material investment purchases. During the quarter, we sold about $360 million in municipal securities as we took advantage of market dislocations, which allowed us to improve interest income going forward. We recognized a net gain of about $33,000 on those transactions. The net unrealized loss on the available-for-sale portfolio at the end of the quarter was $1.61 billion, an increase of $207 million from the $1.4 billion reported at the end of the first quarter. The net unrealized loss on the held-to-maturity portfolio at the end of the quarter was $148 million, up $37 million from the first quarter. The taxable equivalent yield on the total investment portfolio in the second quarter was 3.24%, flat with the first quarter. The taxable portfolio, which averaged $13.8 billion, was up approximately $439 million from the prior quarter, and had a yield of 2.71%, up four basis points from the prior quarter. Our tax-exempt municipal portfolio averaged about $7.5 billion during the second quarter, down about $905 million from the first quarter, and had a taxable equivalent yield of 4.27%, up 4 basis points from the prior quarter. At the end of the second quarter, approximately 72% of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of the second quarter was 5.2 years, down from 5.5 years at the end of the first quarter. Looking at deposits, on a linked-quarter basis, average deposits were down $1.8 billion, or 4.1%, with about 80% of the decrease coming from non-interest-bearing deposits. I want to talk a little bit more about our non-interest-bearing deposits, which totaled $14.9 billion at the end of the quarter, with 96% of that amount being commercial demand deposits. During the individual months of the second quarter, we did see the average balance in the non-interest-bearing accounts begin to stabilize. During last quarter's call, we said that we expected deposits to continue to decline as this has historically been our seasonal trend that deposits peak in the fourth quarter and reach their low in the second quarter before beginning to grow in the second half of the year. I also noted that April non-interest-bearing deposits were down $492 million from March, and that we expected that April average to decline given the anticipated impact of seasonality, including tax payments. April non-interest-bearing balances decreased $587 million from March, almost $100 million more on average than at the time of our call. These average balances then decreased $441 million in May, with the average affected by tax payments in April and then decreased $108 million in June. Month-to-date through yesterday, July average balances are down $202 million from the June average. The June and July average balances have seen the pace of outflow begin to slow down and we are anticipating that slower pace of outflows to continue. But with interest rates at these levels, there continues to be uncertainty with these customer balances. Customers have attractive risk-reward options in this rate cycle that didn't necessarily present themselves in the last cycle, which provides them with multiple options for the utilization of these funds. Looking at total interest-bearing deposits, they've been relatively stable during the period. Average interest-bearing deposits were $25.8 billion during the quarter, down $345 million or 1.3% from the first quarter. We do continue to see a shift in the mix to higher-cost CDs from the lower-cost savings, IOC, and MMA. The cost of interest-bearing deposits in the second quarter was 1.87%, up 35 basis points from 1.52% in the first quarter. Customer repos for the second quarter averaged $3.7 billion, down $492 million from the $4.2 billion average in the first quarter as we saw some flows out of our repo product, including for tax payments during the quarter. The cost of customer repos for the quarter was 3.52%, up 32 basis points from the first quarter. Looking at non-interest income on a linked quarter basis, I just wanted to point out a couple of items, trust and investment management fees were up $3.2 million, or 9%, compared to the first quarter, driven by increases in estate fees of $1.6 million, real estate fees of $751,000, and investment fees of $463,000. Estate fees and real estate fees can fluctuate based on the number of estates settled or properties sold respectively. Insurance commissions and fees were down $6 million, or 32% from the first quarter, driven by lower P&C contingent bonuses down $3.1 million, benefit commissions down $4.8 million, and live commissions down $867,000. Partly offsetting these unfavorable variances was a $3 million increase in P&C commissions when compared to the first quarter. As a reminder, the first quarter is typically our strongest quarter for insurance revenues, given we typically recognize contingent income in that quarter and are also impacted by our natural business cycle. The second quarter is typically our weakest quarter for insurance revenues, again, impacted by our normal renewal business volumes. Looking at our projection of full-year 2023 total non-interest expenses; as I mentioned last quarter, we currently expect total non-interest 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 FDIC special assessment, which has not yet been finalized. The effective tax rate for the first six months of the year was 16%, or about 16.2%, excluding discrete items. Our current expectation is that our full-year effective tax rate for 2023 should approximate 16%, but that can be affected by discrete items during the rest of the year. Regarding our stock buyback, I want to mention that during the second quarter, we utilized about $28 million of our $100 million approved share repurchase plan to buy back approximately 280,000 shares at an average price of $96.02. Regarding the estimate for full-year 2023 earnings, our current projections don't include any additional changes to the fed funds rate through the rest of 2023. Given that rate assumption and our expectation of 2023 non-interest expense growth in the mid-teens, which does not include the impact of the FDIC special assessment, we currently believe that the current mean of analyst estimates of $9.63 is a little high. With that, I'll now turn the call back over to Phil for questions.
Phil Green, Chairman and CEO
All right. Thanks, Jerry. And now, we'll open it up for your questions.
Operator, Operator
Thank you. Today's first question is coming from Brady Gailey of KBW. Please go ahead.
Brady Gailey, Analyst
Hey, thanks. Good afternoon, guys.
Phil Green, Chairman and CEO
Hey, Brady.
Jerry Salinas, Group Executive Vice President and CFO
Hey, Brady.
Brady Gailey, Analyst
So, your net interest margin has held in very well, especially relative to the industry, which saw NIM slippage by a decent amount this quarter for most of your peers. Do you expect the net interest margin to continue to hold in relatively well, or do you think that at some point, you will see some real downside there.
Phil Green, Chairman and CEO
What I'd say, Brady, I thought that last quarter, I said it was going to be relatively stable. I think I'd stick with that, except that I would say that there's a downward bias. When I talked about the two basis-point decrease that we had between the first and the second quarter, all those positive and negatives are still kind of affecting us going forward. So, I'd say kind of stable. but again, with probably more towards a little bit negative bias. But I don't see it changing significantly, not based on anything I'm seeing.
Brady Gailey, Analyst
Okay. And then I know in the past, you guys have talked about some of the financial impacts of expanding into a new market like Austin. I don't think they've moved the numbers a ton. But any guess on the financial impact of the Austin expansion over the next year or two?
Jerry Salinas, Group Executive Vice President and CFO
Brady, we'll talk about that in January. We really would give some guidance and obviously, it's going to be primarily expense based at the beginning as you know. As we start putting those locations together, I don't expect for 2023 that they'll have a significant impact. So any impact will start feeling next year and we'll kind of give some color at the beginning of the year.
Phil Green, Chairman and CEO
Yes. I just might add, Brady, just that the scope of it's a little bit smaller just by its nature than Dallas or Houston. The expansions that we've had there. So, pound for pound, it'll be about the same, but the scope of it just a little small.
Brady Gailey, Analyst
Okay. And then finally, for me, NPAs are up. They're still at a very low level. But I think I heard you mention two credits move into the NPA bucket. One was an $18 million office loan. What was the other NPA that went into that bucket this quarter?
Phil Green, Chairman and CEO
Yes. It was in the pre-owned auto sale dealership, and the higher interest rates really impacted its carry costs and also the performance of some of the paper that it carries. And so we thought it was appropriate to recognize that. So, it wasn't real estate related, but it was in the automobiles area.
Brady Gailey, Analyst
Okay. All right, great. Thank you, guys.
Phil Green, Chairman and CEO
Thank you.
Jerry Salinas, Group Executive Vice President and CFO
Thank you.
Operator, Operator
Thank you. The next question is coming from Steven Alexopoulos of JPMorgan. Please go ahead.
Steven Alexopoulos, Analyst
Hi, everybody.
Phil Green, Chairman and CEO
Hey, Steven.
Jerry Salinas, Group Executive Vice President and CFO
Hey, Steven.
Steven Alexopoulos, Analyst
I want to start. So, the non-interest-bearing deposits last quarter, you guys thought would come down in 2Q and then stabilize, and we're seeing continued outflows. I'm just curious what's taking customers so long to just reach that amount of operating cash that they need? I find it hard to believe with every move, they're like digging deeper and deeper. I would have thought it would pretty much be done by now.
Phil Green, Chairman and CEO
I think the current rate environment is quite unique and presents a lot of opportunities for investment. The rates are impressive, and while a couple of hundred million is certainly better than the decreases we saw previously, there continues to be volatility. There are many options for utilizing those funds, such as paying off debt or investing. We've noticed some money flowing into our off-balance sheet areas as well. I initially thought most of the funds were gone, but given the current environment, I anticipate continued pressure. However, as Phil mentioned, we are optimistic about the new relationships we're establishing and have seen some significant deposit gains. Some of these commercial wins take time to finalize, but in this rate environment, we will remain cautious. Ultimately, it’s up to everyone to decide how they want to invest their funds, and our focus will be on growing the business and acquiring new customers.
Steven Alexopoulos, Analyst
Okay. And then on the balance sheets, you guys had good loan growth in the quarter, more or less funded with securities. If you just look at the movements on the asset side. As we think about the back half, Jerry, is maybe these non-interest-bearing outflows subside a bit, do you think we'll see net balance sheet growth in the second half or will you just continue to fund loan growth with other assets that run off?
Jerry Salinas, Group Executive Vice President and CFO
I think that we're projecting some small growth on the funding side at this point. Nothing really material. Again, given the uncertainty that we've got on the commercial side, our projections really do have some growth, but it's not anything that I would say is significant.
Steven Alexopoulos, Analyst
Okay, thanks. And then final one. So Phil, I appreciate all of the line items that you ran through by market, in terms of customers that you guys are picking up, I'm curious. So, your service is consistently good, peers are consistently not as good. What is it about this environment that you're seeing in so many customers move banks? Thanks.
Phil Green, Chairman and CEO
Yes. Mr. Steven, I think it's a couple of things primarily. When you look at our movement in terms of growth and new relationships, the expansion no doubt has a really big effect on that. and I think it's really paying off in terms of growing those relationships overall. We've also been spending more and focused more on marketing. I think we're doing a better job on marketing. And then reputationally and just to be honest, we've got a great reputation and a reputation for great service. So, it's been pretty exciting as we've moved into some of these markets. In some cases, I was thinking about one we opened up, and I think it's Dallas just recently. I think the closest Frost bank was 15 miles away and the growth has just been tremendous. So, I think it's really simple. I think we are investing in our business. We're growing our distribution in fantastic markets. We've got a great value proposition for service, and we're marketing and investing in marketing and technology. I think it's just all working together to win. And I apologize for giving so much granularity on that, but it just shows that that's really what we're focused on is new relationships. It's a part of our mission statement that's called out. And we're going to go through rate cycles up and down, and we're going to see movements of non-interest-bearing deposits out and all that stuff. That's going to happen. But if we just focus on growing the business, growing the relationships in great markets, we're going to do fine.
Steven Alexopoulos, Analyst
Okay, thanks. And I appreciate all the detail for what it's worth. Thanks for taking my questions.
Phil Green, Chairman and CEO
All right, thank you.
Operator, Operator
Thank you. The next question is coming from Dave Rochester of Compass Point. Please go ahead.
Dave Rochester, Analyst
Hey. good afternoon, guys.
Phil Green, Chairman and CEO
Hey, Dave.
Dave Rochester, Analyst
Just going back to your EPS outlook comment for ‘23, I know you mentioned the stable NIM with a downward bias, so that was helpful to hear. I was just wondering, how are you expecting that to translate into NII trends for the back half of the year at this point? Are you thinking stable-ish NIM and stable funding, what you just mentioned would get you to stable-ish NII, or how are you thinking about that at this point as you look at your EPS outlook?
Phil Green, Chairman and CEO
Yes. I guess, the thing that I would focus on is kind of where we ended the quarter on the deposit side. I mentioned to Steven that we're not projecting a whole lot of growth from there for the rest of the year. And so that obviously will have some impact on net interest income. So, I think that's really where the pressure is.
Dave Rochester, Analyst
Okay. And then regarding deposit trends, you said earlier, it sounded like you're baking in marginal deposit growth or marginal funding growth, I guess, in the back half. Are you assuming that DDA continues to decline through that period as well? I know you mentioned that the runoff had subsided a bit, but is that the general expectation now you continue to have mixed shift through the end of the year?
Phil Green, Chairman and CEO
Yes. and again, we're projecting growth. But I think that on an annualized basis, I think we're at 2% or something like that, that we're projecting. What's interesting is 1% of that is our legacy bank and 1% is coming from our expansion. So obviously, they're having an impact on our growth. But that aside, I think that gives you some perspective on the size of the deposit side that we're projecting. And I think the mix, I would expect that it probably will not change a whole lot. But if there is a movement, I would expect that the pressure continues to be more on the non-interest-bearing side than on the interest-bearing side. And on the interest-bearing side, I think we're starting to see some settlement there on rates. But with this rate hike, we'll actually obviously react to that. But I think you'll still see some movement of mix, but it appears everything's stabilizing, certainly a lot more than we saw just a quarter ago.
Dave Rochester, Analyst
Yes. Okay. And then just given where we are in the rate cycle, have you guys been reducing asset sensitivity at all in the past quarter, or do you have any plans to do that in the back half of the year, just with swaps or anything else?
Phil Green, Chairman and CEO
I think right now, we're really kind of sitting tight. We're obviously looking at a lot of opportunities and things that we can do. But at this point, I wouldn't envision that we're doing anything very drastic obviously, asset sensitivity is diminishing as the balances that we're holding at the fed are diminishing as we're seeing the decreases in non-interest-bearing deposits. But other than that, not doing anything actively.
Dave Rochester, Analyst
Okay. And maybe, just one last one on expenses. I appreciated the reiterated guide there. It seems like just given where we are in the first half, you're looking for a pretty deep ramp up in the second half. Is that kind of what you guys are looking at, at this point? Is that likely to see that kind of a ramp up?
Phil Green, Chairman and CEO
Yes. that's kind of what we're saying. We obviously review our projections monthly and talking to our lines of business, and everything that we're seeing certainly is pointing us in that direction.
Operator, Operator
Thank you. The next question is coming from Manan Gosalia of Morgan Stanley. Please go ahead.
Manan Gosalia, Analyst
Hey, good afternoon. I wanted to ask about the liquidity and the cash balance in the quarter. I know the average was about $7 billion, which was, I think, sort of in line with where you had indicated balances were back in April. So, is it fair to say that you didn't utilize any of that through the quarter? And now that the environment has stabilized, do you plan to continue, or would you use cash to support loan growth and deposit outflow? Or just given where fed rates are, does it sort of make sense to keep cash at 5% and continue to let securities level come down?
Phil Green, Chairman and CEO
Yes. that's really where we are right now. I think that's the sort of guidance we gave last quarter. And you heard me say we didn't make any investment purchases. I think at this point, any decrease that we've seen in the cash balances at the fed and I think we were at the end of the quarter, we were down to $6.3 billion, a little under 16% of our deposit balances. So at this point, I think we're pretty comfortable with that. As you said, looking at the 540 that we're earning now, we're not looking to make any active moves on the investment portfolio at this point.
Manan Gosalia, Analyst
So can you remind us how much the securities portfolio, how much of that should mature every quarter for the next year or so?
Phil Green, Chairman and CEO
I believe for the remainder of the year, we are looking at approximately $720 million, possibly around $715 million, with around $250 million, which is a little more than a third, coming in on the last day of the month. Therefore, the latter half of 2023 is what I would consider a typical amount. Looking ahead to 2024, we are likely talking about something close to $3 billion for the year.
Manan Gosalia, Analyst
Got it. Thank you.
Phil Green, Chairman and CEO
Sure.
Operator, Operator
Thank you. The next question is coming from Peter Winter of D.A. Davidson. Please go ahead.
Peter Winter, Analyst
Thanks. I was curious, what's the outlook for the deposit beta? I think the original forecast was 32%. And then secondly, do you think that there'll be pressure on this deposit beta next year as we're in kind of a higher for longer rate environment and your interest rates on deposits are a little bit lower than peers?
Phil Green, Chairman and CEO
Our cumulative beta on interest-bearing deposits through the second quarter was 37%, an increase from 33% in the first quarter. In terms of total deposits, this corresponds to 23% at the end of the second quarter compared to 20% previously. I anticipate that we might reach around 39% by the end of the year, considering the recent rate hike. This is in line with historical averages from the last two cycles. However, looking ahead to 2024, I don't anticipate significant changes in this environment. It will be interesting to see our position in January and our expectations then. I believe we have been fair in our deposit pricing and have acted promptly to provide our customers with a competitive offer. Once the Fed stops hiking rates, I don't foresee a need for substantial increases in our betas or deposit rates. At this moment, I don't expect much change, but we will continue to ensure we remain competitive with our peers. If I had to predict, I don't see a lot of pressure developing at this time.
Peter Winter, Analyst
Okay. And then I just want to ask a big picture, I'm just a little bit surprised that maybe, the deposit outlook is not a little bit stronger. I mean, I realized what the environment is like. but every quarter, you guys keep having this record new account growth both on the commercial bank, the consumer bank, the success with the branch build out expansion, and that's starting to take hold. I'm just wondering why the deposit outlook is just not a little bit stronger with all this growth.
Jerry Salinas, Group Executive Vice President and CFO
One thing we need to keep in mind as we address this question is that we have a significantly higher number of operational transactional accounts, demand deposit accounts, and checking accounts compared to our peers. These accounts are likely more sensitive to the opportunities discussed. We need to navigate through this situation, and I believe once we hit the lowest point, we will see an upward movement. I am optimistic that we will gain traction from these new relationships. During our early Houston expansion, we noticed that while our performance on deposit relationships exceeded our expectations, we fell short of our commercial deposit balance goals. We learned that establishing the relationship is one thing, but on the commercial side, it’s essential for customers to change their payment processes. There are many operational steps needed before a business can fully experience the benefits of being the primary checking account. However, historically, as we have expanded and built relationships, we have seen an increasing amount of business funneled through these accounts, and I believe we will continue to see that trend.
Peter Winter, Analyst
Got it.
Jerry Salinas, Group Executive Vice President and CFO
Remember, we don't count a relationship unless we get the primary checking account. We'll do business with people. We get different aspects of their business, but you don't get to count it as a relationship unless you get the primary checking account.
Peter Winter, Analyst
Got it. Thank you.
Operator, Operator
Thank you. The next question is coming from Brandon King of Truist Securities. Please go ahead.
Brandon King, Analyst
Hey, good afternoon. Thanks for taking my questions.
Phil Green, Chairman and CEO
Hey, Brandon.
Brandon King, Analyst
So, I wanted to talk about the $80 million office loan. Could you please provide us with some details as far as what potentially makes that loan or property different from the rest of your office CRE portfolio?
Jerry Salinas, Group Executive Vice President and CFO
Okay. well, in the case of this one particular asset, it's one that lost a major tenant and it was one that is a newer relationship for us. And that it came on right before COVID, it came over, I think it was in January of 2020. And so there's not that same type of history. A good reputational group, but not the same kind of history thus. And as they lost that tenant and then their debt service coverage numbers suffered as a result, we felt like they needed to right-size it to a certain extent, they didn't agree with it. And they were willing to do a smaller amount. So, it's been restructured and it'll perform for the next year, but not to the level that we think it should. And so we've got that on a non-accrual and it was basically you just had a disagreement between the parties on what they should do as far as right-sizing the project. In terms of the asset itself, it is an office building loan, but we booked it at the amount of the underlying real estate. And it is a tremendous piece of real estate in a very dynamic area of Houston. And so I'm not concerned about valuation losses of any significance, but because of where we are and because it does cash flow to the place that we feel it needs to be, we put it on non-accrual. And as far as what's different, I mean, look, rates are higher and we've got a tremendous amount of projects and they're not all going to be perfect. And you could end up, I think we talked before, maybe as I recall, you could have a property that is an industrial property with a Fortune 500 credit tenant, long-term lease and underwritten before COVID or the current increases in rates. That looks great, right? But at the present value of that lease stream today is less. And so equity suffers in the project, those types of things. And they've got to get worked out and we'll just see how they work out. Do we think there'll be significant impact on loss? No. but we're watching credits that look like that. You might have a senior housing property that is kind of a different deal. I mean again, this is a lending business. There are all kinds of things that happen. It's a risk business, but there are lots of properties that are being impacted. The main thing that we're doing is we're relying on the underwriting that we did going in and the people that are backing it up, the vast majority of which have been long-term customers. So, we're going to see some dislocation here and there. Sure, we are. But do things look good today on a historical basis? And are we happy with the underwriting that we've done over time? I am. And we'll just see how it goes out over the cycle.
Brandon King, Analyst
Got it. Very helpful. My follow-up question is on the share repurchases in the quarter. Just kind of what led to that decision and kind of what kind of appetite do you have for the rest of the year?
Jerry Salinas, Group Executive Vice President and CFO
We saw the price at $96 and believed it was an opportunity we couldn't ignore. While we didn't use all of it, we felt the price represented great value for us, and we took advantage of it. Moving forward, we'll remain opportunistic if similar situations arise, but at this time, we have no specific plans.
Phil Green, Chairman and CEO
Jerry's a great example of those people using those demand deposit balance.
Brandon King, Analyst
Thanks for taking my questions.
Phil Green, Chairman and CEO
Yes, Brandon.
Operator, Operator
Thank you. The next question is coming from Broderick Preston of UBS. Please go ahead.
Broderick Preston, Analyst
Hey. good afternoon, everyone.
Phil Green, Chairman and CEO
Hey, Brody.
Broderick Preston, Analyst
I was hoping to follow up just on the securities question. I just wanted to confirm what you said, that it was $750 million was that through the rest of the year with the large chunk on 1231? And then 3 billion next year. Am I hearing that correctly?
Jerry Salinas, Group Executive Vice President and CFO
Yes, sir. You got it exactly.
Broderick Preston, Analyst
All right, great. Do you happen to know what the yield on the securities that's rolling off is?
Phil Green, Chairman and CEO
I can tell you something right off the top of my head. We bought $1 billion we've talked about this. We bought $1 billion in treasury securities two years ago, I guess, a year and a half now when there was conversation about Russia invading Ukraine, and we made that purchase as a defensive posture, obviously I wouldn't have made it today. We did that at 1%. So, that first $250 million comes off at the end of the year and it's at 1%, 102, I think is. And then the next $750 of those proceeds come in within the first few weeks of January, again at that same 102%.
Broderick Preston, Analyst
Got it. Okay. And I think you said earlier that you weren't being too aggressive on new purchases, but in terms of adding to the size of the book. But is it safe to assume that you would look to replace that $3.75 billion over the next 18 months? Would you just look to kind of replace that, or are you trying to move the size of the securities portfolio lower?
Phil Green, Chairman and CEO
Yes. I think all things being equal. And by that, again, we're talking about deposits a lot today, and assuming that we've reached some sort of stabilization and start to grow, I think the quick response would be, yes, we would look to replace it. But I think until we get to that point in time, we'll have to see what else is going on, on the balance sheet and make our decision at that point. But obviously, that could be a great positive or will be a great positive impact to NIM and to net interest income in ‘24 just even if we kept it at the fed.
Broderick Preston, Analyst
Got it. Is there any bias towards any type of security? I know you have a lot of the community bonds in Texas. I just didn't know if you would look to kind of replace treasury with treasury, if it was anything more complex than that.
Phil Green, Chairman and CEO
Yes. I think we would really evaluate at that point with our investment committee what made, what we saw the most value. So, we don't have anything that we'd say, oh, we're necessarily going to replace a treasury with a treasury. We're going to see where we think there's most value in the market.
Broderick Preston, Analyst
Okay, got it. That's all I have for questions. Thank you very much.
Phil Green, Chairman and CEO
Thank you.
Operator, Operator
Thank you. The next question is coming from Jon Arfstrom of RBC Capital Markets. Please go ahead.
Jon Arfstrom, Analyst
Thanks. Good afternoon.
Phil Green, Chairman and CEO
Hey, Jon.
Jon Arfstrom, Analyst
Hey, just a few random ones here. On the credit question, Phil or Jerry, what should we expect on non-performers? I know these two kind of feel like random and very different credit, but what do you guys see in terms of stress in the portfolio? And maybe, it's obvious, but do we just expect it to continue to rise?
Phil Green, Chairman and CEO
I believe it is realistic to expect an increase in non-performers, particularly in real estate, especially if rates remain elevated for an extended period. While we are closely monitoring our credits and maintaining a solid oversight, I don't anticipate significant losses. There are certainly some properties facing stress, and I prefer to take a conservative stance. Although I expect non-performers to rise, their current levels are quite low, making it challenging to predict them staying at this level throughout the cycle. I aim to be realistic rather than overly pessimistic, and we will need to be patient as we engage with our customers. It’s essential that borrowers take the necessary steps to work with us on restructuring deals. We are already having these conversations, and I expect everyone to meet their obligations. However, I recognize that not all customers will behave as expected. I don't have specific predictions, but experience tells me that some issues will arise, and that does not concern me greatly at this moment. We are diligently focused on our credit situation and I believe it will resolve over time. I have confidence in our underwriting practices and the relationships we've built in recent years. Ultimately, what truly matters is our track record, and I trust in that. I want to ensure that we continue to be competitive, and I am optimistic about our prospects in Austin, believing it has the potential to match our successes elsewhere. Our primary focus remains on business growth and competitiveness. Yes, I do expect to see some increase in non-performers.
Jon Arfstrom, Analyst
Okay. Yes. It kind of reminds me of energy seven years or eight years ago in some ways. Jerry, for you, the Houston 1.0, you talked about $0.05 EPS impact. So, call it 2% of EPS, maybe, crude math, but 4% of footings, how long does it take Houston 1.0 to reach, like corporate wide profitability and returns?
Jerry Salinas, Group Executive Vice President and CFO
Let me see if I can find that information. It’s interesting that Phil and I haven't discussed this much, but for the quarter, Houston has been performing well and is starting to contribute to the expansion costs. This aligns with our initial plan to make Houston 1.0 profitable so it could support some of the new initiatives. We anticipated that it would take about 27 months to break even. Right now, I'm estimating that Houston 2.0 is probably a couple of years away, mainly because it’s still heavily burdened with expenses. Therefore, it will be a while before Houston 2.0 begins contributing. Although it won’t be as large as 1.0, we are still experiencing some upfront expense loading.
Jon Arfstrom, Analyst
Okay. And just on 1.0 for it to reach call it, similar returns and profitability profile of the rest of the company. Is that a year away?
Jerry Salinas, Group Executive Vice President and CFO
Yes. I think that's probably right. We'd kind of have to take a little bit closer look at it, sharpen our pencil. but I don't think it's too far from that. Again, I don't have in front of me what their projections are for the rest of the year. but like we said, they had a 30% linked-quarter growth on deposits. With that sort of a growth horizon, that we wouldn't be too far. But I have to be honest, I don't have that sort of a projection in front of me and happy to be able to talk about it at some future point when we get together.
Phil Green, Chairman and CEO
Jon, it's an interesting question. Just kind of overall, as we look at these branches and we perform it out, we tend to use, when we began all this, a five-year horizon for the branch to kind of reach maturity. And that was I guess that would be similar profitability to what we were overall. But honestly, it's also true. We don't talk a lot about it, but it's also true that in years six through 10, I think we've seen really more growth than we see in that first five years. As those things mature, we see some really significant growth. So, I think that we're not at five years for all of them and it'll take a little bit even for 1.0 to get there. and then certainly 2.0 is going to take some time before all of those are five year mature, but don't count out continued growth in those markets from the expansion year six through 10. Historically, as we looked at those 40 branches that we had done before we started the expansion, some of the growth in year six through 10 was really significant.
Jerry Salinas, Group Executive Vice President and CFO
Yes. that's really where the power is.
Jon Arfstrom, Analyst
Yes. Okay. So we're just kind of just getting there.
Phil Green, Chairman and CEO
I think so.
Jon Arfstrom, Analyst
Okay. All right. I could go on and on with questions, but I'll just leave it there. I appreciate it, guys.
Phil Green, Chairman and CEO
Thanks, Jon.
Jerry Salinas, Group Executive Vice President and CFO
Thanks, Jon.
Operator, Operator
Thank you. At this time, I'd like to turn the floor back over to Mr. Green for closing comments.
Phil Green, Chairman and CEO
All right. as always, we appreciate all of your interest and we thank you for your questions. And we'll now be adjourned.
Operator, Operator
Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time and enjoy the rest of your day.