Dave Rochester: Great. All right. Thanks for all the color guys. Appreciate it.
Operator: Our next question is from Peter Winter with D.A. Davidson. Please proceed.
Peter Winter: Thanks. Good afternoon. I just wanted to, Phil, if I could follow-up on the problem loan discussion. Just if we’re in this higher for longer rate environment? Because I heard your comments that these aren’t interest rate related yet, but the longer that we are in this higher for longer rate environment. Do you see more pressure on like C&I loans and continued increases in the problem loans sector?
Phil Green: I don’t see anything that’s significant, or a trend for the higher for longer on the C&I piece. To be honest, I think that again, with the exception of some of the auto dealers that I talked about, who are running portfolios, credit and having some issues there. I don’t really see that so much. I think the impact is going to be more on real estate, commercial real estate, and what people – what they were financing at before, and where they are today. And those things are going to have to be solved by borrowers and sponsors coming in and supporting their projects when they come to maturity. And so forth, we’ve had a really good experience, a really good performance by our borrowers. But we could create scenarios where interest rates went higher, and created more pressure, but we’re not seeing that right now.
Peter Winter: Okay. And then just separately, the insurance commissions, it had really nice growth in ’23. It was up almost 10%. But the first quarter year-over-year, it was down 3.5%. Is there anything unusual this quarter? Or just how are you looking at that on a full year basis?
Jerry Salinas: Yes. The one thing I’ll say on the comparison to a year ago. So, the first quarter last year had a very strong life insurance commission. So, we were probably unfavorable this quarter in that comparison, by about $1.1 million. And the commissions on those policies are just one-time you’re in a one-time fee. It’s not like benefit commissions are property and casualty that tend to be a little bit more of an annuity. So that was a little bit lumpy. That was probably the biggest thing that affected us negatively, compared to the first quarter last year. Although I’ll say that benefits commissions was softer than I expected as well.
Peter Winter: Okay. Thanks, Jerry.
Jerry Salinas: Sure.
Operator: Our next question is from [Catherine Miller] with KBW. Please proceed.
Unidentified Analyst: Thanks. Good afternoon.
Phil Green: Hi Catherine.
Unidentified Analyst: A question on expenses. I know that you left your expense guidance unchanged at the 6% to 8% growth rate year-over-year. Curious I know you mentioned that FICA taxes and some kind of 1Q seasonality drove the higher expenses this quarter. Should we assume that we kind of fall back from this first quarter level, as we go into second quarter and then grow from there? Or do you still think you grow from this run rate into next quarter?
Jerry Salinas: Yes. I think a couple of things I’ll say is that we did get the additional surcharge of $7.7 million, right, from the FDIC that we didn’t know anything about when we gave the guidance in January. And we’ve been really trying to run a tight ship here in this first quarter on expenses. Again, we are certainly impacted by the expansion that we’re doing. And so, we kept our guidance the same, even though we were basically saw an additional almost $80 million in expenses that we haven’t expected. And your question was a little muffled, but I think I heard you say that maybe the first quarter was higher from the benefits maybe. I think benefits tends to go down during the year. A lot of it has to do with things like 401(k) contributions, matches that we have to make for payroll tax matches.
In certain cases, employees, especially on the 401(k) side may reach that limit pretty quickly, intentionally or unintentionally. And so, then our – we match up to 6%. If they reach that level, then the match stops. The same thing for the FICA after they reach a certain level, of course, there’s no more contribution there. But so it benefits will go down certainly just trend-wise, I don’t see the trajectory that we have other than – if you take the $7 million out, I would expect that you’ll see a little bit of growth quarter-over-quarter in expenses based on what we’re seeing today. But like I said, I feel good about where we’re at. I think we’ve done a good job this first quarter and continue to try to do that. But I would expect that they will continue to grow up just a little bit quarter-over-quarter.
Unidentified Analyst: Yes, that’s helpful. And to be clear, that 6% to 8% includes the $7 million FDIC assessment?
Jerry Salinas: Exactly. Yes, we just – we assume is operating, if you will, for those purposes. So the $51 million is in the number in 2023, because it’s on an as reported and the $7 million number included in our ’24 numbers.
Unidentified Analyst: Okay. Great. And then next question on fees, service charges, I mean, seasonally also is usually lower in the first quarter, but I know you’ve talked about interchange and some other things being softer in the first quarter. So would you expect that to also increase as we go into the next couple of quarters? Or is this also a good kind of lower run rate for service charges?
Jerry Salinas: Yes. I think that the thing with service charge is the upside to it has been the commercial service charges. In some cases, it works against you, right? Because in some cases, customers may hold decide to pay more for services through hard dollar charges rather than to keeping the balances. So some of that’s some of it. And so that’s been impacting the growth. But the – we’ve done a lot of things I will say, in favor of the customer as it relates to – especially on the consumer side, on the OD fees. And we continue to see good growth there. But a lot of it, as Phil mentioned, we’re just buying those accounts pretty significantly. And I really kind of try to say that I don’t expect those are going to grow. And obviously, there’s some guidance out there potentially that, have a lot of pressure – on that – on those fees.
And so, we’ve really been I will say, in some ways, pleasantly surprised, but I don’t see that having a lot of growth from where we are today. I think, it will just continue to be pressure in that category for the rest of ’24. It’s kind of the numbers that I’m seeing right now.
Unidentified Analyst: Very helpful. Thank you.
Operator: Our next question is from Manan Gosalia with Morgan Stanley. Please proceed.
Manan Gosalia: Hi. Good afternoon. I wanted to ask about deposit pressure. And most banks spoke about how deposit pressure eased in the first quarter. Do you think there’s something related to your specific customer mix, or the fact that you are accelerating growth in new markets, what do you think is driving that incremental pressure on deposit costs for you guys relative to what we’re seeing in the broader market?
Jerry Salinas: From a cost standpoint, I will say that we’re really not feeling from a market standpoint, not feeling a lot of pressure on the deposit cost side. We need to be competitive and we are. I think we’ve got a – we’ve decided we’re competing primarily on the 90-day CD. It’s really more of the pressure is coming on the non-interest-bearing. And I think it really just continues to be the scenario where rates at these higher levels continues to put pressure both on commercial customers and consumer customers of looking for balances. I will say that when we look at the balances, especially on the interest-bearing side, and it’s true, I think, both in consumer and commercial is that we have seen increases in – from February to March, small increases and then March to April as well on that interest-bearing side.
So I think competitively pricing wise, I think things are going right, I think historically, like I said, our balances just tend to be softer in this first quarter. But we’re going to compete on the pricing. We’re not going to be the highest. We’ve never intended to be the highest. But we do keep an eye on what’s going on there, and we take decisions, obviously, on where we want to compete. But as I said earlier, we’re not seeing a lot of pressure on what I’ll call the interest bearing the non-CDs, if you will. So the MMAs specifically, not seeing a lot of pressure there yet competitively. So, we really haven’t moved those rates for a while now.
Manan Gosalia: Got it. And then maybe on the loan side, you spoke about the deals lost being up, because of structure – where are you seeing this competition coming from? Is it private credit? Is it other banks? And is part of the reason for maybe the weakness in NIM, because you’re skewing to higher quality and lower yielding loans right now?
Phil Green: Well, first part of your question, I’d say it’s mainly banks that we’re seeing structure. It is the same old story. It is guarantees. Its loan values, its terms all that. So, there’s some of that. I don’t know. We’re – it could be – certainly, vis-a-vis private credit, we’re getting lower yields that they’re able to achieve, but albeit at higher risk from your case. But yes, you’re probably going to see that we’ve got a little bit lower yield on average, but not by a lot, because we tend to be on the higher quality piece of the credit group.
Manan Gosalia: Got it. Okay. And if I could just have a clarification on one of your comments on the security side. I think you said duration of that book was up about half a year to 5.5 years. Is that in tally from the move up in rates? Or are you taking on a little bit more duration to lock in the benefits of higher rates?
Jerry Salinas: No, like I said, we really didn’t do a lot of purchases in the first quarter. I think some of it was that we had about $1 billion and treasuries that were the end of the year, let’s say, call it $750 million of it that we’re maturing first few days of January. So that was affecting it. And I think there might be a little bit more extended duration on the mortgage banks. But we haven’t added a whole lot of duration of anything that we’ve done in the first quarter.
Manan Gosalia: Great. Thank you.
Operator: Our next question is from Jon Arfstrom with RBC Capital Markets. Please proceed.
Jon Arfstrom: Hi, thanks. Good afternoon, guys. A couple of questions. Phil, should we expect the potential problem loans to continue to migrate higher? Or is that not necessarily true?
Phil Green: Yes, Jon, first of all, I’ll say problem loans, right? The old potential problem loans is a category that we don’t use anymore. But the risk rate 10 and higher, could we expect the increase I would say maybe. And the reason I say that is, because we were at such low levels. Really, the industry is at unsustainably low levels with everything coming out of the pandemic for credit quality, right? And so, we’re still not where we are, I would say, normal. And so – but we are seeing some, what I would call, some reversion to me. So that would tell me, yes, we probably ought to expect it to go up some. But at the same time, some of these that we’ve added, we’re looking for some reasonably quick turnarounds on it. I mean we just trying to be realistic with these risk rates that we’re adding.
And then, it’s not a best tenets or anything. It’s just recognizing that we perceive some elevated risk, but we do work on them, they work to get to correct the company’s work to correct. And so, I’m hopeful that with some of these that we brought on this time, we’ll see that move out, but we can also see some more move in, because again, we’re really coming off with pretty unsustainably low levels. So – that’s why I say maybe. I’m not concerned with credit quality. I mean, I am paid to worry as a broad spanker. And so I guess there’s that part of me that’s always going to be concerned with it. But I think credit quality is good, and we spent a lot of time looking at our commercial real estate portfolio, and a very granular level. And I’ll just tell you that – probably somebody said Austin office building, they would run for the hills.
But I would tell you, I think our Austin office building portfolio is solid, man. And I’ve looked at the – I’ve looked at, I’ve looked at the multifamily deals. People would say, Oh, man, Austin. It’s got reduction in the interest rates, the housing prices to come up 11%. And got a lot of supply coming on, et cetera, et cetera. But I look at our multifamily in the Austin market, I feel great about it. And so, it depends on the deal. It depends on your sponsors, how they’re operating. As far as the Austin house prices being down 11%, they’re up 50% over the two years before that, right? So I mean there’s this headline stuff. And then if you really look below it and you spend time on it, I mean, I feel great about the commercial real estate portfolio for – and our people have done a heck of a job underwriting it.
And part of I feel great is the same reason that we lost 82% of the deals, to structure this quarter. Our folks know how to book these things. It doesn’t mean we won’t have problems that I’ve talk to you about something that popped up at all, but it’s not something that gets me to worry. I think it’s interesting what’s happening with the company-specific stuff on the C&I side. We’re going to have to see where we continue to see things pop up there. And some of these guys may not be able to solve their problems. But most of them will – but that’s just banking. It’s a risk business, and I really think we have a handle on it anyway. Just felt the need to say that.
Jon Arfstrom: Okay. Yes. So it doesn’t sound like you guys feel the need to build reserves from here? I mean, I hear your charge-off guidance and I respect that, but it doesn’t feel like you have more pressure coming, at least in your mind in terms of credit.
Phil Green: Yes, I don’t feel that we know. I mean – can we see it get worse? Sure can. Jerry can speak to the formula, the better than I can. But I think we feel really good about where the reserve is today. And I think another thing I might say about the reserves. You might recall, we built it up during that COVID period, and we never took it out. And so, I think….
Jerry Salinas: Yes, I think that’s a little bit different than others. Yes, we pretty much stayed there. We really haven’t – if you look at our reserve coverage percentage, it really hasn’t moved around very much. And I wouldn’t expect that it will – it’s going to move a couple of basis points here and there, but I don’t envision at this point in any significant reason that we see that reserve number is increasing. Again, assuming a pretty normal sort of credit quality environment.
Jon Arfstrom: Yes. Okay. Jerry, as long as you have the mic, you changed the presentation of the expansion contribution for the quarter. What – if you can share, what kind of contribution did Houston 1.0 have this quarter?
Jerry Salinas: Yes. I think it was – last time we round it to seven, let me make sure I was going to say, I think we rounded to six this quarter, but let me just check. Yes, that’s exactly right. They were $0.07 last quarter, $0.06 this quarter.
Jon Arfstrom: Okay. And the — when you say Houston is funding Dallas and Austin, that’s 1.0 and 2.0, is that right together?
Jerry Salinas: Correct, yes. I would just netted the two and I was trying to keep it simple. Maybe I confused it Yes, Houston together is funding the other expansion. That was really, as we had talked about this and planning it out, that was certainly the way we hope things would going to work out that, if these financial centers began to mature, they would begin to pay for the future expansions and it certainly worked out that way.
