It is a very core business-centric strategy, and we’ve had really good growth there. So I think that’s propping that up. So yes, I would agree that things look a little bit slower, not bad. As I said, Jerry has guided us to a high single-digit loan growth, and I think that’s a realistic number for us. And we’ll get through the election and see where that takes us.
Ebrahim Poonawala: Got it. Thank you both.
Operator: Our next question is from Steven Alexopoulos with JPMorgan. Please proceed.
Steven Alexopoulos: Hi Phil. Hi Jerry.
Phil Green: Hi Steve.
Jerry Salinas: Hi Steve.
Steven Alexopoulos: I want to start. So on expenses, so Jerry, the guidance was off reported expenses. So if I take the FDIC charge out, gather at the midpoint like 12% expense growth, something like that for 2024. Now I’m curious because you guys used to be a mid- to high single-digit expense grower, but you’re having this really great success with all the expansion. How do we think about expenses beyond 2024, right? Do you go to the next market or deeper in existing and the expansion continues. Like should we think about Frost as being a low double-digit expense bank while you continue for the next several years on expansion? Or does it throttle down at some point?
Phil Green: Well, Steve, I’ll talk broadly a little bit and then Jerry might throw in some color. I think there are two Frosts, right? I mean there is what I’ll call legacy Frost, which is our business that we’ve built up over the 155 years and then there is expansion Frost, which is a company that has really come into its own with its ability to grow organically in markets and build households and accounts, and we’re going to keep leaning into that. And our experience shows that it’s great, it’s worthwhile of the shareholder. I mean we’re used to be 25% represented by expansion. That’s – I think that’s pretty remarkable. And I think it shows that we’ll take share in this gain. So that will be higher. I would like to believe, though, if we go past 2020 – past this year, that even though we are going to continue to be expanding, I’d like to see our expense growth rate be a little bit less because we have made – we talked about the generational investment in IT that we made earlier this year, I think it was what we talked about it.
We talked about the marketing expenses that we’ve built up, which we really need to build that infrastructure. And so some of this is building things up that I hope we don’t have to continue to do. And – so I think our expense rate will be elevated from what it was historically, but mainly because of our growth strategy and our expansion strategy. But when you look at the legacy part of the bank, and how we operate on a regular basis. I think we’re still pretty tight. And I’ll be proud of our expense management on that basis. Jerry, any thoughts?
Jerry Salinas: Yes. I agree with everything Phil said, Steven. I would say that even in this environment, we won’t go into a lot of details. But I’ll tell you that we continue to make sure that we’re looking at for any – looking very closely at any request for additional capitalizable items or for new FTEs. We’re really focused on that. So it’s not like the door is open and everything is getting approved. And so I’m very much in the campus still says that we would – we need and we will try to continue to control expenses. I think he talked about a couple of things, but just to give a little bit more – put a little bit more meat on it. Some of the things that we’ve talked about from technology and from marketing to get the two examples that he mentioned, weren’t really in our full run rate for all of 2023.
So some of the lift that we’re seeing is just trying to get the full year impact of some of those expenses. Some of the people have retired until late in the year, for example, whether it’s in the IT area or in the marketing area, and some of those programs hadn’t started. So some of it is just trying to get that into our run rate. So I agree with Phil, I would expect that going forward, I don’t see us going back to a 3% to 4% growth given organic expansion strategy. But I would hope that these – operating at these higher levels is certainly not our current expectation based on what we’re seeing. And of course, in this environment, we did continue to do some things for our employees where we’ve done, I think, a great job of taking on some additional costs corporate-wide that had previously been covered by the employees.
As an example, we cover more of the medical that we did historically. And again, some of those things just trying to be more competitive and at the same time, treating our employees with grace and knowing what a competitive market that we’re operating in. So long-winded answer to say I agree with Phil. I don’t think we’ll be operating at this level past this year that we’re talking about, and we continue to be focused on trying to manage those expenses.
Phil Green: Steven, I’d also point out that – with regard to the expansion, I mean, the numbers are the numbers, and we’re proud of them and what we’re able to do. But I’ll just throw a couple of things out there, too, that we’re looking at. And you might be interested in. If when someone comes here, we’ll survey a broad group of people who are new customers and will ask them what influenced you most in choosing Frost as your bank. And the number one response is convenient locations; and number two, a close second is recommendation from a friend. And it drops off by about 1/3 being 24/7 live customer support and then it drops off by about that by about, say, 15% to convenient ATM network and then it goes to other and a lot of different things.
But it shows in what we ask our customers how – what are the things that brought you here and remember the growth we’ve had and growth in households, and those are the responses our customers have given. And the other thing I’ll point out, and we said this before, and I’ll update this and give a little bit more color. If you look at our Houston expansion, which is still – we still got some developing new branches there, which aren’t fully – we only had one, I think, in the five-year anniversary, which – that was recently. But if you look at those – the relationships, new accounts that are open in Houston, 85% of the Houston expansion new accounts are opened within five miles of a Frost Financial Center. And 44% of the Houston expansion new accounts are located within two miles.
So, again, we’re not trying to process transactions at these locations, but we are projecting our brand into these communities, and we’re leveraging our value proposition. And you heard me say that the number two reason was reference referrals from a friend. So it’s – I like to look at it as a virtuous cycle of what we’re doing, how it’s all working together. So we’re going to continue to lean into that. And will it cost some expense money? Yes, it will. We’re being careful with it, but we really believe it’s generating success for the long term.
Steven Alexopoulos: That’s great color. I wanted to ask about commercial real estate. It was funny this quarter, in particular, I feel that a ton of questions for investors that they want to buy your stock here, they like where it’s trading. They love all these expansion metrics. Commercial real estate concentrations, I think that’s keeping them nervous. And I’m sure you’ve seen the articles to fill the vacancy rate is almost 20% for office in Dallas used in Austin. So my question to you is, what’s your perspective on the commercial real estate market? Like you see these markets from the ground level, is this exaggerated. When you look at your portfolio, I don’t think you have vacancy rates anywhere near that. But can you give us some color on your CRE exposure in those markets, you didn’t see were overly concerned, but maybe we could flush that out for the investors on the call?
