Dave Rochester: Great. Thanks, guys.
Jerry Salinas: Sure.
Operator: Our next question is from Manan Gosalia with Morgan Stanley. Please proceed.
Manan Gosalia: Hey, good afternoon.
Jerry Salinas: Good afternoon.
Manan Gosalia: Follow-up to the question on liquidity, I mean I guess if rates come down in line with the five rate cuts or so that you’re estimating, non-interest-bearing deposits stabilize, can you deploy more of that – those high levels of liquidity that you’re keeping on your balance sheet? I know that the deposit rate you’re forecasting is lower than the loan growth that you’re forecasting. So presumably, you will use some of that. But can you bring that 14%, 15% of assets and cash down meaningfully as we exit 2024?
Jerry Salinas: I think it depends on what meaningfully means. You’re never going to see us running with $1 billion at the Fed, for example. That’s just not the way we operate. But could we make some decisions that had us potentially – especially if we felt good about the economy, we felt good about what was going on with deposit growth and such, could we find ourselves in a position where we were deploying more of that liquidity, I’d say, yes. But it’s going to be dependent on a lot of factors, what’s going on in the economy, those sorts of things.
Manan Gosalia: Got it. And then given your comments on expenses earlier, and there is some one-time or temporary nature of some of the expenses that you mentioned. What point do you get back to positive operating leverage. So I know there is a bit of noise in the revenue line this year with the base effect of rising rates in 2023 and then the rate cuts in 2024. But if rich should stabilize from there, how quickly do you think you can return to positive operating leverage?
Phil Green: It’s a math question. Honestly, I don’t know the answer to, but here’s what I do know that, that the success that we’re having developing these markets as expensive as it is, will create significant positive shareholder value. Now does that manifest itself in a positive operating leverage trend, probably. But honestly, I’m not close enough to the math to tell you when it would happen. But it’s – at some level, it’s just basic business and it’s just a recognition of what we’re developing and understanding the basic profitability of a regional community, middle market-focused bank because that’s really what we’re creating in these markets. We’re creating footprints that basically look like Frost Bank.
And so whatever that, that profitability is for a bank like that. That’s what we’re generating. And I think that’s going to be – that will be positive for a long time, and I’m confident we’ll get back to operating leverage positions that reflect that. Now again, like we talked about earlier, the – as long as we’re continuing to do this and finding markets where it makes sense to grow and develop this for shareholders, on how much we do in any one particular year can affect operating leverage on a particular year. But I think it would be wise for us to also look at what is the operating leverage of the, what I would call, the legacy company, the legacy bank, what is that doing as we’re expanding in these markets. And that’s worth looking into also.
Manan Gosalia: Yes. Would love some disclosure on that if available, but thank you for those comments.
Phil Green: Thank you.
Operator: Our next question is from Peter Winter with D.A. Davidson. Please proceed.
Peter Winter: Good afternoon. Jerry, you gave a little bit of a cautious outlook on fee income being relatively flat. You talked about the regulatory environment with overdraft fees and interchange. Are you guys taking action on this now ahead of any regulation? Or you just think it’s going to be coming down the road this year?
Jerry Salinas: Well, I’ll talk about two pieces of it. The thing for us on the overdraft fees is something that it’s not going to be a growth product for us, right? The reason those revenues are growing is because we’ve had a consistent account growth. We continue to do product – do changes to the product to ensure that, that, that we’re doing what we need to be do from a fairness standpoint and making sure we’re serving the customers with grace. And so we’re doing a lot of things beginning in 2023 that those impacts aren’t – haven’t run completely through the annual financials for 2023. And then we’ve got some additional items that we’re considering doing to tweak the product that are going to – that are telling me that all things being equal, we’re not going to expect to see a lot of growth in those overdraft fees.
On the interchange, that’s really going to just be dependent. Our projections right now have those changes going into effect in the latter part of the year. So just based on the proposal that was out there. So we’re not – on the OD side, we’re doing things that were affecting that revenue ourselves by making some changes to the product that we’re delivering to the customer, which is going to reduce our revenue. In the case of interchange, it’s really based on the anticipated one-third reduction in those fees later this year.
Peter Winter: Okay. Thanks.
Jerry Salinas: So those are the headwinds that we’re dealing with.
Peter Winter: Got it. Thank you. And then separately, the earnings accretion from the Houston expansion has been really taking hold and becoming more accretive. Do you think that the Dallas expansion starts to become accretive to earnings this year? And then secondly, are there opportunities maybe to close some underperforming legacy branches to defray some of the costs with the new branch build-out?
Jerry Salinas: I’m going to step back a second on your question on non-interest income. The other thing that’s affecting us, and I mentioned just one item in the quarter on the Sundry income. We did have some nice Sundry income throughout the year that we don’t really project those sorts of items into our financials. So this $3.5 million recovery of a fraudulent wire that we had in the fourth quarter. Obviously, we’ve got items like that, that go through our non-interest income that we don’t forecast. And so that obviously has a downward effect too on our forecast going forward. As far as the Dallas is concerned, our expectation is we’re still opening locations in Dallas. And so as you know, the most expensive part of this expansion effort is just starting up those locations.
And as Phil said, the first one in Houston just reached its five years. And so as I talk about that profitability, we’ve really happy with where we’re at. And it – when I look at the individual pieces of it, and we’re not ready to disclose overall kind of how what we’re doing. But the plan was, and it’s working this way is that as those Houston locations begin to mature more and more, they’re going to start to offset the losses that we have associated with the expansions that have started more recently. So it’s getting to a point where Houston is going to carry more of the expansion cost of the Houston 2.0 in the Dallas. But Dallas, no, to answer your question, I don’t see them being profitable this year just because we still have locations that we’re opening in.
