Cullen/Frost Bankers - Earnings Call - Q2 2017
July 27, 2017
Transcript
Speaker 0
name is Heidi, and I will be facilitating the audio portion of today's interactive broadcast. At this time, I would like to welcome everyone to the CullenFrost Second Quarter Earnings Conference Call. I would now like to turn today's call over to Mr. Greg Parker, Executive Vice President and Director of Investor Relations. Mr.
Parker, you may begin.
Speaker 1
Thank you, Heidi. This morning'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 Gerry, 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 the 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 at our website or by calling the Investor Relations department at (210) 220-5632. At this time, I'll turn the call over to Phil.
Speaker 2
Thank you, Greg, and good morning, and thanks for joining us. Today, I'll review second quarter twenty seventeen results for Cullen Frost, and our Chief Financial Officer, Jerry Salinas, will also provide additional comments and give insights into our outlook before we open it up to your questions. In the second quarter, Cullen Frost earned $1.29 a share and that compared to $1.11 in the same quarter of last year and $1.28 in the first quarter of this year. And our second quarter results represented a steady continuance of the momentum we built coming out of the 2016. During the second quarter, average loans were $12,300,000,000 up more than 6% from the second quarter last year.
And on a linked quarter annualized basis, at the end of the second quarter, loans were up more than 10%. Our provision for loan losses was $8,400,000 in the second quarter, down from the $9,200,000 reported in the 2016. Nonperforming assets totaled $90,200,000 in the second quarter, down by more than $28,000,000 from the first quarter. And this quarter to quarter improvement was primarily due to a combination of energy resolutions and charge offs. Net charge offs in the 2017 were $11,900,000 compared with $7,900,000 in the previous quarter and $21,400,000 in the 2016.
Annualized net charge offs represent 39 basis points of average loans for the second quarter, and one previously nonaccrual energy credit accounted for $6,000,000 of second quarter charge offs. Overall, delinquencies for accruing loans at the end of the second quarter were only 58 basis points of period end loans, which is the second lowest level of delinquencies over the past eight quarters. Total problem loans, which we define as risk grade 10 and higher, fell by about 6.5% in the second quarter when compared to the first quarter, and this is primarily the result of favorable resolutions like upgrades, paydowns and payoffs. Energy related nonaccruals decreased to $55,500,000 at the end of the second quarter compared to $78,700,000 at the end of the first quarter. Finally, outstanding energy loans at the end of the second quarter totaled $1,400,000,000 or 11.3% of total loans, and that compared with over 16% at its peak in 2015.
Over the past several quarters, Frost has been building on momentum, and we've concentrated our focus on steady and sustainable growth. We've got an attractive product mix. We're seeing positive responses from customers, and we're also well positioned as interest rates slowly climb. Average total deposits in the second quarter rose to $25,700,000,000 up by almost 7% from $24,000,000,000 in the second quarter of last year. On the consumer side, we continue to see excellent growth in accounts, customers and balances.
As an example, same store sales growth for new account origination is up by 27% compared to the 2016 with strong growth in all regions. 14% of our account openings came from our online channel, which includes our Frost Bank mobile app. That's more than double the level of a year ago. In the 2016, total average consumer loans grew by 10.5% compared to the 2016. We're seeing especially good growth in consumer real estate and private banking as we continue to work hard to develop those segments further.
Over the last several years, we've taken several steps to enhance our competitiveness in the retail segment and lower barriers to entry into our bank versus the too big to fail banks. Some examples of these efforts include building the second largest free ATM network in Texas with our company owned machines as well as our branded corner store network and our agreements with the HEB grocery chain implementing twenty four hour telephone customer service with representatives who actually answer your call building our branded award winning web and mobile technology expanding our physical presence in our major markets streamlining our processes for mobile and web based account openings in order to simplify the way people can build a relationship with Frost. These digital account openings have helped us grow while still applying the same Frost standards that are in place for traditional account openings. More recently, we took the step this week of raising interest rates on our high yield money market accounts and our CD offerings. The rates we're offering on these accounts are above most of our competitors and much higher than the largest banks.
This is the right move at the right time for several reasons. Interest rates have now moved up 100 basis points from the bottom and are expected to rise further. The industry will ultimately have to respond with higher rates to compete offerings from non bank alternatives available to customers. It can either respond in a timely manner or risk being too late and losing relationships and trust along the way. We'd also like to see increased growth in our time account relationships more in line with the success we've experienced building checking accounts.
And finally, we believe this move is in line with our culture based value proposition of giving a Square deal to customers that provides excellence at a fair price. We're also building momentum on the commercial side with new loan opportunities up by 27% compared with last year. Importantly, we've seen an increase in the volume of both smaller and larger commitments. We've made significant progress building our core loan portfolio, which will help provide steady, sustainable organic growth. We define the core portfolio as loan relationships under $10,000,000 in size.
New commitments under $10,000,000 were up by 32% in the second quarter compared to last year. It has been a major priority for us to once again grow this portfolio and establish a more balanced growth between larger and small to midsize relationships. Our bankers have been working hard on this, and we've seen great results. In dollar terms, core loans are up $400,000,000 from last year or 7.2%. That doesn't mean we're ignoring larger deals.
New commitments at or above $10,000,000 were 53% higher than last year. Overall, new loan commitments are up by 42% from last year. The above average organic growth that we provide through great customer experiences makes people's lives better. That was confirmed once again by our financial results and the recognition we get from third parties like J. D.
Power, Greenwich and the American Banker Reputation Institute survey. Finally, let me say that none of this could happen without great people. The achievements we've seen over the past several quarters come from our people working with our customers to nurture the long term relationships that make Frost unique. I'd like to thank everyone at Frost for their hard work and dedication as we look further ahead to our accomplishments. Now I'll turn the call over to our Chief Financial Officer, Jerry Salinas, for some additional comments.
Speaker 3
Thank you, Phil. I'm going to make some general comments about the Texas economy, then I'll give some additional information about our financial performance for the quarter before updating our 2017 guidance. I'll then turn the call back over to Phil for questions. The Texas economy strengthened in June with job growth and lower unemployment. The Dallas Fed reported that job growth in the second quarter was an annualized 2.8%.
Additionally, Texas employment expanded at an annualized 3.6% in June, well above its long running 2% average. Texas unemployment, while slightly higher than the national average due to a sharp increase in the state's workforce, is down from 5% in March to 4.6% in June. Looking at the individual markets, the Dallas Fort Worth labor market remains tight. June unemployment in Dallas was 3.8%, while the Fort Worth unemployment rate declined to 4.5%. In the 2017, Fort Worth jobs grew at an annualized 2.7%, and it now leads all Texas metro areas in job growth.
Austin continues to expand at a slow to moderate pace. Annualized job growth was 1.9 in June with a very tight labor market. Over the previous three months, most sectors added jobs. The fastest growth was in electronic parts and machinery production, finance, health care and state government. Austin's unemployment rate in June was 2.9%, the lowest in the state.
San Antonio employment grew at an annualized 1.4% in June. Growth over the past three months was strongest in construction, mining, professional services and health care. San Antonio's unemployment rate was 4% in June. Leading indicators from the Dallas Fed suggest a stronger growth in San Antonio in the second half of the year. The outlook for Houston is cautiously optimistic.
The energy sector in Houston continues to improve. Mining related employment grew nearly 8,000 jobs in the first half of the year after bottoming out in December 2016. Non farm employment grew 3.1 on an annualized basis between February and May, with the largest gains coming from professional and business services and manufacturing. Houston's unemployment rate in June was 5.1%. For Texas overall, the Dallas Fed projects 2.8% job growth in 2017.
Looking at our financial performance. Our net interest margin for the second quarter was 3.7%, up six basis points from the 3.64% reported last quarter. The increase was driven by higher interest rates, which had a positive effect on both our yields on loans and balances kept at the Fed. Lower yields on our investment portfolio had a negative impact on the net interest margin. The yield on earning assets for the quarter was 3.76%, up eight basis points from the prior quarter.
The taxable equivalent loan yield for the quarter was 4.32%, up 17 basis points from the first quarter. Average loans of $12,300,000,000 for the second quarter were up $185,000,000 or 6.1% on an annualized basis from the 12,100,000,000 last quarter. The taxable equivalent yield on the investment portfolio was 3.93%, down six basis points from 3.99% for the previous quarter and was impacted by a lower yield on our municipal portfolio. The taxable equivalent yield on our municipal portfolio was 5.38%, down six basis points from the prior quarter. As a reminder, we had approximately $400,000,000 in municipal securities with an average tax equivalent yield of about 7.3% that, as expected, were called in February, contributing to the drop taxable equivalent yield from the prior quarter.
We are currently projecting that about $200,000,000 in municipals will be called in the third quarter at an average TE yield of around 7.5%. Our plan is to utilize that cash flow and some liquidity to purchase about $250,000,000 in municipal securities starting in the third quarter. The total investment portfolio averaged $12,390,000,000 during the second quarter, down about $157,000,000 from the first quarter average of $12,550,000,000 Our municipal portfolio averaged about $7,280,000,000 during the second quarter, flat with the previous quarter. During the second quarter, we purchased approximately $133,000,000 in municipal securities, yielding about 4.5% on a TE basis with an average life of about twenty one years. At the end of the second quarter, about 67% of the municipal portfolio was pre refunded or PSF insured.
The duration of the investment portfolio at the end of the second quarter was four point nine years, down slightly from five years for the previous quarter. Regarding income taxes. The tax effects of the exercise of stock options during the second quarter had a favorable impact on income tax expense for the quarter of approximately $2,100,000 That's down about $1,500,000 or $02 per share from the first quarter. Our effective tax rate for the second quarter was 13.9%. Without the tax benefit from the stock option exercises, our effective tax rate for the quarter would have been about 16%.
Our capital levels remain strong with our common equity Tier one ratio at 12.81% at the June. Regarding full year 2017 earnings, we currently believe that the current full year mean of analyst estimates of $5.3 is reasonable. I'll now turn the call back over to Phil for questions.
Speaker 2
Thank you, Jerry. Now we'll open up the call for questions.
Speaker 0
Your first question comes from the line of John Pancari from Evercore ISI. Please go ahead.
Speaker 4
Yes. This is Rahul Patil on behalf of John. So question on expenses. If I exclude the card fraud losses of $1,400,000 this quarter, the efficiency ratio came in at around 55%. It was better than recent quarters.
How should we think about the efficiency ratio in the second half of this year and in 2018? And just trying to get a sense of like what do you perceive to be an optimal ratio or range for the bank to operate over the long term?
Speaker 3
Well, I guess I'd say on the efficiency ratio, you're right. We did have some improvement in that ratio, obviously, driven by the increase in revenues. I'll start by just talking about the expense run rate for the quarter. We've been now for the last couple of quarters right around that $188,000,000 level. The way I look at expenses for the rest of the quarter, I think that there's been a lot of movements between the categories.
And I do expect that our run rate for the rest of the year will probably be around there with some small increases as we see some additions for technology. But we could also be impacted by higher revenues in the case of some of those commission businesses, as we pay higher salaries for higher revenues. So that could drive the expense number somewhat higher. But I do think that, that efficiency ratio in that 55% range would be kind of what we're looking at.
Speaker 4
Okay. And then just a question on your branch network. I know last quarter you talked about opening additional branches in 2017, but at a slower pace compared to last year. Could you talk about your updated thoughts on that front? Are you contemplating de novo expansion beyond the current footprint?
And then separately, maybe just update us on your hiring efforts, which markets are you currently focusing on?
Speaker 2
Well, with regard to branch expansion, primarily we're doing it in the major markets and the markets that we're already in, and we'll continue to do that. On an opportunistic basis, we'll take a look at other markets, if it makes sense. But those would be, at this point, more one off deals. And but we continue to expand in the great markets that we're in, and we're going to continue to do that.
Speaker 4
Okay. Thank you.
Speaker 5
Thank you.
Speaker 0
Your next question comes from the line of Brady Gailey from KBW. Please go ahead.
Speaker 6
Hey, good morning. It's Mike Bomis in for Brady. Good morning. I had a quick question on loan growth. Continue to see nice loan growth.
Do you think high single digits, low double digits is kind of the right way to think about it going forward? And maybe a little color around what categories, geographies you think are going to be driving future loan growth? I
Speaker 2
believe that it's been a consistent story over the last few quarters for our loan growth. And that story has really been broad based growth and it's been in all of our markets. So I wouldn't see any change in that. We've had somewhere in, I'll say, high single digits loan growth. We definitely would like to continue that.
It's certainly going to be our goal. And I just want to reiterate, I'm really proud of the job that everyone's done in this core loan portfolio. As many of you know, by looking at our filings over the years, that core portfolio, the relationships $10,000,000 and under, was really flat with non acquisitions, and it was really down a little bit over about an eight-, nine year period. And it was used to be twothree of the portfolio, and it's about half today. So for that portfolio has got to grow in order for us to prudently increase our overall portfolio.
And also, it's a way to generate organic growth because those relationships turn into the bigger relationships. And so we've been really focused on it, and we've been successful on it. So I'm really proud of how that growth is going as well.
Speaker 6
Agreed. Congrats. It's nice to see the initiatives starting to pay off. I guess one more question. In terms of deposit pricing, can you maybe give a little bit of color maybe on the commercial side and then on the retail side kind of what you're seeing?
And then as it relates to your proactive rate increases for your money markets and CDs?
Speaker 3
Yes. Let me just get of course, all our rates are out on our website. Just let me give you a little bit of color. Let me look at, let's say, our twelve month jumbo CD. So we were at about we were at 10 basis points prior to the change.
We've moved that up to 80 basis points. On CDs under $100,000 we were at 10 basis points and we've moved those up to 70 basis points. Looking at our consumer high yield, so everything above $250,000 that would be a consumer and the business high yield both. We took those in the case of the consumer from six basis points up to 35 and the business high yield from four basis points excuse me, eight basis points to 35 on a $250,000 and over.
Speaker 6
Got you. Great. Thanks. Thanks for answering my questions.
Speaker 2
Sure. Thank you.
Speaker 0
Your next question comes from the line of Ebrahim Poonawala from Bank of America. Please go ahead.
Speaker 7
Good morning, guys.
Speaker 3
Good morning.
Speaker 7
One quick follow-up. The rates that you just quoted and the increase, is that applicable to new money coming into the bank? Or did that get revised upward for existing customers as well?
Speaker 2
Anytime we deal with the money market deposit account, all happen all at once and to everybody. The CD rate increases in CDs that Jerry gave one example of, obviously, is a new money thing.
Speaker 7
Okay. So the money market is for everybody. And I guess in light of that, as we think about sort of the margin from $370,000,000 into the back half of the year, would appreciate if you can provide some color in terms of how you see that playing out. Do you expect the June rate hike benefit to essentially get muted because of what we do with the deposit cost strategy?
Speaker 3
What I'd say is, I look at the year to date NIM percentage of about 3.67%, and I think that the full year NIM is gonna be pretty flat with that.
Speaker 7
Understood. And just switching I guess, Phil, you spent some time talking about your consumer strategy. I just wanted to get a sense of is that something that you have refocused on in terms of you've obviously always been focused on consumer, but I'm just wondering as you sort of laid it out there, I was wondering if there's been sort of a fine tuning of the strategy and whether you think there is an opportunity to gain consumer market share either from the big banks or some of the regional competitors. Would love to get your thoughts on how you're thinking about that?
Speaker 2
Yes. I actually do. I do think we have an opportunity there. And it is it's not really new. It's just I think you said it right.
As I recall, you said kind of refocusing. We're good at this. We're great at building relationships. Consumer deposits have always been about half of our deposit base. And our culture gives a great value proposition that we've been building, right?
As I mentioned, we're lowering barriers to entry because it's great business for us, and it's one we want to grow. The lending side is one where yes, think we are focusing on what we're doing there. We've got a great business model, great lenders. Our credit dynamics our credit numbers there, I think, are standing. And we've got the ability to scale that business over what we've done.
So and just another thing to think about, the consumer portfolio, it's larger than our energy portfolio. If you looked at it as one particular portfolio, it would be the largest portfolio in the bank, if you would, as one way to look at it. And so we don't want to forget about that. We've got a great value proposition with great people, great lenders, and we just want to do everything we can to leverage our opportunities so that we can continue to add to this sustainable above average organic growth.
Speaker 7
Got it. And just as a follow-up on that, like the consumer real estate, private banking strategy that you talked about, is that sort of led by targeting sort of higher net worth individuals targeting jumbo mortgages, so to speak? Or is it more broader than that?
Speaker 2
Well, we're it's we don't do mortgages per se, but we do a lot of home equity, both closed in and lines of credit. So there's that. We also do, of course, lines of credit in the private banking sector. I think we've been doing a great job of expanding our private banking offering and just the overall job we're doing in that market. So those are the products that I think we're seeing grow the fastest and grow the most.
Speaker 7
Understood. Thanks for taking my questions.
Speaker 8
Welcome.
Speaker 0
Your next question comes from the line of Brett Rabatin from Piper Jaffray. Please go ahead.
Speaker 9
Hey, guys. Good morning.
Speaker 3
Good morning.
Speaker 9
Wanted to ask you, you lowered the non performers this quarter and had some charge offs. I was hoping you could give us some color on kind of what you managed down in the quarter and just kind of how you see asset quality from here, I. E, can you put the charge off number kind of normalize down at a little slightly lower path in 2Q?
Speaker 2
Yes. I would think because we had the charge off of the $6,000,000 credit that I mentioned, it was elevated for this quarter. So I expect it to be down. But remember what I've been saying for a long time about these energy loans? I mean the portfolio is so much stronger than it was before.
Our customer base is great. They've done a great job of executing their deleveraging strategy. There's a lot more equity in the business. But there's still a few credits moving through the snake, as I've said, right? And this was just one of those credits that moved through the snake.
And we situation had where really agent bank got out of it. And when they did and they sold it, everyone pretty much had to take a mark on the sale price of that. And so that was the liquidation, frankly, wouldn't expect it that way, but we just needed to recognize and move on down the road. So we're that one's through the snake. So I'd say we probably have another three, as I look at it, that got to move their way through.
And I don't expect those to be in line with that particular situations, but they got to move through. And but other than those, again, which I don't expect to be the same as the one we just had, I think the rest of the portfolio is doing well. We're going to have some charge offs of risk business, but I feel good about what we're doing overall.
Speaker 3
I guess the only thing that I would add to that, just if you were looking for activity on the nonperformers, Just looking at the non accruals, for example, those are down like $20,000,000 on a linked quarter basis. And if net charge offs were around 12,000,000 you can see that there was obviously quite a bit of things that were resolved other than those charge offs in that nonaccrual portfolio.
Speaker 9
Okay. And then I appreciate the color on the margin, but I was curious if you could give us any color around what you're replacing the $200,000,000 of municipal runoff in 3Q with in terms of yield? Yes.
Speaker 3
I guess what I said in my comments is that's probably where I'd point you to is looking the best I could tell you at this point since we really haven't purchased them yet is kind of what we've done so far and in the portfolio. So we've been buying, I think, at a 4.5% TE yield in the second quarter. And right now, I'd have to say it's going to be somewhere in that range.
Speaker 5
Your
Speaker 0
next question comes from the line of Scott Valentin from Compass Point.
Speaker 5
Just with regard to capital, you guys are sitting at almost 13% CET1. And just wondering, obviously, M and A is a strategy. You guys have been very disciplined on M and A. I'm just wondering maybe some of the things you're looking at to maybe manage that ratio because it seems well above peers and well above where it could be.
Speaker 2
Well, I'm glad we got strong capital. We will be we'll continue to be very disciplined on acquisitions. So I agree with you there. We've got $100,000,000 buyback in place right now. I hadn't bought anything on it yet, but that's always an option for us, and we will employ that as we have the need.
What I'd really like to do with the capital is just expand the business, right? I think that our growth has been good. I think that our loan growth has turned, and we're showing some consistency there. We want to continue to do that. So I want to make sure that we've got plenty of dry powder to do that and have money available if we do see an acquisition that makes sense.
But I sort of like the capital being strong at this point, and we're not going to do anything reactionary to deal with it, I don't think, right now. Also like our dividend being strong.
Speaker 5
Right. Fair enough. And then just with regard to deposit pricing, you mentioned you took deposit rates up. You're still, I would say, more competitive, but not definitely not a lead rate payer in the market. But end of period deposits were down a little bit linked quarter.
And wondering, one, if there's some seasonality there, I mean, deposits or what may have what may occur. But also the deposit pricing, was that a reaction maybe to the decline in deposits linked quarter?
Speaker 3
You know, from a from a linked quarter basis, you know, what I will say is that, you know, if if they were down, I think if you take down public funds, which can tend to be pretty volatile, they were up a little bit. I guess what I'd say is is Phil mentioned in his comments, you know, we're still, opening accounts and bringing in new customers on on both the consumer side and and commercial side of the bank. Just excuse me. In our analysis, what we've seen is that, we segregate the customers that are augmenting and the customers that are diminishing. So I guess what I'm inferring is that really the change, if you will, is coming on the existing customers.
And for those customers that had historically augmenting, we're just not seeing as much of an increase there as we had been. And those that are diminishing, we're actually seeing, increases in diminishment. So I think that, you know, from my end of the field, I'd say that, the deposit pricing wasn't reactionary to that, but we certainly hope that some of this pricing will create additional growth and stability in that portfolio.
Speaker 2
Thanks, Gerry. And I agree. And I'd just add to it. It really wasn't a reaction to anything that happened in the quarter. It's really just getting a sense with that last Fed increase, and we've been assuming that deposit rates are going to go up.
They just hadn't moved. And that's just not sustainable for us or for the industry. And I think it's important to just to maintain trust with your customer and not hold your breath and wait for the bubble to burst. You just got to run the business in a prudent way going forward and do it for the long term. And that's really what we're doing.
I'd like to see some growth in our time deposits. Our demand deposit growth has just been, I think, if you look at our compound annual growth rate for the last five years, our demand deposit our checking account growth has had a compound annual growth rate of, I think, it's almost 12% or so. And that's very strong. But if you look at our time deposits, they've grown and particularly money market deposit accounts, they've grown about 5.5% over that period of time. You look more recently, demand deposits have grown, let's say, from 2015 to June, say, a little over 8%.
Our money market deposit accounts are down about 2%. So it's not huge. But I think one of the things that's beginning to happen is you're seeing nonbank alternatives that are available to customers that they haven't seen before. And we just want to be fair with our customers. We just want to do the right thing on our value proposition.
And look, rates are going go up and deposit rates are going to go up. And we don't want to be drug kicking, screaming doing that. We want to do that in an orderly way and just manage the business for the long term.
Speaker 5
Okay. Great. I appreciate the color. And then real quick, on the energy portfolio, you guys talked about it's down 11 a little over 11 of the portfolio. Do you have the the amount of reserves against that portfolio?
Has that come down or is it unchanged?
Speaker 2
I I think it's down a little bit because of the charge off. Jerry, you have the yeah.
Speaker 3
Sure. Hold on. Give me just a second to see if I can pull this up here for you. So our reserve on the energy portfolio was 61.8% in March. That's down to 54.3% in June.
Speaker 5
Thanks very much.
Speaker 3
Sure. The reserve coverage is 3.85% on that energy book.
Speaker 5
Thank you.
Speaker 0
Your next question comes from the line of David Rochester from Deutsche Bank. Please go ahead.
Speaker 3
Hey,
Speaker 10
guys. On the muni calls you guys were talking about, I appreciate all the color there. But I was just wondering if you're expecting any other calls as you look beyond 3Q or even into 2018 at this point?
Speaker 3
I guess the only thing that I would say there, we don't give a lot of guidance going forward. But what I will say is the you know, we're projecting all in in '17, say, June roughly. I will say that that our projections right now for '18 don't have, anywhere near that level going into 2018.
Speaker 10
Okay. And on the deposit pricing, you guys gave some great color there. Sorry if I missed this, but have you guys given any thought to raising your earnings credit rate to drive some of that commercial deposit growth as well? Or have you seen any competitors doing that at this point?
Speaker 2
We've been increasing it. And I think it's I think kind of what we've seen competitively is probably more of a one off deal in competitive situations. And I think that's what the general market is doing. But I expect that that rate will go up just as we continue to see increases in general market rates.
Speaker 10
So you guys have increased yours sort of across the board versus kind of on a one off basis for your competitors?
Speaker 2
When we've increased it, we have. I think that's the best way to describe it.
Speaker 10
Are you guys more I guess it would put you above peers then in terms of your earnings credit rate at this point?
Speaker 2
What we look at is we're sort of in the median of what the posted rates are is what I would describe. If you look at the two big to fail banks, we're pretty much in the median, our ECR.
Speaker 10
Okay. And then just switching to your expense commentary. I just want to make sure I understood that you're talking about growing expenses or I guess the current expense level you feel comfortable with and that could actually grow a little bit based on your investment activity in the business. Is that right?
Speaker 3
Yes, that's fair.
Speaker 10
And then just one last
Speaker 3
David. One clarification on that, the mutual call. Just wanted to I didn't want to leave you with the reaction that we weren't expecting any. So yes, obviously, 600,000,000 this year, but again, not anywhere near that. But certainly, we are projecting calls next year.
Speaker 10
Okay. Appreciate that. And then just one last one on the tax rate. Is that 16% you mentioned a good base rate to expect outside of any benefits you guys could get going forward?
Speaker 3
Exactly. Yes.
Speaker 10
Okay, great. All right, thanks guys. Appreciate it. Sure.
Speaker 0
Your next question comes from the line of Jennifer Demba from SunTrust. Please go ahead.
Speaker 8
Good afternoon. Just curious on the energy loans. Are you expecting energy loans to be a big contributor to your commercial loan growth in the next several quarters? Or what's your expectation there?
Speaker 2
Jennifer, I don't think it'd be a big contributor. We did have some growth overall. And it's a kind of situation where we're seeing good deal flow. And heck, you could probably make it as big as you want it to be. But we're being disciplined in what we're doing.
We're making sure that we're doing the best properties, that it's based upon strong relationships. And so I expect that we'll get some growth. And we've got a good pipeline right now. I think the question mark in that portfolio is going to be what do you see in terms of payoffs? Because we're seeing a lot of sales have been seeing sales from independent operators, particularly if you've got Permian products I mean Permian acreage because number one, it's so valuable, but number two, it's so expensive to play.
If you're going to drill a two mile lateral, you got to put together a lot of acreage and you're talking big prices for that. So a lot of people are moving out of that. But I wouldn't say it's a big contributor, but I think it could it should be a contributor. And long term, we want it to be an appropriate, prudent contributor to our growth.
Speaker 0
Your next question comes from the line of Peter Winter from Wedbush Securities. Please go ahead.
Speaker 11
Good morning. Good Big picture question. Loan growth has been coming in better than peers for now a couple of quarters. I'm just wondering, Phil, have you are you doing anything differently than maybe Dick might have been doing it as you've taken over as CEO?
Speaker 2
Well, that's a hypothetical question. Dick, we're doing some stuff differently, but and I don't know that they'd be any different than Dick would have done had he if he was still here. I mean, we're just dealing with the business issues in accordance with our culture, which is what we've always done. And I just happen to sit in the chair today. But I would say that we are doing some things a little differently.
One, we've got a focus on consumer. We got really good growth rates there. But also, we are really working hard on this core portfolio, as I talked about. Our core portfolio really was flat for a number of years. If you read my shareholders letter, I really talk about it in some depth.
And we've got our lenders focused on this. And some of it's tone, right? And it's just awareness of it. We've got great people. And when you make them aware of a business objective, they're really good at going after it.
And then another thing that we've done is we're really trying to utilize our human capital as effectively as we can. And an example that I'd give you on that is we've we're trying to push decisioning on smaller deals a little closer to the customer. We've got great lenders, great senior lenders, great regional presidents, and we've given them some loan authority that will allow them to decision a little faster and give a little bit better customer experience. And that's been helping us as well. We call that final authority around here.
And so we it's not any big thing, but it's just a lot of things trying to grow the whole portfolio in a sustainable way, hopefully, doing above average and certainly make sure it's good organic growth. Does it make sense?
Speaker 11
Does. That's helpful. And just one more question. Can you talk a little bit about what you're seeing in terms of the economy in West Texas and the loan growth there?
Speaker 2
In what and where?
Speaker 4
West Texas.
Speaker 2
West Texas. Economy is better. The I think our people are doing a good job diversifying the portfolio from what was largely an energy based portfolio, and they're still doing that, but they're also doing a good job of working the other segments of the economy. It's still slow because while there's a boom aspect to the a lot of things going on there, You look at some of the activity in the drilling rigs, levels of rigs that they've got there. Another example is I've referred recently that some of the big operators are bringing in frac crews for two weeks on and they're putting them up in hotels and giving them a week off.
That's new. And so we're seeing some improvement in the underlying fundamentals. But we haven't seen a lot of loan growth just because it's still a little bit soft and they're still repairing themselves. But we've got some we've got great customers out there, great people, and we're, I think, doing a good job.
Speaker 11
Your
Speaker 0
next question comes from the line of Matt Onley from Stephens.
Speaker 5
I appreciate the commentary on refocusing on more core customers within the loan growth. Can you just talk about the loan yield difference between those core customers below $10,000,000 versus loan yields above $10,000,000
Speaker 2
Well, they're higher. In fact, the one thing we've talked about with ourselves is, look, you may be doing a $2,000,000 or $5,000,000 deal, but it might weigh as much as a $10,000,000 deal that's priced on LIBOR. A lot of the credits that are in that core portfolio are prime based, probably our biggest prime based portfolio, if you will. And those yields just tend to be a little bit better than straight LIBOR based deals. Yes.
And also thinking about that core portfolio is these are great customers to take advantage of other services that we provide. Many of them don't have the traditional CFO infrastructure, and we can bring products to the table that we offer that can really help their business. And it's not necessarily a beauty pageant when you get in at that level. You've got a relationship, you can bring in something and help somebody. So it's not just the better pricing on the loans on average.
I would say it's in some cases, they're little bit better targets for use of our other products.
Speaker 5
Okay. Understood. And then I believe you mentioned the loan yield in the second quarter was about 4.32%, so a nice pickup. Is that a clean number? Or is there any noise in that number from some type of interest catch up from nonaccruals moving back to accrual status or or any other noise in that number?
Speaker 3
I guess what I'd say is, you know, it's pretty core, but, obviously, so as as, you know, from a from a noise standpoint, if you do get some some loans that pay off early, if you've got any sort of deferred loan fees that are associated with that loan, they'll typically you know, they'll they'll accelerate and come into to, into interest income. You probably got a little bit of that, but for the most part, it's pretty core.
Speaker 5
Okay. Great. Thank you.
Speaker 2
Thank you.
Speaker 0
And there are no further questions in the queue. I turn the call back over to Phil Green for closing remarks.
Speaker 2
Well, thank you. We appreciate your interest and everyone have a great day.
Speaker 0
This concludes today's conference call. You may now disconnect.