Cullen/Frost Bankers Inc (CFR) 2021 Q4 法說會逐字稿

Greetings, and welcome to the Cullen/Frost Bankers Fourth Quarter 2021 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the call over to A.B. Mendez, Senior Vice President and Director of Investor Relations. Thank you. You may begin.

Thanks, Darryl. Our conference call today 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 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 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.

Thanks, A.B. Good afternoon, everyone, and thanks for joining us. Today, I'll review fourth quarter and full year results for Cullen/Frost and our Chief Financial Officer, Jerry Salinas, will also provide additional comments before we open it up to your questions.

In the fourth quarter, Cullen/Frost earned $99.4 million or $1.54 a share compared with earnings of $88.3 million or $1.38 a share reported in the same quarter last year and $106.3 million or $1.65 a share in the third quarter of 2021. For the full year of 2021, Cullen/Frost earned $435.9 million or $6.76 a share compared to earnings of $323.6 million or $5.10 a share reported for 2020. Our return on average assets and average common equity in the fourth quarter were 0.81% and 9.26%, respectively. I am very pleased with our company's results, and I'm optimistic about the prospects for our organic growth strategy.

Average deposits in the fourth quarter were $41 billion, an increase of more than 20% compared with $34.1 billion in the fourth quarter of last year. This continued outstanding deposit growth reflects our success in developing new relationships and expanding current ones. It reflects well on our expansion efforts, our value proposition enhancements and our world-class level of customer service. Jerry will talk more about our deposit growth in a few moments. I was very pleased with our success in our commercial lending segment where we booked $2.4 billion in new commitments in the fourth quarter, up 64% from the first quarter last year and up an unannualized 37% on a linked quarter basis. I'm more or less certain that's our highest level ever.

The growth was geographically diverse. Compared to last year, fourth quarter C&I commitments were up 73%, while CRE was up 121%. On a linked quarter on annualized basis, C&I commitments were up 27%, while CRE commitments increased 55%, and Jerry will talk more about outstanding loan balances in his comments.

As we book these commitments, our weighted pipeline declined 13% from the third quarter. I might point out that in Texas, the confluence in the fourth quarter of football season, hunting season and the holidays combines, so that it's rare that our year-end pipeline would exceed the third quarter, just saying. However, our year-end weighted pipeline was 24% higher than last year's and was our highest fourth quarter ever.

Turning to our consumer business. I am extremely pleased with our progress. In 2021, we brought in almost 27,000 net new checking households. That was 210% of our previous full year household growth record in 2019. Here's some additional context. In 2016, we added 1,897 net new consumer checking households. Our compound annual growth and net household addition for that 5-year period is 70%. Houston is not the only reason, but it's helping. It added 413% more checking households in 2021 than we did in 2018 right before our expansion began. We reported in our release good trust and wealth management numbers, but one other data point of growth I might offer is that our number of customers for our community wealth advisors were up by 28% from a year ago.

As far as the Houston expansion is concerned, we see the momentum continuing to build as the branches mature. The metrics we measure show bankers we hired and onboarded are executing our relationship banking strategy. At year-end, we stood at 128% of our new household goal. We were 178% of our loan goal, and we were 113% of our deposit goal. For the year 2021, we added 6,858 new households, which was nearly the same amount of new households we added for the first 2 years of the expansion.

Over the last 6 months, new households grew by 30% unannualized demonstrating the ability to add new customers while the branches mature in these communities. Loan growth for the year was $218 million or 97% growth. And for the last 6 months of 2021, loan growth was an unannualized 42%. Loan portfolio is a mix of 80% commercial loans and 20% consumer loans. Our focus has been on core loan relationships or small businesses in the communities that we are entering.

There are only 3 loans over $10 million in balances that represent less than 10% of the total loan portfolio. The mix of loans is reflective of our overall loan portfolio with 40% CRE, 40% C&I and 20% consumer. We're building a strong foundation of core relationships that will position us to grow with them as their businesses grow and we meet their needs. Deposit growth for the year was $390 million or 167% from December of 2020. Over the past 6 months of 2021, growth continues to be strong at an unannualized 44% rate.

Our deposit mix is 2/3 commercial and 1/3 consumer, nearly identical to what we had projected to be the mix 3 years ago. We continue to be optimistic about growth in this economy. Our 28-branch expansion project in the Dallas region officially got underway this month with the opening of our first new location, the Frost Medical District Financial Center. We will continue to process nearly tripling our size in Dallas into 2024. The Dallas expansion will follow our Houston model, and we will employ the lessons learned during our team's successful rollout.

Additionally, we will continue our expansion in Houston, adding another 8 locations over the course of 2022 and into 2023. Credit continues to be good. We did not report a credit loss expense for the fourth quarter. Our asset quality outlook is stable and in general, problem assets are declining in number. New problems have dropped to pre-pandemic levels. The net charge-offs for the fourth quarter were $2.8 million compared with $2.1 million in the third quarter. Annualized net charge-offs for the fourth quarter were 7 basis points of average loans.

Nonaccrual loans were $53.7 million at the end of the fourth quarter, a decrease from $57.1 million at the end of the third. Overall delinquencies for accruing loans at the end of the fourth quarter were only $121 million or 74 basis points accrued in loans. Excluding PPP, delinquencies were only $97 million. These are manageable, pre-pandemic levels. Total problem loans, which we define as risk grade 10 and higher, totaled $540 million at the end of the fourth quarter compared with $635 million at the end of the previous quarter.

In the fourth quarter, we continued to make progress toward our goal of mid-single-digit concentration levels in the energy loan portfolio over time with energy loans representing 6.6% of loans at the end of the quarter. Our teams continue to analyze the nonenergy portfolio segments that we considered most risk from the pandemic impacts. And as of the end of the fourth quarter, the total problem loans from hotels and office buildings represented $178 million. Risk is moderate and stable in these areas, and the asset quality outlook improved significantly during 2021.

We've made good progress toward adding residential mortgages to our suite of consumer real estate products later this year. This will complement our portfolio currently consisting of home equity, HELOC, home improvement and purchase money second loans, which has steadily grown to more than $1.4 billion. Utilizing best-in-class technology will allow us to provide Frost level of world-class service as we build this portfolio over time in response to customer demand. And after almost 2 years of working with business customers on PPP loans, we are finally nearing completion with a forgiveness process complete for more than 93% of our customers.

Our team continues to work to get the last of the borrowers through the process, and I want to commend everyone at Frost who has worked so hard on this. Our team took a situation that in the beginning looked difficult and maybe even impossible and turned it into a huge success for our customers and for our company. At the same time, we're working to ensure that we're not only taking care of our customers but our employees and our communities as well. In the fourth quarter, Frost was a founding member of the corporate partners for racial equity here in San Antonio State. And statewide, we announced that we had raised our minimum pay to $20 per hour. Steps like these show our commitment to our communities and being a force for good in people's everyday lives. That's possible only because of our dedicated employees, whether they're asked to tackle historic and heroic tasks like handling more than 32,000 PPP loans, doubling or even tripling the number of locations we have in the region over a couple of years, creating a mortgage lending process from scratch or simply being the best at serving customers around the clock.

Our team at Frost is our true competitive advantage. And I'm proud of them for all of their accomplishments despite the difficulties of the past 2 years, and I'd like to thank them for contributing every day to our company's success.

Now I'll turn the call over to our Chief Financial Officer, Jerry Salinas, for some additional comments.

Thank you, Phil. Looking first at our net interest margin. Our net interest margin percentage for the fourth quarter was 2.31%, down 16 basis points from the 2.47% reported last quarter. The decrease was primarily the result of the impact of lower PPP loan volumes and their related yields compared to the prior quarter. Excluding the impact of PPP loans, our net interest margin percentage would have been 2.25% in the fourth quarter, down 2 basis points from an adjusted 2.27% from the third quarter, with the decrease resulting primarily from lower yields in the investment portfolio, partially offset by higher volumes of investment securities and non-PPP loans.

The taxable equivalent loan yield for the fourth quarter was 3.89%, down 27 basis points from the previous quarter. But excluding the impact of PPP loans, the taxable equivalent loan yield would have been 3.79%, up 5 basis points from the prior quarter with about 3 basis points of the increase resulting from nonrecurring fees. To add some additional color on our PPP loans, our total PPP loans at the end of December were $429 million, down almost $400 million from the $828 million at the end of September. At the end of the fourth quarter, we had only about $2.8 million in net deferred fees remaining to be recognized. And as such, we don't expect PPP to have any material impact on our 2022 results.

Looking at our investment portfolio. The total investment portfolio averaged $14.4 billion during the fourth quarter, up about $1.9 billion from the third quarter average as we deployed some of our excess liquidity during the fourth quarter. We made investment purchases during the quarter were approximately $2.9 billion, consisting of about $1.7 billion in Agency MBS securities with a yield of about 2.05%; about $1 billion in treasuries, yielding a 1.27%; and about $150 million in municipal securities with a TE yield of about 2.34%.

The taxable equivalent yield on the total investment portfolio was 3.08% in the fourth quarter, down 27 basis points from the third quarter. The yield on the taxable portfolio, which averaged $6.1 billion was 1.86%, down 17 basis points from the third quarter. Our tax-exempt municipal portfolio averaged about $8.4 billion during the fourth quarter, flat with the third quarter with a taxable equivalent yield of 4.01%, down 3 basis points from the prior quarter.

At the end of the fourth quarter, 78% of our municipal portfolio was pre-refunded or PSF insured, and the duration of the investment portfolio at the end of the fourth quarter was 4.4 years, down slightly from the 4.5 years at the end of the third quarter. Regarding our noninterest expense outlook for 2022, our projected expense growth in 2022 over our 2021 full year reported noninterest expenses is in the high single digits, impacted by our expansion efforts and salary pressures.

The impact of our Houston and Dallas expansions is responsible for about 2% of the growth. Costs associated with reintroducing our residential mortgage product adds about 0.5% and increasing our minimum wage from $15 per hour to $20 per hour in December as a result of salary pressures across the state is responsible for about 2% of the projected growth in noninterest expenses in 2022.

Just to talk a little bit about current loan and deposit volumes. As you've seen in our press release, and as Phil mentioned, we saw really good strong loan growth, excluding PPP in the fourth quarter, both on an average and period-end basis. As we've moved into January, I just want to confirm that that strong growth has continued, both on average and on a period-end basis. On the deposit side, we also saw strong deposit growth in the fourth quarter on an average and period-end basis and the growth came both from demand deposits and interest-bearing deposits. I was expecting that we might see a seasonal drop in deposits in January, but up to this point that has not occurred.

Regarding the estimates for full year 2022 earnings. Our current projections assume 3 25 basis point Fed rate increases this year with one in May, one in July and the last one in December and thus having no material impact that last one on our projected net interest income in 2022. With those rate assumptions and the expected 2022 expense growth that I previously mentioned, we currently believe that the current need of analyst estimates of $5.88 for 2022 is low.

With that, I'll now turn the call back over to Phil for questions.

Okay. Thanks, Jerry. We'll now open the call up for questions.

(Operator Instructions) Our first question has come from the line of Brady Gailey with KBW.

If I back out the PPP loan shrinkage, I see period-end loan growth just in the fourth quarter of over 20% linked quarter annualized. So a very, very strong level. Maybe just some commentary about where you saw a lot of that loan growth happen?

It's really. Yes, it's really across the board, Brady, to be quite honest with you. It's -- we're seeing good growth, both in C&I. CRE is good. Really all categories are good. We did see some increase in energy as well. That's impacting it. So if I looked at that annualized growth, energy added about 1%, but not materially -- not material to that annualized number that you mentioned. But it's pretty much across the board.

Okay. All right. And then I think last quarter, you guys had about $13 million of PPP fees left. You're now saying it's $3 million. So is it safe to assume that in the fourth quarter, you realized PPP fees of about $10 million in 4Q?

Yes. Let me grab that real quick here. Yes, it's about -- I'm seeing a number. Just on the fee side, it's about $8 million. So if you included the interest on it, it'd probably be in that $9 million range. But I'm showing about $8 million for in the quarter related to those fees.

Okay. All right. And then we saw the bond portfolio expand in the fourth quarter. If you look at the 10-year bond yield, it's now 180 basis points, so it's even higher than where it was then. How should we think about the possibility of Frost continuing to grow the bond book this year in 2022?

Yes. What we've said, Brady, all along is that it was our intent to continue to invest. We like to be opportunistic. I'm going to be honest, with the deposit growth that we saw, I mean, it's just really been incredible. I kind of expected that the fourth quarter might be a little bit softer. I probably said that in the third quarter as well. And so we've been able to make a lot of these investment purchases that we made in 2021 without really having a significant impact on our balances at the Fed. This morning, I think when I got an update, I think we're north of $14 billion still today after the purchases that I talked about. So still pretty strong.

I think from a projection standpoint, we're assuming that we probably have purchases in the neighborhood of half of that $14 billion, if you will. Again, we're going to be opportunistic, but that's the current thought.

Right. And those are just purchases. You'll have obviously bonds that are rolling off. So that's just on the purchase side is what you're saying.

That's right. Yes. I think on the -- yes, I was going to see if I had the maturities here. I think what I'm seeing is that we've got about $2 billion scheduled in maturities and assumptions on prepayments for the year.

Okay. So half of $14 billion is $7 billion. You take away $2 billion that's going to be rolling off and maybe think about the bond book growing roughly $5 billion in 2022. Does that seem fair?

Yes. I don't think you're off base. Again, what we've said is we're going to look at what's going on in the market, and we'll take a look at what's going on in deposits. If these deposits continue to stick, we could be more opportunistic, but that's kind of where I'm thinking right now. We're early in the year. Obviously, the ALCO group meets monthly. So we'll just decide from there. But I don't think you're too far off base with that.

Our next questions come from the line of Jennifer Demba with Truist.

How much of your loan growth this year do you think is going to come from the expansion in Houston and Dallas? And do you think the Dallas branch expansion could be -- you've raised the Houston branch count more than, I think, originally projected. Do you think you could do the same for Dallas at some point?

Well, let's see. Jerry might have some -- a feel on the loan growth from the Houston. I mean it's -- I think I gave the numbers, and I may be able to pull up in a second where we stood at the end of the year. I think loans were just a little under $500 million. Deposits were a little under $700 million, really round numbers. But I think Dallas is going to be solid. I don't have any reason to believe that we performed worst in Houston. Look, it's early. We opened our first branch there. I should say, we opened up a location before -- that we had begun working on before we announced the strategy. We call our Red Bird locations. In the southern sector, Dallas has been really successful.

And so that's the first example I have of boots on the ground there and how we do with the new locations. So that's been really good. I just think the character of Dallas is such that it is a very much of a business-centric market. I think once upon a time, someone told me there were 10,000 corporate headquarters there.

It's not nearly as energy centric as the Houston market. That can be a good thing, a bad thing, but it is -- I think it is just a more diverse market in many ways. And so I've always been excited about the prospects for Frost Bank in Dallas because middle market, small business, commercial is our wheelhouse and man, that is a target-rich environment. So if we just do the right things, learn the lessons that we learned from Houston. I'm real -- I have no reason to believe we won't be successful in the Dallas market.

Jennifer, I can quantify some sort of numbers, just to give you a perspective, fourth quarter to fourth quarter, I don't have the link in front of me. But -- so if we excluded PPP loans, loans were up about 2.4%. So it's about $350 million, about a little north of 1% of that actually came from the Houston expansion. So again, they're starting from small numbers. But if they're contributing that sort of growth on the change, if you will, they were responsible for a significant part of the growth.

Our next questions come from the line of Dave Rochester with Compass Point.

Just wanted to start on NII. You talked about a lot of moving parts with rate hikes and you've got cash deployment and securities that you're expecting, and that sounds like that's going to be pretty meaningful this year. Can you just remind us first maybe what is the impact on NIM or NII from each 25 basis point rate hike that you're looking at this year? And then just bigger picture, what you're thinking on the total NII trends versus '21, that would be great.

Sure. So maybe an easy way to say it is the impact of the net interest -- of the rate hike, each 25 basis point rate hike is about $1.4 million a month for the first 25. And so because of some of the floors, they'll come into play. They don't -- they are impacting that growth in the first hike. By the second hike, that number, most of them are eliminated. And so I would say that number is closer to $1.7 million, say, a month. That will give you some perspective there.

And then just overall for NII growth in '22 versus '21?

Yes. I mean yes, we're projecting -- obviously, we've got a lot of positive things going for us. So if you've got to take out PPP, of course, because if you include PPP, we're going to find some pressure there. I'd say with -- let me hold on -- grab my notes here real quick.

Yes, it is going to be -- it could be pretty substantial, just given, as you said, the assumptions that we're talking about. And some of it is going to be impacted by the timing. As you heard, I said our first assumption for a rate hike is in May. If it happens sooner, that will help us. But we're talking for -- with a -- we're talking with certainly a double-digit sort of mid-teen potential growth for us on a TE basis year-over-year.

And that's factoring in again about net $5 billion in growth in securities and then what you're expecting on the loan side?

That's everything Yes. Exactly.

That's all in. Good. And what are you guys factoring in for deposit growth for this year? Because that, I guess, will drive -- maybe it won't drive that much because you've got enough cash to deploy in securities. I was just curious what you're thinking on the deposit growth side.

Yes. To be honest, we're -- it's been interesting. I've kind of expected that the deposits might slow down some of their growth, as I've said. And it's been pretty solid in the last couple of quarters. Our growth assumptions are that that's somewhat softer in 2022. I can't envision that. And again, I might be eating my words a year from now. But at this point, I don't envision that we'll be seeing a 20% -- or we're not assuming we'll see a 20% year-over-year average growth in deposits. If we do it, it will be great.

As Phil mentioned, we're doing a lot to enhance new customer relationships. The one thing I was really happy to see on the deposit side, continue to be happy to see is we do our 12-month look back on deposit growth. And for the last 12 months, about 1/3 of our growth is coming from new relationships with 2/3 of that then coming from customer augmentation. That number is really the split between new and existing augmentation is really skewing slowly more and more to the new relationships. So we continue to be happy about that, and that could impact the growth. But at this point, on a full year average, I'm thinking we're going to be much softer than where we were in 2022.

Yes. That makes sense. And maybe just one last one on the noninterest income side. You had some good growth in '21. I was just curious what your thoughts are if you're expecting sort of a similar pace of growth on a core basis or if it should accelerate for any reason?

Yes. I think the pressure that -- I'll go through the pressures first. The pressure we're having is on the deposit service charge. We put in the overdraft grace product, as we've talked about quite a bit, really happy with that product. There continues to be, obviously, things that we're doing to continue to look at OD fees and what makes sense and what doesn't make sense. So I don't expect that we'll see a potential for a lot of growth there. So some pressure there.

On the insurance side, I think the pressures that I see there are more on the contingent income side. So we have a pretty big -- and you can see in our numbers, I don't have them in front of me. But a good piece of our business there is contingent income associated with how those policies perform. Let me see if I can grab it in front of me. But I'm expecting that that's going to be softer. So we had about 3 -- it looks like $3.2 million in 2021. If you recall, we had a freeze here in Texas in February that -- which pretty much stopped the state for a few days. So there are quite a few claims there. So I'm expecting there'll be quite a bit of pressure on that contingent income line item in 2022. But we are excited about our trust area. They had good growth there.

Obviously, the markets have helped us. We had good growth in oil and gas fees, which are dependent on what happens in oil prices. But we're optimistic, especially as we add new customers. I think there's a good potential there. I don't think we -- it would be great if the market expectations -- or the market returns in 2022 look like '21, but that's kind of not making sense right now. So it might be a little bit of pressure there as well.

Our next questions come from the line of Peter Winter with Wedbush Securities.

Great. I was curious if the rates come in higher than what you're expecting, so for instance, if we get a rate hike in March, and that would lead to higher net interest income. The question is, would you let most of the benefit fall to the bottom line? Or would there be any type of plans to maybe accelerate some of your branch expansion investments as kind of like a partial offset?

No, not really. The timing of the branches, there's a lot involved in that, right, because we need to make sure that we find the locations. You've got to hire the right people. That's such an important part of the success as we know. And so in some ways, we really wouldn't be able to accelerate that expansion. What I would say is that regarding our deposit betas, we're pretty conservative, I'll say, in our assumptions on deposit betas on the interest-bearing side. I think the last numbers I saw we had deposit betas of, say, 50% in our assumptions.

Historically, when we went back and looked at cycles in '17 to '19, for example, we were probably closer to 30%, 35%. So -- there -- it will be interesting to see what happens. What we've said is that we always want to make sure that we're offering a Square Deal to our customers. We'll be looking at market rates, not only against the too big to fail but who our competitors are. And so we'll react on the deposit side. If the industry as a whole doesn't raise rates, we could have bigger benefits then. But over time, we're going to see increases in deposits just given where the market takes deposit costs.

Just on that point, if I think back to the last cycle, you guys actually moved ahead of peers in terms of raising deposit rates. I'm just curious just given so much deposits that you have today, what's the thought of that type of strategy this time around?

Peter, I guess -- I think you know us and you know us well. I mean we're really all about the customer relationship. We want to make sure that that we provide our customers with a Square Deal. So we want to make sure that the rates that we're offering are competitive. And to the extent that that there are rates that we feel we need to move. Even with a loan-to-deposit ratio under 40, we're going to raise those rates because we think it's fair to -- it's important for us to try to continue to build those relationships and make sure that we're offering our customers a Square Deal.

Peter, last time in '17, you saw the Fed rate move up in rates 100 basis points. And the thing that happened to us is we focused so much on competing with the too big to fail here in these markets that our eyes were squarely on what they were doing competitively, and they really didn't move at all at that point. And so we sort of decided to break away from it at that time. I'll say this time around, we have learned from that experience. And Jerry and his team and our deposit teams have really been very diligent, I think, in paying attention to what rates are regardless of what some of the larger competitors might be doing.

And I think we've done a nice job. I know we have on the CD rates, for example, and there really has been much movement in the non-maturity portfolio rates. But we've moved some on that. I feel really good about where we are. I think we've got a much better start going into this rate cycle moving up than we had in 2017. So we're not really playing from behind the curve right now. And so I feel pretty good about it. And like I say, I think we learned from our experience back in '17.

Right. If I could just -- just quick housekeeping questions. Just other income. If I take out the branch sale gain, it was still pretty elevated relative to the third quarter. I'm just wondering, anything unusual in other income?

Compared to which quarter, I'm sorry, Peter?

The third quarter.

Compared to the third quarter, let me Grab that. Yes, we did have some incentives related to our debit card that were paid to us in the fourth quarter and usually arrive in the fourth quarter and are recognized in the fourth quarter. And that's really the only other major item affecting the linked quarter compares.

Got it. And just the tax rate that we should use for 2022?

I think on a discrete basis, we're probably around 9% would be my guess at this point.

Our next questions come from the line of Steven Alexopoulos with JPMorgan.

I wanted to start, Jerry, to follow up on the high single-digit expense growth guide for 2022, just given where wage pressure and inflation has been trending for everyone, do you think, at least at this stage, it looks like that would be maybe at the upper end of a high single-digit range?

Does that help, as I said, I hope it is? Now let me say -- I'm going to say that just to be clear, we continue to see salary pressure. We're out to get -- and keep -- attract and keep the best people that we can. And so we're going to do what we need to do to be competitive. So it probably would be a little bit premature for me to say that. But I will say that I don't want to mislead you. We are -- we continue to feel salary pressure. We're having conversations all the time to be quite honest with you. So yes, I would be [flip] and dummy to say, yes, we've taken care of the problem because it's something that we're facing every day.

Yes. Okay. That's fair. And then on the loan side, with every bank, right, sitting on a ton of liquidity just like you guys, everybody's focused on loans. Could you give us a sense how competitive is the lending environment today? Are you walking away from even more loan opportunities over structure? And what is the loan outlook for 2022?

I wouldn't say, Steven, it's more competitive. It's really competitive and has been. I think that we -- if you look at what was lost to structure, I'm trying to look here 3 months ago versus now. So we lost 64% of the deals this quarter, the fourth quarter, the structure and, the prior quarter, we lost 68% of the deals to structure. So it's actually been fairly consistent. If you look a year ago, though, we lost 56% of the deals to structure 44% to rate. So we're competing aggressively on price. And I think that's the right thing for us to do -- by the time someone passes our credit criteria and relationship and character and all those elements that go into underwriting it, it's -- and given the cost of goods sold related deposits, which I'll argue for us are as low as anybody I know about.

There's no reason for us to be losing business over a few basis points. So I want us to be competitive on that, and let's engage with somebody and have a long-term relationship. I think it works out for us very well. But man, it's been competitive. It continues to be -- I saw -- I was asking our people about the real estate markets, what's going on, you're seeing interest rates go up some. You look at cap rates, they haven't moved in some cases. For some credits, they've gone down. There's tons of capital still available looking for high-quality, low-risk deals. And so it's not been great, but it's the same.

I'm proud of the way that our people are competing and the kind of customer relationships we have and the kind of deal flow that we're bringing in. So I think we're doing a good job competing, but we're also -- I've said a million times, there's no green pasture on the other side of the fence of great credit quality. It might look good, but it is a waste land out there. And so we're still focused on maintaining our disciplines, and we'll be competitive, but we're not going to be -- I can say we're not going to -- we're trying not to be stupid about it, how about that.

So when you think about 2022, is this a high single-digit year for loan growth? Is that what you're thinking? I don't want to put words in your mouth.

No, I think those are my words. I feel good about high single-digit growth this year. We'll have -- everybody's fighting this thing, Steven, on commercial real estate payoffs, right? Because with rates beginning to move up, you're seeing some people accessing the long-term markets, maybe sooner than they would. I talked about cap rates that people are worried about going up. They might be taking advantage of prices out there, so you could see some deals payoffs more than you've seen.

But the other thing is our advance rates on liquidity lines, working capital lines is up a little bit from the previous quarter. I think we were like around 32.5% this year -- excuse me, this quarter. And it used to be around little over 38%. So there's room there if supply chain things clear up some and maybe that offset some of that. So -- but we're just competing well, and we're seeing relationships grow, and we've got what's going on in Houston and Dallas to take a little while to move the needle, but it's going to. So I'm just optimistic about how it's going.

Maybe just 1 final question. Even though many in our industry think the branches did, how important has it been having a physical branch in your new markets to those growth metrics and consumer checking accounts you mentioned? And could you have pulled that off without a physical branch just with direct digital advertising, et cetera?

I'll give you a number, Steven. 87% of the account growth -- or the relationship growth we've had in Houston has come within 5 miles of a branch. I'd say it matters.

Our next questions come from the line of Jon Arfstrom with RBC.

Just 1 quick follow-up on expenses. You gave us the components of Houston, Dallas residential and then minimum wage. Is the rest of it just compensation? Or is there anything else in there to call out in terms of the increases?

I would say that really, it's related to the base in 2021. Some of the things that we're doing as it relates to starting to meet more with customers. So I'm seeing increases and things that you would expect, like meals, travel and entertainment as we start continuing to do some of that prospecting face-to-face. I saw some good size increases in advertising, marketing as well as we continue to make sure that we're doing what we need to be doing there. And then, yes, we're obviously going to feel, as you're saying, some continued salary pressure. So I would say those in my mind are the major components.

Okay. And then kind of a follow-up on Peter's question. Are there areas where you would like to spend more in the business?

Yes, [you're tying a couple of tight wires], I guess we don't like to spend more. But we do, we sure do. I'll tell you the things that we're doing. You're going to -- as it relates to the legacy business, we're pretty careful on expenses. I mean Jerry has pointed that out. And I think if you peel back all the PPP and you peel back expansion, you peel back our mortgage expansion, our number is pretty conservative there. So I wouldn't say we'd like to spend money. That's not exactly what you said. But I wouldn't say we'd like to do that.

But we will spend money, and we will invest -- we're going to continue to do this, and everyone needs to know it. We'll continue to invest in expanding our business. So if you look at things that we'll invest, and we're going to continue expanding on this organic growth strategy. There's a great payoff in it. And it comes closer and closer to that harvesting phase of these new locations every year. So we're going to do that.

We're going to continue to invest in our people. Jerry talked about what we've been seeing there. I talked to you about how we went to a $20 minimum wage. We're investing our people. There's a lot of other things like that. We're paying a lot bigger share of our medical premiums than we were a year ago. And we're going to continue to invest in technology. I really am extremely proud of our technology and what we're able to do and our strategy that we're -- that we've employed there.

We've -- if you look at our apps, rating is really high. As you know, we do our own web development. We do our own digital development. We have lots of flexibility and ability to have a great customer experience and a branded experience there. So -- and I don't feel -- because we've been willing to do this, I don't feel we're playing from behind the curve in technology. Yes, it's a ton of money, and we spend more there, it seems like, than we spend any other place. But we're not playing from behind the curve. The things that we're doing, I think, are moving us forward, and it's really exciting to see.

Okay. Good. One more thing. You mentioned Houston and Energy a couple of times. Can you just touch on your appetite for energy lending in general?

We've got an appetite for it. But it's kind of like that going on keto diet. You want to get down to that weight loss level and then once you get there, you can normalize your diet. But we said we want to get down to mid-single digits. We're almost there. We're 6.6%. But what I want to point out is that's still a really big part of our portfolio. It's one of the top segments of the portfolio. So we're not moving out of that business. We're just getting to where we need to be on a prudent level. The thing I'm really proud of our people for doing is that we're on the deals that we are engaging in now and prospecting. We're doing it on the basis that we've always underwritten things.

And we are -- we're being disciplined about it. And that's good. It doesn't work for everyone, but it works for the right kind of customer. The way I think about that business is I've always thought about it kind of like the multifamily construction business, right? I mean we can do as much multifamily construction lending as we wanted to. We could take that loan-to-deposit ratio and get it wherever you wanted over the next year, right? But that's not the right thing for us to do. It is an important asset class to us, but we do it in a certain way, and we do it with people that we are familiar with and have had great relationships with or have wanted to have great relationships with.

And does it work for every deal for everyone? No, it doesn't. But those customers that do business with us, they know what we'll do. And they know what works with us and they like to do business with us. We're not going to do every deal for everybody, but we do a lot of deals for them. And I see that being the same thing and same approach we take in the energy business. It won't work for everyone the way we do it, but we're going to do it in such a way that when energy prices move down and they will. It's a commodity business.

We don't want our shareholders losing sleep about it. I sure don't want to lose sleep about it, and we're going to be underwritten in a way that we feel good about it. And there are ways you can do that well, and that's what we're focused on. And it's not going to be such a large level that Cullen/Frost becomes the next easy short when energy prices start moving down.

There are no further questions at this time. I would like to turn the call back over to Phil Green for any closing comments.

Okay. Well, thanks, everyone, for your interest, and we will be adjourned. Thank you.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.