Yahoo Finance

Dan Geddes

Thank you, Phil. Let me start off by giving some additional color on our expansion results. As Phil mentioned, we continue to be pleased with the volumes we've been able to achieve. Looking at year-over-year growth, expansion average loans and deposits increased $511 million and $586 million respectively, representing growth of 38% and 30%. The expansion now represents 9% and 6% of total loans and deposits using average March month-to-date balances. This compares to 7% of loans and 5% of total deposits at March 2024.
Now moving to first-quarter financial performance for the company. Regarding net interest margin, our net interest margin percentage was up 7 basis points to 3.60% from 3.53% reported last quarter. Our net interest margin percentage was positively impacted by increased volumes of higher-yielding taxable securities and loans, combined with lower cost of interest-bearing deposits. These positives were offset somewhat by lower volumes and yields of balances held at the Fed.
Looking at our investment portfolio. The total investment portfolio averaged $19.4 billion during the first quarter, up $743 million from the prior quarter. During the first quarter, investment purchases totaled $2.1 billion, with $1.7 billion being Agency MBS securities, yielding 5.82% and $414 million being municipals with taxable equivalent yield of 5.55%. During the quarter, we had $299 million of municipals roll off at an average tax equivalent yield of 3.86%. The net unrealized loss on the available-for-sale portfolio at the end of the quarter was $1.4 billion, a decrease of $156 million from the $1.56 billion reported at the end of the fourth quarter.
The taxable equivalent yield on the total investment portfolio during the quarter was 3.63%, up 19 basis points from the fourth quarter. The taxable portfolio, which averaged $12.9 billion, up approximately $754 million from the prior quarter had a yield of 3.29%, up 30 basis points from the prior quarter. Our tax-exempt municipal portfolio averaged $6.5 billion during the first quarter, flat with the fourth quarter, and had a taxable equivalent yield of 4.38%, up 5 basis points from the prior quarter. At the end of the first quarter, approximately 69% of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of the first quarter was 5.5 years, down from 5.7 years in the fourth quarter.
Looking at funding sources. On a linked quarter basis, average total deposits of $41.7 billion were down $228 million from the previous quarter. The linked quarter decrease was driven primarily by lower noninterest-bearing accounts. This decrease is in line with normal seasonal trends. The cost of interest-bearing deposits in the first quarter was 1.94%, down 20 basis points from 2.14% in the fourth quarter.
Thus far in April, month-to-date average deposit balances have rebounded and are up to (technical difficulty) As a reminder, we tend to see weaker deposit flows in the first half of the year and stronger flows in the back half of the year and the majority of that seasonality is driven by commercial, noninterest-bearing deposits. Customer repos for the fourth quarter averaged $4.1 billion, up $201 million from the fourth quarter. The cost of customer repos for the quarter was 3.13%, down 21 basis points from the fourth quarter.
Looking at noninterest income and expense, I'll point out a couple of seasonal items impacting the linked quarter results. Regarding noninterest income, insurance commissions and fees were up $6.8 million. Remember, the first quarter is typically our strongest quarter for group benefit renewals and annual bonus payments received. On the expense side, employee benefits were up $13.5 million and were impacted primarily by increased payroll taxes and 401(k) matching expense. These were impacted by our annual incentive payments that are paid during the first quarter.
Regarding our guidance for full-year 2025, our current outlook includes 425 basis point cuts for the Fed funds rate in 2025, with cuts in June, July, September, and October. We have added the July and October cuts from our prior guidance. Despite the updated expectation of four rate cuts, we are seeing benefits of our Q4 and Q1 securities purchases as well as the decrease in our cost of deposits, and now expect net interest income growth for the full year to fall in the range of 5% to 7% compared to our prior guidance of 4% to 6% growth.
For net interest margin, we expect an improvement of about 12 to 15 basis points over our net interest margin of 3.53% for 2024, up from our prior guidance of a 10-basis-point improvement. Looking at loans and deposits, we expect full-year average loan growth to be in the mid- to high single digits and expect full-year average deposits to be up between 2% and 3%. Based on our current projections, we are projecting growth in noninterest income in the range of 2% to 3%, which is an increase from our prior guidance range of 1% to 2% growth, and we expect noninterest expense growth to be in the high single digits.
Regarding net charge-offs, we expect full-year 2025 to be similar to 2024 and in the range of 20 to 25 basis points of average loans. Regarding taxes, we currently expect the full year 2025 to be between 16% and 17%, up from our prior guidance of between 15% and 16%.
With that, I'll turn the call back over to Phil for questions.

Phillip Green

Thank you, Dan. We'll now open up the call for questions.

Question and Answer Session

Operator

(Operator Instructions) Jared Shaw, Barclays.

Jared Shaw

Maybe starting on the deposit side, you had good benefits from lower deposit pricing this quarter. How should we think about the deposit beta on interest-bearing deposits as we sort of move through your rate cut assumptions?

Dan Geddes

Jared, right now, our cumulative beta is about 47%, spot beta is around 50%-ish, if that helps. And as the rate cuts, if they occur, and depending on how quickly they go down, we should expect to see that hold up until as they get if they just continue to go further than what we have as our guidance.

Jared Shaw

Okay. All right. So that level of beta should be able to be sustainable as we see the extra two cuts?

Dan Geddes

Yes. I mean, we're going to look on a competitive basis, but we expect it to. And we kind of have tried to keep the same beta on the way down as we did on the way up.

Jared Shaw

Okay. Great. And then on the expenses, as we look at the guide for the full year, how should we think about sort of the trajectory through the year? And are there any additional tech initiatives, technology initiatives that are going to be coming on? Or how should we think about sort of the investment in technology with that backdrop?

Dan Geddes

I think just overall, you're going to see this quarter was somewhat impacted by the first quarter of '24 having that FDIC special assessment. So if you took that out, it would be in the high single digits, and that's kind of where I would kind of land for the next three quarters.

Phillip Green

Jared, with technology, there's not a big increase for anything specific technology costs have been going up really for everyone becoming a higher percentage of our noninterest expenses, and we track that over time. And I think we sort of peaked in 2023 as far as in our really large, what we call sort of a generational investment there. Numbers are still high, and they'll continue to be high, but they have come down from that level. And what we're hoping is that as we continue to move through some of these foundational things that we're doing for all kinds of things, whether not it's cybersecurity, whether or not it's legacy systems, whether it's growth initiatives that we'll be able to see that begin to move in, and I'm hopeful some in '26
But still, technology expenses are the new -- used to be healthcare, right? Healthcare expenses were out of control, not controllable. That's for some time now, it has been -- technology expense, that has been the largest -- the biggest growth area in our expense base and every place really.

Dan Geddes

Just to clarify, that beta is on interest-bearing deposits.

Jared Shaw

Yeah. Okay. And if I could just sneak the last one and just what sort of the conversations like with commercial customers over the last month or so with the economic backdrop. Are you seeing any of those customers waiting to defer any investments? Or what's the -- what's sort of the broader sentiment?

Phillip Green

I would say some are waiting. What they're really looking for in most cases is clarity, so they can make decisions. I think there'll be -- they're looking forward to getting some trade deals done, so they know what the tariffs will be and will know the impact on their cost structure and supply chain. I'll say one thing that was interesting to me, looking at the responses from our various regions from our various loan officers who talk to customers and then they provide synopsis of those conversations to us in preparations for these calls and other things is there was no apoplexy in the customer base about the tariff situation. I would say, the thing that I learned in reading, and this is admittedly about 30 days ago, was that a fairly high level of confidence from a lot of people on their ability to pass the cost along.
The thought to get pricing capacity with customers in the market. In other cases, there was and had some great anecdotal examples of where there was a sharing of whatever that cost was and working that out. And in other cases, there are buyers that are saying, no, it's too early, you're not going to pass that on. So they're fighting to have -- to not have those costs pass along to them, so they're not having to deal with it right now, although they know they will. So that's just to say there's a lot of different variations.
I don't think there's a lot of pessimism. I think there's some concern because they don't have clarity on what the answer is right now. But I think there's -- for us, seeing a higher degree of confidence that businesses will be able to move through it similar to what they did back with the tariffs (inaudible) But that's what I've heard from customers.

Operator

Casey Haire, Autonomous Research.

Casey Haire

A question on the loan growth outlook. If I heard you right, it sounds like the pipeline is up almost 30% quarter-to-quarter. You guys kept the loan growth guide in place, which implies there's not a lot of growth. Just wondering why we didn't see the loan growth go up given a strong pipeline.

Dan Geddes

I think what we're seeing is some headwind from CRE payoffs that's giving us just -- I think we're just looking at what we expect to get paid off on what we received in payoffs in the first quarter related to large multifamily projects that we -- that are just ready to move on to either be sold or refinanced some of them may be behind in terms of -- there was construction delays during the pandemic and then lease-up has been slower than anticipated. So we've had some several that have paid off through these, I would say, private credit has stepped in and provided some bridge financing.
So that's probably the biggest piece that keeps loan growth where we have it in terms of guidance because we are seeing because when I look at the weighted pipeline and it all starts, as Phil mentioned, with the calling efforts that are officers are making. And to me, that's us doing our jobs and getting out in front, 2/3 of those calls are to customers. And so that means that during this time of a little bit of uncertainty.
We're out and we're hearing from our customers, understanding their needs, how do we help them navigate through it. And so that's -- I think that's helped generate the top of the funnel, those new opportunities. And looking through the numbers, you see a lot of them are those large CRE opportunities, but we've lost our more than our -- more than what we typically experience. I think our loss to pricing and structure is up 65%. And what that tells me is we're maintaining our discipline in terms of structure and pricing as well.
And -- but with a large CRE that those are developers, and we'll see -- we'll continue to see opportunities in feel like we'll get our fair share of those throughout the year.

Casey Haire

Okay. Great. Can you quantify what the CRE payoffs were this quarter and how they've been trending relative to the past?

Dan Geddes

Let me -- I don't have that number off the top of my head. Let me try to get that number, and I'll get back to you.

Casey Haire

Okay. And just last one for me, switching to capital management. Just wondering -- you guys were active last year as share price is lower than where it is today. Just wondering some updated thoughts on share buyback appetite.

Phillip Green

We continue to be opportunistic. We are mainly focused on all the dividend, as we said many times. We did increase the dividend in this quarter, which is -- which was just three quarters from the previous increase. So we were a little more aggressive with the dividend. I think that will be one of the areas that we continue to focus on.

Operator

Catherine Mealor, KBW.

Catherine Mealor

Maybe just want to follow up back into the margin on just the bond book. Can you give us a little bit of color as to how you're thinking about the size of the bond book and then further reinvestment in your cash flows, especially as we have more cuts throughout the back half of the year?

Dan Geddes

I'd be happy to you, Catherine. So we're looking at either maturities or expected paydowns of just under $2 billion for the rest of the year. And that is going to roll off, and I'm just pulling up the exact numbers here, at around 3.40% yield. And we've already purchased -- we've increased our total for the year from about $2 billion in purchases to $4 billion. And I'm going to now our -- what we've purchased so far.
But we plan on -- I would just say for the rest of the year, we're going to look to reinvest -- let me get the exact numbers so I don't -- we have about $850 million yet to be purchased this year. So we'll reinvest some of that, but also build some of our liquidity and fund loan growth.

Catherine Mealor

Got it. Okay. So most of the purchases you're saying have mostly already happened. And so that should kind of trail off in the back half of the year.
And then this quarter since so much of it was -- got it, got it. And so because so much of that happened this quarter, what would you say the full impact of that was on bond yield? Like the whole quarter was a 3.63% bond yield. But I'm assuming that has likely moving higher when you get the full quarter's impact for it.

Dan Geddes

Yeah. Let me -- yeah, we had about 1.7 at about a 5.82% yield, and then our munis were about a 5.55% yield tax equivalent. And so it is going to drive some of that net interest margin growth. And as you kind of pull that forward through the second quarter, third quarter, and then in addition, we have some treasuries out of that $2 billion that's maturing a little over half is going to be in treasuries, of which $675 million is in May, if that helps.

Catherine Mealor

Yeah, no, it does. So it feels like the increase in your NII outlook is really more what's happening in the bond portfolio more than really anything else. Is that a fair?

Dan Geddes

Between that and the lower deposit costs. Those are the two bigger drivers. And then just some loan growth in there.

Catherine Mealor

Great. Okay. And maybe just one follow-up on the new loan growth pricing. What are you seeing there? I know it's gotten more competitive.
Just curious where new loan production is coming on today.

Dan Geddes

So the loan production, we're certainly seeing it in consumer, as we mentioned. We got 20% loan growth. They are kind of -- for the 11th consecutive quarter. We're seeing some better -- some slightly better usage in C&I this last month. It's not -- I wouldn't call it anything related to tariffs. It's just a little bit of a bump.
But we are seeing good volumes on C&I. And then you also saw some energy growth. And we'll be opportunistic. We're going to watch that percentage to loans in our energy book. But I would say it's primarily going to be driven by consumer and C&I.

Operator

Manan Gosalia, Morgan Stanley.

Manan Gosalia

Phil, you noted that many commercial clients are confident in their ability to pass on some of the higher costs to their customers. And I know that part of your loan growth success has also come on the consumer side in addition in addition to commercial. So how sensitive is the consumer client base in your footprint to inflation and the broader macroeconomic trends?

Phillip Green

I don't think any more than you'd see other places. I mean I think that we continue to see the consumer spending money. I think that the -- we continue to borrow money on the home equity side, our mortgage numbers have been good. I would say there's, on the margin, probably a little bit of slowing because there's some uncertainty, but it's interesting to me that some of the confidence numbers that I see published don't really seem to match up exactly with the spending numbers or what you're seeing in other areas. So I don't think we've seen a big slowdown in the consumer at this point.
I think the big reason is because people have jobs and jobs are growing. You're looking taxes rebound, the unemployment rates less, job growth was higher. So as long as they have jobs, I think they're going to continue to be reasonably stable.

Manan Gosalia

Got it. And then maybe on the NII outlook 5% to 7%. I think you noted four cuts are baked into that guide. So if you -- if we get fewer rate cuts this year, how are you thinking about that NII outlook from here? And also like what portion of the curve are you most sensitive to?
So if we get the belly of the curve, maybe staying where it is, but the short end of the growth moving down, does that change where you come in that in your NII range.

Dan Geddes

So in terms of the cuts, it's around $1.7 million, $1.8 million a month impact if -- and so that would be -- if it didn't happen, that would be to the positive on each cut. That might increase closer to $2 million if we get closer to $4 million by the end of the year. But if you think about it in that range. And then in terms and just thinking through the yield curve, on the short end, if we get fewer cuts there, the rates kind of stay elevated on the short end, I mean, that's going to help a big portion of our portfolio. On the long end, that's -- I would say it's going to be more impactful on the short end just in terms of our asset sensitivity is how I would answer that.

Operator

Peter Winter, D.A. Davidson.

Peter Winter

Phil, just given this increased uncertainty, are there any loan portfolios maybe you're watching more closely and/or maybe any portfolios that are causing you to tighten underwriting standards a little bit more?

Phillip Green

Peter, I don't think we're tightening anything as a result of uncertainty really. We tend to be middle of the fairway. We're a little bit more of a conservative underwriter. If you looked at, say, energy, for example, we changed the price deck recently. We've now got a five handle on that price deck. I think it starts with 58 for several years. I think we lowered our price deck on gas. I think it was 3.25 and stayed at 3 now.
So you could argue that's tightening things up, but that normally how that goes. But I really feel though that at where we stand is good. Our credit -- we had some really large improvements last quarter. A couple of years ago, we talked about a trailer manufacturer that had an inventory problem with an ERM system and had some serious problems, but they paid that off in its entirety. That was a $70 million problem credit.
We saw about this time, we sold an office building that we had foreclosed. We talked about one in the Houston area that we've taken on. It was that one that we did a deal right before COVID -- literally the month before COVID hit. We had it on the books for 12. We sold it for 14 change.
And then if you look at the energy portfolio, we were just talking about that recently. I think we're at our lowest level in history with regard to leverage for cash flow. I think our debt to EBITDAX is under 1 now. That number was -- what was it, 3%. The regulators didn't want to see you over that. I remember back from what it was back in 2016, and those periods are a lot higher. So that's historically low.
Our advance rates against collateral really are historically low. And if you look at, say, hedging, we require 50% of production be hedged anywhere between one and two years. And then I looked at problems because you are seeing problems and get solved, seeing problems come in. The problems that are coming in are just the same things that we've been seeing.
They might be a construction firm, might be an equipment dealer, it might be an office building. But they're just -- they're one-off deals that is -- to me, it's just banking. It's really not any way to me anything in particular that we're seeing. So at this point, no.

Peter Winter

Got it. That's helpful. And then just with the insurance commissions, which Dan, you talked about, I know there's a seasonal increase in the first quarter. But year-over-year was incredibly strong, also up 15%. I'm just wondering -- what's driving the growth year-over-year?
And how you may be thinking about the growth rate going forward?

Dan Geddes

We were really encouraged by that growth as well. One quarter doesn't make a trend, but it's sure could be the start of one. And we had a change where the insurance is now aligned with our commercial banking group. And we've seen an increase in the amount of commercial bankers who have gotten their insurance license. And so there's an increase in referral activity into our insurance agency.
And I just think there's better alignment. And it's -- and I asked the question, how much of this 15% increase is just due to increased policy rates because if you've gotten your homeowners insurance or car insurance or if you have a teenager driver, you get some prize with that. But it's -- we looked into it and 80% of that growth is net new business for us picking up market share. So it's an encouraging start. We'll hope it continues.
And I did want to -- Casey, I think you had that question on payoffs in the first quarter of 2025 there was over $430 million in payoffs and that compares to the first quarter last year when we just had a little over $150 million.

Operator

Michael Rose, Raymond James.

Michael Rose

Just wanted to get a better sense for what drove the reduction in problem loans this quarter. It looks like they were down about 5.5%. But you did build the reserve, I think, 2 basis points. So just trying to kind of reconcile that.

Phillip Green

Yeah. I think the -- if you look at problem loan payoffs and resolutions for the quarter and you look at, say, the deals that were 10 million and higher, okay? Well, two of them I talked about, one was that manufacturer of trailers and one of them was an office building we foreclosed. But then another was almost $100 million apartment project that was refinancing and paid off through a private credit facility on a bridge arrangement. So it's just people doing their business.
That would be what I would say would be the most interesting of that. We're always working problem credits to get them better and rehabilitated. So that's never going to change. And like I say, you did see new things coming on. But as I mentioned, they were really just what we've seen before. No one trend in particular.
Michael, that's really what we're seeing.

Dan Geddes

And we did build our allowance, and that's driven by -- we made some tweaks to really account for tariffs, risk of recession. And so that -- we just felt that was prudent to do.

Michael Rose

Great. Okay. Great. And then maybe just on the paydown assumptions. If we don't get 4 cuts, let's say we get 1 or 2. I'd assume that would be a positive to the loan growth outlook, but what's the sensitivity there in terms of your assumptions around paydowns?

Dan Geddes

Well, Mike, I think part of it is if we do get 4 cuts versus 2, I think 2 cuts likely means the economy is doing better. So I think you can make the assumption that we could see stronger loan growth if we get 2 cuts versus 4, just thinking through what the implications of 2 versus 4 means. So I think that's -- I think that's -- you might see if you -- if we do get 4 cuts, the flip side of that might be some of the CRE opportunities. All of a sudden, we may end up -- Those all of a sudden look a lot better than ones on our books. But also, we could see just if that's going to be kind of the expectation of rates going forward, you could see just some more activity in new CRE, but you probably wouldn't see fundings until '26 or '27 on this.

Michael Rose

Got it. Okay. Helpful. Maybe just one last one for me, just on the mortgage business. It looks like balances are up about 15% Q on Q, but some of the more recent industry mortgage numbers haven't been great.
I know it's a new business for you guys. Does the backdrop change any of the assumptions kind of in the intermediate term as it relates to the business? Or is it just you're growing from a small base and don't -- won't be subject to same headwinds that the larger, more established players will be?

Phillip Green

Yes. I think that some of it is a small base. But it really relates, in our case, the referrals that we never get through our system, either and a lot of it relates to internal referrals. And we've really been focused on that. and making sure that we're getting really good response from our bankers because our product is really -- I'd argue it's the best in the market.
If you look at pricing and experience, et cetera. So I think that we can just get people in, we can sell them. So I think that's partly what's happening. I think that there I am aware that there have been some slowdown very recently. We heard were one of the builders, I think, had some layoffs in some of their mortgage operation.
In fact, they were wondering if we were looking to hire people. And I thought that was interesting. But in our case, we're really just trying to put people in homes. It doesn't have a lot of refinance activity. And so it's been pretty stable as long as we get referrals from our bankers.
And of course, we're developing our network of realtors we're new in that business. I think we're going to be fine. I really believe that we can meet our goal, which is by the end of the year being at half of the day.

Dan Geddes

A reminder on those, 30% of those mortgage loans so far have been to brand new customers of the bank. So it's also been a nice lead-in product as over 0.5 million people are moving to Texas or last year. So it gives us this opportunity to deliver a great experience to somebody that may be new to one of our cities here in Texas.

Operator

Jon Arfstrom, RBC Capital Markets.

Jon Arfstrom

A few clean-up questions. What's the reason you guys are adding the 2 more cuts to your guidance? Is that -- is it yield curve driven? Or do you think the economy needs 4 cuts? It doesn't feel like it, but is it just the forward curve?

Dan Geddes

It's -- we're really trying to stay a little bit more conservative than the market or the curve. So I don't think we want to get out ahead of ourselves one way or the other. And that's kind of where we see it right now. I think your guess is probably as good as mine as to where we'll be in 60 days or 90 days.

Jon Arfstrom

Yes. Okay. Phil, maybe for you. You guys didn't change your loan growth guide, and I understand that. But do you feel better about the loan growth outlook now than maybe you did a month or 6 weeks ago when a lot of the tariff noise was higher.

Phillip Green

I don't feel a lot different, John. I think there's 2 things that are working. One is as long as there's uncertainty, businesses tend to stay away from things, okay? They don't tend to lean into uncertainty very hard. And I still think we have some of that.
We need to work through that. So that's a little bit on the negative side. But on the positive side, going back to what I pointed out in my comments, our people are just doing a great job of attacking the market. And our expansion efforts are adding more and more bankers in these communities that are working hard as well. So we've got a lot of stuff.
It's still a great market in Texas, right? And there's still a ton of market share that we don't have. As long as we do our job going through the work going through the steps of developing business. And as long as our value proposition is as good as what it is, I think I'm pretty optimistic about it.

Jon Arfstrom

Okay. And then maybe one more for you, Dan. You talked a little bit about insurance and mortgage, but anything else holding back your expectations on noninterest income growth? I know you bumped it up, but it feels like you're doing a little bit better than the guide.

Dan Geddes

I think, one is just volume of our -- driven through interchange or some service charges that I would expect maybe to the upside as we just continue to build new relationships across the state, whether that's commercial or consumer, I think you heard some industry-leading consumer growth most new relationships in the first quarter. So those would portend for some optimistic noninterest income growth. There's -- I think it's just doing what we do every day and going into new communities with our organic growth strategy, or taking care of our customers, listening to their needs. And so I just think it's just the blocking and tackling of what we do. And I will say we've added in the expansion over 90 relationship managers are calling officers into these 70 -- almost 70 locations that we've added.
That's -- going to make a difference.

Operator

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

Phillip Green

Thank you, everyone. We appreciate your continued interest, and we will be adjourned.

Operator

Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.