Ladies and gentlemen, thank you for standing by, and welcome to the Cullen/Frost Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session.

[Operator Instructions] I would now like to hand the conference over to your speaker for today, Director of Investor Relations, A.B. Mendez. Thank you. Please go ahead..

Thanks, Stephanie. 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 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 the forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, as amended.

Please see the last page of 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 Web site 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 morning everyone, and thanks for joining us. Today, I'll review the third quarter results of Cullen/Frost, and our Chief Financial Officer, Jerry Salinas, will also provide additional comments before we open it up for your questions.

In the third quarter, Cullen/Frost earned $109.8 million or $1.73 per diluted common share, compared with earning of $115.8 million or $1.78 a share reported in the same quarter of last year. Our return on average assets was 1.35% for the quarter compared to 1.49% in the third quarter of last year.

Average deposits in the third quarter were up to $26.4 billion compared with $26.2 billion in third quarter of last year. Average loans in the third quarter were $14.5 billion, up 5.8% from the third quarter of last year. We continue to see growth in our C&I, CRE, and consumer segments.

Our provision for loan losses was $8 million in the third quarter, compared to $6.4 million in the second quarter of 2019, and $2.7 million in the third quarter of 2018. Net charge-offs for the third quarter were $6.4 million compared with $15.3 million for the third quarter of last year.

Third quarter annualized net charge-offs were only 17 basis points of average loans. Nonperforming assets, $105 million at the end of the third quarter, compared to $76.4 million in the second quarter of 2019, and $86.4 million in the third quarter of last year.

The increase in the third quarter related to a single energy credit which had been included in problem energy loans since early 2016. Overall delinquencies or accruing loans at the end of the third quarter were $100 million or 69 basis points of period-end loans.

Those numbers remain well within our standards and comparable to what we have experienced in the past several years. Our overall credit quality remains good.

Total problem loans, which we define as risk grade 10 and higher were $487 million at the end of the third quarter, compared to $457 million in the second quarter of this year, and $504 million for the third quarter of last year.

Energy related problem loans declined to $87.2 million at the end of the third quarter compared to $93.6 million at the end of the second quarter, and $138.8 million in the third quarter of last year. Energy loans in general represented 10.5% of our portfolio at the end of the third quarter, well below our peak of more than 16% in 2015.

Our focus for commercial loans continues to be on consistent, balanced growth, including both the core component, which we define as lending relationships under $10 million in size, as well as larger relationships while maintaining our quality standards. New relationships increased 5% versus the third quarter a year ago.

The dollar amount of new loan commitments both during the third quarter dropped by 14% compared to the prior year, with decreases in C&I, public finance, and energy, but a slight increase in CRE commitments.

Similar to what we discussed last quarter, we're looking at lots of deals, but our booking ratio was down particularly in commercial real estate. In the current quarter, our booking ratio for CRE was 24% versus 32% in the prior year.

Overall, in the third quarter we saw our percentage of deals lost to structure increase from 56% to 61% versus a year ago. I was pleased to see our weighted current active loan pipeline in the third quarter was up by about 30% compared with the end of the second quarter due to higher levels of C&I opportunities, so we're seeing good activity.

And I'm expecting some good growth in the fourth quarter. In consumer banking, our value proposition and award-winning service and technology continue to attract customers. The fourth, fifth, and sixth of the 25 new financial centers planned over the next two years in Houston opened in the third quarter.

And we've already opened the seventh so far in the fourth quarter, with more to come before the end of this year. Overall, net new consumer customer growth for the third quarter was up by 48% compared with a year ago. So far this year, same-store sales as measured by account openings increased by 14%, compared to a year ago.

In the third quarter, just under 30% of our account openings came from our online channel, which includes our Frost Bank mobile app. This channel continues to grow. In fact, online account openings were 56% higher during the quarter compared to the previous year.

The consumer loan portfolio averaged $1.7 billion in the third quarter, increasing by 1.9% compared to the third quarter of last year. I continue to be extremely proud of our banking, insurance, and wealth advisory staff executing our strategy of organic growth consistent with our strong culture.

The interest rate environment presents challenges to our industry, but we continue to focus on the fundamentals and grown in our lines of business in line with our quality standards. To sum up, Frost has received the highest ranking in customer satisfaction in Texas in J.D. Power's U.S. Retail Banking Satisfaction Study for 10 years in a row.

We have received more Greenwich Excellence and Best Brand Awards for small business and middle market banking than any other bank nationwide for three consecutive years. And we've once again been named The Best Bank in Texas by Money Magazine.

You don't do that without great people dedicated to providing the kind of service that makes peoples' lives better. Now, I'll turn the call over to our Chief Financial Officer, Jerry Salinas, for some additional comments..

Thank you, Phil. I'll make a few comments about the Texas economy before providing some additional information about our financial performance for the quarter, and I'll close with our guidance for full-year 2019. Regarding the economy Texas unemployment remained at the historically low levels of 3.4% for the fifth month in a row in September.

Texas job growth continued at a healthy pace, but decelerated during the third quarter coming in at 3% in July, 1.8% in August and 0.9% in September, compared to the 2.3% growth seen in the first six months of the year. The Dallas Fed currently estimates Texas job growth at 2.1% for full-year 2019.

In terms of employment growth by industry, construction has been especially strong growing at 6% year-to-date, followed by manufacturing job growth at 2.7%. Energy Industry job growth is weakened and now stands at 1.6% year-to-date. However, the energy job growth was negative in the third quarter.

Looking at individual markets, Houston economic growth was slightly ahead of historical trends in the third quarter. The Fed Houston business cycle index slowed to a 3.9% growth rate in September, but remains above its historical average of 3.5%. Year-to-date, Houston employment is up 2% with third quarter growth slightly better at 2.2%.

The construction sector saw 7.3% job growth in the nine months through September, the strongest growth of any sector in the Houston economy. Houston's unemployment rate fell slightly to 3.6% in September.

The Dallas business cycle index expanded a 4.4% annual rate in the third quarter, while the Fort Worth business cycle index expanded at a 3.5% annual rate. In September, the unemployment rate fell to 3.1% in Dallas and 3.2% in Fort Worth. The Austin economy also remained in healthy in August.

The Austin business cycle index grew at a 7.8% annualized rate. Austin's unemployment rate stood at 2.7%. The information sector saw by far the fastest job creation and Austin in the year-to-date period with job growth of 23% over the prior year period.

Growth in the San Antonio economy accelerated In September, the San Antonio business cycle index expanded its fastest pace since 2016, growing at a 3.8% rate in September, well above its long-term trend of 2.9%. San Antonio's unemployment rate decreased slightly to 3% as of September.

The Permian Basin economy showed year-to-date job growth of 0.2% through September, with unemployment of 2.3% remaining well below the state's overall 3.4%. Looking at our net interest margin, our net interest margin percentage for the third quarter was 3.76%, down 9 basis points from the 3.85% reported last quarter.

The decrease primarily resulted from lower yield on loans and balances at the Fed partially offset by lower funding costs. The taxable equivalent loan yields to the third quarter were 5.16%, down 18 basis points from the second quarter.

Looking at our investment portfolio, the total investment portfolio averaged $13.4 billion during the third quarter, up about $122 million from the second quarter average, up $13.3 billion, the taxable equivalent yield on the investment portfolio with 3.43% in the third quarter, up one basis point from the second quarter.

Our municipal portfolio averaged about $8.2 billion during the third quarter flat with the second floor. During the third quarter, we purchased about 100 million and agency mortgage-backed securities, yielding 2.63% and about $260 million in municipal securities with a TE yield at 3.31%.

The municipal portfolio had a taxable equivalent yield for the third quarter at 4.08% up two basis points from the previous quarter. At the end of the third quarter about two-thirds of the municipal portfolio was PSF ensure. The duration of the investment portfolio at the end of the quarter was 4.3 years flat with the previous quarter.

Looking at our funding sources, the cost of total deposits for the third quarter was 39 basis points, down 2 basis points from the second quarter.

The cost of combined Fed Funds purchased and repurchase agreements, which consists primarily of customer repose decrease 16 basis points to 1.53% for the third quarter from 1.69% in the sec -- in the previous quarter. Those balances averaged about 1.29 billion during the third quarter, up about 49 million from the previous quarter.

Moving to non-interest expenses, total non-interest expense for the quarter increased approximately 15.2 million or 7.8% compared to the third quarter last year.

Excluding the impact of the Houston expansion and the increased operating cost associated with our headquarters moving downtown San Antonio, non-interest expense growth would have been approximately 4.3%. Regarding the estimates for full-year 2019 reported earnings, we currently believe that the mean of analyst estimates of $6.81 is reasonable.

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

Thanks, Jerry. Now I will open up the call to questions..

[Operator Instructions] Our first question comes from the line of Brady Gailey with KBW..

Hey, good morning, guys..

Hey, Brady..

Good morning..

Maybe we can just start with loan growth.

You are losing more CRE deals, it feels like the structure, where are these deals going, are they going to some of your peer banks, or are they going to non-bank lenders?.

I think there is a combination of all those, you know, will, depending on the deal it could be -- I think I mentioned this last time, it was, we have seen it going to small banks. In smaller communities, we have seen it go to large banks, we have seen it go to private equity, there is still a lot of competition with CRE..

Okay. And it's great to hear you a little more upbeat on loan growth in the fourth quarter, Phil.

What is driving that optimism? I think I had heard you say something about C&I, what's driving the more positive tone there?.

Yes. It's hard to say. We were little disappointed with the C&I growth that we had in the third quarter in terms of book commitments, and it -- as I talk to our folks around, it seems like there was a little bit of a pause with -- on the C&I side, on the customer side, on the prospect side, and maybe that was just an anomaly in timing.

It looks like it's picked up more strongly in the fourth quarter. So, as we look at our weighted pipeline, it's increased, and I am not sure if there's anything I can really specifically relate it to, but it's definitely better than it was in the third quarter..

All right. And then finally from me one for Jerry, I know last quarter, you talked about a full-year net interest margin of 375 for this year. It seems like you are running about 380 on average for the first three quarters.

Now, that we have just got the last rate cut at, what's your updated thoughts on kind of how the NIM reacts from here?.

Brady, I think the guidance I gave you right at was 375 for the full-year, and our assumption last quarter did include rate cuts in July and October, and at this point, we are still comfortable with that 375 kind of a full-year NIM is kind of what we are thinking..

All right, great. Thanks, guys..

Thank you..

Your next question comes from the line of Rahul Patil with Evercore ISI..

Thank you.

Just going back to the NIM question, just wondering looking beyond the fourth quarter, assuming no additional cuts following yesterday's cut, do you expect pressure on asset yields, given competitive pressures to more than offset any benefit that you are seeing on the downward pricing of deposits, or do you anticipate the NIM to kind of inflate at some point in 2020 as you see the benefit from deposit pricing actions?.

I think our -- obviously, there is a going be pressure on the NIM, and a lot of it will be dependent on what happens to any further rate cuts, right? So, at this point, I think what we are projecting is continued pressure on the NIM. From an investment portfolio standpoint, the yields aren't what they used to be.

So, we are struggling a little bit there. We are talking about potentially adding some duration there which will help the portfolio, but from a deposit standpoint, we kind of raised deposits as we were going up, and we've kind of done the same thing coming down.

We are still very competitive on our deposit pricing, but our deposit betas, I think we have been -- let me see here, on total deposits, our beta was about 25% and related to the October cut. So, there's definitely going to be pressure on the NIM.

I can't sit here and say that given what's happening with rates, given what's happening in the loan portfolio, I think Phil has said before that we are going to be more competitive on pricing. There's no reason for us to lose a deal with a long-term relationship.

We're five or 10 basis points, so we're going to be more competitive with pricing even in this lower rate environment. So at this point what I'm seeing if I look forward is still continued pressure and kind of a downward trend on that NIM into 2020..

Got it. And then the deposit growth was pretty strong this quarter, particularly on an end-of-period basis.

Was there anything seasonal that was sort of unique to this quarter that you expect to flow out in fourth quarter?.

Historically for us the third and the fourth quarter are the strongest quarters. It was good to see the sort of growth that we had, on even on average basis I think lean quarter we were up annualized 5.5%.

We had seen some pressures we talked about on the DDA, especially early part of the year, after the fed raised rates in December there was quite a move out, is I think CFOs and treasurers that the interest rates at that point were so high that was an opportunity cost basically to just keep it in their checking account.

And so we started seeing some outflows in those commercial demand deposit accounts. We've started to see some settling in there. We're doing some things on our end to be more competitive. And yes, so I think that it was good to see. I don't think there's anything unusual that caught our attention.

We've had good growth in the CD categories and the MMA obviously, but it was good to see the demand deposits growing also..

Got it.

And just one last, could you quantify the distressed energy loan exposure which is sort of the residuals from the previous energy downturn in 2016 that you are still kind of working through right now versus any new distressed energy credits that just kind of materialized over the recent weeks?.

Okay, well on the -- let me see what I can do for you. Hang on a second. See, as we mentioned, the increase in non-performers was related to an energy credit that had been a part of problem loans for a good while. Let's see. You look at energy loans that we classify as problems, at the end of the third quarter it was about $87 million in round numbers.

And a bit majority, vast majority of that is two credits that are non-performers, one is a $34 million credit one is $33 million. We've been living with those, as we said, moving through the snake for a long time, and they're just trying to generate liquidity.

And it's a tougher environment, as you all know, with less capital moving into those markets for people who want to sell anything and need to sell anything you've got discount rates on the reserves, used to be DB it used to be 15%, 20%, sometimes 25%. So that's reduced collateral values and liquidation values.

So I mean that's really what's happened there. As far as our outlook there, I feel good about the portfolio. It doesn't mean we don't have any risk. If you've got somebody who is intending to sell assets, that's what I worry about.

We've got a credit that's $50 million, it's not a problem loan but I know they're looking to sell assets, and I'm not very optimistic about the environment to do that. So we'll just have to see how that works out. But that's, other than that one, as far as what we've got, we I think feel good about it. We got about $1.5 billion outstanding in energy.

The weighted average risk rate of that portfolio is 6.13 compared to the overall portfolio of 6.44. So, aside from a few larger credits that were either been working through snake or that I've got my eye on out the snake, I think I feel really good about the portfolio..

Got it. Thank you..

Your next question is from the line of Jennifer Demba with SunTrust..

Thank you. Good morning..

Good morning..

On the two energy credits you just mentioned, Phil, $34 million and $33 million on NPL, what kind of reserve is on those loans and what kind of loss are you thinking could happen?.

Yes, I think that reserve, specific reserve wise, we have $10 million roughly associated with each of those credits, so $20 million total between the two..

Okay..

And Jennifer just, it just depends on how things work out until or what it will ultimately be, we don't know. It's kind of a fluid situation, I think in the markets with regard to what the value of these assets are particularly if it's gas related or if it's outside of the Permian, it's still that same situation..

On expenses, you just moved into the new headquarters few months ago, still going through the Houston expansion, I mean should we expect a bit more expense growth next year in 2020 than we're seeing this year, this year, it's been around 6% year-to-date?.

Yes, I think that's a logical question. I think that, if I was putting together a model, what I would say is, yes, we've only been in this building since June of this year. So those additional costs are, it's only going to be partial year of this year, and it'll be a full impact for next year. So that obviously will have an impact on 2020 growth.

And then as far as the Houston expansion is concerned, we talked about what our plan was originally, which we said was about one a month for 25 months. We're running a little bit behind schedule this year.

I think we've opened six through the end of September, the seventh just got open in October, so, running a little bit behind schedule on the opening up of those locations. I think from the hiring standpoint, everything I hear is that we're doing pretty well. And so, hiring has been better than expected.

And so, those are probably going just maybe just a little bit slower on the hiring but I think still really keeping pace. The last numbers, I looked at versus pro forma, we were slightly better on expenses, but not a whole lot.

I mean, the numbers just aren't, for the first couple of quarters weren't that significant, but if you remember, we talked about a $0.19 impact on 2019 and we talked a little bit about the profitability model of those branches.

Well, just as a reminder, what we had done is we went back and looked at on average, how our new branches had performed, I think over a 10 year period, I think we looked like it, 40 branches, if I remember correctly, and what we said on average was that those locations tended to break even about month 27.

And so, really for the $0.19 guidance, a big chunk of that was really expense related, right, because those locations have to open.

You've got to get the deposit, you got to get the loans, but the call start really pretty quickly, and so, the way I would look at it is, we were planning to open 12 that was going to cost us $0.19 and they don't break even, until the month 27 and if 2020 has kind of that same sort of concept, my starting point would be kind of like a $0.19 impact from the new locations opened in 2020, but still a drag from the locations that we opened in 2019.

So, yes, your thought process there is correct that there is going to be a bigger drag on 2020 then there was on 2019..

Thank you..

Your next question is from the line of Brett Rabatin with Piper Jaffray..

Hey guys, good morning..

Hey, Brett. Good morning..

Two housekeeping issues or items, one, would you happen to have interest expense for the quarter and then the ending period securities portfolio?.

Sure. What was your first question? I'm sorry..

Interest expense, you guys have the total net interest income which you know break out the interest expense..

Okay, sure yes, just real quick here.

You wanted it for the quarter?.

Right..

$33.3 million..

Okay.

And then ending period securities portfolio size?.

Grab my 10-Q that is probably the best place for me to go..

Okay..

All right and we will be filing that later today. So, any securities we had a $1.021 billion and held to maturity and 12,420 in available for sale, so 13,440..

Okay, great.

And then just want to go back to expenses and I guess one was how much was incentive comp related to the third quarter increase personnel?.

Take a look there. Really the incentive comp year-over-year, I'm not seeing a real big impact.

Obviously there are some from - could be some from a higher commissions on the insurance agency side is their commissions were up compared to the third -- yes, there are some information, well, there might be some additional commission income that the brokers might earn, but other than that, really the increases have to do primarily with our typical merit and market increases promotions that we give, but also the increase in head counts, it's also impacted by the Houston expansion..

Okay.

And then just thinking about going back to expenses, just thinking about the bigger picture, you've got the branch build out, is there any reason to think that core expense growth in 2020 would be different than taking on 4 or 4.5 range now?.

I think it might be just because I haven't seen detailed numbers my gut tells me with what we're spending on additional cost in technology particularly cybersecurity and then also we've got some technical debt we've been dealing with and that I mentioned in last quarter, I think it was, we had a number of positions that we needed to be filling in the IT and operations sides, we are making some headway on that and we need to, so technology is always something that's going to be a big expense category to every business.

It is stars too. And so, I think that's going to be a little bit outsize for a while. I don't know, that in and of itself is going to drive the number, materially, but it'll drive it some. And then I just think also my gut telling me that just cost for labor is getting tougher, not just for us, but for everyone.

And just what you have to pay to bring in good people, keep good people is you just have to stay up on top of that. Stay on top of the benefits you're providing. So, just as we run the business, those are things I know we're going to be dealing with and we can't be asleep switch on it. So that's why I tend to think you may be a little bit higher..

Yeah, I think that's right, Phil. And you mentioned during the previous call that our - the open positions that we had in the technology area and what our focus was. So as we hire those people in the third and fourth quarter, they'll only be in our run rate for part of the year. So that's going to full impact on 2020..

Okay.

And then maybe just one last one, any thoughts on Cecil [ph] and have you guys -- can you give us some of your range if you're not ready to give a more definitive number?.

Yes, we're going to be a disclosing in our 10-Q that based on our September parallel run, we currently expect that the combined impact on the related to loans and unfunded commitments is about 15% to 25% higher than our allowance at the end of September..

Okay, great. Appreciate all the color..

Yes. And of course, all of the impact on Cecil, we need to say a lot of it's going to be dependent on what sort of economic forecast we have at the end of the year. What our loan portfolio looks like and any refinements that we have made to the credit models by them. But we do have a disclosure in there.

I think the team has done a really good job moving us forward..

Okay, great. Thanks, guys..

Your next question comes from the line of Peter Winter with Wedbush Securities..

Good morning..

Good morning..

Good morning..

Jerry, I heard your comments on the margin initially into 2020, that there'll be some pressure, I guess, as you guys compete on a loan pricing, but just looking out longer-term for the margin, assuming the fed is on holds just directionally.

What do you think the margin does because I know there's a lot of puts and takes? I'm not looking for specific guidance?.

I think that certainly the positives if you will are going to be loan growth. If we've got a long growth kind of consistent with where we've been and Phil mentioned he felt better about our outlook for the fourth quarter. So, obviously long growth is going to have a pause.

We'll have a positive impact there as far as our net interest income is concerned, I talk a little bit about on the investment portfolio, unfortunately today there is just not a lot of opportunities and so what we're talking about now is potentially looking at adding duration, so decisions that we make there could potentially have a positive impact on our net interest margin percentage.

From a deposit sort of standpoint, I think I told you the betas that we've used; I think we've been pretty aggressive on our deposit pricing. We were aggressive going up and we're aggressive coming down, but we're going to continue to keep our eye on what our competitors are doing.

Even though we have a loan to deposit ratio from a deposit standpoint as well enough to know that, we're concerned about the relationships, so we want to make sure that we're treating our customers fairly. If we see any weaknesses there, we'll react accordingly.

So, I think that to say right now that there'd be upward, that I could push you with an upward guidance. I think that's tough right now. I think that where we are right now is we can't make miracles happen. So right now at best I think we could do is kind of stay flattish, but that's really a challenge that we have a movement forward..

Okay. And then you confirmed the full-year guidance at 681 and you beat guidance a little bit in the third quarter. So it does imply a pretty significant drop in earnings from 3Q to 4Q. I'm just wondering where the pressure points are coming. I mean, you reconfirm margin and you're looking for a little bit better loan growth..

Right, I think the thing that I would talk about is the guidance that I gave on full-year expenses during the last call, I think we said, net of the Houston expansion and net of the additional operating costs associated with our move downtown, we said would be in the 4% and 4.5% range. I still feel comfortable there.

So obviously what that infers that there is a ramp up in expenses in the fourth quarter. And if you go back and just look historically, we do have a higher salaries expense in the fourth quarter typically. A lot of the incentive plans are kind of trued up there based on performance.

And if I'm looking here just at third quarter to fourth quarter of last year, I'm seeing the salaries by themselves went up from gosh -- little North of $3 million, so we'll expect that there. And then, now we're also adding the people related to the Houston expansion Phil mentioned also that we're doing hiring in the technology area.

And so, those people that came in that third quarter would've come in either late in the third quarter or starting in the fourth quarter. So we'll see some additional pressures there.

I think that's probably the thing that kind of moves the needle if you will be expenses in that fourth quarter that are -- like I said, that were impacted on a reported basis impacted by the Houston expansion and also the tow..

And then just my last question, just going back to Jennifer's question about the expense growth for next year, I mean in the comments that core expense growth could move up a little bit.

I mean, is it unreasonable to assume like 8% type growth -- expense growth next year?.

Is that -- help me -- are you talking about core, reported?.

Report, it don't just be….

Yes, I think it could be north of that..

Got it. Could you give….

And the thing -- go ahead..

Could you give a range?.

We wouldn't give any sorts -- we typically don't give any guidance really about ranges, and if we did that anyway that conversation wouldn't happen until our fourth quarter call..

Got it..

But I will say as far as the fourth quarter expenses, the third quarter was also lied on advertising costs. So those can really swing the needle and they have during other quarters and some of the projections that I've seen have us increasing those advertising and promotions pretty significantly in the fourth quarter compared to that third..

Thanks, Jerry..

Thanks..

Your next question comes from the line of Ken Zerbe with Morgan Stanley..

Great. Thanks. Good morning..

Good morning..

I guess just - I had a question. You were talking about losing deals to our -- deals lost to structure.

Just to clarify, I believe that is only related to Siri [ph], but correct me if I'm wrong, but the question is also like, do you envision that continuing? Are you still seeing that in October? And is it having a material impact? Is that could have been one of the reasons for the slower loan growth and 3Q? Thanks..

Well, are lost structure comment relates to the entire portfolio. I don't have in front of me what the real-estate number is broken out. But I can just tell you, it will be higher on real-estate because if you look at the mountain, this is the year-to-date number for example, which is what I mainly focus on in this what we call the book-to-book area.

But, real-estate loans, we looked at 34% more deals. So we look at a little over 6 billion as up 34% from the quarter, already full-year, a year ago, a year-to-date third quarter, and we booked 13 million more only 1% more or 1,458 billion.

So I mean, I think that's where you really see it, and when I said earlier, I think I mentioned it was a quarterly number on that success rate going from 2032 to 24, that's a year-to-date number, but that's really what where you see that.

Actually our C&I, I do have a year-to-date number on our success rate for that, it's only down 1% so C&I our book-to-book ratio was 41% last year year-to-date and then it's 40% this year, so you don't see it is badly in the C&I, it's more relationship-based on the factor you increase in there some, but I think it's really mainly related to commercial, real-estate has a lot to do with guarantees, has a lot to do with advance rates, burn downs, you know, just everything..

Okay.

Did you see that trend slowing in fourth quarter because it sound like you are a little more optimistic around loan growth in Fort Worth?.

Yes, I'm optimistic there because we've seen our pipeline increase. Our weighted pipeline and in the C&I is what's driving a lot of that way to pipeline there. So that's really caused for most of my optimism.

Now do I expect it to get better or worse? Probably worse, it's pretty bad now but if things slow you might see people rain in a little bit be less aggressive, but right now, I don't expect to be any better. I think as the yield curve gets -- there's less and less opportunity. There are people looking for spread..

Got it. Okay, thank you..

Thank you..

Stephanie, do we have you?.

Our next question comes from the line of Jon Arfstrom with RBC Capital Markets..

Hi, good morning, guys..

Good morning..

Hi, just a couple of follow-ups maybe just economic health, we can follow-up on what Ken was asking about, but the job growth numbers that you guys talked about, maybe it's just obvious, maybe it's energy, but can you maybe put a finger on or give us an idea of what you think is driving that slower job growth?.

I think some of it is so much energy, but I think one thing that the people that we've talked to have pointed out to us consistently is the tighter it gets, as far as the lower the unemployment rate gets, the bigger impact it's got on the ability to grow jobs.

And so, I think that's also a factor but you are seeing some reduction related to energy employment. So I think those 2 things, those are the things that I would put my finger on..

Okay. Bigger picture, you set aside energy.

You're just -- you don't feel like you're seeing slowly in Texas at all?.

Not really in the energy business, it's slowing a bit and it's not bad but it's slowing and is still strong in the Permian the numbers if you look at the hotel rates out there have gone down, which is something to look at I think they had the highest rates of the state, but still year-over-year growth and employment year-over-year growth and the economic number sales tax and all those kind of things are still positive.

So, but it is slower than it was and it was quite hot before maybe if it's only red hot now. But that's what we're seeing..

Okay. Net new customer growth 48% year-over-year, that's one of the -- and I'm assuming that's consumer, that's just a -- it's a big number..

It is..

And then consumer loans up about 2% year-over-year.

Curious on the 48% and what's driving that and do you think at some point that leads to faster consumer growth for the company overall?.

Excuse me, consumer loan growth, is that what you are really asking?.

Yes..

We are measuring this on consumer deposit relationships.

So yes, I think it's reasonable to assume that I think what one of the things you're seeing in the consumer side is, if you look at the unsecured PLC, part of the business, it's been slowing, we've been more careful there over the last few quarters and so that's, that sort of our downward pressure but we still seeing good growth in commercial, excuse me, consumer real estate and other kinds of real estate products.

So I think once we get some rationalization of the growth rate on the PLC, you'll see some increase in the growth rate on the consumer loan side, as far as what's driving it. It's just, I mean, it sounds corny, but we got a great value proposition tremendous brand.

I mean, we've been spending money to get that out and to make that more well-known our technology is good. I mean, I think good look at some of these awards that we get, and they're a composite of different things and can't mention, I'm not sure I can mention which ones are alone, but it's not unusual for us.

Our mobile apps end up number one in the category, so and we're getting better and we're pretty good and getting better at how we are interacting, engaging the prospects. If you look at broadcast advertising is probably, I don't know, maybe I'm going to guess this less than 15% of what we do.

It's really more engaging the prospect at the proper time on the web. And that's helping us and the people are doing their research online. And of course you can look at the awards and stuff we get, we look pretty good in that regard. So and then the service level that you get is great here. It's just, it's just great.

And that comes out in word of mouth. So you get a lot of people that are willing to refer you, so I mean, I think it's a really important number to look at it we had, like I say it's the third quarter last year we had net new customers that's new and net close.

We had net new customers, not accounts but customers 2,756 this quarter, we have 4,065, so we went over the 4,000 number first time, I remember that but anyway I'm just really feel good about it and it's not any one thing it's a result of a lot of hard work over longtime..

Okay, good.

And then just one more last follow-up on the energy credits with the new NPO any guess on a resolution timeline on that and then the other two that you identified I think you're saying they're in there and you're citing them for us but there isn't anything new on those two because they've been around for a while, is it fair?.

The two non-performers, one of them they are a non-performer for a long time, I don't really know of anything specific going on there. I mean, they're still trying to work some liquidity but that's a tough game right now. The one that came in new is they -- the bar were just change their strategy in terms of providing capital, that type of thing.

There were some changes there. And that really caused that when to go non-performer and that is in the early stages of working that out. I'm not looking for a quick growth resolution there. You never know, but I don't look for one.

I think one thing we've learned about the large energy credits in this cycle is this, you're not in the Permian Basin with oil, it's hard to get, it's hard to work out of a large problem just takes time. The other one that I mentioned, it's not a problem, but it's just, it's just a credit that I'm aware of wants to create some liquidity.

I know that's hard to do. And so, they're good operators, they've got, they support the credit with certain amount of guarantees, they've got other assets. I mean all that, but I mean it is I'm just being realistic, it's a tough market, and it's about $50 million deal to us.

But the point, I guess there is that other than that, yeah, I'm really not aware of anything that concerns me at all. And I think we showed that the problem energy loans we are actually down, so I'd love to get rid of these non-performers, but just take some time..

Yes. Okay. All right, thanks for the help. Appreciate it..

You bet..

Your next question comes from the line of Steven Alexopoulos with JP Morgan..

Hi, everybody..

Hi, Steven….

Hi. I wanted to follow up on the commentary regarding the pace of branch openings in Houston coming in at a slower pace and at least originally outlined.

How many branches do you now think you'll have open by the end of this year and how many will do you think of open by the end of 2020?.

I think that our current projection is 10 and 19 and I think, we're still -- shootings are trying to get all 25 open through 2020..

Oh, okay.

So you plan to accelerate the pace of it?.

Right, right, exactly, and some of it, those openings are a somewhat not completely on under our control. If we're working on a leased location, we've got to work with landlords and such and lease documents, go back and forth and then also, getting, building permits in Houston could also affect the timing of that.

So, a little bit slower this year, but really are working to catch up by the end of next year..

Do you think it'll be relatively even through the year or should we expect most of these to come on pretty late in 2020?.

I think that in my -- I don't have any information in front of me. My recollection was that it was more skewed towards the latter part of the year. But again, I think a lot of it's just dependent on what we can accomplish. I think the people like I said are being hired.

I think we feel good about that, in some places we're booking, we're able to book loans even before the location to open right if those, if the lenders that we hire, the relationship managers that we hire have relationships, but I think right now it's kind of lumpy and really hard to predict and but our overall goal is to try to get 10 units last number that I saw that's obviously a little bit easy to gauge 19 is 20s a little bit more difficult for us, because given some of what we've mentioned..

And then, looking at the branches that you've opened already, is the $1.5 million cumulative loss per branch still a good assumption that you guys originally outlined until breakeven?.

I'd say probably, I mean, I don't really know. I don't have that in front of me now, but I mean that was a fairly representative number for 40 branches that we had done. I don't think anything we've done is such that it's dramatically different from that..

Okay..

So I really surprisingly, I don't know, but I don't know what's worse even..

And then finally, I'm just looking at some of the expense details, why are the benefits costs running up so much? I think for like 14% year-over-year and do you see those continuing in a double digit pace? Any color would be helpful. Thanks..

Sure. On the benefits side, yes, there's obviously some benefits that are going to get impacted just by the numbers of employees. in the case of the third quarter, we really saw an increase, had been seeing an increase through really most of 2019 related to our medical claims. So we're self-insured.

So, there was a pretty good increase in medical reserve contributions if you will in the third quarter. So hopefully, we're doing some things there to manage that, but it content to be lumpy. We obviously, like I said, our self-insured, we do have a stop loss limit, but we can swing quite a bit depending on what's happening there.

we also one of the negatives I guess is related to our retirement plan. I think if you compare the third quarter this year to the third quarter last year, we're up about 600,000. And so, that's really just based on what happened last year, as it relates to return on plant assets.

And even though I think those have performed pretty well the discount rate, if I remember correctly, went down. And so our assumptions related to returns and what the actual discount rate is affecting that.

So some of the numbers I've seen kind of don't see that as having a big impact 20 versus 19 related to the pension plans, but 18 versus 19, they did. The other things are really primarily as you would expect it's going to be things like payroll taxes, 401k contributions. Those are going to be more normalized with employee counts.

So I think that there are some unusual things, the medical I think is lumpier in the third quarter than it would otherwise be. And then compare to the third quarter last year the benefit, the retirement plan expense is higher this year than last.

We really won't know that expense is for '20 until the discount rate gets determined at the end of the year. But from what I have seen, we should be pretty -- in pretty good shape from keeping them relatively flat..

Okay. Thanks for taking my questions..

Sure..

And your next question comes from Ebrahim Poonawala with Bank of America..

Good morning..

Hey Ebrahim..

Jerry, just following up on sort of there has been a bunch of questions around expense and expense growth, to make sure is there anything in your reported numbers from the first three quarters that we should be excluding, or are the reported numbers a good base in terms of how we think about expense growth next year?.

Gosh. First three quarters, I think that's a tough one. I don't think that off the top of my head as I think about it, I don't really recall anything significant that we had. We may have had some move cost that were associated with our move here in downtown San Antonio, and then we also have a move in our Corpus location.

Those costs are in this number –- in this year's numbers, but they are not what I would consider material to run rate if you will. Ebrahim, nothing comes to mind that I could point out to you that that was unusual during the quarters..

That's helpful.

And just I think if you take a step back more, I guess philosophically or strategically, if you can talk about just -- I appreciate you making investments with a longer term view, but Phil if you can talk about just outlook for operating leverage, how do you think about that in terms of where want to manage the bank from an efficiency standpoint because it seems like we should see that drift higher over the course of the next year given your investment plans? So would love to get thoughts around that in terms of how you and the management team thinks about it..

We think about it a lot. We recognize and I am going back to years when the Senate bill that changed the cut line on going to that significant financial institution from $50 million I think it went from down to $250 or so.

I mean there are lot of discussion about will that be a lot of acquisition activity that happens, and we –- you heard us talk about it, and our position was that who we didn't want to doing a roll of strategy in that case, we really sit investing with our balance sheet like expensive roll of acquisitions.

We are going to invest in operating leverage that was improving at that time because higher interest rates more consistent loan growth. And so, we are pretty clear that was our view and our plan and that's what we have been doing. I have realized that it is cost has some money.

And we could ostensibly making more money today if we were not investing in Houston like we are in 2019 and like we are going to do in 2020. We know what the impact of that is. We have been pretty open about what it was this year $0.19.

I think I heard Jerry say it's going to be more like twice that next year or in that range in terms of just the [indiscernible] go through. So we know it's increasing. And there's nothing I can do about it because that's what it takes to execute a strategy like that. I am absolutely confident it's going to be positive for the long term.

And, that's the view we have. And I wish it was different. What I wish if we had higher interest rates instead of rates going down, I could still be able to access -- I would be able to invest some excess to operating leverage, but we just don't have that right now.

But I don't think that changing that strategy just because of some movements in short-term rates is really a thing to do. I have said before, we are not planting corn, we are planting trees. And those trees are going to grow.

And they are going to really be a benefit to us in the long term, and I am also really proud of how we are doing in the Houston market. If you look at some of our better volumes, we are -- there in the Houston market. And it's not just related to branches because those things are pretty new.

But a lot of it's around I think the recognition and buzz that we are creating in that market doing what we are doing. So, that's we are thinking about. I don't have a decimal point oriented number on what we will go to on efficiency ratio or that kind of thing. It's more of a strategic overall view of how we want the company to move forward.

In the meantime, we are doing the best we can on expenses that we do incur today. We have always been careful on expenses. And I think we have shown over time that that's where we have been. You got to recognize and I know you do that we have a hired service model. So we are not going have the lowest efficiency ratio on the block.

We are going to be very profitable. And we are going to have good growth over time. And that's really what we are focused on doing. So I am sorry that it has cost us some money to expand, but I really believe it's the right thing for us to do, and we think paving the way for good returns going forward..

Thank for that. And I guess there is no reason to be sorry. It makes complete sense. But thanks for going through that. And just one follow-up, Jerry, in terms of the margin guidance, so, it sounds like -- and I am not sure if you actually gave that number, but sounds like we will get another 10 basis points drop in the fourth quarter.

Is that reasonable?.

I think that we are going to stick with our guidance, Ebrahim. We think full year will be 375. I think that obviously we will see a drop there. You are right. We saw a 9 basis point drop between second and third. Again, it will be dependent on what happens on some of the loan pricing.

But I wouldn't be surprised if that drop was somewhat higher than that on that net interest mark -- on the percentage..

On the percentage? Okay, got it..

Yes..

Okay, got it. Thanks for taking my questions..

Sure, you bet..

There are no additional questions at this time. I will turn it back over to management for closing remarks..

Well, that is the end of our call. We appreciate your support. Thanks for joining us. We are adjourned..

Thank you. This concludes today's conference. You may now disconnect..