Cullen/Frost Bankers, Inc.

Ladies and gentlemen, thank you for standing by and welcome to Call-In Plus Q3 Earnings Results. At this time, all participants are in a listen-only mode. After this speaker's presentation, there will be a question and answer session. To ask a question, you will need to press star one on your telephone. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker for today. We call in Trust Director, Investor Relations, Mr. A.B. Mendez. Please go ahead, sir.

Thanks, Jerome. This afternoon'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 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 210-5234. At this time, I'll turn the call over to Phil.

Thank you, A.B. Good afternoon, everyone, and thanks for joining us. Today, I'll review third quarter 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 third quarter, Cullen Frost earned $95.1 million, or $1.50 per share, compared with earnings of $109.8 million, or $1.73 per share, reported in the same quarter of last year, and $93.1 million, or $1.47 per share, in the second quarter of this year. Overall, average loans in the third quarter were $18.1 billion, up by 25% from $14.5 billion in the third quarter of last year, which included the impact from PPP loans. However, even excluding this impact, loans managed a 3.3% increase from a year earlier. Average deposits in the third quarter were $32.9 billion, also up by 25% from the $26.4 billion in the third quarter of last year and the highest quarterly average deposits in our history. We understand that the banking industry has seen broad increases in deposit levels as authorities implemented comprehensive fiscal and monetary responses to the pandemic. However, it's also been our experience that Frost has historically been a safe place in times of uncertainty, and I believe this will always be a part of our growth in challenging times. For the first time, our total assets have surpassed $40 billion, up 41% in the last five years, and all of that representing organic growth. And speaking of organic growth, I'll discuss our Houston expansion in more detail later in the call, but I'd like to point out that we were pleased to see our deposit market share in Houston has now moved up to number six, up from 10th place a year ago. Even with the challenging environment, We and others in our industry have seen pressure on profitability. Our return on assets in the third quarter was just below 1% at 0.96, and we were pleased to announce yesterday the action of our board to increase our dividend for the 26th consecutive year. We saw a reduction in credit cost expense to $20.3 million in the third quarter, down from $32 million in the second quarter of 2020. This compared with $8 million in the third quarter of last year. Net charge-offs for the third quarter were $10.2 million, down sharply from the $41 million in the second quarter, and included no energy charge-offs. Annualized net charge-offs for the third quarter were 22 basis points of average loans. Non-performing assets were $96.4 million at the end of the third quarter, compared to $85.2 million at the end of the second quarter, and $105 million at the end of the third quarter last year. The third quarter increase resulted primarily from the addition of an energy service company. Overall delinquencies for accruing loans at the end of the third quarter were $133 million, or 73 basis points of period-end loans. Those numbers remain within our standards and comparable to what we've experienced in the past several years. Regarding payment deferrals, in total, we granted 90-day deferrals to more than 2,500 borrowers for loans totaling $2.2 billion. At the end of the third quarter, there were around 300 loans totaling $157 million in deferment, or about 1%. Total problem loans, which we define as risk grade 10 and higher, were $803 million at the end of the third quarter, compared to $674 million at the end of the second quarter. Energy-related problem loans were $203.5 million at the end of the third quarter, compared to $176.8 million for the previous quarter and $87.2 million for the third quarter last year. To put that in perspective, the year-end 2016 total problem energy loans totaled nearly $600 million. Energy loans continue to decline as a percentage of our portfolio, falling to 9.1% of our non-PPP portfolio at the end of the third quarter. As a reminder, the peak was 16% back in 2015. All prices have stabilized from volatile levels that we saw earlier in the year, and we continue to moderate our company's exposure to the energy segment. Through the first nine months of this year, the pandemic's economic impacts on our portfolio have been negative but manageable. During our last two conference calls, we discussed the non-energy portfolio segments that have had an increased impact from the economic dislocations brought on by the pandemic, namely restaurants, hotels, entertainment and sports, and retail. The total of these portfolio segments, excluding PPP loans, represented $1.54 billion at the end of the third quarter. And our loan loss reserve for these segments was 3.37%. New relationships are up by 38% compared with this time last year, largely because of our strong efforts and reputation for success in helping small businesses get PPP loans. The dollar amount of new loan commitments booked through September is up by about 2% compared to the prior year. Regarding new loan commitments booked, the balance between these relationships has stayed steady at 53% large and 47% core so far in 2020. The market remains competitive and in fact seems to be getting more so. For instance, the percentage of deals lost to structure increased from 61% this time last year to 70% this year. It was good to see that in this environment, our weighted current active loan pipeline in the third quarter was up 11% compared with the second quarter of this year. Consumer banking continues to see growth, although it slowed somewhat by the effect of the pandemic. Overall, net new customer growth The third quarter was down 13% compared with the third quarter of 2019 for consumers. Same-store sales, as measured by account openings, were down by 15.5% through the end of the third quarter when compared with the third quarter of 2019. In the third quarter, 52% of our account openings came from our online channel, which includes our FrostBank mobile app, and online account openings were 73% higher compared to the third quarter of 2019. Our investments in enhancing our mobile and online experience proved timely during the quarantine. The consumer loan portfolio was $1.8 billion at the end of the third quarter, up by 6.7% compared to the third quarter of last year. Our growth is being driven primarily by consumer real estate loans. Our Houston expansion continues on pace with five new financial centers opened in the third quarter for a total of 20 of the 25 planned new financial centers. We expect to open two more in this quarter with the remaining three opening in early 2021. The fact that we've been able to continue our expansion plans through the pandemic and see very promising results is due to the dedication and skill of Frost bankers. When they've done the miraculous, what merely seems extraordinary tends to be taken for granted. But I want to acknowledge the commitment to the Frost philosophy and culture that our people have maintained during what has been a very unusual year. Of course, we realize the pressures impacting the banking industry in light of the current and projected economic and interest rate environment. and the importance of operating as efficiently as possible while providing the level of world-class customer service Ross is known for. I'm proud of our efforts over time, and in particular what we've accomplished this year, which Jerry Salinas has been reporting on as we've moved through 2020. Next year will be no different, and we're committed to improving our operating efficiency further. In that regard, I'll note that our executive team is committed to reduce our own salaries by 10% effective January 1st, as well as reducing my team's bonus targets by 5% and mine by 10% for the coming year. We're taking these actions despite the recognized success Ross has had managing through the pandemic and supporting our customers and communities. They represent management's desire to contribute to the current future long-term well-being of the company and reflect our commitment to our unique culture. All of us at Frost and all our lines of business will face these challenges together, and our company, as always, will emerge stronger than ever. Now, I'll turn the call over to our Chief Financial Officer, Jerry Salinas, for some additional comments.