Cullen/Frost Bankers, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Cullen Frost Q4 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to Mr. A.B. Mendes, Director of Investor Relations. Please go ahead.

Thanks, Ashley. 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 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 Investor Relations 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 results for Cullen Frost and our Chief Financial Officer, Jerry Salinas. We'll also provide additional comments before we open it up to your questions. In the fourth quarter, Cullen Frost earned $88.3 million. or $1.38 a share, compared with earnings of $101.7 million, or $1.60 a share, reported in the same quarter last year, and $95.1 million, or $1.50 a share, in the third quarter of 2020. For the full year of 2020, Cullen Frost earned $323.6 million, or $5.10 a share, compared with earnings of $435.5 million, or $6.84 a share reported for 2019. Our team continues to manage expenses while at the same time pursuing the expansion of market share and investing for long-term growth. Overall average loans in the fourth quarter were $17.9 billion, an increase of 22% compared with $14.7 billion in the fourth quarter of last year, But excluding PPP loans, fourth quarter average loans of $15 billion represented a 2.3% increase compared to the fourth quarter of 2019. Average deposits in the fourth quarter were $34 billion, an increase of 25% compared with the $27 billion in the fourth quarter of last year. For the second consecutive quarter, we've seen the highest quarterly average deposits in our history. This growth reflects that Frost has always been a safe haven for customers in times of uncertainty and also our success in building new relationships. Our return on average assets and average common equity in the fourth quarter was 86 basis points and 8.55% respectively. We saw a reduction in our credit loss expense to $13.8 million in the fourth quarter, down from $20.3 million in the third quarter of 2020, and this compared to $8.4 million in the fourth quarter of last year. Net charge-offs for the fourth quarter were $13.6 million compared with $10.2 million in the third quarter. Annualized net charge-offs for the fourth quarter were 30 basis points of average loans. Non-performing assets were only $62.3 million a year in, down 35% from the $96.4 million at the end of the third quarter. A year ago, non-performers stood at $109.5 million. Overall delinquencies for accruing loans at the end of the fourth quarter were $103 million, or 59 basis points of period-end loans. Those numbers remain within our standards and comparable to what we've experienced in the last several years. Regarding payment deferrals, in total, we've granted 90-day deferrals to more than 2,500 customers for loans totaling $2.2 billion. And at the end of the fourth quarter, only about 46 million remained in deferment. Total problem loans, which we define as risk grade 10 and higher, were $812 million at the end of the fourth quarter, in line with the $803 million at the end of the third. Energy-related problem loans were $133.5 million at the end of the fourth quarter, compared to $203.7 million for the previous quarter, and $132.4 million for the fourth quarter of last year. To put that in perspective, Total problem energy loans peaked at nearly $600 million early in 2016. Energy loans continued to decline as a percentage of our portfolio, falling to 8.2% of our non-PPP portfolio at the end of the fourth quarter. As a reminder, that figure was 9.1% at the end of the third quarter, and the peak was 16% back in 2015. We continue to work hard to rationalize our company's exposure to the energy segment to appropriate levels. Throughout 2020, the pandemic's economic impacts on our portfolio were negative but manageable, and our overall outlook for credit quality is stable to improving. In the second half of 2020, we discussed the non-energy portfolio segments that have had an increased impact from the economic dislocations brought on by the pandemic, restaurants, hotels, entertainment and sports, and retail. The total of these portfolio segments, excluding PPP loans, represented just under $1.6 billion at the end of the fourth quarter, and our loan loss reserve for these segments was 4.55%. We saw the largest reserve increases in hotels and restaurants, where our allocated allowances as a percentage of outstanding balances are now 9.1% and 7.4%, respectively. We continue to monitor credit in these areas closely, and we have a good handle on our risk. And as a reminder, hotels and lodging represent approximately 1.9% of our total loans, and restaurants represent approximately 1.8% of our total loans. To me, a really bright spot is the growth in our commercial relationships in 2020. They were up by 31% compared to a year ago. We're great at building relationships. It's what we do. It's in our mission statements. But clearly, Frost's national recognition for its success in going above and beyond to obtain PPP loans for its customers had a positive impact in the market. In addition, our Houston expansion is also contributing to our success here. New commercial relationships in Houston grew 49% in 2020 and represented 39% of the new commercial relationships company-wide during the year. For the year, our loan commitments booked were down 6% compared to the prior year and reflected the impact of the pandemic. Regarding new loan commitments booked, the balance between these relationships has stayed steady at 53% larger and 47% core at the end of 2020. The market remains very competitive. The percentage of deals lost to structure increased from 61% this time last year to 67% this year. Our weighted current active loan pipeline in the fourth quarter dropped by about 2% compared with the end of the third quarter, reflecting the continued impact of the pandemic on business activity. Consumer banking continues to see good growth. Overall, our net new customer growth for the fourth quarter was up 57% compared to the pre-COVID fourth quarter of 2019. Same store sales as measured by account openings for branches open less than a year were up by 2.2% through the end of the fourth quarter when compared to the fourth quarter of 2019 and up 8.2% compared to the prior quarter. Here again, our Houston expansion is helping this growth. For example, despite currently representing only about 16% of our total consumer households, Houston contributed 34% of fourth quarter total company consumer household growth. In the fourth quarter, 41% of our account openings came from our online channel, including our Frost mobile app. Online account openings were 39.5% higher compared to the fourth quarter of 2019. The consumer loan portfolio was up $1.8 billion at the end of the fourth quarter, up by 7.2% compared to the fourth quarter last year. Our Houston expansion is nearing completion with two new financial centers open in the fourth quarter for a total of 22 of the 25 planned new financial centers. COVID has had an impact on our rollout, but we expect to open the remaining three in the first half of this year. Overall, the new financial centers are exceeding our expectations and the new locations were well-placed and well-timed to leverage our success and obtaining PPP loans for the market. The fourth quarter also saw the opening of our new financial center in College Station with a second financial center to open in nearby Bryan later this quarter. So far in January, our newest location in Dallas, the Redbird Financial Center location, also opened for business. We remain committed to consistent, sustainable, above average organic growth. We also remain committed to managing costs and operating as efficiently as possible. This month, we took the difficult step of eliminating 68 positions across the company where business needs have changed, where technology could be better utilized, and where responsibilities could be consolidated. This, along with broadly successful efforts to improve efficiency, which Jerry will discuss, positioned us well as we move into 2021. I talk often about the dedication and skill of Frost bankers and about their commitment to the Frost philosophy and culture. Throughout a difficult 2020, and now into a new year that promises to be challenging in its own way, the people of Frost have been and will be ready to provide the level of world-class customer service Frost is known for. I'm thankful for them. I'm proud of what we've accomplished, and I'm optimistic about the long-term well-being of the company and the communities we serve. Now I'll turn the call over to our Chief Financial Officer, Jerry Salinas, for some additional comments.