Cullen/Frost Bankers, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Colin Frost Second Quarter Earnings Results Call. 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 during the session, you will need to press star 1 on your telephone, and please be advised that today's conference will be recorded. If you require any further assistance, please press star 0. Thank you. I would now like to hand the conference over to your first speaker today, Mr. A.D. Mendez, Call and Post Director of Investor Relations. Sir, please go ahead.

Thanks, Joanna. 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 the Investor Relations Department 210-220-5234. At this time, I'll turn the caller to Phil.

Thank you, A.B., and good afternoon, everybody. Thanks for joining us. Today I'll review second quarter results for Cullen Frost and our Chief Financial Officer, Jerry Salinas. We'll also provide additional comments before we open it up to you for your questions. In the second quarter, Cullen Frost earned $116.4 million. for $1.80 a share compared with earnings of $93.1 million, or $1.47 a share reported in the same quarter last year, and compared with $113.9 million, or $1.77 a share in the first quarter. In the current environment, our company is in a strong position to benefit from the rebound in economic activity. and we will continue our organic growth strategy while taking steps to enhance frost experience for our customers and our employees. As expected, economic conditions have continued to weigh on conventional loan demand. Overall, average loans in the second quarter were $17.2 billion, a decrease of 1.7 percent compared to $17.5 billion in the second quarter of last year. Excluding PPP loans, second quarter average loans of $14.6 billion represented a decline of 3% compared to the second quarter of 2020. However, we're seeing evidence of loan growth beginning to materialize as non-PPP loans trended up in the month of June and that upward trend has continued into July. Average deposits in the second quarter were $38.3 billion, an increase of more than 22 percent compared with $31.3 billion in the second quarter of last year. Our return on average assets and average common equity in the second quarter were 1.02 percent and 11.18 percent, respectively. We did not report a credit loss expense for the second quarter. Our asset quality outlook is stable, and in general, problem assets are declining in number. New problems have dropped significantly and are at pre-pandemic levels. Net charge-offs for the second quarter total $11.6 million, compared with $1.9 million in the first quarter. Annualized net charge-offs for the second quarter were four basis points of average loans. Non-accrual loans were $57.3 million at the end of the second quarter, a slight increase from $51 million at the end of the first quarter, and primarily represented the addition of three smaller energy loans, which had previously been identified as problems. A year ago, non-accrual loans stood at $79.5 million. Overall delinquencies for accruing loans at the end of the second quarter were 97.3 million, or 59 basis points of period-end loans, and were at manageable pre-pandemic levels. We've discussed in the past 2.2 billion in 90-day deferrals granted to borrowers earlier in the pandemic, as at the end of the second quarter there were no active deferrals. Total problem loans, which we define as risk rate 10 and higher, were $666 million at the end of the second quarter, compared with $774 million at the end of the first quarter. I'll point out that energy loans declined as a percentage of our portfolio, falling to 6.98% of our non-PPP portfolio at the end of the second quarter as we continue to make progress toward a mid-single-digit concentration level for this portfolio over time. Our teams continue to analyze the non-energy portfolio segments that we considered most at risk from pandemic impacts. As of the second quarter, those segments are restaurants, hotels, and entertainment and sports. Those of these portfolio segments, the total, excluding PPP loans, represented $675.1 billion at the end of the second quarter, and our loan loss reserve for these segments was 8.6%. The credit quality of these individual credits in these segments is currently mostly stable or better compared to the end of the first quarter. We also continue to add to our customer base. Through the midpoint of this year, we added 7% more new commercial relationships than we did in 2020, which included the outsized second quarter of 2020 when PPP activity was so strong. Looking at recent trends, our new commercial relationships were 511 in the fourth quarter of 2020, 554 in the first quarter of this year, and 643 in our most recent quarter, so we're seeing good momentum in this area. We're also seeing good momentum in the insurance business, particularly in the benefits and property and casualty segment. We're up about 6% in both of those in terms of new customers. And also, as many others, we're seeing good growth in wealth management from assets under management with these good markets, but we've also seen an increase of around 3% in new customers. In the time since we began our PPP efforts, just under 1,000 new commercial relationships identified our assistance in the PPP process as a significant reason for moving to Frost. New loan commitments booked during the second quarter, excluding PPP loans, were up by 9% compared to the second quarter last year, and up by 45% on a linked quarter basis. Our current weighted pipeline is 12% higher than one year ago, 17% higher than last quarter, and 38% higher than the same time in 2019. The increases are mostly due to CNI. Our current weighted pipeline is as high as it's ever been, so we hope this points for a good third quarter for booking new loans. At the same time, it has to be said that competition is intense. In total, the percentage of deals lost to structure of 56% was down from the 75% we saw this time last year, but that's really more a factor of the increase in price competition, rather than more market discipline around structure. We were extremely proud to have completed our 25-branch Houston expansion initiative in the second quarter, and we continue to be very pleased with the results. It represents a tremendous achievement for our outstanding staff. Let me update you where we stand through the second quarter, and it excludes PPP loans. Our numbers of new households were 141% of target and represents almost 11,000 new individuals and businesses. Our loan volumes were 215% of target and represented $310 million in outstandings. And about 80% represented commercial credits with about 20% consumers. Regarding deposits, at $433 million, they represent 116% of target, and they represent about two-thirds commercial and one-third consumer. Once again, I hope that we've shown that the character of the business we're generating through the expansion is very consistent with the overall company, and its profitability is weighted towards small and mid-sized businesses and complemented by consumer as well as other lines of business, including wealth management and insurance. Consumer banking also continues to see outstanding growth. In just the first six months of this year, we've already surpassed our all-time annual growth for new customer relationships. This represents about 13,500 net new checking customers. Our previous high was 12,700 for full year 2019, and it's all organic growth. We worked hard to lower barriers to entry for potential customers with improved product offerings and our geographic expansion. Houston accounts for about one-third of this relationship growth. Their annual growth rate for consumer customers is up over 13%. That compares to 4% in 2018 before we started the expansion. We were excited to announce this month that we launched a new feature called Early Payday, which gives customers access to direct deposits up to two days before the money arrives in their account. And we put this in place in time for customers to see the effect from the IRS child tax credit payments. And we've already heard great comments from customers who've used early payday to pay bills. This makes a difference in the lives of people who live paycheck to paycheck. And that was on top of our $100 overdraft grace feature that we rolled out in April. Also, earlier this month, we reached an ATM branding partnership with Cardtronics that will result in us having more than 1,725 ATMs in our network across Texas. That is by far the largest ATM network in the state, but just as important, it gives us the largest ATM network in the Dallas-Fort Worth region, as we begin our expansion in Dallas early next year. I mentioned PPP earlier and how our efforts help thousands of small businesses. We closed out the second round of PPP with more than 13,000 loans for $1.4 billion. Combined with the first round, that gives us a PPP program total of more than 32,000 loans and $4.7 billion in outstanding. The historic effort that Frost Bankers put into helping borrowers get PPP loans has now shifted to the forgiveness process. Because borrowers for the first round are approaching payment dates if they don't apply for forgiveness, we've increased our communication to them and worked on ways to make the forgiveness application process simpler. We've already submitted 21,000 forgiveness applications and received approval on nearly 19,100 of them, or $3 billion. That's close to the entire first-round total. We continue to be optimistic about the economy and what lies ahead. We have the best team in the financial services industry, and thanks to them, we'll continue to grow and extend our unique value proposition to more customers. Now I'll turn the call over to our Chief Financial Officer, Jerry Salinas, for some additional comments.