Cullen/Frost Bankers, Inc.

Today's conference call will start momentarily we thank you for your patience. © transcript Emily Beynon © transcript Emily Beynon Greetings and welcome to Cullen Frost Bankers, Inc. Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, A.B. Mendez, Senior Vice President and Director of Investor Relations. Thank you. You may begin.

Thanks, Rob. Our conference call today 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 210-220-5234. 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 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 $106.3 million, or $1.65 per share, compared with earnings of $95.1 million, or $1.50 per share, reported in the same quarter of last year. and this compared with $116.4 million, or $1.80 per share, in the second quarter. We continue to focus on our organic strategy while the economy works to move past supply chain issues and other lingering effects of the pandemic. Average deposits continued their strong increase in the third quarter and were $39.1 billion. an increase of 19 percent compared with $32.9 billion in the third quarter of last year. Overall, average loans in the third quarter were $16.2 billion compared with $18.1 billion in the third quarter of 2020, but this included the impact of PPP loans. Excluding PPP loans, third-quarter average loans of $14.8 billion were essentially flat from a year ago, but up an annualized 6% on a linked quarter basis. And looking forward, we're very encouraged about the outlook for loan growth. New loan commitments booked through the third quarter, excluding PPP loans, were up by 11% compared to the first nine months of last year. For the quarter, new loan commitments were up by 6% on a linked quarter basis. We were especially pleased that the linked quarter increase was due primarily to CNI commitments, which were up 30%. Our current weighted pipeline is 41% higher than one year ago and 22% higher than last quarter. The increases are in both CNI, up 22%, and CRE, up 28%. The market continues to be very competitive. In the third quarter, 69% of the deals we lost were due to structure, compared to 50% in the quarter before. We also continue to add to our commercial customer base, and we recorded 619 new commercial relationships during the quarter. While this was down from the same quarter a year ago, when we were experiencing incredible PPP success, it is two-thirds higher than the quarter immediately before the PPP program. As with the second quarter, we did not report a credit loss expense in the third quarter. Our asset quality outlook is stable, and in general, problem assets are declining in number. New problems have dropped to pre-pandemic levels. Net charge-offs for the third quarter totaled $2.1 million, compared with $1.6 million in the second quarter. Annualized net charge-offs for the third quarter were five basis points of average loans. Non-accrual loans were $57.1 million at the end of the third quarter, a slight decrease from the $57.3 million at the end of the second quarter. Overall delinquencies for accruing loans at the end of the third quarter were 95.3 million, or 60 basis points of purity in loans. These are manageable pre-pandemic levels. What started out as 2.2 billion in 90-day deferrals granted to borrowers early in the pandemic were completely gone as of the end of the third quarter. Total problem loans, which we define as risk grade 10 and higher, were down slightly. to $635 million at the end of the third quarter, compared with $666 million at the end of the second quarter. In the third quarter, we continued making progress toward our goal of mid-single-digit concentration level in the energy portfolio over time, with energy loans falling to 6.5 percent of our non-PPP portfolio at the end of the quarter. Our teams continue to analyze the non-energy portfolio segments that we considered the most at risk from pandemic impacts. As of the third quarter, those segments are represented by restaurants, hotels, and entertainment and sports. The total of these portfolio segments, excluding PPP loans, represented $695 million at the end of the third quarter, and our loan loss reserve for these segments was 8.8 percent. The credit quality of individual credits in these segments is currently mostly stable or better compared to the end of the second quarter. We reported in the second quarter that we had completed our 25-branch Houston expansion initiative, and we're very pleased with the results. We've identified eight more locations to open in the coming months, and that process is underway. Let me update you where we stand through the third quarter with the Houston expansion, excluding PPP loans. Our numbers of new households were 134% of target and represented more than 12,200 new individuals and businesses. Our loan volumes were 177% of target and represented 371.4 million in outstandings. and about 80 percent of this represents commercial credits with about 20 percent consumer. Deposits surpassed half a billion dollars and were 111 percent of target. Commercial deposits accounted for two-thirds of the total. In the meantime, we're also preparing for our upcoming 28-branch expansion project in the Dallas region, which will kick off with the first new financial center opening early next year and continuing into 2024. The Dallas expansion will follow our Houston model, and we will employ the lessons learned during our team's successful rollout. I'll continue to emphasize that the business we are generating through our expansion strategy is consistent with the overall company. Its profitability is weighted towards small and mid-sized businesses, but it also has complemented a wealth management, insurance, and, of course, consumer banking, which continues to see tremendous growth. For example, through the first six months of this year, we had already surpassed consumer banking's all-time annual growth for new customer relationships. which was 12,700 in 2019. At the end of the third quarter of this year, this had risen to 19,974 net new checking customers. That's already more than 150% of our previous annual record. We've worked hard to lower barriers to entry for potential customers with improved product offerings and physical distribution. For example, besides Overdraft Grace, which we introduced in April, and Early Payday, which we announced in July, we also recently established an ATM branding partnership with Cardtronics that resulted in us having, by far, the largest ATM network in the state. In addition, after over two years of study, We've begun the process of putting in place the infrastructure to add residential mortgages to our suite of consumer real estate products in late 2022. This will complement our portfolio currently consisting of home equity, HELOC, home improvement, and purchase money second loans, which has steadily grown to in excess of $1.3 billion. Utilizing best-in-class technology will allow us to provide frost level of world-class customer service as we build this portfolio over time in response to customer demand. Finally, I want to commend our team working on PPP loans. Nearly 90% of the 32,500 loans for $4.7 billion have already been helped through the loan forgiveness process. That includes upwards of 97 percent of the first-round loans from 2020. Our team continues to put in outstanding work to execute our strategies, whether it's PPP, our expansion projects, or the enhancements we've made to our customer experience. And I'd like to thank everyone at Frost. I believe we've got the best team in the financial services industry. They are why I continue to be optimistic about our company and our prospects for success. Now I'll turn the call over to our Chief Financial Officer, Jerry Salinas, for some additional comments.