Cullen/Frost Bankers, Inc.

Greetings and welcome to the Colin Frost Bankers fourth 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. I would now like to turn the call over to A.B. Mendez, Senior Vice President and Director of Investor Relations. Thank you. You may begin.

Thanks, Daryl. 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, AB. Good afternoon, everyone, and thanks for joining us. Today, I'll review fourth quarter and full year 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 fourth quarter, Cullen Frost earned $99.4 million for $1.54 a share, compared with earnings of $88.3 million or $1.38 a share reported in the same quarter last year, and $106.3 million or $1.65 a share in the third quarter of 2021. For the full year of 2021, Cullen Frost earned $435.9 million or $6.76 a share compared to earnings of $323.6 million $5.10 a share reported for 2020. Our return on average assets and average common equity in the fourth quarter were 0.81% and 9.26% respectively. I am very pleased with our company's results, and I'm optimistic about the prospects for our organic growth strategy. Average deposits in the fourth quarter were $41 billion, an increase of more than 20% compared with $34.1 billion in the fourth quarter of last year. This continued outstanding deposit growth reflects our success in developing new relationships and expanding current ones. It reflects well on our expansion efforts our value proposition enhancements, and our world-class level of customer service. Jerry will talk more about our deposit growth in a few moments. I was very pleased with our success in our commercial lending segment, where we booked $2.4 billion in new commitments in the fourth quarter, up 64%. from the first quarter last year and up an unannualized 37% on a linked quarter basis. I'm morally certain that's our highest level ever. The growth was geographically diverse. Compared to last year, fourth quarter CNI commitments were up 73%, while CRE was up 121%. On a link quarter, unannualized basis, C&I commitments were up 27%, while CRE commitments increased 55%. And Jerry will talk more about outstanding loan balances in his comments. As we book these commitments, Our weighted pipeline declined 13% from the third quarter. I might point out that in Texas, the confluence in the fourth quarter of football season, hunting season, and the holidays combines so that it is rare that our year-end pipeline would exceed the third quarter. Just saying. Our year-end weighted pipeline was 24% higher than last year's and was our highest fourth quarter ever. Turning to our consumer business, I am extremely pleased with our progress. In 2021, we brought in almost 27,000 net new checking households. That was 210% of our previous full year household growth record in 2019. Here's some additional context. In 2016, we added 1,897 net new consumer checking households. Our compound annual growth and net household addition for that five year period is 70%. Houston is not the only reason, but it's helping. It added 413% more checking households in 2021 than we did in 2018 right before our expansion began. We reported in our release good trust and wealth management numbers, but one other data point of growth I might offer. is that our number of customers for our community wealth advisors were up by 28% from a year ago. As far as the Houston expansion is concerned, we see the momentum continuing to build as the branches mature. The metrics we measure show bankers we hired and onboarded are executing our relationship banking strategy. At year end, we stood at 128% of our new household goal. We were 178% of our loan goal. And we were 113% of our deposit goal. For the for the year 2021. We added 6858 new households. which was nearly the same amount of new households we added for the first two years of the expansion. Over the last six months, new households grew by 30% unannualized, demonstrating the ability to add new customers while the branches matured in these communities. Loan growth for the year was $218 million, or 97% growth. And for the last six months of 2021, loan growth was an unannualized 42%. Loan portfolio is a mix of 80% commercial loans and 20% consumer loans. Our focus has been on core loan relationships. or small businesses in the communities that we are entering. There are only three loans over $10 million in balances that represent less than 10% of the total loan portfolio. The mix of loans is reflective of our overall loan portfolio with 40% CRE, 40% CNI, and 20% consumer. We're building a strong foundation of core relationships that will position us to grow with them as their businesses grow and we meet their needs. Deposit growth for the year was $390 million, or 167% from December of 2020. Over the past six months of 2021, growth continues to be strong at an unannualized 44% rate. Our deposit mix is two thirds commercial and one third consumer, nearly identical to what we had projected to be the mix three years ago. We continue to be optimistic about growth in this economy. Our 28 branch expansion project in the Dallas region officially got underway this month with the opening of our first new location the frost medical district financial center we will continue the process nearly tripling our size in dallas into 2024. the dallas expansion will follow our houston model and we will employ the lessons learned during our team's successful rollout additionally We will continue our expansion in Houston, adding another eight locations over the course of 2022 and into 2023. Credit continues to be good. We did not report a credit loss expense for the fourth quarter. Our asset quality outlook is stable, and in general, problem assets are declining in number. New problems have dropped to pre-pandemic levels. The net charge-offs for the fourth quarter were $2.8 million, compared with $2.1 million in the third quarter. Annualized net charge-offs for the fourth quarter were seven basis points of average loans. Non-accrual loans were $53.7 million at the end of the fourth quarter, a decrease from $57.1 million at the end of the third. Overall delinquencies for accruing loans at the end of the fourth quarter were only $121 million or 74 basis points of period in loans. Excluding PPP, delinquencies were only 97 million. These are manageable pre-pandemic levels. Total problem loans, which we define as risk grade 10 and higher, total $540 million at the end of the fourth quarter, compared with $635 million at the end of the previous quarter in the fourth quarter we continue to make progress toward our goal of mid single digit concentration levels in the energy loan portfolio over time with energy loans representing 6.6 percent of loans at the end of the quarter our teams continue to analyze the non-energy portfolio segments that we considered most at risk from the pandemic impacts And as of the end of the fourth quarter, the total problem loans from hotels and office buildings represented $178 million. Risk is moderate and stable in these areas, and the asset quality outlook improved significantly during 2021. We've made good progress toward adding residential mortgages to our suite of consumer real estate products later this year. This will complement our portfolio currently consisting of home equity, HELOC, home improvement, and purchase money second loans, which has steadily grown to more than $1.4 billion. Utilizing best-in-class technology will allow us to provide frost level of world-class service as we build this portfolio over time in response to customer demand. And after almost two years of working with business customers on PPP loans, we are finally nearing completion with a forgiveness process complete for more than 93% of our customers. Our team continues to work to get the last of the borrowers through the process, and I want to commend everyone at Frost who's worked so hard on this. Our team took a situation that in the beginning looked difficult, and maybe even impossible, and turned it into a huge success for our customers and for our company. At the same time, we're working to ensure that we're not only taking care of our customers, but our employees and our communities as well. In the fourth quarter, Frost was a founding member of the Corporate Partners for Racial Equity here in San Antonio. State and statewide, we announced that we had raised our minimum pay to $20 per hour. Steps like these show our commitment to our communities and being a force for good in people's everyday lives. That's possible only because of our dedicated employees. Whether they're asked to tackle historic and heroic tasks like handling more than 32,000 PPP loans, doubling or even tripling the number of locations we have in a region over a couple of years, creating a mortgage lending process from scratch, or simply being the best at serving customers around the clock, our team at Frost is our true competitive advantage. And I'm proud of them for all of their accomplishments, despite the difficulties of the past two years, and I'd like to thank them for contributing every day to our company's success. Now I'll turn the call over to our Chief Financial Officer, Jerry Salinas, for some additional comments.