Cullen/Frost Bankers, Inc.

Greetings. Welcome to Colin Frost Bankers Incorporated Third Quarter 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. Please note this conference is being recorded. I would now like to turn the conference over to A.B. Mendez, Senior Vice President and Director of Investor Relations. Thank you. You may begin.

Thanks, Sherry. 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, and 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, is going to provide additional comments before we open it up to your questions. In third quarter, Cullen Frost earned $168.1 million, or $2.59 a share, and that compared with earnings of $106.3 million, or $1.65 a share, reported in the same quarter last year, and $117.4 million, or $1.81 a share, in the second quarter of this year. Our return on average assets and average common equity in the third quarter were 1.27% and 20.13% respectively. These results and our overall growth show that our investments in our strategy of sustainable organic growth are paying off and that our company is well-positioned to succeed. Loan growth continued to be strong and above our long-term expectation of high single-digit annual growth. Average loans, excluding PPP, in the third quarter were $16.75 billion or a 13% higher level than the average loans of $14.82 billion in the third quarter of 2021. On an annualized link quarter basis, loans excluding PPP increased by a little over 5%. Year-over-year growth in the portfolio was broad-based, with about a third coming from our CNI component, about half coming from commercial real estate, and the remainder coming from consumer real estate. We booked about 2.04 billion in new commercial commitments in the third quarter, and this was up 12% from a year ago and down 7% from the second quarter. The drop was mainly from larger deals as core commitments were more in line with the previous quarter. Looking at our pipeline, gross pipeline is basically flat from the last quarter, down 0.9%, and on a weighted basis, it's down 15%. Overall, deposit growth was strong, and we invested in our depositor relationships by doing the right thing and allowing increased interest rates to flow through to our customers. Average deposits in the third quarter were $45.8 billion, an increase of 17% compared to the third quarter of last year, and up 9.6% on an annualized basis over the previous quarter. We continue to see great growth in our consumer banking business. Average consumer loans were $2.1 billion in the third quarter, up by 15.9% over the third quarter last year, and up an unannualized 6.9% compared to the previous quarter. This is primarily from our consumer real estate products of HELOC, home equity, and home improvement. The outlook for these loans continues to be good and credit strong. Growth in new households continues. In the third quarter, we put on 6773 new households. That was 4% higher than the same quarter a year ago. Our total household count of over 405,000 in the third quarter was 7.1% over the record level in 2021. All organic. Regarding our branch expansion efforts, our Houston expansion branches have produced right at $1 billion of deposits with loans of $765 million and over 18,000 new households, and they continue to exceed pro forma. In Dallas, we opened the sixth of our planned new locations earlier this month. and we expect to open four more new locations before the end of this year. We are very encouraged by the preliminary results of the new sites, which have achieved 356% of deposit goals, 290% of loan goals, and 250% of new household goals. Now, before anyone asks, yes, we did set meaningful goals for our new location. As we've said before, those goals are based on the average of what we had achieved for the 40 locations that we had opened in the eight years prior to our Houston expansion strategy. As I mentioned, the new Houston locations are above goal, and the new Dallas branches are performing even better than that. Our team that is building our new mortgage loan process is preparing to launch its pilot programs. with an eye on rolling out our new mortgage loans on a wider basis in stages beginning late this year and early next year. It has been exciting to watch as we create an entire process to originate and service mortgage loans in keeping with the Frost philosophy and our core values of integrity, caring, and excellence. Overall credit quality remains good. The September 30th number for total delinquencies excluding PPP was $80.5 million, or 48 basis points of total loans. The total problem loan level, which we define as risk grade 10 and higher, totaled $387 million at the end of the third quarter, down from $429 million at the end of the second quarter. The favorable rate of problem resolutions that we began seeing late last year via payoffs, payments, and upgrades continued through the third quarter, totaling $381 million to date. Once again, we did not report a credit loss expense in the third quarter, and net charge-offs for the quarter were $2.9 million, which compares favorably with the $2.8 million in the second quarter. Annualized net charge-offs for the third quarter remained at seven basis points of average loans, which is below our typical long-term level. Non-accrual loans were $29.9 million at the end of the third quarter, and that represented a decrease from $35.1 million at the end of the second quarter. You may remember that in our second quarter conference call, I reported that we had achieved our goal of mid-single-digit concentration level in the energy portfolio, and I'm happy to report that we stuck to our goal with energy loans, excluding PPP, representing 5.4% of loans at the end of the third quarter. And speaking of PPP loans, we knew that when that process began, helping our customers get their loans forgiven would be as important as helping them get their applications approved. And our team's done a magnificent job on both ends of the process. And more than 99% of our borrowers are through the process now. And the way that we help borrowers get emergency loans, stay in business, and then get through the PPP forgiveness process is going to pay dividends for our customer relationship for many, many years. All this together demonstrates that we have strategies and systems in place to allow us to succeed in all economic environments. We believe in doing the right thing for our customers, and it isn't just words. It's backed up by the investments in time, resources, and personnel that we make with things like our industry leading rates on deposit accounts, building a world-class mortgage loan process from start to finish, providing overdraft grace, early payday, 24-hour customer assistance seven days a week, and expanding our presence so that we can extend the Frost value proposition to people across Texas. All that takes hard work, and I'd like to thank our people for being a force for good in everyday lives. And now I'll turn the call over to our CFO, Jerry Salinas, for some additional comments.