Cullen/Frost Bankers, Inc.

Greetings and welcome to the Cullen Frost Bankers, Inc. First Quarter Earnings Conference Call. At this time, all participants are on the listen-only mode. A brief 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 at Thank you. Please go ahead.

Thanks, Donna. This morning's conference call, or this afternoon'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 at 210-220-5234. At this time, I'll turn the call over to Phil.

Thanks, A.B., and good afternoon, everyone. Thanks for joining us. Today I'll review first quarter results for Cullen Frost and our Chief Financial Officer, Jerry Salinas. We'll provide additional comments, and then we're going to open up for your questions. In the first quarter, Cullen Frost earned $176 million, or $2.70 per share, compared with earnings of $97.4 million, or $1.50 per share, reported in the same quarter last year. That represents an increase of 80% over last year's level. Our return on average assets and average common equity in the first quarter were 1.39% and 22.59% respectively, and that compares with .79% and 9.58% for the same period last year. I'm extremely proud of this performance, and I believe that it helps demonstrate the value of Frost culture, the excellence of our people, and the soundness of our institution. These results are a product of our commitment to our philosophy, which our late former chairman, Tom Frost, captured years ago in our 21-word mission statement, which reads, We will grow and prosper building long-term relationships based on top quality service, high ethical standards, and safe, sound assets. Never have those words wrong truer. Our commitment to this mission produces tangible results like we've just reported, and it is reflected in factors such as our commitment to sound liquidity, which resulted in our going into March with 20% of our deposit base held in a checking account at the Federal Reserve. This not only serves to protect depositors, it also allowed us to take direct benefit from Federal Reserve interest rate increases as they continued to fight inflation. By sharing these benefits with our depositors throughout this upward rate cycle, I'm convinced we built not only balances but also trust with our deposit customers. Have the level of bank deposits generally been impacted by these higher rates and the Fed's quantitative tightening? Of course they have. Remember, our deposits peaked in August of last year. Did most banks see movement by some nervous depositors last month in the wake of the failure of some specialized banks? Of course they did. But keep this in mind. Frost did not take on any federal home loan bank advances. We did not participate in any special liquidity facility or government borrowing. We did not access any wholesale funding. And we did not utilize any reciprocal insurance arrangements to build insured deposit percentages. And while lending out only 41.5% of our deposit base at quarter end, we continued to provide consistent capital to our customers and communities by growing our average loan portfolio over the year by 7.5% in line with our high single digits target. We also continue to successfully execute our focus on organic expansion in major Texas markets. For example, our Houston expansion, including the original 25-location build-out plus the partial completion of three additional locations in what we call Houston 2.0, continue to mature and exceed pro formas, with 115% of our household goal 169% of our loan goal, and 102% of our deposit goal. I'll add that in a moment, Jerry will share some insights into the financial impact from the maturing Houston expansion. In addition, our Dallas expansion just reached the halfway mark this week and currently stands at 228% of our new household goal 282% of our loan goal, and 318% of our deposit goal. Now, taking a closer look at the quarter, our consumer business continues to perform extremely well. In fact, the first quarter represented an all-time high for net new customers, up 26% from the first quarter of last year. Even more impressive to me was the fact that for the month of March, we exceeded our previous all-time monthly record for net new consumer customers by 33%. That's over 1,000 more customers than our previous record. Our bankers are busy. Looking at this increase in new customer growth, It was led by Dallas and Houston, our two expansion markets, which accounted for 75% of this household growth. Houston was up 33%, and Dallas was up 133%. And even our headquarters market of San Antonio saw net new household growth in March of 14%. Average consumer deposit balances for the first quarter declined 1.4% from the fourth quarter of last year as customers continued to spend excess balances and take advantage of significantly higher rate opportunities. Most of that decline was in our consumer checking balances, which was partially offset by increases in consumer CD balances as customers took advantage of our highest available rates. But I think it's important to note that looking at the period March 10th to April 14th, consumer checking balances were actually up 1.3%. Consumer loan growth ended the quarter at $2.45 billion, or 28% higher than the first quarter of last year, driven by consumer real estate as our home improvement and home equity products continue to be the right product at the right time for customers with low-rate first mortgages. Credit continues to be excellent, with average credit scores exceeding 750. Our new mortgage pilot program continued to originate loans for employees, and we're very pleased with the experience we've been able to provide. We look forward to rolling the product out to the market when we begin offering it initially in our Dallas region later in the second quarter. Looking at our commercial business, it's clear that even as our volumes increased 4.1% from the same quarter a year ago, the increases in interest rates by the Fed are having their intended effect of slowing the rate of growth for commercial activity, in the commercial real estate sector. I'm pleased with our prospecting efforts in the market as we increased our number of calls by 24% over the fourth quarter. That resulted in a linked quarter 25% increase in the dollar amount of prospect deals we looked at. And we actually booked 50% more prospect dollars for this same period. However, we saw the dollars of customer deals we looked at and booked both fall by around 35% for this same period. And this was reflected particularly in a 52% decline in the dollar value of customer CRE deals we looked at and a 66% decline in the dollar value of customer CRE deals booked. It shouldn't be a surprise that commercial real estate activity is moderating in this rate environment. Looking forward, our dollar volume of total new opportunities in our pipeline is up 26% from the end of 2022. And looking out at just the next 90 days, the gross pipeline is up 17% from year end. But when probability weighted by our loan officers, it looks pretty flat. So I'd have to say I'm seeing some mixed signals in the tea leaves, and we'll just have to see how it turns out. What I can say definitively is that between March and April, average loans are up $192 million. So to this point, we're still seeing decent growth. Credit quality continues to be strong by historical standards. Problem loans, which we define as risk grade 10 or higher, were $347 million at quarter end, down $100 million or 22.4% from the first quarter of last year, and up $25 million from our year-end level. Non-performing loans were $39.1 million at quarter end, down 22.9% from a year ago, and flat from the previous quarter. Charge-offs for the quarter were $8.8 million, up $2.5 million from the first quarter of last year, and represented an annualized 21 basis points of average loans. Now, regarding commercial real estate, as we noted last quarter, overall, our commercial real estate portfolio metrics continue to indicate good operating performance across all asset types with acceptable debt service coverage ratios and loan-to-values. Total CRE commitments were $10.9 billion at quarter end with $8.3 billion funded and outstanding. Within this portfolio, what we would consider to be the major categories of investor CRE, things like office, multifamily, retail, and industrial as examples. Total 4.7 billion or 43% of CRE commitments. Our investor CRE portfolio has held up well exhibiting an overall average loan to value of about 55% and loan to cost of about 61% and acceptable reported debt service coverage ratios. Higher interest rates have certainly led to some decline in coverage ratios and will probably lead to some valuation declines, but we're starting from a strong position with good cushion. Specifically, in the office building portfolio, which is top of mind in the current environment, and including medical office, we have about $2.4 billion committed and $2.2 billion outstanding, with about half of that being owner-occupied buildings. We consider owner-occupied properties to have a lower risk profile due to reliance on our CNI borrowers operating cash flow rather than income generated from underlying real estate. And borrowers in our CNI portfolio have held up very well as we operate in some of the strongest markets in the United States. The investor office portfolio exhibited an average loan-to-value of 55% and an average debt service coverage ratio of 1.35 at current interest rates. Again, starting from a strong position with cushion for potential valuation declines. Our comfort level with our office portfolio continues to be based on the character and experience of our borrowers and sponsors, the predominantly class A nature of our office building projects, and the fact that 83% of the exposure is associated with stabilized projects that are 87% leased. It also helps to be operating in Texas. Finally, I'm happy to report we learned in the first quarter that for the seventh year in a row, Frost had received the highest number of Greenwich Excellence and Best Brand Awards of any bank in the nation. The Greenwich Awards are given for providing superior service, advice, and performance to small business and middle market banking clients. In addition, we learned that for the 14th year in a row, Frost had received the highest ranking in customer satisfaction in the J.D. Power U.S. Retail Banking Satisfaction Study for Texas. None of these accomplishments would be possible without our outstanding staff always striving to go above and beyond to make people's lives better. They made it all happen, and I'm immensely proud of them and our great company. Now I'll turn the call over to our Chief Financial Officer, Jerry Salinas, for some additional comments.