Cullen/Frost Bankers, Inc.

Thank you for your patience. The conference will be starting momentarily. Again, we would like to thank you for your patience. Conference will be beginning momentarily. Thank you. © transcript Emily Beynon Greetings. Welcome to Colin Frost Bankers Incorporated's 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 will now turn the conference over to A.B. Menendez, Senior Vice President, Director of Investor Relations. Thank you. You may begin.

Thanks, Sherry. 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, AB. Good afternoon, everyone, and thanks for joining us. Today, I'll review the third quarter results for Cullen Frost. Jerry's going to make some additional comments, and then we're going to open it up for your questions. In the third quarter, Cullen Frost earned $154 million, or $2.38 a share, compared with earnings of $168.1 million, or $2.59 a share, reported in the same quarter last year. Our return on average assets and average common equity in the third quarter were 1.25% and 18.93%, respectively, and that compares with 1.27% and 20.13% for the same period last year. This solid performance can be attributed to the execution of our sustainable organic growth strategy and the commitment to our culture that develops deep customer relationships and provides world-class customer service. And all this happens because of the hard work and dedication of our Frost Bank staff. As in the past, our balance sheet and our liquidity levels remain strong. As an example, at quarter end, our cash liquidity at the Fed equals 17% of our deposit base. Also during the quarter, Cullen Frost did not take on any federal home loan bank advances participate in any special liquidity facility or government borrowing, access any broker deposits, or utilize any reciprocal deposit arrangements to build insured deposit percentages. Let me also say our available for sale portfolio represents 82% of our portfolio at quarter end. So in short, basically with our balance sheet, what you see is what you get. Our average deposits were stable in third quarter at $40.8 billion, less than a percent change from the previous quarter. Average loans grew to $18 billion in the third quarter compared to $17.7 billion in the second quarter, an annualized growth rate of 6.8%. As I mentioned, we're laser-focused on our efforts to achieve organic growth, and I'm very pleased with our results. For example, to update you on our physical expansion efforts, for our combined Houston expansions, we stand at 107% of deposit goal, 162% of loan goal, and 127% of our new household goal. As of quarter end, expansion loans represented 22% and deposits represented 18% of our total Houston market presence. For the Dallas market, we stand at 292% of deposit goal, 273% of loan goal, and 216% of our new household goal. While still relatively early in this effort, expansion loans and deposits represent approximately 9%, respectively, of Dallas market totals. And we're excited about our new Austin expansion effort, which has opened the first of 17 planned locations to double our presence in that market. But beyond these overall numbers, I wanted to take you a little deeper into the character of the expansion business. For example, in Houston, we stand at $1.4 billion in deposits and $1 billion in loans. Our deposit mix is 53% commercial, and 47% consumer, essentially mirroring our company profile. Two-thirds of the deposit relationships are under $1 million, and only four are over $10 million. Loans are 73% commercial, 27% consumer, and only eight customers have over $10 million. Similarly, in Dallas, Of our $325 million in deposits, 53% are consumer versus 47% commercial. And 72% of those deposits were under a million, no relationships over $10 million. Our $258 million in loans are 62% consumer and 38% commercial, which I think is remarkable. The reason I labored through that detail is to show you that the kind of business we've been successful generating in our expansion is core, stable, grassroots business which I believe will generate tremendous value over an extended period of time. I'm very pleased with results of these efforts and I believe that this strategy is both scalable and durable and I'm convinced we'll be doing this for a long time. Looking at our consumer banking business, we continue to see outstanding organic growth. We added 6,220 net new checking households in the quarter, bringing the year-to-date total to 22,800, a 12% improvement on 2022 year-to-date results. To give a perspective of the power and durability of our organic growth, let me point out that in the past 36 months, we've added 80,000 net new consumer checking households. This means we grew our core customer base by 23% in just three years. We believe these are industry-leading numbers and represent tangible evidence that the customer experience we offer and the reputation we've built set us up to be successfully competitive. As we look at these new households, we see that the quality of the growth is also high. A high percentage of the accounts are active, the balances are healthy, and the growth is balanced across all the segments we serve. These factors are evidence that the growth is sustainable and beneficial. Consumer loan balances, outstanding, were 2.8 billion at the end of the quarter, growing 26% year over year. In the third quarter alone, balances increased $181 million, or 7% in the second quarter. This robust growth was driven by our home equity products. In a market where it's becoming increasingly expensive to buy, many families are deciding to stay and fix up their home, and we've got the right products and services and relationships to help at this time. We have a long history of credit quality in the consumer banks, similar to what you're used to hearing about on the commercial side, and the weighted average credit score on the portfolio is 754. Delinquencies are low and stable at about 80 basis points. Charge-offs are also low and stable at 19 basis points for the year. Also, as we've noted, we're excited about the prospects for our new mortgage product, which is in its very early stages, but just recently opened up to all our markets in the state. Now, looking at our commercial business, I think it's an interesting story. Our new opportunities for the quarter were strong, but they were down 17% from the second quarter. However, that was because our second quarter new opportunities were an all-time high after the dislocations brought on by the SVB situation. And as you would expect, our declines for deals were also high and were almost two and a half times our quarterly average. Now looking at the third quarter and focusing on our weighted pipeline, that weighted pipeline is up 22% from last quarter, and it's our highest of all time at 1,918,000. Our previous high was during the second quarter of 2022 at 1,832,000. The increase comes from all categories, both customers up 18%, and prospects, up 25%. Both core, which we define as relationships under $10 million, and large, core up 26%, large up 20%, and both C&I up 23%, and CRE up 24%. Credit quality continues to be good by historical standards with classified and non-accrual assets flat and net charge-offs down quarter over quarter. Non-accrual loans total 67 million at the end of the third quarter compared with 68 million at the end of the second quarter, essentially flat for the quarter. The third quarter figure represents just 37 basis points of total loans and 14 basis points of total assets. Problem loans, which we define as risk grade 10 or higher, total 513 million at the end of the third quarter. That's up from 441 million at the end of the second quarter and 387 million this time last year. Virtually all the linked quarter growth was in the OAEM risk category or grade 10. Net charge-offs for the third quarter were $5 million. They were down from 9.8 million in the second quarter. Annualized net charge-offs for the third quarter represent 11 basis points of average loans, and year-to-date annualized net charge-offs are 18 basis points of average loans, which is below historic averages. Regarding commercial real estate, our overall portfolio remains stable with steady operating performance across all types and acceptable debt service coverage ratios and loan-to-values. Within this portfolio, what we'd consider to be the major categories of investor CRE, that is office, multifamily, retail, and industrial example, total 3.5 billion or 40% of CRE loans outstanding and are flat quarter over quarter. Our investor CRE portfolio has held up well with the average performance metrics remaining essentially unchanged quarter over quarter. and exhibiting an overall loan-to-value of about 54% and loan-to-cost of about 60% and acceptable reported debt service coverage ratios. Higher interest rates continue to be a challenge for our CRE borrowers and have impacted performance of some projects as compared to original pro formas. However, on average we're comfortable with the quality of the portfolio. As an example, The investor office portfolio, which has been top of mind since the pandemic, had a balance of $950 million at quarter end, and it exhibited an average loan-to-value of 52% and an average debt service coverage ratio of 1.46, up slightly from last quarter. 83% of this portfolio is stabilized with healthy coverage levels and less than 5% of the portfolio is considered spec, with even these few projects being in strong sub-markets with good leasing dynamics and strong experienced developers. Our comfort level with our office portfolio continues to be based on the character and experience of our borrowers and sponsors and the predominantly class A nature of our office building projects. And again, we're glad to be operating in Texas. So in closing, we remain optimistic for what lies ahead. We're capitalizing on opportunities, and I'm proud of all our bankers as they accomplish all of this across all our communities. Now I'll turn the call over to our Chief Financial Officer, Jerry Salinas, for some additional comments.