Cullen/Frost Bankers, Inc.

Greetings. Welcome to Colin Frost Bankers Incorporated First Quarter 2024 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. Mendez, Senior Vice President and Director of Investor Relations. Thank you. You may begin.

Thanks, Jerry. 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. Good afternoon, everyone. Thanks for joining us. Today, I'll review the first quarter results for Colin Frost, and our Chief Financial Officer, Jerry Salinas, will provide additional comments before we open it up to your questions. In the first quarter, Colin Frost earned $134 million, or $2.06 per share, compared with earnings of $176 million, or $2.70 a share, reported in the same quarter last year. The first quarter results were affected by an additional FDIC insurance surcharge accrual of $7.7 million, or $0.09 a share, associated with the bank failures that happened in early 2023. Our return on average assets and average common equity in the first quarter were 1.09% and 15.22% respectively, and that compared with 1.39% and 22.59% in the same period last year. solid earnings from the first quarter demonstrate the success of our organic growth strategy and the hard work of our bankers. Our strength and stability, combined with our core values and strong corporate culture, allow us to continue providing world-class service to our customers, which results in sustained long-term growth. Our balance sheet and our liquidity levels remain consistently strong. Also, as was the case in previous quarters, Colin 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 uninsured deposit percentages. And additionally, our available-to-sale securities represented more than 80% of our portfolio at year end. Average deposits in the first quarter were $40.7 billion, down 4.8% from the $42.8 billion in the first quarter last year. Average loans grew 10.4% to $19.1 billion in the first quarter, compared with $17.3 billion in the quarter a year ago. We continue to see excellent results in our organic growth program. For example, we combined our Houston locations from the expansion. They stand at 104% deposit goal, 164% of loan goal, and 122% of our new household goal. For the Dallas market expansion, we stand at 174% of deposit goal, 212% of loan goal, and 185% of our new household goal. Just after the first quarter closed, we opened the second new location on our 17-site Austin expansion project. Our next new Austin region location will open just after Memorial Day. At the end of the first quarter, our overall expansion efforts had generated $2 billion in deposits, $1.5 billion in loans, and added over 46,000 new households. And it helps me to put this in perspective when I remember that the largest acquisition in our history was a company with $1.4 billion in deposits. Our consumer banking business continues to build momentum from the 2023's record net new household growth. And we added 6,600 net new checking accounts or households. to the quarter, and we had an annual growth rate there of 6.5%, which we believe continues to put us among the top-growing banks in the country. Average consumer loans saw steady growth in the first quarter, increasing an annualized 13% on a linked quarter basis, and hit a milestone of $3 billion, and average balance is outstanding. We remain excited about the prospects for a new mortgage product, which is approaching 200 loans, with about half coming in the first quarter. Looking at our commercial business, on a linked quarter basis, average loan balances increased and annualized 10.5% to CNI and 13.4% increase to CRE. Our new commitments booked in the first quarter were 24% less than the level booked in the first quarter of 2023. Our new commercial relationships were up 10% year over year, and at 825, represented our highest level of first quarter relationships ever. This coincided with us achieving our highest level ever for calling activity in the first quarter. New loan opportunities in our pipeline were up 15% year-over-year and were second only to the last year's spike after SBV's failure. Our weighted average pipeline stood at $1.46 billion, up by 24% from the fourth quarter and by 17.5% from the first quarter last year. And regarding those 825 new relationships in the first quarter that I mentioned, about half of those continue to come from the too-big-to-fail banks. We continue to use discretion as we look at our new loan opportunities. And as an example, I'd point out that in the first quarter, our deals lost were up by 24% year-over-year, and 82% of those deals lost were due to structure. Credit quality is good by historical standards with net charge-offs and new non-accrual loans at healthy levels. We're seeing some normalizations in credit risk ratings. And as we come off the historic lows and problems experienced in the years immediately following the pandemic and looking at some of the details, net charge-offs for the first quarter were $7.4 million dollars. compared to 10.9 million last quarter and 8.8 million a year ago. Annualized net charge-offs for the first quarter represented 15 basis points of period in loans. Non-performing assets totaled $72 million at the end of the first quarter compared to 62 million last quarter and 39 million a year ago. The quarter end figure represents just 37 basis points of period in loans and 15 basis points of total assets. Problem loans, which we define as risk grade 10, or OAEM, total $809 million at the end of the first quarter, and that's up from $571 million at the end of the fourth quarter and $347 million at the same time last year. Three-quarters of the increase was due to companies specific CNI loans with the remainder being CRE credits of various types. And this growth in first quarter was fairly evenly split between loans in the OAEM or risk grade 10 and classified or risk grade 11 categories and was mainly attributable to a few larger credits, some of which we expect relatively quick resolutions for. Less than 20% of our problem loans overall are tied to investor commercial real estate. About 50% are related to CNI credits, with most of the balance in owner-occupied real estate, which are closely related to CNI loans. Regarding commercial real estate lending, our overall portfolio remains stable, with steady operating performance across all asset types, and acceptable debt service coverage ratios and loan devalues. Within this portfolio, what we consider to be the major categories of investor CRE, office, multifamily, retail, and industrial, for example, total about $4 billion or 46% of total CRE loans outstanding. Our investor CRE portfolio has held up well. with the average performance metrics stable quarter over quarter exhibiting an overall average loan to value and underwriting of about 53% and average weighted debt service coverage ratio of about 1.47. The investor office portfolio specifically, at a balance of $983 million a quarter in, and that portfolio exhibited an average loan-to-value of 53%, healthy occupancy levels, and an average debt service coverage ratio of 1.53, which is slightly improved for the second consecutive quarter. Our comfort level with the 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. In our last conference call, I mentioned that we had just introduced a new Frost Bank marketing campaign and brand refresh designed to emphasize our great customer experiences. We saw the proof points of that in the first quarter when Frost achieved the highest scores nationwide in the Greenwich Excellence Award for the eighth consecutive year, and the highest ranking for banking customer satisfaction in Texas in J.D. Power's retail banking satisfaction study for the 15th consecutive year. These are unprecedented achievements. No other bank can say those things, and I hope no other bank ever will, but when you think about it, That level of service is what our customers have come to expect from Frost. That's what we deliver on a daily basis, and it's what we mean when we talk in the new campaign about real-life examples of extraordinary customer service with the description, exactly what you unexpected. And none of this is possible without the dedication of our employees across Texas. Their commitment to our culture and their optimistic spirit make all of our successes possible. And I'm proud of everything that our Frost teams are accomplishing across all our communities. And now I'll turn the call over to our Chief Financial Officer, Jerry Salinas, for some additional comments.