Cullen/Frost Bankers, Inc.

Greetings. Welcome to Cullen Frost Bankers Inc. Third 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, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce 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, Jerry Salinas, Group Executive Vice President and CFO, and Dan Geddes, our incoming CFO. Before I turn the call over to Phil, Jerry, and Dan, 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. Thanks for joining us. Today I'll review third quarter results for Cullen Frost, and I'm accompanied on the call by Jerry Salinas and Dan Geddes, who have been working together in anticipation of Jerry's upcoming retirement as CFO, and they'll provide additional commentary. In the third quarter, Cullen Frost earned $144.8 million, or $2.24 a share, compared with earnings of 154 million or 238 a share reported in the same quarter last year. Our return on average assets and average common equity in the third quarter were 1.16% and 15.48% respectively, and that compares with a 125 and 18.93% for the same period last year. Average deposits in the third quarter were $40.7 billion, down just 20 basis points from $40.8 billion in the third quarter of last year. Average loans grew by 11.8% to $20.1 billion in the third quarter, compared with $18 billion in the third quarter of last year. We continue to see solid results resulting from the hard work of our Frost bankers and the extension of our organic growth strategy. As was the case in previous quarters, Colin Frost didn't utilize any FHLB advances, broker deposits, or reciprocal deposit arrangements to build insured deposit percentages or to fund liquidity. So again, as you look at our balance sheet, what you see is what you get. We continue to see excellent results in our organic growth program. For our Houston expansion, on a combined basis, what we call Houston 1.0 and 2.0, we stand at 99% of our deposit goal, 139% of our loan goal, and 118% of our new household goal. For the Dallas market expansion, we stand at 119% of deposit goal, 195% of loan goal, and 170% of our new household goal. We have the first three of our new Austin expansion project open, first three locations, with three more planned open before the end of this year. And early results there continue to be very encouraging. and in line with the other expansion markets. At the end of the third quarter, our overall expansion efforts continued to grow and had generated $2.3 billion in deposits, $1.6 billion in loans, and added more than 55,000 new households. As we've mentioned, the success of the earlier expansion projects are funding the current expansion and we expect the overall expansion project will be accretive to earnings beginning in 2026. In our consumer business, we had our best quarter of the year in customer growth, adding over 7,300 net new checking households. We believe checking household growth remains industry leading at 6% year over year in an extremely competitive deposit environment. That growth has been achieved without the use of direct cash incentive programs in use by many of our competitors. Our focus instead has been on top quality service, great technology, and a convenient expanding network of locations. Consumer deposits overall continue to recover and finish the quarter with a 2.5% year-over-year increase or $464 million. Finally, in the area of consumer, average consumer loans grew $574 million, or 21% year-over-year, making this the ninth consecutive quarter with an annual growth rate of over 20%. This exceptional loan growth comes primarily from our second lien home equity and home improvement products as well as our new mortgage product. The investments we've made in organic expansion, new products, marketing, technology, and our employees are helping drive this outstanding growth across our consumer business. We funded $55 million in mortgage loans in the third quarter, and at quarter end, our total mortgage portfolio stood at $179 million. Looking at our commercial business, average loan balances in the third quarter increased 10.1% versus the same quarter last year. CRE balances grew by 13.7%, energy balances grew by 10.2%, and CNI balances increased by 4.8%. Our growth in new commercial relationships in the third quarter was strong, increasing 8% over the same quarter last year. New loan commitments totaled $1.62 billion in the third quarter, and that was up 3% from the third quarter of last year. The increase came from a 2% increase in both CRE and CNI loans and a 37% increase in energy, albeit on a much smaller base. We saw some improvement in credit quality during the third quarter in terms of problem loan resolutions. Total problem loans, which we define as risk grade 10 or higher, total $839 million at the end of the third quarter, down 15% from the $986 million at the end of the second quarter. Credit quality is good by historical standards with net charge-offs and non-accrual loans, both at healthy levels. Net charge-offs for the third quarter were 9.6 million compared to 9.7 million last quarter and 5 million a year ago. Annualized net charge-offs for the third quarter represent 19 basis points of period and loans. Non-performing assets totaled 106 million at the end of the third quarter, And that compared with $76 million last quarter and $68 million a year ago. And the quarter end figure increase got us to 53 basis points of period end loans and 21 basis points of total assets. And the increase was primarily due to one $20 million credit moving to non-accrual, which was previously identified on our problem loan list. About 24% of our problem loans overall are tied to investor commercial real estate. Slightly less than 40% are related to C&I credits, and most of the balance is in owner-occupied real estate, which is closely related to C&I 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-to-values at levels similar to what we've reported in prior quarters. Investor CRE loans totaled $4.3 billion, or 44% of total CRE loans outstanding, and the investor CRE portfolio exhibited an overall average loan-to-value at underwriting of about 53% and average weighted debt service at that time of 1.42%. I continue to be encouraged by our outlook and the consistent success of our strategy for organic growth and what I believe are the best banking markets in the U.S. And with that, I'll turn it over to Dan.