Cullen/Frost Bankers, Inc. (NYSE:CFR) This fall 2022 Earnings Name Transcript

Cullen/Frost Bankers, Inc. (NYSE:CFR) This fall 2022 Earnings Name Transcript January 26, 2023

Operator: Greetings, girls and gents, and welcome to the Cullen/Frost Bankers Inc. Fourth Quarter Earnings Convention Name. Presently, all contributors are on a listen-only mode. A short question-and-answer session will observe the formal presentation. . As a reminder, this convention is being recorded. It’s now my pleasure to introduce your host, Mr. A.B. Mendez, Senior Vice President and Director of Investor Relations. Thanks. Please go forward.

A.B. Mendez: Thanks, Donna. This morning’s convention name might be led by Phil Inexperienced, Chairman and CEO and Jerry Salinas, Group Govt Vice President and CFO. Earlier than I flip the decision over to Phil and Jerry, I must take a second to deal with the Protected Harbor provisions. Among the remarks made at this time will represent forward-looking statements as outlined within the Non-public Securities Litigation Reform Act of 1995 as amended. We intend such statements to be lined by the Protected Harbor provisions for forward-looking statements contained within the Non-public Securities Litigation Reform Act of 1995 as amended. Please see the final web page of textual content on this morning’s earnings launch for added details about the chance elements related to these forward-looking statements. If wanted, A replica of the discharge is on the market on our web site or by calling the Investor Relations division at 210-220-5234. Presently, I will flip the decision over to Phil.

Phil Inexperienced: Thanks, A.B., and good afternoon, everyone. Thanks for becoming a member of us. Right this moment, I will overview the fourth quarter outcomes for Cullen/Frost and our Chief Monetary Officer, Jerry Salinas, will present further feedback earlier than we open it up in your questions. Nicely, within the fourth quarter, Cullen/Frost earned $189.5 million or $2.91 a share in contrast with earnings of $99.4 million or $1.54 a share reported in the identical quarter of final 12 months. That represented a rise of 90%. You do not get to say that fairly often. Our return on common belongings and common frequent fairness within the fourth quarter had been 1.44% and 27.16%, respectively, that compares with 0.81% and 9.26% for a similar interval final 12 months. These are very robust outcomes and together with our technique of sustainable natural progress, they place us effectively heading into 2023.

Now taking a more in-depth have a look at the quarter, mortgage progress was stable and above our long-term expectation of excessive single-digit annual progress, common loans, excluding PPP within the fourth quarter had been simply over $17 billion in contrast with common loans of $15.4 billion within the fourth quarter of 2021, a rise of 10.6%. For the total 12 months 2022 common whole loans, excluding PPP had been up 11.3%. Our progress in mortgage balances for the fourth quarter versus the third quarter represented roughly 2/3rds C&I progress and 1/third client. CRE balances had been principally flat. We booked $2.2 billion in new business commitments within the fourth quarter, and that is up by a non-annualized 9% from the third quarter and demonstrated our workers success from our calling and prospecting efforts earlier within the 12 months.

That mentioned, I imagine it is clear that the Fed’s program of rate of interest will increase is having an affect on financial exercise, particularly within the business actual property sector as extra debtors consider the affect of the present atmosphere on their tasks. For instance, I believe it is fascinating to take a look at our weighted 90-day pipeline at year-end. It is down 14% from the earlier quarter. Nonetheless, the prospect part of that pipeline is up 19%, whereas the client section of that pipeline is down 32%. In order we proceed to see potential offers are available in from prospects as our robust out there liquidity and our constant underwriting shine via, our present buyer base displays the general softening of the business actual property market. Common deposits within the fourth quarter had been $44.8 billion, a rise of greater than 9% in contrast with the $41 billion within the fourth quarter of final 12 months.

And for the total 12 months 2022, common whole deposits had been $44.6 billion, up 15.9% over 2021, and Jerry will speak extra about current deposit tendencies in his feedback. We proceed to see nice progress in our client banking enterprise. Common client loans had been $2.3 billion within the fourth quarter, up by 22.6% over the fourth quarter final 12 months. That is primarily from our client actual property merchandise of HELOC, house fairness and residential enchancment. The outlook for these loans continues to be good and credit score robust. The truth is, the buyer mortgage progress in 2022 was 283% of our earlier greatest 12 months. The sharp enhance in mortgage charges created the right atmosphere for our secured client actual property loans, similar to house enchancment, house fairness and HELOC. Credit score high quality is excellent on this portfolio, and our common credit score rating is 754.

I am additionally happy that we not too long ago started funding loans in our mortgage program. Our group has created a brand new mortgage mortgage course of from the bottom as much as originate and repair mortgage loans and conserving with the Frost philosophy, and we have created a terrific digital and cellular expertise round it. As soon as we full this pilot program, we’ll roll out mortgage lending to prospects on a or restricted foundation with the objective of opening it as much as everybody later this 12 months. Development in new households continues. For the 12 months, we added nearly 26,000 new households, about 6.6% greater than the variety of prospects we had on the finish of final 12 months. Whereas we imagine this represents best-in-class natural progress, it was down barely from final 12 months’s all-time excessive of just about 27,000 prospects, and that is associated to the decrease web variety of branches that we opened in 2021.

Given the rise in opening since then, we anticipate to attain all-time excessive variety of new prospects in 2023. As well as, our throughout wealth advisers has seen a file quantity of latest enterprise. Relating to our department enlargement efforts, the unique 25 Houston enlargement branches have surpassed $1 billion of deposits, and so they proceed to exceed professional formas. Loans totaled $727 million at year-end, together with the extra branches we have opened in what we name Houston Enlargement 2.0. At year-end, we stood at 114% of our family objective 170% of our mortgage objective and 104% of our deposit targets, and we’ll proceed so as to add new places in robust areas across the area. In Dallas, we’re very inspired by the early outcomes of the brand new websites, that are doing even higher than what Houston had achieved in the identical time-frame, 229% of the brand new family objective, 275% of mortgage objective and 372% of our deposit objective.

We added new monetary facilities at a fast tempo within the fourth quarter and shortly, we’ll be as much as 13 places beneath this system. Total, credit score high quality stays good. Drawback loans, which we outline as danger grade 10 and better, totaled $322 million on the finish of the fourth quarter in contrast with $387 million on the finish of the earlier quarter and $691 million a 12 months in the past. We reported a $3 million of credit score loss expense within the fourth quarter. Web charge-offs for the fourth quarter had been $3.8 million in contrast with $2.8 million within the fourth quarter of 2021. Annualized web charge-offs for the fourth quarter had been 9 foundation factors of period-end loans. Non-accrual loans had been $37.8 million on the finish of the fourth quarter, a rise from the $29.9 million on the finish of the third, which was the results of 2 small credit.

With regard to the present financial atmosphere, there are potential dangers on the horizon that might consequence from greater rates of interest, persevering with excessive inflation and pockets of provide chain disruption. Total, investor business actual property mortgage metrics stay secure and indicative of above-average mission working efficiency throughout all portfolio asset sorts. Whereas acceptable debt service protection ratios are nonetheless reported for workplace, multifamily, workplace warehouse and retail asset sorts, a year-over-year decline is noticed at fourth quarter ’22, primarily as a result of affect of rising rates of interest, greater working bills for multifamily and the inclusion of now accomplished building tasks that stay in lease-up. Relating to particularly the workplace portfolio, our optimism round this asset class stems from, one, the character and expertise of the sponsors; two, the predominantly Class A nature of most portfolio workplace tasks; three, tenant high quality and lease period; and 4, robust current workplace portfolio metrics, together with low loan-to-value at a mean variety of 56% and weighted common debt service protection ratio of 1.59x for the present stabilized workplace belongings.

Workplace buildings excellent at year-end had been $1.8 billion, and of this quantity, half was owner-occupied and half represented investor tasks. Our vitality mortgage portfolio concentrations stays within the single digits at 5.4% of loans excluding PPP on the finish of the fourth quarter. Our vitality debtors as an entire have superior charges and leverage ratios which can be the bottom, we have skilled in a few years, as debtors have continued a program of deleveraging and returning extra to shareholders. The present oil and gasoline worth atmosphere continues to be favorable for them, and our debtors usually have a bullish outlook for costs for the close to and intermediate time period. Frost will proceed to supply vitality lending with prudent constructions together with applicable advance charges and hedging constructions to reduce danger.

We have finished a terrific job with closing out the PPP forgiveness course of. So I wish to say I stay pleased with our group to work so arduous and the relationships that we have constructed and strengthened with prospects when they should assist most. We are saying this typically that we have quite a bit occurring for us. We’re increasing into new areas with stunning new monetary facilities. We’re enhancing our client choices with all new mortgage loans. We’re strengthening our communities and rising our model consciousness with thrilling new sponsorship alternatives that can pay dividends for a few years. And better of all, we’re persevering with with our technique of sustainable natural progress. It is stored our firm robust positioned us effectively for regardless of the future holds. Day in and day trip, our workers do all this whereas adhering to our core values of integrity, carrying and excellence and by offering industry-leading customer support.

At Frost, we really work arduous to be a pressure for good in folks’s on a regular basis lives. Now I will flip the decision over to our Chief Monetary Officer, Jerry Salinas, for some further feedback.

Bank

Financial institution

Jerry Salinas: Thanks, Phil. Trying first at our web curiosity margin. Our web curiosity margin share for the fourth quarter was 3.31%, up 30 foundation factors from the three.01% reported final quarter. Greater yields on each balances held on the Fed and loans had the most important optimistic affect on our web curiosity margin share. The rise was additionally positively impacted to a a lot lesser extent by a better yield on funding securities and by greater volumes of each funding securities and loans. These optimistic impacts had been partially offset by greater prices on deposits and each greater volumes and price of repurchase agreements. our funding portfolio. The full funding portfolio averaged $20.1 billion through the fourth quarter, up $727 million from the third quarter common as we proceed to deploy a few of our extra liquidity through the quarter.

We made funding purchases through the quarter of roughly $1.2 billion, which included $735 million in Company MBS securities with a yield of 5.43% and $470 million in municipal securities with a taxable equal yield of about 5.38%. For 2023, our present expectation is that we’d make investments an extra $4 billion of our extra liquidity into funding purchases through the 12 months or about $2.2 billion web of projected inflows through the 12 months. The taxable equal yield on the full funding portfolio within the fourth quarter was 3.09% up 15 foundation factors from the third quarter. The taxable portfolio, which averaged $12 billion, up roughly $534 million from the prior quarter had a yield of two.41% up 21 foundation factors from the prior quarter, impacted by the upper yields on not too long ago bought Company MBS securities.

Our tax-exempt municipal portfolio averages about $8.1 billion through the fourth quarter, up about $193 million from the third quarter and had a taxable equal yield of 4.17%, up 8 foundation factors from the prior quarter. On the finish of the fourth quarter, roughly 76% of the municipal portfolio was pre-refunded or PSF insured. The period of the funding portfolio on the finish of the fourth quarter was 5.8 years, up from 5.3 years on the finish of the third quarter impacted by the prolonged period of our Company MBS securities on this greater fee atmosphere. deposits. On a linked-quarter foundation, common deposits had been down $1 billion or 2.3% with about half of the lower coming from demand deposits and half coming from interest-bearing deposits.

Buyer repos for the fourth quarter averaged $3.6 billion, up $1.6 billion from the $2 billion common within the third quarter. We now have seen some deposit flows into our repo product through the quarter. Whole mixed deposits and buyer repos within the fourth quarter averaged $48.3 billion, up $571 million from the prior quarter. The price of interest-bearing deposits for the quarter was 1.16%, up 54 foundation factors from the third quarter. Relating to credit score loss expense, through the fourth quarter, we booked a credit score loss expense of $3 million, which represents the primary quarter we booked a credit score loss expense this 12 months. The credit score loss expense was pushed by progress in unfunded commitments. Unfunded commitments grew $698 million through the quarter, ending at $12.5 billion on the finish of the 12 months.

non-interest revenue on a linked quarter foundation. Belief and funding administration charges had been up $1.1 billion or 3% as will increase in property charges of $1.6 million, funding charges of $860,000 and actual property charges of $529,000 had been partly offset by a lower in oil and gasoline charges, down $2 million as a consequence of decrease commodity costs. Service expenses on deposit accounts had been down $639,000 or 2.8% primarily because of decrease business service expenses, down $1.5 million, largely ensuing from a better earnings credit score fee on annualized balances. Partially offsetting this lower was a $756,000 enhance in mixed client and business overdraft expenses. Insurance coverage commissions and charges had been down $1.5 million or 11.2% from the third quarter because of decrease life insurance coverage commissions, which had been down $706,000 and in addition impacted by our regular enterprise cycle.

Different revenue was up $7.1 million, primarily as a consequence of a $5.1 million distribution obtained from an SBIC funding. Relating to whole non-interest bills, whole non-interest expense was up $23.4 million or 9.1% in comparison with the third quarter. The first drivers had been salaries and wages up $9.5 million or 7.5% and different bills up $13.3 million or 29.2% in comparison with the third quarter. The rise in wage and wages was impacted by a $6.4 million enhance in inventory compensation as these inventory awards are made in October of yearly and a few by their nature, are expensed instantly. Moreover, accrued incentives had been up $1 million from the prior quarter. The rise in different non-interest expense of $13.3 million was impacted by greater fraud-related losses up $4.7 million, $4 million associated to a licensing negotiation and advertising and promoting up $2.7 million, which is often greater within the fourth quarter.

our projection of full 12 months 2023 whole noninterest bills, we anticipate whole non-interest expense for the total 12 months 2023 to extend at a share fee within the mid-teens over our 2022 reported degree. Our continued enlargement in Houston and Dallas and the introduction of our mortgage product accounts for about 2.5% of that projected progress. Additionally impacting the projected progress fee is important investments that we are going to be making in info expertise for each folks and infrastructure. Investments in advertising in each promoting and folks as we give attention to increasing the communication of our price proposition and expense progress can also be impacted by prices related to continued help of our workers. The efficient tax fee for the fourth quarter was 13% or about 13.8%, excluding discrete objects.

Our present expectation is that our full 12 months efficient tax fee for 2023 must be within the vary of about 14.5% to fifteen.5%, however that may be affected by discrete objects through the 12 months. Relating to the estimates for full 12 months 2023 earnings, our present projections embrace a 25 foundation level Fed fee enhance in February, adopted by a 25 foundation level lower in July. Given these fee assumptions and the 2023 non-interest expense progress of mid-teens, we at present imagine that the present imply of analyst estimates of $10.89 is affordable. With that, I will now flip the decision again over to Phil for questions.

Phil Inexperienced: Hello Jerry, we’ll open it up for questions now.

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