Cullen/Frost Bankers Inc
NYSE:CFR
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Cullen/Frost Bankers Inc
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Thank you Sherri. This morning'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 that such statements should 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 the 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 morning, everyone. Thanks for joining us. Today, I'll review the fourth quarter results for Cullen/Frost. Our Chief Financial Officer, Jerry Salinas, will also provide additional comments and then we'll open it up to your questions.
In the fourth quarter, Cullen Frost earned $117.2 million or $1.82 per share, which represented 19% increase compared with the $1.53 per share reported in the same quarter last year. For the full year of 2018 Cullen/Frost earned $6.90 a share, which is up more than 25% from 2017. Our solid fourth quarter, and full year earnings result from our continued execution of our plan to pursue consistent above average organic growth across our enterprise.
Our return on average assets reached 1.48% in the fourth quarter compared to 1.26% in the fourth quarter last year. For full year 2018 return on average assets was 1.44% compared to 1.17% in 2017. During the fourth quarter, total average loans were $13.9 billion. This represents an increase of $1.1 billion or slightly over 8% versus the fourth quarter of last year and growth was broadly-based across all categories.
Our provision for loan losses was $3.8 million for the fourth quarter, compared to $2.7 million in the third and $8.1 million in the fourth quarter of '17. And non-performing assets totaled $74.9 million in the fourth quarter and they were down 13% from the third quarter. Additions during the fourth quarter totaled only $2 million, which was the lowest quarterly add in several years.
Net charge-offs in the fourth quarter were $9.2 million compared with $15.3 million in the third and $7 million in the fourth of last year. Fourth quarter charge-offs mostly have been identified as problems and had allowance dollars allocated to them in previous quarters. Fourth quarter annualized net charge-offs were only 26 basis points of average loans.
Overall delinquencies for accruing loans at the end of the fourth quarter were $80 million and was 57 basis points of period end loans. Those numbers are slight improvements from the third quarter and well within our standards and comparable to what we've experienced over the last three years.
Total problem loans, which we define as risk grade 10 and higher, decreased by $26.8 million or a little over 5% compared to the third quarter. They were down about 35% from a year ago. Problem energy loans were down 17% from the third quarter. During the fourth quarter energy commodity prices saw increased volatility but that didn't impact our energy customers significantly. Remember that at Frost we don't bank industries we bank people in industries and our energy customers know that volatility is inherent in the business and they've been prudent with their operating models and balance sheets.
Energy related problem loans totaled a $115 million at the end of the fourth quarter compared to a $139 million for the third quarter, $249 million at the end of 2017. And it was pointed out to me earlier today by our Chief Credit Officer that, that number was down $600 million at the high. The percentage of energy loans in our portfolio remains well below our peak of more than 16% in 2015. Jerry is going to give you a brief Texas economic update, but I'd like to say that after talking to our bankers and our customers there's still a great deal of optimism about opportunities in the state.
Average total deposits in the fourth quarter were $26.5 billion, up slightly from the fourth quarter last year. We saw a steady growth in our money market accounts and CDs as our interest rate increases over the last 18 months continue to see good traction.
In Consumer Banking, our value proposition and award winning service, coupled with our drive to increase deposits, market share in Houston and Dallas continued to attract customers. We opened the first of 25 new financial centers over the next two years in the Houston area just before the end of the fourth quarter.
And overall net new customer growth for the fourth quarter is up by 46% compared with the year ago. Same store sales increased by 4.9% compared to $12 million and compared to 12 months ago. Excluding the Rio Grande Valley, same store sales increased by 8% year-over-year. About 23% of our account openings came from our online channel, which includes Frost Bank mobile app, and that's nearly 40% higher than last year.
The consumer loan portfolio averaged $1.67 billion in the fourth quarter, increasing by 8% compared to the fourth quarter of '17. On the commercial side our focus is on consistent balanced loan growth, including the co-loan component, while maintaining our credit quality standards during this period. I'm pleased that the level of new commitments booked from both core and large relationships continues to be evenly split.
Looking at new loan commitments during 2018, overall they declined by 9% from 2017, but that was due to lower energy and commercial real estate commitments. We saw very good growth in community banking, commercial and industrial commitments which rose by 12% compared to last year. With regard to our current active loan pipeline, the fourth quarter was up from the previous year by 2%.
Finally, during the fourth quarter, we took the opportunity to utilize some of the 150 million stock buyback authorization, buying $100 million in CFR shares. Let me say I'm extremely pleased with what our people at Frost have been able to achieve over a very eventful year 2018, the year that we celebrate our 150th anniversary of our companies founding. I said many times you don't get to be 150 years old, without outstanding employees who take great care of their customers.
As we began 2019, we're happy to learn from third party services and our own market research that our company's net promoter score, which measures how likely it is that people would recommend Frost to friend or colleague is up significantly. We've also seen healthy increases in our brand awareness in key markets. We continue to discuss our optimism initiative, which has resulted in consideration of Frost as a thought leader.
Our sponsorship agreements with the San Antonio Spurs and Houston Rockets of the NBA, are providing great exposure of our brand. Later this year we'll move into our new San Antonio headquarters building, which already has a fan base on social media. And of course, we'll continue to expand our presence not only with our special initiative in Houston, but also with normal expansion in our other markets.
Having a positive optimistic attitude toward opportunities, along with award winning customer service and an attractive value proposition has allowed us to build the kind of long term relationships that have sustained Frost for more than 150 years. And that remains true today.
Now I turn the call over to our Chief Financial Officer, Jerry Salinas for some additional comments.
Thank you, Bill. I'll make a few general comments about the Texas economy, before I provide some additional information about our financial performance in the quarter and I'll close with our guidance for full year 2019. Regarding the economy, the Texas economy continued to grow in the fourth quarter, but at a slightly slower pace than in previous quarters. While employment growth has begun to plateau due to labor market constraints, unemployment continued to decrease to record lows.
According to the Federal Reserve's Dallas branch, Texas employment had expanded by 2.4% year-to-date toward the end of 2018. The energy, manufacturing and financial sectors led growth during the fourth quarter, while the trade transportation and utility sector and the construction industry also added jobs at a strong pace. The Texas unemployment rate fell to 3.7% in November, the most recent month that statistics are available. That's the lowest level in four decades.
Now moving to our financial performance, and looking at our net interest margins, our net interest margin percentage for the fourth quarter was 3.72%, up 6 basis points from the 3.66% reported last quarter. Driving the increase was the favorable effect of higher yields on loans and balances kept at the Fed and higher loan volumes. These favorable variances were partly offset by higher funding costs on both deposits and customer repos during the fourth quarter.
The taxable equivalent loan yield for the fourth quarter was 5.20%, up 16 basis points from the 5.04% reported in the third quarter, driven primarily by the increase in interest rates. Looking at our investment portfolio, the total investment portfolio averaged $12.4 billion during the fourth quarter, up about $380 million from the third quarter average of $12.1 billion. The taxable equivalent yield on the investment portfolio was 3.39% in the fourth quarter, down 2 basis points from the third quarter.
Our municipal portfolio averaged about $8.1 billion during the fourth quarter, up about $180 million from the third quarter. The municipal portfolio had a taxable equivalent yield for the fourth quarter of 4.08%, down 7 basis points from the previous quarter. At the end of the fourth quarter, about two-thirds of the municipal portfolio was pre-refunded or PSF ensured.
The duration of the investment portfolio at the end of the quarter was 4.5 years, down slightly from 4.7 years the previous quarter.
Looking at our funding sources the cost of total deposits for the fourth quarter was 37 basis points, up 3 basis points from the third quarter. The cost of combined Fed funds purchased and repurchase agreements, which consists primarily of customer repos, increased to 1.56% for the fourth quarter, from 90 basis points in the previous quarter.
We instituted a tiered rate for our customer repos during the third quarter, but we continue seeing quite a bit of exception pricing in this product. Those balances averaged about $1.1 billion during the fourth quarter, up about $127 million from the previous quarter.
Regarding estimates for full year 2019 earnings, we currently believe that the mean of analysts' estimates of $7.11 is reasonable. With that, I'll now turn the call back over to Phil for questions.
Thanks, Jerry. I now open the call up for questions.
Thank you. [Operator Instructions] Our first question comes from Brady Gailey with KBW.
Hi. It's Brady. Good morning, guys.
Good morning, Brady.
Maybe just start with the buyback. Phil, I heard you say $100 million in the fourth quarter. What was the average price that you repurchase that at? And just as you look forward, your TC is kind of around the 8% level. How do you think about additional buybacks from here?
Brady, our average price was $97.34. And just to remind you, we do have $150 million buyback program currently outstanding. We did purchase $100 million. So we do have $50 million still authorized.
Right, and then thoughts going forward, can we expect Frost to continue to be active on the buyback front?
I think we will as see opportunity. We don't have a specific schedule. But we've always said we want to be opportunistic and will continue to do that.
And then you have one of your new locations open in Houston. I know last quarter we talked about the financial impact of that being around a $0.19 per share burden to earnings. Is that - as you all kind of gotten into it, have any of those metrics changed or is that still the way to think about the Houston expansion?
Yes. Brady, I think at this point, it's still so early on that I think the guidance we gave is what I continue to stand on.
Okay. Right. And then just bigger picture, I mean, credit continues to improve for you guys and it's very clean. Is there anything out there that is giving you pause or concern on the credit front at this point?
We are always going to be concerned, right? I mean, we're Frost bankers and we worry about everything. You're just seeing a lot of competition today. I think we are - if you look at what we've lost in the pricing structure I think we moved up last quarter to 60% structure versus 40% price. You're seeing longer terms, no prepayment penalties, lower collateral levels, longer amortizations. So you're seeing a lot of competition in that regard. So we just got to maintain our discipline there.
We've had the volatility that I mentioned in my comments in the energy markets. I feel really good about how the portfolio performed. But it's a commodity based business. And so that's - you have to watch that and I feel really good about what we've been putting on and the structures of that. But it's - you always have to watch that, and that's the nature of that business.
You know, I'd say the economy is strong as Jerry pointed out. You know you get to watch supply in some markets. I think it's good. But you've got some slowing in certain segments. For example housing in some markets is slowing a bit. Not bad, but slowing, just general things. There's not any one particular thing that I'm more worried about. Just making sure that we maintain our credit underwriting principles and stay close to our customers.
All right great. Thanks for the color guys.
Thank you. Our next question comes from Jennifer Demba with SunTrust.
Good morning. Question for Jerry on the net interest margin, Jerry, what's the outlook this year, a variety of rates in areas - zero rate hikes or maybe one or two.
Jennifer in all those scenarios that you mentioned we do project an increasing net interest margin percentage. Obviously the rate hike that we got in the fourth quarter of last year helps push us forward. So in that one or two rate hikes scenario of course that would be a positive for us. But even in a flat scenario, given the win behind us we are still projecting increasing trends in that net interest margin percentage.
Can you talk about the deposit competition you are seeing right now, changes you've seen maybe in the last three, six months if any?
I think that from a pricing standpoint you know it's still pretty consistent. I mean I think I took a look at the price - the rates today against competitors locally and nationally and I still feel good about where we are. I think that's what we've been saying. So yeah, we continue to perform well there. I think you know the pressure continues to be on the DDA accounts. I think that's what we've talked about the last couple of quarters.
We're seeing more diminishment on the commercial side, and that kind of goes back to what we've seen in previous scenarios when rates started to move up. I think what we said is we believe there may be some stabilization once rates start increasing - or excuse me, stop increasing. And we are just having a lot of the CFOs I think looking at interest rates and trying to find some better rates on those commercial deposits.
So not any real big changes in my mind from this quarter compared to last.
Thanks so much.
Hey, Jennifer, I feel good about the - like I said the traction that we're getting on those areas where we increased rates, has gone back to cash basis, July '17 now and I think we are seeing good traction in Mas [ph] and CD. So I feel good about what we are paying, I think we are giving our customers a square deal and I think we are going to get known for a place that does that. I think we are seeing some benefit from it.
Thank you.
Thank you. Our next question comes from Peter Winter with Wedbush Securities.
Good morning. I just was curious, was there anything nonrecurring in the other non-interest expense. And I'm just curious what the outlook is for expense growth next year with the build out of the branches.
Let me try to see like if there's anything unusual, you are talking about in the fourth quarter this year?
Yes, so it jumped.
Well, I think the - I think that if you - so you are talking about on a linked-quarter standpoint.
That's right.
We did have - about a $1.5 million related to some write-offs on some assets, also about $700,000 higher in advertising and direct mail. So those are probably the big things there compared to the linked quarter.
As far as outlook for expenses, we are not going to give any sort of explicit expense growth guidance. What I will say is that as we continue to grow our business and we continue to provide excellent customer service we'll continue to see increases in expenses. And in addition we've noted our Houston expansion where we're excited about that opportunity, but for our expenses are going to be front-end loaded, given the nature of that build out.
And Phil also talked about sponsorships and marketing expenses that we are putting in place to increase brand awareness. So I think all of those things will push the growth rate higher in '19.
Okay, thank you. And just on credit. Obviously it's outstanding. And you mentioned that, no big concerns. I am just wondering given where the reserve to loan ratio is, and I know it's formula-driven, but would you expect to start adding to reserves in 2019?
I think you said, and it's formula driven. And it just depends on what happens with classifications and risk rate, I think is the primary thing. I mean you can see, we still got some energy credits moving to the [indiscernible]. So it depends on what happens with some of those. But I don't think we are tied to any one particular number. Jerry, any comments.
No, I guess what I would say is as you noted there really the provision levels during 2018 were unusually low. I mean we had excellent credit quality, we had a lot of improvement on the energy side. So risk-rating improvements, improvements on historical loss factors. So a lot of positive momentum there. That resulted in not having to provide as much as we charged off, given that we had reserves associated with those credits, already allocated to those credits.
So from a provision standpoint, if you are just talking about provision levels, '18 versus '19, I certainly expect that provision levels would be higher given the great credit quality in '18 and the improvement in '18.
And some of this is going to be that as we grow the portfolio, there's going to be normal provisions that go along with that as well. And we've been doing a nice job of consistent growth.
Got it. Thanks appreciate it.
Thank you. Our next question comes from Ebrahim Poonawala with Bank of America Merrill Lynch.
Good morning, guys. Just a question, so a year - I appreciate that you don't want to give a specific guidance on expenses. But if we put together kind of how you talked about the margin and expenses, how do you think about the efficiency ratio? Like do you see that staying around this 55 to 56 or do you still expect positive operating leverage even while you invest for this Houston expansion, any though process around that would be helpful.
Yeah, I think with the Houston expansion, that there's certainly got to be some pressure on that efficiency ratio based on where we ended up the year is kind of I guess what I would say. I think that - I don't envision that it'll change significantly but I think it's going to be under pressures as we put those additional Houston branches on the books.
Yeah, I'd agree with Jerry. One of the things, Ebrahim, that we've talked about early on as we started to talk about this whole initiative in Houston was one of the decisions that we were making was how much of our improving operating leverage are we spending on growing the core business. And so we'll continue to have a business that can grow organically and above average rates. So I think the nature of that kind of investment does spend some operating leverage, but I don't think it's something that changes the momentum or direction of our company, it's continuing to be positive.
And just because obviously the market's been all over the place between now and when you first discussed this is in October. What's the - I know you think very, very long term like is there a point where the macro backdrop deteriorates, you pull back from the strategy a little bit to kind of manage expenses better, or what things need to go get materially worse for that to happen or that cannot happen?
I would not - I don't expect that to happen. That strategy is long term, and as I said Texas - let's say we have a downturn. I mean Texas tends to operate at higher levels than the nation, but the Houston market is a great one. It's growing. I mean it grew through the really bad, you could argue, the really bad downturn in the energy business over the last few years.
So I would not expect us to materially alter that if we had some turmoil in the economy and that is the long term strategy that we don't want to continue to prosecute.
That helps, and just one last question on - Jerry on the margin so it sounds like the margin should go higher with or without rate hikes. Is there a tipping point where the margin starts feeling pressure or there is just so much repricing and you feel good about the deposit cost where you and without the fed doing anything and big changes in the yield curve that it should continue to drift higher?
Yeah, I do feel good about it. I think that one thing you'll see in our 10-K which we would expect to file late next week is we do have over $2 billion in treasuries that are set to mature next year at a rate about $1.55 so the redeployment of those proceeds are on their own. But it's obviously it will affect duration as we move forward but obviously it will help the yield compared to this year.
Understood, thanks for taking my questions.
Thank you. Our next question comes from Brett Rabatin with Piper Jaffray.
Hi guys good morning. Wanted to I guess first two housekeeping issues when you happen to have average interest bearing funds for the quarter and then ending period securities and then maybe just talk about what you did in the securities book this quarter if you can?
Sure hold on just a second. So our investment portfolio at the end of December looks like it's about pretty close to $12 billion size. And then nothing much activity during the quarter. So - gravity here in front of me. I think we purchased municipal of about see here about $65 million in municipals during the quarter at a key rate of about 4.39 and we also bought a $100 million in agencies at a yield at 3.91.
Okay and then Jerry would you happen to have the average interest bearing funds.
Sure for the quarter average interest bearing deposits were 15.767.
Okay and then just wanted to circle back around about expenses and I know last year you would talk some say about AI and doing some things to further the growth of the franchise besides the Houston investment. Is that part of a plan in '19 and is that also impact expenses and maybe just little more color around if you're doing other things besides the Houston build out in '19 that might be impactful.
Yeah, Brett, our conversations around that, really, I think if I'm remembering that conversation has to do with, there were decisions this company made that a generation ago, like 22 years ago with data warehouse technology and 20 years ago with hosting our own website and web development that really have benefited us as we move forward, since that time, and it allowed us to punch above our weight class, as far as customer service and projecting our brand.
Those were great decisions, but my point on all that is that we - and I think this is true for the industry. We've got to make decisions today. We get - that as we go forward in the future, future bankers will look back on and say the same thing about those decisions as I just said about the two I just mentioned. And the thing that's a little more complicated today, I think, is because there are a lot more swim lanes and types of technology and technological waves than there were back 20 years ago when we made those decisions.
And AI is an example where there's crypto-currency or whether it's YouTube, and we just go down the line on the various different kinds of technologies that are coming to market. And so we have to make the right decisions on where to invest on those. I personally believe that AI is one that I think is going to help the industry and that if - as I look at the landscape, and I think what has the probability of being one of those technologies that will really help us and we can look back at it, how it did help our business I think that's one of them.
We do have some opportunities to utilize that on the margin in the business. But that's not something that is a large investment for us right now. What we're doing is we're trying to understand how it might impact us and position ourselves to take advantage of that as we move forward. It's not something that will be affecting us at any material way in 2019.
Okay. And then maybe just one last one, trust and insurance were bright spots in '18, but fee income was a little slower in an aggregate relative to '17. Are you guys thinking about opportunities and fee income and what would they be?
Well, I think those are two good businesses for us. And I think, we had - the market didn't help the fourth quarter, and if anybody, you're in that business, so you know. But I think up until that point, we'd had a really a pretty good year without those headwinds. I feel good about the business long term I feel good about what they plan on doing this this year. I think our insurance businesses is doing well. It's - they managed a 20% pretax profit margin last year, which I think is great for that business. And so they they've had some good momentum. So I think they'll both be contributors.
Okay, I appreciate all the color.
Thank you [Operator Instructions]. Our next question comes from Steven Alexopoulos with JPMorgan.
Hey, guys, this is Anthony [ph] on for Steve. My first question is another one on expenses. How much of the increase in expenses during the quarter was driven by the one branch that opened as well as the upcoming openings particularly in the salaries line?
I don't think they had a - Steven, I don't think they had - excuse me, Anthony. I don't think they had a significant impact on the fourth quarter.
Okay, got it. And then turning to non-interest bearing deposits. It's good to see another small increase for the second straight quarter. Can you comment on any migration you're seeing out of non-interest bearing into interest bearing accounts?
I think that that really what we're saying primarily on that. We do see some of it obviously but I think the bigger changes is really the big large commercial accounts going to sweep account. So I think that's kind of really what we're seeing more of here recently
Okay got it. And then my last question just on loan growth. Is a high single digit pace still good growth rate to expect for 2019? And then do you expect this growth to be broad base or any particular segments outperformed?
Our expectations will continue to be consistent with our growth. And so yeah, I think that's our target. And yeah, we expect it to be broader based.
Got it Thank you.
Thank you. And we do have a question from Jon Arfstrom with RBC Capital Markets.
Hey Thanks. Good morning.
Hey Jon.
I think all the numbers have been handled, but just early assessment on how it's going in Houston. And curious when the branch open and how it's so far and maybe an update in terms of any more or less optimistic on the outlook?
Well, it's early. I'll kind of ask, Jon, you sound like - I think the first week it opened and we have a weekly meeting with our team, that's our implementation team, had been - I think have been open six days they reported that. And one of us said, well, how's it going? It's very early.
Look, these are long term strategies. We're not planting corn. We're planting trees and the important thing is are we hiring the right people to be picked the right markets? And I think, everything we know about these markets, we feel really good about it. I feel good about how we've been able to hire people, because we've got 260 plus people, I think that we want to hire in that market as we expand. And I think we've hired almost 70% of the posted positions that we have - that we put out so far.
And just anecdotally, the response that we're getting from people has been really good. A response that I've heard from our folks is that they'll hear someone say, I wasn't planning on looking at anything, but when I heard it was Frost, I decided to answer the call.
And I think that's gratifying, and I hope it represents that people understand we have a great culture and great place to work. And we're growing company in a growing market. So hope it will create a little bit of momentum there. And I feel really good about the hiring so far. And when I look at, the relationship managers that we've been able to bring on, they've been experienced. And so I'm encouraged.
Okay. And the brand awareness spending is that targeted or maybe allocated a bit more to Houston at this point?
There are some. The Rockets sponsorship that we did is - we wanted to increase our brand in Houston, but I think we were also motivated by our move in four net markets. So I think it was an opportunity for us to leverage the Rockets. I mean they're great franchise and a lot of excitement around them in Houston markets. So we're more visible there. And so that was one I would say is related to that. And we're also increased our market spend in the Houston market, because we want to develop that market.
Okay. All right. Thank you.
Ladies and gentlemen, thank you for participating in the question-and-answer session. I would now like to turn the call back over to management for any closing remarks.
Well thank you. And we appreciate your participation in the call. And with that we'll be adjourned.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect and have a wonderful day.