Cullen/Frost Bankers, Inc. (



Q3 2011 Earnings Call

October 26, 2011 01:00 pm ET


Greg Parker - IR

Dick Evans - Chairman & CEO

Phil Green - Group EVP & CFO


Ken Zerbe - Morgan Stanley

Steven Alexopoulos - JPMorgan

Brady Gailey - Keefe, Bruyette & Woods

Bob Patten - Morgan Keegan

Brett Rabatin - Sterne Agee

Terry Mcevoy - Oppenheimer

David Grayson - SunTrust Robinson Humphrey

Bob Patten - Morgan Keegan



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Good morning. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cullen/Frost Bankers Third Quarter Earnings Call. (Operator Instructions) Thank you, Mr. Greg Parker. You may begin your conference.

Greg Parker

Thank you. This morning’s conference call will be led by Dick Evans, Chairman and CEO, and Phil Green, Group Executive Vice President and CFO. Before I turn the call over to Dick and Phil, 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 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 at our website or by calling the Investor Relations department at 0220-5632.

At this time, I'll turn the call over to Dick.



Thank you, Greg. Good morning, and thanks for joining us. It’s my pleasure today to review Cullen/Frost’s third quarter 2011 results. Our Chief Financial Officer, Phil Green, will then provide additional comments. After that, we’ll be happy to answer your questions.

Cullen/Frost continues to produce steady results in a challenged economy and extended low interest rate environment. Our solid results are a credit to our employees. We remain focused on providing the best possible service to our customers.

During the third quarter, our net income was $54.5 million compared to $55 million reported in the third quarter of 2010. On a per share basis, our earnings were $0.89 per diluted common share, about equal to $0.90 per diluted common share one year ago. Return on assets and equity were 1.15% and 9.79% respectively compared to 1.25% and 10.49% for the same period of 2010.

Included in our quarterly results are two unusual items during the quarter the company corrected an under accrual of taxes from incorrectly deduct in premium amortization on municipal bonds since 2008. This resulted in the unusually high effective tax rate in the third quarter of 30.3%. As a result, the corporation recognized additional income tax expense totaling $6 million. This was offset in part by a $4.2 million after tax net gain on the sale $32.6 million in long term duration municipal securities during the quarter.

Now let’s take a look at deposits which continues to be strong. For the third quarter of 2011, average total deposits were $15.4 billion, an increase of $586 million over the previous quarter and $1.1 billion more than the $14.3 billion reported for the third quarter a year ago.

Our disciplined calling and team selling efforts continued to expand our customer base which should drive our future growth. Nearly half of our deposit growth for the quarter, 43% was from new depository customers.

For the third quarter of 2011, net interest income on a taxable equivalent basis increased to $160.6 million, up 3.1% over the 155.7 reported a year earlier. This clearly resulted from an increase in the average volume of interest-earning assets, and was partly offset by a decrease in net interest margin. Strong growth in deposits helped to fund the increase and the volume of earning assets.

Net interest margin was 3.81% for the quarter compared to 4.4% for the third quarter of 2010, and 3.95% for the second quarter of 2011. Non-interest income was $79.2 million for the third quarter, up $8.8 million compared to the third quarter of 2010. This included the one-time gain from long-term security sale we mentioned earlier. Without this gain, non-interest income would have been up $2.4 million from the third quarter of last year. I was pleased to see the strong growth in trust fees, the majority of investment fees. For the quarter, trust fees were $18.4 million, up $1.4 million from the third quarter of 2010.

Insurance commissions and fees were up $1 million primarily from higher benefit commissions which were boosted in part by the May 2011 acquisition of Clark Benefit Group. We saw solid increases in both, net interest income and non-interest income for the quarter. It’s gratifying to see the response to our company’s value proposition since the financial crisis began. It validates our way of doing business as customers come to understand the Frost difference.

Non-interest expenses for the third quarter were $137.4 million, up 3.7% or $4.9 million from the third quarter of 2010. Salaries rose 3.3% or $2 million from normal annual merit increases. Advertising and promotional expenses increased $2.2 million as we continue to tell others about the unique customer-focused banking experience at Frost.

I will discuss the economy a bit later, but we see the consequences of the economic uncertainty and excess government regulation, most clearly in loan demand. Uncertainty and over regulation are job killers for businesses of any size regardless of locations, even in a relatively strong state like Texas.

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