Cullen/Frost Bankers' CEO Discusses Q4 2011 Results - Earnings Call Transcript

Cullen/Frost Bankers, Inc. ( CFR)

Q4 2011 Earnings Call

January 25, 2012 11:00 a.m. ET

Executives

Greg Parker - IR

Dick Evans - Chairman & CEO

Phil Green - Group EVP & CFO

Analysts

Dave Rochester - Deutsche Bank Securities

Scott Valentin - FBR Capital Markets

Bill Young - Macquarie

John Pancari - Evercore Partners

Brady Gailey - Keefe, Bruyette & Woods

Brett Rabatin - Sterne Agee

Justin Maurer - Lord Abbett

Jon Arfstrom - RBC Capital Markets

Presentation

Operator

Good morning. My name is Ashley, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter 2011 Earnings Conference Call. (Operator Instructions) Thank you.

I would now like to turn the conference over to Greg Parker, Director of Investor Relations. Sir, you may begin your conference.

Greg Parker

Thank you, Ashley. 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 210/220-5632.

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

Dick Evans

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

I am pleased to report that 2011 Cullen/Frost posted record annual earnings and topped $20 billion in assets for the first time in the company history. We also saw the best quarterly credit quality improvement in the past two years. The strong and consistent results amid continued economic challenges and regulatory headwinds are a credit to our dedicated employees and strong value proposition.

During the fourth quarter, our net income was $55.4 million compared to $53.1 million reported in the fourth quarter of 2010. That was $0.90 a share versus $0.87 last year. Fourth quarter return on average assets and equity were 1.12% and 9.74% respectively. The company reported annual earnings for 2011 of $217.5 million, an increase of 4.2% over the 2010 earnings of $208.8 million.

Now let’s look at deposits which continued to be strong. For the year ended December 31, 2011 average total deposits were $15.2 billion, up 8.4% or $1.2 billion over the $14 billion reported in 2010. Much of our deposit growth comes from new relationships developed with business customers through our focused calling effort. These new relationships will help form the foundation for future growth when the economy eventually improves. We saw a good growth both in new consumer relationships and from existing customers.

Net interest income for the fourth quarter of 2011 was $165.3 million compared to $155.2 million last year. This increase primarily resulted from an increase in average volume of interest earning assets and was partly offset by a decrease in the net interest margin. Strong growth in deposits helped to fund the increase in the volume of earning assets.

The net interest margin was 3.76% for the fourth quarter compared to 3.93% for the fourth quarter of 2010 and 3.81% for the third quarter of 2011. For the year 2011, the net interest income on a taxable equivalent basis increased to $642.1 million, up 4.2% over the $616.3 million reported in 2010.

Non-interest income for the fourth quarter of 2011 was $67.7 million, down $2.6 million. The Dodd-Frank commitment to -- the Durbin amendment to Dodd-Frank negatively impacts non-interest income by approximately $5 million per quarter. In the fourth quarter, that impact was most evident in other income, which was down $3.4 million and service charges on deposits, which were down $1 million. For the entire year, non-interest income was $290 million, up $8 million over 2010.

Non-interest expenses for the fourth quarter of 2011 was $143.8 million, up $10.1 million from the $133.7 million in the fourth quarter of 2010. Salaries rose $5.4 million over the same quarter a year earlier from normal annual merit and market increases as well as increase in stock-based compensation expense and incentive compensation.

Brand marketing and advertising increased $2.4 million to help us spread the great message about Frost. We also made a special $2 million contrition to the Frost Charitable Foundation for donations to worthy non-profits in communities we serve.

Economic uncertainty over regulation and intense competition on pricing and structure continued to affect our loan environment. For the year ended December 31, 2011, outstanding loans remained relatively flat at $8 billion. We are working hard to drive new loan commitments through long term relationships and good quality loans.

It is encouraging to see that more of a return to normal in commitments from our customers. For the year, we added 18% more new loan commitments than in 2010. But our loan pay-off rate was much higher than in previous years. Comparing the year end 2010 and 2011, it’s encouraging that our revolving commitments increased by 9.6% and our construction commitments increased by 10.7%. It’s interesting that while commitments are increasing, at the same time the funding rate is decreasing.

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