Cullen/Frost Bankers' CEO Discusses Q2 2012 Results - Earnings Call Transcript

Cullen/Frost Bankers, Inc. (CFR)

Q2 2012 Earnings Conference Call

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


Dick Evans – Chairman and CEO

Phil Green –EVP and CFO


Brett Rabatin -- Sterne Agee

Brady Gailey – KBW

Steven Alexopoulos – JPMorgan

John Pancari -- Evercore Partners

Dave Rochester -- Deutsche Bank

Kevin Reynolds -- Wunderlich Security

Emlen Harmon – Jefferies

Scott Valentin -- FBR Capital Markets

Matt Olney – Stephens

Jon Arfstrom – RBC



Good morning. My name is Fiya, and I’ll be the conference operator today. At this time, I’d like to welcome everyone to the Cullen/Frost Bankers Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. I will now turn the conference over to Mr. Greg Parker. Sir, you may begin.

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 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 210-220-5632.

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 2012 second quarter results. Our Chief Financial Officer Phil Green will then provide some additional comments and after that we both would be happy to answer your questions.

I am pleased to report another good quarter for Cullen/Frost, highlights include 5.2% increase in perio-end loans over 2011 and the best quarter new loan commitments in four years. New customer relationships drove 13.7% increase in deposits and improvement in all credit quality indicators. The quarterly earnings reflects our ability to operate effectively despite a sluggish economy, regulatory challenges and historically low interest rates. While we remain cautious about the economy and the anemic recovery, we’re grateful to our dedicated employees and our loyal customers for another solid quarter.

Our net income was $58.1 million or 4.3% over the $55.7 million reported in the second quarter of 2011. On a per share basis, we recorded $0.94 a share versus $0.91 during the second quarter of last year. Second quarter returns on average assets and equity were 1.14% and 9.95% respectively. Deposits continue to grow significantly. For the quarter ending June 30th 2012, average total deposits were $16.9 billion, up 13.7% over the $14.8 billion reported in the second quarter last year. Throughout the recessions, we have focused on building new relationships. Those new relationships account for a significant amount of the $2 billion and average deposit growth since the second quarter of last year. New relationships are the foundation for future growth, especially when the economy recovers.

As an example of our commitment to continue building customer relationships in Texas, we’re happy to say that today we have signed an agreement with Coretronics , which allows Frost customers to access ATMs at all Texas, the little corner stores throughout the state.

Non-interest income for the second quarter of 2012 was $164 million compared to $159.5 million for the second quarter last year. This is primarily related to an increase in the average volume of interest, earning assets and was partly offset by a decrease in the net interest margin to 3.61%.

Non-interest income for the second quarter 2012 declined only 1% from last year despite a significant negative impact from the Durbin amendment to Dodd-Frank. The Durbin amendment negatively affected interchange in debit card transaction fee income by some $4.4 million from the second quarter of last year. Even so, we were able to make up much of the short fall, thanks to continued good performance in other areas. For example, trust and investment management fees increased 4.8% from the second quarter of 2011.

Insurance commissions and fees were up 16% from a year ago to $9.2 million. Non-interest expenses for the second quarter of 2012 were $142.5 million, up 4.2% from the second quarter of last year. Salaries and benefits increased 2.5% over the same quarter a year earlier as a result of normal annual merit and market increases.

Turning to loan demand. We had the best quarter for new loan commitments in nearly 4 years as the positive loan growth trend continues. Average total loans for the second quarter were $8.3 billion compared to $8.1 billion a year ago. On a period-end basis loans were up 5.2% to $8.5 billion. Year-to-date we have generated double-digit increases in the number of new relationships and new commitments over last year. Loan request are broad-based across all regions and across all categories.

Our current loan pipeline is higher than it’s been in 18 months. In addition to increased activity, the advance rate on our revolving lines has increased this year. So customers are using their lines more now than they were last year. While persistent economic uncertainty still clouds the lending environment, large and medium-sized company attitudes are moving to the positive side. This is natural because large companies are the first to borrow when conditions improve and they are the first to cut back when the economy head south. Our focus on better teaming preparation and collaboration is paying off significantly along with our disciplined culling effort.

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