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Edited Transcript of CFR earnings conference call or presentation 25-Apr-19 3:00pm GMT

Q1 2019 Cullen/Frost Bankers Inc Earnings Call

SAN ANTONIO Apr 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Cullen/Frost Bankers Inc earnings conference call or presentation Thursday, April 25, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* A. B. Mendez

Cullen/Frost Bankers, Inc. - Director of IR

* Jerry Salinas

Cullen/Frost Bankers, Inc. - Group Executive VP & CFO

* Phillip D. Green

Cullen/Frost Bankers, Inc. - Chairman & CEO

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Conference Call Participants

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* Anthony Albert Elian

JP Morgan Chase & Co, Research Division - Analyst

* Brady Matthew Gailey

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Brett D. Rabatin

Piper Jaffray Companies, Research Division - Senior Research Analyst

* David Patrick Rochester

Deutsche Bank AG, Research Division - Equity Research Analyst

* Ebrahim Huseini Poonawala

BofA Merrill Lynch, Research Division - Director

* Jennifer Haskew Demba

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Jon Glenn Arfstrom

RBC Capital Markets, LLC, Research Division - Analyst

* Kenneth Allen Zerbe

Morgan Stanley, Research Division - Executive Director

* Peter J. Winter

Wedbush Securities Inc., Research Division - MD of Equity Research

* Rahul Suresh Patil

Evercore ISI Institutional Equities, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Cullen/Frost Bank First Quarter Earnings Call. My name is Sherry, and I will be facilitating the audio portion of today's interactive broadcast. (Operator Instructions)

At this time, I would like to turn the show over to Mr. A.B. Mendez, Director of Investor Relations. Mr. Mendez, you may begin.

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A. B. Mendez, Cullen/Frost Bankers, Inc. - Director of IR [2]

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Thanks, Sherry. 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 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 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) 220-5234.

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

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Phillip D. Green, Cullen/Frost Bankers, Inc. - Chairman & CEO [3]

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Thanks, A.B. Good morning, everyone, and thanks for joining us. Today, I'll review first quarter results for Cullen/Frost; and our Chief Financial Officer, Jerry Salinas, will also provide additional comments before we open it up your questions.

In the first quarter, Cullen/Frost earned $114.5 million or $1.79 per share, which represents an 11% increase compared to the $1.61 per share reported in the same quarter last year. Our return on average assets reached 1.48% for the first quarter, and that was compared to 1.36% in the first quarter last year.

Average deposits in the first quarter were $26.1 billion, down slightly from the first quarter last year. The quarter saw a pressure on demand deposit volumes but we continued to see strong new customer flows. Average loans in the first quarter were $14.2 billion. This represents an increase of almost $1 billion or 6.8% versus the first quarter last year. Growth was broad-based across all categories.

Our provision for loan losses was $11 million in the first quarter compared to $3.8 million for the fourth quarter of 2018 and $6.9 million in the first quarter of 2018. Net charge-offs in the first quarter were $6.8 million compared with $9.2 million in the fourth quarter and $12.4 million in the first quarter of last year. First quarter annualized net charge-offs were only 19 basis points of average loans. Nonperforming assets totaled $97.4 million in the first quarter compared with $74.9 million in the fourth quarter of 2018 and $136.6 million in the first quarter of last year.

Overall, delinquencies for accruing loans at the end of the first quarter were $73 million or 51 basis points of period end loans. Those numbers are slight improvements from the fourth quarter and are well within our standards and comparable to what we've experienced in the past 3 years.

Total problem loans, which we define as risk grade 10 and higher, totaled $495 million or 27% lower than the same quarter a year ago. Energy-related problem loans totaled $119 million at the end of the first quarter compared to $115 million in the fourth quarter and $223 million in the first quarter last year. And energy loans represented 10.8% of our portfolio at the end of the first quarter, well below our peak of more than 16% in 2015.

Our focus for commercial loans is on consistent, balanced growth, including the core loan component, while maintaining our quality standards. I was pleased that new relationships increased 22% versus the first quarter a year ago. New loan commitments in the first quarter increased by a healthy 12% compared to the first quarter last year. And not only was it balanced between core and large deals, but it was also evenly split between C&I and commercial real estate.

With regard to our current active loan pipeline, the first quarter was up from the previous year by 21%. Interestingly, this quarter, it's driven more by commercial real estate opportunities than C&I. I will say, overall, competition is increasing. A good indicator is the percentage of deals we lose to pricing and structure, take, for example, C&I loans. Last year, we lost roughly 2/3 to price and 1/3 to structure. While this year, it's split to 2/3 due to more aggressive structures. Looking at commercial real estate, last year, deals lost to structure and price were evenly split at 50-50. However, this year, structure is up to 78% and only 22% related to pricing.

In consumer banking, our value proposition and award-winning service, coupled with our drive to increase deposit share in markets like Houston and Dallas, continued to attract customers. The second of the 25 new financial centers planned over the next 2 years in the Houston area opened just after the close of the first quarter. Overall, net new customer growth for the quarter is up by 35% compared to a year ago. And same-store sales increased by 7.5% compared to 12 months ago. About 28% of our account openings came from our online channel, which includes our Frost Bank mobile app. That's 33% higher than last year. The consumer loan portfolio averaged $1.68 billion in the first quarter, increasing by 7% compared to the first quarter last year.

Another highlight for the quarter was our insurance revenue, which increased 15% compared with the first quarter last year to $18.4 million. It was good to see growth across all product lines. 2019 has already been busy for Frost. In addition to our ongoing expansion in Houston, we've opened a great new financial center in the Rio Grande Valley to serve more customers there. And this summer, we'll move our headquarters in San Antonio across the street to the new Frost Tower, a project that has been in process for several years. We're also opening a new regional headquarters building this summer in Corpus Christi while exiting older locations there and actually reducing operating cost. We're also redesigning and enhancing our digital customer experience. All this is going on at a time when our ongoing Opt For Optimism initiative and our marketing partnerships have boosted nonfinancial metrics like brand awareness, consideration and our Net Promoter Score. We have outstanding, welcoming locations and we have top-quality digital services, but those things are frankly useless unless you have a plan to use them well and especially unless you have good people to execute that plan. Those things are Frost's competitive advantage. Our people executing our growth plans guided by the Frost culture that has resulted in award-winning customer service and long-term relationships will sustain Frost, just as it has for more than 150 years.

Now I'll turn the call over to our Chief Financial Officer, Jerry Salinas, for some additional comments.

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Jerry Salinas, Cullen/Frost Bankers, Inc. - Group Executive VP & CFO [4]

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Thank you, Phil. I'll provide some additional information about our financial performance for the quarter and I'll close with our guidance for full year 2019.

Looking at our net interest margin, our net interest margin percentage for the first quarter was 3.79%, up 7 basis points from the 3.72% reported last quarter. The increase in the net interest margin percentage was driven by both positive and negative factors. The positive factors included higher loan volumes and higher rates on loans and balances at the Fed combined with a lower proportion of earning assets related to balances at the Fed. These positive factors were partially offset by higher deposit costs and a lower yield on our investment portfolio. The taxable equivalent loan yield for the first quarter was 5.33%, up 13 basis points from the 5.20% reported in the fourth quarter.

On a linked-quarter basis, average loans grew 7.3% on an annualized basis. Looking at our investment portfolio. The total investment portfolio averaged $12.8 billion during the first quarter, up about $335 million from the fourth quarter average of $12.4 billion. The taxable equivalent yield on the investment portfolio was 3.37% in the first quarter, down 2 basis points from the fourth quarter. Our municipal portfolio averaged about $8.2 billion during the first quarter, up about $156 million from the fourth quarter.

During the first quarter, we purchased about $164 million in municipal securities with a TE yield of about 3.97%. Also, during the first quarter, we purchased about $422 million in agency mortgage-backed securities, yielding about 3.42%. The municipal portfolio had a taxable equivalent yield for the fourth quarter of 4.03%, down 5 basis points from the previous quarter. At the end of the first quarter, about 2/3 of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of the quarter was 4.4 years, down slightly from 4.5 years the previous quarter.

Looking at our funding sources. The cost of total deposits for the first quarter was 42 basis points, up 5 basis points from the fourth quarter. The cost of combined Fed funds purchase and repurchase agreements, which consists primarily of customer repos, increased to 1.72% for the first quarter, up from 1.56% in the previous quarter. Those balances averaged about $1.2 billion during the first quarter, up about $43 million from the previous quarter.

Regarding the outlook for 2019, our current expectations for the interest rate environment for 2019 have changed since the previous quarter's guidance. We were previously projecting 2 Fed rate hikes late in 2019, which we have now pulled from our projections. In addition, our revised projections now include the decline in LIBOR rates that we've seen in 2019 and also project a pretty flat yield curve. As a result of these changes in our assumptions related to the interest rate environment, and the decline in demand deposits earlier this year, we are more comfortable with the lower end of the current range of analyst estimates.

With that, I'll now turn the call back over to Phil for questions.

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Phillip D. Green, Cullen/Frost Bankers, Inc. - Chairman & CEO [5]

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Thanks, Jerry. We'll now open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Ken Zerbe with Morgan Stanley.

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Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [2]

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Just looking at the decline in noninterest-bearing, obviously, I now see that you are baking that into your expectations. But could you just be a little more specific in terms of what you're seeing from the noninterest-bearing flows, say, so far in second quarter? And what your expectation is on retaining those deposits over the course of the year?

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Phillip D. Green, Cullen/Frost Bankers, Inc. - Chairman & CEO [3]

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Yes. The -- as Jerry mentioned, we had -- the decline really happened early in the year. I personally think that as the Fed had that last increase in December, we sort of reached a tipping point with corporate treasurers seeing a higher opportunity cost for those balances. And so we've seen -- we saw an outflow, an accelerated outflow into particularly suite products. Didn't lose the relationships, but we have seen money flow into some of our off-balance sheet alternatives. Actually, if you look at the last 2 months, be in March and then so far in April, we have pretty good growth in demand deposits. So I've talked before about how I think that -- and this is an industry thing. Again, I've said it a lot, but the -- we've got to reach sort of an equilibrium. Once the Fed sort of reaches what interest rates are going to be, there'll be an equilibrium that has to be reached for -- there's a certain amount of demand deposits, free deposits that customers are going to keep, and we'll really grow from there. And I think, we -- at least I hope that we sort of reach that. It looks like we have for the last couple of months as we've seen growth. But we'll have to see. Keep an eye on it because there still is kind of a high opportunity cost today for demand deposits. But we have -- the thing I like about it, even though we were down. If you bifurcate the commercial business and the consumer business sort of like I alluded to in my comments, the commercial balances were down about 4.7%. And as Jerry mentioned, it was really from diminishment in current accounts. We offset half of that diminishment though by new customer growth. So I'm happy with our ability to grow new customers. If you look at the consumer business, our consumer deposits are up by 3.2% compared to the previous quarter, for example. And 3/4 of that growth is from new consumer customers. So I mean, it's a trend we're going to have to watch. But it was much accelerated in the early part of this quarter, and Jerry has included that in his projections.

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Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [4]

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Got you. Okay. And then I guess in terms of the provision expense, obviously, a little higher. It looks like the rest of your metrics are totally fine. But do you have any more color in terms of what drove the higher provision expense?

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Jerry Salinas, Cullen/Frost Bankers, Inc. - Group Executive VP & CFO [5]

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In a lot of cases, the provisions are determined by our allowance calculation, right? And so as we said last year, the -- last year's provision levels really got as low as they could get, to be quite honest, with the significant improvement that we had in the energy book. And so our projections all along had provisions increasing this year. And so most of it is really formulaic and partially due to increases in the C&I portfolio.

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Kenneth Allen Zerbe, Morgan Stanley, Research Division - Executive Director [6]

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Okay. [That helps then]. I guess -- so then just last question I had for you, just in terms of your guidance, the lower end, I just pulled it up. It looks like there's a few estimates in the $6 range, very high $6 range. I would expect that you're sort of implying a sub $7 estimate for the year is kind of -- is how I read the lower end. I just want to make sure we're on the same page.

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Jerry Salinas, Cullen/Frost Bankers, Inc. - Group Executive VP & CFO [7]

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Ken, I think the comments that I made are really kind of what I'm going to stick with. It's -- we're more comfortable with the lower end.

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Operator [8]

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Our next question comes from Dave Rochester with Deutsche Bank.

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David Patrick Rochester, Deutsche Bank AG, Research Division - Equity Research Analyst [9]

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On your comments earlier on competition increasing on loan structure, are you seeing that more from the nonbanks? Or are you actually seeing that from banks as well? And if it's from banks, is there a skew to large banks? Or smaller regional players on that front?

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Phillip D. Green, Cullen/Frost Bankers, Inc. - Chairman & CEO [10]

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It's everywhere. I mean, I could -- I look at some of these specific deals and I see community banks in-state, I see community banks out-of-state. I see large banks. I see -- there's private equity involved in some cases, particularly on the real estate side. So it's really everywhere.

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David Patrick Rochester, Deutsche Bank AG, Research Division - Equity Research Analyst [11]

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Okay. Any concern about that sort of limiting the pool of loans that you guys are interested in? Because I know you skewed to the very higher end of the credit quality. Any thoughts there?

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Phillip D. Green, Cullen/Frost Bankers, Inc. - Chairman & CEO [12]

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Well, I mean, we don't need to practice. We want -- we actually want to make money. And so we're -- we'll say no to the deal that looks like it doesn't make sense. And I want us to. And I'm glad our people are taking that approach. We are a high-quality bank. We perceive ourselves that way, that is our culture. And we like to believe our standards are higher than others. And so -- but when you see something that just doesn't make sense, we'll say no to it. I will say, however, just in talking with our people, we do feel good about the market. I mean, we are prospecting well. Our -- the number of -- I was looking at some numbers where our success rate on new customers has been up, which tells us that, I think, that we're doing a better job of targeting customers that makes sense for us. I was talking with our Chief Banking Officer yesterday, and all the markets that we're in are still growing. It's good. And we've got a great value proposition. So I'm -- even though we've got some tightening competition, I'm still optimistic about our ability to find customers that make sense for us.

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David Patrick Rochester, Deutsche Bank AG, Research Division - Equity Research Analyst [13]

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Yes. Okay. Great. And then just maybe on the loan pipeline comments, were you saying that, that was -- heading into the second quarter that was 21% higher versus a year ago. Did I hear that correctly?

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Phillip D. Green, Cullen/Frost Bankers, Inc. - Chairman & CEO [14]

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Yes.

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David Patrick Rochester, Deutsche Bank AG, Research Division - Equity Research Analyst [15]

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Okay. So that would imply a decent step-up in loan origination activity then in 2Q?

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Phillip D. Green, Cullen/Frost Bankers, Inc. - Chairman & CEO [16]

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Well, it depends. That's the pipeline and you've got to win it and it's all got to make sense. But I think that the -- it's encouraging to me that we saw growth there. As I mentioned, there was -- commercial real estate kind of helped drove that. But you can't put too much. You can't make it too linear a relationship. But yes, the fact that we've got pipelines increasing, I think, is a positive as opposed to where the [number] we'd see it down. So yes, it's a good thing.

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David Patrick Rochester, Deutsche Bank AG, Research Division - Equity Research Analyst [17]

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Okay. And then just maybe one last one if I could on expenses. Now those were a little bit lower than what I think we were looking for and others were looking for generally. Can you just talk about how you see those trending as we go through the year just given the Houston expansion ramping up?

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Jerry Salinas, Cullen/Frost Bankers, Inc. - Group Executive VP & CFO [18]

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Sure. Yes. I can give you just a couple of comments there. What I'll say is, yes, you're right. The first quarter is not really a good run rate for the rest of the year. I guess I'll mention a couple of things, as you indicated, the Houston expansion will continue to ramp up through the rest of the year, and it really didn't have a significant impact on first quarter expenses. In addition, Phil mentioned that we'll be moving into our new headquarters here in downtown San Antonio late in the second quarter. And although we'll have less space in it, it will be at a higher price. So those 2 items alone will be driving higher expenses in future quarters. And of course, we continue to grow the business, we'll continue to provide great customer service and we'll continue to keep up with technology and cybersecurity's cost. So we'll continue to have pressure on those expenses. But yes, you're right, the first quarter, not a good indicator of our expectations for the rest of the year.

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Operator [19]

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Our next question comes from Jennifer Demba with SunTrust.

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Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [20]

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Question on -- for you, Phil, on the implications of the larger merger announcements that occurred in the first quarter. Just wondering what you think that means for the competitive environment going forward, and the direct implication on CFR down the road.

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Phillip D. Green, Cullen/Frost Bankers, Inc. - Chairman & CEO [21]

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Thanks, Jennifer. I don't see a direct implication for us in terms of what we're trying to do. Our focus is making sure our value proposition is great and our -- the markets that we're in are the right ones and that we're prospecting the right way and that we're able to achieve organic growth that's consistent, it's above average. And I think we've been showing that we can do that and have been doing that. I think I can only read in the papers or what you read and that is there's some scale issues that people are trying to achieve. And that's great. But it's -- there are a lot of issues that they will have to deal with as well as they roll up a company. So I think it's interesting, but it's not really having a direct impact on what we're trying to do. If anything, when you end up having mergers in your market, it creates dislocations that allows you to pick up business. So hopefully, we'll see some of that.

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Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [22]

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Okay. And just second question on expenses. There -- you had lower other expenses from no donation to the foundation this year versus last year. Should we expect something later in the year? Is that just a timing issue? Or how do you look at that?

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Jerry Salinas, Cullen/Frost Bankers, Inc. - Group Executive VP & CFO [23]

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Sure. The contribution that we made last year, Jennifer, just as a reminder, we had about the same amount, I think it was $3.7 million in gains that we had recognized on the sale of some bank facilities. And so rather than taking that to the bottom line, we made a contribution to the charitable foundation. So we'll be opportunistic with those sorts of things. But at this point, there was nothing in the quarter.

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Operator [24]

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Our next question comes from Rahul Patil with Evercore.

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Rahul Suresh Patil, Evercore ISI Institutional Equities, Research Division - Analyst [25]

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So last quarter, you talked about expectations for the NIM to expand even if there were no rate hikes. Given the current shape of the curve, considering that Fed hikes are probably not likely this year, and given that loan pricing remains competitive in your markets, where do you see the NIM trend in coming quarters? And what would drive that?

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Jerry Salinas, Cullen/Frost Bankers, Inc. - Group Executive VP & CFO [26]

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Well, I think as I said in my assumption, we are assuming a pretty flat yield curve for the rest of the year. And as I mentioned, we did not include in our previous projections that LIBOR rates would go down during early 2019. So right now, what I'd say is, the NIM percentage is, projection-wise, would probably be relatively flat unless we see some reversals of improvements in the yield curve or LIBOR going back up and those sorts of things. At this point, yes, we're looking pretty flat.

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Rahul Suresh Patil, Evercore ISI Institutional Equities, Research Division - Analyst [27]

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And then are you seeing any abatement in deposit pricing pressure as the Fed rate hikes have kind of taken out of the picture?

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Phillip D. Green, Cullen/Frost Bankers, Inc. - Chairman & CEO [28]

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Yes. A little bit. Yes, on the margins. Nothing dramatic.

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Rahul Suresh Patil, Evercore ISI Institutional Equities, Research Division - Analyst [29]

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Okay. I just want to go back to the expense question. So last quarter, I believe, you talked about some front-loading of the expenses tied to your Houston expansion. And you've -- accordingly, you expected expense growth in 2019 to be higher than what you saw in 2018, I think that was around 4%. Is that still the case? Or is there some incremental upside pressure now given the offices that you've talked about this quarter, the opening of these offices?

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Jerry Salinas, Cullen/Frost Bankers, Inc. - Group Executive VP & CFO [30]

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No. I don't think there's any change in that. The upfront expenses, if you will, that comment is really that when you build a new location, right? And you hire the people, those expenses are going to be -- are going to come early on before you start generating revenue. So that hasn't changed. And so I think that we still feel like that's the case. They'll be -- as I mentioned, we expect that those Houston-related expenses will continue to increase. Again, they were not a big impact in the first quarter. But as we continue to ramp up hiring and opening locations, they'll begin to have an impact on our expense base.

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Operator [31]

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And our next question comes from Brady Gailey with KBW.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [32]

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I wanted to ask one more question on the credit front. So I mean, NPAs are still at a low level, but they did increase on a linked-quarter basis. Any color you can provide us on the NPA pickup?

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Phillip D. Green, Cullen/Frost Bankers, Inc. - Chairman & CEO [33]

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Really, Brady, it was -- biggest one is, there was a low-income housing project that had some issues. I think the main issue, it had a fire and has been trying to recover from that. That was probably $8 million to $9 million, and the rest of them, just what I call cats and dogs, it really wasn't anything specific. It really wasn't an energy-related thing. It was -- it was just doing business and some customers had some problems.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [34]

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All right. And then, Phil, last quarter you repurchased, I think, around 1.5% of the company. Doesn't look like any buybacks this quarter. I know the stock is up from where you repurchased it in the fourth quarter, but can you talk a little bit about your appetite to do additional buybacks at this level?

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Phillip D. Green, Cullen/Frost Bankers, Inc. - Chairman & CEO [35]

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Well, I think, we've got a little powder left. We have about $50 million left in the program and we want to continue to be opportunistic, and that's been our position in the past. I don't see it changing. We do have shares that come into the base just through employee stock plans and those types of things. And I think it's good housekeeping for us to buy those back on a regular basis. So I think that's been our program. I don't see it changing.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [36]

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All right. And then lastly for me just on the earning asset mix. I mean, cash levels have continued to come down here. Cash is now about 7% of average earning assets. It was well north of 10% about a year ago. It looks like you've been putting a little bit of that into the bond books. How should we think about growth in the bond book versus some potential shrinkage in cash going forward?

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Phillip D. Green, Cullen/Frost Bankers, Inc. - Chairman & CEO [37]

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I think we'll end up -- we want to be opportunistic and really just prudent in what we're doing. We're -- given what's happening in rates, you don't want to just be totally leaning towards higher interest rates and we want to be asset-sensitive just fundamentally. But you can take some chips off the table and we plan on doing that. In fact, we've done a little bit of that in this quarter. I don't think we'll be doing it as heavily in municipals because you just want to make sure your liquidity profile is -- continues to be strong. So I think what you'll see us do more of probably would be in the mortgage-backed, the full faith in credit mortgage-backed that runs probably 4-ish duration, which is sort of in line with what our portfolio is today. But it's a ready source of liquidity, if needed. And just given some of the volatility that banks are seeing in demand deposits and that type of thing. Although, as I said, we have seen some good growth over the last couple of months. I mean, you want to make sure your liquidity is strong so -- and I think makes sense to -- given the Fed's position now to pull a few chips off the table. So yes, I think we'll use some of that cash in the bond portfolio.

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Operator [38]

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Our next question comes from Ebrahim Poonawala with Bank of America.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [39]

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All my questions asked and answered.

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Operator [40]

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Our next question comes from Brett Rabatin with Piper Jaffray.

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Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [41]

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Wanted to talk about fee income for a second. Just -- I guess the 2 strong areas, insurance and trust, both up nicely year-over-year. I know insurance is pretty seasonal. Does insurance build off of last year, i.e., it -- was there anything unusual in the first quarter for insurance and then trust? I know oil and gas helps out a lot. Are you guys expecting a pretty good year on that business as well?

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Jerry Salinas, Cullen/Frost Bankers, Inc. - Group Executive VP & CFO [42]

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Yes. You're right. On the trust side, yes, we did have a good quarter. Really the trust revenues -- the oil and gas revenues within trust, really part of it was new product that we started to distribute here recently and that's really kind of helped the growth in that -- from that line item. But you're right, also prices helped too. On the insurance side, they just had a -- as Phil said in his comments, they just had a great first quarter across -- they had growth across all product lines, the commercial lines, the benefit side and even life commission. So nothing unusual. I think even the first quarter is the quarter where we receive a lot of the contingent bonus payments. But I think on a comparative basis, first quarter to first quarter. They were relatively flat. So the growth really is coming all from commissions.

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Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [43]

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Okay. And then the other thing I just wanted to maybe talk about is Houston and the build-out there. Can you guys -- I saw you just got an award for retail. Can you guys just talk about kind of to date, what Houston has done in terms of growth and just how much that's contributed and what your plan is for the eventual size?

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Phillip D. Green, Cullen/Frost Bankers, Inc. - Chairman & CEO [44]

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Well, right now, the branches that we've opened are new, right? So they're not contributing a lot. I said last time, we're really planting trees, not corn, right? So it's -- these things are going to grow into great foundational parts of our distribution system in Houston. So it's going well. I was talking to our people earlier about just how they're feeling about it and we've gotten really good reception in markets that we're in. So it's really -- the Houston expansion isn't going to create a lot of growth immediately, but we feel confident that it's going to be there and help us expand in that market. So we're still optimistic. Again, it's early in the process but I feel great about it.

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Operator [45]

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Our next question comes from Steven Alexopoulos with JPMorgan.

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Anthony Albert Elian, JP Morgan Chase & Co, Research Division - Analyst [46]

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This is Anthony Elian on for Steve. I just had one follow-up question on provisions. So Jerry, I know you said to expect this line to increase given loan growth and coming off a low 2018. But is the $11 million that we saw in the first quarter a good run rate? Or should we expect to step down back to the high single-digits range?

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Jerry Salinas, Cullen/Frost Bankers, Inc. - Group Executive VP & CFO [47]

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Yes. I think that my conversations with our Chief Credit Officer, I think that the first quarter, was probably a little bit high comparatively speaking, but I don't think it's going to be significantly different from that. But you're right, it may trend down a little bit. But it's really all formulaic at the end of the day. So we'll be driven by what happens within the specific portfolio, of course, and with loan growth. But yes, I don't -- I didn't see anything unusual about the first quarter other than it might be a little high. But it really is going to just depend on what happens in the portfolio.

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Operator [48]

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Our next question comes from Peter Winter with Wedbush Securities.

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Peter J. Winter, Wedbush Securities Inc., Research Division - MD of Equity Research [49]

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Jerry, I just wanted to follow up on your comment on the margin. I just want to clarify when you say it's relatively stable, that's relative to the first quarter?

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Jerry Salinas, Cullen/Frost Bankers, Inc. - Group Executive VP & CFO [50]

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Right. Right.

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Peter J. Winter, Wedbush Securities Inc., Research Division - MD of Equity Research [51]

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And so could you just talk about some of the puts and takes to hold it fairly steady going forward?

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Jerry Salinas, Cullen/Frost Bankers, Inc. - Group Executive VP & CFO [52]

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Well, like I said, from a rate forecast, everything we're assuming at this point is relatively flat, right? So any improvements there would certainly help us. Any increase in volumes on the loan side may be higher than we had expected. Part of the improvement, and as I said in my comments, on the percentage improvement, is really the lower proportion of earning assets that are invested in those balances at the Fed. So to the extent that those would have increased or decreased, for example, you're going to see some volatility in that net interest margin percentage.

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Peter J. Winter, Wedbush Securities Inc., Research Division - MD of Equity Research [53]

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Okay. Because I was just thinking -- I would assume that interest-bearing deposit costs continue to move up and you continue to see a shift into interest-bearing as well and then just the reinvestment on securities. But that's still a little bit of pressure.

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Jerry Salinas, Cullen/Frost Bankers, Inc. - Group Executive VP & CFO [54]

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No. I think the -- you're talking about increases in interest-bearing deposit pricing. Right now, we're assuming a relatively flat rate environment. We're not necessarily assuming any sort of increases in deposit pricing. We said that we did a lot of the heavy lifting previously. So when we look at our rates compared to the competitive environment, we feel pretty good about our rates today to be quite honest with you. So I'm not feeling a lot of pressure on the deposit pricing side at this point.

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Operator [55]

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And our final question comes from Jon Arfstrom with RBC Capital Markets.

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [56]

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A few follow-ups here. Phil, you talked about the competitive environment. And you talked about structure being a bigger factor in deals that you lose over price. Why do you think that changed structure over price?

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Phillip D. Green, Cullen/Frost Bankers, Inc. - Chairman & CEO [57]

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It changed because market's gotten more aggressive on structure than we're willing to do. It could be lack of guarantees, it could be extending amortizations, it could be funding levels, it could be structures like prepayment penalties. It could be absolute spreads. It's -- but it's -- just seems like it's getting -- people are willing to do more in terms of more aggressive structures. I mean, I would say -- good thing about it, we still are seeing good equity in deals, but...

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [58]

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Nothing new from your approach?

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Phillip D. Green, Cullen/Frost Bankers, Inc. - Chairman & CEO [59]

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Yes. There's nothing I can really point to. There's no Big Bang change. But just the deals that we saw this time and just looking at them with, 100% financing, long-term amortization, those kind of things. On a roll-up deal, for example, it's just -- why would you do that?

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [60]

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Yes. Okay. Jerry, maybe a question for you. Back on the guidance and the margin, are -- you're essentially just flagging rates and there's really no other message you're trying to portray to us. It's really more about the margin than anything?

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Jerry Salinas, Cullen/Frost Bankers, Inc. - Group Executive VP & CFO [61]

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Well. Again, I guess, I would just lead to -- Phil mentioned in his comments and we talked about -- we did have some -- obviously, some weakness in demand deposits in the first quarter. So we wanted to point that out. And yes, you're right. The rate environment that we were looking at a quarter ago is significantly different than what we're looking at today. And really, that's the points that we're trying to get across.

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [62]

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Okay. And then last question is kind of random but -- and it goes to a prior cycle, but historically, you've done some hedging on the margin. And I'm just wondering if it's just way too early to think about that from your point of view. You've talked about maybe changing the securities portfolio approach a bit, but maybe give us an update on that, on hedging.

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Phillip D. Green, Cullen/Frost Bankers, Inc. - Chairman & CEO [63]

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I think as -- we've looked at it. And if you look at the marketplace today, and then just the opportunity cost or the cost of the hedging is just too much, from what I think you can see the benefit. And we've -- to this point, we're using the cash markets more to sort of hedge our bets there. But -- and we're still asset-sensitive, a little bit less so after making some of the purchases that I referred to earlier. But probably, right now, it's a cash market. But we did keep an eye on it. We talk about it regularly. And if we saw something that opportunistically we thought made sense, we might hit the bid on something like that. Just to follow up on what Jerry is talking about, and just maybe to just kind of bring it in for a landing. Interest rates are big factors for us. They're exogenous variables. Our view of what they are in the trend up has changed. In some cases, our view for future rate changes is different because you don't think that, that's going to increase. In some cases, we've had actual rate decreases. In the case of LIBOR, and we got a lot of assets tied to LIBOR. So we're an asset-sensitive bank and the race is going down in that area. We do regular investing and the curve's a lot flatter than it was a year ago. So -- or even last quarter. And the reaction of treasurers to the last increases makes total sense and it's been happening. So -- I mean, those are factors that affect our business. I mean, we're a financial company, and that just -- that's really arithmetic as much as anything. But the thing that I feel really good about, and I think that I hope you've heard, is that we still do -- are doing a great job prospecting. We're doing a great job continuing to grow our volumes with quality deals. We're willing to say no to deals that don't make sense to us from an overall risk perspective. We are seeing growth in our new customer amounts. If you look at consumer checking accounts, the new -- net new checking accounts, up 40% from where they were a year ago. First quarter last year, we had 1,998 new consumer checking accounts whereas 2,803 this quarter, I mean, that's with no acquisitions. I mean, that's just the hard work of expanding our brand and marketing ourselves. We've seen increases in customer awareness and importantly in consideration for customers to do business with us, and that's really important because we compete against the too-big-to-fail banks. And so when you see -- if you look from fourth quarter to first quarter, we saw an increase in our awareness from, say, 60%, take the Houston market to 65%. We've seen increase in consideration from low 30% to low 40%. So those are all things which are really encouraging to me. And so I think our basic business continues to be strong. Our Houston expansion, sure it cost us money, but it's a thing we need to be doing and so I'm excited about that. I'm excited about what the people are doing in that market and the people that we're being able to hire. And so far, the response of customers in that market for us expanding in these new places. So yes, it's a rough patch with rates right now. But I really feel good about how the fundamental business is performing.

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Operator [64]

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Thank you. Ladies and gentlemen, thank you for participating in the question-and-answer portion of today's call. I would now like to turn the call back over to management for any closing remarks.

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Phillip D. Green, Cullen/Frost Bankers, Inc. - Chairman & CEO [65]

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All right. Well, we thank everybody for their interest and participation, and we are adjourned. Thank you.

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Operator [66]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect and have a wonderful day.