Cullen/Frost Bankers Inc (CFR) 2004 Q2 法說會逐字稿

Good morning. My name is Lee, and I will be your conference facilitator. At this time I would like to welcome everyone to the Cullen/Frost Bankers Inc. 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 period. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press star, then the number 2 on your telephone keypad. Thank you. I will now turn the call over to Mr. Greg Parker, Director of Investor Relations. Sir, you may begin.

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'd like to take a few moments 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, the 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 Web site or by calling the Investor Relations department at 210-220-5632. At this time I'd like to turn the call over to Dick Evans.

Thank you, Greg. I'm pleased with the Company's results for the second quarter and the team work of our staff that made these results possible. Net income was $34.1 million or 65 cents per diluted share, ROA was a 1.43%, ROE 18.11. Net interest income increased 3.3%. This was nice to see after a long period of little or no growth. Non-interest income increased a million dollars to 56.3 million with trust fees being the most notable, up 12.3%. Average loan growth was 7.6%, versus last year. And asset quality improved. Our average demand deposits grew approximately 10% without the large mortgage processor account that we've referred to in previous calls. I would note that we have been notified that this processor will be closing their San Antonio operation in this third quarter. The average time deposits grew approximately 6%.

Looking at how our company is growing, we had a 44% increase in the number of new consumer accounts opened between October of '03 and June of '04 versus the same period for the previous year and we're running about a 60/40 mix of free versus other products, which is good. On the business side, our sales activity continues to improve over last year. Year-to-date our calls are up 9%, our pipeline has increased 38% and our new commitments are up 30%. Also, commercial account service charges increased approximately 7% versus last year. Our average total loans -- loan growth based on linked quarters on an annualized growth basis was 14%. I think this shows the sales activity discipline continuing to be a positive along with a better economy. And this growth was diversified. The fastest growing loan areas of these commitments are energy, medical, insurance, and legal. I would also point out, while energy is our largest concentration, it's less than 10% of the outstandings, and medical, insurance, and legal, none of these others represent more than 5%. Again, good diversification.

It's interesting to also note that, as expected, booked new commitments is the major driver of increased loans. However, the outstandings were helped by a slower runoff of loans, and a greater funding of commitments. As mentioned earlier, trust revenues saw double-digit growth, with better results in equity markets contributing to this growth. As I stated in our last quarter conference call, our company is very focused on activities throughout our company. That result in quality growth. Non-interest expense grew 6.2%, as the company expands and we add staff for future growth. Always a balancing challenge to not let expenses get too far ahead of revenues. Also of note, we had higher director and officer liability insurance. And we moved a larger percentage of our advertising to the first half of this year, so that we would not compete with the elections and Olympics. Both of these factors increased expenses.

Asset quality. We have been -- we have seen improvement in credit quality, and let's talk a minute about the parts. The second quarter charge offs increased to $4.1 million or 34 basis points. The first six months charge offs are at 5.5 million or 23 basis points, which is in line with our past experience. Non-performers continue to trend down. Last December they were 53 million. March, 50 million. And this past June, 46 million. Potential problems are at the lowest level in over a year at $4.2 million. Past due loans over 90 days also at the lowest level, in over a year at $4.5 million and the allowance for possible loan losses was $80.5 million or 1.67% of period end loans.

A word about the economy. Texas is in good shape. But we are growing slower than the U.S. However, we expect Texas' lagging behind to change, because of the state's fundamentals. Two examples, it's the lower cost of doing business. And we have ample supply of venture capital on the sidelines, and this will help pick up the state and we should exceed US growth. My observations from customers is that they're getting more worth but margins are thin because there is still slack in the economy. The state's economy can be summed up in Frank Sinatra's song "the best is yet to come" next I'll ask Phil Green, our CFO, to make a few comments.

Thanks, Dick. I'll make a few additional comments about our operations for the quarter and our current outlook for the year and then turn it back over to Dick for questions. We were pleased to see some improvement in our net interest margin during the quarter and our reported margin, while it was flat with the first quarter, we did get back and and do some dollar roll transactions during the second quarter and that impacted our margin by 8 basis points so if you adjust for this additional leverage our second quarter margin was approximately 410 basis points. And it was about 7 basis points up from the first quarter. This was driven primarily by utilizing our excess liquidity to fund our $162 million in average loan growth and also to a lesser extent our growth in average investment securities of $85 million for the quarter. Dick mentioned that loans are up an annualized 14% on a linked quarter basis. I'll just point out that 70% of that increase came from CNI loans, 20% came from commercial real estate mortgages and of the remainder most came from home equity lines of credit, which is a fairly new product for us.

At the same time deposits were up an annualized 4.8% for the quarter, due solely to increases in demand deposits. They were up about right at $100 million for the quarter on average and this was impacted by a 47 million drop for the quarter in the balances of the mortgage processing customers that Dick referred to earlier, which was due generally to lower mortgage activity. As far as time deposits, they were essentially flat compared to the first quarter, and that was due to some seasonal drops in our public fund balances. Most of the other categories that we've seen grow continue to grow particularly consumer transaction accounts, and money market deposit accounts. Dick also discussed our non-interest areas and noted our trust growth for the year was primarily in investment fees and market increases and also increases in our number of accounts and I might just note that as an example the bank's core stock fund was up about 18% year-over-year and our total number of trust accounts were up a little over 4%.

On a linked quarter basis our growth in trusts came from seasonal trust tax preparation fees and also strong oil and gas fees. For the second quarter on a linked basis, investment fees were fairly flat, as was the general market. As we look forward, we are expecting to see some modest rate increases through the end of the year. The effect of these changes should be beneficial to our margin, although given the fact that we believe that much of this increase won't happen until a little later in the year, some of the benefit won't be felt until 2005. And so in closing, I'll say we're continuing to provide guidance more towards the lower end of the range -- lower end of the range of analysts' estimates for 2004, and with that I'll turn it back over to Dick for questions.

Okay. We'll open it up for questions.

At this time, I would like to remind everyone, in order to ask a question, you may press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster Your first question comes from Scott Alaniz.

Morning.

Good morning, Scott.

Good morning.

A couple of questions. The processing customer -- customer, I'm assuming that you expect all of that business to go away.

We do, yeah. They're going to -- they're going to consolidate at another location in the United States.

And what is the balance? What was the balance?

They -- they run about 100 -- in round numbers about $150 million, Scott. Average for the quarter. But keep in mind, as we said before, it's really not a balance sheet impact that's occurring here because this is a clearing account for us. And we're just clearing checks and all the balances are in float on the other side of the balance sheet in none earning assets. The real impact on a loss on account like this is on the service charge side where we charge a fee for the collection of those, and clearing of those items. On a monthly basis, the service charges for that business has been running a little over $60,000 a month. Of course, we'll reduce expenses associated with something like this so that won't all drop to the bottom line. But, as we said, it's mainly a service charge impact.

I see. Last year in the second quarter there were some odd gains, if you will, or non-recurring -- that 1.1 million charge included the sale of a piece of oil property in -- and on the sale of a. INAUDIBLE AUDIO DIFFICULTIES) Did you have any gains this quarter and perhaps maybe gains on the (INAUDIBLE AUDIO DIFFICULTIES)

Go ahead. Yeah. I'll let Phil do the-- Yeah. I think there were small gains on students loans. There were more last year at this time. But really in summary there really wasn't any gain.

No. I think it was fairly, really plain manilla as as that goes, Scott. You're right we had lower student loans gains of about 1.1 million or so than the previous year and sale of assets was down about 1.1 million. And you're correct in your memory. There were a number of things that were included in that. This was pretty clean as far as other income goes.

Okay. And since. (INAUDIBLE) What has happened to the. (INAUDIBLE) San Antonio and what adjustment to deposit pricing.

Scott, I -- I -- say the first part of your question, I couldn't quite here you.

Since we saw rates increase, what -- what has happened to deposit pricing in San Antonio?

We've seen some increase, as we expected, once the fed increased -- and actually it -- even a little bit before we saw deposit pricing increase mainly on the CD side. Once the fed made the increase, we also increased money market deposit accounts as well. But I'd say that we haven't seen any unusual activity in terms of just crazy pricing on deposits. I think everyone's been pretty responsible in reacting to these rate increases at this point.

Last question, what was -- do you have a gross charge off number and a recovery number for the quarter, Phil?

Yeah. We do. Gross charge offs. Were -- hang on. 5.297 million. Recoveries were 1.195 million.

Thank you.

Your next question comes from Charlie Ernst of Sandler O'Neill Asset Management.

Hi, Charlie.

Hi, guys. Could you -- could you all talk a little bit about the credit numbers and just discuss, if you can put it into context, what your -- what you're expecting, you know, kind of over the second half of the year. It sounds like you're still fairly optimistic in terms of the credit numbers.

You talking about asset quality and --

One, if you could just kind of talk about the net charge offs in the quarter and, secondly, the -- the decline in MPAs and kind of where -- what your bias is at this point for future MPAs.

Well, Charlie, it's a -- you know, I'm always careful to predict anything. I think the most important thing is -- is just looking at the trends. And -- and you did read correctly. I -- I am optimistic and feel good because the trends, I think, are very positive. We -- our charge offs were up, you know, the 34 basis points, the -- the first quarter and the fourth quarter of last year we were running 12 basis points, which I've consistent -- consistently said were very low. We run in the 20 to 25 basis points charge offs, and if you look at the first six months, 23 basis points were right in line. So I -- I think we can -- I don't think there's anything unusual happening. It's pretty much routine. And I think the -- I think the trends are positive for the non performers moving down. And then, as you know, we talk about potential problems, and you've had a history with us of -- of looking at that number. And it's -- it's always -- it -- it has been an indicator of -- of what might happen in the future. I think at $4.2 million that's really positive, always watch past dues over 90 days. They -- I can't remember the exact number, I think there were about 15 million a few quarters ago, then about 10 million and now we sit at 4.5 million. And so -- so I -- I would let you kind of look at the trends too. I think those are -- those are -- are all positive. And we are a company, as you know, that -- that tries to identify things early and work with them. And I think our people are doing a good job of working through these things.

Okay. And, Phil, on the margin, is there anything that you all can say that, you know, might give us a little bit of sense as to what your thoughts are about the margin over the second half of this year.

Well, I think it will be up. And -- and it's -- it's going to depend on what the fed does. We -- we're really anticipating that we might see -- we might see 50 basis points in the third quarter, and we might see 50 basis points in the fourth, although the fourth will happen sort of in November and December. We've got good loan growth. It has been good this year. And should continue to grow. That was really one of the -- the primary factors that drove margin up in the second quarter. So we're -- we're expecting to see growth. I -- I hesitate to say what it is. But I think, first of all, since we're not planning at this point on additional dollar rolls you ought to start with the 410 margin for the second quarter and then move it up some from there.

By the end of the quarter, it looked to me like the dollar rolls were probably winding down. Is that -- is that fair to say?

Yeah. They're not in the -- in the quarter end numbers.

Okay. And then just looking at the period end loan numbers, I know that they can be a little bit quirky but the period end growth was a little bit slower this quarter. And it's a little bit above the average for the quarter. Is there any reason to think that, you know, this quarter, the average loan numbers this quarter were a little bit better than maybe what a normal quarter will look like over the next couple?

I -- I think, Charlie, you've got a good point. I -- in June we saw a little bit of softness as -- as we closed out the quarter. I was -- and so -- but I think we have -- don think we had some payoffs in that regard. We had some adjustments in energy loans. Just to give you an example, you know, our energy loans commitments versus 12/31 are up $50 million or 16%. And yet the outstandings are on -- they are within a million dollars of being flat. So there had been a lot of -- you know, a lot of activity in that regard. I have -- I have -- I -- I think that's a good opportunity for -- for us in the energy, and I think there's -- you know, looking at our price deck, I think we're competitive. We're -- you know, we're at $30 oil for '04, going to 25 in '05 and then 23 below that. Same periods gas, $5, 4.25 and 3.75, the point of that is I think we're competitive in our price deck and I think it's right where we need to be, I think that's, as I said earlier think that's less than 10% of our total outstandings which is -- which is still an important thing. So it's just kind of a -- a guide. I also, in regard to your question, we've -- we sold some participations at the end of the quarter. Just in some -- in a -- in a good credit just being sure that we kept our -- our limits down, and so that had an effect.

Okay. And --

Charlie?

Yes.

This is Phil. Just on a linked quarter period-end basis, just look at the CNI portfolio. It was up about $80 million which would have been 3.5% on actual basis and annualized 14.1 so there are some things where we've got some -- some -- a little bit slower activity. And Dick's right, we did have some payoffs in -- in the sale. But we did still have some pretty decent CNI growth.

Okay. And, Dick, are you seeing any change from the energy -- energy guys in terms of their willingness to start to borrow more money?

Yeah. That's a great question. I -- I would answer the question, yes, some. More activity, I think they're getting more comfortable with -- with prices. Certainly I think, if I looked -- oil today is $42 and, you know, gas 5.88. You know, they're certainly not -- not thinking about those prices. But I think -- I think they are -- are really settled in -- settling in more with a lot of the -- the -- the price increase is related to the dollar, as we all know. Oil is quoted in dollars across the world. And -- and oil hasn't gone up as much as the dollar has gone up, has -- has a lot of effect. But I -- I think we're going to see more activity, just like I said, our commitments are up $50 million. Our outstandings are flat.

Um-hum.

So they are arranging for more -- more loans. And so I -- I think it will pick up. I don't think it's -- you know, the good news is we're not in a boom/bust kind of world, and thank goodness. But I think -- I think the activity will pick up.

Okay. And then lastly, Phil, do you happen to know about the level of ad spending this quarter?

Let's see, Charlie.

I -- I can get it from you after the call if you --

I may have it. Charlie, I show for the second quarter we spent 1.447 million.

And -- and what would kind of a normal level in that line item look like, maybe?

Well, we spent 1.086 million the previous quarter.

And -- and that was an even a little bit elevated, if I'm remembering correctly? Is that a fair comment?

No. No. I wouldn't say necessarily.

Okay. So that's -- so -- so kind of the million dollar level is a decent, normalized level?

I can tell you that the -- that -- you know, the year before in June we spent 1.342 million.

Okay.

So it's kind of jumping around. But in the -- at least the -- the strategy of our marketing area was to get out of the way of some of the high visibility programming like the Olympics and the elections, and move it a little bit up. And so what we were planning on doing, it was a little bit -- it was a little more.

Charlie, the -- the other thing is the way we do our advertising, because we're limited in dollars, we try to focus in on about a two-week period of time, really focused in the spring and in the fall. And -- and that's part of the adjustment. And then you've got some promotional items, as you well know, that we have -- we have had promotional dollars in which we have been promoting our -- our checking accounts and our home equity loans, and so that's had an effect. And that's -- that's different from previous years. That's really a bigger activity this year. And as we pointed out to you, we've had good growth in our new checking and consumer checking accounts, and -- and also good growth in home equity, not as good as we thought. We find that Texans just don't embrace that product like the rest of the United States, and maybe it's going to take a little time for education.

Okay. Great, thanks a lot, you guys.

Your next question comes from Ben Crabtree of Piper Jaffray.

Two unrelated subjects. First of all, the -- I guess I got confused as I was writing down these numbers. I wonder if you could run through -- Dick talked about the -- what was happening in terms of the loan activity. And there was a number given for calls, and for commitments. The commitments, the only thing I got was -- was up 30%. But what were those other numbers?

I said our year-to-date calls were up 9%.

Okay.

Our pipeline was up 38%.

Okay.

And our new commitments were up 30%.

Right, okay. The other area I guess I'd like to talk about is the insurance commission area. You -- you talked about the fact that there's been some pricing pressure there, and I guess I'd like to maybe just get a little bit more color in whether that -- whether, you know, we should be looking at kind of unfavorable comparisons going forward from this point on. Or at least flat, which is more or less what happened this quarter.

Yeah. You know, I think the -- what we're seeing is really just competitive pressure. I mean, I -- we look at our -- you know, our professional liability insurance costs were up 360% this year, compared to last. And any time you've got that kind of situation that, you know, there's paying to the customer, there's -- there's more, I think, movement that can occur with customers, and we have seen more of that. We've seen just, I think, a lot -- a lot tougher competition, frankly, to be honest. And -- and -- but as we look for the entire year, we're expecting to, as we said before, still be be up somewhat from the -- from the year before. Looking at the last couple of quarters, I -- I hope that we'll have a little bit of year-over-year growth, but it -- but it may be frat.

Okay. And I -- I guess ones kind of a follow-on question on the subject of share count. If I just kind of plug in the kind of numbers we're seeing here, it looks as though your -- if you don't do something, your equity asset number is going, just going to kind of gradually move up over the next couple of years. So maybe you could refresh me on what your comfort zone is in terms of equited assets or tangible equited assets and, you know, what you've said about stock buy backs.

Okay. Well, one of the things that we do have in place is a stock buy back program which was announced last quarter, which was a little over 4%, I think, of our outstandings. And that's a two-year program. And we typically have utilized those programs when we haven't had opportunities to use the capital in other profitable ways, primarily acquisitions. And we're -- I guess that's -- that's the position we continue to take. We'd really like to see something happen where an acquisition that -- that meets our culture standards and business mix and financial criteria would come up. You know, we're not in charge of -- of that happening. And so we'll continue to use buy backs as we have in the past, to the extent that the capital -- we can't use it profitably. We don't want to waste any, but I -- I'd look to that program that we -- we announced last quarter as being, you know, that's sort of our arsenal to take care of excess capital buildup over the next couple of years.

Well, you've kind of opened the door there. What -- what's the kind of the sense of the M&A environment out there? Are the prices still -- asking prices, is there still a big gap between the bid/ask spread or is it narrowing any and is there still plenty of competition for the targets?

Well, there's still plenty of competition. As you and I both know, everywhere you read, Texas is a pretty popular place for banks and expansions, so I don't think anybody's missed it. The -- I don't think there's been a lot of change. It kind of depends on -- on what the markets you're looking at. And -- and the markets that we operate in, the major markets, I would say that it -- the pricing is holding pretty steady. Maybe in -- in some of the rural markets it's loosened up somewhat. But it's -- it's been very competitive for a number of years. And it still is today.

Okay. Thanks.

Your next question comes from Brett Rabatin of FTN Midwest Research.

Hi, guys. Good morning. I just wanted to ask a question related to asset sensitivity and see if you you guys could give any color on -- with an increase in prime how much of your loan portfolio or price is within the first month and then how much of price is within the first year of -- of the fed tightening.

Well, about -- I'll give you some round numbers here. About two-thirds of our portfolio floats, and most of that is floating with prime. We've got -- you know, we've got at least a billion dollars worth of Libor nominated floaters. I'm going by memory here. But the -- so prime is the biggest factor for us. And think in terms of round numbers, about two-thirds of the portfolio floating, and then about a billion of that is Libor and that's going to go anywhere from 30-day to, you know, 6-month Libor, probably most of it in the 90-day category. And most of the prime-based loans do float immediately.

Okay. Great. Thanks.

Your next question comes from Kevin Reynolds of Morgan Keegan.

Morning, Guys.

Good morning.

Sorry but my questions have all been answered at this point.

Okay. Good, that's great.

Your next question comes from Jennifer Demba of SunTrust Robinson Humphrey.

Hi. I was wondering if Phil possibly had your no-interest margin by month for the quarter.

Let's see if I have that. Jennifer, I -- I do have it. The thing about it is I don't have it adjusted for the dollar roll impact. So I guess you'd have to take that -- take that in mind. It was 398, a 398 and then a 407.

Okay. And just second question, I was wondering if Dick could talk about the loan pricing environment over the last few months.

Jennifer, it's -- again, continues to be very competitive. I don't -- I don't see it, you know, getting really any worse. But it's -- it's been a very competitive state for a long time. And -- and remains so. So there's -- I don't know what else I'd say about it.

Okay. Thanks.

At this time there are no further questions.

Okay, Lead.

Okay. We thank you very much and appreciate your support.

Thank you for participating in today's conference call. This call will be available for replay, beginning at 1:30 p.m. eastern time today, through 11:59 p.m. eastern time on August the 1st. First the conference ID number for the replay is 8677424. Again, the conference ID number is 8677424. The number to dial for the replay is 1-800-642-1687. Or 706-645-9291. This concludes today's conference. You may now disconnect.