Shift to smaller loans is paying off for Cullen/Frost

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Even as it reduced its exposure to energy loans, Cullen/Frost Bankers in San Antonio expanded its commercial loan book in the first quarter, in part by focusing on smaller lending relationships.

The company said Thursday that net income climbed 26% to $104.5 million from the first quarter last year, and earnings per share totaled $1.61, or 13 cents higher than the mean estimate of analysts polled by FactSet Research Systems.

New loan commitments under $10 million made up 51% of all new loan commitments made in the first quarter, compared with 44% for the comparable period last year, company executives said on an earnings conference call Thursday.

Cullen/Frost isn’t giving up on energy lending, but after energy sector losses took a bite out of profits two years ago, the $31 billion-asset parent of Frost Bank has sought to diversify its loan portfolio and make more loans of $10 million and less, which it considers core loans.

“We've had this focus on regaining our balance in core loans versus large deals,” Chairman and CEO Phil Green said. “We still do large deals, we're good at it. We still do energy deals, we're good at it.”

Nonetheless, the focus on smaller loans creates some consistency in the company’s growth, even if the overall market for commercial and industrial loans is increasingly competitive, he said.

“It's very competitive. It's competitive on structure, it's competitive on price and I think it's getting a little bit worse,” Green said, responding to an analyst’s question. “I think people are getting more aggressive, but it's always been bad. But we're growing loans, and we're just trying to keep from doing anything stupid.”

Company executives are projecting high-single-digit loan growth through the year and cited the healthy Texas economy as a reason for their optimism.

Total loans increased 10% to $13.3 billion. C&I loans climbed 9.6% from the year-ago quarter, and commercial real estate loans increased 10%, Green said.

Energy loans increased 6.2% year over year to $1.4 billion at the end of the first quarter, representing roughly 10.7% of total loans. That's well below the company’s historic peak of 16% in 2015, Green said.

That growth in loans helped to lift net interest income by 10% to $229.7 million, but higher deposit costs led to a 12-basis-point drop in its net interest margin to 3.52%.

Cullen/Frost also got a boost from some of its fee income businesses, particularly insurance fees and commissions, as well as trust and investment management income. Insurance income increased 15.6% to $16 million, and trust and investment management income rose 12% to $29.6 million. Overall noninterest income climbed 9% to $91.4 million.

The company did report that net charge-offs increased 57% year over year to $12.4 million. Green said that was largely due to a single $6 million credit related to one client that ceased operations during the first quarter. He offered few details, except to say that this client was not in the energy sector.

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