Pandemic slows down loans to Frost Bank in San Antonio

This year, the pandemic will continue to hurt lending activities at San Antonio-based Frost Bank, officials said Thursday.

Phil Green, president and CEO of Cullen / Frost Bankers Inc., the parent company of Frost Bank, reported that its loan pipeline – or the opportunities to close loans in the next 90 days – is on the decline due to of the spread of the coronavirus.

“We’re just going to have to see the general level of business confidence rise and be healthy before we see that rise,” Green said on a conference call with analysts. “We’re trying to aim for high single-digit loan growth for the year. Without the loans (Paycheck Protection Program), I don’t expect us to do it. “

“It’s a tough environment,” added Green, who was named president-elect of the San Antonio Chamber of Commerce on Thursday. “I am optimistic about the future, but this year it will continue to be under pressure from COVID.”

The Paycheque Protection Program was established to provide government assistance to businesses during the pandemic. Frost made 19,000 PPP loans for a total of $ 3.3 billion last year.

In the current P3 loan cycle, which began this month, Frost has received approximately 7,500 loan applications representing over $ 1 billion in volume. So far, some 2,500 of these requests have been approved, representing approximately $ 200 million in volume. About 90% of applications come from second-time PPP borrowers, Green said. Loans can be canceled if borrowers meet certain conditions.

Aside from PPP loans, the amount of loans Frost lost to competitors due to the structure – which includes guarantees and equity – fell from 61% to 67%, Green said.

Other banks “are suffering from volumes,” he said. “They are looking for deals they want to make. But I’ll tell you, I’m ready to lose chords for bad structure. There is no greener pasture through the fence of good credit standing. There is nothing but a vacant lot, and I have no intention of going there.

At the start of the pandemic, Cullen / Frost aggressively recorded an expense of $ 175 million related to potential loan losses. For all of last year, the figure was around $ 241 million, up from $ 33.8 million in 2019.

The big expense led to a 25% drop in profits for 2020. Cullen / Frost earned $ 323.6 million, or $ 5.10 per share, on more than $ 1.5 billion in revenue per year. last, against earnings of $ 435.5 million, or $ 6.84 per share, on nearly $ 1.5 billion in revenue in 2019.

Despite the drop in earnings, Cullen / Frost still managed to beat analyst consensus estimates. Analysts polled by Bloomberg predicted the company would earn $ 5 a share on just under $ 1.5 billion in revenue in 2020.

“Looking at the loan book today, it’s not as bad as we all had feared,” said Brady Gailey, analyst at Keefe, Bruyette & Woods in Atlanta. “I think the loan losses will be very manageable. Frost is such a conservative lender, they really won’t have a problem there.

The biggest problem Frost faces is not with bad debt, but low interest rates, he said.

“They are under significant revenue pressure” from the low fares, Gailey said. Profitability will not improve until rates rise, he added.

The management of the freeze reacted by reducing expenses. In October, the company announced that 11 top executives would accept pay cuts in 2021. Green and the management team agree to 10% pay cuts. Green also cut his bonus by 10% this year, while other executives agreed to a 5% cut.

Then, two weeks ago, Frost cut 68 positions in its regions and departments. The abolished positions represented about 1.4 percent of Frost’s approximately 4,700 workforce. Many open positions within the bank were also reduced, Green said.

Cullen / Frost’s non-interest expense rose about 1.7% to $ 848.9 million as of Dec.31 from $ 834.7 million at the end of 2019. The company initially predicted this would climb by about 10.5% last year.

The net interest margin, an indicator of profitability, fell to 2.82% from 3.62% a year ago at the company. Margin measures the difference between what a bank collects on loans and what it pays on deposits.

Frost ended the year with nearly $ 17.5 billion in loans on its balance sheet, an 18.5% increase from the $ 14.8 billion in loans at the end of 2019. The increase was in largely due to PPP loans. Deposits reached $ 35 billion, up nearly 27% from $ 27.6 billion at the end of 2019.

For the fourth quarter, Cullen / Frost earned $ 88.3 million, or $ 1.38 per share, on revenue of $ 357.1 million. It earned $ 101.7 million, or $ 1.60 per share, on revenue of $ 370.3 million in the fourth quarter of 2019.

Analysts predicted the bank would earn around $ 1.27 per share on revenue of $ 351.8 million in the last quarter.

Cullen / Frost CFO Jerry Salinas said analysts’ consensus earnings estimate for 2021 at $ 4.27 per share “is a bit low.”

Cullen / Frost shares fell $ 3.95, or 4%, to close at $ 92.61 on Thursday. Shares hit a 52-week high at $ 98.24 on January 14, almost double their 52-week low at $ 49.22 on March 23.

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