Good morning, ladies and gentlemen, and welcome to Cullen/Frost Bankers First Quarter Earnings Conference Call. I would now like to turn today's call over to Mr. Greg Parker, Executive Vice President and Director of Investor Relations. Mr. Parker, you may begin.
Thank you. 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 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 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 website or by calling the investor relations department at 210-220-5632.
This time, I'll turn the call over to Phil.
Thank you, Greg. Good morning, and thanks for joining us. Today, I'll review first quarter 2017 results for Cullen/Frost, and our Chief Financial Officer, Jerry Salinas, will also provide additional comments before we open it up to your questions. In the first quarter, Cullen/Frost earned $1.28 per diluted common share compared with $1.07 in the same quarter last year, and $1.28 in the fourth quarter of last year. Our first quarter results represent a strong start to 2017, and we're building on the momentum from the second half of 2016. During the first quarter, average loans were $12.1 billion, up more than 5% from the first quarter of last year. On a linked-quarter annualized basis, first quarter average loans were up over 12%. Our provision for loan losses were $8 million in the first quarter, down sharply from $28.5 million reported in the first quarter of 2016.
Non-performing assets total $118 million in the first quarter, which was up by $15.6 million from the fourth quarter, but were down by 34% from the first quarter of 2016. The increase from year-end was primarily related to one energy-related credit, which was included previously in potential problem loans. Net charge-offs in the first quarter of 2017 were $7.9 million, compared with $5.7 million in the previous quarter and $2.5 million in the first quarter of 2016. Annualized net charge-offs represent 27 basis points of average loans for the first quarter. Overall delinquencies for accruing loans at the end of the first quarter were only 36 basis points of period-end loans, an extremely low number. Total problem loans, defined as risk grade 10 and higher, fell by about 5% in the first quarter when compared to the fourth quarter.
This is primarily the result of favorable resolutions like upgrades, paydowns, and payoffs. Energy-related non-accruals increased to $78.7 million at the end of the first quarter, compared to $57.6 million at the end of the fourth quarter, driven by a single energy-related credit mentioned earlier. The specific loan loss allocation for these non-accrual energy credits was $850,000, which was down from $3.75 million in the fourth quarter. The reserve for energy loans at the end of the first quarter was approximately 4.5%. Based on all traditional measures, the number of problem energy borrowers peaked a year ago, and we continue to manage these levels down further. Finally, outstanding energy loans at the end of the first quarter total $1.36 billion, or 11.2% of total loans. That compares with 11.6% at the end of 2016 and over 16% at its peak in 2015.
I believe we've moved from a period of energy-related headwinds to a period of growth, momentum, and optimism. The economy's doing well in Texas, and our customers are responding. Average total deposits in the first quarter rose to $25.8 billion, up by almost 8% from just under $24 billion in the first quarter of last year. On the consumer side, we continue to see good growth in accounts, customers, and balances. Same-store sales growth for new account origination is up by 22% compared to the first quarter of 2016, with growth at or near double digits in all regions. There are several reasons for this growth. First, our value proposition is increasingly attractive versus our competitors in the market. Prospects can now open accounts and become customers using the Frost Bank mobile app wherever they are.
Third, we've opened 10 new financial centers since the beginning of 2016, strengthening our presence in our markets. Finally, I should say that our bankers remain committed to building relationships with customers who come to us digitally or through our locations. Regarding consumer lending, in the first quarter of 2017, total average consumer loans grew by 8.2% compared to the first quarter of 2016. This is an area where we're making a conscious effort to develop this segment of our customer base. On the commercial side, the year started out much stronger than 2016, and new loan opportunities are up by 44% compared with last year. We've seen an increase in the volume of both smaller and larger commitments.
New commitments under $10 million were up by 31% in the first quarter compared to last year, while new commitments at or above $10 million were 41% higher than last year. Overall, new loan commitments are up by 36% from last year. We've been focusing on delivering sustainable, above-average organic growth through great customer experiences that make people's lives better. I believe that our financial results and the recognition that we get from third parties like J.D. Power, Greenwich, and Consumer Reports demonstrate we're making progress toward that end. Let me say, it's our great staff that makes all this happen. As I've said before, without them, we're nothing more than empty buildings and lease obligations. Our people are the ones who work with our customers to nurture the long-term relationships that make Frost unique.
I'd like to thank everyone at Frost for all their hard work and dedication through everything we've been through and into the opportunities to come. I'll turn the call over to our Chief Financial Officer, Jerry Salinas, for some additional comments.
Thank you, Phil. I'm going to make some comments about the economy, then I'll give some additional information about our financial performance for the quarter before updating our 2017 guidance. I'll turn the call back over to Phil for questions. The Texas economy is accelerating across industry sectors and metro areas. Texas employment expanded at an annualized 2.4% in the first quarter of 2017. The Dallas Fed notes more hiring optimism in Texas than in recent years. Although Texas rig counts are rising, employment growth in the energy sector is a bit slower due to both increased efficiency and automation. For the first time in many years, the Texas unemployment rate is higher than the national average due to a sharp increase in the state's workforce. The March unemployment rate in Texas is now 5%, compared to the national average of 4.5%.
Looking at individual markets, Dallas-Fort Worth remains strong, with 2017 employment growth above 4%. The increase is mostly broad-based across sectors. The professional and business services sector is adding jobs rapidly from ongoing relocations and expansions in the Metroplex. The March unemployment rate was 4.1% in Dallas and 4.8% in Fort Worth. Austin continues to expand, but at a slower pace. Austin jobs grew at a 2.6% annualized pace from the previous three months. Austin job expansion is diversified across most industries, especially in construction and manufacturing. Austin's unemployment rate in March was 3.6%. San Antonio employment increased only 0.7% during the first quarter, indicating slower than expected growth in the first half of 2017. Health services jobs rose sharply over the past three months, while jobs in scientific and technical services declined. San Antonio's unemployment rate was 4% in March.
With the oil and gas sector improving, the outlook for Greater Houston is modestly positive. February non-farm employment grew at an annualized 2.5%, or nearly 19,000 jobs. The largest gains in Houston came from manufacturing and professional and business services. Houston's unemployment rate in March was 5.6%. For Texas overall, the Federal Reserve Bank of Dallas projects 2.4% job growth in 2017. Looking at our financial performance, our net interest margin for the first quarter was 3.64%, up nine basis points from the 3.55% reported last quarter. We had some positives and some negatives affecting the net interest margin percentage this quarter as compared to the fourth quarter. On the positive side, we had higher rates that affected our yields on loans and balances kept at the Fed.
A lower proportion of earning assets being held in balances at the Fed as compared to the fourth quarter also had a positive impact on our net interest margin percentage. Partially offsetting these favorable variances was the lower yields on our investment portfolio as compared to last quarter. The taxable equivalent loan yield for the quarter was 4.15%, up 11 basis points from the fourth quarter. Average loans for the first quarter were $12.09 billion, up $364 million, or 12.4% on an annualized basis from the $11.73 billion last quarter. The taxable equivalent yield on the investment portfolio was 3.99%, down five basis points from 4.04% for the previous quarter, and was impacted primarily by a lower yield on our municipal portfolio. The taxable equivalent yield on our municipal portfolio was 5.44%, down eight basis points from the fourth quarter last year.
The duration of the investment portfolio at the end of the fourth quarter was 5.0 years, excuse me, at the end of the first quarter was 5.0 years, up slightly from 4.8 years for the previous quarter. The total investment portfolio averaged $12.55 billion during the first quarter, up about $39 million from the fourth quarter average of $12.51 billion. Our municipal portfolio at the end of the first quarter was down approximately $100 million from December to $7.25 billion. During the first quarter, we purchased approximately $291 million in municipal securities yielding 4.76% with an average life of 20 years. As we expected, during the first quarter, about $400 million in municipal securities were called. These securities came off our books at a taxable equivalent yield of over 7%, which had a negative impact on the municipal portfolio yield for the quarter, as mentioned previously.
At the end of the fourth quarter, about 67% of the municipal portfolio was pre-refunded or PSF insured. Regarding income taxes, the exercise of stock options during the first quarter had a favorable impact on income tax expense for the quarter of approximately $3.5 million. Under the new accounting standard, which we adopted in the third quarter last year, the tax effects of settlement of share-based payments go through income tax expense. Our effective tax rate for the first quarter was 11.83%. Without the tax benefit from the stock option exercises, our effective tax rate for the quarter would've been about 15.5%. Our capital levels remain strong, with our Common Equity Tier 1 ratio at 12.71% at the end of March. Regarding full year 2017 earnings, we currently believe that the current full year mean of analyst estimates of $5.13 is low.
An estimate closer to the average of the low estimate of $5 and the high estimate of $5.45 would be more reasonable. I'll now turn the call back over to Phil for questions.
Thanks, Jerry. We'll now turn the call over for questions.
Just at this time, I'd like to let everyone know if you'd like to ask a question, simply press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of David Rochester of Deutsche Bank. Your line is open.
Hey, good morning, guys.
Good morning.
Good morning.
Just real quickly, housekeeping on the tax rate. You mentioned a 15% core rate ex the tax benefit. How do you think that trend's going forward?
Well, a lot of it'll be dependent on the stock option exercises, which of course, is going to be dependent on stock prices and in people's exercising of stock options. I guess what I'd tell you is that 15.5%, all things being equal, would be our core rate and would be adjusted accordingly for any changes in projected earnings or any exercises that had a tax benefit. Does that make sense?
Okay. Yep. That's great. Thank you. Just switching to the fee income side, I was just wondering what the driver was for the weaker insurance income year-over-year and how you're thinking about growth in that line item going forward.
Sure. In the first quarter, what we typically receive is our bonus payments, the contingent payments that we receive on our policies. The payments that we receive are based on how the business grows from the prior year and how those policies perform individually. For the quarter, we were actually down compared to the first quarter last year. Those contingent fees were down $2.6 million. They were the bulk of the reason for the decrease. Offsetting some of that was about a $1.3 million in favorable commissions, which are the ongoing sort of type fees, resulting in the unfavorable variance of $1.6 million. The contingent, we would've liked to have them, but they're not part of the core business. We feel good about the growth that we're seeing in the commission business.
Okay, year-over-year, are you thinking that you could actually still be up on the insurance line versus last year? For the full year 2017.
Yeah. Are you talking about including those contingents, or are you pulling them out, or how are you treating those?
Just keeping them in. I'm just wondering if this line item for 2017, do you think is going to be down or is there a chance it could actually be up?
It's going to be relatively flat. What we're hoping is that we'll see increases in commissions offsetting those reduced contingent commissions or contingent fees, excuse me. Pretty flat.
Okay. Sounds good. Just real quick on expenses. Those came in a bit below expectations this quarter. How are you thinking about the trend there going into 2Q and then your thoughts for the full year? I know you mentioned growing financial centers a decent amount over the last year. Maybe if you could just comment on your plans for the next year as a part of that'd be great.
I'd say that, looking at expenses, what I'd say is the first quarter had a pretty good run rate associated with it. I think that we'd expect some bumps, some small bumps throughout the year, but with a fairly stable running rate. I don't think there was anything unusual there. You're right, we will continue to open financial centers into 2017. Maybe at a little bit slower pace than the 10 Phil mentioned for 2016. We'll continue to open some.
Okay, great. Thanks, guys.
Thank you.
Your next question comes the line of Jon Arfstrom of Evercore ISI. Your line is open.
Yes. This is Rahul Patil on behalf of Jon. Just a question on loan growth, which came in better this quarter, better than what we were expecting, better than looks like overall industry trends. Could you provide some color on where you're getting incremental loan growth, the main drivers of loan growth in coming quarters?
I think the growth is good overall. As I said, consumers up 8%. We're seeing strong commercial real estate growth. There's a lot of activity there. We're being real careful and selective as far as that goes, and we're seeing good C&I growth. I would say it's a very broad-based growth in the portfolio overall. It's just indicative of better activity.
Just shifting to deposits, could you talk about trends in deposit flows, especially post recent Fed hikes, if you're seeing any notable shift in behavior? Just as a follow-up, what sort of deposit betas are you seeing on your commercial deposits?
On the deposit side, we've seen really good growth in the quarter. It's been pretty broad-based, leaning a little bit more on the commercial side than on the consumer side. We do a look back where we look at deposit growth over the last 12 months rolling, we're really seeing that about half of our growth is coming from existing customers, half is coming from new customers. We did see a good, nice increase in energy deposits also. Overall, feeling pretty good about where deposits are and the growth potential there.
Just lastly, just one small question. Do you have the portion of the demand deposits that are related to commercial clients?
I think the number that we have that's not associated with balances where they're used to paying services are about $3.6 billion, I think was the last number I heard, something in that range.
Okay, perfect. Thank you.
Just a reminder, that is star, then the number one on your telephone keypad if you would like to ask a question at this time. Your next question comes from the line of Brady Gailey of KBW. Your line is open.
It's Brady. Good morning, guys.
Hey, Brady.
It sounds like cash balances went down a little bit linked quarter. Can you just update us on, as we're seeing higher long rates, you guys still have a lot of cash on the balance sheet. What's your interest in putting that cash to work in the bond book longer term?
As we've kind of said it before, our goal is to really create a sustainability of inorganic growth, to do that, we've got to grow the loan portfolio consistently in all our regions. That's what we've been doing and plan on doing. I've really been pleased with the results that we've been seeing. Brady, we're going to try not to buy many more securities. You look at, say, the second half of this year. We'll do a limited amount, less than $100 million would be my guess in municipals just to fill out some of what our plans were and to recognize some payoffs that we're having in that portfolio. We're not really expecting much in the way of securities purchases in the second half of this year.
Okay.
Not very much in the second quarter. That's a good thing.
Yep. Okay, great. Then I don't think you all have much healthcare exposure, we're seeing increased focus on that this quarter. Can you quantify how much healthcare exposure you have, if any?
I can, but it may take me just a second to do it. It's in the top 5 categories of our C&I portfolio. Hang on just a second.
Are you all seeing any weakness in healthcare right now?
No. Yeah, it's probably Brady, we'll have to look for it this second. We'll get back to you on it.
Yeah. That's fine. Thanks for the color, guys.
You bet.
Again, that is star, then the number one on your telephone keypad if you would like to ask a question. There are no further questions in this queue. At this time, I'd like to turn the call back to Phil Green for closing remarks.
Okay. Well, first of all, before we leave, Brady, we were able to locate the medical services number. In 2016, it was 4.6% of our portfolio. It's a good sector, and it's performed very well. Okay. Well, if we have no more questions, we'll bring the call to an end. Thank you for your participation today. We'll be adjourning.
This concludes today's conference call. You may now disconnect.