CULLEN/FROST BANKERS, INC. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Organic Growth: Houston 1.0 and 2.0 at 99% deposit goal, 139% loan goal, 118% new household goal. Dallas market at 119% deposit goal, 196% loan goal, 170% new household goal. Austin expansion with first three locations opened, early results encouraging. Overall expansion generated $2.3 billion in deposits, $1.6 billion in loans, added over 55,000 new households.
• Net Interest Margin: Third quarter NIM 3.56%, up 2 basis points from previous quarter, driven by higher loan volumes and yields.
• Deposits and Funding: Average deposits $40.7 billion, down 20 basis points from last year. Month-to-date October deposits up about $600 million above third quarter average.
• Investment Portfolio: Total investment portfolio averaged $18.9 billion, net unrealized loss on available for sale portfolio $1.13 billion, down from previous quarter.
• Stock Buyback: Bought back $20 million of stock during third quarter.

Segment Performance

• Consumer Business: Best quarter of the year in customer growth, adding over 7,300 net new checking households. Checking household growth at 6% year-over-year. Consumer deposits finished the quarter with a 2.5% year-over-year increase ($464 million). Average consumer loans grew $574 million or 21% year-over-year, ninth consecutive quarter with over 20% growth.
• Commercial Business: Average loan balances increased 10.1% vs same quarter last year. CRE balances grew 13.7%, energy 10.2%, C&I 4.8%. New commercial relationships increased 8% vs same quarter last year. New loan commitments totaled $1.62 billion, up 3% vs same quarter last year. Problem loans totaled $839 million at end of third quarter, down 15% from second quarter. Net charge-offs $9.6 million, non-performing assets $106 million.

Guidance

• Net Interest Income: Expected growth in range of 2% to 3% for full year 2024.
• Loan Growth: Full year average loan growth in low double digits, slightly better than previous guidance of high single digits to low double digits.
• Deposits: Expected full year average deposits to be down between 1% and 2%, down from previous guidance of flat to down 2%.
• Noninterest Income: Projected growth in range of 4% to 5%, up from previous guidance of 2% to 3%.
• Noninterest Expense: Projected growth in range of 6% to 6.5%, down from previous guidance of 6% to 7%.
• Net Charge-offs: Expected to be in range of 18 to 22 basis points of average loans, down from previous guidance of 25 to 30 basis points.
• Effective Tax Rate: Expected to be at current year-to-date level of 16.5% or slightly lower.

Risks

• Deposit Movement: Uncertainty around how deposits will behave as rates change.
• Competition: Intensifying competition from regional and big banks, including private credit and direct lenders.
• Economic Outlook: Potential impact of economic conditions on credit quality and loan performance.
• Interchange Regulation: Possible downside from interchange regulation affecting fee income.

Question and Answer

Q: Could you just talk about maybe the trajectory of the margin as the Fed forward curve is suggesting additional rate cuts? And I would assume less rate cuts and/or more gradual rate cuts and a steeper yield curve is kind of an ideal environment for you?

A: Peter, I think you're right that what we're seeing is some push and pulls here is we feel like there's going to be opportunity to reprice our investment portfolio and our fixed rate portfolio. The unknown is going to be as rates go down what will deposits do. And we're hopeful we'll see continued growth in deposits. And so we think there's some opportunity there. But with such a -- we do have a asset sensitive balance sheet. So as rates go down, we will see that lowering of our yield on our floating rate portfolio, and we're holding that to Fed. So yes, I mean, I think you can see really for the fourth quarter, I think you can see just probably some steadiness. I don't see it moving around much of that fourth quarter.

Q: And do you think -- I mean, I'm not asking for specific items, but can you see the -- even with the Fed cutting rates into next year that the margin could increase just with the repricing benefit on the earning assets and ability to lower deposit costs?

A: I think there is that opportunity, because we do have quite a bit of our securities portfolio maturing or repaying into next year. And we have about $1 billion of our fixed rate loan portfolio in terms of expected payoffs, in terms of amortizations and maturities. So there will be opportunities. If you look at -- if you do look at our kind of back book of both our investment portfolio and our fixed rate portfolio, we're going to be able to pick up some yield there.

Q: You mentioned the big improvement in problem loans this quarter. I was just wondering what the driver was for the bump up in the reserve ratio given that if those were just specific reserves on NPAs, and you talked about the growth you had there or is it something in the economic outlook worsened a bit for you?

A: It wasn't an economic outlook,it was primarily that one loan that Phil had mentioned drove that and just our -- we did have strong loan growth.

Q: I wanted just to first circle back on expenses. I know that the fourth quarter typically has some higher expenses just related to the restricted stock awards. Just wondered if you could remind us on typically what that looks like. And so maybe what a better kind of run rate is to go into as we start next year's growth rate?

A: I guess I would answer and start that and let Dan add any color. I would almost send you back to the trend in last year's third to fourth quarter. I kind of look at that. I think that gives you some good perspective. As you noted in your comments, we do have some awards by their nature get expensed immediately. So I think if you look at that, that kind of give you a feel for kind of what those sort of best things due to our expense run rate.