CULLEN/FROST BANKERS, INC. Q4 FY2024 earnings call

• Fourth quarter earnings were $153.2 million or $2.36 a share compared to $100.9 million or $1.55 per share in the same quarter last year. Full year 2024 net income available to common shareholders was $575.9 million, down from $591.3 million in 2023, with per share earnings of $8.87 vs $9.10 in 2023.
• Average deposits in the fourth quarter were $41.9 billion, up from $41.2 billion last year. Average loans grew by 9% to $20.3 billion in the fourth quarter.
• Expansion efforts generated $2.4 billion in deposits, $1.8 billion in loans, and added over 59,000 new households, with deposits, loans, and households representing 101%, 151%, and 130% of goals respectively.
• Net interest income was up $9 million or 2.3% on a linked-quarter basis, but net interest margin was down three basis points to 3.53%. The investment portfolio averaged $18.6 billion in the fourth quarter, with $840 million in purchases including Agency MBS and municipals.
• Funding sources: Average total deposits were $41.9 billion, up $1.2 billion from the previous quarter. Cost of interest-bearing deposits was 2.14%, down 27 basis points from the third quarter.

Consumer Business: In the fourth quarter, Cullen/Frost saw a $610 million increase in average outstanding balances for consumer loans, representing a 21% annual growth rate and third consecutive year of over 20% high-quality consumer loan growth. 2/3 of the growth came from second lien home equity products and 1/3 from the nationally recognized mortgage program. Consumer checking household growth continued its 4-year industry-leading run of 6% or greater growth. Consumer deposits, making up 47% of the company's total deposit base, grew 3.2% for the year and are now 51% higher than 2019 pre-COVID balances, with an 8.6% compound annual growth rate over the past five years. Commercial Business: Period-end loan balances grew by $1.3 billion or 8.3% year-over-year. CRE balances grew by 11%, energy balances by 20%, and C&I balances increased by 2.4%. New commercial relationships in 2024 were the highest annual level ever, with the expansion accounting for 20% of new commercial relationships and half coming from 'too big to fail' banks.

• Full year 2025 outlook includes 225 basis point cuts for the Fed funds rate in 2025 with cuts in June and September.
• Expect net interest income growth for the full year in the range of 4% to 6%.
• Net interest margin expected to improve by around 10 basis points compared to 2024's 3.53%.
• Full year average loan growth expected to be in the mid to high single digits, and average deposits to be up between 2% and 3%.
• Noninterest income growth projected in the range of 1% to 2%, and noninterest expense to be in the high single digits.
• Net charge-offs expected to be similar to 2024, in the range of 20 to 25 basis points of average loans.
• Taxes expected to be between 15% and 16% for full year 2025.

• Competition from banks and nonbanks, particularly in commercial real estate with private equity engaging in bridge financing and development lending, which could impact underwriting and pricing.
• Uncertainty around overdraft fees and interchange regulations that could affect noninterest income.

Q: Manan Gosalia from Morgan Stanley asked about loan growth slowdown and if there's conservatism baked in.

A: Phillip Green responded that consumer loan growth is expected to continue, but there could be a slowdown in CRE due to funding of past deals being completed, expecting it to be in the low single-digit area.

Q: Will Jones from KBW asked about balance sheet growth and deposit beta.

A: Phillip Green said they expect to invest in securities in the first quarter to support loan growth, and Dan Geddes mentioned deposit beta will be in the 45% range cumulatively.

Q: Ben Gerlinger from Citi asked about expense growth and competition.

A: Dan Geddes talked about investing in technology and compliance, and Phillip Green discussed competition from private equity in commercial real estate, particularly in multifamily projects.

Q: Peter Winter from D.A. Davidson asked about capital strategies and expenses.

A: Phillip Green and Dan Geddes discussed share buyback being opportunistic, and expenses being investments in growth with expectations of moderation in 2026.

Q: Jon Arfstrom from RBC Capital Markets asked about loan growth range and noninterest income.

A: Phillip Green mentioned payoffs in commercial real estate could affect loan growth range, and Dan Geddes talked about noninterest income growth including baked-in considerations for overdraft fees and interchange regulations.

Q: Ebrahim Poonawala from Bank of America asked about branch expansion and market opportunity.

A: Phillip Green said they will continue branch expansion, identifying growing markets, and Dan Geddes mentioned market share in Houston and Dallas is low with room for growth.

Q: Peter Winter from D.A. Davidson followed up on overdraft fees impact.

A: Dan Geddes said overdraft fee impact is baked into guidance, with a reduction starting in July.