CULLEN/FROST BANKERS, INC. Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Financial Results: Q1 2025 earnings were $149.3 million ($2.3 per share) vs. $134 million ($2.06 per share) in Q1 2024. Return on average assets was 1.19% and average common equity 15.54%. Average deposits were $41.7 billion (+2.3% y-o-y) and average loans $20.8 billion (+8.8% y-o-y).
• Expansion: Opening another new financial center in Austin, reaching 200 locations. Expansion efforts generated $2.64 billion in deposits, $1.9 billion in loans, and 64,000 new households. Expansion loans and deposits grew 38% and 30% year-over-year.
• Customer Satisfaction: Frost named #1 in Texas for consumer banking satisfaction for the 16th consecutive year, driven by exceptional customer experience.
• Commercial Activity: Over 54,000 calls by officers during Q1, a record number of new opportunities in the gross pipeline ($6.2 billion), with customer opportunities up 38% vs. prospects 9%.

Segment Performance

• Consumer Banking: Average consumer deposits, making up 47% of the deposit base, grew 3.8% year-over-year. Average consumer loan balances grew 20.5% year-over-year. Driven by consumer real estate lending, including second lien home equity loans and new mortgage products. Second lien home equity products grew $61 million in Q1, mortgage fundings were $39 million, ending the quarter at $297 million.
• Commercial Business: Average loan balances grew $1.1 billion or 6.6% year-over-year. CRE balances grew 8.9%, Energy balances 19.8%, and C&I balances 1%. New loan commitments totaled $1.28 billion, up 1.5% from Q1 2024. 972 new commercial relationships in Q1, an 18% increase year-over-year, with half coming from 'too big to fail' banks.

Guidance

• Interest Income: Expected 5%-7% growth for full-year 2025, up from prior 4%-6% guidance.
• Net Interest Margin: Anticipates improvement of 12-15 basis points, up from prior 10 basis point guidance.
• Loans/Deposits: Full-year average loan growth expected in mid to high single-digits, average deposits up 2%-3%.
• Non-Interest Income: Projected 2%-3% growth, an increase from prior 1%-2% guidance.
• Non-Interest Expense: High single-digit growth expected.
• Net Charge-offs: Expected 20-25 basis points of average loans, similar to 2024.
• Taxes: Expected 16%-17%, up from prior 15%-16% guidance.

Risks

• Economic Uncertainty: Uncertainty in economic conditions, including tariffs, impacting customer investment decisions.
• Rate Cut Impact: Potential impact of fewer than expected rate cuts on loan growth and net interest income.
• Competitive Pressure: Competitive landscape in deposit and loan markets.

Question and Answer

Q: On deposit beta and rate cuts, A: Cumulative beta about 47%, spot beta around 50%, expects to hold as rate cuts occur.

Q: On expenses and tech initiatives, A: Q1 impacted by FDIC special assessment, high single-digit growth expected next three quarters; tech expenses high but coming down from peak.

Q: On commercial customer sentiment, A: Some waiting for clarity on tariffs, but many confident in passing costs along.

Q: On loan growth pipeline and guide, A: CRE payoffs causing headwind, but pipeline strong; loan growth guide maintained.

Q: On bond portfolio impact on NII, A: Purchases of higher yielding securities driving NII growth, along with lower deposit costs.

Q: On consumer sensitivity to macro trends, A: Consumer spending stable, job growth in Texas supports stability.

Q: On loan portfolio underwriting, A: Not tightening, credit quality good, some adjustments to price decks in energy.

Q: On problem loans reduction and reserve, A: Driven by payoffs and resolutions, allowance built for tariffs and recession risk.

Q: On mortgage growth and non-interest income, A: Mortgage balances up, 30% of loans to new customers; non-interest income driven by new relationships and expansion.

Q: On adding rate cuts to guidance, A: Staying conservative, aligning with forward curve expectations.

Q: On loan growth outlook and tariffs, A: Uncertainty exists, but people doing good job in market expansion.