CULLEN quarterly report, Q1 FY2024

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Cullen/Frost Bankers, Inc. — Q1 2024 Form 10-Q

Business context and reporting period. Cullen/Frost is a Texas-based financial holding company providing commercial and consumer banking, wealth management, insurance, and related services. This unaudited report covers the three months ended March 31, 2024; income and cash flow comparisons are with Q1 2023, and balance-sheet comparisons are with December 31, 2023.

Financial performance and position

  • Earnings: Net income was $135.7 million, down 23.6% from $177.7 million. Net income available to common shareholders was $134.0 million, or $2.06 per diluted share, versus $176.0 million, or $2.70 per diluted share. Return on average assets was 1.09% versus 1.39%; return on average common equity was 15.22% versus 22.59%.
  • Revenue and margins: Net interest income was $390.1 million, down 2.4%; taxable-equivalent net interest income was $411.4 million, down 3.4% (or approximately 4.1% excluding the extra leap-year day). Taxable-equivalent net interest margin was 3.48%, up 1 basis point, while net interest spread narrowed to 2.59% from 2.78%. Non-interest income rose 5.8% to $111.4 million. Net interest income plus non-interest income totaled $501.4 million, compared with $505.1 million.
  • Expenses and credit: Non-interest expense increased 14.4% to $326.2 million. Credit loss expense was $13.7 million, versus $9.1 million. The effective tax rate was 16.0%, compared with 15.7%.
  • Loans and asset quality: Loans rose 3.0% from year-end to $19.4 billion, including $9.3 billion of commercial real estate loans. The allowance for loan losses was $250.3 million, or 1.29% of loans, versus $246.0 million, or 1.31%, at year-end. Non-accrual loans increased to $71.5 million from $60.9 million; total past-due loans were $169.2 million. Management cited increases in commercial real estate and commercial-and-industrial non-accruals, and elevated watch-list and classified commercial real estate balances.
  • Deposits, liquidity, and funding: Deposits declined 2.7% from year-end to $40.8 billion. Non-interest-bearing deposits fell to $13.8 billion from $14.9 billion, while interest-bearing deposits were $27.1 billion. Cash and cash equivalents totaled $8.5 billion. The company reported approximately $7.9 billion at the Federal Reserve, $5.8 billion of available FHLB borrowing capacity, and $9.1 billion of unpledged securities available to support additional borrowing. Repurchase agreements were $3.9 billion; federal funds purchased were $41.2 million. Subordinated notes and junior subordinated debentures totaled approximately $222.7 million.
  • Cash flow: Operating activities provided $488.4 million, investing activities provided $620.5 million, and financing activities used $1.33 billion. Cash and cash equivalents decreased $222.8 million during the quarter.
  • Capital and equity: Shareholders’ equity was $3.64 billion, down from $3.72 billion at year-end, mainly reflecting a $157.1 million after-tax other comprehensive loss. CET1 ratios were 13.41% at Cullen/Frost and 13.57% at Frost Bank; both entities exceeded applicable minimum capital requirements and well-capitalized thresholds. The common dividend was $0.92 per share, up from $0.87 a year earlier.

Material changes versus the prior comparable period

  • Common earnings fell $42.0 million, primarily because expenses increased $41.1 million and net interest income declined $9.8 million; higher credit loss expense was partly offset by stronger non-interest income and lower income taxes.
  • Deposit interest expense rose to $155.6 million from $98.0 million. The average cost of interest-bearing deposits increased to 2.34% from 1.52%, while average non-interest-bearing deposits declined $2.7 billion year over year.
  • Average loans increased $1.8 billion year over year, while average securities and interest-bearing deposits declined. The loan yield rose to 7.00% from 6.36%.
  • Deposit insurance expense increased to $14.7 million from $6.2 million, including an additional $7.7 million accrual for the FDIC special assessment. Salaries and wages rose 13.5%, reflecting merit and market increases, staffing growth, and compensation.
  • Available-for-sale securities were $15.2 billion at fair value, down from $16.6 billion at year-end. Accumulated other comprehensive loss widened to $1.28 billion, primarily due to lower fair values of securities as market rates changed. Management said it did not intend, and was not more likely than not required, to sell the securities in unrealized-loss positions before recovery.

Outlook, commentary, risks, and unusual items

  • The filing provides no company earnings or revenue guidance. Management noted that interim results are not necessarily indicative of full-year results. Its discussion references Federal Reserve projections implying possible rate cuts, but these are not company guidance.
  • Interest-rate sensitivity modeling at March 31 projected net interest income over the next 12 months would be 1.4% or 2.9% higher under ratable rate increases of 100 or 200 basis points, and 0.9% or 2.6% lower under equivalent decreases, relative to a flat-rate scenario. Management described the balance sheet as less asset-sensitive than at year-end.
  • Credit risks include Texas economic conditions, rising non-accrual and past-due loans, and commercial real estate exposure. The company added or maintained qualitative credit overlays for office properties, downside economic scenarios, concentration risk, and other exposures. First-quarter model updates increased modeled expected losses but were largely offset by reductions in qualitative adjustments.
  • The FDIC may further adjust its special assessment; the company said future assessment impacts are uncertain. Proposed CFPB overdraft rules and a Federal Reserve proposal to lower debit interchange fee caps could affect fee revenue, but the impact is uncertain.
  • Other risks identified include deposit competition and funding costs, interest-rate and securities-market changes, borrower performance, cyber and technology incidents, regulatory changes, and geopolitical or economic disruption. Management reported no material change in the risk factors in its 2023 Form 10-K.
  • Management does not expect pending claims and legal actions to have a material adverse impact. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.

Important facts for investors to verify

  • Whether the decline in non-interest-bearing deposits continues and how deposit pricing affects net interest margin and earnings.
  • Trends in commercial real estate credit quality, classified and watch-list balances, non-accrual loans, and the adequacy of credit-loss allowances and overlays.
  • The final FDIC special assessment and any further adjustments to deposit insurance expense.
  • Potential revenue effects of proposed overdraft and debit interchange rules.
  • Changes in unrealized securities losses, liquidity, and capital ratios under different interest-rate and funding conditions.
  • Use of the $150 million repurchase authorization, which runs through January 24, 2025; no shares were repurchased under the plan during the quarter.