• Earnings: $144.8 million or $2.24 per share, down from $154 million or $2.38 per share last year.
• Return on Average Assets: 1.16%, compared to 1.25% last year.
• Return on Average Common Equity: 15.48%, compared to 18.93% last year.
• Average Deposits: $40.7 billion, down 20 basis points from $40.8 billion last year.
• Average Loans: Increased by 11.8% to $20.1 billion from $18 billion last year.
• Net Interest Margin: 3.56%, up 2 basis points from 3.54% last quarter.
• Consumer Loan Growth: $574 million or 21% year over year.
• Commercial Loan Growth: Average loan balances increased 10.1% year over year.
• Net Charge-Offs: $9.6 million, representing 19 basis points of period-end loans.
• Non-Performing Assets: $106 million, up from $76 million last quarter.
• Net Interest Income Growth Guidance: 2% to 3% for the full year.
• Average Loan Growth Guidance: Low double digits for the full year.
• Average Deposit Growth Guidance: Expected to be down between 1% and 2% for the full year.
• Non-Interest Income Growth Guidance: 4% to 5% for the full year.
• Non-Interest Expense Growth Guidance: 6% to 6.5% for the full year.
• Net Charge-Offs Guidance: 18 to 22 basis points of average loans for the full year.
• Effective Tax Rate: 16.5% for the year to date, expected to remain at that level or slightly lower.

• Warning! GuruFocus has detected 5 Warning Signs with BBD.

Release Date: October 31, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Cullen/Frost Bankers Inc (NYSE:CFR) reported strong loan growth, with average loans increasing by 11.8% year-over-year to $20.1 billion.
• The company achieved significant milestones in its expansion efforts, particularly in Houston and Dallas, surpassing deposit, loan, and new household goals.
• Consumer business saw robust growth, with a 21% year-over-year increase in average consumer loans, marking the ninth consecutive quarter of over 20% growth.
• Net interest margin improved slightly to 3.56%, driven by higher volumes and yields on loans.
• Cullen/Frost Bankers Inc (NYSE:CFR) maintained strong credit quality, with net charge-offs and non-accrual loans at healthy levels.

Negative Points

• Earnings per share decreased to $2.24 from $2.38 in the same quarter last year, reflecting a decline in profitability.
• Average deposits slightly decreased by 20 basis points year-over-year, indicating challenges in deposit growth.
• Non-performing assets increased to $106 million from $76 million in the previous quarter, primarily due to a $120 million credit moving to non-accrual.
• The company anticipates a decrease in full-year average deposits, revising guidance to a decline of 1% to 2%.
• Increased competition in the lending market, particularly in commercial real estate, poses challenges for maintaining favorable loan structures.

Q & A Highlights

Q: Could you discuss the trajectory of the net interest margin as the Fed is expected to cut rates? A: Dan Geddes, Incoming CFO, explained that while there are opportunities to reprice the investment and fixed-rate portfolios, the impact of rate cuts on deposits is uncertain. The balance sheet is asset-sensitive, so as rates decrease, yields on floating-rate portfolios will also decrease. Geddes anticipates steadiness in the margin for the fourth quarter.

Q: With the Fed cutting rates, could the margin increase due to repricing benefits on earning assets and lower deposit costs? A: Geddes noted that there is potential for margin improvement as a significant portion of the securities portfolio and fixed-rate loans are expected to mature or repay, allowing for yield pickup.

Q: What is driving the strong loan growth, and is there pent-up demand that could lead to stronger growth next year? A: CEO Phillip Green acknowledged some pent-up demand, particularly due to hesitancy around the election. He expects that once the election is over, uncertainty will clear, and fundamentals will drive growth. New commitments and relationships have been strong, indicating potential for continued growth.

Q: What are your expectations for deposit betas as rates decrease, and how does this affect your NII guidance? A: Geddes expects deposit betas to mirror the increase seen when rates rose, around 45 basis points, although it may take time due to the current mix of CDs. The expectation is for a similar beta on the way down.

Q: Can you provide insights into the competitive landscape for lending, especially with regional banks and private credit? A: Green noted increased competition, particularly in commercial real estate, with some structures not aligning with Cullen/Frost's standards. Private equity is playing a role, especially in bridging financing for projects nearing stabilization.

Q: How is Cullen/Frost achieving deposit growth without promotional strategies? A: Green attributed growth to the expansion strategy, excellent customer service, and strong technology. The physical branch network remains a significant channel for new customer acquisition, complemented by effective marketing efforts.

Q: What are the expectations for expenses, and is there potential for growth to decelerate next year? A: Geddes indicated that while they will continue investing in people, technology, and customer experience, there is no expectation for expense growth to decelerate. The focus remains on disciplined investment to support growth.

Q: What drove the increase in the reserve ratio despite improvements in problem loans? A: Geddes explained that the increase was primarily due to a specific loan moving to non-accrual status and strong loan growth, rather than a change in the economic outlook.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.