8-K: Cullen/Frost Bankers Reports Mixed First Quarter Results Amidst FDIC Assessment Impact

Cullen/Frost Bankers reported a decrease in net income for the first quarter of 2024, impacted by a significant FDIC special assessment, despite growth in loans and non-interest income.

Summary

• Cullen/Frost Bankers, Inc. announced its first quarter 2024 results, with net income available to common shareholders at $134.0 million, which was reduced by a $7.7 million FDIC special assessment.
• Excluding the FDIC assessment, net income would have been approximately $140.1 million, still a 20.4 percent decrease compared to the first quarter of 2023.
• Earnings per diluted common share were $2.06, or $2.15 excluding the FDIC impact, also down 20.4 percent year-over-year.
• The company's return on average assets was 1.09 percent, and return on average common equity was 15.22 percent, which would have been 1.14 percent and 15.92 percent respectively, excluding the FDIC assessment.
• Net interest income on a taxable-equivalent basis was $411.4 million, a 3.4 percent decrease compared to the first quarter of 2023.
• Average loans increased by $1.8 billion, or 10.4 percent, to $19.1 billion year-over-year, and increased $503.0 million, or 2.7 percent, compared to the fourth quarter of 2023.
• Average deposits decreased by $2.0 billion, or 4.8 percent, to $40.7 billion year-over-year, and decreased $459.2 million, or 1.1 percent, compared to the fourth quarter of 2023.
• Non-interest income totaled $111.4 million, a 5.8 percent increase compared to the first quarter of 2023, driven by increases in trust and investment management fees and service charges on deposit accounts.
• Non-interest expense was $326.2 million, a 14.4 percent increase year-over-year, which would have been an 11.7 percent increase excluding the FDIC special assessment.
• The company reported a credit loss expense of $13.7 million and net charge-offs of $7.3 million for the quarter.
• The board declared a second-quarter cash dividend of $0.92 per common share and $11.125 per share of Series B Preferred Stock.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to the significant decrease in net income and EPS, despite some positive aspects like loan growth and non-interest income increase. The impact of the FDIC assessment and increased expenses are concerning.

Positives

• Average loans increased by 10.4 percent year-over-year, indicating strong lending activity.
• Non-interest income increased by 5.8 percent, driven by growth in trust and investment management fees and service charges on deposit accounts.
• The company's capital ratios remain strong, exceeding well-capitalized levels and Basel III minimum requirements.
• The company continues to invest in organic expansion, including opening a new location in Austin.
• The board declared a second-quarter cash dividend of $0.92 per common share.

Negatives

• Net income available to common shareholders decreased by 20.4 percent year-over-year, even when excluding the FDIC special assessment.
• Earnings per diluted common share decreased by 20.4 percent year-over-year, even when excluding the FDIC special assessment.
• Net interest income decreased by 3.4 percent compared to the first quarter of 2023.
• Average deposits decreased by 4.8 percent year-over-year.
• Non-interest expense increased by 14.4 percent year-over-year, driven by increases in salaries, wages, and other operating expenses.
• Non-accrual loans increased to $71.5 million at the end of the first quarter of 2024, compared to $38.4 million at the end of the first quarter of 2023.

Risks

• The company's financial performance is subject to changes in interest rates, economic conditions, and regulatory policies.
• Increased non-interest expenses, including salaries and wages, could impact profitability.
• The decrease in deposits could affect the company's funding and liquidity.
• The increase in non-accrual loans could indicate potential credit quality issues.
• The company faces risks related to cyber incidents, technological changes, and competition.

Future Outlook

The company continues to make investments to fuel the sustained growth of its business into the future, including opening new locations and expanding in key markets. The company also provided forward-looking statements regarding potential risks and uncertainties that could affect future results.

Management Comments

• The solid earnings for the first quarter show the results of our organic growth strategy and the hard work of our bankers, said Cullen/Frost Chairman and CEO Phil Green.
• The steady increase in loans and consistent growth in both commercial and consumer relationships reflect Frost's enduring strength and stability.
• We continue to make investments to fuel the sustained growth of our business into the future, including opening the second new location in our Austin expansion on April 1 of this year.
• I want to commend all the Frost bankers who continue to provide world-class service to more people throughout the state as we pursue our organic growth initiatives.

Industry Context

The results reflect a challenging environment for regional banks, with increased regulatory costs (FDIC assessment) and pressure on net interest income due to changes in interest rates. The company's focus on organic growth and expansion is consistent with strategies employed by other regional banks to increase market share and revenue.

Comparison to Industry Standards

• Cullen/Frost's return on average assets of 1.09% is lower than some of the top performing regional banks, such as those with ROA's above 1.2%.
• The company's loan growth of 10.4% is strong compared to some peers, but deposit declines of 4.8% are a concern.
• The increase in non-interest expense of 14.4% is higher than some peers, indicating potential cost management issues.
• Compared to other Texas-based banks, Cullen/Frost's performance is mixed, with some showing stronger net income growth and better deposit retention.
• The company's capital ratios remain strong, which is a positive compared to some banks facing capital adequacy concerns.

Stakeholder Impact

• Shareholders will be impacted by the decrease in net income and EPS, but will receive a second-quarter dividend.
• Employees may be impacted by the increase in salaries and wages, as well as the company's expansion efforts.
• Customers will benefit from the company's continued investment in services and expansion.
• Creditors will be impacted by the company's financial performance and capital ratios.

Next Steps

• The company will host a conference call on April 25, 2024, to discuss the results.
• The company will continue to pursue its organic growth initiatives and make investments in key markets.
• The company will pay a second-quarter cash dividend on June 14, 2024, for common stock and June 17, 2024, for preferred stock.

Key Dates

Keywords

Financial Results, Earnings, Net Income, Loans, Deposits, FDIC Assessment, Non-Interest Income, Non-Interest Expense, Dividends, Capital Ratios, Credit Loss, Banking