8-K: Cullen/Frost Reports Mixed Fourth Quarter Results Amidst FDIC Surcharge, Announces Share Repurchase Program

Cullen/Frost's fourth quarter earnings were impacted by a significant FDIC surcharge, though the company still reported record annual earnings for 2023 and authorized a $150 million stock repurchase program.

Summary

• Cullen/Frost Bankers, Inc. reported a net income of $100.9 million for the fourth quarter of 2023, which was significantly impacted by a $51.5 million one-time FDIC insurance surcharge.
• Excluding this surcharge, the adjusted net income would have been approximately $141.6 million, a 25.3% decrease compared to the fourth quarter of 2022.
• Earnings per diluted common share were $1.55 for the quarter, or $2.18 excluding the FDIC surcharge, a 25.1% decrease from the same period last year.
• The company's full-year 2023 net income available to common shareholders was $591.3 million, a 3.3% increase compared to 2022, or $632.0 million excluding the FDIC surcharge, a 10.4% increase.
• Full-year earnings per diluted common share were $9.10, compared to $8.81 in 2022.
• Average loans for the fourth quarter increased by 9.1% year-over-year to $18.6 billion, while average deposits decreased by 8.0% to $41.2 billion.
• The board has authorized a $150 million stock repurchase program and declared a first-quarter cash dividend of $0.92 per common share.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative due to the significant impact of the FDIC surcharge on fourth-quarter earnings, despite record annual earnings and a stock repurchase program. The decrease in deposits and net interest income also contribute to the mixed sentiment.

Positives

• The company achieved record annual earnings for 2023, with a 3.3% increase in net income compared to 2022.
• Excluding the one-time FDIC surcharge, the annual net income increased by 10.4% compared to 2022.
• Average loans increased by 9.1% year-over-year in the fourth quarter, indicating strong lending activity.
• The company's capital ratios remain in excess of well-capitalized levels and exceed Basel III requirements.
• Non-interest income increased by 7.6% in the fourth quarter compared to the same period last year.
• The board authorized a $150 million stock repurchase program, which could boost shareholder value.
• The company declared a first-quarter cash dividend of $0.92 per common share.

Negatives

• The fourth-quarter net income was significantly impacted by a $51.5 million one-time FDIC insurance surcharge.
• Adjusted fourth-quarter net income decreased by 25.3% compared to the same period in 2022.
• Earnings per diluted common share for the fourth quarter decreased by 25.1% year-over-year, excluding the FDIC surcharge.
• Average deposits decreased by 8.0% in the fourth quarter compared to the same period last year.
• Net interest income decreased by 3.3% in the fourth quarter compared to the same period in 2022.
• Non-interest expense increased by 29.8% in the fourth quarter compared to the same period in 2022, or 11.5% excluding the FDIC surcharge.
• The company reported a credit loss expense of $16.0 million and net charge-offs of $10.9 million for the fourth quarter of 2023, compared to a credit loss expense of $3.0 million and net charge-offs of $3.8 million for the fourth quarter of 2022.

Risks

• The company's financial results are subject to changes in economic conditions, interest rates, and regulatory policies.
• The company faces risks related to credit losses, which increased in the fourth quarter of 2023.
• The company's performance is subject to competition from other financial institutions.
• The company's future results could be affected by technological changes and cyber security risks.
• The company's expansion strategy in key growth markets may not be successful.
• The company's results are subject to the impact of global wars/military conflicts, terrorism, or other geopolitical events.

Future Outlook

The company's future performance is subject to various factors, including economic conditions, interest rates, and regulatory changes. The company will continue to execute its organic expansion strategy in key growth markets in Texas.

Management Comments

• Our solid fourth quarter and record 2023 earnings are a result of continued strong execution by Frost bankers throughout the state, and were aided by our continued success with our organic expansion strategy in key growth markets in Texas, said Phil Green, Cullen/Frost Chairman and CEO.

Industry Context

The banking industry is currently facing challenges related to interest rate fluctuations, regulatory changes, and economic uncertainty. The FDIC surcharge is a result of recent bank failures and is impacting the entire industry. Cullen/Frost's results reflect these broader trends, with increased expenses and decreased net interest income.

Comparison to Industry Standards

• Cullen/Frost's return on average assets of 0.82% for the fourth quarter is below the average for large US banks, which typically range from 1% to 1.5%.
• The company's return on average common equity of 13.51% is also below the industry average, which is often between 15% and 20%.
• Compared to regional banks like Texas Capital Bancshares (TCBI) and Comerica (CMA), Cullen/Frost's loan growth of 9.1% is relatively strong, while its deposit decline of 8.0% is more pronounced.
• The FDIC surcharge is a common issue across the industry, but the magnitude of its impact on Cullen/Frost's earnings is significant.
• The stock repurchase program is a common strategy among banks to enhance shareholder value, and Cullen/Frost's $150 million program is comparable to those of its peers.

Stakeholder Impact

• Shareholders will be impacted by the decreased fourth-quarter earnings, but may benefit from the stock repurchase program and dividend.
• Employees may be impacted by changes in headcount and compensation.
• Customers may be impacted by changes in service charges and fees.
• Creditors may be impacted by changes in the company's financial performance.

Next Steps

• The company will host a conference call on January 25, 2024, to discuss the results.
• The company will execute its $150 million stock repurchase program over the next year.
• The company will continue to focus on its organic expansion strategy in key growth markets in Texas.

Key Dates

Keywords

Cullen/Frost, Banking, Financial Results, Earnings, FDIC Surcharge, Stock Repurchase, Dividends, Loans, Deposits, Net Income