Cullen/Frost Bankers says that its loan growth this year should be better than previously expected, even though interest rate expectations have recently taken a big turn.
The San Antonio-based bank maintained its net interest income projection for 2024, despite slashing the number of rate cuts it expects from five throughout the year to two small cuts in the fall.
The bank anticipates that better-than-expected loan growth will offset worse-than-expected deposit pressure, executives said Thursday on the firm's quarterly earnings call. Cullen/Frost, which operates as Frost Bank, is preparing for a 2%-4% rise in net interest income, in part driven by its yearslong expansion
Last quarter, about one-fourth of the bank's loan deals were from new customers.
"Our growth related to the expansion and new customers there continues to be strong, so we are definitely focused on acquiring new customers," CEO Phil Green said in an interview. "But I think it's good seeing our current customers come through with deals. It means there's still economic activity from our base."
Cullen/Frost, which has $49.5 billion of assets, reeled in $411.4 million in net interest income in the first quarter, up less than 1% from the previous quarter. While many banks are reporting stagnant loan growth, Cullen/Frost raised its overall loan growth expectations for the full year from a mid-to-high single-digit increase to high single-digits, or potentially a low double-digit increase.
The bank's expansion in Houston has reached 122% of its new household goal, 164% of its loan goal and 104% of its deposit goal, Green said on the call. Houston growth has also brought in enough profit to fund similar build-outs in Dallas and Austin, added Chief Financial Officer Jerry Salinas.
Economic growth in Dallas and Houston is strong enough that even regional banks based outside the Lone Star State have been
As Cullen/Frost grows its loan portfolio, it
Valley National Bancorp
But Green said Frost has no plans to pivot away from commercial real estate loans.
"I'm not concerned about the asset class, such that I'm getting out of it," Green said in the interview with American Banker. "Now you want to be careful and not overextend yourself, because I believe in diversification and asset allocation, but we're not running from [CRE]."
He added that the bank even closed a couple of office deals last quarter.
Green also said that Cullen/Frost is conservative in its underwriting, its 44% loan-to-deposit ratio is lower than peers, and it has a solid reserve supply. While indicators of credit quality showed some weakening in the first quarter, those metrics are still below historical levels, Green said on the company's earnings call.
The New York-based bank says it will push its concentration of commercial real estate loans below 400% of risk-based capital over the next two years and focus more on C&I.
Of the loan deals that Cullen/Frost lost in the first quarter, 82% were due to structure, meaning the bank held out on terms like guarantees and loan-to-value ratios where another lender didn't, according to Green. Typically, structure only limits about two-thirds of transactions, he said.
David Chiaverini, an analyst at Wedbush, wrote in a research note that Cullen/Frost has a strong level of excess liquidity and solid loan loss reserves. He added that the bank's footprint expansion is performing well, warranting a "premium valuation." Cullen/Frost's stock price has fallen about 7% to $108.65 since it released its first-quarter results on Thursday morning.
Amid abundant talk about higher-for-longer interest rates on banks' earnings calls this quarter, Cullen/Frost expects a big chunk of the impact to be on its deposits. The bank especially anticipates more pressure on its non-interest-bearing deposits, as consumers switch to accounts that offer yields. Compared with the prior quarter, the bank's deposits were down about 2.6% to $40.8 billion.
Cullen/Frost lowered its deposit guidance for 2024 from 1%-3% growth to between flat and 2% growth.
Green said in the interview that he's hopeful that there will be an inflection point where customers move from other investment areas back to checking accounts.
