Cullen/Frost Bankers Q4 2024 Earnings Report

The OLB Group EPS Results

• Actual EPS: $2.36
• Consensus EPS: $2.17
• Beat/Miss: Beat by +$0.19
• One Year Ago EPS: N/A

The OLB Group Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $535.94 million
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

The OLB Group Announcement Details

• Quarter: Q4 2024
• Date: 1/30/2025
• Time: Before Market Opens
• Conference Call Date: Thursday, January 30, 2025
• Conference Call Time: 2:00PM ET

The OLB Group (NASDAQ:OLB) is a diversified fintech e-commerce merchant services provider and Bitcoin crypto mining enterprise. The Company's eCommerce platform delivers e-commerce services for a digital commerce solution to over 10,500 merchants in all 50 states. The Company's wholly owned subsidiary, DMINT, Inc, is engaged in the mining of Bitcoin utilizing low carbon natural gas with over 1,000 application-specific integrated circuit (ASIC)-based S19j Pro 96T mining computers. www.olb.com and www.olb.com/investors-data.

The OLB Group Q4 2024 Earnings Call Transcript

Presentation

[Operator]

Greetings. Welcome to the Colon Forest Bankers 4th Quarter and Full Year 2024 Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.

[Operator]

It is now my pleasure to introduce A. B. Mendez, Senior Vice President and Director of Investor Relations. Thank you. You may begin.

[A.B. Mendez, Senior Vice President and Director of Investor Relations at Cullen/Frost Bankers]

Thanks, Sherry. This afternoon's conference call will be led by Phil Green, Chairman and CEO and Dan Geddes, Group Executive Vice President and CFO. Before I turn the call over to Phil and Dan, I need to take a moment to address the Safe Harbor provisions. Some of the remarks made today will constitute forward looking statements as defined in the Private Securities Litigation Reform Act of 1995 as amended. We intend such statements to be covered by the Safe Harbor provisions for forward looking statements contained in the Private Securities Litigation Reform Act of 1995, as amended.

[A.B. Mendez, Senior Vice President and Director of Investor Relations at Cullen/Frost Bankers]

Please see the last page of text in this morning's earnings release for additional information about the risk factors associated with these forward looking statements. If needed, a copy of the release is available on our website or by calling the Investor Relations department at 210-220-5234. At this time, I'll turn the call over to Phil.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

Good afternoon, everyone, and thanks for joining us. Today, we'll review our Q4 and full year 2024 results for CullenFrost and our Chief Financial Officer, Dan Geddes, will provide additional commentary and guidance before we take your questions. In the Q4, Cullen Frost earned $153,200,000 or $2.36 a share compared with earnings of $100,900,000 or $1.55 per share reported in the same quarter last year. And for the full year 2024, the company's net income available to common shareholders was $575,900,000 and that compared with 2023 earnings available to common shareholders of $591,300,000 On a per share basis, 2024 full year earnings were $8.87 per share compared with $9.10 per share reported for the full year 2023. Our return on average assets and average common equity in the 4th quarter were 1.19% and 15.58% respectively.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

That compares with 0.82% 13.51% for the same period last year. Average deposits in the 4th quarter were $41,900,000,000 up from $41,200,000,000 in the Q4 last year. Average loans grew by 9% to $20,300,000,000 in the 4th quarter compared with 18 point $6,000,000,000 in the Q4 last year. We continue to see solid results driven by the hard work of our Frost bankers and the expansion effort that we have going today. As was the case in previous quarters, CullenFrost didn't utilize any FHLB advances or broker deposits or reciprocal deposit arrangements to build insured deposit percentages or to fund liquidity.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

So the way I continue to like to say it is, and when you look at our balance sheet, what you see is what you get. We continue to see excellent results with our organic growth strategy. We launched it at the end of 2018. When we did, Frost had 131 Financial Centers across Texas. Around the midpoint of this year, we'll open up our 200 location and we'll keep going from there by identifying strong markets where our value proposition will make an impact.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

At the end of the Q4, our overall expansion efforts continue to grow and have generated $2,400,000,000 in deposits, $1,800,000,000 in loans and added more than 59,000 new households. For deposits, loans and households, these represent 101%, 151% and 130% of GOL, respectively. Our Houston and Dallas efforts continue to perform consistent with what we've reported in the past. We opened our 6th location in the Austin region in the Q4, and we're now approximately 1 third through that effort. Early results continue to be very encouraging and in line with the other expansion markets.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

As we mentioned before, the successes of the earlier expansion locations are now funding the current expansion effort, and we expect the overall effort will be accretive to earnings beginning in 2026. As the proverb says, there's a time to sow and a time to reap, we're getting near reaping time. And as I've said many times, this strategy is both durable and scalable. The investments we made in organic expansion, new products, marketing, technology and our employees are driving outstanding growth throughout our consumer business. We've had record consumer growth for the year with a $610,000,000 increase in average outstanding balances for consumer loans.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

This represents a 21% annual growth rate and our 3rd consecutive year of high quality consumer loan growth over 20%. 2 thirds of the growth comes from our 2nd lien home equity products and the other third comes from our new mortgage program that has been nationally recognized for its excellence in customer experience. We funded $75,000,000 in mortgage loans in the Q4 and at the end of 2024, our total 1 to 4 mortgage portfolios stood at $259,000,000 Consumer checking household growth, our measure of customer growth, continued its 4 year industry leading run of 6% or greater growth. Consumer deposits, which make up 47% of our company's total deposit base, grew 3.2% for the year. We consider this to be excellent deposit growth in an environment of intense competition for deposits.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

And consumer deposits are now 51% higher than our 2019 pre COVID balances, a total increase of $6,500,000,000 over that period. Altogether, this represents an 8.6 percent compound annual growth rate over the past 5 years with all of it organic growth. I'm very excited to see the consistency and sustainability of our results over multiple years, and we're working hard to continue on this trajectory. Overall, our investments in organic expansion as well as new products, marketing, technology and our employees are helping drive this outstanding growth across the consumer business. Now looking at our commercial business, period end loan balances grew by $1,300,000,000 or 8.3 percent year over year.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

CRE balances grew by 11%, energy balances grew by 20% and C and I balances increased by 2.4%. New commercial relationships in 2024 were the highest annual level ever, even beating the Silicon Valley impacted 2023 level by 1%. For the year, the expansion accounted for 20% of new commercial relationships in 2024 and half of our total new commercial relationships are coming from what we call the too big to fail names. New loan commitments totaled $2,000,000,000 in the 4th quarter and were up 24% from the 3rd quarter. Finally, new loan opportunities were up 35% from the same quarter a year ago and represented our highest 4th quarter level ever.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

Our overall credit quality remains good by historical standards with net charge offs and non accruals both at healthy levels. Non performing assets totaled $93,000,000 at the end of the 4th quarter compared with $106,000,000 last quarter $62,000,000 in the Q4 of 2023. The quarter end figure represents 45 basis points of period end loans and 18 basis points of total assets. Net charge offs for the quarter were $14,000,000 compared with $9,600,000 last quarter and $10,900,000 a year ago and annualized net charge offs for the 4th quarter represented 27 basis points of average loans. Total problem loans, which we define as risk grade 10, OAEM or higher, totaled $943,000,000 at the end of the Q4 compared with $839,000,000 at the end of the Q3.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

Our overall commercial real estate lending portfolio remains stable with steady operating performance across all types and acceptable debt service coverage ratios. Our loan to value levels are similar to what we reported in prior quarters. When you put all that together, these results demonstrate what happens when you combine Frost values with the right strategies in the best banking markets in the United States and provide the best customer experiences with the best team anywhere. We are very well positioned to move ahead into 2025 and to extend the Frost value proposition to more customers around the state. And with that, I'll turn it over to Dan.

[Dan Geddes, CFO at Cullen/Frost Bankers]

Thank you, Phil. Let me start off by giving some additional color on our expansion results. As Phil mentioned, we continue to be pleased with the volumes we've been able to achieve. Looking at the Q4, linked quarter growth and expansion average loans and deposits were $130,000,000 $128,000,000 respectively, representing 32% 22% annualized growth. Now moving to the 4th quarter financial performance for the company.

[Dan Geddes, CFO at Cullen/Frost Bankers]

Regarding net interest margin, through 4th quarter, net interest income was up $9,000,000 or 2.3 percent on a linked quarter basis. Our net interest margin percentage was down 3 basis points to 3.53% from the 3.56% reported last quarter. Our net interest margin percentage was negatively impacted by lower rates on balances held at the Fed and loans and offset by higher volumes of balances at the Fed and loans together with lower rates on deposits. Looking at our investment portfolio. The total investment portfolio averaged $18,600,000,000 during the 4th quarter, down $257,000,000 from the prior quarter.

[Dan Geddes, CFO at Cullen/Frost Bankers]

During the 4th quarter, investment purchases totaled $840,000,000 with $754,000,000 being Agency MBS securities yielding 5.8 percent and $64,000,000 being municipals with a taxable equivalent yield of 5.35 percent. I'll note that approximately $500,000,000 of the agency MBS yielding 5.91% that were purchased did not settle until January 21, 2025. During the quarter, we had $500,000,000 of treasuries mature at an average yield of 0.96%. The net unrealized loss on the available for sale portfolio at the end of the quarter was $1,560,000,000 an increase of $429,000,000 from the $1,130,000,000 reported at the end of the 3rd quarter. The taxable equivalent yield on the total investment portfolio during the quarter was 3.44%, up 4 basis points from the 3rd quarter.

[Dan Geddes, CFO at Cullen/Frost Bankers]

The taxable portfolio, which averaged $12,100,000,000 down approximately $149,000,000 from the prior quarter, had a yield of 2.99%, up 5 basis points from the prior quarter. Our tax exempt municipal portfolio averaged $6,500,000 during the 4th quarter, down $108,000,000 from the 3rd quarter and had a taxable equivalent yield of 4.33 percent, up 1 basis point from the prior quarter. At the end of the 4th quarter, approximately 69% of the municipal portfolio was pre refunded or PSF insured. The duration of the investment portfolio at the end of the Q4 was 5.7 years, up from 5.4 years in the Q3. Looking at funding sources, on a linked quarter basis, average total deposits of $41,900,000,000 were up $1,200,000,000 from the previous quarter.

[Dan Geddes, CFO at Cullen/Frost Bankers]

The linked quarter growth was roughly half in money markets, a third in non interest bearing accounts with the remainder being savings and IOC accounts. Average non interest bearing demand deposits were up $393,000,000 or 2.9 percent over the 3rd quarter, while interest bearing deposits increased $759,000,000 or 2.8 percent when compared to the previous quarter. The cost of interest bearing deposits in the 4th quarter was 2.14 percent, down 27 basis points from 2.41% in the 3rd quarter. Thus far in January, both current and month to date average deposits are in line with 4th quarter averages. Customer repos for the Q4 averaged $3,900,000,000 up $168,000,000 from the 3rd quarter.

[Dan Geddes, CFO at Cullen/Frost Bankers]

The cost of customer repos for the quarter was 3.34%, down 38 basis points from the 3rd quarter. Looking at non interest income and expense, I'll point out a couple of seasonal items impacting the linked quarter results. Regarding other non interest income, as in years past, we received our normal annual Visa bonus during the Q4, totaling $4,600,000 Salaries and wages included approximately $8,000,000 in higher stock compensation compared to the Q3. As a reminder, our stock awards are granted in October of each year and some awards by their nature require immediate expense recognition. Regarding our guidance for full year 2025.

[Dan Geddes, CFO at Cullen/Frost Bankers]

Our current outlook includes 2 25 basis point cuts for the Fed funds rate in 2025 with a cut in June September. Given that, we expect net interest income growth for the full year in the range of 4% to 6%. For net interest margin, we expect an improvement around 10 basis points compared to our net interest margin of 3.53 percent for 2024. Looking at loans and deposits, we expect full year average loan growth to be in the mid high single digits and expect full year average deposits to be up between 2% and 3%. Based on current projections, we are projecting growth in non interest income in the range of 1% to 2% and non interest expense to be in the high single digits.

[Dan Geddes, CFO at Cullen/Frost Bankers]

Regarding net charge offs, we expect full year 2025 to be similar to 2024 and in the range of 20 to 25 basis points of average loans. Regarding taxes, we currently expect the full year 2025 to come in between 15% 16%. With that, I'll turn the call over to Phil for questions.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

Thank you, Dan. We'll open the call up now for questions.

[Operator]

Thank Our first question is from Manavansala with Morgan Stanley. Please proceed.

[Manan Gosalia, Equity Analyst at Morgan Stanley]

Hi, good afternoon. Good afternoon. I wanted to start on loan growth. The guide for mid to high single digit loan growth, it implies a little bit of a slowdown from last year. But judging by your comments, they were all fairly positive in terms of new commercial relationships, new loan commitments.

[Manan Gosalia, Equity Analyst at Morgan Stanley]

So wanted to get a sense of if there's any conservatism baked in there? Or are we just growing off of a higher base, which is driving that slowdown? Any thoughts you can share there would be great.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

Thanks. I would say without getting too granular about it, overall, I would expect really good consumer loan growth to continue. That's the point where it's seen a little over 15% of our portfolio and the growth there is, I think, we've had 20% plus growth for 9 quarters in a row. I think C and I growth has been interesting in terms of what we've seen there. And I think that's going to continue to be good, especially based on what we've seen in new opportunities.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

And I think the slowdown if it happens would be with CRE where you've got we haven't had the same velocity of new deals, particularly in multifamily and of course office. And what you're seeing with a lot of the growth we've had over the last several quarters has been really funding of deals that we're putting in place really a couple of years ago. And so that I expect to slow a little bit of a headwind. I think maybe see that in the single digit, low single digit area. But that's really all I would say.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

I think we're really expecting to have a pretty good year with regard to loan growth and absent the slowdown with the CRE fundings that you'll see, it should be pretty good.

[Manan Gosalia, Equity Analyst at Morgan Stanley]

And are there any pay downs being factored in on that CRE side or is it just a function of the belly of the curve is higher and therefore you expect lower demand there?

[Dan Geddes, CFO at Cullen/Frost Bankers]

I think it's going to be more of a factor of expected pay downs that we have some projects as Phil mentioned that have funded up and just by their very nature, we're primarily an interim construction lender. We help you get the projects built and stabilized and now they're likely ready to be either sold or moved into a permanent loan. So that's really just the factor. And then what Phil mentioned earlier was we're looking at a fair amount of commercial real estate loans, but we're just not booking at the same rate. They're just with interest rates higher for longer, they're a little harder to pin out.

[Dan Geddes, CFO at Cullen/Frost Bankers]

And we're not going to compromise our credit quality either.

[Operator]

Our next question is from Will Jones with KBW. Please proceed.

[Will Jones, Associate Vice President at Keefe, Bruyette & Woods (KBW)]

Yes. Hey, guys. Thanks for the questions. Subbing in for Catherine Mealor this afternoon. Just wanted to keep on up on that balance sheet growth conversation.

[Will Jones, Associate Vice President at Keefe, Bruyette & Woods (KBW)]

It sounds like with the outlook for loan growth maybe outpacing what you expect from those deposit side, Do you feel like the investment portfolio really will hold more flat like in other terms, you don't expect to be a net purchaser of securities in 2025?

[Dan Geddes, CFO at Cullen/Frost Bankers]

Right now, we've had this, I'll call it kind of optionality with our balance sheet with our liquidity rates being close to 20%. And so we're going to look to invest some of that liquidity in the Q1. And so you can look for our purchases to accelerate here in the Q1 of securities. We feel like we can utilize some of that liquidity to both support loan growth as you mentioned, but also take advantage of what the yield curve is giving us right now and with it being more positively sloping.

[Will Jones, Associate Vice President at Keefe, Bruyette & Woods (KBW)]

Yes, okay. And any way to quantify how aggressive you guys may be and kind of take a down from your liquidity?

[Dan Geddes, CFO at Cullen/Frost Bankers]

Yes. So we're looking at about a little over $2,000,000,000 in securities that will either mature or expect to be called or for prepayments. And so we'll have that available to use. And so we're looking at around a $4,000,000,000 investment purchase strategy in 2025 with utilizing about half of that in the Q1.

[Will Jones, Associate Vice President at Keefe, Bruyette & Woods (KBW)]

Okay, great. That's awesome color. Thank you for that. And then just switching over to the margin and NII guidance, just in terms of deposit betas, I know last quarter we had kind of talked about landing in the 45% range full cycle just really kind of matching what you're able to do on the up cycle. But if you look at where deposit costs came in this quarter, I mean, you've already really nearly matched that beta.

[Will Jones, Associate Vice President at Keefe, Bruyette & Woods (KBW)]

So I guess the question is, did you kind of view that more as a pull forward of the bidding? I know we talked about maybe a little bit of a lag effect, but do you see like maybe you pulled forward a little bit of that beta this quarter and you kind of see that stabilize as growth picks up for the industry next year and deposit cost position is a little more fierce? Or do you feel like that beta has a little bit more staying power and you could even outperform on deposit costs as we move this year?

[Dan Geddes, CFO at Cullen/Frost Bankers]

I do think that deposit beta will be in that 45% range on a cumulative basis. So I don't think we're too far off. And we're going to listen to the customers and competition and see what we need to do in terms of pricing for our deposit products. But right now, we feel good about we treated customers fairly on the way up and we're kind of continuing that trend on the way down.

[Will Jones, Associate Vice President at Keefe, Bruyette & Woods (KBW)]

Yes. Okay. And then, great. And just lastly for me. I know we've talked historically in terms of each cut having about $1,000,000 a month impact to NII.

[Will Jones, Associate Vice President at Keefe, Bruyette & Woods (KBW)]

Do you guys still see it the same way? Is that still how we should kind of think about how rates have initial impact to income statement?

[Dan Geddes, CFO at Cullen/Frost Bankers]

Yes, I think it's around about $1,700,000 That's kind of where we plan for that kept promotion.

[Will Jones, Associate Vice President at Keefe, Bruyette & Woods (KBW)]

Okay, that's great. All right. So thanks for the question guys.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

Yes. And just so that's other things equal number there. So be careful with that. It remains to be seen what happens with deposits, positive or negative with all of that. So while the numbers is accurate, it is what it is, it's pretty linear in terms of the arithmetic.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

What else happens in the balance sheet around all that remains to be seen, just always need to say that.

[Will Jones, Associate Vice President at Keefe, Bruyette & Woods (KBW)]

Yes. Noted. Great point, Phil. Thank you.

[Operator]

Our next question is from Ben Jellinger with Citi. Please proceed.

[Ben Gerlinger, Vice President of Equity Research at Citigroup]

Hi. Good afternoon.

[Dan Geddes, CFO at Cullen/Frost Bankers]

Hey. Good afternoon, Ben.

[Ben Gerlinger, Vice President of Equity Research at Citigroup]

I think you guys said you started you opened your 6th branch in Austin and you have probably another dozen more to go and then 26 is to fill in kind of year. When you think about just kind of growth in expenses, do you think kind of I know you're not going to get 26, guys, you just get 25. But what we should see this year, should we kind of replicate it again on growth and then expenses in 26? Or is there something that's being pulled forward in the expense base to get to the high single digits you referenced?

[Dan Geddes, CFO at Cullen/Frost Bankers]

When I'm looking at 'twenty five, we're continuing to invest in technology and a lot of it's replacing legacy systems that we'll continue to do 2025 and probably into 2026. And then also just in terms of compliance, cybersecurity and then the people and then our continued expansion. So I think in terms of we've done a lot of the heavy lifting, I would say, in terms of a lot of the people component. And so that pace of growth in terms of us building out that infrastructure, especially in IT and then you'll see growth relative to our growth in the expansion in terms of people. But I think we feel good about that we're compensating people fairly and competitively and our benefits are in line with the market and actually really strong.

[Dan Geddes, CFO at Cullen/Frost Bankers]

So it's a great value proposition to have and we experienced kind of lower attrition than the industry. So that investment is paying off. But if that gives you enough color for 2025, I hope it does.

[Ben Gerlinger, Vice President of Equity Research at Citigroup]

Yes. No, I

[Ben Gerlinger, Vice President of Equity Research at Citigroup]

totally understand. You guys are in

[Ben Gerlinger, Vice President of Equity Research at Citigroup]

growth mode. So it makes sense that you're investing. And then Phil or whoever wants to field the question, when you think about competition in the market, some of the banks that have seen

[Ben Gerlinger, Vice President of Equity Research at Citigroup]

a better pace of growth, whether it

[Ben Gerlinger, Vice President of Equity Research at Citigroup]

be footprint extension or expansion or just a faster growth in general, kind of cited people or other banks or frankly non banks more aggressive in the space. I'm just kind of curious, is it largely just rates that isn't or is there something beyond that where the competition is increasing? I know you're not going to change your box on credit recumbents, but have you seen an increased pace of competition over the past 60, 90 days?

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

I would say the short answer is yes, we have. And a few things going on, some is from banks and some are from non banks. The banks I think really represents from banks that had

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

sort of put their pencils down on, let's say, the commercial

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

real estate side. Down on, let's say, the commercial real estate side. And for the good deals that you're seeing, you're seeing a at least from anecdotally what I've seen on some of the deals we've lost, there's been sort of a drifting back to some of these pre COVID underwriting methodologies, which is kind of basically more money longer terms, no guarantees kind of thing and pricing lower. That's always going to be the case and that will come in waves and then we'll receive and come and receive. So that's one thing.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

I think the other thing that's a little bit different over the last 3 months from what I've seen is you've seen more private equity engaged in the marketplace. The main place that we've seen that and actually it's been kind of a good thing in the short term has been private equity around real estate, commercial real estate, bridge financing and mostly seeing that in the multifamily projects. And the value proposition they typically give is the rate is not all that different really, a little bit higher. They don't have the same rigorous criteria, at least the ones I've seen on debt service coverage ratios, maybe amortization or interest only. It's really it's in there to get that project from where it is today to a stabilized situation.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

Once you get the stabilization, then you can see agency lender, maybe a traditional permanent lender come in, that kind of thing. So a lot of options or sale, cap rates are still really good for the multifamilies. But that asset class has got well known headwinds that it's been up against where there's been higher rates, higher operating costs, more supply, which means slower lease up and now they've got they're actually leasing up, but they're using more free rent. All those things put pressure on the traditional bank metrics of debt service coverage ratio, etcetera. But if you just get to that stabilization, just get to that breakeven or a little bit higher on the coverage in the cash, man, there are lots of options available.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

So that's a positive that we've seen. I think as we've asked ourselves, okay, well, where is this going? What might we be sorry about with the private equity inference 3 years from now? It's probably that you're beginning to see them show up on some of the more what I'll call traditional construction lending, development lending. And so there's a lot of money in that industry and they're looking for things to do and I think we'll see them more over time.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

But right now, that's kind of what we've seen competitively. And as I said, in case of the private equity and multifamily, it's a good thing for us and for the lenders right now and borrowers.

[Ben Gerlinger, Vice President of Equity Research at Citigroup]

Got you. That's helpful color.

[Ben Gerlinger, Vice President of Equity Research at Citigroup]

I appreciate the time guys.

[Operator]

Our next question is from Peter Winter with D. A. Davidson. Please proceed.

[Peter Winter, Managing Director - Senior Research Analyst at D.A. Davidson]

Hi, good afternoon. I wanted to ask about the capital strategies going forward. Obviously, top priority is organic growth, but you did announce a share buyback. I'm just curious how active you plan to be with the buyback? And secondly, if there's any thought of maybe retiring some of the preferred securities as a use of capital?

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

Hey, Peter. I would say right now our focus is really plain vanilla. It's maintained the dividend, keeping that solid. I think we've increased for 31 years and Jerry Salinas just retired at the beginning of the year and his parting words will keep the dividends strong. So if he lives on the call right now, he would he'd be banging the table.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

But so it's that we want to make sure that we've got plenty of room for growth. And as far as other things like you mentioned the buyback, it's totally opportunistic. We utilized about what was it Dan $50,000,000 That's right. I think we bought in around $100 or so. And so it's been good for shareholders, but frankly, I hope not to have the opportunity to buy low on the stock really.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

And then with regard to the preferred, you just have to look at it and see what the numbers said. I'll just be honest, we haven't really talked about it. But since you asked, we will look at it. But thanks for the heads up on it.

[Peter Winter, Managing Director - Senior Research Analyst at D.A. Davidson]

Sure. And then if we could just go back to expenses. I hear you about the investments that you're making with the branch build out and the investments in technology. I'm just surprised it's probably a little bit higher than what I was expecting, just thinking that was going to moderate more than what we've seen the last few years, and it's still pretty elevated. Just wondering just the outlook with expenses, when we should see it kind of moderate from these type of levels?

[Dan Geddes, CFO at Cullen/Frost Bankers]

The way we look at this is that these are investments that are going to set us up on this path of growth that we're on. And so certainly, we're going to look at 2026 as a time when we could see some abatement in that growth. And I had I look back and kind of look at our expense growth over the last 4 years. And if I take out the FDIC limit from 2021 to 2022, it's 16% and then 15% and then 10%, and then now we're guiding kind of high single digits. So it's trending in the right direction, but we're and we're certainly mindful of expenses.

[Dan Geddes, CFO at Cullen/Frost Bankers]

We're not just everything that any new FTE or CapEx over $100,000 still goes by my desk and fills for approval. So we're watching expenses where we can, but we're certainly there's certainly a risk of not making these investments as well. And so we're well on our way to replacing these legacy systems that if we didn't, we would regret it in the future.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

Yes. Peter, we're pretty conservative group and it kind of makes the hair stand up on the back of your neck when you look at how much money we're spending. I mean, just to be perfectly honest, but I mean everything that we look at is there's a lot of accountability with it and we're certain it's helping us get better, it's helping us grow, it's helping us reduce risk. And so and as someone said earlier, we're in a growth mode and we are. So and we've been building that up, right?

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

So there's been some foundational things that we've done. But Dan and I and the management team spend a lot of time talking about it. We're not happy with this level of expense growth. But I don't think we're doing anything wrong with it. It's just we'd like to see it moderate some because like we said, like I said in my comments, there's time for sowing and time for reaping and we really are looking forward to getting to that point, that reaping point.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

And to do that most effectively, we're going to have to bring those expenses down to a more moderate level. I don't think that we're going to be in the mode of just cutting expenses or just growing at inflation because we are growing. I mean, and I like that and we want to do that. But as far as where we are right now, I mean our sense is that we're

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

kind

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

of choking down what we've had to do to this point, but we're really looking forward to getting returns on these investments and we'll do that. Our team and our company will do that.

[Dan Geddes, CFO at Cullen/Frost Bankers]

And just looking where we're spending money, we have our investments in technology, it's kind of the digital experience, modernization and transformation. We're looking, as I mentioned, security fraud and compliance risk management. And then as Bill mentioned, we're just we're a growing company and we're adding more branches, more people and more products with our mortgage product.

[Peter Winter, Managing Director - Senior Research Analyst at D.A. Davidson]

That's perfect. And just to be clear, the expense growth of high single digit is on a GAAP basis for 2024. Is that correct?

[Dan Geddes, CFO at Cullen/Frost Bankers]

Yes.

[Operator]

Our next question is from Jon Arfstrom with RBC Capital Markets. Please proceed.

[Jon Arfstrom, Managing Director - Associate Director of US Research at RBC Capital Markets]

Thanks. Good afternoon.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

Hey, Jon.

[Jon Arfstrom, Managing Director - Associate Director of US Research at RBC Capital Markets]

Hey. Question back on loan growth. You've got some pretty strong pipeline growth. And I'm just curious what you're thinking on what would bring you into the lower end of the range? What would take you to the higher end of the range?

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

I'm just going to throw out payoffs in commercial real estate. I mean, there are a lot of people looking to utilize some of this private equity bridge financing and some people sell them things if they can't, but I'd say it's mainly payoffs. We for example, let's take this quarter, I think we moved 5 multifamily deals to risk grade 10, okay? So that's a problem on category, but I'm not worried about any of them because most of them, 60% of them are in the process of working with private equity to pay it off. There are they're going to work out, but part of them working out is those balances are going to leave, right.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

So if we had those 5 left, that probably I'm going to guess around numbers $150,000,000 So if we see a lot of that, that could be sort of a one time push down. That would be my main thing that I could see we're bringing in the low end. The high end is, who knows. I think that the economy has been really picked up and activities really picked up after the election. And if you've eliminated some of that uncertainty that where we assume, shoot, we've seen C and I loans go down for I think 4 months in a row leading up the election.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

I think they're up every month since. And so that's just beginning and we'll see where that takes us. I don't think anybody knows right now, but I think we do get just more activity and you get, I hate to use the word animal spirits, but those find their way into people doing projects and that's a real thing. We could see it maybe be a little higher. I guess you might see energy grow a little bit there.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

It's been pretty it's grown a little bit in the near term and that can that always moves around a bit, depending on what our borrowers are doing, but stuff like that. I think it would just be in general the water level would go up, that would be it.

[Jon Arfstrom, Managing Director - Associate Director of US Research at RBC Capital Markets]

When you guys say mid to high, you're saying 5% to 9% basically and maybe it's safe to be in the middle. I don't want to pin you down, but that's the way I'm thinking about it.

[Dan Geddes, CFO at Cullen/Frost Bankers]

That's a good range.

[Jon Arfstrom, Managing Director - Associate Director of US Research at RBC Capital Markets]

And should we use full year average or period end? I know we're getting ticky tacky, but That's full year average. Full year average, okay. And then on non interest income, you guys had a strong year and you pulled back the growth rate a little bit. Is there anything you would call out in the 24 growth rates in the big categories, trust, investment management, insurance, interchange, anything you would call out as unsustainable?

[Jon Arfstrom, Managing Director - Associate Director of US Research at RBC Capital Markets]

It just seems like you could do a little better than I'm just curious on your guide.

[Dan Geddes, CFO at Cullen/Frost Bankers]

I guess one thing I'll point out is capital markets had a tremendous year in 2024 and so we're not necessarily expecting to duplicate that. We underwrote a lot of bond offerings here in Texas and so they had a great year. That's one notable. The other is just a little bit of unknown of interchange and overdraft regulation and when that kicks in. And so we have that baked into our 25 growth as well.

[Operator]

Our next question is from Ebrahim Poonawala with Bank of America. Please proceed.

[Ebrahim Poonawala, Managing Director - Head of North American Banks Research at Bank of America Merrill Lynch]

Hey, good afternoon.

[Dan Geddes, CFO at Cullen/Frost Bankers]

Hey, Ebrahim.

[Ebrahim Poonawala, Managing Director - Head of North American Banks Research at Bank of America Merrill Lynch]

Hey, Phil. Just one follow-up. I heard you on Puneef versus Soh getting some, I guess, payoff from all these investments. But just talk about you talked about 200 branches this year, 131 in 2019. Based on, I'm sure, the work you all have done, is that enough?

[Ebrahim Poonawala, Managing Director - Head of North American Banks Research at Bank of America Merrill Lynch]

Or is there a point 2 years from now where you could go from 200 to 250? Just would love to hear your thoughts about how much you maxed the market opportunity with this brand expansion? And is there more to go? And is there a reason why you're not doing that today versus down the road?

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

Yes. Ebrahim, we're going to continue to do it. So you're going to see a regular cadence, I believe, in our identification of and our developing great markets in the state. And a way to think about it is we talked about it, let's say in the next 2 years, we're done with Dallas and we're done with Austin, okay? Well, at that time that will be the Houston 1.0 expansion will be 7 or 8 years, it has to be 8 years old, right?

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

And so if you look at Houston, it has grown a tremendous amount over the last 8 years. So there's going to be the opportunity for us to take advantage of where the market's gone. And instead of plugging really big holes within the city like we did with 1.0 and 2.0, we're going to have the opportunity to move into markets where you're growing. For example, it's growing really strongly West. We finally got to Katy and now that we're in Katy, Texas, everyone's saying, well, how about the communities West of that, for example.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

You can say the same thing in Dallas and other markets. So I think what we'll be doing is identifying where are those where we didn't get to take advantage the first time in the expansion in those markets and then also going to where that market is growing. One of the things that I've asked our team to do over the last year or so is just to be honest is look where the puck is going. It's the state is growing and I want to have locations that we have warehoused and what we believe will be great markets as they develop and have those in our hip pockets so that we can bring those out and not be not take a year or year and a half to scramble and find something in a market that's really starting to take off. So that's why I say I think this is durable and scalable.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

I think we'll continue to be doing this for a good period of time. One thing to keep in mind Ebrahim and I know you we've been with you on this a long time, you've talked about it. But one thing to think about is the longer we do it, the higher and higher percentage of our market locations that are new and that are not so legacy that there's no development left, no growth. And so if we continue to do, I don't know, let's say 10, 15, I'm just throwing numbers out of locations a year, that number will be a smaller and smaller percentage

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

of our current

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

balance sheet. And so I think the we'll continue to do it, but I think that the impact of it is going to be relatively less on as we continue to grow. And then the really good thing is as we talk about, so when we're in the I have to give Dan credit for that one and he thought is that it's we're finally going to get to see and our shareholders are finally going to get to see some payoff for this and I think that's going to be in place for a long time.

[Dan Geddes, CFO at Cullen/Frost Bankers]

And the

[Dan Geddes, CFO at Cullen/Frost Bankers]

2 markets that we're in Houston and Dallas in June of this year, we had a 2.5% market share in Houston and just over 1% market share in Dallas. So there's just in those two markets, there's plenty of room for us to grow there.

[Ebrahim Poonawala, Managing Director - Head of North American Banks Research at Bank of America Merrill Lynch]

That's helpful. That was great color. Thank you,

[Operator]

We do have a follow-up question from Peter Winter with D. A. Davidson. Please proceed.

[Peter Winter, Managing Director - Senior Research Analyst at D.A. Davidson]

Thanks. Sorry about this. Just Dan, can I just clarify the point on the fee income outlook with the overdraft fees? You're assuming that some change to the way overdraft fees are calculated get reduced? And I'm just wondering if that's baked into the guidance and how much of an impact that is?

[Dan Geddes, CFO at Cullen/Frost Bankers]

It is baked in there towards the back half of the year and then interchange as well. Just and again that may or may not happen, but we have it in there. We hope it does. Yes. But yes, it's that especially on the overdraft, our overdrafts have been basically growing as we've been growing customers.

[Dan Geddes, CFO at Cullen/Frost Bankers]

We've been trying to do what we can to I mean that's not something that is going to make our dreams come through is overdraft fees. And so we offer overdraft grace and other products to help, but you've seen just the consumer kind of spend the excess money that they receive during the post pandemic era. So you've seen that kind of tick up a little bit and go back towards closer towards pre pandemic kind of per customer rates. But if that's changed, then we may

[Dan Geddes, CFO at Cullen/Frost Bankers]

not that may not be something that we can expect

[Dan Geddes, CFO at Cullen/Frost Bankers]

to get the same amount of fee income from.

[Peter Winter, Managing Director - Senior Research Analyst at D.A. Davidson]

Can you quantify like how much you earned in 'twenty four and what type of level you expect in 'twenty five?

[Dan Geddes, CFO at Cullen/Frost Bankers]

Yes.

[Dan Geddes, CFO at Cullen/Frost Bankers]

So and just in terms of what we did in higher fee income, retail, this is from 2023 to 24, it was about a $5,500,000 component of that growth that we had. And so we have that basically kind of we have that limited in 2025. And interchange, we are reducing about $1,000,000 a month starting in July.

[Operator]

We have reached the end of our question and answer session. I would like to turn the conference back over to Phil for closing remarks.

[Phillip Green, Chairman & CEO at Cullen/Frost Bankers]

All right, everybody. We thank you for your interest and for participating with us in this call today. And with that, we'll be adjourned. Thank you.

[Operator]

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.

Participants

Analysts

• A.B. Mendez, Senior Vice President and Director of Investor Relations at Cullen/Frost Bankers
• Phillip Green, Chairman & CEO at Cullen/Frost Bankers
• Dan Geddes, CFO at Cullen/Frost Bankers
• Manan Gosalia, Equity Analyst at Morgan Stanley
• Will Jones, Associate Vice President at Keefe, Bruyette & Woods (KBW)
• Ben Gerlinger, Vice President of Equity Research at Citigroup
• Peter Winter, Managing Director - Senior Research Analyst at D.A. Davidson
• Jon Arfstrom, Managing Director - Associate Director of US Research at RBC Capital Markets
• Ebrahim Poonawala, Managing Director - Head of North American Banks Research at Bank of America Merrill Lynch