Business Overview and History

Cullen/Frost Bankers, Inc. (CFR) is a financial holding company and bank holding company headquartered in San Antonio, Texas. Through its subsidiaries, the company provides a wide array of banking, investment, and insurance products and services to customers throughout numerous markets in Texas. With a history spanning over a century, Cullen/Frost has established itself as a leading financial institution in the state, known for its strong customer focus, innovative technology, and disciplined growth strategy.

Cullen/Frost was founded in 1868 as the San Antonio National Bank, making it one of the oldest financial institutions in Texas. Over the decades, the company has grown through a series of strategic mergers and acquisitions, expanding its footprint across the state. In 1977, the company changed its name to Cullen/Frost Bankers, Inc. to better reflect its evolution into a diversified financial services organization.

In its early years, Cullen/Frost focused on serving the banking needs of local communities in San Antonio and the surrounding region. The company demonstrated resilience by weathering several economic downturns, including the Great Depression, through maintaining a conservative and prudent approach to lending and risk management. This strategy allowed Cullen/Frost to emerge from challenging periods in a strong competitive position.

The 1980s and 1990s marked a significant period of growth and expansion for Cullen/Frost as it established a presence in other major Texas markets such as Dallas, Houston, and Austin. This expansion was achieved through both organic growth and strategic acquisitions of smaller regional banks. During this time, the company also diversified its revenue streams by building up its wealth management, insurance, and capital markets advisory businesses.

In the 2000s and 2010s, Cullen/Frost faced various challenges, including the global financial crisis of 2008-2009 and increased competition from new financial technology firms. However, the company's commitment to conservative underwriting, strong risk management practices, and a customer-centric business model allowed it to navigate these headwinds successfully. Throughout these decades, Cullen/Frost continued to grow its franchise, both in terms of geographic footprint and product capabilities, solidifying its position as one of the premier community banks in the state of Texas.

Today, Cullen/Frost operates through three primary business segments: Banking, Frost Wealth Advisors, and Non-Banks. The Banking segment offers a wide range of commercial and consumer banking products and services, including commercial and industrial loans, energy loans, commercial real estate loans, consumer real estate loans, and other consumer loans. The Frost Wealth Advisors segment provides trust and investment management, insurance, brokerage, and other related services. The Non-Banks segment primarily consists of the parent holding company and certain other insignificant non-bank subsidiaries.

Financial Performance and Ratios

As of the latest reporting period, Cullen/Frost had total assets of $51.01 billion, total deposits of $41.72 billion, and total loans of $20.05 billion. The company's net income for the first nine months of 2024 was $427.69 million, with a net interest margin of 3.52% and a return on average assets of 1.15%.

For the most recent fiscal year (2023), Cullen/Frost reported revenue of $1.99 billion, net income of $597.97 million, operating cash flow of $478.85 million, and free cash flow of $320.21 million. In the most recent quarter (Q3 2024), the company's revenue increased by 9.1% year-over-year to $608.159 million, while net income decreased by 5.9% to $146.501 million. Operating cash flow and free cash flow both saw significant increases, rising 41.6% to $307.217 million and 41.4% to $281.888 million, respectively. The increase in revenue, operating cash flow, and free cash flow was primarily driven by strong loan growth, with average loans up 11.8% year-over-year.

Cullen/Frost's financial ratios showcase its strong position in the market. The company's current ratio stands at 0.54, indicating a healthy liquidity position. The debt-to-equity ratio is a low 0.05, demonstrating the company's conservative approach to leverage. Additionally, Cullen/Frost's return on equity of 15.90% and return on assets of 1.15% highlight its ability to generate solid returns for shareholders.

Liquidity

Cullen/Frost maintains a strong liquidity position, as evidenced by its healthy current ratio and quick ratio of 0.54. This indicates that the company has sufficient liquid assets to meet its short-term obligations. The company's conservative approach to leverage, reflected in its low debt-to-equity ratio of 0.051 as of September 30, 2024, further enhances its liquidity profile.

As of September 30, 2024, Cullen/Frost had cash and cash equivalents of $9.2 billion. The company also has a $6.2 billion borrowing capacity with the Federal Home Loan Bank, providing additional financial flexibility. Cullen/Frost's solid liquidity position allows it to navigate economic uncertainties and capitalize on growth opportunities when they arise.

Organic Growth and Expansion

One of the key drivers of Cullen/Frost's success has been its focus on organic growth. The company has been actively expanding its presence in major Texas markets, including Houston, Dallas, and Austin. These expansion efforts have been a significant contributor to the company's growth, with the Houston and Dallas markets already exceeding their initial deposit, loan, and household goals.

In the third quarter of 2024, Cullen/Frost's overall expansion efforts had generated $2.3 billion in deposits, $1.6 billion in loans, and added more than 55,000 new households. The company's expansion strategy has been instrumental in driving its strong loan and deposit growth, with average loans increasing 11.1% year-to-date and consumer deposits growing 2.5% year-over-year.

Technological Innovation and Customer Focus

Cullen/Frost has also been at the forefront of technological innovation, investing heavily in its digital capabilities to enhance the customer experience. The company's mobile banking app has been consistently ranked as one of the highest-rated financial apps in the App Store, reflecting its commitment to providing seamless and user-friendly digital solutions.

Moreover, Cullen/Frost's focus on customer service has been a key differentiator. The company's emphasis on building long-term relationships and providing personalized solutions has contributed to its strong customer loyalty and growth. This customer-centric approach has been instrumental in the company's ability to acquire new households and cross-sell its products and services, as evidenced by the 6% year-over-year growth in checking households during the third quarter.

Challenges and Risks

While Cullen/Frost has navigated the challenges of the past few years effectively, the company faces several risks that warrant consideration. The highly competitive nature of the Texas banking market, with both regional and national players vying for market share, could put pressure on the company's profitability and growth prospects. Additionally, the company's significant exposure to the energy sector, which accounted for 5.3% of its loan portfolio as of the third quarter, makes it susceptible to fluctuations in oil and gas prices.

The company also faces regulatory risks, as changes in banking laws and regulations could impact its operations and compliance requirements. Furthermore, the potential for economic downturns or recessions in its key markets could adversely affect Cullen/Frost's asset quality and credit performance.

Outlook and Guidance

Despite these challenges, Cullen/Frost remains optimistic about its future prospects. The company has provided updated guidance for the full year 2024, expecting net interest income growth in the range of 2% to 3% and noninterest income growth between 4% and 5%, which is an improvement from the previous guidance of 2% to 3%. The company also anticipates full-year average loan growth in the low double digits, slightly better than its previous guidance of high single digits to low double digits.

Cullen/Frost has revised its deposit growth guidance to a decline of 1% to 2%, compared to the previous guidance of flat to down 2%. The company expects noninterest expense growth of 6% to 6.5%, which is lower than the previous guidance of 6% to 7%. Net charge-offs are projected to be 18 to 22 basis points of average loans, an improvement from the previous guidance of 25 to 30 basis points.

The updated guidance reflects Cullen/Frost's strong performance in several areas, including loan growth, noninterest income growth, and net charge-offs, which have exceeded or beat previous expectations.

Segment Performance

The Banking segment, which is the largest contributor to Cullen/Frost's operations, saw a decrease in net income for the three and nine months ended September 30, 2024, by 6.6% and 14.0% respectively, compared to the same periods in 2023. This decrease was primarily driven by a 10.6% increase in non-interest expense and an 8.2% increase in credit loss expense, partly offset by a 4.9% increase in net interest income and a 5.6% increase in non-interest income.

The Frost Wealth Advisors segment showed positive growth, with net income increasing by 11.9% and 4.0% for the three and nine months ended September 30, 2024, respectively, compared to the same periods in 2023. This growth was primarily driven by higher trust and investment management fees, as well as increases in other charges, commissions, and fees.

The Non-Banks segment reported net losses of $3.4 million and $11.8 million for the three and nine months ended September 30, 2024, respectively, compared to net losses of $3.6 million and $10.3 million for the same periods in 2023. The change in net losses was largely due to an increase in net interest expense and an increase in income tax benefit.

Geographic Performance

Cullen/Frost's operations are primarily focused on the Texas market, with the majority of its customer base in the state. The company's expansion efforts in major Texas markets like Houston, Dallas, and Austin have contributed significantly to its recent growth. This geographic focus has allowed Cullen/Frost to capitalize on the robust loan growth in the Texas banking industry, which has outpaced the national average, driven by strong economic conditions and population/business migration to the state.

Conclusion

Cullen/Frost Bankers, Inc. has established itself as a leading financial institution in Texas, with a rich history, a disciplined growth strategy, and a strong focus on customer service and technology. The company's consistent financial performance, robust organic growth, and prudent risk management have made it an attractive investment option for investors seeking exposure to the thriving Texas banking market. As Cullen/Frost navigates the challenges and opportunities ahead, its ability to adapt and capitalize on its strengths will be crucial in maintaining its position as a Texas banking powerhouse. The company's updated guidance and strong performance in key areas such as loan growth and noninterest income growth indicate a positive outlook for the future, despite the competitive landscape and potential economic uncertainties.