Unlike some of its competitors, Cullen/Frost Bankers is raising deposit rates in response to recent interest-rate hikes by the Federal Reserve.
The approach may be hurting the San Antonio-based bank’s margins, but it’s shoring up deposit volumes, and it’s part of what CEO Phil Green calls the “square deal” the bank offers its clients.
The parent company of Frost Bank reported total deposits of $44.7 billion in the second quarter, up 17% from the same period last year.
“If you look at some of the competition, they haven’t moved at all,” Green said during an interview after the bank’s earnings presentation. “We don’t think that’s a credible position to not respond to increases we’ve seen in the market.”
Frost Bank’s 0.17% annual percentage rate for business savings accounts is higher than the national average of 0.10%, according to the most recent data from DepositsAccounts.com. Its one-year rate for certificates of deposit is 1.8% — substantially higher than the national average of 0.56%.
Despite its rising deposit costs, Cullen/Frost reported a 12% increase in net interest income to $288.2 million. Its net interest margin rose by 23 basis points to 2.56%.
The $51.8 billion-asset bank reported quarterly net income of $117.4 million, which was flat from the second quarter of last year. Its earnings per share of $1.81 beat the $1.77 average estimate of analysts surveyed by FactSet Research Systems.
Cullen/Frost reported average loans of $16.5 billion, excluding Paycheck Protection Program loans, a 13.2% increase from the same period a year earlier. The growth was led by a 37% increase in commercial real estate loans. Consumer loans grew 31%, while the commercial and industrial portfolio was up 25%.
Green said Frost is “taking advantage of natural growth” in urban Texas markets including Dallas and Houston. The bank’s expansion efforts in both cities exceeded expectations, he said.
“There’s so much business activity and backlog in these markets,” Green said. “I see that slowing as interest rates go up, but I don’t see it tipping over into a meaningful recession.”
“The economy is very strong here, and I do not expect an imminent recession in this state,” Green said.
The San Antonio bank is preparing to offer all customers — not just those with direct deposit — a break on overdraft charges. But CEO Phillip Green explained in an interview why he’s not prepared to step away from the fees altogether.
Frost reported a $239.6 million allowance for credit losses, down 6% from the same period last year. Second-quarter net charge-offs totaled $2.8 million, a 75% increase from $1.6 million during the same period in 2021.
In a research note Friday, Compass Point Research & Trading analyst David Rochester described the bank’s quarterly results in favorable terms, but pointed to a 14% increase in noninterest expenses as a relative weakness.
Salaries and wage expenses increased 20% to $116.8 million from the same period last year. The increase was partly tied to the implementation of a $20 per hour minimum wage in December.
