Cullen/Frost holds onto loan reserves as COVID surges in Texas

Amid a COVID-19 surge in its home state of Texas, Cullen/Frost Bankers declined to follow the lead of other banks that bolstered their earnings with reserve releases during the second quarter.

The San Antonio company reported a quarterly allowance for credit losses of $255.2 million, or 1.54% of its total loans. That was up from 1.46% three months prior and 1.39% one year before.

CEO Phil Green cited a lack of clarity about the current stage of the pandemic and the nature of the so-called delta variant that has dominated the most recent increase in coronavirus cases.

“We felt it wasn’t appropriate to be taking reserves out when there was so much uncertainty around it,” Green said in an interview Thursday. “It’s not that we’re afraid or worried. We’re just realistic.”

Texas reported 10,086 new COVID-19 cases on Wednesday, its highest daily total since February. Less than 44% of the state’s population has been fully vaccinated, according to data from the Mayo Clinic.

While Cullen/Frost Chief Financial Officer Jerry Salinas told analysts Thursday that he does not expect to start adding provisions for credit losses, he will be watching how the virus moves as more people go back to work, and children return to school, before committing to releasing reserves this year.

“The variant conversation that’s going on currently is starting to highlight other issues, like with the mask again,” Salinas said during the company’s earnings call. “So, we think that September, October, it’ll be interesting to see where we’re at.”

Federal Reserve Chairman Jerome Powell said this week that the spread of the delta variant so far poses no threat to the broader U.S. economy.

“What we’ve seen is with successive waves of COVID over the past year and some months now, there has tended to be less in the way of economic implications from each wave,” Powell said during a press conference Wednesday. “We will see whether that is the case with the delta variety, but it’s certainly not an unreasonable expectation.”

Even without a major reserve release, the $46.7 billion-asset Cullen/Frost reported $116.4 million in net income for the second quarter, up 25% year-over-year. Net interest income ticked up 4.5% from one year prior, and the bank reported no credit loss expenses.

Loan growth outside of the Paycheck Protection Program started to return midway through the second quarter, “and that upward trend has continued into July,” Green said on the call with analysts.

Noninterest income increased 17.5% from one year earlier. Cullen/Frost entered into a branding partnership with Cardtronics earlier in July that is expected to give the company 1,725 ATMs across Texas, more than any other bank. The move will give a boost to the company’s plan to expand into the Dallas-Fort Worth area, Green said in an interview.

“The way that came together was really good,” Green said of the Cardtronics deal. “That sets up really well to enter the Dallas market.”

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