Cullen/Frost Bankers, Inc. (NYSE: CFR) — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparisons are primarily with 2022. This is an annual report, not a standalone fourth-quarter earnings filing. Cullen/Frost is a Texas-focused financial holding company, operating principally through Frost Bank.
Business context and key financial metrics
| Metric | 2023 | 2022 |
|---|---|---|
| Total assets at year-end | $50.8 billion | $52.9 billion |
| Total loans at year-end | $18.8 billion | $17.2 billion |
| Total deposits at year-end | $41.9 billion | $44.0 billion |
| Net interest income | $1.559 billion | $1.291 billion |
| Taxable-equivalent net interest margin | 3.45% | 2.82% |
| Non-interest income | $428.5 million | $404.8 million |
| Non-interest expense | $1.229 billion | $1.024 billion |
| Credit loss expense | $46.2 million | $3.0 million |
| Net income | $598.0 million | $579.2 million |
| Net income available to common shareholders | $591.3 million | $572.5 million |
| Diluted EPS | $9.10 | $8.81 |
| Return on average assets | 1.19% | 1.11% |
- Cash flow: Operating activities provided $478.8 million; investing activities used $942.8 million; financing activities used $2.877 billion. Cash and cash equivalents declined $3.341 billion to $8.687 billion.
- Capital: Shareholders’ equity was $3.716 billion. Cullen/Frost’s CET1, Tier 1, total capital and leverage ratios were 13.25%, 13.73%, 15.18% and 8.35%, respectively; Frost Bank’s were 13.33%, 13.33%, 14.20% and 8.10%. The company reported both entities above regulatory minimums and in the well-capitalized category.
- Funding and liquidity: Year-end deposits were $41.9 billion, including $14.9 billion non-interest-bearing and $27.0 billion interest-bearing. Approximately 53% of deposits were uninsured. Management reported $8.0 billion held at the Federal Reserve, $5.6 billion of FHLB borrowing capacity and $13.1 billion in unencumbered securities available to support borrowing. Parent-company cash was $350.5 million.
- Debt and other borrowings: Year-end repurchase agreements were $4.127 billion; subordinated notes were $99.5 million and junior subordinated debentures were $123.1 million. Most repurchase agreements were overnight or continuous.
- Asset quality: Non-accrual loans increased to $60.9 million from $37.8 million. The loan-loss allowance was $246.0 million, or 1.31% of loans, versus $227.6 million, or 1.33%, in 2022. Total credit-loss allowance for unfunded exposures was $51.8 million.
Material changes versus 2022
- Net interest income rose $267.4 million, or 20.7%, as higher asset yields more than offset higher funding costs. Average loan yield increased to 6.69% from 4.64%; average cost of interest-bearing liabilities increased to 2.19% from 0.64%.
- Average deposits decreased 7.0%, including a 15.7% decline in average non-interest-bearing demand deposits. Year-end deposits fell 4.6%; time deposits increased substantially as customers sought higher yields.
- Loans grew 9.7% year over year. Commercial real estate loans were $9.0 billion, about 47.7% of loans; consumer real estate loans grew 33.5%. Energy loans were $935.3 million, about 5.0% of loans.
- Credit-loss expense increased to $46.2 million from $3.0 million. Management cited increased expected losses and qualitative overlays, particularly for commercial real estate non-owner-occupied and construction portfolios.
- Non-interest expense rose 20.0%. This included a $51.5 million accrual for the FDIC special assessment; excluding that charge, expense increased 14.9%.
- Accumulated other comprehensive loss improved to $1.119 billion from $1.348 billion, principally reflecting higher fair values of available-for-sale securities. The securities portfolio still included $1.402 billion of gross unrealized losses at year-end; management said it did not expect to need material sales for liquidity.
- Common dividends increased to $3.58 per share from $3.24. The company repurchased $39.0 million of stock under its 2023 plan and authorized a new $150 million plan in January 2024.
Outlook, commentary, risks and unusual items
- The filing provides no specific company earnings, revenue or margin guidance. Management discussed rate sensitivity: its year-end model estimated that a 100-basis-point rate increase would raise next-12-month net interest income by 1.7%, while a 100-basis-point decrease would reduce it by 1.3%, relative to a flat-rate case. These are model estimates, not guidance.
- Management described liquidity as adequate and stated it knew of no event or regulatory recommendation reasonably likely to have a material adverse effect on liquidity, capital resources or operations. Deposit outflows, competition for deposits and the high uninsured-deposit share remain risks.
- Credit risks include commercial real estate exposure, office-property conditions, rising rates, large credit relationships and Texas economic conditions. A single relationship accounted for much of the increase in non-accrual commercial real estate loans. Energy exposure is sensitive to oil-price volatility.
- The $51.5 million FDIC special-assessment accrual reflects an assessment expected to be collected over eight quarters beginning in 2024. The FDIC may adjust the amount or collection period; additional future assessments are uncertain.
- Additional risks include interest-rate and securities valuation exposure, cyber incidents and vendor disruptions, regulatory changes, inflation and competition. The company reported that cybersecurity threats had not materially affected it to date. Management did not expect pending legal matters to have a material adverse effect.
- The company’s audited financial statements received an unqualified opinion, and the auditor also gave an unqualified opinion on internal control over financial reporting. The allowance for credit losses was identified as a critical audit matter.
Most important facts for investors to verify
- Deposit trends, especially non-interest-bearing balances, uninsured deposits and the cost of retaining interest-bearing deposits.
- Commercial real estate performance, including office and construction exposures, watch/classified loans, non-accrual trends and the adequacy of credit-loss overlays.
- Whether securities unrealized losses, liquidity needs or deposit movements require asset sales or additional borrowing.
- Whether net interest margin can be sustained as market rates and deposit pricing change; compare actual results with the filing’s rate-sensitivity assumptions.
- The final FDIC assessment and any subsequent special assessments, along with the persistence of operating expense growth.
- Capital ratios, dividends and share repurchases in light of earnings, regulatory requirements and the parent company’s reliance on bank-subsidiary dividends.