Cullen/Frost Bankers, Inc. (NYSE: CFR) — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; fourth-quarter results are also summarized below. Cullen/Frost is a Texas-based financial holding company operating primarily through Frost Bank, with commercial and consumer banking, wealth management, insurance and related services. Total assets were $30.2 billion at year-end.
Key financial metrics
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Net interest income | $776.3 million | $736.6 million | +5.4% |
| Non-interest income | $349.7 million | $328.7 million | +6.4% |
| Total revenue (net interest income plus non-interest income) | $1.126 billion | $1.065 billion | +5.7% |
| Net income | $304.3 million | $279.3 million | +8.9% |
| Net income available to common shareholders | $296.2 million | $271.3 million | +9.2% |
| Diluted earnings per common share | $4.70 | $4.28 | +9.8% |
| Net interest margin (taxable-equivalent) | 3.56% | 3.45% | +11 basis points |
| Return on average assets | 1.03% | 0.97% | +6 basis points |
| Return on average common equity | 10.16% | 9.86% | +30 basis points |
- Quarterly results: Q4 2016 net income was $83.7 million, or $1.28 diluted per common share, versus $58.2 million, or $0.90, in Q4 2015. Q4 loan-loss provision was $8.9 million compared with $34.0 million a year earlier.
- Balance sheet and liquidity: Year-end loans were $12.0 billion, up 4.3%; deposits were $25.8 billion, up 6.0%; and total assets increased 5.7% to $30.2 billion. Cash and cash equivalents totaled $4.14 billion. Operating cash flow was $437.8 million; investing activities used $1.37 billion and financing activities provided $1.49 billion.
- Capital and borrowings: Consolidated CET1, Tier 1, total risk-based capital and leverage ratios were 12.52%, 13.33%, 14.93% and 8.14%, respectively. Frost Bank was reported as well capitalized. Year-end federal funds purchased and repurchase agreements totaled $977.0 million; long-term borrowings included $100 million of subordinated notes due February 2017 and $136.1 million of junior subordinated debentures.
- Credit quality: Allowance for loan losses rose to $153.0 million from $135.9 million, or 1.28% of year-end loans versus 1.18%. Net charge-offs increased to $34.5 million from $15.5 million. Non-performing assets rose to $102.6 million from $85.7 million; non-accrual energy loans increased to $57.6 million from $21.2 million.
Material changes versus the prior period
- Earnings growth reflected higher net interest income and fee income, partly offset by 5.7% growth in non-interest expense to $733.0 million. Lower income-tax expense also supported results; the effective tax rate declined to 10.9% from 12.7%.
- Net interest income benefited from growth in average loans and tax-exempt securities, higher asset yields and lower rates paid on money-market deposits. Average earning assets increased 2.9%.
- Energy loans fell 21.2% to $1.39 billion, or 11.6% of total loans, but credit deterioration and charge-offs increased. Energy net charge-offs were $18.6 million, versus $6.0 million in 2015. Commercial real estate loans grew 11.6%.
- Non-interest income included $15.0 million of net securities gains, compared with $69,000 in 2015, and a $10.3 million gain on the sale of the San Antonio headquarters building and adjacent properties. The sale also resulted in a $7.1 million deferred gain to be amortized over the leaseback term.
- Other non-interest expense included a $6.7 million write-down of assets disposed of in 2016 or expected to be disposed of in 2017. The company also recorded $4.4 million of charitable-foundation contributions and $1.0 million in pension settlement costs related to a former executive’s retirement.
- Other comprehensive income shifted to a $138.5 million after-tax loss, primarily from lower unrealized gains on securities; accumulated other comprehensive income moved from a $113.9 million gain to a $24.6 million loss.
Outlook, commentary and risks
- The filing provides no specific earnings, revenue or loan-growth guidance. Management stated it was not aware of events reasonably likely to materially adversely affect liquidity, capital resources or operations at year-end. Management remained committed to regular cash dividends, subject to future earnings, capital needs, financial condition and regulatory limits.
- Management described the balance sheet as more asset-sensitive than at year-end 2015. Its simulation estimated that a 100- or 200-basis-point rate increase would raise 12-month net interest income by 1.0% or 2.1%, respectively; a 75-basis-point decrease would reduce it by 7.8%. These are model estimates, including assumptions about future deposit pricing.
- Principal risks include Texas economic and industry concentration, energy-sector volatility, commercial and real estate credit exposure, interest-rate and liquidity risk, competition, regulatory change, cybersecurity, and dependence of the parent company on bank-subsidiary dividends. Energy loans were 11.6% of loans; approximately 98.1% of the municipal bond portfolio was issued by Texas entities.
- Commitments to extend credit were $7.48 billion and standby letters of credit were $239.5 million at year-end; contractual amounts do not necessarily represent expected funding needs. Management did not expect pending legal matters to have a material adverse effect.
- The $100 million subordinated note maturity in February 2017 is a near-term funding and capital item to monitor. Cullen/Frost had $289.1 million of liquid assets at the holding-company level at December 31, 2016.
Most important facts for investors to verify
- Whether energy-related credit stress, rising non-accrual loans and higher charge-offs persist, and whether the allowance adequately reflects expected losses.
- The quality and credit performance of Texas municipal securities, especially given the portfolio’s geographic concentration and the securities sold following issuer credit deterioration.
- How deposit pricing and interest-bearing demand deposits evolve as rates rise, and whether actual net-interest-income sensitivity matches management’s model.
- How the February 2017 subordinated-note maturity was addressed and the resulting effect on funding, regulatory capital and liquidity.
- The recurring earnings contribution of securities gains, the headquarters-property sale and other nonrecurring items; also assess expense growth against revenue growth.
- Dividend capacity and capital-return plans, including the $100 million repurchase authorization and restrictions tied to bank regulation and preferred-stock obligations.
The audited financial statements received an unqualified audit opinion, and the auditor also issued an unqualified opinion on internal control over financial reporting.