Cullen/Frost Bankers, Inc. — Q2 2021 Form 10-Q
Business and period. Cullen/Frost is a Texas-based financial holding company providing commercial and consumer banking, wealth management, insurance, and related services. This unaudited filing covers the quarter and six months ended June 30, 2021; balance-sheet comparisons are with December 31, 2020. Amounts below are in millions unless otherwise stated.
Financial results and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $257.2 | $245.8 | $498.0 | $490.3 |
| Non-interest income | $91.2 | $77.6 | $184.5 | $290.5 |
| Net income | $118.1 | $93.1 | $234.1 | $147.8 |
| Net income available to common shareholders | $116.4 | $93.1 | $230.3 | $140.3 |
| Diluted earnings per common share | $1.80 | $1.47 | $3.57 | $2.21 |
| Taxable-equivalent net interest margin | 2.65% | 3.13% | 2.68% | 3.33% |
- Management reported common-shareholder earnings rose 25.1% year over year in Q2 and 64.1% for the first half. The comparisons were materially affected by 2020 credit-loss provisions; first-half 2020 also included a $109.0 million securities gain and a $5.5 million preferred-stock redemption charge to common earnings.
- Q2 total credit-loss expense was zero: a $4.4 million loan credit-loss benefit offset by $4.4 million expense for off-balance-sheet exposures. First-half total credit-loss expense was $0.1 million, versus $207.2 million in 2020.
- Non-interest expense was $215.3 million in Q2, up 7.8%, and $425.4 million for the first half, up 0.4%. Q2 increases included salaries, technology, occupancy, donations, advertising and fraud losses.
- Effective tax rates were 11.3% for Q2 and 8.9% year to date, compared with a Q2 2020 tax benefit and a 1.3% first-half 2020 rate. Tax-exempt income, stock compensation and a one-time 2020 charitable-trust tax benefit affected comparisons.
Balance sheet, funding and capital
- Total assets were $46.7 billion, up from $42.4 billion at year-end. Cash and cash equivalents were $15.2 billion, including approximately $14.5 billion in interest-bearing deposits at the Federal Reserve.
- Total deposits rose to $38.7 billion from $35.0 billion; non-interest-bearing deposits were $16.5 billion. Loans declined to $16.6 billion from $17.5 billion. Excluding Paycheck Protection Program (PPP) loans, loans declined 2.5% from year-end to $14.7 billion.
- Shareholders’ equity was $4.4 billion. Cullen/Frost’s regulatory ratios were 13.60% CET1, 14.21% Tier 1, 16.17% total capital and 7.60% leverage; Frost Bank also exceeded regulatory “well capitalized” thresholds.
- Funding and debt included $2.2 billion of repurchase agreements, $26.7 million of federal funds purchased, $136.4 million of junior subordinated debentures and $99.1 million of subordinated notes. The filing reports $348.6 million of operating cash flow and $762.8 million of investing cash inflow for the first half; cash and cash equivalents increased $4.9 billion, principally alongside deposit growth.
- Liquidity sources included approximately $4.4 billion of available FHLB borrowing capacity and $7.6 billion in unencumbered securities. The $100 million repurchase program authorized in January had no repurchases in the first half. Common dividends were $0.72 per share in each 2021 quarter.
Material changes and credit quality
- Net interest income increased, but taxable-equivalent margin contracted as lower market rates and a larger share of earning assets held in low-yielding reserve deposits weighed on asset yields. Average interest-bearing deposits made up 31.1% of Q2 average earning assets, versus 14.2% a year earlier.
- Non-interest income increased in Q2, including higher trust fees and card transaction fees. First-half non-interest income fell 36.5%, largely because 2020 included the $109.0 million securities gain; excluding that gain, it increased 1.6%.
- The allowance for loan losses was $255.3 million, or 1.54% of loans (1.74% excluding PPP loans), versus $263.2 million, or 1.51%, at year-end. Non-accrual loans declined to $57.3 million from $61.4 million; total past-due loans were $123.0 million.
- Commercial real estate was 42.5% of loans. The energy portfolio was $1.0 billion, or 6.2% of total loans (7.0% excluding PPP). Management reduced energy exposure, while commercial real estate allowance allocations rose to $148.0 million.
- COVID-19 loan deferrals remaining at quarter-end were not significant. Pandemic-related uncertainty remained, and management retained qualitative credit-loss adjustments, including for commercial real estate, energy, and vulnerable industries such as hotels, restaurants and entertainment.
Outlook, commentary and risks
- The filing provides no company-wide earnings or revenue guidance. Management said low market rates were expected to continue affecting net interest income and margin in the near term; PPP fees were expected to provide a near-term benefit.
- For PPP loans funded through June 30, approximately $38.0 million of net deferred processing fees remained to be recognized, with about 72% expected in 2021 and the balance in 2022.
- Management’s interest-rate model projected next-12-month net interest income 3.7% higher under a 100-basis-point rate increase and 9.0% higher under a 200-basis-point increase; a 25-basis-point decrease implied a 2.5% decline versus the flat-rate case. These are model scenarios, not guidance.
- Texas severe weather in early 2021 was expected to affect insurance performance-related contingent payments in 2022, but the impact was not determinable. Management did not expect pending legal matters to have a material adverse financial impact. The filing reported no material change to the risk factors in the 2020 Form 10-K.
- Principal disclosed risks include economic and pandemic conditions, borrower and credit quality, energy and commercial real estate exposures, interest rates, liquidity, competition, cybersecurity and technology, regulation, and legal or vendor-related events.
Important facts for investors to verify
- How deposit growth and reserve balances evolve, and whether loan demand resumes without materially pressuring net interest margin.
- Whether credit performance supports the current allowance, particularly for commercial real estate, energy, and pandemic-sensitive borrowers; monitor non-accruals, delinquencies and qualitative reserves.
- The pace of PPP forgiveness and recognition of the remaining deferred fees, including the effect on future reported loan yields.
- Interest-rate sensitivity assumptions, especially modeled commercial deposit pricing, and the effect of market-rate changes on actual funding costs and earnings.
- Available liquidity and capital after dividends, potential repurchases and any changes in deposit balances or regulatory restrictions.