Cullen/Frost Bankers, Inc. (NYSE: CFR) — FY 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter earnings release; the filing does not provide a clear standalone Q4 income statement summary.
Business context
Cullen/Frost is a Texas-focused financial holding company whose principal subsidiary, Frost Bank, provides commercial and consumer banking, wealth and trust services, insurance, and related financial services. At year-end, the company reported $50.9 billion in assets; Frost Bank operated approximately 157 financial centers in Texas.
Key financial metrics
| Metric | FY 2021 / Dec. 31, 2021 | FY 2020 / Dec. 31, 2020 |
|---|---|---|
| Net interest income | $984.9 million | $976.0 million |
| Non-interest income | $386.7 million | $465.5 million |
| Total revenue, net interest income plus non-interest income | $1,371.6 million | $1,441.5 million |
| Credit loss expense | $0.1 million | $241.2 million |
| Non-interest expense | $882.0 million | $848.9 million |
| Net income | $443.1 million | $331.2 million |
| Net income available to common shareholders | $435.9 million; diluted EPS $6.76 | $323.6 million; diluted EPS $5.10 |
| Net interest margin, taxable-equivalent | 2.53% | 3.09% |
| Return on average assets | 0.95% | 0.85% |
| Return on average common equity | 10.35% | 8.11% |
| Operating cash flow | $648.3 million | $524.2 million |
| Total assets | $50.9 billion | $42.4 billion |
| Total loans | $16.3 billion | $17.5 billion |
| Total deposits | $42.7 billion | $35.0 billion |
| Shareholders’ equity | $4.44 billion | $4.29 billion |
Material changes and balance-sheet position
- Common earnings rose $112.3 million year over year, principally because credit loss expense fell by $241.2 million from the elevated 2020 provision. Net interest income increased modestly.
- Non-interest income declined $78.7 million, largely reflecting the comparison with a $109.0 million securities gain in 2020. Excluding securities gains, non-interest income increased $30.2 million, or 8.5%.
- Average deposits grew 22.4% to $38.5 billion. Year-end deposits increased 21.9% to $42.7 billion. Non-interest-bearing deposits were $18.4 billion, approximately 43% of year-end deposits.
- Year-end loans decreased 6.5%; excluding Paycheck Protection Program loans, they increased 5.7%. PPP balances fell to $428.9 million from $2.4 billion as loans were forgiven or repaid.
- Net interest margin fell 56 basis points to 2.53%, despite a small increase in taxable-equivalent net interest income. Management attributed pressure to low market rates and a larger share of funds held in low-yielding interest-bearing deposits at the Federal Reserve.
- The allowance for loan losses was $248.7 million, or 1.52% of loans (1.56% excluding PPP loans); the separate allowance for unfunded credit exposures was $50.3 million. Non-accrual loans declined to $53.7 million from $61.4 million.
- Commercial real estate represented approximately 46.4% of loans; commercial and industrial loans were 32.9%. Energy loans were 6.6% of total loans, or 6.8% excluding PPP loans.
- Cash and cash equivalents totaled $16.6 billion, including $16.0 billion in interest-bearing deposits. Management also cited $3.1 billion of FHLB borrowing capacity and $9.3 billion of unencumbered securities available to support borrowing.
- Year-end regulatory capital ratios for Cullen/Frost were 13.13% CET1, 13.70% Tier 1, 15.45% total capital, and 7.34% leverage; Frost Bank was also reported well capitalized. Common dividends were $2.94 per share for 2021, versus $2.85 for 2020.
- Debt included $2.74 billion of repurchase agreements, $123.0 million of junior subordinated debentures, and $99.2 million of subordinated notes. The company redeemed $13.4 million of debentures during 2021.
Outlook, risks and unusual items
- The filing gives no company earnings or revenue guidance. Management cited Federal Reserve projections implying rate increases during 2022–2024, while noting there was no assurance they would occur. Its interest-rate model estimated that a 100- or 200-basis-point increase would raise next-12-month net interest income by 2.8% or 7.1%, respectively, versus a flat-rate scenario; a 25-basis-point decrease would reduce it by 3.0%.
- Management expected to complete transitions from LIBOR-linked contracts by Q1 2023. Approximately $3.9 billion of loans, plus certain other instruments, had LIBOR exposure at year-end. New LIBOR-based loan originations ceased December 31, 2021.
- The company expected to recognize about $2.8 million of remaining net PPP processing fees in 2022 and planned to begin regular portfolio production of 1–4 family mortgage loans in the second half of 2022.
- COVID-19 impacts remained uncertain. Management highlighted pandemic-related credit and operating risks, labor-market pressures, supply-chain disruption, inflation, and potential new virus variants. Commercial real estate, energy, hotels and lodging, restaurants, and entertainment were monitored areas.
- Despite improved economic forecasts and lower 2021 credit loss expense, management maintained additional qualitative credit reserves, including $127.2 million for commercial real estate risks. The allowance estimate was identified as the audit’s critical audit matter.
- Other notable items: 2021 other comprehensive loss was $165.7 million, primarily reflecting lower unrealized gains on securities; 2020 included the $109.0 million securities gain and a $5.5 million preferred-stock redemption charge. A $100 million share repurchase authorization was approved in January 2022.
- Management said pending legal matters were not expected to have a material adverse effect. The financial statements and internal control over financial reporting received unqualified audit opinions.
Important facts for investors to verify
- Whether deposit growth can be retained and deployed profitably, and how rising rates affect deposit costs, loan yields, and net interest margin.
- Credit trends in commercial real estate and other concentrated commercial lending, including the sustainability of management’s qualitative reserve adjustments.
- Underlying fee-income growth excluding the unusually large 2020 securities gain, and the durability of 2021 earnings as credit-loss benefits normalize.
- Progress and potential customer or financial impacts from LIBOR contract conversion, particularly for the $3.9 billion of LIBOR-exposed loans.
- Actual use of the January 2022 repurchase authorization, capital distributions, and the capacity of Frost Bank to upstream dividends under regulatory limits.
- Audited financial statements, regulatory capital disclosures, and the filing’s stated risks related to COVID-19, cyber incidents, Texas economic conditions, and climate-related credit exposure.