Cullen/Frost Bankers, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Unaudited consolidated results. Cullen/Frost is a Texas-based financial holding and bank holding company providing commercial and consumer banking, wealth management, insurance, and related services.
Financial results and position
Unless otherwise noted, figures are in millions of dollars. Income-statement comparisons are year over year; balance-sheet comparisons are versus December 31, 2020.
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $240.9 | $244.5 in Q1 2020 |
| Taxable-equivalent net interest margin | 2.72% | 3.56% in Q1 2020 |
| Non-interest income | $93.2 | $212.9 in Q1 2020 |
| Non-interest expense | $210.1 | $224.2 in Q1 2020 |
| Credit loss expense | $0.1 | $175.2 in Q1 2020 |
| Net income / diluted EPS | $116.0 / $1.77 | $54.8 / $0.75 in Q1 2020 |
| Total assets | $44,046.8 | $42,391.3 |
| Loans, gross | $17,889.7 | $17,481.3 |
| Total deposits | $36,925.2 | $35,015.8 |
| Cash and cash equivalents | $11,802.3 | $10,288.9 |
| Total shareholders’ equity | $4,267.9 | $4,293.0 |
- Cash flow: Operating activities provided $219.8 million; investing activities used $402.0 million; financing activities provided $1,695.7 million. Cash and cash equivalents increased $1,513.4 million during the quarter.
- Funding and liquidity: Deposits rose $1.9 billion; non-interest-bearing demand deposits were $16.1 billion, or 43.6% of deposits. Management reported approximately $11.1 billion held at the Federal Reserve, $2.9 billion in available FHLB borrowing capacity, and $7.4 billion of unencumbered securities. The parent company reported $407.8 million in liquid assets.
- Debt and capital: Balance-sheet borrowings included $1.9 billion in repurchase agreements, $136.4 million in junior subordinated debentures, and $99.1 million in subordinated notes. Cullen/Frost’s CET1, Tier 1, total capital, and leverage ratios were 13.45%, 14.07%, 16.07%, and 7.97%; Frost Bank’s were 13.25%, 13.25%, 14.25%, and 7.49%. Both exceeded regulatory “well capitalized” thresholds.
- Credit: The loan-loss allowance was $261.3 million, or 1.46% of loans (1.77% excluding PPP loans), versus $263.2 million at year-end. Non-accrual loans declined to $51.0 million from $61.4 million. Net recoveries were $1.9 million. PPP loans totaled $3.1 billion and are fully SBA-guaranteed.
- Shareholder returns: The common dividend was $0.72 per share in Q1. A $100 million, one-year repurchase authorization was approved in January; no shares were repurchased under that program in Q1. Reported quarterly purchases of 11,625 shares related to vesting of share awards.
Material changes versus Q1 2020
- Net income available to common shareholders increased $66.6 million, or 141.1%, to $113.9 million. The increase was primarily driven by a $175.1 million reduction in credit loss expense and lower operating expenses.
- The comparison is significantly affected by unusual prior-year items: Q1 2020 included $175.2 million of credit loss expense amid pandemic and oil-price uncertainty, a $109.0 million securities gain, and a $5.5 million preferred-stock redemption charge to common earnings. Q1 2021 had no securities-sale gains and only $63,000 of total credit loss expense.
- Excluding the prior-year securities gain, non-interest income declined $10.7 million, or 10.3%. Net interest income declined $3.6 million; taxable-equivalent net interest income declined $4.5 million, or 1.7% (about $2.6 million excluding the extra leap-year day in Q1 2020).
- Lower market rates weighed on asset yields and margin: taxable-equivalent margin fell 84 basis points to 2.72%. Average earning assets increased $9.0 billion, largely from higher deposits held at the Federal Reserve and PPP lending; average interest-bearing asset yield fell to 2.78% from 3.84%.
- Loans increased $408.3 million from year-end, but excluding PPP balances, loans declined $287.1 million. Energy loans declined $133.0 million to $1.1 billion; energy represented 6.2% of total loans, or 7.5% excluding PPP.
- Accumulated other comprehensive income declined $125.2 million, primarily from lower unrealized gains on available-for-sale securities, reducing reported shareholders’ equity by the quarter-end comparison.
Outlook, commentary, and risks
- Management expected low market interest rates to continue weighing on net interest income and margin, while PPP participation was expected to support them in the near term. The filing does not provide formal earnings or revenue guidance.
- For PPP loans funded through March 31, management expected to recognize approximately $72.8 million of remaining net deferred processing fees as loan-yield adjustments, about 90% in 2021 and the balance in 2022.
- Credit estimates reflect an improving economic forecast, but management cited continuing recovery headwinds and elevated risk in commercial real estate, energy, and pandemic-affected industries. Additional qualitative allowances included $102.7 million for commercial real estate and $60.4 million for industries affected by COVID-19; the latter overlaps in part with the former.
- At March 31, 22 COVID-related payment-deferred loans had an aggregate balance of approximately $11.4 million. Management noted pandemic-related risks to borrower performance, delinquencies, defaults, and collateral values.
- Interest-rate modeling projected net interest income increases of 3.4% and 8.6% under +100 and +200 basis-point scenarios, respectively, and a 1.8% decrease under a 25-basis-point decline, relative to a flat-rate case over 12 months. These are model scenarios, not guidance.
- Other notable items: Q1 included $1.5 million in donations to the Frost Charitable Foundation. A severe Texas weather event was expected to affect insurance performance-related contingent payments in 2022, but the impact was not determinable. Management said litigation was not expected to have a material adverse impact; risk factors were reported as unchanged from the 2020 Form 10-K.
Important facts for investors to verify
- How much of the Q1 year-over-year earnings increase is attributable to the unusually high Q1 2020 credit provision and securities gain, rather than recurring operating performance.
- PPP forgiveness timing, fee recognition, and the trajectory of non-PPP loan balances and deposits.
- Whether commercial real estate, energy, and pandemic-affected borrower risks justify current allowance levels; monitor risk grades, delinquencies, non-accrual loans, and charge-offs.
- Net interest margin sensitivity to persistently low rates, deposit pricing competition, and the pace of commercial deposit repricing.
- Impact of market-rate changes on securities values, accumulated other comprehensive income, and reported equity.
- Capacity to maintain dividends and execute the authorized repurchase program subject to regulatory and bank-dividend restrictions.