Cullen/Frost Bankers, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Unaudited consolidated results. Cullen/Frost is a Texas-based financial holding company whose subsidiaries provide banking, wealth management, insurance, investment banking and related services.
Key financial results
| Metric | Q1 2015 | Q1 2014 / prior period |
|---|---|---|
| Net interest income | $180.7 million | $160.3 million |
| Net interest margin, taxable-equivalent | 3.41% | 3.42% |
| Non-interest income | $83.2 million | $77.5 million |
| Non-interest expense | $171.5 million | $157.9 million |
| Provision for loan losses | $8.2 million | $6.6 million |
| Net income | $72.2 million | $61.2 million |
| Net income available to common shareholders | $70.1 million | $59.2 million |
| Diluted earnings per common share | $1.10 | $0.96 |
| Return on average assets / common equity | 1.02% / 10.34% | 1.00% / 9.97% |
Unless otherwise indicated, dollar amounts below are in billions. At March 31, 2015, total assets were $28.16 billion, loans net of allowance were $11.11 billion, deposits were $24.15 billion and shareholders’ equity was $2.91 billion. Loans grew 2.1% and deposits were essentially unchanged versus December 31, 2014. Cash and cash equivalents were $3.84 billion, down from $4.36 billion at year-end.
Q1 operating cash flow was $54.8 million, compared with $72.6 million in Q1 2014. Investing activities used $355.4 million; financing activities used $218.7 million. The cash decrease was $519.4 million. Borrowings at quarter-end included $604.2 million of federal funds purchased and repurchase agreements, $137.1 million of junior subordinated debentures and $100.0 million of other long-term borrowings.
Changes and drivers versus Q1 2014
- Net income available to common shareholders rose 18.5%. Management attributed the increase mainly to $20.4 million higher net interest income and $5.7 million higher non-interest income, partly offset by a $13.6 million increase in non-interest expense and a $1.6 million increase in loan-loss provision.
- Taxable-equivalent net interest income rose 15.4%, principally on higher average earning-asset balances, including securities and loans. Margin edged down one basis point; average loan yield fell to 3.92% from 4.48%, while securities yield increased to 3.91% from 3.81%.
- Non-interest income growth included higher trust and investment fees, insurance commissions, card fees and customer derivative income. First-quarter insurance income included $3.8 million of contingent commissions, which management describes as seasonal.
- Expenses increased 8.6%, partly reflecting the May 2014 WNB Bancshares acquisition, additional employees and facilities, and higher employee-benefit and occupancy costs. Q1 2014 included $1.1 million of WNB acquisition expenses.
Credit, capital, liquidity and risks
- Allowance for loan losses was $105.7 million, or 0.94% of loans, versus $99.5 million, or 0.91%, at year-end. Net charge-offs were $2.0 million, down from $3.9 million a year earlier; annualized net charge-offs were 0.07% of average loans.
- Non-performing assets were $59.6 million, or 0.21% of assets, down from $65.2 million and 0.23% at year-end. Potential problem loans increased to $24.7 million from $15.1 million. The filing reports energy loans of $1.82 billion, or 16.2% of total loans; the weighted-average energy-loan risk grade worsened to 6.07 from 5.45 at year-end. Management noted increased reserves for energy concentrations amid oil-price uncertainty.
- Capital ratios were above stated requirements, including fully phased-in Basel III minimums: Cullen/Frost’s Common Equity Tier 1 ratio was 11.55%, Tier 1 ratio 12.60%, total capital ratio 13.93% and leverage ratio 7.89%. Frost Bank’s corresponding ratios were 11.95%, 11.95%, 12.57% and 7.46%.
- The common dividend was $0.51 per share, up from $0.50 in Q1 2014. No active stock repurchase plan was in place, and no shares were repurchased during the quarter. Frost Bank could pay up to $307.7 million in dividends to the holding company without prior regulatory approval, subject to applicable restrictions.
- Management reported no known event reasonably likely to have a material adverse effect on liquidity, capital resources or operations. It cited core deposits, market funding access and stress testing as liquidity-management tools. The filing does not provide company-wide revenue or earnings guidance.
- Interest-rate simulations estimated net interest income changes over 12 months of -0.1% for a 100-basis-point rate increase, +0.1% for a 200-basis-point increase and -2.9% for a 25-basis-point decrease, relative to a flat-rate case. Results assume interest begins being paid on certain demand deposits in Q2 2015.
- Other considerations include $8.03 billion of commitments to extend credit, legal claims that management does not expect to have a material adverse impact, and the Federal Reserve-agreed compliance enhancements related to fair lending following the WNB acquisition. Management identified economic, market, interest-rate, credit, regulatory, technology and integration risks; it reported no material change to the risk factors in the 2014 Form 10-K.
Important facts for investors to verify
- Whether energy-sector credit quality, risk grades and reserve needs change further, given energy’s 16.2% loan concentration and increased problem-loan balance.
- Whether loan growth and securities reinvestment sustain net interest income as loan yields and interest-rate sensitivity evolve.
- Whether deposit pricing, especially any interest paid on demand deposits, affects funding costs and the disclosed rate-sensitivity scenarios.
- How much earnings growth persists after accounting for WNB-related scale and costs, seasonal contingent insurance commissions, securities gains and other non-recurring or variable items.
- Whether liquidity, capital distributions and credit commitments remain consistent with regulatory requirements and the company’s funding plans.