Cullen/Frost Bankers, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited fourth-quarter results. Cullen/Frost is a Texas-based financial holding company whose principal subsidiary, Frost Bank, operates across Texas.
Financial performance and condition
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Total revenue (net interest income plus non-interest income) | $923.4 million | $893.6 million |
| Net interest income | $620.6 million | $604.9 million |
| Provision for loan losses | $20.6 million | $10.1 million |
| Non-interest expense | $611.9 million | $575.1 million |
| Net income | $237.9 million | $238.0 million |
| Net income available to common shareholders | $231.1 million | $238.0 million |
| Diluted EPS | $3.80 | $3.86 |
| Net interest margin | 3.41% | 3.59% |
| Return on average assets | 1.02% | 1.14% |
Fourth-quarter 2013 net income was $62.6 million and diluted EPS was $0.99, compared with net income of $60.2 million and diluted EPS of $0.97 in Q4 2012. Fourth-quarter net interest income was $159.2 million versus $154.4 million; non-interest expense was $154.5 million versus $146.1 million.
Year-end assets were $24.3 billion, up from $23.1 billion. Loans rose 3.2% to $9.52 billion and deposits rose 6.1% to $20.69 billion. Cash and cash equivalents totaled $4.56 billion. Operating cash flow was $173.6 million, compared with $300.0 million in 2012; cash increased by $1.03 billion during 2013, principally alongside deposit growth and financing inflows.
Year-end shareholders’ equity was $2.51 billion. Cullen/Frost’s Tier 1 and total risk-based capital ratios were 14.65% and 15.79%, respectively; Frost Bank’s were 12.58% and 13.12%. Both entities were reported as well capitalized. Long-term debt and other borrowings were $223.7 million; federal funds purchased and repurchase agreements were $668.3 million. Frost Bank could pay approximately $294.7 million in dividends to the parent without prior regulatory approval, subject to stated conditions.
Changes versus the prior comparable period
- Common net income declined $6.8 million, or about 2.9%, and diluted EPS fell from $3.86 to $3.80. Net income was nearly unchanged; the new preferred stock dividends reduced earnings attributable to common shareholders.
- Revenue increased about 3.3%, supported by higher net interest income and non-interest income. Average earning assets grew 10.4%, but the net interest margin contracted 18 basis points to 3.41% amid low rates and a greater share of lower-yielding deposits.
- Non-interest expense increased 6.4%. The provision for loan losses more than doubled, partly because of a $18.8 million charge-off on one commercial borrower.
- Credit quality improved overall: non-performing assets fell to $69.8 million from $105.2 million, and the ratio to loans plus foreclosed assets declined to 0.73% from 1.14%. Net charge-offs rose to $32.6 million from $15.8 million, largely due to the single large charge-off; excluding it, management reported net charge-offs of $13.8 million.
- Common dividends increased to $1.98 per share from $1.90. The company issued $150 million liquidation preference of Series A preferred stock and used approximately $144 million of net proceeds in an accelerated repurchase of 2.24 million common shares.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance is provided. Management expected the pending WNB Bancshares acquisition, subject to regulatory approval, to close in Q2 2014. Consideration was to include two million Cullen/Frost shares and cash, with adjustments under the merger agreement.
- Management said it expected the company and Frost Bank to meet Basel III capital requirements on a fully phased-in basis. New capital rules were scheduled to begin in 2015, with trust preferred securities phased out of Tier 1 capital by 2016. Management reported no known events expected to materially adversely affect liquidity, capital resources or operations.
- Interest-rate sensitivity remains material. The year-end model projected net interest income increases of 0.2% and 1.4% under +100 and +200 basis-point scenarios, and a 3.0% decrease under a 25 basis-point decline, relative to a flat-rate case. These projections assumed interest would begin being paid on certain demand deposits in Q1 2014.
- Key exposures include Texas economic conditions, commercial lending and real estate, and energy loans, which were 11.7% of loans. About 96.3% of municipal securities were issued by Texas entities. Most loans were commercial and industrial, construction or commercial real estate; management cautioned that deterioration in a small number of large credits could materially affect asset quality.
- Unusual items included the $18.8 million single-borrower charge-off, $7.2 million of land and other asset write-downs, a $5.6 million gain on sale of a building and parking garage (with $4.8 million recognized in 2013), and $1.4 million of WNB acquisition costs. The effective tax rate fell to 18.2% from 22.9%, primarily reflecting tax-exempt income. Other comprehensive income included a $97.6 million after-tax loss, mainly from lower unrealized securities gains.
- Management did not expect pending litigation to have a material adverse impact. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether the WNB acquisition closed on the expected timetable, received approvals, and delivered its expected benefits without material dilution or integration issues.
- Whether credit costs remain manageable after the large borrower charge-off; track criticized loans, non-performing assets, potential problem loans and allowance coverage.
- How loan and deposit growth, deposit pricing and demand-deposit interest costs affect net interest margin as rates change.
- The quality and concentration of the Texas municipal securities portfolio and energy-related lending, and the impact of market-rate movements on securities values and capital.
- Capital and dividend capacity after Basel III implementation, including the planned phase-out of trust preferred securities from Tier 1 capital and the effect of preferred dividends and share repurchases.