Cullen/Frost Bankers, Inc. — Q1 2022 Form 10-Q
Business context and period. Cullen/Frost is a Texas-based financial holding company providing banking, wealth management, insurance and related services. This unaudited report covers the three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise noted.
Financial performance and position
| Metric | Q1 2022 / March 31, 2022 | Comparison |
|---|---|---|
| Total revenue (net interest income plus non-interest income) | $350.5 million | $334.1 million, up 4.9% |
| Net interest income | $249.1 million | $240.9 million, up 3.4% |
| Taxable-equivalent net interest margin | 2.33% | 2.72%, down 39 basis points |
| Non-interest income | $101.4 million | $93.2 million, up 8.7% |
| Non-interest expense | $238.7 million | $210.1 million, up 13.6% |
| Net income / diluted EPS | $99.1 million / $1.50 | $116.0 million / $1.77 |
| Net income available to common shareholders | $97.4 million | $113.9 million, down 14.4% |
| Loans / deposits | $16.5 billion / $44.4 billion | Loans up 1.3% and deposits up 4.1% from December 31, 2021 |
| Cash and cash equivalents | $14.5 billion | $16.6 billion at December 31, 2021 |
| Shareholders’ equity | $3.8 billion | $4.4 billion at December 31, 2021 |
Cash flow and funding. Operating cash flow was $332.8 million; investing cash flow was negative $3.26 billion, primarily reflecting $3.36 billion of available-for-sale securities purchases; financing cash flow was positive $801.0 million, including $1.74 billion of deposit growth, partly offset by reduced short-term borrowings. Management reported $13.4 billion in interest-bearing deposits at the Federal Reserve, approximately $3.2 billion of FHLB borrowing capacity and $12.8 billion in unencumbered securities available to support borrowing. Cash and resell agreements at the holding company totaled $476 million.
Debt and capital. At quarter-end, federal funds purchased were $35.2 million, repurchase agreements were $1.84 billion, junior subordinated debentures were $123.0 million and subordinated notes were $99.2 million. Cullen/Frost reported a 12.78% CET1 ratio, 14.97% total capital ratio and 7.08% leverage ratio; Frost Bank’s respective ratios were 12.39%, 13.29% and 6.57%. Both exceeded applicable well-capitalized thresholds. The company paid a $0.75 common dividend per share in the quarter and authorized a $100 million repurchase program; no program shares were repurchased.
Material changes and management commentary
- Common earnings fell as non-interest expense rose $28.6 million and income tax expense rose $4.7 million, outweighing increases of $8.2 million each in net interest income and non-interest income.
- Salary and wage expense increased $17.9 million, reflecting merit and market raises, a $20-per-hour minimum wage introduced in December 2021, staffing and incentive costs, and lower loan-origination cost deferrals. Management cited a competitive labor market as a continuing cost pressure.
- Net interest income benefited from growth in taxable securities and interest-bearing deposits, while margin contracted. Average loans declined year over year, principally because PPP balances and related fee income were lower; excluding PPP, average loans increased 8.3%.
- Period-end loans increased $206 million from year-end; excluding PPP, they increased $427 million. Non-accrual loans declined to $49.0 million from $53.7 million at year-end. The allowance for loan losses was $246.8 million, or 1.49% of loans (1.51% excluding PPP).
- Available-for-sale securities recorded $719.5 million of after-tax unrealized losses in Q1, moving accumulated other comprehensive income from a $347.3 million gain at year-end to a $371.8 million loss. Management attributed the losses to higher market interest rates, reported no credit-loss allowance for these securities, and said it did not intend or expect to need to sell them before recovery. The AOCI change reduced GAAP equity; the company had elected to exclude most AOCI from regulatory capital.
- Management’s interest-rate simulations projected net interest income over the next 12 months to be 2.1% higher under a 100-basis-point rate increase and 5.8% higher under a 200-basis-point increase, versus a flat-rate case; a 50-basis-point decrease implied a 3.7% decline. Management said the balance sheet was less asset-sensitive than at year-end.
Outlook, risks and contingencies
The filing provides no formal earnings or revenue guidance. Management expected to begin regular production of 1–4 family mortgage loans for portfolio investment in the second half of 2022 and expected to complete outstanding LIBOR loan transitions by Q1 2023. It noted uncertainties from COVID-19, inflation, interest-rate and market volatility, labor and supply constraints, geopolitical conflict including Russia’s invasion of Ukraine, and economic conditions affecting borrowers. The allowance relies on forecasts and management overlays, including downside-scenario, commercial real estate, office-building, post-pandemic and concentration adjustments. Management said pending claims and legal actions were not expected to materially adversely affect the financial statements; it reported no material change in previously disclosed risk factors.
Most important facts for investors to verify
- Whether margin pressure and the higher cost base persist as interest rates, deposit mix and competition evolve.
- Whether securities unrealized losses recover as management expects, and whether liquidity needs could require securities sales.
- Loan and credit trends, especially commercial real estate and energy exposures, classified credits, charge-offs and the adequacy of allowance overlays.
- Deposit stability and liquidity capacity, including uninsured deposits, collateral availability and reliance on repurchase and other funding.
- Progress on LIBOR transitions, the planned mortgage-loan launch, and any use of the authorized share-repurchase program.