Cullen/Frost Bankers, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. Cullen/Frost is a Texas-focused financial holding company, principally operating through Frost Bank, with banking and wealth-advisory businesses. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Financial performance and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue (net interest income plus non-interest income) | $1.368 billion | $1.309 billion |
| Net interest income | $1.004 billion | $957.9 million |
| Net interest margin, taxable-equivalent | 3.75% | 3.64% |
| Non-interest income | $363.9 million | $351.3 million |
| Non-interest expense | $834.7 million | $778.9 million |
| Provision for loan losses | $33.8 million | $21.6 million |
| Net income | $443.6 million | $454.9 million |
| Net income available to common shareholders | $435.5 million | $446.9 million |
| Diluted EPS | $6.84 | $6.90 |
| Return on average assets / common equity | 1.36% / 12.24% | 1.44% / 14.23% |
| Year-end loans / total assets | $14.75 billion / $34.03 billion | $14.10 billion / $32.29 billion |
| Year-end deposits / shareholders’ equity | $27.64 billion / $3.91 billion | $27.15 billion / $3.37 billion |
| Cash and cash equivalents | $3.79 billion | $3.96 billion |
| Net cash from operating activities | $634.1 million | $562.4 million |
| Net cash from investing activities | $(1.387) billion | $(1.913) billion |
| Net cash from financing activities | $585.1 million | $253.7 million |
| Common Equity Tier 1 / total risk-based capital / leverage ratios | 12.36% / 14.57% / 9.28% | 12.27% / 14.64% / 9.06% |
Material changes and credit quality
- Common-shareholder income declined 2.5% and diluted EPS declined from $6.90 to $6.84. Higher net interest income and fee income were outweighed mainly by a $55.8 million increase in non-interest expense and a $12.1 million increase in loan-loss provision.
- Net interest income rose 4.8% on a taxable-equivalent basis, supported by loan and securities growth and higher asset yields. Net interest margin increased 11 basis points; funding costs also rose as deposit competition and market rates increased.
- Loans grew 4.6%. Commercial real estate represented 42.0% of loans and energy 11.2%; management reported no other single-industry loan concentration above 10%.
- Non-performing assets increased to $109.5 million from $74.9 million; the ratio to loans and foreclosed assets rose to 0.74% from 0.53%. Non-accrual energy loans were $65.8 million. Net charge-offs improved to $33.7 million from $44.8 million, while the allowance was essentially unchanged at $132.2 million, or 0.90% of loans.
- Deposit growth was modest; average non-interest-bearing deposits declined 3.7%, while average interest-bearing deposit costs rose. Year-end short-term borrowings, primarily repurchase agreements, were $1.70 billion; subordinated notes and junior subordinated debentures totaled about $235 million.
Outlook, risks, and unusual items
- The filing provides no formal earnings or revenue guidance. Management said it knew of no events reasonably likely to materially adversely affect liquidity, capital resources, or operations at year-end.
- Management expected adoption of the CECL credit-loss standard on January 1, 2020 to increase the combined loan-loss allowance and unfunded-commitment reserves by 20%–35%; the estimate was not final. It did not expect a significant effect on regulatory capital ratios.
- Key risks include Texas economic and oil-price exposure, commercial real estate and commercial lending concentrations, borrower credit deterioration, interest-rate and deposit-pricing changes, LIBOR transition, liquidity, competition, regulation, and cybersecurity/vendor disruptions. About 99.7% of municipal securities were Texas-issued, adding geographic concentration.
- New accounting rules for callable securities reduced opening 2019 retained earnings by $14.7 million and increased 2019 premium amortization expense by about $5.2 million. The new headquarters lease contributed to higher occupancy expense; the company recognized substantial lease right-of-use assets and liabilities.
- Other comprehensive income was $331.0 million, largely reflecting improved unrealized securities values; year-end accumulated other comprehensive income was $267.4 million versus a $63.6 million loss in 2018. The company repurchased $68.8 million of stock and paid $185.1 million in common and preferred dividends.
- A 2018 third-party lockbox software security incident caused $2.1 million of costs; the company said no further costs were expected. Management did not expect pending legal matters to have a material adverse effect.
Investor verification priorities
- Review the drivers and durability of expense growth, particularly compensation, occupancy, technology/cloud costs, and the new headquarters lease.
- Track energy and commercial real estate credit migration, non-accrual balances, specific reserves, charge-offs, and the effect of CECL adoption.
- Assess deposit mix and pricing, reliance on repurchase-agreement funding, and the liquidity implications of substantial customer credit commitments.
- Verify the realized impact of LIBOR transition and changing interest rates on net interest income, deposit costs, and derivative exposure.
- Confirm the final CECL transition adjustment and whether capital, dividends, and repurchases remain consistent with regulatory requirements.