CULLEN annual report, FY2022

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Cullen/Frost Bankers, Inc. (NYSE: CFR) — 2022 Form 10-K

Business context and reporting period. This filing covers the fiscal year ended December 31, 2022; it is an annual report, not a standalone fourth-quarter report. Cullen/Frost is a Texas-focused financial holding company, operating primarily through Frost Bank, with Banking and Frost Wealth Advisors as its reportable segments. It reported consolidated assets of $52.9 billion at year-end.

Financial performance and position

  • Earnings: Net income was $579.2 million, up 30.6% from $443.1 million in 2021. Net income available to common shareholders was $572.5 million, or $8.81 diluted EPS, versus $435.9 million, or $6.76, in 2021. Return on average assets was 1.11% (0.95% in 2021); return on average common equity was 16.86% (10.35%).
  • Revenue and margins: Net interest income was $1.291 billion, up $306.4 million; taxable-equivalent net interest margin rose to 2.82% from 2.53%. Non-interest income increased 4.7% to $404.8 million. Non-interest expense rose 16.1% to $1.024 billion. The filing reports no conventional gross margin.
  • Credit costs: Credit loss expense was $3.0 million, compared with $63 thousand in 2021. Loan credit loss benefit was $5.3 million; the allowance for loan losses ended at $227.6 million, or 1.33% of loans, versus $248.7 million, or 1.52%, a year earlier. Non-accrual loans fell to $37.8 million from $53.7 million.
  • Cash flow: Operating cash flow was $722.6 million, compared with $648.3 million in 2021. Investing cash flow was negative $8.277 billion, primarily reflecting securities purchases; financing cash flow was positive $3.000 billion. Cash and cash equivalents declined $4.555 billion to $12.028 billion.
  • Loans, deposits and liquidity: Year-end loans rose 5.0% to $17.155 billion (7.6% excluding Paycheck Protection Program loans); deposits rose 2.9% to $43.954 billion. Average deposits increased 15.9%. The company reported $11.1 billion in interest-bearing Federal Reserve deposits, $3.4 billion of available FHLB borrowing capacity and $12.7 billion of unencumbered securities. Management said it knew of no events reasonably likely to materially adversely affect liquidity.
  • Debt and capital: Repurchase agreements increased to $4.661 billion from $2.741 billion; federal funds purchased were $51.7 million. Junior subordinated debentures and subordinated notes were $123.1 million and $99.3 million, respectively. Shareholders’ equity decreased to $3.137 billion from $4.440 billion, largely reflecting a $1.696 billion after-tax other comprehensive loss on securities. Cullen/Frost and Frost Bank reported capital ratios above regulatory minimums; Frost Bank’s CET1 ratio was 13.00% and total capital ratio 13.80%.

Material changes versus 2021

  • Higher market rates materially lifted asset yields and net interest income, while the average rate paid on interest-bearing liabilities increased to 0.64% from 0.10%.
  • Non-interest expense grew faster than non-interest income, driven notably by salaries and wages, which increased 24.4%, including market and merit increases, the $20-per-hour minimum wage and higher staffing.
  • Year-end commercial real estate loans increased 8.0% excluding energy, while energy loans declined 14.1%. Commercial real estate mortgage loans represented approximately 36.0% of total loans.
  • Higher interest rates reduced available-for-sale securities fair values; the resulting after-tax OCI loss was $1.694 billion and reduced reported equity. Management elected to exclude most accumulated OCI effects from regulatory capital ratios.

Outlook, commentary, risks and unusual items

  • Outlook: The filing provides no specific company earnings or revenue guidance. Management described a focus on organic growth, with expansion in Houston and Dallas and a planned residential mortgage offering in 2023. It expected the LIBOR transition for remaining exposures to be completed by the end of first-quarter 2023; approximately $1.4 billion of loans remained directly or indirectly LIBOR-dependent at year-end.
  • Interest-rate sensitivity: Year-end modeling showed a 100- or 200-basis-point rate increase would raise projected next-12-month net interest income by 0.2% or 1.4%, respectively, relative to a flat-rate scenario; equivalent decreases would reduce it by the same amounts. Management characterized the balance sheet as less asset-sensitive than a year earlier.
  • Credit and economic risks: The loan book is concentrated in commercial, energy, construction and commercial real estate lending; 86.2% consisted of commercial and industrial, energy, construction and commercial real estate mortgage loans. Management added or retained qualitative credit overlays, including for office-property exposure, large credit relationships and a downside economic scenario. The allowance relies on estimates and forecasts that may change.
  • Other risks and contingencies: The filing highlights Texas economic and energy-market exposure, deposit competition and liquidity risk, inflation, rising rates, cybersecurity and vendor risks, climate-related impacts, and regulatory change. Management did not expect the disposition of ordinary-course legal matters to materially adversely affect results.
  • Notable items: The effective tax rate increased to 13.4% from 9.5%, remaining below the 21% federal statutory rate mainly because of tax-exempt income. Consumer overdraft changes implemented in 2022 were expected to reduce annual revenue by as much as $3.5 million. A $100 million share repurchase authorization was approved in January 2023; no shares were repurchased under a repurchase plan in 2022. The independent auditor issued unqualified opinions on the financial statements and internal control; the allowance for credit losses was identified as a critical audit matter.

Important facts for investors to verify

  1. How deposit costs and deposit mix evolve as rates and competition change, and whether strong net interest income growth can persist.
  2. Commercial real estate exposures—especially office, construction and non-owner-occupied loans—and the adequacy of credit-loss overlays and reserves.
  3. The liquidity and funding implications of increased repurchase agreements and the substantial uninsured deposit balance ($23.840 billion).
  4. The potential effect of securities losses, deposit outflows or further rate changes on tangible equity, capital and the ability to return capital.
  5. Progress on LIBOR contract conversions, planned mortgage lending, and the financial impact of fee changes and the new buyback authorization.