CULLEN annual report, FY2020

Abrir documento

Cullen/Frost Bankers, Inc. (NYSE: CFR) — FY 2020 Form 10-K

Reporting period: Year ended December 31, 2020; comparison is primarily with FY 2019. Amounts are U.S. dollars.

Business context

Cullen/Frost is a Texas-based financial holding company whose principal subsidiary, Frost Bank, provides commercial and consumer banking, trust and investment management, insurance, brokerage, and related services across Texas. It reported $42.4 billion in assets and $35.0 billion in deposits at year-end. Banking and Frost Wealth Advisors are its reportable operating segments.

Financial results and condition

  • Earnings: Net income was $331.2 million, down 25.3% from $443.6 million. Net income available to common shareholders was $323.6 million; diluted EPS was $5.10 versus $6.84. Return on average assets was 0.85% (1.36% in 2019), and return on average common equity was 8.11% (12.24%).
  • Revenue and margins: Net interest income was $976.0 million, down 2.8%; taxable-equivalent net interest margin declined 66 basis points to 3.09%. Non-interest income rose 27.9% to $465.5 million, including a $109.0 million securities gain. Excluding securities gains, non-interest income declined 2.0%. Non-interest expense increased 1.7% to $848.9 million.
  • Credit costs and asset quality: Credit loss expense was $241.2 million versus $33.8 million, reflecting CECL adoption and pandemic- and oil-related economic deterioration. The year-end loan-loss allowance rose to $263.2 million, or 1.51% of loans (1.75% excluding PPP loans), from $132.2 million, or 0.90%. Net charge-offs were $103.4 million, or 0.60% of average loans. Non-performing assets fell to $62.3 million from $109.5 million, while accruing past-due loans increased to $102.9 million from $58.2 million.
  • Balance sheet and funding: Assets rose 24.6% to $42.4 billion; loans increased 18.5% to $17.5 billion, including $2.4 billion in PPP loans at year-end. Excluding PPP, loans grew 2.0%. Deposits rose 26.7% to $35.0 billion, including $15.1 billion of non-interest-bearing deposits. Cash and cash equivalents totaled $10.3 billion, including $9.8 billion of interest-bearing deposits. Shareholders’ equity was $4.3 billion.
  • Debt and liquidity: Year-end federal funds purchased and repurchase agreements were $2.1 billion; junior subordinated debentures and subordinated notes totaled $235.4 million. Management reported $2.9 billion of FHLB borrowing capacity and $7.3 billion of unpledged securities. The company reported $381.2 million of liquid assets at the parent-company level. Operating cash flow was $524.2 million; investing cash flow was negative $1.63 billion and financing cash flow was positive $7.61 billion.
  • Capital and shareholder returns: Cullen/Frost’s CET1, Tier 1, total risk-based capital, and leverage ratios were 12.86%, 13.47%, 15.44%, and 8.07%, respectively; Frost Bank was also reported well capitalized. Common dividends were $2.85 per share for the year. Series A preferred stock was redeemed for $150 million and $150 million of Series B preferred stock was issued.

Material changes versus prior period

  • The sharp increase in credit loss expense was the principal cause of lower earnings, alongside lower net interest income and higher operating expenses.
  • Lower market rates reduced asset yields and net interest margin; lower deposit costs partly offset that pressure.
  • COVID-19-related deposits and PPP lending drove substantial balance-sheet growth. The company funded approximately $3.3 billion of PPP loans during 2020.
  • The $109.0 million securities gain—principally from selling Treasury securities in the first quarter—boosted non-interest income. The company also recognized a one-time tax benefit related to an asset contribution to a charitable trust.
  • CECL adoption reduced retained earnings by $29.3 million at January 1, 2020; the allowance on off-balance-sheet exposures also increased substantially upon adoption.

Outlook, risks, and unusual items

The filing gives no quantitative earnings or financial guidance. Management described the pandemic’s ultimate effects as uncertain and expected continued credit, operating, and revenue pressure. Management noted that low rates could continue to compress net interest income, while PPP-related deferred processing fees of approximately $39.5 million remained to be recognized, mostly in 2021. These fees are subject to loan forgiveness and repayment timing.

  • Credit and concentration risks: Commercial real estate represented 40.1% of total loans, and energy loans were 7.1% (8.2% excluding PPP). Management highlighted pandemic-sensitive industries, including hotels, restaurants, retail, entertainment, and commercial real estate. Potential problem loans totaled $85.2 million, with exposure concentrated in energy, hotels/lodging, and restaurants.
  • COVID-19 accommodations: At year-end, 39 loans totaling $45.9 million remained in COVID-related payment deferral. Management said a small proportion of borrowers sought additional deferrals. Deferrals meeting applicable conditions were not automatically treated as troubled restructurings or reported past due.
  • Credit estimate sensitivity: The allowance depends on forecasts, models, and management overlays. The auditor identified the allowance for credit losses as a critical audit matter. The commercial real estate allowance rose sharply during 2020.
  • Interest-rate and transition risks: Management’s year-end model projected net interest income increases of 2.3% and 6.2% under +100 and +200 basis-point scenarios, and a 1.8% decrease under a 25-basis-point decline. The filing also identifies LIBOR transition risk across loans, derivatives, and borrowings.
  • Other matters: Deposits substantially exceed FDIC insurance limits; liquidity depends on maintaining deposit confidence and access to funding. The company disclosed a 2018 third-party lockbox data incident, with $2.1 million of costs and no further costs expected. Management did not expect outstanding legal matters to have a material adverse effect; disclosed PPP agent-fee suits were resolved or dismissed.

The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management also concluded controls were effective at year-end.

Important facts for investors to verify

  • Whether the $263.2 million loan allowance adequately captures losses under updated economic forecasts, especially for commercial real estate, energy, and pandemic-sensitive borrowers.
  • Subsequent trends in criticized and potential problem loans, charge-offs, payment deferrals, and the repayment or forgiveness of PPP loans and related fees.
  • Whether deposit growth and the large cash position persist, and the related liquidity, funding-cost, and uninsured-deposit risks.
  • Actual net interest margin performance against management’s rate-sensitivity assumptions, including any changes in deposit pricing and LIBOR transition execution.
  • The sustainability of earnings excluding the securities gain and one-time tax benefit, and the capacity to maintain dividends while meeting capital and regulatory requirements.