Cullen/Frost Bankers, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet figures are as of March 31, 2013. The unaudited filing covers a Texas-focused financial holding company providing banking, wealth management, insurance and related services.
Financial results and position
- Revenue and earnings: Net interest income was $152.8 million and non-interest income was $77.8 million, totaling $230.6 million. Net income was $55.2 million; net income available to common shareholders was $55.1 million, or $0.91 per diluted share.
- Margins and returns: Taxable-equivalent net interest margin was 3.45%, down from 3.73% in Q1 2012 and 3.48% in Q4 2012. Return on average assets was 1.01%; return on average common equity was 9.47%.
- Cash flow: Operating activities used $45.2 million, versus $101.9 million provided in Q1 2012. Investing activities provided $250.8 million and financing activities used $512.1 million; cash and equivalents fell $306.5 million during the quarter to $3.218 billion. The operating cash flow decline reflected, in part, a $140.7 million decrease in accrued interest payable and other liabilities.
- Loans and credit: Loans were $9.162 billion, down $61.5 million from year-end but up from $8.127 billion a year earlier. Allowance for loan losses was $93.6 million, or 1.02% of loans. Non-performing assets were $105.9 million, 0.47% of assets; non-accrual loans were $91.6 million.
- Deposits, liquidity and debt: Deposits totaled $19.044 billion, down $453.5 million from year-end and up from $16.909 billion a year earlier. Cash and equivalents were $3.218 billion; management separately reported $257.4 million of holding-company liquid assets, including cash and resell agreements. Federal funds purchased and repurchase agreements were $510.1 million, junior subordinated debentures $123.7 million and other long-term borrowings $100.0 million.
- Capital: Shareholders’ equity was $2.443 billion. Cullen/Frost reported total risk-based capital of 15.44%, Tier 1 risk-based capital of 14.23% and a leverage ratio of 8.42%; Frost Bank’s corresponding ratios were 13.66%, 12.93% and 7.65%. Management said both were well capitalized.
Material changes from comparable periods
- Common earnings declined 9.8% from Q1 2012, to $55.1 million; diluted EPS fell from $0.99 to $0.91. Non-interest expense increased 9.7% to $155.8 million, and loan-loss provision rose to $6.0 million from $1.1 million.
- Taxable-equivalent net interest income increased 4.9% year over year to $172.8 million, but margin contracted 28 basis points. Average earning assets increased $2.3 billion, while lower asset yields and a greater share of lower-yielding liquid assets weighed on margin.
- Non-interest income rose 8.1% year over year, including a $4.3 million recognized gain from a building and parking-garage sale. Other non-interest expense included $7.2 million of asset write-downs, including $6.2 million related to San Antonio property.
- Non-performing assets declined from $120.5 million at March 31, 2012, but increased slightly from $105.2 million at December 31, 2012. Net charge-offs were $16.9 million, including a $15.0 million charge-off on one commercial and industrial relationship; excluding it, management reported net charge-offs of $1.9 million, or 0.08% of average loans annualized.
- The company issued $150 million liquidation preference of 5.375% Series A preferred stock, receiving approximately $144.5 million net proceeds, and entered an accelerated share repurchase. It paid $144 million under the agreement and received approximately 1.9 million shares initially; final settlement was expected in Q3 2013.
Outlook, commentary and risks
- No specific earnings or revenue guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year or future results.
- Management described the broader credit-quality trend as improving, while noting higher classified commercial and industrial and commercial real estate balances and elevated contractor risk. A single large borrower entered bankruptcy proceedings in April 2013 after the quarter-end charge-off.
- Interest-rate simulations projected net interest income changes over the next 12 months of +0.1% for a 100-basis-point rate increase, +1.1% for a 200-basis-point increase and −2.1% for a 25-basis-point decrease. These model results assumed the company would begin paying interest on demand deposits in Q2 2013; actual deposit pricing could differ.
- Key risks cited include economic and market conditions, interest rates, credit quality and reserve estimates, regulatory and capital changes, liquidity, competition, technology, legal matters and operational controls. Management said it knew of no event reasonably likely to have a material adverse effect on liquidity, capital resources or operations; it did not expect pending legal matters to materially affect the financial statements.
- Unrealized losses on securities were attributed primarily to interest-rate changes; management considered them temporary and reported no credit-related impairment. Proposed capital rules had not yet been finalized or applied.
Important facts for investors to verify
- Whether the $15.0 million charge-off and April bankruptcy lead to additional losses, reserve changes or deterioration in related credits.
- Whether deposit trends, asset yields and any new interest paid on demand deposits affect net interest margin and modeled rate sensitivity.
- How recurring earnings compare with results affected by the property-sale gain and $7.2 million asset write-down.
- Final share count and settlement terms of the accelerated repurchase, and the ongoing cost and dividend terms of the preferred stock.
- Whether deposit outflows, securities valuations, regulatory capital rule changes or legal developments materially alter liquidity, capital or reported results.