Cullen/Frost Bankers, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited. Cullen/Frost is a Texas-based financial holding company providing banking, wealth management, insurance and related services.
Financial results and position
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Net interest income | $355.5 million | $246.1 million | +44.5% |
| Net interest margin, taxable-equivalent | 3.01% | 2.47% | +54 basis points |
| Net income | $169.8 million | $108.0 million | +57.2% |
| Diluted earnings per common share | $2.59 | $1.65 | +$0.94 |
| Non-interest income | $99.8 million | $93.2 million | +7.1% |
| Non-interest expense | $257.9 million | $218.0 million | +18.3% |
For the first nine months, net interest income was $892.8 million versus $744.2 million; taxable-equivalent net interest margin was 2.64% versus 2.61%. Net income was $388.0 million versus $342.1 million, and diluted EPS was $5.90 versus $5.22. Non-interest income rose 7.7%, while non-interest expense rose 15.5%.
- Balance sheet at September 30: Assets were $52.9 billion, deposits $46.6 billion, and loans $17.0 billion. Since December 31, 2021, deposits increased $3.9 billion and loans increased $614 million.
- Credit quality: Non-accrual loans were $29.9 million, down from $53.7 million at year-end. The loan-loss allowance was $234.3 million, or 1.38% of loans (1.39% excluding PPP loans), versus $248.7 million, or 1.52%, at year-end. Nine-month loan credit-loss benefit was $2.4 million; total reported credit-loss expense was zero after the offsetting allowance for off-balance-sheet exposures.
- Cash flow and liquidity: Nine-month operating cash flow was $539.9 million. Investing cash flow was negative $6.55 billion, primarily reflecting securities purchases; financing cash flow was positive $3.06 billion, including deposit growth. Cash and cash equivalents were $13.63 billion at quarter-end. Management reported $3.4 billion of FHLB borrowing capacity and $14.4 billion of unencumbered securities available to support additional borrowing. Cullen/Frost parent-company liquid assets were $381.5 million.
- Debt and capital: Quarter-end repurchase agreements totaled $2.08 billion; subordinated notes were $99.3 million and junior subordinated debentures were $123.1 million. Regulatory capital ratios remained above minimums: Cullen/Frost CET1 was 12.74% and total capital 14.80%; Frost Bank CET1 was 12.71% and total capital 13.54%.
Material changes and drivers
- Higher market rates lifted yields on interest-bearing deposits, securities and loans, driving quarterly net interest income growth. Deposit interest expense also rose: the average cost of interest-bearing deposits was 0.62% in Q3, versus 0.07% a year earlier.
- Average deposits grew year over year, and loan growth excluding PPP balances was 13.0% in Q3. Commercial real estate and consumer real estate balances increased; energy loans declined and represented 5.4% of total loans.
- Expenses rose notably, especially salaries and wages, reflecting wage increases, hiring and incentive compensation. Management cited expansion in Houston and Dallas and a competitive labor market.
- Shareholders’ equity fell to $2.81 billion from $4.44 billion at year-end, mainly because available-for-sale securities’ after-tax unrealized losses moved accumulated other comprehensive income from a $347 million gain to a $1.53 billion loss. These market-value changes did not reduce reported regulatory capital under the company’s elected treatment.
Outlook, risks and unusual items
- The filing provides no formal company earnings or revenue guidance. Management noted that future net interest income and margin depend on interest rates, asset and deposit mix, and competition. Its sensitivity model estimated that a 100- or 200-basis-point rate increase would raise projected 12-month net interest income by 1.0% or 3.0% versus a flat-rate case; equivalent decreases would reduce it by 1.6% or 5.6%. These are model scenarios, not guidance.
- Available-for-sale securities had $1.90 billion of gross unrealized losses at quarter-end. Management attributed them to higher market rates, reported no credit impairment, and said it did not intend, and was not likely required, to sell before recovery. Held-to-maturity securities had an estimated fair value about $257 million below amortized cost.
- Allowance estimates rely on economic forecasts and management overlays. The filing highlights recession, inflation, rising rates, commercial real estate construction and land, office-property demand, concentrated borrower exposures, and unsecured consumer lending as credit risks. Texas energy exposure was 5.4% of loans; energy-related unfunded commitments included $1.1 billion of credit commitments.
- $26.6 billion of deposits were reported as not covered by deposit insurance. Management also identifies liquidity, borrower performance, cybersecurity, vendor and system reliability, legal and regulatory matters, and geopolitical and pandemic developments as risks.
- Other notable items: the company accrued $1.6 million for a probable loss; expanded consumer overdraft-fee relief, which it expects could reduce annual revenue by up to $3.5 million; and expects to begin regular 1–4 family mortgage production in the first half of 2023. Management targeted completion of remaining LIBOR loan transitions by Q1 2023.
- Legal claims are ongoing, but management does not expect their ultimate disposition to materially adversely affect the financial statements. The filing reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether higher deposit costs and further rate moves sustain or compress net interest margin.
- Whether securities unrealized losses recover without forced sales, and how AOCI affects book equity and market perception.
- Whether loan growth, commercial real estate overlays and credit quality trends support the current allowance.
- How deposit growth, uninsured balances and available contingent borrowing capacity evolve.
- Whether expense growth moderates and whether fee changes, FDIC assessment increases and planned mortgage expansion affect future profitability.