Cullen/Frost Bankers(US:CFR)2020-04-30 18:41Part I - Financial Information Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements for Q1 2020, including balance sheets, income, comprehensive income, equity, and cash flows, with notes on the CECL accounting standard adoption Consolidated Balance Sheets Total assets slightly increased to $34.15 billion by March 31, 2020, driven by growth in net loans and deposits, while shareholders' equity slightly decreased to $3.83 billion Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $34,147,305 | $34,027,428 | | Total cash and cash equivalents | $4,195,585 | $3,788,181 | | Net loans | $15,074,379 | $14,618,165 | | Total Liabilities | $30,320,639 | $30,115,760 | | Total deposits | $28,140,867 | $27,639,564 | | Total Shareholders' Equity | $3,826,666 | $3,911,668 | - The allowance for credit losses on loans significantly increased to $263.9 million from $132.2 million at year-end 2019, primarily due to the adoption of the CECL accounting standard and deteriorating economic conditions14 Consolidated Statements of Income Net income available to common shareholders for Q1 2020 sharply declined to $47.2 million from $114.5 million year-over-year, primarily due to a massive increase in credit loss expense, despite a $109.0 million net gain on securities transactions Q1 2020 vs Q1 2019 Income Statement (in thousands, except per share) | Metric | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Net Interest Income | $244,521 | $246,469 | | Credit Loss Expense | $175,197 | $11,003 | | Non-interest Income | $212,915 | $96,785 | | Net Income | $54,753 | $116,496 | | Net Income Available to Common Shareholders | $47,223 | $114,480 | | Diluted EPS | $0.75 | $1.79 | - A significant net gain on securities transactions of $109.0 million was recorded in Q1 2020, compared to none in Q1 201916 Consolidated Statements of Comprehensive Income (Loss) Comprehensive income for Q1 2020 was $151.2 million, down from $273.9 million in Q1 2019, primarily driven by unrealized gains on available-for-sale securities Comprehensive Income (in thousands) | Component | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Net Income | $54,753 | $116,496 | | Other Comprehensive Income (Loss), net of tax | $96,445 | $157,374 | | Comprehensive Income (Loss) | $151,198 | $273,870 | Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity was impacted by a $29.3 million reduction from CECL adoption, the $150.0 million redemption of Series A preferred stock, and $44.9 million in common shareholder dividends - The company adopted a new accounting standard (CECL), resulting in a $29.3 million reduction to retained earnings at the beginning of the period23 - All 6,000,000 shares of Series A preferred stock were redeemed for an aggregate of $150.0 million23 - Cash dividends of $0.71 per common share were paid, totaling $44.9 million23 Consolidated Statements of Cash Flows Net cash from operating activities was $248.9 million in Q1 2020, with investing activities providing $391.0 million and financing activities using $232.5 million, resulting in a $407.4 million net increase in cash Net Cash Flow Summary (in thousands) | Activity | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Net cash from operating activities | $248,928 | $146,132 | | Net cash from investing activities | $390,997 | ($785,465) | | Net cash from financing activities | ($232,521) | ($1,034,992) | | Net change in cash and cash equivalents | $407,404 | ($1,674,325) | Notes to Consolidated Financial Statements The notes detail accounting policies, including the CECL standard adoption which significantly impacted credit losses, provide breakdowns of securities and loan portfolios, and cover capital adequacy and derivative instruments - The company adopted ASC 326 (CECL) on January 1, 2020, replacing the 'incurred loss' model with an 'expected loss' model for credit losses, resulting in a $29.3 million after-tax reduction to retained earnings3032 - Total loans were $15.34 billion, with energy loans comprising 10.2% of the portfolio, and non-accrual loans decreased to $66.7 million from $102.3 million at year-end 2019626369 - All regulatory capital ratios for Cullen/Frost and Frost Bank exceeded 'well capitalized' minimums, and the company redeemed all its Series A Preferred Stock for $150 million in March 2020122123 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant impact of the COVID-19 pandemic and sharp oil price decline on financial results, with net income falling to $47.2 million due to increased credit loss expense, while capital and liquidity remain strong - Net income available to common shareholders decreased by 58.8% YoY to $47.2 million, primarily due to a $164.2 million increase in credit loss expense211 - The COVID-19 pandemic and oil price volatility led to significant qualitative adjustments to the allowance for credit losses, including an $85.0 million adjustment for the energy portfolio320 - The company began originating PPP loans in April 2020, funding approximately $3.0 billion to over 10,500 customers by April 27, 2020294 Recent Developments Related to COVID-19 This section details the company's response to the COVID-19 pandemic, including implementing its Business Continuity Plan, enabling remote work, offering payment deferrals, and highlighting significant uncertainty and negative impacts on exposed sectors - The company implemented its Business Continuity and Health Emergency Response plans, closing financial center lobbies and enabling remote work for nearly 90% of its workforce193 - The company is offering loan customers deferrals of payments for up to 90 days to mitigate the adverse effects of COVID-19197 - The company has significant loan exposure to industries heavily impacted by COVID-19, including energy, restaurants, hotels/lodging, aviation, entertainment, and retail197 Results of Operations Operations analysis shows a 1.0% decrease in taxable-equivalent net interest income to $268.5 million, with net interest margin contracting by 23 basis points, while non-interest income surged 120% to $212.9 million due to a $109.0 million gain on securities sales Q1 2020 vs Q1 2019 Key Metrics | Metric | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Taxable-equivalent net interest income | $268,453 | $271,179 | | Net Interest Margin | 3.56% | 3.79% | | Non-interest income | $212,915 | $96,785 | | Non-interest expense | $224,163 | $201,800 | - Non-interest income was boosted by a $109.0 million net gain on securities transactions from the sale of U.S. Treasury and residential mortgage-backed securities253 Allowance for Credit Losses The allowance for credit losses on loans dramatically increased to $263.9 million (1.72% of total loans) due to a $172.9 million provision, driven by CECL adoption and a significantly worsened economic forecast from COVID-19 and oil price volatility Allowance for Credit Losses on Loans (in thousands) | Metric | March 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Allowance for Credit Losses on Loans | $263,881 | $132,167 | | Ratio of Allowance to Total Loans | 1.72% | 0.90% | - The economic forecast used for CECL modeling was the Moody's Analytics March 2020 S8 Low Oil Price Scenario, which assumed WTI crude oil at $35/barrel for two years314 - Management made significant qualitative adjustments (Q-Factors) to the modeled results, including an $85.0 million adjustment for the energy portfolio and additional amounts for other industries heavily impacted by COVID-19320322 Capital and Liquidity The company's capital and liquidity positions remain strong, with shareholders' equity stable at $3.8 billion, despite the $150 million preferred stock redemption and suspension of common stock repurchases due to COVID-19 uncertainty - On March 16, 2020, the company redeemed all 6,000,000 shares of its 5.375% Series A Preferred Stock for $150.0 million334 - The company repurchased 177,834 shares for $13.7 million during the quarter but has suspended further repurchases under the program due to COVID-19 uncertainty335 - Liquidity remains robust, with approximately $4.3 billion held at the Federal Reserve as of April 27, 2020, and $9.1 billion in unencumbered securities available to support additional borrowings as of March 31, 2020338 Quantitative and Qualitative Disclosures About Market Risk The primary market risk is interest rate risk, with the balance sheet showing increased asset sensitivity; a hypothetical 100 basis point rate increase was projected to increase net interest income by 1.6%, while a 25 basis point decrease would lower it by 4.5% Interest Rate Sensitivity Analysis (as of March 31, 2020) | Rate Scenario | Impact on Net Interest Income (next 12 months) | | :--- | :--- | | +200 bps | +3.9% | | +100 bps | +1.6% | | -25 bps | -4.5% | - The company's balance sheet shifted to a more asset-sensitive position as of March 31, 2020, compared to the prior year350 Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2020, with no material changes to internal control over financial reporting during the first quarter - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of the end of the period covered by the report354 - No change in internal control over financial reporting occurred during the last fiscal quarter that materially affected, or is reasonably likely to materially affect, internal controls354 Part II - Other Information Legal Proceedings The company is subject to various claims and legal actions arising in the normal course of business, but management does not anticipate a material adverse impact on its financial statements - The company is subject to various claims and legal actions that have arisen in the course of conducting business, but management does not expect the ultimate disposition to have a material adverse impact on financial statements356 Risk Factors This section highlights key risks, focusing on the adverse impacts of the COVID-19 pandemic and crude oil price volatility, which increase credit risk, reduce fee income, and create operational challenges, especially given the company's $1.6 billion energy loan exposure - The COVID-19 pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, the company's business, financial condition, liquidity, and results of operations357358 - The company is subject to volatility risk in crude oil prices, with $1.6 billion in energy loans (10.2% of the total loan portfolio) as of March 31, 2020365 Unregistered Sales of Equity Securities and Use of Proceeds During Q1 2020, the company repurchased a total of 181,825 shares of its common stock, with 177,834 shares purchased as part of a publicly announced repurchase plan Common Stock Repurchases (Q1 2020) | Period | Total Shares Purchased | Avg. Price Paid | Shares Purchased Under Plan | | :--- | :--- | :--- | :--- | | Jan 2020 | — | — | — | | Feb 2020 | — | — | — | | Mar 2020 | 181,825 | $76.85 | 177,834 | | Total | 181,825 | | 177,834 | Defaults Upon Senior Securities No defaults upon senior securities were reported - No defaults upon senior securities were reported368 Mine Safety Disclosures No mine safety disclosures were reported - No mine safety disclosures were reported368 Other Information No other information was reported under this item - No other information was reported under this item368 Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications under Sarbanes-Oxley Sections 302 and 906, and Inline XBRL interactive data files - The exhibits filed with the report include Rule 13a-14(a) and Section 1350 certifications from the CEO and CFO, as well as Inline XBRL documents370