Cullen/Frost Bankers(CFR) - 2020 Q2 - Quarterly Report

Part I - Financial Information Item 1. Financial Statements (Unaudited) The unaudited financial statements reflect the company's financial position, operations, and cash flows, highlighting the impacts of the new CECL standard and the COVID-19 pandemic - On January 1, 2020, the company adopted the new Current Expected Credit Loss (CECL) accounting standard (ASC 326), which replaces the incurred loss model with an expected loss model for measuring credit losses[32] Impact of ASC 326 Adoption on Allowance for Credit Losses (January 1, 2020) | Category | Pre-Adoption Allowance | Impact of Adoption | Post-Adoption Allowance | Cumulative Effect on Retained Earnings | | :--- | :--- | :--- | :--- | :--- | | Securities held to maturity | $0 | $215 | $215 | ($170) | | Loans | $132,167 | ($2,565) | $129,602 | $2,026 | | Off-balance-sheet credit exposures | $500 | $39,377 | $39,877 | ($31,108) | | Total After-Tax Impact | | | | ($29,252) | Consolidated Balance Sheets Total assets grew to $39.4 billion due to a $3.2 billion increase in net loans from PPP originations and a $5.0 billion rise in deposits Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 | December 31, 2019 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $39,377,553 | $34,027,428 | +15.7% | | Net Loans | $17,721,876 | $14,618,165 | +21.2% | | Allowance for credit losses on loans | ($250,061) | ($132,167) | +89.2% | | Total Deposits | $32,679,096 | $27,639,564 | +18.2% | | Total Shareholders' Equity | $4,008,801 | $3,911,668 | +2.5% | Consolidated Statements of Income Net income declined in Q2 and YTD 2020, driven by a significant surge in credit loss expense despite a substantial gain on securities transactions - The six-month results for 2020 include a significant $109.0 million net gain on securities transactions, compared to a negligible gain in the prior year period[14] Key Income Statement Data (in thousands, except EPS) | Metric | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $245,811 | $253,431 | $490,332 | $499,900 | | Credit Loss Expense | $31,975 | $6,400 | $207,172 | $17,403 | | Non-interest Income | $77,601 | $82,638 | $290,516 | $179,423 | | Net Income Available to Common Shareholders | $93,072 | $109,571 | $140,295 | $224,051 | | Diluted EPS | $1.47 | $1.72 | $2.21 | $3.51 | Consolidated Statements of Cash Flows Cash and cash equivalents increased by $2.8 billion in the first half of 2020, driven by strong deposit inflows that far exceeded cash used for loan growth Six Months Ended June 30 Cash Flow Summary (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash from operating activities | $206,960 | $291,915 | | Net cash from investing activities | ($2,078,199) | ($955,925) | | Net cash from financing activities | $4,682,626 | ($1,346,359) | | Net change in cash and cash equivalents | $2,811,387 | ($2,010,369) | Notes to Consolidated Financial Statements The notes detail accounting policies and financial instrument compositions, highlighting the impact of COVID-19 through loan deferments, PPP participation, and increased credit loss allowances Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the significant financial impacts of the COVID-19 pandemic and CECL adoption, including decreased net income, balance sheet expansion, and increased credit loss provisions - The decrease in net income for Q2 2020 was primarily driven by a $25.6 million increase in credit loss expense and a $7.6 million decrease in net interest income[209] - The company's business has been materially impacted by the COVID-19 pandemic, leading to operational changes, increased credit risk, and participation in government relief programs like the PPP[186][190] - Through June 30, 2020, the company funded approximately $3.2 billion of SBA-approved PPP loans, which are fully guaranteed by the SBA[291][292] Results of Operations Net income decreased significantly in Q2 and the first half of 2020 due to substantially higher credit loss expense, partially offset by gains on securities sales Performance Summary | Metric | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Income Available to Common Shareholders | $93,072K | $109,571K | $140,295K | $224,051K | | Diluted EPS | $1.47 | $1.72 | $2.21 | $3.51 | | Return on Average Assets | 0.99% | 1.40% | 0.79% | 1.44% | | Return on Average Common Equity | 9.60% | 12.60% | 7.24% | 13.32% | Financial Condition Loan growth of $3.2 billion was driven entirely by PPP originations, while the allowance for credit losses nearly doubled to reflect the worsened economic outlook - Total loans increased by $3.2 billion since year-end 2019, driven by the origination of $3.16 billion in PPP loans[283] - The allowance for credit losses on loans increased to $250.1 million at June 30, 2020, from $132.2 million at December 31, 2019, reflecting the adoption of CECL and the deteriorating economic environment[305] Non-Performing Assets (in thousands) | Category | June 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Non-accrual loans | $79,461 | $102,303 | | Restructured loans | $4,932 | $6,098 | | Foreclosed assets | $806 | $1,084 | | Total Non-Performing Assets | $85,199 | $109,485 | | NPA / Total Loans & Foreclosed Assets | 0.47% | 0.74% | Capital and Liquidity The company maintained a strong capital position well above regulatory minimums and robust liquidity, while executing a preferred stock redemption and common stock repurchases - On March 16, 2020, the company redeemed all 6,000,000 shares of its 5.375% Non-Cumulative Perpetual Preferred Stock, Series A, for an aggregate redemption of $150.0 million[124][337] - Under its stock repurchase program, the company repurchased 177,834 shares for $13.7 million during the first quarter of 2020, with no repurchases made in the second quarter[127][338] Regulatory Capital Ratios (Cullen/Frost Bankers, Inc.) | Ratio | June 30, 2020 | Minimum to be Well Capitalized | | :--- | :--- | :--- | | Common Equity Tier 1 | 12.48% | 6.50% | | Tier 1 Capital | 12.48% | 8.00% | | Total Capital | 14.43% | 10.00% | | Leverage Ratio | 8.01% | 5.00% | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with its balance sheet showing a more asset-sensitive position as of June 30, 2020 - The company's interest rate risk simulation model as of June 30, 2020, indicates a more asset-sensitive position compared to June 30, 2019[352] Interest Rate Sensitivity Analysis (Projected 12-Month NII Change) | Rate Shock | June 30, 2020 | June 30, 2019 | | :--- | :--- | :--- | | +200 bps | +4.0% | +1.7% | | +100 bps | +1.4% | +0.4% | | -25 bps | -1.8% | N/A | | -100 bps | N/A | -3.0% | Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period, with no material changes to internal controls - Based on an evaluation as of June 30, 2020, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[356] Part II - Other Information Legal Proceedings The company is involved in ordinary course legal claims, with class action lawsuits related to its PPP participation having been favorably resolved - Purported class action lawsuits filed against Frost Bank in Federal and Texas State courts regarding its participation in the PPP have been favorably resolved[114] - A separate purported class action lawsuit filed in May 2020, alleging refusal to pay agent fees to agents of PPP borrowers, is ongoing, and Frost Bank believes these claims are without merit[114] Risk Factors Key risks are heightened by the COVID-19 pandemic and crude oil price volatility, impacting credit, market, and operational areas - The COVID-19 pandemic has created significant economic and financial disruptions that have adversely affected, and are expected to continue to adversely affect, the company's business, financial condition, and results of operations[360] - The company is subject to risk from volatility in crude oil prices, which impacts its $1.4 billion energy loan portfolio (7.9% of total loans) and the Texas economy[366] Unregistered Sales of Equity Securities and Use of Proceeds No shares of common stock were repurchased during the second quarter of 2020, leaving $69.2 million available under the existing buyback plan - No shares of common stock were repurchased by the company during the three months ended June 30, 2020[367][368] Exhibits This section lists exhibits filed with the Form 10-Q, including management compensation agreements and required CEO/CFO certifications - Exhibits filed include CEO and CFO certifications under Rules 13a-14(a) and Section 1350, as well as Inline XBRL data files[371]