Cullen/Frost Bankers(CFR) - 2020 Q3 - Quarterly Report

Part I - Financial Information Financial Statements (Unaudited) The unaudited consolidated financial statements for the period ended September 30, 2020, reflect the company's financial position, results of operations, and cash flows - On January 1, 2020, the company adopted the new Current Expected Credit Loss (CECL) standard (ASC 326), resulting in an after-tax cumulative effect reduction to retained earnings of $29.3 million[33][37] Consolidated Balance Sheet Highlights (As of September 30, 2020 vs. December 31, 2019) | Metric | September 30, 2020 ($ in thousands) | December 31, 2019 ($ in thousands) | Change | | :--- | :--- | :--- | :--- | | Total Assets | $40,101,240 | $34,027,428 | +17.8% | | Net Loans | $17,960,402 | $14,618,165 | +22.9% | | Total Deposits | $33,499,503 | $27,639,564 | +21.2% | | Total Shareholders' Equity | $4,085,026 | $3,911,668 | +4.4% | Consolidated Income Statement Highlights (Nine Months Ended September 30) | Metric | 2020 ($ in thousands) | 2019 ($ in thousands) | Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $733,755 | $752,907 | -2.5% | | Credit Loss Expense | $227,474 | $25,404 | +795.4% | | Net Gain on Securities | $108,989 | $265 | N/A | | Net Income | $242,881 | $339,918 | -28.5% | | Diluted EPS | $3.71 | $5.24 | -29.2% | Notes to Consolidated Financial Statements The notes detail significant accounting policies, including the material impact of adopting the CECL standard (ASC 326) - The adoption of ASC 326 on Jan 1, 2020, replaced the 'incurred loss' model with an 'expected loss' model for credit losses, resulting in an after-tax reduction to retained earnings of $29.3 million[33][37] - As of September 30, 2020, the loan portfolio included $3.23 billion in Paycheck Protection Program (PPP) loans, which are fully guaranteed by the SBA and constituted 17.7% of total loans[66] - The company redeemed all 6,000,000 shares of its 5.375% Series A Preferred Stock on March 16, 2020, for an aggregate redemption of $150.0 million[124] - At September 30, 2020, the company had approximately 300 loans in COVID-19 related deferment with an aggregate outstanding balance of approximately $157.2 million[73] Regulatory Capital Ratios (Cullen/Frost) | Ratio | September 30, 2020 | Minimum to be Well Capitalized | | :--- | :--- | :--- | | Common Equity Tier 1 | 12.71% | 6.50% | | Tier 1 Capital | 12.71% | 8.00% | | Total Capital | 14.69% | 10.00% | | Leverage Ratio | 7.85% | 5.00% | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management's discussion highlights the significant impact of the COVID-19 pandemic and oil price volatility on operations and financial results - The COVID-19 pandemic has negatively impacted business operations, financial position, and operating results, leading to the implementation of Business Continuity and Health Emergency Response plans, including remote work for nearly all employees and temporary lobby closures[187][188] - Net income available to common shareholders for the nine months ended Sep 30, 2020, decreased by $98.5 million (29.5%) year-over-year, primarily due to a $202.1 million increase in credit loss expense and a $19.2 million decrease in net interest income[213] - The company originated approximately $3.3 billion in SBA-approved Paycheck Protection Program (PPP) loans through September 30, 2020, which positively impacted net interest income through deferred processing fees[298] - The allowance for credit losses on loans to total loans increased to 1.45% at Sep 30, 2020 (1.76% excluding PPP loans), from 0.90% at Dec 31, 2019, reflecting deteriorating economic forecasts and portfolio risk[333][335] Results of Operations For the nine months ended Sep 30, 2020, net income available to common shareholders fell to $235.4 million from $333.9 million YoY Key Operating Results (Nine Months Ended September 30) | Metric | 2020 ($ in thousands) | 2019 ($ in thousands) | | :--- | :--- | :--- | | Taxable-equivalent net interest income | $805,216 | $825,547 | | Credit loss expense | $227,474 | $25,404 | | Non-interest income | $374,117 | $268,647 | | Non-interest expense | $625,992 | $613,873 | | Net income available to common shareholders | $235,351 | $333,871 | - The increase in non-interest income for the nine-month period was primarily due to a $109.0 million net gain on securities transactions[240] - Salaries and wages increased by $5.4 million (2.0%) YoY for the nine-month period, but this was partly offset by a $5.9 million increase in deferred salary costs related to the high volume of PPP loan originations[262] Loans Total loans increased by $3.5 billion (23.5%) to $18.2 billion at September 30, 2020, from year-end 2019 Loan Portfolio Composition | Loan Category | Sep 30, 2020 ($ in thousands) | % of Total | Dec 31, 2019 ($ in thousands) | % of Total | | :--- | :--- | :--- | :--- | :--- | | Commercial and industrial | $4,820,018 | 26.4% | $5,187,466 | 35.2% | | Energy | $1,363,368 | 7.4% | $1,652,882 | 11.2% | | Paycheck Protection Program | $3,226,980 | 17.7% | — | — | | Commercial real estate | $7,007,218 | 38.5% | $6,196,239 | 42.0% | | Consumer real estate | $1,307,753 | 7.2% | $1,194,413 | 8.1% | | Consumer and other | $498,540 | 2.8% | $519,332 | 3.5% | | Total loans | $18,223,877 | 100.0% | $14,750,332 | 100.0% | - Excluding the $3.2 billion in PPP loans, the total loan portfolio would have increased by only $246.6 million, or 1.7%, since December 31, 2019[289] Non-Performing Assets Total non-performing assets (NPAs) decreased by $13.1 million to $96.4 million at September 30, 2020, from year-end 2019 Non-Performing Assets Summary | Category | Sep 30, 2020 ($ in thousands) | Dec 31, 2019 ($ in thousands) | | :--- | :--- | :--- | | Total non-accrual loans | $91,578 | $102,303 | | Restructured loans | $3,932 | $6,098 | | Foreclosed assets | $850 | $1,084 | | Total non-performing assets | $96,360 | $109,485 | - The ratio of non-performing assets to total loans (excluding PPP) and foreclosed assets was 0.64% at September 30, 2020, down from 0.74% at December 31, 2019[299] - Potential problem loans, which are not included in NPAs, increased to $126.0 million at September 30, 2020, from $46.8 million at year-end 2019, with 63.7% related to the energy industry and 20.6% to the hotel/lodging industry[306] Allowance for Credit Losses The allowance for credit losses on loans increased to $263.5 million at Sep 30, 2020, from $132.2 million at year-end 2019 - The allowance for credit losses on loans increased to $263.5 million at Sep 30, 2020[310][333] - The estimate of expected credit losses was based on Moody's Analytics September 2020 CF Consensus Scenario, which included projections for GDP growth, unemployment rates, and oil prices[315] - A qualitative adjustment of $24.4 million was made for energy production loans based on borrowing base deficiencies using a projected oil price of $30/barrel for 2020[327] - An additional qualitative adjustment of $27.1 million was applied to industries heavily impacted by COVID-19, including retail/strip centers, hotels/lodging, restaurants, and entertainment, which collectively had outstanding balances of $1.54 billion[332] Capital and Liquidity Shareholders' equity stood at $4.1 billion at September 30, 2020 - Shareholders' equity increased to $4.1 billion at Sep 30, 2020, from $3.9 billion at Dec 31, 2019, despite a $150.0 million redemption of preferred stock and $136.8 million in dividend payments[337] - The company maintains significant liquidity, with approximately $6.6 billion held at the Federal Reserve and an additional borrowing capacity of $2.7 billion from the FHLB as of September 30, 2020[345] - A quarterly dividend of $0.71 per common share was paid during each of the first three quarters of 2020, resulting in a payout ratio of 57.3% for the nine-month period[340] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, managed through an earnings simulation model - The company's earnings simulation model as of September 30, 2020, indicates an asset-sensitive position[356] - A hypothetical 25 basis point ratable decrease in interest rates is projected to result in a negative variance in net interest income of 1.5% relative to the flat-rate case over the next 12 months[356] - The shift to a more asset-sensitive position compared to the prior year is primarily due to an increased proportion of interest-bearing deposits held at the Federal Reserve and a change in modeling assumptions for interest paid on commercial demand deposits[357][358] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of September 30, 2020 - Based on an evaluation as of the end of the reporting period, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[361] - No changes in internal control over financial reporting occurred during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal controls[361] Part II - Other Information Legal Proceedings The company is subject to various routine legal claims - The company is involved in several purported class action lawsuits related to the Paycheck Protection Program (PPP), alleging refusal to pay agent fees and refusal to provide a loan[114] - Management believes the claims related to the PPP lawsuits are without merit and does not expect the ultimate disposition of these matters to have a material adverse impact on the financial statements[113][114] Risk Factors This section supplements existing risk factors with two key additions: the adverse effects of the COVID-19 pandemic and the volatility risk in crude oil prices - The COVID-19 pandemic is identified as a significant risk factor, expected to continue adversely affecting business, financial condition, and results through increased unemployment, business disruption, loan defaults, and market volatility[364][365][366] - Volatility in crude oil prices is highlighted as a major risk[374] - Participation in government programs like the PPP introduces risks of litigation, regulatory scrutiny, and reputational damage[368] Unregistered Sales of Equity Securities and Use of Proceeds During the third quarter of 2020, the company repurchased 400 shares of its common stock at an average price of $70.56 per share Issuer Purchases of Equity Securities (Q3 2020) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | July 1-31, 2020 | 400 | $70.56 | | August 1-31, 2020 | 0 | N/A | | September 1-30, 2020 | 0 | N/A | | Total | 400 | $70.56 | - The repurchases were made in connection with the vesting of certain share awards[376] Defaults Upon Senior Securities None Mine Safety Disclosures None Other Information None Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications (Rule 13a-14(a) and Section 1350) and Inline XBRL data files - Key exhibits filed include CEO and CFO certifications pursuant to Rule 13a-14(a) and Section 1350[379] - The filing includes Inline XBRL documents for financial data tagging[379] Signatures