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Cullen/Frost (CFR) Down Despite Q3 Earnings Beat, Costs Up

Zacks Equity Research

Cullen/Frost Bankers, Inc. CFR delivered third-quarter 2019 positive earnings surprise of 2.4%. Earnings per share of $1.73 surpassed the Zacks Consensus Estimate of $1.69. However, the bottom line compares unfavorably with the prior-year quarter figure of $1.78 per share.

Top-line strength and higher loan balance were reflected in the quarter. Further, a strong balance-sheet position and expansion of margins were driving factors. However, elevated expenses and provisions were major drags, escalating investors’ concerns.

Perhaps, due to these concerns the investors are skeptical about the company’s future performance. Thus, following the earnings release, the stock has declined 3.3%.

The company reported net income available to common shareholders of $109.8 million compared with $115.8 million recorded in the prior-year quarter.

Revenues Rise, Expenses Escalate

The company’s total revenues were $365.8 million in the third quarter, up 4.3% from the prior-year quarter. The revenue figure topped the Zacks Consensus Estimate of $364.6 million.

Net interest income on a taxable-equivalent basis climbed 4.1% year over year to $276.6 million. Additionally, net interest margin expanded 10 basis points (bps) to 3.76%.

Non-interest income totaled $89.2 million, up 1.8% from the year-ago quarter. This increase was mainly due to higher trust and investment management, commissions and fees, along with service charge on deposits.

Non-interest expenses of $208.9 million jumped 7.8% year over year. Increase in almost all the cost components led to elevated expenses in the reported quarter.    

Strong Balance Sheet

As of Sep 30, 2019, total loans were $14.6 billion, up 1.2% sequentially. Total deposits amounted to $27.1 billion, up 4.2% from the prior quarter.

Credit Quality: A Mixed Bag

As of Sep 30, 2019, provision for loan losses increased significantly on a year-over-year basis to $8 million. Non-performing assets were $105 million, up 21.6%.

However, net charge-offs, annualized as a percentage of average loans shrunk 27 bps year over year to 0.17%. Allowance for loan losses, as a percentage of total loans, was 0.93%, down 7 bps.

Steady Profitability and Capital Ratios

As of Sep 30, 2019, Tier 1 risk-based capital ratio was 12.99% compared with 13.24% recorded at the end of the prior-year quarter. Furthermore, total risk-based capital ratio was 14.63%, down from 14.99% as of Sep 30, 2018. Leverage ratio inched up to 9.36% from 9.19% as of Sep 30, 2018.

Return on average assets and return on average common equity were 1.35% and 11.83%, respectively, compared with 1.49% and 14.4% witnessed in the prior-year quarter.

Capital Deployment Update

Cullen/Frost’s board of directors raised the fourth-quarter common dividend by 6% to 71 cents. The new dividend will be paid out on Dec 13 to shareholders of record as on Nov 29.

Our Viewpoint

Cullen/Frost remains well positioned for revenue growth, given the steady improvement in loan and deposit balances as well as efforts to improve fee income. However, rising provisions and expenses along with lower rates are major concerns.

Cullen/Frost Bankers, Inc. Price, Consensus and EPS Surprise

Cullen/Frost Bankers, Inc. Price, Consensus and EPS Surprise

Cullen/Frost Bankers, Inc. price-consensus-eps-surprise-chart | Cullen/Frost Bankers, Inc. Quote

Currently, Cullen/Frost has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.    

Performance of Other Banks

UMB Financial UMBF reported third-quarter 2019 net operating earnings of $1.27 per share, surpassing the Zacks Consensus Estimate of $1.17. The reported figure also compares favorably with the prior-year quarter’s earnings of $1.16.

New York Community Bancorp, Inc. NYCB reported third-quarter 2019 earnings per share of 19 cents, in line with the Zacks Consensus Estimate. The figure, however, compares unfavorably with the prior-year quarter figure of 20 cents.

Bank of Hawaii Corporation BOH reported a negative earnings surprise of 6.5% in third-quarter 2019. Earnings per share of $1.29 lagged the Zacks Consensus Estimate of $1.38. Further, the reported figure compares unfavorably with $1.36 earned in the prior-year quarter.

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