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Why Is Cullen/Frost (CFR) Down 12.6% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Cullen/Frost Bankers (CFR). Shares have lost about 12.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Cullen/Frost due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Cullen/Frost Q2 Earnings As Expected, Costs Up

Cullen/Frost reported earnings per share of $1.72 in second-quarter 2019, in line with the Zacks Consensus Estimate. Results compare favorably with the prior-year quarter figure of $1.68 per share.

Top-line strength and higher loan balance were reflected in the quarter. Further, a strong balance-sheet position and lower provisions were driving factors. However, elevated expenses were a major drag.

The company reported net income available to common shareholders of $109.6 million compared with $109.3 million recorded in the prior-year quarter.

Revenue Growth Offset Escalated Expenses

The company’s total revenues were $360.4 million in the second quarter, up 4.3% from the prior-year quarter. The revenue figure, however, lagged the Zacks Consensus Estimate of $364.6 million.

Net interest income on a taxable-equivalent basis climbed 6.6% year over year to $277.8 million. Additionally, net interest margin expanded 21 basis points (bps) year over year to 3.85%.

Non-interest income totaled $82.6 million, down 2.9% from the year-ago quarter. This decrease came in mainly due to lower other charges, commissions and fees, along with other non-interest income.

Non-interest expenses of $203.2 million flared up 7.6% year over year. Increase in almost all the cost components led to elevated expenses in the reported quarter.    

Strong Balance Sheet

As of Jun 30, 2019, total loans were $14.5 billion, slightly up sequentially. Total deposits amounted to $26 billion, down 1.1% from the prior quarter.

Credit Quality: A Marked Improvement

Credit metrics improved during the June-end quarter. As of Jun 30, 2019, provision for loan losses decreased 22.9% on a year-over-year basis to $6.4 million. Further, net charge-offs, annualized as a percentage of average loans shrunk 1 basis point year over year to 0.22%. Allowance for loan losses, as a percentage of total loans, was 0.93%, down 17 bps from the prior-year quarter.

Non-performing assets were $76.4 million, down 37.8% from the year-ago quarter.

Steady Profitability and Capital Ratios

As of Jun 30, 2019, Tier 1 risk-based capital ratio was 12.94% compared with 13.02% recorded at the end of the prior-year quarter. Total risk-based capital ratio was 14.60%, up from 14.85% as of Jun 30, 2018. Furthermore, leverage ratio inched up to 9.40% from 9.02% as of Jun 30, 2018.

Return on average assets and return on average common equity were 1.40% and 12.60%, respectively, compared with 1.43% and 14.03% witnessed in the prior-year quarter.

Capital Deployment Update

Cullen/Frost’s board of directors announced a new stock-repurchase plan worth $100 million.

Outlook

Assuming a lower rate environment, management projects two Fed rate cuts during the remainder of 2019, including one cut at the end of July, and another at the end of October. Further, it estimates a range of $6.84 to $7.02.

How Have Estimates Been Moving Since Then?

Estimates revision followed a downward path over the past two months.

VGM Scores

Currently, Cullen/Frost has a subpar Growth Score of D, a grade with the same score on the momentum front. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Cullen/Frost has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.



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