Cullen/Frost (CFR) Q4 Earnings Beat Estimates, Revenues Rise

Cullen/Frost Bankers, Inc. (NYSE:CFR) delivered fourth-quarter 2019 positive earnings surprise of 1.3%. Earnings per share of $1.60 surpassed the Zacks Consensus Estimate of $1.58. However, the bottom line compared unfavorably with the prior-year quarter figure of $1.82 per share.

Results reflected top-line strength and higher loan and deposit balances. However, elevated expenses and provisions, along with contracting margins, were major drags.

The company reported net income available to common shareholders of $101.7 million, down 13.3% from the prior-year quarter.

In 2019, earnings of $6.84 per share were down nearly 1% from the prior year’s figure, but outpaced the consensus estimate by 2 cents. Net income declined 2.5% to $435.5 million.

Revenues Rise, Expenses Escalate

The company’s total revenues were $370.3 million in the fourth quarter, up 2.6% from the prior-year quarter. The revenue figure topped the Zacks Consensus Estimate of $364.6 million.

In 2019, total revenues were $1.5 billion, up 4.3%. Also, the top line matched the consensus estimate.

Net interest income on a taxable-equivalent basis moved marginally upward year over year to $275 million. Additionally, net interest margin contracted 10 basis points (bps) to 3.62%.

Non-interest income totaled $95.3 million, up 9.3% from the year-ago quarter. This increase was due to rise in all the components except interchange and debit card transaction fees, and other charges, commissions and fees.

Non-interest expenses of $220.8 million jumped 10.6% year over year. Increase in almost all the cost components led to elevated expenses in the reported quarter.

Strong Balance Sheet

As of Dec 31, 2019, total loans were $14.8 billion, marginally up from the prior quarter. Total deposits amounted to $27.6 billion, up 2.1% sequentially.

Credit Quality: A Mixed Bag

As of Dec 31, 2019, provision for loan losses increased significantly on a year-over-year basis to $8.4 million. Non-performing assets were $109.5 million, up 46.2%. Also, net charge-offs, annualized as a percentage of average loans, expanded 8 bps year over year to 0.34%. However, allowance for loan losses, as a percentage of total loans, was 0.90%, down 4 bps.

Profitability and Capital Ratios

As of Dec 31, 2019, Tier 1 risk-based capital ratio was 12.99% compared with 12.94% recorded at the end of the prior-year quarter. Furthermore, total risk-based capital ratio was 14.57%, down from 14.64% as of Dec 31, 2018. Leverage ratio moved up to 9.28% from 9.06% as of Dec 31, 2018.

Return on average assets and return on average common equity were 1.21% and 10.74%, respectively, compared with 1.48% and 14.85% in the prior-year quarter.

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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. Also, a strong balance sheet is likely to aid the company’s performance going forward. However, rising provisions and expenses are major concerns. Moreover, low interest rates might keep margins under pressure.