Cullen/Frost Bankers (NYSE:CFR), a regional bank based in Texas, reported its second-quarter results on Wednesday.
Top-line growth was muted yet again, mostly owing to a small decline in non-interest income. Expenses largely held steady and helped to offset that weakness, but net income was essentially flat year-over-year. Stock buybacks helped the company to show a small gain in EPS, and the company authorized a new stock buyback plan to take advantage of its weak share price.
Cullen/Frost Bankers Q2: The raw numbers
|Metric||Q2 2019||Q2 2018||Change (YOY)|
|Net interest income||$253.4 million||$237.3 million||6.7%|
|Non-interest income||$82.6 million||$85.0 million||(2.8%)|
|Net income||$109.6 million||$109.3 million||0%|
|Earnings per share||$1.73||$1.70||2%|
What happened with Cullen/Frost Bankers this quarter?
- Average loans grew 6% to $14.4 billion.
- Average deposits declined slightly to $26 billion.
- Return on average assets fell by 3 basis points to 1.4% (one basis point equals one-hundredth of a percent, or 0.01%).
- Return on common equity dropped 143 basis points to 12.6%.
- Net interest margin was 3.85%, up 6 basis points sequentially.
- Book value per share at quarter-end grew 16% year over year to $57.42.
- The allowance for loan losses as a percentage of total loans dropped 17 basis points to 0.93%.
- Non-performing assets were down $21 million sequentially to $76.4 million.
- Net charge-offs declined slightly to $7.8 million.
- A $100 million stock repurchase program was authorized.
What management had to say
CEO Phil Green said that the company's focus on organic growth continues to lead to solid quarterly results:
During the second quarter, we continued our expansion in the Houston market by opening two more new financial centers, and after six years of planning and implementation, we also moved to our new corporate headquarters in San Antonio.
He also stated on the call with investors that investments in its online channel continue to pay off:
In the second quarter, about 27% of our account openings came from our online channel which includes our Frost Bank mobile app, that's up from 22% a year ago. It also represents a 24% year-over-year increase in the total number of online openings, so they're growing both in number and in the proportion of overall account openings.
CFO Jerry Salinas noted that the bank now expects that interest rates will be cut by the Federal Reserve twice later in the year, which he expects will impact the company's profitability. In response, he noted that the company is "comfortable with the lower end of the current range of analyst estimates"; the current range of analyst estimates for earnings per share for the full year is $6.84 to $7.02. If the company hits the bottom of this range, EPS will remain flat when compared to the year-ago period.
For context, EPS for 2018 was $6.90, which indicates that management expects profits to slightly decline in 2019.
Cullen/Frost's stock declined by a few percent in the wake of this earnings report, which makes sense given the weak forecast for the full year. While that decline makes sense, investors should be encouraged that nearly all of the bank's key metrics are moving in the right direction. What's more, the $100 million stock buyback could prove to be a value-accretive move given that the share price is down from its 52-week high while book value per share continues to rise.
While a decline in interest rates will put short-term pressure on profits, the picture looks bright over the longer term. Texas' economy looks healthy, and Cullen/Frost is poised to continue to win its fair share of new business, both of which should help the company to drive long-term profit growth. Buying shares while they are on sale today could prove to be a profit-friendly move.