Annual profits

Frost Bank parent company announces first drop in annual profits in 6 years

Cullen / Frost Bankers Inc. reported Thursday that its annual profit fell 2.5% last year, the first time in six years that the San Antonio financial holding company has experienced a bottom line.

Higher expenses resulting from its expansion in Houston and its new headquarters in San Antonio contributed to lower profits for Frost Bank’s parent company.

The company earned $ 435.5 million, or $ 6.84 per share, on nearly $ 1.5 billion in revenue last year.

By comparison, it posted earnings of $ 446.9 million, or $ 6.90 per share, on roughly $ 1.4 billion in revenue in 2018.

He still managed to beat last year’s consensus estimate of 12 analysts polled by Bloomberg by one cent per share.

The last decline in annual profits occurred in 2013, when they fell $ 6.8 million, or just under 3%.

President and CEO Phil Green said on a call with analysts that “2019 has had its share of challenges, but also its share of achievements.”

Frost, like other banks, is grappling with falling interest rates which is negatively affecting earnings. The Federal Reserve cut interest rates three times last year.

Green also detailed a more difficult lending landscape for Frost, the largest regional bank based in San Antonio with $ 34 billion in assets.

“Quality offers are hard to find,” he said. “In 2019, we reserved only 3% more loan commitments compared to 2018, despite an additional 16% number of transactions”.

The percentage of home loans that Frost lost to competitors due to structure – which includes things like guarantees and equity – rose to 69% last year, from 63% in 2018, a Green said.

“The competition continues to be tough, and it’s mostly around structure,” he said, adding that it came from big banks, small banks and non-bank lenders like private equity and insurance companies.

In the past, Frost has targeted single-digit percentage loan growth. For this year, Green said the bank is aiming for more than 5%, but “I don’t think it’s going to be double digits.”

The company ended last year with nearly $ 14.8 billion in loans, up from $ 14.1 billion at the end of 2018. Deposits stood at $ 27.6 billion, up from $ 21.1 billion during the same period.

Wedbush Securities downgraded its rating on Cullen / Frost to “underperform” relative to “neutral” in November, partly on the basis of forecasts for the company to decline in profits for three consecutive years, the analyst said Peter Winter.

“The lower rate environment is really having an impact on the (net interest) margin,” Winter said, explaining why he foresees the tough times for the company. “And then that’s the management decision with this construction in Houston.”

The net interest margin measures the difference between what a bank collects on loans and what it pays on deposits. The margin fell to 3.62% in the last quarter, compared to 3.76% in the third quarter and 3.72% in the fourth quarter of 2018.

Frost opened 10 of 25 planned Houston branches, affecting earnings by 19 cents a share. That figure is expected to be closer to 35 cents per share this year.

“Longer term, I can understand why they’re doing it,” Winter said of the branch openings. “It’s just that most banks will expand by acquisition.”

However, he added that doing it alone allows Frost to be selective about who he hires to run the branches. It has already filled 150 of the 200 jobs it hopes to create.

Non-interest expense increased $ 55.8 million, or 7.2%, last year largely due to the expansion of Houston and the move to the new headquarters.

“Cullen is different from other companies,” Winter said. “They definitely adopt a long-term shareholder vision. Some investors certainly have a shorter timeline than maybe Cullen’s. “

Frost has not been immune to a “small deterioration” in its energy loan portfolio from a credit standpoint, Winter said.

Frost had $ 132 million in problematic energy loans at the end of 2019, up from $ 115 million at the end of 2018, Green said. Problematic energy loans were at $ 600 million at their peak.

“They’ve been working on these things and these things for quite some time – in one case about three years,” he said, adding that these could be resolved soon. “My gut tells me that there will be accusations related to these. “

Write-offs amounted to $ 2.9 million in the fourth quarter.

Energy loans represented 11.2% of Frost’s portfolio at the end of the fourth quarter, up from the previous quarter but still below its peak of 16% in 2015.

For the fourth quarter, the company earned $ 101.7 million, or 1.60 per share, on revenue of $ 370.3 million. It earned $ 117.2 million, or $ 1.82 per share, on $ 360.9 million in revenue in the last quarter of 2018. Analysts predicted the company would earn $ 1.57 per share in the quarter. most recent.

Frost CFO Jerry Salinas called the consensus estimate of earnings per share of $ 6.13 “reasonable.”

Cullen / Frost shares rose 78 cents to close at $ 92.68 on Thursday. The stock’s closing price over the past year has ranged from a low of $ 80.32, set on August 27, to a high of $ 105.70, set on February 20.

Patrick Danner is a San Antonio-based writer who covers banking and civil courts. Read it on our free site, and on our subscriber site, | [email protected] | Twitter: @AlamoPD

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