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Cullen/Frost (CFR) Beats on Q1 Earnings, Misses Revenues

Cullen/Frost Bankers, Inc. CFR reported a positive earnings surprise of 3.9% in first-quarter 2016 wherein earnings per share came in at $1.07, beating the Zacks Consensus Estimate by 4 cents. However, results were slightly below the prior-year quarter figure of $1.11. Notably, the release had a minimal effect on the stock.

Results reflected higher revenues and growth in loan and deposit balances. However, elevated non-interest expenses and deteriorated credit metrics were the undermining factors.
 
Net income available to common shareholders was $66.8 million compared with $70.1 million in the year-ago quarter.
 

Performance in Detail
 
Cullen/Frost’s total revenue (net of interest expenses) increased 8.3% year over year to $285.8 million. However, it missed the Zacks Consensus Estimate of $303 million.

Net interest income came in at $229.2 million, up 5% year over year. Net interest income on a taxable-equivalent basis was up 5.8% year over year to $229.2 million. Moreover, net interest margin increased 17 basis points (bps) year over year to 3.58%, driven by Fed’s interest rate increase and a rise in yielding earning assets.

Non-interest income was $96.1 million, up 15.5% year over year. The increase in interchange and debit card transaction fees, other charges, commissions and fees as well as elevated net gain on securities transactions mainly led to the rise.
 
Non-interest expenses climbed 4.5% year over year to $179.2 million. The rise in almost all categories of expenses led to the increase.

Cullen/Frost continued to exhibit strong loan and deposit growth during the quarter. Total loans jumped 2.7% year over year to $11.5 million, while deposits increased slightly to $24.2 million.

Credit Quality
 
Credit metrics deteriorated during the quarter. Non-performing assets more than tripled on a year-over-year basis to $180 million. Allowance for loan losses, as a percentage of total loans, was 1.40% as of Mar 31, 2016, up 46 bps from the prior-year quarter.

Net charge-offs, annualized as a percentage of average loans, stood at 0.09% as of Mar 31, 2016, up 2 bps year over year. Provisions escalated on a year-over-year basis to $28.5 million.
 
Capital Position
 
Cullen/Frost remained well capitalized during the reported quarter. As of Mar 31, 2016, Tier 1 risk-based capital ratio was 12.66% while total risk-based capital ratio was 14.39% compared with 12.60% and 13.93%, respectively, as of Mar 31, 2015. Further, leverage ratio was recorded at 7.96% versus 7.89% as of Mar 31, 2015.
 
Return on average assets and return on average common equity were 0.96% and 9.55%, respectively, compared with 1.02% and 10.34% in the prior-year quarter.

Our Viewpoint
 
Going forward, we expect the company to witness organic growth driven by higher revenues and rising loans and deposits. Moreover, the WNB Bancshares merger has helped Cullen/Frost strengthen its Texas franchise and enter the profitable markets of Midland and Odessa, thereby expanding its footprint.
 
However, the prevalent low interest rate environment and surging expenses continue to restrict the company’s bottom-line growth. In addition, significant exposure to the risky real estate loans and deteriorating credit quality, as a result of weakness in the energy sector, continue to raise concern.

Currently, Cullen/Frost carries a Zacks Rank #3 (Hold).
 
Performance of Other Banks
 
Texas Capital Bancshares Inc. TCBI reported a negative surprise of 26.9% in the first quarter of 2016 on higher expenses. Earnings per share of 49 cents missed the Zacks Consensus Estimate of 67 cents by a wide margin. Moreover, earnings lagged the prior-year quarter figure of 70 cents.
 
TCF Financial Corporation’s TCB first-quarter 2016 earnings per share of 26 cents beat the Zacks Consensus Estimate by 2 cents. Further, the bottom line improved 23.8% year over year.

Huntington Bancshares Incorporated HBAN reported first-quarter 2016 earnings per share of 20 cents, in line with the Zacks Consensus Estimate. However, the figure came a penny above the prior-year quarter earnings. The reported quarter’s earnings included certain merger and acquisition-related costs.

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HUNTINGTON BANC (HBAN): Free Stock Analysis Report
 
TCF FINL CORP (TCB): Free Stock Analysis Report
 
TEXAS CAP BCSHS (TCBI): Free Stock Analysis Report
 
CULLEN FROST BK (CFR): Free Stock Analysis Report
 
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