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Cullen/Frost's (CFR) Q2 Earnings Beat Despite High Provisions

Cullen/Frost Bankers, Inc. CFR posted second-quarter 2016 earnings per share of $1.11, beating the Zacks Consensus Estimate of $1.04. The company reported the same number a year ago.

Higher revenues primarily supported the beat. The company registered growth in loan and deposit balances. However, elevated provisions and non-interest expenses were the dampening factors.
 
Net income available to common shareholders came in at $69.5 million, exceeding the year-ago quarter figure by 2.3%.
 

Revenue Growth Offsets Escalated Expenses
 
Cullen/Frost’s total revenue (net of interest expenses) was $268.5 million, reflecting an increase of 2.6% from the year-ago quarter. However, it missed the Zacks Consensus Estimate of $299 million.

Net interest income on a taxable-equivalent basis increased 4.6% year over year to $230.2 million. Moreover, net interest margin was 3.57%, up 10 basis points (bps) year over year due to the Fed’s Dec 2015 rate hike and a shift in the mix of earning assets to higher yielding assets.

Non-interest income totaled $78 million, down 1.2% from the year-ago quarter. The decrease was due to all components, except interchange and debit card transaction fees and other income.
 
Non-interest expenses of $179.4 million rose 3.6% year over year. The rise in almost all categories of expenses except intangible amortization and other expenses led to the increase.

Balance Sheet Strengthens

As of Jun 30, 2016, total loans summed $11.6 million, up from $11.5 million in the prior quarter. Further, total deposits amounted to $24.3 million, compared with $24.2 million as of Mar 31, 2016.

Credit Quality Deteriorates
 
As of Jun 30, 2016, non-performing assets were $89.5 million, compared with $180 million in the prior quarter. However, allowance for loan losses, as a percentage of total loans, was 1.29% as of Jun 30, 2016, up 35 bps from the prior-year quarter.

Net charge-offs, annualized as a percentage of average loans plunged 67 bps year over year to 0.74%. Conversely, provisions escalated significantly to $9.2 million from $2.9 million in the year-ago quarter.
 
Capital Ratios Improve
 
As of Jun 30, 2016, Tier 1 risk-based capital ratio was 12.73%, up 1 bps from the prior-year quarter. Total risk-based capital ratio was 14.36% compared with 14.06% as of Jun 30, 2015. Further, leverage ratio was recorded at 8.13% versus 8.07% as of Jun 30, 2015.
 
Profitability Ratios Deteriorate

Return on average assets and return on average common equity were 0.99% and 9.70%, respectively, compared with 1.03% and 10.34% in the prior-year quarter.

Our Viewpoint
 
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 concerns.

CULLEN FROST BK Price, Consensus and EPS Surprise

CULLEN FROST BK Price, Consensus and EPS Surprise | CULLEN FROST BK Quote

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Currently, Cullen/Frost carries a Zacks Rank #3 (Hold).
 
Performance of Other Banks
 
Texas Capital Bancshares Inc. TCBI reported a positive surprise of 2.6% in second-quarter 2016 on higher revenues. Earnings per share of 78 cents surpassed the Zacks Consensus Estimate as well as the prior-year quarter figure of 76 cents.
 
TCF Financial Corporation’s TCB second-quarter 2016 earnings per share of 31 cents beat the Zacks Consensus Estimate by 2 cents. Further, the bottom line improved 6.9% year over year.

Huntington Bancshares Incorporated HBAN reported second-quarter 2016 earnings per share of 21 cents, in line with the Zacks Consensus Estimate. However, the figure was below the prior-year quarter earnings of 23 cents. The reported quarter’s earnings excluded 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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