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Cullen/Frost Q2 Earnings Beat Estimates on Higher Revenues

Zacks Equity Research

Shares of Cullen/Frost Bankers, Inc. (CFR) rose 1.85% to close at $79.40, after the company posted impressive second-quarter 2014 results on Wednesday, before the opening bell. Driven by strong top-line performance, the company reported earnings of $1.02 per share, outpacing the Zacks Consensus Estimate by a penny. Moreover, results were up 8.5% from the prior-year quarter figure of 94 cents.

Our proven model predicted that Cullen/Frost will post an earnings beat as it has the right combination of two key ingredients – a positive Earnings ESP and a Zacks Rank #3 (Hold).

Cullen/Frost’s encouraging results were driven by an improved top line along with continued growth in loan and deposit balances. However, higher operating expenses were a concern.  Moreover, elevated provision for credit losses was on the downside.

The company’s net income available to common shareholders of $64.5 million in the reported quarter reflects a 13.2% increase from the year-ago quarter.

Cullen/Frost Bankers, Inc - Earnings Surprise | FindTheBest


Performance in Detail

Cullen/Frost’s total revenue (net of interest expenses) on a taxable equivalent basis increased 12.8% year over year to $278.1 million. Further, it surpassed the Zacks Consensus Estimate of $261 million.

Net interest income on a taxable-equivalent basis was $198.9 million, up 14.3% from the year-ago quarter. The rise was primarily driven by increased average volume of interest earning assets. Moreover, net interest margin (NIM) climbed 5 basis points year over year to 3.48%.

Cullen/Frost’s non-interest income of $79.2 million was up 9.2% on a year-over-year basis. The surge was primarily attributable to increase in trust and investment management fees, insurance commissions and fees, service charges on deposit accounts and other non-interest income.

Non-interest expense climbed 9.5% year over year to $164 million. This was mainly due to an increase in personnel expenses, net occupancy costs and other non-interest expenses.

Credit Quality

Credit metrics were a mixed bag in the reported quarter. Non-performing assets declined 32.5% year over year to $68.6 million. The allowance for loan losses as a percentage of total loans stood at 0.92%, as of Jun 30, 2014, down 9 basis points from the prior-year quarter.

Further, net charge-offs were $1.8 million, down 52.6% year over year. However, provision for loan losses jumped 36.1% year over year to $4.9 million.

Capital Position

Cullen/Frost exhibited a strong capital position. Tier 1 Risk-Based Capital Ratio was 13.84%, compared with 14.22% in the prior-year quarter. Total Risk-Based Capital Ratio was 14.76% versus 15.39% at the end of the prior-year quarter.

Leverage ratio was 8.66% compared with 8.60% in the prior-year quarter. Return on average assets were up 1 basis point year over year to 1.04%, while return on average common equity rose 40 basis points to 10.33%.

Total loans increased 16.3% year over year to $10.7 billion while total deposits came in at $22.5 billion, up 17.8%.

Our Viewpoint

Going forward, we expect the company’s profitability to be aided by the growth in loans and deposits. Moreover, its capital deployment activities remained encouraging. Further, the WNB Bancshares merger enabled Cullen/Frost to reinforce its Texas franchise and enter the profitable Midland and Odessa markets and thereby aid expansion.

However, the prevalent low interest rate environment and surging expenses will continue to restrict bottom-line improvement. Nevertheless, with the ongoing revival of the economy, we expect the company to deliver better earnings.

Performance of other Southwest banks

First Financial Bankshares Inc.’s (FFIN) second-quarter 2014 earnings per share of 33 cents missed the Zacks Consensus Estimate by 2 cents. However, it compared favorably with the year-ago earnings of 31 cents. Notably, the prior-year per share information has been adjusted on account of the 2-for-1 stock split in June. Results were adversely affected by elevated operating expenses and provision for credit losses. Also, declining profitability ratios were among the negatives.

Texas Capital Bancshares Inc. (TCBI) reported second-quarter 2014 earnings per share of 71 cents, up 36.5% year over year. Moreover, the figure surpassed the Zacks Consensus Estimate of 69 cents. Results benefited from elevated net interest income, lower provisions and growth in loans and deposits. However, decline in non-interest income and higher expenses were among the unfavorable factors.

Prosperity Bancshares Inc.’s (PB) second-quarter 2014 earnings per share came in at $1.08 surpassing the Zacks Consensus Estimate of $1.02. Moreover, earnings per share escalated 21.3% from the year-ago quarter. Strong results were driven by increase in revenue, partly offset by higher provision for credit losses and elevating expenses. Solid growth in loans and deposits and improved profitability ratios were the positives while deterioration in capital ratios were among the negatives.

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