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Cullen/Frost Bankers, Inc. (CFR - Analyst Report) reported second-quarter 2013 earnings of 94 cents per share. The results were in line with the Zacks Consensus Estimate as well as the prior-year figure.

The company witnessed improved top line, thanks to a rise in both net interest and non-interest income. Further, increases in loans and deposits were impressive. However, higher provision for credit losses and operating expenses were the headwinds.

Net income available to common shareholders came in at $57.0 million, compared with $58.1 million in the prior-year quarter.

Quarter in Detail

Total revenue, net of interest expenses, increased 5.5% year over year to $246.5 million. Revenues also surpassed the Zacks Consensus Estimate of $237 million.

Cullen/Frost‘s net interest income on a taxable-equivalent basis was $174.0 million, up 6.1% from the year-ago quarter. The increase was primarily driven by better interest earning assets, partly mitigated by a decline in net interest margin (NIM).

Total loans increased 8.8% to $9.2 billion on a year-over-year basis. Additionally, total deposits increased 10.4% to $19.1 billion. However, NIM decreased 18 basis points (bps) to 3.43%.

Cullen/Frost’s non-interest income of $72.5 million advanced 3.9% year over year. The increase was mainly backed by a rise in trust and investment management fees, Insurance commissions and fees, other charges, commissions and fees and other fees.

On the flip side, Cullen/Frost’s non-interest expense rose 5.1% year over year to $149.8 million. This was due to an increase in salaries and employee benefit expenses, net occupancy costs, furniture and equipment costs and other expenditures. These negatives were partially offset by a decline in both deposit insurance and intangible amortization costs.

Credit Quality

Credit metrics was a mixed bag. Nonperforming assets equaled 0.45% of total assets, down 9 bps year over year.

Provisions for credit losses were $3.6 million, up from $2.4 million in the prior-year quarter. However, non-accrual loans decreased and came in at $86.7 million, compared with $92.3 million in the prior-year quarter.

Moreover, net charge-offs decreased to $3.8 million from $3.9 million in the prior-year quarter. Net charge-offs as a percentage of average loans were 0.16%, down 3 bps year over year.

Capital Ratios

Cullen/Frost had a strong capital position. Tier 1 Risk-Based Capital Ratio was 14.22%, compared with 14.07% in the prior-year quarter. Total Risk-Based Capital Ratio was 15.39%, compared with 15.61% in prior-year quarter.

Adjusted stockholders’ equity rose 7.7% year over year to $2.3 billion as of Jun 30, 2013.

Our Viewpoint

Growth in total loans and deposits are expected to drive Cullen/Frost’s profitability going forward. However, the prevalent low interest rate environment and continuing pressure on NIM remain areas of concern. Moreover, surging expenses also pose a challenge to bottom-line growth. Nevertheless, with an eventual revival of the economy, we expect the company to deliver better earnings.

Another Southwest bank BOK Financial Corporation (BOKF - Analyst Report) is expected to report second-quarter earnings on Jul 31, 2013.

Cullen/Frost currently carries a Zacks Rank #3 (Hold). Some better performing Southwest banks include Banc of California, Inc. (BANC - Snapshot Report) and First Financial Bankshares Inc. (FFIN - Snapshot Report). Both these stocks carry a Zacks Rank #2 (Buy).

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