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Cullen/Frost Bankers, Inc. (CFR - Free Report) reported third-quarter 2016 earnings per share of $1.24, beating the Zacks Consensus Estimate of $1.16. Moreover, the reported figure was up from $1.17 per share recorded in the year-ago quarter.
Higher net interest income and falling provisions primarily supported the beat. The company also registered growth in deposit balances. Moreover, improvement in capital ratios added to the positives. However, elevated expenses, lower non-interest income and deteriorating credit metrics were the dampening factors. This perhaps led to a drop in Cullen/Frost’s share price by 1.4%.
Net income available to common shareholders came in at $78.2 million, exceeding the year-ago quarter figure by approximately 6%.
Cullen/Frost’s total revenue (net of interest expenses) was $276.6 million, reflecting an increase of 2.3% from the year-ago quarter. However, it missed the Zacks Consensus Estimate of $306.1 million.
Net interest income on a taxable-equivalent basis increased 4.5% year over year to $235.7 million. Moreover, net interest margin was 3.53%, up 5 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 $82.1 million, down 1.5% from the year-ago quarter. The decrease was mainly due to a fall in service charges on deposit accounts, insurance commissions and fees and other income.
Non-interest expenses of $180.5 million rose 2.8% year over year. The rise in almost all categories of expenses except intangible amortization and salaries and wages led to the increase.
Strong Balance Sheet
As of Sep 30, 2016, total loans summed $11.6 billion, down marginally from the prior quarter. Further, total deposits amounted to $25.1 billion, compared with $24.3 billion as of Jun 30, 2016.
Deteriorating Credit Quality
As of Sep 30, 2016, non-performing assets were $100.9 million, up 73.4% from the prior-year quarter. Also, allowance for loan losses, as a percentage of total loans, was 1.29%, up 32 bps from the prior-year quarter.
Net charge-offs, annualized as a percentage of average loans rose 6 bps year over year to 0.17%. Conversely, provision for loan losses decreased 26.5% year over year to $5 million.
Capital Ratios Improve, Mixed Profitability Ratios
As of Sep 30, 2016, Tier 1 risk-based capital ratio was 13.24%, up 63 bps from the prior-year quarter. Total risk-based capital ratio was 14.86%, up from 13.96% as of Sep 30, 2015. Further, leverage ratio improved to 8.18% from 7.91% as of Sep 30, 2015.
Return on average assets and return on average common equity were 1.07% and 10.31%, respectively, compared with 1.04% and 10.73% in the prior-year quarter.
Our Viewpoint
We expect Cullen/Frost to witness organic growth, driven by continued improvement in loan and deposit balances. Moreover, the WNB Bancshares merger has helped Cullen/Frost to further capitalize on the growth momentum in the diverse Texas markets.
However, escalating 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.
Backed by higher revenues, Texas Capital Bancshares Inc. (TCBI - Free Report) reported a positive earnings surprise of 1.2% in third-quarter 2016. Earnings per share of 87 cents outpaced the Zacks Consensus Estimate by a penny. Moreover, the bottom line improved 16% from the prior-year quarter figure of 75 cents.
TCF Financial Corporation delivered a positive earnings surprise of 3.3% for third-quarter 2016 on the back of higher revenues. Earnings per share of 31 cents surpassed the Zacks Consensus Estimate by a penny. Moreover, the figure reflects a 6.9% rise from the year-ago tally of 29 cents.
Huntington Bancshares Incorporated (HBAN - Free Report) reported a positive earnings surprise of 4.8% in third-quarter 2016. Earnings per share of 22 cents outpaced the Zacks Consensus Estimate by a penny. Moreover, the figure was higher than the prior-year quarter adjusted earnings of 21 cents.
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Why Cullen/Frost (CFR) Fell 1.4% Despite Q3 Earnings Beat
Cullen/Frost Bankers, Inc. (CFR - Free Report) reported third-quarter 2016 earnings per share of $1.24, beating the Zacks Consensus Estimate of $1.16. Moreover, the reported figure was up from $1.17 per share recorded in the year-ago quarter.
Higher net interest income and falling provisions primarily supported the beat. The company also registered growth in deposit balances. Moreover, improvement in capital ratios added to the positives. However, elevated expenses, lower non-interest income and deteriorating credit metrics were the dampening factors. This perhaps led to a drop in Cullen/Frost’s share price by 1.4%.
Net income available to common shareholders came in at $78.2 million, exceeding the year-ago quarter figure by approximately 6%.
Improved Revenues Offset Rising Expenses
Cullen/Frost’s total revenue (net of interest expenses) was $276.6 million, reflecting an increase of 2.3% from the year-ago quarter. However, it missed the Zacks Consensus Estimate of $306.1 million.
Net interest income on a taxable-equivalent basis increased 4.5% year over year to $235.7 million. Moreover, net interest margin was 3.53%, up 5 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 $82.1 million, down 1.5% from the year-ago quarter. The decrease was mainly due to a fall in service charges on deposit accounts, insurance commissions and fees and other income.
Non-interest expenses of $180.5 million rose 2.8% year over year. The rise in almost all categories of expenses except intangible amortization and salaries and wages led to the increase.
Strong Balance Sheet
As of Sep 30, 2016, total loans summed $11.6 billion, down marginally from the prior quarter. Further, total deposits amounted to $25.1 billion, compared with $24.3 billion as of Jun 30, 2016.
Deteriorating Credit Quality
As of Sep 30, 2016, non-performing assets were $100.9 million, up 73.4% from the prior-year quarter. Also, allowance for loan losses, as a percentage of total loans, was 1.29%, up 32 bps from the prior-year quarter.
Net charge-offs, annualized as a percentage of average loans rose 6 bps year over year to 0.17%. Conversely, provision for loan losses decreased 26.5% year over year to $5 million.
Capital Ratios Improve, Mixed Profitability Ratios
As of Sep 30, 2016, Tier 1 risk-based capital ratio was 13.24%, up 63 bps from the prior-year quarter. Total risk-based capital ratio was 14.86%, up from 13.96% as of Sep 30, 2015. Further, leverage ratio improved to 8.18% from 7.91% as of Sep 30, 2015.
Return on average assets and return on average common equity were 1.07% and 10.31%, respectively, compared with 1.04% and 10.73% in the prior-year quarter.
Our Viewpoint
We expect Cullen/Frost to witness organic growth, driven by continued improvement in loan and deposit balances. Moreover, the WNB Bancshares merger has helped Cullen/Frost to further capitalize on the growth momentum in the diverse Texas markets.
However, escalating 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
Currently, Cullen/Frost carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Performance of Other Banks
Backed by higher revenues, Texas Capital Bancshares Inc. (TCBI - Free Report) reported a positive earnings surprise of 1.2% in third-quarter 2016. Earnings per share of 87 cents outpaced the Zacks Consensus Estimate by a penny. Moreover, the bottom line improved 16% from the prior-year quarter figure of 75 cents.
TCF Financial Corporation delivered a positive earnings surprise of 3.3% for third-quarter 2016 on the back of higher revenues. Earnings per share of 31 cents surpassed the Zacks Consensus Estimate by a penny. Moreover, the figure reflects a 6.9% rise from the year-ago tally of 29 cents.
Huntington Bancshares Incorporated (HBAN - Free Report) reported a positive earnings surprise of 4.8% in third-quarter 2016. Earnings per share of 22 cents outpaced the Zacks Consensus Estimate by a penny. Moreover, the figure was higher than the prior-year quarter adjusted earnings of 21 cents.
Confidential from Zacks
Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>.