Cullen/Frost's Q1 Earnings up Y/Y, Lags Estimate - Analyst Blog

Shares of Cullen/Frost Bankers, Inc. (CFR) rose 1.94% to close at $79.30, after the company posted encouraging first-quarter 2014 results. Driven by strong top-line performance, the company reported earnings of 96 cents per share, up 5.5% from the prior-year quarter figure of 91 cents. However, results lagged the Zacks Consensus Estimate by a penny.

Our proven model predicted that Cullen/Frost may not post an earnings beat as it did not have the right combination of two key ingredients – positive Earnings ESP and a Zacks Rank #3 (Hold) or higher. It had a positive Earnings ESP, but a Zacks Rank #4 (Sell).

Cullen/Frost's impressive results were driven by an improved top line along with continued growth in loan and deposit balances. However, higher operating expenses reflected undisciplined expense management.  Moreover, higher provision for credit losses was on the downside.

The company's net income of $59.2 million in the reported quarter reflects a 7.2% increase from the year-ago quarter.

Performance in Detail

Cullen/Frost's total revenue (net of interest expenses) on a taxable equivalent basis increased 6.3% year over year to $265.3 million. Further, it surpassed the Zacks Consensus Estimate of $254.0 million.

Net interest income on a taxable-equivalent basis was $187.8 million, up 8.7% from the year-ago quarter. The increase was primarily driven by a larger number of interest earning assets. However, net interest margin (NIM) reduced 3 basis points year over year to 3.42%.

Cullen/Frost's non-interest income of $77.5 million was almost in line on a year-over-year basis. The increase in trust and investment management fees, insurance commissions and fees was offset by reduced service charges on deposit accounts and other non-interest income.

Non-interest expense climbed 1.3% year over year to $157.9 million. This was mainly due to an increase in personnel expenses and net occupancy costs, partially offset by a decline in intangible amortization costs and other non-interest expenses.

Credit Quality

Credit metrics were a mixed bag in the reported quarter. Non-performing assets declined 42.1% year over year to $61.3 million. The allowance for loan losses as a percentage of total loans stood at 0.98%, as of Mar 31, 2014, down 4 basis points from the prior-year quarter.

Further, net charge-offs was $3.9 million, down 76.9% year over year. However, provision for loan losses jumped 10.0% year over year to $6.6 million.

Capital Position

Cullen/Frost exhibited a strong capital position. Tier 1 Risk-Based Capital Ratio was 14.41%, compared with 14.23% in the prior-year quarter. Total Risk-Based Capital Ratio was 15.38% versus 15.44% at the end of the prior-year quarter.

Leverage ratio was 8.59% as compared with 8.42% in the prior-year quarter. Return on average assets were down 1 basis point year over year to 1.00%, while return on average common equity rose 48 basis points to 9.97%.

Total loans increased 6.4% year over year to $9.75 billion while total deposits came in at $21.07 billion, up 10.7%.

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 will enable 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.

Cullen/Frost currently carries a Zacks Rank #4 (Sell).

Performance of other Southwest banks

First Financial Bankshares Inc. (FFIN) reported first-quarter 2014 earnings of 70 cents per share, beating the Zacks Consensus Estimate of 66 cents by 6.06%. Also, this was above the prior-year quarter figure of 59 cents. The quarter exhibited strong top-line performance, partially offset by elevated non-interest expenses.

Among other Southwest banks, BOK Financial Corporation (BOKF) is expected to report March-quarter end results on Apr 30 while Banc of California, Inc. (BANC) on May 14