Cullen/Frost (CFR) Q3 Earnings Top Estimates, Costs Soar

Cullen/Frost Bankers, Inc. CFR reported a positive surprise of 7.6% in third-quarter 2017. Earnings per share of $1.41 handily surpassed the Zacks Consensus Estimate of $1.31. Moreover, the reported figure was 13.7% up from $1.24 recorded in the year-ago quarter.

Top-line strength was reflected in the quarter. Further, increase in loans and deposits and a strong balance sheet position were the positives. However, elevated expenses and higher provisions remained major drags.

Net income available to common shareholders came in at $91.1 million, exceeding the year-ago quarter tally by approximately 16.5%.

Revenue Growth Offsets Escalated Expenses

The company’s total revenues were $346 million, up 8.9% from the prior-year quarter. Further, revenues outpaced the Zacks Consensus Estimate of $329.6 million.

Net interest income on a taxable-equivalent basis climbed 12.2% year over year to $264.4 million. The upswing is primarily attributable to a rise in earning assets, higher yields on loans and increase in cash balances.

Moreover, net interest margin expanded 20 basis points (bps) year over year to 3.73%, as the Fed’s interest rate hikes led to higher yielding assets.

Non-interest income totaled $81.6 million, slightly down from the year-ago quarter. The decrease was mainly due to net loss on securities transactions and lower insurance commissions and fees.

Non-interest expenses of $186.8 million flared up 3.5% year over year. Increase in almost all the cost components led to elevated expenses in the reported quarter.

Strong Balance Sheet

As of Sep 30, 2017, total loans were $12.7 billion, up 9.5% year over year. Total deposits amounted to $26.4 billion, up 5.2% from the prior-year quarter.

Credit Quality: A Mixed Bag

As of Sep 30, 2017, provision for loan losses more than doubled on a year-over-year basis to $11 million. Also, net charge-offs, annualized as a percentage of average loans expanded 3 bps year over year to 0.20%. Allowance for loan losses, as a percentage of total loans, was 1.21%, down 8 bps from the prior-year quarter.

Non-performing assets were $150 million, up 48.7% from the year-ago quarter.

Profitability and Capital Ratios Improve

As of Sep 30, 2017, Tier 1 risk-based capital ratio was 13.14% compared with 13.24% recorded at the end of the prior-year quarter. Total risk-based capital ratio was 15.19%, up from 14.86% as of Sep 30, 2016. Furthermore, leverage ratio increased to 8.39% from 8.18% as of Sep 30, 2016.

Return on average assets and return on average common equity were 1.19% and 11.71%, respectively, compared with 1.07% and 10.31% witnessed in the prior-year quarter.

Capital Deployment Update

During the third quarter, the company completed $100 million buyback, repurchasing 1.1 million shares at an average price of $88.11.

Notably, the company's board of directors has authorized a new $150-million stock repurchase plan to be completed over a two-year period.

Our Viewpoint

Cullen/Frost reported decent performance in the third quarter. Growth in loan and deposit balance indicates continued organic growth. Also, the company remains well poised to benefit from easing margin pressure. However, escalating expenses may continue to depress the company’s bottom-line growth. In addition, significant exposure to the risky real estate loans raises concerns.

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

Regions Financial Corporation’s RF third-quarter 2017 earnings from continuing operations of 25 cents per share came in line with the Zacks Consensus Estimate. The figure came in 4.2% higher than the prior-year quarter tally. Easing margin pressure and lower expenses were the positive factors. Decline in non-interest income, along with lower loans and deposits balance, were the undermining factors. Moreover, provisions escalated.

BB&T Corporation’s BBT third-quarter 2017 adjusted earnings of 78 cents per share came in line with the Zacks Consensus Estimate. The company recorded 2.6% bottom-line improvement from the year-ago quarter. Results reflected an increase in revenues and higher expenses. The quarter witnessed a decrease in loans and leases and deposits. Additionally, provision for credit losses decreased, which was a tailwind.

Driven by top-line strength, Synovus Financial Corporation SNV recorded a positive earnings surprise of 1.6% in third-quarter 2017. Adjusted earnings of 65 cents per share beat the Zacks Consensus Estimate by a penny. Also, the reported figure came in 25% higher than the prior-year quarter tally. Higher revenues backed by strong loans & deposits balances drove organic growth. Notably, lower efficiency ratio was a tailwind. Moreover, positive impact of rising rates was witnessed.

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