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Texas-based Cullen/Frost Bankers (NYSE:CFR) recently reported results from its second quarter. Last quarter we saw that results were heavily weighed down by the bank's exposure to the energy sector. Now that energy prices have started to bounce back, was the bank able to show an improvement in its results? Let's dig in to find out.

Cullen/Frost Bankers Q2: the raw numbers

MetricQ2 2016Q2 2015Change %
Net interest income $230.2 million $220.1 million 


Non-interest income $78 million $79 million (1.2%)
Net income $69.5 million $71.1 million (2.3%) 
EPS $1.11 $1.11         --


What happened with Cullen/Frost Bankers this quarter?

The bank's top and bottom lines held relatively steady year over year, which is a decent result considering the tough operating environment.

A few more details about the quarter:

  • Returns on average assets was 0.99% Returns on common equity was 9.70%. That was down slightly from the 1.03% and 10.34%, respectively, that the bank recorded in the year-ago period.
  • Average loans rose 2.5% to $11.5 billion.
  • Average deposits increased 1.3% to $24 billion.
  • The bank continues to be well capitalized, as common equity Tier 1, Tier 1, and total risk-based capital ratios were 11.90%, 12.73%, and 14.36%, respectively, at quarter's end.
  • Net interest margin rose by 10 basis points year over year to 3.57%.
  • Non-interest expense increased by 3.6% to $179.4 million. 
  • Book value per share rose to $48.22, up 11.7% from the same quarter last year.

The big news this quarter was that provisions for loan losses came in at $9.2 million -- which is a substantial decrease from the $28.5 million in the first quarter of 2016. Net charge-offs were $21.4 million, much more than the $2.5 million we saw during the first quarter. Non-performing assets also dropped to $89.5 million during the period, down sharply from $180 million in the first quarter.

Earlier in the quarter management also announced that it would be increasing its quarterly dividend payment by a penny to $0.54. That marks the 23rd straight annual increase.

What management had to say

CEO Phil Green was very pleased with the bank's performance this quarter: 

Frost has emerged from the challenges of recent quarters in a good position because of the approach we take to underwriting business and working with customers. Our provision for loan losses has declined by 68% from the last quarter, and our non-performing assets were cut in half. Our second quarter results show that by sticking to our core principles, Frost continues to address the challenges facing our industry.

Looking forward

The price of oil has bounced back from its January lows, but it still remains at a depressed level. There's no telling where it might head next, but the huge downward movement in non-performing assets hints that banks have already seen the worst of the energy hit.

That's especially true when you consider that Cullen/Frost isn't the only bank reporting better numbers this quarter from the energy rebound. BOK Financial, another regional bank with a lot of energy exposure, recently reported that its loan loss provisions fell by $20 million this quarter. BOK Financial also said it expects to see that number decline into the third and fourth quarter, assuming that commodity markets remain relatively stable.

If the energy markets have indeed stabilized, then Cullen/Frost looks well positioned to continue its 148-year history of doing what it does best -- delighting its customers, growing with the Texas economy, and sharing its prosperity with investors.


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