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It's been a tough couple of months to be a shareholder of Cullen/Frost Bankers (NYSE:CFR). The bank's stock price is down around 38% from its summertime highs, as fears that its exposure to the energy sector could cause some of its loans to go belly up.

Cullen/Frost isn't alone. Investors have been selling off other regional bank stocks with exposure to energy, even ones with a seemingly minuscule amount. Shares of Ohio's KeyCorp have dropped more than 30% from their July highs, even though only 1.3% of its total assets are exposed to the energy sector. The fact that most of KeyCorp's loans have been made to E&P energy companies -- which are typically better hedged than oil services companies -- hasn't helped.

Investors' logic is backed by a decline in Cullen/Frost's profitability. A week ago, it pre-announced that its provision for loan losses was expected to come in at $34 million for the fourth quarter, up from only $4.4 million in the year-ago period. This caused the market to brace itself for bad news when the bank, headquartered in San Antonio, released its fourth-quarter results.

Cullen/Frost Bankers results: The raw numbers

 Q4 2015Q4 2014Change %
Net Interest Income $225.6 Million $212.6 Million 


Non-Interest Income $83.2 Million $82.6 Million 1%
Net Income $56.2 Million $70.7 Million -20% 
EPS $0.90 $1.11  -19%

Data source: Cullen/Frost Bankers.

What happened with Cullen/Frost Bankers this quarter?
Modest growth in the company's top line couldn't overcome the increase in its provision for loan losses during the quarter. That caused its profitability and a few of its key ratios to take a step back. 

  • Return on average assets was 0.78%, down from the 1.02% it reported last year
  • Return on equity was 8.07%, down from 10.36% reported a year ago
  • Loan losses as a percentage of total loans came in at 1.18%, up from 0.91% at the end of 2014
  • Non-performing assets were $85.7 million at year end, up from $65.2 million at year-end 2014
  • Net charge-offs of $8.5 million were up substantially from the $3.2 million it recorded last year

While most of the bank's numbers headed in the wrong direction, there were a handful of bright spots:

  • Net interest margin expanded to 3.43%, up slightly from the 3.34% it recorded a year ago
  • Average deposits rose by 3.2% to $24.5 billion, and average loans also grew 4.2% to $11.4 billion
  • Tier 1 and Total Risk-Based Capital Ratios at quarters end were 12.38% and 13.85%, respectively

Cullen/Frost also continues to make progress bringing its bank into the 21st century. The company added new features to its smartphone apps and released a new app for the Apple Watch.

Consumers seem to be responding well to these moves, as the bank was listed as the top-rated regional or community bank in a Consumer Reports survey. In addition, J.D. Power and Associates also said that for the sixth year in a row the bank won the highest ranking in consumer satisfaction.

What management had to say
Cullen/Frost CEO Dick Evans is aware that the bank's profitability has taken a hit, and he's taking actions to protect the bank from a prolonged downturn in the oil markets.  "In addition to reserves already allocated, we provided $22 million for possible energy industry exposure primarily based on our sensitivity stress test," Evans said in prepared remarks. "In this volatile market, we are comfortable that our energy exposure is manageable."

Outside of its energy exposure, Evans said he was pleased with the bank's results and he plans continue to expand its reach through this rough patch. "Continued growth in loans in the fourth quarter and for 2015 reflects our determination to leverage the new business relationships we added throughout the downturn," he said. He then went on to note that consumers continue to respond well to the bank's value proposition, noting that the way it conducts itself seems to be appreciated.

Looking forward
No one knows how long this downturn will last, but this isn't Cullen/Frost's first rodeo, so to speak, given the company's 148-year history. The bank has shown that it can survive through rough patches and still manage to take care of shareholders, as evidenced by its 22-year history of increasing its dividend.

The huge sell-off in shares have them currently trading hands for slightly more than the bank's book value and its dividend yield is now over 4.9%. Given the company's long history of success, it's not hard to imagine that investors who hold on to their shares through this difficult time will be rewarded over the long term.