The huge downturn in the energy markets has sent shock waves across the economy, and regional banks with a strong presence in energy-producing states have been hit especially hard. As a Texas-based bank, Cullen/Frost Bankers (NYSE:CFR) has higher-than-average exposure to the energy sector, which was a great asset when the hunt for black gold was strong, but more recently some of its oil loans have gone bust and weighed heavily on the business.
Cullen/Frost recently reported results from its first quarter. Let's dig in to see how the company is holding up against a challenging backdrop.
Cullen/Frost Bankers' first-quarter results:
|Q1 2016||Q1 2015||Change %|
|Net interest income||$229.2 million||$216.7 million||
|Non-interest income||$96.1 million||$83.2 million||15.5%|
|Net income||$68.7 million||$72.1 million||-4.7%|
What happened with Cullen/Frost Bankers this quarter?
The bank successfully grew its top line during the period, which is impressive considering its operating environment, but an uptick in its provision for loan losses put pressure on its profitability during the quarter. That caused nearly every single one of the bank's key financials ratios to deteriorate on a year-over-year basis. Here are some more details:
- Return on average assets was 0.96%, down from the 1.02%
- Return on equity was 9.55%, down from 10.34%
- Loan losses as a percentage of total loans jumped to 1.4%, up sharply from the 0.94%
- Non-performing assets more than tripled to $180 million
- The provision for loan losses rose to $28.5 million from $8.2 million
- Net charge-offs of $2.5 million were up slightly from $2.0 million
While the majority of the bank's results reflected the tough times it is facing, there were a few positives worth highlighting:
- Net interest margin rose to 3.58%, up from the 3.41% it recorded in the year-ago period
- Average deposits held steady during the period and came in at $24 billion
- Average loans increased 3.8% to $11.5 billion
- The company remains well capitalized as its Tier 1 and Total Risk-Based Capital Ratios at quarter's end were 12.66% and 14.39%, respectively
Misery loves company
At least, Cullen/Frost isn't the only bank that is showing weakening fundamentals from the energy downturn. Oklahoma-based BOK Financial (NASDAQ:BOKF) also recently posted results and is also seeing huge financial pressure from its heavy energy exposure. BOK Financial's net income dropped by more than 43% -- far higher than Cullen/Frost's decline -- as its provision for loan losses also jumped substantially year over year.
For comparison purposes, BOK Financial said that it was reserving against 1.5% of total loans, which is in line with Cullen/Frost's results.
What management had to say
Cullen/Frost Chairman and CEO Phil Green acknowledge that his bank is facing a challenging time, but did his best to assure investors that the bank can continue to operate in this tough environment. Green also reminded investors that Texas's economy is still healthy even with the downturn. Green stated:
Texas's diversified economy remains resilient, people are attracted to the state's low-cost, pro-business environment. The Federal Reserve Bank of Dallas is predicting job growth of 1.0 percent in Texas this year, increasing employment in the state by 116,200 jobs to 12.1 million. Frost continues to expand, establishing new financial centers, completing the new One Frost operations and support center, and enhancing the Frost customer experience through technology.
Green also said that the company sold off some of its uninsured municipal bonds during the quarter, which should help to reduce the bank's risk.
Oil prices have rebounded sharply from their February lows, so it's possible that the worst of the energy downturn is behind us. But since there's no way to know that for sure, it's good to see that Cullen/Frost is still bracing itself for more pain ahead.
Investors should keep in mind that this isn't the first time the company has faced a challenge as this bank has been in business for 148 years. As Green reminded investors:
Our corporate culture and philosophy have guided our company through ups and downs since 1868, and will continue to do so. We have taken steps over the years that position Frost to get through uncertain times. We will control the things that we can, which we believe will keep Frost a safe, sound place for our customers to do business.