Frost Bank’s 2Q earnings rise 20 percent on increased lending

July 27, 2017

Focusing on loan growth has paid off for Phil Green in his first year running San Antonio-based Cullen/Frost Bankers Inc., which on Thursday reported a 20 percent rise in profit during the second quarter.

Green, who replaced Dick Evans as chairman and CEO of Frost Bank’s corporate parent about 16 months ago, told analysts on a call Thursday morning that the bank was “really working hard” on increasing lending in its core lending portfolio, which caters to smaller businesses that need to borrow less than $10 million.

“Our core portfolio was really flat for a number of years,” Green said when asked if he was doing anything different from Evans. “It has been a major priority for us to once again grow this portfolio and establish a more balanced growth between larger and smaller to mid-size relationships.”

The move is paying dividends, with the increase in core lending propelling the overall loan portfolio, which climbed $928 million, or 8 percent, to $12.5 billion as of June 30 from the same time last year. From the end of the first quarter, loans rose $326 million, or 2.6 percent.

The bank holding company earned $83.5 million, or $1.29 a share, in the three months ended June 30, the company said in a statement today. By comparison, Frost posted earnings of $69.5 million, or $1.11 a share, in the same period a year ago.

Cullen/Frost’s latest quarterly profit matched the average estimate of 16 analysts polled by Thomson Reuters.

“Our second-quarter results represented a steady continuance of the momentum we built coming out of the second half of 2016,” Green said. New loan commitments at $10 million or higher were up 53 percent in the second quarter over the same period last year.

Peter J. Winter, an analyst with Wedbush in New York, said earlier this week that “Cullen/Frost has had some of the best loan growth we’re seeing in the industry.”

Frost generated $339.1 million in revenue in the second quarter, up 10 percent from the same time last when it posted $308.2 million in revenue.

Energy loans totaled $1.4 billion, or 11.3 percent of Frost’s loan portfolio at the end of the second quarter — essentially unchanged from the first quarter. That’s down from the peak of $1.8 billion, or 16.2 percent of the loan portfolio, as of March 31, 2015.

Asked if energy loans would be a big contributor to its commercial loan growth in the next several quarters, Green said, “We’re seeing good deal flow. Heck, you could probably make it as big as you want it to be. But we are being disciplined in what we’re doing. I expect we’ll get some growth. We’ve got a good pipeline right now.”

Frost’s bottom line received a boost from a lower provision for loan losses. The company booked a more than $8.4 million expense to deal with potential loan losses, down $763,000, or 8.3 percent from $9.2 million a year ago.

Bad debt that’s unlikely to be recovered, or net charge-offs, fell 44 percent from $21.4 million in the second quarter of 2016 to $11.9 million in the latest quarter. Charge-offs were $7.9 million in the first quarter.

Non-performing assets, which are loans borrowers aren’t paying back, were $90.2 million at the end of the second quarter, an increase of $700,000 from the same point last year, but down $28 million from the end of the first quarter.

The bank had $25.6 billion in deposits as of June 30, an increase of more than $1.3 billion, or 5.5 percent, from almost $24.3 billion at the end of the second quarter last year. However, deposits fell $528 million, or 2 percent, from end of the first quarter.

Frost this week raised interest rates on its high-yield money-market accounts and certificate of deposit offerings, which Green said are above most of its competitors and much higher than the largest banks.

“The industry will ultimately have to respond with higher rates to compete with offerings from nonbank alternatives available to customers,” Green said. “They can either respond in a timely manner, or risk being too late and losing relationships and trust along the way.”

Cullen/Frost is the largest regional bank based in San Antonio. It had $30.2 billion in assets at the end of the second quarter. It ranked as the 49th largest U.S. bank with $30.5 million assets as of March 31, according to S&P Global Market Intelligence.

This article will be updated later today.