DBRS Comments on Cullen/Frost’s 2Q12 Results; Ratings Unchanged – Senior at “A”, Stable Trend

DBRS, Inc. (DBRS) has today commented that its ratings for Cullen/Frost Bankers, Inc. (Cullen/Frost or the Company), including its “A” Issuer & Senior Debt rating, are unchanged following the release of 2Q12 earnings. The trend on all ratings is Stable. For the quarter, the Company reported net income of $58.1 million, down from record earnings of $61.0 million in 1Q12.

Balance sheet trends, which included 3% quarter-over-quarter (QoQ) growth in both average loans and deposits, were positive in the quarter. Indeed, the Company continues to increase its customer base and reported that new loan commitments were the highest in four years. Moreover, pipelines remain strong and line utilization has increased in the first half of 2012. In addition, Cullen/Frost’s credit metrics continued to improve in 2Q12.

Notwithstanding these underlying trends, net interest income declined 0.4% on an FTE basis to $164.0 million. The decline occurred despite earning asset growth as the NIM remained pressured by both the low rate environment and the intense competition in Texas. Specifically, the NIM declined 12 basis points to 3.61% from 1Q12. Earnings were also impacted by lower fee revenues, driven by seasonal declines in insurance commissions, as well as a modest uptick in expenses that reflected higher write downs on OREO, and increased marketing costs. In all, expenses increased 0.35% from 1Q12, while revenues declined 1.2% on an FTE basis.

Cullen/Frost’s asset quality continues to trend positively and compares favorably to peers. The increase in the provision in 2Q12 was driven by loan growth, as both nonperforming assets (NPAs) and net charge-offs (NCOs) continued to decline. Specifically, NPAs were down 7% to $112.1 million from 1Q12, representing 1.32% of total loans and foreclosed assets at June 30 2012. Meanwhile, NCOs declined 4% to $3.9 million, representing a modest 0.19% (annualized) of average 2Q12 loans. Given these trends, DBRS considers the Company’s allowance for loan loss reserves to be sufficient at 1.24% of period-end loans. In addition, classified loan balances continued to decline, suggesting that further improvement in asset quality in the coming quarters is sustainable.

DBRS views the Company’s funding profile as strong, underpinned by its sizable, low-cost core deposit base that comfortably funds the entire loan portfolio. Average non-interest bearing demand deposits increased 7% from 1Q12 and represented a substantial 40% of average total deposits, adding stability to the Company’s NIM. Meanwhile, the Company’s capital position remains solid, providing for ample loss absorption capacity. At the end of 2Q12, Cullen/Frost’s tangible common equity ratio was strong at 8.94%. The Company believes that current Basel III capital ratios, on a fully phased-in basis and calculated using the recent NPR, would be significantly in excess of required levels.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Mark Nolan
Approver: Roger Lister
Initial Rating Date: 17 October 2007
Most Recent Rating Update: 6 January 2012

For additional information on this rating, please refer to the linking document under Related Research.