DBRS Comments on Cullen/Frost’s 3Q12 Results; Ratings Unchanged – Senior at “A”, Stable Trend

DBRS, Inc. (DBRS) today has 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 3Q12 earnings. The trend on all ratings is Stable. For the quarter, the Company reported net income of $58.7 million, up from $58.1 million in 2Q12.

Key from DBRS’s perspective, Cullen/Frost continues to display better-than-peer balance sheet trends, reflecting the strength of its Texas market, but also a strengthening franchise in DBRS view. The Company continues to increase its customer base and reported that new loan commitments were the highest in four years. For 3Q12, Cullen/Frost reported 3.8% quarter-over-quarter (QoQ) growth in period-end loans and 5.6% deposit growth. Loan growth was primarily in C&I, though CRE and construction balances also increased in the quarter. In addition, loan pipelines were at an all-time high entering the fourth quarter.

Still, Cullen/Frost is not immune from the headwinds in the current low rate environment and DBRS notes that competition in Texas remains intense. The Company’s NIM declined 7 bps to 3.54%, driven by the strong deposit growth in the quarter and lower loan yields. Growth in lending volume in the quarter did offset the margin pressure as net interest income (FTE) grew 2.1% QoQ to $167.3 million. Cullen/Frost hopes to maintain its core NIM around current levels and DBRS comments that net interest income should benefit from continued loan growth.

Third quarter fee revenues were $71.2 million, up from $69.4 million in 2Q12 (excluding securities gains). The increase reflected higher insurance commissions and fees as well as higher income from securities trading and customer derivatives. Most other key fee lines were similar to 2Q12 levels. Meanwhile, expenses remain well-controlled in DBRS’s view, as third quarter results showed positive operating leverage for the Company. Total expenses increased 1.3% from 2Q12 to $144 million. The QoQ increase was primarily attributable to higher salary and wages that reflected the impact of annual merit increases.

For the most part, Cullen/Frost’s asset quality continues to trend positively and compares favorably to peers. NCOs declined 29.3% from 2Q12 to $2.7 million, representing a modest 0.13% (annualized) of average 3Q12 loans. NPAs did increase noticeably in the quarter, up 11.5% QoQ to $124.9 million; however at 1.41% of total loans plus OREO balances remain comparatively low. Also, the Company reported that potential problem loans declined substantially, suggesting further improvement in asset quality in coming quarters. As such, DBRS considers the Company’s allowance for loan loss reserves to be adequate at 1.20% of period-end loans. DBRS notes that the 3Q12 loan loss provision of $2.5 million was less than quarterly NCOs, leading to a slight QoQ decline in the allowance.

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 4.9% from 2Q12 and represented a substantial 41% of average total deposits. Meanwhile, the Company’s capital position remains solid, providing for ample loss absorption capacity given consistently low charge-off rates. At quarter end, Cullen/Frost’s tangible common equity ratio was strong at 8.80%, and its Tier 1 ratio was 14.1%.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. 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: Alan G. Reid
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.