DBRS Comments on Cullen/Frost’s 4Q12 Results; Ratings Unchanged - Senior at “A”, Stable Trend

DBRS, Inc. (DBRS) has commented today 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 4Q12 results. The trend on all ratings is Stable. For the quarter, the Company reported net income of $60.2 million, up from $58.7 million in 3Q12.

Cullen/Frost continues to display solid fundamentals, reflecting both the strength of its franchise and the Texas market. Highlights for the quarter included sustained loan and deposit growth and sound asset quality. For 4Q12, Cullen/Frost reported 4.7% loan growth quarter-over-quarter (QoQ) and 6.4% deposit growth. Loan growth was mostly in the commercial & industrial and commercial real estate loan portfolios and to a lesser degree, in the consumer real estate portfolio. DBRS notes that 4Q12 was the best quarter for new loan commitments since 3Q08. Positively, the Company’s pipeline remains healthy for 1Q13. Supporting loan growth, higher deposits reflected increased levels of demand and time deposits. Finally, asset quality remains sound reflecting modest net charge-offs (NCOs) and lower levels of non-performing assets (NPAs).

The current low rate environment continues to pressure earnings. Cullen/Frost’s net interest margin (NIM) narrowed 6 bps to 3.48%, driven by continued strong deposit growth in the quarter. However, growth in loans did offset the margin pressure, as spread income (TE basis) increased 2.9% QoQ to $172.1 million. Management anticipates some pressure on future margin, yet spread income should continue to benefit from sustained loan growth.

Fourth quarter non-interest income was $75.9 million, up 6.6% from 3Q12. Excluding $4.4 million of securities gains, fee income increased a more modest 0.4%, sequentially to $71.4 million. The increase reflected higher levels of other charges/commissions/fees (up 6.5%) and service charges on deposit accounts (up 1.8%). Meanwhile, expenses remain well-controlled in DBRS’s view, despite being up 1.1% QoQ. Higher expenses primarily reflected a 3.8% increase in salaries and wages, mostly due to merit and normal market increases. Most other expense line items were moderately down sequentially.

For the most part, asset quality continues to trend positively, and compares favorably to peers. NPAs contracted QoQ and represented a moderate 1.14% of loans, at December 31, 2012, down from 1.41% at September 30, 2012. Although NCOs increased 84.7%, sequentially, they remain very low at $5.1 million, or 0.23% of average loans for 4Q12. DBRS anticipates that Cullen/Frost’s credit quality will continue to remain strong. As such, DBRS considers the allowance for loan loss reserves to be adequate at 1.13% of period-end loans.

DBRS views Cullen/Frost’s funding profile to be strong, underpinned by its large core deposit base that easily funds the entire loan portfolio. Finally, the Company’s capital position remains solid, and provides ample loss absorption capacity, especially given its sustained low levels of NCOs. At December 31, 2012, Cullen/Frost’s tangible common equity ratio was a high 8.30% and its Tier 1 capital ratio was 13.68%.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]