DBRS Comments on Cullen/Frost’s 1Q13 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 1Q13 results. The trend on all ratings is Stable. For the quarter, the Company reported net income of $55.1 million, down from $60.2 million in 4Q12.

Cullen/Frost continues to display solid fundamentals, reflecting both the strength of its franchise and the Texas market. Highlights for the quarter included sustained growth in average loans and deposits and expected continued loan growth given strong pipelines. For 1Q13, Cullen/Frost reported 2.7% growth in average loans quarter-over-quarter (QoQ) and 1.6% growth in average deposits. Finally, asset quality remains sound reflecting manageable, although elevated this quarter, levels of net charge-offs (NCOs), and stable non-performing assets (NPAs).

As with most banks, the current low rate environment continues to pressure earnings. However, Cullen/Frost’s net interest margin (NIM) was fairly resilient in 1Q13 narrowing just 3 bps to 3.45%. Additionally, growth in average loans offset the margin pressure and the lower day count in the quarter, as spread income (TE basis) increased a modest 0.4% QoQ to $172.8 million. Management anticipates some pressure on future margin, yet spread income should continue to benefit from sustained loan growth.

First quarter non-interest income was $77.8 million, up 2.5% from 4Q12. Both this quarter and the previous quarter had similar levels of nonrecurring revenue. Excluding $4.4 million of securities gains in the previous quarter and a $4.3 million gain from the sale of a building and parking garage in San Antonio in 1Q13, fee income increased by $2.0 million or 2.8%. The increase reflected seasonally higher insurance commissions and fees, and higher trust and investment fees, partially offset by lower service charges on deposit accounts. Meanwhile, expenses remain well-controlled in DBRS’s view, despite being up $9.7 million or 6.7% QoQ. Higher expenses primarily reflected a $7.2 million write down of certain land and other assets. Additionally, a $5.1 million increase in employee benefits reflecting higher payroll taxes and expenses related to the Company’s 401(k) and profit sharing plans also contributed to the increase.

Asset quality continues to be highly manageable. NPAs inched up modestly QoQ and represented 1.15% of loans, at March 31, 2013, up just 1 basis point from the prior quarter and down 33 bps from a year ago. Although NCOs increased a fairly substantial $11.8 million, QoQ, the increase was driven by a $15.0 million charge-off reflecting one C&I borrower that filed for bankruptcy during the quarter. Despite the effect of this one credit, DBRS anticipates that Cullen/Frost’s credit quality will remain strong. As such, DBRS considers the allowance for loan loss reserves to be adequate at 1.02% of period-end loans.

DBRS views Cullen/Frost’s funding profile to be a key strength, underpinned by its large core deposit base and low loan to deposit ratio. Finally, the Company’s capital position remains solid, and provides ample loss absorption capacity, especially given its historically well managed asset quality. At March 31, 2013, Cullen/Frost’s tangible common equity ratio was 8.00% and its Tier 1 capital ratio was 14.23%.

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

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