DBRS Confirms Cullen/Frost Bankers, Inc. at “A”: Stable

DBRS, Inc. (DBRS) has today confirmed the ratings of Cullen/Frost Bankers, Inc. (Cullen/Frost or the Company) and its operating bank subsidiary, Frost Bank, including Cullen/Frost’s Issuer & Senior Debt rating of “A”. The trend for all ratings remains Stable. The ratings action follows a detailed review by DBRS of the Company’s operating performance, financial fundamentals, and future prospects.

The confirmation of Cullen/Frost’s ratings with a Stable trend reflects its resilient earnings, sound asset quality, strong liquidity, and ample capital base. The ratings also consider the Company’s geographic concentration in Texas, as well as its moderate CRE concentration. DBRS views Cullen/Frost as well positioned within its rating category.

The Company’s consistent earnings generation reflects its solid commercially-oriented banking franchise, ample low-cost funding base and conservative management profile. Credit costs, which were elevated but remained manageable throughout the financial crisis, have declined substantially. Despite ongoing net interest margin pressure, the Company’s spread income (on a tax equivalent basis) has modestly trended up during the last three quarters, driven mostly by growth in the loan portfolio. Going forward, DBRS anticipates that Cullen/Frost’s spread income will remain pressured by the protracted low-interest rate environment despite accelerating loan growth.

Fee income, driven mostly by the Company’s deposit, trust and insurance businesses consistently contribute about one-third of total revenues. While Cullen/Frost’s fee income has been pressured by the regulatory environment, including Reg. E and the Durbin amendment (interchange fees); improvements in trust and insurance commissions have provided an offset. Finally, the Company’s expense base is well managed and its expense ratio compares favorably to that of its similarly rated peers.

Despite its moderate concentration in commercial real estate, Cullen/Frost’s asset quality remained relatively sound during the financial crisis. The Company’s conservative underwriting standards, risk management profile and concentration in Texas, which fared better during the crisis than much of the country, helped Cullen/Frost successfully navigate through the economic downturn. Nonperforming assets (NPAs) as percentage of loans and foreclosed assets peaked in 3Q09 at a relatively manageable 2.58% and have since declined to 1.15%. Additionally, losses remained well contained as quarterly net charge-offs (NCOs) peaked at 0.95% in 4Q09 and averaged just 0.30% over the last five quarters. Also helping to insulate the Company from credit risk is its large, low credit risk investment securities portfolio, which represented approximately 40% of assets at March 31, 2013. The portfolio also includes a large amount of municipal securities primarily political subdivisions or agencies in Texas. Almost 74% of these securities are guaranteed by the highly-rated Texas Permanent School Fund or secured by U.S. Treasury securities.

Although the economy of Texas has become more diverse and has recently outperformed the vast majority of states, the Company is heavily concentrated within Texas, especially San Antonio, making it more susceptible to local economic conditions. Positively, DBRS considers Cullen/Frost’s deeply entrenched market presence in San Antonio to be defensible, even against its largest competitors. The Company also has a smaller but growing presence in other major Texas MSAs, including Dallas-Fort Worth, Houston, and Austin. A 2012 agreement with Valero Corner Stores substantially increases the Company’s ATM presence in the state adding convenience for its banking customers statewide without the higher cost of traditional branches.

DBRS views the Company’s funding profile as strong, driven by a sizable core deposit base that accounts for a very high 195% of net loans (DBRS calculated). Cullen/Frost continues to exhibit solid deposit growth, as it proactively seeks new customers. Additionally, a sizeable 40% of deposits are non-interest bearing. The Company has also maintained a strong liquidity position with 14% of assets in cash and equivalents as well as the aforementioned securities portfolio (which could be pledged or sold). Rounding out its liquidity profile is access to the Federal Home Loan Bank and Federal Reserve.

The Company’s capital position is ample, and provides solid loss absorption capacity and financial flexibility. At March 31, 2013, Cullen/Frost’s tangible common equity ratio was 7.97%, tier 1 ratio was 14.23% and total risk-based capital ratio was 15.44%. The Company’s consistent capital generation allows for the support of both organic growth and the return of capital through a common stock dividend, while maintaining a substantial capital position.

Cullen/Frost Bankers, Inc., a bank holding company headquartered in San Antonio, Texas, had $22.5 billion in assets at March 31, 2013. DBRS notes that the Company’s bank subsidiary Frost Bank was previously The Frost National Bank. The bank’s name was changed in June 2012 in conjunction with a change from a national bank to a state bank charter.

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, DBRS Criteria: Rating Bank and Bank Holding Company Trust Preferred Securities, DBRS Criteria: Rating Bank Preferred Shares & Equivalent Hybrids, and DBRS Criteria: Rating Bank Subordinated Debt & Hybrid Instruments with Discretionary Payments. These can be found at: http://www.dbrs.com/about/methodologies

[Amended on August 28, 2014, to reflect actual methodologies used]

The sources of information used for this rating include company documents, the Federal Reserve, the Federal Deposit Insurance Corporation 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
Rating Committee Chair: William Schwartz
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.