DBRS Comments on Cullen/Frost’s 2Q13 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 Issuer & Senior Debt rating of “A”, are unchanged following the release of 2Q13 results. The trend on all ratings is Stable. For the quarter, the Company reported net income of $57.0 million, up from $55.2 million in 1Q13. Earnings equated to a return on average assets of 1.03% and return on average common equity of 9.93%, up modestly from the linked quarter.

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 2Q13, Cullen/Frost reported 1.1% growth in average loans quarter-over-quarter (QoQ) and 0.3% growth in average deposits. Finally, asset quality remains sound reflecting manageable levels of net charge-offs (NCOs) and declining 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 2Q13 narrowing just 2 bps to 3.43%. Additionally, modest QoQ growth in earnings assets combined with improving asset yields and a decline in funding costs helped offset the margin drag of increased levels of liquidity. For 2Q13, Cullen/Frost’s spread income (TE basis) increased just 0.7% QoQ to $174.0 million. Management anticipates some continued pressure on margin, yet spread income should continue to benefit from sustained loan growth and reinvestment of the Company’s sizeable liquidity position.

Second quarter non-interest income was $72.5 million, down 6.8% from 1Q13. Excluding the previous quarter’s $4.3 million gain from the sale of a building and parking garage in San Antonio, fee income was down just $1.0 million or 1.3%. The decrease reflected seasonally lower insurance commissions and fees, partially offset by higher trust and investment fees, interchange and debit card transaction fees and other charges, commissions and fees. Meanwhile, expenses remain well-controlled in DBRS’s view, and declined $6.1 million or 3.9% QoQ. Expenses in the previous quarter also reflected a $7.2 million write down of certain land and other assets.

Asset quality continues to be highly manageable. NPAs declined QoQ and represented 1.10% of loans and foreclosed assets, at June 30, 2013, down 5 basis points from the prior quarter and down 21 bps from a year ago. Additionally, NCOs, which were elevated in 1Q13 as a C&I borrower filed for bankruptcy, decreased a fairly substantial $13.1 million, QoQ and, at 0.16% of average loans are more in line with recent low charge-off levels. As such, DBRS considers the allowance for loan loss reserves to be adequate at 1.01% 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 June 30, 2013, Cullen/Frost’s tangible common equity ratio was 7.90% and its Tier 1 capital ratio was 14.22%. Additionally, the Company currently meets the fully-phased in Basel III capital requirements as recently announced.

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

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