DBRS: Cullen/Frosts 4Q13 Earnings Increase QoQ on Higher Revenues

Summary

• Cullen/Frost reported a 4% increase in 4Q13 net income available to common shareholders to $60.6 million, compared to $58.4 for 3Q13 driven by revenue growth partially offset by higher expenses.
• DBRS views Cullen/Frost’s 4Q13 results as reflecting continued growth in both loan and deposit customers.
• DBRS rates the Company’s Issuer & Senior Debt rating at A with a Stable trend

DBRS, Inc. (DBRS) considers Cullen/Frost Bankers, Inc. (Cullen/Frost or the Company) 4Q13 earnings as reflecting the realization of positive results stemming from the Company’s efforts to build new customer relationships. Higher earnings this quarter equated to a return on average assets of 1.02% and return on average common equity of 10.21%, modestly better than 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 existing pipelines.

As with most banks, the current low rate environment continues to pressure earnings. However, Cullen/Frost’s NIM was fairly resilient in 4Q13 relatively flat from 3Q13. Additionally, QoQ growth in earnings assets combined with improving investment securities yields through reinvestment helped offset the margin drag of additional liquidity generated from robust deposit growth. Spread income should continue to benefit from sustained loan growth and reinvestment of the Company’s sizeable liquidity position. The non-interest income growth QoQ reflected increases in a number of categories and notably higher trust and investment management fees. Meanwhile, expenses, while up QoQ, remain well-controlled in DBRS’s view.

Cullen/Frost’s asset quality remains sound reflecting manageable levels of NCOs and declining NPAs. As such, DBRS considers the allowance for loan loss reserves to be adequate at 0.97% of period-end loans. Finally, the Company’s capital position remains solid, and provides ample loss absorption capacity, especially given its historically well managed asset quality. Following the close of the pending WNB Bancshares acquisition, capital levels will decline from current levels, although remaining solid. When the acquisition was announced, Cullen/Frost estimated that, at close, pro forma TCE/TA will be approximately 7.5% and Tier 1 common will be 11.6%.
Cullen/Frost’s relatively high ratings reflect its resilient earnings, sound asset quality, strong liquidity, and ample capital base. 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. The ratings are tempered by the Company’s geographic concentration in Texas, as well as its moderate CRE concentration.

DBRS rates Cullen/Frost’s Issuer & Senior Debt at A with a Stable trend. DBRS views Cullen/Frost as well positioned within its rating category.

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

[Amended on December 23th, 2014 to remove unnecessary disclosures.]