DBRS Confirms Cullen/Frost Bankers, Inc. at “A”; Maintains Stable Trend and Withdraws Ratings

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. Subsequent to the confirmation, DBRS withdrew the ratings of Cullen/Frost. The decision to withdraw the ratings was made at DBRS’s discretion.

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 commercial real estate concentration (CRE). DBRS considers the Company’s recent operating results as reflecting successful ongoing efforts to build new customer relationships through a disciplined calling program. Cullen/Frost continues to display solid fundamentals, indicative of both the strength of its franchise and the Texas market. Highlights of recent quarters include sustained growth in average loans and deposits, and expected continued loan growth, given existing pipelines. 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 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. Fee income, driven mostly by the Company’s deposit, trust and insurance businesses, consistently contributes about one-third of total revenues. Finally, the Company’s expense base is well managed and its expense ratio compares favorably to that of its similarly rated peers.

Cullen/Frost’s asset quality remains sound, reflecting manageable levels of net charge-offs (NCOs) and declining non-performing assets (NPAs). As such, DBRS considers the allowance for loan loss reserves to be adequate at 0.98% of period-end loans. Despite its moderate CRE concentration, Cullen/Frost’s asset quality performed relatively well 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. NPAs as percentage of loans and foreclosed assets peaked in 3Q09 at a relatively manageable 2.58% and have since declined to 0.63%. Additionally, losses remained well contained, as quarterly NCOs peaked at 0.95% in 4Q09 and averaged just 0.31% over the last five quarters. Also helping to insulate the Company from credit risk is its large, high quality investment securities portfolio, which represented approximately 35% of assets at March 31, 2014. DBRS notes that the securities portfolio has a moderate concentration in municipal securities, which are primarily political subdivisions or agencies in Texas. Approximately 69% of these securities are guaranteed by the highly-rated Texas Permanent School Fund or secured by U.S. Treasury securities.

DBRS views the Company’s funding profile as strong, driven by a sizable core deposit base. Cullen/Frost continues to exhibit solid deposit growth, as it proactively seeks new customers. Additionally, a sizeable 41% of deposits are non-interest bearing. The Company has also maintained a strong liquidity position with 21% of assets in cash and equivalents, as well as the aforementioned securities portfolio (which could be pledged or sold).

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 remain solid. When the deal was announced, the Company estimated that, at close, pro forma tangible common equity/tangible assets (TCE/TA), would be approximately 7.5%. At March 31, 2014, Cullen/Frost’s TCE ratio was 7.78%, tier 1 ratio was 14.41% and total risk-based capital ratio was 15.38%. 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 $24.7 billion in assets at March 31, 2014.

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 applicable methodologies include the DBRS Criteria: Support Assessment for Banks and Banking Organisations and DBRS Criteria: Rating Bank Capital Securities - Subordinated, Hybrid, Preferred & Contingent Capital Securities. These can be found on the DBRS website under Methodologies.

The primary 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: 9 December 2013

For additional information on this rating, please refer to the linking document under Related Research.