DBRS Comments on the Q1 2009 Earnings of Cullen/Frost Bankers, Inc. – Senior at “A”

DBRS commented today on the Q1 2009 earnings of Cullen/Frost Bankers, Inc. (Cullen/Frost or the Company). The Company reported earnings of $45.0 million for the quarter, down from $52.9 million for the prior quarter and $52.8 million for Q1 2008. On a sequential quarterly basis, earnings were negatively impacted by a 27 basis point (bps) narrowing in net interest margin (NIM) to 4.33%, a 12.3% increase in provisions for loan loss reserves, 41% of which was for reserve build and a 4.8% increase in non-interest expenses. Partially offsetting was the Company’s higher levels of insurance related fees and service charges on deposit accounts. On an annual quarter basis, earnings were pressured by a 34 bps narrowing of NIM, a 1.4 times increase in provisions for loan loss reserves and a 7.9% increase in non-interest expenses. Somewhat offsetting were an 11.2% increase in average loans and a 27% increase in service charges on deposits. The Company’s credit fundamentals continue to support the current rating levels – “A” for senior obligations – and Stable trend.

The deteriorating economy has led to a considerable escalation in asset quality erosion throughout the banking universe. However, Cullen/Frost’s credit deterioration has been somewhat more restrained. At March 31, 2009, the Company’s non-performing assets (NPAs) increased to 1.45% of total loans, from 0.88% at December 31, 2008 and 0.46% at March 31, 2008. Meanwhile Cullen/Frost’s net charge-offs (NCOs) remained modest at 0.26% of average loans, up slightly from 0.25% for the prior quarter and 0.20% for Q1 2008. DBRS notes that the bulk of the sequential quarter increase in NPAs reflected homebuilder exposures. NCOs were mostly commercial and industrial, commercial real estate and consumer loans. Cullen/Frost’s allowance for loan loss reserves was adequate at 1.3% of total loans. DBRS believes that further erosion in the Company’s asset quality is likely, given the rapidly declining economy and the downturn in the energy sector. Nonetheless, DBRS believes that Cullen/Frost can readily absorb the likely incremental loan losses from earnings without impairing its capital and franchise strengths.

On a linked quarter basis, Cullen/Frost’s NIM narrowed by 27 bps to 4.33%, reflecting the steep decline in interest rates during December 2008 and decreasing asset yields outpacing decreasing funding costs.

Cullen/Frost’s liquidity position remains strong, as core deposits account for approximately 122% (at December 31, 2008) of net loans. A good-quality securities portfolio and access to the Federal Home Loan Bank (FHLB), underpin the Company’s liquidity profile.

Unlike most banks, Cullen/Frost did not seek funds from the U.S. Department of the Treasury, Capital Purchase Program. Cullen/Frost’s capital metrics remain ample as evidenced by its March 31, 2009, Tier 1 and Total risk-based capital ratios of 10.64% and 12.98%, respectively.

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

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.