DBRS Confirms Cullen/Frost Bankers, Inc. – Senior at A: Trend Stable

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

Despite a narrowing margin, and moderate increase in credit costs, CFR’s franchise remains on solid footing. When most banks have experienced rapid deterioration in credit quality, due to the declining economy, CFR’s credit erosion has been relatively moderate. The Company’s ratings reflect its solid and sustainable earnings, sound asset quality, ample capital and strong liquidity.

Although CFR’s franchise has a geographic concentration in Texas, it has benefited from this characteristic, given the State’s relatively solid demographics versus the country as a whole. Indeed, although the state is not immune to the national recession, its impact on Texas has been somewhat more measured.

Notwithstanding the declining economy, the Company generates solid earnings, reflecting its healthy loan yields, low-cost funding and adequate fees and commissions. Supporting the Company’s low cost funding is its robust and defensible core deposit base. Profitability indicators – ROA, ROE, risk adjusted return and NIM – are all above respective medians for banks similarly rated by DBRS. Although DBRS anticipates that asset quality will continue to deteriorate, CFR’s core earnings should comfortably absorb the additional credit costs.

DBRS comments that commercial loans represent the overwhelming majority of CFR’s loan portfolio. This portfolio is well diversified among various industries and only two industries represent more than 5% of loans. The energy sector represents the largest industry concentration at 10% of total loans, and is primarily a function of the significant presence of oil and gas interests in Texas. Exposure to the energy sector is predominantly with production related companies and of a secured nature.

CFR’s loan portfolio is somewhat less granular, due in-part to long term customers who require increased levels of funding and banking services. DBRS comments that the granularity risk is mitigated, to some extent, by the Company’s conservative underwriting standards, which are evidenced by its sound asset quality measures. At March 31, 2009, the Company’s non-performing assets (NPAs) amounted to a relatively moderate 1.45% of total loans, and Q1 2009 net charge-offs (NCOs) were modest at 0.26% of average loans. DBRS notes that both metrics fall at the low end of those of its similarly rated peers. Although the Company has a high weighting of CRE loans as a percentage of its loan portfolio and equity, the overwhelming majority are commercial mortgages. Furthermore, DBRS comments that roughly 58% of CRE exposures are “owner occupied”. DBRS considers such loans to be more akin to commercial and industrial loans rather than CRE loans, in that the borrowers’ capacity to repay the loans could be supported by more than one source of cash flow.

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

CFR’s liquidity position remains strong, as core deposits accounted 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, CFR did not seek funds from the U.S. Department of the Treasury, Capital Purchase Program. CFR’s capital metrics remain ample as reflected 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.