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Cullen/Frost Reports Strong Quarter

The Texas bank reported another solid quarter.



) - Texas-based

Cullen/Frost Bankers

(CFR) - Get Report

reported third-quarter net income on Wednesday of $55 million, or 90 cents a share, slightly ahead of the 88-cent consensus estimate of analysts polled by Thomson Reuters.

Earnings increased from $52.9 million, or 87 cents a share the previous quarter, and $47.8 million, or 79 cents a share, during the third quarter of 2009.

The biggest factor in the earnings improvement was a decline in noninterest expenses. The year-over-year earnings improvement was driven by a decline in the provision for loan losses, which was $10.1 million during the third quarter, compared to $13.6 million during the third quarter of 2009. During the second quarter, the provision was even lower, at $8.7 million.

Overall earnings performance has been quite consistent, with a third-quarter return on average assets (ROA) of 1.25%, compared to 1.26% in the second quarter and 1.17% a year earlier. The return on average equity (ROE) was 10.49%, compared to 10.67% in the second quarter and 10.07% in the third quarter of 2009.

Third-quarter net interest income before the provision for loan losses was a tax-adjusted $155.7 million, improving from $155.1 million in the second quarter and $150.3 million in the third quarter of 2009.

Cullen Frosts's net interest margin - essentially the difference between a bank's average yield on loans and investment securities and its average cost for deposits and borrowings -- was 4.04 % during the third quarter, declining from 4.12% the previous quarter and 4.18% a year earlier.

In its earnings release, the company said the margin was "pressured in this near zero rate environment although that pressure has been mitigated somewhat by the benefits of quality municipal bond investments made since the last half of 2009." That being said, Cullen Frost's margin compares favorably against the national aggregate net interest margin of 3.76% for all U.S. banks and thrifts, as reported by the

Federal Deposit Insurance Corp.


In-line with the industry trend for regional banks, deposits increased 6% year-over-year to $14.3 billion as of September 30, while non-interest bearing deposits grew 4% to $9.2 billion.

CEO Dick Evans said he was "pleased to see good growth in net interest income," as the company continued to "see the benefits of lower deposit costs and having deployed some of our liquidity into quality investments during the last half of 2009."

Credit quality was strong for the current overall credit environment, with nonperforming assets - including nonaccrual loans and repossessed real estate - making up0.95% of total assets as of September 30, compared to 0.93% the previous quarter and 1.02% in September 2009. Net charge-offs - loan losses less recoveries - totaled $9.4 million during the third quarter, compared to $8.6 million in the second quarter and $13.5 million in the third quarter of 2009.

The ratio of net charge-offs to average loans for the third quarter was a low 0.46%. While third quarter industry aggregates won't be available for several weeks, the national aggregate net charge-off ratio in the second quarter was 2.64% according to the FDIC. Cullen/Frost's loan loss reserves covered 1.57% of total loans as of September 30.

Despite the low charge-off rate, Cullen/Frost added a small amount to loan loss reserves during the third quarter, which directly impacted earnings and ran counter to the trend for the largest U.S. bank holding companies, including


(C) - Get Report

, which released $1.8 billion from loan loss reserves;

Bank of America

(BAC) - Get Report

, which also released $1.8 billion from reserves;

Wells Fargo

(WFC) - Get Report

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, which released $650 million from reserves; and

JPMorgan Chase

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, which released $1.7 billion from reserves during the third quarter.

Cullen/Frost reported a Tier 1 leverage ratio of 8.67% and a total risk-based capital ratio of 15.46% as of September 30, well above the 5% and 10% required for most banks to be considered


by regulators. The tangible common equity ratio was 9.15%.

Cullen/Frost's shares closed at $52.46, Tuesday, returning 8% year-to-date. Out of 15 analysts covering the company, three rate the shares a buy, 11 have hold ratings and one analyst recommends investors sell the shares.

Based on the quarterly dividend payout of 45 cents, the shares have a yield of 3.43%.


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Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.