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CFR AT A GLANCE

P/E ► 15.8 AVG EV/EBITDA ► 9.75 AVG ROA ► 2% AVG ROE ► 11.1% AVG Debt to Equity ► 7.78 AVG Interest Coverage Ratio ► 3.35 AVG

 

 

 

 

 

 

With total consolidated assets of $15.0 billion^[1], Cullen/Frost Bankers (NYSE:CFR) is the 5th largest bank and financial holding company in Texas, behind J P Morgan Chase, Bank of America, Wells Fargo and Banco Bilbao Vizcaya.^[2] The company's revenues come from two sources: a) interest on loans provided; and b) fees for services rendered. In 2008, Cullen/Frost Bankers had net interest income of $534 million and total non-interest income of $287 million, up from $519 million and $268 million respectively in 2007.^[3] In addition to the company's wholly-owned commercial and consumer banking subsidiary called Frost Bank, Cullen/Frost Bankers also has subsidiaries in the insurance, brokerage and securities industries. However, 91.2% of the company's net income in 2008 came from its Banking segment.^[4]

The company's primary source of funds are deposits, of which 65.7% are interest bearing and 34.3% are non-interest bearing.^[5] As of 31 December 2008, 60.7% of these funds were invested in loans and 24.3% in securities like treasuries and bonds.^[5] In the first 3 quarters of 2008, Cullen/Frost Bankers return on average assets was 1.53%, compared to 0.43% for Bank of America, 1.21% for Wells Fargo and 0.35% for J P Morgan Chase.^[6][7][8][9] Unlike its competitors, Cullen/Frost Bankers isn't geographically diversified and operates exclusively in the state of Texas. As a result, economic conditions in this state and the United States as a whole significantly impact demand for the company's products and services, sources of funding and the ability of its customers to repay loans.^[10]

Company Overview

Headquartered in San Antonio, Cullen/Frost Bankers operates exclusively in the state of Texas and offers clients a wide range of financial services, including commercial and consumer banking, trust and investment management, insurance, brokerage, investment banking and treasury management services.^[11] Although the company has many subsidiaries, its Banking segment accounted for 91.2% of the company's net income in 2008.

From late 2005 to mid 2008, Cullen/Frost Bankers expanded its presence in major Texan cities by acquiring Horizon Capital Bank (Houston), Texas Community Bancshares (Dallas), Alamo Corporation of Texas (Rio Grande Valley), Summit Bancshares (Fort Worth), Prime Benefits (Austin) and, most recently, R.G. Seeberger Company (Dallas).^[12][13] Despite the financial crisis, Frost Bank opened 7 new financial centers in 2008 and plans to open more in Austin, Houston, San Antonio and Dallas in 2009.^[14]

Business and Financial Metrics

Total Revenue and Net Income for Cullen/Frost Bankers from 2004 to 2008.^[3]

Segment Contribution to Net Income of Cullen/Frost Bankers in 2008.^[15]

In 2008, Cullen/Frost Bankers had total interest income of $676 million, total non-interest income of $287 million and net income of $207 million.^[3] While total interest income decreased 12.1% from $769 million in 2007, the company's net interest income actually increased 2.9% from $519 million in 2007 to $534 million in 2008.^[3] The company attributed this to a 4.7% increase in the average volume of interest-earning assets partly offset by a 14.9% decrease in the average yield on these assets.^[16] Similarly, total non-interest income increase 7.1% from $268 million in 2007.^[17] The company attributed this increase to a 10.9% increase in trust fees, an 8.5% increase in service charges on deposit accounts and a 6.7% increase in insurance commissions and fees.^[18]

Business Segments

Cullen/Frost Bankers has 3 operating segments: i) Banking; ii) Financial Management Group; and iii) Non-Banks.

Banking (86.7% of total revenue and 91.2% of net income in 2008)^[15]

The Banking segment covers commercial and consumer banking services, Frost Insurance Agency and Frost Securities.^[15] Commercial banking services are provided to corporations and other business clients and include a range of lending and cash management products. Consumer banking services include direct lending and depository services. Frost Insurance Agency provides insurance brokerage services to individuals and businesses. Frost Securities provides advisory and private equity services to middle market companies. In 2008, the Banking segment's contribution to net income was $189 million, down 5.7% from $200 million in 2007.^[4] The company attributed this decrease to 158% increase in its provision for possible loan losses and 5.2% increase in total non-interest expenses.

Financial Management Group (13.0% of total revenue and 14.5% of net income in 2008)^[15]

The FMG segment covers fee-based services within private trust and retirement services in addition to personal wealth management and brokerage services.^[15] In 2008, the FMG segment's contribution to net income was $26.9 million, down 1.7% from $27.3 million in 2007.^[19] The company attributed this decrease to 5.2% increase in total non-interest expenses.^[19]

Non-Banks (-4.2% of total revenue and -1.3% of net income in 2008)^[15]

The Non-Banks segment covers the parent holding company and other insignificant non-bank subsidiaries that, for the most part, have little or no activity.^[20] The parent company's main activities include direct and indirect ownership of banking and non-banking subsidiaries as well as the issuance of debt and equity. In 2008, this segment's net loss was $8.6 million, down 45.2% from $15.6 million in 2007.^[4] The company attributed this decrease to the absence of one-off expenses from 2007 and a decrease in interest payments for its debt borrowings.^[19] A net loss for this segment is not unusual as it does not earn any income and has historically posted losses.

Key Trends and Forces

The company hedges against interest rate fluctuations

U.S. interest rates over time

In 2008, Cullen/Frost Bankers entered into an interest rate swap contract covering a total notional amount of $120 million designed to protect quarterly interest payments on the company's debentures from fluctuations in the 3-month LIBOR.^[21] In 2007, Cullen/Frost Bankers entered into a similar contract covering a total notional amount of $1.2 billion designed to protect the company's monthly interest income from a rolling portfolio of variable-rate loans.^[21] As a result, the company's balance sheet has become more interest-neutral and interest rate fluctuations are expected to have a lesser impact on its net interest margin and net interest spread.^[22]

Commercial and industrial loans make up 85.8% of the company's loan portfolio

Loan Portfolio Breakdown for Cullen/Frost Bankers in 2008^[23]

As of 31 December 2008, Cullen/Frost Bankers had 60.7% of its funds invested in loans and 85.8% of this $8.8 billion loan portfolio consisted of commercial, industrial, construction and commercial real estate loans. 37.8% of these loans are due in less than 1 year and 39.5% are due after 1, but within 5 years.^[24] Although these loans are typically larger and earn better interest rates than consumer and residential real estate loans, the company also views them as being riskier.^[25][26] Nonetheless, the company has largely been insulated from the subprime lending crisis and credit crunch because just 0.9% of its loan portfolio consists of 1-4 family residential mortgages.^[24] As a result, Cullen/Frost Bankers was one of only a handful of regional banks to turn down government assistance from the Troubled Assets Relief Program (TARP).^[27]

The company's earnings rely on the energy industry and the state of Texas

Loans to any given sector do not constitute more than 10% of the company's total loan portfolio. However, the energy industry has a relatively higher concentration of funds with $854 million or 9.7% of the company's loans tied directly to this sector.^[28] This represents the company's largest concentration in any given industry. The next largest concentration is medical services with $441 million or 5.0% of the company's loans.

As mentioned earlier, Cullen/Frost Bankers operates exclusively in the state of Texas and, more specifically, in the areas of Austin, Corpus Christi, Dallas, Fort Worth, Houston, Rio Grande Valley and San Antonio regions.^[29] The company's dependence on these metropolitan areas can best be seen from each area's contribution to total deposits. As of 31 December 2008, Cullen/Frost Bankers had just 3.1% of its deposits coming from areas outside the 7 listed above.^[29]

The company's non-performing assets increased 161% in 2008

In 2008, Cullen/Frost Bankers' total non-performing assets increased 161% from $29.8 million to $78.0 million.^[30] In addition, total accruing past due loans increased 104% from $59.6 million to $121.8 million.^[30] The company attributed these increases to credit relationships with residential construction and land development organization as well as economic conditions in 2008 and overall growth in its loan portfolio. To combat these increases, the company's provision for possible loan losses increased 157% from $14.7 million to $37.8 million.^[31]

Competition

Chief among the company's competitors are Bank of America (BAC), J P Morgan Chase (JPM) and Wells Fargo (WFC). In terms of deposits, Cullen/Frost Bankers ranks 5th in Texas with $10.8 billion or 2.7% of Texas' $393 billion in total deposits.^[2]

• Bank of America (BAC) is one of the world's leading bank and financial holding companies with net interest income of $34.4 billion, non-interest income of $31.8 billion and net income of $15 billion in 2007.^[32] Within Texas, Bank of America competes with Cullen/Frost Bankers in both the Banking and FMG segments. With total deposits of $59.9 Billion in Texas, it ranks 2nd in the state with a 15.3% market share.^[2]

• J P Morgan Chase (JPM) is one of the largest financial institutions in the United States and the leader in Texas by total deposits. With its 19.6% market share and $77.0 billion in deposits, it operates 750 branches throughout the state.^[2] In 2007, it earned had net interest income of $26.4 billion, non-interest income of $45.0 billion and net income of $15.4 billion.^[33]

• Wells Fargo (WFC) is the 5th largest financial institution in the United States with over 6,000 branches and the 3rd largest ATM network in America. In Texas, it holds an 11.5% market share with total deposits in 2008 of $45.1 billion.^[2] In 2007, it had net interest income of $20.9 billion, non-interest income of $18.4 billion and net income of $8.1 Billion.^[34]

References

1. ↑ CFR 10-K 2008 Item 1 Pg. 3
2. ↑ ^{2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7} First National Bankshares Investor Relations
3. ↑ ^{3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9} CFR 10-K 2008 Item 6 Pg. 31
4. ↑ ^{4.0 4.1 4.2} CFR 10-K 2008 Item 7 Pg. 47
5. ↑ ^{5.0 5.1} CFR 10-K 2008 Item 7 Pg. 50
6. ↑ CFR 10-Q 2008 Item 2 Pg. 25
7. ↑ BAC 10-Q 2008 Item 2 Pg. 70
8. ↑ WFC 10-Q 2008 Item 1 Pg. 2
9. ↑ JPM 10-Q 2008 Item 2 Pg. 19
10. ↑ CFR 10-K 2008 Item 1A Pg. 21
11. ↑ CFR 10-K 2006 Item 1 Pg. 3
12. ↑ CFR 10-K 2007 Item 1 Pg. 3
13. ↑ CFR 10-Q 2008 Item 1 Pg. 8
14. ↑ Cullen/Frost CEO expects company will weather recession, San Antonio Business Journal.
15. ↑ ^{15.0 15.1 15.2 15.3 15.4 15.5} CFR 10-K 2008 Item 8 Pg. 120
16. ↑ CFR 10-K 2008 Item 7 Pg. 40
17. ↑ CFR 10-K 2008 Item 7 Pg. 41
18. ↑ CFR 10-K Item 7 2008 Pg.42
19. ↑ ^{19.0 19.1 19.2} CFR 10-K 2008 Item 7 Pg. 49
20. ↑ CFR 10-K 2007 Item 8 Pg. 108
21. ↑ ^{21.0 21.1} CFR 10-K 2007 Item 8 Pg. 110
22. ↑ CFR 10-K 2007 Item 7 Pg. 38
23. ↑ CFR 10-K 2008 Item 7 Pg. 51
24. ↑ ^{24.0 24.1} CFR 10-K 2008 Item 8 Pg. 90
25. ↑ CFR 10-K 2007 Item 1 Pg. 19
26. ↑ CFR Annual Report 2007 Pg. 3
27. ↑ Regional banks see sweet spot in Collin County, Dallas Business Journal.
28. ↑ CFR 10-K 2008 Item 7 Pg. 53
29. ↑ ^{29.0 29.1} CFR 10-K 2008 Item 7 Pg. 68
30. ↑ ^{30.0 30.1} CFR 10-K 2008 Item 7 Pg. 58
31. ↑ CFR 10-K 2008 Item 7 Pg. 63
32. ↑ ^{32.0 32.1} BAC 10-K 2007 Pg. 16
33. ↑ J P Morgan Chase & Co Financial Statements, Reuters
34. ↑ ^{34.0 34.1} WFC Annual Report 2007 Pg. 74
35. ↑ JPM 10-K 2008 Item 6 Pg. 26