Business Context and Reporting Period
Company: Cullen/Frost Bankers, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: A financial holding company headquartered in San Antonio, Texas, providing commercial and consumer banking, trust and investment management, insurance, and brokerage services primarily within Texas markets.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Net Income | $48.97 million | $154.29 million |
| Earnings Per Share (Diluted) | $0.82 | $2.61 |
| Total Assets | $14.06 billion | N/A |
| Total Loans | $8.60 billion | N/A |
| Total Deposits | $10.62 billion | N/A |
| Net Interest Income | $134.74 million | $395.94 million |
| Non-Interest Income | $77.32 million | $218.12 million |
| Provision for Loan Losses | $18.94 million | $29.27 million |
| Allowance for Loan Losses | $107.11 million | N/A |
| Shareholders' Equity | $1.61 billion | N/A |
| Return on Average Assets | 1.44% | 1.53% |
| Return on Average Equity | 12.39% | 13.23% |
Material Changes vs. Prior Period
- Net Income Decline: Net income decreased 13.3% ($7.5 million) for the three months ended September 30, 2008, compared to the same period in 2007. For the nine-month period, net income decreased 2.0% ($3.1 million).
- Provision for Loan Losses: The provision increased significantly by $13.2 million (227%) for the quarter and $18.2 million (164%) for the nine months compared to 2007. This increase was primarily driven by a $10 million provision for probable loan losses related to Hurricane Ike impacts in Houston and Galveston.
- Non-Interest Expense: Increased $9.4 million (8.3%) for the quarter and $14.8 million (4.3%) for the nine months year-over-year, driven by higher salaries, FDIC insurance expenses, and Hurricane Ike-related costs.
- Net Interest Income: Increased $4.1 million (3.1%) for the quarter and $8.0 million (2.1%) for the nine months, despite lower market interest rates, due to increased loan volumes and a lower cost of funds.
- Non-Performing Assets: Total non-performing assets rose to $55.2 million (0.64% of total loans) from $26.4 million (0.35%) at September 30, 2007, reflecting an increase in non-accrual loans to $45.5 million.
Guidance, Outlook, and Risks
- Market Conditions: Management notes significant volatility and disruption in national and international financial markets, reduced business activity, and falling home prices. The company is assessing participation in the TARP Capital Purchase Program and the Temporary Liquidity Guarantee Program but has not made a definitive decision.
- Interest Rate Outlook: The company believes it is reasonably possible that federal funds and prime rates will be further reduced in the foreseeable future. The balance sheet is currently more interest-rate neutral due to hedging activities.
- Hurricane Ike Impact: The company recognized approximately $1.0 million in expenses and a $10 million provision for loan losses related to Hurricane Ike. Future provisions may change based on the assessment of probable losses in impacted areas.
- Student Loans: The company discontinued the origination of student loans for resale in the second quarter of 2008 and expects to complete the sale of the remaining portfolio in 2009.
- Regulatory Capital: As of September 30, 2008, both Cullen/Frost and Frost Bank met all capital adequacy requirements and were considered "well capitalized."
Investor Verification Checklist
- Hurricane Ike Exposure: Verify the adequacy of the $10 million provision for loan losses and the potential for future charge-offs in the Houston and Galveston markets.
- Non-Performing Assets Trend: Monitor the rapid increase in non-accrual loans (from $24.4 million to $45.5 million year-over-year) and the ratio of allowance to non-accrual loans (235.53%).
- TARP Participation: Confirm the company's final decision regarding participation in the Troubled Asset Relief Program and its impact on capital structure and executive compensation.
- Interest Rate Sensitivity: Review the effectiveness of the $1.2 billion interest rate swap portfolio in mitigating the impact of further interest rate declines on net interest margin.
- FDIC Assessment Costs: Track the impact of potential increases in FDIC deposit insurance premiums announced for 2009 on future non-interest expenses.