Amid a deluge of steep profit declines and losses this earnings season, Cullen/Frost Bankers Inc. of San Antonio reported profit increases for the fourth quarter and the year.
Chairman and chief executive Dick Evans said the performance was indicative of Cullen/Frost's conservative approach, its location in Texas growth markets, and decisions it made long ago to get out of the mortgage and credit card businesses.
"We have been fortunate to avoid the major problem areas in the current banking environment," Mr. Evans told analysts in a conference call Wednesday.
Net income for the quarter rose 13%, to $54.7 million, or 93 cents per diluted common share, matching analyst estimates. For the year net income rose 9.5%, to $212.1 million, or $3.55 per diluted common share. Analysts had expected $3.61.
The $13.5 billion-asset Cullen/Frost said it benefited from $1.2 billion of seven-year interest rate swap agreements signed Oct. 23.
Mr. Evans said in an interview Wednesday that "the swap helped us neutralize our balance sheet and give us the ability through rates going up and down to really see the benefit of running the company better."
Chief financial officer Phillip Green told analysts on the call that the swap arrangements contributed $241,000 of positive cash flow in the fourth quarter and are contributing about $3.2 million this quarter.
In the interview, Mr. Evans said several recent initiatives, such as revamping checking account products and a push to make Cullen/Frost more appealing to prospective customers, helped earnings. In the fourth quarter deposits rose 7.5% from the year-earlier quarter, to $10.2 billion. The company said same-store sales for new accounts rose in the upper single digits last year. Efforts to boost loan volume are paying off as well, the CEO said. Cullen/Frost bankers made 14% more calls in 2007 to prospective borrowers, and the pipeline increased 22% for the year. Total loans, mostly commercial, were $7.5 billion at yearend, up 14.4%.
In the interview, Mr. Evans said Cullen/Frost continues to watch sectors that may become threats to its loan portfolio. "We learned very clearly in the 1980s that if you address a problem before it becomes too serious, it will reduce your losses significantly," he said.
Of particular concern are home builders and strip center developments, though Mr. Evans was quick to say he thinks his company's portfolios are showing little to no weakness. Cullen/Frost has $510 million committed to home builders, with about 50% outstanding, and $185 million committed to strip center developments, with $115 million outstanding.
On Dec. 31, nonperforming assets were $29.8 million, 48% less than a year earlier. But compared with the third quarter, nonperformers increased 13%, or $3.2 million in the fourth quarter. Home builders accounted for $4.4 million of the nonperformers in the quarter, Mr. Evans said during the conference call. Cullen/Frost also foreclosed on $2 million worth of a builder's loan on Jan. 1. On the subject of underperforming markets, Mr. Evans said, "I think the important thing is to address those quickly and turn them around, which I think we've been successful at doing."
On Wednesday, in a broad rally for bank stocks, Cullen/Frost's shares rose 10.7%.
