There are no safe havens in the stock market. Every stock carries risk. But some less than others. This column features stocks that have shown one or more of the following characteristics: less volatility, better earnings, larger market caps, safe and increasing dividends. In these times of turmoil, our goal is to show readers better opportunities for investing with fewer risks.

August 23, 2010 - Cullen/Frost Bankers, Inc. (CFR-NYSE) through its subsidiaries, provides various banking and financial products and services primarily in Texas. The company, through its main subsidiary, The Frost National Bank (Frost Bank), offers various commercial banking services to corporations and other business clients, such as financing for industrial and commercial properties; financing for equipment, inventories, and accounts receivable; acquisition financing; commercial leasing; and treasury management services.

In addition, Frost Bank operates as a correspondent for financial institutions; offers a range of trust, investment, agency, and custodial services for individual and corporate clients; and provides capital markets services, including sales and trading, new issue underwriting, money market trading, and securities safekeeping and clearance.

As of December 31, 2009, the bank operated approximately 110 financial centers in the Austin, Corpus Christi, Dallas, Fort Worth, Houston, Rio Grande Valley, and San Antonio regions of Texas.

In addition, Cullen/Frost, through its other subsidiaries, provides insurance brokerage services; brokerage services, including the sale and purchase of securities; advisory and private equity services to middle market companies; and loans to qualified borrowers. It serves energy, manufacturing, services, construction, retail, telecommunications, healthcare, military, and transportation industries. The company was founded in 1868 and is headquartered in San Antonio, Texas.

Is it a good idea to buy a bank now, given all the bad headlines and low interest rates? It is if you buy one that is increasing profits, has good market share, and low loan losses. CFR has all of these and more.

Yes, times are tough. Most banks are taking huge losses from bad loans. But CFR isn't one of them. Its net charge-offs in 2009 were .58% of average loans while its loan-loss reserve, as of March, 2010, was 1.53%. In other words, loan losses are less than half the reserves the bank has taken to cover them.

One reason for CFR's better results is low interest rates, a seeming anamoly. But when a company's cost of materials (in this case, money in the form of deposits) goes down, usually profits go up. That's what's happening here. CFR's cost of funds have decreased further than the interest earned on assets, leaving a wider spread (known as Net Interest Margin or NIM) between deposits and earning assets. For CFR, with many corporate accounts (which don't receive any interest), the NIM is very healthy. Add to the NIM the non-interest income of fees charged for credit cards, overdrafts, etc., and expenses that are flat with last year, it's more understandable as to why CFR is on the road to higher returns.

One factor working for CFR: Texas has higher than average job creation. That means stronger loan demand (increases in the last 2 quarters) which translates into better NIM. That should also mean more fee type services such as credit cards, overdraft protection, mortgages, etc. Further benefit to the bottom line was lower loan defaults and delinquencies in the second quarter. If that trend continues, the bank can take lower loan-loss reserves.

There is a new expense this year: a technology center. Occupancy, staffing, and equipment will add to costs but very few other, new items are expected. Analysts see expenses increasing around 5% this year with the new center.

One of the appealing attributes of CFR is its stock price. It's been relatively stable over the last 10 years, rising from a low of $23.60 in 2001, hitting a high of $73 in 2008, then dropping at the beginning of 2009 to $35 before rebounding to $60. That may seem like a volatile stock but compared to most other stock charts, it looks very tame. Beta is .53.

Another positive for CFR: the dividend. It's currently $1.80 for a yield of 3.50%. Last year, it was $1.71. In 2008, $1.66. In 2007, $1.54. In 2006, $1.32. You see the pattern. In an interest rate environment where deposits at a bank yield less than 1%, this dividend has appeal. It takes about 53% of earnings to pay. The next dividend will be on September 14. Ex-dividend date is August 30.

More numbers: Trailing P/E is 16 while Forward P/E is 13.60. Price to book is 1.55. Operating margin for the last 12 months was 34.03% while Profit margin was 25.57%. Return on equity was 10.26% and Return on assets was 1.20%. There are 60.68 million shares outstanding with a Float of 52.59%. Insiders own 13.20% of the stock. Institutions own 74.10% of the Float. Value Line gives the stock an A rating for its Financial Strength.

CFR is a solid, Texas lender. As long as the Lone Star State can create jobs, this bank should perform well. The oil disaster in the Gulf of Mexico may hurt business for a while, but that's only one region in the largest state in the U.S. Conservative investors should like the stability of the price and the solid dividend. But expectations for strong price appreciation should be tempered by the fact that the stock is up 50% in the last 15 months.

- Company Web site: www.frostbank.com

- Ted Allrich