Cullen/Frost Bankers (CFR) is proving that a little vanity can be a good thing.
Earlier this week the San Antonio company announced it would acquire WNB Bancshares in Odessa, Texas, for $220 million in cash and stock.
"This bank looks very much like a little Frost Bank and that made it very attractive to us because you can't do that unless you are a real relationship bank," Dick Evans, the chief executive of the $22.6 billion-asset Cullen/Frost, said in an interview on Wednesday.
The deal is Cullen/Frost's first since 2006, when it made Summit Bancshares its fourth bank acquisition over a two-year period.
Evans says he wasn't on a hiatus, just waiting for the right deal.
"If you listen to our conference calls for the last six years, the message has been the same. We are aggressive lookers and conservative buyers. That hasn't changed," Evans says. "We certainly looked at almost everyone that has sold in Texas" in recent years.
It is unsurprising that Evans found the right deal in bank similar to his own, analysts say.
"It makes a lot of sense that they would buy something like that they are pretty traditional," says Scott Valentin, an analyst with FBR Capital Markets. "They've said that they aren't looking to stray from the beaten path."
During Cullen/Frost's second-quarter conference call, Valentin asked if the company was considering buying a nonbank, an increasingly popular deal type. Evans responded candidly.
"We are not going to go buy a bunch of loans or go out and get in the national leasing business or something crazy like that," Evans said in the July call. "I have watched a lot of people blow up that way, and I don't believe in it."
Buying something similar to its own business didn't come cheaply, however. The deal is priced at 280% of WNB's tangible book value, making it one of the highest if not the highest disclosed deal price this year.
"We buy quality banks," Evans says. "If you buy something that is worth something you are going to pay up for it."
Beyond its similarities, the deal does provide the company with a few new tricks. WNB and its eight branches spread out among western Texas are in the Permian Basin, an oil-rich area that provides the United States with 14% of its oil. Energy giant Halliburton describes the region on its website as potentially holding approximately 29% of the future oil reserves in the U.S.
Cullen/Frost is already an accomplished energy lender, but didn't previously have operations in that part of the state.
WNB may have been partially motivated to sell because energy credits are larger and the $1.4 billion-asset company may have been restrained by its size, Valentin says. WNB's loans were down year over year and, at $656 million, were relatively flat from the first quarter.
WNB executives could not be reached for comment, but C.K. Lee, a managing director at Commerce Street Capital in Dallas who represented the family-owned company, said its decision to sell was equal parts leadership-succession planning and recognition that it needed to get bigger.
"Given the lack of succession, they thought it was as good of a time as any to find a partner and move forward with someone else's operation," Lee says. "It is a very typical community bank story."
Lee says that the pricing is also not an outlier or at least it shouldn't be.
"In M&A, we've been looking for a return to normalcy," Lee says. "Strong banks that are making a lot of money are going to be able to fetch strong premiums. That's how it should be. Price is coming back a little bit. It starts in Texas, but should flow through the rest of the economy."
Investors liked the deal, which was announced after the market closed on Tuesday. Cullen/Frost's stock rose nearly 2% on Wednesday, but moderated a bit on Thursday, down 0.88% to $72.71. The company has traded at more than twice its tangible book value of $28.70 since January.
More deals could be on the way, Evans says, while echoing his core M&A tenet every analyst interviewed for this story could recite it.
"What's my appetite for further deals?" Evans says. "We are an aggressive looker and a conservative buyer."