Merger Prospects Spur Interest in Cullen/Frost

Culle/Frost Bankers of San Antonio survived the oil bust and the real estate debacle, but it may not outlast industrywide consolidation.

Frequently an object of merger speculation, the bank saw an 11% run-up in the price of its shares in the 10 days that ended Monday. Trading volume since an Oct. 15 earnings announcement has been three times normal, noted SNL Securities, Charlottesville, Va.

A Texas Survivor

"It's the last viable Texas banking company," said Frank Anderson of Stephens Inc., a Little Rock, Ark., investment firm. Of the 10 largest Texas banks, only Cullen/Frost, with $3.3 billion of assets, has escaped being swallowed by an out-of-state predator or shut down by regulators.

In the absence of any new rumors on acquirers, analysts tied the recent surge to the earnings report, which indicated modest improvement in asset quality.

The per-share earnings for the third quarter - 6 cents - ordinarily would not impress investors. But in a turnaround, asset quality is watched more closely, Mr. Anderson said. And Cullen/ Frost on June 30 reported a decline in nonperforming assets to $115 million, from $123 million, due to a $9 million reduction in foreclosed property.

Merger Play

The stock was trading at $12.25 on Tuesday, off 75 cents from a high that it reached Friday. Meanwhile, heavy trading activity underscored the appeal to merger-minded investors of independently owned, midsized banks in states with recognized growth potential.

Acquirers may want to move in now while the stock price is still significantly lower than book value per share, $19.15.

But any acquirer also faces a significant hurdle: Cullen/Frost chairman T.C. Frost and other so-called 5% owners, who control nearly 44% of the bank's shares. Institutions, whose shares would be key to any unfriendly takeover, own less than 34% of the stock.

Chairman T.C. Frost may prefer to forestall a merger if he looks at the improvement and concludes "that the light at the end of the tunnel is true light, and not another freight train coming," Mr. Anderson said.

Moreover, the Frost and Cullen families revel in running a locally owned and managed institution. And the promising results could encourage management to resist offers that would force them to share the benefits of a rebound.

Nevertheless, Mr. Anderson said, the incentive to find a partner may be stronger once loan demand improves and the San Antonio bank finds itself competing with the much larger players in the ???.

Merger talk has centered on companies that are trying to establish themselves in Texas, such as BankAmerica Corp. and Comerica, and on companies such as NCNB, Banc One, and Chemical Banking Corp., that might like to beef up already substantial presences, said Mark Lynch, analyst for Bear Stearns Inc. The New York investment house maintains a buy recommendation on the stock.

Major banks gained in share price in morning trading and generally hung onto the giants as the broader market fell back in the afternoon. Comerica and Manufacturers National Corp. continue to rise on Monday's merger announcement. In late afternoon trading, Comerica was at $49.25, up $1.625. Manufacturers was up $1.50, to $38.875.

PHOTO : The Last Holdout Source: DB Technology Inc., Reuters

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