Cullen/Frost: The Prize Catches Being Eyed By Big Banks

Merger fever has taken hold of bankers. Hoping to grab market share, large banks are shopping among their smaller brethren. Several thousand of the nation's 11,806 commercial banks could be swallowed up in the coming consolidation. True, potential buyers are moving slowly. Lower interest rates and stronger earnings have boosted the value of even weaker banks. But patient investors can still find attractive buyout candidates. The following banks are among those whose stocks generate the most takeover talk.


Veteran banker T.C. Frost steered the institution founded by his great-grandfather, a former Texas Ranger and colonel in the Confederate Army, through the turbulent years after oil prices collapsed in the mid-1980s. Now, with loan losses down, earnings up, and the local economy rebounding, the 64-year-old chairman of San Antonio-based Cullen/Frost Bankers Inc. faces yet another challenge. As the largest remaining independent bank in Texas, Cullen/Frost is extremely vulnerable to a takeover. Every other promising Texas bank of any size has already been gobbled up by one of three out-of-state powerhouses--Banc One, Chemical Banking, and NationsBank.

So far, Frost, who himself owns 3.7% of Cullen/Frost's stock, insists that he isn't interested in selling to an "outlander." But many analysts speculate that a buyout may be just a matter of time. With just $3 billion in assets, the bank will find it tough to compete.

Cullen/Frost's franchise is tempting. With 23 branches, it is one of the leading banks in San Antonio, the third-largest city in Texas. Indeed, it's running neck-and-neck for market share with NationsBank. Cullen/Frost also has banking subsidiaries in Houston, Galveston, Dallas, Austin, and Corpus Christi.

`SCRUBBED CLEAN.' Another selling point is its steadily improving balance sheet. After being buffeted by waves of bad energy and real estate loans, the bank's loan portfolio now looks a lot healthier. Nonperforming assets dropped to 2.87% of total assets at the end of the first quarter from 4% a year ago. "It appears they've scrubbed the deck clean on credit issues," says David S. Berry, associate director of research for Keefe, Bruyette & Woods Inc. Earnings have begun to respond as well. Profits in the first quarter were up almost 60%, to $3.3 million. While Cullen/Frost's overall profitability is well below average, its return onequity increased to 7.4% from 4.7%.

Takeover speculation has sent Cullen/Frost's stock price soaring. After closing 1991 at 15 1/8, the stock is now at 28 1/2, almost four times its 52-week low of 7 1/2. It currently trades at a healthy 145% of book value. Still, some analysts say the stock has further to go. Buyouts of similar banks fetched prices nearly twice book value.

For the moment, Frost says his priority is to win new business for the bank. And he isn't afraid of going head-to-head with the competition. "We've competed with the best banks in the nation before," he says. Trying to beat them, though, may eventually prove a lot less attractive than joining them.

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