Cullen/Frost Bankers: Acquisition Winner

NEW YORK ( TheStreet) -- Cullen/Frost Bankers ( CFR) of San Antonio was the winner among regional U.S. banks on Wednesday, with shares rising 2% to close at $73.37.

The broad indices all saw significant declines, after Macy's ( M) reported disappointing second-quarter results and lowered its full-year guidance, leading investors to fear further disappointment from coming earnings announcements from Kohl's ( KSS), Wal-Mart ( WMT) and, of course, J.C. Penney ( JCP). It is worth mentioning that Macy's earnings were up 7.5% year-over-year, and that during the first half of 2013 the retailer generated positive net cash flow of $664 million, up 4% from a year earlier.

The retail blues offset some very good news from across the water. The European Commission on Wednesday said both the euro area and the European Union had emerged from recession during the second quarter, with gross domestic product growth of 0.3%. GDP growth rates for the two areas improved from -0.3% and -0.1%, respectively, during the first quarter.

The most notable improvement among eurozone nations was seen in Portugal, with GDP growing by 1.1% during the second quarter, after shrinking 0.4% during the first quarter.

Germany's GDP grew by 0.7% during the second quarter, following a GDP during the first quarter. France saw GDP growth of 0.5% during the second quarter, improving from -0.2% the previous quarter. Italy remained in recession, with GDP declining by 0.2% in the second quarter, which was an improvement from a decline of 0.6% during the first quarter.

The United Kingdom saw second-quarter GDP growth of 0.6%, improving from 0.3% in the first quarter.

"Germany and France will be key to continued overall Euro Area growth, but the peripheral countries are still struggling mightily and the recession continues for many in the region," BMO Capital Markets chief economist Benjamin Reitzes wrote in note to clients Wednesday morning. Indeed, while positive growth is anticipated in the second half of this year, any expansion will likely remain lackluster as the Euro Area continues to deal with a debt overhang and structural economic reform," he added.

The KBW Bank Index ( I:BKX) was flat, closing at 65.36, with winners and losers evenly split.

A Nice Texas Deal

Cullen/Frost late on Tuesday announced a deal to acquire the closely held WNB Bancshares of Odessa, Texas, for $220 million. WNB Bancshares is the holding company for Western National Bank, and had $1.4 billion in total assets and $1.2 billion in total deposits as of June 30. The acquiring bank had $22.6 billion in total assets as of June 30.

The deal is subject to regulatory approval and is expected to be completed in January. The companies together announced that WNB's senior management would stay with the combined company. Cullen/Frost chairman Dick Evans said in a press release that WNB's strong presence in the Permian Basin "plays a big role in the Texas economy because it is a driver of the state's surging oil and gas business," with 14% of U.S. oil production and 57% of oil production in Texas.

Based on "a targeted book equity value of WNB of $87 million at closing," Cullen/Frost is paying 2.5 times book value for an acquisition expected to be "approximately 4 percent accretive to Cullen/Frost's 2014 earnings per share before one-time restructuring charges."

That's a high price for a community bank acquisition in the current environment. However WNB Bancshares is a strong performer, with solid credit quality and an estimated tax-adjusted return on average assets (ROA) of 1.1% and return on tangible common equity of 15% in 2012, according to KBW analyst Brady Gailey. In a note to clients late Tuesday, Gailey said that Cullen/Frost was paying 2.8 times tangible common equity to acquire WNB.

"With the stock trading near its all-time high, CFR took advantage of its valuable currency in its first M&A deal since 2006 as it deployed some excess capital in return for modest EPS accretion," Gailey wrote. "Overall, we like the deal," he added, citing the target bank's geographic footprint.

"Additionally, we are becoming less negative given what we view as a lack of negative catalysts going forward," Gaily wrote. "Still, we like the shares as a relative short as we believe CFR will continue to face earnings headwinds going forward, including an expensive hedge rolling off in late 2014 and declining asset yields."

Gailey rates Cullen/Frost "underperform," with a price target of $65.00.

Cullen/Frost is a pricey stock in the current environment for bank valuation, trading for 2.5 times tangible book value, according to Thomson Reuters Bank Insight, and for 18.1 times the consensus 2014 earnings estimate of $4.05.

But as we discussed back in May, Cullen/Frost earned a premium by putting up very solid earnings numbers for 10 years running, even during the worst period of the financial crisis.

With such high valuation, seven of 18 analysts covering Cullen/Frost rate the shares "underperform" or "sell," with only two buy ratings. But long-term investors get what they pay for.

CFR Chart CFR data by YCharts

Interested in more on Cullen Frost Bankers? See TheStreet Ratings' report card for this stock.

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-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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