DBRS Comments on Cullen/Frost’s Acquisition of WNB Bancshares, Inc.

Today, DBRS, Inc. (DBRS) has commented that its ratings for Cullen/Frost Bankers, Inc. (Cullen/Frost or the Company), including its Issuer & Senior Debt rating of “A”, are unaffected following the Company’s announcement of definitive agreement to acquire WNB Bancshares, Inc. (WNB). The trend on all ratings is Stable.

DBRS views the planned acquisition as consistent with Cullen/Frost’s strategy to expand its commercial banking presence in Texas. Additionally, WNB appears to have a similar culture and business focus. With $1.4 billion in assets, WNB represents an easily digestible 6% of Cullen/Frost’s $22.6 billion in assets. The purchase price of $220 million will be approximately 66% stock and the remainder in cash, although the final mix will be determined just prior to the closing date. The transaction is expected to close in January 2014 pending customary regulatory approvals and other closing conditions. Cullen/Frost expects the acquisition to be 4% accretive to 2014 earnings prior to one-time restructuring charges estimated to be $6.8 million. DBRS views the expected expense synergies of 15% of WNB’s non-interest expense as reasonable. While the price seems high at 2.8x tangible book value, it is in line with other recent deals in Texas. Additionally, pro forma capital will decline from current levels, although remain solid. The Company has estimated that, at close, pro forma TCE/TA will be approximately 7.5% and Tier 1 common will be 11.6%.

Privately-held WNB is the parent company of Western National Bank which operates 8 branches predominately in the Texas markets of Midland and Odessa. Except for 4Q09, WNB was profitable through the cycle with a manageable level of net charge-offs. Additionally, WNB operates with a similar loan and deposit mix to CFR, emphasizing transaction accounts and C&I loans as well as a focus on the energy sector.

While all acquisitions pose integration risks, the relative small size of the transaction and retention of WNB’s senior management as well as Cullen/Frost’s familiarity with these Texas markets should assuage the level of risk.

Notes:
All figures are in U.S. dollars unless otherwise noted.

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]