DALLAS — San Antonio-based Cullen/Frost Bankers Inc.’s proposed acquisition of Fort Worth-based Summit Bancshares Inc. could pave the way for additional investment banking business by Frost’s new negotiated underwriting division.
The boards of Frost and Summit have approved the merger, though the agreement is predicated on the approval later this year by shareholders for both banks. It is expected that the merger, valued at about $363 million, would not be completed until late 2006.
Cullen/Frost is the parent company of Frost Bank, which operates 93 locations throughout Texas, with business centered around its home base of San Antonio as well as Houston, Austin, the Dallas-Fort Worth Metroplex, and south Texas.
Frost Bank had $11.6 billion in assets as of March 31, while Summit — which offers full-service commercial and consumer banking in Tarrant County and has 12 offices — currently has assets of $1.1 billion.
In April, Frost Bank added negotiated underwriting to its slate of commercial and consumer banking products, investment and brokerage services, insurance products, and investment banking services.
“We certainly hope that the merger with Summit will increase our underwriting business,” said Bill Sirakos, a senior executive vice president with Frost Bank’s capital markets group. “This is a fairly new business area for us, but we do see a lot of potential for growth.”
Sirakos said the bank in April hired longtime JPMorgan banker Rogelio Rodriguez to head up its negotiated underwriting efforts.
“Rogelio is very well known and very well respected, especially here in south Texas,” he said. “He brought a wealth of contacts with him — he knows everyone. He’s also a workhorse — we know he can get these jobs done.”
So far, Frost has served as a co-manager on Bexar Metropolitan Water District’s $55.9 million deal June 9 and as co-senior manager on a June 26 transaction by the Schertz-Cibolo-Universal City Independent School District.
“We have several additional underwritings in the pipeline now,” said Sirakos, adding that the contracts for those transactions have not been finalized. “One of those could be our first lead manager position, in a large deal for a school district.”
Sirakos said that while the bank had been involved in competitive municipal debt transactions, it opted to instead pursue negotiated financings.
“We had been doing competitive underwritings for a number of years,” he said. “But that business had been drying up – we were really seeing many more deals going to market in negotiated pricings.”
The competitive underwritings in which Frost Bank had participated were largely bank-qualified deals.
“Banks were our main clients, so we really focused on that,” Sirakos said. “Most of that debt was for school districts, so it was really clean paper. Now, however, we are focusing on doing a lot more non-bank-qualified work.”
The acquisition of Summit, as well as Frost Bank’s own public finance department, is expected to yield more referrals for the underwriting division.
“Our public finance division does not do underwriting or financial advisory services,” Sirakos said. “They focus on offering traditional banking services and cash management services to the public sector. They are also actively pursuing depository contracts.”
Because the broker-dealer arm of the bank must be separate from the commercial banking enterprise, underwriting services are under the bank’s capital markets umbrella.
“Under the rules of the [Municipal Securities Rulemaking Board], the underwriting division has to be in a separately identified department,” Sirakos said.
That division could be expanded in the near future, he added.
“I have approval to hire another banker, either in Houston or in the Dallas-Fort Worth area,” Sirakos said. “Part of that depends on where we can best use the person, while the rest of it depends on where the best person is. We obviously want someone very knowledgeable, but it’s not going to be just about how many deals that person can bring to market — it’s also going to be the right person for Frost. We need someone with integrity, with a good attitude toward his work and the other people here.”
While financial advisory work is not in the bank’s current plan, that line of business may be pursued in the future.
“Rogelio is networking with financial advisers at other firms to help us get into deals,” Sirakos said. “But if it is advantageous for us to move forward in that line of business, we will do it. It could give us more bargaining leverage that would allow us to get into more deals.”
Sirakos pointed out that while he does not believe that an FA should underwrite deals for clients, serving clients in that capacity could allow the bank to cement relationships with other banks that would, in turn, offer Frost Bank underwriting jobs.
“This is a relationship business,” he said.
In the merger negotiations, Lehman Brothers served as Frost’s financial adviser, while its legal adviser was Sullivan & Cromwell LLP. Summit’s FA was Keefe, Bruyette & Woods Inc., and its legal adviser was Bracewell & Giuliani LLP.
Cullen/Frost earlier this year acquired Alamo-based Alamo Bank of Texas and Dallas-based Texas Community Bancshares Inc. In 2005, it acquired Houston-based Horizon Capital Bank.
Frost National Bank was originally chartered in 1868 in San Antonio. In 1977, it merged with Houston-based Cullen Bank and began a pattern of growth and acquisition that has since made it the largest bank based in Texas.
