GO­ING ITS OWN WAY

Frost Bank says branches still mat­ter.

Houston Chronicle - - TEXAS INC - By John C. Roper

Frost Bank sur­vived the Great De­pres­sion, which caused more than 5,000 banks to close. It was the only Texas bank to sur­vive the 1980s bank­ing col­lapse with­out tak­ing fed­eral as­sis­tance or takeover, and Frost was no­tably the first to de­cline bailout funds dur­ing the 2008 fi­nan­cial cri­sis when many banks were ea­ger to re­ceive then-con­tro­ver­sial gov­ern­ment aid.

Now the 150-year-old Tex­asc-en­tric bank is on the cusp of do­ing what most re­gional banks in the dig­i­tal age have stopped do­ing: adding more branch bank­ing out­lets in the Hous­ton area.

“I see huge op­por­tu­ni­ties in one of the best bank­ing mar­kets in the coun­try,” Cullen/Frost Chair­man and CEO Phil Green said.

Green said he be­lieved Frost’s ex­pan­sion in Hous­ton was past

“Phys­i­cal lo­ca­tions are still re­ally im­por­tant to busi­nesses.” Cullen/Frost CEO Phil Green

due.

“Truth is, we’re prob­a­bly un­der­in­vested in the Hous­ton mar­ket over the last few years, so we’re catch­ing up a bit,” Green said.

Frost an­nounced in late Oc­to­ber it will nearly dou­ble the num­ber of branches it has in the re­gion. Frost in a rapid clip ex­pects to open about a branch a month in 2019 and 2020 as it adds 25 bank­ing fa­cil­i­ties that will cre­ate more than 200 jobs. Frost cur­rently has 34 banks and about 600 em­ploy­ees in the Hous­ton area.

This strat­egy is con­trary to what most re­gional banks are do­ing: shrink­ing their brick-and-mor­tar pres­ence as dig­i­tal bank­ing has many for­get­ting when they last even vis­ited a bank.

Branch bank­ing peaked in 2009 when there were more than 100,000 U.S. branches. It has now dwin­dled to 88,000 as of last fall.

In the last 10 years, Hous­ton has lost 18 bank­ing in­sti­tu­tions and 125 branch banks, a de­cline of about 8 per­cent. That’s slightly less than the 11 per­cent drop seen na­tion­ally over the same time span, ac­cord­ing to the Fed­eral De­posit In­sur­ance Corp., or FDIC. At its peak in 2008, Hous­ton had 1,545 branch banks. By June 2018, that num­ber had dropped to 1,420 branches.

The big­gest 12-month de­cline for bank branches oc­curred be­tween June 2016 and June 2017, when more than 1,700 U.S. bank branches closed. Lucky start

Frost Bank was cre­ated in 1868 in the back of a mer­can­tile store in San An­to­nio by Col. Thomas Clai­borne “T.C.” Frost. A lit­tle more than a cen­tury later, Frost ar­rived in Hous­ton in July 7, 1977, when it merged with Hous­ton-based Cullen Bankers. The lucky date of 7-7-77, when the deal was made, has been lore at Frost ever since.

To­day, it’s one of the 50 largest banks in the United States, with $31.2 bil­lion in as­sets and $36 bil­lion in trust, bro­ker­age and ad­vi­sory as­sets. It’s the largest Texas-based bank­ing com­pany that op­er­ates only in the state and has 4,200 em­ploy­ees. Frost Bank has out­posts in Austin, Cor­pus Christi, Dal­las, Fort Worth, Hous­ton, and the Per­mian Basin and Rio Grande Val­ley re­gions.

In its Oc­to­ber earn­ings an­nounce­ment, Cullen/Frost re­ported that its profit rose 21.3 per­cent, ex­ceed­ing an­a­lysts’ ex­pec­ta­tions.

An­a­lysts be­lieve that’s due in part to their cost ef­fi­ciency.

“They al­ready have a built-in ad­van­tage,” said Dan Bass, manag­ing di­rec­tor at Per­for­mance Trust Cap­i­tal Part­ners. “They’re one of the best in the state when it comes to hav­ing low cost to funds.”

Cost to funds is a key mea­sure of fi­nan­cial in­sti­tu­tions that shows what in­ter­est rate a bank pays on the money it uses in its daily busi­ness, such as for longterm and short-term loans to its cus­tomers.

The av­er­age cost to funds for the 17 pub­licly traded banks in Texas is 0.95 per­cent, while the av­er­age cost of funds of the 30 Hous­ton-based banks is 0.77 per­cent, ac­cord­ing to the FDIC.

Frost pays 0.39 per­cent, which helps it gen­er­ate bet­ter re­turns than many of its com­peti­tors.

An­a­lysts see Frost as a con­ser­va­tive, low-risk bank with a bit of Texas swag­ger. The bank touts its “square-deal-to-cus­tomers” cul­ture in its mar­ket­ing ma­te­ri­als and even dur­ing its earn­ings calls.

In his first call with in­vestors in April 2016 after tak­ing over as CEO, Green told an­a­lysts: “We’re go­ing to stay true to the cul­ture that we’ve had for 150 years.”

Green ap­pears so far to have kept his word. Em­ploy­ees and cus­tomers

Each year around Christ­mas­time, Green vis­its each of the 150 Frost lo­ca­tions in Texas, which in­cludes 134 branches as well as ware­hous­ing and pro­cess­ing cen­ters, with the goal of per­son­ally shak­ing the hand of each of its em­ploy­ees.

Tom Frost, whose great-grand­fa­ther founded the bank, be­gan this tra­di­tion in the 1980s. He led the bank for 35 years and died last year in San An­to­nio at age 90.

“I start on the Mon­day after Thanks­giv­ing and end the day be­fore Christ­mas Eve,” Green said dur­ing a stop in Hous­ton last De­cem­ber at a branch in the Gal­le­ria area on Post Oak Boule­vard.

Green spends sev­eral min­utes with each em­ployee, shak­ing hands and say­ing thank you. He asks about their fam­i­lies and about how busi­ness is go­ing.

“I re­ally learn a lot from our em­ploy­ees dur­ing these,” Green said. He said the em­ployee vis­its keep a pulse on the health of the com­pany.

An­a­lysts say that for most banks, tout­ing cul­ture can lead to eye rolls. Not so with Frost.

“I think one of the things that is note­wor­thy is that their valu­a­tion tends to be a lit­tle higher than their peers, so that tells you that in­vestors value their cul­ture,” said Brett Ra­batin, a se­nior bank­ing an­a­lyst at Piper Jaf­fray who cov­ers South­west banks, in­clud­ing Frost, from Nashville, Tenn.

Ra­batin, who has been cov­er­ing Frost about 10 years, said Frost tends to plan long term more than most of the banks he cov­ers.

For ex­am­ple, Ra­batin said that Frost an­nounced in its sec­ond-

Frost from page B10 quar­ter earn­ings call in 2017 that in re­sponse to rate hikes by the Fed­eral Re­serve, it had in­creased de­posit rates it was pay­ing cus­tomers. Other banks at the time had not fol­lowed suit, and in­vestors ques­tioned why Frost would pay cus­tomers more in­stead of tak­ing an ex­tra bite of profit for it­self.

Frost’s stock lost 5 per­cent of its value that day.

“Peo­ple were say­ing, ‘You don’t need to do that,’ ” Ra­batin said. “And their re­sponse was they were think­ing about the fu­ture.”

When asked about it dur­ing an in­ter­view, Green de­ferred to a note he sent to share­hold­ers later that year in which he told them the move for Frost was a “cul­tural im­per­a­tive.”

“Rais­ing rates was nec­es­sary to pro­vide a square deal to our de­posit cus­tomers,” Green ex­plained in the note. “In­ter­est rates had in­creased 100 ba­sis points, but de­posit rates hadn’t moved in the mar­ket.”

Frost’s strat­egy for in­creas­ing its pres­ence in Hous­ton is based on in­creas­ing de­posits to in­crease loans. Frost be­lieves that new branches in Hous­ton will am­plify its brand to help ac­com­plish that.

“It’s a way for us to en­gage the com­mu­nity,” Green said.

Branches still wanted

Cus­tomers to­day can open bank­ing ac­counts with ease on their mo­bile de­vices with­out ever vis­it­ing a branch. But Green said those cus­tomers who rarely visit a phys­i­cal bank still want to have one close.

“Sixty per­cent of our ac­counts in the Hous­ton mar­ket are within 5 miles of an ex­ist­ing branch to­day,” Green said. “I think this is true of con­sumers: They want to know that a branch is nearby if they need any­thing.”

Busi­ness cus­tomers pre­fer that safety cush­ion as well.

“Phys­i­cal lo­ca­tions are still re­ally im­por­tant to busi­nesses,” Green said, adding that four of the last five busi­ness pro­pos­als he’s re­ceived have come with the ques­tion, “‘Where’s your near­est lo­ca­tion?’ ”

With nearly $240 bil­lion in de­posits, Hous­ton is an at­trac­tive mar­ket for banks, and an­a­lysts say the Bayou City is less com­pet­i­tive than Dal­las, the largest bank­ing mar­ket in Texas with $272 bil­lion in de­posits. The top five banks in Hous­ton, ranked by de­posits, are mega-fi­nan­cial in­sti­tu­tions based out­side Texas: JPMor­gan Chase & Co., Wells Fargo & Co., Bank of Amer­ica Corp., BBVA and Zions Ban­corp.

Chase has the largest foot­print in Hous­ton with a nearly 43 per­cent mar­ket share, $103 bil­lion in de­posits and 193 branches, ac­cord­ing to S&P Mar­ket In­tel­li­gence. Frost is eighth with a 1.9 per­cent mar­ket share, about $4.5 bil­lion in de­posits and 34 branches.

“It’s hard to com­pete with those be­he­moths,” said Dan Bass, manag­ing di­rec­tor of in­vest­ment bank­ing for bank ad­vi­sory firm Per­for­mance Trust Cap­i­tal Part­ners.

Most of the top five banks in Hous­ton have ex­panded through ac­qui­si­tions. While this of­fers a quick so­lu­tion to growth, Bass said there is a down­side.

“You’re in­her­it­ing some­thing you re­ally didn’t have a de­ci­sion in,” Bass said.

Branches live or die by re­la­tion­ships with those in the nearby com­mu­nity.

“There’s been a lot of dis­rup­tion in the mar­ket­place with all of the M&A ac­tiv­ity,” Bass said of the Hous­ton area, adding that bank cus­tomers like the sta­bil­ity of know­ing a bank is not go­ing to be sold.

Texas proud

Tex­ans are well known for their fond­ness for Texas brands. Bass be­lieves this gives Frost an ad­van­tage in Hous­ton.

“Hous­ton has a lot of out-of­s­tate banks, and Tex­ans are very loyal to their state,” Bass said.

Frost has long been a mar­ket­ing part­ner with the San An­to­nio Spurs and re­cently be­gan to spon­sor the Hous­ton Rock­ets.

What Green and an­a­lysts see are 25 sub­mar­kets in Hous­ton with de­posits roughly equal to the size of a San An­to­nio mar­ket where Frost and its hold­ing com­pany, Cullen/Frost Bankers, are based.

The San An­to­nio-area bank­ing mar­ket has about $38 bil­lion in de­posits, ac­cord­ing to S&P Global Mar­ket In­tel­li­gence.

Frost said it ex­pects the new branches to fol­low its cur­rent met­rics: a de­posit base of about 55 per­cent com­mer­cial and 45 per­cent con­sumer.

The branches are go­ing into ar­eas around the perime­ter of Hous­ton as well as in­fill ar­eas in the city, Green said. Frost would not dis­close the lo­ca­tions as it is still ne­go­ti­at­ing for real es­tate, but it said most of the branches will be in ex­ist­ing build­ings.

“If you were to look at the quin­tes­sen­tial tar­get branch 10 to 15 years ago, it was on the frontage road, had lots of mo­tor bank lanes, peo­ple could get in and out and then go home,” Green said. “To­day it’s more about pro­ject­ing your brand, cre­at­ing your com­mu­nity and solv­ing your prob­lem.”

Yi-Chin Lee / Staff pho­tog­ra­pher

Frost an­nounced in late Oc­to­ber it will nearly dou­ble the num­ber of branches it has in the re­gion.

Steve Gon­za­les / Staff pho­tog­ra­pher

Green says he learns a lot from em­ploy­ees about busi­ness con­di­tions.

Steve Gon­za­les / Staff pho­tog­ra­pher

Bar­bara Robin­son shows her ex­cite­ment as CEO Phil Green pays a visit.

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