GOING ITS OWN WAY
Frost Bank says branches still matter.
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
“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.
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.”
Frost announced in late October it will nearly double the number of branches it has in the region.
Green says he learns a lot from employees about business conditions.
Barbara Robinson shows her excitement as CEO Phil Green pays a visit.