Push across state boundaries and grab for share. Wheel and deal for every buck. And don’t get caught in the middle ground between megabanks and community banks. To all such conventional wisdom, San Antonio’s Cullen/Frost Bankers, Inc., won’t bow.
By Steve Cocheo, executive editor,
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Frost National Bank, a one-state, mid-sized, 140-year-old operation thrives in Texas, guided by CEO Dick Evans and the bank’s “blue book”
In his office in the Frost Bank Tower in downtown San Antonio, Dick Evans keeps two reminders of what he considers important to his 37-year career at $13.5 billion-assets Cullen/Frost Bankers, Inc. and its Frost National Bank.
Both items—each quite different from the other—serve as illustrations of what leads to the kind of performance that consistently produces strong numbers for the company. Such performance placed it 17th in the ABA Banking Journal financial rankings for 2007 for institutions over $3 billion in assets. This after 140 years of up and down cycles, and in an age when pundits say there’s no room for anyone in the middle ground of bank size.
“We live in the middle range,” Evans, chairman and CEO of the bank and holding company, told an analyst meeting earlier this year. “We’re kind of the last of the Mohicans. We’re large enough to do 90% of what the megabanks do, and yet we can act like a community bank.”
Cullen/Frost attained record profits in 2007, a year of fallen profits or even losses for other large banking firms.
And when most of the large commercial bank operations in Texas have out-of-state corporate parentage, the publicly traded holding company (CFR; NYSE) and its Frost National Bank, remain Texan.
But back to those items we mentioned. You’ll find the first in a breakfront cabinet, where you’ll see two gorgeous presentation-grade Winchester repeating rifles. By the butt of one rifle, stands a single bullet.
It’s no ordinary round. It’s made of silver. And Evans, 61, says it’s there as a reminder from his corporate counsel, Stan McCormick, that “there are no silver bullets, Dick.”
“What is important is not that we have not had any magic formulas, because we didn’t, but that we have stayed true to the kind of bank we are, one based on relationships,” says Evans. This is a key Cullen/Frost attitude.
The book of Frost
The second reminder, which you’ll usually find on Evans’ credenza, while less dramatic looking, is even more meaningful.
It is a dog-eared copy of the Cullen/Frost “blue book.” Reaching behind him, during an interview, Evans grabs a large plastic sleeve. The pamphlet inside has seen hard use over the years. There are numerous underlinings, margin notes, and addenda.
Evans holds up this battered item with a touch of pride.
“This is not something we put on the shelf, and just hope somebody uses it,” says Evans. “It is the way we live our lives. I like to remind people that we didn’t get some hot-shot consulting firm to come in and write this. We spent a year asking ourselves, ‘How did we manage to stick around for more than 100 years?’”
Actually, Evans, like every Cullen/Frost employee, could have himself a crisp, clean copy of The Frost Philosophy. But, as he thumbs through his personal edition, he says, “My old book is tattered and torn, but I prefer it. As we bought banks, there are notes here on how we introduced our philosophy to them; notes on different points I wanted to make at the time.”
The booklet itself, though only a handful of pages long, speaks volumes for Frost Bank employees. The contents are short and sweet: “The Frost Philosophy,” spelled out by Evans, the first head of the bank who did not come from the founding Frost family.
The booklet begins, “At Frost, everything we do begins with this book…”, and it includes the company mission statement and a summary of the organization’s core values. (You can read The Frost Philosophy in our digital edition, accessible from www.ababj.com.)
“People can have good philosophies and good culture, but the real trick is living it every day,” says Evans. “That’s what we try to do. We’re far from perfect, and we never will be perfect.”
Evans says it’s quite common for him to quote or refer to passages from the blue book when speaking to fellow officers and employees about new services or pending deals, and, also, for others to quote to him.
“You know what I love?” he continues. “I love it when somebody says, ‘Wait a minute, Dick. You’re not pulling the wagon.’ That’s healthy.”
Walking the Frost walk
Evans, a native of the small Texas town of Uvalde, 80 miles south of San Antonio, is plainly dedicated to Frost Bank. He’s spent his entire banking career there, starting in its training program in 1971, after a stint as a national bank examiner.
His father had died when he was young, and a local banker became the young man’s mentor. When he finished college, unsure what to do with himself, the banker suggested giving banking a try, with federal examination work as an introductory course.
“‘If you get lucky, maybe a bank will hire you’,” Evans recalls his mentor telling him. “‘And after you’ve worked at a bank for ten years, you’ll know if you’re going to be a banker’.”
When he began, Frost Bank had $350 million in assets. Today, the company tops $13 billion. Its trust department has more than $25 billion in assets under management—it manages over six million acres of oil and gas interests, among other things.
The bank began as an offshoot to a family business. Colonel Thomas Claiborne Frost, whose service in the Confederate Army legally barred him from resuming his law practice after the Civil War, saw Texas as a place to start fresh. He’d spent two years running a profitable freight line, and put money into his brother’s failing general store and auction business. What started as store credit accounts, and the equivalent of inventory finance among Texas sheepherders holding out for better prices for their wool, evolved into Frost Bank. (Excerpts from the bank’s history books appear in the magazine’s 100th Anniversary section at www.ababj.com.)
Although the bank in time went public, until Evans became bank president in 1985, there was always a Frost at the helm.
But Evans is all but considered a Frost by family patriarch Tom Frost, who today is senior chairman. (Four of Frost’s sons hold other posts in the Cullen/Frost organization.)
“Dick Evans thinks like us, and he has the same principles,” says Frost, 80. “Having Dick Evans here is every bit as good as having family here.”
Banking by relationships
Part of the heritage, taken quite seriously at Cullen/Frost, is an insistence that good banking is not a matter of transactions and “doing deals” piecemeal.
“We don’t do business with anybody we don’t know, where there isn’t a natural relationship,” says Evans.
Echoing a long tradition at the company, Evans puts it succinctly: “We’re in the people business. Money comes in tens and twenties, but the thing that makes the difference starts right here in our own organization. It’s how we get along with each other. Only then can we relate to our customers.”
While his office is far from the big banking floor at San Antonio headquarters, Evans is known for his fieldwork.
For more than a decade, he’s made it his yearend holiday practice to get out of the bank and literally visit every employee in all 105 offices.
“I shake their hands, and tell them ‘thank you’ for the year and wish them a happy holiday,” says Evans. “That is very rewarding to me, because I do care about them as individuals and for what they have done for the company. Quite frankly, without them, we are nothing. And so, if we can’t take time to spend some time with them and express that, well, then there would be something wrong with us.”
Another field effort concerns customers and prospective customers. No hard sell for Evans. He sees the banker’s role as cultivating the customer relationship first, and then finding how the bank can meet their needs. “Sales” isn’t a dirty word to him. But it’s a matter of nuance.
“We’re not product peddlers,” insists Evans. “We’re in the business of building relationships with customers, helping them to be more successful in accomplishing their objectives.”
“Relationship banking” is a term much bandied about and much abused, confused, and defused. But Cullen/Frost executives are true believers in relationship banking when characterized along these lines: It’s not a matter of trying to be all things to all people, but, rather, being all the essential things to the people with whom you’ve decided to create a relationship with.
Our words. But Evans concurs. “It’s often hard to explain something so simple to people,” he says. “If you have good employees and listen to what the customers’ needs are, you work hard to fulfill those needs. It works out. You get a good return for your shareholders. You’ve just got to make sure you don’t focus on the money, but instead on the customer.”
Cullen/Frost’s business comprises 50% commercial customers and 50% retail customers on the deposit side, and 85% commercial on the asset side. “So we’re both a retail bank and a business bank,” says Evans.
This is reflected in its branches, which are expected to serve both markets and therefore tend to be larger than the average branch. Newer branches have “Frost Rooms,” featuring Texas photos and mementoes, internet access, and more.
Customer contact critical
What Evans brings to this customer focus is himself, literally. He believes the weakness of megabanks is that the leaders, the decisionmakers, don’t see customers.
“They’re not bad,” he says, “but they can’t see what we can because we’re actually looking people in the eye, dealing with real customers. I don’t want to sit in this office and think I understand. I want to go out and talk to real customers, to support our staff.” Evans says he gets out to make calls with Frost bankers at least every six to eight weeks.
Indeed, this attitude of keeping contact with customers is formalized in many areas of the organization. On the consumer side, for instance, in an effort instigated nearly a decade ago by Paul Olivier, group vice-president and chief consumer banking officer, Frost bankers reach out regularly to customers to see how a particular product is doing for them, or simply to see if they are happy with service.
“It’s kind of a Stevie Wonder call,” jokes Pam R. Thomas, executive vice-president, marketing. “You know, ‘I just called to say I love you’. We can’t just throw products at them all the time.” Through this and other efforts, Frost maintains a consumer household retention rate of 91%.
Survival then and now
Survival is a concept Evans is well-acquainted with. During the 1980s, when even conservative Cullen/Frost felt substantial pain as the oil and commercial real estate markets collapsed in Texas, he spent much of his time, essentially, as “chief workout officer.”
He says someone asked him a while back if he hadn’t considered quitting, in those black days.
“I was floored,” says Evans. “Not only did I never think about quitting, I didn’t think about thinking about it. I really felt responsible to help us fix things, to get us out of the ditch.”
Some bankers today know little of that period, a maelstrom that chewed up big chunks of Texas banking. Many large native banks wound up being acquired, one way or another, and much of the Texas banking industry today is still controlled by out-of-state companies. So much so that an ongoing line in Frost advertising is: “We’re from here.” Frost was the only top-ten Texas bank of the 1980s to survive the period intact.
“I believe the reason we didn’t go broke or have to sell out in the 1980s was because we had a relationship bank,” says Evans. “When you looked at the numbers, it said we would never make it. But we took it one day at a time and worked with our customers to work through these situations.”
Reflecting on those days, Evans says that “we’re much better bankers today because of the pain we went through in the 1980s.”
He pauses, and adds, “Don’t misunderstand me. I don’t want to travel that road again. It was more than I needed in one lifetime.”
In contrast to the 1980s, Texas today is faring better than the economy as a whole in the current downturn.
“I think we’ll continue to have job growth,” say Evans, and “I think we’ll have fewer residential real-estate problems than the rest of the nation. Because of the fundamentals of our state, Texas will do better than the rest of the country. But Texas will adjust, too.”
The 1980s, and a period of commercial credit trouble in the early part of this decade, led to stronger credit discipline for the bank. Evans calls it a “concurrent system.”
There is a credit officer and a relationship officer assigned to commercial accounts. As exposure rises, signoffs are required at different levels. At $10 million and above, the relationships come before the only credit committee the bank has, a group of senior credit officers. And Evans himself must sign off on anything over $10 million.
Once again, in keeping with the bank’s philosophy, “it’s about how you manage the relationship,” says Evans. “It’s not about the credit officer saying ‘no.’ The credit officer is participating with the relationship officer to make sure that we make better decisions.”
There is no board-level involvement in individual credit decisions.
“I believe that management should run the company,” says Evans. “And along with that comes responsibility. I’m not confused about that part.”
Tied up in Evans’ references to Texas is the fact that Cullen/Frost is quite content sticking to its home state. Out-of-state acquisitions and forays for new customers, are not in the cards, according to Evans. Actually, there are some cities in Texas where Evans feels Cullen/Frost still needs to make a bigger dent.
In April the company launched a major print advertising campaign—marking a shift from a strong TV effort—devoted to reaching out to Texans who still don’t have a touch of Frost. The aggressive campaign features headlines like: “Texas is the 10th largest economy in the world. We’re its bank”; “Nothing embarrassing to report for the 560th consecutive quarter”; and “There’s a reason your parents didn’t name you ‘Acct#2299046’. ”
“It’s a big state, it’s growing, we’ve got a great brand, and we don’t need to go anywhere else,” says Evans. “We’ve got work beyond my lifetime to do right here.”
Several timely exits
The other, more direct aspect of survival and success lies in Cullen/Frost’s own strategies and choices, based to a great degree, again, on the belief in relationship banking.
For example, in 2000, the company took a contrarian road. Even as many commercial banks were aggressively building up activity in residential mortgages, Cullen/Frost decided to stop making home mortgages, and let that business run off.
(The company continues to make home equity lines and loans, which benefit from Texas laws barring overleveraging of equity borrowers, and it continues to finance home builders. There have been some nonperformers in the latter portfolio; the bank isn’t immune to broad trends.)
Evans acknowledges that the 2000 move made management look prescient, but declines to take credit for a crystal ball. With the strong emphasis on secondary market sales, management felt mortgages had lost their relationship-building features, and become a financial commodity with too little profitability.
Similarly, the bank had dropped out of the credit card business two decades ago, seeing that it was becoming a scale business, and not one where relationship building took place.
Any time a business begins to resemble a commodity, Frost Bank begins to get itchy. Indirect lending is another field that management decided to exit, in recent years, for much the same reasons. “There came a time when there were so many people in the business that we could no longer build an ‘A’-quality portfolio,” says Evans. “So we chose to exit.”
Staples that still work
With more and more banking services appearing to be moving towards commoditization, isn’t there a risk that Cullen/Frost will find itself operating in a shrinking circle?
Evans doesn’t credit that notion overmuch. He says that rather than dwelling too long on the businesses that Cullen/Frost has exited, people should spend some time focusing on the ones they entered.
One example is the bank’s extensive leasing business. Also, while it has expanded into nontraditional banking services, the bank continues to do well with some business banking staples that demand custom tailoring. Almost half of the loan portfolio consists of C&I loans, for instance, which Evans notes breed demand deposits. (The bank’s largest industrial concentration is in energy.)
Nearly 60% of the bank’s real estate loans are owner-occupied. “That builds relationships,” says Evans, “and brings in the deposit side and drives fee income, just as C&I loans do.”
The bank enjoyed a 4.69% net interest margin in 2007. By contrast, banking companies tracked in Lehman Brothers’ Mid-/Small-Cap Bank Monitor (including Cullen/Frost), showed an average NIM of only 3.64% in 2007.
About 42% of 2007 revenues came from fees, and about half of that came from fees on commercial customers and correspondent banks. Frost still maintains a very healthy correspondent operation among 289 Texas banks, with much of the program devoted to check processing. Indeed, Cliff McCauley, executive vice-president, correspondent banking, says this business line gives Frost Bank the efficiency of a payment volume of a bank of $50 billion—about three times its actual size.
“This is a purposeful complement to our main franchise,” McCauley explains.
Insurance can be humbling
Cullen/Frost has built major operations in trust, wealth management, investments, and insurance. Ask Dick Evans about Cullen/Frost’s experience in insurance, and lessons learned in that business, and he gives you a quick, ironic grin.
“When you show up on a Monday morning with 17 people walking out of your insurance business in one group, it’s very humbling,” Evans explains. At one point, those employees, who had joined the organization through an acquisition of an insurance firm, decided to pull up stakes.
For a company that takes pride in its people skills, it was a bad mark, one that bugs Evans. “We hadn’t really built a relationship,” he says. “But at the end of the day we learned a lot. I’m sure they’re better off, and we’re better off.” Frost first got into the insurance business nine years ago.
Among the course adjustments made in recent years is an emphasis, in the company’s marketing, on its triple-tier offerings, to better publicize how much Cullen/Frost can bring to its customers. Nowadays signage and other corporate identity is being amended, where it makes sense, to shift from a “Frost Bank” motif to one of “Frost: Banking: Investments: Insurance.”
At the end of 2007, insurance commissions and fees represented about 11.5% of total Cullen/Frost noninterest income. Of that slice, 62% came from commercial lines, 25% from employee benefits, and 13% from personal lines.
A key element here, Evans says, is a reasonable expectation for referrals.
“Somebody in executive management could say, ‘We’re in the insurance business, so refer all insurance leads to our agency, or we’re going to kill you’,” Evans says. “So they send it all over and 80% is not what your agency is interested in.”
Cullen/Frost takes a different tack, and, says the CEO, “I’m proud to say we now close better than 60% of the referrals from the bank.”
Like its banking business, about 80% of the insurance clientele are businesses (including both commercial accounts and employee benefit accounts). The operation does a big volume in commercial property and casualty coverage.
Date before marrying
Besides organic growth, Cullen/Frost grew through a steady stream of acquisitions over the years. Since 1993 the company has been through 19 banking combinations and eight insurance combinations, contributing to an increase in office locations over that period of nearly 290%, and a rise of 322% in asset size.
Cultural fit is key, says Evans. “I do what I call a lot of ‘dating’ with those organizations that I think would fit us culturally.” Frost Bank’s correspondent program helps build some familiarity.
Over time, he says, “if it looks like we’re together philosophically, then we’ll sit down and start working out numbers.”
For Cullen Frost itself, the word “independence” seems against Evans’ grain.
“I don’t know how to tell our people to go out and be ‘independent’,” he explains. “But I do know how to help coach our group to build value and take care of customers. If we give our customers more value every day, in the long run, we’ll be rewarded.”
He adds: “You know, having a market cap of over $2 billion with no one owning over 5%, we have to perform. And it’s been in the best interests of our shareholders that we continue to do what we’re doing.”
So, Cullen/Frost continues to strive to bring the best of the big and the best of the small to the customers of the middle. Will there come a time that the organization can no longer keep one foot in each of the two worlds? Evans says that’s a possibility. “But I think it’s a long way away for us.” BJ
The electronic version of this article available at: http://www.nxtbook.com/nxtbooks/sb/ababj0508/index.php?startid=26
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