Enlarge This ImageAs he prepared to take the helm of Frost National Bank in 1997, Richard "Dick" Evans spent more than a year working with his mentor and predecessor, Tom Frost, developing a business plan.
The San Antonio bank had made it through the Great Depression and was Texas' only top 10 bank that didn't sell itself or rely on federal assistance during the state's economic downturn in the 1980s. With the bank in the midst of an aggressive expansion through acquisitions across the state in the 1990s, Evans sought to answer a fundamental question: how had Frost survived for more than 100 years?
"What we call the Blue Book, or our philosophy, is really the answer," said Evans, the chairman and chief executive of the bank and its parent, Cullen/Frost Bankers Inc., "and it's a way to guide us as we go forward."
The 15-page handbook is a mix of the company's mission statement and core values, and describes a conservative ethos rooted in strong customer relationships. It's written by employees, not outside consultants.
"We will grow and prosper building long-term relationships based on top quality service, high ethical standards, and safe, sound assets," the mission statement says.
If the Blue Book is Frost's bible, Evans, 65, has been the preacher leading by example. He's never been afraid of making unpopular decisions, or passing up what others saw as opportunities when they didn't align with Frost's values.
In 2000, for example, the company exited the mortgage business when Evans felt that relationships were taking a backseat to profits. It stopped buying indirect auto loans when it became clear that the quality of loans was declining.
And in 2008, when the bank was encouraged to apply for government assistance from the Troubled Asset Relief Program, Evans was the first to tell regulators thanks, but no thanks.
In hindsight, the decisions minimized the bank's exposure to risk in the impending crisis, and gave it a leg up against competitors who would soon scramble to realign their business models.
For his unwavering commitment to the company's conservative philosophy, which insulated it from the effects of the downturn and fostered growth in a time of decline, Dick Evans is one of American Banker's Community Bankers of the Year for 2011.
Evans joined the bank in 1971 as a commercial loan officer after a short stint as a national bank examiner upon graduation from the University of Texas at Austin. He served in management roles in the bank's commercial loan, credit and marketing areas, and was elected president of the bank in 1985.
In 1997, he became the first chief executive who didn't have the Frost surname.
To hear Evans tell it, he hasn't done anything radical. Rather, he put Frost's practices into writing and stuck with what's worked since its founding in 1868.
But the company's performance betrays his modesty.
While many banks have been hunkering down in recent years, Frost has grown its assets by nearly 50% since the end of 2007, to $19.5 billion at the end of the third quarter, largely by beefing up its presence in Dallas, Houston and Austin.
It continues to dominate the San Antonio market, where it holds 9.5% of deposits, despite fierce competition from big banks. (USAA Federal Savings Bank is the city's largest, but most of its customers live elsewhere.) And it has the seventh-largest market share in the state, at 2.81%, according to data from the FDIC.
"I think their competition will tell you a) they're tough to compete against, and b), if you want to get one of their customers, that's a pretty tough thing to do," said Brett Rabatin, an analyst with Sterne, Agee & Leach Inc.
To be sure, Texas wasn't hit as hard by the recession, and banks there have generally outperformed their peers.
Still, few banks have performed as well for as long as Frost, which consistently ranks among the industry's leaders in all key measures. At June 30, it had a 1.24% return on assets, compared to the industry average of 0.86%, and a 10.32% return on equity, compared to 7.65% for the rest of the industry. Nonperforming assets totaled just 0.94% of total assets, compared to an average of 2.75% for the rest of the industry.
Evans, for his part, doesn't get too hung up on quarterly results.
"I always say you can't eat relative success, you can only eat actual success," he said. "We had our second best quarter in the history [of the company] in the second quarter, and that's good, but certainly we have high standards for what we want to accomplish."
It was those standards that led to Evans' decision to get out of the residential mortgage business in 2000.
The bank was making more than $200 million a year on mortgage loans, but management felt that the mortgage business had become commodity and no longer allowed for building the long-term relationships that Frost prized.
For one, pricing had become extremely aggressive. In one instance, the bank offered what it considered a great deal to a major corporation relocating to one of its markets, only to open the newspaper the following week and see that a competitor had offered a much lower rate, said Phil Green, the company's chief financial officer.
Customers looked for the best rates they could find, and it was no longer important to them to have their mortgage where they had their banking relationship, or even who serviced their mortgage, Green said. To stay in the mortgage business and be successful, it seemed the bank could no longer compete on service or relationships — only on price.
"We could have continued to do it, but it would have become a financial transaction as opposed to a relational one," Green said.
Management turned to the Blue Book's mission statement, which left little room for interpretation: "We will grow and prosper building long-term relationships …"
"Now when people look back and say, 'Hey, you got out of the mortgage business in 2000, aren't you smart, how'd you know all that?'" Evans said. "We didn't know anything, we just we wanted to live what we did."
Getting out of the mortgage business was the logical conclusion of being true to the company's values, said Green, but it frustrated some Frost employees who liked being able to offer mortgages to customers,
In retrospect, the decision couldn't have been better. Green gives the credit to Evans.
"He keeps us focused on culture and philosophy, and it's applied in our daily business activities," Green said. "And he's willing — he's strong enough — to take the heat."
In the same year, the bank exited the indirect automobile buying business, which it had been in for nearly 40 years. The company spent decades trying to cross-sell the business with moderate success, and the quality of the loans for sale were declining. Again, management consulted the Blue Book, and referred to the last words of the mission statement: top-quality assets.
"We just don't run the company that way," Evans said. "We believe in a high quality of loan portfolio. We had about $300 million in indirect paper, and we just let it all run off."
The bank now focuses primarily on business lending at a time when every bank is trying to scale back in commercial real estate and into business lending. Competition is stiff, and Frost's loan growth hasn't kept pace with some competitors that observers say are loosening standards to win business.
But "if we did end up going into a double-dip recession, they're going to be in a much better position to weather the storm, just given that they've adhered to their credit standards," Rabatin said.
People who know and work with Evans say one of his primary responsibilities is reminding employees of those standards and keeping the organization focused on its culture. He doesn't just talk about the Blue Book philosophy, he lives it.
And it isn't always easy. Take the Troubled Asset Relief Program. Nearly all the bank's external advisors encouraged Frost to take the money. It was pitched as a cheap source of capital and a public relations boost for the banks that were healthy enough to receive it.
But the bank already had enough capital, and an internal analysis revealed the money would cost more than it originally appeared. Evans turned it down, and set out to reassure investors that the company was stable, it just wasn't interested.
Not long after, as an employee was giving a presentation to investors, the bank was introduced as "the bank that didn't take Tarp money." The crowd gave him a standing ovation.
"It became very much a positive for us to be that bank that is strong on its own," Evans said.
Evans said Frost's strategy going forward is to keep doing what it's doing: focusing on relationship lending, maintaining its strict credit discipline and treating customers fairly.
"The entire management team under his direction really believes that if you do things right, it works out for you," said Dave Beck, Cullen/Frost's chief business banking officer. "Quarter to quarter it may not, but when you look out for the future of our company, it works. That's the way Tom Frost ran it, and I don't think he could have picked a better person to step in for himself."
