Why Frost Bank is building and not buying in Houston

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It’s not just big banks that are aggressively adding branches in fast-growing urban markets.

The $31.8 billion-asset Cullen/Frost Bankers has so far added four of 11 branches it plans to open this year in the Greater Houston market. If all goes according to plan — and chairman and CEO Phil Green expects it will — the San Antonio-based parent of Frost Bank will have 25 new branches in that market by the end of 2020.

A number of much larger banks have also been adding branches on a grander scale. JPMorgan Chase, for example, is expanding into new markets, including Boston, Philadelphia and Washington, D.C., with 400 new branches. Bank of America is working on adding another 500 branches. And Fifth Third Bancorp in Cincinnati is beefing up its retail presence in the Southeast with another 100 to 125 new branches.

Frost is sticking closer to home and is targeting Houston for expansion because, Green said, it “is a great business city” where the bank has at least some name recognition. Frost had 32 branches in Greater Houston before its expansion began and the additional branches, to go along with its improved digital capabilities, should help it chip away at the market share dominance of rivals JPMorgan Chase, Bank of America and Wells Fargo.

“As a company…we’re split fairly evenly between commercial and retail business, and our deposit base is about 55% commercial and 45% consumer. That’s really what we’re looking for” in Houston, Green said. “It’s the fourth-largest city in the U.S. and has a broad base of consumers and businesses."

The Houston expansion was one of several topics Green discussed in a recent conversation with American Banker. He also touched on loan competition, the impact of U.S. trade policy on Frost’s clients and managing the margin in a low interest rate environment. The interview has been edited and condensed for clarity.

Q: When you’re hiring new bankers in Houston, are they mostly coming from big banks, small banks or other banks your size?

PHIL GREEN: They’re coming from all kinds of places. We’re hiring some internally, some from small banks, and some from big banks. What we’re really trying to do is get talent in the general market we’re moving into. We’re moving into submarkets that have between $2 [billion] and $4 billion in bank deposits. If you’re going into a community, if you can get someone who’s been there a while, understands the market and people there, that’s the best thing you can do.

How do you feel about M&A versus organic growth?

We’ve probably bought 30, 40 companies in my [Frost] career. We know how to do it. [But] a roll up strategy is not something that we’re interested in as we develop the Houston market. The thing that’s worked better for us over time is when you do an acquisition that puts you in a market that allows you to execute an organic strategy from that point. That’s probably the best use of an acquisition for a company like ours.

What does the competitive environment look like for commercial loans right now?

It’s always tough. I think it’s getting a little worse as we get longer in the cycle and the yield curve has gotten to be more flat. I think you’ve got some more nonbank competition coming in and depending on the particular deal, you can see competition for a structure that wouldn’t fit what we would do. You can see that coming from a large bank, a small bank, a nonbank. It’s coming from everywhere and I think it’s just a tougher market competitively than it was a year ago.

What types of nonbank lenders are you seeing in your market?

You can see private equity deals, some funds, and some [real estate investment trusts] might be involved. I think insurance companies are involved. [A colleague] was telling me about some market share information they’d seen on [commercial real estate] that indicated banks had kept about the same share of transactions year-over-year at just below 40%, but they had seen a pick-up in market share for insurance companies and also funds and REITs. That’s consistent with the activity we’re seeing in the marketplace.

What do you see as the most pressing challenge for a bank of Frost’s size?

What happens with interest rates and what that does to spreads is probably the biggest factor to us. Then the other one would be, what is the economy going to do? Will it continue to be strong or are we going to see it tip over and if it does, what’s the impact to credit?

I would say the economy’s generally strong across the board and our customers have been strong across the board. Credit has almost never been better. It’s a good overall economy right now.

How are you managing interest rates now that the Fed is cutting rates?

Well, there’s no doubt that lower rates will mean tighter spreads. There’s really no getting around that. When the Fed raised rates — they finally got to 100 basis points from zero — that’s when we made the decision to begin increasing our interest rate offerings for our customers on time deposits. That was centered on fairness and trust and really what our brand represents.

We took a lot of heat doing it, but we continued to raise rates as the Fed kept going up. One of the things that’s helped us now is we’ve had the ability to lower rates commensurate with the Fed’s lowering interest rates since we actually had raised rates up to a fair level. It’s given us the ability to defend the margin a little bit.

Are your clients concerned at all about what’s going on with U.S. trade policy and tariffs?

Honestly, we’re still not hearing lots of noise around trade. I was with some customers on a regular call about two, three weeks ago and these were companies in San Antonio. Three of the four customers told me that times had...never been better.

We’re always interested in trade and the impact of trade and tariffs, and that was not their concern. Their big concern continues to be labor, the availability of labor. But they’re not really seeing dislocations in their business at this point because of trade policy.

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