Root Strength: Can Local Ties Help Midsize Banks Stay Independent?

Last of three parts

Frost Bank likes to think of itself as being synonymous with Texas.

In television commercials throughout the last decade, the San Antonio bank — the largest bank operating only in Texas and the main banking subsidiary of Cullen/Frost Bankers Inc. — has touted that its employees are Texans first and bankers second, and that it "speaks Texan."

That tight local connection fuels an independent-minded spirit in an era when mergers and acquisitions en masse are considered inevitable. Frost Bank isn't alone.

With the market trying to peg who's a buyer and who's a seller, some analysts put a handful of midsize banks, including Zions Bancorp. and UMB Financial Corp., in a category all their own: highly unlikely to ever be sold.

Certainly all publicly traded banks must make decisions based on what is best for shareholders. But, as experts like to point out, banks are sold, not bought, and there is something to be said for the influence hometown pride or family history can have in a bank's decision-making.

"There are banks that fiercely want to remain independent," said Bruce Voelker, managing director of Accenture's U.S. banking practice. "There's a fiduciary responsibility to look at offers. But in the end if the bank management team and the board wants to remain independent, believes they can grow independently, they can make that decision."

Factors like community ties and rich histories tend to hold more weight at midtier banks, many of which expanded in earlier years through acquisitions and now see an opportunity in focusing on organic growth.

"To the extent that a sense of community is maybe a de-motivating factor that could affect the desire to sell, I would think as a bank gets bigger and bigger that sense of community becomes less and less of a factor," said William Fitting, group practice manager at the bank consultancy CCG Catalyst.

Those factors can also be deterrents for would-be acquirers.

"It's fair to say that banks have an asset in their customer base and there is an emotional tie in many cases between the bank and its customers, and that emotional tie may be based on history, family relationships, local community," Voelker said. "An acquiring bank is effectively buying those customers. If they think those customers will leave because that acquisition will affect that local tie, that does create a disincentive."

Frost Chairman and Chief Executive Dick Evans plays up the bank's independent spirit.

"We're not for sale, so there's nothing to talk about," he said matter-of-factly when asked recently for his opinion on the subject.

He later added, "Through the years we have looked back and asked ourselves, How did this company stay around for 140 years? And the real answer that we came to the conclusion to was our culture."

Frost was founded in 1868 by Colonel T.C. Frost. Evans, who was appointed CEO in 1997, is the first non-Frost-family member to run the bank, which today has more than 100 branches throughout Texas.

"That's a name that goes back a long way in Texas," said Scott Valentin, an analyst at FBR Capital Markets. "They do have a little bit of a higher bar there with relation to a sale because of the way they view themselves in the Texas landscape."

Michael Diana, an analyst at Cantor Fitzgerald, wrote in a research note earlier this year that he did not "view Cullen/Frost as a seller. Period. Cullen/Frost is very proud of its heritage as the oldest, largest, most prominent independent Texas bank, and has been able to compete well in spite of its size — or probably because of its (more nimble) size. We see no change going forward."

There are other characteristics though that set Frost apart from its peers: The bank exited the residential mortgage business in 2000 and elected not to apply to receive federal bailout funds under the Troubled Asset Relief Program. The $17.9 billion-asset bank also continued to pay, and even increase, its dividend throughout the crisis. It currently pays a dividend of 46 cents per share.

In the first quarter of this year, Frost reported net income of $51.9 million, a 9% increase over the year-ago period.

"They've definitely earned the right to remain independent," based on financial performance, Valentin said.

Solid numbers and a foothold in the highly attractive Texas market make Frost a desirable franchise. But the company's stock, which currently trades at more than 15 times earnings, could be another deterrent to potential suitors, Valentin said.

"If a buyer comes in they'd have to pay some premium to that," Valentin said. "Many potential buyers have depressed stock prices."

No matter, though, because Evans is adamant that the bank will stay on a course of steady growth on its own. As evidence of this commitment, the bank plans to increase its marketing efforts this year to win new customers.

"Our real opportunity today is organic growth," Evans said. "At the same time, if we found an acquisition that is appropriate and complementary to what we're doing, certainly we'd do it." But expanding out of Texas, he said, is "not a priority."

UMB On Offense
Like Frost, UMB Financial has a long family history.

Founded in 1913 in Kansas City, Mo., it is led today by Mariner Kemper, the sixth CEO to carry the Kemper name, which has long been associated with Midwest banking. (Neighboring Commerce Bancshares Inc., with $19 billion of assets, has historical ties to UMB and is run by Mariner's first cousin, David Kemper.)

With $13.4 billion in assets and 133 branches in seven states, UMB is the tenth-largest bank holding company based in Missouri.

Just as important as its family ties in enabling its independence is UMB's steady approach to growth.

"We're particularly proud of sticking to our guns and doing the same thing year in and year out," Kemper said in an interview.

UMB declined to take Tarp funds, which Kemper is particularly proud of. Kemper said he believes this is part of the reason the bank has been able to take significant market share coming out of the crisis. Its total loans grew 8.5% during the first quarter, while many in the industry reported declines.

"We do believe across our footprint we're picking up market share because people do care about doing business with companies that show the ability to maintain independence, profitability and growth without having to rely on third parties for liquidity or survival," he said. "As I was trained, you always want to row close enough to shore that you know how to get back and get back on your own."

Peyton Green, a managing director at Sterne Agee, said UMB has benefited from exhibiting consistency throughout the cycle.

"That in and of itself can position you to remain independent," he said.

Through more than 20 acquisitions of banks and business portfolios over the past decade, UMB has diversified into areas like asset management and asset servicing. Its priorities for growth include continued expansion of its fee-generating businesses, such as asset servicing, trust and securities processing and investment management and advisory services. Fee revenue currently accounts for more than half of the company's revenue overall.

The company may put the brakes on acquisitions for the time being though.

"We continue to look for bank acquisitions, however in this environment there doesn't seem to be a whole lot … that meets the bill for us," Kemper said. "We're pretty focused right now on integrating what we've done and assimilating the acquisitions we've done over the last few years."

Zions' Protection
Zions is another bank with a storied past and a fiercely independent culture, stemming in part from its unique structure and connection to the Church of Jesus Christ of Latter-day Saints.

Founded by Brigham Young in Salt Lake City in 1873, the $51 billion-asset Zions is the holding company for eight distinct banking businesses that operate under local management teams and individual community identities. In total, Zions operates 500 bank branches in 10 states in the West and Southwest regions.

"Zions is the only remaining Utah-based bank of significant size," Cantor Fitzgerald's Diana wrote. "We believe that the preference of the board of directors of Zions is to assure the presence of a major bank based in Utah."

Though the bank is no longer owned by the Mormon church (which sold its majority interest in 1960), its presence is still felt, albeit in less obvious ways. Harris H. Simmons, Zions' chairman and CEO, and several members of the board are Mormon.

Paul Miller, who covers Zions at FBR Capital Markets, observed that the Church does not interfere with the company and how it is run. "I just think it's a unique relationship," he said.

It would be "very hard culturally for the board or senior management to sell because of the culture aspect of Zions relative to the Church and Salt Lake City," Miller said.

Zions, however, sees its structure as its biggest shield when it comes to M&A.

"While it is difficult to speak for what other banking organizations may consider to be a barrier, one significant consideration may be our structure, consisting of eight separately managed banks, all of which operate reasonably autonomously, and several of which have very deep roots in their local communities," James Abbott, director of investor relations at Zions, wrote in an email. "A potential suitor would need to carefully consider how that structure helps to create our core strategic advantage, including an exceptionally strong core deposit base borne out of solid local business relationships, and how tampering with this structure may detrimentally affect the franchise value."

Unlike Frost and UMB, Zions accepted Tarp funds, and has yet to repay the government as it works through credit issues still lingering from the crisis. Earlier this month, while speaking at a conference, Abbott said that once the bank repays Tarp it may consider acquiring smaller community banks.

"But that's not part of the primary game plan," he said. "I'd call that the special-teams plan. Most of the game plan is organic growth for us going forward."

Editor's Note: This is the third in a series about the plight of today's midtier banks and the prospects for future ones. Next: Editor-at-Large Barbara A. Rehm predicts regulators' interpretation of Dodd-Frank's supervisory directives for "systemically important" banks will have a big impact on the $50 billion-asset-plus sector and hasten the industry's concentration.