Cullen/Frost Bankers, Inc. operates as the bank holding company for Frost Bank that offers commercial and consumer banking services in Texas.
The combination of good non-interest deposit growth per branch and a conservative lending culture, has made Frost a very safe bank since Texas emerged from its early 1990s oil bust recession. During the 2008 financial crisis – which was less severe in Texas than in other parts of the U.S. – Frost turned down TARP money. Frost had already exited all mortgage lending in 2000. Mortgage lending had become commoditized. Customers of Frost can get mortgages. But, they have to use a partner of Frost’s that simply offers loans to these customers to keep them from leaving Frost. Frost does not take any part in mortgage loans to Frost Bank customers. And it is clearly marked on Frost’s website – and elsewhere – that this mortgage lending is being done by a third party. Frost never owned securities that were subprime. Charge-offs were low throughout The Great Recession. In 2009, Frost charged off 0.58% of total loans. In 2010, it charged-off 0.52% of total loans. In 2011, it charged-off 0.54% of total loans. Losses at many U.S. banks were 5 times higher during the crisis.
Frost has created a lot of intrinsic value since the 2008 financial panic. The stock market has not realized this because Frost has made very little on its loans and securities due to the Fed Funds Rate being near zero. In 2008, Frost had $10.5 billion in deposits. Today, Frost has $24 billion in deposits. Frost’s value comes entirely from its non-interest and very low interest bearing deposits. So, the intrinsic value of Frost as a buy and hold forever stock more than doubled from 2008 to today. The stock did not double, because reported EPS barely budged due to the yield on loans and securities being the lowest in history.
A Fed Funds Rate near zero disguised this fact for about 7 years. Frost’s value was hidden for the last 7 years. But, Frost’s value will be obvious over the next 7 years. Frost is the clearest and best investment idea we have had since
starting Singular Diligence in 2013. That fact is not obvious as we write this in 2015 with a Fed Funds rate near zero. It will be obvious in hindsight (in say 2019) with a Fed Funds rate near 3%.