The history of Frost Bank is nearly as old and as colorful as the history of Texas itself. In 1868, Colonel T.C. Frost founded a mercantile store – the roots of what is now one of Texas’ largest financial institutions – in the frontier town of San Antonio. Little more than a century later, descendants of wildcatter Hugh Roy Cullen joined forces with Frost Bank to form what is known today as Cullen/Frost Bankers, Inc. Less than a month ago, this financial institution that boasts a 145-year history, announced the launch of Frost Specialty Finance. Under Harry J. Kaplun's lead, Frost brings together its equipment finance, asset-based lending and factoring businesses proving that much has changed since the days of colonels and wildcatters. Equipment Finance Advisor spoke with Kaplun as he ventures into this "new frontier."
Equipment Finance Advisor: Harry, please give our readers a sense of your background and your tenure at Frost Bank.
Harry Kaplun: I’ve been in the equipment finance business for nearly 30 years. Before I joined Frost Bank 11 years ago, I was with Wells Fargo, which I had joined as the result of Wells' acquisition of First Security Bank in Salt Lake City, Utah. I was leading the equipment finance business at First Security and that’s where I had gotten to know the people at Frost. We were running a private label finance program for Frost in the late 1990s. When the acquisition occurred, the people at Frost liked the equipment finance product and in time, they asked me to join their organization to start their own group. So now, I’m a Texan.
When we started the equipment finance business in 2002, we launched it on a very small scale. Today, my greatest pride is we’ve developed a wide variety of products. And that’s largely due to the fact that Frost serves a wide variety of customers – from not-for-profits, to municipalities and of course, corporations – and we need to be able to service each of those customers with the wide variety of equipment they require. For us, that equipment ranges from airplanes to cars and trucks, to manufacturing equipment, medical equipment and oil field services equipment, to name a few. We have programs to meet all of those needs and that has served us well. In the 11 years I’ve been here, we’ve grown to be one of the top 40 bank-owned leasing companies in the U.S.
But I have to give credit where credit is due. The launch of an equipment finance business along with the purchase of an asset-based lending company back in the 1990s was really the vision of our chairman, Dick Evans. At that time, his vision was to have a financial services company for commercial customers and we are largely a commercial bank. The idea was, and still is, is if you’re going to be a commercial bank, you need to have all of the products that any commercial customer may want or need. And certainly, equipment leasing and financing, asset-based lending and factoring all serve the needs of the commercial community.
Equipment Finance Advisor: From your perspective, what is the secret to these successes?
Kaplun: We’ve made great progress and that’s largely due to the result of the good people we have here at Frost. But there’s more to it … our strategy is a little unique. In many organizations, equipment finance and asset-based lending professionals are in a sort of silo. Sure, you’re comrades, but in the end you are pretty much pursuing your own interests. At Frost, we don’t operate in that fashion. Here, we operate in a manner that is much more team oriented … and I know that can sound trite.
At Frost, we emphasize team selling because we are of the mindset that no one person knows all there is to know about the products that we offer and no one person can really define what a customer needs. This team selling approach requires a lot of communication because the people who face our customers have to be sensitive to what the customer is saying. This opens the door for a specialist to come in and if that specialist has a success with meeting a customer’s needs, more successes will follow. What we work very hard at is getting ourselves focused on our customers and prospects.
I think our approach is working because in equipment finance, we have something in the neighborhood of a 70% repeat rate with customers. People often say, “The equipment finance business is a transactional business … if you’re there at the right moment with the right price, you win.” That could be true, but I think if you are more interested in a customer’s business and in developing the relationship through many products, the repeat business comes naturally.
Equipment Finance Advisor: Tell us a bit about your customers on the equipment finance side and on the asset-based lending side of the business.
Kaplun: We tend to play in the middle-market with business in the $10 million to $200 million revenue range. With those companies, they may have a financial staff and an operational staff, but they don’t have a lot of depth. We think companies in that range are looking for good, solid banking relationships … and by bank, I really mean the whole gamut of financial services products.
In terms of our footprint in the equipment finance business, we are focused on the Texas market which has just expanded a bit by the recent announcement that Frost has agreed to merge with WNB Bancshares in Midland-Odessa. When I first thought about coming on board here, our footprint was quite frankly, a consideration. But there are more than 25 million people here in Texas and there’s real diversity when it comes to industries … it’s not all oil driven by any means. Because of these diverse industries and in particular with these mid-sized companies, there’s a great deal of opportunity. That’s another reason we’ve been able to grow the way we have. We are doing business on the equipment finance side in 20 different states because our customers have operations there.
As for our average transaction size, this year it’s running at about $388,000 although we finance many larger transactions. For example, we were part of a deal for a $60 million Gulfstream. On the other end, we finance equipment like business owners’ cars and trucks.
Equipment Finance Advisor: Please tell us a bit about Frost’s asset-based lending product.
Kaplun: In the ABL business, our transactions average out to about $7 million with the higher end being in the $20 million to $30 million range. So we are in the middle market there as well. This business is a bit different than the equipment finance business in that at one time, the ABL group actively pursued transactions in the contiguous 48 states. That’s something we’re going to de-emphasize going forward. We won’t turn away any of our existing customers, but our focus going forward will be on Texas.
In terms of participations, we don’t do much of that on the asset-based lending side … it’s not something we have ever seen as a way to develop customer relationships. I know it represents volume and it goes on quite a bit in the industry, but it just doesn’t fit what we see our focus to be at Frost.
Equipment Finance Advisor: What do you see as an important objective to obtain with the asset-based lending group?
Kaplun: Going forward, I envision this group being more integrated, or woven into the fabric of the bank, if you will. For example, our commercial bankers may make a call on a customer who might not quite meet the credit standards of the commercial bank, but could fit nicely within the ABL group. Once the customer’s situation is righted, they can move back into Frost’s commercial bank.
Equipment Finance Advisor: What synergies and economies of scale do you expect to capitalize on with moving the equipment finance, asset-based lending and factoring groups under the Specialty Finance division?
Kaplun: This is not so much about bringing the business lines closer together. I really don’t see that much synergy by being the head of these businesses, except maybe in the case of equipment valuations. That being said, I have a great deal of expertise that I can transfer over to the ABL side. As I said, I see the main objective is to have the asset-based lending group integrated into the fabric of the bank.
With regard to economies of scale, we have very powerful sales management systems and by bringing on the ABL professionals into those systems, I think we will become more productive. This will be a big plus for that group.
When all is said and done, I have no doubt that we’ll continue to grow because our equipment finance business is just booming right now. I see that there will be more opportunities for our businesses to grow and for our people to grow and there’s a point where we’ll need to start adding more resources. That’s where we are on the equipment finance side and I expect that will be the same on the ABL side as well.
Equipment Finance Advisor: What are the near-term challenges and opportunities for these businesses as you look toward the end of the year and into 2014?
Kaplun: I think they are almost one in the same … the challenges are the opportunities. The opportunity in equipment finance is one of penetration. I’ve got a great deal of market data and even with our recently announced acquisition, we are just a sliver of what goes in some of the markets like Dallas and Houston. In West Texas, we have little presence, but we have a great deal of opportunity in the Midland and Odessa area with the recently announced merger with WNB Bancshares.
If you look at asset-based lending, it’s exactly the same in that in both Dallas and Houston, we are just a small part of the marketplace. Knowing the products we have and the services we offer, there is no good reason for us not to grow our market share.
Equipment Finance Advisor: Is there anything else you’d like our readers to know?
Kaplun: There are a good many similarities between equipment finance and asset-based lending. In these businesses, you have to be very attentive to the fundamentals so that you structure transactions correctly. You have to be very good at monitoring everything that is happening to be assured that what you expected to happen is actually happening. That strict discipline is required in both of these businesses.