Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Cullen/Frost Bankers, Inc. (NYSE:CFR)

Q3 2011 Earnings Call

October 26, 2011 01:00 pm ET

Executives

Greg Parker - IR

Dick Evans - Chairman & CEO

Phil Green - Group EVP & CFO

Analysts

Ken Zerbe - Morgan Stanley

Steven Alexopoulos - JPMorgan

Brady Gailey - Keefe, Bruyette & Woods

Bob Patten - Morgan Keegan

Brett Rabatin - Sterne Agee

Terry Mcevoy - Oppenheimer

David Grayson - SunTrust Robinson Humphrey

Bob Patten - Morgan Keegan

Operator

Good morning. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cullen/Frost Bankers Third Quarter Earnings Call. (Operator Instructions) Thank you, Mr. Greg Parker. You may begin your conference.

Greg Parker

Thank you. This morning’s conference call will be led by Dick Evans, Chairman and CEO, and Phil Green, Group Executive Vice President and CFO. Before I turn the call over to Dick and Phil, I need to take a moment to address the Safe Harbor provisions.

Some of the remarks made today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, as amended. We intend such statements to be covered by the Safe Harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 as amended.

Please see the last page of the text in this morning’s earnings release for additional information about the risk factors associated with these forward-looking statements. If needed, a copy of the release is available at our website or by calling the Investor Relations department at 0220-5632.

At this time, I'll turn the call over to Dick.

Dick Evans

Thank you, Greg. Good morning, and thanks for joining us. It’s my pleasure today to review Cullen/Frost’s third quarter 2011 results. Our Chief Financial Officer, Phil Green, will then provide additional comments. After that, we’ll be happy to answer your questions.

Cullen/Frost continues to produce steady results in a challenged economy and extended low interest rate environment. Our solid results are a credit to our employees. We remain focused on providing the best possible service to our customers.

During the third quarter, our net income was $54.5 million compared to $55 million reported in the third quarter of 2010. On a per share basis, our earnings were $0.89 per diluted common share, about equal to $0.90 per diluted common share one year ago. Return on assets and equity were 1.15% and 9.79% respectively compared to 1.25% and 10.49% for the same period of 2010.

Included in our quarterly results are two unusual items during the quarter the company corrected an under accrual of taxes from incorrectly deduct in premium amortization on municipal bonds since 2008. This resulted in the unusually high effective tax rate in the third quarter of 30.3%. As a result, the corporation recognized additional income tax expense totaling $6 million. This was offset in part by a $4.2 million after tax net gain on the sale $32.6 million in long term duration municipal securities during the quarter.

Now let’s take a look at deposits which continues to be strong. For the third quarter of 2011, average total deposits were $15.4 billion, an increase of $586 million over the previous quarter and $1.1 billion more than the $14.3 billion reported for the third quarter a year ago.

Our disciplined calling and team selling efforts continued to expand our customer base which should drive our future growth. Nearly half of our deposit growth for the quarter, 43% was from new depository customers.

For the third quarter of 2011, net interest income on a taxable equivalent basis increased to $160.6 million, up 3.1% over the 155.7 reported a year earlier. This clearly resulted from an increase in the average volume of interest-earning assets, and was partly offset by a decrease in net interest margin. Strong growth in deposits helped to fund the increase and the volume of earning assets.

Net interest margin was 3.81% for the quarter compared to 4.4% for the third quarter of 2010, and 3.95% for the second quarter of 2011. Non-interest income was $79.2 million for the third quarter, up $8.8 million compared to the third quarter of 2010. This included the one-time gain from long-term security sale we mentioned earlier. Without this gain, non-interest income would have been up $2.4 million from the third quarter of last year. I was pleased to see the strong growth in trust fees, the majority of investment fees. For the quarter, trust fees were $18.4 million, up $1.4 million from the third quarter of 2010.

Insurance commissions and fees were up $1 million primarily from higher benefit commissions which were boosted in part by the May 2011 acquisition of Clark Benefit Group. We saw solid increases in both, net interest income and non-interest income for the quarter. It’s gratifying to see the response to our company’s value proposition since the financial crisis began. It validates our way of doing business as customers come to understand the Frost difference.

Non-interest expenses for the third quarter were $137.4 million, up 3.7% or $4.9 million from the third quarter of 2010. Salaries rose 3.3% or $2 million from normal annual merit increases. Advertising and promotional expenses increased $2.2 million as we continue to tell others about the unique customer-focused banking experience at Frost.

I will discuss the economy a bit later, but we see the consequences of the economic uncertainty and excess government regulation, most clearly in loan demand. Uncertainty and over regulation are job killers for businesses of any size regardless of locations, even in a relatively strong state like Texas.

Outstanding loans have remained relatively flat at $8 billion. The fact is we’ve been working hard to drive commitments. While our customers are requesting more loans, they are also paying them down faster. Our loan payoff rate this year has been about 15% faster than last year which means we have to pedal that much harder just to keep pace.

Year-to-date new loan commitments are up 24% and nearly all regions showed double-digit increases compared to last year. Current customers have provided 85% of those increase compared to 67% in the same quarter of last year. This increase was driven by new commercial and industrial commitments which are up 22% versus last year, the highest levels since 2008. I am very pleased with this growth in C&I in this current environment.

In fact if you look at the outstanding loan portfolio of third quarter of last year versus this year, we are up $200 million in C&I loans or 5.4%. It’s also important to note that almost $400 million in problem loans moved out of the portfolio since the third quarter of 2010, improving credit quality. Real estate commitments have increased at an annualized rate of 6% since the year end of 2010.

Obviously these commitments will fund up as the projects are built. As we discussed in previous quarters, many of our large customers appear to have lost their way on pricing and structure disciplines. We will stay true to our principals and emphasize asset quality with a long-term view in mind and we will remain committed to our value proposition by offering excellence at a fair price.

Credit quality continues to improve as part of a now 18-month positive trend. As we've noted in previous reporting periods, this improvement is across the spectrum and is not a result of one or two events. Good science and problem loan totals, non-performing assets, delinquencies and other measures suggest that we are at or nearing the end of a difficult cycle.

Non-performing assets decreased to $139.3 million at the end of the third quarter and are at the lowest or best level since the first quarter of 2009. Delinquencies ended the third quarter at 0.98% of total loans, adequately reserving for write-downs in prior periods, along with the continuing trend of fewer and new credit quality issues, resulted in releasing the reserves. The provision for possible loan losses was $9 million versus charge-offs of $16.3 million for the third quarter of 2011.

The allowance for possible loan losses as a percentage of total loans was 1.43% at the end of the third quarter of 2011 compared to 1.57% at the end of the third quarter of last year and 1.52% at the end of the second quarter of 2011. I am pleased to report that our capital levels remained very strong. Tier I and total-risk based capital ratios for Cullen/Frost were 14.59% and 16.57% respectively at the end of the third quarter. The ratio of tangible common equity to tangible assets remained strong at 9.1% at the end of the third quarter.

Cullen/Frost posted steady results for the quarter as the economy struggled to gain any momentum. We expanded customer relationships and managed expenses during a challenging revenue environment amidst changing regulations. Before I turn the call over to Phil, I will close with a few comments about the economy and why I am optimistic about Cullen/Frost.

Last quarter, I mentioned that the economic uncertainty and excessive government regulation are hampering small businesses and our recovery. Unfortunately, nothing coming out of Washington suggests that anything will change soon. Until the U.S. Supreme Court provides similarity on Healthcare Law and until we go through another election cycle to help determine the future fiscal and regulatory policy direction of our country, the national economy could be in a holding pattern. One popular phrase to describe it is ‘Lower for Longer,’ lower levels for a longer period.

If there is a silver lining, it’s that home building is already at the bottom and can’t get much worse. Home building is such a big part of the economy that any positive movement there will lift everyone.

Another positive for Cullen/Frost is that we are in Texas; while the economic downturn affected Texas as well, the state continues to outperform the national average. Texas entered the recession late and came out at a stronger pace than most states. Texas has created 40% of new jobs in America since June of ’09. Projected job growth in Texas is now expected to be 2% this year compared to 1% growth for the entire nation. Texas unemployment remains lower than the national average.

In addition to operating in Texas, we continue to reach out to new and existing customers during the recovery. As always, it is our people who make Cullen/Frost’s success possible. They provide the human capital that makes our business work and they are doing a great job of helping us take advantage of the opportunities we have been seeing in this recession. I appreciate their continued efforts to help our company grow.

In summary, our credit quality levels have improved significantly. Our capital levels remain strong, we have money to lend. We remain focused on our value proposition, strong culture and excellent customer service as validated by J.D. Power and Associates and Greenwich Excellence Awards.

We have consistently paid shareholders dividend and in fact, we have increased the dividend annually for the past 17 years. We are adjusting our business model to the new rules and regulation coming out of Washington. But regardless of what those regulations are, we at Cullen/Frost will remain true to our principles. We will treat our customers the right way, while providing an outstanding value and we will continue to deliver steady and superior financial performance for our shareholders.

And with that, I’ll turn the call over to our CFO, Phil Green.

Phil Green

Thanks, Dick. I’ll make a few additional comments concerning our operations for the quarter including our tax adjustment, gain on sales securities, our net interest margin dynamics and after that I am going to turn it back over to Dick for questions.

Regarding the margin, we saw a drop of 14 basis points for the second quarter but once again this reflects the liquidity build up from our tremendous deposit growth. On a linked quarter annualized basis, our deposits were up 16% in the third quarter. If you look at demand deposits they’re up at 32% annualized growth in the third quarter.

Demand now represents over 38% of the deposit base of the company and it helps illustrate the success we are having in building new depository relationships and along that line I wanted to echo the comments Dicks made earlier that 43% of our total year-over-year core deposit growth comes from new relationships, that is people who have previously had no depository relationship with us.

Now when you look at the commercial component of that growth 58% of the annual growth came from new depository relationships. So again, we’re having success in building new relationships.

Now going back to the 14 basis point drop that we had in margin, the linked-quarter deposit growth of about $600 million helped drive a $900 million increase in our quarterly – an increase in the quarter for our Fed account.

So as the liquidity cost us 20 basis points on the margin, remember we’re down 14. So helping offset the impact of this reduction was the redemption of $150 million in banks sub debt procuring an interest rate of just under 7% and that added 4 basis points to the margin. And then also we had a reduction in the cost of interest bearing deposits and customer repos which added 2 basis points to the margin.

Regarding $6 million tax accrual adjustment where we corrected the treatment of muni-premium, $4.3 million of the expense related to prior years and $1.7 million related to the first two quarters of this year and if you were to exclude the effect of the prior year correction, our 2011 year-to-date effective tax rate would be 21.5%.

Regarding the $4.2 million after-tax security gain which was $6.4 million pre-tax, we sold $32.6 million in some of our longest maturity municipals and this reduced our portfolio average maturity in small amount while taking advantage of the Feds twist yield curve.

Now, shortening our muni-maturities and lowering OCI volatility in light of the Basel III capital rules is a positive, but taking securities gains is not what we’d normally do. But since we have the extra expense for the tax accrual adjustment, it was an easier decision.

With regard to our liquidity position, since quarter end we've seen our Fed account grow to $3.6 billion, which represents almost 20% of our balance sheet. And in light of this growth, and also in light of national economic outlook we’ve begun to undertake some investing of these funds during the fourth quarter and securities with an overall duration of around three years, which is about 25% less than the current portfolio duration. I’ve said many times, while we don’t like the market, we haven't liked it for a long time. At times we’ll hold our nose in a way when necessary and we’re doing some of that in fourth quarter.

Finally, I will say that with regard to our outlook for 2011, it really remains unchanged from what we indicated in the last quarter when we said we were and we felt that the average investments was reasonable.

And with that, I will turn it back over to Dick for questions.

Dick Evans

Thank you, Phil. We are now happy to take your questions.

Operator

(Operator Instructions) Our first question comes from the line of Ken Zerbe with Morgan Stanley.

Ken Zerbe - Morgan Stanley

Thank you. Just I was hoping if we can get a little more color on your views on competition in the Texas market. I think I heard the phrase that your competitors have lost their way.

Dick Evans

Correctly.

Ken Zerbe - Morgan Stanley

We have seen a lot of growth, I mean, not just in Texas but throughout the country for most of the banks. I do feel broadly speaking that people are just, that they are giving up too much on structure or price or both or?

Dick Evans

Out of the last quarter, 60% was related to what we consider too low prices and 40% was structured. You can say that’s a positive that there is less in structure but both are something that I think is particularly not good for this country and a very weak economy. As you may have talked to us back in the heyday of ’08 or ’07 or whenever.

We also reported to you certain numbers of pricing and structure. You can understand that a little bit better when the economy is blowing and going. But when you do that kind of thing in a weaker economy I think it could create a bubble, I hope not. But it’s not getting primarily. It’s in the business side. Everybody is chasing that C&I bone. I think we’ve done a good job. I am pleased with having grown $200 million in C&I loans over the last year.

Ken Zerbe - Morgan Stanley

Okay. That makes sense. And then just how much of the secured -- the lower NIM was a result of security repricing, because I think you mentioned the cash increase was 20 basis points all in, but how much are we are seeing on the MBS side?

Phil Green

Well, actually if you looked at the investment portfolio on linked-quarter basis, our yield in the second quarter was 79, yes 479, and in the third quarter it was a 488. So it actually went up and one of the things that happened is we had the maturity of $200 million and what were originally two year treasuries that were yielding 1%. Those came off. So we saw the taxable component of our treasury, taxable component of our securities portfolio grow from 351 yield to 357. So I wouldn’t say we took much as it relates to the investment portfolio. I think the liquidity piece of it was most of it. Long-term yield dropped a little bit, went from a quarterly average of 5 out of 499, but we also saw about the same drop in terms of interest-bearing deposits went from 25 basis points to 22. So I do think that the three factors that I mentioned capture most of the margin change?

Operator

Our next question comes from the line of Steven Alexopoulos of JPMorgan.

Steven Alexopoulos - JPMorgan

Dick, you gave a number that commitments were up 22% year-over-year. Could you talk about how those trended in the third quarter versus second quarter, and then secondly, businesses in Texas has more cautious. Why do they want higher commitment levels here?

Dick Evans

Well, I think a lot of it is because we have been pressing harder. I am talking about Cullen/Frost commitments are up. As I told you, when we entered the recession, you remember we didn’t take TARP money. So, we had strong capital, lots of liquidity. So we became very aggressive about calling on prospects and customers and so that is – that’s one of the reasons. Just to look at the numbers, let’s say, year-to-date, our commitments are up 24% and I mentioned, and nearly all our regions and primarily driven by commitments and C&I were up 22%.

Let me see if I have a quarterly -- the third quarter the commitments had slowed. They were essentially flat with the second quarter. It’s interesting, you know that, we see all this volatility and if you look at these numbers, yes I told you that the portfolio had grown at a rate of 5.4% year-to-date. In fact for the third quarter, it grew $89 million or that’s an annualize rate of 9.3%. I just said you get volatility. So don’t get locked into the 9.3. But commitments go up and they will close the loans, which happened in the third quarter. I just said to you commitments went down in the third quarter but the closings went up, which isn’t unusual to go through that. I mean I’d love commitments to go up every quarter and outstandings go up, but you want to get the loan and you close it and then you start hustling for another one. That makes --

Steven Alexopoulos - JPMorgan

Yeah, that make sense. I want to follow-up. When you look at the deposit growth, where are all the funds coming from? Is it other banks? Is it non-banks, it’s just remarkable how much cash the industry is taking in?

Phil Green

No I think. We get a lot of customers from other banks. Yes, I think that’s clear. When you look at, say on the commercial side, 58% of our growth as I mentioned, comes from new relationships and new deposits. People who weren’t depositing with us before. And as you imply, they were doing business somewhere. Kind of say, they were depositing some place. So I think we’re doing a great job on that. You know, you’re seeing people continuing to build liquidity, that means what is it, 42% of the growth in our commercial customers has come from people holding higher balances, is the same customers holding higher balances. It is more dramatic than that on the consumer side, we still have much more in terms of current customer average deposit growth in terms of their individual accounts as opposed to new customers, although we are growing new customers there.

So as I said last quarter, I think that when we get the economy turnaround, we’re going to see a reduction in average balances because these balances you know that people are holding are unusually high, but the positive news I think that we’re holding on to is that our good relationship growth that we can offset, what’s going to happen in terms of the decline in balances from normalization of balance levels by new customers.

And as I said before, when you go back and look in the early 2000s when we had the recession there and then we came out of it, we worried about because we had such great deposit growth at that time also, that we see a drop in deposits and actually what happened was we had a flattening and we took off with growth after that and we’re hopeful that because we’re doing such a good job, growing a relationships. We’ll see a similar trend when things turn around.

Dick Evans

Just to add a couple of things. Phil is giving a lot of good detail, just kind of 50,000 feet just remember you know last time it was 57% from, on the individual side were new customers. This time it is 43 and you know we are giving all these numbers. Just think, about half of our deposits are coming from new customers.

The other thing I would say to you is we’ve said many times before, we’ve focused on the big guys in the state, that’s were they have 55% of the four competitors. The four competitors above us have 55% of the market and that's really who we go after and compete with.

Steven Alexopoulos - JPMorgan

Maybe just one final one for Phil, I might have missed this. You said the securities went to 4.89, what's your opportunity, what rate are you investing for your three-year duration you talked about.

Phil Green

Honestly, on the new stuff you are looking at around 1.5% on average. So coming out of the 25 basis points and the Fed account into that.

Operator

Our next question comes from the line of Brady Gailey with Keefe, Bruyette & Woods.

Brady Gailey - Keefe, Bruyette & Woods

I was wondering if you could provide an update on Durbin. You know I think in the past, you guys have said it would be a hit of roughly $4 million a quarter, I mean you haven't had that long, but you have had about a month of Durbin being under effect, are you still comfortable and do you still think that the $4 million burden is the right number?

Phil Green

I think it’s higher. I think it’s going to around 5. One of the things we saw was competitively what the retailers have done and how they are directing payments and we are seeing more leakage, not just from what the Fed did, but from the retailers as well. So I think it’s closer to five now.

Brady Gailey - Keefe, Bruyette & Woods

You know you are seeing a lot of the larger banks put in place debit fees, have you all thought about that as a possibility for Frost?

Phil Green

No we have not.

Brady Gailey - Keefe, Bruyette & Woods

Then on another topic, the topic of buybacks, you know we saw one of your peers, First Financial out of Abilene announced this morning a buyback, I was just wondering that your capital continues to grow, your stock has gotten a little cheaper from where we set this time last quarter, is the buyback a realistic possibility for you guys?

Phil Green

Well I mean the buybacks are something that’s the tool. I mean we have used them in the past, we go back 10 years 15 years and we have had them at various times and we typically use them when we haven’t had use for the capital in other ways. The thing is a little different this time. We’ve said this before is that until we get a little more visibility on what regulatory capital is going to be required and the kind of volatility that capital as a result of the OCI for example are including that in capital on the Basel III, we are being careful with the capital position that we have.

And so we, you know, it’s something that we, you know, it’s our job. We think about that kind of thing, but where we are right now on the balance is that we feel like we are going to keep a little stronger capital until we get a little bit better visibility and then we will do the right thing on capital at some point, we are going doing it right now, but at some point if it includes buybacks, we would use them.

Operator

Our next question comes from the line of Bob Patten with Morgan Keegan.

Bob Patten - Morgan Keegan

Most of my questions have been asked, but I think here is a question, with the commitments being up so much you guys, a lot of success there, are you able to get unused fees with these commitments so you’re at least compensating for capital?

Dick Evans

We work hard at it. And yes we have improved it substantially. There is more room to in that regard. But yes, we do some of it. We try to do all of it.

Bob Patten - Morgan Keegan

Okay. And I guess following up on Steve’s question because I was just trying to figure where this cash is coming from, when you open accounts, do you go through a series of questions and ask are you coming from a competitor bank, I mean is there any indication from you guys this cash is just been pulled out of the market and thrown in to safekeeping or is it actually people are frustrated with their banks changing deposit services, is there any feel there?

Dick Evans

There’s some of all of it, but I think though that, we don’t get a sense of people who are coming out of the market you know for example the stock market and coming into the banks, I think what we are seeing is like people just moving from other places and people that are generating cash in their business are really not doing much with it and so would you seen it build up and we don’t get a sense that it’s people liquidating out of the stock market for example and coming into the banks. Also we are seeing, you know as this cash fills up and as I reported the success of our investment fees and they are doing a great job and you know there are other people going into the market and we are proud of the job that our investment group are doing and the different choices I have.

Operator

Our next question comes from the line of Brett Rabatin with Sterne Agee.

Brett Rabatin - Sterne Agee

Wanted to ask on the securities portfolio on the taxable side, may be Phil, can you give us some idea of how much cash flow you’re kind of expecting over the next year.

Phil Green

If you give a minute, I might could look it up. One of the things that we think about in terms of the mortgage-backed securities, I think our cash flow on that turns to be about $50 million a month or so. That includes including prepayments and regular maturities, I’d say it runs around $50 million, may be a little bit less a month. So if you were to look at over the next 12 months, prepayments and regular maturities I am showing about $0.5 billion in maturities, cash flow from that.

Brett Rabatin - Sterne Agee

Okay. And then I missed the language around – comment on buying for duration securities in the fourth quarter. Obviously, a large amount $3.6 billion at the quarter or after the end of the quarter I think you said. How much are you buying and then I think you mentioned like 1.5% yield on what you were investing, was that correct?

Phil Green

Yeah, it looks like around that may be a little bit under that and we haven’t really bought all of what we may buy. I think we might see may be two-thirds of that liquidity invested. I mean it will be high-quality stuff but – the thing that’s happening is as I said, we saw almost $1 billion in our Fed account quarter-to-quarter on a linked basis, so if you’re not doing something, you’re just going to continue to have that increases in liquidity.

Brett Rabatin - Sterne Agee

Okay. So you’re going to drain most of the liquidity this quarter as I understand?

Phil Green

I would say, we’re looking at something we haven’t done this much yet, but we’re keeping around $3.6 billion is where we hit and we could be a little over half of that.

Brett Rabatin - Sterne Agee

Okay. And then just lastly thinking about the tax rate going forward, obviously the large municipal bug has an impact on that, but any thoughts on the tax rate going forward would be any different or is it going to be similar to may be 2010?

Phil Green

I think this year we said it would be – if we didn’t have any adjustments it have been around 21.5%. I think that’s about right.

Operator

The next question comes from the line of Terry Mcevoy with Oppenheimer.

Terry Mcevoy - Oppenheimer

Thanks, good morning. Thanks for taking my questions. And the first one, quite a few banks are announcing call it expense reduction initiatives; anything going on at Cullen/Frost or you are paying a closer attention to expenses given the revenue outlook. And well I am asking about expenses, the advertising brand promotion which you mentioned earlier did go up in the quarter; is that really to take advantage of some of the disruption and going after clients that you called them the big four, the big five within the State of Texas?

Dick Evans

As we mentioned Terry when we started this year, we made a commitment we think there is a great opportunity to build the base of this company for the long-term with some outstanding customers and that’s the reason we committed to this program which we have been doing all year, and you are correct, it was $2.2 million in the third quarter and we’re committed to continue and its working well for us.

And we continually on expense management in general, we’ve said to go you before I mean there is no new expense over $10,000 that Phil and I don’t both approve; let in to be act like the government that is really to ask our people to see if its the right decision. And we probably approved 99% of it and so I think there is a good expense discipline, but certainly in this environment you’ve got to look at all the time trying to improve your expenses. And so I think we managed it well, can we do better, yes, and we’re always looking to. Phil, do you have any additional?

Phil Green

No, I think you’re right. I mean some people are closing you know a significant amounts of branches there, you know they’re – I don’t know what all they have done, but they have specific programs that they are putting in place to reduce expenses. Ours has really been more a program of just we want to reduce unnecessary expenses and I think we have done a pretty good job of that and we’ll take individual pockets here and there and make improvements on.

So I think we’ll continue to see some of that and you know just like Dick said, I mean we really think we have an opportunity here given our reputation, our value proposition in the state that we’re in or markets that we’re in to take share. And so we’re committing some money in this period of time to do that so that's really been more of our focus. But the underlying assumption is that revenue is tight or hard to grow and so what you’re doing about expenses and that's not lost on our people.

Terry Mcevoy - Oppenheimer

Just one other question, Dick you talked about over regulation and uncertainty in Washington limiting hiring plans, investment and essentially loan demand. Do you get a sense that we’ll see kind of a springboard effect once there is some clarity and that's really how you are positioning that the company to be prepared for that specific event?

Dick Evans

Well, certainly as you know this is a 143 year old company and what I am most pleased is we have good steady consistent results through different times in the cycle. Certainly, we are affected a little bit here and there, but and you know and you don’t have no time for me to talk about what I think about Washington, but I don't think anything is going to happen for a year till the next election. And you know its just we just got to holding here and right through it.

I am pleased in this environment of how we are building the base of this company and I think that we talked to you a lot about relationships and we talked about relationships we are talking and those numbers we have talked about in deposits of about 50% growth in new relationships. That means -- that’s not just somebody coming in and putting $200 in an account, that’s moving their primary account to us.

And so that’s building the base and Phil gave you the numbers of businesses so while those businesses are cautious, as this economy starts to get better and this – it is all about confidence across this country and it’s about – and you’ve got to have that in order to build jobs and with a bigger base we will see a lift, and I don’t think that’s going to happen overnight, no. But it could be very important to us and if you could.

Operator

(Operator Instructions) Our next question comes from the line of Jennifer Demba with SunTrust Robinson Humphrey.

David Grayson - SunTrust Robinson Humphrey

Hey good morning everyone. This is David Grayson in for Jenny. Thanks for taking my questions. I wanted to start with the deposit growth that you have seen, it’s been a good bit of time talking about where that’s coming from, your marketing efforts driving a lot of that. And if I look forward in my model and try to figure out some estimate perhaps in margin, I guess the question I am asking is do you expect this deposit growth to be similarly strong over the next several quarters and you know can you expect that to drive similar margin pressure in the near-term?

Dick Evans

It is hard to say what deposits are going to do. I mean they’ve been so strong for so long. You just think that they’re going to be some moderation of that at some point. But that’s hard to say. What we tend to do as we think about the margin is we sort of put that as separate bucket optically. I know you’ve got a model that you got to run and you have my empathy with that. But we’ve got this optical effect of growing liquidity and growing deposits and investing those in, with this Fed account of 25 basis points or you know, say we do some investment that we are talking about.

Or for doing loans where you know you could end up helping your margin. I mean, anytime if you get that liquidity increase, you just need to kind of feel that out because it doesn’t cost us any money. Alright? Start reducing our net interest income and the things that are going to drive real net interest income growth are going to be, you know, or you doing any investing, 25 basis points into something, like we talked about certainly loan growth, I mean you know all this. The loan growth is the other factor, if you can’t decide what you can see there. And then some people talked about the investment portfolio, what are we going to see there because obviously we can’t replace the yields we got there in the current market and I think we said we have $0.5 dollars over the next 12 months, might be our rough estimate of what comes out there.

David Grayson - SunTrust Robinson Humphrey

Right. And I guess a quick clarification kind of along the same topic. Phil, earlier in your comments you mentioned the positive offset to the excess liquidity of the margin. There was four basis points for some debt maturity and then two basis points for something I didn’t catch that, I just want to clarify.

Phil Green

Okay. That was lower deposit cost in customer repo, the cost.

David Grayson - SunTrust Robinson Humphrey

Okay, all right. Thank you, that’s helpful. And then one follow-up if I might. You guys opened three branches and we’re seeing no other comments or uptick in your occupancy and equipment line item. Is this a pretty good run rate going forward and what may be or in the near-term branch expansion branch?

Phil Green

I think we’ll probably see a similar amount of branches for the next 12 months. You saw the past 12. So you’re going to continue to see some growth there. It’s really the branches. I think you got to understand with branches because you talked about branches and look at what some people. If you got a bunch of -- you’ve got too many branches, we don’t have too many branches in this market. We’re very selective. The analysis that we do, make sure we have a mix of business and retail customers. As you know half of our deposits come -- our individuals and half of our businesses. And so we’ve built our branch in markets like that. We’re very selective and we’ve been consistent. We’re going to keep what we’ve been doing, just any expansion to take advantage. You take some markets like Dallas and Houston. It’s -- there’s another life time good work we’re getting there. And we don’t try to build all at once but we try to be consistent and steady in what we’re going and it’s paying off.

Operator

Our next question comes from the line of Bob Patten with Morgan Keegan.

Bob Patten - Morgan Keegan

You’re certainly getting, probably one of the guys will comment on this but if I look all those things that are impacting Cullen/Frost from Durbin and another regulatory changes and that doesn’t include overtime you guys are spending interpreting those rules. In your view, how are the 5 or 6000 banks below you dealing with all this stuff and if the outlook that you guys are kind of given is keep grinding away, don’t change our standards seems to me that these little guys are either in denial and you’re probably looking at some of these for future growth, but it’s getting worse and worse, in my view for the smaller banks with all these advent to change happening?

Dick Evans

It’s a very difficult situation and concerns me greatly because I think it will hurt the growth of this country and capitalism, but I do think the banks of 500 million and assets and less are at risk. Now as we go forward, there is entrepreneurship working and they’ll be firms that come together to help them outsource some of these complaints issues. You can’t outsource Reg-Q and paying interest on demand deposits, right now it’s a non-event and probably the next couple of years, you tell me how long interest rates are going to stay at zero.

It’s a not a big effect, but long term it is and that’s something to consider and if Basel III and mark-to-market of the portfolio goes through, that’s a another big hit, so you can deal with some of it by outsourcing if you are a small bank, it’s a problem in this country.

Bob Patten - Morgan Keegan

Yeah and I guess you won’t hear the regulators or the administration say it, but it is almost as if they don’t want as many banks to exist today?

Dick Evans

But I have confronted them on that. If their desire is for the United States to have four or five banks like Canada, they are doing a hell of a good job. They of course won’t admit that. If you look at the regulators, they are so buried. There is 339 of Dodd-Frank out of 400 interpretations that have not come forward. There are 126 issues that missed the deadline that regulators couldn’t make the deadline.

And so they are spending too, probably one of the biggest concerns is the conflict between regulators. You know the SEC says one thing and the Fed will say another thing or OCC or FDIC and I know they are addressing those issues to try to get some consistently, so it’s just Dodd-Frank was a terrible bill.

Did we need some correction in the financial industry, yes we did. But we needed people to sit down and find the right answer and we are not getting that. You know I am not talking about republicans or democrats or the White House, I am talking about everyone of them. None of them. On the debt crisis that we had in August, you can go visit any kindergarten class in the United States and you will find more working together and finding better ways than we saw in Washington and we've got on November the 23rd, they hope to sit down and find where they are going to get their $1.5 trillion and if they don't get it on the 31st, there are some triggers that just happen.

And so it will be another circus that we will watch going up to November 23. So we are in a mess right now and it’s sad for America. We need Americans to go to Washington and do what’s best for their country not their party or their self interest.

Operator

There are no further questions at this time.

Dick Evans

All right. Well we appreciate your interest in our company and your support. We stand adjourned.

Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Cullen/Frost Bankers' CEO Discusses Q3 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts