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Executives

Greg Parker - IR

Dick Evans - Chairman & CEO

Phil Green - Group EVP & CFO

Analysts

Dave Rochester - Deutsche Bank Securities

Scott Valentin - FBR Capital Markets

Bill Young - Macquarie

John Pancari - Evercore Partners

Brady Gailey - Keefe, Bruyette & Woods

Brett Rabatin - Sterne Agee

Justin Maurer - Lord Abbett

Jon Arfstrom - RBC Capital Markets

Cullen/Frost Bankers, Inc. (CFR) Q4 2011 Earnings Call January 25, 2012 11:00 AM ET

Operator

Good morning. My name is Ashley, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter 2011 Earnings Conference Call. (Operator Instructions) Thank you.

I would now like to turn the conference over to Greg Parker, Director of Investor Relations. Sir, you may begin your conference.

Greg Parker

Thank you, Ashley. 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 210/220-5632.

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 2011 fourth quarter and annual results. Our Chief Financial Officer, Phil Green, will then provide additional comments. And after that, we both will be happy to answer your questions.

I am pleased to report that 2011 Cullen/Frost posted record annual earnings and topped $20 billion in assets for the first time in the company history. We also saw the best quarterly credit quality improvement in the past two years. The strong and consistent results amid continued economic challenges and regulatory headwinds are a credit to our dedicated employees and strong value proposition.

During the fourth quarter, our net income was $55.4 million compared to $53.1 million reported in the fourth quarter of 2010. That was $0.90 a share versus $0.87 last year. Fourth quarter return on average assets and equity were 1.12% and 9.74% respectively. The company reported annual earnings for 2011 of $217.5 million, an increase of 4.2% over the 2010 earnings of $208.8 million.

Now let’s look at deposits which continued to be strong. For the year ended December 31, 2011 average total deposits were $15.2 billion, up 8.4% or $1.2 billion over the $14 billion reported in 2010. Much of our deposit growth comes from new relationships developed with business customers through our focused calling effort. These new relationships will help form the foundation for future growth when the economy eventually improves. We saw a good growth both in new consumer relationships and from existing customers.

Net interest income for the fourth quarter of 2011 was $165.3 million compared to $155.2 million last year. This increase primarily resulted from an increase in average volume of interest earning assets and was partly offset by a decrease in the net interest margin. Strong growth in deposits helped to fund the increase in the volume of earning assets.

The net interest margin was 3.76% for the fourth quarter compared to 3.93% for the fourth quarter of 2010 and 3.81% for the third quarter of 2011. For the year 2011, the net interest income on a taxable equivalent basis increased to $642.1 million, up 4.2% over the $616.3 million reported in 2010.

Non-interest income for the fourth quarter of 2011 was $67.7 million, down $2.6 million. The Dodd-Frank commitment to -- the Durbin amendment to Dodd-Frank negatively impacts non-interest income by approximately $5 million per quarter. In the fourth quarter, that impact was most evident in other income, which was down $3.4 million and service charges on deposits, which were down $1 million. For the entire year, non-interest income was $290 million, up $8 million over 2010.

Non-interest expenses for the fourth quarter of 2011 was $143.8 million, up $10.1 million from the $133.7 million in the fourth quarter of 2010. Salaries rose $5.4 million over the same quarter a year earlier from normal annual merit and market increases as well as increase in stock-based compensation expense and incentive compensation.

Brand marketing and advertising increased $2.4 million to help us spread the great message about Frost. We also made a special $2 million contrition to the Frost Charitable Foundation for donations to worthy non-profits in communities we serve.

Economic uncertainty over regulation and intense competition on pricing and structure continued to affect our loan environment. For the year ended December 31, 2011, outstanding loans remained relatively flat at $8 billion. We are working hard to drive new loan commitments through long term relationships and good quality loans.

It is encouraging to see that more of a return to normal in commitments from our customers. For the year, we added 18% more new loan commitments than in 2010. But our loan pay-off rate was much higher than in previous years. Comparing the year end 2010 and 2011, it’s encouraging that our revolving commitments increased by 9.6% and our construction commitments increased by 10.7%. It’s interesting that while commitments are increasing, at the same time the funding rate is decreasing.

The competition in price and structure is as fierce as we’ve ever seen it. In an environment with irrational loan pricing, it’s more challenging for institutions like ours with strong lending disciplines to win a large percentage of business from non-customers. We continue to believe that the dramatic growth in deposits and new relationships is important, because these new and existing customers will be important in the future loan growths when the economy turns around.

Our credit quality had the single largest quality improvement in the last eight quarters and continues the positive trend that began two years ago. All traditional measures of credit quality improved during the fourth quarter of 2011.

Non-performing assets decreased 13% from the previous quarter. Net charge-offs declined significantly from the third quarter of 2011. The fourth quarter charge-offs are the lowest quarterly volume since the second quarter of 2008 which was before the recession.

Delinquencies ended the fourth quarter at 0.75% of total loans. This is the third consecutive quarter for past due loans to represent less than 1% of total loans. Adequately reserving for writedowns in prior periods along with decreasing levels of classified loans resulted in releasing of reserves.

Our provision for possible loan losses went from $11.3 million in the fourth quarter of last year to zero in the fourth quarter of 2011. It’s very unusual for us not to take a loan loss provision. But the health of our portfolio has improved to such a degree that the formula simply does not allow us to build further reserves now. Absent any significant changes in global or natural economy, we expect our positive credit quality trends to continue.

I am pleased to report that our capital levels remain very strong. Tier 1 and total risk-based capital for Cullen/

Frost were 14.38% and 16.24% respectively at the end of the fourth quarter and are in excess our proposed Basel III fully phased in capital requirements. The ratio of tangible common equity to tangible assets remained strong at 8.82% at the end of the fourth quarter 2011.

Overall, 2011 was our best year ever for earnings, although it really didn’t feel that way given the sluggish economy and changing government regulation. The Durbin amendment alone had a $0.05 per share negative impact on our fourth quarter earnings, but we found a way to grow despite the bad public policy.

We posted steady results, expanded customer relationships and managed expenses during that challenging revenue environment. We are grateful for the dedicated – our dedicated employees and loyal customers who understand and appreciate the Frost difference.

Before I turn the call over to Phil, I will close with a few comments about the economy and my continued optimism for Cullen/Frost.

For several quarters, we have discussed how economic uncertainty and excessive government regulation are hampering small business and our recovery. Unfortunately, nothing really has changed. Now that we are in an election year, we can expect to see more political posturing than effective policy changes. So the economy likely will remain in a holding pattern, lower for longer.

At some point this year, the U.S. Supreme Court should provide some clarity on healthcare law which has been a lingering drag on the economy due to all the question marks surrounding it. It’s because of bad policy decisions and uncertainty over pending regulations that U.S. businesses refuse to add jobs until they know what the costs of these jobs will be. The side benefit is that U.S. companies have adjusted to the revenues and to their expenses and are the most efficient and well run companies in the world.

The Texas economy is growing modestly but it continues to outpace the natural averages. The Texas economy is expected to grow 2.1% in 2012 compared to 1.3% for the U.S. Texas unemployment remains lower than national average. The Eagle Ford Shale also continues to energize oil and gas industry and technology in Texas should pick up in the last part of the year.

As for Cullen/Frost, we continue to reach out to new and existing customers during the recovery and expand our customer base. Our assets now exceed $20 billion for the first time in our history. Since year end 2007, our assets have grown 50% from $13.5 billion and that’s organic growth without bank acquisitions.

As always, it’s our people who make Cullen/Frost success possible. I appreciate their continued efforts to help our company grow.

It’s also important to note several other events that occurred in the fourth quarter. In December, Frost Bank received an A+ credit rating from Standard & Poor’s for the first time in the company’s history. The agency cited for our strong capital, excellent liquidity, consistent profitability and solid credit performance relative to peers, reinforced by our conservative strategy and solid market position in Texas.

Frost is now one of the highest ranked financial institutions in the U.S. Our rating upgrade also bucks the national trend of credit rating downgrades for financial institutions. Like our high ranking from J.D. Power and Associates, Greenwich Research, Allegiance, the S&P rating upgrade provides third-party validation to the difference customer experience can have at Frost Bank.

By the way, Greenwich Associates just announced that Frost Bank received 21 excellent awards tied for the most awards in the nation and more than any other bank serving Texas. In December, we announced the acquisition of Stone Partners, a Houston-based human resource consulting firm that we operate as a division of Frost Insurance.

We also expanded our footprint in Houston by adding three new financial centers in the fourth quarter in addition to two new financial centers in Houston and one in the Dallas region. Despite the economic downturn, Cullen/Frost continues to grow.

In summary, our credit quality is improving significantly and continues to show a positive trend for the future. Our capital levels are very strong. We have money to lend. We remain focused on our value proposition, strong culture and excellent customer service as validated by the multiple third party agencies.

We have consistently paid shareholder dividends and have increased the dividend annually for 17 years. We are successfully adjusting our business model to new rules and regulations coming out of Washington. We are staying true to our principles and our strong lending disciplines. We are treating our customers the right way while providing outstanding value. And we are delivering steady superior financial performance for our shareholders.

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

Phil Green

Thank you, Dick. I just want to make a couple of additional comments about the quarter and then we’ll open it up to questions.

First, Dick noted our net interest margin was 3.76%, and this was down 5 basis points from the third quarter’s level of 3.81%. However, once again it’s important to understand the underlying components to see the impact on our operations.

Strong deposit growth lowered the stated number by 15 basis points and our slightly lower loan balances hit margin by 2 basis points. However there were number of positive items which offset some of this impact. For example, better loan yields and lower deposit costs added 3 basis points to our margin, and in addition, the investing of liquidity that we mentioned in last quarter’s call added 9 basis points to margin.

Recapping those investments, we purchased $2.5 billion in the fourth quarter with an approximate yield of 1.33% and with the duration of around 3.5 years. They settle at various times but average $1.5 billion in the fourth quarter, so without the deposit impact, margin would have actually been 10 basis points higher during the fourth quarter.

Also, during the fourth quarter, total deposits grew an annualized 18% and demand deposits increased an annualized 29%. And as long as we see this kind of deposit growth, we will continue to see nominal net interest margin compression but it doesn’t reduce net interest income. In fact, given the fact that our overall deposit costs, including both time and demand, average is just 12 basis points, we still add net interest income even if the funds end up in our Fed account. And that’s true even after taking off the cost of FDIC insurance.

I think this helps demonstrate the core nature of our deposit base and the fact that over 39% of our deposits are demand deposits. In fact, if you add in consumer checking accounts, which grew an annualized 32% during the quarter, you’d see over 52% of our deposits are represented by these low-cost transaction accounts.

I also want to reinforce what Dick said about the high percentage of deposit growth from new relationships. Over half of our growth is coming from new customers. So we are excited about the job we’re doing in growing relationships and believe this will pay off as the economy improves.

And finally, as we look at 2012, we believe the current average of analysts’ estimates for the year is reasonable. And with that, I’ll turn it back over to Dick for questions.

Dick Evans

Thank you, Phil. We will be happy to take your questions.

Question-and-Answer Session

(Operator Instructions) Our first question comes from the line of Dave Rochester with Deutsche Bank.

Dave Rochester - Deutsche Bank Securities

Appreciate the color on the competitive landscape there. Would you say competition has intensified even from third quarter and was the pay-down rate this quarter roughly in line with last quarter?

Dick Evans

I wouldn’t say it’s changed a lot. It’s just consistent through the year. It’s been – the pay-off rates have been strong. And the pricing is just very competitive. But I don’t see a lot of change in the fourth quarter. It’s just more of the same.

It’s interesting, I am encouraged by the increase in the commitments in not just the last year. If you look – let’s just take example of our revolving commitments that I talked about were up 9.6%. If you look at that, that’s very encouraging. What’s happened is that the outstandings on them is up 6.75%. So I think the good news -- you may remember, I talked about this a couple of years ago when we were seeing, obviously the recession was strong and loans were going down. And I talked about that, for example, the company that has a $1 million line was lowering that line to, say, $750,000 and was borrowing -- typically they borrow about 50% of the line in normal times.

What I think is happening to us, which I think is a light at the end of the tunnel is that people are starting to ask for larger lines and they wouldn’t do that if they didn’t see some improvement in the economy. So they are preparing for what they think is going to be better. And so what should happen next is obviously the advance rates should come along. Now I don’t know whether it’s going to happen tomorrow, next month or six months from now but I think it is a positive trend that we are starting to see.

Dave Rochester - Deutsche Bank Securities

Okay. Great, that’s good color. And just given the landscape today and your comments just now about lines increasing, are you thinking that we should start to see that growth in the portfolio edge up in the first half, maybe slowly but at least kind of moving up from here?

Dick Evans

When you’ve gone through about three or four years of loans being down for the first part of it and flat for the last year, I am scared to make any big projections because I’ve kind of been beat up. But there is no doubt that the commitments are better.

The other thing I talked about was the increase in commitments in construction loans. And these were year-end things that comparing 2010 to 2011 and construction loans commitments going up 10.7%. Obviously with the construction loans, you’ve got an advance over a period of time. So those were new commitments, a bright light in the loan portfolio are apartment loans as we -- all this housing stuff we all know about. You’re seeing multifamily being stronger and so I think that’s a positive.

So there are some signs that as they start to build, like I said it won’t happen overnight but it will move up. I’d also say to you that for the year, our C&I loans were up $128 million for the year. So it was buried and did show up because we moved $283 million of problem loans out of the portfolio. And as I talked about at some length, all the signs in the problem loans look very positive. About the time you say that something jumps up and bites you but they are positive. And so we shouldn’t have that headwind pushing on us.

Dave Rochester - Deutsche Bank Securities

Great. And just one last one real quick. You mentioned you expect the credit trends to improve and that makes perfect sense. Do you expect the provision could be close to zero in the next quarter or two as well?

Dick Evans

Well, I hope not, because if we get back to more normal loan growth, we should get back to normal provisioning. But as I said, we are not wanting to put zero but the classifieds have come way down and non-performers, all the things I talked about. So let’s don’t jump to either conclusion either way on that.

Dave Rochester - Deutsche Bank Securities

Okay. We’re great. Thanks for taking my questions and nice deposit growth this quarter.

Operator

Our next question comes from the line of Scott Valentin with FBR Capital Markets.

Scott Valentin - FBR Capital Markets

First question on the non-interest expense looking at third quarter to fourth quarter, I think you guys called out some items, stock incentive and incentive comp and market related expenses. Just curious to think going forward, is the fourth quarter kind of a good benchmark to use non-interest expense going forward, will it be some items that come out there, like some of the maybe year-end comp expense or incentive expenses?

Phil Green

Well, I hope it’s not indicative because we did have some special items of expense. The $2 million in donations was definitely an unusual item. And I think some of the comp as you mentioned. So I think it’s a little bit higher, I think it would be little bit lower on run rate.

Obviously you’re going to have expense growth during the year. That’s going to occur naturally. But I wouldn’t tag that natural growth on the top of the fourth quarter as a base per se. Only other thing I will mention is that first quarter – those of you who have followed us for a long time know that first quarter tends to be a little bit higher with regard to payroll taxes and that type of expense early in the year. But that’s a little bit of a seasonal factor. But the fourth quarter should definitely be little higher than normal.

Scott Valentin - FBR Capital Markets

And then just kind of a general question, you mentioned uncertainty kind of holding back businesses, and the government has been going through the base realignment, I guess the BRAC concept. And San Antonio has a pretty large military presence. Just curious as to maybe you talked to borrowers, is there a concern out there? Has there been any numbers put forward on maybe potential impact on the economy in San Antonio?

Dick Evans

We’ve gone through a lot of that over the last 10 years. And what we have recently had is the new military hospital, BAMC that was built over the last couple of years, it’s finished. It’s staffing up and that’s a real positive. And what the military did was combine all the hospitals into one and one of those, I think the other one is in Washington DC and the second one here in San Antonio. So that’s something that quite frankly is bucking the trend.

Scott Valentin - FBR Capital Markets

Okay. Thank you. Just one follow-up question. On a linked quarter trust fees were down little bit. Was there anything kind of non-recurring or anything one time in there?

Phil Green

Well, we did have a fairly low quarter for estate fees. That was one, that was down. Linked quarter basis, the estate fees were down really 80% from the prior quarter. They were only $87,000 compared to third quarter, they were $440,000, we had nice fee at that time.

So the estate fees as you would guess are related to when people die frankly. And so that tends to be – there is no predictability in that the fees are typically collected about nine months after the estate is established. And so that was one area of volatility that we did see.

Dick Evans

We call it the maturing of wills.

Phil Green

And that’s true. So that’s the biggest item I saw. We had – oil and gas fees were down little bit during the quarter. That’s mainly related to price, particularly gas. Gas is at very low levels in most of our production that we managed, not all of it but most of it is gas, dry gas. So I think that’s another area. Those are the things I think that were the most unusual.

Dick Evans

I might just comment. Phil talked about dry gas, and I don’t want you worrying about our loan portfolio. Obviously we – our largest segment is our energy loans. And we’ve – it’s interesting what’s happening as you know the price of – that you read in the paper is dry gas. Interesting enough, we have done a complete review of our energy customer. All of them have some gas and some oil but particularly those that are say in 60% gas, what’s really encouraging as you look at the wet gas which is where the majority of ours are, and that’s – those have been very strong with the liquids and condensate and just natural gas liquids.

And so as you look at that, quite frankly our customers are getting somewhere around $5 for their natural gas when you blend into liquids, we’ve also seen as high as $7.50. So they have some oil components which we know is strong. The advance rate is still running around in the 50% range. A lot of those customers are hedged and some of them are just rich. And so they can cover the volatility in the market.

And so when we look at that and chart, we’ve reviewed these issues and really we see their ability to repay and perform as agreed. It was interesting just in the paper yesterday, you probably read in the Financial Times that Apache has made a $2.8 billion acquisition. And they talked about this very fact of where dry gas is and they talked about it could be with wet gas as much as $6.95. But we are very comfortable with where we are, with our gas portfolio.

Operator

Our next question comes from the line of Bill Young with Macquarie.

Bill Young - Macquarie

Just a follow-up question on expenses this quarter. The magnitude of increase in the kind of your salary expense has forced them to go up a little bit more than it has in the past. I know it tends to be seasonally higher with the year-end merit increases. But was there anything in particular this quarter that drove kind of the outsized increase?

Phil Green

There were some – are you talking about on a linked quarter basis?

Bill Young - Macquarie

On a linked quarter basis -- even on a year over year it’s a little bit higher than what was expected.

Phil Green

Yeah. One of the things that did happen little bit unusual is we had some vesting of restricted stock that occurred – that was unusual in terms of just how it built up and then when it vested. So it’s higher this year than last year and I don’t think it’s going to be (indiscernible). So a little bit of unusual in terms of the timing of all of it relates to the ages of some of the officers and when that actually vests. And so that I think might have been another thing that was a larger item, it’s about $1.5 million on a linked quarter – excuse me, on comparison basis up from year over year. And then it was also higher by about $3.5 million on a linked quarter basis.

Bill Young - Macquarie

And it’s very helpful. And then secondly, on kind of the deployment of liquidity into securities, are you – do you still expect to kind of deploy more of that next year particularly if loan demand doesn’t kind of come to fruition and you still see strong deposit flows or kind of what’s the expectation there? And also if you could just remind us what the year-end balance was in liquidity?

Phil Green

Okay. First of all, with regard to the balance at year end with regard to liquidity, I don’t have that number on year end top of mind. I think what’s more important is what we’ve been running so far in January. It had been running about $2 billion, had gotten up from $1 billion after we did the investment in vesting. So we’ve seen growth there.

As far as investing, yeah, I think we will do some more investing but I don’t think it’s going to be really the same character that we did in the fourth quarter. In the fourth quarter, we mixed some three year treasuries, some five year treasuries, some ten-year mortgage backed agencies, some things that were blended together to get some yield, as I said about 1.33%. We actually just recently bought another $1 billion of three year treasuries which has a duration of about -- what it is – 2.8 years or so, maybe little bit less. Just to sop up some of the increasing liquidity that we have even after we made the fourth quarter purchases, because we’ve brought that liquidity down to around $1 billion at the Fed after those purchases and then we’ve seen it grow up to -- actually, I think we made those investments as we’ve grown about $2.2 billion. So we are down about, I’d say around, call it round numbers $1 billion right now and we’ve continued growth in deposit.

So we really did that additional $1 billion recently as a defensive measure. We don’t want to get caught if the Fed does move that 25 basis point Fed rate on our cash at the Fed down, we want to have some protection against that. And given the outlook on rates, we think we can let those three years roll down the yield curve and be okay. So that’s sort of what we have been thinking.

Operator

Our next question comes from the line of John Pancari with Evercore Partners.

John Pancari - Evercore Partners

Just want to confirm, you indicated despite the margin compression you expect, you still think that you should see some growth in spread revenue over 2012. Is that correct?

Phil Green

You mean in terms of dollars?

John Pancari - Evercore Partners

Yes, growth in non-interest and net interest income.

Phil Green

Yes, we do.

John Pancari - Evercore Partners

Okay. And then can you give a little bit more color on the loan pricing environment in terms of where you are seeing the heightened competition? Is it in larger credit still, or is it kind of permeating down into the mid-market and the small business? And then also where you’re seeing some new commercial loan yields coming at versus the current portfolio yield? Thanks.

Dick Evans

The pressure -- most of the pricing, of course, would be on the bigger – the bigger credits, which you would expect because of just larger dollars and of course, a lot of the energy credits are LIBOR based and we saw some help with LIBOR and then lost it over the quarter, came up, came back down. It’s interesting that – so that’s where the big push on pricing. On structure, we are about 60% pricing that that was – even though we used to run 50:50, we lose credits 50% from pricing, 50% from structure. That’s about 60% pricing, 40% structure.

And more of the structure is in the $3 million to $10 million of loans, the smaller ones but the great loans and you are seeing some of that weakness happen in some of the smaller banks. I forgot the last part of your question.

John Pancari - Evercore Partners

Just where newer commercial loan yields are coming on the books versus your existing portfolio yields?

Dick Evans

Phil, as far as the loan yield –

Phil Green

I think our average for the last quarter was about 100 basis points over prime, which is down little bit I think from the previous quarter. But we have been expecting some compression there, we did see some addition. So I think it’s around new and renewed loans average about 100 over prime.

Operator

Our next question comes from the line of Brady Gailey with KBW.

Brady Gailey - Keefe, Bruyette & Woods

I just had a couple of questions on the reserves and on net charge-offs. With net charge-offs down to 26 basis points, that’s a really low level. Do you think that low level will be sustainable going forward in 2012? And then on the reserve, you’re at about 1.38%. I know as credit continues to improve for you guys, that reserve will likely go lower. But I wonder where the reserve will kind of bottom out. Is that 125 or is it 1%?

Dick Evans

We don’t know that as you know probably as I mentioned earlier the real driving factor is solvent problems which we talked all about. The other thing is most sensitive to classified assets. And so – and we see very positive trends in that regard. So nobody knows where it goes there – I don’t think you can get locked into a number. You just have to watch since what’s happening in the classifieds and certainly in the K and Qs all that is disclosed today.

But classifieds are improving. And you mentioned that 26 basis points of charge-offs – 27 is very low, it’s not low enough for us. You will remember we operate historically in about 23 to 25 basis points, so I’d like to see a little bit more improvement. I am happy with where we are that it has improved to that point. But I will tell you that’s not where this company normally operates.

Operator

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

Brett Rabatin - Sterne Agee

I was wondering on – first, on the deposit flows that you had. I was curious if you could maybe break out how much of that might be due to customers essentially hoarding cash or having excess liquidity versus you gaining new customers and kind of you mentioned growth so far this year if you expect continued deposit flows on a similar fashion?

Phil Green

Well, I think the thing to me that we are looking at that really gives us lot of encouragements is the fact that over half of our deposit growth is coming from new customers. So I think it’s 55% overall over the last year, looking at the end of the year, go back 12 months and over half of that growth came from people that did not have any depository relationship with us in the year before. And that same time now that number is probably little bit less than what it was a couple of quarters ago because we have some tremendous amount of growth with regard to what we call augmentation of people increasing the current amounts that they have.

So we’ve definitely seen that. And I think at some point as we said before, we are going to see some of those unusually have balances go back somewhat to somewhat of a normalized number, whatever that is. But as long as we continue with being successful in growing share and growing new customers the way we are, we think we will be able to fade that pretty well. And then once that normalizes continue to show growth as we have over the last several years that Dick talked about.

Dick Evans

I’d just add to that, that I talked a lot about the Frost difference. We talked about the increase in our marketing and we are different. And our biggest challenge is to let people know that this isn’t like a commodity like many banks are but if you look at – and I mentioned this third party like Greenwich on the business side, JD Power second year in a row, it’s not us saying about the quality, although I know it because I live with our wonderful staff. And there is a difference to banking here and that through wherever we are in the cycle, we will continue to grow this business.

Brett Rabatin - Sterne Agee

Okay. That’s great color. The other thing I was wondering is was there any impact on the securities this quarter from premium amortization? Then as I didn’t know what the average yield was for the quarter, for the non-muni portfolio. I didn’t know if you had that handy, Phil?

Phil Green

Yeah, I do. Just give me a second. First of all, I am going to answer your question about the premium amortization. Premium amortization during the quarter was $2.3 million – well, $2.36 million. And in the third quarter it’s $1.34 million.

If you look at the taxable, non-taxable yields, hang on a second. On the quarter taxable yields were 2.78% that was on average balance of $5.081 billion. And our tax-exempt yields were 6.94% tax equivalent at balance of $2.220 billion compared to the third quarter – you noticed that taxable rate went down from 3.57% to that 2.78% but that reflects the big increase we had that, that we talked about in the purchases because our average balance in the third quarter those taxable were $3.538 billion. So while the taxable yield went down in that portfolio, the important thing is we were moving those yields from that 25 basis points in the Fed account to those 1.33% overall yield we got in the investments.

Operator

(Operator Instructions) Our next question comes from the line of Justin Maurer with Lord Abbett.

Justin Maurer - Lord Abbett

Hey Phil, just I know you mentioned the cash earlier. Just I want to make sure I have the numbers right. So end of last quarter, you guys had nearly $4.5 billion of cash, 20% of the balance sheet. And I think you said it, you ran it down to a $1 billion, then it drifted back up to $2.2 billion and then you took it back down to $1 billion at the end of the year. Is that right?

Phil Green

Yeah, I think that we probably averaged closer – when we made those investments, I think we were about $3.5 billion in cash. Okay. And then we took it down some. And then we got through investing we were around $1 billion, we may have been 100 million or shorter –

Justin Maurer - Lord Abbett

So at the end of the year you got --

Phil Green

Then we saw it move back up. Just recently I know we were running $2.2 billion. And then again, just because we didn’t want to be left hanging, if the Fed decides to cut that rate. We said let’s be defensive on some of that. We took $1 billion, put it on the three year, and we think we’re okay on that, make a little money on that, I am not impressed with it. But we will make a little bit of money on it and then roll it down the yield curve in the event we do get some increase in rates, it won't hurt us too bad.

Justin Maurer - Lord Abbett

And what would you guess – with in terms of timing in the quarter of all this, what was the benefit to do this over the – there is a lot of moving parts here to the fourth quarter and therefore you will get more of a call it full quarter’s benefit going forward, albeit the rates are low. But is it – is a few million bucks is kind of order of magnitude I guess?

Phil Green

Well, I think the easiest way to figure it is, we bought $2.5 billion but it averaged $1.5 billion at that 1.33%. So we are going to get some impact in the first quarter to just take that additional $1 billion and take that. So that will work with everything else we’ve got going on as that will be a positive. And whatever else is happening in the margin it will be one of the factors for this quarter.

Justin Maurer - Lord Abbett

Got it. From a deposit standpoint, like you said you guys gained a lot of new customers, what is your – have you pulled the numbers yet together for year end or just some sense of what your deposit share is in your markets? I mean, just given like you guys talked about earlier, your massive growth over the last five years in deposits, I don’t think the industry is growing at that rate. So what has your share actually done just kind of rough numbers?

Phil Green

Well, the last numbers I guess we have seen on that would have been about six months ago or so. And our share is good, I mean, it’s improving. I mean, we’ve got a long way to go before we take over 55% of the four banks above us but what we know is that we’ve taken share. I think a lot of it just by definition because the banks above us have so much of the market, we’re getting most of it from those big banks.

Justin Maurer - Lord Abbett

Just seeing $6 billion of incremental and 60% growth in deposits, you have to be taking a lot of share in order to get that level – the percentage growth even though like you said, the big guys have a lot of the dollar – lot of the dollars still to be had. But –

Dick Evans

With the tides coming in, we’re doing good but it’s going up for everybody too, maybe not as much.

Justin Maurer - Lord Abbett

Dick, on the loan side, we’ve always needled you about the loan to deposit ratio and so even if you go back just looking at the press release back to ’07, you were running 70%, then call it at the peak, now we are under 50%. So structurally, if you went back to 70% hypothetically over the next five years, pick a time horizon, you guys could put on additional $3.5 billion or $4 billion of loans now that it will be some deposits run off presumably. But is there anything structurally in your enterprise in terms of number of bankers, or number of officers, regions you are in and such that, that would prevent that from happening or just you’d have to layer on a lot more costs to do that? or Is that realistic to say you’ve grown the balance sheet like you said, 50% in the last five years, you have just that more earnings power embedded in this business once rates decide to rise some day?

Dick Evans

Well, I don’t think there is any significant increase in cost. I think we are always growing. We grow – we now have over half of our relationship officers we’ve grown ourselves. And we run through our Frost University. And so we prefer to do that, that way you don’t have to change somebody that’s already set in their ways or hiring somebody from another bank.

But I think we are very consistent in what’s happening. The other thing you’ve got to remember is the increase in the existing commitments. We are running probably a little under 45% loan to deposit ratio. I mean advance on commitments. And what I talked about on, I am happy to see that we are doing better. Our customers are coming back to more normal, increasing their commitments. So that’s where you are going to get the big lift. Historically, you always get about 80% of your growth from your existing customers. So as the economy gets a little better and it is a little better, you will get the big lift from just advancing on the work that we’ve already done. That doesn’t mean, we don’t stop but that takes a bit load off of where you are talking about in the overhead.

So I think we are well positioned that I think we got a lot more capacity to – and the other thing – the thing that’s kind of discouraging to us and I can’t remember the exact numbers. But the churn in the portfolio is tremendous, I mean like $2.5 billion is big numbers through a quarter. So don’t get locked into the $2.5 billion because I would lose with that number. But it’s – so the work is being done and the discouraging thing, you just don’t see the customers borrowing the money but they are increasing their lines and the current customers are doing that which is very encouraging. So you don’t have to – if you got the loan on the books, you got the commitment, that’s just a telephone call to say advance $1 million or whatever.

Justin Maurer - Lord Abbett

Well, the reason I asked too a lot, the infrastructure of the company being capable of handling that is if you took that level of loans, again it’s not going to happen overnight but if you did that at even a 3% better spread than you just have at the 1.33%, or whatever Phil is investing your money at today, that’s potentially just a buck of earnings, if my math is right, right there.

Dick Evans

You are right. In fact, if we get – for us to get up to 80% loan to deposit ratio which we were not only ago, you can cover up all this bad policy that was done by Washington, and you can – we’d have a lot of happy investors.

Operator

Our next question comes from the line of Jon Arfstrom with RBC Capital Markets.

Jon Arfstrom - RBC Capital Markets

Justin grabbed a couple of my questions. But it is interesting you have record earnings in a less than 50% loan to deposit ratio, I think that’s notable. Question I have though is branch plans for 2012, I think you are little more active than some of the other banks out there but curious what you are thinking for expansion?

Phil Green

I think we got six, we did this year and last year. And I think right now would be something similar. So I don’t see a big change in our approach.

Jon Arfstrom - RBC Capital Markets

And then the other question I had for you is on capital allocation. Curious your thoughts on what to do with each new dollar of capital, obviously that you’ve extended the securities portfolio that – how do you think about a buyback for the company and how does that factor in your allocation model?

Phil Green

I think a lot of people heard this because we said it a long time. But historically we set a good dividend and we try and make acquisitions if they make sense and then if we don’t have acquisitions that we do and we are generating a lot of capital and we are very profitable, so we do that. We will use a buyback and we have over time, we don’t have one in place today largely because we don’t think the capital rules that are in place – that will be in place for the industry, you are finally set today, particularly we don’t know exactly what they are going to do with the OCI component. And as a result, we are just given the environment that we are in, we are just taking advantage of husbanding capital and letting it to be very strong.

We don’t intend to let it lie fallow and just waste away, we will do something with it at the right time. But we don’t feel under any pressure right now to do a buyback. I was just going to say, but it’s not like it’s not on our radar screen. We think about all that stuff all the time.

Jon Arfstrom - RBC Capital Markets

Okay. Dick, any notable on M&A?

Dick Evans

There is all kinds of discussions. Again, you come back to the uncertainty with regulation and what other 300 interpretations that still haven’t been made out of Dodd-Frank and there are so many unknowns that it’s hard to see what a bank is worth. But I will tell you that we’ve, as I’ve always said, we’re aggressive lookers and conservative buyers. And so we continue to really try to understand what’s happening in the industry, what’s happening with banks. And I think there is still a lot of denial and lot of banks have all the things that are going to happen to them. And so as time goes on, there will be more reality set in.

Operator

And at this time, there are no further questions. I will now turn the call over to Mr. Evans for any closing remarks.

Dick Evans

Well, this concludes our fourth quarter and year end 2011 discussion. And we are adjourned.

Operator

Thank you ladies and gentlemen, this does conclude today’s conference call. You may now disconnect.

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