Cullen/Frost Bankers Inc (CFR) 2009 Q3 法說會逐字稿

Good morning. My name is Susan and I will be your conference operator today. At this time, I would like to welcome everyone to the Cullen/Frost Bank third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions). Thank you.

Mr. Greg Parker, Executive Vice President of Investor Relations, you may begin your conference.

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 with 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.

Thank you, Greg, and good morning everyone and thank you for joining us today. I am pleased to review our earnings for the third quarter of 2009. I will offer a brief overview of our results and then turn it over to our Chief Financial Officer Phil Green, who will provide some additional detail. After that, Phil and I will be glad to take your questions.

The results we announced today, are about what you should expect from a conservatively run bank that is succeeding in a difficult environment. We're making process, however incremental it may be, against stiff headwinds. Let me be clear. There is no pleasure in reporting that earnings have decreased, not just because of what it means to Cullen/Frost, but what it means to our customers. It means that they are hurting, plain and simple. But I do take great comfort and a certain amount of pride in our overall results that show that our approach in this environment is the right one. This is a tough time to be in the banking business, but we have some tough-minded bankers here at Cullen/Frost. We're going about our business in a very methodical, rational manner that will see us through this situation and prepare us when the environment turns. You can see that in our extremely strong capital levels, our robust deposit growth, and our increasing [calling] effort to build new relationships.

Now let's take a look at the results. Cullen/Frost net income for the third quarter was $44.7 million, which is down 8.2% from the $49 million for the same period a year-ago. On a per share basis, our net income for the quarter was $0.75 per diluted common share compared to $0.83 per diluted common share a year earlier.

The provision for possible loan losses was $16.9 million compared to net charge-offs of $16.3 million. For the third quarter of 2008, the provision was $18.9 million, compared to net charge-offs of $6.4 million. You will recall that approximately $10 million of the provision for possible loan losses for the third quarter of 2008 was related to Hurricane Ike. The allowance for possible loan losses as a percentage of total loans was 1.45% at September 30th, 2009 compared to 1.25% at the end of the third quarter last year and 1.42% at the end of the second quarter of 2009. Return on assets and return on equity for the third quarter of 2009 was 1.11% and 9.7% respectively.

Average loans for the third quarter of 2009 rose slightly to $8.6 billion, compared to $8.4 billion reported for the same period last year. Still, this is down from the second quarter as businesses and customers continue to deleverage and adjust to lower topline revenues caused by the recession. Average deposits for the quarter were $12.8 billion, an increase of $613 million over the previous quarter and an increase of 23% over the $10.4 billion reported in the third quarter of last year.

Net interest income on a taxable equivalent basis for the third quarter rose 3.8% from a year ago to $144.9 million. This is due mostly to an increase in the average volume of earning assets and was offset by a decrease in the net interest margin, which was 4.12% compared to 4.74% in the third quarter of 2008 and 4.28% in the second quarter of this year.

Our capital levels are strong. Tier 1 total risk-based capital and leverage ratios for the corporation at the end of the third quarter of 2009 were 11.49%, 13.72%, and 8.47% respectively. Non-interest income for the third quarter of 2009 totaled $69.5 million, compared to $77.3 million reported in the third quarter of 2008.

Looking at some of the components, trust fee income was $16.8 million, compared to $19.7 million a year earlier. Most of the decrease relates to lower oil and gas trust management fees, down $1.9 million from last year's third quarter. Service charges on deposits were $26.4 million, up $3.8 million compared to the third quarter of 2008. Impacting this rise is a $3.1 million increase in service charges on commercial accounts resulting from higher treasury management fees.

Other charges, commissions and fees were $6.8 million for the third quarter of 2009, down $3.9 million from last year's third quarter. Last year's third quarter included a $2.6 million investment banking fee, and money market fees were down $1 million for the same period. Other non-interest income was $11 million, down $4.9 million compared to the $15.9 million reported in the quarter a year earlier. Most of this decrease is due to income of $2.2 million recognized in the third quarter of last year for the collection of loan interest and other charges written off in previous years. Also impacting the decrease was a $1 million gain on the sale of assets recorded in last year's third quarter.

On the expense side, non-interest expenses was $132.2 million for the quarter, up $9.3 million or 7.5% versus a year earlier. A large part of this increase is due to an increase in FDIC insurance expense of $2.8 million. In addition, total salaries rose $888,000(Sic-see press release) or 1.4% to $58.6 million, and were impacted by normal annual merit increases and small increases in the number of employees, which was offset in part by a decrease in incentive compensation. Employee benefits were up $2.8 million, primarily due to increases in expenses related to the company's medical costs, 401(k) and profit sharing plans and retirement plans.

Furniture and equipment was $11.1 million, which was up $1.5 million for the same quarter last year. This increase occurred due to the increase in depreciation expense related to furniture and fixtures, primarily for new locations and amortization of software and software maintenance expense. Other expenses rose $1.1 million from the third quarter last year. Most of this increase was due to the recognition of expenses for other real estate owned.

Let's turn now to credit quality, which continues to be a manageable challenge for Frost in this weak economy. On a positive note, deterioration in credit quality moderated somewhat in the third quarter. As a result, we're working through issues and not dealing with an increase in the problems. The issues we're managing here are to be expected, especially in this environment, and our loan loss reserve was built early in anticipation of the modest increases we're seeing in non-performing assets. Non-performers at quarter-end totaled $220 million. On December 31, March 1, and June 30, these stood at $78 million, $128 million, and $190 million respectively.

The $30 million increase this past quarter is the smallest increase for the last three quarters. It was driven by one credit, a commercial crane operator, whose loan was $25.7 million. The commercial crane issue is related to the economic downturn, and slow reaction time by the management of the customer -- another example of problems caused by weaker management. The borrower filed Chapter 11 bankruptcy and plans to emerge within 180 days or so as a new, leaner and more efficient company. Our exposure of loss to principal is minimal and we're in a preferred position from a legal standpoint and as a key component of the bankruptcy plan. Overall, we're comfortable with the adequacy of the reserve and any further erosion of earnings as a result of needing additional reserves for new non-accruals should be limited.

We also saw charge-offs increase to $16.3 million, up from $8.3 million in the second quarter. Annualized on this quarter number and year-to-date number equals to 75 and 46 basis points respectively. However, based on what we now know, 2009 charge-offs should be in the range of $45 million to $47 million or approximately 55 basis points of loans, assuming no loan growth through the fourth quarter. This surge in charge-offs during the third quarter is a result of management working through issues, establishing known losses to facilitate the resolution process. Collateral is being garnered and liquidated, guarantors are being aggressively pursued, and judgments are being obtained to accelerate the ultimate recovery process.

Loan delinquencies 30 days or more stood at $123 million, or 1.44% of total loans. Past due loans are reasonable and expected to remain so. It is noteworthy that loans over 90 days delinquent on September 30th stood at $37.2 million versus $41.1 million on June 30th, a sign that problems are subsiding. Another sign of possible improvement is the potential problem loans. Their total today stands at $11 million, verse $28 million in the second quarter of 2009. Like the 90-day delinquent category, potential problem loans frequently deteriorate to non-accrual status.

The decrease in potential problem loan totals during the third quarter suggest that fewer potential non-accrual candidates exist. Non-accrual loans plus 90-day delinquent and potential problem loans has actually remained about the same from the second to the third quarter. Finally, it is important to recognize that the allowance for loan and lease losses did move up slightly for the quarter. The quarter-end total of $123 million affords the following coverage -- 1.45% coverage of total loans, and the allowance to charge-offs is approximately three years, covers three years of charge-offs based on annualized year-to-date charge-offs.

Turning now to the consumer side, we generated solid growth in the number of checking accounts and deposit balances in the third quarter. Checking accounts net growth was up 5.6%, balance growth increased 14.8% over the same quarter last year, and balance growth 1.3% on a linked quarter basis. Consumer sumer loans are up slightly in the quarter versus last year, but they are flat on a linked quarter basis. We are closely following the discussions and proposed changes related to consumer product fees, and while any final decision are premature, we will be prepared to respond quickly to meet any new guidelines.

The business results are really underscored by the difference between banks that serve Main Street like Cullen/Frost and those who serve Wall Street. We continued to generate new relationships and build our core businesses. These new relationships are up 92% over the same time last year. Our stability and reputation are working in our favor, paving the way for a strong recovery when the economy turns.

According to Barlow Research, C&I loans for US banks have declined over 8% for the first half of this year, where at Frost, loans serviced by commercial loan officers are down 3.8% for the first three quarters. Our drop has been primarily in smaller companies that have chosen to reduce debt. And, of course, we're comparing our best third quarter in the history of our company last year with a very difficult period for most companies this year. The new loan requests from customers is off 34% from last year, which compares closely to the drop in revenues across Texas and the rest of the country. The great news is that we're seeing some improvement in the latest quarters. Loan commitment growth has improved to double-digit levels for the last two quarters.

Before I turn the call over to Phil, let me note a few more items. In our last quarter call, I said that the Texas economy was showing signs of leveling off or bottoming out. The question is the same one today -- how long will we bump along the bottom? No one can provide a definite answer to that, but I am more optimistic than I was three months ago. We're seeing signs of improvement. More recent forecasts for 2009 shows Texas job growth is a negative 3%, better than the nation's decline of 4%. Most Texas companies are not changing employment levels, although temporary services are seeing an upswing. On average over the last 30 years, Texas job growth runs 1% higher than the US. In fact, the actual statistics for 30 years is Texas grew on average 2.8% and the US grew at 1.8%.

Looking out to 2010 forecast for Texas, job growth ranges are from 1% to 1.5%, slower than the historical average, but still much better than 2009. Meantime, we will continue to manage our business as always -- conservatively, deliberately and confidently. Two Two other reasons for optimism -- things that are a drag on many other financial institutions, such as excessive exposure to toxic home equity market, exposure to a poor commercial real estate market in some areas of the country, or even dealing with the fallout of accepting TARP funds, Cullen/Frost is free of these issues, thankfully. And finally I'm optimistic because we have some of the hardest working people in the banking industry right here at Cullen/Frost. They do a terrific job for our customers. They know how hard we have to keep pushing in this economy and they continue driving growth wherever possible. I would like to thank all of our employees for their effort under extraordinary circumstances. And now let me turn the call over to Phil Green.

Thanks, Dick. I will just make a few additional comments on our operations and then turn it back over to Dick for questions. As Dick noted, our net interest margin did see decline. We were down 16 basis points from the second quarter to [4.12%], and in the primary driver of this decline is our strong deposit growth, which we couple with our build-up in liquidity. This impacted our margin by 19 basis points.

In the third quarter, our average deposits increased a little over $600 million on annualized growth of 20%. At the same time, the average balance in our fed account increased a similar amount, growing from $500 to $1.1 billion. The average cost of all of our deposits, both demand and time in the third quarter, was 43 basis points, while the rate earned on our excess liquidity of the fed is only 25 basis points today. So you can see the squeeze created by this unusual interest rate environment when the marginal investment is in some form of short-term liquidity.

As we said before, mortgage-backed agencies have long been a core holding of the bank, but we've not [lagged] the market because we believe the yields are artificially low due to the large levels of government purchases. We also said we knew at some point we would have to hold our nose and wade in. Our preference has been to fund profitable vending relationships and purchase high quality PSF insured Texas municipals, where there's been in our view a fair return on investment. However, given the lower loan demand in the state this year and given the fact there is some limit to the level of municipals we should utilize, we will be utilizing some agency mortgage-backed securities in the coming quarters.

With that said, we still believe in the importance of strong liquidity to meet the lending needs of our customers as the economy turns and to meet the demands of our deposit customers as they ultimately begin the utilize extremely high liquidity levels currently entrusted to us. This is true, even if our liquidity position costs us something in the short term.

Looking at our actual investments for the third quarter, we purchased approximately $260 million in municipals with an average final maturity of 18 years and average yield of 5.47%. In the fourth quarter, we expect to continue at about half of that level of investment purchases or municipal purchases while beginning to purchase some agency mortgage-backed securities.

Looking at our loan growth for the quarter, average loans were up 2% from the previous year, but were down an annualized 9% compared to the second quarter. Of this $202 million drop, $135 million came in our C&I portfolio, with one-third of that decline represented by shared national credit. And the remaining $67 million decline was broadly based in real estate loans including land, construction, and commercial mortgages. Total loans continued to decline another $27 million through mid-October.

Looking at deposits, both demand and time each experienced 20% annualized linked quarter growth in the third quarter. 90% of our $400 million increase in time deposits was from money market deposit accounts. The categories of time deposits, most categories of time deposits showed increases, with the exception of jumbo and consumer CDs. Last quarter, I noted some specific categories of deposits included in the numbers above, and to update them -- correspondent bank deposits into our corporate high yield money market deposit account increased $77 million to $239 million. CDs related to the [CDRS] program declined $22 million to $196 million, and our innovative online hybrid checking and savings account known as the Momentum account increased $32 million to $154 million.

Also I wanted to make a few comments in addition, to Dick's review of non-interest income and expenses. First, regarding trust fees, although oil and gas fees made up only 15% of our total trust fees in the third quarter of 2008, they accounted for two-thirds of the total drop in trust fees in the current quarter compared to last year. These revenues have been highly impacted by the drop in energy prices and drilling activity, particularly related to natural gas. However, as the economy improves and this sector recovers, we should see renewed growth as this industry returns to normal.

On a linked quarter basis, trust revenues were basically flat. However, investment fees were up a non-annualized 7.9%, increasing $950,000. Both account growth and investment performance have been good. As an example, the S&P increased a little under 7.5% in the third quarter versus the second. However, our equities under management increased by just under 15%. This was offset by a seasonal decline of $740,000 in tax preparation fees and some other fee categories. However, we're looking forward to once again seeing good growth in these revenues as financial and energy markets return to normalcy.

Looking at noninterest expenses, obviously FDIC expenses have had a big effect on the year to date -- $2.8 million is 2008 to $20.7 million in 2009. Aside from that, the company has been very careful with capital expenditures, new hiring, and expenses -- focusing on the completion of our new technology center in San Antonio, targeted branch expansion in very attractive markets, and the completion of critical system upgrades committed to in previous years.

Also as an aside, while not a current expense, I would like to note that our FDIC assessment -- under the FDIC's assessment prepayment proposal, we anticipate paying about $62 million into the fund in the near future. In addition, you will note as a result of our purchase of municipal securities over the year, our effective tax rate has improved dramatically, declining from 30.2% in the third quarter to 17.7% in the third quarter of 2009. With that, I will turn it back over to Dick for questions.

Thank you, Phil, I will open the call up to questions.

(Operator Instructions). Your first question comes from the line of Brett Rabatin with Sterne Agee.

I wanted to first ask, could you give a little more color, Dick and Phil, maybe on the charge-offs on the quarter and the composition of what those were? And could you give us some more commentary, perhaps, on energy and the portfolio that you have and how it's been performing in the environment?

Sure, the charge-offs for the quarter -- there were two credits that were -- five or six credits we have been dealing with that we put behind us and charged off about $5 million, $4.5 million on one and about $5.5 million on the other. That really put them to bed. Now we're pursuing the guarantor and there was a bad audit in regard to the other -- they overstated the inventory for one of the manufacturing companies by $4 million. And obviously we're pursuing the accounting firm and their insurance coverage. But the main thing is -- what we have been trying to do, as I said in the call, is to address these quickly. If it's necessary to go into bankruptcy, push them in there as fast as we can, deal with exactly what the collateral is worth, liquidate it, and then pursue the guarantors. And in this particular case, these were two credits in which we have now liquidated the collateral and now it's just about pursuing any recovery, but obviously any recovery is not reflected in any of our comments.

I would like to point out on an overall basis if you look at our net charge-offs for the quarter, about 80% were from the C&I area with about $13.2 million. Commercial real estate was $993,000, just under $1 million, and consumer real estate was about $500,000. Consumer was about $1.7 million. So they totaled $16.3 million.

Thank you, Phil. Let me expand on the other part of your question. You asked about energy. Quite frankly, our energy loans are performing very well. You will remember that we have only one classified energy credit. It's one I have talked about all year long. It's the one that is a production credit that they mainly in 2008 were trying to sell the company and just didn't focus on their business. That company is now in the process of being sold, and working through, and so we'll deal with that.

I will also add, while we're talking about credits, and energy credits, that is the only classified credit we have in our shared national credits. With our call last time, I was asked several times, and those results as you know nationally just come out in August. In our entire shared national credits we have only one classified loan, and that is the oil and gas I just talked about. Furthermore, to expand on energy, as you will remember, the hedges on natural gas for 2009 -- most of our customers and certainly those who are leveraged are at $7.75, so 2009 is pretty comfortable. And so the real question is what does it looks like going into 2010? As you look at that, and in general our customers are very comfortable with oil at $70 and comfortable to the extent that they are planning on drilling some oil prospects.

So that half of it seems to be working very well. As far as natural gas, it's really all over the map. If you follow the futures, as I do almost daily, you will see they have moved up a lot in the last two or three weeks and it's somewhat confusing, because the storage is so high. So the prospects of working through that in 2010 would say that it takes time. But with this opportunity we're seeing many of our customers take advantage of hedging their gas at roughly $6.10 for 2010 and close to $7 for 2011. Certainly there are some that don't hedge at all, and they are ones that have a lack of leverage and I guess you would say have a tendency for a little greed. And so when you look at all of the factors, our energy portfolio is performing very well.

I also just might take two other segments and talk about real estate. It seems like you can't go anywhere, or at least I can't and somebody doesn't ask me about commercial real estate. As we told you in the past and looked at some details, we have only one retail center that is non-performing, and so why is it that we're different? I think there are a couple of factors. First of all, 60% of our commercial real estate is underoccupied, so it's to that business that is cash flowing and they would either be paying rent or paying for their real estate. So that is performing very well.

I think you have got to drill down into the different types of where the problems across this country are. Certainly condos, multi-family apartments, spec office buildings. Those are things that we really avoid. We just haven't felt comfortable with financing condos, or multi-family, or spec office buildings for five years, and certainly sometime during that five years people made a lot of good money and we didn't do it. But now we were concerned about those and stayed out of that. As far as land loans go, the land that we did finance was mainly for one to four family builders. So even though as slow as the market it, that eventually will be taken as that market expands. So we really haven't seen problems.

If you dig down a little deeper, you'll find across the country that there's been some painful pieces in finance and franchises. Really, we have avoided this sector. We have one exception, and you have heard about the pizza operation that we have dealt with. So we shouldn't have done that one, but thank goodness we didn't do really a lot or any others. And as I said, we talked about on the retail side, as I discussed in some detail on previous quarters, we have looked at the tenants and we have been very fortunate to have good, strong tenants and have dodged the bullet of those that had tenants that filed bankruptcy.

So I think if I was to sum up this credit quality issue, I would say that we're working through the issue and we're not adding problems. The increase in nonaccrual loans have been sourced from relationships previously identified as problems. So we built those reserves as we identified those. Our increase in charge-offs is just working through the loans that we already noted as problems, and for the most part, we have adequate reserves for the period. Delinquencies are consistent with prior reporting periods. And those potential problem loans, I was very pleased to see that from the second quarter we moved down from $28 million to $11 million. So the deterioration in credit quality has moderated in this third quarter, and it's like the pig is working its way through the python.

Thanks for all the great color.

Thank you.

Your next question comes from the line of John Pancari with Fox-Pitt Kelton.

Hi, John.

You did not provide EPS expectations or your view on consensus this quarter. You normally do that on the conference call. So should we read into that at all and can you give us an update what you think about consensus expectations at this point?

John, the reason -- what we always do is give an annual number. We have been careful not to give quarterly guidance in the past for the most part, and we have just got one quarter left. So we give guidance on, specific guidance on the year, we would be giving you guidance on the quarter, which is not our practice to do. So if you need me to say something about earnings guidance, I will say if you look at the range of estimates for the year out there, we think we'll be somewhere in that range.

Okay. And then secondly, can you talk a little bit about whether you have other similarly sized MPAs, similar to the large crane operator credit that you are watching closely at this point, that we could see move through the snake?

What I meant by move through the snake -- the ones that we know and we have tried to dig down in our portfolio have really all been identified, and I have talked previously about the pizza operation. I have talked about the oil and gas loan that I just talked about again. And so there is not anything -- the [Mexico], as a group, is really working out like we expected -- and so there is not anything that I haven't previously talked about, other than the crane operator did go to non-accrual. We always want to know more than you do, and you know what I know about the portfolio, and as I said, I'm really optimistic that we're working through things properly.

Okay, and then lastly, can you just give us an idea in terms of -- it seems like you expect some continued shrinkage in the loan portfolio, but you are seeing good deposit growth. So should we assume that the margins will see some continued pressure here despite your reinvestment of excess liquidity into agencies, et cetera?

John, I think we could see a little benefit a pop in the margins, because of the investments that we made, because we used up some of our liquidity. It was not all of it by any stretch of the imagination, but it was some nice investments in munis that are beginning to kick in. I think we'll begin to see a little pickup in margin, other things equal, in the fourth quarter, to be honest with you. But over the long-term, and it's really an industry issue -- deposit posit pricing seems to have decoupled from money market rates and we have got to get some correlation back together with those in order to be able to make even just a little bit of money on liquidity as opposed to losing money on the margins. So I think as we move along through next year and if we see liquidity levels just building up like they have this year and those kind of deposit growths, I think we'll see some margin pressure, but I think in the near term we expect to see a little bit of help because the investments.

John, on loan growth, we're making, as we have reported over and over, just a tremendous amount of more calls and calling on customers. I think one of the interesting things that just shows how frozen, is my term, the business person on Main Street is. If you look at our in person calls versus our pipeline, in January it took 10.6 calls in person to convert it to a pipeline. That line has moved up to where, in fact, it's moved up -- at last quarter it was 13.8 calls and today it takes 16.4 calls. Year-to-date, it's taken -- just on customers, in fact, it takes more calls, 14.5 calls to convert to a pipeline and prospects, 13.7 to get a loan opportunity.

So one of the things that I have communicated with regulators is that there is much discussion that banks don't want to loan money. Phil just told you how much liquidity we have. We are anxious to loan money. We are trying as hard as we can. People don't want to borrow money. They are very scared in this environment and it is really the falling out of this that needs to happen.

I think as the economy is showing these improved signs, as I just discussed, that will be some help, but this is a slow hill to climb. I think it's moving positive, but it's going to take a little while. But certainly we have got the money. We want to make the loans and we're trying very hard. I would also just add one other, we have talked about our pricing metrics, where we have been widening the spread, which is appropriate, not only because rates are practically zero, but banks -- the industry has not [conveyed] in our opinion for the risk involved and we have made headway in that regard. So there are a lot of factors working.

Okay. Thank you.

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

My questions have been asked, but just following-up on the color you gave, if you look forward into 2010 and 2011, obviously line of credit borrowings are down -- where do you see growth beginning from the best opportunities for growth? Is it small business? Is it middle market? Is it organic? Is it share gains? Just general thoughts on that?

Our life is really in the middle market, and I see opportunities as soon as this thaws out. I think one of the things -- it's very hard to see the turn now, but we have got to remember that while the consumer has been deleveraging and businesses have been deleveraging, the natural state of both an individual and a business is the business wants to grow profits and the individual likes to buy things. So when that turns and those start to push forward, I don't know, but I think that is the pressure that goes against all the other things, the headwinds that are pushing the other way. So the most important thing from our perspective is the reason that we keep emphasizing these new relationships is because we want to build our customer base. And we are building it, 92% more new relationships than we had last year. And remember, we're comparing this quarter with the quarter a year-ago, which was the best in our history. Even though the economy was starting to have trouble, it was a great quarter for us. So we got the extremes, but I am optimistic that we're starting to at least slowly move upwards.

Dick, I think also, don't you think while we have been doing a good job of moving relationships over, our current customer base as you said hasn't been borrowing money. So we have seen that the money borrowed tends to be offset by regular amortization of the portfolio, and what is more normal for us is to see not just new customers come in, but see some deal flow from the current customer base that we have, and I think we'll see that turn around as things get some normalcy. That is where we'll be able to leverage the great base of customers we have.

That is a good point, Phil, and one thing we have to remember is with revenues dropping, the businessperson has been trying to find a new level of revenues. As all of us know, that they have been letting inventories just go out the door and not replacing them. We saw a little bit of jump, I think it was in August in inventory statistics of going up. So I think we're getting to the bottom of that. And so you are going to see businesses start to build their inventory as they have more confidence that this new level of revenue stream is where they should have the inventory level to handle those sales.

Thank you, Dick. Good color.

(Operator Instructions). Our next question comes from the line of Michael Rose with Raymond James.

Just wondering if you could touch a little bit on your hiring plans over the next couple of quarters. I know you have expressed that one of the mistakes made in the late 1980s/early 1990s was not being aggressive enough in going after business. I know you guys are cognizant of that, but could you talk about that and what that means going forward?

Sure, Michael. First of all, we have got a great staff and a good base of relationship officers. And secondly, we have made great progress in what we refer to as our team selling. We're crossing lines of business and everybody is helping each other sell all the different things that we do. So you get a certain amount of leverage and efficiency in that.

Secondly, I would say to you that we're always looking for outstanding people, and people that appreciate the way we do business and have an appreciation for our culture. So that never changes over years and yea, and certainly as those opportunities come up, we'll take advantage of it.

And last, but not least is that we run a wonderful training program for our young people, and that is what we call our Frost University. We have run over the last few years a wonderful base of young people that as I see this is a tremendous opportunity for them, because they have been well-trained. They have had obviously different levels of experience. Some just graduated last March and some graduated two years ago. But that group is in the inflow of coming forward. And so in fact, we have been really growing our own people out, I would say, in round numbers, and it's always dangerous to make a generalization -- probably 50% come from growing our own people and 50% from outside.

So I don't see -- I think that is the other thing about our company. We don't have to jerk and react. We're proactive in continually building through the different economic cycles.

I think another thing I might point out is if you look at -- as I mentioned in the expenses, we're being very careful in expenses, but there are some things that we're committing money to and one I named was new branches, and these branches are great locations in terrific markets. I think we opened around six, I guess, in the last 12 months and we hired about 50 people that are associated with all of those branches. Typically that will include a community leader -- someone who is not just a teller/manager or branch manager in a traditional retail setting, but someone who has responsibility for that market. And sometimes we hire those people from outside and sometimes we bring them in from inside. So to me, that is a strong statement as I look at those new hires that we're committed to growing the business in the good markets that we want to be in.

Thanks for the color, guys. I appreciate it.

Your final question comes from the line of Peter Winter with BMO Capital Management.

Good morning.

Good morning.

I saw that you had mentioned the benefit on the tax rate from some investment in the tax-exempt securities. Can you talk about what the outlook for the tax rate is in the fourth quarter and 2010? The second part of the question is, you talked about the loan paydowns. I was wondering -- could you give some trends on the line utilization rates?

With regard to the tax rate, I think because we intend to be buy some additional municipals and because we'll be averaging a full-year with the municipals that we bought this year, I think we will see the tax rate go down somewhat, but I wouldn't -- I think it's what, 17% in this quarter. I would think we would go down some, but I honestly don't know the answer to that question. It probably won't be that much different.

The second part of your question on the advance rate, typically you will see advance rates go from [45 to 55], and I would tell you that we're at the lower end of that range, and certainly we have seen that advances on new lines have really been at a lower part also. So there is no doubt that people are getting their lines set up, but not using near as much as they normally would.

Let me take a look at some information on that effective tax rate. Let me say that this year, if you don't just look at quarter, but look at the full-year, we're going to be around 22%. And I would expect it to be similar as we move forward.

Okay. Thank you.

There are no further questions at this time.

Well, thank you for your interest in Cullen/Frost. This concludes our call.

This concludes today's Cullen/Frost Bank third quarter earnings conference call. You may now disconnect.