Cullen/Frost Bankers Inc (CFR) 2010 Q3 法說會逐字稿

I would like to welcome everyone to the Cullen/Frost Bankers third quarter earnings call. (Operator Instructions) I will turn the call over to Greg Parker Vice President of Investor Relations.

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 security Safe Harbor provisions of 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 Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended.

Please see the last page of the text in this morning's earning's release for the risk factors associated with the forward-looking statements. If needed, a copy of the release is available at our website or calling the investor relations department it at (210)220-5632.

At this time I will turn the call over to Dick.

Thank you, Greg. Good morning and thanks for joining us today.

It is my pleasure today to review Cullen/Frost's 3rd quarter 2010 results. Then our Chief Financial Officer Phil Green will offer additional details behind the numbers. After that, we will both be happy to answer your questions.

Back in July, when we last met, we tested on the notion of American businesses continuing to operate conservatively, reducing the spending and paying down debt during the economic down cycle. The economy of Texas, we said, continued to add jobs, and slightly outpace the growth of the US in general. At Cullen/Frost, we went on to say, is making progress on this environment and staying true to its core philosophy in this process.

Today, we can tell you that the big picture remains pretty much the same. For us, the Texas and for the country. In this environment, Cullen/Frost once again turned in strong results. Let me tell you, it is good to be in Texas. The lone star state continues to add jobs. Our September unemployment rate was 8.3%. Remains lower than the nation's 9.6% and job growth here is still projected to be between 2% and 3% in 2010 compared to the US rate of a 0.5% to 1.5% percent.

I noticed also, where the feds surveyed last week showed that the economy in Texas continued to grow in September and early October. Although, that growth has cooled somewhat. In fact, Texas has weathered the recession better than most for many of the reasons we discussed before. My belief is that we are also currently doing better than the nation because of our strength and energy and high tech. Of course that doesn't mean everything is rosey. Uncertainty has been persistent. It is not difficult to say why. Concerns about taxes, and also legislation related to healthcare and financial reform are real and challenging issues.

Worrying about these it has paralyzed business owners and investors. And that will likely be true it until they it retain it confidence in the economy and in the future. We are hearing so much discussion about midterm it elections right now among customers. In fact, a theme we are consistently hearing from customers and prospects is, call me after the election.

Clearly, people want to get through the election cycle. And get some clarity. In times of uncertainty, you have to be decisive. If you know who you are and can effectively articulate what sets you apart and how your decisions help not only your company, but also your customers and shareholders, the message comes across and brings real results.

At Cullen/Frost, we have made smart decisions and Cullen/Frost has strong capital and money to lend. We continue to focus on building and expanding relationships. We have got good stories to tell. Stories like our turning down TARP bailout funds. Easily among the best decision in our 142 year history.

And about exiting the residential mortgage business in 2000. A decision looking better in the light of the procedural mess.

But success is not only built on only avoiding pitfalls in this industry. It also comes from being aggressive and finding ways it grow your business. That's what declining the bailout funds freed us do to. Focus our attention unabated on expanding our business. And we have been successful on this front as we continue to bring in significant numbers on new relationships.

Looking at the company today. We have great people. A great culture. A clearly defined value proposition. And we are executing and communicating these across Texas and its paying off.

Now let's take a look at our 3rd quarter 2010 results. Our net income for the third quarter was $55 million. That is up 23% from the $44.7 million reported in the 3rd quarter of 2009. On a per share basis, earnings were $0.90 per diluted common share compared to $0.75 for diluted common share a year ago. Return on assets and equity were 1.25% and 10.49% respectively compared to 1.11% and 9.70% for the same period of '09.

For the 3rd quarter of 2010, net interest income grew to $155.7 million on a taxable equivalent basis. A 7.4% increase over the $144.9 million reported for the third quarter of 2009. This increase primarily resulted from an increase and the average volume of earning assets as we are now seeing the benefits of deploying some of our liquidity into quality investments late in the second half of 2009. Along with lower deposit costs. The net interest margin was 4.04%. Compared to 4.12% for the year earlier period. And 4.18% on a link quarter basis.

The flight to quality and safety that Cullen/Frost has been experiencing has been for eight quarters continues to drive average deposit growth. With deposits up almost $4 billion over the past two years. Average deposits for the quarter stayed strong at $14.3 billion. A rise of $1.5 billion over the $12.8 billion reported in the third quarter of '09 and increase of $474 million over the previous quarter.

Average loans for the third quarter of 2010 declined slightly to $8.1 billion. Compared to $8.6 billion reported in the third quarter a year earlier. And were essentially flat compared to the previous quarter.

Part of that aggressive it pursuit of growth has been to call it prospects and customers. Our prospect calling has really helped in moving business from other banks. And our pipeline is showing some positive trends. This calling effort has been successful.

In fact, there is more growth in the pipeline from prospects than from existing customers. To date, we have made it 16% more calls on prospects than we did last year. Our loan pipeline is now about at about the same level it was before the economy began to collapse in it May of 2008.

There is a point of reference. For the 18 months ending June 2008, before the economy collapsed. Over 85% of our new commitments came from existing customers compared to under 70% at the end of this third quarter.

More importantly, customer requests have increased for each of the last three quarters. This is an important trend because customers historically provide such a big portion of our loan request. The good thing is we have seen an increase in businesses moving to Frost because of out value proposition.

They feel more significant. They understand we offer a square deal. Excellence at a fair price. And that Cullen/Frost is a safe and sound place to do business.

Turning to credit quality. Our levels continue to be manageable and stable. Third quarter credit quality remain comparable to what was reported in the second quarter of 2010.

We continue to work through problems and the majority coming from resolutions. They are charging off loans. And we're seeing resolutions occuring through credit quality and improvement of individual credits, refinancing of loans elsewhere and loan payments and pay downs and orderly collateral liquidation.

Net charge offs of $9.4 million is representing a slight increase from the second quarter figure but was well below the peak in the fourth quarter of last year.

As in previous quarters, the third quarter write downs were adequately reserved for in prior reporting periods. Deliquincies at the end of the quarter were $90 million or 1.11% of total loans. The lowest percentage in the last seven quarters.

On September 30, non performing assets were $169 million up from the $159 million reported for the second quarter. They allowed for loans, losses, and leases remain comparable to what are reported for the last three quarters at $126 million or 1.57% of total loans. Non-interest income for the third quarter of 2010 was $70.4 million. Up 1.4% compared to $69.5 million reported a year earlier.

A major component of non-interest income is trust income. It was $17 millions compared to $16.8 million year ago. Most of this increase was related to the increase and all trust management fees and securities lending income. Investment fees which represent 74% of total trust fees were flat compared to the same quarter a year ago.

Moving now to consumer banking activity, the third quarter produced growth and the number of checking accounts. Up 5.5% at end ever the 3rd quarter of 2010. Over the same quarter a year earlier. Balances grew 6.8% over the same period.

Before I turn this call over to Phil Green, I want to leave you with this.

Cullen/Frost has been aggressive in this down cycle. Our efforts with outbound calls have really been paying off and building relationships and building our customer base. Of course, we are still working hard to expand relationships and also grow loans.

If you look at businesses today. The big companies are flush with cash. They have refinanced in the public markets at low rates and are posed to spring. Small and m,medium businesses have lowered their cost to match their new revenue strain. And they are the ones that bring us the real creativity in this system. Is it the creativity of letting capitalism work, that is so wonderful about our country. Businesses are ready to expand, to invest or buy another piece of equipment. And if they can just gain confidence in the future.

In the meantime, Washington has made banking more difficult by adding costs and reducing fees. The new legislation penalizes not only the bad actors in the industry but also some of the good actors; banks like ours. This is something we are in the process of addressing. And while we know we have to go through a period of adjustment to the new rules we feel very optimistic in the long term.

We're starting to see positive flow through the pipeline. We anticipate that the uncertainly will ease and with that clarity, people will be more decisive. There's still a lot we don't know about the new financial reform legislation. But it seems certain that it will reduce revenues for banks at a time when the economy is weak.

What I do know is that a strong decisive bank like Cullen/Frost will find opportunities to explained our business and grow revenues in the long run.

We are going to move ahead confidently. Dealing with the changes and legislation prudently in a way that meets the needs of our customers and is consistent with our value proposition. Cullen/Frost is well positioned for these uncertain times. We are going to continue to focus on the strategies and values that got us here.

And with that, I'd like to turn it over to our CFO, Phil Green.

Thanks, Dick. First of all let me say I agree with Dick. It is good to be in Texas.

And yes, we did report nice results for the third quarter. In fact if you look back this was the second highest level in our history. That seems odd to say in a uncertain time of historically low interest rates, weak loan demand, slow economy and regulatory tightening but it is what it is.

How we got to this point of a 23% increase over last year's earnings is pretty basic. The company managed expenses exteremly well, we lowered credit costs as we continued to work through manageable problem loans we lowered deposit costs when the competitive situation allowed it.

And in the absence of loan growth we made some timely investments with out strong deposit inflows whenever we saw value in the market. Our strong deposit increases have helped us increase net interest income by funding earning asset growth, but the arithmetic of it puts pressure on our net interest margin. That's what happened in the third quarter as the net interest income grew 1.7% annualize from the second quarter even as our margin dropped 14 basis points to 4.04%. During this period of time, we saw our average Federal Reserve balances increase from $1.785 billion to $2.128 billion. And this accounted for all the margin decline.

This increase in liquidy occurred even with our purchase of $600 million in investments in the quarter. We purchased $500 million in three-year treasuries at 1% which incidently yields about 59 basis points if you bought it today. And $100 million in GMA Orms yielding 2.04% and today, those would yield 180 basis points.

We have to say that as we see it today, it is hard to envision investing in the current market given market where yields are.

With the limited exception of some additional purchases of Texas PSF Insured Municipal. That means that we expect to see liquidity continue to build from now until either we see either some adjustment of the yield curve or we see loan volumes increase more significantly.

We realize that just saying no to this market creates some opportunity cost and margin pressure for a time. But we believe right now it as prudent response to what looks more and more to us like a bubble.

Looking forward, we discussed the Dodd-Frank Act and Reg E and the major areas affecting bank revenues and expenses and there is no question that these changes will put pressure on bank revenues from inter-change and overdraft fees, while the elimination of REINCREASE expenses that bank pay on, interest on demand deposits. Not to mention cost increase from general regulation.

Some of the overdraft impact began late in the third quarter and increase as we move forward. While Durbin and Reg Q will begin mid 2011. All this will put pressure on bank earnings.

However, while these impacts were effective laugh the day. Looking past this newer term impact, we were encouraged that the fundamentals of the company put us in a good did place to prosper at the economy improves and we see our lone to deposit ratio increase to previous levels.

In addition, we have seen significant increases in the market over the last 24 months in loan pricing. As an example, our Pre-Lehman 2008 spread to prime from new and renewed loans averaged about 38 basis points.

However, for 2010, this spread has averaged over 120 basis points. These two factors represent powerful operating leverage for the company once the economy returns to a more normal state. Finally looking forward to the rest of the year. We believe full year earnings somewhere around the current average consensus estimate is reasonable. With that, I will turn it back over to Dick for questions.

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

(Operator Instrcutions). Your first question comes from the line of Bob Patten with Morgan Keegan.

Morning, Dick, Phil. Phil, very good discussion on liquidity. And that is on everybody's mine right now.

Over the next few quarters assuming QE2 keeps rates low,, should we expect the same level of compression over the next couple of quarters with the margin?

Well, I think, with the scenario, you've painted and I agree with it,I mean he Feds pretty much said what it's going to do. I think there will be additional pressure on the margin just as you see additional funds come in I think the best we can do if we are not going to be buying large blocks of securities in the market. Particularly governments and agencies, best we can do is a Fed account . And if you look today the average weighted cost for all the deposits together, the demand deposits, the [tide over thing] is about 20 basis points. And we get 25 at the fed.

So that is sort of a wash when you bring that in. And if you are not making loans or investments to the level you want. What is going to happen is that you will have runoff going off in your securities portfolio going forward. That's where it will put pressure on

In terms of that. Your key comes up quick. Can you give us some color on what's going to be in the securities portfolio in terms of cash flows over the next couple quarters coming out?

Yes, I can give you a feel for it. I think we have been running $150 million on the mortgage back portfolio quarter. If you look at just kind of the speeds we have got. I can give you information on maybe duration. You look at the investment portfolio. That it includes the agencies and most responsive to speeds and lower rates. The average duration right now is about 2.42 years and concentration of that portfolio which is almost $2.3 billion.

It is 55% or Jennie Maes, 28% is Freddy Macs. And 17% are Fannie Maes.

Very helpful, fill in. Dick, your gut as to how fast the margin could snap back if we get loan growth it again?

You know its- its. I am stuttering because it is just a tough question. I am really encouraged by the call in effort for the last two years. And I think we're starting to see some light at the end of the tunnel with the pipeline. If the optimism after the election is positive, then, you know, we can start to see people do something.

As you well know, there is liquidity everywhere. I was encouraged somewhat that it our loans were down $300 million in the first six months of this year. About $150 million a quarter. And they were down, you know, $12.7 million. This last quarter. One quarter doesn't make it.

We are starting to see some signs that maybe it is turning. Obviously our staff is working extremely hard to move those goods, the good credits across the street. And we have been successful at doing it.

Just to repeat what I said and you know It is amazing statistic. If you go back 18 months ago and in June, 2008 before the economy collapsed, 85% of our new commitments came from existing customers and under 70% are coming today. The customers are there and they are ready to and they have the lines obviously.

Their volumes are down. Just as I said. In a slower economy, they have adjusted their expenses revenues down but they are certainly poised to move forward. I know that's a long rambling answer, but there's just a lot of factors. My gut, to answer your question, I am more optimistic that we are getting close to a turn.

Thank you, Dick, appreciate it.

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

Two things. One- first on expenses, is this a run rate we should look at going forward? Can the expenses say at about the level going forward that you had in three Q and that also wanted to ask on the following up on the question loan growth and the pipeline and what you are seeing out there. Was curious to hear any color regarding competition. It seems like everyone is trying to be a senile lender and grow and just wanted to see if that was impacting what you are seeing pricing-wise?

Let me take the expense thing first, Dick and then you can handle the loan one.

Actually, what I see is that we will see increase in expenses from a third quarter level.

Few reasons. One, I think we have it got seasonal increase in the fourth quarter. As an example. Marketing costs are going to be higher in that quarter. And we are going to have some vesting with reguard to some stock awards that are going to be higher than the previous quarter.

And then more importantly, we have some new initiatives that will be rolled out in our IT area, software, and infrastructure projects that are coming to completion that we will begin to advertise so those are some of the operating aspects of it.

The other thing I think that all banks are seeing is we're seeing additional cost for compliance and regulation and having to build our infrastructure there so I think frankly the trend on expenses it going to be moving up. Not because we are not doing a good job. I think our numbers speak for themselves in terms of what our people have done. But I think just the lay of the land and where we are today, we will call for higher numbers there.

On the second part of your question, first of all, it is important you know we watch closely to make sure we are not getting in something we haven't been in. If you look at the new commitments we're putting on. Well, CNI and commercial real estate. They are in the same categories that we have always done. Obviously energy is an important part of our business. Energy is kind of all over the board. You know Dodd-Franks has effected commodity trading. And that effects the hedges somewhat. We still feel really good about this business. We are kind of looking over the next few years that is all prices will stay. 80 - 83, gas three to five. Certainly we don't know anymore more than the other.

Finding cost is pretty reasonable particularly RIGS although FRACKing is expensive and very competitive just because there fewer people that do it. But we've had some growth in our energy credits, A lot of those, or some of that are insured National credits which is a positive because you want bigger credits that have big diversification.

And you have weaker sports you are still kind of working through. Contractors are delayed somewhat. Particularly, I'm talking about road contractors. And billing concrete fences on the border. And all that kind of stuff. They are starting to run out of steam a little bit. Because Texas has been so hot, any contractor that is in a weak part of the country has been coming to Texas. I think they are all hat and no cattle. But they are kind of messing the market up. So, we are kind of working through those ares. But its-its we're going to stay with what we know how to do and continue to grow that part of the business.

One last follow up and natural gas is above three, you are comfortable with the energy piece of your portfolio?

I am comfortable with where it is. I mean, gas is still a little bit below that. And I think we will be fine. Yes, I do feel comfortable. And what I am trying to say is that you know, you got to figure how long. There are a lot of different factors. It is not just price. I have felt good that the kind of customers and that the properties we financed have an economic half-life of seven years. So, I am comfortable with where we are.

Great. Thanks. Nice results for the environment.

Thank you.

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

Good morning. Back on the long growth topic, can you - more specifically, just wanted to see if you can you give us more color on where utilization rates stand right now as well as if you can give us the numbers in terms of loan originations in total and how they trend in the quarter..

Let me think. Ask me again, make sure I understand the question.

Yes, again, I wanted to if I can get some color on commercial utilization rates and line utilization rates where they stand right now and as well growth in the front end productions in loans and loan origination. How that trended in the quarter?

Well, some of the strength came from the shared national credits were up about $35 million. CNI loans were pretty flat. We've got to ride out bicycle pretty fast because you've got some run off still coming in. The way I look at line usage, I think there's two factors. Not only is line usage around 50% of below, kind of in the high 40s, probably the most important factor in line usage is with revenues down say in general 40%, its bad to make generalizations, but that's where it is. If you had a million dollar line for higher revenues. You only need a $600,000 line today.

I talked about this before with you. So where you ran 50% of a million, you're now running 50% of $600,000. As I said to you earlier, in the call, there is 70% of you know, we are the less and 70% of our customers are requesting.

So everybody's kind of in this frozen path. Year to date our commitments are $1.1 billion to $1.3 billion increase in the third quarter.

So, it is the thing you have to it look at our at the counter commitments that we are making the kind of commitments the same that we always used to do. And I like that diversification. We are not off into something new and staying right on the core.. Does that help you?

It does. Thank you.

Follow up question on credit. Can you talk about your MPL end flows in the quarter? What that it number was compared to last. And then also some color around the early stage indicators. 30 89-day past dues on your watch list?

The past dues over 90 days are really flat. 33.2 vs 33.9. Potential problems moved up about 7 million. There's no particular io industry in that. There is a couple of contractors. That moved that up somewhat. And the non-performers one of the things I always emphasize because I think it is really important about our company is that we provide, our charge-offs have all been provided in previous quarters. So that means we're staying ahead of - we are starting to work. I'd rather non-performers go down and continue to go down every quarter, that's not realistic. This just happened to be they moved up a little. I think we'll continue to see very positive trends going forward. It's mushy. I mean you're not going to see the line to straight down. You're just kind of working through this. And there is no big new problem in that. Its just working through the existing ones. The 30 to 89 past dues which is the lowest in seven or eight quarters. Which I think is a really positive, its kind of where you get your flow of new problems. The nonperforming end flow really been flat for it first, second and third it quarters. And in '09 we saw a big increase. And so the trend while we have a little blip here, I wouldn't come to any big negative conclusions, its still working down. It's mushy. You just don't get out of this stuff overnight. And don't forget our overall levels I think compared to the industry are extremely low.

Thanks for taking my questions.

Next question comes from the line of Mike Zielinski with Credit Suisse.

Hi gentlemen, thank you for taking my question. Back on securities, you guys have done a pretty good job on the past on buying munis and I think they were Texas munis. Is there a pipeline that you think you could buy. It sounds like from the comments there might not be.

I think there are securities out there to be had. I think one of the advantages that we have being able to buy these at such a good it yield. Is that there are a lot of people who can't buy municipals because they can't utilize the tax free income. They're just not making enough. And so there's just one place in the market there's been value.

I think you're still seeing in the 20 year area of about 5% yields. which you just beats anything out there in the market. The problem is that duration that is associated with them. You just can't load up on them forever without causing too much exposure. That's the main thing we were looking at. I know we've got some additional room, we'll probably buy another $100 million this quarter and maybe just small amounts at this point as we look forward.

And maybe we can adjust it but Id say maybe a run rate of $25 million a quarter just as a normal purchase. That's why the collar that asked before about the margin compression. If you cant buy anything in the market because QE2 is just driving everything down and there is a bubble in price and you want to be careful in reguard to duration exposure in municipals even though you buy some. That just takes us out of the game for now. We just feel its a prudent thing to do because I mean buying a seven year treasury for 1.25 or something crazy like that, can you imagine holding that thing three years from now and what's it's going to feel like?

We have had a pop in the tenure it recently. It will be tough. The tax rates, I am kind of low this quarter I believe. What should we be thinking going forward?

You know, I think we may see. I don't think we'll see a big difference from where we are this year. I think we'd had it in the low 20s. I think we'll be somewhere around that area. Last, is a stock repurchase program is that on the table? Are you guys thinking about that? We haven't had one in a little while because we've been wanting to husband capital and make it increase those ratios. I am glad we did given what the basil's thing has been. So you know the board considers all that in their normal work and we will consider that.

Historically what we've done in when we haven't had acquisitions that we feel are to our benefit and once we've got the dividends from we'll put in place of buy back. But I will say we will be careful with that. I don't think all the rules are well known as of yet.

Thank you very much.

Your next question is comes from Mike Turner with Compass Point.

Good quarter in light of the environment. And I am just going to beat a dead horse on the net interest margin. Can you talk about the absolute yields are originating at right now. Is it 4%.

What area?

On the portfolio, we'll just say the entire quarter. Everything, I guess.

Well, maybe let me see I understand your question. Maybe what we say is the overall rate earned and all earning assets for the quarter was at 4.39. That doesn't necessarily mean that's where we were originating.

I guess what I am trying to figure out. It is the last quarter at least in the cue, your yield on your loans was five-point, little over 500 basis points.

It was 518.

That's what it was last quarter or this quarter? Last quarter. It was 518. And in the third quarter where were your new original nation yields? I said that wrong. It was at 511. Pardon me.

Okay. 511, that's what I thought. And then in the third quarter where are you originating loan on average right now? We have moved up some. And I think, I mentioned what our spread to prime on new and renewed was on average for the year. And I this we are hanging in there.

Oh, around the 5% level. Again, that's the average. And what I said.

This spread has been around. 120 over prime for new and renewed. What is the math of that? That is 450 or so. Something like that.

As long as loan growth, we will say it stays flat with no change in interest rates. Then you know absent the securities and replenishment or runoff. And originating in a slightly lower yield than were the book is now. Could you see net interest income dollars grow or be flat next year? I'm trying to think about that on a dollar basis not even in the margin.

First of all. Let me make sure we have the loan thing straight. The new and renewed. I am talking about loans that are relative to prime. And there is a fixed component of the portfolio where we make fixed rate loans. Commercial mortgages,other occupied things that are going typically to be higher than that. I tend to see the yield is not sort of sticky.

Okay.

Okay. And it is in terms of how we look at it of the it is sticky. And you know, it is the problem is the securities portfolio. We're running stuff off of good yields and we dont see anything hardly in the market that is worth buying today. I think that equals margin compression in this market. I do. And I think that's true of everybody. And I think we have to go it through that. The point I made at the end of my comments was that I think the wrong thing to do is to panic and say, well, it is only market we have got and we are going head first. That's what people in California did whan they bought houses in mid-2008 It was the only market they had and they went into it. I really think we have a bubble in prices right now. And the important thing is that once we see our loan to deposit ratio go from 55 or whatever it is today back to the 75/80 where it is was and we layer on what I think is more disciplined in the market today with regard to pricing, post Lehman. I think the mechanic, the arithmetic of that and the leverage of that is very good. But you just have to get there. And I think you have to make responsible decisions in the mean time. And that's what we are saying.

Let me add something on the competition. And what Phil is saying. If you just look at the capital requirements. This industry has got to increase their spreads on loans. Are some crazy things being done in the market? Yes. There are. And realistically it is simple math that spreads we have got to as an industry get paid for the risk. I feel good about our discipline. We are being competitive and adjusting where we have to but this is got to continue to move up. Even as bad as everyone needs loans, they have got to be priced properly and I think as we go forward you're going to even see realize that. Because you've got more and more capital in the industry.

Okay. Great. Thanks.

(Operator Instructions). Your next question comes from the line of Terry McEvoy with Oppenheimer.

Thanks for taking my questions. Phil, just to circle back to a comment you made earlier about being comfortable with the full year average estimates that are out there. As we look specifically at the fourth quarter and taking into consideration a lot of the themes you've touched on, margin compression. Expenses being higher and seasonal impact on the insurance fees and plus service charges coming down.

As I look at the fourth quarter in order to maybe get to what analysts are looking for, that would mean we are going to see a decline in the provision potentially and or some security gains and one time it gains like we saw in the fourth quarter of last year.

As you look at that statement. Are you expecting any call it non-recurring items in the fourth quarter to maybe back up the statement?

No, I don't think anything is significant, no.

The second question, in the past, you haven't had any restructured loans at all in the nonaccrual or nonperforming, any restructured loans this quarter.

No.

The last question on my list. You provide non-interest it bearing deposits. Any comments at all and it will be out in the Q1 on period and non interest bearing deposits?

Did you continue to see growth there or did that growth it moderate at all in the 3rd quarter.

It continued to grow and the thing about looking at [pury] in deposits, you know, they are pretty volatile. I can tell you what they were and non-interest bearing. And period end, looks like $5.295 billion is where we were and If you want to know what the average is. Wait, I think the average is in the release.

That's correct, yes. Okay. That's it for my list.

Next question comes from the line of Justin Maurer with Lord Abbott.

Morning guys. Hi Justin. Phil, just on the [nims], I know it was addresses earlier the 15 bips, was there any kind of noise, good or bad. Late quarter, that we shouldn't think about directionally. All things being equal in the world for the foreseeable feature? That's the order of change we should see for awhile?

Well, if you look at just the net interest margin it number. Second to third basically, all of that was because of the increase in liquidity that we have.

And so, you know, what I have been talking about with regard and going forward in this issue. We don;t like this market. We think its imprudent to load up in it. And I looked for and talked about that impact on the margin. That's less than an optical issue.

And more than the mechanics of rolling off securities that you're not going to be able to replace and you're going to be building up liquidity. That is margin pressure and given what we have with the market today.

Relative to either, it seems like. You don't have a lot of borrowing see.

And you had some sub notes. And other borrowing and then some repos. Have you taken those down at all? Is there prepayment on that? And doesn't make sense.

Now, we did, we did pay off the home loan advances earlier this year. It was a couple hundred million bucks and we did some of that. As far as what is left. The Fed Funds and repos are really core for us. And they are mainly treasure management customers that sweep into it and we're not doing any institutional funding at all in that area. The trust that we've got left. We are probably going to keep it, Justin, because I think are liable plus 155. And if it is not peer one capital anymore, it is pretty cheap funding. We are rolling off some sub data of about $100 million or so.

Last question, what is the shortest term. CMO or MBS, that you can buy. Not on an effective duration, but an actual duration. And example, there seems to be varying degrees of what banks are- some are actually increasing their securities portfolio because of this liquidity problem right now. And they tell you the average duration is 2.3 years. But intuitively you know that can't be right. But are there other shorter term instruments, MBS type instruments you can actually buy? And not assuming prepay rates and they will magically extend once it is going up?

Justin, to be honest, we don't buy CMOs. We don't think there is value there. Someone can put a structure together and say it does one thing or other but we just don't own any of them. So, I am not there.

Thank you, gentlemen. Keep it up. Thank you.

Your next question comes from the line of Tom Alonso with Macquarie.

Good morning gentleman. Most of my questions have been answered at this point in time. Given your thoughts on the bottom market and sort of a bubble if you will, there. Any thoughts of taking advantages of some of the gains you have embedded in the portfolio.

No, no we don't. For one thing, it is just, as you just run the business, any gain you took you just have to go back in the market or worse. And so. I think we just. We stand pat right now. And that's what our intention would be. And ride it out.

Fair enough. I assumed as much. Just wanted to check. And just on the service charges on depositing cash you did a good job of offsetting Reg E any thoughts on how that's going to work out in the fourth quarter for you?

It implemented late in the third quarter so I think there is still some it will negative that we'll see because you're going to phase Reg E in. And I think most banks are adjusting their overdraft program even further. More aggressively.

And there is additional costs as we move forward.

It will be a bigger impact than it was in the third quarter. And I agree.

We did a splendid job of getting a very high opt in break from our customers.

Fair enough. Thanks, guys. I will turn the call back over to Mr. Evans for closing remarks.

Thank you for your confidence for Cullen/Frost. We now stand adjourned.

Thank you for participating in today's conference call.