Cullen/Frost Bankers Inc (CFR) 2011 Q3 法說會逐字稿

Good morning. My name is Brandy, and I will be your conference Operator today. At this time, I would like to welcome everyone to the Cullen/Frost Bankers third quarter earnings conference call. (Operator Instructions)

Thank you. Mr. Greg Parker, 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 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.

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

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

During the third quarter our net income was $54.5 million compared to $55 million reported in the third quarter of 2010. On a per share basis, earnings were $0.89 per diluted common share, about equal to $0.90 per diluted common share 1 year ago. Return on assets and equity were 1.15% and 9.79% respectively compared to 1.25% and 10.49% for the same period of 2010.

Included in our quarterly results are 2 unusual items. During the quarter, the Company corrected an under-accrual of taxes from incorrectly deducting premium amortization on municipal bonds since 2008. This resulted in the unusually high effective tax rate in the third quarter of 30.3%. As a result, the Corporation recognized additional income tax expense totaling $6 million. This was offset in part by a $4.2 million after tax net gain on the sale of $32.6 million in long term duration municipal securities during the quarter.

Now let's take a look at deposits, which continues to be strong. For the third quarter of 2011, average total deposits were $15.4 billion, an increase of $586 million over the previous quarter, and $1.1 billion more than the $14.3 billion reported for the third quarter a year ago. Our disciplined calling and team selling efforts continued to expand our customer base which should drive our future growth. Nearly half of our deposit growth for the quarter, 43%, was from new depository customers. For the third quarter of 2011 net interest income on a taxable equivalent basis increased to $160.6 million, up 3.1% over the $155.7 million reported a year earlier. This primarily resulted from an increase in the average volume of interest earnings assets and was partly offset by a decrease in net interest margins. Strong growth in deposits helped define the increase in the volume of earning assets. Net interest margin was 3.81% for the quarter compared to 4.4% for the third quarter of 2010 and 3.95% for the second quarter of 2011.

Non-interest income was $79.2 million for the third quarter, up $8.8 million compared to the third quarter of 2010. This included the 1-time gain from the long term security sales we mentioned earlier. Without this gain, non-interest income would have been up $2.4 million from the third quarter of last year. I was pleased to see the strong growth in trust fees. The majority of it from investment fees. For the quarter, trust fees were $18.4 million, up $1.4 million from the third quarter of 2010.

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

Non-interest expenses for the third quarter were (audio difficulties) $137.4 million up 3.7% or $4.9 million from the third quarter of 2010. Salaries rose 3.3% or $2 million from normal annual merit increases. Advertising and promotional expenses increased $2.2 million as we continue to tell others about the unique customer focused banking experience at Frost. I'll discuss the economy a bit later, but we see the consequences of the economic uncertainty and excess government regulation most clearly in loan demand. Uncertainty and over regulation are job killers for businesses of any size regardless of location, even in a relatively strong state like Texas. Outstanding loans have remained relatively flat at $8 billion for the year. (Audio returns) The fact is we've been working hard to drive commitments.

While our customers are requesting more loans, they are also paying them down faster. Our loan payoff rate this year has been about 15% faster than last year, which means we have to pedal that much harder just to keep pace. Year to date, new loan commitments are up 24% and nearly all regions showed double digit increases compared to last year. Current customers have provided 85% of this increase compared to 67% in the same quarter of last year. This increase was driven by new commercial and industrial commitments, which are up 22% versus last year, the highest level since 2008.

I'm very pleased with this growth in C&I in this current environment. In fact, if you look at the outstanding loan portfolio of third quarter of last year versus this year, we're up $200 million in C&I loans, or 5.4%. It's also important to note that almost $400 million in problem loans moved out of the portfolio since the third quarter of 2010 improving credit quality. Real estate commitments have increased at an annualized rate of 6% since the year end of 2010. Obviously, these commitments will fund up as the projects are built.

As we discussed in previous quarters, many of our large customers appear to have lost their way on pricing and structure disciplines. We will stay true to our principles and emphasize asset quality with the long term view in mind. And we will remain committed to our value proposition by offering excellence at a fair price.

Credit quality continues to improve as part of a now 18-month positive trend. As we've noted in previous reporting periods, this improvement is across the spectrum and is not a result of 1 or 2 events. Good science and problem loan totals, non-performing assets, delinquencies and other measures suggest that we are at, or nearing, the end of a difficult cycle. Non-performing assets decreased to $139.3 million at the end of the third quarter and are at the lowest or best level since the first quarter of 2009. Delinquencies ended the third quarter at 0.90% of total loans.

Adequately reserving for write-downs in prior periods, along with the continuing trend of fewer and new credit quality issues resulted in releasing of reserves. The provision for possible loan losses was $9 million versus charge-offs of $16.3 million for the third quarter of 2011. The allowance for possible loan losses as a percentage of total loans was 1.43% at the end of the third quarter of 2011 compared to 1.57% at the end of the third quarter of last year and 1.52% at the end of the second quarter of 2011.

I'm pleased to report that our capital levels remain very strong. Tier one and total risk based capital ratios for Cullen/Frost were 14.59% and 16.57% respectively at the end of the third quarter. The ratio of tangible common equity to tangible assets remains strong at 9.1% at the end of the third quarter. Cullen/Frost posted steady results for the quarter as the economy struggled to gain any momentum. We expanded customer relationships and managed expenses during a challenging revenue environment amid changing regulation.

Before I turn the call over to Phil, I'll close with a few comments about the economy and why I'm optimistic about Cullen/Frost. Last quarter I mentioned that the economic uncertainty and excessive government regulation are hampering small businesses and our recovery. Unfortunately, nothing coming out of Washington suggests that anything will change soon. Until the US supreme court provides some clarity on healthcare law and until we go through another election cycle to help determine the future of fiscal and regulatory policy direction of our country, the national economy could be in a holding pattern. One popular phrase to describe it is lower for longer; lower levels for a longer period.

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

Another positive for Cullen/Frost is that we're in Texas. While the economic downturn affected Texas as well, the state continues to outperform the national average. Texas entered the recession late and came out at a stronger pace than most states. Texas has created 43% of all new jobs in America since June of 2009. Projected job growth in Texas is now (audio difficulties) expected to be 2% this year compared to 1% growth for the entire nation. Texas unemployment remains lower than the national average. In addition to operating in Texas, we continue to reach out to new and existing customers during the recovery.

As always, it is our people who make Cullen/Frost's success possible. They provide the human capital that makes our business work and they're doing a great job of helping us take advantage of the opportunities we have been seeing in this recession. I appreciate their continued efforts to help our company grow.

In summary, our credit quality levels have improved significantly. Our capital levels remain strong. We have money to lend. We remain focused on our value proposition, strong culture, and excellent customer service (audio resumes) as validated by JD Power and Associated and Greenwich Excellent Awards.

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

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

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

Regarding the margin, we saw drop of 14 basis points for the second quarter, but once again this reflects a liquidity buildup from our tremendous deposit growth. Our linked-quarter annualized -- on a linked-quarter basis, our deposits were up 16% in the third quarter and if you look at demand deposits, they were up a 32% annualized growth in the third quarter. Demand now represents over 38% of the deposit base of the Company and it helps illustrate the success we're having building new depository relationships. And along that line I wanted to echo the comments that Dick made earlier that 43% of our total year-over-year core deposit growth comes from new relationships. That is, people who previously had no depository relationship with us. When you look at the commercial component of that growth, 58% of the annual growth came from new depository relationships. So again, we're having success at building new relationships.

Now, going back to the 14 basis point drop that we had in margin, the linked-quarter deposit growth of about $600 million helped drive a $900 million increase in our quarterly -- an increase in the quarter for our Fed account. So that increase in liquidity cost us 20 basis points on the margins, and remember we were down 14 basis points. So, helping offset the impact of the reduction was a redemption of $150 million in bank sub debt carrying an interest rate of just under 7% and that added 4 basis points to the margin. And then also we had a reduction in the cost of interest bearing deposits and customer repos, which added 2 basis points to the margin.

Regarding $6 million tax accrual adjustment where we corrected the treatment of muni-premium; $4.3 million of expense related to prior years and $1.7 million related to the first 2 quarters of this year. And if you were to exclude the effect of the prior year correction, our 2011 year-to-date effective tax rate would be 21.5%.

Regarding the $4.2 million after tax security gain, which was $6.4 million pre-tax, we sold $32.6 million in some of our longest maturity municipals and this reduced our portfolio average maturity a small amount while taking advantage of the Feds twist yield curve. Now, shortening our muni maturities in lowering OCI volatility in light of the Basel III Capital Rules is a positive, but taking security gains is not what we'd normally do. But since we had the extra expense for the tax accrual adjustment, it was an easier decision.

With regard to our liquidity position, since quarter end, we've seen our Fed account grow to $3.6 billion, which represents almost 20% of our balance sheet. And in light of this growth and also in light of the national economic outlook, we've begun to undertake some investing of these funds during the fourth quarter in securities with an overall duration of around 3 years, which is about 25% less than the current portfolio duration. I've said many times, that while we don't like the market and haven't for a long time, at times we'll hold our nose and wade in when necessary and we're doing some of that in the fourth quarter.

Finally, I'll say that with regard to our outlook for 2011, it really remains unchanged from what we indicated last quarter where we said we felt that the average investments was reasonable.

With that I'll turn it back over to Dick for questions.

Thank you Phil. We're now happy to take your questions.

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

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

You listened correctly.

Yes, we have seen a lot of growth, not just in Texas but throughout the country for most of the banks. Do you feel broadly speaking that people are just -- that they're giving up too much on structure, or price, or both, or?

I do. Out of the last quarter, 60% was related to what we consider to low prices and 40% was structure. You can say that's a positive that there's less in structure. But both are something that I think is particularly not good for this country. And a very weak economy. As you may have talked to us back in the heyday of 2008 or 2007, or whenever, it -- we also reported certain numbers of pricing and structure. You can understood that a little bit better when the economy is blowing and going. But when you do that kind of thing in a weak economy, I think it could create a bubble. I hope not. But it's not good. And primarily it's in the business side. Everybody's chasing that C&I bone. I think we've done a good job. I'm pleased with having grown $200 million in C&I loans over the last year.

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

Well, actually if you looked at the investment portfolio on a linked-quarter basis, our yield in the second quarter was a 4.79% yield? Yes, 4.79% yield. And in the third quarter, it was a 4.88% yield, so it actually went up. And one of the things that happened is we had the maturity of $200 million in what were originally 2-year treasuries that were yielding 1%. Those came off. And so we saw the taxable component of our treasury, taxable component of our securities portfolio go from a 3.51% yield to 3.57% yield.

So I wouldn't say we took much hit as it relates to the investment portfolio. I think the liquidity piece of it was most of it. Our loan yield dropped a little bit. Went from a quarterly average of 5.02% to a 4.99%. But we also saw about the same drop in terms of interest-bearing deposits went from 25 basis points to 22 basis points. So we think that the 3 factors that I mentioned capture most of the margin change.

Great. Alright, thank you.

You're welcome.

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

Good morning, everyone.

Good morning.

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

Well, I think a lot of it is because we've been out hustling harder. I'm talking about Cullen/Frost commitments are up. As I've told you for the -- when we entered the recession, you remember we didn't take Tarp money. So we had strong capital, lots of liquidity. So we became very aggressive about calling on prospects and customers. And so that is one of the reasons.

Just to look at the numbers, let's see, year to date our commitments are up 24%. And I mentioned in nearly all our regions. And primarily driven by commitments in C&I were up 22%.

And let me see if I have a quarterly. Third quarter the commitments had slowed. They were essentially flat with the second quarter.

That's helpful.

So they slowed down. It's interesting. We see all this volatility and if you look at these numbers, I told you that the portfolio had grown at a rate of 5.4% year to date. In fact for the third quarter, it grew $89 million, or that's an annualized rate of 9.3%. I just said you got volatility so don't get locked into the 9.3%. But a large, you have your commitments go up and then we'll close the loans, which happened in the third quarter. I just said to you commitments went down in the third quarter. But the closings went up. Which isn't unusual to go through that. I'd love commitments to go up every quarter and outstandings go up. But, you work to get the loan and you close it, and then you start hustling for another one. Does that make sense?

Yes, yes that makes sense. I wanted to follow up. When you look at the deposit growth, where are all these funds coming from? Is it other banks? Is it non-banks. It's just remarkable how much cash the industry is taking in.

I think, we're getting a lot of customers from other banks. I think that's clear. When you look at, say on the commercial side, 58% of our growth as I mentioned comes from new relationships, new depositors. People who weren't depositing with us before. And as you imply, they were doing business somewhere, they were depositing some place. So I think we're doing a great job on that.

You are seeing people are continuing to build liquidity. That means that what is it in 42% of our commercial customers -- 42% of the growth in our commercial customers, has come from people holding higher balances. The same customers holding higher balances. It's more dramatic than that on the consumer side. We still have much more in terms of current customer average deposit growth in terms of their individual accounts as opposed to new customers, although we are growing new customers there.

So, as I said last quarter, I think that when we get the economy turned around, we're going to see a reduction in average balances because these balances that people are holding are unusually high. But the positive news, I think, that we're holding onto is that with our good relationship growth that we can offset what's going to be happen in terms of the decline in balances from normalization of balance levels by new customers. And, as I've said before, when you go back and look in the early 2000s when we had the recession there and we came out of it, we worried about -- because we had such great deposit growth at that time also that we'd see a drop in deposits. And actually what happened was we had a flattening and then we took off with growth after that. And we're hopeful that because we're doing such a good job growing relationships, we'll see a similar trend when things turn around.

I'll just add a couple things. Phil is giving you a lot of good detail. Just kind of 50,000 feet, just remember last time it was 57% from -- on the individual side with new customers. This time it's 43%. And we're giving you all these numbers. But just think in terms, about 50% of our deposits are coming from new customers. The other thing I would say to you is we've said many times before, we focus on the big guys in the state. That's where they have 55% --.

Yes, the 4 competitors above us.

The 4 competitors above us have 55% of the market. And that's really who we go after and compete with.

Okay. Maybe just one final one for Phil. I might have missed this. You said the securities yield went to 4.89%? What's your opportunity? What rate are you investing, at your 3 year duration you talked about?

Honestly, on the new stuff?

Yes.

You're looking at around a 1.5% on average. So coming out of the 25 basis points and the Fed account into that.

1.5%. Okay. (Multiple speakers.) Thanks for taking my questions. Yes, thanks.

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

Good morning.

Good morning.

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

I think it's higher. I think it's going to be around $5 million. One of the things we saw was, competitively, what the retailers are doing and how they're directing payments. We're seeing more leakage. Not just from what the Fed did, but from the retailers as well. So, I think it's closer to $5 million now.

Yes, you've seen a lot of the larger banks put in place debit fees. Have you all thought about that as a possibility for Frost?

No, we have not.

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

Well, buybacks are something that's a tool. We've used them in the past, if you go back 10 years, 15 years, and we've had them at various times. And we typically used them when we haven't had use for the capital in other ways. The thing that's a little different this time, we've said this before, is that until we get a little more visibility on what regulatory capital is going to be required and the kind of volatility of that capsule as a result of the OCI, for example including that in capital and under Basel III, we're being careful with the capital position that we have. And so we -- it's something that we, it's our job. We think about that kind of thing, but where we are right now on a balance is that we feel we're going to keep a little stronger capital until we get a little bit better visibility and then we'll do the right thing on capital at some point. We're doing it right now, but at some point if it includes buybacks we would use them.

Okay, thanks, guys.

Our next question comes from the line of Bob Patten with Morgan Keegan & Co., Inc.

Morning gentlemen.

Hi Bob.

Most of my questions have been asked, but Dick, here's a question. With the commandments being up so much, you guys, lot of success there. Are you able to get unused fees with these commandments, so you're at least compensating for capital?

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

Okay, and I guess following up on Steve's question. Because everybody is trying to figure out where the cash is coming from. When you open accounts, do you go through a series of questions and ask, are you coming from a competitor bank? Is there any indication from you guys this cash is just being pulled out of the market and thrown into safe keeping? Or is it actually people are frustrated with their banks changing deposit services? Is there any feel there?

There's some of all of it.

Yes. But I think, though, that we don't get a sense that people are coming out of the market. For example, the stock market and coming into banks. I think what we're seeing is people are just moving from other places and people that are generating cash in their business they're really not doing much with it. And so we're just seeing it build up. We don't get a sense that it's people liquidating out of the stock market, for example, and coming into the banks.

Also, we're seeing as this cash builds up, and as I reported the success of our investment fees and they're doing a great job. And, there are other people going into the market. And I'm real proud of the job that our investment groups are doing and the different choices they have.

Thank you, guys. Appreciate it.

Our next question comes from the line of Brett Rabatin with Stern, Agee & Leach.

Hi guys. Good morning.

Morning.

Wanted to ask, on the securities portfolio on the taxable side, can, maybe you Phil, can you give us an idea of how much cash flow you're expecting over the next year?

Well, let's see. If you give me a minute I might could look it up. One of the things we think about in terms of the mortgage backed securities, I think our cash flow on that turns out to be about $50 million a month or so.

Okay.

Hang on one second. That includes prepay, yes, including prepayments and regular maturities. I'd say it runs around $50 million, maybe a little bit less, a month. So if you were to look at over the next 12 months, prepayments and regular maturities -- I'm showing we might have $0.5 billion in maturities, cash flow from that.

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

Yes, it looks like around that. Maybe a little bit under that. Just depends. We haven't bought all of what we may buy. I think we might see maybe 2/3 of that liquidity invested. It will be high quality stuff. The thing that's happening is, as I said, we saw almost $1 billion dollars increase in our Fed account quarter-to-quarter on a link basis. If you're not doing something, you're just going to continue to have that increase in liquidity.

Okay, so you're going to drain most of the liquidity this quarter then, if I understand?

No. Well, I would say we're looking at something -- we haven't done this much yet. But we're keeping around $3.6 billion is where we hit. And we could be a little over 50% of that.

Okay. And then just lastly, thinking about the tax rate going forward. Obviously, the large municipal book has an impact on that. But any thoughts on the tax rate going forward? Would it be any different or is it going to be similar to maybe 2010?

I think that this year we said it would be, if we didn't have any adjustments, it would be around 21.5%. I think that's about right for us.

Okay. Great. Thanks for all the color.

Our next question comes from the line of Terry McEvoy with Oppenheimer.

Thanks. Good morning. Thanks for taking my questions. The first one, quite a few banks are announcing call it expense reduction initiatives. Anything going on at Cullen/Frost where you're paying a closer attention to expenses given the revenue outlook?

And while I'm asking about expenses, the advertising brand promotion, which you mentioned earlier, did go up in the quarter. Is that really to take advantage of some of the disruption and going after clients, you called it the big 4, the big 5 within the state of Texas?

Yes, as we mentioned to you when we started this year, we made a commitment we think that's a great opportunity to build the base of this Company for the long term with some outstanding customers. And that's the reason we committed to this program, which we have been doing all year, then you're correct. It was $2.2 million in the third quarter. And we're committed to continue and it's working well for us. And we continually, on expense management in general, we've said to you before, there's no new expense over $10,000 that Phil and I don't both approve. That isn't to be -- act like the government. That is really to ask our people to see if it's the right decision. And we probably approve 99% of them.

And so it just -- I think there's a good expense discipline. But certainly in this environment, you've got to look at all the time trying to improve your expenses and so I think we manage expenses well. Can we do better? Yes. And we're always looking to.

Phil, do you have any additional?

No. I think you're right. Some people are closing significant amounts of branches. They're-- I don't know what all they're doing. But they have specific programs that they're putting in place to reduce expenses. Ours is really been more a program of just we want to reduce unnecessary expenses. And I think we've done a pretty good job of that. And we'll take individual pockets here and there and make improvements on it. So I think we'll continue to see some of that. And, just like Dick said, we really think we have an opportunity here given our reputation, our value proposition, and the state that we're in and the markets that we're in to take share. And so we're committing some money in this period of time to do that. So that's really been more of our focus.

But the underlying assumption is that revenue is tight or hard to grow. And so what are you doing about expenses? And that's not lost on us, and it's not lost on our people.

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

Well, certainly what we -- as you know, this is a 143-year-old company. And what I'm most pleased is we have good, steady, consistent results through different times in the cycle. Certainly, we're affected a little bit here and there. But, and you don't have enough time for me to talk about what I think about Washington. But I don't think anything is going to happen for 1 year until the next election. And, it's just, we just got to hold in here and ride through it.

I am pleased in this environment of how we're building the base of this Company. And I think that we've talked to you a lot about relationships. And we talk about a relationship, we're talking -- and those numbers we talked about, deposits of about 50% growth in new relationships. That means that's not just somebody coming in here and putting $200 in an account. That's moving their primary account to us. And, and so that's building the base. And Phil gave you the numbers of businesses and so while those businesses are cautious as this economy starts to get better and this -- it's all, it's all about confidence across this country and it's about -- and you've got to have that in order to build jobs. And with a bigger base, we'll see a lift. Do I think that's going to happen overnight? No. But it could be very important to us in the future.

Thank you.

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

Good morning, everyone. This is David Grayson in for Jenny. Thanks for taking my questions.

Yes, David.

Wanted to start with the deposit growth that you've seen. You've spent a good bit of time talking about where that's coming from. Your marketing effort driving a lot of that. And as I look forward in my model and try to figure out some estimate of perhaps margin pressure, I guess the question I'm asking is do you expect this deposit growth to be similarly strong over the next several quarters? Do you expect that to drive similar margin pressure in the near term?

David, it's hard to say what deposits are going to do. They have been so strong for so long. You just think that there's got to be some moderation of that at some point. But that's, that's hard to say.

What we tend to do is we think about the margin is, we sort of put that a separate bucket. Optically, and I know you've got a model that you've got to run and you have my empathy with that. But we've got this optical effect of growing liquidity, growing deposits and investing those, whether it's the Fed account at 25 basis points, or let's say we do some investing like we're talking about, or if we're doing loans where you're going to end up helping your margin. Any time you get that liquidity increase you just need to kind of peel that out. Because it doesn't cost us any money. right? It's not reducing our net interest income. And the things that are going to drive real net interest income growth are going to be, are you doing any investing? Were you coming out at 25 basis points and into something like we talked about? Certainly loan growth. You know all this.

Sure.

Loan (audio difficulties) growth is the other factor. You have to decide what you'll see there. And some people have talked about the investment portfolio, what are we going to see there? Obviously, we can't replace the yields we've got there in the current market. And I think we said we have $0.5 billion dollars over the next 12 months might be the estimate.

I guess a quick clarification along the same topic, early in the topics you mentioned the positive offsets. There was 4 basis points for debt maturity and two basis points for something I didn't catch.

That was lower deposit costs in customer repo costs.

Okay. All right. That's helpful. And in the quarter you opened 3 branches and we see a commensurate uptick in occupancy and equipment line item. Is this a run rate going forward? What may be the expansion plans?

I think we'll probably see a similar amount of branches for the next 12 month that is you saw the past 12. We're going to continue to see some growth there related to branches.

I think one of the things you got to understand with branches, you're talking about if you got a bunch, too many branches, we don't have too many branches in this market. We're very selective. The analysis that we do, make sure we have a mix of business and (audio resumes) retail customers. As you know, 50% of our deposits come -- are individuals and 50% are businesses. And so we've built our branches in markets like that. We're very selective. And, we've been consistent. We're going to keep doing what we've been doing. Just steady expansion to take advantage. You take some markets, big markets like Dallas and Houston, there's another lifetime of good work we can do there. And we don't try to do it all at once. But we try to be consistent and steady in what we're doing. And it's paying off.

Okay, great. Well, that's all I had. Thanks so much for your help.

Thank you, David.

Our next question comes from the line of Bob Patten with Morgan Keegan & Co., Inc.

Hey, guys. I figured while I got you online I might as well hit everything I'm thinking about. Dick, you're certainly going to, probably one of the guys that will comment on this, but if I look at all the things that are impacting Cullen/Frost, from Durbin and other regulatory changes, and that doesn't include all the time you guys are spending interpreting these rules. In your view, how are the 5,000 banks or 6,000 banks below you dealing with all this stuff? And if the outlook that you guys are kind of giving is keep grinding away, don't change our standards, seems to me these little guys are either in denial and you're probably looking at some of these for future growth? But it's getting worse and worse, in my view, for these smaller banks with all these advent of change happening.

It is a very difficult situation. And concerns me greatly because I think it will hurt the growth of this country and capitalism. But I do think that the banks of $500 million in assets and less are at risk. Now, as we go forward, there is entrepreneurship working and they'll be firms that come together to help them out, so are some of these compliance issues. You can't outsource Reg-Q and paying interest on demand deposits. Right now it's a non-event and probably the next couple years, you tell me how long interest rates are going to stay at 0%. It's not a big effect. But long term it is. And that's something to consider. And if Basel III and Mark to Market of the portfolio goes through, that's another big hit.

So you can deal with some of it by outsourcing if you're a small bank. But it's, it's a problem in this country.

Yes and I guess you won't hear the regulators or the administration say it. But it's almost as if they don't want as many banks to exist today, for one reason or --.

I've confronted them on that. If their desire is for the United States to have 4 or 5 banks like Canada, they're doing a hell of a good job. They, of course, won't admit that. If you look at the regulators, they're so buried. There's 339 of Dodd-Frank out of 400 interpretations that have not come forward. There are 126 issues that missed the deadline that regulators couldn't make the deadline. And so they're spending, too.

Probably one of the biggest concerns is the conflict between regulators. The SEC says one thing, and the Fed will say another thing, or OCC, or FDIC. And I know their addressing those issues to try to get some consistently. So it's just, Dodd-Frank was a terrible bill. Did we need some correction in the financial industry? Yes, we did. But we needed people to sit down and find the right answer. And we're not getting that. I'm not talking about Republicans, or Democrats or the White House. I'm talking about every one of them. None of them, on the debt crisis that we had in August, you can go visit any kindergarten class in the United States and you will find more working together and finding better ways than we saw in Washington. And we've got on November 23, 2011, they're supposed to sit down and find where they're going to get their $1.5 trillion and if they don't get it on the November 31, 2011, there's some triggers that just happen. And so it will be another circus that we'll watch going up to November 23, 2011.

So we're in a mess right now. And it's sad for America. We need Americans to go to Washington and do what's best for the country, not their party or their self-interests.

I appreciate your candor and I'm sure we all do, Dick. Thank you very much.

You're welcome.

There are no further questions at this time.

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

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