Cullen/Frost Bankers Inc (CFR) 2011 Q4 法說會逐字稿

Good morning. My name is Ashley. I will be your conference operator today. At this time, I would like to welcome everyone to the fourth-quarter 2011 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. I would now like to turn the conference over to Greg Parker, Director of Investor Relations. Sir, you may begin your conference.

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

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

Please see the last page of the text in this morning's earnings release for additional information about the risk factors associated with these forward-looking statements. If needed, a copy of the release is available at our website or by calling the Investor Relations department at 210-220-5632. At this time, I will turn the call over to Dick.

Thank you, Greg. Good morning, and thanks for joining us. It is my pleasure today to review Cullen/Frost's 2011 fourth-quarter and annual results. Our Chief Financial Officer, Phil Green, will then provide additional comments, and after that we will both be happy to answer your questions.

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

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

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

Net interest income for the fourth quarter of 2011 was $165.3 million, compared to $155.2 million last year. This increase primarily resulted from an increase in the average volume of interest-earning assets and was partly offset by a decrease in the net interest margin. Strong growth in deposits helped to fund the increase in the volume of earning assets. The net interest margin was 3.76% for the fourth quarter, compared to 3.93% for the fourth quarter of 2010 and 3.81% for the third quarter of 2011.

For the year 2011 net interest income on a taxable equivalent basis increased to $642.1 million, up 4.2% over the $616.3 million reported in 2010. Non-interest income for the fourth quarter of 2011 was $67.7 million, down $2.6 million. The Dodd-Frank amendment to -- the Durbin amendment to Dodd-Frank negatively impact non-interest income by approximately $5 million per quarter.

In the fourth quarter that impact was most evident in other income which was down $3.4 million and in service charges on deposits, which were down $1 million. For the entire year, non-interest income was $290 million, up $8 million over 2010.

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

Brand marketing and advertising increased $2.4 million to help us spread the great message about Frost. We also made a special $2 million contribution to the Frost charitable foundation for donations to worthy nonprofits in communities in which we serve.

Economic uncertainty, over-regulation, and intense competition on pricing and structure continued to affect our loan environment. For the year ended December 31, 2011, outstanding loans remained relatively flat at $8 billion. We are working hard to drive new loan commitments through long-term relationships and good quality loans. It is encouraging to see that more of a return to normal in commitments for our customers.

For the year, we added 18% more new loan commitments than in 2010, but our loan payoff rate was much higher than in previous years. Comparing the year-end 2010 and 2011, it is encouraging that our revolving commitments increased by 9.6% and our construction commitments increased by 10.7%. It is interesting that while commitments are increasing, at the same time the funding rate is decreasing.

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

Our credit quality had the single largest quality improvement in the last eight quarters and continues a positive trend that began two years ago. All traditional measures of credit quality improved during the fourth quarter of 2011. Non-performing assets increased -- decreased 13% from the previous quarter.

Net charge-offs declined significantly from the third quarter of 2011. The fourth quarter charge-offs are the lowest quarterly volumes since the second quarter of 2008, which was before the recession. Delinquencies ended the fourth quarter at 0.75% of total loans. This is the third consecutive quarter for past due loans to represent less than 1% of total loans.

Adequately reserving for write-downs in prior periods along with decreasing levels of classified loans resulted in releasing of reserves. Our provision for possible loan losses went from $11.3 million in the fourth quarter of last year to zero in the fourth quarter of 2011.

It's very unusual for us not to take a loan loss provision, but the health of our portfolio has improved to such a degree that the formula simply does not allow us to build further reserves now. Absent any significant changes in global or national economy, we expect our positive credit quality trends to continue.

I'm pleased to report that our capital levels remain very strong. Tier 1 and total risk-based capital for Cullen/Frost were 14.38% and 16.24% respectively at the end of the fourth quarter and are in excess of proposed Basel III fully phased in capital requirements. The ratio of tangible common equity to tangible assets remains strong at 8.82% at the end of the fourth quarter 2011.

Overall, 2011 was our best year ever for earnings, although it really didn't feel that way given the sluggish economy and changing government regulation. The Durbin amendment had a $0.05 per share negative impact on our fourth-quarter earnings, but we found a way to grow despite the bad public policy. We posted steady results, expanded customer relationships, and managed expenses during a challenging revenue environment. We're grateful for the dedicated -- our dedicated employees and loyal customers who understand and appreciate the Frost difference.

Before I turn the call over to Phil, I will close with a few comments about the economy and my continued optimism for Cullen/Frost. For several quarters, we have discussed how economic uncertainty and excessive government regulation are hampering small business and our recovery. Unfortunately, nothing really has changed.

Now that we're in an election year, we can expect to see more political posturing than effective policy changes. So, the economy likely will remain in a holding pattern, lower for longer. At some point this year the US Supreme Court should provide some clarity on healthcare law, which has been a lingering drag on the economy due to all the question marks surrounding it.

It's because of bad policy decisions and uncertainty over pending regulation that US businesses refuse to add jobs until they know what the cost of these jobs will be. The side benefit is that US companies have adjusted to the revenues and to their expenses and are the most efficient and well-run companies in the world.

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

As for Cullen/Frost, we continue to reach out to new and existing customers during the recovery and expand our customer base. Our assets now exceed $20 billion for the first time in our history. Since year-end 2007, our assets have grown 50% from $13.5 billion, and that's organic growth without bank acquisitions. As always, it's our people who make Cullen/Frost success possible. I appreciate their continued efforts to help our company grow.

It is also important to note that several other events that occurred in the fourth quarter. In December Frost Bank received an A plus credit rating from Standard & Poor's for the first time in the Company's history. The agency cited Frost's strong capital, excellent liquidity, consistent profitability, and solid credit performance relative to peers reinforced by our conservative strategy and solid market position in Texas. Frost is now one of the highest ranked financial institutions in the US.

Our rating upgrade also bucks the national trend of credit rating downgrades for financial institutions. Like our high ranking from J.D. Powers and Associates, Greenwich Research, Allegiance, the S&P rating upgrade provides third-party validation to the difference customer experience can have at Frost Bank. By the way, Greenwich Associates just announced that Frost Bank received 21 excellent awards, tied for the most awards in the nation and more than any other bank serving Texas.

In December we announced the acquisition of Stone Partners, a Houston-based human resource consulting firm that will operate as a division of Frost Insurance. We also expanded our footprint in Houston by adding three new financial centers in the fourth quarter in addition to two new financial centers in Austin and one in the Dallas region. Despite the economic downturn, Cullen/Frost continues to grow.

In summary, our credit quality is improving significantly and continues to show a positive trend for the future. Our capital levels are very strong. We have money to lend. We remain focused on our value proposition, strong culture, and excellent customer service as validated by the multiple third-party agencies. We have consistently paid shareholder dividends and have increased the dividend annually for 17 years.

We are successfully adjusting our business model to new rules and regulations coming out of Washington. We are staying true to our principles and our strong lending disciplines. We're treating our customers the right way while providing outstanding value. And we are delivering steady superior financial performance for our shareholders. And, with that, I will turn the call over to our CFO, Phil Green.

Thank you, Dick. I just want to make a couple of additional comments about the quarter and then we'll open it up for questions. First, Dick noted our net interest margin for the quarter was 3.76%, and this was down five basis points from the third quarter's low of 3.81%. However, once again it's important to understand the underlying components to see the impact on our operations.

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

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

Also during the fourth quarter, total deposits grew an annualized 18% and demand deposits increased an annualized 29%. And as long as we see this kind of deposit growth, we will continue to see nominal net interest margin compression, but it doesn't reduce net interest income.

In fact, given the fact that our overall deposit cost, including both time and demand, average is just 12 basis points, we still add net interest income even if the funds end up in our fed account, and that's true even after taking off the cost of FDIC insurance. And I think this helps demonstrate the core nature of our deposit base and the fact that over 39% of our deposits are demand deposits. In fact, if you add in consumer checking accounts, which grew an annualized 32% during the quarter, you would see over 52% of our deposits are represented by these low-cost transaction accounts.

I also want to reinforce what Dick said about the high percentage of deposit growth from new relationships. Over half of our growth is coming from new customers so we're excited about the job we're doing growing relationships and believe this will pay off as the economy improves. Finally, as we look out at 2012, we believe the current average of analyst estimates for the year is reasonable. And with that, I will turn it back over to Dick for questions.

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

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

Good morning, guys.

Good morning.

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

I wouldn't say it's changed a lot. It's just consistent through the year. The payoff rates have been strong, and the pricing is just very competitive, but I don't see a lot of change in the fourth quarter. It's just more of the same.

Okay.

It's interesting, I'm encouraged by the increase in the commitments and not just the last quarter. If you look, let's just take an example of our revolving commitments that I talked about were up 9.6%. If you look at that, that's very encouraging. What's happened is that the outstandings on them is up 6.75%. So I think the good news -- you may remember, I talked about this a couple years ago when we were seeing -- obviously the recession was strong and loans were going down and I talked about that, for example, the Company that has a $1 million line was lowering that line to, say, $750,000, and was borrowing -- typically they borrow 50% of the line at normal times. What I think is happening to us, which I think is a light at the end of the tunnel, is that people are starting to ask for larger lines and they wouldn't do that if they didn't see some improvement in the economy. So they're preparing for what they think is going to be better and so what should happen next is obviously the advance rates should come along. Now, I don't know whether it's going to happen tomorrow, next month or six months from now, but I think it is a positive trend that we're starting to see.

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

Well, when you have gone through about three or four years of loans being down for the first part of it and flat for the last year, I'm scared to make any big projections because I've kind of been beat up, but there's no doubt that the commitments are better. The other thing I talked about was the increase in commitments in construction loans and these were year-end things that, comparing 2010 to 2011, and construction loans commitments going up 10.7%. Obviously with a construction loan you've got an advance over a period of time and so those were new commitments. A bright light in the loan portfolio are apartment loans, all this housing stuff we all know about. You're seeing multifamily being stronger, and so I think that's a positive. So there's some signs that as they start to build, and like I said, it won't happen overnight but it will move up. I would also say to you that for the year, our C&I loans were up $128 million for the year. So it was buried and didn't show up because we moved $283 million of problem lopes out of the portfolio. And as I talked about at some length, all the signs in the problem loans look very positive. About the time you say that, something jumps up and bites you, but they are positive, and so we shouldn't have that head wind pushing on us.

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

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

Okay. Great, thanks for taking my questions and nice deposit growth this quarter.

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

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

Well, I hope it's not indicative because we did have some special items of expense. The $2 million in donation was definitely an unusual item and I think some of the comp, as you mentioned. I think it's a little bit high. I think it will be a little bit lower on the run rate.

Okay, thanks.

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

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

We've gone through a lot of that over the last 10 years and what we have recently had is the new military hospital (inaudible) that was built over the last couple of years. It is finished. It is staffing up and that's a real positive. And what the military did was combined all of the hospitals into one and one of those, I think the other one is in Washington, D.C., the second one here in San Antonio, so that's something that quite frankly is bucking the trend without a lot of procurement here either.

Okay, thank you. Just one final question. I noticed in the linked quarter trust fees were down a little bit. Was there anything nonrecurring or anything one-time in there?

Well, we did have a fairly low quarter for estate fees. That was one that was down on a linked quarter basis. Estate fees were down really 80% from the prior quarter. They were only $87,000 compared to the third quarter they were $440,000, we had nice -- a nice fee at -- at that time. We had a nice fee at that time. So estate fees, as you would guess, are related to when people die, frankly, and so that's -- that tends to be -- there's no predictability in that. The fees are typically collected about nine months after an estate is established and so that was one area of volatility that we did see.

We call it the maturing of wills.

That's true.

Okay.

That's the biggest item I saw. Oil and gas fees were down a little bit during the quarter. That's mainly related to price, particularly gas. Gas is at very low levels and most of our production that we manage, not all, but most of it is gas, dry gas. So I think that's another area. Those were the things I think that were the most unusual.

I might just comment, Phil talked about dry gas, and I don't want you worrying about our loan portfolio. Obviously our largest segment is our energy loans, and we've -- it's interesting what's happening. As you know, the price that you read in the paper is dry gas. Interesting enough, we've done a complete review of our energy customers. All of them have some gas and some oil but particularly those that are, say, 60% gas, what's really encouraging, as you look at the wet gas, which is where the majority of ours are, and that's -- those have been very strong with the liquids and condensate and just natural gas liquids, and so as you look at that, quite frankly, our customers are getting somewhere around $5 for their natural gas when you blend in the liquids. We've also seen as high as $7.50. So they have some oil components which we know is strong. The advanced rate is still running around in the 50% range. A lot of those customers are hedged and some of them are just rich and so they can cover the volatility in the market. So when we looked at that and chart, we've reviewed these issues and really we see their ability to repay and perform as agreed. It was interesting just in the paper yesterday, you probably read in the financial times that Apache has made a $2.8 billion acquisition and they talk about this very fact of where dry gas is and they talk about it could be with wet gas as much as $6.95, but we're very comfortable with where we are with our gas portfolio.

Thanks for the color on that.

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

Good morning, guys.

Good morning.

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

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

On a linked quarter basis, even year-over-year it's a little bit higher than I would have expected.

Yes, one of the things that happened a little bit unusual is we had some vesting of restricted stock that occurred that was unusual in terms of just how it built up when it vested. So, it's higher this year than last year and I don't think it's going to be quite as high next year. So, a little bit unusual in terms of the timing of all of it relates to the ages of some of the officers and when that actually vests. So that, I think, might have been another thing that was a larger item. It was about $1.5 million on a linked quarter -- excuse me, on a comparison basis from year-over-year. And then it was also higher by about $3.5 million on a linked quarter basis.

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

Okay. First of all, with regard to the balance at year end with regard to liquidity, no, I don't have that number on year end top of mind, but I think what's more important is what we've been running so far in January. It had been running about $2 billion. It had gotten up from the $1 billion after we did the investing so we've seen growth there.

As far as investing, yes, I think we'll do some more investing but I don't think it's going to be really the same character that we did in the fourth quarter. In the fourth quarter we mixed some three-year treasuries, some five-year treasuries, some 10-year mortgage backs, agencies, some things that were blended together to get some yield, as I said, about a 1.33%. We actually just recently bought another $1 billion of three-year treasuries which has a duration of about, what is it, 2.8 years or so, maybe a little bit less, just to sop up some of the increasing liquidity that we have even after we made the fourth quarter purchases because we had brought that liquidity down to around $1 billion at the fed after those purchases and then we've seen it grow up to actually I think we made those investments, it's grown to about $2.2 billion. So, we're down to about, I would say, call it round numbers, $1 billion right now, and with continued growth in deposits. So, we really did that additional $1 billion recently as a defensive measure. We don't want to get caught, if the fed does move that 25-basis-point fed rate on our cash at the fed down, we want to have some protection against that, and given the outlook on rates, we think we can let those three years roll down the yield curve and be okay. So that's sort of what we've been thinking.

Thanks. That's helpful. Thanks a lot.

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

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

You mean in terms of dollars?

Yes, growth in net interest income.

Yes, we do.

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

The pressure -- most of the pricing, of course, would be in the bigger credits which you would expect because they're just larger dollars and, of course, a lot of the energy credits are LIBOR based and we saw some help with LIBOR and then lost it over the quarter. It kind of came up and then came back down. It's interesting that -- so that's where the big push on pricing. On structure, we're about 60% pricing that we're seeing. We used to run 50/50. We'd lose credits 50% from pricing, 50% from structure. Now it's about 60% pricing, 40% structure. More of the structure is in the $3 million to $10 million loans, the smaller ones, but great loans. You're seeing some of that weakness happening in some of the smaller banks. I forgot the last part of your question.

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

As far as the loan yield--.

I think our average for the last quarter was about 100 basis points over prime which is down a little bit, I think, from the previous quarter, but we've been expecting some compression there. We did see some additional. So I think it's around -- new and renewed loans average about 100 over prime.

Okay. Great. Thank you.

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

Thanks, guys. I just had a couple of questions on the reserve and on net charge-offs. With net charge-offs down to 26 basis points, that's a really low level. Do you think that low level will be sustainable going forward in 2012? And then on the reserve, you're at about 1.38%. I know as credit continues to improve for you guys that reserve will likely go lower, but I wonder where the reserve will kind of bottom out? Is it 1.25%? Is it 1%?

We don't know that. As you know, probably, as I mentioned earlier, the real driving factor is solving problems, which we've talked all about, and the other thing, it's most sensitive to classified assets. And so -- and we see very positive trends in that regard. So it's -- nobody knows where it goes. There's -- I don't think you can get locked into a number. You just have to watch the -- since -- what's happening in the classifieds, and certainly in the K and the Q's. All of that is disclosed today, but classifieds are improving. You mentioned that 26 basis points of charge-offs -- 27 is very low. It's not low enough for us. You will remember, we operate historically on about 23 to 25 basis points. So I would like to see a little bit more improvement and I'm happy with where we are, that it has improved to that point, but I would tell you that's not where this Company normally operates.

Okay, thanks, guys.

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

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

Well, I think that -- the thing to me that we're looking at that really gives us a lot of encouragement is the fact that over half of our deposit growth is coming from new customers. So I think it was 55% overall over the last year. Looking at the end of the year, go back 12 months, and over half of that growth came from people that did not have any depository relationship with us a year before. And at the same time that number is probably a little bit less than what it was a couple quarters ago because we have seen a tremendous amount of growth with regard to what we call augmentation when people increasing the current balances they have. So we're definitely seeing that. And I think at some point, as we've said before, we're going to see some of those unusually high balances go back somewhat to somewhat of a normalized number, whatever that is. But as long as we continue with being successful and growing share and growing new customers the way we are, we think we will be able to fade that pretty well, then once that normalizes, continue to show growth as we have over the last several years that Dick talked about.

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

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

Yes, I do. First of all, I am going to answer your question about premium amortization. Premium amortization during the quarter was $2.3 million -- $2.36 million and in the third quarter was $1.34 million.

Okay.

If you look at the taxable and non-taxable yields, hang on just a second, in the quarter, taxable yields were 2.78%. That was on an average balance of 50 -- excuse me, $5.81 billion. And our tax exempt yields were 6.94% tax equivalent, that's average balance of $2.220 billion. Compared to the third quarter you'll notice that that taxable rate went down from a 3.57% to that 2.78%, but that reflects the big increase we had that we talked about in the purchases because our average balance in third quarter, those taxables were $3.538 billion. So while the taxable yield went down on that portfolio, the important thing is we were moving those yields from that 25 basis points in the fed account to those 1.33% overall yield we got in the investments.

Okay. That's great color. Thank you.

You're welcome.

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

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

Yes, I think, though that we probably averaged closer -- when we made those investments I think we were about $3.5 billion in cash.

Okay.

Then we took it down some, and then we got through investing, we were around $1 billion. We may have been $100 million or so short or high. We saw it move back up. Just recently we were running $2.2 billion. Then, again, just because we didn't want to be left hanging, if the fed decides to cut that rate, we said let's be defensive on some of that, took $1 billion, put it out on the three-year and we think we will be okay on that, make a little money on that. I'm not impressed with it, but we will make a little bit of money on it and then roll it down the yield curve in the event we do get some increase in rates, it won't hurt us too bad.

What would you guess -- in terms of timing in the quarter of all this, what was the benefit to do this over the -- because there's a lot of moving parts here, to the fourth quarter, and therefore will you get more of a, call it full quarter's benefit going forward albeit the rates are low, but is it a few million bucks? Just order of magnitude.

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

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

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

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

The tide is coming in. We're doing good, but it's going up for everybody, too. Maybe not as much.

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

I don't think there's any significant increase in cost. I think we -- we're always growing. We grow -- we now have over half of our relationship officers we've grown ourselves and we run them through our Frost university. So we prefer to do that, that way you don't have to change somebody that's already set in their ways or hiring somebody from another bank, but I think we're very consistent in what's happening. The other thing you've got to remember is the increase in the existing commitments. We were running probably a little under 45% loan to deposit ratio, and--.

Or maybe--.

--I mean advance on commitments and what I talked about, I'm happy to see that we are doing better. Our customers are coming back to more normal increase in their commitments and so that's where you are going to get the big lift. Historically you always get about 80% of your growth from existing customers. So as the economy gets a little better, and it is a little better, you will get the big lift from just advancing on the work that we've already done. That doesn't mean we don't stop, but that takes a big load off of where you're talking about in the overhead. So, I think we're well positioned. I think we've got a lot more capacity.

And the other thing, the thing that's kind of discouraging to us, and I can't remember the exact numbers, but we're also -- the churn in the portfolio is tremendous, I mean like $2.5 billion. It's big numbers through a quarter. So, don't get locked into the $2.5 billion because I was loose with that number, so the work is being done, and the discouraging thing, you just don't see the customers borrowing the money, but they are increasing their lines and the current customers are doing that which is very encouraging. So you don't have to -- if you've got the loan on the books, you've got the commitment, it's just a telephone call to, say, advance $1 million or whatever.

The reason I asked, too, about the infrastructure of the Company being capable of handling that is if you took that level of loans, again, it's not going to happen overnight, but if you did that at even a 3% better spread than you have at the 1.33%, or whatever Phil is investing your money at today, that's potentially just $1 of earnings, if my math is right, right there.

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

Thank you much. Good luck, guys.

Thanks.

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

Thanks. Justin grabbed a couple of my questions, but it is interesting you have record earnings on a less than 50% loan to deposit ratio. I think that's notable. The question I do have though is, branch plans for 2012? I think you were a little more active than some of the other banks out there but curious what you're thinking for expansion.

I think we had six we did this year -- or last year. I think right now would be something similar. So I don't see a big change in our approach.

And then the other question I had for you was on capital allocation. Curious your thoughts on what to do with each new dollar of capital. Obviously you've extended the securities portfolio a bit, but how do you think about a buyback for the Company, and how does that factor into your allocation model?

I think that -- I mean, a lot of people have heard this, because we've said it a long time, but historically we've -- we set a good dividend and we try and make acquisitions if they make sense, and then if we don't have acquisitions that we can do and we're generating a lot of capital and we're very profitable so we do that, we'll use a buyback and we have over time. We don't have one in place today largely because we don't think the capital rules that will be in place for the industry are finally set today. Particularly, we don't know exactly what they're going to do with the OCI component. As a result, just given the environment that we're in, we're just taking advantage of husbanding capital and letting it be strong. We don't intend to let it lie fallow and just waste away. We will do something with it at that time right time, but we don't feel under any pressure right now to do a buyback.

And then, Dick, any -- go ahead, sorry.

I was going to say, it's not like it's not on our radar screen. We think about all that stuff all the time.

Okay. Dick, anything notable on M&A?

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

All right, thank you.

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

Well, this concludes our fourth quarter and year-end 2011 discussion and we're adjourned.

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