Cullen/Frost Bankers Inc (CFR) 2012 Q4 法說會逐字稿

Good morning. My name is Jackie and I will be your conference operator today. At this time, I would like to welcome everyone to the Cullen/Frost Bankers fourth-quarter and annual earnings conference call. (Operator Instructions). Mr. 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 and thanks for joining us.

It's my pleasure today to review Cullen/Frost's 2012 fourth-quarter and annual results. Our Chief Financial Officer, Phil Green, will then provide additional comments. After that, we both will be happy to answer your questions.

Despite continued economic challenges and regulatory headwinds, I'm pleased to report that for 2012 Cullen/Frost posted record annual earnings, recorded double-digit loan and deposit growth, continued across-the-board credit quality improvement, received respected third-party recognition as one of the strongest banks in Texas and in the entire nation, and topped $23 billion in assets for the first time in our Company history. The solid and consistent results are a credit to our dedicated employees and strong value proposition.

During the fourth quarter of 2012, our net income was $60.2 million, compared to $55.4 million reported in the fourth quarter of 2011. This was $0.97 a share, versus $0.90 in the fourth quarter of 2011.

Fourth-quarter 2012 return on average assets and equity were 1.09% and 9.84%, respectively. The Company reported annual earnings for 2012 of $238 million, an increase of 9.4% over the 2011 earnings of $217.5 million.

For the year, return on average assets and equity were 1.14% and 10.03%, respectively, compared to 1.17% and 10.01% reported in 2011.

Deposits continue to be strong. Fourth-quarter deposits were up 14.2% over the fourth quarter of 2011 to $18.4 billion. For the year ended December 31, 2012, average total deposits were $17.3 billion, up 13.6%, or $2.1 billion over 2011 averages.

To provide some color on this, according to S&L data from June 2011 to June 2012, our 14% deposit growth was the largest of the top five banks in Texas. We are number five in deposits in Texas. The four above us represent 52% of all deposits, and three of the four are the too-big-to-fail banks.

Net interest income for the fourth quarter of 2012 was $172.2 million, compared to $165.3 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. The net interest margin was 3.48% for the fourth quarter of 2012, compared to 3.76% in the fourth quarter of 2011 and 3.54% for the third quarter of 2012.

For 2012, net interest income on a taxable equivalent basis increased to $668.2 million, up 4.1% over $642.1 million reported in 2011.

Noninterest income for the fourth quarter of 2012 was $75.9 million, up $8.2 million, or 12.2%, from the $67.7 million reported a year earlier. Part of the increase was from a $4.4 million gain on the sale of treasuries. Trust and management fees increased $1.7 million over the fourth quarter of 2011 to $20.5 million.

We also are pleased to see some interchange and debit card transaction fee growth, which reflects card usage by our expanding customer base.

For the entire year, noninterest income was flat with 2011. Considering the ongoing negative impact of the Durbin amendment, flat is a great accomplishment. I commend all those whose efforts made this possible.

Noninterest expenses for the fourth quarter of 2011 were $146.1 million, compared to $143 million in the fourth quarter of 2011.

Salaries were up $1.3 million over the same period a year ago as a result of normal annual merit and market increases. Brand marketing and advertising increased $1.2 million to help us to spread the great message about Frost and develop new relationships.

Turning to loan demand, we continued the strong loan growth we saw in the first three quarters of 2012. Fourth-quarter 2012 average loans were up 11.2% over the fourth quarter of 2011 to $8.9 billion.

The fourth quarter was the best quarter for new loan commitments since the third quarter of 2008, and December was our best-ever month for new commitments.

For the year, our period-end loans on December 31, 2012, were $9.2 billion, up 15.4% from a year earlier.

In 2012, we developed new relationships and saw double-digit percentage increases in the requests for new loans. These increases were broad based from both customers and prospects in all size segments. Our loan pipeline is about 20% higher than a year ago, but lower than the previous quarter.

While we often see a seasonal drop in the pipeline from the third to the fourth quarter, a number of requests were closed in the fourth quarter due to year-end tax and estate planning issues. I'm extremely pleased with the results of our loan growth and the hard work to make it possible. I am optimistic we will continue to have good growth because of our disciplined approach to execution.

However, the headwinds of uncertainty continually coming out of Washington, combined with overregulation, do pose a serious challenge for growth. A few examples of how this negative news impacted loan growth.

First, in Frost's program to create appointments with business prospects, year to date through August of last year they were up 3%. If you look at September through December, they were down 35%. Remember the priorities during that time were the election and the fiscal cliff. The good news is January is up.

Secondly, looking at new loan opportunities, here are a few facts. For the year 2012, opportunities from customers were up 21% and from prospects were up 86%. But if you look at the third quarter to the fourth quarter of 2012, opportunities from customers were up 11% and prospects were down 48%.

You can't talk to somebody about a loan when there's that much craziness going on.

Our relationship officers will continue to differentiate Frost from the competition through our superior service levels, prompt follow-up, and good listening skills. That is why I'm optimistic about our 2013 loan growth.

Our credit quality continues the positive trends that began three years ago and traditional measures of credit quality improved during the fourth quarter of 2012. Absent any significant changes in the global or national economy, we expect that our positive credit quality trends will continue.

Our capital levels remain very strong. Tier 1 and total risk-based capital ratios for Cullen/Frost were 13.68% and 15.11%, respectively, at the end of the fourth quarter of 2012 and are in excess of proposed Basel III fully phased-in capital requirements. The ratio of tangible common equity to tangible assets remained strong at 8.30% at the end of the fourth-quarter 2012.

Despite regulatory and economic headwinds, 2012 was our best year ever for earnings. We posted solid results, grew customer relationships, and managed expenses during a challenging revenue environment. We expanded our ATM footprint to more than 1,100 locations through our partnership with Valero Corner Stores and Cardtronics. We opened several new financial centers in Houston and in Austin.

J.D. Power and Associates ranked Frost highest in Texas retail banking customer satisfaction, and we were one of only 50 brands across all industries to be named a 2012 J.D. Power Customer Service Champion.

And just yesterday, Greenwich Associates announced that Frost received a record-high 22 Greenwich excellence awards for superior performance and overall client satisfaction and other relationships and service categories in small business and middle market banking.

No other bank in the US ranks higher than Frost in Moody's published financial strength ratings. This goes along with our A+ credit rating from Standard & Poor's.

We are grateful for our dedicated employees and loyal customers who make our success possible.

Before I turn the call over to Phil, I'll 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 businesses and our economy. The November election results, fiscal cliff agreement, and Supreme Court ruling on healthcare provided some measure of clarity for businesses, but much uncertainty remains over government spending, the deficit, and our national debt.

We are fortunate to operate in Texas where jobs grew 3.1% in 2012, compared to the national average of 1.4%. That growth was even faster when you look only at the private-sector jobs, Texas, 3.5%, versus the US at 1.7%. Texas unemployment has declined sharply to 6.2%. The Texas economy should continue to outperform the US economy in 2013, with energy remaining at high levels and a pickup in housing construction.

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 $23 billion for the first time in our history. Since year-end 2007, before the recession began, our assets have grown 72%. That's organic growth without any bank acquisitions.

We're seeing double-digit growth in loans and deposits. Our credit quality is improving and continues to show a positive trend in the future. Our capital levels are strong. We have money to lend. This growth is possible because we remain focused on our value proposition, strong culture, and excellent customer service.

We are successfully adjusting our business model to the new rules and regulations coming out of Washington. We are staying true to our principles and our lending disciplines. We have consistently paid a shareholder dividend and have increased the dividend annually for 18 consecutive years, delivering steady and superior financial performance for our shareholders.

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

Thank you, Dick.

I'm just going to make a few comments about our operations for the quarter and our earnings outlook for 2013 before turning it back over to Dick for questions.

First, with regard to the margin for the quarter, as Dick mentioned we did see a decline of six basis points to 3.48%. However, the increase in our Fed liquidity from strong deposit growth more than accounted for this decline by reducing the margin 10 basis points. Partially offsetting this impact was the impact of higher loan volumes and slightly better investment yields.

More important than the margin compression brought about by the additional liquidity is the growth in taxable equivalent net interest income for the quarter, which increased almost $5 million over the previous quarter more annualized growth rate of over 11%, and this was brought about by increases in our volumes of loans and investments.

Looking at average loan growth for the quarter of $233 million, 56% of the growth came from C&I, while the commercial real estate component accounted for about 40%, with the remainder coming from consumer real estate loans. Average shared national credit balances were actually down slightly for the quarter.

Regarding deposit growth, it continued to be extremely strong. For example, on a linked-quarter basis, average demand deposits grew an annualized 30% and average timed deposits grew an annualized 17%. We saw very high levels of current customer account augmentation during the quarter, so our ratio of new account balances to current customer balance increases slipped to about one-third, two thirds from 40%, 60% in the previous quarter, but we think that may be an anomaly because of specific factors, like potential tax changes and end to the TAG program that were in place at the end of the year.

One thing I wanted to point out was the securities gain we realized in the fourth quarter related to the sale of a block of treasuries. Late in October, we had decided to utilize $600 million of our Fed liquidity to invest in five-year treasuries at 77 basis points. However, immediately after the election, we saw these rates decline significantly.

And it was our view that there would be much uncertainty and volatility in the market as fiscal issues got hashed out over the coming weeks and that we'd have the opportunity to revisit the purchase in the near future since we had no immediate time pressure driving the treasury investment. As a result, on November 8 we decided to take advantage of the $4.5 million gain and wait on developments. As it turned out, rates did shortly return to the previous level, but instead we opted to take advantage of a much smaller, longer-duration municipal investment.

One other development that I want to mention is that as to the year-end, we moved approximately $2.6 billion of our municipal portfolio into held to maturity, and this represents about 80% of our municipal portfolio and about a third of our overall total securities portfolio. We did this primarily because it insulates OCI against market-value variations related to these securities since the Fed to date seems incapable of removing OCI from their Basel III proposal.

But I think this also makes intuitive sense in that we have the intent and ability to hold this portfolio to maturity, especially when you look at the fact that these instruments have the highest yields of any assets on our balance sheet today.

Finally, with regard to 2013 we feel that the current average of analyst estimates is reasonable.

And 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). Dave Rochester, Deutsche Bank.

Can you just update us on the loan pricing this quarter? I think you'd mentioned you were prime plus 90 bps as more of an average last quarter.

I think that we had a little compression. Let me see if I can pull up a more current number. No, I'd say it's probably around 90 basis points, on average (multiple speakers)

Okay, so pretty stable the last quarter?

Yes, I mean, it moves around month to month, but I think on average it was about 90 basis points.

Okay, and on the securities purchases, I know you talked about some munis, how much in aggregate did you buy? Was that munis plus other things? And then, the overall reinvestment rate on that?

Okay, not including the $600 million treasuries that we bought and then sold in just a short period of time, during the fourth quarter we bought $487 million in municipals. They averaged a tax-equivalent yield of 3.74%.

Okay. And that was it for purchases, outside of the treasuries you mentioned?

Yes, that was it. That was it for purchases.

Okay. And lastly, just in looking at the other income line, I noticed there was some growth there. And if I back out, I guess you had a $1.8 million legal settlement gain in Q3 that was up pretty substantially this quarter, in Q4. I was just wondering what that $3 million increase was and if this is a good run rate going forward.

You were looking at the linked quarter, fourth quarter to third quarter? (Multiple speakers)

That's right, in the other income line. So the $9.2 million, roughly.

One of the big things we had during the quarter was about a $2 million additional revenue associated with really good derivative sales to customers downstream. It's primarily interest rate swaps, so it's plain vanilla, but it's been a really great product for us and we've had some really good success. So we had a particularly good quarter.

I think it should continue to be the run rate, but our people in the sales area tell me there's a little bit of an anomaly (laughter)

Got you.

So I think it was a little bit unusual.

Okay, all right, great. Thanks, guys. Nice growth this quarter.

Thank you.

Brett Rabatin, Sterne, Agee.

I wanted to, first, just going back to the securities portfolio, I didn't know, Phil, if you had handy the yield on the taxable portfolio for the quarter.

And then, just was hoping to get some more color around -- obviously, the margin would have actually been a little higher, excluding liquidity. Was just curious on kind of your thoughts on the margin in the near term.

First of all with regard to the securities portfolio yields, our average for the fourth quarter, we had taxable yields of 2%. And on the tax-exempt side, we had a 6.27% tax-equivalent yield.

So the overall portfolio on a tax-equivalent basis yielded a 3.32%, and that was up by about four basis points on a total basis from the previous quarter, third quarter.

Okay.

As far as the items that offset the growth and liquidity, it was -- as I said, it was brought about by loan volumes and then a little bit better securities pricing. Both of those were about -- just around two basis points each, so not a huge impact, but I think some positive there.

I guess I've always said that the underlying margin is going to be based upon two things. One is what loan growth is going to do, and then, I guess to an extent, how much liquidity that we employ into the securities arena. So I think probably -- because I think deposits are going to continue to be strong, the optical margin is going to continue to have some pressure on it. And that's a high-class problem to have, in my opinion, whenever you -- it's based on good relationship growth.

The underlying margin, not including that, I think is going to be based upon loan growth and what we do in securities. And I think that's -- it could be stable to maybe slightly down. It just depends on what we see in the investment arena. I mean, we -- I've said for a long time now we hate the market, but occasionally, as you see, we do go in whenever we see the -- when the liquidity gets extremely high or when we see there might be some opportunity in the market. And so, we could do some additional investing, which could be a positive to the margin, other things equal, but I like to do as little of that as we can.

Okay. And then, the other thing I was curious about was just the loan growth in the quarter, if you guys had any kind of estimate on how much it related to year-end tax stuff and then how much was energy related?

Energy has been pretty steady, and there were -- it's hard to separate the tax. There was a little bit of issue, but we had some good solid growth.

If you look at kind of what's been driving all year long, energy's been an important factor. And public finance, particularly for education facilities. If you look at the real estate side, multi-family has been strong. Home construction is starting to pick up. We've always been focused on owner-occupied, which is starting to grow. So there's a good mix. Equipment, our leasing operation was very strong last year throughout the year.

So, you know, the economy is starting to get a little bit better. We're seeing the advanced rate on our revolving lines move up. It's at about 44.7%, which historically is still extremely low. You know, it got down to 41% or 42%, but it's starting to move up. Of course, that's where there's a lot of leverage, if people would just start using their lines.

Okay, great. Thanks for all the color.

John Pancari, Evercore Partners.

Thanks. Dick, could you talk a little bit more about what you're seeing on the real estate front? We've been hearing about a couple of banks talking about some stabilization there. Are you really seeing the developers come back in a big way yet?

Yes, we definitely are in Texas.

Lots are at kind of a ridiculous low level, good lots. So you're seeing developers start to develop that. Dallas, Houston, and Austin are particularly strong in those markets, and so it's starting to turn.

I don't want to overemphasize the turn because there's still a lot of craziness coming out of Washington, as I tried to demonstrate in a couple of examples, so you've got -- you know, we lived through a lot of volatility in 2012. I think we'll continue to have some volatility. People get happy at one moment on some statistic that comes out and the press blows it up, and the next day they blow something else up. And so, I think that's kind of the environment we're living in.

But overall just -- I've been doing this for almost 45 years, and you look at housing inventories and lots, and they swing big swings. When the market is hot, you just hardly don't have anything, and then when things slow down, you've got 100 years of lots and houses, and really the answer is somewhere in between, but it's getting better. There's no question about it. Slowly but surely.

All right, thanks. And then, did you -- on Brett's question, did you indicate how much of the loan growth in the quarter was from -- was tax related on the borrowers' behalf?

Not anything specific, but there was a little bit of that. But it's also -- it's kind of indirect. We saw some -- just to give you an example, in public finance where we -- where there was a piece of land adjacent to a nonprofit school, and the driver was the family never had any desire to sell the land. They needed it for future expansion, so you can say that that was tax driven because they wanted to do it before the year closed, but at the same time the school is going to build on it and expand. So it's not two and two is four.

Okay. And then, lastly, Phil, on the margin outlook, I think you'd indicated you expect relatively stable with maybe some downside. What does that assume in terms of new loan pricing and competition, and as your loans mature and renew at lower rates? Does that continue to assume a downside reinvestment risk as you're factoring that in?

I think it assumes a little bit tighter loan spreads, not a lot, but a little bit. It doesn't assume much reinvestment on the investment side, so we're going to get some compression there. But what's got to make it up is the loan volumes, and that's always been the offset.

So I think what you're seeing right now is sort of a dynamic equilibrium of both those things. We've got good loan volumes, and it's tending to offset compression on investment yields and slight compression, although not a lot, on the lending side.

Okay, thanks a lot.

Brady Gailey, KBW.

My question was on the reserve. If you look at 2012, you took the reserve as a percentage of loans from 1.38% down to 1.13%. Looking forward to 2013, do you think you could see that ratio drop to as low as 1.0% or potentially lower than that?

I think the way I would look at it is the -- what you've got, thank goodness, we have great credit quality right now and just almost historical lows, but the good news is we've got loan growth.

And so, you're going to see less releasing of reserves. You're going to see, because of the loan growth, of building the reserve up. So those are the dynamics that are going to kind of take place, and so, we'll just kind of go through the year.

As we've always said, it's more sensitive to classifieds. But now, I think we'll just see, with this kind of loan growth that we are optimistic about it continuing, that you'll see just the normal thing that you ought to have of just building the reserve from that standpoint.

Okay. And then, for Phil, I was just wondering about the level of cash you had on the balance sheet in Q4, maybe on an average and end-of-period basis, and if you have any plans to deploy that cash into the bond book in the near term?

I think we've got some -- first of all, let me start with the cash level. It averaged $2.2 billion for the fourth quarter. It's running around $2.2 billion today in round numbers. We've got a few more municipals under a program we've been -- we approved at the end of last quarter, but not much. It's less than $100 million of munis to buy. Other than that, we really don't have any program on the horizon right now.

Okay.

Just to elaborate a little bit on what Dick said, I mean, we think you're right. We did see a reduction in the reserve as a percentage this last year, and I think that the outlook is [free] to continue to decline.

And then, lastly, Phil, I know you mentioned that your shared national credit balances were down on an average basis, but yet when you look at the entire loan book, the end-of-period loan growth was a lot higher than the average. So I was wondering if SNC balances were also down on an end-of-period basis, quarter on quarter, or if you all had an inflow of SNCs late in the quarter.

The actual outstanding balance on 12/31 was $628 million, down from 9/30 of $712 million, and --

So down about $84 million.

Yes, the outstandings continue to grow. It's still energy over 60%.

One thing that was a little bit of an anomaly at the end of the year was there was just a short-term overdraft that was technical from one correspondent bank that didn't get -- make a transfer from the Fed account. They had the money at the Fed; they just neglected to make the transfer. So it was over that period of time, over the end of the year, it was a $100 million overdraft.

So that affected that period-end number somewhat, but again, shared national credits were also down about $85 million at the end of the period. So I guess you could say those tended to offset a little bit.

Okay, then last question for Dick on the acquisition front. Is there any increased activity or talk for you guys on the acquisition front in the state of Texas?

We're still -- as I always say, the talk continues. You know, we're aggressive lookers and conservative buyers.

There's a lot more risk to buying something that I -- just because you don't have an investment portfolio, if you don't get the loan growth out of an acquisition, and then all the other things, the compliance issues and those things. So we continue to look and we will stay in that posture, but we're going to make sure it makes some sense.

It's really nice when you're growing this strong organically. Just to put it in perspective, the biggest bank we ever bought was about $1 billion, and today we're growing at a rate of about $2 billion a year. So this organic isn't bad.

Thanks for the color, guys.

(Operator Instructions). Steven Alexopoulos, JPMorgan.

Hi, everyone. This is actually [Breezy Dixon] on for Steve. Most of my questions have been asked. One last thing, sorry if I missed this, but I know you guys usually comment on your expectations relative to consensus. Do you have any opinion on how 2013 is shaping up?

Yes, what I said was we think that the consensus is reasonable.

Okay, great, and then one last thing. I know you gave a lot of color on the securities portfolio. Do you have the end-of-period and average balances for the total securities?

Total securities had an average balance for the quarter of $9.28 billion. I guess, let me see here, on a period-end basis it would be -- I think the total of about $9.1 billion.

$9.1 billion. Okay, thank you so much.

Matt Olney, Stephens.

A question for Phil. Phil, it seems like you still have some benefits from a swap gain that's still amortizing but was settled a few years ago. Is that right? Can you give us any color on how much the impact was in the fourth quarter? And when should we expect that to roll off?

Okay. As we've been saying for a while, think of that like an investment yield that's going to mature that we can't replace, right? And that -- when we settled that thing, gosh, it's been over a year ago now. I can't remember exactly. It amortizes through almost the end of 2014 and it's about $9 million into the margin, in round numbers, a quarter, and so that'll have a maturity sometime right at the end of 2014.

And Phil, is there anything that could offset that impact?

In what way are you talking about?

Well, I guess it sounds like it just rolls off and it's gone. I didn't know if there was any offsetting thing that we should be thinking about when we're forecasting the NII?

You know, I think that there is a small -- there is one that happens, a swap that goes the other way. It's much smaller. It's on our trust preferred securities. It comes off, I think, right around the first of 2014, but it's a lot smaller in terms of its impact. I can't remember the exact number, but it is a little bit of an impact there.

No, I would say your benefit on the margin would be whether about that time if you do have any rate increases, and we do have some benefits from sensitivity which could offset it some, but I think that would be on the margin the most logical factor. Again, it's just like losing a really beneficial block of municipal securities to maturity. You just have to see what the market is at that time.

Okay, that's helpful, and then, secondly, Phil, the tax rate has been a little bit heavy this quarter. What should we be expecting for 2013 tax rate?

Let me look and see if I've got a number here. I think it would be -- can you remind me what it was for this quarter?

I'm showing around 24%.

Okay, so I think it will be a little bit less because I think there were some nondeductible -- yes, okay, nondeductible premium interest there because we had some higher muni purchases. But I think it would probably be a little bit lower than the 24% but -- say something around 20%.

Okay. Thank you, guys.

John Moran, Macquarie Capital.

Just wanted to revisit the securities book, and sorry if I missed this in the prepared remarks, but it sounded like $500 million or so of munis was deployed -- or deployed into munis this quarter. Was that kind of even throughout the quarter or was it a little bit lumpy?

Well, I think we had an average increase in munis of about $400 million over the previous quarter, so it was throughout the quarter, but that was the average increase.

Okay. And then, Phil, do you happen to have kind of what comes off the securities book on a quarterly basis in 2013? And then, I guess, related, if you had -- and sorry if I missed this, too -- but if you have duration or weighted average life?

Okay. Overall, our portfolio cash flow runs about -- let's say for 2013, if you take prepayments and regular maturities, it would be, I'd say, around $1.2 billion for the year, and that comes off at different speeds.

We've got a maturity of about $500 million of US Treasuries in July, so that's a little bit of an unusual amount for us, so call it $700 million, $800 million on an annual basis, which should be more or less ratable. It moves around, particularly the repayment speeds in a few maturities here or there, but that's kind of what you're looking at with regard to cash flow.

And then, as far as duration of the portfolio, look at it two ways. One is the duration of the portfolio with municipals all going to maturity would be a [595], but 100% of all those municipals are being called today or pre-refunded. So if you look at the Bloomberg option adjusted maturities, you'd look at a duration of our portfolio of about 3.38 years, so that's what you're looking at. I think for operating purposes today, unless we get a tremendous increase in interest rates you're looking at a portfolio duration of around 3.4 years.

Got you. That is very helpful. Thanks for the detail.

You're welcome.

Brett Rabatin, Sterne, Agee.

Hi, I just had a follow-up. I was curious. I saw recently in a news article that you guys want to double your size in Dallas in the next five years, and I know you kind of addressed acquisitions. But I'm curious if acquisitions don't occur, how you do that? Are you going to open up a lot of branches in that market? What your thoughts are on the Dallas market?

We've seen good growth in the Dallas market, and we have been expanding our branches in really good segments. Obviously, it's a big city, and that has been a great opportunity for us. But we think the -- we don't think, the organic growth that we've had has been working well. And you've got to remember, we've got a small base in Dallas, and you can -- it's going to grow faster.

Fair enough. Thank you.

(Operator Instructions). Jon Arfstrom, RBC Capital Markets.

Jon, are you there?

Hello?

Yes, we can hear you now.

Okay, good, thanks. So Dick, just maybe a bigger-picture loan lending question for you. I think we all like to listen to your prepared comments in terms of what is holding people back, but the last few quarters we're seeing some pretty strong loan growth out of your Company. And I guess my question is, do you feel like your borrowers are still being held back somewhat? And what is possible? Can growth accelerate from here as you guys have your clients use up some of their commitments that you've made to them?

Well, you have to -- let's go back to a couple of basics. First of all, 80% of your loan growth comes from current customers, so you've got two dynamics.

I mentioned the advance rate on lines has moved up from, say, 42% to 45%, and that doesn't sound much in percentages, but it's a big deal when you look at how many dollars we have outstanding. We've got revolving lines in total for the bank of a little over $10 billion, and that's where you've got an advance rate of almost 45%. So that's going to be if you get a little more confidence in the economy, which we're getting, and certainly we're fortunate to be in Texas, that's where you're going to see the biggest growth.

The other thing is this strong calling effort that we have done ever since the world blew up of the great recession and didn't have the TARP money. We have been building this base and those things start to build. You don't just go make the first call and get the loan. You love it if you can, but -- so I think we're starting to get some leverage from that.

We have a very disciplined plan in our calling effort. We watch it constantly. We know that the work we do today is going to pay off about 120 days from now, so we're staying ahead, watching the levels of commitments. You know, I talked about just appointments on prospects. I talked about opportunities. We've done a lot of work in making sure we leverage between markets. We may be real good at lending to automobile dealers in one market and not in another. So we're cross training and helping one another in that regard.

So there's a very disciplined execution plan that is really where we're getting at, but -- and there's no doubt. I've always said you're not as stupid as you look in a bad economy and you're not as smart as you look in a real good one, and we're just kind of in an average kind of economy with a lot of this national debt and the negative -- we've got about $0.74 of income out of every $1.00 we spend nationally, and so that's a big problem and an overhang.

But we are fortunate to be in Texas. We're working hard. We've got the disciplines. We're not compromising our credit standard. We're being competitive on rate. It's getting a little bit better, the rate. You'll see a juvenile delinquent come in every now and then, and that doesn't -- juvenile delinquent doesn't mean a little bank. It means usually the too-big-to-fail will come flying in with some crazy pricing.

But it's getting a little better in that regard, so all these little things add up, and Frost has a great brand that we continue to build and execute on. So it's a lot of moving parts and we're trying to work on all of them. And we're working more and more as a team to be able, if we can get just one piece of business from a prospect -- insurance, investments, wealth advisory -- then we're leveraging off of that to build other fee and loan business. And certainly we talk a lot about relationships of getting the primary account, and we've been successful, as you've seen in our deposit growth, of building on that.

Okay, that's helpful. Thank you.

Brady Gailey, KBW.

Hey, thanks. I had a follow-up about the comments, talking about the benefits to earnings from a swap gain. I just wanted to clarify. So it's benefiting spread by $9 million a quarter currently, is that right?

Yes, that's the amortization on it. That's been that way for -- gosh, since we monetized that.

Okay. And it rolls off at the end of 2014, so once this goes away -- I mean, right now on an annualized basis, this is adding about $0.45 to earnings annually, right? And once that goes away, those $0.45 will be gone?

I don't think it's $0.45, but whatever the $0.09 would be, $0.09 per quarter. What is that, $0.36?

Yes.

So maybe a little bit less than that, but yes. It's --

And will that $0.09 -- is it $0.09 a quarter until it goes to zero or is there more of a natural decline where it goes from $0.09 to $0.08 to $0.06 and kind of naturally goes down?

It's amortizing right now on a straight-line basis, so it's not a, you know -- it's not something that's going to sort of taper off. I mean, like I just said, one other swap will offset it somewhat, but --

Okay, all right, great. Thanks for the clarity.

Emlen Harmon, Jefferies.

Jon kind of addressed my question a couple minutes ago. I guess maybe getting into the intricacies of just the loan growth a little bit. You guys had talked through the cycle about kind of customer acquisition and waiting for that to pay off in terms of loan growth. Could you give us a sense just of what the actual pace of customer acquisition has been in the last couple of quarters? And is that kind of building at a compounding rate where you think it can actually even generate an acceleration in loan growth as we get through 2013 here?

We've had -- it was a pretty good acceleration that we had last year that we're optimistic about continuing. That's a pretty good run rate, particularly for an organization to be in the 15% to 18% growth rate. You know, as I said, we think we can continue to run that. You can't run at that rate forever, but I think it's already working.

We reported, I don't know, a year ago or sometime last year, what we were getting out of new relationships that we have, and that's not a giant number, but it's certainly significant and continues to grow. And it's a little bit choppy. It'll be strong one quarter where you get a pretty good loan from a brand-new customer, and then it -- but all in all, as I said, it's -- the thing that's most important is our growth is broad based in all segments and really in all sizes of loans.

Got you, and then just a quick one on provision. Could you give us a sense of what portion of the provision was attributable to the new loan growth versus just kind of charge-offs or resolutions in the quarter?

As we said before, frankly the reserve is most responsive at the level of classifieds, and so since the historical losses on new loans is not very high, there's a modest amount of provision that relates to the loan growth, but it's not as much as the changes in classifications, by a long shot.

Got it. Thank you.

At this time, you have no further questions. I'd now like to turn the floor back over to Mr. Evans for any closing remarks.

This concludes our fourth-quarter 2012 conference call. We appreciate your support and interest in Cullen/Frost. We stand adjourned.

Thank you. This concludes today's conference call. You may now disconnect.