Cullen/Frost Bankers Inc (CFR) 2013 Q2 法說會逐字稿

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

(Operator Instructions)

Thank you. Mr. Greg Parker, EVP and Director of Investor Relations, you may begin your conference.

Thank you, Susan.

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. Let me apologize, to begin with, with my voice, allergies are taking over. The good news is we've had good rains in Texas. The bad news is the molds are pretty good too.

Well, with that I will get started. It is my pleasure today to review second-quarter 2013 results for Cullen/Frost. Our Chief Financial Officer, Phil Green, will then provide additional comments. After that, we will be happy to answer your questions. I am pleased to report that for the second quarter of 2013, Cullen/Frost reported double-digit increases in average loans and deposits. And, of course, our capital levels and liquidity continued to be even stronger now than they were prior to the 2008 financial crisis.

The results amid ongoing economic and regulatory challenges are a credit to our dedicated employees. During the second quarter of 2013, our net income available to common shareholders was $57 million, compared to $58.1 million reported in the second quarter of 2012. This was $0.94 per common share, the same as in the second quarter of 2012. These results included our initial preferred stock dividend of $2.7 million. For the second quarter 2013, return on average assets and common equity were 1.03% and 9.93% respectively. Deposit growth continues to be strong, second quarter 2013 average deposits were $18.8 billion, up $1.9 billion or 11.2%, over the $16.9 billion reported in the second quarter of 2012.

Our deposit growth was broad-based with 46% coming from new customers, and 54% from existing ones. Net interest income for the second quarter of 2013 was $174 million, up 6.1% from $164 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 3.43% for the second quarter of 2013. Non-interest income for the second quarter of 2013 was $72.5 million, up $2.7 million from the $69.8 million reported a year earlier. Trust and investment management fees increased $1.3 million to $22.6 million, a 6% increase over the second quarter of 2012.

Other charges, commissions and fees were $8.6 million, up 9.6% from the second quarter 2012, primarily due to increases from the sale of mutual funds and annuities. Other income increased $1.6 million to $7.8 million, primarily related to sundry income and mineral interest income. Non-interest expenses for the second quarter 2013 was $149.8 million, compared to $142.5 million in the second quarter of 2012. Salaries and employee benefits were up $4.4 million over the same period a year earlier. Furniture and equipment increased $1.3 million from the second quarter 2012 due to service contract expenses and software amortization. Other expenses increased $1.3 million, partly from advertising and promotions.

Turning to loan demand. We had another strong quarter of double-digit loan growth thanks to our disciplined calling efforts. Second-quarter 2013 average total loans were $9.2 billion, up 11.4% from the $8.3 billion for the second quarter of last year. Year to date, we've had the highest level ever of both new loan requests, and new loan opportunities for the first half of this year. As a result, the level of new loan commitments booked in the second quarter was 25% higher than the first quarter this year, and up 3% over the second quarter of last year.

In summary, commitments are staying at consistently high levels. While commitments are strong, and customers are preparing for growth and establishing lines of credit, there is some indication that they still are reluctant to use them due to the ongoing uncertainty in our economy. Nevertheless, we expect to see continued loan growth thanks, in part, to our discipline team approach and strategic calling effort. Our credit quality trends remain positive. Problem loans are at pre-recession levels. Our capital levels remain very strong. Tier 1 of total risk-based capital ratios for Cullen/Frost were 14.22%, and 15.39%, respectively at the end of the second quarter of 2013. Our ratios are in excess of the recently issued Basel III fully phased-in capital requirements. The ratio of tangible common equity to tangible assets was 7.9% at the end of the second quarter for 2013.

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. While we are seeing some positive signs in the economy, much uncertainty remains over government regulation, spending, the deficit, dysfunction in Washington and outlook for jobs. The inconsistent implementation, and ongoing lack of clarity surrounding the Federal Healthcare law illustrates how government regulation can adversely impact job growth, particularly among small businesses. Until companies know the rules, and when and how these rules will be enforced, they are less likely to add jobs. And if the rules penalize companies for hiring full-time employees, business will higher part-time work instead.

Fortunately for Frost, we are blessed to operate in a pro-business state like Texas, where job growth remains higher and unemployment lower than at national averages. Construction, energy and technology continue to drive a diverse Texas economy. Commercial property activity, increased real estate values, corporate relocation, and expansions all signal strong momentum in Texas. At Frost, we are working hard and growing as well. In the second quarter, we opened two financial centers in Dallas, and one in Houston. Our highly rated Frost app for iPhone is extremely popular, and underscores our efforts to provide outstanding technology, convenience and service to our customers. We are seeing double-digit growth in average loans and deposits. We remain focused on our value proposition, culture and excellent customer service. As a result, customers continue to choose Frost.

I am grateful to our dedicated employees for their commitment to bring our culture to life each and every day. We are staying true to our principles, and our lending disciplines. Our capital levels are strong. We have paid and increased to our shareholder dividend annually for 18 straight years, delivering steady and superior financial performance for our shareholders. Most importantly, we are well-positioned to serve our customers, create new opportunities, and to continue to produce strong financial results.

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

Thanks, Dick.

I'll make just a few additional comments about our operations, and then we are going to open it up for questions. As Dick mentioned, our net interest margin for the quarter was fairly stable, it was down 2 basis points to 3.43%. We had a modest increase in liquidity, of just over $100 million, which impacted the margin slightly. Meanwhile, rate movements on the asset side of the balance sheet largely offset with a drop in the loan yield of 6 basis points, offset by increases in investment yields of 4 basis points, and a slight 1 basis point drop in deposit costs. The loan yield decline resulted largely from increased rate competition for quality loans, as well as some larger deals at lower risk levels and related pricing.

The investment portfolio yield increase reflected some additional investments over the last few months. Looking at the balance sheet, Dick pointed out our good growth in loan commitments, which has been strong. However, in part because of line utilization which is in decline, our annualized growth in loans outstanding was just over 4% on a linked-quarter basis, so we're looking forward to the time when many of those commitments start to fund up. Looking at deposits, they were up about 1% annualized versus a very strong first quarter, which benefited from an unusually large buildup late in the fourth quarter of last year.

However, we have seen deposit show some really nice growth late in the second quarter and through July, to the point where we are once again experiencing all time highs in average monthly deposits. Turning to the securities portfolio, we did make some investments during the quarter, as we continue to see a buildup in liquidity. We stayed away from treasuries and agencies, and continued to use the segment of the market, which in our opinion provides the greatest value, namely the municipal market. We did, however, reduce the terms of the securities we purchased. But most of our purchases over the last few years have been around the 20-year level, with calls of around 10 years. Of our second-quarter purchases $444 million, or 80%, average 6.7 years, and $116 million, or 20%, average 16 years.

Liquidity continues to be strong. Even in the wake -- or in the wake of deposit growth, and hopefully, on maturities, and for an example for this past week in July, our [Fed] account has been running around $3 billion dollars, even with these purchases. And when we make additional investments for the rest of the year, we expect them to continue to be in these shorter term municipals. Just as a reminder, particularly in light of the issues in Detroit, our municipal portfolio is comprised of 96% Texas issuers, 73% of the Texas municipal portfolio are Texas schools insured by the Texas program school fund, which we have discussed with you several times in the past. Another 3% of the Texas portfolio has been pre-refunded with US government. Of the out-of-state portfolio, the largest issuers are the state of North Carolina and the state of Florida. We have mainly utilized out-of-state positions in order to acquire shorter maturities in size. In short, we feel very good about the quality and performance of our investment portfolio.

Finally, regarding our outlook for the year, we currently believe the average of analyst estimates is reasonable.

And with that, I will turn it back over to Dick for questions.

Thank you Phil. We are now happy to take your questions.

(Operator instructions)

Stephen Alexopoulos with JPMorgan.

Just on the loan growth, could you give some color on the components of what drove the growth in the quarter between C&I, CRE, et cetera?

It is the similar drivers. We are seeing energy, and certainly service companies within that sector, manufacturing, medical, and then we saw some aviation. That's mainly in the C&I loans. And the commercial real estate, no surprise, multifamily continues to be strong, owner-occupied, and some religious organizations are all in the real estate category. The interesting thing in this environment we are in, we've got good mix, as I mentioned, I am extremely pleased with our growth of our commitments.

The amazing thing is customers are not using their revolving lines. If you look back to a year ago, we were at about 40.5% advanced rate, as you went through the last quarter of last year, it got up right at 42%. And this quarter, we closed the quarter 39.8%. So the line usage, and funding end of the lines, has been very weak. But, the thing you want is to build the commitments, and we are doing that. It's broad-based, very healthy. I mean even if you look at our shared national credits, they're down $53 million, over commitments are the same, and we are still running a little over 60%. Energy and that sector. Our customers are in a good liquid position, just like this bank is.

I'll just throw in a few summary numbers of the portfolio, Dick has given some great color here on the portfolio changes. If you just break it down, some of the larger categories, and I'll look at period end numbers. On a linked-quarter basis, we were up $70 million on period end. $64 million of that was in C&I area. We had a $94 million increase in C&I loans. We had a $54 million drop in shared-national credits in C&I, and then on the leases side we were up by $24 million. On an annualized basis, period end leases were up by 34%, C&I loans were up by 10.5%, shared national credits were down, actually on an annualized basis, by 32%.

If you look at the commercial real estate component on a period end to period basis we were down by $20 million. That was in construction, which was down 36% on an annualized basis, down by $59 million. Our commercial real estate mortgages were actually up $32 million, as a 5% percent annualized growth, and land was up about $7 million, which was 12% growth. And on the consumer side we were up about 7% annualized, up $13 million on primarily consumer real estate. So just a few of the numbers on growth.

Thanks for that color, it's actually really helpful. Do you also have the balance of what the loan commitments were in the quarter, and how did that change versus 1Q?

You're talking about the loan commitments?

Yes, the commitments outstanding, yes.

Hang on just a minute, and let me get you that number. $12 million. Yes, on 12-31, our commitments were $12.274 million. And on 6-30, they were $12.847 million.

Billion.

$12 billion I'm sorry.

That's okay.

So, it's $12.274 billion, and then a year it's up to $12.847 billion.

And the C&I loan growth numbers are pretty strong. Are you seeing the typical reduction in deposit balances from those customers, in line with that growth?

No.

No?

What we've seen on the deposit side, it goes back to the tremendous buildup that we had in the fourth quarter in anticipation of there's so much going on, the tax law change, the TAG program change, et cetera, and we saw a huge build up there. We've seen, over the last couple of quarters, a reduction in what we call augmentation of current customer growth. If you look at, Dick mentioned in his comments, we were 55% of our deposit growth was from account augmentation, 45% from new account growth. If you go back a couple of quarters or so, that augmentation piece was a lot higher instead of 50%-some odd, it'd been 60%-some odd.

So we are seeing augmentation in terms of the balances of our current customers, but we're not seeing it to the same level we saw in the past. And as a result, we're getting a higher percentage of our growth from new customer growth which is really the great effort that are people are making in terms of calls, and, of course, our value proposition. So, we believe that that's probably a little bit of a sign, a good sign. As you see less and less liquidity buildup, it's the rate of liquidity buildup is slowing as opposed to just absolute reductions in balances of customers. If that makes sense.

Okay, that make sense. Thanks for all the color.

John Pancari with Evercore Partners.

I want to see if you can give us just a little bit more color on your margin outlook? More specifically are you seeing any benefit here from the steeper curve, maybe on your securities yields, as well as possibly on the loan side? Maybe on the CRE yield?

Okay, John, it is a little bit hard to hear you, but what you are asking was what the outlook for the margins today, going forward. And, I think I heard you say, given the impacts of investment yields, loan yields, et cetera.

Yes.

I would say what we anticipated last time was fairly flat, where volumes and utilization and liquidity provide the positives, and where maturities, particularly in investment portfolio, provide the negatives or the pressures, and the notice of some basically offsetting. I would say we continue to believe that pretty much to be the case, with the possible exception that we could get a little margin relief in investments. Because when you look at what we have been purchasing, those 7 years, and then the 15 years, have got really good yields on a tax equivalent basis, those 15 years are about 5%, the 7 years, it was 6.7 year on average. But those run around almost 3%, say to 2.85%, 2.95% tax equivalent. So that could help us our margin somewhat.

We were surprised, I won't say surprised, but I mean we did see a little bit, tougher rate competition in the quarter. You heard my comments with regard to the loan yield drop. We've been saying what the average spreads in new and renewed loans has been on a running basis for a while now. I think the last quarter was like 92 basis points, it was 85 basis points this quarter. And, some of that is, again, if you are in bigger higher-quality deals, you're going to get lower pricing. And some of it is just competition, which it still continues to be fierce, and got, a little bit worse in the last few months. Not terribly bad, but a little bit worse.

So anyway, that's a long-winded answer. We're looking at, I would hope, a little bit more of a stable margin, with the possibility that cooler margin could get some benefit if we see some benefit from some of these additional investment purchases.

Okay, all right. And then lastly on credit, not that it is an issue for you guys at all, but I just want to get a feel here for your reserve level. Do you think it is pretty much at a bottom here at 1%, now that it is getting around that 1% level of loans?

I would just say that from the accounting part of it, the financial part of it, it could get less than that. I mean if it's not a line in the sand that we have drawn. I mean the formula is the formula. And if charge-offs continue to be extremely low where they have been, I think, for example, that this quarter on an annualized basis, there were 16 basis points again. If we continue to have that kind of performance, I would not say that 1% is a line in the sand. But, look, we like reserves as much as anyone, and we have just got to play within the rules. Dick, do you have any comment on that?

I just going to say there's some of these old perceptions that you can't go below 1%, and you got to do this and that. I don't think those are true. It is a formula. Phil said it. We like reserves. Theoretically you ought to build reserves in good times. These are good times. But, if you don't follow the formula you go to jail. I don't mind working hard, but I'm not going to go to jail.

All right, all right. Thank you for taking my questions.

Brady Gailey with KBW.

As we look, as analysts, into forecasting 2015 estimates, can you just remind us, Phil, maybe on the impact? I know you all had a swap that was previously terminated, and there's a gain, a run in through spread income that goes away some time in the back half of '14. Can you just remind us of the details of that?

Okay. Without going through the history of it, but obviously it was a great hedge force in a lower rate environment. We did monetize that a couple of years ago. That contract, which was originally seven years, would have run through, I think it was, November of next year. November 2014. When we monetized it, we had to take, under the rules, we had to take a gain that we recognize on our cash basis, and amortize it through the remaining life of that contract. So, it's been amortizing about $9 million a quarter, it's in the queue. But it amortizes on a straight line basis from where it is -- at the end of every quarter it amortizes straight line through the end of that contract, which is around $9 million.

Okay, and does that flow-through the bond yield or the loan yield?

It's goes through the loan yields, it has to be accounted for in the loan yield itself.

Okay.

So as we hit November of next year, that amount won't be there anymore. I think of it like, you think about our balance sheet overall. There are lots of things in our balance sheet that are great, and some of which won't be there. A great example is our municipal portfolio which has a tremendous yield today, on a tax equivalent basis, but at some point those yields are going to roll off. And I think of that bond maturity -- I think of that gain maturity like an investment. It's going to mature at some point that we are not going to be able to replace in the current market. And so, it is one of the headwinds that we have from lower interest rates. As far as what happens when that rolls off, in 18 months or so whatever it is from now, that's going to depend on a lot of different things.

It is like, again, if you think of it like a bond that is going to mature, it is really a notional amount. It's actually an amount that doesn't have any cash flow associated with it, since it's a gain amortization. On the other side, though, if you look in the virtual, or in the real world, we've got tremendous amounts of liquidity. In fact, as I mention, as we sit here today, we've got about $3 billion in our Fed account, which this last quarter is 2.3%. So, we're actually building up liquidity on our actual balance sheet for what amounts to a notional maturity, if you think of that way. So there are different things that just occur as you run your business that will impact, could have a potential to impact some of that impact of that gain running off. That is just an example of one.

Okay, that's helpful. And then, I know at the end of March, your asset sensitivity position, you guys were just modestly asset sensitive in a rising rate environment. Did that change a lot as of the end of 2Q?

It didn't. And I'm glad you asked, Brady, on that sensitivity position. Because, one of the things I want to make sure we are clear on, and it says it in the queue, but our assumption on -- and anybody's assumption on what happens with interest paid on demand deposits is a big factor with regard to how much sensitivity you have. Whether it is a bank, in specific, or whether it is the industry in total. And we have always been, we say we have always been, very aggressive with regard to our assumption on the sensitivity of the rate increases on demand deposits as rates go up.

And, we have always done that because we want to be careful that if the market goes crazy, as it sometimes does, with what it pays on these things, that we are taking that into account in the analysis of our sensitivity. So we have assumed a high correlation to the changes in Fed funds rate, a high correlation of that demand deposit rate that we'll pay. So that if that turns out not to be that case, and it turns out to be more of an administered rate, then it can have a big impact on your sensitivity in terms of making you more asset sensitive in the near-term. So that is one thing I will say about it.

Always when I have talked to people about it, I say look it's a fairly linear relationship. You can choose what percentage of Fed funds you think you will pay on that demand deposit. Pick a portion of the demand deposits that you think subject to that rate and apply fairly basic arithmetic, and you can see what the impact of that would be on a higher or even lower rate environment. That's one thing I will say about sensitivity. Another thing I will say about sensitivity is that the analysis that we do in our Q assumes what we feel is a real-world look at rate increases, which is that they happen over time. So that up-to-100 analysis assumes that it is up 200 basis points over a 12-month period, so, obviously, it averages100 basis points.

If you look at that second, we're not required to do this analysis for reporting purposes, but if you do look at that second year, after rates begin to go up, regardless of how much you are paying on those demand deposits in our scenarios, whether it's aggressive or more conservative, there's a whole lot of asset sensitivity and a whole lot of benefit that occurs in that month 13 through 24 as opposed to that first 12 months in those scenarios. So, that's another thing for people to keep in mind as they look at our asset sensitivity. In my mind, just as we operate the Business and look forward to the impact of rate, what I call our company is at this point in time, we are probably solidly asset sensitive, today.

Okay. And then lastly, the duration was about 3.3 years at the end of the last quarter. What's that updated for 2Q?

It is 3.33.

Okay. All right, thanks for the color guys.

And I should also always point out that that assumes the expected calls revised on the municipal portfolio, that's what you'd see if you looked at Bloomberg on our holdings. If for some reason, none of those were called, and they all went to maturity, our portfolio would go from an overall 3.3 to a 5.9. You'd see some extension there. On the other side of the coin though, the portfolio yield would increase significantly because those bonds would have been amortized, those premiums amortized to the par call, and we'd see those yields move up to coupons. I should point out, I hate to give so much inside baseball because of you who understand, bond investing and municipals in particular.

I will point out that we have 80% of our municipal portfolio has coupons of 5% or greater. And so the performance of those bonds has been extremely good, so they're not subject to the taxability discounts. In fact, over 90% of our portfolio has coupons of 4% or higher. So, if we do see some extension on those bonds, we will see some nice rate increases on that portfolio.

Okay, thank you Phil.

Terry McEvoy with Oppenheimer.

Now that we have some clarity on capital, what are your thoughts on buying back stock, especially as a way to maybe look at offsetting some of the dilution related to the run off of the swap that you talked about earlier?

I think, first of all, I am really glad we finally know what the rules are. And so, we have some flexibility with that side of our capital planning. As we've said many times, our hierarchy of what we like to do with capital is always we are looking for an acquisition that we can undertake that meets our criteria, which admittedly is very high. Dick has always said we are aggressive lookers and conservative buyers. But, if we are able to find that unique situation, we would love to do that with capital.

And, secondly, if we are unable to do that kind of thing, we've historically utilized, and will utilize in the future, stock buybacks. And that is a good point, to the extent that we utilize excess capital to buy back stock, now that those rules are in place today, and now we know what they are. That would provide some benefit with regard to EPS accretion, that is just another example of something that could happen in your balance sheet to offset the impact.

And then just a question on the advertising and promotion expenses. Where do you see those going in the second half of this year? Remain at these levels, or will they come down a bit?

They should be fairly consistent. I don't think we will see a big drop. We saw an increase from the first quarter, as a seasonal change. But we are expecting it to be fairly level.

Great, thank you.

Brett Rabatin with Sterne Agee.

Hi, guys, good morning, it's Sterne Agee. Was hoping to get maybe some thoughts, you talked a lot about asset sensitivity and thinking about 2015. I'm just curious if you guys wanted to give any thoughts around just with the yield curve where it is today how you guys view your profitability potential? Can you move that higher from the one ROA with the balance sheet today? Or is that just the level that we are going to be at until rates move higher?

Well, as long as rates are where they are now, I mean to quote Dick -- it is a tough fight with a short stick. But, as we look at our company fundamentally, we're very optimistic about the fundamental capability of us to earn much higher levels than we are at today. I mean you talk about intrinsic value, the company, we are at a 48% loan to deposit ratio. Even if rates stayed low, if we were able to move that back to where it was four years ago, then you'd see tremendous earnings capacity of the Company. The problem is, if rates stayed like this we are not going to see our loan to deposit ratio increase to historical levels. I think that we have got to see a stronger economy, and Feds gotta get out of the way, that kind of thing.

So there's tremendous earnings capacity, and our liquidity that we maintain with our 48% loan to deposit ratio. Then also, I think, since you are moving out to '15, we're going a couple of years from now, you're assuming rates are beginning to move up modestly. There's really lots of potential earnings capacity, and operating leverage, in just the sensitivity that we have for the Company. It has been talked about earlier, we do have to fade that amortization that's going away sometime late next year. But, we are focused on that as well, and we are not ignoring it. So, we feel very optimistic about it. Dick, do you have anything to --

Yes. What you have got to think about in this environment, we have been at zero interest rates, the government has just absolutely scared the hell out of everybody in the country about growing their business. This healthcare thing is ridiculous. They're not going to hire anybody. The Fed doesn't have the guts to do what they need to do and quit buying bonds. So when you have got that many people so dysfunctional in a powerful place, and you take a great company like ours, obviously I am very biased. But we are trying really hard to have good quarters, which we are, and not blow the place up.

There are a lot of people, there's a lot of things that you can do to try to build your earnings up for the quarter, but so what? This is a good, consistent growth. You look at this, these commitments we have been building, that is long-term. You look at this growth of deposits from customers that never banked with us before. We're doing some fundamental things to this Company that I'm extremely optimistic about the future, and when we get some sanity, which there may not be any sanity in Washington, but you got to hope that someday somebody will have some sense. And when they do, this is going to be a company that is going to take off, because we have taken care of our customers.

The thing to do is to focus, we believe on helping our customers be successful, and try not to get confused in this insanity that is going on. So I feel good about where we are. I feel good about how we positioned this Company. You can get down that the earnings were flat, or you can get real excited that we continue to grow it, and have good study earnings. So, we have great opportunity. And we are going to continue to focus on helping our customers be more successful. And when we get to the road, the end of the road, it is going to be good.

Okay. That is great color, and there is a lot of operating leverage as you get out to the next couple of years. I joined a few minutes late, I heard you talk about buying some shorter-term municipals, but I didn't hear if you gave it, I apologize if you did, but just the amount that you are thinking about buying, and the yield on those munis? What that might add to the overall securities portfolio yield in the next few quarters?

Well, I did mention what we did last quarter, which was $444 million, and 6.7 years was the average. And that was 80% of what we bought. We bought, I'm trying to remember now, $715 million or so, and 20% of what we bought was 15, say 16 years. So that is down from what we had been buying. The kinds of things we are buying, the shorter-term munis right now, tax equivalent basis, I said that we are looking at yields today of around 3% tax equivalent for the seven-year stuff. And we're looking at yields around 5% tax equivalent on the 15-year stuff.

And we're not buying nearly as much 15-year stuff, just because we are getting at the end of a rate cycle, and you have got to be careful, not just with credit, you got to be careful with interest rate exposure. So, we know how much duration we got to spend. Some of it we're going to spend on 15 years, down from the 20 to 25. Most of it, though, you're going to see us buy, when you add up everything we bought this year, you're going to see most of our purchases going to be inside the seven-year area of municipals. But that's better than what we got at the Fed, and we feel like we have got duration that we can allocate still to that asset class.

As far as what we buy looking forward, the second quarter was a pretty big quarter for us in terms of volume of securities. You're going to look for something, I'd just say something like maybe half that, if we do, if we feel like the market is advantageous, maybe half that level for the quarter moving forward. As we go through the end of the year.

Okay. And then maybe just one last quick one. I know, Dick, you have been talking about, in the past quarter or two, a pretty competitive environment, and maybe being more competitive with how you are funding loans, and how you are competing in the market. Could you maybe comment on that, in terms of just if you're getting more aggressive vis-à-vis where your peers are to be able to maybe attract new customers?

Well, we are doing pretty good, commitments are growing awful strong. So, we are competing. I'm going to try real hard not to do something stupid, like a lot of these banks are doing, and charging -- getting paid 1.87% locked in for 10 years on a loan, which I saw the other day, and there is some really insane stuff going on. But we are competing. We're going to stay competing with quality. When we go after that quality bone, there will be a lot of dogs there, but we will get it nine out a ten times. And we're doing plenty good if you look at the lost business. And our pricing is still 60/40, 60/40 we're losing cause of price.

But you got to be real careful of just how far you go. I mean, don't forget, this is not a nonprofit. This is a profit business. And there is some stuff going on in this competitive environment of giving money away. We rent it, we don't give it away. We want to get it back too. So, we are being competitive, we're going to continue to. And we are lowering prices where we think it is appropriate. But, that's where we are.

Okay. Appreciate all the color, thanks.

Emlen Harmon with Jefferies.

Good morning. So just one quick question on the securities book. Munis have become a larger part of that book. Over the course of the past years that is where you have focused your investment. Is there a point where you feel like you are maybe over concentrated within munis and just what is the next attractive investment category in the securities book?

Well, there is a limit to everything. If you look today, let's say you looked at the end of the second quarter, municipals were about 41% of our portfolio, and treasuries 36%, agencies 22%. Agencies used to be by far the largest asset class we had, but the government screwed everything up with that asset class, and those securities, and they are still messing it up with what they're doing with their heart programs, et cetera. So we see no value, zero value, real value in the agency portfolio today. So, it is not going to be the agencies anytime soon.

Frankly, what I hope we see as the next big asset class is loans. I mean we've got more room for investments if we need to, again we are at $3 billion in our Fed account last week, right. And, last quarter we averaged $2.3 billion in the Fed account. So you can see liquidity continuing to grow. What I'm trying to say in plain English, we're going to see that component grow some. But, I hope what we do is we see the next big asset class being loans.

And I would love for the Fed to get out of the way, and let us have some price discovery in the treasury markets. I would love to buy some more treasuries if I thought I could get them at the right yield, which we can't today. Obviously, it'd be hard, it's going to be a while before we get it to 50%, but it could get to 50% of our portfolio. But we just have to see. It is going to depend on what the Fed does. It's going to depend on what loans do. But rest assured, we look at it, we think about it, we evaluate the duration risk, we evaluate the credit risk. So it's not easy is where we are right now.

Got it, right. That's helpful, thank you.

Scott Valentin with FBR capital markets.

Good morning, and thanks for taking my question. Just with regards to M&A, you have said in the past you look at a lot of deals, but you are conservative and it has to pass a high threshold. Just wondering -- one, if you are seeing more banks or more assets available? Which some other banks have indicated, it seems like there's a lot of chatter out there. But also -- two, more clarity on capital if that changes your approach at all to M&A?

Well, there is a lot more chatter, a lot of things are going. And if you were a $200 million or $300 million asset bank, you know you are going to be wiped out because the regulations that the Fed has put with the dump truck bill of Dodd-Frank. So, you got to do something, so there is a lot of merging with smaller ones. But, again we are aggressive lookers and conservative buyers. As far as, with the capital clarity and that sort of thing you just talked about, I hope it does not change our discipline.

I hope our discipline stays the same. And our intent is to buy banks that we think can give a good return to our shareholders, and make this whole company more valuable, and compliment it. That's what we did when we bought acquisitions, bought banks. We will continue to look hard, and if we find something that bring value to our shareholders, we'll buy it. We've got the money.

And then just a follow-up question. What about non-bank acquisitions, looking to bolt-on any type of maybe a lending division or maybe more against the income side?

Well, we are not going to go buy a bunch of loans or go out and get in the national leasing business or something crazy like that. I have watched a lot of people blow up that way, and I don't believe in it. You know we are buying some insurance business from time to time, and they've been small but we continue to grow that business and we've done it, and we'll continue to do it. But, no, we are not going to go out and buy a bunch of loans just for an investment. We're in the relationship business.

Okay, thank you very much.

(Operator instructions)

Matthew Keating with Barclays.

Yes, thank you, good morning. As your municipal security purchases continue to increase, do you expect your effective tax rate to stay at these levels or potentially move lower? Thanks.

The rate on a year-to-date basis probably runs around a little under 19% right now. I think that based on what we are planning on doing, that would be fairly stable. To the extent we increase it further, from what our anticipated purchases are, you could see it move down some. But, I think that the effective tax rate that we recognize in the quarter -- the way you have to do your tax accrual is you have to estimate where you are going to be for the full-year, so we have already assumed purchases that we would have for the remaining part of the year that would be municipals, and how it would affect our effective tax rate. So we think we have got that in there, as you look at our year-to-date effective tax rate today. So, I would expect it to be fairly consistent with the year-to-date rate where we are today.

Thanks, that's helpful. And then, just a separate question. Maybe you could help us better understand. It was last quarter that you commented that the active loan pipeline was up 30%. Now, is there a difference between the active loan pipeline, and the loan commitments that you talked about today? Maybe you could just explain that, it would be helpful? Thanks.

Yes, the way to think about it is, you first got to get a request, and then that turns into an opportunity, if it's something we are interested in, and then that turns into a commitment. And then you get an active pipeline working, and you book the commitment. And as you know our commitments have increased, and the outstandings. And, we just wish they'd pull those lines down.

Got you. And then, in terms of loan trends, or loan demand trends by client size, are you seeing any differences between the larger companies and say, middle market companies, in terms of borrowing demands at this juncture? Thank you.

Well, it is pretty well understood that you are going to have bigger companies be first in line, and then middle size, and then small ones. But we have been in this zero gain for a long period of time. And as I have talked about us being focused on our customers, one of the things we're doing is getting involved in all sizes, and trying to be sure that we are helping them expand in the right way. And we really want to build a relationship to help all sizes.

But if you just look in general, it is the bigger companies that are going to be more aggressive first. But, it's been a pretty long storm we've been in of zero interest rates. And customers are getting to the point that let's just try to run our Business. And we're really working hard to help it.

Great, thank you.

I would now like to turn the call back over to Mr. Dick Evans for any closing remarks.

We appreciate your interest in Cullen/Frost and thank you for joining us on this conference call today. This concludes our call.

This does conclude today's conference call. You may now disconnect.