Cullen/Frost Bankers Inc (CFR) 2013 Q3 法說會逐字稿

Good morning. My name is Christy and I'll be a conference operator today. At this time I would to welcome everyone to the Cullen/Frost Bankers third quarter earnings conference call.

(Operator Instructions)

After the speakers remarks there will be a question-and-answer session.

(Operator instructions)

I would now like to turn the call over to Mr. Greg Parker, Executive Vice President and Director of Investor Relations. 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. (technical difficulty) 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, 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 is my pleasure today to review third 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 third quarter 2013, Cullen/Frost reported significant increases in a number of key areas, including average deposits, average loans and trust and investment fees.

During the third quarter, Cullen/Frost also announced a merger agreement with the WNB Bancshares. When this merger is completed, they will bring Frost into Midland and Odessa for the first time. The Permian Basin is a significant driver of the state's strong oil and gas business and we are delighted to be expanding into this dynamic region to give us additional opportunities for growth. As we prepare to enter the Permian Basin, our capital levels and liquidity are stronger now than before 2008 financial crisis. Amid ongoing economic and regulatory uncertainty, these results are a credit to our dedicated employees and strong value proposition.

During the third quarter of 2013, our net income available to common shareholders was $58.4 million compared to $58.7 million reported in the third quarter of last year. This was $0.96 per diluted common share compared to $0.95 in the third quarter of 2012. For the third quarter of 2013, return on average assets and common equity were 1.01% and 10.07% respectively.

Deposit growth continues to be strong. Third quarter 2013 average deposits were $19.5 billion up $2 billion or 11.5% over the third quarter last year. Our deposit growth was broad-based with 52% coming from new customers. And 48% from existing customers. Since year-end 2007, before the financial crisis began, year to date average deposits at Frost have risen $8.8 billion; a reflection of our efforts to build and extend relationships.

Net interest income for the third quarter this year was $179.1 million, up 7%. This increase primarily resulted from an increase in average volume of interest earning assets that was partly offset by a decrease in the net interest margin. The net interest margin was 3.38% for the third quarter of 2013. Non-interest income for the third quarter of 2013 was $74 million up 4% from the $71.2 million reported a year earlier. Trust and investment management fees increased $1.8 million to $22.7 million and 8.9% increase over the third quarter of 2012.

Other charges, commissions and fees were $9.3 million up $2 million from the third quarter of 2012, due in part to higher annuity and mutual fund sales. Non-interest expense for the third quarter of 2013 was $151.8 million compared to $144.5 million in the third quarter of 2012.

Salaries and employee benefits were up $4.5 million over the same period a year earlier due to the increase in the number of employees, normal merit and market increases and higher medical expense and payroll taxes. Other expenses was $36.9 million, up 6.9%. Higher professional services expenses including $853,000 of transaction related expenses associated with the pending WNB Bancshares acquisition contributed to the increase.

Turning now to loan demand, we had another good quarter thanks to our disciplined team approach and strategic calling effort. Second quarter 2013 average total loans were $9.3 billion up 7.1% from the $8.6 billion for the third quarter of last year. Through the first three quarters of 2013, we have recorded our highest ever level of new loan requests. Year to date new loan commitments are the highest since 2008. Our loan pipeline is higher than last year, but down from the previous quarter, due to an across-the-board slowdown in requests. We believe the slowdown is related to economic uncertainty caused by the turmoil in Washington. This a slowdown occurred in the most every region for customers and prospects.

As long as Congress and the President continue to kick the debt limit can down the road, a few months at a time, without taking steps to address spending, the deficit or the national debt, businesses will remain very cautious. When they do address, we're seeing businesses using their own money -- equity first because of the low interest rates. The funding rate on our revolving and construction lines has decreased since year end from 44.2% to 41.4%. If customers utilize these lines at the year-end level, our out-standings would be $320 million higher. We still expect to see loan growth but we have lost some of the momentum on the business side. Given all of the challenges are dedicated relationship managers have done a remarkable job to grow loans.

As you have heard me say in the past, our focus on building new relationships has been important to our long term growth and in the short term, these relationships were a significant part of the growth in commitments and loan outstandings. Our credit quality trends remain positive; problem loans are pre recession levels. Our capital levels a very strong. Tier 1 and total risk-based capital ratios for Cullen/Frost were 14.52% and 15.68% respectively at the end of the third quarter of 2013. And our in excess of the proposed Basel III fully phased-in capital requirements. The ratio of tangible common equity to tangible assets was 7.81% at the end of the third quarter of 2013.

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. The ongoing dysfunction and lack of leadership in Washington create an environment of uncertainty for business owners and the general public. American families and businesses need confidence, that our elected officials will address the fiscal mess responsibly and put us on a course to and the runaway deficit spending and exploding national debt. The government shutdown is the latest symptom of a larger ongoing problem. As Dallas Fed President, Richard Fisher, said, kicking the can down the road for a few months will not solve the pathology of fiscal misfeasance that undermines our economy and threatens our future.

Fortunately for Frost, we operate in a pro-business state of Texas. For as Richard Fisher calls it; the nation's most dynamic economy. Job growth in Texas remains higher and unemployment lower than the national average. Commercial property activity increased real estate values, corporate relocations and expansions signal strong momentum in Texas. Constructions, technology and energy continue to drive our states a diverse economy. And nowhere is it stronger than Midland and Odessa.

The following are a few more details on why the Permian Basin is so strategically important for Frost. Today the Permian Basin is responsible for approximately 14% of the oil produced in the United States and 57% of the oil produced in Texas. The region has had 40 consecutive months of economic expansion and developers are placing big bets on the long-term future. New technology has made vast amounts of additional reserves available for production and major oil companies are investing billions of dollars to develop resources which should assure the regions growth for decades.

In addition to preparing to expand into the Permian Basin, Frost recently launched our popular new banking app for Android phone users. Combined with our app for iPhone, our customized and highly rated smartphone app, already generated nearly twice as many monthly deposits as any single Frost financial center. We expect that this growth trend will continue as Frost works to be at the center of technology, convenience and service. At Frost 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 in a challenging environment. Our capital levels are strong. We have paid and increased our shareholder dividend annually for 19 straight years, delivering steady and superior financial performance for our shareholders. We are well positioned to serve our customers, create new opportunities, like our expansion into the Permian Basin and continue to generate strong financial results. And with that I'll turn the call over to our CFO Phil Green.

Thanks, Dick. Just a couple of additional points before I talk about the outlook and turn it back over to Dick for questions. First, the net interest margin. Our margin dropped 5 basis points in the third quarter, as Dick mentioned, compared to the second quarter. But the drop resulted entirely from the very strong 14.7% annualized deposit growth we experienced during the quarter.

This helped push our fed deposit level up from $2.3 billion in the second quarter to $3.2 billion in the third. Without the 11 basis points drag of this increased liquidity, our core margin actually increased 6 basis points driven by activity in our investment portfolio for maturities of lower yielding US Treasury and agency securities were replaced with higher yielding municipal security purchases. To be specific, our security purchases during the third quarter consisted of $150 million in Texas municipals with an average term of 6.4 years and a tax equivalent yield of 3.24%. We also purchased $65 million in Texas municipals with an average term of 17.5 years and a tax equivalent yield of 6.2%.

Looking little closer at the deposit growth, Dick mentioned that about half of our year-over-year deposit growth had come from new customers which had no previous deposit relationship with us. That 52% number was actually the highest annual growth for new customers in eight quarters and I believe it demonstrates the success we've been having in building new relationships. This is particularly true in our commercial segment where fully two-thirds of our deposit growth came from new customers. Compared to a still strong 52% a year ago. On the consumer side, it's the inverse with one-third of our deposit growth coming from new customers compared to the 28% to 36% we have experienced over the last five quarters.

So going back to a Dick was saying about our success in creating new loan commitment relationships, which have not yet resulted in an outstanding balances, our deposit growth is another set of our success in developing new customer relationships which drive value for the future. Also wanted to give a little color on our loan growth for the quarter by focusing on period end balances compared the second quarter. In round numbers, our $74 million growth in outstanding loans during this period was comprised about half from C&I loans and about half from consumer loans including consumer real estate. Commercial real estate loans were flat and were impacted by a number of large payoffs during the quarter.

Finally, before turning it back over to Dick for questions, I wanted to comment on our outlook for full year 2013. Keeping in mind that only two months remain in the year, I can't be too specific in my guidance so let me just say that we believe the current average of analyst estimates is reasonable. And with that, I will turn it back over to Dick for questions.

Thank you, Phil, we're now happy to entertain your questions.

(Operator instructions)

Dave Rochester, Deutsche Bank.

Hello, good morning, guys.

So it sounded like you might be a little bit less positive on the loan growth side. Do you think you still see growth in 4Q? Or could we see paydowns potentially driving balances lower next quarter?

Well I guess you are referring to my statement about that we still expect loan growth but we've lost some momentum. Let's not forget what we're experienced. The commitment growth is very strong. We're running commitment growth at about 11%, a little over 11%, and loan growth around 6%. And we're in a time that in 45 years I have never seen before. And I talked about this in previous calls, to where commitments, people are preparing to borrow money but they're not yet ready.

And what we saw across this nation, and certainly our experience, when you get into this kindergarten fight in Washington, that they're all involved in, in the fight and me instead of we and making this country better, you see a great pause. Because there is a lack of confidence and the uncertainty.

I am optimistic that we are building the base and we are factually building the commitments. And when that turns, we are already have the commitments in place to advance. That is the reason I pointed out to you, if you just look at the 44% of advanced rate owned construction loans and working capital loans, revolving lines, at year-end at 44% dropping to 41%, you see that, that's a difference of $320 million. So, as we move through this year and continue to build on certainty and it was already at a higher level, I'm optimistic that the commitments are growing.

You can lead a horse to water and there's plenty of water in the trough. We have got tons of liquidity. But I cannot make them drink. I can't make them advance on the line. But we are growing our relationships. In fact, year-to-date, we grew commitments $2 billion; interestingly enough, $1 billion, half of those, came from our new relationships. And had we not had those and been building these new relationships, we would have probably have been flat on loans.

So, yes, I am pessimistic about Washington. I am optimistic about this economy and about Cullen/Frost and the work our people are doing to get out and hustle new loans.

Got you. Thanks for that color there.

And just switching to the margin, if you could just talk about how loan spreads have trended. Last quarter you mentioned you saw them come in a little bit to that 85 basis-point range; and if you could just give us an update on where you see the margin trending from here, that would be great.

I think we are pretty flat from last quarter terms of that spread that we mentioned to you. It's around 85 basis points. I don't think it's a big difference. Frankly though, I think we're going to see spreads come in a little bit over the next 12 months. I just sense, just from what I have seen, just more rate competition as we continue, as the Fed continues with its interest rate policies and we are going through this period of financial repression.

So I think that we are seeing more competition. So I think we could see that spread come in some. And if the market comes in more, we'll have to respond because we're going to compete. We're just not going to abdicate. So I am a little pessimistic on spreads going forward. But right now, this last quarter, they were fairly stable.

If you look historically, we run 50-50 of losing credits to price and structure. It is now 60-40. More from price. And we were there a year ago and we lowered some pricing. And to stay competitive, as Phil just described to you, you've just got to stay in there.

The good news is that we're truly building long term relationships. The rates aren't good and the zero interest rate environment, there's hardly anywhere to go. I don't know how to explain that to you all.

Yes, that makes sense.

One last one on the margin. Was there any lift this quarter from a decline in security premium amortization? And do you expect any of that to continue in any kind of decline into 4Q at this point?

No, I don't think that was significant impact to us in the quarter.

Okay. Great; thanks guys.

Scott Valentin, FBR Capital Markets.

Good morning and thanks for taking my question.

Just with regards to the securities portfolio, you mentioned you picked up some yield there moving from agencies and US treasuries to munis. Is there more of that coming? Can we expect to see yields go up in the securities portfolio?

First of all to answer, do you expect to do more? Yes, we expect to do more municipal purchases. We are going to continue to mix, I believe, some of the shorter stuff that we talked about with the barbell approach, doing some longer, say 15 year maturities. That's really about the only value that we see in the marketplace right now. With the Fed buying everything else, you don't really have any real price discovery with any agency or treasury. And so, knock on wood, so far they haven't been buying municipals, so you've got a real market there, which kind of helps you see the difference between the actual market and the Fed's created market.

So we will still be there because that's really where there is the best yield return for the credit. And remember, we are buying just Texas municipals now, and the vast majority of those are [psfin] short. And so, we do have plenty of duration spend within our balance sheet. And we've got plenty of liquidity to spend. So we're going to do some of it. But we will be doing more of it through the next several quarters.

Okay. So, it would be safe to say, expect the margin to improve in that portfolio going forward? Assuming rates stay where they are right now?

Yes, there are already things going plus and minus in the margin. I mean, first of all, you have to peel off the liquidity build, right, if the deposits continue to be as dramatically successful as we have been. That will be some optical pressure. But I think the purchases will help. And you have to offset that with, are we going to have loan pressure in terms of pricing? Are we going to have maturities of some other loan securities that we would call, et cetera, that we'll lose if it may not replace?

So yes, I would say, as I look at the margin, the core margin, I would expect it to be flat to possibly slightly up if we continue with the securities purchase we talked about.

That's very helpful.

And on the deposit growth, I think you mentioned earlier, just over half, I think 52%, of the deposit growth came from new customers. Just wondering where you are seeing those customers come from? Is it just the money center banks or is it community banks?

We primarily compete with the top 4 banks which are money center banks. And so, yes, that is primarily where we pull business.

Okay, and the mix -- commercial versus consumer -- is it mostly commercial [bob] that is coming over?

Our mix is about 55% commercial and 45% consumer at this point. So think we've seen a little bit higher commercial deposit growth and I think it was of the last couple of years. But it is still good growth in both of them.

Okay. Thank you very much.

Brady Gailey, KBW.

Good morning, guys.

So the deposit growth has just been very robust. As you look out a couple years, as we get potentially to a higher rate environment, how sticky do think that deposit growth will be? Or would you expect to see some of these deposits flow back out of the bank in a higher interest rate environment?

I think that we'll lose some. Or I was talking about this before, Brady, but when you go back to 2001 -- I think it is a little different because it has been a little deeper and longer -- but if you go back to 2001, when Greenspan jammed rates down to 1% for a long period of time and then we saw demand deposits grow tremendously. And I felt like we were going to tip over whenever the rates began to rise and see those deposits flow out.

And what we did was, we saw them flatten. And then once they reached an equilibrium for a while they begin to increase again. I think that, just because our deposit growth from new customers has been so strong, as we've pointed out a couple of times on the call already, I think we have got a chance of having a flattening as opposed to a drop in deposits. So, I think that's kind of my gut feel on it. But, they could drop; it depends.

There's a new term that I'm sure you have heard, they're calling them surge deposits. And people wonder what the surge deposits are and how much they'll go down. One thing about us is we're not buying into that. And that is one of the reasons that our liquidity is being maintained so high. Because, I believe that, really and truly, the only liquidity that you have going into a crisis is the liquidity you brought into the crisis. So, we're careful with that.

That is one of the reasons that we are maintaining such a high liquidity. And we could see a drop some, as I said, because it's been lower for longer than it was back when Greenspan cut rates.

I think Phil is right on at a big level. But let me remind you of the value that we are bringing to customers with the iPhone and the Android app. I mean, to have nearly half of our deposits -- not half of our deposits, but twice coming of any one financial center -- there is real value there. That is an excellent piece of technology.

And as you know, we are fanatical about our culture, our value proposition. And so a lot of these relationships are not just coming because of a place to stack money. But they truly want a relationship with an organization that is long term in its thinking and is bringing in tremendous value.

Obviously I'm partial. But I think it is showing up in the numbers. And that is a part of the growth. I'm not differing with Phil at all, because who knows in this world overall how much is going to go out when we get back to our normal world, if we ever do.

Okay. And then back to the loan growth discussion -- if I look back over the last couple of years, loans were down in 2010, down in 2011. You had a nice loan growth here last year; in 2012 it was up about 15%. Now we are back, loan growth is roughly flat.

And Dick, as I've heard you talk on the call for the last couple of years, it sounds like you got a little more competitive on pricing in 2012 and that's what drove that higher level of loan growth. At what point do you begin to get more aggressive on pricing now? To try to hope for a higher level of load growth?

Well, we do it every day. Don't let me mislead you. We are fighting that battle with each and every customer that comes along. And so -- let's remember something about 2012. Yes, it was wonderful. But remember, the tax -- a lot of that in the fourth quarter last year and rolling over to the first quarter was tax driven. When the administration was going to -- there was a question whether they were going to take away some of the benefits of estate planning. And there was a lot of that done, a lot so you may remember. We had one loan that was almost $100 million that was related to a family selling a piece of property that they never planned to sell, because of tax driven.

And then, you go in to the second quarter this year, and you started to see it slowed down by quarter. I am looking at just current loans on an average basis. The fourth quarter was 10.8%, the first quarter was 10.9%. A lot of that was carryover of the growth. And then, you go into average growth for the second quarter of 2013 at 4.3%. And average growth in the third quarter of 2013 at 1.9%. I'm talking about linked quarter growth, annualized.

And that is the reason I talk about, when you don't know if the government is going to shut down, and you turn on that television and it is just constant, you know people are not going to do much in that regard. And I'll tell you, as good and as superior as our value proposition is, and people want to bank with us, the last thing they want to do, prospects, is to change thanks in that kind of environment. So this environment has a lot to do with it.

Again I will tell you, look at the commitment growth. It is significant. And companies are sitting on the sideline wanting to buy a company, wanting to expand. But they're scared to do it, when you have got such a dysfunctional state of affairs in Washington.

Okay. Thanks for the color, Dick.

Brett Rabatin, Sterne Agee.

Hello, I know the Q will be out later, but I didn't know if, Phil, you had handy, just for my housekeeping perspective, the gross interest income and interest expense for the quarter?

Gross interest income and interest expense? Okay.

Interest income would have been $160.851 million. And that's on [TE].

Gross interest expense would have been a whopping $5.498 million.

Okay. And I was hoping to get a little more color around payoffs. I know you said the had a few that impacted the quarter. Any idea of the volume there in 3Q? And then, just if that is something that you are thinking about maybe still being an offset over the next few quarters? With maybe companies selling, or I'm not sure what exactly affected the payoffs in 3Q.

I think it was just a large amount. I didn't have a number that would detail the payoffs. But just to say that there were some particularly large ones; some real estate loans that ultimately you're going to want those to pay off. So as they move out, we saw some of those was the main thing in some markets that we saw -- I know Houston had a significant number of payoffs.

Year to date, the runoff rate has been about $221 million more than last year.

Okay. That's helpful.

And then the other thing was just around the purchases of additional munis. I'm just curious, with the tax rate where it is, how much more capacity do you guys have to add more munis? And do run into an AMT issue with taxes or any thoughts around that?

Yes, I would say that we have got more room. Obviously it is not something that we are going to make a career out of going forward. I think that right now, it is the asset of choice.

We are not in an AMT position right now. So keep in mind we are very profitable, so if we were to get to AMT, it's not an earnings item, it is a deferred item that doesn't have the carry-forward and doesn't have a termination on the life. So not really too concerned about that prospect. We're not into right now. But if we were to get into it, I don't think it's an issue and it would be a temporary thing, just keeping in mind that our earnings are strong and continue to be strong.

So to me, it is more of a balance overall. It is watching the effective tax rate, it is watching your duration overall in your balance sheet. You know, we do not want to get too strung-out at this point with our belief that rates are going to go up at some point. And we want to be able to take advantage of that. We are in a position to take advantage of that today. So it is really where those items [does].

Okay. And just any thoughts around the tax rate? It was trending down.

Yes, it was down in the third quarter, because you have got to estimate every quarter what you think you annual is going to be. And with our purchases of some more municipals, we had an effective tax rate we're expecting for the year of about 18%. So, since we'd booked a little higher effective tax rate in the first two quarters, we had to make the third quarter little bit less just to true it up on a year-to-date basis. I think 18% was about where we are running.

One other thing I would mention on the municipals -- the stated duration on that portfolio is about 10.5 years. But the duration to expect the call is about 5 years. And we are seeing not only every municipal that can be, is being called. But we are seeing tremendous amount of pre-refunding on the municipal portfolio, particularly in the PSF part of the portfolio.

So, what happens when it pre-refunds is, that is a commitment to that bond is going to be called when the call date does come up in a year or 2 or whatever -- 3 years. So there is a lot more certainty being created in that portfolio of what's actually maturing and how much cash flow you're going to get back. So that is tending to shorten the duration of that portfolio and I think that gives us some more duration to consider as we look at the current municipal market, and do we and when we make investments there.

Okay. I appreciate all of the color.

Ken Zerbe, Morgan Stanley.

Sorry; my questions have been answered. Thank you

Emlen Harmon, Jefferies

Good morning.

How do you guys think about TCE versus regulatory ratios in terms of your capital planning? Just given the robust balance sheet growth you've had in the last several quarters, TCE has leaked down a bit. Just kind of curious how that plays into your thinking from the capital planning perspective?

Well our Tangible Common Equity ratio is around 780 right now. We did bring it down a little bit as we took advantage of the ability to hold some preferred and historically low rates earlier this year. And ball back some comment. That is a ratio that we look at. With a lot of the ratios, we forecast that we are paying a lot of attention to the Basel III numbers as they phase in and where we stand there.

So it is a number that we look at, and we look at with several others. And -- one of the things you just need to continue to look at is, what your capital generation rate? Are you profitable? Are you producing a lot of capital? We continue to do that. So I feel comfortable with where we are. I think the rating agencies will come to where we are as well.

Got it.

And is there any opportunity to bring down liquidity as part of the WNB deal? Effectively reducing the capital impact, then?

Not immediately. Their loan to deposit ratios -- ours is a little bit over 50. So they have got a portfolio of about $600 million, which is very liquid today. And so once we bring them on, we are going to have to actually produce a plan to utilize that liquidity, and we planned on that whenever we did the acquisition.

So no, I don't think -- I think longer-term, just because we will be able to do bigger-size deals in a tremendously strong market in the Permian Basin -- yes, I think it has a benefit in terms of utilizing some of our liquidity. But I don't think that will happen in the first year or so.

Got it. Thanks.

And as you noted earlier, not a whole lot of time left here in 2013. Any thoughts on where analyst estimates are in 2014 at this point?

No, we don't make comments on that until the next call. So I cannot give you any feedback there.

Okay, thanks. Thought I would try there.

John Pancari, Evercore

Good morning, guys.

Just back to the loan growth, can you tell us -- what loan types did you really see the pullback in the pipeline? Which ones are you notably more concerned here? Is it mainly the CRE area, just given the competition from the permanent financing market?

Well, the loan growth in the commitments -- we have had a little over $2 billion year to date in commitments. And in the commercial and industrial growth has been primarily focused in energy, manufacturing, and public finance. In the commercial real estate, it has been focused in owner-occupied, multifamily, land, as we've used up a lot of the builders that are short on lots. And so there have been some opportunity there. And medical has also been strong in the commercial real estate.

Does that answer your question, John? That is where the growth has really come from.

Right. I guess I was just trying to get a feel of where did you see the slowing in the pipeline, given that you had indicated that you saw that pull back. And I was wondering, was that concentrated in the CRE versus CNI?

You mean in the advances, you mean?

Yes, the advances, as I mentioned earlier, in the commercial real estate have been slow, because people would rather put their equity in first before they borrow the money. And so, that has been a little bit slower. We hope that catches up as they get into advancing on the loans.

But it is pretty much across the board. If you look at the mix in loans, they really continue to be -- the pie chart continues to be pretty much the same. If you look at the larger concentrations -- real estate, for example, office buildings, and office warehouses and medical and multifamily and religions are kind of the top five.

And if you look at the new commitments to real estate, again you've got office buildings, multifamily, office warehouses, and you jump in land -- it's picked up --and medical continues to be. So really, it's staying pretty consistent. Borrowers are taking advantage of these low interest rates. They are taking advantage to get the commitments. I wish they would use the money.

Okay. All right.

And then lastly, in terms of how you are competing, I wanted to see if we could get a little bit more detail on how you're pricing your new relationships here. Can you give us some color, possibly, Phil, really, when it comes to the new loan yields, the new money yields that you are seeing on CNI and commercial real estate?

Well, I think the thing to keep your eye on, as we mentioned it a little bit earlier just briefly here, is the spread to prime on new and renewed. And it was right at 85 basis points. And so, that's been consistent. I say the segment that's got the most competition is LIBOR-based loans and particularly LIBOR base for the highest -- for larger deals with highest credit quality. That is significantly below that.

So it just depends on what segment of the market you are in. And just how competitive the rates would have to be. But like I said, I really sense that we are seeing a tightening of price pressure in the marketplace. And we're going to have to respond to that.

It remains to be seen how much that will be. I just expect that over the next few quarters.

I guess you answered my next question. But I was going to say, if you expect to get more competitive, where do see that 85 bps going? Or how much more of a narrowing would you allow to happen?

I don't know, John. It is going to depend on what the market is. And we wouldn't want to take a hatchet to it. We will test the market and just keep moving in and see what works.

I expected to be somewhat lower. I want to get commitment on what it would be, but we are watching the market closely and you got to be in the market. You can want it to be a certain rate, but if it's not that rate, that's all there is.

I think, John, too, I can't prove this to you, but I think you'll find that we have a higher quality that we are looking for. That is the reason that we have more equity in our customers are putting into deals. They are cautious. But long term, that is how we have run this company for 145 years and we are going to continue to do that. So we obviously are building the base of the company. And with new relationships, it is really healthy in that regard.

Okay. Thank you.

Terry McEvoy, Oppenheimer.

Thanks; good morning.

Question or two on WNB. Energy bankers in Texas call it highly sought after. What have you done ahead of closing the deal to keep the right people at Frost after the deal closes? And could you just talk about your credit culture versus theirs? And whether you would expect any runoff after the deal closes in terms of some loans that just don't fit the credit profile of your company?

When we looked at WNB, we'd probably never seen a bank that was more like a little Frost. And it is not that little; it's $1.2 billion. We obviously spent a lot of time in due diligence for the very reason you are asking the question. And I would say that we are optimistic about that their underwriting standards were very similar to ours. As Phil has already said, with the larger capital base, we will be able to take care of larger customers that they already had. And be able to take care of the whole loan rather than they had to sell off pieces.

So we found in due diligence that their underwriting standards were very good. And obviously, that is why we bought it and we think going forward with the larger capital and liquidity, we are pretty optimistic about growing the business.

And with regard to the other part of your question, we have put in place contracts with key people, so we have got our work there. We feel comfortable with the position we are in for the next few years.

I think the other thing you have got to remember in a market like that, this was a bank that didn't have wealth management or trust or insurance. And certainly those are opportunities for us to expand the relationships. And also, we help our energy customers with commodity hedging of oil and gas. And so, all of those are added value that we can bring to a very good customer base that they have.

And then just a quick follow-up.

Any feel for what you called transaction-related expenses in the fourth quarter? Should we expect something similar to what was recorded in Q3?

I would think they would be lower; just a little bit lower. But there is just going to be some. It would probably change character; there is a lot of legal costs associated in the third quarter. And we have got cost of preparing for the convergence and that kind of thing. But I would expect them to be maybe slightly lower, but still some there.

Great; thank you.

John Moran, Macquarie Capital.

Hello, guys; thanks for taking my question.

Just a real quick housekeeping item on WNB. Still expecting that to close mid-January?

We expected to close in the first 6 months. Certainly as we -- the regulators are busy with a lot of things as you know.

I think our estimate initially was for the fast-track in January. But it could be little bit longer than that, but I don't think it would be significantly.

Okay. And then, Dick, maybe a big picture question.

You guys have taken a pause on M&A for a while and this the first one that you have done post-crisis. Are there other -- presumably there are -- other WNB opportunities out there? Do you guys remain active lookers, selective purchasers?

I haven't changed on that regard. And we were pleased that WNB came to us and wanted to bring it together with us and the more we looked at it; the better we felt. And so, yes, we are aggressive lookers and conservative buyers.

And would you say that the chatter in the state is being picked up a bit over the last, call it 6 months or so?

Oh, yes. I think the chatter is definitely -- and particularly in smaller banks, that are working to get to over $1 billion so that they have enough scale to cover the compliance costs and those kinds of things. And so there is a lot of activity in that regard. But we're particular about what we want, but we try to look at all of the things.

Okay. And then maybe, Phil, just two housekeeping questions.

One, I think in the past you guys had provided update on Tier 1 common under Basel III, and you alluded to keeping an eye on that and how things were progressing. If memory serves, it was about 100 basis points light of where you are under Basel I, mostly on unfunded commitments. Is that the case?

Can you repeat that one more time?

Sorry about that, yes.

The update on where you guys stand on Tier 1 common under Basel III. If memory serves, it was a little bit light of stated on Basel I, mostly driven by unfunded commitments.

No, I think we are over the requirements. For 2019.

Yes, clearly over where you would need to be. But just what the delta is between where you are on Basel I and Basel III?

Okay. Let's see.

The leverage ratio in the third quarter, fully phased-in Basel I, and I guess we would be around 8.1. And right now our ratio is about 8.6. So it is about 50 basis points difference in Tier 1 leverage.

Okay. And do you happen to know Tier 1 common?

Tier 1 common would be -- looks about probably around 100 basis points.

Okay. And then one last kind of housekeeping question; and I'm sorry if I missed this.

And I understand and appreciate the comments around duration on some of the stuff that you put on with the 10-year stated duration but 5-year to call. Do have point-to-point, what duration was, second quarter? And then what it was at the end of this quarter?

It really did not change much at all.

Okay. Thanks very much, guys.

I'll tell you what they are -- a duration on the treasury portfolio -- these are all down a little bit, I think; the duration on the treasury is1.7 years. Duration on the agency portfolios 2.8 years. The duration on our municipal portfolio is 10.4 to maturity. And it is 5 based on expected calls, et cetera. So overall, the portfolio duration was about 3.5; almost 3.6.

Okay; thank you very much. That is good detail. Thank you.

Jennifer Demba, SunTrust Robinson Humphrey.

My questions were covered.

Thank you.

Steven Alexopoulos, JPMorgan.

I just have one follow-up question.

A few banks have now posted relatively weak long growth out of Texas this quarter. And given your comments around customer sentiment, are you sensing a slowdown of the Texas economy here?

No, you're really not. If you look at the Texas leading economic index, it is near an all-time high. And then, if you look a little bit deeper into the economy, I think what is important is to understand that 2011 and 2012 were extremely strong years of growth. And I think you will see Texas end up a year maybe little bit over 2% growth. We run higher than the nation.

You dig a little bit deeper and look at energy. We were growing at 15% in jobs. And now it is running about 8%. I'm sure there a lot of areas that would give anything to have some segment running that 8%.

So it is still very strong. I think that if the world economy picks back up, you could see a possibility of us moving back to 2.5% loan growth. I mean -- job growth I mean. And normally long-term growth in Texas is about 2%.

So we're still very good. It's slowed down a little bit. You see Houston slowing slightly because energy has slowed a little bit. High tech has been a little weak but it is catching up in Austin. Dallas is really growing strong as housing there has been very strong.

So you're not going to see a big bounce back in this economy. But you are going to see gradually back to trends. The real challenge is in jobs, is lack of skills. And so that is really the challenge.

But all of the markets are doing well. The strongest is Midland and Odessa, as we have said, and it's very strong compared to the state average. And Corpus Christi has been much stronger as the Eagle Ford has certainly benefited all parts of Texas. But Corpus has been a good winner. San Antonio is picking up. It normally runs about the state average and it's been a little bit weaker.

The border, down deep in South Texas, has been a little weaker, mainly because of some changes in the medical field related to health care. Home health care has slowed that area down. But overall, it's a good strong growth. And what we've got is, we've just fallen into extremely strong years of 2011-2012.

(Operator instructions)

There are no further questions at this time. I would like to turn the call back over to Dick for closing remarks.

This concludes our third-quarter 2013 conference call. We appreciate your confidence in our Company and we stand adjourned.

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