Cullen/Frost Bankers, Inc. (CFR) Q2 2013 Earnings Report, Transcript and Summary

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. [Operator Instructions] 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 again how weak my voice is, allergies have kind of taken over. Good news is we've had good rains in Texas, the bad news is the molds are pretty good too. Well, with that, I'll 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'll be happy to answer your questions. I'm pleased to report that for the second quarter 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 of 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 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 2013. Noninterest income for the second quarter 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. Noninterest 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 promotion. 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's 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 disciplined team approach and strategic calling effort. Our credit quality trends remain positive. Problem loans are at prerecession levels. Our capital levels remain very strong. Tier 1 and total risk-based capital ratios for Cullen/Frost were 14.22% and 15.39%, respectively, at the end of the second quarter 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 asset was 7.9% at the end of the second 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. While we're seeing some positive signs in the economy, much uncertainty remains over government regulation, spending, the deficit, dysfunction in Washington and the outlook for jobs. The inconsistent implementation and ongoing lack of clarity surrounding the federal health care 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 hire 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 the 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're working hard and growing as well. In the second quarter, we opened 2 financial centers in Dallas and 1 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're 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're staying true to our principles and our lending disciplines. Our capital levels are strong. We have paid and increased 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'll 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're 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 the 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. 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 has declined, 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 build up late in the fourth quarter 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're 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 build up in liquidity. We stayed away from treasuries and agencies and continue 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. 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% averaged 6.7 years and $116 million or 20% averaged 16 years. Liquidity continues to be strong, even in the wake -- or in the wake of deposit growth and portfolio maturities. And for example, for this past week in July, our Fed account has been running around $3 billion, even with these purchases. And when we make additional investments for the rest of the year, we expect them to continue to be in the 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 Permanent School Fund, which we've discussed with you several times in the past. Another 3% of the Texas portfolio has been pre-refunded with U.S. governments. Of the out-of-state portfolio, the largest issuers are the State of North Carolina and the State of Florida. We've mainly utilized out-of-state positions in order to acquire shorter maturities and 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'll turn it back over to Dick for questions.

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

[Operator Instructions] Your first question comes from the line of Steven Alexopoulos with JPMorgan. Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division: 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's kind of the summer drivers. We're 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, multi-family continues to be strong. Owner occupied and some religious organizations are all in the real estate category. The interesting thing in this environment we're in, we've got good mix. As I mentioned, I am extremely pleased with our growth of our commitments. The amazing thing is customers aren't 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 at 39.8%. So the line usage and funding under the lines has been very weak. But the thing you want is to build commitments, and we're doing that. It's broad-based, very healthy. I mean, even if you'd look at our Shared National Credits, they're down $53 million over commitments of the same and the -- and we're still running the lower 60% energy in that sector. And our customers are in 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 there on the portfolio changes. If you just break it down to 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 the C&I area. We had a $94 million increase in C&I loans. We had a $54 million drop in Shared National Credits and C&I. And then on the leases side, we were up by $24 million. So our -- on an annualized basis, period end leases were up by 34%. C&I loans were up about 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 end" basis, we were down by about $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. That's a 5% annualized growth, and land grew -- was up about $7 million, which is 12% growth. So on the consumer side, we were up about 7% annualized, up $13 million on the -- primarily consumer real estate. Those are just few of the numbers on growth. Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division: 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? Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division: Yes, the commitments outstanding.

Hold on just a minute, and let me get you that number. $12 million. Yes, on 12/31 of '12, our commitments were $12,274,000. And on 6/30, they were $12,847,000.

Billion.

$12 billion, I'm sorry. Sorry, it's $12,274,000,000. At the end of the year, it's at $12,847,000,000. Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division: Okay. 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. Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division: No?

You know what we've seen on the deposit side, I think, is -- and I think 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 changes, et cetera. And we saw a huge build up there. We've seen over the last couple of quarters a reduction of what we call augmentation of current customer growth. If you look at, I think 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 had been 60-some-odd percent. So we're seeing, I think, augmentation in terms of the balances of our current customers, but we're not seeing it at the same level we saw in the past. And we're in -- as a result, we're getting a higher percentage of our growth from new customer growth, which is really the great effort our people are making in terms of calls and, of course, our value proposition. So I think 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 kind of the rate of liquidity build up is slowing as opposed to just absolute reductions in balances adjustments, if that makes sense.

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

Wondering if you can give us a little 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's a little bit hard to hear you, but I think what you were asking was what's the outlook for the margins today going forward. And I think I heard you say, given the impact of investment yields, loan yields, et cetera. I would say, what we anticipated last time was fairly flat, where we had -- where volumes and utilization and liquidity provide the positives and where maturities, particularly in the investment portfolio, provide the negatives, some of the pressures and then notice that some basically offsetting. I would say, we continue to believe that pretty much to be the case with possible exception that it could get a little margin relief in investments, because when you look at what we've been purchasing, you know those 7 years and then the 15 years have got really good yields. I think on a tax equivalent basis, those 15 years are about 5%. The 7 years -- I think, it was 6.7 years on average, but those were on around almost 3%, say 2.85% to 2.95% tax equivalents. So that could help us -- our margins, somewhat. We were -- I wouldn't say surprised, but, I mean, we did see a little bit of, I think, tougher rate competition in the quarter. You heard my comments with regard to the loan yield drop. We've been saying what the average spread to 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's, again, if you're in bigger, higher quality deals, you can get lower pricing. And some of it's just competition, which just still continues to be fierce. And it gotten a little -- I think, 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. I think we're looking at, I would hope, a little bit more stable margin with the possibility that core margin could get some benefit, if we see some benefit from some of these additional investment purchases. Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division: Okay, all right. And then, lastly, on credit. Not that it's an issue for you guys at all. But I just want to get a feel here. For your reserve level, do you think it's pretty much at the bottom here at 1%. Now that -- getting right around that 1% level of loans.

I'll just say that from the accounting part of it, the financial part of it, it could get less than that. I mean, that's not a line in the sand that we've 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, this quarter on annualized basis, they were 16 basis points again. I mean, we continue to have that kind of performance. I wouldn't say the 1% is a line in the sand. But, I mean, look, we'd like reserves as much as anyone, but we just got to play within the rules. Dick, you have any comment on that?

I'm just going to say, I think 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. And it's a formula, Phil said it. We like reserves. Theoretically, good 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.

Your next question comes from the line of Brady Gailey with KBW. Brady Gailey - Keefe, Bruyette, & Woods, Inc., Research Division: 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 I think there's a gain running through spread income that goes away sometime in the back half of '14. Can you just remind us of the details of that?

Okay. Without going through the history, but, obviously, it was a great hedge for us in the lower-rate environment. We did monetize that a couple of years ago. That contract, which originally 7 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 recognized on a cash basis and amortize it through the remaining life of that contact. So it's been amortizing about $9 million a quarter. It's in the Q. 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. Brady Gailey - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And does that flow through the volume yield or the loan yield?

It goes to the loan yields. It has to be accounted for in the loan yield, itself. So in November -- as we hit November of next year, that amount will -- won't be there anymore. And it's -- think of it like, as you think about our balance sheet, overall, I mean, there are lots of things in our balance sheet that are great, and some of which won't be there at some point. I think a great example is our municipal portfolio, in terms of tremendous yields today on tax equivalent basis, which 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 that's going to mature at some point, that we're not going to be able to replace in the current market. And so it's 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's sort of like a -- again, if you think of it like a bond, that's going to mature, it's 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 -- in the real world, we've got tremendous amounts of liquidity. In fact, as I mentioned, we sit here today, we've got about $3 billion in our fed account, which this last quarter is $2.3 billion. So we're actually building up liquidity on our actual balance sheet for what amounts to a notional maturity if you think of it that way. So, I mean, there are different things that just occur as you run your business, that will impact -- will have a potential to impact some of that impact to that gain running off. That's just a [indiscernible]. Brady Gailey - Keefe, Bruyette, & Woods, Inc., Research Division: 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. It's -- and I'm glad you asked, Brady, on that -- on the sensitivity position, because one thing I want to make sure we're clear on, and it says it in the Q, 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's a bank in specific or whether it's the industry in total. And we've always been, and we said we've 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 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've assumed a high correlation to the changes in the fed fund's 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's one thing I'll say about it. And I think, always, when I talk to people about -- I say, look, it's a fairly linear relationship. You can choose what percentage of fed funds you think you'll pay on that demand deposits. Pick a portion of 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 -- or higher rate environment. That's one thing I'll say about sensitivity. Another thing I'll 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 200 analysis assumes that it's up 200 basis points over a 12-month period. So obviously, the average is 100 basis points. If you look at that second, we don't -- we're not required to do this analysis, but if you -- for reporting purposes, but if you do look at that second year after rates began to go up, regardless of how much you're paying on these demand deposits, and our scenario's 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, I think what I call our company is, at this point in time, we're probably, solidly asset sensitive today. Brady Gailey - Keefe, Bruyette, & Woods, Inc., Research Division: And then lastly, the duration was about 3.3 years at -- than the last quarter, what's that updated for 2Q?

It's 3.33. And I should also always point out that, that assumes that the expected calls and refis in the municipal portfolio, that's what you'd see if you looked at Bloomberg on our holdings. If for some reason, they -- 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. At -- 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 a prior call, and we'd see those yields move up to coupons. I should point out -- I hate to get so much inside baseball, but those of you who understand, bond investing and municipals, in particular, I'll point out that we have 80% of our municipal portfolio as coupons of 5% or greater. And so the performance of those bonds has been extremely good. So they're not subject to the taxability of discounts, and so -- and in fact, over 90% of our portfolio has coupons of 4% or higher. So if we do see some extension of those bonds, we'll see some nice rate increases on that portfolio.

Your next question comes from the line of Terry McEvoy with Oppenheimer. Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division: 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'm really glad we finally know what the rules are. And so I think we have some flexibility with that side of our capital planning. As we've said many times, sort of our hierarchy of what we like to do with capital is always we're looking for an acquisition that we can undertake that meets our criteria, which admittedly is very high. Dick's always said we're aggressive lookers and conservative buyers. But if we are able to find that unique situation, we love to do that with capital. And secondly, if we're 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's just another example of something that could happen to your balance sheet to offset that impact. Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division: And then just a question on the advertising and promotion expenses. Where do you see those going in the second half of this year? Does that remain at these levels? Or will they come down a bit?

I think they should be fairly consistent. I don't think we'll see a big drop. I think we saw an increase from the first quarter as sort of a seasonal change. But I think we're expecting to be fairly level.

Your next question comes from the line of Brett Rabatin with Sterne Agee. Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division: It's Sterne Agee. I 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, kind of how you guys view your profitability potential? Can you move that higher from kind of the one ROA level with the balance sheet today? Or is that just sort of the level we're going to be at until rates move higher?

Well, as long as rates are where they are now, I mean, to quote Dick, "It's a tough fight with a short stick." I think as we look at our company fundamentally, we're very optimistic about the fundamental capability of us to earn much higher levels than we're at today. I mean, you talked about intrinsic value of the company, I think we're at 48% loan-to-deposit ratio. Even if rates stay low, if we were able to move that back to where it was 4 years ago, when you see tremendous earnings capacity of the company, the problem is, I think, if rates stay like this, we're not going to see our loan-to-deposit ratio increase to historical levels. I think that we've got to see a stronger economy, fed's got to get out of the way, that kind of thing. So there's tremendous earnings capacity in our liquidity that we maintain with our 48% loan-to-deposit ratio. And then also, I think, since you're moving now to '15, you got a couple of years from now, you're assuming rates are beginning to move up modestly. I think there's really lots of potential earnings capacity and operating leverage and just the sensitivity that we have for the company. As we talked about earlier, we have -- we do have to say that amortization, that's going away sometime late next year. But we're focused on that as well, and we're not ignoring it. so I think we feel very optimistic about it. Dick, you have anything also?

I think what you got to think about in this environment, we've been at 0 interest rates. The government is just absolutely scared the hell out of everybody and the country about growing their business. This health care thing is ridiculous. They're not going to hire anybody. The fed, it doesn't have the guts to do what they need to do and start -- quit buying bonds. So when you got that much -- that many people so dysfunctional and in a powerful place, and you take a great company like ours, obviously, I'm very biased, we're not -- we're trying real hard to have good quarters, which we are, and not blow the place up. There's a lot of people, there's a lot of things 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 these commitments we've been building, that's 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 some day, somebody will have some sense. And when they do, this is going to be a company that is going to take off, because we've taken care of our customers. The thing to do to is to focus, we believe, on helping our customers be successful and try not to get confused in this insanity that's going on. So I feel good about where we are. I feel good about how we position this company. You can get down that the earnings were kind of flat, or you can get really excited that we continue to grow it and help get steady earnings. So I think as -- I think, we have a great opportunity. And we're going to continue to focus on helping our customers be more successful. And when we get to the road -- end of the road, it's going to be good. Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division: Okay, that's great color. And there was lot of operating leverage as you get out in the next couple of years. I've joined a few minutes late. I missed -- I heard you talk about buying some shorter-term municipals, but I didn't hear if you gave it, so I apologize if you did. But sort of the amount that you're thinking about buying and kind of the yield on those munis, what that might add to that overall securities portfolio yield in the next few quarters?

Well I did mention what we did last quarter, which was $444 million in the -- 6.7 years was the average, and that was the 80% of what we bought. We bought -- I'm trying to remember now. It's about $115million -- or say, $115 million or so. And the 20% of what we bought was 15, say 16 years, so that's down from what we have been buying. From the kinds of things we're buying, the shorter-term munis, right now, tax-equivalent basis, I said that we're looking at yields today of around 3% tax equivalent for the -- for the, say, 7-year stuff. And we're looking at yields of around 5% tax equivalent on a 15-year stuff. And we're not buying nearly as much 15-year stuff, just because we're getting at the end of a rate cycle, and you got to be careful -- not just for credit, you got to be careful with interest rate exposure. And so we know how much duration we've got to spend. And some of it we're going to spend on 15 years, down from the 20 to 25. So we're going down. Most of it, though, I think, you're going to see us, but when you add up everything we bought this year, I think you're going to see most of our purchases are going to be in, say, 7-year period of municipals. But those are -- that's better than what we got the Fed. I didn't -- and we feel like we've got duration that we can allocate still to that asset class. As far as what we bought, looking forward, I think the second quarter was a pretty big quarter for us in terms of volume of securities. I think 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's advantageous. Maybe half that level for the quarter moving forward as we get to the end of the year. Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division: Okay. And then maybe just one last quick one. I know, Dick, you've been talking about in the past quarter or 2, a pretty competitive environment and maybe being more competitive with how you're funding loans and how you're competing in the market. Could you maybe comment on that in terms of just if you're getting more aggressive vis-a-vis where your peers are to be able to maybe attract new customers?

Well, we're doing pretty good. Commitments are growing awfully strong, so we're competing. I'm going to try really hard not to be -- 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 I think there's some really insane stuff going on, but we're competing. We're going to stay competing with quality. When we go after that quality bond, there'll be a lot of dogs there, but we'll get it 9 out of 10 times. And I think we're doing plenty good. If you'd look at loss business, pricing is still 60-40. 60-40, we're losing because of price. But I think you got to be real careful just how far you go. I mean, don't forget, this is not a nonprofit. This is a profit business. And to -- there's some stuff going on in this competitive environment of giving money away. We were in it, we don't give it away. We want to get it back too, and so we're being competitive. We're going to continue to. And we're lowering prices, where we think it's appropriate. But that's where we are.

Your next question comes from the line of Emlen Harmon with Jefferies.

So just one -- I guess, one quick question on the securities book. Your munis have become a kind of larger part of that book over the course of the year -- the past years, that's kind of where you focused your investment. Is there a point where you feel like you maybe over-concentrated within munis? And just kind of like what's the next, I guess, track of investment category in the securities book?

Well, there's a limit to everything. I think if you look today -- let's say you looked at the end of the second quarter. Municipals were about 41% of our portfolio. Treasury is 36%, agency is 22%. Agency used to be, by far, the largest asset class we have, but the government screwed everything up with that asset class and those securities. And they're still messing it up with what they're doing with their HARP programs et cetera, so we see no value, 0 value, real value in the agency portfolio today. So it's not going to be the agencies anytime soon. Frankly, what I hope we see is the next big asset class of loans. I mean, I think we've got more room for investments if we need to, again, we're $3 billion in our Fed account in last week, right? And in last quarter, we averaged $2.3 billion in the Fed accounts. So you can see liquidity continuing to grow. I think we'll see the municipal -- I guess, what I'm trying to say, plain English, we're going to see that component grow some. I -- but I hope what we do is we see the next this big asset class being loans. And I would love to -- I'd love for the Fed to get out of the way and let us have some price discovery into Treasury markets. I'd love to buy some more treasuries, if I thought I'd get them at the right yield, which we can't today. I don't know. I mean, obviously, we've got -- it'll 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's 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, that's where we are right now.

Your next question comes from the line of Scott Valentin with FBR Capital Markets. Scott Valentin - FBR Capital Markets & Co., Research Division: Just with regard to M&A, I know you guys said in the past, you look at a lot of deals, but you're conservative and has to pass a high threshold. Just wondering, one, if you're seeing more banks or more assets available, which some other banks have indicated, since there's a lot of chatter out there. But also, too, if knowing -- 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're going to be wiped out, because the regulations the Fed has put with the dump truck bill of Dodd-Frank. So you got to do something, so kind of there's a lot of merging with smaller ones. But again, we're aggressive lookers and conservative buyers as far as with the capital clarity and that sort of thing you just talked about. I hope it doesn't 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'll continue to look hard. And if we find something to bring value to our shareholders, we'll buy it. We got the money. Scott Valentin - FBR Capital Markets & Co., Research Division: And then just a follow-up question. What about non-bank acquisitions? Looking at bolt-on, any kind of maybe a lending division or maybe more in the fee income side?

We're not going to buy a bunch of loans or go out and get a national lease or something crazy like that. There's a lot of people blow up that way, and I don't believe in it. You know we're 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. And -- but no, we're not going to go out and buy a bunch of loans just for an investment. We're in the relationship business.

[Operator Instructions] Your next question comes from the line of Matthew Keating with Barclays.

As your municipal security purchases continue to increase, do you expect your effective tax rate to kind of stay at these levels or potentially move lower?

I think the rate on, I guess, year-to-date basis probably runs around a little under 19% right now. I think, that, basically, what we're planning on doing, that would be fairly stable. To the extent we increase it further from what our anticipated purchases are, you can 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 what were you going to be for the full year. So we've already assumed purchases that we would have for the remaining part of the year that would be municipals and how it affect our effective tax rate. So we think we've got that in there. And if 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.

That's helpful. And then just a separate question, maybe you could help me better understand. I think 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 sort of the loan commitment that you talked about today? And maybe you could just explain that. That would be helpful.

Yes. The way to think about it is I talk to -- you first got to get a request, and then that turns into an opportunity, that's something we're 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, I guess, in terms of loan trends or loan demand trends by client size, are you seeing any differences between the larger companies and middle market companies in terms of borrowing demands at this juncture?

Well it's pretty well understood that you're going to have bigger companies be first in line and middle size and then small ones. But we've been in this 0 game for a long period of time. And as I 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 we just look, in general, it's the bigger companies that again are being more aggressive first. But this has been a pretty long storm we've been in of 0 interest rates. And I think customers are kind of getting to the point that's, let's just try to run our business. We're really working hard to help.

I would now like 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 and for staying. This concludes our call.

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