Cullen/Frost Bankers, Inc. (CFR) Q3 2013 Earnings Report, Transcript and Summary

Greg Parker Richard W. Evans - Chairman, Chief Executive Officer, President, Chairman of Executive Committee, Chairman of Strategic Planning Committee, Chairman of The Frost National Bank and Chief Executive Officer of Frost National Bank Phillip D. Green - Chief Financial Officer, Principal Accounting Officer, Group Executive Vice President, Chief Financial Officer of Frost National Bank and Group Executive Vice President of Frost National Bank

David Rochester - Deutsche Bank AG, Research Division Scott Valentin - FBR Capital Markets & Co., Research Division Brady Gailey - Keefe, Bruyette, & Woods, Inc., Research Division Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division Ken A. Zerbe - Morgan Stanley, Research Division Emlen B. Harmon - Jefferies LLC, Research Division John G. Pancari - Evercore Partners Inc., Research Division Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division John V. Moran - Macquarie Research Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cullen/Frost Bank's (sic) [Bankers] third quarter earnings conference call. [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. Please see the last page of the text in this morning's earnings release for additional information about the risk factors associated with these forward-looking statements. If needed, a copy of the release is available at our website or by calling the Investor Relations department at (210) 220-5632. At this time, I'll turn the call over to Dick.

Thank you, Greg. Good morning and thanks for joining us. It's my pleasure today to review third 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 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 WNB Bancshares. When this merger is completed, it 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 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 million -- $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 the average volume of interest-earning assets and was partly offset by a decrease in the net interest margin. The net interest margin was 3.38% for the third quarter of 2013. Noninterest 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, an 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. Noninterest 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 an 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 3 quarters of 2013, we 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. The slowdown occurred in almost 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 invest, 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 outstandings would be $320 million higher. We still expect to see loan growth, but we've lost some of the momentum on the business side. Given all the challenges, our dedicated relationship managers have done a remarkable job to grow loans. As you've 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 at prerecession levels. Our capital levels are very strong. Tier 1 and total risk-based capital ratios for Cullen/Frost were 14.53% and 15.68% respectively, at the end of the third quarter of 2013 and are 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 end 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, or 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 signals strong momentum in Texas. Construction, technology and energy continue to drive our state's 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 region's 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 smart phone 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're 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 resulting entirely from the very strong 14.7% annualized deposit growth we experienced during the quarter. The silk [ph] pushed 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 where maturities of lower yielding U.S. 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 a little closer at deposit growth, Dick mentioned that about half 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 8 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 2/3 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 1/3 of our deposit growth coming from new customers compared to the 28% to 36% we've experienced over the last 5 quarters. So going back to what Dick was saying about our success in creating new loan commitments relationships, which have not yet resulted in outstanding balances, our deposit growth is another sign of our success in developing new customer relationships which drive value for the future. I also wanted to give a little color on our loan growth for the quarter by focusing on period-end balances compared to 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. Keep it in mind that only 2 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 analysts' estimates is reasonable. And with that, I'll turn it back over to Dick for questions.

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

[Operator Instructions] And your first question comes from Dave Rochester with Deutsche Bank.

So it sounded like you might be a little 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, you probably -- I guess you're referring to my statement about -- we expect loan growth -- still expect loan growth, but we've lost some momentum. Let's not forget what we experienced. The commitment growth is very strong. We're running commitment growth at about 11% -- little over 11% and loan growth around 6%. And we're in a time that in 45 years I've never seen before, and I've talked about this in previous calls, to where commitments, people are preparing to borrow money, but they are not yet ready. And what we saw across this nation and, certainly, our experience, when you get into this kindergarten fight in Washington, because they're all involved in the fight -- and me instead of we in making this country better, you see a great pause because there's a lack of confidence and the uncertainty. I am optimistic that we're building the base, and we are factually building the commitments. And when that turns, we already have the commitments in place to advance. That's the reason I pointed out to you if you just look at the 44% of advanced rate on construction loans and working capital loans revolving lines, at year end from 44% drop into 41%, you see that that's a difference of $320 million. So as we moved through this year and continued to build uncertainty and it was already at a high 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've got tons of liquidity, but I can't make them drink. I can't make them advance on the line, but we are growing our relationships. And in fact, year-to-date, we grew commitments $2 billion. Interesting enough, $1 billion, half of those, came from our new relationships. And had we not have those and been building these new relationships, we would've probably been flat on loans. So yes, I'm pessimistic about Washington; I'm 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, I guess, if you could just talk about how loan spreads have trended. Last quarter, you mentioned you saw them coming 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're pretty flat from last quarter in terms of that spread that we mentioned to you. It's around 85 basis points. I don't think it's a big difference. The -- frankly, though, I think we're going to see spreads come in a little bit over the last 12 months. I just sense, just from what I've seen, just more rate competition as we continue, as I said, continues with its interest rate policies and we're going through this period of, frankly, financial repression. And so I think that we're 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 just not going to abdicate, so. I'm a little pessimistic on spreads going forward, but right now, this last quarter, they were fairly stable.

If you look historically, we've run 50-50 of losing credits to price and structure. It's 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 got to -- you just got to stay in there. And there's -- the good news is that we're truly building long-term relationships. The rates aren't good and in this 0 interest rate environment, there's hardly anywhere to go. I don't have to explain that to you all.

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

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

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 the securities portfolio. You mentioned you picked up some yield there, moving from agencies in U.S. treasuries to munis. Is there more of that coming? Can we expect to see yields go up in the securities portfolio?

First of all, answer to the do you expect to do more? Yes, we expect to do some more municipal purchases. We are going to continue to mix, I believe, the -- some of the shorter stuff that we talked about with the kind of a barbell approach doing some longer, say, 15-year maturities. That's really about the only value we see in the marketplace right now. With the Fed buy [ph] and everything else, you really don't 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 had a real market there which kind of helps you see the difference between the actual market and the Fed's created market. So we'll still be there because that's really where -- it's where there's the best yield return for the credit. And remember, we're buying just Texas municipals now, and vast majority of those are PSF insured. And so we do have plenty of duration to spend within our balance sheet and we've got plenty of liquidity to spend. So were going to do some of it, but we will be doing more of it through the next several quarters. Scott Valentin - FBR Capital Markets & Co., Research Division: Okay. So it would be kind of safe to say you expect the margin to improve in that portfolio going forward, assuming rates stay where they're kind of are right now?

Yes. There are always things going plus and minus in the margin. I mean, if you -- first of all, you're going to have to look at -- you have to peel off the liquidity build, right, if deposits continue to be as dramatically successful as we have been, that'll be some optical pressure. But yes, I think the purchases will help and what you -- you have to offset that with -- are we going to have loan pressure in terms of pricing or we're having maturities with some other loan -- securities are being called, et cetera, that we'll lose and we may not replace. So I guess, I would say, as I look at the margin, the core margin, I'd expect it to be flat to possibly slightly up if we continue with the securities purchases we talked about. Scott Valentin - FBR Capital Markets & Co., Research Division: And then 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're seeing those customers come from? Is it kind of 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's primarily where we pull business. Scott Valentin - FBR Capital Markets & Co., Research Division: Okay. And the mix, commercial versus consumer, is it mostly commercial deposits coming over?

It's about, our mix is about 55 commercial, 45 consumer at this point. So I think we've seen a little bit higher -- well, we have seen higher commercial deposit growth, I think, over the last couple of years but still good growth in both of them.

Your next question comes from Brady Gailey with KBW. Brady Gailey - Keefe, Bruyette, & Woods, Inc., Research Division: So I mean, the deposit growth has just been very robust. As you look out a couple of years, as we get potentially to a higher rate environment, how sticky do you 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 -- I think it was lose some or -- I've talked about this before, Brady, but when you go back to 2001, I think it's a little different because it's been a little deeper and longer. 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 we felt like we're going to tip over whenever 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 began to increase again. I think that just because our deposit growth from new customers has been so strong as we point out a couple of times on the call already, I think we've 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 that could drop, it depends. There's a new term that I'm sure you've heard. They call them surge deposits. And people wonder what their surge deposits are, how much they'll go down. One thing about us is we're not blind to that, and that's one of the reasons that our liquidity is being maintained so high. Because I believe the -- really and truly, the only liquidity you have going into a crisis is the liquidity you brought into the crisis. And so we're careful with that. That's one of the reasons we are maintaining such a high liquidity. And we could see it drop some, as I've said, because it's been lower for longer than it was back when Greenspan cut rates.

I think Phil is right with the big level, but let me remind you of the value that we're 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's real value there. That is an excellent piece of technology. And as you know, we're fanatical about our culture, our value proposition, and so a lot of these relationships are not just coming because -- a place to stack money, but they truly want a relationship with an organization that is long term and is thinking and is bringing tremendous value. Obviously, I'm partial, but I think it's shorten -- it's showing up in the numbers and that's a part of the growth. I'm not different with Phil at all, because who knows in this world overall how much is going to go out when we get back to a normal world if we ever do. Brady Gailey - Keefe, Bruyette, & Woods, Inc., Research Division: 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 year last year in 2012. It was up about 15%. Now we're back, your 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 kind of drove that higher level of loan growth. At what point begin to get more aggressive on pricing now to just maybe try to hope for a higher level of loan growth?

Well, we do it every day. Don't let me mislead you. I mean, we're fighting that battle with each and every customer that comes along. And so -- and 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 into the first quarter was tax driven. When the administration was going to -- there was a question whether they'd take away some of the benefits of estate planning and there was a lot of that done, a lot of so you may remember. We had 1 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 it. And then you go in to the third -- the second quarter of this year and you started to see it slow down by quarter. I'm 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, the growth. And then you go into average growth for the second quarter of '13 at 4.3%, and average growth in the third quarter of '13 at 1.9%. I'm talking about linked quarter growth, annualized. And that's the reason I talked about -- when you don't know if the government's going to shut down and you turn on that television and it's just constant, people are not going to do much in that regard. And I will 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 banks 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's 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've got such a dysfunctional state of affairs in Washington.

Your next question comes from Brett Rabatin with Sterne Agee. Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division: I know the Q will be out later, but I didn't know if, Phil, you had handy, just from a housekeeping perspective, the gross interest income and interest expense for the quarter?

Gross interest income and interest expense? Yes, okay. Interest income would've been $160,851,000 and that's on TE. And gross interest expense would've been a whopping $5,498,000. Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division: Okay. All right. And I was hoping to maybe get a little more color around payoffs. I know you said you had a few that impacted the quarter. Any idea of the volume there in 3Q? And then, just if that's 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 just was a large amount. I don't have the number that would detail the payoffs. But just to say that there were some particularly large ones, some real estate loans that, ultimately, you going to want those to payoff, right, and so -- as they move out. So we saw some of those -- it was 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. Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division: Okay. That's helpful. And then the other thing, always 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 you run into an AMT issue with taxes or any thoughts around that?

Yes. I'd say we've got more room. Obviously, it's not something that we're going to make a career out of going forward. I mean, but right now, it is the asset of choice. We're not in an AMT position right now. Keep in mind, we are very profitable. If we were to get AMT, it's just a -- it's not an earnings item; it's a deferred item that doesn't have -- carry forward doesn't have a termination on the life. So not to really be even too concerned about that prospect; we're not into it right now. But if we were to get into it, I don't think it's an issue and it'd be a temporary thing. Just keeping in mind our earnings are strong and continue to be strong. So to me, it's more of a -- it's a balance overall. It's watching the effective tax rate. It's watching your duration overall and your balance sheet. We don't want to get too strung out at this point with -- our belief that rates are going to go up at some point and that we want to be able to take advantage of that. We are in a position to take advantage of that today, so it's really what those items does. Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division: Okay. And just any thoughts around the tax rate. It's kind of down.

Yes, it was down in the third quarter because you got to estimate every quarter what you think your 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 we had -- since we booked a little higher effective tax rate in the first 2 quarters, we had to make the third quarter a little bit less just to true it up in a year-to-date basis, so -- but I think 18% is about where we're running. And one other thing I'd mentioned on the munis -- municipals. The stated duration on that portfolio is about 10.5 years, but the duration to expected call is about 5 years. And we are seeing not only every municipal that can be is being called, but we're seeing tremendous amount of pre-refunding on the municipal portfolio, particularly in the PSF part of the portfolio. So what's your -- what happens when it pre-refunds is that is a commitment to that bond's going to be called, when they call date does come up in 1 year or 2, whatever, 3 years. So there's 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's 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.

Your next question comes from the line of Ken Zerbe with Morgan Stanley.

Sorry. Questions have been answered.

Your next question comes from Emlen Harmon with Jefferies.

How do you guys think about TCE versus regular -- regulatory ratios in terms of your capital planning? I mean, 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 a capital planning perspective?

Well, our tangible common equity ratio is about 7.80% right now. We did bring it down a little bit as we took advantage of the ability to hold some preferred at historically low rates earlier this year and ball back some common. Municipal ratio that we look at with a lot of the ratios, I mean, we're -- we forecast -- we're paying a lot of attention to the Basel III numbers as they phase in and where we stand there. So it's a number we look at. We look at it with several others. And to me, one of the things you just need to continue to look at is what's your capital generation rate are you properly or are you producing with the capital. We continue to that. So I feel comfortable with where we are. I think the rating agencies feel comfortable with where we are right now as well.

Got it. And any -- is there any opportunity to bring down liquidity as part of the WNB deal, so effectively kind of reducing the capital impact there?

Not immediately. Actually [indiscernible] loan to deposit ratios -- ours, it's about -- it's a little over 50. And so they've got a portfolio about $600 million, which is very liquid today. And so once we bring them on, we're 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'll 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'll happen in the first year or so.

Got it. And, Phil, as you noted earlier, not a whole lot of time left here in '13. Any thoughts on kind of where analysts' estimates are in '14 at this point?

We don't make comments on that until the next call, so I can't give you any feedback there.

Our next question comes from John Pancari with Evercore.

Just back to the loan growth. Can you tell us where -- 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?

For the loan growth and the commitments, we've had a little over $2 billion year-to-date in commitments. And the commercial and industrial growth has been primarily focused in energy, manufacturing and public finance. In the commercial real estate, it's been focused in owner-occupied multifamily land as we've used up -- a lot of builders are short on lots, and so there's been some opportunity there. And medical has also been strong and the commercial real estate. So that's -- does that answer your question, John? That's 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 CRE versus C&I?

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's been a little bit slower. We hope that kind of catches up as they get in to advancing on their loans, but it's pretty much across-the-board. If you look at the mix on 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, office warehouse, medical, multifamily and religions are kind of the top 5. And if you look at the new commitments to real estate, again, you got office buildings; multifamily; office warehouse; and you jump in land, it has kind of pickup; and medical continues to be. So really there's -- it's staying pretty consistent. They -- borrowers are taking advantage of these low interest rates. I wish -- they're taking advantage to get the commitments. I wish they'd use the money.

Okay, all right. And then, lastly, in terms of how you're competing, I want to see if we can 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're seeing on C&I and commercial real estate?

Well, I think the thing that's -- to keep your eye on is, we mentioned it a little 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'd say the segment that's got the most competition is LIBOR-based loans, Particularly, LIBOR-based were highest for larger deals with highest credit quality, and that's significantly below that. So it just depends on what segment of the market you're in and just what -- how competitive rates are going to have to be. But like I said, I really sense that we are -- we're seeing a tightening of price pressure in the marketplace, and we're going to have to respond to that. And it remains to be seen how much that will that be, but I'd just expect that over the next few quarters.

I guess, you kind of just answered my next question. But I'm going to say if you expect to get more competitive, where do you see that 85 bits going or how much more of a narrowing would you allow to happen?

I don't know, John. I mean, it's going to depend on what the market is. Yes, we wouldn't want to take a hatchet to it. We want to -- we'll test the market and just keep moving in, moving in and see what works. So I expect it to be somewhat lower. I don't want to make a commitment on what it would be, but -- I mean, we're watching the market closely and you got to be in the market, right? I mean, you -- if you want it to be a certain rate, but it's not that rate, that's not what it is.

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

Your next question comes from Terry McEvoy with Oppenheimer. Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division: Question or 2 on WNB. Energy bankers in Texas -- energy banks 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?

So when we looked at WNB, we probably never seen a bank that was more like a little Frost, and it's not that little, it's $1.2 billion. We obviously spent a lot of time in due diligence for the very reason you're asking the question. And I would say that we're optimistic about -- that their underwriting standards were very similar to ours. As Phil's already said, with the larger capital base, we'll 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 I think they're -- we found the due diligence that their underwriting standards was -- were very good, and, obviously, that's why we bought it. And we think going forward, with a larger capital and liquidity, we think we're pretty optimistic about growing the business.

And with regard to the other part of your question, we put in place contracts with key people, so we've got our work there to -- we feel comfortable with the position we're in the next few years.

I think the other thing you've 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. Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division: 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'd be lower, just a little bit lower. But I mean, there's still going to be some -- they tried -- they probably changed characters, there's a lot of legal costs associated in the third quarter. And we've got cost of preparing for the convergence and that kind of thing, but I would expect them to be maybe slightly lower but still there -- still some there.

Our next question comes from John Moran with Macquarie Capital.

Just real quick housekeeping item on WNB. Still expecting close mid January?

It -- we expect it to close in the first 6 months. Certainly, as we -- the regulators are busy with a lot of things, as you know, and it's...

Yes, I think our investment initially was for fast tracking in January. It could be a little bit longer than that, but I don't think it will be significantly.

Okay. And then, Dick, maybe a big picture question. Sort of you guys have taken kind of a pause on M&A for a while. This is the first one that you've done kind of post crisis. Are there other -- presumably there are, other WNB opportunities out there? Do you guys kind of remain active lookers, select the purchasers?

Yes, 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 look at it, the better we felt. And so, yes, we're aggressive lookers and conservative buyers.

And would you say that sort of [indiscernible] data's 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 they have enough scale to cover the compliance costs and those kinds of things. And so there's a lot of activity in that regard, but we're particular about what we want, but we try to look at all the things.

Okay. And then maybe, Phil, just 2 kind of housekeeping questions. One, I think in the past, you guys had provided an update on Tier 1 common under Basel III, and you sort of alluded that keeping an eye on that and how things were progressing. If memory serves, it was maybe about 100 basis points later for you under Basel I mostly on unfunded commitments; is that the case?

Can you repeat that one more time? I'm...

Sorry about that. Yes, it's just the update on where you guys stand on Tier 1 common under Basel III. If memory serves, it was -- it was a little bit light of stated on Basel I, mostly driven by unfunded commitments.

No, no. I think we're over the requirements for 2019.

No, no. Yes, clearly, clearly, over where you'd need to be, but just what the delta is between where you are on Basel I and Basel III.

Okay. Well, let's see. The leverage ratio [indiscernible] the third quarter fully phased-in Basel I. It'd be -- I guess, we'd be around 8.1. And right now, our ratio is about 8.6, so that's -- so it's about a -- would be about 50 basis points difference in Tier 1 leverage.

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

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

Okay. And then one last kind of housekeeping question, 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 kind of the 10 year stated duration but 5 year to call. Do you have point-to-point what duration was second quarter and then what it was at the end of this quarter?

It really didn't change much at all. I'll tell you what they are. I mean, duration on our treasury portfolio, these are all down a little bit, I think. But duration on treasury is like 1.7 years, duration on the agency portfolio is 2.8 years, the duration on -- the duration on our municipal portfolio is 10.4 to maturity and it's a 5, based on expected calls, et cetera. And so overall, the portfolio duration was about 3.5, almost 3.6.

Your next question comes from Jennifer Demba with SunTrust Robinson Humphrey.

My questions were covered.

Your next question comes from Steven Alexopoulos with JPMorgan. Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division: I just had one follow-up question. A few banks have now posted relatively weak loan 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's near all-time high. And then if you look a little bit deeper into the economy, I think what's important is to understand that we've -- 2011 and '12 were extremely strong years of growth. And the -- I think you'll see Texas end up the year maybe a little bit over 2% growth. That's -- 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's running about 8%. I'm sure there's a lot of areas that give anything to have some segment running at 8%. So it's still very strong. I think that if world economy picks back up, you could see a possibility of us moving back to 2.5% loan growth. I mean, it would very position -- job growth, I mean. And normally, long-term growth in Texas is about 2%, so we're still very good. It slowed down a little bit. You see Houston slowing slightly because energy slowed a little bit. High tech has been a little weak, but it's catching up in Austin. Dallas is really growing strong as housing there has been very strong, so you got -- you're not going to see a big bounce-back in this economy but you're going to see gradually back to trends. The real challenge is -- in jobs is lack of skills, and so that's really the challenge. But all the markets are doing well. The strongest is Midland and Odessa, as we've 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 averages, been a little bit weaker. The border down deep in South Texas has been a little weaker, mainly because of some changes in medical field in -- related to health care -- home health care has kind of slowed that area down. But overall, it's a good strong growth and what we've got is we're just following 2 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.