Cullen/Frost Bankers, Inc. (CFR) Q3 2014 Earnings Report, Transcript and Summary

Good morning. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cullen/Frost Bank's Third Quarter Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the -- today's call over to Mr. Greg Parker, Executive Vice President and Director of Investor Relations. Mr. Parker, you may begin.

Thank you, Melissa. 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 to review third quarter 2014 results for Cullen/Frost. Our Chief Financial Officer, Phil Green, will then provide additional comments and after that, we'll be happy to answer your questions. In the third quarter of 2014, Cullen/Frost reported significant increases in net income, average deposits and average loans. We also saw continued improvement in asset quality. We are pleased by our successful integration of WNB Bancshares which helps validate our entry into the Permian Basin. The acquisition which closed at the end of May has already exceeded our expectation. WNB results are included in our quarterly report and accounted for approximately $1.6 billion in deposits and $671 million in loans. Even without WNB, however, we had substantial growth in loans, deposits and earnings. During the third quarter of 2014, our net income available for common shareholders rose to $75.6 million, a 29.4% increase over the $58.4 million reported in the third quarter of last year. This was $1.19 per common share compared to $0.96 in the third quarter of 2013. For the third quarter of 2014, the return on average assets and common equity were 1.13% and 11.32%, respectively, compared to 1.01% and 10.07% for the same period last year. Deposit growth continues to be strong. Third quarter 2014 average deposits were $22.7 billion, up $3.3 billion or 16.9% over the $19.5 billion reported in the third quarter of last year. Since 2007, before the great recession, our average deposits have doubled. This underscores our efforts to build and extend relationships with both new and long-time customers who trust Frost and appreciate our value proposition. Taxable equivalent net interest income for the third quarter of 2014 was $208.6 million, up 16.5% from the $179.1 million reported in the third quarter of last year. Strong deposit growth drove our increase in average volume of interest earning assets. The net interest margin grew to 3.39% from the third quarter 2014 compared to 3.38% in the same period last year and was down from 3.48% in the second quarter of this year. Noninterest income for the third quarter of 2014 was $80.9 million, up 9.3% from the $74 million reported a year earlier. Trust and investment management fees increased $4.1 million to $26.8 million, an 18.1% increase over the third quarter of 2013. Most of this increase was from investment fees related to improved equity markets, new business and changes in the fee schedule. Insurance commissions and fees were $11.3 million, up 9.4% from the third quarter of 2013. Noninterest expenses for the third quarter of 2014 was $163.8 million compared to $151.8 million in the third quarter of 2013. Salaries and wages were up $5.2 million over the same period a year earlier and included employees from WNB. Net occupancy expense rose 7.3% over last year due in part to the increase in additional facilities connected with the WNB acquisition. Turning to loan demand. Our year-long trend of favorable loan growth continues. Third quarter 2014 average loans were $10.6 billion, up 14.7% from the $9.3 billion in the third quarter last year. Even without the WNB acquisition, this has been our best year ever for new relationships, new loan opportunities and new loan commitments. We continue to see a steady increase in the percentage of our pipeline from existing customers. This is important because our success rate is much better with these opportunities. The willingness of our customers to seek financing also is a good indicator of an improving economy. During the past year, excluding the acquisition, we have grown our combined revolving lines and construction commitments by 15.7%. Furthermore, the outstanding balances under those commitments have increased 20.5%. I'm grateful for the work our staff has done to build new relationships, which are critical to our growth. New relationships added since January 2013 not including WNB accounted for 55.6% of our year-to-date growth in total loans outstanding. New relationships accounted for 83.7% of our growth in loans under $10 million. I'm also encouraged that the ratio of lost opportunities continues to be about 60/40 in favor of structure this year. That means that we were competitive in pricing with abstract sacrificing credit quality, and that's exactly where we want to be. Absent any foreseen changes in the economy, we expect our favorable loan growth trends to continue. Our credit quality trends remain positive, problem loans are at prerecession level. Net charge-offs during the quarter were only $364,000. Our capital levels remained very strong. Tier 1 and total risk-based capital ratios for Cullen/Frost were 13.91% and 14.81%, respectively, at the end of the third quarter of 2014, and are in excess of Basel III phased-in -- fully phased-in capital requirements. 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. Despite the recent roller coaster ride in the stock market, we continue to see positive signs that economic recovery is extending to mainstream. Businesses are hiring again, consumer confidence is up and small business owners are taking advantage of opportunities to expand in a prudent way. We are blessed to live and operate in this business-friendly state of Texas, which was just ranked again by corporate executives as the best state for business. Texas has consistently held the top spot for the past 15 years. The Lone Star State has led the U.S. in job creation over the past 2 decades. This includes jobs at all income levels. Our economy consistently grows faster than the national economy. Our unemployment rate is consistently lower than the national average. Texas is the largest exporting state and exports are increasing. Texas is also #1 relocation state with people coming mostly from the East and West Coast. As I mentioned at the outset, we are pleased by our merger with WNB Bancshares. The acquisition is performing better-than-expected, and we're optimistic about the future. We have a diversified portfolio and disciplined approach, which enables us to perform well through all stages of the market and industry cycles. We work hard to provide top-quality service, convenience and superior technology to our customers. Our top-rated Frost App for phone and tablet is a preferred option for most banking transactions for a large and growing number of our customers. We are also finalizing plans to enable ApplePay for our Frost debit cards. We continue to give customer options on the way they can interact with us. Because of our strong value proposition culture and excellent service, customers continue to choose Frost. I am grateful to our dedicated employees, including our new employees from WNB, who bring our culture to life every day and help make a -- our strong results possible. In summary, it was a bang up quarter. We saw significant increases in net income, average deposits, average loans and net interest income. Our credit quality trends remain positive as we stay true to our principles and our lending disciplines. Our capital levels are strong. We have paid and increased our shareholder dividend annually for 20 consecutive years, and we are well positioned to serve our customers create new opportunities, continue to produce strong financial results. And with that, I'll turn the call over to Phil Green.

Thank you, Dick. I'm just going to make a few additional comments about the quarter and then our outlook for the rest of the year, and then I'll turn it back over to Dick for questions. First, I'd like to take just a moment to discuss the net interest margin for the third quarter. As Dick mentioned, our net interest margin was 3.39% for the third quarter and that represented a decline of 9 basis points on a linked-quarter basis. However, this decline really resulted from an increase in our Fed liquidity of a little over $400 million for the quarter. Remember that yield is only 25 basis points. And also we had the purchase of almost $600 million in U.S. treasuries at a yield averaging about 2%. But if you look at our actual net interest income, it grew by about $8 million versus the second quarter, which represented an annualized growth rate of about 15% on the basis of an equivalent number of days. As we've noted for sometime now, the third quarter was the last full quarter of amortization of our prime rate swap and it represented about $9 million of interest income in the quarter. The last remaining month will be amortized in October, representing about $3 million in interest income. And as we said in previous calls, we are in the process of replacing this lost income through the purchase of municipal securities, which will be completed over the next few months. Looking at our investment activity during the quarter. We purchased $270 million in municipal securities with tax equivalent yields averaging about 4.85%, final maturities of a little over 20 years and they were all callable basically in 10 years. In addition as I noted earlier, we purchased a little under $600 million in treasury securities, split between 5- and 7-year maturities and averaging a combined yield of approximately 2%. And these treasury purchases essentially replace the similar amount of treasury maturities occurring in October. Dick also mentioned the strong increase in our noninterest income for the quarter of over 9% and the strongest component of noninterest income, which represented 60% of the overall increase was related to our trust business. 3/4 of this growth in trust represented investment management fees, which increased a little over 20% from a year ago. This was aided by strong markets over this period of time, new account growth and an increase in our fee schedule late last year to be closer to market. Most of the remaining growth came from strong oil and gas management fees, which were up 50% from last year and reflect increased activity in the Eagle Ford Shale. And this was driven primarily by royalty interest along with some lease bonus payments, but the big majority of it was royalty related. One other item to emphasize is the fact that the quarter was benefited by relatively large recovery on a single commercial credit of $3.4 million, which contributed to our unusually low provision for the third quarter, and we don't expect that to be repeated. So finally, looking forward at our operating earnings for 2014. Excluding the $0.07 in transaction costs in the current year related to the WNB acquisition, we currently believe and especially in line of our third quarter results that the 2014 mean for analyst estimates of $4.23 for operating earnings is a little low and that estimates nearer the higher end of the range would be more 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 Emlen Harmon with Jefferies.

This is actually Travis Potts on for Emlen. I was just wondering it looked like quarter loan growth backed off the pace from recent quarters. Can you give a little more color there, sort of, what you were seeing? What slowed down?

You're going to have -- we've had a strong first 6 months, and yes, it slowed down a little bit. But what I'm very comfortable with is how strong the pipeline is. And you can -- you get some large payments and kind of hit those times, but I wouldn't let the third quarter discourage you about just continued steady movement in our loan growth. I -- just looking at advanced rates on the lines of credit. You heard me be very, very disappointed particularly in our construction loans. They ran around 47% advance rates at the beginning of the year. Got as low in April as 44%. They're now sitting at almost 51% and so that's coming along. I talked a lot about construction loans, more cash going into the front-end and paying them all quicker and all those kinds of things. But I see a little light at the end of the tunnel there. Also if you've looked at our advanced rate on our revolving credits, last year, this time last year, we were at about 40% advanced rate. And today, we sit at 42%. And that's -- I know 2% doesn't sound like much, but when you take it $1 billion it turns out to be real money. So yes, we had a little bit of a downturn in the third quarter, but all the statistics and -- of looking forward looked very positive as we go along, and I'm very encouraged.

Actually, one other thing I just along the lines of what Dick is talking about. If you look what recent loan activity has been, look what loan growth has been, we ended the quarter at about $10.7 billion in loans and latest number I have as we sit today at about $10.9 billion. So we've seen -- I've to call it good growth since the end of the quarter, which -- it was along with what Dick was saying about activity is still being good.

Great. That's great color. And then, I guess, just on swap benefit roll off. I know you said you added -- I think it was $270 million in muni this quarter. I guess how should we be thinking about the impact? And kind of how much more progress do you think you need to make on the muni to offset the swap benefits?

I think just the -- based upon the yields we're receiving on the kind of things that we're buying. In the $800 million range it's sort of been the target that we feel would be needed to replace the interest income that's rolling off of that. And so we're working hard to do that, and we're doing a great job in terms of keeping our quality up and the names and the terms that we like to see. But at the same time, we have to -- that's really just a replacement of what we are -- what's rolling off. In fact, I guess at this date, it's already rolled off. And we need to continue to invest the liquidity that will continue and to see in our balance sheet. So we'll be doing that and more.

Your next question comes from the line of Brady Gailey with KBW. Brady Gailey - Keefe, Bruyette, & Woods, Inc., Research Division: We've had a lot of focus this earnings season on energy lending. I know you guys are in that space pretty heavily. With the price of oil now in the low 80s, it doesn't sound like it's going to be much of a credit impact at least in the near-term. But can you comment on what's you expect to see from utilization of energy lines and energy balances? Whether those will grow more or less with energy being where it is?

Yes. Let me -- let's talk a little bit about the energy business because there's a great deal of discussion in the media about it? And quite frankly, there's a lot of speculation about what's going on. So let me just review a few facts and then let's comment specifically what you're talking about. All prices now are at $80. They declined by about 20% since the January-July averages. The Henry hub gas price around $3.65 is down about 23%. So we've seen the decline in pricing. Drilling activity is still pretty strong with 1,900 rigs, a little over 80% are in the oil pads. They're drilling for oil. At the same time, it's had tremendous success in this country, contributing about 1 million barrels of oil adding to the production growth since July of last year, just over the last year. So I think we can say that yes, we've had a decline in -- but it's really helped this country in building our reserves. Now depending on what price settles out and how long it stays there, it's really going to have a lot to do with what's happening. And this also we got to recognize when you get a downturn like this, you're going to see lower drilling cost and many factors are in play as we go along hedging dividend policies, debt management. There would be some sales and purchase decisions. And certainly depending on which location in the United States basins have a wide difference in economic quality. So let's now look at a few facts about Frost. I think it's important to start with our price deck. Remember that we review our price deck quarterly. Today, we're at $80 a barrel and holding off flat. Natural gas were $3.75 in '15, increasing $0.25 a year until 2018 and holding flat at $4.50. Also always remember the discounting future cash flow is 9%. So where all that leads to is that we lend -- we also lend 65% of these amounts after you do all those calculations. And so 2015 oil would mean we're loaning $52 a barrel and $2.40 on natural gas. We always factor in other differentials such as transportation and unique lifting and secondary cost. So it all results in the numbers even being a little bit lower than that. And when you look at our portfolio, production borrowers in general are at an advanced rate of about 50%. Our mix of oil and gas runs about 60% gas, 40% oil. So dropping oil prices is not a one-on-one impact on the revenues and the collateral values. Based on our conversation with our customers, cost of delivering finance production really needs around $75 a barrel you're still receiving a good favorable return. If it gets to $70 a barrel, it would delay some projects not all projects, and you would also see some aggressive cuts and expenses. Again, I think it's always important we've seen to just read about the price of oil or gas. It's got to hold there as a general rule for about 90 days until you start to see the decision process start to take place. Overall, on our energy credits, we -- any energy credit $5 million in size are reviewed quarterly with a few exceptions of where the risk rate is just so favorable and there's a lots of other assets we don't feel it's necessary. I think the other thing to remember I'm very proud of our energy team. There are lots of experience. We have built our team strong over the last couple of years. The acquisition of WNB added some real expertise, outstanding engineering and we have a history of knowing our customers. We're not playing the numbers game. We know who we're dealing with, we know their characteristics and so I feel good about where we are. So it's certainly no time to panic in my opinion. You've got to watch the speculation but it is a time to stay close to our customers and continue to stay true to our credit disciplines. So all those facts and you asked me what's going to happen, I -- certainly, we talked a lot about oil. There's all kinds of factors in place that are going on with this. I mean, Libya coming on with what, 3 billion barrels or whatever it was, kind of is one of the shocks that happened to it. If you look in the Southern region, I see an opportunity for drilling natural gas, which has been really pretty weak, and it is a good opportunity as we go forward. If you look at the southern part, and you got to think of natural gas in 2 segments of the United States. There's no question that the Marcellus and Utica is a great natural gas play, but also those pipelines are not sufficient to bring gas to the southern part of the United States and the Southeast. So most of that is going to the markets that are near. So if you'd look down at Texas, Oklahoma, Louisiana, New Mexico and Arkansas, you'll find that gas production in this region is declining and the gas storage in this region is running about 17% behind last year. And the Gulf Coast demand will grow over the next 5 years because of petrochemicals and LNG. And we could go into great detail about technology, it certainly -- that's really what's happened, the technology for this play. The other thing that's important to note in our portfolio, we run about 50% or 60% of our portfolio is hedged for 12 to 18 months out. Some are more than that, 24 months, so because of the hedge positions, there are some protection there and their customers have the wherewithal to continue to move forward. If you go to the Permian Basin, certainly a very mature area that has a lot of the infrastructure, and they're going back into those oil fields and you're seeing the tremendous results of that. We have years of experience, say at $80 or $90. It's a good range to have oil. It keeps the speculators out of the market. In fact, we've been living, you and all of us in this country of too much money to chase and too few deals. I think we're in a pretty healthy position today. And so we just again, coming back to knowing your customers, knowing what's happened staying close to. I think there'll be some opportunities for us. You can already see that out of 50% advance rate, there's been pretty good conservatism as we go. But they're finding good reserves, as I mentioned at the very first of it and I feel comfortable. I'm not confused that it is a commodity. It's going to go up and down and that's the reason you have stay close to the market and everyday I pull up on my app to see where the price is and all of our energy people are watching very closely. Brady Gailey - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And then can you just remind us what percentage of your loan book is energy as of the end of the quarter?

A little less than 14%.

Your next question comes from the line of Brett Rabatin with Sterne Agee. Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division: I wanted to -- I know the Q will be out later, but didn't know if you had handy, Phil, maybe the gross [indiscernible] revenue and interest expense for the quarter?

Gross revenue and interest expense for the quarter? Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division: Right.

Yes. I think [indiscernible] my hands on that. Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division: And while you're looking for that. Maybe you guys could comment on just the expense run rate from here just thinking about post the deal. Is this kind of a good number for expenses going forward? Or is it going to be any kind of downtick from the third quarter? Any thoughts on that expense levels going forward?

I would say that expenses for the quarter were a little bit high. We had some in terms of the rate of growth, we did bring in WNB employees so we have the cost for a full quarter whereas we had it for a month or a quarter before. We had some -- we made some, I'll call it, discretionary contributions to our charitable foundation because we did have really good performance and felt we could afford it. We make those contributions, those monies are no longer belong to us. We direct them, but so those are -- that cash is going to be spend for causes in the future but it comes out of our operating earnings. Today, that was about $0.5 million. We did have the -- some good growth in debit card usage on the good sign and then on the bad side, there were some breaches everyone knows about Home Depot, and of course, we always had some customers that were caught up in that and banks usually lose something there, it just a little bit of a unusual thing and then there was some -- just some other, I'll call it, just sundry thing that were a little bit high. So it's fine to say, was it a little bit high on run rate? I'd say it probably was. But just remember that going forward, we are doing a lot of things to continue to improve our franchise and our value proposition. We're taking care of some facilities issues that we've really needed to do for a long time and in terms of providing for some operation centers and that kind of thing. So I hate to say that it's dramatically high. We've had a few unusual things in it, but things kind of come along over the next year, sometimes unusual things, sometimes just building our business. It wouldn't make too much of it. Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division: Okay. Will an offset be any build you guys might have to do in terms of the regulatory compliance landscape? Does that essentially offset any sort of potential reduction you've from either expense saves from WNB or some of that extraneous noise you mentioned in 3Q?

We've been -- actually we've been doing that, and there'll be some more. That's been sort of a steady stream. You're right, we've been building the compliance area just, for example, as a result of our agreement with the Fed. But it hasn't been something that's just been overwhelming at this point. I think it's just going to be a steady stream continuing to build that capacity. Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division: Okay. And then just...

It's pretty much built into the run rate this year, kind of what our expenses were near [indiscernible] kind of [indiscernible].

I think so for the compliance thing. And then I think you asked about revenue for the quarter is that... Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division: Right.

I've got tax equivalent revenue of $289 million for the third quarter '14. Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division: Okay. And then, I guess, the other thing was just curious with the actions you're taking with the securities portfolio, any thoughts on where you guys think you might end up from an asset sensitive perspective kind of once you're done assuming most of it is going to happen in 4Q? Will that kind of change how you guys model yourself from an asset sensitivity perspective?

We are still solidly asset sensitive today. You remember when you see it in the Q, we're conservative on our assumptions for demand deposit, the interest rate that we pay on it. We've got a fair -- a very sensitive rate that's fairly highly correlated directionally to LIBOR and I keep saying that the reason we do that is because we're not in charge of what the market does and we're going to compete in the marketplace and we want to put a conservative number out there that would show a very competitive situation and us reacting to it. In the event that we don't have that which I think is probably -- was the most probable, we're much more asset sensitive. So we'll show in the Q that up 200 ratable increase, so it averages 100 basis points. We'll show about 0.5% positive asset sensitivity, but that again is with the demand deposit rate that's moving shortly upward. We're much more asset sensitive much more than that in the event that, that rate is more than administered rate. But I think a couple of other things to talk about it kind of anecdotally gives you a feel for what is our sensitivity and how we think about it. Just remember that don't just look at the investment portfolio and what we're doing there because we really sort of have a barbell strategy that's represented by the investment portfolio and taking advantage of where we see value there in the market on one hand and then the liquidity that we're maintaining on the balance sheet, which is basically a 1-day duration on the other hand. Our liquidity continues to be strong. I talked about the investment purchases that we made during the quarter. We've made some after the quarter. We averaged in round numbers about $4.5 billion at the Fed for this quarter. That was up by, I think I said $400 million from the previous quarter. So we saw an increase there. If you look at where we are today, even with the investments that we've made, we're today sitting around $4.7 billion at the Fed. At some point, we got up to over $5 billion in the Fed in terms of liquidity in the third quarter. So the investments of these funds that you're seeing us talk about really is just necessary in light of the growth -- great growth in deposits because it relationships mainly and good customer growth that we've had in our balance sheet. And then maturities of what's coming out of our portfolio otherwise. So we monitor the entire balance sheet not just what's going on in the investment portfolio and because of where we stand with our liquidity and because of the growth in our relational core accounts that have really long durations themselves. We feel very good about continuing to maintain a solidly asset sensitivity, a solidly asset sensitive position.

[Operator Instructions] Your next question comes from the line of Scott Valentin with FBR & Company. Scott Valentin - FBR Capital Markets & Co., Research Division: Just to follow-up on the theme earlier on Fed funds and securities portfolio. If you did kind of a combined duration of the 2 given the barbell strategy, how is that moving over time?

Over time, well, okay, that's pretty open-ended, but I'd say that the... Scott Valentin - FBR Capital Markets & Co., Research Division: Maybe the last 2 quarters, 3 quarters to give me more a fixed time frame.

Okay. I would say our duration of our investment portfolio has increased somewhat over time, over the last couple of quarters. And just if I can look back here. First of all, let me tell you what our duration is today. We're -- as we said many times, we need -- you need to consider what you think is going to happen with municipal securities. And will they be totaled or not? Because remember our strategy is to buy municipal securities with high coupons and with 10-year calls and those securities really are anticipated by us and the market to be called. And so if you look at the duration of our portfolio within municipals to call, overall duration is about a 3.8 years duration. And that's -- that really hasn't changed much to over the last few quarters and the reason is because as we're buying some of the -- continue to buy some municipals. We've also bought treasuries and in some cases some short-term treasuries. So we're sort of mixing in shorter durations along with the longer term muni. So it really hasn't changed a whole lot. I should say if none of the munis are called, which we certainly don't expect, the market don't expect, our duration would increase to about 6.3 years. But looking at the option adjusted duration of the 3.83 years and that's without the liquidity piece of it then you could see that's been fairly stable. If we were to -- just of the top of my head, if we were to look at the liquidity piece over the last few quarters, let's go back a couple of quarters, I said we were $4.6 billion on average this quarter. If you look at the first quarter we averaged $3.8 billion. So that 1 day liquidity piece is really growing frankly, at a higher percentage rate than our investment portfolio. Scott Valentin - FBR Capital Markets & Co., Research Division: Okay. That helps. And just in terms of -- I know you mentioned keeping the barbell strategy and maybe doing some more short-term investments on the treasury side, but is there room to shift more of that Fed funds into maybe higher earnings securities? Or would that then throw off the duration more than you'd like?

It's interesting you mentioned it. We did buy -- I talked about there's almost $600 million that we bought at the end of the quarter, split between 5-year and 7-year treasuries. And we really felt like given where rates were and where they're likely to move and we're really seeing it sort of the intermediate term of the curve and closer, that's where the moves might come. We felt like there was pretty good value there and given the fact our liquidity and -- as I mentioned it going over 5, and we had $600 million maturing although it's pretty low duration maturing in October. We feel we really needed to bite the bullet and move out on the curve some. We'll probably do some more of those. Well, we will do some more of those in the treasury side of the portfolio in the fourth quarter just recognizing sort of what you've said that -- we do have to do something with the money because as we say, doing nothing is bad. So we'll do some more of that. I don't think anyone likes this market. I know I've said for years, we don't like it, but occasionally we hold our nose when we get into it because it's the only market we have. And that's what we're doing. But I think on -- all in, we feel real good with what we've been buying and where we stand on the duration and we feel like we've gotten pretty good value out of the part of the market and the curve that we've been investing in.

Your next question comes from the line of Jon Arfstrom from RBC Capital Markets.

Just a couple of questions here. Dick, have you seen any change in activity in the WNB footprint or maybe give us an idea of what kind of demand you're seeing there?

Well, it's been very good. I mean, certainly, we may have lost a customer, but I can't tell you here who it was. So we've just held very strong in protecting the -- conversion process is always difficult and when you can go through that and hold on to all your customers and what I see now is all that's kind of settling down and we're moving into starting to build and I just see a real good opportunity from that. I'm really proud of the team out there. We're obviously stand very close to them to help educate them on how we do business, but I just see it as really positive and some good -- with a good opportunity. What we haven't talked about, they did not have a wealth management business, and we have begun to spend time out there with both our wealth management and our insurance. So those are really good opportunities and where we have a lot of depth and expertise. And there's a lot of wealth out there. So I think the -- I think to answer your question, it's been successful in holding on and stand where we are with a little bit of growth, but I see the opportunities to grow and in growing some businesses they weren't in, as significant over time.

So satisfied thus far with the progress?

I'm very satisfied.

Okay. I forgot the phrase you used aggressive lookers, cautious buyer or something like that. Is that still -- are you seeing anymore activity?

That's where I am. I'm an aggressive looker and conservative buyer.

Okay. Just maybe for you, Phil, a follow-up on loan-to-deposit ratio and securities portfolio. I guess my sense says that you're not really satisfied with the fact that you have to keep growing the securities portfolio, and I'm just wondering if you all eventually expect the loan demand to pick up to allow you to utilize some of the cash that you have sitting around? Or is this something where in a year from now we could -- what if it grows to $6 billion or $7 billion and how would you handle something like that?

Well, I wouldn't like it. But -- because we'd like to have -- we like to see the economy continue to improve, and we are seeing that. I would also like to see a little bit more rationality and structure in the market and I think that, hopefully, when the Fed gets out of the way and we get out of these 0% interest rates and people are just not starved for someplace to put their money, you'll see some rationality. They may take a while. But I think the combination of those factors maybe a normalized rate environment maybe a little bit more normalcy in terms of government, although we'll see, could help us on -- just the general feel of the economy. And other thing is we've done -- as Dick talks about all the time, I think we've done a great job of increasing and expanding our relationships. We've already done a lot of the hard work of growing these relationships and it's really more of a situation now where a lot of these, if we can see them optimistic enough to borrow under and advance under these lines, I think that's some good wind at our backs that we'll see. And then we've some strong pay down activity in the quarter, which I think related to one of the questions that was asked earlier. And if we can see that slowdown, we'll continue to see some wind at our back from that. So I mean, long-winded answer. We really hope to see some loan growth -- great loan growth over the next couple of years. It will take a while. It's not going to take a couple of years. It will take -- it could take 5 years-plus to bring our loan-to-deposit ratio back to kind of where it was. But frankly, right now that's almost a high-class problem because in our deposit growth is really the result of increasing relationships and half of our growth in deposits is great as it is, is coming from new relationships. People who didn't have any relationships with us a year ago. So as long as we continue to do that, we'll continue to have lots of money to lend in, what's a great, Texas economy. So I'm hopeful that we'll have to buy -- we will feel the need to buy less securities because of loan growth picking up faster, but we'll just have to see.

I'd just remind you. I made this comment, I guess, 2 to 3 things. One, I can't tell you how proud I am of our staff and how hard they work in a very disciplined way to call on customers. And you'll remember when we came out of this -- coming out of the great recession and we were committed to building relationships, which we all know now was very successful. But let's not forget that we -- these new relationships account for 50 -- almost 56% of our year-to-date growth and total loans outstanding and these new relationships account for 84% of our growth and loans under $10 million. So we believed at that time in '09 that if we built the base of this company that, that would turn into other opportunities. And I think the facts that we're looking at today show it is definitely happening, and I'm so glad that we did that. And then you just start because we do so much team selling is selling wealth management, insurance products and all those other things. So it's proof in the pudding that it's working.

Yes, I agree with that. Maybe a crazy question to ask you, to ask Dick Evans, but do you ever said random things that maybe you're being too conservative on lending? And that you can increase the pace of growth a bit, particularly with what you're seeing on the credit quality front with that continuing to get better?

You and I didn't know each other in the '80s, and I can talk to you about it without my shrink sitting next to me. And I got a pretty deep scar that's healed from. And I tell you what the way you blow a bank up is making bad loans. And there's a lot of crazy stuff going on right now. And as I told you, I am extremely pleased that we're staying true to what we were doing. And when you look kind of deeper into details, I told you the structure is still about 60% and 40%. That's where we want. And when you look at prospects, we're not losing from pricing, but we've increased a loss from structure. So there are more people doing crazy things, and our book rate with prospects was up from last year and you look at customers. We're, again, competitive on pricing but structure, we're losing a few more deals in that, but our book rate is up to about 71%. So I just think you got to be real careful. Are we working hard to make every deal work? You bet we are. But I don't want to be talking to you 3 years from now about all the problems we created when everybody was just going crazy and you got a little bit of -- not a little bit, you got a lot of just everybody thinking you can make any deal and it'll work out. I'm proud of our credit disciplines, but also don't hear me saying we're just sitting back old conservative Frost not doing things. We're finding every way in the world to structure something to make the loan.

Your next question comes from the line of Matthew Olney with Stephens Inc.

I wanted to go back to the discussion on expenses. And Phil, can you talk more about if there was any effect on pension expense in 3Q? Any material change in the accrual during 3Q? And I know they came behind us pretty ugly, but can you talk about if there could be any material change in the pension expense in 2015 given the recent volatility of rates?

Okay. Well, the retirement pension expense has been a real positive this year because -- it's actually because of the performance of the assets. We actually had income related to that this year as opposed to expense. And so it's been a pretty big favorable swing. I mean compared to a year ago, we're, call them, $1.2 million less than -- a net swing from last year. I think you can make a good point given where our interest rates are and what the market has been doing recently. We're probably seeing that turnaround to an expense. So there'll be some impact there. I can't tell you what it will be right now because as you say, the accounting is pretty arcane and it's very complicated. But I would say my gut is that we won't have income this next year. We'll probably have some level of expense. You see that turnaround.

Okay, that's helpful. And then as far as the purchases of securities -- I'm sorry, of treasuries, of $600 million that you mentioned earlier. I think you said you're replacing that with a similar amount that's maturing this month. Just to clarify, at what point did you purchase the $600 million? Was it since the end of the quarter? And secondly, what was the average yield of the $600 million that's maturing?

We purchased this -- the almost $600 million in September. And then the -- I think the average yield and the stuff that was maturing, it was pretty low. I want to say it was like 37. I can look that out, but it was fairly low. My recollection is just 37 basis points, but I'll take a look at it as we go along to see if I can true that up.

And I think you already mentioned this, but what was the average yield of which you were purchasing of that $600 million?

It was around 2% when you average both tranches together.

Your next question comes from the line of John Moran with Macquarie.

Phil, maybe a quick follow-up on the fees side of things, which I have had a string of pretty big quarters here. I guess, that 50% of that increase was that a trust business, 75% of that was management fees and then oil and gas I missed was up a bunch and drove some portion of that?

I'm sorry, it was kind of hard to hear you in the first part of your question. Could you repeat it? I apologize. Can you just repeat that?

Yes, sorry about that. On the fees side of things, a good couple of quarters kind of strung together here, and you had mentioned some statistics on that in the prepared remarks. And I just missed what portion of that was oil and gas kind of management fee driven?

Okay. Well, let's see. The -- I think 60%. Let me see what my comments were. Just give me 1 second here.

While he's looking for that number, I'll just say to you that the -- in the oil and gas, fees were up. I was very pleased that most of that was royalty increases, which you like to see. Don't misunderstand me, I love the bonuses too in the trust area, but royalties are more lasting.

Yes, yes. If you just look at the numbers, we were up year-over-year $4.1 million in round numbers in the trust. The investment fees were up $3.1 million, and the oil and gas fees were $930,000 increase.

Okay. And just given market volatility and the price of the commodity, there could be -- it seems safe to assume that there could be some downward pressure on those lines. But that -- it sounds like with WNB coming in, and them not really having that as a line of business, there'd be plenty of opportunity to kind of cross-sell and offset any weakness that we might see there otherwise?

Yes. There is an opportunity, but it takes time. This stuff won't happen overnight. Certainly, we're committed to it in building that wealth advisory business.

Got it. And that's helpful. And then, Dick, you mentioned, I mean, we've talked for a lot of quarters about pricing being under pressure and some structure weakness, but it sounds like maybe things are materially worsening on the structure side. And this is kind of a little bit of a follow-up. Could you give us an example of something where structure just is, like: A, we're going to draw a bright line we're not going on there; and kind of what would be an example of something that you guys were seeing in the market that you're just walking away from?

Well, you get a lot out of it just in the knits and knots of covenants, and -- but if you've got to -- you got a deal that we think needs to be secured by collateral and somebody walks in and does it unsecured, it's -- we're just not going to do that depending on the circumstances. The -- on the construction loans, they're up to 48 months. You've got to watch to make sure that they're not stretching too long in those regards. And so it's a great question. It's kind of there's so many details that you get down and start looking at of -- it gets down to a judgment case of where you just think there's more risk than the return deserves. And you come back to the fact that which is very fundamental for us, it really gets down to who we're dealing with. And if you get somebody that's just not going to take the responsibility, you also get -- you get guarantees that burn off too quick. That's a big factor that we're seeing. And basically particularly in construction, you want the person building it to stay there until it's built. And that's the risk in it. It's being sure that somebody is going to be responsible to build it. But once it's complete and occupied, well, then you can understand why some guarantees ought to burn off. Does that help you any?

It does, yes. I appreciate that. I got one last kind of ticky tack one for Phil. Just on tax rate ran such higher than I think we were looking for and where it had been on the first half of the year. Is this kind of 18-ish the right way to be thinking about of for the year?

Well, it was actually a little bit high in the third quarter because it had been running less. And the way you have to do that is you have to estimate your effective tax rate for the whole year and then you got to true it up at the end of the quarter. And so we have some catch up we had to do because earnings were really better, frankly. It's the main reason. And so we ran about 18% for the quarter. It ought to run around 17.2%, I'd say for the full year and that would be our expectation of around that level for the fourth quarter.

Okay. And then into '15 as you layer in some more munis we could see presumably some downward drift in that?

It could go down some. It could.

[Operator Instructions] There are no further questions in queue. I turn the call back over to Mr. Dick Evans for any closing remarks.

Well, thank you for your interest in Cullen/Frost. This concludes our third quarter 2014 conference call.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.