Cullen/Frost Bankers Inc (CFR) 2003 Q2 法說會逐字稿

Good day. All participants on the conference line in a listen-only mode. I'd like to turn the program to your host, Senior Vice President and Director of Investor Relations, Mr. Greg Parker.

Thank you and welcome to our second quarter earnings conference call. This morning's conference call will be lead by Richard Evans, Chairman & CEO and Phillip 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 space 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 would like to turn the call over to Dick Evans.

Thank you Greg. The second quarter of 2003 was another good quarter for Cullen/Frost. Earnings at $0.65 per diluted common share, was up 6.6 from the previous year, and up 10.2% versus the first quarter. Net income was $34.2m, return on assets and equity were 1.41% and 18.72%, again a good quarter. These results are only possible because of their outstanding staff and their ability to execute in this slow economic environment and low interest rates. Some highlights - fee income growth continues to be a major factor in our positive performance. It was up 5.9% driven by service charges on deposits up 11% versus last quarter. Insurance commissions up 18%, and trust fee is up 12% or $1.3m from the first quarter. Controlling expenses is always a priority, a 3.4% increase over last year, I consider this to be well managed, and especially considering some of the details.

Salaries and benefits were up understandably because it reflects the lifting of the salary freeze and higher retirement related cost. Insurance compensation is up with a strong increase in commission income. I would also note that expenses versus the first quarter of this year are down $900,000. On asset quality, again the levels continue to be very manageable and stable to improving. The allowance at 1.87%, nonperformers are down 9.5% from March, almost $5m, provision matched the charge-offs past 2% are under 1% and over 90 days we are down almost $4m. Problem loan, potential problem loans are down almost $1m, and new problems are looking at the inflow of problem loan had significantly slowed versus a year ago.

I believe all this adds up to be a good story. Net interest income, there is no question that the low rate environment continues to put pressure on our margins. However, volumes have helped offset the squeeze. Demand deposits are strong and the income from our dollar rows have also contributed. To summarize the second quarter, I would say that there is lots of good signs. Looking forward, I am optimistic about our Texas economy. I wouldn't say that there is lots of good signs, but I would say there are increasing good signs. Energy is picking up, oil and gas prices are up, drilling activity has picked up, believe it or not there is some improvement in high-tech and like the nation, the refinancing, adding to considerable spending, stock prices went up, productivity strong are all factors added together with the others that have resulted in Texas leading and index being up.

If we take a closer look at some of our Texas cities, from the standpoint of payroll and employment, on an annualized growth rate basis for the six months ending June 30th, you would find that Texas is up by 0.5% or 1%. Austin has increased a little over 1%. Remember this is the city with broad base of hi-tech, Dallas is still down, a little over 1%, really believe that's the drag of telecom and airlines. Houston is down less than 0.5% or 1%, in fact, 0.38%, surprisingly good with the Enron clown and San Antonio is up one and three quarter’s percent, mainly driven from healthcare and military. As I talk with folks across our state and look for what I call the strolls in the wind for answers of how much and how quick this economy is going to increase, and as I look at Frost's strong calling activity, particularly been strong as we have entered the slow summer months, all this has resulted in a real strong pipeline, a long pipeline for us. So with us together, I am cautiously optimistic about growth in the third and fourth quarters. Now, I ask Phil Green to share his thoughts.

Thanks, Dick. I would like to address in a little more detail some of the aspects of our operations, provide an update to our earnings guidance and then take the rest of the time to open it up for questions. As Dick said, we continue to be pleased with the company's performance even with this low interest rate environment that we continue to find. And more in a big way, we've tried to do that as to focus on non-interest income which is now 41% of our revenue base for the quarter, up from 40% last quarter and I would like to focus for just a minute on some other categories of non-interest income. Over two-thirds of our growth in non-interest income from last year is in deposit service charges, which are up 11% in total and about 60% of this was from individuals, 40% from commercial customers.

The driving factor in the increase from individuals is really higher overdraft income and this resulted from higher usage by our customers. And where this came from was, we initiated a program this year to establish a $500 guideline for allowable overdrafts on most individual accounts, and once the customers become aware of this option, many have chosen to utilize it more often and that's resulted in higher revenue gross. As far as the commercial component, it's really related to two things, a lower earnings credit rate but also higher levels of services that we are providing to our commercial customers. If you look at insurance fees, they continue their strong growth; they were up 18% from last year. They were up 12% if we exclude acquisitions. We did have a benefit agency acquisition in Fort worth during this period of time. And I should point out that we continue to close over 60% of all qualified referrals from the bank in this area. As far as Trust Fees, we were up only about 1% from last year because of the decline in the equity markets. But this decline was a little more than offset by strong fees for the management of Trust owned Gas properties. I think, probably, the more important is the fact that we were up 6% in Trust Fees from the first quarter and we finally got some relief in the equity market valuations. At the same time, we continue to grow Trust owned gas fields.

One another thing that happened during the second quarter is, we did recognize some seasonal fees, which we do annually, related to the preparation of Trust tax information for our customers. As far as other income, it was up about 4%, we had about a million dollars less gain on the sale of student loans compared to last year. But we pretty much offset that with the gain of about 700,000 from the sale of a piece of oil property and a gain of about 400,000 from the sale of an old Motor bank facility in San Antonio. So that left the growth in the category to really come from miscellaneous operating items. As Dick outlined, non-interest expenses were pretty well controlled, they were up only about 3%. With the growth coming mainly from salaries and benefits. Looking at net interest income, it does continue to be under pressure from lower rates, that's not a new story for us. But it was almost flat from last year because of the increase in Balance Sheet volumes.

Demand deposits, for example, were up by 29% from last year. And dollar roll borrowings averaged 600m for the quarter compared to zero last year. Now, we've talked about the dollar rolls before; these represent an opportunity for us to take advantage of the value of certain mortgage bank securities that we hold as part of our core portfolio and in order to obtain extremely low cost short term borrowings. We then take those moneys and invest those in credit bonds. As an example, the average cost of all the dollar borrowings from second quarter was a negative 2 basis points. As you're aware, this additional leverage puts pressure on our net interest margin and it costs us 22 basis points on margin for the quarter, which was the same as in the first quarter. However, it is an excellent low risk opportunity for us to add margin dollars in the slow rate environment. Finally, take note that our provision that charge-offs for the quarter. As you recall, we've been building the reserve over the last several quarters even as loans have been flat. And our reserve at the end of the quarter stands at a very strong 1.87%. And then with regard to the earnings outlook, we continue to see flat interest rates for the remainder of the year and we're coupled with the current range of annual assessments. And with that I'll turn it back over to Dick Evans for questions.

Thank you Phillip and we are now ready to entertain any questions.

If you would like to ask a question please press star one now on your touchtone telephone. To withdraw yourself from the queue, please press pound. Once again to ask a question press star one now on your touchtone phone. One moment while we queue for questions. And if you would like to ask a question please press star one now on your touchtone phone. To withdraw yourself from the queue, you can press pound. One moment while we queue for questions. We will take our first question from the site of Charlie Ernst of KVW. Go ahead.

Hey guys.

Hey Charlie.

Could you go through and just give some more color in terms of you know looking at the earning asset growth being up a little over $300m in the quarter, average loans down almost $80m, and talk a little bit about, you know, what the increase in earning assets specifically was?

Sure, Charlie, as you noted, we didn't really have any loan growth and so we went two places with the earning assets. We had securities in total go up about $100m and then unsold was up about $290m. So it really is in - most of it was in the most liquid part of our earning asset base.

Could you also talk about the period and earning asset number, it looks to me like it's up, I think the number was up about another $300m, yeah $300m versus the average for this quarter and yet the period in loan number is relatively flat?

Charlie, normally we deal with the averages but I think in the case of the period end, what you see is our deposits can be pretty volatile on any one particular day and that was the growth in demand deposits, which would have been higher than average at the end of the quarter.

Okay and could you just reconcile your economic commentary a little bit, I mean you sounded much more positive than I would say that we have heard you in quite a while and it's just I guess relative to the other banks we have heard in Texas, I would say that they sounded a little bit less optimistic than their prior comments, still I think cautiously optimistic, but maybe a little bit tone down compared to the past?

Charlie, hi, you know, any time you are looking into the future, it's always tough to call and as you heard me say, I was cautiously optimistic. But with that I - you know, we are really out trying to see if the turn is there and I would tell you that a lot of it comes from talking to customers, and when I say a turn, I don't think we are going to have a giant take off here, but I think we have probably been bobbling along on the bottom and I am optimistic that we are going to come up somewhere. I think that - I think we've all got to remember a couple of things when we talk about optimism or pessimism or whatever as we have been having a recession that really hasn't been very deep. It's been pretty flat and long. So it's not going to shoot up but - so when we come off the bottom, I don't think we are going to - you know there is a big up turn but I think we are going to positively move forward.

As some of the - just looking at - I think I got some encouragement, there is no question out there as, looking at the payroll on format standpoint and growth, you know, I think one of the positive thing is , you know, with a positive number there, certainly San Antonio and I think Houston could be where it is, it's positive. We got to remember a couple of things too about our state, that while it has a very good diversified economic base, energy and technology are real important factors to us. I think that I am optimistic about energy, I am really optimistic from the standpoint that while last time worried about 5.50 gas, June was nicely the biggest month ever to restore reserves and we have had a pretty number across the nation. And so I think probably we will see some reasonableness to gas prices, probably they will be down a little bit from where they are now unless we get some kind of big blow. So - and I think that's helping, I think there are prices that can really drive some development, as I said rates are up and I think there is activity in that regard.

Oil prices to me are surprising that they have been as strong as they have been, and I think that that is really driven by an alternative fuel as gas prices have moved up so strong. So you are seeing companies switch over to oil and burn it rather than gas. So I think those signs are positive, starting to move up a little bit, and I do - and we are really into some crystal ball when we get into this hi-tech. But as I talk to companies across the state, I think a lot of companies are reaching a point to where they need to invest in, renewing a Microsoft contract or buying some software and I think that activity is starting to - starting to happen a little bit and that will be a real positive to our state. Charles, and I am cautiously optimistic, I am on the positive side again for coming off the bottom here.

And Phil, one last question for you. Could you go through any sort of margin guidance, I know that lot of things can change that, but just where do you all stand, kind of looking into the end of the year?

Charlie I think, that we are going to continue to see some compression on margins, mainly because and I am excluding the dollar will impact on this. Mainly because of the maturities in the security portfolio, and our assumption that we have going to have flat rates. I will say that, we have seen recently a steepening of the U curve and that could help that some. I don't know how long that will last and we need not to - well that's a very volatile part, obviously at the curve now. And, but I will say with a flat interest rate environment and with the maturities you have got in the securities portfolio and loan demands still being what I will call fairly modest, we should see some continued pressure in the net interest margin.

Any quantification range to that?

I think what I said last time was that we wouldn't expect to the see kind of drop we had between the fourth and first because we had with rate cut there, and we were fighting then. I think now we are dealing mainly with this compression in the investment portfolio and I would say just a gross estimate around five basis points or so.

Thanks a lot..

Charles.

Yeah.

I just want to add that, I am not saying then that we are going to have another big shock in the economy, or another war, heaven-forbid and another thing like the World Trade Centre but I think we are missing - certainty to work now. That we have got plan our lives with times moving forward and my remarks also look, are saying that I don't see any who knows. But I am not taking any consideration of big shock.

Thanks a lot guys.

Our next question comes from the side of Robert Lacoursiere of Lehman Brothers.

Good morning guys.

Hi Robert.

Hi Robert.

I am actually asking for Robert he had to step away this is Will Durban just a few questions he wanted me to ask for you guys. First I guess a little follow-up on one of the previous questions. If you can address, sort of what you are seeing in the loan portfolio obviously the net was negative, is there any sort of growth in any of the sectors that you are seeing.

Yeah the, Well first of all is we've known and discussed we've exited some businesses and direct just about beyond I think we have $7m on our books and so that that story is about over and mortgages continued to reduce and then we have sold student loans and then we are going to adjust in our shared national credit we talked about but finally the shared national credits closed out at a balance of $177m and a lot of that is not as suggesting that energy is down about $15m.

Prosports which we had a couple of alliance that were significant for it represented about $26m their paid off is as you know the NBA and NFL now have an arrangement for all the Prosports across it, the country to borrow an central location so those are some things that have driven our shared national credit just from a pay off stand point. So that's a kind of where the loans are going down. If you take a look at some of the increases just on an average basis and one of the reasons I have some optimism we have had, you take all those numbers out you and get about 1.5% growth in allowance exclude the mortgage in direct shared national credit student loans. And you look at where the growth is, commercial and industrial is up about 1.5% our $25m, that's our general portfolio that is really where we spend a lot of our time growing this company so it continues to grow.

We also had some growth in commercial land loans about $25m and at first flush you would kind of say what you doing there that's really the majority of it is comes from two things one to two family lots and these are lots and for entry homes you and I both know that, this is really been a strong area across the country and so I've just trying to keep up with the development launched to build those homes. Those inventories are very low and so that is been an area, and then the rural land or ranch land has been a really strong segment, we have helped to, some of our wealthier customers to get tax-free exchanges in this area, so, that’s been a part as well. And then commercial real state mortgages, we're out of our total commercial real state business over half of that is owner occupied which is a real sweet spot for us and a part of our business that we feel good about and in that, in that area that has also been a growth for us of over $50m. So, those are some of the places that are growing, we feel very comfortable with of where that growth is coming from

Okay and are there any particular that see more momentum than others that you expect to sort of drive growth going forward or are you, are you going to comment on that?

Yes, I think the growth is again going to come in this C&I loans, we haven't said much about consumers if all those that are paying off. But certainly, home equity is that's, you know, the preferred choice of that of the consumer across the country and even though Texas has some antiquated laws, our home equity loans were up 4.7%, so that continues to be an important factor in that regard. So, that's your question over the areas that I have mentioned to you, as I could continue to see growth in those areas.

All right, great. Couple of other questions, you addressed earlier in a comment the increase in other income, but I don't think I clearly followed. What are the elements that were in there for the quarter-over-quarter increase. I guess, what you mentioned were the old year sale and the $400,000 in old bank sale.

That's right. Let me just go through it again and may be I would do a better job on it this time. The - going back to last year we had some gains on student loan sales roughly $2.5m. Little bit but unusual sales for us, we do self-student loans regularly throughout the year, we have for years and years, we will continue to do it for years and years.

We did do large blocks for some various reasons at that time. We had gains on sales of student loans this year in this quarter, but it was about in round numbers about $1m less than last year. So, what you had is about $1m drop in other income related to just student loans. What I am trying to point out is that that million dollar drop ended up being made up by a couple of other sales and work student loan sales, but there was more, one was the sale of Orio for that $700,000 gain, one was a sale of an old bank property for about 400,000. So that sort of offset would have been a decline related to student loan income. And what was left, when you just look at the growth would have been from operating items. For example, visa cheque card income, which has been very strong, another thing is, you know, the company owns various properties where we actually have minimal interests, revenue in the holding company have for years and years. I mean that income was also up, there is oil and gas revenues, increased nationally, so that's really where the growth came from and I've just tried to point out, that we sort of cancelled out what would have been otherwise a decline in student loan gains.

Thank you. Okay, so is the run rate seeing in other income from first quarter/ second quarter? Something we'd expect to see going forward.

I think the first to second quarter, you are going to have to - we can't assume that we are going to continue to have gains on student loans at the level that we have. Those will come down fairly sharply. As I said, I think we sold around 1.5m in round numbers in student loan gains. So, you need to take that out. I don't think we can guarantee we can replicate these other types of, sort of one-off gains. So, on a core basis, I'd take that as well.

Okay. And then one last question, sorry, if I could ask you to just explain a little bit more on the - about the dollar role. And how you are - how it's able to cost essentially nothing or even negative 2 basis points you've set. I definitely agree that it's a great conservative way to leverage balance sheet, but where is the cost in there?

The reason that we are able to get this advantage is because we own certain mortgage back securities that are particularly valuable in the marketplace, and a great example is Fannie Mae 15 years. It depends on the coupon that is hot at the time, maybe Fannie Mae 4, Fannie Mae 4.5, but what happens is there is a tremendous amount of demand today for fixed rate product, but a lot of that demand is a little bit further in on the curve than say a 30 years or Fannie Mae 15 years. A lot of people don't have the world with all the desire to hold those kinds of securities, whereas with us, with our loan to deposit ratio of 59% or so, historically are lower along the deposit ratio.

Investment securities have always been a core component of our earning assets and probably we'll continue to be it for the foreseeable future. So, we own these types of securities. And what's happening is the Street takes these kinds of mortgage back securities and uses them as the building blocks for creating CMO products which can be divided up into various of various terms. So, they are able to produce fixed rate product of terms that meets the demand of the marketplace out there, and whenever there is a dislocation in the market with regard to the availability of these securities, these mortgage back securities of 15 year Fannie Maes etc, in order to get the deal done, they'll have to take in a block of bonds, let's say a $100m block of bonds build by Ian in order to complete the transaction.

That may be all that's left of a much, much larger, CMO's structured obligation. And so that's done, and then as that dislocation in the market place is rectified and more of those securities become available, the advantage of that dollar role will go away. But, we just happened to own securities and right now the market has the ability to leverage in terms of the CMO product and they are willing to pay to get it.

Okay great, thanks very much for the explanation.

Our next question comes from the side of Kevin Reynolds of Morgan Keegan.

Good morning guys.

Good morning.

A couple of questions here. One is, I may have missed this, if you gave it on the call, if so I apologize. The balance of 90-day past due loans, number one, if you can give me that real quick.

Yeah, the over 90-day past dues are at $6.8m, they are down $4m. It went from about 11 down to $6.5m.

Okay. Next couple of questions. First, assuming we have moved forward in time and you've got clear evidence that the economy is in fact better and back in a growth mode, what might your target reserve be, and where would you feel comfortable and also a loan-to-deposit ratio?

Let me make a few comments on our. First of all, I think loan allowance is really related to the environment that you're in. If you look at ours at 1.87% and we are extremely comfortable with that. You know that last year it was our intent to build that, and as we started to get ahead of the curve, obviously you also know that the documentation and form memos which you follow are certainly important and they have some. Obviously all of our reserves have fulfilled all those requirements, but we are very comfortable with our reserve. As you know, by matching the charge offs and not adding to it, we've reached a point where we think that's a comfortable position. It's not unlikely that if the economy improved that you could hit a time to where matching is not even necessary.

Normally what happens is, in my 30 plus years in this business, you start seeing it, economy starts to slow and you have to build your reserves, because the problem will start to come in, and then what happens if you start to command over things that are good, what you want to happen is, you want the launch to start growing at a speed and you need the reserve, because the loans are growing. So, reserves are kind of interesting and I think that you need them, because loans are turning bad and when it's turning bad, and you need them because you are growing. And so I think, I hope where we are, is that we are at a time to where this good reserve that we have will help us as we enter into a loan growth.

So hopefully that it is that clear in kind of where we are in there? I believe so and I guess what I am trying to go on - not asking you obviously to build your reserves from here but I mean could we see a- could you grow into overtime of 1.50 or even 1.40 reserve, if things truly get better and economy went back on to passive sustained growth?

There are signs, there are all-possible. That would be great, you know strong economy and sure that percentage could move to reflex like that we saw that kind of out of the 80's and went into a growth period time and we are just take it, a month to time and quarter to time as we see lots of progress for the environment that we are in. We take until lack reserves.

You had one of the part of that question and I had do with loan deposit ratio and it is hard to say what it will go to it is the best thing to do I think if you just look back on what we did. Before the economy turned and loan started slowing down and we started beaten off portions of the portfolio we didn't think that our economic crest hold any longer. We've exceeded about 70% loan deposit ratio. We were getting a lot of questions at that time was how can you grow and we thought lot of revenue to move there. Our peers were probably mid to the high 80's as far as that goes. Then we thought we probably a little bit blow up here because we traditionally value the quantity. So I think we got a awful lot of room to grow just to get back to where it was before it turned a couple of years ago. We look for 70% or so and we hopefully we'll be able build it up from there.

I really agree with Phil. I think this important core value that is, we've got a lot of potential for an increase in that. I think we are in good shape for growth and opportunity in that regard.

But why the kind of buying's are jumping to 100%?

No we are not going to believe in the fact.

Okay and then one last question for scratching my head here. It sounds like you guys partially or domestic with respect to modest loan growth, second half- excuse me. Stable margin X dollar rolls, pretty solid credit quality that has been improving and then comfortable with the range of estimates I think by using the high estimate out there right now, that would employee guys going from $0.65 a quarter of this quarter down to about $0.60 or even less on average in the next two quarters haven't. Can you reconcile that for?

Well, first of all let me correct something I might have mis-spoke on, I didn't mean to say, we would have a stable margin. What I am hope to - give an indication was, we'd have some margin compression and I think that will happen, as I indicated I think may be 5 basis points a quarter or so. I think - I guess that I said, I can't reconcile it for you, we are coupled with a range, one thing to keep in mind that, with the $0.65 we have as we pointed out at the previous call, we did have some games within that, then we don't think its prudent for us to say that we can replicate at this time.

Let me just mention, I'm glad all of you are here and may be optimistic and I am glad to be optimistic. And I think it's important but also let's remember that how beat the trophy, it's not real deed and so I don't think we are in just a boom town, I think we're just steadily going to improve and come out of here and so I'm positive about where we are going.

Okay well then, I'll continue to scratch my head on that one. Thanks.

You're welcome.

Our next question comes from the Ben Crabtree of Piper Jaffrey.

Thanks, good morning. And I guess so, I have to say, I'm scratching my head too, because we get 1.25m in the first half, so, in appear fairly dramatically lower earnings in the second half to get the consensus number out there, but I guess my primary question is related to your comfort zone on capital ratios and I'm wondering what you kind of manage to over a longer term, leading to a question as to whether or not, it might be a better use of money to say buyback stock, well then invest in, then maintain the dollar roll. What's the incremental return on shareholder money and dollar roll program?

Well, I would say that the risk adjustment return would be extremely good, I mean basically, you're looking at a 100 plus basis points on day money on short periods of time, and I think that's the decision that we make on a monthly basis, it's not as though we've built a factory or bought a bank, I mean we have the capital available to us regularly, if we need to use it for another alternative when we just think it's a good way to ware house it today. So as far as, stock buybacks, we've used them in the past, I won't disagree with you there that, they have their place, we just haven't been using them today. And what we'd like to see is for the economy there to begin to take off, and to use it for growth and to see some acquisitions that make sense for us. But we're comfortable right now a bit. Since we own the bonds anyway, that it's a good thing to do in the slow rate environment to take advantage of our position.

Okay, thanks.

We have a follow up question from Mr.Charlie Ernst of KBW.

Hi guys, just, could you comment a little bit in terms of the sensitivity of the company, that may not view the bank balance sheet is being very asset sensitive, but given all the kind of leveraging and everything else thats going on - I'm struggling with kind of figuring out rates at the short end of the curve goes up. How much you've, kind of, reduced your asset sensitivity and, so could you make a comment on that?

Charlie, I wouldn't worry about us be asset sensitive. we continue to be asset sensitive. 42% of our deposit base today is in demand deposits. We have - we have not gone off from the deep end, with regard to investments. If you look during the quarter, I think, we've bought back less than investments and we actually had mature and pre pay. So we continue to be asset sensitive, I don't think we've fundamentally changed that aspect of our company and it's tough to swallow at these low rate points, but there is a better and brighter day. If rates ever normalized from these historical levels.

And could you also say what the impact of the insurance deal was on the quarter, in terms of both the revenue and the expense sides?

It was pretty much immaterial, I would think from the company's point of view, Charlie. I think, as I mentioned, it affected our fees, it would've affected the growth rate year-over-year from like 18 down to 12%. But it would not depend materially or on a net basis.

Okay, and then lastly, any sense in terms of the expense outlook. I was expecting it to be down a little bit ongoing quarter but that was more than expected?

I don't really think that there is anything unusual there, Charlie. I think, you know, as I said the - as Dick pointed out, the increases has been mainly related to salaries cost, we are going to continue to see that.

We always have a strong first quarter on expenses from salary standpoint, usually. It's a little stronger than other quarters with the taxes and bonuses and those kinds of things. So, I think, we should have expected little improvement.

Okay. Thanks a lot, guys.

Once again please press star one if you would like to ask a question. We have a question from Tim Buckley of Schroeder Investment. Go ahead.

Thanks. I was just wondering what your thoughts would be on deposit growth that we see some kind of recovery and maybe if you can comment on your deposit growth, maybe, as a mix between new customers and kind of average balance per customer, thanks.

We take a stay back than let feel ahead toward the - we stayed all alone as it - that we really believe that our deposit growth is - that we are earning that growth. As you heard, 42% of our deposits are in demand account; we've had a growth in our treasury management and brought on new customers in that regard. So, that - I am interpreting some of your questions, can mean if things take off and people start moving money back into the stock market or other investments. Do we have some of that? I am sure we do. Have we paid half-rates versus the market and attracted what I would call hot money? No, we haven't. We are conservative in our rates and we are earning on those demand accounts. So, I would think that we've got some good steady growth there and it's hard to tell how much is of the other. But it - doesn't have the characteristics. We have done so much

Hi Tim. This is Phil. I think with regard to the deposit growth, it should continue to be good for the reason that Dick stated. I mean, we offer a lot of cash management services to our customers here. We've relationship-oriented bank; we're not just making loans to people without deposit relationships. So, as we go alone, as the economy improves we're going to continue to see growth in deposits. At the same time, I think this is historic low of falling interest rates and the slower economy has resulted in some people holding more cash levels and higher demand deposit levels because they don't have much else to do with the money. Also, it takes more money to pay for the same level of services at these lower interest rates. And as you've heard us talk about before, I mean, we have some customers and in particular, a very large one, which is a National Mortgage originator and services and they're just having incredible amounts of money flow through them and we're their clearing bank and so we see that roll through our balance sheet as well, as they see these mortgage repay. So I think there is a lot of things which in the scenario you created or you painted which was, I think of a little bit of an improving economy, we'll see some reduction in some of these very high levels of deposits particular for demand side but I think at a core level we'll continue to see, you know, historical growth that we've had in the past.

Great thanks nice job.

We have a follow up from Mr. Charlie Ernst of KBW.

I apologize for taking up so much time. But, Dick can you quantify the level of deposits currently from the clearing bank. And then just one last question on the gains that you're talking about in the quarter. I mean, I'm coming up with 2.7m as the total amount between the loan sale gain and the Oreo and the bank sale, the bank property sale.

I think that's pretty close from the gain side. And with regard to the relationship that I'm talking about, you know, that just to give you feel of that, that relationship was like, little over $500m in terms of balances. So, that just gives you the indication of how much money is flowing through the re-finance boom and floating into this company and to our bank as we clear it. Now, one thing about that, a relationship like that, a clearing relationship, there is not a lot of, what we call, negative float associated with that. We don't get to use that money very much. We're pretty efficient with it and you'll see it mainly be in the cash numbers for us. It's not like we're taking that money and making loans with it, if you know what I'm saying. But, still, it does tend to increase our deposit relationships in our balance sheet. Where we make our money on a relationship like that is on the fees side because we have a very efficient clearing operation here and we're able to make a spread on the dollars that we charge them for that service.

Thanks a lot.

Need to presume no further questions at this time. Mr. Parker, Mr. Evans, I'll turn the program back over to you.

Okay, thank you very much and we appreciate your good questions and we also appreciate your support of this company. I might just close with a couple of comments about the economy, which is kind of driven a lot of the discussion. We believe that the economy has a lot of stimulus in it, overall with monetary and fiscal, assuming no war and no terrorist attack, knowing that Texas is a good business state. We are diversified and energy prices are strong and activity in that regard, in drilling activity. And if we like the tech, we might have a little upswing and this seems very shallow recession and not a deep, so we didn't go deep and we won't come out at a peak. As I go in and for all the times, with all those comments that we got the positive side of the curve rather than the negative side. And so, I am cautiously optimistic, and I believe very strongly in this state. I think we have the best brand and if we do have growth, certainly we are going to get our share. With that, thank you very much for your support.

Thank you. That does conclude our conference call for today. You may now disconnect your lines and thank you for participating.