Cullen/Frost Bankers Inc (CFR) 2004 Q1 法說會逐字稿

Good morning. My name is Felicia and I will be your conference facilitator. At this time, I would like to welcome everyone to the Cullen/Frost Bankers, Inc. first quarter earnings conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone key pad. If you would like to withdraw your question, press star, then the number two on your telephone key pad. Thank you. 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 would like to turn the call over to Dick Evans.

Thank you, Greg. I'm pleased to share with you that 2004 is off to a good start. Our first quarter, the net income was $32.9 million, up 6.6% over last year, and 62 cents per diluted common share. The return on assets was 1.42%. Return on equity, 16.89%. Our noninterest income including security loss, was up 10.3%. Average deposits and loans were up 3.6%.

And 2.1%, respectively. Our net interest income, as you know, represents 58% of our total revenue an it continues to be flat with little or no growth. Which continues to be a challenge to our asset sensitive balance sheet. As we take a closer look at how we're growing our company, I am particularly pleased with the outstanding job our staff is doing to execute our plan of growing relationships. All areas are supporting this effort throughout the company. Let me give you two examples. Our new demand deposit accounts opened are up over 40% versus last year.

You will remember that we announced at the beginning of the fourth quarter of '03 that we were lowering our fees on existing checking account products, and introducing a new free checking product. We are very pleased with this success. The growth is good. And the mix of the products is what we expected. On the business side, we spent a lot of time looking at activities. Activity has also increased significantly.

The first quarter of '04 was much better than the first quarter of '03 and all activities. The relationship officers increased their calls by 12%. The dollars of new loan pipeline by 75%. New commitments by 46%. And our current active pipeline is 25% higher than this time last year. Bottom line, the first quarter ending loan balance of $4,726,000,000 is a 4.8% increase over last year, and $11.8% annualized growth, based on linked quarters.

These results are primarily because of the activities that we did three, six, and nine months ago. Our company is very focused on activities that result in quality growth in all areas of our business. As mentioned earlier, our noninterest income increased 10.3% over the previous year. The fee income in this company is almost 42% of total revenues. And continues to be a major contributor to our good performance. Trust fees increased 20.6% over last year.

Investment fees was the most significant component resulting from improved market conditions. Insurance commissions and fees increased 15.1%. Over half of this is due to an increase in contingent commitments. These are seasonal in nature and generally received in the first quarter of each year. And both trust and insurance continue a strong selling effort that continues to grow the revenues.

Also included in noninterest income was a $1.1 million termination of settlement of an operational contract. And finally, the 10.3% increase was after including a restructuring in the company's securities portfolio to increase the average portfolio yield. The net loss was $1.7 million on this transaction. Noninterest expense increased 6.8%, resulting primarily from merit increases, additional staff, and those salaries that are tied to sales, such as our insurance business. Asset quality remains manageable.

To the allowance for possible loan losses continues strong at 1.75%, down from 1.82% last quarter. The seven basis points decrease is primarily due to the increase in loan volume along with the charge-offs of $1.4 million and a provision of $500,000. Most important, the net charge-offs continue to be low at 12 basis points for the quarter. Nonperformers were down from $53 million to $50 million. Potential problems are up from $7 million to $14 million. Past dues, over 90 days, are down almost $5 million.

Now while these pluses and minuses basically offset each other, the charge-offs remain low and we continue to believe the risk levels for asset quality to be very manageable. The economy is in good shape. Texas is expected to return to outperforming the nation. History will show us that it is energy that is the primary driver of performing better than the nation. However, Texas today is different.

While energy is important, high-tech is also a major factor and we believe that is good for the long-term growth of Texas. A few comments about the specific markets. Austin, jobs are slightly up. On a formal business, you will find venture capital is raising money and making investments. On an informal basis, I understand that the market is back to deals being made at the Starbucks in Austin.

Houston had a good year, primarily driven from the medical and energy. San Antonio, as we've said before, is stable and will perform about at the same rate as the overall state. Fort Worth, a growing market, and will get stronger as manufacturing improves. Dallas has had slight growth and as we know the weakness has primarily been caused by telecom and the airlines industry and primarily American Airlines.

All in all, we're positive about our markets and Texas. In conclusion, Cullen/Frost has stronger disciplines and process to execute and build business. And Texas is improving and we expect the growth to be ahead of the country. Next I will ask Phil Green, our CFO, to make a few comments.

Thanks, Dick. Dick did a good job of covering the basic operations of the company for the quarter and I will make a few comments about our net interest margin and the outlook for the year and then we will open it up for questions. First of all, we do continue to labor through the low interest rate environment. Net interest income was basically flat quarter over quarter and if you adjust for the number of days, it was also flat versus the fourth quarter, so we are still not getting any help from the largest component of our revenue base at this time.

And as Dick mentioned, it is really our ability to grow fee income and manage operating expenses, and lower credit costs which has allowed us to continue increasing earnings during this time. Our net interest margin did show very slight improvement in the first quarter. It increased two basis points to 4.03%. There were a couple of offsetting factors that impacted the margin trend.

First, we picked up seven basis points in margin improvement due to the fact that the quarter had no dollar role repos while the fourth quarter had $145 million dollars of those repos. And secondly, somewhat offsetting this, we issued a $120 million in trust-preferred securities in the first quarter to increase our tier one capital position, and that additional leverage cost us about four basis points of margin.

So even adjusting for these transactions, which were a little bit unusual, our margin was fairly flat. Looking forward, we don't expect to see rate increases until sometime in the fourth quarter, so really, any margin improvement should be modest for the remainder of the year, with any increase coming from loan growth and securities purchases. And just to conclude, at this time, we continue to be more comfortable guiding towards the lower range of the earnings estimate for the year. At this time, I'll now turn it back over to Dick Evans for questions.

Thank you, Phil. We will open it up for questions.

At this time I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone key pad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Scott Allen of Sandler, O'Neill & Partners.

Good morning, gentlemen.

Hi, Scott.

Few questions. The first, could you please provide us a little more color on the loan growth and where you're seeing it? Which areas geographically, if, you know, you're starting to see energy come back in particular? That's my first question.

Scott, I think the most important thing about the loan growth that I'm pleased about is that there is a good balance of all types, and so it is not concentrated in any one field. Energy is moving back somewhat. We are pleased about that. But it is very balanced throughout the portfolio. Our commercial real estate portfolio is growing.

It, too, is balanced the way that we currently have been, and that is about half of it is owner-occupied where we would like to stay. It runs, as you know, about a third of our portfolio. It is staying about a third. So there is no one particular area. It is across the board.

Okay. And then just a detail question. Where is the -- where did you end the quarter in terms of your syndicated credits?

$194 million I believe was the -- yes, $194 million.

Okay.

And that was up -- that is up about $18 million. And if as we have said for several quarters, we had hoped that would increase. We have adjusted -- have been adjusting that for over a year, and it is where we want it. And we look forward to it growing.

And let me just verify a few numbers. I think -- you ran through some percentage gains, talking about really -- you're calling effort on the lending side. 12%, that's an increase in calls?

That's right.

Okay, and then what are the 75% number and the 46%?

Let me -- let me first tell you what I think they mean and then I will give you the -- well let me give the you the numbers. You are right. The officers increased their costs 12%. And the key is new loan pipelines were up by 75%. That's new loans.

Okay.

And commitments were up 46%. And as I said, the active pipeline is 25% higher than this time last year. I would caution you to not get locked in to this percentages unless you and I and the whole conference call would last for a day of talking about all the things these different numbers mean. But let me tell you what is real important that I think the point that I'm trying to make with them.

And that is that we have a discipline and we have a process that we have worked on for several years, and that we are very pleased with being able to measure activity. In other words, today, we're not so much concentrated on what is going to happen this week and how we close this month out. Certainly, we've got a -- you always want to close them out and get the papers signed. But we know that what's important today is what is our activity going to be during the summer months, when we have a large percentage of our staff is on vacation.

So the focus of this company, because of the data that we have, is out three and six months. And we're running the company in that way, as opposed to right up to to the last minute and what I meant by this activity, by watching this activity, you can have a correlation of what kind of success we're going to have 90 days from now. It doesn't -- it doesn't add up two and two is four.

So I would caution you to not get locked in that 75% commitments are going to happen to this, and so on and so forth. But you should have a clear understanding that there is a very strong discipline and a process that this company has and works that results in a bottom line loan growth.

I see. One question, switching to the deposit side, then we will let some others ask a question. You mentioned earlier new demand deposit accounts were up 40%.

Yes.

How much of that would you attribute to your overdraft courtesy product in particular? Or the rationalization, if you will, on the checking account side that you all went through or undertook last year? You know, just talk a little bit more about that.

Let me answer it this way. First of all, the key word, and you said it, are new accounts. So we're talking about new accounts. Secondly, what is important in there is the growth is important, and there are 40% more accounts than we had a year ago. What's important, I think, that will maybe get at what you're asking, is the mix of the products.

You will remember that when we announced in the fourth quarter of last year, we were lowering fees on our checking account products by a million dollars on an annual basis. And what we -- what we've -- we sell on a value basis, in other words not everyone should have a free checking account because it is better for them to have another style account, depending on how much money. What I'm particularly pleased with is that our goal was that as a result of this promotion, and moving forward, that we would have a mix of 50% free checking, and 50% of our other products.

The results of the last months have been that we are running about 58% free and the remaining in a mix of the other products. Which I believe is good news.

Excellent. Thank you.

And this is Phil. I think it is -- you do make a good point, the rationalization of our pricing on our deposit products, and the introduction of a free account, combined with additional efforts with regard to direct marketing, and direct mail related to these accounts really resulted in these increases, that Dick talked about. We've opened up a little over 9,000 accounts, new accounts, through the first three months of this year, and you can -- you can tie the growth in accounts pretty directly to those new activities and those new account structures and so --

Phil, are those accounts spread pretty evenly? Or is it mostly in San Antonio and Houston? I mean how are those new accounts spread geographically?

They are spread, you know, fairly evenly. We have different sizes in deposits in different markets so you would expect them to be larger in San Antonio and -- San Antonio year-to-date has done about 3,900 of those accounts and then you've got about -- just below 1,500 in markets like Fort Worth and Houston, and, you know, Austin, for example. And all markets have had growth in terms of numbers and new accounts. And it is -- as you would expect, has been more heavily weighted towards San Antonio but our deposit base is more heavily weighted there with about I guess just under 40% of the deposits being San Antonio.

I see. Thank you.

The next question comes from Charlie Ernst of KBW.

Hey guys.

Hay Charlie.

Nice loan numbers in the quarter.

Thank you.

A couple numbers real quick. Do you have what the gross charge-off number was and also the recovery number?

Yeah, hang on just a second, Charlie. For the first quarter, our recoveries were $3 million five, and our gross charge-offs were $4 million nine.

Okay. And then could you talk a little bit about where the average bond portfolio was in the quarter and also where it ended in the quarter?

Okay. The bond portfolio for the quarter had an average balance on the available for sale securities about $2 billion 968 and its average yield for the quarter, just if you're interested was a 4.79%. And in terms of where we ended the quarter, that was higher, because we did some investing near the end of the quarter. They average -- excuse me, they ended at $3 billion, 227.

Phil, can you add a little bit of color on the -- the earning asset decline? Is that primarily due to the lower dollar rolls in the quarter?

That would definitely be a part of it. In terms of reduction of fed funds sold, those funds were in dollar roll, I mean the dollar rolls were in fed funds sold which was an earning asset. We also saw a drop in -- you see the drop in time deposits in the press release on a period-end basis, and that was some seasonal build-up we had for public funds.

Okay.

Which then reduced -- Texas changed the way -- or a lot of the entities where we operate in Texas changed the way they collected taxes, so they didn't give you a discount any longer to pay your taxes early and a lot of that money came in near the end of the year, and that sort of ballooned up, and then it's being used during the first quarter.

Okay. And could you just give a little bit of color as to the restructuring, you know, why you did it, kind of what it did for you?

Sure. We sold about $177 million in Fannie Mae fours which were 15-year securities. You know, that we buy 15-year mortgage backs primarily. And those were some bonds that we bought about mid 2003. They had a yield of $3.85%. They were our lowest yielding position in the portfolio.

And you will recall, Charlie that there was a jobs report that came out during the quarter which was unexpectedly soft, and rates just really fell significantly. We fell unusually and unsustainably low and given -- given the fact that we felt like this was a blip in the market, we had the opportunity to take just a $1.7 million loss and get out of our lowest yielding portfolio position, and we reinvested those back into similar securities that had about a 4.25 yield, so it was -- it has about a two, a little below 2.5 year payback on the loss itself, but it is a good transaction for us to take advantage of an unusual situation.

And our securities overall increased a little over $280 million during the quarter on a period-end basis. We invested in about 4 3/8, I will say on average, for the securities portfolio, and that was what our activity looked like during the quarter. You know, we did have the trust preferred issuance, about $120 million there, so we put those into securities as well, although we didn't put them into 15-year Fannie Mae securities. We put those into a little bit shorter yielding -- shorter-term security with a little bit lower yield.

Okay. And then on the credit side, MBA's were down a couple million. Could you comment there, if there is anything, the effect that is going on, and also, I mean it sounds like you all are pretty optimistic in terms of just the overall credit picture.

Charlie, we are. You know, they were down $3 million. You always wish they were down more. Potential problems as I pointed out were up $7 million.

So, you know, you are always, you know, there is always something in the pipeline, but I would tell you that I am extremely pleased with how the two larger credits that we mentioned that, oh, six months ago, whenever they moved into the potential problem list and then into nonperformers are moving through at really what we would expect, and in a very orderly fashion. Again, it just takes longer than you want them to.

And any thoughts on the capital situation? I mean it is obviously your cap levels are very strong. Where do you stand with your buyback? How does all that relate to potential deals?

Charlie, we actually pretty much completed the off drives buyback that we had outstanding in the first quarter. We purchased about 850,000 shares. Spent about $35 million doing it. So we agree our capital position is very strong. I think we ended our tier one position now, is 921, after the issuance of the trust preferred securities.

And so we took advantage of our strong capital position to buy back pretty much the remainder of that program. I think we have about 80,000 shares left under the authorized program and we will be finishing that up pretty soon. So that's where we stand with regard to the buyback. And we agree our cap position looks pretty strong right now.

Did that buyback have much of an impact in terms of the overall share count? Or is that more on the come heading into the second quarter?

I guess on an average basis -- we bought most of it in March. So I would say, you know, probably 800,000 or so in March, so on an average basis, it will have little effect next quarter. We did also have, in addition to the $35 million worth of stock that we bought back during the quarter, we had about, I want to say $11 million worth of capital impact related to just employee stock options.

You know about $8 million in strike price and $3 million in tax benefits. So the $35 million, let's say about $11 got spent in terms of just capital increase from employee compensation, stock plans. So that was the net impact there. As far as -- so that's one of -- I guess one reason as you look at the share count, you get a little bit of offset versus what we repurchased.

And sorry to go on so long, but any thoughts on deals, kind of what the environment looks like out there, and where you guys currently stand?

Charlie, it continues to be where we have -- where we've always been. Our responsibility is to continue to look, and -- at those organizations that we think would be, you know, good for us, and be in the market, but it is -- I don't see that the market is changed substantially over the last few years. It is a very attractive market. And we are glad we are here.

I think we're in pretty good shape capital-wise to the extent opportunities present themselves, Charlie.

Great. Thank you, guys.

Your next question comes from Kevin Reynolds of Morgan Keegan.

Good morning, gentlemen.

Good morning.

Quick question on the linked quarter increase in salaries and benefits. I know you talked about the contingent income and the insurance segment and merit raises. As I look at it, it looks like most of the increase was in the benefits section, or benefits line item. Can you kind of walk through what is related to the seasonal impact and what might be related to the merit increases that will last with us for the rest of the year, just to get a run rate going into Q2?

Okay. The linked quarter impact on our benefits was driven by two things primarily. One was a $1.6 million increase in payroll taxes. And then a lot of the rest of it was about $530,000 increase in the bank's part of the 401(k) plan contribution.

And one of the things that happens during the quarter, in addition to just salary increases, and I think we hired about -- we had about seven FTE increase linked quarter basis, but we have the bonuses that are paid out, the annual bonuses that are paid under our bonus plan, all hit in the first quarter, and what that does is it tends to increase the amount of FICA tax you're paying, if you see what I'm saying and then what happens is you just, people get to their maximum sooner and so those FICA taxes drop off but there is a seasonal aspect where your payroll taxes will balloon up, in the first part of the year, a lot of it related to that type of thing.

And then -- and of course, we match 401(k) based upon what people put in and what they put in is based upon compensation that includes bonuses and so that 401(k) contribution tends to be higher earlier on. And I think you can look at other -- other years, and quarterly trend, and see how that does tend to drop off, as people hit those maximums.

Okay. And then on the salaries and wages increase, how much of that would have been -- if you can talk about what was related to the incentive compensation for the insurance increase that was seasonal?

Yeah, let's see. With regard to -- it would have been -- those types of -- that type of compensation payments that are incentive-related relate not just to insurance but other types of sales, like investment products, we have a lot of people on that kind of compensation, so it wouldn't just be that. But I would say that the -- most of the increase was just -- was normal merit-type increases.

And as I said, we had a small increase in FTEs. And I may be able to find an impact that adjusts out the insurance company, but it may take me just a minute. Let's see.

Well, and while you're looking for that, let me ask one more general question. We're talking about activity picking up earlier, you know, but just coming back from the gulf south conference it seems like everyone wants to be in Texas, and you've seen the branch building activity that people have announced, and there is an expectation that, you know, more and more banks are looking that way. How difficult will it be for you over time, or will it be difficult at all, to retain your top talent? And if you do retain it, is that going to have an upward pressure on the salaries levels?

Well, I think it is all -- it has been difficult for some period of time. And the way we've done that is as you know our company culture is a big part of our company. And what people that -- that go to work for our company want to be a part of a Texas company that has a value system that they appreciate and have seen be successful in past years of a lot of wonderful organizations that are no longer here, that have been merged into other organizations. So I think that gives us -- that's our opportunity to tell our story, and continue to build there.

As I have said before, if it is just about salary and just about money, you live by the sword, you die by the sword, and we really try to avoid that. I find that as we're -- I don't -- it is very competitive. There is no question about it. And lots of people have made lots of announcements.

Usually, the number of offices that they announce they're going to build doesn't come as -- quite as fast, but all in all, there is a lot of people here, and coming here, and what we stay doing, which we've been doing for over 100 years, is to keep telling our story, stay with our value system, and it has been good for us to not only maintain our staff, but to grow it. And it is -- I believe it will continue to work as the environment continues to change.

With regard to that impact of the seasonality of the insurance business, and the increased fees and therefore the increase of compensation in that first quarter, it is about -- I would say roughly a million dollars of that impact is related to the insurance seasonality. On the salary impact.

Okay. And then one last question. You may have already answered this, related to the securities portfolio. What is the duration of the portfolio at period end?

Portfolio duration is a little over three years. I think it is about 3.3 years.

Okay.

We will get some extension on that if rates really do spike up. But it probably wouldn't be much over 4 1/2. And -- but it is 3.3 years at the end of the first quarter.

Okay. Thanks a lot.

Your next question comes from Ben Crabtree of Piper Jaffray.

Yes, thank you. On the fourth quarter earnings call, you indicated that you were reasonably confident that commercial loan growth could be in the low double digits this year, and obviously, based on the sequential improvement from the fourth quarter, that would certainly, you know, be consistent with that, but I just wondered if you would be willing to say that you still had confidence in that, and you also said that you thought you would probably be benefiting from the Chase/Bank One merger. I'm just wondering if you're seeing that, you know, say in hiring bankers, or just in business coming your way?

A couple of things. I can't remember exactly what I said in the fourth quarter. I hear what you're saying. I have been optimistic about our loan growth. I didn't know I set a specific target.

I would say that, you know, our feeling is that we're -- we still feel confident, as confident as we did before about those numbers, Ben. To say that means we don't see any change right now.

Okay.

Yeah, and I think in regards to the other -- the question about the J.P. Morgan Chase/Bank One merger, certainly they -- there is still a lot do. I understand that -- just what I read in the paper, that it is supposed to close sometime in midsummer and probably you will see more of that activity after that is what typically happens. And we're certainly like everybody else, out calling on customers and building business.

And again, I come back, Ben, to the discussion I had earlier. I think what I get a great deal of comfort in is the discipline in the process we have. And whether you have a J.P. Morgan Chase/Bank One merger or not, or whatever is -- or everybody is moving to Texas, or all these other questions, what I think is really important, and what we have tried to do is build a discipline in this company that through any of those kinds of times we should be able to continue to grow our business. And I'm pleased with the results of this first quarter.

And if there is a, you know, a difference on loans and again, I think overall, we don't see it being really any different than we thought before. We are seeing home equity lending be a little bit less than we anticipated on the home equity line of credit side. That was a totally new product for the state, and it is kind of unusual in its design, if you followed it at all, in terms of the percentages, et cetera. So there is a fair amount of education that's got to happen with the customer base.

And we've got about $21 million of those loans at the end of the first quarter. And that's running less than we thought we would be, frankly. But it is -- you know, it is hard work getting the customer educated, and so that's the only area I think that we've seen it be somewhat softer than we anticipated but I think overall we're still comfortable with where we anticipated being.

Okay. Thanks and if I could ask a question about reserve ratios and things like that. Obviously your credit quality has been good, and your reserve as a multiple of charge-offs is huge. Just trying to get a sense of, you know, how much more in the way of reserve release we could be looking at here, if you're driving towards -- or comfortable in seeing the reserve to loan number run down, you know, for the next -- let's say the next few quarters.

I think we are going to take that just a quarter at a time. And just see the improvement. There's two factors going on. Obviously, what you just said. We got to watch the nonperformers, and the charge-off ratios and that's one side of the equation.

And the other, as I mentioned, in fact, slice the cheese pretty thin, but out of the seven basis points decrease, probably four were related to the loan growth, and three were the difference between the charge-offs and the provision. And so ideally, and we've lived through times like this, if we're right that the economy continues to improve and loans continue to grow, that is what you like to see happen is that you grow the loans into the reserve, and the reserve naturally just -- the percentage naturally moves down.

How fast that is going to happen we will just have to look quarter to quarter, and as you know, there are a lot of disciplines and formulas to evaluate the reserve, and we have stayed with those for years. But certainly, we saw in this first quarter that some of that is beginning to happen.

Okay. Thank you.

Your next question comes from Jennifer Demba of Robinson Humphrey.

Good morning. Most of the questions have been asked. But can you give us the dollar amount, Phil, of the insurance contingency fees in the first quarter?

I think I can. Let me see. Okay, good. Here it is. All right.

Contingent income for the first quarter, again this is very seasonal number, typically hits in the first quarter, and just for those of you who need some background, that basically this is additional contingent commissions that we receive from insurance companies based upon the performance of the policies we write. The better the policies perform, the more this number is. And it was $2.6 million in the first quarter.

Okay. And Dick, can you just remind us, you know, you talked about capital levels before. Can you just remind us what kind of acquisitions you might be looking for over the next year or two?

Well, the acquisitions that we have always looked for were mainly banks that we believed had the same kind of culture, that's where it starts, and that we believe that it could come together with our organization, and from that moment forward, we would continue to grow the business. Fortunately, while we haven't bought anything recently, history has shown we were pretty successful at that.

The last large acquisition was Overton in the Fort Worth, north Texas area, and a great group of people that we knew well, and have -- are still running that market. And it is -- it has been a good combination for us. Those are -- that's the number one principal that we look for. As you know, we have a large correspondent banking business in Texas, and that gives us an opportunity to know the bankers of Texas, and what their desires are.

And I learned long ago that a bank -- there are a lot of reasons why they sell, but kind of bottom line is what can be referred to as shareholder fatigue. Finally, they just decide that they want to do something else, and my job, and our job, is to stay before those organizations that have a culture like ours, and be sure that our phone rings when they get to that fatigue point.

Thanks.

You have a follow-up question from Charlie Ernst of KBW.

Hey, Phil, on the insurance line, it has been pretty volatile lately. If I back out the $2.6 million, do you feel -- do you feel like that is a good run rate going forward?

Well, you are still going to see some seasonality on that, Charlie, because I think for example, if you look at the press release, we've got a five quarter trend there. The first quarter is one of our, you know, strongest quarters in terms just when a lot of our policies for our customers renew. And fourth quarter is usually pretty light. So you look at the trend there, I think we had $5.9 million dollars in the fourth quarter of last year.

And you look at the third quarter, $7.3 million. And so it does jump around. But I think that -- it's probably a little bit stronger for the first quarter than you will see for the other, just because it is -- it is just the strongest quarter of activity for that business. So I wouldn't necessarily just straightline that, but it is going to be a little bit higher in the first quarter.

Okay. So -- I mean but somewhere kind of, you know, midway between here and last quarter, probably isn't a terrible place to be in the model, in terms of, you know, what are we building off of?

I don't think you can really go there, Charlie. There is a lot of different kinds of businesses, and as we brought -- as we brought these insurance agencies together, they really vary. The original one, which still is a good business and we talked about it to you before, is that in the third quarter was always a big school business renewal of school insurance, and you know, that kind of spiked it up, so there's those different elements in each quarter.

I think Charlie, just conceptually where you're headed is not -- you know, it is not that far off base. I can't tell you what the budget for insurance is, for the year, but I mean where you are trying to go with that is not that far offbase.

Okay. Great. Thank you.

Your next question is a follow-up from Scott Allen of Sandler O'Neill.

A couple of things. First, on the insurance, Dick, I believe you mentioned in a previous quarter that you were seeing some pricing pressure in certain of those categories. Has that changed any at all or intensified? What does the pricing scenario look like in the insurance business?

Well, it is -- I guess the best way to describe it is we know the market's hardened for a number of years and we happen to be a trend where that went straight up and it started to level off somewhat, but also quality made a difference. You will find that where you have higher risk, pricing has not eased. It is still high.

But where you have insurance or mainly clients, customers that do have a high quality, then you're seeing some of those premiums come down. So it is easing somewhat. And that again is where we believe that bringing -- being a part of a financial service company where we can start to build the referrals, and continue to build the referrals to the insurance, hopefully they can continue to build their volume and have those opportunities. But it is -- pricing is easing somewhat, but not overall.

Okay. Okay. Good. Second question. I know you maintain a clearing balance for a large customer, could you talk about maybe what happened with that in the quarter?

Yes, Scott, we said for a number of quarters we do have a -- we do clearing for a lot of different customers, we're very large in that business. One customer that we do have again for those of you that need a little background is a very large mortgage service or originator, and where we just clear items for them that come in to the -- to the facility, and we don't do a lock box for them but we do do the item clearing for them. And so the -- the balances for that, as you would expect given the fact prepayments are significantly down from where they had been at their peak, is down, but it's still a great relationship, and the average just ledger for that -- for that account ran around just under $200 million, and was down on an average basis by probably $50 million from the previous quarter. Again, as we said many time, the balances that you see in those -- in that account and accounts like that are not really -- they're really offset on the other side of the balance sheet in cash because what we're doing is we're clearing those items and they go into things like, you know, items in the process of collection, if you will, and as soon as they're collected the customer takes the funds down, and where we make our money, however, is on the fees associated with the accounts like that. Where we're charging them a per item amount to clear those items.

I see. And Dick, you mentioned earlier how your acquisition of Overton in Terrant County, seeing a west Texas bank just purchased Mercantile Bank there in Fort Worth which was a $200 million blank. Is that $200 million bank, is that the size of an acquisition that you all would still look at? Are you still willing to look at deals of that size, assuming that it is in the right market?

Size is not an issue with us. Quality of the organization and culture and so we would consider a $200 million, we would consider a billion. It is really -- it really is the kind of organization that we think would fit. So we're interested in -- again, we're interested in the right kind of culture that we think would fit and we could grow together.

I see. All right. Thank you.

At this time, there are no further questions. Mr. Evans, are there any closing remarks?

We appreciate the support of our shareholders, and we are going to continue to work hard. We stand adjourned.

And this does conclude today's Cullen/Frost Bankers first quarter earnings conference call. You may now disconnect.