Cullen/Frost Bankers Inc (CFR) 2006 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the Cullen/Frost Bankers Inc. first quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] Thank you. Mr. Parker, you may begin your conference.

Thank you. This morning's conference call will be led will 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 mad today will constitute forward-looking statements as defined if 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 earning's 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 investor relations at 210-220-5632. At this time, I'll turn the call over to Dick Evans.

Thank you, Greg. Texas remains a great state for doing business. The first quarter '06 resulted in record net income of $46.7 million for Cullen/Frost, up 24.9% from the $37.4 million in the first quarter of '05. Every day throughout our organization, our outstanding staff demonstrates stewardship and working for what's best for our customers and prospects. They are committed to superior levels of service, and to a disciplined sales culture we have cultivated. I am deeply grateful for their initiative and dedication.

The strong performance for the first quarter reflects the results of our companywide sales focus backed by a tremendous support staff and the successful integration of acquisitions we have completed during the past six months, Horizon Capital Bank, Texas Community Bank, and Alamo Bank of Texas. We welcome these banks staff and customers to our company. Further highlights for the first quarter of '06. On a per share basis, earnings for the quarter were $0.83 per diluted common share, up 18.6% over the $0.70 per diluted common share reported a year earlier. Return on assets, 1.68%. Return on equity, 18.86%.

Net interest margin rose to 4.66%, up from 4.54% in the fourth quarter of '05, and 4.29% in the first quarter of '05. Taxable equivalent net interest income of $114.7 million reflects a 25% increase over the first quarter of '05. Our noninterest income for the first quarter of 2006 increased 4.7% from a year earlier. Trust fees increased 10.2% to $15.8 million, versus the first quarter of last year. Primarily as a result of increased levels of investment fees and oil and gas trust management fees. Insurance commissions and fees were $9 million, an increase of 4.2% over the first quarter of '05.

Looking at balance sheet growth, our average loans were up 19.3% over the first quarter of '05 to $6.3 billion. Average deposits rose 13.1% over the first quarter of '05 to $9 billion. Excluding the impact of the recent three acquisitions, average loans grew 11%, and average deposits grew 7.1%. Provisions for possible loan losses was $3.9 million, compared to net charge-offs for the quarter of 2.5 million. 16 basis points. And as we have said, chargeoffs continue to run below historical levels. The allowance for possible loan losses for the first quarter end '06 is 1.29%, and nonperforming assets remained relatively flat. Also, for the first time, shareholder equity exceeded $1 billion at quarter end.

A word about Texas. Texas remains a great state for doing business. Cost of living is reasonable and below many states. And job growth is solid, fundamentally strong, and broad-based. We look at job growth for 2005, the U.S. grew at 1.5%, and Texas grew at 2.7%. If we look further at a 35-year job growth average, the U.S. grew at 1.8%, and Texas 2.8%. After two or three years of Texas falling behind in growth, we now see that the State has returned to growing at about 1% faster than the nation. McAllen and the Rio Grande Valley and Austin were the strongest in job growth, and all other markets we serve were slightly better than the state average of 2.7%.

Hiretech is doing well in Texas, as shown by Austins strong growth, and Houston numbers are softer than one would expect with a strong energy sector, but possibly the pull of workers to the New Orleans area could be having some effect on job growth. I was talking recently with someone who had visited New Orleans, and talked about a sign in Popeye's fried chicken restaurant that offered a weekly bonus of $125. We know that fast-food restaurants are now paying $12.50 per hour in this area. San Antonio's new Toyota plant will begin producing trucks in August and September of this year. And the Rio Grand Valley, particularly McAllen, continues to benefit from the wealthy Monterey and Mexico residents in housing and retail. All in all, Texas' economy is doing well, and expectations for this year should be slightly better than '05.

Looking forward, we recognize that the increase in rates over the year have benefited Cullen/Frost. However, 2/3 of the interest income improvement has come from volume increases in loans and deposits. In fact, we are extremely pleased that loan growth was funded 100% from growth in deposits over the last year.

As we have discussed each quarter over the last year, our focus on a strong sales discipline throughout our company is fundamental to our success. We are pleased with our staff's execution of these plans. On the consumer side, net new accounts growth continues in line with last years and last quarter's performance. Our participation in various independent research that measures customer service and loyalty shows Cullen/Frost competes at the highest levels of industry standards. On the business side, our lending sales activity have improved compared to the first quarter of '05. Geographically, our highest level of new loan commitments versus the first quarter of last year came from Austin, Fort Worth, Houston, and San Antonio, and the growth is well diversified. Also, the increase in new loan commitments in the $500,000 to $3 million loan size grew two times faster than loans greater or equal to $10 million.

First quarter of this year continues good improvement in growing new relationships faster than last year. Again, let me remind you the Texas market continues to be very competitive, and we're working hard to maintain our pricing and structure disciplines. The first quarter we lost $300 million in opportunities, 20% more than the first quarter of last year, about half from pricing, and half from structure. Now I'll ask Phil Green, our CFO to make some comments.

Thanks, Dick, I'm just going to make a couple of additional comments and then we'll turn it back over to Dick for questions. Dick talked about our net interest margin being up. It was up by 12 basis points from the fourth quarter. We were up to 466. Of that 12 basis points, about half of it would result from the fact that we reduced some of the liquidity build up that we had in the fourth quarter, which, as you recall from our call last quarter, we felt we had about 9 basis points of compression, because the unusually high buildup of fed funds sold during the quarter. We brought down some of that liquidity, although still not to the level that we were in the third quarter, but it was about 6 basis points, and then the rest of it, about 6 basis points, was the net impact of higher interest rates as we saw, and also the increased loan growth that we've been describing.

Dick commented a minute ago about how we did have a 25% increase in net interest income. I think it's important that he pointed out that while rates are important to us, and about a third of the increase was because of the increase in rates, that volumes, as he pointed out loans and deposits, especially, accounted for 2/3 of the growth that we had in net interest income, so we're not just sitting around waiting for interest rates to float this boat. We're all paddling hard down stream, the staff has done a really outstanding job of continuing to move us forward. Excuse me.

I think also it's important to note that revenue growth was -- once again exceeded expense growth from a your ago. Our growth in revenue was 60% higher than our growth in expenses. Revenue was up a little over 17%. Noninterest expenses were up a little over 10%. So once again, our operating leverage improved, and while our net interest income was the lions share obviously of our growth in revenue, noninterest income was up by about 5%, and that's despite the fact that service charges on deposits were down slightly, and they're going to continue to be down, as long as interest rates are up, but I will trade a reduction in service charges due to the higher interest rates for the benefit that higher rates give us overall, and we also didn't have a $1.7 million gain this quarter like we did a year ago when we sold our interest in the Pulse EFT, so that had a depressing impact on the growth rate of the noninterest income, so again, overall I feel good about our growth in noninterest income.

Dick talked about trust that was related to the stocks, investment fees, and also oil and gas prices, which you look at insurance fees, we were up by about 4% there, and while the first quarter is typically by far our largest quarter, because of the seasonality of that business, compared to the same quarter a year ago, we were up about 4% so I think we're back on track in this area, and we're now growing this business again. Other service charges were up by about 12%, and that's just a lot of various fees. I think the largest year-over-year increase was about $150,000, because of higher fees from the sales of money market mutual funds, so it tells you that it's fairly diversified, and I would say that's true, also, of other income where we were up by about 5%. Remember, '05 included a $1.7 million gain last year, so adjusting for that we were really at over 20% here. And the biggest factor here is usage on our Visa check card, which has become an important determinant of our business model in terms of the profitability of our individual accounts, and we're also seeing our business accounts use those cards more and more. So that's important.

We also had higher income because of our official check outsource program, which we get paid fees based upon the performance of that program, and higher rates are of benefit there. And other things, again, just miscellaneous things, like annuity sales were strong for us, and so we saw just a diversified increase in the other income category.

Turning to noninterest expense, we were up by about 10.7%, and this reflected the impact of some of the acquisitions that we've had. We've done three banks from a year ago. Salaries were up about 15%, which was a high number for us. About a third of that, though, was from bank acquisitions, and also the effect of bringing in house our main frame data operations which for years has been outsourced in what we call a facilities management arrangement.

It was with Fidelity, and we brought that in-house at the beginning of the year. So we did is we brought in staff, and we brought in equipment, and had to pay software and licenses, et cetera, the benefit was that we reduced the fees we paid for the outsourcing, and the net benefit to us was a little over $1 million on an annual basis. So netting out that, we were up about 10%, and there were a lot of different things associated with that increase. We had merit increases. We brought in some additional staff as you would expect with a growing company. We had stock option expenses that we had now. We had incentive based income which was a lot higher. And with the kind of revenue growth we've seen you'd expect that. We also had higher deferred costs related to FAS 91 than we had a year ago as we adjusted the amount that we were capitalizing on origination costs there based upon our current cost structure.

Benefits were pretty much in line with our salaries year-over-year. Furniture and equipment, you would see an increase there. That's acquisitions, but it's also, as I mentioned bringing our DP in house for the main frame processing, and then on other expenses we were up by about 5%. That would have been up higher though, but we reduced the fee that we paid for the Fidelity processing by about 1.5 million in round numbers for the quarter.

Overall, as I said, we're pleased with the profitability. Our ROA was a new all-time high for us, we improved our operating leverage, we improved our efficiency. And so again, it was a good quarter for us, and I think pretty plain vanilla in terms of what it included. Last quarter we said we expected one more rate increase. We actually got two. There is some question as to whether or not we'll get any more, but I would say that in light of the higher rates that we have today, if you assume that our operating trends continue, I would have to say that right now that we're more comfortable more towards the higher edge of the range of estimates that we have for earnings for the year right now, although that pains me somewhat to say that, but we have to call it as we see it every quarter, and with that, I guess I'll turn it over to to Dick.

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

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Kerstin Ramstrom.

Hello.

Hello, Kerstin.

How are you? Could you talk a little bit about the insurance line of business? I'm sure we all remember last year when you had the team leave, and that put some pressure on your insurance revenue, and now it seems to have come back quite nicely. How much of that is just seasonal increases in seasonal activity in that line item, and how much of it is that you've been able to replace that team?

Let me kind of take a 20,000-foot view, and then Phil can clarify, as he's already said, a little bit about how the first quarter is always seasonal. If you'll remember, it was the end of the first quarter when the change took place, and -- or right towards the end, and we did have 17 people leave us. It was primarily a benefits operation in Austin. We did settle our differences, and were paid for that business in the second quarter. At the same time, we began to build the staff back. We're certainly not at the 17 mark, and shouldn't be, because we don't have that large a volume, but overall, the Company continues, the insurance operation, continues to grow extremely well. We're extremely pleased with the staff. And I would say to you that probably as bad as it seemed to me this time last year, it was probably the best year we've ever had. Our -- from the standpoint of organization and people were concerned, we have an outstanding organization, excellent management, and I think our business is back on track to be in an orderly growth position.

Kerstin, this is Phil. I think one way to keep in mind the character of the business is it tends to be very seasonal as we have the highest level of income in the first quarter. We'll probably have -- we've probably run around 30% of our income for the year occurs in the first quarter. I think that's fairly consistent between '05 and '06, just in round numbers so I think it shows that we're pretty much back on our operating path now.

Okay. That's great. And then could you tell me what the percentage of fixed versus floating, your loan portfolio is?

Yes, we have -- I would say in round numbers, we run about 2/3 of our portfolio floats, and about 1/3 is fixed.

And have you made any changes to that recently?

I don't think so. I think that we probably are seeing demand for fixed rate loans increase somewhat, but I don't think it's changing the needle tremendously.

Okay. Because what that feeds into for me is trying to figure out if you guys have taken any other steps in trying to lessen the asset sensitivity of the bank so that when the fed does stop raising rates, you guys will be maybe a little better positioned for that. I know last quarter you had mentioned that you put the floors on some loans.

Well, that's true. I think the floor position is important. It's 1.3 billion, just to remind those who might not remember it, we put 1.3 billion hedge on, which hedges our prime-based loans, prime floating, prime plus 0.5, and prime plus 1 in three separate tranches, and basically it covers us for prime below 6%, so we thought that was a positive. We did increase our investments a little bit, as we mentioned in our call last quarter. I think we bought $325 million of Fannie Mae 15 years, which helps us a little bit, and we've also been utilizing interest rates swaps less as we do hedge our portfolio of loans, and we recently moved out of some of the hedges that we did have on those portfolios. So we moved those too, from floating rate LIBOR assets to fixed. So those are not huge things, but they are all things on the margin that we're trying to do to sort of lean against the wind if rates do, when rates do begin to move down.

Okay. And then in terms of option expense. In the press release, you indicated that you took about 1.6 million in the quarter. In previous disclosures that you guys have provided in your filings, there had been a breakout between stock option expense and nonvested stock awards. Does this 1.6 million encompass both of those?

No, it was just options.

Okay. And do you generally take all of your option expense in the first quarter of the year? Or is this something that's generally spread throughout the year?

It's ratable.

It's what?

It's ratable throughout the year.

Okay.

It's amortized throughout the year.

Okay. And then do you have a trust asset number for the end of March?

End of March? It was 18.9.

And that is combined managed and custody?

Yes, it is. Let me see if I can give you the number broken out here. 10.6 is custody, 8.3 is managed.

Okay. Great. Thanks so much.

You're welcome.

Your next question is from the line of John Pancari?

Hi, guys. I just wondered if I could get some more detail on th loan growth you saw in the quarter by types of loans? How much came out of C&I and how much out of real estate related loans?

Okay. I would like to make a few comments, Dick, if you have got any additional. On a link quarter basis, do you want to look at average, John, or period end?

I guess period end.

Period end? All right. Well, hang on a second. On a period end basis, we saw an increase in commercial loans of 5.6% actual growth it's not annualized. It was 157 million. Overall, our growth was 426 million on a period end basis. We had growth in land at about 32 million. We had growth in construction, both consumer and commercial, 48. We had growth in commercial real estate mortgage of about 130. Interestingly we had growth in residential mortgages one to four family, not because we were making them, but some included in the acquisitions we had, we had about 29 million there, and I would say those are the largest components of it.

I might just add, John, that the -- when you look at the mix, the kinds of loans we're putting on, if you looked at a pie chart, they would look, just pretty much the same this year as they did last year. Probably the only exception is our public finance is growing a little faster, which we would expect, but other than that, that's something we watch carefully to make sure that we're doing the same kind of business that we have in the past. I will say that if you also look at commercial real estate, it's at about 38% today. We've run closer to 34, 35%. That's moved up mainly because of the acquisitions. It's not uncommon that banks the size of those that we acquired run a higher percentage in commercial real estate, and that's driven up our mix a little bit in that regard.

John, one other thing I would also like to point out. Is there were some acquired balances in the first quarter, we did bring in TCBT and also Alamo, and the total of those loans would have been -- let me see here -- about $224 million for Alamo and the TCBT, Texas Community, was about 65 million.

Okay. Great. And then of the acquired loans on the commercial real estate front, was a good portion of them in, like, residential development construction?

The mix is pretty well balanced in what we were already doing. Not skewed a lot in one way or the other.

Okay.

The -- if that's what you're asking.

Yes, and I guess tied to that, can you comment at all on the environment you're seeing there on the residential construction side with your developers, and I guess the demand you're seeing there, as well as, some evaluations you're seeing in the markets?

Yes, I tell you I think we're pretty fortunate to be in Texas. If you will look, we don't have the escalation that the rest of the nation, particularly East and West Coast, and it's really from the simple fact that we have more raw land and it's easily accessed. You can commute easily into the big cities. So that's helped hold the costs down. Don't misunderstand me, certainly we have some increases, just like the whole nation has. We certainly watch the builders, because I think everybody is in this environment, but I think we're in a with better place than others. Let me also just say to you that in regard to the overall commercial real estate, both in the acquisitions and in ours we -- in our, current portfolio, we run about half owner occupied, and about half -- about half owner occupied, and half just regular commercial loans.

Okay. And lastly, if we just talk regionally here, I know you gave us the break out of the growth you saw on the loan side across your markets, Austin is consistently at the higher -- one of your more solid markets as of late, and I guess what are your plans for growth there, both de novo, and you can comment on the M&A environment. What are the opportunities potentially in that market. Certainly your diversifications and your regions is certainly worth noting, and just given how strong Austin's been, I just want to see your priorities there.

Well, Austin has obviously been a strong and good market for us for some time. It's kind of spread out. We always talk about Austin, but as you know, a lot of the growth is to the north of Austin. We opened a new office not far from Dell Computer last year. And it is our intent to continue to build de novos in that market, and certainly as we always say if the right acquisition came up, we would certainly do that, but our -- our growth is finding those acquisitions that have the right people, and that we think we can grow from that standpoint, but it's got to be a combination, also, with de novos, and we're doing that throughout our operations, but certainly Austin is a priority.

Great. Thank you.

You're welcome.

Your next question is from the line of Charles Ernst.

Good morning, guys. Great quarter.

Thank you Charlie.

Were there any student loan sales in the quarter?

Yes, there were, but those are fairly stable now. I think it's -- just a second. I think I might have the number here. I want to say there's probably, Charlie, in round numbers, 400,000 to 700,000. 700,000, 770.

Typically the first quarter is a heavier quarter, right, in terms of gains?

Well, the fourth quarter had 805.

Okay.

Not really. Not really. What we have tried to do, we try to balance.

Yes, you have kind of a normal sales, as we go through the year.

So looking at the other fee line, you feel like that's a pretty real number?

There's really nothing very unusual in other.

And then, Phil, can you just say what the FICO expenses were in the quarter?

Yes, if you make me. Take me just a second here, Charlie. Hang on.

Maybe in the meantime, the short-term earning asset, the average balance on that, and also the bond yield.

Hang on one second. Payroll taxes were 4.45 million in the first quarter, and just to give you a comparison, the fourth quarter was 2.9, but you can so that -- and we paid bonuses in the first quarter, and of course FICA is taken out for that, and 401(K) contributions are made, and we match those. That's one of the reasons it bumps it up.

And then the average balance on the short-term earning assets?

Short-term earning assets? You mean Fed funds?

Yes.

Fed funds averaged 576 million.

And then do you have the bond yield as well?

On the total portfolio?

Yes, excluding the -- how you break it out in the 10-Q.

Okay. The total tax equivalent yield on the portfolio was a 494.

And did you buy any more bonds during the quarter, other than that purchase you talked about on the last conference call?

No, not really.

Okay. And, Phil, can you just give us a quick description of how the floors flowed through the numbers this quarter?

It really didn't have any impact. They weren't in the money. The amount of amortization of premium is very low, because as you said last time, it's economically determined, so it's actually based on the cost of each one of those 36 floorlets, and that's going to be weighted more towards the -- although the premium, you probably have 1/3 of it next year, and then 2/3 of it the year after that, so it really didn't affect us. We did -- the market value, because interest rates headed up, the market value was less than our purchase amount, and that goes through other comprehensive income, but there was no impact on the statement.

Okay great. Thanks again.

Your next question is from the line of Andrea Jao.

Good morning.

Good morning.

The first question is actually on employee expenses. In terms of being able to hire relationship managers in the Texas market, what are you seeing there? Are you seeing this becoming more difficult and more expensive? And how will it impact you?

Well, it's been very difficult and very expensive for some period of time, and you'd have to slice the cheese pretty thin to say whether it's more than it has been, but I don't want to mislead you, it has been very competitive, and certainly it's a factor on us. We are very strong on our culture of our company, and we work hard to make sure people work here because they believe in how we conduct ourselves and how we run our company, and that their life over a long period of time will be better in this company than somewhere else. And we're certainly aware of the market, and we're competitive in our salaries and benefits, and we've been able to have a good stable staff, and certainly we have good incentives, so that as they perform better, we certainly -- they have an opportunity to make more money, and I hope they make a lot of money, because that means we're growing the business.

Great. Regarding net charge-offs, how do you think those unfold over the course of the year? Do you see them stable within a certain range, or increasing gradually?

Well, as I -- as I said in the call, that 16 basis points is well below the historical level, and we use -- and it's been that way. I've been saying it for a year, so let's enjoy it. We were 19 basis points in the fourth quarter, 19 in the third quarter of last year, 12, and then 13 in the first quarter of last year. I think that the whole industry is at very low levels of chargeoffs. Asset quality is is very strong. But I've also been if this business for over 35 years, and it will cycle, and I think it's important that we look at historical levels, because history will certainly show that. The last seven years we've ranged in the 20 to 22 basis points, sometimes 25 basis points, charge-offs. So that's where we are. It's -- they're very low.

Got you. I'm not going to complain about good credit quality.

No, I would be happy if there are no chargeoffs.

Do you think MPAs continue to slip lower, also, during the course of the year?

Well, that also, I've talked about it for a year, and we've been stuck in the mud on non performers. That doesn't mean that we haven't been working hard. There's been a lot of churn there, but I've been disappointed that it hasn't gone down faster but it just takes longer to work through those kinds of things. We're at a -- it's just stuck in the mud. I'm not real concerned. I know we don't want it, but it's kind of been at a level that we've been hard to get off of. It's moved kind of around the $40 million range, as you can see from the numbers. We get up to 41, get down to 38, but I promise you there's a lot of work there to bring them down, and I'd hope they would get down, but they haven't been. I thought that this time last year. So we're going to see next quarter.

Okay. Last question. Last January, you expressed comfort kind of in the middle of consensus, which then was $3.22 to $3.37, X $0.08 of option expensing. Do you have any updates or do you have any comments for us this quarter?

What I said was I thought we were more comfortable with the higher end of the range now, given what's happened with rates. And that assumes our current operating trends continue. I urge you to read the disclaimer at the front of the presentation.

Right. Thank you very much.

You are welcome.

Your next question is from the line of Andrew Collins.

Good morning.

Good morning.

Just wonder if you could discuss the loan standards and pricing environment by both loan type, as well as size.

Let me make sure I understand the -- you're talking about the $300 million I referred to in loan pricing and structure?

That's right.

Well, we started this time last year talking about those numbers to just give a feel of how competitive the market is. I would say there's no particular type. You -- it's not -- it's not categorized by any industry. It's pretty much across the board. What happens when you get, as you know, a real aggressive economy, and very competitive, it doesn't come in big chunks, there's not any big thing that happens. You have deterioration in covenants. We had a -- just to give you an example, we had a loan last week that we -- that the customer was out of the covenants, and we were doing what you're supposed to do, that's sit down with the customer, and try to understand what the Company is doing, and the next thing we know, another bank had loaned them the money unsecured, that way you don't have to worry about covenants. I don't think that's the right way to do it, and I think it's not in the best interests of the customer, but that's what's happening, but it's not a -- it's not a particular industry. We just want to maintain our disciplines and environments very, very competitive. We're trying to stay close to our customers.

The problem is, I think it relates to the customer, it's, if -- in a competitive thing like this, we -- the covenants aren't there to hurt somebody, they're there to deal with the reality of what's happening with the business, and to try to make it better, and to deal with those issues. And when somebody stays in denial, when a customer stays in denial, or picks up an unsecured credit, they're really not dealing with the reality. So we're trying to stay real close to our customers, have more people involved, and really understand the business, and help them be successful.

And you also mentioned that you're having better success in growing smaller loans, perhaps, currently? and I was just wondering if that has something to do with your risk outside, or would you just say it's demand on the part of the customer?

Well, one of the ways that that happens -- number one, I mentioned it, because I'm pleased with it, and it's a long-term goal for us to continue to build the smaller and middle size credits. It's not going to happen overnight. It was good. We made progress in this quarter. Also, you need to understand that some of that is the result of the acquisitions we bought, and because they obviously had smaller loans. And so that helped that mix, and so that's a part of it.

And just an additional question on the reserve levels. I guess they continue to come down here at least looking at the reserve to total loans, and I'm just wondering if you have a target there, or is it just such a good environment that that won't change for a while?

Well, first of all, you will remember that that isn't -- I don't just control that and pull that out of the air. That is by a very complicated formula that is set, as you know by accounting standards, and the regulators, and we'd talked about the reserve is different today than historically, where it was more for a rainy day, so that's really formula driven. And as you know, the good news is, as you heard, the loan growth is very good. And as long as it continues to grow and problems are low, that percentage is going to go down. It just mathematically works that way. So it really doesn't make any difference what I would like. That's just the facts.

Okay. Great. Thank you.

Your next question comes from the line of Justin Maurer.

Fed funds last quarter was what level?

Fed funds last quarter?

Yes.

They were 854 million, 855.

Okay. So almost 300 million out. What's your thoughts kind of as we go next couple of quarters, would you say? Down to five and change?

On funds?

Yes.

Well, I think it might go down a little but I don't know that it's going to go down a whole lot because I'm just not sure what that yield curve is going to give us, and what we're going to take advantage of there for one thing. It's going to depend on what loan growth is, and then, of course, what kind of deposit volumes we're seeing. They have been pretty good recently, but we'll have to see how that goes. I mean, I know that's not rocket science, and that's basic banking, but we really just have to watch all of those things, and it's really just kind of the derivative of all of those factors.

If you look at it the other way, you talked about what the contribution was to margin as that came down. What do you think, since you guys are conservative by nature, you're leaving on the table with respect to margin by having it at its level? I mean I know you're going to have a certain level of those, but just order of magnitude.

Well, I think -- I'll just throw it back to you, and just say it really depends on what you think we're going to do with the money, then you can make your own assumptions there. I mean we're paying right now 475 for that money, and if we're -- if our average time deposit costs, for example, say two, two and a half let's say. I don't think it's quite that, but let's say it was, and there was, what, 225 or something spread on it, and that's half the spread we're making -- that's half the margin that we're making for our company, and so you can just take the percentage of that and figure out how many basis points it's dragging you down. If you say it's going into loans, it would be even more. That's the way I do the math, and kind of leave it up to you to figure out what the impact is.

Yes.

We are somewhat conservative, and we do like liquidity, so don't be surprised if we still have some.

If you go back a few years, as rates were kind of moving the other direction, what -- I know there's no such thing as an average level, but kind of looking back over a period of years, what is a normalized level, would you say?

Well, the thing about a few years ago, is -- we were going out, the curb gave you something to go out, and we were asset sensitive, and so we were trying to take advantage of it, so -- hang on a second I'll try to look for a longer term number. I've got one here. Thank you. All right. Let's go back. I don't know what this is going to say, so--.

Put you on the spot.

Yes. If you went back to, say, 2003, our average was 825 million. Of course loan demand was weak.

Right.

So if you go back before then, we were talking about an average balance of fed funds of say 250 million in 2002, and 2001, it was 253 million, so, but then again, we were a $7.8 billion company in 2001 so we're probably in the $400 million range or so, maybe 3, 400 million, I would guess, but again, your mileage may vary on that. It just depends on what we're going to see in the markets, what's happening on loans and deposits.

Dollar rolls, are there any more of those left to speak of, or is that pretty much out?

No, none of those.

And then lastly on the insurance piece, if my math is right, you guys did about 31 million in '04, a little under 28 million in '05. I mean it's based on the first quarter, and Dick's comments about, feeling pretty good about the folks there, no reason to believe that eclipsing '04 is not in the cards, right?

If you add in all of the income associated with it--?

Just took the insurance line item.

Yes. I don't know that we'll we'll be -- it's hard to see. I don't think we'll blow it away. We're still building back, having gone down some, so I think we're making progress.

I understand. Okay. Thank you, gentlemen.

You're welcome.

[OPERATOR INSTRUCTIONS] Your next question is from the line of Tom Haines.

Hi, good morning.

Good morning, Tom.

Just one very quick question. From the transactions you've done the last two quarters, is there any kind of material cost saves yet to be taken out of those, or is it pretty much integrated?

Well, the only thing we haven't integrated yet is Alamo. It's integrated and to some degree it's a part of our company, but it's not converted in on the Frost bank systems and that won't happen until, I think June 23. The others have already been integrated and converted.

Okay. So it's fair to say your cost base is kind of run rate?

Well, there will typically be some saves that happen once you convert in your own common systems so I think there remains some benefit there.

Okay. Great. That's it. Thank you very much.

Thank you.

At this time, we have no further questions.

Okay. Thank you for your interest and support of Cullen/Frost Bankers, Inc. This concludes our conference call.