Cullen/Frost Bankers Inc (CFR) 2008 Q1 法說會逐字稿

Good afternoon. My name is Jonathan, and I will be your conference operator today. At this time I would like to welcome everyone to the Cullen/Frost Bankers 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 session. (OPERATOR INSTRUCTIONS) 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'll turn the call over to Dick Evans.

Thank you, Greg. Cullen/Frost's net income was $52.8 million, up 11.6% for the first quarter of 2008, or $0.89 per diluted common share, or 14.1% increase compared to the first quarter of 2007. Return on assets, 1.59%, return on equity, 13.89%.

I am pleased to report another quarter of strong results for our company. For the first quarter, we saw good increases in fee income from trust, insurance operation and growth in business volumes as both loans and deposits were up over the first quarter of 2007. Credit quality continues to be manageable and capital levels are favorable in comparison to our peers. While competition in the Texas markets we serve continue to be brisk, this is a great state and an exceptional place for business. The strong job growth is the foundation for Texas good economy with over 30% of all private sector jobs created last year were created in the great state of Texas. We're committed to staying close to our customers and providing them with the very best service and products. As always, I am deeply grateful to our outstanding people who bring the Frost brand to life every day while taking care of our customers.

As the U.S. economy undergoes contraction and Texas performs better, Cullen/Frost is well-positioned. Capital ratios are all well above minimum requirements and our liquidity position gives us the ability to meet current obligations and future opportunities as they occur.

In the financial crisis, having exited the residential mortgage business and indirect auto lending business over five years ago and credit cards prior to that, we avoided the areas creating much of the current problems. Our relationship customer focused and staying true to the principles of human judgment and remembering the experiences of the '80s as our executive team remains the same as it was in the '80s. We do not depend on risk models alone, while today have proven once again to fail the financial system.

As stated earlier, our business volumes are growing. Average deposits are up 1.4% to $10.4 billion versus first quarter of last year. Average loans are up 6.9% or $513 million to $7.9 billion versus last year and $357 million of that increase was from the fourth quarter to the first quarter. Net interest income increased 2.8% to $135 million.

While the Federal Reserve has worked to restore order in the financial system since late August with the cutting of interest rates of 300 basis points since this time last year, with 200 basis points occurring in the first quarter of '08, this does impact our balance sheet which still has some asset sensitivity. Without question, our seven-year, $1.2 billion interest rate hedge we purchased in late 2007 helped to mitigate the impact of these cuts. Our net interest margin is down 3 basis points to 4.67% from the fourth quarter of '07. Noninterest income is up 4.7% to $70.2 million. Trust fees up 8%. Service charges on deposits up 4%. Insurance commissions up 5%. Noninterest expenses continue to be well managed with a growing company. Asset quality remains at manageable levels. The provision for the quarter of $4 million covered net chargeoffs of $3.8 million or 5 basis points for the quarter.

Allowance for loans is 1.15% of total loans. Nonaccruals increased from $29.8 million to $36.6 million. The allowance to nonperforming loans is well covered at 323%. If you take the total potential problems plus past dues over 90 days and nonperforming assets versus last quarter, they increased less than $4 million. As discussed last quarter, the increase in problem loans is fortunately limited to one sector, 1 to 4 family builders. Our homebuilder commitments versus our last call are down from $510 million to $480 million and outstandings are flat with the last quarter.

To give you an idea of home affordability in Texas versus other areas of the country, in Los Angeles in 1999, 43% of the homes were affordable to median income families, but only 2% at the end of 2006. Comparing that with Texas and Dallas in 1999, 64% of the homes were affordable. By 2006, the percentage had barely slipped to 62%. In Austin, home prices actually became more affordable over this period of time in contrast to the U.S. as a whole. At this time, we don't see any other trends and homebuilders appear to be manageable.

In a recent speech, Richard Fisher, President and CEO of the Federal Reserve Bank of Dallas, stated that Jack Kennedy before becoming president reminded an audience once that the Chinese character for the word crisis has two brush strokes. One stroke means danger. The other means opportunity. As you can see from the review of our growth in the first quarter, we do have opportunities and a few words about our growth activities. In person calls across the company are running consistently over 1,700 calls per week. I am particularly pleased that our calling effort is working as a team across business lines approximately 20% of the time. Our banking activities -- in person calls are up 9% and 14% versus the fourth quarter. In person prospect calls are up 21% and 32% versus the fourth quarter. As you can see, our officers are responding to our focus and that is to increase quality calls especially on prospects. This focus is resulting in 34% more in the pipeline from prospects and as expected, new commitments are up 9%. Competition in Texas still remains strong for the quarter. We lost $339 million due to structure and pricing, about 55% more than last year.

Taking a look at the consumer side, our organic checking accounts are growing in the mid single digit. Consumer deposit growth is slightly above 2%. Consumer loan growth is in the high single digit range primarily in home equity loans. In our trust and brokerage area, in person calls are over 350 per week and prospect calls as a percentage of total calls are in the 30% range. Our good investment performance has saved us over 60% from the total market decline--again, a good opportunity to bring new clients.

New business booked is better than expected by almost 60% and the loss of business is less. Our investment team projected the first half of '08 would be a weak market and the last half will be better. Let's hope they're right about the whole year, because we are now seeing the weak market and that will affect our fee growth. Overall, we feel good about the performance and opportunity for growth of new business.

The Texas economy is a good place to be. The first quarter job growth for Texas was 1.80% versus the U.S. at a negative 0.7%. All of the markets we serve are at or above the state job growth rate with the exception of Dallas at a strong 1.30% and Corpus Christi was slightly negative. Labor markets are tight. Businesses in general are performing well. We expect some slowing versus '07 in job growth falling to 1% range in the first half and stronger in the last half. For several years, I have said to you that Texas jobs grow about two times the nation. But it doesn't seem to work anymore with the U.S. at a negative growth rate. Now, I ask Phil Green, our CFO, to make some comments.

Thank you, Dick. I'll just make a couple of additional comments. One about margin and one about our outlook and then we'll open it up for questions. As Dick mentioned, I believe our quarterly results were solid and they reflected our commitment to relationship bank business and also to a common sense approach to risk management. As you know during the quarter, the Fed cut interest rates by 200 basis points. We were able to manage a net interest margin of 4.67%, which is down only 3 basis points from the fourth quarter of last year. If you look at net interest income, and if we adjust it for one less day that we have in this year's first quarter compared to the fourth, we would have actually increased net interest income by almost 1% versus the fourth quarter of last year even with the reduction in rates. And I believe that this reflects a few things. One, our good volume growth as Dick just mentioned that we had in the first quarter, as well as good performance with our investment portfolio and also the impact of $1.2 billion seven-year interest rate swap that we put on in October of last year.

Dick has already discussed our loan growth but I might also point out that as of April 21st, our loans had increased another $126 million since quarter end. So at this point, there appears to be good follow on and it also appears to be broad-based. But it is going to take hard work to continue to sustain in our competitive market place. No question about that.

Related to our investment portfolio, that's had very good performance. It saw an increase in yield of 4 basis points compared to the fourth quarter to yield of 5.34%. As many dislocations occurred in the fixed income markets, we did utilize our liquidity and our high quality investment portfolio to take advantage of selected opportunities and as an example, I would point out that late in the first quarter, we sold approximately $600 million in mortgage-backed agency securities. We mixed gains and losses of about $5 million each to essentially break even. And the securities we sold had a duration of 3.9 years. We went out slightly on the yield curve. We purchased $550 million of a 4.6 year duration of mortgage backed securities from the same agency and we took advantage of a steeper yield curve and picked up 53 basis points again with no net loss.

We also saw some opportunities in the municipal securities markets and we purchased almost $20 million in AAA Texas school district municipals. These are backed by the Texas Permanent School Fund known as PSF to yield right at 7%. I think it is interesting that these were nonbank qualified securities and that this yield is net paying the full [temporary] tax. Finally, this week, we purchased $300 million in 30-year Ginnie Mae mortgage backed securities with durations 4.5 years yielding 5.25% to take advantage of the unprecedented spreads available on these full faith and credit investments.

With regard to the $1.2 billion interest rate hedge against prime, in the fourth quarter, as we reported, it provided net positive cash flow of $240,000 and 1 basis point of margin improvement. In the first quarter, this had improved to $4 million in net positive cash flow and 14 basis points in margin improvement. And at its current pay rate with prime at 5.25, the swap is now providing approximately $6.9 million of quarterly positive cash flow and 24 basis points of margin improvement. So it is definitely helping us achieve our goal of a more neutral position with regard to interest rates. Our outlook for rates calls for two more 25 basis point cuts by the Fed, although we'll add given inflation and the dollar, it is our opinion that these are neither necessary nor warranted. But that's another discussion. Finally, given our current outlook for the environment, we continue to see our performances somewhere more toward the middle section of the range of estimates for our company. With that, I'll turn it back over to Dick for questions.

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

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Brent Christ.

Good morning, guys.

Good morning.

You posted pretty strong loan growth for the past couple quarters and even it sounds like that has occurred so far in the second quarter has continued that momentum. Could you just give us a little bit more sense of where you're getting that growth from both from a geographic as well as a product perspective?

The geographic --

First of all, Brent, you want to look at the linked quarter or the year over year?

The linked quarter if you have it.

The linked quarter. If you look at the linked quarter basis outlook in period and numbers, we were up by $243 million, which is about 3.1% not annualized. The biggest part of that was in C&I. This is all spread around pretty well. We had $121 million growth in commercial and industrial loans. The next portion obviously would be real estate. We had $110 million growth in real estate. Commercial construction is $75 million which has been the largest component of that. Rest of it was spread out in a lot of various categories of the real estate. The only reductions in the real estate segments would have been in land was down about $1.4 million and 1 to 4 family mortgage, which we only have because we picked up some in acquisitions, was down about $1 million as it continues to roll off. If you looked at the geographic growth, really, we had good broad-based growth in every region. For example, Austin was up $11 million, say 2%. Corpus was up. These are unannualized percentages, by the way. Corpus Christi was up 1.3%. Dallas up 3.3%. Fort Worth up 3.1%. Houston up 2.5%. San Antonio up 4.7%. Rio Grande valley up about 0.7%. So, I think you see that it is pretty broad-based both in terms of the portfolio and geographically. Go ahead.

I mean, I know it is quite a competitive market. Are you having to compromise at all in terms of pricing or structure to get this growth? Or is there just -- would you view a flight to quality by some of the borrowers in that you're able to pick up some of this business?

Well, the world is pretty much a compromise, so to say we're not compromising at all wouldn't be correct. But I would say that because we tried to share with you how much business we do lose to structure in pricing, we certainly try to hold the line on the principles of good structure. What's kind of interesting is that the market in Texas versus the rest of the nation, I'm not in the rest of the nation, but my observation is that things are tightening up and pricing is increasing. We haven't seen as much of that in Texas and so it is still very competitive. I think one of the things, I don't know whether you picked up on it, is I reported the $339 million that we lost due to structure in pricing. That's 55% more than last year. And when I saw that number, I was kind of astounded but it makes sense when you take into consideration how strong our prospecting is increasing. So, we're increasing the prospecting obviously to grow new relationships because that grows deposits and grows the other types of businesses which is the key to a relationship type bank. At the same time, as you increase prospecting, you're going to lose more business and really, the loss is about the same as it was the first quarter and it is hard to compare these kinds of things. But from structure in pricing. But the increase in prospecting will create more as a result because it is just harder to take business away from somebody else.

But the good news is that we have a strong effort going that way. We've been successful in that regard. And what's even more important, you build a greater diversification of loan size, which is our objective, and that's something that doesn't happen overnight. It happens over years. But certainly that is an objective. So, the real drivers were energy and owner occupied real estate. We did have some automobile agencies increase to customers that we've had for at least 25 years. We're seeing in our insurance company financing and medical. And I'm particularly pleased that our risk grades continue to -- for new commitments, to be about where the average is. So, that tells me that we're not putting on greater risks as we continue to grow this business.

And finally, if you look at our pie chart of the diversification in our portfolio, I'm also pleased that it is not changing. What that means is energy runs the largest and it is under 10%, but it stays about the same percentage. So, we're not out doing something new in some business we've never been in before. We're staying consistent with the kind of things we've done in the past, just expanding those sectors.

And then one last question. You mentioned some of the actions with the investment portfolio in terms of kind of swapping out of some securities into some higher yielding ones with longer duration. But that occurred late in the quarter. Could you give us a sense in terms of the potential margin lift from that and if there was a notable change in the trajectory upward later in the quarter because of those actions?

Well, the moves that we made all did help margin, that's true, Brent. Remember though, we did have as far as the margin trajectory, we did have the 200 basis point rate cuts by the Fed. So, all of these things were working at times against each other, working to offset each other. So, I think what it's helped us to do is to help us have more stability in the margin. All of those three factors we talked about -- the volumes, investment portfolio moves, the interest rate swap hedge, all of those things helped together to really provide more stability. So, I'm not looking so much for a dramatic trajectory increase in margins so much as we're hoping to provide more stability.

Okay. Thank you.

Your next question comes from the line of John Pancari.

Morning.

Good morning.

Wanted to see if you could give us a little bit more color on your (inaudible) trends and your delinquency trends as well, particularly in the residential homebuilder portfolio.

As I mentioned to you, when you add up the potential problems -- first of all, as I said, the real increases, the majority of them, are really related to 1 to 4 family builders. But when you look at potential problems and nonperforming assets and past dues over 90 days, they're up less than $4 million. So, I think you can look at it as the $4 million is really kind of the bottom line of the increase. We do have -- because we've lived through times like this, kind of an unbelievable focus on all homebuilders. I mean we know what every one of them is doing almost all the time. And you can see that we are down in total commitments, but the outstandings are pretty much flat. You would expect that to happen because the springtime and summer is when you build and sell homes. So -- but I think we'll see it kind of stay around that $250 million level of outstandings. And obviously where you've got the builders that have low capital going into this slowdown, their only way to pay it out is to sell homes, and they're selling a little bit slower. But all in all, I remember in the '80s, we really didn't experience large losses in the homebuilders. What happened, it just took longer. Sometimes you would lose some interest and that's the reason our -- the nonperformers are up from $29.8 million to $36.6 million. That's in essence homebuilding. And so you get into that and it takes a little bit of a delay. But I do feel comfortable. It is just going to take a little bit of time. And the good news is Texas is growing jobs and that's the real key to it. And we're still very affordable.

Okay.

Does that address your issue?

Yes, it does. Consistent with what you're seeing there on the homebuilder front, would you, I guess what type of range would you be expecting here that your nonperformers could trend in this type of cycle and again, just pointing to the weakness you're seeing in homebuilding?

I wish I knew that answer. Because we're right on top of it. I don't see any dramatic change. You never know -- certainly I hope that we are on the front end and aggressive in addressing, because that's the characteristic of our company, and at the same time, this is a great opportunity, those good builders, to help them through this period of time. We're not a company that turns the spigot on or off. We're a company that looks at the individual customer and makes sure that we're dealing with the reality. And if they're out of capital, we have to deal with that. That's a smaller group. The foreclosures are around $5 million and so I don't see it as -- I see it as something that certainly is getting our attention and should get our attention. But as you saw by affordability in the comments I made about us versus the rest of the country, I think it would be unwise for us to overdramatize the problem in Texas because it is just going to be a lot better.

Okay. All right. One last question. On the fee income side, I'm sorry if I missed it because I got on the call late, but the decline and other charges, commissions and fees in the quarter. If you can talk to that?

On the linked quarter comparison, there is primarily the result of lower investment banking fees in the first quarter compared to the fourth. We've still got a good pipeline on those -- just remember, we used the word lumpy in terms of how the fees flow in because we work on several -- on a few deals. Usually a few larger deals during the year and they take time to bring in. We feel pretty good about the activity that we've got there. Don't see any difference.

Okay, great. Thank you.

Your next question comes from the line of Andrea Jao from Lehman Brothers.

Hi, Andrea.

Good morning. Andrea Jao from Lehman Brothers.

Good morning.

A lot of the smaller regional banks are building reserves at a time when earnings power isn't as strong as it has been. The earnings power means relatively strong, especially compared to your peers and now I know credit quality is good. And I know reserves covers MPLs more than 300%, but are you even considering or can you even consider building up reserves even a little at this point?

We're not going to consider going to jail. And the laws are pretty strict on that, as you know. And the SEC wants to have volatility and more of a mark to market. And the rules are strict. So, it isn't just what I want to do. It is what is required under the laws. I will tell you that our methodologies have been consistent for years and years. And it is showing that our reserve is adequate and that we are building it in according to the problems. And the weakness in the economy, and so you can't build it more than that unfortunately. We don't have more weakness.

Okay. With respect to the process, I was hoping to get more color on what trends you're seeing. Are customers more apt to seek the safety and soundness of bank deposits? What kinds of seasonality are you seeing at this point?

Well, they should. But they don't always see it. I think that I'll make an editorial comment, in this environment, when you may be playing with too big too fail and not letting the cycles and the capitalistic system work, you have -- and that is if somebody's broke, they're broke. But we are always been a safe haven and safety and soundness and we do get -- I get every month editorial comments from our customers or factual comments from our customers, sharing with us how they want their money to be in a good, safe place and we have had some benefit to that. I guess I'm saying to you, not as much as I think probably is realistic in this environment. I'll let Phil make a few comments.

Andrea, we've had -- I think good deposit growth. As far as seasonality, we do see some increase this time of year. A lot of it from -- we've always said was build up for taxes, in taxes that were paid. So, we've had really good growth in transaction accounts. I feel just like a strong -- anecdotally, a strong feeling there. We've mentioned before -- we have a relationship with a company which provides a debit card services to students and universities that we got through the Horizon acquisition. We've actually been working with them to try to offload that for some period of time. And I think that probably within the next six months, we'll definitely exit that relationship. That shows up as demand deposits. The way it works is the fee we pay into that relationship basically means that while those costs go through noninterest income, it basically costs us 75% of the Fed funds rate for that portion of demand deposit that relates to that relationship. So, that's a little bit unusual. They had good growth because of just the increase in funds that go into the students this time of year.

So, you know, not including that, I feel like we had a pretty standard seasonality related to our demand deposits. I think our time deposits have been good. It is interesting what you see going into the pricing of these deposits in the market. If you were to look at since the Feds started cutting, they're down about 300 basis points in general market rates. We've been able to cut our MMA rate only about two-thirds of that. So, we've given the customer about 100 basis points of that change. On CD rates, we cut about 60% of the rates. So, we've given them 40% of that rate cut. If you look at what happened this quarter, the Fed cut rates 200 basis points and we were only -- we only decided to cut our MMA rate about a little over half of what that rate cut was. We dropped rates there about 1.1%.

And the reason we're seeing that compression is -- I won't call it irrational pricing from the larger competitors because if I were in the shape they were in, building liquidity is not irrational. I would say it is unconventional pricing where they're paying well in excess in many cases of Fed funds to obtain the deposits. I think that there is, though, in the mind of our customers and general market, there is an important -- safety and soundness is very important. I can tell you for me, as a depositor, it is very important to me. And I think that value proposition is important for us and I think as far as how much we'll be able to cut deposit rates, assuming the Fed continues to move down, we'll make those decisions as we look at the market and we evaluate our situation when those happen. But I'm of the mind that safety and soundness today is a very important value proposition and there should be a differential in terms of what rates are paid. So, we may be more aggressive than we have been in terms of more offsetting our deposit rates against these changes from the Fed.

Okay. Then one housekeeping question. Is there anything nonrecurring in the other expense line?

Anything nonrecurring in the other expense line?

Or anything in particular that drove it higher compared to last quarter?

Well, compared to last quarter, actually, we had a little bit more unusual stuff, I would say in the first quarter seasonally. But the fourth quarter is our lowest quarter for advertising and promotion. And so $735,000 of the unfavorable was related to advertising, because it is our first quarter and second quarter typically are higher for us. And then the other things I would say are just more activity-related. Other professional related -- just different things. The most significant factor I saw was advertising and promotion was up by $735,000 compared to the fourth quarter.

Okay. Thank you so much.

Your next question comes from the line of Justin Maurer.

Hi, guys.

Hi, Justin.

Phil, on the Fed funds, purchase sold, any discussion kind of where you think you're up at year end, you were kind of $350 million sold and $900 million ish bought. Any change there? Kind of with the rates coming down so much?

Justin, if you look at what we averaged on the first quarter, our Fed funds sold were about $266 million. They were down some from the $379 million average for the fourth quarter.

Yes.

In terms of the Fed funds purchased and repos, we were down just a little bit. We averaged $894 million. It was down a little bit from the $919 million in the previous quarter. I would say that what we're seeing now is -- got good loan growth and so we're using some liquidity to fund that. And we also took advantage of as I said, what really incredible spreads to treasuries on some of the full [bank] and credit mortgage backs and took advantage of that and bought $300 million of that in just this week. So we saw that as an opportunity to use some dry powder and we took it.

But it was that -- that doesn't sound like it was Fed funds. You said $894 million. What's it running currently? Is it up from that? To buy those?

No. We didn't really buy anything. We just used our Fed funds liquidity position to do it.

Okay. Any sense as to how much you guys may have benefited from LIBOR being sticky on the way down because of what's going on? I know others have talked about it and I think it is somewhat surprising for most that the margins haven't gotten as crushed as people thought in part because LIBOR has remained at higher levels?

If you look at LIBOR-based loans, I want to say we have about $1.5 billion worth of LIBOR-based loans. But I think that's reasonably close. And so if they true that up, that could be a slight benefit.

It doesn't sound like it is much though?

$1.5 billion is $1.5 billion.

Whatever you want to guess as to what the delta should be instead of what it is, I guess?

I think we saw once it came out in the papers, my investment guys are telling me they saw LIBOR cleanup (inaudible) by about 20 basis points. There could be some marginal benefit there but you can do the math.

Then lastly, I hate to say it, but you guys nudged over 76% loan to deposits. Is there an aid in your future if loan growth is still good?

Well, you know our strong feelings. We're never going to be 100%.

Yes.

But it -- this is a time that there is some good opportunities and I think the real key is to stay with quality and relationships. We're not going to -- as you know, we're not focused on just loan growth. But if, because of this unusual time and what's happening to the large banks, it may be a time to take it a little bit higher. But we don't have a number, Justin.

Justin, as I recall, we got up to almost 80% a few years ago.

I think it was 78 something or 79.

Before the last recession. So it could happen. What we want to do is definitely work the deposits. Work the relationships and which will generate deposits and grow both sides of the balance sheet. We're keeping our eye on it.

That's really the key is remember we want to grow deposits with loans and so as you do that, that keeps the ratio from moving as much.

Back to the money market that you've only taken two-thirds down, is there -- how do you guys think about it in terms of on the one hand, the whole safety and soundness thing, you're close to the top of the heap and from a selling perspective to the customer, that's a great selling point. But at the same time, acknowledging that others around you need liquidity like you said, Phil, and therefore, you can't maybe push it too far but do you guys think those potentially offset each other in a sense and therefore there is more room to move down?

Justin, again, that's more art than science. I would say that there has been. We've had decent growth in our time deposits. We haven't seen a decline. But I'll tell you today, if you look, there's some people paying -- I'm looking at the rate sheet today. You've got some people paying [135]. These are the largest banks in the country. 35 basis points over Fed funds. Here's one 15 over Fed funds. Here's one 65 over Fed funds. Here's another large bank we're ahead of which is paying about 50 under Fed funds. So, it just is an unusual time. Right now, our value proposition has allowed us to be fourth in the market on money market rate and be okay. I think that -- I just think it is worth something. You can't push it too far but I think you really need to recognize what your strengths are, too. And I frankly think that if the Fed does move down, again, and possibly one more time that given what inflation is doing and things, it will be more short term anyway. We'll just have to see. We're feeling more aggressive though, I'll tell you, given where we are in the market, given what's going on in the market place than just feeling that we have to compare rates with every wounded bank out there.

I guess, Justin, I don't guess -- but with our people that handle our customers, we are helping them understand that a bank that pays those kinds of rates above Fed funds or whatever the rate is, there is no doubt there's more risk and they need to evaluate that proposition. And most people when they come down to it, their deposits in the bank, they don't put them here because they plan on losing them.

Right.

One thing that we've said and it is kind of caught on around here that we're using with ourselves and customers and I'll give credit to an investor that happened to use the phrase with me at a conference a couple of months ago. He said, you really ought to not be picking up pennies in front of steamrollers today. And that's what a lot of people were doing. And I think that's a really good visual picture of what you could be doing if you make the wrong choice with the wrong financial institution for a few basis points.

It is important to the extent you guys are much more tilted toward the commercial side where by in large, their balances won't be insured because of the amount that they have versus the standard retail customer. They might be willing to roll the dice a little bit because they are insured.

I think from the commercial standpoint, they obviously -- obviously they understand the markets better in general.

Justin, one other thing, we have lots of alternatives for customers. I mean as you look at CD pricing for example, we're probably number two. We're number two versus most of the categories there. We've got that opportunity. We've got money market funds, both Treasury and traditional money market funds we offer people. We've got all kinds of wealth management. We can give you anything you want, but if you're a depositor that's really concerned about safety and soundness of your money, we can give you fair rate and we can let you sleep at night. That's one important value proposition we have.

And one of the things having the $25 billion trust and asset management business, we have been moving lots of money into it. And holding on to the relationship of the customer and giving them that alternative.

Okay.

So, anyway, to sum up, I've always said pricing is art, not science really as it relates to these deposits. We'll just have to see, what we do with regards to cutting rates whenever the Fed cuts and we'll just have to see.

Thanks, guys.

Your next question comes from the line of Jennifer Demba.

Phil, could you give us an idea of what the contingency fees were on the insurance commission line? Of this quarter versus a year ago?

Okay. Hang on just one second. I think I'm putting my hands on that. Let's see. It was down a little bit. I think it was -- I think it was $3.3 million.

So about $3.3 million.

Let me get back with you on that.

Okay.

I'll have it for you.

Can you give us a flavor? How much of the $36 million in nonperforming assets is residential builder related, just to give us an idea? Approximately.

The nonaccruals are about $5 million and the foreclosures are about $5 million. So, it is about $10 million total.

Okay. Thank you very much. Good quarter.

Thank you, Jen.

We were -- the $3.3 million is right. We were down about $142,000 from the previous year.

Thanks.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Jon Barlow.

Hello, Jon. Jon? Jon, we're not hearing you. Maybe the operator can help us.

(OPERATOR INSTRUCTIONS)

Jon, we're still not hearing you.

Mr. Harlow's question has been withdrawn. Your next question comes from the line of Jon Arfstrom.

Morning.

Good morning, Jon.

I thought my name was Harlow for a second. Should have heard me trying to get through. Obviously you have capital and you have access to capital and a nice stock price. And I'm just curious on M&A if you're seeing interesting opportunities. And if so, what kind of appetite do you have?

Well, Jon, our focus has not changed in that regard. The kind of banks we're interested in are obviously in Texas, in the markets we currently operate and more important have the culture and the relationship focus that we have. I would say the market is a little quieter in this environment and certainly there are those that we have -- are aware that we would have an interest and they continue to operate and Texas is a good economy. But we're just staying the course of looking for that right opportunity. We're not -- we don't bound price. We buy on quality. And I do think that this is an environment that if those opportunities appear, that it certainly would require a lot more due diligence because this is a real unusual time. But we're interested just as we were a year ago or five years ago. But it is all related to the kinds of customers and the kind of operation they have.

Okay. Then a question on oil prices, if you can. Obviously people think oil prices and they think Texas and I'm curious if you have any opinion on how much it benefits you. And given where the prices are, if you have any concerns in terms of credits inside of your portfolio due to the high prices.

Let's take the -- first of all, in general, when -- the way I look at Texas with all income is there's no doubt when you look at the whole economy as a whole, it certainly is a benefit and a positive and raises the water line for the economy as a whole. There's lots of individuals like myself that I don't have any oil and gas production. So, therefore, I feel the pain the same as any other individual at the pump. So, you've got kind of a mixture there. Moving more specifically to your question, we're comfortable with our pipeline and it really relates to the price deck of the kind -- of the price that we're loaning per barrel. Currently, we're loaning $55 in '08, $52.50 '09, and $50 beyond that. On gas, $6.25 '08 and $6 '09. Those prices are going to come up. It could be $60 in '08, say $55 in '09 and maybe hold the $50 beyond there and possibly a $6.50 versus a $6.25 on gas in '08 and a $6.25. Some of the things we're looking at. Then beyond that, we learned in the '80s we look at the sensitivity where we take 75% of the best case and that would be somewhere in the neighborhood of $45 oil and under $5 on gas. And from that perspective, I would tell you I'm comfortable with those numbers. And so I don't -- I don't get very excited if it goes to $117 or it's $100 except from an economic standpoint and all of the issues related to the dollar and worldwide and those kinds of things. But for Cullen/Frost Bankers, Inc., I feel comfortable with the prices that we're using and where we are. The other thing I would say to you is that unlike two years ago and certainly five or ten years ago, many of our customers use hedging to lock in their prices and probably in general about 60% of the portfolio is hedged in some way or another. And so all of that has taken a lot of the risk out of it from my perspective.

Okay. That's helpful. And then Phil, you said the size of the energy portfolio is under 10%. Is the growth rate any faster or slower than the rest of the portfolio?

I might -- it is staying about the same. When you look at shared national credits, they jumped and that's where a lot of the energy is just simply because of the price even at $50, it just takes a lot of money to what used to be $10 million loan is $30 or $40. But our share national credit percentage of energy loans is still running 65% and so it's -- relatively speaking, it's holding its own percentagewise to the overall portfolio. We learned a lot from the '80s and we really watched these concentrations of credits and have good disciplines that I think are well in line.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) We will pause for a moment to compile the Q&A roster. There are no further questions at this time. Mr. Evans, do you have any closing remarks?

We appreciate and thank everybody for participating in the call, and your interest in Cullen/Frost Bankers, Inc. This completes our call.

This completes today's conference call. You may now disconnect.