Cullen/Frost Bankers Inc (CFR) 2008 Q3 法說會逐字稿

Good morning. At this time, I would like to welcome everyone to the Cullen/Frost third quarter earnings 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 Greene, 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 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 investors relations department at 210-220-5632. At this time, I will turn the call over to Dick Evans.

Good morning and thank you for joining our call. I'm very pleased to share some outstanding results with you today. Let me provide a little context for the strong numbers I'm about to review with you. After that, our CFO, Phil Green, will provide some additional comments behind the results and then we'll be happy to handle any questions.

I would characterize our third quarter as a tale of two storms. Investors everywhere know all about the first storm; the turmoil that is tearing through the financial sector in the US and around the world. It's the same storm that has disrupted markets and taken with it banks and financial institutions of all sizes. Many banks would be very relieved to announce that they are weathering the storm, but Cullen/Frost is not just weathering the financial crisis.

We are, in fact, prospering. Our deposits are up. Our loans are up. Our net interest margin is up. Our noninterest income is up. We opened new financial centers in Houston and San Antonio and we will open additional locations in coming months to capture the opportunities before us.

But the storm that impaired our results is the one that most people have forgotten. I'm talking about Hurricane Ike; one of the most devastating storms in our history. Ike was a Texas-sized disaster, decimating Galveston and shut down the city of Houston where 30% of all Texas jobs are located. Risk management estimates Ike's impact will exceed $6 billion of insured losses.

Investors, media, and others moved on from Hurricane Ike relatively quickly for several reasons. The global financial crisis was dominating the news and the historic presidential election demands a great deal of attention, and because of the relief effort was managed well. On that note, I would like to thank all of our employees who worked so hard to get our locations back up running in face of such hardships. Our employees remain the best asset we have.

Still, if something is bad for the Texas economy, it's bad for Cullen /Frost. Job growth in Texas for example, is fundamental to Cullen/Frost's economic vitality. But some estimate that Hurricane Ike may reduce job growth by 0.05% in fourth quarter, and into January on annualized basis. As a result, we have made a special provision of approximately $10 million to cover potential loan losses related to the impact of Hurricane Ike. This is the greatest mitigating factor to what otherwise would have been sterling results.

Primary because of Ike, our earnings for the third quarter of 2008 were $49 million compared to $56.5 million in the third quarter of '07. On a per share basis, net income for the quarter was $0.82 per diluted common share compared to $0.95 per diluted common share reported a year earlier. Again, the provision related to Hurricane Ike cost $0.11 on an after-tax per share basis.

Average loans for the third quarter increased 13.4% from last year, to $8.4 billion. Average deposits were up 2% to $10.4 billion. In the first few weeks of the fourth quarter, we continued to see increases in deposits from both consumers and businesses looking for a safe financial haven and excellent commercial service.

Our net interest margin was 4.74% for the third quarter of '08, an increase of five basis points over year -go quarter, and 6 basis points over last quarter. Net interest income on a taxable equivalent basis rose 3.7% to $139.7 million, compared to $134.7 million reported in the third quarter of last year. The third quarter of 2008, the provision for possible loan losses was $18.9 million, compared to charge offs of $6.4 million. As I said earlier, approximately $10 million of the provision for possible loan losses was related to the projected impact of Hurricane Ike.

We ended the quarter very well-capitalized. Tier one and total risk-based capital ratios were 10.3% and 12.7% respectively for the Corporation. And for Frost Bank, the ratios were 10.4%, and 11.9% respectively. Both sets of ratios are well in excess of the levels that considered well-capitalized.

Noninterest income, $77.3 million, up 9.3% from the third quarter of last year. Looking at the components, trust income increased 11.3% to $19.7 million. This was due to higher levels of oil and gas management fees, as well as investment fees. Service charges on deposits were $22.6 million, up 9.4%. Insurance commissions and fees were $8.3 million, compared to $7.7 million, reported in the same quarter a year ago. And noninterest income increased 14.6%, to $15.9 million.

On the expense side, noninterest expenses for the quarter were up 8.3% to $123 million from the third quarter of last year. The major component of this increase was salaries and wages and related employee benefits, which increased 7.5% to $68.5 million. This increase was primarily due to normal merit increases and increases in the number of employees.

Let's turn to credit quality for a moment. Overall credit quality remains favorable. Some elevation in credit issues has occurred. However, the rate of increases is very manageable and issues are not appearing from unexpected sources. Management has been able to work with the borrowers, shore up positions, and manage through the issues which generally result in fewer non-performers, charge-offs and expenses.

With respect to our special provision for Hurricane Ike, the Houston region has credit commitments of approximately $1.9 billion. Commitments in the mandatory evacuation zones are approximately $300 million. We have performed a high level overview of these credits by reviewing historical payment performance, our collateral position, the borrowers' credit scores and geographic locations of the borrower. More complete reviews, includes direct discussions are occurring with borrowers to more fully understand the current needs and abilities.

Some traditional metrics have expand some elevation, while others have remained relatively flat. Non-performers at the quarter and aggregated $55.2 million. At the end of the second quarter, they stood at $49.6 million, and at year-end non-performers totaled $29.8 million.

Remember that the '07 total was at or near historical lows when compared to total assets and total loans. Approximately 50% of the increase has occurred during '08. It can be tied to home building industry; another 25% related to the insurance industry, and the balance is spread over general commercial lending, with no one industry segment standing out.

While non-performers have increased, they represent only 0.39% and 0.64% of period end assets and period end loans respectively. Both numbers are very respectable and comparable to prior reporting periods and well below current industry levels. Additional increases in non-performers are possible, however, we do not foresee any significant increase.

Charge-offs for the quarter were $8.1 million and recoveries totaled $1.7 million for a net position of $6.4 million. The $6.4 million when annualized represents 30 basis points of our results. The year-to-date net charge-off figure of $14.5 million is 24 basis points of average loans. While net charge-offs did increase during the third quarter, they were driven by two specific credits, neither related to home building or commercial real estate, but rather the driver of the losses were poor management and administration of those businesses. There's no systemic or industry downturns that drove current charge-offs. The outlook for charge-offs to remain consistent.

Past due loans at quarter end totaled $74.2 million, or 0.86% of period end loans. Both of these figures are comparable to prior reporting periods. The 90-day and over subset of delinquencies stood at $7.8 million, the lowest level in several quarters. It is this subset that frequently forecasts increases in charge-offs and non-performers. Potential problems were $42.4 million on September 30, up from $33.4 million as of June 30.

One primary borrower contributed to this increase, a home builder for $13.1 million. Progress is being made. The borrower is cooperative. The collateral protections afforded the bank. The loan is current.

Now let's turn to our consumer banking. Our consumer banking business remains strong by any measure. Looking at customer growth, same-store sales growth and de novo accounts acquisition are both strong.

On consumer loans, looking at month-end balances of the third quarter '08 versus '07, consumer loans experienced a 14% growth rate. Home equity and home improvement products have resulted in the largest growth contributor. I want to remind you again, Texas law is very conservative on these products, compared to other states, and home values have remained relatively stable in Texas.

Now, let's move to our business side. We have seen a change in the pipeline as evidenced in looking at borrowing requests of customers. For the full year of '07, we had 12% more borrowing requests from customers than the prior year. However, through September 2008, our customers have requested 14% less in borrowing needs than the same period last year. However, our increased prospecting efforts have offset this reduction.

This coincides with our accelerated prospecting effort which is yielding good results. To date, we have made 33% more in-person calls on prospects than last year. More importantly, we have increased the number of new relationships by 23%, compared to last year.

To summarize, let me repeat how pleased we are with the Company's performance, especially in light of the twin storm environment we faced this quarter. Our company continues to grow and this quarter was no exception, validating our business model of relationship banking, extraordinary customer service, and fair pricing. That was further validated by the research firm of Greenwich and Associates, which last month rated Frost as a national winner in overall customer satisfaction, online service and relationship management performance among middle market banks.

I'm very pleased with that kind of recognition because it speaks so highly of the commitment to excellence that our employees bring to work every day. And being of course, the other piece of good news for us is that the Atlantic hurricane season officially ends next month, and that can't come soon enough. Now I would like to turn over to Phil Greene.

Thanks, Dick. I will make a few additional comments to Dick's comprehensive overview, then update our outlook and then open it up to questions. We were pleased that our margins continued to grow during the quarter.

As Dick said, it increased 6 basis points for the second quarter to 474. Of that increase, about half was related to volumes, primarily loans. The remainer related to various improved asset yields.

Dick pointed out the strong growth in our loan portfolio and through the 20th of this month, they have continued to increase. Our growth through that date has increased another $72 million to $8.668 billion. It remains to be seen how volumes will do if the economy continues to slow. But if our calling efforts, as Dick pointed out, are any indication we have some reason to hope for continued success.

Regarding pricing, we have definitely seen an increase in deposit pricing, relative to general market rates. This competition in our markets has increased. Now, I will give you an example. We have seen our top tier personal money market rate go from 125 basis points below Fed funds a year ago, to 25 basis points above Fed funds today as we have deliberately improved our value proposition in this area.

However, at the same time, we have seen even more dramatic changes from some larger banks in our market. We have also escalated similar efforts to improve our rates on CDs. And at the same time, we are also looking to improve spreads in our loan portfolio to more rational pricing that gives effect to the current environment.

Through all this, our interest rate prime swap continues to serve us well and it contributed $7.7 million during the quarter. And it helps to us to neutralize our margin against rate moves. At current prime levels, the swap contributes $9.1 million per quarter.

Just a few comments about some noninterest items. We are very pleased with the growth in our trust fees versus last year. Oil and gas fees are up 72% from last year to $3.1 million, reflecting both prices and drilling activity. A few things to keep in mind, as we have seen energy prices decline. About 90% of our revenues is related to royalties. About 80% of our production is gas, which is down about 30% from the peak versus oil's 50% drop. And other things equal, we are going to see some pressure on these revenues in light of lower prices. However, there's a great deal of drilling activity going on that's leading to new wells. And remember also, there's a three-month lag on production to payment, so the October royalties that we're seeing are based on July's peak prices currently.

Looking at growth and trusts on a lien quarter basis, they were driven by a few things. One, an $838,000 increase in oil and gas fees. An $386,000 increase in investment fees in a tough market. $356,000 increase in state fees, and these were somewhat offset by a $752,000 quarterly decline related to seasonal reductions in tax preparation fees which happens each year. We continue to be pleased with our performance in this area.

Taking a look at insurance fees for the quarter, they were up 7% from a year ago, which is good in light of a tough market. If you look at the year-to-date performance, we have experienced a 7.5% drop in property and casualty fees due to the soft market. But we've had a 53% increase in benefit commissions. Half of that from acquisition, but half of it is from organic growth. And all that together produces a 7.5% growth in insurance fees overall for the year-to-date.

On other charges and fees, they were flat, but we had $1 million less in investment banking advisory fees related to the natural variability at the time of these revenues. Also other income included a $1.7 million recovery of previously charged-off interest on a particular credit in the their quarter, which we were very pleased to see. Also of note is other expenses, which included $1.6 million in higher FDIC premiums, and $1 million in expenses related to Hurricane Ike, not included in the $10 million provision impact that Dick noted. The FDIC has proposed increasing premiums, which we understand would essentially double our current expense before adding any additional impact of the new expanded FDIC coverage for transaction accounts and senior debt recently announced.

Finally, about half the increases in expenses for net occupancy and furniture and equipment relate to new and relocated branches as the Company continues to expand to take advantage of growth opportunities in our major markets. I will conclude by saying that based on what we are currently seeing today, we believe the current consensus of analyst estimates for 2008 is reasonable. With that, I'll turn it back to over to Dick for questions.

Thank you, Phil. Now we will be happy to entertain your questions.

(OPERATOR INSTRUCTIONS.) Your first question comes from the line of Andrea Jao of [Artview] Capital.

Good morning, everyone.

Good morning.

I was hoping would you share with us your interest rate outlook or the assumptions that you have for the remainder of the year and perhaps the first half of '09. Then given those assumptions, will are the drivers that you already spoke about regarding the margin change, ie., do you think you can still get improving loan spreads? How will funding pricing be?

Andrea, in our outlook, we do not have another prime cut factored in. For example, we have the Fed standing pat on rates through the end of this year, but I believe we have a prime cut near the very end of the year or very early next year. As far as the impact on our outlook, I don't think it really affects us that much, particularly another, say, 50 basis point cut, if that's what the Fed chose to do because the prime swap that we have in place has really rendered us to be neutral in our position as opposed to so highly asset sensitive as we used to be. Our comfort with the guidance we gave is agnostic with regard to what the Fed does, with any -- there's no telling what they could possibly do. But let's say with 50 basis points for sure, we would feel pretty good about.

Got you. What are your thoughts regarding participation with TAR and if everyone participates, what kind of exit plan would you have in place?

Well, first of all we are just studying exactly what it is. To my knowledge, there was a final document earlier this week. We are still in the analysis stages to see exactly what would be good for us. As I stated, you heard how strong our capital is. And we are pleased to be going into this with a good capital position, but we will look for the right answer for our shareholders.

Got you. Thank you so much.

Your next question comes from the line of John Pancari with JPMorgan.

Good morning.

Good morning.

Can you talk a little bit about the expected impact or the impact you may already be seeing of the pull back in oil and energy prices on the local economies, and what that could mean in terms of loan demand and ultimately credit? I know you did talk about this a little bit, but you indicated more detail around your direct business with the energy companies. I just want to get an idea of what your view is in terms of an economic pull back.

We still say -- I think as we look at next year, the rest of it, I think we will end up with job growth in Texas of about 1.5%. It could be a little higher and '09 being 1%. It's going to drop a little bit. Energy could be an effect of that, but I think when you look at prices of energy, we've got to remember a couple of things.

As I look at the price of oil and gas, you really see that natural gas at -- let's take around $6 or $7. Quite frankly, that's pretty much where it's been since '04. You've had these peaks, but I'm taking the peaks out. But it's pretty steady around $6 or $7, and oil dropping down and I haven't looked today, and I don't know where it is. Say at $70, we were a little higher than that in '06 and about there in '05.

We have to remember that we had good growth for several years at -- to say at lower prices. All of these prices were higher. I feel certainly Houston could show some slowing, although we have a good, diversified economy in Texas. It isn't near what it used to be.

As a look at our portfolio, and I will just remind you, when you look at the sensitivity and taking out the hedges because that's even a greater protection of our portfolio. Over the life of the loans -- we can get out of the loans at $45 oil and $4.78 gas. That's really the triggers we watch.

There's no question, you have read that there has been a cutback in the drilling activity, particularly in the Barnett Shale. Chesapeake has announced which they are one of the players there. Certainly the leasing activity has slowed, although most of that land is all leased. As I fly in and out of DFW, you will see drilling rigs all around you.

Let's don't -- just because the price dropped, think it would come to a wrong conclusion that everything is shutting down. In fact, the economics of -- of Houston were what -- nearly 50%. If you look at the three months job growth, you've got Texas at about 1.5% and you've got Houston at about 2.3%. It's still growing very well. The hurricane will slow it down but also as you know, with hurricanes, you get a dead cat bounce when you get the construction activity that's so strong for six to nine months after a hurricane.

Okay. Is that $45 -- is that your price tag that you are using on the oil?

No. No. No. That's the sensitivity -- what it gets down to.

Price dex, we are $65 for the rest of '08, $60 for the next two years and $55. And then we take the discount and then we take 75% of that is how we look at our portfolio. That's the scars of the '80s, something I learned. I want to see where the bottom is for our company.

Okay. All right. And then separately, in terms of your provision you took for Ike, can you talk about the recoverability of that provision? And if you expect any proceeds from insurance, et cetera, to help offset that impact that you had to take or the hit you have to take in terms of the provision for the storm?

Those are all good questions, and I wish I had the answers. What we do know is what I said to you, is that we used a methodology which was a high level of reviewing the payment records and looking at credit scores and collateral positions and geographic locations, and obviously focusing on that mandatory evacuation zones where we have $300 million. And we -- that analysis was done extremely well, and that's how we came up with the $10 million. And every day, we're talking to customers and learning more.

As you look at Houston, while it was really tough, Houston was really shut down for a week and then took about three weeks to get all the electricity back up, but it's up and running. And if you go to Houston today, things are very vibrant -- moving forward and people are doing all the things that you see except for some trees and other things that are still being done. I will say I was in Galveston last weekend. We have to remember them in Galveston, 75% of all the homes had water in it. While it was a Category 2 storm, it was really a Category 4 from the water surge. It came back up out of the bay and covered the island, as I said. That damage we have to deal with.

Downtown, the stores are all being redone, and met with the mayor. They are really doing everything they can to rebuild it, but that -- that island was -- if you go out on the island were the homes and you saw some of the pictures on television. It looks like a bomb hit it.

One last question. In terms of credit again, where are you seeing weakness in your portfolio, particularly, if you could just talk about that. And then related, are you seeing any pressures in term of your loan participations if you could talk about that book as well?

As I mentioned, the good news, as I said, we've already talked a lot about home builders and we have identified that very specifically. I'm particularly pleased -- when I first started -- we started realizing the difficulty for home builders, we had $550 million in outstanding commitments. Today we have $380 million. Back then, we had $250 million in outstandings and today we have $227 million. Obviously the outstandings have slowed somewhat as a result. It's slowing.

Houses are selling slower but it's in an orderly fashion. I was also particularly pleased to see that the non-performers of home builders represents about 28% of our total non-performers and I say pleased. I'm not pleased with any of that, but I would have guessed, had I not looked at it, it would have been higher than that figure. As I pointed out last time, and it continues to be true today, that there's really no particular area -- as I talked about the two loans that we had losses on. Really, it it was just poor management and administration of the businesses. In fact, it probably would have happened in any kind of economic climate.

Home builders, retail centers which I talked about for two quarters is where we are looking and starting to see maybe some very slight trends in not-for-profits, churches. Research shows us that basically what happens, people honor their pledges but they are just spread them out over a longer period of time. But to answer your question, it's -- there's no specific area, except what I pointed out to you.

Thank you.

Your next question comes from the line of Charlie Ernst from Sandler O'Neill.

In the press release, you mentioned that you are seeing pretty good deposit flows since the end of the quarter. Can you elaborate on that?

Charlie, the thing I thought was most exciting, if you look at the average of time deposits since -- for October, it's about just under $200 million higher than the period end for the third quarter. That's just pretty strong time deposit growth for us.

Okay. And then it -- given that you had a number of days shut down, was there any discernible revenue loss that happened because of this storm?

Are you talking about for our customers or for us?

Yes, in your income statement this quarter.

No, just the -- as I pointed out, there was another $1 million of expenses and other expenses that represents our opportunity to recognize the uninsured part of all this, but that's the only other thing that we saw. I'm not aware of any revenue loss or any specific customer we know at this point that has specific problems with their credit as a result of the storm.

Charlie, our staff did an incredible job of bringing our offices back up. We were able to get one of our guys into Galveston at the very early stages which was almost impossible. We have had our units working on a couple of branches that were -- we had a roof totally fall in our Pearland which is an office building that we had to totally redo.

Then our Galveston location, both the downtown and the one on [Sterd] Road had to be rebuilt. As I was over there, I can't tell you how impressed the customers were. Going into a trailer, which they -- it wasn't perfect but it was from their perspective and how much they appreciated us coming up early. Our staff did a great job.

Okay. Great. And then, Phil, on the balance sheet, average earnings assets were pretty flat in the quarter, so I'm assuming, you are remixing out of either bonds or short-term assets. Can you add a little bit of color as to what was happening there?

If you look at the averages, you are exactly right. We did see securities down somewhat on an average basis. We are from $3.380 billion in the second quarter, down to $3.206 billion in the third.

Although, I think essentially our yields improved slightly. We went from a 539 in the second quarter to a 543 in the third, as I pointed out. That's one of those benefits that endured to our margins somewhat. And then we also saw Fed funds decline. The Fed funds sold average, we were $144 million in the second quarter and that dropped down to $66 million in the third quarter.

Do you expect that to continue, that you will use your bond portfolio to fund loans or will we start to see maybe a little bit better balance sheet growth?

I think that we are hoping to see better deposit and balance sheet growth. There's a natural amortization that occurs in that HC mortgage-backed portfolio although that's slow. I think we were around $50 million a month there for awhile, that's moved down to $25 million. You have seen a slower speed for mortgages today. That's going to provide some, but we are also expecting to see deposit growth be more important driver than it was before.

Your capital historically is at higher levels. Is the bias right now to sit back and let that build given the uncertainties in the world. Are you thinking more about how you can use that?

We have been really husbanding capital for the last couple of quarters. We had the buy back runout in the first quarter of this year. We didn't reinstate one so we have been building capital up. I think it's the prudent thing to do in this economy.

Okay. Great. Thanks a lot, you guys.

Your next question comes from the line of Jennifer Demba from Suntrust.

Hi, Jennifer.

I jumped on a few minutes late, so you may have discussed. Can you give us some color on your loan growth this quarter? Also Phil, you mentioned there was a nonrecurring item in other income, if you can repeat that.

The nonrecurring item, it's unusual. We have these occasionally, and so it's hard to say nonrecurring. It's a pretty large one. It was $1.7 million related to interest -- previously charged off interest recovery for a particular credit relates to prior years. When that comes in, that's booked in other income. That was a nice deal for us to receive.

As far as the loan growth, did I point out, Jennifer, that the -- we had increased another -- if you will just let me refer to it for a second. I will look at notes. We saw loan growth increase $72 million after the end of the quarter to $8.668 billion as of yesterday or the day before. We have seen that continue to grow. And Dick pointed out, the average increase was around 13% year-over-year.

Jennifer, I might just comment. It's interesting what's happening and I talked a little bit about changes. What we are really seeing is slower pay downs and greater advances year-over-year. When I say slower pay downs, that's not a negative. It's just that customers are using their money a little longer.

You've got advances on the lines of credit -- are stronger. And when people do have a new commitment and they are -- the new growth, the advances on those lines is greater at the beginning than we have seen in the past. Then we've had a good growth of just brand new credits in total. Probably one of the most interesting things, and I feel good about and talking a little bit about mix, is we all know 70% of your growth usually comes from existing customers. We still have good growth from that.

But what we started to see those lines cross in the third quarter of '08 to where we are starting to see that the growth from prospects is, in fact, greater than just existing customers. Existing customers are using their lines and using the money, and not as much paydown activity as they have seen in the past, but we are building in a lot of new customers. That is a good diverse group and so it really speaks to the opportunity. Now, had we not started over five years ago with a very disciplined, very detailed and very accountable calling program, I don't think we would be where we are today. It's those tools that you put into place many years before that really make the difference. I'm very pleased to see that and see the opportunity.

Thank you. Phil, one more question. You said you had $1 million in costs related to Ike. You have anymore costs in the fourth quarter?

We tried hard to recognize all those in the quarter, because they happen then. The open thing I can think of right now is if there's any -- and this is just the way it works is if there's any insurance dispute or that type of thing, you might see some costs associated with that. I'm not aware of any right now, but I've had a few things insured in my life and seen how that works. That would be the only thing.

I think we tried hard to recognize pretty much everything. I just want to echo what Dick said. Our people did a fantastic job of being the first full-service branch open in Galveston after the disaster there, which is really devastating and just literally rebuilding two branches in Houston in six weeks. Just fantastic.

Thanks so much. Nice quarter.

Thank you.

You do have a follow-up question from the line of Andrea Jao of Barclay Capital.

Hello again. Earlier you gave the number for securities. I was hoping you could share the number for borrowed funds. I believe it was $958.3 million last quarter. And then given everything that's been going on the past quarter, just an update that you've had to do certain things differently.

Andrea, our borrowed funds were pretty consistent. They were $949 million in the third quarter. The thing that I think we are doing differently is really just on the margins. We are just being more aggressive with our value proposition on rates, and trying to be on our deposits. I think that's definitely helping us.

The safety and soundness, the safe haven is also a big deal to us, also. We have seen some pretty interesting movements of money in, some very large as people were just concerned about places to go and it felt good about this place. It's on the deposit side that we will try to be more aggressive, because it's long term and I'm talking really long term.

I think the banking industry has to [reintermediate] funds back from the money market funds, because everyone is going to have to fund their own asset expansion. That's what we have done for our entire history, but I think more and more people are going to do it. It could mean more competitiveness with regard to deposit pricing over time. I have said, though, that I believe that if there will be some rationalization of the loan pricing which really there was banks were not being paid for the risk over the last few years, there's more than enough money there to pay for the deposit pricing that we'll need experience as a company and as an industry. That's the thing I see being a little bit different, but I believe that we can hold our own there.

Fantastic. Thank you again.

You're welcome.

Your next question comes from the line of Susan [McGinley[ of Benham Investments.

Hi. You just touched on it a little bit, but I was wondering if you could talk a little bit more about what you currently are seeing from your competitors on the loan side. Have things rationalized a bit?

They are starting to begin to. Compared to the past -- what borrowers have had the last five to almost ten years is the greatest time they will ever experience. It's been to where the financial industry really didn't charge the right rate for risk. And we are -- we -- as Phil just discussed with you, what we believe going forward over the long term of deposit pricing moving up. Certainly you've got to move on pricing, we are in the midst of talking to our borrowers about that and that's a long, gradual process.

It's intellectually very easy to understand. It's emotionally very difficult for the customers, but we are moving through that. By the very nature of that, and able to increase pricing somewhat as we go forward, it is beginning to be rational. We feel strongly about it and we have been forging ahead. We are in the early stages of it, but I am encouraged by it and I see that it will work well.

Are you -- in terms of the growth from prospects, are you seeing any pattern in those prospects? For instance, taking prospects, winning them versus larger players or smaller players? Just curious about that.

I don't have any numbers on specifically -- I think one of our greatest opportunity as this industry continues to consolidate, the larger players will have a difficult time of really having a good borrower/bank relationship. If you look at the problems that existed, the trillion dollars or whatever you want to call it, that to me is fundamentally what happened to the industry. And that's why it's difficult.

The lender, the -- doesn't know who the are borrower and the borrower can't find the lender. That's something we don't believe in and haven't done for 140 years. We call that relationship banking.

That is our model, where we take both deposits and lend to people that we know. And I see that as a real advantage. Out of the top 30 banks in the country, we are the number one retention organization, and we -- and that is a result of good customer service and good relationships.

You have a follow-up question from Charlie Ernst of Sandler O'Neill.

Hey, guys. Dick, can you just give us some observations when you look at your energy customers about how their balance sheets are situated right now? My recollection is that a lot of these guys were paying down loans and not really drawing down big lines of credit while the prices were so high. How do they stand from just an ability to persevere in a period of potentially lower prices?

Charlie, I feel good about it. They've hedged a lot of their positions. Last time I looked, I think our customer is about 60% hedged and that runs all over the board. Some are not hedged and some are hedged 100%. You get everything in between. But they are strong on cash.

The main thing is when you look at the paydowns or look at their ability to pay their loans down which is as you know -- when you look at balance sheets of energy companies or production companies, they don't mean a lot. When you look at the value and the amount of production they have and the price, and that's the reason I always focus and have the discussion on price is that is what really -- that cash flow is what gives them the ability to service their debt. They are going into -- you can call it a down turn. And, yes, $80 is less than $140, but it's a lot more than what it's been in the past. Gas is a little bit more squeezed. But it always moves with demand.

They remember the pain that they've had -- the customers -- most of our customers that we deal with and so they position themselves pretty well with where they are. You go to somebody like a Chesapeake and you've certainly read what's happened and they cut back. This is not first time they have made big cutbacks in their drilling expenses over a period of time. This was -- I think it was $3 billion, a giant number.

But it's a giant company and a lot going on. We are going through the -- they are pretty good about pulling back because they have been through these times -- let the market settle and see where it's going to be, and then see where they go there.

Great. Thanks a lot.

There are no further questions at this time.

We appreciate your continued support and this concludes our conference call. Thank you very much.

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