Cullen/Frost Bankers Inc (CFR) 2014 Q1 法說會逐字稿

Good morning, my name is Mike, and I will be your conference Operator today. At this time I would like to welcome everyone to Cullen/Frost Bankers Inc. first-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be question and answer session.

(Operator Instructions).

I would now like to turn today's call over to Mr. Greg Parker, Executive Vice President and Director of Investor Relations. Mr. Parker, you may begin.

Thank you, Mike. 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 in 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 Investor Relations at 220-5632, area code 210.

Thank you and at this time I will turn the call over to Dick.

Thank you, Greg. Good morning and thanks for joining us.

It is my pleasure today to review first quarter 2014 results for Cullen/Frost. Our Chief Financial Officer, Phil Green, will then provide additional comments and after that, we'll both be happy to answer your questions.

I'm pleased to report that for the first quarter of 2014, Cullen/Frost grew year-over-year net income by more than 7%. Increased average loans by more than 5% and recorded 9.5% growth in average deposits. The results amid ongoing economic and regulatory changes are a credit to our dedicated employees who share a culture and value proposition every day.

During the first quarter of 2014 our net income available to common shareholders was $59.2 million compared to $55.2 million recorded in the first quarter of 2013. This was $0.96 per diluted common shares versus $0.91 in the first quarter of 2013. For the first quarter of 2014 return on average assets and average common equity were 1% and 9.97% respectively compared to [1.01%] and 9.49% reported in the first quarter of 2013.

Deposit growth continues to be strong. First-quarter 2014 average total deposits, were $20.5 billion, up $1.8 billion or 9.5% over the $18.7 billion reported in the first quarter of 2013. Our deposit growth is coming from both new and existing customers.

Net interest income on a taxable equivalent basis for the first quarter of 2014 was $187.8 million up $8.7 million for our -- the $172.8 million for the first quarter last year. This increase primarily resulted from an increase in the average volume of interest earning assets. We are seeing stability in the net interest margin which was 3.42% for the first quarter of this year, compared to 3.45% in the first quarter of last year, and 3.39% for the fourth quarter of last year.

Non-interest income for the first quarter of 2014 was $77.5 million compared to $77.8 million reported a year earlier. Trust and investment management fees increased $3.5 million to $25.4 million up 16.1% from the $21.9 million reported in the first quarter of last year. Most of the gain came from investment fees which increased $2.7 million from the first quarter of 2013.

Other non-interest income was affected by $4.3 million gain recognized from the sale of the bank owned property in the first quarter of last year. Non-interest expenses for the first quarter of 2014 were $157.9 million compared to $155.8 million in the first quarter last year.

Salaries and employee benefits were up $3.8 million over the same period a year earlier, from added employees and normal annual merit market increases. Other expenses was $38.6 million down $2.9 million from the first quarter of last year. Largely due to the write down of land that is part of the headquarter facility that was made available for sale in the first quarter of last year. Other expenses for the first quarter of 2014 also included $1.1 million in acquisition related costs associated with the pending WNB Bancshares merger.

Turning to loan demand, our strong first-quarter provides good reason for optimism through 2014. In the first three months of this year we booked more loan commitments than any other first quarter since 2008. Year to date new commitments are up 19% and nearly every region is ahead of last year.

It was our second best first quarter ever for adding new relationships. Year to date, our new relationships are up 13%.

First quarter 2014 average total loans were $9.6 billion. Up a 5.1% from the $9.1 billion reported in the first quarter of last year. Average loans grew almost 10% on an annualized basis from the fourth quarter of 2013. We are seeing steady increases in the percentage of our pipeline for smaller companies which is great news for small businesses and for the economy.

Since year-end, customers are using their lines more. As a result, we are seeing a slight increase in the advance rate on revolving lines and construction loans. Thanks in part to a disciplined team approach and aggressive calling effort I am optimistic. We will see good loan growth through 2014 with in the current economic environment. Our credit quality trends continue to be positive, our non-performing assets declined by $44.6 million from the first quarter of 2013, that's a 42% drop from last year and $8.5 million decline from the fourth quarter of last year.

Net charge-offs during the first quarter of 2014 were $3.9 million for an annualized run rate of 16 basis points. In contrast, our net charge-offs in 2013 were 35 basis points of average loans. Our capital levels remain strong. T

ier 1 and total risk raised capital ratios for Cullen/Frost were 14.41% and 15.38% respectively at the end of the first quarter of 2014 and significantly exceeded Basel III fully phased in capital requirements. The ratio of tangible common equity, to tangible assets was 7.78% at the end of the first quarter of 2014 compared to 8% for the same quarter last year.

We are grateful for another good quarter, and are optimistic about the future for number of reasons. We continue to see strong deposit and loan growth with solid performance from various lines of business. Small business owners increasingly are using their lines of credit. Suggesting that economic recovery is extending into Main Street.

We operate in the pro-business state of Texas, where the economic growth and employment are consistently higher than the national average. Texas is creating jobs in all sectors and all income categories. Texas is growing through its diversified economy with the strength in construction, energy, technology, and petroleum exports.

The states dynamic energy industry is a primary reason why we are expanding into the vibrant Permian Basin. We expect approval on the WNB Bancshares merger in the second quarter. Midland and Odessa are some of the fastest growing cities in the country, and we are excited to align ourselves with the well-respected, well-managed Western National Bank.

We are also optimistic because of our culture and great people at Frost. Since our earnings call in January, we were named a J.D. Power Customer Champion for the second consecutive time. Frost is one of only 50 US brands recognized across all industries for this distinguished award that recognizes service excellence.

In February, Frost received 21 national and regional Greenwich Excellent Awards (sic - see press release "Greenwich Excellence Awards") for superior service and performance in small business and middle-market banking. I commend our dedicated employees who work hard and represent the Frost culture every day to our loyal customers.

At Cullen/Frost we continue to focus on the basics. We are reaching out to new and existing customers to expand our customer base. Our assets are approaching $25 billion. Our credit quality continues to show a positive trend as we stay true to our principles and lending disciplines. Our capital levels are strong. We have money to lend. We remain focused on our value proposition, a strong culture and excellent customer service. And we continue to deliver steady superior financial performance for our shareholders.

And with that I will turn the call over to our CFO, Phil Green.

Thanks, Dick. Let me make just a few additional comments about our operating results for the first quarter and discuss our outlook for the rest of year. And then I'll turn it back over to Dick for questions.

Our net interest margin increased for the second consecutive quarter. The three basis point increase in the first quarter was driven primarily by higher investment portfolio yields, which were up 13 basis points for the quarter compared to the fourth quarter of last year. This added five basis points to the margin.

Also adding to the margin was a slight lowering of deposit costs, and the expiration of a fixed rate interest rate swap on some trust preferred debt late last year. Both these combined to improved margin almost three basis points. On the negative side we saw a small drop in the loan yield which hit margin by a little over two basis points.

The increase in investment yields was the result of shifts from lower yielding taxable securities, into higher yielding and municipals. As the average investment portfolio was flat at about $8.8 billion. The decline in the loan portfolio was also related to mix. We actually saw the spread to prime for new and renewed prime base loans improve 7 basis points in the first quarter to 93 basis points.

However, we saw an increase in the percentage of new and renewed loans tied to LIBOR, which typically carry a little lower rate and also tend to be larger deals with lower risk rates. During 2013, LIBOR base loans represented 16% of all new and renewed loans, and in the first quarter they averaged 28% of total new and renewed loans.

Looking briefly at loan growth for the quarter on a period end basis, loans were up $235 million from the end of last year which represents an annualized growth rate of 10%. 85% of that growth came from C&I component with only $30 million representing shared national credits. Also, loans of continued their growth in April and currently average almost $9.8 billion, a nice increase from first quarter levels.

On another note, Dick mentioned that the growth in trust and investment management fees which were up 16% year-over-year which we were excited to see. Of this $3.5 million in growth, three-fourths of it represents increases in investment management fees from both equities and fixed income. Over the rest, almost half a million dollars came from our unusually high level of real estate management fees, due to some large properties sold during the quarter. And a little over $200,000 came from increases in oil and gas fees related to a normal increases in production as opposed to leasing bonuses.

Finally, looking forward at our operating results, or expected operating earnings for 2014, excluding transaction costs related to the Western National acquisition, we currently believe that the 2014 mean, for analyst estimatesof $4.11 is a little low. And a more reasonable estimate would be somewhere closer to the midpoint between the current mean and the highest part of the range. With that I'll turn back over to Dick for questions.

Thank you, Phil. We are now happy to take your questions.

(Operator Instructions)

Scott Valentin with FBR Capital Markets.

Hello guys, this is Josh in for Scott. Thanks for taking our questions. Can you provide more color on the loan growth during the quarter, and whether it is driven more by increased line utilization or new accounts?

It's kind of a combination of both. I think there's a couple things that are particularly interesting. You had about $235 million growth. $200 million came from C&I loans, which if you analyze that growth would be about a little over 16%. That's good diversification in all factors.

In that number, as Phil said earlier, though, about $30 million of increase in the shared national credits, which quite frankly have been at a very low funding rate, so it was good to see a little bit of growth there. So it's a lot of diversified growth and a little bit of everything, commercial real estate moved up a little bit.

If you look at the different segments, as I said, energy was up, multifamily, there was a drug company that is a real good small- to middle-sized company that made an acquisition. It's a little bit from everywhere.

Got it. Could you provide the line utilization rates for this quarter versus last?

They're up slightly as I said in my comments and you've got to slice the cheese pretty thin, but I was so happy to see any movement in that, that it's come up.

As I've talked to you about this, the run-in on the revolving lines, they dip down a little bit. They run around 42%. They've been high as about 44%; they are probably up to 43%. So you've seen a little bit of improvement. One of the things in the commercial real estate that I've talked about befor, is that I'm just astounded at how we 're growing the real estate commitments, but at the same time the advanced rate is so weak.

And I've talked about the reasons before putting all the equity in at the first, when the project is finished because there's a lot of demand for loans, both in shorter-term construction loans such as we make. But also for insurance companies that as soon as the project's almost finished, they're going into permanent. But I was looking, too, at the levels of revolving and declining commitments from 2005 to 2014. And it's really interesting to me that over that long period of time, the commitments have doubled and yet the line usage, the advance rate on them, is only up about a third.

So, I guess the good news is there's a lot of pent-up demand as the economy gets a little bit better. I think it's a good sign that we saw the small business line usage start to increase a little bit. And as I said, that's a good sign for the economy, that means that -- that finally this recovery that has been so slow and smart economists tell you that that's what happens with the financial recession, that it takes a long time to come out of it.

Certainly it's taken longer than I thought was necessary. But that's good to see small businesses. That means it's getting close, the recovery is dipping down into Main Street.

Okay, thanks for that color. That's it for us.

Brady Gailey, KBW.

Good morning, guys.

Good morning.

Maybe to ask the loan growth question a little differently. The uptick in loan growth in Q1, do you think that was more driven by the Texas economy, or was it more driven by something internally at Frost, whether it be a different loan pricing schedule or whatnot?

Brady, it's because we work hard -- than anybody else. I don't know the whole answer. Certainly we're in a good economy, but I've talked to you for years about how proud of our people and our disciplined calling effort, and our team calling effort, and I think they're doing a great job. We do work hard. And we stay with our culture and I think that's the big factor in it.

Okay. Then probably a question for Phil. You have the expiration towards the end of this year of some nice swap gains that I think are adding around $0.10 per share, per quarter, in earnings. How do you -- what's the plan to offset that burden? Could you see adding to the municipal bond portfolio to help offset that burden or what's the plan to deal with that?

Yes, Brady, I think it's closer to nine by my calculation. But it's a lot, so we're together on that.

I think what we said in the past and then our plan continues to be, that -- I will just say it again, that we've got, it represents a maturity of sorts. It's a notional maturity. Something that we can't replace, similar to a bond that we couldn't replace. The good news is that, while a notional maturity doesn't have any cash associated with it, we have tremendous amount of cash in our balance sheet with our liquidity position averaging $3.8 billion, I think, for the first quarter. I think it's up to just under $4.5 billion these days, since we've had some maturities.

So we're going to take some of that liquidity and utilize that investment portfolio in the municipal sector, which that's really where the yields are that we thought for a long time were where there's value. That will start later on during the year. I'd like to have a little time. I'm hoping for a little bit better market, frankly. But also -- so it will take a little time to do that. I mean, you can't buy municipals like you can buy treasuries.

So there may be a little bit of a squeeze, depending upon how, for a short period of time, based upon how fast we can bring those on. But that's really our plan for that, and believe we can replace the notional maturity with actual re-investments of current liquidity.

Okay. That expiration really shouldn't be much of a burden once you buy some more muni's?

Yes. The burden would be how long it takes us to buy, because, again, the kind of things we buy are extremely high quality and we're very discriminating while we're buying.

Okay. And then finally in other operating income down in fees, looks like that went quarter on quarter from $9.2 million down to $6.5 million. And honestly, it looks like the $9.2 million in the fourth quarter was a little higher than average. Can you remind us what pushed up the 4Q number and other operating income and fees?

You're looking at other income?

Yes, sir.

Yes. Well, the reason that other income was down was because we had a gain on a sale of a property a year ago that was included in the first quarter. We had a $4.3 million gain on a downtown office building that we'd got a good offer on and had decided to move out of. So we sold that and had a gain. We didn't have it this quarter, so that's the drop in other income.

I'm actually looking at quarter on quarter. So the fourth quarter of 2013 versus the first quarter of 2014. Looks like it was down a little under $3 million?

Okay. If you're looking at other income on a linked quarter basis, I'm sorry. Two things. One is we had a recovery in the fourth quarter of about $1.5 million related to a particular credit and those look kind of lumpy. We will have those occasionally and, again, it's sort of lumpy.

And then, we had particularly good Capital Markets trading activity, associated with sales of derivatives to customers for hedging purposes. That was a little lower than in the first quarter. So those two things were most of that drop.

Okay. Great. Thank you for the color.

You bet. Sorry I missed your question.

Steven Alexopoulos with JPMorgan.

Good morning, everyone.

Good morning.

I wanted to start and maybe follow up on Dick's comments regarding seeing the margin stabilize. And I was wondering are you seeing loan portfolio yields stabilize, or is the outlook coming just from investing the excess cash? Maybe color on that AMEX driving that.

Let me make a couple of comments, and then I'll have Phil get into it. I wish it was because pricing on loans was better. It's extremely competitive. However, it looks like that we may be hitting kind of the bottom. And it could be a little bounce-up in that regard.

This is so competitive everywhere, and particularly in Texas on loans. If I look at loan pricing with customers last year, I've talked to you about 60/40; 60% of our loans we are losing and 40% getting, and talked about pricing and structure. If you look at pricing, last year it had an affect on loans with customers are losing about 8.7% and this year it's about 2.7%.

I think what you're seeing is the pricing is stabilizing somewhat and we're being more competitive. And I think we've done about all we can do. The whole industry has. The thing that I worry about, it seems to be moving to structure, which is a bigger problem. Which last year it was about 7%; today it's about 12%. That's the place we're not going to compromise.

We'll certainly work with customers to explain what's going on, but we have compromised pricing. And pricing's had -- down to the bottom and you getting some opportunity to move up a little bit.

I am going to just add, I think Dick's right. We're seeing some -- what I'll call some stabilization, depending on what area you're looking at. As I mentioned, the spread to prime on new and renewed. That's the biggest part of our new and renewed loans was actually up 7 basis points from 86 basis points last quarter to 93 basis points this quarter. So that's a positive.

If you look at the LIBOR, as I said, the more LIBOR deals you do, that tends to compress what your yields would otherwise be, because they tend to have the lower rates. And LIBOR pricing spreads actually contracted a little bit. They're a smaller percentage, but they did contract a little bit. They were down about 18 basis points on the first quarter versus the fourth quarter.

So you have those two things working against each other a little bit, which equals, I think, pretty much stabilization on rate. I think the real impact, though, and the answer to your question is that, we're not going to look for margin in -- a lot of margin improvement from just loan yields, because I just don't think in this current market you're going to see the ability to significantly increase prices competitively. You need to -- I'm happy with what we are doing, as I just described, and I think we're holding our own.

The real key is what are loan volumes going to do? And we did see good growth in loan volumes. And we need to see a lot more for a long period of time really to, what I'll say is repair the traditional relationship between loans and deposits that we usually have. We're down to under 50% today; five years ago we were 80%. That's really what we need to do is work on the volume side. That's what's going to help the margin.

You do have the ability, as we continue to employ some of the tremendous liquidity that we have, to increase your net interest margin and net interest income with what you do in bonds. And we have done some of that, and we need to do some investing over time and we'll continue. And, as I mentioned in my comments, I think that was the biggest positive was just volume-related issues in the investment portfolio. But again, loans were up, as Dick said, $235 million on a period and basis for the quarter and that helps margins as well.

Okay. Thanks for that color. Maybe just one other question. The seasonal increase in insurance fees and commissions seemed a bit light and was flat year-over-year. Any color on why we didn't see more of a pickup there in the first quarter?

I think one thing that happened last -- remember last quarter we had some particularly good insurance commission revenue. And remember we had a number of customers who were trying to come in early, getting grandfathered in to the Affordable Health Care Act. They wanted to -- if they did the renewal prior to the end of the year, they would actually be able to avoid some ramifications, I'm not exactly sure what.

But as result, I think we had people who would normally have renewed in the first quarter of this year which actually did it last quarter, the fourth quarter last year. So that, I think, probably accounts for the reason. I think our operating numbers and what we're seeing in that business have not changed. That would be the thing, I would think, it would relate to.

Okay. Appreciate all the color. Thanks.

John Pancari, Evercore.

Good morning, guys.

Morning, John.

Back to the pricing question, can you just give us some idea of what the -- where your new production is coming in at for C&I and CRE in terms of new money yields? Just so we can gauge what kind of impact that's having?

Well, as I mentioned in the first quarter, the new and renewed loans that were based on prime, which is the big majority of our new and renewed loans, that had a 93 basis point spread to prime, so prime was 325 so you can add that on top of that. The LIBOR pricing is a little bit less than that, but it was, I think I said, down 18 basis points, so -- (multiple speakers) The number to keep your eye on is that spread to prime on the new and renewed.

Right. Okay. That's fair for the C&I. And then CRE, I guess what I was getting at, that could be a little bit different, right? Because that could be some five-year fix paper as well. So any change there?

No. We did not -- I'm looking at that. Looks to me to be fairly stable. I don't see a big change there.

Okay. All right. And then separately, in terms of the rate sensitivity, I wonder if you can give us an update in terms of how you're positioned from the rate sensitivity perspective? And more specifically, if you can give us an update on, longer term, how much in deposit runoff do you expect ultimately as rates start to move higher?

I know you were one of the earlier banks to flag the red Q issue. And as we get to an environment here where we could be looking at higher rates in the next year or year and half or so, that brings that into question. So wanted to get your updated thoughts. Thanks.

John, let me jump in there a minute and then I'll let Phil talk a minute. I made a comment that we were very pleased about the new and existing; the deposit growth keeps coming from new and existing.

One of the interesting things that's happening, 60% of the growth came from new, and 40% from existing. And that's overall, all deposits. So what I think is really important is, as you projected, that at some point people are going to start using their money more. And, as a matter fact, on the consumer side, the net augmentation from consumer deposits has weakened, which means people are starting to spend their money and invest it or do whatever they do.

So one of the things that we've been positioning ourselves of these relationships, you've heard us talk about it for almost 10 years, is it's not just about deposits. It's about relationships. And we're continuing to grow on the new side. And, yes, as a matter of fact, as I just gave you the example on the consumer -- not the example, the fact -- consumers are starting to spend more money, not build up deposits as much, and they're feeling better about the economy, and that's good news.

John, I'd say on just asset sensitivity, there are a lot of parts to your questions. One thing I'd say is, with regard to what are deposits going to do, Dick mentioned how we're seeing some less augmentation, and the biggest percentage of our growth is coming from new accounts.

If that continues, I think we could see, first of all, we could see a flattening of deposits when rates begin to go up as opposed to an absolute turnover and drop in deposits. We could have some drop, but if you continue to grow with your new relationships, and we're working hard to do that, you may see a flattening as opposed to a runoff.

But let's assume -- let us talk about your assumption which, let's say, deposits run off or let's say rates on DDA are paid and begin to increase. Our disclosures have always been, in our Q's, an assumption that we pay a very market-sensitive rate on demand deposits, with a fairly high correlation to what would happen to increases in fed funds.

We always do that because we know we're not in control competitively of what others do, and we're going to be competitive in the market with rates we're paying, if we have to respond to what others do, particularly too-big-to- fail banks. So those disclosures are based on a very market-sensitive rate on demand deposits. And we have shown and we'll continue to show that we are asset sensitive, not by a huge amount, but we are asset sensitive during the first 12 months. On a up 200 rate increase, it will be a little over 1%.

As I always say, it is really months -- the second year, it's months 13 through 24 where you really see the sensitivity. And we've gotten much more asset sensitivity on that second year, even with a very highly sensitive demand- deposit rate to market-rate increases. We also say in those disclosures, and I'll say again, that if the rate on the DDA is much more administered, sort of more like what a demand-deposit rate is or an earnings-credit rate on, say, treasury management accounts, that type of thing, to the extent that's lower, we become much more asset sensitive. And I think my sense, although we don't know what the sense of the market is, we're probably going to end up with a more administered rate as opposed to a highly sensitive rate. So I think that we would be, as our disclosure said, would be even more asset sensitive.

The word I would use with you is I think that we are and should continue to be solidly asset sensitive. So we're poised for that and we have got lots of liquidity, if we do see some declines in deposits. But when you look at the liquidity that we've got in our checkbook account today at the Fed, it's getting up near 20% of our deposits. I don't think we'll see anything like that, even if there is a huge runoff. So I feel good about it. I think we're solidly asset sensitive and that's my view on it.

Okay. All right. Thanks for all the detail.

Emlen Harmon, Jefferies.

Hey, good morning.

Good morning.

I was hoping to approach the competition question from a different angle. You guys have obviously talked a lot today about just pricing and structure pressure. It feels like every time we turn the corner, we hear about another bank trying to enter the Texas market, whether it's loan production offices or just outright acquisitions.

One of the things you guys have prided yourselves on is growing customer relationships throughout the cycle. Is this getting any harder with the number of new entrants into the market? And what are your views on that and what you're seeing from some of those -- seeing from some of those new competitors?

It's a lot of the same. New competitors coming to Texas is not new. And we continue to do well with -- I mean, look at the numbers. They continue to grow.

New accounts are up substantially with individuals. And so I think we're able to compete well with them. And our strong calling effort and doing more team calling. As I said, our opportunities are off to a great start; they're up; commitments are up. There's a lot of activity that's up, and I think it's very well.

I wouldn't overlook the strength of our eCommerce. We've got 78% of our consumer customers are online; 70% of our business customers are online. It's continuing to go -- 20% of our check deposits come from outside the branch. And we are a 4.5 Star rated app. You're not going to find one higher, as you go through financial apps.

So we are extremely in a good position to compete. Obviously I'm biased, but you're not going to find a better group of bankers and a better culture than Frost. And if somebody wants excellent service, this is the place they come to.

I might also just add to what Dick's saying. As we've said many times, the four banks bigger than us in this market have 55% of the deposits. And the four banks below us have less than 10. And we compete more than anything else against the too-big-to-fail.

And you're really not seeing any more too-big-to-fail come in. They're already here. We'll be competing against them for the rest of our business career. So when you see others come in, yes, you do see other people come in. They'll make announcements and make a splash.

I think, as is true of most new competitors and markets, the main value proposition they try to bring to the table is price, and we've been talking about the price issue already. That's already factored into and baked into our discussions that we've had already.

And as Dick said, the key question's what's the overall value proposition that they can bring and can you match up with ours? We think ours is great. We think the third-party research and awards (inaudible) continue to validate that. So we're going to continue to see more and more in terms of competition, but in our life it is going to be primarily competing against the too-big-to-fail in this state for a long, long time.

I'd rather be in a state that's very competitive, than a state that doesn't have any business.

Great. Thanks, guys.

Dave Rochester, Deutsche bank.

Hello, good morning, everyone. This is actually [Timor Braziler] filling in for Dave. Just a couple follow-up questions on the security book. I'm just wondering what the absolute dollar amount of muni's purchased during the quarter and the rate on those?

Okay. As far as on the investment of muni's during the quarter, we bought a little over $300 million in muni's with the yield, tax current yield of 5.4%. Those were yields of about 18 years. Remember, they're ten-year callable. And I think a lot of those will get called, so we're not going to get to have them for that long.

Then we bought $130 million in seven- year muni's with about a three-fifteen tax-equivalent yield. So that was the muni activity for the quarter.

Okay, great. And just looking at the portfolio as a whole, the securities portfolio. What is the current duration on the securities portfolio?

Current duration of the portfolio is, with expected calls on the muni's, is a 4.2. If none of the muni's are called, and that's not going to happen, it would be a 6.7 result in maturity. But if you look at expected call [glum] Bloomberg and take a look at all our portfolio, it would be a 4.2.

Great. Thanks for the color on that. Next, switching over to asset quality. I noticed that the reserve ratio actually ticked up a little bit this quarter when compared to the fourth quarter. But it looks like the rest of the asset quality trends were very stable. I'm just wondering, is that a reflection of any kind of migration into the criticized buckets? Can you give any kind of color on that? That would be great.

No. It's not.

Okay. Great. I guess just one last modeling question. The tax rate this quarter looked like it was about 16.5%. Is that a good run rate for the remainder of year or should we expect a little bit of a bump there?

I think right now that's where we'd be shooting for, as far as effective tax rate for the year. That can change depending upon what happens with various things, but right now that's our estimate.

Okay, great. Thanks.

John Moran, Macquarie Capital.

Thanks. A quick one. Housekeeping on the seasonal comp and benefit. Looks like it ran probably $2 million to $3 million high, on the benefit line. Is that the right way to think about that?

On the benefit side?

Correct, yes.

You're looking at on a linked quarter basis?

I think versus run rate. I guess on a linked quarter basis, it was up even more than that, $3 million, $4 million high.

I think that the increase on our quarter to quarter that you saw in benefits is primarily related to seasonal items in the first quarter.

So, it is fair to assume most of that backs out. And then on the actual salary and wages line, that's been back-half heavy the last couple years. Is it fair to assume that there is some kind of build-in, in there? Ex anything that comes on with WNB?

One of the things that happens is we, on stock awards that are given for people that are at already at 65 years of age, accounting rules make you expense those immediately as opposed to amortizing them.

So you end up with a comparable number on a year-over-year basis. But you do it up with a little bit of a seasonal increase in comp related to those awards, because you have to take what is awarded. And even though those are a longer-term award, they have to be expensed upfront. So I think that's probably what you're seeing.

Okay. Then I know you guys the timing on the transaction closing still expected this quarter. I guess it's been pushed out a little bit. Any sense of what's delaying that at this point? And if you could give us first half of this quarter, back half of this quarter, if you have any kind of insight on when that might happen?

It is going to be in the second quarter, and we're pretty well into it. And it will close, and it's just part of the process you have to go through today.

Okay. Then last one for me is just following back up on the pricing discussion. The composition of the origin, I think if I heard Phil correctly, skewed more towards LIBOR, to LIBOR-based lending this quarter. I think you said it was close to 30% versus 16% was what it was last year. Anything driving that? Is it just a pickup in a certain kind of loan? And what would the expectation be for that going forward?

I think we expect it to be less. It was 28% versus [716% ]a year ago, so it was a little bit unusual. Larger deals, et cetera, can drive that. Sometimes competition can. I mean, we'd like to see that lower. We just think that, while there are certain parts of the business, like energy, where those are typically all priced off LIBOR, that the prime is a better, more realistic number domestically for loan pricing.

Both for us and our customers. So we'd like to see more of that. And we do a lot of C&I deals, and the kind of deals that we do tend to be priced at way more. So hopefully we'll see it move down more towards a higher percentage of loans. It's priced off prime, but we'll see.

That's just another factor in the scheme of all this pricing in the mix, but these things kind of move and sway in different directions.

Got it. Just kind of circling back, I think to some comments that were made in the opening remarks, sounds like the pipeline for small business lending was looking good and that that was improving. Presumably more of that is prime-based, so that would be a factor here going forward?

That's a correct statement.

Okay. Terrific. Thanks very much guys.

(Operator Instructions).

Mikhail Goberman, Portales Partners.

Good morning, gentlemen. Just had a quick question about your reserve ratio. Is a 1% ratio a good normalized level to think about going forward, give or take a few bps above or below it?

I would say that, as we've always said, it's formula driven, so we can't -- and the formula doesn't have a line in it that says 1% minimum. The accountants have their rules and we've got to follow them and as asset qualities improve, we've seen that number move down.

I'll say another reason why 1% won't be a number you can hang your hat on, is when you do acquisitions, the accountants in their wisdom have said that the reserves of the acquired companies have got to be netted against their loans, which you keep your reserves for the loans that we have for the acquirers. So you're going to have what's a hidden reserve in the loans that are brought over for Western. That's going to bring our number down, I don't know, probably somewhere between five and eight basis points or something. Just because of the arithmetic of the accounting rule. That's another reason why I don't think you'll see the 1%.

Got you, thank you. Forgive me if this is covering something you've already covered, but what are your thoughts on the future M&A possibilities specifically out there in West Texas Permian Basin? Thank you.

Well, I've said it over and over, we're an aggressive looker and conservative buyer and nothing's changed in that regard.

Okay, thank you.

Scott Valentine, FBR Capital Markets.

Hey, guys my follow-up was actually answered. Thanks.

You're welcome.

I will now turn the call back over to the presenters.

Thank you for this discussion and this concludes our first quarter 2014 conference call.

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