Cullen/Frost Bankers Inc (CFR) 2014 Q2 法說會逐字稿

Good morning, my name is Lori, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cullen/Frost Bank second-quarter earnings conference call.

(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 Lori. 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 and 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 and 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 will turn the call over to Dick.

Thank you, Greg. Good morning, and thanks for joining us. It's my pleasure today to review second quarter 2014 results for Cullen/Frost. Our Chief Financial Officer, Phil Green, will then provide additional comments. After that, we will be happy to answer your questions. I am pleased to report that for the first second quarter of 2014 Cullen/Frost reported a double-digit increase in net income and average deposits, average loans of more than $10 billion for the first time, an increase in the net interest margin, and total assets of more than $25 billion for the first time. During the second quarter, we also completed our acquisition of WNB Bancshares. WNB results are included from an acquisition -- from the acquisition date, at a close of business on May 30, 2014.

Our strong quarter underscores noticeable improvement in the economy, but our results also came amid WNB merger approval process, and ongoing interest rate and regulatory challenges. I commend our dedicated employees for their dedication and their focus on serving customers. During the second quarter of 2014, our net income available for common shareholders was $64.5 million or a 13.1% increase, from the $57 million reported in the second quarter of 2013. This was $1.02 per common share, compared to $0.94 in the second quarter of 2013. For the second quarter of 2014, return on average assets and common equity were 1.4% and 10.33%, respectively, compared to 1.3% and 9.93% for the same period last year.

WNB Bancshares Inc., with loans of $673 million and deposits of $1.6 billion, affected average loan and deposit numbers for the quarter by one month. Deposit growth continues to be strong. Second quarter 2014 average deposits were $21.2 billion, up $2.4 billion or 13% over the $18.8 billion reported in the second quarter of 2013. Taxable equivalent net interest income for the second quarter 2014 was $198.9 million, up 14.3% from the $174 million from last year's second quarter. This increase primarily resulted from an increase in the average volume of interest earning assets, driven by strong deposit growth. Our deposit growth has been steady and consistent throughout the economic downturn and slow recovery.

The net interest margin grew to 3.48% from the second quarter -- for the second quarter of 2014, compared to 3.43% in the same period last year, and 3.42% for the first quarter of this year. It's a great sign to see the increase in net interest margin. Non-interest income for the second quarter of 2014 was $79.2 million, up 9.2% or $6.6 million from the $72.5 million reported a year earlier. Trust and investment management fees increased $4.2 million to $26.7 million, or an 18.6% increase over the second quarter of 2013. Most of this increase was from investment fees related to an improved equities market, new business, and changes in the fee schedule.

Insurance commissions and fees were up 6% to $9.8 million, and other income increased $1.2 million to $8.9 million. Non-interest expense for the second quarter of 2014 was $164 million, compared to $149.8 million in the second quarter of 2013. Salaries and wages were up $4 million over the same period a year earlier. Net occupancy expense rose $1.1 million to $13.7 million over the last year, primarily from increases in lease expense, and other expense increased $8.4 million. $4.8 million of the increase was transaction-related expenses associated with the WNB acquisition, with another $1.6 million from an increase in check card expense.

Turning to loan demand, we saw a continued trend of favorable loan growth. Second quarter 2014 average loans were $10.1 billion, up $873 million or 9.5% from the $9.2 billion for the second quarter of last year. Excluding the Permian Basin acquisition, the first half of 2014 was the best first half ever for new relationships. We also had the best first half for new commitments since 2008, which was just before the economic downturn.

Over the past year, we have seen a steady increase in the percentage of our pipeline from existing customers. This is important, because our success rate is much better with these opportunities. The willingness of customers to seek financing also is a good indicator of our improving economy. During the past year, customers have started to use their lines more. As a result, the advanced rate on both revolving lines and construction loans has increased. The advanced rate on lines grew faster than the growth of commitments, which is what we have been waiting for.

I'm also encouraged that the ratio of lost opportunities has shifted from around 60/40 in favor of pricing last year, to 60/40 in favor of structure this year. That means that we are competitive on pricing without sacrificing credit quality. And that is right where we want to be. I commend our employees for their disciplined team calling efforts to help make our solid loan growth possible. Absent any foreseen changes in the economy, we expect favorable loan growth trends to continue.

Our credit quality trends remain positive. Problem loans are at pre-recession levels. Our capital levels remain very strong. Tier 1 and total risk-based capital ratios for Cullen/Frost were 13.84% and 14.76%, respectively, at the end of the second quarter of 2014, and are in excess of proposed BASEL III fully phased-in capital requirements. The ratio of tangible common equity to tangible assets was 7.59% at the end of the second quarter of 2014.

Before I turn the call over to Phil, I'll close with a few comments about the economy and my continued optimism for Cullen/Frost. We're seeing positive signs in the economy, with an increase in jobs and a decline in unemployment. At Frost, we are blessed to operate in Texas, a business-friendly state with an extraordinary diversified economy and bright future. The Federal Reserve Bank of Dallas projected 2014 job growth in Texas to be 3% to 4%, nearly double the national average. Texas unemployment is projected to end the year at around 4.8%, which is lower than the national average.

Construction, energy, and technology continue to drive our diverse economy, to help make Texas one of the strongest states in the country. The continued strength of the energy sector in Texas is just one of the reasons why we are so excited about WNB acquisition. The dynamic Permian Basin is responsible for approximately 14% of all the oil produced in the US, and 57% of the oil produced in Texas.

The acquisition expands our Texas footprint, and provides our new customers in Midland and Odessa with access to more extensive banking, investment and insurance services. We are excited about the new opportunities we can bring, and the positive impact we can make on the Permian Basin. We welcome our new employees in west Texas, who share our long-standing commitment to outstanding customer service.

We are working hard to provide top-quality service, convenience, and superior technology to our customers. Our top-rated Frost app for iPhone and Android is extremely popular, and the growing choice of many customers for most of their banking transactions. We are giving customers options on the way they can interact with us. Because of our strong value proposition, culture, excellent service; customers continue to choose Frost. I am grateful to our dedicated employees who bring our culture to life each and every day, and help make our strong second-quarter possible.

In summary, we saw double-digit increase in net income and average deposits. Loans topped $10 billion. Net interest income grew 14.3%, and net interest margin increased. Our credit quality trends remain positive, as we stay true to our principles and our lending disciplines. Our capital levels are strong. We have paid an increased shareholder dividend annually for 20 consecutive years, and we're well-positioned to serve our customers, create new opportunities, and continue to produce strong financial results.

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

Thanks, Dick. Let me make a few additional comments about our operations and outlook for the remainder of the year, and then I will turn it back over to Dick for questions. We certainly were pleased to complete the acquisition of Western National Bank and to fold them into our results for the month of June. The Western team has done an outstanding job of keeping focused, and growing the bank up through closing, during what was a fairly arduous and lengthy approval process. In addition, great work was done in identifying and implementing cost savings, such that we exceeded our goal of 15% cost savings. This great market, along with the great staff, make us very optimistic toward the Permian Basin moving forward.

We were also glad to experience an increase in our margin of 6 basis points, to 3.48% in the second quarter. This increase was driven primarily from higher investment portfolio yields, and increased average loan volumes. Investment portfolios saw an increase in both taxable and tax-exempt yields, increasing 28 basis points overall, while average loans increased just over $0.5 billion to $10.1 billion. Offsetting these positive factors somewhat was an increase in our average liquidity levels at the Fed by $362 million, which brought our average second quarter Fed level liquidity to $4.2 billion.

I also wanted to highlight a very strong quarter that we experienced in our trust and investment management business. Overall, trust fees increased almost 19% from last year. Almost three-quarters of this growth was from investment management fees. These fees increased 20% over last year, with almost two-thirds of the growth in new business and higher markets, and the remainder from adjustments to our fee schedule late last year. 20% of the overall growth in trust fees came from increases in oil and gas management, due to higher production revenues, as opposed to bonus payments. And the remainder of our trust growth represented higher estate fees in our north Texas markets.

Before discussing our outlook for the full year, I want to continue reminding our listeners that the gain from the amortization of our prime rate swap will end, beginning in November of this year. It currently provides approximately $9 million in interest income per quarter. And our plan continues to be to replace these earning by utilizing about $720 million of our current $4.6 billion fed liquidity over a six-month period, starts somewhere in the fourth quarter to purchase 15 to 25 year Munis with 10 year calls. And we recognize that there'll be some timing differences, as these securities are accumulated in a prudent manner over the six-month period. But finally looking forward, at our operating earnings for 2014, and excluding the $0.06 in transaction costs in the current year related to the WNB acquisition, we currently believe the 2014 main [brand for analyst] estimates of $4.13 is a little low, and that estimates nearer the high end of the range would be more reasonable. And with that, I will turn it back over to Dick for questions.

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

(Operator Instructions)

Dave Rochester, Deutsche Bank.

Hello, good morning. This is actually Timur Braziler filling in for Dave. Just a couple questions to start here. Maybe talk about what happened within the muni portfolio during the quarter, the size of purchases, the type of yield, and the duration?

Okay. I will say that the portfolio increased on an average basis about -- a little under $300 million. It averaged $4.450 billion in the first quarter, and averaged at $4.763 billion in the second quarter. If you look at what we actually did with regard to activity, we had investments in total in the second quarter of about $890 million. And some of this was the investment of a liquidity that came over in the WNB acquisition, that came up with a -- I will say a normalized, round number $650 million in their fed account, and we invested those dollars during the year.

Another thing that happened that increased our investments in the quarter was -- and you might recall, in the first quarter we had a maturity, an unusual maturity of $1 billion of what were two-year treasuries, which had a yield of 36 basis points. They came out of our portfolio, and we did some reinvestment of those. Some of that we did in the first quarter, but we also had some follow-on in the second. So we had a lot of money to invest in the quarter.

As far as what we bought, we purchased $250 million in treasuries, five-year treasuries. We purchased $150 million in two-year treasuries, and then we purchased in the munis, $250 million in round numbers, which were basically 20 year maturities with 10 year calls. And we did some seven-years -- a small amount of seven-year investments in munis. So that was sort of a character of what we were doing. It was kind of a heavy month for us, but it was the result of some heavy cash flow.

If you look at actual portfolio in total, average to average, first quarter to second quarter, it was actually down about $90 million, with some increase in munis, and some decrease in treasuries. I think you asked about the duration of the portfolio. If you look at the duration of the overall portfolio, utilizing the expected calls, the refis, and maturities of the muni portfolio, it runs around 3.9 years. Which is down a little bit from last year -- I mean, not last year, but last quarter. And it's -- the duration -- if all the munis went to maturity, it would be about 6 -- a little under 6.5 years, but that is not expected at all. So I would say the duration runs about [3.9] right now.

Okay. That's helpful color. And switching to the loan size, can you maybe give the production yields that you were seeing this quarter, and maybe how spreads held up, compared to the first quarter of the year?

I will talk about the spreads in just a second. As you know, we have been sort of tracking what the weighted average of spread to prime is on new and renewed loans, which I think is in our wheelhouse for the kind of business we do. And it actually held up pretty well. The first quarter was 93 basis points spread to prime, second quarter was 92.3. So I felt pretty good about that, in terms of how we held up spreads. We had sort of begun to see, at least in that prime sector of the portfolio, sort of some stabilization over the last few quarters.

Now the LIBOR continues to be, I would say, a little bit more aggressive in terms of pricing there. It was down from say, a 2.42% to 2.32% spread to LIBOR on the deals that we do there, and a little bit of compression, not too much on the fixed-rate component. So I think it was a pretty good quarter for spreads.

And I think that I would just add that, as I said earlier, that this is exactly where we want to be. I am very pleased that the 60/40 has flipped on us. I would also say to you, while there still some insanity in pricing loans, I think competition realizes that it is not healthy to go below zero. There is still risk in loaning money, which seems to be common sense, but it went kind of crazy. But we are doing all right on the pricing. Certainly, we walk away from things we think are ridiculous, but I think it is kind of stabilizing around this lower area. But this structure thing, I really believe is real important for our customers.

Just to give you an idea of how pricing and structure has changed. Last year, we lost about 8.7% because of -- or we declined, because of pricing, and today it's about 5%. Structure was about 6.6% last year, and today it is 10.4%. And then you have got, declines went down from 12.7% to 8.7% -- from 12.7% to 8.7%. And a lot of that is just the same ratio of pricing and structure. But what is important is that we booked 74% versus 69% last year, so we are booking more, and so that is in customers.

And from prospects, it is always a little bit different, but you have a similar trend, even a little stronger from the pricing of trying to pick up some -- move some customers over. Last year, it was 14.7%, this year it is 7.6%. And structure has gone from 13.9% to 19.2%, and then you add the decline. So about 60% are turned down -- or loans that we lose -- is about 60% because of structure. The booking rate is up. It's up from 23.8% to 26.3%. All of that is good news.

And we have said to you, ever since we have been talking for years, and for the 146- year history of this Company, we believe in our strong credit discipline. We are not always right, but I think it is the way to run a bank, and it has paid off for 100-plus years. And I think in this very competitive, and particularly in Texas environment, we are doing what we ought to do. And sure, we would like spreads to come up, and I think we will see rates start to come up. I don't know any more than anybody else, when. But I think we are in the right place of taking real good care of our customers, selling our value proposition, and building more than just a loan. We are not in the transaction business. We are in the relationship business, to where we want to make sure that we have that major deposit account, and major relationship before we loan to anybody.

Okay. That's very helpful color there. And then, just one last question on the loan side. Was there any unusual paydown activity during the quarter?

It has slowed a little bit. It has been unusual for -- since 2008 or 2007. I mean, the payments -- we couldn't quite get ahead of the curve, because -- and there is still a lot of activity. I mean, if a customer starts to -- gets an opportunity to sell his company at a ridiculous price, he will do it. And there is a little bit of that going on. But the -- it has improved a little bit from the standpoint of paydowns, but nothing real unusual.

Okay, great. And then just lastly, on the expense side, the $4 million in the other expense category associated with the acquisition, was that all deals -- deal-related expense or was any of that core WNB expense?

None of that was core. It was deal-related, just transaction costs, whether it was advisors, severance, those kinds of things.

Okay, great. And then just for the cost saves. I appreciate the color that they have been coming in better than expected. Has all of that been reflected in the 2Q results at this point, or should we still see some carryover into the following quarter?

Well, they have all been achieved. I am not sure exactly your question in the trend -- Western National was in our operations for June, so one quarter of the second quarter. So in that sense, I guess, none of it was in there on a full quarter basis, so you will see some roll forward with that. But the savings we are talking about on a percentage basis, is an annualized number in terms of the percentage that we talked about, and they have all been achieved at this point. We are operating on that basis on a go forward basis.

Excellent. Thank you very much.

Jennifer Demba, SunTrust Robinson Humphrey.

Well, thank you. Good morning. I have two questions. First on loan growth, just wondering if you could give us some color on geographic sources of the loan growth this quarter, as well as by category?

They are across all segments in which we operate, and there is really no specific thing that stood out in that regard. And quite frankly, energy was a little weaker as far as categories. Still very good, so it wasn't a big switch there. I think the real thing in loan growth is -- I talked about it last quarter -- I talked about it sometime of how our commitments have been growing over this long period of time since the recession happened, and yet outstandings held down. And I am real pleased that in the first quarter, we saw some advancement of outstandings going up somewhat, and yet still growing commitments. And that is -- that is true today.

If you look at all commitments -- all main and revolving lines and real estate, overall the numbers, I mean, were up 43.9% advanced rate, funding rate on these commitments, which is really good. It has been in the low 40%s. And you just -- as Phil just talked about and I have talked about, you only have one month of WNB in there. And without that, it was 43.5%. So you really got -- WNB had about a 0.5% reason -- I mean, effect on the numbers. And so, the basic business that we have been in prior to [CNBC] -- the Western -- is really doing well. I also talked about last quarter that I was really pleased with under $10 million advance rate, and they are doing well. They continue to stay about the same percentage, and so that means that Main Street is starting to pick up its activity.

Commitments didn't stop growing either, and that's good news. In fact, without Permian, they grew on real estate about almost 18%. And then on the revolving lines, they grew about 7%. So basically the change you see is people are starting to use these commitments that we have worked so hard over the last years and relationships to build, and that is really good news.

Jennifer, I have just a couple other comments, related to your question. If you look across all of our markets, I would say it was fairly consistent growth. On a linked-quarter basis if you were to look at all of them, a little bit higher growth in the North Texas and Houston markets, I think what you would expect. But it was fairly consistent overall, so I am glad to see that. If you look at some of the broad categories of growth, we had on a linked-quarter average basis, a little over $0.5 billion in growth, and the C&I portion of that was $338 million. So that was the lion's share of it. And then commercial real estate was $135 million. So I think that is really where the growth came from, in terms of regionally and in the broad segments of the portfolio.

I would just also add, that what you have got happening is this job growth and corporate relocations come to Texas, you obviously -- commercial real estate going to grow. Multifamily is strong, one to four family is good. As we finance builders across the state, and as you will remember, we didn't have the big downturn, but certainly it slowed. C&I support growth and accounts receivable and inventory, so it is all the kinds of things that you ought to see when an economy starts to improve.

If I can ask a follow-up, on expenses. I think in May, you announced that you had agreed to enhance your compliance program as part of the regulatory approval of WNB. Just wondering if those cost are included in the second quarter run rate, and what you anticipate those costs being?

I would say they are not fully included in the second quarter run rate at this point. Because some of them are, I mean, that is a process, right, so it is going to take a little bit of time to fully implement everything. So I would say, no, it is probably not fully implemented there. As far as the amount of cost, we haven't said what that would be. We don't -- it's a process, as we said.

Okay. Do you think it will take the remainder of 2014 to get everything you want accomplished, before you might look at more M&A transactions?

Well, that is -- that is not up to us, right? It is up to the regulators, and so we don't want to speculate on what the timing might be. Again, I use the word again, but it's a process, and we are just working through it at this point.

Yes, don't forget our position. We are aggressive lookers and conservative buyers. We bought one bank since 2008, so I wouldn't get too twisted up about it. I think in regard to the other factor the -- about people -- we want to find the right people, and that takes a little bit of time. But we are not going to just stack people in, just for the sake of stacking people. That is the reason this Company is strong, is that we have really outstanding individuals, very committed to what we do and our culture.

Thank you for the color.

Brett Rabatin, Sterne Agee.

Hello, good morning.

Good morning.

I wanted to ask just about -- you are going to buy the munis. I think the number is $720 million. If you could just give us maybe an outlook on, at the present time, what kind of yield you think you will get on those purchases? And then just -- you also model your interest rate sensitivity pretty conservatively I think vis-a-vis a lot of the industry. And so, I was just curious if you thought any of about -- with the changes you are going to make later this year to the balance sheet, might have on how you model your sensitivity to higher rates?

Yes. Well, I would say first of all, the yields on the muni market -- I mean, you can look on Bloomberg and find out what it is. I mean, it is -- you are probably -- depending -- like I said, we are doing 15 to 25 year munis. And so you could -- that could be anywhere from, say, around 5% to around 5.25% on a tax equivalent basis. I mean, I am not committing to that, right? Because that is -- we are talking about months ahead of ourselves here --

Right.

-- market is, but that is if you were looking more or less recently, that would be a real ballpark for the kind of yield you are talking about on these kinds of things. But with regard to asset sensitivity, yes, we are -- I have used the term before, I still believe we are solidly asset sensitive, particularly given more and more, if that -- if what happens with the rates on demand deposits, if the rates go up, or sort of the administered rates, as we talk about in our disclosure. So the purchase of these securities will -- would it reduce what we otherwise have been, in terms of asset sensitivity, yes? Asset sensitivity, yes. Is it going to cause us to not be asset sensitive solidly? No.

I mean, one thing to keep in mind, is we sort of run a barbell in terms of sensitivity if you are just looking at the non-loan part of the business, right? I mean, we have got an investment portfolio of $8 billion or $9 billion. We have got right now at the fed, about half of that in day money, right? And so, as I mentioned earlier, our position at the fed, with all the investments that we did, still increased over $350 million in terms of liquidity. And so, we are continuing to have that.

So I think we still have that balance, short-term day money, mixed with what we feel is where there is value in the curve. And on the credit side, which is in municipal markets. So we are going to continue to do that. We don't think it does any violence to the position that we really want to be in, which is we want to continue to be asset sensitive at this point in the cycle.

Okay. That's great color. And then, I guess the other thing, I was just curious about was this -- I think you talked around it some, Dick, but just along utilization -- I missed it, if you gave it -- the number for the entire operation. But what was the increase linked-quarter in the utilization rate? And then just, do you have any idea -- I know you have in the past, given a number of around the increase in your calling efforts. Didn't know if you had that number.

Yes, it is -- we have been strong on calling for a number of years, and it's holding at that strong level. You can't do much more calling. So I just -- I would say that is pretty much where we are. What I said to you, I guess, what you are asking is, is the funding rate on all commitments. And it was up to -- 44%, 43.9%. And without the Permian Basin one month effect, it was up to 43.5%. So the Permian made about [a half] difference. But it is really, quite frankly since -- well, really this first half of the year, it has been coming up, which is really nice to see, because it had been pretty weak.

I think the other thing when you look at construction loans -- I talked a lot about it. Didn't talk about it much -- I have talked a lot about it in the past -- didn't talk much about it today, because it is finally they are starting to use some of the money for construction advances. And that -- we have been just -- our folks have worked hard to put some great loans on the books. But they put all their equity in first. And as soon as they finished it, they sold it rather than leaving it in -- in the construction phase for a year or so. But it has moved up, and that's healthy.

Okay. I appreciate all the color.

(Operator Instructions)

Steven Alexopoulos, JPMorgan.

Hello, everyone. This is actually Preeti Dixit on for Steve. Just a question on the trust fees, and your growth has been really strong the past few quarters. You mentioned some of the drivers including changes to the fee structure. Is there still more of a tailwind from this, or should we expect growth from here to track more closely with market improvement?

I would say, looking at a year-over-year basis, there is probably a little bit of a tailwind, because we did the rate fee schedule change, I think a little bit later in the year. But as far as what is going on with the business from this point, I think you are seeing increases due to markets. But I think you are also seeing increases due to new business and growth in account relationships. That is an important part of what we do on a relational basis. It is not everything.

But just as an example, anecdotally, and there is a lot of wealth being created out here, with what's going on with the Eagle Ford shale play, a lot of people have money they need help with. And we are taking advantage of some of that as well.

I would say that I think that, given the fact that Western National didn't provide trust services, and that is a real core competency of us, and that market has such really -- frankly great wealth and it and growing wealth, so we think that is an important opportunity there. So we want to do a good job taking advantage of that. But notwithstanding that, we think that growth is going to come from new business and end markets.

I would just say too -- I -- it was pleasing to me to see that increase at 63% came from growing the business, and certainly the improvement in the equity markets, but only 37% was related to the price increase. So the basic business is growing. And just to emphasize, I mean, Permian Basin had no effect on that because they weren't in that part of the business. And as Phil just described to you, I think there is a good opportunity over time to grow that.

Okay. That's helpful color. And then turning to the deposits, if we back out what came from WNB, it looks like period end deposits were down a little. Was there anything unusual there? Have you started to see companies maybe utilize more cash here?

No. Quite frankly, I would just challenge you a little bit there. Deposits were up $2.4 billion beyond -- that's 13% year-over-year. You have really got -- we have been growing pretty consistently every conference call about $2 billion. And year-over-year, quarter to quarter, and so you only have one month of deposits in the -- from the Permian Basin. So it's still strong.

I would say -- did you mention period end?

Yes. That's right.

Oh, I am sorry, yes -- (Multiple Speakers).

I am just looking at the $22.5 billion in period end deposits.

Yes. I will be honest with you, I don't really follow the period end number too much, because there is such volatility in the number -- can be, particularly with our high level demand deposits. So I tend to look more at the averages when I am looking at that. And if you were to look, say year-over-year on our average basis, we were up say, $2.4 billion, up 13%. The average of Western National would have been around say, $500 million, $550 million for the quarter. So you can take that out. So we would have been a little bit below $2 billion, but it has still been pretty strong.

On a linked-quarter basis, which is maybe more to your point, we were up $705 million on an average basis. That was up on an annualized basis 13%. Let's take out say, $500 million or so just for easier math, and you will bring that down. It is still pretty decent growth, and nothing really of what I would say is unusual. We still had good deposit growth. And I don't think we were seeing any dramatic change, in terms of how people are using their money at this point.

I would also tell you, that one of the effects of averages and period end, particularly with Western -- the run checks come in around the 20th to the 25th of the month. And so, you are going to build the averages, and then they start go out as they take that money out. And so, that lowers your period end numbers from the acquisition. That is just the characteristic of a big part of Western National is when these run checks come in. So it runs the averages up, and yet the period ends is lower than probably the month end average.

One other thing I would say is, there is a little bit of a seasonal impact on public funds. They were down about $110 million on a linked-quarter average basis, and that is somewhat of a seasonal impact, as school districts and others use the tax monies that come in near the end of the year.

So that's a lot of detail. The question is, are companies starting to use their liquidity? I don't think so, really, it is -- you would have to really stretch to find that trend. Someday it will turn, but I don't think it's in the numbers today.

I agree with that.

Got it. Thank you for all that color. That's helpful. One quick follow-up on the rate sensitivity question, to your point on the cash. Do you have a sense at this point of how much this $4.2 billion in cash is sticky, once rates start to rise, or how are you thinking about outflow?

I think about it all the time. But we've said before, that we believe that the balances are unusually high. We definitely agree with that. We did see something similar in 2001, whenever Greenspan jammed rates down for 1% for such a long period of time, we saw really extremely high deposit growth, and really high demand deposit growth. We expect it may -- we might -- be some actual deposit outflows at that time.

We actually saw a flattening, and the reason it flattened I think in retrospect -- although we didn't have as good of numbers as we have today to evaluate what was going on back then -- but I think the reason it flattened and didn't go down back then, is because we had really good growth in relationships, which grew deposits. We have been growing about -- at least half of our deposit growth has been coming from new relationships, as opposed to augmentation of current relationships. And I think if we can continue to work hard and continue to grow those relationships, once those balances begin to diminish, because they've come to more normalized levels, I think we have got a shot at being more like what happened in 2001. When instead of tipping over, we flattened out. And then once we reached sort of a dynamic equilibrium, we began to move forward and see deposits rise.

That is what we are hopeful of. But to be honest, we can't really -- we can't really say, because rates have been lower, and they have been longer than they were in 2001. So we have got sort of a sneaking suspicion that we might see some decline there. But it is that sneaking suspicion that helps us keep what is really extremely high liquidity levels, that we maintain I think relative to peers. And I said it before, but the only liquidity I believe you have in a crisis is liquidity you bring to a crisis. I also believe that, if you are going to a knife fight, you don't bring a policy on a knife fighting, you bring a knife. And so, that is one of the things that we've got our balance sheet right now, is preparing for those kind of things.

And I would just say, let's look at this economy we are operating in. I realize that until you get labor increase and wages, you really don't affect the inflation numbers. But I will tell you that consistently, everywhere we go and the customers we talk to, and if you want to look at lumber and concrete and built steel and building costs, they are up oh, 30% to 40% over the last two years and continue to rise.

We are also starting to see there is not enough labor. I get a little disgusted with people that are not working. If I had to feed my family, and I lived in part of the country where I couldn't get a job -- you may not like west Texas, but the job growth out there is 7.22% for the last six months, and 4.69%. You can get a job, if you want a job.

And eventually, and I think it's around the corner, I think we are knocking on the door of inflation. We will see what the Fed says about it, but it is here, whether you want to admit it or not, and labor cost is certainly getting a lot of pressure. We -- I even heard a story that last week that -- of a company that could hire 100 people, but they really don't have enough confidence in what Washington is doing to hire them, and invest in the infrastructure to do it.

So there is -- this economy is turning. People are -- despite their uncertainty, see business there and starting to invest and take care of the customers. Which is kind of a unique thought in Washington, that -- let the customers choose the winners and losers, not central government. So that is a little editorial comment to share with all of you.

All right. Thank you so much for all the color, gentlemen.

You have no further questions at this time. I will turn the call back over to Mr. Dick Evans.

Well, thank you very much. We appreciate your interest and support of our company. This concludes our second quarter 2014 conference call.