Cullen-Frost Bankers' CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.24.14 | About: Cullen/Frost Bankers, (CFR)

Cullen/Frost Bankers, Inc (NYSE:CFR)

Q1 2014 Earnings Conference Call

April 24, 2014 11:00 AM ET

Executives

Greg Parker – EVP and Director, IR

Dick Evans – Chairman and CEO

Phil Green – EVP and CFO

Analysts

Joshua Cohen – FBR

Brady Gailey – KBW

Steven Alexopoulos – JPMorgan

John Pancari – Evercore Partners

Emlen Harmon – Jefferies

Timur Braziler – Deutsche Bank

John Moran – Macquarie Capital

Mikhail Goberman – Portales Partners

Scott Valentin – FBR Capital Markets

Operator

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. (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.

Greg Parker

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.

Dick Evans

Thank you Greg. Good morning and thanks for joining us. It's 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 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 of ongoing economic and regulatory changes are credit to our dedicated employees who share our 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 reported in the first quarter of 2013. This was $0.96 per diluted common share 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 101% 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 our tax equivalent basis for the first quarter of 2014 was a 187.8 million up 8.7 million for the 172.8 million for the first quarter of last year.

This increase primarily resulted from an increase in the average volume of interest earning assets.

We’re 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 a bank owned property in the first quarter last year. Non-interest expenses for the first quarter of 2014 were 157.9 million compared to a 155.8 million in the first quarter of last year. Salaries and employee benefits were up 3.8 million over the same period a year earlier from added [ph] employees and normal annual merit market increases. Other expenses was 38.6 million down 2.9 million from the first quarter 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 2014 also included $1.1 million and acquisition related cost 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 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.

Wit same 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’re seeing a slight increase in the advance rate on revolving lines and construction loans.

Thanks for our disciplined team approach and aggressive calling effort. I’m optimistic we will see good loan growth through 2014 within 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 2013, that’s a 42% drop from last year and a $8.5 million from the fourth quarter of last year.

Net charges off during the first quarter of 2014 was $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 Tier I and total risk based capital ratios for Cullen/Frost were 14.41% and 15.38% respectively at the end of the first quarter 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 2014 compared to 8% for the same quarter last year.

We’re grateful for another good quarter and are optimistic about the future for a 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 mainstream.

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, flat economy with strength in construction, energy, technology and petroleum exports. The state’s 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’re excited to align ourselves with a well-respected, well managed Western National Bank. We’re 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 U.S. brands recognized across all industries for this distinguished award that recognizes service excellence. In February Frost received 21 National and Regional Greenwich Excellence Awards for superior service and performance in small business and middle market banking.

I command our dedicated employees who work hard and represent the Frost culture every day to our loyal customers. In 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, 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.

Phil Green

Let me make just few additional comments about our operating results for the first quarter and discuss our outlook for the rest of the year and then I will 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 cost and the exploration of fixed rate interest rate swap on some trust preferred debt late last year. Both these combined to improve margin almost three basis points. On the negative side we saw small drop in the loan yield which hit margin by little over two basis points.

The increase in investment yields was the result of shifts from lower yielding taxable securities and the higher yielding 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 of prime for new and renewed prime based loans improve seven 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 over rate and also tend to be larger deals with lower risk rates.

During 2013 LIBOR based loans represented 16% of all new and renewed loans and then 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 have continued their growth in April and currently average almost $9.8 billion a nice increase from first quarter levels. On another note Dick mentioned the growth in Trust and Investment management fees which were up 16% year-over-year which we were excited to see.

Off this $3.5 million in growth 3/4ths of it represents increases in investment management fees from both equities and fixed income. Of the rest almost $0.5 million came from our unusually high level of real estate management fees due to some large properties sold in the quarter and a little over 200,000 came from increases in oil and gas fees related to normal increases in production as opposed to leasing bonuses.

Finally looking forward at our operating results our expected operating earnings for 2014 excluding transaction cost related to the Western National acquisition, we currently believe that the 2014 mean for analyst estimates a $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.

And with that I will turn it back over to Dick for questions.

Dick Evans

Thank you Phil. We’re now happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question is from Scot Valentin with FBR.

Joshua Cohen – FBR

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?

Dick Evans

It's kind of a combination of both, I think there is a couple things that are particularly interesting. We had about $235 million growth, 200 million came from C&I loans which if you analyze our growth it would be little over 16% and that’s good diversification in all factors. In that numbers as Phil said earlier about $30 million of increase in the shared national credits which quite frankly have been a great 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 I mean our energy was up multi-family, there was a drug company that is a real good small to middle size company and made an acquisition. So it's a little bit from everywhere.

Joshua Cohen – FBR

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

Dick Evans

They are up slightly. As I said in my comments and you got to slice the cheese pretty thin but I was so happy to see any movement in that it's come up. As I talk to you about this the run-in on the revolving lines they dip down a little bit, they run around 42%. They have been as high as about 44%, they are probably up to 43%. So you’re seeing a little bit of improvement. One of the things in the commercial real estate that I’ve talked about before is that I’m just astounded at how we’re growing real estate commitments but at the same time the advanced rate is so weak and I’ve talked about the reasons before putting all their equity in it at the first when the project is finished because there is a lot of demand for loans both in shorter term construction loan such as we make but also for insurance companies that as soon as the project is almost finished they are going into permanent.

But I was looking to it the levels of revolving and declining commitments from ’05 to ’14 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. And so I guess the good news is there is 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 it's finally this recovery that has been so slow and smart economist tell you that that’s what happens was a financial recession that it takes a long time to come out of it and certainly it's taken longer than I thought was necessary but that’s good to see small businesses that means, it's getting -- the recovery is dipping down into mainstream.

Operator

Your next question is from the line of Brady Gailey with KBW.

Brady Gailey – KBW

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 what not.

Dick Evans

Well 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 have talked to you for years about how proud of our people and our disciplined calling effort and our team calling effort. I think they are doing a great job. We do work hard and we stay with our culture and I think that’s a big factor.

Brady Gailey – KBW

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?

Phil Green

I think it's closer to 9 but calculation is lot, so we’re together on that. I think what we said in the past and our plan continues to be that I will just say it again that we have 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 while the 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 had some maturities. So we’re going to take some of that liquidity and utilize it in investment portfolio in the municipal sector which and that’s really where the yields are that reap up for long time where there is value and that will start later on during the year.

I would 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 and you can’t buy municipals like you can treasuries and so there maybe a little bit of squeeze depending upon for a short period of time based upon how fast we can bring those on but that’s really our plan for that and we can replace the notional maturity with actual reinvestments of current liquidity.

Brady Gailey – KBW

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

Phil Green

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 it.

Brady Gailey – KBW

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?

Phil Green

You’re looking at other income?

Brady Gailey – KBW

Yes, sir.

Phil Green

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

Brady Gailey – KBW

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?

Phil Green

Okay, if you’re looking at other income on a link quarter basis I’m sorry. Two things, one is we had a recovery in the fourth quarter of about a 1.5 million related to particular credit and those were kind of lumpy. We will have those occasionally and again sort of a 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 bit lower than first quarter. So those two things were most of that drop.

Operator

Your next question is from the line of Steven Alexopoulos with JPMorgan.

Steven Alexopoulos – JPMorgan

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.

Dick Evans

Let me make a couple of comments and then I will have Phil get into. I wish it was because pricing on loans was rather 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 I so competitive, everywhere and particularly in Texas on loans. If I look at loan pricing with customers last year I have talked to you about 60:40, 60% of our loans. We’re losing 40% and getting and talked about pricing and structure. If you think of pricing last year it had an effect on loans with customers, they are losing about 8.7% and this year it's about 2.7. So I think what you’re saying is the pricing is stabilizing somewhat and we have been more competitive and I think there is, we have 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 a place we’re not going to compromise. We will certainly work with customers to explain what’s going on but we have compromised pricing and pricing has had kind of down at the bottom and you’re getting some opportunity move up.

Phil Green

I think Dick is right, we’re seeing some what I will 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 and 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 are otherwise because they tend to have lower rates and LIBOR pricing spreads actually contracted a little bit. There is smaller percentage but it 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 of working against each other a little bit which kind of equals I think pretty much stabilization on rate.

I think the real impact and the answer to your question is that we’re not going to look for margin, 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. I mean you need to -- I am happy with what we’re 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 sort of what I will 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%. So I mean that’s really what we need to do is work on the volume side. That’s what’s going to help the margin and you do have the ability as we continue to employee some of the tremendous liquidity that we have to increase your net interest margin, net interest income with what you do in bonds and we have done some of that and we need to do some investing overtime and we will continue so.

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 period end basis for the quarter and that helps margins as well.

Steven Alexopoulos – JPMorgan

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?

Phil Green

I think one thing that happened I 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 into the Affordable Healthcare Act. 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 a result I think we had people who would have normally renewed in first quarter of this year which actually did it last quarter, four 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 and that would be the thing I would think would related [ph].

Operator

Your next question is from John Pancari with Evercore.

John Pancari – Evercore Partners

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?

Phil Green

Well as I mentioned in the first quarter for the new and renewed loans for they were based on prime which is the big majority of our new renewed loans, it had 93% points spread to prime, so prime was 325 so you can get that on top of that and you know the LIBOR pricing is a little bit less in that but and it was I think it hitting down 18 basis point. The number -- is to keep an eye is on that spread to prime on the renewed.

John Pancari – Evercore Partners

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?

Phil Green

No we did not. I’m looking at that, that looks to me to be fairly stable. I don’t see big change there.

John Pancari – Evercore Partners

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.

Dick Evans

John let me jump in there for a minute and then I will let Phil talk about it. I made a comment that we were very pleased about the new and existing, the deposit growth was coming from new and existing. One of the interesting things that’s happened in 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 of fact on the consumer side the net augmentation from consumer deposits has weakened which means people are starting to spend their money and invested or do whatever they do and so one of the things that we have 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 continue to grow on the new side and yes as a matter of fact as I just gave you the example on the consumer but not the example but fact, consumers are starting to spend more money, not build up deposits as much and they are feeling better about the economy and that’s good news.

Phil Green

I would say just asset sensitivity, there are lot of parts to your question. One thing I would say is with regard with our deposits going to do, I mean 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 in drop of deposits. We could have some drop but if you continue to grow with your new relationships and we are working hard to do that, you may see a flattening as opposed to a run-off. But let’s assume let’s talk about your assumption, let’s say deposits run-off or let say rates on DDA are paid and begin to increase. Our disclosures have always been in our Qs, and assumption that we pay a market sensitive rate on demand deposits with fairly high correlation to what would happen to increases in Fed funds and 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.

And so those disclosures are based on a very market sensitive rate on demand deposits and we have shown and will continue to show that we’re asset sensitive not by huge amount but we’re asset sensitive during the first 12 months of 200 rate increase. It will a little over 1%. As I always say it's really months -- the second year it's months 13 through 24 where you really see I think the sensitivity and we have got much more exit 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 will say again that if the rate on the DDA is much more administrated sort of more like what demand deposit rate is or an earnings credit rate on say treasure 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 the sense of the market is we’re probably going to end up with more administered rate as opposed to a highly sensitive rate and so I think that we’re we would be as your disclosure said we 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 and so we’re poised for that and we have got lots of liquidity, if we do see some declines in deposits but -- and you look at the liquidity that we have got in our check book account today at the Fed it's getting up near 20% of our deposits. I don’t think we will see anything like that even if there is a huge run-offs. So I feel good about it, I think we’re solidly asset sensitive and that’s my view on it.

Operator

Your next question is from Emlen Harmon with Jefferies.

Emlen Harmon – Jefferies

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?

Dick Evans

Well it's a lot of the same I mean new competitors come into Texas is not new and we continue to do -- I mean look at the numbers they continue to grow new accounts, they 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 there. Commitments are up, there is a lot of activity that’s up and I think it's very well.

I wouldn’t overlook the strength of our e-commerce. We have 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’re 4.5 star rated app, you’re not going to find one higher as you go through financial apps and so we’re 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.

Phil Green

And I might also just add what Dick is saying, I mean as we have said many times the four banks bigger than us in this market has 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. I mean they are already here and we will 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 will make announcements and make a splash. I think as it's true of most new competitors in market the main value proposition they try to bring to the table is price and we have been talking about the price issue already and that’s already factored into and baked into our discussions that we have had already and as Dick said the key question is what’s the overall proposition that they can bring and get to match up with ours.

We think ours is great, we think that third party research and awards in the sector [ph] have continued to validate that. So, we’re going to continue to see more and more in terms of competition but our life is going to be primarily competing against the too big to fail in this state for a long, long time

Dick Evans

I would rather be in a state that’s very competitive than a state that doesn’t have any business.

Operator

Your next question is from Dave Rochester with Deutsche Bank.

Timur Braziler – Deutsche Bank

This is actually Timur 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 munis purchased during the quarter and the rate on those?

Phil Green

As far as on the investment of muni’s during the quarter we bought a little over $300 million in munis with the yield, tax current yield of 5.4%. Those were yields of about 18 years but remember they are 10 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. And then we bought a $130 million in 7 year munis with about a 315 tax equivalent yield and so that was the muni activity for the quarter.

Timur Braziler – Deutsche Bank

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

Phil Green

The current duration of the portfolio is with expected cost on the muni’s is a 4.2, if none of the muni’s are called that’s not going to happen it would be a 6.7 result in maturity. But if you look at expected call on Bloomberg and take a look at all of our portfolio it would be a 4.2

Timur Braziler – Deutsche Bank

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.

Dick Evans

No it's not.

Timur Braziler – Deutsche Bank

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?

Phil Green

I think right now that’s where we would be shooting for as far as the effective tax rate, that can change depending on what happens with various things but right now that’s our estimate.

Operator

Your next question is from John Moran with Macquarie Capital.

John Moran – Macquarie Capital

A quick one, kind of 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?

Phil Green

On the benefit side?

John Moran – Macquarie Capital

Correct, yes.

Phil Green

So you’re looking at on a linked quarter basis or?

John Moran – Macquarie Capital

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

Phil Green

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.

John Moran – Macquarie Capital

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?

Phil Green

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 and so you end up with kind of a comparable number of a year-over-year basis but you do end up with a little bit of a seasonal increase in comp related to those awards because we have to take what’s awarded and even though those are a longer term award, they have to be expensed up front. So I think that’s probably what you’re seeing.

John Moran – Macquarie Capital

Okay. Then I know you guys said 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?

Phil Green

It's going to be in the second quarter and we are pretty well into it and it will hit a close and it's just part of the process you’ve to go through it.

John Moran – Macquarie Capital

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?

Phil Green

I think we expected it to be less. It was 28% versus something 16% a year ago. So it's a bit unusual and larger deals et cetera can drive that, sometimes competition can. I mean we would like to see that lower we just think that while there are certain parts of the business like energy where those are typically all price off LIBOR that the prime, it's better more realistic number domestically for loan pricing both for us and our customers. So we would like to see more of that and we do a lot of C&I deals and the kind of deals that we do I think tend to be priced at way more. So hopefully we will see it move down more towards a higher percentage of loan. It's priced off prime but we will see.

Dick Evans

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.

John Moran – Macquarie Capital

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?

Dick Evans

It's a correct statement.

Operator

(Operator Instructions). The next question is from Mikhail Goberman with Portales Partners.

Mikhail Goberman – Portales Partners

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?

Phil Green

I would say that as always said it's formula driven. So we can’t and the formula doesn't have a line in it that says 1% minimum I mean it's, the accountants have their rules and we got to follow them, as assets quality improve we have seen that number move down. I would say another reason why 1% won't be a number you could hang your head on is once when you do acquisitions the accountants and their wisdom have if said that the reserves of the acquired companies they got to be netted against their loans which you keep your reserve for the loans that we have for the acquirer. So you’re going to have what’s kind of the hidden reserve and the loans that are brought over from Western and that’s going to bring our number down. I don’t know somewhere between 5 and 8 basis points or something just because of the arithmetic of the accounting rule. So that’s another reason why I don’t think you will see the 1%.

Mikhail Goberman – Portales Partners

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.

Dick Evans

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

Operator

Our last question is from Scott Valentin with FBR Capital Markets.

Scott Valentin – FBR Capital Markets

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

Operator

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

Dick Evans

Well thank for this discussion and this concludes our first quarter 2014 conference call.

Operator

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

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