Cullen/Frost Bankers' (CFR) CEO Richard Evans on Q2 2014 Results - Earnings Call Transcript

Jul.30.14 | About: Cullen/Frost Bankers, (CFR)

Cullen/Frost Bankers (NYSE:CFR)

Q2 2014 Earnings Call

July 30, 2014 11:00 am ET

Executives

Greg Parker -

Richard W. Evans - Chairman, Chief Executive Officer, President, Chairman of Executive Committee, Chairman of Strategic Planning Committee, Chairman of the Frost National Bank and Chief Executive Officer of Frost National Bank

Phillip D. Green - Chief Financial Officer, Principal Accounting Officer, Group Executive Vice President, Chief Financial Officer of Frost National Bank and Group Executive Vice President of Frost National Bank

Analysts

Timur Braziler - Deutsche Bank AG, Research Division

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

Preeti S. Dixit - JP Morgan Chase & Co, Research Division

Operator

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's 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.

Greg Parker

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 Litigation Reform Act of 1995 as amended. We intend such statements to be covered by the Safe Harbor Provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 as amended.

Please see the last page of the text in this morning's earnings release for additional information about the risk factors associated with these forward-looking statements. If needed, a copy of the release is available at our website or by calling the Investor Relations Department at (210) 220-5632.

At this time, I'll turn the call over to Dick.

Richard W. Evans

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'll be happy to answer your questions.

I'm pleased to report that for the 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 the acquisition date at of 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 rates and regulatory challenges. I commend our dedicated employees for their dedication and their focus on serving customers.

During the second quarter 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 1 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 of 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.

Noninterest 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 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.

Noninterest 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 of 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've 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're competitive on pricing without sacrificing credit quality. And that's 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 prerecession levels. Our capital levels remained very strong, Tier 1 and total risk-based capital ratios for Cullen/Frost were 13.84% and 14.76% respectively at the and 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 and of 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're 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're so excited about WNB acquisition. The dynamic Permian Basin is responsible for approximately 14% of all the oil produced in the U.S. 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're 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, we share -- who share our long-standing commitment to outstanding customer service. We're 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're 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'm 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 a 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'll turn the call over to our CFO, Phil Green.

Phillip D. Green

Thanks, Dick. Let me make a few additional comments about our operations and outlook for the remainder of the year, and then I'll turn it back over to Dick for questions.

We certainly were pleased to complete the acquisition of Western National Bank and have pulled them into our results for the month of June. The Western team has done outstanding job of keeping focused in 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 saving such that we exceeded our goal of 15% cost savings. This great market, along with the great staff, make us very optimistic towards the Permian Basin moving forward.

We're also glad to experience an increase in our margin, 6 basis points to 3.48% in the second quarter. This increase was driven primarily from higher investment portfolio yields and increase in average loan volume. Investment portfolio 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, about $362 million, which brought our average second quarter Fed level liquidity to $4.2 billion.

I also wanted to highlight the very strong quarter that we experienced in our Trust and Investment Management business. Overall trust fees increased almost 19% from last year. Almost 3/4 of this growth was from investment management fees. These fees increased 20% over last year with almost 2/3 of the growth from new business and higher markets; and the remainder, from adjustments to our fee schedule late last year. 20% of the overall growth of 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 this year. It currently provides approximately $9 million in interest income per quarter, that our plan continues to be to replace these earnings by utilizing about $720 million of our current $4.6 billion Fed liquidity over a 6-month period, started somewhere in the fourth quarter, to purchase 15- to 25-year munis with 10-year calls. And we recognize there will be some timing differences as these securities are accumulated in a prudent manner over the 6-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 that 2014 mean for analyst estimates of $4.13 is a little low and that estimates near the high end of the range would be more reasonable.

And with that, I'll turn it back over to Dick for questions.

Richard W. Evans

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Dave Rochester of Deutsche Bank.

Timur Braziler - Deutsche Bank AG, Research Division

This is actually Timur Braziler filling in for Dave. Just a couple of 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.

Phillip D. Green

Okay. I'll say that the portfolio increased, on an average basis, about a little under $300 million. It averaged $4,450,000,000 in the first quarter, in average to $4,763,000,000 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. They came over with, I'll say, normalized -- in round numbers -- $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 the maturity -- unusual maturity of $1 billion and what were 2-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, 5-year treasuries, we purchased $150 million, 2-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 7 years -- a small amount of 7-year investments in munis. So that was sort of the character of what we were doing. It was kind of a heavy month for us, but it the result is some heavy cash flow. If you look at the actual portfolio in total, average-to-average first quarter, second quarter is actually down, about $90 million. There's some increase in munis, there's some decrease in treasuries. I think you asked about the duration of the portfolio. If you look at the duration of the overall portfolio, legalizing [ph] the expected cost and revising maturities of the muni portfolio, it runs around 3.9 years, which was down a little bit from last year -- not last year but last quarter. And the duration of all the munis went to maturity would be about 6 -- a little under 6.5 years, but that's not expected at all. So I'd say the duration runs around 3.9 right now.

Timur Braziler - Deutsche Bank AG, Research Division

Okay, that's helpful color. And then, 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?

Phillip D. Green

I'll talk about the spreads for just a second. Yes, as you know, we've been sort of tracking what the weighted average spread of findings on new and renewed loans. Which I think in our wheelhouse for the kind of business we did. 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 actually a little bit more aggressive in terms of pricing there. They're just down from, say, 242 to 232 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.

Richard W. Evans

Yes, I think I'll just add that, as I said earlier, this is exactly where we want to be. I'm very pleased that the 60/40 has flipped on us. I'd also say to you, while there's still some insanity in pricing loans, I think competition realizes that it's not healthy to go below 0. There's still risk and loan in money, which seems to be common sense but it went kind of crazy. But we -- we're doing all right on the pricing. Certainly, we walk away from things we think are ridiculous, but I think that's kind of stabilizing around this low area. But this structure thing, I really believe is really important. For our customers, just to give you an idea of how pricing and structures change, 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; today, it's 10.4%. And then you've 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's important is that we booked 74% versus 69% last year, so we're booking more. So that's in customers. And from prospects, it's always a little bit different, but you have a similar trend, even a little stronger from the pricing. I'm trying to pick up some move -- some customers over. Last year, it was 14.7%; this year it's 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've been talking, for years, and for 146-year history of this company, we believe in our strong credit discipline. We're not always right, but I think it's the way to run a bank, and it's paid off for 100-plus years. And I think in this very competitive, and particularly in Texas, environment, we're doing what we ought to do. And I'm sure we'd like spreads to come up, and I think we'll see rate start to come up. I don't know any more than anybody else when, but I think we're in the right place, taking really good care of our customers, selling our value proposition and building more than just a loan. We're not in the transaction business, we're in the relationship business, to where we want to make sure that we have that major deposit account and a major relationship before we loan to anybody.

Timur Braziler - Deutsche Bank AG, Research Division

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

Richard W. Evans

It has slowed a little bit. It's been unusual for -- since '08 or '07. I mean the payments, we couldn't quite get ahead of the curve because -- and there's still a lot of activity, I mean, if a customer starts to -- gets an opportunity to sell his company at a ridiculous price, he'll do it. And there's a little bit of that going on. But the -- it's improved a little bit from the standpoint of pay downs, but nothing really unusual.

Timur Braziler - Deutsche Bank AG, Research Division

Okay, great. And then, just lastly, on the expense side. The $4.0 million in the other expense categories associated with the acquisition, was that all deal-related expense or is any of that core WNB expense?

Phillip D. Green

None of that was core, it was deal-related. Just transaction cost, whether it was advisors', severance, those kinds of expense.

Timur Braziler - Deutsche Bank AG, Research Division

Okay, great. And then, just for the cost saves. I appreciate the color that they've 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?

Phillip D. Green

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

Operator

Your next question comes from the line of Jennifer Demba of SunTrust Robinson Humphrey.

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

I have 2 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?

Richard W. Evans

They're across all segments in which we operate in. There's really no specific thing that stood out in that regard. And quite frankly, energy was a little weaker. As far as category, it's 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, we talked about it some time of how our commitments have been growing over this long period of time, since the recession happened, and yet outstandings held [ph] down. And I'm real pleased that in the first quarter, we saw some advancement of outstandings going up somewhat and yet still growing commitments, and 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's been in the low 40s. And you just, as Phil just talked about and I've 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've 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 advanced rate, and they're doing well. They continue to say about the same percentage and so that means that main street is starting to pick up it's 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 in relationships to build, and that's really good news.

Phillip D. Green

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

Richard W. Evans

I would just also add that what you got happening is this job growth and corporate relocations come to Texas, you obviously -- commercial real estate is going to grow. Multifamily is strong, 1 to 4 family is good, as we finance builders and across the state. And as you will remember, we didn't have the big downturn but certainly it slowed. C&I support growth in accounts receivable and inventories. So it's all the kinds of things that you ought to see when an economy starts to improve.

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

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

Phillip D. Green

I would say they're not fully included in the second quarter run rate at this point, because, I mean, some of them are. But I mean it's -- that's a process, right? So it's going to take a little bit of time to fully implement everything. So I'd say no, it's still 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.

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

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 transaction?

Phillip D. Green

Well, that's not up to us, right? It's 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're just working through it at this time.

Richard W. Evans

Yes, don't forget our position. We're aggressive lookers and conservative buyers. We bought one bank since '08. So I wouldn't get too twisted up about that. 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're not going to just stack people in just for the sake of stacking people. That's the reason this company's strong is that we have really outstanding individuals, very committed to what we do in our culture.

Operator

Your next question comes from the line of Brett Rabatin of Sterne Agee.

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

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

Phillip D. Green

Well, I'd say first of all the yields on the munis market, I mean, you can look on Bloomberg and find out what it is. I mean, it's you're probably -- it depend -- like I said, we've done 15- to 25-year munis and so you could -- that could be anywhere from the -- say around 5% to around 5.25% I mean that's on a tax equivalent basis. I'm not committing to that, right? Because that's -- we're talking about months ahead of ourselves here [indiscernible] -- market is. But that's -- if you were looking more or less recently, that would be a real ballpark for the kind of yields you're talking about on these kinds of things. With regard to asset sensitivity, yes, we are -- I've used the term before, I still believe we're solidly asset-sensitive, particularly given more and more if that -- what happens with the roads on demand deposits or rates go up -- or sort of administered rates as we talked about in our disclosures. So the purchase of these securities -- would it reduce what we otherwise have been in terms of 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 just look in at the non-loan part of the business, right? I mean we've got an invested portfolio of $8 billion or $9 billion. We've got, right now the Fed about half of that in day money, right? And so as I've 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're continuing to have that. So I think we still have that balance short-term, day money, mixed with what we feel is where there's value in the curve and on the credit side, which is in the municipal market. So we're going to continue to do that, but we don't think it does any violence to the position that we really want to be in, which is we want to the continue to be asset-sensitive at this point in the cycle.

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

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

Richard W. Evans

Yes. It's -- we've been strong in 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'd say, that's pretty much where we are. What I said to you, I guess, what you were asking is the funding rate on all commitments. And it was up to 44%, 43.9%. And without the Permian Basin, 1 month effect, it was up to 43.5%. So Permian made about 0.5% difference. But it's really, quite frankly since -- well, really, this first half of the year, it's been coming up, which is really nice to see because it's been pretty weak. I think the other thing when you look at construction loans, I talked a lot about it, didn't talk much about it -- I've talked a lot about it in the past, didn't talk much about it today because it's finally, they're starting to use some of the money for construction advances. And that, we've just been -- our folks have worked hard to fit some great loans on the books but they'd put all their equity in first and as soon as they finished it, they sold it rather than leaving it in our -- in the construction phase for a year or so. But it's moved up and that's healthy.

Operator

[Operator Instructions] Your next question comes from the line of Steven Alexopoulos of JPMorgan.

Preeti S. Dixit - JP Morgan Chase & Co, Research Division

This is actually Preeti Dixit on for Steve. Just a question on the trust fees. Growth has been really strong in 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?

Phillip D. Green

I would say if you look at a year-over-year basis, there's probably a little bit of a tailwind because we did this -- we did the rate fee schedule change I think a little bit later in the year. But as far as what's going on with the business from this point. I think you're seeing increases due to markets. I think you're also seeing increases due to new business and growth in account relationships, that's an important part of what we do on a relational basis. It's not everything but just as an example, anecdotally. I mean there's 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're taking advantage on some of that as well. I would say that I think that -- or given the fact that Western National didn't provide trust services, and that is a real core competency of us. And that market is -- has such, really frankly, great wealth in it and growing wealth. But we think that's 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.

Richard W. Evans

I'll just say too, it was pleasing to me to see that, that increase of 63% came from growing the business and certainly, the improvement in the equity market. 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's a good opportunity over time to grow that.

Preeti S. Dixit - JP Morgan Chase & Co, Research Division

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

Richard W. Evans

No, quite frankly. Just to challenge you a little bit there. Deposits were up $2.4 billion, that's 13% year-over-year. You've really got -- we've been growing pretty consistently every conference call about $2 billion and year-over-year, quarter-to-quarter, and so you only have 1 month of deposits in the Permian Basin. So it's still strong.

Phillip D. Green

Yes, I'd say -- did you mention period end?

Preeti S. Dixit - JP Morgan Chase & Co, Research Division

Yes, that's right. I'm just looking at the $22.5 billion in period end deposits.

Phillip D. Green

Yes, to be honest with you, I don't really follow the period end number too much because there's such volatility and the number -- can be -- particularly with our high level demand deposits, so I tend to look more at the average. Average is what I'm looking at that. And if you were to look, say, year-over-year on an 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 could take that out. It would have been a little below $2 billion, but it's 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 annualized basis, 13%. Let's take out $500 million -- say $500 million or so just for easier math and you'll bring [indiscernible]. Yes, but still pretty decent growth. And nothing really what I would say is unusual, we still had good deposit growth. And I don't think we're seeing any dramatic change in terms of how people are using their money at this point.

Richard W. Evans

I'd also tell you that one of the effects of averages in period end, particularly with Western, the run checks come in around the 20th to the 25th of the month, and so you're going to build the averages and then they start to go out as they take that money out. So that lowers your period end numbers from the acquisition. That's 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 end is lower than probably the month end average.

Phillip D. Green

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

Richard W. Evans

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

Phillip D. Green

I agree with that.

Preeti S. Dixit - JP Morgan Chase & Co, Research Division

Got it, that's helpful. Just 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 of that $4.2 billion in cash is sticky, once rates start to rise? Or how are you thinking about outflow?

Phillip D. Green

We think about it all the time. But we've said before that we believe that balances are unusually high, we definitely agree with that. We did see something similar in 2001, whatever Greenspan jam rates down [ph] 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 see some actual deposit outflows at that time. But we actually saw a flattening, and the reason it flattened I think in retrospect -- although, we didn't have as good the 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 have a really good growth in relationships, which grew deposits. We've 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 the -- once those balances begin to diminish, because they come to more normalized levels, I think we've got a shot at being more like what happened in 2001, when [indiscernible] tipping over, we flattened out and then once we restored the dynamic equilibrium, we began to move forward and see deposits rise. That's what we're hopeful of. But to be honest, we can't really say, because rates have been lower and they've been longer than they were in '01. So we got sort of a sneaking suspicion that we might see some decline there, but it's that sneaking suspicion that helps us keep what is really extremely high liquidity levels that we maintain, I think relative to peers. And I've said it before, but the only liquidity, I believe, we have in a crisis is the liquidity you bring to a crisis. I also believe that if you're going to a knife fight, you don't bring a policy on knife fighting, you bring a knife. And so that's one of the things -- we've got our balance sheet right now, just preparing for those kind of things.

Richard W. Evans

Yes, and I'll just say, let's look at this economy we're operating in. I realize that until you get labor increase in wages, you really don't affect the inflation numbers. But I would 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 cost, they're up 30% to 40% over the last 2 years and continue to rise. We're also starting to see there's 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 a 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 6 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're knocking on the door of inflation. We'll see what the Fed says about it but it's 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. And so there's -- 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 kind of let the customer choose the winners and losers, not Central Government. So that's a little editorial comment to share with all of you.

Operator

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

Richard W. Evans

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

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