Cullen/Frost Bankers Inc (CFR) 2003 Q1 法說會逐字稿

Please stand by. The conference is about to begin. Good day. All sites are now on the conference line in a listen-only mode. Welcome to the Cullen/Frost Bankers Incorporated first quarter 2003 earnings release.

I'd like to turn the program over to Mr. Greg Parker, SVP and Director of Investor Relations. Go ahead please.

Thank you. This morning's conference call will be led by Dick Evans, Chairman and CEO and Phil Green, Group EVP 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 this release is available at our web site or by calling the investor relations department at 210-220-5632. And at this time I'd like to turn the call over to Dick Evans.

Thanks Greg. Well, the first quarter of 2003 results for Cullen/Frost was the way to start a new year. Fifty-nine cents per diluted common share, 13.5 percent increase over last year or $30.9 million in net income.

Return on assets and equity were 1.33 percent and 17.63 percent. I am particularly pleased with these solid results considering the uncertain economy, low rates and the weak stock market. Again, our staff has done an excellent job. Net interest income at $79.5 million was up from last year. Driven by substantial asset growth. Primarily it was seen in the strong deposit growth and within that strong deposit growth it was mainly demand deposits that had the growth.

Also a major factor were our short term secured borrowings known as bottle rows. Our investment staff has done a great job of maximizing returns and there's no question that we have the right securities at the right time. Now, Phil, will talk more about this later in the conference call.

Moving to non-interest expense, it also showed increases. Our service charge on deposits were up, mostly commercial, resulting for providing more service. Insurance commissions was another important factor where we had better sales and prices were up. Our non interest expenses, while they were up, when you take a close look you'll find that salaries, wages and benefits were up primarily as a result that we removed the salary freeze that we were under this time last year.

And as I said earlier, our insurance commissions were up. As you know, compensation in this business is tied to this increase so that's good news.

The provision and asset quality, taking a look, you will see that our allowance -- that's 1.85 percent. We continue to believe in early identification of credit weakness, and we think the proof that it's working is with our fewer charge-offs. Now, while there is a lot of churn and activity at the end of the day or at the end of the quarter, and looking at the key asset quality measurements, there's really little change. The risk is about the same as we discussed at the last quarter call. Our levels continue to be very manageable.

Now, let's take a look forward. I would describe our feeling as cautiously optimistic. When you look at the economy in total, it's the first time that we've watched a live-TV war, and if you think about the technology, it was unbelievable. It is amazing what we did. And I understand that much of the technology that we saw working is 10 to 20 years old. That is a reminder, I believe, of the importance of technology today. While we know that this industry activity is so slow that it even seems like it's stopped, we believe it's not over. In fact, it may be just the beginning.

This is important to us in Texas because we have an outstanding base. As you know, when technology was strong, it was moving in a major way in Texas. And as we look forward, we have the base to build on when that turn occurs.

Today in technology, the inventories are low and I will report to you that in our markets we see a slight positive sign. I'll underline the word slight. On the energy spectrum, this is still important in Texas. While this has been soft, we believe that it's a positive that we have seen most of the war premium move out of the price of oil. We've also seen recounts move up from 900 to 975. And mainly, this increase in rig counts is a reaction to the low gas inventory, which is the normal thing that should happen. So, we see some positive signs in this regard in energy.

Also, like all of the United States, Texas has a lot of money waiting for a home in the venture capital area, which will also help to boost the economy.

Looking a little bit closer at the future for Cullen/Frost, we're in great markets, we have an outstanding staff, we have better processes and disciplines throughout our company. And if this economy continues a slow growth, or returns to a faster growth, like we saw prior to the last two years, Frost will continue to repeat its 135-year history of steady, consistent, positive performance in all environments.

Now, I'll ask our Chief Financial Officer, Phil Green, to share his thoughts.

Thanks, Dick.

I'm gonna make a few comments about our operations. I'm gonna update the guidance comments that we've made during the call, and then we're gonna open it up for questions.

I agree with Dick that we did have a very good quarter; our EPS being up 13 percent from where it was last year. I'll also agree that it was a challenging environment. I think, particularly, in the rate environment; interest rates have been challenging for us. As you all know, we are an asset-sensitive company. We are that way because we carry a lot of core deposit funding, and while that's a short term negative in a down rate environment, it's very positive for the long terms and we wouldn't trade that position with any other bank in the country, I don't believe.

In spite of this however, we did have our second quarterly increase year-over-year in net interest income, so that was a very positive development for us. We grew net interest income two percent from where it was last year. We were able to offset the rate squeeze that we were experiencing by increasing earnings assets by about 16 percent year-over-year.

That's important, but I think maybe more importantly is the fact that we were able to efficiently fund that increase in earnings with very low cost funding sources. And what I mean by that, if you take the first source, would be deposit growth of about nine percent.

As Dick mentioned that increase in deposit growth was primarily through demand deposit, it was 85 percent of our deposit growth was no cost or a zero interest rate, demand deposits.

Now we've talked about for some time we have a clearing relationship with a national mortgage servicing and originating company here in San Antonio, that has operations here, and that's mainly clearing items and primarily represents the increase in those balances in cash and collections items. But even adjusting for that large relationship increase, our demand deposits were up by 13 percent year-over-year.

The second source of low-cost funding that we generated as Dick mentioned, was the, what we call the dollar roll repos, and we utilize $500 million on average, approximately in the first quarter in those sources of [Inaudible] . The cost of those dollar roll repos were only 17 basis points, as far as the funding costs. So I think you'd agree is a very low-cost source of funding.

We've talked about these dollar roll repos in the past, just to remind you, it gives us the opportunity in a low-rate environment to leverage the especially valuable securities that we maintain in our investment portfolio to secure this very advantageous funding. It's really a result of this high levels of liquidity that our company maintains and we have historically had a very large investment portfolio and when we run into interest rate environments like today, where many people and investors are looking for fixed rate alternatives to equity securities, et cetera, and the CMO market is, is very robust, the building blocks of those securities are things like Fannie Mae's and Jenny Mae's (ph) securities which we own, which we can then do dollar rolls to companies who put together CMOs and they're willing to pay us very favorable interest rates on that funding.

We do invest those funds overnight in Fed Fund Sold, but we don't extend the duration with those funds, but even with an overnight investment, our spread on that transaction is about 110 basis points for the quarter. So while it does tend to squeeze our margins, it is a very profitable transaction and low-risk transaction for us in a low rate environment, and one we definitely want to take advantage of.

Making the margin impact, I think Dick said something about it as well, I really think it's important to keep in mind the impact on this additional leverage on the margin, you saw it went from a 441 in the fourth quarter down to a 410 in the first quarter. The dollar rolls were only four basis impact on the fourth quarter. They were 23 basis points on the first quarter, so 19 basis points or that change was the result of just the dollar rolls, which I consider pretty much a cosmetic impact. The remaining 12 basis points change really had to do with, say, three basis points of it was our increased deposits versus the previous quarter.

About nine basis points of it represents what I would just determine discontinued interest rate squeeze that we're undergoing. Remember, we did have a Fed rate cut of 50 basis points about mid-way through the fourth quarter that we had to work all the way through the entire first quarter.

Continuing on talking about earnings assets, the loans were flat on an average basis year over year. But if you look behind that, I think there was some good signs underneath it. First of all, CNI, without concluding some shared national credits, were up by almost 9.5 percent year over year. They're up $167 million.

Commercial real estate mortgages, which for us are primarily owner occupied properties, were up by five percent or about 51 million, and commercial land was up by about 23 percent of $29 million. If we now turn to the other component of non-interest items. The largest component of revenue increase for us continues to be non-interest income.

It was three-quarters of our revenue increase. Dick's really already talked about the components there. I may add just a few additional comments. Of the 14 percent increase in service charges, year over year, it was split mostly commercial. It was about 60 percent commercial. Retail, however, was also good. It was up by about - it was up 40 percent of the increase.

If you'll look at the commercial growth, the reasons behind it, there are two things. One is that the earnings credit rate that we give on commercial deposits is less than it was a year ago because interest rates are a lot less than they were a year ago. So the same level of deposits buys you fewer services if you were depositing. So you have to make up the difference with a hard dollar fee.

That's a good portion of it, but we also had increases in what we call billable services, which is just the amount of activity that we provide our commercial customers who are on what we call account analysis. So those two factors account for the growth in the service charge revenue on the commercial side.

Insurance commissions continue to be a great story for us, up 24 percent. That's internally generated growth. It's not from acquisitions. Prices are up, so our commissions are up. But also our sales levels are up and we continue to close over 60 percent of all the referrals that the bank relationship managers provide to the insurance company. When we pitch the business we close it over 60 percent of the time.

Another thing that you get if you're in the insurance business, is something called contingency income. It's probably known by different names in different agencies. We call it contingency income and basically its rebates that you get from the insurance carriers based upon the performance of the policies that you write.

If you have good loss experience, et cetera, you can get what's called a rebate from the insurance company and we got $1.8 million of that in the first quarter. And that was up 800,000 from where it was the same quarter a year ago. Now that's seasonal income, but it is regular income. It typically occurs around the first quarter for us.

The area of weakness that we've had in non-interest income continues to be in our trust revenues. I think it's understandable, however, when you consider that 75 percent of our trust revenues are investment fees. And you look at the S&P 500 over a year ago is down around 23 percent. About almost 40 percent of our trust managed assets are in equities and so you can see how that affects our trust fees.

And that's really not been a change in material until we get some help from the market and I think those of you out there who are investors on the call certainly understand what we're talking about there.

On non-interest expenses, I'll just say I think it's continued good expense control. We did have salary and benefit increases. Dick talked about the salary freeze that was in place for most of last year. It was off for this year, so we had some increase in salaries -- 3.9 percent -- really resulting from the bank side of that. 1.9 percent of the growth that we had of the 5.8 percent total salary increase was related to those insurance commissions that Dick talked about.

Then, you can see that benefits were up about 20 percent. The largest factor there was pension costs, which -- with lower interest rates, which increases the present value of that pension liability and the performance of the stock market, which has been not good; it has increased the level of the unfunded status of the plan increase expenses for pension. Although, by going from the defined benefit plan at the beginning of last year to the profit-sharing plan, we did save what would have been a much larger increase in pension costs.

If you take out salaries and benefits, though, other expenses were flat overall, and that's just good, hard work on the part of our employees.

Finally, looking at the asset quality as it relates to charge-offs and provisions, you can see that we did reduce our provisions from where it was a year ago; we had 6.8 million a year ago. We had 3.6 million this year in the first quarter. For the quarter, we covered 130 percent of charge-offs, increased the allowance, as Dick said, to 1.85 percent of loans, so that continues to be up. It's up from the end of last year; I think it was 1.83 last year, and a year ago it was 1.70.

Now, we did have a much higher level of coverage on provision versus charge-offs a year ago, but remember -- if you recall back on the call that we had back during that time -- we said that we definitely wanted to get out ahead of the charge-offs last year. We wanted to build the reserve because of the uncertainty we saw in the economy, and we wanted to do the heavy lifting early. And that's what we were doing. That's one reason that you see a 300 percent coverage last year versus what I think is a good 130 percent coverage this year.

So, finally, looking forward, we continue to expect flat rates throughout the year. That's what we expected in our last call. We continue to expect that now. Our outlook really hasn't changed from where we stood three months ago. We have seen the range of estimates move down, and we can tell you that we're comfortable with the range of estimates that are currently in place for full-year earnings.

With that, I'll go ahead and turn it back over to Dick Evans.

We're ready to entertain any questions that you might have.

Very good. If you'd like to ask a question, press star, one now on your touchtone telephone. To withdraw yourself from the queue, you may press pound. Once again, to ask a question, press star, one now on your touchtone phone.

We'll take our first question from the site of Mr. Charlie Ernst or KBW. Go ahead, sir.

Hey, guys.

Hey, Charlie.

Hey, Charlie.

A couple of questions on the credit side. Could you just give a little bit of color behind the increase in MPAs? I'm assuming that this is linked to the text that you put into the 10-K. And also, could you just talk a little bit about the current capital levels and how comfortable you are at these levels, and what the impact of the insurance deal that you all announced a couple of weeks ago is gonna have on that?

OK. First, I'll talk a little bit about kind of what's happening with non-performers. I think -- what I meant, Charlie, when I said that you've got to look at kind of the whole total. And if you look at what's been happening, quite frankly, we had about three credits moved from potential problem categories that we disclosed over into non-performers, which were really no surprise.

And if you look at, at our potential problems, they were at $25 million the last time we talked; they're at 19 million now. About six million, as I said, moved over into the non-performers. That's probably the good news is that's we properly identified them and that's what we try to do. The bad news is they moved to non-performers. As we look at the 19 million, probably the thing we're most pleased with, last time we talked, we had one credit in there, we talked about before that was $15 million. That credit, quite frankly has improved. They sold a portion of their business and reduced the debt down from 15 million to 10.8, and the company's loans have been restructured and it's performing and in fact has had a several months of good first quarters.

So that's exactly what potential problems are about. You want them to get well. Like for all of them to happen like the $15 million, but every now and then something moves over.

So that's really what happened in that. What I see, what I meant by a lot of churn and you get down in the muck of what's happening, there's just a tremendous amount of work that takes place in all this, and at the end of the day, there's really not a lot of change as far as the risk goes.

Could you, in the potential non-performers, or potential problems, say you went from 25 to 19 and the big credit went from 15 to 10.8. So it seems to me that, excluding the big credit and the movement out of the portfolio, in the rest of the portfolio stayed about the same.

Does that make sense?

When you go through this, you can go over and over and over and explain it a lot of different ways, but yes, at the end of the day, the risk is about the same as it was.

And Dick, can you give a little bit of color about any potential loss content on those credits that moved into non-performing and what kind of guidance you're giving right now, in terms of where you're expecting the range of that ratio to fall over the next year or so?

Well I think in regard to average, to our charge-offs, you know, we were at 25 basis points this quarter, 30 last time, 26 before, 36, 21. We stay, you know, about in that category and I think it's pretty representative of what you can expect. You know, that's, I really look at our history and feel comfortable with where our charge-off levels, you know, is. You know that, this is an impossible thing to say exactly where it's going to be, again, I come back to the fact that we learn during the 80's and we continue that we try to be aggressive on identifying problems and working with them early.

I think that $15 million credit we were just talking about that paid down to 10 is a good example. We've been in there really pushing hard, but they sell this portion of the company to reduce their leverage and that's what they did, and you know, that's what you need to do. Had we not done that, who knows what would have happened?

But I'm pleased with our charge off level and, again, I think it's the result of what we're doing before you get there. And I think somewhere in the range of what the history's been. Again, it's been as high as 36 in the second quarter 2002 and it's been as low as 21 basis points for the first quarter of last year.

Any guidance range on the MPA number?

We stopped a couple of months ago. I think that what we've tried to do, Charlie (ph) , is now that the K's and the Q's are full of so much detail that you really know what I know about what the facts are. And it's, again, we're going to stay ahead of the curb.

Charlie, this is Phil. With regard to your question about capital, as relates to the insurance it really doesn't much of an impact. That was a small acquisition. We're happy to have it. It was a primarily benefits organization up in Fort Worth, but revenues for that were a little over a million dollars a year.

So you can see it was not a big deal for us. Would not have had much impact as relates to our capital. As I said, we're very happy to have it, but it was not a large deal. I think the - if you're looking at the trend in our capital ratios and your seeing them the last couple of quarters go down a little bit on the leverage, I think you have to keep in mind that the leverage of the dollar roll position that we've had with the additional 500 million is going to tend to press that down a little bit.

We're still over seven percent at the end of the first quarter and I think that's fine for us. And we continue to generate a lot of capital on an ongoing basis with our profitability. I think we've done good.

So when did the insurance deal close?

It closed at second quarter.

OK.

I might just put in perspective on the insurance deals that we announced. We announced a lot of the expansion that we're doing in insurance is one and two person businesses that bring their business.

Thanks a lot.

Our next question comes from Mr. Robert Lacoursiere of Lehman Brothers.

Just a few balance questions. First, if you could provide the average balance for borrowed fund and the average balance of equity, please?

OK. Let me get to it real quickly. You look for the first quarter of 2003, the average balance of borrowed funds, I'm going to say that is going to be the line item of fed funds purchased in repo's which will include the dollar roll position. OK Robert?

Right.

It was at $923 million for the first quarter.

OK.

The average shareholder equity position - I could look at shareholders equity more at the end of the period. I'm not sure what average means a lot of times, but average is [Inaudible] 710 million.

OK. Thanks. And also, you talked about the potential problem loans, but if you could just give the balance for the 90 days past due?

The 90 days past due is $11,290,000. That's up from 9,081,000 in the end of December. As you look at it, I will tell you that there's - the largest item in there is a $1.5 million loan that we are holding past due. The money's in escrow to pay it off. It's a bankruptcy situation. And so, it's in hold in that regard. As so, after you get out of the million and a half, it really drops down to small items, and we don't see any, you know, major problem in that regard.

But the answer to your question is there's 11.3 million.

Great.

[Inaudible] , this is Phil. I just thought I might want to give you what the fed funds sold (ph) piece of that is in case it's of interest to you. Fed funds sold and securities purchased under resale agreements -- the average for the first quarter was 722 million.

Great. Thank you. And then, just sort of along the same lines as the asset quality, you talked about charge-offs and the reserve a little bit. But in terms of provisioning going forward, do you intend to serve (ph) provision above charge-off levels? And, I mean, you have a very low provision this quarter, and that's great, and it goes along with the improving charge-offs. But would we expect to see provisioning at these low levels going forward? Or, will it just depend kind of on the evolution of asset quality?

Well, certainly it's gonna relate to the evolution on asset quality, both good and bad, whatever happens, and I hope it's all good. But let me just talk just a minute about -- let's go back a minute to what Phil said earlier. Remember, last year it was our intent to build the reserve. We said it at the very beginning, and we consistently did it all year long. And we feel that we have, you know, at 1.85, a very good allowance. And we feel very comfortable with that, and are happy -- or we think we did the right job to build the reserve.

If you look historically, we also have had, obviously, a record of covering our charge-offs, and, as I talked about earlier, we have a charge-off history; I named percentages before. But in the second quarter of 2002, it was $4.1 million. It was kind of the high point to 2.3 million, and really the 2.3, 2.9, 2.8 that we just had, is kind of what our charge-offs have been running.

So, I would say to you that we would hope that we continue at this good level of charge-offs, and if we do, we'll continue to certainly cover the charge-offs and go from there.

OK. And so, one last balance question, or a question about -- what's actually within the other income? It's all a good up-tick, year-over-year and quarter-over-quarter. If you could just sort of talk a little bit about what drove that increase, please.

I think the biggest factor there is the $1.8 million in what we call "contingent income" that we received in our insurance agency from insurance companies for the good performance of the policies that they've written. That's a seasonal item, typically received in the first quarter. It was about, I guess, a million dollars in the first quarter of last year, at 1.8 million this year. So, that would account for about 800,000 of the year-over-year difference if you look on a lien quarter basis, we don't really get much of that in the fourth quarter. Again it's more of a first quarter event, so all 1.8 would have been primarily, you know, a change on the fourth quarter and would have accounted for a lot of the growth in other income, in a link quarter basis.

OK, great, thank you very much.

We'll take our next question from Catherine Murray of Neuberger Berman.

Yes, good morning.

Hi Catherine.

Hi there. I was wondering if you could elaborate a bit on the trend in net interest income on a linked quarter basis, because it was pretty flat? And I guess in particular I'm wondering if interest rates kind of stabilize here, as you indicated in your outlook. Should we expect some, to see some growth going forward given the deposit and loan trends you discussed?

Catherine on the, first of all, with regard to the linked quarter trends, had we had the same number of days, you know, in the first quarter, we would have been up some. You know, we had two less days, because of February. With regard to the trend we expect in the margins, I think if rates are flat, we're probably still going to see some compression, because of just the roll-off in the securities portfolio that we have. The good deposit growth actually because of investment yields available today and because we, you know, value liquidity and we don't just take every deposit we take and put in a long-term security. We tend to keep it fairly on liquidity. That deposit growth that we're generating probably dilutes our net, well it does dilute our net interest margin, because securities yields today, you know, are just, I mean you just think about it, our margin's at 410 and if we took a demand deposit in, and we bought, you know, a 350 yield security, that's going to hurt our net interest margin, but it would make us 350 basis point to spread, that would be a good thing.

So I think all those factors combined probably mean a little bit of margin compression going forward, not nearly what we had between the fourth and first. Again, because we didn't have a decline of 50 basis points from the Fed, but just other things equal, I'm sorry, I'm rambling here, other things equal I think we're going to get a little bit of margin compression and just mainly because of the maturities of the securities portfolio. And if were to see really good loan growth, you might could change that somewhat, but we're probably looking for somewhere in the mid-single digits and long-growth on an annualized basis through the remainder of the year. So I don't see that offsetting that impact entirely.

And just as a follow-up there, I'm with you on what could drive the margin compression, but other than the day count, should we expect to see some dollar pickup, given the investments you're talking about, dollar pickup in net interest income?

I would say that it would be modest. You might see some modest improvement.

OK, and then, I guess on a related topic, I was wondering if, given this prolonged low-rate environment, if you've done anything to alter what would be the natural interest rate profile? I understand what you're saying on the leverage, but beyond that, are you doing anything to alter your interest rate position?

Not fundamentally.

OK.

We have tried to make some investments as rates went down and try and keep our duration up a little bit on our investment portfolio, our duration of the portfolio is down to 2.6 years now.

And while we realize that will extend if rates increase, you know, it's been hard to keep duration on your balance sheets. So we've made some investments that are, you know, 15 year PMA's. Occasionally even some 30 year Jenny Mae's to make up for some of the run off there.

But that doesn't fundamentally impact the character of our margin, which is if rates go up we're going to be - we're going to have a great advantage from that increase.

Right. OK. That's where I was going. And then finally, in the other category of non-interest income. Is there anything in particular in that amount this quarter that would be of an unusual nature?

I don't think so. I think it's pretty clean. Like I said, it is seasonal because of the contingency income but no real sales of assets or that type. Nothing like a student loan gains we had a few quarters ago, et cetera.

OK. Great. Thank you.

We have a question, actually a follow up from Mr. Charlie Ernst of KBW. Go ahead sir.

Phil, could you talk about how big FICA taxes were in the quarter? And then I've got a follow up on the bond portfolio.

I'm sorry, Charlie, how big what was?

The FICA taxes were?

The FICA taxes. OK. Let me see. I may have to dig into this. Do you have a follow up question?

Yes. On the bond portfolio, what is the weighted average yield down?

The weighted average yield on the portfolio is about 480.

And could you comment on what the premium amortization was in the quarter versus last quarter?

Well, Charlie, maybe the best way to answer that is the entire amount of unamortized premium we have on our portfolio, I mean in total, is only $11.8 million.

So it's fairly immaterial. We basically are par buyers on the portfolio and so it's really not a material amount.

Where does the mix stand now, in terms of mortgage backs, CMO's and whatever else you have on there?

We are primarily a mortgage-backed holder. When you look at CMO's, to put it in perspective, as of the end of the first quarter we had a little over $2 million in CMO's. That's versus - that's out of a portfolio of around 2.5 billion.

So we're really not a CMO buyer. We really like more the straight agency product. If you look at prepayments fees, Charlie, I know you've been interested in that in the past. They are up significantly from the last year. They've probably doubled. We've probably run about 40 CPR on our mortgage-backed portfolio. It's up 20 a year ago.

And that's part of the reason behind the shortening duration of that portfolio.

And what kind of, you know, weighted average yield are you placing the cash flows with?

Well, you mean what kind of reinvestment?

Yes, exactly.

Depends on opportunities. You know, we're probably getting - this moves around a lot, but if you look at the first quarter investments that we made. We did a little bit better than 4.5 percent on the 15 year Fannie Mae's that we did.

That was the largest piece. If you're doing a Fannie Mae agency that's a five-year no -call fee (ph) , you get about [Inaudible] .

OK. And Phil, when I look at the period-end asset number versus the average for the quarter, it seems to be up about 400 million or so. And when I look at the period-end loan number versus the average for the quarter, it's slightly down. So, were there additional bonds -- I guess the question is how much did the bond portfolio grow during the quarter? And is that reason for the increase -- for those nuances?

Really, the period-end deposit number is driven a whole lot by the demand deposits.

If I said deposits, I meant assets versus loans -- that the loan number was down a little bit the period-end asset number was up about 400 million.

Well, it's mainly gonna be debt bonds (ph) and some investment securities. But, I mean, the demand deposits at the end of the period -- and I'm going back to that because the demand deposits have a lot of volatility, and those numbers will [Inaudible] cash or are sold (ph) a lot of times. And so, you'd see that most of that is gonna go into fed funds sold, and we really didn't do that much for (ph) long-term investing near the end of the period.

So, the answer to the question is, with the loans going down, you'd have seen that primarily going to liquidity.

OK. Thanks a lot.

We have a question from Mr. Caleb Piper (ph) or Morgan Stanley.

Hi, guys.

Earlier in the conference call, you guys' year-over-year growth numbers for C&I; commercial real estate and commercial land. Could you give those just quarter-over-quarter?

Yeah. Let me -- hold on. I'm looking at period-end loans, and this is all -- link-quarter basis you want?

Yes, please.

On a link-quarter basis, C&I loans were pretty much flat; not including shared national credits, they were basically up about a million dollars.

Um-hmm.

If you look at construction, commercial would have up about $20 million. Commercial real estate mortgages would have been up around 10. And those would have been the categories that you've seen the most increases in.

OK. Can you just quickly talk about your outlook for loan growth; what you're seeing in your pipeline, what we should expect for the second quarter?

Well, I think if you look -- obviously, if you look over the last year, we're pretty flat. If you get below it and all the churn that's been happening with the indirects about over, it's pretty well run off. Mortgages still have some. Shared national credits, in fact, were down this quarter compared to the fourth quarter, so there's a lot. If you kind of take all of that out, I think we had a core loan growth of about 1.7 percent.

Um-hmm.

And so, you know, as we talked all last year, two or three percent core loan growth, and it all washes out -- it has in the past -- to be pretty flat.

So, we've been riding our bicycle pretty fast to kind of hold our own. We're particularly pleased with our C&I loan growth and our core growth. I recently saw an article in the American Banker -- in fact, it was in early April -- that took a look at overall C&I loans were down and where the growth in the United States in commercial banks has really come from consumer, of course, that's not a strong, consumer loans are not a big part of our picture, and so the C&I have done, really pretty well at that, you know, around that two percent core loan growth.

We certainly home equity loans are important to us. You will remember Texas as ultra-conservative on its law in that regard and there's some possibilities that we'll get a revolving product in May that should create some opportunity for us and some increase.

So it's a lot moving. We continue to always be pruning and adjusting the portfolio, particularly in a slower economy. I will tell you that I look closely and our organization spends a lot of time looking at our call volumes, and this past March was the strongest that we've had probably ever and certainly in the last 12 to 18 months.

So we're out on the streets really looking for good opportunities and that', they're always is a correlation between the cause and the volume, it runs about 90 days later.

But can you sort of describe the competitive landscape out there? You said C&I's pretty flat. I presume that there are a lot of banks out there on the commercial side that are scratching their heads trying to find the next loan. Are you seeing, you're being more competitive on price or terms or people are just being pretty quiet.

You know, what I would say, you know, it's been really competitive for the last couple of years, so I don't see a lot of change in that regard. I think the, you know, in a weak economy, I think everybody's doing a good job of watching quality, or they should be, we certainly are, I can speak for us.

And so where the growth really is, when you got an economy that's not really growing, then what you got to do is take it away from the other guy, and so there's a lot of that activity going on and we're certainly participating in it. We try to find those very best loans and move them over to, or to our organization.

And I will tell you that in an uncertain economy, the customer's uncertain and he's reluctant to move as fast. We look at from the time of a call to the time we can book the loan, and those times have continued to stretch.

So structure wise, I'd say there's not really much change. Price is always tremendously competitive and continues to be.

Great. Thank you.

This is Phil Green, I wanted to respond to Charlie Ernst's previous question, I neglected to get to. He asked about what FICA was for the quarter. And we group up all payroll taxes together, which would include FICA and that's 3.7 million. So Charlie, if you're still on the line, that's the answer to that question.

Also wanted to point out one other thing and when you do look at what securities were on a period-end basis, there were in securities at the end of the quarter, $120 million worth of some discount notes. There were just a three month, or actually about a, I think it was about a three-month security, and so that is essentially liquidity there. So you need to sort of mentally take that out, not, don't envision that as a mortgage back security increase. That went right back into liquidity after the end of the quarter.

Once again, if you'd like to ask a question please press star one now on your touchtone phone. We have a follow up from Mr. Charlie Ernst of KBW.

Still here. Phil, can you compare that with the prior quarter in terms of what the FICA tax was?

Yes. On the December '02, it would have been $2.4 million.

Two point four, so there was about a 1.3 million seasonal swing or something like that?

Yes.

OK. Great. Thanks.

Once again, press star one if you have question. It appears we have no further questions. I'll turn the program back over to our host for any concluding remarks.

Let me just say thank you for your continued support of our company. We are very pleased to be in a great market, as I've said earlier, and we've got a great brand and we look forward to continuing to work hard for you.

We stand adjourned.

This does conclude our conference call for this morning. You may now disconnect your lines and have a great day.