Cullen/Frost Bankers Inc (CFR) 2007 Q1 法說會逐字稿

Good morning. My name is Felicia and I will be your conference operator today. At this time, I would like to welcome everyone to the Cullen/Frost Bankers first-quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). Mr. Parker, you may begin.

Thank you. 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 area code 210-220-5632. At this time, I will turn the call over to Dick Evans.

Thank you, Greg. First-quarter 2007 net income for Cullen/Frost was $47.3 million versus the first quarter of '06 of $46.7 million. On a per-share basis, the earnings for the quarter were $0.78 per diluted common share, down 6% versus a year ago. However, the first-quarter of 2007 results included $5.3 million in expenses related to the early redemption of $100 million in trust referred securities or $0.06 per diluted common share after tax.

For the first quarter, our return on assets was 1.47% and return on equity was 13.78%. I am grateful to our outstanding staff for their dedication and hard work as they continue to meet challenges head-on. The Texas economy continues to expand, growing at about 1% faster than the US.

I would first like to focus on the linked quarters, looking at the fourth quarter versus the first quarter of '07. Total loans at period-end increased to $7.5 billion. If you annualize the increase, it was a 4.7% annual growth. Looking deeper into that, the commercial and industrial loans, I was pleased, grew on an annualized basis of 7.8% or $60 million. Commercial real estate loans also grew $29 million at an annualized rate of 4.2%.

As we look geographically at our different markets, you will find that Fort Worth was our strongest growth market in the first quarter, increasing some $88 million or 16% on an annualized basis. We are extremely pleased with the way the Summit acquisition and integration continues to be right on target and the teams come together as one.

San Antonio continues to be a strong market for us and it grew $55 million or annualized at a 15.6% rate. Austin at $14 million growth or 10.4% annualized and Corpus Christi of $4.2 million or 4.8% annualized growth. The markets that had negative growth were Houston, Dallas and the Rio Grande Valley. Houston was down $55 million. We had an unusual number of customers that sold their company and paid off loans. Dallas was down $21 million. We had turnover in our commercial real estate area several months ago and now have new leadership in the commercial real estate in place and are already seeing producing volumes.

The Rio Grande Valley was down $8 million for the quarter. Our Alamo acquisition we are extremely pleased with. With the portfolio, we have been adjusting loans out of that portfolio to other organizations to meet the Frost standards and the quality that we want in our portfolio.

Looking at total deposits, on March 31, our total deposits ended at $10.3 billion. We were down $100 million from year-end, which is typically high for us. Looking closer at deposits, I am extremely pleased that consumer deposits were up some $87 million or 7.6% on an annualized growth basis. And the numbers of new accounts grew 3.6% annualized.

We also believe the new product of remote capture is extremely important to long-term retention and attracting new customers and currently we have over 500 active workstations in service. Our net interest margin increased three basis points from last quarter to 4.65%.

Now comparing non-interest income and expenses to last year, our non-interest income grew 10% to $67 million. Within that number, we continue to see good trust fee increases. They were up 7% to 16.9% and also increased the number of new accounts. Our insurance commissions and fees had a very good period of up 18% to $10.6 million and check card usage, which is very important in the consumer relationships, also added $650,000 to revenues during this period of time.

Non-interest expenses increased 21.5%, obviously impacted by the three acquisitions that we closed during this period of time. Salaries were up 12%. Approximately 16% were merit and the headcount was up 118 people as you would expect with these acquisitions.

With acquisitions, you have more locations and certainly increases in net occupancy and other expenses also were up and two-thirds of that were related to the trust preferred redemption that we mentioned earlier, $5.3 million and other unusual items that totaled $1.6 million.

Moving to asset quality. It continues to improve from year-end. Non-performing loans were down some $8 million to $50 million. If you look at combining the non-performers, the past dues over 90 days and potential problems, that area also improved almost $10 million and closed at $72 million on March 31.

Our net charge-offs were 14 basis points of average loans and they reduced from $3.3 million last quarter to $2.6 million in the first quarter and our loan-loss reserve continues to be very flat at 1.29%.

Looking forward, competition continues to be our greatest challenge in regard to keeping our margins and quality at profitable levels versus growth alone. We lost or declined business in the first quarter of $101 million due to price and $111 million due to structure.

While there are many variables in negotiating price and structure, we are seeing certain terms that we feel are not in the best interest of our shareholders long term. For example, we are seeing a greater increase of fixed-rate loans that are fixed for five years to greater with no prepayment terms. We are also seeing on the structure side this past quarter, we saw more financing without personal liability. Now that is particularly true where you have, in our case, where we had credits that cannot be supported by collateral or strong capital in a company or other sources of potential financing in the public markets.

Certainly we recognize that personal liability is not on every credit, but in circumstances where you don't have the support of the collateral, or the capital or other financing, we feel strongly that that is not a loan that we would do.

Cullen/Frost clearly recognizes that we cannot change the environment and certainly wouldn't. This is a great environment. Texas is growing good, but as I have said many times, it is very competitive.

I think the question that we really need to address -- can we grow loans at a higher level than this recent experience of 4.7% annualized? The answer would be that we expect the momentum of the loan growth to increase over the remaining part of the year. The reason we expect this is because of some facts.

First of all, our calls are up 14% over last year. Our pipeline is up 25% over last year and commitments are up 17% over last year. Probably the most important thing on commitments is that the fourth quarter and the first quarter of this year, we saw a new commitment growth that were records for our Company.

We booked 33% more from prospects in the first quarter compared to last year. We recognize that with this tremendous calling effort and increased commitments, it doesn't eliminate the competition from offering our customers lower rate and more liberal terms and we are proactive and will continue to be in addressing these issues while positioning ourselves more as a partner and adviser to help our customers be successful by bringing more value to the table.

In closing, we understand the long-term growth expectations of the market and our goals are the same. We know what is expected of net income growth, our loans and deposit growth and fee income growth and we also know we must maintain a high level of low-cost deposits, which is key to our profitability.

Now I will ask Phil Green, our CFO, to make some additional comments.

Thanks, Dick. I am going to make a few additional comments as you mentioned and I want to talk about our outlook for a second and then open it up for questions, turning back to Dick.

As we talked about before, the first quarter is a seasonally weak one for us. We talked about this in our last call for example. There are a number of reasons for that and I wanted to talk about some of those reasons and also the impact of unusual one-time items on the quarter so that we can better understand the outlook for the year.

The more major seasonal items that impact us versus the fourth quarter -- for one thing, the number of days in the quarter are less. It's a shorter quarter for us. There are two days less for us to earn interest, which costs us about $2.7 million in net interest income.

We talked a lot of times about benefit costs being higher in the first quarter because bonuses are paid and FICA and other payroll taxes are paid on that and also 401(k) contributions related to those payments were made and it shifts a lot of those costs into the first quarter. That was $2.9 million higher than the fourth quarter.

If you go back historically, that is a very consistent trend. In the first quarter of '06, we were $2.4 million higher than the previous quarter. If you go back to the first quarter of '05, we were $2 million higher than the previous quarter, so that just continues on.

We also had in the advertising area a little bit of an unusual situation in that we were up about $1 million higher than what we would typically be. We were up about $1 million higher than the fourth quarter. We actually spent about 40% of what our allocation for advertising was during the first quarter because we wanted to get some increased visibility in the North Texas market with the significant Summit acquisition that we had. We wanted to take advantage of some opportunities we had there, particularly on broadcast media in order to get our name out and just continue to get more visibility as I said. So, those three items together were about $6.5 million pretax negative when you compare versus the previous quarter.

On the positive side, insurance always has its best quarter in the first quarter as we said before. They were $3.7 million more profitable than in the fourth quarter. So if you net those out and you can see it -- a $2.8 million net pretax seasonal negative compared to the previous quarter.

Then you also take into account the trust preferred call premium that Dick mentioned and we had disclosed previously of $5.3 million and that totals a pretax $8.1 million impact on the first quarter compared to the fourth, which works out to about $0.09 a share. For the rest of the year, these seasonal and unusual impacts will reduce significantly as we move forward.

There were also some other non-operating items in other income and expenses, but these pretty much offset and I will not discuss these in this context unless there are questions later on.

One thing I will mention here that it's not a seasonal item, but is a new and little unusual item is the new Texas tax that we are now having to pay. It is called a margin, tax but essentially it is a corporate income tax. The idea was that reductions in property taxes would offset the amount of tax that had to be paid under the margin tax.

What happened is because of some unintended consequences in that bill, there actually is more taxes that we are going to have to pay as a bank and that costs us about $0.06 a year or $0.015 a quarter. As I said, it's pretty much understood to have been an unintended consequence. It really has to do with the computation of using out-of-state receipts and while we would love to see this addressed and corrected by the legislature at some point, it remains to be seen if that will happen.

Dick mentioned the margin expansion during the quarter. I feel very good about what we have been able to do, not just in the first quarter, but also maintaining good margin stability over the last year. We are pretty much in line with what our margin was a year ago. We have been doing this in a very challenging rate environment.

When you look at the first quarter and see the increase, there were really some competing things that were going back and forth, but we managed to have a net increase on the negative side. Loan yields and timed deposit costs were where we had a little pressure. We were able to offset that with -- we did refinance the trust preferred, which helped us. We made some investments in the fourth quarter near the end, which helped us as the average full quarter in the first quarter.

We were able to reduce repo rates and still maintain a good market positioning with those liabilities and that helped us and then just having Summit for the full quarter also helped us. Those were the things that offset some of the operating pressures that Dick has described earlier.

If you look at the margin going forward, we actually expect some expansion in the margin. As we look at the loan growth, it should be occurring. As Dick mentioned, the activity we had in commitments. As we mentioned before, additional loans will help our balance sheet be more efficient and help our margin.

We will have a full quarter of the debt refinancing that will help us. We'll have a full quarter of the repo rate reductions. We made some additional investments, about $150 million, that should help us in the second quarter. And then we also did see some moderation in deposit rate pricing. We had the ability to adjust some of our rates down and still remain very competitive and just to illustrate that, I think I have said before, we track about 30 different rate categories that we compare ourselves to the top largest banks, top five largest banks in Texas. Of those 30 rates, we were the highest rate on 13 of the 30. We are the second-highest rate on 15 of those 30 and we are -- on 29 out of the 30, we are above the average. So I still feel very good about our competitive positioning in our deposits.

Looking forward, we don't anticipate any movement by the Fed in interest rates for the rest of the year and so given the strong growth in loan commitments that Dick mentioned and their implication for increasing the loan growth momentum through the end of the year and a moderation of the seasonal and unusual items that occurred in the first quarter and we are also ignoring the impact of the trust preferred call premium costs as I believe most of the analyst community has. We believe that the current consensus estimates for our Company of somewhere in the mid 360s continue to be reasonable for us.

And with that, I will open it up for questions and turn it back over to Dick.

We will entertain your questions now.

(OPERATOR INSTRUCTIONS). John Pancari, JPMorgan.

Good morning.

Good morning.

In terms of your Outlook for loan growth, I know you are implying that you expect a rebound there. I just wanted to get an idea of what growth rate would you think would be reasonable? Would you think we are looking at a 10% or a 11% growth rate or low teens? I just want to get your thoughts on where you think that could approximate as we go through '07.

John, that is a great question. Let me give you a little background just to give you what we are looking at. When you look at commitments, in the first quarter of last year, we had total new commitments of $685 million. Second quarter, $635 million and third quarter, $634 million and as I mentioned earlier, our fourth quarter and first quarter were our highest ever. We had in the fourth quarter $872 million, in the first quarter $802 million.

So the potential for growth is the reason I am optimistic that we can get back to a higher growth rate. Certainly I think in the 10% to 11% is a goal that we would reach for. As I mentioned, it is an increasing to get there. We are not going to -- I wouldn't think -- I would love to jump there in the second quarter, but I think what you will see over the year is that we increasingly get better as we move forward because of the statistics of just the pipeline and the commitments.

It hasn't been a lack of effort on our officers' part of making calls as you heard the statistics or building pipeline or commitment because they have done a great job of it by evidence of being at the highest point in the last two quarters.

What the real challenge has been is in payoffs that we didn't expect and I think it is a result of the liquidity and of just so many ways to (inaudible). People are selling companies that they might not have thought of before and we just happen to be plagued by more of it than expected.

Well, to what extent is that 10%, 11% growth outlook consider still elevated payoffs, particularly given the aggressiveness of the investment banks?

Well, it certainly -- it has to consider that. My statement as far as increasing growth -- I do expect -- I think we have been hit with an unusual amount of it and I think we will be able to get back to growing loans gradually over the rest of this year.

John, this is Phil. Just to give you an idea of kind of our latest update. As of yesterday, the loan portfolio stood at period-end of $7.520 billion, which would be up a little over $60 million from the end of the period just to give you some more recent visibility.

Okay, great. And then in terms of the margin, I know you indicated that you added some investments in a bond portfolio in the quarter. I just want to get an idea of what yields you were putting on securities this quarter.

The investments that we did this quarter, which would be about $150 million total, we are getting about -- there is really two kinds of things we are doing. We are getting about $120 million of Freddie Mac's at about 5.5 and we were able to do about $47 million of municipals at a tax equivalent rate of 6.2.

Okay. And how much excess short-term liquidity do you have currently on the balance sheet remaining?

We have today -- well, let's see. On average for the quarter, [Charlie] usually asks me this question, but we had about $731 million of average fed funds sold for the first quarter.

Okay. That's helpful. And then one last question and I will hop off. Around the expenses, I understand the seasonality that you are pointing to. Outside of that, it seems like the advertising expenses were the only ones that were somewhat outsized and some within that may not have been initially projected given your discussions with us previously, but I am trying to get an idea of where else could we see some reduction or is there anything else that is going to help bring the expense levels down, just trying to gauge your run rate here?

I think we had some -- the things I focused on were the things that I felt were not offset in the other side of the income statement. We did have about $1.4 million associated with a catch-up on a contribution of 401(k)s. That is not going to happen again in the subsequent quarter. We had about $800,000 worth of OREO loss. So those two things I look at and the other expenses were about $2.2 million.

However, to be fair on the other side, we had $1.1 million in recoveries associated with a prior loan. We had a branch sale where we had a gain of $600,000. You know we had an unusual fee in the trust area for a successful settlement we had in a lawsuit, so that was $400,000. So those kind of add up to $2.1 million. So I look at those kind of offsetting.

Now your question was specifically expenses and so $2.2 million of those were expenses, so you could see those other things equal come out of it, but just keep your eye on the other income side too because we did have some other unusual things there as well.

Okay. Fair enough. Thank you.

Andrea Jao, Lehman Brothers.

Good morning. Andrea, we can't hear you. Wonder if your phone is still on mute?

Andrea's line has been removed from queue. Your next question comes from the line of Charlie Ernst.

Good morning. Can you guys update us on the Summit deal and kind of where the integration stands?

Well, the Summit deal is going very well. We, of course as you know, we closed it all on December 8 and we have gotten our costs, all that we expected have been taken care of. I think the important thing is that the Summit loan portfolio, just looking at it about a month after we closed the deal versus today, is up about $1 million and then you saw -- you heard me say that overall market is up in Fort Worth. Some $88 billion is our strongest growth market.

I feel very good about the teams coming together, working together as one. They are doing an outstanding job and certainly the leadership of Phil and [Nathan] are doing a great job of leading that group, so it is -- for where we are today, it is working very well and I am pleased with the job they are doing.

Dick, when did the operational conversion occur?

Well, we closed the deal on December 8 and as you know, that is when we paid for it, changed over and reduced the expenses and so that is --

And all the systems were converted at that time as well?

Yes, sir.

Right.

Everything was done --

So you really -- you had a good -- you are on a good run rate right now in terms of savings being integrated into the numbers?

That's right.

Okay. And were there any -- I'm sorry -- go ahead.

I think, Charlie, the thing -- all of that is done and couldn't be pleased and at this point in time, we couldn't be more pleased. It does take time to get the sales culture and everybody adopted to the new part of that and running, but they are doing a good job. As you can see, the total market is up and it is working well.

And were there any student loan sale gains in the quarter?

You know, I think there were, Charlie. If you give me a second, I'd like to find some. We usually have some every quarter.

All right. You guys are spreading those out now over the full year versus kind of taking them in a lumpier --

That's right. We try to not have any lumps in it.

It's not a big deal, Phil.

It's okay. I have got it here, Charlie. We had gain on student loans of $585,000.

Okay. Great. And lastly, can you just remind me when you called the trust preferred and what you refinanced it with?

We called it on the 21st of February and we refinanced it with sub debt at I believe 575.

And that had like an 8% cost to it?

It was about an 8.42% I think on the trust preferred.

Okay, great. Thanks a lot, you guys.

Thank you.

Andrea Jao, Lehman Brothers.

Good morning. Can you hear me now?

I can. Thank you.

Okay. That's much better. I am hoping to get a full quarter's impact -- you know the increased linked quarter of Summit on the balance sheet. There is loans, securities. If you can give us average securities for the quarter, as well as deposits.

Well, let's see.

And borrowings if you have that available as well too.

You know, Andrea, let me see if -- let me give you some figures on just balance sheet growth. I guess a lot of this is going to be Summit. You know loans were up $724 million on average. Investments were up about 200. Fed funds sold were down about 200. Demand deposits, up about 120 in round numbers. Timed deposits, up about $600 million and most of that is Summit. Repos were up by $52 million.

Okay. So ex-Summit, how much was average loan growth in the quarter?

Well that is --

Well, that is -- let's see. That would have an about 1.8%. Annualized, 7%.

Okay. And deposit growth?

On deposits, let's see. It would have been about -- without Summit, I think it would've been flat. Without Summit, it had been pretty much flat and keep in mind that the first quarter typically is a little weaker for us just from a seasonal point of view. In fact, a lot of times, we have a reduction in deposits in the first quarter.

Understood. I guess especially in your commercial accounts, right?

That's right.

Have you started to see those come back early in the second quarter?

Yes, they are normal. They are acting very normal. It always builds up at the year-end and then --

I think we've seen some growth in deposits. A lot of it happens with tax build-up. In the tax season, you'll see the deposits be strong during April. I think we have some seen some growth there.

Okay. Now to the margin, you did mention that you're comfortable thinking of expansion for the remainder of the year. Are you willing to share with us where you think it would be by year-end?

Did you say the operative word there was willing?

Will you please share with us?

Andrea, I hate to go out that far and tell you what margin is going to be. I would rather say that we think we do have some expansion because of the factors that I mentioned. I don't want to get locked into saying how large it is going to be, but you know if those factors happen, we feel like we will get some expansion.

Okay. Cool. Thank you very much.

[Ibrahim Poonawalla], Morgan Keegan.

It's Bob Patten at Morgan Keegan. How are you guys doing?

Good.

Phil, Dick, the color you give on market dynamics is very helpful and in terms of loosening structure and standards, I guess we've seen this movie before, Dick. Can you give any additional color? Is it large banks, small banks? Is it spread across all your markets? Are you seeing more of it in one market than another?

I think that it is pretty much everywhere and with different sizes. You know when you get into a discussion like that, it is always more difficult to kind of pinpoint it. The other thing I am sure some of them are saying that we are doing some of it. The bigger factors I mentioned I think are the most concerning to me. You are always tweaking loan covenants and tweaking pricing and looking at the total relationship to see what your overall profitability is.

But when it comes down to giving up some pretty significant things such as personal guarantees where there is not anything else to support the credit or a gap in the credit and going out to term, these are the kind of things that when it cycles, when the market cycles, come back to really haunt you. To answer your question, it is some of everything. You know we have got some situations where people are coming into the market and it is a hot market and people are buying marketshare. How long they will do that, I don't know.

Okay. Thanks very much.

Brent Christ, Fox-Pitt.

Good morning, guys.

Good morning.

A couple of questions. First, in terms of the linked quarter reduction in non-performing assets, did you see any resolution with either the two large credits you guys added last quarter at the student lending housing projects?

No, they have not changed any. In fact, they are single entity units and they did file bankruptcy, which I'm not crazy about bankruptcy, but in this particular case, it is probably a positive. Particularly as you know with single entity companies in bankruptcy, that is something bankruptcy really doesn't like. We are working to pull those out and be able to deal quicker with those. But it had no effect. They are just the same as they were the previous quarter.

Okay. What was really driving the sequential decline then? Was it granular or centered in one or two loans?

It is really granular.

Yes, we had the OREO sale.

Yes, we did sell an old OREO property that Phil mentioned. We charged part of it down and sold it, so it is an old probable glad to have moved out.

Okay. The next question in terms of your outlook for the margin, it seemed somewhat reliant on loan growth picking up a little bit in the back half of the year, but how are you assuming that you are going to be funding that loan growth with your upward march in assumption?

I would think that just in general it would probably be say 60% -- 50% to 60% deposits in capital and the remainder being in investment, maturities and liquidity.

Okay. And then the last question, you mentioned a little bit of flexibility on the deposit pricing side given that you are above market on most of your products. Could you talk a little bit about maybe where you have pulled back rates to an extent in terms of which products and how much you are reducing the rates?

Well, we are still well over in some of the money market products that we have. We are well over market in terms of where we are there. We have moved back some of the CD rates a little bit. We are still well over on our basic checking account rate compared to the other five large banks. So I would say our strongest positioning where we have the top rate is in the regular money market accounts.

We are real strong on having the second-highest rate in the high-yield areas and the highest rate in some of the categories there. We definitely have the highest rate in savings accounts, things like that and probably of the six categories we look at in jumbos, we have got the highest rate in two of the six and the same thing on consumer. So it is kind of a broad view of where we are competitively and when we did make some adjustments, I think we made it in some of the regular money market account where we still remain very much overmarket.

Would you anticipate remaining at the high end or migrating more toward the middle of the pack over time?

You know I think deposit pricing is a little bit art rather than science. We want to make sure our value proposition overall is good and right now, we have got a great one. It is probably still as good as it has been in my 27 years here. I think what I have said about what we have today though is I think we do have pricing power remaining in our deposit pricing and in our value proposition. How much is hard to say what it would be. It is just going to depend on the circumstances, but I feel really good that we do have good pricing power.

Okay. Thanks a lot.

[Kathryn Meeler], KBW.

My questions have all been answered. Thank you so much.

Jon Arfstrom, RBC Capital Markets.

Good morning, guys.

Good morning.

A couple of questions for you. The commitment numbers that you gave out were very helpful and it looks like something changed between the third and the fourth quarter and Dick, I was just wondering if there was anything you can point to that allowed that number to improve? Is it Summit? Is it better opportunities or what is driving that number higher?

You know my first reaction to that is it is just a lot of hard work and the Company being more focused in accomplishing that. We did have in the fourth quarter, we had some public finance that drove the commitments up, which you are always in big dollars and have an effect on in it. But overall, I really believe it is a commitment to focus and going after the customers.

I will tell you that we have done a lot of work and really focusing on the kind of customers that we think -- that we know would be a better fit for Frost. We did this by the last couple of years spending some time on researching our customer base and understanding why those customers have been with us for more than 50 years -- more than 25 years, excuse me. We are old, but this research -- been with us for more than 25 years.

And we have then looked at the total pool of prospects and identified within that total pool about [40,000] or 30,000 prospects across the state that meet the criteria. We are more focused on going after those customers, which we believe from the work we have done the last few years, should result in a better match and should result in more success of bringing that customer in quicker. Obviously the sales cycles are longer in a competitive market and you get some spurts and stops as you go along the way as everybody jumps on the bandwagon.

All right. A couple more questions here. The comment you made about the Houston credits being down and there were some larger payouts, is there any theme there? Is it real estate, energy or something else?

No, it's not any -- certainly real estate is a part of it that I would say, but the other is really related to companies that we had a relatively large credit that we have had for a number of years and the market was so good that they sold the company and most of the reduction has come as a result of large commercial customers just finding opportunities in this hot market to sell and we have just been plagued by more of that in Houston than in our other markets.

Okay. Then Phil, just a couple for you. Do you have the average earning asset yields and also the funding costs, what they did Q4 to Q1?

Yes. The earning assets -- yes, John, the earning asset yield was 695 and in quarter four, it was 688 and then on the funding cost, it was at 328 in the first quarter and it was at 330 in the fourth quarter.

Okay. And then I wanted to confirm, did you say potential problem loans were down $10 million sequentially?

I'm sorry. What is the question?

Potential problems.

Potential problems. I missed that.

Yes, what I did -- the number I gave you, I added -- the potential problems are pretty flat. The number I gave you was adding the non-performers, past due loans over 90 days and potential problems together were down $10 million. All of those categories added together was the figure that I gave you.

Okay. Good. And then Phil, the last one on the guidance, just to make sure it is clear. You are assuming that $0.84 -- when you said you are excluding the trust preferred cost, that $0.84 is the core number for the first quarter?

Yes, I am adding -- yes, I am adding back that trust preferred $0.06 into the quarter to get the core.

Okay. Great. Thank you.

Heather Wolf, Merrill Lynch.

Hi, good morning.

Good morning.

Just a question about the commitments again. You had mentioned that your commitments were at all-time highs in the fourth quarter, as well as the first quarter, but those commitments didn't really translate into loan growth for the first quarter and I am curious if that was timing-related or if there was something else going on?

That's a great question. I have been asking the same and what it was -- in that number, as I mentioned earlier, part of it is because of the public finance and those drive up commitments and often times don't fund that much, but the commitments really did convert into loans. The problem that was offsetting that good commitment was the high paydowns in the first quarter.

And of the $870 million I think you said of commitments currently, how much of that is public finance?

In the fourth quarter of the $872 million, I think about $100 million in rough numbers. I don't have that exact number in front of me, but what I would look at is it was $872 million in the fourth quarter and $800 million in the first quarter. I would say those are probably pretty level around $800 million. The commitments in public finances are -- there is not anything unusually strong in the first quarter.

Okay, great. And then Phil, did you say something in your comments about the redemption of trust preferred adding $0.09 or did I just misinterpret that?

No, when I mentioned the $0.09 [debt], took the redemption cost of trust preferred, which is the $5.3 million, and I added that to the pretax net seasonal impacts where we had the benefit of insurance and then we had the negatives of (inaudible).

Got it.

The others -- and when you add all those together, that is $0.09.

Got it. Got it. Okay, great. Thank you very much.

Let me add something just to give you a number. Of the $800 million of commitments in the first quarter, $228 million were in Houston and yet we were still down $55 million. So that is what I meant by it is not in the potential for the growth, but it is in the paydowns that is what hit us. Does that clarify?

Yes, that's great. Thank you.

(OPERATOR INSTRUCTIONS). John Langston, First Dallas Securities.

Hi, guys. Just wanted to get your feedback on kind of possibly expanding your footprint here going forward, maybe moving west of Fort Worth any and your thoughts on possibly doing that you know over the next few years. Thanks.

If I understand moving west, we are committed to the markets in which we currently serve; Fort Worth, Dallas, Houston, Austin, San Antonio, Corpus and the Rio Grande Valley. So we made a conscious decision some time ago to not go out of the major metropolitan areas. Certainly we surround them as they grow in different directions. Then secondly, obviously we were able to double our size with the Summit acquisition and also increase our branches substantially in that market. In Dallas, we have -- currently we are looking at real estate and have improved several branches in that market. I think it is three de novos to expand the Dallas market.

Okay, great. Thanks.

Brent Christ, Fox-Pitt.

Thanks for taking the question, guys. Just to follow up on the guidance, I guess you are expressing comfort with kind of a mid-360 type of number and if you back out the $0.84 core number you are using this quarter, that assumes an average of $0.93 to $0.94 over the remainder of the year. It sounds like you get about $0.03 lift from seasonal factors, but I guess where is the rest of the lift coming from from this quarter's levels?

Well, I mean I think that what we are expecting to see is the additional loan growth that Dick's been talking about in terms of the activities. That is an important factor, just getting the, as you mentioned, the seasonality. We are going to see that go away. And then just hard work on all the other fronts.

We do have, like I said, we should get some margin expansion because of the factors that we talked about, which should help us as well and as well as the -- you know which includes some investment activity. But it's really just all those factors that at the present time (inaudible) stay flat and you know you have to have caveats to all that. You know things don't just totally fall out of bed competitively on pricing and that type of thing, but we feel like we have got some things working in our favor.

Okay. Thanks a lot, guys.

At this time, there are no further questions. Are there any closing remarks?

Thank you for your interest in our Company and we appreciate your questions and this would conclude our call.

Ladies and gentlemen, this concludes today's Cullen/Frost Bankers first-quarter earnings call. At this time, you may disconnect.