Cullen/Frost Bankers Inc (CFR) 2012 Q1 法說會逐字稿

Good morning. My name is Kristi 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 conference 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) Thank you.

I will now turn the conference over to Greg Parker, Executive Vice President and Director of Investor Relations. Please go ahead.

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, covered 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.

Thanks, Greg. Good morning and thanks for joining us. It's my pleasure today to review Cullen/Frost 2012 first quarter results. Our Chief Financial Officer, Phil Green, will then provide additional comments and after that, both of us will be happy to answer your questions.

I'm pleased to report that for the first quarter 2012 Cullen/Frost posted record high quarterly earnings, continued our strong deposit growth trends, returned to loan growth, and saw improvement in all credit quality indicators. The record quarter earning reflects our ability to operate effectively despite regulatory changes and low interest rate headwinds and a slowly recovering economy. While we remain cautious about the economy and the slow recovery, we had a good quarter. Our net income was $61 million, up 17.5% over the $51.9 million reported in the first quarter of 2011. On a per-share basis, we recorded $0.99 a share versus $0.85 during the first quarter of last year. First quarter returns on average assets and equity were 1.23% and 10.59%, respectively.

Deposits continue to grow significantly. For the quarter ended March 31, 2012, average total deposits were $16.4 billion, up13.3% or $1.9 billion over the $14.5 billion reported for the first quarter of last year. 50% of our deposit growth continues to come from new relationships, 70% were new business customers, a result of our focused calling efforts. As you know, new relationships are the foundation for future growth as the economy continues its slow recovery. Net interest income for the first quarter 2012 was $164.7 million, comparer to $156.6 million for the first quarter of last year. This increase primarily resulted from an increase in the average volume of earning assets. Obviously, strong deposit growth helped and was partly offset by a decrease in net interest margin to 3.73%. The extra operating day from the leap year added approximately $1.8 million.

Non-interest income for the first quarter of 2012 was flat from a year ago. The Durbin amendment to Dodd-Frank negatively affected interchange and debit card transactions fee income, which was down $3.9 million from the first quarter of 2011. This was offset in part by a $1.2 million increase in our wealth advisory fees over the first quarter of 2011. Insurance commissions and fees -- typically the first quarter is a strong one -- were up 17.9% to $12.4 million from the $10.5 million reported a year ago. Other income increased $1.3 million from the first quarter of last year, primarily from mineral interest income.

Non-interest expenses and for the first quarter of 2012 were $142 million, up $1.9 million from the first quarter of 2011. Salaries and benefits increased $2.7 million over the same quarter a year earlier as a result of normal annual merit and market increases. Advertising cost increased by $1 million over the first quarter of 2011 as we continued our statewide strategic marketing initiative to promote Frost to new audiences. FDIC insurance declined $2.3 million to help offset increases in non-interest expenses.

Turning to loan demand, we saw some encouraging developments. The first quarter of 2012 was our best quarter ever for new loan requests. Request were broad-based across all regions and across all categories and both small and large loans. While many businesses remain cautious amid much economic uncertainty, their attitudes are starting to move to the positive side. Our focus on better teaming, collaboration, and better action planning is paying off.

We know if a customer will use just one product, either a deposit, insurance, or wealth advisory, and experience the Frost difference, we're on the move to broaden and deepen the relationship. New loan requests are up because we made more calls. It is important to note that we're getting more out of our calls. You may remember during the middle of the great recession, I was talking about how I took twice the average number of calls to get a piece of business and now we're back closer to the average.

In the first quarter, we added 63% more new commercial primary relationships than in the first quarter of 2011. All [regions] were up more than 30% compared to the same quarter last year. Remember, this is the primary operating account that is the foundation to build loan commitments from customers. Year to date, existing customers have accounted for 85% of our new loan commitments, which again, underscores the emphasis we're placing on growing our customer base. Overall, year to date, new commitments were 40% higher than in the first quarter of 2011. It was our best first quarter for new loan commitments in four years. Revolving lines of credit are up and usage is up from 39% to 40% on a [linked] quarter basis. Incidentally, 1% equates to about a $70 million increase.

While there are a lot of moving parts, bottom line, the first quarter ended March 31, 2012, average loans were $8.1 billion, compared to $8 billion last quarter. I would expect similar growth trends in the second quarter of this year. To conclude the loan growth discussion, the positive signs are even more impressive considering the fact that our customers continue to pay off their loans even faster than last year. Uncertainty and deleveraging continues. Our credit quality continues a positive trend that began two years ago, adequately reserving for write-downs in prior-periods along with decreasing levels of classified loans resulted in releasing of reserves.

Absent any significant change in global or national economy, we expect that our positive credit quality trends will continue. Capital levels remain very strong. Tier 1 and total risk-based capital ratios for Cullen/Frost were 14.47% and 16.1%, respectively, at the end of the first quarter of 2012. The ratio for tangible common equity to tangible assets remains strong at 8.93% at the end of the first quarter of 2012.

To summarize, it was a great quarter for Cullen/Frost. Despite the negative impact of Durbin amendment, bad public policy decisions, and a challenging revenue environment, we posted record high quarterly earnings. We expanded customer relationships, increased loans, improved our credit quality, and managed expenses well. Also this quarter, we filed an application with the Texas Department of Banking to change our charter from a national bank to a state bank and notified the Federal Reserve Bank of Dallas of our intention to be a state-chartered member bank. We've been a national bank since 1899 and have had a good relationship with the OCC but we believe this is the right decision for our Company at this time. Under the state charter, we will work primarily with regulators in Austin and Dallas, not Washington, which should lead to better communications.

Before turn the call over to Phil, I'll close with a few comments about our economy and my continued optimism for Cullen/Frost. We believe 2012 will be a volatile and pivotal year due to the presidential elections in November and other factors that create uncertainty for businesses and the economy. In the second quarter, the US Supreme Court should provide some clarity on healthcare law which has been a lingering drag on the economy due to all of the question marks surrounding it. Much uncertainty also exists in Europe which could lead to unpredictable gyrations in the stock market. The US economy continues its slow recovery and the Texas economy is outpacing the national average. Job growth in Texas is now expected to be between 2.5% and 3% in 2012 and Texas unemployment remains lower than the national average. The Eagle Ford Shale continues to energize modest growth in the state's energy industry. Technology in Texas has done very well and should accelerate even more throughout the year.

As for Cullen/Frost, we remain focused on serving our customers and expanding our customer base. It's our people who make our success possible and I am grateful for their dedication and commitment to treat customers the right way. And it's not me, just me, saying these things. Last week, JD Power and Associates released the results of its 2011 retail banking satisfaction study. For the third consecutive year, Frost Bank ranked highest in customer satisfaction with retail banking in Texas. Also, for the first time, JD Power and Associates recently recognized Frost Bank as one of the nation's top 50 customer service champions along with respected brands like Apple, Lexus, and Southwest Airlines. In the financial service sector, where customers too often find frustrations, Cullen/Frost is clearly an exception and sets the standard for customer service. I commend our incredible employees for making this possible.

In summary, our high record quarterly earnings reflect a slowly recovering economy and some very hard work. We're expanding our customer base and deposits significantly. Our capital levels are strong. We have money to lend and loans are increasing. Our credit quality is the best it's been in years and continues to show a positive trend for the future. We're blessed to be operating in Texas. We remain focused on our value proposition, strong culture, excellent customer service, as validated by multiple third-party agencies. We have increased our dividend annually for the past 18 years and we deliver steady and superior financial performance for our shareholders.

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

Thank you, Dick. I'm going to make a few additional comments about our performance for the quarter and comment on our outlook for the year before turning it back over to Dick for questions.

Our 17.5% increase in earnings versus last year was driven by a 3.5% increase in revenue and all that was from net interest income. And we also had a 90% reduction in provision expense as credit quality improved. You add to that the operating expenses that were increased by only 1.4% and you end up with our highest quarterly earnings ever. Needless to say, we're really proud of what our people have been able to accomplish in a really tough interest rate and regulatory environment.

Now, as Dick noted, our net interest margin did drop 3 basis points for the quarter compared to the fourth quarter, but as usual, there were a number of factors that impacted this both on the positive side and the negative side. Our increased loans and investments that we made last quarter were two of the most significant factors which combined to add 8 basis points to the margin. Offsetting factors included strong deposit growth which took 6 basis points off the margin and a little over 4 basis points from a lower loan yield versus the fourth quarter because of lower LIBOR rates and also more competitive loan pricing, particularly on the fixed rate side. Dick also mentioned our loan growth, which on a period-end basis was up by an annualized 6.6% from the fourth quarter and this was driven almost entirely by [CNI] growth, which was up $126 million or annualized 12.9%. And also, since the end of the first quarter, our loans have continued to increase and they're currently $104 million over the level at quarter end.

Looking now at non-interest income and expenses, there were a few items I think worth focusing on. The first quarter is always a seasonal high for our insurance business because of the timing of policy renewals and the receipt of contingency and bonus payments. And our pretax margin in the first quarter for this business ran about $2 million higher than normal so that helped out our first quarter results. And in addition, marketing related costs ran about $1 million lower than the typical quarter so that was another benefit and also Dick mentioned the mineral interest income from some properties we hold in a non-bank subsidiary, which were included in other income. And I believe this was at least $1 million higher than normal in the first quarter. Finally, as we say every year around this time, benefits expense were higher than normal in the first quarter due primarily to the timing of payments for FICA taxes and this hit the quarter with about $1.5 million of additional expenses. So you can see, there were some usual favorable and unfavorable items in the quarter but in my view, they netted to a favorable impact of around $0.03 a share in the first quarter.

Looking forward, we expect to see -- continue to see loan growth which is a positive. And on the negative side, we're seeing prepayment speeds picking up on our MBS portfolio since year end, I'm sure some in response to the government's HARP refinancing programs. And we're also seeing some pick up in the levels of calls on municipal securities. Additionally, as I said before, there's continued pressure on loan pricing, particularly for fixed rate deals. So given all of these factors and assuming continued improvement in our credit metrics, we currently view the average of analyst estimates for 2012 to be a little on the low side.

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

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

Brady Gailey of KBW.

Hey, good mornings, guys.

Good morning.

I was just wondering on the loan growth. You've seen a decent pick up this quarter. Is it more of the factor of true loan demand? Or have you all made a decision to get more aggressive on loan pricing?

We have gotten more aggressive on the loan pricing. We've just got some competition there but it's really a lot of hard work. I think a couple things you need to understand. One of the things we've obviously really focused because in this environment, there's really no place to go. At the same time, obviously you want to keep credit quality up. So what we've have done is taken the approach to make sure that we're looking at the opportunities across our Company and where we might have been focused on builders in one market and weak in that regard, we'll move over and start building that in another market, and vice versa.

We're not doing loans only. I talked a lot about this customer base. We're building relationships and from the relationships, we're building from that standpoint. I think another thing that's kind of fascinating to me is, I refer to it in my remarks about the in-person calls and the result of loan opportunities. If you look back to the first quarter of 2008, it took about 5.3 calls in person to get a loan opportunity. As the economy started slowing, it got up as high as 13, but really from about '09 through the second quarter of '11, it was about 10. And now, it's dropped back down to 8. All that's a lot to say that number one, we're making more calls. But we're also getting more out of our calls. We're getting to loan opportunities. We're working very hard to be very focused.

The other thing Phil refer to, the $126 million in growth in CNI loans, what's really important is that we're staying -- it's really across the board and we're staying in the same sectors that we always did, which we believe they're very important. We've always watched that because if it grows too fast, it's a weed. But this is staying in types of loans that we've been in for years.

The other thing that's happening on our commercial real estate loans is they were up $14 million on period-end and we're starting to see advancing on these credits that we put on our books, these construction loans. Obviously, multifamily is the strongest but you're seeing retail's growing, lots of different sectors that are continuing to expand. It goes without saying energy continues to be very strong even with some weakness in pricing. We're very fortunate that most of our energy loans that are based on gas are wet gas and so that's price is somewhere up around $5.50 to $6. On the dry gas sector, at $2, we've got about four customers and they've got enough wealth in other sectors to weather through that so we feel comfortable there.

In oil, our base case is at $75 and those continue to be good. The Eagle Ford is strong and continues to expand. Also, our share national credits were up and that is going to be the result of mainly energy but some other lines too. But energy's about 64% of our shared national credits.

All that's a lot to say that it's good growth across the board, staying with the kind of loans that we've had experience in making, and really a lot of hard work from our staff. I talked about collaboration. I talked about teaming and so across the board we're really working to help each other, whether you're in our wealth advisory or insurance or deposit gathering business, everybody's helping each other grow these loans and look for opportunities. And the executive team is also playing a major role to give support to the entire Company.

Okay, thanks for the color, Dick. And I had a follow-up for Phil. Phil, could you just give us a level of cash that was on the balance sheet at the end of the quarter and any deployment of cash you did intra-quarter and what you're thinking going forward? That'd be great. Thanks.

We'll use our Fed balance as a proxy for what our cash level is. Let's see, I think what's been running has been I'd say probably $1.5 billion today. It's been building up. For the first quarter, it averaged about $1.1 billion. We've moved it up to about, like I said, about $1.5 billion. We did make some investments in treasuries but they were defensive in the first quarter. We invested about $1 billion in two-year treasuries at 37 basis points. Our main reason for doing that was because we were concerned the Fed might move that rate down on the reserve balances and so that was a defensive move for us. So you can see that even putting $1 billion to work defensively in the two-year treasury this quarter, we're still $1 billion, right around $1.5 billion, on liquidity today as we sit here. Deposits continue to be very strong. We've got tremendous liquidity to employ and what we want to do is to do that on the loan side because we really don't see much value at all in the fixed income markets today.

Okay, thanks, guys.

John Pancari of Evercore Partners.

Hi, this is Rahul in for John. Your [NIM] declined 3 bps this quarter and I was just wondering if you give us a sense of what your loan yields did this quarter. And do you see any room for further reduction in your deposit costs? I believe they're around 20 bps last quarter.

If you look at the quarterly yield on loans, we'll just use that. I think what you said was -- it was a little hard to hear -- but I think you said what were loan yields and then what's the opportunity to reduce deposit costs?

Right.

Loan yields in the fourth quarter overall were 5.04% and the first quarter they were at 4.94%. So you can see there was about 10 basis point drop there and that, as I mentioned earlier, had an impact on our net interest margin. As far as opportunity to reduce deposit costs, it's really going to depend on what the market does because we're very disciplined about pricing right and I tend to think of it as more of the median of the market for the major banks we compete against. We haven't seen much movement there. I think that we could see signs [of] room, given general market levels and treasuries that could move down. But I don't think we'll see much movement. Right now, our deposit costs for interest-bearing are 18 basis points. That's pretty low and there's not a lot of room to move forward on that.

All right. Another question on the fee income. I noticed it's up around 7%, linked quarter, and I see the [trust fees] up another 17%, linked quarter. Do you see that as new run rates going forward?

I think as Dick mentioned, there are a number of things that were going on, on the trust side. We had an especially good quarter related to estate fees and those fees, particularly when you deal with larger fees, they tend to be lumpy because they're really based upon an estate that comes into being because of someone's death. We had an unusually good quarter for that. Our estate fees for the first quarter in total were $860,000, which were up dramatically from the fourth quarter. They were only $87,000. A year earlier, they were $438,000. So that run rate there obviously is a tremendous one which we're not going to replicate on an ongoing basis. So you'd need to adjust out some of that increase in estate fee growth and be careful not to annualized that.

The rest of it, when you look at investment fees and investment fees are about 75% of the total of our trust fees, they had extremely good growth rate in the teens. And that was really a factor of the strong market that existed in the first quarter. I don't think many people will expect the market to continue at that rate so I think just the level of growth that we had in those fees, I think, will be representative of the market and typically we do a little bit better than the market. But I don't think we anticipate at this point having the same growth rate that we had in the first quarter. We'd love to. We'd love to see the market do that but I think we want to realistic about it as well.

All right. Thank you.

Dave Rochester of Deutsche Bank.

Hey, good morning, guys.

Good morning.

You talked about getting a little more aggressive on the loan pricing. Can you talk about the pricing in the pipeline today and how those spreads compare to the prior quarter, just to give us some kind of sense for how much it's coming in?

You can't look at all and it's just one thing. It's not one model, the thing that operates the same way. What I mean to say there is, I think it's aggressive in terms of competition all over the place. I think it's most competitive on a fixed rate side. If you look at our pricing spread to prime, let's say, comparing first quarter and the fourth quarter, we've actually got a favorable trend there. We averaged a little over 100 basis points spread to prime in total for new and renewed loans whereas in the fourth quarter, we were about 95, 96 basis points. I think we've seen good discipline overall from our people as we price loans that are more tied to floating index. I think it's the fixed rate side that we've seen the most aggressive competition there. And we've seen that tighten up some in the first quarter versus the fourth.

And would that be up on the order of maybe 25 basis points? Or would it be even more than that?

I would say 25's probably on the high side.

Okay.

I think another thing you've got to recognize is that we're really controlling our pricing exceptions and when we look at making the difference, it's obviously looking at the quality of the customer and the total relationship. So it's not just a mathematical equation and really making sure that we can build something and overall the value to the bank and to the customer is there. It's a lot about value and not just the price. But we're paying a lot of attention to all of the factors that go into the relationship with the customer.

Okay. And just one quick follow up on the deposit side. I guess that the gross slowed a little bit this quarter. Was just wondering, given your comments on business is feeling better and whatnot, or at least incrementally better, is that slowdown a reflection of increased investments, use of cash for projects, or is it just a reflection of maybe a little seasonal weakness?

It's been so strong so long that I think you've got a lot of just settling in. You're not going to go straight up forever. I think the business person is, as I said earlier, starting to have a little more positive attitude. The economy is getting a little better and so you're getting a little bit of help from there. I think we all need to remember that the natural state is for expansion. We've just been through a recession for the last four or five years and we've got our minds buried in that, but people like to expand and grow. As the economy is getting a little better, I think people are taking a little bit of that cash and doing something with it.

At the same time, I don't think you can come to the conclusion that all the cash is going to go away and the loans don't. I think it's really what we're seeing. We've been saying this to you for a few years that once things start to get a little bit better, you'll see the loans coming up, the commitments coming up, the loans coming up a little. And you'll see a little easing in the deposits. But still, we've got tremendous deposit growth.

Yes. Okay. Great, thanks, guys.

Brett Rabatin of Sterne Agee.

Hi, good morning.

Good morning.

I wanted to ask, I think you mentioned, Phil, the commentary about prepays higher on the MBS portfolio. Was premium amortization, did that affect the yield in the first quarter on the MBS portfolio? And then, do you have a number for the yield there?

Let me think. Premium amortization always will. We don't have a tremendous amount of premium. I think we have in total on our portfolio, $58 million in total premium.

Okay.

Hang on one second. Let me look to make sure I've got that total right. But it's not a very large amount, I don't think, relative to others because we typically haven't bought premium bonds. But what I'm really talking about is just the cash flow associated with pay-downs. If you look at the, say, the fourth quarter pay-downs are running -- this is October through December -- they ran $38 million, $48 million, and then $45 million. And then in the first quarter, they run $52 million, $52 million, and $60 million. So you can just see there's a pick up.

Yes.

And by the way, our total premium is about $54 million.

Okay. Do you happen to have the yield for the MBS portfolio handy?

I think I do. Hang on.

I know the [key] will probably be out shortly.

On the MBS portfolio, it currently yields a 3.21%.

Okay. And I wanted to ask on the provision for the quarter, was that essentially what was required for the new loan growth? Or was the provision a function also of the improved asset quality resulting in your equation resulting in a lower provision? Can you give us any color around of the provisioning this quarter and then any thoughts on what kind of provisioning might be necessary as you grow going forward?

Really, it's the second one. It's how the formula computes it. Loan growth is a factor in that. Actually, loan growth is not a huge contributor to increases in the formula just because obviously your loss ratio on unclassified loans is extremely low. So, it's more what's going on with the classified loans and some of the - I call them [BC201] factors -- which are the general factors.

I know there's an equation there, but assuming credit stays as good as it is or gets better, would the provisioning essentially continue to be pretty light even if you're growing your loan portfolio at a stable, to even higher, rate?

Let's just make general comments here. I would say, in my opinion, if we had the continued improvement in credit quality like we have, probably for your purposes, what I would say is we're probably not going to be of the cover charge-offs in some of the quarters this year.

Okay. That's what I needed, thank you.

James Ellman of Ascend.

I guess most of my questions have been answered, but I was hoping you could give us a little bit of insight into where you expect the tax rate to fall out through the quarters for the rest of the year?

I think our tax rate for this year, we assume is going to be about 22.9% right now, so just under 23%.

All right. And what's driving that from the fourth quarter of last year?

In what way?

In terms of moving up or moving down?

I think the fourth quarter of last year it was down a little bit. It's down a little bit from the fourth quarter last year and I think one of the things that happened in the fourth quarter, it's a little bit inside baseball, but we did have some non-deductible compensation because we had the vesting of certain stock awards for people that had reached age 65. And some of that's not deductible so that tends to bump that up. We did not have that in this quarter. If I had to pick one thing that caused a slight reduction in effective tax rate, that's what it would be.

Very good. Thank you very much.

Steven Alexopoulos of JPMorgan.

Hi, everyone, this is (inaudible) for Steve. Just wanted to follow up on some of the earlier questions. I know you said you're getting a little more aggressive on pricing but can you talk specifically about what's changed, maybe in a competitive environment? And in the past you've talked about pricing and terms out in the market not being favorable. Just curious if that's improved it all.

Not really.

Okay, so competitive environment's pretty much where it was last quarter?

That is correct.

Okay. Then could you just touch on whether the change in regulators should reduce your regulatory compliance costs at all, and what impact, if any, you're expecting to the business from the change?

It's not the reason that we're making the change, but just the arithmetic of it I think it's probably around $1.3 million, to $1.5 million on an annual basis that you'll see in lower fees because you've just got less overhead, I think. Honestly, we'd like to see ours sales employ that back into our business. They're a lot of things we could be doing competitively and growing the business and we're not looking just to add that a penny a share on. We're looking to plow that back into our business.

Okay, great. Thank you.

Emlen Harmon from Jeffries

Good morning. Just going back to the reserve and the provision quickly for a minute. If we look at it in a historical context, the reserve's getting to levels back where it was in pre-cycle, back to '07 levels. Could you give us a sense? Has the composition of the loan portfolio changed much, where you think you can run below historical levels? How should we be thinking about that in a historical context?

I think you kind of answered your question. If you analyze the first quarter it's 20 basis points. If you look historically, it runs somewhere in the 23, 24 basis points.

On the charge-offs.

Charge-offs. As I already said, if you look at the composition of the loan portfolio, it's really the same mix. It's just more of them. I think you've just got to look to the bottom line of charge-offs, and as I have already addressed, go from there.

Got you. I guess my question was more specific to just reserve to loans but just based on your answer, I guess would say, you would say that historical levels are a pretty fair reflection of where it should be.

That's what I said.

Long-term, your reserve's going to have to be adequate to cover charge-offs and if charge-offs move back to historical levels, there ought to be some correlation.

Got you. And then, on the low growth fund, you mentioned a couple of times today just seeing good trends on the energy side of things. Could you give me a sense of what overall exposure or concentration is within the loan portfolio to the energy industry specifically? And is there some level at which you would start to be concerned, I guess, about letting that grow further?

It is around 10%. It's been 9%-something for some time. So it's up a little bit. I think you've got to look deeper into the numbers of the kinds of energy loans you're making. You've got to remember that for our percentage it includes production loans which is the majority part of that. But we've got some service and a little bit of trading companies. So there's a lot of different factors in that. As I talked a little bit about, you've got to look at the prices of what's happening to the commodity and you can see that we have focused on the wet gas and that's certainly been the right thing to do. There's still a lot of good opportunities. This country, if people in Washington ever get their heads screwed on right, which probably won't happen, we could drive every car, heat every house, and do everything with natural gas and wouldn't be dependent on other countries.

Really, our concentrations of credits in all areas is how we manage the portfolio and have done that for many years. And we look at those percentages and our chief credit officer reviews that with the director's risk committee and we talk about it from that standpoint.

Okay, great. Thanks for taking my questions.

(Operator Instructions) Matt Olney of Stephens.

Yes, good morning. Phil, on the insurance revenue, you mentioned that the contingent commissions benefited that in first quarter. Can you quantify how much that was in the first quarter?

Yes, our contingencies and bonus in total looks like around $2.3 million for contingencies.

Okay. And then, also just circling back on the margin, obviously a lot of moving parts, but it sounds like the [RE] asset yields will continue to have some of pressure but the remix of RE assets towards loans will help negate that. How do we think about the direction of the margin of the next few quarters?

I think you said the factors and it's going to depend on the interplay of those. You're always -- just because the positive growth's strong -- going to see some, I'm going to call it, optical pressure on the margin because we're just going to build liquidity if we don't see opportunities for good investments, or if we can't employ it all in loans and I don't think will be able to do that. It's just based upon deposit growth.

I think you're going to see some margin declines just from the growth in deposits over the next few quarters. And as I've said, I think some of the pressure's going to come from the investment portfolio just because there's really not a lot out there today, given what the Fed's doing that we'd like to go out and invest in. We can see some leakage on our margin because of that and it just is going to depend on how good our loan growth is, in terms of how much we're able to offset it. I sense some margin pressure probably, if you strip out the deposit side, probably a little margin pressure for the next few quarters, just given the investing environment and what we're seeing in the portfolio.

Okay. Thanks for taking my questions.

You're welcome.

Terry McEvoy of Oppenheimer.

Thanks, good morning. I've been listening to about 20 of these calls over the last few weeks. A lot of the industry's looking to cut costs. You guys actually spent an additional million dollars just on advertising across the state. And I guess the question is, is there a specific market where you feel like the Cullen/Frost name needs to be more visible? So is it statewide or on a specific market?

And then the second part of that question, net interest income fell quarter over quarter. You just mentioned some NIM compression. How are you looking at managing the expense base going forward in this challenging revenue environment?

Yes, you asked a lot of questions there. I'd say first of all, with regard to the advertising, and if I'm interpreting your question right, you're just asking where you're doing it and why do you need to do that? Really, the advertising that we're doing is to put ourselves in a growth mode in all the major markets that we serve. We want to be in front of the customer enough times to be in what we would consider, and our marketing group would consider, a growth mode. Again, if it's a major market that we're in, we're attacking it that way and I think we're seeing some good results for it.

Look, this is really our time. Our reputation's never been better. Whether it's from the regulators, whether it's from JD Power and Associates -- I don't know if Dick mentioned it, I can't remember, but we won 21 Greenwich and Associates awards on the commercial side. That was the highest of any bank in the country. Rated A+ from S&P today. Knock on wood, this is really time for our bank. Our value proposition resonates better than anybody else's, frankly, and if you look at the JD Power data, it'll show it.

As Dick's said many times, we learned coming out of the '80s that the market recognized we were in better shape faster than we did. And there was opportunity that we could've taken advantage of if we had been more aggressive coming out of it. And so, the other thing I'll say is we didn't take a TARP. That's allowed us to continue as Dick said many times to be aggressive throughout the great recession. It's just our view that it's really our time to be growing the business and building the foundation for strong growth going forward and now's the time to take advantage of that. And given the fact that our profitability is very good and of course it's higher than our peers, that's really what's driving us to have that vision. That is higher and it's higher in all of the markets that we serve.

Dick, were you going to say something?

Yes, Phil's really answered your question and our positioning in this markets. It is a great opportunity. And the other thing I mentioned, people are frustrated with the too-big-to-fail banks because they pay no attention to the customer. And if they can experience any product with us, they then find this place is different. It's a great opportunity to expand our business as Phil's gone through and we should be doing this. That's what we've done. As you know, since the end of '08, we've increased our balance sheet -- or end of '07 -- we've increased our balance sheet 50%. We've grown these new relationships and so this is the time to spend some money and build it. You can't cut enough expenses to grow your profits much. And you also destroy the basis of your company. I won't mention names, but you've got them and you can see companies -- there's a few too-big-to-fail companies that are blowing themselves up right now.

That's right. Now, with regard to your question, with regard to expense control, we know that you've got to be an adult as you manage a business and we have had challenges over the last few years. But I think what you'll see is the money that we're spending, where we're moving forward aggressively, has to do with marketing our Company, customer service, distribution, and those kind of things to move the business forward. Other expenses, we're good expense managers and we're careful about it. One of our strategic priorities is to reduce unnecessary expenses but we don't do it with a lot of hoopla.

And I'll give you an example. Over the last 24 months, we've reduced our costs of item processing for deposit accounts by 38%. That's a huge number. We've seen salary and personnel costs associated with that down 57%. That's the result of utilizing better technology and additional technology on the image side. So that's a significant reduction in expenses. Those are the kinds of things that we're doing all of the time. Are we going to look at our expense structure moving forward? Are we going to make sure that our distribution's in the right place, that we're as efficient as we need to be with it? Yes, we are. But we're not going to do it as a means to an end. We're going to do it as a part of just running the business effectively as we go through this period of time and go forward.

At the end of the day, and we've said this many times, expense reductions have got to be managed well but they're not going to make your dreams come true. What's going to make the investors' dreams come true with our Company is continuing to prosecute our value proposition, stick by our philosophy, and we've ultimately got to repair our loan-to-deposit ratio from the 40%- some odd we have today, up to where was two or three years ago. That's really, I think at the end of the day, what we need to be most focused on.

I'll tell when we started managing expenses good, 144 years ago, when this Company began. And do it every day.

Thank you very much. I appreciate the insight.

Brady Gailey of KBW.

Thanks, guys. I just had a follow up of for Dick. Dick, if you look in Texas in the first quarter, you saw two decent sized acquisitions. Prosperity took American State and Paul Murphy took Encore. I know you guys are aggressive lookers, conservative buyers, but you do have some excess capital. Do you think you're closer to pulling the trigger on an acquisition at today's pricing in Texas?

I think you answered my question. We are aggressive lookers and conservative buyers and we're going to continue.

Jennifer Demba of SunTrust Robinson.

Good morning. A follow up on Brady's question. It seems like at least the last few acquisitions you guys have done have been in metro markets. Is a smaller micropolitan or more rural market hold any interest for Cullen in the state of Texas?

I wouldn't take it out of interest, but certainly you know where our focus is. We're where 70% of the population is. We're where the average income is higher and we're where the growth rates are higher. That's where our priority is.

Okay. Thanks a lot.

I will now turn the conference back over to Dick Evans for closing remarks.

Thank you for your interest in our Company. We'll continue to work hard for you and this concludes our first quarter 2012 conference call.

Thank you again for participating in today's conference call. You may now disconnect.