Cullen/Frost Bankers Inc (CFR) 2013 Q1 法說會逐字稿

Good morning, my name is Jared, and I will be your conference operator today. At this time I would like to welcome everyone to the first quarter earnings conference call for Cullen/Frost Bankers, Inc. 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. Mr. Parker, you may begin.

Thank you, Jared. 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 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 Investor Relations department at 210-220-5632. At this time I will turn the call over to Dick.

Thank you, Greg. Good morning, and thanks for joining us. It is my pleasure today to review first quarter 2013 results for Cullen/Frost. Our Chief Financial Officer Phil Green will then provide additional comments. After that we will be happy to answer your questions. I am pleased to report that for the first quarter of 2013 Cullen/Frost grew loans by 13%, and reported 14% deposit growth. Our capital levels and liquidity are stronger now than they were before the 2008 financial crisis. The results amid economic and regulatory challenges are a credit to our dedicated employees and an excellent value proposition.

During the first quarter of 2013 our net income was $55.1 million, compared to $61 million reported in the first quarter of last year. This was $0.91 a share versus $0.99 for the first quarter of 2012. For the first quarter of 2013 return on average assets and equity were 1.01% and 9.47% respectively, compared to 1.23% and 10.59% reported in the first quarter of last year. Deposit growth continues to be strong. First quarter 2013 average total deposits were $18.7 billion, up $2.3 billion or 14.2% over the $16.4 billion reported in the first quarter of 2012. Our deposit growth is coming from both new and existing customers.

Net interest income for the first quarter of 2013 was $172.8 million, up 4.9% from last year. This increase primarily resulted from an increase in the average volume of interest earning assets and was partly offset by a decrease in the net interest margin. Net interest margin was 3.45% for the first quarter of 2013, compared to 3.73% in the first quarter of 2012, and 3.48% for the fourth quarter of 2012. Noninterest income for the first quarter of 2013 was $77.8 million, up $5.8 million from the $72 million reported a year earlier.

Trust and investment management fees increased $1.2 million to $21.9 million, a 6% increase from the $20.7 million reported in the first quarter of 2012. Insurance commissions and fees were $13.1 million, up 5.6% from the first quarter of last year. Other income was $11 million, up $3.8 million from the first quarter of 2012, resulting from a $4.3 million gain from the sale of the Rand Building and garage next to the Frost Bank Tower in downtown San Antonio.

Noninterest expense for the first quarter of 2013 were $155.8 million, compared to $142 million in the first quarter of 2012. Salaries and employee benefits were up $4.1 million over the same period a year earlier as a result of normal annual merit and market increases, higher commissions and an increase in incentive compensation. Other expenses were $41.5 million, up $8.6 million from the first quarter 2012. The vast majority of the increase in other expense came from the write-down of a long-term bank-owned property in downtown San Antonio, which was recently designated as available for sale. ATM expenses up $812,000 from the previous year as a result of our successful branding arrangement with Cardtronics and Valero Corner Stores. Frost customers now have free access to more than 1,100 ATMs across the state, including five new ATMs at the modernized Dallas Love Field Airport.

Turning to loan demand, we continued the strong loan growth that we saw throughout 2012. In the first three months of this year, we saw the highest level of quarterly loan requests in our history. Double-digit percentage increases were broad-based from customers and prospects. And in both large and small sized segments. First quarter 2013 average total loans were $9.1 billion, up $1.1 billion or 13.2% compared to the $8 billion for the first quarter of last year. Our active loan plan is now 30% higher than last quarter and 40% higher than a year ago. The level of new loan commitments booked in the first quarter was the second best first quarter since 2008, which was before the financial crisis. And only the first quarter of last year was better.

I am extremely pleased with the results of our loan growth despite ongoing economic and regulatory challenges. I am optimistic we will continue to see loan growth because of our disciplined approach to execution. Our credit quality trends have been and continue to be positive. In late March we discovered an issue with a large commercial and industrial relationship. By mid-April the borrower filed for Chapter 11 bankruptcy. As a result, we took a $15 million charge off on this loan. Thorough internal and external reviews are underway. We are turning over all of the rocks to find out what happened, and to recover the money owed to the bank. For the quarter total net chargeoffs were $16.9 million compared to $4.1 million for the first quarter of 2012. We expect chargeoffs in subsequent quarters this year to be similar to what occurred in 2012. Our provision for loan losses was $6 million in the first quarter of 2013, compared to $1.1 million in the first quarter last year.

Our nonperforming assets at the end of the first quarter of 2013 were $105.9 million, compared to $120.5 million a year ago. Past due loans ended the first quarter at 0.59% of total loans, which is our are ninth consecutive quarter where past due loans do represent less than 1% of total loans. Aside from the one loan, all traditional measures of credit quality remain positive. Our capital levels remain very strong. Tier 1 and total risk-based capital ratios for Cullen/Frost were 14.23% and 15.44% respectively at the end of the first quarter of 2013, and are in excess of the proposed BASIL 3 fully phased in capital requirements. The ratio of tangible common equity to tangible assets was 8% at the end of the first quarter of this year.

Before I turn the call over to Phil, I will close with a few comments about the economy, and my continued optimism for Cullen/Frost. While the first quarter saw big gains in property values and the stock market, much economic uncertainty remains over government regulation, spending, the deficit, national debt, and overall jobs outlook. We are blessed to operate in a pro-business state like Texas, where projected 2013 job growth of 2.5% continues to outpace the vast majority of states and the international average.

Dallas Fed President Richard Fisher says that the road to dignity is through work. And that jobs provide the means for economic advancement. Texas is doing its part to create jobs in all sectors and income categories. Construction, energy, technology are all driving a diverse Texas economy. Major cities in Texas are among the fastest growing in the nation. In fact, five out of the top six US cities in Forbes Magazine's 2013 list of Best Cities for Good Jobs are in Texas. And Frost operates in each of those markets.

At Frost we are seeing double-digit growth in our loans and deposits. Our capital levels are strong. We remain focused on our value proposition, culture and excellent customer service. Just this past week, J.D. Power and Associates 2013 retail banking satisfaction study ranked Frost highest in customer satisfaction with retail banking in Texas for the fourth consecutive year. We are honored by this distinguished third-party recognition, and I am grateful to our dedicated employees for making this possible.

Top quality service is a big part of our mission statement. I am pleased that others verify that we are practicing what we preach. We are now staying true to our principles and our lending disciplines. We have consistently paid a shareholder dividend, and have increased that dividend annually for 18 consecutive years. Delivering steady and superior financial performance for our shareholders. And with that, I will turn the call over to our CFO, Phil Green.

Thanks, Dick. I am going to make just a few additional comments concerning our regular operations and transactions involving San Antonio downtown real estate, and our current outlook for the year and then we will turn it back over to Dick for questions. As Dick mentioned, our net interest margin for the first quarter was down 3 basis points to 3.45%, and most of the slight decline resulted from a 12 basis point lower loan yield versus the previous quarter. We did not see an increase in deposit-generated liquidity during the first quarter because of a seasonal slowdown in deposit growth, so that was not a factor in margin compression in the first quarter.

Looking at loan and deposit growth on a linked quarter basis, average loans were up an annualized 11%, and were driven by a 15.6% annualized increase in C&I loans, and an 8.9% annualized increase in commercial real estate loans. Average deposits grew an annualized 6.5% on a linked quarter basis because of the seasonal annualized decline in average demand deposits of 13%, but on the other hand our time deposits were very strong with an annualized growth on a linked quarter basis of almost 21%, with the biggest contributors there being regular money market deposit accounts and interest-bearing checking accounts.

Looking at our overall deposit portfolio, over last year we still have good growth coming from new customers. During this time approximately 40% of our growth comes from new customer relationships compared to 60% from account augmentation. I also want to make a couple of brief comments about the two downtown San Antonio properties that Dick mentioned. As he said, we did sell the Rand Building and garage in the first quarter. We actually realized a gain of about $5.6 million on the property, but since we took back a two year lease on much of it, we had to defer about $1.3 million of this gain over the lease term. At the same time we executed this transaction to pare down some of our investment in San Antonio real estate, we decided to designate an additional piece of excess bank property as available for sale in the form of a piece of land which has served as a greenbelt for our headquarters building for over 25 years.

This necessitated a writedown in the property's book value to be more in line with current values for real estate at this time, and that resulted in a writedown of about $6.2 million. So the net impact included in the current quarter for both of these properties was a cost of approximately $1.9 million. Again, not including the $1.3 million gain we are now amortizing. And finally, as far as our expectations for the full year 2013, we currently expect to be slightly below the mean for analyst estimates for the year. And with that, I will turn it back over to Dick for questions.

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

(Operator Instructions). Okay. Our first question comes from Brady Gailey.

Good morning, Brady.

The loan loss reserve on a percentage basis was down roughly 10 basis points to almost 1%, but was some of that reserve release dedicated towards the special C&I credit, or in other words, did you have allocated reserves in the reserve on that credit, and that is what partially drove the lower loan loss reserve ratio?

Brady, this is Phil. We didn't have anything specifically ID'd for that particular credit, but there was sufficient reserve available to I would say take care of about $10 million of the $15 million. And I would say of our provision for the quarter probably $5 million would have been related to that one credit. So we would have had a lower provision were it not for that.

Okay. And with the reserve at 1% flat, up almost, do you think you are done seeing that reserve move down on a percentage basis?

I think for the most part, without being too exact about it, I think we are at 1.02 as I recall for the end of the quarter. And, yes, I would say probably for the most part.

Okay. And then finally on loan growth, average balances were up nicely, but if you look at end of period they were down a modest 3%. But what is the difference of last quarter's positive 19% was there anything driving that kind of lower end of period loan growth in Q1, or was it just a pull-forward in 4Q as we had the fiscal cliff uncertainty? Could you guys hear me?

Excuse me, ladies and gentlemen. We are experiencing technical difficulty. One moment. I will place you on music hold.

I was going to talk about --

Okay, and you are live.

This is Dick Evans and Phil Green again. Brady, I think you had the last question regarding the loan growth being flat for the first quarter. In fact it was actually down about $61 million. I would remind you of the $100 million overdraft towards the end of the year we talked about, that was with the corresponding bank that failed to transfer the money in, and so it was outstanding for a day or two. So that is the reason I say flat. In fact, commercial real estate loans were up $72 million, and remind you that loans build up towards the end of the year for balance sheet purposes, and also there are a few seasonal things that take place such as with the spirit type credits that we have, and also there was substantial borrowing at the end of the year for estate planning, some of which remained and others did not. So I would also say to you looking at the economic statistics, there was somewhat of a pause in the first quarter of people just kind of held back. But I was extremely pleased with the information I shared with you about the activity. And so while loans were flat for the first quarter, the activity building into the second quarter was very positive.

Hey, Brady, this is Phil. One other thing to point out just to give you a little bit more visibility on where we stand today. Most recent numbers for loans on a point in time basis would be recently loans at $9,213,000,000, compared to $9,224,000,000, which is pretty much flat from where we were at the end of the year. Remember as Dick said that included that $100 million overdraft. If we adjusted that out, I would say we were somewhat up from the end of the year as where we stand today.

Okay. Thanks, guys.

Your next question comes from Ken Zerbe with Morgan Stanley.

Good morning.

I wanted to quickly see if there was anything you could add on what you see on the securities portfolio this quarter. If you sort of look back at the prior quarter, you had some elevated purchases and were going to buy some more muni going into the quarter, but if we look at the balances this quarter it looks like it has come down quite materially. Was there any change in sort of the types of securities that you are buying, or you are just pulling back because of loan growth is pulling in strong?

Okay. Ken, where we stand on the portfolio we did make during the quarter I would say a modest amount of purchases of investments for munis, about $113 million. Averaged about a 360 yield and so that was the most recent activity in the investment portfolio. As far as the change in the portfolio total securities, the average for the fourth quarter was $9,029,000,000. We averaged slightly higher, $9,090,000,000 in the first quarter. And we did have a shift in the mix, we had a little bit higher municipals because of the purchases that we had talked about last quarter, and the ones that I just mentioned to you. So munis actually averaged $2,871,000,000 for the fourth quarter, and they were $3,253,000,000 for the first quarter. At the same time, we had a drop in taxable securities from $6,158,000,000 in average for the fourth quarter to it $5,837,000,000 in the first.

So what you are seeing is a move, slightly more municipals coming out of taxables. A slight increase in the portfolio overall by about I would say $50 million to $60 million on an average basis from the fourth to the first, and on the net basis over the entire portfolio the yield actually was the same. It was a 3.32 in the fourth quarter. It was a 3.32 in the first quarter. I would say outlook-wise for what we would see for investments, really don't like much out there but we do continue to see that we feel like the most value there is in the municipal segment of the market. We have got a tremendous amount of liquidity. I think we averaged $2.2 billion in Fed liquidity in the first quarter. But if you look more recently we are up, I think a little bit over $3 billion today. So I think we are going to be doing some modest continued purchases of municipal securities, probably in the, I would say average 15 year segment, and that is going to be what we will do with the portfolio as we stand right now.

Okay. That is helpful, thanks. I guess one quick follow-up. If I look at overall on the earning asset balances, have you seen any move in liquidity quarter-over-quarter?

Yes, we did. I mean do you mean like as in the quarter we stand you mean recently?

First versus fourth?

Oh, first versus fourth. Actually not really. We look at our balances at the Fed as a proxy for our, what we call our checkbook liquidity, and it was $2,212,000,000 in the fourth quarter. It was $2.2 billion let's call it even in the first. There was about a $12 million change was all. And what we saw is that the growth that we had in the deposit category, really went to fund loans and then this is on an average basis went to fund loans, and a slight increase in investment securities. So we didn't really see much change in liquidity in the first quarter versus the fourth. That was really as I said earlier, we tend to have weaker demand deposits after the end of the year, so we had that decline in demand deposits annualized 13%, but those tend to recover and continue to move up. And we have seen that trend happen as we sit here in the second quarter.

Great. Thank you, that was very helpful.

Your next question comes from Dave Rochester with Deutsche Bank.

Hello, Dave.

Could you guys talk about loan pricing in the market? I think you mentioned that all end spreads to prime were near 90 bips or so in 4Q. If we could just get an update there, and then what you are seeing generally in the competitive environment?

I would say, first of all, with regard to our spreads to prime, they actually have been fairly consistent at the low 90s, I would say around 92 or 93 basis points. So really when we look at the loan yield decline in the first quarter versus the fourth, I think it is probably we estimate that it is, say two-thirds related to payoffs of higher rate loans, fixed rate loans for example, that were just made higher yields and re-pricing of deals and renewals where there is a little bit tighter spread, and probably a third of it is related to a larger number of deals that were bigger deals that typically carry tighter spreads. But as far as the average renewal rate, it was fairly close to where it was as a spread to prime in the first quarter versus fourth.

I might just make a couple of comments about the market. We recently got the Greenwich Research Study, and by the way we had another year of outstanding recognition in that regard. But our customers are more satisfied than any other bank in the state, which is a good feeling. It also pointed out that Texas is the most competitive market. Texas is more conservative about spending than the rest of the country, so that is a reason we are very disciplined in our calling effort. The bank is, there is no question that we have seen it to be a very competitive market. I will tell you that this time last year we were sitting at 60/40, pricing being 60% of the loans we lost over pricing. Then we moved to 50/50 through the fourth quarter, and we have seen it come back to 60/40 this past quarter. So it is extremely competitive, and we continue to see those challenges. As you know, we are not going to compromise our credit disciplines in that regard.

Great. Thanks. And are you thinking that at this point the margins should continue to drift lower here, as you continue to see those resets from the higher rate fixed product?

I would say, last quarter I thought it would be flat to slightly down. We had a little bit of compression this quarter. I think it is going to depend on really what happens with loan growth, and how successful we are going to be expanding that, and using liquidity up for that. I would say flat to maybe slightly down for the margin. Again, the securities that we end up buying could have some impact on that. Let's just say flat to slightly down.

Got you. Just one last one. Do you have the duration on the securities book today? And then how much more room do you have to build that muni book at this point?

Well, first of all, with your question regarding duration, we are sitting today or I should say at the end of the quarter at a 3.3 year duration on the portfolio, which I think is really historically pretty much in our sweet spot where we have been. I think we have got, it depends on how much liquidity we have come in this terms of the room we have. I would say if you are talking with regard to overall asset sensitivity of the Company, actually we have moved more and more towards an asset sensitive position. I think we have got probably more room than we had, say, a year ago for example in terms of being able to spend some of our duration that we would normally use in our balance sheet, because of the move towards more asset sensitivity. And that has really happened as we continued to see deposits come on, a lot of those nonmaturity type deposits like demand deposits, and a lot of that money has gone into day money at the Fed, which is immediately sensitive. So I really feel we are really not limited so much on the sensitivity position of the Company, because I think that has continued to get more and more liquid.

To us it is just really, I mean I think municipals are one of the best values out there, but we still don't love them. We would like to see more spread in them, but you have got to do something. I think it is more an issue of how much we are willing to do with our liquidity in this market. And right now I think munis are the best thing. And I will just say that we continue to buy only the highest quality segment of that portfolio. All we are buying is Texas, and 75% of what we have is PSF insured Texas schools, so those of you who know the bond market and municipal market know what high quality AAA's those are.

Great, thanks for the color.

You bet.

Your next question comes from John Pancari with Evercore Partners.

Good morning. It is actually Steve Moss in for John here. Just wanted to ask in terms of the loan pipeline pickup, where are you seeing the greatest increase in loan demand?

It is really broad-based. Obviously some of the drivers are energy, medical, automobiles. One of the largest contributors to C&I. We are also seeing a pickup on the commercial real estate and owner occupied, and multifamily continues to be a strong segment. So it is pretty broad-based. As I said in my comments, we are pleased that it is broad-based across all of the markets, and across all segments and both large and small loans.

Okay. And just judging by the pickup in loan pipeline, I guess it would be fair to assume that year-over-year loan growth will probably be higher versus last year's 5% or so?

Well, we will just have to see. It is a pretty volatile year, but certainly when you see the pipeline and all of the other statistics about what we are seeing, and Phil shared with you some growth just in this last sector, last month, it is positive.

Okay. Thank you very much.

And your next question comes from Emlen Harmon with Jefferies.

Phil, I was just hoping you could give us a little bit of color on the other fee line, obviously been kind of volatile over the course of the last year, or you said down a bit this quarter, I was hoping you could give us a little bit of I guess an explanation behind that, or help us understand what is going on there?

Okay. Well, the biggest thing that was in the other income category was the gain on sale that we were able to recognize currently on the Rand Building and garage. So that was $4.5 million in this quarter, in the first quarter. I would say that is probably the biggest thing that affected us. Remember last quarter in the fourth quarter we had a very high level of derivative sales, particularly interest rate swaps on some large transactions. There was a couple million dollars there which sort of moved that up. It is kind of by its nature, they are just sundry, they are kind of other items. They are not really, you always have a certain level of them, but they are not as predictable as some of the other areas. Those are two of the big items that I would say happened in last quarter and this quarter.

Okay. So I mean if we think about obviously probably going to be some kind of lumpiness in there but if we think of that as a run rate, kind of that 6.5 million level as at least the kind of a good starting base, excepting some other kind of unusual items that may spring up?

Well, if you are saying should we take out that $4.5 million from where we were in the first quarter, yes, I mean that is a start. I would say yes, I mean I would say that is reasonable. But as you said, it is going to be lumpy, so there is going to be some positives and negatives in there.

Got you. Okay, thanks. And then just one other quick one on the tax rate, kind of the 20% range this quarter. Down a good amount. Is there some effect from the asset sales in there, or is that more related to just kind of mixing to a larger center of the securities book being tax free?

Are you comparing it to the fourth quarter?

Yes.

Well, one of the things that happened in the fourth quarter, our effective tax rate was a little bit higher than normal, because obviously you have to true up the last quarter of the year to what your final tax rate turns out to be. And remember we had those sales of investment securities. I recall it was a gain of round numbers about $4.5 million in the fourth quarter, that were just opportunistic and we didn't anticipate in our planning, and so those were taxed at a 35% marginal rate, and so you had to factor those in and only had one quarter to do it, and our run rate had been in the low-20s on average during the year, okay. That is why, that is the main reason the fourth quarter was a little higher and it was about a 24.9% let's say effective tax rate. Since we don't have those gains in the current quarter, or anticipate them for the year, right now we have a, call it 19.75% effective tax rate in the first quarter. I would say that is a little bit lower than last year as a result of some of the additional municipals and tax free income that we have in this year compared to last year. It just related to those additional munis that we bought.

Got it. Thanks. One more quick one, I guess, if I could. Just the share count in the quarter, you guys obviously executed kind of the preferred issuance in the share buy back in the quarter. Looks like there may be a little bit more leak in the share count. Have you guys kind of finished that repurchase program, or can we expect the share count to come down a little bit as well?

The ASR program buyback continues, and so in and of itself, all things equal you should see it go down from that. One of the things that is happening is with the stock price where it is, we have seen a very high level of option exercises on the part of staff, and so what you are seeing there I think is a lot of that strike price that increases the capital, and of course, the shares are issued that increases, the shares that are issued increase our stock outstanding. I think that is the other thing that is affecting it.

Okay. Got you. Thank you.

One other thing, I think as the stock price goes up is the effective impact of your options tends to go up as well. That is a little inside baseball. But you know what I am talking about there when you do the, I used to call it the Treasury stock method of accounting for stock options.

I have a question from Brett Rabatin with Sterne Agee.

Wanted to just firstly just housekeeping if you had handy, Phil, the gross spread revenue and then interest expense for the quarter, and then I was hoping to get maybe any color around line utilization for the quarter? Didn't know how that compared to 4Q?

Let me make sure I am, you want the tax equivalent net interest income for the quarter?

Yes, you guys give the net number. Just was just hoping you might have handy, Phil, the gross spread income and expense for the quarter?

Okay, I have got it non-TE. Let me just give you the numbers okay.

Okay.

First quarter interest income would have been $159 million. Interest expense $5.9 million. So net interest income on a non-TE basis, $152.8 million.

Okay.

Line usage, was that the second part of the question?

Right.

The advance rate on revolving lines decreased in the quarter, but at the end of March they had returned to the same level as in December of 2012. So obviously they are much higher than a year ago. The percentages of line usage, I don't have the exact percentage here but it should be about the same as we have been experiencing.

And Brett, by the way, it just took me a minute to find it, but the tax equivalent adjustment for the first quarter was 19., well it is $20 million even.

Okay. That is what I needed. Thank you.

Thank you.

Your next question comes from Terry McEvoy with Oppenheimer.

Phil, I was wondering if you could help me a bit looking at the second quarter expenses, a better feel for the run rate. I know you talked about the real estate sales but the increase in fraud that was mentioned in the press release, as well as the ATM expenses are those ongoing or one-time in nature, or closer to one-time in nature?

You were coming in really weak at the first part of that question. I apologize, but could you repeat your question?

Sure, just a better sense for expenses, the expense run rate in the second quarter? It obviously popped up in the first quarter. Can you help us get a feel for Q2?

I would say that obviously adjusting out to $6.2 million writedown that we had really to that one property would definitely come out of there in determining the run rate. I would say of the sundry losses and write-offs that I saw, I would estimate that probably another million dollars would not be what I would say core run rate. I would take out another million. I mean there is always going to be some stuff that comes up there, but I would say probably another million dollars that was unusual enough that I would say I wouldn't include it in my run rate.

Okay. And then as a follow-up is there a revenue component at all for the ATM expansion and the rebranding, or is that purely for marketing and convenience for your customer base?

It is marketing convenience for our customer base.

Okay. Great. Thank you.

(Operator Instructions). And you have a question from Scott Valentin with FBR.

Thanks for taking my question. Just trying to think of the asset mix going forward this quarter, interest earning asset growth a little less than we thought and I think you pointed to demand deposit, typical seasonality, seeing some shrinkage there. But just wondering the mix going forward, if you see that getting the same level of deposits that you had last year in growth, should we expect the securities portfolio to grow to take up the excess liquidity?

Honestly, I expect our liquidity to grow. Mainly just because of the bond market, we are going to do as little as we can, and I know that is style, that is more art than science. It sounds like it is. We just don't like the market, and as we said for years we will just do what we he have to do when we have to do it. But I he would expect our liquidity to grow because our deposit growth has picked back up, and just the opportunities for purchases out there, they are just few and far between.

Okay. Thank you very much.

You are welcome.

Your next question comes from Jon Arfstrom with RBS.

RBC. Good morning, guys.

Good morning.

Good morning, Jon.

Question for you, Dick. Just maybe looking at loan growth potential a different way. When I see a 30% up pipeline sequentially and 40% year-over-year, it suggests pretty strong loan growth, and you seem a little bit cautious on promising that, and I understand that. But I guess my question for you is, if you could point to one or two things that you think are holding your borrowers back or that make you a little more cautious on promising more loan growth, I would be interested in what those factors are?

Well, in a word it is the uncertainty in this environment coming out of Washington. People continue to be scared to death. But even with that, you are seeing some growth in capital expenditures, I think that just is a necessary thing as we have been dragging along here for a number of years, people have to buy new machinery and computers, and that sort of thing. You are obviously seeing some growth in commercial real estate, and housing is starting to pick up somewhat. We are really seeing a broad base in commercial real estate. As I mentioned owner occupied, people are starting to expand their business somewhat. I think the word I would say is caution, but we have been frozen for five years, and so people are starting to just expand very cautiously.

Okay. And do you feel like you, are you comfortable taking more risk from a lending point of view?

I would never say that. I think we are managing our risks properly. I feel good about where we are. We are in a really good market, Texas is strong. I think that the reason we are able to grow at these higher rates is because we have a very disciplined execution. We are very focused on loan growth, and don't forget that if you just look at the comparison of deposit we are number five in the state of Texas, the four banks bigger than we are, three of them are too big to fail, and they have 55% of the deposits, and obviously lots of loans. The four banks below us have about 8% of the deposits and fewer loans. And so there is the good opportunity. We are competing against the big guys, and we will continue to be aggressive. We have been very successful in our public funds area, but primarily in nonprofits like hospitals and the expansion of schools have been a good opportunity, and we have picked up some really good relationships in that regard, that have a multiplier effect of taking care of these large nonprofits. The Boards of those are substantial individuals, and see what we are doing for them, and it has led to some other business.

Jon, this is Phil. I think that we don't want to leave the impression that we don't expect to have loan growth. I mean we do but you know us, I mean someone throws a number out there and says are you going to grow this, I mean we are not that comfortable promising numbers or percentages. So we need to hedge that a little bit. But you I think everything you heard Dick say, is we anticipate, we fully expect to have loan growth but we always want to be careful with what we promise on percentages.

Let me just share something else with you. We saw in the first quarter that our growth of new loans, 64% came from prospects. You have heard me say many times that over a long history, 80% of your growth comes from existing customers, and I think that is something to remember. But it is refreshing to see the opportunities we are getting from new customers. It is a tough fight out there with a short stick, but our people are doing a good job. We are doing our calling discipline is very strong. We are doing better planning on the leads that we call on. And we are doing better team calls. And what I mean by that, where we have the insurance business from a customer is being sure that we see if we can't get a loan opportunity. And all of the mixtures of Treasury management, and trying every way in the world to work as a team, and we have a real disciplined approach to that. I also would say to you we have been saying to you for over five years that we believe that building new relationships would start to pay off, and while I don't have specifics, we are seeing that, and it is proving in the base, that we are not only getting deposits from these customers, but we are starting to get loan opportunities, which was the whole strategy that we had in building the base of the Company.

Okay. Alright. Thank you.

And you have a question from Matthew Keating with Barclays.

Matthew.

Could you let us know your shared national credit balance at the end of the quarter? I think it was $628 million at 4Q. Did that go up or down this quarter? Thanks.

At the end of March 31, we were $669 million. That is up $41 million from December 31. We continue to, it stays a little over 60% energy, and really doesn't change that percentage much.

Thank you. And then just a question on capital redeployment strategy. I think in the past you have talked about wanting to preserve capital for opportunistic M&A and for dividends and just for organic growth. Maybe, obviously you switched the accelerated share repurchase this quarter. Can you just talk about your thoughts generally on capital return, and maybe comment on the M&A environment? Thank you.

Well, I would say just with regard to capital return, what we said when we did the preferred stock issuance is that we weren't reducing our level of Tier 1 capital. What we were doing is recasting Tier 1 from common into the professional preferred, because regulators gave you the opportunity to do that in the capital rules. The reason we didn't reduce our absolute level of common equity, or of Tier 1 capital was because we don't know what the rules are, and regulators won't tell you what they are because they don't know. So we can't tell you how overcapitalized we are until we know what the final rules are. We can't tell you right now if we are going to have to capitalize OCI or not, and that is a crazy way to regulate an industry, but that is where we are. I can't really say definitively where we are with regard to capital returns until we know what those numbers are. I would say historically what we have done is, we always said we have historically done acquisitions first with excess capital, made sure our dividend is strong, and then when we didn't have opportunity in those other, in those areas we did share repurchases, and I don't think anything has changed with regard to our view concerning those three alternatives.

I would just add to what Phil said, that in regard to acquisitions you have heard me say it a thousand times, that we are aggressive lookers and conservative buyers. And that remains true today. Interesting enough, in the last 90 days in the smaller banks in the state of Texas, there has been a change. You are seeing more mergers of a small bank with another smaller bank, and I assume that is a movement to try to deal with the added expense of all of the over regulation that has been put on to the banking system. I am not sure that will work. But if you are not making much money, then you just make more volume, is kind of what I have seen in the past. But there is a change, prices have come up a little bit in regard to the very bottom. But there may be the beginning of a trend of smallers getting together to try to fight this cost issue that they are faced with. For us, we will continue to look hard for the opportunities. But you when you are growing at organically at the rate we are growing, we really like that, and our disciplines of calling as I have talked about are very good, and our quality service as you heard us talk about, and another recognition by J.D. Power and Associates this year, on the retail side we are taking very good care of customers. And with the ATM expansion that is making more convenience for our customers across the state. So there are a lot of things, not to mention our new app has just been released, and it has had phenomenal results. So there are a lot of things happening to continue to grow this Company organically.

Thank you.

And we have no further questions. Dick, you may continue.

Thank you very much. Well, this concludes our first quarter 2013 conference call. We thank you for your interest. We stand adjourned.

Thank you for your participation. This concludes today's program. You may now disconnect.