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Executives

Greg Parker - EVP & Director, IR

Dick Evans - Chairman & CEO

Phil Green - EVP & CFO

Analysts

Brady Gailey - KBW

Dave Rochester - Deutsche Bank

Brett Rabatin - Sterne Agee

James Ellman - Ascend

Preeti Dixit - JPMorgan

Emlen Harmon - Jefferies

Matt Olney - Stephens

Terry McEvoy - Oppenheimer

Jennifer Demba - SunTrust Robinson

Cullen/Frost Bankers, Inc. (CFR) Q1 2012 Earnings Call April 25, 2012 11:00 AM ET

Operator

Good morning. My name is Christy 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. (Operator Instructions) After the Speaker' remarks there will be a question-and-answer session. (Operator Instructions). Thank you. I would now turn the conference over to Greg Parker, Executive Vice President and Director of Investor Relations. Please go ahead.

Greg Parker

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.

Dick Evans

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 am 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 quarterly earnings 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, up 13.3% or $1.9 billion over the $14.5 billion reported for the first quarter of last year. Half 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 economy continues its slow recovery. Net interest income for the first quarter of 2012 was $164.7 million compared 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 value 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 transaction 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, we are 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 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 costs 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 in 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 deposit, insurance or wealth advisory and experience the Frost difference.

We are 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 are getting more out of our calls. You may remember during the middle of the great recession I was talking about how it took twice the average number of calls to get a piece of business and now we are 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, the existing customers have accounted for 85% of our new loan commitments which again underscores the emphasis we are 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 link quarter basis. Incidentally 1% equates to about $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 payoff 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 and 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 remained very strong. Tier 1 and total risk-based capital ratio for Cullen/Frost were 14.47% and 16.10% respectively at the end of the first quarter of 2012. The ratio for tangible common equity to tangible assets remained 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've filed an application with the Texas Department of Banking to change our charter from a national bank to a state bank and notify 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 I turn the call over to Phil, I will 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 the question marks surrounding it. Much uncertainty also exists in Europe, which could lead to unpredictable gyrations in the stock market.

The U.S. economy continues its slow recovery and the Texas economy is up pacing 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 is doing 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 just me saying these things. Last week, J.D. Power and Associates released the result 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, J.D. 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 do 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 are 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 continuous to show a positive trend for the future. We are blessed to be operating in Texas. We remained focus 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 will turn the call over to our CFO, Phil Green.

Phil Green

Thank you, Dick. I am going to make a few additional comments about our performance for the quarter and I will comment on our outlook for the year before I turn it back over to Dick for questions. Our 17.5% increase in earnings versus last year was driven by 3.5% increase in revenue and all that was from net interest income and we also had a 90% reduction in provision expenses, credit quality improved.

And you add to that the operating expenses that were increased 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 three basis points for the quarter compared to the fourth quarter but as usual there are number of factors that impacted this both on the positive side and negative side. Our increased loans and investments that we made last quarter were two of the most significant factors which combined to add eight basis points to the margin.

Offsetting factors included strong deposit growth which took six basis points off the margin and a little over 4 basis points from the lower loan yield versus the 4th 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 on an annualized 6.6% from the fourth quarter and this was driven almost entirely by C&I growth which was up by $126 million or annualized 12.9%. And also since the end of the first quarter, our loans have continued to increase and they are currently a $104 million over the level at quarter-end.

I am looking now at non-interest income and expenses. There were a few items, I think, we are focusing on. The first quarter is always a seasonal high for our instruments business but because of the timing of policy renewals and we see the contingency in bonus payments, and our pre-tax margin in the first quarter of this business ran about $2 million higher than normal. So that helped our first quarter results.

And in addition, marketing-related cost ran about a $1 million lower than the typical quarter. So that was another benefit. And also Dick mentioned a mineral interest income from some properties we hold in non-bank subsidiary, which were included in other income. And I believe this was at least a $1 million higher than normal in the first quarter.

Finally as we see every year around this time, benefits expense were higher than normal in the first quarter due primarily to the timing of payments for taxes and this year the quarter was about a million a half of additional expenses. So you see there were some unusual favorable and unfavorable items in the quarter, but in my view, they made it 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 are seeing prepayment speeds picking up on our MBS portfolio since year end. I am sure, some in response to the government’s HARP refinancing programs and we are also seeing some pick-up in the levels of calls on municipal securities.

Additionally, as I said before there is continued pressure on loan pricing particularly for fixed rate deals. So given all these factors and assuming continued improvement in our credit metrics, we currently view the average 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.

Dick Evans

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Brady Gailey of KBW.

Brady Gailey - KBW

I just wondered on the loan growth, you have seen a decent pick-up this quarter, is there more of a factor of true loan demand or have you all made a decision to get more aggressive on loan pricing?

Dick Evans

Well, we haven't gotten more aggressive on loan pricing. We just got some competition there, but it’s really a lot of hard work. I think the couple of things you need to understand, one of the things we obviously really focused, because in this environment there is really no place to go, at the same time obviously you want to keep great quality up.

So what we’ve 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 we in that regard will move over and start building that another market and vice versa. We are not doing loans on like, I mean 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 fascinated to me is that I referred to it in my remarks about the in person call and the result of long opportunities. If you look back to the first quarter of 2008, it took about 5.3 calls in person to get a loan opportunity. And then it started, as the economy start slowing, it got up as high as 13, but really from about ’09 through second quarter of ‘11, it was about 10 and that’s drop back down to eight. 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 hard to be very focused.

The other thing Phil referred to the $126 million in growth and C&I loans what’s really important is that we’re seeing it’s really across the board and we’re seeing in the same sectors that we’re always there which we believe are very important. We have always watched that because of the growth is too fast, it’s a weed, but this is staying and types of loans that we have been in for year.

The other thing that’s happening on our commercial real estate loans, they were up $14 million from period end and we’re starting to see advancing on these credits that we put on our books, these construction loans; obviously multi-family is the strongest, but we’re seeing retail growing and lots of different sectors that are continuing to expand.

It goes with saying the 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 price is somewhere up around $5.50 to $6. On the dry gas sector, the $2, we’ve got about four customers and they have got enough oil in other sectors to weather through that. So we feel comfortable there.

And all with our base case is at $75 and those continue to be good. The Eagle Ford is strong and continues to expand. We also -- and our share of natural credits were up and that is going to be the result of mainly energy, but some other lines too. But energy is about 64% of our share of natural credits.

So 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 are really working to help each other whether you are in a wealth advisory or insurance or deposit gathering business whatever, everybody is helping each to 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.

Brady Gailey - KBW

Okay, thanks for the color Dick and I have a follow-up for Phil. Phil, could you just give us the level of cash that was on the balance sheet at the end of the quarter and any deployment of cash you did in for quarter and what’s your thinking going forward that would great? Thanks.

Phil Green

Lets say, we will use our debt balance as a proxy for where our cash level is and see I think as once been running has been I would say probably $1.5 billion today. It’s been building up. For the first quarter, it averaged about a $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 into the treasuries at 37 basis points the main reason for doing that because we were concerned that that 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 are still a billion, or rather around $1.5 billion on liquidity today as we sit here. So deposits continue to be very strong, we 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 very much value at all in the fixed income markets.

Operator

Your next question comes from the line of John Pancari of Evercore Partners.

Unidentified Analyst

Hi this is (inaudible) for John. You NIM declined three bips in this quarter and (inaudible) give 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 are at around 20 bips in the last quarter?

Phil Green

Okay. Well, if you look at the quarterly yield on loans what you see is that I think what you said 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?

Loan yields in the fourth quarter overall were 504, in the first quarter they were 494. So you can see there was about 10 basis points drop there in 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 are very disciplined about pricing writing and tend to think of it as more in the median of the market with major banks we compete against.

We haven't seen much movement there. I think that we could see signs because then given general market levels and treasuries that could move down, but I don't think we will see much movement. Right now our deposit costs for interest bearing are 18 basis points that's pretty low and there is not a lot of room to move forward on that.

Unidentified Analyst

Just another question on the fee income. I noticed that’s up around 7% link quarter and see to trust fees up another 17% link quarter. Do you see that as the new run rate going forward?

Phil Green

I think as Dick mentioned, there are a number of things that are going on, on the trust side we had an especially good quarter related to state fees and those fees particularly when you deal with larger fees, they tend to be lumpy because they are really based upon a state that comes into being because of someone's death. And so we had an unusually good quarter for that, our state 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 runrate there obviously is a tremendous one which we’re not going to replicate on an ongoing basis. So you need to adjust out some of that increase in the state fee growth and be careful not to annualize 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 an 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 we will be representative of the market and typically we do a little bit better than market, but I don’t think we anticipate at this point having the same growth rate that we had in the first quarter. We would love to, we'd love to see the market do that but I think we want to be realistic about it as well.

Operator

Your next question comes from the line of Dave Rochester of Deutsche Bank.

Dave Rochester - Deutsche Bank

So 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 compared to the prior quarter, just to give us some kind of sense for how much it is coming in?

Phil Green

Well, if you look at, we think you need to, you can’t look at all in just one thing. It is not one model thing it does it 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 the fix rate side. If you look at our pricing spread to [prime], let’s say comparing the first quarter and fourth quarter, we have actually got a favorable trend there. And we averaged a little over a 100 basis point 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 have seen good discipline overall from our people as we price, loans that are more tied to floating index. It’s the fixed rate side that we see the most aggressive competition here and we have seen that tighten up some in the first quarter versus the fourth.

Dave Rochester - Deutsche Bank

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

Phil Green

You know I would say, actually 25 is quite on the higher side.

Dick Evans

I think another thing you got to recognize is that you know we are really controlling our pricing exceptions and when we look at making a difference it's obviously looking at the quality of the customer and the total relationships, 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. So it's a lot about value and not just the price, but we are paying a lot of attention to all the factors that go into the relationship with the customer.

Dave Rochester - Deutsche Bank

And just one quick follow up on the deposit side, I guess the growth slowed a little bit this quarter and was just wondering given your comments on business is feeling better and what not 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 just maybe a little seasonal weakness?

Dick Evans

Well it's been so strong so long that I think you got a lot just kind of settling in, you know you are not going to go straight up forever and you have got – you know I think the business portion is, as I said earlier is starting to have a little more positive attitude. The economy is getting a little better and so you are getting a little bit of help from there.

And 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 kind of got our minds buried in that. But people like to expand and grow and so as economies are getting a little better, I think people are taking a little bit of 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 its really what we’re saying. We have been saying this for a few years that once banks start to get better, you will see the loans coming up, the commitments coming up, the loans coming up a little and you will see a little ease in the deposit. But still, I mean we've got tremendous deposit growth.

Operator

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

Brett Rabatin - Sterne Agee

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 yields in the first quarter on the MBS portfolio and then do you have a number for the yield there?

Phil Green

Well, 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.

Brett Rabatin - Sterne Agee

Okay.

Phil Green

One second. Let me look and make sure I've got that totally right, but its not a very large amount and I think relative to and because we haven't bought premium bonds, but what I am really talking about is just the cash flow associated with pay downs; I mean if you look at the fourth quarter pay downs are running, this is October through December, they were around $38 million, $48 million and $45 million and then in the first quarter they were around $52 million, $52 million and $60 million. So you see there is a pick-up, and our total premium is about $54 million.

Brett Rabatin - Sterne Agee

Do you happen to have the yield for the MBS portfolio lending?

Phil Green

Think I do.

Brett Rabatin - Sterne Agee

I know the yields are shortly of….

Phil Green

On the MBS portfolio it currently yields at 321.

Brett Rabatin - Sterne Agee

And then, I want 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 or so the improved asset quality resulting then in your equation resulted in the lower provision. Can you give us any color around the provisioning this quarter and then any thoughts on what kind of provisioning might be necessary as you grow going forward?

Dick Evans

Really, it’s the second one. Its held a formula computed and you know loan growth is a factor in that but actually loan growth is not a huge contributor to increases in the formula just because obviously your loss ratio on classified loans is extremely low. So its more what’s going on with the classified loans and some of the -- I call them [BC-201] factors which are the general factors.

Brett Rabatin - Sterne Agee

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

Dick Evans

I think let’s just make a general comment here. I would say, we had continued improvement in credit quality like we have probably for your purchases, what I would say is we are probably not able to cut the charge offs in some of the quarters this year.

Operator

Your next question comes from the line of James Ellman of Ascend [Capital].

James Ellman - Ascend

I guess most of my questions have been answered, but I was hoping if you could just 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?

Phil Green

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

James Ellman - Ascend

And what’s driving that from the fourth quarter of last year?

Phil Green

In what way?

James Ellman - Ascend

In terms of moving up or moving down?

Phil Green

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 though we did had some non-deductible compensation because we have the divesting of certain stock awards for people that had reached age 65 and some of that is not deductible, so that tends to bump that up. And we didn’t have that in this quarter. So if I had to pick one thing that causes slight reduction in effective tax rate that’s what it would be.

Operator

Your next question comes from the line of Steven Alexopoulos of JPMorgan.

Preeti Dixit - JPMorgan

Hi everyone, this is Preeti Dixit on for Steve. Just wanted a follow-up on some of the earlier questions; I know you said you are getting a little more aggressive on pricing, but can you talk specifically about what change maybe in the competitive environment; and I know in the past you talked on about pricing in terms of market not being favorable, so just curious if that competitive at all?

Dick Evans

Not really.

Preeti Dixit - JPMorgan

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

Dick Evans

That’s correct.

Preeti Dixit - JPMorgan

And then, could you just touch on whether the change in regulators should reduce your regulatory compliance cost at all and what impact if any you are expecting to the business from the change?

Dick Evans

You know it’s not the reason that we are making the change, but I mean just the arithmetic of it is, I think it’s probably around a $1.3 million to $1.5 million on annual basis that you will see in lower fees because the, I mean it’s got less lower. But honestly, we would like to see ourselves employ that back into our business; there are a lot of things that we can be doing competitively in growing the business and we are not looking to just add that to penny a share and we are looking to plough that back.

Operator

Your next question comes from the line of Emlen Harmon of Jefferies.

Emlen Harmon - Jefferies

Just going back to the reserve and the provision quickly fermented; if we look it in a historical context, reserves kind of get into levels back where it was pre-cycle, back to kind of ‘07 levels. Give us a sense, I mean has the composition of the loan portfolio changed much or you think you can rumble low historical levels, how should we be thinking about that in historical context?

Dick Evans

I think that you kind of answered your question in a way, if you analyze the first quarter it's 20 basis points. If you look historically, it runs somewhere in the 23 basis points to 24 basis points from the charge offs and 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 and so I think you just got to look to the bottom line of charge offs and as I have already addressed and kind of go from there.

Emlen Harmon - Jefferies

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

Dick Evans

That's what I said.

Emlen Harmon - Jefferies

Okay.

Phil Green

Long term I mean the reserves are going to have adequate cover charge offs and charge offs move back to historical levels I mean there ought to be some correlations.

Emlen Harmon - Jefferies

And then on the loan growth fund, you know you mentioned a couple of times today, just seeing good trends on the energy side of things, could you give me a sense just of kind 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.

Dick Evans

It's around 10%, it's been 9 something for sometime, so it's up a little bit. I think you've got to look deeper into the number, so the kinds of energy loans you are making, you 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.

And so there is a lot of different of 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’ve focused on the [what] guess and that’s certainly been the right thing to do and they are still lot a good opportunities. This country, people on margin never the head screwed on right which probably won’t happen.

We could drive every car heater, every house and the other thing with natural gas and would be dependant on other countries and really our concentrations of credit 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 Directors Risk Committee and we talk about it from that standpoint.

Operator

(Operator Instructions). Your next question comes from the line of Matt Olney of Stephens.

Matt Olney - Stephens

Phil, on the insurance revenue you mentioned that the Contingent Commission's Bennett said that in the first quarter. Can you quantify how much that was in the first quarter?

Phil Green

Yeah. Our contingencies and bonuses in total looks like around 2 million - three for contingencies.

Matt Olney - Stephens

Okay and then also just circling back on the margin, obviously a lot of moving parts, but it sounds like the [varying] asset yields will continue to have some pressure but the re-mix of varying assets towards loans will help negate that, how do we think about the direction of the margin in the next few quarters?

Phil Green

I think you said the factors and it is going to depend on the interplay on those. I mean, you are always, just because the deposit growth is so strong, you are always going to see some optical pressure on the margin because with the built 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 we will be able to do that.

And just based upon deposit growth, so I think you are going to see some margin declines just from the growth in deposits over the next few quarters and as I said, I think, it’s some of the pressure is going to come from the investment portfolio just because there is really not a lot out there today given what the Fed's doing that we would like to go out and invest in. So we could see some leakage on our margin because of that and just going to depend on how good our loan growth is in terms of how much we are able to offset it. But I could sense, I sense some margin pressure probably. If you strip out the deposits, so probably a little margin pressure for the next few quarter just given the investing environment and what we are seeing in the portfolio.

Operator

Your next question comes from the line of Terry McEvoy of Oppenheimer.

Terry McEvoy - Oppenheimer

I have listened about 20 of these calls over the last couple of weeks a lot. To cut costs, you guys actually have spent an additional million dollars just on advertising across the state. I guess the question is there a specific market where you feel like the Cullen/Frost name needs to be more -- be more visible. And so is it statewide or on a specific market? And then the second part of that question. Net interest income, sale 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?

Phil Green

Well, you know, you asked a lot of questions there. So first of all, with regard to the advertising that -- and I am interpret your question right, you were just sort of asking where you are dealing it, why you need to do that, and really the advertising that we are doing is to put ourselves in a growth mode in all of the major markets that we serve. You know we want to be in front of the customer enough times to be what we would consider and our marketing group would consider in a growth mode. And we have -- again if it’s a major market we are in, we are attacking it that way. And I think we are seeing some good results for. I mean look, this is really our time. And our reputations have never been better. I mean, just look at -- whether it’s from regulators, whether it’s from the J.D. Power and Associates, whether it is -- Dick mentioned if you remember but we won 21 Greenwich Associates awards on the commercial side. That was the highest an e-bank in the country rated A + from S&P today. I mean this is really the time for bank. Our value proposition resonates better than anybody else as frankly. And if you look at J.D. Power data, it will show it.

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

Dick Evans

I was just -- Phil really answered your question and our positioning in this market. It is a great opportunity and the other thing I mentioned how many people are frustrated with the too-big-to-fail banks because they paid no attention to the customer. And if they can experience any product with us, they then find this place is different. And it’s a great opportunity to expand our businesses as Phil has gone through and we should be doing this. And 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, and you also destroy the basis of your company. I won’t mention things, but you’ve got, I mean you can see companies there is a few too big deferral companies that are blowing themselves up right now.

Phil Green

That’s right and with regard your question with regard your expense control, I mean look we know that you’ve got to be in delta as you manage your 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 for aggressively has to do with marketing our company, our customer service, our distribution and those kinds of things to move the business forward.

Now, other expenses we’ve been -- we are good expense managers and we are careful about it. One of our strategic priorities is to reduce some necessary expenses, but we don’t do with a lot of hoopla. I’ll give an example, like over the last 24 months we’ve reduced our cost of item processing for deposit accounts by 38% that’s a huge number. We have seen salary and personnel cost associated were down 57% that’s a result of utilizing better technology and additional technology on the image side. So I mean that’s a significant reduction in expenses.

And then those are the kinds of things that we’re doing all the time. Are going to look at our expense structure moving forward? We got to make sure that our distribution is in the right place, that we’re as efficient as we need to be, yes, we are. But we’re not going to do it as a means to an end; we’re going to do 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 said this many times, expense reductions have got to be managed well, they are going to make the dreams come true. It’s going to make the investor’s dreams comes true with our company; it’s continuing to prosecute our value proposition, stick by our philosophy and we have ultimately got to repair our loan to deposit ratio from that 40% somewhat we have today up to where it was two, three years ago. That’s really I think at the end of the day what we need to be more focused on.

Dick Evans

I’ll tell you when we started managing the expenses good, 144 years ago when this company began and we do it everyday.

Operator

Your next question is from the line of Brady Gailey of KBW.

Brady Gailey - KBW

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

Dick Evans

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

Operator

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

Jennifer Demba - SunTrust Robinson

A follow-up on Brady’s question, it seems like the last, at least the last few acquisitions, you guys have done have been in metro markets, is the smaller metropolitan or rural market hold any interest for Cullen in the State of Texas?

Dick Evans

I wouldn’t take it out of interest; but certainly you know where our focus is; where 70% of the population is; where the average income is higher and where the growth rates are higher and that’s where our priority is.

Operator

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

Dick Evans

Well, thank you for your interest in our company. We will continue to work hard for you. And this concludes our first quarter 2012 conference call.

Operator

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

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