Cullen/Frost Bankers Inc. said Wednesday that its first-quarter profit was hurt by sluggish loan growth and a decline in deposits as competition in its Texas home market offset the beneficial effects of improved credit quality.

The $13 billion-asset San Antonio company reported earnings of $47.3 million, down 1.3% from a year earlier. The per share profit was 78 cents, after deducting $5.3 million, or 6 cents a share, for expenses related to early redemption of securities. Excluding this impact, the 84-cent profit missed the average Thomson Financial estimate by five cents.

The loan portfolio was $7.5 billion at March 31, up 1.2% from the preceding quarter. Chairman and chief executive Richard W. Evans Jr. said on a conference call that the growth was partly attributable to the contribution of Summit Bancshares Inc. in Fort Worth, which it bought in the fourth quarter. Deposits were $10.3 billion, down 1% from the fourth quarter. Net interest margin was up three basis points from the fourth quarter, to 4.65%, and net chargeoffs as a percentage of average loans declined 6 basis points from the fourth quarter, to 0.14%.

"Looking forward," said Mr. Evans, "competition continues to be our greatest challenge in regard to keeping our margins and quality at profitable levels versus growth in loans."

Texas' favorable economic and demographic trends are attracting more competition for Cullen/Frost. Comerica Inc. in Detroit said last month that it will move its headquarters to Dallas by Sept. 30. And BOK Financial Corp. in Tulsa said on March 12 it would buy Worth Bancorp. Inc. in a deal that would boost BOK's branch count in the Dallas-Forth Worth area.

Merger and acquisition activity among its customers in Texas was one reason loan growth was a challenge, Mr. Evans said. "We had an unusual amount of customers that sold their companies and paid off loans," he said. He also said that Cullen/Frost's refusal to ease up on lending terms cost it some business. "We are seeing certain terms that are not in the best interest of our shareholders," he said.

In response to a question from an analyst on the call, Mr. Evans said the company would strive for loan growth of 10% to 11%, but "I wouldn't think we'll jump there in the second quarter," he added.

Terry McEvoy, an analyst at Oppenheimer & Co., applauded Cullen/Frost's stance and said he is optimistic that the company could meet its goals while staying conservative.

"The growth of today could easily translate into some credit losses tomorrow," he said. "That's what the company is always looking to avoid." He rates the shares "neutral."

Cullen/Frost's stock was down 1.5% in afternoon trading.

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