Cullen/Frost Bankers, Inc. (CFR) Q4 2015 Earnings Report, Transcript and Summary

Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cullen/Frost Bankers, Incorporated Fourth Quarter and Annual Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Greg Parker, Executive Vice President and Director of Investor Relations, you may begin your conference.

Thank you, Chris. This morning’s conference call will be led by Richard Evans, Chairman and CEO; and Phil Green, President of Cullen/Frost Bankers; and Jerry Salinas, Group Executive Vice President, and CFO. Before I turn the call over to Dick, Phil, and Jerry, I need to take a moment to address the Safe Harbor provisions. Some of the remarks made today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 as amended. We intend such statements to be covered by the Safe Harbor Provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 as amended. Please see the last page of the text in this morning’s earnings release for additional information about the risk factors associated with these forward-looking statements. If needed, a copy of the release is available at our website or by calling the Investor Relations Department at 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’s my pleasure today to review 2015 fourth quarter and annual results for Cullen/Frost. Our President, Phil Green; and Chief Financial Officer, Jerry Salinas, then will provide additional comments before we open it up for your questions. As most of you know, we announced last week that we would raise our loan provision to $34.0 million for the fourth quarter of 2015 due to the ongoing downturn in energy sector. We had no new problem credits from what we saw a year ago. The problem loans we identified in the fourth quarter of 2014 are the same today. The difference now is a cash flow issue. The lower price of oil is reducing the cash flow of our borrowers. Although the oil downturn is lasting longer, we believe this reserve level is appropriate to manage the energy industry risk. The fundamentals of our bank remained strong, but the increased reserves affected our fourth quarter and annual results. During the fourth quarter of 2015, our net income available to common shareholders was $56.2 million, compared to $70.7 million reported in the fourth quarter of 2014. This was $0.90 per diluted common share compared to $1.11 last year. The fourth quarter of 2015 return on average assets and common equity were 0.78% and 8.07% respectively compared to 1.02% and 10.36% for the same period of 2014. The company reported 2015 annual net income available to common shareholders of $271.3 million, a $1.4 million increase over 2014 earnings of $269.9 million. On a per-share basis, 2015 earnings were $4.28 per diluted common share compared to $4.29 reported in 2014. For the year, return on average assets and common equity were 0.97% and 8.86% [ph] respectively, compared to 1.05% and 10.51% reported in 2014. Even with the impact of higher provision, the fact that we were able to increase our net income over the previous year’s results is a testament to our company’s underlying financial strength. I am proud of the way our team is taking care of customers and helping us manage through this volatility just as we have done throughout our 148-year history. Deposit growth for our company remained strong especially with new customers. Because of our strong capital and liquidity, Frost remains a safe place for depositors. This deposit growth for the quarter and the year confirms that confidence. Fourth quarter average deposits rose 3.2% to $24.5 billion from the $23.7 billion a year earlier. Average total deposits in 2015 rose to $24 billion, up $2 billion or 9% from 2014. Net interest income on a taxable-equivalent basis for the fourth quarter of 2015 was $225.6 million, up 6.1% from a year earlier. Our increase resulted primarily from an increase in average volume of interest earning assets. The net interest margin was 3.43% for the fourth quarter of 2015 compared to 3.34% in the fourth quarter of 2014 and 3.48% for the third quarter of 2015. For 2015, net interest income on a taxable-equivalent basis increased to $888.0 million, up 9.9% over 2014. Non-interest income for the fourth quarter of 2015 was $83.2 million, up 1% from a year earlier. Insurance commissions and fees were $12.4 million, up $1.6 million or 14.6% from the fourth quarter of last year. Trust and investment management fees for the fourth quarter of 2015 were $26.3 million, down $1.0 million from last year due to lower oil and gas fees, and fees from securities lending, a business we exited at the end of the first quarter 2015. For the entire year, non-interest income was $328.7 million, up 2.7% over 2014. Non-interest income for the fourth quarter of 2015 was $173.4 million, up 2.6% from the $169.0 million in the fourth quarter of 2014. Salaries were nearly flat for the same period a year earlier, while benefits rose 19.9% from increased retirement plan expenses and higher medical and dental expenses. Net occupancy expense increased $1.8 million, primarily from higher depreciation expense and property taxes related to our new operations and support center. For the entire year, non-interest expense was $693.7 million, up 6% over 2014. Turning to loan demand, 2015 was an interesting year of stark contrast. For the year, average total loans were $11.3 billion, up 9.4% from the $10.3 billion reported a year earlier. Excluding the WNB acquisition that closed mid 2014, average loans were up 6.6%. I commend our team for their performance, their outstanding business development work, and disciplined calling efforts. During 2015, we made a record number of calls on both customers and future customers. Year-over-year, total calls were up 14%. We continued to remain very focused on high quality calls. New loan opportunities remained strong with our best fourth quarter ever. In fact, 2015 was a record year for loan request and the highest level ever for new commitments booked as new commitments grew 7% from last year. However, 2015 was also a record year for commitment runoffs. During the year, we had about $654 million more in commitment runoffs than expected based on our historical experience. We attribute this to a couple of factors. First, lower energy prices caused us to reduce borrowing bases of our oil and gas lines of credit. Second, businesses sold assets or their entire companies because of premium prices offered. Even with these challenges, we were able to grow total loan commitments 4.2% over year-end 2014. I want to mention that the market continues to be very competitive. Our loan lost opportunities shows more deals lost to structure than pricing, which was consistent with 2014. We remain consistent in our underwriting standards, and the credit discipline serves us well. Even with the volatility and uncertainty in the market, we expect to see moderate loan growth moving forward thanks in part to our disciplined team approach and aggressive calling efforts. Turning now to credit quality, all traditional measures indicate that our credit quality remains healthy. Delinquencies continue to be well below 1% at 0.59%. Energy related delinquencies at the end of 2015 aggregated $3.6 million. Non-performing assets increased to $85.7 million in the fourth quarter of 2015 compared to $58.2 million last quarter, and $65.2 million at the end of 2014. Our year-end non-performing assets represented 0.75% of total loans and 0.3% of total assets. A majority of the non-performing increase in the fourth quarter was one, healthcare related credit for $22.6 million that was previously reported as a potential problem loan. Energy loans on non-accrual totaled $21 million. Net charge-offs in 2015 represented 14 basis points of loans. Energy related loans charged off during 2015 totaled $6 million and represented 20% of gross charge-offs. Problem loans increased slightly in the fourth quarter to $486 million compared to $446 million at the end of the third quarter of 2015. The year-end figure represents 4.23% of total loans compared to 3.93% at the end of the third quarter. Given our low level of problem loans at the end of 2014 our total at the end of 2015 is very manageable and compares favorably to our historical percentage of problem assets. Before we go into the details on energy, I would like to frame how we arrived at the $34 million provision that we announced last week. Using our consistent methodology for reserve requirements we added $12 million in reserves for the fourth quarter of 2015. You will recall that a year ago we shared the results of the stress test at $37 a barrel, which did not require any general energy industry provision. This year we did the same sensitivity analysis at $28.13 a barrel. As a result of the sensitivity analysis at $28.13 a barrel, we allocated $15 million for production credits and $7 million for non-production credits, or an additional $22 million for energy industry exposure. This brings the provision total to $34 million. Now let me drill down on our energy portfolio. Outstanding energy loans as of December 31 totaled $1.76 billion or approximately 15.3% of total loans. Our energy loan segments at the end of 2015, production $1.25 billion or 71% of our energy loans, $106 million as our problems; services $273 million or 15.5% of the energy portfolio, we recognized $46 million as a problem; manufacturing, $65.6 million or 3.7% of our energy loans, we considered $19.8 million of that as a problem. The remaining 10% of the portfolio consist of mid-stream, refining, traders and private client or wealthy individuals. We have zero identified problems with these loans. Our typical borrower is an owner, operator, energy professional who has spent his or her entire career, if not life, in the business. Many are second and third generations in the industry. They have been through cycles before and they will be through cycles again. They know the meaning of commitments and responsibility. They have a stake in the local communities and they make decisions locally. We have not and will not look to equity funds, private investor groups, shared national credits, and other such entities to grow our loans. Shared national credits are approximately 29.5% of our outstanding dollars. We do not seek out shared national credits. They are the result of our borrowers being successful, growing and prospering. Consequently, their credit needs increase. As we have stated before, we do not bank the energy industry, we bank with people who are in the energy business. Problem energy credits at the end of the fourth quarter of 2015 totaled $172 million and represents 9.79% of our total energy portfolio compared to September 30, problem energy credits of $125 million or 6.98% of total energy loans. Two borrowers primarily drove the $47 million increase in the fourth quarter, one production-based credit for $23 million and one credit for $14 million associated with a company that manufactures oil and gas components. The fall borrowing base redeterminations had only minimal impact on asset quality within the oil and gas production portfolio. Our current price deck for 2016 is $37.50 for oil and $2.25 for gas. This escalates to $55 a barrel for oil and $3.25 for gas in the year 2020. As we have done in the past, our sensitivity prices are 75% of the price deck. So for 2016, our oil sensitivity price is $28.13 a barrel. It is worth noting that on the oil sensitivityeoil sensitivity price, it does not move beyond the 30s until 2020. This sensitivity price time series was one of the variables that we considered to help us determine our fourth quarter allowance provision. We also looked at the quality of the collateral, the strength of the balance sheetWe also looked of individual customers and the resulting leverage. We also considered the experience of borrowers and their ability to withstand these cycles. We analyzed 72 borrowers representing $1.1 billion or approximately 90% of our outstanding production base loans. This activity had two primary purposes; identifying potentially weak borrowers not already noted as a problem and recognize the reserve need reflected in recent oil and gas price movements. To determine the amount of provision, we hypothetically adjusted risk grades and applied our allowance for loan loss methodology. Accordingly, our methodology, the incremental need for production based credits was $15 million. We performed a similar analysis on non-production based borrowers. These are borrowers engaged in manufacturing service, trading and midstream. Accordingly, according to our methodology the incremental need for non-production credits was $7 million. In total, we reviewed, discussed, analyzed, [shocked] individual borrowers representing 83% of the outstanding energy dollars. We looked at nearly 90% of the outstanding production and service related segments of the portfolio. Accordingly, $22 million of the fourth quarter provision was dedicated to what we view today as additional inherent risk within our energy book of business. When added to existing energy allowance dollars that $22 million increase are energy reserve dollars to $54 million at year-end, or 3.11% of total outstanding energy loans. Surprises can still happen, but no new names were added to problem credits in 2015 among our individual energy customers. Because we have maintained our underwriting standards and credit disciplines and have chosen to bank experienced individuals who have been through multiple downturns, we can address the impact of increasing problem loans on a rational and proper manner. We will continue to evaluate borrowers on an individual basis, gather and analyze data and information, answer questions, make realistic assumptions and stress our conclusions accordingly. That's how we've done it for nearly a 150 years. Turning now to capital ratios. Our capital levels are strong. Tier 1 and total risk based capital ratios for Cullen/Frost were 12.38% and 13.85% respectively at the end of the fourth quarter 2015 and are in excess of Basel III fully phased-in capital requirements. The ratio of tangible common equity to tangible assets remained strong at 7.46% at the end of the fourth quarter of 2015. 2015 was another good year for Cullen/Frost, despite the downturn in the energy sector. We continue to grow and serve customers with outstanding technology, service, and convenience. We released our new app for Apple watch to give customers quick access to their account balances and recent transactions. We also introduced several new features on our highly rated smartphone app for iPhone and Android. The features allow customers to freeze the debit card and travel alerts and see all their investments in one place. Consumer reports; subscribers rank Frost first and customer satisfaction among the nation's regional and community banks. For the six consecutive year, JD Powers and Associates ranked Frost highest in Texas in retail banking customer satisfaction. We opened three new financial centers in Dallas while relocating and renovating several older facilities across the state. In 2015, we expanded our customer base and increased shareholder dividend for the 22nd consecutive year. It is the outstanding people at every level here at Frost who makes our results possible. I am grateful to them for their dedication to our company and for the way they live our culture and take amazing care of our customers. I continue to be optimistic about Cullen/Frost. We're focused on the basics, which have been a hallmark of our company since it was founded. Our credit quality is healthy because we stay true to our principles and lending disciplines and all market cycles. Our capital levels are excellent. We have money to lend. We're reaching out to new and existing customers to expand our customer base. We have more than 4200 employees focused on our value proposition, outstanding culture, and excellent customer service. We continue to deliver steady and superior financial performance for our shareholders. We're fortunate to operate in Texas; a state that still values and promotes the free enterprise system and a low tax structure. And with that, I'll turn the call over to Phil Green and Jerry Salinas.

Thanks, Dick. Texas finished 2015 with a 1.4% job growth overall, which is actually very good and we consider the 17% drop in jobs relating to oil and gas and 4% drop in manufacturing. Manufacturing's not only been impacted by the slowdown in the energy sector, but also by the strong US dollar and its impact on exports. Except for these two sectors and a small decrease in information services, all the other major categories of Texas inform an increase including construction, trade, business services, leisure and hospitality, government, and health care. This points out the importance of Texas' economic diversification. The housing markets' strong throughout the state with home inventories near historically low levels, and home prices that continue to rise. In fact, Texas, currently, both the lowest level of home equity or of home negative equity in the nation at just 2.1% of mortgages. According to the Dallas Fed, the office vacancy rates, they statewide currently run about 15%, although Houston exceeds this level. Looking at job creation by market, the strongest is in Dallas at 4.2%, Austin 4%, San Antonio 3.3%, while among the major markets [forward] comes in at just 0.6% and Houston at 0.3%, were worse impacted by lower manufacturing, while Houston has offset mining and manufacturing the clients new construction health services and leisure and hospitality. The Permian basin is weak, with increases in an informant and annualized declines in jobs in the third quarter of 2015, up 2.9%. I recently saw some economic data reported with the Permian basin that showed many current declines in economic activity, which are basically giving back the growth from the previous year. For example, sales tax received decline by 17% compared to a year ago, which were up 19% compared to the previous year. Similarly, retail auto or real auto spending has declined by 32% compared to a year ago. But the previous year before that was up by 32%. And finally residential real-estate sales adjusted to inflation are down by 43% compared to a year ago, but compared to a 44% increase the year before that. Now, while we're on the subject of the Permian basin regarding our acquisition of WNB, I believe it's perform well overall and remarkably well, given the circumstances. While loans and deposits are down 7% to 8% from our expected levels given that current economic environment, our cost savings were significantly higher than anticipated. So, on a pretax pre-provision basis, we're actually exceeding our pro forma. I think that's a testament to our great staff in the Permian basin. Of course, provisions are higher than we had spent a two years ago, which is true for the rest of the company as well, I might add. But even considering that, we estimate we're still achieving almost 89% of the accretion we anticipated when we announced the merger. But all this now we're standing, let's remember that we didn’t do the WNB deal to make a play on energy, even though it resides in the most prolific and most mature energy region in the country. We did it because it was an extremely well run bank with a great culture in an area with tremendous wealth, were we could grow long term relationships and ultimately take advantage of business plans they did not offer. Stepping back on the Permian basin and looking at our broader presence in the major markets in the state, what we're seeing overall is a fair amount of stability. We're not currently seeing any significant contingent from energy across the broader economy which is a testament to the economic diversity of Texas. We've been paying particularly close attention to commercial real-estate across the state and what we're hearing from our teams on the ground and from customers. Taking a look at Houston, I'd say we would describe it as cautious. People are double checking all their projects and asking what makes sense today. Somewhere delaying projects from late 2015 and in early 2016 to wait and see what develops. And in some cases holding off on Phase II's. Single family housing is strong as it is statewide and it's still trying to catch up with the job growth it's already incurred. Retail and industrial vacancy rates are running a low 5% or less. Of course in Houston, it's a tail of submarkets with some stronger than other and we are seeing some softening in the energy quarter. The North Texas Metroplex is what we call business as usual, good absorption of office space and all-time high for multifamily occupancy at 95% and 6% rental growth. Strong single family and low retail and industrial vacancies at 5% to 6%. And finally, I described San Antonio is consistent with these other markets with a cautious tone but moving forward. In summary, what we say is that this is not what we experienced during the 1980s. Prepare for its key fill-ups, senior economist for the Dallas Fed, there's a [view be falling] oil prices or broad contingent for the state. However, this time the situation is totally different. And he will point out as we and others have, about how the 1980s real-estate was seriously impacted by the tax reform act in 1986, and the actions up and subsequent implosion of the savings and loan industry. While at the present time, real-estate is a string on both the residential and commercial side. Finally, I point out to the Dallas Feds index of leading indicators with 1987 as the base year with an index of 100, while today with oil prices at these levels, the leading index stands at about 125. We point all these out not to ignore that the, that an important industry within the state is undergoing a serious downturn, but merely to point out that the rest of the state has not disappeared into the Gulf of Mexico. With that, I'll turn it over to Jerry Salinas for some additional comments.

Thank you, Phil. I will make a few additional comments on the quarter, then I'll discuss our earnings guidance for 2016 before turning the call back over to Dick for questions. The net interest margin for the quarter was 3.43% down five basis points from the 3.48% we reported last quarter. You may recall that I meant at last quarter that our third quarter net interest margin percentage was favorably impacted by purchase discounts associated with our acquisition of Western National which had a three basis point positive effect. Adjusting for that, our fourth quarter net interest margin was down two basis point, which is primarily related to higher levels of challenges how is the best, up a 182 million in the fourth quarter when compared to the third. During the quarter, we purchased approximately 78 million in municipal securities, and 265 million in four-year treasury securities. These purchases were partially offset by about 77 million in pay down. For the fourth quarter, the investment portfolio averaged 11.8 billion up 231 million from the 11.6 billion average for the third quarter. The tax equivalent yield of the investment portfolio remains flat with the third quarter at 3.99%. The duration of the investment portfolio at December 31st was 4.3 years down from 4.5 years last quarter. Our effective tax rate for the year was 12.66% down from 17.37% last year and was favorably impacted by our higher level of municipal securities this year. Our effective tax rate for the fourth quarter of 2015 at 5.91% was affected by the higher loan loss provision reported this quarter. Our capital ratios remain strong. Our common equity Tier 1 ratio was 11.37%. During the fourth quarter, we completed our 100 million stock buyback program. During the fourth quarter, we purchased approximately 390,000 shares at an average price of $64.21. Finally, regarding full year 2016 earnings, we currently believe that the full year mean of analyst estimates are $4.61 as reported by Capital IQ is reasonable. With that, I'll turn the call back over to Dick for questions.

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

[Operator Instructions] And our first question is from Brady Gailey with KBW. Your line is open.

Hi, good morning, guys.

Good morning.

Good morning.

So, with the 2016 consensus being reasonable, I guess that backs into the fact that you all feel like the fourth quarter provision was kind of a one time in nature thing and that going forward the provision will normalize lower?

Look, yes. To answer your question in general, but that question is filled with all kinds of indications. What we have done is used a sensitivity price deck, and we know each of our individual customers, and we have done a tremendous amount of analysis on each customer and we feel great comfortable with where it is. I don’t have to tell you or anybody on this call, none of us know where the price of oil is going to be , what it's going to do. Today’s strip, when I looked at it this morning, the spot market was $30.85 going to an average of $35.55 this year and after $47.17. You can pick almost any scenario you want. Because we have a company that we know each individual customer as I describe and went through a complete analysis, and I feel very comfortable with the $28.13 stress test and going out to where we don’t get out of the 30's until 2020. And so, I think that's reasonable. We could argue all day long about what is reasonable, and I would tell you that the thing we need to know is that everybody that's related to the oil business is getting hurt. Even OPEC is with their 11 companies, they are hurt and there is lots of economic damage. If you look at what they did from 2015 at an average price of $49.49 versus 2014 at $96.29, they've had an economic damage of $400 billion in decreased revenues. Can they withstand it? Yes. What I understand, they've got close to a trillion dollars and they borrowed $99 billion last year. And you can go through every country in the 11 OPECs and only Qatar could wait or still operate as a surplus. So, I use that as an example that everybody is getting hurt in this, you name all companies, big, little, but I feel very strongly that with a rational and manageable scenario and going through the detail, yes, I'm comfortable with where we are. And we will adjust as we go forward. If another scenario, you pick one, below $28.13, this company will adjust to that sensitivity. We don’t know exactly where prices are going to stay. And secondly, we don’t know the time factor. The time factor is a big function of this. How long will it stay there. So, there's lot of uncertainty, there's lots of volatility, but yes, I am very comfortable with where we sit today.

All right. And then, Dick, loans grew 5% last year in 2015. How do you envision that playing out in 2016? Do you think you guys will start to scale back in loan growth just given the economic uncertainty?

Well, as I told you, I'm still optimistic, and as Phil did a great description or described on the economy, we haven’t fallen off in the Gulf of Mexico, and the diversification is in Texas. And we certainly understand energy, and we understand where it is. But it continues to be a diversified, well managed -- it's a very diversified economy. If you look at Houston, which everybody focuses on and Phil went through a great description, there's a 33% increase in retail development to catch up with the growth we've already had. A lot of it's in supermarkets. But there is much to be done. As also was shared with you, office is at a lot of discussion. There is no new office building being built. What is happening, those that had started when the downturn happened are being finished, and yes there will be some sublease growth and it looks manageable of how to manage that. Our multi-family is the other big factor, the merchant builders of multi-family moved out over a year ago, and so that slowed. And then, on the other side, the diversification of medical construction, petrochemical, Port of Houston, and job growth are still estimated in Houston to be 20,000 to 25,000 in 2016, and there is a direct correlation and some analysis that I have reviewed of Houston office markets due to the reduced job growth. And who knows, if you look at that, it looks like the forecast for office absorption is more like a U-shape and from 16 through 18, there is an absorption of 2.7 to 5 to 4.7 million square feet of absorption. And so, will it be flat and will the absorption be lower, yes, it will be if it is flat.

Alright, then lastly Dick, Frost is one of the few banks that actually survived the 80s, I realize that 80s as a completely different backdrop in what we are looking at today for a number of reasons, but –?

Thank you. Some people don't realize that thank you.

Well, do you remember just I’ve had investors ask for, but do you remember what the peak NPA ratio was or the [cume] loan losses were back when you all went through the 80s?

I remember that if you got over 10% of non-performing that we knocked on the door of it, but banks that went under were over 10%, and I am going by memory here, I can't check the numbers right here, but it is very different. I would tell you that as I have looked at the lessons learned, and I think the lessons learned, let me state it plainly. The lessons we learned in the 80s have kept this portfolio in very rational and management levels. What if I learned that I didn't know this time? The two credits that we have the biggest challenges were primarily related to the quality of the reserves and the operations of those. And thank god, we didn't mess more. When you look at the Permian basin for example, you will see over this year prices versus the engineering values that the prices that they will sell those properties for will be about two times the engineering values. And I am already seeing some of that and so a lot of it when you think about this business is the quality of the reserves. The reason I say the quality of the reserves when you have got a loan on a property that is expensive to operate and of lower quality it can't work at these levels. Already when I talked about cash flow, this cash flow squeeze is getting the best of it, when the tide goes out all the boats are lowered. We are not going to get stuck on the sand and we are going to be able to manage it very well. But that's what I am talking about, you get and I feel comfortable with where we are and I think you will continue to see and we’ll see a lot more sales and different companies over the next six months have some challenges, but it's going to relate to over leverage and quality of the reserves.

Alright, as always Dick thanks for the color and also I think this is your last earnings conference call. So I just wanted to wish you well on retirement.

Thank you.

The next question is from Steven Alexopoulos with JPMorgan. Your line is open.

Hey good morning everybody.

Good morning.

At the start, you give some of the problem buckets, but could you give us the actual balance of criticize, classified and special mention for the energy loans that you are in?

Well, I told you let me see, I told you that production, we had $1.25 billion and 106 million were problem loans. Here is the criticized assets, risk grade 10, 62 million 163,000; risk grade 11, 76 million 853; risk grade 12, 19 million 180; risk grade 13, $2 million totaling $160 million $196,000 or 9.11% of energy loans and 1.39% of total loans.

Perfect, that's very helpful. I then wanted to follow-up and better understand the stress test that you talked about at $28, if oil remained at 30 for the rest of the year right, other banks Comerica, Zions are talking of big incremental provisions this year. Based on what you provided, are you, if we did see 30 for the rest of the year, are you not expecting a large increase in the reserve in 2016?

That's what the numbers would tell us.

Okay, that's helpful. And then based on the stress test again, what rough level oil do you think you will need to see to take this pressure off the portfolio and I am not going for an exact number but a range?

I don't know. The volatility is so great today, I will let you come up with a number, I mean, look what I’ve tried to tell you, I told you what our price deck was, 3,750 for 2016 and I can go through all those specifics with you of exactly year-over-year. But it goes out to 50, it escalates to 55 for oil in 2020 and 325. So what I’ve tried to do, what I am trying to do, what I have done is given you the price deck and then I have given you the sensitivity of 2813 and you got to get beyond the 30s, you don't get beyond the 30s until 2020. So somewhere in there you pick a number.

Okay. It's actually very helpful what you are getting. Just one final one what’s the balance of Huston commercial real estate loans at the end of the quarter?

I would say if you look at commitments in Huston for total commercial real estate end of the quarter, it would be and this is for commitments over $250,000, so it's significant, it would be about $934 million.

And the outstanding?

Outstanding would be probably two-thirds of that really round number just two-thirds of it.

Okay. And are you guys seeing buyers of the new commercial construction projects in Huston either renegotiated for lower price or walking away from deals?

Say one more time.

So, if you look at the Huston commercial real estate market and the construction projects that are wrapping up, are you seeing the buyers of those either renegotiate for a lower price or just walk away from the deal entirely?

That's not been our experience in terms of –

Okay, thanks for the color guys.

Thank you.

The next question is from Jennifer Demba with SunTrust. Your line is open.

Thank you for the color on the energy portfolio, very helpful. Can you just talk to us about the commercial real estate portfolio in Huston and what that comprised of?

Let’s go by, yes let’s take a granular look at it. Say owner occupied runs about $445 million and non-owner occupied which includes investors that’s the major tenant, would be the balance of that investors of about $400 million major tenants that is $8 million, so that's the breakdown with regard to owner occupied investor. You are probably wondering what you have in office building and we have got about $195 million exposure there. Office warehouses is $219 million exposure, would be the largest ones we have there, multi-family we have about $100 million exposure. If someone may ask, so you say what’s the energy component of that the total energy component for commercial real estate in Huston would be about $78 million, owner occupied be around $61 million the estimate there and investor being around $16 million to $17 million.

Thank you that's good color Dick. Best of luck to your retirement. We miss you.

Thank you.

The next question is from Emlen Harmon with Jefferies. Your line is open.

Hey good morning guys.

Good morning.

So quick question for you as we look out to next year, if the operating environment remains difficult generally, do you have any levers that you feel like you can pull, I know you guys have utilized stock repurchase plan in the back half of 2015, is that something you could do more of, do you feel like if things stay tough, do you potentially start to look at expenses or anything else just curious of what you think you could do from an operating perspective?

Yes, I think, the company has got great operating leverages. The biggest operating leverage in the company is from two sources one is interest rates being asset sensitive and the level rates where we are today and again you see little help there. Great operating leverage there also the operating leverage on loan to deposit ratio. So those are the two things that we hope to be able to employ over the next year. You asked about loan growth for the year, we are expecting to see some decline in energy, but we are expecting to see increase in the rest of the portfolio so we hope to do well there. And then, as it relates to the rates, we did see some increases over the one increase that happened few weeks ago. Our projections that you see in the disclosures in the 10-K and have seen for years have always been very conservative with regard to what interest rate would do on deposits in response to general market increase in rates. We continue to project on that basis, but I will be honest we haven't seen any increases in rates on the deposit side at this point. And then we won’t, we are not ready to declare victory but if things behave there on those interest rates even just one rate increase we have that will provide us some leverage just on that one increase. So those are the two things I mean, your question really about expenses is, this company is going to do what we have to do to be successful, but I think that when you look at what we are doing today we are being careful on expenses. We are providing for things that will move this company forward whether its [skills] wise or technology wise, or value proposition wise for our customers we will continue to do that we are not ready to give up on that. We think that the environment is still good enough and the states diversified enough that we can continue to manage the company on that basis and that's the way we want to approach it right now.

Got it and on the repurchase specifically I think you guys used up that program you had announced last quarter or quarter before is that something you would revisit?

I would think so. I think, it’s a good housekeeping to have a program in place at some point. We haven't announced one right now, but it's something always on our radar and what we like to do is take a look at what our opportunities are with the capital and then we always compare that to buying back stock, so we will continue to look at that.

Okay. Thank you.

The next question is from Ebrahim Poonawala with Merrill Lynch. Your line is open.

Good morning guys.

Good morning.

I just have a quick question going back to, Dick your comments around I appreciate the color around assuming $30 oil through 2020 and you spoke about the diversity in the Texas economy, I appreciate it if you can sort of tell us what you think the outlook for sort of Huston particularly in the rest of, some of the energy exposed markets would be if oil stayed at 30 for the next two to three years?

Well, first of all let me be clear what you understood. We started in 2016 at $28.13 and it goes up through the $30s. So I wanted you to know and basically 2016 if you look at the script this morning its $35.55 versus $28.13. 2017 stress is at 31.88 versus 40.91 and goes out to 20 and you can see the escalation. So, I just want to be sure you are clear on exactly what we did. I didn't want you to think with regard to 28 stay flat at 30 if I heard your question.

No, got that.

Okay. Second thing if I understood your question is, what does that do to Huston real estate is that correct what you ask?

Huston real estate and just the overall economy right, I mean there is lot of debates right now if the last 15 years in Texas coincided with the commodity boom and will there be a prolonged sort of under-performance for the next few years, if we don't see a meaningful improvement in oil prices from where it is today?

Well first of all, it's this state, let’s not forget how diversified it is and the strength of it. Phil described that very well to you, I don't, I have a crystal ball but it what I think you would see in the energy business is you will continue to see more consolidation and you will see the players, the independent players where we primarily are, we will continue to stay in dead zone what I mean by that I am not talking about a zone and all. But they will continue to play at their level and you will also see that where they have a very valuable reserve base that they need to spend lots of dollars to develop it you will see them sell parts or all of that because they don't have the capital to do it at these prices. So but that –

Yes, I will just say there is no doubt at all staying at $30 this year and $30 for next and $30 after that you would see some additional slowing. I think, what I have seen from the Dallas fair economic reports is that they are probably expecting for this year 16 little over 1% job growth in Texas, but if oil stayed at $30 bucks flat for the whole year it’s probably closer to flat job growth in Texas. So I think they certainly see some sensitivity with regard to it, so it wouldn't be good.

Let all know this, the sort always cuts both directions, as we know what it’s done for the chemical industry and that primarily is in Huston has been a tremendous positive for Texas in regard to the natural gas prices being low. Healthcare is a tremendous growth related to chemicals, but also to exports, the ports are seeing tremendous investments continuing to build for more exports and particularly in the chemicals. But also in LNG you have billions of dollars being spent in the Huston area and also in Corpus Christi. And then on the other side of the equation the cost of living with lower gas prices and the cost to bill are the positives to it. So let’s don't just take the hammer and slam our foot on the negative. Let’s look at both sides of it and you will balance out that I feel good about how this state will continue to grow.

Got it that was very helpful and Dick good luck with retirement.

Thank you.

The next question is from Brett Rabatin with Piper Jaffray. Your line is open.

Hi, good morning. I wanted to just go back, I joined a few minutes late but I wanted to just go back make sure I understood the provision for the fourth quarter I think you indicated $22 million was for energy on a 3.1 reserve for that portfolio at the end of the year, can you maybe talk about the piece that wasn't energy in 4Q, was that qualitative, was that for the loan growth and does that give you some maybe a little bit of general reserve that you could pull into energy if things didn't go your way in the first half of the year?

Well, let’s be sure we understand. We have a total energy reserve of $54,696,000 in that we have a industry provision of $22,181,000 that is the $15 million on production and $7 million for non-production loans. In addition to that the way the formula normally works, you’ve got environmental risk that has $3,795,000 and excessive industry concentration of $2,847,000. So just within that you got $54 million or that represents about 40% of our total reserve is related to energy. So, what we did the normal methodology had we not put the extra $22 million was $12 million. And yes, we use some of that to charge down some loans and that's just what you do normally. Let’s not forget how low our charge-off levels have been running, they ran in 15 of 14 basis points historically this is what I think is ironic. We are sitting here talking about downturn and the sky falling. Normally we run around 23, 25 basis points of charge-offs normally run in the company. Last year was 14 basis points among all this negativism. And we have as I just described to you, an extra $22 million in that reserve for the stress test at 28.13. The only reason where you hit the 14 basis points was because we had less recoveries and these recoveries when you charge-off they have got if I remember and I haven't looked at the numbers for a number of years, but they run about three years later, you charge sum off and round numbers you get it about three years later. So yes, we have been running low charge-offs and so we’d have lower recoveries.

Thanks for all that color Dick. And then, maybe Phil, I was hoping just for your thoughts on mini buying and managing that portfolio and the tax rate thoughts for 2016?

Well, Jerry speak to the effective tax rate assumptions but what we have done is just maintained in the portfolio relative proportion what we have had last year so we will continue to buy as we see growth in our overall balance sheet we are sort of keeping our asset mix relatively consistent. So, we are taking advantage of the mini markets just like we have done in the past, but we are not doing it to the extent that we are altering the relative percentages that the portfolio has represented of the overall portfolio. We will just continue to press all that we have been.

And as far as the effective tax rate, as I said we’ve recognized an effective rate for 2015 of 12.7 so of course, as we project higher earnings for 2016 and you would assume that that effective tax rate will go up. So I would assume something north of 13.

Okay, great, thanks for the color.

The next question is from Steven Moss with Evercore ISI. Your line is open.

Good morning guys.

Morning.

I was wondering to start with, I wonder what your line utilization is on the energy portfolio?

Let’s see, the lines have come down it was running pretty low, let’s see exactly let me find an exact number for you. I think the average use was about 50 million last quarter and yes, it runs about what I don't know is with the lines dropping it was running low and obviously all of that is tied to a borrowing base so if you are trying to run just strictly the math of that we will advance back up, it's all tied to the energy reserve. So it didn't work like that we had oil and gas commitments of $3 billion $121 million and we had outstanding of $1 billion $751 million, but you understand the difference I am saying if you assume that all that will be advanced that's a wrong assumption that ratio is 52% if you want to just use and it was flat with 2014.

Okay. And then, I was wondering if oil price stay here around $30 by how much would you expect [inaudible] decrease in the spring redetermination period?

We have done, when we did the sensitivity, we lowered those, we are looking at the collateral base and as I told you before I don't think the problem is in the collateral base as much as margin at those prices which is what I refer to as a cash flow issue. That's really where you get into it and where you got the margin squeeze in the industry it's what creates the staying power. It's about 15% to 17% to answer your original question. And I think the other thing you got to look at, I mean, already we have seen in the major projects of oil and gas there was $380 billion of what I call major projects, 68 different projects which are the long lead projects these are the global projects that only the big boys do. And those have, all they have been, they have deferred and the future ones they are finishing what they have started. This is the deep water, the oil sands, such as mining or steam floods mostly in Canada, those projects are really deferred. So that's where you feedback into the supply demand as we all know and so was the energy information administration, last year at this time I told you I thought this supply demand would come in balance at the end of this year. I was wrong and so was the EIA. Now their forecast says that it ought to be almost in balance in the fourth quarter of next year. Nobody knows that's where you get into all this discussions about storage and about half of the storages is in the US and so we kind of have the perfect storm right now and that winter time is when the refineries are shut down for maintenance and they will start building up in March, April and begin to make gasoline for the summer driving months. So there is a lot of things that are changing to get this supply back and balance and of course, we’ve talked about China forever and ever and so you are going to have a lot of big supply store to come off, the sales are already slowed down and so we got a lot of different things that are happening. With the spring re-determinations you have to keep in mind it's not just price. And I think that I know it's difficult for the analyst community because it's hard to get into specific analysis of different banks, you have banks that have lots of shared national credits, you have banks that have a higher concentration of service, and you get into service of the closure to the drill bait versus fortunately for us away from the drill bait. So all these variables, I know it's difficult when you just take price but that's why I come down and we have done the very specific analysis by customer and why we feel very comfortable with where we sit today.

Okay and I guess another thing I wanted to ask is where is the mix today between oil versus natural gas in the loan portfolio?

It's about 55:45

55% oil?

Yes.

Okay. Thanks very much and Dick best wishes and good luck on your retirement.

Thank you.

[Operator Instructions] The next question is from John Moran with Macquarie Capital. Your line is open.

Hey, thanks for taking the question. Just a real quick follow-up first on Huston CRE, when you were talking about the owner occupied in the term CRE, I think I wrote down 445 on owner occupied and term was 400 you are saying outstanding or is that commitment?

Well, I was talking about commitments. I should point out there are left out constructions in land which are if you look at outstanding about $164 million of constructions and 70 on land so not including constructions land our commitments for little over $900 million bucks, owner occupied $440 million little over 487 if you include investors and major tenants properties.

Okay. And then it was 100 million in commitments on multi-fam correct?

Yes.

Alright that's helpful.

And then just to be clear, I estimated about two-thirds of that being outstanding but that was without constructions land. If you add all that together we are about, I’d say we will be around 890 million plus in outstanding as of the end of the year in Huston commercial real estate.

Let me just add what Phil is saying. There are four projects in Huston that make up really the multi-family, one is a senior retirement project, one is 61% leased, one is 90% occupied and the other is under construction that is in a project for low to medium income near the new [Axon] headquarters are main facility in Huston and it has 35% equity in it and has ran at a dollar 42 square foot. So I feel comfortable we have one other in the multi-family in Huston which is a UT student housing unit and so I feel very comfortable with our multi-family exposure.

Okay, that's very helpful detail there. Then the other kind of follow-up that I had I think it was Dick that said the two credit to the energy book that are the most challenged it's really around the quality of the reserve. I am assuming that that means I am going to read that as non-Permian and I guess maybe could you or do you guys disclose how much is the book is Permian based versus in other comp plays and I know not every non-Permian play is marginal but if you have how many of them are in kind of secondary or tertiary kind of plays?

We have not disclosed that but obviously Permian is a big part of what we do and let me tell you something, you can have a Permian and on the edges that can be an old expensive operating unit and so you got to be careful with general assumptions is for and I know that's a challenge to you because you just got broad information. But when we look at the specifics I am, if you got half operating cost it is, I already said to you for the best of company the margins are very expensive, are very narrow and it's hard to make them work. And so when you get into high cost area that you do squeeze it all out and I was surprised, I saw a figure recently of how many Texas wells are the old. Half of the oil wells in Texas are vertical wells that are producing less than 10 barrels of oil a day that's real old stuff. And so that's difficult so you can try to that's very expensive to operate. You are not making much money, it cost you to cap the wells and close it out, so it's going to hell if you do and hell if you don't kind of a scenario. But we are fortunate to have two that fall under this category and they have been properly classified, properly reserved well, we are doing what we are supposed to do.

That’s helpful and useful as always. The last one I had is just kind of a tick-a-tack modeling question OpEx came in a little bit below where I was expecting anything kind of one timer showing in that number and I know obviously 1Q has some seasonal factors and that we have kind of account on compound benefits, but what might be a good run rate there?

What I would say is the couple of things that we’re in there that our advertising promotion marketing expenses were really quite a bit lower. It was really just seasonal. We actually just ended spending the money earlier in the year and not as much in the fourth quarter so they were usually low and really incentives and bonuses in the fourth quarter were quite a bit lower than our normal run rate, so few things are affecting the fourth quarter run rate.

Okay. Thanks very much and Dick I’ll add my congrats and well wishes.

Thank you.

There are no further questions at this time. We will turn the call back over to Mr. Evans for any closing remarks.

Well, thank you for your questions. Cullen/Frost is a special company whose culture and values strengthen leadership changes. We don't make leadership changes very often, but when we do they are well considered with the strong focus on continuity. We have an outstanding leadership team led by Phil Green to guide us starting April 1. It has been an enormous privilege and honor to serve this wonderful company for 45 years including almost two decades as Chairman and CEO. This will be as all of you said my final earnings call and I thank our shareholders, our loyal customers and dedicated employees for their support. I am grateful to the financial analysts and reporters on the line who have covered us so fairly.

And Dick just on behalf of the company, let me say how much we appreciate all you have done for the company over your 45 years you across and specially the 19 years you served as our CEO. And we’ve pleasure your last two months in that role and then look forward to the advisory role you’ll play for at least the next five years. Well done my friend. This concludes our fourth quarter 2015 conference call.

Ladies and gentlemen, this concludes today’s conference call, you may now disconnect.