Cullen/Frost Bankers Inc (CFR) 2015 Q1 法說會逐字稿

Good morning. My name is Mike, and I will be your conference operator today. At this time I would like to welcome everyone to Cullen/Frost Bank's first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will a question and answer session. (Operator Instructions). I will now turn the call over to Mr. Greg Parker, Executive Vice President and Direction of Investor Relations. Mr. Parker, you may begin.

Thank you Mike. This morning's conference call will be led by Dick Evans, Chairman and CEO, and Phil Green, President of Cullen/Frost Bankers Inc., 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 Investor Relations at (210) 220-5632. At this time I'll turn the call over to Dick.

Thank you, Greg. Good morning, and thanks for joining us. It's my pleasure today to review first quarter 2015 results for Cullen/Frost. Our President, Phil Green, and Chief Financial Officer, Jerry Salinas, will then provide additional comments, before we open it up for your questions.

I'm pleased to report that the first quarter 2015 Cullen/Frost had solid growth in average loans, average deposits, and revenues. These positive results amid a declining oil price and slower growth economy, are a credit to our dedicated employees, who live our culture and help distinguish Frost in the marketplace. During the first quarter of 2015, our net income available for common shareholders was $70.1 million, up 18.6% compared to the $59.2 million reported in the first quarter of 2015. That was $1.10 per diluted common share, versus $0.96 in the first quarter of 2014.

For the first quarter of 2015, return on average assets and average common equity were 1.02% and 10.34%, respectively, compared to 1% and 9.97% reported in the first quarter of 2014. Our successful merger with WNB Bancshares contributed to the good quarter. WNB's loans of $670.6 million, and deposits of $1.6 billion were included in our results on the May 30, 2014 acquisition date.

First quarter of 2015 average deposits were $23.9 billion, up $3.4 billion, or 16.6% over the $20.5 billion reported in the first quarter of 2014. Our strong deposit growth from both new and existing customers underscores our focus on developing relationships through the economic downturn. Since 2007, before the financial crisis began, year-to-date average deposits at Frost have risen $13.7 billion, or more than 130%.

Net interest income on a taxable equivalent basis for the first quarter of 2015 was $216.7 million, up 15.4% from the $187.8 million reported last year. This increase primarily results from an increase in the average volume of interest-earning assets. On a net interest margin, it was 3.41% in the first quarter of 2015, compared to 3.42% in the first quarter of 2014, and 3.34% in the fourth quarter of 2014. Non-interest income for the first quarter of 2015 was $83.2 million, up 7.4% from the $77.5 million reported last year.

Trust and investment management fees increased 6.9% from the same quarter last year to $27.2 million. Insurance commissions and fees were $14.6 million, up 11.5% from the $13.1 million reported a year earlier. Non-interest expenses for the first quarter of 2015 was $171.5 million, compared to $157.9 million in the first quarter of 2014. Total salaries were up $5.9 million, or 8.3% over the same period a year earlier, from the additions of new employees, including those from WNB acquisition, combined with normal annual merit and market increases.

Net occupancy expense rose $2.1 million, from higher lease expense and higher property taxes. Other expenses was $40.1 million, up 3.8%, excluding $1.1 million from acquisition-related expenses in the first quarter of 2014. Other expenses were up $2.6 million.

Turning to loan demand, we continue to see good consistent growth, despite uncertainty in the market from declining energy prices. First quarter 2015 average loans were $11.1 billion, up 15.6% from the $9.6 billion reported for the first quarter last year. Our new commitments booked were 22% higher than last year, including Permian Basin commitments. Not including the Permian Basin, new commitments were still 13% higher, driven by energy and real estate.

I am proud of the hard work our staff is doing to grow new relationships. New relationships added since January of 2014, accounted for 51% of our loan growth and 44% of our growth in total commitments. Calls are running near maximum levels, with about 60% to existing customers and 40% to prospects. Our leadership is very focused on quality calls. New opportunities are down slightly from the first quarter of 2014. While customer growth is on par with last year, prospect growth is a bit lower because of the uncertainty in the economy. Weaker structure from competition is a major factor.

We have grown our combined revolving lines in construction commitments by 21.7% year-over-year, and our customers are using those commitments more. Balances under the commitments are up 29.4% from last year. Customer payoffs are occurring at a faster rate, requiring us to paddle faster against these economic headwinds. On the other side, advance rates on revolvers increased on a linked quarter basis from 42.7% to 43.5%. Real estate advance rates increased from 50% in the fourth quarter to 50.7%. Average loans grew on a linked-quarter basis at an annualized rate of 6%.

Despite the volatility and uncertainty in the market, we will continue to see loan growth moving forward, thanks in part to our disciplined team approach and aggressive calling efforts. Our credit quality is strong. Non-performing assets at the end of the first quarter 2015 represented 0.53% of total loans, our lowest level since September of 2008, when the bank was about half its current size. Net charge-offs during the first quarter were just under $2 million, representing 7 basis points of average loans.

So we entered this time of lower oil prices and slower job growth in Texas with strong credit quality. We maintained close, regular communications with our energy-related customers. We told you in January, we had visited with more than 90% of our customers. Well, we visited with them again in March and early April, and there were no surprises or material issues.

Energy industry loans totaled $1.8 billion, or about 16% of our period end loans. Of those energy loans, risk grades 10 and 11, special mention and substandard, increased from $6 million to $50 million on a linked-quarter basis. We will continue to see some increase in this total, as reasonable time is required for our customers to execute their plans to adjust to the new environment. We continue to have good, ongoing communications with these customers.

We have increased our allowance for loan losses slightly to deal with the economic uncertainties surrounding lower oil prices. As we go through the adjustment period, we will be able to address loans rationally through our normal course of business.

All the other information we shared with you in January concerning borrowing leverage, location of services, oil price deck of oil and gas, and hedges, remain the same. Although there are still some unknowns about the duration and impact of lower oil prices, we know a lot more than we did three months ago.

After observing May contracts of crude oil future prices, reports suggest that oil is trying to hit bottom. We have talked with our customers, and have seen how quickly the industry has adjusted to market conditions. Rig counts are down 41%, which means fewer energy sector jobs and less drilling. But it's also a sign that Texas companies are doing what is prudent and necessary to weather the price decline. Businesses that respond quickly should be more viable, and will be in a position to take advantage of the next upward price trend.

As I mentioned in January, our energy customers are among the most established and experienced in the industry. They know what to do when the market turns. We believe that our conservative underwriting and strong credit disciplines will continue to serve us well. Surprises can always happen, but we believe we're about as well-positioned as you could be, and remain optimistic about the future.

Our capital levels remain strong. In fact, all regulatory capital ratios significantly exceed well capitalized levels. We're grateful for another good quarter with consistent deposit and loan growth, and positive results in all areas of our Company. The quarter was especially good given the economic uncertainty in the US and Texas.

2015 looks to be a year of mixed economic growth in Texas. Models indicate we could lose about 140,000 jobs in the energy sector. In March, the number of jobs in Texas declined for the first time in more than two years, and it is expected to take until the fourth quarter for oil supply and demand to come into balance. More broadly, the recent strength of the US dollar is putting downward pressure on Texas exports. Still, the Dallas Fed projects Texas job growth between 0.5% and 1.5% this year.

Although this could be lower than the US average for the first time in 12 years, Texas is still growing. And there are a number of reasons to remain bullish on the Texas economy. Texas is a highly diversified, pro business state with GDP higher than Australia. Our unemployment rate has been at or below the national average for 99 consecutive months. Despite losing some jobs in March, the Texas unemployment rate fell to 4.2% compared to 5.5% for the US.

According to the Texas Controllers Office, job growth, sales tax collection, and building permits are all signals of an expanding economy. Healthcare and construction are poised for another year of strong growth in Texas. Multi-billion dollar manufacturing plants along the Gulf Coast are pushing nonresidential construction values to record highs.

In Houston, refineries are enjoying greater profitability from more favorable spreads and petrochemical plants are expanding as they continue to benefit from low natural gas prices. Many displaced workers are expected to move to East Houston, going from energy to petrochemical. While job transitions are challenging on an individual basis, skilled workers are becoming available to move to other industries that have gone begging for help, including construction, transportation, and engineering-intense businesses. Having access to that skill base could help accelerate growth across a wide swath of Texas. Consumers are already benefiting from lower gasoline prices with more disposable income, that eventually will build demand for other sectors of the economy.

Finally, there's a lot of liquidity in Texas, from wealth generated in recent years, particularly in areas hardest hit by the energy job losses. For example, Midland, Texas, in the heart of the Permian Basin, has the highest per capita income in the nation. People there and elsewhere are investing in energy assets and other opportunities which will benefit the state in the long term.

On the public policy side, even with lower projected revenues, the Texas legislature is addressing important infrastructure needs, while cutting taxes and adding to our record $8.5 billion rainy day fund. Texas will remain a very attractive state to entrepreneurs and companies around the globe. 2015 is an adjustment year for job growth, but Texas is still growing.

Many expect that the slight pullback this year is setting the stage for a strong 2016. We are especially optimistic about the future because of our culture and great people at Frost. In February Frost received 21 national and regional Greenwich Excellence Awards for Superior Service and Performance in Small Business and Middle Market Banking. In our hometown of San Antonio, we are excited to be completing and occupying a new operation and support center, which will bring together employees from four separate facilities in the city into a more collaborative, innovative, and customer-centric environment.

At Cullen/Frost, we continue to focus on the basics. We're reaching out to new and existing customers to expand our customer base. Our credit quality trend is positive, as we stay true to our principles and lending disciplines. Our capital levels are strong. We have money to lend. We remain focused on our value proposition, strong culture and excellent customer service. And we continue to deliver steady and superior financial performance for our shareholders.

And with that, I'll turn the call over to Cullen/Frost's President, Phil Green, and Chief Financial Officer, Jerry Salinas.

Thanks, Dick. I'd just like to make a brief comment before turning it over to our CFO, Jerry Salinas. Specifically, I wanted to discuss our recent trend in net interest margin, which at 3.41%, saw a 7 basis point increase over the fourth quarter of last year. This increase was despite the 4 basis point negative impact from having the first full quarter, without any benefit from the gain amortization on our prime interest rate swap.

The fourth quarter had a $3 million benefit because of October's amortization, while the first quarter had none. The major positive factor in our margin growth was an increase in average investments of $1.1 billion compared to the fourth quarter of last year, which increased margin by 13 basis points. This included the full quarter impact of fourth quarter investments we reported on last call, as well as some additional investments we made during the first quarter in Treasuries and municipals.

During the first quarter, we purchased $772 million of securities against $687 million of maturities, calls, and sales. As of the end of the first quarter, the entire investment portfolio expected duration stood at 4.67 years, with a tax equivalent yield of 3.91%, and an unrealized gain of approximately $283 million.

I'm going to turn it over now to our CFO, Jerry Salinas, for some additional comments.

Thank you, Phil. I'm going to make a couple of additional comments about the quarter, and then I'll discuss our guidance for 2015 before turning it back over to Dick for questions.

Looking at the linked quarter, we saw an 8% annualized growth in period-end loans. About 60% of that growth came from C&I loans and about a third came from commercial real estate. About 75% of the growth in commercial real estate was in the construction category. During the month of April, we've continued to see consistent loan growth. Looking at our deposits on a linked-quarter basis, average deposits increased at an annualized rate of 3.7%, this coming on the heels of our typical seasonal jump in deposits in the fourth quarter.

During the first quarter, we saw good growth in savings and interest on checking, with the growth being fairly broad-based across the state. Looking at our capital ratios under Basel 3, I did want to mention that our common equity Tier 1 ratio at the end of the first quarter was strong at 11.55%. In anticipation of the new Basel 3 capital rules, which were effective at the beginning of the year, we did make the decision to exit the securities lending business, because of the negative capital impact of that business under the new capital rules.

Securities lending represented about $3 million in revenues in 2014, with a pretax margin of a little over $1 million. The securities lending revenues were included in the Trust and Investment Management fees line item. We were completely out of that business by the end of the first quarter.

Our effective tax rate for the first quarter was 14.3%, down from 16.5% and 17.6% we recorded in the first and fourth quarters last year. Our effective tax rate in the first quarter of 2015 was favorably impacted by the purchases of municipal securities that we made in the fourth quarter last year and this first quarter of 2015. Regarding consensus estimates for 2015, we currently believe that the 2015 mean of analysts' estimates of $4.53 is reasonable.

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

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

(Operator Instructions). We will pause for a few moments to compile the Q&A roster. Your first question is from Dave Rochester with Deutsche Bank.

Good morning, guys.

Good morning.

Good morning.

Hey, on the loan growth fronts, given the uncertainty still in the market from energy, are you expecting loan growth to remain somewhat stable with that 1Q rate going forward, or are you looking for a seasonal step-up into 2Q? And then if you could comment on how much the energy portfolio contributed to growth this quarter, that would be great.

I think we can expect energy to hold flat through the end of June. There's a lot of variables in that. What we experienced in the first quarter was what I talked about in January, that we thought we'd have some opportunities with very strong energy independents, that we had longed to build a relationship with, and that was one of the reasons for the growth in the first quarter. Certainly we're working through this, and we're somewhat optimistic that it will remain flat.

As I mentioned in my comments, construction is very strong. There's just a lot going on in Texas. If you look at office, offices are still -- the statistics show that there's opportunity. The occupancy rates are under the status -- under the line where you would see a need. So I don't think there's overbuilding, and certainly the Gulf Coast, which I mentioned in the petrochemical plants, up and down, LNG plants; these things are all -- LNG plants, you don't build one for less than $10 billion, and it's over a number of years, so there's a lot happening also in the residential area.

You're seeing prices continue to increase for homes, even in a market like Houston, which you would assume is somewhat weaker. I think that's an incorrect assumption because of the movement, as I said, from the energy side, to the building and the petrochemical. So it could be a quarter similar to the first quarter, and it's always dangerous to predict, but things are moving along. Our people are really working hard. And I would say that the diversification in Texas is a real strength.

So it sounds like maybe a little bit stronger on the construction side, flat on the energy, in the energy segment. And then was that most of the C&I growth in the first quarter that came from energy?

About a third of it was in energy.

Okay. Great. And the other comment you guys made on the weaker loan structures, has the prevalence of that actually increased in the last quarter? And does that at all concern you about growth going forward? Because I know you guys traditionally are pretty conservative on the credit front.

I think there's still plenty of opportunity for us to grow and keep our credit standards, which we're not going to change, but we are starting to see competition kind of reach out there. It's primarily in guarantees. To give you an example, just yesterday, with a great customer of ours was building an apartment project and chose not to guarantee it. We chose not to make the loan. And he'll most likely be able to get it somewhere else.

Okay. And then one last one, just on the securities purchases, if you guys could break down how much of that was munis this quarter of that $700 million and change, and then what the rates were on those purchases?

On the municipals for the quarter, we bought $352 million, average yield tax equivalent was around a 4.40%. We also bought some Treasuries. We had about $200 million in five years at a 1.28%. We had $220 million at a 1.34%. We sold a one-year Treasury which was about $220 million at 30 basis points. So we took a one-year Treasury that would have been maturing next year, we extended the duration a little bit on that. That was on the $220 million. Got some additional yield on that. Started that rolling down the yield curve. And then as I said, bought $200 million of five-year Treasuries at a 1.28%.

And what's your appetite for munis going forward through the end of this year? Are you still thinking that $350 million to maybe $400 million range is good for purchases going forward?

Actually, I think the first quarter purchases that we made were a little bit overstated because we saw some opportunity there. We've begun to -- I'd say first of all, that what we'd expect would probably be about, I'd say $100 million or so less than that on a quarterly basis. We saw a pre-refunding of a security that we owned, and we went ahead and got into that security. It was a little bit of an opportunity. We liked the credit and terms, and so we bought that. Got out a little bit ahead of our purchase plan, but I think we'd probably be, like I say, around $100 million or so less than that on a regular basis.

Okay. Great. Thanks for all the color, guys. Appreciate it.

The next question is from John Pancari with Evercore ISI.

Yes, this is [Azlut Batu] on behalf of John. A question just regarding your energy book. I know you mentioned that you expect the energy loans to be flat through end of June. I'm just wondering if oil stabilizes at this point, do you think your energy clients would feel comfortable enough to increase their borrowings later in the year?

Well, there's a lot happening in energy. Rig count is down, and so they've kind of got to go through an adjustment period of time. As I mentioned, in the first quarter we're still -- many of them are still enjoying those hedges that they had in place. I think we had about 41% were hedged this year, and about 15% in 2016. I think the important thing of hedges, it gives you the ability to go through an adjustment period of time. I wouldn't -- don't think of it -- or I don't think of it in terms of big swings. We've got to adjust. Prices have dropped more than half. And it looks like, as I said earlier, that oil is trying to find a bottom. I watch it every day, but I don't get much excited about what's happening, and I don't think energy companies.

We just got to see how this thing washes out. In the meantime, our customers are going to go through a period of time where, as we move through this and get into the current prices, there's still a little tightness in borrowing bases with existing customers. And as this supply and demand starts to balance out in the fourth quarter, you'll see this adjustment. So I wouldn't expect a big change in the second quarter. I think flat is very good. And certainly I would say to you, like we saw in the first quarter, the opportunity really lies in those customers that we've always wanted to bank, and see opportunities to pick them up.

Okay. And then you mentioned the reserve actually increased slightly this quarter. That was kind of specific to the oil price decline. And then last quarter I know you mentioned the energy reserve level was around 10% of the total reserve, that's around 55 bps? Where does that reserve specific to the energy book stand today?

It stands at about a little over 17%. I think it's about $18 million.

All right. Thank you.

Thank you.

The next question is from Jennifer Demba from SunTrust.

Good morning. Sorry if you may have already covered this, but how far are you through your redetermination season at this point?

You're talking about looking at all the energy loans and repricing, we are probably about 50%. But I would say to you, because of what I said we did in the first quarter of talking to 90% of our customers, and again visiting with them in March and early April, we know pretty much where they are. And the hedges are still an important factor. And I think you're going to see a lot more this summer, but certainly in the fall you'll continue to see how you go through this adjustment period. That's when we'll know, at the end.

But the new production costs are much lower. I've read a number of articles on cost improvement, and you're seeing in some sectors that costs -- I always think of costs of about an $8 million cost of a well by the time you drill it, frac it and complete it. You're seeing some examples of that coming down to $4.5 million or $5 million. So I don't think we can underestimate the mother of invention of what technology -- we saw what technology did to fracking, and we will continue to see improvements in cost.

Thanks so much.

Your next question is from Steven Alexopoulos from JPMorgan.

Good morning, everyone.

Good morning.

Maybe to follow up on the spring redetermination being halfway through, what's been the average decline that you've seen so far from the fall period?

There are a lot of moving parts to this thing, so it's hard to say, two and two isn't four. Certainly what you're seeing is, you've come off of a big drilling time, and that's dropped. And so what you see is a lot more value in the reserves, and you see prices down, and you see hedges still carrying you through. So it's like I said, there are a lot of -- some are flat, by the time you take all of those factors, some are 15% down. And so there's not a simple answer to what you said, but what you're observing is, it's pretty rational.

I think most of the other banks have talked about a reduction in the 10% to call it 12% range. Do you think baking everything in the cake, maybe you're coming out a little bit better than that? Is that what I'm hearing?

You're slicing the cheese awful thin. I said 15%, and with some of them I wouldn't come to that conclusion. There are just too many variables in that regard. But I think everything is pretty much in line.

Is that what drove the increase in the risk Grade 10 and 11 credits?

Really, the formula, which we talk a lot about the formula, it's working like it should. And any time you -- I said we went from $6 million to $59 million in the 10s and 11s, and that's going to have an effect. And so the reserve is really related to the formula, and yes, it's working.

Okay. Maybe to talk for a minute on commercial real estate, can you share what percent of your commercial real estate book would be for Houston properties, and maybe more specifically office?

Okay. Hold on just a minute. That's a good question. We've got it. While we're trying to find an exact number with you, let me say to you that in regard to apartments, I think what you see across the state is, you see the merchant builders start to back up a little bit, which is really healthy. You're seeing some individual opportunities that are still good opportunities.

So you asked me about, what Houston, of commercial real estate commitments?

Yes. Specifically office?

Okay. Commitments overall in Houston are about 20% of our commitments, and office buildings are about $159 million, or about 20%.

Okay. That's helpful.

Of the total of $804 million.

Okay. Then finally, I just wanted to follow up on your commentary about customers paying off loans early. Is this just cautiousness on the economy, is it related to the competitive environment you talked about, just better deals elsewhere without guarantees, et cetera?

No, I don't think it's in the latter part. It's about companies selling, is the biggest factor in that regard. We can't forget that, before we got into this oil price, there was too much money chasing too few deals. What I've been surprised about is that there is even more funds trying to buy opportunities of all types.

And so there's a lot of Wall Street money sitting on the sidelines, still looking for yield, and offering companies a big price for their company. And they -- which is where most of it's coming from. We're not really seeing a lot moving to permanent lenders. And so it's mainly in the acquisitions, lots of money chasing too few deals.

Okay.

Driving up prices for companies.

Then just one final one. I want to understand this. I would have thought, with the economy softening a bit, that some of the outer market banks might be pulling out of the market. They don't have as much experience as the banks headquartered in Texas, which would soften the competitive environment. So when you're looking at new loan opportunities, does it tend to be across the board, not really anybody pulling out of the market? Just everybody trying to make up for a lack of energy growth?

There's nobody pulling out of the market. Look at the statistics. Everybody still wants to be in Texas. We still got 4.4% unemployment versus the nation's 5.5%. If you read the press, you would think Texas was falling off in the Gulf of Mexico, but the reality, it's still a very strong pro business market, and lots of opportunities. Still the number one export state, and will remain that way even with the strong dollar. There's a lot happening here that's very positive.

So basically everybody's trying to do what you're doing, and get that customer that they always wanted, right?

You bet. You bet.

Okay. Thanks for the color.

The next question is from Brady Gailey from KBW.

Hey, good morning, guys.

Good morning.

My question is on the duration of the bond portfolio. Over the last two to three quarters we've seen that duration move up from 4 years to 4.4 years last quarter, now it's 4.7 years, which is just a little surprising to see, as we near the time where rates are going to start to increase. Can you just talk about why the duration has been expanding over the last two or three quarters?

Well, Brady, it's been expanding for the last seven years as we've waited for interest rates to increase. It's increasing because we buy investments in the place in the market where we feel there's value, and we continue to do that in the municipal side. I think a big thing, though, when you look at last quarter, we had the -- remember, the swap was coming off? We said for a long time that we wanted to replace that with that notional maturity with actual liquidity that we had built up over time into our balance sheet. So we had a fairly sizable increase in our municipal purchases in the fourth quarter, as you'll recall, $700 million or so. And that probably had an impact just because of the durations on those things.

So I would say replacing the swap had an impact in that. I don't think you'll see the same relative increase in duration. You're going to see some. But it depends on what happens with maturities and all. We're getting a lot of calls on these, and refinancings on these munis. But would I like to not be in the bond market at all? Sometimes yes, I would like to not be in it, but we're in business, we're growing deposits, it's an important asset class to us, and we'll continue to invest over time.

I think that the thing to keep in mind that we always look at is not just the portfolio, but we look at what is the duration that we've got available to spend within our balance sheet. And we're still solidly asset-sensitive. We still maintain over $3 billion in day money in terms of our Fed account. So we'll continue to see liquidity roll in. And we're keeping an eye on that. And as I said, I don't think that, we're not going to have the same level of municipal purchases this year as we had last year. And hopefully we'll see loan volumes as the economy continues to grow over time, it will take the place of some of these investments.

Okay. Okay. Great. And when you look at deposit growth, you all have had years of great deposit growth, but as we get towards a higher rate environment, how do you think deposits will react? I mean, do you think that you could actually see some net deposit outflows? Or do you think it's more, the growth in the deposit rate will fall from where it's been over the last three, four, five years?

I definitely think it will fall. I'm not sure if it will drop. And as we said before, historically we had, when we saw rates go from I think it was 1% before the Greenspan, we saw rates go up there, and we had great deposit growth during that low period of time, particularly in demand deposits. We expected it to fall. It went flat. And it went flat, we think now because we did such a good job of growing relationships. We still, this quarter we had our growth year-over-year was half in new customers and half in augmentation, net augmentation on customers that we currently have.

So I think we continue to do a good job with relationships, and we're growing 5%, let's say, or we're growing 50% from new customers. We've got an opportunity to offset the increase in diminishment that is clearly going to happen. And the question is how much of either do you have? So I tend to think more of a flattening, but we could see some decline. But I would tend to think maybe flattening. And that's once rates really begin to go up, and not see just small increases.

I might just add to what Phil is saying, and we've said over and over, don't forget about the mix and how much demand we have, which is a longer sales cycle, and that's something you can't do overnight. And it's really important. And just to give you an example of how we think, if you look at WNB, you heard the numbers when we made the acquisition. We had $671 million in loans, today we have $688 million. And at acquisition we had $1.624 billion in deposits, and today we have $1.185 billion.

And you say, my gosh, what happened? Well, first of all, a few days before the acquisition, a company sold that built the deposits up $300 million. And it was just there for a week at the longest. And so that took $300 million off. And secondly, in regard to how we think about things, they had about $300 million in broker MMA product, which we don't really use, and so we've moved that out over time. And there's a little over $200 million of that has moved out. Some of it's gone in our investment, a lot of it's gone to other type of investments. So think of our deposit base as a long-term sales cycle with that mix where it is.

Okay. Great. Thanks, guys.

Your next question is from Emlen Harmon from Jefferies.

Hey, good morning, guys. This is Travis Potts on for Emlen. So just talking about -- you said muni build is going to slow this year. How should we be thinking about the impact that will have on tax rate? Are we going to see it sort of slip up this year? Any color going forward?

I would say that the effective tax rate that you saw for the first quarter is our expectation for the year.

Okay. So it stays pretty stable. Thanks. And then you mentioned there was about $900,000 in OREO gains this quarter, or that was the increase year-over-year. Do you have the dollar amount that was, what the impact was in 1Q?

Yes, I think that was -- the bulk of the gain, to be quite honest with you, was one transaction, and really with the amount in the quarter and the representative increase from the prior year.

It was pretty close. All right. Thank you.

Your next question is from [Abraham Panwala] from Bank of America.

All my questions have been asked and answered. Thank you.

Thank you.

Your next question is from Brett Rabatin from Piper Jaffray.

Hi, guys. Good morning.

Good morning.

I wanted to go back to credit and thinking about the provision going forward. Would you guys anticipate additional reserve building, and sort of how do you think about the reserves, especially with energy? Did you guys feel like you really took a hard look at that portfolio in the first quarter, have made everything, have done everything you need to do, or do you think you'll have to maybe add to the reserve in that portfolio as you move through the year?

Well, first of all, anybody that can predict the future and know everything that's going to happen is going to be wrong. Remember what I said, the provision was increased because of the formula. And it relates to classifications and all of the other stuff. So it's just consistent with that. I also said that I can't predict a surprise, because that's the definition of a surprise: it's something you don't know. And I don't think you can build for surprises because you don't know how -- what to build. About the time anybody thinks they do, they don't have enough or whatever. So it's going to work. It's working like it should.

Okay. I appreciate that. And then I guess the other thing I was curious about was, you guys had mentioned that April you were seeing consistent continued growth on the loan portfolio, but also that payoffs had been making you run faster to grow the portfolio like you have. Are the payoffs that you guys are -- I guess, A, do you think the payoffs are elevated relative to where they were in the past few quarters? And then, B, do you think that might subside as you maybe work through some loans that are at higher lending spreads?

Let's remember what I said. I said that payoffs are running at a higher rate in the first quarter of 2015 than they ran in 2014. As I discussed earlier, they're really coming from companies selling, and that sort of thing. In our slides of projecting out where I said that I thought we'd have a run rate loan growth in the second quarter about where we're going, that takes into consideration historical payoffs. And so your guess is as good as mine, but I think we'll plug along and continue to -- we're going to work hard bringing in new customers, and it's harder because of competition, but we'll get our share. And I don't know whether more companies are going to sell or less companies, but we pretty much project it about what historical numbers have been. And I think that's about as good as you can get.

Okay. Great. I appreciate the color.

Your next question is from John Moran from Macquarie Capital.

Hi, guys. Just two kind of housekeeping ones, and apologizes if I missed this, but the services versus E&P split in the energy book, I think was 60/40. Is that still the same?

I think it's about 70/30.

70/30. And then I have written it down twice and I think I have different numbers, but the 10 and 11 grades, the adverse migration, it went from $6 million to $59 million, is that correct?

That is correct.

And is that just energy credits, or is that the entire loan book, 10, 11 grades?

That is just energy, and all of the others were pretty stable. Other categories.

Okay. Got you. And so 50% through redeterminations, you'd expect then to see some additional migration into those buckets as the year goes forward, if I'm reading you right?

Well, let me say this. Not so much redetermination. Certainly that's a factor. But what you're going to have is, as the hedges roll off and as you certainly see how much new production versus the other, and where price is, and all of those various factors, I think it will get a little tighter, but not serious problems. But that's what could increase these numbers somewhat.

Let me kind of explain it this way. What you've got is, when you get a little over your borrowing base, you're going to increase these numbers. But then you could say to me, well then, does that mean loss or moving to a worse category? Not really, because then what you're looking at is the other assets of the borrower to help bridge. Are they going to put more capital? We see funds putting in new capital to bridge over this period of time, we see individuals that have substantial net worth in marketable securities, or those kinds of things. So this thing is going to bubble up a little bit as those factors start to happen, and then it will start to come down, probably in the fourth quarter.

Perfect. That's helpful. And then I guess one for Jerry, just kind of a housekeeping one on OpEx. The employee benefit line, I think in the press release, you guys call out $1.3 million or so, impacted by lower discount rates and actuarial assumptions. Is that a one-time kind of catch-up, or is that something that's going to be in that run rate going forward here?

It is a net run rate all year.

Okay. Perfect.

We'll have that additional $1.3 million in additional expense compared to the prior year for each of the four quarters.

Okay. Got it. Thank you very much for taking the questions, guys.

Thank you.

(Operator Instructions). The next question is from Jon Arfstrom from RBC Capital Markets.

Hey, thanks for taking my questions. A couple of things here. In terms of the Midland/Odessa exposure, I appreciate the update on the loan growth balances, but what kind of growth are you expecting from here? Is this relatively flat-lined, or do you still expect to see growth from those markets?

Well, I expect it's going to be good growth. You're going to have obviously weakness in the energy side of it. But also remember this. Why did we buy WNB? We bought it because of the people, and their history of going through the downturns, and we're very pleased. It's proven out to be a great staff. And so the other thing that you got to remember that we're seeing happening from a loan growth standpoint, is bringing our leasing product, which they didn't have; our public finance, which we're seeing opportunities in schools and churches and hospitals, and those type of things in the public finance. And so leveraging this in a $25 billion company with all the products we have, gives us an opportunity to bring ability that they never had before.

So I think there's a lot of opportunity in that regard. And one of the biggest opportunities is in the wealth business, which as you know, we've got this $30 billion-plus wealth advisory business, and starting to build that staff out there. And we see a lot of opportunities there because, as I said to you, right in the middle of that, they have the highest per capita income in the United States. And so there's a lot of wealth that has been created, and we see opportunity in that regard.

Okay. Good. That's helpful. Jerry, the comment on the comfort with the current consensus numbers, is the assumption that provisions remain relatively flat from here?

We really don't give that level of detailed guidance, Jon.

Okay. All right. I guess we can draw our own conclusions on that. And then, Dick, a question for you, non-energy-related and kind of a follow up on Brady's question. But before energy, we used to talk more about Reg Q and compensation on deposits, and what might happen when rates finally rise. Can you give us some updated thoughts on that?

You're talking about what the profitability from increase in rates?

Jon, say that question one more time. I want to make sure I understand it.

In terms of compensation on commercial deposits, before we had energy to talk about, it seems like you had some different asset sensitivity commentary than some of your peers. And I think the expectation was that once rates start to rise, the commercial customers are going to ask for more compensation. And I'm just curious if you had any updated thoughts on that?

Okay, I see what you're saying now. Yes, I'll just say that, for a long time, we've had in our disclosure for our sensitivity to interest rates as far as our net interest income sensitivity, that we're fairly aggressive and conservative, I'll say, in terms of the movement in interest paid on commercial demand deposits. Because again we want to be conservative, and if the market says that they're going to pay aggressively on there, we'll compete. We're in the marketplace.

We're somewhat asset-sensitive in the 12-month period in that analysis. If that happens, if it's more of an administered rate, we're much more asset-sensitive. And I would say that our take on the market probably right now is, it's not going to be very aggressive pricing. I think there will be some movement, and we're planning in some movement up in rates, but either of the two, we're still asset-sensitive. We're much more asset-sensitive if you have more of an administered rate.

All right. Thank you.

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

Thank you for your interest and support of Cullen/Frost. This concludes our first quarter 2015 conference call.

This concludes today's conference call. You may now disconnect.