Cullen/Frost Bankers Inc (CFR) 2015 Q4 法說會逐字稿

Good morning. My name is Chris, and I will be your conference operator today. At this time I'd like to welcome everyone to the Cullen/Frost Bankers, Incorporated fourth-quarter and annual earnings call. (Operator Instructions).

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 Dick 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 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 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 reserved level is appropriate to manage the energy industry risk. The fundamentals of our bank remain 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. Fourth quarter 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% 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'm 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 remains 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 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 million, up 9.9% over 2014. Noninterest 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 million from last year due to lower oil and gas fees and fees from security lending, a business we exited at the end of the first quarter of 2015. For the entire year, non-interest income was $328.7 million, up 2.7% over 2014. Noninterest income for the fourth quarter of 2015 was $173.4 million, up 2.6% from the $169 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, noninterest expense was $693.7 million, up 6% over 2014.

Turning to loan demand, 2015 was an interesting year of stark contrasts. 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 continue to remain very focused on high-quality calls.

New loan opportunities remain strong with our best fourth-quarter ever. In fact, 2015 was a record year for loan requests 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 basis of our oil and gas lines of credit. Second, businesses sold assets or the 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 loss loan-loss opportunity 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 nonaccrual 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 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 loan level 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'd like to frame up 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 consider $19.8 million of that as a problem. The remaining 10% of the portfolio consists of midstream, 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 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 base 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 on the 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's worth noting that on the oil 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 sheet of individual cust0omers 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-based loans. This activity had two primary purposes, identify 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 base 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, our energy reserve dollars to $54 million at year end, are 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, ask tough questions, make realistic assumptions and stress our conclusions accordingly. That's how we've done it for nearly 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 of 2015 and are in excess of Basel III fully phased-in capital requirements.

The ratio of tangible common equity to tangible assets remains strong at 7.46% at the end of the fourth quarter 2015.

2015 was another good year for Cullen/Frost despite the downturn in the energy sector. We continued 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, enter travel alerts and see all their investments in one place.

Consumer Reports subscribers rank Frost first in customer satisfaction among the nations regional and community banks. For the sixth consecutive year, J.D. 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 in 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 will 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 when you consider the 17% drop in jobs relating to oil and gas and a 4% drop in manufacturing. Manufacturing has 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 employment increased, including construction, trade, business services, leisure and hospitality, government and healthcare. This points out the importance of Texas's economic diversification.

The housing market is strong throughout the state with home inventories near historically low levels and home prices that continue to rise. In fact, Texas currently boasts the lowest level of home equity -- of home negative equity in the nation at just 2.1% of mortgages.

According to the Dallas Fed, the office vacancy rates 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, Fort Worth comes in at just 0.6% and Houston at 0.3%. Fort Worth is impacted by lower manufacturing while Houston has offset mining and manufacturing declines through construction, health services and leisure and hospitality.

The Permian Basin is weak with increases in unemployment and annualized declines in jobs in the third quarter of 2015 of 2.9%. I recently saw some economic data reported for the Permian Basin that showed many current declines and economic activity which are basically giving back growth from the previous year. For example, sales tax receipts declined by 17% compared to a year ago which were up 19% compared to the previous year. Similarly, retail -- 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 for 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 has performed well over all and remarkably well given the circumstances. While loans and deposits are down 7% to 8% from our expected levels given the 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 expected 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 notwithstanding, 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 where we could grow long-term relationships and ultimately take advantage of business lines they did not offer.

Stepping back from the Permian Basin and looking at our broader presence in the major markets of the state, what we're seeing overall is a fair amount of stability. We are not currently seeing any significant contagion 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 are 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. Some are delaying projects from late 2015 into early 2016 to wait and see what develops and in some cases holding off on phase 2s.

Single-family housing is strong as it is statewide and it is still trying to catch up with the job growth that's already occurred. Retail and industrial vacancy rates are running a low 5% or less. Of course in Houston, it's a tale of submarkets with some stronger than others and we are seeing some softening in the energy corridor.

The North Texas Metroplex is what we call business as usual with good absorption of office space, an all-time high for multi-family occupancy at 95% and 6% rental growth, strong single-family and low retail and industrial vacancies at 5% to 6%.

And finally, I'd describe San Antonio as consistent with these other markets with a cautious tone but moving forward.

In summary, what we'd say is that this is not what we experienced during the 1980s. To paraphrase Keith Phillips, Senior Economist for the Dallas Fed, there is a view that falling oil prices are a broad contagion 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 of 1986 and the actions of and subsequent implosion of the savings-and-loan industry, while at the present time, real estate is a strength on both the residential and commercial side.

Finally, I will point out that the Dallas Fed's index are the 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 this out not to ignore that the 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 will turn over to Jerry Salinas for some additional comments.

Thank you, Phil. I will make a few additional comments on the quarter and then I will 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 5 basis points from the 3.48% we reported last quarter. You may recall that I mentioned 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 3 basis point positive effect. Adjusting for that, our fourth-quarter net interest margin was down 2 basis points which is primarily related to higher levels of balances held at the Fed, up $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 paydowns.

For the fourth quarter, the investment portfolio averaged $11.8 million, up $231 million from the $11.6 billion average for the third quarter. The tax equivalent yield of the investment portfolio remained flat with the third quarter at 3.99%. The duration of the investment portfolio at December 31 was 4.3 years down from 4.5 years last quarter.

Our effective tax rate for the year was 12.66%, down from 17.27% 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 recorded 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 of $4.61 as reported by Capital IQ is reasonable.

With that, I will turn the call back over to Dick for questions.

Thank you, Phil and Jerry. We are now happy t0o take your questions.

(Operator Instructions). Brady Gailey, KBW.

Good morning, guys. 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 very 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 do -- 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 out to $47.17. You can pick almost any scenario you want.

Because we have a company that we know each individual customer, as I described, 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 $30s out to 2020. And so I think that's reasonable. We could argue all day long about what is reasonable, and I will 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's 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. From what I understand, they've got close to $1 trillion and they borrowed $99 billion last year. And you can go through every country in the 11 OPECs and only Qatar, Kuwait are still operating as a surplus.

So I use that as an example that everybody is getting hurt in this thing. You can name oil 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'll 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? There's lots 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 of describing 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 is in supermarkets. But there is much to be done. As also was shared with you, office is a lot of discussion. There are no new office buildings being built. What is happening, those that had started when the downturn happened are being finished. And, yes, there will be some sublease grow and it looks manageable of how to manage that.

On 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've reviewed of Houston office markets due to reduce to the job growth. And who knows?

If you look at that, it looks like that the forecast for office absorption is more like a U-shape and from 2016 through 2018, there is an absorption of 2.7 million to 5.0 million 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.

All right. And then lastly, Dick, Frost is one of the few banks that actually survived the 1980s. I realize the 1980s is a completely different backdrop than what we're looking at today for a number of reasons --

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

Doo remember just -- I've had investors ask for it, but do you remember what the peak NPA ratio was, or the cum loan losses were back when you all went through the 1980s?

I remember that if you got over 10% of nonperforming, and I think we knocked on the door of it, but banks that went under or over 10%, and I'm going by memory here. I can't check the numbers right here, but it is very different. I would tell you that as I've looked at the lessons learned and I think the lessons learned -- let me state it plainly -- the lessons we learned in the 1980s have kept this portfolio in very rational and management levels. What have I learned that I didn't know this time?

The two credits that we have the biggest challenges with primarily relate to the quality of the reserves and the operations of those. And thank God we didn't miss 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 value and I'm 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've got a loan on a property that is expensive to operate and of lower quality, it is -- it can't work at these levels. Already when I talked about cash flow, this cash flow squeeze is getting the best of them. When the tide goes out, all the boats are lowered.

We're not going to get stuck on the sand and we going to be able to manage very well but that's what I'm talking about. And I feel comfortable with where we are and I think you will continue to see -- and we will 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.

All right. As always, Dick, thanks for the color, and also I think this is your last earnings conference call, so just wanted to wish you well in retirement.

Thank you.

Steven Alexopoulos, JPMorgan.

Good morning, everybody. Dick, I wanted to start, you gave some of the problem buckets but could you give us the actual balance of criticized, classified and special mention for the energy loans that you're in?

I told you -- let me see -- I told you that production we had $1.25 billion and $106 million were problem loans. Criticized assets, risk-grade 10, $62.163 million; risk-grade 11, $76.853 million; risk-grade 12, $19.180 million; risk grade 13, $2 million totaling $160.196 million or 9.11% of energy loans and 1.39% of total loans.

Perfect. That's a 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, other banks, Comerica, Zions are talking about 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 of oil do you think you would need to see to take this pressure off the portfolio? And I'm not looking for an exact number but a range.

I don't know. The volatility is so great today. I'll let you come up with that number. Look what I tried to tell you. I told you what our price deck was, $37.50 for 2016 and I can go through all the specifics with you exactly every year, but it goes out to -- escalates to $55 for oil in 2020 and $3.25.

So what I've tried to do, not what I've tried to do -- what I've done is given you the price deck and then I've given you the sensitivity of $28.13 and you've got to get beyond the $30s, you don't get beyond the $30s until 2020. So somewhere in there, you pick a number.

Okay. That's actually very helpful what you are giving. Just one a final one. What's the balance of Houston commercial real estate loans at the end of the quarter?

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

And the outstanding?

Outstandings would be probably two-thirds of that in really round numbers, just use two-thirds of it.

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

One more time?

So if you look at the Houston 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 what we've seen.

Okay. Thanks for the color, guys.

Jennifer Demba, SunTrust.

Thanks for all the color on the energy portfolio, very helpful. Can you just talk to us about the commercial real estate portfolio in Houston and what that's comprised of?

Yes, let's take a granular look at it. Say owner occupied runs about $445 million and non-owner occupied would include investors or investor major tenant would be the balance of that. Investors about $400 million. Major tenant about $88 million. So that's the breakdown with regard to owner occupied and investor.

You're probably wondering what do you have in office building and we've got about $195 million exposure there. Office warehouses, $219 million exposure would be the largest ones we have there. Multi-family we have about $100 million exposure. Someone may ask, someone so you say what's the energy component of that? The total energy component for commercial real estate in Houston would be about $78 million; owner occupied being around $61 million would be your estimate there and investor being around $16 million to $17 million.

Thank you; that's good color. Dick, best of luck in retirement. We'll miss you.

Thank you.

Emlen Harmon, Jefferies.

Good morning, guys. Phil, a 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 the 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 you potentially start to look at expenses or anything else? I would just be curious of what you think you could do from an operating perspective.

The Company's got great operating leverage. The biggest operating leverage in the Company is from two sources. One is interest rates being asset sensitive and the level of rates where we are today and beginning to see a little help there. Great operating leverage there. Also the operating leverage on the loan to deposit ratio. So those are the two things that we hope to be able to employ over the next year.

Somebody asked about loan growth for the year. We're expecting to see some decline in energy but we're 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, or the one increase that happened a few weeks ago. Our projections that you see in our disclosures in the 10-K and have seen for years have always been very conservative with regard to what interest rates would do on deposits in response to general market increases in rates. We continue to project on that basis. But I'll be honest, we haven't seen any increases in rates on the deposit side at this point. That doesn't mean we won't. We're not ready to declare victory, but if things behave there on those interest rates, even just the one rate increase we have, that will provide us some leverage just on that one increase.

So those are the two things. 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're doing today, we are being careful on expenses. We are providing for things that will move this Company forward, whether it's facilities-wise or technology-wise or value proposition-wise for our customers. We are going to continue to do that. We're not ready to give up on that.

We think that the environment is still good enough and the state is diversified enough that we can continue to manage the Company on that basis, and that's the way we're going to approach it right now.

Got it. And on the repurchase specifically, I think you guys used up that program that you had announced last quarter or the quarter before. Is that something that you'd revisit?

I would think so. I think it's good housekeeping to have a program in place at some point. We haven't announced one right now but it's something that's 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'll continue to look at that.

Thank you.

Ebrahim Poonawala, Merrill Lynch.

Good morning, guys. Just had a quick question going back to, Dick, your comments around -- appreciate the color around assuming $30 oil through 2020. And you spoke about the diversity in the Texas economy. I would appreciate if you can kind of tell us what you think the outlook for Houston, particularly in the rest of some of the energy exposed market 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 strip this morning, it's a $35.55 versus $28.13 2017 stress is at $31.88 versus $40.91. And it 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 we go to $28 and stay flat at $30, if I heard your question?

No. Got that. Yes.

Okay. The second thing, if I understood your question is, what does that do to Houston real estate. Is that correct what you asked?

Houston real estate and just the overall economy. I think there's a lot of debate right now if the last 15 years in Texas coincided with the commodity boom and would there be a prolonged underperformance for the next few years if we don't see meaningful improvement in oil prices from where it is today?

First of all, this state -- let's don't forget how diversified it is and the strength of it. Phil described that very well to you. I don't have a crystal ball but 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, will continue to stay in their zone. What I mean by that, I'm not talking about a zone in oil, 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.

I would just say there's no doubt if oil stays at $30 this year and $30 for next and $30 after that, you'd see some additional slowing. I think what I've seen from the Dallas Fed economic reports is that they are probably expecting for this year, 2016, a little over 1% job growth in Texas.

But if oil stayed at $30 flat for the whole year, it would probably be 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.

But on the other side, the sword always cuts both directions. As we know what it's done for the chemical industry, and that primarily is in Houston, 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 Houston 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 build are the positives to it. So let's don't just take the hammer and slam our foot on the negatives. 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.

Brett Rabatin, Piper Jaffray.

Good morning. Wanted just to go back -- I joined a few minutes late -- but wanted just to go back and make sure I understood the provision for the fourth quarter. I think you indicated $22 million was for energy and that you had 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 it 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 million. In that we have an industry provision of $22.181 million. That is the $15 million on production and $7 million for nonproduction loans.

In addition to that, the way the formula normally works, you've got environmental risk that has $3.795 million and excessive industry concentration of $2.847 million. So just within that you've 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 used 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 2014 -- in 2015 -- 14 basis points.

Historically -- this is what I think is ironic. We are sitting here talking about downturn and the sky falling. We had -- normally we run around 23, 25 basis points of charge-offs normally running the Company. Last year was 14 basis points among all this negativism. And we have, as I just described to you, put an extra $22 million in that reserve for the stress test at $28.13. The only reason we hit the 14 basis points was because we had less recoveries. And these recoveries when you charge off they've got if I remember and I haven't looked at the numbers in a number of years -- but they run about three years later. You charge something off and in round numbers you get about three years later. So yes, we've been running at low charge-offs and so we'd have lower recoveries.

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

Well, I'll let Jerry speak to the effective tax rate assumptions but what we've been doing is just maintaining the portfolio relative to proportion what we have had the last year, so we're continuing to buy. As we see growth in the overall balance sheet, we're sort of keeping our asset mix relatively consistent. So we're taking advantage of the muni market just like we've done in the past. But we're not doing it to the extent that we're offering the relative percentages that the portfolio has represented of the overall portfolio. So just continuing to press on like we have been.

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

Okay. Great. Thanks for all the color.

Stephen Moss, Evercore ISI.

Good morning. I was wondering -- I would start with -- I'm wondering what your line utilization is on the energy portfolio here?

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 on average it was around 59% last quarter.

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 that will advance back up, it's all tied to the energy reserves. So it doesn't work like that. We had oil and gas commitments of $3.121 billion and we had outstandings of $1.751 billion. And so do you understand the difference? I'm 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 was wondering if oil prices stay here around $30, by how much would you expect the borrowing base to decrease in the spring redetermination period?

You know, we've 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 a thin margin at those prices, which is what I referred to as a cash flow issue. That's really where you get into it and where you've 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've got to look at, already we've 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 are -- they've deferred any future ones. They are finishing what they started. This is the deep water, the oilsands such as mining or steam floods mostly in Canada. Those projects are really deferred. So that's where you feed back 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 the supply/demand would come and balance at the end of this year. I was wrong. And so was the EIA. Now their forecast says that it will be almost in balance in the fourth quarter of next year. Nobody knows. That's where you get into all this discussion about storage and about half of the storage is in the US. And so we kind of have the perfect storm right now in that wintertime is when the refineries are shut down for maintenance and they will start building up March, April and begin to make gasoline for the summer driving months.

So there's a lot of things that are changing to get this supply back in balance and of course we've talked about China forever and ever and so you are going to have a lot of big supply start to come off the shelves or already slow down and so we've got a lot of different things that are happening.

With the spring redeterminations, 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 will have banks that have lots of shared national credits; you will have banks that have a higher concentration of service and you get into service or closer to the drill bit versus fortunately for us away from the drill bit.

So all these variables, I know it's difficult when you just take price, but that's why I come down and we've 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 also 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. Thank you very much and, Dick, best wishes and good luck on your retirement.

Thank you.

(Operator Instructions). John Moran, Macquarie Capital.

Thanks for taking the question. Just a real quick follow up first on Houston CRE. When you were talking about the owner occupied and the term CRE, I think I wrote down $445 million on owner occupied and then term was $400 million. You are saying outstandings, or is that commitment?

I was talking about commitments. Now I should point out that I left out construction and land, which if you look at outstandings are about $164 million on construction and $70 million on land. So not including construction and land, our commitments were a little over $900 million, owner occupied $445 million, a little over $487 million if you include investor and major tenant properties.

Okay. And then it was $100 million in commitments on multi-fame, correct?

Yes.

All right. That's helpful.

Just to be clear, I estimated about two-thirds of that being outstanding, but that was without construction and land. If you add that all together, we're about -- I'd say we'll be around $890 million plus in outstandings as of the end of the year in Houston commercial real estate.

Let me just add to what Phil is saying, there are four projects in Houston 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 Exxon headquarters, or main facility in Houston. And it has 35% equity in it and is ran at $1.42 a square foot. So I feel comfortable. We have one other in the multi-family in Houston 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. The other follow-up that I had is I think it was Dick that said the two credits of the energy book that are the most challenged it's really around the quality of the reserve. I'm assuming that that means -- I'm going to read that as non-Permian. And I guess maybe could you, or do you guys disclose how much of the book is Permian based versus in other kind of plays, and I know not every non-Permian play is marginal, but if you have, how many of them are in secondary or tertiary kind of plays?

We have not disclosed that, but obviously the Permian is a big part of what we do. And let me tell you something, you can have a Permian on the edges that can be an old expensive operating unit and so you've got to be careful with general assumptions as far -- and I know that's a challenge to you because you've just got broad information, but when we look at the specifics, if you've got a high operating cost it is -- I already said to you for the best of companies, 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 just squeeze it all out.

And I was surprised, I saw a figure recently of how many Texas wells are the old. It's 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're not making much money. Cost you to cap the wells and close it out. So it's kind of hell if you do and hell if you don't kind of a scenario.

But we're fortunate to have two that fall into this category and they've been properly classified, properly reserved with. We are doing what we're supposed to do.

That's helpful, and useful as always. The last one that I had is just kind of a ticky-tacky modeling question. Open came in a little bit below where I was expecting. Anything kind of one-time-is or so in that number? And I know obviously 1Q has some seasonal factors in it that we have to account for on comp and benefits, but what might be a good run rate there?

What I would say is a couple of things that were in there is our advertising promotions marketing expenses were really quite a bit lower. It was really just seasonal. We actually just ended up just spending the money earlier in the year and not as much in the fourth quarter, so they were unusually low. And really incentives and bonuses in the fourth quarter were quite a bit lower than our normal run rate. So those two things are affecting the fourth-quarter run rate.

Okay. Thanks very much and Dick, I will add my congrats and well-wishes.

Thank you.

There are no further questions at this time. We'll 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 transcend leadership changes. We don't make leadership changes very often but when we do, they are well considered with a 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've done over your 45 years here at Frost, and especially the 19 years you've served as our CEO. And we'll treasure your last two months in that role and then look forward to the advisory role you will 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.