Cullen Frost 1Q15 Earnings Call Notes

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Solid ROA, ROE

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.”

Consistent loan demand despite energy prices

“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 of last year.’

No surprises or material issues with energy customers

“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 them again in March and early April, and there were no surprises or material issues.”

Increased allowance

“We continue to have good ongoing communications with these customers. We have increased our allowance for loan losses slightly to deal with the economic uncertainty 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.”

Industry has adjusted very quickly

“After observing May contracts of crude oil future prices, report 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.”

Mixed economic year in 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.”

There’s a lot of liquidity in Texas from wealth generated in recent years

“Finally, there is 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. ”

Construction is very strong in Texas

“construction is very strong. There is just a lot going on in Texas. It is, if you look at office, offices are still, the statistic show that there is opportunity. Occupancy rates are under the line where you would see a need. So I don’t think there is overbuild. 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 is a lot happening.”

The hedges are still helping. You’ll see more adjustment in the summer and fall

the hedges are still are an important factor. And I think you’re going to see the real — you’re going to see a lot more this summer, but certainly in the fall you will continue to see how you go through this adjustment period. That’s when we’ll know at the end.”

New production costs have fallen much lower

“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 cost — I always think of cost of about $8 million cost of 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. And 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.”

I don’t really like this response to the question of whether reserves will continue to increase

“Well, first of all, anybody that can predict the future and know everything is going to happen is going to be wrong. Remember what I have said, the provision was increased because of the formula, and it relates to classifications and all the other stuff. So it’s just consistent with that.”