Cullen Frost 4Q15 Earnings Call Notes

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Cullen/Frost Bankers’ (CFR) CEO Richard Evans on Q4 2015 Results

Breakdown of the energy portfolio

“Outstanding energy loans as of December 31 totaled $1.76 billion or approximately 15.3% of total loans. Our energy loan segments at the end of 2015, production $1.25 billion or 71% of our energy loans, $106 million as our problems; services $273 million or 15.5% of the energy portfolio, we recognized $46 million as a problem; manufacturing, $65.6 million or 3.7% of our energy loans, we considered $19.8 million of that as a problem. The remaining 10% of the portfolio consist of mid-stream, refining, traders and private client or wealthy individuals. We have zero identified problems with these loans.'”

We know our borrowers

“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 credits are 10% of the energy portfolio

“Problem energy credits at the end of the fourth quarter of 2015 totaled $172 million and represents 9.79% of our total energy portfolio compared to September 30, problem energy credits of $125 million or 6.98% of total energy loans.”

We stay true to our principles and disciplines in all market cycles

“We’re focused on the basics, which have been a hallmark of our company since it was founded. Our credit quality is healthy because we stay true to our principles and lending disciplines and all market cycles.”

IN the 80s we got to about 10% non performings, but the lessons we learned from the 80s have kept us rational today

“I remember that if you got over 10% of non-performing that we knocked on the door of it, but banks that went under were over 10% and I am going by memory here, I can’t check the numbers right here, but it is very different. I would tell you that as I have looked at the lessons learned and I think the lessons learned, let me state it plainly. The lessons we learned in the 80s have kept this portfolio in very rational and management levels. What if I learned that I didn’t know this time? The two credits that we have the biggest challenges were primarily related to the quality of the reserves and the operations of those.”

Quality of reserves makes a big difference

“a lot of it when you think about this business is the quality of the reserves. The reason I say the quality of the reserves when you have got a loan on a property that is expensive to operate and of lower quality it can’t work at these levels. Already when I talked about cash flow, this cash flow squeeze is getting the best of it, when the tide goes out all the boats are lowered.”

I think you’ll see more sales over the next six months

“I think you will continue to see and we’ll see a lot more sales and different companies over the next six months have some challenges, but it’s going to relate to over leverage and quality of the reserves.”

Not all energy loans are created equal

“I know it’s difficult for the analyst community because it’s hard to get into specific analysis of different banks, you have banks that have lots of shared national credits, you have banks that have a higher concentration of service, and you get into service of the closure to the drill bait versus fortunately for us away from the drill bait. So all these variables, I know it’s difficult when you just take price but that’s why I come down and we have done the very specific analysis by customer and why we feel very comfortable with where we sit today.”

Dick Evans last call

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

Phillip Green

This is not what we experienced during the 80s

“In summary, what we say is that this is not what we experienced during the 1980s…this time the situation is totally different…the 1980s real-estate was seriously impacted by the tax reform act in 1986, and the actions up and subsequent implosion of the savings and loan industry.”

The rest of the state has not disappeared

“We point all these out not to ignore that the, that an important industry within the state is undergoing a serious downturn, but merely to point out that the rest of the state has not disappeared into the Gulf of Mexico.”

Everybody related to the oil business is getting hurt

“I would tell you that the thing we need to know is that everybody that’s related to the oil business is getting hurt. Even OPAC is what there’s 11 companies. They are hurt and there is lots of economic damage. If you look at what they did from 2015 at an average price of $49.49 versus 2014 at $96.29, they’ve had an economic damage of $400 billion and the decreased revenues. Can they withstand it? Yes.”

Jerry Salinas