Welcome to the Fourth Quarter 2014 and Annual Results Conference Call. I would now like to turn today's call over to Mr. Greg Parker, Executive Vice President and Director of Investor Relations. Mr. Parker, you may begin.

Thank you, Shannon. 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 the Investor Relations Department 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 2015 fourth quarter and annual results for Cullen/Frost. Our new Cullen/Frost President, Phil Green, and new Chief Financial Officer, Jerry Salinas, then will provide additional comments before we open it up for your questions. The separate announcement today concerning Phil, Jerry, and other expanded executive team roles is available on your website if you have not already seen that. I'm pleased to report for 2014 that Cullen/Frost had record annual earnings with double-digit increase increases in loans, deposits and net interest margin. We also maintained our strong and positive credit quality, received respected third-party recognition as one of the nation's best banks, topped $28 billion in assets for the first time in the Company history. This strong and consistent results are a credit to all our dedicated employees and strong value proposition. During the fourth quarter 2014, our net income available to common shareholders was $70.7 million, a 16.7% increase. This was $1.11 per diluted common share compared to $0.99 for the fourth quarter of 2013. The Company reported 2014 annual net income available to common shareholders of $269.9 million, a 16.8% increase over 2013 earnings of $231.1 million. On a per-share basis, 2014 earnings were $4.29 per diluted common share compared to $3.80 reported in 2013. For the year, return on average assets and common equity were 1.05% and 10.51% respectively compared to 1.02% and 9.93% reported in 2013. Also in 2014, we completed our acquisition of WNB Bancshares to add the Permian Basin to strengthen our Texas franchise. WNB, like Frost, had a relationship culture with outstanding employees, so the integration process has gone even better than we expected. WNB loans of $671 million and deposits of $1.6 billion were included in…

Think you, Dick. With all the folks on energy prices and the challenges that might be presented because of it, it is easy to lose sight of that the fact that, not long ago, a lot of discussion centered around how we planned on recovering from the loss of $36 million a year in net interest income when the gain amortization from our prime interest-rate swap was completed. Well as scheduled, that income went away in the fourth quarter, beginning in November. Also, as we've outlined in the past, our plans have been to utilize excess liquidity built up in our balance sheet to invest in municipal securities with our investment strategy in order to continue to replace this income. In effect using actual liquidity reinvestment to replace notional maturity. Our investment division did a great job acquiring $717 million in municipal securities during the quarter which made up the Lion's share of the investments needed. Also during the quarter, we invested $1.4 billion in additional liquidity into US treasury securities about two-thirds of which were five-year maturities in a third and seven year maturities. These purchases were prompted by continued strong liquidity fueled by strong deposit growth and our view of value at that point of the yield curve in the current economic environment. They have proved to be advantageous to this point and we think they are likely to be as they roll down the yield curve over time. At the end of the day, after our investment activity, we continue to maintain strong liquidity, including about $3 billion at the Fed, and investment portfolio representing half munis and have treasuries and agencies in a balance sheet with overall asset sensitivity. Just a couple of comments that our balance sheet volumes. Our loan volume was solid for the…

Thank you, Phil. I am going to make a few additional comments about the quarter, and then I'll discuss our guidance for 2015 before turning it back over to Dick for questions. Summarizing the quarter compared to a year ago, we did see net interest income on a TE basis grow 15%. Provision for loan losses was down $1.5 million and it exceeded our net charge-offs by $1.2 million. Non-interest income grew 5.2% and if you take out the $1.2 million in securities gains that we recognized in the fourth quarter last year, non-interest income growth was over 6.8%. Non-interest expense growth was affected not only by our acquisition of Western National in the second quarter last year, but also by a $1.4 million increase in fraud losses, some of which was associated with high visibility breaches that have been reported in the media. We also saw an increase in sundry losses of $1.1 million during the quarter. In addition, we continue to focus on expanding our business as we saw an increase in advertising and marketing costs of $2.2 million. Our effective tax rate for the quarter was 17.6%, down from 19.1% recorded in last year's fourth quarter, and continues to be favorably impacted by our purchases of municipal securities. Net income grew a solid 16.7% compared to a year ago. As Phil mentioned, our net interest was up on a linked-quarter basis, as we were able to offset the loss of the deferred gain amortization with investment purchases. The loss of the income for net deferred gain did have an impact on our net interest margin for the quarter, which was 3.34%, down five basis points on a linked-quarter basis. That five basis point decrease is affected by some positive factors and some negative factors. On the negative…

Well, thank you, Jerry and Phil. We'll be happy to entertain your questions now.

[Operator Instructions] Your first question comes from the line of John Pancari of Evercore ISI. Your line is now open.

Good morning, guys.

Good morning, John.

Good morning, John.

Of course, I’m going to start on energy here. So did you say Phil that actually did that there was a shift in the loan loss reserve allocation this quarter from allocated to energy?

I was saying that – no I didn’t say that what I am saying is that the normal, what I am pleased about just the normal methodology allowed us to – for it to build on energy because of the and be unallocated. And what I said is a built up to about 10% of the total reserve rewards. And basically it doubled from about 5% to 10%.

Okay, I guess I was trying to understand, what would you say as a part of reserve right now, is the portion that is specifically allocated to energy?

We don’t because - you heard the discussion I went through on the specific loans. It would be very nominal. If any. This is all and the general. Are you with me?

Yes. Yes.

Because see after we’ve looked and talked to these customers, you heard me say there is no energy additions to the problem ones. So What you've got of the methodology and allowance working the way it would work. If you have an industry that starts to get week, it should pull more of the reserve. That's all that's happened. There are no specific problems that we've identified even though we have gone through in a detailed and stress the customer. Are we together?

Yes. Now we have seen other banks significantly increase the qualitative component of their reserves given the decline in oil prices and that’s what's getting out…

I don’t worry about other banks I'm telling you what we've done it and have other banks gone and talk to each of their customers in detail, saying their plans, and I am telling you the results of that.

Got it. Now regarding what you have stressed. You stressed 90% of the portfolio you indicated, is there – are you currently stressing the remaining 10% and how does that 10% differ than the initial 90% that you did?

Don't get into that. It doesn't make any difference, the 90% - my whole point is like an a stress test is to - the point you should have heard because it's a point I hear from the stress is because it says do we have any problems at those kinds prices. You may remember that for years I've been telling you that in addition to the base cases on energy that we've done and as a result of our experience in 80s of surviving, we added another component of sensitivity. And the 65% loan base and all those kinds of things we then took 75% sensitivity. The prices you heard me talk about of a stress test we just said let's see what the values are at the sensitivity of 75%. That's where you start with 37% and you don't go over 50%. And basically when you went down in commitments to $5 million commitments you get 90%. So the whole point that I'm trying to make is I think this is a very good analogy. This is just a stress test and I'll be honest with you I'm surprised it was as good as it was. Do you understand what I’m saying?

Yes. On the loan side, are you seeing any impact on energy loan demand or any change in borrower behavior I mean the pullback in oil prices?

Not yet. Not really, I would tell you that – things are going to slow. Particularly in the first 90 days to six months of this year. Because what's going to happen – I told that our service companies expect the revenues to be down 30% to 50%. That's a pretty good drop. And so what’s going to happen this people all that were running four rigs are going to two or one. You've seen the rig counts. They're coming off pretty fast. Quite frankly that's healthy. I am surprised that unlike the 1980s were people stayed in denial much longer. That is not happening today. I will tell you their cutting costs fast. And that is healthy to get the cost cut out of there. And so I think we're in a healthy process of where it's going.

Okay Rich, thank you.

Yes.

Your next question comes from the line of Brady Gailey of KBW. Your line is now open.

Hey, good morning guys.

Good morning.

Good morning.

So when you look at the low growth that you’ll had in the fourth quarter it looks like most of it was energy related. I think energy went from 14% loans to 16% of the loans. I hear your longer-term it's going to be a negative for energy lending, but it sure doesn't seem it was a negative in 4Q, was most of that growth driven by a heavier utilization of existing lines? Or new energy customers?

In fact, the growth is very little. I understand where you're getting your numbers because I'm the one that told we had a round number of around 15% and 16%. Be careful with that conclusion, because the facts are that energy did not grow except there was a greater usage of the lines under those commitments, which is to be expected as they started to come down to finish the drilling programs before they shut the breakdown that is in the normal. So to say that it's growth because they got a lot of new customers isn't correct.

Okay. Okay. Yes, yes we are and then when you look at the $1.8 billion that’s on the books at year end, was a lot of that snick balances and if so what percentage, I guess how of that book is snicks where Frost is not the lead?

The total should national credits were $470 million at the end of the year for energy and the big majority of those were not the lead.

Okay, and then lastly, with the bond purchases you put on in the quarter did that change the duration of the bond book much?

It changed some. The portfolio duration went from the end of the third quarters four years it went to 4.4%.

Okay, great. Thank you, guys.

You are welcome.

Your next question comes from the line of Steven Alexopoulos of JP Morgan. Your line is now open.

Hey, good morning everyone.

Good morning.

Good morning.

Dick, the outcome from the stress test that you discussed, the 7% exposure you referred to what exactly was that number? That's not a charge-off rate. Is that the percentage of loans that moved into non-accrual I just want to understand what that number was?

Okay, maybe this is just to test to see just a proxy of what you get. What that is - is that we just took those numbers. $37 oil in 2015 and below $50 up to 2018. So remember we’re talking about four years. Over that four year period of time at $37 and below $50 and with nothing else taken into consideration, yes, you would have an exposure of 7% of about $1 billion. But when you consider the other responsibility of the borrowers which is how we make our credit decision because we don’t just loan on the energy, we together? Let me give you an example. In those dollars of that potential exposure here is a customer that owes a $65 million. It had its stress test exposure as a part of the 7% of $ 7 million. That borrower has $50 million to $75 million in cash in the bank. You with me? You've got another one that part of that exposure the borrower has begun selling non-core assets to reduce the debt and has a guarantee of another part of his company. And so when you go through the total assets, that's a reason we loan to people and there are other things. You get that exposure down to 1%. That did I answer your question?

Yes. That example is very helpful. Maybe I could - it's interesting because you said you were in close contact with your customers and what we are hearing from pure banks, I know you will all hear about pure banks. But what we're hearing from pure banks is that have to wait until March and April till we get financial statements and they are just guessing with the impact would be, when you talk to your customers. Are they actually cut expenses and going to that contingency plan now? Or are they waiting to eventually see where oil prices stabilize?

No, it started in January and you are going to see this continue to be hard and fast. That's what I mean by people not being in denial. And that drop is going to be - is today happening as we talked and it started before and it'll be hard and fast. And that's good. You're going to get the weak players out of the market. They're going to go broke. You're going to get the cost down. You're going to adjust real quick to reality. There is a couple of things, let's not forget, it wasn’t many years ago that oil and gas was at $ 40, $45. And you know what, the people make a lot of money. And so this is going through the construction – just adjusting down. We’ve also got a lot of equipment out there that ought to be junked and it will be junked as these lower prices and the other thing I’ve talked about quarter-after-quarter is we couldn’t get any skilled labor. Let me tell you, this is good news because I tell you if you can do the job you are going to have a job, but those that were not that good are going to be out of work which is good. So this industry needed cleaning up. And last but not least, I can't tell you how many calls I get of funds and individuals wanting to buy some problem loans. I don’t have any problems to sell that’s a good news, but there is tremendous money and capital on the sideline waiting to take advantage of these.

Maybe to follow-up on that. All of these disclosures you are providing illustrate why Frost is so differentiated right and why you performed so well in other periods of price shocks. Now in your opinion, do you see that other banks have learned lessons from the past, do you just think the industry is better positioned today to deal with those price shock?

Let me tell you, I have spent 100% of my time worrying about Frost than I have been worrying about those others. I’m sorry, I can’t help you there.

Okay. Just a final one. Our any of the changes being made to credit risk management? Does it have anything to do with pressure on the energy portfolio at all?

Absolutely not. This started at the beginning of last year. I've been working and it is just a continuation of what this Company's done for over 100 years, to be sure that we continue to expand and grow responsibility, but it has nothing to do with this oil and gas.

Okay. That’s what I figured. Thanks for all the color.

Your next question comes from the line of Ken Zerbe of Morgan Stanley. Your line is now open.

Thank you. First question, just in terms of expenses, it looks like they ticked up a fair amount this quarter. I think I heard you mentioned something about $1.5 million or so fraud losses, but when you think about going aside from first quarter seasonality going into 2015, is 169 roughly a good rate or was there other unusual items in there that may bring it lower?

Zerbe this is Jerry. We don’t give a lot of granular guidance, but I could talk to little bit about what's happening with expenses and let you get a feel for it. We will have higher compliance costs in 2015 as we work towards meeting our agreement with a Federal Reserve in conjunction with their approval of Western. We're also seeing - we saw lower rates at the end of the year, which resulted in us using our lower discount rate on pension plan. And as a result, we actually had income in the plan this year and in we will be – and 2014will actually be recording expense in 2015. Last quarter, Phil also mentioned that we were opening and operations center here in San Antonio which is going to bring together quite a bit of our back-office staff and then you where just growing business its going to continue to grow our franchise in our value proposition and that's about all I could tell you about expenses going forward.

All right, that is still very helpful. And then just quick question on the differed cumulative gain on the swap. I'm assuming the most of that is one time. But what is the residual impact that we might see on margin in the first quarter.

I am not sure on the one-time. Let me just say what it was - it had been like $89 million a quarter in round numbers and $3.25 in the fourth quarter because we really had one month amortization. So there is one month of amortization more then you will see in the first quarter of 2015 so that would be residual impact I would say.

Yes, Brady we think that’s about four basis points just given one month to make it.

Service can, but okay understood take out the $3 million. Thank you.

Your next question comes from the line of Dave Rochester of Deutsche Bank. Your line is now open.

Hey, good morning guys.

Good morning Dave.

If you guys can give just to more detail on those Muni and [indiscernible] purchases. I've got the amounts but you have the rates in terms on those, and then if could just talk about your outlook on Muni purchases for the year going forward that you’ve got baked into your guidance that would be great.

On the seven years we bought as I mentioned is about a third of its $500 million for seven years yield on that 205 in December and then of the reminder which have been $900 million five year point the curve it had about 165 both which pretty good given the current market. Again we feel like well for us given our view what likely to happen yield curve and then don't forget as those things run down the yield curve rolled no the yield curve we expected to be advantages for us as well.

And then on the Muni side.

On the Muni side we bought the $717 million that we did in the quarter had an average tax equivalent yield 465. Average term of 23 years remember the way we buy these things they were all 10-year callable’s for virtually 10-year callable’s. They are high coupons, higher than the on the run coupon. So we got fairly high certainty of call for the…

Okay, and I appreciate the color on the energy portfolio and your credit process there. I was just wondering, you have any concerns about the Texas muni portfolio at this point, maybe if you just talked about your exposure there to certain regions of Texas. There might be hard hit by the drop in energy prices. I know you got some insurance and a good chunk of that. So just any additional color there would be great?

Okay, great. No we’re not worried about that at all. The 65% of our portfolio or as you said insured which is the Texas PSF, Permanent School Fund which is, it continues to have a better credit rating in U.S. treasuries literally, rest of it are, we’ve got from state of Texas exposure which we feel extremely good about the state of Texas. Only 2.5% roughly is outside of Texas and those are states that you know that have very conservative fiscal situations and our state up names. We really don’t buy I mean the thing I think you might be referring to is let's say our revenue bond and I don't know anything specific examples, we’ll see our revenue bond in for a hospital or something to take care and that they were counting on energy related that might be the kind of thing you are talking about, we don’t buy those kinds of things, we don’t buy revenue bonds first of all. And very specific example that maybe University of Texas, dormitories, Texas and in dormitories that kind of thing. So we are doing in that part of the market, there could be confusions in the smaller markets, but we are not there.

Great, thanks. Just one more on the loan pipeline regarding for 2015, how are you guys thinking about loan growth for the year, you had pointed to some slow incoming just to see any runoff at all in the energy portfolio this year is that baked into your guidance?

Yes, I mean there would be some runoff, although I’d tell you what’s amazing on the acquisition, the strong players are going to buy the weak players and we’ve already seen some activity in that regard. And so it's hard to call. I mean some of the production loans by their nature if it stays down low, the loans are going to just liquidate out. But there's a lot of other things happening. We've had just yesterday two customers see an advantage of the lower prices and acquired additional acreage. I've had - if you look at the dollars you’ll find that the strong players know that they can acquire or believe they'll have opportunities to acquire properties and they run cheaper then they can drill. So there’s two sides to this thing. And everybody’s talking about one price of oil. Hadn't talked about gas. It's not moving much and even with the cold winter there's a lot in storage. So, there are just a lot of moving parts.

I would say we don't have a significant dramatic drop-off in energy lending at this point baked into these numbers. There could be some pressure in what people decide to do as Dick says. But remember, our portfolio is very diversified. Our people are working extremely hard and some great markets to grow overall. So…

Sorry just back on that muted question. Are you anticipating anymore purchases there, do you feel like you pretty much offset the lost income from the swap amortization going away?

The stuff that you'll see from this point on - would be sort of normal course of business. This is as the company grows and we've had great growth in terms of deposits et cetera so they'll be some normal. But nothing like the kind of quarterly activity that we saw in the fourth quarter.

Perfect, all right, thanks guys. I appreciate it.

You’re welcome.

Your next question comes from the line of [indiscernible] of BOA. Your line is now open.

Good morning, guys.

Good morning.

Good morning.

I just have a first follow-up question in terms of if you can provide us what was the royalty fees type to the ONG business in the trust income this quarter?

Just overall we think that the oil and gas income and our wealth advisory business will be pretty much flat with last year. But I'm sure some of my cohorts have better.

For the quarter you're looking for the oil and gas fees?

Correct.

In our wealth advisors? That was $2.6 million in the quarter.

$2.6 million. Thanks for that. And I think just bigger picture Dick, thanks a lot for the color on your stress test, I guess as you think about where could we be going in terms of I mean I appreciate you guys being former conservative than the industry historically. But where could we be wrong in terms of why losses could be worse than we expect?

Well, we think, why losses could be worse for us is that what you are asking me?

That’s correct. Is there any room, when you look at sort of your full year 2015 EPS guidance what is the downside risk there? Is energy prices need to fall just absolutely much lower or what needs to happen for the risk to get worse.

Well there are so many factors on this side, but I've said over and over, tell them what we don’t know, you don’t know and nobody knows where the price is going to go to and how longs its going to stay there. Quite frankly I feel comfortable with the sensitivity test that we did that 75% of the deck that where we are. I also say and let me make it very clear all of us can be surprised that’s what a surprise is, it is something you do not know, but I feel number one we have communicated and our staff is very knowledgeable and we're staying very close to the industry of what's happening day-by-day. And at this point, I have shared with you everything that I know to-date and what understanding of risk that I see going forward and from that standpoint you know I’m very comfortable. Yes there can be a surprise and there can be a surprise to your analysis, but that's what a surprise is. It's something we don't know. I’ve been amazed; you can see projections that we will go to 30 in the first six months of this year and be over 100 by year end. I mean it's all over the board. The other thing that I think is really just two things. One, what the environmental going to do to this thing and of course I’m in Texas where we believe in letting free enterprise work. That doesn't seem to be a consensus nationally. This is no time to hit the industry again and at the end of the day when you really study in regard to the supply and demand and I’m not an expert in that but just looking at the U.S Energy Information Administration and you…

Thank.

Your next question comes from the line of Emlen Harmon of Jefferies. Your line is now open.

Good morning. At this point, how much higher do you let the liquidity builds just giving kind of where rates are I am obviously little bit way on capital there and obviously lower profitability just kind of be curious is what your higher thinking about that?

Well, when we think about it the liquidity is really a derivative of our relationship based strategy. I mean we don't have any wholesale funding really at all in the company, so all of our balance sheet side on the liability side is a result of relationship with somebody. So we don’t really have the option or desire to reduce it based upon slowing the inflow, because what we are really doing is building a long-term relationship. So what we are trying to do is utilize the markets to the extent that we can to make good loans the best we can in a quality way. We are going to the markets and extract value where we think is on the curve in various segments. And then we’ll let the liquidity built because we believe that there is tremendous value long-term with those relationships and we haven’t talked about in a while given the discussion of energy sector, but having a 46%, 47% loan the deposit ratio and get into normalized environment creates tremendous operating leverage for us and that's going to be where we’ll take advantage of these. So we made the, say pressure on margin if you will or some of the capital leverage that it creates, so waiting for the time when that value is realized.

Okay, thanks. And then just quickly on the loan yields how much of the decline where this quarter was a completion of the swap amortization versus actual kind of like core loan yields coming down a bit?

Let say about numbers call it two-thirds of it was from the swap and a third is nearly a factor that Jerry mentioned.

Got it. Okay, thank you.

Your next question comes from the line of Brett Rabatin from Sterne, Agee. Your line is now open

Hi, guys good morning. I wanted to ask a question on the guidance. I was just curious thinking about 2015. Does that make any assumptions for interest rates staying flat, going up? What's your underlying thought on interest rates in?

We do have it embedded in our assumptions, modest rate increases in the second half of the year.

They are really small, and for the second half. So…

Okay, and then just you know balances for deposits, obviously strong deposits was in 4Q was any of that sort of year end liquidity build or can you give us any color on you obviously continue to have strong deposit flows but was any of that a bit of noise in the fourth quarter?

I don’t think it was anything special we know, it tends to be seasonally – have going for us. And that’s what we saw, we’ve seen deposits tail off a little bit in the first quarter, again which is a seasonal factor. But nothing that I would say was anything large that we – move the needle.

Okay, and then just going back to think about maybe the margin in 2015, what it seem likely at the margin, might continue to have a little bit of pressure in the first half. But it sounds like you are saying it might, start to move back higher in the back half of the year. Would that be a fair assumption?

No, I think we typically wouldn’t give that kind of granularity on the move into March, and I think what we would typically say, as Jerry mentioned earlier there is some good things and some bad things that are always work there, you know that the bad things are that were maturing assets. So that we can replace in the current yield environment, that’s going to create some pressure. On the good side, these things were able to make loans and in some cases make investments like we did in the fourth quarter that’s going to be a positive. We tend to see – I would say that those things would tend to somewhat offset our view of the margin and when we talked on these calls, historically it’s been sort of more of a flat range. These things can offset each other and the ducks moving across the pond it looks like its pretty smooth, it’s like going on underneath it.

Okay and then one last clean up. WNB took quite longer than expected and I know your guys say you are aggressive, [indiscernible] any thoughts on the M&A environment as you see it in Texas today?

Nothing has changed from what you already know our positions is.

Okay. Good, thanks for the color.

Your next question comes from the line of Jennifer Demba of SunTrust Robinson Humphrey. Your line is open.

My question was just covered. Thank you very much.

Thank you Jen.

[Operator Instructions] your next question comes from the line of Jon Arfstrom of RBC Capital Markets. Your line is open.

Hey thanks. Good morning.

Hey Jon. Good morning.

I think everything has pretty much been covered here, but Dick, just one of them if you could talk about this. The management announcements that you made this morning, what changes at the bank and is there any messaging here in terms of your long-term plans?

The messaging is just what I said was, this isn’t unusual for a company that’s been around 146 years to spread responsibility, continue to develop people and that’s what we're doing that’s it.

And not going anywhere in the near-term.

I’m right here, working hard, I hope you heard me; I worked hard to understand all these energy stuff.

We heard you, I think the transcript is going to be in all caps, but we heard you.

You know I can explain stuff to people, but I can’t understand it from, so I think I was trying to work on my understanding.

All right thank you. End of Q&A

You have no further questions at this time. I will turn the call back over to you.

Thank you very much. We appreciate your support of our company. This concludes our fourth quarter and year-end 2014 conference call.