Good morning and welcome to the Cullen/Frost Q1 Earnings Results Call. My name is James, and I'll be facilitating the audio portion of today's interactive broadcast. All lines have been placed on mute to prevent any background noise. [Operator Instructions] At this time, I would like to turn the show over to Mr. Avi Mendes. Sir, the floor is yours.

Thanks, James. This morning's conference call will be led by Phil Green, Chairman and CEO; and Jerry Salinas, Group Executive Vice President and CFO. Before I turn the call over to Phil and Jerry, I would like 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 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 on our website or by calling the Investor Relations department at (210) 220-5234. At this time, I'll turn the call over to Phil.

Thanks Avi. Good morning everyone and thanks for joining us today. Today I'll review the first quarter results for Cullen/Frost; and our Chief Financial Officer, Jerry Salinas, will also provide additional comments before we open it up to your questions. In the first quarter, Cullen/Frost earned $47.2 million or $0.75 per share compared with earnings of $114.5 million, or $1.79 a share reported in the same quarter last year. In a very challenging environment, which our bank lobbies are closed, more than two thirds of our employees are working remotely. Our team continues to serve our customers at a very high level that Frost is known for and execute our strategy of pursuing consistent above average organic growth. In the first quarter, our return on average assets was 0.57% compared to 1.48% in the first quarter of last year. Average deposits in the first quarter were $27.4 billion, up from $26.1 billion in the first quarter of last year. And average loans in the first quarter were up 15 – were up to $15 billion from $14.2 billion in the first quarter of last year. Our credit loss expense was $175.2 million for the first quarter and that compared to $8.4 million in the fourth quarter of 2019 and $11 million in the first quarter of 2019. In addition to changes related to CECL, our credit loss expense was elevated in the first quarter as a result of COVID-19 related business closures and also challenges faced by our energy industry customers due to recent commodity price declines. Net charge-offs for the first quarter were $38.6 million compared with $12.7 million in the fourth quarter of 2019 and $6.8 million in the first quarter of last year. Annualized net charge-offs for the first quarter were 1.04% of average loans. Non-performing assets…

Thank you, Phil. Today I’m going to keep our usual about the Texas economy, given the level of economic uncertainty in the short term there wouldn’t be value in macro comments at this time. I will point out that it has been reported that it has been reported that businesses in Texas received more PPP loans that businesses in any other state, and we are proud to have been a leading participant in that program, as Phil in his remarks, making approximately $3 billion in loans over remarkably short period of time. We are now involved with the second tranche of that program, and we continue to assist our customers during this challenging time. Now I will turn to our financial performance in the first quarter. Looking at our net interest margin, our net interest margin percentage for the first quarter was 3.56%, down six basis points from the 3.62% reported last quarter. The decrease primarily the results are from lower loan yields – lower yields on loans and balances at the Fed as well as an increase in the proportion of balances at the Fed as a percentage of earning assets, partially offset by lower funding costs. The taxable equivalent loan yield for the first quarter was 4.65%, down 23 basis points from the fourth quarter, impacted by the lower rate environment with the March Fed rate cuts and decreases in LIBOR during the quarter. Looking at our investment portfolio, the total investment portfolio averaged $13 billion during the first quarter, down about $678 million from the fourth quarter average of $13.6 billion. The taxable equivalent yield on the investment portfolio was 3.46% in the first quarter, up nine basis points from the fourth quarter. Our municipal portfolio averaged about $8.5 billion during the first quarter, up about $109…

Thank you, Jerry. Okay, we'll open it up for questions now.

[Operator Instructions] Your first question comes from the line of Brady Gailey of KBW. Your line is open.

Hey thank you. Good morning guys.

Hey Brady.

Good morning.

So if you look at period end loan balances, you had some strong growth in the first quarter. Can you expand on what drove that and how you are looking about loan growth for the rest of the year, excluding the P?

Yes, let me see. Let me see. Let me give you some clarity now. Are you looking at period in or are you average numbers?

I was talking about period in loans which grew up…

Period loans.

Yes Brady, we did – from a linked quarter basis we did have a pretty significant growth. We grew 4% on period end, so about 16% annualized. A big portion of that growth if you annualized it was related to our C&I portfolio that was up almost 6.7% just actual growth and if you annual that almost 27%. And we did see some increases in commercial lines that were drawn on during the quarter, and especially during that time period leading up to March period end. We have seen some of that begin to subside the pace of those draws. And I'm going to say that was the bulk of the increase there. We actually had a decrease in energy between December and March they were down $84 million.

We also had some nice gains in the public finance area with some large deals. And one related to a port in the state, a very large it was related to a medical center, large medical center, HVAC. So both of those things were also positive.

All right. And then when you look at the SBA's PPP, you had $3 billion in round one, how much do you expect to do in round two and where is that fee coming? I think most banks are saying it's around 3%. Would that be a fair estimate for Frost?

It is our fee is running about that. I think it ended up maybe being a tad lower in the first round. But I think we’re seeing a little bit smaller balance in the second. And so I think it will make it solidly in the 3%. As far as volumes, a couple of things are happening. One is we are making sure that we get through the best we can, the applications that were not processed in the first round, so our backlog there was somewhere between 3,000 and 4,000 applications. I can't remember the exact number right now. And so we are working on those. As we look at the second round applications, which we may be at the point of processing those now, late last night, we may have started that. We're seeing a little bit lower volume we received about 2000 applications, as I recall this event at end of yesterday. With loan balances, as I said, being a little bit on the smaller side. So still good activity, but not the huge rush that was there at the beginning because I think a lot of larger customers more sophisticated customers have more visibility just in of their awareness of the program. So we saw a larger ratio than at the beginning. As far as where we're booking that that's going into interest income.

Okay, that's helpful. And then finally from me, you mentioned 57% of the energy production is hedged in this year, 32% next year. Are you going to say 30% are 100% of the total production, or those are the percentages of your energy customers that just have some level of hedging?

Yes, those are customers that have some level of hedging.

Okay, great. Thanks guys.

Thank you, Brady.

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

Okay, thanks. Good morning. May be a multi-part question a little bit. Can you just talk a little bit more about the increase in net charge offs in the quarter? But also layer in how much of that related to energy and certainly whether, how much of the energy reserve bill is related to specific reserves versus just sort of normal CECL reserves, if that makes sense.

Yes, well, first of all, the charge offs for the quarter, were heavily related to energy. There was, I would call, $38 million related to two credits, who are nonperforming. And we described those as we've been moving through the snake really for a couple of years now or even longer. They were written down to values, which at the time were based upon deals that were on the table in one case and in a bankruptcy in another which there has been an offer related to. Honestly, as we've seen COVID-19 pandemic impact and the reduction in volumes, in demand usage worldwide, I think, those values are certainly at risk. So that's really what that relates to. And it brought both of those two credits down to, I think, a combined amount of $28 million. And so we were close to getting out of the snake, but it didn't quite make it through in time for the pandemic.

Just to clarify there our total was $38.6 million for the quarter and $33.8 million of that with energy related, as Phil mentioned.

Thanks for your thoughts. 38 is the total.

And then in terms of specific energy reserve build versus more general CECL?

Yes, we didn't book any specific energy reserves.

That’s correct.

I'm going to let Jerry speak to the CECL aspect of it, which will include some overlays and Q factors.

Yes, sure. What we did was our team ended up using the Moody's baseline forecast that was adjusted around the middle of March that took West Texas intermediate down to $35 flat for three years. And that's an area, I think, it was called the F8 scenario. And then what happened was that Moody's continued to reduce that given what was going on in the global economy, if you will, between Russia and Saudi Arabia. And so we were and pandemic started coming in. And so we decided that what we would do is we would use really more overlay then adjust or update the usage of a different Moody's model, if you will. So our energy reserves that we created were primarily related to overlays rather than specific reserves. And we can kind of talk a little bit, if you'd like about the work that was done there. But that's how – that's what increased the reserves, was not so much specific, as much as more macro sort of overlay type stress tests that were done.

And if they update their models to be more reflective of the situation with energy in the pandemic, would you see maybe a reduction of overlays…

Exactly. That would be our expectation. And just to give you a little bit of insight and all this is in our 10-Q and we'll file this here this morning, but the stress testing that was done on that in energy portfolio assumed $9 per barrel during 2020. And then we did create a sort of – I guess, they call it an energy oversight council that became, that was created in towards the end of March. And they review the credit portfolio of all our major energy credits. And so that group was very involved with what was done. And so they took the decision to go ahead and run those stress tests, assuming $9 in 2020 and then increasing to $36 in 2021, $40 in 2022 and $45 thereafter. And that work that was done was what created the overlay. I think the overlay in the energy portfolio was included the Q factors in the overlays. It's like $88 million and as Phil said, the expectation for us is that during the next quarter if you will, when the CECL models rerun, we would expect we would use more updated model inputs. And our expectation currently is that a big portion of that overlay would be moved into more model type results. But we'll have to see what the models, that's kind of what happened during this first quarter.

It makes sense. And then just one follow-up. I think you said you brought your energy as a percentage of total loans from 11.2% down to 10.2% of total loans. Just kind of how did you bring it down so much in the quarter. And where do you envision this going over the next few quarters?

I think we had a little bit of anomaly in the previous quarter and gone from 10 point – basically 10% of total loans. I think it just came down to a more normalized level based upon activity. I don't think there was any one thing, we have been working to reduce the exposure of the energy portfolio and we'll continue to do so. We're going to get it below the 10% level. I'd like to see it move more towards the mid single-digits over time. But that takes time to do because you've got credit agreements in place that you've got to move through and we're not in charge of the timing on all that. We're still going to be in the business as we said. We want to be there with the best customers as we – in periods like this, we call them prune the hedge, and we want to continue to do that. So we're working hard to continue to rationalize our exposure down to more in line with some of the other significant components of a loan portfolio.

And of course, as Phil mentioned earlier, we did have almost $34 million in charge off…

Yes, we did.

They’re going to affect that percentage also.

It's true.

Understood. All right. Thank you very much.

Your next question comes from the line of Dave Rochester of Compass Point. Your line is open.

Hey, good morning guys.

Good morning.

Hey, on the energy book. Definitely appreciate all the color you gave there. And sorry if I missed this, but I was just wondering if you could give some background on how far along you are in the redetermination process and what you're seeing in terms of how much lines are declining for customers and what utilization is at this point?

Okay. We are about – I'd say about a third through the redetermination process that happens at this time of year. And what we've been seeing thus far is about 13% reduction in valuations.

So the actual lines to customers have only come in 13%.

Well, that's the reduction in the valuations. I don't know that – we've been working to reduce that over and above the redetermination process. As Jerry mentioned the energy council that we've put in place and we're talking with customers, making sure we understand what their operating plans are, what their expense reductions are, cash flow, et cetera. We've been pretty successful even before maturities are getting some line reduction. So I don't want to say it all relates to the redeterminations, but because it has been just working with customers as well. As far as the – we could look I guess on commitment levels and see what the differences there. But I don't have at hand right now what the reduction is in that but we can look while we're on the call.

And then how does that inform the reserve for the quarter? Do you sort of extrapolate results from that one-third onto the two-thirds remaining that you're still working on and then you set the reserve that way or are we going to see that incremental reserve flow into 2Q for the additional two-thirds you're working on now?

Remember some of what we did in this first stage of CECL and the overlay was really based on a stress test that had based on $9 oil for the year. And I think that – really at that point what they used, but they used the reserve level that, that before the redetermination.

Okay. Got it. And then for the two energy credits you talked about charging off, what was the severity on those?

In what way – what do you mean severity?

In terms of the book value, which you had the mark, what was the percentage, a charge that you ultimately took to resolve those?

Those – it's pretty big on those. I can cut somewhere around here the original amount, but the charts down, I would say it's at least three quarters on those…

Either some of the credits but they may feel they have said that, that are making their way through the snake.

Yes, they were put in place….

They had some pretty significant charge offs…

As a rule of thumb, say used to report, it's not our finest hour for sure.

Okay. And then just backing up to the total loan book level, could you just give that deferral amount again on the higher risk bucket that you mentioned that they combined a $1.36 billion, I think it was that you mentioned. And then what was the total deferral percentage for the entire loan book at this point?

Okay. Well, the deferrals for the higher risk bucket. And this is not including energy would have been – this was as of the end, let’s say, April 23, $227 million.

Okay.

Of the $1.361 billion outstanding and if you look at the deferrals for the entire company…

About $1.3 billion – about 8% of our loans.

8%, okay. And then maybe just one last one on the NIM. 2Q I know is when you'll get that full quarter impact of the rate cuts you talked about the trend there being down. I was just wondering if you could sort of bracket that in terms of rough range or estimate in terms of magnitude, what's you're expecting for 2Q? That'd be great.

I think the only color I can give there really is I don’t know think any of us really completely understand how the PPP loans will affect net margin, how quickly they'll be repaid. Some of our conversations internally we talk about potentially 75% of them maybe getting paid within say the first 10 weeks. But that's really just us trying to figure out how all this will work. I mean, we had some challenges obviously with some of the inputting into the system, there is no secret there. I know there's a lot of credit associated with that, so don't fully understand yet how all that's going to play out as we move forward. But that would be a big – assuming that it worked out that way, obviously you'd have a significant hit there from a positive standpoint.

Any way to just estimate, backing that out because – you're absolutely right, I mean, that's going to be some noise in 2Q and maybe even 3Q too depending on when these things are forgiven or whatever happens with those, but maybe just backing that impact out in any sense just from a magnitude perspective?

Yes, I would tell you that if you back them out again, I think that our net interest margin, we were at 3.56. I think that, full year we'll still be north of three is what our current projection is. But you're going to see some drag, especially between the first and the second. After that it still levels out a little bit, but you're going to see some significant reductions in the NIM. Again, we've not making any investment assumptions. Of course, there's nothing really to buy right now. We're really trying to make sure that we keep our liquidity as high as we can and we have not borrowed from the Federal Reserve under their liquidity program. And so yes, there's going to be obviously some pressure on that on the NIM, especially with LIBOR going down as much as it has to recently. It was kind of nice to have it at higher levels, but it's moving down pretty quickly now.

Yes. Okay, all right. Thanks guys. Appreciate it.

Thank you.

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

Thank you. Good morning.

Good morning.

Phil, you mentioned your $1.36 billion of loans in more vulnerable categories. Of those categories, what are the larger exposures within that $1.36 billion?

Let me just give you what the – segment them for you. If you look at a category for religion, public finance, outstandings at the end of the quarter were approximately $336 million. Restaurants total their outstanding is $275 million, hotels $239 million, aviation $196 million. If you look at the public finance area, looking at associations and organizations was $115 million, entertainment and sports was $114 million and retail businesses, not the investor real estate, but the retail businesses were about $86 million. So that's the breakdown in these categories.

Do you have SBA loans or?

We have some but not a lot of them, I mean our portfolio of SBA is – let’s say, I remember it right, it's a $150 million range. So are you talking about PPP loans, Jennifer or are you talking about traditional SBA loans?

No, regular.

Regular SBA, if you give me a minute, I might be able to pull that. I've seen that somewhere. It's not a big factor.

Okay, okay. And I assume the hotels are mainly limited service type properties.

Some are – our hotel exposure is committed. I gave you outstandings, committed was $314 million. We've got 28 projects. We've got eight of them in construction and the construction ones will be finished sometime this year, remains to be seen when they're going to open them. We've got average loan to value on that this property is 64%. So our owners are experienced, they've got a lot of equity in the projects. Good operators, a lot of Hilton and Marriott Flags. There no gateway cities, nothing related to cruise ships or theme parks or those kinds of things. For the projects, they've actually closed its $38 million in commitments. That's actually closing from operations just going dark on because they've seen – they've seen occupancy levels go down at six low levels. So actually, we feel really good about the portfolio. I think we're going to have some risk rate increases in our parlance, which means increasing risk but really don't feel at this point we see any loss in that portfolio. Good sponsors, many of which have good liquidity.

What does the restaurant do look like?

The restaurants, our commitments there. Sorry, I gave you outstandings before we analyze mainly on commitments. About $340 million commitments, $119 million of them have asked for deferrals at this point. Two thirds of that portfolio of committed dollars are associated with multiple format restaurants, multiple sites like franchisees with obviously less locations. I think the exposure there, Jennifer, probably relates to the small restaurant that maybe isn't as used to deal with the takeout format. I'd say maybe borrowers of less than $100,000. Where you don't have a lot of value in the collateral associated with it. It's not a big number. It's $6.4 million for small restaurants that are loans less than $100,000. Obviously, they add up a bit. I think right now, that's where we see the exposure. The hard thing about all this is that the numbers that we're working with really are from third quarter year end, we don't have audit reports for a lot of the companies. And even if you did, I mean, the numbers look good for everything. So what we're doing is we're just having to analyze where we are and use our experience just to estimate where these things going to show up. So when I tell you, in the restaurants, we think it's under $100,000 and that portfolio is $6.4 million. That's true. It’s our best guess of where we'll see it. But the fact is we just know about right now. We're still waiting to see the impacts.

Thanks so much. Good color.

You are welcome.

Your next question comes from the line of Jon Arfstrom of RBC Capital Markets. Your line is open.

Thanks. Good morning.

Hey, Jon. Good morning.

I had a different topic, but I just wanted to follow-up one on Jennifer's questions. It looks like you had some downgrades in terms of problem loans outside of energy. Just curious about that and maybe can you touch on maybe broadness in frequency of your loan grading process.

Yes. I think that we saw new problem loans. Some of the larger ones, public finance related. Organizations that – maybe in the arts or the education area, we saw some downgrades there. We think it would be fine, but we saw that. I'd say energy is the main area where we did see the did see the increases in what we call problem loans, which are risk grade 10 and higher. As far as the grading process, I mean our officers are responsible to have the grades and make sure they're accurate. We really want to avoid a double-down greens, and we measure that as we measure individual relationship manager performance. So they're responsible for keeping up with it. And I didn't really notice anything that gave me much pause in the nonenergy migration to the downgrades that we saw. I think may have somewhere around here. Jerry, do you have the nonenergy [indiscernible] numbers?

Yes, I have to look for. We give you a little bit time.

Yes, okay. So Jon, excuse me, we're having to pull that up.

If we can come back to that, just on PPP, curious why you think you were able to secure three times what you expected? And also wondering if you'd take a stab at how much of that three plus or $3 billion is maybe people that are new to frost, customers that are new to Frost?

Yes. Well, first of all, our position was that we would deal with cross customers so you didn't have to be a borrower, but you did need to be a commercial customer when it started out. And the reason for that wasn't – it was all based upon what was the fastest way to get money into the community. Because if we were dealing with noncustomers, we would have to go through the federal government's regulations on BSA, AML, now your customer and we really didn't have any slack. They didn't cut any slack for anyone that I'm aware of in that area. And so the fastest way to process the applications was to do it with people that we'd already gone through that process with. And that's the first thing as it relates to that. The second thing I'd say is regarding how we were able to do it as effectively as we did. It's just I have not said before, it's just terrific people and an outstanding culture that has a culture going above and beyond. We had over 500 volunteers. People that didn't do anything like this in the regular job and wanted to be a part of the process. And inputs applications at night from home or who's doing the stuff at home, but not just application inputting. I mean, the completion rate, accurate completion rate of the applications that comes in, I'd be surprised if it was 60%. And so a tremendous amount of work had to go onto contacting the customer getting information that might have been missing. Some cases, we had suspicion that they had filled it out long based upon how they've given the answers on the questionnaire. So we spent a lot of time talking to customers and getting those applications ready. And so being able to get 75% or so of the applications through, I think was just amazing because I guarantee you, we didn't get 75% completed ready – input-ready applications. And so there was a tremendous amount of working from home late hours around the clock. We've been doing this seven days a week. We took Easter Sunday off, and it's just been grit, just grid of our people. I really think that what I've seen and not just us, but others – other community banks and other banks. I mean, everyone's trying their best. But it's just – it's unprecedented. It's historic. And truly, really, it's heroic what we've seen. And so I'm just amazed that the success we've had.

Okay. Good. Thanks guys.

Jon, just one thing I was going to say we – I've got the information for you, but it's really broken down by risk rated by commercial loan class. And so I can go through all the numbers, but we're going to file our Q right after this, and it will be on Page 17 will be the current year by class and by risk rate of the current year and the next page on Page 18 will be the December information with the new CECL disclosures. We just don't have – I don't have a comparison here that I could dispute it to you one versus the other.

Okay. That helps. Thank you.

Your next question comes from the line of Steven Alexopoulos of JPMorgan. Your line is open.

Hey, good morning, everybody.

Hey Steve.

Good morning.

To start, just to follow-up on energy click. What were the problem loan balances at the end of the first quarter? It was $132 million last quarter. And then what specific deferrals that you provide to energy companies in the quarter?

Okay. Problems loans would have been at the end of the first quarter, $141.7 million and the previous as you said, they were $132.4 at the end of previous quarter. So a decline in risk rate 10s around that was about 40 and an increase in the risk rate 11 looks like about, say, 85 or so. So we had a little migration there. We talk as far as that, we talked about a credit for the last two quarters that was really dependent upon asset sales in order to make their business plan work, and we were fighting the issue that discount rates had gone so high with the absence of equity in the business and private equity moving out of market. You added that on top of that what's going on with this demand destruction, COVID-19. So you've got just discount rates being high also prices being low. So we saw some deterioration in that relationships. So that – I think that drove most of that, that I just described. So that's – I think those are the most – yes, on energy deferrals, we've not seen really a whole lot at all. We made a pretty de minimis amount of energy customers have asked for.

Okay. Okay. That’s helpful. And then – thank you. On the expense outlook being taken down for 2020, is that – or how much of that is related to the Houston expansion? Is that being slowed at all, can you give some color there?

Yes, the – it's not related to the Houston expansion is just – we're being careful on the people that we're hiring. We're reducing expenses. Really in all categories is just trying to be smart about it. As we do lose people and we see we're losing people from for various reasons. And we're just answering the question, do we need to replace that position? I think we're just – we're doing a good job there. We're continuing on with the Houston expansion. We've been investing in that for the last couple of years. I feel good about what's going on with regard to that. We were looking at. It seems like ancient history now, given everything is either PPP or COVID-19. But I'm really excited about the performance we've had in Houston. If you look at our new household goal and where we are versus it, we're 146% ahead of our new household goal. And by we – actually when I look at mostly to get to that one. It's taken care of it tends to take care of everything else. We're 260% of our loan goal for our Houston expansion at this point in time. Our deposits are 68% of our gold but it has been improving. For example, if you look over the last three months. We're at 108% of our goal for deposits. And that's really because of the commercial side. The consumer side is actually over the last three months, 240% of our goal. And so the commercial side takes longer to develop where you can move a relationship over, but it takes a while for that operating business to really end up in your numbers as they move and mature. So we're about 15% of our goal over the last three months in commercial,…

And how many branches have you opened at this point for Houston, and how many are left?

11.

11 remaining or 11 opening?

Remaining, no. We were opening 25. So we had 14 remaining.

14 remaining. Okay. Thanks so much for the color.

You’re welcome.

Your next question comes from the line of Matt Olney of Stephens. Your line is open.

Hey, good morning and thanks for taking my question. Most of my questions have been addressed. But Phil, you mentioned the bank's intention to reduce the energy exposure over time to the mid single-digit level. And it sounds like this could take a while, but can you talk more about the driver of that decision? Was it made at the board level? And does this speak to the risk profile of the asset class that isn't as favorable as it once was or does it speak more to the volatility of the stock price? Just trying to understand the driver of this decision. Thanks.

Yes. No, it wasn't made at the board level. I've been talking about this, keep in mind, when I first started talking about this we were at 16% going to 20 probably and so we stopped the growth, we made the decision to move it down. We said we wanted to be between 10% and 13%. I think we're – and obviously moving to down to 10. I’ve said in previous calls, I’d like to see a single-digit handle on that. And one of the things as you refer to I'm just sort of came up on the finance side, being a big believer in asset allocation, right? And you just take your business, I mean, you can pick the best stock in an industry segment that's not doing well and you're not going to do well, even if you pick the best stock. And so, I think our shareholders sign up for less volatility with company like ours. And if you looked at the correlation of our stock price to energy prices, we had the highest correlation of stock price to the price of oil, of any of our peers. And I just don't think that our shareholders sign up for that kind of volatility, I'm a big shareholder, I don't sign up for that kind of volatility, with a company like ours. And so, I think this makes sense that what we needed to be doing was not just the one long haul around energy, but just by doing that, the ground gain, what we’ve talked about for a long time now the core loan, so it was under $10 million, right. And we’re also making sure that we’re doing what our culture and our – what we say we do around underwriting, making sure that we're really…

Perfect. Thank you very much.

Your next question comes from the line of Ebrahim Poonawala of Bank of America Securities. Your line is open.

Good morning, guys.

Good morning.

Most of my questions have been asked and answered. Just a couple of follow-ups. And then Phil, you previously talked about obviously the organic expansion in Houston and your interest there. I guess, in the world where there is some market dislocation and some M&A opportunities come up. Can you talk to in terms of your interest level and like if there is something like a distressed situation, would you think about M&A in the current environment or are you still rather go back to the organic growth that you were doing pre this crisis?

Yes, Ebrahim. Ebrahim, I think that – still focused on the organic growth for all the reasons that we have in the past. A lot of that around brand, a lot of that around operational exposure. I think the pandemic introduces some other variables as well around credit, that type of things. But I mean, at the core, it's still that strategic decision that we've been able to create a brand that's shown, demonstrated its ability to grow organically and we just think it's the best deal for our shareholders who have let us build a company with a brand like that to be able to prosecute, even though it does take some operational burn in the build out period, but it's a winning long-term strategy and one that we really liked to see the benefits of go to the current shareholders that allowed us of build that brand as opposed to other companies that might dilute that. It continues to be our focus.

Understood. And then just one follow-up in terms of – you gave out a lot of numbers around the energy book. I think, I heard you say that you assumed $9 in oil prices for this year and $36 next year. Is it reasonable to take the $36 and assume that if oil prices are higher, like the power prices for next year above that mid-30s, your portfolio is well reserved for based on the stress analysis that you’ve performed.

Well. Did you say, you assume that – yes, next year it’s in the low-30, we’ll see some – we're believing we'll see some increase in demand. I think one thing that you're seeing also with the disruption of production in the U.S., one thing that we have to keep an eye on is are we going to see such a reduction in – over the next 12 to 24 months, that we see price movements up. So I think they tend to not be small move, just small changes in the swing volumes up or down tend to make fairly large price changes. So we're expecting to see some resumption of usage in burn, the current inventory and that’s why we have the 30 for next year.

[Indiscernible] assets we did, right.

Okay. Got it. Thank you.

Thank you.

Your next question comes from the line of Michael Rose of Raymond James. Your line is open.

Hey, thanks for taking my questions. Just two follow-ups. It looks like the total potential problem loans were up $71 million, it looks like about 9 or 10 of that was energy related. What made up the other component of it? And how much of it was in that higher risk category that you mentioned?

I believe that the largest increase – the biggest increase we saw there was the problem with the credit that I mentioned earlier and had mentioned over the last couple of quarters with this reliant on sales of property. And as I mentioned, when equity drew – drive up in the market and you saw discount rates increase, it made anybody needing to sell properties was under some stress and would be under stress and we saw that. And then we saw prices go down. So not only our discount rates will have the price, prices are low and so it really is hurt, what was the operating model that credit has. So – and that as I mentioned before that one is about a $50 million, it’s about $49 million exposure.

Okay, that's helpful. And then just one additional question on capital. You guys are really strong during the great financial crisis and actually continue to increase your dividend. Can you just give us some updated thoughts on the dividend and how you're thinking about buybacks at this point? Thanks,

Michael, I think at this point our focus would be around the dividend on the importance of that as opposed to buybacks. And if you're going to see us lean towards the dividend as opposed to buyback, I think we’re going to…

Yes, I think we’ve got $70 million left on a program that is authorized, I think it expires in July. We made the decision, we're not going to do any buybacks under that program.

Okay. And then [indiscernible] Okay, that’s it. And then no other thoughts on the dividend. I assume it's stable here.

Yes. We’ll have something on that. But it’s certainly a priority for us and something that we want to maintain in place.

Yes. I mean, we certainly – yes, it’s important to us. We saw – you saw in the press release we continued our $0.71 a share dividend this morning. So yes, I mean the dividends important to us are – we're focused on ensuring that we keep that and yes, we got good capital levels. So yes, very focused on the dividend and continuing to keep that there. That's our focus.

Great. Thanks for taking my questions.

Thank you.

There are no further questions at this time. You may continue.

Okay. Well, we thank everyone for your interest and with that, we’ll be adjourned. Thank you.

Ladies and gentlemen, this concludes today’s conference call. Thank you everyone for participating. You may now disconnect.