Document
Table of Contents

United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended: March 31, 2017
Or
¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                    to
Commission file number: 001-13221
Cullen/Frost Bankers, Inc.
(Exact name of registrant as specified in its charter)
Texas
74-1751768
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
100 W. Houston Street, San Antonio, Texas
78205
(Address of principal executive offices)
(Zip code)
(210) 220-4011
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý
As of April 21, 2017 there were 63,950,427 shares of the registrant’s Common Stock, $.01 par value, outstanding.

Table of Contents

Cullen/Frost Bankers, Inc.
Quarterly Report on Form 10-Q
March 31, 2017
Table of Contents
 
Page
Item 1.
 
 
 
 
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 

2
Table of Contents

Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Cullen/Frost Bankers, Inc.
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
 
March 31,
2017
 
December 31,
2016
Assets:
 
 
 
Cash and due from banks
$
509,506

 
$
561,838

Interest-bearing deposits
3,989,375

 
3,560,865

Federal funds sold and resell agreements
30,292

 
18,742

Total cash and cash equivalents
4,529,173

 
4,141,445

Securities held to maturity, at amortized cost
1,640,255

 
2,250,460

Securities available for sale, at estimated fair value
10,612,493

 
10,203,277

Trading account securities
17,094

 
16,703

Loans, net of unearned discounts
12,185,645

 
11,975,392

Less: Allowance for loan losses
(153,056
)
 
(153,045
)
Net loans
12,032,589

 
11,822,347

Premises and equipment, net
521,092

 
525,821

Goodwill
654,952

 
654,952

Other intangible assets, net
6,318

 
6,776

Cash surrender value of life insurance policies
178,206

 
177,884

Accrued interest receivable and other assets
332,533

 
396,654

Total assets
$
30,524,705

 
$
30,196,319

 
 
 
 
Liabilities:
 
 
 
Deposits:
 
 
 
Non-interest-bearing demand deposits
$
10,909,415

 
$
10,513,369

Interest-bearing deposits
15,232,749

 
15,298,206

Total deposits
26,142,164

 
25,811,575

Federal funds purchased and repurchase agreements
895,200

 
976,992

Junior subordinated deferrable interest debentures, net of unamortized issuance costs
136,141

 
136,127

Subordinated notes, net of unamortized issuance costs
98,446

 
99,990

Accrued interest payable and other liabilities
155,376

 
169,107

Total liabilities
27,427,327

 
27,193,791

 
 
 
 
Shareholders’ Equity:
 
 
 
Preferred stock, par value $0.01 per share; 10,000,000 shares authorized; 6,000,000 Series A shares ($25 liquidation preference) issued at March 31, 2017 and December 31, 2016
144,486

 
144,486

Common stock, par value $0.01 per share; 210,000,000 shares authorized; 63,915,806 shares issued at March 31, 2017 and 63,632,464 shares issued at December 31, 2016
640

 
637

Additional paid-in capital
926,005

 
906,732

Retained earnings
2,032,097

 
1,985,569

Accumulated other comprehensive income, net of tax
(5,850
)
 
(24,623
)
Treasury stock, at cost; none at March 31, 2017 and 158,243 shares at December 31, 2016
—

 
(10,273
)
Total shareholders’ equity
3,097,378

 
3,002,528

Total liabilities and shareholders’ equity
$
30,524,705

 
$
30,196,319

See Notes to Consolidated Financial Statements.


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Table of Contents

Cullen/Frost Bankers, Inc.
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
 
Three Months Ended 
 March 31,
 
2017
 
2016
Interest income:
 
 
 
Loans, including fees
$
122,600

 
$
112,586

Securities:
 
 
 
Taxable
25,302

 
25,974

Tax-exempt
56,947

 
50,333

Interest-bearing deposits
6,836

 
3,653

Federal funds sold and resell agreements
107

 
58

Total interest income
211,792

 
192,604

Interest expense:
 
 
 
Deposits
1,868

 
1,787

Federal funds purchased and repurchase agreements
139

 
56

Junior subordinated deferrable interest debentures
908

 
750

Other long-term borrowings
368

 
287

Total interest expense
3,283

 
2,880

Net interest income
208,509

 
189,724

Provision for loan losses
7,952

 
28,500

Net interest income after provision for loan losses
200,557

 
161,224

Non-interest income:
 
 
 
Trust and investment management fees
26,470

 
25,334

Service charges on deposit accounts
20,769

 
20,364

Insurance commissions and fees
13,821

 
15,423

Interchange and debit card transaction fees
5,574

 
5,022

Other charges, commissions and fees
9,592

 
9,053

Net gain (loss) on securities transactions
—

 
14,903

Other
7,474

 
6,044

Total non-interest income
83,700

 
96,143

Non-interest expense:
 
 
 
Salaries and wages
82,512

 
79,297

Employee benefits
21,625

 
20,305

Net occupancy
19,237

 
17,187

Furniture and equipment
17,990

 
17,517

Deposit insurance
4,915

 
3,657

Intangible amortization
458

 
664

Other
41,178

 
40,532

Total non-interest expense
187,915

 
179,159

Income before income taxes
96,342

 
78,208

Income taxes
11,401

 
9,392

Net income
84,941

 
68,816

Preferred stock dividends
2,016

 
2,016

Net income available to common shareholders
$
82,925

 
$
66,800

 
 
 
 
Earnings per common share:
 
 
 
Basic
$
1.29

 
$
1.07

Diluted
1.28

 
1.07

See Notes to Consolidated Financial Statements.

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Table of Contents

Cullen/Frost Bankers, Inc.
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
 
Three Months Ended 
 March 31,
 
2017
 
2016
Net income
$
84,941

 
$
68,816

Other comprehensive income (loss), before tax:
 
 
 
Securities available for sale and transferred securities:
 
 
 
Change in net unrealized gain/loss during the period
33,811

 
122,218

Change in net unrealized gain on securities transferred to held to maturity
(6,286
)
 
(8,166
)
Reclassification adjustment for net (gains) losses included in net income
—

 
(14,903
)
Total securities available for sale and transferred securities
27,525

 
99,149

Defined-benefit post-retirement benefit plans:
 
 
 
Reclassification adjustment for net amortization of actuarial gain/loss included in net income as a component of net periodic cost (benefit)
1,357

 
1,553

Total defined-benefit post-retirement benefit plans
1,357

 
1,553

Other comprehensive income (loss), before tax
28,882

 
100,702

Deferred tax expense (benefit) related to other comprehensive income
10,109

 
35,246

Other comprehensive income (loss), net of tax
18,773

 
65,456

Comprehensive income (loss)
$
103,714

 
$
134,272

See Notes to Consolidated Financial Statements.

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Table of Contents

Cullen/Frost Bankers, Inc.
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands, except per share amounts)
 
Three Months Ended 
 March 31,
 
2017
 
2016
Total shareholders’ equity at beginning of period
$
3,002,528

 
$
2,890,343

Net income
84,941

 
68,816

Other comprehensive income (loss)
18,773

 
65,456

Stock option exercises/stock unit conversions (442,054 shares in 2017 and 1,875 shares in 2016)
24,747

 
97

Stock compensation expense recognized in earnings
3,103

 
2,482

Purchase of treasury stock (469 shares in 2017)
(42
)
 
—

Cash dividends – preferred stock (approximately $0.34 per share in both 2017 and in 2016)
(2,016
)
 
(2,016
)
Cash dividends – common stock ($0.54 per share in 2017 and $0.53 per share in 2016)
(34,656
)
 
(32,938
)
Total shareholders’ equity at end of period
$
3,097,378

 
$
2,992,240

See Notes to Consolidated Financial Statements.


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Table of Contents

Cullen/Frost Bankers, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
 
Three Months Ended 
 March 31,
 
2017
 
2016
Operating Activities:
 
 
 
Net income
$
84,941

 
$
68,816

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Provision for loan losses
7,952

 
28,500

Deferred tax expense (benefit)
(4,301
)
 
(4,395
)
Accretion of loan discounts
(3,913
)
 
(3,727
)
Securities premium amortization (discount accretion), net
21,638

 
19,725

Net (gain) loss on securities transactions
—

 
(14,903
)
Depreciation and amortization
12,121

 
11,912

Net (gain) loss on sale/write-down of assets/foreclosed assets
(533
)
 
(632
)
Stock-based compensation
3,103

 
2,482

Net tax benefit from stock-based compensation
3,515

 
37

Earnings on life insurance policies
(783
)
 
(867
)
Net change in:
 
 
 
Trading account securities
(1,088
)
 
(444
)
Accrued interest receivable and other assets
55,705

 
29,418

Accrued interest payable and other liabilities
(48,702
)
 
(5,792
)
Net cash from operating activities
129,655

 
130,130

 
 
 
 
Investing Activities:
 
 
 
Securities held to maturity:
 
 
 
Purchases
—

 
—

Sales
—

 
135,610

Maturities, calls and principal repayments
599,457

 
149,507

Securities available for sale:
 
 
 
Purchases
(466,004
)
 
(813,955
)
Sales
—

 
1,060,196

Maturities, calls and principal repayments
107,586

 
91,993

Proceeds from sale of loans
—

 
—

Net change in loans
(214,281
)
 
(54,632
)
Benefits received on life insurance policies
461

 
—

Proceeds from sales of premises and equipment
1,544

 
1,513

Purchases of premises and equipment
(6,311
)
 
(7,366
)
Proceeds from sales of repossessed properties
345

 
57

Net cash from investing activities
22,797

 
562,923

 
 
 
 
Financing Activities:
 
 
 
Net change in deposits
330,589

 
(186,620
)
Net change in short-term borrowings
(81,792
)
 
(199,636
)
Proceeds from issuance of subordinated notes
98,446

 
—

Principal payments on subordinated notes
(100,000
)
 
—

Proceeds from stock option exercises
24,747

 
97

Purchase of treasury stock
(42
)
 
—

Cash dividends paid on preferred stock
(2,016
)
 
(2,016
)
Cash dividends paid on common stock
(34,656
)
 
(32,938
)
Net cash from financing activities
235,276

 
(421,113
)
 
 
 
 
Net change in cash and cash equivalents
387,728

 
271,940

Cash and equivalents at beginning of period
4,141,445

 
3,591,523

Cash and equivalents at end of period
$
4,529,173

 
$
3,863,463


See Notes to Consolidated Financial Statements.

7
Table of Contents

Notes to Consolidated Financial Statements
(Table amounts in thousands, except for share and per share amounts)
Note 1 - Significant Accounting Policies
Nature of Operations. Cullen/Frost Bankers, Inc. (“Cullen/Frost”) is a financial holding company and a bank holding company headquartered in San Antonio, Texas that provides, through its subsidiaries, a broad array of products and services throughout numerous Texas markets. The terms “Cullen/Frost,” “the Corporation,” “we,” “us” and “our” mean Cullen/Frost Bankers, Inc. and its subsidiaries, when appropriate. In addition to general commercial and consumer banking, other products and services offered include trust and investment management, insurance, brokerage, mutual funds, leasing, treasury management, capital markets advisory and item processing.
Basis of Presentation. The consolidated financial statements in this Quarterly Report on Form 10-Q include the accounts of Cullen/Frost and all other entities in which Cullen/Frost has a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and financial reporting policies we follow conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry.
The consolidated financial statements in this Quarterly Report on Form 10-Q have not been audited by an independent registered public accounting firm, but in the opinion of management, reflect all adjustments necessary for a fair presentation of our financial position and results of operations. All such adjustments were of a normal and recurring nature. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2016, included in our Annual Report on Form 10-K filed with the SEC on February 3, 2017 (the “2016 Form 10-K”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for loan losses and the fair values of financial instruments and the status of contingencies are particularly subject to change.
Cash Flow Reporting. Additional cash flow information was as follows:
 
Three Months Ended 
 March 31,
 
2017
 
2016
Cash paid for interest
$
3,257

 
$
2,794

Cash paid for income taxes
—

 
—

Significant non-cash transactions:
 
 
 
Unsettled purchases of securities
33,466

 
94,905

Loans foreclosed and transferred to other real estate owned and foreclosed assets
—

 
376

Accounting Changes, Reclassifications and Restatements. Certain items in prior financial statements have been reclassified to conform to the current presentation. As more fully described in our 2016 Form 10-K, during the third quarter of 2016, we elected to adopt the provisions of ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” in advance of the required application date of January 1, 2017. Our financial statements for the three months ended March 31, 2016 have been restated to reflect the adoption of ASU 2016-09 as of January 1, 2016. As a result, compared to previously reported amounts, our consolidated income statement as of March 31, 2016 reflects a $37 thousand decrease in income tax expense and a $37 thousand increase in net income which did not impact previously reported earnings per share.

8
Table of Contents

Note 2 - Securities
Securities. A summary of the amortized cost and estimated fair value of securities, excluding trading securities, is presented below.
 
March 31, 2017
 
December 31, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Held to Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
—

 
$
—

 
$
—

 
$
—

 
$
249,889

 
$
1,762

 
$
—

 
$
251,651

Residential mortgage-backed securities
4,313

 
30

 
—

 
4,343

 
4,511

 
39

 
—

 
4,550

States and political subdivisions
1,634,592

 
27,531

 
3,039

 
1,659,084

 
1,994,710

 
16,821

 
6,335

 
2,005,196

Other
1,350

 
—

 
4

 
1,346

 
1,350

 
—

 
—

 
1,350

Total
$
1,640,255

 
$
27,561

 
$
3,043

 
$
1,664,773

 
$
2,250,460

 
$
18,622

 
$
6,335

 
$
2,262,747

Available for Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
4,203,543

 
$
25,386

 
$
7,698

 
$
4,221,231

 
$
4,003,692

 
$
24,984

 
$
8,945

 
$
4,019,731

Residential mortgage-backed securities
711,040

 
27,305

 
1,426

 
736,919

 
756,072

 
30,388

 
1,293

 
785,167

States and political subdivisions
5,624,493

 
70,205

 
82,860

 
5,611,838

 
5,403,918

 
50,101

 
98,134

 
5,355,885

Other
42,505

 
—

 
—

 
42,505

 
42,494

 
—

 
—

 
42,494

Total
$
10,581,581

 
$
122,896

 
$
91,984

 
$
10,612,493

 
$
10,206,176

 
$
105,473

 
$
108,372

 
$
10,203,277

All mortgage-backed securities included in the above table were issued by U.S. government agencies and corporations. At March 31, 2017, approximately 98.1% of the securities in our municipal bond portfolio were issued by political subdivisions or agencies within the State of Texas, of which approximately 67.2% are either guaranteed by the Texas Permanent School Fund, which has a “triple A” insurer financial strength rating, or are secured by U.S. Treasury securities via defeasance of the debt by the issuers. Securities with limited marketability, such as stock in the Federal Reserve Bank and the Federal Home Loan Bank, are carried at cost and are reported as other available for sale securities in the table above. The carrying value of securities pledged to secure public funds, trust deposits, repurchase agreements and for other purposes, as required or permitted by law was $3.4 billion at March 31, 2017 and $3.9 billion and December 31, 2016.
During the fourth quarter of 2012, we reclassified certain securities from available for sale to held to maturity. The securities had an aggregate fair value of $2.3 billion with an aggregate net unrealized gain of $165.7 million ($107.7 million, net of tax) on the date of the transfer. The net unamortized, unrealized gain on the remaining transferred securities included in accumulated other comprehensive income in the accompanying balance sheet as of March 31, 2017 totaled $21.5 million ($14.0 million, net of tax). This amount will be amortized out of accumulated other comprehensive income over the remaining life of the underlying securities as an adjustment of the yield on those securities.
Unrealized Losses. As of March 31, 2017, securities with unrealized losses, segregated by length of impairment, were as follows:
 
Less than 12 Months
 
More than 12 Months
 
Total
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
Held to Maturity
 
 
 
 
 
 
 
 
 
 
 
States and political subdivisions
$
27,969

 
$
249

 
$
120,214

 
$
2,790

 
$
148,183

 
$
3,039

Other
1,346

 
4

 
—

 
—

 
1,346

 
4

Total
$
29,315

 
$
253

 
$
120,214

 
$
2,790

 
$
149,529

 
$
3,043

Available for Sale
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
1,621,498

 
$
7,698

 
$
—

 
$
—

 
$
1,621,498

 
$
7,698

Residential mortgage-backed securities
61,669

 
1,166

 
$
6,200

 
260

 
67,869

 
1,426

States and political subdivisions
2,182,114

 
82,860

 
—

 
—

 
2,182,114

 
82,860

Total
$
3,865,281

 
$
91,724

 
$
6,200

 
$
260

 
$
3,871,481

 
$
91,984


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Table of Contents

Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and our ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in cost.
Management has the ability and intent to hold the securities classified as held to maturity in the table above until they mature, at which time we will receive full value for the securities. Furthermore, as of March 31, 2017, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost. Any unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of March 31, 2017, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in our consolidated income statement.
Contractual Maturities. The amortized cost and estimated fair value of securities, excluding trading securities, at March 31, 2017 are presented below by contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Residential mortgage-backed securities and equity securities are shown separately since they are not due at a single maturity date.
 
Held to Maturity
 
Available for Sale
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Due in one year or less
$
327,143

 
$
335,353

 
$
50,830

 
$
51,606

Due after one year through five years
166,880

 
174,676

 
4,793,171

 
4,819,082

Due after five years through ten years
349,195

 
353,119

 
366,528

 
376,888

Due after ten years
792,724

 
797,282

 
4,617,507

 
4,585,493

Residential mortgage-backed securities
4,313

 
4,343

 
711,040

 
736,919

Equity securities
—

 
—

 
42,505

 
42,505

Total
$
1,640,255

 
$
1,664,773

 
$
10,581,581

 
$
10,612,493

Sales of Securities. As more fully discussed in our 2016 Form 10-K, during 2016, we sold certain securities issued by municipalities that, based upon our internal credit analysis, had experienced significant deterioration in creditworthiness. Some of the securities we sold were classified as held to maturity prior to their sale. Despite their classification as held to maturity, we believe the sale of these securities was merited and permissible under the applicable accounting guidelines because of the significant deterioration in the creditworthiness of the issuers.
Sales of securities held to maturity were as follows:
 
Three Months Ended 
 March 31,
 
2017
 
2016
Proceeds from sales
$
—

 
$
135,610

Amortized cost
—

 
131,840

Gross realized gains
—

 
3,770

Gross realized losses
—

 
—

Tax (expense) benefit of securities gains/losses
—

 
(1,319
)
Sales of securities available for sale were as follows:
 
Three Months Ended 
 March 31,
 
2017
 
2016
Proceeds from sales
$
—

 
$
1,060,196

Gross realized gains
—

 
11,133

Gross realized losses
—

 
—

Tax (expense) benefit of securities gains/losses
—

 
(3,897
)

10
Table of Contents

Premiums and Discounts. Premium amortization and discount accretion included in interest income on securities was as follows:
 
Three Months Ended 
 March 31,
 
2017
 
2016
Premium amortization
$
(24,028
)
 
$
(22,340
)
Discount accretion
2,390

 
2,615

Net (premium amortization) discount accretion
$
(21,638
)
 
$
(19,725
)
Trading Account Securities. Trading account securities, at estimated fair value, were as follows:
 
March 31,
2017
 
December 31,
2016
U.S. Treasury
$
17,094

 
$
16,594

States and political subdivisions
—

 
109

Total
$
17,094

 
$
16,703

Net gains and losses on trading account securities were as follows:
 
Three Months Ended 
 March 31,
 
2017
 
2016
Net gain on sales transactions
$
311

 
$
302

Net mark-to-market gains (losses)
13

 
1

Net gain (loss) on trading account securities
$
324

 
$
303

Note 3 - Loans
Loans were as follows:
 
March 31,
2017
 
Percentage
of Total
 
December 31,
2016
 
Percentage
of Total
Commercial and industrial
$
4,402,276

 
36.2
%
 
$
4,344,000

 
36.3
%
Energy:
 
 
 
 
 
 
 
Production
982,266

 
8.0

 
971,767

 
8.1

Service
204,797

 
1.7

 
221,213

 
1.8

Other
175,493

 
1.5

 
193,081

 
1.7

Total energy
1,362,556

 
11.2

 
1,386,061

 
11.6

Commercial real estate:
 
 
 
 
 
 
 
Commercial mortgages
3,602,100

 
29.6

 
3,481,157

 
29.1

Construction
1,063,894

 
8.7

 
1,043,261

 
8.7

Land
322,790

 
2.6

 
311,030

 
2.6

Total commercial real estate
4,988,784

 
40.9

 
4,835,448

 
40.4

Consumer real estate:
 
 
 
 
 
 
 
Home equity loans
346,632

 
2.8

 
345,130

 
2.9

Home equity lines of credit
269,813

 
2.2

 
264,862

 
2.2

Other
332,531

 
2.7

 
326,793

 
2.7

Total consumer real estate
948,976

 
7.7

 
936,785

 
7.8

Total real estate
5,937,760

 
48.6

 
5,772,233

 
48.2

Consumer and other
483,053

 
4.0

 
473,098

 
3.9

Total loans
$
12,185,645

 
100.0
%
 
$
11,975,392

 
100.0
%
Concentrations of Credit. Most of our lending activity occurs within the State of Texas, including the four largest metropolitan areas of Austin, Dallas/Ft. Worth, Houston and San Antonio, as well as other markets. The majority of our loan portfolio consists of commercial and industrial and commercial real estate loans. As of March 31, 2017, there were no concentrations of loans related to any single industry in excess of 10% of total loans other than energy loans, which totaled 11.2% of total loans. Unfunded commitments to extend credit and standby letters of credit issued to customers in the energy industry totaled $1.2 billion and $38.4 million, respectively, as of March 31, 2017.

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Table of Contents

Foreign Loans. We have U.S. dollar denominated loans and commitments to borrowers in Mexico. The outstanding balance of these loans and the unfunded amounts available under these commitments were not significant at March 31, 2017 or December 31, 2016.
Non-Accrual and Past Due Loans. Non-accrual loans, segregated by class of loans, were as follows:
 
March 31,
2017
 
December 31,
2016
Commercial and industrial
$
26,531

 
$
31,475

Energy
78,747

 
57,571

Commercial real estate:
 
 
 
Buildings, land and other
7,608

 
8,550

Construction
—

 
—

Consumer real estate
2,987

 
2,130

Consumer and other
303

 
425

Total
$
116,176

 
$
100,151

As of March 31, 2017, non-accrual loans reported in the table above included $11.2 million related to loans that were restructured as “troubled debt restructurings” during 2017. See the section captioned “Troubled Debt Restructurings” elsewhere in this note. Had non-accrual loans performed in accordance with their original contract terms, we would have recognized additional interest income, net of tax, of approximately $851 thousand for the three months ended March 31, 2017, compared to $844 thousand for three months ended March 31, 2016.
An age analysis of past due loans (including both accruing and non-accruing loans), segregated by class of loans, as of March 31, 2017 was as follows:
 
Loans
30-89 Days
Past Due
 
Loans
90 or More
Days
Past Due
 
Total
Past Due
Loans
 
Current
Loans
 
Total
Loans
 
Accruing
Loans 90 or
More Days
Past Due
Commercial and industrial
$
20,566

 
$
23,787

 
$
44,353

 
$
4,357,923

 
$
4,402,276

 
$
3,014

Energy
2,941

 
29,467

 
32,408

 
1,330,148

 
1,362,556

 
628

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Buildings, land and other
6,243

 
5,214

 
11,457

 
3,913,433

 
3,924,890

 
1,834

Construction
2,115

 
113

 
2,228

 
1,061,666

 
1,063,894

 
113

Consumer real estate
5,145

 
2,230

 
7,375

 
941,601

 
948,976

 
695

Consumer and other
4,598

 
668

 
5,266

 
477,787

 
483,053

 
530

Total
$
41,608

 
$
61,479

 
$
103,087

 
$
12,082,558

 
$
12,185,645

 
$
6,814


12
Table of Contents

Impaired Loans. Impaired loans are set forth in the following table. No interest income was recognized on impaired loans subsequent to their classification as impaired.
 
Unpaid Contractual
Principal
Balance
 
Recorded Investment
With No
Allowance
 
Recorded Investment
With
Allowance
 
Total
Recorded
Investment
 
Related
Allowance
March 31, 2017
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
35,005

 
$
18,113

 
$
5,763

 
$
23,876

 
$
2,751

Energy
84,912

 
53,313

 
25,326

 
78,639

 
850

Commercial real estate:
 
 
 
 
 
 

 
 
Buildings, land and other
11,635

 
6,453

 
—

 
6,453

 
—

Construction
—

 
—

 
—

 
—

 
—

Consumer real estate
1,881

 
1,548

 
—

 
1,548

 
—

Consumer and other
75

 
23

 
—

 
23

 
—

Total
$
133,508

 
$
79,450

 
$
31,089

 
$
110,539

 
$
3,601

December 31, 2016
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
40,288

 
$
19,862

 
$
9,047

 
$
28,909

 
$
5,436

Energy
60,522

 
27,759

 
29,804

 
57,563

 
3,750

Commercial real estate:

 

 

 

 

Buildings, land and other
11,369

 
6,866

 
—

 
6,866

 
—

Construction
—

 
—

 
—

 
—

 
—

Consumer real estate
977

 
655

 
—

 
655

 
—

Consumer and other
32

 
30

 
—

 
30

 
—

Total
$
113,188

 
$
55,172

 
$
38,851

 
$
94,023

 
$
9,186

The average recorded investment in impaired loans was as follows:
 
Three Months Ended 
 March 31,
 
2017

2016
Commercial and industrial
$
26,393

 
$
23,809

Energy
68,101

 
67,615

Commercial real estate:
 
 
 
Buildings, land and other
6,660

 
31,985

Construction
—

 
770

Consumer real estate
1,102

 
471

Consumer and other
27

 
—

Total
$
102,283

 
$
124,650

Troubled Debt Restructurings. Troubled debt restructurings during the three months ended March 31, 2017 and March 31, 2016 are set forth in the following table.
 
Three Months Ended 
 March 31, 2017
 
Three Months Ended 
 March 31, 2016
 
Balance at
Restructure
 
Balance at
Period-End
 
Balance at
Restructure
 
Balance at
Period-End
Commercial and industrial
$
—

 
$
—

 
$
19

 
$
17

Energy
11,262

 
11,212

 
62,546

 
61,095

Commercial real estate:
 
 
 
 
 
 
 
Construction
—

 
—

 
243

 
235

 
$
11,262

 
$
11,212

 
$
62,808

 
$
61,347

Loan modifications are typically related to extending amortization periods, converting loans to interest only for a limited period of time, deferral of interest payments, waiver of certain covenants, consolidating notes and/or reducing collateral or interest rates. The modifications during the reported periods did not significantly impact our determination of the allowance for loan losses. As of March 31, 2017, there was one loan restructured during the last year totaling $747 thousand that was in excess of 90 days past due. During the first quarter of 2017, we recognized a charge-off of $2.0 million related to a loan restructured during the third quarter of 2016.

13
Table of Contents

Credit Quality Indicators. As part of the on-going monitoring of the credit quality of our loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted-average risk grade of commercial loans, (ii) the level of classified commercial loans, (iii) the delinquency status of consumer loans (see details above), (iv) net charge-offs, (v) non-performing loans (see details above) and (vi) the general economic conditions in the State of Texas.
We utilize a risk grading matrix to assign a risk grade to each of our commercial loans. Loans are graded on a scale of 1 to 14. A description of the general characteristics of the 14 risk grades is set forth in our 2016 Form 10-K. In monitoring credit quality trends in the context of assessing the appropriate level of the allowance for loan losses, we monitor portfolio credit quality by the weighted-average risk grade of each class of commercial loan. Individual relationship managers review updated financial information for all pass grade loans to reassess the risk grade on at least an annual basis. When a loan has a risk grade of 9, it is still considered a pass grade loan; however, it is considered to be on management’s “watch list,” where a significant risk-modifying action is anticipated in the near term. When a loan has a risk grade of 10 or higher, a special assets officer monitors the loan on an on-going basis. The following tables present weighted-average risk grades for all commercial loans by class.
 
March 31, 2017
 
December 31, 2016
 
Weighted
Average
Risk Grade
 
Loans
 
Weighted
Average
Risk Grade
 
Loans
Commercial and industrial:
 
 
 
 
 
 
 
Risk grades 1-8
6.00

 
$
3,981,338

 
6.01

 
$
3,989,722

Risk grade 9
9.00

 
194,639

 
9.00

 
106,988

Risk grade 10
10.00

 
87,107

 
10.00

 
115,420

Risk grade 11
11.00

 
112,511

 
11.00

 
100,245

Risk grade 12
12.00

 
23,681

 
12.00

 
25,939

Risk grade 13
13.00

 
3,000

 
13.00

 
5,686

Total
6.38

 
$
4,402,276

 
6.35

 
$
4,344,000

Energy
 
 
 
 
 
 
 
Risk grades 1-8
6.33

 
$
876,206

 
6.34

 
$
854,688

Risk grade 9
9.00

 
55,136

 
9.00

 
78,524

Risk grade 10
10.00

 
152,360

 
10.00

 
150,872

Risk grade 11
11.00

 
199,479

 
11.00

 
244,406

Risk grade 12
12.00

 
78,525

 
12.00

 
53,821

Risk grade 13
13.00

 
850

 
13.00

 
3,750

Total
7.86

 
$
1,362,556

 
7.95

 
$
1,386,061

Commercial real estate:
 
 

 
 
 
 
Buildings, land and other
 
 
 
 
 
 
 
Risk grades 1-8
6.69

 
$
3,605,460

 
6.67

 
$
3,463,064

Risk grade 9
9.00

 
107,441

 
9.00

 
109,110

Risk grade 10
10.00

 
132,850

 
10.00

 
145,067

Risk grade 11
11.00

 
71,531

 
11.00

 
66,396

Risk grade 12
12.00

 
7,608

 
12.00

 
8,550

Risk grade 13
13.00

 
—

 
13.00

 
—

Total
6.96

 
$
3,924,890

 
6.95

 
$
3,792,187

Construction
 
 
 
 
 
 
 
Risk grades 1-8
7.06

 
$
1,037,166

 
6.97

 
$
1,023,194

Risk grade 9
9.00

 
21,193

 
9.00

 
15,829

Risk grade 10
10.00

 
446

 
10.00

 
2,889

Risk grade 11
11.00

 
5,089

 
11.00

 
1,349

Risk grade 12
12.00

 
—

 
12.00

 
—

Risk grade 13
13.00

 
—

 
13.00

 
—

Total
7.12

 
$
1,063,894

 
7.01

 
$
1,043,261


14
Table of Contents

Net (charge-offs)/recoveries, segregated by class of loans, were as follows:
 
Three Months Ended 
 March 31,
 
2017
 
2016
Commercial and industrial
$
(2,729
)
 
$
(1,132
)
Energy
(4,225
)
 
(1,011
)
Commercial real estate:
 
 
 
Buildings, land and other
42

 
61

Construction
3

 
7

Consumer real estate
96

 
99

Consumer and other
(1,128
)
 
(503
)
Total
$
(7,941
)
 
$
(2,479
)
In assessing the general economic conditions in the State of Texas, management monitors and tracks the Texas Leading Index (“TLI”), which is produced by the Federal Reserve Bank of Dallas. The TLI, the components of which are more fully described in our 2016 Form 10-K, totaled 123.4 at February 28, 2017 (most recent date available) and 123.1 at December 31, 2016. A higher TLI value implies more favorable economic conditions.
Allowance for Loan Losses. The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of inherent losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. Our allowance for loan loss methodology, which is more fully described in our 2016 Form 10-K, follows the accounting guidance set forth in U.S. generally accepted accounting principles and the Interagency Policy Statement on the Allowance for Loan and Lease Losses, which was jointly issued by U.S. bank regulatory agencies. The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss and recovery experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off.
The following table presents details of the allowance for loan losses allocated to each portfolio segment as of March 31, 2017 and December 31, 2016 and detailed on the basis of the impairment evaluation methodology we used:
 
Commercial
and
Industrial
 
Energy
 
Commercial
Real Estate
 
Consumer
Real Estate
 
Consumer
and Other
 
Total
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Historical valuation allowances
$
26,216

 
$
38,666

 
$
17,932

 
$
2,329

 
$
5,297

 
$
90,440

Specific valuation allowances
2,751

 
850

 
—

 
—

 
—

 
3,601

General valuation allowances
8,072

 
5,255

 
6,333

 
1,939

 
19

 
21,618

Macroeconomic valuation allowances
8,544

 
17,022

 
9,744

 
555

 
1,532

 
37,397

Total
$
45,583

 
$
61,793

 
$
34,009

 
$
4,823

 
$
6,848

 
$
153,056

Allocated to loans:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated
$
2,751

 
$
850

 
$
—

 
$
—

 
$
—

 
$
3,601

Collectively evaluated
42,832

 
60,943

 
34,009

 
4,823

 
6,848

 
149,455

Total
$
45,583

 
$
61,793

 
$
34,009

 
$
4,823

 
$
6,848

 
$
153,056

December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Historical valuation allowances
$
33,251

 
$
34,626

 
$
16,976

 
$
2,225

 
$
4,585

 
$
91,663

Specific valuation allowances
5,436

 
3,750

 
—

 
—

 
—

 
9,186

General valuation allowances
6,708

 
3,769

 
5,004

 
1,506

 
(144
)
 
16,843

Macroeconomic valuation allowances
7,520

 
18,508

 
8,233

 
507

 
585

 
35,353

Total
$
52,915

 
$
60,653

 
$
30,213

 
$
4,238

 
$
5,026

 
$
153,045

Allocated to loans:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated
$
5,436

 
$
3,750

 
$
—

 
$
—

 
$
—

 
$
9,186

Collectively evaluated
47,479

 
56,903

 
30,213

 
4,238

 
5,026

 
143,859

Total
$
52,915

 
$
60,653

 
$
30,213

 
$
4,238

 
$
5,026

 
$
153,045


15
Table of Contents

Our recorded investment in loans as of March 31, 2017 and December 31, 2016 related to each balance in the allowance for loan losses by portfolio segment and detailed on the basis of the impairment methodology we used was as follows:
 
Commercial
and
Industrial
 
Energy
 
Commercial
Real Estate
 
Consumer
Real Estate
 
Consumer
and Other
 
Total
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated
$
23,876

 
$
78,639

 
$
6,453

 
$
1,548

 
$
23

 
$
110,539

Collectively evaluated
4,378,400

 
1,283,917

 
4,982,331

 
947,428

 
483,030

 
12,075,106

Total
$
4,402,276

 
$
1,362,556

 
$
4,988,784

 
$
948,976

 
$
483,053

 
$
12,185,645

December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated
$
28,909

 
$
57,563

 
$
6,866

 
$
655

 
$
30

 
$
94,023

Collectively evaluated
4,315,091

 
1,328,498

 
4,828,582

 
936,130

 
473,068

 
11,881,369

Total
$
4,344,000

 
$
1,386,061

 
$
4,835,448

 
$
936,785

 
$
473,098

 
$
11,975,392

The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2017 and 2016. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
 
Commercial
and
Industrial
 
Energy
 
Commercial
Real Estate
 
Consumer
Real Estate
 
Consumer
and Other
 
Total
Three months ended:
 
 
 
 
 
 
 
 
 
 
 
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
52,915

 
$
60,653

 
$
30,213

 
$
4,238

 
$
5,026

 
$
153,045

Provision for loan losses
(4,603
)
 
5,365

 
3,751

 
489

 
2,950

 
7,952

Charge-offs
(3,527
)
 
(4,278
)
 
—

 
(11
)
 
(3,548
)
 
(11,364
)
Recoveries
798

 
53

 
45

 
107

 
2,420

 
3,423

Net charge-offs
(2,729
)
 
(4,225
)
 
45

 
96

 
(1,128
)
 
(7,941
)
Ending balance
$
45,583

 
$
61,793

 
$
34,009

 
$
4,823

 
$
6,848

 
$
153,056

March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
42,993

 
$
54,696

 
$
24,313

 
$
4,659

 
$
9,198

 
$
135,859

Provision for loan losses
3,223

 
31,288

 
(794
)
 
(972
)
 
(4,245
)
 
28,500

Charge-offs
(1,861
)
 
(1,011
)
 
(28
)
 
(154
)
 
(2,724
)
 
(5,778
)
Recoveries
729

 
—

 
96

 
253

 
2,221

 
3,299

Net charge-offs
(1,132
)
 
(1,011
)
 
68

 
99

 
(503
)
 
(2,479
)
Ending balance
$
45,084

 
$
84,973

 
$
23,587

 
$
3,786

 
$
4,450

 
$
161,880

Note 4 - Goodwill and Other Intangible Assets
Goodwill and other intangible assets are presented in the table below.
 
March 31,
2017
 
December 31,
2016
Goodwill
$
654,952

 
$
654,952

Other intangible assets:
 
 
 
Core deposits
$
4,960

 
$
5,298

Customer relationships
1,296

 
1,410

Non-compete agreements
62

 
68

 
$
6,318

 
$
6,776


16
Table of Contents

The estimated aggregate future amortization expense for intangible assets remaining as of March 31, 2017 is as follows:
Remainder of 2017
$
1,245

2018
1,424

2019
1,167

2020
918

2021
697

Thereafter
867

 
$
6,318

Note 5 - Deposits
Deposits were as follows:
 
March 31,
2017
 
Percentage
of Total
 
December 31,
2016
 
Percentage
of Total
Non-interest-bearing demand deposits:
 
 
 
 
 
Commercial and individual
$
10,220,181

 
39.1
%
 
$
9,670,989

 
37.5
%
Correspondent banks
264,543

 
1.0

 
280,751

 
1.1

Public funds
424,691

 
1.6

 
561,629

 
2.2

Total non-interest-bearing demand deposits
10,909,415

 
41.7

 
10,513,369

 
40.8

Interest-bearing deposits:
 
 
 
 
 
 
 
Private accounts:
 
 
 
 
 
 
 
Savings and interest checking
6,545,178

 
25.0

 
6,436,065

 
24.9

Money market accounts
7,489,565

 
28.7

 
7,486,431

 
29.0

Time accounts of $100,000 or more
446,809

 
1.7

 
460,028

 
1.8

Time accounts under $100,000
332,543

 
1.3

 
338,714

 
1.3

Total private accounts
14,814,095

 
56.7

 
14,721,238

 
57.0

Public funds:
 
 
 
 
 
 
 
Savings and interest checking
302,202

 
1.1