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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: June 30, 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 July 20, 2017 there were 64,229,805 shares of the registrant’s Common Stock, $.01 par value, outstanding.

Table of Contents

Cullen/Frost Bankers, Inc.
Quarterly Report on Form 10-Q
June 30, 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)
 
June 30,
2017
 
December 31,
2016
Assets:
 
 
 
Cash and due from banks
$
542,475

 
$
561,838

Interest-bearing deposits
3,040,148

 
3,560,865

Federal funds sold and resell agreements
123,692

 
18,742

Total cash and cash equivalents
3,706,315

 
4,141,445

Securities held to maturity, at amortized cost
1,596,262

 
2,250,460

Securities available for sale, at estimated fair value
10,783,737

 
10,203,277

Trading account securities
27,600

 
16,703

Loans, net of unearned discounts
12,512,338

 
11,975,392

Less: Allowance for loan losses
(149,558
)
 
(153,045
)
Net loans
12,362,780

 
11,822,347

Premises and equipment, net
520,253

 
525,821

Goodwill
654,952

 
654,952

Other intangible assets, net
5,880

 
6,776

Cash surrender value of life insurance policies
178,987

 
177,884

Accrued interest receivable and other assets
369,548

 
396,654

Total assets
$
30,206,314

 
$
30,196,319

 
 
 
 
Liabilities:
 
 
 
Deposits:
 
 
 
Non-interest-bearing demand deposits
$
10,707,365

 
$
10,513,369

Interest-bearing deposits
14,906,208

 
15,298,206

Total deposits
25,613,573

 
25,811,575

Federal funds purchased and repurchase agreements
924,867

 
976,992

Junior subordinated deferrable interest debentures, net of unamortized issuance costs
136,155

 
136,127

Subordinated notes, net of unamortized issuance costs
98,473

 
99,990

Accrued interest payable and other liabilities
209,317

 
169,107

Total liabilities
26,982,385

 
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 June 30, 2017 and December 31, 2016
144,486

 
144,486

Common stock, par value $0.01 per share; 210,000,000 shares authorized; 64,225,827 shares issued at June 30, 2017 and 63,632,464 shares issued at December 31, 2016
642

 
637

Additional paid-in capital
948,593

 
906,732

Retained earnings
2,078,898

 
1,985,569

Accumulated other comprehensive income, net of tax
51,310

 
(24,623
)
Treasury stock, at cost; none at June 30, 2017 and 158,243 shares at December 31, 2016
—

 
(10,273
)
Total shareholders’ equity
3,223,929

 
3,002,528

Total liabilities and shareholders’ equity
$
30,206,314

 
$
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 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Interest income:
 
 
 
 
 
 
 
Loans, including fees
$
131,073

 
$
113,349

 
$
253,673

 
$
225,935

Securities:
 
 
 
 
 
 
 
Taxable
23,527

 
25,531

 
48,829

 
51,505

Tax-exempt
55,435

 
50,910

 
112,382

 
101,243

Interest-bearing deposits
9,076

 
3,602

 
15,912

 
7,255

Federal funds sold and resell agreements
163

 
59

 
270

 
117

Total interest income
219,274

 
193,451

 
431,066

 
386,055

Interest expense:
 
 
 
 
 
 
 
Deposits
2,173

 
1,773

 
4,041

 
3,560

Federal funds purchased and repurchase agreements
187

 
52

 
326

 
108

Junior subordinated deferrable interest debentures
962

 
803

 
1,870

 
1,553

Other long-term borrowings
1,164

 
321

 
1,532

 
608

Total interest expense
4,486

 
2,949

 
7,769

 
5,829

Net interest income
214,788

 
190,502

 
423,297

 
380,226

Provision for loan losses
8,426

 
9,189

 
16,378

 
37,689

Net interest income after provision for loan losses
206,362

 
181,313

 
406,919

 
342,537

Non-interest income:
 
 
 
 
 
 
 
Trust and investment management fees
27,727

 
26,021

 
54,197

 
51,355

Service charges on deposit accounts
21,198

 
19,865

 
41,967

 
40,229

Insurance commissions and fees
9,728

 
9,360

 
23,549

 
24,783

Interchange and debit card transaction fees
5,692

 
5,381

 
11,266

 
10,403

Other charges, commissions and fees
9,898

 
10,069

 
19,490

 
19,122

Net gain (loss) on securities transactions
(50
)
 
—

 
(50
)
 
14,903

Other
6,887

 
7,321

 
14,361

 
13,365

Total non-interest income
81,080

 
78,017

 
164,780

 
174,160

Non-interest expense:
 
 
 
 
 
 
 
Salaries and wages
80,995

 
78,106

 
163,507

 
157,403

Employee benefits
18,198

 
17,712

 
39,823

 
38,017

Net occupancy
19,153

 
18,242

 
38,390

 
35,429

Furniture and equipment
18,250

 
17,978

 
36,240

 
35,495

Deposit insurance
5,570

 
4,197

 
10,485

 
7,854

Intangible amortization
438

 
619

 
896

 
1,283

Other
45,447

 
42,591

 
86,625

 
83,123

Total non-interest expense
188,051

 
179,445

 
375,966

 
358,604

Income before income taxes
99,391

 
79,885

 
195,733

 
158,093

Income taxes
13,838

 
8,378

 
25,239

 
17,770

Net income
85,553

 
71,507

 
170,494

 
140,323

Preferred stock dividends
2,015

 
2,015

 
4,031

 
4,031

Net income available to common shareholders
$
83,538

 
$
69,492

 
$
166,463

 
$
136,292

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
1.30

 
$
1.12

 
$
2.59

 
$
2.19

Diluted
1.29

 
1.11

 
2.57

 
2.19

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 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
85,553

 
$
71,507

 
$
170,494

 
$
140,323

Other comprehensive income (loss), before tax:
 
 
 
 
 
 
 
Securities available for sale and transferred securities:
 
 
 
 
 
 
 
Change in net unrealized gain/loss during the period
90,390

 
165,288

 
124,201

 
287,506

Change in net unrealized gain on securities transferred to held to maturity
(3,860
)
 
(9,185
)
 
(10,146
)
 
(17,351
)
Reclassification adjustment for net (gains) losses included in net income
50

 
—

 
50

 
(14,903
)
Total securities available for sale and transferred securities
86,580

 
156,103

 
114,105

 
255,252

Defined-benefit post-retirement benefit plans:
 
 
 
 
 
 
 
Change in the net actuarial gain/loss
—

 
(862
)
 
—

 
(862
)
Reclassification adjustment for net amortization of actuarial gain/loss included in net income as a component of net periodic cost (benefit)
1,358

 
1,740

 
2,715

 
3,293

Total defined-benefit post-retirement benefit plans
1,358

 
878

 
2,715

 
2,431

Other comprehensive income (loss), before tax
87,938

 
156,981

 
116,820

 
257,683

Deferred tax expense (benefit) related to other comprehensive income
30,778

 
54,943

 
40,887

 
90,189

Other comprehensive income (loss), net of tax
57,160

 
102,038

 
75,933

 
167,494

Comprehensive income (loss)
$
142,713

 
$
173,545

 
$
246,427

 
$
307,817

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)
 
Six Months Ended 
 June 30,
 
2017
 
2016
Total shareholders’ equity at beginning of period
$
3,002,528

 
$
2,890,343

Net income
170,494

 
140,323

Other comprehensive income (loss)
75,933

 
167,494

Stock option exercises/stock unit conversions (752,075 shares in 2017 and 67,075 shares in 2016)
44,149

 
3,586

Stock compensation expense recognized in earnings
6,291

 
5,477

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

Cash dividends – preferred stock (approximately $0.67 per share in both 2017 and in 2016)
(4,031
)
 
(4,031
)
Cash dividends – common stock ($1.11 per share in 2017 and $1.07 per share in 2016)
(71,393
)
 
(66,524
)
Total shareholders’ equity at end of period
$
3,223,929

 
$
3,136,668

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)
 
Six Months Ended 
 June 30,
 
2017
 
2016
Operating Activities:
 
 
 
Net income
$
170,494

 
$
140,323

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Provision for loan losses
16,378

 
37,689

Deferred tax expense (benefit)
(4,173
)
 
(9,633
)
Accretion of loan discounts
(7,403
)
 
(8,185
)
Securities premium amortization (discount accretion), net
43,652

 
38,806

Net (gain) loss on securities transactions
50

 
(14,903
)
Depreciation and amortization
24,055

 
23,823

Net (gain) loss on sale/write-down of assets/foreclosed assets
(1,383
)
 
(596
)
Stock-based compensation
6,291

 
5,477

Net tax benefit from stock-based compensation
5,579

 
65

Earnings on life insurance policies
(1,565
)
 
(1,745
)
Net change in:
 
 
 
Trading account securities
(7,120
)
 
177

Accrued interest receivable and other assets
(20,116
)
 
(26,795
)
Accrued interest payable and other liabilities
(36,277
)
 
(4,664
)
Net cash from operating activities
188,462

 
179,839

 
 
 
 
Investing Activities:
 
 
 
Securities held to maturity:
 
 
 
Purchases
—

 
—

Sales
—

 
135,610

Maturities, calls and principal repayments
634,874

 
164,687

Securities available for sale:
 
 
 
Purchases
(8,825,545
)
 
(1,514,263
)
Sales
8,247,439

 
1,060,196

Maturities, calls and principal repayments
164,182

 
165,883

Proceeds from sale of loans
—

 
30,470

Net change in loans
(549,408
)
 
(144,192
)
Benefits received on life insurance policies
462

 
591

Proceeds from sales of premises and equipment
1,550

 
1,516

Purchases of premises and equipment
(14,481
)
 
(23,459
)
Proceeds from sales of repossessed properties
345

 
297

Net cash from investing activities
(340,582
)
 
(122,664
)
 
 
 
 
Financing Activities:
 
 
 
Net change in deposits
(198,002
)
 
(56,144
)
Net change in short-term borrowings
(52,125
)
 
(160,362
)
Proceeds from issuance of subordinated notes
98,434

 
—

Principal payments on subordinated notes
(100,000
)
 
—

Proceeds from stock option exercises
44,149

 
3,586

Purchase of treasury stock
(42
)
 
—

Cash dividends paid on preferred stock
(4,031
)
 
(4,031
)
Cash dividends paid on common stock
(71,393
)
 
(66,524
)
Net cash from financing activities
(283,010
)
 
(283,475
)
 
 
 
 
Net change in cash and cash equivalents
(435,130
)
 
(226,300
)
Cash and equivalents at beginning of period
4,141,445

 
3,591,523

Cash and equivalents at end of period
$
3,706,315

 
$
3,365,223


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:
 
Six Months Ended 
 June 30,
 
2017
 
2016
Cash paid for interest
$
6,666

 
$
5,770

Cash paid for income taxes
22,801

 
25,979

Significant non-cash transactions:
 
 
 
Unsettled purchases of securities
80,586

 
306,564

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

 
422

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 and six months ended June 30, 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 reflects decreases in income tax expense of $28 thousand and $65 thousand for the three and six months ended June 30, 2016, respectively, and corresponding increases in net income of $28 thousand and $65 thousand for the three and six months ended June 30, 2016, respectively. The increase in net income during the six months ended June 30, 2016 resulted in a $0.01 increase in previously reported diluted 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.
 
June 30, 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
3,992

 
32

 
24

 
4,000

 
4,511

 
39

 
—

 
4,550

States and political subdivisions
1,590,920

 
37,288

 
2,891

 
1,625,317

 
1,994,710

 
16,821

 
6,335

 
2,005,196

Other
1,350

 
—

 
2

 
1,348

 
1,350

 
—

 
—

 
1,350

Total
$
1,596,262

 
$
37,320

 
$
2,917

 
$
1,630,665

 
$
2,250,460

 
$
18,622

 
$
6,335

 
$
2,262,747

Available for Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
4,203,901

 
$
27,541

 
$
7,188

 
$
4,224,254

 
$
4,003,692

 
$
24,984

 
$
8,945

 
$
4,019,731

Residential mortgage-backed securities
681,364

 
25,693

 
1,436

 
705,621

 
756,072

 
30,388

 
1,293

 
785,167

States and political subdivisions
5,734,600

 
122,028

 
45,286

 
5,811,342

 
5,403,918

 
50,101

 
98,134

 
5,355,885

Other
42,520

 
—

 
—

 
42,520

 
42,494

 
—

 
—

 
42,494

Total
$
10,662,385

 
$
175,262

 
$
53,910

 
$
10,783,737

 
$
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 June 30, 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 67.3% 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 $3.3 billion at June 30, 2017 and $3.9 billion at 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 June 30, 2017 totaled $17.6 million ($11.4 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 June 30, 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
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities
$
2,191

 
$
24

 
$
—

 
$
—

 
$
2,191

 
$
24

States and political subdivisions
20,127

 
83

 
118,937

 
2,808

 
139,064

 
2,891

Other
1,348

 
2

 
—

 
—

 
1,348

 
2

Total
$
23,666

 
$
109

 
$
118,937

 
$
2,808

 
$
142,603

 
$
2,917

Available for Sale
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
1,587,812

 
$
7,188

 
$
—

 
$
—

 
$
1,587,812

 
$
7,188

Residential mortgage-backed securities
67,596

 
1,204

 
5,866

 
232

 
73,462

 
1,436

States and political subdivisions
1,450,982

 
38,138

 
142,507

 
7,148

 
1,593,489

 
45,286

Total
$
3,106,390

 
$
46,530

 
$
148,373

 
$
7,380

 
$
3,254,763

 
$
53,910


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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 expect to receive full value for the securities. Furthermore, as of June 30, 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 June 30, 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 June 30, 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
$
329,237

 
$
334,156

 
$
57,171

 
$
57,528

Due after one year through five years
170,170

 
177,977

 
4,818,303

 
4,845,635

Due after five years through ten years
349,324

 
357,485

 
362,030

 
375,143

Due after ten years
743,539

 
757,047

 
4,700,997

 
4,757,290

Residential mortgage-backed securities
3,992

 
4,000

 
681,364

 
705,621

Equity securities
—

 
—

 
42,520

 
42,520

Total
$
1,596,262

 
$
1,630,665

 
$
10,662,385

 
$
10,783,737

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 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
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 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Proceeds from sales
$
8,247,439

 
$
—

 
$
8,247,439

 
$
1,060,196

Gross realized gains
—

 
—

 
—

 
11,133

Gross realized losses
(50
)
 
—

 
(50
)
 
—

Tax (expense) benefit of securities gains/losses
18

 
—

 
18

 
(3,897
)

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Premiums and Discounts. Premium amortization and discount accretion included in interest income on securities was as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Premium amortization
$
(24,119
)
 
$
(22,219
)
 
$
(48,147
)
 
$
(44,559
)
Discount accretion
2,105

 
3,138

 
4,495

 
5,753

Net (premium amortization) discount accretion
$
(22,014
)
 
$
(19,081
)
 
$
(43,652
)
 
$
(38,806
)
Trading Account Securities. Trading account securities, at estimated fair value, were as follows:
 
June 30,
2017
 
December 31,
2016
U.S. Treasury
$
17,726

 
$
16,594

States and political subdivisions
9,874

 
109

Total
$
27,600

 
$
16,703

Net gains and losses on trading account securities were as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Net gain on sales transactions
$
293

 
$
351

 
$
604

 
$
653

Net mark-to-market gains (losses)
(56
)
 
(2
)
 
(43
)
 
(1
)
Net gain (loss) on trading account securities
$
237

 
$
349

 
$
561

 
$
652

Note 3 - Loans
Loans were as follows:
 
June 30,
2017
 
Percentage
of Total
 
December 31,
2016
 
Percentage
of Total
Commercial and industrial
$
4,604,269

 
36.8
%
 
$
4,344,000

 
36.3
%
Energy:
 
 
 
 
 
 
 
Production
1,040,506

 
8.3

 
971,767

 
8.1

Service
183,543

 
1.5

 
221,213

 
1.8

Other
185,563

 
1.5

 
193,081

 
1.7

Total energy
1,409,612

 
11.3

 
1,386,061

 
11.6

Commercial real estate:
 
 
 
 
 
 
 
Commercial mortgages
3,620,885

 
28.9

 
3,481,157

 
29.1

Construction
1,050,837

 
8.4

 
1,043,261

 
8.7

Land
322,130

 
2.6

 
311,030

 
2.6

Total commercial real estate
4,993,852

 
39.9

 
4,835,448

 
40.4

Consumer real estate:
 
 
 
 
 
 
 
Home equity loans
355,744

 
2.8

 
345,130

 
2.9

Home equity lines of credit
283,344

 
2.3

 
264,862

 
2.2

Other
351,985

 
2.8

 
326,793

 
2.7

Total consumer real estate
991,073

 
7.9

 
936,785

 
7.8

Total real estate
5,984,925

 
47.8

 
5,772,233

 
48.2

Consumer and other
513,532

 
4.1

 
473,098

 
3.9

Total loans
$
12,512,338

 
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 June 30, 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 11.3% of total loans. Unfunded commitments to extend credit and standby letters of credit issued to customers in the energy industry totaled $1.1 billion and $42.9 million, respectively, as of June 30, 2017.

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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 June 30, 2017 or December 31, 2016.
Non-Accrual and Past Due Loans. Non-accrual loans, segregated by class of loans, were as follows:
 
June 30,
2017
 
December 31,
2016
Commercial and industrial
$
21,226

 
$
31,475

Energy
55,464

 
57,571

Commercial real estate:
 
 
 
Buildings, land and other
6,916

 
8,550

Construction
—

 
—

Consumer real estate
2,543

 
2,130

Consumer and other
264

 
425

Total
$
86,413

 
$
100,151

As of June 30, 2017, non-accrual loans reported in the table above included $11.4 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 $798 thousand and $1.6 million for the three and six months ended June 30, 2017, compared to $936 thousand and $1.8 million for three and six months ended June 30, 2016.
An age analysis of past due loans (including both accruing and non-accruing loans), segregated by class of loans, as of June 30, 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
$
24,320

 
$
26,149

 
$
50,469

 
$
4,553,800

 
$
4,604,269

 
$
10,768

Energy
5,991

 
6,430

 
12,421

 
1,397,191

 
1,409,612

 
2,902

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Buildings, land and other
21,157

 
4,166

 
25,323

 
3,917,692

 
3,943,015

 
944

Construction
—

 
—

 
—

 
1,050,837

 
1,050,837

 
—

Consumer real estate
4,693

 
2,022

 
6,715

 
984,358

 
991,073

 
739

Consumer and other
3,508

 
740

 
4,248

 
509,284

 
513,532

 
650

Total
$
59,669

 
$
39,507

 
$
99,176

 
$
12,413,162

 
$
12,512,338

 
$
16,003

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
June 30, 2017
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
27,709

 
$
14,777

 
$
4,040

 
$
18,817

 
$
1,780

Energy
59,771

 
36,162

 
19,215

 
55,377

 
350

Commercial real estate:
 
 
 
 
 
 

 
 
Buildings, land and other
9,729

 
5,478

 
—

 
5,478

 
—

Construction
—

 
—

 
—

 
—

 
—

Consumer real estate
1,203

 
1,203

 
—

 
1,203

 
—

Consumer and other
—

 
—

 
—

 
—

 
—

Total
$
98,412

 
$
57,620

 
$
23,255

 
$
80,875

 
$
2,130


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Unpaid Contractual
Principal
Balance
 
Recorded Investment
With No
Allowance
 
Recorded Investment
With
Allowance
 
Total
Recorded
Investment
 
Related
Allowance
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 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017

2016
Commercial and industrial
$
21,347

 
$
24,866

 
$
23,867

 
$
24,197

Energy
67,008

 
78,359

 
63,860

 
59,286

Commercial real estate:
 
 
 
 
 
 
 
Buildings, land and other
5,966

 
20,533

 
6,266

 
24,497

Construction
—

 
648

 
—

 
622

Consumer real estate
1,376

 
443

 
1,135

 
457

Consumer and other
12

 
27

 
18

 
18

Total
$
95,709

 
$
124,876

 
$
95,146

 
$
109,077

Troubled Debt Restructurings. Troubled debt restructurings during the six months ended June 30, 2017 and June 30, 2016 are set forth in the following table.
 
Six Months Ended 
 June 30, 2017
 
Six Months Ended 
 June 30, 2016
 
Balance at
Restructure
 
Balance at
Period-End
 
Balance at
Restructure
 
Balance at
Period-End
Commercial and industrial
$
784

 
$
643

 
$
510

 
$
505

Energy
12,959

 
12,458

 
62,546

 
20,795

Commercial real estate:
 
 
 
 
 
 
 
Buildings, land and other
—

 
—

 
1,456

 
1,456

Construction
—

 
—

 
243

 
224

 
$
13,743

 
$
13,101

 
$
64,755

 
$
22,980

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 June 30, 2017, there were no loans restructured during the last year that were in excess of 90 days past due. During the six months ended June 30, 2017, we recognized charge-offs totaling $10.0 million related to loans restructured during the third and fourth quarters of 2016. During the six months ended June 30, 2016, we recognized a charge-off of $9.5 million related to a loan restructured during the first quarter of 2016. The loan was subsequently sold with proceeds from the sale totaling $30.5 million.
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

13
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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.
 
June 30, 2017
 
December 31, 2016
 
Weighted
Average
Risk Grade
 
Loans
 
Weighted
Average
Risk Grade
 
Loans
Commercial and industrial:
 
 
 
 
 
 
 
Risk grades 1-8
6.00

 
$
4,146,261

 
6.01

 
$
3,989,722

Risk grade 9
9.00

 
222,108

 
9.00

 
106,988

Risk grade 10
10.00

 
78,696

 
10.00

 
115,420

Risk grade 11
11.00

 
135,978

 
11.00

 
100,245

Risk grade 12
12.00

 
19,446

 
12.00

 
25,939

Risk grade 13
13.00

 
1,780

 
13.00

 
5,686

Total
6.39

 
$
4,604,269

 
6.35

 
$
4,344,000

Energy
 
 
 
 
 
 
 
Risk grades 1-8
6.32

 
$
1,024,927

 
6.34

 
$
854,688

Risk grade 9
9.00

 
43,415

 
9.00

 
78,524

Risk grade 10
10.00

 
115,913

 
10.00

 
150,872

Risk grade 11
11.00

 
169,893

 
11.00

 
244,406

Risk grade 12
12.00

 
55,114

 
12.00

 
53,821

Risk grade 13
13.00

 
350

 
13.00

 
3,750

Total
7.49

 
$
1,409,612

 
7.95

 
$
1,386,061

Commercial real estate:
 
 

 
 
 
 
Buildings, land and other
 
 
 
 
 
 
 
Risk grades 1-8
6.69

 
$
3,590,525

 
6.67

 
$
3,463,064

Risk grade 9
9.00

 
123,492

 
9.00

 
109,110

Risk grade 10
10.00

 
148,718

 
10.00

 
145,067

Risk grade 11
11.00

 
73,364

 
11.00

 
66,396

Risk grade 12
12.00

 
6,916

 
12.00

 
8,550

Risk grade 13
13.00

 
—

 
13.00

 
—

Total
6.97

 
$
3,943,015

 
6.95

 
$
3,792,187

Construction
 
 
 
 
 
 
 
Risk grades 1-8
7.03

 
$
1,019,355

 
6.97

 
$
1,023,194

Risk grade 9
9.00

 
22,632

 
9.00

 
15,829

Risk grade 10
10.00

 
5,116

 
10.00

 
2,889

Risk grade 11
11.00

 
3,734

 
11.00

 
1,349

Risk grade 12
12.00

 
—

 
12.00

 
—

Risk grade 13
13.00

 
—

 
13.00

 
—

Total
7.10

 
$
1,050,837

 
7.01

 
$
1,043,261

Net (charge-offs)/recoveries, segregated by class of loans, were as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Commercial and industrial
$
(4,861
)
 
$
(3,966
)
 
$
(7,590
)
 
$
(5,098
)
Energy
(6,236
)
 
(16,747
)
 
(10,461
)
 
(17,758
)
Commercial real estate:
 
 
 
 
 
 
 
Buildings, land and other
460

 
481

 
502

 
542

Construction
3

 
2

 
6

 
9

Consumer real estate
111

 
74

 
207

 
173

Consumer and other
(1,401
)
 
(1,199
)
 
(2,529
)
 
(1,702
)
Total
$
(11,924
)
 
$
(21,355
)
 
$
(19,865
)
 
$
(23,834
)

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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 124.7 at May 31, 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 June 30, 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
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Historical valuation allowances
$
28,504

 
$
32,452

 
$
17,975

 
$
2,416

 
$
5,455

 
$
86,802

Specific valuation allowances
1,780

 
350

 
—

 
—

 
—

 
2,130

General valuation allowances
8,418

 
5,934

 
4,724

 
2,032

 
137

 
21,245

Macroeconomic valuation allowances
10,204

 
15,541

 
10,303

 
1,087

 
2,246

 
39,381

Total
$
48,906

 
$
54,277

 
$
33,002

 
$
5,535

 
$
7,838

 
$
149,558

Allocated to loans:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated
$
1,780

 
$
350

 
$
—

 
$
—

 
$
—

 
$
2,130

Collectively evaluated
47,126

 
53,927

 
33,002

 
5,535

 
7,838

 
147,428

Total
$
48,906

 
$
54,277

 
$
33,002

 
$
5,535

 
$
7,838

 
$
149,558

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 June 30, 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
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated
$
18,817

 
$
55,377

 
$
5,478

 
$
1,203

 
$
—