Edgar Filing: CULLEN/FROST BANKERS, INC.

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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: September 30, 2017

¨ 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 October 19, 2017 there were 63,164,491 shares of the registrant’s Common Stock, $.01 par value, outstanding.

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Cullen/Frost Bankers, Inc.

Quarterly Report on Form 10-Q

September 30, 2017

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		Page
Part I - Financial Information
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets	3
	Consolidated Statements of Income	4
	Consolidated Statements of Comprehensive Income	5
	Consolidated Statements of Changes in Shareholders’ Equity	6
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57
Item 4.	Controls and Procedures	58

Part II - Other Information
Item 1.	Legal Proceedings	59
Item 1A.	Risk Factors	59
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 3.	Defaults Upon Senior Securities	59
Item 4.	Mine Safety Disclosures	59
Item 5.	Other Information	59
Item 6.	Exhibits	59

Signatures		60

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Part I. Financial Information

Item 1. Financial Statements (Unaudited)

Cullen/Frost Bankers, Inc.

Consolidated Balance Sheets

(Dollars in thousands, except per share amounts)



	September 30, 2017			December 31, 2016
Assets:
Cash and due from banks	$	503,961		$	561,838
Interest-bearing deposits	4,538,300			3,560,865
Federal funds sold and resell agreements	49,642			18,742
Total cash and cash equivalents	5,091,903			4,141,445
Securities held to maturity, at amortized cost	1,442,222			2,250,460
Securities available for sale, at estimated fair value	10,185,100			10,203,277
Trading account securities	19,721			16,703
Loans, net of unearned discounts	12,706,304			11,975,392
Less: Allowance for loan losses	(154,303		)	(153,045		)
Net loans	12,552,001			11,822,347
Premises and equipment, net	520,639			525,821
Goodwill	654,952			654,952
Other intangible assets, net	5,475			6,776
Cash surrender value of life insurance policies	179,789			177,884
Accrued interest receivable and other assets	338,170			396,654
Total assets	$	30,989,972		$	30,196,319

Liabilities:
Deposits:
Non-interest-bearing demand deposits	$	11,174,251		$	10,513,369
Interest-bearing deposits	15,229,018			15,298,206
Total deposits	26,403,269			25,811,575
Federal funds purchased and repurchase agreements	997,919			976,992
Junior subordinated deferrable interest debentures, net of unamortized issuance costs	136,170			136,127
Subordinated notes, net of unamortized issuance costs	98,512			99,990
Accrued interest payable and other liabilities	165,059			169,107
Total liabilities	27,800,929			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 September 30, 2017 and December 31, 2016	144,486			144,486
Common stock, par value $0.01 per share; 210,000,000 shares authorized; 64,236,306 shares issued at September 30, 2017 and 63,632,464 shares issued at December 31, 2016	642			637
Additional paid-in capital	951,893			906,732
Retained earnings	2,133,259			1,985,569
Accumulated other comprehensive income, net of tax	57,675			(24,623		)
Treasury stock, at cost; 1,122,721 shares at September 30, 2017 and 158,243 shares at December 31, 2016	(98,912		)	(10,273		)
Total shareholders’ equity	3,189,043			3,002,528
Total liabilities and shareholders’ equity	$	30,989,972		$	30,196,319

See Notes to Consolidated Financial Statements.

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Cullen/Frost Bankers, Inc.

Consolidated Statements of Income

(Dollars in thousands, except per share amounts)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Interest income:
Loans, including fees	$	138,400		$	114,368		$	392,073		$	340,303
Securities:
Taxable	23,203			25,897			72,032			77,402
Tax-exempt	54,939			53,065			167,321			154,308
Interest-bearing deposits	10,800			4,111			26,712			11,366
Federal funds sold and resell agreements	244			48			514			165
Total interest income	227,586			197,489			658,652			583,544
Interest expense:
Deposits	5,668			1,749			9,709			5,309
Federal funds purchased and repurchase agreements	523			44			849			152
Junior subordinated deferrable interest debentures	1,020			839			2,890			2,392
Other long-term borrowings	1,164			350			2,696			958
Total interest expense	8,375			2,982			16,144			8,811
Net interest income	219,211			194,507			642,508			574,733
Provision for loan losses	10,980			5,045			27,358			42,734
Net interest income after provision for loan losses	208,231			189,462			615,150			531,999
Non-interest income:
Trust and investment management fees	27,493			26,451			81,690			77,806
Service charges on deposit accounts	20,967			20,540			62,934			60,769
Insurance commissions and fees	10,892			11,029			34,441			35,812
Interchange and debit card transaction fees	5,884			5,435			17,150			15,838
Other charges, commissions and fees	10,493			10,703			29,983			29,825
Net gain (loss) on securities transactions	(4,867		)	(37		)	(4,917		)	14,866
Other	10,753			7,993			25,114			21,358
Total non-interest income	81,615			82,114			246,395			256,274
Non-interest expense:
Salaries and wages	84,388			79,411			247,895			236,814
Employee benefits	17,730			17,844			57,553			55,861
Net occupancy	19,391			18,202			57,781			53,631
Furniture and equipment	18,743			17,979			54,983			53,474
Deposit insurance	4,862			4,558			15,347			12,412
Intangible amortization	405			586			1,301			1,869
Other	41,304			41,925			127,929			125,048
Total non-interest expense	186,823			180,505			562,789			539,109
Income before income taxes	103,023			91,071			298,756			249,164
Income taxes	9,892			10,852			35,131			28,622
Net income	93,131			80,219			263,625			220,542
Preferred stock dividends	2,016			2,016			6,047			6,047
Net income available to common shareholders	$	91,115		$	78,203		$	257,578		$	214,495

Earnings per common share:
Basic	$	1.43		$	1.24		$	4.02		$	3.44
Diluted	1.41			1.24			3.98			3.42

See Notes to Consolidated Financial Statements.

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Cullen/Frost Bankers, Inc.

Consolidated Statements of Comprehensive Income

(Dollars in thousands)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Net income	$	93,131		$	80,219		$	263,625		$	220,542
Other comprehensive income (loss), before tax:
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period	7,082			(95,641		)	131,283			191,865
Change in net unrealized gain on securities transferred to held to maturity	(3,514		)	(7,278		)	(13,660		)	(24,629		)
Reclassification adjustment for net (gains) losses included in net income	4,867			37			4,917			(14,866		)
Total securities available for sale and transferred securities	8,435			(102,882		)	122,540			152,370
Defined-benefit post-retirement benefit plans:
Change in the net actuarial gain/loss	—			—			—			(862		)
Reclassification adjustment for net amortization of actuarial gain/loss included in net income as a component of net periodic cost (benefit)	1,357			1,585			4,072			4,878
Total defined-benefit post-retirement benefit plans	1,357			1,585			4,072			4,016
Other comprehensive income (loss), before tax	9,792			(101,297		)	126,612			156,386
Deferred tax expense (benefit) related to other comprehensive income	3,427			(35,453		)	44,314			54,736
Other comprehensive income (loss), net of tax	6,365			(65,844		)	82,298			101,650
Comprehensive income (loss)	$	99,496		$	14,375		$	345,923		$	322,192

See Notes to Consolidated Financial Statements.

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Cullen/Frost Bankers, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

(Dollars in thousands, except per share amounts)



	Nine Months Ended September 30,
	2017			2016
Total shareholders’ equity at beginning of period	$	3,002,528		$	2,890,343
Net income	263,625			220,542
Other comprehensive income (loss)	82,298			101,650
Stock option exercises/stock unit conversions (774,799 shares in 2017 and 908,921 shares in 2016)	45,422			47,873
Stock compensation expense recognized in earnings	9,013			7,998
Purchase of treasury stock (1,135,435 shares in 2017)	(100,042		)	—
Cash dividends – preferred stock (approximately $1.01 per share in both 2017 and in 2016)	(6,047		)	(6,047		)
Cash dividends – common stock ($1.68 per share in 2017 and $1.61 per share in 2016)	(107,754		)	(100,563		)
Total shareholders’ equity at end of period	$	3,189,043		$	3,161,796

See Notes to Consolidated Financial Statements.

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Cullen/Frost Bankers, Inc.

Consolidated Statements of Cash Flows

(Dollars in thousands)



	Nine Months Ended September 30,
	2017			2016
Operating Activities:
Net income	$	263,625		$	220,542
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses	27,358			42,734
Deferred tax expense (benefit)	(9,505		)	(11,629		)
Accretion of loan discounts	(11,567		)	(11,893		)
Securities premium amortization (discount accretion), net	66,455			59,071
Net (gain) loss on securities transactions	4,917			(14,866		)
Depreciation and amortization	35,819			35,712
Net (gain) loss on sale/write-down of assets/foreclosed assets	(2,045		)	(373		)
Stock-based compensation	9,013			7,998
Net tax benefit from stock-based compensation	5,844			1,610
Earnings on life insurance policies	(2,367		)	(2,678		)
Net change in:
Trading account securities	(3,018		)	418
Accrued interest receivable and other assets	10,495			11,134
Accrued interest payable and other liabilities	(39,580		)	(2,806		)
Net cash from operating activities	355,444			334,974

Investing Activities:
Securities held to maturity:
Purchases	—			—
Sales	—			135,610
Maturities, calls and principal repayments	780,562			227,760
Securities available for sale:
Purchases	(9,138,457		)	(10,079,302		)
Sales	8,993,963			9,040,245
Maturities, calls and principal repayments	283,278			270,737
Proceeds from sale of loans	—			30,470
Net change in loans	(745,702		)	(142,698		)
Benefits received on life insurance policies	462			906
Proceeds from sales of premises and equipment	1,553			1,517
Purchases of premises and equipment	(23,796		)	(32,647		)
Proceeds from sales of repossessed properties	517			297
Net cash from investing activities	152,380			(547,105		)

Financing Activities:
Net change in deposits	591,694			763,953
Net change in short-term borrowings	20,927			(89,220		)
Proceeds from issuance of subordinated notes	98,434			—
Principal payments on subordinated notes	(100,000		)	—
Proceeds from stock option exercises	45,422			47,873
Purchase of treasury stock	(100,042		)	—
Cash dividends paid on preferred stock	(6,047		)	(6,047		)
Cash dividends paid on common stock	(107,754		)	(100,563		)
Net cash from financing activities	442,634			615,996

Net change in cash and cash equivalents	950,458			403,865
Cash and equivalents at beginning of period	4,141,445			3,591,523
Cash and equivalents at end of period	$	5,091,903		$	3,995,388

See Notes to Consolidated Financial Statements.

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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:



	Nine Months Ended September 30,
	2017		2016
Cash paid for interest	$	15,611	$	8,731
Cash paid for income taxes	41,969		39,160
Significant non-cash transactions:
Unsettled purchases of securities	41,763		54,342
Loans foreclosed and transferred to other real estate owned and foreclosed assets	257		422

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Note 2 - Securities

Securities. A summary of the amortized cost and estimated fair value of securities, excluding trading securities, is presented below.



	September 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	3,708		21		24		3,705		4,511		39		—		4,550
States and political subdivisions	1,437,164		36,991		2,556		1,471,599		1,994,710		16,821		6,335		2,005,196
Other	1,350		—		1		1,349		1,350		—		—		1,350
Total	$	1,442,222	$	37,012	$	2,581	$	1,476,653	$	2,250,460	$	18,622	$	6,335	$	2,262,747
Available for Sale
U.S. Treasury	$	3,452,882	$	23,796	$	3,050	$	3,473,628	$	4,003,692	$	24,984	$	8,945	$	4,019,731
Residential mortgage-backed securities	658,281		24,218		1,304		681,195		756,072		30,388		1,293		785,167
States and political subdivisions	5,898,098		130,142		40,501		5,987,739		5,403,918		50,101		98,134		5,355,885
Other	42,538		—		—		42,538		42,494		—		—		42,494
Total	$	10,051,799	$	178,156	$	44,855	$	10,185,100	$	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 September 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 67.7% 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 $3.5 billion at September 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 September 30, 2017 totaled $14.1 million ($9.2 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 September 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	$	2,212	$	24	$	—	$	—	$	2,212	$	24
States and political subdivisions	5,301		28		74,965		2,528		80,266		2,556
Other	1,349		1		—		—		1,349		1
Total	$	8,862	$	53	$	74,965	$	2,528	$	83,827	$	2,581
Available for Sale
U.S. Treasury	$	840,074	$	3,050	$	—	$	—	$	840,074	$	3,050
Residential mortgage-backed securities	75,441		618		19,458		686		94,899		1,304
States and political subdivisions	986,705		9,713		842,751		30,788		1,829,456		40,501
Total	$	1,902,220	$	13,381	$	862,209	$	31,474	$	2,764,429	$	44,855

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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 September 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 securities 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 September 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 September 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	$	251,739	$	256,716	$	37,321	$	38,127
Due after one year through five years	116,604		121,451		4,056,709		4,085,795
Due after five years through ten years	411,074		420,160		385,649		399,538
Due after ten years	659,097		674,621		4,871,301		4,937,907
Residential mortgage-backed securities	3,708		3,705		658,281		681,195
Equity securities	—		—		42,538		42,538
Total	$	1,442,222	$	1,476,653	$	10,051,799	$	10,185,100

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 September 30,				Nine Months Ended September 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 September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Proceeds from sales	$	746,524		$	7,980,049		$	8,993,963		$	9,040,245
Gross realized gains	—			1			—			11,134
Gross realized losses	(4,867		)	(38		)	(4,917		)	(38		)
Tax (expense) benefit of securities gains/losses	1,703			13			1,721			(3,884		)

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Premiums and Discounts. Premium amortization and discount accretion included in interest income on securities was as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Premium amortization	$	(24,586	)	$	(22,762	)	$	(72,733	)	$	(67,321	)
Discount accretion	1,783			2,497			6,278			8,250
Net (premium amortization) discount accretion	$	(22,803	)	$	(20,265	)	$	(66,455	)	$	(59,071	)

Trading Account Securities. Trading account securities, at estimated fair value, were as follows:



	September 30, 2017		December 31, 2016
U.S. Treasury	$	18,814	$	16,594
States and political subdivisions	907		109
Total	$	19,721	$	16,703

Net gains and losses on trading account securities were as follows:



	Three Months Ended September 30,					Nine Months Ended September 30,
	2017			2016		2017			2016
Net gain on sales transactions	$	414		$	379	$	1,018		$	1,032
Net mark-to-market gains (losses)	(8		)	—		(51		)	(1		)
Net gain (loss) on trading account securities	$	406		$	379	$	967		$	1,031

Note 3 - Loans

Loans were as follows:



	September 30, 2017		Percentage of Total		December 31, 2016		Percentage of Total
Commercial and industrial	$	4,677,923	36.8	%	$	4,344,000	36.3	%
Energy:
Production	1,094,927		8.6		971,767		8.1
Service	159,893		1.3		221,213		1.8
Other	132,240		1.0		193,081		1.7
Total energy	1,387,060		10.9		1,386,061		11.6
Commercial real estate:
Commercial mortgages	3,714,172		29.2		3,481,157		29.1
Construction	1,082,229		8.5		1,043,261		8.7
Land	307,701		2.4		311,030		2.6
Total commercial real estate	5,104,102		40.1		4,835,448		40.4
Consumer real estate:
Home equity loans	357,542		2.8		345,130		2.9
Home equity lines of credit	288,981		2.3		264,862		2.2
Other	367,948		2.9		326,793		2.7
Total consumer real estate	1,014,471		8.0		936,785		7.8
Total real estate	6,118,573		48.1		5,772,233		48.2
Consumer and other	522,748		4.2		473,098		3.9
Total loans	$	12,706,304	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 September 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 10.9% 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 $40.9 million, respectively, as of September 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 September 30, 2017 or December 31, 2016.

Non-Accrual and Past Due Loans. Non-accrual loans, segregated by class of loans, were as follows:



	September 30, 2017		December 31, 2016
Commercial and industrial	$	37,239	$	31,475
Energy	96,717		57,571
Commercial real estate:
Buildings, land and other	6,773		8,550
Construction	—		—
Consumer real estate	2,167		2,130
Consumer and other	208		425
Total	$	143,104	$	100,151

As of September 30, 2017, non-accrual loans reported in the table above included $54.1 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 $783 thousand and $2.4 million for the three and nine months ended September 30, 2017, compared to $647 thousand and $2.4 million for three and nine months ended September 30, 2016.

An age analysis of past due loans (including both accruing and non-accruing loans), segregated by class of loans, as of September 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	$	26,415	$	30,740	$	57,155	$	4,620,768	$	4,677,923	$	20,614
Energy	12,585		46,097		58,682		1,328,378		1,387,060		634
Commercial real estate:
Buildings, land and other	9,065		4,065		13,130		4,008,743		4,021,873		2,229
Construction	—		2,331		2,331		1,079,898		1,082,229		2,331
Consumer real estate	7,671		2,107		9,778		1,004,693		1,014,471		835
Consumer and other	9,754		486		10,240		512,508		522,748		478
Total	$	65,490	$	85,826	$	151,316	$	12,554,988	$	12,706,304	$	27,121

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
September 30, 2017
Commercial and industrial	$	48,751	$	31,065	$	3,937	$	35,002	$	1,665
Energy	107,883		34,834		61,805		96,639		13,267
Commercial real estate:
Buildings, land and other	9,976		5,627		—		5,627		—
Construction	—		—		—		—		—
Consumer real estate	1,214		1,214		—		1,214		—
Consumer and other	—		—		—		—		—
Total	$	167,824	$	72,740	$	65,742	$	138,482	$	14,932

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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 September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Commercial and industrial	$	26,910	$	26,921	$	26,651	$	25,365
Energy	76,008		47,003		72,055		57,309
Commercial real estate:
Buildings, land and other	5,553		8,904		6,106		20,444
Construction	—		326		—		548
Consumer real estate	1,209		545		1,155		508
Consumer and other	—		48		13		24
Total	$	109,680	$	83,747	$	105,980	$	104,198

Troubled Debt Restructurings. Troubled debt restructurings during the nine months ended September 30, 2017 and September 30, 2016 are set forth in the following table.



	Nine Months Ended September 30, 2017				Nine Months Ended September 30, 2016
	Balance at Restructure		Balance at Period-End		Balance at Restructure		Balance at Period-End
Commercial and industrial	$	4,026	$	3,875	$	510	$	505
Energy	56,097		55,023		73,977		31,918
Commercial real estate:
Buildings, land and other	—		—		1,455		1,455
Construction	—		—		243		221
	$	60,123	$	58,898	$	76,185	$	34,099

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 September 30, 2017, there was one loan totaling $43.1 million that was restructured during the third quarter of 2017 that was in excess of 90 days past due, however, the underlying terms of the modification allow for the deferral of payments. During the nine months ended September 30, 2017, we recognized charge-offs totaling $10.0 million related to loans restructured during the third and fourth quarters of 2016. During the nine months ended September 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

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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.



	September 30, 2017			December 31, 2016
	Weighted Average Risk Grade	Loans		Weighted Average Risk Grade	Loans
Commercial and industrial:
Risk grades 1-8	6.01	$	4,236,670	6.01	$	3,989,722
Risk grade 9	9.00	201,635		9.00	106,988
Risk grade 10	10.00	89,126		10.00	115,420
Risk grade 11	11.00	113,253		11.00	100,245
Risk grade 12	12.00	35,574		12.00	25,939
Risk grade 13	13.00	1,665		13.00	5,686
Total	6.38	$	4,677,923	6.35	$	4,344,000
Energy
Risk grades 1-8	6.19	$	1,082,349	6.34	$	854,688
Risk grade 9	9.00	46,285		9.00	78,524
Risk grade 10	10.00	67,694		10.00	150,872
Risk grade 11	11.00	94,015		11.00	244,406
Risk grade 12	12.00	83,450		12.00	53,821
Risk grade 13	13.00	13,267		13.00	3,750
Total	7.21	$	1,387,060	7.95	$	1,386,061
Commercial real estate:
Buildings, land and other
Risk grades 1-8	6.69	$	3,720,068	6.67	$	3,463,064
Risk grade 9	9.00	115,196		9.00	109,110
Risk grade 10	10.00	110,647		10.00	145,067
Risk grade 11	11.00	69,189		11.00	66,396
Risk grade 12	12.00	6,773		12.00	8,550
Risk grade 13	13.00	—		13.00	—
Total	6.93	$	4,021,873	6.95	$	3,792,187
Construction
Risk grades 1-8	7.14	$	1,058,847	6.97	$	1,023,194
Risk grade 9	9.00	18,106		9.00	15,829
Risk grade 10	10.00	3,768		10.00	2,889
Risk grade 11	11.00	1,508		11.00	1,349
Risk grade 12	12.00	—		12.00	—
Risk grade 13	13.00	—		13.00	—
Total	7.19	$	1,082,229	7.01	$	1,043,261

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Net (charge-offs)/recoveries, segregated by class of loans, were as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Commercial and industrial	$	(4,565	)	$	(3,079	)	$	(12,155	)	$	(8,177	)
Energy	451			(865		)	(10,010		)	(18,623		)
Commercial real estate:
Buildings, land and other	266			259			768			801
Construction	2			9			8			18
Consumer real estate	(629		)	(195		)	(422		)	(22		)
Consumer and other	(1,760		)	(1,115		)	(4,289		)	(2,817		)
Total	$	(6,235	)	$	(4,986	)	$	(26,100	)	$	(28,820	)

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 124.6 at August 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 September 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
September 30, 2017
Historical valuation allowances	$	27,190	$	21,900	$	18,304	$	2,443	$	5,491		$	75,328
Specific valuation allowances	1,665		13,267		—		—		—			14,932
General valuation allowances	7,397		4,677		4,841		2,040		163			19,118
Macroeconomic valuation allowances	12,185		12,069		14,930		2,392		3,349			44,925
Total	$	48,437	$	51,913	$	38,075	$	6,875	$	9,003		$	154,303
Allocated to loans:
Individually evaluated	$	1,665	$	13,267	$	—	$	—	$	—		$	14,932
Collectively evaluated	46,772		38,646		38,075		6,875		9,003			139,371
Total	$	48,437	$	51,913	$	38,075	$	6,875	$	9,003		$	154,303
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

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Our recorded investment in loans as of September 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
September 30, 2017
Individually evaluated	$	35,002	$	96,639	$	5,627	$	1,214	$	—	$	138,482
Collectively evaluated	4,642,921		1,290,421