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: March 31, 2018

¨ 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 19, 2018 there were 63,797,196 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

March 31, 2018

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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 (Loss)	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	54
Item 4.	Controls and Procedures	55

Part II - Other Information
Item 1.	Legal Proceedings	56
Item 1A.	Risk Factors	56
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 3.	Defaults Upon Senior Securities	56
Item 4.	Mine Safety Disclosures	56
Item 5.	Other Information	56
Item 6.	Exhibits	56

Signatures		57

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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)



	March 31, 2018			December 31, 2017
Assets:
Cash and due from banks	$	434,155		$	545,542
Interest-bearing deposits	3,907,051			4,347,538
Federal funds sold and resell agreements	339,742			159,967
Total cash and cash equivalents	4,680,948			5,053,047
Securities held to maturity, at amortized cost	1,247,154			1,432,098
Securities available for sale, at estimated fair value	10,536,532			10,489,009
Trading account securities	19,772			21,098
Loans, net of unearned discounts	13,364,029			13,145,665
Less: Allowance for loan losses	(149,885		)	(155,364		)
Net loans	13,214,144			12,990,301
Premises and equipment, net	521,202			520,958
Goodwill	654,952			654,952
Other intangible assets, net	4,685			5,073
Cash surrender value of life insurance policies	181,297			180,477
Accrued interest receivable and other assets	398,546			400,867
Total assets	$	31,459,232		$	31,747,880

Liabilities:
Deposits:
Non-interest-bearing demand deposits	$	10,934,162		$	11,197,093
Interest-bearing deposits	15,743,616			15,675,296
Total deposits	26,677,778			26,872,389
Federal funds purchased and repurchase agreements	1,032,221			1,147,824
Junior subordinated deferrable interest debentures, net of unamortized issuance costs	136,198			136,184
Subordinated notes, net of unamortized issuance costs	98,591			98,552
Accrued interest payable and other liabilities	271,014			195,068
Total liabilities	28,215,802			28,450,017

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, 2018 and December 31, 2017	144,486			144,486
Common stock, par value $0.01 per share; 210,000,000 shares authorized; 64,236,306 shares issued at both March 31, 2018 and December 31, 2017	642			642
Additional paid-in capital	956,536			953,361
Retained earnings	2,234,301			2,187,069
Accumulated other comprehensive income, net of tax	(53,354		)	79,512
Treasury stock, at cost; 442,610 shares at March 31, 2018 and 760,720 shares at December 31, 2017	(39,181		)	(67,207		)
Total shareholders’ equity	3,243,430			3,297,863
Total liabilities and shareholders’ equity	$	31,459,232		$	31,747,880

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 March 31,
	2018			2017
Interest income:
Loans, including fees	$	151,202		$	122,600
Securities:
Taxable	20,558			25,302
Tax-exempt	56,711			56,947
Interest-bearing deposits	14,094			6,836
Federal funds sold and resell agreements	761			107
Total interest income	243,326			211,792
Interest expense:
Deposits	10,638			1,868
Federal funds purchased and repurchase agreements	634			139
Junior subordinated deferrable interest debentures	1,142			908
Other long-term borrowings	1,164			368
Total interest expense	13,578			3,283
Net interest income	229,748			208,509
Provision for loan losses	6,945			7,952
Net interest income after provision for loan losses	222,803			200,557
Non-interest income:
Trust and investment management fees	29,587			26,470
Service charges on deposit accounts	20,843			20,769
Insurance commissions and fees	15,980			13,821
Interchange and debit card transaction fees	3,158			5,574
Other charges, commissions and fees	9,007			9,592
Net gain (loss) on securities transactions	(19		)	—
Other	12,889			7,474
Total non-interest income	91,445			83,700
Non-interest expense:
Salaries and wages	86,683			82,512
Employee benefits	21,995			21,625
Net occupancy	19,740			19,237
Technology, furniture and equipment	19,679			17,990
Deposit insurance	4,879			4,915
Intangible amortization	388			458
Other	43,247			41,178
Total non-interest expense	196,611			187,915
Income before income taxes	117,637			96,342
Income taxes	11,157			11,401
Net income	106,480			84,941
Preferred stock dividends	2,016			2,016
Net income available to common shareholders	$	104,464		$	82,925

Earnings per common share:
Basic	$	1.63		$	1.29
Diluted	1.61			1.28

See Notes to Consolidated Financial Statements.

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Cullen/Frost Bankers, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(Dollars in thousands)



	Three Months Ended March 31,
	2018			2017
Net income	$	106,480		$	84,941
Other comprehensive income (loss), before tax:
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period	(178,904		)	33,811
Change in net unrealized gain on securities transferred to held to maturity	(2,619		)	(6,286		)
Reclassification adjustment for net (gains) losses included in net income	19			—
Total securities available for sale and transferred securities	(181,504		)	27,525
Defined-benefit post-retirement benefit plans:
Change in the net actuarial gain/loss	—			—
Reclassification adjustment for net amortization of actuarial gain/loss included in net income as a component of net periodic cost (benefit)	1,250			1,357
Total defined-benefit post-retirement benefit plans	1,250			1,357
Other comprehensive income (loss), before tax	(180,254		)	28,882
Deferred tax expense (benefit)	(37,853		)	10,109
Other comprehensive income (loss), net of tax	(142,401		)	18,773
Comprehensive income (loss)	$	(35,921	)	$	103,714

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)



	Three Months Ended March 31,
	2018			2017
Total shareholders’ equity at beginning of period	$	3,297,863		$	3,002,528
Cumulative effect of accounting change	(2,285		)	—
Total shareholders' equity at beginning of period, as adjusted	3,295,578			3,002,528
Net income	106,480			84,941
Other comprehensive income (loss)	(142,401		)	18,773
Stock option exercises/stock unit conversions (318,110 shares in 2018 and 442,054 shares in 2017)	19,165			24,747
Stock compensation expense recognized in earnings	3,175			3,103
Purchase of treasury stock (469 shares in 2017)	—			(42		)
Cash dividends – preferred stock (approximately $0.34 per share in both 2018 and in 2017)	(2,016		)	(2,016		)
Cash dividends – common stock ($0.57 per share in 2018 and $0.54 per share in 2017)	(36,551		)	(34,656		)
Total shareholders’ equity at end of period	$	3,243,430		$	3,097,378

See Notes to Consolidated Financial Statements.

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Cullen/Frost Bankers, Inc.

Consolidated Statements of Cash Flows

(Dollars in thousands)



	Three Months Ended March 31,
	2018			2017
Operating Activities:
Net income	$	106,480		$	84,941
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses	6,945			7,952
Deferred tax expense (benefit)	10,411			(4,301		)
Accretion of loan discounts	(3,378		)	(3,913		)
Securities premium amortization (discount accretion), net	24,260			21,638
Net (gain) loss on securities transactions	19			—
Depreciation and amortization	12,130			12,121
Net (gain) loss on sale/write-down of assets/foreclosed assets	(3,982		)	(533		)
Stock-based compensation	3,175			3,103
Net tax benefit from stock-based compensation	2,211			3,515
Earnings on life insurance policies	(820		)	(783		)
Net change in:
Trading account securities	1,326			(1,088		)
Accrued interest receivable and other assets	23,555			55,705
Accrued interest payable and other liabilities	28,376			(48,702		)
Net cash from operating activities	210,708			129,655

Investing Activities:
Securities held to maturity:
Purchases	(1,500		)	—
Sales	—			—
Maturities, calls and principal repayments	179,149			599,457
Securities available for sale:
Purchases	(3,245,923		)	(466,004		)
Sales	2,984,867			—
Maturities, calls and principal repayments	62,768			107,586
Proceeds from sale of loans	—			—
Net change in loans	(227,417		)	(214,281		)
Benefits received on life insurance policies	—			461
Proceeds from sales of premises and equipment	11,317			1,544
Purchases of premises and equipment	(16,759		)	(6,311		)
Proceeds from sales of repossessed properties	307			345
Net cash from investing activities	(253,191		)	22,797

Financing Activities:
Net change in deposits	(194,611		)	330,589
Net change in short-term borrowings	(115,603		)	(81,792		)
Proceeds from issuance of subordinated notes	—			98,446
Principal payments on subordinated notes	—			(100,000		)
Proceeds from stock option exercises	19,165			24,747
Purchase of treasury stock	—			(42		)
Cash dividends paid on preferred stock	(2,016		)	(2,016		)
Cash dividends paid on common stock	(36,551		)	(34,656		)
Net cash from financing activities	(329,616		)	235,276

Net change in cash and cash equivalents	(372,099		)	387,728
Cash and cash equivalents at beginning of period	5,053,047			4,141,445
Cash and cash equivalents at end of period	$	4,680,948		$	4,529,173

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, 2017, included in our Annual Report on Form 10-K filed with the SEC on February 7, 2018 (the “2017 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,
	2018		2017
Cash paid for interest	$	13,740	$	3,257
Cash paid for income taxes	—		—
Significant non-cash transactions:
Unsettled purchases/sales of securities	47,723		33,466
Loans foreclosed and transferred to other real estate owned and foreclosed assets	7		—

Accounting Changes, Reclassifications and Restatements. Certain items in prior financial statements have been reclassified to conform to the current presentation. In addition, we adopted ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" as of January 1, 2018. In accordance with ASU 2018-02, we elected to reclassify certain income tax effects related to the change in the U.S. statutory federal income tax rate under the Tax Cuts and Jobs Act, which was enacted on December 22, 2017, from accumulated other comprehensive income to retained earnings. Such amounts, which totaled $9.5 million, related to a net actuarial loss on defined benefit post-retirement plans and unrealized gains on securities available for sale and securities transferred to held to maturity. See Note 14 - Other Comprehensive Income. The effects of the Tax Cuts and Jobs Act on deferred taxes related to amounts initially recorded in accumulated other comprehensive income are provisional. As we finalize the accounting for the tax effects of the Tax Cuts and Jobs Act, additional reclassification adjustments may be recorded in future periods. See Note 13 - Income Taxes. Notwithstanding this election made in accordance with ASU 2018-02, our policy is to release such income tax effects only when the entire portfolio to which the underlying transactions relate is liquidated, sold or extinguished.

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We also adopted ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)” as of January 1, 2018. Using a modified retrospective transition approach for contracts that were not complete as of our adoption, we recognized a cumulative effect reduction to beginning retained earnings totaling $2.3 million. The amount was related to certain revenue streams within trust and investment management fees. Additionally, based on our underlying contracts, ASU 2014-09 requires us to report network costs associated with debit card and ATM transactions netted against the related fees from such transactions. Previously, such network costs were reported as a component of other non-interest expense. For the three months ended March 31, 2018, gross interchange and debit card transaction fees totaled $6.1 million while related network costs totaled $2.9 million. On a net basis, we reported $3.2 million as interchange and debit card transaction fees in the accompanying Consolidated Statement of Income for the three months ended March 31, 2018. For the three months ended March 31, 2017, we reported interchange and debit card transaction fees totaling $5.6 million on a gross basis in the accompanying Consolidated Statement of Income while related network costs totaling $3.2 million were reported as a component of other non-interest expense. ASU 2014-09 also required us to change the way we recognize certain recurring revenue streams reported as components of trust and investment management fees, insurance commissions and fees and other categories of non-interest income, however, such changes were not significant to our financial statements for the three months ended March 31, 2018.

Under ASU 2014-09, we adopted new policies related to revenue recognition. In general, for revenue not associated with financial instruments, guarantees and lease contracts, we apply the following steps when recognizing revenue from contracts with customers: (i) identify the contract, (ii) identify the performance obligations, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations and (v) recognize revenue when performance obligation is satisfied. Our contracts with customers are generally short term in nature, typically due within one year or less or cancellable by us or our customer upon a short notice period. Performance obligations for our customer contracts are generally satisfied at a single point in time, typically when the transaction is complete, or over time. For performance obligations satisfied over time, we primarily use the output method, directly measuring the value of the products/services transferred to the customer, to determine when performance obligations have been satisfied. We typically receive payment from customers and recognize revenue concurrent with the satisfaction of our performance obligations. In most cases, this occurs within a single financial reporting period. For payments received in advance of the satisfaction of performance obligations, revenue recognition is deferred until such time the performance obligations have been satisfied. In cases where we have not received payment despite satisfaction of our performance obligations, we accrue an estimate of the amount due in the period our performance obligations have been satisfied. For contracts with variable components, only amounts for which collection is probable are accrued. We generally act in a principal capacity, on our own behalf, in most of our contracts with customers. In such transactions, we recognize revenue and the related costs to provide our services on a gross basis in our financial statements. In some cases, we act in an agent capacity, deriving revenue through assisting other entities in transactions with our customers. In such transactions, we recognized revenue and the related costs to provide our services on a net basis in our financial statements. These transactions primarily relate to insurance and brokerage commissions and fees derived from our customers' use of various interchange and ATM/debit card networks.

Note 2 - Securities

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



	March 31, 2018								December 31, 2017
	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
Residential mortgage-backed securities	$	3,503	$	12	$	57	$	3,458	$	3,610	$	15	$	38	$	3,587
States and political subdivisions	1,242,151		13,910		3,126		1,252,935		1,428,488		26,462		2,746		1,452,204
Other	1,500		—		7		1,493		—		—		—		—
Total	$	1,247,154	$	13,922	$	3,190	$	1,257,886	$	1,432,098	$	26,477	$	2,784	$	1,455,791
Available for Sale
U.S. Treasury	$	3,453,887	$	373	$	36,113	$	3,418,147	$	3,453,391	$	7,494	$	15,732	$	3,445,153
Residential mortgage-backed securities	636,498		16,012		6,815		645,695		648,288		19,048		2,250		665,086
States and political subdivisions	6,423,389		71,360		64,644		6,430,105		6,185,711		167,293		16,795		6,336,209
Other	42,585		—		—		42,585		42,561		—		—		42,561
Total	$	10,556,359	$	87,745	$	107,572	$	10,536,532	$	10,329,951	$	193,835	$	34,777	$	10,489,009

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All mortgage-backed securities included in the above table were issued by U.S. government agencies and corporations. At March 31, 2018, approximately 98.2% 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 and that do not have readily determinable fair values are carried at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar securities of the same issuer. These securities include stock in the Federal Reserve Bank and the Federal Home Loan Bank 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 March 31, 2018 and $3.8 billion at December 31, 2017.

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, 2018 totaled $8.9 million ($7.1 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, 2018, 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	$	1,120	$	23	$	1,516	$	34	$	2,636	$	57
States and political subdivisions	231,906		900		44,869		2,226		276,775		3,126
Other	1,493		7		—		—		1,493		7
Total	$	234,519	$	930	$	46,385	$	2,260	$	280,904	$	3,190
Available for Sale
U.S. Treasury	$	2,616,630	$	27,797	$	514,691	$	8,316	$	3,131,321	$	36,113
Residential mortgage-backed securities	219,091		4,508		45,424		2,307		264,515		6,815
States and political subdivisions	2,004,045		26,466		815,756		38,178		2,819,801		64,644
Total	$	4,839,766	$	58,771	$	1,375,871	$	48,801	$	6,215,637	$	107,572

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 March 31, 2018, 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 March 31, 2018, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in our consolidated income statement.

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Contractual Maturities. The amortized cost and estimated fair value of securities, excluding trading securities, at March 31, 2018 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	$	105,054	$	106,904	$	118,442	$	119,061
Due after one year through five years	165,355		168,916		4,010,195		3,980,391
Due after five years through ten years	432,654		433,756		486,543		491,153
Due after ten years	540,588		544,852		5,262,096		5,257,647
Residential mortgage-backed securities	3,503		3,458		636,498		645,695
Equity securities	—		—		42,585		42,585
Total	$	1,247,154	$	1,257,886	$	10,556,359	$	10,536,532

Sales of Securities. Sales of securities available for sale were as follows:



	Three Months Ended March 31,
	2018			2017
Proceeds from sales	$	2,984,867		$	—
Gross realized gains	—			—
Gross realized losses	(19		)	—
Tax (expense) benefit of securities gains/losses	4			—

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



	Three Months Ended March 31,
	2018			2017
Premium amortization	$	(26,036	)	$	(24,028	)
Discount accretion	1,776			2,390
Net (premium amortization) discount accretion	$	(24,260	)	$	(21,638	)

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



	March 31, 2018		December 31, 2017
U.S. Treasury	$	19,772	$	19,210
States and political subdivisions	—		1,888
Total	$	19,772	$	21,098

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



	Three Months Ended March 31,
	2018			2017
Net gain on sales transactions	$	505		$	311
Net mark-to-market gains (losses)	(36		)	13
Net gain (loss) on trading account securities	$	469		$	324

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Note 3 - Loans

Loans were as follows:



	March 31, 2018		Percentage of Total		December 31, 2017		Percentage of Total
Commercial and industrial	$	4,876,523	36.5	%	$	4,792,388	36.4	%
Energy:
Production	1,125,321		8.4		1,182,326		9.0
Service	192,115		1.4		171,795		1.3
Other	129,552		0.9		144,972		1.1
Total energy	1,446,988		10.7		1,499,093		11.4
Commercial real estate:
Commercial mortgages	4,060,946		30.4		3,887,742		29.6
Construction	1,076,785		8.1		1,066,696		8.1
Land	317,189		2.4		331,986		2.5
Total commercial real estate	5,454,920		40.9		5,286,424		40.2
Consumer real estate:
Home equity loans	355,715		2.7		355,342		2.7
Home equity lines of credit	295,677		2.2		291,950		2.2
Other	388,271		2.9		376,002		2.9
Total consumer real estate	1,039,663		7.8		1,023,294		7.8
Total real estate	6,494,583		48.7		6,309,718		48.0
Consumer and other	545,935		4.1		544,466		4.2
Total loans	$	13,364,029	100.0	%	$	13,145,665	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, 2018, there were no concentrations of loans related to any single industry in excess of 10% of total loans other than energy loans, which totaled 10.7% 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 $44.8 million, respectively, as of March 31, 2018.

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, 2018 or December 31, 2017.

Related Party Loans. In the ordinary course of business, we have granted loans to certain directors, executive officers and their affiliates (collectively referred to as “related parties”). Such loans totaled $180.7 million at March 31, 2018 and $166.4 million at December 31, 2017

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



	March 31, 2018		December 31, 2017
Commercial and industrial	$	17,314	$	46,186
Energy	93,097		94,302
Commercial real estate:
Buildings, land and other	10,858		7,589
Construction	—		—
Consumer real estate	1,878		2,109
Consumer and other	5		128
Total	$	123,152	$	150,314

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As of March 31, 2018, non-accrual loans reported in the table above included $2.2 million related to loans that were restructured as “troubled debt restructurings” during 2018. 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 $1.5 million for the three months ended March 31, 2018, compared to $851 thousand for three months ended March 31, 2017.

An age analysis of past due loans (including both accruing and non-accruing loans), segregated by class of loans, as of March 31, 2018 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	$	25,701	$	23,946	$	49,647	$	4,826,876	$	4,876,523	$	10,357
Energy	24,404		4,207		28,611		1,418,377		1,446,988		3,137
Commercial real estate:
Buildings, land and other	36,130		5,470		41,600		4,336,535		4,378,135		3,889
Construction	9,497		—		9,497		1,067,288		1,076,785		—
Consumer real estate	8,225		3,164		11,389		1,028,274		1,039,663		1,680
Consumer and other	7,486		218		7,704		538,231		545,935		213
Total	$	111,443	$	37,005	$	148,448	$	13,215,581	$	13,364,029	$	19,276

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, 2018
Commercial and industrial	$	38,136	$	1,802	$	13,430	$	15,232	$	7,930
Energy	123,351		41,569		63,502		105,071		14,772
Commercial real estate:
Buildings, land and other	13,078		7,577		2,047		9,624		708
Construction	—		—		—		—		—
Consumer real estate	1,427		1,427		—		1,427		—
Consumer and other	—		—		—		—		—
Total	$	175,992	$	52,375	$	78,979	$	131,354	$	23,410
December 31, 2017
Commercial and industrial	$	60,781	$	28,038	$	15,722	$	43,760	$	7,553
Energy	99,606		33,080		61,162		94,242		13,267
Commercial real estate:
Buildings, land and other	10,795		6,394		—		6,394		—
Construction	—		—		—		—		—
Consumer real estate	1,214		1,214		—		1,214		—
Consumer and other	—		—		—		—		—
Total	$	172,396	$	68,726	$	76,884	$	145,610	$	20,820

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The average recorded investment in impaired loans was as follows:



	Three Months Ended March 31,
	2018		2017
Commercial and industrial	$	29,496	$	26,393
Energy	99,657		68,101
Commercial real estate:
Buildings, land and other	8,009		6,660
Construction	—		—
Consumer real estate	1,321		1,102
Consumer and other	—		27
Total	$	138,483	$	102,283

Troubled Debt Restructurings. Troubled debt restructurings during the three months ended March 31, 2018 and March 31, 2017 are set forth in the following table.



	Three Months Ended March 31, 2018				Three Months Ended March 31, 2017
	Balance at Restructure		Balance at Period-End		Balance at Restructure		Balance at Period-End
Commercial and industrial	$	2,203	$	2,171	$	—	$	—
Energy	13,708		12,058		11,262		11,212
	$	15,911	$	14,229	$	11,262	$	11,212

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. Additional information related to restructured loans was as follows:



	March 31, 2018		March 31, 2017
Restructured loans past due in excess of 90 days at period-end:
Number of loans	—		1
Dollar amount of loans	$	—	$	747
Restructured loans on non-accrual status at period end	2,171		11,212
Charge-offs of restructured loans:
Recognized in connection with restructuring	—		—
Recognized on previously restructured loans	1,650		2,000

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 2017 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.

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The following tables present weighted-average risk grades for all commercial loans by class.



	March 31, 2018			December 31, 2017
	Weighted Average Risk Grade	Loans		Weighted Average Risk Grade	Loans
Commercial and industrial:
Risk grades 1-8	6.05	$	4,505,491	6.06	$	4,378,839
Risk grade 9	9.00	151,084		9.00	170,285
Risk grade 10	10.00	121,457		10.00	99,260
Risk grade 11	11.00	81,148		11.00	97,818
Risk grade 12	12.00	9,412		12.00	38,633
Risk grade 13	13.00	7,931		13.00	7,553
Total	6.35	$	4,876,523	6.41	$	4,792,388
Energy
Risk grades 1-8	6.12	$	1,173,702	6.01	$	1,199,207
Risk grade 9	9.00	50,364		9.00	50,427
Risk grade 10	10.00	37,670		10.00	64,282
Risk grade 11	11.00	92,155		11.00	90,875
Risk grade 12	12.00	78,325		12.00	81,035
Risk grade 13	13.00	14,772		13.00	13,267
Total	7.02	$	1,446,988	6.97	$	1,499,093
Commercial real estate:
Buildings, land and other
Risk grades 1-8	6.77	$	4,051,952	6.75	$	3,868,659
Risk grade 9	9.00	124,048		9.00	151,487
Risk grade 10	10.00	120,399		10.00	129,391
Risk grade 11	11.00	70,878		11.00	62,602
Risk grade 12	12.00	10,150		12.00	7,589
Risk grade 13	13.00	708		13.00	—
Total	7.00	$	4,378,135	7.00	$	4,219,728
Construction
Risk grades 1-8	7.16	$	1,040,071	7.11	$	1,019,635
Risk grade 9	9.00	15,541		9.00	18,042
Risk grade 10	10.00	17,361		10.00	23,393
Risk grade 11	11.00	3,812		11.00	5,626
Risk grade 12	12.00	—		12.00	—
Risk grade 13	13.00	—		13.00	—
Total	7.25	$	1,076,785	7.23	$	1,066,696

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



	Three Months Ended March 31,
	2018			2017
Commercial and industrial	$	(7,675	)	$	(2,729	)
Energy	(2,849		)	(4,225		)
Commercial real estate:
Buildings, land and other	81			42
Construction	2			3
Consumer real estate	(526		)	96
Consumer and other	(1,457		)	(1,128		)
Total	$	(12,424	)	$	(7,941	)

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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 2017 Form 10-K, totaled 131.5 at February 28, 2018 (most recent date available) and 129.6 at December 31, 2017. 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 2017 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, 2018 and December 31, 2017 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, 2018
Historical valuation allowances	$	26,658	$	12,266	$	19,870	$	2,470	$	6,729		$	67,993
Specific valuation allowances	7,930		14,772		708		—		—			23,410
General valuation allowances	8,053		8,015		4,025		1,601		(95		)	21,599
Macroeconomic valuation allowances	15,092		3,986		13,871		2,278		1,656			36,883
Total	$	57,733	$	39,039	$	38,474	$	6,349	$	8,290		$	149,885
Allocated to loans:
Individually evaluated	$	7,930	$	14,772	$	708	$	—	$	—		$	23,410
Collectively evaluated	49,803		24,267		37,766		6,349		8,290			126,475
Total	$	57,733	$	39,039	$	38,474	$	6,349	$	8,290		$	149,885
December 31, 2017
Historical valuation allowances	$	26,401	$	22,073	$	18,931	$	2,473	$	5,603		$	75,481
Specific valuation allowances	7,553		13,267		—		—		—			20,820
General valuation allowances	9,112		7,964		4,165		2,133		(91		)	23,283
Macroeconomic valuation allowances	16,548		8,224		7,852		1,051		2,105			35,780
Total	$	59,614	$	51,528	$	30,948	$	5,657	$	7,617		$	155,364
Allocated to loans:
Individually evaluated	$	7,553	$	13,267	$	—	$	—	$	—		$	20,820
Collectively evaluated	52,061		38,261		30,948		5,657		7,617			134,544
Total	$	59,614	$	51,528	$	30,948	$	5,657	$	7,617		$	155,364

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Our recorded investment in loans as of March 31, 2018 and December 31, 2017 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, 2018
Individually evaluated	$	15,232	$	105,071	$	9,624	$	1,427	$	—	$	131,354
Collectively evaluated	4,861,291		1,341,917		5,445,296		1,038,236		545,935		13,232,675
Total	$	4,876,523	$	1,446,988	$	5,454,920	$	1,039,663	$	545,935	$	13,364,029
December 31, 2017
Individually evaluated	$	43,760	$	94,242	$	6,394	$	1,214	$	—	$	145,610
Collectively evaluated	4,748,628		1,404,851		5,280,030		1,022,080		544,466		13,000,055
Total	$	4,792,388	$	1,499,093	$	5,286,424	$	1,023,294	$	544,466	$	13,145,665

The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2018 and 2017. 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, 2018
Beginning balance	$	59,614		$	51,528		$	30,948		$	5,657		$	7,617		$	155,364
Provision for loan losses	5,794			(9,640		)	7,443			1,218			2,130			6,945
Charge-offs	(9,252		)	(2,850		)	(5		)	(719		)	(3,972		)	(16,798		)
Recoveries	1,577			1			88			193			2,515			4,374
Net charge-offs	(7,675		)	(2,849		)	83			(526		)	(1,457		)	(12,424		)
Ending balance	$	57,733		$	39,039		$	38,474		$	6,349		$	8,290		$	149,885
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

Note 4 - Goodwill and Other Intangible Assets

Goodwill and other intangible assets are presented in the table below.



	March 31, 2018		December 31, 2017
Goodwill	$	654,952	$	654,952
Other intangible assets:
Core deposits	$	3,748	$	4,044
Customer relationships	900		986
Non-compete agreements	37		43
	$	4,685	$	5,073

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The estimated aggregate future amortization expense for intangible assets remaining as of March 31, 2018 is as follows:



Remainder of 2018	$	1,036
2019	1,167
2020	918
2021	697
2022	481
Thereafter	386
	$	4,685

Note 5 - Deposits

Deposits were as follows:



	March 31, 2018		Percentage of Total		December 31, 2017		Percentage of Total
Non-interest-bearing demand deposits:
Commercial and individual	$	10,294,977	38.6	%	$	10,412,882	38.8	%
Correspondent banks	212,199		0.8		222,648		0.8
Public funds	426,986		1.6		561,563		2.1
Total non-interest-bearing demand deposits	10,934,162		41.0		11,197,093		41.7
Interest-bearing deposits:
Private accounts:
Savings and interest checking	6,869,783		25.8		6,788,766		25.2