Document
Table of Contents

United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended: June 30, 2018
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 19, 2018 there were 63,907,784 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, 2018
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,
2018
 
December 31,
2017
Assets:
 
 
 
Cash and due from banks
$
509,191

 
$
545,542

Interest-bearing deposits
2,476,587

 
4,347,538

Federal funds sold and resell agreements
329,692

 
159,967

Total cash and cash equivalents
3,315,470

 
5,053,047

Securities held to maturity, at amortized cost
1,236,511

 
1,432,098

Securities available for sale, at estimated fair value
10,717,743

 
10,489,009

Trading account securities
21,334

 
21,098

Loans, net of unearned discounts
13,711,762

 
13,145,665

Less: Allowance for loan losses
(150,226
)
 
(155,364
)
Net loans
13,561,536

 
12,990,301

Premises and equipment, net
539,861

 
520,958

Goodwill
654,952

 
654,952

Other intangible assets, net
4,316

 
5,073

Cash surrender value of life insurance policies
181,756

 
180,477

Accrued interest receivable and other assets
453,735

 
400,867

Total assets
$
30,687,214

 
$
31,747,880

 
 
 
 
Liabilities:
 
 
 
Deposits:
 
 
 
Non-interest-bearing demand deposits
$
10,525,998

 
$
11,197,093

Interest-bearing deposits
15,470,501

 
15,675,296

Total deposits
25,996,499

 
26,872,389

Federal funds purchased and repurchase agreements
977,470

 
1,147,824

Junior subordinated deferrable interest debentures, net of unamortized issuance costs
136,213

 
136,184

Subordinated notes, net of unamortized issuance costs
98,630

 
98,552

Accrued interest payable and other liabilities
168,890

 
195,068

Total liabilities
27,377,702

 
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 June 30, 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 June 30, 2018 and December 31, 2017
642

 
642

Additional paid-in capital
960,121

 
953,361

Retained earnings
2,297,099

 
2,187,069

Accumulated other comprehensive income, net of tax
(63,319
)
 
79,512

Treasury stock, at cost; 332,722 shares at June 30, 2018 and 760,720 shares at December 31, 2017
(29,517
)
 
(67,207
)
Total shareholders’ equity
3,309,512

 
3,297,863

Total liabilities and shareholders’ equity
$
30,687,214

 
$
31,747,880

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,
 
2018
 
2017
 
2018
 
2017
Interest income:
 
 
 
 
 
 
 
Loans, including fees
$
164,133

 
$
131,073

 
$
315,335

 
$
253,673

Securities:
 
 
 
 
 
 
 
Taxable
21,188

 
23,527

 
41,746

 
48,829

Tax-exempt
57,298

 
55,435

 
114,009

 
112,382

Interest-bearing deposits
13,917

 
9,076

 
28,011

 
15,912

Federal funds sold and resell agreements
1,415

 
163

 
2,176

 
270

Total interest income
257,951

 
219,274

 
501,277

 
431,066

Interest expense:
 
 
 
 
 
 
 
Deposits
17,575

 
2,173

 
28,213

 
4,041

Federal funds purchased and repurchase agreements
631

 
187

 
1,265

 
326

Junior subordinated deferrable interest debentures
1,311

 
962

 
2,453

 
1,870

Other long-term borrowings
1,164

 
1,164

 
2,328

 
1,532

Total interest expense
20,681

 
4,486

 
34,259

 
7,769

Net interest income
237,270

 
214,788

 
467,018

 
423,297

Provision for loan losses
8,251

 
8,426

 
15,196

 
16,378

Net interest income after provision for loan losses
229,019

 
206,362

 
451,822

 
406,919

Non-interest income:
 
 
 
 
 
 
 
Trust and investment management fees
29,121

 
27,727

 
58,708

 
54,197

Service charges on deposit accounts
21,142

 
21,198

 
41,985

 
41,967

Insurance commissions and fees
10,556

 
9,728

 
26,536

 
23,549

Interchange and debit card transaction fees
3,446

 
5,692

 
6,604

 
11,266

Other charges, commissions and fees
9,273

 
9,898

 
18,280

 
19,490

Net gain (loss) on securities transactions
(60
)
 
(50
)
 
(79
)
 
(50
)
Other
11,588

 
6,887

 
24,477

 
14,361

Total non-interest income
85,066

 
81,080

 
176,511

 
164,780

Non-interest expense:
 
 
 
 
 
 
 
Salaries and wages
85,204

 
80,995

 
171,887

 
163,507

Employee benefits
17,907

 
18,198

 
39,902

 
39,823

Net occupancy
19,455

 
19,153

 
39,195

 
38,390

Technology, furniture and equipment
20,459

 
18,250

 
40,138

 
36,240

Deposit insurance
4,605

 
5,570

 
9,484

 
10,485

Intangible amortization
369

 
438

 
757

 
896

Other
40,909

 
45,447

 
84,156

 
86,625

Total non-interest expense
188,908

 
188,051

 
385,519

 
375,966

Income before income taxes
125,177

 
99,391

 
242,814

 
195,733

Income taxes
13,836

 
13,838

 
24,993

 
25,239

Net income
111,341

 
85,553

 
217,821

 
170,494

Preferred stock dividends
2,015

 
2,015

 
4,031

 
4,031

Net income available to common shareholders
$
109,326

 
$
83,538

 
$
213,790

 
$
166,463

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
1.70

 
$
1.30

 
$
3.33

 
$
2.59

Diluted
1.68

 
1.29

 
3.30

 
2.57

See Notes to Consolidated Financial Statements.

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Table of Contents

Cullen/Frost Bankers, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(Dollars in thousands)
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
111,341

 
$
85,553

 
$
217,821

 
$
170,494

Other comprehensive income (loss), before tax:
 
 
 
 
 
 
 
Securities available for sale and transferred securities:
 
 
 
 
 
 
 
Change in net unrealized gain/loss during the period
(11,884
)
 
90,390

 
(190,788
)
 
124,201

Change in net unrealized gain on securities transferred to held to maturity
(2,041
)
 
(3,860
)
 
(4,660
)
 
(10,146
)
Reclassification adjustment for net (gains) losses included in net income
60

 
50

 
79

 
50

Total securities available for sale and transferred securities
(13,865
)
 
86,580

 
(195,369
)
 
114,105

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)
1,251

 
1,358

 
2,501

 
2,715

Total defined-benefit post-retirement benefit plans
1,251

 
1,358

 
2,501

 
2,715

Other comprehensive income (loss), before tax
(12,614
)
 
87,938

 
(192,868
)
 
116,820

Deferred tax expense (benefit)
(2,649
)
 
30,778

 
(40,502
)
 
40,887

Other comprehensive income (loss), net of tax
(9,965
)
 
57,160

 
(152,366
)
 
75,933

Comprehensive income (loss)
$
101,376

 
$
142,713

 
$
65,455

 
$
246,427

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,
 
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
217,821

 
170,494

Other comprehensive income (loss)
(152,366
)
 
75,933

Stock option exercises/stock unit conversions (428,599 shares in 2018 and 752,075 shares in 2017)
25,448

 
44,149

Stock compensation expense recognized in earnings
6,760

 
6,291

Purchase of treasury stock (601 shares in 2018 and 469 shares in 2017)
(70
)
 
(42
)
Cash dividends – preferred stock (approximately $0.67 per share in both 2018 and in 2017)
(4,031
)
 
(4,031
)
Cash dividends – common stock ($1.24 per share in 2018 and $1.11 per share in 2017)
(79,628
)
 
(71,393
)
Total shareholders’ equity at end of period
$
3,309,512

 
$
3,223,929

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,
 
2018
 
2017
Operating Activities:
 
 
 
Net income
$
217,821

 
$
170,494

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Provision for loan losses
15,196

 
16,378

Deferred tax expense (benefit)
22,886

 
(4,173
)
Accretion of loan discounts
(6,904
)
 
(7,403
)
Securities premium amortization (discount accretion), net
48,936

 
43,652

Net (gain) loss on securities transactions
79

 
50

Depreciation and amortization
24,581

 
24,055

Net (gain) loss on sale/write-down of assets/foreclosed assets
(5,453
)
 
(1,383
)
Stock-based compensation
6,760

 
6,291

Net tax benefit from stock-based compensation
3,160

 
5,579

Earnings on life insurance policies
(1,663
)
 
(1,565
)
Net change in:
 
 
 
Trading account securities
(2,263
)
 
(7,120
)
Accrued interest receivable and other assets
(42,959
)
 
(20,116
)
Accrued interest payable and other liabilities
(26,176
)
 
(36,277
)
Net cash from operating activities
254,001

 
188,462

 
 
 
 
Investing Activities:
 
 
 
Securities held to maturity:
 
 
 
Purchases
(1,500
)
 
—

Sales
—

 
—

Maturities, calls and principal repayments
183,140

 
634,874

Securities available for sale:
 
 
 
Purchases
(11,453,662
)
 
(8,825,545
)
Sales
10,890,388

 
8,247,439

Maturities, calls and principal repayments
108,316

 
164,182

Proceeds from sale of loans
18,918

 
—

Net change in loans
(601,101
)
 
(549,408
)
Benefits received on life insurance policies
384

 
462

Proceeds from sales of premises and equipment
12,844

 
1,550

Purchases of premises and equipment
(45,766
)
 
(14,481
)
Proceeds from sales of repossessed properties
986

 
345

Net cash from investing activities
(887,053
)
 
(340,582
)
 
 
 
 
Financing Activities:
 
 
 
Net change in deposits
(875,890
)
 
(198,002
)
Net change in short-term borrowings
(170,354
)
 
(52,125
)
Proceeds from issuance of subordinated notes
—

 
98,434

Principal payments on subordinated notes
—

 
(100,000
)
Proceeds from stock option exercises
25,448

 
44,149

Purchase of treasury stock
(70
)
 
(42
)
Cash dividends paid on preferred stock
(4,031
)
 
(4,031
)
Cash dividends paid on common stock
(79,628
)
 
(71,393
)
Net cash from financing activities
(1,104,525
)
 
(283,010
)
 
 
 
 
Net change in cash and cash equivalents
(1,737,577
)
 
(435,130
)
Cash and cash equivalents at beginning of period
5,053,047

 
4,141,445

Cash and cash equivalents at end of period
$
3,315,470

 
$
3,706,315


See Notes to Consolidated Financial Statements.

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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, 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:
 
Six Months Ended 
 June 30,
 
2018
 
2017
Cash paid for interest
$
31,962

 
$
6,666

Cash paid for income taxes
3,888

 
22,801

Significant non-cash transactions:
 
 
 
Unsettled purchases/sales of securities
2,186

 
80,586

Loans foreclosed and transferred to other real estate owned and foreclosed assets
2,656

 
—

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 fee income from such transactions. Previously, such network costs were reported as a component of other non-interest expense. For the three and six months ended June 30, 2018, gross interchange and debit card transaction fees totaled $6.5 million and $12.6 million, respectively, while related network costs totaled $3.0 million and $6.0 million, respectively. On a net basis, we reported $3.4 million and $6.6 million as interchange and debit card transaction fees in the accompanying Consolidated Statement of Income for the three and six months ended June 30, 2018, respectively. For the three and six months ended June 30, 2017, we reported interchange and debit card transaction fees totaling $5.7 million and $11.3 million, respectively, on a gross basis in the accompanying Consolidated Statement of Income while related network costs totaling $2.9 million and $6.1 million were reported as a component of other non-interest expense for the three and six months ended June 30, 2017, respectively. 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 six months ended June 30, 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.

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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.
 
June 30, 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
$
3,317

 
$
9

 
$
73

 
$
3,253

 
$
3,610

 
$
15

 
$
38

 
$
3,587

States and political subdivisions
1,231,694

 
13,100

 
2,394

 
1,242,400

 
1,428,488

 
26,462

 
2,746

 
1,452,204

Other
1,500

 
—

 
10

 
1,490

 
—

 
—

 
—

 
—

Total
$
1,236,511

 
$
13,109

 
$
2,477

 
$
1,247,143

 
$
1,432,098

 
$
26,477

 
$
2,784

 
$
1,455,791

Available for Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
3,454,387

 
$
—

 
$
44,306

 
$
3,410,081

 
$
3,453,391

 
$
7,494

 
$
15,732

 
$
3,445,153

Residential mortgage-backed securities
625,897

 
13,540

 
7,779

 
631,658

 
648,288

 
19,048

 
2,250

 
665,086

States and political subdivisions
6,626,495

 
71,701

 
64,807

 
6,633,389

 
6,185,711

 
167,293

 
16,795

 
6,336,209

Other
42,615

 
—

 
—

 
42,615

 
42,561

 
—

 
—

 
42,561

Total
$
10,749,394

 
$
85,241

 
$
116,892

 
$
10,717,743

 
$
10,329,951

 
$
193,835

 
$
34,777

 
$
10,489,009

All mortgage-backed securities included in the above table were issued by U.S. government agencies and corporations. At June 30, 2018, approximately 98.3% of the securities in our municipal bond portfolio were issued by political subdivisions or agencies within the State of Texas, of which approximately 67.9% 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 $3.3 billion at June 30, 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 June 30, 2018 totaled $6.9 million ($5.4 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, 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
$
1,103

 
$
25

 
$
1,392

 
$
48

 
$
2,495

 
$
73

States and political subdivisions
232,707

 
633

 
44,490

 
1,761

 
277,197

 
2,394

Other
1,490

 
10

 
—

 
—

 
1,490

 
10

Total
$
235,300

 
$
668

 
$
45,882

 
$
1,809

 
$
281,182

 
$
2,477

Available for Sale
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
2,841,825

 
$
34,887

 
$
568,256

 
$
9,419

 
$
3,410,081

 
$
44,306

Residential mortgage-backed securities
238,548

 
4,687

 
58,923

 
3,092

 
297,471

 
7,779

States and political subdivisions
1,907,610

 
25,535

 
813,864

 
39,272

 
2,721,474

 
64,807

Total
$
4,987,983

 
$
65,109

 
$
1,441,043

 
$
51,783

 
$
6,429,026

 
$
116,892


10
Table of Contents

Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and our ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in cost.
Management has the ability and intent to hold the securities classified as held to maturity in the table above until they mature, at which time we expect to receive full value for the securities. Furthermore, as of June 30, 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 June 30, 2018, 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, 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
$
138,403

 
$
140,001

 
$
400,123

 
$
398,992

Due after one year through five years
134,389

 
136,874

 
3,739,862

 
3,705,611

Due after five years through ten years
448,447

 
450,758

 
480,038

 
481,384

Due after ten years
511,955

 
516,257

 
5,460,859

 
5,457,483

Residential mortgage-backed securities
3,317

 
3,253

 
625,897

 
631,658

Equity securities
—

 
—

 
42,615

 
42,615

Total
$
1,236,511

 
$
1,247,143

 
$
10,749,394

 
$
10,717,743

Sales of Securities. Sales of securities available for sale were as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Proceeds from sales
$
7,905,521

 
$
8,247,439

 
$
10,890,388

 
$
8,247,439

Gross realized gains
3

 
—

 
3

 
—

Gross realized losses
(63
)
 
(50
)
 
(82
)
 
(50
)
Tax (expense) benefit of securities gains/losses
13

 
18

 
17

 
18

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,
 
2018
 
2017
 
2018
 
2017
Premium amortization
$
(26,689
)
 
$
(24,119
)
 
$
(52,723
)
 
$
(48,147
)
Discount accretion
2,010

 
2,105

 
3,787

 
4,495

Net (premium amortization) discount accretion
$
(24,679
)
 
$
(22,014
)
 
$
(48,936
)
 
$
(43,652
)
Trading Account Securities. Trading account securities, at estimated fair value, were as follows:
 
June 30,
2018
 
December 31,
2017
U.S. Treasury
$
20,755

 
$
19,210

States and political subdivisions
579

 
1,888

Total
$
21,334

 
$
21,098


11
Table of Contents

Net gains and losses on trading account securities were as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Net gain on sales transactions
$
434

 
$
293

 
$
939

 
$
604

Net mark-to-market gains (losses)
23

 
(56
)
 
(13
)
 
(43
)
Net gain (loss) on trading account securities
$
457

 
$
237

 
$
926

 
$
561

Note 3 - Loans
Loans were as follows:
 
June 30,
2018
 
Percentage
of Total
 
December 31,
2017
 
Percentage
of Total
Commercial and industrial
$
5,043,272

 
36.8
%
 
$
4,792,388

 
36.4
%
Energy:
 
 
 
 
 
 
 
Production
1,211,261

 
8.8

 
1,182,326

 
9.0

Service
163,013

 
1.2

 
171,795

 
1.3

Other
153,754

 
1.1

 
144,972

 
1.1

Total energy
1,528,028

 
11.1

 
1,499,093

 
11.4

Commercial real estate:
 
 
 
 
 
 
 
Commercial mortgages
4,097,255

 
29.9

 
3,887,742

 
29.6

Construction
1,106,999

 
8.1

 
1,066,696

 
8.1

Land
305,585

 
2.2

 
331,986

 
2.5

Total commercial real estate
5,509,839

 
40.2

 
5,286,424

 
40.2

Consumer real estate:
 
 
 
 
 
 
 
Home equity loans
352,243

 
2.6

 
355,342

 
2.7

Home equity lines of credit
321,795

 
2.3

 
291,950

 
2.2

Other
400,661

 
3.0

 
376,002

 
2.9

Total consumer real estate
1,074,699

 
7.9

 
1,023,294

 
7.8

Total real estate
6,584,538

 
48.1

 
6,309,718

 
48.0

Consumer and other
555,924

 
4.0

 
544,466

 
4.2

Total loans
$
13,711,762

 
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 June 30, 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 11.1% 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 $47.6 million, respectively, as of June 30, 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 June 30, 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 $213.2 million at June 30, 2018 and $166.4 million at December 31, 2017.

12
Table of Contents

Non-Accrual and Past Due Loans. Non-accrual loans, segregated by class of loans, were as follows:
 
June 30,
2018
 
December 31,
2017
Commercial and industrial
$
17,306

 
$
46,186

Energy
79,963

 
94,302

Commercial real estate:
 
 
 
Buildings, land and other
19,415

 
7,589

Construction
—

 
—

Consumer real estate
872

 
2,109

Consumer and other
1,625

 
128

Total
$
119,181

 
$
150,314

As of June 30, 2018, non-accrual loans reported in the table above included $843 thousand 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 $1.4 million and $2.9 million for the three and six months ended June 30, 2018, compared to $798 thousand and $1.6 million for the three and six months ended June 30, 2017.
An age analysis of past due loans (including both accruing and non-accruing loans), segregated by class of loans, as of June 30, 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
$
19,560

 
$
14,656

 
$
34,216

 
$
5,009,056

 
$
5,043,272

 
$
5,842

Energy
3,775

 
19,914

 
23,689

 
1,504,339

 
1,528,028

 
5,878

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
Buildings, land and other
14,208

 
23,300

 
37,508

 
4,365,332

 
4,402,840

 
9,055

Construction
615

 
—

 
615

 
1,106,384

 
1,106,999

 
—

Consumer real estate
6,399

 
1,959

 
8,358

 
1,066,341

 
1,074,699

 
1,617

Consumer and other
3,710

 
608

 
4,318

 
551,606

 
555,924

 
608

Total
$
48,267

 
$
60,437

 
$
108,704

 
$
13,603,058

 
$
13,711,762

 
$
23,000

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, 2018
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
23,510

 
$
3,710

 
$
11,671

 
$
15,381

 
$
7,667

Energy
90,744

 
19,461

 
60,228

 
79,689

 
14,371

Commercial real estate:
 
 
 
 
 
 

 
 
Buildings, land and other
18,382

 
2,512

 
15,597

 
18,109

 
999

Construction
—

 
—

 
—

 
—

 
—

Consumer real estate
293

 
293

 
—

 
293

 
—

Consumer and other
1,625

 
—

 
1,625

 
1,625

 
1,625

Total
$
134,554

 
$
25,976

 
$
89,121

 
$
115,097

 
$
24,662

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


13
Table of Contents

The average recorded investment in impaired loans was as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018

2017
Commercial and industrial
$
15,307

 
$
21,347

 
$
24,791

 
$
23,867

Energy
92,380

 
67,008

 
93,001

 
63,860

Commercial real estate:
 
 
 
 
 
 
 
Buildings, land and other
13,867

 
5,966

 
11,376

 
6,266

Construction
—

 
—

 
—

 
—

Consumer real estate
860

 
1,376

 
978

 
1,135

Consumer and other
813

 
12

 
542

 
18

Total
$
123,227

 
$
95,709

 
$
130,688

 
$
95,146

Troubled Debt Restructurings. Troubled debt restructurings during the six months ended June 30, 2018 and June 30, 2017 are set forth in the following table.
 
Six Months Ended 
 June 30, 2018
 
Six Months Ended 
 June 30, 2017
 
Balance at
Restructure
 
Balance at
Period-End
 
Balance at
Restructure
 
Balance at
Period-End
Commercial and industrial
$
2,203

 
$
843

 
$
784

 
$
643

Energy
13,708

 
—

 
12,959

 
12,458

 
$
15,911

 
$
843

 
$
13,743

 
$
13,101

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:
 
June 30, 2018
 
June 30, 2017
Restructured loans past due in excess of 90 days at period-end:
 
 
 
Number of loans
—

 
—

Dollar amount of loans
$
—

 
$
—

Restructured loans on non-accrual status at period end
843

 
11,405

Charge-offs of restructured loans:
 
 
 
Recognized in connection with restructuring
—

 
—

Recognized on previously restructured loans
1,650

 
9,951

Proceeds from sale of restructured loans
13,350

 
—

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.

14
Table of Contents

The following tables present weighted-average risk grades for all commercial loans by class.
 
June 30, 2018
 
December 31, 2017
 
Weighted
Average
Risk Grade
 
Loans
 
Weighted
Average
Risk Grade
 
Loans
Commercial and industrial:
 
 
 
 
 
 
 
Risk grades 1-8
6.10

 
$
4,737,862

 
6.06

 
$
4,378,839

Risk grade 9
9.00

 
110,377

 
9.00

 
170,285

Risk grade 10
10.00

 
117,623

 
10.00

 
99,260

Risk grade 11
11.00

 
60,104

 
11.00

 
97,818

Risk grade 12
12.00

 
9,639

 
12.00

 
38,633

Risk grade 13
13.00

 
7,667

 
13.00

 
7,553

Total
6.33

 
$
5,043,272

 
6.41

 
$
4,792,388

Energy
 
 
 
 
 
 
 
Risk grades 1-8
5.98

 
$
1,288,490

 
6.01

 
$
1,199,207

Risk grade 9
9.00

 
44,181

 
9.00

 
50,427

Risk grade 10
10.00

 
48,115

 
10.00

 
64,282

Risk grade 11
11.00

 
67,279

 
11.00

 
90,875

Risk grade 12
12.00

 
65,591

 
12.00

 
81,035

Risk grade 13
13.00

 
14,372

 
13.00

 
13,267

Total
6.74

 
$
1,528,028

 
6.97

 
$
1,499,093

Commercial real estate:
 
 

 
 
 
 
Buildings, land and other
 
 
 
 
 
 
 
Risk grades 1-8
6.77

 
$
4,071,883

 
6.75

 
$
3,868,659

Risk grade 9
9.00

 
130,689

 
9.00

 
151,487

Risk grade 10
10.00

 
101,505

 
10.00

 
129,391

Risk grade 11
11.00

 
79,348

 
11.00

 
62,602

Risk grade 12
12.00

 
18,416

 
12.00

 
7,589

Risk grade 13
13.00

 
999

 
13.00

 
—

Total
7.01

 
$
4,402,840

 
7.00

 
$
4,219,728

Construction
 
 
 
 
 
 
 
Risk grades 1-8
7.13

 
$
1,077,422

 
7.11

 
$
1,019,635

Risk grade 9
9.00

 
10,873

 
9.00

 
18,042

Risk grade 10
10.00

 
17,237

 
10.00

 
23,393

Risk grade 11
11.00

 
1,467

 
11.00

 
5,626

Risk grade 12
12.00

 
—

 
12.00

 
—

Risk grade 13
13.00

 
—

 
13.00

 
—

Total
7.20

 
$
1,106,999

 
7.23

 
$
1,066,696

Net (charge-offs)/recoveries, segregated by class of loans, were as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Commercial and industrial
$
(3,548
)
 
$
(4,861
)
 
$
(11,223
)
 
$
(7,590
)
Energy
(2,076
)
 
(6,236
)
 
(4,925
)
 
(10,461
)
Commercial real estate:
 
 
 
 
 
 
 
Buildings, land and other
(402
)
 
460

 
(321
)
 
502

Construction
6

 
3

 
8

 
6

Consumer real estate
(164
)
 
111

 
(690
)
 
207

Consumer and other
(1,726
)
 
(1,401
)
 
(3,183
)
 
(2,529
)
Total
$
(7,910
)
 
$
(11,924
)
 
$
(20,334
)
 
$
(19,865
)

15
Table of Contents

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 129.7 at June 30, 2018 and 129.4 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 June 30, 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
June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Historical valuation allowances
$
25,233

 
$
12,117

 
$
20,072

 
$
2,555

 
$
6,779

 
$
66,756

Specific valuation allowances
7,667

 
14,371

 
999

 
—

 
1,625

 
24,662

General valuation allowances
9,671

 
6,807

 
4,036

 
1,474

 
(114
)
 
21,874

Macroeconomic valuation allowances
15,142

 
4,018

 
13,811

 
2,307

 
1,656

 
36,934

Total
$
57,713

 
$
37,313

 
$
38,918

 
$
6,336

 
$
9,946

 
$
150,226

Allocated to loans:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated
$
7,667

 
$
14,371

 
$
999

 
$
—

 
$
1,625

 
$
24,662

Collectively evaluated
50,046

 
22,942

 
37,919

 
6,336

 
8,321

 
125,564

Total
$
57,713

 
$
37,313

 
$
38,918

 
$
6,336

 
$
9,946

 
$
150,226

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


16
Table of Contents

Our recorded investment in loans as of June 30, 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
June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated
$
15,381

 
$
79,689

 
$
18,109

 
$
293

 
$
1,625

 
$
115,097

Collectively evaluated
5,027,891

 
1,448,339

 
5,491,730

 
1,074,406

 
554,299

 
13,596,665

Total
$
5,043,272

 
$
1,528,028

 
$
5,509,839

 
$
1,074,699

 
$
555,924

 
$
13,711,762

December 31, 2017