Attached files
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, 2016
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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ý | Accelerated filer | ¨ |
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
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 22, 2016 there were 62,107,408 shares of the registrant’s Common Stock, $.01 par value, outstanding.
Cullen/Frost Bankers, Inc.
Quarterly Report on Form 10-Q
June 30, 2016
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
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, 2016 | December 31, 2015 | ||||||
Assets: | |||||||
Cash and due from banks | $ | 572,287 | $ | 532,824 | |||
Interest-bearing deposits | 2,726,094 | 2,991,782 | |||||
Federal funds sold and resell agreements | 66,842 | 66,917 | |||||
Total cash and cash equivalents | 3,365,223 | 3,591,523 | |||||
Securities held to maturity, at amortized cost | 2,339,602 | 2,663,009 | |||||
Securities available for sale, at estimated fair value | 10,044,033 | 9,206,358 | |||||
Trading account securities | 27,934 | 16,579 | |||||
Loans, net of unearned discounts | 11,584,182 | 11,486,531 | |||||
Less: Allowance for loan losses | (149,714 | ) | (135,859 | ) | |||
Net loans | 11,434,468 | 11,350,672 | |||||
Premises and equipment, net | 564,199 | 559,124 | |||||
Goodwill | 654,668 | 654,668 | |||||
Other intangible assets, net | 7,517 | 8,800 | |||||
Cash surrender value of life insurance policies | 176,345 | 175,191 | |||||
Accrued interest receivable and other assets | 362,260 | 340,018 | |||||
Total assets | $ | 28,976,249 | $ | 28,565,942 | |||
Liabilities: | |||||||
Deposits: | |||||||
Non-interest-bearing demand deposits | $ | 9,779,387 | $ | 10,270,233 | |||
Interest-bearing deposits | 14,508,064 | 14,073,362 | |||||
Total deposits | 24,287,451 | 24,343,595 | |||||
Federal funds purchased and repurchase agreements | 733,160 | 893,522 | |||||
Junior subordinated deferrable interest debentures, net of unamortized issuance costs | 136,098 | 136,069 | |||||
Other long-term borrowings, net of unamortized issuance costs | 99,930 | 99,870 | |||||
Accrued interest payable and other liabilities | 582,942 | 202,543 | |||||
Total liabilities | 25,839,581 | 25,675,599 | |||||
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, 2016 and December 31, 2015 | 144,486 | 144,486 | |||||
Common stock, par value $0.01 per share; 210,000,000 shares authorized; 63,632,464 shares issued at June 30, 2016 and December 31, 2015 | 637 | 637 | |||||
Additional paid-in capital | 902,892 | 897,350 | |||||
Retained earnings | 1,914,022 | 1,845,188 | |||||
Accumulated other comprehensive income, net of tax | 281,357 | 113,863 | |||||
Treasury stock, at cost; 1,583,056 shares at June 30, 2016 and 1,650,131 shares at December 31, 2015 | (106,726 | ) | (111,181 | ) | |||
Total shareholders’ equity | 3,136,668 | 2,890,343 | |||||
Total liabilities and shareholders’ equity | $ | 28,976,249 | $ | 28,565,942 |
See Notes to Consolidated Financial Statements.
3
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, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Interest income: | |||||||||||||||
Loans, including fees | $ | 113,349 | $ | 108,105 | $ | 225,935 | $ | 213,771 | |||||||
Securities: | |||||||||||||||
Taxable | 25,531 | 27,917 | 51,505 | 58,089 | |||||||||||
Tax-exempt | 50,910 | 48,053 | 101,243 | 94,599 | |||||||||||
Interest-bearing deposits | 3,602 | 1,836 | 7,255 | 3,806 | |||||||||||
Federal funds sold and resell agreements | 59 | 21 | 117 | 41 | |||||||||||
Total interest income | 193,451 | 185,932 | 386,055 | 370,306 | |||||||||||
Interest expense: | |||||||||||||||
Deposits | 1,773 | 2,182 | 3,560 | 4,938 | |||||||||||
Federal funds purchased and repurchase agreements | 52 | 38 | 108 | 74 | |||||||||||
Junior subordinated deferrable interest debentures | 803 | 672 | 1,553 | 1,327 | |||||||||||
Other long-term borrowings | 321 | 231 | 608 | 455 | |||||||||||
Total interest expense | 2,949 | 3,123 | 5,829 | 6,794 | |||||||||||
Net interest income | 190,502 | 182,809 | 380,226 | 363,512 | |||||||||||
Provision for loan losses | 9,189 | 2,873 | 37,689 | 11,035 | |||||||||||
Net interest income after provision for loan losses | 181,313 | 179,936 | 342,537 | 352,477 | |||||||||||
Non-interest income: | |||||||||||||||
Trust and investment management fees | 26,021 | 26,472 | 51,355 | 53,633 | |||||||||||
Service charges on deposit accounts | 19,865 | 20,033 | 40,229 | 39,810 | |||||||||||
Insurance commissions and fees | 9,360 | 10,130 | 24,783 | 24,765 | |||||||||||
Interchange and debit card transaction fees | 5,381 | 4,917 | 10,403 | 9,560 | |||||||||||
Other charges, commissions and fees | 10,069 | 10,113 | 19,122 | 18,554 | |||||||||||
Net gain (loss) on securities transactions | — | — | 14,903 | 228 | |||||||||||
Other | 7,321 | 7,317 | 13,365 | 15,647 | |||||||||||
Total non-interest income | 78,017 | 78,982 | 174,160 | 162,197 | |||||||||||
Non-interest expense: | |||||||||||||||
Salaries and wages | 78,106 | 76,633 | 157,403 | 152,705 | |||||||||||
Employee benefits | 17,712 | 17,339 | 38,017 | 37,566 | |||||||||||
Net occupancy | 18,242 | 16,429 | 35,429 | 31,510 | |||||||||||
Furniture and equipment | 17,978 | 15,649 | 35,495 | 31,183 | |||||||||||
Deposit insurance | 4,197 | 3,563 | 7,854 | 7,176 | |||||||||||
Intangible amortization | 619 | 849 | 1,283 | 1,743 | |||||||||||
Other | 42,591 | 42,777 | 83,123 | 82,867 | |||||||||||
Total non-interest expense | 179,445 | 173,239 | 358,604 | 344,750 | |||||||||||
Income before income taxes | 79,885 | 85,679 | 158,093 | 169,924 | |||||||||||
Income taxes | 8,406 | 12,602 | 17,835 | 24,684 | |||||||||||
Net income | 71,479 | 73,077 | 140,258 | 145,240 | |||||||||||
Preferred stock dividends | 2,015 | 2,015 | 4,031 | 4,031 | |||||||||||
Net income available to common shareholders | $ | 69,464 | $ | 71,062 | $ | 136,227 | $ | 141,209 | |||||||
Earnings per common share: | |||||||||||||||
Basic | $ | 1.12 | $ | 1.12 | $ | 2.19 | $ | 2.23 | |||||||
Diluted | 1.11 | 1.11 | 2.18 | 2.22 |
See Notes to Consolidated Financial Statements.
4
Cullen/Frost Bankers, Inc.
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Net income | $ | 71,479 | $ | 73,077 | $ | 140,258 | $ | 145,240 | |||||||
Other comprehensive income (loss), before tax: | |||||||||||||||
Securities available for sale and transferred securities: | |||||||||||||||
Change in net unrealized gain/loss during the period | 165,288 | (113,268 | ) | 287,506 | (78,741 | ) | |||||||||
Change in net unrealized gain on securities transferred to held to maturity | (9,185 | ) | (8,207 | ) | (17,351 | ) | (16,094 | ) | |||||||
Reclassification adjustment for net (gains) losses included in net income | — | — | (14,903 | ) | (228 | ) | |||||||||
Total securities available for sale and transferred securities | 156,103 | (121,475 | ) | 255,252 | (95,063 | ) | |||||||||
Defined-benefit post-retirement benefit plans: | |||||||||||||||
Change in the net actuarial gain/loss | 1,553 | 1,749 | 3,106 | 3,498 | |||||||||||
Remeasurement of projected benefit obligation related to SERP | (862 | ) | — | (862 | ) | — | |||||||||
Reclassification adjustment for SERP settlement costs included in net income | 187 | — | 187 | — | |||||||||||
Total defined-benefit post-retirement benefit plans | 878 | 1,749 | 2,431 | 3,498 | |||||||||||
Other comprehensive income (loss), before tax | 156,981 | (119,726 | ) | 257,683 | (91,565 | ) | |||||||||
Deferred tax expense (benefit) related to other comprehensive income | 54,943 | (41,904 | ) | 90,189 | (32,048 | ) | |||||||||
Other comprehensive income (loss), net of tax | 102,038 | (77,822 | ) | 167,494 | (59,517 | ) | |||||||||
Comprehensive income (loss) | $ | 173,517 | $ | (4,745 | ) | $ | 307,752 | $ | 85,723 |
See Notes to Consolidated Financial Statements.
5
Cullen/Frost Bankers, Inc.
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands, except per share amounts)
Six Months Ended June 30, | |||||||
2016 | 2015 | ||||||
Total shareholders’ equity at beginning of period | $ | 2,890,343 | $ | 2,851,403 | |||
Net income | 140,258 | 145,240 | |||||
Other comprehensive income (loss) | 167,494 | (59,517 | ) | ||||
Stock option exercises (67,075 shares in 2016 and 171,474 shares in 2015) | 3,586 | 8,950 | |||||
Stock compensation expense recognized in earnings | 5,477 | 5,337 | |||||
Tax benefits related to stock compensation | 65 | 750 | |||||
Purchase of treasury stock (140,571 shares in 2015) | — | (10,594 | ) | ||||
Cash dividends – preferred stock (approximately $0.67 per share in both 2016 and in 2015) | (4,031 | ) | (4,031 | ) | |||
Cash dividends – common stock ($1.07 per share in 2016 and $1.04 per share in 2015) | (66,524 | ) | (65,871 | ) | |||
Total shareholders’ equity at end of period | $ | 3,136,668 | $ | 2,871,667 |
See Notes to Consolidated Financial Statements.
6
Cullen/Frost Bankers, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Six Months Ended June 30, | |||||||
2016 | 2015 | ||||||
Operating Activities: | |||||||
Net income | $ | 140,258 | $ | 145,240 | |||
Adjustments to reconcile net income to net cash from operating activities: | |||||||
Provision for loan losses | 37,689 | 11,035 | |||||
Deferred tax expense (benefit) | (9,633 | ) | (7,404 | ) | |||
Accretion of loan discounts | (8,185 | ) | (6,951 | ) | |||
Securities premium amortization (discount accretion), net | 38,806 | 35,511 | |||||
Net (gain) loss on securities transactions | (14,903 | ) | (228 | ) | |||
Depreciation and amortization | 23,823 | 20,175 | |||||
Net (gain) loss on sale/write-down of assets/foreclosed assets | (596 | ) | (845 | ) | |||
Stock-based compensation | 5,477 | 5,337 | |||||
Tax deficiency from stock-based compensation | (60 | ) | (3 | ) | |||
Excess tax benefits from stock-based compensation | (125 | ) | (753 | ) | |||
Earnings on life insurance policies | (1,745 | ) | (1,814 | ) | |||
Net change in: | |||||||
Trading account securities | 177 | (212 | ) | ||||
Accrued interest receivable and other assets | (26,795 | ) | (64,974 | ) | |||
Accrued interest payable and other liabilities | (4,474 | ) | (17,811 | ) | |||
Net cash from operating activities | 179,714 | 116,303 | |||||
Investing Activities: | |||||||
Securities held to maturity: | |||||||
Purchases | — | — | |||||
Sales | 135,610 | — | |||||
Maturities, calls and principal repayments | 164,687 | 103,580 | |||||
Securities available for sale: | |||||||
Purchases | (1,514,263 | ) | (931,021 | ) | |||
Sales | 1,060,196 | 223,987 | |||||
Maturities, calls and principal repayments | 165,883 | 471,195 | |||||
Proceeds from sale of loans | 30,470 | — | |||||
Net change in loans | (144,192 | ) | (410,449 | ) | |||
Benefits received on life insurance policies | 591 | — | |||||
Proceeds from sales of premises and equipment | 1,516 | 10 | |||||
Purchases of premises and equipment | (23,459 | ) | (96,805 | ) | |||
Proceeds from sales of repossessed properties | 297 | 3,947 | |||||
Net cash from investing activities | (122,664 | ) | (635,556 | ) | |||
Financing Activities: | |||||||
Net change in deposits | (56,144 | ) | (294,776 | ) | |||
Net change in short-term borrowings | (160,362 | ) | (210,755 | ) | |||
Proceeds from stock option exercises | 3,586 | 8,950 | |||||
Excess tax benefits from stock-based compensation | 125 | 753 | |||||
Purchase of treasury stock | — | (10,594 | ) | ||||
Cash dividends paid on preferred stock | (4,031 | ) | (4,031 | ) | |||
Cash dividends paid on common stock | (66,524 | ) | (65,871 | ) | |||
Net cash from financing activities | (283,350 | ) | (576,324 | ) | |||
Net change in cash and cash equivalents | (226,300 | ) | (1,095,577 | ) | |||
Cash and equivalents at beginning of period | 3,591,523 | 4,364,123 | |||||
Cash and equivalents at end of period | $ | 3,365,223 | $ | 3,268,546 |
See Notes to Consolidated Financial Statements.
7
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 our 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, 2015, included in our Annual Report on Form 10-K filed with the SEC on February 4, 2016 (the “2015 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, | |||||||
2016 | 2015 | ||||||
Cash paid for interest | $ | 5,770 | $ | 6,845 | |||
Cash paid for income taxes | 25,979 | 22,300 | |||||
Significant non-cash transactions: | |||||||
Securities purchased not yet settled | 306,564 | 50,567 | |||||
Loans foreclosed and transferred to other real estate owned and foreclosed assets | 422 | 161 | |||||
Loans to facilitate the sale of other real estate owned | — | 20 |
Reclassifications and Restatements. Certain items in prior financial statements have been reclassified to conform to the current presentation. In that regard, in connection with the adoption of a new accounting standard that requires unamortized debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, our consolidated balance sheet as of December 31, 2015 reflects a $1.2 million decrease in accrued interest receivable and other assets, a $1.0 million decrease in junior subordinated deferrable interest debentures and a $130 thousand decrease in other long-term borrowings.
8
Note 2 - Securities
Securities. A summary of the amortized cost and estimated fair value of securities, excluding trading securities, is presented below.
June 30, 2016 | December 31, 2015 | ||||||||||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||||||
Held to Maturity | |||||||||||||||||||||||||||||||
U.S. Treasury | $ | 249,661 | $ | 5,461 | $ | — | $ | 255,122 | $ | 249,441 | $ | 7,776 | $ | — | $ | 257,217 | |||||||||||||||
Residential mortgage-backed securities | 5,156 | 63 | — | 5,219 | 6,456 | 63 | 4 | 6,515 | |||||||||||||||||||||||
States and political subdivisions | 2,083,435 | 72,954 | 3,697 | 2,152,692 | 2,405,762 | 46,003 | 6,149 | 2,445,616 | |||||||||||||||||||||||
Other | 1,350 | — | — | 1,350 | 1,350 | — | 13 | 1,337 | |||||||||||||||||||||||
Total | $ | 2,339,602 | $ | 78,478 | $ | 3,697 | $ | 2,414,383 | $ | 2,663,009 | $ | 53,842 | $ | 6,166 | $ | 2,710,685 | |||||||||||||||
Available for Sale | |||||||||||||||||||||||||||||||
U.S. Treasury | $ | 3,984,495 | $ | 135,522 | $ | — | $ | 4,120,017 | $ | 3,980,986 | $ | 22,041 | $ | 8,507 | $ | 3,994,520 | |||||||||||||||
Residential mortgage-backed securities | 861,794 | 46,504 | 113 | 908,185 | 1,000,024 | 42,142 | 734 | 1,041,432 | |||||||||||||||||||||||
States and political subdivisions | 4,695,526 | 277,835 | 7 | 4,973,354 | 3,996,113 | 133,305 | 1,459 | 4,127,959 | |||||||||||||||||||||||
Other | 42,477 | — | — | 42,477 | 42,447 | — | — | 42,447 | |||||||||||||||||||||||
Total | $ | 9,584,292 | $ | 459,861 | $ | 120 | $ | 10,044,033 | $ | 9,019,570 | $ | 197,488 | $ | 10,700 | $ | 9,206,358 |
All mortgage-backed securities included in the above table were issued by U.S. government agencies and corporations. At June 30, 2016, approximately 97.9% of the securities in our municipal bond portfolio were issued by political subdivisions or agencies within the State of Texas, of which approximately 68.1% are either guaranteed by the Texas Permanent School Fund, which has a “triple A” insurer financial strength rating, or secured by U.S. Treasury securities via defeasance of the debt by the issuers. Securities with limited marketability, such as stock in the Federal Reserve Bank and the Federal Home Loan Bank, are carried at cost and are reported as other available for sale securities in the table above. The carrying value of securities pledged to secure public funds, trust deposits, repurchase agreements and for other purposes, as required or permitted by law was $3.3 billion at June 30, 2016 and $3.9 billion and December 31, 2015.
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. Some of these securities were sold during the first quarter of 2016, as more fully discussed below. 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, 2016 totaled $42.6 million ($27.7 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, 2016, 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 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
States and political subdivisions | 37,489 | 512 | 154,689 | 3,185 | 192,178 | 3,697 | |||||||||||||||||
Total | $ | 37,489 | $ | 512 | $ | 154,689 | $ | 3,185 | $ | 192,178 | $ | 3,697 | |||||||||||
Available for Sale | |||||||||||||||||||||||
Residential mortgage-backed securities | $ | 139 | $ | 3 | $ | 16,844 | $ | 110 | $ | 16,983 | $ | 113 | |||||||||||
States and political subdivisions | 10,340 | 7 | — | — | 10,340 | 7 | |||||||||||||||||
Total | $ | 10,479 | $ | 10 | $ | 16,844 | $ | 110 | $ | 27,323 | $ | 120 |
9
Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and our ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in cost.
Management has the ability and intent to hold the securities classified as held to maturity in the table above until they mature, at which time we will receive full value for the securities. Furthermore, as of June 30, 2016, 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 largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of June 30, 2016, 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, 2016 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 | $ | 608,032 | $ | 621,611 | $ | 59,059 | $ | 59,905 | |||||||
Due after one year through five years | 349,978 | 371,006 | 3,778,355 | 3,873,477 | |||||||||||
Due after five years through ten years | 277,818 | 287,257 | 1,204,980 | 1,282,404 | |||||||||||
Due after ten years | 1,098,618 | 1,129,290 | 3,637,627 | 3,877,585 | |||||||||||
Residential mortgage-backed securities | 5,156 | 5,219 | 861,794 | 908,185 | |||||||||||
Equity securities | — | — | 42,477 | 42,477 | |||||||||||
Total | $ | 2,339,602 | $ | 2,414,383 | $ | 9,584,292 | $ | 10,044,033 |
Sales of Securities. During the first quarter of 2016, a portion of the securities we sold included certain securities that were issued by municipalities and special-purpose districts under municipal control (together referred to as “municipalities”) within the State of Texas that have been significantly impacted by the significant decline in market oil prices due to the fact that their tax bases are heavily reliant on the energy industry relative to other sectors of the economy. Specifically, the revenues of these municipalities have been adversely impacted by the sustained low-level of oil prices. Additionally, some of these municipalities had been put on credit watch and subsequently received downgrades by credit rating agencies. In consideration of this, along with our own internal credit analysis, we determined that the creditworthiness of these municipalities had significantly deteriorated and that it was reasonably possible that all amounts due would not be collected. Because this increased risk exposure exceeded acceptable levels, we sold certain securities issued by those municipalities. We did not sell any securities issued by these municipalities that are either guaranteed by the Texas Permanent School Fund or secured by U.S. Treasury securities via defeasance of the debt by the issuers because, as a result of these credit enhancements, the collectibility of these securities is not in doubt. Some of the securities we sold were classified as held to maturity prior to their sale. Despite their classification as held to maturity, we believe the sale of these securities was merited and permissible under the applicable accounting guidelines because of the significant deterioration in the creditworthiness of the issuers.
Sales of securities held to maturity were as follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Proceeds from sales | $ | — | $ | — | $ | 135,610 | $ | — | |||||||
Amortized cost | — | — | 131,840 | — | |||||||||||
Gross realized gains | — | — | 3,770 | — | |||||||||||
Gross realized losses | — | — | — | — | |||||||||||
Tax (expense) benefit of securities gains/losses | — | — | (1,319 | ) | — |
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Sales of securities available for sale were as follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Proceeds from sales | $ | — | $ | — | $ | 1,060,196 | $ | 223,987 | |||||||
Gross realized gains | — | — | 11,133 | 228 | |||||||||||
Gross realized losses | — | — | — | — | |||||||||||
Tax (expense) benefit of securities gains/losses | — | — | (3,897 | ) | (80 | ) |
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, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Premium amortization | $ | (22,219 | ) | $ | (20,832 | ) | $ | (44,559 | ) | $ | (40,838 | ) | |||
Discount accretion | 3,138 | 2,629 | 5,753 | 5,327 | |||||||||||
Net (premium amortization) discount accretion | $ | (19,081 | ) | $ | (18,203 | ) | $ | (38,806 | ) | $ | (35,511 | ) |
Trading Account Securities. Trading account securities, at estimated fair value, were as follows:
June 30, 2016 | December 31, 2015 | ||||||
U.S. Treasury | $ | 13,381 | $ | 16,443 | |||
States and political subdivisions | 14,553 | 136 | |||||
Total | $ | 27,934 | $ | 16,579 |
Net gains and losses on trading account securities were as follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Net gain on sales transactions | $ | 351 | $ | 278 | $ | 653 | $ | 558 | |||||||
Net mark-to-market gains (losses) | (2 | ) | (32 | ) | (1 | ) | (46 | ) | |||||||
Net gain (loss) on trading account securities | $ | 349 | $ | 246 | $ | 652 | $ | 512 |
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Note 3 - Loans
Loans were as follows:
June 30, 2016 | Percentage of Total | December 31, 2015 | Percentage of Total | ||||||||||
Commercial and industrial | $ | 4,253,822 | 36.7 | % | $ | 4,120,522 | 35.9 | % | |||||
Energy: | |||||||||||||
Production | 1,059,524 | 9.1 | 1,249,678 | 10.9 | |||||||||
Service | 226,637 | 2.0 | 272,934 | 2.4 | |||||||||
Other | 217,447 | 1.9 | 235,583 | 2.0 | |||||||||
Total energy | 1,503,608 | 13.0 | 1,758,195 | 15.3 | |||||||||
Commercial real estate: | |||||||||||||
Commercial mortgages | 3,380,524 | 29.2 | 3,285,041 | 28.6 | |||||||||
Construction | 804,341 | 6.9 | 720,695 | 6.3 | |||||||||
Land | 290,752 | 2.5 | 286,991 | 2.5 | |||||||||
Total commercial real estate | 4,475,617 | 38.6 | 4,292,727 | 37.4 | |||||||||
Consumer real estate: | |||||||||||||
Home equity loans | 340,196 | 3.0 | 340,528 | 3.0 | |||||||||
Home equity lines of credit | 248,812 | 2.1 | 233,525 | 2.0 | |||||||||
Other | 312,142 | 2.7 | 306,696 | 2.6 | |||||||||
Total consumer real estate | 901,150 | 7.8 | 880,749 | 7.6 | |||||||||
Total real estate | 5,376,767 | 46.4 | 5,173,476 | 45.0 | |||||||||
Consumer and other | 449,985 | 3.9 | 434,338 | 3.8 | |||||||||
Total loans | $ | 11,584,182 | 100.0 | % | $ | 11,486,531 | 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, 2016, there were no concentrations of loans related to any single industry in excess of 10% of total loans other than energy loans, which totaled 13.0% 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 $60.8 million, respectively, as of June 30, 2016.
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, 2016 or December 31, 2015.
Non-Accrual and Past Due Loans. Non-accrual loans, segregated by class of loans, were as follows:
June 30, 2016 | December 31, 2015 | ||||||
Commercial and industrial | $ | 27,955 | $ | 25,111 | |||
Energy | 42,755 | 21,180 | |||||
Commercial real estate: | |||||||
Buildings, land and other | 11,469 | 34,519 | |||||
Construction | 551 | 569 | |||||
Consumer real estate | 2,132 | 1,862 | |||||
Consumer and other | 268 | 226 | |||||
Total | $ | 85,130 | $ | 83,467 |
As of June 30, 2016, non-accrual loans reported in the table above included $21.0 million related to loans that were restructured as “troubled debt restructurings” during 2016. 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 $936 thousand and $1.8 million for the three and six months ended June 30, 2016, compared to $364 thousand and $760 thousand for three and six months ended June 30, 2015.
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An age analysis of past due loans (including both accruing and non-accruing loans), segregated by class of loans, as of June 30, 2016 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 | $ | 33,273 | $ | 31,096 | $ | 64,369 | $ | 4,189,453 | $ | 4,253,822 | $ | 12,802 | |||||||||||
Energy | 24,335 | 17,332 | 41,667 | 1,461,941 | 1,503,608 | 11,393 | |||||||||||||||||
Commercial real estate: | |||||||||||||||||||||||
Buildings, land and other | 22,458 | 8,124 | 30,582 | 3,640,694 | 3,671,276 | 3,731 | |||||||||||||||||
Construction | 2,074 | 326 | 2,400 | 801,941 | 804,341 | — | |||||||||||||||||
Consumer real estate | 3,168 | 1,996 | 5,164 | 895,986 | 901,150 | 1,573 | |||||||||||||||||
Consumer and other | 4,739 | 912 | 5,651 | 444,334 | 449,985 | 853 | |||||||||||||||||
Total | $ | 90,047 | $ | 59,786 | $ | 149,833 | $ | 11,434,349 | $ | 11,584,182 | $ | 30,352 |
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, 2016 | |||||||||||||||||||
Commercial and industrial | $ | 32,079 | $ | 18,723 | $ | 6,251 | $ | 24,974 | $ | 4,727 | |||||||||
Energy | 51,030 | 34,217 | 8,410 | 42,627 | 2,500 | ||||||||||||||
Commercial real estate: | |||||||||||||||||||
Buildings, land and other | 14,131 | 7,840 | 1,680 | 9,520 | 875 | ||||||||||||||
Construction | 326 | 326 | — | 326 | — | ||||||||||||||
Consumer real estate | 725 | 428 | — | 428 | — | ||||||||||||||
Consumer and other | 103 | 54 | — | 54 | — | ||||||||||||||
Total | $ | 98,394 | $ | 61,588 | $ | 16,341 | $ | 77,929 | $ | 8,102 | |||||||||
December 31, 2015 | |||||||||||||||||||
Commercial and industrial | $ | 26,067 | $ | 18,776 | $ | 4,084 | $ | 22,860 | $ | 2,378 | |||||||||
Energy | 25,240 | 8,689 | 12,450 | 21,139 | 2,000 | ||||||||||||||
Commercial real estate: | |||||||||||||||||||
Buildings, land and other | 37,126 | 32,425 | — | 32,425 | — | ||||||||||||||
Construction | 793 | 569 | — | 569 | — | ||||||||||||||
Consumer real estate | 755 | 485 | — | 485 | — | ||||||||||||||
Consumer and other | — | — | — | — | — | ||||||||||||||
Total | $ | 89,981 | $ | 60,944 | $ | 16,534 | $ | 77,478 | $ | 4,378 |
The average recorded investment in impaired loans was as follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Commercial and industrial | $ | 24,866 | $ | 29,680 | $ | 24,197 | $ | 30,406 | |||||||
Energy | 78,359 | 636 | 59,286 | 636 | |||||||||||
Commercial real estate: | |||||||||||||||
Buildings, land and other | 20,533 | 14,028 | 24,497 | 15,254 | |||||||||||
Construction | 648 | 1,497 | 622 | 1,929 | |||||||||||
Consumer real estate | 443 | 859 | 457 | 771 | |||||||||||
Consumer and other | 27 | — | 18 | — | |||||||||||
Total | $ | 124,876 | $ | 46,700 | $ | 109,077 | $ | 48,996 |
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Troubled Debt Restructurings. Troubled debt restructurings during the six months ended June 30, 2016 and June 30, 2015 are set forth in the following table.
Six Months Ended June 30, 2016 | Six Months Ended June 30, 2015 | ||||||||||||||
Balance at Restructure | Balance at Period-End | Balance at Restructure | Balance at Period-End | ||||||||||||
Commercial and industrial | $ | 510 | $ | 505 | $ | 709 | $ | 584 | |||||||
Energy | 62,546 | 20,795 | — | — | |||||||||||
Commercial real estate: | |||||||||||||||
Buildings, land and other | 1,456 | 1,456 | — | — | |||||||||||
Construction | 243 | 224 | — | — | |||||||||||
$ | 64,755 | $ | 22,980 | $ | 709 | $ | 584 |
The modifications during the six months ended June 30, 2016 primarily related to extending amortization periods, converting loans to interest only for a period of time, deferral of interest payments and the waiver of certain covenants, while the modifications during the six months ended June 30, 2015 primarily related to extending amortization periods and a temporary reduction in payments. The modifications during the reported periods did not significantly impact our determination of the allowance for loan losses. During the second quarter of 2016, we recognized a charge-off of $9.5 million related to a loan restructured during the first quarter of 2016. The loan was subsequently sold with proceeds from the sale totaling $30.5 million.
Credit Quality Indicators. As part of the on-going monitoring of the credit quality of our loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted-average risk grade of commercial loans, (ii) the level of classified commercial loans, (iii) the delinquency status of consumer loans (see details above), (iv) net charge-offs, (v) non-performing loans (see details above) and (vi) the general economic conditions in the State of Texas.
We utilize a risk grading matrix to assign a risk grade to each of our commercial loans. Loans are graded on a scale of 1 to 14. A description of the general characteristics of the 14 risk grades is set forth in our 2015 Form 10-K. In monitoring credit quality trends in the context of assessing the appropriate level of the allowance for loan losses, we monitor portfolio credit quality by the weighted-average risk grade of each class of commercial loan. Individual relationship managers review updated financial information for all pass grade loans to reassess the risk grade on at least an annual basis. When a loan has a risk grade of 9, it is still considered a pass grade loan; however, it is considered to be on management’s “watch list,” where a significant risk-modifying action is anticipated in the near term. When a loan has a risk grade of 10 or higher, a special assets officer monitors the loan on an on-going basis. The following tables present weighted average risk grades for all commercial loans by class.
June 30, 2016 | December 31, 2015 | ||||||||||||
Weighted Average Risk Grade | Loans | Weighted Average Risk Grade | Loans | ||||||||||
Commercial and industrial: | |||||||||||||
Risk grades 1-8 | 5.95 | $ | 3,953,406 | 5.88 | $ | 3,869,203 | |||||||
Risk grade 9 | 9.00 | 98,610 | 9.00 | 100,670 | |||||||||
Risk grade 10 | 10.00 | 88,370 | 10.00 | 76,030 | |||||||||
Risk grade 11 | 11.00 | 85,456 | 11.00 | 49,508 | |||||||||
Risk grade 12 | 12.00 | 23,041 | 12.00 | 22,644 | |||||||||
Risk grade 13 | 13.00 | 4,939 | 13.00 | 2,467 | |||||||||
Total | 6.25 | $ | 4,253,822 | 6.13 | $ | 4,120,522 | |||||||
Energy | |||||||||||||
Risk grades 1-8 | 6.19 | $ | 812,591 | 6.12 | $ | 1,385,749 | |||||||
Risk grade 9 | 9.00 | 124,776 | 9.00 | 212,250 | |||||||||
Risk grade 10 | 10.00 | 295,723 | 10.00 | 62,163 | |||||||||
Risk grade 11 | 11.00 | 227,763 | 11.00 | 76,853 | |||||||||
Risk grade 12 | 12.00 | 40,255 | 12.00 | 19,180 | |||||||||
Risk grade 13 | 13.00 | 2,500 | 13.00 | 2,000 | |||||||||
Total | 8.07 | $ | 1,503,608 | 6.89 | $ | 1,758,195 |
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(continued) | June 30, 2016 | December 31, 2015 | |||||||||||
Weighted Average Risk Grade | Loans | Weighted Average Risk Grade | Loans | ||||||||||
Commercial real estate: | |||||||||||||
Buildings, land and other | |||||||||||||
Risk grades 1-8 | 6.62 | $ | 3,375,360 | 6.58 | $ | 3,280,435 | |||||||
Risk grade 9 | 9.00 | 122,532 | 9.00 | 140,900 | |||||||||
Risk grade 10 | 10.00 | 77,356 | 10.00 | 72,577 | |||||||||
Risk grade 11 | 11.00 | 84,559 | 11.00 | 43,601 | |||||||||
Risk grade 12 | 12.00 | 10,594 | 12.00 | 34,519 | |||||||||
Risk grade 13 | 13.00 | 875 | 13.00 | — | |||||||||
Total | 6.89 | $ | 3,671,276 | 6.85 | $ | 3,572,032 | |||||||
Construction | |||||||||||||
Risk grades 1-8 | 7.05 | $ | 794,323 | 6.91 | $ | 696,229 | |||||||
Risk grade 9 | 9.00 | 7,818 | 9.00 | 13,074 | |||||||||
Risk grade 10 | 10.00 | 1,598 | 10.00 | 2,757 | |||||||||
Risk grade 11 | 11.00 | 51 | 11.00 | 8,066 | |||||||||
Risk grade 12 | 12.00 | 551 | 12.00 | 569 | |||||||||
Risk grade 13 | 13.00 | — | 13.00 | — | |||||||||
Total | 7.08 | $ | 804,341 | 7.01 | $ | 720,695 |
Net (charge-offs)/recoveries, segregated by class of loans, were as follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Commercial and industrial | $ | (3,966 | ) | $ | (1,683 | ) | $ | (5,098 | ) | $ | (2,535 | ) | |||
Energy | (16,747 | ) | 1 | (17,758 | ) | 3 | |||||||||
Commercial real estate: | |||||||||||||||
Buildings, land and other | 481 | 279 | 542 | (28 | ) | ||||||||||
Construction | 2 | 15 | 9 | 16 | |||||||||||
Consumer real estate | 74 | 81 | 173 | 53 | |||||||||||
Consumer and other | (1,199 | ) | (667 | ) | (1,702 | ) | (1,479 | ) | |||||||
Total | $ | (21,355 | ) | $ | (1,974 | ) | $ | (23,834 | ) | $ | (3,970 | ) |
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 2015 Form 10-K, totaled 122.9 at May 31, 2016 (most recent date available) and 123.0 at December 31, 2015. 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 2015 Form 10-K and below for changes made during the first quarter of 2016, 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.
During the first quarter of 2016, we changed the way we estimate valuation allowances for consumer and other loans, particularly overdrafts. Prior to 2016, we used a single, combined historical loss allocation factor for all consumer and other loans, which included overdrafts. In 2016, we began using two separate historical loss allocation factors for consumer and other loans, one historical loss allocation factor for consumer and other loans, excluding overdrafts, and a separate historical loss allocation factor for overdrafts. While the effect of this change resulted in a decrease in the estimated valuation allowances needed for consumer and other loans, the impact of the change was not significant to our overall allocation of the allowance for loan losses.
15
The following table presents details of the allowance for loan losses allocated to each portfolio segment as of June 30, 2016 and December 31, 2015 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, 2016 | |||||||||||||||||||||||
Historical valuation allowances | $ | 30,005 | $ | 42,179 | $ | 15,886 | $ | 2,160 | $ | 4,468 | $ | 94,698 | |||||||||||
Specific valuation allowances | 4,727 | 2,500 | 875 | — | — | 8,102 | |||||||||||||||||
General valuation allowances | 5,147 | 3,762 | 3,215 | 1,284 | (234 | ) | 13,174 | ||||||||||||||||
Macroeconomic valuation allowances | 7,699 | 17,898 | 7,087 | 491 | 565 | 33,740 | |||||||||||||||||
Total | $ | 47,578 | $ | 66,339 | $ | 27,063 | $ | 3,935 | $ | 4,799 | $ | 149,714 | |||||||||||
Allocated to loans: | |||||||||||||||||||||||
Individually evaluated | $ | 4,727 | $ | 2,500 | $ | 875 | $ | — | $ | — | $ | 8,102 | |||||||||||
Collectively evaluated | 42,851 | 63,839 | 26,188 | 3,935 | 4,799 | 141,612 | |||||||||||||||||
Total | $ | 47,578 | $ | 66,339 | $ | 27,063 | $ | 3,935 | $ | 4,799 | $ | 149,714 | |||||||||||
December 31, 2015 | |||||||||||||||||||||||
Historical valuation allowances | $ | 25,428 | $ | 21,195 | $ | 15,544 | $ | 2,109 | $ | 12,813 | $ | 77,089 | |||||||||||
Specific valuation allowances | 2,378 | 2,000 | — | — | — | 4,378 | |||||||||||||||||
General valuation allowances | 7,339 | 5,525 | 4,619 | 2,052 | (6,932 | ) | 12,603 | ||||||||||||||||
Macroeconomic valuation allowances | 7,848 | 25,976 | 4,150 | 498 | 3,317 |