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EX-32.2 - EXHIBIT 32.2 - CHIEF FINANCIAL OFFICER SECTION 1350 CERTIFICATION - CULLEN/FROST BANKERS, INC.exhibit3222q16.htm
EX-32.1 - EXHIBIT 32.1 - CHIEF EXECUTIVE OFFICER SECTION 1350 CERTIFICATION - CULLEN/FROST BANKERS, INC.exhibit3212q16.htm
EX-31.2 - EXHIBIT 31.2 - CHIEF FINANCIAL OFFICER CERTIFICATION - CULLEN/FROST BANKERS, INC.exhibit3122q16.htm
EX-31.1 - EXHIBIT 31.1 - CHIEF EXECUTIVE OFFICER CERTIFICATION - CULLEN/FROST BANKERS, INC.exhibit3112q16.htm

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
)
 


10


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


11


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.

12


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


13


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



14


(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

 
41,789

Total
$
42,993

 
$
54,696

 
$
24,313

 
$
4,659

 
$
9,198

 
$
135,859

Allocated to loans:
 
&#