Edgar Filing: CULLEN/FROST BANKERS, INC.

10-Q

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: March 31, 2016

¨ 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 April 22, 2016 there were 61,991,208 shares of the registrant’s Common Stock, $.01 par value, outstanding.

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Cullen/Frost Bankers, Inc.

Quarterly Report on Form 10-Q

March 31, 2016

Table of Contents



		Page
Part I - Financial Information
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets	3
	Consolidated Statements of Income	4
	Consolidated Statements of Comprehensive Income	5
	Consolidated Statements of Changes in Shareholders’ Equity	6
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 4.	Controls and Procedures	54

Part II - Other Information
Item 1.	Legal Proceedings	55
Item 1A.	Risk Factors	55
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3.	Defaults Upon Senior Securities	55
Item 4.	Mine Safety Disclosures	55
Item 5.	Other Information	55
Item 6.	Exhibits	55

Signatures		56

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Part I. Financial Information

Item 1. Financial Statements (Unaudited)

Cullen/Frost Bankers, Inc.

Consolidated Balance Sheets

(Dollars in thousands, except per share amounts)



	March 31, 2016			December 31, 2015
Assets:
Cash and due from banks	$	559,469		$	532,824
Interest-bearing deposits	3,274,877			2,991,782
Federal funds sold and resell agreements	29,117			66,917
Total cash and cash equivalents	3,863,463			3,591,523
Securities held to maturity, at amortized cost	2,368,019			2,663,009
Securities available for sale, at estimated fair value	9,067,229			9,206,358
Trading account securities	17,023			16,579
Loans, net of unearned discounts	11,542,035			11,486,531
Less: Allowance for loan losses	(161,880		)	(135,859		)
Net loans	11,380,155			11,350,672
Premises and equipment, net	556,988			559,124
Goodwill	654,668			654,668
Other intangible assets, net	8,136			8,800
Cash surrender value of life insurance policies	176,058			175,191
Accrued interest receivable and other assets	308,347			340,018
Total assets	$	28,400,086		$	28,565,942

Liabilities:
Deposits:
Non-interest-bearing demand deposits	$	9,649,933		$	10,270,233
Interest-bearing deposits	14,507,042			14,073,362
Total deposits	24,156,975			24,343,595
Federal funds purchased and repurchase agreements	693,886			893,522
Junior subordinated deferrable interest debentures, net of unamortized issuance costs	136,083			136,069
Other long-term borrowings, net of unamortized issuance costs	99,900			99,870
Accrued interest payable and other liabilities	321,002			202,543
Total liabilities	25,407,846			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 March 31, 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 March 31, 2016 and December 31, 2015	637			637
Additional paid-in capital	899,870			897,350
Retained earnings	1,878,985			1,845,188
Accumulated other comprehensive income, net of tax	179,319			113,863
Treasury stock, at cost; 1,648,256 shares at March 31, 2016 and 1,650,131 shares at December 31, 2015	(111,057		)	(111,181		)
Total shareholders’ equity	2,992,240			2,890,343
Total liabilities and shareholders’ equity	$	28,400,086		$	28,565,942

See Notes to Consolidated Financial Statements.

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Cullen/Frost Bankers, Inc.

Consolidated Statements of Income

(Dollars in thousands, except per share amounts)



	Three Months Ended March 31,
	2016		2015
Interest income:
Loans, including fees	$	112,586	$	105,666
Securities:
Taxable	25,974		30,172
Tax-exempt	50,333		46,546
Interest-bearing deposits	3,653		1,970
Federal funds sold and resell agreements	58		20
Total interest income	192,604		184,374
Interest expense:
Deposits	1,787		2,756
Federal funds purchased and repurchase agreements	56		36
Junior subordinated deferrable interest debentures	750		655
Other long-term borrowings	287		224
Total interest expense	2,880		3,671
Net interest income	189,724		180,703
Provision for loan losses	28,500		8,162
Net interest income after provision for loan losses	161,224		172,541
Non-interest income:
Trust and investment management fees	25,334		27,161
Service charges on deposit accounts	20,364		19,777
Insurance commissions and fees	15,423		14,635
Interchange and debit card transaction fees	5,022		4,643
Other charges, commissions and fees	9,053		8,441
Net gain (loss) on securities transactions	14,903		228
Other	6,044		8,330
Total non-interest income	96,143		83,215
Non-interest expense:
Salaries and wages	79,297		76,072
Employee benefits	20,305		20,227
Net occupancy	17,187		15,081
Furniture and equipment	17,517		15,534
Deposit insurance	3,657		3,613
Intangible amortization	664		894
Other	40,532		40,090
Total non-interest expense	179,159		171,511
Income before income taxes	78,208		84,245
Income taxes	9,429		12,082
Net income	68,779		72,163
Preferred stock dividends	2,016		2,016
Net income available to common shareholders	$	66,763	$	70,147

Earnings per common share:
Basic	$	1.07	$	1.11
Diluted	1.07		1.10

See Notes to Consolidated Financial Statements.

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Cullen/Frost Bankers, Inc.

Consolidated Statements of Comprehensive Income

(Dollars in thousands)



	Three Months Ended March 31,
	2016			2015
Net income	$	68,779		$	72,163
Other comprehensive income (loss), before tax:
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period	122,218			34,527
Change in net unrealized gain on securities transferred to held to maturity	(8,166		)	(7,887		)
Reclassification adjustment for net (gains) losses included in net income	(14,903		)	(228		)
Total securities available for sale and transferred securities	99,149			26,412
Defined-benefit post-retirement benefit plans:
Change in the net actuarial gain/loss	1,553			1,749
Other comprehensive income (loss), before tax	100,702			28,161
Deferred tax expense (benefit) related to other comprehensive income	35,246			9,856
Other comprehensive income (loss), net of tax	65,456			18,305
Comprehensive income	$	134,235		$	90,468

See Notes to Consolidated Financial Statements.

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Cullen/Frost Bankers, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

(Dollars in thousands, except per share amounts)



	Three Months Ended March 31,
	2016			2015
Total shareholders’ equity at beginning of period	$	2,890,343		$	2,851,403
Net income	68,779			72,163
Other comprehensive income (loss)	65,456			18,305
Stock option exercises (1,875 shares in 2016 and 14,350 shares in 2015)	96			728
Stock compensation expense recognized in earnings	2,482			2,562
Tax benefits related to stock compensation	38			74
Cash dividends – preferred stock (approximately $0.34 per share in both 2016 and in 2015)	(2,016		)	(2,016		)
Cash dividends – common stock ($0.53 per share in 2016 and $0.51 per share in 2015)	(32,938		)	(32,288		)
Total shareholders’ equity at end of period	$	2,992,240		$	2,910,931

See Notes to Consolidated Financial Statements.

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Cullen/Frost Bankers, Inc.

Consolidated Statements of Cash Flows

(Dollars in thousands)



	Three Months Ended March 31,
	2016			2015
Operating Activities:
Net income	$	68,779		$	72,163
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses	28,500			8,162
Deferred tax expense (benefit)	(4,395		)	(3,748		)
Accretion of loan discounts	(3,727		)	(3,571		)
Securities premium amortization (discount accretion), net	19,725			17,308
Net (gain) loss on securities transactions	(14,903		)	(228		)
Depreciation and amortization	11,912			10,034
Net (gain) loss on sale/write-down of assets/foreclosed assets	(632		)	(779		)
Stock-based compensation	2,482			2,562
Net tax benefit (deficiency) from stock-based compensation	(3		)	(1		)
Excess tax benefits from stock-based compensation	(41		)	(75		)
Earnings on life insurance policies	(867		)	(886		)
Net change in:
Trading account securities	(444		)	(236		)
Accrued interest receivable and other assets	29,418			(36,504		)
Accrued interest payable and other liabilities	(5,714		)	(9,423		)
Net cash from operating activities	130,090			54,778

Investing Activities:
Securities held to maturity:
Sales	135,610			—
Maturities, calls and principal repayments	149,507			95,453
Securities available for sale:
Purchases	(813,955		)	(772,500		)
Sales	1,060,196			223,987
Maturities, calls and principal repayments	91,993			372,316
Net change in loans	(54,632		)	(225,770		)
Proceeds from sales of premises and equipment	1,513			—
Purchases of premises and equipment	(7,366		)	(51,803		)
Proceeds from sales of repossessed properties	57			2,901
Net cash from investing activities	562,923			(355,416		)

Financing Activities:
Net change in deposits	(186,620		)	13,692
Net change in short-term borrowings	(199,636		)	(198,912		)
Proceeds from stock option exercises	96			728
Excess tax benefits from stock-based compensation	41			75
Cash dividends paid on preferred stock	(2,016		)	(2,016		)
Cash dividends paid on common stock	(32,938		)	(32,288		)
Net cash from financing activities	(421,073		)	(218,721		)

Net change in cash and cash equivalents	271,940			(519,359		)
Cash and equivalents at beginning of period	3,591,523			4,364,123
Cash and equivalents at end of period	$	3,863,463		$	3,844,764

See Notes to Consolidated Financial Statements.

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Notes to Consolidated Financial Statements

(Table amounts in thousands, except for share and per share amounts)

Note 1 - Significant Accounting Policies

Nature of Operations. Cullen/Frost Bankers, Inc. (“Cullen/Frost”) is a financial holding company and a bank holding company headquartered in San Antonio, Texas that provides, through 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:



	Three Months Ended March 31,
	2016		2015
Cash paid for interest	$	2,794	$	3,639
Cash paid for income taxes	—		—
Significant non-cash transactions:
Securities purchased not yet settled	94,905		12,192
Loans foreclosed and transferred to other real estate owned and foreclosed assets	376		67

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.

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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.



	March 31, 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	$	249,550	$	6,895	$	—	$	256,445	$	249,441	$	7,776	$	—	$	257,217
Residential mortgage-backed securities	5,756		71		2		5,825		6,456		63		4		6,515
States and political subdivisions	2,111,363		55,139		5,088		2,161,414		2,405,762		46,003		6,149		2,445,616
Other	1,350		—		—		1,350		1,350		—		13		1,337
Total	$	2,368,019	$	62,105	$	5,090	$	2,425,034	$	2,663,009	$	53,842	$	6,166	$	2,710,685
Available for Sale
U.S. Treasury	$	3,731,803	$	93,031	$	—	$	3,824,834	$	3,980,986	$	22,041	$	8,507	$	3,994,520
Residential mortgage-backed securities	930,927		45,929		216		976,640		1,000,024		42,142		734		1,041,432
States and political subdivisions	4,067,577		156,585		876		4,223,286		3,996,113		133,305		1,459		4,127,959
Other	42,469		—		—		42,469		42,447		—		—		42,447
Total	$	8,772,776	$	295,545	$	1,092	$	9,067,229	$	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 March 31, 2016, approximately 97.7% of the securities in our municipal bond portfolio were issued by political subdivisions or agencies within the State of Texas, of which approximately 68.0% 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 $3.4 billion at March 31, 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 March 31, 2016 totaled $51.8 million ($33.7 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 March 31, 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	$	2,352	$	2	$	—	$	—	$	2,352	$	2
States and political subdivisions	60,055		1,016		142,187		4,072		202,242		5,088
Total	$	62,407	$	1,018	$	142,187	$	4,072	$	204,594	$	5,090
Available for Sale
Residential mortgage-backed securities	$	227	$	2	$	24,321	$	214	$	24,548	$	216
States and political subdivisions	164,280		449		67,609		427		231,889		876
Total	$	164,507	$	451	$	91,930	$	641	$	256,437	$	1,092

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Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and our ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in cost.

Management has the ability and intent to hold the securities classified as held to maturity in the table above until they mature, at which time we will receive full value for the securities. Furthermore, as of March 31, 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 March 31, 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 March 31, 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	$	576,622	$	594,737	$	55,687	$	57,014
Due after one year through five years	323,002		343,717		3,504,555		3,572,118
Due after five years through ten years	291,767		297,659		1,235,012		1,293,154
Due after ten years	1,170,872		1,183,096		3,004,126		3,125,834
Residential mortgage-backed securities	5,756		5,825		930,927		976,640
Equity securities	—		—		42,469		42,469
Total	$	2,368,019	$	2,425,034	$	8,772,776	$	9,067,229

Sales of Securities. During the three months ended March 31, 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 have 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 March 31,
	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 March 31,
	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 March 31,
	2016			2015
Premium amortization	$	(22,340	)	$	(20,006	)
Discount accretion	2,615			2,698
Net (premium amortization) discount accretion	$	(19,725	)	$	(17,308	)

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



	March 31, 2016		December 31, 2015
U.S. Treasury	$	16,544	$	16,443
States and political subdivisions	479		136
Total	$	17,023	$	16,579

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



	Three Months Ended March 31,
	2016		2015
Net gain on sales transactions	$	302	$	280
Net mark-to-market gains (losses)	1		(14		)
Net gain (loss) on trading account securities	$	303	$	266

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Note 3 - Loans

Loans were as follows:



	March 31, 2016		Percentage of Total		December 31, 2015		Percentage of Total
Commercial and industrial	$	4,184,960	36.3	%	$	4,120,522	35.9	%
Energy:
Production	1,175,149		10.2		1,249,678		10.9
Service	251,147		2.2		272,934		2.4
Other	230,064		2.0		235,583		2.0
Total energy	1,656,360		14.4		1,758,195		15.3
Commercial real estate:
Commercial mortgages	3,351,533		29.0		3,285,041		28.6
Construction	752,916		6.5		720,695		6.3
Land	282,354		2.5		286,991		2.5
Total commercial real estate	4,386,803		38.0		4,292,727		37.4
Consumer real estate:
Home equity loans	341,327		3.0		340,528		3.0
Home equity lines of credit	236,290		2.0		233,525		2.0
Other	302,611		2.6		306,696		2.6
Total consumer real estate	880,228		7.6		880,749		7.6
Total real estate	5,267,031		45.6		5,173,476		45.0
Consumer and other	433,684		3.7		434,338		3.8
Total loans	$	11,542,035	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 March 31, 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 14.4% of total loans. Unfunded commitments to extend credit and standby letters of credit issued to customers in the energy industry totaled $1.3 billion and $61.1 million, respectively, as of March 31, 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 March 31, 2016 or December 31, 2015.

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



	March 31, 2016		December 31, 2015
Commercial and industrial	$	26,922	$	25,111
Energy	114,124		21,180
Commercial real estate:
Buildings, land and other	33,449		34,519
Construction	970		569
Consumer real estate	1,770		1,862
Consumer and other	220		226
Total	$	177,455	$	83,467

As of March 31, 2016, non-accrual loans reported in the table above included $61.3 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 $844 thousand for the three months ended March 31, 2016, compared to $397 thousand for three months ended March 31, 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 March 31, 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	$	26,818	$	23,617	$	50,435	$	4,134,525	$	4,184,960	$	4,909
Energy	12,616		15,499		28,115		1,628,245		1,656,360		1,262
Commercial real estate:
Buildings, land and other	15,129		26,135		41,264		3,592,623		3,633,887		805
Construction	1,300		995		2,295		750,621		752,916		669
Consumer real estate	5,276		1,380		6,656		873,572		880,228		1,269
Consumer and other	5,203		399		5,602		428,082		433,684		338
Total	$	66,342	$	68,025	$	134,367	$	11,407,668	$	11,542,035	$	9,252

Impaired Loans. Impaired loans are set forth in the following table. No interest income was recognized on impaired loans subsequent to their classification as impaired.



	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
March 31, 2016
Commercial and industrial	$	27,980	$	20,367	$	4,390	$	24,757	$	2,852
Energy	122,242		27,612		86,479		114,091		27,450
Commercial real estate:
Buildings, land and other	36,348		31,545		—		31,545		—
Construction	1,218		970		—		970		—
Consumer real estate	740		457		—		457		—
Consumer and other	—		—		—		—		—
Total	$	188,528	$	80,951	$	90,869	$	171,820	$	30,302
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 March 31,
	2016		2015
Commercial and industrial	$	23,809	$	31,428
Energy	67,615		636
Commercial real estate:
Buildings, land and other	31,985		16,313
Construction	770		2,767
Consumer real estate	471		582
Consumer and other	—		—
Total	$	124,650	$	51,726

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Troubled Debt Restructurings. Troubled debt restructurings during the three months ended March 31, 2016 and March 31, 2015 are set forth in the following table.



	Three Months Ended March 31, 2016				Three Months Ended March 31, 2015
	Balance at Restructure		Balance at Period-End		Balance at Restructure		Balance at Period-End
Commercial and industrial	$	19	$	17	$	709	$	613
Energy	62,546		61,095		—		—
Commercial real estate:
Construction	243		235		—		—
	$	62,808	$	61,347	$	709	$	613

The modifications during the three months ended March 31, 2016 primarily related to extending amortization periods, deferral of interest payments and the waiver of certain covenants, while the modifications during the three months ended March 31, 2015 primarily related to extending amortization periods and a temporary reduction in payments. As of March 31, 2016, there was one loan restructured during the last year totaling $17 thousand that was in excess of 90 days past due. The modifications during the reported periods did not significantly impact our determination of the allowance for loan losses.

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 recalculate the risk grade on at least an annual basis. When a loan has a calculated 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 calculated 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.



	March 31, 2016			December 31, 2015
	Weighted Average Risk Grade	Loans		Weighted Average Risk Grade	Loans
Commercial and industrial:
Risk grades 1-8	5.92	$	3,888,217	5.88	$	3,869,203
Risk grade 9	9.00	121,570		9.00	100,670
Risk grade 10	10.00	84,614		10.00	76,030
Risk grade 11	11.00	63,637		11.00	49,508
Risk grade 12	12.00	23,994		12.00	22,644
Risk grade 13	13.00	2,928		13.00	2,467
Total	6.21	$	4,184,960	6.13	$	4,120,522
Energy
Risk grades 1-8	6.16	$	846,191	6.12	$	1,385,749
Risk grade 9	9.00	216,140		9.00	212,250
Risk grade 10	10.00	276,693		10.00	62,163
Risk grade 11	11.00	203,213		11.00	76,853
Risk grade 12	12.00	85,919		12.00	19,180
Risk grade 13	13.00	28,204		13.00	2,000
Total	8.18	$	1,656,360	6.89	$	1,758,195

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(continued)	March 31, 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	6.60	$	3,324,030	6.58	$	3,280,435
Risk grade 9	9.00	133,790		9.00	140,900
Risk grade 10	10.00	79,584		10.00	72,577
Risk grade 11	11.00	63,034		11.00	43,601
Risk grade 12	12.00	33,449		12.00	34,519
Risk grade 13	13.00	—		13.00	—
Total	6.89	$	3,633,887	6.85	$	3,572,032
Construction
Risk grades 1-8	7.05	$	739,863	6.91	$	696,229
Risk grade 9	9.00	10,759		9.00	13,074
Risk grade 10	10.00	1,271		10.00	2,757
Risk grade 11	11.00	53		11.00	8,066
Risk grade 12	12.00	970		12.00	569
Risk grade 13	13.00	—		13.00	—
Total	7.09	$	752,916	7.01	$	720,695

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



	Three Months Ended March 31,
	2016			2015
Commercial and industrial	$	(1,132	)	$	(852	)
Energy	(1,011		)	2
Commercial real estate:
Buildings, land and other	61			(307		)
Construction	7			1
Consumer real estate	99			(28		)
Consumer and other	(503		)	(812		)
Total	$	(2,479	)	$	(1,996	)

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 120.6 at February 29, 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.

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The following table presents details of the allowance for loan losses allocated to each portfolio segment as of March 31, 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
March 31, 2016
Historical valuation allowances	$	28,755	$	43,633	$	15,352	$	2,097	$	4,387		$	94,224
Specific valuation allowances	2,852		27,450		—		—		—			30,302
General valuation allowances	5,790		3,673		4,047		1,230		(426		)	14,314
Macroeconomic valuation allowances	7,687		10,217		4,188		459		489			23,040
Total	45,084		84,973		23,587		3,786		4,450			161,880
Allocated to loans:
Individually evaluated	$	2,852	$	27,450	$	—	$	—	$	—		$	30,302
Collectively evaluated	42,232		57,523		23,587		3,786		4,450			131,578
Total	$	45,084	$	84,973	$	23,587	$	3,786	$	4,450		$	161,880
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:
Individually evaluated	$	2,378	$	2,000	$	—	$	—	$	—		$	4,378
Collectively evaluated	40,615		52,696		24,313		4,659		9,198			131,481
Total	$	42,993	$	54,696	$	24,313	$	4,659	$	9,198		$	135,859

Our recorded investment in loans as of March 31, 2016 and December 31, 2015 related to each balance in the allowance for loan losses by portfolio segment and detailed on the basis of the impairment methodology we used was as follows:



	Commercial and Industrial		Energy		Commercial Real Estate		Consumer Real Estate		Consumer and Other		Total
March 31, 2016
Individually evaluated	$	24,757	$	114,091	$	32,515	$	457	$	—	$	171,820
Collectively evaluated	4,160,203		1,542,269		4,354,288		879,771		433,684		11,370,215
Total	$	4,184,960	$	1,656,360	$	4,386,803	$	880,228	$	433,684	$	11,542,035
December 31, 2015
Individually evaluated	$	22,860	$	21,139	$	32,994	$	485	$	—	$	77,478
Collectively evaluated	4,097,662		1,737,056		4,259,733		880,264		434,338		11,409,053
Total	$	4,120,522	$	1,758,195	$	4,292,727	$	880,749	$	434,338	$	11,486,531

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The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2016 and 2015. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.



	Commercial and Industrial			Energy			Commercial Real Estate			Consumer Real Estate			Consumer and Other			Total
Three months ended:
March 31, 2016
Beginning balance	$	42,993		$	54,696		$	24,313		$	4,659		$	9,198		$	135,859
Provision for loan losses	3,223			31,288			(794		)	(972		)	(4,245		)	28,500
Charge-offs	(1,861		)	(1,011		)	(28		)	(154		)	(2,724		)	(5,778		)
Recoveries	729			—			96			253			2,221			3,299
Net charge-offs	(1,132		)	(1,011		)	68			99			(503		)	(2,479		)
Ending balance	$	45,084		$	84,973		$	23,587		$	3,786		$	4,450		$	161,880
March 31, 2015
Beginning balance	$	44,273		$	14,919		$	27,163		$	5,178		$	8,009		$	99,542
Provision for loan losses	346			6,025			248			(243		)	1,786			8,162
Charge-offs	(2,132		)	—			(478		)	(80		)	(2,805		)	(5,495		)
Recoveries	1,280			2			172			52			1,993			3,499
Net charge-offs	(852		)	2			(306		)	(28		)	(812		)	(1,996		)
Ending balance	$	43,767		$	20,946		$	27,105		$	4,907		$	8,983		$	105,708

Note 4 - Goodwill and Other Intangible Assets

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



	March 31, 2016		December 31, 2015
Goodwill	$	654,668	$	654,668
Other intangible assets:
Core deposits	$	6,587	$	7,086
Customer relationships	1,433		1,557
Non-compete agreements	116		157
	$	8,136	$	8,800

The estimated aggregate future amortization expense for intangible assets remaining as of March 31, 2016 is as follows:



Remainder of 2016	$	1,749
2017	1,619
2018	1,346
2019	1,102
2020	877
Thereafter	1,443
	$	8,136

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Note 5 - Deposits

Deposits were as follows:



	March 31, 2016		Percentage of Total		December 31, 2015		Percentage of Total
Non-interest-bearing demand deposits:
Commercial and individual	$	8,796,847	36.4	%	$	9,251,463	38.0	%
Correspondent banks	310,417		1.3		378,930		1.6
Public funds	542,669		2.2		639,840		2.6
Total non-interest-bearing demand deposits	9,649,933		39.9		10,270,233		42.2
Interest-bearing deposits:
Private accounts:
Savings and interest checking	5,732,748		23.7		5,149,905		21.1
Money market accounts	7,514,572		31.1		7,536,998		31.0
Time accounts of $100,000 or more	415,207		1.7		420,697		1.7
Time accounts under $100,000	397,091		1.7		405,726		1.7
Total private accounts	14,059,618		58.2		13,513,326		55.5
Public funds:
Savings and interest checking	304,500		1.3		420,324		1.7
Money market accounts	113,713		0.5		93,969		0.4
Time accounts of $100,000 or more	28,203		0.1		44,941		0.2
Time accounts under $100,000	1,008		—