XNYS:CFR Cullen/Frost Bankers Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Form 10-Q
Table of Contents

 

 

United States

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: June 30, 2012

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  x    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  x    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   x    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  x

As of July 19, 2012, there were 61,405,024 shares of the registrant’s Common Stock, $.01 par value, outstanding.

 

 

 


Table of Contents

Cullen/Frost Bankers, Inc.

Quarterly Report on Form 10-Q

June 30, 2012

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      39   
   Item 3.    Quantitative and Qualitative Disclosures About Market Risk      65   
   Item 4.    Controls and Procedures      66   

Part II - Other Information

  
   Item 1.    Legal Proceedings      67   
   Item 1A.    Risk Factors      67   
   Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      67   
   Item 3.    Defaults Upon Senior Securities      67   
   Item 4.    Mine Safety Disclosures      67   
   Item 5.    Other Information      67   
   Item 6.    Exhibits      67   

Signatures

     68   

 

2


Table of Contents

Part I. Financial Information

Item 1. Financial Statements (Unaudited)

Cullen/Frost Bankers, Inc.

Consolidated Balance Sheets

(Dollars in thousands, except per share amounts)

 

     June 30,
2012
    December 31,
2011
    June 30,
2011
 

Assets:

      

Cash and due from banks

   $ 609,211      $ 574,039      $ 575,464   

Interest-bearing deposits

     1,673,538        2,314,251        2,836,046   

Federal funds sold and resell agreements

     12,502        19,302        9,051   
  

 

 

   

 

 

   

 

 

 

Total cash and cash equivalents

     2,295,251        2,907,592        3,420,561   

Securities held to maturity, at amortized cost

     365,356        365,996        349,997   

Securities available for sale, at estimated fair value

     8,475,767        7,789,700        5,432,354   

Trading account securities

     16,563        13,609        14,517   

Loans, net of unearned discounts

     8,489,763        7,995,129        8,068,212   

Less: Allowance for loan losses

     (105,648     (110,147     (122,741
  

 

 

   

 

 

   

 

 

 

Net loans

     8,384,115        7,884,982        7,945,471   

Premises and equipment, net

     319,904        319,042        316,165   

Goodwill

     535,560        528,072        528,072   

Other intangible assets, net

     10,039        10,604        12,764   

Cash surrender value of life insurance policies

     136,041        133,967        131,883   

Accrued interest receivable and other assets

     327,630        363,681        326,602   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 20,866,226      $ 20,317,245      $ 18,478,386   
  

 

 

   

 

 

   

 

 

 

Liabilities:

      

Deposits:

      

Non-interest-bearing demand deposits

   $ 7,136,674      $ 6,672,555      $ 5,818,692   

Interest-bearing deposits

     10,140,443        10,084,193        9,285,439   
  

 

 

   

 

 

   

 

 

 

Total deposits

     17,277,117        16,756,748        15,104,131   

Federal funds purchased and repurchase agreements

     656,025        722,202        574,132   

Junior subordinated deferrable interest debentures

     123,712        123,712        123,712   

Other long-term borrowings

     100,017        100,026        250,036   

Accrued interest payable and other liabilities

     346,744        331,020        249,730   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     18,503,615        18,033,708        16,301,741   

Shareholders’ Equity:

      

Preferred stock, par value $0.01 per share; 10,000,000 shares authorized; none issued

     —          —          —     

Common stock, par value $0.01 per share; 210,000,000 shares authorized; 61,404,274, shares issued at June 30, 2012, 61,271,603 shares issued at December 31, 2011 and 61,271,603 shares issued at June 30, 2011

     614        613        613   

Additional paid-in capital

     692,625        680,803        673,620   

Retained earnings

     1,416,097        1,354,759        1,301,279   

Accumulated other comprehensive income, net of tax

     253,275        247,734        202,589   

Treasury stock, 7,640 shares at December 31, 2011 and 26,359 shares at June 30, 2011, at cost

     —          (372     (1,456
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     2,362,611        2,283,537        2,176,645   
  

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 20,866,226      $ 20,317,245      $ 18,478,386   
  

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

3


Table of Contents

Cullen/Frost Bankers, Inc.

Consolidated Statements of Income

(Dollars in thousands, except per share amounts)

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012     2011  

Interest income:

          

Loans, including fees

   $ 98,336       $ 99,811       $ 195,687      $ 198,299   

Securities:

          

Taxable

     34,399         31,668         70,465        62,853   

Tax-exempt

     22,125         23,169         44,628        45,902   

Interest-bearing deposits

     903         1,472         1,833        2,643   

Federal funds sold and resell agreements

     33         13         48        29   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total interest income

     155,796         156,133         312,661        309,726   

Interest expense:

          

Deposits

     4,547         5,946         9,119        11,897   

Federal funds purchased and repurchase agreements

     34         83         68        214   

Junior subordinated deferrable interest debentures

     1,711         1,691         3,385        3,363   

Other long-term borrowings

     287         4,080         1,165        8,160   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total interest expense

     6,579         11,800         13,737        23,634   

Net interest income

     149,217         144,333         298,924        286,092   

Provision for loan losses

     2,355         8,985         3,455        18,435   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     146,862         135,348         295,469        267,657   

Non-interest income:

          

Trust and investment management fees

     21,279         20,313         41,931        39,784   

Service charges on deposit accounts

     20,639         21,328         41,433        42,578   

Insurance commissions and fees

     9,171         7,908         21,548        18,402   

Interchange and debit card transaction fees

     4,292         8,695         8,409        16,740   

Other charges, commissions and fees

     7,825         6,825         15,175        14,053   

Net gain (loss) on securities transactions

     370         —           (121     5   

Other

     6,187         5,723         13,367        11,563   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total non-interest income

     69,763         70,792         141,742        143,125   

Non-interest expense:

          

Salaries and wages

     62,624         61,775         126,326        124,205   

Employee benefits

     14,048         13,050         30,749        28,361   

Net occupancy

     12,213         11,823         24,010        23,475   

Furniture and equipment

     13,734         12,628         27,154        24,909   

Deposit insurance

     2,838         2,598         5,335        7,358   

Intangible amortization

     994         1,107         2,005        2,227   

Other

     36,085         33,816         68,997        66,323   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total non-interest expense

     142,536         136,797         284,576        276,858   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

     74,089         69,343         152,635        133,924   

Income taxes

     16,027         13,657         33,540        26,310   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 58,062       $ 55,686       $ 119,095      $ 107,614   
  

 

 

    

 

 

    

 

 

   

 

 

 

Earnings per common share:

          

Basic

   $ 0.94       $ 0.91       $ 1.94      $ 1.76   

Diluted

     0.94         0.91         1.93        1.75   

See Notes to Consolidated Financial Statements.

 

4


Table of Contents

Cullen/Frost Bankers, Inc.

Consolidated Statements of Comprehensive Income

(Dollars in thousands)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

Net income

   $ 58,062      $ 55,686      $ 119,095      $ 107,614   

Other comprehensive income (loss), before tax:

        

Securities available for sale:

        

Change in net unrealized gain/loss during the period

     20,968        82,674        22,850        90,964   

Reclassification adjustment for net (gains) losses included in net income

     (370     —          121        (5
  

 

 

   

 

 

   

 

 

   

 

 

 

Total securities available for sale

     20,598        82,674        22,971        90,959   

Defined-benefit post-retirement benefit plans:

        

Change in the net actuarial gain/loss

     1,428        782        2,657        1,565   

Derivatives:

        

Change in the accumulated gain/loss on effective cash flow hedge derivatives

     (64     (1,716     (491     (1,651

Reclassification adjustments for (gains) losses included in net income:

        

Interest rate swaps on variable-rate loans

     (9,345     (9,345     (18,690     (18,690

Interest rate swap on junior subordinated deferrable interest debentures

     1,044        1,100        2,077        2,186   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total derivatives

     (8,365     (9,961     (17,104     (18,155
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), before tax

     13,661        73,495        8,524        74,369   

Deferred tax expense (benefit) related to other comprehensive income

     4,782        25,724        2,983        26,030   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     8,879        47,771        5,541        48,339   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 66,941      $ 103,457      $ 124,636      $ 155,953   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

5


Table of Contents

Cullen/Frost Bankers, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

(Dollars in thousands, except per share amounts)

 

      Six Months Ended
June 30,
 
     2012     2011  

Total shareholders’ equity at beginning of period

   $ 2,283,537      $ 2,061,680   

Net income

     119,095        107,614   

Other comprehensive income

     5,541        48,339   

Stock option exercises (140,311 shares in 2012 and 144,203 shares in 2011)

     7,211        7,239   

Stock compensation expense recognized in earnings

     5,398        7,583   

Tax benefits (deficiencies) related to stock compensation

     (414     278   

Purchase of treasury stock (29,823 shares in 2011)

     —          (1,657

Common stock issued/sold to the 401(k) stock purchase plan (22,680 shares in 2011)

     —          1,360   

Cash dividends ($0.94 per share in 2012 and $0.91 per share in 2011)

     (57,757     (55,791
  

 

 

   

 

 

 

Total shareholders’ equity at end of period

   $ 2,362,611      $ 2,176,645   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

6


Table of Contents

Cullen/Frost Bankers, Inc.

Consolidated Statements of Cash Flows

(Dollars in thousands)

 

     Six Months Ended
June 30,
 
     2012     2011  

Operating Activities:

    

Net income

   $ 119,095      $ 107,614   

Adjustments to reconcile net income to net cash from operating activities:

    

Provision for loan losses

     3,455        18,435   

Deferred tax expense (benefit)

     (3,977     245   

Accretion of loan discounts

     (5,663     (5,773

Securities premium amortization (discount accretion), net

     9,222        4,905   

Net (gain) loss on securities transactions

     121        (5

Depreciation and amortization

     18,942        18,500   

Net loss on sale/write-down of assets/foreclosed assets

     2,598        2,303   

Stock-based compensation

     5,398        7,583   

Net tax benefit (deficiency) from stock-based compensation

     (490     (89

Excess tax benefits from stock-based compensation

     (76     (367

Earnings on life insurance policies

     (2,074     (1,961

Net change in:

    

Trading account securities

     (2,954     584   

Accrued interest receivable and other assets

     23,261        31,745   

Accrued interest payable and other liabilities

     597        (18,048
  

 

 

   

 

 

 

Net cash from operating activities

     167,455        165,671   

Investing Activities:

    

Securities held to maturity:

    

Purchases

     —          (66,688

Maturities, calls and principal repayments

     489        301   

Securities available for sale:

    

Purchases

     (17,060,846     (6,195,363

Sales

     15,987,480        5,548,386   

Maturities, calls and principal repayments

     401,078        458,171   

Net change in loans

     (501,622     19,018   

Net cash paid in acquisitions

     (7,199     (1,044

Proceeds from sales of premises and equipment

     3,613        1,131   

Purchases of premises and equipment

     (16,032     (12,272

Proceeds from sales of repossessed properties

     9,530        8,876   
  

 

 

   

 

 

 

Net cash from investing activities

     (1,183,509     (239,484

Financing Activities:

    

Net change in deposits

     520,369        624,789   

Net change in short-term borrowings

     (66,177     98,459   

Principal payments on long-term borrowings

     (9     (9

Proceeds from stock option exercises

     7,211        7,239   

Excess tax benefits from stock-based compensation

     76        367   

Purchase of treasury stock

     —          (1,657

Cash dividends paid

     (57,757     (55,791
  

 

 

   

 

 

 

Net cash from financing activities

     403,713        673,397   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (612,341     599,584   

Cash and equivalents at beginning of period

     2,907,592        2,820,977   
  

 

 

   

 

 

 

Cash and equivalents at end of period

   $ 2,295,251      $ 3,420,561   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

7


Table of Contents

Cullen/Frost Bankers, Inc.

Notes to Consolidated Financial Statements

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

Note 1 - Significant Accounting Policies

Nature of Operations. Cullen/Frost Bankers, Inc. (Cullen/Frost) is a financial holding company and a bank holding company headquartered in San Antonio, Texas that provides, through its subsidiaries, a broad array of products and services throughout numerous Texas markets. In addition to general commercial and consumer banking, other products and services offered include trust and investment management, investment banking, insurance, brokerage, leasing, asset-based lending, treasury management 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 (collectively referred to as the “Corporation”). All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and financial reporting policies the Corporation follows 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 the Corporation’s 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 the Corporation’s consolidated financial statements, and notes thereto, for the year ended December 31, 2011, included in the Corporation’s Annual Report on Form 10-K filed with the SEC on February 3, 2012 (the “2011 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, the fair value of stock-based compensation awards, 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,
 
     2012      2011  

Cash paid for interest

   $ 16,007       $ 24,473   

Cash paid for income tax

     13,947         12,406   

Significant non-cash transactions:

     

Loans foreclosed and transferred to other real estate owned and foreclosed assets

     4,697         13,553   

Common stock/treasury stock issued to the Corporation’s 401(k) stock purchase plan

     —           1,360   

Reclassifications. Certain items in prior financial statements have been reclassified to conform to the current presentation. Mutual fund investment management fees previously reported as a component of other charges, commissions and fees are now included with trust fees and reported as trust and investment management fees in the consolidated statements of income. Additionally, interchange and debit card transaction fees (including automated teller machine fees) previously reported as components of service charges on deposit accounts; other charges, commissions and fees; or other non-interest income are now reported as interchange and debit card transaction fees in the consolidated statements of income.

 

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Table of Contents

Note 2 - Securities

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

 

     June 30, 2012      December 31, 2011  
    
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

   $ 247,989       $ 31,932       $ —         $ 279,921       $ 247,797       $ 31,715       $ —         $ 279,512   

Residential mortgage-backed securities

     11,367         290         —           11,657         11,874         153         —           12,027   

States and political subdivisions

     105,000         9,444         —           114,444         105,325         6,597         —           111,922   

Other

     1,000         —           —           1,000         1,000         —           —           1,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 365,356       $ 41,666       $ —         $ 407,022       $ 365,996       $ 38,465       $ —         $ 404,461   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Available for Sale:

                       

U. S. Treasury

   $ 3,019,137       $ 39,063       $ —         $ 3,058,200       $ 2,020,621       $ 36,111       $ —         $ 2,056,732   

U.S. government agencies/corporations

     250,000         528         —           250,528         250,000         884         —           250,884   

Residential mortgage-backed securities

     2,789,723         157,673         1         2,947,395         3,135,064         154,386         180         3,289,270   

States and political subdivisions

     2,008,745         175,228         209         2,183,764         1,996,703         158,133         23         2,154,813   

Other

     35,880         —           —           35,880         38,001         —           —           38,001   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,103,485       $ 372,492       $ 210       $ 8,475,767       $ 7,440,389       $ 349,514       $ 203       $ 7,789,700   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

All mortgage-backed securities included in the above table were issued by U.S. government agencies and corporations. 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 above table. 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 $2.1 billion at June 30, 2012 and $2.4 billion at December 31, 2011.

As of June 30, 2012, securities, with unrealized losses segregated by length of impairment, were as follows:

 

     Less than 12 Months      More than 12 Months      Total  
     Estimated      Unrealized      Estimated      Unrealized      Estimated      Unrealized  
     Fair Value      Losses      Fair Value      Losses      Fair Value      Losses  

Available for Sale

                 

Residential mortgage-backed securities

   $ —         $ —         $ 48       $ 1       $ 48       $ 1   

States and political subdivisions

     39,348         209         —           —           39,348         209   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 39,348       $ 209       $ 48       $ 1       $ 39,396       $ 210   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 ability of the Corporation to retain its 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 the Corporation will receive full value for the securities. Furthermore, as of June 30, 2012, 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 the Corporation 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, 2012, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in the Corporation’s consolidated income statement.

 

9


Table of Contents

The amortized cost and estimated fair value of securities, excluding trading securities, at June 30, 2012 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

   $ 1,000       $ 1,000       $ 14,302       $ 14,480   

Due after one year through five years

     247,989         279,921         3,394,320         3,443,606   

Due after five years through ten years

     3,311         3,653         201,784         217,308   

Due after ten years

     101,689         110,791         1,667,476         1,817,098   

Residential mortgage-backed securities

     11,367         11,657         2,789,723         2,947,395   

Equity securities

     —           —           35,880         35,880   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 365,356       $ 407,022       $ 8,103,485       $ 8,475,767   
  

 

 

    

 

 

    

 

 

    

 

 

 

Sales of securities available for sale were as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012     2011      2012     2011  

Proceeds from sales

   $     6,002,402      $ 845       $ 15,987,480      $ 5,548,386   

Gross realized gains

     371        —           2,508        9   

Gross realized losses

     (1     —           (2,629     4   

Tax (expense) benefit of securities gains/losses

     (130     —           42        (2

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

 

     June 30,      December 31,  
     2012      2011  

U.S. Treasury

   $ 13,410       $ 13,609   

States and political subdivisions

     3,153         —     
  

 

 

    

 

 

 

Total

   $ 16,563       $ 13,609   
  

 

 

    

 

 

 

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

 

      Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012     2011      2012     2011  

Net gain on sales transactions

   $ 299      $ 161       $ 622      $ 469   

Net mark-to-market gains (losses)

     (19     7         (79     7   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net gain on trading account securities

   $ 280      $ 168       $ 543      $ 476   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

10


Table of Contents

Note 3 - Loans

Loans were as follows:

 

     June 30,     Percentage     December 31,     Percentage     June 30,     Percentage  
     2012     of Total     2011     of Total     2011     of Total  

Commercial and industrial:

            

Commercial

   $ 3,911,502        46.1   $ 3,553,989        44.5   $ 3,510,738        43.5

Leases

     236,891        2.8        193,412        2.4        184,991        2.3   

Asset-based

     161,496        1.9        169,466        2.1        146,421        1.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial and industrial

     4,309,889        50.8        3,916,867        49.0        3,842,150        47.6   

Commercial real estate:

            

Commercial mortgages

     2,396,609        28.2        2,383,479        29.8        2,403,350        29.8   

Construction

     538,681        6.3        434,870        5.5        533,132        6.6   

Land

     184,612        2.2        202,478        2.5        220,617        2.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial real estate

     3,119,902        36.7        3,020,827        37.8        3,157,099        39.1   

Consumer real estate:

            

Home equity loans

     288,917        3.4        282,244        3.5        276,869        3.4   

Home equity lines of credit

     189,910        2.2        191,960        2.4        189,356        2.4   

1-4 family residential mortgages

     39,006        0.5        45,943        0.6        49,849        0.6   

Construction

     19,498        0.2        17,544        0.2        17,952        0.2   

Other

     224,729        2.7        225,118        2.8        239,043        3.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer real estate

     762,060        9.0        762,809        9.5        773,069        9.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

     3,881,962        45.7        3,783,636        47.3        3,930,168        48.7   

Consumer and other:

            

Consumer installment

     306,130        3.6        301,518        3.8        298,327        3.7   

Other

     10,873        0.1        11,018        0.1        15,978        0.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer and other

     317,003        3.7        312,536        3.9        314,305        3.9   

Unearned discounts

     (19,091     (0.2     (17,910     (0.2     (18,411     (0.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

   $ 8,489,763        100.0   $ 7,995,129        100.0   $ 8,068,212        100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loan Origination/Risk Management. The Corporation has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Corporation’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Corporation’s commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce the Corporation’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Corporation avoids financing single-purpose

 

11


Table of Contents

projects unless other underwriting factors are present to help mitigate risk. The Corporation also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At June 30, 2012, approximately 57% of the outstanding principal balance of the Corporation’s commercial real estate loans were secured by owner-occupied properties.

With respect to loans to developers and builders that are secured by non-owner occupied properties that the Corporation may originate from time to time, the Corporation generally requires the borrower to have had an existing relationship with the Corporation and have a proven record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Corporation until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

The Corporation originates consumer loans utilizing a computer-based credit scoring analysis to supplement the underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage of 80%, collection remedies, the number of such loans a borrower can have at one time and documentation requirements.

The Corporation maintains an independent loan review department that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Corporation’s policies and procedures.

Concentrations of Credit. Most of the Corporation’s 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 the Corporation’s loan portfolio consists of commercial and industrial and commercial real estate loans. Other than energy loans, as of June 30, 2012 there were no concentrations of loans related to any single industry in excess of 10% of total loans.

Foreign Loans. The Corporation has 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, 2012 or December 31, 2011.

Non-Accrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. In determining whether or not a borrower may be unable to meet payment obligations for each class of loans, the Corporation considers the borrower’s debt service capacity through the analysis of current financial information, if available, and/or current information with regards to the Corporation’s collateral position. Regulatory provisions would typically require the placement of a loan on non-accrual status if (i) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection or (ii) full payment of principal and interest is not expected. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income on non-accrual loans is recognized only to the extent that cash payments are received in excess of principal due. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period (at least six months) of repayment performance by the borrower.

 

12


Table of Contents

Non-accrual loans, segregated by class of loans, were as follows:

 

     June 30,      December 31,      June 30,  
     2012      2011      2011  

Commercial and industrial:

        

Energy

   $ —         $ —         $ —     

Other commercial

     43,855         43,874         73,686   

Commercial real estate:

        

Buildings, land and other

     42,226         43,820         49,787   

Construction

     2,245         1,329         2,942   

Consumer real estate

     3,241         4,587         3,683   

Consumer and other

     688         728         430   
  

 

 

    

 

 

    

 

 

 

Total

   $ 92,255       $ 94,338       $ 130,528   
  

 

 

    

 

 

    

 

 

 

Had non-accrual loans performed in accordance with their original contract terms, the Corporation would have recognized additional interest income, net of tax, of approximately $639 thousand and $1.3 million for the three and six months ended June 30, 2012, compared to $861 thousand and $1.7 million for the same periods in 2011.

An age analysis of past due loans (including both accruing and non-accruing loans), segregated by class of loans, as of June 30, 2012 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:

               

Energy

   $ —         $ —         $ —         $ 1,063,480      $ 1,063,480      $ —     

Other commercial

     27,667         22,549         50,216         3,196,193        3,246,409        7,210   

Commercial real estate:

               

Buildings, land and other

     20,699         10,433         31,132         2,550,089        2,581,221        3,300   

Construction

     571         1,203         1,774         536,907        538,681        146   

Consumer real estate

     6,610         3,385         9,995         752,065        762,060        2,042   

Consumer and other

     3,086         168         3,254         313,749        317,003        126   

Unearned discounts

     —           —           —           (19,091     (19,091     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 58,633       $ 37,738       $ 96,371       $ 8,393,392      $ 8,489,763      $ 12,824   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Impaired Loans. Loans are considered impaired when, based on current information and events, it is probable the Corporation will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectibility of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Regulatory guidelines require the Corporation to reevaluate the fair value of collateral supporting impaired collateral dependent loans on at least an annual basis. While the Corporation’s policy is to comply with the regulatory guidelines, the Corporation’s general practice is to reevaluate the fair value of collateral supporting impaired collateral dependent loans on a quarterly basis. Thus, appraisals are never considered to be outdated, and the Corporation does not need to make any adjustments to the appraised values. The fair value of collateral supporting impaired collateral dependent loans is evaluated by the Corporation’s internal appraisal services using a methodology that is consistent with the Uniform Standards of Professional Appraisal Practice. The fair value of collateral supporting impaired collateral dependent construction loans is based on an “as is” valuation.

 

13


Table of Contents

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

 

     Unpaid      Recorded      Recorded                    Average Recorded  
     Contractual      Investment      Investment      Total             Investment  
     Principal      With No      With      Recorded      Related      Quarter      Year  
     Balance      Allowance      Allowance      Investment      Allowance      To Date      To Date  

June 30, 2012

                    

Commercial and industrial:

                    

Energy

   $ —         $ —         $ —         $ —         $ —         $ —         $ —     

Other commercial

     51,506         22,115         17,088         39,203         5,140         41,970         41,090   

Commercial real estate:

                    

Buildings, land and other

     47,785         32,892         6,154         39,046         1,148         39,055         39,680   

Construction

     2,541         2,197         —           2,197         —           1,717         1,572   

Consumer real estate

     1,343         1,279         —           1,279         —           1,928         2,109   

Consumer and other

     456         439         —           439         —           487         509   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 103,631       $ 58,922       $ 23,242       $ 82,164       $ 6,288       $ 85,157       $ 84,960   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

                    

Commercial and industrial:

                    

Energy

   $ —         $ —         $ —         $ —         $ —         $ —         $ —     

Other commercial

     57,723         34,712         4,619         39,331         2,696         46,151         53,830   

Commercial real estate:

                    

Buildings, land and other

     51,163         38,686         2,243         40,929         1,113         41,522         48,635   

Construction

     1,568         1,281

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