XNYS:CFR Cullen/Frost Bankers Inc Quarterly Report 10-Q Filing - 9/30/2012

Effective Date 9/30/2012

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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: September 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 October 18, 2012, there were 61,463,049 shares of the registrant’s Common Stock, $.01 par value, outstanding.

 

 

 


Table of Contents

Cullen/Frost Bankers, Inc.

Quarterly Report on Form 10-Q

September 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      40   
   Item 3.    Quantitative and Qualitative Disclosures About Market Risk      68   
   Item 4.    Controls and Procedures      69   

Part II - Other Information

  
   Item 1.    Legal Proceedings      70   
   Item 1A.    Risk Factors      70   
   Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      70   
   Item 3.    Defaults Upon Senior Securities      70   
   Item 4.    Mine Safety Disclosures      70   
   Item 5.    Other Information      70   
   Item 6.    Exhibits      70   

Signatures

     71   

 

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)

 

     September 30,
2012
    December 31,
2011
    September 30,
2011
 

Assets:

      

Cash and due from banks

   $ 637,042      $ 574,039      $ 571,332   

Interest-bearing deposits

     2,098,682        2,314,251        3,885,202   

Federal funds sold and resell agreements

     16,452        19,302        30,827   
  

 

 

   

 

 

   

 

 

 

Total cash and cash equivalents

     2,752,176        2,907,592        4,487,361   

Securities held to maturity, at amortized cost

     364,997        365,996        366,267   

Securities available for sale, at estimated fair value

     8,717,645        7,789,700        5,339,812   

Trading account securities

     14,823        13,609        15,823   

Loans, net of unearned discounts

     8,811,040        7,995,129        8,089,577   

Less: Allowance for loan losses

     (105,401     (110,147     (115,433
  

 

 

   

 

 

   

 

 

 

Net loans

     8,705,639        7,884,982        7,974,144   

Premises and equipment, net

     317,197        319,042        321,517   

Goodwill

     535,509        528,072        528,072   

Other intangible assets, net

     9,066        10,604        11,656   

Cash surrender value of life insurance policies

     137,009        133,967        132,899   

Accrued interest receivable and other assets

     293,480        363,681        312,091   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 21,847,541      $ 20,317,245      $ 19,489,642   
  

 

 

   

 

 

   

 

 

 

Liabilities:

      

Deposits:

      

Non-interest-bearing demand deposits

   $ 7,720,930      $ 6,672,555      $ 6,541,239   

Interest-bearing deposits

     10,524,267        10,084,193        9,522,634   
  

 

 

   

 

 

   

 

 

 

Total deposits

     18,245,197        16,756,748        16,063,873   

Federal funds purchased and repurchase agreements

     601,204        722,202        658,246   

Junior subordinated deferrable interest debentures

     123,712        123,712        123,712   

Other long-term borrowings

     100,012        100,026        100,031   

Accrued interest payable and other liabilities

     358,799        331,020        296,904   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     19,428,924        18,033,708        17,242,766   

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; 61,461,924, shares issued at September 30, 2012, 61,271,603 shares issued at December 31, 2011 and 61,271,603 shares issued at September 30, 2011

     615        613        613   

Additional paid-in capital

     698,038        680,803        676,079   

Retained earnings

     1,445,241        1,354,759        1,327,587   

Accumulated other comprehensive income, net of tax

     274,723        247,734        244,053   

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

     —          (372     (1,456
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     2,418,617        2,283,537        2,246,876   
  

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 21,847,541      $ 20,317,245      $ 19,489,642   
  

 

 

   

 

 

   

 

 

 

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
September 30,
     Nine Months Ended
September 30,
 
     2012      2011      2012     2011  

Interest income:

          

Loans, including fees

   $ 101,643       $ 99,737       $ 297,330      $ 298,036   

Securities:

          

Taxable

     32,091         30,089         102,556        92,942   

Tax-exempt

     23,283         23,127         67,911        69,029   

Interest-bearing deposits

     1,115         1,811         2,948        4,454   

Federal funds sold and resell agreements

     27         15         75        44   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total interest income

     158,159         154,779         470,820        464,505   

Interest expense:

          

Deposits

     4,598         5,306         13,717        17,203   

Federal funds purchased and repurchase agreements

     37         63         105        277   

Junior subordinated deferrable interest debentures

     1,711         1,710         5,096        5,073   

Other long-term borrowings

     281         2,339         1,446        10,499   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total interest expense

     6,627         9,418         20,364        33,052   

Net interest income

     151,532         145,361         450,456        431,453   

Provision for loan losses

     2,500         9,010         5,955        27,445   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     149,032         136,351         444,501        404,008   

Non-interest income:

          

Trust and investment management fees

     20,843         19,652         62,774        59,436   

Service charges on deposit accounts

     20,797         22,072         62,230        64,650   

Insurance commissions and fees

     9,964         9,569         31,512        27,971   

Interchange and debit card transaction fees

     4,194         8,719         12,603        25,459   

Other charges, commissions and fees

     7,265         6,572         22,440        20,625   

Net gain (loss) on securities transactions

     —           6,409         (121     6,414   

Other

     8,095         6,224         21,462        17,787   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total non-interest income

     71,158         79,217         212,900        222,342   

Non-interest expense:

          

Salaries and wages

     64,984         61,697         191,310        185,902   

Employee benefits

     14,019         12,004         44,768        40,365   

Net occupancy

     13,193         12,080         37,203        35,555   

Furniture and equipment

     14,193         13,106         41,347        38,015   

Deposit insurance

     2,593         2,583         7,928        9,941   

Intangible amortization

     973         1,108         2,978        3,335   

Other

     34,495         34,829         103,492        101,152   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total non-interest expense

     144,450         137,407         429,026        414,265   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

     75,740         78,161         228,375        212,085   

Income taxes

     17,071         23,654         50,611        49,964   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 58,669       $ 54,507       $ 177,764      $ 162,121   
  

 

 

    

 

 

    

 

 

   

 

 

 

Earnings per common share:

          

Basic

   $ 0.95       $ 0.89       $ 2.89      $ 2.64   

Diluted

     0.95         0.89         2.88        2.64   

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
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

Net income

   $ 58,669      $ 54,507      $ 177,764      $ 162,121   

Other comprehensive income (loss), before tax:

        

Securities available for sale:

        

Change in net unrealized gain/loss during the period

     40,122        78,552        62,972        169,516   

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

     —          (6,409     121        (6,414
  

 

 

   

 

 

   

 

 

   

 

 

 

Total securities available for sale

     40,122        72,143        63,093        163,102   

Defined-benefit post-retirement benefit plans:

        

Change in the net actuarial gain/loss

     1,427        783        4,084        2,348   

Derivatives:

        

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

     (269     (909     (760     (2,560

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

        

Interest rate swaps on variable-rate loans

     (9,345     (9,345     (28,035     (28,035

Interest rate swap on junior subordinated deferrable interest debentures

     1,063        1,118        3,140        3,304   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total derivatives

     (8,551     (9,136     (25,655     (27,291
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), before tax

     32,998        63,790        41,522        138,159   

Deferred tax expense (benefit) related to other comprehensive income

     11,550        22,326        14,533        48,356   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     21,448        41,464        26,989        89,803   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 80,117      $ 95,971      $ 204,753      $ 251,924   
  

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

     Nine Months Ended
September 30,
 
     2012     2011  

Total shareholders’ equity at beginning of period

   $ 2,283,537      $ 2,061,680   

Net income

     177,764        162,121   

Other comprehensive income

     26,989        89,803   

Stock option exercises (197,961 shares in 2012 and 144,203 shares in 2011)

     10,092        7,239   

Stock compensation expense recognized in earnings

     7,942        10,016   

Tax benefits (deficiencies) related to stock compensation

     (425     304   

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 ($1.42 per share in 2012 and $1.37 per share in 2011)

     (87,282     (83,990
  

 

 

   

 

 

 

Total shareholders’ equity at end of period

   $ 2,418,617      $ 2,246,876   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

6


Table of Contents

Cullen/Frost Bankers, Inc.

Consolidated Statements of Cash Flows

(Dollars in thousands)

 

     Nine Months Ended
September 30,
 
     2012     2011  

Operating Activities:

    

Net income

   $ 177,764      $ 162,121   

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

    

Provision for loan losses

     5,955        27,445   

Deferred tax expense (benefit)

     (5,020     (137

Accretion of loan discounts

     (8,321     (9,865

Securities premium amortization (discount accretion), net

     14,952        7,590   

Net (gain) loss on securities transactions

     121        (6,414

Depreciation and amortization

     28,374        28,082   

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

     4,182        4,240   

Stock-based compensation

     7,942        10,016   

Net tax benefit (deficiency) from stock-based compensation

     (535     (89

Excess tax benefits from stock-based compensation

     (110     (393

Earnings on life insurance policies

     (3,042     (2,977

Net change in:

    

Trading account securities

     (1,214     (722

Accrued interest receivable and other assets

     53,120        41,588   

Accrued interest payable and other liabilities

     (4,945     (1,145
  

 

 

   

 

 

 

Net cash from operating activities

     269,223        259,340   

Investing Activities:

    

Securities held to maturity:

    

Purchases

     —          (83,184

Maturities, calls and principal repayments

     766        464   

Securities available for sale:

    

Purchases

     (17,484,661     (6,195,375

Sales

     15,987,480        5,587,391   

Maturities, calls and principal repayments

     617,489        587,650   

Net change in loans

     (823,627     (17,748

Net cash paid in acquisitions

     (7,199     (1,044

Proceeds from sales of premises and equipment

     3,765        1,256   

Purchases of premises and equipment

     (19,724     (23,266

Proceeds from sales of repossessed properties

     10,715        11,825   
  

 

 

   

 

 

 

Net cash from investing activities

     (1,714,996     (132,031

Financing Activities:

    

Net change in deposits

     1,488,449        1,584,531   

Net change in short-term borrowings

     (120,998     182,573   

Principal payments on long-term borrowings

     (14     (150,014

Proceeds from stock option exercises

     10,092        7,239   

Excess tax benefits from stock-based compensation

     110        393   

Purchase of treasury stock

     —          (1,657

Cash dividends paid

     (87,282     (83,990
  

 

 

   

 

 

 

Net cash from financing activities

     1,290,357        1,539,075   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (155,416     1,666,384   

Cash and equivalents at beginning of period

     2,907,592        2,820,977   
  

 

 

   

 

 

 

Cash and equivalents at end of period

   $ 2,752,176      $ 4,487,361   
  

 

 

   

 

 

 

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:

 

     Nine Months Ended
September 30,
 
     2012      2011  

Cash paid for interest

   $ 22,913       $ 39,809   

Cash paid for income tax

     38,761         35,612   

Significant non-cash transactions:

     

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

     5,336         16,803   

Loans to facilitate the sale of other real estate owned

     —           75   

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.

 

8


Table of Contents

Note 2 - Securities

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

 

     September 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

   $ 248,088       $ 31,892       $ —         $ 279,980       $ 247,797       $ 31,715       $ —         $ 279,512   

Residential mortgage-backed securities

     11,074         360         —           11,434         11,874         153         —           12,027   

States and political subdivisions

     104,835         12,009         —           116,844         105,325         6,597         —           111,922   

Other

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 364,997       $ 44,261       $ —         $ 409,258       $ 365,996       $ 38,465       $ —         $ 404,461   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Available for Sale:

                       

U. S. Treasury

   $ 3,019,622       $ 41,930       $ —         $ 3,061,552       $ 2,020,621       $ 36,111       $ —         $ 2,056,732   

U.S. government agencies/corporations

     250,000         145         —           250,145         250,000         884         —           250,884   

Residential mortgage-backed securities

     2,587,218         164,665         —           2,751,883         3,135,064         154,386         180         3,289,270   

States and political subdivisions

     2,412,514         205,676         12         2,618,178         1,996,703         158,133         23         2,154,813   

Other

     35,887         —           —           35,887         38,001         —           —           38,001   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,305,241       $ 412,416       $ 12       $ 8,717,645       $ 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. At September 30, 2012, approximately 99% of the securities in the Corporation’s municipal bond portfolio were issued by political subdivisions or agencies within the State of Texas, of which approximately 84% are either guaranteed by the Texas Permanent School Fund, which has a “triple-A” insurer financial strength, 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 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 $2.2 billion at September 30, 2012 and $2.4 billion at December 31, 2011.

As of September 30, 2012, 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
 

Available for Sale

                 

States and political subdivisions

   $ 16,761       $ 12       $ —         $ —         $ 16,761       $ 12   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 expects to receive full value for the securities. Furthermore, as of September 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 September 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 September 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       $ 635,154       $ 638,634   

Due after one year through five years

     248,088         279,980         2,900,392         2,949,445   

Due after five years through ten years

     3,301         3,672         215,664         234,329   

Due after ten years

     101,534         113,172         1,930,926         2,107,467   

Residential mortgage-backed securities

     11,074         11,434         2,587,218         2,751,883   

Equity securities

     —           —           35,887         35,887   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 364,997       $ 409,258       $ 8,305,241       $ 8,717,645   
  

 

 

    

 

 

    

 

 

    

 

 

 

Sales of securities available for sale were as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
         2012          2011     2012     2011  

Proceeds from sales

   $ —         $ 39,005      $ 15,987,480      $ 5,587,391   

Gross realized gains

     —           6,409        2,508        6,418   

Gross realized losses

     —           —          (2,629     4   

Tax (expense) benefit of securities gains/losses

     —           (2,243     42        (2,245

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

 

     September 30,
2012
     December 31,
2011
 

U.S. Treasury

   $ 13,761       $ 13,609   

States and political subdivisions

     1,062         —     
  

 

 

    

 

 

 

Total

   $ 14,823       $ 13,609   
  

 

 

    

 

 

 

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2012      2011      2012     2011  

Net gain on sales transactions

   $ 310       $ 303       $ 932      $ 772   

Net mark-to-market gains (losses)

     22         4         (57     11   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net gain on trading account securities

   $ 332       $ 307       $ 875      $ 783   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

Note 3 – Loans

Loans were as follows:

 

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

Commercial and industrial:

            

Commercial

   $ 4,055,807        46.0   $ 3,553,989        44.5   $ 3,571,807        44.2

Leases

     247,210        2.8        193,412        2.4        184,614        2.3   

Asset-based

     183,284        2.1        169,466        2.1        175,120        2.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial and industrial

     4,486,301        50.9        3,916,867        49.0        3,931,541        48.6   

Commercial real estate:

            

Commercial mortgages

     2,455,488        27.9        2,383,479        29.8        2,370,871        29.3   

Construction

     584,207        6.6        434,870        5.5        508,182        6.3   

Land

     210,440        2.4        202,478        2.5        214,436        2.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial real estate

     3,250,135        36.9        3,020,827        37.8        3,093,489        38.2   

Consumer real estate:

            

Home equity loans

     295,735        3.4        282,244        3.5        277,284        3.4   

Home equity lines of credit

     188,993        2.1        191,960        2.4        190,958        2.4   

1-4 family residential mortgages

     39,836        0.4        45,943        0.6        47,455        0.6   

Construction

     18,057        0.2        17,544        0.2        17,965        0.2   

Other

     225,861        2.6        225,118        2.8        233,053        2.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer real estate

     768,482        8.7        762,809        9.5        766,715        9.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

     4,018,617        45.6        3,783,636        47.3        3,860,204        47.7   

Consumer and other:

            

Consumer installment

     311,898        3.5        301,518        3.8        299,417        3.7   

Other

     13,694        0.2        11,018        0.1        14,926        0.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer and other

     325,592        3.7        312,536        3.9        314,343        3.9   

Unearned discounts

     (19,470     (0.2     (17,910     (0.2     (16,511     (0.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

   $ 8,811,040        100.0   $ 7,995,129        100.0   $ 8,089,577        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 September 30, 2012, approximately 56.2% 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 September 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 September 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.

 

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Table of Contents

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

 

     September 30,
2012
     December 31,
2011
     September 30,
2011
 

Commercial and industrial:

        

Energy

   $ —         $ —         $ —     

Other commercial

     52,819         43,874         58,208   

Commercial real estate:

        

Buildings, land and other

     48,674         43,820         45,333   

Construction

     1,144         1,329         1,821   

Consumer real estate

     3,069         4,587         4,060   

Consumer and other

     701         728         756   
  

 

 

    

 

 

    

 

 

 

Total

   $ 106,407       $ 94,338       $ 110,178   
  

 

 

    

 

 

    

 

 

 

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 $646 thousand and $1.9 million for the three and nine months ended September 30, 2012, compared to $823 thousand and $2.6 million for the three and nine months ended September 30, 2011.

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

   $ 63       $ —         $ 63       $ 1,130,840      $ 1,130,903      $ —     

Other commercial

     16,378         17,792         34,170         3,321,228        3,355,398        5,793   

Commercial real estate:

               

Buildings, land and other

     14,668         11,547         26,215         2,639,713        2,665,928        400   

Construction

     467         —           467         583,740        584,207        —     

Consumer real estate

     7,458         3,162         10,620         757,862        768,482        1,720   

Consumer and other

     4,147         579         4,726         320,866        325,592        537   

Unearned discounts

     —           —           —           (19,470     (19,470     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 43,181       $ 33,080       $ 76,261       $ 8,734,779      $ 8,811,040      $ 8,450   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

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.

 

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

September 30, 2012

                    

Commercial and industrial:

                    

Energy

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

Other commercial

     61,081         37,231         11,845         49,076         4,059         44,140         43,087   

Commercial real estate:

                    

Buildings, land and other

     54,690         39,691         6,401         46,092         823         42,569         41,283   

Construction

     1,515         1,144         —           1,144         —           1,671         1,465   

Consumer real estate

     974         894         —           894         —           1,087         1,805   

Consumer and other

     443         420         —           420         —           430         487   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 118,703       $ 79,380       $ 18,246       $ 97,626       $ 4,882       $ 89,897       $ 88,127   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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         —           1,281         —           1,527         4,339   

Consumer real estate

     2,499         1,719         751         2,470         95         2,484         1,845   

Consumer and other

     562         554         —           554         —           561         265   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 113,515       $ 76,952       $ 7,613       $ 84,565       $ 3,904       $ 92,245       $ 108,914   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2011

                    

Commercial and industrial:

                    

Energy

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

Other commercial

     79,327         42,583         10,387         52,970         6,883         60,696         57,455   

Commercial real estate:

                    

Buildings, land and other

     52,193         34,267         7,848         42,115         1,283         44,453         50,562   

Construction

     2,162         1,773         —           1,773         —           2,265         5,104   

Consumer real estate

     2,510         2,498         —           2,498         —           2,227         1,689   

Consumer and other

     568         568         —           568         —           335         193   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 136,760       $ 81,689       $ 18,235       $ 99,924       $ 8,166       $ 109,976       $ 115,003   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings. The restructuring of a loan is considered a “troubled debt restructuring” if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses.

During the nine months ended September 30, 2012, the Corporation had one troubled debt restructuring. The troubled debt restructuring related to an other commercial and industrial loan which had a restructuring date balance of $445 thousand. During the nine months ended September 30, 2011, the Corporation had troubled debt restructurings with an aggregate restructuring date balance of $9.1 million (including $7.5 million related to commercial real estate – buildings, land and other; $969 thousand related to consumer real estate; $469 thousand related to consumer and $191 thousand related to commercial and industrial – other). All of the loans identified as troubled debt restructurings by the Corporation during the reported periods were previously on non-accrual status and reported as impaired loans prior to restructuring. The modifications primarily related to extending the amortization periods of the loans. The Corporation did not grant interest-rate concessions on any restructured loan. All loans restructured during the reported periods were on non-accrual status as of the end of those periods. Because the loans were classified and on non-accrual status both before and after restructuring, the modifications did not impact the Corporation’s determination of the allowance for loan losses. During the nine months ended September 30, 2012, defaults on loans restructured during 2011 were not significant and such defaults did not significantly impact the Corporation’s determination of the allowance for loan losses.

 

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Table of Contents

Credit Quality Indicators. As part of the on-going monitoring of the credit quality of the Corporation’s 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.

The Corporation utilizes a risk grading matrix to assign a risk grade to each of its commercial loans. Loans are graded on a scale of 1 to 14. A description of the general characteristics of the 14 risk grades is as follows:

 

   

Grades 1, 2 and 3 – These grades include loans to very high credit quality borrowers of investment or near investment grade. These borrowers are generally publicly traded (grades 1 and 2), have significant capital strength, moderate leverage, stable earnings and growth, and readily available financing alternatives. Smaller entities, regardless of strength, would generally not fit in these grades.

 

   

Grades 4 and 5 – These grades include loans to borrowers of solid credit quality with moderate risk. Borrowers in these grades are differentiated from higher grades on the basis of size (capital and/or revenue), leverage, asset quality and the stability of the industry or market area.

 

   

Grades 6, 7 and 8 – These grades include “pass grade” loans to borrowers of acceptable credit quality and risk. Such borrowers are differentiated from Grades 4 and 5 in terms of size, secondary sources of repayment or they are of lesser stature in other key credit metrics in that they may be over-leveraged, under capitalized, inconsistent in performance or in an industry or an economic area that is known to have a higher level of risk, volatility, or susceptibility to weaknesses in the economy.

 

   

Grade 9 – This grade includes loans on management’s “watch list” and is intended to be utilized on a temporary basis for pass grade borrowers where a significant risk-modifying action is anticipated in the near term.

 

   

Grade 10 – This grade is for “Other Assets Especially Mentioned” in accordance with regulatory guidelines. This grade is intended to be temporary and includes loans to borrowers whose credit quality has clearly deteriorated and are at risk of further decline unless active measures are taken to correct the situation.

 

   

Grade 11 – This grade includes “Substandard” loans, in accordance with regulatory guidelines, for which the accrual of interest has not been stopped. By definition under regulatory guidelines, a “Substandard” loan has defined weaknesses which make payment default or principal exposure likely, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business.

 

   

Grade 12 – This grade includes “Substandard” loans, in accordance with regulatory guidelines, for which the accrual of interest has been stopped. This grade includes loans where interest is more than 120 days past due and not fully secured and loans where a specific valuation allowance may be necessary, but generally does not exceed 30% of the principal balance.

 

   

Grade 13 – This grade includes “Doubtful” loans in accordance with regulatory guidelines. Such loans are placed on non-accrual status and may be dependent upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. Additionally, these loans generally have a specific valuation allowance in excess of 30% of the principal balance.

 

   

Grade 14 – This grade includes “Loss” loans in accordance with regulatory guidelines. Such loans are to be charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. “Loss” is not intended to imply that the loan or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of debt.

 

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In monitoring credit quality trends in the context of assessing the appropriate level of the allowance for loan losses, the Corporation monitors 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 table presents weighted average risk grades for all commercial loans by class.

 

     September 30, 2012      December 31, 2011      September 30, 2011  
     Weighted
Average
Risk Grade
     Loans      Weighted
Average
Risk Grade
     Loans      Weighted
Average
Risk Grade
     Loans  

Commercial and industrial:

                 

Energy

                 

Risk grades 1-8

     5.36       $ 1,128,700         5.21       $ 868,561         5.18       $ 912,728   

Risk grade 9

     9.00         2,203         9.00         2,025         9.00         1,419   

Risk grade 10

     10.00         —           10.00         —           10.00         —     

Risk grade 11

     11.00         —           11.00         —           11.00         —     

Risk grade 12

     12.00         —           12.00         —           12.00         —     

Risk grade 13

     13.00         —           13.00         —           13.00         —     
     

 

 

       

 

 

       

 

 

 

Total energy

     5.37       $ 1,130,903         5.22       $ 870,586         5.19       $ 914,147   
     

 

 

       

 

 

       

 

 

 

Other commercial

                 

Risk grades 1-8

     6.05       $ 3,110,022         6.20       $ 2,802,037         6.20       $ 2,687,564   

Risk grade 9

     9.00         83,799         9.00         55,105         9.00         94,687   

Risk grade 10

     10.00         44,530         10.00         49,982         10.00         52,753   

Risk grade 11

     11.00         61,845         11.00         96,046         11.00         124,603   

Risk grade 12

     12.00         50,670         12.00         39,826         12.00         47,875   

Risk grade 13

     13.00         4,532         13.00         3,285         13.00         9,912   
     

 

 

       

 

 

       

 

 

 

Total other commercial

     6.37       $ 3,355,398         6.55       $ 3,046,281         6.67       $ 3,017,394   
     

 

 

       

 

 

       

 

 

 

Commercial real estate:

                 

Buildings, land and other

                 

Risk grades 1-8

     6.64       $ 2,397,984         6.69       $ 2,266,576         6.65       $ 2,259,305   

Risk grade 9

     9.00         102,689         9.00         103,894         9.00         91,035   

Risk grade 10

     10.00         31,755         10.00         45,278         10.00         72,975   

Risk grade 11

     11.00         83,818         11.00         126,594         11.00         116,659   

Risk grade 12

     12.00         48,859         12.00         41,747         12.00         42,391   

Risk grade 13

     13.00         823         13.00         1,868         13.00         2,942   
     

 

 

       

 

 

       

 

 

 

Total commercial real estate

     7.01       $ 2,665,928         7.14       $ 2,585,957         7.12       $ 2,585,307   
     

 

 

       

 

 

       

 

 

 

Construction

                 

Risk grades 1-8

     6.92       $ 548,019         6.95       $ 378,530         6.98       $ 439,502   

Risk grade 9

     9.00         31,366         9.00         30,376         9.00         30,358   

Risk grade 10

     10.00         1,754         10.00         16,186         10.00         28,255   

Risk grade 11

     11.00         1,924         11.00         8,449         11.00         8,246   

Risk grade 12

     12.00         1,144         12.00         1,329         12.00         1,821   

Risk grade 13

     13.00         —           13.00         —           13.00         —     
     

 

 

       

 

 

       

 

 

 

Total construction

     7.06       $ 584,207         7.30       $ 434,870         7.35       $ 508,182   
     

 

 

       

 

 

       

 

 

 

The Corporation has established maximum loan to value standards to be applied during the origination process of commercial and consumer real estate loans. The Corporation does not subsequently monitor loan-to-value ratios (either individually or on a weighted-average basis) for loans that are subsequently considered to be of a pass grade (grades 9 or better) and/or current with respect to principal and interest payments. As stated above, when an individual commercial real estate loan has a calculated risk grade of 10 or higher, a special assets officer analyzes the loan to determine whether the loan is impaired. At that time, the Corporation reassesses the loan to value position in the loan. If the loan is determined to be collateral dependent, specific allocations of the allowance for loan losses are made for the amount of any collateral deficiency. If a collateral deficiency is ultimately deemed to be uncollectible, the amount is charged-off. These loans and related assessments of collateral position are monitored on an individual, case-by-case basis. The Corporation does not monitor loan-to-value ratios on a weighted-average basis for commercial real estate loans having a calculated risk grade of 10 or higher. Nonetheless, there were three commercial real estate loans having a calculated risk grade of 10 or higher in excess of $5 million as of September 30, 2012, which totaled $31.8 million and had a weighted-average loan-to-value ratio of

 

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68.0%. When an individual consumer real estate loan becomes past due by more than 10 days, the assigned relationship manager will begin collection efforts. The Corporation only reassesses the loan to value position in a consumer real estate loan if, during the course of the collection process, it is determined that the loan has become collateral dependent, and any collateral deficiency is recognized as a charge-off to the allowance for loan losses. Accordingly, the Corporation does not monitor loan-to-value ratios on a weighted-average basis for collateral dependent consumer real estate loans.

Generally, a commercial loan, or a portion thereof, is charged-off immediately when it is determined, through the analysis of any available current financial information with regards to the borrower, that the borrower is incapable of servicing unsecured debt, there is little or no prospect for near term improvement and no realistic strengthening action of significance is pending or, in the case of secured debt, when it is determined, through analysis of current information with regards to the Corporation’s collateral position, that amounts due from the borrower are in excess of the calculated current fair value of the collateral. Notwithstanding the foregoing, generally, commercial loans that become past due 180 cumulative days are classified as a loss and charged-off. Generally, a consumer loan, or a portion thereof, is charged-off in accordance with regulatory guidelines which provide that such loans be charged-off when the Corporation becomes aware of the loss, such as from a triggering event that may include new information about a borrower’s intent/ability to repay the loan, bankruptcy, fraud or death, among other things, but in no case should the charge-off exceed specified delinquency timeframes. Such delinquency timeframes state that closed-end retail loans (loans with pre-defined maturity dates, such as real estate mortgages, home equity loans and consumer installment loans) that become past due 120 cumulative days and open-end retail loans (loans that roll-over at the end of each term, such as home equity lines of credit) that become past due 180 cumulative days should be classified as a loss and charged-off.

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

 

      Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

Commercial and industrial:

        

Energy

   $ —        $ 1      $ 4      $ 5   

Other commercial

     (4,656     (13,602     (9,511     (25,154

Commercial real estate:

        

Buildings, land and other

     2,678        (1,162     811        (8,689

Construction

     14        (121     36        (473

Consumer real estate

     (156     (750     (441     (1,642

Consumer and other

     (627     (684     (1,600     (2,375
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (2,747   $ (16,318   $ (10,701   $ (38,328
  

 

 

   

 

 

   

 

 

   

 

 

 

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 is a single summary statistic that is designed to signal the likelihood of the Texas economy’s transition from expansion to recession and vice versa. Management believes this index provides a reliable indication of the direction of overall credit quality. The TLI is a composite of the following eight leading indicators: (i) Texas Value of the Dollar, (ii) U.S. Leading Index, (iii) real oil prices (iv) well permits, (v) initial claims for unemployment insurance, (vi) Texas Stock Index, (vii) Help-Wanted Index and (viii) average weekly hours worked in manufacturing. The TLI totaled 122.2 at July 31, 2012 (most recent date available), 120.3 at December 31, 2011 and 118.3 at September 30, 2011. 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 probable 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. The Corporation’s allowance for loan loss methodology 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 the U.S. bank regulatory agencies. In that regard, the Corporation’s allowance for loan losses includes allowance allocations calculated in accordance with ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.” Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Corporation’s process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. The provision for loan losses also reflects the totality of actions taken on all loans for a particular period. In other words, the amount of the provision reflects not only the necessary increases in the allowance for loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools.

 

17


Table of Contents

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. While management utilizes its best judgment and information available, the ultimate determination of the appropriate level of the allowance is dependent upon a variety of factors beyond the Corporation’s control, including, among other things, the performance of the Corporation’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications. The Corporation monitors whether or not the allowance for loan loss allocation model, as a whole, calculates an appropriate level of allowance for loan losses that moves in direct correlation to the general macroeconomic and loan portfolio conditions the Corporation experiences over time.

The Corporation’s allowance for loan losses consists of three elements: (i) specific valuation allowances determined in accordance with ASC Topic 310 based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with ASC Topic 450 based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) general valuation allowances determined in accordance with ASC Topic 450 based on general economic conditions and other risk factors both internal and external to the Corporation.

The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of problem loans. Loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the obligor’s ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. This analysis is performed at the relationship manager level for all commercial loans. When a loan has a calculated grade of 10 or higher, a special assets officer analyzes the loan to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the allowance for loan losses to the loan. Specific valuation allowances are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things.

Historical valuation allowances are calculated based on the historical gross loss experience of specific types of loans and the internal risk grade of such loans at the time they were charged-off. The Corporation calculates historical gross loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical gross loss ratios are periodically updated based on actual charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical gross loss ratio and the total dollar amount of the loans in the pool. The Corporation’s pools of similar loans include similarly risk-graded groups of commercial and industrial loans, commercial real estate loans, consumer real estate loans and consumer and other loans.

The components of the general valuation allowance include (i) the additional reserves allocated as a result of applying an environmental risk adjustment factor to the base historical loss allocation, (ii) the additional reserves allocated for loans to borrowers in distressed industries and (iii) the additional reserves allocated for groups of similar loans with risk characteristics that exceed certain concentration limits established by management.

The environmental adjustment factor is based upon a more qualitative analysis of risk and is calculated through a survey of senior officers who are involved in credit making decisions at a corporate-wide and/or regional level. On a quarterly basis, survey participants rate the degree of various risks utilizing a numeric scale that translates to varying grades of high, moderate or low levels of risk. The results are then input into a risk-weighting matrix to determine an appropriate environmental risk adjustment factor. The various risks that may be considered in the determination of the environmental adjustment factor include, among other things, (i) the experience, ability and effectiveness of the bank’s lending management and staff; (ii) the effectiveness of the Corporation’s loan policies, procedures and internal controls; (iii) changes in asset quality; (iv) the impact of legislative and governmental influences affecting industry sectors; (v) the effectiveness of the internal loan review function; (vi) the impact of competition on loan structuring and pricing; and (vii) the impact of rising interest rates on portfolio risk. In periods where the surveyed risks are perceived to be higher, the risk-weighting matrix will generally result in a higher environmental adjustment factor, which, in turn will result in higher levels of general valuation allowance allocations. The opposite holds true in periods where the surveyed risks are perceived to be lower.

During the fourth quarter of 2011, the Corporation refined its methodology for the determination of the allowance for loan losses to provide reserves for loans to borrowers in distressed industries. To determine the amount of the allocation, management calculates the weighted-average risk grade for all loans to borrowers in distressed industries by loan portfolio segment. A multiple is then applied to the amount by which the weighted-average risk grade for loans to borrowers in distressed industries exceeds the weighted-average risk grade for all pass-grade loans within the loan portfolio segment to derive an allocation factor for loans to borrowers in distressed industries. The amount of the allocation for each loan portfolio

 

18


Table of Contents

segment is the product of this allocation factor and the outstanding balance of pass-grade loans within the identified distressed industries that have a risk grade of 6 or higher. This change in the Corporation’s methodology for the determination of the allowance for loan losses did not significantly impact the provision for loan losses recorded during 2011. Management identifies potential distressed industries by analyzing industry trends related to delinquencies, classifications and charge-offs. At September 30, 2012 and December 31, 2011, contractors were considered to be a distressed industry based on elevated levels of delinquencies, classifications and charge-offs relative to other industries within the Corporation’s loan portfolio. Furthermore, the Corporation determined, through a review of borrower financial information that, as a whole, contractors have experienced, among other things, decreased revenues, reduced backlog of work, compressed margins and little, if any, net income.

General valuation allowances include allocations for groups of loans with similar risk characteristics that exceed certain concentration limits established by management and/or the Corporation’s board of directors. Concentration risk limits have been established, among other things, for certain industry concentrations, large balance and highly leveraged credit relationships that exceed specified risk grades, and loans originated with policy, credit and/or collateral exceptions that exceed specified risk grades. Additionally, general valuation allowances are provided for loans that did not undergo a separate, independent concurrence review during the underwriting process (generally those loans under $1.0 million at origination). The Corporation’s allowance methodology for general valuation allowances also includes a reduction factor for recoveries of prior charge-offs to compensate for the fact that historical loss allocations are based upon gross charge-offs rather than net. The adjustment for recoveries is based on the lower of annualized, year-to-date gross recoveries or the total gross recoveries for the preceding four quarters, adjusted, when necessary, for expected future trends in recoveries.

The following table presents details of the allowance for loan losses, segregated by loan portfolio segment. Prior to September 30, 2012, certain general valuation allowances were not allocated to specific loan portfolio segments.

 

     Commercial
and
Industrial
    Commercial
Real Estate
    Consumer
Real Estate
    Consumer
and Other
    Unallocated     Total  

September 30, 2012

            

Historical valuation allowances

   $ 30,785      $ 15,455      $ 3,010      $ 7,479      $ —        $ 56,729   

Specific valuation allowances

     4,059        823        —          —          —          4,882   

General valuation allowances:

            

Environmental risk adjustment

     6,018        3,722        702        1,924        —          12,366   

Distressed industries

     4,998        1,173        —          —          —          6,171   

Excessive industry concentrations

     3,469        3,229        —          —          —          6,698   

Large relationship concentrations

     1,419        1,030        —          —          —          2,449   

Highly-leveraged credit relationships

     3,656        1,055        —          —          —          4,711   

Policy exceptions

     —          —          —          —          2,319        2,319   

Credit and collateral exceptions

     —          —          —          —          1,582        1,582   

Loans not reviewed by concurrence

     2,235        2,446        2,370        1,183        —          8,234   

Adjustment for recoveries

     (5,097     (1,292     (688     (6,684     —          (13,761

General macroeconomic risk

     —          —          —          —          13,021        13,021   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 51,542      $ 27,641      $ 5,394      $ 3,902      $ 16,922      $ 105,401   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2011

            

Historical valuation allowances

   $ 30,368      $ 15,153      $ 2,742      $ 9,876      $ —        $ 58,139   

Specific valuation allowances

     2,696        1,113        95        —          —          3,904   

General valuation allowances:

            

Environmental risk adjustment

     5,656        3,724        703        2,759        —          12,842   

Distressed industries

     4,054        922        —          —          —          4,976   

Excessive industry concentrations

     —          —          —          —          6,995        6,995   

Large relationship concentrations

     —          —          —          —          2,232        2,232   

Highly-leveraged credit relationships

     —          —          —          —          3,530        3,530   

Policy exceptions

     —          —          —          —          2,121        2,121   

Credit and collateral exceptions

     —          —          —          —          1,603        1,603   

Loans not reviewed by concurrence

     —          —          —          —          9,030        9,030   

Adjustment for recoveries

     —          —          —          —          (13,071     (13,071

General macroeconomic risk

     —          —          —          —          17,846        17,846   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 42,774      $ 20,912      $ 3,540      $ 12,635      $ 30,286      $ 110,147   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The Corporation monitors whether or not the allowance for loan loss allocation model, as a whole, calculates an appropriate level of allowance for loan losses that moves in direct correlation to the general macroeconomic and loan portfolio conditions the Corporation experiences over time. In assessing the general macroeconomic trends/conditions, the Corporation analyzes trends in the components of the TLI, as well as any available information related to regional, national and international economic conditions and events and the impact such conditions and events may have on the Corporation and its customers. With regard to assessing loan portfolio conditions, the Corporation analyzes trends in weighted-average portfolio risk-grades, classified and non-performing loans and charge-off activity. In periods where general macroeconomic and loan portfolio conditions are in a deteriorating trend or remain at deteriorated levels, based on historical trends, the Corporation would expect to see the allowance for loan loss allocation model, as a whole, calculate higher levels of required allowances than in periods where general macroeconomic and loan portfolio conditions are in an improving trend or remain at an elevated level, based on historical trends.

The following table details activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2012 and 2011. 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
    Commercial
Real Estate
    Consumer
Real Estate
    Consumer
and Other
    Unallocated     Total  

Three months ended:

            

September 30, 2012

            

Beginning balance

   $ 53,475      $ 27,631      $ 5,235      $ 3,649      $ 15,658      $ 105,648   

Provision for loan losses

     2,723        (2,682     315        880        1,264        2,500   

Charge-offs

     (5,837     (520     (209     (2,391     —          (8,957

Recoveries

     1,181        3,212        53        1,764        —          6,210   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (charge-offs) recoveries

     (4,656     2,692        (156     (627     —          (2,747
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 51,542      $ 27,641      $ 5,394      $ 3,902      $ 16,922      $ 105,401   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2011

            

Beginning balance

   $ 56,566      $ 20,901      $ 3,683      $ 12,611      $ 28,980      $ 122,741   

Provision for loan losses

     3,920        1,194        513        880        2,503        9,010   

Charge-offs

     (15,084     (1,689     (834     (2,359     —          (19,966

Recoveries

     1,483        406        84        1,675        —          3,648   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (13,601     (1,283     (750     (684     —          (16,318
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 46,885      $ 20,812      $ 3,446      $ 12,807      $ 31,483      $ 115,433   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine months ended:

            

September 30, 2012

            

Beginning balance

   $ 42,774      $ 20,912      $ 3,540      $ 12,635      $ 30,286      $ 110,147   

Provision for loan losses

     18,275        5,882        2,295        (7,133     (13,364     5,955   

Charge-offs

     (13,323     (3,715     (1,104     (6,605     —          (24,747

Recoveries

     3,816        4,562        663        5,005        —          14,046   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (charge-offs) recoveries

     (9,507     847        (441     (1,600     —          (10,701
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 51,542      $ 27,641      $ 5,394      $ 3,902      $ 16,922      $ 105,401   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2011

            

Beginning balance

   $ 57,789      $ 28,534      $ 3,223      $ 11,974      $ 24,796      $ 126,316   

Provision for loan losses

     14,245        1,440        1,865        3,208        6,687        27,445   

Charge-offs

     (28,258     (10,261     (2,113     (7,058     —          (47,690

Recoveries

     3,109        1,099        471        4,683        —          9,362   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (25,149     (9,162     (1,642     (2,375     —          (38,328
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 46,885      $ 20,812      $ 3,446      $ 12,807      $ 31,483      $ 115,433   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The following table details the amount of the allowance for loan losses allocated to each portfolio segment as of September 30, 2012, December 31, 2011 and September 30, 2011, detailed on the basis of the impairment methodology used by the Corporation.

 

     Commercial
and
Industrial
     Commercial
Real Estate
     Consumer
Real Estate
     Consumer
and Other
     Unallocated      Total  

September 30, 2012

                 

Loans individually evaluated for impairment

   $ 14,301       $ 2,149       $ —         $ —         $ —         $ 16,450   

Loans collectively evaluated for impairment

     37,241         25,492         5,394         3,902         16,922         88,951   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at September 30, 2012

   $ 51,542       $ 27,641       $ 5,394       $ 3,902       $ 16,922       $ 105,401   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

                 

Loans individually evaluated for impairment

   $ 15,829       $ 3,625       $ 95       $ —         $ —         $ 19,549   

Loans collectively evaluated for impairment

     26,945         17,287         3,445         12,635         30,286         90,598   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at December 31, 2011

   $ 42,774       $ 20,912       $ 3,540       $ 12,635       $ 30,286       $ 110,147   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2011

                 

Loans individually evaluated for impairment

   $ 23,263       $ 4,075       $ —         $ —         $ —         $ 27,338   

Loans collectively evaluated for impairment

     23,622         16,737         3,446         12,807         31,483         88,095   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at September 30, 2011

   $ 46,885       $ 20,812       $ 3,446       $ 12,807       $ 31,483       $ 115,433   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Corporation’s recorded investment in loans as of September 30, 2012, December 31, 2011 and September 30, 2011 related to each balance in the allowance for loan losses by portfolio segment and detailed on the basis of the impairment methodology used by the Corporation was as follows:

 

     Commercial
and
Industrial
     Commercial
Real Estate
     Consumer
Real Estate
     Consumer
and Other
     Unearned
Discounts
    Total  

September 30, 2012

                

Loans individually evaluated for impairment

   $ 161,577       $ 170,077       $ 894       $ 420       $ —        $ 332,968   

Loans collectively evaluated for impairment

     4,324,724         3,080,058         767,588         325,172         (19,470     8,478,072   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance

   $ 4,486,301       $ 3,250,135       $ 768,482       $ 325,592       $ (19,470   $ 8,811,040   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2011

                

Loans individually evaluated for impairment

   $ 189,139       $ 241,451       $ 2,470       $ 554       $ —        $ 433,614   

Loans collectively evaluated for impairment

     3,727,728         2,779,376         760,339         311,982         (17,910     7,561,515   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance

   $ 3,916,867       $ 3,020,827       $ 762,809       $ 312,536       $ (17,910   $ 7,995,129   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

September 30, 2011

                

Loans individually evaluated for impairment

   $ 235,143       $ 273,289       $ —         $ —         $ —        $ 508,432   

Loans collectively evaluated for impairment

     3,696,398         2,820,200         766,715         314,343         (16,511     7,581,145   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance

   $ 3,931,541       $ 3,093,489       $ 766,715       $ 314,343       $ (16,511   $ 8,089,577   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

Note 4 - Goodwill and Other Intangible Assets

Goodwill and other intangible assets are presented in the table below. The increases in goodwill and certain other intangible assets were primarily related to the acquisition of Stone Partners Inc. (“Stone”), a human resource consulting firm that specializes in compensation, benefits and outsourcing services, on January 1, 2012. Stone was based in Houston with additional offices in Dallas and Austin. Stone was fully integrated into Frost Insurance Agency subsequent to acquisition. The acquisition of Stone did not significantly impact the Corporation’s financial statements.

 

     September 30,
2012
     December 31,
2011
 

Goodwill

   $ 535,509       $ 528,072   
  

 

 

    

 

 

 

Other intangible assets:

     

Core deposits

   $ 5,990       $ 8,234   

Customer relationship

     2,433         2,113   

Non-compete agreements

     643         257   
  

 

 

    

 

 

 
   $ 9,066       $ 10,604   
  

 

 

    

 

 

 

The estimated aggregate future amortization expense for intangible assets remaining as of September 30, 2012 is as follows:

 

Remainder of 2012

   $ 919   

2013

     3,115   

2014

     2,270   

2015

     1,490   

2016

     777   

Thereafter

     495   
  

 

 

 
   $ 9,066   
  

 

 

 

Note 5 - Deposits

Deposits were as follows:

 

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

Non-interest-bearing demand deposits:

            

Commercial and individual

   $ 6,907,201         37.9   $ 5,848,840         34.9   $ 5,759,723         35.8

Correspondent banks

     350,895         1.9        370,275         2.2        350,082         2.2   

Public funds

     462,834         2.5        453,440         2.7        431,434         2.7   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total non-interest-bearing demand deposits

     7,720,930         42.3        6,672,555         39.8        6,541,239         40.7   

Interest-bearing deposits:

            

Private accounts:

            

Savings and interest checking

     3,198,939         17.5        2,912,937         17.4        2,579,745         16.1   

Money market accounts

     5,906,083         32.4        5,664,780         33.8        5,469,492         34.0   

Time accounts of $100,000 or more

     535,308         3.0        533,682         3.2        581,192         3.6   

Time accounts under $100,000

     477,168         2.6        522,887         3.1        546,583         3.4   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total private accounts

     10,117,498         55.5        9,634,286         57.5        9,177,012         57.1   

Public funds:

            

Savings and interest checking

     224,427         1.2        265,747         1.6        164,183         1.0   

Money market accounts

     49,709         0.3        44,590         0.3        46,099         0.3   

Time accounts of $100,000 or more

     129,843         0.7        136,422         0.8        132,657         0.9   

Time accounts under $100,000

     2,790         —          3,148         —          2,683         —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total public funds

     406,769         2.2        449,907         2.7        345,622         2.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total interest-bearing deposits

     10,524,267         57.7        10,084,193         60.2        9,522,634         59.3   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total deposits

   $ 18,245,197         100.0   $ 16,756,748         100.0   $ 16,063,873         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

The following table presents additional information about the Corporation’s deposits:

 

     September 30,
2012
     December 31,
2011
     September 30,
2011
 

Money market deposits obtained through brokers

   $ —         $ 24,500       $ 28,246   

Deposits from the Certificate of Deposit Account Registry Service (CDARS) deposits

     9,399         45,005         60,979   

Deposits from foreign sources (primarily Mexico)

     787,304         744,669         729,933   

Note 6 - Commitments and Contingencies

Financial Instruments with Off-Balance-Sheet Risk. In the normal course of business, the Corporation enters into various transactions, which, in accordance with generally accepted accounting principles are not included in its consolidated balance sheets. The Corporation enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The Corporation minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.

The Corporation enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of the Corporation’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. Standby letters of credit are written conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Corporation would be required to fund the commitment. The maximum potential amount of future payments the Corporation could be required to make is represented by the contractual amount of the commitment. If the commitment were funded, the Corporation would be entitled to seek recovery from the customer. The Corporation’s policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.

The Corporation considers the fees collected in connection with the issuance of standby letters of credit to be representative of the fair value of its obligation undertaken in issuing the guarantee. In accordance with applicable accounting standards related to guarantees, the Corporation defers fees collected in connection with the issuance of standby letters of credit. The fees are then recognized in income proportionately over the life of the standby letter of credit agreement. The deferred standby letter of credit fees represent the fair value of the Corporation’s potential obligations under the standby letter of credit guarantees.

Financial instruments with off-balance-sheet risk were as follows:

 

     September 30,
2012
     December 31,
2011
 

Commitments to extend credit

   $ 5,569,362       $ 5,147,363   

Standby letters of credit

     195,216         235,903   

Deferred standby letter of credit fees

     1,305         1,488   

Lease Commitments. The Corporation leases certain office facilities and office equipment under operating leases. Rent expense for all operating leases totaled $5.9 million and $16.9 million during the three and nine months ended September 30, 2012 and $5.3 million and $16.1 million during the three and nine months ended September 30, 2011. There has been no significant change in the future minimum lease payments payable by the Corporation since December 31, 2011. See the 2011 Form 10-K for information regarding these commitments.

Litigation. The Corporation is subject to various claims and legal actions that have arisen in the course of conducting business. Management does not expect the ultimate disposition of these matters to have a material adverse impact on the Corporation’s financial statements.

 

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Table of Contents

Note 7 - Regulatory Matters

Regulatory Capital Requirements. Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.

Quantitative measures established by regulations to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to adjusted quarterly average assets (as defined).

Cullen/Frost’s and Frost Bank’s Tier 1 capital consists of shareholders’ equity excluding unrealized gains and losses on securities available for sale, the accumulated gain or loss on effective cash flow hedging derivatives, the net actuarial gain/loss on the Corporation’s defined benefit post-retirement benefit plans, goodwill and other intangible assets. Tier 1 capital for Cullen/Frost also includes $120 million of trust preferred securities issued by its unconsolidated subsidiary trust. Cullen/Frost’s and Frost Bank’s total capital is comprised of Tier 1 capital for each entity plus a permissible portion of the allowance for loan losses. The Corporation’s aggregate $100 million of floating rate subordinated notes are not included in Tier 1 capital but the permissible portion (which decreases 20% per year during the final five years of the term of the notes) totaling $80 million at September 30, 2012, is included in total capital of Cullen/Frost.

The Tier 1 and total capital ratios are calculated by dividing the respective capital amounts by risk-weighted assets. Risk-weighted assets are calculated based on regulatory requirements and include total assets, excluding goodwill and other intangible assets, allocated by risk weight category, and certain off-balance-sheet items (primarily loan commitments). The leverage ratio is calculated by dividing Tier 1 capital by adjusted quarterly average total assets, which exclude goodwill and other intangible assets.

Actual and required capital ratios for Cullen/Frost and Frost Bank were as follows:

 

      Actual     Minimum Required
for Capital Adequacy
Purposes
    Required to be
Considered Well
Capitalized
 
      Capital
Amount
     Ratio     Capital
Amount
     Ratio     Capital
Amount
     Ratio  

September 30, 2012

               

Total Capital to Risk-Weighted Assets

               

Cullen/Frost

   $ 1,912,550         15.62   $ 979,742         8.00   $ 1,224,678         10.00

Frost Bank

     1,705,199         13.93        979,294         8.00        1,224,117         10.00   

Tier 1 Capital to Risk-Weighted Assets

               

Cullen/Frost

     1,727,149         14.10        489,871         4.00        734,807         6.00   

Frost Bank

     1,599,798         13.07        489,647         4.00        734,470         6.00   

Leverage Ratio

               

Cullen/Frost

     1,727,149         8.59        804,371         4.00        1,005,464         5.00   

Frost Bank

     1,599,798         7.96        803,878         4.00        1,004,848         5.00   

December 31, 2011

               

Total Capital to Risk-Weighted Assets

               

Cullen/Frost