Cullen/Frost Bankers, Inc. (Exact name of registrant as specified in - PDF document

Section 1: 10-Q (10-Q) Table of Contents United States Securities and Exchange Commission Washington, D.C. 20549 Form 10-Q ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended: June 30, 2017 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 (I.R.S. Employer incorporation or organization) Identification No.) 100 W. Houston Street, San Antonio, Texas 78205 (Address of principal executive offices) (Zip code) (210) 220 - 4011 (Registrant’s telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S - T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non - accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b - 2 of the Exchange Act. ý ¨ Large accelerated filer Accelerated filer ¨ (Do not check if a smaller reporting company) ¨ Non - accelerated filer Smaller reporting company ¨ Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b - 2 of the Act). Yes ¨ No ý As of July 20, 2017 there were 64,229,805 shares of the registrant ’ s Common Stock, $.01 par value, outstanding.

Table of Contents Cullen/Frost Bankers, Inc. Quarterly Report on Form 10 - Q June 30, 2017 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 33 Item 3. Quantitative and Qualitative Disclosures About Market Risk 54 Item 4. Controls and Procedures 55 Part II - Other Information Item 1. Legal Proceedings 56 Item 1A. Risk Factors 56 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 56 Item 3. Defaults Upon Senior Securities 56 Item 4. Mine Safety Disclosures 56 Item 5. Other Information 56 Item 6. Exhibits 56 Signatures 57 2

Table of Contents Part I. Financial Information Item 1. Financial Statements (Unaudited) Cullen/Frost Bankers, Inc. Consolidated Balance Sheets (Dollars in thousands, except per share amounts) June 30, December 31, 2017 2016 Assets: Cash and due from banks $ 542,475 $ 561,838 Interest - bearing deposits 3,040,148 3,560,865 Federal funds sold and resell agreements 123,692 18,742 Total cash and cash equivalents 3,706,315 4,141,445 Securities held to maturity, at amortized cost 1,596,262 2,250,460 Securities available for sale, at estimated fair value 10,783,737 10,203,277 Trading account securities 27,600 16,703 Loans, net of unearned discounts 12,512,338 11,975,392 Less: Allowance for loan losses (149,558 ) (153,045 ) Net loans 12,362,780 11,822,347 Premises and equipment, net 520,253 525,821 Goodwill 654,952 654,952 Other intangible assets, net 5,880 6,776 Cash surrender value of life insurance policies 178,987 177,884 Accrued interest receivable and other assets 369,548 396,654 Total assets $ 30,206,314 $ 30,196,319 Liabilities: Deposits: Non - interest - bearing demand deposits $ 10,707,365 $ 10,513,369 Interest - bearing deposits 14,906,208 15,298,206 Total deposits 25,613,573 25,811,575 Federal funds purchased and repurchase agreements 924,867 976,992 Junior subordinated deferrable interest debentures, net of unamortized issuance costs 136,155 136,127 Subordinated notes, net of unamortized issuance costs 98,473 99,990 Accrued interest payable and other liabilities 209,317 169,107 Total liabilities 26,982,385 27,193,791 Shareholders ’ Equity: Preferred stock, par value $0.01 per share; 10,000,000 shares authorized; 6,000,000 Series A shares ($25 liquidation preference) issued at June 30, 2017 and December 31, 2016 144,486 144,486 Common stock, par value $0.01 per share; 210,000,000 shares authorized; 64,225,827 shares issued at June 30, 2017 and 63,632,464 shares issued at December 31, 2016 642 637 Additional paid - in capital 948,593 906,732 Retained earnings 2,078,898 1,985,569 Accumulated other comprehensive income, net of tax 51,310 (24,623 ) Treasury stock, at cost; none at June 30, 2017 and 158,243 shares at December 31, 2016 — ( 10,273 ) Total shareholders ’ equity 3,223,929 3,002,528 Total liabilities and shareholders ’ equity $ 30,206,314 $ 30,196,319 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 Six Months Ended June 30, June 30, 2017 2016 2017 2016 Interest income: Loans, including fees $ 131,073 $ 113,349 $ 253,673 $ 225,935 Securities: Taxable 23,527 25,531 48,829 51,505 Tax - exempt 55,435 50,910 112,382 101,243 Interest - bearing deposits 9,076 3,602 15,912 7,255 Federal funds sold and resell agreements 163 59 270 117 Total interest income 219,274 193,451 431,066 386,055 Interest expense: Deposits 2,173 1,773 4,041 3,560 Federal funds purchased and repurchase agreements 187 52 326 108 Junior subordinated deferrable interest debentures 962 803 1,870 1,553 Other long - term borrowings 1,164 321 1,532 608 Total interest expense 4,486 2,949 7,769 5,829 Net interest income 214,788 190,502 423,297 380,226 Provision for loan losses 8,426 9,189 16,378 37,689 Net interest income after provision for loan losses 206,362 181,313 406,919 342,537 Non - interest income: Trust and investment management fees 27,727 26,021 54,197 51,355 Service charges on deposit accounts 21,198 19,865 41,967 40,229 Insurance commissions and fees 9,728 9,360 23,549 24,783 Interchange and debit card transaction fees 5,692 5,381 11,266 10,403 Other charges, commissions and fees 9,898 10,069 19,490 19,122 Net gain (loss) on securities transactions (50 ) — ( 50 ) 14,903 Other 6,887 7,321 14,361 13,365 Total non - interest income 81,080 78,017 164,780 174,160 Non - interest expense: Salaries and wages 80,995 78,106 163,507 157,403 Employee benefits 18,198 17,712 39,823 38,017 Net occupancy 19,153 18,242 38,390 35,429 Furniture and equipment 18,250 17,978 36,240 35,495 Deposit insurance 5,570 4,197 10,485 7,854 Intangible amortization 438 619 896 1,283 Other 45,447 42,591 86,625 83,123 Total non - interest expense 188,051 179,445 375,966 358,604 Income before income taxes 99,391 79,885 195,733 158,093 Income taxes 13,838 8,378 25,239 17,770 Net income 85,553 71,507 170,494 140,323 Preferred stock dividends 2,015 2,015 4,031 4,031 Net income available to common shareholders $ 83,538 $ 69,492 $ 166,463 $ 136,292 Earnings per common share: Basic $ 1.30 $ 1.12 $ 2.59 $ 2.19 Diluted 1.29 1.11 2.57 2.19 See Notes to Consolidated Financial Statements.

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Table of Contents Cullen/Frost Bankers, Inc. Consolidated Statements of Comprehensive Income (Dollars in thousands) Three Months Ended Six Months Ended June 30, June 30, 2017 2016 2017 2016 Net income $ 85,553 $ 71,507 $ 170,494 $ 140,323 Other comprehensive income (loss), before tax: Securities available for sale and transferred securities: Change in net unrealized gain/loss during the period 90,390 165,288 124,201 287,506 Change in net unrealized gain on securities transferred to held to maturity (3,860 ) (9,185 ) (10,146 ) (17,351 ) Reclassification adjustment for net (gains) losses included in net income 50 — 50 (14,903 ) Total securities available for sale and transferred securities 86,580 156,103 114,105 255,252 Defined - benefit post - retirement benefit plans: Change in the net actuarial gain/loss — ( 862 ) — ( 862 ) Reclassification adjustment for net amortization of actuarial gain/loss included in net 1,358 1,740 2,715 3,293 income as a component of net periodic cost (benefit) Total defined - benefit post - retirement benefit plans 1,358 878 2,715 2,431 Other comprehensive income (loss), before tax 87,938 156,981 116,820 257,683 Deferred tax expense (benefit) related to other comprehensive income 30,778 54,943 40,887 90,189 Other comprehensive income (loss), net of tax 57,160 102,038 75,933 167,494 Comprehensive income (loss) $ 142,713 $ 173,545 $ 246,427 $ 307,817 See Notes to Consolidated Financial Statements. 5