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: ~~September 30, 2017~~March 31, 2018

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

For the transition period from to

Commission file number: 001-13221

Cullen/Frost Bankers, Inc.

(Exact name of registrant as specified in its charter)



Texas	74-1751768
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

100 W. Houston Street, San Antonio, Texas	78205
(Address of principal executive offices)	(Zip code)

(210) 220-4011

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.



Large accelerated filer	ý	Accelerated filer	¨
Non-accelerated filer	¨ (Do not check if a smaller reporting company)	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 ~~October~~April 19, ~~2017~~2018 there were ~~63,164,491~~63,797,196 shares of the registrant’s Common Stock, $.01 par value, outstanding.

Cullen/Frost Bankers, Inc.

Quarterly Report on Form 10-Q

~~September 30, 2017~~March 31, 2018

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 (Loss)	5
	Consolidated Statements of Changes in Shareholders’ Equity	6
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5754
Item 4.	Controls and Procedures	5855

Part II - Other Information
Item 1.	Legal Proceedings	5956
Item 1A.	Risk Factors	5956
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5956
Item 3.	Defaults Upon Senior Securities	5956
Item 4.	Mine Safety Disclosures	5956
Item 5.	Other Information	5956
Item 6.	Exhibits	5956

Signatures		6057

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, 2017			December 31, 2016			March 31, 2018			December 31, 2017
Assets:
Cash and due from banks	$	503,961		$	561,838		$	434,155		$	545,542
Interest-bearing deposits	4,538,300			3,560,865			3,907,051			4,347,538
Federal funds sold and resell agreements	49,642			18,742			339,742			159,967
Total cash and cash equivalents	5,091,903			4,141,445			4,680,948			5,053,047
Securities held to maturity, at amortized cost	1,442,222			2,250,460			1,247,154			1,432,098
Securities available for sale, at estimated fair value	10,185,100			10,203,277			10,536,532			10,489,009
Trading account securities	19,721			16,703			19,772			21,098
Loans, net of unearned discounts	12,706,304			11,975,392			13,364,029			13,145,665
Less: Allowance for loan losses	(154,303		)	(153,045		)	(149,885		)	(155,364		)
Net loans	12,552,001			11,822,347			13,214,144			12,990,301
Premises and equipment, net	520,639			525,821			521,202			520,958
Goodwill	654,952			654,952			654,952			654,952
Other intangible assets, net	5,475			6,776			4,685			5,073
Cash surrender value of life insurance policies	179,789			177,884			181,297			180,477
Accrued interest receivable and other assets	338,170			396,654			398,546			400,867
Total assets	$	30,989,972		$	30,196,319		$	31,459,232		$	31,747,880

Liabilities:
Deposits:
Non-interest-bearing demand deposits	$	11,174,251		$	10,513,369		$	10,934,162		$	11,197,093
Interest-bearing deposits	15,229,018			15,298,206			15,743,616			15,675,296
Total deposits	26,403,269			25,811,575			26,677,778			26,872,389
Federal funds purchased and repurchase agreements	997,919			976,992			1,032,221			1,147,824
Junior subordinated deferrable interest debentures, net of unamortized issuance costs	136,170			136,127			136,198			136,184
Subordinated notes, net of unamortized issuance costs	98,512			99,990			98,591			98,552
Accrued interest payable and other liabilities	165,059			169,107			271,014			195,068
Total liabilities	27,800,929			27,193,791			28,215,802			28,450,017

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 September 30, 2017 and December 31, 2016	144,486			144,486
Common stock, par value $0.01 per share; 210,000,000 shares authorized; 64,236,306 shares issued at September 30, 2017 and 63,632,464 shares issued at December 31, 2016	642			637
Preferred stock, par value $0.01 per share; 10,000,000 shares authorized; 6,000,000 Series A shares ($25 liquidation preference) issued at March 31, 2018 and December 31, 2017							144,486			144,486
Common stock, par value $0.01 per share; 210,000,000 shares authorized; 64,236,306 shares issued at both March 31, 2018 and December 31, 2017							642			642
Additional paid-in capital	951,893			906,732			956,536			953,361
Retained earnings	2,133,259			1,985,569			2,234,301			2,187,069
Accumulated other comprehensive income, net of tax	57,675			(24,623		)	(53,354		)	79,512
Treasury stock, at cost; 1,122,721 shares at September 30, 2017 and 158,243 shares at December 31, 2016	(98,912		)	(10,273		)
Treasury stock, at cost; 442,610 shares at March 31, 2018 and 760,720 shares at December 31, 2017							(39,181		)	(67,207		)
Total shareholders’ equity	3,189,043			3,002,528			3,243,430			3,297,863
Total liabilities and shareholders’ equity	$	30,989,972		$	30,196,319		$	31,459,232		$	31,747,880

See Notes to Consolidated Financial Statements.

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,					Three Months Ended March 31,
	2017			2016			2017			2016		2018			2017
Interest income:
Loans, including fees	$	138,400		$	114,368		$	392,073		$	340,303	$	151,202		$	122,600
Securities:
Taxable	23,203			25,897			72,032			77,402		20,558			25,302
Tax-exempt	54,939			53,065			167,321			154,308		56,711			56,947
Interest-bearing deposits	10,800			4,111			26,712			11,366		14,094			6,836
Federal funds sold and resell agreements	244			48			514			165		761			107
Total interest income	227,586			197,489			658,652			583,544		243,326			211,792
Interest expense:
Deposits	5,668			1,749			9,709			5,309		10,638			1,868
Federal funds purchased and repurchase agreements	523			44			849			152		634			139
Junior subordinated deferrable interest debentures	1,020			839			2,890			2,392		1,142			908
Other long-term borrowings	1,164			350			2,696			958		1,164			368
Total interest expense	8,375			2,982			16,144			8,811		13,578			3,283
Net interest income	219,211			194,507			642,508			574,733		229,748			208,509
Provision for loan losses	10,980			5,045			27,358			42,734		6,945			7,952
Net interest income after provision for loan losses	208,231			189,462			615,150			531,999		222,803			200,557
Non-interest income:
Trust and investment management fees	27,493			26,451			81,690			77,806		29,587			26,470
Service charges on deposit accounts	20,967			20,540			62,934			60,769		20,843			20,769
Insurance commissions and fees	10,892			11,029			34,441			35,812		15,980			13,821
Interchange and debit card transaction fees	5,884			5,435			17,150			15,838		3,158			5,574
Other charges, commissions and fees	10,493			10,703			29,983			29,825		9,007			9,592
Net gain (loss) on securities transactions	(4,867		)	(37		)	(4,917		)	14,866		(19		)	—
Other	10,753			7,993			25,114			21,358		12,889			7,474
Total non-interest income	81,615			82,114			246,395			256,274		91,445			83,700
Non-interest expense:
Salaries and wages	84,388			79,411			247,895			236,814		86,683			82,512
Employee benefits	17,730			17,844			57,553			55,861		21,995			21,625
Net occupancy	19,391			18,202			57,781			53,631		19,740			19,237
Furniture and equipment	18,743			17,979			54,983			53,474
Technology, furniture and equipment												19,679			17,990
Deposit insurance	4,862			4,558			15,347			12,412		4,879			4,915
Intangible amortization	405			586			1,301			1,869		388			458
Other	41,304			41,925			127,929			125,048		43,247			41,178
Total non-interest expense	186,823			180,505			562,789			539,109		196,611			187,915
Income before income taxes	103,023			91,071			298,756			249,164		117,637			96,342
Income taxes	9,892			10,852			35,131			28,622		11,157			11,401
Net income	93,131			80,219			263,625			220,542		106,480			84,941
Preferred stock dividends	2,016			2,016			6,047			6,047		2,016			2,016
Net income available to common shareholders	$	91,115		$	78,203		$	257,578		$	214,495	$	104,464		$	82,925

Earnings per common share:
Basic	$	1.43		$	1.24		$	4.02		$	3.44	$	1.63		$	1.29
Diluted	1.41			1.24			3.98			3.42		1.61			1.28

See Notes to Consolidated Financial Statements.

Cullen/Frost Bankers, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(Dollars in thousands)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2017			2016			2017			2016			2018			2017
Net income	$	93,131		$	80,219		$	263,625		$	220,542		$	106,480		$	84,941
Other comprehensive income (loss), before tax:
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period	7,082			(95,641		)	131,283			191,865			(178,904		)	33,811
Change in net unrealized gain on securities transferred to held to maturity	(3,514		)	(7,278		)	(13,660		)	(24,629		)	(2,619		)	(6,286		)
Reclassification adjustment for net (gains) losses included in net income	4,867			37			4,917			(14,866		)	19			—
Total securities available for sale and transferred securities	8,435			(102,882		)	122,540			152,370			(181,504		)	27,525
Defined-benefit post-retirement benefit plans:
Change in the net actuarial gain/loss	—			—			—			(862		)	—			—
Reclassification adjustment for net amortization of actuarial gain/loss included in net income as a component of net periodic cost (benefit)	1,357			1,585			4,072			4,878			1,250			1,357
Total defined-benefit post-retirement benefit plans	1,357			1,585			4,072			4,016			1,250			1,357
Other comprehensive income (loss), before tax	9,792			(101,297		)	126,612			156,386			(180,254		)	28,882
Deferred tax expense (benefit) related to other comprehensive income	3,427			(35,453		)	44,314			54,736
Deferred tax expense (benefit)													(37,853		)	10,109
Other comprehensive income (loss), net of tax	6,365			(65,844		)	82,298			101,650			(142,401		)	18,773
Comprehensive income (loss)	$	99,496		$	14,375		$	345,923		$	322,192		$	(35,921	)	$	103,714

See Notes to Consolidated Financial Statements.

Cullen/Frost Bankers, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

(Dollars in thousands, except per share amounts)


	Nine Months Ended September 30,						Three Months Ended March 31,
	2017			2016			2018			2017
Total shareholders’ equity at beginning of period	$	3,002,528		$	2,890,343		$	3,297,863		$	3,002,528
Cumulative effect of accounting change							(2,285		)	—
Total shareholders' equity at beginning of period, as adjusted							3,295,578			3,002,528
Net income	263,625			220,542			106,480			84,941
Other comprehensive income (loss)	82,298			101,650			(142,401		)	18,773
Stock option exercises/stock unit conversions (774,799 shares in 2017 and 908,921 shares in 2016)	45,422			47,873
Stock option exercises/stock unit conversions (318,110 shares in 2018 and 442,054 shares in 2017)							19,165			24,747
Stock compensation expense recognized in earnings	9,013			7,998			3,175			3,103
Purchase of treasury stock (1,135,435 shares in 2017)	(100,042		)	—
Cash dividends – preferred stock (approximately $1.01 per share in both 2017 and in 2016)	(6,047		)	(6,047		)
Cash dividends – common stock ($1.68 per share in 2017 and $1.61 per share in 2016)	(107,754		)	(100,563		)
Purchase of treasury stock (469 shares in 2017)							—			(42		)
Cash dividends – preferred stock (approximately $0.34 per share in both 2018 and in 2017)							(2,016		)	(2,016		)
Cash dividends – common stock ($0.57 per share in 2018 and $0.54 per share in 2017)							(36,551		)	(34,656		)
Total shareholders’ equity at end of period	$	3,189,043		$	3,161,796		$	3,243,430		$	3,097,378

See Notes to Consolidated Financial Statements.

Cullen/Frost Bankers, Inc.

Consolidated Statements of Cash Flows

(Dollars in thousands)


	Nine Months Ended September 30,						Three Months Ended March 31,
	2017			2016			2018			2017
Operating Activities:
Net income	$	263,625		$	220,542		$	106,480		$	84,941
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses	27,358			42,734			6,945			7,952
Deferred tax expense (benefit)	(9,505		)	(11,629		)	10,411			(4,301		)
Accretion of loan discounts	(11,567		)	(11,893		)	(3,378		)	(3,913		)
Securities premium amortization (discount accretion), net	66,455			59,071			24,260			21,638
Net (gain) loss on securities transactions	4,917			(14,866		)	19			—
Depreciation and amortization	35,819			35,712			12,130			12,121
Net (gain) loss on sale/write-down of assets/foreclosed assets	(2,045		)	(373		)	(3,982		)	(533		)
Stock-based compensation	9,013			7,998			3,175			3,103
Net tax benefit from stock-based compensation	5,844			1,610			2,211			3,515
Earnings on life insurance policies	(2,367		)	(2,678		)	(820		)	(783		)
Net change in:
Trading account securities	(3,018		)	418			1,326			(1,088		)
Accrued interest receivable and other assets	10,495			11,134			23,555			55,705
Accrued interest payable and other liabilities	(39,580		)	(2,806		)	28,376			(48,702		)
Net cash from operating activities	355,444			334,974			210,708			129,655

Investing Activities:
Securities held to maturity:
Purchases	—			—			(1,500		)	—
Sales	—			135,610			—			—
Maturities, calls and principal repayments	780,562			227,760			179,149			599,457
Securities available for sale:
Purchases	(9,138,457		)	(10,079,302		)	(3,245,923		)	(466,004		)
Sales	8,993,963			9,040,245			2,984,867			—
Maturities, calls and principal repayments	283,278			270,737			62,768			107,586
Proceeds from sale of loans	—			30,470			—			—
Net change in loans	(745,702		)	(142,698		)	(227,417		)	(214,281		)
Benefits received on life insurance policies	462			906			—			461
Proceeds from sales of premises and equipment	1,553			1,517			11,317			1,544
Purchases of premises and equipment	(23,796		)	(32,647		)	(16,759		)	(6,311		)
Proceeds from sales of repossessed properties	517			297			307			345
Net cash from investing activities	152,380			(547,105		)	(253,191		)	22,797

Financing Activities:
Net change in deposits	591,694			763,953			(194,611		)	330,589
Net change in short-term borrowings	20,927			(89,220		)	(115,603		)	(81,792		)
Proceeds from issuance of subordinated notes	98,434			—			—			98,446
Principal payments on subordinated notes	(100,000		)	—			—			(100,000		)
Proceeds from stock option exercises	45,422			47,873			19,165			24,747
Purchase of treasury stock	(100,042		)	—			—			(42		)
Cash dividends paid on preferred stock	(6,047		)	(6,047		)	(2,016		)	(2,016		)
Cash dividends paid on common stock	(107,754		)	(100,563		)	(36,551		)	(34,656		)
Net cash from financing activities	442,634			615,996			(329,616		)	235,276

Net change in cash and cash equivalents	950,458			403,865			(372,099		)	387,728
Cash and equivalents at beginning of period	4,141,445			3,591,523
Cash and equivalents at end of period	$	5,091,903		$	3,995,388
Cash and cash equivalents at beginning of period							5,053,047			4,141,445
Cash and cash equivalents at end of period							$	4,680,948		$	4,529,173

See Notes to Consolidated Financial Statements.

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. The terms “Cullen/Frost,” “the Corporation,” “we,” “us” and “our” mean Cullen/Frost Bankers, Inc. and its subsidiaries, when appropriate. In addition to general commercial and consumer banking, other products and services offered include trust and investment management, insurance, brokerage, mutual funds, leasing, treasury management, capital markets advisory and item processing.

Basis of Presentation. The consolidated financial statements in this Quarterly Report on Form 10-Q include the accounts of Cullen/Frost and all other entities in which Cullen/Frost has a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and financial reporting policies we follow conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry.

The consolidated financial statements in this Quarterly Report on Form 10-Q have not been audited by an independent registered public accounting firm, but in the opinion of management, reflect all adjustments necessary for a fair presentation of our financial position and results of operations. All such adjustments were of a normal and recurring nature. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, ~~2016~~2017, included in our Annual Report on Form 10-K filed with the SEC on February ~~3, 2017~~7, 2018 (the ~~“2016~~“2017 Form 10-K”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for loan losses and the fair values of financial instruments and the status of contingencies are particularly subject to change.

Cash Flow Reporting. Additional cash flow information was as follows:


	Nine Months Ended September 30,				Three Months Ended March 31,
	2017		2016		2018		2017
Cash paid for interest	$	15,611	$	8,731	$	13,740	$	3,257
Cash paid for income taxes	41,969		39,160		—		—
Significant non-cash transactions:
Unsettled purchases of securities	41,763		54,342
Unsettled purchases/sales of securities					47,723		33,466
Loans foreclosed and transferred to other real estate owned and foreclosed assets	257		422		7		—

Accounting Changes, Reclassifications and Restatements. Certain items in prior financial statements have been reclassified to conform to the current presentation. In addition, we adopted ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" as of January 1, 2018. In accordance with ASU 2018-02, we elected to reclassify certain income tax effects related to the change in the U.S. statutory federal income tax rate under the Tax Cuts and Jobs Act, which was enacted on December 22, 2017, from accumulated other comprehensive income to retained earnings. Such amounts, which totaled $9.5 million, related to a net actuarial loss on defined benefit post-retirement plans and unrealized gains on securities available for sale and securities transferred to held to maturity. See Note 14 - Other Comprehensive Income. The effects of the Tax Cuts and Jobs Act on deferred taxes related to amounts initially recorded in accumulated other comprehensive income are provisional. As we finalize the accounting for the tax effects of the Tax Cuts and Jobs Act, additional reclassification adjustments may be recorded in future periods. See Note 13 - Income Taxes. Notwithstanding this election made in accordance with ASU 2018-02, our policy is to release such income tax effects only when the entire portfolio to which the underlying transactions relate is liquidated, sold or extinguished.

We also adopted ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)” as of January 1, 2018. Using a modified retrospective transition approach for contracts that were not complete as of our adoption, we recognized a cumulative effect reduction to beginning retained earnings totaling $2.3 million. The amount was related to certain revenue streams within trust and investment management fees. Additionally, based on our underlying contracts, ASU 2014-09 requires us to report network costs associated with debit card and ATM transactions netted against the related fees from such transactions. Previously, such network costs were reported as a component of other non-interest expense. For the three months ended March 31, 2018, gross interchange and debit card transaction fees totaled $6.1 million while related network costs totaled $2.9 million. On a net basis, we reported $3.2 million as interchange and debit card transaction fees in the accompanying Consolidated Statement of Income for the three months ended March 31, 2018. For the three months ended March 31, 2017, we reported interchange and debit card transaction fees totaling $5.6 million on a gross basis in the accompanying Consolidated Statement of Income while related network costs totaling $3.2 million were reported as a component of other non-interest expense. ASU 2014-09 also required us to change the way we recognize certain recurring revenue streams reported as components of trust and investment management fees, insurance commissions and fees and other categories of non-interest income, however, such changes were not significant to our financial statements for the three months ended March 31, 2018.

Under ASU 2014-09, we adopted new policies related to revenue recognition. In general, for revenue not associated with financial instruments, guarantees and lease contracts, we apply the following steps when recognizing revenue from contracts with customers: (i) identify the contract, (ii) identify the performance obligations, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations and (v) recognize revenue when performance obligation is satisfied. Our contracts with customers are generally short term in nature, typically due within one year or less or cancellable by us or our customer upon a short notice period. Performance obligations for our customer contracts are generally satisfied at a single point in time, typically when the transaction is complete, or over time. For performance obligations satisfied over time, we primarily use the output method, directly measuring the value of the products/services transferred to the customer, to determine when performance obligations have been satisfied. We typically receive payment from customers and recognize revenue concurrent with the satisfaction of our performance obligations. In most cases, this occurs within a single financial reporting period. For payments received in advance of the satisfaction of performance obligations, revenue recognition is deferred until such time the performance obligations have been satisfied. In cases where we have not received payment despite satisfaction of our performance obligations, we accrue an estimate of the amount due in the period our performance obligations have been satisfied. For contracts with variable components, only amounts for which collection is probable are accrued. We generally act in a principal capacity, on our own behalf, in most of our contracts with customers. In such transactions, we recognize revenue and the related costs to provide our services on a gross basis in our financial statements. In some cases, we act in an agent capacity, deriving revenue through assisting other entities in transactions with our customers. In such transactions, we recognized revenue and the related costs to provide our services on a net basis in our financial statements. These transactions primarily relate to insurance and brokerage commissions and fees derived from our customers' use of various interchange and ATM/debit card networks.

Note 2 - Securities

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


	September 30, 2017								December 31, 2016								March 31, 2018								December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Held to Maturity
U.S. Treasury	$	—	$	—	$	—	$	—	$	249,889	$	1,762	$	—	$	251,651
Residential mortgage-backed securities	3,708		21		24		3,705		4,511		39		—		4,550		$	3,503	$	12	$	57	$	3,458	$	3,610	$	15	$	38	$	3,587
States and political subdivisions	1,437,164		36,991		2,556		1,471,599		1,994,710		16,821		6,335		2,005,196		1,242,151		13,910		3,126		1,252,935		1,428,488		26,462		2,746		1,452,204
Other	1,350		—		1		1,349		1,350		—		—		1,350		1,500		—		7		1,493		—		—		—		—
Total	$	1,442,222	$	37,012	$	2,581	$	1,476,653	$	2,250,460	$	18,622	$	6,335	$	2,262,747	$	1,247,154	$	13,922	$	3,190	$	1,257,886	$	1,432,098	$	26,477	$	2,784	$	1,455,791
Available for Sale
U.S. Treasury	$	3,452,882	$	23,796	$	3,050	$	3,473,628	$	4,003,692	$	24,984	$	8,945	$	4,019,731	$	3,453,887	$	373	$	36,113	$	3,418,147	$	3,453,391	$	7,494	$	15,732	$	3,445,153
Residential mortgage-backed securities	658,281		24,218		1,304		681,195		756,072		30,388		1,293		785,167		636,498		16,012		6,815		645,695		648,288		19,048		2,250		665,086
States and political subdivisions	5,898,098		130,142		40,501		5,987,739		5,403,918		50,101		98,134		5,355,885		6,423,389		71,360		64,644		6,430,105		6,185,711		167,293		16,795		6,336,209
Other	42,538		—		—		42,538		42,494		—		—		42,494		42,585		—		—		42,585		42,561		—		—		42,561
Total	$	10,051,799	$	178,156	$	44,855	$	10,185,100	$	10,206,176	$	105,473	$	108,372	$	10,203,277	$	10,556,359	$	87,745	$	107,572	$	10,536,532	$	10,329,951	$	193,835	$	34,777	$	10,489,009

All mortgage-backed securities included in the above table were issued by U.S. government agencies and corporations. At ~~September 30, 2017,~~March 31, 2018, approximately ~~98.1%~~98.2% of the securities in our municipal bond portfolio were issued by political subdivisions or agencies within the State of Texas, of which approximately 67.7% are either guaranteed by the Texas Permanent School Fund, which has a “triple A” insurer financial strength rating, or are secured by U.S. Treasury securities via defeasance of the debt by the issuers. Securities with limited marketability ~~such as~~and that do not have readily determinable fair values are carried at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar securities of the same issuer. These securities include stock in the Federal Reserve Bank and the Federal Home Loan Bank ~~are carried at cost~~ and are reported as other available for sale securities in the table above. The carrying value of securities pledged to secure public funds, trust deposits, repurchase agreements and for other purposes, as required or permitted by law was $3.5 billion at ~~September 30, 2017~~March 31, 2018 and ~~$3.9~~$3.8 billion at December 31, ~~2016.~~2017.

During the fourth quarter of 2012, we reclassified certain securities from available for sale to held to maturity. The securities had an aggregate fair value of $2.3 billion with an aggregate net unrealized gain of $165.7 million ($107.7 million, net of tax) on the date of the transfer. The net unamortized, unrealized gain on the remaining transferred securities included in accumulated other comprehensive income in the accompanying balance sheet as of ~~September 30, 2017~~March 31, 2018 totaled ~~$14.1~~$8.9 million ($~~9.2~~7.1 million, net of tax). This amount will be amortized out of accumulated other comprehensive income over the remaining life of the underlying securities as an adjustment of the yield on those securities.

Unrealized Losses. As of ~~September 30, 2017~~March 31, 2018, securities with unrealized losses, segregated by length of impairment, were as follows:


	Less than 12 Months				More than 12 Months				Total				Less than 12 Months				More than 12 Months				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
Held to Maturity
Residential mortgage-backed securities	$	2,212	$	24	$	—	$	—	$	2,212	$	24	$	1,120	$	23	$	1,516	$	34	$	2,636	$	57
States and political subdivisions	5,301		28		74,965		2,528		80,266		2,556		231,906		900		44,869		2,226		276,775		3,126
Other	1,349		1		—		—		1,349		1		1,493		7		—		—		1,493		7
Total	$	8,862	$	53	$	74,965	$	2,528	$	83,827	$	2,581	$	234,519	$	930	$	46,385	$	2,260	$	280,904	$	3,190
Available for Sale
U.S. Treasury	$	840,074	$	3,050	$	—	$	—	$	840,074	$	3,050	$	2,616,630	$	27,797	$	514,691	$	8,316	$	3,131,321	$	36,113
Residential mortgage-backed securities	75,441		618		19,458		686		94,899		1,304		219,091		4,508		45,424		2,307		264,515		6,815
States and political subdivisions	986,705		9,713		842,751		30,788		1,829,456		40,501		2,004,045		26,466		815,756		38,178		2,819,801		64,644
Total	$	1,902,220	$	13,381	$	862,209	$	31,474	$	2,764,429	$	44,855	$	4,839,766	$	58,771	$	1,375,871	$	48,801	$	6,215,637	$	107,572

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

Management has the ability and intent to hold the securities classified as held to maturity in the table above until they mature, at which time we expect to receive full value for the securities. Furthermore, as of ~~September 30, 2017,~~March 31, 2018, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost. Any unrealized losses are 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 securities 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, 2017~~March 31, 2018, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in our consolidated income statement.

Contractual Maturities. The amortized cost and estimated fair value of securities, excluding trading securities, at ~~September 30, 2017~~March 31, 2018 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				Held to Maturity				Available for Sale
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	251,739	$	256,716	$	37,321	$	38,127	$	105,054	$	106,904	$	118,442	$	119,061
Due after one year through five years	116,604		121,451		4,056,709		4,085,795		165,355		168,916		4,010,195		3,980,391
Due after five years through ten years	411,074		420,160		385,649		399,538		432,654		433,756		486,543		491,153
Due after ten years	659,097		674,621		4,871,301		4,937,907		540,588		544,852		5,262,096		5,257,647
Residential mortgage-backed securities	3,708		3,705		658,281		681,195		3,503		3,458		636,498		645,695
Equity securities	—		—		42,538		42,538		—		—		42,585		42,585
Total	$	1,442,222	$	1,476,653	$	10,051,799	$	10,185,100	$	1,247,154	$	1,257,886	$	10,556,359	$	10,536,532

Sales of Securities. As more fully discussed in our 2016 Form 10-K, during 2016, we sold certain securities issued by municipalities that, based upon our internal credit analysis, had experienced significant deterioration in creditworthiness. Some of the securities we sold were classified as held to maturity prior to their sale. Despite their classification as held to maturity, we believe the sale of these securities was merited and permissible under the applicable accounting guidelines because of the significant deterioration in the creditworthiness of the issuers.

~~Sales of securities held to maturity were as follows:~~

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
Proceeds from sales $ —
$ —
$ —
$ 135,610
Amortized cost —
—
—
131,840
Gross realized gains —
—
—
3,770
Gross realized losses —
—
—
—
Tax (expense) benefit of securities gains/losses —
—
—
(1,319 )

Sales of securities available for sale were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2017			2016			2017			2016			2018			2017
Proceeds from sales	$	746,524		$	7,980,049		$	8,993,963		$	9,040,245		$	2,984,867		$	—
Gross realized gains	—			1			—			11,134			—			—
Gross realized losses	(4,867		)	(38		)	(4,917		)	(38		)	(19		)	—
Tax (expense) benefit of securities gains/losses	1,703			13			1,721			(3,884		)	4			—

Premiums and Discounts. Premium amortization and discount accretion included in interest income on securities was as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2017			2016			2017			2016			2018			2017
Premium amortization	$	(24,586	)	$	(22,762	)	$	(72,733	)	$	(67,321	)	$	(26,036	)	$	(24,028	)
Discount accretion	1,783			2,497			6,278			8,250			1,776			2,390
Net (premium amortization) discount accretion	$	(22,803	)	$	(20,265	)	$	(66,455	)	$	(59,071	)	$	(24,260	)	$	(21,638	)

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


	September 30, 2017		December 31, 2016		March 31, 2018		December 31, 2017
U.S. Treasury	$	18,814	$	16,594	$	19,772	$	19,210
States and political subdivisions	907		109		—		1,888
Total	$	19,721	$	16,703	$	19,772	$	21,098

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


	Three Months Ended September 30,					Nine Months Ended September 30,						Three Months Ended March 31,
	2017			2016		2017			2016			2018			2017
Net gain on sales transactions	$	414		$	379	$	1,018		$	1,032		$	505		$	311
Net mark-to-market gains (losses)	(8		)	—		(51		)	(1		)	(36		)	13
Net gain (loss) on trading account securities	$	406		$	379	$	967		$	1,031		$	469		$	324

Note 3 - Loans

Loans were as follows:


	September 30, 2017		Percentage of Total		December 31, 2016		Percentage of Total		March 31, 2018		Percentage of Total		December 31, 2017		Percentage of Total
Commercial and industrial	$	4,677,923	36.8	%	$	4,344,000	36.3	%	$	4,876,523	36.5	%	$	4,792,388	36.4	%
Energy:
Production	1,094,927		8.6		971,767		8.1		1,125,321		8.4		1,182,326		9.0
Service	159,893		1.3		221,213		1.8		192,115		1.4		171,795		1.3
Other	132,240		1.0		193,081		1.7		129,552		0.9		144,972		1.1
Total energy	1,387,060		10.9		1,386,061		11.6		1,446,988		10.7		1,499,093		11.4
Commercial real estate:
Commercial mortgages	3,714,172		29.2		3,481,157		29.1		4,060,946		30.4		3,887,742		29.6
Construction	1,082,229		8.5		1,043,261		8.7		1,076,785		8.1		1,066,696		8.1
Land	307,701		2.4		311,030		2.6		317,189		2.4		331,986		2.5
Total commercial real estate	5,104,102		40.1		4,835,448		40.4		5,454,920		40.9		5,286,424		40.2
Consumer real estate:
Home equity loans	357,542		2.8		345,130		2.9		355,715		2.7		355,342		2.7
Home equity lines of credit	288,981		2.3		264,862		2.2		295,677		2.2		291,950		2.2
Other	367,948		2.9		326,793		2.7		388,271		2.9		376,002		2.9
Total consumer real estate	1,014,471		8.0		936,785		7.8		1,039,663		7.8		1,023,294		7.8
Total real estate	6,118,573		48.1		5,772,233		48.2		6,494,583		48.7		6,309,718		48.0
Consumer and other	522,748		4.2		473,098		3.9		545,935		4.1		544,466		4.2
Total loans	$	12,706,304	100.0	%	$	11,975,392	100.0	%	$	13,364,029	100.0	%	$	13,145,665	100.0	%

Concentrations of Credit. Most of our lending activity occurs within the State of Texas, including the four largest metropolitan areas of Austin, Dallas/Ft. Worth, Houston and San Antonio, as well as other markets. The majority of our loan portfolio consists of commercial and industrial and commercial real estate loans. As of ~~September 30, 2017,~~March 31, 2018, there were no concentrations of loans related to any single industry in excess of 10% of total loans other than energy loans, which totaled ~~10.9%~~10.7% of total loans. Unfunded commitments to extend credit and standby letters of credit issued to customers in the energy industry totaled ~~$1.1~~$1.2 billion and ~~$40.9~~$44.8 million, respectively, as of ~~September 30, 2017.~~March 31, 2018.

Foreign Loans. We have U.S. dollar denominated loans and commitments to borrowers in Mexico. The outstanding balance of these loans and the unfunded amounts available under these commitments were not significant at ~~September 30, 2017~~March 31, 2018 or December 31, ~~2016.~~2017.

Related Party Loans. In the ordinary course of business, we have granted loans to certain directors, executive officers and their affiliates (collectively referred to as “related parties”). Such loans totaled $180.7 million at March 31, 2018 and $166.4 million at December 31, 2017

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


	September 30, 2017		December 31, 2016		March 31, 2018		December 31, 2017
Commercial and industrial	$	37,239	$	31,475	$	17,314	$	46,186
Energy	96,717		57,571		93,097		94,302
Commercial real estate:
Buildings, land and other	6,773		8,550		10,858		7,589
Construction	—		—		—		—
Consumer real estate	2,167		2,130		1,878		2,109
Consumer and other	208		425		5		128
Total	$	143,104	$	100,151	$	123,152	$	150,314

As of ~~September 30, 2017,~~March 31, 2018, non-accrual loans reported in the table above included ~~$54.1~~$2.2 million related to loans that were restructured as “troubled debt restructurings” during ~~2017.~~2018. See the section captioned “Troubled Debt Restructurings” elsewhere in this note.

Had non-accrual loans performed in accordance with their original contract terms, we would have recognized additional interest income, net of tax, of approximately ~~$783 thousand and $2.4~~$1.5 million for the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2018, compared to ~~$647~~$851 thousand ~~and $2.4 million~~ for three ~~and nine~~ months ended ~~September 30, 2016.~~March 31, 2017.

An age analysis of past due loans (including both accruing and non-accruing loans), segregated by class of loans, as of ~~September 30, 2017~~March 31, 2018 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		Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Commercial and industrial	$	26,415	$	30,740	$	57,155	$	4,620,768	$	4,677,923	$	20,614	$	25,701	$	23,946	$	49,647	$	4,826,876	$	4,876,523	$	10,357
Energy	12,585		46,097		58,682		1,328,378		1,387,060		634		24,404		4,207		28,611		1,418,377		1,446,988		3,137
Commercial real estate:
Buildings, land and other	9,065		4,065		13,130		4,008,743		4,021,873		2,229		36,130		5,470		41,600		4,336,535		4,378,135		3,889
Construction	—		2,331		2,331		1,079,898		1,082,229		2,331		9,497		—		9,497		1,067,288		1,076,785		—
Consumer real estate	7,671		2,107		9,778		1,004,693		1,014,471		835		8,225		3,164		11,389		1,028,274		1,039,663		1,680
Consumer and other	9,754		486		10,240		512,508		522,748		478		7,486		218		7,704		538,231		545,935		213
Total	$	65,490	$	85,826	$	151,316	$	12,554,988	$	12,706,304	$	27,121	$	111,443	$	37,005	$	148,448	$	13,215,581	$	13,364,029	$	19,276

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


	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
September 30, 2017
March 31, 2018
Commercial and industrial	$	48,751	$	31,065	$	3,937	$	35,002	$	1,665	$	38,136	$	1,802	$	13,430	$	15,232	$	7,930
Energy	107,883		34,834		61,805		96,639		13,267		123,351		41,569		63,502		105,071		14,772
Commercial real estate:
Buildings, land and other	9,976		5,627		—		5,627		—		13,078		7,577		2,047		9,624		708
Construction	—		—		—		—		—		—		—		—		—		—
Consumer real estate	1,214		1,214		—		1,214		—		1,427		1,427		—		1,427		—
Consumer and other	—		—		—		—		—		—		—		—		—		—
Total	$	167,824	$	72,740	$	65,742	$	138,482	$	14,932	$	175,992	$	52,375	$	78,979	$	131,354	$	23,410
December 31, 2017
Commercial and industrial											$	60,781	$	28,038	$	15,722	$	43,760	$	7,553
Energy											99,606		33,080		61,162		94,242		13,267
Commercial real estate:
Buildings, land and other											10,795		6,394		—		6,394		—
Construction											—		—		—		—		—
Consumer real estate											1,214		1,214		—		1,214		—
Consumer and other											—		—		—		—		—
Total											$	172,396	$	68,726	$	76,884	$	145,610	$	20,820

Unpaid Contractual
Principal
Balance Recorded Investment
With No
Allowance Recorded Investment
With
Allowance Total
Recorded
Investment Related
Allowance
December 31, 2016
Commercial and industrial $ 40,288
$ 19,862
$ 9,047
$ 28,909
$ 5,436
Energy 60,522
27,759
29,804
57,563
3,750
Commercial real estate:
Buildings, land and other 11,369
6,866
—
6,866
—
Construction —
—
—
—
—
Consumer real estate 977
655
—
655
—
Consumer and other 32
30
—
30
—
Total $ 113,188
$ 55,172
$ 38,851
$ 94,023
$ 9,186

The average recorded investment in impaired loans was as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2017		2016		2017		2016		2018		2017
Commercial and industrial	$	26,910	$	26,921	$	26,651	$	25,365	$	29,496	$	26,393
Energy	76,008		47,003		72,055		57,309		99,657		68,101
Commercial real estate:
Buildings, land and other	5,553		8,904		6,106		20,444		8,009		6,660
Construction	—		326		—		548		—		—
Consumer real estate	1,209		545		1,155		508		1,321		1,102
Consumer and other	—		48		13		24		—		27
Total	$	109,680	$	83,747	$	105,980	$	104,198	$	138,483	$	102,283

Troubled Debt Restructurings. Troubled debt restructurings during the ~~nine~~three months ended ~~September 30,~~March 31, 2018 and March 31, 2017 ~~and September 30, 2016~~ are set forth in the following table.

Nine Months Ended
September 30, 2017 Nine Months Ended
September 30, 2016

Balance at
Restructure

Balance at
Period-End

Balance at
Restructure

Balance at
Period-End
Commercial and industrial $ 4,026
$ 3,875
$ 510
$ 505
Energy 56,097
55,023
73,977
31,918
Commercial real estate:
Buildings, land and other —
—
1,455
1,455
Construction —
—
243
221
$ 60,123
$ 58,898
$ 76,185
$ 34,099



	Three Months Ended March 31, 2018				Three Months Ended March 31, 2017
	Balance at Restructure		Balance at Period-End		Balance at Restructure		Balance at Period-End
Commercial and industrial	$	2,203	$	2,171	$	—	$	—
Energy	13,708		12,058		11,262		11,212
	$	15,911	$	14,229	$	11,262	$	11,212

Loan modifications are typically related to extending amortization periods, converting loans to interest only for a limited period of time, deferral of interest payments, waiver of certain covenants, consolidating notes and/or reducing collateral or interest rates. The modifications during the reported periods did not significantly impact our determination of the allowance for loan losses. As of September 30, 2017, there was one loan totaling $43.1 million that was restructured during the third quarter of 2017 that was in excess of 90 days past due, however, the underlying terms of the modification allow for the deferral of payments. During the nine months ended September 30, 2017, we recognized charge-offs totaling $10.0 millionAdditional information related to restructured loans restructured during the third and fourth quarters of 2016. During the nine months ended September 30, 2016, we recognized a charge-off of $9.5 million related to a loan restructured during the first quarter of 2016. The loan was ~~subsequently sold with proceeds from the sale totaling $30.5 million.~~as follows:



	March 31, 2018		March 31, 2017
Restructured loans past due in excess of 90 days at period-end:
Number of loans	—		1
Dollar amount of loans	$	—	$	747
Restructured loans on non-accrual status at period end	2,171		11,212
Charge-offs of restructured loans:
Recognized in connection with restructuring	—		—
Recognized on previously restructured loans	1,650		2,000

Credit Quality Indicators. As part of the on-going monitoring of the credit quality of our loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted-average risk grade of commercial loans, (ii) the level of classified commercial loans, (iii) the delinquency status of consumer loans (see details above), (iv) net charge-offs, (v) non-performing loans (see details above) and (vi) the general economic conditions in the State of Texas.

We utilize a risk grading matrix to assign a risk grade to each of our commercial loans. Loans are graded on a scale of 1 to 14. A description of the general characteristics of the 14 risk grades is set forth in our ~~2016~~2017 Form 10-K. In monitoring credit quality

trends in the context of assessing the appropriate level of the allowance for loan losses, we monitor portfolio credit quality by the weighted-average risk grade of each class of commercial loan. Individual relationship managers review updated financial information for all pass grade loans to reassess the risk grade on at least an annual basis. When a loan has a risk grade of 9, it is still considered a pass grade loan; however, it is considered to be on management’s “watch list,” where a significant risk-modifying action is anticipated in the near term. When a loan has a risk grade of 10 or higher, a special assets officer monitors the loan on an on-going basis.

The following tables present weighted-average risk grades for all commercial loans by class.


	September 30, 2017			December 31, 2016			March 31, 2018			December 31, 2017
	Weighted Average Risk Grade	Loans		Weighted Average Risk Grade	Loans		Weighted Average Risk Grade	Loans		Weighted Average Risk Grade	Loans
Commercial and industrial:
Risk grades 1-8	6.01	$	4,236,670	6.01	$	3,989,722	6.05	$	4,505,491	6.06	$	4,378,839
Risk grade 9	9.00	201,635		9.00	106,988		9.00	151,084		9.00	170,285
Risk grade 10	10.00	89,126		10.00	115,420		10.00	121,457		10.00	99,260
Risk grade 11	11.00	113,253		11.00	100,245		11.00	81,148		11.00	97,818
Risk grade 12	12.00	35,574		12.00	25,939		12.00	9,412		12.00	38,633
Risk grade 13	13.00	1,665		13.00	5,686		13.00	7,931		13.00	7,553
Total	6.38	$	4,677,923	6.35	$	4,344,000	6.35	$	4,876,523	6.41	$	4,792,388
Energy
Risk grades 1-8	6.19	$	1,082,349	6.34	$	854,688	6.12	$	1,173,702	6.01	$	1,199,207
Risk grade 9	9.00	46,285		9.00	78,524		9.00	50,364		9.00	50,427
Risk grade 10	10.00	67,694		10.00	150,872		10.00	37,670		10.00	64,282
Risk grade 11	11.00	94,015		11.00	244,406		11.00	92,155		11.00	90,875
Risk grade 12	12.00	83,450		12.00	53,821		12.00	78,325		12.00	81,035
Risk grade 13	13.00	13,267		13.00	3,750		13.00	14,772		13.00	13,267
Total	7.21	$	1,387,060	7.95	$	1,386,061	7.02	$	1,446,988	6.97	$	1,499,093
Commercial real estate:
Buildings, land and other
Risk grades 1-8	6.69	$	3,720,068	6.67	$	3,463,064	6.77	$	4,051,952	6.75	$	3,868,659
Risk grade 9	9.00	115,196		9.00	109,110		9.00	124,048		9.00	151,487
Risk grade 10	10.00	110,647		10.00	145,067		10.00	120,399		10.00	129,391
Risk grade 11	11.00	69,189		11.00	66,396		11.00	70,878		11.00	62,602
Risk grade 12	12.00	6,773		12.00	8,550		12.00	10,150		12.00	7,589
Risk grade 13	13.00	—		13.00	—		13.00	708		13.00	—
Total	6.93	$	4,021,873	6.95	$	3,792,187	7.00	$	4,378,135	7.00	$	4,219,728
Construction
Risk grades 1-8	7.14	$	1,058,847	6.97	$	1,023,194	7.16	$	1,040,071	7.11	$	1,019,635
Risk grade 9	9.00	18,106		9.00	15,829		9.00	15,541		9.00	18,042
Risk grade 10	10.00	3,768		10.00	2,889		10.00	17,361		10.00	23,393
Risk grade 11	11.00	1,508		11.00	1,349		11.00	3,812		11.00	5,626
Risk grade 12	12.00	—		12.00	—		12.00	—		12.00	—
Risk grade 13	13.00	—		13.00	—		13.00	—		13.00	—
Total	7.19	$	1,082,229	7.01	$	1,043,261	7.25	$	1,076,785	7.23	$	1,066,696

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


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2017			2016			2017			2016			2018			2017
Commercial and industrial	$	(4,565	)	$	(3,079	)	$	(12,155	)	$	(8,177	)	$	(7,675	)	$	(2,729	)
Energy	451			(865		)	(10,010		)	(18,623		)	(2,849		)	(4,225		)
Commercial real estate:
Buildings, land and other	266			259			768			801			81			42
Construction	2			9			8			18			2			3
Consumer real estate	(629		)	(195		)	(422		)	(22		)	(526		)	96
Consumer and other	(1,760		)	(1,115		)	(4,289		)	(2,817		)	(1,457		)	(1,128		)
Total	$	(6,235	)	$	(4,986	)	$	(26,100	)	$	(28,820	)	$	(12,424	)	$	(7,941	)

In assessing the general economic conditions in the State of Texas, management monitors and tracks the Texas Leading Index (“TLI”), which is produced by the Federal Reserve Bank of Dallas. The TLI, the components of which are more fully described in our ~~2016~~2017 Form 10-K, totaled ~~124.6~~131.5 at ~~August 31, 2017~~February 28, 2018 (most recent date available) and ~~123.1~~129.6 at December 31, ~~2016.~~2017. A higher TLI value implies more favorable economic conditions.

Allowance for Loan Losses. The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of inherent losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. Our allowance for loan loss methodology, which is more fully described in our ~~2016~~2017 Form 10-K, follows the accounting guidance set forth in U.S. generally accepted accounting principles and the Interagency Policy Statement on the Allowance for Loan and Lease Losses, which was jointly issued by U.S. bank regulatory agencies. The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss and recovery experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off.

The following table presents details of the allowance for loan losses allocated to each portfolio segment as of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017 and detailed on the basis of the impairment evaluation methodology we used:


	Commercial and Industrial		Energy		Commercial Real Estate		Consumer Real Estate		Consumer and Other			Total		Commercial and Industrial		Energy		Commercial Real Estate		Consumer Real Estate		Consumer and Other			Total
September 30, 2017
March 31, 2018
Historical valuation allowances	$	27,190	$	21,900	$	18,304	$	2,443	$	5,491		$	75,328	$	26,658	$	12,266	$	19,870	$	2,470	$	6,729		$	67,993
Specific valuation allowances	1,665		13,267		—		—		—			14,932		7,930		14,772		708		—		—			23,410
General valuation allowances	7,397		4,677		4,841		2,040		163			19,118		8,053		8,015		4,025		1,601		(95		)	21,599
Macroeconomic valuation allowances	12,185		12,069		14,930		2,392		3,349			44,925		15,092		3,986		13,871		2,278		1,656			36,883
Total	$	48,437	$	51,913	$	38,075	$	6,875	$	9,003		$	154,303	$	57,733	$	39,039	$	38,474	$	6,349	$	8,290		$	149,885
Allocated to loans:
Individually evaluated	$	1,665	$	13,267	$	—	$	—	$	—		$	14,932	$	7,930	$	14,772	$	708	$	—	$	—		$	23,410
Collectively evaluated	46,772		38,646		38,075		6,875		9,003			139,371		49,803		24,267		37,766		6,349		8,290			126,475
Total	$	48,437	$	51,913	$	38,075	$	6,875	$	9,003		$	154,303	$	57,733	$	39,039	$	38,474	$	6,349	$	8,290		$	149,885
December 31, 2016
December 31, 2017
Historical valuation allowances	$	33,251	$	34,626	$	16,976	$	2,225	$	4,585		$	91,663	$	26,401	$	22,073	$	18,931	$	2,473	$	5,603		$	75,481
Specific valuation allowances	5,436		3,750		—		—		—			9,186		7,553		13,267		—		—		—			20,820
General valuation allowances	6,708		3,769		5,004		1,506		(144		)	16,843		9,112		7,964		4,165		2,133		(91		)	23,283
Macroeconomic valuation allowances	7,520		18,508		8,233		507		585			35,353		16,548		8,224		7,852		1,051		2,105			35,780
Total	$	52,915	$	60,653	$	30,213	$	4,238	$	5,026		$	153,045	$	59,614	$	51,528	$	30,948	$	5,657	$	7,617		$	155,364
Allocated to loans:
Individually evaluated	$	5,436	$	3,750	$	—	$	—	$	—		$	9,186	$	7,553	$	13,267	$	—	$	—	$	—		$	20,820
Collectively evaluated	47,479		56,903		30,213		4,238		5,026			143,859		52,061		38,261		30,948		5,657		7,617			134,544
Total	$	52,915	$	60,653	$	30,213	$	4,238	$	5,026		$	153,045	$	59,614	$	51,528	$	30,948	$	5,657	$	7,617		$	155,364

Our recorded investment in loans as of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017 related to each balance in the allowance for loan losses by portfolio segment and detailed on the basis of the impairment methodology we used was as follows:


	Commercial and Industrial		Energy		Commercial Real Estate		Consumer Real Estate		Consumer and Other		Total		Commercial and Industrial		Energy		Commercial Real Estate		Consumer Real Estate		Consumer and Other		Total
September 30, 2017
March 31, 2018
Individually evaluated	$	35,002	$	96,639	$	5,627	$	1,214	$	—	$	138,482	$	15,232	$	105,071	$	9,624	$	1,427	$	—	$	131,354
Collectively evaluated	4,642,921		1,290,421		5,098,475		1,013,257		522,748		12,567,822		4,861,291		1,341,917		5,445,296		1,038,236		545,935		13,232,675
Total	$	4,677,923	$	1,387,060	$	5,104,102	$	1,014,471	$	522,748	$	12,706,304	$	4,876,523	$	1,446,988	$	5,454,920	$	1,039,663	$	545,935	$	13,364,029
December 31, 2016
December 31, 2017
Individually evaluated	$	28,909	$	57,563	$	6,866	$	655	$	30	$	94,023	$	43,760	$	94,242	$	6,394	$	1,214	$	—	$	145,610
Collectively evaluated	4,315,091		1,328,498		4,828,582		936,130		473,068		11,881,369		4,748,628		1,404,851		5,280,030		1,022,080		544,466		13,000,055
Total	$	4,344,000	$	1,386,061	$	4,835,448	$	936,785	$	473,098	$	11,975,392	$	4,792,388	$	1,499,093	$	5,286,424	$	1,023,294	$	544,466	$	13,145,665

The following table details activity in the allowance for loan losses by portfolio segment for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 and ~~2016~~2017. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.


	Commercial and Industrial			Energy			Commercial Real Estate			Consumer Real Estate			Consumer and Other			Total			Commercial and Industrial			Energy			Commercial Real Estate			Consumer Real Estate			Consumer and Other			Total
Three months ended:
September 30, 2017
March 31, 2018
Beginning balance	$	48,906		$	54,277		$	33,002		$	5,535		$	7,838		$	149,558		$	59,614		$	51,528		$	30,948		$	5,657		$	7,617		$	155,364
Provision for loan losses	4,096			(2,815		)	4,805			1,969			2,925			10,980			5,794			(9,640		)	7,443			1,218			2,130			6,945
Charge-offs	(5,468		)	—			—			(766		)	(4,120		)	(10,354		)	(9,252		)	(2,850		)	(5		)	(719		)	(3,972		)	(16,798		)
Recoveries	903			451			268			137			2,360			4,119			1,577			1			88			193			2,515			4,374
Net charge-offs	(4,565		)	451			268			(629		)	(1,760		)	(6,235		)	(7,675		)	(2,849		)	83			(526		)	(1,457		)	(12,424		)
Ending balance	$	48,437		$	51,913		$	38,075		$	6,875		$	9,003		$	154,303		$	57,733		$	39,039		$	38,474		$	6,349		$	8,290		$	149,885
September 30, 2016
March 31, 2017
Beginning balance	$	47,578		$	66,339		$	27,063		$	3,935		$	4,799		$	149,714		$	52,915		$	60,653		$	30,213		$	4,238		$	5,026		$	153,045
Provision for loan losses	4,632			(3,231		)	1,886			427			1,331			5,045			(4,603		)	5,365			3,751			489			2,950			7,952
Charge-offs	(4,036		)	(884		)	(9		)	(287		)	(3,300		)	(8,516		)	(3,527		)	(4,278		)	—			(11		)	(3,548		)	(11,364		)
Recoveries	957			19			277			92			2,185			3,530			798			53			45			107			2,420			3,423
Net charge-offs	(3,079		)	(865		)	268			(195		)	(1,115		)	(4,986		)	(2,729		)	(4,225		)	45			96			(1,128		)	(7,941		)
Ending balance	$	49,131		$	62,243		$	29,217		$	4,167		$	5,015		$	149,773		$	45,583		$	61,793		$	34,009		$	4,823		$	6,848		$	153,056

Nine months ended:
September 30, 2017
Beginning balance	$	52,915		$	60,653		$	30,213		$	4,238		$	5,026		$	153,045
Provision for loan losses	7,677			1,270			7,086			3,059			8,266			27,358
Charge-offs	(14,574		)	(10,595		)	(14		)	(779		)	(11,291		)	(37,253		)
Recoveries	2,419			585			790			357			7,002			11,153
Net charge-offs	(12,155		)	(10,010		)	776			(422		)	(4,289		)	(26,100		)
Ending balance	$	48,437		$	51,913		$	38,075		$	6,875		$	9,003		$	154,303
September 30, 2016
Beginning balance	$	42,993		$	54,696		$	24,313		$	4,659		$	9,198		$	135,859
Provision for loan losses	14,315			26,170			4,085			(470		)	(1,366		)	42,734
Charge-offs	(10,754		)	(18,644		)	(56		)	(464		)	(9,276		)	(39,194		)
Recoveries	2,577			21			875			442			6,459			10,374
Net charge-offs	(8,177		)	(18,623		)	819			(22		)	(2,817		)	(28,820		)
Ending balance	$	49,131		$	62,243		$	29,217		$	4,167		$	5,015		$	149,773

Note 4 - Goodwill and Other Intangible Assets

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


	September 30, 2017		December 31, 2016		March 31, 2018		December 31, 2017
Goodwill	$	654,952	$	654,952	$	654,952	$	654,952
Other intangible assets:
Core deposits	$	4,340	$	5,298	$	3,748	$	4,044
Customer relationships	1,086		1,410		900		986
Non-compete agreements	49		68		37		43
	$	5,475	$	6,776	$	4,685	$	5,073

The estimated aggregate future amortization expense for intangible assets remaining as of ~~September 30, 2017~~March 31, 2018 is as follows:


Remainder of 2017	$	402
2018	1,424
Remainder of 2018			$	1,036
2019	1,167		1,167
2020	918		918
2021	697		697
2022			481
Thereafter	867		386
	$	5,475	$	4,685

Note 5 - Deposits

Deposits were as follows:


	September 30, 2017		Percentage of Total		December 31, 2016		Percentage of Total		March 31, 2018		Percentage of Total		December 31, 2017		Percentage of Total
Non-interest-bearing demand deposits:
Commercial and individual	$	10,466,844	39.6	%	$	9,670,989	37.5	%	$	10,294,977	38.6	%	$	10,412,882	38.8	%
Correspondent banks	226,313		0.9		280,751		1.1		212,199		0.8		222,648		0.8
Public funds	481,094		1.8		561,629		2.2		426,986		1.6		561,563		2.1
Total non-interest-bearing demand deposits	11,174,251		42.3		10,513,369		40.8		10,934,162		41.0		11,197,093		41.7
Interest-bearing deposits:
Private accounts:
Savings and interest checking	6,449,079		24.4		6,436,065		24.9		6,869,783		25.8		6,788,766		25.2
Money market accounts	7,607,675		28.8		7,486,431		29.0		7,706,531		28.9		7,624,471		28.4
Time accounts of $100,000 or more	454,096		1.7		460,028		1.8		458,103		1.7		453,668		1.7
Time accounts under $100,000	323,748		1.3		338,714		1.3		322,105		1.2		324,636		1.2
Total private accounts	14,834,598		56.2		14,721,238		57.0		15,356,522		57.6		15,191,541		56.5
Public funds:
Savings and interest checking	312,430		1.2		446,872		1.7		308,609		1.1		410,140		1.5
Money market accounts	68,018		0.3		113,669		0.4		63,155		0.2		59,008		0.2
Time accounts of $100,000 or more	13,462		—		15,748		0.1		14,892		0.1		14,301		0.1
Time accounts under $100,000	510		—		679		—		438		—		306		—
Total public funds	394,420		1.5		576,968		2.2		387,094		1.4		483,755		1.8
Total interest-bearing deposits	15,229,018		57.7		15,298,206		59.2		15,743,616		59.0		15,675,296		58.3
Total deposits	$	26,403,269	100.0	%	$	25,811,575	100.0	%	$	26,677,778	100.0	%	$	26,872,389	100.0	%

The following table presents additional information about our deposits:

September 30,
2017 December 31,
2016
Deposits from foreign sources (primarily Mexico) $ 756,326
$ 776,003
Deposits not covered by deposit insurance 13,255,165
12,889,047

~~Note 6 - Borrowed Funds~~

~~Subordinated Notes Payable.~~ In March 2017, we issued $100 million of 4.50% subordinated notes that mature on March 17, 2027. The notes, which qualify as Tier 2 capital for Cullen/Frost, bear interest at the rate of 4.50% per annum, payable semi-annually on each March 17 and September 17. The notes are unsecured and subordinated in right of payment to the payment of our existing and future senior indebtedness and structurally subordinated to all existing and future indebtedness of our subsidiaries. Unamortized debt issuance costs related to these notes, totaled approximately $1.5 million at September 30, 2017. Proceeds from sale of the notes were used for general corporate purposes.

Our $100 million of 5.75% fixed-to-floating rate subordinated notes matured and were redeemed on February 15, 2017. See Note 8 - Borrowed Funds in our 2016 Form 10-K for additional information about these notes.



	March 31, 2018		December 31, 2017
Deposits from foreign sources (primarily Mexico)	$	736,786	$	716,339
Deposits not covered by deposit insurance	13,104,781		13,281,040

Note 76 - Commitments and Contingencies

Financial Instruments with Off-Balance-Sheet Risk. In the normal course of business, we enter into various transactions, which, in accordance with generally accepted accounting principles are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. As more fully discussed in our ~~2016~~2017 Form 10-K, 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. We minimize our exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.

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


	September 30, 2017		December 31, 2016		March 31, 2018		December 31, 2017
Commitments to extend credit	$	7,939,438	$	7,476,420	$	7,939,929	$	7,949,400
Standby letters of credit	236,996		239,482		220,294		236,595
Deferred standby letter of credit fees	1,860		2,054		1,586		1,843

Lease Commitments. We lease certain office facilities and office equipment under operating leases. Rent expense for all operating leases totaled ~~$7.7~~$8.2 million and ~~$23.0~~$7.7 million during the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 and ~~$7.5 million and $22.0 million during the three and nine months ended September 30, 2016.~~2017. There has been no significant change in our expected future minimum lease payments since December 31, ~~2016~~2017. See the ~~2016~~2017 Form 10-K for information regarding these commitments.

Litigation. We are 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 our financial statements.

Note 87 - Capital and Regulatory Matters

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.

Cullen/Frost’s and Frost Bank’s Common Equity Tier 1 capital includes common stock and related paid-in capital, net of treasury stock, and retained earnings. In connection with the adoption of the Basel III Capital Rules, we elected to opt-out of the requirement to include most components of accumulated other comprehensive income in Common Equity Tier 1. Common Equity Tier 1 for both Cullen/Frost and Frost Bank is reduced by, goodwill and other intangible assets, net of associated deferred tax liabilities, and subject to transition provisions. Frost Bank's Common Equity Tier 1 is also reduced by its equity investment in its financial subsidiary, Frost Insurance Agency (“FIA”).

Tier 1 capital includes Common Equity Tier 1 capital and additional Tier 1 capital. For Cullen/Frost, additional Tier 1 capital at ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017 includes $144.5 million of 5.375% non-cumulative perpetual preferred stock. Frost Bank did not have any additional Tier 1 capital beyond Common Equity Tier 1 at ~~September 30, 2017~~March 31, 2018 or December 31, ~~2016.~~2017.

Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital for both Cullen/Frost and Frost Bank includes a permissible portion of the allowance for loan losses. Tier 2 capital for Cullen/Frost also includes $100.0 million of qualified subordinated debt ~~at September 30, 2017~~ and $133.0 million of trust preferred securities at both ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016.~~

2017.

The following ~~table presents~~tables present actual and required capital ratios as of March 31, 2018 and December 31, 2017 for Cullen/Frost and Frost Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017 based on the phase-in provisions of the Basel III Capital Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules have been fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. See the ~~2016~~2017 Form 10-K for a more detailed discussion of the Basel III Capital Rules.


	Actual				Minimum Capital Required - Basel III Phase-In Schedule				Minimum Capital Required - Basel III Fully Phased-In				Required to be Considered Well Capitalized				Actual				Minimum Capital Required - Basel III Phase-In Schedule				Minimum Capital Required - Basel III Fully Phased-In				Required to be Considered Well Capitalized
	Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio
September 30, 2017
March 31, 2018
Common Equity Tier 1 to Risk-Weighted Assets
Cullen/Frost	$	2,345,433	12.38	%	$	1,089,289	5.75	%	$	1,326,014	7.00	%	$	1,231,370	6.50	%	$	2,504,319	12.69	%	$	1,258,491	6.375	%	$	1,381,873	7.00	%	$	1,283,167	6.50	%
Frost Bank	2,461,004		13.02		1,086,527		5.75		1,322,652		7.00		1,228,248		6.50		2,560,828		13.00		1,255,352		6.375		1,378,426		7.00		1,279,967		6.50
Tier 1 Capital to Risk-Weighted Assets
Cullen/Frost	2,489,919		13.14		1,373,451		7.25		1,610,160		8.50		1,515,532		8.00		2,648,805		13.42		1,554,607		7.875		1,677,988		8.50		1,579,283		8.00
Frost Bank	2,461,004		13.02		1,369,969		7.25		1,606,077		8.50		1,511,690		8.00		2,560,828		13.00		1,550,729		7.875		1,673,803		8.50		1,575,344		8.00
Total Capital to Risk-Weighted Assets
Cullen/Frost	2,877,222		15.19		1,752,334		9.25		1,989,021		10.50		1,894,415		10.00		3,032,190		15.36		1,949,427		9.875		2,072,809		10.50		1,974,104		10.00
Frost Bank	2,615,307		13.84		1,747,891		9.25		1,983,978		10.50		1,889,612		10.00		2,711,213		13.77		1,944,565		9.875		2,067,639		10.50		1,969,180		10.00
Leverage Ratio
Cullen/Frost	2,489,919		8.39		1,187,616		4.00		1,187,573		4.00		1,484,521		5.00		2,648,805		8.62		1,228,567		4.00		1,228,567		4.00		1,535,709		5.00
Frost Bank	2,461,004		8.29		1,186,763		4.00		1,186,719		4.00		1,483,453		5.00		2,560,828		8.34		1,227,539		4.00		1,227,539		4.00		1,534,424		5.00
December 31, 2016
Common Equity Tier 1 to Risk-Weighted Assets
Cullen/Frost	$	2,239,186	12.52	%	$	916,360	5.125	%	$	1,251,425	7.00	%	$	1,162,213	6.50	%
Frost Bank	2,296,480		12.88		913,460		5.125		1,247,463		7.00		1,158,535		6.50
Tier 1 Capital to Risk-Weighted Assets
Cullen/Frost	2,383,672		13.33		1,184,563		6.625		1,519,587		8.50		1,430,416		8.00
Frost Bank	2,296,480		12.88		1,180,814		6.625		1,514,776		8.50		1,425,889		8.00
Total Capital to Risk-Weighted Assets
Cullen/Frost	2,669,717		14.93		1,542,168		8.625		1,877,137		10.50		1,788,020		10.00
Frost Bank	2,449,525		13.74		1,537,286		8.625		1,871,194		10.50		1,782,361		10.00
Leverage Ratio
Cullen/Frost	2,383,672		8.14		1,171,682		4.00		1,171,573		4.00		1,464,602		5.00
Frost Bank	2,296,480		7.85		1,170,249		4.00		1,170,141		4.00		1,462,812		5.00



	Actual				Minimum Capital Required - Basel III Phase-In Schedule				Minimum Capital Required - Basel III Fully Phased-In				Required to be Considered Well Capitalized
	Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio
December 31, 2017
Common Equity Tier 1 to Risk-Weighted Assets
Cullen/Frost	$	2,426,048	12.42	%	$	1,123,430	5.75	%	$	1,367,583	7.00	%	$	1,269,965	6.50	%
Frost Bank	2,518,999		12.92		1,120,663		5.75		1,364,214		7.00		1,266,836		6.50
Tier 1 Capital to Risk-Weighted Assets
Cullen/Frost	2,570,534		13.16		1,416,499		7.25		1,660,637		8.50		1,563,033		8.00
Frost Bank	2,518,999		12.92		1,413,010		7.25		1,656,546		8.50		1,559,183		8.00
Total Capital to Risk-Weighted Assets
Cullen/Frost	2,959,326		15.15		1,807,257		9.25		2,051,375		10.50		1,953,792		10.00
Frost Bank	2,674,791		13.72		1,802,805		9.25		2,046,321		10.50		1,948,979		10.00
Leverage Ratio
Cullen/Frost	2,570,534		8.46		1,215,227		4.00		1,215,186		4.00		1,519,034		5.00
Frost Bank	2,518,999		8.30		1,214,295		4.00		1,214,254		4.00		1,517,869		5.00

As of ~~September 30, 2017~~,March 31, 2018, capital levels at Cullen/Frost and Frost Bank exceed all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis. Based on the ratios presented above, capital levels as of ~~September 30, 2017~~March 31, 2018 at Cullen/Frost and Frost Bank exceed the minimum levels necessary to be considered “well capitalized.”

Cullen/Frost and Frost Bank are subject to the regulatory capital requirements administered by the Federal Reserve Board and, for Frost Bank, the Federal Deposit Insurance Corporation (“FDIC”). Regulatory authorities can initiate certain mandatory actions if Cullen/Frost or Frost Bank fail to meet the minimum capital requirements, which could have a direct material effect on our financial statements. Management believes, as of ~~September 30, 2017~~March 31, 2018, that Cullen/Frost and Frost Bank meet all capital adequacy requirements to which they are subject.

repurchase shares of our common stock over a two-year period from time to time at various prices in the open market or through private transactions. ~~During the three months ended September 30, 2017,~~No shares were repurchased under this plan during 2018 or 2017. Under a prior plan, we repurchased 1,134,966 shares under the plan at at a total cost of $100.0 ~~million.~~million during the third quarter of 2017.

Dividend Restrictions. In the ordinary course of business, Cullen/Frost is dependent upon dividends from Frost Bank to provide funds for the payment of dividends to shareholders and to provide for other cash requirements. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of Frost Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years. Under the foregoing dividend restrictions and while maintaining its “well capitalized” status, at ~~September 30, 2017,~~March 31, 2018, Frost Bank could pay aggregate dividends of up to ~~$480.2~~$446.7 million to Cullen/Frost without prior regulatory approval.

Under the terms of the junior subordinated deferrable interest debentures that Cullen/Frost has issued to Cullen/Frost Capital Trust II and WNB Capital Trust I, Cullen/Frost has the right at any time during the term of the debentures to defer the payment of interest at any time or from time to time for an extension period not exceeding 20 consecutive quarterly periods with respect to each extension period. In the event that we have elected to defer interest on the debentures, we may not, with certain exceptions, declare or pay any dividends or distributions on our capital stock or purchase or acquire any of our capital stock.

Under the terms of our Series A Preferred Stock, in the event that we do not declare and pay dividends on our Series A Preferred Stock for the most recent dividend period, we may not, with certain exceptions, declare or pay dividends on, or purchase, redeem or otherwise acquire, shares of our common stock or any of our securities that rank junior to our Series A Preferred Stock.

Note 98 - Derivative Financial Instruments

The fair value of derivative positions outstanding is included in accrued interest receivable and other assets and accrued interest payable and other liabilities in the accompanying consolidated balance sheets and in the net change in each of these financial statement line items in the accompanying consolidated statements of cash flows.

Interest Rate Derivatives. We utilize interest rate swaps, caps and floors to mitigate exposure to interest rate risk and to facilitate the needs of our customers. Our objectives for utilizing these derivative instruments are described in our ~~2016~~2017 Form 10-K.

The notional amounts and estimated fair values of interest rate derivative contracts are presented in the following table. The fair values of interest rate derivative contracts are estimated utilizing internal valuation models with observable market data inputs, or as determined by the Chicago Mercantile Exchange (“CME”) for centrally cleared derivative contracts. ~~Beginning in 2017,~~ CME rules legally characterize variation margin payments for centrally cleared derivatives as settlements of the derivatives' exposure rather than collateral. As a result, the variation margin payment and the related derivative instruments are considered a single unit of account for accounting and financial reporting purposes. Variation margin, as determined by the CME, is settled daily. As a result, derivative contracts that clear through the CME have an estimated fair value of zero as of ~~September 30,~~March 31, 2018 and December 31, 2017.


	September 30, 2017					December 31, 2016					March 31, 2018					December 31, 2017
	Notional Amount		Estimated Fair Value			Notional Amount		Estimated Fair Value			Notional Amount		Estimated Fair Value			Notional Amount		Estimated Fair Value
Derivatives designated as hedges of fair value:
Financial institution counterparties:
Loan/lease interest rate swaps – assets	$	39,372	$	296		$	41,818	$	368		$	11,904	$	286		$	13,679	$	242
Loan/lease interest rate swaps – liabilities	14,077		(764		)	18,812		(1,278		)	10,141		(445		)	11,147		(593		)
Non-hedging interest rate derivatives:
Financial institution counterparties:
Loan/lease interest rate swaps – assets	206,930		747			206,745		2,649			615,433		3,416			430,449		1,418
Loan/lease interest rate swaps – liabilities	735,583		(14,623		)	694,965		(25,466		)	520,466		(8,461		)	541,496		(12,820		)
Loan/lease interest rate caps – assets	114,744		547			85,966		575			121,976		906			114,619		480
Customer counterparties:
Loan/lease interest rate swaps – assets	735,583		22,384			694,965		25,467			491,786		12,204			541,496		17,882
Loan/lease interest rate swaps – liabilities	206,930		(2,442		)	206,745		(2,649		)	596,473		(12,846		)	430,449		(4,861		)
Loan/lease interest rate caps – liabilities	114,744		(547		)	85,966		(575		)	121,976		(906		)	114,619		(480		)

The weighted-average rates paid and received for interest rate swaps outstanding at ~~September 30, 2017~~March 31, 2018 were as follows:


	Weighted-Average				Weighted-Average
	Interest Rate Paid		Interest Rate Received		Interest Rate Paid		Interest Rate Received
Interest rate swaps:
Fair value hedge loan/lease interest rate swaps	2.32	%	1.23	%	3.27	%	1.77	%
Non-hedging interest rate swaps – financial institution counterparties	3.96	%	2.84	%	3.96	%	3.28	%
Non-hedging interest rate swaps – customer counterparties	2.84	%	3.96	%	3.35	%	4.06	%

The weighted-average strike rate for outstanding interest rate caps was ~~3.07%~~3.47% at ~~September 30, 2017.~~March 31, 2018.

Commodity Derivatives. We enter into commodity swaps and option contracts that are not designated as hedging instruments primarily to accommodate the business needs of our customers. Upon the origination of a commodity swap or option contract with a customer, we simultaneously enter into an offsetting contract with a third party financial institution to mitigate the exposure to fluctuations in commodity prices.

The notional amounts and estimated fair values of non-hedging commodity swap and option derivative positions outstanding are presented in the following table. We obtain dealer quotations and use internal valuation models with observable market data inputs to value our commodity derivative positions.


		September 30, 2017				December 31, 2016					March 31, 2018				December 31, 2017
	Notional Units	Notional Amount	Estimated Fair Value			Notional Amount	Estimated Fair Value			Notional Units	Notional Amount	Estimated Fair Value			Notional Amount	Estimated Fair Value
Financial institution counterparties:
Oil – assets	Barrels	977	$	1,530		227	$	206		Barrels	462	$	1,676		253	$	193
Oil – liabilities	Barrels	1,082	(1,311		)	944	(4,400		)	Barrels	2,663	(19,122		)	2,731	(13,448		)
Natural gas – assets	MMBTUs	3,351	319			—	—			MMBTUs	6,963	984			5,927	1,399
Natural gas – liabilities	MMBTUs	1,546	(81		)	1,299	(1,357		)	MMBTUs	6,230	(591		)	3,917	(326		)
Customer counterparties:
Oil – assets	Barrels	1,096	1,459			944	4,580			Barrels	2,699	19,301			2,731	13,709
Oil – liabilities	Barrels	963	(1,327		)	227	(206		)	Barrels	426	(1,668		)	253	(187		)
Natural gas – assets	MMBTUs	1,546	96			1,299	1,393			MMBTUs	6,133	602			3,917	340
Natural gas – liabilities	MMBTUs	3,351	(285		)	—	—			MMBTUs	7,060	(975		)	5,927	(1,366		)

Foreign Currency Derivatives. We enter into foreign currency forward contracts that are not designated as hedging instruments primarily to accommodate the business needs of our customers. Upon the origination of a foreign currency denominated transaction with a customer, we simultaneously enter into an offsetting contract with a third party financial institution to negate the exposure to fluctuations in foreign currency exchange rates. We also utilize foreign currency forward contracts that are not designated as hedging instruments to mitigate the economic effect of fluctuations in foreign currency exchange rates on foreign currency holdings and certain short-term, non-U.S. dollar denominated loans. The notional amounts and fair values of open foreign currency forward contracts were as follows:


		September 30, 2017				December 31, 2016					March 31, 2018				December 31, 2017
	Notional Currency	Notional Amount	Estimated Fair Value			Notional Amount	Estimated Fair Value			Notional Currency	Notional Amount	Estimated Fair Value			Notional Amount	Estimated Fair Value
Financial institution counterparties:
Forward contracts – assets	EUR	135	$	1		—	$	—		EUR	5,110	$	167		4,014	$	77
Forward contracts – assets	CAD	7,234	15			—	—			GBP	832	8			127	1
Forward contracts – assets	GBP	547	1			—	—			AUD	59	1			—	—
Forward contracts – assets	AUD	60	1			—	—
Forward contracts – liabilities										EUR	—	—			4,846	(37		)
Forward contracts – liabilities	EUR	4,693	(80		)	870	(9		)	CAD	23,228	(68		)	25,413	(142		)
Forward contracts – liabilities	CAD	—	—			2,214	(21		)	GBP	453	(5		)	1,178	(9		)
Forward contracts – liabilities	GBP	1,075	(24		)	419	(3		)	AUD	58	—			—	—
Customer counterparties:
Forward contracts – assets	EUR	3,867	104			—	—			EUR	—	—			3,867	58
Forward contracts – assets	CAD	7,205	15			2,205	29			CAD	23,170	136			25,282	279
Forward contracts – assets	GBP	192	2			—	—			GBP	88	1			—	—
Forward contracts – liabilities										EUR	4,041	(135		)	4,041	(51		)
Forward contracts – liabilities										GBP	—	—			127	—

Gains, Losses and Derivative Cash Flows. For fair value hedges, the changes in the fair value of both the derivative hedging instrument and the hedged item are included in other non-interest income or other non-interest expense. The extent that such changes in fair value do not offset represents hedge ineffectiveness. Net cash flows from interest rate swaps on commercial loans/leases designated as hedging instruments in effective hedges of fair value are included in interest income on loans. For non-hedging derivative instruments, gains and losses due to changes in fair value and all cash flows are included in other non-interest income and other non-interest expense.

Amounts included in the consolidated statements of income related to interest rate derivatives designated as hedges of fair value were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2017			2016			2017			2016			2018			2017
Commercial loan/lease interest rate swaps:
Amount of gain (loss) included in interest income on loans	$	(149	)	$	(331	)	$	(592	)	$	(1,057	)	$	(42	)	$	(245	)
Amount of (gain) loss included in other non-interest expense	(2		)	4			(5		)	(3		)	—			(1		)

As stated above, we enter into non-hedge related derivative positions primarily to accommodate the business needs of our customers. Upon the origination of a derivative contract with a customer, we simultaneously enter into an offsetting derivative contract with a third party financial institution. We recognize immediate income based upon the difference in the bid/ask spread of the underlying transactions with our customers and the third party. Because we act only as an intermediary for our customer, subsequent changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact our results of operations.

Amounts included in the consolidated statements of income related to non-hedging interest rate, commodity and foreign currency derivative instruments are presented in the table below.


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2017		2016		2017		2016		2018			2017
Non-hedging interest rate derivatives:
Other non-interest income	$	1,085	$	374	$	2,062	$	1,788	$	1,488		$	370
Other non-interest expense	—		—		1		—		(21		)	(1		)
Non-hedging commodity derivatives:
Other non-interest income	231		110		387		255		90			52
Non-hedging foreign currency derivatives:
Other non-interest income	83		8		101		22		59			9

Counterparty Credit Risk. Our credit exposure relating to interest rate swaps, commodity swaps/options and foreign currency forward contracts with bank customers was approximately ~~$23.6~~$29.3 million at ~~September 30, 2017.~~March 31, 2018. This credit exposure is partly mitigated as transactions with customers are generally secured by the collateral, if any, securing the underlying transaction being hedged. Our credit exposure, net of collateral pledged, relating to interest rate swaps, commodity swaps/options and foreign currency forward contracts with upstream financial institution counterparties was approximately ~~$10.3~~$9.2 million at ~~September 30, 2017.~~March 31, 2018. This amount was primarily related to excess collateral we posted to counterparties. Collateral levels for upstream financial institution counterparties are monitored and adjusted as necessary. See Note 109 – Balance Sheet Offsetting and Repurchase Agreements for additional information regarding our credit exposure with upstream financial institution counterparties.

The aggregate fair value of securities we posted as collateral related to derivative contracts totaled ~~$13.2~~$6.6 million at ~~September 30, 2017.~~March 31, 2018. At such date, we also had ~~$10.6~~$25.8 million in cash collateral on deposit with other financial institution counterparties.

Note 109 - Balance Sheet Offsetting and Repurchase Agreements

Balance Sheet Offsetting. Certain financial instruments, including resell and repurchase agreements and derivatives, may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements or similar agreements. Our derivative transactions with upstream financial institution counterparties are generally executed under International Swaps and Derivative Association (“ISDA”) master agreements which include “right of set-off” provisions. In such cases there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle such amounts on a net basis. Nonetheless, we do not generally offset such financial instruments for financial reporting purposes.

Information about financial instruments that are eligible for offset in the consolidated balance sheet as of ~~September 30, 2017~~March 31, 2018 is presented in the following tables.


	Gross Amount Recognized		Gross Amount Offset		Net Amount Recognized		Gross Amount Recognized		Gross Amount Offset		Net Amount Recognized
September 30, 2017
March 31, 2018
Financial assets:
Derivatives:
Loan/lease interest rate swaps and caps	$	1,590	$	—	$	1,590	$	4,608	$	—	$	4,608
Commodity swaps and options	1,849		—		1,849		2,660		—		2,660
Foreign currency forward contracts	18		—		18		176		—		176
Total derivatives	3,457		—		3,457		7,444		—		7,444
Resell agreements	17,642		—		17,642		9,642		—		9,642
Total	$	21,099	$	—	$	21,099	$	17,086	$	—	$	17,086
Financial liabilities:
Derivatives:
Loan/lease interest rate swaps	$	15,387	$	—	$	15,387	$	8,906	$	—	$	8,906
Commodity swaps and options	1,392		—		1,392		19,713		—		19,713
Foreign currency forward contracts	104		—		104		73		—		73
Total derivatives	16,883		—		16,883		28,692		—		28,692
Repurchase agreements	987,869		—		987,869		1,015,021		—		1,015,021
Total	$	1,004,752	$	—	$	1,004,752	$	1,043,713	$	—	$	1,043,713


			Gross Amounts Not Offset										Gross Amounts Not Offset
	Net Amount Recognized		Financial Instruments			Collateral			Net Amount		Net Amount Recognized		Financial Instruments			Collateral			Net Amount
September 30, 2017
March 31, 2018
Financial assets:
Derivatives:
Counterparty A	$	397	$	(397	)	$	—		$	—	$	1,012	$	(1,012	)	$	—		$	—
Counterparty B	866		(866		)	—			—		2,152		(2,152		)	—			—
Counterparty C	204		(204		)	—			—		84		(84		)	—			—
Counterparty D	—		—			—			—
Other counterparties	1,990		(1,631		)	(130		)	229		4,196		(1,217		)	(2,751		)	228
Total derivatives	3,457		(3,098		)	(130		)	229		7,444		(4,465		)	(2,751		)	228
Resell agreements	17,642		—			(17,642		)	—		9,642		—			(9,642		)	—
Total	$	21,099	$	(3,098	)	$	(17,772	)	$	229	$	17,086	$	(4,465	)	$	(12,393	)	$	228
Financial liabilities:
Derivatives:
Counterparty A	$	8,984	$	(397	)	$	(8,587	)	$	—	$	5,706	$	(1,012	)	$	(4,694	)	$	—
Counterparty B	3,535		(866		)	(2,669		)	—		4,103		(2,152		)	(1,258		)	693
Counterparty C	1,128		(204		)	(830		)	94		1,467		(84		)	(1,383		)	—
Counterparty D	—		—			—			—
Other counterparties	3,236		(1,631		)	(1,605		)	—		17,416		(1,217		)	(16,099		)	100
Total derivatives	16,883		(3,098		)	(13,691		)	94		28,692		(4,465		)	(23,434		)	793
Repurchase agreements	987,869		—			(987,869		)	—		1,015,021		—			(1,015,021		)	—
Total	$	1,004,752	$	(3,098	)	$	(1,001,560	)	$	94	$	1,043,713	$	(4,465	)	$	(1,038,455	)	$	793

Information about financial instruments that are eligible for offset in the consolidated balance sheet as of December 31, ~~2016~~2017 is presented in the following tables.


	Gross Amount Recognized		Gross Amount Offset		Net Amount Recognized		Gross Amount Recognized		Gross Amount Offset		Net Amount Recognized
December 31, 2016
December 31, 2017
Financial assets:
Derivatives:
Loan/lease interest rate swaps and caps	$	3,592	$	—	$	3,592	$	2,140	$	—	$	2,140
Commodity swaps and options	206		—		206		1,592		—		1,592
Foreign currency forward contracts	—		—		—		78		—		78
Total derivatives	3,798		—		3,798		3,810		—		3,810
Resell agreements	9,642		—		9,642		9,642		—		9,642
Total	$	13,440	$	—	$	13,440	$	13,452	$	—	$	13,452
Financial liabilities:
Derivatives:
Loan/lease interest rate swaps	$	26,744	$	—	$	26,744	$	13,413	$	—	$	13,413
Commodity swaps and options	5,757		—		5,757		13,774		—		13,774
Foreign currency forward contracts	33		—		33		188		—		188
Total derivatives	32,534		—		32,534		27,375		—		27,375
Repurchase agreements	963,317		—		963,317		1,117,199		—		1,117,199
Total	$	995,851	$	—	$	995,851	$	1,144,574	$	—	$	1,144,574


			Gross Amounts Not Offset										Gross Amounts Not Offset
	Net Amount Recognized		Financial Instruments			Collateral			Net Amount		Net Amount Recognized		Financial Instruments			Collateral			Net Amount
December 31, 2016
December 31, 2017
Financial assets:
Derivatives:
Counterparty A	$	687	$	(687	)	$	—		$	—	$	395	$	(395	)	$	—		$	—
Counterparty B	223		(223		)	—			—		1,028		(1,028		)	—			—
Counterparty C	158		(158		)	—			—		55		(55		)	—			—
Counterparty D	1,820		(1,820		)	—			—
Other counterparties	910		(677		)	(64		)	169		2,332		(1,830		)	(387		)	115
Total derivatives	3,798		(3,565		)	(64		)	169		3,810		(3,308		)	(387		)	115
Resell agreements	9,642		—			(9,642		)	—		9,642		—			(9,642		)	—
Total	$	13,440	$	(3,565	)	$	(9,706	)	$	169	$	13,452	$	(3,308	)	$	(10,029	)	$	115
Financial liabilities:
Derivatives:
Counterparty A	$	11,233	$	(687	)	$	(10,026	)	$	520	$	7,397	$	(395	)	$	(7,002	)	$	—
Counterparty B	6,867		(223		)	(6,344		)	300		4,466		(1,028		)	(3,101		)	337
Counterparty C	4,578		(158		)	(4,415		)	5		1,520		(55		)	(1,450		)	15
Counterparty D	7,706		(1,820		)	(5,886		)	—
Other counterparties	2,150		(677		)	(676		)	797		13,992		(1,830		)	(11,215		)	947
Total derivatives	32,534		(3,565		)	(27,347		)	1,622		27,375		(3,308		)	(22,768		)	1,299
Repurchase agreements	963,317		—			(963,317		)	—		1,117,199		—			(1,117,199		)	—
Total	$	995,851	$	(3,565	)	$	(990,664	)	$	1,622	$	1,144,574	$	(3,308	)	$	(1,139,967	)	$	1,299

Repurchase Agreements. We utilize securities sold under agreements to repurchase to facilitate the needs of our customers and to facilitate secured short-term funding needs. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. We monitor collateral levels on a continuous basis. We may be required to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents.

The remaining contractual maturity of repurchase agreements in the consolidated balance sheets as of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017 is presented in the following tables.


	Remaining Contractual Maturity of the Agreements										Remaining Contractual Maturity of the Agreements
	Overnight and Continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total		Overnight and Continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total
September 30, 2017
March 31, 2018
Repurchase agreements:
U.S. Treasury	$	907,509	$	—	$	—	$	—	$	907,509	$	999,320	$	—	$	—	$	—	$	999,320
Residential mortgage-backed securities	80,360		—		—		—		80,360		15,701		—		—		—		15,701
Total borrowings	$	987,869	$	—	$	—	$	—	$	987,869	$	1,015,021	$	—	$	—	$	—	$	1,015,021
Gross amount of recognized liabilities for repurchase agreements	Gross amount of recognized liabilities for repurchase agreements								$	987,869	Gross amount of recognized liabilities for repurchase agreements								$	1,015,021
Amounts related to agreements not included in offsetting disclosures above	Amounts related to agreements not included in offsetting disclosures above								$	—	Amounts related to agreements not included in offsetting disclosures above								$	—

December 31, 2016
December 31, 2017
Repurchase agreements:
U.S. Treasury	$	841,475	$	—	$	—	$	—	$	841,475	$	1,036,891	$	—	$	—	$	—	$	1,036,891
Residential mortgage-backed securities	121,842		—		—		—		121,842		80,308		—		—		—		80,308
Total borrowings	$	963,317	$	—	$	—	$	—	$	963,317	$	1,117,199	$	—	$	—	$	—	$	1,117,199
Gross amount of recognized liabilities for repurchase agreements	Gross amount of recognized liabilities for repurchase agreements								$	963,317	Gross amount of recognized liabilities for repurchase agreements								$	1,117,199
Amounts related to agreements not included in offsetting disclosures above	Amounts related to agreements not included in offsetting disclosures above								$	—	Amounts related to agreements not included in offsetting disclosures above								$	—

Note 1110 - Stock-Based Compensation

A combined summary of activity in our active stock plans is presented in the table. Performance stock units outstanding are presented assuming attainment of the maximum payout rate as set forth by the performance criteria. ~~The target award level for performance stock units granted in 2016 was 29,240.~~As of ~~September 30, 2017,~~March 31, 2018, there were ~~1,499,399~~1,400,402 shares remaining available for grant for future stock-based compensation awards.


	Director Deferred Stock Units Outstanding				Non-Vested Stock Awards/Stock Units Outstanding				Performance Stock Units Outstanding			Stock Options Outstanding				Director Deferred Stock Units Outstanding			Non-Vested Stock Awards/Stock Units Outstanding				Performance Stock Units Outstanding			Stock Options Outstanding
	Number of Units		Weighted- Average Fair Value at Grant		Number of Shares/Units		Weighted- Average Fair Value at Grant		Number of Units	Weighted- Average Fair Value at Grant		Number of Shares		Weighted- Average Exercise Price		Number of Units	Weighted- Average Fair Value at Grant		Number of Shares/Units		Weighted- Average Fair Value at Grant		Number of Units	Weighted- Average Fair Value at Grant		Number of Shares		Weighted- Average Exercise Price
Balance, January 1, 2017	53,659		$	61.48	256,850		$	73.43	43,860	$	69.70	4,089,028		$	62.67
Balance, January 1, 2018																53,008	$	64.87	312,656		$	81.71	80,103	$	79.91	2,917,142		$	63.34
Authorized	—		—		—		—		—	—		—		—		—	—		—		—		—	—		—		—
Granted	5,447		95.37		—		—		—	—		—		—		—	—		—		—		—	—		—		—
Exercised/vested	(6,098	)	62.29		(1,730	)	76.07		—	—		(766,971	)	59.22		—	—		—		—		—	—		(318,110	)	60.25
Forfeited/expired	—		—		(2,860	)	76.07		—	—		(50,764	)	69.65		—	—		(3,527	)	86.54		—	—		(29,125	)	69.67
Balance, September 30, 2017	53,008		$	64.87	252,260		$	73.38	43,860	$	69.70	3,271,293		$	63.37
Balance, March 31, 2018																53,008	$	64.87	309,129		$	81.66	80,103	$	79.91	2,569,907		$	63.65

Shares issued in connection with stock compensation awards are issued from available treasury shares. If no treasury shares are available, new shares are issued from available authorized shares. Shares issued in connection with stock compensation awards along with other related information were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2017		2016		2017		2016		2018		2017
New shares issued from available authorized shares	9,299		—		602,662		—		—		283,342
Issued from available treasury stock	13,425		841,846		172,137		908,921		318,110		158,712
Total	22,724		841,846		774,799		908,921		318,110		442,054

Proceeds from stock option exercises	$	1,274	$	44,287	$	45,422	$	47,873	$	19,165	$	24,747

Stock-based compensation expense is recognized ratably over the requisite service period for all awards. For most stock option awards, the service period generally matches the vesting period. For stock options granted to certain executive officers and for non-vested stock units granted to all participants, the service period does not extend past the date the participant reaches 65 years of age. Deferred stock units granted to non-employee directors generally have immediate vesting and the related expense is fully recognized on the date of grant. For performance stock units, the service period generally matches the three-year performance period specified by the award, however, the service period does not extend past the date the participant reaches 65 years of age. Expense recognized each period is dependent upon our estimate of the number of shares that will ultimately be issued.

Stock-based compensation expense and the related income tax benefit is presented in the following table.


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2017		2016		2017		2016		2018		2017
Stock options	$	1,532	$	2,163	$	4,892	$	6,405	$	1,085	$	1,787
Non-vested stock awards/stock units	813		358		2,747		1,073		1,468		1,033
Director deferred stock units	—		—		519		520		—		—
Performance stock units	377		—		855		—		622		283
Total	$	2,722	$	2,521	$	9,013	$	7,998	$	3,175	$	3,103
Income tax benefit	$	953	$	882	$	3,155	$	2,799	$	667	$	1,086

Unrecognized stock-based compensation expense at ~~September 30, 2017~~March 31, 2018 is presented in the table below. Unrecognized stock-based compensation expense related to performance stock units is presented assuming attainment of the maximum payout rate as set forth by the performance criteria.


Stock options	$	6,952	$	4,148
Non-vested stock awards/stock units	7,448		13,218
Performance stock units	2,202		4,507
Total	$	16,602	$	21,873

Note 1211 - Earnings Per Common Share

Earnings per common share is computed using the two-class method as more fully described in our ~~2016~~2017 Form 10-K. The following table presents a reconciliation of net income available to common shareholders, net earnings allocated to common stock and the number of shares used in the calculation of basic and diluted earnings per common share.


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2017		2016		2017		2016		2018		2017
Net income	$	93,131	$	80,219	$	263,625	$	220,542	$	106,480	$	84,941
Less: Preferred stock dividends	2,016		2,016		6,047		6,047		2,016		2,016
Net income available to common shareholders	91,115		78,203		257,578		214,495		104,464		82,925
Less: Earnings allocated to participating securities	475		282		1,346		769		702		435
Net earnings allocated to common stock	$	90,640	$	77,921	$	256,232	$	213,726	$	103,762	$	82,490

Distributed earnings allocated to common stock	$	36,174	$	33,918	$	107,194	$	100,203	$	36,306	$	34,475
Undistributed earnings allocated to common stock	54,466		44,003		149,038		113,523		67,456		48,015
Net earnings allocated to common stock	$	90,640	$	77,921	$	256,232	$	213,726	$	103,762	$	82,490

Weighted-average shares outstanding for basic earnings per common share	63,667,356		62,449,660		63,822,011		62,114,075		63,649,198		63,738,191
Dilutive effect of stock compensation	897,945		691,543		957,337		448,290		1,012,997		999,194
Weighted-average shares outstanding for diluted earnings per common share	64,565,301		63,141,203		64,779,348		62,562,365		64,662,195		64,737,385

Note 1312 - Defined Benefit Plans

The components of the combined net periodic expense (benefit) for our defined benefit pension plans are presented in the table below.


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2017			2016			2017			2016			2018			2017
Expected return on plan assets, net of expenses	$	(2,779	)	$	(2,890	)	$	(8,338	)	$	(8,669	)	$	(2,979	)	$	(2,779	)
Interest cost on projected benefit obligation	1,547			1,732			4,642			5,230			1,475			1,547
Net amortization and deferral	1,357			1,585			4,072			4,691			1,250			1,357
SERP settlement costs	—			—			—			187
Net periodic expense (benefit)	$	125		$	427		$	376		$	1,439		$	(254	)	$	125

Our non-qualified defined benefit pension plan is not funded. No contributions to the qualified defined benefit pension plan were made during the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. We do not expect to make any contributions to the qualified defined benefit plan during the remainder of ~~2017.~~2018.

Note 1413 - Income Taxes

Income tax expense was as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2017			2016			2017			2016			2018			2017
Current income tax expense	$	15,224		$	12,848		$	44,636		$	40,251		$	746		$	15,702
Deferred income tax expense (benefit)	(5,332		)	(1,996		)	(9,505		)	(11,629		)	10,411			(4,301		)
Income tax expense, as reported	$	9,892		$	10,852		$	35,131		$	28,622		$	11,157		$	11,401

Effective tax rate	9.6		%	11.9		%	11.8		%	11.5		%	9.5		%	11.8		%

Net deferred tax assets totaled ~~$28.9~~$59.6 million at ~~September 30, 2017~~March 31, 2018 and ~~$63.7~~$31.7 million at December 31, ~~2016.~~2017. No valuation allowance for deferred tax assets was recorded at ~~September 30, 2017~~March 31, 2018 as management believes it is more likely than not that all of the deferred tax assets will be realized ~~because they were supported by recoverable taxes paid in prior years.~~against deferred tax liabilities and projected future taxable income.

The effective income tax rates differed from the U.S. statutory ~~rate~~federal income tax rates of 21% during 2018 and 35% during ~~the comparable periods~~2017 primarily due to the effect of tax-exempt income from loans, securities and life insurance policies and the income tax effects associated with stock-based compensation. The effective income tax rates for the three and nine months ended September 30, 2017 were also impacted by the correction of an over-accrual of taxes that resulted from incorrectly classifying certain tax-exempt loans as taxable for federal income tax purposes since 2013. As a result, we recognized tax benefits totaling $3.7 million, which included $2.9 million related to the 2013 through 2016 tax years and $756 thousand related to the first and second quarters of 2017. There were no unrecognized tax benefits during any of the reported periods. Interest

and/or penalties related to income taxes are reported as a component of income tax expense. Such amounts were not significant during the reported periods.

We file income tax returns in the U.S. federal jurisdiction. We are no longer subject to U.S. federal income tax examinations by tax authorities for years before ~~2013.~~2014.

Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act was enacted on December 22, 2017 as more fully discussed in the 2017 Form 10-K. Among other things, the new law established a new, flat corporate federal statutory income tax rate of 21%. As a result, we remeasured our deferred tax assets and liabilities based on the new tax rate and recognized a provisional net tax benefit related to the remeasurement totaling $4.0 million. Notwithstanding the foregoing, we are still analyzing certain aspects of the new law and refining our calculations, which could affect the measurement of these assets and liabilities or give rise to new deferred tax amounts. Nonetheless, there has been no change to the provisional net tax benefit we recorded during the fourth quarter of 2017.

Note 1514 - Other Comprehensive Income (Loss)

The before and after tax amounts allocated to each component of other comprehensive income (loss) are presented in the following table. Reclassification adjustments related to securities available for sale are included in net gain (loss) on securities transactions in the accompanying consolidated statements of income. Reclassification adjustments related to defined-benefit post-retirement benefit plans are included in the computation of net periodic pension expense (see Note 1312 – Defined Benefit Plans).


	Three Months Ended September 30, 2017									Three Months Ended September 30, 2016									Three Months Ended March 31, 2018									Three Months Ended March 31, 2017
	Before Tax Amount			Tax Expense, (Benefit)			Net of Tax Amount			Before Tax Amount			Tax Expense, (Benefit)			Net of Tax Amount			Before Tax Amount			Tax Expense, (Benefit)			Net of Tax Amount			Before Tax Amount			Tax Expense, (Benefit)			Net of Tax Amount
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period	$	7,082		$	2,479		$	4,603		$	(95,641	)	$	(33,473	)	$	(62,168	)	$	(178,904	)	$	(37,570	)	$	(141,334	)	$	33,811		$	11,834		$	21,977
Change in net unrealized gain on securities transferred to held to maturity	(3,514		)	(1,230		)	(2,284		)	(7,278		)	(2,547		)	(4,731		)	(2,619		)	(550		)	(2,069		)	(6,286		)	(2,200		)	(4,086		)
Reclassification adjustment for net (gains) losses included in net income	4,867			1,703			3,164			37			12			25			19			4			15			—			—			—
Total securities available for sale and transferred securities	8,435			2,952			5,483			(102,882		)	(36,008		)	(66,874		)	(181,504		)	(38,116		)	(143,388		)	27,525			9,634			17,891
Defined-benefit post-retirement benefit plans:
Change in the net actuarial gain/loss	—			—			—			—			—			—			—			—			—			—			—			—
Reclassification adjustment for net amortization of actuarial gain/loss included in net income as a component of net periodic cost (benefit)	1,357			475			882			1,585			555			1,030			1,250			263			987			1,357			475			882
Total defined-benefit post-retirement benefit plans	1,357			475			882			1,585			555			1,030			1,250			263			987			1,357			475			882
Total other comprehensive income (loss)	$	9,792		$	3,427		$	6,365		$	(101,297	)	$	(35,453	)	$	(65,844	)	$	(180,254	)	$	(37,853	)	$	(142,401	)	$	28,882		$	10,109		$	18,773

	Nine Months Ended September 30, 2017									Nine Months Ended September 30, 2016
	Before Tax Amount			Tax Expense, (Benefit)			Net of Tax Amount			Before Tax Amount			Tax Expense, (Benefit)			Net of Tax Amount
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period	$	131,283		$	45,949		$	85,334		$	191,865		$	67,154		$	124,711
Change in net unrealized gain on securities transferred to held to maturity	(13,660		)	(4,781		)	(8,879		)	(24,629		)	(8,620		)	(16,009		)
Reclassification adjustment for net (gains) losses included in net income	4,917			1,721			3,196			(14,866		)	(5,204		)	(9,662		)
Total securities available for sale and transferred securities	122,540			42,889			79,651			152,370			53,330			99,040
Defined-benefit post-retirement benefit plans:
Change in the net actuarial gain/loss	—			—			—			(862		)	(302		)	(560		)
Reclassification adjustment for net amortization of actuarial gain/loss included in net income as a component of net periodic cost (benefit)	4,072			1,425			2,647			4,878			1,708			3,170
Total defined-benefit post-retirement benefit plans	4,072			1,425			2,647			4,016			1,406			2,610
Total other comprehensive income (loss)	$	126,612		$	44,314		$	82,298		$	156,386		$	54,736		$	101,650

Activity in accumulated other comprehensive income (loss), net of tax, was as follows:


	Securities Available For Sale			Defined Benefit Plans			Accumulated Other Comprehensive Income			Securities Available For Sale			Defined Benefit Plans			Accumulated Other Comprehensive Income
Balance January 1, 2018										$	117,230		$	(37,718	)	$	79,512
Other comprehensive income (loss) before reclassifications										(143,403		)	—			(143,403		)
Reclassification of amounts included in net income										15			987			1,002
Net other comprehensive income (loss) during period										(143,388		)	987			(142,401		)
Reclassification of certain income tax effects related to the change in the U.S. statutory federal income tax rate under the Tax Cuts and Jobs Act to retained earnings										17,557			(8,022		)	9,535
Balance at March 31, 2018										$	(8,601	)	$	(44,753	)	$	(53,354	)

Balance January 1, 2017	$	16,153		$	(40,776	)	$	(24,623	)	$	16,153		$	(40,776	)	$	(24,623	)
Other comprehensive income (loss) before reclassifications	76,455			—			76,455			17,891			—			17,891
Amounts reclassified from accumulated other comprehensive income (loss)	3,196			2,647			5,843
Reclassification of amounts included in net income										—			882			882
Net other comprehensive income (loss) during period	79,651			2,647			82,298			17,891			882			18,773
Balance at September 30, 2017	$	95,804		$	(38,129	)	$	57,675

Balance January 1, 2016	$	160,611		$	(46,748	)	$	113,863
Other comprehensive income (loss) before reclassifications	108,702			2,489			111,191
Amounts reclassified from accumulated other comprehensive income (loss)	(9,662		)	121			(9,541		)
Net other comprehensive income (loss) during period	99,040			2,610			101,650
Balance at September 30, 2016	$	259,651		$	(44,138	)	$	215,513
Balance at March 31, 2017										$	34,044		$	(39,894	)	$	(5,850	)

Note 1615 – Operating Segments

We are managed under a matrix organizational structure whereby our two primary operating segments, Banking and Frost Wealth Advisors, overlap a regional reporting structure. See our ~~2016~~2017 Form 10-K for additional information regarding our operating segments. Summarized operating results by segment were as follows:

Banking
Frost Wealth
Advisors
Non-Banks Consolidated
Revenues from (expenses to) external customers:
Three months ended:
September 30, 2017 $ 266,582
$ 36,529
$ (2,285 ) $ 300,826
September 30, 2016 244,343
33,536
(1,258 ) 276,621
Nine months ended:
September 30, 2017 $ 786,743
$ 107,829
$ (5,669 ) $ 888,903
September 30, 2016 737,060
97,484
(3,537 ) 831,007
Net income (loss):
Three months ended:
September 30, 2017 $ 88,368
$ 6,417
$ (1,654 ) $ 93,131
September 30, 2016 76,347
4,797
(925 ) 80,219
Nine months ended:
September 30, 2017 $ 250,766
$ 17,990
$ (5,131 ) $ 263,625
September 30, 2016 210,454
13,809
(3,721 ) 220,542



	Banking		Frost Wealth Advisors		Non-Banks			Consolidated
Revenues from (expenses to) external customers:
Three months ended:
March 31, 2018	$	288,561	$	35,081	$	(2,449	)	$	321,193
March 31, 2017	258,911		34,588		(1,290		)	292,209
Net income (loss):
Three months ended:
March 31, 2018	$	103,641	$	5,634	$	(2,795	)	$	106,480
March 31, 2017	80,869		5,294		(1,222		)	84,941

Note 1716 – Fair Value Measurements

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, we utilize valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 820 establishes a three-level fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. See our ~~2016~~2017 Form 10-K for additional information regarding the fair value hierarchy and a description of our valuation techniques.

Financial Assets and Financial Liabilities. The table below summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, segregated by the level of the valuation inputs within the fair value hierarchy of ASC Topic 820 utilized to measure fair value.


	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
September 30, 2017
March 31, 2018
Securities available for sale:
U.S. Treasury									$	3,418,147	$	—	$	—	$	3,418,147
Residential mortgage-backed securities									—		645,695		—		645,695
States and political subdivisions									—		6,430,105		—		6,430,105
Other									—		42,585		—		42,585
Trading account securities:
U.S. Treasury									19,772		—		—		19,772
Derivative assets:
Interest rate swaps, caps and floors									—		16,812		—		16,812
Commodity swaps and options									—		20,844		1,719		22,563
Foreign currency forward contracts									313		—		—		313
Derivative liabilities:
Interest rate swaps, caps and floors									—		22,658		—		22,658
Commodity swaps and options									—		22,356		—		22,356
Foreign currency forward contracts									208		—		—		208
December 31, 2017
Securities available for sale:
U.S. Treasury	$	3,473,628	$	—	$	—	$	3,473,628	$	3,445,153	$	—	$	—	$	3,445,153
Residential mortgage-backed securities	—		681,195		—		681,195		—		665,086		—		665,086
States and political subdivisions	—		5,987,739		—		5,987,739		—		6,336,209		—		6,336,209
Other	—		42,538		—		42,538		—		42,561		—		42,561
Trading account securities:
U.S. Treasury	18,814		—		—		18,814		19,210		—		—		19,210
States and political subdivisions	—		907		—		907		—		1,888		—		1,888
Derivative assets:
Interest rate swaps, caps and floors	—		23,974		—		23,974		—		20,022		—		20,022
Commodity swaps and options	—		3,404		—		3,404		—		14,408		1,233		15,641
Foreign currency forward contracts	139		—		—		139		415		—		—		415
Derivative liabilities:
Interest rate swaps, caps and floors	—		18,376		—		18,376		—		18,754		—		18,754
Commodity swaps and options	—		3,004		—		3,004		—		15,327		—		15,327
Foreign currency forward contracts	104		—		—		104		239		—		—		239
December 31, 2016
Securities available for sale:
U.S. Treasury	$	4,019,731	$	—	$	—	$	4,019,731
Residential mortgage-backed securities	—		785,167		—		785,167
States and political subdivisions	—		5,355,885		—		5,355,885
Other	—		42,494		—		42,494
Trading account securities:
U.S. Treasury	16,594		—		—		16,594
States and political subdivisions	—		109		—		109
Derivative assets:
Interest rate swaps, caps and floors	—		29,059		—		29,059
Commodity swaps and options	—		6,179		—		6,179
Foreign currency forward contracts	29		—		—		29
Derivative liabilities:
Interest rate swaps, caps and floors	—		29,968		—		29,968
Commodity swaps and options	—		5,963		—		5,963
Foreign currency forward contracts	33		—		—		33

Derivative assets, measured at fair value on a recurring basis using significant unobservable (Level 3) inputs during the reported periods consist of commodity swaps sold to loan customers. The significant unobservable (Level 3) inputs used in the fair value measurement of these commodity swaps sold to loan customers primarily relate to the probability of default and loss severity in the event of default. The probability of default is determined by the underlying risk grade of the loan (see Note 3 - Loans) underlying the commodity swap in that the probability of default increases as a loan’s risk grade deteriorates, while the loss severity is estimated through an analysis of the collateral supporting both the underlying loan and commodity swap. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity. The weighted-average risk grade of loans underlying commodity swaps measured at fair value using significant unobservable (Level 3) inputs was 12.0 for both periods ended March 31, 2018 and December 31, 2017. The weighted-average loss severity in the event of default on the commodity swaps was 15.4% for both periods ended March 31, 2018 and December 31, 2017. A reconciliation of the beginning and ending balances of derivative assets measured at fair value on a recurring basis using significant unobservable (Level 3) inputs is not presented as such amounts were not significant during the reported periods.

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets measured at fair value on a non-recurring basis during the reported periods include certain impaired loans reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. The following table presents impaired loans that were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for loan losses based upon the fair value of the underlying collateral during the reported periods.


	Nine Months Ended September 30, 2017					Nine Months Ended September 30, 2016					Three Months Ended March 31, 2018						Three Months Ended March 31, 2017
	Level 2		Level 3			Level 2		Level 3			Level 2			Level 3			Level 2		Level 3
Carrying value of impaired loans before allocations	$	—	$	64,287		$	—	$	11,023		$	365		$	56,788		$	—	$	24,171
Specific valuation allowance (allocations) reversals of prior allocations	—		(13,477		)	—		(3,750		)	(64		)	(1,520		)	—		(1,340		)
Fair value	$	—	$	50,810		$	—	$	7,273		$	301		$	55,268		$	—	$	22,831

Non-Financial Assets and Non-Financial Liabilities. We do not have any non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Non-financial assets measured at fair value on a non-recurring basis during the reported periods include certain foreclosed assets which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for loan losses and certain foreclosed assets which, subsequent to their initial recognition, were remeasured at fair value through a write-down included in other non-interest expense. The following table presents foreclosed assets that were remeasured and reported at fair value during the reported periods:


	Nine Months Ended September 30, 2017						Three Months Ended March 31, 2018
	2017			2016			2018			2017
Foreclosed assets remeasured at initial recognition:
Carrying value of foreclosed assets prior to remeasurement	$	—		$	425		$	7		$	—
Charge-offs recognized in the allowance for loan losses	—			(3		)	—			—
Fair value	$	—		$	422		$	7		$	—
Foreclosed assets remeasured subsequent to initial recognition:
Carrying value of foreclosed assets prior to remeasurement	$	89		$	492		$	1,823		$	89
Write-downs included in other non-interest expense	(16		)	(217		)	(473		)	(16		)
Fair value	$	73		$	275		$	1,350		$	73

Financial Instruments Reported at Amortized Cost. The estimated fair values of financial instruments that are reported at amortized cost in our consolidated balance sheets, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, were as follows:


	September 30, 2017				December 31, 2016				March 31, 2018				December 31, 2017
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Level 2 inputs:
Cash and cash equivalents	$	5,091,903	$	5,091,903	$	4,141,445	$	4,141,445	$	4,680,948	$	4,680,948	$	5,053,047	$	5,053,047
Securities held to maturity	1,442,222		1,476,653		2,250,460		2,262,747		1,247,154		1,257,886		1,432,098		1,455,791
Cash surrender value of life insurance policies	179,789		179,789		177,884		177,884		181,297		181,297		180,477		180,477
Accrued interest receivable	118,035		118,035		156,714		156,714		125,485		125,485		167,508		167,508
Level 3 inputs:
Loans, net	12,552,001		12,574,862		11,822,347		11,903,956		13,214,144		13,184,663		12,990,301		12,981,165
Financial liabilities:
Level 2 inputs:
Deposits	26,403,269		26,398,885		25,811,575		25,812,039		26,677,778		26,671,005		26,872,389		26,866,676
Federal funds purchased and repurchase agreements	997,919		997,919		976,992		976,992		1,032,221		1,032,221		1,147,824		1,147,824
Junior subordinated deferrable interest debentures	136,170		137,115		136,127		137,115		136,198		137,115		136,184		137,115
Subordinated notes payable and other borrowings	98,512		102,072		99,990		100,000		98,591		103,409		98,552		105,311
Accrued interest payable	1,737		1,737		1,204		1,204		3,196		3,196		3,358		3,358

Under ASC Topic 825, entities may choose to measure eligible financial instruments at fair value at specified election dates. The fair value measurement option (i) may be applied instrument by instrument, with certain exceptions, (ii) is generally irrevocable and (iii) is applied only to entire instruments and not to portions of instruments. Unrealized gains and losses on items for which the fair value measurement option has been elected must be reported in earnings at each subsequent reporting date. During the reported periods, we had no financial instruments measured at fair value under the fair value measurement option.

Note 1817 - Accounting Standards Updates

Information about certain recently issued accounting standards updates is presented below. Also refer to Note 21 - Accounting Standards Updates in our ~~2016~~2017 Form 10-K for additional information related to previously issued accounting standards updates.

Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We adopted ASU 2014-09 ~~was originally going to be~~ effective ~~for us on January 1, 2017; however, the FASB issued~~ ~~ASU 2015-14, “Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date"~~ ~~which deferred the effective date of ASU 2014-09 by one year to~~ January 1, 2018. Our revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. We expect that ASU 2014-09 will require us to change how we recognize certain recurring revenue streams within trust and investment management fees, insurance commissions and fees and other categories of non-interest income; however, we do not expect these changes to have a significant impact on our financial statements. We expect to adopt the standard in the first quarter of 2018 with a cumulative effect adjustment to opening retained earnings, if such adjustment is deemed to be significant.See Note 1 - Significant Accounting Policies for additional information.

ASU 2016-02,“Leases (Topic 842).” ASU 2016-02 will, among other things, require lessees to recognize a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, “Revenue from Contracts with Customers.” ASU 2016-02 will be effective for us on January 1, 2019 and will require transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Notwithstanding the foregoing, in January 2018, the Financial Accounting Standards Board issued a proposal to provide an additional transition method that would allow entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We are currently evaluating the potential impact of ASU 2016-02 on our financial statements. In that regard, we ~~have selected, and will soon implement,~~are currently implementing a third-party vendor solution to assist us in the application of ASU 2016-02.

ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective on January 1, 2020. We are currently evaluating the potential impact of ASU 2016-13 on our financial statements. In that regard, we have formed a cross-functional working group, under the direction of our Chief Financial Officer and our Chief Risk Officer. The working group is comprised of individuals from various functional areas including credit, risk management, finance and information technology, among others. We are currently developing an implementation plan to include assessment of processes, portfolio segmentation, model development, system requirements and the identification of data and resource needs, among other things. We ~~are also currently evaluating selected~~have recently begun to implement a third-party vendor ~~solutions~~solution to assist us in the application of the ASU 2016-13. The adoption of the ASU 2016-13 ~~is likely to~~could result in an increase in the allowance for loan losses as a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. Furthermore, ASU 2016-13 will necessitate that we establish an allowance for expected credit losses onfor certain debt ~~securities.~~securities and other financial assets. While we are currently unable to reasonably estimate the impact of adopting ASU 2016-13, we expect that the impact of adoption will be significantly influenced by the composition, characteristics and quality of our loan and securities portfolios as well as the prevailing economic conditions and forecasts as of the adoption date.

~~ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment.”~~ ASU 2017-04 eliminates Step 2 from the goodwill impairment test which required entities to compute the implied fair value of goodwill. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 will be effective for us on January 1, 2020, with early adoption permitted for interim or annual impairment tests beginning in 2017. ASU 2017-04 is not expected to have a significant impact on our financial statements.

ASU 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) - Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.” ASU 2017-05 clarifies the scope of Subtopic 610-20 and adds guidance for partial sales of nonfinancial assets, including partial sales of real estate. Historically, U.S. GAAP contained several different accounting models to evaluate whether the transfer of certain assets qualified for sale treatment. ASU 2017-05 reduces the number of potential accounting models that might apply and clarifies which model does apply in various circumstances. ASU 2017-05 will be effective for us on January 1, 2018 and is not expected to have a significant impact on our financial statements.

ASU 2017-08,“Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization on Purchased Callable Debt Securities.” ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium to require such premiums to be amortized to the earliest call date unless applicable guidance related to certain pools of securities is applied to consider estimated prepayments. Under prior guidance, entities were generally required to amortize premiums on individual, non-pooled callable debt securities as a yield adjustment over the contractual life of the security. ASU 2017-08 does not change the accounting for callable debt securities held at a discount. ASU 2017-08 will be effective for us on January 1, 2019, with early adoption permitted. WeWhile we are currently evaluating the potential impact of ASU 2017-08 on our financial ~~statements.~~statements, we expect that the impact of adoption will be significantly influenced by the composition of our securities portfolio as of the adoption date.

ASU ~~2017-09, “Compensation~~2018-02, "Income Statement - ~~Stock Compensation~~Reporting Comprehensive Income (Topic ~~718)~~220) - ~~Scope~~Reclassification of ~~Modification Accounting.”~~Certain Tax Effects from Accumulated Other Comprehensive Income." UnderASU ~~2017-09 clarifies when changes~~2018-02, entities may elect to reclassify certain income tax effects related to the ~~terms or conditions~~change in the U.S. statutory federal income tax rate under the Tax Cuts and Jobs Act, which was enacted on December 22, 2107, from accumulated other comprehensive income to retained earnings. ASU 2018-02 also requires certain accounting policy disclosures. We elected to adopt the provisions of ~~a share-based payment award must be accounted for~~ASU 2018-02 as ~~modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if all~~ of the following are the same immediately before and after the change: (i) the award's fair value, (ii) the award's vesting conditions and (iii) the award's classification as an equity or liability instrument. ASU 2017-09 will be effective for us on January 1, 2018 ~~and is not expected to have a significant impact on our financial statements.~~in advance of the required application date of January 1, 2019. See Note 1 - Significant Accounting Policies.

ASU ~~2017-12, “Derivatives and Hedging~~2018-05, "Income Taxes (Topic ~~815)~~740) - ~~Targeted Improvements~~Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting ~~for Hedging Activities.”~~Bulletin (SAB) No. 118" ASU ~~2017-12~~2018-05 amends the ~~hedge accounting recognition and presentation requirements in ASC 815~~Accounting Standards Codification to ~~improve~~incorporate various SEC paragraphs pursuant to the ~~transparency and understandability~~issuance of information conveyed to financial statement users about an entity’s risk management activities to better align the entity’s financial reporting for hedging relationships with those risk management activities and to reduce the complexity of and simplifySAB 118. SAB 118 addresses the application of ~~hedge accounting. ASU 2017-12 will be effective~~generally accepted accounting principles in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for ~~us on January 1, 2019~~certain income tax effects of the Tax Cuts and ~~is not expected to have a significant impact on our financial statements.~~Jobs Act. See Note 13 - Income Taxes.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Financial Review

Cullen/Frost Bankers, Inc.

The following discussion should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, ~~2016~~2017, and the other information included in the ~~2016~~2017 Form 10-K. Operating results for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 are not necessarily indicative of the results for the year ending December 31, ~~2017~~2018 or any future period.

Dollar amounts in tables are stated in thousands, except for per share amounts.

Forward-Looking Statements and Factors that Could Affect Future Results

Certain statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”), notwithstanding that such statements are not specifically identified as such. In addition, certain statements may be contained in our future filings with the SEC, in press releases, and in oral and written statements made by us or with our approval that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of Cullen/Frost or its management or Board of Directors, including those relating to products, services or ~~services;~~operations; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “continue”, “remain”, “will”, “should”, “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

Local, regional, national and international economic conditions and the impact they may have on us and our customers and our assessment of that impact.

Volatility and disruption in national and international financial and commodity markets.

Government intervention in the U.S. financial system.

Changes in the mix of loan geographies, sectors and types or the level of non-performing assets and charge-offs.

Changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements.

The effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board.

Inflation, interest rate, securities market and monetary fluctuations.

The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which we and our subsidiaries must comply.

The soundness of other financial institutions.

Political instability.

Impairment of our goodwill or other intangible assets.

Acts of God or of war or terrorism.

The timely development and acceptance of new products and services and perceived overall value of these products and services by users.

Changes in consumer spending, borrowings and savings habits.

Changes in the financial performance and/or condition of our borrowers.

Technological changes.

The cost and effects of failure, interruption, or breach of security of our systems.

Acquisitions and integration of acquired businesses.

Our ability to increase market share and control expenses.

Our ability to attract and retain qualified employees.

Changes in the competitive environment in our markets and among banking organizations and other financial service providers.

The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters.

Changes in the reliability of our vendors, internal control systems or information systems.

Changes in our liquidity position.

Changes in our organization, compensation and benefit plans.

The costs and effects of legal and regulatory developments, the resolution of legal proceedings or regulatory or other governmental inquiries, the results of regulatory examinations or reviews and the ability to obtain required regulatory approvals.

Greater than expected costs or difficulties related to the integration of new products and lines of business.

Our success at managing the risks involved in the foregoing items.

Forward-looking statements speak only as of the date on which such statements are made. We do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events.

Application of Critical Accounting Policies and Accounting Estimates

We follow accounting and reporting policies that conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry. 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 amounts reported in the financial statements and accompanying notes. While we base estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.

We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial statements. Accounting policies related to the allowance for loan losses are considered to be critical as these policies involve considerable subjective judgment and estimation by management.

For additional information regarding critical accounting policies, refer to Note 1 - Summary of Significant Accounting Policies and Note 3 - Loans in the notes to consolidated financial statements and the sections captioned “Application of Critical Accounting Policies and Accounting Estimates” and “Allowance for Loan Losses” in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the ~~2016~~2017 Form 10-K. There have been no significant changes in our application of critical accounting policies related to the allowance for loan losses since December 31, ~~2016~~2017.

Overview

A discussion of our results of operations is presented below. Certain reclassifications have been made to make prior periods comparable. Taxable-equivalent adjustments are the result of increasing income from tax-free loans and investments by an amount equal to the taxes that would be paid if the income were fully taxable based on athe applicable 21% federal tax rate in 2018 and 35% federal tax rate in 2017, thus making tax-exempt yields comparable to taxable asset yields.

Results of Operations

Net income available to common shareholders totaled ~~$91.1~~$104.5 million, or ~~$1.41 per diluted common share and $257.6 million, or $3.98~~$1.61 per diluted common share, for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 compared to ~~$78.2~~$82.9 million, or ~~$1.24 per diluted common share, and $214.5 million, or $3.42~~$1.28 per diluted common share, for the three ~~and nine~~ months ended ~~September 30, 2016.~~March 31, 2017.

Selected data for the comparable periods was as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2017			2016			2017			2016			2018			2017
Taxable-equivalent net interest income	$	264,406		$	235,665		$	774,819		$	694,997		$	252,536		$	252,393
Taxable-equivalent adjustment	45,195			41,158			132,311			120,264			22,788			43,884
Net interest income	219,211			194,507			642,508			574,733			229,748			208,509
Provision for loan losses	10,980			5,045			27,358			42,734			6,945			7,952
Net interest income after provision for loan losses	208,231			189,462			615,150			531,999			222,803			200,557
Non-interest income	81,615			82,114			246,395			256,274			91,445			83,700
Non-interest expense	186,823			180,505			562,789			539,109			196,611			187,915
Income before income taxes	103,023			91,071			298,756			249,164			117,637			96,342
Income taxes	9,892			10,852			35,131			28,622			11,157			11,401
Net income	93,131			80,219			263,625			220,542			106,480			84,941
Preferred stock dividends	2,016			2,016			6,047			6,047			2,016			2,016
Net income available to common shareholders	$	91,115		$	78,203		$	257,578		$	214,495		$	104,464		$	82,925
Earnings per common share – basic	$	1.43		$	1.24		$	4.02		$	3.44		$	1.63		$	1.29
Earnings per common share – diluted	1.41			1.24			3.98			3.42			1.61			1.28
Dividends per common share	0.57			0.54			1.68			1.61			0.57			0.54
Return on average assets	1.19		%	1.07		%	1.14		%	1.01		%	1.36		%	1.12		%
Return on average common equity	11.71			10.31			11.44			9.87			13.62			11.55
Average shareholders’ equity to average assets	10.63			10.85			10.43			10.70			10.46			10.14

Net income available to common shareholders increased ~~$12.9~~$21.5 million, or ~~16.5%~~26.0%, for the three months ended ~~September 30, 2017 and increased $43.1 million, or 20.1% for the nine months ended September 30, 2017~~March 31, 2018 compared to the same ~~periods~~period in ~~2016.~~2017. The increase ~~during the three months ended September 30, 2017~~ was primarily the result of a ~~$24.7~~$21.2 million increase in net interest income, a $7.7 million increase in non-interest income, a $1.0 million decrease in the provision for loan losses and a ~~$960~~$244 thousand decrease in income tax expense partly offset by ~~a $6.3~~an $8.7 million increase in non-interest expense, a $5.9 million increase in the provision for loan losses and a $499 thousand decrease in non-interest income. The increase during the nine months ended September 30, 2017 was primarily the result of a $67.8 million increase in net interest income and a $15.4 million decrease in the provision for loan losses partly offset by a $23.7 million increase in non-interest expense, a $9.9 million decrease in non-interest income and a $6.5 million increase in income tax expense.

Details of the changes in the various components of net income are further discussed below.

During the third quarter of 2017, our operations in our Houston and Corpus Christi market areas were disrupted by hurricane Harvey. As a result, we incurred certain additional expenses, as discussed below; lost potential revenue as a result of branch closures; and allocated a portion of our allowance for loan losses for probable losses related to the impact of the hurricane, as discussed below. While the ultimate impact of the hurricane on our operations is uncertain, we expect that it will be mitigated, at least in part, by insurance coverage and, based on the information available to us at this time, we do not expect any significant impact on our financial statements.

Net Interest Income

Net interest income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is our largest source of revenue, representing ~~72.3%~~71.5% of total revenue during the first ~~nine~~three months of ~~2017.~~2018. Net interest margin is the ratio of taxable-equivalent net interest income to average earning assets for the period. The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net interest income and net interest margin.

The Federal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. Our loan portfolio is significantly affected by changes in the prime interest rate. The prime ~~interest~~ rate ~~which is the rate offered on loans to borrowers with strong credit, remained~~began 2017 at ~~3.50% during most of 2016. In December 2016, the prime rate increased 25 basis points to~~ 3.75% and remained at that level until March 2017, when ~~the prime rated~~it increased

~~another~~ 25 basis points to 4.00%. ~~In June~~During the remainder of 2017, the prime rate increased an additional 50 basis points (25 basis points in each of June and December) to end 2017 at 4.50%. In March 2018, the prime rate increased 25 basis points to ~~4.25%~~end the first quarter at 4.75%. Our loan portfolio is also impacted by changes in the London Interbank Offered Rate (LIBOR). At ~~September 30,~~March 31, 2018, the one-month and three-month U.S. dollar LIBOR interest rates were 1.89% and 2.31%, respectively, while at March 31, 2017, the one-month and three-month U.S. dollar LIBOR interest rates were ~~1.23%~~0.98% and ~~1.33%, respectively, while at September 30, 2016, the one-month and three-month U.S. dollar LIBOR interest rates were 0.53% and 0.85%~~1.15%, respectively. The effective federal funds rate, which is the cost of immediately available overnight funds, began 2017 at 0.75% and remained at ~~0.50% during most~~that level until March 2017, when it increased 25 basis points to 1.00%. During the remainder of ~~2016.~~2017, the effective federal funds rate increased an additional 50 basis points (25 basis points in each of June and December) to end 2017 at 1.50%. In ~~December 2016,~~March 2018, the effective federal funds rate increased 25 basis points to ~~0.75% and remained~~end the first quarter at that level until March 2017, when the effective federal funds rate increased another 25 basis points to 1.00%. In June 2017, the effective federal funds rate was increased an additional 25 basis points to 1.25%1.75%.

We are primarily funded by core deposits, with non-interest-bearing demand deposits historically being a significant source of funds. This lower-cost funding base is expected to have a positive impact on our net interest income and net interest margin in a rising interest rate environment. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)

repealed the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts beginning July 21, 2011. To date, we have not experienced any significant additional interest costs as a result of the repeal. However, ~~in light of the aforementioned increases in~~as market interest rates ~~in late July 2017,~~have increased, we have increased the interest rates we pay on most of our interest-bearing deposit products. See Item 3. Quantitative and Qualitative Disclosures About Market Risk elsewhere in this report for information about the expected impact of this legislation on our sensitivity to interest rates. Further analysis of the components of our net interest margin is presented below.

The following ~~tables present~~table presents the changes in taxable-equivalent net interest income and identifies the changes due to differences in the average volume of earning assets and interest-bearing liabilities and the changes due to changes in the average interest rate on those assets and liabilities. The changes in net interest income due to changes in both average volume and average interest rate have been allocated to the average volume change or the average interest rate change in proportion to the absolute amounts of the change in each. The comparison between the periods includes an additional change factor ~~that shows~~detailing the effect of the ~~difference~~reduction in the ~~number of days in each period for assets~~U.S. statutory federal income tax rate under the Tax Cuts and ~~liabilities that accrue interest based upon the actual number of days in the period,~~Jobs Act, which was enacted on December 22, 2107, as further discussed ~~below.~~in our 2017 Form 10-K.

Three Months Ended
September 30, 2017 vs. September 30, 2016
Increase (Decrease) Due to Change in
Rate Volume Number of Days Total
Interest-bearing deposits $ 6,472
$ 217
$ —
$ 6,689
Federal funds sold and resell agreements 75
121
—
196
Securities:
Taxable (1,176 ) (1,518 ) —
(2,694 )
Tax-exempt (3,239 ) 7,234
—
3,995
Loans, net of unearned discounts 13,650
12,298
—
25,948
Total earning assets 15,782
18,352
—
34,134
Savings and interest checking —
83
—
83
Money market deposit accounts 3,339
4
—
3,343
Time accounts 147
(13 ) —
134
Public funds 362
(3 ) —
359
Federal funds purchased and repurchase agreements 467
12
—
479
Junior subordinated deferrable interest debentures 181
—
—
181
Subordinated notes payable and other notes 819
(5 ) —
814
Total interest-bearing liabilities 5,315
78
—
5,393
Net change $ 10,467
$ 18,274
$ —
$ 28,741


	Nine Months Ended												Three Months Ended
	September 30, 2017 vs. September 30, 2016												March 31, 2018 vs. March 31, 2017
	Increase (Decrease) Due to Change in												Increase (Decrease) Due to Change in
	Rate			Volume			Number of Days			Total			Rate			Volume			Tax Rate			Total
Interest-bearing deposits	$	13,757		$	1,630		$	(41	)	$	15,346		$	6,453		$	805		$	—		$	7,258
Federal funds sold and resell agreements	202			148			(1		)	349			148			506			—			654
Securities:
Taxable	(4,440		)	(726		)	(204		)	(5,370		)	386			(5,130		)	—			(4,744		)
Tax-exempt	(9,516		)	32,818			—			23,302			(2,852		)	3,788			(22,177		)	(21,241		)
Loans, net of unearned discounts	28,934			25,851			(1,257		)	53,528			16,798			12,908			(1,195		)	28,511
Total earning assets	28,937			59,721			(1,503		)	87,155			20,933			12,877			(23,372		)	10,438
Savings and interest checking	—			117			(3		)	114			847			17			—			864
Money market deposit accounts	3,391			6			(13		)	3,384			6,545			17			—			6,562
Time accounts	231			(41		)	(3		)	187			680			(3		)	—			677
Public funds	721			(6		)	—			715			687			(20		)	—			667
Federal funds purchased and repurchase agreements	638			60			(1		)	697			470			25			—			495
Junior subordinated deferrable interest debentures	497			1			—			498			234			—			—			234
Subordinated notes payable and other notes	1,875			(137		)	—			1,738			529			267			—			796
Total interest-bearing liabilities	7,353			—			(20		)	7,333			9,992			303			—			10,295
Net change	$	21,584		$	59,721		$	(1,483	)	$	79,822		$	10,941		$	12,574		$	(23,372	)	$	143

Taxable-equivalent net interest income for the three months ended ~~September 30, 2017~~March 31, 2018 increased ~~$28.7 million,~~$143 thousand, or ~~12.2%~~0.1%, ~~while~~compared to the same period in 2017. Taxable-equivalent net interest income for the three months ended March 31, 2018 was impacted by the reduction in the U.S. federal statutory income tax rate from 35% to 21% under the Tax Cuts and Jobs Act enacted on December 22, 2017. As a result of the tax rate reduction, taxable-equivalent net interest income for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 based on a 21% tax rate was approximately $23.4 million lower than would have been the case based on a 35% tax rate. Excluding the effect of the tax rate reduction, taxable-equivalent net interest income effectively increased ~~$79.8~~approximately $23.5 million ~~or 11.5%,~~during the three months ended March 31, 2018 compared to the same ~~periods in 2016. Taxable-equivalent net interest income for the nine months ended September 30, 2017 included 273 days compared to 274 days for the same~~ period in 2016 as a result of the leap year. The additional day added approximately $1.5 million to taxable-equivalent net interest income during the nine months ended September 30, 2016. Excluding the impact of the additional day results in an2017. This effective increase in taxable-equivalent net interest income of approximately $81.3 million during the nine months ended September 30, 2017. The increases in taxable-equivalent net interest income during the three and nine months ended September 30, 2017, excluding the impact of the aforementioned additional day during the nine months ended September 30, 2016, werewas primarily related to ~~the impact of increases in the average volume of tax-exempt securities, loans and interest-bearing deposits as well as~~ increases in the average yields on loans and interest-bearing deposits ~~partly offset by the impact of decreases in the average yields on tax-exempt and taxable securities and the impact of~~combined with increases in the average ~~rate~~volumes of loans and tax-exempt securities. The impact of these items was partly offset by an increase in the average rates paid on interest-bearing ~~liabilities.~~ deposits and other borrowed funds, a decrease in the average volume of taxable securities and a decrease in the average yield on tax-exempt securities, notwithstanding the effect of the tax rate reduction.

The average volume of interest-earning assets for the three months ended ~~September 30, 2017~~March 31, 2018 increased ~~$1.3 billion, while the average volume of interest-earning assets during the nine months ended September 30, 2017 increased $1.7 billion~~$995.0 million compared to the same ~~periods~~period in ~~2016.~~2017. The increase ~~in average earning assets during the three months ended September 30, 2017,~~ included a ~~$1.1~~$1.2 billion increase in average loans, a ~~$377.0~~$388.2 million increase in average tax-exempt securities, ~~and~~ a ~~$161.3~~$497.9 million increase in average interest-bearing deposits, federal funds sold and resell agreements partly offset by a $421.2 million decrease in average taxable securities. The increase in average earning assets during the nine months ended September 30, 2017, included an $821.8 million increase in average loans, a $648.9 million increase in average tax-exempt securities and a $384.9 million increase in average interest-bearing deposits partly offset by a $133.6 million$1.1 billion decrease in average taxable securities.

The taxable-equivalent net interest margin ~~increased 20~~decreased 12 basis points from ~~3.53%~~3.64% during the three months ended ~~September 30, 2016~~March 31, 2017 to ~~3.73%~~3.52% during the three months ended ~~September 30, 2017 and increased 13 basis points from 3.56% during the nine months ended September 30, 2016 to 3.69% during the nine months ended September 30, 2017.~~March 31, 2018. The ~~increases in the~~taxable-equivalent net interest margin for the three months ended March 31, 2018 was impacted by the aforementioned reduction in the U.S. federal statutory income tax rate. As a result of the tax rate reduction, the taxable-equivalent net interest margin for the three months ended March 31, 2018 based on a 21% tax

rate was approximately 32 basis points lower than would have been the case based on a 35% tax rate. Excluding the effect of the tax rate reduction, the taxable-equivalent net interest margin effectively increased 20 basis points during the three ~~and nine~~ months ended ~~September 30, 2017 were~~March 31, 2018 compared to the same period in 2017. This effective increase was primarily ~~due~~related to increases in the average yields on loans, interest-bearing deposits and federal funds sold and resell agreements partly offset by an increases in the average cost of interest-bearing deposits and other borrowed funds and a decrease in the average yield on ~~interest earning assets.~~ tax-exempt securities, notwithstanding the effect of the tax rate reduction.

The average taxable-equivalent yield on interest-earning assets increased 283 basis points from ~~3.57%~~3.68% during the three months ended ~~September 30, 2016~~March 31, 2017 to ~~3.85%~~3.71% during the three months ended ~~September 30, 2017 and increased 17 basis points from 3.60% during the nine months ended September 30, 2016 to 3.77% during the nine months ended September 30, 2017.~~March 31, 2018. The ~~increases~~increase in the average yield on interest earning assets during the three ~~and nine~~ months ended ~~September 30, 2017 were mostly~~March 31, 2018 was primarily due to increases in the average yields on loans, interest-bearing deposits and ~~loans.~~federal funds sold and resell agreements mostly offset by a decrease in the average taxable-equivalent yield on tax exempt securities, primarily because of the tax rate reduction, as further discussed below. The average taxable-equivalent yield on interest-earning assets is primarily impacted by changes in market interest rates, ~~as well as~~ changes in the volume and relative mix of interest-earning ~~assets.~~assets and statutory tax rates.

The average taxable-equivalent yield on loans increased 3250 basis points from ~~4.00%~~4.15% during the ~~first nine~~three months ~~of 2016~~ended March 31, 2017 to ~~4.32%~~4.65% during the ~~first nine~~three months ~~of 2017.~~ended March 31, 2018. The average taxable-equivalent yield on loans was positively impacted by the increases in market interest rates ~~compared~~discussed above. Due to the ~~same period~~relative proportion of our tax-exempt loan portfolio to total loans, the reduction in ~~2016, as discussed above.~~the U.S. federal statutory income tax rate did not significantly impact the overall average taxable-equivalent yield on loans during the three months ended March 31, 2018. The average volume of loans ~~during~~for the ~~first nine~~three months ~~of 2017~~ended March 31, 2018 increased ~~$821.8 million,~~$1.2 billion, or ~~7.1%~~10.0%, compared to the same period in ~~2016.~~2017. Loans made up approximately ~~43.8%~~45.8% of average interest-earning assets during the ~~first nine~~three months ~~of 2017~~ended March 31, 2018 compared to ~~43.6%~~43.2% during the same period in ~~2016.~~

2017.

The average taxable-equivalent yield on securities was ~~3.96%~~3.36% during the ~~first nine~~three months ~~of 2017,~~ended March 31, 2018, decreasing 563 basis points from ~~4.01%~~3.99% during the ~~first nine~~three months ended March 31, 2017. The decrease in the average taxable-equivalent yield on securities was primarily related to a decrease in the average taxable-equivalent yield on tax exempt securities partly offset by an increase in the relative proportion of ~~2016. Despite the fact that~~higher-yielding tax exempt securities to total securities and, to a lesser extent, an increase in the average yield on taxable ~~securities decreased 12 basis points from 2.02% during the first nine months of 2016 to 1.90% during the first nine months of 2017 and the~~securities. The average taxable-equivalent yield on tax-exempt securities decreased 19132 basis ~~point~~points from ~~5.58%~~5.44% during the ~~first nine~~three months ~~of 2016~~ended March 31, 2017 to ~~5.39%~~4.12% during the ~~first nine~~three months ended March 31, 2018. This decrease was primarily related to the aforementioned reduction in the U.S. federal statutory income tax rate. As a result of ~~2017,~~ the tax rate reduction, the taxable-equivalent yield on tax exempt securities for the three months ended March 31, 2018 based on a 21% tax rate was approximately116 basis points lower than would have been the case based on a 35% tax rate. Excluding the effect of the tax rate reduction, the taxable-equivalent yield on tax exempt securities effectively decreased 16 basis points during the three months ended March 31, 2018 compared to the same period in 2017. The overall average yield on total securities ~~only decreased 5 basis points because of~~was positively impacted by a higher proportion of average securities invested in ~~higher yielding tax-exempt~~higher-yielding tax exempt securities during the ~~first nine~~three months ~~of 2017~~ended March 31, 2018 compared to the same period in ~~2016.~~2017. Tax exempt securities made up approximately ~~58.8%~~64.8% of total average securities during the ~~first nine~~three months ~~of 2017,~~ended March 31, 2018, compared to ~~55.9%~~58.0% during the same period in ~~2016.~~2017. The average yield on taxable securities increased 3 basis points from 1.96% during the three months ended March 31, 2017 to 1.99% during the three months ended March 31, 2018. The average volume of total securities during the ~~first nine~~three months ~~of 2017 increased $515.3~~ended March 31, 2018 decreased $707.9 million, or ~~4.3%~~5.6%, compared to the same period in ~~2016.~~2017. Securities made up approximately ~~44.1%~~40.8% of average interest-earning assets during the ~~first nine~~three months ~~of 2017~~ended March 31, 2018 compared to ~~45.1%~~44.8% during the same period in ~~2016.~~2017.

Average interest-bearing deposits, federal funds sold and resell agreements ~~and interest-bearing deposits during~~for the ~~first nine~~three months ~~of 2017~~ended March 31, 2018 increased ~~$407.3~~$497.9 million, or 14.8%, compared to the same period in ~~2016.The~~2017.The increase in average interest-bearing deposits, federal funds sold and resell agreements ~~and interest-bearing deposits~~ was primarily related to growth in average deposits. ~~Federal~~Interest-bearing deposits, federal funds sold and resell agreements ~~and interest-bearing deposits~~ made up approximately ~~12.1%~~13.4% of average interest-earning assets during the ~~first nine~~three months ~~of 2017~~ended March 31, 2018 compared to ~~11.3%~~12.0% during the same period in ~~2016.~~2017. The combined average yield on interest-bearing deposits, federal funds sold and resell agreements ~~and interest-bearing deposits~~ was ~~1.07%~~1.56% during the ~~first nine~~three months ~~of 2017~~ended March 31, 2018 compared to ~~0.51%~~0.84% during the same period in ~~2016.~~2017. As discussed above, the effective federal funds rate began 2017 at 0.75% and remained at that level until March 2017, when it increased ~~from 0.50% to 0.75% in December 2016, increased from 0.75%~~25 basis points to 1.00%. During the remainder of 2017, the effective federal funds rate increased an additional 50 basis points (25 basis points in each of June and December) to end 2017 at 1.50%. In March ~~2017 and~~2018, the effective federal funds rate increased ~~from 1.00%~~25 basis points to ~~1.25% in June 2017.~~end the first quarter at 1.75%.

The average rate paid on interest-bearing liabilities was ~~0.13%~~0.33% during the ~~first nine~~three months ~~of 2017,~~ended March 31, 2018, increasing 525 basis points from 0.08% during the same period in ~~2016.~~2017. Average deposits increased ~~$1.5 billion~~$608.2 million ($246.0 million non-interest bearing and $362.2 million interest-bearing) during the ~~first nine~~three months ~~of 2017~~ended March 31, 2018 compared to the same period in 2016. Average non-interest-bearing deposits for the first nine months of 2017 increased $832.2 million compared to the same period in 2016, while average interest-bearing deposits for the first nine months of 2017 increased $699.7 million compared to the same period in 2016.2017. The ratio of average interest-bearing deposits to total average deposits ~~was 58.3%~~remained unchanged during the ~~first nine~~comparable periods, totaling 58.5% during both the three months ~~of 2017 compared to 59.1% during the same period in 2016.~~ended March 31, 2018 and 2017. The average cost of deposits is primarily impacted by changes in market interest rates as well as changes in the volume and relative mix of interest-bearing deposits. The average cost of interest-bearing deposits and total deposits was ~~0.09%~~0.28% and ~~0.05%~~0.16%, respectively, during the ~~first nine~~three months ~~of 2017~~ended March 31, 2018 compared

to 0.05% and 0.03%, respectively, during the ~~first nine~~three months ~~of 2016.~~ended March 31, 2017. The average cost of deposits during ~~2017~~2018 was impacted by ~~the aforementioned~~ increases in the interest rates ~~paid~~we pay on most of our interest-bearing deposit products ~~during~~as a result of the ~~third quarter.~~aforementioned increases in market interest rates.

Our net interest spread, which represents the difference between the average rate earned on earning assets and the average rate paid on interest-bearing liabilities, was ~~3.64%~~3.38% during the first ~~nine~~three months of ~~2017~~2018 compared to ~~3.52%~~3.60% during the same period in ~~2016.~~2017. Our net interest spread during the three months ended March 31, 2018 was negatively impacted by the aforementioned reduction in the U.S. federal statutory income tax rate, which limited growth in the average taxable-equivalent yield on interest earning assets despite increases in market interest rates. The net interest spread during the three months ended March 31, 2018 was further negatively impacted by the increases in the average cost of interest-bearing deposits and other borrowed funds. The net interest spread, as well as the net interest margin, will be impacted by future changes in short-term and long-term interest rate levels, as well as the impact from the competitive environment. A discussion of the effects of changing interest rates on net interest income is set forth in Item 3. Quantitative and Qualitative Disclosures About Market Risk included elsewhere in this report.

Our hedging policies permit the use of various derivative financial instruments, including interest rate swaps, swaptions, caps and floors, to manage exposure to changes in interest rates. Details of our derivatives and hedging activities are set forth in Note 98 - Derivative Financial Instruments in the accompanying notes to consolidated financial statements included elsewhere in this report. Information regarding the impact of fluctuations in interest rates on our derivative financial instruments is set forth in Item 3. Quantitative and Qualitative Disclosures About Market Risk included elsewhere in this report.

Provision for Loan Losses

The provision for loan losses is determined by management as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level which, in management’s best estimate, is necessary to absorb inherent losses within the existing loan portfolio. The provision for loan losses totaled ~~$11.0 million and $27.4~~$6.9 million for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 compared to ~~$5.0 million and $42.7~~$8.0 million for the three ~~and nine~~ months ended ~~September 30, 2016.~~March 31, 2017. See the section captioned “Allowance for Loan Losses” elsewhere in this discussion for further analysis of the provision for loan losses.

Non-Interest Income

The components of non-interest income were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,					Three Months Ended March 31,
	2017			2016			2017			2016		2018			2017
Trust and investment management fees	$	27,493		$	26,451		$	81,690		$	77,806	$	29,587		$	26,470
Service charges on deposit accounts	20,967			20,540			62,934			60,769		20,843			20,769
Insurance commissions and fees	10,892			11,029			34,441			35,812		15,980			13,821
Interchange and debit card transaction fees	5,884			5,435			17,150			15,838		3,158			5,574
Other charges, commissions and fees	10,493			10,703			29,983			29,825		9,007			9,592
Net gain (loss) on securities transactions	(4,867		)	(37		)	(4,917		)	14,866		(19		)	—
Other	10,753			7,993			25,114			21,358		12,889			7,474
Total	$	81,615		$	82,114		$	246,395		$	256,274	$	91,445		$	83,700

Total non-interest income for the three ~~and nine~~ months ended ~~September 30, 2017 decreased $499 thousand, or 0.6% and decreased $9.9~~March 31, 2018 increased $7.7 million, or ~~3.9%~~9.3%, compared to the same periods in 2016, respectively. Excluding the impact of the net gain (loss) on securities transactions, total non-interest income effectively increased $4.3 million, or 5.3%, and $9.9 million, or 4.1%, respectively, for the three and nine months ended September 30, 2017 compared to the same period in ~~2016.~~2017. Changes in the various components of non-interest income are discussed in more detail below.

Trust and Investment Management Fees. Trust and investment management fees for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 increased ~~$1.0~~$3.1 million, or ~~3.9%, and increased $3.9 million, or 5.0%~~11.8%, compared to the same ~~periods~~period in ~~2016, respectively.~~2017. Investment fees are the most significant component of trust and investment management fees, making up approximately ~~83.5%~~84.0% and ~~81.6%~~84.2% of total trust and investment management fees for the first ~~nine~~three months of ~~2017~~2018 and ~~2016,~~2017, respectively. Investment and other custodial account fees are generally based on the market value of assets within a trust account. Volatility in the equity and bond markets impacts the market value of trust assets and the related investment fees.

The increase in trust and investment management fees during the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 compared to the same period in ~~2016~~2017 was primarily the result of increases in trust investment fees (up ~~$1.6 million~~$2.6 million) and, ~~$4.7 million, respectively)~~to a lesser extent, an increase in oil and gas fees (up $345 thousand). The increase in trust investment fees during ~~2017~~2018 was due to higher average equity valuations. The ~~increases~~increase in ~~trust investment fees were partly offset by decreases in estate fees (down $212 thousand and $537 thousand during the three and nine months ended September 30, 2017, respectively) and~~ oil and gas fees ~~(down $294 thousand and $159 thousand during the three and nine months ended September 30, 2017, respectively).~~was related to an increase in energy prices.

At ~~September 30, 2017,~~March 31, 2018, trust assets, including both managed assets and custody assets, were primarily composed of equity securities ~~(49.6%~~(49.8% of assets), fixed income securities ~~(39.1%~~(38.6% of assets) and cash equivalents ~~(6.9%~~(7.0% of assets). The estimated fair value of

these assets was ~~$31.0~~$32.9 billion (including managed assets of ~~$13.9~~$14.2 billion and custody assets of ~~$17.2~~$18.7 billion) at ~~September 30, 2017,~~March 31, 2018, compared to ~~$29.3~~$32.8 billion (including managed assets of ~~$13.4~~$14.1 billion and custody assets of ~~$15.9~~$18.7 billion) at December 31, ~~2016~~2017 and ~~$29.7~~$30.1 billion (including managed assets of ~~$13.3~~$13.6 billion and custody assets of ~~$16.4~~$16.5 billion) at ~~September 30, 2016.~~March 31, 2017.

Service Charges on Deposit Accounts. Service charges on deposit accounts for the three months ended ~~September 30, 2017~~March 31, 2018 increased ~~$427~~$74 thousand, or ~~2.1%~~0.4%, compared to the same period in ~~2016.~~2017. The increase was primarily due to increases in consumer service charges (up ~~$429~~$421 thousand) and overdraft/insufficient funds charges on consumer and commercial accounts (up ~~$315~~$190 thousand and ~~$62~~$94 thousand, respectively) ~~partly~~mostly offset by a decrease in commercial service charges (down $368 thousand). Service charges on deposit accounts for the nine months ended September 30, 2017 increased $2.2 million, or 3.6%, compared to the same period in 2016. The increase was primarily due to increases in overdraft/insufficient funds charges on consumer and commercial accounts (up $1.6 million and $361 thousand, respectively) and consumer service charges (up $451 thousand) partly offset by a decrease in commercial service charges (down $221$630 thousand). Overdraft/insufficient funds charges totaled ~~$8.7~~$8.8 million ($6.8 million consumer and $2.1 million commercial) during the three months ended March 31, 2018 compared to $8.5 million ($6.6 million consumer and $2.0 million commercial) during the ~~three months ended September 30, 2017 compared to $8.4 million ($6.5 million consumer and $1.9 million commercial) during the~~ same period in 2016. Overdraft/insufficient funds charges totaled $25.9 million ($20.0 million consumer and $5.9 million commercial) during the nine months ended September 30, 2017 compared to $23.9 million ($18.4 million consumer and $5.5 million commercial) during the same period in 2016.2017.

Insurance Commissions and Fees. Insurance commissions and fees for the three months ended ~~September 30, 2017 decreased $137 thousand,~~March 31, 2018 increased $2.2 million, or ~~1.2%~~15.6%, compared to the same period in ~~2016.~~2017. The ~~decrease~~increase was related to ~~a decrease~~increases in commission income (up $1.1 million) and contingent income ~~(down $212 thousand) partly offset by an~~(up $1.1 million). The increase in commission income ~~(up $75 thousand). Insurance~~was primarily related to increases in benefit plan commissions and ~~fees for the nine months ended September 30, 2017 decreased $1.4 million, or 3.8%, compared~~commissions on property and casualty policies due to ~~the same period in 2016. The decrease was~~

~~related to a decrease in contingent income (down $2.7 million) partly offset by an increase in commission income (up $1.3 million).~~increased business volumes. Insurance commissions and fees include contingent income totaling ~~$358 thousand and~~ $3.4 million during the three ~~and nine~~ months ended ~~September 30, 2017, respectively,~~March 31, 2018 and ~~$570 thousand and $6.1~~$2.4 million during the same ~~periods~~period in ~~2016.~~2017. Contingent income primarily consists of amounts received from various property and casualty insurance carriers related to the loss performance of insurance policies previously placed. These performance related contingent payments are seasonal in nature and are mostly received during the first quarter of each year. This performance related contingent income totaled ~~$2.1~~$2.9 million and ~~$4.6~~$1.7 million during the ~~nine~~three months ended ~~September 30,~~March 31, 2018 and 2017, ~~and 2016,~~ respectively. The ~~decrease~~increase in performance related contingent income during ~~2017~~2018 was related to ~~a lack of~~ growth within the portfolio and ~~a deterioration~~improvement in the loss performance of insurance policies previously placed. Contingent income also includes amounts received from various benefit plan insurance companies related to the volume of business generated and/or the subsequent retention of such business. This benefit plan related contingent income totaled ~~$311~~$552 thousand and ~~$1.3 million~~$634 thousand during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017, and $417 thousand and $1.5 million during the three and nine months ended September 30, 2016. The increases in commission income during the three and nine months ended September 30, 2016 were primarily related to increases in benefit plan commissions due to increased business volumes partly offset by decreases in commissions on property and casualty policies.respectively.

Interchange and Debit Card Transaction Fees. Interchange fees, or “swipe” fees, are charges that merchants pay to us and other card-issuing banks for processing electronic payment transactions. Interchange and debit card transaction fees consist of income from check card usage, point of sale income from PIN-based debit card transactions and ATM service fees. Beginning in 2018, in connection with the adoption of Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” interchange and debit card transaction fees are reported net of related network costs. See Note 1 - Significant Accounting Policies. Previously, such network costs were reported as a component of other non-interest expense. Interchange and debit card transaction fees for the three ~~and nine~~ months ended ~~September 30, 2017 increased $449 thousand, or 8.3%,~~March 31, 2018 reported on a net basis totaled $3.2 million while interchange and ~~$1.3 million, or 8.3%, compared to the three and nine months ended September 30, 2016. The increases were primarily due to increases in income from~~ debit card ~~transactions (up $381 thousand and $1.0 million~~transaction fees for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2017 ~~respectively)~~reported on a gross basis totaled $5.6 million. A comparison of gross interchange and ~~ATM service~~debit card transaction fees ~~(up $68 thousand~~ and ~~$267 thousand~~interchange and debit card transaction fees net of associated network costs for the ~~three~~reported periods is presented in the table below:



	Three Months Ended March 31,
	2018		2017
Income from debit card transactions	$	5,124	$	4,694
ATM service fees	947		880
Gross interchange and debit card transaction fees	6,071		5,574
Network costs	2,913		3,223
Net interchange and debit card transaction fees	$	3,158	$	2,351

The increase net interchange and ~~nine months ended September 30, 2017, respectively). The increases were~~debit card transaction fees, on a net basis, was primarily related to increased transaction ~~volumes.~~volumes combined with a decrease in network costs.

Federal Reserve rules applicable to financial institutions that have assets of $10 billion or more provide that the maximum permissible interchange fee for an electronic debit transaction is the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction. An upward adjustment of no more than 1 cent to an issuer's debit card interchange fee is allowed if the card issuer develops and implements policies and procedures reasonably designed to achieve certain fraud-prevention standards. The Federal Reserve also has rules governing routing and exclusivity that require issuers to offer two unaffiliated networks for routing transactions on each debit or prepaid product.

Other Charges, Commissions and Fees. Other charges, commissions and fees for the three months ended ~~September 30, 2017~~March 31, 2018 decreased ~~$210~~$585 thousand, or ~~2.0%~~6.1%, compared to the same period in ~~2016.~~2017. The decrease ~~included~~was primarily related to decreases in ~~human resources consulting fee income~~loan

processing fees (down ~~$160~~$610 thousand) and income from ~~corporate finance and~~ capital market advisory services (down ~~$109~~$305 thousand)~~, among other things.~~. These ~~items~~decreases were partly offset by an increase in income related to the sale of mutual funds (up $128 thousand), among other things. Other charges, commissions and fees for the nine months ended September 30, 2017 increased $158 thousand, or 0.5%, compared to the same period in 2016. The increase included increases in income related to the sale of mutual funds (up $911 thousand) and wire transfer fees (up $235 thousand), among other things. These items were partly offset by decreases in human resources consulting fee income (down $486 thousand) and income from corporate finance and capital market advisory services (down $476 thousand), among other things. Human resources consulting fee income decreased as we no longer provide these services. Changes in the other aforementioned categories of other charges, commissions and fees wereprimarily due to fluctuations in business volumes.

Net Gain/Loss on Securities Transactions. During the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, we sold certain available-for-sale U.S Treasury securities with an amortized cost totaling ~~$8.2~~$3.0 billion and realized a net loss of ~~$50~~$19 thousand on those sales. The sales were primarily related to securities purchased during ~~2017~~2018 and subsequently sold in connection with our tax planning strategies related to the Texas franchise tax. The gross proceeds from the sales of these securities outside of Texas are included in total revenues/receipts from all sources reported for Texas franchise tax purposes, which results in a reduction in the overall percentage of revenues/receipts apportioned to Texas and subjected to taxation under the Texas franchise tax. We ~~also sold,~~did not realize any gains or losses on securities transactions during the third quarter of 2017, certain other available-for-sale U.S. Treasury securities with an amortized cost totaling $751.4 million and realized a net loss of $4.9 million on those sales. These securities were sold with the intent to reinvest the sales proceeds in higher yielding debt securities and other investments.

~~During the nine~~three months ended September 30, 2016, we sold certain available-for sale U.S. Treasury securities with an amortized cost totaling $8.0 billion and realized a net loss of $37 thousand on those sales. The sales were primarily related to securities purchased during 2016 and subsequently sold in connection with our aforementioned tax planning strategies related to the Texas franchise tax. We also sold certain other available-for-sale U.S. Treasury securities with an amortized cost totaling $749.5 million and realized a net gain of $2.8 million on those sales. The securities sold were due to mature during 2016. Most of the proceeds from the sale of these securities were reinvested into U.S. Treasury securities having comparable yields, but longer-terms. During the nine months ended September 30, 2016, we also sold certain municipal securities that were classified as both available for

sale and held to maturity due to a significant deterioration in the creditworthiness of the issuers. These securities had a total amortized cost of $431.4 million and we realized a gain of $12.1 million on those sales. Refer to our 2016 Form 10-K for additional information related to these sales.March 31, 2017.

Other Non-Interest Income. Other non-interest income for the three months ended ~~September 30, 2017~~March 31, 2018 increased ~~$2.8~~$5.4 million, or ~~34.5%~~72.5%, compared to the same period in 2016. The increase was primarily related to increases in sundry and other miscellaneous income (up $1.1 million), income from customer derivative and trading activities (up $935 thousand), gains on the sale of foreclosed and other assets (up $724 thousand) and income from customer foreign currency transactions (up $248 thousand). Sundry and other miscellaneous income during the three months ended September 30, 2017 included $1.2 million related to the collection of amounts charged-off by Western National Bank prior to our acquisition and $426 thousand related to recoveries of prior write-offs, among other things, while sundry and other miscellaneous income during the same period in 2016 included $453 thousand related to recoveries of prior write-offs, among other things. The fluctuations in income from customer derivative and trading activities and income from customer foreign currency transactions were primarily related to changes in business volumes. During the third quarter of 2017, gains on the sale of foreclosed and other assets included $700 thousand related to amortization of the deferred gain on our headquarters building, which we sold in December 2016.

~~Other non-interest income for the nine months ended September 30, 2017 increased $3.8 million, or 17.6%, compared to the same period in 2016.~~2017. The increase was primarily related to increases in gains on the sale of foreclosed and other assets (up ~~$1.5~~$3.8 million), ~~sundry and other miscellaneous income (up $1.5 million), income from customer foreign currency transactions (up $497 thousand) and~~ income from customer derivative and trading activities (up ~~$422 thousand), among other things, partly offset by decreases in lease rental~~$1.4 million) and income ~~(down $384 thousand) and earnings on the cash surrender value of life insurance policies (down $311~~from customer foreign currency transactions (up $295 thousand), among other things. ~~Sundry income during~~During the ~~nine months ended September 30, 2017~~first quarter of 2018, gains on the sale of foreclosed and other assets included ~~the aforementioned $1.2~~$3.7 million related to gains on the ~~collection~~sale of ~~amounts charged-off by Western National Bank prior to our acquisition, $864 thousand related to the settlement of a non-solicitation agreement~~various branch and $541 thousand related to recoveries of prior write-offs among other things, while sundry and other miscellaneous income during the same period in 2016 included $1.1 million related to recoveries of prior write-offs, among other things.operational facilities. The fluctuations in income from customer foreign currency transactions and income from customer derivative and trading activities were primarily related to changes in business volumes. ~~During the first nine months of 2017, gains on the sale of foreclosed and other assets included $2.2 million related to amortization of the aforementioned deferred gain on our headquarters building.~~

Non-Interest Expense

The components of non-interest expense were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2017		2016		2017		2016		2018		2017
Salaries and wages	$	84,388	$	79,411	$	247,895	$	236,814	$	86,683	$	82,512
Employee benefits	17,730		17,844		57,553		55,861		21,995		21,625
Net occupancy	19,391		18,202		57,781		53,631		19,740		19,237
Furniture and equipment	18,743		17,979		54,983		53,474
Technology, furniture and equipment									19,679		17,990
Deposit insurance	4,862		4,558		15,347		12,412		4,879		4,915
Intangible amortization	405		586		1,301		1,869		388		458
Other	41,304		41,925		127,929		125,048		43,247		41,178
Total	$	186,823	$	180,505	$	562,789	$	539,109	$	196,611	$	187,915

Total non-interest expense for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 increased ~~$6.3~~$8.7 million, or ~~3.5% and $23.7 million, or 4.4%~~4.6%, compared to the same ~~periods~~period in ~~2016.~~2017. Changes in the various components of non-interest expense are discussed below.

Salaries and Wages. Salaries and wages for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 increased ~~$5.0~~$4.2 million, or ~~6.3%, and $11.1 million, or 4.7%~~5.1%, compared to the same ~~periods~~period in ~~2016.~~2017. The increase was primarily related to an increase in salaries, due to an increase in the number of employees and normal annual merit and market increases, as well as ~~increases~~an increase in ~~stock compensation and~~ incentive compensation. Salaries and wages during the three and nine months ended September 30, 2017 also included approximately $1.2 million in severance expense primarily related to the closure of certain branch locations.

Employee Benefits. Employee benefits expense for the three months ended ~~September 30, 2017 decreased $114~~March 31, 2018 increased $370 thousand, or ~~0.6%~~1.7%, compared to the same period in ~~2016.~~2017. The ~~decrease~~increase was primarily due to ~~decreases~~increases in ~~medical insurance expense (down $502 thousand), expenses related to our defined benefit retirement plans (down $302~~payroll taxes (up $482 thousand) and ~~other employee benefits (down $120 thousand) partly offset by an increase in~~ expenses related to our 401(k) and profit sharing plans (up ~~$851~~$358 thousand)~~. Employee~~

benefits expense for the nine months ended September 30, 2017 increased $1.7 million, or 3.0%, compared to the same period in 2016. The increase was primarily due to increases in expenses related to our 401(k) and profit sharing plans (up $1.6 million) and payroll taxes (up $1.1 million) partly offset by a decrease in expenses related to our defined benefit retirement plans, ~~(down $1.1 million).~~as further discussed below.

During the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2018, we recognized a combined net periodic pension ~~expense~~benefit of ~~$125~~$254 thousand ~~and $376 thousand, respectively,~~ related to our defined benefit retirement plans compared to a combined net periodic pension expense of ~~$427~~$125 thousand ~~and $1.4 million~~ during the same ~~periods~~period in 2016. Net periodic pension expense during the nine months ended September 30, 2016 included $187 thousand in supplemental executive retirement plan (“SERP”) settlement costs related to the retirement of a former executive officer.2017. Our defined benefit retirement and restoration plans were frozen effective as of December 31, 2001 and were replaced by a profit sharing plan. Management believes these actions helped to reduce the volatility in retirement plan expense. However, we still have funding obligations related to the defined benefit and restoration plans and could recognize retirement expense related to these plans in future years, which would be dependent on the return earned on plan assets, the level of interest rates and employee turnover. See Note 12 - Defined Benefit Plans for additional information related to our net periodic pension benefit/cost.

Net Occupancy. Net occupancy expense for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 increased ~~$1.2 million,~~$503 thousand, or ~~6.5%, and $4.2 million, or 7.7%~~2.6%, compared to the same ~~periods~~period in ~~2016.~~2017. The increase ~~during the three months ended September 30, 2017~~ was primarily related to increases in lease expense (up ~~$782~~$503 thousand)~~, property taxes (up $338 thousand), utilities~~ and repairs and maintenance/service contracts expense (up ~~$140 thousand) and depreciation on leasehold improvements (up $125~~$192 thousand) partly offset by a decrease in ~~building depreciation (down $372 thousand). The increase during the nine months ended September 30, 2017 was primarily related to increases in lease expense (up $2.6 million),~~ property taxes ~~(up $1.0 million), depreciation on leasehold improvements (up $604~~(down $188 thousand), repairs and maintenance/service contracts expense (up $535 thousand) and utilities expense (up $336 thousand) partly offset by a decrease in building depreciation (down $1.1 million). The increases in lease expense and the decreases in building depreciation during the reported periods were primarily related to the sale and lease back of our headquarters building in December 2016, as more fully discussed in our 2016 Form 10-K.among other things.

Technology, Furniture and Equipment. ~~Furniture~~Technology, furniture and equipment expense for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 increased ~~$764 thousand, or 4.2%, and $1.5~~$1.7 million, or ~~2.8%~~9.4%, compared to the same ~~periods~~period in ~~2016.~~2017. The ~~increases were~~increase was primarily related to increases in software maintenance (up ~~$974 thousand~~$1.3 million), software amortization (up $412 thousand) and ~~$2.3 million for the three and nine months ended September 30, 2017, respectively) and depreciation on furniture and equipment~~service contracts expense (up ~~$198 thousand and $1.4 million for the three and nine months ended September 30, 2017, respectively)~~$311 thousand) partly offset by a decrease in depreciation on furniture and equipment ~~rental expense~~ (down ~~$576 thousand and $1.6 million for the three and nine months ended September 30, 2017, respectively), and, for the nine months ended September 30, 2017, a decrease in service contracts (down $413~~$368 thousand)~~, among other things.~~.

Deposit Insurance. Deposit insurance expense totaled $4.9 million ~~and $15.3 million~~ for both the three ~~and nine~~ months ended ~~September 30, 2017 compared to $4.6 million~~March 31, 2018 and ~~$12.4 million for~~2017. The level of deposit insurance expense during the ~~three and nine months ended September 30, 2016. Deposit insurance expense~~comparable periods was impacted by ~~an increase in assets and, during the nine-months ended September 30, 2017, an increase in the overall assessment rate. The increase in the assessment rate was partly related to~~ a ~~new~~ surcharge that became applicable during the third quarter of 2016. In August 2016, the Federal Deposit Insurance Corporation (“FDIC”) announced that the Deposit Insurance Fund (“DIF”) reserve ratio had surpassed 1.15% as of June 30, 2016. As a result, beginning in the third quarter of 2016, the range of initial assessment rates for all institutions was adjusted downward and institutions with $10 billion or more in assets were assessed a quarterly surcharge. The quarterly surcharge will continue to be assessed until such time as the reserve ratio reaches the statutory minimum of 1.35% required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

~~Intangible Amortization~~. Intangible amortization is primarily related to core deposit intangibles and, to a lesser extent, intangibles related to customer relationships and non-compete agreements. Intangible amortization for the three and nine months ended September 30, 2017 decreased $181 thousand, or 30.9%, and $568 thousand, or 30.4%, respectively, compared to the same periods in 2016. The decrease in amortization was primarily related to the completion of amortization of certain previously recognized intangible assets as well as a reduction in the annual amortization rate of certain previously recognized intangible assets as we use an accelerated amortization approach which results in higher amortization rates during the earlier years of the useful lives of intangible assets.

Other Non-Interest Expense. Other non-interest expense for the three months ended ~~September 30, 2017 decreased $621 thousand,~~March 31, 2018 increased $2.1 million, or ~~1.5%~~5.0%, compared to the same period in ~~2016. The decrease included decreases~~2017. As discussed above in ~~check card expense (down $1.2 million), sundry~~the section captioned “Interchange and ~~other miscellaneous expense (down $711 thousand), regulatory examination fees (down $198 thousand) and losses on~~Debit Card Transaction Fees,” in connection with the ~~sale/write-down~~adoption of ~~foreclosed and other assets (down $170 thousand). These items were partly offset by increases~~ASU 2014-09 in guard services expense (up $580 thousand), the provision for losses on unfunded loan commitments (up$250 thousand), business development expenses (up $207 thousand), point-of-sale related expenses (up $205 thousand), platform fees2018, network costs associated with ~~our managed mutual funds (up $198 thousand)~~debit card and ~~travel/meals~~ATM transactions are now reported netted against the related fees from such transactions and ~~entertainment expense (up $194 thousand), among~~included in Interchange and Debit Card Transaction Fees in the accompanying Consolidated Statement of Income for the three months ended March 31, 2018. Previously, such network costs were reported as a component of other ~~things. Other~~non-interest expense. Network costs associated with debit card and ATM transactions totaled $2.9 million and $3.2 million during the three months ended March 31, 2018 and 2017, respectively. Excluding network costs from the three months ended March 31, 2017, other non-interest expense ~~for the nine months ended September 30, 2017~~effectively increased

~~$2.9 million, or 2.3%, compared to the same period in 2016. The~~ $5.3 million. This increase included increases in ~~guard~~donations expense related to a contribution to our charitable foundation (up $3.7 million); professional services expense (up ~~$1.1~~$2.0 million)~~, fraud losses (up $924 thousand), travel/meals and entertainment expense (up $828 thousand), advertising/promotions expense (up $688 thousand)~~; and outside computer services expense (up ~~$760~~$317 thousand), among other things. These items were partly offset by ~~a decrease~~decreases in ~~check card~~advertising/promotions expense (down ~~$1.8 million)~~$512 thousand), data communications expense (down $436 thousand) and travel/meals and entertainment expense (down $204 thousand), among other things. ~~Guard~~The increase in professional services expense during the ~~three and nine months ended September 30, 2017~~first quarter of 2018 was ~~impacted by the effects of hurricane Harvey during the third quarter. The increase in fraud losses was primarily~~partly related to ~~check cards, ATMs~~an information systems breach which resulted in unauthorized access to a third-party lockbox software program used by certain of our commercial lockbox customers to store digital images. We have stopped the identified unauthorized access and ~~checks.~~are working with a leading cybersecurity firm. We have reported the incident to, and are cooperating with, law-enforcement authorities and our investigation is ongoing. We have contacted each of the affected commercial customers and are working with them to support them in taking appropriate actions. The identified incident did not impact other Frost systems.

Results of Segment Operations

Our operations are managed along two primary operating segments: Banking and Frost Wealth Advisors. A description of each business and the methodologies used to measure financial performance is described in Note 1615 - Operating Segments in the accompanying notes to consolidated financial statements included elsewhere in this report. Net income (loss) by operating segment is presented below:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2017			2016			2017			2016			2018			2017
Banking	$	88,368		$	76,347		$	250,766		$	210,454		$	103,641		$	80,869
Frost Wealth Advisors	6,417			4,797			17,990			13,809			5,634			5,294
Non-Banks	(1,654		)	(925		)	(5,131		)	(3,721		)	(2,795		)	(1,222		)
Consolidated net income	$	93,131		$	80,219		$	263,625		$	220,542		$	106,480		$	84,941

Banking

Net income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 increased ~~$12.0~~$22.8 million, or ~~15.7%, and $40.3 million, or 19.2%~~28.2%, compared to the same ~~periods~~period in ~~2016.~~2017. The increase ~~during the three months ended September 30, 2017~~ was primarily the result of a ~~$24.0~~$25.1 million increase in net interest income, ~~and~~ a ~~$1.8 million decrease in income tax expense partly offset by a $6.1~~$4.6 million increase in non-interest expense, a $5.9 million increase in the provision for loan losses and a $1.8 million decrease in non-interest income. The increase during the nine months ended September 30, 2017 was primarily the result of a $65.0 million increase in net interest income and a ~~$15.4~~$1.0 million decrease in the provision for loan losses partly offset by a ~~$20.2~~$7.2 million increase in non-interest expense ~~a $15.4 million decrease in non-interest income~~ and a ~~$4.5 million~~$676 thousand increase in income tax expense.

Net interest income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 increased ~~$24.0~~$25.1 million, or ~~12.5%, and $65.0 million, or 11.4%~~12.2%, compared to the same ~~periods in 2016. Taxable-equivalent net interest income for the first nine months of 2017 included 273 days compared to 274 days for the same~~ period in ~~2016 as a result of the leap year.~~2017. The ~~additional day added approximately $1.5 million~~increase was primarily related to taxable-equivalent net interest income during the first nine months of 2016. Despite the effect of this additional day during 2016, net interest income during the three and nine months ended September 30, 2017 increased due to the impact of increases in the average volume of tax-exempt securities, loans and interest-bearing deposits as well as increases in the average yields on loans and interest-bearing deposits ~~partly offset by the impact of decreases in the average yields on tax-exempt and taxable securities~~ combined with ~~the impact of~~ increases in the average ~~rate~~volumes of loans and tax-exempt securities. The impact of these items was partly offset by an increase in the average rates paid on interest-bearing ~~liabilities.~~deposits and other borrowed funds, a decrease in the average volume of taxable securities and a decrease in the average yield on tax-exempt securities. See the analysis of net interest income included in the section captioned “Net Interest Income” included elsewhere in this discussion.

The provision for loan losses for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 totaled ~~$11.0 million and $27.4~~$6.9 million compared to ~~$5.0 million and $42.7~~$8.0 million for the same ~~periods~~period in ~~2016.~~2017. See the analysis of the provision for loan losses included in the section captioned “Allowance for Loan Losses” included elsewhere in this discussion.

Non-interest income for the three months ended ~~September 30, 2017 decreased $1.8~~March 31, 2018 increased $4.6 million, or ~~3.5%, while non-interest income for the nine months ended September 30, 2017 decreased $15.4 million, or 9.2%~~8.7%, compared to the same ~~periods~~period in 2016. Both the three and nine months ended September 30, 2017 included a net loss on securities transactions of $4.9 million compared to a net loss of $37 thousand during the three months ended September 30, 2016 and a net gain of $14.9 million during the nine months ended September 30, 2016. See the analysis of these net gains and losses included in the section captioned “Net Gain/Loss on Securities Transactions” included elsewhere in this discussion. Excluding the impact of the net gains or losses on securities transactions, total non-interest income during the three and nine months ended September 30, 2017 effectively increased $3.0 million, or 5.9%, and $4.4 million, or 2.9%, respectively compared to the same periods in 20162017. The increase was primarily due to increases in other non-interest income ~~service charges on deposit accounts~~ and ~~interchange~~insurance commissions and ~~debit card transactions~~ fees partly offset by decreases in ~~insurance commissions~~interchange and ~~fees~~debit card transactions fess and other charges, commissions and fees. The ~~increases~~increase in other non-interest income ~~for the three and nine months ended September 30, 2017 were~~was primarily related to increases in gains on the sale of foreclosed and other assets, ~~sundry~~income from customer derivative and trading activities and income from customer foreign currency transactions, among other things. Gains on the sale of foreclosed and other ~~miscellaneous income,~~assets during 2018 included $3.7 million related to gains on the sale of various branch and operational facilities. The fluctuations in income from customer foreign currency transactions and income from customer derivative and trading activities among other things, partly offset by decreases in lease rental income and earnings on the cash surrender value of life insurance policies, among other things. Sundry income during the three and nine months ended September 30, 2017 included $1.2 million related to the collection of amounts charged-off by Western National Bank prior to our acquisition,

among other things. Gains on the sale of foreclosed and other assets during 2017 included the amortization of the deferred gain on our headquarters building, which we sold in December 2016. The increase in service charges on deposit accounts during the three and nine months ended September 30, 2017 were primarily due to increases in overdraft/insufficient funds charges on consumer and commercial accounts and consumer service charges partly offset by decreases in commercial service charges. The increase in interchange and debit card transactions fees during the three and nine months ended September 30, 2017 were primarily due to increases in income from debit card transactions and ATM service fees. The increases were primarily related to ~~increased transaction~~changes in business volumes. The ~~decrease~~increase in insurance commissions and fees ~~during the three and nine months ended September 30, 2017 were~~was related to ~~decreases~~an increase in commission income, primarily related to an increases in benefit plan commissions and commissions on property and casualty policies due to increased business volumes, and an increase in contingent income, primarily related to ~~a lack of~~ growth within the portfolio and ~~a deterioration~~improvement in the loss performance of insurance policies previously ~~placed, partly offset by increases~~placed. In connection with the adoption of a new accounting standard in ~~commission income, primarily~~2018, network costs associated with debit card and ATM transactions are now reported netted against the related ~~to increases~~fees from such transactions. Previously, such network costs were reported as a component of other non-interest expense. If such network costs had been netted against interchange and debit card transaction fees in ~~benefit plan commissions due to~~2017, interchange and debit card transaction fees would have reflected an increase in 2018 as a result of increased ~~business volumes.~~transaction volumes combined with a decrease in network costs. The decrease in other charges, commissions and fees ~~during the three and nine months ended September 30, 2017~~ was primarily due to decreases in ~~human resources consulting fee income~~loan processing fees and income from ~~corporate finance and~~ capital market advisory services ~~among other things, partly offset by increases~~due to fluctuations in ~~wire transfer fees, and for the nine months ended September 30, 2017, an increase in loan processing fees, among other things.~~business volumes. See the analysis of these categories of non-interest income included in the section captioned “Non-Interest Income” included elsewhere in this discussion.

Non-interest expense for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 increased ~~$6.1~~$7.2 million, or ~~4.0%, and $20.2 million, or 4.4%~~4.5%, compared to the same ~~periods~~period in ~~2016.~~2017. The increase ~~during the three months ended September 30, 2017~~ was primarily related to increases in salaries and wages, ~~other non-interest expense and~~technology furniture and equipment expense, and other non-interest expense. The increase ~~during the nine months ended September 30, 2017~~in salaries was primarily related to ~~increases~~an increase in salaries, ~~and wages, other non-interest expense, deposit insurance expense, employee benefits and furniture and equipment expense. The increases in salaries were primarily~~ due to ~~increases~~an increase in the number of employees and normal annual merit and market increases, as well as ~~increases~~an increase in ~~stock compensation and~~ incentive compensation. The ~~increases~~increase in other non-interest expense were primarily related to increases in guard services expense, sundry and other miscellaneous expense and travel/meals and entertainment, among other things. Guard services expense during the three and nine months ended September 30, 2017 was impacted by the effects of hurricane Harvey during the third quarter. The increases intechnology, furniture and equipment expense ~~were~~was primarily related to increases in software maintenance, software amortization and ~~depreciation on furniture and equipment~~service contracts expense partly offset by a decrease in ~~equipment rental~~depreciation on furniture and equipment. The increase in other non-interest expense included increases in donations expense, related to a contribution to our charitable foundation; professional services expense; and outside computer services expense, among other things. The increase in deposit insurance expense during the nine months ended September 30, 2017 was related to an increase in the assessment rate due to a new quarterly surcharge which began in the third quarter of 2016 and an increase in assets. The increase in employee benefits during the nine months ended September 30, 2017 was primarily due to increases in payroll taxes and expenses related to our 401(k) and profit sharing plansThese items were partly offset by decreases in advertising/promotions expense, data communications expense and travel/meals and entertainment expense, among other things. As discussed above, network costs associated with debit card and ATM transactions are now reported netted against the related fees from such transactions, rather than as a ~~decrease in expenses related to our defined benefit retirement plans.~~component of other non-interest expense as was previously the case. See the analysis of these categories of non-interest expense included in the section captioned “Non-Interest Expense” included elsewhere in this discussion.

Frost Insurance Agency, which is included in the Banking operating segment, had gross commission revenues of ~~$10.9 million and $34.6~~$16.1 million during the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 and ~~$11.0 million and $35.9~~$14.0 million during the three ~~and nine~~ months ended ~~September 30, 2016.~~March 31, 2017. The ~~decreases were~~increase was primarily related to ~~decreases in contingent commissions, partly offset by~~ increases in benefit plan ~~commissions.~~commissions and commissions on property and casualty policies due to increased business volumes, and an increase in contingent income, primarily related to growth within the portfolio and improvement in the loss performance of insurance policies previously placed. See the analysis of insurance commissions and fees included in the section captioned “Non-Interest Income” included elsewhere in this discussion.

Frost Wealth Advisors

Net income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 increased ~~$1.6 million,~~$340 thousand, or ~~33.8% and $4.2 million, or 30.3%~~6.4%, compared to the same ~~periods~~period in ~~2016.~~2017. The increase ~~during the three months ended September 30, 2017~~ was primarily due to a $1.7 million increase in net interest income and a $1.3 million increase in non-interest income partly offset by an $873 thousand increase in income tax expense and a $500 thousand increase in non-interest expense. The increase during the nine months ended September 30, 2017 was primarily due to a $5.4$3.3 million increase in non-interest income and a ~~$5.0~~$1.4 million ~~increase~~decrease in income tax expense partly offset by a $2.8 million decrease in net interest income ~~partly offset by~~and a ~~$3.9~~$1.5 million increase in non-interest ~~expense and a $2.3 million increase in income tax~~ expense.

Net interest income for the three ~~and nine~~ months ended ~~September 30, 2017 increased $1.7~~March 31, 2018 decreased $2.8 million, or ~~57.0%, and $5.0 million, or 64.5%~~75.1%, compared to the same ~~periods~~period in ~~2016. The increases~~2017. Beginning in 2018, certain repurchase agreements that were ~~primarily due~~previously allocated to ~~an increase~~the Frost Wealth Advisors segment are now allocated to the Banking segment, which resulted in the ~~funds transfer price received for funds provided related to Frost Wealth Advisors' repurchase agreements and increases~~decrease in ~~the average volume of funds provided.~~net interest income.

Non-interest income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 increased ~~$1.3~~$3.3 million, or ~~4.3%, and $5.4 million, or 6.0%~~10.7%, compared to the same ~~periods~~period in ~~2016.~~2017. The ~~increases~~increase in non-interest income ~~during the three and nine months ended September 30, 2017 were~~was primarily related to ~~increases~~an increase in trust and investment management ~~fees and other charges, commissions and~~ fees. Trust and investment management fee income is the most significant income component for Frost Wealth Advisors. Investment fees are the most significant component of trust and investment management fees, making up approximately ~~83.5%~~84.0% of total trust and investment management fees for the first ~~nine~~three months of ~~2017.~~2018. Investment and other custodial account fees are

generally based on the market value of assets within a trust account. Volatility in the equity and bond markets impacts the market value of trust

assets and the related investment fees. The ~~increases~~increase in trust and investment management fees during the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 compared to the same ~~periods~~period in ~~2016 were~~2017 was primarily the result of increases in trust investment fees and, to a lesser extent, an increase in oil and gas fees. The increase in trust investment fees during ~~2017~~2018 was due to higher average equity ~~valuations~~valuations. The increase in oil and gas fees was related to an increase in the number of accounts. The increase in other charges, commissions and fees during the three and nine months ended September 30, 2017 was primarily due to increases in income related to the sale of mutual funds.energy prices. See the analysis of trust and investment management ~~fees and other charges, commissions and~~ fees included in the section captioned “Non-Interest Income” included elsewhere in this discussion.

Non-interest expense for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 increased ~~$500 thousand, or 1.9%, and $3.9~~$1.5 million, or ~~5.1%~~5.7%, compared to the same periods in ~~2016.~~2017. The ~~increases during the three and nine months ended September 30, 2017 were~~increase was primarily related to increases in ~~net occupancy~~other non-interest expense, salaries and wages and employee ~~benefits partly offset by decreases in other non-interest expense.~~benefits. The increase ~~in net occupancy expense and decrease~~ in other non-interest expense ~~were~~was primarily related to ~~a change~~increases in ~~the way we allocate occupancy expenses~~professional services expense and outside computer services expense, among our operating segments. Beginning in 2017, operating segments receive a direct charge for occupancy expense based upon cost centers within the segment. Such amounts are now reported as occupancy expense. Previously, these costs were included within the allocated overhead and reported as a component of other ~~non-interest expense.~~things. The increases in salaries and wages ~~during the three and nine months ended September 30, 2017 were~~was primarily related to an increases in the number of employees, ~~and~~ normal annual merit and market ~~increases.~~increases and an increase in incentive compensation partly offset by a decrease in stock-based compensation. The increases in employee benefits expense ~~during the three and nine months ended September 30, 2017 were~~was primarily related to increases in payroll taxes and expenses related to our ~~defined benefit retirement plans and medical insurance expense.~~401k plan.

Non-Banks

The Non-Banks operating segment had a net loss of ~~$1.7 million and $5.1~~$2.8 million for the three ~~and nine~~ months ended ~~September 30, 2017, respectively,~~March 31, 2018 compared to a net loss of ~~$925 thousand and $3.7~~$1.2 million for the same ~~periods~~period in ~~2016.~~2017. The ~~increases~~increase in net loss during ~~the three and nine months ended September 30, 2017 were~~2018 was primarily due to ~~increases~~an increase in net interest expense due to an increase in the interest rates paid on our long-term borrowings.

Income Taxes

We recognized income tax expense of ~~$9.9 million and $35.1~~$11.2 million, for an effective tax rate of ~~9.6% and 11.8%~~9.5% for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 compared to ~~$10.9 million and $28.6~~$11.4 million, for an effective tax rate of ~~11.9% and 11.5%~~11.8% for the three ~~and nine~~ months ended ~~September 30, 2016.~~March 31, 2017. The effective income tax rates differed from the U.S. statutory federal income tax ~~rate~~rates of 21% during 2018 and 35% during ~~the comparable periods~~2017 primarily due to the effect of tax-exempt income from loans, securities and life insurance policies and the income tax effects associated with stock-based compensation. The decrease in income tax expense and the effective tax rate during the three months ended ~~September 30, 2017 compared to the same period in 2016~~March 31, 2018 was primarily related to a decrease in the ~~correction of an over-accrual of taxes that resulted from incorrectly classifying certain tax-exempt loans as taxable for~~U.S. statutory federal income tax ~~purposes since 2013. As a result, we recognized tax benefits totaling $3.7 million,~~rate under the Tax Cuts and Jobs Act which ~~included $2.9 million related to the 2013 through 2016 tax years and $756 thousand related to the first and second quarters~~is more fully discussed in our 2017 Form 10-K. The effect of ~~2017. The increase in income tax expense and the effective tax rate during the nine months ended September 30, 2017~~this decrease was ~~primarily related to~~partly offset by an increase in total income with a higher proportion of taxable income relative to tax-exempt income ~~partly offset by~~and the ~~effect~~impact of certain expenses related to meals and entertainment, executive compensation and deposit insurance, among other things, that are no longer deductible as a result of the ~~aforementioned tax benefits related to tax-exempt loans. Excluding the effect of the corrections related to tax-exempt loan interest, our effective tax rates would have been 13.2%~~Tax Cuts and ~~12.7% for the three and nine months ended September 30, 2017, respectively.~~Jobs Act.

Excluding the deferred tax effects related to other comprehensive income, net deferred tax assets totaled $59.9 million at September 30, 2017. This amount is based upon the current statutory federal income tax rate of 35%. There have been recent legislative proposals to reduce the statutory federal income tax rate. While there can be no assurance that a reduction will ultimately occur, any such reduction in the statutory federal income tax rate would impact the carrying value of our net deferred tax assets with a corresponding charge to income tax expense.

Average Balance Sheet

Average assets totaled ~~$30.2~~$31.1 billion for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 representing an increase of ~~$1.7 billion,~~$987.1 million, or ~~6.1%~~3.3%, compared to average assets for the same period in ~~2016.~~2017. The growth in average assets was primarily funded by deposit growth, an increase in average federal funds purchased and repurchase agreements and earnings retention. The increase was primarily reflected in earning assets, which increased ~~$1.7 billion,~~$995.0 million, or ~~6.6%~~3.6%, during the first ~~nine~~three months of ~~2017~~2018 compared to the same period in ~~2016.~~2017. The increase in earning assets included ~~an $821.8 million~~a $1.2 billion increase in average loans, a ~~$648.9~~$388.2 million increase in average tax-exempt securities, ~~and~~ a ~~$384.9~~$497.9 million increase in average interest-bearing deposits, federal funds sold and resell agreements partly offset by a ~~$133.6 million~~$1.1 billion decrease in average taxable securities. Average deposit growth included ~~an $832.2~~a $246.0 million increase in non-interest bearing deposits and a ~~$699.7~~$362.2 million increase in interest-bearing deposit accounts. Average non-interest bearing deposits made up ~~41.7% and 40.9%~~41.5% of average total deposits during the first ~~nine~~three months of ~~2017~~2018 and ~~2016,~~2017, respectively.

Loans

Loans were as follows as of the dates indicated:


	September 30, 2017		Percentage of Total		December 31, 2016		Percentage of Total		March 31, 2018		Percentage of Total		December 31, 2017		Percentage of Total
Commercial and industrial	$	4,677,923	36.8	%	$	4,344,000	36.3	%	$	4,876,523	36.5	%	$	4,792,388	36.4	%
Energy:
Production	1,094,927		8.6		971,767		8.1		1,125,321		8.4		1,182,326		9.0
Service	159,893		1.3		221,213		1.8		192,115		1.4		171,795		1.3
Other	132,240		1.0		193,081		1.7		129,552		0.9		144,972		1.1
Total energy	1,387,060		10.9		1,386,061		11.6		1,446,988		10.7		1,499,093		11.4
Commercial real estate:
Commercial mortgages	3,714,172		29.2		3,481,157		29.1		4,060,946		30.4		3,887,742		29.6
Construction	1,082,229		8.5		1,043,261		8.7		1,076,785		8.1		1,066,696		8.1
Land	307,701		2.4		311,030		2.6		317,189		2.4		331,986		2.5
Total commercial real estate	5,104,102		40.1		4,835,448		40.4		5,454,920		40.9		5,286,424		40.2
Consumer real estate:
Home equity loans	357,542		2.8		345,130		2.9		355,715		2.7		355,342		2.7
Home equity lines of credit	288,981		2.3		264,862		2.2		295,677		2.2		291,950		2.2
Other	367,948		2.9		326,793		2.7		388,271		2.9		376,002		2.9
Total consumer real estate	1,014,471		8.0		936,785		7.8		1,039,663		7.8		1,023,294		7.8
Total real estate	6,118,573		48.1		5,772,233		48.2		6,494,583		48.7		6,309,718		48.0
Consumer and other	522,748		4.2		473,098		3.9		545,935		4.1		544,466		4.2
Total loans	$	12,706,304	100.0	%	$	11,975,392	100.0	%	$	13,364,029	100.0	%	$	13,145,665	100.0	%

Loans increased ~~$730.9~~$218.4 million, or ~~6.1%~~1.7%, compared to December 31, ~~2016.~~2017. The majority of our loan portfolio is comprised of commercial and industrial loans, energy loans and real estate loans. Commercial and industrial loans made up ~~36.8%~~36.5% and ~~36.3%~~36.4% of total loans at ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, respectively, while energy loans made up ~~10.9%~~10.7% and ~~11.6%~~11.4% of total loans, respectively, and real estate loans made up ~~48.1%~~48.7% and ~~48.2%~~48.0% of total loans, respectively, at those dates. Real estate loans include both commercial and consumer balances. Selected details related to our loan portfolio segments are presented below. Refer to our ~~2016~~2017 Form 10-K for a more detailed discussion of our loan origination and risk management processes.

Commercial and industrial. Commercial and industrial loans increased ~~$333.9~~$84.1 million, or ~~7.7%~~1.8%, during the first ~~nine~~three months of ~~2017.~~2018. Our commercial and industrial loans are a diverse group of loans to small, medium and large businesses. The purpose of these loans varies from supporting seasonal working capital needs to term financing of equipment. While some short-term loans may be made on an unsecured basis, most are secured by the assets being financed with collateral margins that are consistent with our loan policy guidelines. The commercial and industrial loan portfolio also includes commercial leases and purchased shared national credits ("SNC"s).

Energy. Energy loans include loans to entities and individuals that are engaged in various energy-related activities including (i) the development and production of oil or natural gas, (ii) providing oil and gas field servicing, (iii) providing energy-related transportation services (iv) providing equipment to support oil and gas drilling (v) refining petrochemicals, or (vi) trading oil, gas and related commodities. Energy loans ~~increased $999 thousand,~~decreased $52.1 million, or ~~0.1%~~3.5%, during the first ~~nine~~three months of ~~2017~~2018 compared to December 31, ~~2016.~~2017. The ~~increase~~decrease was related to ~~an increase~~a decrease in production and other loans mostly offset by ~~decreases~~an increase in service ~~and other~~ loans. The average loan size, the significance of the portfolio and the specialized nature of the energy industry requires a highly

prescriptive underwriting policy. Exceptions to this policy are rarely granted. Due to the large borrowing requirements of this customer base, the energy loan portfolio includes participations and SNCs.

Purchased Shared National Credits. Purchased shared national credits are participations purchased from upstream financial organizations and tend to be larger in size than our originated portfolio. Our purchased SNC portfolio totaled ~~$795.4~~$778.5 million at ~~September 30, 2017, increasing $23.3~~March 31, 2018, decreasing $56.5 million, or ~~3.0%~~6.8%, from ~~$772.2~~$835.0 million at December 31, ~~2016.~~2017. At ~~September 30, 2017, 53.4%~~March 31, 2018, 53.8% of outstanding purchased SNCs were related to the energy industry, ~~and 16.4% of outstanding purchased SNCs were~~while 12.0% related to the construction industry and 10.4% related to the investment management industry. The remaining purchased SNCs were diversified throughout various other industries, with no other single industry exceeding 10% of the total purchased SNC portfolio. Additionally, almost all of the outstanding balance of purchased SNCs was included in the energy and commercial and industrial portfolio, with the remainder included in the real estate categories. SNC participations are originated in the normal course of business to meet the needs of our customers. As a matter of policy, we generally only participate in SNCs for companies headquartered in or which have significant operations within our market areas. In addition, we must have direct access to the company’s management, an existing banking relationship or the expectation of broadening the relationship with other banking products and services within the following 12 to 24 months. SNCs are reviewed at least quarterly for credit quality and business development successes.

Commercial Real Estate. Commercial real estate loans totaled ~~$5.1~~$5.5 billion at ~~September 30, 2017,~~March 31, 2018, increasing ~~$268.7~~$168.5 million compared to ~~$4.8~~$5.3 billion at December 31, ~~2016.~~2017. At such dates, commercial real estate loans represented ~~83.4%~~84.0% and 83.8% of total real estate loans, respectively. The majority of this portfolio consists of commercial real estate mortgages, which includes both permanent and intermediate term loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Consequently, these loans must undergo the analysis and underwriting process of a commercial and industrial loan, as well as that of a real estate loan. At ~~September 30, 2017,~~March 31, 2018, approximately 51% of the outstanding principal balance of our commercial real estate loans were secured by owner-occupied properties.

Consumer Real Estate and Other Consumer Loans. The consumer loan portfolio, including all consumer real estate and consumer installment loans, totaled ~~$1.5~~$1.6 billion at ~~September 30, 2017~~both March 31, 2018 and ~~$1.4 billion at~~ December 31, ~~2016.~~2017. Consumer real estate loans, increased ~~$77.7~~$16.4 million, or ~~8.3%~~1.6%, from December 31, ~~2016.~~2017. Combined, home equity loans and lines of credit made up ~~63.7%~~62.7% and ~~65.1%~~63.3% of the consumer real estate loan total at ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, respectively. We offer home equity loans up to 80% of the estimated value of the personal residence of the borrower, less the value of existing mortgages and home improvement loans. In general, we do not originate 1-4 family mortgage loans; however, from time to time, we may invest in such loans to meet the needs of our customers or for other regulatory compliance purposes. Consumer and other loans, increased ~~$49.7~~$1.5 million, or ~~10.5%~~0.3%, from December 31, ~~2016.~~2017. The consumer and other loan portfolio primarily consists of automobile loans, overdrafts, unsecured revolving credit products, personal loans secured by cash and cash equivalents and other similar types of credit facilities.

Non-Performing Assets

Non-performing assets and accruing past due loans are presented in the table below. Troubled debt restructurings on non-accrual status are reported as non-accrual loans. Troubled debt restructurings on accrual status are reported separately.


	September 30, 2017			December 31, 2016			March 31, 2018			December 31, 2017
Non-accrual loans:
Commercial and industrial	$	37,239		$	31,475		$	17,314		$	46,186
Energy	96,717			57,571			93,097			94,302
Commercial real estate:
Buildings, land and other	6,773			8,550			10,858			7,589
Construction	—			—			—			—
Consumer real estate	2,167			2,130			1,878			2,109
Consumer and other	208			425			5			128
Total non-accrual loans	143,104			100,151			123,152			150,314
Restructured loans	4,815			—			12,058			4,862
Foreclosed assets:
Real estate	2,094			2,440			1,371			2,116
Other	—			—			—			—
Total foreclosed assets	2,094			2,440			1,371			2,116
Total non-performing assets	$	150,013		$	102,591		$	136,581		$	157,292

Ratio of non-performing assets to:
Total loans and foreclosed assets	1.18		%	0.86		%	1.02		%	1.20		%
Total assets	0.48			0.34			0.43			0.50
Accruing past due loans:
30 to 89 days past due	$	52,044		$	55,456		$	98,484		$	93,428
90 or more days past due	27,121			24,864			19,276			14,432
Total accruing past due loans	$	79,165		$	80,320		$	117,760		$	107,860
Ratio of accruing past due loans to total loans:
30 to 89 days past due	0.41		%	0.46		%	0.74		%	0.71		%
90 or more days past due	0.21			0.21			0.14			0.11
Total accruing past due loans	0.62		%	0.67		%	0.88		%	0.82		%

Non-performing assets include non-accrual loans, troubled debt restructurings and foreclosed assets. Non-performing assets at ~~September 30, 2017 increased $47.4~~March 31, 2018 decreased $20.7 million from December 31, ~~2016~~2017 primarily due to a decrease in non-accrual commercial and industrial loans partly offset by an increase in non-accrual ~~energy~~commercial real estate loans. There were no non-accrual commercial industrial loans ~~and, to a lesser extent, non-accrual~~in excess of $5.0 million at March 31, 2018. Non-accrual commercial and industrial ~~loans. Non-accrual energy~~ loans at December 31, 2017 included ~~four~~two credit relationships in excess of $5 million totaling ~~$86.4 million at September 30, 2017. Of this amount, $29.0~~$34.2 million. We charged-off $8.2 million related to these two credit relationships ~~that were previously reported as non-accrual at December 31, 2016 and $57.5 million related to two credit relationships that were placed on non-accrual status~~ during the ~~third~~first quarter of ~~2017,~~2018. Subsequent to the charge-offs, one ~~of which was a $43.1 million~~ credit relationship ~~that was previously reported as~~paid off and the other had a ~~potential problem loan~~remaining outstanding balance totaling $4.3 million at ~~June 30, 2017.~~March 31, 2018. Non-accrual energy loans included ~~four~~five credit relationships in excess of $5 million totaling ~~$52.1~~$87.2 million at March 31, 2018. Each of these credit relationships was previously reported as non-accrual at December 31, ~~2016. Of this amount, we~~2017 with an aggregate balance totaling $83.5 million. We charged-off ~~a total of $10.0~~$1.2 million related to ~~two~~one of these credit relationships during the first and second quarters of 2017. The outstanding balance of these two credit relationships was $20.5 million at December 31, 2016. Subsequent to the charge-off, the remaining balance of one of these credit relationships was paid-off. The outstanding balance of the other credit relationship totaled $4.9 million at September 30, 2017 and is included in non-accrual energy loans in the table above. Non-accrual commercial and industrial loans included one credit relationship in excess of $5 million totaling $22.0 million at September 30, 2017. This credit relationship was placed on non-accrual status during the third quarter of 2017 and was previously classified as “substandard - accrual” (risk grade 11) at June 30, 2017, though not reported as a potential problem at that time. Non-accrual commercial and industrial loans included one credit relationship in excess of $5 million totaling $9.8 million at December 31, 2016. Of this amount, we charged-off $4.7 million during the third quarter of 2017. The outstanding balance of this credit relationship totaled $4.9 million at September 30, 2017 and is included in non-accrual commercial and industrial loans in the table above.2018. Non-accrual real estate loans primarily consist of land development, 1-4 family residential construction credit relationships and loans secured by office buildings and religious facilities. There were no non-accrual commercial real estate loans in excess of $5.0 million at March 31, 2018 or December 31, 2017.

Generally, loans are placed on non-accrual status if principal or interest payments become 90 days past due and/or management deems the collectibility of the principal and/or interest to be in question, as well as when required by regulatory requirements. Once interest accruals are discontinued, accrued but uncollected interest is charged to current year operations. Subsequent receipts

on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Classification of a loan as non-accrual does not preclude the ultimate collection of loan principal or interest.

Restructured loans totaled $12.1 million at March 31, 2018 and consisted of one energy loan relationship restructured during the first quarter of 2018. This loan was subsequently sold in April 2018. Restructured loans totaled $4.9 million at December 31, 2017 and consisted of one energy loan relationship restructured during the second quarter of 2017 totaling $1.3 million, one

commercial and industrial credit relationship restructured during the third quarter of 2017 totaling $3.1 million and one construction loan relationship restructured during the fourth quarter of 2017 totaling $388 thousand.

Foreclosed assets represent property acquired as the result of borrower defaults on loans. Foreclosed assets are recorded at estimated fair value, less estimated selling costs, at the time of foreclosure. Write-downs occurring at foreclosure are charged against the allowance for loan losses. Regulatory guidelines require us to reevaluate the fair value of foreclosed assets on at least an annual basis. Our policy is to comply with the regulatory guidelines. Write-downs are provided for subsequent declines in value and are included in other non-interest expense along with other expenses related to maintaining the properties. Write-downs of foreclosed assets ~~were not significant~~totaled $473 thousand and $16 thousand during the ~~nine~~three months ended ~~September 30,~~March 31, 2018 and 2017, ~~or 2016.~~respectively.

Potential problem loans consist of loans that are performing in accordance with contractual terms but for which management has concerns about the ability of an obligor to continue to comply with repayment terms because of the obligor’s potential operating or financial difficulties. Management monitors these loans closely and reviews their performance on a regular basis. At ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, we had ~~$89.7~~$55.3 million and ~~$62.7~~$61.4 million in loans of this type which are not included in any one of the non-accrual, restructured or 90 days past due loan categories. At ~~September 30, 2017,~~March 31, 2018, potential problem loans consisted of ~~seven~~five credit relationships. Of the total outstanding balance at ~~September 30, 2017, 32.5%~~March 31, 2018, 59.2% was related to the energy industry, ~~24.8%~~25.4% was related to the ~~manufacturing~~nursing/assisted living industry and ~~13.9%~~15.4% was related to the ~~chemicals~~restaurant industry. Weakness in these organizations’ operating performance and financial condition, ~~loan agreement breaches and borrowing base deficits for certain energy credits,~~ among other factors, have caused us to heighten the attention given to these credits.

Allowance for Loan Losses

The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of inherent losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. Our allowance for loan loss methodology, which is more fully described in our ~~2016~~2017 Form 10-K, follows the accounting guidance set forth in U.S. generally accepted accounting principles and the Interagency Policy Statement on the Allowance for Loan and Lease Losses, which was jointly issued by U.S. bank regulatory agencies. The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss and recovery experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off.

The table below provides, as of the dates indicated, an allocation of the allowance for loan losses by loan type; however, allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories:


	September 30, 2017		December 31, 2016		March 31, 2018		December 31, 2017
Commercial and industrial	$	48,437	$	52,915	$	57,733	$	59,614
Energy	51,913		60,653		39,039		51,528
Commercial real estate	38,075		30,213		38,474		30,948
Consumer real estate	6,875		4,238		6,349		5,657
Consumer and other	9,003		5,026		8,290		7,617
Total	$	154,303	$	153,045	$	149,885	$	155,364

The reserve allocated to commercial and industrial loans at ~~September 30, 2017~~March 31, 2018 decreased ~~$4.5~~$1.9 million compared to December 31, ~~2016.~~2017. The decrease was due to decreases in ~~historical~~macroeconomic valuation allowances and ~~specific~~general valuation allowances partly offset by increases in ~~macroeconomic~~specific valuation allowances and ~~general~~historical valuation allowances. ~~Historical~~Macroeconomic valuation allowances for commercial and industrial loans decreased ~~$6.1~~$1.5 million from ~~$33.3~~$16.5 million at December 31, ~~2016~~2017 to ~~$27.2~~$15.1 million at ~~September 30, 2017.~~March 31, 2018. The decrease was primarily related to a decrease in the general macroeconomic risk allocation (down $1.7 million), which was partly related to improvements in the weighted-average risk grade of the portfolio and the level of classified loans, as further discussed below. General valuation allowances for commercial and industrial loans decreased $1.1 million from $9.1 million at December 31, 2017 to $8.1 million at March 31, 2018. The decrease was primarily related to an increase in the adjustment for recoveries combined with decreases in the ~~historical loss~~allocations for loans not reviewed by concurrence and large credit relationships partly offset by an increase in the allocation ~~factors~~ for ~~non-classified~~excessive industry concentrations. Historical valuation allowances increased $257 thousand from $26.4 million at December 31, 2017 to $26.7 million at March 31, 2018. The increase was primarily related to an increase in the volume of pass grade loans and loans graded ~~as “watch” (risk grade 9) and~~ “special mention” (risk grade 10) ~~and classified commercial and industrial loans~~ partly offset by ~~increases~~the impact of decreases in the volume of ~~certain categories of both non-classified~~classified loans and ~~classified loans.~~loans graded "watch" (risk grade 9). Classified loans consist of loans having a risk grade of 11, 12 or 13. Classified commercial and industrial loans totaled ~~$150.5~~$98.5 million at ~~September 30, 2017~~March 31, 2018 compared to ~~$131.9~~$144.0 million at December 31, ~~2016.~~2017. The weighted-average risk grade of commercial and industrial loans was ~~6.38~~6.35 at ~~September 30, 2017~~March 31, 2018 compared to ~~6.35~~6.41 at December 31, ~~2016.~~2017. Commercial loan net charge-offs totaled ~~$12.2~~$7.7 million during the first ~~nine~~three months of ~~2017~~

2018 compared to ~~$8.2~~$2.7 million during the first ~~nine~~three months of ~~2016. Specific valuation allowances decreased $3.8 million from $5.4 million at December 31, 2016 to $1.7 million at September 30,~~ 2017. Charge-offs in ~~2017~~2018 included ~~$3.6~~$8.2 million related to two credit relationships that, as of December 31, ~~2016,~~2017, had associated specific valuation allowances totaling ~~$3.5~~$5.9 million. ~~Charge-offs in 2017 also included $7.4 million related to two credit relationships for which we had no specific allocation as of December 31, 2016, or at the time of charge-off. Macroeconomic~~Specific valuation allowances ~~for commercial and industrial loans~~ increased ~~$4.7 million~~$377 thousand from ~~$7.5~~$7.6 million at December 31,

~~2016~~ 2017 to ~~$12.2~~$7.9 million at September 30, 2017. The increase was primarily related to an increase in the general macroeconomic allocation (up $5.5 million) partly offset by a decrease in the environmental risk adjustment (down $980 thousand). The general macroeconomic risk allocation at September 30, 2017 was partly impacted by the effect of hurricane Harvey on our Houston and Corpus Christi market areas. General valuation allowances for commercial and industrial loans increased $689 thousand from $6.7 million at DecemberMarch 31, 2016 to $7.4 million at September 30, 2017. The increase was primarily related to increases in the allocations for highly leveraged credit relationships, large credit relationships and loans not reviewed by concurrence combined with a decrease in the adjustment for recoveries. These items were partly offset by a decrease in the allocation for excessive industry concentrations.2018.

The reserve allocated to energy loans at ~~September 30, 2017~~March 31, 2018 decreased ~~$8.7~~$12.5 million compared to December 31, ~~2016.~~2017. As a result, reserves allocated to energy loans as a percentage of total energy loans totaled ~~3.74%~~2.70% at ~~September 30, 2017~~March 31, 2018 compared to ~~4.38%~~3.44% at December 31, ~~2016.~~2017. This decrease was primarily related to decreases in historical valuation allowances and macroeconomic valuation allowances and partly offset by ~~increases~~an increase in specific ~~valuation allowances and general~~ valuation allowances. Historical valuation allowances decreased ~~$12.7~~$9.8 million from ~~$34.6~~$22.1 million at December 31, ~~2016~~2017 to ~~$21.9~~$12.3 million at ~~September 30, 2017.~~March 31, 2018. The decrease was primarily related to decreases in the ~~volume of classified energy loans and higher risk categories of non-classified energy loans partly offset by increases in the~~ historical loss allocation factors for ~~both~~ non-classified energy loans and classified energy ~~loans. Classified~~loans graded “substandard - accrual” (risk grade 11). The decrease was also partly related to a decrease in the volume of non-classified energy ~~loans totaled $190.7 million at September 30, 2017 compared to $302.0 million at December 31, 2016, decreasing $111.2 million.~~loans. Non-classified energy loans graded as “watch” and “special mention” totaled ~~$114.0~~$88.0 million at ~~September 30, 2017~~March 31, 2018 compared to ~~$229.4~~$114.7 million at December 31, ~~2016,~~2017, decreasing ~~$115.4~~$26.7 million, while "pass" grade energy loans ~~increased $227.7~~decreased $25.5 million from ~~$854.7~~December 31, 2017. Classified energy loans did not significantly change totaling $185.3 million at March 31, 2018 compared to $185.2 million at December 31, ~~2016 to $1.1 billion at September 30,~~ 2017. ~~As a result of these changes, the~~The weighted-average risk grade of energy loans ~~decreased~~increased slightly to ~~7.21~~7.02 at ~~September 30, 2017~~March 31, 2018 from ~~7.95~~6.97 at December 31, ~~2016.~~2017 as the proportion of lower risk grade non-classified energy loans to total energy loans decreased relative to higher risk grade classified energy loans. Macroeconomic valuation allowances related to energy loans decreased ~~$6.4~~$4.2 million from ~~$18.5~~$8.2 million at December 31, ~~2016~~2017 to ~~$12.1~~$4.0 million at ~~September 30, 2017,~~March 31, 2018, primarily due to a decrease in the general macroeconomic risk allocation (down $2.7 million); in part due to ~~improving trends in the weighted-average risk grade of~~stabilization within the energy loan portfolio, ~~and~~ decreased oil price ~~volatility. The price per barrel of crude oil was approximately $54 at December 31, 2016~~volatility and ~~$52 at September 30, 2017. Despite~~ the overall decline in portfolio volume; and a decrease ~~macroeconomic~~in the environmental risk adjustment (down $1.6 million) due to decreases in the historical loss valuation allowances ~~related~~ to ~~energy loans at September 30, 2017 were partly impacted by~~which the ~~effect of hurricane Harvey on our Houston and Corpus Christi market areas.~~environmental risk adjustment factor is applied. Specific valuation allowances for energy loans increased ~~$9.5~~$1.5 million from ~~$3.8~~$13.3 million at December 31, ~~2016~~2017 to ~~$13.3~~$14.8 million at ~~September 30, 2017.~~March 31, 2018. Specific valuation allowances at ~~September 30,~~March 31, 2018 and December 31, 2017 ~~were~~primarily related to two credit relationships totaling ~~$61.8~~$61.1 million ~~while specific valuation allowances~~and $61.2 million at ~~December 31, 2016 were~~such dates, respectively. We recognized a $1.2 million charge-off related to ~~three~~one of these credit relationships ~~totaling $29.8 million. Energy~~during the first quarter of 2018. Total energy loan net charge-offs ~~totaled $10.0~~were $2.8 million during the ~~first nine~~three months ~~of 2017~~ended March 31, 2018 compared to net charge-offs of ~~$18.6~~$4.2 million during the ~~first nine months of 2016. The charge-offs~~same period in 2017 included $10.0 million related to two credit relationships that, as of December 31, 2016, had associated specific valuation allowances totaling $3.4 million. General valuation allowances increased $908 thousand primarily due to an increase in the allocation for excessive industry concentrations partly offset by and increase in the adjustment for recoveries.2017.

The reserve allocated to commercial real estate loans at ~~September 30, 2017~~March 31, 2018 increased ~~$7.9~~$7.5 million compared to December 31, ~~2016.~~2017. The increase was primarily related to increases in macroeconomic valuation allowances, historical valuation allowances and ~~historical~~specific valuation allowances. Macroeconomic valuation allowances increased ~~$6.7~~$6.0 million from ~~$8.2~~$7.9 million at December 31, ~~2016~~2017 to ~~$14.9~~$13.9 million at ~~September 30, 2017.~~March 31, 2018. The increase was primarily related to an increase in the general macroeconomic risk allocation (up ~~$6.3~~$5.8 million), which reflects growth in the portfolio and increased inherent risk due to rising interest rates and the environmental risk adjustment (up $503 thousand). The increase in macroeconomic valuation allowances reflects current economic trends impacting our Houston market area which has been impacted by decreased construction, higher rent concessionsrelated impact on capitalization rates and ~~higher vacancy rates. Macroeconomic valuation allowances were also partly impacted by the effect of hurricane Harvey on our Houston and Corpus Christi market areas.~~real estate valuations. Historical valuation allowances increased ~~$1.3 million~~$939 thousand primarily due to an increase in the volume of ~~non-classified commercial real estate loans. Non-classified~~“pass” grade commercial real estate loans, which increased ~~$267.5~~$203.7 million ~~from December 31, 2016 to September 30, 2017 primarily due to an increase in commercial real estate loans graded as “pass.”~~during the first three months of 2018. Classified commercial real estate loans increased ~~$1.2~~$9.7 million from ~~$76.3~~$75.8 million at December 31, ~~2016~~2017 to ~~$77.5~~$85.5 million at ~~September 30, 2017 due to an increase in loans classified as “substandard - accrual” (risk grade 11).~~March 31, 2018. The weighted-average risk grade of commercial real estate loans ~~was 6.98~~did not change totaling 7.05 at ~~September 30, 2017 compared~~both March 31, 2018 and December 31, 2017. Specific valuation allowances totaled $708 thousand at March 31, 2018 and related to ~~6.96~~three credit relationships totaling $2.0 million. There were no specific valuation allowances related to commercial real estate loans at December 31, ~~2016.~~2017.

The reserve allocated to consumer real estate loans at ~~September 30, 2017~~March 31, 2018 increased ~~$2.6 million~~$692 thousand compared to December 31, ~~2016.~~2017. This increase was ~~mostly~~primarily due to a ~~$1.9~~$1.2 million increase in macroeconomic valuation allowances, which ~~was~~reflects growth in the portfolio and increased inherent risk due to rising interest rates, partly ~~impacted~~offset by ~~the effect of hurricane Harvey on our Houston and Corpus Christi market areas, and~~ a ~~$534~~$532 thousand ~~increase~~decrease in general valuation allowances, which was primarily related to ~~an increase~~a decrease in allowances allocated for loans not reviewed by concurrence and ~~a decrease~~an increase in the reduction for recoveries.

The reserve allocated to consumer and other loans at ~~September 30, 2017~~March 31, 2018 increased ~~$4.0 million~~$673 thousand compared to December 31, ~~2016.~~2017. The increase was primarily related to ~~increases in macroeconomic valuation allowances, historical valuation allowances and, to~~ a ~~lesser extent, an increase in general valuation allowances. The increase in macroeconomic valuation allowances was related to a $2.7~~$1.1 million increase in the general macroeconomic allocation, which was primarily related to growth in unsecured personal lines of credit, and also partly impacted by the effect of hurricane Harvey on our Houston and Corpus Christi market

~~areas. The~~ increase in historical valuation allowances ~~was primarily~~ due to an increase in the ~~volume of non-classified consumer and other loans. The increase in general valuation allowances was primarily related to an increase in the~~historical loss allocation ~~for loans not reviewed~~factor partly offset by ~~concurrence and~~ a $449 thousand decrease in ~~the adjustment for recoveries.~~macroeconomic valuation allowances.

Activity in the allowance for loan losses is presented in the following table.


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2017			2016			2017			2016			2018			2017
Balance at beginning of period	$	149,558		$	149,714		$	153,045		$	135,859		$	155,364		$	153,045
Provision for loan losses	10,980			5,045			27,358			42,734			6,945			7,952
Charge-offs:
Commercial and industrial	(5,468		)	(4,036		)	(14,574		)	(10,754		)	(9,252		)	(3,527		)
Energy	—			(884		)	(10,595		)	(18,644		)	(2,850		)	(4,278		)
Commercial real estate	—			(9		)	(14		)	(56		)	(5		)	—
Consumer real estate	(766		)	(287		)	(779		)	(464		)	(719		)	(11		)
Consumer and other	(4,120		)	(3,300		)	(11,291		)	(9,276		)	(3,972		)	(3,548		)
Total charge-offs	(10,354		)	(8,516		)	(37,253		)	(39,194		)	(16,798		)	(11,364		)
Recoveries:
Commercial and industrial	903			957			2,419			2,577			1,577			798
Energy	451			19			585			21			1			53
Commercial real estate	268			277			790			875			88			45
Consumer real estate	137			92			357			442			193			107
Consumer and other	2,360			2,185			7,002			6,459			2,515			2,420
Total recoveries	4,119			3,530			11,153			10,374			4,374			3,423
Net charge-offs	(6,235		)	(4,986		)	(26,100		)	(28,820		)	(12,424		)	(7,941		)
Balance at end of period	$	154,303		$	149,773		$	154,303		$	149,773		$	149,885		$	153,056

Ratio of allowance for loan losses to:
Total loans	1.21		%	1.29		%	1.21		%	1.29		%	1.12		%	1.26		%
Non-accrual loans	107.83			154.67			107.83			154.67			121.71			131.74
Ratio of annualized net charge-offs to average total loans	0.20			0.17			0.28			0.33			0.38			0.27

The provision for loan losses decreased ~~$15.4~~$1.0 million, or ~~36.0%~~12.7%, during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 compared to the same period in ~~2016. The level of~~2017. Despite increases in net charge-offs and specific valuation allowances during the three months ended March 31, 2018 compared to the same period in 2017, the provision for loan losses ~~in 2016 was reflective of~~decreased due to a ~~significant increase~~decrease in the ~~volume~~calculated reserves necessary as a result of the aforementioned decreases in our historical loss allocation factors for energy loans, decreases in the level of classified ~~energy loans, specific valuation allowances taken on certain classified energy~~ loans and ~~increases~~positive trends in the overall weighted-average risk ~~grades~~grade of our energy, commercial and industrial and commercial real estate loan portfolios. Classified energy, commercial and industrial and commercial real estate loans totaled ~~$418.7~~$369.3 million at ~~September 30, 2017~~March 31, 2018 compared to ~~$510.1~~$405.0 million at December 31, ~~2016~~2017 and ~~$498.7~~$502.3 million at September 30, 2016. Specific valuation allowances related to energy, commercial and industrial and commercial real estate loans totaled $14.9 million at September 30, 2017 compared to $9.2 million at DecemberMarch 31, ~~2016 and $7.8 million at September 30, 2016.~~2017. The overall weighted-average risk grade of our energy, commercial and industrial and commercial real estate loan portfolios was 6.76 at ~~September 30, 2017~~March 31, 2018 compared to ~~6.84~~6.77 at December 31, ~~2016~~2017 and 6.85 at ~~September 30, 2016.~~March 31, 2017. Net charge-offs totaled $12.4 million for three months ended March 31, 2018 compared to $7.9 million for the same period in 2017. Specific valuation allowances related to energy, commercial and industrial and commercial real estate loans totaled $23.4 million at March 31, 2018 compared to $20.8 million at December 31, 2017 and $3.6 million at March 31, 2017. The level of the provision for loan losses during the three months ended March 31, 2017 was mostly reflective of the level of net charge-offs during ~~during the nine months ended September 30, 2017, which totaled $26.1 million. These charge-offs were mostly related to six credit relationships, as discussed above.~~ that period.

The ratio of the allowance for loan losses to total loans was ~~1.21%~~1.12% at ~~September 30, 2017~~March 31, 2018 compared to ~~1.28%~~1.18% at December 31, ~~2016.~~2017. Management believes the recorded amount of the allowance for loan losses is appropriate based upon management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. Should any of the factors considered by management in evaluating the appropriate level of the allowance for loan losses change, our estimate of probable loan losses could also change, which could affect the level of future provisions for loan losses.

Capital and Liquidity

Capital. Shareholders’ equity totaled $3.2 billion at ~~September 30, 2017~~March 31, 2018 and ~~$3.0~~$3.3 billion December 31, ~~2016.~~2017. In addition to net income of ~~$263.6~~$106.5 million, other sources of capital during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 included ~~$82.3 million of other comprehensive income, net of tax, $45.4~~$19.2 million in proceeds from stock option exercises and ~~$9.0~~$3.2 million related to stock-based compensation. Uses of capital during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 included ~~$113.8~~an other comprehensive loss, net of tax, of $142.4 million, $38.6 million of dividends paid on preferred and common ~~stock.~~stock and $2.3 million related to the cumulative effect of a new accounting principle adopted during the first quarter of 2018. See Note 1 - Significant Accounting Policies.

The accumulated other comprehensive income/loss component of shareholders’ equity totaled a net, after-tax, unrealized ~~gain~~loss of ~~$57.7~~$53.4 million at ~~September 30, 2017~~March 31, 2018 compared to a net, after-tax, unrealized ~~loss~~gain of ~~$24.6~~$79.5 million at December 31, ~~2016.~~2017. The change was primarily due to ~~an $85.3~~a $141.3 million net, after-tax, ~~increase~~decrease in the net unrealized ~~gain~~gain/loss on securities available for sale. Accumulated other comprehensive income at December 31, 2017 included $9.5 million related to certain income tax effects from the remeasurement of deferred tax assets and liabilities in connection with the change in the U.S. statutory federal income tax rate under the Tax Cuts and Jobs Act enacted on December 22, 2017. This amount was reclassified to retained earnings as of January 1, 2018 in accordance with an accounting standard update issued during the first quarter of 2018. See Note 1 - Significant Accounting Policies and Note 18 - Accounting Standards Updates.

Under the Basel III Capital Rules, we have elected to opt-out of the requirement to include most components of accumulated other comprehensive income in regulatory capital. Accordingly, amounts reported as accumulated other comprehensive income/loss do not increase or reduce regulatory capital and are not included in the calculation of risk-based capital and leverage ratios. Regulatory agencies for banks and bank holding companies utilize capital guidelines designed to measure capital and take into consideration the risk inherent in both on-balance sheet and off-balance sheet items. See Note 87 - Capital and Regulatory Matters in the accompanying notes to consolidated financial statements included elsewhere in this report.

We paid a quarterly dividend of ~~$0.54,~~ $0.57 ~~and $0.57 per common share during the first, second and third quarters of 2017, respectively, and a quarterly dividend of $0.53, $0.54~~ and $0.54 per common share during the first ~~second and third~~ quarters of ~~2016,~~2018 and 2017, respectively. This equates to a common stock dividend payout ratio of ~~41.8%~~35.0% and ~~46.9%~~41.8% during the first ~~nine~~three months of ~~2017~~2018 and ~~2016,~~2017, respectively. Our ability to declare or pay dividends on, or purchase, redeem or otherwise acquire, shares of our capital stock may be impacted by certain restrictions under the terms of our junior subordinated deferrable interest debentures and our Series A Preferred Stock as described in Note 8 - Capital and Regulatory Matters in the accompanying notes to consolidated financial statements included elsewhere in this report.

Stock Repurchase Plans. From time to time, our board of directors has authorized stock repurchase plans. In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders. Shares purchased under such plans also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards. On October ~~27, 2016,~~24, 2017, our board of directors authorized a ~~$100.0~~$150.0 million stock repurchase program, allowing us to repurchase shares of our common stock over a two-year period from time to time at various prices in the open market or through private transactions. ~~During the third quarter of 2017,~~No shares were repurchased under this plan during 2018 or 2017. Under a prior plan, we repurchased 1,134,966 shares under the plan at a total cost of $100.0 ~~million. On October 24, 2017, our board~~million during third quarter of directors authorized a new $150.0 million stock repurchase plan allowing us to repurchase shares of our common stock over a two-year period from time to time at various prices in the open market or through private transactions.2017. See Part II, Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds, included elsewhere in this report.

Liquidity. As more fully discussed in our ~~2016~~2017 Form 10-K, our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Liquidity risk management is an important element in our asset/liability management process. We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed problematic by management. These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs. As of ~~September 30, 2017,~~March 31, 2018, management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on us.

Since Cullen/Frost is a holding company and does not conduct operations, its primary sources of liquidity are dividends upstreamed from Frost Bank and borrowings from outside sources. Banking regulations may limit the amount of dividends that may be paid by Frost Bank. See Note 87 - Capital and Regulatory Matters in the accompanying notes to consolidated financial statements included elsewhere in this report regarding such dividends. At ~~September 30, 2017,~~March 31, 2018, Cullen/Frost had liquid assets, including cash and resell agreements, totaling ~~$241.3~~$295.2 million.

Accounting Standards Updates

See Note 1817 - Accounting Standards Updates in the accompanying notes to consolidated financial statements included elsewhere in this report for details of recently issued accounting pronouncements and their expected impact on our financial statements.

Consolidated Average Balance Sheets and Interest Income Analysis - ~~Quarter~~Year To Date

(Dollars in thousands - taxable-equivalent basis)


	September 30, 2017							September 30, 2016							March 31, 2018							March 31, 2017
	Average Balance			Interest Income/ Expense		Yield/ Cost		Average Balance			Interest Income/ Expense		Yield/ Cost		Average Balance			Interest Income/ Expense		Yield/ Cost		Average Balance			Interest Income/ Expense		Yield/ Cost
Assets:
Interest-bearing deposits	$	3,351,576		$	10,800	1.28	%	$	3,190,306		$	4,111	0.51	%	$	3,682,909		$	14,094	1.55	%	$	3,323,244		$	6,836	0.83	%
Federal funds sold and resell agreements	72,239			244		1.34		28,152			48		0.68		186,278			761		1.66		48,005			107		0.90
Securities:
Taxable	4,970,647			23,203		1.88		5,391,848			25,897		1.97		4,167,397			20,558		1.99		5,263,538			25,302		1.96
Tax-exempt	7,360,643			96,912		5.34		6,983,626			92,917		5.53		7,671,186			78,334		4.12		7,282,991			99,575		5.44
Total securities	12,331,290			120,115		3.94		12,375,474			118,814		3.97		11,838,583			98,892		3.36		12,546,529			124,877		3.99
Loans, net of unearned discounts	12,587,290			141,622		4.46		11,457,464			115,674		4.02		13,294,638			152,367		4.65		12,089,586			123,856		4.15
Total Earning Assets and Average Rate Earned	28,342,395			272,781		3.85		27,051,396			238,647		3.57		29,002,408			266,114		3.71		28,007,364			255,676		3.68
Cash and due from banks	483,497							487,456							511,948							532,541
Allowance for loan losses	(152,237		)					(152,549		)					(156,517		)					(153,810		)
Premises and equipment, net	522,413							564,764							523,576							524,640
Accrued interest and other assets	1,194,316							1,180,987							1,249,881							1,233,469
Total Assets	$	30,390,384						$	29,132,054						$	31,131,296						$	30,144,204

Liabilities:
Non-interest-bearing demand deposits:
Commercial and individual	$	10,159,636						$	9,225,059						$	10,282,274						$	9,958,059
Correspondent banks	233,748							292,971							224,935							284,592
Public funds	362,779							484,543							464,850							483,382
Total non-interest-bearing demand deposits	10,756,163							10,002,573							10,972,059							10,726,033
Interest-bearing deposits:
Private accounts
Savings and interest checking	6,344,476			347		0.02		5,948,616			264		0.02		6,635,495			1,137		0.07		6,315,152			273		0.02
Money market deposit accounts	7,501,285			4,513		0.24		7,473,650			1,170		0.06		7,590,194			7,698		0.41		7,478,330			1,136		0.06
Time accounts	766,339			412		0.21		807,055			278		0.14		778,309			984		0.51		786,763			307		0.16
Public funds	381,632			396		0.41		420,281			37		0.03		452,767			819		0.73		514,354			152		0.12
Total interest-bearing deposits	14,993,732			5,668		0.15		14,649,602			1,749		0.05		15,456,765			10,638		0.28		15,094,599			1,868		0.05
Total deposits	25,749,895							24,652,175							26,428,824							25,820,632
Federal funds purchased and repurchase agreements	1,005,486			523		0.21		797,417			44		0.02		1,050,410			634		0.24		905,002			139		0.06
Junior subordinated deferrable interest debentures	136,164			1,020		3.00		136,107			839		2.47		136,193			1,142		3.35		136,136			908		2.67
Subordinated notes payable and other notes	98,498			1,164		4.73		99,948			350		1.40		98,576			1,164		4.72		64,184			368		2.29
Total Interest-Bearing Funds and Average Rate Paid	16,233,880			8,375		0.21		15,683,074			2,982		0.08		16,741,944			13,578		0.33		16,199,921			3,283		0.08
Accrued interest and other liabilities	168,572							285,585							161,855							163,079
Total Liabilities	27,158,615							25,971,232							27,875,858							27,089,033
Shareholders’ Equity	3,231,769							3,160,822							3,255,438							3,055,171
Total Liabilities and Shareholders’ Equity	$	30,390,384						$	29,132,054						$	31,131,296						$	30,144,204
Net interest income				$	264,406						$	235,665						$	252,536						$	252,393
Net interest spread						3.64	%						3.49	%						3.38	%						3.60	%
Net interest income to total average earning assets						3.73	%						3.53	%						3.52	%						3.64	%

For these computations: (i) average balances are presented on a daily average basis, (ii) information is shown on a taxable-equivalent basis assuming a ~~35%~~21% tax rate ~~(iii) average loans include loans on non-accrual status,~~in 2018 and ~~(iv) average securities include unrealized gains and losses on securities available for sale while yields are based on average amortized cost.~~

~~Consolidated Average Balance Sheets and Interest Income Analysis - Year To Date~~

~~(Dollars in thousands - taxable-equivalent basis)~~

September 30, 2017 September 30, 2016
Average
Balance Interest
Income/
Expense Yield/
Cost Average
Balance Interest
Income/
Expense Yield/
Cost
Assets:
Interest-bearing deposits $ 3,341,710
$ 26,712
1.07 % $ 2,956,822
$ 11,366
0.51 %
Federal funds sold and resell agreements 56,581
514
1.21
34,179
165
0.64
Securities:
Taxable 5,112,072
72,032
1.90
5,245,649
77,402
2.02
Tax-exempt 7,309,739
293,888
5.39
6,660,843
270,586
5.58
Total securities 12,421,811
365,920
3.96
11,906,492
347,988
4.01
Loans, net of unearned discounts 12,319,125
397,817
4.32
11,497,340
344,289
4.00
Total Earning Assets and Average Rate Earned 28,139,227
790,963
3.77
26,394,833
703,808
3.60
Cash and due from banks 503,818
504,074

Allowance for loan losses (152,604 ) (151,643 )
Premises and equipment, net 522,768
561,215

Accrued interest and other assets 1,211,309
1,180,513

Total Assets $ 30,224,518
$ 28,488,992

Liabilities:
Non-interest-bearing demand deposits:
Commercial and individual $ 10,054,481
$ 9,055,750

Correspondent banks 253,567
322,495

Public funds 417,555
515,195

Total non-interest-bearing demand deposits 10,725,603
9,893,440

Interest-bearing deposits:
Private accounts
Savings and interest checking 6,352,986
892
0.02
5,610,695
778
0.02
Money market deposit accounts 7,454,421
6,929
0.12
7,441,626
3,545
0.06
Time accounts 777,202
1,040
0.18
813,297
853
0.14
Public funds 433,395
848
0.26
452,655
133
0.04
Total interest-bearing deposits 15,018,004
9,709
0.09
14,318,273
5,309
0.05
Total deposits 25,743,607
24,211,713

Federal funds purchased and repurchase agreements 942,400
849
0.12
734,022
152
0.03
Junior subordinated deferrable interest debentures 136,150
2,890
2.83
136,092
2,392
2.34
Subordinated notes payable and other notes 87,173
2,696
4.12
99,918
958
1.28
Total Interest-Bearing Funds and Average Rate Paid 16,183,727
16,144
0.13
15,288,305
8,811
0.08
Accrued interest and other liabilities 161,643
259,131

Total Liabilities 27,070,973
25,440,876

Shareholders’ Equity 3,153,545
3,048,116

Total Liabilities and Shareholders’ Equity $ 30,224,518
$ 28,488,992

Net interest income $ 774,819
$ 694,997

Net interest spread 3.64 % 3.52 %
Net interest income to total average earning assets 3.69 % 3.56 %

~~For these computations: (i) average balances are presented on a daily average basis, (ii) information is shown on a taxable-equivalent basis assuming~~ a 35% tax rate in 2017, (iii) average loans include loans on non-accrual status, and (iv) average securities include unrealized gains and losses on securities available for sale while yields are based on average amortized cost.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The disclosures set forth in this item are qualified by the section captioned “Forward-Looking Statements and Factors that Could Affect Future Results” included in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report and other cautionary statements set forth elsewhere in this report.

Refer to the discussion of market risks included in Item 7A. Quantitative and Qualitative Disclosures About Market Risk in the ~~2016~~2017 Form 10-K. There has been no significant change in the types of market risks we face since December 31, ~~2016.~~2017.

We utilize an earnings simulation model as the primary quantitative tool in measuring the amount of interest rate risk associated with changing market rates. The model quantifies the effects of various interest rate scenarios on projected net interest income and net income over the next 12 months. The model measures the impact on net interest income relative to a flat-rate case scenario of hypothetical fluctuations in interest rates over the next 12 months. These simulations incorporate assumptions regarding balance sheet growth and mix, pricing and the repricing and maturity characteristics of the existing and projected balance sheet. The impact of interest rate derivatives, such as interest rate swaps, caps and floors, is also included in the model. Other interest rate-related risks such as prepayment, basis and option risk are also considered.

For modeling purposes, as of ~~September 30, 2017,~~March 31, 2018, the model simulations projected that 100 and 200 basis point ratable increases in interest rates would result in positive variances in net interest income of ~~1.2%~~0.9% and ~~3.3%~~2.8%, respectively, relative to the flat-rate case over the next 12 months, while 100 and ~~125~~175 basis point ratable decreases in interest rates would result in a negative variances in net interest income of ~~5.1%~~3.7% and ~~9.9%~~9.7%, respectively, relative to the flat-rate case over the next 12 months. The ~~September 30, 2017~~March 31, 2018 model simulations for increased interest rates were impacted by the assumption, for modeling purposes, that we will begin to pay interest on commercial demand deposits (those not already receiving an earnings credit rate) in the ~~fourth~~second quarter of ~~2017,~~2018, as further discussed below. For modeling purposes, as of ~~September 30, 2016,~~March 31, 2017, the model simulations projected that 100 and 200 basis point ratable increases in interest rates would result in positive variances in net interest income of ~~0.4%~~1.0% and ~~1.5%~~2.2%, respectively, relative to the flat-rate case over the next 12 months, while a decrease in interest rates of 50100 basis points would result in a negative variance in net interest income of ~~6.5%~~9.9% relative to the flat-rate case over the next 12 months. The ~~September 30, 2016~~March 31, 2017 model simulations for increased interest rates were impacted by the assumption, for modeling purposes, that we would begin to pay interest on commercial demand deposits (those not already receiving an earnings credit rate) in the ~~fourth~~second quarter of ~~2016,~~2017, as further discussed below. The likelihood of a decrease in interest rates beyond ~~125~~175 basis points as of ~~September 30, 2017~~March 31, 2018 and 50100 basis points as of ~~September 30, 2016~~March 31, 2017 was considered to be remote given prevailing interest rate levels.

The model simulations as of ~~September 30, 2017~~March 31, 2018 indicate that the sensitivity of our balance sheet ~~is more asset sensitive in comparison~~ to our balance sheet as of September 30, 2016. The shift to a more asset sensitive position was primarily due to increases in the relative proportion of federal funds sold to projected average interest-earning assets. Federal funds sold are more immediately impacted by changes in interest rates ~~in comparison to other categories~~is not significantly different from March 31, 2017 as we had a similar mix of earning ~~assets.~~assets and interest-bearing liabilities at such dates.

Financial regulatory reform legislation entitled the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Dodd-Frank Act”) repealed the federal prohibition on the payment of interest on demand deposits, thereby permitting depository institutions toWe do not currently pay interest on ~~business transaction and other accounts beginning July 21, 2011. To date, we have not experienced any~~a significant ~~additional interest costs as a result of the repeal. However, in light of recent increases in market interest rates, in late July 2017, we increased the interest rates we pay on most~~portion of our ~~interest-bearing deposit products.~~commercial demand deposits. If we began to pay interest on commercial demand deposits (those not already receiving an earnings credit rate), our balance sheet would likely become less asset sensitive. ~~Because the~~Any interest rate that ~~will~~would ultimately be paid on these commercial demand deposits ~~depends~~would likely depend upon a variety of factors, some of which are beyond our ~~control,~~control. For modeling purposes, we have assumed an aggressive pricing structure ~~for the purposes of the model simulations discussed above~~ with interest payments for commercial demand deposits (those not already receiving an earnings credit) beginning in the ~~fourth quarter~~second quarters of ~~2017.~~2017 and 2018, respectively, for each simulation. Should the actual interest rate paid on commercial demand deposits be less than the rate assumed in the model simulations, or should the interest rate paid for commercial demand deposits become an administered rate with less direct correlation to movements in general market interest rates, our balance sheet could be more asset sensitive than the model simulations might otherwise indicate.

As of ~~September 30, 2017,~~March 31, 2018, the effects of a 200 basis point increase and a ~~125~~175 basis point decrease in interest rates on our derivative holdings would not result in a significant variance in our net interest income.

The effects of hypothetical fluctuations in interest rates on our securities classified as “trading” under ASC Topic 320, “Investments—Debt and Equity Securities,” are not significant, and, as such, separate quantitative disclosure is not presented.

Item 4. Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out by management, with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report. No change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the last fiscal quarter that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

We are 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 our financial statements.

Item 1A. Risk Factors

There has been no material change in the risk factors disclosed under Item 1A. of our ~~2016~~2017 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information with respect to purchases we made or were made on our behalf or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of our common stock during the three months ended ~~September 30, 2017.~~March 31, 2018. Dollar amounts in thousands.

Period
Total Number of
Shares Purchased

Average Price
Paid Per Share

Total Number of
Shares Purchased
as Part of Publicly
Announced Plan

Maximum
Number of Shares
(or Approximate
Dollar Value)
That May Yet Be
Purchased Under
the Plan at the
End of the Period
July 1, 2017 to July 31, 2017 169,342
$ 91.11
169,342
$ 84,572
August 1, 2017 to August 31, 2017 614,493
88.69
614,493
30,070
September 1, 2017 to September 30, 2017 351,131
85.64
351,131
—
Total 1,134,966
$ 88.11
1,134,966



Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan	Maximum Number of Shares (or Approximate Dollar Value) That May Yet Be Purchased Under the Plan at the End of the Period
January 1, 2018 to January 31, 2018	—	$	—	—	$	150,000
February 1, 2018 to February 28, 2018	—	—		—	150,000
March 1, 2018 to March 31, 2018	—	—		—	150,000
Total	—	$	—	—

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

(a) Exhibits



Exhibit Number	Description
31.1	Rule 13a-14(a) Certification of the Corporation's Chief Executive Officer
31.2	Rule 13a-14(a) Certification of the Corporation's Chief Financial Officer
32.1+	Section 1350 Certification of the Corporation's Chief Executive Officer
32.2+	Section 1350 Certification of the Corporation's Chief Financial Officer
101	Interactive Data File


+	This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




		Cullen/Frost Bankers, Inc.
		(Registrant)

Date:	~~October~~April 26, ~~2017~~2018	By:	/s/ Jerry Salinas
��			Jerry Salinas
			Group Executive Vice President
			and Chief Financial Officer
			(Duly Authorized Officer, Principal Financial
			Officer and Principal Accounting Officer)

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