# Cullen/Frost Bankers, Inc.: Form 10-Q for the period ended Sep 30, 2023

- Company: [Cullen/Frost Bankers, Inc.](/companies/cfr.md) (CIK 39263)
- Form: 10-Q
- Filed: 2023-10-26
- Accepted by EDGAR: Oct 26, 2023, 15:14 ET
- Period: 2023-09-30
- Accession: 0000039263-23-000072
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/39263/000003926323000072/cfr-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/39263/000003926323000072/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $23.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $69.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $175.7m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $468.1m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $31.3m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $96.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $155.7m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $495.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $2.38 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $7.54 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $2.38 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $7.56 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 64,239,244 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 64,434,300 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $561.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $118.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2023-01-01 to 2023-09-30 | $172.6m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $40.5m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | at 2023-09-30 | $48.75bn | us-gaap:Assets |
| Total liabilities | at 2023-09-30 | $45.75bn | us-gaap:Liabilities |
| Shareholders' equity | at 2023-09-30 | $3.00bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 128,384 characters.

### Financial Review

The following discussion should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2022, and the other information included in the 2022 Form 10-K. Operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results for the year ending December 31, 2023 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 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:

- 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.
- Local, regional, national, and international economic conditions and the impact they may have on us and our customers and our assessment of that impact.
- Changes in the financial performance and/or condition of our borrowers.
- 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 credit loss reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements.
- Changes in our liquidity position.
- Impairment of our goodwill or other intangible assets.
- 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, borrowing, and saving habits.
- Greater than expected costs or difficulties related to the integration of new products and lines of business.
- Technological changes.
- The cost and effects of cyber incidents or other failures, interruptions, or security breaches of our systems or those of our customers or third-party providers.
- Acquisitions and integration of acquired businesses.
- Changes in the reliability of our vendors, internal control systems or information systems.
- Our ability to increase market share and control expenses.
- Our ability to attract and retain qualified employees.
- Changes in our organization, compensation, and benefit plans.
- The soundness of other financial institutions.
- Volatility and disruption in national and international financial and commodity markets.
- Changes in the competitive environment in our markets and among banking organizations and other financial service providers.
- Government intervention in the U.S. financial system.
- Political or economic instability.
- Acts of God or of war or terrorism.
- The potential impact of climate change.
- The impact of pandemics, epidemics, or any other health-related crisis.
- 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.
- The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities, and insurance) and their application with which we and our subsidiaries must comply.
- 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.
- Our success at managing the risks involved in the foregoing items.

In addition, financial markets and global supply chains may continue to be adversely affected by the current or anticipated impact of global wars/military conflicts, terrorism, or other geopolitical events.

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 credit losses on financial instruments including loans and off-balance-sheet credit exposures are considered to be critical as these policies involve considerable subjective judgment and estimation by management. In the case of loans, the allowance for credit losses is a contra-asset valuation account, calculated in accordance with Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”) Financial Instruments - Credit Losses, that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. In the case of off-balance-sheet credit exposures, the allowance for credit losses is a liability account, calculated in accordance with ASC 326, reported as a component of accrued interest payable and other liabilities in our consolidated balance sheets. The amount of each allowance account represents management's best estimate of current expected credit losses on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. Relevant available information includes historical credit loss experience, current conditions, and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions, or other relevant factors. While management utilizes its best judgment and information available, the ultimate adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets. Refer to the 2022 Form 10-K for additional information regarding critical accounting policies.

### 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 a 21% federal tax rate, thus making tax-exempt yields comparable to taxable asset yields.

### Results of Operations

Net income available to common shareholders totaled $154.0 million, or $2.38 per diluted common share, and $490.4 million, or $7.54 per diluted common share, for the three and nine months ended September 30, 2023 compared to $168.1 million, or $2.59 per diluted common share, and $383.0 million, or $5.90 per diluted common share for the three and nine months ended September 30, 2022.

Selected data for the comparable periods was as follows:

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Taxable-equivalent net interest income | $407,353 | $379,518 | $1,241,791 | $963,089 |
| Taxable-equivalent adjustment | 21,927 | 23,971 | 71,279 | 70,263 |
| Net interest income | 385,426 | 355,547 | 1,170,512 | 892,826 |
| Credit loss expense | 11,185 | — | 30,190 | — |
| Net interest income after credit loss expense | 374,241 | 355,547 | 1,140,322 | 892,826 |
| Non-interest income | 105,998 | 99,821 | 314,791 | 299,138 |
| Non-interest expense | 293,256 | 257,898 | 863,440 | 742,977 |
| Income before income taxes | 186,983 | 197,470 | 591,673 | 448,987 |
| Income taxes | 31,332 | 27,710 | 96,251 | 61,011 |
| Net income | 155,651 | 169,760 | 495,422 | 387,976 |
| Preferred stock dividends | 1,668 | 1,668 | 5,006 | 5,006 |
| Net income available to common shareholders | $153,983 | $168,092 | $490,416 | $382,970 |
| Earnings per common share – basic | $2.38 | $2.60 | $7.56 | $5.92 |
| Earnings per common share – diluted | 2.38 | 2.59 | 7.54 | 5.90 |
| Dividends per common share | 0.92 | 0.87 | 2.66 | 2.37 |
| Return on average assets | 1.25% | 1.27% | 1.32% | 1.00% |
| Return on average common equity | 18.93 | 20.13 | 20.25 | 14.19 |
| Average shareholders’ equity to average assets | 6.91 | 6.60 | 6.79 | 7.32 |

Net income available to common shareholders decreased $14.1 million, or 8.4%, for the three months ended September 30, 2023 and increased $107.4 million, or 28.1%, for the nine months ended September 30, 2023 compared to the same respective periods in 2022. The decrease during the three months ended September 30, 2023 was primarily the result of a $35.4 million increase in non-interest expense, an $11.2 million increase in credit loss expense, and a $3.6 million increase in income tax expense partly offset by a $29.9 million increase in net interest income and a $6.2 million increase in non-interest income. The increase during the nine months ended September 30, 2023 was primarily the result of a $277.7 million increase in net interest income and a $15.7 million increase in non-interest income partly offset by a $120.5 million increase in non-interest expense, a $35.2 million increase in income tax expense, and a $30.2 million increase in credit loss expense. Details of the changes in the various components of net income are further discussed below.

### 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 78.8% of total revenue during the first nine months of 2023. 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. As of September 30, 2023, approximately 43.1% of our loans had a fixed interest rate, while the remaining loans had floating interest rates that were primarily tied to a benchmark developed by the American Financial Exchange, the Secured Overnight Financing Rate (“SOFR”) (approximately 24.4%); the prime interest rate (approximately 23.3%); or the American Interbank Offered Rate (“AMERIBOR”) (approximately 8.7%). Certain other loans are tied to a benchmark developed by Bloomberg Index Services (“BSBY”) or other indices, however, such loans do not make up a significant portion of our loan portfolio as of September 30, 2023.

Select average market rates for the periods indicated are presented in the table below.

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Federal funds target rate upper bound | 5.43% | 2.37% | 5.10% | 1.21% |
| Effective federal funds rate | 5.26 | 2.18 | 4.92 | 1.03 |
| Interest on reserve balances at the Federal Reserve | 5.33 | 2.25 | 4.99 | 1.10 |
| Prime | 8.43 | 5.37 | 8.09 | 4.21 |
| AMERIBOR Term-30(1) | 5.31 | 2.29 | 4.98 | 1.13 |
| AMERIBOR Term-90(1) | 5.54 | 2.89 | 5.25 | 1.62 |
| 1-Month Term SOFR(2) | 5.29 | 2.43 | 4.98 | 1.18 |
| 3-Month Term SOFR(2) | 5.37 | 2.82 | 5.09 | 1.49 |
| Bloomberg 1-Month Short-Term Bank Yield Index | 5.34 | 2.35 | 5.00 | 1.14 |
| Bloomberg 3-Month Short-Term Bank Yield Index | 5.53 | 2.89 | 5.22 | 1.60 |
| 1-Month LIBOR(3) | N/A | 2.47 | 4.85 | 1.24 |
| 3-Month LIBOR(3) | N/A | 3.00 | 5.15 | 1.68 |

(1) AMERIBOR Term-30 and AMERIBOR Term-90 are published by the American Financial Exchange.

(2) 1-Month Term SOFR and 3-Month Term SOFR market data are the property of Chicago Mercantile Exchange, Inc., or its licensors as applicable. All rights reserved, or otherwise licensed by Chicago Mercantile Exchange, Inc.

(3) 1-Month and 3-Month LIBOR ceased to be published effective June 30, 2023. Accordingly, average rates reflect through that date.

As of September 30, 2023, the target range for the federal funds rate was 5.25% to 5.50%. In September 2023, the Federal Reserve released projections whereby the midpoint of the projected appropriate target range for the federal funds rate would rise to 5.6% by the end of 2023 and subsequently decrease to 5.1% by the end of 2024. While there can be no such assurance that any increases or decreases in the federal funds rate will occur, these projections imply up to a 25 basis point increase in the federal funds rate during the remainder of 2023, followed by a 50 basis point decrease in 2024.

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. Nonetheless, our access to and pricing of deposits may be negatively impacted by, among other factors, periods of higher interest rates which could promote increased competition for deposits, including from new financial technology competitors, or provide customers with alternative investment options. See Item 3. Quantitative and Qualitative Disclosures About Market Risk elsewhere in this report for information about our sensitivity to interest rates. Further analysis of the components of our net interest margin is presented below.

The following tables present an analysis of net interest income and net interest spread for the periods indicated, including average outstanding balances for each major category of interest-earning assets and interest-bearing liabilities, the interest earned or paid on such amounts, and the average rate earned or paid on such assets or liabilities, respectively. The tables also set forth the net interest margin on average total interest-earning assets for the same periods. For these computations: (i) average balances are presented on a daily average basis, (ii) information is shown on a taxable-equivalent basis assuming a 21% tax rate, (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.

| Assets: | Quarter To Date September 30, 2023 Average Balance | Interest Income/ Expense | Yield/ Cost | Quarter To Date September 30, 2022 Average Balance | Interest Income/ Expense | Yield/ Cost |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-bearing deposits | $6,746,560 | $91,904 | 5.33% | $12,776,193 | $74,257 | 2.27% |
| Federal funds sold | 12,675 | 183 | 5.65 | 50,656 | 316 | 2.44 |
| Resell agreements | 84,664 | 1,197 | 5.53 | 10,471 | 64 | 2.39 |
| Securities: |  |  |  |  |  |  |
| Taxable | 13,565,303 | 103,875 | 2.76 | 11,486,105 | 68,311 | 2.20 |
| Tax-exempt | 6,991,710 | 76,714 | 4.26 | 7,915,790 | 81,831 | 4.09 |
| Total securities | 20,557,013 | 180,589 | 3.24 | 19,401,895 | 150,142 | 2.94 |
| Loans, net of unearned discounts | 17,965,343 | 309,166 | 6.83 | 16,822,933 | 207,522 | 4.89 |
| **Total Earning Assets and Average Rate Earned** | 45,366,255 | 583,039 | 4.92 | 49,062,148 | 432,301 | 3.43 |
| Cash and due from banks | 590,526 |  |  | 633,905 |  |  |
| Allowance for credit losses on loans and securities | (235,507) |  |  | (238,623) |  |  |
| Premises and equipment, net | 1,163,204 |  |  | 1,061,315 |  |  |
| Accrued interest and other assets | 1,919,314 |  |  | 1,864,046 |  |  |
| **Total Assets** | $48,803,792 |  |  | $52,382,791 |  |  |
| **Liabilities:** |  |  |  |  |  |  |
| Non-interest-bearing demand deposits | 14,822,586 |  |  | 18,511,055 |  |  |
| Interest-bearing deposits: |  |  |  |  |  |  |
| Savings and interest checking | 10,202,037 | 9,757 | 0.38 | 12,235,537 | 2,159 | 0.07 |
| Money market deposit accounts | 11,143,718 | 77,997 | 2.78 | 13,465,863 | 36,568 | 1.08 |
| Time accounts | 4,659,395 | 51,025 | 4.34 | 1,590,561 | 3,955 | 0.99 |
| Total interest-bearing deposits | 26,005,150 | 138,779 | 2.12 | 27,291,961 | 42,682 | 0.62 |
| Total deposits | 40,827,736 |  | 1.35 | 45,803,016 |  | 0.37 |
| Federal funds purchased | 21,181 | 288 | 5.32 | 41,718 | 249 | 2.33 |
| Repurchase agreements | 3,536,167 | 33,195 | 3.67 | 1,959,630 | 7,529 | 1.50 |
| Junior subordinated deferrable interest debentures | 123,107 | 2,260 | 7.34 | 123,049 | 1,159 | 3.77 |
| Subordinated notes | 99,437 | 1,164 | 4.69 | 99,281 | 1,164 | 4.69 |
| **Total Interest-Bearing Funds and Average Rate Paid** | 29,785,042 | 175,686 | 2.33 | 29,515,639 | 52,783 | 0.71 |
| Accrued interest and other liabilities | 823,756 |  |  | 897,094 |  |  |
| **Total Liabilities** | 45,431,384 |  |  | 48,923,788 |  |  |
| **Shareholders’ Equity** | 3,372,408 |  |  | 3,459,003 |  |  |
| **Total Liabilities and Shareholders’ Equity** | $48,803,792 |  |  | $52,382,791 |  |  |
| Net interest income |  | $407,353 |  |  | $379,518 |  |
| Net interest spread |  |  | 2.59% |  |  | 2.72% |
| Net interest income to total average earning assets |  |  | 3.44% |  |  | 3.01% |

43

| Assets: | Year To Date September 30, 2023 Average Balance | Interest Income/ Expense | Yield/ Cost | Year To Date September 30, 2022 Average Balance | Interest Income/ Expense | Yield/ Cost |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-bearing deposits | $7,430,746 | $278,897 | 4.95% | $13,190,883 | $106,971 | 1.07% |
| Federal funds sold | 32,984 | 1,246 | 4.98 | 32,042 | 428 | 1.76 |
| Resell agreements | 86,317 | 3,391 | 5.18 | 6,461 | 78 | 1.59 |
| Securities: |  |  |  |  |  |  |
| Taxable | 13,563,754 | 303,610 | 2.71 | 10,280,574 | 167,734 | 2.06 |
| Tax-exempt | 7,624,722 | 249,295 | 4.26 | 7,960,457 | 239,730 | 4.05 |
| Total securities | 21,188,476 | 552,905 | 3.24 | 18,241,031 | 407,464 | 2.90 |
| Loans, net of unearned discounts | 17,651,920 | 873,475 | 6.62 | 16,629,559 | 526,515 | 4.23 |
| **Total Earning Assets and Average Rate Earned** | 46,390,443 | 1,709,914 | 4.75 | 48,099,976 | 1,041,456 | 2.86 |
| Cash and due from banks | 631,338 |  |  | 643,654 |  |  |
| Allowance for credit losses on loans and securities | (232,085) |  |  | (244,763) |  |  |
| Premises and equipment, net | 1,141,719 |  |  | 1,053,887 |  |  |
| Accrued interest and other assets | 1,917,405 |  |  | 1,723,257 |  |  |
| **Total Assets** | $49,848,820 |  |  | $51,276,011 |  |  |
| **Liabilities:** |  |  |  |  |  |  |
| Non-interest-bearing demand deposits | 15,556,563 |  |  | 18,277,657 |  |  |
| Interest-bearing deposits: |  |  |  |  |  |  |
| Savings and interest checking | 10,903,147 | 31,254 | 0.38 | 12,176,393 | 3,775 | 0.04 |
| Money market deposit accounts | 11,655,293 | 229,804 | 2.64 | 12,650,089 | 51,334 | 0.54 |
| Time accounts | 3,408,515 | 95,976 | 3.76 | 1,403,238 | 7,078 | 0.67 |
| Total interest-bearing deposits | 25,966,955 | 357,034 | 1.84 | 26,229,720 | 62,187 | 0.32 |
| Total deposits | 41,523,518 |  | 1.15 | 44,507,377 |  | 0.19 |
| Federal funds purchased | 34,970 | 1,283 | 4.84 | 35,053 | 336 | 1.26 |
| Repurchase agreements | 3,819,406 | 99,960 | 3.45 | 1,917,622 | 9,837 | 0.68 |
| Junior subordinated deferrable interest debentures | 123,093 | 6,354 | 6.81 | 123,035 | 2,515 | 2.70 |
| Subordinated notes | 99,399 | 3,492 | 4.69 | 99,242 | 3,492 | 4.69 |
| **Total Interest-Bearing Funds and Average Rate Paid** | 30,043,823 | 468,123 | 2.08 | 28,404,672 | 78,367 | 0.37 |
| Accrued interest and other liabilities | 865,789 |  |  | 840,489 |  |  |
| **Total Liabilities** | 46,466,175 |  |  | 47,522,818 |  |  |
| **Shareholders’ Equity** | 3,382,645 |  |  | 3,753,193 |  |  |
| **Total Liabilities and Shareholders’ Equity** | $49,848,820 |  |  | $51,276,011 |  |  |
| Net interest income |  | $1,241,791 |  |  | $963,089 |  |
| Net interest spread |  |  | 2.67% |  |  | 2.49% |
| Net interest income to total average earning assets |  |  | 3.45% |  |  | 2.64% |

44

The following 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.

|  | Three Months Ended September 30, 2023 vs. September 30, 2022 Increase (Decrease) Due to Change in Rate | Volume | Total |
| --- | ---: | ---: | ---: |
| Interest-bearing deposits | $63,760 | $(46,113) | $17,647 |
| Federal funds sold | 211 | (344) | (133) |
| Resell agreements | 177 | 956 | 1,133 |
| Securities: |  |  |  |
| Taxable | 19,328 | 16,236 | 35,564 |
| Tax-exempt | 3,321 | (8,438) | (5,117) |
| Loans, net of unearned discounts | 86,788 | 14,856 | 101,644 |
| Total earning assets | 173,585 | (22,847) | 150,738 |
| Savings and interest checking | 8,009 | (411) | 7,598 |
| Money market deposit accounts | 48,640 | (7,211) | 41,429 |
| Time accounts | 29,978 | 17,092 | 47,070 |
| Federal funds purchased | 201 | (162) | 39 |
| Repurchase agreements | 16,494 | 9,172 | 25,666 |
| Junior subordinated deferrable interest debentures | 1,100 | 1 | 1,101 |
| Subordinated notes | — | — | — |
| Total interest-bearing liabilities | 104,422 | 18,481 | 122,903 |
| Net change | $69,163 | $(41,328) | $27,835 |

|  | Nine Months Ended September 30, 2023 vs. September 30, 2022 Increase (Decrease) Due to Change in Rate | Volume | Total |
| --- | ---: | ---: | ---: |
| Interest-bearing deposits | $235,961 | $(64,035) | $171,926 |
| Federal funds sold | 806 | 12 | 818 |
| Resell agreements | 512 | 2,801 | 3,313 |
| Securities: |  |  |  |
| Taxable | 62,104 | 73,772 | 135,876 |
| Tax-exempt | 12,119 | (2,554) | 9,565 |
| Loans, net of unearned discounts | 312,913 | 34,047 | 346,960 |
| Total earning assets | 624,415 | 44,043 | 668,458 |
| Savings and interest checking | 27,900 | (421) | 27,479 |
| Money market deposit accounts | 182,831 | (4,361) | 178,470 |
| Time accounts | 67,868 | 21,030 | 88,898 |
| Federal funds purchased | 948 | (1) | 947 |
| Repurchase agreements | 72,478 | 17,645 | 90,123 |
| Junior subordinated deferrable interest debentures | 3,838 | 1 | 3,839 |
| Subordinated notes | — | — | — |
| Total interest-bearing liabilities | 355,863 | 33,893 | 389,756 |
| Net change | $268,552 | $10,150 | $278,702 |

Taxable-equivalent net interest income for the three months ended September 30, 2023 increased $27.8 million, or 7.3%, while taxable-equivalent net interest income for the nine months ended September 30, 2023 increased $278.7 million, or 28.9%, compared to the same periods in 2022. The increases in taxable-equivalent net interest income during the three and nine months ended September 30, 2023 were primarily related to increases in the average yields on loans and, to a lesser extent, the average volumes of loans; increases in the average yields on interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve); increases in the average volumes of and average yields on taxable securities; and increases in the average taxable-equivalent yields on tax-exempt securities, among other things. The impact of these items was partly offset by increases in the average costs of interest-bearing deposit accounts and repurchase agreements, among other things, combined with decreases in the average volumes of interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) and increases in the average volumes of time deposit accounts and repurchase agreements, among other things.

As a result of the aforementioned fluctuations, the taxable-equivalent net interest margin increased 43 basis points from 3.01% during the three months ended September 30, 2022 to 3.44% during the three months ended September 30, 2023 while the taxable-equivalent net interest margin increased 81 basis points from 2.64% during the nine months ended September 30, 2022 to 3.45% during the nine months ended September 30, 2023.

The average volume of interest-earning assets for the three months ended September 30, 2023 decreased $3.7 billion while the average volume of interest-earning assets for the nine months ended September 30, 2023 decreased $1.7 billion compared to the same periods in 2022. The decrease in the average volume of interest-earning assets during the three months ended September 30, 2023 was primarily related to a $6.0 billion decrease in average interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) and a $924.1 million decrease in average tax-exempt securities partly offset by a $2.1 billion increase in average taxable securities and a $1.1 billion increase in average loans. The average taxable-equivalent yield on interest-earning assets increased 149 basis points from 3.43% during the three months ended September 30, 2022 to 4.92% during the three months ended September 30, 2023. The decrease in the average volume of interest-earning assets during the nine months ended September 30, 2023 was primarily related to a $5.8 billion decrease in average interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) and a $335.7 million decrease in average tax-exempt securities partly offset by a $3.3 billion increase in average taxable securities and a $1.0 billion increase in average loans. The average taxable-equivalent yield on interest-earning assets increased 189 basis points from 2.86% during the nine months ended September 30, 2022 to 4.75% during the nine months ended September 30, 2023. The average taxable-equivalent yield on interest-earning assets during the comparable periods was impacted by the aforementioned changes in market interest rates and changes in the volume and relative mix of interest-earning assets.

The average taxable-equivalent yield on loans increased 194 basis points from 4.89% during the three months ended September 30, 2022 to 6.83% during the three months ended September 30, 2023 while the average taxable-equivalent yield on loans increased 239 basis points from 4.23% during the nine months ended September 30, 2022 to 6.62% during the nine months ended September 30, 2023. The average taxable-equivalent yields on loans during the three and nine months ended September 30, 2023 were positively impacted by recent increases in market interest rates. The average volume of loans for the three months ended September 30, 2023 increased $1.1 billion, or 6.8%, while the average volume of loans for the nine months ended September 30, 2023 increased $1.0 billion, or 6.1%, compared to the same periods in 2022. Loans made up approximately 39.6% and 38.1% of average interest-earning assets during the three and nine months ended September 30, 2023, compared to 34.3% and 34.6% during the same respective periods in 2022.

The average taxable-equivalent yield on securities was 3.24% during both the three and nine months ended September 30, 2023, increasing 30 basis points from 2.94% during the three months ended September 30, 2022 and increasing 34 basis points from 2.90% during nine months ended September 30, 2022. The average yield on taxable securities was 2.76% during the three months ended September 30, 2023, increasing 56 basis points from 2.20% during the same period in 2022 while the average yield on taxable securities was 2.71% during the nine months ended September 30, 2023, increasing 65 basis points from 2.06% during the same period in 2022. The average taxable-equivalent yield on tax-exempt securities was 4.26% during both the three and nine months ended September 30, 2023, increasing 17 basis points from 4.09% during the three months ended September 30, 2022 and increasing 21 basis points from 4.05% during the nine months ended September 30, 2022.

Tax-exempt securities made up approximately 34.0% and 36.0% of total average securities during the three and nine months ended September 30, 2023, compared to 40.8% and 43.6% during the same periods in 2022. The average volume of total securities during the three months ended September 30, 2023 increased $1.2 billion, or 6.0%, compared to the same period in 2022 while the average volume of total securities during the nine months ended September 30, 2023 increased $2.9 billion, or 16.2%, compared to the same period in 2022. Securities made up approximately 45.3% of average interest-earning assets during the three months ended September 30, 2023 compared to 39.5% during the same period in 2022 while securities made up approximately 45.6% of average interest-earning assets during the nine months ended September 30, 2023 compared to 37.9% during the same period in 2022. The increases during the three and nine months ended September 30, 2023 were primarily related to the investment of available funds (primarily from the reinvestment of amounts held in an interest-bearing account at the Federal Reserve) into taxable securities.

Average interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) for the three months ended September 30, 2023 decreased $6.0 billion, or 47.2%, compared to the same period in 2022, while average interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) for the nine months ended September 30, 2023 decreased $5.8 billion, or 43.7%, compared to the same period in 2022. Interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) made up approximately 14.9% of average interest-earning assets during the three months ended September 30, 2023 compared to 26.0% during the same period in 2022 while interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) made up approximately 16.0% of average interest-earning assets during the nine months ended September 30, 2023 compared to 27.4% during the same period in 2022. The decreases during the three and nine months ended September 30, 2023 were primarily related to the reinvestment of amounts held in an interest-bearing account at the Federal Reserve into taxable securities, and to a lesser extent, loans combined with decreases in average funding provided by customer deposits (primarily non-interest-bearing). The average yield on interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) was 5.33% and 4.95% during the three and nine months ended September 30, 2023, compared to 2.27% and 1.07% during the same respective periods in 2022. The average yields on interest-bearing deposits during the three and nine months ended September 30, 2023 were impacted by higher interest rates paid on reserves held at the Federal Reserve, compared to the same respective periods in 2022.

The average rate paid on interest-bearing liabilities was 2.33% during the three months ended September 30, 2023, increasing 162 basis points from 0.71% during the same period in 2022 while the average rate paid on interest-bearing liabilities was 2.08% during the nine months ended September 30, 2023, increasing 171 basis points from 0.37% during the same period in 2022. Average deposits decreased $5.0 billion, or 10.9%, during the three months ended September 30, 2023 compared to the same period in 2022 and included a $3.7 billion decrease in average non-interest-bearing deposits and a $1.3 billion decrease in average interest-bearing deposits. Average deposits decreased $3.0 billion, or 6.7%, during the nine months ended September 30, 2023 compared to the same period in 2022 and included a $2.7 billion decrease in average non-interest-bearing deposits and a $262.8 million decrease in average interest-bearing deposits. The ratio of average interest-bearing deposits to total average deposits was 63.7% and 62.5% during the three and nine months ended September 30, 2023 compared to 59.6% and 58.9% during the same respective periods in 2022. 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 2.12% and 1.35%, respectively, during the three months ended September 30, 2023 compared to 0.62% and 0.37%, respectively, during the same period in 2022. The average cost of interest-bearing deposits and total deposits was 1.84% and 1.15%, respectively, during the nine months ended September 30, 2023 compared to 0.32% and 0.19%, respectively, during the same period in 2022. The average cost of deposits during the comparable periods was impacted by increases in the interest rates we pay on our interest-bearing deposit products as a result of the 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 2.59% and 2.67% during the three and nine months ended September 30, 2023 compared to 2.72% and 2.49% during the same respective periods in 2022. 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, including from new financial technology competitors, and the availability of alternative investment options. 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 7 - 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.

### Credit Loss Expense

Credit loss expense is determined by management as the amount to be added to the allowance for credit loss accounts for various types of financial instruments including loans, securities and off-balance-sheet credit exposures after net charge-offs have been deducted to bring the allowances to a level which, in management’s best estimate, is necessary to absorb expected credit losses over the lives of the respective financial instruments. The components of credit loss expense were as follows:

| Credit loss expense (benefit) related to: | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Loans | $13,608 | $(2,463) | $38,216 | $(2,395) |
| Off-balance-sheet credit exposures | (2,466) | 2,463 | (8,178) | 2,395 |
| Securities held to maturity | 43 | — | 152 | — |
| Total | $11,185 | $— | $30,190 | $— |

See the section captioned “Allowance for Credit Losses” elsewhere in this discussion for further analysis of credit loss expense related to loans and off-balance-sheet credit exposures.

### Non-Interest Income

Total non-interest income for the three and nine months ended September 30, 2023 increased $6.2 million, or 6.2%, and increased $15.7 million, or 5.2%, respectively, compared to the same periods in 2022. 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 decreased $936 thousand, or 2.4%, for the three months ended September 30, 2023 and decreased $1.8 million, or 1.6%, for the nine months ended September 30, 2023, compared to the same respective periods in 2022. Investment management fees are the most significant component of trust and investment management fees, making up approximately 79.5% and 78.0% of total trust and investment management fees for the first nine months of 2023 and 2022, respectively. The decrease in trust and investment management fees during the three months ended September 30, 2023 was primarily due to a decrease in oil and gas fees (down $2.9 million) partly offset by an increase in investment management fees (up $1.9 million). The decrease in trust and investment management fees during the nine months ended September 30, 2023 was primarily due to a decrease in oil and gas fees (down $4.0 million) partly offset by increases in real estate fees (up $807 thousand), estate fees (up $663 thousand), and investment management fees (up $340 thousand). The decreases in oil and gas fees during the three and nine months ended September 30, 2023 were primarily related to lower average market prices in 2023 relative to 2022. The increases in real estate fees and estate fees during the nine months ended September 30, 2023 were primarily related to increases in transaction volumes. Investment management fees are generally based on the market value of assets within an account and are thus impacted by volatility in the equity and bond markets. The increase in investment management fees during the three and nine months ended September 30, 2023 was primarily related to an increase in the average value of assets maintained in accounts, despite a slight decrease in the number of accounts. The increase in the average value of assets was partly related to higher equity valuations during the second and third quarters of 2023 relative to the same periods in 2022.

At September 30, 2023, trust assets, including both managed assets and custody assets, were primarily composed of equity securities (41.1% of assets), fixed income securities (33.4% of assets), alternative investments (10.3% of assets) and cash equivalents (8.7% of assets). The estimated fair value of these assets was $44.5 billion (including managed assets of $22.5 billion and custody assets of $22.0 billion) at September 30, 2023, compared to $42.9 billion (including managed assets of $21.4 billion and custody assets of $21.5 billion) at December 31, 2022 and $40.1 billion (including managed assets of $19.3 billion and custody assets of $20.8 billion) at September 30, 2022.

*Service Charges on Deposit Accounts.* Service charges on deposit accounts for the three and nine months ended September 30, 2023 increased $643 thousand, or 2.8%, and decreased $601 thousand, or 0.9%, respectively, compared to the same periods in 2022. The increase during the three months ended September 30, 2023 was primarily related to increases in overdraft charges on consumer and commercial accounts (up $1.1 million and $207 thousand, respectively) and consumer service charges (up $338 thousand), partly offset by a decrease in commercial service charges (down $994 thousand). The decrease during the nine months ended September 30, 2023 was primarily related to a decrease in commercial service charges (down $6.2 million), partly offset by increases in overdraft charges on consumer and commercial accounts (up $3.2 million and $1.4 million, respectively) and consumer service charges (up $962 thousand). The decreases in commercial service charges during the three and nine months ended September 30, 2023 primarily resulted from a higher average earnings credit rate applied to deposits maintained by treasury management customers. Because average market interest rates were higher during

2023 compared to 2022, deposit balances were more valuable and yielded a higher average earnings credit rate. As a result, customers paid for less of their services through fees rather than with earnings credits applied to their deposit balances. Overdraft charges totaled $11.0 million ($8.3 million consumer and $2.6 million commercial) during the three months ended September 30, 2023 compared to $9.7 million ($7.2 million consumer and $2.4 million commercial) during the same period in 2022. Overdraft charges totaled $32.5 million ($24.6 million consumer and $7.9 million commercial) during the nine months ended September 30, 2023 compared to $27.9 million ($21.4 million consumer and $6.5 million commercial) during the same period in 2022. The increases in overdraft charges during the three and nine months ended September 30, 2023 were impacted by increases in the volumes of fee assessed overdrafts relative to 2022, in part due to growth in the number of accounts.

*Insurance Commissions and Fees*. Insurance commissions and fees for the three and nine months ended September 30, 2023 increased $484 thousand, or 3.7%, and increased $4.0 million, or 9.6%, respectively, compared to the same periods in 2022. The increase during the three months ended September 30, 2023 was primarily the result of an increase in commission income (up $552 thousand) partly offset by a decrease in contingent income (down $68 thousand). The increase during the nine months ended September 30, 2023 was primarily the result of increases in commission income (up $2.8 million) and contingent income (up $1.2 million). The increase in commission income during the three months ended September 30, 2023 was related to an increase in commercial lines property and casualty commissions and, to a lesser extent, an increase in personal lines property and casualty commissions, partly offset by a decrease in life insurance commissions and, to a lesser extent, a decrease in benefit plan commissions. The increase in commission income during the nine months ended September 30, 2023 was related to increases in commercial and personal lines property and casualty commissions, life insurance commissions and benefit plan commissions. The increases in commercial and personal lines property and casualty commissions during the three and nine months ended September 30, 2023 and benefit plan commissions during the nine months ended September 30, 2023 were primarily related to increases in the underlying exposure bases and increases in rates. The fluctuations in life insurance commissions during the three and nine months ended September 30, 2023 were primarily due to variations in business volumes.

Contingent income totaled $210 thousand and $4.5 million during the three and nine months ended September 30, 2023, respectively, compared to $278 thousand and $3.3 million during the same respective periods in 2022. Contingent income primarily consists of amounts received from various property and casualty insurance carriers related to portfolio growth and 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 $3.2 million and $1.9 million during the nine months ended September 30, 2023 and 2022, respectively. The increase in performance related contingent income was primarily related to growth within the portfolio and improvement in the loss performance of insurance policies previously placed. Performance related contingent income in 2022 was impacted by a severe weather event in Texas during 2021 that resulted in significant property and casualty claims and losses. 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 $135 thousand and $1.2 million during the three and nine months ended September 30, 2023, respectively, compared to $232 thousand and $1.4 million during the same respective periods in 2022.

*Interchange and 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 card transaction fees consist of income from debit and credit card usage, point of sale income from PIN-based card transactions and ATM service fees. Interchange and card transaction fees are reported net of related network costs.

Net interchange and card transaction fees for the three and nine months ended September 30, 2023 increased $58 thousand, or 1.3%, and increased $1.1 million, or 7.7%, respectively, compared to the same periods in 2022 primarily due to increases in transaction volumes partly offset by an increase in network costs. A comparison of gross and net interchange and card transaction fees for the reported periods is presented in the table below.

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Income from card transactions | $9,041 | $8,292 | $27,248 | $24,081 |
| ATM service fees | 902 | 871 | 2,658 | 2,502 |
| Gross interchange and card transaction fees | 9,943 | 9,163 | 29,906 | 26,583 |
| Network costs | 5,271 | 4,549 | 15,095 | 12,832 |
| Net interchange and card transaction fees | $4,672 | $4,614 | $14,811 | $13,751 |

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, 2023 increased $2.0 million, or 18.3%, compared to the same period in 2022. The increase was primarily related to increases in other service charges (up $711 thousand), capital markets advisory fees (up $428 thousand), letter of credit fees (up $393 thousand), merchant services rebates/bonuses (up $269 thousand), and income from the placement of money market accounts (up $219 thousand), among other things. Other charges, commissions, and fees for the nine months ended September 30, 2023 increased $6.3 million, or 20.6%, compared to the same period in 2022. The increase was primarily related to increases in income from the placement of money market accounts (up $2.2 million), other service charges (up $2.0 million), capital markets advisory fees (up $1.3 million), letter of credit fees (up $873 thousand), commitment fees on unused lines of credit (up $839 thousand), and merchant services rebates/bonuses (up $600 thousand), among other things, partly offset by a decrease in income from the sale of mutual funds (down $1.4 million), among other things.

*Net Gain/Loss on Securities Transactions*. During the nine months ended September 30, 2023, we sold certain available-for-sale securities with amortized costs totaling $1.9 billion and realized a net gain of $66 thousand. Market conditions provided us an opportunity to sell certain lower-yielding securities. The proceeds from these sales enhanced our current liquidity position and will provide us the flexibility to be more opportunistic with the reinvestment of these funds in the future. There were no sales of securities during 2022.

*Other Non-Interest Income.* Other non-interest income for the three months ended September 30, 2023 increased $3.9 million, or 41.1%, compared to the same period in 2022. The increase was primarily related to increases in income from customer derivative and foreign exchange transactions (up $2.6 million) and public finance underwriting fees (up $751 thousand), among other things.

Other non-interest income for the nine months ended September 30, 2023 increased $6.7 million, or 23.2%, compared to the same period in 2022. The increase was partly related to increases in income from customer derivative and foreign exchange transactions (up $3.0 million), sundry and other miscellaneous income (up $1.2 million), income from customer securities trading transactions (up $685 thousand), earnings on the cash surrender value of life insurance (up $603 thousand), and gains on the sale of foreclosed and other assets (up $327 thousand), among other things. The increases in income from customer derivative and securities trading transactions and income from customer foreign exchange transactions were primarily related to increases in transaction volumes. Sundry income during the nine months ended September 30, 2023 included $1.5 million related to a distributions received from a Small Business Investment Company (“SBIC”) fund investment, $1.3 million related to the recovery of prior write-offs, $950 thousand related to merchant services performance and revenue milestone bonuses, $839 thousand related to a volume bonus received from Frost Brokerage Services' clearing broker, and $575 thousand related to a partnership interest, among other things, while sundry income during the nine months ended September 30, 2022 included $2.2 million in card related incentives/rebates, $1.2 million related to the recovery of prior write-offs, and $458 thousand related to a contract fee, among other things. The increase in earnings on the cash surrender value of life insurance was related to an increase in market interest rates. The increase in gains on the sale of foreclosed and other assets was primarily related to the sale of foreclosed real estate property.

### Non-Interest Expense

Total non-interest expense for the three and nine months ended September 30, 2023 increased $35.4 million, or 13.7%, and increased $120.5 million, or 16.2%, respectively, compared to the same periods in 2022. 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, 2023 increased $10.4 million, or 8.2%, and increased $45.7 million, or 12.9%, respectively, compared to the same periods in 2022. The increases in salaries and wages were primarily related to increases in salaries due to annual merit and market increases and increases in the number of employees. The increases in the number of employees were partly related to our investments in organic expansion in the Houston, Dallas, and Austin markets as well as the gradual rollout of our mortgage loan product offering. Salaries and wages during the nine months ended September 30, 2023 was also impacted, to a lesser extent, by an increase in stock-based compensation. The aforementioned increases were partly offset by decreases in incentive compensation during the three and nine months ended September 30, 2023. We are experiencing a competitive labor market which has resulted in and could continue to result in an increase in our staffing costs.

*Employee Benefits*. Employee benefits expense for the three and nine months ended September 30, 2023 increased $4.8 million, or 22.4%, and increased $20.6 million, or 30.9%, respectively, compared to the same periods in 2022. The increases were primarily related to increases in 401(k) plan expense (up $321 thousand and $5.9 million during the three and nine months ended September 30, 2023, respectively), medical benefits expense (up $2.0 million and $5.6 million during the three and nine months ended September 30, 2023, respectively), and payroll taxes (up $850 thousand and $3.7 million during the three and nine months ended September 30, 2023, respectively), and decreases in the net periodic benefit related to our defined benefit retirement plan (down $1.6 million and $4.9 million, respectively), among other things.

Our defined benefit retirement and restoration plans were frozen in 2001 which has helped to reduce the volatility in retirement plan expense. We nonetheless still have funding obligations related to these plans and could recognize 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 11 - 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, 2023 increased $3.4 million, or 12.3%, and increased $9.7 million, or 11.6%, respectively, compared to the same periods in 2022. The increases during the three and nine months ended September 30, 2023 were primarily related to increases in depreciation on buildings and leasehold improvements (together up $1.3 million and $3.0 million, respectively), lease expense (up $383 thousand and $2.8 million, respectively), utilities expense (up $381 thousand and $1.3 million, respectively), and repairs/maintenance/service contracts expense (up $867 thousand and $1.2 million, respectively), among other things. The increases in the aforementioned components of net occupancy expense were impacted, in part, by our expansion within the Houston and Dallas market areas.

*Technology, Furniture, and Equipment.* Technology, furniture, and equipment expense for the three and nine months ended September 30, 2023 increased $4.5 million, or 14.6%, and increased $10.9 million, or 12.2%, respectively, compared to the same periods in 2022. The increases during the three and nine months ended September 30, 2023 were primarily related to increases in cloud services expense (up $3.3 million and $6.9 million, respectively) and service contracts expense (up $1.3 million and $3.2 million, respectively), among other things.

*Deposit Insurance*. Deposit insurance expense totaled $6.0 million and $18.5 million for the three and nine months ended September 30, 2023, respectively, compared to $4.3 million and $11.6 million for the three and nine months ended September 30, 2022, respectively. The increases during the three and nine months ended September 30, 2023 were primarily related to an increase in the assessment rate. In October 2022, the Federal Deposit Insurance Corporation (“FDIC”) adopted a final rule to increase the initial base deposit insurance assessment rate schedules uniformly by 2 basis points beginning with the first quarterly assessment period of 2023.

In May 2023, the FDIC issued a Notice of Proposed Rulemaking proposing an emergency special assessment to recover losses to the Deposit Insurance Fund ("DIF") incurred as a result of recent bank failures and the FDIC's use of the systemic risk exception to cover certain deposits that were otherwise uninsured. Under the proposal, the special assessment would be based on estimated uninsured deposits as of December 31, 2022 (excluding the first $5.0 billion) and assessed at a rate of 25 basis points payable over eight quarters beginning in the first quarter of 2024. If this rule is made final as it is proposed, we expect that we will incur a special assessment of approximately $47.9 million ($37.9 million after tax). Based on the proposed rule, such amount will be fully expensed in the period the rule is made final, which is currently expected to be later in 2023. Nonetheless, the proposal could be changed and the timing of accounting recognition is still under consideration. Under the proposed rule, the estimated loss pursuant to the systemic risk determination would be periodically adjusted, and the FDIC would retain the ability to cease collection early, extend the special assessment collection period and impose a final shortfall special assessment on a one-time basis. The extent to which any such future assessment will impact our future deposit insurance expense is currently uncertain.

*Other Non-Interest Expense*. Other non-interest expense for the three and nine months ended September 30, 2023 increased $10.4 million, or 22.8%, and increased $26.6 million, or 19.7%, respectively, compared to the same periods in 2022. The increase during the three months ended September 30, 2023 included increases in advertising/promotions expense (up $3.6 million); professional services expense (up $3.5 million), which was primarily related to information technology services; fraud losses (up $1.2 million); and travel, meals, and entertainment expense (up $706 thousand); among other things. These items were partly offset by a decrease in sundry and other miscellaneous expenses (down $789 thousand), among other things. Sundry and other miscellaneous expenses during the three months ended September 30, 2022 included $1.6 million related to an operational loss and $225 thousand related to the write-off of certain assets while sundry and other miscellaneous expenses during the three months ended September 30, 2023 included $465 thousand related to an operational loss. The increase during the nine months ended September 30, 2023 included increases in professional services expense (up $8.6 million), which was primarily related to information technology services; advertising/promotions expense (up $7.7 million); travel, meals, and entertainment (up $3.0 million); fraud losses (up $1.6 million); check card expense (up $1.6 million); business development expense (up $1.5 million); and stationery, printing and supplies expense (up $941 thousand), among other things.

### Results of Segment Operations

We are managed under a matrix organizational structure whereby our two primary operating segments, Banking and Frost Wealth Advisors, overlap a regional reporting structure. A third operating segment, Non-Banks, is for the most part the parent holding company, as well as certain other insignificant non-bank subsidiaries of the parent that, for the most part, have little or no activity. A description of each segment, the methodologies used to measure segment financial performance and summarized operating results by segment are described in Note 14 - Operating Segments in the accompanying notes to consolidated financial statements included elsewhere in this report. Segment operating results are discussed in more detail below.

#### Banking

Net income for the three and nine months ended September 30, 2023 decreased $10.4 million, or 6.4%, and increased $113.4 million, or 30.8%, respectively, compared to the same periods in 2022. The decrease during the three months ended September 30, 2023 was primarily the result of a $31.6 million increase in non-interest expense, an $11.2 million increase in credit loss expense, and a $4.5 million increase in income tax expense partly offset by a $30.3 million increase in net interest income and a $6.5 million increase in non-interest income. The increase during the nine months ended September 30, 2023 was primarily the result of a $276.9 million increase in net interest income and a $13.9 million increase in non-interest income partly offset by a $110.8 million increase in non-interest expense, a $36.4 million increase in income tax expense and a $30.2 million increase in credit loss expense.

Net interest income for the three and nine months ended September 30, 2023 increased $30.3 million, or 8.5%, and $276.9 million, or 30.9%, respectively, compared to the same periods in 2022. The increases during the three and nine months ended September 30, 2023 were primarily related to increases in the average yields on loans and, to a lesser extent, the average volumes of loans; increases in the average yields on interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve); increases in the average volumes of and average yields on taxable securities; and increases in the average taxable-equivalent yields on tax-exempt securities, among other things. The impact of these items was partly offset by increases in the average costs of interest-bearing deposit accounts and repurchase agreements, among other things, combined with decreases in the average volumes of interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) and increases in the average volumes of time deposit accounts and repurchase agreements, among other things. See the analysis of net interest income included in the section captioned “Net Interest Income” included elsewhere in this discussion.

Credit loss expense for the three and nine months ended September 30, 2023 totaled $11.2 million and $30.2 million, respectively. There was no credit loss expense during the three and nine months ended September 30, 2022. See the sections captioned “Credit Loss Expense” and “Allowance for Credit Losses” elsewhere in this discussion for further analysis of credit loss expense related to loans and off-balance-sheet commitments.

Non-interest income for the three months ended September 30, 2023 increased $6.5 million, or 11.7%, compared to the same period in 2022, while non-interest income for the nine months ended September 30, 2023 increased $13.9 million, or 8.2%, compared to the same period in 2022. The increase during the three months ended September 30, 2023 was primarily due to increases in other non-interest income; other charges, commissions, and fees; service charges on deposit accounts and insurance commissions, and fees. The increase during the nine months ended September 30, 2023 was primarily related to increases in other charges, commissions, and fees; other non-interest income; insurance commissions and fees and interchange and card transaction fees. The increases in other charges, commissions, and fees during the three and nine months ended September 30, 2023 included increases in capital markets advisory fees, letter of credit fees, and merchant services rebates/bonuses, among other things, and for the nine months ended September 30, 2023, an increase in commitment fees on unused lines of credit. The increase in other non-interest income during the three months ended September 30, 2023 was primarily related to increases in income from customer derivative and foreign exchange transactions and public finance underwriting fees, among other things. The increase in other non-interest income during the nine months ended September 30, 2023 was partly related to increases in income from customer derivative and foreign exchange transactions, sundry and other miscellaneous income, earnings on the cash surrender value of life insurance, and gains on the sale of foreclosed and other assets, among other things. The increase in insurance commissions and fees during the three months ended September 30, 2023 was primarily the result of an increase in commission income partly offset by a decrease in contingent income, while the increase during the nine months ended September 30, 2023 was primarily the result of increases in both commission income and contingent income. These changes are further discussed below in relation to Frost Insurance Agency. The increase in interchange and card transaction fees during the nine months ended September 30, 2023 was primarily due to an increase in transaction volumes partly offset by an increase in network costs. The increase in service charges on deposit accounts during the three months ended September 30, 2023 was primarily related to increases in overdraft charges on consumer and commercial accounts and consumer service charges, partly offset by a decrease in commercial service charges. 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 three and nine months ended September 30, 2023 increased $31.6 million, or 14.1%, and $110.8 million, or 17.3%, compared to the same respective periods in 2022. The increases during the three and nine months ended September 30, 2023 were primarily due to increases in salaries and wages; other non-interest expense; employee benefit expense; technology, furniture, and equipment expense; net occupancy expense and deposit insurance. The increases in salaries and wages during the three and nine months ended September 30, 2023, were primarily related to increases in salaries due to annual merit and market increases and increases in the number of employees. The increase in the number of employees was partly related to our investments in organic expansion in the Houston, Dallas, and Austin markets as well as the gradual rollout of our mortgage loan product offering. Salaries and wages during the nine months ended September 30, 2023 was also impacted, to a lesser extent, by an increase in stock-based compensation. The aforementioned increases were partly offset by decreases in incentive compensation during the three and nine months ended September 30, 2023. The increases in employee benefits expense during the three and nine months ended September 30, 2023 were primarily related to increases in 401(k) plan expense, medical benefits expense, and payroll taxes, and decreases in the net periodic benefit related to our defined benefit retirement plan, among other things. The increases in other non-interest expense during the three and nine months ended September 30, 2023 were primarily related to increases in professional services expense; advertising/promotions expense; travel, meals, and entertainment; check card expense; business development expense and stationery, printing and supplies expense, among other things. The increases in technology, furniture, and equipment expense during the three and nine months ended September 30, 2023 were primarily related to increases in cloud services expense and service contracts expense, among other things. The increases in net occupancy during the three and nine months ended September 30, 2023 were primarily related to increases in depreciation on buildings and leasehold improvements, lease expense, utilities expense, and repairs/maintenance/service contracts expense, among other things. The increases in the aforementioned components of net occupancy expense were impacted, in part, by our expansion within the Houston and Dallas market areas. The increases in deposit insurance during the three and nine months ended September 30, 2023 were primarily related to an increase in the assessment rate. 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 $13.6 million and $45.6 million during the three and nine months ended September 30, 2023, respectively, compared to $13.2 million and $41.6 million during the same respective periods in 2022. The increase during the three months ended September 30, 2023 was primarily related to an increase in commission income while the increase during the nine months ended September 30, 2023 was primarily due to increases in both commission and contingent income. The increases in commission income during the three months ended September 30, 2023 was related to an increase in commercial lines property and casualty commissions and, to a lesser extent, an increase in personal lines property and casualty commissions, partly offset by a decrease in life insurance commissions and, to a lesser extent, a decrease in benefit plan commissions. The increase in commission income during the nine months ended September 30, 2023 was related to increases in commercial and personal lines property and casualty commissions, life insurance commissions and benefit plan commissions. The increases in commercial and personal lines property and casualty commissions during the three and nine months ended September 30, 2023 and benefit plan commissions during the nine months ended September 30, 2023 were primarily related to increases in the underlying exposure bases and increases in rates. The fluctuations in life insurance commissions during the three and nine months ended September 30, 2023 were primarily due to variations in business volumes. The increase in contingent income during the nine months ended September 30, 2023 was primarily related to an increase in performance related contingent payments due 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, 2023 decreased $2.7 million, or 28.7%, and decreased $3.9 million, or 13.7%, respectively, compared to the same periods in 2022. The decrease during the three months ended September 30, 2023 was primarily the result of a $3.8 million increase in non-interest expense and a $360 thousand decrease in non-interest income partly offset by a $730 thousand decrease in income tax expense and a $661 thousand increase in net interest income. The decrease during the nine months ended September 30, 2023 was primarily the result of a $9.2 million increase in non-interest expense partly offset by a $2.7 million increase in net interest income, a $1.5 million increase in non-interest income and a $1.0 million decrease in income tax expense.

Net interest income for the three and nine months ended September 30, 2023 increased $661 thousand, or 48.7%, and increased $2.7 million, or 91.1%, respectively, compared to the same periods in 2022. The increases during the three and nine months ended September 30, 2023 were primarily due to increases in the average funds transfer prices allocated to funds provided by Frost Wealth Advisors. See the analysis of net interest income included in the section captioned “Net Interest Income” included elsewhere in this discussion.

Non-interest income for the three and nine months ended September 30, 2023 decreased $360.0 thousand, or 0.8%, and increased $1.5 million, or 1.2%, respectively, compared to the same periods in 2022. The decrease during the three months ended September 30, 2023 was primarily due to a decrease in trust and investment management fees partly offset by increases in other non-interest income and other charges, commissions, and fees. The increase during the nine months ended September 30, 2023 was primarily due to increases in other non-interest income and other charges, commissions, and fees partly offset by a decrease in trust and investment management fees. Trust and investment management fee income is the most significant income component for Frost Wealth Advisors. Investment management fees are the most significant component of trust and investment management fees, making up approximately 79.5% of total trust and investment management fees for the first nine months of 2023. The decrease in trust and investment management fees during the three months ended September 30, 2023 was primarily due to a decrease in oil and gas fees partly offset by an increase in investment management fees. The decrease in trust and investment management fees during the nine months ended September 30, 2023 was primarily due to a decrease in oil and gas fees partly offset by increases in real estate fees, estate fees, and investment management fees. The decreases in oil and gas fees during the three and nine months ended September 30, 2023 were primarily related to lower average market prices in 2023 relative to 2022. The increases in real estate fees and estate fees during the nine months ended September 30, 2023 were primarily related to increases in transaction volumes. The increase in investment management fees during the three and nine months ended September 30, 2023 was primarily related to an increase in the average value of assets maintained in accounts, despite a slight decrease in the number of accounts. The increase in the average value of assets was partly related to higher equity valuations during the second and third quarters of 2023 relative to the same periods in 2022. The increases in other non-interest income during the three and nine months ended September 30, 2023 were primarily related to increases in income from customer securities trading transactions, and for the nine months ended September 30, 2023, an increase in sundry income, primarily related to a volume bonus received from Frost Brokerage Services' clearing broker. The increases in other charges, commissions, and fees during the three and nine months ended September 30, 2023 were primarily related to increases in income from the placement of money market accounts, among other things, partly offset by decreases in income from the sale of mutual funds, among other things. See the analysis of trust and investment management fees, other non-interest income 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, 2023 increased $3.8 million, or 11.3%, and increased $9.2 million, or 9.4%, respectively, compared to the same periods in 2022. The increases during the three and nine months ended September 30, 2023 were primarily due to increases in salaries and wages, other non-interest expense, employee benefits expense and net occupancy expense. The increases in salaries and wages were primarily due to an increase in salaries, due to annual merit and market increases, as well as increases in commission expense, among other things. The increase in other non-interest expense during the three months ended September 30, 2023 was primarily related increases in sundry and other miscellaneous expenses and professional service expense, among other things. The increase in other non-interest expense during the nine months ended September 30, 2023 was primarily related to an increase in the corporate overhead expense allocation and an increase in professional service expense, among other things. The increases in employee benefits during the three and nine months ended September 30, 2023 were primarily related to increases in medical benefits expense, payroll taxes, defined benefit plan expense and 401(k) plan expense, among other things. The increases in net occupancy expense during the three and nine months ended September 30, 2023 were primarily related to increases in lease expense.

#### Non-Banks

The Non-Banks operating segment had net losses of $3.6 million and $10.3 million during the three and nine months ended September 30, 2023, respectively, compared to net loss of $2.6 million and $8.2 million during the same respective periods in 2022. The increases in net losses during the three and nine months ended September 30, 2023 were primarily due to increases in net interest expense due to an increase in the average rates paid on our long-term borrowings.

### Income Taxes

During the three months ended September 30, 2023, we recognized income tax expense of $31.3 million, for an effective tax rate of 16.8%, compared to $27.7 million, for an effective tax rate of 14.0%, for the same period in 2022. During the nine months ended September 30, 2023, we recognized income tax expense of $96.3 million, for an effective tax rate of 16.3%, compared to $61.0 million, for an effective tax rate of 13.6%, for the same period in 2022. The effective income tax rates differed from the U.S. statutory federal income tax rate of 21% during 2023 and 2022 primarily due to the effect of tax-exempt income from securities, loans and life insurance policies and the income tax effects associated with stock-based compensation, among other things, and their relative proportion to total pre-tax net income. The increases in the effective tax rates during 2023 was primarily related to an increase in projected pre-tax net income and, to a lesser extent, increases in disallowed deposit interest expense and deposit insurance premiums and a decrease in discrete tax benefits associated with stock-based compensation, among other things.

### Average Balance Sheet

Average assets totaled $49.8 billion for the nine months ended September 30, 2023 representing a decrease of $1.4 billion, or 2.8%, compared to average assets for the same period in 2022. Earning assets decreased $1.7 billion, or 3.6%, during the nine months ended September 30, 2023 compared to the same period in 2022. The decrease in earning assets was primarily related to a $5.8 billion decrease in average interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) and a $335.7 million decrease in tax-exempt securities partly offset by a $3.3 billion increase in average taxable securities and a $1.0 billion increase in average loans. Average deposits decreased $3.0 billion, or 6.7%, during nine months ended September 30, 2023 compared to the same period in 2022. The decrease included a $2.7 billion decrease in non-interest-bearing deposits and a $262.8 million decrease in interest-bearing deposits. Average non-interest-bearing deposits made up 37.5% and 41.1% of average total deposits during the nine months ended September 30, 2023 and 2022, respectively.

### Loans

Details of our loan portfolio are presented in Note 3 - Loans in the accompanying notes to consolidated financial statements included elsewhere in this report. Loans increased $1.2 billion, or 7.3%, from $17.2 billion at December 31, 2022 to $18.4 billion at September 30, 2023. The majority of our loan portfolio is comprised of commercial and industrial loans, energy loans, and real estate loans. Real estate loans include both commercial and consumer balances. Selected details related to our loan portfolio segments are presented below. Refer to our 2022 Form 10-K for a more detailed discussion of our loan origination and risk management processes.

*Commercial and Industrial.* Commercial and industrial loans increased $162.1 million, or 2.9%, from $5.7 billion at December 31, 2022 to $5.8 billion at September 30, 2023. 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 $81.1 million, or 8.8%, from $925.7 million at December 31, 2022 to $1.0 billion at September 30, 2023. Energy loans are one of our largest industry concentrations totaling 5.5% of total loans at September 30, 2023, up from 5.4% of total loans at December 31, 2022. 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.* SNCs are participations purchased from upstream financial organizations and tend to be larger in size than our originated portfolio. Our purchased SNC portfolio totaled $789.3 million at September 30, 2023, decreasing $1.2 million, or 0.2%, from $790.5 million at December 31, 2022. At September 30, 2023, 35.1% of outstanding purchased SNCs were related to the construction industry while 19.3% were related to the energy industry, and 16.7% were related to the real estate 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 increased $555.1 million, or 6.8%, from $8.2 billion at December 31, 2022 to $8.7 billion at September 30, 2023. Commercial real estate loans represented 78.9% of total real estate loans at September 30, 2023 compared to 81.6% at December 31, 2022. The majority of our commercial real estate loan 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, 2023, approximately 49.6% 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 real estate loan portfolio increased $495.8 million, or 26.9%, from $1.8 billion at December 31, 2022 to $2.3 billion at September 30, 2023. Combined, home equity loans and lines of credit made up 60.5% and 61.9% of the consumer real estate loan total at September 30, 2023 and December 31, 2022, 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. Prior to 2023, we did not generally originate 1-4 family mortgage loans; however, from time to time, we did invest in such loans to meet the needs of our customers or for other regulatory compliance purposes. We began offering 1-4 family mortgage loans to our employees during the first quarter of 2023 and have since gradually expanded our production of 1-4 family mortgage loans for customers. We expect our 1-4 family mortgage operations to be fully implemented across our markets by the end of 2023. Our 1-4 family mortgage loan production is intended to be for portfolio investment purposes. Nonetheless, 1-4 family mortgage loans are not a significant component of our consumer real estate portfolio. Consumer and other loans decreased $33.0 million, or 6.7%, from December 31, 2022. 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.

*Paycheck Protection Program*. We have originated loans to qualified small businesses under the PPP administered by the SBA under the provisions of the CARES Act. Loans covered by the PPP may be eligible for loan forgiveness for certain costs incurred related to payroll, group health care benefit costs and qualifying mortgage, rent and utility payments. The remaining loan balance after forgiveness of any amounts is still fully guaranteed by the SBA. Refer to the 2022 Form 10-K for additional details.

*Accruing Past Due Loans.* Accruing past due loans are presented in the following tables. Also see Note 3 - Loans in the accompanying notes to consolidated financial statements included elsewhere in this report.

| September 30, 2023 | Total Loans | Accruing Loans 30-89 Days Past Due Amount | Percent of Loans in Category | Accruing Loans 90 or More Days Past Due Amount | Percent of Loans in Category | Total Accruing Past Due Loans Amount | Percent of Loans in Category |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial and industrial | $5,836,877 | $13,873 | 0.24% | $5,404 | 0.09% | $19,277 | 0.33% |
| Energy | 1,006,859 | 1,684 | 0.17 | — | — | 1,684 | 0.17 |
| Paycheck Protection Program | 17,945 | 2,000 | 11.15 | 1,954 | 10.89 | 3,954 | 22.04 |
| Commercial real estate: |  |  |  |  |  |  |  |
| Buildings, land, and other | 7,193,785 | 9,368 | 0.13 | 1,056 | 0.01 | 10,424 | 0.14 |
| Construction | 1,544,666 | 8,523 | 0.55 | — | — | 8,523 | 0.55 |
| Consumer real estate | 2,339,363 | 12,106 | 0.52 | 6,801 | 0.29 | 18,907 | 0.81 |
| Consumer and other | 459,764 | 5,041 | 1.10 | 523 | 0.11 | 5,564 | 1.21 |
| Total | $18,399,259 | $52,595 | 0.29 | $15,738 | 0.09 | $68,333 | 0.38 |
| Excluding PPP loans | $18,381,314 | $50,595 | 0.28 | $13,784 | 0.07 | $64,379 | 0.35 |
| **December 31, 2022** |  |  |  |  |  |  |  |
| Commercial and industrial | $5,674,798 | $30,769 | 0.54% | $5,560 | 0.10% | $36,329 | 0.64% |
| Energy | 925,729 | 1,472 | 0.16 | — | — | 1,472 | 0.16 |
| Paycheck Protection Program | 34,852 | 5,321 | 15.27 | 13,867 | 39.79 | 19,188 | 55.06 |
| Commercial real estate: |  |  |  |  |  |  |  |
| Buildings, land, and other | 6,706,078 | 23,561 | 0.35 | 5,664 | 0.08 | 29,225 | 0.43 |
| Construction | 1,477,247 | — | — | — | — | — | — |
| Consumer real estate | 1,843,539 | 7,856 | 0.43 | 2,398 | 0.13 | 10,254 | 0.56 |
| Consumer and other | 492,726 | 5,155 | 1.05 | 311 | 0.06 | 5,466 | 1.11 |
| Total | $17,154,969 | $74,134 | 0.43 | $27,800 | 0.16 | $101,934 | 0.59 |
| Excluding PPP loans | $17,120,117 | $68,813 | 0.40 | $13,933 | 0.08 | $82,746 | 0.48 |

Accruing past due loans at September 30, 2023 decreased $33.6 million compared to December 31, 2022. The decrease was primarily related to decreases in past due commercial real estate - buildings, land, and other loans (down $18.8 million); past due commercial and industrial loans (down $17.1 million); and past due PPP loans (down $15.2 million) partly offset by increases in past due consumer real estate loans (up $8.7 million) and past due commercial real estate - construction loans (up $8.5 million). PPP loans are fully guaranteed by the SBA and we expect to collect all amounts due related to these loans. Excluding PPP loans, accruing past due loans decreased $18.4 million.

*Non-Accrual Loans.* Non-accrual loans are presented in the table below. Also see in Note 3 - Loans in the accompanying notes to consolidated financial statements included elsewhere in this report.

|  | September 30, 2023 Total Loans | Non-Accrual Loans Amount | Percent of Loans in Category | December 31, 2022 Total Loans | Non-Accrual Loans Amount | Percent of Loans in Category |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial and industrial | $5,836,877 | $27,326 | 0.47% | $5,674,798 | $18,130 | 0.32% |
| Energy | 1,006,859 | 14,200 | 1.41 | 925,729 | 15,224 | 1.64 |
| Paycheck Protection Program | 17,945 | — | — | 34,852 | — | — |
| Commercial real estate: |  |  |  |  |  |  |
| Buildings, land, and other | 7,193,785 | 23,112 | 0.32 | 6,706,078 | 3,552 | 0.05 |
| Construction | 1,544,666 | — | — | 1,477,247 | — | — |
| Consumer real estate | 2,339,363 | 2,537 | 0.11 | 1,843,539 | 927 | 0.05 |
| Consumer and other | 459,764 | — | — | 492,726 | — | — |
| Total | $18,399,259 | $67,175 | 0.37 | $17,154,969 | $37,833 | 0.22 |
| Allowance for credit losses on loans |  | $242,235 |  |  | $227,621 |  |
| Ratio of allowance for credit losses on loans to non-accrual loans |  | 360.60% |  |  | 601.65% |  |

Non-accrual loans at September 30, 2023 increased $29.3 million from December 31, 2022 primarily due to an increase in non-accrual commercial real estate - buildings, land, and other loans, which was mostly related to a single credit relationship; and, to a lesser extent, increases in non-accrual commercial and industrial loans and consumer real estate loans.

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. Non-accrual commercial and industrial loans included one credit relationship in excess of $5.0 million totaling $15.9 million at September 30, 2023, while there were no non-accrual commercial and industrial loans in excess of $5.0 million at December 31, 2022. Non-accrual energy loans included one credit relationship in excess of $5.0 million totaling $6.3 million at September 30, 2023. There were two non-accrual energy loan relationships in excess of $5.0 million with an aggregate balance of $11.1 million at December 31, 2022. The aggregate balance of these loans totaled $6.4 million at September 30, 2023 and neither credit relationship exceeded $5.0 million as of that date. The decreases in the aggregate balance of these credit relationship were related to principal payments made by these borrowers. 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 was one non-accrual commercial real estate loan in excess of $5.0 million totaling $17.7 million at September 30, 2023, while there were no non-accrual commercial real estate loans in excess of $5.0 million at December 31, 2022.

### Allowance for Credit Losses

In the case of loans and securities, allowances for credit losses are contra-asset valuation accounts, calculated in accordance with Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”) Financial Instruments - Credit Losses, that are deducted from the amortized cost basis of these assets to present the net amount expected to be collected. In the case of off-balance-sheet credit exposures, the allowance for credit losses is a liability account, calculated in accordance with ASC 326, reported as a component of accrued interest payable and other liabilities in our consolidated balance sheets. The amount of each allowance account represents management's best estimate of current expected credit losses (“CECL”) on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. Relevant available information includes historical credit loss experience, current conditions, and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions, or other relevant factors. While management utilizes its best judgment and information available, the ultimate adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets. See our 2022 Form 10-K for additional information regarding our accounting policies related to credit losses. Also see Note 3 - Loans in the accompanying notes to consolidated financial statements for information related to model updates during the first quarter of 2023.

*Allowance for Credit Losses - Loans.* The table below provides, as of the dates indicated, an allocation of the allowance for loan losses by loan portfolio segment; however, allocation of a portion of the allowance to one segment does not preclude its availability to absorb losses in other segments.

| September 30, 2023 | Amount of Allowance Allocated | Percent of Loans in Each Category to Total Loans | Total Loans | Ratio of Allowance Allocated to Loans in Each Category |
| --- | ---: | ---: | ---: | ---: |
| Commercial and industrial | $74,307 | 31.7% | $5,836,877 | 1.27% |
| Energy | 17,066 | 5.5 | 1,006,859 | 1.69 |
| Paycheck Protection Program | — | 0.1 | 17,945 | — |
| Commercial real estate | 126,492 | 47.5 | 8,738,451 | 1.45 |
| Consumer real estate | 15,039 | 12.7 | 2,339,363 | 0.64 |
| Consumer and other | 9,331 | 2.5 | 459,764 | 2.03 |
| Total | $242,235 | 100.0% | $18,399,259 | 1.32 |
| **December 31, 2022** |  |  |  |  |
| Commercial and industrial | $104,237 | 33.1% | $5,674,798 | 1.84% |
| Energy | 18,062 | 5.4 | 925,729 | 1.95 |
| Paycheck Protection Program | — | 0.2 | 34,852 | — |
| Commercial real estate | 90,301 | 47.7 | 8,183,325 | 1.10 |
| Consumer real estate | 8,004 | 10.7 | 1,843,539 | 0.43 |
| Consumer and other | 7,017 | 2.9 | 492,726 | 1.42 |
| Total | $227,621 | 100.0% | $17,154,969 | 1.33 |

The allowance allocated to commercial and industrial loans totaled $74.3 million, or 1.27% of total commercial and industrial loans, at September 30, 2023 decreasing $29.9 million, or 28.7%, compared to $104.2 million, or 1.84% of total commercial and industrial loans, at December 31, 2022. Modeled expected credit losses decreased $16.5 million while qualitative factor (“Q-Factor”) and other qualitative adjustments related to commercial and industrial loans decreased $12.7 million. Specific allocations for commercial and industrial loans that were evaluated for expected credit losses on an individual basis decreased $720 thousand from $6.1 million at December 31, 2022 to $5.4 million at September 30, 2023. The decrease in specific allocations for commercial and industrial loans was primarily related to the recognition of charge-offs partly offset by new specific allocations for new individually assessed loans.

The allowance allocated to energy loans totaled $17.1 million, or 1.69% of total energy loans, at September 30, 2023 decreasing $996 thousand, or 5.5%, compared to $18.1 million, or 1.95% of total energy loans, at December 31, 2022. Modeled expected credit losses related to energy loans decreased $1.5 million while Q-Factor and other qualitative adjustments related to energy loans increased $2.2 million. Specific allocations for energy loans that were evaluated for expected credit losses on an individual basis totaled $2.7 million at September 30, 2023 decreasing $1.7 million compared to $4.4 million on December 31, 2022. The decrease in specific allocations for energy loans was related to principal payments received and loans no longer requiring a specific allocation.

The allowance allocated to commercial real estate loans totaled $126.5 million, or 1.45% of total commercial real estate loans, at September 30, 2023 increasing $36.2 million, or 40.1%, compared to $90.3 million, or 1.10% of total commercial real estate loans, at December 31, 2022. Modeled expected credit losses related to commercial real estate loans decreased $10.6 million while Q-Factor and other qualitative adjustments related to commercial real estate loans increased $47.1 million. Specific allocations for commercial real estate loans that were evaluated for expected credit losses on an individual basis decreased from $1.7 million at December 31, 2022 to $1.4 million at September 30, 2023. The decrease in specific allocations for commercial real estate loans was related to principal payments received and loans no longer requiring a specific allocation partly offset by new specific allocations for new individually assessed loans.

The allowance allocated to consumer real estate loans totaled $15.0 million, or 0.64% of total consumer real estate loans, at September 30, 2023 increasing $7.0 million, or 87.9%, compared to $8.0 million, or 0.43% of total consumer real estate loans, at December 31, 2022. Modeled expected credit losses related to consumer real estate loans increased $6.4 million while Q-Factor and other qualitative adjustments related to consumer real estate loans increased $341 thousand.

The allowance allocated to consumer loans totaled $9.3 million, or 2.03% of total consumer loans, at September 30, 2023 increasing $2.3 million, or 33.0%, compared to $7.0 million, or 1.42% of total consumer loans, at December 31, 2022. Modeled expected credit losses related to consumer loans increased $275 thousand while Q-Factor and other qualitative adjustments increased $2.0 million, which was primarily due to an increase in the consumer overlay, which is further discussed below.

As more fully described in our 2022 Form 10-K, we measure expected credit losses over the life of each loan utilizing a combination of models which measure probability of default and loss given default, among other things. The measurement of expected credit losses is impacted by loan/borrower attributes and certain macroeconomic variables. Models are adjusted to reflect the current impact of certain macroeconomic variables as well as their expected changes over a reasonable and supportable forecast period.

In estimating expected credit losses as of September 30, 2023, we utilized the Moody’s Analytics September 2023 Consensus Scenario (the “September 2023 Consensus Scenario”) to forecast the macroeconomic variables used in our models. The September 2023 Consensus Scenario was based on the review of a variety of surveys of baseline forecasts of the U.S. economy. The September 2023 Consensus Scenario projections included, among other things, (i) U.S. Nominal Gross Domestic Product annualized quarterly growth rate of 3.13% during the remainder of 2023 followed by average annualized quarterly growth rates of 2.91% in 2024 and 4.31% through the end of the forecast period in the third quarter of 2025; (ii) average U.S. unemployment rate of 4.03% during the remainder of 2023 followed by average annualized quarterly rates of 4.52% in 2024 and 4.36% through the end of the forecast period in the third quarter of 2025; (iii) average Texas unemployment rate of 4.25% during the remainder of 2023 followed by average annualized quarterly rates of 4.38% in 2024 and 4.15% through the end of the forecast period in the third quarter of 2025; (iv) projected average 10 year Treasury rate of 4.18% during the remainder of 2023, decreasing to 3.94% during 2024 and 3.66% through the end of the forecast period in the third quarter of 2025 and (v) average oil price of $78.95 per barrel during the remainder of 2023, increasing to $79.15 per barrel in 2024 and decreasing to $78.59 per barrel by the end of the forecast period in the third quarter of 2025.

In estimating expected credit losses as of December 31, 2022, we utilized the Moody’s Analytics December 2022 Baseline Scenario (the “December 2022 Baseline Scenario”) to forecast the macroeconomic variables used in our models. The December 2022 Baseline Scenario was based on the most likely outcome based on prevailing economic conditions and Moody's forecast of the U.S. economy. The December 2022 Baseline Scenario projections included, among other things, (i) U.S. Nominal Gross Domestic Product annualized quarterly growth rate of 2.65% in the first quarter of 2023, followed by annualized quarterly growth rates in the range of 3.62% to 4.50% during the remainder of 2023 and an average annualized growth rate of 4.79% through the end of the forecast period in the fourth quarter of 2024; (ii) U.S. unemployment rate of 3.80% in the first quarter of 2023 and an average quarterly U.S. unemployment rate of 4.06% through the end of the forecast period in the fourth quarter of 2024; (iii) Texas unemployment rate of 4.10% in the first quarter of 2023 and an average quarterly Texas unemployment rate of 4.04% through the end of the forecast period in the fourth quarter of 2024; (iv) projected average 10 year Treasury rate of 4.03% in the first quarter of 2023 and average projected rates of 4.25% during the remainder of 2023 and 3.96% in 2024; and (v) average oil price of $93 per barrel in the first quarter of 2023 decreasing to $67 per barrel by the end of the forecast period in the fourth quarter of 2024.

The overall loan portfolio as of September 30, 2023 increased $1.2 billion, or 7.3%, compared to December 31, 2022. This increase included a $555.1 million, or 6.8%, increase in commercial real estate loans; a $495.8 million, or 26.9%, increase in consumer real estate loans; a $162.1 million, or 2.9%, increase in commercial and industrial loans; and an $81.1 million, or 8.8%, increase in energy loans; partly offset by a $33.0 million, or 6.7%, decrease in consumer and other loans.

The weighted average risk grade for commercial and industrial loans increased to 6.46 at September 30, 2023 from 6.39 at December 31, 2022. The increase was partly related to an increase in the weighted-average risk grade of pass-grade commercial and industrial loans, which increased to 6.29 at September 30, 2023 from 6.24 at December 31, 2022, and a $48.9 million increase in higher-risk grade classified loans. Classified loans consist of loans having a risk grade of 11, 12 or 13. The impact of the increase in the volume of classified commercial and industrial loans was partly offset by a decrease in the weighted-average risk grade of such loans from 11.43 at December 31, 2022 to 11.31 at September 30, 2023. The weighted-average risk grade for energy loans increased to 6.10 at September 30, 2023 from 5.67 at December 31, 2022. Pass grade energy loans increased $16.5 million while the weighted-average risk grade of such loans increased from 5.44 at December 31, 2022 to 5.67 at September 30, 2023. The weighted average risk grade for commercial real estate loans increased to 7.22 at September 30, 2023 from 7.10 at December 31, 2022. Pass grade commercial real estate loans increased $462.5 million while the weighted-average risk grade of such loans increased from 6.96 at December 31, 2022 to 7.05 at September 30, 2023. Commercial real estate loans graded as “watch” and “special mention” increased $12.8 million while classified commercial real estate loans increased $79.8 million.

As noted above, our credit loss models utilized the economic forecasts in the Moody's September 2023 Consensus Scenario for our estimated expected credit losses as of September 30, 2023 and the Moody’s December 2022 Baseline Scenario for our estimate of expected credit losses as of December 31, 2022. We qualitatively adjusted the model results based on these scenarios for various risk factors that are not considered within our modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools. These qualitative factor, or Q-Factor, adjustments are discussed below.

Q-Factor adjustments are based upon management's judgment and current assessment as to the impact of risks related to changes in lending policies and procedures; economic and business conditions; loan portfolio attributes and credit concentrations; and external factors, among other things, that are not already captured within the modeling inputs, assumptions and other processes. Management assesses the potential impact of such items within a range of severely negative impact to positive impact and adjusts the modeled expected credit loss by an aggregate adjustment percentage based upon the assessment. As a result of this assessment as of September 30, 2023, modeled expected credit losses were adjusted upwards by a weighted-average Q-Factor adjustment of approximately 4.5%, resulting in a $3.8 million total adjustment, compared to 2.3% at December 31, 2022, which resulted in a $2.3 million total adjustment. The increase in the Q-Factor adjustment percentage as of September 30, 2023 was largely related to a generally more negative outlook associated with national, regional and local economic and business conditions and developments that affect the collectability of loans; changes in loan portfolio concentrations; changes in the volumes and severity of loan delinquencies; changes in risk grades and adverse classifications; and the potential for deterioration of collateral values, among other things.

We have also provided additional qualitative adjustments, or management overlays, as of September 30, 2023 as management believes there are still significant risks impacting certain categories of our loan portfolio. Q-Factor and other qualitative adjustments as of September 30, 2023 are detailed in the table below.

|  | Q-Factor Adjustment | Model Overlays | Office Building Overlays | Down-Side Scenario Overlay | Credit Concentration Overlays | Consumer Overlay | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial and industrial | $1,816 | $— | $— | $14,802 | $6,929 | $— | $23,547 |
| Energy | 283 | — | — | — | 7,018 | — | 7,301 |
| Commercial real estate: |  |  |  |  |  |  |  |
| Owner occupied | 445 | 25,008 | — | — | 626 | — | 26,079 |
| Non-owner occupied | 243 | 35,162 | 11,110 | — | 1,076 | — | 47,591 |
| Construction | 487 | 28,261 | 5,400 | — | 862 | — | 35,010 |
| Consumer real estate | 498 | — | — | — | — | — | 498 |
| Consumer and other | 73 | — | — | — | — | 4,000 | 4,073 |
| Total | $3,845 | $88,431 | $16,510 | $14,802 | $16,511 | $4,000 | $144,099 |

Model overlays are qualitative adjustments to address the effects of risks not captured within our commercial real estate credit loss models. These adjustments are determined based upon minimum reserve ratios for our commercial real estate loans. In the case of our commercial real estate - owner occupied loan portfolio, we determined a minimum reserve ratio is appropriate to address the effect of the model's over-sensitivity to positive changes in certain economic variables. After analysis and benchmarking against peer bank data, we believe the modeled results may be overly optimistic and not appropriately capturing downside risk. As such, we determined that the appropriate forecasted loss rate for our owner-occupied commercial real estate loan portfolio should be more closely aligned with that of our commercial and industrial loan portfolio. In the case of our commercial real estate - non-owner occupied and commercial real estate - construction loan portfolios, we determined minimum reserve ratios are appropriate as we believe the modeled results are not appropriately capturing the downside risk associated with our borrowers' ability to access the capital markets for the sale or refinancing of investor real estate and assets currently under construction. We believe access to capital may be impaired for a significant amount of time. Accordingly, this would require secondary sources of liquidity and capital to support completed projects that may take considerably longer to stabilize than originally underwritten. Furthermore, rapidly rising interest rates have presented a new emerging risk as most non-owner occupied and construction loans are originated with floating interest rates.

Office building overlays are qualitative adjustments to address longer-term concerns over the utilization of commercial office space which could impact the long-term performance of some types of office properties within our commercial real estate loan portfolio. These adjustments are determined based upon minimum reserve ratios for loans within our commercial real estate - non-owner occupied and commercial real estate - construction loan portfolios that have risk grades of 8 or worse.

The down-side scenario overlay is a qualitative adjustment for our commercial and industrial loan portfolio to address the significant risk of economic recession as a result of inflation; rising interest rates; labor shortages; disruption in financial markets and global supply chains; further oil price volatility; and the current or anticipated impact of global wars/military conflicts, terrorism, or other geopolitical events. Factors such as these are outside of our control but nonetheless affect customer income levels and could alter anticipated customer behavior, including borrowing, repayment, investment, and deposit practices. To determine this qualitative adjustment, we use an alternative, more pessimistic economic scenario to forecast the macroeconomic variables used in our models. As of September 30, 2023, we used the Moody’s Analytics September S3 Alternative Scenario Downside - 90th Percentile. In modeling expected credit losses using this scenario, we also assume each non-classified loan within our modeled loan pools is downgraded by one risk grade level. The qualitative adjustment is based upon the amount by which the alternative scenario modeling results exceed those of the primary scenario used in estimating credit loss expense, adjusted based upon management's assessment of the probability that this more pessimistic economic scenario will occur.

Credit concentration overlays are qualitative adjustments based upon statistical analysis to address relationship exposure concentrations within our loan portfolio. Variations in loan portfolio concentrations over time cause expected credit losses within our existing portfolio to differ from historical loss experience. Given that the allowance for credit losses on loans reflects expected credit losses within our loan portfolio and the fact that these expected credit losses are uncertain as to nature, timing and amount, management believes that segments with higher concentration risk are more likely to experience a high loss event. Due to the fact that a significant portion of our loan portfolio is concentrated in large credit relationships and because of large, concentrated credit losses in recent years, management made the qualitative adjustments detailed in the table above to address the risk associated with such a relationship deteriorating to a loss event.

The consumer overlay is a qualitative adjustment for our consumer and other loan portfolio to address the risk associated with the level of unsecured loans within this portfolio and other risk factors. Unsecured consumer loans have an elevated risk of loss in times of economic stress as these loans lack a secondary source of repayment in the form of hard collateral. This adjustment was determined by analyzing our consumer loan charge-off trends as well as those of the general banking industry. Management deemed it appropriate to consider an additional overlay to the modeled forecasted losses for the unsecured consumer portfolio.

As of December 31, 2022, we provided qualitative adjustments, as detailed in the table below. Further information regarding these qualitative adjustments is provided in our 2022 Form 10-K.

|  | Q-Factor Adjustment | Model Overlays | Office Building Overlays | Down-Side Scenario Overlay | Credit Concentration Overlays | Consumer Overlay | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial and industrial | $929 | $— | $— | $29,632 | $5,676 | $— | $36,237 |
| Energy | 128 | — | — | — | 5,020 | — | 5,148 |
| Commercial real estate: |  |  |  |  |  |  |  |
| Owner occupied | 318 | 19,708 | — | — | 1,718 | — | 21,744 |
| Non-owner occupied | 95 | 10,472 | 16,557 | — | 487 | — | 27,611 |
| Construction | 660 | 7,905 | 3,122 | — | 530 | — | 12,217 |
| Consumer real estate | 157 | — | — | — | — | — | 157 |
| Consumer and other | 34 | — | — | — | — | 2,000 | 2,034 |
| Total | $2,321 | $38,085 | $19,679 | $29,632 | $13,431 | $2,000 | $105,148 |

61

Additional information related to credit loss expense and net (charge-offs) recoveries is presented in the tables below. Also see Note 3 - Loans in the accompanying notes to consolidated financial statements included elsewhere in this report.

| Three months ended: September 30, 2023 | Credit Loss Expense (Benefit) | Net (Charge-Offs) Recoveries | Average Loans | Ratio of Annualized Net (Charge-Offs) Recoveries to Average Loans |
| --- | ---: | ---: | ---: | ---: |
| Commercial and industrial | $(623) | $(236) | $5,742,644 | (0.02)% |
| Energy | 1,784 | 353 | 985,432 | 0.14 |
| Paycheck Protection Program | — | — | 19,924 | — |
| Commercial real estate | 5,424 | 142 | 8,502,967 | 0.01 |
| Consumer real estate | 2,130 | (126) | 2,251,932 | (0.02) |
| Consumer and other | 4,893 | (5,125) | 462,444 | (4.40) |
| Total | $13,608 | $(4,992) | $17,965,343 | (0.11) |
| **September 30, 2022** |  |  |  |  |
| Commercial and industrial | $10,844 | $716 | $5,501,675 | 0.05% |
| Energy | 2,491 | 93 | 971,418 | 0.04 |
| Paycheck Protection Program | — | — | 70,896 | — |
| Commercial real estate | (16,522) | 23 | 8,147,431 | — |
| Consumer real estate | 940 | 241 | 1,630,568 | 0.06 |
| Consumer and other | (216) | (3,927) | 500,945 | (3.11) |
| Total | $(2,463) | $(2,854) | $16,822,933 | (0.07) |
| **Nine months ended:** |  |  |  |  |
| **September 30, 2023** |  |  |  |  |
| Commercial and industrial | $(18,903) | $(11,027) | $5,705,645 | (0.26)% |
| Energy | (1,683) | 687 | 1,023,472 | 0.09 |
| Paycheck Protection Program | — | — | 26,033 | — |
| Commercial real estate | 35,918 | 273 | 8,346,397 | — |
| Consumer real estate | 7,235 | (200) | 2,079,406 | (0.01) |
| Consumer and other | 15,649 | (13,335) | 470,967 | (3.79) |
| Total | $38,216 | $(23,602) | $17,651,920 | (0.18) |
| **September 30, 2022** |  |  |  |  |
| Commercial and industrial | $29,347 | $(2,608) | $5,495,705 | (0.06)% |
| Energy | 874 | 760 | 1,021,927 | 0.10 |
| Paycheck Protection Program | — | — | 171,591 | — |
| Commercial real estate | (44,363) | 34 | 7,932,491 | — |
| Consumer real estate | 1,497 | (47) | 1,516,912 | — |
| Consumer and other | 10,250 | (10,095) | 490,933 | (2.75) |
| Total | $(2,395) | $(11,956) | $16,629,559 | (0.10) |

We recorded a net credit loss expense related to loans totaling $38.2 million for the nine months ended September 30, 2023 while we recorded a net credit loss expense totaling $2.4 million during the same period in 2022. Net credit loss expense/benefit for each portfolio segment reflects the amount needed to adjust the allowance for credit losses allocated to that segment to the level of expected credit losses determined under our allowance methodology after net charge-offs have been recognized.

The net credit loss expense related to loans during the first nine months of 2023 primarily reflects an increase in expected credit losses associated with commercial real estate loans, primarily related to increases in the minimum reserve ratios for our commercial real estate - non-owner occupied and construction portfolios. The net credit loss expense related to loans during the first nine months of 2023 also reflects charge-off trends related to commercial and industrial loans as well as consumer and other loans (primarily related to overdrafts) and the additional expected credit losses associated with our consumer real estate and consumer and other loan portfolios. The impact of these items was partly offset by a decrease in expected credit losses associated with commercial and industrial loans; primarily related to decreases in modeled expected losses and the down-side scenario overlay; and a decrease in the expected credit losses associated with energy loans; primarily related to decreases in modeled expected losses and specific allocations.

The ratio of the allowance for credit losses on loans to total loans was 1.32% at September 30, 2023 compared to 1.33% at December 31, 2022. Management believes the recorded amount of the allowance for credit losses on loans is appropriate based upon management’s best estimate of current expected credit losses within the existing portfolio of loans. Should any of the factors considered by management in making this estimate change, our estimate of current expected credit losses could also change, which could affect the level of future credit loss expense related to loans.

*Allowance for Credit Losses - Off-Balance-Sheet Credit Exposures.* The allowance for credit losses on off-balance-sheet credit exposures totaled $50.4 million and $58.6 million at September 30, 2023 and December 31, 2022, respectively. The level of the allowance for credit losses on off-balance-sheet credit exposures depends upon the volume of outstanding commitments, underlying risk grades, the expected utilization of available funds and forecasted economic conditions impacting our loan portfolio. We recognized a net credit loss benefit related to off-balance-sheet credit exposures totaling $8.2 million during the nine months ended September 30, 2023 compared to a net credit loss expense of $2.4 million during the same period in 2022. Our policies and methodology used to estimate the allowance for credit losses on off-balance-sheet credit exposures are further described in our 2022 Form 10-K. This methodology was also impacted by the model updates during the first quarter of 2023 described in Note 3 - Loans in the accompanying notes to consolidated financial statements elsewhere in this report. The overall approximate impact of model updates during the first quarter was a $19.0 million decrease in modeled expected credit losses for off-balance-sheet credit exposures, though the impact of this decrease was largely offset with a qualitative adjustment similar to the model overlay described above for commercial real estate - construction loans.

### Capital and Liquidity

*Capital*. Shareholders’ equity totaled $3.0 billion and $3.1 billion at September 30, 2023 and December 31, 2022, respectively. Sources of capital during the nine months ended September 30, 2023 included net income of $495.4 million, $12.6 million related to stock-based compensation and $3.0 million in proceeds from stock option exercises. Uses of capital during the nine months ended September 30, 2023 included an other comprehensive loss, net of tax, of $430.5 million; $177.6 million of dividends paid on preferred and common stock; and $40.5 million of treasury stock purchases.

The accumulated other comprehensive income/loss component of shareholders’ equity totaled a net, after-tax, unrealized loss of $1.8 billion at September 30, 2023 compared to a net, after-tax, unrealized loss of $1.3 billion at December 31, 2022. The increase in the net, after-tax, unrealized loss was primarily due to a $432.6 million net, after-tax, decrease in the fair value of securities available for sale.

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 our regulatory capital ratios. In connection with the adoption of ASC 326 on January 1, 2020, we also elected to exclude, for a transitional period, the effects of credit loss accounting under CECL in the calculation of our regulatory capital and regulatory capital 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 6 - Capital and Regulatory Matters in the accompanying notes to consolidated financial statements included elsewhere in this report.

We paid a quarterly dividend of $0.87, $0.87, and $0.92 per common share during the first, second and third quarters of 2023, respectively and a quarterly dividend of $0.75, $0.75 and $0.87 per common share during the first, second and third quarters of 2022, respectively. These dividend amounts equate to a common stock dividend payout ratio of 35.2% and 40.0% during the first nine months of 2023 and 2022, 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 described in Note 6 - 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. For additional details, see Note 6 - Capital and Regulatory Matters in the accompanying notes to consolidated financial statements and Part II, Item 2 - Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities each included elsewhere in this report.

In August 2022, the Inflation Reduction Act of 2022 (the “IRA”) was enacted. Among other things, the IRA imposes a new 1% excise tax on the fair market value of stock repurchased after December 31, 2022 by publicly traded U.S. corporations. With certain exceptions, the value of stock repurchased is determined net of stock issued in the year, including pursuant to compensatory arrangements.

*Liquidity*. As more fully discussed in our 2022 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. Our principal source of funding has been our customer deposits, supplemented by our short-term and long-term borrowings as well as maturities of securities and loan amortization. As of September 30, 2023, we had approximately $7.0 billion held in an interest-bearing account at the Federal Reserve. We also have the ability to borrow funds as a member of the Federal Home Loan Bank (“FHLB”). As of September 30, 2023, based upon available, pledgeable collateral, our total borrowing capacity with the FHLB was approximately $5.4 billion. Furthermore, at September 30, 2023, we had approximately $14.1 billion in securities that were unencumbered by a pledge and could be used to support additional borrowings, as needed, through repurchase agreements, the Federal Reserve discount window or the Federal Reserve's new Bank Term Funding Program (“BTFP”). The BTFP is a new facility established in response to recent liquidity concerns within the banking industry in part due to recent deposit runs that resulted in a few large bank failures. The BTFP was designed to provide available additional funding to eligible depository institutions in order to help assure that banks have the ability to meet the needs of all their depositors. Under the program, eligible depository institutions can obtain loans of up to one year in length by pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP is intended to eliminate the need for depository institutions to quickly sell their securities when they are experiencing stress on their liquidity.

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 6 - Capital and Regulatory Matters in the accompanying notes to consolidated financial statements included elsewhere in this report regarding such dividends. At September 30, 2023, Cullen/Frost had liquid assets, primarily consisting of cash on deposit at Frost Bank, totaling $317.1 million.

### Accounting Standards Updates

See Note 16 - 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.

## Market risk

As filed, 4,676 characters.

*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 2022 Form 10-K. There has been no significant change in the types of market risks we face since December 31, 2022.

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, 2023, 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 1.7% and 3.3%, respectively, relative to the flat-rate case over the next 12 months, while 100 and 200 basis point ratable decreases in interest rates would result in a negative variances in net interest income of 1.2% and 2.8%, respectively, relative to the flat-rate case over the next 12 months. For modeling purposes, as of December 31, 2022, 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 0.2% and 1.4%, respectively, relative to the flat-rate case over the next 12 months, while 100 and 200 basis point ratable decreases in interest rates would result in a negative variances in net interest income of 0.2% and 1.4%, respectively, relative to the flat-rate case over the next 12 months.

We do not currently pay interest on a significant portion of our commercial demand deposits. Any interest rate that would ultimately be paid on these commercial demand deposits would likely depend upon a variety of factors, some of which are beyond our control. Our September 30, 2023 and December 31, 2022 model simulations did not assume any payment of interest on commercial demand deposits (those not already receiving an earnings credit). Management believes, based on our experience during the last interest rate cycle, that it is less likely we will pay interest on these deposits as rates increase.

The model simulations as of September 30, 2023 indicate that our projected balance sheet is more asset sensitive in comparison to our balance sheet as of December 31, 2022. The increased asset sensitivity was partly due to a decrease in the expected deposit pricing beta for rate increases on certain types of deposit accounts. The deposit pricing beta is a measure of how much deposit rates will reprice, up or down, given a defined change in market rates. Management believes that the deposit pricing betas used as of September 30, 2023 are more reflective of current expectations. The increased asset sensitivity was also partly due to an increase in the relative proportion of interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) and federal funds sold to projected average interest-earning assets combined with a decrease in the relative proportion of fixed-rate securities to projected average interest-earning assets. Interest-bearing deposits and federal funds sold are more immediately impacted by changes in interest rates in comparison to our other categories of earning assets.

As of September 30, 2023, the effects of a 200 basis point increase and a 200 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.

## Controls and procedures

As filed, 833 characters.

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was conducted 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.

Filed Oct 26, 2023.
Source: SEC EDGAR, the filing index for accession 0000039263-23-000072. Last ingested by Listed: Nov 5, 2026, 13:53 ET. No prices; not investment advice.