Cullen/Frost Bankers, Inc.: Form 10-Q for the period ended Jun 30, 2025

Financial Review

The following discussion should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2024, and the other information included in the 2024 Form 10-K. Operating results for the three and six months ended June 30, 2025 are not necessarily indicative of the results for the year ending December 31, 2025 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 and the implementation of tariffs and other protectionist trade policies.
• 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, international relations, and global supply chains have been significantly impacted by recent U.S. trade policies and practices. Due to the rapidly evolving and changing state of U.S. trade policies, the amount and duration of any tariffs and their ultimate impact on us, our customers, financial markets, and the overall U.S. and global economies is currently uncertain. Nonetheless, prolonged uncertainty, elevated tariff levels or their wide-spread use in U.S. trade policy could weaken economic conditions and adversely impact the ability of borrowers to repay outstanding loans or the value of collateral securing these loans or adversely affect financial markets. To the extent that these risks may have a negative impact on the financial condition of borrowers or financial markets, it could also have a material adverse effect on our business, financial condition and results of operations.

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 2024 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 $155.3 million, or $2.39 per diluted common share, and $304.6 million, or $4.69 per diluted common share, for the three and six months ended June 30, 2025, compared to $143.8 million, or $2.21 per diluted common share, and $277.9 million, or $4.27 per diluted common share for the three and six months ended June 30, 2024.

Selected data for the comparable periods was as follows:

Net income available to common shareholders increased $11.5 million, or 8.0%, for the three months ended June 30, 2025 and increased $26.7 million, or 9.6%, for the six months ended June 30, 2025, compared to the same periods in 2024. The increase during the three months ended June 30, 2025 was primarily the result of a $32.9 million increase in net interest income, a $6.1 million increase in non-interest income, and a $2.7 million decrease in credit loss expense partly offset by a $30.2 million increase in non-interest expense. The increase during the six months ended June 30, 2025 was primarily the result of a $59.1 million increase in net interest income, a $18.7 million increase in non-interest income, and a $3.2 million decrease in credit loss expense partly offset by a $52.0 million increase in non-interest expense and a $2.3 million increase in income tax 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 77.8% of total revenue during the first six months of 2025. 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 June 30, 2025, approximately 40.6% 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 34.6%); the prime interest rate (approximately 20.8%); or the American Interbank Offered Rate (“AMERIBOR”) (approximately 3.9%). Certain other loans are tied to other indices; however, such loans do not make up a significant portion of our loan portfolio as of June 30, 2025.

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

(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.

As of June 30, 2025, the target range for the federal funds rate was 4.25% to 4.50% In June 2025, the Federal Reserve released projections whereby the midpoint of the projected appropriate target range for the federal funds rate would fall to 3.9% by the end of 2025 and subsequently decrease to 3.6% by the end of 2026. While there can be no such assurance that any such decreases in the federal funds rate will occur, these projections imply up to a 50 basis point decrease in the federal funds rate during 2025, followed by a 25 basis point decrease in 2026.

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, particularly in rising or high interest rate environments. 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 increases and decreases in 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.

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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. The comparison between the quarters includes an additional change factor that shows the effect of the difference in the number of days in each period for assets and liabilities that accrue interest based upon the actual number of days in the period, as further discussed below.

Taxable-equivalent net interest income for the three months ended June 30, 2025 increased $32.9 million, or 7.9%, while taxable-equivalent net interest income for the six months ended June 30, 2025, increased $58.0 million, or 7.0%, compared to the same periods in 2024. Taxable-equivalent net interest income for the six months ended June 30, 2025, included 181 days compared to 182 for the same period in 2024 as a result of the leap year. The additional day added approximately $3.0 million to taxable-equivalent net interest income during the six months ended June 30, 2024. Excluding the impact of the additional day in 2024 results in an effective increase in taxable-equivalent net interest income of approximately $60.9 million during the six months ended June 30, 2025.

The increase in taxable-equivalent net interest income during the three months ended June 30, 2025 was primarily related to decreases in the average costs of interest-bearing deposit accounts and repurchase agreements combined with increases in the average yields on and volumes of taxable and, to a lesser extent, tax-exempt securities and an increase in the average volume of loans, among other things. The impact of these items was partly offset by decreases in the average yield on and volume of interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve), a decrease in average yield on loans, and increases in the average volumes of interest-bearing deposit accounts and repurchase agreements, among other things.

The increase in taxable-equivalent net interest income during the six months ended June 30, 2025 was primarily related to decreases in the average costs of interest-bearing deposit accounts and repurchase agreements combined with an increase in the average volume of loans, increases in the average yield on and volume of taxable securities, and an increase in the average yield on tax-exempt securities, among other things. The impact of these items was partly offset by decreases in the average yield on and volume of interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve), a decrease in average yield on loans, and decreases in the average volumes of tax-exempt securities and resell agreements, among other things, combined with increases in the average volumes of interest-bearing deposit accounts and repurchase agreements, among other things.

As a result of the aforementioned fluctuations, the taxable-equivalent net interest margin increased 13 basis points from 3.54% during the three months ended June 30, 2024 to 3.67% during the three months ended June 30, 2025 while the taxable-equivalent net interest margin increased 12 basis points from 3.51% during the six months ended June 30, 2024 to 3.63% during the six months ended June 30, 2025.

The average volume of interest-earning assets for the three months ended June 30, 2025 increased $2.1 billion while the average volume of interest-earning assets for the six months ended June 30, 2025 increased $1.8 billion compared to the same periods in 2024. The increase in the average volume of interest-earning assets during the three months ended June 30, 2025 was primarily related to a $1.7 billion increase in average taxable securities, a $1.4 billion increase in average loans, and a $32.7 million increase in average tax-exempt securities, partly offset by a $986.3 million decrease in average interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve), and a $61.9 million decrease in average resell agreements. The average taxable-equivalent yield on interest-earning assets decreased 16 basis points from 5.23% during the three months ended June 30, 2024 to 5.07% during the three months ended June 30, 2025.

The increase in the average volume of interest-earning assets during the six months ended June 30, 2025 was primarily related to a $1.5 billion increase in average loans and a $1.1 billion increase in average taxable securities, partly offset by a $555.1 million decrease in average interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve), a $140.5 million decrease in average tax-exempt securities, and a $68.4 million decrease in average resell agreements. The average taxable-equivalent yield on interest-earning assets decreased 15 basis points from 5.18% during the six months ended June 30, 2024 to 5.03% during the six months ended June 30, 2025. The average taxable-equivalent yields on interest-earning assets during comparable periods were impacted by changes in market interest rates (as noted in the table above) and changes in the volumes and relative mixes of interest-earning assets.

The average taxable-equivalent yield on loans decreased 48 basis points from 7.08% during the three months ended June 30, 2024 to 6.60% during the three months ended June 30, 2025 while the average taxable-equivalent yield on loans decreased 46 basis points from 7.04% during the six months ended June 30, 2024 to 6.58% during the six months ended June 30, 2025. The average taxable-equivalent yields on loans during the three and six months ended June 30, 2025 were impacted by decreases in market interest rates (as noted in the table above). The average volume of loans for the three months ended June 30, 2025 increased $1.4 billion, or 7.2%, while the average volume of loans for the six months ended June 30, 2025 increased $1.5 billion, or 8.0%, compared to the same period in 2024. Loans made up approximately 44.2% and 44.0% of average interest-earning assets during the three and six months ended June 30, 2025, compared to 43.2% and 42.4% during the same respective periods in 2024. The increases were primarily related to the use of available funds to originate loans.

The average taxable-equivalent yield on securities was 3.79% during the three months ended June 30, 2025, increasing 41 basis points from 3.38% during the three months ended June 30, 2024 while the average taxable-equivalent yield on securities was 3.71% during the six months ended June 30, 2025, increasing 36 basis points from 3.35% during the six months ended June 30, 2024. The average yield on taxable securities was 3.48% during the three months ended June 30, 2025, increasing 56 basis points from 2.92% during the same period in 2024 while the average yield on taxable securities was 3.38% during the six months ended June 30, 2025, increasing 50 basis points from 2.88% during the same period in 2024. The average taxable-equivalent yield on tax-exempt securities was 4.48% during the three months ended June 30, 2025, increasing 18 basis points from 4.30% during the same period in 2024 while the average taxable-equivalent yield on tax-exempt securities was 4.43% during the six months ended June 30, 2025, increasing 14 basis points from 4.29% during the same period in 2024.

Tax-exempt securities made up approximately 32.5% and 33.0% of total average securities during the three and six months ended June 30, 2025, compared to 35.5% and 35.4% during the same respective periods in 2024. The average volume of total securities during the three months ended June 30, 2025 increased $1.8 billion, or 9.5%, compared to the same period in 2024 while the average volume of total securities during the six months ended June 30, 2025 increased $918.8 million, or 4.8%, compared to the same period in 2024. Securities made up approximately 42.8% and 41.9% of average interest-earning assets during the three and six months ended June 30, 2025, compared to 40.9% and 41.5% during the same respective periods in 2024.

Average interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) for the three months ended June 30, 2025 decreased $986.3 million, or 13.8%, compared to the same period in 2024 while average interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) for the six months ended June 30, 2025 decreased $555.1 million, or 7.7%, compared to the same period in 2024. Interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) made up approximately 12.9% and 14.1% of average interest-earning assets during the three and six months ended June 30, 2025, compared to 15.7% and 15.9% during the same respective periods in 2024. The decreases during the three and six months ended June 30, 2025 were primarily related to the reinvestment of amounts held in an interest-bearing account at the Federal Reserve into securities and loans. The average yields on interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) were 4.41% and 4.40% during the three and six months ended June 30, 2025, compared to 5.40% during both the three and six months ended June 30, 2024. The average yields on interest-bearing deposits during the three and six months ended June 30, 2025 were impacted by lower average interest rates paid on reserves held at the Federal Reserve, compared to the same periods in 2024.

The average rate paid on interest-bearing liabilities was 2.12% during the three months ended June 30, 2025, decreasing 47 basis points from 2.59% during the same period in 2024 while the average rate paid on interest-bearing liabilities was 2.12% during the six months ended June 30, 2025, decreasing 45 basis points from 2.57% during the same period in 2024. Average deposits increased $1.3 billion, or 3.1%, during the three months ended June 30, 2025, compared to the same period in 2024 and included a $1.1 billion increase in average interest-bearing deposits and a $109.6 million increase in average non-interest-bearing deposits. Average deposits increased $1.1 billion, or 2.7%, during the six months ended June 30, 2025, compared to the same period in 2024 and included a $1.1 billion increase in average interest-bearing deposits partly offset by a $34.2 million decrease in average non-interest-bearing deposits. The ratio of average interest-bearing deposits to total average deposits was 67.0% during both the three and six months ended June 30, 2025, compared to 66.2% and 66.0% during the same respective periods in 2024. 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 costs of interest-bearing deposits and total deposits were 1.93% and 1.29%, respectively, during the six months ended June 30, 2025, compared to 2.36% and 1.56%, respectively, during the same period in 2024. The average costs of deposits were impacted by decreases in the interest rates we pay on our interest-bearing deposit products as a result of decreases in market interest rates.

Our net interest spreads, which represent the difference between the average rate earned on earning assets and the average rate paid on interest-bearing liabilities, were 2.95% and 2.91% during the three and six months ended June 30, 2025, compared to 2.64% and 2.61% during the same respective periods in 2024. Our net interest spreads, as well as our net interest margins, 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:

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 six months ended June 30, 2025 increased $6.1 million, or 5.5%, and increased $18.7 million, or 8.4%, respectively, compared to the same periods in 2024. 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 increased $2.3 million, or 5.5%, for the three months ended June 30, 2025 and increased $6.1 million, or 7.6%, for the six months ended June 30, 2025, compared to the same respective periods in 2024. Investment management fees are the most significant component of trust and investment management fees, making up approximately 80.9% and 80.6% of total trust and investment management fees for the first six months of 2025 and 2024, respectively. The increases in trust and investment management fees during the three and six months ended June 30, 2025 were primarily related to increases in investment management fees (up $2.2 million and $5.2 million, respectively) and, to a lesser extent during the six months ended June 30, 2025, estate fees (up $504 thousand), among other things. 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 increases in investment management fees during the three and six months ended June 30, 2025 were primarily related to increases in the average values of assets maintained in accounts. The increases in the average values of assets were partly related to higher average equity valuations during 2025 relative to 2024 and growth in the number of accounts. The increase in estate fees during the six months ended June 30, 2025 was primarily related to an increase in transaction volumes relative to 2024.

At June 30, 2025, trust assets, including both managed assets and custody assets, were primarily composed of equity securities (44.5% of assets), fixed income securities (33.5% of assets), alternative investments (8.7% of assets) and cash equivalents (7.2% of assets). The estimated fair value of these assets was $50.9 billion (including managed assets of $25.8 billion and custody assets of $25.1 billion) at June 30, 2025, compared to $51.4 billion (including managed assets of $26.2 billion and custody assets of $25.2 billion) at December 31, 2024 and $48.9 billion (including managed assets of $24.7 billion and custody assets of $24.3 billion) at June 30, 2024.

Service Charges on Deposit Accounts. Service charges on deposit accounts for the three and six months ended June 30, 2025 increased $3.0 million, or 11.6%, and increased $6.9 million, or 13.5%, respectively, compared to the same periods in 2024. The increase during the three months ended June 30, 2025 was primarily related to increases in overdraft charges on consumer and, to a lesser extent, commercial accounts (up $2.3 million and $285 thousand, respectively), and commercial service charges (up $859 thousand), partly offset by a decrease in consumer service charges (down $370 thousand). The increase during the six months ended June 30, 2025, was primarily related to increases in overdraft charges on consumer and, to a lesser extent, commercial accounts (up $4.1 million and $759 thousand, respectively), and commercial service charges (up $2.7 million), partly offset by a decrease in consumer service charges (down $706 thousand).

Overdraft charges totaled $14.7 million ($11.4 million consumer and $3.3 million commercial) during the three months ended June 30, 2025, compared to $12.1 million ($9.1 million consumer and $3.0 million commercial) during the same period in 2024. Overdraft charges totaled $28.9 million ($22.1 million consumer and $6.8 million commercial) during the six months ended June 30, 2025, compared to $24.0 million ($17.9 million consumer and $6.1 million commercial) during the same period in 2024. The increases in overdraft charges during the three and six months ended June 30, 2025 was impacted by increases in the volumes of fee assessed overdrafts relative to 2024, in part due to growth in the number of accounts.

As more fully discussed in our 2024 Form 10-K, in December 2024, the Consumer Financial Protection Bureau (“CFPB”) issued a final rule, which would have been applicable to Frost Bank in October 2025, that modified or eliminated several long-standing exclusions from requirements generally applicable to consumer credit that previously exempted certain overdraft practices from such requirements and required banks to restructure many overdraft fees, overdraft lines of credit, and other overdraft practices as separate consumer credit accounts that have become subject to those requirements. In March and April 2025, the U.S. Senate and House of Representatives, respectively, each adopted a resolution that would nullify the CFPB's overdraft rule. The measure was signed by the President in May 2025.

The increases in commercial service charges during the three and six months ended June 30, 2025 were partly related to increases in billable services related to analyzed treasury management accounts combined with the effect of a lower average earnings credit rate applied to deposits maintained by treasury management customers which resulted in customers paying for more of their services through fees rather than with earnings credits applied to their deposit balances. The increases in commercial service charges were also partly related to increases in service fees on non-analyzed accounts.

Insurance Commissions and Fees. Compared to the same respective periods in 2024, insurance commissions and fees for the three months ended June 30, 2025 did not significantly fluctuate while insurance commissions and fees for the six months ended June 30, 2025 increased $2.7 million, or 8.3%. The increase during the six months ended June 30, 2025 was primarily the result of increases in benefit plan commissions (up $1.4 million), life insurance commissions (up $598 thousand), and contingent income (up $469 thousand). The increase in benefit plan commissions was primarily due to an increase in business volumes as well as premium and exposure rate increases within the existing customer base. The increase in life insurance commissions was primarily related to an increase in business volumes.

Contingent income totaled $4.6 million during the six months ended June 30, 2025 compared to $4.1 million during the six months ended June 30, 2024. 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 $3.6 million during the six months ended June 30, 2025 and $3.0 million during the six months ended June 30, 2024. Performance related contingent income related to commercial lines insurance policies increased due to improved loss performance of commercial lines insurance policies previously placed and growth within the commercial lines portfolio. 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 $1.0 million during the six months ended June 30, 2025, compared to $1.1 million during the six months ended June 30, 2024.

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 six months ended June 30, 2025 increased $268 thousand, or 5.0%, and increased $1.2 million, or 12.2%, respectively, compared to the same periods in 2024. The increases were primarily due to increases in income from card transactions partly offset by increases in network costs. A comparison of gross and net interchange and card transaction fees for the reported periods is presented in the table below.

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. In October 2023, the Federal Reserve issued a proposal under which the maximum permissible interchange fee for an electronic debit transaction would be the sum of 14.4 cents per transaction and 4 basis points multiplied by the value of the transaction. Furthermore, the fraud-prevention adjustment would increase from a maximum of 1 cent to 1.3 cents. The proposal would adopt an approach for future adjustments to the interchange fee cap, which would occur every other year based on issuer cost data gathered by the Federal Reserve from large debit card issuers. Had the proposed maximum interchange fees been in effect during the reported periods, interchange and debit card transaction fees would have been approximately 30% lower. The comment period for this proposal ended in May 2024. The extent to which any such proposed changes in permissible interchange fees will impact our future revenues is currently uncertain.

Other Charges, Commissions, and Fees. Other charges, commissions, and fees for the three and six months ended June 30, 2025 increased $947 thousand, or 7.3%, and increased $2.5 million, or 9.9%, compared to the same respective periods in 2024. The increases during the three and six months ended June 30, 2025 were primarily related to increases in income from the placement of annuities (up $555 thousand and $1.4 million, respectively) and commitment fees on unused lines of credit (up $380 thousand and $681 thousand, respectively), among other things.

Net Gain/Loss on Securities Transactions. During the six months ended June 30, 2025, we sold certain available-for-sale securities with amortized costs totaling $40.1 million and realized a net loss of $14 thousand. These sales were primarily related to a municipal tender offer during the first quarter. There were no sales of securities during the six months ended June 30, 2024.

Other Non-Interest Income. Other non-interest income for the three and six months ended June 30, 2025 decreased $394 thousand, or 3.5%, and decreased $595 thousand, or 2.5%, compared to the same periods in 2024. The decrease during the three months ended June 30, 2025 was primarily related to decreases in sundry and other miscellaneous income (down $559 thousand) and public finance underwriting fees (down $339 thousand), among other things, partly offset by increases in income from customer securities trading and derivatives trading activities (up $378 thousand and $210 thousand, respectively), among other things. The decrease during the six months ended June 30, 2025 was primarily related to decreases in public finance underwriting fees (down $3.0 million) and sundry and other miscellaneous income (down $1.3 million), among other things, partly offset by increases in gains on the sale of foreclosed and other assets (up $2.6 million) and income from customer derivatives trading and securities trading activities (up $786 thousand and $478 thousand, respectively), among other things. The fluctuations in public finance underwriting fees and income from customer derivative and securities trading activities during the comparable periods were primarily related to variations in transaction volumes. Gains on the sale of foreclosed and other assets during the six months ended June 30, 2025 included a $2.5 million gain related to the sale of a foreclosed real estate property during the first quarter.

Non-Interest Expense

Total non-interest expense for the three and six months ended June 30, 2025 increased $30.2 million, or 9.5%, and increased $52.0 million, or 8.1%, respectively, compared to the same periods in 2024. Changes in the various components of non-interest expense are discussed below.

Salaries and Wages. Salaries and wages for the three and six months ended June 30, 2025 increased $10.9 million, or 7.2%, and increased $23.8 million, or 7.9%, compared to the same periods in 2024. The increases in salaries and wages during the three and six months ended June 30, 2025 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 investment in organic expansion in various markets. Salaries and wages during the three and six months ended June 30, 2025 were also impacted, to a lesser extent, by increases in incentive compensation.

Employee Benefits. Employee benefits expense for the three and six months ended June 30, 2025 increased $4.0 million, or 14.0%, and increased $10.2 million, or 15.8%, respectively, compared to the same periods in 2024. The increases during the three and six months ended June 30, 2025 were primarily related to increases in 401(k) plan expense (up $1.6 million and $4.6 million, respectively), medical/dental benefits expense (up $1.4 million and $2.9 million, respectively), and payroll taxes (up $635 thousand and $2.5 million, respectively).

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 six months ended June 30, 2025 increased $2.3 million, or 7.0%, and increased $3.8 million, or 5.9%, respectively, compared to the same periods in 2024. The increases during the three and six months ended June 30, 2025 were primarily related to increases in depreciation on buildings and leasehold improvements (together up $679 thousand and $1.4 million, respectively); lease expense (up $663 thousand and $1.2 million, respectively);

and property taxes (up $654 thousand and $854 thousand, respectively), among other things. The increases in the aforementioned components of net occupancy expense were impacted, in part, by our expansion efforts.

Technology, Furniture, and Equipment. Technology, furniture, and equipment expense for the three and six months ended June 30, 2025 increased $4.6 million, or 12.9%, and increased $9.7 million, or 13.7%, compared to the same respective periods in 2024. The increases during the three and six months ended June 30, 2025 were primarily related to increases in cloud services expense (up $2.6 million and $5.1 million, respectively), software maintenance (up $1.3 million and $2.6 million, respectively), depreciation on furniture and equipment (up $732 thousand and $1.3 million, respectively), and service contracts expense (up $344 thousand and $731 thousand, respectively), among other things.

Deposit Insurance. Deposit insurance expense totaled $6.6 million and $13.8 million for the three and six months ended June 30, 2025, respectively, compared to $8.4 million and $23.1 million for the three and six months ended June 30, 2024, respectively. Deposit insurance expense during the three and six months ended June 30, 2024 included $1.2 million and $9.0 million, respectively, related to additional accruals related to a special deposit insurance assessment. Refer to our 2024 Form 10-K for additional information related to the special deposit insurance assessment. Excluding these special assessments from 2024, deposit insurance expense did not significantly fluctuate during the comparable periods.

Other Non-Interest Expense. Other non-interest expense for the three and six months ended June 30, 2025 increased $10.1 million, or 16.8%, and increased $13.9 million, or 11.5%, respectively, compared to the same periods in 2024. The increase during the three months ended June 30, 2025 included increases in advertising/promotions expense (up $4.2 million); sundry and other miscellaneous expense (up $2.1 million); fraud losses (up $1.1 million); business development expense (up $786 thousand); research and platform fees (up $644 thousand); and travel, meals and entertainment (up $602 thousand), among other things, partly offset by a decrease in check card expenses (down $492 thousand) and professional services expense (down, $315 thousand), among other things. The increase during the six months ended June 30, 2025 included increases in advertising/promotions expense (up $3.3 million); sundry and other miscellaneous expense (up $2.3 million); business development expense (up $1.3 million); fraud losses (up $1.3 million); donations expense (up $1.1 million), primarily related to a donation to the Frost Charitable Foundation; research and platform fees (up $1.1 million); professional services expense (up $734 thousand); and travel, meals and entertainment (up $710 thousand), among other things, partly offset by a decrease in check card expenses (down $908 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 six months ended June 30, 2025 increased $12.3 million, or 8.8%, and increased $26.3 million, or 9.7%, respectively, compared to the same periods in 2024. The increase during the three months ended June 30, 2025 was primarily the result of a $32.5 million increase in net interest income, a $3.5 million increase in non-interest income and a $2.7 million decrease in credit loss expense partly offset by a $26.2 million increase in non-interest expense. The increase during the six months ended June 30, 2025 was primarily the result of a $58.2 million increase in net interest income, a $10.9 million increase in non-interest income, and a $3.2 million decrease in credit loss expense partly offset by $44.1 million increase in non-interest expense and a $2.0 million increase in income tax expense.

Net interest income for the three and six months ended June 30, 2025 increased $32.5 million, or 8.1%, and increased $58.2 million, or 7.4%, respectively, compared to the same periods in 2024. The increase during the three months ended June 30, 2025 was primarily related decreases in the average costs of interest-bearing deposit accounts and repurchase agreements combined with increases in the average yields on and volumes of taxable and, to a lesser extent, tax-exempt securities and an increase in the average volume of loans, among other things. The impact of these items was partly offset by decreases in the average yield on and volume of interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve), a decrease in average yield on loans, and increases in the average volumes of interest-bearing deposit accounts and repurchase agreements, among other things. The increase during the six months ended June 30, 2025 was primarily related to decreases in the average costs of interest-bearing deposit accounts and repurchase agreements combined with an increase in the average volume of loans, increases in the average yield on and volume of taxable securities, and an increase in the average yield on tax-exempt securities, among other things. The impact of these items was partly offset by decreases in the average yield on and volume of interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve), a decrease in average yield on loans, and decreases in the average volumes of tax-exempt securities and resell agreements, among other things, combined with increases in the average volumes of interest-bearing deposit accounts and repurchase agreements, among other things. Net interest income for the first six months of 2024 included an additional day as a result of leap year. 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 six months ended June 30, 2025 totaled $13.1 million and $26.2 million compared to $15.8 million and $29.4 million during the same periods in 2024. 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 June 30, 2025 increased $3.5 million, or 5.6%, compared to the same period in 2024 while non-interest income for the six months ended June 30, 2025 increased $10.9 million, or 8.5%, compared to the same period in 2024. The increase during the three months ended June 30, 2025 was primarily related to an increase in service charges on deposit accounts, and to a lesser extent, increases in other charges, commissions, and fees and interchange and card transaction fees. The increase during the six months ended June 30, 2025 was primarily related to increases in service charges on deposit accounts; insurance commissions and fees; interchange and card transaction fees; and other charges, commissions, and fees. The increases in service charges on deposit accounts were primarily related to increases in overdraft charges on consumer and commercial accounts and commercial service charges. The increase in insurance commissions and fees during the six months ended June 30, 2025, was primarily the result of increases in benefit plan commissions, life insurance commissions, and contingent income. The increases in interchange and card transaction fees were primarily related to increases in income from card transactions partly offset by increases in network costs. The increases in other charges, commissions, and fees were primarily related to increases in commitment fees on unused lines of credit, among other things. See the analysis of these categories of non-interest income included in the section captioned “Non-Interest Income” included elsewhere in this discussion.

Non-interest expense for the three and six months ended June 30, 2025 increased $26.2 million, or 9.5%, and increased $44.1 million, or 7.8%, respectively, compared to the same periods in 2024. The increases during the three and six months ended June 30, 2025 were primarily due to increases in salaries and wages; other non-interest expense; technology, furniture, and equipment expense; employee benefits expense; and net occupancy expense. These increases were partly offset by decreases in deposit insurance expense. 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. Salaries and wages were also impacted, to a lesser extent, by increases in incentive compensation. The increases in other non-interest expense included increases in advertising/promotions expense; sundry and other miscellaneous expense; business development expense; fraud losses; and travel, meals and entertainment, among other things, partly offset by decreases in check card expenses, among other things. The increase in other non-interest expense during the six months ended June 30, 2025 also included an increase in donations expense, primarily related to a donation to the Frost Charitable Foundation; and an increase in professional services expense. The increases in employee benefits expense were primarily related increases in 401(k) plan expense, medical/dental benefits expense and payroll taxes. The increases in technology, furniture, and equipment expense were primarily related to increases in cloud services expense, software maintenance, and depreciation on furniture and equipment, among other things. The increases in net occupancy expense were primarily related to increases in depreciation on buildings and leasehold improvements; lease expense; property taxes; and repairs/maintenance/service contracts expense, among other things. The decreases in deposit insurance expense were primarily related to prior year accruals for a special deposit insurance assessment totaling $1.2 million and $9.0 million during the three and six months ended June 30, 2024, respectively. See the analysis of these categories of non-interest expense included in the section captioned “Non-Interest Expense” included elsewhere in this discussion.

Frost Wealth Advisors

Net income for the three months ended June 30, 2025 decreased $1.2 million, or 11.6%, compared to the same period in 2024, while net income for the six months ended June 30, 2025 remained relatively flat compared to the same period in 2024. The decrease during the three months ended June 30, 2025 was primarily the result of a $3.9 million increase in non-interest expense partly offset by $2.2 million increase in non-interest income, among other things. Net income during the six months ended June 30, 2025 was negatively impacted by a $7.8 million increase in non-interest expense but was positively impacted by a $7.5 million increase in non-interest income, among other things.

Non-interest income for the three and six months ended June 30, 2025 increased $2.2 million, or 4.5%, and increased $7.5 million, or 7.9%, respectively, compared to the same periods in 2024. The increases during the three and six months ended June 30, 2025 were primarily due to increases in trust and investment management fees and other charges, commissions, and fees. The increases in trust and investment management fees were primarily related to increases in investment management fees and, to a lesser extent during the six months ended June 30, 2025, estate fees, among other things. The increases in investment management fees were primarily related to increases in the average value of assets maintained in accounts. The increases in the average value of assets were partly related to higher average equity valuations during 2025 relative to 2024 and growth in the number of accounts. The increase in estate fees during the six months ended June 30, 2025 was primarily related to an increase in transaction volumes relative to 2024. The increases in other charges, commissions, and fees were primarily related to increases in income from the placement of annuities, 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 six months ended June 30, 2025 increased $3.9 million, or 10.2%, and increased $7.8 million, or 10.2%, respectively, compared to the same periods in 2024. The increases during the three and six months ended June 30, 2025 were primarily related to increases in salaries and wages; other non-interest expense; and employee benefits expense. The increases in salaries and wages were primarily due to increases in salaries, due to annual merit and market increases, and increases in incentive compensation. The increases in other non-interest expense were primarily related to increases in corporate overhead expense allocations and research and platform fees, among other things, partly offset by decreases in sundry and other miscellaneous expense and professional services expense, among other things. The increases in employee benefits were primarily related to increases in 401(k) plan expense, payroll taxes, and medical/dental benefits expense, among other things.

Non-Banks

The Non-Banks operating segment had net losses of $4.4 million and $8.0 million during the three and six months ended June 30, 2025, compared to net losses of $4.8 million and $8.4 million during the same periods in 2024. The decreases in the net losses during three and six months ended June 30, 2025 were primarily due to decreases in net interest expense due to decreases in the average rates paid on our long-term borrowings, among other things.

Income Taxes

During the three months ended June 30, 2025, we recognized income tax expense of $29.6 million, for an effective tax rate of 15.9%, compared to $29.7 million, for an effective tax rate of 16.9%, for the same period in 2024. During the six months ended June 30, 2025, we recognized income tax expense of $57.8 million, for an effective tax rate of 15.8%, compared to $55.5 million, for an effective tax rate of 16.5%, for the same period in 2024. The effective income tax rates differed from the U.S. statutory federal income tax rate of 21% during 2025 and 2024 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 increase in income tax expense during the six months ended June 30, 2025 was primarily due to an increase in projected pre-tax net income. The decreases in the effective tax rate during the three and six months ended June 30, 2025 were primarily related to decreases in projected non-deductible deposit interest expense combined with increases in tax-exempt interest from securities and in tax benefits associated with stock compensation, among other things.

One Big Beautiful Bill Act. The One Big Beautiful Bill Act (“OBBBA”) was enacted on July 4, 2025. Among other things, the new law makes permanent certain expiring business tax provisions of the Tax Cuts and Jobs Act (“TCJA”). These include provisions which allow businesses to immediately expense, for tax purposes, the cost of new investments in certain qualified depreciable assets and the cost of qualified domestic research and development. The OBBBA also imposes a floor on tax deductions taken on charitable contributions. We do not expect these items to have a significant impact on our financial statements, though we expect that some minor operational changes may be necessary to support new information reporting requirements. The OBBBA also significantly changes U.S. tax law related to foreign operations and certain tax credits; however, such changes do not currently impact us.

Average Balance Sheet

Average assets totaled $51.1 billion for the six months ended June 30, 2025 representing an increase of $1.9 billion, or 3.9%, compared to average assets for the same period in 2024. Earning assets increased $1.8 billion, or 4.0%, during the six months ended June 30, 2025, compared to the same period in 2024. The increase in earning assets was primarily related to a $1.5 billion increase in average loans and a $1.1 billion increase in average taxable securities partly offset by a $555.1 million decrease in average interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve), a $140.5 million decrease in tax-exempt securities, and a $68.4 million decrease in average resell agreements. Average deposits increased $1.1 billion, or 2.7%, during the six months ended June 30, 2025, compared to the same period in 2024. The increase included a $1.1 billion increase in interest-bearing deposits partly offset by a $34.2 million decrease in non-interest-bearing deposits. Average non-interest-bearing deposits made up 33.1% and 34.0% of average total deposits during the six months ended June 30, 2025 and 2024, 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 $499.7 million, or 2.4%, from $20.8 billion at December 31, 2024 to $21.3 billion at June 30, 2025. 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 2024 Form 10-K for a more detailed discussion of our loan origination and risk management processes.

Commercial and Industrial. Commercial and industrial loans totaled $6.1 billion at both December 31, 2024 and June 30, 2025. 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 $186.3 million, or 16.5%, from $1.1 billion at December 31, 2024 to $1.3 billion at June 30, 2025. Energy loans are one of our largest industry concentrations totaling 6.2% of total loans at June 30, 2025, up from 5.4% of total loans at December 31, 2024. 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 $867.5 million at June 30, 2025, decreasing $137.4 million, or 13.7%, from $1.0 billion at December 31, 2024. At June 30, 2025, 31.9% of outstanding purchased SNCs were related to the construction industry while 15.1% were related to the real estate management industry, 11.9% were related to the financial services industry, 10.4% were related to the energy industry, and 10.2% were related to the retail industry. The remaining purchased SNCs were diversified throughout various other industries, with no other single industry exceeding 10% of the total purchased SNC portfolio. 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 $125.2 million, or 1.3%, from $10.0 billion at December 31, 2024, to $10.1 billion at June 30, 2025. Commercial real estate loans represented 75.1% and 76.3% of total real estate loans at June 30, 2025 and December 31, 2024, respectively. 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 June 30, 2025, approximately half of the outstanding principal balance of our commercial real estate loans (excluding construction and land) were secured by owner-occupied properties.

Consumer Real Estate and Other Consumer Loans. The consumer real estate loan portfolio increased $235.9 million, or 7.6%, from $3.1 billion at December 31, 2024 to $3.3 billion at June 30, 2025. Combined, home equity loans and lines of credit made up 58.6% and 58.8% of the consumer real estate loan total at June 30, 2025 and December 31, 2024, 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. We also originate 1-4 family mortgage loans for portfolio investment purposes. Consumer and other loans decreased $7.4 million, or 1.7%, from December 31, 2024. The consumer and other loan portfolio primarily consists of unsecured revolving credit products, secured personal loans, motor vehicle loans, overdrafts, and other similar types of credit facilities.

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.

Accruing past due loans at June 30, 2025 decreased $8.6 million compared to December 31, 2024. The decrease was primarily related to decreases in past due commercial and industrial loans (down $12.4 million ), past due energy loans (down $3.2 million) and past due consumer and other loans (down $2.0 million) partly offset by an increase in past due commercial real estate - buildings, land, and other loans (up $9.0 million). Accruing past due commercial real estate loans - building, land and other at June 30, 2025 and December 31, 2024 included $4.4 million and $6.2 million, respectively, related to owner occupied properties and $42.8 million and $32.1 million, respectively, related to non-owner occupied properties.

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.

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Non-accrual loans at June 30, 2025 decreased $16.5 million from December 31, 2024 primarily due to decreases in non-accrual commercial and industrial loans and non-accrual commercial real estate - buildings, land, and other loans. Non-accrual commercial real estate loans - building, land and other at June 30, 2025 and December 31, 2024 included $11.4 million and $19.8 million, respectively, related to owner occupied properties and $2.6 million and $2.1 million, respectively, related to non-owner occupied properties.

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 two credit relationships in excess of $5.0 million totaling $17.4 million at June 30, 2025 and $28.7 million at December 31, 2024. One of these credit relationships had unfunded commitments totaling $53.3 million (including $20.9 million available under a revolving line of credit and $32.4 million in outstanding letters of credit) at June 30, 2025 and $46.4 million (including $2.3 million available under a revolving line of credit and $44.1 million in outstanding letters of credit) at December 31, 2024. Non-accrual commercial real estate loans included one credit relationship in excess of $5.0 million totaling $7.5 million at December 31, 2024. The outstanding balance of this credit relationship decreased to $2.9 million at June 30, 2025 as a result of principal payments. Another credit relationship had an aggregate balance of $5.1 million at December 31, 2024 of which $4.6 million was included with non-accrual commercial real estate loans and $586 thousand was included with non-accrual commercial and industrial loans. This credit relationship paid off during the first quarter of 2025 and we recognized $329 thousand as a recovery of prior charge-offs.

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 2024 Form 10-K for additional information regarding our accounting policies related to credit losses.

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.

The allowance allocated to commercial and industrial loans totaled $95.5 million, or 1.57% of total commercial and industrial loans, at June 30, 2025 increasing $7.9 million, or 9.0%, compared to $87.6 million, or 1.43% of total commercial and industrial loans, at December 31, 2024. Modeled expected credit losses increased $4.7 million, in part due to a deterioration in forecasted economic conditions, particularly in the second half of 2025, relative to the comparable forecast as of December 31, 2024 (see discussion of the Moody’s Analytics scenarios below). Qualitative factor (“Q-Factor”) and other qualitative adjustments related to commercial and industrial loans increased $1.1 million primarily due to an increase in the model overlay for credit concentrations. Specific allocations for commercial and industrial loans that were evaluated for expected credit losses on an individual basis increased $2.1 million from $13.3 million at December 31, 2024 to $15.3 million at June 30, 2025. The increase was primarily related to new specific allocations for new individually assessed loans.

The allowance allocated to energy loans totaled $10.4 million, or 0.79% of total energy loans, at June 30, 2025 increasing $397 thousand, or 4.0%, compared to $10.0 million, or 0.89% of total energy loans, at December 31, 2024. The increase was primarily due to a $419 thousand increase in modeled expected credit losses, which was partly due to an increase in the volume of energy loans. Specific allocations for energy loans that were evaluated for expected credit losses on an individual basis totaled $2.7 million at both June 30, 2025 and December 31, 2024.

The allowance allocated to commercial real estate loans totaled $140.9 million, or 1.40% of total commercial real estate loans, at June 30, 2025 decreasing $2.3 million, or 1.6%, compared to $143.2 million, or 1.44% of total commercial real estate loans, at December 31, 2024. The decrease was primarily related to a $3.0 million decrease in Q-factor and other qualitative adjustments (primarily related to the office building overlay) partly offset by a $610 thousand increase in specific allocations for commercial real estate loans that were evaluated for expected credit losses on an individual basis from $625 thousand at December 31, 2024 to $1.2 million at June 30, 2025.

Additional information related to the allowance allocated to commercial real estate loans at June 30, 2025 and December 31, 2024 is included in the following table:

The allowance allocated to consumer real estate loans totaled $21.7 million, or 0.65% of total consumer real estate loans, at June 30, 2025 increasing $2.6 million, or 13.6%, compared to $19.1 million, or 0.62% of total consumer real estate loans, at December 31, 2024. The increase was primarily related to an increase in modeled expected credit losses due, in part, to growth within the portfolio.

The allowance allocated to consumer loans totaled $9.3 million, or 2.13% of total consumer loans, at June 30, 2025, decreasing $979 thousand, or 9.5%, compared to $10.3 million, or 2.31% of total consumer loans, at December 31, 2024. The decrease was primarily related to a decrease in modeled expected credit losses, down $812 thousand, in part due to a decrease in the expected loss rate associated with overdrafts.

As more fully described in our 2024 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 June 30, 2025, we utilized the Moody’s Analytics June 2025 Baseline Scenario (the “June 2025 Baseline Scenario”) to forecast the macroeconomic variables used in our models. The June 2025 Baseline Scenario is an estimate of the most likely path of the economy through the current business cycle (50% probability that economic conditions will be worse and 50% probability that economic conditions will be better). The June 2025 Baseline Scenario projections included, among other things, (i) U.S. Nominal Gross Domestic Product annualized quarterly growth rate of 2.56% during the remainder of 2025 followed by average annualized quarterly growth rates of 4.30% in 2026 and 3.90% through the end of the forecast period in the second quarter of 2027; (ii) average U.S. unemployment rate of 4.31% during the remainder of 2025 followed by average annualized quarterly rates of 4.68% in 2026 and 4.72% through the end of the forecast period in the second quarter of 2027; (iii) average Texas unemployment rate of 4.23% during the remainder of 2025 followed by average annualized quarterly rates of 4.33% in 2026 and 4.39% through the end of the forecast period in the second quarter of 2027; (iv) projected average 10 year Treasury rate of 4.23% during the remainder of 2025, 4.23% during 2026 and 4.31% through the end of the forecast period in the second quarter of 2027 and (v) average oil price of $63.97 per barrel during the remainder of 2025, $64.57 per barrel in 2026, and $63.38 per barrel through the end of the forecast period in the second quarter of 2027.

In estimating expected credit losses as of December 31, 2024, we utilized the Moody’s Analytics December 2024 Consensus Scenario (the “December 2024 Consensus Scenario”) to forecast the macroeconomic variables used in our models. The December 2024 Consensus Scenario was based on the review of a variety of surveys of baseline forecasts of the U.S. economy. The December 2024 Consensus Scenario projections included, among other things, (i) U.S. Nominal Gross Domestic Product average annualized quarterly growth rates of 3.50% in 2025 and 4.43% in 2026; (ii) average annualized U.S. unemployment rate of 4.36% during 2025 and 4.19% in 2026; (iii) average annualized Texas unemployment rate of 4.21% during 2025 and 3.99% during 2026; (iv) projected average 10 year Treasury rate of 4.23% during 2025 and 4.12% during 2026; and (v) average oil price of $70.88 per barrel during 2025 and $69.96 per barrel during 2026.

The overall loan portfolio as of June 30, 2025 increased $499.7 million, or 2.4%, compared to December 31, 2024. This increase included a $235.9 million, or 7.6%, increase in consumer real estate loans; a $186.3 million, or 16.5%, increase in energy loans; and a $125.2 million, or 1.3%, increase in commercial real estate loans. These increases were partly offset by a $40.3 million, or 0.7%, decrease in commercial and industrial loans and a $7.4 million, or 1.7%, decrease in consumer and other loans.

The weighted average risk grade for commercial and industrial loans decreased to 6.45 at June 30, 2025 from 6.64 at December 31, 2024. The decrease was partly related to a decrease in the weighted-average risk grade of pass grade commercial and industrial loans, which decreased to 6.12 at June 30, 2025 from 6.30 at December 31, 2024. The decrease was also partly related to a $32.7 million decrease in higher-risk grade, classified commercial and industrial loans. Classified loans consist of loans having a risk grade of 11, 12 or 13. The weighted-average risk grade for energy loans increased to 5.62 at June 30, 2025 from 5.58 at December 31, 2024. Pass-grade energy loans increased $176.9 million while the weighted-average risk grade of such loans increased from 5.51 at December 31, 2024 to 5.52 at June 30, 2025. The increase in the weighted-average risk grade for energy loans was also partly due to a $7.4 million increase in energy loans graded as “special mention” (risk grade 10) and a $6.1 million increase in classified energy loans. The weighted average risk grade for commercial real estate loans was 7.35 at both June 30, 2025 and December 31, 2024 as the impact of an increase in the weighted-average risk grade of pass grade loans from 7.07 at December 31, 2024 to 7.09 at June 30, 2025 was offset by the impact of a decrease in classified commercial real estate loans (down $21.7 million).

As noted above, our credit loss models utilized the economic forecasts in the Moody's June 2025 Baseline Scenario for our estimated expected credit losses as of June 30, 2025 and the Moody’s December 2024 Consensus Scenario for our estimate of expected credit losses as of December 31, 2024. 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 June 30, 2025, modeled expected credit losses were adjusted upwards by a weighted-average Q-Factor adjustment of approximately 4.0%, resulting in a $4.1 million total adjustment, compared to 4.1% at December 31, 2024, which resulted in a $3.8 million total adjustment.

We have also provided additional qualitative adjustments, or management overlays, as of June 30, 2025 as management believes there are still significant risks impacting certain categories of our loan portfolio. Q-Factor and other qualitative adjustments as of June 30, 2025 are detailed in the table below.

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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, most of our non-owner occupied and construction loans are originated with floating interest rates. As a result, these borrowers have been significantly impacted by the most recent cycle of rising interest rates. While there was a slight decrease in market interest rates in the second half of 2024, market expectations for short-term rates now forecast that future reductions will come at a slower pace than previously thought while longer-term rates are increasing as investors have begun to demand term and risk premiums at the long end of the yield curve.

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; tariffs and other protectionist trade policies; 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 June 30, 2025, we used the Moody’s Analytics 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, 2024, we provided qualitative adjustments, as detailed in the table below. Further information regarding these qualitative adjustments is provided in our 2024 Form 10-K.

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.

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We recorded a net credit loss expense related to loans totaling $28.5 million for the six months ended June 30, 2025 compared to $27.4 million during the same period in 2024. 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 six months of 2025 primarily reflects an increase in expected credit losses associated with commercial and industrial loans primarily related to increases in modeled expected credit losses, specific allocations and model overlays; an increase in the volume of consumer real estate loans, which resulted in an increase in modeled expected credit losses for such loans; and an increase in the level of charge-offs related to commercial real estate loans. The net credit loss expense related to loans during the first six months of 2025 also reflects recent charge-off trends particularly related to commercial and industrial loans and consumer loans (overdrafts). In 2025, we implemented new tools and enhanced internal procedures that are designed to identify fraudulent activity more accurately and more rapidly than in the past. As a result, we began writing-off deposit accounts that were overdrawn as a result of fraudulent activity directly to fraud expense, which is included in other non-interest expense in the accompanying consolidated income statements, rather than as charge-offs through the allowance for credit losses on loans. No prior period amounts were reclassified in accordance with these new procedures as management determined such amounts were not significant to the prior financial statements.

The ratio of the allowance for credit losses on loans to total loans was 1.31% at June 30, 2025 compared to 1.30% December 31, 2024. 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 $49.6 million and $51.9 million at June 30, 2025 and December 31, 2024, 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. The allowance for credit losses on off-balance-sheet credit exposures at both June 30, 2025 and December 31, 2024 were also impacted by specific allocations related to amounts available under a revolving line of credit and outstanding letters of credit for a commercial and industrial borrower that was evaluated for expected credit losses on an individual basis. The specific allocations totaled $4.5 million at June 30, 2025 and $4.3 million at December 31, 2024. We also recognized specific allocations for funded loans to this borrower totaling $7.0 million at June 30, 2025 and $7.2 million at December 31, 2024. We recognized a net credit loss benefit related to off-balance-sheet credit exposures totaling $2.3 million during the six months ended June 30, 2025, compared to a net credit loss expense of $2.1 million during the same period in 2024. Our policies and methodology used to estimate the allowance for credit losses on off-balance-sheet credit exposures are further described in our 2024 Form 10-K.

Capital and Liquidity

Capital. Shareholders’ equity totaled $4.2 billion at June 30, 2025 and $3.9 billion at December 31, 2024. Sources of capital during the six months ended June 30, 2025 included net income of $307.9 million; other comprehensive income, net of tax, of $111.5 million; $8.9 million related to stock-based compensation; and $6.0 million in proceeds from stock option exercises. Uses of capital during the six months ended June 30, 2025 included $129.9 million of dividends paid on preferred and common stock and $2.7 million of treasury stock purchases.

The accumulated other comprehensive income/loss component of shareholders’ equity totaled a net, after-tax, unrealized loss of $1.1 billion at June 30, 2025, compared to a net, after-tax, unrealized loss of $1.3 billion at December 31, 2024. The decrease in the net, after-tax, unrealized loss was primarily due to a $111.0 million net, after-tax, increase 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. The transitional period ended on December 31, 2024. 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 $1.00 and $0.95 per common share during the first and second quarters of 2025, respectively, and a quarterly dividend of $0.92 per common share during each of the first and second quarters of 2024. These dividend amounts equate to a common stock dividend payout ratio of 41.6% and 43.0% during the first six months of 2025 and 2024, 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 provide management the ability to repurchase shares of our common stock opportunistically in instances where management believes the market price undervalues our company. Such plans also provide us with the ability to repurchase shares of common stock that can be used to satisfy obligations related to stock compensation awards in order to mitigate the dilutive effect of such 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 and Use of Proceeds, each included elsewhere in this report.

Liquidity. As more fully discussed in our 2024 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 June 30, 2025, we had approximately $6.3 billion held in an interest-bearing account at the Federal Reserve. We also have the ability to borrow funds as a member of the FHLB. As of June 30, 2025, based upon available, pledgeable collateral, our total borrowing capacity with the FHLB was approximately $6.6 billion. Furthermore, at June 30, 2025, we had approximately $9.1 billion in securities that were available to pledge and could be used to support additional borrowings, as needed, through repurchase agreements or the Federal Reserve discount window.

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 June 30, 2025, Cullen/Frost had liquid assets, primarily consisting of cash on deposit at Frost Bank, totaling $365.3 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.

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 2024 Form 10-K. There has been no significant change in the types of market risks we face since December 31, 2024.

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.

Our model simulations as of June 30, 2025 indicate that our projected balance sheet is slightly less asset sensitive in comparison to our balance sheet as of December 31, 2024. For modeling purposes, as of June 30, 2025, the model simulations projected that 100 and 200 basis point ratable increases in interest rates would result in positive variances in net interest income of 1.2% and 2.4%, 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 negative variances in net interest income of 1.0% and 2.2%, respectively, relative to the flat-rate case over the next 12 months. For modeling purposes, as of December 31, 2024, 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 1.5% and 2.8%, 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 negative variances in net interest income of 1.1% and 2.2%, 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 June 30, 2025 and December 31, 2024, 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.

As of June 30, 2025, 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.

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.