Cullen/Frost Bankers, Inc.: Form 10-Q for the period ended Mar 31, 2026

Financial Review

The following discussion should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2025, and the other information included in the 2025 Form 10-K. Operating results for the three months ended March 31, 2026 are not necessarily indicative of the results for the year ending December 31, 2026 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, military conflict between the U.S. and Iran has contributed to heightened uncertainty and volatility in global markets. Such conditions can result in price volatility in energy and commodity markets, changes in inflation expectations, increased financial market volatility, and potential disruptions to global supply chains and trade flows. The timing, magnitude, and duration of these impacts are uncertain and may evolve rapidly based on geopolitical developments, policy responses, and market conditions. Heightened geopolitical uncertainty may influence Federal Reserve policy decisions and broader financial conditions, including interest‑rate volatility, funding costs, and liquidity conditions. These factors could adversely affect our funding profile; customer credit quality, particularly in sectors sensitive to energy prices, global trade, or economic cycles; and the market value of certain financial instruments. Prolonged volatility could also negatively impact economic growth, increase borrower stress, and contribute to higher credit losses, any of which could have a material adverse effect on our business, financial condition, and results of operations. We will continue to monitor these developments and adjust our risk management and capital planning strategies as appropriate.

Furthermore, financial markets, international relations, and global supply chains continue to be significantly impacted by evolving U.S. trade policies and practices. The scope, duration, and ultimate impact of tariffs on us, our customers, financial markets, and the U.S. and global economies remain uncertain, particularly following the U.S. Supreme Court’s February 20, 2026 ruling that the International Emergency Economic Powers Act (“IEEPA”) does not authorize presidential tariff authority, which invalidated prior IEEPA‑based tariffs. This ruling has introduced uncertainty regarding the timing and extent of potential tariff refunds, as well as the likelihood of new or replacement tariffs imposed under alternative statutory authorities under U.S. trade law. These developments may affect customer cash flows, credit conditions, supply chain decisions, and overall market activity and volatility, thereby increasing our exposure to operational, credit, and market risks. If such uncertainty negatively affects borrower financial condition or market stability, it could 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 (“U.S. GAAP”) and general practices within the financial services industry. The preparation of financial statements in conformity with U.S. GAAP 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 lifetime expected credit losses on these financial instruments carried at amortized cost, based on available information from internal and external sources that is relevant to assessing exposure to credit loss over the expected lives of the instruments. Relevant information includes historical credit loss experience, current conditions, and reasonable and supportable forecasts. While historical credit loss experience provides a starting point for estimating credit losses, adjustments may be made to reflect differences in current portfolio‑specific risk characteristics, economic and environmental conditions, or other relevant factors. Although management utilizes its best judgment and the information available, the ultimate adequacy of our allowance accounts depends on a variety of factors beyond our control, including portfolio performance, macroeconomic conditions, changes in interest rates, the accuracy of forecasted assumptions, and regulatory interpretations and supervisory assessments related to credit quality and asset classification. Refer to our 2025 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 conform prior‑period presentations and provide comparability. Taxable‑equivalent adjustments represent income from tax‑free loans and investments grossed up by the amount of federal income taxes that would have been incurred had such income been fully taxable, calculated using 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 $169.3 million, or $2.65 per diluted common share, for the three months ended March 31, 2026, compared to $149.3 million, or $2.30 per diluted common share, for the three months ended March 31, 2025.

Selected data for the comparable periods was as follows:

Net income available to common shareholders increased $20.1 million, or 13.4%, for the three months ended March 31, 2026 compared to the same period in 2025. The increase during the three months ended March 31, 2026 was primarily the result of a $22.3 million increase in net interest income, a $12.3 million increase in non-interest income, and a $6.3 million decrease in credit loss expense partly offset by a $17.6 million increase in non-interest expense and a $3.2 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 76.3% of total revenue during the first three months of 2026. 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 affect net interest income and net interest margin.

The Federal Reserve influences market interest rates, including the deposit and loan rates offered by many financial institutions. As of March 31, 2026, approximately 40.0% 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 39.1%); the prime interest rate (approximately 18.9%); or the American Interbank Offered Rate (“AMERIBOR”) (approximately 2.0%). Certain other loans are tied to other indices; however, such loans represent an immaterial portion of our loan portfolio as of March 31, 2026.

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 March 31, 2026, the target range for the federal funds rate was 3.50% to 3.75%. In March 2026, the Federal Reserve released projections whereby the midpoint of the projected appropriate target range for the federal funds rate would fall to 3.4% by the end of 2026 and subsequently decrease to 3.1% by the end of 2027. While there can be no assurance that any decreases in the federal funds rate will occur, these projections imply up to a 25 basis point decrease in the federal funds rate during the remainder of 2026, followed by a 25 basis point decrease in 2027.

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. Additional 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 those balances, and the related average rates. The tables also present net interest margin calculated on average total interest‑earning assets for the same periods. For these calculations: (i) average balances are based on daily averages; (ii) amounts are stated 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 available‑for‑sale securities, while yields are calculated 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 attributable to each factor. The comparison between the quarters also includes, when applicable, an additional change factor that reflects 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.

Taxable-equivalent net interest income for the three months ended March 31, 2026, increased $24.4 million, or 5.6%, compared to the same period in 2025. The increase in taxable-equivalent net interest income during the three months ended March 31, 2026 was primarily related to decreases in the average costs of interest-bearing deposit accounts and repurchase agreements combined with increases in the average volumes of loans and tax-exempt securities and increases in the average tax-equivalent yields on tax-exempt and taxable securities. The impact of these items was partly offset by a decrease in the average yield on loans, decreases in the average yield on and volume of interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) and a decrease in the average volume of taxable securities combined with an increase in the average volume of interest-bearing deposit accounts, among other things. As a result of these offsetting fluctuations, the taxable-equivalent net interest margin increased 14 basis points from 3.60% during the three months ended March 31, 2025 to 3.74% during the three months ended March 31, 2026.

The increase in the average volume of interest-earning assets during the three months ended March 31, 2026 was primarily related to a $1.2 billion increase in average loans and a $608.2 million increase in average tax-exempt securities partly offset by a $486.0 million decrease in average interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) and a $139.5 million decrease in average taxable securities. The average taxable-equivalent yield on interest-earning assets decreased 11 basis points from 4.99% during the three months ended March 31, 2025 to 4.88% during the three months ended March 31, 2026. 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 34 basis points from 6.57% during the three months ended March 31, 2025 to 6.23% during the three months ended March 31, 2026. The average taxable-equivalent yield on loans during the three months ended March 31, 2026 was impacted by decreases in market interest rates (as noted in the table above). The average volume of loans for the three months ended March 31, 2026 increased $1.2 billion, or 5.9%, compared to the same period in 2025. Loans made up approximately 45.3% of average interest-earning assets during the three months ended March 31, 2026, compared to 43.8% during the same period in 2025. The increase was primarily related to the use of available funds to originate loans.

The average taxable-equivalent yield on securities was 3.85% during the three months ended March 31, 2026, increasing 22 basis points from 3.63% during the three months ended March 31, 2025. The average yield on taxable securities was 3.39% during the three months ended March 31, 2026, increasing 10 basis points from 3.29% during the same period in 2025. The average taxable-equivalent yield on tax-exempt securities was 4.73% during the three months ended March 31, 2026, increasing 35 basis points from 4.38% during the same period in 2025. Tax-exempt securities made up approximately 35.8% of total average securities during the three months ended March 31, 2026, compared to 33.5% during the same period in 2025. The average volume of total securities during the three months ended March 31, 2026 increased $468.7 million, or 2.4%, compared to the same period in 2025. Securities made up approximately 40.8% of average interest-earning assets during the three months ended March 31, 2026, compared to 40.9% during the same period in 2025.

Average interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) for the three months ended March 31, 2026 decreased $486.0 million, or 6.7%, compared to the same period in 2025. Interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) made up approximately 13.9% of average interest-earning assets during the three months ended March 31, 2026, compared to 15.3% during the same period in 2025. The decrease during the three months ended March 31, 2026 was primarily related to the reinvestment of amounts held in an interest-bearing account at the Federal Reserve into loans and securities. The average yield on interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) was 3.64% during the three months ended March 31, 2026, compared to 4.39% during the same period in 2025. The average yield on interest-bearing deposits during the three months ended March 31, 2026 was impacted by lower average interest rates paid on reserves held at the Federal Reserve, compared to the same period in 2025.

The average rate paid on interest-bearing liabilities was 1.72% during the three months ended March 31, 2026, decreasing 40 basis points from 2.12% during the same period in 2025. Average deposits increased $567.9 million, or 1.4%, during the three months ended March 31, 2026, compared to the same period in 2025 and included a $422.1 million increase in average interest-bearing deposits and a $145.8 million increase in average non-interest-bearing deposits. The ratio of average interest-bearing deposits to total average deposits was 67.0% during the three months ended March 31, 2026, compared to 66.9% during the same period in 2025. 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 1.55% and 1.04%, respectively, during the three months ended March 31, 2026, compared to 1.94% and 1.30%, respectively, during the same period in 2025. 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 spread, which represents the difference between the average rate earned on earning assets and the average rate paid on interest-bearing liabilities, was 3.16% during the three months ended March 31, 2026, compared to 2.87% during the same period in 2025. 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 represents the amount added to the allowance for credit losses for various types of financial instruments, including loans, securities, and off‑balance‑sheet credit exposures, after net charge‑offs, to bring the allowances to a level that, in management’s best estimate, is sufficient to absorb current expected credit losses over the expected lives of the respective financial instruments measured at amortized cost, in accordance with ASC 326. 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 months ended March 31, 2026 increased $12.3 million, or 9.9%, compared to the same period in 2025. 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 $5.0 million, or 11.7%, for the three months ended March 31, 2026, compared to the same period in 2025. Investment management fees are the most significant component of trust and investment management fees, making up approximately 82.2% and 81.8% of total trust and investment management fees for the first three months of 2026 and 2025, respectively. The increase in trust and investment management fees was primarily related to an increase in investment management fees (up $4.3 million). Trust and investment management fees during the three months ended March 31, 2026 were also impacted by a one-time, $1.3 million administrative fee associated with a large trust account. Investment management fees are generally based on the market value of assets within an account and are therefore sensitive to volatility in the equity and bond markets. The increase in investment management fees during the three months ended March 31, 2026 was partly related to higher average equity valuations on managed accounts during 2026 relative to 2025 as well as growth in the number of accounts. The increase was also partly related to variation in the timing of certain court-approved fees associated with a large guardianship trust.

At March 31, 2026, trust assets, including both managed assets and custody assets, were primarily composed of equity securities (47.7% of assets), fixed income securities (30.5% of assets), alternative investments (8.9% of assets) and cash equivalents (7.5% of assets). The estimated fair value of these assets was $50.4 billion (including managed assets of $26.4 billion and custody assets of $24.1 billion) at March 31, 2026, compared to $51.0 billion (including managed assets of $26.7 billion and custody assets of $24.3 billion) at December 31, 2025 and $50.7 billion (including managed assets of $25.3 billion and custody assets of $25.5 billion) at March 31, 2025.

Service Charges on Deposit Accounts. Service charges on deposit accounts increased $3.5 million, or 12.4%, for the three months ended March 31, 2026, compared to the same period in 2025. The increase was primarily related to an increase in commercial service charges (up $2.2 million) and overdraft charges on consumer accounts (up $1.3 million). The increase in commercial service charges during the three months ended March 31, 2026 was partly related to an 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 increase in commercial service charges was also partly related to an increase in service fees on non-analyzed accounts. Overdraft charges totaled $15.6 million ($12.0 million consumer and $3.6 million commercial) during the three months ended March 31, 2026, compared to $14.2 million ($10.7 million consumer and $3.5 million commercial) during the same period in 2025. The increase in overdraft charges during the three months ended March 31, 2026 was impacted by higher volumes of fee-assessed overdrafts relative to 2025, in part due to growth in the number of accounts.

Insurance Commissions and Fees. Insurance commissions and fees increased $1.1 million, or 5.0%, for the three months ended March 31, 2026, compared to the same period in 2025. The increase was primarily the result of increases in benefit plan commissions (up $1.2 million) and contingent income (up $451 thousand), partly offset by a decrease in life insurance commissions (down $465 thousand). The increase in benefit plan commissions was primarily due to premium and exposure rate increases within the existing customer base and an increase in business volumes. The decrease in life insurance commissions was primarily related to a decrease in business volumes.

Contingent income totaled $4.5 million during the three months ended March 31, 2026 compared to $4.0 million during the three months ended March 31, 2025. 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. Performance-related contingent income totaled $3.8 million during the three months ended March 31, 2026 and $3.5 million during the three months ended March 31, 2025. 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 $643 thousand during the three months ended March 31, 2026, compared to $517 thousand during the three months ended March 31, 2025.

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 increased $1.1 million, or 20.9%, for the three months ended March 31, 2026, compared to the same period in 2025. The increase was primarily due to increased card transaction volumes. 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 August 2025, the U.S. District Court for the District of North Dakota ruled to vacate the Federal Reserve’s current interchange rules but simultaneously stayed its own vacatur pending appeal to the circuit court. The outcome of this litigation could have a significant and adverse effect on the fees banks can charge on debit card transactions.

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 cannot be determined at this time.

Other Charges, Commissions, and Fees. Other charges, commissions, and fees decreased $318 thousand, or 2.3%, for the three months ended March 31, 2026, compared to the same period in 2025. The decrease was primarily related to decreases income from the placement of annuities (down $300 thousand), subscription fee income (down $156 thousand), and commitment fees on unused lines of credit (down $136 thousand), among other things, partly offset by an increase income from the placement of mutual funds (up $262 thousand), among other things.

Net Gain/Loss on Securities Transactions. There were no sales of securities during the three months ended March 31, 2026. During the three months ended March 31, 2025, we sold certain available-for-sale securities with amortized costs totaling $38.6 million and realized a net loss of $14 thousand. These sales were primarily made in connection with a municipal tender offer.

Other Non-Interest Income. Other non-interest income increased $1.9 million, or 14.9%, for the three months ended March 31, 2026, compared to the same period in 2025. The increase was primarily related to increases in sundry and other miscellaneous income (up $2.2 million); benefits received on life insurance policies (up $632 thousand); income from customer derivatives trading and securities trading activities (combined up $456 thousand); and public finance underwriting fees (up $341 thousand); among other things. The increase from these items was partly offset by a decrease in gains on the sale of foreclosed and other assets (down $2.1 million), among other things. Sundry and other miscellaneous income during the three months ended March 31, 2026 included a $2.7 million one-time fee associated with the termination of a customer lease. The increases in income from customer derivative and securities trading activities and public finance underwriting fees were primarily related to increased transaction volumes. Gains on the sale of foreclosed and other assets during the three months ended March 31, 2025 included a $2.5 million gain related to the sale of a foreclosed real estate property.

Non-Interest Expense

Total non-interest expense for the three months ended March 31, 2026 increased $17.6 million, or 5.1%, compared to the same period in 2025. Changes in the various components of non-interest expense are discussed below.

Salaries and Wages. Salaries and wages increased $5.3 million, or 3.3%, for the three months ended March 31, 2026, compared to the same period in 2025. The increase in salaries and wages was primarily related to an increase in salaries due to annual merit and market increases and an increase in the number of employees. The increase in the number of employees was partly related to our investment in organic expansion in various markets. Salaries and wages during the three months ended March 31, 2026 were also impacted, to a lesser extent, by increases in stock-based compensation and commissions.

Employee Benefits. Employee benefits expense increased $2.5 million, or 5.9%, for the three months ended March 31, 2026, compared to the same period in 2025. The increase was primarily related to increases in medical/dental benefits expense (up $1.7 million), primarily due to an increase in expected costs; payroll taxes (up $792 thousand); and 401(k) plan expense (up $274 thousand). These items were partly offset by an increase in the net periodic pension benefit related to our defined benefit retirement and restoration plans (up $432 thousand).

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/expense.

Net Occupancy. Net occupancy expense increased $1.5 million, or 4.4%, for the three months ended March 31, 2026, compared to the same period in 2025. The increase was primarily related to increases in depreciation on buildings and leasehold improvements (together up $875 thousand); a decrease in rental income from tenants (down ($607 thousand); and lease expense (up $300 thousand), among other things.

Technology, Furniture, and Equipment. Technology, furniture, and equipment expense increased $1.6 million, or 3.9%, for the three months ended March 31, 2026, compared to the same period in 2025. The increase during the three months ended March 31, 2026 was primarily related to increases in cloud services expense (up $1.8 million), equipment rental (up $189 thousand), and depreciation on furniture and equipment (up $147 thousand), among other things, partly offset by a decrease in software amortization (down $693 thousand).

Deposit Insurance. Deposit insurance expense totaled $7.2 million for the three months ended March 31, 2026, and did not significantly fluctuate compared to the same period in 2025.

Other Non-Interest Expense. Other non-interest expense increased $6.7 million, or 10.4%, for the three months ended March 31, 2026, compared to the same period in 2025. The increase included increases in fraud losses, primarily related to deposits (up $2.4 million); advertising/promotions expense (up $1.9 million); amortization of deferred costs on loan commitments (up $1.2 million); professional services expense (up $532 thousand); guard service expense (up $476 thousand); research and platform fees (up $445 thousand); and travel, meals and entertainment (up $439 thousand), among other things. The increases from these items were partly offset by decreases in donations expense (down $937 thousand) and foreclosed assets expense (down $451 thousand), among other things. On April 22, 2026, Sefas Innovation, Inc., a third-party vendor used by Frost Bank, notified us that they experienced a cybersecurity incident that likely involved certain Frost Bank customer data. Our investigation into the incident, including the scope and nature of the data potentially involved, is ongoing. The incident neither affected our systems or networks, nor disrupted our operations. At this time, the incident is not reasonably likely to have a material impact on our financial condition or results of operations.

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 immaterial 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 months ended March 31, 2026 increased $17.9 million, or 12.2%, compared to the same period in 2025. The increase during the three months ended March 31, 2026 was primarily the result of a $22.3 million increase in net interest income, a $7.2 million increase in non-interest income, and a $6.3 million decrease in credit loss expense, partly offset by a $15.4 million increase in non-interest expense and a $2.6 million increase in income tax expense.

Net interest income for the three months ended March 31, 2026 increased $22.3 million, or 5.3%, compared to the same period in 2025. The increase during the three months ended March 31, 2026 was primarily related to decreases in the average costs of interest-bearing deposit accounts and repurchase agreements combined with increases in the average volumes of loans and tax-exempt securities and increases in the average tax-equivalent yields on tax-exempt and taxable securities. The impact of these items was partly offset by a decrease in the average yield on loans, decreases in the average yield on and volume of interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) and a decrease in the average volume of taxable securities combined with an increase in the average volume of interest-bearing deposit accounts, among other things. See the analysis of net interest income included in the section captioned “Net Interest Income” included elsewhere in this discussion.

Credit loss expense for the three months ended March 31, 2026 totaled $6.7 million compared to $13.1 million during the same period in 2025. 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 March 31, 2026 increased $7.2 million, or 9.7%, compared to the same period in 2025. The increase during the three months ended March 31, 2026 was primarily related to increases in service charges on deposit accounts; other non-interest income; interchange and card transaction fees; and insurance commissions and fees. The increase in service charges on deposit accounts was primarily related to an increase in commercial service charges and overdraft charges on consumer accounts. The increase in other non-interest income was primarily related to increases in sundry and other miscellaneous income; benefits received on life insurance policies; income from customer derivatives trading activities; and public finance underwriting fees, among other things, partly offset by a decrease in gains on the sale of foreclosed and other assets, among other things. The increase in interchange and card transaction fees was primarily related to increased card transaction volumes. The increase in insurance commissions and fees was primarily the result of increases in benefit plan commissions and contingent income, partly offset by a decrease in life insurance commissions. 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 months ended March 31, 2026 increased $15.4 million, or 5.1%, compared to the same period in 2025. The increase during the three months ended March 31, 2026 was primarily due to increases in other non-interest expense; salaries and wages; employee benefits expense; technology, furniture, and equipment expense; and net occupancy expense. The increase in other non-interest expense included increases in fraud losses; advertising/promotions expense; amortization of deferred costs on loan commitments; professional services expense; travel, meals and entertainment; and guard service expense; among other things, partly offset by decreases in donations expense and foreclosed assets expense, among other things. The increase in salaries and wages was primarily related to an increase 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 an increase in stock-based compensation. The increase in employee benefits expense was primarily related to increases in medical/dental benefits expense, payroll taxes, and 401(k) plan expense, among other things, partly offset by an increase in the net periodic pension benefit related to our defined benefit retirement and restoration plans. The increase in technology, furniture, and equipment expense was primarily related to increases in cloud services expense, equipment rental, and depreciation on furniture and equipment, among other things, partly offset by a decrease in software amortization. The increase in net occupancy expense was primarily related to an increase in depreciation on buildings and leasehold improvements, a decrease in rental income from tenants, and an increase in lease expense, among other things. 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 March 31, 2026 increased $1.7 million, or 19.8%, compared to the same period in 2025. The increase in net income during the three months ended March 31, 2026 was primarily the result of a $4.7 million increase in non-interest income, partly offset by a $2.3 million increase in non-interest expense, among other things.

Non-interest income for the three months ended March 31, 2026 increased $4.7 million, or 9.2%, compared to the same period in 2025. The increase during the three months ended March 31, 2026 was primarily due to an increase in trust and investment management fees. The increase in trust and investment management fees was primarily related to increases in investment management fees and was also impacted by a one-time, $1.3 million administrative fee associated with a large trust account. The increase in investment management fees was partly related to higher average equity valuations on managed accounts during 2026 relative to 2025, as well as growth in the number of accounts. The increase was also partly related to variation in the timing of certain court-approved fees associated with a large guardianship trust. See the analysis of these categories of non-interest income in the section captioned “Non-Interest Income” included elsewhere in this discussion.

Non-interest expense for the three months ended March 31, 2026 increased $2.3 million, or 5.6%, compared to the same period in 2025. The increase was primarily related to increases in other non-interest expense; salaries and wages; and net occupancy expense, among other things. The increase in other non-interest expense during the three months ended March 31, 2026 was primarily related to increases in corporate overhead expense allocations; research and platform fees; and professional services expense, among other things. The increase in salaries and wages was primarily due to an increase in commissions expense. The increase in net occupancy expense during the three months ended March 31, 2026 was related to an increase in lease expense. See the analysis of these categories of non-interest expense included in the section captioned “Non-Interest Expense” included elsewhere in this discussion.

Non-Banks

The Non-Banks operating segment had a net loss of $3.0 million during the three months ended March 31, 2026, compared to a net loss of $3.5 million during the same period in 2025. The decrease in the net loss during the three months ended March 31, 2026 was primarily due to a decrease 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 March 31, 2026, we recognized income tax expense of $31.4 million, for an effective tax rate of 15.5%, compared to $28.2 million, for an effective tax rate of 15.7%, for the same period in 2025. The effective income tax rates differed from the U.S. statutory federal income tax rate of 21% during 2026 and 2025 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 three months ended March 31, 2026 was primarily due to an increase in projected pre-tax net income. The decrease in the effective tax rate during the three months ended March 31, 2026 was primarily related to an increase in projected tax-exempt interest from securities combined with a decrease in projected non-deductible deposit interest expense.

Average Balance Sheet

Average assets totaled $52.1 billion for the three months ended March 31, 2026 representing an increase of $1.2 billion, or 2.4%, compared to average assets for the same period in 2025. Earning assets increased $1.2 billion, or 2.5%, during the three months ended March 31, 2026, compared to the same period in 2025. The increase in earning assets was primarily related to a $1.2 billion increase in average loans and a $608.2 million increase in average tax-exempt securities partly offset by a $486.0 million decrease in average interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) and a $139.5 million decrease in average taxable securities. Average deposits increased $567.9 million, or 1.4%, during the three months ended March 31, 2026, compared to the same period in 2025. The increase included a $422.1 million increase in interest-bearing deposits and a $145.8 million increase in non-interest-bearing deposits. Average non-interest-bearing deposits made up 33.0% and 33.1% of average total deposits during the three months ended March 31, 2026 and 2025, 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 $540.6 million, or 2.5%, from $21.9 billion at December 31, 2025 to $22.4 billion at March 31, 2026. 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 2025 Form 10-K for a more detailed discussion of our loan origination and risk management processes.

Commercial and Industrial. Commercial and industrial loans totaled $6.3 billion at both March 31, 2026 and December 31, 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 $113.4 million, or 10.4%, from $1.1 billion at December 31, 2025 to $1.2 billion at March 31, 2026. Energy loans are one of our largest industry concentrations, totaling 5.4% of total loans at March 31, 2026, up from 5.0% of total loans at December 31, 2025. 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 $851.2 million at March 31, 2026, decreasing $24.5 million, or 2.8%, from $875.7 million at December 31, 2025. At March 31, 2026, 35.8% of outstanding purchased SNCs were related to the construction industry and 19.9% were related to the real estate management industry. The remaining purchased SNCs were diversified throughout various other industries, with no other single industry exceeding 10% of the total purchased SNC portfolio. 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 $246.5 million, or 2.4%, from $10.3 billion at December 31, 2025 to $10.6 billion at March 31, 2026. Commercial real estate loans represented 73.1% and 73.5% of total real estate loans at March 31, 2026 and December 31, 2025, 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 March 31, 2026, 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 $161.9 million, or 4.4%, from $3.7 billion at December 31, 2025 to $3.9 billion at March 31, 2026. Combined, home equity loans and lines of credit made up 55.4% and 56.6% of the consumer real estate loan total at March 31, 2026 and December 31, 2025, 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 $7.6 million, or 1.6%, from $460.7 million at December 31, 2025 to $453.1 million at March 31, 2026. 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 March 31, 2026 decreased $43.7 million compared to December 31, 2025. The decrease was primarily related to decreases in past due commercial real estate loans - non-owner occupied (down $49.3 million), past due energy loans (down $18.0 million), past due commercial and industrial loans (down $12.5 million) and past due commercial real estate loans - owner occupied (down $5.9 million) partly offset by an increase in past due commercial real estate loans - construction (up $37.9 million).

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

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Generally, loans are placed on non‑accrual status when principal or interest becomes 90 days past due, when management determines that the collectibility of principal or interest is in doubt, or when otherwise required by regulatory guidelines. Upon placement on non‑accrual status, accrued but uncollected interest is reversed and charged to current‑period earnings. Subsequent cash receipts on non‑accrual loans are generally applied to principal, and interest income is recognized only after the recovery of principal is reasonably assured. Classification of a loan as non‑accrual does not necessarily preclude the ultimate collection of principal or interest.

Non-accrual loans increased $1.8 million, from $70.5 million at December 31, 2025 to $72.4 million at March 31, 2026, primarily due to increases in non-accrual commercial real estate - owner occupied loans and, to a lesser extent, consumer real estate loans. Non-accrual commercial and industrial loans included one credit relationship in excess of $5.0 million totaling $23.8 million at March 31, 2026 and $28.5 million at December 31, 2025. There were no non-accrual energy or commercial real estate loans in excess of $5.0 million totaling at either March 31, 2026 and December 31, 2025.

Allowance for Credit Losses

In the case of loans and securities, allowances for credit losses are contra-asset valuation accounts, calculated in accordance with ASC 326, 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 lifetime expected credit losses on these financial instruments carried at amortized cost, based on available information from internal and external sources that is relevant to assessing exposure to credit loss over the expected lives of the instruments. Relevant information includes historical credit loss experience, current conditions, and reasonable and supportable forecasts. While historical credit loss experience provides a starting point for estimating credit losses, adjustments may be made to reflect differences in current portfolio‑specific risk characteristics, economic and environmental conditions, or other relevant factors. Although management utilizes its best judgment and the information available, the ultimate adequacy of our allowance accounts depends on a variety of factors beyond our control, including portfolio performance, macroeconomic conditions, changes in interest rates, the accuracy of forecasted assumptions, and regulatory interpretations and supervisory assessments related to credit quality and asset classification. Refer to our 2025 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.

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The allowance allocated to commercial and industrial loans totaled $98.9 million, or 1.56% of total commercial and industrial loans, at March 31, 2026, increasing $449 thousand, or 0.5%, compared to $98.4 million, or 1.56% of total commercial and industrial loans, at December 31, 2025. Qualitative factor (“Q-Factor”) and other qualitative adjustments related to commercial and industrial loans increased $6.7 million, primarily due to an increase in the model overlay for the downside scenario, which is further discussed below. Modeled expected credit losses decreased $4.3 million, in part due to improvements in certain macroeconomic variables that influence projected loss expectations. Specific allocations for commercial and industrial loans evaluated for expected credit losses on an individual basis decreased $2.0 million from $16.6 million at December 31, 2025 to $14.7 million at March 31, 2026, primarily due a $2.0 million charge-off and loan repayments, partially offset by new specific allocations on newly assessed loans.

The allowance allocated to energy loans totaled $11.1 million, or 0.92% of total energy loans, at March 31, 2026 decreasing $481 thousand, or 4.2%, compared to $11.6 million, or 1.06% of total energy loans, at December 31, 2025. The decrease was primarily related to a decrease in the credit concentrations overlay.

The allowance allocated to commercial real estate loans totaled $138.0 million, or 1.31% of total commercial real estate loans, at March 31, 2026, increasing $2.9 million, or 2.2%, compared to $135.1 million, or 1.31% of total commercial real estate loans, at December 31, 2025. The increase was primarily related to a $2.3 million increase in modeled expected credit losses, driven by growth in our owner occupied portfolio and, to a lesser extent, our construction and land portfolio. The increase was also partly related to a $609 thousand increase in Q-factor and other qualitative adjustments that was primarily attributable to an increase in the model overlay our construction and land portfolio.

Additional information related to the allowance allocated to commercial real estate loans at March 31, 2026 and December 31, 2025 is included in the following table:

The allowance allocated to consumer real estate loans totaled $27.4 million, or 0.71% of total consumer real estate loans, at March 31, 2026, increasing $1.8 million, or 6.9%, compared to $25.6 million, or 0.69% of total consumer real estate loans, at December 31, 2025. The increase was primarily related to a $2.1 million increase in Q-factor and other qualitative adjustments that was primarily attributable to the establishment of a model overlay for second-lien revolving lines of credit. The increase was also partly related to a new specific allocation of $791 thousand for a consumer real estate loan evaluated for expected credit losses on an individual basis. These increases were partially offset by a $1.1 million decrease in modeled expected credit losses, primarily due to a reduction in the expected loss rate applied to first‑lien residential mortgage loans.

The allowance allocated to consumer loans totaled $10.8 million, or 2.39% of total consumer loans, at March 31, 2026, increasing $63 thousand, or 0.6%, compared to $10.7 million, or 2.33% of total consumer loans, at December 31, 2025. The allowance did not significantly fluctuate during the period, as a $309 thousand increase in modeled expected credit losses was largely offset by a $246 thousand decrease in Q-factor and other qualitative adjustments, primarily related to the consumer overlay.

As more fully described in our 2025 Form 10-K, we measure expected credit losses over the expected life of each loan using a combination of models that estimate probability of default and loss given default, among other factors. The measurement of expected credit losses is impacted by loan- and borrower-specific attributes, as well as certain macroeconomic variables. Models are adjusted to reflect the current macroeconomic conditions and expected changes over a reasonable and supportable forecast period.

In estimating expected credit losses as of March 31, 2026, we utilized the Moody’s Analytics March 2026 Baseline Scenario (the “March 2026 Baseline Scenario”) to forecast the macroeconomic variables used in our models. The March 2026 Baseline Scenario was based on the most likely outcome based on prevailing economic conditions and Moody's forecast of the U.S. economy. The March 2026 Baseline Scenario projections included, among other things, (i) U.S. Nominal Gross Domestic Product average annualized quarterly growth rates of 5.06% during the remainder of 2026 and 4.04% through the end of the forecast period in the first quarter of 2028; (ii) average annualized U.S. unemployment rates of 4.49% during the remainder of 2026 and 4.47% through the end of the forecast period in the first quarter of 2028; (iii) average annualized Texas unemployment rate of 4.19% during the remainder of 2026 and 4.16% through the end of the forecast period in the first quarter of 2028; (iv) projected average 10 year Treasury rate of 4.27% during the remainder of 2026 and 4.32% through the end of the forecast period in the first quarter of 2028; and (v) average oil price of $67.37 per barrel during the remainder of 2026 and $63.19 per barrel through the end of the forecast period in the first quarter of 2028.

In estimating expected credit losses as of December 31, 2025, we utilized the Moody’s Analytics December 2025 Baseline Scenario (the “December 2025 Baseline Scenario”) to forecast the macroeconomic variables used in our models. The December 2025 Baseline Scenario was based on the most likely outcome based on prevailing economic conditions and Moody's forecast of the U.S. economy. The December 2025 Baseline Scenario projections included, among other things, (i) U.S. Nominal Gross Domestic Product average annualized quarterly growth rates of 4.75% in 2026 and 4.03% in 2027; (ii) average annualized U.S. unemployment rates of 4.67% during both 2026 and 2027; (iii) average annualized Texas unemployment rate of 4.36% during 2026 and 4.37% during 2027; (iv) projected average 10 year Treasury rate of 4.23% during 2026 and 4.31% during 2027; and (v) average oil price of $61.09 per barrel during 2026 and $62.90 per barrel during 2027.

The overall loan portfolio at March 31, 2026 increased $540.6 million, or 2.5%, compared to December 31, 2025. The increase reflected growth across most portfolios, including a $246.5 million, or 2.4%, increase in commercial real estate loans; a $161.9 million, or 4.4%, increase in consumer real estate loans; a $113.4 million, or 10.4%, increase in energy loans; and a $26.4 million, or 0.4%, increase in commercial and industrial loans. These increases were partially offset by a $7.6 million, or 1.6%, decrease in consumer and other loans.

The weighted average risk grade for commercial and industrial loans increased slightly to 6.49 at March 31, 2026, compared to 6.44 at December 31, 2025. This increase was primarily related to an increase in the weighted-average risk grade of pass-grade commercial and industrial loans, which increased to 6.15 at March 31, 2026 from 6.06 at December 31, 2025. This increase was partially offset by a $25.1 million decrease classified commercial and industrial loans, which consist of loans assigned risk grades of 11, 12 or 13. The weighted-average risk grade for energy loans remained unchanged at 6.16 at both March 31, 2026 and December 31, 2025. While the weighted-average risk grade of pass-grade energy loans decreased to 5.75 at March 31, 2026 from 5.86 at December 31, 2025, this improvement was offset by a $39.5 million increase in energy loans graded as “watch” (risk grade 9) and “special mention” (risk grade 10). The weighted average risk grade for commercial real estate loans also remained unchanged at 7.29 at both March 31, 2026 and December 31, 2025. A slight increase in the weighted-average risk grade of pass-grade commercial real estate loans, to 7.06 at March 31, 2026 from 7.05 at December 31, 2025, was offset by a $31.9 million decrease in classified commercial real estate loans.

As discussed above, our credit loss models utilized the Moody's Analytics March 2026 Baseline Scenario to estimate expected credit losses as of March 31, 2026 and utilized the Moody’s Analytics December 2025 Baseline Scenario to estimate expected credit losses as of December 31, 2025. Model results were then qualitatively adjusted to reflect certain risk factors that are not captured within the modeling processes but are nonetheless relevant in assessing expected credit losses across our loan portfolios. These qualitative factor, or Q‑Factor, adjustments are discussed below.

Q‑Factor adjustments are based on management’s judgment and current assessment of risks related to, among other factors, changes in lending policies and procedures; economic and business conditions; loan portfolio composition and credit concentrations; and other external factors not already reflected in the modeling inputs, assumptions, or methodologies. Management evaluates the potential impact of these factors across a range of outcomes and applies an aggregate adjustment percentage to the modeled expected credit losses based on this assessment. As of March 31, 2026, modeled expected credit losses were increased by a weighted-average Q-Factor adjustment of approximately 3.0%, resulting in a $3.1 million total adjustment, compared to approximately 3.0% at December 31, 2025, which resulted in a $3.2 million total adjustment.

In addition, as of March 31, 2026, management applied other qualitative adjustments, or management overlays, to address risks impacting certain categories of the loan portfolio that management believes are not fully reflected in the modeled results. Q‑Factor and other qualitative adjustments as of March 31, 2026 are presented in the table below.

Model overlays related to commercial real estate loans are qualitative adjustments designed to address risks not captured within our commercial real estate credit loss models. These adjustments are established based on minimum reserve ratios for our commercial real estate loan portfolios. For our commercial real estate - owner occupied loan portfolio, management determined that a minimum reserve ratio was appropriate to address the model’s oversensitivity to favorable changes in certain economic variables. Based on internal analysis and benchmarking against peer bank data, the modeled results are considered overly optimistic and do not appropriately capture downside risk. Accordingly, management determined that the forecasted loss rate for the owner‑occupied commercial real estate loan portfolio should more closely align with that of the commercial and industrial loan portfolio. For the commercial real estate - non‑owner occupied and construction and land loan portfolios, minimum reserve ratios were determined to be appropriate because the modeled results do not appropriately capture downside risk related to borrowers’ ability to access capital markets for the sale or refinancing of investor real estate and assets under construction. Management believes access to capital may remain impaired for an extended period, which could require borrowers to rely on secondary sources of liquidity and capital to support completed projects that could take longer to stabilize than originally underwritten. In addition, most non‑owner‑occupied and construction loans are originated with floating interest rates. These borrowers have been adversely impacted by the recent cycle of rising interest rates, as declines in short‑term rates have occurred at a slower pace. Longer‑term interest rates have increased as investors demand higher term and risk premiums at the long end of the yield curve.

The model overlay related to consumer real estate loans is a qualitative adjustment designed to address management’s assessment that expected credit losses related to second-lien revolving lines of credit within our consumer real estate portfolio are underpredicted based on an analysis of historical loss trends. Specifically, management observed that both recent and longer‑term loss experience for second‑lien revolving lines of credit within the consumer real estate portfolio has exceeded modeled expectations, particularly during periods of economic stress. This indicates that the models may not fully capture loss sensitivity under adverse economic conditions. Accordingly, management applied a qualitative overlay to increase expected credit losses to a level more consistent with observed historical loss performance and current portfolio risk characteristics for second‑lien revolving lines of credit within the consumer real estate portfolio.

Office building overlays are qualitative adjustments designed to address longer-term concerns regarding the utilization of commercial office space that may adversely impact the long-term performance of certain office properties within our commercial real estate loan portfolio. These adjustments are established based on minimum reserve ratios applied to loans within our commercial real estate - non-owner occupied and construction and land loan portfolios that have risk grades of 8 or worse. Loans of these risk grades were targeted for the overlays as they represent elevated credit risk and are more susceptible to adverse changes in property performance, collateral values, and capital market conditions, and therefore warrant additional qualitative consideration beyond modeled results.

The downside scenario overlay is a qualitative adjustment applied to the commercial and industrial loan portfolio to address the risk of an economic downturn resulting from factors such as inflation; tariffs and other protectionist trade policies; rising interest rates; labor shortages; disruption in financial markets and global supply chains; continued oil price volatility; and the current or anticipated impacts of global wars or military conflicts, terrorism, and other geopolitical events. These factors are outside of management’s control but may adversely affect customer income levels and could alter anticipated customer behavior, including borrowing, repayment, investment, and deposit practices. To determine this qualitative adjustment, management utilizes an alternative, more pessimistic economic scenario to forecast the macroeconomic variables used in the credit loss models. As of March 31, 2026, the Moody’s Analytics S3 Alternative Scenario Downside - 90th Percentile was used. In modeling expected credit losses under this scenario, management also assumes that each non‑classified loan within the modeled loan pools is downgraded by one risk grade. The resulting qualitative adjustment is based on the amount by which expected credit losses under the alternative scenario exceed those estimated using the primary scenario, adjusted based on management’s assessment of the probability that this downside economic scenario will occur.

Credit concentration overlays are qualitative adjustments based on statistical analysis designed to address relationship exposure concentrations within the loan portfolio. Changes in loan portfolio concentrations over time can cause expected credit losses within the current portfolio to differ from historical loss experience. Because the allowance for credit losses reflects expected credit losses within the loan portfolio and such losses are uncertain as to their nature, timing, and amount, management believes that portfolio segments with higher concentration risk are more susceptible to the occurrence of a significant loss event. Accordingly, given the concentration of a significant portion of the loan portfolio in large credit relationships and the experience of large, concentrated credit losses in recent years, management applied the qualitative adjustments presented in the table above to address the increased risk associated with the potential deterioration of a large credit relationship into a loss event.

The consumer overlay is a qualitative adjustment applied to the consumer and other loan portfolio to address risks associated with the level of unsecured loans within the portfolio, as well as other risk factors. Unsecured consumer loans present an elevated risk of loss during periods of economic stress, as these loans lack a secondary source of repayment in the form of hard collateral. This overlay was determined based on management’s analysis of historical charge‑off trends within the consumer loan portfolio, as well as charge‑off trends observed across the broader banking industry. Based on this analysis, management determined it was appropriate to apply an additional qualitative overlay to the modeled expected credit losses for the unsecured consumer loan portfolio.

As of December 31, 2025, we provided qualitative adjustments, as detailed in the table below. Further information regarding these qualitative adjustments is provided in our 2025 Form 10-K.

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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.

We recorded a net credit loss expense related to loans of $10.5 million for the three months ended March 31, 2026, compared to $15.0 million during the same period in 2025. Net credit loss expense or benefit for each portfolio segment represents the amount required to adjust the allowance for credit losses allocated to that segment to the level of expected credit losses determined under our allowance methodology, after giving effect to net charge‑offs. Net credit loss expense for the first three months of 2026 primarily reflected (i) an increase in expected credit losses associated with consumer real estate loans, largely related to the new model overlay discussed above; (ii) growth in commercial real estate owner‑occupied and construction and land loans, which resulted in higher modeled expected credit losses; (iii) an increase in the model overlay for commercial real estate construction and land loans; and (iv) net charge‑offs related to consumer and other loans (primarily overdrafts), commercial and industrial loans, and consumer real estate loans.

The ratio of the allowance for credit losses on loans to total loans was 1.28% at March 31, 2026 compared to 1.29% December 31, 2025. Management believes the allowance for credit losses on loans is appropriate based on management’s best estimate of expected credit losses within the existing loan portfolio. Changes in the factors considered by management in estimating expected credit losses could result in changes to the allowance for credit losses and future credit loss expense.

Allowance for Credit Losses - Off-Balance-Sheet Credit Exposures. The allowance for credit losses on off-balance-sheet credit exposures totaled $47.6 million at March 31, 2026, compared to $51.3 million at December 31, 2025. The level of the allowance for credit losses on off-balance-sheet credit exposures is impacted by the volume of outstanding commitments, underlying risk grades, expected utilization of available commitments, and forecasted economic conditions impacting the loan portfolio. We recognized a net credit loss benefit related to off-balance-sheet credit exposures of $3.7 million during the three months ended March 31, 2026, compared to a net credit loss benefit of $2.0 million during the same period in 2025. Our policies and methodology used to estimate the allowance for credit losses on off-balance-sheet credit exposures are further described in our 2025 Form 10-K.

Capital and Liquidity

Capital. Shareholders’ equity totaled $4.5 billion at March 31, 2026 and $4.6 billion at December 31, 2025. Sources of capital during the three months ended March 31, 2026 included net income of $171.0 million and $5.2 million related to stock-based compensation. Uses of capital during the three months ended March 31, 2026 included other comprehensive loss, net of tax, of $80.6 million, $72.3 million of treasury stock purchases, and $65.7 million of dividends paid on preferred and common stock.

The accumulated other comprehensive income/loss component of shareholders’ equity totaled a net, after-tax, unrealized loss of $923.5 million at March 31, 2026, compared to a net, after-tax, unrealized loss of $843.0 million at December 31, 2025. The increase in the net, after-tax, unrealized loss was primarily due to an $80.7 million net, after-tax, decrease in the fair value of securities available for sale. Under the Basel III Capital Rules, we have elected to opt-out of the requirement to include most components of accumulated other comprehensive income in regulatory capital. Accordingly, amounts reported as accumulated other comprehensive income/loss do not increase or reduce regulatory capital and are excluded from the calculation of our regulatory capital ratios. Bank regulatory agencies utilize capital guidelines designed to measure capital and take into consideration the risk inherent in both on-balance-sheet and off-balance-sheet exposures. See Note 6 - Capital and Regulatory Matters in the accompanying notes to consolidated financial statements included elsewhere in this report.

Details of dividends declared and paid are presented in the table below. 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.

On March 19, 2026, U.S. bank regulatory agencies jointly issued a Notice of Proposed Rulemaking (“NPR”) that would revise certain elements of the regulatory capital framework applicable to standardized‑approach banking organizations, including Cullen/Frost and Frost Bank. The proposal, which is open for public comment through June 18, 2026, is intended to enhance risk sensitivity while maintaining overall framework simplicity. Key provisions would revise risk weights for corporate and retail loans, introduce more granular loan‑to‑value‑based risk weights for residential mortgages, replace the deduction of mortgage servicing assets with a 250% risk weight, and refine methodologies for calculating exposure amounts and risk‑weighted assets related to counterparty credit risk, securitizations, and synthetic risk transfer transactions, including adjustments to the recognition of credit risk mitigants. We are currently evaluating the potential effects of the proposal on our regulatory capital ratios, capital planning processes, and risk‑weighted assets; however, because the NPR has not been finalized and may change following the comment period, the ultimate impact cannot yet be determined. Based on our preliminary assessment, the proposed recalibration of risk weights for corporate, retail, and residential mortgage exposures would be expected to modestly reduce our total risk‑weighted assets. Management will continue to monitor regulatory developments and assess implications for our capital structure, capital planning, and business strategy.

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 levels and provide management with the flexibility to repurchase shares of our common stock opportunistically when management believes the market price undervalues our company. Such plans also provide us with the ability to repurchase shares of common stock to be used to satisfy obligations related to stock compensation awards and thereby 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 2025 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 pressures 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 requirements. Our principal source of funding has been customer deposits, supplemented by short-term and long-term borrowings as well as maturities of securities and loan amortization. As of March 31, 2026, we had approximately $6.4 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 March 31, 2026, based upon available, pledgeable collateral, our total borrowing capacity with the FHLB was approximately $7.1 billion. Furthermore, at March 31,

2026, we had approximately $12.8 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. As of March 31, 2026, management is not aware of any events that have occurred that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on us on a consolidated basis.

Since Cullen/Frost is a holding company and does not conduct operations, its primary sources of liquidity are dividends received 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 March 31, 2026, Cullen/Frost had liquid assets, primarily consisting of cash on deposit at Frost Bank, totaling $273.0 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, and should be read in conjunction with, 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, as well as 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 2025 Form 10-K. There has been no material change in the types of market risks we face since December 31, 2025.

We utilize an earnings simulation model as the primary quantitative tool to measure interest rate risk associated with changes in 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 base‑case scenario under hypothetical interest rate fluctuations over the same period. 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 March 31, 2026 indicate that our projected balance sheet is slightly less asset-sensitive compared to our balance sheet as of December 31, 2025. For modeling purposes, as of March 31, 2026, 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 1.3% and 2.5%, 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 0.9% and 2.7%, respectively, relative to the flat-rate case over the next 12 months. For modeling purposes, as of December 31, 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 1.5% and 3.0%, 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 1.3% and 3.4%, respectively, relative to the flat-rate case over the next 12 months.

We do not currently pay interest on a significant portion of our commercial demand deposits. Whether interest may be paid on these deposits in the future would depend on a variety of factors, some of which are beyond our control. Our March 31, 2026 and December 31, 2025, model simulations did not assume any payment of interest on commercial demand deposits (those not already receiving an earnings credit). Management believes, based on experience during prior interest rate cycles, that it is not likely we will pay interest on these deposits as rates increase.

As of March 31, 2026, 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 material 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 material. Accordingly, 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.