ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements and Factors that Could Affect Future Results
Certain statements contained in this Annual Report on Form 10-K 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.
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• The costs and effects of legal and regulatory developments, the resolution of legal proceedings or regulatory or other governmental inquiries, the results of regulatory examinations or reviews and the ability to obtain required regulatory approvals.
• The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities, and insurance) and their application with which we and our subsidiaries must comply.
• The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters.
• Our success at managing the risks involved in the foregoing items.
In addition, financial markets, international relations, and global supply chains have been significantly impacted by recent U.S. trade policies and practices. Due to the rapidly evolving and changing state of U.S. trade policies, the amount and duration of any tariffs and their ultimate impact on us, our customers, financial markets, and the overall U.S. and global economies is currently uncertain. Nonetheless, prolonged uncertainty, elevated tariff levels or their wide-spread use in U.S. trade policy could weaken economic conditions and adversely impact the ability of borrowers to repay outstanding loans or the value of collateral securing these loans or adversely affect financial markets or the values of securities. To the extent that these risks may have a negative impact on the financial condition of borrowers or financial markets, it could also have a material adverse effect on our business, financial condition and results of operations.
Forward-looking statements speak only as of the date on which such statements are made. We do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events.
Application of Critical Accounting Policies and Accounting Estimates
We follow accounting and reporting policies that conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While we base estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.
We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial statements.
Accounting policies related to the allowance for credit losses on financial instruments including loans and off-balance-sheet credit exposures are considered to be critical as these policies involve considerable subjective judgment and estimation by management. These policies are in accordance with Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”) Financial Instruments - Credit Losses. In the case of loans, the allowance for credit losses is a contra-asset valuation account, calculated in accordance with ASC 326, that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. In the case of off-balance-sheet credit exposures, the allowance for credit losses is a liability account, calculated in accordance with ASC 326, reported as a component of accrued interest payable and other liabilities in our consolidated balance sheets. The amount of each allowance account represents management's best estimate of current expected credit losses on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. Relevant available information includes historical credit experience, current conditions and reasonable and supportable forecasts. While historical credit experience provides the basis for the estimation of expected credit , adjustments to historical information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. While management utilizes its judgment and information available, the ultimate adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets. See the section captioned “Allowance for Credit ” elsewhere in this discussion as well as Note 1 - Summary of Significant Accounting Policies and Note 3 - Loans in the notes to consolidated financial statements
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included in Item 8. Financial Statements and Supplementary Data elsewhere in this report for further details of the risk factors considered by management in estimating the necessary level of the allowance for credit losses.
Overview
The following discussion and analysis presents the more significant factors that affected our financial condition as of December 31, 2025 and 2024 and results of operations for each of the years then ended. Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K filed with the SEC on February 6, 2025 (the “ 2024 Form 10-K ”) for a discussion and analysis of the more significant factors that affected periods prior to 2024.
Certain reclassifications have been made to make prior periods comparable. This discussion and analysis should be read in conjunction with our consolidated financial statements, notes thereto and other financial information appearing elsewhere in this report.
Taxable-equivalent adjustments are the result of increasing income from tax-free loans and investments by an amount equal to the taxes that would be paid if the income were fully taxable, thus making tax-exempt yields comparable to taxable asset yields. Taxable equivalent adjustments were based upon a 21% income tax rate.
Dollar amounts in tables are stated in thousands, except for per share amounts.
Results of Operations
Net income available to common shareholders totaled $641.9 million, or $9.92 diluted per common share, in 2025 compared to $575.9 million, or $8.87 diluted per common share, in 2024 and $591.3 million, or $9.10 diluted per common share, in 2023.
Selected income statement data, returns on average assets and average equity and dividends per share for the comparable periods were as follows:
Taxable-equivalent net interest income
Taxable-equivalent adjustment
Net interest income
Credit loss expense
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income
Preferred stock dividends
Net income available to common shareholders
Earnings per common share - basic
Earnings per common share - diluted
Dividends per common share
Return on average assets
Return on average common equity
Average shareholders' equity to average assets
Net income available to common shareholders increased $66.0 million for 2025 compared to 2024. The increase was primarily the result of a $131.5 million increase in net interest income, a $40.0 million increase in non-interest income, and a $20.8 million decrease in credit loss expense partly offset by a $116.6 million increase in non-interest expense and and a $9.7 million increase in income tax expense.
Details of the changes in the various components of net income are further discussed below.
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Net Interest Income
Net interest income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is our largest source of revenue, representing 77.7% of total revenue during 2025. Net interest margin is the ratio of taxable-equivalent net interest income to average earning assets for the period. The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net interest income and net interest margin.
The Federal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. As of December 31, 2025, approximately 39.7% 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 38.4%); the prime interest rate (approximately 19.1%); or the American Interbank Offered Rate (“AMERIBOR”) (approximately 2.2%). Certain other loans are tied to other indices; however, such loans do not make up a significant portion of our loan portfolio as of December 31, 2025.
Select average market rates for the periods indicated are presented in the table below.
Federal funds target rate upper bound
Effective federal funds rate
Interest on reserve balances
Prime
AMERIBOR Term-30 (1)
AMERIBOR Term-90 (1)
1-Month Term SOFR (2)
3-Month Term SOFR (2)
1-Month LIBOR (3)
3-Month LIBOR (3)
(1) AMERIBOR Term-30 and AMERIBOR Term-90 are published by the American Financial Exchange.
(2) 1-Month Term SOFR and 3-Month Term SOFR market data are the property of Chicago Mercantile Exchange, Inc. or its licensors as applicable. All rights reserved, or otherwise licensed by Chicago Mercantile Exchange, Inc.
(3) 1-Month and 3-Month LIBOR ceased to be published effective June 30, 2023. Accordingly, average rates reflect through that date.
As of December 31, 2025, the target range for the federal funds rate was 3.50% to 3.75%. In December 2025, 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 such assurance that any such decreases in the federal funds rate will occur, these projections imply up to a 25 basis point decrease in the federal funds rate during 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 7A. Quantitative and Qualitative Disclosures About Market Risk elsewhere in this report for information about our sensitivity to interest rates. Further analysis of the components of our net interest margin is presented below.
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The following table presents an analysis of net interest income and net interest spread for the periods indicated, including average outstanding balances for each major category of interest-earning assets and interest-bearing liabilities, the interest earned or paid on such amounts, and the average rate earned or paid on such assets or liabilities, respectively. The table also sets forth the net interest margin on average total interest-earning assets for the same periods. For these computations: (i) average balances are presented on a daily average basis, (ii) information is shown on a taxable-equivalent basis assuming a 21% tax rate, (iii) average loans include loans on non-accrual status, and (iv) average securities include unrealized gains and losses on securities available for sale, while yields are based on average amortized cost.
Average
Balance
Interest
Income/
Expense
Yield
/Cost
Average
Balance
Interest
Income/
Expense
Yield
/Cost
Average
Balance
Interest
Income/
Expense
Yield
/Cost
Assets:
Interest-bearing deposits
Federal funds sold
Resell agreements
Securities:
Taxable
Tax-exempt
Total securities
Loans, net of unearned discount
Total earning assets and average rate earned
Cash and due from banks
Allowance for credit losses
Premises and equipment, net
Accrued interest receivable and other assets
Total assets
Liabilities:
Non-interest-bearing demand deposits
Interest-bearing deposits:
Savings and interest checking
Money market deposit accounts
Time accounts
Total interest-bearing deposits
Total deposits
Federal funds purchased
Repurchase agreements
Junior subordinated deferrable interest debentures
Subordinated notes
Total interest-bearing liabilities and average rate paid
Accrued interest payable and other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Net interest income
Net interest spread
Net interest income to total average earning assets
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The following table presents the changes in taxable-equivalent net interest income and identifies the changes due to differences in the average volume of earning assets and interest-bearing liabilities and the changes due to changes in the average interest rate on those assets and liabilities. The changes in net interest income due to changes in both average volume and average interest rate have been allocated to the average volume change or the average interest rate change in proportion to the absolute amounts of the change in each.
Increase (Decrease)
Due to Change in
Increase (Decrease)
Due to Change in
Rate
Volume
Days
Total
Rate
Volume
Days
Total
Interest-bearing deposits
Federal funds sold
Resell agreements
Securities:
Taxable
Tax-exempt
Loans, net of unearned discounts
Total earning assets
Savings and interest checking
Money market deposit accounts
Time accounts
Federal funds purchased
Repurchase agreements
Junior subordinated deferrable interest debentures
Subordinated notes
Total interest-bearing liabilities
Net change
Taxable-equivalent net interest income for 2025 increased $134.0 million, or 7.9%, compared to 2024. Taxable-equivalent net interest income in 2024 included 366 days compared to 365 days in 2025 as a result of the leap year. The additional day added approximately $3.0 million to taxable-equivalent net interest income during 2024. Excluding the impact of the additional day in 2024 results in an effective increase in taxable-equivalent net interest income of $137.0 million during 2025 compared to 2024.
The increase in taxable-equivalent net interest income during 2025 was primarily related to decreases in the average costs of interest-bearing deposit accounts and repurchase agreements combined with an increase in the average volume of loans, and increases in the average yield on and volume of taxable securities, and, to a lesser extent, tax-exempt securities, among other things. 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 resell agreements, among other things, combined with increases in the average volumes of interest-bearing deposit accounts and repurchase agreements, among other things. As a result of the aforementioned fluctuations, the taxable-equivalent net interest margin increased 13 basis points from 3.53% during 2024 to 3.66% during 2025.
The average volume of interest-earning assets for 2025 increased $2.1 billion, or 4.6%, compared to 2024. The increase in the average volume of interest-earning assets during 2025 was primarily related to a $1.4 billion increase in average loans, a $938.4 million increase in average taxable securities, and a $173.1 million increase in average tax-exempt securities, partly offset by a $376.1 million decrease in average interest-bearing deposits (primarily amounts held by us in an interest-bearing account at the Federal Reserve) and a $42.3 million decrease in average resell agreements.
The average yield on interest-earning assets decreased 14 basis points from 5.18% during 2024 to 5.04% during 2025 while the average rate paid on interest-bearing liabilities decreased 44 basis points from 2.52% in 2024 to 2.08% in 2025. The average taxable-equivalent yields on interest-earning assets during the comparable periods was impacted by changes in market interest rates (as noted in the table above) and changes in the volume and relative mix of interest-earning assets.
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The average taxable-equivalent yield on loans decreased 44 basis points from 6.99% during 2024 to 6.55% during 2025. The average taxable-equivalent yield on loans during 2025 was partly impacted by changes in market interest rates (as noted in the table above). The average volume of loans increased $1.4 billion, or 7.3%, in 2025 compared to 2024. Loans made up approximately 43.9% of average interest-earning assets during 2025 compared to 42.8% during 2024.
The average taxable-equivalent yield on securities was 3.77% during 2025, increasing 39 basis points compared to 3.38% during 2024. The average yield on taxable securities was 3.41% during 2025 compared to 2.92% during 2024, increasing 49 basis points, while the average yield on tax exempt securities was 4.52% during 2025 compared to 4.31% during 2024, increasing 21 basis points. Tax exempt securities made up approximately 34.1% of total average securities during 2025, compared to 35.2% during 2024. The average volume of total securities increased $1.1 billion, or 5.9%, during 2025 compared to 2024. Securities made up approximately 41.3% of average interest-earning assets in 2025 compared to 40.8% in 2024.
Average interest-bearing deposits (primarily amounts held by us in an interest-bearing account at the Federal Reserve), during 2025 decreased $376.1 million, or 5.0%, compared to 2024. Interest-bearing deposits made up approximately 14.8% of average interest-earning assets during 2025 compared to approximately 16.3% in 2024. The decrease during 2025 was primarily related to the reinvestment of amounts held in an interest-bearing account at the Federal Reserve into securities and loans. The average yield on interest-bearing deposits was 4.31% during 2025 and 5.27% during 2024. The average yield on interest-bearing deposits during 2025 was impacted by a lower average interest rate paid on reserves held at the Federal Reserve, compared to 2024.
The average rate paid on interest-bearing liabilities was 2.08% during 2025, decreasing 44 basis points from 2.52% during 2024. Average deposits increased $1.2 billion, or 3.0%, in 2025 compared to 2024. Average interest-bearing deposits increased $1.2 billion in 2025 compared to 2024, while average non-interest-bearing deposits increased $83.0 million in 2025 compared to 2024. The ratio of average interest-bearing deposits to total average deposits was 67.0% in 2025 compared to 66.2% in 2024. The average cost of deposits is primarily impacted by changes in market interest rates as well as changes in the volume and relative mix of interest-bearing deposits. The average rates paid on interest-bearing deposits and total deposits were 1.89% and 1.26%, respectively, in 2025 compared to 2.32% and 1.54%, respectively, in 2024. The average cost of deposits during 2025 was 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 taxable-equivalent net interest spread, which represents the difference between the average rate earned on earning assets and the average rate paid on interest-bearing liabilities, was 2.96% in 2025 compared to 2.66% in 2024. The net interest spread, as well as the net interest margin, will be impacted by future changes in short-term and long-term interest rate levels, as well as the impact from the competitive environment. A discussion of the effects of changing interest rates on net interest income is set forth in Item 7A. Quantitative and Qualitative Disclosures About Market Risk 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 14 - Derivative Financial Instruments in the accompanying notes to consolidated financial statements elsewhere in this report. Information regarding the impact of fluctuations in interest rates on our derivative financial instruments is set forth in Item 7A. Quantitative and Qualitative Disclosures About Market Risk elsewhere in this report.
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Credit Loss Expense
Credit loss expense is determined by management as the amount to be added to the allowance for credit loss accounts for various types of financial instruments including loans, securities and off-balance-sheet credit exposure after net charge-offs have been deducted to bring the allowance to a level which, in management’s best estimate, is necessary to absorb expected credit losses over the lives of the respective financial instruments.
The components of credit loss expense were as follows.
Credit loss expense (benefit) related to:
Loans
Off-balance-sheet credit exposures
Securities held to maturity
Total
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 2025 increased $40.0 million, or 8.7%, compared to 2024. Changes in the various components of non-interest income are discussed in more detail below.
Trust and Investment Management Fees. Trust and investment management fee income for 2025 increased $11.8 million, or 7.2%, compared to 2024. Investment management fees are the most significant component of trust and investment management fees, making up approximately 81.8% and 81.3% of total trust and investment management fees in 2025 and 2024, respectively. The increase in trust and investment management fees during 2025 was primarily related an increase in investment management fees (up $10.4 million) and, to a lesser extent, estate fees (up $2.0 million), among other things. Investment management fees are generally based on the market value of assets within an account and are thus impacted by volatility in the equity and bond markets. The increase in investment management fees during 2025 was primarily related to an increase in the average value of assets maintained in accounts. The increase in the average values of assets was partly related to higher average equity valuations during 2025 relative to 2024 and growth in the number of accounts. The increase in estate fees during 2025 was primarily related to an increase in transaction volumes relative to 2024.
At December 31, 2025, trust assets, including both managed assets and custody assets, were primarily composed of equity securities (47.7% of trust assets), fixed income securities (30.3% of trust assets), alternative investments (8.7% of assets) and cash equivalents (7.4% of trust assets). The estimated fair value of trust assets was $51.0 billion (including managed assets of $26.7 billion and custody assets of $24.3 billion) at December 31, 2025 compared to $51.4 billion (including managed assets of $26.2 billion and custody assets of $25.2 billion) at December 31, 2024.
Service Charges on Deposit Accounts. Service charges on deposit accounts for 2025 increased $15.3 million, or 14.4%, compared to 2024. The increase was primarily related to increases in overdraft charges on consumer and, to a lesser extent, commercial accounts (up $7.6 million and $1.1 million, respectively), and commercial service charges (up $7.2 million).
Overdraft charges totaled $60.6 million ($46.7 million consumer and $13.9 million commercial) during 2025 compared to $51.9 million ($39.1 million consumer and $12.8 million commercial) during 2024. The increase in overdraft charges during 2025 was impacted by an increase in the volume of fee assessed overdrafts relative to 2024, in part due to growth in the number of accounts. The increase in commercial service charges during 2025 was partly related to an increase 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.
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Insurance Commissions and Fees. Insurance commissions and fees for 2025 increased $4.2 million, or 6.9%, compared to 2024. The increase was primarily the result of increases in benefit plan commissions (up $1.9 million), property and casualty commissions (up $1.3 million) and life insurance commissions (up $878 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 volume. The increase in property and casualty commissions was primarily related to commercial lines due to an increase in business volumes partly offset by variations in the rate and exposure base within the existing customer bases. The increase in life insurance commissions was primarily related to an increase in business volumes.
Contingent income totaled $5.1 million in 2025 and $5.0 million in 2024. Contingent income primarily consists of amounts received from various property and casualty insurance carriers related to the loss performance of insurance policies previously placed. These performance related contingent payments are seasonal in nature and are mostly received during the first quarter of each year. This performance related contingent income totaled $3.7 million in 2025 and $3.4 million in 2024. Performance related contingent income related to commercial lines insurance policies increased due to improved loss performance of commercial lines insurance policies previously placed and growth within the commercial lines portfolio. Contingent income also includes amounts received from various benefit plan insurance companies related to the volume of business generated and/or the subsequent retention of such business. This benefit plan related contingent income totaled $1.4 million in 2025 and $1.6 million in 2024.
Interchange and Card Transaction Fees. Interchange fees, or “swipe” fees, are charges that merchants pay to us and other card-issuing banks for processing electronic payment transactions. Interchange and card transaction fees consist of income from check-card usage, point of sale income from PIN-based debit card transactions and ATM service fees. Interchange and card transaction fees are reported net of related network costs.
Net revenues from interchange and card transaction fees for 2025 increased $1.8 million, or 8.8%, compared to 2024 primarily due to an increase in income from card transactions partly offset by an increase in network costs. A comparison of gross and net interchange and card transaction fees for the reported periods is presented in the table below.
Income from debit card transactions
ATM service fees
Gross interchange and debit card transaction fees
Network costs
Net interchange and debit card transaction fees
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 significantly and adversely affect 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 currently uncertain.
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Other Charges, Commissions and Fees. Other charges, commissions and fees for 2025 increased $4.2 million, or 7.8%, compared to 2024. The increase was primarily related to increases in income from the placement of annuities (up $1.5 million), commitment fees on unused lines of credit (up $943 thousand), income from the placement of mutual funds (up $591 thousand), merchant services rebates (up $578 thousand), funds transfer service charges (up $499 thousand), and letter of credit fees (up $439 thousand), among other things, partly offset by a decrease in subscription fee income (down $740 thousand), among other things.
Net Gain/Loss on Securities Transactions . During 2025, we sold certain available-for-sale securities with amortized costs totaling $45.4 million and realized a net loss of $850 thousand. During 2024, we sold certain available-for-sale securities with amortized costs totaling $123.3 million and realized a net loss of $96 thousand.
Other Non-Interest Income. Other non-interest income for 2025 increased $3.3 million, or 6.4%, compared to 2024. The increase was primarily related to increases in gains on the sale of foreclosed and other assets (up $3.0 million) and income from customer securities trading and derivatives trading activities (up $1.8 million and $791 thousand, respectively), partly offset by a decrease in public finance underwriting fees (down $1.7 million), among other things. The fluctuations in public finance underwriting fees and income from customer derivative and securities trading activities were primarily related to variations in transaction volumes. Gains on the sale of foreclosed and other assets during 2025 included a $2.5 million gain related to the sale of a foreclosed real estate property during the first quarter and $768 thousand in gains related to sales of certain lots of land during the fourth quarter.
Non-Interest Expense
Total non-interest expense for 2025 increased $116.6 million, or 8.9%, compared to 2024. Total non-interest expense during 2024 included accruals totaling $9.0 million related to a special deposit insurance assessment. During 2025, we reversed $9.7 million of our special deposit insurance assessment accrual based upon a decrease in expected future payments related to the special deposit insurance assessment. Details of the special deposit insurance assessment are discussed below. Excluding the impact of the special deposit insurance assessment, total non-interest expense would have increased $135.3 million, or 10.5%. Changes in the various components of non-interest expense are discussed below.
Salaries and Wages. Salaries and wages increased $53.3 million, or 8.6%, in 2025 compared to 2024. The increase in salaries and wages was primarily related to increases 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 were also impacted, to a lesser extent, by increases in incentive compensation and stock-based compensation.
Employee Benefits . Employee benefits expense for 2025 increased $23.7 million, or 19.3%, compared to 2024. The increase was primarily related to increases in medical/dental benefits expense (up $11.8 million), 401(k) plan expense (up $7.7 million), and payroll taxes (up $3.5 million).
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 additional 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 10 - Employee Benefit Plans in the accompanying notes to consolidated financial statements elsewhere in this report for additional information related to our net periodic pension benefit/cost.
Net Occupancy. Net occupancy expense for 2025 increased $8.2 million, or 6.4%, compared to 2024. The increase was primarily related to increases in depreciation on buildings and leasehold improvements (together up $2.9 million); lease expense (up $2.9 million); and property taxes (up $2.2 million), among other things. The increases in the aforementioned components of net occupancy expense were impacted, in part, by our expansion efforts.
Technology, Furniture and Equipment. Technology, furniture and equipment expense for 2025 increased $17.3 million, or 11.6%, compared to 2024. The increase was primarily related to increases in cloud services expense (up $10.3 million), software maintenance (up $4.9 million), depreciation on furniture and equipment (up $2.5 million), and service contracts expense (up $1.1 million), among other things.
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Deposit Insurance. Deposit insurance expense totaled $18.8 million in 2025 compared to $37.3 million in 2024. Deposit insurance expense during 2024 included accruals totaling $9.0 million ($7.1 million after tax) related to a special deposit insurance assessment discussed below. During 2025, we reversed a total of $9.7 million ($7.7 million after tax) of our special deposit insurance assessment accrual based upon a decrease in expected future payments related to the special deposit insurance assessment. Excluding the special assessments from 2024 and reversals in 2025, deposit insurance expense did not significantly fluctuate during the comparable periods.
In November 2023, the FDIC issued a final rule to implement a special assessment to recover losses to the DIF incurred as a result of bank failures earlier that year and the FDIC's use of the systemic risk exception to cover certain deposits that were otherwise uninsured. The special assessment was based on estimated uninsured deposits as of December 31, 2022 (excluding the first $5.0 billion) and was assessed at a quarterly rate of 3.36 basis points, over eight quarterly assessment periods, beginning in the first quarter of 2024. As a result of this final rule, we accrued $51.5 million ($40.7 million after tax) related to this assessment in 2023. This amount was based on our estimate of the full amount of the assessment at that time. During 2024, the FDIC increased their loss estimate related to the aforementioned bank failures. As a result, we accrued an additional $9.0 million ($7.1 million after tax) in 2024. At that time, due to the increased estimate of losses, the FDIC also projected that the special assessment will be collected for an additional two quarters beyond the initial eight-quarter collection period, at a lower rate.
In December 2025, based upon the first six quarterly collections of the special assessment and anticipated collections for the seventh quarterly special assessment, the FDIC issued an interim final rule to amend the collection of the special assessment to reduce the eighth quarterly assessment rate from 3.36 basis points to 2.97 basis points. Because the cumulative amount collected through the initial eight quarter special assessment period is projected to equal the FDIC’s loss estimate, the additional two quarter extended assessment period was removed. In light this interim final rule, we reversed a total of $9.7 million ($7.7 million after tax) of our special deposit insurance assessment accrual based upon a decrease in expected future payments related to the special deposit insurance assessment. The interim final rule also requires the FDIC to provide an offset to regular quarterly deposit insurance assessments for institutions subject to the special assessment if the aggregate amount collected exceeds estimated losses following the resolution of pending litigation, and again following the termination of the receiverships. As provided for in the special assessment rule, if losses at the termination of the receiverships exceed the amount collected, the FDIC will implement a one-time final special assessment to ensure the full amount of actual is recovered as required by law. The extent to which any such future offsets or a future one-time special assessment will impact our future deposit insurance expense is currently uncertain.
Other Non-Interest Expense. Other non-interest expense for 2025 increased $32.7 million, or 13.4%, compared to 2024. The increase included increases in fraud losses (up $6.6 million); sundry and other miscellaneous expense (up $6.3 million), of which $5.8 million related to increased operational losses and asset write-offs; advertising/promotions expense (up $5.5 million); donations expense (up $4.8 million), primarily related to donations to the Frost Charitable Foundation; professional services expense (up $2.4 million); business development expense (up $2.2 million); research and platform fees (up $1.9 million); travel, meals and entertainment (up $1.3 million); and communications expense (up $1.2 million); among other things, partly offset by a decrease in check card expenses (down $1.6 million), among other things.
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Results of Segment Operations
We are managed under a matrix organizational structure whereby our two primary operating segments, Banking and Frost Wealth Advisors, overlap a regional reporting structure. A third operating segment, Non-Banks, is for the most part the parent holding company, as well as certain other insignificant non-bank subsidiaries of the parent that, for the most part, have little or no activity. A description of each business and the methodologies used to measure financial performance is described in Note 17 - Operating Segments in the accompanying notes to consolidated financial statements elsewhere in this report. Details of net income (loss) by operating segment are discussed in more detail below.
Banking
Net income for 2025 increased $65.2 million, or 11.6%, compared to 2024. The increase was primarily the result of a $130.3 million increase in net interest income, a $25.4 million increase in non-interest income, and a $20.8 million decrease in credit loss expense partly offset by a $102.0 million increase in non-interest expense and a $9.4 million increase in income tax expense.
Net interest income for 2025 increased $130.3 million, or 8.1%, compared to 2024. The increase was primarily related to decreases in the average costs of interest-bearing deposit accounts and repurchase agreements combined with an increase in the average volume of loans, and increases in the average yield on and volume of taxable securities, and, to a lesser extent, tax-exempt securities, among other things. 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 resell agreements, among other things, combined with increases in the average volumes of interest-bearing deposit accounts and repurchase agreements, among other things. See the analysis of net interest income included in the section captioned “Net Interest Income” included elsewhere in this discussion.
Credit loss expense for 2025 totaled $44.2 million compared to $65.0 million in 2024. See the sections captioned “Credit Loss Expense” and “Allowance for Credit Losses” elsewhere in this discussion for further analysis of credit loss expense related to loans and off-balance-sheet commitments.
Non-interest income for 2025 increased $25.4 million, or 9.6%, compared to 2024. The increase was primarily related to increases in service charges on deposit accounts; insurance commissions and fees; other non-interest income; interchange and card transaction fees; and other charges, commissions and fees.
The increase in service charges on deposit accounts was primarily related to increases in overdraft charges on consumer and, to a lesser extent, commercial accounts, and commercial service charges. The increase in insurance commissions and fees were primarily related to increases in benefit plan commissions, property and casualty commissions and life insurance commissions. The increase in other non-interest income was primarily related to increases in gains on the sale of foreclosed and other assets and income from customer securities trading and derivatives trading activities, partly offset by a decrease in public finance underwriting fees, among other things. The increase in interchange and card transaction fees was primarily due to an increase in income from card transactions partly offset by an increase in network costs. The increase in other charges, commissions and fees was primarily due to increases in commitment fees on unused lines of credit, merchant services rebates, funds transfer service charges, and letter of credit fees, among other things, partly offset by a decrease in subscription fee income, among other things. See the analysis of these categories of non-interest income included in the section captioned “Non-Interest Income” included elsewhere in this discussion.
Non-interest expense for 2025 increased $102.0 million, or 9.0%, compared to 2024. The increase was primarily related to increases in salaries and wages; other non-interest expense; employee benefit expense; technology, furniture, and equipment expense; and net occupancy expense, partly offset by a decrease in deposit insurance expense.
The increase in salaries and wages was primarily related to increases in salaries due to annual merit and market increases and an increase in the number of employees. Salaries and wages were also impacted, to a lesser extent, by increases in incentive compensation and stock-based compensation. The increase in other non-interest expense included increases in fraud losses; sundry and other miscellaneous expense; advertising/promotions expense; donations expense, primarily related to donations to the Frost Charitable Foundation; professional services expense; business development expense; travel, meals and entertainment; and communications expense; among other things,
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partly offset by a decrease in check card expenses, among other things. The increase in employee benefits expense was primarily related to increases in medical/dental benefits expense, 401(k) plan expense, and payroll taxes. The increase in technology, furniture, and equipment expense was primarily related to increases in cloud services expense, software maintenance expense, depreciation on furniture and equipment, and service contracts expense, among other things. The increase in net occupancy expense was primarily related to increases in depreciation on buildings and leasehold improvements; lease expense; and property taxes, among other things. Deposit insurance expense during 2024 included accruals totaling $9.0 million ($7.1 million after tax) related to a special deposit insurance assessment. During 2025, we reversed a total of $9.7 million ($7.7 million after tax) of our special deposit insurance assessment accrual based upon a decrease in expected future payments related to the special deposit insurance assessment. Excluding the special assessments from 2024 and reversals in 2025, deposit insurance expense did not significantly fluctuate during the comparable periods. 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 2025 decreased $929 thousand, or 2.5%, compared to 2024. The decrease was primarily due to a $14.8 million increase in non-interest expense partly offset by a $13.6 million increase in non-interest income.
Non-interest income for 2025 increased $13.6 million, or 6.9%, compared to 2024. The increase was primarily related to increases in trust and investment management fees and other charges, commissions, and fees. Trust and investment management fee income is the most significant income component for Frost Wealth Advisors. Investment management fees are the most significant component of trust and investment management fees, making up approximately 81.8% and 81.3% of total trust and investment management fees for 2025 and 2024, respectively. The increase in trust and investment management fees was primarily due to an increase in investment management fees and, to a lesser extent, estate fees, among other things. The increase in investment management fees was primarily related to an increase in the average value of assets maintained in accounts. The increase in the average value of assets was partly related to higher average equity valuations during 2025 relative to 2024 and growth in the number of accounts. The increase in estate fees was primarily related to an increase in transaction volumes relative to 2024. The increase in other charges, commissions, and fees was primarily related to increases in income from the placement of annuities and mutual funds, among other things. See the analysis of trust and investment management fees, other non-interest income and other charges, commissions, and fees included in the section captioned “Non-Interest Income” included elsewhere in this discussion.
Non-interest expense for 2025 increased $14.8 million, or 9.4%, compared to 2024. The increase was primarily related to increases in other non-interest expense; salaries and wages; and employee benefits expense. The increase in other non-interest expense was primarily related to an increases in the corporate overhead expense allocation and research and platform fees, among other things, partly offset by decreases in sundry and other miscellaneous expense and professional services expense. The increase in salaries and wages was primarily due to an increase in salaries, due to annual merit and market increases, as well as an increases in commissions, among other things, partly offset by decreases in incentive compensation and stock-based compensation. The increase in employee benefits was primarily related to increases in 401(k) plan expense, medical/dental benefits expense, and payroll taxes, among other things.
Non-Banks
The Non-Banks operating segment had a net loss of $13.6 million for 2025 compared to a net loss of $15.4 million in 2024. The decrease in net loss was mostly due to a decrease in net interest expense due to a decrease in the average rates paid on our long-term borrowings, among other things.
Income Taxes
We recognized income tax expense of $123.1 million, for an effective tax rate of 16.0%, in 2025 compared to $113.4 million, for an effective tax rate of 16.3%, in 2024. The effective income tax rates differed from the U.S. statutory federal income tax rate of 21% during 2025 and 2024 primarily due to the effect of tax-exempt income from securities, loans and life insurance policies, among other things, and their relative proportion to total pre-tax net income. The increase in income tax expense during 2025 was primarily due to an increase in pre-tax net income and a decrease in tax benefits associated with stock compensation, among other things. The decrease in the effective tax rate during 2025 was primarily related to an increase in tax-exempt interest from securities combined with a
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decrease in non-deductible deposit interest expense. See Note 12 - Income Taxes in the accompanying notes to consolidated financial statements included elsewhere in this report.
One Big Beautiful Bill Act. The One Big Beautiful Bill Act (“OBBBA”) was enacted on July 4, 2025. Among other things, the new law makes permanent certain expiring business tax provisions of the Tax Cuts and Jobs Act (“TCJA”). These include provisions which allow businesses to immediately expense, for tax purposes, the cost of new investments in certain qualified depreciable assets and the cost of qualified domestic research and development. The OBBBA also imposes a floor on tax deductions taken on charitable contributions. These items did not have a significant impact on our financial statements, though some minor operational changes were necessary to support new information reporting requirements. The OBBBA also significantly changes U.S. tax law related to foreign operations and certain tax credits; however, such changes do not currently impact us.
Sources and Uses of Funds
The following table illustrates, during the years presented, the mix of our funding sources and the assets in which those funds are invested as a percentage of our average total assets for the period indicated. Average assets totaled $51.9 billion in 2025 compared to $49.7 billion in 2024.
Sources of Funds:
Deposits:
Non-interest-bearing
Interest-bearing
Federal funds purchased
Repurchase agreements
Long-term debt and other borrowings
Other non-interest-bearing liabilities
Equity capital
Total
Uses of Funds:
Loans
Securities
Interest-bearing deposits
Federal funds sold
Resell agreements
Other non-interest-earning assets
Total
Deposits continue to be our primary source of funding. Average deposits increased $1.2 billion, or 3.0%, in 2025 compared to 2024. Non-interest-bearing deposits remain a significant source of funding, which has been a key factor in maintaining our relatively low cost of funds. Average non-interest-bearing deposits totaled 33.0% of total average deposits in 2025 compared to 33.8% in 2024.
We primarily invest funds in loans, securities and interest-bearing deposits (primarily amounts held by us in an interest-bearing account at the Federal Reserve). Average loans increased $1.4 billion, or 7.3%, in 2025 compared to 2024 while average securities increased $1.1 billion, or 5.9%, in 2025 compared to 2024. Average interest-bearing deposits (primarily amounts held by us in an interest-bearing account at the Federal Reserve) decreased $376.1 million, or 5.0%, in 2025 compared to 2024.
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Loans
Overview. Details of our loan portfolio are presented in Note 3 - Loans in the accompanying notes to consolidated financial statements included elsewhere in this report. Year-end total loans increased $1.1 billion, or 5.5%, during 2025 compared to 2024. The majority of our loan portfolio is comprised of commercial and industrial loans, energy loans and real estate loans. Commercial and industrial loans made up 28.8% and 29.5% of total loans at December 31, 2025 and 2024 while energy loans made up 5.0% and 5.4% of total loans at December 31, 2025 and 2024 and real estate loans made up 64.1% and 63.0% of total loans at December 31, 2025 and 2024. Energy loans include commercial and industrial loans, leases and real estate loans to borrowers in the energy industry. Real estate loans include both commercial and consumer balances.
Loan Origination/Risk Management. We have certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions. The amount and type of collateral supporting a loan impacts the level of credit risk related to that loan. Collateral is regularly assessed as a part of the overall on-going credit evaluation of the loan. We continue to explore the credit and reputational risks associated with climate change and their potential impact on the foregoing, while closely monitoring regulatory developments on climate risk.
Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, our management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
Our energy loan portfolio includes loans for production, energy services and other energy loans, which includes private clients, transportation and equipment providers, manufacturers, refiners and traders. The origination process for energy loans is similar to that of commercial and industrial loans. Because, however, of the average loan size, the significance of the portfolio and the specialized nature of the energy industry, our energy lending requires a highly prescriptive underwriting policy. Production loans are secured by proven, developed and producing reserves. Loan proceeds for these types of loans are typically used for the development and drilling of additional wells, the acquisition of additional production, and/or the acquisition of additional properties to be developed and drilled. Our customers in this sector are generally large, independent, private owner-producers or large corporate producers. These borrowers typically have large capital requirements for drilling and acquisitions, and as such, loans in this portfolio are generally greater than $10 million. Production loans are collateralized by the oil and gas interests of the borrower. Collateral values are determined by the risk-adjusted and limited discounted future net revenue of the reserves. Our valuations take into consideration geographic and reservoir differentials as well as cost structures associated with each borrower. Collateral value is calculated at least semi-annually using third-party engineer-prepared reserve studies. These reserve studies are conducted using a discount factor and base case assumptions for the current and future value of oil and gas. To qualify as collateral, typically reserves must be proven, developed and producing. For certain borrowers, collateral may include up to 20% proven, non-producing reserves. Loan commitments are limited to 65% of estimated reserve value. Cash flows must be sufficient to amortize the loan commitment within 120% of the half-life of the underlying reserves. Loan commitments generally must also be 100% covered by the risk-adjusted and limited discounted future net revenue of the reserves when at 75% of our base case price assumptions. In addition, the ratio of the borrower's debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) should generally not exceed 350%. We generally require production borrowers to maintain an active hedging program to manage risk and to have at least 50% of their production hedged for two years.
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Oil and gas service, transportation, and equipment providers are economically aligned due to their reliance on drilling and active oil and gas development. Income for these borrowers is highly dependent on the level of drilling activity and rig utilization, both of which are driven by the current and future outlook for the price of oil and gas. We mitigate the credit risk in this sector through conservative concentration limits and guidelines on the profile of eligible borrowers. Guidelines require that the companies have extensive experience through several industry cycles, and that they be supported by financially competent and committed guarantors who provide a significant secondary source of repayment. Borrowers in this sector are typically privately-owned, middle-market companies with annual sales of less than $100 million. The services provided by companies in this sector are highly diversified, and include down-hole testing and maintenance, providing and threading drilling pipe, hydraulic fracturing services or equipment, seismic testing and equipment and other direct or indirect providers to the oil and gas production sector.
We also have a small portfolio of loans to energy trading companies that serve as intermediaries that buy and sell oil, gas, other petrochemicals, and ethanol. These companies are not dependent on drilling or development. As a general policy, we do not lend to energy traders; however, we have made an exception to this policy for certain customers based upon their underlying business models which minimize risk as commodities are bought only to fill existing orders (back-to-back trading). As such, the commodity price risk and sale risk are eliminated.
Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing our commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce our exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, we avoid financing single-purpose projects unless other underwriting factors are present to help mitigate risk. We also utilize third-party experts to provide insight and guidance about economic conditions and trends affecting market areas we serve. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans (see the table below under the section captioned “Commercial Real Estate Loans”).
With respect to loans to developers and builders that are secured by non-owner occupied properties that we may originate from time to time, we generally require the borrower to have had an existing relationship with us and have a proven record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from us until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, construction completion risk, governmental regulation of real property, general economic conditions and the availability of long-term financing.
We originate consumer loans utilizing an underwriting process that assesses, among other things, an applicant's (i) stability of residence and employment, (ii) credit and bill paying history, (iii) financial capacity, (iv) sources of repayment, and (v) debt-to-income ratio, which incorporates information obtained from third-party credit bureaus. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, loan-to-value limitations, collection remedies, the number of such loans a borrower can have at one time and documentation requirements.
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We maintain an independent loan review department that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management and the appropriate committees of our board of directors. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as our policies and procedures.
Commercial and Industrial . Commercial and industrial loans increased $197.4 million, or 3.2%, during 2025 compared to 2024. 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 the commercial lease and purchased shared national credits.
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 decreased $34.2 million, or 3.0%, during 2025 compared to 2024. The average loan size, the significance of the portfolio and the specialized nature of the energy industry requires a highly prescriptive underwriting policy. Exceptions to this policy are rarely granted. Due to the large borrowing requirements of this customer base, the energy loan portfolio includes participations and purchased shared national credits.
Commercial Real Estate Loans. Commercial real estate loans increased $342.3 million, or 3.4%, during 2025 compared to 2024. Commercial real estate loans include loans secured by owner occupied real estate; loans secured by non-owner occupied real estate; and construction and land loans, as detailed in the table below. 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, commercial real estate loans must undergo the analysis and underwriting process of a commercial and industrial loan, as well as that of a real estate loan. Commercial real estate loans by class of loan are presented in the following table.
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land
Total commercial real estate loans
Consumer Loans . The consumer loan portfolio at December 31, 2025 increased $631.5 million, or 17.8%, from December 31, 2024. The consumer loan portfolio includes consumer real estate loans and consumer and other loans as presented in the following table.
Consumer real estate:
Home equity lines of credit
Home equity loans
Home improvement loans
1-4 family mortgage loans
Other
Total consumer real estate
Consumer and other loans
Total consumer loans
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Consumer real estate loans at December 31, 2025 increased $615.3 million, or 19.8%, from December 31, 2024. Combined, home equity loans and lines of credit made up 56.6% and 58.8% of the consumer real estate loan total at December 31, 2025 and 2024, respectively. We offer home equity loans up to 80% of the estimated value of the personal residence of the borrower, less the value of existing mortgages and home improvement loans. We also originate 1-4 family mortgage loans for portfolio investment purposes. The consumer and other loan portfolio at December 31, 2025 increased $16.2 million, or 3.6%, from December 31, 2024. This portfolio primarily consists of automobile loans, unsecured revolving credit products, personal loans secured by cash and cash equivalents, and other similar types of credit facilities.
Industry Concentrations. As of December 31, 2025 and 2024, there were no concentrations of loans related to any single industry, as segregated by Standard Industrial Classification code (“SIC code”), in excess of 10% of total loans. The SIC code system is a federally designed standard industrial numbering system used by us to categorize loans by the borrower’s type of business.
The following table summarizes the industry concentrations of our commercial and industrial and energy loan portfolios, as segregated by SIC code, as of December 31, 2025 and 2024.
Commercial and industrial:
Investor
Public Finance
Contractors
Services
Automobile
Medical Services
Manufacturing - Other
Financial - Non-banks
Wholesale - Heavy Equipment
Service - Transportation
Utilities
Real Estate
Service - Legal
Aviation
Service - Other Professional
Wholesale - Commercial Products
Building
Food - Manufacturing / Wholesale
Service - Leasing / Rental
Other
Total
Energy:
Production
Service
Other
Total
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The following table summarizes our commercial real estate loan portfolio, by underlying property type, as of December 31, 2025 and 2024.
Owner
Occupied
Non-owner Occupied
Construction and Land
Total
December 31, 2025
Property Type:
Office/Warehouse
Office Building
Retail
Multi Family
Auto/Truck Dealer
Medical Office & Services
Hotel
Non Farm - Non Residential
1-4 Family Construction
Religious
Strip Centers
Land in Development
Other
Total
December 31, 2024
Property Type:
Office / Warehouse
Office Building
Retail
Multi Family
Auto / Truck Dealer
Medical Office & Services
Non Farm - Non Residential
1-4 Family Construction
Hotel
Religious
Raw Land
Other
Total
Large Credit Relationships. The market areas served by us include five of the top fifteen most populated cities in the United States. These market areas are also home to a significant number of Fortune 500 companies. As a result, we originate and maintain large credit relationships with numerous commercial customers in the ordinary course of business. We consider large credit relationships to be those with commitments equal to or in excess of $50.0 million, excluding treasury management lines exposure, prior to any portion being sold. Large relationships also include loan participations purchased if the credit relationship with the agent is equal to or in excess of $50.0 million. In addition to our normal policies and procedures related to the origination of large credits, one of our Regional Credit Committees must approve all new credit facilities and renewals of such credit facilities with exposures between $20.0 million and $30.0 million. Our Central Credit Committee must approve all new credit facilities which are part of large credit relationships and renewals of such credit facilities with exposures that exceed $30.0 million. The Regional and Central Credit Committees meet regularly to review large credit relationship activity and discuss the current pipeline, among other things.
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The following table provides additional information on our large credit relationships with committed amounts in excess of $50.0 million as of year-end.
Number of
Relationships
Period-End Balances
Number of
Relationships
Period-End Balances
Committed
Outstanding
Committed
Outstanding
Amount outstanding
Average
Purchased Shared National Credits (“SNCs”). Purchased SNCs are participations purchased from upstream financial organizations and tend to be larger in size than our originated portfolio. Our purchased SNC portfolio totaled $875.7 million at December 31, 2025 decreasing $129.2 million, or 12.9%, from $1.0 billion at December 31, 2024. At December 31, 2025, 37.3% of outstanding purchased SNCs were related to the construction industry, 17.1% were related to the real estate management industry and 10.4% were related to the financial services industry. The remaining purchased SNCs were diversified throughout various other industries, with no other single industry exceeding 10% of the total purchased SNC portfolio. Additionally, almost all of the outstanding balance of purchased SNCs was included in the energy and commercial and industrial portfolios, with the remainder included in the real estate categories. SNC participations are originated in the normal course of business to meet the needs of our customers. As a matter of policy, we generally only participate in SNCs for companies headquartered in or which have significant operations within our market areas. In addition, we must have direct access to the company’s management, an existing banking relationship or the expectation of broadening the relationship with other banking products and services within the following 12 to 24 months. SNCs are reviewed at least quarterly for credit quality and business development successes.
The following table provides additional information about certain credits within our purchased SNCs portfolio with committed amounts in excess of $50.0 million as of year-end.
Number of
Relationships
Period-End Balances
Number of
Relationships
Period-End Balances
Committed
Outstanding
Committed
Outstanding
Amount outstanding
Average
Geographic Distribution of Loans. The following table summarizes our loan portfolio by geographic distribution as of December 31, 2025 and 2024. Commercial real estate loans are reported in the geographic region in which the property securing the credit is located. Other loans are reported in the geographic region in which the loans were originated.
Commercial
and Industrial
Energy
Commercial
Real Estate
Consumer
Real Estate
Consumer
and Other
Total
December 31, 2025
San Antonio
Houston
Dallas
Fort Worth
Austin
Gulf Coast
Permian Basin
Out of market - Texas
Out of market - outside of Texas
Total
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Commercial
and Industrial
Energy
Commercial
Real Estate
Consumer
Real Estate
Consumer
and Other
Total
December 31, 2024
San Antonio
Houston
Dallas
Fort Worth
Austin
Gulf Coast
Permian Basin
Out of market - Texas
Out of market - outside of Texas
Total
Further information regarding the geographic distribution of commercial real estate loans, by class, as of December 31, 2025 and 2024, is presented in the table below.
Owner
Occupied
Non-owner
Occupied
Construction
and Land
Total Commercial
Real Estate
December 31, 2025
San Antonio
Houston
Dallas
Fort Worth
Austin
Gulf Coast
Permian Basin
Out of market - Texas
Out of market - outside of Texas
Total
December 31, 2024
San Antonio
Houston
Dallas
Fort Worth
Austin
Gulf Coast
Permian Basin
Out of market - Texas
Out of market - outside of Texas
Total
Foreign Loans . We make U.S. dollar-denominated loans and commitments to borrowers in Mexico. The outstanding balance of these loans and the unfunded amounts available under these commitments were not significant at December 31, 2025 or 2024.
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Maturities and Sensitivities of Loans to Changes in Interest Rates. The following table presents the maturity distribution of our loan portfolio at December 31, 2025. The table also presents the portion of loans that have fixed interest rates or variable interest rates that fluctuate over the life of the loans in accordance with changes in an interest rate index.
Due in
One Year
or Less
After One,
but Within
Five Years
After Five but Within Fifteen Years
After
Fifteen Years
Total
Commercial and industrial
Energy
Commercial real estate
Owner occupied
Non-owner occupied
Construction and land
Consumer Real Estate
Consumer and Other
Total
Loans with fixed interest rates:
Commercial and industrial
Energy
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land
Consumer Real Estate
Consumer and Other
Total
Loans with variable interest rates:
Commercial and industrial
Energy
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land
Consumer Real Estate
Consumer and Other
Total
We generally structure commercial loans with shorter-term maturities in order to match our funding sources and to enable us to effectively manage the loan portfolio by providing the flexibility to respond to liquidity needs, changes in interest rates and changes in underwriting standards and loan structures, among other things. Due to the shorter-term nature of such loans, from time to time in the ordinary course of business and without any contractual obligation on our part, we will renew/extend maturing lines of credit or refinance existing loans at their maturity dates. Some loans may renew multiple times in a given year as a result of general customer practice and need. These renewals, extensions and refinancings are made in the ordinary course of business for customers that meet our normal level of credit standards. Such borrowers typically request renewals to support their on-going working capital needs to finance their operations. Such borrowers are not experiencing financial difficulties and generally could obtain similar financing from another financial institution. In connection with each renewal, extension or refinancing, we may require a principal reduction, adjust the rate of interest and/or modify the structure and other terms to reflect the current market pricing/structuring for such loans or to maintain competitiveness with other financial institutions. In such cases, we do not generally grant concessions, and, except for those reported in Note 3 - Loans in the accompanying notes to consolidated financial statements included elsewhere in this report, any such renewals, extensions or refinancings that occurred during the reported periods were not deemed to be loan modifications pursuant to applicable accounting guidance. Loans exceeding $1.0 million undergo a complete underwriting process at each renewal.
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Accruing Past Due Loans. Accruing past due loans are presented in the following table. Also see Note 3 - Loans in the accompanying notes to consolidated financial statements included elsewhere in this report.
Accruing Loans
30-89 Days Past Due
Accruing Loans
90 or More Days
Past Due
Total Accruing
Past Due Loans
Total
Loans
Amount
Percent of Loans in Category
Amount
Percent of Loans in Category
Amount
Percent of Loans in Category
December 31, 2025
Commercial and industrial
Energy
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land
Consumer real estate
Consumer and other
Total
December 31, 2024
Commercial and industrial
Energy
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land
Consumer real estate
Consumer and other
Total
Accruing past due loans at December 31, 2025 increased $60.5 million compared to December 31, 2024. The increase was primarily related to increases in past due commercial real estate - non-owner occupied loans (up $29.3 million), past due energy loans (up $15.2 million), past due commercial real estate - owner occupied loans (up $14.4 million), and past due consumer real estate loans (up $9.3 million), partly offset by a decrease in past due commercial and industrial loans (down $8.7 million).
Non-Accrual Loans. Non-accrual loans are presented in the tables below. Also see Note 3 - Loans in the accompanying notes to consolidated financial statements included elsewhere in this report.
December 31, 2025
December 31, 2024
Non-Accrual Loans
Non-Accrual Loans
Total
Loans
Amount
Percent of Loans in Category
Total
Loans
Amount
Percent of Loans in Category
Commercial and industrial
Energy
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land
Consumer real estate
Consumer and other
Total
Allowance for credit losses on loans
Ratio of allowance for credit losses on loans to non-accrual loans
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Non-accrual loans at December 31, 2025 decreased $8.4 million from December 31, 2024 primarily due to a decreases in non-accrual commercial real estate and energy loans partly offset by an increase in non-accrual commercial and industrial loans.
Generally, loans are placed on non-accrual status if principal or interest payments become 90 days past due and/or management deems the collectibility of the principal and/or interest to be in question, as well as when required by regulatory requirements. Once interest accruals are discontinued, accrued but uncollected interest is charged to current year operations. Subsequent receipts on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Classification of a loan as non-accrual does not preclude the ultimate collection of loan principal or interest.
Non-accrual commercial and industrial loans included one credit relationship in excess of $5.0 million totaling at $28.5 million at December 31, 2025. Non-accrual commercial and industrial loans included two credit relationships in excess of $5.0 million totaling $28.7 million at December 31, 2024. During 2025, one of these credit relationships was removed from non-accrual status due to improved credit quality while the other was sold. We recognized a net charge-off of $828 thousand in connection with the sale. There were no non-accrual commercial real estate loans excess of $5.0 million at December 31, 2025 while there was one credit relationship in excess of $5.0 million totaling $7.5 million (owner occupied) at December 31, 2024. This credit relationship paid-off in 2025. Another credit relationship had an aggregate balance of $5.1 million at December 31, 2024 of which $4.6 million was included with non-accrual commercial real estate loans and $586 thousand was included with non-accrual commercial and industrial loans. This credit relationship paid off during 2025 and we recognized $329 thousand as a partial recovery of prior charge-offs. We previously recognized charged-offs totaling $2.4 million on commercial and industrial loans associated with this credit relationship during 2024.
Allowance For Credit Losses
Our allowance for credit losses on loans is calculated in accordance with Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”) Financial Instruments - Credit Losses. In the case of off-balance-sheet credit exposures, the allowance for credit losses is a liability account, calculated in accordance with ASC 326, reported as a component of accrued interest payable and other liabilities in our consolidated balance sheets. The amount of each allowance account represents management's best estimate of current expected credit losses (“CECL”) on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. While management utilizes its judgment and information available, the ultimate adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets. For additional information regarding our accounting policies related to credit , refer to Note 1 - Summary of Significant Accounting Policies and Note 3 - Loans in the accompanying notes to consolidated financial statements included elsewhere in this report.
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Allowance for Credit Losses - Loans. The table below provides an allocation of the year-end allowance for credit losses on loans 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.
Amount of Allowance Allocated
Percent of Loans in Each Category to Total Loans
Total
Loans
Ratio of Allowance Allocated to Loans in Each Category
December 31, 2025
Commercial and industrial
Energy
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land
Consumer real estate
Consumer and other
Total
December 31, 2024
Commercial and industrial
Energy
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land
Consumer real estate
Consumer and other
Total
The allowance allocated to commercial and industrial loans totaled $98.4 million, or 1.56% of total commercial and industrial loans, at December 31, 2025 increasing $10.9 million, or 12.4%, compared to $87.6 million, or 1.43% of total commercial and industrial loans at December 31, 2024. Modeled expected credit losses increased $4.4 million, in part due to growth in the portfolio. Specific allocations for commercial and industrial loans that were evaluated for expected credit losses on an individual basis increased $3.4 million from $13.3 million at December 31, 2024 to $16.6 million at December 31, 2025. The increase in specific allocations for commercial and industrial loans was primarily related to new specific allocations for new individually assessed loans. Qualitative factor (“Q-Factor”) and other qualitative adjustments related to commercial and industrial loans increased $3.1 million, primarily due to an increases in the down-side and credit concentrations overlays.
The allowance allocated to energy loans totaled $11.6 million, or 1.06% of total energy loans, at December 31, 2025 increasing $1.6 million, or 15.7%, compared to $10.0 million, or 0.89% of total energy loans, at December 31, 2024. Modeled expected credit losses increased $3.2 million, in part due to an increase in the weighted-average risk grade of the portfolio. Q-Factor and other qualitative adjustments related to energy loans increased $325 thousand, primarily related to the overlay for credit concentrations.
The allowance allocated to commercial real estate loans totaled $135.1 million, or 1.31% of total commercial real estate loans at December 31, 2025, decreasing $8.1 million, or 5.7%, compared to $143.2 million, or 1.44% of total commercial real estate loans at December 31, 2024. Q-Factor and other qualitative adjustments related to commercial real estate loans decreased $8.2 million, primarily related to decreased model overlays, while modeled expected credit losses related to commercial real estate loans decreased $531 thousand. Specific allocations for commercial real estate loans that were evaluated for expected credit losses on an individual basis increased from $625 thousand at December 31, 2024 to $1.2 million at December 31, 2025.
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Additional information related to the allowance allocated to commercial real estate loans at December 31, 2025 is included in the following table:
Owner
Occupied
Non-owner
Occupied
Construction
and Land
Total
December 31, 2025
Modeled expected credit losses
Q-Factor and other qualitative adjustments
Specific allocations
Total
Total loans
Ratio of allowance to loans in each category
December 31, 2024
Modeled expected credit losses
Q-Factor and other qualitative adjustments
Specific allocations
Total
Total loans
Ratio of allowance to loans in each category
The allowance allocated to consumer real estate loans totaled $25.6 million, or 0.69% of total consumer real estate loans, at December 31, 2025 increasing $6.5 million, or 34.2%, compared to $19.1 million, or 0.62% of total consumer real estate loans at December 31, 2024 primarily due to a $6.7 million increase in modeled expected credit losses.
The allowance allocated to consumer and other loans totaled $10.7 million, or 2.33% of total consumer and other loans, at December 31, 2025 increasing $467 thousand, or 4.5%, compared to $10.3 million, or 2.31% of total consumer loans at December 31, 2024. Q-Factor and other qualitative adjustments related to consumer and other loans increased $2.3 million, which was primarily due to an increase in the consumer overlay. Modeled expected credit losses related to consumer and other loans decreased $1.7 million.
As more fully described in Note 3 - Loans in the accompanying notes to consolidated financial statements included elsewhere in this report, we measure expected credit losses over the life of each loan utilizing a combination of models which measure probability of default and loss given default, among other things. The measurement of expected credit losses is impacted by loan/borrower attributes and certain macroeconomic variables. Models are adjusted to reflect the current impact of certain macroeconomic variables as well as their expected changes over a reasonable and supportable forecast period.
In estimating expected credit losses as of 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 rate 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.
In estimating expected credit losses as of December 31, 2024, we utilized the Moody’s Analytics December 2024 Consensus Scenario (the “December 2024 Consensus Scenario”) to forecast the macroeconomic variables used in our models. The December 2024 Consensus Scenario was based on the review of a variety of surveys of baseline forecasts of the U.S. economy. The December 2024 Consensus Scenario projections included, among other things, (i) U.S. Nominal Gross Domestic Product average annualized quarterly growth rates of 3.50% in 2025 and 4.43% in 2026; (ii) average annualized U.S. unemployment rate of 4.36% during 2025 and 4.19% in 2026; (iii) average annualized Texas unemployment rate of 4.21% during 2025 and 3.99% during 2026; (iv) projected average 10 year Treasury rate of 4.23% during 2025 and 4.12% during 2026; and (v) average oil price of $70.88 per barrel during 2025 and $69.96 per barrel during 2026.
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The overall loan portfolio as of December 31, 2025 increased $1.1 billion, or 5.5%, compared to December 31, 2024. This increase included a $615.3 million, or 19.8%, increase in consumer real estate loans; a $342.3 million, or 3.4%, increase in commercial real estate loans; a $197.4 million, or 3.2%, increase in commercial and industrial loans; and a $16.2 million, or 3.6%, increase in consumer and other loans partly offset by a $34.2 million, or 3.0%, decrease in energy loans
The weighted average risk grade for commercial and industrial loans decreased to 6.44 at December 31, 2025 from 6.64 at December 31, 2024. The decrease was related to a decrease in the weighted-average risk grade of pass grade commercial and industrial loans, which decreased to 6.06 at December 31, 2025 from 6.30 at December 31, 2024 combined with a $39.3 million decrease in higher-risk grade classified loans. Classified loans consist of loans having a risk grade of 11, 12 or 13. The impact of these changes was partly offset by increases in commercial and industrial loans graded as “watch” and “special mention” (together up $127.3 million). The weighted-average risk grade for energy loans increased to 6.16 at December 31, 2025 from 5.58 at December 31, 2024. Pass-grade energy loans decreased $101.1 million while the weighted-average risk grade of such loans increased from 5.51 at December 31, 2024 to 5.86 at December 31, 2025. The increase in the weighted-average risk grade on energy loans was also partly the result of increases in energy loans graded as “watch” and “special mention” (together up $65.0 million). The weighted average risk grade for commercial real estate loans decreased to 7.29 at December 31, 2025 from 7.35 at December 31, 2024. The decrease was primarily related to decreases in commercial real estate loans graded as “watch” and “special mention” (together down $126.6 million) partly offset by an increase in classified commercial real estate loans (up $10.7 million).
As noted above our credit loss models utilized the economic forecasts in the December 2025 Baseline Scenario for our estimated expected credit losses as of December 31, 2025 and the December 2024 Consensus Scenario for our estimate of expected credit losses as of December 31, 2024. We qualitatively adjusted the model results based on these scenarios for various risk factors that are not considered within our modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools. These Q-Factor and other qualitative adjustments are discussed below.
Q-Factor adjustments are based upon management judgment and current assessment as to the impact of risks related to changes in lending policies and procedures; economic and business conditions; loan portfolio attributes and credit concentrations; and external factors, among other things, that are not already captured within the modeling inputs, assumptions and other processes. Management assesses the potential impact of such items within a range of severely negative impact to positive impact and adjusts the modeled expected credit loss by an aggregate adjustment percentage based upon the assessment. As a result of this assessment as of December 31, 2025, modeled expected credit losses were adjusted upwards by a weighted-average Q-Factor adjustment of approximately 3.0%, resulting in a $3.2 million total adjustment, compared to approximately 4.1% at December 31, 2024, which resulted in a $3.8 million total adjustment.
We have also provided additional qualitative adjustments, or management overlays, as of December 31, 2025 as management believes there are still significant risks impacting certain categories of our loan portfolio. Q-Factor and other qualitative adjustments as of December 31, 2025 are detailed in the following table.
Q-Factor Adjustment
Model Overlays
Office Building Overlays
Down-Side Scenario Overlay
Credit
Concentration
Overlays
Consumer Overlay
Total
Commercial and industrial
Energy
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land
Consumer real estate
Consumer and other
Total
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Model overlays are qualitative adjustments to address the effects of risks not captured within our commercial real estate credit loss models. These adjustments are determined based upon minimum reserve ratios for our commercial real estate loans. In the case of our commercial real estate - owner occupied loan portfolio, we determined a minimum reserve ratio is appropriate to address the effect of the model's over-sensitivity to positive changes in certain economic variables. After analysis and benchmarking against peer bank data, we believe the modeled results may be overly optimistic and not appropriately capturing downside risk. As such, we determined that the appropriate forecasted loss rate for our owner-occupied commercial real estate loan portfolio should be more closely aligned with that of our commercial and industrial loan portfolio. In the case of our commercial real estate - non-owner occupied and commercial real estate - construction loan portfolios, we determined minimum reserve ratios are appropriate as we believe the modeled results are not appropriately capturing the downside risk associated with our borrowers' ability to access the capital markets for the sale or refinancing of investor real estate and assets currently under construction. We believe access to capital may be impaired for a significant amount of time. Accordingly, this would require secondary sources of liquidity and capital to support completed projects that may take considerably longer to than originally underwritten. Furthermore, most of our non-owner occupied and construction loans are originated with floating interest rates. As a result, these borrowers have been significantly impacted by the most recent cycle of rising interest rates as decreases in short-term rates have come at a pace. Furthermore, longer-term rates are increasing as investors demand term and risk premiums at the long end of the yield curve.
Office building overlays are qualitative adjustments to address longer-term concerns over the utilization of commercial office space which could impact the long-term performance of some types of office properties within our commercial real estate loan portfolio. These adjustments are determined based upon minimum reserve ratios for loans within our commercial real estate - non-owner occupied and commercial real estate - construction loan portfolios that have risk grades of 8 or worse.
The down-side scenario overlay is a qualitative adjustment for our commercial and industrial loan portfolio to address the significant risk of economic recession as a result of inflation; elevated interest rates; labor shortages; disruption in financial markets and global supply chains; further oil price volatility; and the current or anticipated impact of global wars/military conflicts, terrorism, or other geopolitical events. Factors such as these are outside of our control but nonetheless affect customer income levels and could alter anticipated customer behavior, including borrowing, repayment, investment, and deposit practices. To determine this qualitative adjustment, we use an alternative, more pessimistic economic scenario to forecast the macroeconomic variables used in our models. As of December 31, 2025, we used the Moody’s Analytics S3 Alternative Scenario Downside - 90th Percentile. In modeling expected credit losses using this scenario, we also assume each non-classified loan within our modeled loan pools is downgraded by one risk grade level. The qualitative adjustment is based upon the amount by which the alternative scenario modeling results exceed those of the primary scenario used in estimating credit expense, adjusted based upon management's assessment of the probability that this more pessimistic economic scenario will occur.
Credit concentration overlays are qualitative adjustments based upon statistical analysis to address relationship exposure concentrations within our loan portfolio. Variations in loan portfolio concentrations over time cause expected credit losses within our existing portfolio to differ from historical loss experience. Given that the allowance for credit losses on loans reflects expected credit losses within our loan portfolio and the fact that these expected credit losses are uncertain as to nature, timing and amount, management believes that segments with higher concentration risk are more likely to experience a high loss event. Due to the fact that a significant portion of our loan portfolio is concentrated in large credit relationships and because of large, concentrated credit losses in recent years, management made the qualitative adjustments detailed in the table above to address the risk associated with such a relationship deteriorating to a loss event.
The consumer overlay is a qualitative adjustment for our consumer and other loan portfolio to address the risk associated with the level of unsecured loans within this portfolio and other risk factors. Unsecured consumer loans have an elevated risk of loss in times of economic stress as these loans lack a secondary source of repayment in the form of hard collateral. This adjustment was determined by analyzing our consumer loan charge-off trends as well as those of the general banking industry. Management deemed it appropriate to consider an additional overlay to the modeled forecasted losses for the unsecured consumer portfolio.
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As of December 31, 2024, we provided qualitative adjustments, as detailed in the table below. Further information regarding these qualitative adjustments is provided in our 2024 Form 10-K.
Q-Factor Adjustment
Model Overlays
Office Building Overlays
Down-Side Scenario Overlay
Credit Concentration Overlays
Consumer Overlay
Total
Commercial and industrial
Energy
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land
Consumer real estate
Consumer and other
Total
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.
Credit Loss Expense (Benefit)
Net
(Charge-Offs)
Recoveries
Average
Loans
Ratio of Annualized Net (Charge-Offs)
Recoveries to Average Loans
Commercial and industrial
Energy
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land
Consumer real estate
Consumer and other
Total
Commercial and industrial
Energy
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land
Consumer real estate
Consumer and other
Total
Commercial and industrial
Energy
Commercial real estate:
Owner occupied
Non-owner occupied
Construction and land
Consumer real estate
Consumer and other
Total
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We recorded a net credit loss expense related to loans totaling $44.6 million in 2025, $64.8 million in 2024 and $52.9 million in 2023. Net credit loss expense/benefit for each portfolio segment reflects the amount needed to adjust the allowance for credit losses allocated to that segment to the level of expected credit losses determined under our allowance methodology after net charge-offs have been recognized. The net credit loss expense related to loans during 2025 primarily reflects an increase in expected credit losses associated with commercial and industrial loans; consumer real estate loans; and energy loans. The increases in expected credit losses were primarily related to increases in modeled expected credit losses for the aforementioned portfolio segments as well as qualitative adjustments and specific allocations for commercial and industrial loans. The net credit loss expense related to loans during 2025 also reflects charge-off trends related to consumer and other loans (primarily overdrafts) and commercial and industrial loans and, to a lesser extent, both commercial and consumer real estate loans. The impact of these items was partly offset by a decrease in expected credit associated with commercial real loans; primarily related to decreases in the model overlays and the office building overlays.
The ratio of the allowance for credit losses on loans to total loans was 1.29% at December 31, 2025 compared to 1.30% at December 31, 2024. Management believes the recorded amount of the allowance for credit losses on loans is appropriate based upon management’s best estimate of current expected credit losses within the existing portfolio of loans. Should any of the factors considered by management in making this estimate change, our estimate of current expected credit losses could also change, which could affect the level of future credit loss expense related to loans.
Allowance for Credit Losses - Off-Balance-Sheet Credit Exposures. The allowance for credit losses on off-balance-sheet credit exposures totaled $51.3 million at December 31, 2025 and $51.9 million at December 31, 2024. The level of the allowance for credit losses on off-balance-sheet credit exposures depends upon the volume of outstanding commitments, underlying risk grades, the expected utilization of available funds and forecasted economic conditions impacting our loan portfolio. The allowance for credit losses on off-balance-sheet credit exposures at December 31, 2024 was also impacted by a $4.3 million specific allocation related to certain unfunded letters of credit for a commercial and industrial borrower that was evaluated for expected credit losses on an individual basis. We recognized a net credit loss benefit related to off-balance-sheet credit exposures totaling $606 thousand in 2025 compared to a net credit loss expense of $153 thousand during 2024 and a net credit loss benefit of $6.8 million during 2023. Further information regarding our policies and methodology used to estimate the allowance for credit on off-balance-sheet credit exposures is presented in Note 7 - Off-Balance-Sheet Arrangements, Commitments, Guarantees and Contingencies in the accompanying notes to consolidated financial statements included elsewhere in this report.
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Securities
The following tables summarize the maturity distribution schedule with corresponding weighted-average yields of securities held to maturity and securities available for sale as of December 31, 2025. Weighted-average yields have been computed on a fully taxable-equivalent basis using a tax rate of 21%. Mortgage-backed securities are included in maturity categories based on their stated maturity date. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Other securities classified as available for sale include stock in the Federal Reserve Bank and the Federal Home Loan Bank, which have no maturity date. These securities have been included in the total column only. Held-to-maturity securities are presented at amortized cost before any allowance for credit losses.
Within 1 Year
1-5 Years
5-10 Years
After 10 Years
Total
Amount
Weighted
Average
Yield
Amount
Weighted
Average
Yield
Amount
Weighted
Average
Yield
Amount
Weighted
Average
Yield
Amount
Weighted
Average
Yield
Held to maturity:
Residential mortgage- backed securities
States and political subdivisions
Other
Total
Available for sale:
U.S. Treasury
Residential mortgage- backed securities
States and political subdivisions
Other
Total
All mortgage-backed securities included in the above tables were issued by U.S. government agencies and corporations. At December 31, 2025, all of the securities in our municipal bond portfolio were issued by the State of Texas or political subdivisions or agencies within the State of Texas, of which approximately 69.7% are either guaranteed by the Texas Permanent School Fund, which has a “triple-A” insurer financial strength rating, or secured by U.S. Treasury securities via defeasance of the debt by the issuers.
The average taxable-equivalent yield on the securities portfolio based on a 21% tax rate was 3.77% in 2025 compared to 3.38% in 2024. Tax-exempt municipal securities totaled 34.1% of average securities in 2025 compared to 35.2% in 2024. The average yield on taxable securities was 3.41% in 2025 compared to 2.92% in 2024, while the average taxable-equivalent yield on tax-exempt securities was 4.52% in 2025 compared to 4.31% in 2024. See the section captioned “Net Interest Income” elsewhere in this discussion.
Deposits
The table below presents the daily average balances of deposits by type and weighted-average rates paid thereon during the years presented:
Average
Balance
Average
Rate Paid
Average
Balance
Average
Rate Paid
Average
Balance
Average
Rate Paid
Non-interest-bearing demand deposits
Interest-bearing deposits:
Savings and interest checking
Money market accounts
Time accounts
Total interest-bearing deposits
Total deposits
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Average deposits increased $1.2 billion, or 3.0%, in 2025 compared to 2024. The increase was primarily related to interest-bearing deposits which increased $1.2 billion, or 4.3%, primarily due to an increase in money market accounts and to a lesser extent increases in time deposits and savings and interest checking accounts. Average non-interest-bearing demand deposits increased $83.0 million, or 0.6%. The ratio of average interest-bearing deposits to total average deposits was 67.0% in 2025 compared to 66.2% in 2024. The average rates paid on interest-bearing deposits and total deposits were 1.89% and 1.26%, respectively, during 2025 compared to 2.32% and 1.54%, respectively, during 2024. The average rate paid on interest-bearing deposits during 2025 was impacted by decreases in the interest rates we pay on most of our interest-bearing deposit products as a result of decreases in average market interest rates.
Geographic Concentrations . The following table summarizes our average total deposit portfolio, as segregated by the geographic region from which the deposit accounts were originated. Certain accounts, such as correspondent bank deposits and deposits allocated to certain statewide operational units, are recorded at the statewide level.
Percent
Percent
Percent
of Total
of Total
of Total
San Antonio
Houston
Fort Worth
Austin
Dallas
Gulf Coast
Permian Basin
Statewide
Total
Foreign Deposits. Mexico has historically been considered a part of the natural trade territory of our banking offices. Accordingly, U.S. dollar-denominated foreign deposits from sources within Mexico have traditionally been a significant source of funding. Average deposits from foreign sources, primarily Mexico, totaled $1.2 billion in 2025 and $1.1 billion in 2024.
Brokered Deposits. From time to time, we have obtained interest-bearing deposits through brokered transactions including participation in the Certificate of Deposit Account Registry Service (“CDARS”). Brokered deposits were not significant during the reported periods.
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Capital and Liquidity
Capital . Shareholders’ equity totaled $4.6 billion at December 31, 2025 and $3.9 billion at December 31, 2024. In addition to net income of $648.6 million, other sources of capital during 2025 included other comprehensive income, net of tax, of $409.1 million; $24.8 million related to stock-based compensation; and $11.9 million in proceeds from stock option exercises. Uses of capital during 2025 included $262.0 million of dividends paid on preferred and common stock and $157.8 million of treasury stock purchases.
The accumulated other comprehensive income/loss component of shareholders’ equity totaled a net, after-tax, unrealized loss of $843.0 million at December 31, 2025 compared to a net, after-tax, unrealized loss of $1.3 billion at December 31, 2024. The decrease in the net, after-tax, unrealized loss was primarily due to a $407.2 million net, after-tax, increase in the fair value of securities available for sale.
Under the Basel III Capital Rules, we 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 related to securities available for sale, effective cash flow hedges and defined benefit post-retirement benefit plans do not increase or reduce regulatory capital and are not included in the calculation of risk-based capital and leverage ratios. Regulatory agencies for banks and bank holding companies utilize capital guidelines designed to measure capital and take into consideration the risk inherent in both on-balance sheet and off-balance sheet items. See Note 8 - Capital and Regulatory Matters in the accompanying notes to consolidated financial statements included elsewhere in this report.
We paid quarterly dividends of $0.95, $1.00, $1.00 and $1.00 per common share during the first, second, third and fourth quarters of 2025, respectively, and quarterly dividends of $0.92, $0.92, $0.95 and $0.95 per common share during the first, second, third and fourth quarters of 2024, respectively. This equates to a dividend payout ratio of 39.8% in 2025 and 40.3% in 2024. The amount of dividend, if any, we may pay may be limited as more fully discussed in Note 8 - Capital and Regulatory Matters in the accompanying notes to consolidated financial statements included elsewhere in this report.
Preferred Stock . On November 19, 2020 we issued 150,000 shares, or $150.0 million in aggregate liquidation preference, of our 4.450% Non-Cumulative Perpetual Preferred Stock, Series B, par value $0.01 and liquidation preference $1,000 per share (“Series B Preferred Stock”). Each share of Series B Preferred Stock issued and outstanding is represented by 40 depositary shares, each representing a 1/40th ownership interest in a share of the Series B Preferred Stock (equivalent to a liquidation preference of $25 per share). Additional details about our preferred stock are included in Note 8 - Capital and Regulatory Matters in the accompanying notes to consolidated financial statements included elsewhere in this report.
Purchases of Equity Securities. From time to time, our board of directors has authorized stock repurchase plans. On January 29, 2025, our board of directors authorized a $150.0 million stock repurchase plan (the “2025 Repurchase Plan”), allowing us to repurchase shares of our common stock over a one-year period expiring on January 28, 2026. The 2025 Repurchase Plan was publicly announced in a current report on Form 8-K filed with the SEC on January 30, 2025. Shares repurchased under stock repurchase plans may be repurchased from time to time through a variety of methods, which may include open market purchases, in privately negotiated transactions, block trades, accelerated share repurchase transactions, and/or through other legally permissible means. The timing and amount of any share repurchases is determined by management at its discretion and based on market conditions and other considerations. Share repurchase plans may be suspended or discontinued at any time at our discretion and we are not obligated to purchase any amount of common stock. Stock repurchase plans allow us to proactively manage our capital position and provide management the ability to repurchase shares of our common stock opportunistically in instances where management believes the market price undervalues our company. Such plans also provide us with the ability to repurchase shares of common stock that can be used to satisfy obligations related to stock compensation awards in order to mitigate the dilutive effect of such awards. Under the 2025 Repurchase Plan, we repurchased 1,203,141 shares at a total cost of $150.0 million during 2025. During 2025, we also repurchased 51,340 shares at a total cost of $6.7 million in connection with the vesting of certain share awards. Repurchases made in connection with the vesting of share awards are not associated with any publicly announced stock repurchase plan.
Under prior publicly announced stock repurchase plans, we repurchased 489,862 shares at a total cost of $50.0 million during 2024 and 400,868 shares at a total cost of $39.0 million during 2023. Shares repurchased in
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connection with the vesting of certain share awards totaled 87,775, at a total cost of $10.9 million, in 2024 and 35,897, at a total cost of $3.5 million, in 2023.
On January 28, 2026, our board of directors authorized a $300.0 million stock repurchase plan (the “2026 Repurchase Plan”), allowing us to repurchase shares of our common stock over a one-year period expiring on January 27, 2027. This repurchase plan was publicly announced in a current report on Form 8-K filed with the SEC on January 29, 2026.
Liquidity . Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits and to take advantage of interest rate market opportunities. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets and its access to alternative sources of funds. The objective of our liquidity management is to manage cash flow and liquidity reserves so that they are adequate to fund our operations and to meet obligations and other commitments on a timely basis and at a reasonable cost. We seek to achieve this objective and ensure that funding needs are met by maintaining an appropriate level of liquid funds through asset/liability management, which includes managing the mix and time to maturity of financial assets and financial liabilities on our balance sheet. Our liquidity position is enhanced by our ability to raise additional funds as needed in the wholesale markets.
Asset liquidity is provided by liquid assets which are readily marketable or pledgeable or which will mature in the near future. Liquid assets include cash, interest-bearing deposits in banks, securities available for sale, maturities and cash flow from securities held to maturity, and federal funds sold and resell agreements. Liability liquidity is provided by access to funding sources which include core deposits and correspondent banks in our natural trade area that maintain accounts with and sell federal funds to Frost Bank, as well as federal funds purchased and repurchase agreements from upstream banks and deposits obtained through financial intermediaries.
Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Liquidity risk management is an important element in our asset/liability management process. We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed problematic by management. These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs. Our principal source of funding has been our customer deposits, supplemented by our short-term and long-term borrowings as well as maturities of securities and loan amortization. As of December 31, 2025, we had approximately $8.2 billion held in an interest-bearing account at the Federal Reserve. We also have the ability to borrow funds as a member of the Federal Home Loan Bank (“FHLB”). As of December 31, 2025, based upon available, pledgeable collateral, our total borrowing capacity with the FHLB was approximately $6.9 billion. Furthermore, at December 31, 2025, we had approximately $11.3 billion in securities that were unencumbered by a pledge and could be used to support additional borrowings through repurchase agreements or the Federal Reserve discount window, as needed. As of December 31, 2025, management is not aware of any events that are reasonably likely to have a material 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 effect on us.
In the ordinary course of business, we have entered into contractual obligations and have made other commitments to make future payments. Refer to the accompanying notes to consolidated financial statements included elsewhere in this report for the expected timing of such payments as of December 31, 2025. These include payments related to (i) long-term borrowings (Note 6 - Borrowed Funds), (ii) operating leases (Note 4 - Premises and Equipment and Lease Commitments), (iii) time deposits with stated maturity dates (Note 5 - Deposits) and (iv) commitments to extend credit and standby letters of credit (Note 7 - Off-Balance-Sheet Arrangements, Commitments, Guarantees and Contingencies).
Since Cullen/Frost is a holding company and does not conduct operations, its primary sources of liquidity are dividends upstreamed from Frost Bank and borrowings from outside sources. Banking regulations may limit the amount of dividends that may be paid by Frost Bank. See Note 8 - Capital and Regulatory Matters in the accompanying notes to consolidated financial statements included elsewhere in this report regarding such dividends. At December 31, 2025, Cullen/Frost had liquid assets, primarily consisting of cash on deposit at Frost Bank, totaling $301.2 million.
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Regulatory and Economic Policies
Our business and earnings are affected by general and local economic conditions and by the monetary and fiscal policies of the United States government, its agencies and various other governmental regulatory authorities, among other things. The Federal Reserve Board regulates the supply of money in order to influence general economic conditions. Among the instruments of monetary policy historically available to the Federal Reserve Board are (i) conducting open market operations in United States government obligations, (ii) changing the discount rate on financial institution borrowings, (iii) imposing or changing reserve requirements against financial institution deposits, and (iv) restricting certain borrowings and imposing or changing reserve requirements against certain borrowings by financial institutions and their affiliates. These methods are used in varying degrees and combinations to affect directly the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. For that reason alone, the policies of the Federal Reserve Board have a material effect on our earnings.
Governmental policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future; however, we cannot accurately predict the nature, timing or extent of any effect such policies may have on our future business and earnings.
Accounting Standards Updates
See Note 19 - 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.
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