Operating Segments

We are managed under a matrix organizational structure whereby our two primary operating segments, Banking and Frost Wealth Advisors, overlap a regional reporting structure. The regions are primarily based upon geographic location and include Austin, Corpus Christi, Dallas, Fort Worth, Houston, Permian Basin, Rio Grande Valley, San Antonio and Statewide. We are primarily managed based on the line of business structure. In that regard, all regions have the same lines of business, which have the same product and service offerings, have similar types and classes of customers and utilize similar service delivery methods. Pricing guidelines for products and services are the same across all regions. The regional reporting structure is primarily a means to scale the lines of business to provide a local, community focus for customer relations and business development.

Banking and Frost Wealth Advisors are delineated by the products and services that each segment offers. The Banking operating segment includes both commercial and consumer banking services, Frost Insurance Agency and, prior to June 30, 2015, Frost Securities. Commercial banking services are provided to corporations and other business clients and include a wide array of lending and cash management products. Consumer banking services include direct lending and depository services. Frost Insurance Agency provides insurance brokerage services to individuals and businesses covering corporate and personal property and casualty products, as well as group health and life insurance products. Frost Securities, Inc. provided advisory and private equity services to middle market companies. The operations of Frost Securities were discontinued and the entity was closed effective June 30, 2015. The Frost Wealth Advisors operating segment includes fee-based services within private trust, retirement services, and financial management services, including personal wealth management and securities brokerage services. 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. The parent company’s principal activities include the direct and indirect ownership of our banking and non-banking subsidiaries and the issuance of debt and equity. Our principal source of revenue is dividends from our subsidiaries.

The accounting policies of each reportable segment are the same as those of our consolidated entity except for the following items, which impact the Banking and Frost Wealth Advisors segments: (i) expenses for consolidated back-office operations and general overhead-type expenses such as executive administration, accounting and internal audit are allocated to operating segments based on estimated uses of those services, (ii) income tax expense for the individual segments is calculated essentially at the statutory rate, and (iii) the parent company records the tax expense or benefit necessary to reconcile to the consolidated total.

We use a match-funded transfer pricing process to assess operating segment performance. The process helps us to (i) identify the cost or opportunity value of funds within each business segment, (ii) measure the profitability of a particular business segment by relating appropriate costs to revenues, (iii) evaluate each business segment in a manner consistent with its economic impact on consolidated earnings, and (iv) enhance asset and liability pricing decisions.

Financial results by operating segment are detailed below. Certain prior period amounts have been reclassified to conform to the current presentation. Frost Wealth Advisors excludes off balance sheet managed and custody assets with a total fair value of $32.8 billion, $29.3 billion and $30.7 billion at December 31, 2017, 2016 and 2015.



	Banking		Frost Wealth Advisors		Non-Banks			Consolidated
2017
Net interest income (expense)	$	856,593	$	17,644	$	(7,815	)	$	866,422
Provision for loan losses	35,460		—		—			35,460
Non-interest income	207,810		128,819		(159		)	336,470
Non-interest expense	644,072		108,931		6,066			759,069
Income (loss) before income taxes	384,871		37,532		(14,040		)	408,363
Income tax expense (benefit)	37,837		13,137		(6,760		)	44,214
Net income (loss)	347,034		24,395		(7,280		)	364,149
Preferred stock dividends	—		—		8,063			8,063
Net income (loss) available to common shareholders	$	347,034	$	24,395	$	(15,343	)	$	356,086
Revenues from (expenses to) external customers	$	1,064,403	$	146,463	$	(7,974	)	$	1,202,892
Average assets (in millions)	$	30,391	$	43	$	16		$	30,450



	Banking		Frost Wealth Advisors			Non-Banks			Consolidated
2016
Net interest income (expense)	$	769,625	$	11,335		$	(4,624	)	$	776,336
Provision for loan losses	51,672		1			—			51,673
Non-interest income	229,791		120,102			(185		)	349,708
Non-interest expense	624,396		102,062			6,502			732,960
Income (loss) before income taxes	323,348		29,374			(11,311		)	341,411
Income tax expense (benefit)	33,683		10,281			(6,814		)	37,150
Net income (loss)	289,665		19,093			(4,497		)	304,261
Preferred stock dividends	—		—			8,063			8,063
Net income (loss) available to common shareholders	$	289,665	$	19,093		$	(12,560	)	$	296,198
Revenues from (expenses to) external customers	$	999,416	$	131,437		$	(4,809	)	$	1,126,044
Average assets (in millions)	$	28,795	$	34		$	3		$	28,832

2015
Net interest income (expense)	$	732,671	$	7,634		$	(3,673	)	$	736,632
Provision for loan losses	51,848		(3		)	—			51,845
Non-interest income	205,606		121,489			1,635			328,730
Non-interest expense	589,394		98,405			5,919			693,718
Income (loss) before income taxes	297,035		30,721			(7,957		)	319,799
Income tax expense (benefit)	34,997		10,753			(5,279		)	40,471
Net income (loss)	262,038		19,968			(2,678		)	279,328
Preferred stock dividends	—		—			8,063			8,063
Net income (loss) available to common shareholders	$	262,038	$	19,968		$	(10,741	)	$	271,265
Revenues from (expenses to) external customers	$	938,277	$	129,123		$	(2,038	)	$	1,065,362
Average assets (in millions)	$	28,023	$	36		$	2		$	28,061