Operating Segments

12 Months Ended

Dec. 31, 2019

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 and Frost Insurance Agency. 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. 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 $37.8 billion, $33.3 billion and $32.8 billion at December 31, 2019, 2018 and 2017.



	Banking		Frost Wealth Advisors		Non-Banks			Consolidated
2019
Net interest income (expense)	$	1,010,368	$	4,001	$	(10,364	)	$	1,004,005
Provision for loan losses	33,758		1		—			33,759
Non-interest income	218,447		145,905		(450		)	363,902
Non-interest expense	703,121		124,622		6,936			834,679
Income (loss) before income taxes	491,936		25,283		(17,750		)	499,469
Income tax expense (benefit)	55,520		5,308		(4,958		)	55,870
Net income (loss)	436,416		19,975		(12,792		)	443,599
Preferred stock dividends	—		—		8,063			8,063
Net income (loss) available to common shareholders	$	436,416	$	19,975	$	(20,855	)	$	435,536
Revenues from (expenses to) external customers	$	1,228,815	$	149,906	$	(10,814	)	$	1,367,907
Average assets (in millions)	$	32,019	$	56	$	11		$	32,086



	Banking		Frost Wealth Advisors		Non-Banks			Consolidated
2018
Net interest income (expense)	$	963,757	$	4,083	$	(9,948	)	$	957,892
Provision for loan losses	21,613		—		—			21,613
Non-interest income	213,763		138,045		(522		)	351,286
Non-interest expense	657,448		114,166		7,270			778,884
Income (loss) before income taxes	498,459		27,962		(17,740		)	508,681
Income tax expense (benefit)	52,928		5,872		(5,037		)	53,763
Net income (loss)	445,531		22,090		(12,703		)	454,918
Preferred stock dividends	—		—		8,063			8,063
Net income (loss) available to common shareholders	$	445,531	$	22,090	$	(20,766	)	$	446,855
Revenues from (expenses to) external customers	$	1,177,520	$	142,128	$	(10,470	)	$	1,309,178
Average assets (in millions)	$	30,964	$	54	$	12		$	31,030
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