Operating Segments

12 Months Ended

Dec. 31, 2012

Operating Segments

Note 17 - Operating Segments

The Corporation is managed under a matrix organizational structure whereby its 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, Rio Grande Valley, San Antonio and Statewide. The Corporation is 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 Securities, Inc. 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 and human resources consulting services. Frost Securities, Inc. provides advisory and private equity services to middle market companies. The Frost Wealth Advisors operating segment includes fee-based services within private trust, retirement services, and financial management services, including personal wealth management and brokerage services. The 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 the Corporation’s banking and non-banking subsidiaries and the issuance of debt and equity. Its principal source of revenue is dividends from its subsidiaries.

The accounting policies of each reportable segment are the same as those of the Corporation 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.

The Corporation uses a match-funded transfer pricing process to assess operating segment performance. The process helps the Corporation 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.

	Banking		Frost Wealth Advisors			Non-Banks			Consolidated
2012
Net interest income (expense)	$	605,330	$	8,013		$	(8,482	)	$	604,861
Provision for loan losses		10,078		2			-			10,080
Non-interest income		188,440		96,577			3,770			288,787
Non-interest expense		485,302		82,744			7,047			575,093
Income (loss) before income taxes		298,390		21,844			(11,759	)		308,475
Income tax expense (benefit)		69,078		7,646			(6,201	)		70,523
Net income (loss)	$	229,312	$	14,198		$	(5,558	)	$	237,952
Revenues from (expenses to) external customers	$	793,770	$	104,590		$	(4,712	)	$	893,648
Average assets (in millions)	$	20,783	$	29	(1)	$	15		$	20,827
2011
Net interest income (expense)	$	588,092	$	6,323		$	(12,639	)	$	581,776
Provision for loan losses		27,449		(4	)		-			27,445
Non-interest income		196,226		91,710			2,066			290,002
Non-interest expense		469,152		84,114			4,832			558,098
Income (loss) before income taxes		287,717		13,923			(15,405	)		286,235
Income tax expense (benefit)		71,298		4,873			(7,471	)		68,700
Net income (loss)	$	216,419	$	9,050		$	(7,934	)	$	217,535
Revenues from (expenses to) external customers	$	784,318	$	98,033		$	(10,573	)	$	871,778
Average assets (in millions)	$	18,530	$	26	(1)	$	13		$	18,569
2010
Net interest income (expense)	$	570,019	$	6,271		$	(12,831	)	$	563,459
Provision for loan losses		43,607		4			-			43,611
Non-interest income		194,111		85,804			2,118			282,033
Non-interest expense		449,430		80,346			5,765			535,541
Income (loss) before income taxes		271,093		11,725			(16,478	)		266,340
Income tax expense (benefit)		60,742		4,101			(7,267	)		57,576
Net income (loss)	$	210,351	$	7,624		$	(9,211	)	$	208,764
Revenues from (expenses to) external customers	$	764,130	$	92,075		$	(10,713	)	$	845,492
Average assets (in millions)	$	17,140	$	27	(1)	$	20		$	17,187

(1) Excludes off balance sheet managed and custody assets with a total fair value of $26.2 billion, $25.2 billion, and $24.9 billion at December 31, 2012, 2011 and 2010.