Securities and Exchange Commission

Washington, D.C. 20549

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Securities registered pursuant to Section 12(b) of the Act:

~~Name of each exchange on~~

~~which registered~~

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October ~~24, 2019~~22, 2020 there were ~~62,565,469~~62,854,581 shares of the registrant’s Common Stock, $.01 par value, outstanding.

Cullen/Frost Bankers, Inc.

Quarterly Report on Form 10-Q

September 30, ~~2019~~2020

Item 1. Financial Statements (Unaudited)

See Notes to Consolidated Financial Statements.


	Preferred Stock		Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss), Net of Tax		Treasury Stock		Total
Three months ended:
September 30, 2020
Balance at beginning of period	$	0	$	642	$	989,034	$	2,678,686	$	488,264	$	(147,825)	$	4,008,801
Net income	—		—		—		95,056		—		—		95,056
Other comprehensive income, net of tax	—		—		—		—		16,881		—		16,881
Stock option exercises/stock unit conversions (53,425 shares)	—		—		—		(2,502)		—		5,200		2,698
Stock-based compensation expense recognized in earnings	—		—		2,443		—		—		—		2,443
Purchase of treasury stock (400 shares)	—		—		—		—		—		(27)		(27)
Treasury stock issued to the 401(k) stock purchase plan ( 58,900 shares)	—		—		—		(1,602)		—		5,733		4,131
Cash dividends – common stock ($0.71 per share)	—		—		—		(44,957)		—		—		(44,957)
Balance at end of period	$	0	$	642	$	991,477	$	2,724,681	$	505,145	$	(136,919)	$	4,085,026

September 30, 2019
Balance at beginning of period	$	144,486	$	642	$	975,322	$	2,556,235	$	219,438	$	(156,877)	$	3,739,246
Net income	—		—		—		111,836		—		—		111,836
Other comprehensive loss, net of tax	—		—		—		—		85,945		—		85,945
Stock option exercises/stock unit conversions (101,284 shares)	—		—		—		(3,851)		—		9,516		5,665
Stock-based compensation expense recognized in earnings	—		—		2,675		—		—		—		2,675
Purchase of treasury stock (202,724 shares)	—		—		—		—		—		(17,190)		(17,190)
Cash dividends – preferred stock (approximately $0.34 per share)	—		—		—		(2,016)		—		—		(2,016)
Cash dividends – common stock ($0.71 per share)	—		—		—		(44,704)		—		—		(44,704)
Balance at end of period	$	144,486	$	642	$	977,997	$	2,617,500	$	305,383	$	(164,551)	$	3,881,457

See accompanying Notes to Consolidated Financial Statements

Preferred
Stock

Common
Stock

Additional
Paid-In
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax

Treasury
Stock
Total
Nine months ended:
September 30, 2019
Balance at beginning of period $ 144,486
$ 642
$ 967,304
$ 2,440,002
$ (63,600 ) $ (119,917 ) $ 3,368,917
Cumulative effect of accounting change —
—
—
(14,672 ) —
—
(14,672 )
Total shareholders' equity at beginning of period, as adjusted 144,486
642
967,304
2,425,330
(63,600 ) (119,917 ) 3,354,245
Net income —
—
—
339,918
—
—
339,918
Other comprehensive income, net of tax —
—
—
—
368,983
—
368,983
Stock option exercises/stock unit conversions (255,184 shares) —
—
—
(9,569 ) —
23,075
13,506
Stock-based compensation expense recognized in earnings —
—
10,693
—
—
—
10,693
Purchase of treasury stock (704,382 shares) —
—
—
—
—
(67,709 ) (67,709 )
Cash dividends – preferred stock (approximately $1.01 per share) —
—
—
(6,047 ) —
—
(6,047 )
Cash dividends – common stock ($2.09 per share) —
—
—
(132,132 ) —
—
(132,132 )
Balance at end of period $ 144,486
$ 642
$ 977,997
$ 2,617,500
$ 305,383
$ (164,551 ) $ 3,881,457

September 30, 2018
Balance at beginning of period $ 144,486
$ 642
$ 953,361
$ 2,187,069
$ 79,512
$ (67,207 ) $ 3,297,863
Cumulative effect of accounting change —
—
—
(2,285 ) —
—
(2,285 )
Total shareholders' equity at beginning of period, as adjusted 144,486
642
953,361
2,184,784
79,512
(67,207 ) 3,295,578
Net income —
—
—
335,665
—
—
335,665
Other comprehensive loss, net of tax —
—
—
—
(230,282 ) —
(230,282 )
Reclassification of certain income tax effects related to the change in the U.S. statutory federal income tax rate under the Tax Cuts and Jobs Act —
—
—
(9,535 ) 9,535
—
—
Stock option exercises/stock unit conversions (447,831 shares) —
—
—
(12,887 ) —
39,454
26,567
Stock-based compensation expense recognized in earnings —
—
9,556
—
—
—
9,556
Purchase of treasury stock (601 shares) —
—
—
—
—
(70 ) (70 )
Cash dividends – preferred stock (approximately $1.01 per share) —
—
—
(6,047 ) —
—
(6,047 )
Cash dividends – common stock ($1.91 per share) —
—
—
(122,721 ) —
—
(122,721 )
Balance at end of period $ 144,486
$ 642
$ 962,917
$ 2,369,259
$ (141,235 ) $ (27,823 ) $ 3,308,246


	Preferred Stock		Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss), Net of Tax		Treasury Stock		Total
Nine months ended:
September 30, 2020
Balance at beginning of period	$	144,486	$	642	$	983,250	$	2,667,534	$	267,370	$	(151,614)	$	3,911,668
Cumulative effect of accounting change	—		—		—		(29,252)		—		—		(29,252)
Total shareholders' equity at beginning of period, as adjusted	144,486		642		983,250		2,638,282		267,370		(151,614)		3,882,416
Net income	—		—		—		242,881		—		—		242,881
Other comprehensive income, net of tax	—		—		—		—		237,775		—		237,775
Stock option exercises/stock unit conversions (196,948 shares)	—		—		—		(11,627)		—		19,171		7,544
Stock-based compensation expense recognized in earnings	—		—		8,227		—		—		—		8,227
Redemption of preferred stock (6,000,000 shares)	(144,486)		—		—		(5,514)		—		—		(150,000)
Purchase of treasury stock (182,225 shares)	—		—		—		—		—		(14,000)		(14,000)
Treasury stock issued to the 401(k) stock purchase plan (97,843 shares)	—		—		—		(2,563)		—		9,524		6,961
Cash dividends – preferred stock (approximately $0.34 per share)	—		—		—		(2,016)		—		—		(2,016)
Cash dividends – common stock ($2.13 per share)	—		—		—		(134,762)		—		—		(134,762)
Balance at end of period	$	0	$	642	$	991,477	$	2,724,681	$	505,145	$	(136,919)	$	4,085,026

September 30, 2019
Balance at beginning of period	$	144,486	$	642	$	967,304	$	2,440,002	$	(63,600)	$	(119,917)	$	3,368,917
Cumulative effect of accounting change	—		—		—		(14,672)		—		—		(14,672)
Total shareholders' equity at beginning of period, as adjusted	144,486		642		967,304		2,425,330		(63,600)		(119,917)		3,354,245
Net income	—		—		—		339,918		—		—		339,918
Other comprehensive loss, net of tax	—		—		—		—		368,983		—		368,983
Stock option exercises/stock unit conversions (255,184 shares)	—		—		—		(9,569)		—		23,075		13,506
Stock-based compensation expense recognized in earnings	—		—		10,693		—		—		—		10,693
Purchase of treasury stock (704,382 shares)	—		—		—		—		—		(67,709)		(67,709)
Cash dividends – preferred stock (approximately $1.01 per share)	—		—		—		(6,047)		—		—		(6,047)
Cash dividends – common stock ($2.09 per share)	—		—		—		(132,132)		—		—		(132,132)
Balance at end of period	$	144,486	$	642	$	977,997	$	2,617,500	$	305,383	$	(164,551)	$	3,881,457

See accompanying Notes to Consolidated Financial Statements


	Nine Months Ended September 30,
	2020		2019
Operating Activities:
Net income	$	242,881	$	339,918
Adjustments to reconcile net income to net cash from operating activities:
Credit loss expense	227,474		25,404
Deferred tax expense (benefit)	(8,803)		(1,625)
Accretion of loan discounts	(11,905)		(11,364)
Securities premium amortization (discount accretion), net	93,080		84,963
Net (gain) loss on securities transactions	(108,989)		(265)
Depreciation and amortization	47,752		39,182
Net (gain) loss on sale/write-down of assets/foreclosed assets	(6)		(6,016)
Stock-based compensation	8,227		10,693
Net tax benefit from stock-based compensation	694		1,602
Earnings on life insurance policies	(2,895)		(2,744)
Net change in:
Trading account securities	(197)		(3,132)
Lease right-of-use assets	17,419		14,618
Accrued interest receivable and other assets	(52,842)		37,608
Accrued interest payable and other liabilities	23,208		56,354
Net cash from operating activities	475,098		585,196
Investing Activities:
Securities held to maturity:
Purchases	(1,500)		0
Maturities, calls and principal repayments	63,333		69,273
Securities available for sale:
Purchases	(8,324,364)		(9,815,936)
Sales	1,162,352		8,236,066
Maturities, calls and principal repayments	8,162,036		1,007,783
Proceeds from sale of loans	0		24,036
Net change in loans	(3,551,650)		(569,223)
Benefits received on life insurance policies	903		0
Proceeds from sales of premises and equipment	3,054		8,019
Purchases of premises and equipment	(81,866)		(168,326)
Proceeds from sales of repossessed properties	73		131
Net cash from investing activities	(2,567,629)		(1,208,177)
Financing Activities:
Net change in deposits	5,859,939		(65,622)
Net change in short-term borrowings	(86,675)		(166,893)
Proceeds from Federal Home Loan Bank advances	1,250,000		0
Principal payments on Federal Home Loan Bank advances	(1,250,000)		0
Redemption of preferred stock	(150,000)		0
Proceeds from stock option exercises	7,544		13,506
Purchase of treasury stock	(14,000)		(67,709)
Cash dividends paid on preferred stock	(2,016)		(6,047)
Cash dividends paid on common stock	(134,762)		(132,132)
Net cash from financing activities	5,480,030		(424,897)
Net change in cash and cash equivalents	3,387,499		(1,047,878)
Cash and cash equivalents at beginning of period	3,788,181		3,955,779
Cash and cash equivalents at end of period	$	7,175,680	$	2,907,901

Nine Months Ended
September 30,
2019 2018
Operating Activities:
Net income $ 339,918
$ 335,665
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses 25,404
17,846
Deferred tax expense (benefit) (1,625 ) 39,198
Accretion of loan discounts (11,364 ) (10,470 )
Securities premium amortization (discount accretion), net 84,963
73,748
Net (gain) loss on securities transactions (265 ) 113
Depreciation and amortization 39,182
37,452
Net (gain) loss on sale/write-down of assets/foreclosed assets (6,016 ) (6,122 )
Stock-based compensation 10,693
9,556
Net tax benefit from stock-based compensation 1,602
3,378
Earnings on life insurance policies (2,744 ) (2,510 )
Net change in:
Trading account securities (3,132 ) (1,094 )
Lease right-of-use assets 14,618
—
Accrued interest receivable and other assets 37,608
(19,047 )
Accrued interest payable and other liabilities 56,354
(17,545 )
Net cash from operating activities 585,196
460,168

Investing Activities:
Securities held to maturity:
Purchases —
(1,500 )
Maturities, calls and principal repayments 69,273
300,340
Securities available for sale:
Purchases (9,815,936 ) (14,983,642 )
Sales 8,236,066
13,838,566
Maturities, calls and principal repayments 1,007,783
182,028
Proceeds from sale of loans 24,036
21,318
Net change in loans (569,223 ) (718,551 )
Benefits received on life insurance policies —
384
Proceeds from sales of premises and equipment 8,019
12,859
Purchases of premises and equipment (168,326 ) (56,781 )
Proceeds from sales of repossessed properties 131
1,106
Net cash from investing activities (1,208,177 ) (1,403,873 )

Financing Activities:
Net change in deposits (65,622 ) (523,535 )
Net change in short-term borrowings (166,893 ) (64,047 )
Proceeds from stock option exercises 13,506
26,567
Purchase of treasury stock (67,709 ) (70 )
Cash dividends paid on preferred stock (6,047 ) (6,047 )
Cash dividends paid on common stock (132,132 ) (122,721 )
Net cash from financing activities (424,897 ) (689,853 )

Net change in cash and cash equivalents (1,047,878 ) (1,633,558 )
Cash and cash equivalents at beginning of period 3,955,779
5,053,047
Cash and cash equivalents at end of period $ 2,907,901
$ 3,419,489

Note 1 - Significant Accounting Policies

Nature of Operations. Cullen/Frost Bankers, Inc. (“Cullen/Frost”) is a financial holding company and a bank holding company headquartered in San Antonio, Texas that provides, through its subsidiaries, a broad array of products and services throughout numerous Texas markets. The terms “Cullen/Frost,” “the Corporation,” “we,” “us” and “our” mean Cullen/Frost Bankers, Inc. and its subsidiaries, when appropriate. In addition to general commercial and consumer banking, other products and services offered include trust and investment management, insurance, brokerage, mutual funds, leasing, treasury management, capital markets advisory and item processing.

Basis of Presentation. The consolidated financial statements in this Quarterly Report on Form 10-Q include the accounts of Cullen/Frost and all other entities in which Cullen/Frost has a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and financial reporting policies we follow conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry.

The consolidated financial statements in this Quarterly Report on Form 10-Q have not been audited by an independent registered public accounting firm, but in the opinion of management, reflect all adjustments necessary for a fair presentation of our financial position and results of operations. All such adjustments were of a normal and recurring nature. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, ~~2018~~,2019, included in our Annual Report on Form 10-K filed with the SEC on February ~~6, 2019~~4, 2020 (the ~~“2018~~“2019 Form 10-K”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Use of Estimates. 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for loan losses and the fair values of financial instruments and the status of contingencies are particularly subject to change.

Cash Flow Reporting. Additional cash flow information was as follows:

Nine Months Ended
September 30,
2019 2018
Cash paid for interest $ 100,041
$ 59,764
Cash paid for income taxes 42,352
5,112
Significant non-cash transactions:
Unsettled purchases/sales of securities 82,064
74,191
Loans foreclosed and transferred to other real estate owned and foreclosed assets 1,302
2,898
Loans to facilitate the sale of other real estate owned 847
—
Right-of-use lease assets obtained in exchange for lessee operating lease liabilities 315,542
—


	Nine Months Ended September 30,
	2020		2019
Cash paid for interest	$	41,634	$	100,041
Cash paid for income taxes	44,140		42,352
Significant non-cash transactions:
Unsettled securities transactions	6,698		82,064
Loans foreclosed and transferred to other real estate owned and foreclosed assets	140		1,302
Loans to facilitate the sale of other real estate owned	0		847
Right-of-use lease assets obtained in exchange for lessee operating lease liabilities	18,284		315,542
Treasury stock issued to 401(k) stock purchase plan	6,961		0

Accounting Changes, Reclassifications and Restatements. Certain items in prior financial statements have been reclassified to conform to the current presentation. In addition, on January 1, 2020, we adopted Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” as subsequently updated for certain clarifications, targeted relief and codification improvements. Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”) replaces the previous “incurred loss” model for measuring credit losses, which encompassed allowances for current known and inherent losses within the portfolio, with an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. The new current expected credit loss (“CECL”) model requires the measurement of all expected credit losses for financial assets measured at amortized cost and certain off-balance-sheet credit exposures based on historical experience, current conditions, and reasonable and supportable forecasts. ASC 326 also requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASC 326 includes certain changes to the accounting for available-for-sale securities including the requirement to present credit losses as

an allowance rather than as a direct write-down for available-for-sale securities management does not intend to sell or believes that it is more likely than not they will be required to sell.

We adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. Upon adoption, we recognized an after-tax cumulative effect reduction to retained earnings totaling $29.3 million, as detailed in the table below. Operating results for periods after January 1, 2020 are presented in accordance with ASC 326 while prior period amounts continue to be reported in accordance with previously applicable standards and the accounting policies described in our 2019 Form 10-K.

The following table details the impact of the adoption of ASC 326 on the allowance for credit losses as of January 1, 2020.

In connection with the adoption of ASC 326, we revised certain accounting policies and implemented certain accounting policy elections. The revised accounting policies are described below.

Securities: Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them until maturity. Securities to be held for indefinite periods of time are classified as available for sale and carried at fair value, with the unrealized holding gains and losses (those for which no allowance for credit losses are recorded) reported as a component of other comprehensive income, net of tax. Securities held for resale in anticipation of short-term market movements are classified as trading and are carried at fair value, with changes in unrealized holding gains and losses included in income. Management determines the appropriate classification of securities at the time of purchase. Securities with limited marketability, such as stock in the Federal Reserve Bank and the Federal Home Loan Bank, are carried at cost.

Interest income on securities includes amortization of purchase premiums and discounts. Premiums and discounts on securities are generally amortized using the interest method with a constant effective yield without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Premiums on callable securities are amortized to their earliest call date. A security is placed on non-accrual status if (i) principal or interest has been in default for a period of 90 days or more or (ii) full payment of principal and interest is not expected. Interest accrued but not received for a security placed on non-accrual status is reversed against interest income. Gains and losses on sales are recorded on the trade date and are derived from the amortized cost of the security sold.

Allowance For Credit Losses - Held-to-Maturity Securities: The allowance for credit losses on held-to-maturity securities is a contra-asset valuation account, calculated in accordance with ASC 326, that is deducted from the amortized cost basis of held-to-maturity securities to present management's best estimate of the net amount expected to be collected. Held-to-maturity securities are charged-off against the allowance when deemed uncollectible by management. Adjustments to the allowance are reported in our income statement as a component of credit loss expense. Management measures expected credit losses on held-to-maturity securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Management has made the accounting policy election to exclude accrued interest receivable on held-to-maturity securities from the estimate of credit losses. Further information regarding our policies and methodology used to estimate the allowance for credit losses on held-to-maturity securities is presented in Note 2 - Securities.

Allowance For Credit Losses - Available-for-Sale Securities: For available-for-sale securities in an unrealized loss position, we first assess whether (i) we intend to sell, or (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either case is affirmative, any previously recognized allowances are charged-off and the security's amortized cost is written down to fair value through income. If neither case is affirmative, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and any adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Adjustments to the allowance are reported in our income statement as a component of credit loss expense. Management has made the accounting policy election to exclude accrued interest receivable on available-for-sale securities from the estimate of credit losses. Available-for-sale securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met.

Loans: Loans are reported at the principal balance outstanding net of unearned discounts. Interest income on loans is reported on the level-yield method and includes amortization of deferred loan fees and costs over the terms of the individual loans to which they relate, or, in certain cases, over the average expected term for loans where deferred fees and costs are accounted for on a pooled basis. Net loan commitment fees or costs for commitment periods greater than one year are deferred and amortized into fee income or other expense on a straight-line basis over the commitment period. Income on direct financing leases is recognized on a basis that achieves a constant periodic rate of return on the outstanding investment. Further information regarding our accounting policies related to past due loans, non-accrual loans, collateral dependent loans and troubled-debt restructurings is presented in Note 3 - Loans.

Allowance For Credit Losses - Loans: The allowance for credit losses on loans is a contra-asset valuation account, calculated in accordance with ASC 326, that is deducted from the amortized cost basis of loans to present management's best estimate of the net amount expected to be collected. Loans are charged-off against the allowance when deemed uncollectible by management. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Adjustments to the allowance are reported in our income statement as a component of credit loss expense. Management has made the accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses. Further information regarding our policies and methodology used to estimate the allowance for credit losses on loans is presented in Note 3 - Loans.

Allowance For Credit Losses - Off-Balance-Sheet Credit Exposures: The allowance for credit losses on off-balance-sheet credit exposures is a liability account, calculated in accordance with ASC 326, representing expected credit losses over the contractual period for which we are exposed to credit risk resulting from a contractual obligation to extend credit. No allowance is recognized if we have the unconditional right to cancel the obligation. The allowance is reported as a component of accrued interest payable and other liabilities in our consolidated balance sheets. Adjustments to the allowance are reported in our income statement as a component of credit loss expense. Further information regarding our policies and methodology used to estimate the allowance for credit losses on off-balance-sheet credit exposures is presented in Note 6 - Off-Balance-Sheet Arrangements, Commitments, Guarantees and Contingencies.

As more fully discussed in our 2019 Form 10-K, we adopted certain accounting standard updates related to accounting for leases (Topic 842 - Leases), primarily Accounting Standards Update (“ASU”) 2016-02 and subsequent updates. Among other things, these updates require lessees to recognize a lease liability, measured on a discounted basis, related to the lessee's obligation to make lease payments arising under a lease contract; and a right-of-use asset related to the lessee’s right to use, or control the useas of a specified asset for the lease term. The updates did not significantly change lease accounting requirements applicable to lessors and did not significantly impact our financial statements in relation to contracts whereby we act as a lessor. We adopted the updatesJanuary 1, 2019 using a modified-retrospective transition approach and recognized right-of-use lease assets and related lease liabilities totaling $170.5 million and $174.4 million, respectively, as of January 1, 2019. We elected to apply certain practical adoption expedients provided under the updates whereby we did not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. We did not elect to apply the recognition requirements of the updates to any short-term leases (as discussed below). As of September 30, 2019, right-of-use lease assets and related lease liabilities totaled $299.5 million and $325.3 million, respectively. During the

second quarter of 2019, we recognized a right-of-use asset totaling $121.7 million and a related lease liability totaling $121.7 million in connection with the commencement of the lease of our new corporate headquarters facility in downtown San Antonio. See Note 6 - Commitments and Contingencies.

We lease certain office facilities and office equipment under operating leases. We also own certain office facilities which we lease to outside parties under operating lessor leases; however, such leases are not significant. We do not apply the recognition requirements of Topic 842 - Leases to short-term operating leases. A short-term operating lease has an original term of 12 months or less and does not have a purchase option that is likely to be exercised. For non-short-term operating leases, we recognized lease right-of-use assets and related lease liabilities on our balance sheet upon commencement of the lease in accordance with Topic 842 - Leases. In recognizing lease right-of-use assets and related lease liabilities, we account for lease and non-lease components (such as taxes, insurance, and common area maintenance costs) separately as such amounts are generally readily determinable under our lease contracts. Lease payments over the expected term are discounted using our incremental borrowing rate referenced to the Federal Home Loan Bank Secure Connect advance rates for borrowings of similar term. We also consider renewal and termination options in the determination of the term of the lease. If it is reasonably certain that a renewal or termination option will be exercised, the effects of such options are included in the determination of the expected lease term. Generally, we cannot be reasonably certain about whether or not we will renew a lease until such time the lease is within the last two years of the existing lease term. However, renewal options related to our regional headquarter facilities or operations centers are evaluated on a case-by-case basis, typically in advance of such time frame. When we are reasonably certain that a renewal option will be exercised, we measure/remeasure the right-of-use asset and related lease liability using the lease payments specified for the renewal period or, if such amounts are unspecified, we generally assume an increase (evaluated on a case-by-case basis in light of prevailing market conditions) in the lease payment over the final period of the existing lease term.

date. We also adopted ~~ASU 2017-08 “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization on Purchased Callable Debt Securities” as of January 1, 2019. ASU 2017-08 shortens~~an accounting standard update which shortened the amortization period for certain callable debt securities held at a premium ~~to require such premiums to be amortized to the earliest call date unless applicable guidance related to certain pools~~as of securities is applied to consider estimated prepayments. Under prior guidance, entities were generally required to amortize premiums on individual, non-pooled callable debt securities as a yield adjustment over the contractual life of the security. ASU 2017-08 does not change the accounting for callable debt securities held at a discount. Upon adoption,January 1, 2019 using a modified retrospective transition adoption approach weand recognized a cumulative effect reduction to retained earnings ~~totaling$14.7~~totaling $14.7 million. ~~We previously reported a cumulative effect reduction~~

Table of $12.6 million. During the third quarter of 2019, we retroactively corrected this amount and reduced retained earnings by an additional $2.1 million. All financial information related to prior periods has been revised to reflect this adjustment. We expect premium amortization expense for 2019 will be approximately $5.2 million higher than what would have been the case had we continued to amortize the affected securities to their respective maturity dates.Contents

Note 2 - Securities

~~Securities.~~Securities - Held to Maturity. A summary of the amortized cost, ~~and estimated~~ fair value and allowance for credit losses related to securities held to maturity as of ~~securities, excluding trading securities,~~September 30, 2020 and December 31, 2019 is presented below.

September 30, 2019 December 31, 2018

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair Value

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair Value
Held to Maturity
Residential mortgage-backed securities $ 2,472
$ 25
$ 2
$ 2,495
$ 2,737
$ 8
$ 85
$ 2,660
States and political subdivisions 1,016,866
26,563
—
1,043,429
1,101,820
11,525
552
1,112,793
Other 1,500
—
1
1,499
1,500
—
—
1,500
Total $ 1,020,838
$ 26,588
$ 3
$ 1,047,423
$ 1,106,057
$ 11,533
$ 637
$ 1,116,953
Available for Sale
U.S. Treasury $ 2,806,802
$ 20,725
$ 1,731
$ 2,825,796
$ 3,455,417
$ 1,772
$ 29,500
$ 3,427,689
Residential mortgage-backed securities 2,198,466
42,766
780
2,240,452
823,208
13,079
6,547
829,740
States and political subdivisions 6,931,673
380,113
413
7,311,373
7,089,132
70,760
72,690
7,087,202
Other 42,825
—
—
42,825
42,690
—
—
42,690
Total $ 11,979,766
$ 443,604
$ 2,924
$ 12,420,446
$ 11,410,447
$ 85,611
$ 108,737
$ 11,387,321


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Allowance for Credit Losses		Net Carrying Amount
September 30, 2020

Residential mortgage-backed securities	$	529,290	$	45,504	$	0	$	574,794	$	0	$	529,290
States and political subdivisions	1,420,754		61,808		0		1,482,562		(160)		1,420,594
Other	1,500		0		1		1,499		0		1,500
Total	$	1,951,544	$	107,312	$	1	$	2,058,855	$	(160)	$	1,951,384
December 31, 2019

Residential mortgage-backed securities	$	530,861	$	22	$	9,365	$	521,518	$	0	$	530,861
States and political subdivisions	1,497,644		28,909		896		1,525,657		0		1,497,644
Other	1,500		0		0		1,500		0		1,500
Total	$	2,030,005	$	28,931	$	10,261	$	2,048,675	$	0	$	2,030,005

All mortgage-backed securities included in the above table were issued by U.S. government agencies and corporations. At September 30, 2019, approximately 99.7% of the securities in our municipal bond portfolio were issued by political subdivisions or agencies within the State of Texas, of which approximately 69.3% are either guaranteed by the Texas Permanent School Fund, which has a “triple A” insurer financial strength rating, or are secured by U.S. Treasury securities via defeasance of the debt by the issuers. Securities with limited marketability and that do not have readily determinable fair values are carried at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar securities of the same issuer. These securities include stock in the Federal Reserve Bank and the Federal Home Loan Bank and are reported as other available for sale securities in the table above. The carrying value of held-to-maturity securities pledged to secure public funds, trust deposits, repurchase agreements and for other purposes, as required or permitted by law was ~~$3.6 billion~~$663.2 million and $561.4 million at September 30, ~~2019~~2020 and ~~$3.8 billion at~~ December 31, ~~2018.~~2019, respectively. Accrued interest receivable on held-to-maturity securities totaled $11.9 million and $21.1 million at September 30, 2020 and December 31, 2019, respectively and is included in accrued interest receivable and other assets in the accompanying consolidated balance sheets.

~~During the fourth quarter of 2012,~~From time to time, we have reclassified certain securities from available for sale to held to maturity. ~~The~~During the fourth quarter of 2019, we reclassified securities ~~had~~with an aggregate fair value of ~~$2.3 billion~~ ~~with~~$377.8 million and an aggregate net unrealized gain of ~~$165.7~~$3.3 million (~~$107.7~~ ($2.6 million,, net of tax) on the date of the transfer. The net unamortized, unrealized gain remaining on ~~the remaining~~ transferred securities, including those transferred in 2019 and in years prior, included in accumulated other comprehensive income in the accompanying balance sheet ~~as of September 30, 2019~~ totaled ~~$1.8~~$3.8 million ($~~1.4~~3.0 million, net of tax). at September 30, 2020 and $4.8 million ($3.8 million, net of tax) at December 31, 2019. This amount will be amortized out of accumulated other comprehensive income over the remaining life of the underlying securities as an adjustment of the yield on those securities.

~~Unrealized Losses.~~ AsThe allowance for credit losses on held-to-maturity securities is a contra-asset valuation account that is deducted from the amortized cost basis of held-to-maturity securities to present the net amount expected to be collected. Management measures expected credit losses on held-to-maturity securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. With regard to U.S. Treasury and residential mortgage-backed securities issued by the U.S. government, or agencies thereof, it is expected that the securities will not be settled at prices less than the amortized cost bases of the securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. Accordingly, no allowance for credit losses has been recorded for these securities. With regard to securities issued by States and political subdivisions and other held-to-maturity securities, management considers (i) issuer bond ratings, (ii) historical loss rates for given bond ratings, (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, (iv) internal forecasts and (v) whether or not such securities are guaranteed by the Texas Permanent School Fund (“PSF”) or pre-refunded by the issuers.

The following table summarizes Moody's and/or Standard & Poor's bond ratings for our portfolio of held-to-maturity securities issued by States and political subdivisions and other securities as of September 30, ~~2019~~2020:


	States and Political Subdivisions
	Not Guaranteed or Pre-Refunded		Guaranteed by the Texas PSF		Pre-Refunded		Total		Other Securities
Aaa/AAA	$	115,385	$	797,659	$	332,240	$	1,245,284	$	0
Aa/AA	112,614		0		0		112,614		0
A	62,856		0		0		62,856		0
Not rated	0		0		0		0		1,500
Total	$	290,855	$	797,659	$	332,240	$	1,420,754	$	1,500

Table of Contents,

Historical loss rates associated with securities ~~with unrealized losses, segregated by length of impairment, were~~having similar grades as ~~follows:~~

Less than 12 Months More than 12 Months Total

Estimated
Fair Value

Unrealized
Losses

Estimated
Fair Value

Unrealized
Losses

Estimated
Fair Value

Unrealized
Losses
Held to Maturity
Residential mortgage-backed securities $ —
$ —
$ 413
$ 2
$ 413
$ 2
Other 1,499
1
—
—
1,499
1
Total $ 1,499
$ 1
$ 413
$ 2
$ 1,912
$ 3
Available for Sale
U.S. Treasury $ —
$ —
$ 1,722,158
$ 1,731
$ 1,722,158
$ 1,731
Residential mortgage-backed securities 49,657
290
44,458
490
94,115
780
States and political subdivisions 41,619
413
—
—
41,619
413
Total $ 91,276
$ 703
$ 1,766,616
$ 2,221
$ 1,857,892
$ 2,924

~~Declines~~those in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value hasour portfolio have generally not been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and our ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in cost.

~~Management has the ability and intent to hold the securities classified as held to maturity in the table above until they mature, at which time we expect to receive full value for the securities.~~significant. Furthermore, as of September 30, 2020, there were no past due principal or interest payments associated with these securities. The PSF is a sovereign wealth fund which serves to provide revenues for funding of public primary and secondary education in the State of Texas. Based upon (i) the PSF's AAA insurer financial strength rating, (ii) the PSF's substantial capitalization and excess guarantee capacity and (iii) a zero historical loss rate, no allowance for credit losses has been recorded for securities guaranteed by the PSF as there is no current expectation of credit losses related to these securities. Pre-refunded securities have been defeased by the issuer and are fully secured by cash and/or U.S. Treasury securities held in escrow for payment to holders when the underlying call dates of the securities are reached. Accordingly, no allowance for credit losses has been recorded for securities that have been defeased as there is no current expectation of credit losses related to these securities.

The following table details activity in the allowance for credit losses on held-to-maturity securities during the three and nine months ended September 30, 2020.


	Three Months Ended September 30, 2020		Nine Months Ended September 30, 2020

Beginning balance	$	172	$	0
Impact of adopting ASC 326	0		215
Credit loss expense (benefit)	(12)		(55)
Ending balance	$	160	$	160

Securities - Available for Sale. A summary of the amortized cost, fair value and allowance for credit losses related to securities available for sale as of September 30, 2020 and December 31, 2019 is presented below.


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Estimated Fair Value
September 30, 2020
U.S. Treasury	$	1,084,210	$	40,755	$	0	$	0	$	1,124,965

Residential mortgage-backed securities	2,092,184		72,021		43		0		2,164,162
States and political subdivisions	6,695,946		577,059		0		0		7,273,005
Other	42,348		0		0		0		42,348
Total	$	9,914,688	$	689,835	$	43	$	0	$	10,604,480

December 31, 2019
U.S. Treasury	$	1,941,283	$	18,934	$	12,084	$	0	$	1,948,133

Residential mortgage-backed securities	2,176,275		32,608		1,289		0		2,207,594
States and political subdivisions	6,717,344		353,857		204		0		7,070,997
Other	42,867		0		0		0		42,867
Total	$	10,877,769	$	405,399	$	13,577	$	0	$	11,269,591

All mortgage-backed securities included in the above table were issued by U.S. government agencies and corporations. At September 30, 2020, all of the securities in our available for sale municipal bond portfolio were issued by the State of Texas or political subdivisions or agencies within the State of Texas, of which approximately 75.8% are either guaranteed by the PSF or have been pre-refunded. Securities with limited marketability, such as stock in the Federal Reserve Bank and the Federal Home Loan Bank, are carried at cost and are reported as other available for sale securities in the table above. The carrying value of available-for-sale securities pledged to secure public funds, trust deposits, repurchase agreements and for other purposes, as required or permitted by law was $3.8 billion and $3.4 billion at September 30, 2020 and December 31, 2019, respectively. Accrued interest receivable on available-for-sale securities totaled $66.6 million and $115.9 million at September 30, 2020 and December 31, 2019, respectively, and is included in accrued interest receivable and other assets in the accompanying consolidated balance sheets.

The table below summarizes, as of September 30, 2020, securities available for sale in an unrealized loss position for which an allowance for credit losses has not been recorded, aggregated by type of security and length of time in a continuous unrealized loss position.


	Less than 12 Months				More than 12 Months				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses

Residential mortgage-backed securities	$	7,527	$	42	$	124	$	1	$	7,651	$	43

Total	$	7,527	$	42	$	124	$	1	$	7,651	$	43

Table of Contents

As of September 30, 2020, no allowance for credit losses has been recognized on available for sale securities in an unrealized loss position as management does not believe any of the securities are impaired due to reasons of credit quality. This is based upon our analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors (such as a PSF guarantee) related to our available for sale securities and in consideration of our historical credit loss experience and internal forecasts. The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the securities. Furthermore, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost. ~~Any~~The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. ~~Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of~~ ~~September 30, 2019, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in our consolidated income statement.~~

Contractual Maturities. The ~~amortized cost and estimated fair value~~following table summarizes the maturity distribution schedule of securities ~~excluding trading~~held to maturity and securities at available for sale as of September 30, ~~2019~~2020. Mortgage-backed securities are ~~presented below by contractual maturity.~~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. ~~Residential mortgage-backed~~Other securities classified as available for sale include stock in the Federal Reserve Bank and ~~equity securities are shown separately since they are not due at a single~~the Federal Home Loan Bank, which have no maturity date. These securities have been included in the total column only.

Held to Maturity Available for Sale

Amortized
Cost

Estimated
Fair Value

Amortized
Cost

Estimated
Fair Value
Due in one year or less $ 25,254
$ 25,418
$ 1,882,023
$ 1,881,435
Due after one year through five years 166,412
170,675
1,328,841
1,356,833
Due after five years through ten years 530,808
543,464
453,192
480,892
Due after ten years 295,892
305,371
6,074,419
6,418,009
Residential mortgage-backed securities 2,472
2,495
2,198,466
2,240,452
Equity securities —
—
42,825
42,825
Total $ 1,020,838
$ 1,047,423
$ 11,979,766
$ 12,420,446


	Within 1 Year		1 - 5 Years		5 - 10 Years		After 10 Years		Total
Held To Maturity
Amortized Cost

Residential mortgage-backed securities	$	0	$	231	$	516,368	$	12,691	$	529,290
States and political subdivisions	55,180		355,409		399,377		610,788		1,420,754
Other	0		1,500		0		0		1,500
Total	$	55,180	$	357,140	$	915,745	$	623,479	$	1,951,544
Estimated Fair Value

Residential mortgage-backed securities	$	0	$	233	$	560,456	$	14,105	$	574,794
States and political subdivisions	56,043		369,536		411,517		645,466		1,482,562
Other	0		1,499		0		0		1,499
Total	$	56,043	$	371,268	$	971,973	$	659,571	$	2,058,855
Available For Sale
Amortized Cost
U. S. Treasury	$	299,355	$	784,855	$	0	$	0	$	1,084,210
Residential mortgage-backed securities	175		45,832		22,949		2,023,228		2,092,184
States and political subdivisions	201,529		1,029,750		696,654		4,768,013		6,695,946
Other	0		0		0		0		42,348
Total	$	501,059	$	1,860,437	$	719,603	$	6,791,241	$	9,914,688
Estimated Fair Value
U. S. Treasury	$	305,121	$	819,844	$	0	$	0	$	1,124,965
Residential mortgage-backed securities	182		47,995		23,439		2,092,546		2,164,162
States and political subdivisions	204,107		1,127,267		757,126		5,184,505		7,273,005
Other	0		0		0		0		42,348
Total	$	509,410	$	1,995,106	$	780,565	$	7,277,051	$	10,604,480

Sales of Securities. Sales of securities available for sale were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Proceeds from sales	$	0	$	4,944,537	$	1,162,352	$	8,236,066
Gross realized gains	0		96		108,989		899
Gross realized losses	0		0		0		(634)
Tax (expense) benefit of securities gains/losses	0		(21)		(22,888)		(56)

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Proceeds from sales $ 4,944,537
$ 2,948,178
$ 8,236,066
$ 13,838,566
Gross realized gains 96
—
899
3
Gross realized losses —
(34 ) (634 ) (116 )
Tax (expense) benefit of securities gains/losses (21 ) 7
(56 ) 24

Table of Contents

Premiums and Discounts. Premium amortization and discount accretion included in interest income on securities was as follows:

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Premium amortization $ (29,511 ) $ (27,381 ) $ (88,798 ) $ (80,104 )
Discount accretion 1,274
2,569
3,835
6,356
Net (premium amortization) discount accretion $ (28,237 ) $ (24,812 ) $ (84,963 ) $ (73,748 )


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Premium amortization	$	(31,540)	$	(29,511)	$	(94,873)	$	(88,798)
Discount accretion	637		1,274		1,793		3,835
Net (premium amortization) discount accretion	$	(30,903)	$	(28,237)	$	(93,080)	$	(84,963)

Trading Account Securities. Trading account securities, at estimated fair value, were as follows:

September 30,
2019 December 31,
2018
U.S. Treasury $ 23,747
$ 21,928
States and political subdivisions 3,922
2,158
Total $ 27,669
$ 24,086


	September 30, 2020		December 31, 2019
U.S. Treasury	$	24,495	$	24,298
States and political subdivisions	1,313		0
Total	$	25,808	$	24,298

Net gains and losses on trading account securities were as follows:

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Net gain on sales transactions $ 731
$ 465
$ 1,789
$ 1,404
Net mark-to-market gains (losses) (201 ) (8 ) (170 ) (21 )
Net gain (loss) on trading account securities $ 530
$ 457
$ 1,619
$ 1,383


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net gain on sales transactions	$	159	$	731	$	933	$	1,789
Net mark-to-market gains (losses)	1		(201)		94		(170)
Net gain (loss) on trading account securities	$	160	$	530	$	1,027	$	1,619

Note 3 - Loans

Loans were as follows:

September 30,
2019
Percentage
of Total
December 31,
2018
Percentage
of Total
Commercial and industrial $ 5,179,780
35.4 % $ 5,111,957
36.3 %
Energy:
Production 1,282,180
8.7
1,309,314
9.3
Service 189,350
1.3
168,775
1.2
Other 75,388
0.5
124,509
0.9
Total energy 1,546,918
10.5
1,602,598
11.4
Commercial real estate:
Commercial mortgages 4,555,171
31.1
4,121,966
29.2
Construction 1,370,206
9.4
1,267,717
9.0
Land 290,706
2.0
306,755
2.2
Total commercial real estate 6,216,083
42.5
5,696,438
40.4
Consumer real estate:
Home equity loans 363,224
2.5
353,924
2.5
Home equity lines of credit 350,461
2.4
337,168
2.4
Other 458,618
3.1
427,898
3.0
Total consumer real estate 1,172,303
8.0
1,118,990
7.9
Total real estate 7,388,386
50.5
6,815,428
48.3
Consumer and other 519,844
3.6
569,750
4.0
Total loans $ 14,634,928
100.0 % $ 14,099,733
100.0 %


	September 30, 2020		Percentage of Total		December 31, 2019		Percentage of Total
Commercial and industrial	$	4,820,018	26.4	%	$	5,187,466	35.2	%
Energy:
Production	1,108,753		6.1		1,348,900		9.2
Service	163,197		0.9		192,996		1.3
Other	91,418		0.4		110,986		0.8
Total energy	1,363,368		7.4		1,652,882		11.2
Paycheck Protection Program	3,226,980		17.7		0		0
Commercial real estate:
Commercial mortgages	5,412,731		29.7		4,594,113		31.1
Construction	1,274,080		7.0		1,312,659		8.9
Land	320,407		1.8		289,467		2.0
Total commercial real estate	7,007,218		38.5		6,196,239		42.0
Consumer real estate:
Home equity loans	340,226		1.9		375,596		2.6
Home equity lines of credit	434,171		2.4		354,671		2.4
Other	533,356		2.9		464,146		3.1
Total consumer real estate	1,307,753		7.2		1,194,413		8.1
Total real estate	8,314,971		45.7		7,390,652		50.1
Consumer and other	498,540		2.8		519,332		3.5
Total loans	$	18,223,877	100.0	%	$	14,750,332	100.0	%

Concentrations of Credit. Most of our lending activity occurs within the State of Texas, including the four largest metropolitan areas of Austin, Dallas/Ft. Worth, Houston and San Antonio, as well as other markets. The majority of our loan portfolio consists of commercial and industrial and commercial real estate loans. As of September 30, ~~2019,~~2020, there were 0 concentrations of loans related to any single industry in excess of 10% of total ~~loans other than~~loans. The largest industry concentration was related to the energy ~~loans,~~industry, which totaled ~~10.5%~~7.4% of total loans, or 9.1% excluding PPP loans. Unfunded commitments to extend credit and standby letters of credit issued to customers in the energy industry totaled ~~$1.3 billion~~$910.3 million and ~~$66.1~~$62.6 million, respectively, as of September 30, ~~2019.~~2020.

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Foreign Loans. We have 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 September 30, ~~2019~~2020 or December 31, ~~2018.~~2019.

Related Party Loans. In the ordinary course of business, we have granted loans to certain directors, executive officers and their affiliates (collectively referred to as “related parties”). Such loans totaled ~~$326.1~~$316.0 million at September 30, ~~2019~~2020 and ~~$256.1~~$298.5 million at December 31, ~~2018.~~2019.

Accrued Interest Receivable. Accrued interest receivable on loans totaled $43.9 million and $45.5 million at September 30, 2020 and December 31, 2019, respectively and is included in accrued interest receivable and other assets in the accompany consolidated balance sheets.

COVID-19 Loan Deferments. Certain borrowers are currently unable to meet their contractual payment obligations because of the adverse effects of COVID-19. To help mitigate these effects, loan customers may apply for a deferral of payments, or portions thereof, for up to 90 days. After 90 days, customers may apply for an additional deferral, and a small proportion of our customers have requested such an additional deferral. In the absence of other intervening factors, such short-term modifications made on a good faith basis are not categorized as troubled debt restructurings, nor are loans granted payment deferrals related to COVID-19 reported as past due or placed on non-accrual status (provided the loans were not past due or on non-accrual status prior to the deferral). At September 30, 2020, there were approximately 300 loans in COVID-19 related deferment with an aggregate outstanding balance of approximately $157.2 million.

Non-Accrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. In determining whether or not a borrower may be unable to meet payment obligations for each class of loans, we consider the borrower’s debt service capacity through the analysis of current financial information, if available, and/or current information with regards to our collateral position. Regulatory provisions would typically require the placement of a loan on non-accrual status if (i) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection or (ii) full payment of principal and interest is not expected. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed against income. Interest income on non-accrual loans is recognized only to the extent that cash payments are received in excess of principal due. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period (at least six months) of repayment performance by the borrower.

Non-accrual loans, segregated by class of loans, were as follows:


	September 30, 2020				December 31, 2019
	Total Non-Accrual		Non-Accrual with No Credit Loss Allowance		Total Non-Accrual		Non-Accrual with No Credit Loss Allowance
Commercial and industrial	$	21,566	$	6,583	$	26,038	$	13,266
Energy	54,041		33,324		65,761		3,281
Paycheck Protection Program	0		0		0		0
Commercial real estate:
Buildings, land and other	13,525		6,754		8,912		6,558
Construction	680		680		665		665
Consumer real estate	1,748		1,748		922		922
Consumer and other	18		0		5		0
Total	$	91,578	$	49,089	$	102,303	$	24,692

September 30,
2019 December 31,
2018
Commercial and industrial $ 13,929
$ 9,239
Energy 70,883
46,932
Commercial real estate:
Buildings, land and other 9,240
15,268
Construction 697
—
Consumer real estate 527
892
Consumer and other 2,170
1,408
Total $ 97,446
$ 73,739

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The following table presents non-accrual loans as of September 30, 2020 by class and year of origination.


	2020		2019		2018		2017		2016		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Commercial and industrial	$	9,317	$	3,743	$	1,886	$	1,263	$	110	$	51	$	1,879	$	3,317	$	21,566
Energy	24,149		7,021		2,204		0		0		0		15,054		5,613		54,041
Paycheck Protection Program	0		0		0		0		0		0		0		0		0
Commercial real estate:
Buildings, land and other	1,426		6,014		169		1,372		840		3,590		114		0		13,525
Construction	680		0		0		0		0		0		0		0		680
Consumer real estate	0		0		421		211		350		382		261		123		1,748
Consumer and other	0		0		0		0		0		0		18		0		18
Total	$	35,572	$	16,778	$	4,680	$	2,846	$	1,300	$	4,023	$	17,326	$	9,053	$	91,578

In the table above, loans reported as 2020 originations were, for the most part, first originated in various years prior to 2020 but were renewed in the current year. Had non-accrual loans performed in accordance with their original contract terms, we would have recognized additional interest income, net of tax, of approximately ~~$0.9~~$670 thousand and $2.3 million for the three and nine months ended September 30, 2020, and approximately $937 thousand and $3.0 million for the three and nine months ended September 30, ~~2019, compared to $1.3 million and $4.2 million for the three and nine months ended September 30, 2018.~~2019.

An age analysis of past due loans (including both accruing and non-accruing loans), segregated by class of loans, as of September 30, ~~2019~~ ~~was as follows:~~

Loans
30-89 Days
Past Due

Loans
90 or More
Days
Past Due

Total
Past Due
Loans

Current
Loans

Total
Loans

Accruing
Loans 90 or
More Days
Past Due
Commercial and industrial $ 39,540
$ 13,622
$ 53,162
$ 5,126,618
$ 5,179,780
$ 3,574
Energy 3,350
21,836
25,186
1,521,732
1,546,918
530
Commercial real estate:
Buildings, land and other 29,147
8,279
37,426
4,808,451
4,845,877
6,513
Construction 1,412
1,471
2,883
1,367,323
1,370,206
774
Consumer real estate 8,305
2,443
10,748
1,161,555
1,172,303
2,150
Consumer and other 7,815
2,419
10,234
509,610
519,844
855
Total $ 89,569
$ 50,070
$ 139,639
$ 14,495,289
$ 14,634,928
$ 14,396

~~Impaired Loans.~~ ~~Impaired loans are set forth in the following table. NaN interest income was recognized on impaired loans subsequent to their classification as impaired.~~

Unpaid Contractual
Principal
Balance

Recorded Investment
With No
Allowance

Recorded Investment
With
Allowance

Total
Recorded
Investment

Related
Allowance
September 30, 2019
Commercial and industrial $ 15,020
$ 4,874
$ 7,280
$ 12,154
$ 5,785
Energy 88,531
4,777
65,800
70,577
19,722
Commercial real estate:

Buildings, land and other 9,553
3,864
5,015
8,879
1,483
Construction 697
697
—
697
—
Consumer real estate 293
293
—
293
—
Consumer and other 2,171
—
2,170
2,170
2,170
Total $ 116,265
$ 14,505
$ 80,265
$ 94,770
$ 29,160
December 31, 2018
Commercial and industrial $ 9,094
$ 2,842
$ 4,287
$ 7,129
$ 2,558
Energy 67,900
6,817
39,890
46,707
9,671
Commercial real estate:
Buildings, land and other 15,774
2,168
12,517
14,685
2,599
Construction —
—
—
—
—
Consumer real estate 293
293
—
293
—
Consumer and other 1,475
—
1,407
1,407
1,407
Total $ 94,536
$ 12,120
$ 58,101
$ 70,221
$ 16,235

~~The average recorded investment in impaired loans~~2020 was as follows:

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019
2018
Commercial and industrial $ 14,438
$ 13,447
$ 12,552
$ 21,025
Energy 55,195
78,772
50,642
82,640
Commercial real estate:
Buildings, land and other 9,418
14,306
14,961
12,328
Construction 349
—
277
—
Consumer real estate 293
671
541
807
Consumer and other 1,795
1,073
1,605
805
Total $ 81,488
$ 108,269
$ 80,578
$ 117,605


	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Commercial and industrial	$	36,067	$	25,115	$	61,182	$	4,758,836	$	4,820,018	$	19,392
Energy	31,071		9,588		40,659		1,322,709		1,363,368		559
Paycheck Protection Program	0		0		0		3,226,980		3,226,980		0
Commercial real estate:
Buildings, land and other	25,113		19,571		44,684		5,688,454		5,733,138		11,676
Construction	0		0		0		1,274,080		1,274,080		0
Consumer real estate	11,054		4,761		15,815		1,291,938		1,307,753		3,406
Consumer and other	6,629		673		7,302		491,238		498,540		673
Total	$	109,934	$	59,708	$	169,642	$	18,054,235	$	18,223,877	$	35,706

Troubled Debt Restructurings. Troubled debt restructurings during the nine months ended September 30, ~~2019~~2020 and September 30, ~~2018~~2019 are set forth in the following table.

Nine Months Ended
September 30, 2019 Nine Months Ended
September 30, 2018

Balance at
Restructure

Balance at
Period-End

Balance at
Restructure

Balance at
Period-End
Commercial and industrial $ 3,845
$ 2,188
$ 2,203
$ —
Energy —
—
13,708
—
Commercial real estate:
Buildings, land and other 9,456
9,494
—
—
Consumer real estate 124
123
—
—
$ 13,425
$ 11,805
$ 15,911
$ —


	Nine Months Ended September 30, 2020				Nine Months Ended September 30, 2019
	Balance at Restructure		Balance at Period-End		Balance at Restructure		Balance at Period-End
Commercial and industrial	$	3,660	$	1,415	$	3,845	$	2,188

Commercial real estate:
Buildings, land and other	6,606		6,585		9,456		9,494
Construction	1,192		1,181		0		0
Consumer real estate	0		0		124		123
Consumer and other	1,104		104		0		0
	$	12,562	$	9,285	$	13,425	$	11,805

Loan modifications are typically related to extending amortization periods, converting loans to interest only for a limited period of time, deferral of interest payments, waiver of certain covenants, consolidating notes and/or reducing collateral or interest rates. The modifications during the reported periods did not significantly impact our determination of the allowance for ~~loan losses.~~credit losses on loans.

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Additional information related to restructured loans as of or for the three months ended September 30, ~~2019~~2020 and September 30, ~~2018~~2019 is set forth in the following table.


	September 30, 2019		September 30, 2018			September 30, 2020		September 30, 2019
Restructured loans past due in excess of 90 days at period-end:					Restructured loans past due in excess of 90 days at period-end:
Number of loans	4		—		Number of loans	2		4
Dollar amount of loans	$	3,244	$	—	Dollar amount of loans	$	3,682	$	3,244
Restructured loans on non-accrual status at period end	5,645		—		Restructured loans on non-accrual status at period end	5,353		5,645
Charge-offs of restructured loans:					Charge-offs of restructured loans:
Recognized in connection with restructuring	1,500		—		Recognized in connection with restructuring	0		1,500
Recognized on previously restructured loans	—		4,650		Recognized on previously restructured loans	2,188		0
Proceeds from sale of restructured loans	—		15,750

Credit Quality Indicators. As part of the on-going monitoring of the credit quality of our loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted-average risk grade of commercial loans, (ii) the level of classified commercial loans, (iii) the delinquency status of consumer loans ~~(see details above),~~ (iv) ~~net charge-offs, (v)~~ non-performing loans (see details above) and (vi) the general economic conditions in the State of Texas.

We utilize a risk grading matrix to assign a risk grade to each of our commercial loans. Loans are graded on a scale of 1 to 14. A description of the general characteristics of the 14 risk grades is set forth in our ~~2018~~2019 Form 10-K. ~~In monitoring credit quality trends in the context of assessing the appropriate level of the allowance for loan losses, we~~We monitor portfolio credit quality by the weighted-average risk grade of each class of commercial loan. Individual relationship managers, under the oversight of credit administration, review updated financial information for all pass grade loans to reassess the risk grade on at least an annual basis. When a loan has a risk grade of 9, it is still considered a pass grade loan; however, it is considered to be on management’s “watch list,” where a significant risk-modifying action is anticipated in the near term. When a loan has a risk grade of 10 or higher, a special assets officer monitors the loan on an on-going basis.

The following tables present weighted-average risk grades for all commercial loans, by ~~class.~~class and year of origination/renewal as of September 30, 2020. Paycheck Protection Program (“PPP”) loans are excluded as such loans are fully guaranteed by the Small Business Administration (“SBA”).

September 30, 2019 December 31, 2018
Weighted
Average
Risk Grade Loans Weighted
Average
Risk Grade Loans
Commercial and industrial:
Risk grades 1-8 6.19
$ 4,856,712
6.12
$ 4,862,275
Risk grade 9 9.00
165,195
9.00
112,431
Risk grade 10 10.00
75,276
10.00
58,328
Risk grade 11 11.00
68,668
11.00
69,684
Risk grade 12 12.00
8,144
12.00
6,681
Risk grade 13 13.00
5,785
13.00
2,558
Total 6.42
$ 5,179,780
6.30
$ 5,111,957
Energy
Risk grades 1-8 5.85
$ 1,379,566
5.76
$ 1,451,673
Risk grade 9 9.00
80,170
9.00
35,565
Risk grade 10 10.00
1,105
10.00
43,001
Risk grade 11 11.00
15,194
11.00
25,427
Risk grade 12 12.00
51,161
12.00
37,261
Risk grade 13 13.00
19,722
13.00
9,671
Total 6.36
$ 1,546,918
6.22
$ 1,602,598
Commercial real estate:

Buildings, land and other
Risk grades 1-8 6.78
$ 4,528,963
6.76
$ 4,143,264
Risk grade 9 9.00
117,739
9.00
109,660
Risk grade 10 10.00
97,083
10.00
62,353
Risk grade 11 11.00
92,852
11.00
98,176
Risk grade 12 12.00
7,757
12.00
12,669
Risk grade 13 13.00
1,483
13.00
2,599
Total 6.99
$ 4,845,877
6.98
$ 4,428,721
Construction
Risk grades 1-8 7.19
$ 1,314,076
7.13
$ 1,177,260
Risk grade 9 9.00
31,506
9.00
60,754
Risk grade 10 10.00
21,686
10.00
24,877
Risk grade 11 11.00
2,241
11.00
4,826
Risk grade 12 12.00
697
12.00
—
Risk grade 13 13.00
—
13.00
—
Total 7.28
$ 1,370,206
7.29
$ 1,267,717

In the tables above, certain loans are reported as 2020 originations and have risk grades of 11 or higher. These loans were, for the most part, first originated in various years prior to 2020 but were renewed in the current year.

The following tables present weighted average risk grades for all commercial loans by class as of December 31, 2019.


	Commercial and Industrial			Energy			Commercial Real Estate - Buildings, Land and Other			Commercial Real Estate - Construction			Total Commercial Real Estate
	W/A Risk Grade	Loans		W/A Risk Grade	Loans		W/A Risk Grade	Loans		W/A Risk Grade	Loans		W/A Risk Grade	Loans
Risk grades 1-8	6.17	$	4,788,857	5.90	$	1,488,301	6.78	$	4,523,271	7.25	$	1,274,098	6.88	$	5,797,369
Risk grade 9	9.00	247,212		9.00	32,163		9.00	163,714		9.00	21,509		9.00	185,223
Risk grade 10	10.00	71,472		10.00	51,898		10.00	103,626		10.00	15,243		10.00	118,869
Risk grade 11	11.00	53,887		11.00	14,760		11.00	84,057		11.00	1,144		11.00	85,201
Risk grade 12	12.00	18,189		12.00	45,514		12.00	8,529		12.00	665		12.00	9,194
Risk grade 13	13.00	7,849		13.00	20,246		13.00	383		13.00	0		13.00	383
Total	6.44	$	5,187,466	6.39	$	1,652,882	7.01	$	4,883,580	7.31	$	1,312,659	7.07	$	6,196,239

Information about the payment status of consumer loans, segregated by ~~class~~portfolio segment and year of origination, as of September 30, 2020 was as follows:


	2020		2019		2018		2017		2016		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Consumer real estate:
Past due 30-89 days	$	787	$	850	$	1,434	$	858	$	540	$	4,558	$	1,535	$	492	$	11,054
Past due 90 or more days	0		139		894		542		351		2,028		600		207		4,761
Total past due	787		989		2,328		1,400		891		6,586		2,135		699		15,815
Current loans	253,392		188,770		106,947		93,143		75,216		142,983		414,331		17,156		1,291,938
Total	$	254,179	$	189,759	$	109,275	$	94,543	$	76,107	$	149,569	$	416,466	$	17,855	$	1,307,753
Consumer and other:
Past due 30-89 days	$	1,328	$	326	$	288	$	75	$	2	$	1	$	4,313	$	296	$	6,629
Past due 90 or more days	69		189		3		0		0		1		372		39		673
Total past due	1,397		515		291		75		2		2		4,685		335		7,302
Current loans	38,114		32,214		7,985		3,131		2,070		950		376,762		30,012		491,238
Total	$	39,511	$	32,729	$	8,276	$	3,206	$	2,072	$	952	$	381,447	$	30,347	$	498,540

Revolving loans that converted to term during the three and nine months ended September 30, 2020 were as follows:

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Commercial and industrial $ (1,520 ) $ (7,807 ) $ (5,912 ) $ (19,030 )
Energy (1,260 ) (5,347 ) (3,184 ) (10,272 )
Commercial real estate:
Buildings, land and other 38
33
(466 ) (288 )
Construction 8
3
14
11
Consumer real estate (103 ) (388 ) (2,078 ) (1,078 )
Consumer and other (3,534 ) (1,792 ) (9,351 ) (4,975 )
Total $ (6,371 ) $ (15,298 ) $ (20,977 ) $ (35,632 )



	Three Months Ended September 30, 2020		Nine Months Ended September 30, 2020
Commercial and industrial	$	10,224	$	25,340
Energy	7,144		38,642
Commercial real estate:
Buildings, land and other	637		8,094
Construction	0		0
Consumer real estate	421		2,132
Consumer and other	5,494		15,338
Total	$	23,920	$	89,546

In assessing the general economic conditions in the State of Texas, management monitors and tracks the Texas Leading Index (“TLI”), which is produced by the Federal Reserve Bank of Dallas. The TLI, the components of which are more fully described in our ~~2018~~2019 Form 10-K, totaled ~~128.1~~113.1 at September 30, ~~2019~~2020 and ~~126.4~~127.9 at December 31, ~~2018.~~2019. A ~~higher~~lower TLI value implies ~~more~~less favorable economic conditions.

Allowance ~~for Loan~~For Credit Losses - Loans. . The allowance for ~~loan~~credit losses on loans is a ~~reserve established through a provision for loan losses charged~~contra-asset valuation account, calculated in accordance with ASC 326, that is deducted from the amortized cost basis of loans to ~~expense, which~~present the net amount expected to be collected. The amount of the allowance represents ~~management’s~~management's best estimate of ~~inherent~~current expected credit losses on loans considering available information, from internal and external sources, relevant to assessing collectibility over the loans' contractual terms, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless (i) management has a reasonable expectation that ~~have been incurred within~~a trouble debt restructuring will be executed with an individual borrower or (ii) such extension or renewal options are not unconditionally cancellable by us and, in such cases, the ~~existing portfolio~~borrower is likely to meet applicable conditions and likely to request extension or renewal. 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 ~~loans.~~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. The allowance for credit losses is measured on a collective basis for portfolios of loans when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Expected credit losses for collateral dependent loans, including loans where the borrower is experiencing financial difficulty but foreclosure is not probable, are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

Credit loss expense related to loans reflects the totality of actions taken on all loans for a particular period including any necessary increases or decreases in the ~~judgment~~allowance related to changes in credit loss expectations associated with specific loans or pools of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. Our allowance for loan loss methodology, which is more fully described in our 2018 Form 10-K, follows the accounting guidance set forth in U.S. generally accepted accounting principles and the Interagency Policy Statement on the Allowance for Loan and Lease Losses, which was jointly issued by U.S. bank regulatory agencies. The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss and recovery experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio.loans. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate appropriateness of the allowance is dependent upon a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

In calculating the allowance for credit losses, most loans are segmented into pools based upon similar characteristics and risk profiles. Common characteristics and risk profiles include the type/purpose of loan, underlying collateral, geographical similarity and historical/expected credit loss patterns. In developing these loan pools for the purposes of modeling expected credit losses, we also analyzed the degree of correlation in how loans within each portfolio respond when subjected to varying economic conditions and scenarios as well as other portfolio stress factors. For modeling purposes, our loan pools include (i) commercial and industrial and energy - non-revolving, (ii) commercial and industrial and energy - revolving, (iii) commercial real estate - owner occupied, (iv) commercial real estate - non-owner occupied, (v) commercial real estate - construction/land development, (vi) consumer real estate and (vii) consumer and other. We periodically reassess each pool to ensure the loans within the pool continue to share similar characteristics and risk profiles and to determine whether further segmentation is necessary.

For each loan pool, we measure expected credit losses over the life of each loan utilizing a combination of models which measure (i) probability of default (“PD”), which is the likelihood that loan will stop performing/default, (ii) probability of attrition (“PA”), which is the likelihood that a loan will pay-off prior to maturity, (iii) loss given default (“LGD”), which is the expected loss rate for loans in default and (iv) exposure at default (“EAD”), which is the estimated outstanding principal balance of the loans upon default, including the expected funding of unfunded commitments outstanding as of the measurement date. For certain commercial loan portfolios, the PD is calculated using a transition matrix to determine the likelihood of a customer’s risk grade migrating from one specified range of risk grades to a different specified range. Expected credit losses are calculated as the product of PD (adjusted for attrition), LGD and EAD. This methodology builds on default probabilities already incorporated into our risk grading process by utilizing pool-specific historical loss rates to calculate expected credit losses. These pool-specific historical loss rates may be adjusted for current macroeconomic assumptions, as further discussed below, and other factors such as differences in underwriting standards, portfolio mix, or when historical asset terms do not reflect the contractual terms of the financial assets being evaluated as of the measurement date. Each time we measure expected credit losses, we assess the relevancy of historical loss information and consider any necessary adjustments to address any differences in asset-specific characteristics. Due to their short-term nature, expected credit losses for overdrafts included in consumer and other loans are based solely upon a weighting of recent historical charge-offs over a period of three years.

The measurement of expected credit losses is impacted by loan/borrower attributes and certain macroeconomic variables. Significant loan/borrower attributes utilized in our modeling processes include, among other things, (i) origination date, (ii) maturity date, (iii) payment type, (iv) collateral type and amount, (v) current risk grade, (vi) current unpaid balance and commitment utilization rate, (vii) payment status/delinquency history and (viii) expected recoveries of previously charged-off amounts. Significant macroeconomic variables utilized in our modeling processes include, among other things, (i) Gross State Product for Texas and U.S. Gross Domestic Product, (ii) selected market interest rates including U.S. Treasury rates, bank prime rate, 30-year fixed mortgage rate, BBB corporate bond rate, among others, (iii) unemployment rates, (iv) commercial and residential property prices in Texas and the U.S. as a whole, (v) West Texas Intermediate crude oil price and (vi) total stock market index.

PD and PA were estimated by analyzing internally-sourced data related to historical performance of each loan pool over a complete economic cycle. PD and PA are adjusted to reflect the current impact of certain macroeconomic variables as well as their expected changes over a reasonable and supportable forecast period. We have determined that we are reasonably able to forecast the macroeconomic variables used in our modeling processes with an acceptable degree of confidence for a total of two years with the last twelve months of the forecast period encompassing a reversion process whereby the forecasted macroeconomic variables are reverted to their historical mean utilizing a rational, systematic basis. The macroeconomic variables utilized as inputs in our modeling processes were subjected to a variety of analysis procedures and were selected primarily based on statistical relevancy and correlation to our historical credit losses. By reverting these modeling inputs to their historical mean and considering loan/borrower specific attributes, our models will yield a measurement of expected credit losses that reflects our average historical loss rates for periods subsequent to the twelve-month reversion period. The LGD is based on historical recovery averages for each loan pool, adjusted to reflect the current impact of certain macroeconomic variables as well as their expected changes over a two-year forecast period, with the final twelve months of the forecast period encompassing a reversion process, which management considers to be both reasonable and supportable. This same forecast/reversion period is used for all macroeconomic variables used in all of our models. EAD is estimated using a linear regression model that estimates the average percentage of the loan balance that remains at the time of a default event.

Management qualitatively adjusts model results for 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 qualitative factor (“Q-Factor”) adjustments may increase or decrease management's estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk. The various risks that may be considered in making Q-Factor adjustments include, among other things, the impact of (i) changes in lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries, (ii) actual and expected changes in international, national, regional, and local economic and business conditions and developments that affect the collectibility of the loan pools, (iii) changes in the nature and volume of the loan pools and in the terms of the underlying loans, (iv) changes in the experience, ability, and depth of our lending management and staff, (v) changes in volume and severity of past due financial assets, the volume of non-accrual assets, and the volume and severity of adversely classified or graded assets, (vi) changes in the quality of our credit review function, (vii) changes in the value of the underlying collateral for loans that are non-collateral dependent, (viii) the existence, growth, and effect of any concentrations of credit and (ix) other factors such as the regulatory, legal and technological environments; competition; and events such as natural disasters or health pandemics.

In some cases, management may determine that an individual loan exhibits unique risk characteristics which differentiate the loan from other loans within our loan pools. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific allocations of the allowance for credit losses are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things. A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. We reevaluate the fair value of collateral supporting collateral dependent loans on a quarterly basis. The fair value of real estate collateral supporting collateral dependent loans is evaluated by our internal appraisal services using a methodology that is consistent with the Uniform Standards of Professional Appraisal Practice. The fair value of collateral supporting collateral dependent construction loans is based on an “as is” valuation.

The following table presents details of the allowance for ~~loan~~credit losses ~~allocated to each~~on loans segregated by loan portfolio segment as of September 30, ~~2019 and December 31, 2018 and detailed on~~2020, calculated in accordance with the ~~basis of the impairment evaluation~~CECL methodology ~~we used:~~

Commercial
and
Industrial
Energy
Commercial
Real Estate

Consumer
Real Estate

Consumer
and Other
Total
September 30, 2019
Historical valuation allowances $ 28,872
$ 7,422
$ 22,051
$ 2,641
$ 7,545
$ 68,531
Specific valuation allowances 5,785
19,722
1,483
—
2,170
29,160
General valuation allowances 10,866
4,120
4,349
1,172
(325 ) 20,182
Macroeconomic valuation allowances 7,144
2,082
7,470
1,071
919
18,686
Total $ 52,667
$ 33,346
$ 35,353
$ 4,884
$ 10,309
$ 136,559
Allocated to loans:
Individually evaluated $ 5,785
$ 19,722
$ 1,483
$ —
$ 2,170
$ 29,160
Collectively evaluated 46,882
13,624
33,870
4,884
8,139
107,399
Total $ 52,667
$ 33,346
$ 35,353
$ 4,884
$ 10,309
$ 136,559
December 31, 2018
Historical valuation allowances $ 25,351
$ 9,697
$ 20,817
$ 2,688
$ 6,845
$ 65,398
Specific valuation allowances 2,558
9,671
2,599
—
1,407
16,235
General valuation allowances 10,062
6,014
4,366
1,671
(13 ) 22,100
Macroeconomic valuation allowances 10,609
3,670
10,995
1,744
1,381
28,399
Total $ 48,580
$ 29,052
$ 38,777
$ 6,103
$ 9,620
$ 132,132
Allocated to loans:
Individually evaluated $ 2,558
$ 9,671
$ 2,599
$ —
$ 1,407
$ 16,235
Collectively evaluated 46,022
19,381
36,178
6,103
8,213
115,897
Total $ 48,580
$ 29,052
$ 38,777
$ 6,103
$ 9,620
$ 132,132

~~Our recorded investment in~~described above. No allowance for credit losses has been recognized for PPP loans as such loans are fully guaranteed by the SBA.


	Commercial and Industrial		Energy		Commercial Real Estate		Consumer Real Estate		Consumer and Other		Total
Modeled expected credit losses	$	68,896	$	21,644	$	125,965	$	10,226	$	7,420	$	234,151
Q-Factor and other qualitative adjustments	(1,647)		24,630		(8,685)		51		31		14,380
Specific allocations	5,256		8,357		1,313		0		18		14,944
Total	$	72,505	$	54,631	$	118,593	$	10,277	$	7,469	$	263,475

The following table presents details of ~~September 30, 2019 and December 31, 2018 related to each balance in~~ the allowance for ~~loan~~credit losses on loans segregated by loan portfolio segment ~~and detailed on the basis~~as of ~~the impairment~~December 31, 2019, calculated in accordance with our prior incurred loss methodology ~~we used was as follows:~~described in our 2019 Form 10-K.


	Commercial and Industrial		Energy		Commercial Real Estate		Consumer Real Estate		Consumer and Other		Total
Historical valuation allowances	$	29,015	$	7,873	$	21,947	$	2,690	$	7,562	$	69,087
Specific valuation allowances	7,849		20,246		383		0		5		28,483
General valuation allowances	9,840		5,196		4,201		904		(409)		19,732
Macroeconomic valuation allowances	4,889		4,067		4,506		519		884		14,865
Total	$	51,593	$	37,382	$	31,037	$	4,113	$	8,042	$	132,167

Commercial
and
Industrial
Energy Commercial
Real Estate Consumer
Real Estate Consumer
and Other Total
September 30, 2019
Individually evaluated $ 12,154
$ 70,577
$ 9,576
$ 293
$ 2,170
$ 94,770
Collectively evaluated 5,167,626
1,476,341
6,206,507
1,172,010
517,674
14,540,158
Total $ 5,179,780
$ 1,546,918
$ 6,216,083
$ 1,172,303
$ 519,844
$ 14,634,928
December 31, 2018
Individually evaluated $ 7,129
$ 46,707
$ 14,685
$ 293
$ 1,407
$ 70,221
Collectively evaluated 5,104,828
1,555,891
5,681,753
1,118,697
568,343
14,029,512
Total $ 5,111,957
$ 1,602,598
$ 5,696,438
$ 1,118,990
$ 569,750
$ 14,099,733

The following table details activity in the allowance for ~~loan~~credit losses on loans by portfolio segment for the three and nine months ended September 30, ~~2019~~2020 and ~~2018~~.2019. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. No allowance for credit losses has been recognized for PPP loans as such loans are fully guaranteed by the SBA.


	Commercial and Industrial		Energy		Commercial Real Estate		Consumer Real Estate		Consumer and Other		Total
Three months ended:
September 30, 2020
Beginning balance	$	98,536	$	40,817	$	93,425	$	8,998	$	8,285	$	250,061
Credit loss expense	(18,547)		13,814		25,368		1,794		1,161		23,590
Charge-offs	(8,605)		0		(242)		(1,088)		(4,219)		(14,154)
Recoveries	1,121		0		42		573		2,242		3,978
Net charge-offs	(7,484)		0		(200)		(515)		(1,977)		(10,176)
Ending balance	$	72,505	$	54,631	$	118,593	$	10,277	$	7,469	$	263,475
September 30, 2019
Beginning balance	$	57,714	$	25,818	$	35,914	$	5,637	$	9,846	$	134,929
Credit loss expense	(3,527)		8,788		(607)		(650)		3,997		8,001
Charge-offs	(2,705)		(2,000)		0		(557)		(6,357)		(11,619)
Recoveries	1,185		740		46		454		2,823		5,248
Net charge-offs	(1,520)		(1,260)		46		(103)		(3,534)		(6,371)
Ending balance	$	52,667	$	33,346	$	35,353	$	4,884	$	10,309	$	136,559
Nine months ended:
September 30, 2020
Beginning balance	$	51,593	$	37,382	$	31,037	$	4,113	$	8,042	$	132,167
Impact of adopting ASC 326	21,263		(10,453)		(13,519)		2,392		(2,248)		(2,565)
Credit loss expense	10,737		96,478		104,716		3,716		8,096		223,743
Charge-offs	(14,815)		(68,842)		(3,826)		(1,508)		(13,402)		(102,393)
Recoveries	3,727		66		185		1,564		6,981		12,523
Net charge-offs	(11,088)		(68,776)		(3,641)		56		(6,421)		(89,870)
Ending balance	$	72,505	$	54,631	$	118,593	$	10,277	$	7,469	$	263,475
September 30, 2019
Beginning balance	$	48,580	$	29,052	$	38,777	$	6,103	$	9,620	$	132,132
Credit loss expense	9,999		7,478		(2,972)		859		10,040		25,404
Charge-offs	(8,782)		(4,000)		(617)		(2,936)		(17,157)		(33,492)
Recoveries	2,870		816		165		858		7,806		12,515
Net charge-offs	(5,912)		(3,184)		(452)		(2,078)		(9,351)		(20,977)
Ending balance	$	52,667	$	33,346	$	35,353	$	4,884	$	10,309	$	136,559

The following table presents loans that were evaluated for expected credit losses on an individual basis and the related specific allocations, by loan portfolio segment as of September 30, 2020 and December 31, 2019.


	September 30, 2020				December 31, 2019
	Loan Balance		Specific Allocations		Loan Balance		Specific Allocations
Commercial and industrial	$	22,930	$	5,256	$	24,360	$	7,849
Energy	56,420		8,357		65,244		20,246
Paycheck Protection Program	0		0		0		0
Commercial real estate:
Buildings, land and other	25,611		1,313		8,609		383
Construction	680		0		665		0
Consumer real estate	1,335		0		570		0
Consumer and other	18		18		5		5
Total	$	106,994	$	14,944	$	99,453	$	28,483

Commercial
and
Industrial
Energy
Commercial
Real Estate

Consumer
Real Estate

Consumer
and Other
Total
Three months ended:
September 30, 2019
Beginning balance $ 57,714
$ 25,818
$ 35,914
$ 5,637
$ 9,846
$ 134,929
Provision for loan losses (3,527 ) 8,788
(607 ) (650 ) 3,997
8,001
Charge-offs (2,705 ) (2,000 ) —
(557 ) (6,357 ) (11,619 )
Recoveries 1,185
740
46
454
2,823
5,248
Net charge-offs (1,520 ) (1,260 ) 46
(103 ) (3,534 ) (6,371 )
Ending balance $ 52,667
$ 33,346
$ 35,353
$ 4,884
$ 10,309
$ 136,559
September 30, 2018
Beginning balance $ 57,713
$ 37,313
$ 38,918
$ 6,336
$ 9,946
$ 150,226
Provision for loan losses 1,085
(521 ) 250
246
1,590
2,650
Charge-offs (8,491 ) (5,400 ) —
(431 ) (4,274 ) (18,596 )
Recoveries 684
53
36
43
2,482
3,298
Net charge-offs (7,807 ) (5,347 ) 36
(388 ) (1,792 ) (15,298 )
Ending balance $ 50,991
$ 31,445
$ 39,204
$ 6,194
$ 9,744
$ 137,578

Nine months ended:
September 30, 2019
Beginning balance $ 48,580
$ 29,052
$ 38,777
$ 6,103
$ 9,620
$ 132,132
Provision for loan losses 9,999
7,478
(2,972 ) 859
10,040
25,404
Charge-offs (8,782 ) (4,000 ) (617 ) (2,936 ) (17,157 ) (33,492 )
Recoveries 2,870
816
165
858
7,806
12,515
Net charge-offs (5,912 ) (3,184 ) (452 ) (2,078 ) (9,351 ) (20,977 )
Ending balance $ 52,667
$ 33,346
$ 35,353
$ 4,884
$ 10,309
$ 136,559
September 30, 2018
Beginning balance $ 59,614
$ 51,528
$ 30,948
$ 5,657
$ 7,617
$ 155,364
Provision for loan losses 10,407
(9,811 ) 8,533
1,615
7,102
17,846
Charge-offs (21,896 ) (10,939 ) (619 ) (1,632 ) (12,240 ) (47,326 )
Recoveries 2,866
667
342
554
7,265
11,694
Net charge-offs (19,030 ) (10,272 ) (277 ) (1,078 ) (4,975 ) (35,632 )
Ending balance $ 50,991
$ 31,445
$ 39,204
$ 6,194
$ 9,744
$ 137,578

Table of Contents

Note 4 - Goodwill and Other Intangible Assets

Goodwill and other intangible assets are presented in the table below. As of September 30, 2020, we evaluated recent potential triggering events that might be indicators that our goodwill was impaired. The events include the economic disruption and uncertainty surrounding the COVID-19 pandemic and the circumstances surrounding recent volatility in the market price of crude oil. Based on our evaluation, we concluded that our goodwill was not more than likely impaired as of that date.


	September 30, 2020		December 31, 2019
Goodwill	$	654,952	$	654,952
Other intangible assets:
Core deposits	$	1,465	$	2,043
Customer relationships	306		438
	$	1,771	$	2,481

September 30,
2019 December 31,
2018
Goodwill $ 654,952
$ 654,952
Other intangible assets:
Core deposits $ 2,254
$ 2,959
Customer relationships 491
672
Non-compete agreements —
18
$ 2,745
$ 3,649

The estimated aggregate future amortization expense for intangible assets remaining as of September 30, ~~2019~~2020 is as follows:

Remainder of 2019 $ 263
2020 919
2021 697
2022 481
2023 283
Thereafter 102
$ 2,745


Remainder of 2020	$	208
2021	697
2022	481
2023	282
2024	87
Thereafter	16
	$	1,771

Note 5 - Deposits

Deposits were as follows:

September 30,
2019
Percentage
of Total
December 31,
2018
Percentage
of Total
Non-interest-bearing demand deposits:
Commercial and individual $ 10,070,621
37.2 % $ 10,305,850
37.9 %
Correspondent banks 258,981
1.0
235,748
0.9
Public funds 420,642
1.5
455,896
1.7
Total non-interest-bearing demand deposits 10,750,244
39.7
10,997,494
40.5
Interest-bearing deposits:
Private accounts:
Savings and interest checking 6,741,340
24.9
6,977,813
25.7
Money market accounts 7,960,223
29.4
7,777,470
28.6
Time accounts of $100,000 or more 707,657
2.6
526,789
2.0
Time accounts under $100,000 346,440
1.3
331,511
1.2
Total private accounts 15,755,660
58.2
15,613,583
57.5
Public funds:
Savings and interest checking 483,303
1.8
473,754
1.8
Money market accounts 68,321
0.2
59,953
0.2
Time accounts of $100,000 or more 25,922
0.1
4,332
—
Time accounts under $100,000 132
—
88
—
Total public funds 577,678
2.1
538,127
2.0
Total interest-bearing deposits 16,333,338
60.3
16,151,710
59.5
Total deposits $ 27,083,582
100.0 % $ 27,149,204
100.0 %


	September 30, 2020		Percentage of Total		December 31, 2019		Percentage of Total
Non-interest-bearing demand deposits:
Commercial and individual	$	13,852,404	41.4	%	$	10,212,265	36.9	%
Correspondent banks	208,836		0.6		246,181		0.9
Public funds	784,530		2.3		415,183		1.5
Total non-interest-bearing demand deposits	14,845,770		44.3		10,873,629		39.3
Interest-bearing deposits:
Private accounts:
Savings and interest checking	8,176,608		24.4		7,147,327		25.9
Money market accounts	8,684,470		25.9		7,888,433		28.5
Time accounts of $100,000 or more	791,004		2.4		736,481		2.7
Time accounts under $100,000	339,174		1.0		347,418		1.2
Total private accounts	17,991,256		53.7		16,119,659		58.3
Public funds:
Savings and interest checking	583,214		1.8		548,399		2.0
Money market accounts	76,088		0.2		73,180		0.3
Time accounts of $100,000 or more	3,092		0		24,672		0.1
Time accounts under $100,000	83		0		25		0
Total public funds	662,477		2.0		646,276		2.4
Total interest-bearing deposits	18,653,733		55.7		16,765,935		60.7
Total deposits	$	33,499,503	100.0	%	$	27,639,564	100.0	%

The following table presents additional information about our deposits:


	September 30, 2020		December 31, 2019
Deposits from the Certificate of Deposit Account Registry Service (CDARS) deposits	$	369	$	361
Deposits from foreign sources (primarily Mexico)	845,950		805,828
Deposits not covered by deposit insurance	17,265,358		13,115,796

September 30,
2019 December 31,
2018
Deposits from the Certificate of Deposit Account Registry Service (CDARS) deposits $ 358
$ —
Deposits from foreign sources (primarily Mexico) 776,490
752,658
Deposits not covered by deposit insurance 12,681,664
13,111,210

Table of Contents

Note 6 - Off-Balance-Sheet Arrangements, Commitments, Guarantees and Contingencies

Financial Instruments with Off-Balance-Sheet Risk. In the normal course of business, we enter into various transactions, which, in accordance with generally accepted accounting principles are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. As more fully discussed in our ~~2018~~2019 Form 10-K, these transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. We minimize our exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.

Financial instruments with off-balance-sheet risk were as follows:


	September 30, 2020		December 31, 2019
Commitments to extend credit	$	9,586,212	$	9,306,043
Standby letters of credit	260,683		260,587
Deferred standby letter of credit fees	1,716		1,276

September 30,
2019 December 31,
2018
Commitments to extend credit $ 9,036,441
$ 8,369,721
Standby letters of credit 283,821
271,575
Deferred standby letter of credit fees 1,547
2,069
Allowance For Credit Losses - Off-Balance-Sheet Credit Exposures. The allowance for credit losses on off-balance-sheet credit exposures is a liability account, calculated in accordance with ASC 326, representing expected credit losses over the contractual period for which we are exposed to credit risk resulting from a contractual obligation to extend credit. No allowance is recognized if we have the unconditional right to cancel the obligation. Off-balance-sheet credit exposures primarily consist of amounts available under outstanding lines of credit and letters of credit detailed in the table above. For the period of exposure, the estimate of expected credit losses considers both the likelihood that funding will occur and the amount expected to be funded over the estimated remaining life of the commitment or other off-balance-sheet exposure. The likelihood and expected amount of funding are based on historical utilization rates. The amount of the allowance represents management's best estimate of expected credit losses on commitments expected to be funded over the contractual life of the commitment. Estimating credit losses on amounts expected to be funded uses the same methodology as described for loans in Note 3 - Loans as if such commitments were funded.

The following table details activity in the allowance for credit losses on off-balance-sheet credit exposures.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Beginning balance	$	46,939	$	500	$	500	$	500
Impact of adopting ASC 326	0		0		39,377		0
Credit loss expense (benefit)	(3,276)		0		3,786		0
Ending balance	$	43,663	$	500	$	43,663	$	500

Lease Commitments. We lease certain office facilities and office equipment under operating leases. ~~Rent~~The components of total lease expense ~~for all~~were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Amortization of lease right-of-use assets	$	8,521	$	7,415	$	24,545	$	19,698
Short-term lease expense	172		1,199		1,343		3,316
Non-lease components (including taxes, insurance, common maintenance, etc.)	2,586		3,114		8,410		7,022
Total	$	11,279	$	11,728	$	34,298	$	30,036

Right-of-use lease assets totaled $298.6 million at September 30, 2020 and $297.7 million at December 31, 2019 and are reported as a component of premises and equipment on our accompanying consolidated balance sheets. The related lease liabilities totaled $328.9 million at September 30, 2020 and $323.7 million at December 31, 2019 and are reported as a component of accrued interest payable and other liabilities in the accompanying consolidated balance sheets. Lease payments under operating leases that were applied to our operating lease liability totaled ~~$11.7~~$8.0 million and ~~$30.0~~$23.8 million during the three and nine months ended September 30, ~~2019~~2020 and ~~$8.1~~$7.6 million and ~~$24.4~~$19.7 million during the three and nine months ended September 30, 2018. On January 1, 2019, we adopted a new accounting standard which required the recognition of our operating leases on our balance sheet. See Note 1 - Significant Accounting Policies. As of September 30, 2019, right-of-use lease assets and related lease liabilities totaled $299.5 million and $325.3 million, respectively, and are included with premises and equipment and accrued interest payable and other liabilities, respectively, on our accompanying consolidated balance sheet. During the second quarter of 2019, we recognized a right-of-use asset totaling $121.7 million and a related lease liability totaling $121.7 million in connection with the commencement of the lease of our new corporate headquarters facility in downtown San Antonio.2019. There has been no0 significant change in our expected future minimum lease payments since December 31, ~~2018.~~2019. See the ~~2018~~2019 Form 10-K for information regarding these commitments.

Table of Contents

Litigation. We are subject to various claims and legal actions that have arisen in the course of conducting business. Management does not expect the ultimate disposition of these matters to have a material adverse impact on our financial statements.

In May of 2020, a purported class action lawsuit was filed against Frost Bank in a Texas Federal court alleging that Frost Bank had refused to pay agent fees to purported agents of borrowers under the PPP in violation of SBA regulations. The Plaintiff's motion to dismiss the Federal lawsuit was effected and as a result the Federal lawsuit is resolved. In July of 2020, another purported class action lawsuit was filed against Frost Bank in a California Federal court alleging that Frost Bank had refused to pay agent fees to purported agents of borrowers under the PPP in violation of SBA regulations. Frost Bank believes the claims to be without merit. In October of 2020, a lawsuit was filed against Frost Bank in Texas State court alleging, among other claims, that Frost Bank refused to provide a PPP loan to the purported applicant. Frost Bank believes the claims to be without merit.

Note 7 - Capital and Regulatory Matters

Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.

Cullen/Frost’s and Frost Bank’s Common Equity Tier 1 capital includes common stock and related paid-in capital, net of treasury stock, and retained earnings. In connection with the adoption of the Basel III Capital Rules, we elected to opt-out of the requirement to include most components of accumulated other comprehensive income in Common Equity Tier 1. We also elected to exclude, for a five-year transitional period, the effects of credit loss accounting under CECL from Common Equity Tier 1, as further discussed below. Common Equity Tier 1 for both Cullen/Frost and Frost Bank is reduced by goodwill and other intangible assets, net of associated deferred tax ~~liabilities, and subject to transition provisions.~~liabilities. Frost Bank's Common Equity Tier 1 is also reduced by its equity investment in its financial subsidiary, Frost Insurance Agency (“FIA”).

Tier 1 capital includes Common Equity Tier 1 capital and additional Tier 1 capital. ~~For~~ Cullen/Frost ~~additional Tier 1 capital at September 30, 2019~~ and ~~December 31, 2018 includes $144.5 million of 5.375% non-cumulative perpetual preferred stock.~~ Frost Bank did ~~not~~0t have any additional Tier 1 capital beyond Common Equity Tier 1 at September 30, ~~2019 or~~2020. For Cullen/Frost, additional Tier 1 capital included $144.5 million of preferred stock at December 31, ~~2018.~~2019, the details of which are further discussed below. Frost Bank did 0t have any additional Tier 1 capital beyond Common Equity Tier 1 at December 31, 2019.

Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital for both Cullen/Frost and Frost Bank includes a permissible portion of the ~~allowance~~allowances for ~~loan losses.~~credit losses on securities, loans and off-balance-sheet credit exposures. Tier 2 capital for Cullen/Frost also includes $100.0 million of qualified subordinated debt and $133.0 million of trust preferred securities at both September 30, ~~2019~~2020 and December 31, ~~2018.~~2019.

As discussed in Note 1 - Significant Accounting Policies, in connection with the adoption of ASC 326, we recognized an after-tax cumulative effect reduction to retained earnings totaling $29.3 million. In February 2019, the federal bank regulatory agencies issued a final rule (the “2019 CECL Rule”) that revised certain capital regulations to account for changes to credit loss accounting under U.S. GAAP. The 2019 CECL Rule included a transition option that allows banking organizations to phase in, over a three-year period, the day-one adverse effects of CECL on their regulatory capital ratios (three-year transition option). In March 2020, the federal bank regulatory agencies issued an interim final rule that maintains the three-year transition option of the 2019 CECL Rule and also provides banking organizations that were required under U.S. GAAP (as of January 2020) to implement CECL before the end of 2020 the option to delay for two years an estimate of the effect of CECL on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). We elected to adopt the five-year transition option. Accordingly, a CECL transitional amount totaling $63.7 million has been added back to CET1 as of September 30, 2020. The CECL transitional amount includes $29.3 million related to cumulative effect of adopting CECL and $34.4 million related to the estimated incremental effect of CECL since adoption.

In April 2020, we began originating loans to qualified small businesses under the PPP administered by the SBA. Federal bank regulatory agencies have issued an interim final rule that permits banks to neutralize the regulatory capital effects of participating in the Paycheck Protection Program Lending Facility (the “PPP Facility”) and clarify that PPP loans have a zero percent risk weight under applicable risk-based capital rules. Specifically, a bank may exclude all PPP loans pledged as collateral to the PPP Facility from its average total consolidated assets for the purposes of calculating its leverage ratio, while PPP loans that are not pledged as collateral to the PPP Facility will be included. Our PPP loans are included in the calculation of our leverage ratio as of September 30, 2020 as we did not utilize the PPP Facility for funding purposes.

Table of Contents

The following ~~tables present~~table presents actual and required capital ratios as of September 30, ~~2019~~2020 and December 31, ~~2018~~2019 for Cullen/Frost and Frost Bank under the Basel III Capital Rules. The Basel III Capital Rules became fully phased-in on January 1, 2019. The minimum required capital amounts presented as of December 31, 2018 include the minimum required capital levels applicable as of that date as well as the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules became fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. See the ~~2018~~2019 Form 10-K for a more detailed discussion of the Basel III Capital Rules. After a review of risk-weight classifications during the first quarter of 2019, risk-weightings for certain loans were reclassified. Amounts reported as of December 31, ~~2018~~2019 have been revised to reflect these reclassifications.


														Actual				Minimum Capital Required - Basel III				Required to be Considered Well Capitalized
	Actual				Minimum Capital Required - Basel III				Required to be Considered Well Capitalized					Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio
	Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio
September 30, 2019
September 30, 2020													September 30, 2020
Common Equity Tier 1 to Risk-Weighted Assets													Common Equity Tier 1 to Risk-Weighted Assets
Cullen/Frost	$	2,788,313	12.35	%	$	1,580,199	7.00	%	$	1,467,328	6.50	%	Cullen/Frost	$	3,003,029	12.71	%	$	1,654,073	7.00	%	$	1,535,925	6.50	%
Frost Bank	2,910,446		12.92		1,576,393		7.00		1,463,794		6.50		Frost Bank	3,010,290		12.76		1,651,191		7.00		1,533,249		6.50
Tier 1 Capital to Risk-Weighted Assets													Tier 1 Capital to Risk-Weighted Assets
Cullen/Frost	2,932,799		12.99		1,918,813		8.50		1,805,942		8.00		Cullen/Frost	3,003,029		12.71		2,008,517		8.50		1,890,369		8.00
Frost Bank	2,910,446		12.92		1,914,192		8.50		1,801,593		8.00		Frost Bank	3,010,290		12.76		2,005,018		8.50		1,887,076		8.00
Total Capital to Risk-Weighted Assets													Total Capital to Risk-Weighted Assets
Cullen/Frost	3,302,858		14.63		2,370,298		10.50		2,257,427		10.00		Cullen/Frost	3,471,898		14.69		2,481,109		10.50		2,362,961		10.00
Frost Bank	3,047,505		13.53		2,364,590		10.50		2,251,991		10.00		Frost Bank	3,246,159		13.76		2,476,787		10.50		2,358,845		10.00
Leverage Ratio													Leverage Ratio
Cullen/Frost	2,932,798		9.36		1,252,781		4.00		1,565,976		5.00		Cullen/Frost	3,003,029		7.85		1,530,584		4.00		1,913,230		5.00
Frost Bank	2,910,446		9.30		1,251,713		4.00		1,564,642		5.00		Frost Bank	3,010,290		7.87		1,530,076		4.00		1,912,596		5.00

Actual Minimum Capital Required - Basel III Phase-In Schedule
Minimum Capital Required - Basel III
Fully Phased-In
Required to be
Considered Well
Capitalized
Capital
Amount Ratio Capital
Amount Ratio Capital
Amount Ratio Capital
Amount Ratio
December 31, 2018
Common Equity Tier 1 to Risk-Weighted Assets
Cullen/Frost $ 2,642,475
12.27 % $ 1,372,573
6.375 % $ 1,507,139
7.00 % $ 1,358,171
6.50 %
Frost Bank 2,743,973
12.78
1,368,701
6.375
1,502,887
7.00
1,354,222
6.50
Tier 1 Capital to Risk-Weighted Assets
Cullen/Frost 2,786,961
12.94
1,695,532
7.875
1,830,098
8.50
1,671,595
8.00
Frost Bank 2,743,973
12.78
1,690,748
7.875
1,824,934
8.50
1,666,735
8.00
Total Capital to Risk-Weighted Assets
Cullen/Frost 3,152,593
14.64
2,126,143
9.875
2,260,709
10.50
2,089,494
10.00
Frost Bank 2,876,605
13.40
2,120,144
9.875
2,254,331
10.50
2,083,419
10.00
Leverage Ratio
Cullen/Frost 2,786,961
9.06
1,231,028
4.00
1,231,028
4.00
1,538,785
5.00
Frost Bank 2,743,973
8.93
1,229,650
4.00
1,229,650
4.00
1,537,062
5.00




December 31, 2019
Common Equity Tier 1 to Risk-Weighted Assets
Cullen/Frost	$	2,857,250	12.36	%	$	1,617,886	7.00	%	$	1,502,323	6.50	%
Frost Bank	2,958,326		12.82		1,615,206		7.00		1,499,834		6.50
Tier 1 Capital to Risk-Weighted Assets
Cullen/Frost	3,001,736		12.99		1,964,576		8.50		1,849,013		8.00
Frost Bank	2,958,326		12.82		1,961,322		8.50		1,845,950		8.00
Total Capital to Risk-Weighted Assets
Cullen/Frost	3,367,403		14.57		2,426,829		10.50		2,311,266		10.00
Frost Bank	3,090,993		13.40		2,422,809		10.50		2,307,438		10.00
Leverage Ratio
Cullen/Frost	3,001,736		9.28		1,293,188		4.00		1,616,485		5.00
Frost Bank	2,958,326		9.15		1,292,743		4.00		1,615,929		5.00

As of September 30, ~~2019,~~2020, capital levels at Cullen/Frost and Frost Bank exceed all capital adequacy requirements under the ~~fully phased-in~~ Basel III Capital Rules. Based on the ratios presented above, capital levels as of September 30, ~~2019~~2020 at Cullen/Frost and Frost Bank exceed the minimum levels necessary to be considered “well capitalized.”

Cullen/Frost and Frost Bank are subject to the regulatory capital requirements administered by the Federal Reserve Board and, for Frost Bank, the Federal Deposit Insurance Corporation (“FDIC”). Regulatory authorities can initiate certain mandatory actions if Cullen/Frost or Frost Bank fail to meet the minimum capital requirements, which could have a direct material effect on our financial statements. Management believes, as of September 30, ~~2019~~,2020, that Cullen/Frost and Frost Bank meet all capital adequacy requirements to which they are subject.

Preferred Stock. On March 16, 2020, we redeemed all 6,000,000 shares of our 5.375% Non-Cumulative Perpetual Preferred Stock, Series A, (“Series A Preferred Stock”) at a redemption price of $25 per share, or an aggregate redemption of $150.0 million. When issued, the net proceeds of the Series A Preferred Stock totaled $144.5 million after deducting $5.5 million of issuance costs including the underwriting discount and professional service fees, among other things. Upon redemption, these issuance costs were reclassified to retained earnings and reported as a reduction of net income available to common shareholders.

Table of directors authorized a $150.0 million stock repurchase program, allowing us to repurchase shares of our common stock over a two-year period from time to time at various prices in the open market or through private transactions. We repurchased 496,307 shares at a total cost of $50.0 million under this plan during the second quarter of 2019 and 1,027,292 shares at a total cost of $100.0 million during the fourth quarter of 2018.Contents

awards. On July 24, 2019, our board of directors authorized a $100.0 million stock repurchase program, allowing us to repurchase shares of our common stock over a ~~one-year~~one-year period from time to time at various prices in the open market or through private transactions. WeUnder this plan, we repurchased 177,834 shares at a total cost of $13.7 million during the first quarter of 2020 and 202,724 shares at a total cost of $17.2 million ~~under this plan~~ during the third quarter of 2019. Under the Basel III Capital Rules, Cullen/Frost may not repurchase or redeem any of its ~~preferred stock or~~ subordinated notes and, in some cases, its common stock without the prior approval of the Federal Reserve Board.

Dividend Restrictions. In the ordinary course of business, Cullen/Frost is dependent upon dividends from Frost Bank to provide funds for the payment of dividends to shareholders and to provide for other cash requirements, including to repurchase its common stock. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of Frost Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years. Under the foregoing dividend restrictions and while maintaining its “well capitalized” status, at September 30, ~~2019,~~2020, Frost Bank could pay aggregate dividends of up to ~~$633.8~~$482.1 million to Cullen/Frost without prior regulatory approval.

Under the terms of the junior subordinated deferrable interest debentures that Cullen/Frost has issued to Cullen/Frost Capital Trust II and WNB Capital Trust I, Cullen/Frost has the right at any time during the term of the debentures to defer the payment of interest at any time or from time to time for an extension period not exceeding 20 consecutive quarterly periods with respect to each extension period. In the event that we have elected to defer interest on the debentures, we may not, with certain exceptions, declare or pay any dividends or distributions on our capital stock or purchase or acquire any of our capital stock.

Under the terms of our Series A Preferred Stock, in the event that we do not declare and pay dividends on our Series A Preferred Stock for the most recent dividend period, we may not, with certain exceptions, declare or pay dividends on, or purchase, redeem or otherwise acquire, shares of our common stock or any of our securities that rank junior to our Series A Preferred Stock.

Note 8 - Derivative Financial Instruments

The fair value of derivative positions outstanding is included in accrued interest receivable and other assets and accrued interest payable and other liabilities in the accompanying consolidated balance sheets and in the net change in each of these financial statement line items in the accompanying consolidated statements of cash flows.

Interest Rate Derivatives. We utilize interest rate swaps, caps and floors to mitigate exposure to interest rate risk and to facilitate the needs of our customers. Our objectives for utilizing these derivative instruments are described in our ~~2018~~2019 Form 10-K.

The notional amounts and estimated fair values of interest rate derivative contracts are presented in the following table. The fair values of interest rate derivative contracts are estimated utilizing internal valuation models with observable market data inputs, or as determined by the Chicago Mercantile Exchange (“CME”) for centrally cleared derivative contracts. CME rules legally characterize variation margin payments for centrally cleared derivatives as settlements of the derivatives' exposure rather than collateral. As a result, the variation margin payment and the related derivative instruments are considered a single unit of account for accounting and financial reporting purposes. Variation margin, as determined by the CME, is settled daily. As a result, derivative contracts that clear through the CME have an estimated fair value of 0 as of September 30, ~~2019~~2020 and December 31, ~~2018.~~2019.


	September 30, 2020				December 31, 2019
	Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value
Derivatives designated as hedges of fair value:
Financial institution counterparties:
Loan/lease interest rate swaps – assets	$	0	$	0	$	2,545	$	6
Loan/lease interest rate swaps – liabilities	4,036		(167)		6,000		(138)
Non-hedging interest rate derivatives:
Financial institution counterparties:
Loan/lease interest rate swaps – assets	0		0		122,788		67
Loan/lease interest rate swaps – liabilities	1,192,762		(36,975)		1,002,860		(19,483)
Loan/lease interest rate caps – assets	306,171		1,197		107,835		266
Customer counterparties:
Loan/lease interest rate swaps – assets	1,192,762		95,462		1,002,860		43,857
Loan/lease interest rate swaps – liabilities	0		0		122,788		(310)
Loan/lease interest rate caps – liabilities	306,171		(1,197)		107,835		(266)

September 30, 2019 December 31, 2018

Notional
Amount

Estimated
Fair Value

Notional
Amount

Estimated
Fair Value
Derivatives designated as hedges of fair value:
Financial institution counterparties:
Loan/lease interest rate swaps – assets $ 5,583
$ 15
$ 10,941
$ 207
Loan/lease interest rate swaps – liabilities 6,356
(179 ) 3,885
(199 )
Non-hedging interest rate derivatives:
Financial institution counterparties:
Loan/lease interest rate swaps – assets 94,855
65
496,887
2,384
Loan/lease interest rate swaps – liabilities 1,008,173
(24,268 ) 691,143
(8,921 )
Loan/lease interest rate caps – assets 102,634
233
122,791
509
Customer counterparties:
Loan/lease interest rate swaps – assets 1,008,173
55,529
691,143
16,706
Loan/lease interest rate swaps – liabilities 94,855
(175 ) 496,887
(8,891 )
Loan/lease interest rate caps – liabilities 102,634
(233 ) 122,791
(509 )

Table of Contents

The weighted-average rates paid and received for interest rate swaps outstanding at September 30, ~~2019~~2020 were as follows:

Weighted-Average

Interest
Rate
Paid

Interest
Rate
Received
Interest rate swaps:
Fair value hedge loan/lease interest rate swaps 2.33 % 2.05 %
Non-hedging interest rate swaps – financial institution counterparties 4.17
3.71
Non-hedging interest rate swaps – customer counterparties 3.71
4.17


	Weighted-Average
	Interest Rate Paid		Interest Rate Received
Interest rate swaps:
Fair value hedge loan/lease interest rate swaps	3.39	%	0.15	%
Non-hedging interest rate swaps – financial institution counterparties	4.00		1.93
Non-hedging interest rate swaps – customer counterparties	1.93		4.00

The weighted-average strike rate for outstanding interest rate caps was ~~3.16%~~3.67% at September 30, ~~2019.~~2020.

Commodity Derivatives. We enter into commodity swaps and option contracts that are not designated as hedging instruments primarily to accommodate the business needs of our customers. Upon the origination of a commodity swap or option contract with a customer, we simultaneously enter into an offsetting contract with a third party financial institution to mitigate the exposure to fluctuations in commodity prices.

The notional amounts and estimated fair values of non-hedging commodity swap and option derivative positions outstanding are presented in the following table. We obtain dealer quotations and use internal valuation models with observable market data inputs to value our commodity derivative positions.

September 30, 2019 December 31, 2018

Notional
Units

Notional
Amount

Estimated
Fair Value

Notional
Amount

Estimated
Fair Value
Financial institution counterparties:
Oil – assets Barrels 2,280
$ 12,884
2,416
$ 24,332
Oil – liabilities Barrels 727
(1,363 ) 415
(646 )
Natural gas – assets MMBTUs 8,716
2,053
5,745
417
Natural gas – liabilities MMBTUs 3,439
(191 ) 9,314
(1,272 )
Customer counterparties:
Oil – assets Barrels 730
1,392
415
646
Oil – liabilities Barrels 2,277
(12,572 ) 2,416
(24,009 )
Natural gas – assets MMBTUs 3,543
205
10,236
1,373
Natural gas – liabilities MMBTUs 8,613
(1,960 ) 4,823
(393 )


		September 30, 2020			December 31, 2019
	Notional Units	Notional Amount	Estimated Fair Value		Notional Amount	Estimated Fair Value
Financial institution counterparties:
Oil – assets	Barrels	2,296	$	18,718	1,214	$	2,796
Oil – liabilities	Barrels	3,089	(9,132)		2,148	(6,916)
Natural gas – assets	MMBTUs	5,623	932		8,295	2,131
Natural gas – liabilities	MMBTUs	18,181	(5,879)		2,689	(70)
Customer counterparties:
Oil – assets	Barrels	3,106	9,461		2,172	7,208
Oil – liabilities	Barrels	2,279	(18,506)		1,190	(2,652)
Natural gas – assets	MMBTUs	19,940	6,161		2,689	83
Natural gas – liabilities	MMBTUs	3,864	(915)		8,295	(2,039)

Foreign Currency Derivatives. We enter into foreign currency forward contracts that are not designated as hedging instruments primarily to accommodate the business needs of our customers. Upon the origination of a foreign currency denominated transaction with a customer, we simultaneously enter into an offsetting contract with a third party financial institution to negate the exposure to fluctuations in foreign currency exchange rates. We also utilize foreign currency forward contracts that are not designated as hedging instruments to mitigate the economic effect of fluctuations in foreign currency exchange rates on foreign currency holdings and certain short-term, non-U.S. dollar denominated loans. The notional amounts and fair values of open foreign currency forward contracts were as follows:

September 30, 2019 December 31, 2018

Notional
Currency

Notional
Amount

Estimated
Fair Value

Notional
Amount

Estimated
Fair Value
Financial institution counterparties:
Forward contracts – liabilities CAD 5,283
$ (11 ) 11,003
$ (13 )
Forward contracts – liabilities GBP —
—
142
(2 )
Forward contracts – liabilities MXN —
—
3,015
(132 )
Customer counterparties:
Forward contracts – assets CAD 5,271
24
10,979
40
Forward contracts – assets GBP —
—
145
4
Forward contracts – assets MXN —
—
3,000
149


		September 30, 2020		December 31, 2019
	Notional Currency	Notional Amount	Estimated Fair Value	Notional Amount	Estimated Fair Value
Financial institution counterparties:






Forward contracts – liabilities	CAD	0	0	4,593	$	(33)



Customer counterparties:

Forward contracts – assets	CAD	0	0	4,583	45

Gains, Losses and Derivative Cash Flows. For fair value hedges, the changes in the fair value of both the derivative hedging instrument and the hedged item are included in other non-interest income or other non-interest expense. The extent that such changes in fair value do not offset represents hedge ineffectiveness. Net cash flows from interest rate swaps on commercial loans/leases designated as hedging instruments in effective hedges of fair value are included in interest income on loans. For non-hedging derivative instruments, gains and losses due to changes in fair value and all cash flows are included in other non-interest income and other non-interest expense.

Table of Contents

Amounts included in the consolidated statements of income related to interest rate derivatives designated as hedges of fair value were as follows:

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Commercial loan/lease interest rate swaps:
Amount of gain (loss) included in interest income on loans $ 24
$ 12
$ 78
$ 1
Amount of (gain) loss included in other non-interest expense (1 ) —
—
(1 )


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Commercial loan/lease interest rate swaps:
Amount of gain (loss) included in interest income on loans	$	(36)	$	24	$	(79)	$	78
Amount of (gain) loss included in other non-interest expense	2		(1)		6		0

As stated above, we enter into non-hedge related derivative positions primarily to accommodate the business needs of our customers. Upon the origination of a derivative contract with a customer, we simultaneously enter into an offsetting derivative contract with a third party financial institution. We recognize immediate income based upon the difference in the bid/ask spread of the underlying transactions with our customers and the third party. Because we act only as an intermediary for our customer,

subsequent changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact our results of operations.

During the first quarter of 2020, we sold certain non-hedge related, short-term put options on U.S. Treasury securities with an aggregate notional amount of $500 million and realized gains totaling approximately $6.0 million in connection with the sales. The put options were not exercised and expired in March 2020.

Amounts included in the consolidated statements of income related to ~~non-hedging interest rate, commodity and foreign currency~~non-hedge related derivative instruments are presented in the table below.

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Non-hedging interest rate derivatives:
Other non-interest income $ 215
$ 699
$ 1,188
$ 2,889
Other non-interest expense —
2
—
(2 )
Non-hedging commodity derivatives:
Other non-interest income 109
456
322
492
Non-hedging foreign currency derivatives:
Other non-interest income 12
53
41
203


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Non-hedging interest rate derivatives:
Other non-interest income	$	280	$	215	$	2,615	$	1,188
Other non-interest expense	1		0		1		0
Non-hedging commodity derivatives:
Other non-interest income	379		109		1,057		322
Non-hedging foreign currency derivatives:
Other non-interest income	10		12		28		41
Non-hedging put options:
Other non-interest income	0		0		5,980		0

Counterparty Credit Risk. Our credit exposure relating to interest rate swaps, commodity swaps/options and foreign currency forward contracts with bank customers was approximately ~~$55.4~~$103.0 million at September 30, ~~2019.~~2020. This credit exposure is partly mitigated as transactions with customers are generally secured by the collateral, if any, securing the underlying transaction being hedged. Our credit exposure, net of collateral pledged, relating to interest rate swaps, commodity swaps/options and foreign currency forward contracts with upstream financial institution counterparties was approximately ~~$18.6~~$19.2 million at September 30, ~~2019.~~2020. This amount was primarily related to initial margin payments to the CME and excess collateral we posted to counterparties. Collateral levels for upstream financial institution counterparties are monitored and adjusted as necessary. See Note 9 – Balance Sheet Offsetting and Repurchase Agreements for additional information regarding our credit exposure with upstream financial institution counterparties. At September 30, ~~2019,~~2020, we had ~~$32.1~~$48.6 million in cash collateral related to derivative contracts on deposit with other financial institution counterparties.

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Note 9 - Balance Sheet Offsetting and Repurchase Agreements

Balance Sheet Offsetting. Certain financial instruments, including resell and repurchase agreements and derivatives, may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements or similar agreements. Our derivative transactions with upstream financial institution counterparties are generally executed under International Swaps and Derivative Association (“ISDA”) master agreements which include “right of set-off” provisions. In such cases there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle such amounts on a net basis. Nonetheless, we do not generally offset such financial instruments for financial reporting purposes.

Information about financial instruments that are eligible for offset in the consolidated balance sheet as of September 30, ~~2019~~2020 is presented in the following tables.


	Gross Amount Recognized		Gross Amount Offset		Net Amount Recognized
September 30, 2020
Financial assets:
Derivatives:
Loan/lease interest rate swaps and caps	$	1,197	$	0	$	1,197
Commodity swaps and options	19,650		0		19,650
Foreign currency forward contracts	0		0		0
Total derivatives	20,847		0		20,847
Resell agreements	20,000		0		20,000
Total	$	40,847	$	0	$	40,847
Financial liabilities:
Derivatives:
Loan/lease interest rate swaps	$	37,142	$	0	$	37,142
Commodity swaps and options	15,011		0		15,011
Foreign currency forward contracts	0		0		0
Total derivatives	52,153		0		52,153
Repurchase agreements	1,574,367		0		1,574,367
Total	$	1,626,520	$	0	$	1,626,520


			Gross Amounts Not Offset
	Net Amount Recognized		Financial Instruments		Collateral		Net Amount
September 30, 2020
Financial assets:
Derivatives:
Counterparty A	$	8	$	(8)	$	0	$	0
Counterparty B	5,996		(5,996)		0		0


Other counterparties	14,843		(14,510)		(327)		6
Total derivatives	20,847		(20,514)		(327)		6
Resell agreements	20,000		0		(20,000)		0
Total	$	40,847	$	(20,514)	$	(20,327)	$	6
Financial liabilities:
Derivatives:
Counterparty A	$	7,178	$	(8)	$	(7,170)	$	0
Counterparty B	14,386		(5,996)		(8,210)		180
Counterparty C	94		0		(94)		0

Other counterparties	30,495		(14,510)		(13,971)		2,014
Total derivatives	52,153		(20,514)		(29,445)		2,194
Repurchase agreements	1,574,367		0		(1,574,367)		0
Total	$	1,626,520	$	(20,514)	$	(1,603,812)	$	2,194

Gross Amount
Recognized

Gross Amount
Offset

Net Amount
Recognized
September 30, 2019
Financial assets:
Derivatives:
Loan/lease interest rate swaps and caps $ 313
$ —
$ 313
Commodity swaps and options 14,937
—
14,937
Foreign currency forward contracts —
—
—
Total derivatives 15,250
—
15,250
Resell agreements 11,299
—
11,299
Total $ 26,549
$ —
$ 26,549
Financial liabilities:
Derivatives:
Loan/lease interest rate swaps $ 24,447
$ —
$ 24,447
Commodity swaps and options 1,554
—
1,554
Foreign currency forward contracts 11
—
11
Total derivatives 26,012
—
26,012
Repurchase agreements 1,187,355
—
1,187,355
Total $ 1,213,367
$ —
$ 1,213,367

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Gross Amounts Not Offset

Net Amount
Recognized

Financial
Instruments
Collateral
Net
Amount
September 30, 2019
Financial assets:
Derivatives:
Counterparty A $ 38
$ (38 ) $ —
$ —
Counterparty B 4,344
(4,344 ) —
—
Counterparty C 8
(8 ) —
—
Other counterparties 10,860
(5,503 ) (2,880 ) 2,477
Total derivatives 15,250
(9,893 ) (2,880 ) 2,477
Resell agreements 11,299
—
(11,299 ) —
Total $ 26,549
$ (9,893 ) $ (14,179 ) $ 2,477
Financial liabilities:
Derivatives:
Counterparty A $ 6,192
$ (38 ) $ (6,154 ) $ —
Counterparty B 7,810
(4,344 ) (3,466 ) —
Counterparty C 164
(8 ) (156 ) —
Other counterparties 11,846
(5,503 ) (6,259 ) 84
Total derivatives 26,012
(9,893 ) (16,035 ) 84
Repurchase agreements 1,187,355
—
(1,187,355 ) —
Total $ 1,213,367
$ (9,893 ) $ (1,203,390 ) $ 84

Information about financial instruments that are eligible for offset in the consolidated balance sheet as of December 31, ~~2018~~2019 is presented in the following tables.


	Gross Amount Recognized		Gross Amount Offset		Net Amount Recognized
December 31, 2019
Financial assets:
Derivatives:
Loan/lease interest rate swaps and caps	$	339	$	0	$	339
Commodity swaps and options	4,927		0		4,927

Total derivatives	5,266		0		5,266
Resell agreements	31,299		0		31,299
Total	$	36,565	$	0	$	36,565
Financial liabilities:
Derivatives:
Loan/lease interest rate swaps	$	19,621	$	0	$	19,621
Commodity swaps and options	6,986		0		6,986
Foreign currency forward contracts	33		0		33
Total derivatives	26,640		0		26,640
Repurchase agreements	1,668,142		0		1,668,142
Total	$	1,694,782	$	0	$	1,694,782


			Gross Amounts Not Offset
	Net Amount Recognized		Financial Instruments		Collateral		Net Amount
December 31, 2019
Financial assets:
Derivatives:
Counterparty A	$	39	$	(39)	$	0	$	0
Counterparty B	1,650		(1,650)		0		0
Counterparty C	1		(1)		0		0

Other counterparties	3,576		(3,546)		0		30
Total derivatives	5,266		(5,236)		0		30
Resell agreements	31,299		0		(31,299)		0
Total	$	36,565	$	(5,236)	$	(31,299)	$	30
Financial liabilities:
Derivatives:
Counterparty A	$	5,192	$	(39)	$	(5,153)	$	0
Counterparty B	7,424		(1,650)		(5,774)		0
Counterparty C	135		(1)		(134)		0

Other counterparties	13,889		(3,546)		(10,343)		0
Total derivatives	26,640		(5,236)		(21,404)		0
Repurchase agreements	1,668,142		0		(1,668,142)		0
Total	$	1,694,782	$	(5,236)	$	(1,689,546)	$	0

Gross Amount
Recognized

Gross Amount
Offset

Net Amount
Recognized
December 31, 2018
Financial assets:
Derivatives:
Loan/lease interest rate swaps and caps $ 3,100
$ —
$ 3,100
Commodity swaps and options 24,749
—
24,749
Foreign currency forward contracts —
—
—
Total derivatives 27,849
—
27,849
Resell agreements 11,642
—
11,642
Total $ 39,491
$ —
$ 39,491
Financial liabilities:
Derivatives:
Loan/lease interest rate swaps $ 9,120
$ —
$ 9,120
Commodity swaps and options 1,918
—
1,918
Foreign currency forward contracts 147
—
147
Total derivatives 11,185
—
11,185
Repurchase agreements 1,360,298
—
1,360,298
Total $ 1,371,483
$ —
$ 1,371,483

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Gross Amounts Not Offset

Net Amount
Recognized

Financial
Instruments
Collateral
Net
Amount
December 31, 2018
Financial assets:
Derivatives:
Counterparty A $ 598
$ (598 ) $ —
$ —
Counterparty B 7,255
(3,380 ) (3,875 ) —
Counterparty C 81
(81 ) —
—
Other counterparties 19,915
(2,084 ) (17,776 ) 55
Total derivatives 27,849
(6,143 ) (21,651 ) 55
Resell agreements 11,642
—
(11,642 ) —
Total $ 39,491
$ (6,143 ) $ (33,293 ) $ 55
Financial liabilities:
Derivatives:
Counterparty A $ 4,293
$ (598 ) $ (3,651 ) $ 44
Counterparty B 3,380
(3,380 ) —
—
Counterparty C 326
(81 ) (245 ) —
Other counterparties 3,186
(2,084 ) (725 ) 377
Total derivatives 11,185
(6,143 ) (4,621 ) 421
Repurchase agreements 1,360,298
—
(1,360,298 ) —
Total $ 1,371,483
$ (6,143 ) $ (1,364,919 ) $ 421

Repurchase Agreements. We utilize securities sold under agreements to repurchase to facilitate the needs of our customers and to facilitate secured short-term funding needs. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. We monitor collateral levels on a continuous basis. We may be required to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents.

The remaining contractual maturity of repurchase agreements in the consolidated balance sheets as of September 30, ~~2019~~2020 and December 31, ~~2018~~2019 is presented in the following tables.

Remaining Contractual Maturity of the Agreements
Overnight and Continuous Up to 30 Days 30-90 Days Greater than 90 Days Total
September 30, 2019
Repurchase agreements:
U.S. Treasury $ 162,566
$ 2,550
$ —
$ —
$ 165,116
Residential mortgage-backed securities 1,022,239
—
—
—
1,022,239
Total borrowings $ 1,184,805
$ 2,550
$ —
$ —
$ 1,187,355
Gross amount of recognized liabilities for repurchase agreements $ 1,187,355
Amounts related to agreements not included in offsetting disclosures above $ —

December 31, 2018
Repurchase agreements:
U.S. Treasury $ 1,334,063
$ —
$ —
$ —
$ 1,334,063
Residential mortgage-backed securities 26,235
—
—
—
26,235
Total borrowings $ 1,360,298
$ —
$ —
$ —
$ 1,360,298
Gross amount of recognized liabilities for repurchase agreements $ 1,360,298
Amounts related to agreements not included in offsetting disclosures above $ —


	Remaining Contractual Maturity of the Agreements
	Overnight and Continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total
September 30, 2020
Repurchase agreements:
U.S. Treasury	$	99,365	$	0	$	0	$	0	$	99,365

Residential mortgage-backed securities	1,475,002		0		0		0		1,475,002
Total borrowings	$	1,574,367	$	0	$	0	$	0	$	1,574,367
Gross amount of recognized liabilities for repurchase agreements									$	1,574,367
Amounts related to agreements not included in offsetting disclosures above									$	0

December 31, 2019
Repurchase agreements:
U.S. Treasury	$	435,904	$	0	$	0	$	0	$	435,904

Residential mortgage-backed securities	1,232,238		0		0		0		1,232,238
Total borrowings	$	1,668,142	$	0	$	0	$	0	$	1,668,142
Gross amount of recognized liabilities for repurchase agreements									$	1,668,142
Amounts related to agreements not included in offsetting disclosures above									$	0

Note 10 - Stock-Based Compensation

A combined summary of activity in our active stock plans is presented in the table. Performance stock units outstanding are presented assuming attainment of the maximum payout rate as set forth by the performance criteria. As of September 30, ~~2019,~~2020, there were ~~1,277,578~~1,109,864 shares remaining available for grant for future stock-based compensation awards.


	Director Deferred Stock Units Outstanding			Non-Vested Stock Awards/Stock Units Outstanding			Performance Stock Units Outstanding			Stock Options Outstanding
	Number of Units	Weighted- Average Fair Value at Grant		Number of Shares/Units	Weighted- Average Fair Value at Grant		Number of Units	Weighted- Average Fair Value at Grant		Number of Shares	Weighted- Average Exercise Price
Balance, January 1, 2020	55,370	$	74.76	440,647	$	90.22	177,288	$	83.48	1,980,866	$	64.60
Authorized	—	—		—	—		—	—		—	—
Granted	10,428	73.84		458	65.43		—	—		—	—
Exercised/vested	(12,938)	71.09		(1,640)	76.07		(41,755)	69.70		(140,615)	53.65
Forfeited/expired	—	—		(2,813)	90.20		(6,894)	81.33		(5,427)	75.74
Balance, September 30, 2020	52,860	$	75.47	436,652	$	90.24	128,639	$	88.07	1,834,824	$	65.41

Director Deferred
Stock Units
Outstanding

Non-Vested Stock
Awards/Stock Units
Outstanding
Performance Stock Units Outstanding
Stock Options
Outstanding
Number of Units
Weighted-
Average
Fair Value
at Grant

Number
of Shares/Units

Weighted-
Average
Fair Value
at Grant
Number of Units
Weighted-
Average
Fair Value
at Grant

Number
of Shares

Weighted-
Average
Exercise
Price
Balance, January 1, 2019 48,910
$ 71.14
383,797
$ 85.59
125,809
$ 82.55
2,352,008
$ 63.55
Authorized —
—
—
—
—
—
—
—
Granted 7,592
102.70
1,957
91.96
—
—
—
—
Exercised/vested (1,132 ) 106.03
(17,800 ) 65.11
—
—
(236,252 ) 57.17
Forfeited/expired —
—
(11,850 ) 89.29
—
—
(11,000 ) 65.11
Balance, September 30, 2019 55,370
$ 74.76
356,104
$ 86.53
125,809
$ 82.55
2,104,756
$ 64.26

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Shares issued in connection with stock compensation awards are issued from available treasury shares. If no treasury shares are available, new shares are issued from available authorized shares. Shares issued in connection with stock compensation awards along with other related information were as follows:

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
New shares issued from available authorized shares —
—
—
—
Issued from available treasury stock 71,284
19,232
225,184
447,831
Total 71,284
19,232
225,184
447,831

Proceeds from stock option exercises $ 5,665
$ 1,119
$ 13,506
$ 26,567


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
New shares issued from available authorized shares	0		0		0		0
Issued from available treasury stock	53,425		71,284		196,948		225,184
Total	53,425		71,284		196,948		225,184

Proceeds from stock option exercises	$	2,698	$	5,665	$	7,544	$	13,506

Stock-based compensation expense is recognized ratably over the requisite service period for all awards. For most stock option awards, the service period generally matches the vesting period. For stock options granted to certain executive officers and for non-vested stock units granted to all participants, the service period does not extend past the date the participant reaches 65 years of age. Deferred stock units granted to non-employee directors generally have immediate vesting and the related expense is fully recognized on the date of grant. For performance stock units, the service period generally matches the three-year performance period specified by the award, however, the service period does not extend past the date the participant reaches 65 years of age. Expense recognized each period is dependent upon our estimate of the number of shares that will ultimately be issued.

Stock-based compensation expense and the related income tax benefit is presented in the following table.

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Stock options $ 330
$ 960
$ 1,091
$ 3,064
Non-vested stock awards/stock units 1,536
1,357
5,727
4,196
Director deferred stock units —
—
780
720
Performance stock units 809
479
3,095
1,576
Total $ 2,675
$ 2,796
$ 10,693
$ 9,556
Income tax benefit $ 452
$ 587
$ 1,768
$ 2,007


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Stock options	$	0	$	330	$	0	$	1,091
Non-vested stock awards/stock units	1,999		1,536		6,325		5,727
Director deferred stock units	0		0		770		780
Performance stock units	444		809		1,132		3,095
Total	$	2,443	$	2,675	$	8,227	$	10,693
Income tax benefit	$	450	$	452	$	1,539	$	1,768

Unrecognized stock-based compensation expense at September 30, ~~2019~~2020 is presented in the table below. Unrecognized stock-based compensation expense related to performance stock units is presented assuming attainment of the maximum payout rate as set forth by the performance criteria.


Non-vested stock awards/stock units	$	12,337
Performance stock units	4,651
Total	$	16,988

Stock options $ 96
Non-vested stock awards/stock units 11,196
Performance stock units 3,432
Total $ 14,724

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Note 11 - Earnings Per Common Share

Earnings per common share is computed using the two-class method as more fully described in our ~~2018~~2019 Form 10-K. The following table presents a reconciliation of net income available to common shareholders, net earnings allocated to common stock and the number of shares used in the calculation of basic and diluted earnings per common share.

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Net income $ 111,836
$ 117,844
$ 339,918
$ 335,665
Less: Preferred stock dividends 2,016
2,016
6,047
6,047
Net income available to common shareholders 109,820
115,828
333,871
329,618
Less: Earnings allocated to participating securities 876
750
2,761
2,178
Net earnings allocated to common stock $ 108,944
$ 115,078
$ 331,110
$ 327,440

Distributed earnings allocated to common stock $ 44,370
$ 42,811
$ 131,069
$ 121,907
Undistributed earnings allocated to common stock 64,574
72,267
200,041
205,533
Net earnings allocated to common stock $ 108,944
$ 115,078
$ 331,110
$ 327,440

Weighted-average shares outstanding for basic earnings per common share 62,566,128
63,892,023
62,786,501
63,793,514
Dilutive effect of stock compensation 592,866
1,022,168
725,911
1,037,043
Weighted-average shares outstanding for diluted earnings per common share 63,158,994
64,914,191
63,512,412
64,830,557


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net income	$	95,056	$	111,836	$	242,881	$	339,918
Less: Preferred stock dividends	0		2,016		2,016		6,047
Redemption of preferred stock	0		0		5,514		0
Net income available to common shareholders	95,056		109,820		235,351		333,871
Less: Earnings allocated to participating securities	877		876		2,236		2,761
Net earnings allocated to common stock	$	94,179	$	108,944	$	233,115	$	331,110

Distributed earnings allocated to common stock	$	44,546	$	44,370	$	133,511	$	131,069
Undistributed earnings allocated to common stock	49,633		64,574		99,604		200,041
Net earnings allocated to common stock	$	94,179	$	108,944	$	233,115	$	331,110

Weighted-average shares outstanding for basic earnings per common share	62,726,542		62,566,128		62,655,393		62,786,501
Dilutive effect of stock compensation	193,116		592,866		263,028		725,911
Weighted-average shares outstanding for diluted earnings per common share	62,919,658		63,158,994		62,918,421		63,512,412

Note 12 - Defined Benefit Plans

The components of the combined net periodic expense (benefit) for our defined benefit pension plans are presented in the table below.

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Expected return on plan assets, net of expenses $ (2,693 ) $ (2,979 ) $ (8,079 ) $ (8,937 )
Interest cost on projected benefit obligation 1,618
1,475
4,854
4,424
Net amortization and deferral 1,406
1,250
4,218
3,751
Net periodic expense (benefit) $ 331
$ (254 ) $ 993
$ (762 )


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Expected return on plan assets, net of expenses	$	(3,073)	$	(2,693)	$	(9,217)	$	(8,079)
Interest cost on projected benefit obligation	1,252		1,618		3,757		4,854
Net amortization and deferral	1,330		1,406		3,989		4,218
Net periodic expense (benefit)	$	(491)	$	331	$	(1,471)	$	993

Our non-qualified defined benefit pension plan is not funded. NaN contributions to the qualified defined benefit pension plan were made during the nine months ended September 30, ~~2019.~~2020. We do not expect to make any contributions to the qualified defined benefit plan during the remainder of ~~2019.~~2020.

Note 13 - Income Taxes

Income tax expense was as follows:

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Current income tax expense (benefit) $ 14,480
$ (1,152 ) $ 43,984
$ 955
Deferred income tax expense (benefit) (950 ) 16,312
(1,625 ) 39,198
Income tax expense, as reported $ 13,530
$ 15,160
$ 42,359
$ 40,153

Effective tax rate 10.8 % 11.4 % 11.1 % 10.7 %


	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Current income tax expense (benefit)	$	(33,614)		$	14,480		$	20,328		$	43,984
Deferred income tax expense (benefit)	43,130			(950)			(8,803)			(1,625)
Income tax expense, as reported	$	9,516		$	13,530		$	11,525		$	42,359
Effective tax rate	9.1		%	10.8		%	4.5		%	11.1		%

We had a net deferred tax liability totaling ~~$76.7~~$122.4 million at September 30, ~~2019~~2020 and ~~a net deferred tax asset totaling $19.8~~$75.8 million at December 31, ~~2018. The change in net deferred taxes was primarily related to unrealized gains on available-for-sale securities during the nine months ended September 30,~~ 2019. NaN valuation allowance for deferred tax assets was recorded at September 30, ~~2019~~2020 as management believes it is more likely than not that all of the deferred tax assets will be realized against deferred tax liabilities and projected future taxable income.

The effective income tax rates differed from the U.S. statutory federal income tax rates of 21% during the comparable periods primarily due to the effect of tax-exempt income from loans, securities and life insurance policies and the income tax effects associated with stock-based compensation. The effective tax rates during 2020 were also impacted by a one-time, discrete tax benefit associated with an asset contribution to a charitable trust during the second quarter. There were 0

Table of Contents

unrecognized tax benefits during any of the reported periods. Interest and/or penalties related to income taxes are reported as a component of income tax expense. Such amounts were not significant during the reported periods.

We file income tax returns in the U.S. federal jurisdiction. We are no longer subject to U.S. federal income tax examinations by tax authorities for years before 2016.

Note 14 - Other Comprehensive Income (Loss)

The before and after tax amounts allocated to each component of other comprehensive income (loss) are presented in the following table. Reclassification adjustments related to securities available for sale are included in net gain (loss) on securities transactions in the accompanying consolidated statements of income. Reclassification adjustments related to defined-benefit post-retirement benefit plans are included in the computation of net periodic pension expense (see Note 12 – Defined Benefit Plans).


	Three Months Ended September 30, 2019									Three Months Ended September 30, 2018										Three Months Ended September 30, 2020						Three Months Ended September 30, 2019
	Before Tax Amount			Tax Expense, (Benefit)			Net of Tax Amount			Before Tax Amount			Tax Expense, (Benefit)			Net of Tax Amount				Before Tax Amount		Tax Expense, (Benefit)		Net of Tax Amount		Before Tax Amount		Tax Expense, (Benefit)		Net of Tax Amount
Securities available for sale and transferred securities:																			Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period	$	107,786		$	22,635		$	85,151		$	(96,147	)	$	(20,190	)	$	(75,957	)	Change in net unrealized gain/loss during the period	$	20,332	$	4,269	$	16,063	$	107,786	$	22,635	$	85,151
Change in net unrealized gain on securities transferred to held to maturity	(305		)	(64		)	(241		)	(3,764		)	(790		)	(2,974		)	Change in net unrealized gain on securities transferred to held to maturity	(294)		(62)		(232)		(305)		(64)		(241)
Reclassification adjustment for net (gains) losses included in net income	(97		)	(21		)	(76		)	34			7			27			Reclassification adjustment for net (gains) losses included in net income	0		0		0		(97)		(21)		(76)
Total securities available for sale and transferred securities	107,384			22,550			84,834			(99,877		)	(20,973		)	(78,904		)	Total securities available for sale and transferred securities	20,038		4,207		15,831		107,384		22,550		84,834
Defined-benefit post-retirement benefit plans:																			Defined-benefit post-retirement benefit plans:

Reclassification adjustment for net amortization of actuarial gain/loss included in net income as a component of net periodic cost (benefit)	1,406			295			1,111			1,250			262			988			Reclassification adjustment for net amortization of actuarial gain/loss included in net income as a component of net periodic cost (benefit)	1,330		280		1,050		1,406		295		1,111
Total defined-benefit post-retirement benefit plans	1,406			295			1,111			1,250			262			988			Total defined-benefit post-retirement benefit plans	1,330		280		1,050		1,406		295		1,111
Total other comprehensive income (loss)	$	108,790		$	22,845		$	85,945		$	(98,627	)	$	(20,711	)	$	(77,916	)	Total other comprehensive income (loss)	$	21,368	$	4,487	$	16,881	$	108,790	$	22,845	$	85,945


	Nine Months Ended September 30, 2019									Nine Months Ended September 30, 2018										Nine Months Ended September 30, 2020						Nine Months Ended September 30, 2019
	Before Tax Amount			Tax Expense, (Benefit)			Net of Tax Amount			Before Tax Amount			Tax Expense, (Benefit)			Net of Tax Amount				Before Tax Amount		Tax Expense, (Benefit)		Net of Tax Amount		Before Tax Amount		Tax Expense, (Benefit)		Net of Tax Amount
Securities available for sale and transferred securities:																			Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period	$	464,072		$	97,455		$	366,617		$	(286,935	)	$	(60,256	)	$	(226,679	)	Change in net unrealized gain/loss during the period	$	406,959	$	85,462	$	321,497	$	464,072	$	97,455	$	366,617
Change in net unrealized gain on securities transferred to held to maturity	(957		)	(201		)	(756		)	(8,424		)	(1,769		)	(6,655		)	Change in net unrealized gain on securities transferred to held to maturity	(979)		(206)		(773)		(957)		(201)		(756)
Reclassification adjustment for net (gains) losses included in net income	(266		)	(56		)	(210		)	113			24			89			Reclassification adjustment for net (gains) losses included in net income	(108,989)		(22,888)		(86,101)		(266)		(56)		(210)
Total securities available for sale and transferred securities	462,849			97,198			365,651			(295,246		)	(62,001		)	(233,245		)	Total securities available for sale and transferred securities	296,991		62,368		234,623		462,849		97,198		365,651
Defined-benefit post-retirement benefit plans:																			Defined-benefit post-retirement benefit plans:

Reclassification adjustment for net amortization of actuarial gain/loss included in net income as a component of net periodic cost (benefit)	4,218			886			3,332			3,751			788			2,963			Reclassification adjustment for net amortization of actuarial gain/loss included in net income as a component of net periodic cost (benefit)	3,989		837		3,152		4,218		886		3,332
Total defined-benefit post-retirement benefit plans	4,218			886			3,332			3,751			788			2,963			Total defined-benefit post-retirement benefit plans	3,989		837		3,152		4,218		886		3,332
Total other comprehensive income (loss)	$	467,067		$	98,084		$	368,983		$	(291,495	)	$	(61,213	)	$	(230,282	)	Total other comprehensive income (loss)	$	300,980	$	63,205	$	237,775	$	467,067	$	98,084	$	368,983

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Activity in accumulated other comprehensive income (loss), net of tax, was as follows:

Securities
Available
For Sale

Defined
Benefit
Plans

Accumulated
Other
Comprehensive
Income
Balance January 1, 2019 $ (16,103 ) $ (47,497 ) $ (63,600 )
Other comprehensive income (loss) before reclassifications 365,861
—
365,861
Reclassification of amounts included in net income (210 ) 3,332
3,122
Net other comprehensive income (loss) during period 365,651
3,332
368,983
Balance at September 30, 2019 $ 349,548
$ (44,165 ) $ 305,383

Balance January 1, 2018 $ 117,230
$ (37,718 ) $ 79,512
Other comprehensive income (loss) before reclassifications (233,334 ) —
(233,334 )
Reclassification of amounts included in net income 89
2,963
3,052
Net other comprehensive income (loss) during period (233,245 ) 2,963
(230,282 )
Reclassification of certain income tax effects related to the change in the U.S. statutory federal income tax rate under the Tax Cuts and Jobs Act to retained earnings 17,557
(8,022 ) 9,535
Balance at September 30, 2018 $ (98,458 ) $ (42,777 ) $ (141,235 )


	Securities Available For Sale		Defined Benefit Plans		Accumulated Other Comprehensive Income
Balance January 1, 2020	$	313,304	$	(45,934)	$	267,370
Other comprehensive income (loss) before reclassifications	320,724		0		320,724
Reclassification of amounts included in net income	(86,101)		3,152		(82,949)
Net other comprehensive income (loss) during period	234,623		3,152		237,775
Balance at September 30, 2020	$	547,927	$	(42,782)	$	505,145

Balance January 1, 2019	$	(16,103)	$	(47,497)	$	(63,600)
Other comprehensive income (loss) before reclassifications	365,861		0		365,861
Reclassification of amounts included in net income	(210)		3,332		3,122
Net other comprehensive income (loss) during period	365,651		3,332		368,983

Balance at September 30, 2019	$	349,548	$	(44,165)	$	305,383

Note 15 – Operating Segments

We are managed under a matrix organizational structure whereby our 2 primary operating segments, Banking and Frost Wealth Advisors, overlap a regional reporting structure. See our ~~2018~~2019 Form 10-K for additional information regarding our operating segments. Summarized operating results by segment were as follows:

Banking
Frost Wealth
Advisors
Non-Banks Consolidated
Revenues from (expenses to) external customers:
Three months ended:
September 30, 2019 $ 307,312
$ 37,549
$ (2,630 ) $ 342,231
September 30, 2018 295,062
36,868
(2,608 ) 329,322
Nine months ended:
September 30, 2019 $ 918,672
$ 111,064
$ (8,182 ) $ 1,021,554
September 30, 2018 874,056
106,475
(7,680 ) 972,851
Net income (loss):
Three months ended:
September 30, 2019 $ 110,583
$ 4,106
$ (2,853 ) $ 111,836
September 30, 2018 114,214
6,442
(2,812 ) 117,844
Nine months ended:
September 30, 2019 $ 334,393
$ 15,403
$ (9,878 ) $ 339,918
September 30, 2018 327,131
17,977
(9,443 ) 335,665


	Banking		Frost Wealth Advisors		Non-Banks		Consolidated
Revenues from (expenses to) external customers:
Three months ended:
September 30, 2020	$	293,855	$	35,282	$	(2,113)	$	327,024
September 30, 2019	307,312		37,549		(2,630)		342,231
Nine months ended:
September 30, 2020	$	1,003,469	$	111,493	$	(7,090)	$	1,107,872
September 30, 2019	918,672		111,064		(8,182)		1,021,554
Net income (loss):
Three months ended:
September 30, 2020	$	93,507	$	4,130	$	(2,581)	$	95,056
September 30, 2019	110,583		4,106		(2,853)		111,836
Nine months ended:
September 30, 2020	$	238,023	$	13,642	$	(8,784)	$	242,881
September 30, 2019	334,393		15,403		(9,878)		339,918

Note 16 – Fair Value Measurements

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, we utilize valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 820 establishes a three-level fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. See our ~~2018~~2019 Form 10-K for additional information regarding the fair value hierarchy and a description of our valuation techniques.

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Financial Assets and Financial Liabilities. The ~~table~~tables below ~~summarizes~~summarize financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, segregated by the level of the valuation inputs within the fair value hierarchy of ASC Topic 820 utilized to measure fair value.

Level 1
Inputs Level 2
Inputs Level 3
Inputs Total Fair
Value
September 30, 2019
Securities available for sale:
U.S. Treasury $ 2,825,796
$ —
$ —
$ 2,825,796
Residential mortgage-backed securities —
2,240,452
—
2,240,452
States and political subdivisions —
7,311,373
—
7,311,373
Other —
42,825
—
42,825
Trading account securities:
U.S. Treasury 23,747
—
—
23,747
States and political subdivisions —
3,922
—
3,922
Derivative assets:
Interest rate swaps, caps and floors —
55,842
—
55,842
Commodity swaps and options —
16,534
—
16,534
Foreign currency forward contracts 24
—
—
24
Derivative liabilities:
Interest rate swaps, caps and floors —
24,855
—
24,855
Commodity swaps and options —
16,086
—
16,086
Foreign currency forward contracts 11
—
—
11
December 31, 2018
Securities available for sale:
U.S. Treasury $ 3,427,689
$ —
$ —
$ 3,427,689
Residential mortgage-backed securities —
829,740
—
829,740
States and political subdivisions —
7,087,202
—
7,087,202
Other —
42,690
—
42,690
Trading account securities:
U.S. Treasury 21,928
—
—
21,928
States and political subdivisions —
2,158
—
2,158
Derivative assets:
Interest rate swaps, caps and floors —
19,806
—
19,806
Commodity swaps and options —
26,768
—
26,768
Foreign currency forward contracts 193
—
—
193
Derivative liabilities:
Interest rate swaps, caps and floors —
18,520
—
18,520
Commodity swaps and options —
26,320
—
26,320
Foreign currency forward contracts 147
—
—
147


	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
September 30, 2020
Securities available for sale:
U.S. Treasury	$	1,124,965	$	—	$	—	$	1,124,965
Residential mortgage-backed securities	—		2,164,162		—		2,164,162
States and political subdivisions	—		7,273,005		—		7,273,005
Other	—		42,348		—		42,348
Trading account securities:
U.S. Treasury	24,495		—		—		24,495
States and political subdivisions	—		1,313		—		1,313
Derivative assets:
Interest rate swaps, caps and floors	—		96,659		—		96,659
Commodity swaps and options	—		35,272		—		35,272
Foreign currency forward contracts	—		—		—		—
Derivative liabilities:
Interest rate swaps, caps and floors	—		38,339		—		38,339
Commodity swaps and options	—		34,432		—		34,432
Foreign currency forward contracts	—		—		—		—


December 31, 2019
Securities available for sale:
U.S. Treasury	$	1,948,133	$	—	$	—	$	1,948,133
Residential mortgage-backed securities	—		2,207,594		—		2,207,594
States and political subdivisions	—		7,070,997		—		7,070,997
Other	—		42,867		—		42,867
Trading account securities:
U.S. Treasury	24,298		—		—		24,298

Derivative assets:
Interest rate swaps, caps and floors	—		44,196		—		44,196
Commodity swaps and options	—		12,218		—		12,218
Foreign currency forward contracts	45		—		—		45
Derivative liabilities:
Interest rate swaps, caps and floors	—		20,197		—		20,197
Commodity swaps and options	—		11,677		—		11,677
Foreign currency forward contracts	33		—		—		33

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain ~~circumstances (for example, when there is evidence of impairment).~~circumstances. Financial assets measured at fair value on a non-recurring basis during the reported periods include certain ~~impaired~~collateral dependent loans reported at the fair value of the underlying collateral if repayment is expected solely from the collateral.

The following table presents ~~impaired~~collateral dependent loans that were remeasured and reported at fair value through a specific ~~valuation allowance~~ allocation of the allowance for ~~loan~~credit losses on loans based upon the fair value of the underlying collateral during the reported periods.


	Nine Months Ended September 30, 2020				Nine Months Ended September 30, 2019
	Level 2		Level 3		Level 2		Level 3
Carrying value before allocations	$	6,388	$	8,660	$	2,416	$	60,010
Specific (allocations) reversals of prior allocations	(930)		14,928		1,116		(12,437)
Fair value	$	5,458	$	23,588	$	3,532	$	47,573

Nine Months Ended
September 30, 2019 Nine Months Ended
September 30, 2018
Level 2 Level 3 Level 2 Level 3
Carrying value of impaired loans before allocations $ 2,416
$ 60,010
$ 12,876
$ 28,638
Specific valuation allowance (allocations) reversals of prior allocations 1,116
(12,437 ) (2,599 ) 4,256
Fair value $ 3,532
$ 47,573
$ 10,277
$ 32,894

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Non-Financial Assets and Non-Financial Liabilities. We do not have any non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Non-financial assets measured at fair value on a non-recurring basis during the reported periods may include certain foreclosed assets which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for loan losses and certain foreclosed assets which, subsequent to their initial recognition, were remeasured at fair value through a write-down included in other non-interest expense. The following table presents foreclosed assets that were remeasured and reported at fair value during the reported periods:

Nine Months Ended
September 30,
2019 2018
Foreclosed assets remeasured at initial recognition:
Carrying value of foreclosed assets prior to remeasurement $ 1,302
$ 2,898
Charge-offs recognized in the allowance for loan losses (76 ) —
Fair value $ 1,226
$ 2,898
Foreclosed assets remeasured subsequent to initial recognition:
Carrying value of foreclosed assets prior to remeasurement $ —
$ 1,823
Write-downs included in other non-interest expense —
(473 )
Fair value $ —
$ 1,350


	Nine Months Ended September 30,
	2020		2019
Foreclosed assets remeasured at initial recognition:
Carrying value of foreclosed assets prior to remeasurement	$	0	$	1,302
Charge-offs recognized in the allowance for credit losses on loan	0		(76)
Fair value	$	0	$	1,226
Foreclosed assets remeasured subsequent to initial recognition:
Carrying value of foreclosed assets prior to remeasurement	$	328	$	0
Write-downs included in other non-interest expense	(231)		0
Fair value	$	97	$	0

Financial Instruments Reported at Amortized Cost. The estimated fair values of financial instruments that are reported at amortized cost in our consolidated balance sheets, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, were as follows:

September 30, 2019 December 31, 2018

Carrying
Amount

Estimated
Fair Value

Carrying
Amount

Estimated
Fair Value
Financial assets:
Level 2 inputs:
Cash and cash equivalents $ 2,907,901
$ 2,907,901
$ 3,955,779
$ 3,955,779
Securities held to maturity 1,020,838
1,047,423
1,106,057
1,116,953
Cash surrender value of life insurance policies 186,217
186,217
183,473
183,473
Accrued interest receivable 133,950
133,950
188,989
188,989
Level 3 inputs:
Loans, net 14,498,369
14,542,918
13,967,601
13,933,239
Financial liabilities:
Level 2 inputs:
Deposits 27,083,582
27,084,765
27,149,204
27,143,572
Federal funds purchased and repurchase agreements 1,200,655
1,200,655
1,367,548
1,367,548
Junior subordinated deferrable interest debentures 136,285
137,115
136,242
137,115
Subordinated notes payable and other borrowings 98,826
106,447
98,708
98,458
Accrued interest payable 10,177
10,177
7,394
7,394


	September 30, 2020				December 31, 2019
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Level 2 inputs:
Cash and cash equivalents	$	7,175,680	$	7,175,680	$	3,788,181	$	3,788,181
Securities held to maturity	1,951,384		2,058,855		2,030,005		2,048,675
Cash surrender value of life insurance policies	189,148		189,148		187,156		187,156
Accrued interest receivable	122,618		122,618		183,850		183,850
Level 3 inputs:
Loans, net	17,960,402		18,160,904		14,618,165		14,654,615
Financial liabilities:
Level 2 inputs:
Deposits	33,499,503		33,503,668		27,639,564		27,641,255
Federal funds purchased and repurchase agreements	1,608,667		1,608,667		1,695,342		1,695,342
Junior subordinated deferrable interest debentures	136,342		137,115		136,299		137,115
Subordinated notes	98,982		112,912		98,865		89,077
Accrued interest payable	9,144		9,144		12,393		12,393

Under ASC Topic 825, entities may choose to measure eligible financial instruments at fair value at specified election dates. The fair value measurement option (i) may be applied instrument by instrument, with certain exceptions, (ii) is generally irrevocable and (iii) is applied only to entire instruments and not to portions of instruments. Unrealized gains and losses on items for which the fair value measurement option has been elected must be reported in earnings at each subsequent reporting date. During the reported periods, we had 0 financial instruments measured at fair value under the fair value measurement option.

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Note 17 - Accounting Standards Updates

Information about certain recently issued accounting standards updates is presented below. Also refer to Note 20 - Accounting Standards Updates in our ~~2018~~2019 Form 10-K for additional information related to previously issued accounting standards updates.

~~ASU 2016-02, “Leases (Topic 842).”~~ ASU 2016-02, among other things, requires lessees to recognize a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. We adopted ASU 2016-02, along with several other subsequent codification updates related to lease accounting, as of January 1, 2019. See Note 1 - Significant Accounting Policies for additional information.

ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. ~~In addition,~~We adopted ASU 2016-13, ~~amends~~as subsequently updated for certain clarifications, targeted relief and codification improvements, as of January 1, 2020. See Note 1 - Significant Accounting Policies for additional information.

ASU 2020-4, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-4 provides optional expedients and exceptions for accounting related to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 applies only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform and do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. ASU 2020-4 was effective upon issuance and generally can be applied through December 31, 2022. The adoption of ASU 2020-4 did not significantly impact our financial statements.

ASU 2020-8, “Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs.” ASU 2020-8 clarifies the accounting for ~~credit losses on available-for-sale~~the amortization of purchase premiums for callable debt securities ~~and purchased financial assets~~ with ~~credit deterioration. In April 2019,~~multiple call dates. ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” was issued to address certain codification improvements and to provide certain accounting policy electives related to accrued interest as well as disclosure related to credit losses, among other things. In May 2019, ASU 2019-05, “Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief,” was issued to provide transition relief in connection with the adoption of ASU 2016-03 whereby entities would have the option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. ASU 2016-13, as updated,2020-8 will be effective for us on January 1, ~~2020.~~

~~We are currently working through our implementation plan with our cross-functional working group, under the direction of our Chief Financial Officer~~2021 and our Chief Credit Officer. The working group is comprised of individuals from various functional areas including credit, risk management, finance and information technology, among others. Our implementation plan includes assessment and documentation of processes, internal controls and data sources; model development, documentation and validation; and system configuration, among other things. We are also in the process of implementing a third-party vendor solution to assist us in the application of ASU 2016-13. Based upon our preliminary parallel run as of September 30, 2019, we currently expect the adoption of ASU 2016-13 will result in a combined 15.0% to 25.0% increase in our allowance for loan losses and our reserves for unfunded commitments. This increase is a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. Furthermore, ASU 2016-13 will necessitate that we establish an allowance for expected credit losses for certain debt securities and other financial assets; however, we do not expect these allowances to be significant. Additionally, the adoption of ASU 2016-13 is not expected to have a significant impact on our regulatory capital ratios. The ultimate impact of adoption on January 1, 2020 could be significantly different than our current expectation as our modeling processes will be significantly influenced by the composition, characteristics and quality of our loan and securities portfolios as well as the prevailing economic conditions and forecasts as of that date, notwithstanding any further refinements to our expected credit loss models.

~~ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization on Purchased Callable Debt Securities.”~~ ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium to require such premiums to be amortized to the earliest call date unless applicable guidance related to certain pools of securities is applied to consider estimated prepayments. Under prior guidance, entities were generally required to amortize premiums on individual, non-pooled callable debt securities as a yield adjustment over the contractual life of the security. ASU 2017-08 did not change the accounting for callable debt securities held at a discount. We adopted ASU 2017-08 effective January 1, 2019 and recognized a cumulative effect adjustment reducing retained earnings by $14.7 million. See Note 1 - Significant Accounting Policies.

~~ASU 2017-12, “Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities.”~~ ASU 2017-12 amends the hedge accounting recognition and presentation requirements in ASC 815 to improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities to better align the entity’s financial reporting for hedging relationships with those risk management activities and to reduce the complexity of and simplify the application of hedge accounting. ASU 2017-12 became effective for us on January 1, 2019 and did not have a significant impact on our financial statements. In April 2019, ASU 2019-04 was issued to clarify certain aspects of accounting for hedging activities addressed by ASU 2017-12, among other things.

ASU 2018-16, “Derivatives and Hedging (Topic 815) - Inclusion of the Secured Overnight Financing Rate (“SOFR”) Overnight Index Swap (“OIS”) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes.” The amendments in this update permit use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the interest rates on direct U.S. Treasury obligations, the LIBOR swap rate, the OIS rate based on the Fed Funds Effective Rate and the Securities Industry and Financial Markets Association (“SIFMA”) Municipal Swap Rate. ASU 2018-16 became effective for us on January 1, 2019 and did not have a significant impact on our financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Financial Review

Cullen/Frost Bankers, Inc.

The following discussion should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, ~~2018~~,2019, and the other information included in the ~~2018~~2019 Form 10-K. Operating results for the three and nine months ended September 30, ~~2019~~2020 are not necessarily indicative of the results for the year ending December 31, ~~2019~~2020 or any future period.

Dollar amounts in tables are stated in thousands, except for per share amounts.

Forward-Looking Statements and Factors that Could Affect Future Results

Certain statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”), including statements regarding the potential effects of the ongoing COVID-19 pandemic on our business, financial condition, liquidity and results of operations, 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:

•Local, regional, national and international economic conditions and the impact they may have on us and our customers and our assessment of that impact.

•Volatility and disruption in national and international financial and commodity markets.

•Government intervention in the U.S. financial system.

•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 reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements.

•The effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board.

•Inflation, interest rate, securities market and monetary fluctuations.

•The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which we and our subsidiaries must comply.

•The soundness of other financial institutions.

•Political instability.

•Impairment of our goodwill or other intangible assets.

•Acts of God or of war or terrorism.

•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, borrowings and savings habits.

•Changes in the financial performance and/or condition of our borrowers.

•Technological changes.

•The cost and effects of ~~failure, interruption,~~cyber incidents or ~~breach of~~other failures, interruptions or security breaches of our ~~systems.~~systems or those of third-party providers.

•Acquisitions and integration of acquired businesses.

•Our ability to increase market share and control expenses.

•Our ability to attract and retain qualified employees.

•Changes in the competitive environment in our markets and among banking organizations and other financial service providers.

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•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.

•Changes in the reliability of our vendors, internal control systems or information systems.

•Changes in our liquidity position.

•Changes in our organization, compensation and benefit plans.

•The impact of the ongoing COVID-19 pandemic and any other pandemic, epidemic or health-related crisis.

•The costs and effects of legal and regulatory developments, the resolution of legal proceedings or regulatory or other governmental inquiries, the results of regulatory examinations or reviews and the ability to obtain required regulatory approvals.

•Greater than expected costs or difficulties related to the integration of new products and lines of business.

•Our success at managing the risks involved in the foregoing items.

Further, statements about the potential effects of the ongoing COVID-19 pandemic on our business, financial condition, liquidity and results of operations may constitute forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our customers, clients, third parties and us.

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.

Recent Developments Related to COVID-19

Overview. Our business has been, and continues to be, impacted by the recent and ongoing outbreak of COVID-19. In March 2020, COVID-19 was declared a pandemic by the World Health Organization and a national emergency by the President of the United States. Efforts to limit the spread of COVID-19 have included shelter-in-place orders, the closure of non-essential businesses, travel restrictions, supply chain disruptions and prohibitions on public gatherings, among other things, throughout many parts of the United States and, in particular, the markets in which we operate. As the current pandemic is ongoing and dynamic in nature, there are many uncertainties related to COVID-19 including, among other things, its ultimate geographic spread; its severity; the duration of the outbreak; the impact to our customers, employees and vendors; the impact to the financial services and banking industry; and the impact to the economy as a whole as well as the effect of actions taken, or that may yet be taken, or inaction by governmental authorities to contain the outbreak or to mitigate its impact (both economic and health-related). COVID-19 has negatively affected, and is expected to continue to negatively affect, our business, financial position and operating results. In light of the uncertainties and continuing developments discussed herein, the ultimate adverse impact of COVID-19 cannot be reliably estimated at this time, but it has been and is expected to continue to be material.

Impact on our Operations. In the State of Texas, many jurisdictions have declared health emergencies. The resulting closures and/or limited operations of non-essential businesses and related economic disruption have impacted our operations as well as the operations of our customers. Financial services have been identified as a Critical Infrastructure Sector by the Department of Homeland Security. Accordingly, our business remains open. To address the issues arising as a result of COVID-19, and in order to facilitate the continued delivery of essential services while maintaining a high level of safety for our customers as well as our employees, we have implemented our Business Continuity and Health Emergency Response plans. Among other things, significant actions taken under these plans include:

•Implemented our communications plans to ensure our employees, customers and critical vendors are kept abreast of developments affecting our operations.

•Restricted all non-essential travel and large external gatherings and have instituted a mandatory quarantine period for anyone that has traveled to an impacted area.

•After temporarily closing all of our financial center lobbies and other corporate facilities to non-employees, except for certain limited cases by appointment only, we reopened our financial center lobbies with limited capacity. We continue to serve our consumer and business customers through our motor-banks, ATMs, internet banking, mobile app and telephone customer service capabilities.

•Expanded remote-access availability so that nearly all of our work-force has the capability to work from home or other remote locations. All activities are performed in accordance with our compliance and information security policies designed to ensure customer data and other information is properly safeguarded.

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•Instituted mandatory social distancing policies for those employees not working remotely. Members of certain operations teams have been split into separate buildings or locations to create redundancy for key functions across the organization.

Notwithstanding the foregoing actions, the COVID-19 outbreak could still greatly affect our routine and essential operations due to staff absenteeism, particularly among key personnel; further limited access to or closures of our branch facilities and other physical offices; operational, technical or security-related risks arising from a remote work-force; and government or regulatory agency orders, among other things. The business and operations of our third-party service providers, many of whom perform critical services for our business, could also be significantly impacted, which in turn could impact us. As a result, we are currently unable to fully assess or predict the extent of the effects of COVID-19 on our operations as the ultimate impact will depend on factors that are currently unknown and/or beyond our control.

Impact on our Financial Position and Results of Operations. Our financial position and results of operations are particularly susceptible to the ability of our loan customers to meet loan obligations, the availability of our workforce, the availability of our vendors and the decline in the value of assets held by us. While its effects continue to materialize, the COVID-19 pandemic has resulted in a significant decrease in commercial activity throughout the State of Texas as well as nationally. This decrease in commercial activity has caused and may continue to cause our customers (including affected businesses and individuals), vendors and counterparties to be unable to meet existing payment or other obligations to us. The national public health crisis arising from the COVID-19 pandemic (and public expectations about it), combined with certain pre-existing factors, including, but not limited to, international trade disputes, inflation risks and oil price volatility, could further destabilize the financial markets and geographies in which we operate. The resulting economic pressure on consumers and uncertainty regarding the sustainability of any economic improvements has impacted the creditworthiness of potential and current borrowers. Borrower loan defaults that adversely affect our earnings correlate with deteriorating economic conditions (such as the unemployment rate), which, in turn, are likely to impact our borrowers' creditworthiness and our ability to make loans. See further information related to the risk exposure of our loan portfolio under the sections captioned “Loans” and “Allowance for Credit Losses” elsewhere in this discussion.

In addition, the economic pressures and uncertainties arising from the COVID-19 pandemic has resulted in and may continue to result in specific changes in consumer and business spending and borrowing and saving habits, affecting the demand for loans and other products and services we offer. Consumers affected by COVID-19 may continue to demonstrate changed behavior even after the crisis is over. For example, consumers may decrease discretionary spending on a permanent or long-term basis, certain industries may take longer to recover (particularly those that rely on travel or large gatherings) as consumers may be hesitant to return to full social interaction. We lend to customers operating in such industries including energy, retail/strip centers, hotels/lodging, restaurants, entertainment and commercial real estate, among others, that have been significantly impacted by COVID-19 and we are continuing to monitor these customers closely. To help mitigate the adverse effects of COVID-19, loan customers may apply for a deferral of payments, or portions thereof, for up to 90 days. After 90 days, customers may apply for an additional deferral. Additionally, the temporary closures of bank branches and the safety precautions implemented at re-opened branches could result in consumers becoming more comfortable with technology and devaluing face-to-face interaction. Our business is relationship driven and such changes could necessitate changes to our business practices to accommodate changing consumer behaviors. The potential changes in behaviors driven by COVID-19 also present heightened liquidity risks, for example, arising from increased demand for our products and services (such as unusually high draws on credit facilities) or decreased demand for our products and services (such as idiosyncratic, or broad-based, market or other developments that lead to deposit outflows).

Legislative and Regulatory Developments. Recent actions taken by the federal government and the Federal Reserve and other bank regulatory agencies to mitigate the economic effects of COVID-19 will also have an impact on our financial position and results of operations. These actions are further discussed below.

In an emergency measure aimed at blunting the economic impact of COVID-19, the Federal Reserve lowered the target for the federal funds rate to a range of between zero to 0.25% effective on March 16, 2020. This action by the Federal Reserve followed a prior reduction of the targeted federal funds rates to a range of 1.0% to 1.25% effective on March 4, 2020. Our earnings and cash flows are largely dependent upon our net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. As our balance sheet is more asset sensitive, our earnings are more adversely affected by decreases in market interest rates as the interest rates received on loans and other investments fall more quickly and to a larger degree than the interest rates paid on deposits and other borrowings. The decline in interest rates has already led to new all-time low yields across the US Treasury maturity curve. In September 2020, the Federal Reserve indicated that it expects to maintain the targeted federal funds rate at current levels until such time that labor market conditions have reached levels consistent with the Federal Open Market Committee's assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time. This timeframe is currently expected to last through 2023. Nonetheless, if

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the Federal Reserve decreases the targeted federal funds rates even further in response to the economic effects of COVID-19, overall interest rates will decline further, which will negatively impact our net interest income and further compress our net interest margin.

Other actions taken by the Federal Reserve in an effort to provide monetary stimulus to counteract the economic disruption caused by COVID-19 include:

•Expanded reverse repo operations, adding liquidity to the banking system.

•Restarted quantitative easing.

•Lowered the interest rate on the discount window by 1.5% to 0.25%.

•Reduced reserve requirement ratios to zero percent.

•Encouraged banks to use their capital and liquidity buffers to lend.

•Introduced and expanded several new programs that will operate on a temporary basis to help preserve market liquidity.

The U.S. government has also enacted certain fiscal stimulus measures in several phases to counteract the economic disruption caused by the COVID-19. The Phase 1 legislation, the Coronavirus Preparedness and Response Supplemental Appropriations Act, was enacted on March 6, 2020 and, among other things, authorized funding for research and development of vaccines and allocated money to state and local governments to aid containment and response measures. The Phase 2 legislation, the Families First Coronavirus Response Act, was enacted on March 18, 2020 and provides for paid sick/medical leave, establishes no-cost coverage for coronavirus testing, expands unemployment benefits, expands food assistance, and provides additional funding to states for the ongoing economic consequences of the pandemic, among other provisions. The Phase 3 legislation, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), was enacted on March 27, 2020. Among other provisions, the CARES Act (i) authorized the Secretary of the Treasury to make loans, loan guarantees and other investments, up to $500 billion, for assistance to eligible businesses, States and municipalities with limited, targeted relief for passenger air carriers, cargo air carriers, and businesses critical to maintaining national security, (ii) created a $349 billion loan program called the Paycheck Protection Program (the “PPP”) for loans to small businesses for, among other things, payroll, group health care benefit costs and qualifying mortgage, rent and utility payments, (iii) provided certain credits against the 2020 personal income tax for eligible individuals and their dependents, (iv) expanded eligibility for unemployment insurance and provides eligible recipients with an additional $600 per week on top of the unemployment amount determined by each State and (v) expanded tele-health services in Medicare. The Phase 3.5 legislation, the Paycheck Protection Program and Healthcare Enhancement Act of 2020 (the “PPPHE Act”), was enacted on April 24, 2020. Among other things, the PPPHE Act provided an additional $310 billion of funding for the PPP of which, $30 billion is specifically allocated for use by banks and other insured depository institutions that have assets between $10 billion and $50 billion.

The Paycheck Protection Program Flexibility Act of 2020” (the “PPPF Act”) was enacted in June 2020 and modified the PPP as follows: (i) established a minimum maturity of five years for all loans made after the enactment of the PPPF Act and permits an extension of the maturity of existing loans to five years if the borrower and lender agree; (ii) extended the “covered period” of the CARES Act from June 30, 2020, to December 31, 2020; (iii) extended the eight-week “covered period” for expenditures that qualify for forgiveness to the earlier of 24 weeks following loan origination or December 31, 2020; (iv) extended the deferral period for payment of principal, interest and fees to the date on which the forgiveness amount is remitted to the lender by the SBA; (v) changed requirements such that the borrower must use at least 60% (down from 75%) of the proceeds of the loan for payroll costs, and up to 40% (up from 25%), for other permitted purposes, as a condition to obtaining forgiveness of the loan; (vi) delayed from June 30, 2020 to December 31, 2020 the date by which employees must be rehired to avoid a reduction in the amount of forgiveness of a loan, and creates a “rehiring safe harbor” that allows businesses to remain eligible for loan forgiveness if they make a good-faith attempt to rehire employees or hire similarly qualified employees, but are unable to do so, or are able to document an inability to return to pre-COVID-19 levels of business activity due to compliance with social distancing measures; and (vii) allows borrowers to receive both loan forgiveness under the PPP and the payroll tax deferral permitted under the CARES Act, rather than having to choose which of the two would be more advantageous.

In July 2020, the CARES Act was amended to extend, through August 8, 2020, the SBA’s authority to make commitments under the PPP. The SBA’s existing authority had previously expired on June 30, 2020. In August 2020, President Trump signed four executive actions to provide additional COVID-19 relief. The first action authorized the Lost Wages Assistance Program (“LWAP”), which provides for a $400-per-week payment to those currently receiving more than $100 a week in unemployment benefits due to disruptions caused by COVID-19. The LWAP per-week payment is retroactive to the week ending August 1, 2020. The second executive action extended the moratorium on payments and interest accrual on student loans held by the government until the end of 2020. The moratorium was previously set to expire September 30, 2020. The third action instructed the Department of the Treasury and the Department of Housing and Urban Development to help provide temporary assistance to renters and homeowners and promote their ability to avoid eviction or foreclosure. The fourth executive action allows

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employers to defer, for the period from September 1, 2020 through December 31, 2020, the employee portion of Social Security payroll taxes for certain individuals earning less than approximately $104 thousand per year. We are continuing to monitor the potential development of additional legislation and further actions taken by the U.S. government.

The Federal Reserve has created various additional lending facilities and expanded existing facilities to help provide financing in response to the financial disruptions caused by COVID-19. The programs include, among other things, (i) the PPP Facility, which is intended to extend loans to banks making PPP loans, (ii) the Municipal Liquidity Facility, which is intended to facilitate the purchase of eligible notes from states, and certain counties and cities around the country, and (iii) the Main Street Lending Program (“MSLP”), which is intended to facilitate credit flows to businesses affected by the COVID-19 pandemic with up to 10,000 employees or up to $2.5 billion in 2019 annual revenues. As more fully discussed in the section captioned “Loans” elsewhere in this discussion, we are currently participating in the PPP as a lender. We do not currently expect to participate in the MSLP.

Banks and bank holding companies have been particularly impacted by the COVID-19 pandemic as a result of disruption and volatility in the global capital markets. This disruption has impacted our cost of capital and may adversely affect our ability to access the capital markets if we need or desire to do so and, although the ultimate impact cannot be reliably estimated at this time in light of the uncertainties and ongoing developments noted herein, such impacts could be material. Furthermore, bank regulatory agencies have been (and are expected to continue to be) very proactive in responding to both market and supervisory concerns arising from the COVID-19 pandemic as well as the potential impact on customers, especially borrowers. As shown during and following the financial crisis of 2007-2008, periods of economic and financial disruption and stress have, in the past, resulted in increased scrutiny of banking organizations. We are closely monitoring the potential for new laws and regulations impacting lending and funding practices as well as capital and liquidity standards. Such changes could require us to maintain significantly more capital, with common equity as a more predominant component, or manage the composition of our assets and liabilities to comply with formulaic liquidity requirements. Furthermore, provisions of the CARES Act allow, but do not require, the FDIC to guarantee deposit obligations of banks in non-interest-bearing transaction accounts through December 31, 2020. Participation in any such guarantee program may result in fees and other assessments as the FDIC determines and may include special assessments. Other provisions of the CARES Act as well as actions taken by bank regulators, such as potential relief for working with borrowers who are distressed as a result of the effects of COVID-19, could similarly impact aggregate deposit insurance expense.

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 ~~loan~~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. As discussed in Note 1 - Summary of Significant Accounting Policies, our policies related to allowances for credit losses changed on January 1, 2020 in connection with the adoption of a new accounting standard update as codified in 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 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 best judgment and information available, the ultimate adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the

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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 critical accounting policies, refer to Note 1 - Summary of Significant Accounting Policies and Note 3 - Loans in the notes to consolidated financial statements and the sections captioned “Application of Critical Accounting Policies and Accounting Estimates” and “Allowance for Loan Losses” in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the ~~2018~~ ~~Form 10-K. There have been no significant changes in our application of critical accounting policies related to the allowance for loan losses since~~ ~~December 31, 2018~~.statements.

Overview

A discussion of our results of operations is presented below. Certain reclassifications have been made to make prior periods comparable. 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 based on a 21% federal tax rate, thus making tax-exempt yields comparable to taxable asset yields.

Results of Operations

Net income available to common shareholders totaled $95.1 million, or $1.50 per diluted common share, and $235.4 million, or $3.71 per diluted common share, for the three and nine months ended September 30, 2020 compared to $109.8 million, or $1.73 per diluted common share, and $333.9 million, or $5.24 per diluted common share, for the three and nine months ended September 30, ~~2019 compared to $115.8 million, or $1.78 per diluted common share, and $329.6 million, or $5.08 per diluted common share, for the three and nine months ended September 30, 2018.~~2019.

Selected data for the comparable periods was as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018				2020			2019			2020			2019
Taxable-equivalent net interest income	$	276,618		$	265,687		$	825,547		$	778,754		Taxable-equivalent net interest income	$	267,041		$	276,618		$	805,216		$	825,547
Taxable-equivalent adjustment	23,611			24,022			72,640			70,071			Taxable-equivalent adjustment	23,618			23,611			71,461			72,640
Net interest income	253,007			241,665			752,907			708,683			Net interest income	243,423			253,007			733,755			752,907
Provision for loan losses	8,001			2,650			25,404			17,846
Net interest income after provision for loan losses	245,006			239,015			727,503			690,837
Credit loss expense													Credit loss expense	20,302			8,001			227,474			25,404
Net interest income after credit loss expense													Net interest income after credit loss expense	223,121			245,006			506,281			727,503
Non-interest income	89,224			87,657			268,647			264,168			Non-interest income	83,601			89,224			374,117			268,647
Non-interest expense	208,864			193,668			613,873			579,187			Non-interest expense	202,150			208,864			625,992			613,873
Income before income taxes	125,366			133,004			382,277			375,818			Income before income taxes	104,572			125,366			254,406			382,277
Income taxes	13,530			15,160			42,359			40,153
Income tax expense\(benefit)													Income tax expense\(benefit)	9,516			13,530			11,525			42,359
Net income	111,836			117,844			339,918			335,665			Net income	95,056			111,836			242,881			339,918
Preferred stock dividends	2,016			2,016			6,047			6,047			Preferred stock dividends	—			2,016			2,016			6,047
Redemption of preferred stock													Redemption of preferred stock	—			—			5,514			—
Net income available to common shareholders	$	109,820		$	115,828		$	333,871		$	329,618		Net income available to common shareholders	$	95,056		$	109,820		$	235,351		$	333,871
Earnings per common share – basic	$	1.74		$	1.80		$	5.28		$	5.13		Earnings per common share – basic	$	1.50		$	1.74		$	3.72		$	5.28
Earnings per common share – diluted	1.73			1.78			5.24			5.08			Earnings per common share – diluted	1.50			1.73			3.71			5.24
Dividends per common share	0.71			0.67			2.09			1.91			Dividends per common share	0.71			0.71			2.13			2.09
Return on average assets	1.35		%	1.49		%	1.41		%	1.42		%	Return on average assets	0.96		%	1.35		%	0.85		%	1.41		%
Return on average common equity	11.83			14.40			12.79			14.02			Return on average common equity	9.30			11.83			7.95			12.79
Average shareholders’ equity to average assets	11.87			10.79			11.48			10.63			Average shareholders’ equity to average assets	10.31			11.87			10.80			11.48

Net income available to common shareholders decreased ~~$6.0~~$14.8 million, or ~~5.2%~~13.4%, for the three months ended September 30, ~~2019~~2020 and ~~increased $4.3~~decreased $98.5 million, or ~~1.3%~~29.5%, for the nine months ended September 30, ~~2019~~2020 compared to the same periods in ~~2018.~~2019. The decrease during the three months ended September 30, ~~2019~~2020 was primarily the result of a ~~$15.2~~$12.3 million increase in credit loss expense, a $9.6 million decrease in net interest income and a $5.6 million decrease in non-interest income partly offset by a $6.7 million decrease in non-interest expense and a $4.0 million decrease in income tax expense. The decrease during the nine months ended September 30, 2020 was primarily the result of a $202.1 million increase in credit loss expense, a $19.2 million decrease in net interest income and a $12.1 million increase in non-interest expense ~~and a $5.4 million increase in the provision for loan losses~~ partly offset by ~~an $11.3 million increase in net interest income,~~ a ~~$1.6~~$105.5 million increase in non-interest income and a ~~$1.6~~$30.8 million decrease in income tax expense. The increase in credit loss expense during the comparable periods resulted from both our adoption of a new credit loss accounting standard and the adverse events impacting our loan portfolio, including those arising from the COVID-19 pandemic and the significant volatility in oil prices. The increase in non-interest income during the nine months ended September 30, ~~2019~~2020 was primarily related to a $109.0 million net gain on securities transactions. Net income available to common shareholders for the ~~result~~nine months ended September 30, 2020 was also impacted by the reclassification of ~~a $44.2~~$5.5 million ~~increase in net interest income and a $4.5 million increase in non-interest income partly offset by a $34.7 million increase in non-interest expense, a $7.6 million increase~~of issuance costs associated with our preferred stock to retained earnings upon redemption of the preferred stock in the ~~provision for loan losses and a $2.2 million increase in income tax expense.~~first quarter.

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 ~~73.7%~~66.2% of total revenue during the first nine months of ~~2019.~~2020. Excluding the revenue associated with the $109.0 million net gain on securities transactions realized during the first quarter of 2020, net interest income would have represented 73.5% of total revenue during the first nine months of 2020. 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. Our loan portfolio is significantly affected by changes in the prime interest rate. The prime rate began ~~2018~~2019 at ~~4.50%~~5.50% and ~~subsequently increased 100 basis points (25 basis points in each of March, June, September and December) to end 2018 at 5.50%. The prime rate~~ decreased 50 basis points during the third quarter of 2019 (25 basis points in each of August and September) and 25 basis points in October 2019 to end the ~~quarter~~year at ~~5.00%~~4.75%. During 2020, the prime rate decreased 150 basis points in March to 3.25% where it remained through September 30, 2020. Our loan portfolio is also impacted by changes in the London Interbank Offered Rate (LIBOR). At September 30, 2020, the one-month and three-month U.S. dollar LIBOR interest rates were 0.15% and 0.23%, respectively, while at September 30, 2019, the one-month and three-month U.S. dollar LIBOR interest rates were 2.02% and 2.09%, ~~respectively, while at September 30, 2018, the one-month and three-month U.S. dollar LIBOR interest rates were 2.26% and 2.40%,~~ respectively. The ~~effective~~target range for the federal funds rate, which is the cost of immediately available overnight funds, began ~~2018~~2019 at ~~1.50%~~2.25% to 2.50% and ~~subsequently increased 100 basis points (25 basis points in each of, March, June, September and December) to end~~

~~2018 at 2.50%. The effective federal funds rate~~ decreased 50 basis points during the third quarter of 2019 (25 basis points in each of August and September) and 25 basis points in October 2019 to end the ~~quarter~~year at ~~2.00%~~1.50 to 1.75%. During 2020, the target range for the federal funds rate decreased 150 basis points in March to zero to 0.25% where it remained through September 30, 2020. As noted in the section captioned “Recent Developments Related to COVID-19” elsewhere in this discussion, the decrease in the target range for the federal funds rate in March 2020 was largely an emergency measure by the Federal Reserve aimed at blunting the economic impact of COVID-19.

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 in a rising interest rate environment. ~~The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) repealed the~~Though federal prohibitions on the payment of interest on demand deposits ~~thereby permitting depository institutions to pay interest on business transaction and other accounts beginning July 21, 2011. To date,~~were repealed in 2011, we have not experienced any significant additional interest costs as a ~~result of the repeal. However, as market interest rates have increased, we have increased the interest rates we pay on most of our interest-bearing deposit products.~~result. See Item 3. Quantitative and Qualitative Disclosures About Market Risk elsewhere in this report for information about ~~the expected impact of this legislation on~~ our sensitivity to interest rates. Further analysis of the components of our net interest margin is presented below.

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. The comparison between the quarters includes an additional change factor that shows the effect of the difference in the number of days in each period for assets and liabilities that accrue interest based upon the actual number of days in the period, as further discussed below.

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	Three Months Ended									Nine Months Ended
	September 30, 2019 vs. September 30, 2018									September 30, 2019 vs. September 30, 2018											Three Months Ended
	Increase (Decrease) Due to Change in									Increase (Decrease) Due to Change in											September 30, 2020 vs. September 30, 2019
																				Increase (Decrease) Due to Change in
	Rate			Volume			Total				Rate			Volume			Total					Rate		Volume		Number of days		Total
Interest-bearing deposits	$	934		$	(6,620	)	$	(5,686	)	$	11,214		$	(26,444	)	$	(15,230	)	Interest-bearing deposits		$	(14,019)	$	6,772	$	—	$	(7,247)
Federal funds sold and resell agreements	46			(251		)	(205		)	920			(172		)	748			Federal funds sold and resell agreements		(600)		(575)		—		(1,175)
Securities:																			Securities:
Taxable	5,045			5,738			10,783			11,954			12,086			24,040			Taxable		(2,937)		(6,625)		—		(9,562)
Tax-exempt	(1,398		)	(869		)	(2,267		)	(3,602		)	7,734			4,132			Tax-exempt		—		949		—		949
Loans, net of unearned discounts	4,247			10,274			14,521			42,837			31,780			74,617			Loans, net of unearned discounts		(58,920)		40,855		—		(18,065)
Total earning assets	8,874			8,272			17,146			63,323			24,984			88,307			Total earning assets		(76,476)		41,376		—		(35,100)
Savings and interest checking	(446		)	5			(441		)	—			(46		)	(46		)	Savings and interest checking		(1,016)		189		—		(827)
Money market deposit accounts	—			369			369			18,360			457			18,817			Money market deposit accounts		(17,919)		1,658		—		(16,261)
Time accounts	2,123			596			2,719			6,568			1,054			7,622			Time accounts		(1,747)		387		—		(1,360)
Public funds	246			543			789			1,740			1,108			2,848			Public funds		(1,790)		(2)		—		(1,792)
Federal funds purchased and repurchase agreements	1,970			778			2,748			10,843			876			11,719			Federal funds purchased and repurchase agreements		(5,441)		883		—		(4,558)
Junior subordinated deferrable interest debentures	30			1			31			552			2			554			Junior subordinated deferrable interest debentures		(726)		1		—		(725)
Subordinated notes payable and other notes	(2		)	2			—			(6		)	6			—
Subordinated notes																			Subordinated notes		(2)		2		—		—

Total interest-bearing liabilities	3,921			2,294			6,215			38,057			3,457			41,514			Total interest-bearing liabilities		(28,641)		3,118		—		(25,523)
Net change	$	4,953		$	5,978		$	10,931		$	25,266		$	21,527		$	46,793		Net change		$	(47,835)	$	38,258	$	—	$	(9,577)


	Nine Months Ended
	September 30, 2020 vs. September 30, 2019
	Increase (Decrease) Due to Change in
	Rate		Volume		Number of days		Total
Interest-bearing deposits	$	(37,564)	$	21,192	$	40	$	(16,332)
Federal funds sold and resell agreements	(1,983)		(1,459)		3		(3,439)
Securities:
Taxable	(1,087)		(14,088)		—		(15,175)
Tax-exempt	784		(451)		—		333
Loans, net of unearned discounts	(142,044)		90,004		1,883		(50,157)
Total earning assets	(181,894)		95,198		1,926		(84,770)
Savings and interest checking	(3,403)		435		4		(2,964)
Money market deposit accounts	(48,768)		3,881		49		(44,838)
Time accounts	(1,785)		1,719		42		(24)
Public funds	(4,599)		442		5		(4,152)
Federal funds purchased and repurchase agreements	(12,820)		1,534		15		(11,271)
Junior subordinated deferrable interest debentures	(1,510)		2		—		(1,508)
Subordinated notes	—		—		—		—
Federal home loan bank advances	—		318		—		318
Total interest-bearing liabilities	(72,885)		8,331		115		(64,439)
Net change	$	(109,009)	$	86,867	$	1,811	$	(20,331)

Taxable-equivalent net interest income for the three months ended September 30, ~~2019 increased $10.9~~2020 decreased $9.6 million, or ~~4.1%~~3.5%, while taxable-equivalent net interest income for nine months ended September 30, 2020 decreased $20.3 million, or 2.5%, compared to the same periods in 2019. Taxable-equivalent net interest income for the nine months ended September 30, ~~2019 increased $46.8 million, or 6.0%,~~2020 included 274 days compared to 273 days for the same ~~periods~~period in ~~2018.~~2019 as a result of the leap year. The ~~increases were primarily related~~additional day added approximately $1.8 million to ~~increases~~taxable-equivalent net interest income during the nine months ended September 30, 2020. Excluding the impact of the additional day results in an effective decrease in taxable-equivalent net interest income of approximately $22.1 million during the ~~average yields on loans, taxable securities and interest-bearing deposits combined with increases in~~nine months ended September 30, 2020. The taxable-equivalent net interest margin decreased 81 basis points from 3.76% during the ~~average volumes of loans and taxable securities and, for~~three months ended September 30, 2019 to 2.95% during the three months ended September 30, 2020 while the taxable-equivalent net interest margin decreased 60 basis points from 3.80% during the nine months ended September 30, 2019 ~~an increase~~to 3.20% during the nine months ended September 30, 2020.

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The decreases in taxable-equivalent net interest income and taxable-equivalent net interest margin during the three and nine months ended September 30, 2020 were primarily related to decreases in the average ~~balance~~yields on loans and interest-bearing deposits (primarily amounts held in ~~tax-exempt securities.~~an interest-bearing account at the Federal Reserve) combined with, to a significantly lesser extent, decreases in the average volume of taxable securities (based on amortized cost) and increases in the average volume of interest-bearing deposit liabilities. The impact of these items was partly offset by increases in the average ~~rates paid on~~volumes of loans and interest-bearing deposits ~~and other borrowed funds and a decrease in the average volume of interest bearing deposits~~ (primarily ~~excess reserves~~amounts held in an interest-bearing account at the Federal Reserve). combined with decreases in the average cost of interest-bearing deposit liabilities and other borrowed funds.

The average volume of interest-earning assets for the three ~~months ended September 30, 2019 increased $897.6 million, while the average volume of interest-earning assets for the~~and nine months ended September 30, ~~2019~~2020 increased ~~$442.4 million~~$7.1 billion and $5.0 billion compared to the same periods in ~~2018.~~2019, respectively. The increase in the average volume of interest-earning assets for the three months ended September 30, ~~2019~~2020 included a ~~$1.1~~$4.3 billion increase in average ~~taxable securities,~~interest-bearing deposits, a ~~$788.1 million~~$3.7 billion increase in average loans (of which approximately $3.2 billion related to PPP loans, as further discussed below) and a ~~$276.0~~$312.5 million increase in average tax-exempt securities partly offset by a ~~$1.3~~$1.1 billion decrease in average ~~interest-bearing deposits,~~taxable securities and a $180.6 million decrease in average federal funds sold and ~~resell~~resale agreements. The increase in the average volume of interest-earning assets for the nine months ended September 30, ~~2019~~2020 included ~~an $845.3 million~~a $3.0 billion increase in average interest-bearing deposits, a $2.6 billion increase in average loans ~~a $793.9 million increase in average taxable securities~~(of which $1.9 billion related to PPP loans, as further discussed below) and a ~~$446.7~~

$256.8 million increase in average tax-exempt securities partly offset by a ~~$1.6 billion~~$723.5 million decrease in average ~~interest-bearing deposits,~~taxable securities and a $108.2 million decrease in average federal funds sold and resell ~~agreements~~

The taxable-equivalent net interest margin increased 10 basis points from 3.66% during the three months ended September 30, 2018 to 3.76% during the three months ended September 30, 2019 and increased 19 basis points from 3.61% during the nine months ended September 30, 2018 to 3.80% during the nine months ended September 30, 2019. The increases in the taxable-equivalent net interest margin during the three and nine months ended September 30, 2019 were primarily related to increases in the average yields on loans; taxable securities; interest-bearing deposits; and federal funds sold and resell agreements partly offset by increases in the average cost of interest-bearing deposits and other borrowed funds and a decrease in the average yield on tax-exempt securities. The taxable-equivalent net interest margin was also positively impacted by a decrease in the relative proportion of interest-earning assets invested in lower-yielding interest-bearing deposits (primarily excess reserves held in an interest-bearing account at the Federal Reserve).agreements.

The average taxable-equivalent yield on interest-earning assets ~~increased 17~~decreased 117 basis points from ~~4.04% during the three months ended September 30, 2018 to~~ 4.21% during the three months ended September 30, 2019 ~~and increased 38 basis points from 3.89%~~to 3.04% during the ~~nine~~three months ended September 30, ~~2018 to~~2020 while the average taxable-equivalent yield on interest-earning assets decreased 92 basis points from 4.27% during the nine months ended September 30, ~~2019.~~2019 to 3.35% during the nine months ended September 30, 2020. The average taxable-equivalent ~~yield~~yields on interest-earning assets ~~was~~were primarily impacted by the aforementioned changes in market interest rates and changes in the volume and relative mix of interest-earning assets.

The average taxable-equivalent yield on loans ~~increased 41~~decreased 143 basis points from ~~4.86%~~5.16% during the ~~nine~~three months ended September 30, ~~2018~~2019 to 3.73% during the three months ended September 30, 2020 while the average taxable-equivalent yield on loans decreased 119 basis points from 5.27% during the nine months ended September 30, ~~2019.~~2019 to 4.08% during the nine months ended September 30, 2020. The average taxable-equivalent yield on loans was ~~positively~~negatively impacted by ~~higher~~lower average market interest rates ~~in 2019~~during the three and nine months ended September 30, 2020 compared to ~~2018.~~the same periods in 2019. The average volume of loans for the three and nine months ended September 30, ~~2019~~2020 increased ~~$845.3 million,~~$3.7 billion, or ~~6.3%~~25.4%, and $2.6 billion, or 17.8%, compared to the same ~~period~~periods in ~~2018.~~2019. Loans made up approximately ~~49.0%~~49.4% of average interest-earning assets during both of the three and nine months ended September 30, 2020, compared to 48.7% and 49.0% during the same periods in 2019 respectively. As discussed in the section captioned “Loans” elsewhere in this discussion, in April 2020, we began originating loans to qualified small businesses under the PPP administered by the SBA under the provisions of the CARES Act. Through September 30, 2020, we have funded approximately $3.3 billion of SBA-approved PPP loans. During the three and nine months ended September 30, 2020, we recognized approximately $21.1 million and $40.4 million, respectively, in PPP loan related deferred processing fees (net of amortization of related deferred origination costs) as a yield adjustment and this amount is included in interest income on loans. As a result of the inclusion of these net fees in interest income, the average yield on PPP loans was approximately 3.65% and 3.86% during the three and nine months ended September 30, 2020, respectively, compared to the stated interest rate of 1.0% on these loans. As of September 30, 2020, we expect to recognize additional PPP loan related deferred processing fees (net of deferred origination costs) totaling approximately $58.5 million as a yield adjustment over the remaining terms of these loans.

The average taxable-equivalent yield on securities was 3.44% during the three months ended September 30, 2020, increasing 1 basis point from 3.43% during the same period in 2019 while the average taxable-equivalent yield on securities was 3.48% during the nine months ended September 30, 2020, increasing 7 basis points from 3.41% during the same period in 2019. The average taxable-equivalent yields on securities during the three and nine months ended September 30, 2020 were positively impacted by increases in the relative proportion tax-exempt securities to total securities.

The average yield on taxable securities decreased 24 basis points from 2.45% during the three months ended September 30, 2019 to 2.21% during the three months ended September 30, 2020 while the average yield on taxable securities decreased 3 basis points from 2.35% during the nine months ended September 30, 2019 ~~compared~~ to ~~46.9%~~2.32% during the ~~same period in 2018.~~

nine months ended September 30, 2020. The average taxable-equivalent yield on tax-exempt securities ~~was 3.41%~~remained unchanged at 4.08% during the three months ended September 30, 2020 and 2019 while the average taxable-equivalent yield on tax-exempt securities increased 1 basis point from 4.06% during the nine months ended September 30, 2019 ~~increasing 3 basis points compared~~ to ~~the 3.38% during the same period in 2018. The average taxable-equivalent yield on securities~~4.07% during the nine months ended September 30, ~~2019~~2020. Tax exempt securities made up approximately 66.9% and 66.6% of total average securities during the three and nine months ended September 30, 2020, respectively, compared to 60.7% and 62.3% during the same respective periods in 2019. The average volume of total securities (based on carrying amount) during the three months ended

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September 30, 2020 decreased $764.0 million, or 5.7%, compared to the same period in ~~2018 was positively impacted by increases in~~2019 while the average volume of ~~tax-exempt and taxable~~total securities ~~and an increase in the average yield~~(based on ~~taxable securities but was negatively impacted by a decrease in the average yield on tax-exempt securities. The average yield on taxable securities increased 35 basis points from 2.00%~~carrying amount) during the nine months ended September 30, ~~2018 to 2.35% during the nine months ended September 30, 2019. The average taxable-equivalent yield on tax-exempt securities~~2020 decreased 6 basis points from 4.12% during the nine months ended September 30, 2018 to 4.06% during the nine months ended September 30, 2019. Tax exempt securities made up approximately 62.3% of total average securities during the nine months ended September 30, 2019, compared to 65.0% during the same period in 2018. The average volume of total securities during the nine months ended September 30, 2019 increased $1.2 billion,$466.7 million, or ~~10.4%~~3.5%, compared to the same period in ~~2018.~~2019. Securities made up approximately ~~45.1%~~34.5% and 37.1% of average interest-earning assets during the three and nine months ended September 30, ~~2019~~2020, respectively, compared to ~~41.4%~~45.3% and 45.1% during the same ~~period~~respective periods in ~~2018.~~2019. The decreases were partly related to the impact of PPP loans and increased interest-bearing deposits on total average interest-earning assets.

Average interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) for the three and nine months ended September 30, 2020 increased $4.3 billion, or 276.1%, and $3.0 billion, or 201.87%, respectively, compared to the same periods in 2019. Interest-bearing deposits made up approximately 16.0% and 13.1% of average interest-earning assets during the three and nine months ended September 30, 2020, respectively, compared to 5.3% and 5.1% during the same periods in 2019. The increases in the average volume of interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) were primarily due to increases in the average volumes of deposits and other borrowed funds and the proceeds from the sale of securities. The average yield on interest-bearing deposits was 0.10% and 0.32% during the three and nine months ended September 30, 2020, respectively, compared to 2.19% and 2.41% during the same periods in 2019, respectively. The average yields on interest-bearing deposits were negatively impacted by lower interest rates paid on excess reserves held at the Federal Reserve for the three and nine months ended September 30, 2020 compared to the same periods in 2019.

Average federal funds sold and resell agreements for the three and nine months ended September 30, ~~2019~~2020 decreased ~~$1.6 billion,~~$180.6 million, or ~~48.8%~~85.3%, and $108.2 million, or 45.9%, respectively, compared to the same ~~period~~periods in ~~2018. Interest-bearing deposits, federal~~2019. Federal funds sold and resell agreements ~~made up approximately 5.9%~~were not a significant component of ~~average~~ interest-earning assets during the ~~nine months ended September 30, 2019 compared to 11.7% during the nine months ended September 30, 2018.~~comparable periods. The ~~decrease in the~~ average ~~volume of interest-bearing deposits,~~yield on federal funds sold and resell agreements was ~~primarily due to a decrease in the average volume of our excess reserves held in an interest-bearing account at the Federal Reserve~~0.24% and 0.91% during the ~~first~~three and nine months ~~of 2019~~ended September 30, 2020, respectively, compared to 2.21% and 2.42% during the same ~~period~~respective periods in ~~2018 as such funds were invested in higher yielding loans and securities.~~2019. The ~~combined~~ average ~~yield~~yields on ~~interest-bearing deposits,~~ federal funds sold and resell agreements ~~was 2.41% during~~were negatively impacted by lower average market interest rates for the three and nine months ended September 30, ~~2019~~2020 compared to ~~1.83% during~~ the same ~~period~~periods in ~~2018. The average yield on interest-bearing deposits, federal funds sold and resell agreements was positively impacted by higher average market interest rates in 2019 compared to 2018.~~2019.

The average rate paid on interest-bearing liabilities was ~~0.79%~~0.15% during the three months ended September 30, 2020, decreasing 60 basis points from 0.75% during the same period in 2019 while the average rate paid on interest-bearing liabilities was 0.27% during the nine months ended September 30, ~~2019 increasing 30~~2020, decreasing 52 basis points from ~~0.49%~~0.79% during the same period in ~~2018.~~2019. Average deposits ~~decreased $62.6 million,~~increased $6.5 billion, or ~~0.24%~~24.8%, during the three months ended September 30, 2020 compared to the same period in 2019 and included a $2.3 billion increase in average interest-bearing deposits and a $4.3 billion increase in average non-interest bearing deposits. Average deposits increased $4.4 billion, or 16.8%, during the nine months ended September 30, ~~2019~~2020 compared to the same period in ~~2018~~2019 and included a ~~$543.2 million decrease~~$1.6 billion increase in average interest-bearing deposits and a $2.8 billion increase in average non-interest bearing ~~deposits mostly offset by a $480.7 million increase in average interest-bearing~~ deposits. The ratio of average interest-bearing deposits to total average deposits was ~~60.9%~~55.6% and 57.3% during the three and nine months ended September 30, ~~2019~~2020, respectively, compared to ~~58.9%~~60.9% during each of the same ~~period~~periods in ~~2018.~~2019. 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 cost of interest-bearing deposits and total deposits was ~~0.67%~~0.12% and ~~0.41%~~0.07%, respectively, during the three months ended September 30, 2020 compared to 0.63% and 0.39%, respectively, during the same period in 2019. The average cost of interest-bearing deposits and total deposits was 0.21% and 0.12%, respectively, during the nine months ended September 30, ~~2019~~2020 compared to ~~0.44%~~0.67% and ~~0.26%~~0.41%, respectively, during the ~~nine months ended September 30, 2018.~~same period in 2019. The average cost of deposits during ~~2019~~the three and nine months ended September 30, 2020 was impacted by

~~increases~~ decreases in the interest rates we pay on most of our interest-bearing deposit products as a result of the aforementioned ~~increases~~decreases in market interest ~~rates and market competition.~~rates.

In April 2020, we borrowed an aggregate $1.3 billion from the Federal Home Loan Bank (“FHLB”) to provide additional liquidity in light of our significant PPP lending volume. These advances were subsequently paid-off in May 2020 as we determined additional liquidity resources were not necessary.

Our net interest spread, which represents the difference between the average rate earned on earning assets and the average rate paid on interest-bearing liabilities, was ~~3.48%~~2.89% and 3.08% during the three and nine months ended September 30, ~~2019~~2020, respectively, compared to ~~3.40%~~3.46% and 3.48% during same ~~period~~periods in ~~2018.~~2019. 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 3. Quantitative and Qualitative Disclosures About Market Risk included elsewhere in this report.

Our hedging policies permit the use of various derivative financial instruments, including interest rate swaps, swaptions, caps and floors, to manage exposure to changes in interest rates. Details of our derivatives and hedging activities are set forth in Note 8 - Derivative Financial Instruments in the accompanying notes to consolidated financial statements included elsewhere in

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this report. Information regarding the impact of fluctuations in interest rates on our derivative financial instruments is set forth in Item 3. Quantitative and Qualitative Disclosures About Market Risk included elsewhere in this report.

Our net interest income and net interest margin have been, and we currently expect them to continue to be, impacted by the aforementioned decreases in market interest rates and the expectation that interest rates will remain at these low levels for some period of time in light of the on-going economic disruption arising from the COVID-19 pandemic. Notwithstanding the foregoing, our participation in the PPP, as discussed above, is expected to continue to positively impact net interest income and net interest margin in the near term.

~~Provision for Loan Losses~~

~~The provision for loan losses~~Credit Loss Expense

Credit loss expense is determined by management as the amount to be added to the allowance for ~~loan losses~~credit loss accounts for various types of financial instruments including loans, securities and off-balance-sheet credit exposures after net charge-offs have been deducted to bring the ~~allowance~~allowances to a level which, in management’s best estimate, is necessary to absorb ~~inherent~~expected credit losses ~~within~~over the ~~existing loan portfolio.~~lives of the respective financial instruments. The ~~provision for loan losses totaled $8.0 million and $25.4 million~~components of credit loss expense were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Credit loss expense related to:
Loans	$	23,590	$	8,001	$	223,743	$	25,404
Off-balance-sheet credit exposures	(3,276)		—		3,786		—
Securities held to maturity	(12)		—		(55)		—
Total	$	20,302	$	8,001	$	227,474	$	25,404

Credit loss expense for the three and nine months ended September 30, 2019 ~~compared to $2.7 million and $17.8 million for~~was calculated under the ~~three and nine months ended September 30, 2018.~~prior incurred loss accounting methodology. See the section captioned “Allowance for ~~Loan~~Credit Losses” elsewhere in this discussion for further analysis of ~~the provision for loan losses.~~credit loss expense related to loans and off-balance-sheet credit exposures.

Non-Interest Income

The components of non-interest income were as follows:


	Three Months Ended September 30,					Nine Months Ended September 30,						Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018			2019		2018				2020		2019		2020		2019
Trust and investment management fees	$	31,649	$	30,801		$	93,794	$	89,509		Trust and investment management fees	$	31,469	$	31,649	$	97,002	$	93,794
Service charges on deposit accounts	22,941		21,569			65,529		63,554			Service charges on deposit accounts	19,812		22,941		60,043		65,529
Insurance commissions and fees	11,683		11,037			40,207		37,573			Insurance commissions and fees	11,456		11,683		38,609		40,207
Interchange and debit card transaction fees	4,117		3,499			11,265		10,103			Interchange and debit card transaction fees	3,503		4,117		9,724		11,265
Other charges, commissions and fees	10,108		9,580			28,103		27,860			Other charges, commissions and fees	8,370		10,108		25,398		28,103
Net gain (loss) on securities transactions	96		(34		)	265		(113		)	Net gain (loss) on securities transactions	—		96		108,989		265
Other	8,630		11,205			29,484		35,682			Other	8,991		8,630		34,352		29,484
Total	$	89,224	$	87,657		$	268,647	$	264,168		Total	$	83,601	$	89,224	$	374,117	$	268,647

Total non-interest income for the three and nine months ended September 30, ~~2019 increased $1.6~~2020 decreased $5.6 million, or ~~1.8%~~6.3%, ~~while total non-interest income for~~and increased $105.5 million, or 39.3%, respectively compared to the same periods in 2019. Excluding $109.0 million and $265 thousand in net gains on securities transactions during the nine months ended September 30, 2020 and 2019, ~~increased $4.5~~respectively, total non-interest income decreased $3.3 million, or ~~1.7%~~1.2%, ~~compared to~~during the ~~same periods in 2018, respectively.~~nine months ended September 30, 2020. Changes in the various components of non-interest income are discussed in more detail below.

Trust and Investment Management Fees. Trust and investment management fees for the three and nine months ended September 30, ~~2019 increased $848~~2020 decreased $180 thousand, or ~~2.8%~~0.6%, and ~~$4.3~~increased $3.2 million, or ~~4.8%~~3.4%, respectively compared to the same periods in ~~2018, respectively.~~2019. Investment fees are the most significant component of trust and investment management fees, making up approximately 82.7% and 82.5% of total trust and investment management fees for ~~both~~ the first nine months of 2020 and 2019, respectively. The decrease in trust and ~~2018.~~investment management fees during the three months ended September 30, 2020 was primarily due to decreases in oil and gas fees (down $1.2 million), custody fees (down $267 thousand) and tax fees (down $229 thousand) mostly offset by an increase in trust investment fees (up $1.4 million). The increase in trust and investment management fees during the nine months ended September 30, 2020 was primarily due to increases in trust investment fees (up $2.8 million), estate fees (up $987 thousand), real estate fees (up $575 thousand) partly offset by decreases in oil and gas fees (down $784 thousand) and tax fees (down ($332 thousand). Investment and other custodial account fees are generally based on

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the market value of assets within a trust account. The increases in trust investment fees were primarily related to an increase in the number of accounts. The fluctuations in estate fees, real estate fees, custody fees and tax fees were primarily related to variation in transaction volume. Oil and gas fees during the second and third quarters of 2020 were impacted by the sharp decline in oil prices in March 2020. Though the $40 price per barrel of oil as of September 30, 2020 has rebounded from recent lows, it still remains significantly lower than the $61 price per barrel as of December 31, 2019. Volatility in the equity and bond markets impacts the market value of trust assets and the related investment fees. ~~The increase~~Investor concerns related to the uncertain economic outlook arising from the COVID-19 pandemic caused significant market volatility resulting in ~~trust and investment management fees~~significant declines in market valuations, particularly among equity securities, during the ~~three~~latter part of the first quarter of 2020 and ~~nine months ended~~the early part of the second quarter of 2020. Market valuations as of September 30, ~~2019 compared to~~2020 have rebounded from the same periods in 2018 was primarily the result of increases in trust investment fees (up $793 thousand and $3.5 million, respectively) due to higher average equity valuations and an increase in the number of accounts.recent declines.

At September 30, ~~2019,~~2020, trust assets, including both managed assets and custody assets, were primarily composed of equity securities ~~(49.7%~~(50.8% of assets), fixed income securities ~~(36.3%~~(34.5% of assets) and cash equivalents (8.7% of assets). The estimated fair value of these assets was $36.6 billion (including managed assets of $16.2 billion and custody assets of $20.4 billion) at September 30, 2020, compared to $37.8 billion (including managed assets of $16.4 billion and custody assets of $21.4 billion) at December 31, 2019 and $36.4 billion (including managed assets of $15.7 billion and custody assets of $20.7 billion) at September 30, 2019, compared to $33.3 billion (including managed assets of $14.7 billion and custody assets of $18.7 billion) at December 31, 2018 and $34.7 billion (including managed assets of $15.6 billion and custody assets of $19.1 billion) at September 30, 2018.

2019.

Service Charges on Deposit Accounts. Service charges on deposit accounts for the three and nine months ended September 30, ~~2019 increased $1.4~~2020 decreased $3.1 million, or ~~6.4%~~13.6%, and ~~$2.0~~$5.5 million, or ~~3.1%~~8.4%, ~~respectively,~~ compared to the same periods in ~~2018.~~2019. The ~~increases~~decreases were primarily related to ~~increases~~decreases in overdraft/insufficient funds charges on consumer and commercial ~~accounts (up $1.2~~accounts. Overdraft/insufficient funds charges totaled $7.6 million ($6.2 million consumer and ~~$3.2~~$1.3 million ~~respectively) partly offset,~~commercial) during the ~~nine~~three months ended September 30, ~~2019, by a decrease in commercial service charges (down $942 thousand). Overdraft/insufficient funds charges totaled~~2020 compared to $11.2 million ($8.8 million consumer and $2.4 million commercial) during the ~~three~~same period in 2019. Overdraft/insufficient funds charges totaled $23.7 million ($18.8 million consumer and $4.9 million commercial) during the nine months ended September 30, ~~2019~~2020 compared to ~~$10.0 million ($7.8 million consumer and $2.2 million) during the same period in 2018. Overdraft/insufficient funds charges totaled~~ $31.1 million ($24.3 million consumer and $6.8 million commercial) during the same period in 2019. Consumer overdraft/insufficient funds charges decreased $2.6 million and $5.5 million during the three months and nine months ended September 30, ~~2019 compared to $28.0~~2020, respectively, while commercial overdrafts/insufficient funds charges decreased $1.1 million ~~($21.6~~and $1.9 million ~~consumer and $6.4 million commercial)~~ during the same ~~period in 2018.~~respective periods. The ~~increases~~decreases in overdraft/insufficient funds charges ~~were partly due to increased transaction volumes~~ during the three and nine months ended September 30, ~~2019 compared~~2020 were primarily related to a decrease in the volume of overdrafts relative to the same periods in ~~2018. Overdraft/insufficient funds~~2019.

Commercial service charges ~~were also impacted by a change in the fee schedule~~increased $727 thousand and $2.7 million during the ~~second quarter of 2019.~~three and nine months ended September 30, 2020, respectively. The ~~decrease~~increases in commercial service charges were ~~partly related to~~impacted by a ~~higher~~lower earnings credit ~~rate.~~rate partly offset by decreases in the volume of billable services. The earnings credit rate is the value given to deposits maintained by treasury management customers. ~~Because average market interest rates in 2019 were higher compared to 2018, deposit balances have become more valuable and are yielding a higher earnings credit rate.~~ Earnings credits applied to customer deposit balances offset service fees that would otherwise be charged. Because average market interest rates in 2020 have been lower compared to 2019, deposit balances have become less valuable and are yielding a lower earnings credit.

Insurance Commissions and Fees. Insurance commissions and fees for the three and nine months ended September 30, ~~2019 increased $646~~2020 decreased $227 thousand, or ~~5.9%~~1.9%, and $1.6 million, or 4.0%, respectively, compared to the same ~~period~~periods in ~~2018.~~2019. The ~~increase was related to an increase~~decreases were the result of decreases in commission income ~~(up $666 thousand)~~(down $90 thousand and $926 thousand during the three and nine months ended September 30, 2020, respectively) and contingent income (down $136 thousand and $672 thousand during the three and nine months ended September 30, 2020, respectively). ~~Insurance~~The decreases in commission income were primarily related to decreases in benefit plan commissions and, ~~fees for~~during the nine months ended September 30, ~~2019 increased $2.6 million, or 7.0%, compared to the same period in 2018. The increase was related to an increase in commission income (up $3.0 million)~~2020, life insurance commissions partly offset by ~~a decrease~~increases in ~~contingent income (down $341 thousand). The increase in commission income~~both commercial lines and personal lines property and casualty commissions and, during the three months ended September 30, 2019 was primarily related to an increase in commissions on commercial lines property and casualty policies. The increase in commission income during the nine months ended September 30, 2019 was primarily related to increases in commissions on commercial lines property and casualty policies, benefit plan commissions and2020, life insurance commissions. The ~~increases~~decreases in ~~property and casualty commissions and~~ benefit plan commissions were related to ~~increased~~decreased business volumes, premium reductions and flat to lower market rates. The ~~increase~~increases in commercial lines and personal lines property and casualty commissions were primarily related to increased rates. The fluctuations in life insurance commissions ~~was~~were related to ~~increased~~changes in business volumes.

Contingent income totaled ~~$254~~$117 thousand and ~~$3.8~~$3.2 million during the three and nine months ended September 30, ~~2019,~~2020, respectively, compared to ~~$273~~$254 thousand and ~~$4.2~~$3.8 million during the same periods in ~~2018.~~2019. 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 ~~$2.8~~$2.1 million and ~~$3.1~~$2.8 million during the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively. The decrease in performance related contingent income during ~~2019~~2020 was related to lower growth within the portfolio ~~partly offset by the impact of improvement~~combined with a deterioration in the loss performance of insurance policies previously placed. 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 ~~$193~~$77 thousand and $1.1 million during the three and nine months ended September 30, ~~2019,~~2020, respectively, ~~and $200~~compared to $193 thousand and $1.1 million during the same periods in ~~2018.~~2019.

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Notwithstanding normal seasonal variation, commission income during the second and third quarters of 2020 was partly impacted by reduced business volumes resulting from the COVID-19 pandemic, relative to the first quarter of 2020. Commission income in future periods may be similarly impacted. Benefit plan commissions may be particularly impacted by the effects of temporary furloughs and permanent layoffs. The COVID-19 pandemic has also given rise to a hard insurance market characterized by decreased capacity for most types of insurance coupled with more stringent underwriting standards among insurers. This may cause clients to drop or adjust coverage choices as part of expense control measures. Reduced business volumes may also adversely impact the level of contingent commissions we receive in 2021.

Interchange and Debit 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 debit card transaction fees consist of income from debit card usage, point of sale income from PIN-based debit card transactions and ATM service fees. Interchange and debit card transaction fees are reported net of related network costs.

A comparison of gross and net interchange and debit card transaction fees for the reported periods is presented in the table ~~below:~~

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Income from debit card transactions $ 6,191
$ 5,484
$ 17,569
$ 16,075
ATM service fees 1,069
991
3,136
2,954
Gross interchange and debit card transaction fees 7,260
6,475
20,705
19,029
Network costs 3,143
2,976
9,440
8,926
Net interchange and debit card transaction fees $ 4,117
$ 3,499
$ 11,265
$ 10,103

~~The increase in~~below. Net revenues from interchange and debit card transactions during the reported periods were impacted by reduced transaction ~~fees during 2019, on a net basis, was primarily~~volumes, in part related to the COVID-19 pandemic, and increased ~~transaction volumes.~~network costs.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Income from debit card transactions	$	6,097	$	6,191	$	17,429	$	17,569
ATM service fees	842		1,069		2,522		3,136
Gross interchange and debit card transaction fees	6,939		7,260		19,951		20,705
Network costs	3,436		3,143		10,227		9,440
Net interchange and debit card transaction fees	$	3,503	$	4,117	$	9,724	$	11,265

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.

Other Charges, Commissions and Fees. Other charges, commissions and fees for the three months ended September 30, ~~2019 increased $528 thousand,~~2020 decreased $1.7 million, or ~~5.5%~~17.2%, compared to the same period in ~~2018.~~2019. The ~~increase~~decrease was primarily related to ~~increases~~decreases in income from the placement of money market accounts (down $1.3 million) and income from the sale of ~~money market accounts (up $426 thousand), letter of credit fees (up $256 thousand) and income from capital markets advisory services (up $131~~mutual funds (down $113 thousand), among other ~~things, partly offset by decreases in income from sale of life insurance (down $322 thousand) and processing fees (down $181 thousand).~~things. Other charges, commissions and fees for the nine months ended September 30, ~~2019 increased $243 thousand,~~2020 decreased $2.7 million, or ~~0.9%~~9.6%, compared to the same period in ~~2018.~~2019. The ~~increase was primarily related to~~decrease included decreases in income from the placement of money market accounts (down $1.6 million); letter of credit fees (down $519 thousand); income from the sale of life insurance (down $398 thousand); and funds transfer service charges (down $200 thousand); among other things. The decreases in these items were partly offset by increases in income from the sale of annuities (up $263 thousand) and mutual funds (up $165 thousand) and an increase in brokerage commissions (up $118 thousand). Income from the placement of money market accounts ~~(up $1.1 million) and letter of credit fees (up $534 thousand), among~~was impacted by a decrease in market rates. The other ~~things, mostly offset~~aforementioned revenue streams were impacted by ~~decreases~~fluctuations in processing fees (down $592 thousand), brokerage commissions (down $392 thousand), income from the sale of mutual funds and annuities (down $268 thousand and $247 thousand, respectively) and income from capital markets advisory services (down $225 thousand).transaction volumes.

Net Gain/Loss on Securities Transactions. During the nine months ended September 30, ~~2019,~~2020 and ~~2018,~~2019, we sold certain available-for-sale ~~U.S Treasury~~ securities with amortized costs totaling ~~$7.4~~$1.0 billion and ~~$13.8~~$8.2 billion, respectively. We realized a net gain of ~~$99~~$109.0 million on the 2020 sales and a net gain of $265 thousand on the 2019 ~~sales~~sales. During the first quarter of 2020, we sold $483.1 million of residential mortgage-backed securities and realized a net ~~loss~~gain of ~~$113 thousand~~$1.9 million on ~~the 2018~~those sales. The proceeds from these sales were ~~primarily related~~reinvested into other residential mortgage-backed securities that had lower pre-payment rates. We also sold $519.1 million of 30-year U.S Treasury securities during the first quarter of 2020 and realized a net gain of $107.1 million on those sales. These U.S. Treasury securities were purchased during the fourth quarter of 2019 to hedge, in effect, against falling interest rates. Prior to their sale, these securities had significant unrealized holding gains as a result of decreases in market interest rates during the first quarter of 2020. We elected to sell these securities to provide liquidity and realize the gains.

During the first nine months of 2019, we purchased and subsequently sold ~~in the same period~~$7.4 billion of ~~their purchase~~U.S. Treasury securities in connection with our tax planning strategies related to the Texas franchise tax. The gross proceeds from the sales of these securities outside of Texas are included in total revenues/receipts from all sources reported for Texas franchise tax purposes, which results in a reduction in the overall percentage of revenues/receipts apportioned to Texas and subjected to taxation under the Texas franchise tax.

~~Additionally, during the second quarter~~ We realized a net gain of ~~2019, we~~$99 thousand on those sales. We also sold certain available-for-sale U.S. Treasury securities with an amortized cost totaling $548.9 million and certain available-for-sale municipal securities with an

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amortized cost totaling $310.7 million. We realized a net gain of $166 thousand on those sales. The proceeds from the sales provided short-term liquidity and were subsequently reinvested in other higher yielding securities.

Other Non-Interest ~~Income~~Income. . Other non-interest income for the three months ended September 30, ~~2019 decreased $2.6 million,~~2020 increased $361 thousand, or ~~23.0%~~4.2%, compared to the same period in ~~2018.~~2019. The ~~decrease~~increase was primarily related to ~~decreases~~an increase in sundry and other miscellaneous income ~~(down $2.9~~(up $1.3 million) and ~~income from customer derivative and trading activities (down $798~~public finance underwriting fees (up $833 thousand) partly offset by ~~increases~~a decrease in gains on the sale of foreclosed and other assets ~~(up $638 thousand)~~(down $1.3 million), among other things. Sundry and other miscellaneous income during the third quarter of 2020 included $1.0 million related to a Visa rebate and $512 thousand related to settlements. The increase in public finance underwriting fees ~~(up $430 thousand).~~ was primarily related to increased business volumes. Gains on the sale of foreclosed and other assets included a $1.3 million gain on the sale of a branch facility during the third quarter of 2019.

Other non-interest income for the nine months ended September 30, ~~2019 decreased $6.2~~2020 increased $4.9 million, or ~~17.4%~~16.5%, compared to the same period in 2018. The decrease was primarily related to decreases in sundry and other miscellaneous income (down $4.9 million) and income from customer derivative and trading activities (down $1.8 million) partly offset by an increase in public finance underwriting fees (up $299 thousand). Sundry2019. Other non-interest income during the nine months ended September 30, 2020 included approximately $6.0 million in gains realized on the sale of certain non-hedge related, short-term put options on U.S. Treasury securities with an aggregate notional amount of $500 million. The put options were not exercised and expired in March 2020. The increase in other non-interest income during the nine months ended September 30, 2020 was also partly related to increases in sundry and other miscellaneous income (up $2.4 million), income from customer derivative and trading activities (up $1.6 million) and public finance underwriting fees (up $1.5 million). The aforementioned items were partly offset by decreases in gains on the sale of foreclosed and other assets (down $5.9 million) and income from customer foreign exchange transactions (down $464 thousand), among other things. Sundry and other miscellaneous income during 2020 included $1.0 million related to a Visa volume-related bonus, $512 thousand related to settlements and $2.8 million related to the recovery of prior write-offs. Sundry and other miscellaneous income during 2019 included $1.1 million related to the recovery of prior write-offs, ~~$277~~$278 thousand related to ~~distributions from~~a distribution on a private equity investment and $250 thousand related to a settlement, among other things, while sundry income for the same period in 2018 included $4.5 million related to the recovery of prior write-offs, $1.2 million related to a distribution from a private equity investment and $775 thousand related to the settlement of an insurance claim, among other things.settlement. The fluctuations in income from customer derivative and trading activities, public finance underwriting fees and income from ~~customer derivative and trading activities during the three and nine months ended September 30, 2019~~foreign exchange transactions were primarily related to changes in business volumes. ~~Other non-interest income also~~Gains on the sale of foreclosed and other assets included gains on the sale of various branch and operational facilities totaling $758 thousand and $6.7 million, during the nine months ended September 30, 2020 and 2019, ~~and $6.8 million during the same period in 2018.~~respectively.

Non-Interest Expense

The components of non-interest expense were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018			2020		2019		2020		2019
Salaries and wages	$	93,812	$	87,547	$	277,078	$	259,434	Salaries and wages	$	93,323	$	93,812	$	282,485	$	277,078
Employee benefits	21,002		18,355		64,579		58,257		Employee benefits	16,074		21,002		59,824		64,579
Net occupancy	24,202		19,894		64,602		59,089		Net occupancy	25,466		24,202		76,116		64,602
Technology, furniture and equipment	22,415		21,004		66,236		61,142		Technology, furniture and equipment	26,482		22,415		77,768		66,236
Deposit insurance	2,491		4,694		7,752		14,178		Deposit insurance	2,372		2,491		7,796		7,752
Intangible amortization	274		336		904		1,093		Intangible amortization	212		274		710		904
Other	44,668		41,838		132,722		125,994		Other	38,221		44,668		121,293		132,722
Total	$	208,864	$	193,668	$	613,873	$	579,187	Total	$	202,150	$	208,864	$	625,992	$	613,873

Total non-interest expense for the three and nine months ended September 30, ~~2019 increased $15.2~~2020 decreased $6.7 million, or ~~7.8%~~3.2%, and ~~$34.7~~increased $12.1 million, or ~~6.0%~~2.0%, respectively, compared to the same periods in ~~2018, respectively.~~2019. Changes in the various components of non-interest expense are discussed below.

Salaries and Wages. Salaries and wages for the three and nine months ended September 30, ~~2019~~2020 decreased $489 thousand, or 0.5%, and increased ~~$6.3~~$5.4 million, or ~~7.2%, and $17.6 million, or 6.8%~~2.0%, compared to the same periods in ~~2018. The increases were primarily related to increases~~2019. Despite an increase in salaries, due to an increase in the number of employees and normal, annual merit and market increases, salaries and towages during the three months ended September 30, 2020, decreased primarily as a ~~lesser extent, increases~~result of decreases in incentive compensation, commissions and stock-based compensation. ~~The increase for~~Salaries and wages during the nine months ended September 30, ~~2019~~2020 increased primarily due to an increase in salaries, due to an increase in the number of employees and normal, annual merit and market increases. This increase was ~~also impacted~~partly offset by an increase in ~~stock compensation.~~salary costs deferred as loan origination costs, up $5.9 million primarily in connection with the high volume of PPP loan originations during the second quarter of 2020, and decreases in incentive compensation, stock-based compensation and commissions. Salary costs deferred in connection with loan originations will be recognized as a yield adjustment component of interest income over the remaining terms of these loans.

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Employee Benefits. Employee benefits expense for the three and nine months ended September 30, ~~2019 increased $2.6~~2020 decreased $4.9 million, or ~~14.4%~~23.5%, and ~~$6.3~~decreased $4.8 million, or ~~10.9%~~7.4%, compared to the same periods in ~~2018, respectively.~~2019. The ~~increases~~decreases in employee benefits expense were primarily ~~due~~related to ~~increases~~decreases in ~~medical benefits expense (up $838 thousand~~certain discretionary benefit plan expenses and ~~$2.1 million, respectively),~~ expenses related to our defined benefit retirement and restoration plans ~~(up $585 thousand and $1.8 million, respectively), expenses related to our 401(k) plan (up $373 thousand and $1.3 million, respectively)~~partly offset by increases in medical benefits expense and payroll taxes, ~~(up $562 thousand and $859 thousand, respectively).~~among other things.

During the three and nine months ended September 30, 2019, we recognized a combined net periodic pension expense of $331 thousand and $993 thousand, respectively, related to our defined benefit retirement plans compared to a combined net periodic pension benefit of $254 thousand and $762 thousand during the same periods in 2018. Our defined benefit retirement and restoration plans were frozen effective as of December 31, 2001 and were replaced by a profit sharing plan (which was merged with and into our 401(k) plan during 2019). Management believes these actions helped to reduce the volatility in retirement plan expense. However, we still have funding obligations related to the defined benefit and restoration plans and could recognize retirement 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. A prolonged negative impact on the value of stocks and other asset classes due to the COVID-19 pandemic could result in a significant reduction to pension plan asset values and expected returns, which could impact the level of future funding and expense. See Note 12 - Defined Benefit Plans for additional information related to our net periodic pension benefit/cost.

Net Occupancy. Net occupancy expense for the three and nine months ended September 30, ~~2019~~2020 increased ~~$4.3~~$1.3 million, or ~~21.7%~~5.2%, and ~~$5.5~~increased $11.5 million, or ~~9.3%~~17.8%, respectively, compared to the same periods in ~~2018.~~2019. The ~~increases~~increase during the three months ended September 30, 2020 was primarily related to increases in depreciation on leasehold improvements (up $842 thousand), property taxes (up $805 thousand) and building depreciation (up $300 thousand), among other things, partly offset by a decrease in repairs and maintenance/service contracts expense (down $602 thousand). The increase during the nine months ended September 30, ~~2019 were~~2020 was primarily related to increases in lease expense (up ~~$3.8 million and $6.0 million, respectively) and~~$4.5 million), depreciation on leasehold improvements (up ~~$708 thousand~~$3.2 million), property taxes (up $2.4 million) and ~~$1.2 million, respectively)~~building depreciation (up $1.3 million), among other things, partly offset by ~~decreases~~a decrease in ~~property taxes (down $370 thousand~~repairs and ~~$1.9 million, respectively) and utilities~~maintenance/service contracts expense (down ~~$438 thousand and $838 thousand, respectively)~~$1.2 million). ~~Fluctuations in the foregoing categories of net~~Net occupancy expense ~~were primarily related to~~was impacted by the commencement of the lease of our new corporate headquarters building in San Antonio ~~and~~in June 2019, as well as renewals of other leases related to existing facilities and new locations, in part related to our expansion within the Houston market area.

Technology, Furniture and Equipment. Technology, furniture and equipment expense for the three and nine months ended September 30, ~~2019~~2020 increased ~~$1.4~~$4.1 million, or ~~6.7%~~18.1%, and ~~$5.1~~$11.5 million, or ~~8.3%~~17.4%, respectively, compared to the same periods in ~~2018.~~2019. The increases were primarily related to increases in cloud services expense (up $2.6 million and $6.5 million, respectively), depreciation of furniture and equipment (up $1.2 thousand and $3.2 million, respectively), software maintenance (up ~~$1.7~~$299 thousand and $2.1 million respectively) and software amortization (up $481 thousand and $1.1 million, respectively).

Deposit Insurance. Deposit insurance expense totaled $2.4 million and ~~$4.8~~$7.8 million for the three and nine months ended September 30, ~~2019, respectively). The increase for the nine months ended September 30, 2019 was also impacted by an increase in software amortization (up $483 thousand).~~

~~Deposit Insurance. Deposit insurance expense totaled~~2020 compared to $2.5 million and $7.8 million for the three and nine months ended September 30, ~~2019 compared~~2019. Provisions of the CARES Act allow, but do not require, the FDIC to ~~$4.7 million and $14.2 million for the three and nine months ended September 30, 2018. The decrease in~~expand deposit insurance ~~expense during 2019 was primarily related to the termination~~coverage for non-interest-bearing transaction accounts through December 31, 2020. Such action could result in additional deposit insurance expense. Other provisions of the ~~quarterly Deposit Insurance Fund surcharge in the fourth quarter of 2018, as further discussed below.~~

In August 2016, the Federal Deposit Insurance Corporation (“FDIC”) announced that the Deposit Insurance Fund reserve ratio had surpassed 1.15% as of June 30, 2016. As a result, beginning in the third quarter of 2016, the range of initial assessment rates for all institutions was adjusted downward and institutions with $10 billion or more in assets were assessed a quarterly surcharge. The quarterly surcharge was terminated in the fourth quarter of 2018 as the Deposit Insurance Fund reserve ratio as of September 30, 2018 exceeded the statutory minimum of 1.35% required by the Dodd-Frank Act.

~~Intangible Amortization.~~ Intangible amortization is primarily related to core deposit intangibles and, to a lesser extent, intangibles related to customer relationships and non-compete agreements. Intangible amortization for the three and nine months ended September 30, 2019 decreased $62 thousand, or 18.5%, and $189 thousand, or 17.3%, respectively, compared to the same periods in 2018. The decrease in amortization during 2019 was primarily related to the completion of amortization of certain previously recognized intangible assetsCARES Act as well as actions taken by bank regulators, such as potential relief for working with borrowers who are distressed as a reduction in the annual amortization rate of certain previously recognized intangible assets as we use an accelerated amortization approach which results in higher amortization rates during the earlier yearsresult of the ~~useful lives~~effects of ~~intangible assets.~~COVID-19, could similarly impact aggregate deposit insurance expense.

Other Non-Interest Expense. Other non-interest expense for the three and nine months ended September 30, ~~2019 increased $2.8~~2020 decreased $6.4 million, or ~~6.8%~~14.4%, and ~~$6.7~~$11.4 million, or ~~5.3%~~8.6%, respectively, compared to the same periods in ~~2018.~~2019. The ~~increase~~decrease during the three months ended September 30, ~~2019~~2020 included ~~among other things, increases~~decreases in travel, meals and entertainment expense (down $3.1 million); professional services expense (down $1.6 million); and advertising/promotions expense (down $1.2 million); among other things. The decrease during the nine months ended September 30, 2020 included decreases in travel, meals and entertainment expense (down $6.1 million); advertising/promotions expense (down $3.7 million); professional services expense (down $1.1 million); and business development expense (down $702 thousand); among other things. The decrease in other non-interest expense during the nine months ended September 30, 2020 was also partly due to an increase in costs deferred as loan origination costs, up $1.9 million primarily in connection with the high volume of PPP loan originations during the second quarter of 2020. Costs deferred in connection with loan originations will be recognized as a yield adjustment component of interest income over the remaining terms of these loans. The impact of the aforementioned items was partly offset by increases in donations expense (up ~~$2.3~~$1.1 million);, telephone/data communications expense (up $907 thousand), and platform fees related to investment services (up ~~$558~~$727 thousand); losses on the sale of foreclosed and other assets (up $424 thousand) and computer services expense (up $325 thousand). The increase from these items was partly offset by a decrease in advertising/promotions expense (down $1.3 million), among other things. The increase during the nine months ended September 30, 2019 included, among other things, increases in advertising/promotions expense, partly related to new sponsorship arrangements (up $5.5 million); professional services expense (up $2.2 million); platform fees related to investment services (up $2.1 million); and travel, meals and entertainment expense (up $1.4 million). The increase from these items was partly offset by decreases in donations expense, which was impacted by a significant contribution to our charitable foundation in 2018 (down $4.1 million); and sundry and other miscellaneous expense (down $1.4 million).

Table of Contents

Results of Segment Operations

Our operations are managed along two primary operating segments: Banking and Frost Wealth Advisors. A description of each business and the methodologies used to measure financial performance is described in Note 15 - Operating Segments in the accompanying notes to consolidated financial statements included elsewhere in this report. Net income (loss) by operating segment is presented below:


	Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended September 30,				Nine Months Ended September 30,
	2019			2018			2019			2018				2020		2019		2020		2019
Banking	$	110,583		$	114,214		$	334,393		$	327,131		Banking	$	93,507	$	110,583	$	238,023	$	334,393
Frost Wealth Advisors	4,106			6,442			15,403			17,977			Frost Wealth Advisors	4,130		4,106		13,642		15,403
Non-Banks	(2,853		)	(2,812		)	(9,878		)	(9,443		)	Non-Banks	(2,581)		(2,853)		(8,784)		(9,878)
Consolidated net income	$	111,836		$	117,844		$	339,918		$	335,665		Consolidated net income	$	95,056	$	111,836	$	242,881	$	339,918

Net income for the three and nine months ended September 30, ~~2019~~2020 decreased ~~$3.6~~$17.1 million, or ~~3.2%~~15.4%, and ~~increased $7.3~~decreased $96.4 million, or ~~2.2%~~28.8%, respectively, compared to the same periods in ~~2018.~~2019. The decrease during the three months ended September 30, ~~2019~~2020 was primarily the result of ~~an $11.5~~a $12.3 million increase in credit loss expense, a $9.9 million decrease in net interest income and a $3.5 million decrease in non-interest income partly offset by a $4.8 million decrease in non-interest expense and a ~~$5.4~~$3.9 million ~~increase in the provision for loan losses partly offset by an $11.4 million increase in net interest income, an $839 thousand increase in non-interest income and a $980 thousand~~ decrease in income tax expense. The ~~increase~~decrease during the nine months ended September 30, ~~2019~~2020 was primarily the result of a ~~$44.8~~$202.1 million increase in credit loss expense, a $19.8 million decrease in net interest income ~~partly offset by~~and a ~~$27.1~~$9.0 million increase in non-interest expense partly offset by a ~~$7.6~~$104.6 million increase in ~~the provision for loan losses~~non-interest income and a ~~$2.7~~$29.9 million ~~increase~~decrease in income tax expense.

Net interest income for the three and nine months ended September 30, ~~2019 increased $11.4~~2020 decreased $9.9 million, or ~~4.7%~~3.9%, and ~~$44.8~~decreased $19.8 million, or ~~6.3%~~2.6%, compared to the same periods in ~~2018.~~2019. The ~~increases~~decreases were primarily related to ~~increases~~decreases in the average yields on loans, ~~taxable securities and~~ interest-bearing deposits and federal funds sold and resell agreements combined with, ~~increases~~to a significantly lesser extent, decreases in the average volumes of ~~loans and~~ taxable securities (based on amortized cost) and ~~for the nine months ended September 30, 2019, an increase~~increases in the average ~~balance in tax-exempt securities.~~volume of interest bearing liabilities. The impact of these items was partly offset by increases in the average ~~rates paid on~~volumes of loans and interest-bearing deposits ~~and other borrowed funds and a decrease in the average volume of interest bearing deposits~~ (primarily ~~excess reserves~~amounts held in an interest-bearing account at the Federal Reserve). combined with decreases in the average cost of interest-bearing deposit liabilities and other borrowed funds. Net interest income for the first nine months of 2020 was also positively impacted by the additional day as a result of leap year. See the analysis of net interest income included in the section captioned “Net Interest Income” included elsewhere in this discussion.

~~The provision for loan losses~~Credit loss expense for the three and nine months ended September 30, ~~2019~~2020 totaled $20.3 million and $227.5 million, respectively, compared to $8.0 million and $25.4 ~~million compared to $2.6 million and $17.8~~ million for the same periods in ~~2018.~~2019. The increases resulted from both our adoption of a new credit loss accounting standard and the adverse events impacting our loan portfolio, including those arising from the COVID-19 pandemic and the significant decline in oil prices. See the ~~analysis of the provision for loan losses included in the section~~sections captioned “Credit Loss Expense” and “Allowance for ~~Loan~~Credit Losses” ~~included~~ elsewhere in this ~~discussion.~~discussion for further analysis of credit loss expense related to loans and off-balance-sheet commitments.

Non-interest income for the three and nine months ended September 30, ~~2019~~2020 decreased $3.5 million, or 6.7% and increased ~~$839 thousand,~~$104.6 million, or ~~1.6%~~65.0%, ~~and decreased$161 thousand, or 0.1%,~~respectively, compared to the same periods in ~~2018, respectively.~~2019. The ~~increase~~decrease during the three months ended September 30, ~~2019~~2020 was primarily due to ~~increases~~decreases in ~~service~~services charges on deposit accounts; interchange and debit card transaction fees; other charges, commissions and fees; and insurance commissions and fees partly offset by an increase in other non-interest income. The increase during the nine months ended September 30, 2020 was primarily due to a $109.0 million net gain on securities transactions. Excluding the net gain on securities transactions during the nine months ended September 30, 2020, total non-interest income for the Banking segment decreased $4.1 million, or 2.6%, compared to the same period in 2019. This decrease was primarily due to decreases in services charges on deposit accounts; insurance commissions and fees; interchange and debit card transaction fees; and other charges, commissions and fees partly offset by ~~a decrease~~an increase in other non-interest income. The ~~decrease~~decreases in services charges on deposit accounts during the three and nine months ended September 30, ~~2019 was~~2020 were primarily related to decreases in overdraft/insufficient funds charges on consumer and commercial accounts due to ~~a decrease~~decreases in ~~other non-interest income mostly offset by increases~~transaction volumes. The decreases in ~~insurance commissions and fees; service charges on deposit accounts and~~ interchange and debit card transactions fees during the three and nine months ended September 30, 2020 were impacted by reduced transaction ~~fees.~~volumes, in part related to the COVID-19 pandemic. The ~~increase~~decrease in ~~insurance~~other charges, commissions and fees during the three and nine months ended September 30, 2019 was primarily related to increased business volumes and market rates partly offset by a decrease in contingent income. The increase in service charges on deposit accounts during 2019 was primarily related to an increase in overdraft/insufficient funds charges on consumer and commercial accounts partly offset by a decrease in commercial service charges. The increase in interchange and debit card transaction fees during 2019 was primarily related to increased transaction volumes. The increase in

~~other charges, commissions and fees during the three months ended September 30, 2019 was primarily related to increases~~2020 included decreases in letter of credit fees ~~income from capital markets advisory services~~ and ~~unused balance fees on loan commitments.~~funds transfer service charges, among other things. The decreases in ~~other non-interest income during~~insurance commissions and fees for the three and nine months ended September 30, ~~2019~~2020 were ~~primarily related to~~the result of decreases in ~~sundry and other miscellaneous~~commission income and contingent income, ~~from customer derivative and trading activities partly offset by an~~which are further discussed below in relation to Frost Insurance Agency. The increase in ~~public finance underwriting fees and, for~~other non-interest income during the three months ended September 30, ~~2019,~~2020 was primarily related to an increase in sundry and other

miscellaneous income and public finance underwriting fees partly offset by a decrease in gains on the sale of foreclosed and other ~~assets.~~assets, among other things. The increase in other non-interest income during the nine months ended September 30, 2020 included approximately $6.0 million in gains realized on the sale of certain non-hedge related, short-term put options on U.S. Treasury securities with an aggregate notional amount of $500 million. The put options were not exercised and expired in March 2020. The increase in other non-interest income during the nine months ended September 30, 2020 was also partly related to increases in sundry and other miscellaneous income, income from customer derivative and trading activities and public finance underwriting fees. The aforementioned items were partly offset by decreases in gains on the sale of foreclosed and other assets and income from customer foreign exchange transactions, among other things. The fluctuations in 2020 income from customer derivative and trading activities, public finance underwriting fees and income from foreign exchange transactions were primarily related to changes in business volumes. 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 decreased $4.8 million, or 2.7%, for the three months ended September 30, 2020 and increased $9.0 million, or 1.7%, for the nine months ended September 30, 2020, compared to the same periods in 2019. The decrease during the three months ended was primarily due to decreases in other non-interest expense and employee benefits partly offset by increases in technology, furniture and equipment expense and net occupancy expense. The increase during the nine months ended was primarily related to increases in technology, furniture and equipment expense, net occupancy expense and salaries and wages partly offset by a decrease in other non-interest expense and employee benefits. The decreases in other non-interest expense during the three and nine months ended September 30, ~~2019 increased $11.5 million, or 7.0%,~~2020 included decreases in travel, meals and ~~$27.1 million, or 5.5%, compared~~entertainment expense; professional services expense; advertising/promotions expense; and business development expense among other things. The decrease in other non-interest expense during the nine months ended September 30, 2020 was also partly due to an increase in costs deferred as loan origination costs in connection with the ~~same periods~~high volume of PPP loan originations during the second quarter of 2020. The impact of the aforementioned items was partly offset by increases in ~~2018.~~donations expense, and telephone/data communications expense, among other things. The decreases in employee benefits expense during the three and nine months ended September 30, 2020 were primarily related to decreases in certain discretionary benefit plan expenses and expenses related to ourdefined benefit retirement and restoration plans partly offset by increases in medical benefits expense and payroll taxes, among other things. The increases in technology, furniture and equipment expense during the three and nine months ended September 30, 2020 were primarily related to increases in ~~salaries and wages; employee benefits; technology,~~cloud services expense, depreciation of furniture and equipment, ~~expense;~~software maintenance and software amortization. The increases in net occupancy ~~expense;~~expense during the three and nine months ended September 30, 2020 were primarily related to increases in depreciation on leasehold improvements, property taxes, and building depreciation, among other ~~non-interest expense~~things, and, for the nine months ended September 30, 2020, an increase in lease expense. The increases from these items were partly offset by decreases in ~~deposit insurance~~repairs and maintenance/service contracts expense. The ~~increases~~increase in salaries and wages during ~~2019 were~~the nine months ended September 30, 2020 was primarily related to an increase in salaries, due to an increase in the number of employees and normal, annual merit and market increases, ~~and, to a lesser extent increases in incentive compensation. The increase in salaries expense during the nine months ended September 30, 2019 was also impacted~~partly offset by an increase in ~~stock compensation. The increases~~salary costs deferred as loan origination costs, primarily in ~~employee benefits were primarily related to increases in medical benefits expense, expenses related to our defined benefit retirement plans, expenses related to our 401(k) plan~~connection with the high volume of PPP loan originations during the second quarter of 2020, and payroll taxes. The increases in technology, furniture and equipment expense during 2019 were primarily related to increases in software maintenance, software amortization and depreciation. The increases in net occupancy expense during 2019 were primarily related to increases in lease expense, depreciation on leasehold improvements and insurance expense partly offset by decreases in ~~property taxes~~incentive compensation, stock-based compensation and utilities expenses. The increase in other non-interest expense during the three months ended September 30, 2019 compared to the same period in 2018 included increases in professional services expense; losses on the sale of foreclosed and other assets; and stationary/supplies expense partly offset by a decrease in advertising/promotions expense, among other things. The increase in other non-interest expense during the nine months ended September 30, 2019 compared to the same period in 2018 included increases in advertising/promotions expense; professional services expense; travel, meals and entertainment; losses on the sale of foreclosed and other assets; and stationary/supplies expense partly offset by decreases in donations expense and sundry and other miscellaneous expense, among other things. The decreases in deposit insurance expense during 2019 were primarily related to the termination of the quarterly Deposit Insurance Fund surcharge in the fourth quarter of 2018.commissions. See the analysis of these categories of non-interest expense included in the section captioned “Non-Interest Expense” included elsewhere in this discussion.

Frost Insurance Agency, which is included in the Banking operating segment, had gross commission revenues of $11.5 million and $38.7 million during the three and nine months ended September 30, 2020 compared to $11.7 million and $40.3 million during the three and nine months ended September 30, ~~2019 compared to $11.0 million and $37.7 million during~~2019. The decreases for the three and nine months ended September 30, ~~2018.~~2020 were the result of decreases in commission income and contingent incomes. The ~~increase~~decreases in commission income were primarily related to decreases in benefit plan commissions and, during the nine months ended September 30, 2020, life insurance commissions partly offset by increases in both commercial lines and personal lines property and casualty commissions and, during the three months ended September 30, 2019 was primarily related to an increase in commissions on commercial lines property and casualty policies. The increase during the nine months ended September 30, 2019 was primarily related to increases in commissions on commercial lines property and casualty policies; benefit plan commissions; and2020, life insurance commissions. The ~~increases~~decreases in ~~property and casualty commissions and~~ benefit plan commissions were related to ~~increased~~decreased business volumes, premium reductions and flat to lower market rates. The ~~increase~~increases in commercial lines and personal lines property and casualty commissions were primarily related to increased rates. The fluctuations in life insurance commissions ~~was~~were related to ~~increased~~changes in business volumes. The decrease in contingent income during 2020 was partly due to lower growth and a deterioration in the loss performance of insurance policies previously placed. See the analysis of insurance commissions and fees included in the section captioned “Non-Interest Income” included elsewhere in this discussion.

Net income for the three and nine months ended September 30, ~~2019~~2020 increased $24 thousand, or 0.6%, and decreased ~~$2.3~~$1.8 million, or ~~36.3%~~11.4%, ~~and $2.6 million, or 14.3%,~~respectively, compared to the same periods in ~~2018.~~2019. During the three months ended September 30, 2020 a $2.3 million decrease in non-interest expense was mostly offset by a $1.9 million decrease in non-interest income, a $387 thousand decrease in net interest income and a $7 thousand increase in income tax expense. The decrease in net income during the nine months ended September 30, 2020 was primarily related to a $2.7 million increase in non-interest expense and a $875

Net interest income for the three and nine months ended September 30, 2020 decreased $387 thousand, or 39.1%, and $875 thousand, or 28.8%, respectively, compared to the same periods in 2019. These decreases were primarily ~~related~~due to ~~increases in non-interest expense (up $3.6 million and $7.8 million, respectively) partly offset by increases in non-interest income (up $720 thousand and $4.6 million, respectively) and~~ decreases in the average funds transfer prices allocated to the funds provided by Frost Wealth Advisors. The decreases in the average funds transfer prices were primarily due to decreases in market interest rates. See the analysis of net interest income ~~tax expense (down $621 thousand and $686 thousand, respectively).~~included in the section captioned “Net Interest Income” included elsewhere in this discussion.

Non-interest income for the three and nine months ended September 30, ~~2019 increased $720 thousand,~~2020 decreased $1.9 million, or ~~2.0%~~5.1%, and ~~$4.6~~increased $1.3 million, or ~~4.4%~~1.2%, respectively, compared to the same periods in ~~2018.~~2019. The ~~increases were~~decrease during the three months ended September 30, 2020 was primarily related to a decrease in other charges, commissions and fees. The increase during the nine months end September 30, 2020 was primarily related to an increase in trust and investment management fees partly offset by decreases in other charges, commissions and fees. Trust and investment management fee income is the most significant income component for Frost Wealth Advisors. Investment fees are the most significant component of trust and investment management fees, making up approximately ~~82.5%~~82.7% of total trust and investment management fees for the first nine months of 2019. Investment and other custodial account fees are generally based on the market value of assets within a trust account. Volatility in the equity and bond markets impacts the market value of trust assets and the related investment fees. The increases in trust2020. Trust and investment management fees during the three and nine months ended September 30, ~~2019 compared to the same periods in 2018~~2020 were ~~primarily the result of~~impacted by increases in trust investment fees, estate fees and real estate fees and decreases in oil and gas fees and tax fees. The decrease in other charges, commissions and fees during the three months ended September 30, 2020 was primarily related to decreases in income from the placement of money market accounts and mutual funds, among other things, partly offset by an increase in income from the placement of annuities. The decrease in other charges commissions and fees during the nine months ended September 30, 2020 was primarily due to ~~higher average equity valuations~~decreases in income from the placement of money market accounts and life insurance, among other things, partly offset by increases in income from the placement of annuities and mutual funds and an increase in brokerage commissions. Income from the ~~number~~placement of ~~accounts.~~money market accounts was impacted by a decrease in market rates. The other aforementioned revenue streams were impacted by fluctuations in transaction volumes. See the analysis of trust and investment management fees, particularly as it relates to the effects of the COVID-19 pandemic, and other charges, commissions and fees included in the section captioned “Non-Interest Income” included elsewhere in this discussion.

Non-interest expense for the three and nine months ended September 30, ~~2019 increased $3.6~~2020 decreased $2.3 million, or ~~12.7%~~7.1%, and ~~$7.8~~increased $2.7 million, or ~~9.4%~~2.9%, respectively, compared to the same periods in ~~2018.~~2019. The ~~increases were~~decrease during the three months ended September 30, 2020 was primarily ~~related~~due to ~~increases~~decreases in other non-interest ~~expense, net occupancy~~ expense and salaries and wages. The increase during the nine months ended September 30, 2020 was primarily due to increases in net occupancy expense partly offset by a decrease in other non-interest expense. The decreases in other non-interest expense during ~~2019~~the three and nine months ended September 30, 2020 were primarily

~~due to increases in platform fees~~ related to ~~investment services; professional service expense; and~~decreases in travel, meals and entertainment expense and professional service expense, among other things. ~~The increases in salaries~~Salaries and wages during ~~2019~~the three months ended September 30, 2020 were ~~primarily~~impacted by decreases in incentive compensation, commissions and stock-based compensation despite an increase in salaries, due to an increase in the number of employees and normal, annual merit and market ~~increases, as well as increases in incentive compensation.~~increases. The ~~increases~~increase in net occupancy expense during ~~2019 were partly~~the nine months end September 30, 2020 was primarily related to ~~increases~~an increase in lease ~~overhead allocations.~~expense.

The Non-Banks operating segment had net losses of ~~$2.9~~$2.6 million and ~~$9.9~~$8.8 million during the three and nine months ended September 30, ~~2019,~~2020, respectively, compared to a net losses of ~~$2.8~~$2.9 million and ~~$9.4~~$9.9 million during the same periods in ~~2018.~~2019. The ~~increased~~decreases in the net losses for the three and nine months ended September 30, ~~2019~~2020 were primarily due to ~~increases~~decreases in net interest expense, ~~due~~primarily related to ~~increases~~decreases in the ~~interest rate~~average rates paid on our ~~long-term~~long term borrowings, and increases in ~~other non-interest expense partly offset by decreases in salaries and wages compared to the same periods in 2018.~~income tax benefit.

WeDuring the three months ended September 30, 2020, we recognized income tax expense of $9.5 million, for an effective tax rate of 9.1%, compared to income tax expense of $13.5 million, ~~and~~for an effective tax rate of 10.8%, during the same period in 2019. During the nine months ended September 30, 2020, we recognized income tax expense of $11.5 million, for an effective tax rate of 4.5%, compared to income tax expense of $42.4 million, for an effective tax rate of ~~10.8% and~~ 11.1%, for the ~~three and nine months ended September 30, 2019 compared to $15.2 million and $40.2 million, for an effective tax rate of 11.4% and 10.7% for the three and nine months ended September 30, 2018.~~ same period in 2019.

The effective income tax rates differed from the U.S. statutory federal income tax ~~rates~~rate of 21% during ~~2019~~2020 and ~~2018~~2019 primarily due to the effect of tax-exempt income from loans, securities and life insurance policies and the income tax effects associated with stock-based ~~compensation.~~compensation, among other things, and their relative proportion to total pre-tax net income. The decreases in the effective tax rates during 2020 were primarily related to a decrease in pre-tax net income. The effective tax rates during 2020 were also impacted by a one-time, discrete tax benefit associated with an asset contribution to a charitable trust during the second quarter.

Average Balance Sheet

Average assets totaled ~~$31.7~~$37.0 billion for the nine months ended September 30, ~~2019~~2020 representing an increase of ~~$744.8 million,~~$5.3 billion, or ~~2.4%~~16.7%, compared to average assets for the same period in ~~2018.~~2019. Earning assets increased ~~$442.4 million,~~$5.0 billion, or ~~1.5%~~17.0%, during the first nine months of ~~2019~~2020 compared to the same period in ~~2018.~~2019. The increase in earning assets was primarily related to ~~an $845.3 million~~a $2.9 billion increase ~~in average loans, a $793.9 million increase in average taxable securities and a $446.7 million increase in average tax-exempt securities mostly offset by a $1.6 billion decrease~~ in average interest-bearing deposits, federal funds sold and resell ~~agreements.~~agreements; a $2.6 billion increase in average loans; and a $256.8 million increase in average tax-exempt securities partly offset by a $723.5 million decrease in average taxable securities. Average premises and equipment increased ~~$301.5~~$206.6 million, or ~~56.6%~~24.8%, ~~primarily resulting from~~in part due to the ~~adoption~~commencement of ~~a new accounting standard which required~~ the ~~recognition of our operating leases~~lease on our ~~balance sheet (See Note 1 - Significant Accounting Policies~~new downtown San Antonio headquarters in the ~~accompanying Notes to Financial Statements).~~second quarter of 2019 as well as the commencement of other new leases associated with various new branch locations. Average deposits ~~decreased $62.6 million,~~increased $4.4 billion, or ~~0.2%~~16.8%, during the first nine months of ~~2019~~2020 compared to the same period in ~~2018.~~2019. The ~~decrease~~increase included a ~~$543.2 million decrease~~$2.8 billion increase in non-interest bearing deposits ~~mostly offset by~~and a ~~$480.7 million~~$1.6 billion increase in interest-bearing deposit accounts. Average non-interest bearing deposits made up ~~39.1%~~42.7% and ~~41.1%~~39.1% of average total deposits during the first nine months of ~~2019~~2020 and ~~2018,~~2019, respectively.

Loans were as follows as of the dates indicated:

Through September 30, 2020, we have funded approximately $3.3 billion of SBA-approved PPP loans. During the three and nine months ended September 30, 2020, we recognized approximately $21.1 million and $40.4 million, respectively, in PPP loan related deferred processing fees (net of amortization of related deferred origination costs) as yield adjustments and these amounts are included in interest income on loans during each respective period. As a result of the inclusion of these net fees in interest income, the average yield on PPP loans was approximately 3.65% and 3.86% during the three and nine months ended September 30, 2020, respectively, compared to the stated interest rate of 1.0% on these loans. As of September 30, 2020, we expect to recognize additional PPP loan related deferred processing fees (net of deferred origination costs) totaling approximately $58.5 million as a yield adjustment over the remaining terms of these loans.

Non-performing assets and accruing past due loans are presented in the table below. Troubled debt restructurings on non-accrual status are reported as non-accrual loans. Troubled debt restructurings on accrual status are reported separately.

Non-performing assets include non-accrual loans, troubled debt restructurings and foreclosed assets. Non-performing assets at September 30, ~~2019 increased $30.1~~2020 decreased $13.1 million from December 31, ~~2018 reflecting increases~~2019 primarily due to decreases in non-accrual energy loans and commercial and industrial loans, ~~energy loans~~which, for the most part, were related to the recognition of charge-offs, and a decrease in restructured ~~loans~~loans. These decreases were partly offset by ~~decreases~~an increase in non-accrual commercial real estate loans. There were no non-accrual commercial and industrial loans in excess of $5.0 million at September 30, 2019 or December 31, 2018. Non-accrual energy loans included two credit relationships in excess of $5 million totaling $65.8 million at September 30, 2019. This included a single credit relationship totaling $34.0 million that was classified as non-accrual during the third quarter of 2019. The other credit relationship, which totaled $31.8 million at September 30, 2019, was previously reported as non-accrual with an aggregate balance of $37.6 million at December 31, 2018. We charged off $4.0 million related to this credit relationship during the nine months ended September 30, 2019. Non-accrual energy loans included one other credit relationship in excess of $5 million totaling $6.4 million at December 31, 2018. Non-accrual real estate loans primarily consist of land development, 1-4 family residential construction credit relationships and loans secured by office buildings and religious facilities. There were no non-accrual commercial real estate loans in excess of $5.0 million at September 30, 2019. Non-accrual commercial real estate loans included one relationship in excess of $5.0 million totaling $12.2 million at December 31, 2018. This credit relationship was sold during the second quarter of 2019.

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 $9.4 million at September 30, 2020. This credit relationship was previously reported as non-accrual with an aggregate balance of $8.4 million at December 31, 2019. Non-accrual energy loans included three credit relationships in excess of $5 million totaling $53.7 million at September 30, 2020 and two credit relationships in excess of $5 million totaling $61.7 million at December 31, 2019. During the nine months ended September 30, 2020, we charged off $68.8 million related to energy loans. Of that amount, $48.8 million related to credit relationships previously reported as non-accrual as of December 31, 2019. Non-accrual real estate loans primarily consist of land development, 1-4 family residential construction credit relationships and loans secured by office buildings and religious facilities. There were no non-accrual commercial real estate loans in excess of $5.0 million at September 30, 2020 or December 31, 2019.

Restructured loans totaled ~~$6.2~~$3.9 million at September 30, 2020 and consisted of a single credit relationship including commercial and industrial loans, a commercial real estate loan and a consumer loan. Restructured loans at December 31, 2019 totaled $6.1 million and consisted of three credit relationships primarily related to commercial real estate. ~~There were no restructured loans at December 31, 2018.~~

Foreclosed assets represent property acquired as the result of borrower defaults on loans. Foreclosed assets are recorded at estimated fair value, less estimated selling costs, at the time of foreclosure. Write-downs occurring at foreclosure are charged against the allowance for loan losses. Regulatory guidelines require us to reevaluate the fair value of foreclosed assets on at least an annual basis. Our policy is to comply with the regulatory guidelines. Write-downs are provided for subsequent declines in value and are included in other non-interest expense along with other expenses related to maintaining the properties. ~~There~~Write-downs of foreclosed assets totaled $231 thousand during the nine months ended September 30, 2020, while there were no write-downs of foreclosed assets during the nine months ended September 30, ~~2019 while write-downs of foreclosed assets totaled $473 thousand during the nine months ended~~2019.

Accruing past due loans at September 30, ~~2018.~~2020 increased $74.4 million compared to December 31, 2019. The increase was primarily related to increases in all loan portfolio segments with the largest increases in past due commercial and industrial loans (up $30.5 million), commercial real estate loans (up $21.2 million) and energy (up $15.5 million).

Potential problem loans consist of loans that are performing in accordance with contractual terms but for which management has concerns about the ability of an obligor to continue to comply with repayment terms because of the obligor’s potential operating or financial difficulties. Management monitors these loans closely and reviews their performance on a regular basis. At September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, we had ~~$62.0~~$126.0 million and ~~$63.4~~$46.8 million in loans of this type which are not included in any one of the non-performing non-accrual, restructured or 90 days past due loan categories. At September 30, ~~2019,~~2020, potential problem loans consisted of ~~thirteen~~12 credit relationships. Of the total outstanding balance at September 30, ~~2019, 18.3%~~2020, 63.7% was related to the energy industry ~~18.2%~~and 20.6% was related to the ~~restaurant industry, 13.6% was related to the medical industry, 12.8% was related to the leasing industry and 10.6% was related to the entertainment~~hotel/lodging industry. Weakness in these organizations’ operating performance and financial condition, among other factors, have caused us to heighten the attention given to these credits.

Certain borrowers are currently unable to meet their contractual payment obligations because of the adverse effects of COVID-19. In an effort to mitigate these effects, loan customers may apply for a deferral of payments, or portions thereof, for up to 90 days. After 90 days, customers may apply for an additional deferral, and a small proportion of our customers have requested such an additional deferral. In the absence of other intervening factors, such short-term modifications made on a good faith basis are not categorized as troubled debt restructurings, nor are loans granted payment deferrals related to COVID-19 reported as past due or placed on non-accrual status (provided the loans were not past due or on non-accrual status prior to the deferral). The COVID-19 pandemic has contributed to an increased risk of delinquencies, defaults and foreclosures. As a result of the COVID-19 pandemic, a significant number and amount of our loans have experienced ratings downgrades, credit deterioration and defaults. We have a significant amount of loans in certain industries that have been particularly impacted. These include energy, retail/strip centers, hotels/lodging, restaurants, entertainment and commercial real estate, among others. See additional information about the effects of and risks associated with the COVID-19 pandemic in the section captioned “Recent Developments Related to COVID-19” elsewhere in this discussion and Part II. Other Information, Item 1A. Risk Factors elsewhere in this report.

Allowance for ~~Loan~~Credit Losses

~~The~~As discussed in Note 1 - Summary of Significant Accounting Policies in the accompanying notes to consolidated financial statements, our policies and procedures related to accounting for credit losses changed on January 1, 2020 in connection with the adoption of a new accounting standard update as codified in Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”) Financial Instruments - Credit Losses. In the case of loans and securities, allowances for credit losses are contra-asset valuation accounts, calculated in accordance with ASC 326, that are deducted from the amortized cost basis of these assets to present the net amount expected to be collected. In the case of off-balance-sheet credit exposures, the allowance for ~~loan~~credit losses is a ~~reserve established through~~liability account, calculated in accordance with ASC 326, reported as a ~~provision for loan losses charged to expense, which~~component of accrued interest payable and other liabilities in our consolidated balance sheets. The amount of each allowance account represents ~~management’s~~management's best estimate of ~~inherent~~current expected credit losses ~~that have been incurred within~~(“CECL”) on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the ~~existing portfolio~~contractual term of ~~loans. The~~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 best 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 critical accounting policies, refer to Note 1 - Summary of Significant Accounting Policies and Note 3 - Loans in the ~~judgment of management, is necessary~~accompanying notes to reserve for estimated loan losses and risks inherent in the loan portfolio. Our allowance for loan loss methodology, which is more fully described in our 2018 Form 10-K, follows the accounting guidance set forth in U.S. generally accepted accounting principles and the Interagency Policy Statement on the consolidated financial statements.

Allowance for ~~Loan and Lease~~Credit Losses which was jointly issued by U.S. bank regulatory agencies. The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss and recovery experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off.

- Loans. The table below provides, as of the dates indicated, an allocation of the allowance for loan losses by loan ~~type;~~portfolio segment; however, allocation of a portion of the allowance to one ~~category of loans~~segment does not preclude its availability to absorb losses in other ~~categories:~~segments:


	September 30, 2020		June 30, 2020		Post ASC 326 Adoption on January 1, 2020		December 31, 2019
Commercial and industrial	$	72,505	$	98,536	$	72,856	$	51,593
Energy	54,631		40,817		26,929		37,382
Commercial real estate	118,593		93,425		17,518		31,037
Consumer real estate	10,277		8,998		6,505		4,113
Consumer and other	7,469		8,285		5,794		8,042
Total	$	263,475	$	250,061	$	129,602	$	132,167

September 30,
2019 December 31,
2018
Commercial and industrial $ 52,667
$ 48,580
Energy 33,346
29,052
Commercial real estate 35,353
38,777
Consumer real estate 4,884
6,103
Consumer and other 10,309
9,620
Total $ 136,559
$ 132,132
Upon the adoption of ASC 326 on January 1, 2020, the total amount of the allowance for credit losses on loans estimated using the CECL methodology decreased $2.6 million compared to the total amount of the allowance for credit losses on loans estimated as of December 31, 2019 using the prior incurred loss model. Fluctuations in the estimated allowances by portfolio segment offset one another, for the most part, and, as a result, the overall estimated amount of allowance for credit losses did not significantly change as a result of the change in methodology. The manner in which credit loss allowances are allocated to the individual portfolio segments was partly impacted by a change in the way the underlying loans within each segment are pooled for modeling purposes. The impact of varying economic conditions and portfolio stress factors are now a component of the credit loss models applied to each modeling pool. In that regard, the amounts allocated to the underlying pools of loans within each portfolio segment more directly reflect the economic variables and portfolio stress factors that correlate with credit losses within each portfolio. Under the prior methodology, allocations in excess of those derived from historical loss rates were recognized as an overlay on each of the various portfolios based upon management judgment. Nonetheless, despite fluctuations in the allocation of portions of the overall allowance to the various portfolio segments, the entire allowance is available to absorb any credit losses within the entire loan portfolio. The remainder of this discussion focuses on expected credit losses estimated as of September 30, 2020 compared to the post ASC 326 estimate of expected credit losses as of January 1, 2020 and, in some cases, June 30, 2020.

The ~~reserve~~allowance allocated to commercial and industrial loans totaled $72.5 million, or 1.50% of total commercial and industrial loans, at September 30, ~~2019 increased $4.1 million~~2020 decreasing $351 thousand, or 0.5%, compared to ~~December 31, 2018.~~$72.9 million, or 1.40% of total commercial and industrial loans, post ASC 326 adoption on January 1, 2020. Modeled expected credit losses increased $11.7 million while Q-Factor adjustments related to commercial and industrial loans decreased $9.4 million. Specific allocations for commercial and industrial loans that were evaluated for expected credit losses on an individual basis decreased from $7.9 million post ASC 326 adoption on January 1, 2020 to $5.3 million at September 30, 2020. The ~~increase~~allowance allocated to energy loans totaled $54.6 million, or 4.01% of total energy loans, at September 30, 2020 increasing $27.7 million, or 102.9%, compared to $26.9 million, or 1.63% of total energy loans, post ASC 326 adoption on January 1, 2020. Modeled expected credit losses related to energy loans increased $15.8 million while Q-Factor adjustments related to energy loans increased $23.8

million. Specific allocations for energy loans that were evaluated for expected credit losses on an individual basis totaled $20.2 million post ASC 326 adoption on January 1, 2020. The loans to which these specific allocations were related were subsequently charged off and there were $8.4 million of specific allocations related to energy loans at September 30, 2020. The allowance allocated to commercial real estate loans totaled $118.6 million, or 1.69% of total commercial real estate loans, at September 30, 2020 increasing $101.1 million, or 577.0%, compared to $17.5 million, or 0.28% of total commercial real estate loans, post ASC 326 adoption on January 1, 2020. Modeled expected credit losses related to commercial real estate loans increased $110.6 million while Q-Factor adjustments related to commercial real estate loans decreased $10.5 million. Specific allocations for commercial real estate loans that were evaluated for expected credit losses on an individual basis increased from $383 thousand post ASC 326 adoption on January 1, 2020 to $1.3 million at September 30, 2020. The allowance allocated to consumer real estate loans totaled $10.3 million, or 0.79% of total consumer real estate loans, at September 30, 2020 increasing $3.8 million, or 58.0%, compared to $6.5 million, or 0.54% of total consumer real estate loans, post ASC 326 adoption on January 1, 2020. Modeled expected credit losses related to consumer real estate loans increased $4.3 million while Q-Factor adjustments related to consumer real estate loans decreased $540 thousand. The allowance allocated to consumer loans totaled $7.5 million, or 1.50% of total consumer loans, at September 30, 2020 increasing $1.7 million, or 28.9%, compared to $5.8 million, or 1.12% of total consumer loans, post ASC 326 adoption on January 1, 2020. Modeled expected credit losses related to consumer loans increased $1.8 million while Q-Factor adjustments related to consumer loans decreased $123 thousand.

As more fully described in Note 3 - Loans in the accompanying consolidated financial statements, 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 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 September 30, 2020, we utilized the Moody’s Analytics September 2020 CF Consensus Scenario (the “September CF Scenario”) to forecast the macroeconomic variables used in our models. The September CF Scenario was ~~primarily due~~based on the review of a variety of surveys of baseline forecasts of the U.S. economy. The September CF Scenario projections included, among other things, (i) U.S. Gross Domestic Product (“GDP”) annualized quarterly growth rates of 27.4% and 8.7% in the third and fourth quarters of 2020, respectively, followed by annualized quarterly growth rates in the range of 5.0% to 7.0% during 2021 and 3.0% to 5.0% through the end of the forecast period in the third quarter of 2022; (ii) a U.S. unemployment rate of 8.9% in the third quarter of 2020 improving to 6.6% by the fourth quarter of 2021 and 6.3% by the end of the forecast period in the third quarter of 2022 with Texas unemployment rates slightly less at those dates; and (iii) an average 10 year Treasury rate of 0.64% in the third quarter of 2020, dropping to a low of 0.30% in the third quarter of 2021 and increasing to 0.92% by the end of the forecast period in the third quarter of 2022. The September CF Scenario also projected average oil prices of $42 per barrel in the third quarter of 2020, $38 per barrel in the fourth quarter of 2020, $47 per barrel on average for the year in 2021 and $52 in the third quarter of 2022.

For our estimate of expected credit losses during the first and second quarters of 2020, our outlook for oil prices was significantly more negative as a result of the assumed persistence of the oil price war between Saudi Arabia and Russia and increasing oil supplies in the face of decreasing global demand resulting from the COVID-19 pandemic. As a result, we used significant qualitative adjustments in the determination of the allowance for credit losses on energy loans. For the third quarter of 2020, we continue to make qualitative adjustments related to the impact of oil price volatility in the determination of the allowance for credit losses on energy loans, as further discussed below.

In estimating expected credit losses as of June 30, 2020, we utilized the Moody’s Analytics June 2020 CF Consensus Scenario (the “June CF Scenario”) to forecast the macroeconomic variables used in our models. The June CF Scenario was based on the review of a variety of surveys of baseline forecasts of the U.S. economy. The June CF Scenario projections included, among other things, (i) a 36.9% decline in the U.S. GDP in the second quarter of 2020 followed by a 23.5% rebound in the third quarter of 2020; (ii) a U.S. unemployment rate of 15.8% for in the second quarter of 2020 improving to 9.6% by the fourth quarter of 2020 and 6.5% by the end of the forecast period in the second quarter of 2022 with Texas unemployment rates slightly less at those dates; and (iii) an average 10 year Treasury rate of 0.67% in the second quarter of 2020, dropping to a low of 0.34% in the second quarter of 2021 and increasing to 0.91% by the end of the forecast period in the second quarter of 2022. The June CF Scenario also projected average oil prices of $26 per barrel in the second quarter of 2020, $32 per barrel in the fourth quarter of 2020, $42 per barrel on average for the year in 2021 and $50 in the second quarter of 2022.

The economic forecast used in our initial estimate of expected credit losses under ASC 326 on January 1, 2020 projected that the Texas unemployment rate would remain below 4.0% through 2021. The increases in ~~historical valuation allowances~~modeled expected credit losses across all of our loan portfolios as of September 30, 2020 compared to the modeled expected credit losses as of our initial adoption of ASC 326 on January 1, 2020 were primarily the result of changes in our economic forecast, particularly forecasts related to unemployment and ~~specific valuation allowances~~the gross domestic product, as well as changes in portfolio volumes and risk attributes, as discussed below.

The overall loan portfolio, excluding PPP loans which are fully guaranteed by the SBA, increased $246.6 million, or 1.7%, which included a $811.0 million, or 13.1%, increase in commercial real estate loans and a $113.3 million, or 9.5%, increase in consumer real estate loans partly offset by a $367.4 million, or 7.1%, decrease in ~~macroeconomic valuation allowances. Historical valuation allowances increased $3.5~~commercial and industrial loans, a $289.5 million, ~~from $25.4~~or 17.5%, decrease in energy loans and a $20.8 million, or 4.0% decrease in consumer and other loans. The weighted average risk grade for commercial and industrial loans did not significantly change totaling 6.42 at September 30, 2020 compared to 6.44 at December 31, ~~2018 to $28.9 million at September 30,~~ 2019. ~~The increase was primarily related to an increase in the historical loss allocation factor applied to classified~~Commercial and industrial loans graded ~~as "substandard - accrual"~~“watch” and “special mention” (risk ~~grade 11)~~grades 9 and ~~an increase in~~10) increased $28.8 million during the ~~volume~~first nine months of ~~non-classified~~2020 while classified commercial and industrial loans ~~graded "watch" (risk grade 9).~~decreased $9.7 million. Classified loans consist of loans having a risk grade of 11, 12 or 13. ~~Classified commercial and industrial loans totaled $82.6 million at September 30, 2019 compared to $78.9 million at December 31, 2018.~~ The weighted-average risk grade ~~of commercial and industrial~~for energy loans ~~was 6.42~~increased to 7.39 at September 30, ~~2019 compared to 6.30~~2020 from 6.39 at December 31, 2018. Commercial loan net charge-offs totaled $5.9 million during the first nine months of 2019 compared to $19.0 million during the first nine months of 2018. Charge-offs in 2018 included $15.3 million related to four credit relationships. Specific valuation allowances for commercial and industrial loans increased $3.2 million from $2.6 million at December 31, 2018 to $5.8 million at September 30, 2019. The increase included a new specific valuation allowance totaling $2.5 million on a single credit relationships which had an aggregate outstanding balance totaling $3.1 million at September 30, 2019. Macroeconomic valuation allowances for commercial and industrial loans decreased $3.5 million from $10.6 million at December 31, 2018 to $7.1 million at September 30, 2019. The decreasein the weighted average risk grade was primarily related to a $106.3 million increase in classified energy loans and a $155.7 million increase in energy loans graded “watch” and “special mention,” while pass grade energy loans decreased $551.5 million. The weighted average risk grade for commercial real estate loans increased to 7.33 at September 30, 2020 from 7.07 at December 31, 2019. Commercial real estate loans graded as “watch” and “special mention” increased $435.4 million while classified commercial real estate loans increased $64.4 million.

As noted above our credit loss models utilized the economic forecasts in the Moody’s CF Consensus Scenario for September 2020 in the third quarter of 2020 and the Moody's CF Consensus Scenario for June 2020 in the second quarter of 2020. We qualitatively adjust the model results based on this scenario 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 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 September 30, 2020, modeled expected credit losses were adjusted upwards by a weighted-average Q-Factor adjustment of approximately 1.1%, increasing slightly from 0.7% at June 30, 2020 and decreasing from 12.9% upon the adoption of ASC 326 on January 1, 2020 (as further discussed below). The weighted-average Q-Factor adjustment at September 30, 2020 was based on a positive expected impact related to changes in lending policies, procedures and underwriting standards; a limited negative expected impact associated with changes in loan portfolio attributes and concentrations, changes in risk grades, changes in the volumes and severity of loan delinquencies and adverse classifications and potential deterioration of collateral values; and a severely negative impact from other risk factors associated with our commercial real estate construction and land loan portfolios, particularly the risks related to expected extensions.

In connection with our assessment of Q-Factor adjustments for our initial estimate of expected credit losses upon the adoption of ASC 326 on January 1, 2020, modeled expected credit losses were adjusted upwards by a weighted-average Q-Factor adjustment of approximately 12.9%, which included a 10% upward adjustment to modeled expected credit losses related to risks associated with model uncertainty and under-prediction. This adjustment was based upon the results of certain back testing procedures performed on our credit loss models. The Q-Factor adjustment as of September 30, 2020 and June 30, 2020 did not include this additional 10% upward adjustment related to risks associated with model uncertainty and under-prediction. While management believes this adjustment is appropriate in a relatively benign or moderately stressful economic environment, management nonetheless believes this adjustment is not currently appropriate given the extreme levels and volatility in macroeconomic indicators under the current economic conditions and the fact that such conditions are expected to persist for the foreseeable future. The increase in weighted-average Q-Factor adjustment during the third quarter of 2020 compared to the second quarter reflects increased risk primarily associated with our commercial real estate loan portfolio coupled with the increase in the relative proportion of such loans within our total loan portfolio.

Management also made certain other qualitative adjustments for loans within certain industries that are expected to be more significantly impacted by the COVID-19 pandemic and oil price volatility and declines as described below.

In early March 2020, Saudi Arabia announced significant price discounts on oil which resulted in a sharp decrease in global oil prices including the benchmark WTI. Saudi Arabia further announced that it would significantly increase its production leading Russia to respond in kind. These actions arose in the face of increasing global supplies and decreasing global demand. The subsequent worsening global economic outlook and decreased demand resulting from the COVID-19 pandemic resulted in further decreases in energy prices. The WTI price per barrel of crude oil was approximately $40 as of September 30, 2020 up from $20 per barrel as of March 31, 2020 but still down from approximately $61 per barrel as of December 31, 2019. In late March 2020, we established a special Energy Oversight Council to oversee and assess the credit quality of our energy loan portfolio.

As of September 30, 2020, we provided an additional qualitative adjustment for our energy loan portfolio. This adjustment was estimated based on borrowing base determinations for our energy production loans using current engineering valuations and a projected oil price deck of $30 for 2020 and increasing to $36 for 2021 and $40 for 2022. We also perform an analysis of our customers' secondary sources of capital. Through this process at September 30, 2020, we estimated an aggregate borrowing base deficiency on energy production loans totaling approximately $44.4 million compared to an aggregate borrowing base deficiency of approximately $36.0 million at June 30, 2020. The June 30, 2020 borrowing base determinations were also based on a projected oil price deck of $30 for 2020 and increasing to $36 for 2021 and $40 for 2022. Management believes that the aggregate borrowing base deficiency amount should serve as the appropriate level of expected credit losses for energy production loans. Accordingly, this resulted in an additional qualitative adjustment of $24.4 million for energy production loans at September 30, 2020, up from $20.5 million at June 30, 2020.

We performed a separate assessment of other energy loans which are primarily made up of borrowers associated with oilfield services such as transportation and logistics; equipment manufacturing and other services, among other things. Business activity among oilfield service firms has experienced contraction since March 2020; however, there are indications that the pace of contraction has significantly lessened during the third quarter of 2020 relative to the second quarter. There has been a significant decrease in the ~~general macroeconomic~~number of active oil rigs in Texas since March 2020, though the rate of decline in utilization has slowed considerably in the third quarter of 2020 relative to the second quarter. Based on the level of modeled expected credit losses for this portfolio and the expectation of more stabilized conditions with regard to business activity related to oilfield services, we determined that no additional qualitative adjustment for non-production energy loans was necessary as of September 30, 2020. As of June 30, 2020, we provided an additional qualitative adjustment of $5.0 million for non-production energy loans based upon the more negative prevailing outlook for business activity and rig utilization at that time.

In late June 2020, we established a special Commercial Real Estate Oversight Council to oversee and assess the credit quality of our non-owner occupied and construction commercial real estate loan portfolios. Due to the adverse economic effects of the COVID-19 pandemic, management believes these portfolios have an elevated level of risk that requires a higher level of oversight, particularly as it relates to monitoring risk grades, payment deferrals, covenant modifications and structuring issues, among other things.

In estimating current expected credit losses as of September 30, 2020, we determined that our credit loss models for our owner occupied commercial real estate loan portfolio were overly sensitive to the volatility of the forecasted Texas unemployment rate and the forecasted U.S. GDP. The modeled loss rate for this portfolio was significantly higher than the modeled loss rate for our commercial and industrial loan portfolio. Management believes that the loss rates for our owner occupied commercial real estate loan portfolio and our commercial and industrial loan portfolio should be similar due to the fact that that the loans within both portfolios are underwritten with the assumption that the primary repayment source is the cash flow from the operations of the borrower. This differs from non-owner occupied real estate where the primary repayment source is the cash flow generated by the underlying real estate being financed. Furthermore, our owner occupied commercial real estate loan portfolio and our commercial and industrial loan portfolio have a similar customer base. The loans within our owner occupied commercial real estate loan portfolio generally have a longer term than the loans within our commercial and industrial loan portfolio, which increases the modeled loss rate of the portfolio, despite the fact that this portfolio generally experiences lower losses in the case of default due to higher collateral valuations relative to the amount of the underlying loans. In light of the foregoing, management reduced the modeled loss allocation ~~(down $2.5 million),~~for owner occupied commercial real estate loans by $45.4 million as of September 30, 2020. Of this amount, $3.3 million was reallocated to the non-owner occupied commercial real estate loan portfolio and $2.3 million was reallocated to the commercial real estate construction loan portfolio. Additional qualitative adjustments were made for these portfolios as we believe our borrowers' ability to access the capital markets for the sale or refinancing of assets, including those under construction, may be impaired for a significant amount of time. This would require secondary sources of capital and liquidity to support completed projects, access to which may take considerably longer to stabilize than was expected at the time the loans to these borrowers were originally underwritten. Additionally, management reallocated an additional $27.1 million for specific industries within the commercial real estate loan portfolio that have been particularly impacted by the economic effects of the COVID-19 pandemic, as further discussed ~~below, and~~below. The net effect of these additional qualitative adjustments, when combined with the aforementioned 1.1% weighted-average Q-Factor adjustment, was an overall negative qualitative adjustment to the allowance for credit losses on commercial real estate loans totaling $8.7 million.

The COVID-19 pandemic has resulted in a significant decrease in commercial activity throughout the ~~environmental risk adjustment (down $936 thousand)~~State of Texas as ~~a result~~well as nationally. Efforts to limit the spread of ~~a decrease~~COVID-19 have led to the closure of non-essential businesses, travel restrictions, supply chain disruptions and prohibitions on public gatherings, among other things, throughout many parts of the United States and, in particular, the markets in which we operate. Aside from the energy industry, which is discussed above, we lend to customers operating in certain other industries that have been, and are expected to be, more significantly impacted by the effects

of the COVID-19 pandemic. These industries are presented in the ~~environmental adjustment factor. General valuation allowances~~

~~for~~following table and include amounts reported as both commercial and industrial loans ~~increased $804 thousand~~and commercial real estate loans while PPP loans are excluded.


	Outstanding Balance at September 30, 2020		Percentage of Total Loans, Excluding PPP Loans		Allocated Allowance		Allocated Allowance as a Percentage of Outstanding Balance
Retail/strip centers	$	860,889	5.74	%	$	19,105	2.22	%
Hotels/lodging	281,411		1.88		14,014		4.98
Restaurants	273,625		1.82		13,057		4.77
Entertainment	128,373		0.86		5,821		4.53
Total	$	1,544,298	10.30	%	$	51,997	3.37	%

We are continuing to monitor customers in these industries closely. In assessing these portfolios for an additional qualitative adjustment as of September 30, 2020, we performed a comprehensive review of the financial condition and overall outlook of the borrowers within these portfolios. Based on this analysis, we determined that there continues to be an elevated level of risk due to state and nationwide restrictions impacting each of these industries. As a result, we provided an additional qualitative adjustment of $27.1 million, which, for the most part, was allocated to commercial real estate loans. This amount is up from ~~$10.1 million at December 31, 2018 to~~ $10.9 million at ~~September~~June 30, ~~2019 primarily due to an increase~~2020.

Activity in ~~allocations~~the allowance for ~~excessive industry concentrations.~~credit losses on loans is presented in the following table.

The reserve allocated to energy loans at September 30, 2019 increased $4.3 million compared to December 31, 2018. As a result, reserves allocated to energy loans as a percentage of total energy loans totaled 2.16% at September 30, 2019 compared to 1.81% at December 31, 2018. This increase was primarily


	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Balance at beginning of period	$	250,061		$	134,929		$	132,167		$	132,132
Impact of adopting ASC 326	—			—			(2,565)			—
Credit loss expense	23,590			8,001			223,743			25,404
Charge-offs:
Commercial and industrial	(8,605)			(2,705)			(14,815)			(8,782)
Energy	—			(2,000)			(68,842)			(4,000)
Commercial real estate	(242)			—			(3,826)			(617)
Consumer real estate	(1,088)			(557)			(1,508)			(2,936)
Consumer and other	(4,219)			(6,357)			(13,402)			(17,157)
Total charge-offs	(14,154)			(11,619)			(102,393)			(33,492)
Recoveries:
Commercial and industrial	1,121			1,185			3,727			2,870
Energy	—			740			66			816
Commercial real estate	42			46			185			165
Consumer real estate	573			454			1,564			858
Consumer and other	2,242			2,823			6,981			7,806
Total recoveries	3,978			5,248			12,523			12,515
Net charge-offs	(10,176)			(6,371)			(89,870)			(20,977)
Balance at end of period	$	263,475		$	136,559		$	263,475		$	136,559

Ratio of allowance for credit losses on loans to:
Total loans	1.45		%	0.93		%	1.45		%	0.93		%
Total loans - excluding PPP loans	1.76			0.93			1.76			0.93
Non-accrual loans	287.71			140.14			287.71			140.14
Ratio of annualized net charge-offs to:
Average total loans	0.22			0.17			0.71			0.20
Average total loans - excluding PPP loans	0.27			0.17			0.80			0.20

Credit loss expense related to an increase in specific valuation allowances partly offset by decreases in historical valuation allowances, general valuation allowances and macroeconomic valuation allowances. Specific valuation allowances for energy loans totaled $19.7 million at September 30, 2019 and related to two credit relationships totaling $65.8 million while specific valuation allowances for energy loans totaled $9.7 million at December 31, 2018 and related to four credit relationships totaling $39.9 million. Historical valuation allowances decreased $2.3 million from $9.7 million at December 31, 2018 to $7.4 million at September 30, 2019. The decrease was partly related to decreases in the historical loss allocation factors for both non-classified energy loans and classified energy loans. The decrease was also partly related to decreases in the volume of non-classified energy loans graded as "pass"(risk grades below 9) (down $72.1 million) and "special mention" (risk grade 10) (down $41.9 million) and classified energy loans graded as "substandard - accrual" (risk grade 11) (down $10.2 million) partly offset by an increase in the volume of non-classified energy loans graded as "watch" (risk grade 9) (up $44.6 million). Total classified energy loans increased $13.7 million from $72.4 million at December 31, 2018 to $86.1 million at September 30, 2019. The weighted-average risk grade of energy loans increased to 6.36 at September 30, 2019 from 6.22 at December 31, 2018. Energy loan net charge-offs totaled $3.2$198.3 million during the nine months ended September 30, ~~2019~~2020 compared to ~~net charge-offs of $10.3 million during~~ the same period in ~~2018. Charge-offs in 2019 included $4.0 million~~2019. Credit loss expense related to a single credit relationship. We also charged-off $3.0 million related to this credit relationship in 2018 as well as $7.3 million related to two other credit relationships. General valuation allowances for energy loans decreased $1.9 million from $6.0 million at December 31, 2018 to $4.1 million at September 30, 2019. The decrease was primarily related to a decrease in the allocation for highly-leveraged transactions. Macroeconomic valuation allowances related to energy loans decreased $1.6 million from $3.7 million at December 31, 2018 to $2.1 million at September 30, 2019, due to a decrease in the general macroeconomic risk allocation (down $805 thousand), as further discussed below, and a decrease in the environmental risk adjustment (down $783 thousand), as a result of decreases in the environmental adjustment factor and the historical loss valuation allowances to which the environmental risk adjustment factor is applied.

The reserve allocated to commercial real estate loans at September 30, 2019 decreased $3.4 million compared to December 31, 2018. The decrease was primarily related to decreases in macroeconomic valuation allowances and specific valuation allowances partly offset by an increase in historical valuation allowances. Macroeconomic valuation allowances decreased $3.5 million from $11.0 million at December 31, 2018 to $7.5 million at September 30, 2019. The decrease was primarily related to a decrease in the general macroeconomic risk allocation (down $2.5 million), as further discussed below, and a decrease in the environmental risk adjustment (down $1.0 million), primarily resulting from a decrease in the environmental risk adjustment factor. Specific valuation allowances for commercial real estate loans totaled $1.5 million at September 30, 2019 decreasing $1.1 million from $2.6 million at December 31, 2018. Specific valuation allowances at December 31, 2018 primarily related to a single credit relationship totaling $12.2 million. This relationship was sold during the second quarter of 2019. We recognized net charge-offs totaling $266 thousand in connection with the sale. Specific valuation allowances for commercial real estate loans at September 30, 2019 related to three credit relationships totaling $5.0 million. Historical valuation allowances related to commercial real estate loans increased $1.2 million from $20.8 million at December 31, 2018 to $22.1 million at September 30, 2019. Non-classified commercial real estate loans increased $532.9 million from $5.6 billion at December 31, 2018 to $6.1 billion at September 30, 2019 while classified commercial real estate loans decreased $13.2 million from $118.3 million at December 31, 2018 to $105.0 million at September 30, 2019. The weighted-average risk grade of commercial real estate loans was 7.05 at both September 30, 2019 and December 31, 2018. General valuation allowances for commercial real estate loans decreased $17 thousand from $4.4 million at December 31, 2018 to $4.3 million at September 30, 2019.

The reserve allocated to consumer real estate loans at September 30, 2019 decreased $1.2 million compared to December 31, 2018. This decrease was primarily due to a $531 thousand decrease in the general macroeconomic risk allocation, as further discussed below, and a $499 thousand decrease in general valuation allowances, which was primarily related to an increase in the adjustment for recoveries combined with a decrease in the allocation for loans not reviewed by concurrence.

The reserve allocated to consumer and other loans at September 30, 2019 increased $689 thousand compared to December 31, 2018. The increase was primarily related to an increase in specific valuation allowances (up $763 thousand) as well as an increase in historical valuation allowances (up $700 thousand) primarily due to an increase in the historical loss allocation factor. These items were partly offset by decreases in macroeconomic valuation allowances (down $462 thousand) and general valuation allowances (down $312 thousand). The decrease in macroeconomic valuation allowances was primarily related to a decrease in the general macroeconomic risk allocation, as further discussed below, and a decrease in the environmental risk adjustment due to a decrease in the environmental risk adjustment factor. The decrease in general valuation allowances was primarily related to a decrease in the allocation for loans not reviewed by concurrence combined with an increase in the adjustment for recoveries.

As more fully discussed in our 2018 Form 10-K, under our allowance methodology, we allocate additional reserves for general macroeconomic risk in excess of our minimum calculated need using our allowance model. These additional reserves are based upon management's assessment of current and expected economic conditions, trends and other quantitative and qualitative portfolio risk factors that are external to us or that are not otherwise captured in our allowance modeling process but impact the credit risk or inherent losses within our loan portfolio segments. These additional reserves are allocated to our various portfolio segments based upon management judgment.

~~Activity in the allowance for loan losses is presented in the following table.~~

~~The provision for loan losses increased $7.6 million, or 42.4%,~~ during the nine months ended September 30, ~~2019 compared to~~2020 primarily reflects the ~~same period~~increase in ~~2018. The provision for loan~~expected credit losses ~~during~~resulting from a deterioration in forecasted economic conditions and the ~~nine months ended September 30, 2019 primarily~~current and uncertain future impacts associated with the COVID-19 pandemic and recent volatility in oil prices. Credit loss expense also reflects the level of net charge-offs, the deterioration of credit quality and ~~specific valuation allowances as well as the impact of an increase in classified/non-accrual loans and the overall growth in~~other changes within the loan portfolio ~~since December 31, 2018. Net charge-offs totaled $21.0 million for~~during the first nine months ended September 30, 2019 compared to $35.6 million for the same period in 2018. Specific valuation allowances totaled $29.2 million at September 30, 2019 compared to $16.2 million at December 31, 2018 and $21.5 million at September 30, 2018. Classified energy, commercial and industrial and commercial real estate loans totaled $273.7 million at September 30, 2019 compared to $269.6 million at December 31, 2018 and $288.3 million at September 30, 2018. The overall weighted-average risk grade of ~~our energy, commercial and industrial and commercial real estate loan portfolios was 6.72 at September 30, 2019 compared to 6.63 at December 31, 2018 and 6.65 at September 30, 2018.~~

2020. The ratio of the allowance for ~~loan~~credit losses on loans to total loans was ~~0.93%~~1.45% (1.76% excluding PPP

loans) at September 30, ~~2019~~2020 compared to ~~0.94%~~0.90% at December 31, ~~2018.~~2019. Management believes the recorded amount of the allowance for ~~loan~~credit losses on loans is appropriate based upon management’s best estimate of ~~probable~~current expected credit losses ~~that have been incurred~~ within the existing portfolio of loans. Should any of the factors considered by management in ~~evaluating the appropriate level of the allowance for loan losses~~making this estimate change, our estimate of ~~probable loan~~current expect credit losses could also change, which could affect the level of future ~~provisions~~credit loss expense related to loans.

Allowance for ~~loan losses.~~Credit Losses - Off-Balance-Sheet Credit Exposures. Upon the adoption of ASC 326 on January 1, 2020, the total amount of the allowance for credit losses on off-balance-sheet credit exposures estimated using the CECL methodology increased $39.4 million compared to the total amount of the allowance for credit losses on off-balance-sheet credit exposures estimated as of December 31, 2019 using the prior incurred loss model. The increase reflects the impact of assuming portions of all of these commitments will fund in the future and applying our credit loss modeling processes to such amounts as if such amounts were funded loans. Previously, we only recognized a liability for estimated incurred credit losses on off-balance-sheet credit exposures when the borrowers to which such commitments were extended exceeded certain risk grades and had not violated any underlying covenants that would relieve us of any obligation to fund additional amounts under the commitment. Subsequent to the adoption of ASC 326 on January 1, 2020, we recognized credit loss expense related to off-balance-sheet credit exposures totaling $3.8 million during the first nine months of 2020 to increase the amount of the related allowance for credit losses on off-balance-sheet credit exposures to $43.7 million as of September 30, 2020. The increase primarily reflects changes in underlying risk grades and expected utilization of available funds, an increase in overall off-balance-sheet credit exposures and a deterioration in forecasted economic conditions and the current and uncertain future impacts associated with COVID-19. Further information regarding our policies and methodology used to estimate the allowance for credit losses on off-balance-sheet credit exposures is presented in Note 6 - Off-Balance-Sheet Arrangements, Commitments, Guarantees and Contingencies in the accompanying notes to consolidated financial statements.

Capital and Liquidity

Capital. Shareholders’ equity totaled ~~$3.9~~$4.1 billion at September 30, ~~2019~~2020 and ~~$3.4~~$3.9 billion December 31, ~~2018.~~2019. In addition to net income of ~~$339.9~~$242.9 million, other sources of capital during the nine months ended September 30, ~~2019~~2020 included other comprehensive income, net of tax, of ~~$369.0~~$237.8 million; ~~$13.5~~$8.2 million related to stock-based compensation and $7.5 million in proceeds from stock option ~~exercises and $10.7~~exercises. Additionally, we issued $7.0 million

~~related~~ of common stock held in treasury to ~~stock-based compensation.~~our 401(k) plan. During the second quarter of 2020, we began to issue shares of our common stock directly to our 401(k) plan in connection with matching contributions. Previously, we contributed the matching contributions in cash which were then utilized to purchase shares of our common stock on the open market. Uses of capital during the nine months ended September 30, ~~2019~~2020 included ~~$138.2~~a $150.0 million redemption of preferred stock, $136.8 million of dividends paid on preferred and common stock, ~~$67.7 million of treasury stock purchases and $14.7~~$29.3 million related to the cumulative effect of adopting a new accounting principle ~~adopted during the first quarter~~and $14.0 million of ~~2019.~~treasury stock purchases. See Note 1 - Significant Accounting Policies.

The accumulated other comprehensive income/loss component of shareholders’ equity totaled a net, after-tax, unrealized gain of ~~$305.4~~$505.1 million at September 30, ~~2019~~2020 compared to ~~a net, after-tax, unrealized loss of $63.6~~$267.4 million at December 31, ~~2018.~~2019. The change was primarily due to a ~~$366.4~~$235.4 million net, after-tax, ~~change~~increase in the net unrealized ~~gain/loss~~gain on securities available for sale.

Under the Basel III Capital Rules, we have elected to opt-out of the requirement to include most components of accumulated other comprehensive income in regulatory capital. Accordingly, amounts reported as accumulated other comprehensive income/loss do not increase or reduce regulatory capital and are not included in the calculation of ~~risk-based~~our regulatory capital ratios. In connection with the adoption of ASC 326 on January 1, 2020, we also elected to exclude, for a transitional period, the effects of credit loss accounting under CECL in the calculation of our regulatory capital and ~~leverage~~regulatory capital 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~~on-balance-sheet and ~~off-balance sheet~~off-balance-sheet items. See Note 7 - Capital and Regulatory Matters in the accompanying notes to consolidated financial statements included elsewhere in this report.

We paid a quarterly dividend of $0.71 per common share during the first, second and third quarters of 2020, respectively, and quarterly dividends of $0.67, $0.71 and $0.71 per common share during the first, second and third quarters of 2019, ~~respectively, and a quarterly dividend of $0.57, $0.67 and $0.67 per common share during the first, second and third quarters of 2018,~~ respectively. This equates to a common stock dividend payout ratio of ~~39.6%~~57.3% and ~~37.2%~~39.6% during the first nine months of ~~2019~~2020 and ~~2018,~~2019, respectively. Our ability to declare or pay dividends on, or purchase, redeem or otherwise acquire, shares of our capital stock may be impacted by certain restrictions described in Note 7 - Capital and Regulatory Matters in the accompanying notes to consolidated financial statements included elsewhere in this report.

issuance costs were reclassified to retained earnings and reported as a reduction of net income available to common shareholders. See Note 7 – Capital and Regulatory Matters in the accompanying notes to consolidated financial statements included elsewhere in this report.

Stock Repurchase Plans. From time to time, our board of directors has authorized stock repurchase plans. In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders. Shares purchased under such plans also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards. On October 24, 2017, our board of directors authorized a $150.0 million stock repurchase program, allowing us to repurchase shares of our common stock over a two-year period from time to time at various prices in the open market or through private transactions. We repurchased 496,307 shares under this plan at a total cost of $50.0 million during the second quarter of 2019 while we repurchased 1,027,292 shares at a total cost of $100.0 million during the fourth quarter of 2018. On July 24, 2019, our board of directors authorized a $100.0 million stock repurchase program, allowing us to repurchase shares of our common stock over a one-year period from time to time at various prices in the open market or through private transactions. We repurchased 177,834 shares at a total cost of $13.7 million during the first quarter of 2020 and 202,724 shares at a total cost of $17.2 million ~~under this plan~~ during the third quarter of 2019. No further repurchases were made under this plan prior to its expiration on July 24, 2020. See Note 7 - Capital and Regulatory Matters in the accompanying notes to consolidated financial statements and Part II, Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds, each included elsewhere in this report.

Liquidity. As more fully discussed in our ~~2018~~2019 Form 10-K, our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Liquidity risk management is an important element in our asset/liability management process. We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding 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 September 30, ~~2019, management is not aware~~2020, we had approximately $6.6 billion held in an interest-bearing account at the Federal Reserve. We also have the ability to borrow funds as a member of ~~any events~~the Federal Home Loan Bank (“FHLB”). As of September 30, 2020, based upon available, pledgeable collateral, our total borrowing capacity with the FHLB was approximately $2.7 billion. Furthermore, at September 30, 2020, we had approximately $8.1 billion in securities that ~~are reasonably likely~~were unencumbered by a pledge and could be used to ~~have a material adverse effect on our liquidity, capital resources~~support additional borrowings through repurchase agreements or ~~operations.~~the Federal Reserve discount window, as needed.

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 7 - Capital and Regulatory Matters in the accompanying notes to consolidated financial statements included elsewhere in this report regarding such dividends. At September 30, ~~2019,~~2020, Cullen/Frost had liquid assets, including cash and resell agreements, totaling ~~$230.3~~$207.6 million.

Accounting Standards Updates

See Note 17 - 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Refer to the discussion of market risks included in Item 7A. Quantitative and Qualitative Disclosures About Market Risk in the ~~2018~~2019 Form 10-K. There has been no significant change in the types of market risks we face since December 31, ~~2018.~~2019.

We utilize an earnings simulation model as the primary quantitative tool in measuring the amount of interest rate risk associated with changing market rates. The model quantifies the effects of various interest rate scenarios on projected net interest income and net income over the next 12 months. The model measures the impact on net interest income relative to a flat-rate case scenario of hypothetical fluctuations in interest rates over the next 12 months. These simulations incorporate assumptions regarding balance sheet growth and mix, pricing and the repricing and maturity characteristics of the existing and projected balance sheet. The impact of interest rate derivatives, such as interest rate swaps, caps and floors, is also included in the model. Other interest rate-related risks such as prepayment, basis and option risk are also considered.

For modeling purposes, as of September 30, 2020, the model simulations projected that 100 and 200 basis point ratable increases in interest rates would result in positive variances in net interest income of 1.9% and 5.3%, respectively, relative to the flat-rate case over the next 12 months, while a 25 basis point ratable decrease in interest rates would result in a negative variance in net interest income of 1.5% relative to the flat-rate case over the next 12 months. The September 30, 2020 model simulations for increased interest rates were impacted by the assumption, for modeling purposes, that we will begin to pay interest on commercial demand deposits (those not already receiving an earnings credit rate) in the fourth quarter of 2020, as further discussed below. For modeling purposes, as of September 30, 2019, the model simulations projected that 100 and 200 basis point ratable increases in interest rates would result in positive variances in net interest income of 0.2% and 1.3%, respectively, relative to the flat-rate case over the next 12 months, while 100 and 200 basis point ratable decreases in interest rates would result in negative variances in net interest income of 1.7% and 5.7%, respectively, relative to the flat-rate case over the next 12 months. The September 30, 2019 model simulations for increased interest rates were impacted by the assumption, for modeling purposes, that we ~~will~~would begin to pay interest on commercial demand deposits (those not already receiving an earnings credit rate) in the fourth quarter of 2019, as further discussed below. ~~For modeling purposes,~~The likelihood of a decrease in interest rates beyond 25 basis points as of September 30, ~~2018, the model simulations projected that 100 and 200 basis point ratable increases in~~2020 was considered remote given prevailing interest rates would result in positive variances in net interest income of 0.3% and 1.5%, respectively, relative to the flat-rate case over the next 12 months, while 100 and 200 basis point ratable decreases in interest rates would result in negative variances in net interest income of 2.9% and 8.0%, respectively, relative to the flat-rate case over the next 12 months. The September 30, 2018 model simulations for increased interest rates were impacted by the assumption, for modeling purposes, that we would begin to pay interest on commercial demand deposits (those not already receiving an earnings credit rate) in the fourth quarter of 2018, as further discussed below. rate levels.

The model simulations as of September 30, ~~2019~~2020 indicate that our projected balance sheet is ~~less~~more asset sensitive in comparison to our ~~projected~~ balance sheet as of September 30, ~~2018.~~2019. The shift to a ~~less~~more asset sensitive position was primarily due to ~~a decrease~~an increase in the relative proportion of interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) and federal funds sold to projected average interest-earning assets. Interest-bearing deposits and federal funds sold are more immediately impacted by changes in interest rates in comparison to our other categories of earning assets. The shift to a more asset sensitive position was also partly due to a decrease in the assumed interest rate paid on projected commercial demand deposits (those not already receiving an earnings credit rate), as further discussed below.

We do not currently pay interest on a significant portion of our commercial demand deposits. ~~If we began to pay interest on commercial demand deposits (those not already receiving an earnings credit rate), our balance sheet would likely become less asset sensitive.~~ Any interest rate that would ultimately be paid on these commercial demand deposits would likely depend upon a variety of factors, some of which are beyond our control. ~~For~~Our modeling ~~purposes, we have~~simulation as of September 30, 2020 assumed a moderate pricing structure with regards to interest payments on commercial demand deposits (those not already receiving an earnings credit) with interest payments assumed to begin in the fourth quarter of 2020. This moderate pricing structure on commercial demand deposits assumes a deposit pricing beta of 25%. The pricing beta is a measure of how much deposit rates reprice, up or down, given a defined change in market rates. Our modeling simulation as of September 30, 2019 assumed a much more aggressive pricing structure with regards to interest payments for commercial demand deposits (those not already receiving anand earnings credit) ~~beginning~~with interest payments assumed to begin in the fourth ~~quarters~~quarter of ~~2018 and~~2019. We modified our assumed pricing structure during 2020 compared to 2019 ~~respectively, for each simulation. Should~~based upon our market observations during the ~~actual~~most recent interest rate paid on commercial demand deposits be less than the rate assumed in the model simulations, or should the interest rate paid for commercial demand deposits become an administered rate with less direct correlation to movements in general market interest rates, our balance sheet could be more asset sensitive than the model simulations might otherwise indicate.cycle.

As of September 30, ~~2019,~~2020, the effects of a 200 basis point increase and a ~~200~~25 basis point decrease in interest rates on our derivative holdings would not result in a significant variance in our net interest income.

The effects of hypothetical fluctuations in interest rates on our securities classified as “trading” under ASC Topic 320, “Investments—Debt and Equity Securities,” are not significant, and, as such, separate quantitative disclosure is not presented.

Item 4. Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out by management, with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report. No change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the last fiscal quarter that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Our business, financial condition, liquidity and results of operations have been, and will likely continue to be, adversely affected by the COVID-19 pandemic.

The COVID-19 pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, our business, financial condition, liquidity and results of operations. The extent to which the COVID-19 pandemic will continue to negatively affect our business, financial condition, liquidity and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic (including the possibility of resurgence of COVID-19 after initial abatement), the effectiveness of our Business Continuity and Health Emergency Response plans, the direct and indirect impact of the pandemic on our employees, customers, clients, counterparties and service providers, as well as other market participants, and actions taken, or that may yet be taken, or inaction by governmental authorities and other third parties in response to the pandemic.

The COVID-19 pandemic has contributed to:

•Increased unemployment and business disruption and decreased consumer and business confidence and consumer and commercial activity generally, leading to an increased risk of delinquencies, defaults and foreclosures.

•Higher and more volatile credit loss expense and potential for increased charge-offs, particularly as customers may need to draw on their committed credit lines to help finance their businesses and activities.

•Ratings downgrades, credit deterioration and defaults in many industries, particularly energy, retail/strip centers, hotels/lodging, restaurants, entertainment and commercial real estate.

•A sudden and significant reduction in the valuation of the equity, fixed-income and commodity markets and the significant increase in the volatility of those markets.

•A decrease in the rates and yields on U.S. Treasury securities, which may lead to decreased net interest income.

•Increased demands on capital and liquidity, leading us to cease repurchases of our common stock in order to preserve capital and provide added liquidity.

•A reduction in the value of the assets that we manage or otherwise administer or service for others, affecting related fee income and demand for our services.



~~N/A~~	(210)	220-4011
(Registrant's telephone number, including area code)



		Page
Part I - Financial Information
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets	3
	Consolidated Statements of Income	4
	Consolidated Statements of Comprehensive Income (Loss)	5
	Consolidated Statements of Changes in Shareholders’ Equity	6
	Consolidated Statements of Cash Flows	8
	Notes to Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	3641
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5672
Item 4.	Controls and Procedures	5673

Part II - Other Information
Item 1.	Legal Proceedings	5774
Item 1A.	Risk Factors	5774
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5775
Item 3.	Defaults Upon Senior Securities	5775
Item 4.	Mine Safety Disclosures	5775
Item 5.	Other Information	5775
Item 6.	Exhibits	5776

Signatures		5877


	2020		2019		2018		2017		2016		Prior		Revolving Loans		Revolving Loans Converted to Term		Total		W/A Risk Grade
Commercial and industrial
Risk grades 1-8	$	1,101,917	$	625,692	$	340,799	$	251,180	$	120,777	$	129,757	$	1,788,761	$	43,468	$	4,402,351	6.12
Risk grade 9	69,846		27,843		36,271		21,352		9,910		1,087		77,802		4,462		248,573		9.00
Risk grade 10	4,394		7,722		13,867		6,875		812		824		60,028		4,347		98,869		10.00
Risk grade 11	3,675		4,507		6,720		4,422		1,896		167		17,909		9,363		48,659		11.00
Risk grade 12	6,917		2,791		1,544		708		110		51		1,350		3,022		16,493		12.00
Risk grade 13	2,400		952		342		555		0		0		529		295		5,073		13.00
	$	1,189,149	$	669,507	$	399,543	$	285,092	$	133,505	$	131,886	$	1,946,379	$	64,957	$	4,820,018	6.42
W/A risk grade	6.12		6.81		7.20		6.32		6.37		5.87		6.32		7.92		6.42
Energy
Risk grades 1-8	$	454,901	$	25,589	$	10,956	$	6,732	$	1,481	$	4,709	$	407,478	$	24,936	$	936,782	6.18
Risk grade 9	108,859		5,542		3,190		0		0		0		90,292		14,974		222,857		9.00
Risk grade 10	486		4,113		1,461		0		907		0		7,837		2,105		16,909		10.00
Risk grade 11	78,832		15,724		3,280		1,210		0		1,066		32,398		269		132,779		11.00
Risk grade 12	24,149		4,829		714		0		0		0		10,629		5,613		45,934		12.00
Risk grade 13	0		2,192		1,490		0		0		0		4,425		0		8,107		13.00
	$	667,227	$	57,989	$	21,091	$	7,942	$	2,388	$	5,775	$	553,059	$	47,897	$	1,363,368	7.39
W/A risk grade	7.43		9.19		8.78		7.83		7.93		8.06		6.98		8.76		7.39


	2020		2019		2018		2017		2016		Prior		Revolving Loans		Revolving Loans Converted to Term		Total		W/A Risk Grade
Commercial real estate:
Buildings, land, other
Risk grades 1-8	$	1,167,872	$	1,010,418	$	829,640	$	660,047	$	430,971	$	752,461	$	62,672	$	53,480	$	4,967,561	6.98
Risk grade 9	26,056		93,113		67,546		66,365		45,477		92,060		4,413		1,042		396,072		9.00
Risk grade 10	1,362		26,080		29,357		39,853		65,702		42,528		4,147		2,876		211,905		10.00
Risk grade 11	7,416		7,108		13,425		42,660		10,487		59,730		3,038		211		144,075		11.00
Risk grade 12	1,226		5,214		169		1,372		840		3,340		51		0		12,212		12.00
Risk grade 13	200		800		0		0		0		250		63		0		1,313		13.00
	$	1,204,132	$	1,142,733	$	940,137	$	810,297	$	553,477	$	950,369	$	74,384	$	57,609	$	5,733,138	7.34
W/A risk grade	7.09		7.34		7.46		7.48		7.73		7.26		7.41		6.84		7.34
Construction
Risk grades 1-8	$	272,025	$	480,166	$	224,389	$	753	$	1,164	$	1,786	$	160,654	$	0	$	1,140,937	7.01
Risk grade 9	31,402		8,370		0		39,688		0		0		14,608		0		94,068		9.00
Risk grade 10	6,133		0		27,479		0		0		0		3,838		0		37,450		10.00
Risk grade 11	0		0		0		0		0		945		0		0		945		11.00
Risk grade 12	680		0		0		0		0		0		0		0		680		12.00
Risk grade 13	0		0		0		0		0		0		0		0		0		13.00
	$	310,240	$	488,536	$	251,868	$	40,441	$	1,164	$	2,731	$	179,100	$	0	$	1,274,080	7.25
W/A risk grade	6.87		7.18		7.74		8.98		7.29		8.02		7.00		0		7.25
Total commercial real estate	$	1,514,372	$	1,631,269	$	1,192,005	$	850,738	$	554,641	$	953,100	$	253,484	$	57,609	$	7,007,218	7.33
W/A risk grade	7.04		7.29		7.52		7.55		7.73		7.26		7.12		6.84		7.33



	~~(210)~~	~~220-4011~~
~~(Registrant's telephone number, including area code)~~


	September 30, 2019			December 31, 2018				September 30, 2020		December 31, 2019
Assets:							Assets:
Cash and due from banks	$	653,969		$	678,791		Cash and due from banks	$	499,396	$	581,857
Interest-bearing deposits	1,865,883			2,641,971			Interest-bearing deposits	6,655,784		2,849,950
Federal funds sold and resell agreements	388,049			635,017			Federal funds sold and resell agreements	20,500		356,374
Total cash and cash equivalents	2,907,901			3,955,779			Total cash and cash equivalents	7,175,680		3,788,181
Securities held to maturity, at amortized cost	1,020,838			1,106,057
Securities held to maturity, net of allowance for credit losses of $160 at September 30, 2020							Securities held to maturity, net of allowance for credit losses of $160 at September 30, 2020	1,951,384		2,030,005
Securities available for sale, at estimated fair value	12,420,446			11,387,321			Securities available for sale, at estimated fair value	10,604,480		11,269,591
Trading account securities	27,669			24,086			Trading account securities	25,808		24,298
Loans, net of unearned discounts	14,634,928			14,099,733			Loans, net of unearned discounts	18,223,877		14,750,332
Less: Allowance for loan losses	(136,559		)	(132,132		)
Less: Allowance for credit losses on loans							Less: Allowance for credit losses on loans	(263,475)		(132,167)
Net loans	14,498,369			13,967,601			Net loans	17,960,402		14,618,165
Premises and equipment, net	987,503			552,330			Premises and equipment, net	1,055,064		1,011,947
Goodwill	654,952			654,952			Goodwill	654,952		654,952
Other intangible assets, net	2,745			3,649			Other intangible assets, net	1,771		2,481
Cash surrender value of life insurance policies	186,217			183,473			Cash surrender value of life insurance policies	189,148		187,156
Accrued interest receivable and other assets	391,536			457,718			Accrued interest receivable and other assets	482,551		440,652
Total assets	$	33,098,176		$	32,292,966		Total assets	$	40,101,240	$	34,027,428

Liabilities:							Liabilities:
Deposits:							Deposits:
Non-interest-bearing demand deposits	$	10,750,244		$	10,997,494		Non-interest-bearing demand deposits	$	14,845,770	$	10,873,629
Interest-bearing deposits	16,333,338			16,151,710			Interest-bearing deposits	18,653,733		16,765,935
Total deposits	27,083,582			27,149,204			Total deposits	33,499,503		27,639,564
Federal funds purchased and repurchase agreements	1,200,655			1,367,548			Federal funds purchased and repurchase agreements	1,608,667		1,695,342
Junior subordinated deferrable interest debentures, net of unamortized issuance costs	136,285			136,242			Junior subordinated deferrable interest debentures, net of unamortized issuance costs	136,342		136,299
Subordinated notes, net of unamortized issuance costs	98,826			98,708			Subordinated notes, net of unamortized issuance costs	98,982		98,865

Accrued interest payable and other liabilities	697,371			172,347			Accrued interest payable and other liabilities	672,720		545,690
Total liabilities	29,216,719			28,924,049			Total liabilities	36,016,214		30,115,760

Shareholders’ Equity:							Shareholders’ Equity:
Preferred stock, par value $0.01 per share; 10,000,000 shares authorized; 6,000,000 Series A shares ($25 liquidation preference) issued at September 30, 2019 and December 31, 2018	144,486			144,486
Common stock, par value $0.01 per share; 210,000,000 shares authorized; 64,236,306 shares issued at September 30, 2019 and December 31, 2018	642			642
Preferred stock, par value $0.01 per share; 10,000,000 shares authorized; 6,000,000 Series A shares ($25 liquidation preference) issued at December 31, 2019							Preferred stock, par value $0.01 per share; 10,000,000 shares authorized; 6,000,000 Series A shares ($25 liquidation preference) issued at December 31, 2019	0		144,486
Common stock, par value $0.01 per share; 210,000,000 shares authorized; 64,236,306 shares issued at September 30, 2020 and December 31, 2019							Common stock, par value $0.01 per share; 210,000,000 shares authorized; 64,236,306 shares issued at September 30, 2020 and December 31, 2019	642		642
Additional paid-in capital	977,997			967,304			Additional paid-in capital	991,477		983,250
Retained earnings	2,617,500			2,440,002			Retained earnings	2,724,681		2,667,534
Accumulated other comprehensive income (loss), net of tax	305,383			(63,600		)	Accumulated other comprehensive income (loss), net of tax	505,145		267,370
Treasury stock, at cost; 1,699,662 shares at September 30, 2019 and 1,250,464 shares at December 31, 2018	(164,551		)	(119,917		)
Treasury stock, at cost; 1,454,736 shares at September 30, 2020 and 1,567,302 shares at December 31, 2019							Treasury stock, at cost; 1,454,736 shares at September 30, 2020 and 1,567,302 shares at December 31, 2019	(136,919)		(151,614)
Total shareholders’ equity	3,881,457			3,368,917			Total shareholders’ equity	4,085,026		3,911,668
Total liabilities and shareholders’ equity	$	33,098,176		$	32,292,966		Total liabilities and shareholders’ equity	$	40,101,240	$	34,027,428


	January 1, 2020
	Pre-Adoption Allowance		Impact of Adoption		Post-Adoption Allowance		Cumulative Effect on Retained Earnings
Securities held to maturity:
U.S. Treasury	$	0	$	0	$	0	$	0
Residential mortgage-backed securities	0		0		0		0
States and political subdivisions	0		215		215		(170)
Other	0		0		0		0
Total	$	0	$	215	$	215	$	(170)
Loans:
Commercial and industrial	$	51,593	$	21,263	$	72,856	$	(16,798)
Energy	37,382		(10,453)		26,929		8,258
Commercial real estate	31,037		(13,519)		17,518		10,680
Consumer real estate	4,113		2,392		6,505		(1,890)
Consumer and other	8,042		(2,248)		5,794		1,776
Total	$	132,167	$	(2,565)	$	129,602	$	2,026
Off-balance-sheet credit exposures	$	500	$	39,377	$	39,877	$	(31,108)



	September 30, 2019								December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Held to Maturity
Residential mortgage-backed securities	$	2,472	$	25	$	2	$	2,495	$	2,737	$	8	$	85	$	2,660
States and political subdivisions	1,016,866		26,563		—		1,043,429		1,101,820		11,525		552		1,112,793
Other	1,500		—		1		1,499		1,500		—		—		1,500
Total	$	1,020,838	$	26,588	$	3	$	1,047,423	$	1,106,057	$	11,533	$	637	$	1,116,953
Available for Sale
U.S. Treasury	$	2,806,802	$	20,725	$	1,731	$	2,825,796	$	3,455,417	$	1,772	$	29,500	$	3,427,689
Residential mortgage-backed securities	2,198,466		42,766		780		2,240,452		823,208		13,079		6,547		829,740
States and political subdivisions	6,931,673		380,113		413		7,311,373		7,089,132		70,760		72,690		7,087,202
Other	42,825		—		—		42,825		42,690		—		—		42,690
Total	$	11,979,766	$	443,604	$	2,924	$	12,420,446	$	11,410,447	$	85,611	$	108,737	$	11,387,321



	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
September 30, 2019
Commercial and industrial	$	15,020	$	4,874	$	7,280	$	12,154	$	5,785
Energy	88,531		4,777		65,800		70,577		19,722
Commercial real estate:
Buildings, land and other	9,553		3,864		5,015		8,879		1,483
Construction	697		697		—		697		—
Consumer real estate	293		293		—		293		—
Consumer and other	2,171		—		2,170		2,170		2,170
Total	$	116,265	$	14,505	$	80,265	$	94,770	$	29,160
December 31, 2018
Commercial and industrial	$	9,094	$	2,842	$	4,287	$	7,129	$	2,558
Energy	67,900		6,817		39,890		46,707		9,671
Commercial real estate:
Buildings, land and other	15,774		2,168		12,517		14,685		2,599
Construction	—		—		—		—		—
Consumer real estate	293		293		—		293		—
Consumer and other	1,475		—		1,407		1,407		1,407
Total	$	94,536	$	12,120	$	58,101	$	70,221	$	16,235



	September 30, 2019			December 31, 2018
	Weighted Average Risk Grade	Loans		Weighted Average Risk Grade	Loans
Commercial and industrial:
Risk grades 1-8	6.19	$	4,856,712	6.12	$	4,862,275
Risk grade 9	9.00	165,195		9.00	112,431
Risk grade 10	10.00	75,276		10.00	58,328
Risk grade 11	11.00	68,668		11.00	69,684
Risk grade 12	12.00	8,144		12.00	6,681
Risk grade 13	13.00	5,785		13.00	2,558
Total	6.42	$	5,179,780	6.30	$	5,111,957
Energy
Risk grades 1-8	5.85	$	1,379,566	5.76	$	1,451,673
Risk grade 9	9.00	80,170		9.00	35,565
Risk grade 10	10.00	1,105		10.00	43,001
Risk grade 11	11.00	15,194		11.00	25,427
Risk grade 12	12.00	51,161		12.00	37,261
Risk grade 13	13.00	19,722		13.00	9,671
Total	6.36	$	1,546,918	6.22	$	1,602,598
Commercial real estate:
Buildings, land and other
Risk grades 1-8	6.78	$	4,528,963	6.76	$	4,143,264
Risk grade 9	9.00	117,739		9.00	109,660
Risk grade 10	10.00	97,083		10.00	62,353
Risk grade 11	11.00	92,852		11.00	98,176
Risk grade 12	12.00	7,757		12.00	12,669
Risk grade 13	13.00	1,483		13.00	2,599
Total	6.99	$	4,845,877	6.98	$	4,428,721
Construction
Risk grades 1-8	7.19	$	1,314,076	7.13	$	1,177,260
Risk grade 9	9.00	31,506		9.00	60,754
Risk grade 10	10.00	21,686		10.00	24,877
Risk grade 11	11.00	2,241		11.00	4,826
Risk grade 12	12.00	697		12.00	—
Risk grade 13	13.00	—		13.00	—
Total	7.28	$	1,370,206	7.29	$	1,267,717



Remainder of 2019	$	263
2020	919
2021	697
2022	481
2023	283
Thereafter	102
	$	2,745



	Actual				Minimum Capital Required - Basel III Phase-In Schedule				Minimum Capital Required - Basel III Fully Phased-In				Required to be Considered Well Capitalized
	Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio		Capital Amount		Ratio
December 31, 2018
Common Equity Tier 1 to Risk-Weighted Assets
Cullen/Frost	$	2,642,475	12.27	%	$	1,372,573	6.375	%	$	1,507,139	7.00	%	$	1,358,171	6.50	%
Frost Bank	2,743,973		12.78		1,368,701		6.375		1,502,887		7.00		1,354,222		6.50
Tier 1 Capital to Risk-Weighted Assets
Cullen/Frost	2,786,961		12.94		1,695,532		7.875		1,830,098		8.50		1,671,595		8.00
Frost Bank	2,743,973		12.78		1,690,748		7.875		1,824,934		8.50		1,666,735		8.00
Total Capital to Risk-Weighted Assets
Cullen/Frost	3,152,593		14.64		2,126,143		9.875		2,260,709		10.50		2,089,494		10.00
Frost Bank	2,876,605		13.40		2,120,144		9.875		2,254,331		10.50		2,083,419		10.00
Leverage Ratio
Cullen/Frost	2,786,961		9.06		1,231,028		4.00		1,231,028		4.00		1,538,785		5.00
Frost Bank	2,743,973		8.93		1,229,650		4.00		1,229,650		4.00		1,537,062		5.00



Stock options	$	96
Non-vested stock awards/stock units	11,196
Performance stock units	3,432
Total	$	14,724



	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
September 30, 2019
Securities available for sale:
U.S. Treasury	$	2,825,796	$	—	$	—	$	2,825,796
Residential mortgage-backed securities	—		2,240,452		—		2,240,452
States and political subdivisions	—		7,311,373		—		7,311,373
Other	—		42,825		—		42,825
Trading account securities:
U.S. Treasury	23,747		—		—		23,747
States and political subdivisions	—		3,922		—		3,922
Derivative assets:
Interest rate swaps, caps and floors	—		55,842		—		55,842
Commodity swaps and options	—		16,534		—		16,534
Foreign currency forward contracts	24		—		—		24
Derivative liabilities:
Interest rate swaps, caps and floors	—		24,855		—		24,855
Commodity swaps and options	—		16,086		—		16,086
Foreign currency forward contracts	11		—		—		11
December 31, 2018
Securities available for sale:
U.S. Treasury	$	3,427,689	$	—	$	—	$	3,427,689
Residential mortgage-backed securities	—		829,740		—		829,740
States and political subdivisions	—		7,087,202		—		7,087,202
Other	—		42,690		—		42,690
Trading account securities:
U.S. Treasury	21,928		—		—		21,928
States and political subdivisions	—		2,158		—		2,158
Derivative assets:
Interest rate swaps, caps and floors	—		19,806		—		19,806
Commodity swaps and options	—		26,768		—		26,768
Foreign currency forward contracts	193		—		—		193
Derivative liabilities:
Interest rate swaps, caps and floors	—		18,520		—		18,520
Commodity swaps and options	—		26,320		—		26,320
Foreign currency forward contracts	147		—		—		147


Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan	Maximum Number of Shares (or Approximate Dollar Value) That May Yet Be Purchased Under the Plan at the End of the Period
July 1, 2020 to July 31, 2020	400	(1)	$	70.56	—	$	—
August 1, 2020 to August 31, 2020	—		—		—	—
September 1, 2020 to September 30, 2020	—		—		—	—
Total	400				—



Exhibit Number			Description
31.1			Rule 13a-14(a) Certification of the Corporation's Chief Executive Officer
31.2			Rule 13a-14(a) Certification of the Corporation's Chief Financial Officer
~~32.1+~~ 32.1(1)			Section 1350 Certification of the Corporation's Chief Executive Officer
~~32.2+~~ 32.2(1)			Section 1350 Certification of the Corporation's Chief Financial Officer
~~101~~ 101.INS(2)			~~Interactive Data File - The instance document does not appear in the interactive data file because its~~Inline XBRL ~~tags are embedded within the inline XBRL document.~~Instance Document
~~104~~101.SCH			Inline XBRL Taxonomy Extension Schema Document
101.CAL			Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF			Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB			InlineXBRL Taxonomy Extension Label Linkbase Document
101.PRE			Inline XBRL Taxonomy Extension Presentation Linkbase Document
104(3)			Cover Page Interactive Data File ~~- The cover page XBRL tags are embedded within the inline XBRL document (included in Exhibit 101)~~


+	This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.