Companies: 10,649     total market cap: NZ$235.703 T
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Cullen/Frost Bankers
CFR
#2182
Rank
NZ$15.25 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
NZ$241.32
Share price
-0.10%
Change (1 day)
-2.77%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Cullen/Frost Bankers
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2022 Q2

Cullen/Frost Bankers - 10-Q quarterly report FY2022 Q2


Text size:
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United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended: June 30, 2022
Or
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ________________ to ________________
Commission file number: 001-13221
Cullen/Frost Bankers, Inc.
(Exact name of registrant as specified in its charter)
Texas74-1751768
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
111 W. Houston Street,San Antonio,Texas78205
(Address of principal executive offices)(Zip code)
(210)220-4011
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on
which registered
Common Stock, $.01 Par ValueCFRNew York Stock Exchange
Depositary Shares, each representing a 1/40th interest in a share of 4.450% Non-Cumulative Perpetual Preferred Stock, Series BCFR.PrBNew York Stock Exchange
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.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
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 July 21, 2022 there were 64,127,979 shares of the registrant’s Common Stock, $.01 par value, outstanding.


Cullen/Frost Bankers, Inc.
Quarterly Report on Form 10-Q
June 30, 2022
Table of Contents
 Page
Item 1.
3
4
5
6
8
9
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
37
Item 3.
63
Item 4.
63
Item 1.
64
Item 1A.
64
Item 2.
64
Item 3.
64
Item 4.
64
Item 5.
64
Item 6.
65
66
2
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Cullen/Frost Bankers, Inc.
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
June 30,
2022		December 31,
2021
Assets:
Cash and due from banks$743,098 $555,778 
Interest-bearing deposits12,809,937 15,985,244 
Federal funds sold95,900 34,075 
Resell agreements9,650 7,903 
Total cash and cash equivalents13,658,585 16,583,000 
Securities held to maturity, net of allowance for credit losses of $158 at June 30, 2022 and $158 at December 31, 2021
1,946,428 1,749,179 
Securities available for sale, at estimated fair value16,781,685 13,924,628 
Trading account securities24,680 25,162 
Loans, net of unearned discounts16,736,026 16,336,397 
Less: Allowance for credit losses on loans(239,632)(248,666)
Net loans16,496,394 16,087,731 
Premises and equipment, net1,046,495 1,050,331 
Goodwill654,952 654,952 
Other intangible assets, net589 866 
Cash surrender value of life insurance policies189,823 190,139 
Accrued interest receivable and other assets985,257 612,502 
Total assets$51,784,888 $50,878,490 
Liabilities:
Deposits:
Non-interest-bearing demand deposits$18,783,931 $18,423,018 
Interest-bearing deposits26,817,834 24,272,678 
Total deposits45,601,765 42,695,696 
Federal funds purchased43,200 25,925 
Repurchase agreements1,664,685 2,740,799 
Junior subordinated deferrable interest debentures, net of unamortized issuance costs123,040 123,011 
Subordinated notes, net of unamortized issuance costs99,256 99,178 
Accrued interest payable and other liabilities905,967 754,326 
Total liabilities48,437,913 46,438,935 
Shareholders’ Equity:
Preferred stock, par value $0.01 per share; 10,000,000 shares authorized; 150,000 Series B shares ($1,000 liquidation preference) issued at June 30, 2022 and December 31, 2021
145,452 145,452 
Common stock, par value $0.01 per share; 210,000,000 shares authorized; 64,236,306 shares issued at June 30, 2022 and December 31, 2021
642 642 
Additional paid-in capital1,015,451 1,009,921 
Retained earnings3,070,109 2,956,966 
Accumulated other comprehensive income (loss), net of tax(874,206)347,318 
Treasury stock, at cost; 113,267 shares at June 30, 2022 and 250,070 shares at December 31, 2021
(10,473)(20,744)
Total shareholders’ equity3,346,975 4,439,555 
Total liabilities and shareholders’ equity$51,784,888 $50,878,490 
See Notes to Consolidated Financial Statements.

3
Cullen/Frost Bankers, Inc.
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
Three Months Ended
June 30,		Six Months Ended
June 30,
2022202120222021
Interest income:
Loans, including fees$166,679 $182,695 $316,656 $350,178 
Securities:
Taxable56,365 20,602 99,423 40,630 
Tax-exempt57,078 56,111 113,944 112,774 
Interest-bearing deposits26,371 3,614 32,714 6,047 
Federal funds sold99 8 112 11 
Resell agreements10 4 14 5 
Total interest income306,602 263,034 562,863 509,645 
Interest expense:
Deposits14,593 3,499 19,505 7,016 
Federal funds purchased75 7 87 15 
Repurchase agreements1,790 570 2,308 965 
Junior subordinated deferrable interest debentures772 638 1,356 1,284 
Subordinated notes1,164 1,164 2,328 2,328 
Total interest expense18,394 5,878 25,584 11,608 
Net interest income288,208 257,156 537,279 498,037 
Credit loss expense— — — 63 
Net interest income after credit loss expense288,208 257,156 537,279 497,974 
Non-interest income:
Trust and investment management fees37,776 37,874 76,432 73,188 
Service charges on deposit accounts23,870 19,849 46,610 39,842 
Insurance commissions and fees11,776 10,773 28,384 28,086 
Interchange and card transaction fees4,911 4,641 9,137 8,734 
Other charges, commissions and fees9,887 8,640 19,514 16,944 
Net gain (loss) on securities transactions— — — — 
Other9,707 9,470 19,240 17,689 
Total non-interest income97,927 91,247 199,317 184,483 
Non-interest expense:
Salaries and wages116,881 97,035 228,210 190,493 
Employee benefits20,733 18,728 44,953 41,264 
Net occupancy28,379 26,650 55,790 52,701 
Technology, furniture and equipment29,921 27,998 59,078 56,014 
Deposit insurance3,724 2,877 7,357 5,805 
Intangible amortization131 185 277 387 
Other46,578 41,781 89,414 78,732 
Total non-interest expense246,347 215,254 485,079 425,396 
Income before income taxes139,788 133,149 251,517 257,061 
Income taxes20,674 15,081 33,301 22,978 
Net income119,114 118,068 218,216 234,083 
Preferred stock dividends1,669 1,669 3,338 3,820 
Net income available to common shareholders$117,445 $116,399 $214,878 $230,263 
Earnings per common share:
Basic$1.82 $1.81 $3.32 $3.59 
Diluted1.81 1.80 3.31 3.57 
See Notes to Consolidated Financial Statements.
4
Cullen/Frost Bankers, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(Dollars in thousands)
Three Months Ended
June 30,		Six Months Ended
June 30,
2022202120222021
Net income$119,114 $118,068 $218,216 $234,083 
Other comprehensive income (loss), before tax:
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period(636,523)30,668 (1,547,318)(129,111)
Change in net unrealized gain on securities transferred to held to maturity(189)(245)(398)(504)
Reclassification adjustment for net (gains) losses included in net income— — — — 
Total securities available for sale and transferred securities(636,712)30,423 (1,547,716)(129,615)
Defined-benefit post-retirement benefit plans:
Reclassification adjustment for net amortization of actuarial gain/loss included in net income as a component of net periodic cost (benefit)741 1,529 1,482 3,058 
Total defined-benefit post-retirement benefit plans741 1,529 1,482 3,058 
Other comprehensive income (loss), before tax(635,971)31,952 (1,546,234)(126,557)
Deferred tax expense (benefit)
(133,555)6,710 (324,710)(26,577)
Other comprehensive income (loss), net of tax(502,416)25,242 (1,221,524)(99,980)
Comprehensive income (loss)$(383,302)$143,310 $(1,003,308)$134,103 
See Notes to Consolidated Financial Statements.
5
Cullen/Frost Bankers, Inc.
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands, except per share amounts)
Preferred
Stock		Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax		Treasury
Stock		Total
Three months ended:
June 30, 2022
Balance at beginning of period$145,452 $642 $1,012,033 $3,002,642 $(371,790)$(12,687)$3,776,292 
Net income— — — 119,114 — — 119,114 
Other comprehensive income (loss), net of tax— — — — (502,416)— (502,416)
Stock option exercises/stock unit conversions (28,832 shares)
— — — (1,463)— 2,214 751 
Stock-based compensation expense recognized in earnings— — 3,418 — — — 3,418 
Cash dividends – Series B preferred stock (approximately $11.13 per share which is equivalent to approximately $0.28 per depositary share)
— — — (1,669)— — (1,669)
Cash dividends – common stock ($0.75 per share)
— — — (48,515)— — (48,515)
Balance at end of period$145,452 $642 $1,015,451 $3,070,109 $(874,206)$(10,473)$3,346,975 
June 30, 2021
Balance at beginning of period$145,452 $642 $999,694 $2,797,064 $387,748 $(62,682)$4,267,918 
Net income— — — 118,068 — — 118,068 
Other comprehensive income (loss), net of tax— — — — 25,242 — 25,242 
Stock option exercises/stock unit conversions (114,252 shares)
— — — (4,225)— 11,510 7,285 
Stock-based compensation expense recognized in earnings— — 3,245 — — — 3,245 
Cash dividends – Series B preferred stock (approximately $11.13 per share which is equivalent to approximately $0.28 per depositary share)
— — — (1,669)— — (1,669)
Cash dividends – common stock ($0.72 per share)
— — — (46,272)— — (46,272)
Balance at end of period$145,452 $642 $1,002,939 $2,862,966 $412,990 $(51,172)$4,373,817 
See accompanying Notes to Consolidated Financial Statements

6
Cullen/Frost Bankers, Inc.
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands, except per share amounts)
Preferred
Stock		Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax		Treasury
Stock		Total
Six months ended:
June 30, 2022
Balance at beginning of period$145,452 $642 $1,009,921 $2,956,966 $347,318 $(20,744)$4,439,555 
Net income— — — 218,216 — — 218,216 
Other comprehensive income (loss), net of tax— — — — (1,221,524)— (1,221,524)
Stock option exercises/stock unit conversions (144,262 shares)
— — — (4,777)— 11,267 6,490 
Stock-based compensation expense recognized in earnings— — 5,530 — — — 5,530 
Purchase of treasury stock (7,459 shares)
— — — — — (996)(996)
Cash dividends – Series B preferred stock (approximately $22.25 per share which is equivalent to approximately $0.56 per depositary share)
— — — (3,338)— — (3,338)
Cash dividends – common stock ($1.50 per share)
— — — (96,958)— — (96,958)
Balance at end of period$145,452 $642 $1,015,451 $3,070,109 $(874,206)$(10,473)$3,346,975 
June 30, 2021
Balance at beginning of period$145,452 $642 $997,168 $2,750,723 $512,970 $(113,939)$4,293,016 
Net income— — — 234,083 — — 234,083 
Other comprehensive income (loss), net of tax— — — — (99,980)— (99,980)
Stock option exercises/stock unit conversions (628,076 shares)
— — — (25,567)— 62,249 36,682 
Stock-based compensation expense recognized in earnings— — 5,771 — — — 5,771 
Purchase of treasury stock (11,625 shares)
— — — — — (1,288)(1,288)
Treasury stock issued to the 401(k) stock purchase plan (18,555 shares)
— — — (57)— 1,806 1,749 
Cash dividends – Series B preferred stock (approximately $25.46 per share which is equivalent to approximately $0.64 per depositary share)
— — — (3,820)— — (3,820)
Cash dividends – common stock ($1.44 per share)
— — — (92,396)— — (92,396)
Balance at end of period$145,452 $642 $1,002,939 $2,862,966 $412,990 $(51,172)$4,373,817 
See accompanying Notes to Consolidated Financial Statements




7
Cullen/Frost Bankers, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Six Months Ended
June 30,
20222021
Operating Activities:
Net income$218,216 $234,083 
Adjustments to reconcile net income to net cash from operating activities:
Credit loss expense— 63 
Deferred tax expense (benefit)(2,404)5,188 
Accretion of loan discounts(6,581)(6,577)
Securities premium amortization (discount accretion), net53,225 60,434 
Net (gain) loss on securities transactions— — 
Depreciation and amortization35,406 34,060 
Net (gain) loss on sale/write-down of assets/foreclosed assets103 (1,876)
Stock-based compensation5,530 5,771 
Net tax benefit from stock-based compensation1,645 4,218 
Earnings on life insurance policies(1,016)(1,343)
Net change in:
Trading account securities482 319 
Lease right-of-use assets12,042 11,697 
Accrued interest receivable and other assets(135,239)(39,195)
Accrued interest payable and other liabilities113,645 41,748 
Net cash from operating activities295,054 348,590 
Investing Activities:
Securities held to maturity:
Purchases(411,527)— 
Maturities, calls and principal repayments263,226 122,416 
Securities available for sale:
Purchases(4,778,475)(801,167)
Sales— — 
Maturities, calls and principal repayments382,152 576,763 
Proceeds from sale of loans2,365 — 
Net change in loans(404,515)884,799 
Benefits received on life insurance policies1,332 1,509 
Proceeds from sales of premises and equipment18 6,436 
Purchases of premises and equipment(28,016)(28,053)
Proceeds from sales of repossessed properties1,543 100 
Net cash from investing activities(4,971,897)762,803 
Financing Activities:
Net change in deposits2,906,069 3,718,379 
Net change in short-term borrowings(1,058,839)126,592 
Proceeds from stock option exercises6,490 36,682 
Purchase of treasury stock(996)(1,288)
Cash dividends paid on preferred stock(3,338)(3,820)
Cash dividends paid on common stock(96,958)(92,396)
Net cash from financing activities1,752,428 3,784,149 
Net change in cash and cash equivalents(2,924,415)4,895,542 
Cash and cash equivalents at beginning of period16,583,000 10,288,853 
Cash and cash equivalents at end of period$13,658,585 $15,184,395 

See Notes to Consolidated Financial Statements.
8
Notes to Consolidated Financial Statements
(Table amounts in thousands, except for share and per share amounts)
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, 2021, included in our Annual Report on Form 10-K filed with the SEC on February 4, 2022 (the “2021 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:
Six Months Ended
June 30,
20222021
Cash paid for interest$22,551 $15,936 
Cash paid for income taxes45,500 15,400 
Significant non-cash transactions:
Unsettled securities transactions110,623 358,752 
Loans foreclosed and transferred to other real estate owned and foreclosed assets— 3,251 
Right-of-use lease assets obtained in exchange for lessee operating lease liabilities8,857 1,552 
Treasury stock issued to 401(k) stock purchase plan— 1,749 
Accounting Changes, Reclassifications and Restatements. Certain items in prior financial statements have been reclassified to conform to the current presentation.
9
Note 2 - Securities
Securities - Held to Maturity. A summary of the amortized cost, fair value and allowance for credit losses related to securities held to maturity as of June 30, 2022 and December 31, 2021 is presented below.
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Estimated
Fair Value		Allowance
for Credit
Losses		Net
Carrying
Amount
June 30, 2022
Residential mortgage-backed securities
$526,675 $— $40,383 $486,292 $— $526,675 
States and political subdivisions
1,418,411 3,956 81,583 1,340,784 (158)1,418,253 
Other1,500 — 61 1,439 — 1,500 
Total$1,946,586 $3,956 $122,027 $1,828,515 $(158)$1,946,428 
December 31, 2021
Residential mortgage-backed securities
$527,264 $18,766 $— $546,030 $— $527,264 
States and political subdivisions
1,220,573 41,141 101 1,261,613 (158)1,220,415 
Other1,500 — — 1,500 — 1,500 
Total$1,749,337 $59,907 $101 $1,809,143 $(158)$1,749,179 
All mortgage-backed securities included in the above table were issued by U.S. government agencies and corporations. 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 $245.5 million and $642.3 million at June 30, 2022 and December 31, 2021, respectively. Accrued interest receivable on held-to-maturity securities totaled $18.0 million and $18.4 million at June 30, 2022 and December 31, 2021, respectively and is included in accrued interest receivable and other assets in the accompanying consolidated balance sheets.
From time to time, we have reclassified certain securities from available for sale to held to maturity. The net unamortized, unrealized gain remaining on transferred securities included in accumulated other comprehensive income in the accompanying balance sheet totaled $2.1 million ($1.7 million, net of tax) at June 30, 2022 and $2.5 million ($2.0 million, net of tax) at December 31, 2021. 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.
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 June 30, 2022 and December 31, 2021:
States and Political Subdivisions
Not Guaranteed or Pre-RefundedGuaranteed by the Texas PSFPre-RefundedTotalOther
Securities
June 30, 2022
Aaa/AAA$161,274 $764,405 $344,335 $1,270,014 $— 
Aa/AA148,397 — — 148,397 — 
Not rated— — — — 1,500 
Total$309,671 $764,405 $344,335 $1,418,411 $1,500 
December 31, 2021
Aaa/AAA$92,379 $460,648 $563,251 $1,116,278 $— 
Aa/AA
104,295 — — 104,295 — 
Not rated— — — — 1,500 
Total$196,674 $460,648 $563,251 $1,220,573 $1,500 
10
The following table details activity in the allowance for credit losses on held-to-maturity securities during the three and six months ended June 30, 2022 and 2021.
Three Months Ended
June 30,		Six Months Ended
June 30,
2022202120222021
Beginning balance$158 $158 $158 $160 
Credit loss expense (benefit)— — — (2)
Ending balance$158 $158 $158 $158 
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 June 30, 2022 and December 31, 2021 is presented below.
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Allowance
for Credit
Losses		Estimated
Fair Value
June 30, 2022
U.S. Treasury$4,656,896 $2,093 $242,690 $— $4,416,299 
Residential mortgage-backed securities
5,967,803 3,443 635,521 — 5,335,725 
States and political subdivisions
7,183,199 50,465 246,368 — 6,987,296 
Other42,365 — — — 42,365 
Total$17,850,263 $56,001 $1,124,579 $— $16,781,685 
December 31, 2021
U.S. Treasury$2,165,702 $23,333 $9,602 $— $2,179,433 
Residential mortgage-backed securities
4,059,692 31,662 25,089 — 4,066,265 
States and political subdivisions
7,178,135 463,810 5,374 — 7,636,571 
Other42,359 — — — 42,359 
Total$13,445,888 $518,805 $40,065 $— $13,924,628 
All mortgage-backed securities included in the above table were issued by U.S. government agencies and corporations. At June 30, 2022, 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 75.3% 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 $4.4 billion and $5.8 billion at June 30, 2022 and December 31, 2021, respectively. Accrued interest receivable on available-for-sale securities totaled $131.3 million and $120.5 million at June 30, 2022 and December 31, 2021, respectively, and is included in accrued interest receivable and other assets in the accompanying consolidated balance sheets.
The table below summarizes, as of June 30, 2022, 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 MonthsMore than 12 MonthsTotal
Estimated
Fair Value		Unrealized
Losses		Estimated
Fair Value		Unrealized
Losses		Estimated
Fair Value		Unrealized
Losses
U.S. Treasury$4,224,018 $242,690 $— $— $4,224,018 $242,690 
Residential mortgage-backed securities4,825,871 568,405 369,098 67,116 5,194,969 635,521 
States and political subdivisions3,249,625 241,884 13,824 4,484 3,263,449 246,368 
Total$12,299,514 $1,052,979 $382,922 $71,600 $12,682,436 $1,124,579 
As of June 30, 2022, 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 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. The unrealized losses
11
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.
Contractual Maturities. The following table summarizes the maturity distribution schedule of securities held to maturity and securities available for sale as of June 30, 2022. Mortgage-backed securities are included in maturity categories based on their stated maturity date. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Other securities classified as available for sale include stock in the Federal Reserve Bank and the Federal Home Loan Bank, which have no maturity date. These securities have been included in the total column only.
Within 1 Year1 - 5 Years5 - 10 YearsAfter 10 YearsTotal
Held To Maturity
Amortized Cost
Residential mortgage-backed securities$3 $— $514,582 $12,090 $526,675 
States and political subdivisions350,365 84,053 22,102 961,891 1,418,411 
Other— 1,500 — — 1,500 
Total$350,368 $85,553 $536,684 $973,981 $1,946,586 
Estimated Fair Value
Residential mortgage-backed securities$3 $— $475,721 $10,568 $486,292 
States and political subdivisions351,237 84,787 22,166 882,594 1,340,784 
Other— 1,439 — — 1,439 
Total$351,240 $86,226 $497,887 $893,162 $1,828,515 
Available For Sale
Amortized Cost
U. S. Treasury$— $3,031,706 $1,433,320 $191,870 $4,656,896 
Residential mortgage-backed securities55 11,080 18,743 5,937,925 5,967,803 
States and political subdivisions207,078 1,546,995 902,953 4,526,173 7,183,199 
Other— — — — 42,365 
Total$207,133 $4,589,781 $2,355,016 $10,655,968 $17,850,263 
Estimated Fair Value
U. S. Treasury$— $2,957,018 $1,301,539 $157,742 $4,416,299 
Residential mortgage-backed securities55 11,231 18,792 5,305,647 5,335,725 
States and political subdivisions209,138 1,579,097 893,132 4,305,929 6,987,296 
Other— — — — 42,365 
Total$209,193 $4,547,346 $2,213,463 $9,769,318 $16,781,685 
Sales of Securities. No held to maturity or available for sale securities were sold during the three or six months ended June 30, 2022 or 2021.
Premiums and Discounts. Premium amortization and discount accretion included in interest income on securities was as follows:
Three Months Ended
June 30,		Six Months Ended
June 30,
2022202120222021
Premium amortization$(28,053)$(30,541)$(57,113)$(61,776)
Discount accretion2,482 705 3,888 1,342 
Net (premium amortization) discount accretion$(25,571)$(29,836)$(53,225)$(60,434)
Trading Account Securities. Trading account securities, at estimated fair value, were as follows:
June 30,
2022		December 31,
2021
U.S. Treasury$24,615 $24,237 
States and political subdivisions65 925 
Total$24,680 $25,162 
12
Net gains and losses on trading account securities were as follows:
Three Months Ended
June 30,		Six Months Ended
June 30,
2022202120222021
Net gain on sales transactions$1,012 $293 $1,352 $402 
Net mark-to-market gains (losses)(76)— (244)(69)
Net gain (loss) on trading account securities$936 $293 $1,108 $333 
Note 3 - Loans
Loans were as follows:
June 30,
2022		December 31,
2021
Commercial and industrial$5,539,277 $5,364,954 
Energy:
Production762,625 878,436 
Service121,356 105,901 
Other103,944 93,455 
Total energy987,925 1,077,792 
Paycheck Protection Program91,919 428,882 
Commercial real estate:
Commercial mortgages6,041,606 5,867,062 
Construction1,535,808 1,304,271 
Land478,674 405,277 
Total commercial real estate8,056,088 7,576,610 
Consumer real estate:
Home equity loans352,633 324,157 
Home equity lines of credit603,907 519,098 
Other604,495 567,535 
Total consumer real estate1,561,035 1,410,790 
Total real estate9,617,123 8,987,400 
Consumer and other499,782 477,369 
Total loans$16,736,026 $16,336,397 
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 June 30, 2022, there were no concentrations of loans related to any single industry in excess of 10% of total loans. The largest industry concentration was related to the energy industry, which totaled 5.9% of total loans (also 5.9% excluding PPP loans). Unfunded commitments to extend credit and standby letters of credit issued to customers in the energy industry totaled $887.3 million and $79.1 million, respectively, as of June 30, 2022.
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 June 30, 2022 or December 31, 2021.
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 $342.5 million at June 30, 2022 and $350.5 million at December 31, 2021.
Accrued Interest Receivable. Accrued interest receivable on loans totaled $44.8 million and $40.0 million at June 30, 2022 and December 31, 2021, respectively and is included in accrued interest receivable and other assets in the accompany consolidated balance sheets.
13
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.
Non-accrual loans, segregated by class of loans, were as follows:
June 30, 2022December 31, 2021
Total Non-AccrualNon-Accrual with No Credit Loss AllowanceTotal Non-AccrualNon-Accrual with No Credit Loss Allowance
Commercial and industrial$11,170 $3,093 $22,582 $4,701 
Energy11,114 6,442 14,433 8,533 
Paycheck Protection Program— — — — 
Commercial real estate:
Buildings, land and other11,806 6,419 15,297 13,817 
Construction— — 948 — 
Consumer real estate1,035 732 440 138 
Consumer and other— — 13 13 
Total$35,125 $16,686 $53,713 $27,202 
The following table presents non-accrual loans as of June 30, 2022 by class and year of origination.
20222021202020192018PriorRevolving LoansRevolving Loans Converted to TermTotal
Commercial and industrial$— $98 $3,520 $3,507 $1,491 $653 $108 $1,793 $11,170 
Energy5,779 — — — 21 — 5,127 187 11,114 
Paycheck Protection Program — — — — — — — — — 
Commercial real estate:
Buildings, land and other1,116 7,556 — 229 313 2,592 — — 11,806 
Construction— — — — — — — — — 
Consumer real estate— — — — — 380 — 655 1,035 
Consumer and other— — — — — — — — — 
Total$6,895 $7,654 $3,520 $3,736 $1,825 $3,625 $5,235 $2,635 $35,125 
Had non-accrual loans performed in accordance with their original contract terms, we would have recognized additional interest income, net of tax, of approximately $436 thousand and $843 thousand for the three and six months ended June 30, 2022, respectively, and approximately $427 thousand and $881 thousand for the three and six months ended June 30, 2021, respectively.
An age analysis of past due loans (including both accruing and non-accruing loans), segregated by class of loans, as of June 30, 2022 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$14,529 $3,993 $18,522 $5,520,755 $5,539,277 $3,280 
Energy200 3,275 3,475 984,450 987,925 — 
Paycheck Protection Program5,919 5,063 10,982 80,937 91,919 5,063 
Commercial real estate:
Buildings, land and other17,852 7,441 25,293 6,494,987 6,520,280 781 
Construction832 — 832 1,534,976 1,535,808 — 
Consumer real estate6,921 1,268 8,189 1,552,846 1,561,035 903 
Consumer and other4,443 598 5,041 494,741 499,782 598 
Total$50,696 $21,638 $72,334 $16,663,692 $16,736,026 $10,625 
14
Troubled Debt Restructurings. Troubled debt restructurings during the six months ended June 30, 2022 and 2021 are set forth in the following table.
Six Months Ended
June 30, 2022		Six Months Ended
June 30, 2021
Balance at
Restructure		Balance at
Period-End		Balance at
Restructure		Balance at
Period-End
Energy$— $— $3,817 $3,817 
Commercial real estate:
Buildings, land and other1,155 1,116 582 579 
$1,155 $1,116 $4,399 $4,396 
Loan modifications are typically related to extending amortization periods, converting loans to interest only for a limited period of time, deferral of interest payments, waiver of certain covenants, consolidating notes and/or reducing collateral or interest rates. The modifications during the reported periods did not significantly impact our determination of the allowance for credit losses on loans.
Information as of or for the six months ended June 30, 2022 and 2021 related to loans restructured during the preceding twelve months is set forth in the following table.
June 30, 2022June 30, 2021
Restructured loans past due in excess of 90 days at period-end:
Number of loans— 1 
Dollar amount of loans$— $1,322 
Restructured loans on non-accrual status at period end1,116 4,090 
Charge-offs of restructured loans:
Recognized in connection with restructuring— — 
Recognized on previously restructured loans723 — 
Proceeds from sale of restructured loans1,070 — 
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, (iv) non-performing loans (see details above) and (v) 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 2021 Form 10-K. 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.

15
The following tables present weighted-average risk grades for all commercial loans, by class and year of origination/renewal as of June 30, 2022. Paycheck Protection Program (“PPP”) loans are excluded as such loans are fully guaranteed by the Small Business Administration (“SBA”).
20222021202020192018PriorRevolving LoansRevolving Loans Converted to TermTotalW/A Risk Grade
Commercial and industrial
Risk grades 1-8$1,009,520 $805,675 $563,122 $267,129 $142,114 $221,192 $2,213,761 $54,235 $5,276,748 6.23 
Risk grade 912,633 21,474 6,914 9,067 20,961 8,682 79,546 5,662 164,939 9.00 
Risk grade 105,000 23,293 2,437 705 1,808 255 20,879 2,093 56,470 10.00 
Risk grade 11— 1,651 6,280 9,490 1,556 2,027 4,100 4,846 29,950 11.00 
Risk grade 12— 98 2,569 3,106 1,427 251 108 747 8,306 12.00 
Risk grade 13— — 951 401 64 402 — 1,046 2,864 13.00 
$1,027,153 $852,191 $582,273 $289,898 $167,930 $232,809 $2,318,394 $68,629 $5,539,277 6.38 
W/A risk grade6.28 7.03 6.10 6.75 7.01 5.79 6.20 7.52 6.38 
Energy
Risk grades 1-8$312,271 $111,163 $6,939 $6,332 $3,564 $5,239 $446,460 $49,185 $941,153 5.57 
Risk grade 91,660 95 268 1,192 26 — 10,955 39 14,235 9.00 
Risk grade 10— — 73 515 239 — — 58 885 10.00 
Risk grade 119,097 221 541 4,630 885 164 5,000 — 20,538 11.00 
Risk grade 123,463 — — — 21 — 2,771 187 6,442 12.00 
Risk grade 132,316 — — — — — 2,356 — 4,672 13.00 
$328,807 $111,479 $7,821 $12,669 $4,735 $5,403 $467,542 $49,469 $987,925 5.82 
W/A risk grade6.09 5.66 7.69 8.63 8.30 7.17 5.46 6.25 5.82 
Commercial real estate:
Buildings, land, other
Risk grades 1-8$1,101,851 $1,495,414 $999,836 $788,421 $428,539 $963,918 $84,964 $106,450 $5,969,393 6.90 
Risk grade 964,026 27,271 99,934 47,898 20,773 35,908 7,412 2,848 306,070 9.00 
Risk grade 105,851 17,824 17,104 52,210 20,353 53,622 3,500 — 170,464 10.00 
Risk grade 11162 434 1,269 7,189 8,969 44,318 206 — 62,547 11.00 
Risk grade 12646 6,545 — 229 313 2,592 — — 10,325 12.00 
Risk grade 13470 1,011 — — — — — — 1,481 13.00 
$1,173,006 $1,548,499 $1,118,143 $895,947 $478,947 $1,100,358 $96,082 $109,298 $6,520,280 7.12 
W/A risk grade7.01 7.23 7.16 7.25 7.28 6.95 7.24 6.44 7.12 
Construction
Risk grades 1-8$276,072 $662,364 $179,896 $100,915 $631 $1,804 $253,781 $4,247 $1,479,710 6.86 
Risk grade 911,295 637 2,670 — — 401 — — 15,003 9.00 
Risk grade 1027,992 — — 13,103 — — — — 41,095 10.00 
Risk grade 11— — — — — — — — — 11.00 
Risk grade 12— — — — — — — — — 12.00 
Risk grade 13— — — — — — — — — 13.00 
$315,359 $663,001 $182,566 $114,018 $631 $2,205 $253,781 $4,247 $1,535,808 6.96 
W/A risk grade7.10 7.12 6.64 8.21 6.21 7.16 6.10 5.01 6.96 
Total commercial real estate$1,488,365 $2,211,500 $1,300,709 $1,009,965 $479,578 $1,102,563 $349,863 $113,545 $8,056,088 7.09 
W/A risk grade7.03 7.19 7.09 7.36 7.28 6.95 6.41 6.39 7.09 
In the table above, certain energy and commercial real estate loans are reported as 2022 originations and have risk grades of 11 or higher. These loans were, for the most part, first originated in various years prior to 2022 but were renewed in the current year.
16
The following tables present weighted average risk grades for all commercial loans by class as of December 31, 2021. Refer to our 2021 Form 10-K for details of these loans by year of origination/renewal.
Commercial and IndustrialEnergyCommercial Real Estate - Buildings, Land and OtherCommercial Real Estate - ConstructionTotal Commercial Real Estate
W/A Risk GradeLoansW/A Risk GradeLoansW/A Risk GradeLoansW/A Risk GradeLoansW/A Risk GradeLoans
Risk grades 1-86.01 $5,063,847 5.78 $1,008,370 6.91 $5,574,922 6.99 $1,262,200 6.92 $6,837,122 
Risk grade 99.00 187,870 9.00 36,622 9.00 321,533 9.00 41,123 9.00 362,656 
Risk grade 1010.00 59,137 10.00 1,773 10.00 269,447 10.00 — 10.00 269,447 
Risk grade 1111.00 31,518 11.00 16,594 11.00 91,140 11.00 — 11.00 91,140 
Risk grade 1212.00 12,535 12.00 8,953 12.00 15,097 12.00 748 12.00 15,845 
Risk grade 1313.00 10,047 13.00 5,480 13.00 200 13.00 200 13.00 400 
Total6.22 $5,364,954 6.06 $1,077,792 7.22 $6,272,339 7.06 $1,304,271 7.19 $7,576,610 
Information about the payment status of consumer loans, segregated by portfolio segment and year of origination, as of June 30, 2022 was as follows:
20222021202020192018PriorRevolving LoansRevolving Loans Converted to TermTotal
Consumer real estate:
Past due 30-89 days$140 $287 $387 $668 $401 $2,771 $602 $1,665 $6,921 
Past due 90 or more days— — — 4 142 875 247 — 1,268 
Total past due140 287 387 672 543 3,646 849 1,665 8,189 
Current loans154,178 324,089 211,133 80,351 43,828 137,836 592,539 8,892 1,552,846 
Total$154,318 $324,376 $211,520 $81,023 $44,371 $141,482 $593,388 $10,557 $1,561,035 
Consumer and other:
Past due 30-89 days$1,974 $69 $64 $44 $5 $45 $32 $2,210 $4,443 
Past due 90 or more days439 — — 19 11 — — 129 598 
Total past due2,413 69 64 63 16 45 32 2,339 5,041 
Current loans31,230 30,712 10,798 4,166 1,814 2,042 391,713 22,266 494,741 
Total$33,643 $30,781 $10,862 $4,229 $1,830 $2,087 $391,745 $24,605 $499,782 
Revolving loans that converted to term during the three and six months ended June 30, 2022 and 2021 were as follows:
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Commercial and industrial$16,518 $22,111 $21,973 $31,561 
Energy247 294 247 6,177 
Commercial real estate:
Buildings, land and other10,681 8,195 10,726 31,321 
Construction13 — 4,248 — 
Consumer real estate888 205 1,684 977 
Consumer and other1,792 1,961 5,868 5,696 
Total$30,139 $32,766 $44,746 $75,732 
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 2021 Form 10-K, totaled 138.4 at June 30, 2022 and 135.9 at December 31, 2021. A higher TLI value implies more favorable economic conditions.

17
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 the net amount expected to be collected. The amount of the allowance represents management's best estimate of 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. 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 allowance related to changes in credit loss expectations associated with specific loans or pools of 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. Our allowance methodology is more fully described in our 2021 Form 10-K.
The following table presents details of the allowance for credit losses on loans segregated by loan portfolio segment as of June 30, 2022 and December 31, 2021. No allowance for credit losses has been recognized for PPP loans as such loans are fully guaranteed by the SBA.
June 30, 2022Commercial
and
Industrial		EnergyCommercial
Real Estate		Consumer
Real Estate		Consumer
and Other		Total
Modeled expected credit losses$48,776 $6,106 $20,093 $6,639 $9,609 $91,223 
Q-Factor and other qualitative adjustments35,134 3,989 95,532 133 2,526 137,314 
Specific allocations3,360 6,172 1,481 82 — 11,095 
Total$87,270 $16,267 $117,106 $6,854 $12,135 $239,632 
December 31, 2021
Modeled expected credit losses$46,946 $6,363 $16,676 $6,484 $6,397 $82,866 
Q-Factor and other qualitative adjustments14,609 5,374 127,860 65 1,440 149,348 
Specific allocations
10,536 5,480 400 36 — 16,452 
Total$72,091 $17,217 $144,936 $6,585 $7,837 $248,666 
The following table details activity in the allowance for credit losses on loans by portfolio segment for the three and six months ended June 30, 2022 and 2021. 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		EnergyCommercial
Real Estate		Consumer
Real Estate		Consumer
and Other		Total
Three months ended:
June 30, 2022
Beginning balance$87,026 $15,422 $128,954 $6,359 $9,074 $246,835 
Credit loss expense (benefit)942 427 (12,232)583 5,884 (4,396)
Charge-offs(1,891)— — (131)(5,322)(7,344)
Recoveries1,193 418 384 43 2,499 4,537 
Net charge-offs(698)418 384 (88)(2,823)(2,807)
Ending balance$87,270 $16,267 $117,106 $6,854 $12,135 $239,632 
June 30, 2021
Beginning balance$70,892 $33,472 $144,440 $5,636 $6,818 $261,258 
Credit loss expense (benefit)(5,901)(5,527)3,654 611 2,784 (4,379)
Charge-offs(685)— (137)(388)(3,882)(5,092)
Recoveries965 65 36 295 2,140 3,501 
Net charge-offs280 65 (101)(93)(1,742)(1,591)
Ending balance$65,271 $28,010 $147,993 $6,154 $7,860 $255,288 
18
Commercial
and
Industrial		EnergyCommercial
Real Estate		Consumer
Real Estate		Consumer
and Other		Total
Six months ended:
June 30, 2022
Beginning balance$72,091 $17,217 $144,936 $6,585 $7,837 $248,666 
Credit loss expense (benefit)18,503 (1,617)(27,841)557 10,466 68 
Charge-offs(5,346)(371)(702)(362)(11,093)(17,874)
Recoveries2,022 1,038 713 74 4,925 8,772 
Net (charge-offs) recoveries(3,324)667 11 (288)(6,168)(9,102)
Ending balance$87,270 $16,267 $117,106 $6,854 $12,135 $239,632 
June 30, 2021
Beginning balance$73,843 $39,553 $134,892 $7,926 $6,963 $263,177 
Credit loss expense (benefit)(7,866)(11,328)12,576 (2,111)4,350 (4,379)
Charge-offs(2,874)(1,433)(137)(672)(7,942)(13,058)
Recoveries2,168 1,218 662 1,011 4,489 9,548 
Net (charge-offs) recoveries(706)(215)525 339 (3,453)(3,510)
Ending balance$65,271 $28,010 $147,993 $6,154 $7,860 $255,288 
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 June 30, 2022 and December 31, 2021.
June 30, 2022December 31, 2021
Loan
Balance		Specific AllocationsLoan
Balance		Specific Allocations
Commercial and industrial$12,539 $3,360 $24,523 $10,536 
Energy15,906 6,172 16,393 5,480 
Paycheck Protection Program— — — — 
Commercial real estate:
Buildings, land and other21,205 1,481 24,670 200 
Construction— — 948 200 
Consumer real estate934 82 303 36 
Consumer and other— — — — 
Total$50,584 $11,095 $66,837 $16,452 
Note 4 - Goodwill and Other Intangible Assets
Goodwill and other intangible assets are presented in the table below.
June 30,
2022		December 31,
2021
Goodwill$654,952 $654,952 
Other intangible assets:
Core deposits$479 $718 
Customer relationships110 148 
$589 $866 
The estimated aggregate future amortization expense for intangible assets remaining as of June 30, 2022 is as follows:
Remainder of 2022$204 
2023282 
202487 
202511 
20265 
$589 
19
Note 5 - Deposits
Deposits were as follows:
June 30,
2022		December 31,
2021
Non-interest-bearing demand deposits$18,783,931 $18,423,018 
Interest-bearing deposits:
Savings and interest checking12,309,066 11,930,959 
Money market accounts12,989,902 11,228,815 
Time accounts1,518,866 1,112,904 
Total interest-bearing deposits26,817,834 24,272,678 
Total deposits$45,601,765 $42,695,696 
The following table presents additional information about our deposits:
June 30,
2022		December 31,
2021
Deposits from foreign sources (primarily Mexico)$1,090,169 $993,479 
Non-interest-bearing public funds deposits681,205 1,235,026 
Interest-bearing public funds deposits837,427 810,863 
Total deposits not covered by deposit insurance25,810,407 24,125,359 
Time deposits not covered by deposit insurance364,486 238,608 
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 2021 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:
June 30,
2022		December 31,
2021
Commitments to extend credit$10,771,940 $10,420,142 
Standby letters of credit327,847 238,690 
Deferred standby letter of credit fees1,890 2,072 
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. 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. Our allowance methodology is more fully described in our 2021 Form 10-K.
The following table details activity in the allowance for credit losses on off-balance-sheet credit exposures.
Three Months Ended
June 30,		Six Months Ended
June 30,
2022202120222021
Beginning balance$45,850 $44,217 $50,314 $44,152 
Credit loss expense (benefit)4,396 4,379 (68)4,444 
Ending balance$50,246 $48,596 $50,246 $48,596 
20
Lease Commitments. We lease certain office facilities and office equipment under operating leases. The components of total lease expense were as follows:
Three Months Ended
June 30,		Six Months Ended
June 30,
2022202120222021
Amortization of lease right-of-use assets$8,209 $8,129 $16,314 $16,412 
Short-term lease expense490 530 1,103 734 
Non-lease components (including taxes, insurance, common maintenance, etc.)2,748 2,337 5,768 5,341 
Total$11,447 $10,996 $23,185 $22,487 
Right-of-use lease assets totaled $278.3 million at June 30, 2022 and $281.4 million at December 31, 2021 and are reported as a component of premises and equipment on our accompanying consolidated balance sheets. The related lease liabilities totaled $310.5 million at June 30, 2022 and $313.4 million at December 31, 2021 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 $8.4 million and $16.4 million during the three and six months ended June 30, 2022, respectively, and $8.0 million and $16.1 million during the three and six months ended June 30, 2021, respectively. There has been no significant change in our expected future minimum lease payments since December 31, 2021. See the 2021 Form 10-K for information regarding these commitments.
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.
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 (“CET1”) 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 CET1. We also elected to exclude the effects of credit loss accounting under CECL from CET1 for a five-year transitional period, as further discussed in our 2021 Form 10-K. This CECL transitional adjustment totaled $46.2 million and $61.6 million at June 30, 2022 and December 31, 2021, respectively. CET1 is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities. Frost Bank's CET1 is also reduced by its equity investment in its financial subsidiary, Frost Insurance Agency (“FIA”).
Tier 1 capital includes CET1 and additional Tier 1 capital. For Cullen/Frost, additional Tier 1 capital included $145.5 million of 4.450% non-cumulative perpetual preferred stock at June 30, 2022 and December 31, 2021, the details of which are further discussed below. Frost Bank did not have any additional Tier 1 capital beyond Common Equity Tier 1 at June 30, 2022 or December 31, 2021. 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 allowances for credit losses on securities, loans and off-balance-sheet credit exposures. Tier 2 capital for Cullen/Frost also includes the permissible portion of qualified subordinated debt (which decreases 20.0% per year during the final five years of the term of the notes) totaling $80.0 million at June 30, 2022 and $100.0 million at December 31, 2021 and trust preferred securities totaling $120.0 million at both June 30, 2022 and December 31, 2021.
21
The following table presents actual and required capital ratios as of June 30, 2022 and December 31, 2021 for Cullen/Frost and Frost Bank under the Basel III Capital Rules. 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 2021 Form 10-K for a more detailed discussion of the Basel III Capital Rules.
ActualMinimum Capital Required - Basel IIIRequired to be
Considered Well
Capitalized
Capital
Amount		RatioCapital
Amount		RatioCapital
Amount		Ratio
June 30, 2022
Common Equity Tier 1 to Risk-Weighted Assets
Cullen/Frost$3,485,759 12.64 %$1,930,703 7.00 %$1,792,796 6.50 %
Frost Bank3,423,585 12.42 1,929,368 7.00 1,791,556 6.50 
Tier 1 Capital to Risk-Weighted Assets
Cullen/Frost3,631,211 13.17 2,344,425 8.50 2,206,518 8.00 
Frost Bank3,423,585 12.42 2,342,804 8.50 2,204,992 8.00 
Total Capital to Risk-Weighted Assets
Cullen/Frost4,069,206 14.75 2,896,055 10.50 2,758,148 10.00 
Frost Bank3,661,580 13.28 2,894,052 10.50 2,756,240 10.00 
Leverage Ratio
Cullen/Frost3,631,211 7.03 2,067,513 4.00 2,584,391 5.00 
Frost Bank3,423,585 6.62 2,067,942 4.00 2,584,928 5.00 
December 31, 2021
Common Equity Tier 1 to Risk-Weighted Assets
Cullen/Frost$3,371,043 13.13 %$1,796,549 7.00 %$1,668,224 6.50 %
Frost Bank3,261,532 12.72 1,795,221 7.00 1,666,991 6.50 
Tier 1 Capital to Risk-Weighted Assets
Cullen/Frost3,516,495 13.70 2,181,523 8.50 2,053,198 8.00 
Frost Bank3,261,532 12.72 2,179,911 8.50 2,051,681 8.00 
Total Capital to Risk-Weighted Assets
Cullen/Frost3,966,244 15.45 2,694,823 10.50 2,566,498 10.00 
Frost Bank3,491,281 13.61 2,692,831 10.50 2,564,601 10.00 
Leverage Ratio
Cullen/Frost3,516,495 7.34 1,917,533 4.00 2,396,917 5.00 
Frost Bank3,261,532 6.80 1,917,679 4.00 2,397,099 5.00 
As of June 30, 2022, capital levels at Cullen/Frost and Frost Bank exceed all capital adequacy requirements under the Basel III Capital Rules. Based on the ratios presented above, capital levels as of June 30, 2022 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 June 30, 2022, that Cullen/Frost and Frost Bank meet all capital adequacy requirements to which they are subject.
Preferred Stock. Outstanding preferred stock includes 150,000 shares, or $150.0 million in aggregate liquidation preference, of our 4.450% Non-Cumulative Perpetual Preferred Stock, Series B, par value $0.01 and liquidation preference $1,000 per share (“Series B Preferred Stock”). Each share of Series B Preferred Stock issued and outstanding is represented by 40 depositary shares, each representing a 1/40th ownership interest in a share of the Series B Preferred Stock (equivalent to a liquidation preference of $25 per share). The Series B Preferred Stock qualifies as Tier 1 capital for the purposes of the regulatory capital calculations. The net proceeds from the issuance and sale of the Series B Preferred Stock, after deducting $4.5 million of issuance costs including the underwriting discount and professional service fees, among other things, were approximately $145.5 million. Refer to our 2021 Form 10-K for additional details related to our Series B Preferred Stock.
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 January 26, 2022, 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
22
through private transactions. No shares have been repurchased under this plan or the prior plan during the reported periods. 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 June 30, 2022, Frost Bank could pay aggregate dividends of up to $447.3 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, 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.
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, swaptions 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 2021 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 methods 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 zero as of June 30, 2022 and December 31, 2021.
June 30, 2022December 31, 2021
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$1,743 $18 $— $— 
Loan/lease interest rate swaps – liabilities— — 2,426 (34)
Non-hedging interest rate derivatives:
Financial institution counterparties:
Loan/lease interest rate swaps – assets904,706 27,908 247,592 1,207 
Loan/lease interest rate swaps – liabilities244,663 (2,489)928,756 (19,142)
Loan/lease interest rate caps – assets269,389 10,209 270,431 3,239 
Customer counterparties:
Loan/lease interest rate swaps – assets244,663 3,350 928,756 39,864 
Loan/lease interest rate swaps – liabilities904,706 (45,542)247,592 (2,846)
Loan/lease interest rate caps – liabilities269,389 (10,209)270,431 (3,239)
23
The weighted-average rates paid and received for interest rate swaps outstanding at June 30, 2022 were as follows:
Weighted-Average
Interest
Rate
Paid		Interest
Rate
Received
Interest rate swaps:
Fair value hedge loan/lease interest rate swaps1.58 %1.06 %
Non-hedging interest rate swaps – financial institution counterparties3.71 2.87 
Non-hedging interest rate swaps – customer counterparties2.87 3.71 
The weighted-average strike rate for outstanding interest rate caps was 3.28% at June 30, 2022.
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 methods with observable market data inputs to value our commodity derivative positions.
June 30, 2022December 31, 2021
Notional
Units		Notional
Amount		Estimated
Fair Value		Notional
Amount		Estimated
Fair Value
Financial institution counterparties:
Oil – assetsBarrels4,173 $20,653 4,809 $14,721 
Oil – liabilitiesBarrels9,125 (181,161)7,032 (73,594)
Natural gas – assetsMMBTUs11,753 3,181 15,947 4,143 
Natural gas – liabilitiesMMBTUs21,557 (38,990)29,446 (21,249)
Customer counterparties:
Oil – assetsBarrels9,606 182,274 7,046 74,437 
Oil – liabilitiesBarrels3,692 (20,306)4,796 (14,294)
Natural gas – assetsMMBTUs21,557 39,110 29,446 21,456 
Natural gas – liabilitiesMMBTUs11,753 (3,181)15,947 (4,124)
Foreign Currency Derivatives. We enter into foreign currency forward and option 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 and options 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 and option contracts were as follows:
 June 30, 2022December 31, 2021
Notional
Currency		Notional
Amount		Estimated
Fair Value		Notional
Amount		Estimated
Fair Value
Financial institution counterparties:
Forward and option contracts – assetsEUR6,400 $16 1,900 $29 
Forward and option contracts – assetsCAD658 9 658 — 
Forward and option contracts – liabilitiesEUR6,400 (174)— — 
Customer counterparties:
Forward and option contracts – assetsEUR6,400 174 — — 
Forward and option contracts – assetsCAD— — 658 4 
Forward and option contracts – liabilitiesEUR6,400 (16)1,900 (55)
Forward and option contracts – liabilitiesCAD658 (5)— — 
24
Gains, Losses and Derivative Cash Flows. For fair value hedges, the changes in the fair value of both the derivative hedging instrument and the hedged item are included in other non-interest income or other non-interest expense. The extent that such changes in fair value do not offset represents hedge ineffectiveness. Net cash flows from interest rate swaps on commercial loans/leases designated as hedging instruments in effective hedges of fair value are included in interest income on loans. For non-hedging derivative instruments, gains and losses due to changes in fair value and all cash flows are included in other non-interest income and other non-interest expense.
Amounts included in the consolidated statements of income related to interest rate derivatives designated as hedges of fair value were as follows:
Three Months Ended
June 30,		Six Months Ended
June 30,
2022202120222021
Commercial loan/lease interest rate swaps:
Amount of gain (loss) included in interest income on loans$(5)$(25)$(18)$(53)
Amount of (gain) loss included in other non-interest expense3 2 5 5 
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.
Amounts included in the consolidated statements of income related to non-hedge related derivative instruments are presented in the table below.
Three Months Ended
June 30,		Six Months Ended
June 30,
2022202120222021
Non-hedging interest rate derivatives:
Other non-interest income$515 $141 $1,031 $1,728 
Other non-interest expense— — — (1)
Non-hedging commodity derivatives:
Other non-interest income649 969 1,578 2,123 
Non-hedging foreign currency derivatives:
Other non-interest income45 — 63 30 
Counterparty Credit Risk. Our credit exposure relating to interest rate swaps, commodity swaps/options and foreign currency forward and option contracts with bank customers was approximately $198.1 million at June 30, 2022. 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/option contracts with upstream financial institution counterparties was approximately $41.5 million at June 30, 2022. This amount was primarily related to initial margin payments to the CME and excess collateral we posted to counterparties. Excess collateral is generally cleared on the next business day. 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 June 30, 2022, we had $212.4 million in cash collateral related to derivative contracts on deposit with other financial institution counterparties.
25
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 June 30, 2022 is presented in the following tables.
Gross Amount
Recognized		Gross Amount
Offset		Net Amount
Recognized
June 30, 2022
Financial assets:
Derivatives:
Loan/lease interest rate swaps and caps$38,135 $— $38,135 
Commodity swaps and options23,834 — 23,834 
Foreign currency forward contracts25 — 25 
Total derivatives61,994 — 61,994 
Resell agreements9,650 — 9,650 
Total$71,644 $— $71,644 
Financial liabilities:
Derivatives:
Loan/lease interest rate swaps and caps$2,489 $— $2,489 
Commodity swaps and options220,151 — 220,151 
Foreign currency forward contracts174 — 174 
Total derivatives222,814 — 222,814 
Repurchase agreements1,664,685 — 1,664,685 
Total$1,887,499 $— $1,887,499 
Gross Amounts Not Offset
Net Amount
Recognized		Financial
Instruments		CollateralNet
Amount
June 30, 2022
Financial assets:
Derivatives:
Counterparty A$41 $(41)$— $— 
Counterparty B25,962 (25,962)— — 
Counterparty C16 (16)— — 
Other counterparties35,975 (25,533)(10,442)— 
Total derivatives61,994 (51,552)(10,442)— 
Resell agreements9,650 — (9,650)— 
Total$71,644 $(51,552)$(20,092)$— 
Financial liabilities:
Derivatives:
Counterparty A$1,726 $(41)$(1,571)$114 
Counterparty B50,901 (25,962)(24,939)— 
Counterparty C174 (16)(10)148 
Other counterparties170,013 (25,533)(144,463)17 
Total derivatives222,814 (51,552)(170,983)279 
Repurchase agreements1,664,685 — (1,664,685)— 
Total$1,887,499 $(51,552)$(1,835,668)$279 
26
Information about financial instruments that are eligible for offset in the consolidated balance sheet as of December 31, 2021 is presented in the following tables.
Gross Amount
Recognized		Gross Amount
Offset		Net Amount
Recognized
December 31, 2021
Financial assets:
Derivatives:
Loan/lease interest rate swaps and caps$4,446 $— $4,446 
Commodity swaps and options18,864 — 18,864 
Total derivatives23,339 — 23,339 
Resell agreements7,903 — 7,903 
Total$31,242 $— $31,242 
Financial liabilities:
Derivatives:
Loan/lease interest rate swaps and caps$19,176 $— $19,176 
Commodity swaps and options94,843 — 94,843 
Total derivatives114,019 — 114,019 
Repurchase agreements2,740,799 — 2,740,799 
Total$2,854,818 $— $2,854,818 
Gross Amounts Not Offset
Net Amount
Recognized		Financial
Instruments		CollateralNet
Amount
December 31, 2021
Financial assets:
Derivatives:
Counterparty A$6 $(6)$— $— 
Counterparty B7,655 (7,655)— — 
Other counterparties15,678 (15,678)— — 
Total derivatives23,339 (23,339)— — 
Resell agreements7,903 — (7,903)— 
Total$31,242 $(23,339)$(7,903)$— 
Financial liabilities:
Derivatives:
Counterparty A$3,870 $(6)$(3,864)$— 
Counterparty B28,130 (7,655)(20,475)— 
Counterparty C9 — (9)— 
Other counterparties82,010 (15,678)(66,225)107 
Total derivatives114,019 (23,339)(90,573)107 
Repurchase agreements2,740,799 — (2,740,799)— 
Total$2,854,818 $(23,339)$(2,831,372)$107 
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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 June 30, 2022 and December 31, 2021 is presented in the following tables.
Remaining Contractual Maturity of the Agreements
Overnight and ContinuousUp to 30 Days30-90 DaysGreater than 90 DaysTotal
June 30, 2022
Repurchase agreements:
U.S. Treasury$834,063 $— $— $— $834,063 
Residential mortgage-backed securities830,622 — — — 830,622 
Total borrowings$1,664,685 $— $— $— $1,664,685 
Gross amount of recognized liabilities for repurchase agreements$1,664,685 
Amounts related to agreements not included in offsetting disclosures above$— 
December 31, 2021
Repurchase agreements:
U.S. Treasury$1,342,591 $— $— $— $1,342,591 
Residential mortgage-backed securities1,398,208 — — — 1,398,208 
Total borrowings$2,740,799 $— $— $— $2,740,799 
Gross amount of recognized liabilities for repurchase agreements$2,740,799 
Amounts related to agreements not included in offsetting disclosures above$— 
Note 10 - Stock-Based Compensation
A combined summary of activity in our active stock plans is presented in the table below. Performance stock units outstanding are presented assuming attainment of the maximum payout rate as set forth by the performance criteria. As of June 30, 2022, there were 788,070 shares remaining available for grant for future stock-based compensation awards.
Deferred
Stock Units
Outstanding		Non-Vested
Stock Units
Outstanding		Performance
Stock Units
Outstanding		Stock Options
Outstanding
Number
of Units		Weighted-
Average
Fair Value
at Grant		Number
of 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, 202256,301 $79.21 449,337 $93.05 202,460 $84.71 877,681 $69.02 
Authorized— — — — — — — — 
Granted5,382 133.67 3,460 132.72 — — — — 
Exercised/vested(16,022)74.89 — — (25,180)87.18 (103,060)62.97 
Forfeited/expired— — (3,167)94.57 (16,058)87.18 — — 
Balance, June 30, 202245,661 87.15 449,630 93.35 161,222 84.08 774,621 69.83 
28
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
June 30,		Six Months Ended
June 30,
2022202120222021
New shares issued from available authorized shares— — — — 
Shares issued from available treasury stock28,832 114,252 144,262 628,076 
Proceeds from stock option exercises$751 $7,285 $6,490 $36,682 
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 or benefit and the related income tax benefit is presented in the following table. The service period for performance stock units granted each year begins on January 1 of the following year.
Three Months Ended
June 30,		Six Months Ended
June 30,
2022202120222021
Non-vested stock units$2,291 $1,768 $4,649 $3,651 
Deferred stock units720 700 720 700 
Performance stock units407 777 161 1,420 
Total$3,418 $3,245 $5,530 $5,771 
Income tax benefit$612 $514 $1,320 $881 
Unrecognized stock-based compensation expense at June 30, 2022 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 units$13,954 
Performance stock units8,256 
Total$22,210 
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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 2021 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
June 30,		Six Months Ended
June 30,
2022202120222021
Net income$119,114 $118,068 $218,216 $234,083 
Less: Preferred stock dividends1,669 1,669 3,338 3,820 
Net income available to common shareholders117,445 116,399 214,878 230,263 
Less: Earnings allocated to participating securities1,036 1,141 1,888 2,307 
Net earnings allocated to common stock$116,409 $115,258 $212,990 $227,956 
Distributed earnings allocated to common stock$48,092 $45,824 $96,143 $91,484 
Undistributed earnings allocated to common stock68,317 69,434 116,847 136,472 
Net earnings allocated to common stock$116,409 $115,258 $212,990 $227,956 
Weighted-average shares outstanding for basic earnings per common share64,112,828 63,606,340 64,082,185 63,457,245 
Dilutive effect of stock compensation354,401 495,819 382,395 511,288 
Weighted-average shares outstanding for diluted earnings per common share64,467,229 64,102,159 64,464,580 63,968,533 
Note 12 - Defined Benefit Plans
The components of the combined net periodic expense (benefit) for our defined benefit pension plans are presented in the table below.
Three Months Ended
June 30,		Six Months Ended
June 30,
2022202120222021
Expected return on plan assets, net of expenses$(3,492)$(3,210)$(6,983)$(6,420)
Interest cost on projected benefit obligation1,004 836 2,008 1,671 
Net amortization and deferral741 1,529 1,482 3,058 
Net periodic expense (benefit)$(1,747)$(845)$(3,493)$(1,691)
Our non-qualified defined benefit pension plan is not funded. No contributions to the qualified defined benefit pension plan were made during the six months ended June 30, 2022. We do not expect to make any contributions to the qualified defined benefit plan during the remainder of 2022.
Note 13 - Income Taxes
Income tax expense was as follows:
Three Months Ended
June 30,		Six Months Ended
June 30,
2022202120222021
Current income tax expense (benefit)$22,646 $14,065 $35,705 $17,790 
Deferred income tax expense (benefit)(1,972)1,016 (2,404)5,188 
Income tax expense, as reported$20,674 $15,081 $33,301 $22,978 
Effective tax rate14.8 %11.3 %13.2 %8.9 %
We had a net deferred tax asset totaling $245.9 million at June 30, 2022 and a net deferred tax liability totaling $81.2 million at December 31, 2021. No valuation allowance for deferred tax assets was recorded at June 30, 2022 as management believes it is more likely than not that all of the deferred tax assets will be realized against deferred tax liabilities and projected future taxable income.
The effective income tax rates differed from the U.S. statutory federal income tax rates of 21% during the comparable periods primarily due to the effect of tax-exempt income from loans, securities and life insurance policies and the income tax effects associated with stock-based compensation. There were no unrecognized tax benefits during any of the reported periods.
30
Interest and/or penalties related to income taxes are reported as a component of income tax expense. Such amounts were not significant during the reported periods.
We file income tax returns in the U.S. federal jurisdiction. We are no longer subject to U.S. federal income tax examinations by tax authorities for years before 2018.
Note 14 - Other Comprehensive Income (Loss)
The before and after tax amounts allocated to each component of other comprehensive income (loss) are presented in the following table. Reclassification adjustments related to securities available for sale are included in net gain (loss) on securities transactions in the accompanying consolidated statements of income. Reclassification adjustments related to defined-benefit post-retirement benefit plans are included in the computation of net periodic pension expense (see Note 12 – Defined Benefit Plans).
Three Months Ended
June 30, 2022		Three Months Ended
June 30, 2021
Before Tax
Amount		Tax  Expense,
(Benefit)		Net of  Tax
Amount		Before Tax
Amount		Tax  Expense,
(Benefit)		Net of  Tax
Amount
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period$(636,523)$(133,670)$(502,853)$30,668 $6,441 $24,227 
Change in net unrealized gain on securities transferred to held to maturity(189)(40)(149)(245)(52)(193)
Reclassification adjustment for net (gains) losses included in net income— — — — — — 
Total securities available for sale and transferred securities(636,712)(133,710)(503,002)30,423 6,389 24,034 
Defined-benefit post-retirement benefit plans:
Reclassification adjustment for net amortization of actuarial gain/loss included in net income as a component of net periodic cost (benefit)741 155 586 1,529 321 1,208 
Total defined-benefit post-retirement benefit plans741 155 586 1,529 321 1,208 
Total other comprehensive income (loss)$(635,971)$(133,555)$(502,416)$31,952 $6,710 $25,242 
Six Months Ended
June 30, 2022		Six Months Ended
June 30, 2021
Before Tax
Amount		Tax  Expense,
(Benefit)		Net of  Tax
Amount		Before Tax
Amount		Tax  Expense,
(Benefit)		Net of  Tax
Amount
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period$(1,547,318)$(324,937)$(1,222,381)$(129,111)$(27,113)$(101,998)
Change in net unrealized gain on securities transferred to held to maturity(398)(84)(314)(504)(106)(398)
Reclassification adjustment for net (gains) losses included in net income— — — — — — 
Total securities available for sale and transferred securities(1,547,716)(325,021)(1,222,695)(129,615)(27,219)(102,396)
Defined-benefit post-retirement benefit plans:
Reclassification adjustment for net amortization of actuarial gain/loss included in net income as a component of net periodic expense (benefit)1,482 311 1,171 3,058 642 2,416 
Total defined-benefit post-retirement benefit plans1,482 311 1,171 3,058 642 2,416 
Total other comprehensive income (loss)$(1,546,234)$(324,710)$(1,221,524)$(126,557)$(26,577)$(99,980)
31
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, 2022$380,209 $(32,891)$347,318 
Other comprehensive income (loss) before reclassifications
(1,222,695)— (1,222,695)
Reclassification of amounts included in net income
— 1,171 1,171 
Net other comprehensive income (loss) during period(1,222,695)1,171 (1,221,524)
Balance at June 30, 2022$(842,486)$(31,720)$(874,206)
Balance January 1, 2021$563,801 $(50,831)$512,970 
Other comprehensive income (loss) before reclassifications
(102,396)— (102,396)
Reclassification of amounts included in net income
— 2,416 2,416 
Net other comprehensive income (loss) during period(102,396)2,416 (99,980)
Balance at June 30, 2021$461,405 $(48,415)$412,990 

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Note 15 – Operating Segments
We are managed under a matrix organizational structure whereby our two primary operating segments, Banking and Frost Wealth Advisors, overlap a regional reporting structure. See our 2021 Form 10-K for additional information regarding our operating segments. Summarized operating results by segment were as follows:
BankingFrost  Wealth
Advisors		Non-BanksConsolidated
Three months ended:
June 30, 2022
Net interest income (expense)$289,186 $958 $(1,936)$288,208 
Credit loss expense1 (1)— — 
Non-interest income55,397 43,054 (524)97,927 
Non-interest expense211,044 33,158 2,145 246,347 
Income (loss) before income taxes133,538 10,855 (4,605)139,788 
Income tax expense (benefit)19,821 2,279 (1,426)20,674 
Net income (loss)113,717 8,576 (3,179)119,114 
Preferred stock dividends— — 1,669 1,669 
Net income (loss) available to common shareholders$113,717 $8,576 $(4,848)$117,445 
Revenues from (expenses to) external customers$344,583 $44,012 $(2,460)$386,135 
June 30, 2021
Net interest income (expense)$258,450 $508 $(1,802)$257,156 
Credit loss expense (benefit)— — — — 
Non-interest income48,944 42,534 (231)91,247 
Non-interest expense183,109 30,014 2,131 215,254 
Income (loss) before income taxes124,285 13,028 (4,164)133,149 
Income tax expense (benefit)13,605 2,736 (1,260)15,081 
Net income (loss)110,680 10,292 (2,904)118,068 
Preferred stock dividends— — 1,669 1,669 
Net income (loss) available to common shareholders$110,680 $10,292 $(4,573)$116,399 
Revenues from (expenses to) external customers$307,394 $43,042 $(2,033)$348,403 
Six months ended:
June 30, 2022
Net interest income (expense)$539,305 $1,658 $(3,684)$537,279 
Credit loss expense (benefit)— — — — 
Non-interest income114,103 86,283 (1,069)199,317 
Non-interest expense417,582 64,068 3,429 485,079 
Income (loss) before income taxes235,826 23,873 (8,182)251,517 
Income tax expense (benefit)30,835 5,013 (2,547)33,301 
Net income (loss)204,991 18,860 (5,635)218,216 
Preferred stock dividends— — 3,338 3,338 
Net income (loss) available to common shareholders$204,991 $18,860 $(8,973)$214,878 
Revenues from (expenses to) external customers$653,408 $87,941 $(4,753)$736,596 
June 30, 2021
Net interest income (expense)$500,655 $994 $(3,612)$498,037 
Credit loss expense63 — — 63 
Non-interest income102,724 82,143 (384)184,483 
Non-interest expense362,260 59,951 3,185 425,396 
Income (loss) before income taxes241,056 23,186 (7,181)257,061 
Income tax expense (benefit)20,782 4,869 (2,673)22,978 
Net income (loss)220,274 18,317 (4,508)234,083 
Preferred stock dividends— — 3,820 3,820 
Net income (loss) available to common shareholders$220,274 $18,317 $(8,328)$230,263 
Revenues from (expenses to) external customers$603,379 $83,137 $(3,996)$682,520 

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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 2021 Form 10-K for additional information regarding the fair value hierarchy and a description of our valuation techniques.
Financial Assets and Financial Liabilities. The tables below summarize financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021, segregated by the level of the valuation inputs within the fair value hierarchy of ASC Topic 820 utilized to measure fair value.
Level 1 InputsLevel 2 InputsLevel 3 InputsTotal Fair Value
June 30, 2022
Securities available for sale:
U.S. Treasury$4,416,299 $— $— $4,416,299 
Residential mortgage-backed securities— 5,335,725 — 5,335,725 
States and political subdivisions— 6,987,296 — 6,987,296 
Other— 42,365 — 42,365 
Trading account securities:
U.S. Treasury24,615 — — 24,615 
States and political subdivisions— 65 — 65 
Derivative assets:
Interest rate swaps, caps and floors— 41,485 — 41,485 
Commodity swaps and options— 245,218 — 245,218 
Foreign currency forward contracts199 — — 199 
Derivative liabilities:
Interest rate swaps, caps and floors— 58,240 — 58,240 
Commodity swaps and options— 243,638 — 243,638 
Foreign currency forward contracts195 — — 195 
December 31, 2021
Securities available for sale:
U.S. Treasury$2,179,433 $— $— $2,179,433 
Residential mortgage-backed securities— 4,066,265 — 4,066,265 
States and political subdivisions— 7,636,571 — 7,636,571 
Other— 42,359 — 42,359 
Trading account securities:
U.S. Treasury24,237 — — 24,237 
States and political subdivisions— 925 — 925 
Derivative assets:
Interest rate swaps, caps and floors— 44,310 — 44,310 
Commodity swaps and options— 114,757 — 114,757 
Foreign currency forward contracts33 — — 33 
Derivative liabilities:
Interest rate swaps, caps and floors— 25,261 — 25,261 
Commodity swaps and options— 113,261 — 113,261 
Foreign currency forward contracts55 — — 55 

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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. Financial assets measured at fair value on a non-recurring basis during the reported periods include certain collateral dependent loans reported at the fair value of the underlying collateral if repayment is expected solely from the collateral.
The following table presents collateral dependent loans that were remeasured and reported at fair value through a specific allocation of the allowance for credit losses on loans based upon the fair value of the underlying collateral during the reported periods.
Six Months Ended
June 30, 2022		Six Months Ended
June 30, 2021
Level 2Level 3Level 2Level 3
Carrying value before allocations$5,454 $3,614 $3,399 $19,423 
Specific (allocations) reversals of prior allocations(1,327)6,877 (336)(3,273)
Fair value$4,127 $10,491 $3,063 $16,150 
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. From time to time, non-financial assets measured at fair value on a non-recurring basis 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. There were no such fair value measurements during the reported periods.
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:
June 30, 2022December 31, 2021
Carrying
Amount		Estimated
Fair Value		Carrying
Amount		Estimated
Fair Value
Financial assets:
Level 2 inputs:
Cash and cash equivalents$13,658,585 $13,658,585 $16,583,000 $16,583,000 
Securities held to maturity1,946,428 1,828,515 1,749,179 1,809,143 
Cash surrender value of life insurance policies189,823 189,823 190,139 190,139 
Accrued interest receivable194,049 194,049 179,111 179,111 
Level 3 inputs:
Loans, net16,496,394 16,126,497 16,087,731 16,079,454 
Financial liabilities:
Level 2 inputs:
Deposits45,601,765 45,584,113 42,695,696 41,343,426 
Federal funds purchased43,200 43,200 25,925 25,925 
Repurchase agreements1,664,685 1,664,685 2,740,799 2,740,799 
Junior subordinated deferrable interest debentures123,040 123,712 123,011 123,712 
Subordinated notes99,256 99,626 99,178 111,430 
Accrued interest payable6,059 6,059 3,026 3,026 
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 no 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 2021 Form 10-K for additional information related to previously issued accounting standards updates.
ASU 2022-01, “Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method.” Under prior guidance, entities can apply the last-of-layer hedging method to hedge the exposure of a closed portfolio of prepayable financial assets to fair value changes due to changes in interest rates for a portion of the portfolio that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows. ASU 2022-01 expands the last-of-layer method, which permits only one hedge layer, to allow multiple hedged layers of a single closed portfolio. To reflect that expansion, the last-of-layer method is renamed the portfolio layer method. ASU 2022-01 also (i) expands the scope of the portfolio layer method to include non-prepayable financial assets, (ii) specifies eligible hedging instruments in a single-layer hedge, (iii) provides additional guidance on the accounting for and disclosure of hedge basis adjustments under the portfolio layer method and (iv) specifies how hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio. ASU 2022-01 will be effective for us on January 1, 2023 though early adoption is permitted. The adoption of ASU 2022-01 is not expected to have a significant impact on our financial statements.
ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings in Accounting Standards Codification (“ASC”) Subtopic 310-40, Receivables - Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, ASU 2022-02 requires entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC Subtopic 3126-20, Financial Instruments - Credit Losses - Measured at Amortized Cost. ASU 2022-02 will be effective for us on January 1, 2023 though early adoption is permitted. The adoption of ASU 2022-02 is not expected to have a significant impact on our financial statements.
ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. ASU 2022-03 also clarifies that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction and requires certain new disclosures for equity securities subject to contractual sale restrictions. ASU 2022-03 will be effective for us on January 1, 2024 though early adoption is permitted. The adoption of ASU 2022-03 is not expected to 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, 2021, and the other information included in the 2021 Form 10-K. Operating results for the three and six months ended June 30, 2022 are not necessarily indicative of the results for the year ending December 31, 2022 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) and their application 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 potential impact of climate change.
•The timely development and acceptance of new products and services and perceived overall value of these products and services by users.
•Changes in consumer spending, borrowing and saving habits.
•Changes in the financial performance and/or condition of our borrowers.
•Technological changes.
•The cost and effects of cyber incidents or other failures, interruptions or security breaches of our systems or those of our customers or third-party providers.
•Acquisitions and integration of acquired businesses.
•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.
In addition, financial markets and global supply chains may be adversely affected by the current or anticipated impact of military conflict, including the current Russian invasion of Ukraine, terrorism or other geopolitical events.
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.
COVID-19 Effects and Actions
Our business has been, and continues to be, impacted by the effects of the COVID-19 pandemic. There remains many uncertainties related to COVID-19 including, among other things, the ongoing 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 mitigate both the economic and health-related effects of COVID-19. Refer to our 2021 Form 10-K for further information regarding (i) the impact of the COVID-19 pandemic on our operations and our results thereof, as well as the impact on our financial position and (ii) legislative and regulatory actions taken related to the COVID-19 pandemic, particularly as they relate to the banking and financial services industry.
Application of Critical Accounting Policies and Accounting Estimates
We follow accounting and reporting policies that conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While we base estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.
We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial statements.
Accounting policies related to the allowance for credit losses on financial instruments including loans and off-balance-sheet credit exposures are considered to be critical as these policies involve considerable subjective judgment and estimation by management. In the case of loans, the allowance for credit losses is a contra-asset valuation account, calculated in accordance with Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”) Financial Instruments - Credit Losses, 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
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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 performance of our portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets. Refer to the 2021 Form 10-K for additional information regarding critical accounting policies.
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 $117.4 million, or $1.81 per diluted common share, and $214.9 million, or $3.31 per diluted common share for the three and six months ended June 30, 2022 compared to $116.4 million, or $1.80 per diluted common share, and $230.3 million, or $3.57 per diluted common share for the three and six months ended June 30, 2021.
Selected data for the comparable periods was as follows:
Three Months Ended
June 30,		Six Months Ended
June 30,
2022202120222021
Taxable-equivalent net interest income$311,377 $279,997 $583,572 $543,946 
Taxable-equivalent adjustment23,169 22,841 46,293 45,909 
Net interest income288,208 257,156 537,279 498,037 
Credit loss expense— — — 63 
Net interest income after credit loss expense288,208 257,156 537,279 497,974 
Non-interest income97,927 91,247 199,317 184,483 
Non-interest expense246,347 215,254 485,079 425,396 
Income before income taxes139,788 133,149 251,517 257,061 
Income taxes20,674 15,081 33,301 22,978 
Net income119,114 118,068 218,216 234,083 
Preferred stock dividends1,669 1,669 3,338 3,820 
Net income available to common shareholders$117,445 $116,399 $214,878 $230,263 
Earnings per common share – basic$1.82 $1.81 $3.32 $3.59 
Earnings per common share – diluted1.81 1.80 3.31 3.57 
Dividends per common share0.75 0.72 1.50 1.44 
Return on average assets0.92 %1.02 %0.85 %1.05 %
Return on average common equity13.88 11.18 11.53 11.16 
Average shareholders’ equity to average assets6.93 9.46 7.70 9.77 
Net income available to common shareholders increased $1.0 million, or 0.9%, for the three months ended June 30, 2022 and decreased $15.4 million, or 6.7%, for the six months ended June 30, 2022 compared to the same periods in 2021. The increase during the three months ended June 30, 2022 was primarily the result of a $31.1 million increase in net interest income and a $6.7 million increase in non-interest income partly offset by a $31.1 million increase in non-interest expense and a $5.6 million increase in income tax expense. The decrease during the six months ended June 30, 2022 was primarily the result of a $59.7 million increase in non-interest expense and a $10.3 million increase in income tax expense partly offset by a $39.2 million increase in net interest income and a $14.8 million increase in non-interest income. 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 72.9% of total revenue during the first six months of 2022. Net interest margin is the ratio of taxable-equivalent net interest income to average earning assets for the period. The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net interest income and net interest margin.
The Federal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. As of June 30, 2022, approximately 42.0% of our loans had a fixed interest rate, while the remaining loans had floating interest rates that were primarily tied to the prime interest rate (approximately 29.2%) or the London Interbank Offered Rate (“LIBOR”) (approximately 17.0%). We discontinued originating LIBOR-based loans effective December 31, 2021 and have begun to negotiate loans using our preferred replacement index, the American Interbank Offered Rate (“AMERIBOR”), a benchmark developed by the American Financial Exchange, the Secured Overnight Financing Rate (“SOFR”) or a benchmark developed by Bloomberg Index Services (“BSBY”). As of June 30, 2022, approximately 11.7% of loans were tied to one of these indexes. For our currently outstanding LIBOR-based loans, the timing and manner in which each customer’s contract transitions from LIBOR to another rate will vary on a case-by-case basis. Our goal is to complete all transitions by the first quarter of 2023.
Select average market rates for the periods indicated are presented in the table below.
Three Months Ended
June 30,		Six Months Ended
June 30,
2022202120222021
Federal funds target rate upper bound0.95 %0.25 %0.62 %0.25 %
Effective federal funds rate0.77 0.07 0.45 0.07 
Interest on reserve balances0.84 0.11 0.52 0.10 
Prime3.95 3.25 3.62 3.25 
1-Month LIBOR1.00 0.10 0.61 0.11 
3-Month LIBOR1.51 0.16 1.01 0.18 
AMERIBOR Term-30(1)
0.87 0.09 0.53 0.11 
AMERIBOR Term-90(1)
1.42 0.15 0.97 0.17 
1-Month Term SOFR(2)
0.92 0.02 0.54 0.03 
3-Month Term SOFR(2)
1.31 0.03 0.82 0.04 
Bloomberg 1-Month Short-Term Bank Yield Index0.87 0.07 0.52 0.08 
Bloomberg 3-Month Short-Term Bank Yield Index1.41 0.12 0.94 0.14 
____________________
(1)AMERIBOR Term-30 and AMERIBOR Term-90 are published by the American Financial Exchange.
(2)1-Month TERM SOFR and 3-Month Term SOFR market data are the property of Chicago Mercantile Exchange, Inc. or its licensors as applicable. All rights reserved, or otherwise licensed by Chicago Mercantile Exchange Inc.
Effective July 28, 2022, the Federal Reserve increased the target range for the federal funds rate to 2.25% to 2.50% and stated that they anticipate on-going increases in the target range will be appropriate. Additionally, the interest rate paid on reserve balances was increased to 2.40%.
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. See Item 3. Quantitative and Qualitative Disclosures About Market Risk elsewhere in this report for information about our sensitivity to interest rates. Further analysis of the components of our net interest margin is presented below.
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The following tables present an analysis of net interest income and net interest spread for the periods indicated, including average outstanding balances for each major category of interest-earning assets and interest-bearing liabilities, the interest earned or paid on such amounts, and the average rate earned or paid on such assets or liabilities, respectively. The tables also set forth the net interest margin on average total interest-earning assets for the same periods. For these computations: (i) average balances are presented on a daily average basis, (ii) information is shown on a taxable-equivalent basis assuming a 21% tax rate, (iii) average loans include loans on non-accrual status, and (iv) average securities include unrealized gains and losses on securities available for sale, while yields are based on average amortized cost.
Quarter To DateQuarter To Date
June 30, 2022June 30, 2021
Average
Balance		Interest
Income/
Expense		Yield/
Cost		Average
Balance		Interest
Income/
Expense		Yield/
Cost
Assets:
Interest-bearing deposits$13,040,852 $26,371 0.80 %$13,346,885 $3,614 0.11 %
Federal funds sold31,173 99 1.26 21,390 8 0.15 
Resell agreements3,027 10 1.32 7,905 4 0.20 
Securities:
Taxable10,327,627 56,365 2.04 4,168,034 20,602 2.01 
Tax-exempt7,802,864 79,001 4.04 8,125,745 77,801 4.09 
Total securities18,130,491 135,366 2.87 12,293,779 98,403 3.36 
Loans, net of unearned discounts16,674,489 167,925 4.04 17,246,389 183,846 4.28 
Total Earning Assets and Average Rate Earned47,880,032 329,771 2.71 42,916,348 285,875 2.71 
Cash and due from banks646,121 529,447 
Allowance for credit losses on loans and securities(246,976)(262,389)
Premises and equipment, net1,049,494 1,040,400 
Accrued interest and other assets1,758,932 1,441,264 
Total Assets$51,087,603 $45,665,070 
Liabilities:
Non-interest-bearing demand deposits18,354,651 16,456,245 
Interest-bearing deposits:
Savings and interest checking12,336,089 1,206 0.04 10,881,459 379 0.01 
Money market deposit accounts12,607,969 11,115 0.35 9,790,253 2,196 0.09 
Time accounts1,427,267 2,272 0.64 1,142,873 924 0.32 
Total interest-bearing deposits26,371,325 14,593 0.22 21,814,585 3,499 0.06 
Total deposits44,725,976 0.13 38,270,830 0.04 
Federal funds purchased35,529 75 0.84 34,344 7 0.08 
Repurchase agreements1,742,669 1,790 0.41 2,058,818 570 0.11 
Junior subordinated deferrable interest debentures123,035 772 2.51 136,380 638 1.87 
Subordinated notes99,242 1,164 4.69 99,085 1,164 4.70 
Total Interest-Bearing Funds and Average Rate Paid
28,371,800 18,394 0.26 24,143,212 5,878 0.10 
Accrued interest and other liabilities821,571 745,406 
Total Liabilities47,548,022 41,344,863 
Shareholders’ Equity3,539,581 4,320,207 
Total Liabilities and Shareholders’ Equity
$51,087,603 $45,665,070 
Net interest income$311,377 $279,997 
Net interest spread2.45 %2.61 %
Net interest income to total average earning assets
2.56 %2.65 %
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Year To DateYear To Date
June 30, 2022June 30, 2021
Average
Balance		Interest
Income/
Expense		Yield/
Cost		Average
Balance		Interest
Income/
Expense		Yield/
Cost
Assets:
Interest-bearing deposits$13,401,664 $32,714 0.49 %$11,615,467 $6,047 0.10 %
Federal funds sold22,581 112 0.99 13,222 11 0.17 
Resell agreements4,423 14 0.63 5,285 5 0.19 
Securities:
Taxable9,667,818 99,423 1.97 4,093,306 40,630 2.03 
Tax-exempt7,983,161 157,900 4.03 8,177,407 156,376 4.09 
Total securities17,650,979 257,323 2.87 12,270,713 197,006 3.38 
Loans, net of unearned discounts16,531,269 318,993 3.89 17,463,944 352,485 4.07 
Total Earning Assets and Average Rate Earned47,610,916 609,156 2.56 41,368,631 555,554 2.74 
Cash and due from banks648,609 530,196 
Allowance for credit losses on loans and securities(247,883)(264,798)
Premises and equipment, net1,050,111 1,043,156 
Accrued interest and other assets1,648,876 1,425,072 
Total Assets$50,710,629 $44,102,257 
Liabilities:
Non-interest-bearing demand deposits18,159,023 15,887,529 
Interest-bearing deposits:
Savings and interest checking12,146,331 1,616 0.03 10,300,751 735 0.01 
Money market deposit accounts12,235,442 14,766 0.24 9,519,014 3,875 0.08 
Time accounts1,308,025 3,123 0.48 1,140,570 2,406 0.43 
Total interest-bearing deposits25,689,798 19,505 0.15 20,960,335 7,016 0.07 
Total deposits43,848,821 0.09 36,847,864 0.04 
Federal funds purchased31,666 87 0.55 37,461 15 0.08 
Repurchase agreements1,896,270 2,308 0.24 1,950,005 965 0.10 
Junior subordinated deferrable interest debentures123,028 1,356 2.19 136,373 1,284 1.88 
Subordinated notes99,222 2,328 4.69 99,065 2,328 4.70 
Total Interest-Bearing Funds and Average Rate Paid
27,839,984 25,584 0.18 23,183,239 11,608 0.10 
Accrued interest and other liabilities808,896 723,807 
Total Liabilities46,807,903 39,794,575 
Shareholders’ Equity3,902,726 4,307,682 
Total Liabilities and Shareholders’ Equity
$50,710,629 $44,102,257 
Net interest income$583,572 $543,946 
Net interest spread2.38 %2.64 %
Net interest income to total average earning assets
2.45 %2.68 %
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The following table presents the changes in taxable-equivalent net interest income and identifies the changes due to differences in the average volume of earning assets and interest-bearing liabilities and the changes due to changes in the average interest rate on those assets and liabilities. The changes in net interest income due to changes in both average volume and average interest rate have been allocated to the average volume change or the average interest rate change in proportion to the absolute amounts of the change in each.
Three Months Ended
June 30, 2022 vs. June 30, 2021
Increase (Decrease) Due to Change in
RateVolumeTotal
Interest-bearing deposits$22,842 $(85)$22,757 
Federal funds sold85 6 91 
Resell agreements9 (3)6 
Securities:
Taxable312 35,451 35,763 
Tax-exempt(986)2,186 1,200 
Loans, net of unearned discounts(10,005)(5,916)(15,921)
Total earning assets12,257 31,639 43,896 
Savings and interest checking792 35 827 
Money market deposit accounts8,111 808 8,919 
Time accounts1,079 269 1,348 
Federal funds purchased68 — 68 
Repurchase agreements1,320 (100)1,220 
Junior subordinated deferrable interest debentures201 (67)134 
Subordinated notes(2)2 — 
Total interest-bearing liabilities11,569 947 12,516 
Net change$688 $30,692 $31,380 
Six Months Ended
June 30, 2022 vs. June 30, 2021
Increase (Decrease) Due to Change in
RateVolumeTotal
Interest-bearing deposits$25,656 $1,011 $26,667 
Federal funds sold88 13 101 
Resell agreements10 (1)9 
Securities:
Taxable(1,237)60,030 58,793 
Tax-exempt(2,317)3,841 1,524 
Loans, net of unearned discounts(15,172)(18,320)(33,492)
Total earning assets7,028 46,574 53,602 
Savings and interest checking809 72 881 
Money market deposit accounts9,531 1,360 10,891 
Time accounts317 400 717 
Federal funds purchased74 (2)72 
Repurchase agreements1,370 (27)1,343 
Junior subordinated deferrable interest debentures202 (130)72 
Subordinated notes(4)4 — 
Total interest-bearing liabilities12,299 1,677 13,976 
Net change$(5,271)$44,897 $39,626 
Taxable-equivalent net interest income for the three months ended June 30, 2022 increased $31.4 million, or 11.2%, while taxable-equivalent net interest income for the six months ended June 30, 2022 increased $39.6 million, or 7.3%, compared to the same periods in 2021. The increase in taxable-equivalent net interest income during the three months ended June 30, 2022 was primarily related to an increase in the average volume of taxable securities, an increase in the average yield on interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) and, to a much lesser extent, an increase in the average volume of tax-exempt securities. The impact of these items was partly offset by a decrease in the average volume of loans combined with decreases in the average yields on loans and tax-exempt securities and increases in the
43
average cost and average volume of interest-bearing deposit accounts (primarily money market deposit accounts) and an increase in the average cost of repurchase agreements. The increase in taxable-equivalent net interest income during the six months ended June 30, 2022 was primarily related to an increase in the average volume of taxable securities and an increase in the average yield on interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) and, to a much lesser extent, increases in the average volumes of tax-exempt securities and interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve). The impact of these items was partly offset by a decrease in the average volume of loans combined with decreases in the average yields on loans, tax-exempt securities and taxable securities; an increase in the average cost and average volume of interest-bearing deposits (primarily money market deposit accounts); and an increase in the average cost of repurchase agreements. As a result of these fluctuations, the taxable-equivalent net interest margin decreased 9 basis points from 2.65% during the three months ended June 30, 2021 to 2.56% during the three months ended June 30, 2022 while the taxable-equivalent net interest margin decreased 23 basis points from 2.68% during the six months ended June 30, 2021 to 2.45% during the six months ended June 30, 2022.
The average volume of interest-earning assets for the three months ended June 30, 2022 increased $5.0 billion while the average volume of interest-earning assets for the six months ended June 30, 2022 increased $6.2 billion compared to the same periods in 2021. The increase in the average volume of interest-earning assets during the three months ended June 30, 2022 primarily related to a $6.2 billion increase in average taxable securities partly offset by a $571.9 million decrease in average loans (which was primarily impacted by a $2.5 billion decrease in average PPP loans, as further discussed below), a $322.9 million decrease in average tax-exempt securities and a $306.0 million decrease in average interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve). The increase in the average volume of interest-earning assets during the six months ended June 30, 2022 primarily related to a $5.6 billion increase in average taxable securities and a $1.8 billion increase in average interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) partly offset by a $932.7 million decrease in average loans (which was primarily impacted by a $2.5 billion decrease in average PPP loans, as further discussed below) and a $194.2 million decrease in average tax-exempt securities.
The average taxable-equivalent yield on interest-earning assets was 2.71% during both the three months ended June 30, 2021 and 2022 while the average taxable-equivalent yield on interest-earning assets decreased 18 basis points from 2.74% during the six months ended June 30, 2021 to 2.56% during the six months ended June 30, 2022. The average taxable-equivalent yield on interest-earning assets during 2022 was 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 decreased 24 basis points from 4.28% during the three months ended June 30, 2021 to 4.04% during the three months ended June 30, 2022 while the average taxable-equivalent yield on loans decreased 18 basis points from 4.07% during the six months ended June 30, 2021 to 3.89% during the six months ended June 30, 2022. The average taxable-equivalent yield on loans during the three and six months ended June 30, 2021 was positively impacted by a higher average proportion of higher-yielding PPP loans to total loans compared to the three and six months ended June 30, 2022. The average volume of loans for the three months ended June 30, 2022 decreased $571.9 million, or 3.3%, while the average volume of loans for the six months ended June 30, 2022 decreased $932.7 million, or 5.3%, compared to the same periods in 2021. The decreases in the average volume of loans were primarily due to a $2.5 billion decrease in the average volumes of PPP loans during both the three and six months ended June 30, 2022. Excluding PPP loans, average loans would have increased $1.9 billion, or 13.2%, and $1.6 billion, or 10.8%, during the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021. Loans made up approximately 34.8% and 34.7% of average interest-earning assets during the three and six months ended June 30, 2022, respectively, compared to 40.2% and 42.2% during the same respective periods in 2021.
During the six months ended June 30, 2022, we recognized approximately $2.6 million 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. Such amounts were not significant during the three months ended June 30, 2022. During the three and six months ended June 30, 2021, we recognized approximately $38.8 million and $62.3 million, respectively, in PPP loan related deferred processing fees (net of amortization of related deferred origination costs). As a result of the inclusion of these net fees in interest income, the average yields on PPP loans was 1.00% and 3.32% during the three and six months ended June 30, 2022, and 6.89% and 5.60% during the three and six months ended June 30, 2021, compared to the stated interest rate of 1.0% on these loans.
The average taxable-equivalent yield on securities was 2.87% during both the three and six months ended June 30, 2022, decreasing 49 basis points from 3.36% during the three months ended June 30, 2021 and decreasing 51 basis points from 3.38% during the six months ended June 30, 2021. The average yield on taxable securities was 2.04% during the three months ended June 30, 2022 increasing 3 basis points from 2.01% during the same period in 2021 while the average yield on taxable securities was 1.97% during the six months ended June 30, 2022 decreasing 6 basis points from 2.03% during the same period in 2021. The average taxable-equivalent yield on tax-exempt securities was 4.04% during the three months ended June 30, 2022
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decreasing 5 basis points from 4.09% during the same period in 2021 while the average taxable-equivalent yield on tax-exempt securities was 4.03% during the six months ended June 30, 2022, decreasing 6 basis points from 4.09% during the same period in 2021.
Tax exempt securities made up approximately 43.0% and 45.2% of total average securities during the three and six months ended June 30, 2022, respectively, compared to 66.1% and 66.6% during the same periods in 2021. The average volume of total securities during the three months ended June 30, 2022 increased $5.8 billion, or 47.5%, compared to the same period in 2021 while the average volume of total securities during the six months ended June 30, 2022 increased $5.4 billion, or 43.8%, compared to the same period in 2021. Securities made up approximately 37.9% of average interest-earning assets during the three months ended June 30, 2022 compared to 28.6% during the same period in 2021 while securities made up approximately 37.1% of average interest-earning assets during the six months ended June 30, 2022 compared to 29.7% during the same period in 2021. The increases during the three and six months ended June 30, 2022 were primarily related to the investment of available funds (primarily from growth in deposits) in taxable securities.
Average interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) for the three months ended June 30, 2022 decreased $306.0 million, or 2.3%, compared to the same period in 2021 while average interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) for the six months ended June 30, 2022 increased $1.8 billion, or 15.4%, compared to the same period in 2021. Interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) made up approximately 27.2% of average interest-earning assets during the three months ended June 30, 2022 compared to 31.1% during the same period in 2021 while interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) made up approximately 28.1% of average interest-earning assets during the six months ended June 30, 2022 and 2021. The average yield on interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) was 0.80% and 0.49% during the three and six months ended June 30, 2022, respectively, compared to 0.11% and 0.10% during the same respective periods in 2021. The average yields on interest-bearing deposits during the three and six months ended June 30, 2022 were impacted by higher interest rates paid on reserves held at the Federal Reserve, compared to the same respective periods in 2021.
The average rate paid on interest-bearing liabilities was 0.26% during the three months ended June 30, 2022, increasing 16 basis points from 0.10% during the same period in 2021 while the average rate paid on interest-bearing liabilities was 0.18% during the six months ended June 30, 2022 increasing 8 basis points from 0.10% during the same period in 2021. Average deposits increased $6.5 billion, or 16.9%, during the three months ended June 30, 2022 compared to the same period in 2021 and included a $4.6 billion increase in average interest-bearing deposits and a $1.9 billion increase in average non-interest bearing deposits. Average deposits increased $7.0 billion, or 19.0%, during the six months ended June 30, 2022 compared to the same period in 2021 and included a $4.7 billion increase in average interest-bearing deposits and a $2.3 billion increase in average non-interest bearing deposits. The ratio of average interest-bearing deposits to total average deposits was 59.0% and 58.6% during the three and six months ended June 30, 2022 compared to 57.0% and 56.9% during the same respective periods in 2021. 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 0.22% and 0.13%, respectively, during the three months ended June 30, 2022 compared to 0.06% and 0.04%, respectively, during the same period in 2021. The average cost of interest-bearing deposits and total deposits was 0.15% and 0.09%, respectively, during the six months ended June 30, 2022 compared to 0.07% and 0.04%, respectively, during the same period in 2021. The average cost of deposits during 2022 was impacted by an increase in the interest rates we pay on most of our interest-bearing deposit products as a result of the aforementioned increase in market interest rates.
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 2.45% and 2.38% during the three and six months ended June 30, 2022 compared to 2.61% and 2.64% during the same respective periods in 2021. 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 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.
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Credit Loss Expense
Credit loss expense is determined by management as the amount to be added to the allowance for credit loss accounts for various types of financial instruments including loans, securities and off-balance-sheet credit exposures after net charge-offs have been deducted to bring the allowances to a level which, in management’s best estimate, is necessary to absorb expected credit losses over the lives of the respective financial instruments. The components of credit loss expense were as follows:
Three Months Ended
June 30,		Six Months Ended
June 30,
2022202120222021
Credit loss expense (benefit) related to:
Loans$(4,396)$(4,379)$68 $(4,379)
Off-balance-sheet credit exposures4,396 4,379 (68)4,444 
Securities held to maturity— — — (2)
Total$— $— $— $63 
See the section captioned “Allowance for Credit Losses” elsewhere in this discussion for further analysis of credit loss expense related to loans and off-balance-sheet credit exposures.
Non-Interest Income
Total non-interest income for the three and six months ended June 30, 2022 increased $6.7 million, or 7.3%, and increased $14.8 million, or 8.0%, respectively, compared to the same periods in 2021. 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 six months ended June 30, 2022 decreased $98 thousand, or 0.3%, and increased $3.2 million, or 4.4%, respectively, compared to the same periods in 2021. Investment management fees are the most significant component of trust and investment management fees, making up approximately 79.6% and 81.8% of total trust and investment management fees for the first six months of 2022 and 2021, respectively. The decrease in trust and investment management fees during the three months ended June 30, 2022 was primarily due to decreases in estate fees (down $968 thousand) and investment management fees (down $863 thousand), among other things, mostly offset by an increase in oil and gas fees (up $1.8 million).
The increase in trust and investment management fees during the six months ended June 30, 2022 was primarily due to increases in oil and gas fees (up $2.6 million), investment management fees (up $966 thousand) and real estate fees (up $580 thousand) partly offset by a decrease in estate fees (down $888 thousand). Investment management fees are generally based on the market value of assets within an account and are thus impacted by volatility in the equity and bond markets. The increase in investment management fees during six months ended June 30, 2022 was primarily related to higher average equity valuations as well as an increase in the number of accounts. The decrease in investment management fees during three months ended June 30, 2022 was primarily related to the sharp decline in equity valuations during the second quarter of 2022. Oil and gas fees during the three and six months ended June 30, 2022 were impacted by increases in oil and gas prices. The fluctuations in estate fees and real estate fees during the comparable periods were primarily related to variations in transaction volumes.
At June 30, 2022, trust assets, including both managed assets and custody assets, were primarily composed of equity securities (43.0% of assets), fixed income securities (33.1% of assets), alternative investments (7.5% of assets) and cash equivalents (9.9% of assets). The estimated fair value of these assets was $40.1 billion (including managed assets of $19.4 billion and custody assets of $20.6 billion) at June 30, 2022, compared to $43.3 billion (including managed assets of $19.1 billion and custody assets of $24.2 billion) at December 31, 2021 and $42.3 billion (including managed assets of $18.1 billion and custody assets of $24.2 billion) at June 30, 2021.
Service Charges on Deposit Accounts. Service charges on deposit accounts for the three and six months ended June 30, 2022 increased $4.0 million, or 20.3%, and increased $6.8 million, or 17.0%, respectively, compared to the same periods in 2021. The increase during the three months ended June 30, 2022 was primarily related to increases in overdraft charges on consumer and commercial accounts (up $2.1 million and $624 thousand, respectively) and commercial service charges (up $1.1 million). The increase during the six months ended June 30, 2022 was primarily related to increases in overdraft charges on consumer and commercial accounts (up $2.7 million and $1.1 million, respectively) and commercial service charges (up $2.5 million).
Commercial service charges during the three and six months ended June 30, 2022 were primarily impacted by increases in the volumes of billable services compared to the same periods in 2021. Overdraft charges totaled $9.6 million ($7.4 million consumer and $2.1 million commercial) during the three months ended June 30, 2022 compared to $6.9 million ($5.3 million consumer and $1.5 million commercial) during the same period in 2021. Overdraft charges totaled $18.2 million ($14.1 million
46
consumer and $4.1 million commercial) during the six months ended June 30, 2022 compared to $14.4 million ($11.4 million consumer and $3.0 million commercial) during the same period in 2021. The increases in overdraft charges during the three and six months ended June 30, 2022 were impacted by increases in the volumes of fee assessed overdrafts relative to the same periods in 2021.
In June 2022, we expanded the overdraft grace feature first implemented in April 2021. This feature, which was previously only available to certain consumer demand deposit accounts, is now available to all of our consumer demand deposit accounts, regardless of direct deposit status. With this feature no fees will be assessed on overdrafts of $100 or less. Additionally, we also eliminated fees on non-sufficient and returned items for all consumer deposit accounts. We expect these changes will impact revenue by as much as $3.5 million on an annual basis.
Insurance Commissions and Fees. Insurance commissions and fees for the three and six months ended June 30, 2022 increased $1.0 million, or 9.3%, and increased $298 thousand, or 1.1%, respectively, compared to the same periods in 2021. The increase during the three months ended June 30, 2022 was the result of increases in commission income (up $774 thousand) and contingent income (up $229 thousand). The increase during the six months ended June 30, 2022 was the result of an increase in commission income (up $1.3 million) mostly offset by a decrease in contingent income (down $1.0 million).
Contingent income totaled $578 thousand and $3.0 million during the three and six months ended June 30, 2022, respectively, compared to $349 thousand and $4.0 million during the same periods in 2021. Contingent income primarily consists of amounts received from various property and casualty insurance carriers related to portfolio growth and 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 $1.8 million and $3.1 million during the six months ended June 30, 2022 and 2021, respectively. The decrease in performance related contingent income during 2022 was related to low growth within the portfolio and a deterioration in the loss performance of insurance policies previously placed. This deterioration was impacted by a severe weather event in Texas during the first quarter of 2021 that resulted in a significant increase in property and casualty claims and losses. 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 $385 thousand and $1.2 million during the three and six months ended June 30, 2022, respectively, compared to $274 thousand and $899 thousand during the same respective periods in 2021. The increases in commission income during the three and six months ended June 30, 2022 were primarily related to increases in commercial and personal lines property and casualty commissions and benefit plan commissions partly offset by decreases in life insurance commissions. The increases in commercial and personal lines property and casualty commissions and benefit plan commissions during the three and six months ended June 30, 2022 were related to increased business volumes and increased market rates while the decreases in life insurance commissions were related to decreased business volumes.
Interchange and Card Transaction Fees. Interchange fees, or “swipe” fees, are charges that merchants pay to us and other card-issuing banks for processing electronic payment transactions. Interchange and card transaction fees consist of income from debit and credit card usage, point of sale income from PIN-based card transactions and ATM service fees. Interchange and card transaction fees are reported net of related network costs.
Net interchange and card transaction fees for the three and six months ended June 30, 2022 increased $270 thousand, or 5.8%, and increased $403 thousand, or 4.6%, respectively, compared to the same periods in 2021 primarily due to increases in transaction volumes as well as the impact of new card products partly offset by an increase in network costs. A comparison of gross and net interchange and card transaction fees for the reported periods is presented in the table below.
Three Months Ended
June 30,		Six Months Ended
June 30,
2022202120222021
Income from card transactions$8,308 $7,553 $15,789 $13,945 
ATM service fees867 866 1,631 1,651 
Gross interchange and card transaction fees9,175 8,419 17,420 15,596 
Network costs4,264 3,778 8,283 6,862 
Net interchange and card transaction fees$4,911 $4,641 $9,137 $8,734 
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-
47
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 June 30, 2022 increased $1.2 million, or 14.4%, compared to the same period in 2021. The increase was primarily related to increases in income from the placement of money market accounts (up $1.1 million) and merchant services rebates/bonuses (up $472 thousand), among other things, partly offset by a decrease in income from the sale of mutual funds (down $448 thousand), among other things. Other charges, commissions and fees for the six months ended June 30, 2022 increased $2.6 million, or 15.2%, compared to the same period in 2021. The increase was primarily related to increases in income from the placement of money market accounts (up $944 thousand), merchant services rebates/bonuses (up $898 thousand), letter of credit fees (up $463 thousand) and funds transfer service charges (up $295 thousand), among other things.
Other Non-Interest Income. Other non-interest income for the three months ended June 30, 2022 increased $237 thousand, or 2.5%, compared to the same period in 2021.The increase was primarily related to increases in sundry and other miscellaneous income (up $1.2 million), income from customer derivative and securities trading transactions (up $742 thousand) and income from customer foreign exchange transactions (up $547 thousand), among other things, partly offset by decreases in gains on the sale assets (down $1.8 million) and mineral interest income (down $289 thousand), among other things. Sundry income during the three months ended June 30, 2022 included $1.0 million in card related incentives/rebates and $489 thousand related to the recovery of prior write-offs. The increases in income from customer derivative and securities trading transactions and customer foreign exchange transactions were primarily related to increases in transaction volumes. Gains on the sale of assets during the second quarter of 2021 included $1.8 million related to the sale of certain parking lots in downtown San Antonio. The decrease in mineral interest income was related to the donation of certain mineral interests in 2021.
Other non-interest income for the six months ended June 30, 2022 increased $1.6 million, or 8.8%, compared to the same period in 2021. The increase was primarily related to increases in sundry and other miscellaneous income (up $2.3 million), public finance underwriting fees (up $1.6 million) and income from customer foreign exchange transactions (up $926 thousand) partly offset by decreases in gains on the sale of foreclosed and other assets (down $1.8 million), mineral interest income (down $497 thousand) and income from customer derivative and securities trading transactions (down $435 thousand), among other things. Sundry income during the six months ended June 30, 2022 included $1.0 million related to the recovery of prior write-offs, $1.0 million in card related incentives/rebates and $458 thousand related to a contract fee. The increases in public finance underwriting fees and income from customer foreign exchange transactions were primarily related to increases in transaction volumes. The decrease in gains on the sale of assets was primarily related to the aforementioned sale of certain parking lots in downtown San Antonio during the second quarter of 2021. The decrease in mineral interest income was related to the donation of certain mineral interests in 2021. The decrease in income from customer derivative transactions was primarily due to a decrease in transaction volume.
Non-Interest Expense
Total non-interest expense for the three and six months ended June 30, 2022 increased $31.1 million, or 14.4%, and increased $59.7 million, or 14.0%, respectively, compared to the same periods in 2021. Changes in the various components of non-interest expense are discussed below.
Salaries and Wages. Salaries and wages for the three and six months ended June 30, 2022 increased $19.8 million, or 20.5%, and increased $37.7 million, or 19.8%, respectively, compared to the same periods in 2021. The increases in salaries and wages were primarily related to increases in salaries, due to annual merit and market increases as well as the implementation of a $20 per hour minimum wage in December, 2021. Salaries and wages was also impacted by increases in the number of employees, increases in incentive compensation and, primarily during the six months ended June 30, 2022, a decrease in salary costs deferred in connection with loan originations as the first quarter of 2021 was impacted by the high volume of PPP loan originations. We are experiencing an increasingly competitive labor market which has resulted in and could continue to result in an increase in our staffing costs.
Employee Benefits. Employee benefits expense for the three and six months ended June 30, 2022 increased $2.0 million, or 10.7%, and increased $3.7 million, or 8.9%, respectively, compared to the same periods in 2021. The increases were primarily related to increases in payroll taxes, 401(k) plan expense and medical benefits expense, among other things, partly offset by increases in the net periodic benefits related to our defined benefit retirement plan.
Our defined benefit retirement and restoration plans were frozen in 2001 which has helped to reduce the volatility in retirement plan expense. We nonetheless still have funding obligations related to these plans and could recognize expense related to these plans in future years, which would be dependent on the return earned on plan assets, the level of interest rates
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and employee turnover. 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 six months ended June 30, 2022 increased $1.7 million, or 6.5%, and increased $3.1 million, or 5.9%, respectively, compared to the same periods in 2021. The increases during the three and six months ended June 30, 2022 were primarily related to increases in repairs and maintenance/service contracts expense (up $1.0 million and $1.8 million, respectively), depreciation on buildings and leasehold improvements (together up $308 thousand and $663 thousand, respectively) and lease expense (up $433 thousand and $528 thousand, respectively), among other things. The increases in the aforementioned components of net occupancy expense were impacted, in part, by our expansion within the Houston and Dallas market areas.
Technology, Furniture and Equipment. Technology, furniture and equipment expense for the three and six months ended June 30, 2022 increased $1.9 million, or 6.9%, and increased $3.1 million, or 5.5%, respectively, compared to the same periods in 2021. The increases during the three and six months ended June 30, 2022 were primarily related to increases in cloud services expense (up $1.1 million and $1.9 million, respectively), depreciation of furniture and equipment (up $348 thousand and $863 thousand, respectively) and service contracts expense (up $466 thousand and $583 thousand, respectively), among other things, partly offset by decreases in software maintenance (down $199 thousand and $557 thousand, respectively).
Deposit Insurance. Deposit insurance expense totaled $3.7 million and $7.4 million for the three and six months ended June 30, 2022, respectively, compared to $2.9 million and $5.8 million for the three and six months ended June 30, 2021. The increases were primarily related to an increase in total assets partly offset by a decrease in the assessment rate. In June 2022, the Federal Deposit Insurance Corporation issued a notice of proposed rulemaking, applicable to all insured depository institutions, to increase the initial base deposit insurance assessment rates by 2 basis points, beginning with the first quarterly assessment period of 2023.
Other Non-Interest Expense. Other non-interest expense for the three and six months ended June 30, 2022 increased $4.8 million, or 11.5%, and increased $10.7 million, or 13.6%, respectively, compared to the same periods in 2021. The increase during the three months ended June 30, 2022 included increases in travel, meals and entertainment (up $1.7 million); professional services expense (up $1.2 million); sundry and other miscellaneous expenses (up $1.1 million); and advertising/promotions expense (up $661 thousand). Sundry and other miscellaneous expenses during the three months ended June 30, 2022 included $446 thousand related to the write-off of certain assets and $387 thousand related to settlements. The impact of the aforementioned items was partly offset by decreases in donations expense (down $1.8 million), which was impacted by a $1.8 million contribution to the Frost Charitable Foundation in the second quarter of 2021, among other things. The increase during the six months ended June 30, 2022 included increases in professional services expense (up $3.0 million); travel, meals and entertainment (up $3.0 million); advertising/promotions expense (up $2.8 million); and business development expense (up $889 thousand); among other things. Other non-interest expense during the six months ended June 30, 2022 was also impacted by a decrease in costs deferred as loan origination costs (down $1.2 million) as the first quarter of 2021 was impacted by a large volume of PPP loan originations. The impact of the aforementioned items was partly offset by decreases in donations expense (down $3.2 million), which was impacted by $3.3 million in contributions to the Frost Charitable Foundation in the first six months of 2021; and amortization of deferred costs associated with loan commitments (down $663 thousand), among other things.
Results of Segment Operations
We are managed under a matrix organizational structure whereby our two primary operating segments, Banking and Frost Wealth Advisors, overlap a regional reporting structure. A third operating segment, Non-Banks, is for the most part the parent holding company, as well as certain other insignificant non-bank subsidiaries of the parent that, for the most part, have little or no activity. A description of each segment, the methodologies used to measure segment financial performance and summarized operating results by segment are described in Note 15 - Operating Segments in the accompanying notes to consolidated financial statements included elsewhere in this report. Segment operating results are discussed in more detail below.
Banking
Net income for the three and six months ended June 30, 2022 increased $3.0 million, or 2.7%, and decreased $15.3 million, or 6.9%, respectively, compared to the same periods in 2021. The increase during the three months ended June 30, 2022 was primarily the result of a $30.7 million increase in net interest income and a $6.5 million increase in non-interest income partly offset by a $27.9 million increase in non-interest expense and a $6.2 million increase in income tax expense. The decrease during the six months ended June 30, 2022 was primarily the result of a $55.3 million increase in non-interest expense and a $10.1 million increase in income tax expense partly offset by a $38.7 million increase in net interest income and an $11.4 million increase in non-interest income.
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Net interest income for the three and six months ended June 30, 2022 increased $30.7 million, or 11.9%, and $38.7 million, or 7.7%, respectively, compared to the same periods in 2021. The increase during the three months ended June 30, 2022 was primarily related to an increase in the average volume of taxable securities, an increase in the average yield on interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) and, to a much lesser extent, an increase in the average volume of tax-exempt securities. The impact of these items was partly offset by a decrease in the average volume of loans combined with decreases in the average yields on loans and tax-exempt securities and increases in the average cost and average volume of interest-bearing deposit accounts (primarily money market deposit accounts) and an increase in the average cost of repurchase agreements. The increase during the six months ended June 30, 2022 was primarily related to an increase in the average volume of taxable securities and an increase in the average yield on interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) and, to a much lesser extent, increases in the average volumes of tax-exempt securities and interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve). The impact of these items was partly offset by a decrease in the average volume of loans combined with decreases in the average yields on loans, tax-exempt securities and taxable securities; an increase in the average cost and average volume of interest-bearing deposits (primarily money market deposit accounts); and an increase in the average cost of repurchase agreements. See the analysis of net interest income included in the section captioned “Net Interest Income” included elsewhere in this discussion.
Credit loss expense/benefit was not significant for the Banking segment during the reported periods. See the sections captioned “Credit Loss Expense” and “Allowance for Credit Losses” elsewhere in this discussion for further analysis of credit loss expense related to loans and off-balance-sheet commitments.
Non-interest income for the three months ended June 30, 2022 increased $6.5 million, or 13.2%, compared to the same period in 2021, while non-interest income for the six months ended June 30, 2022 increased $11.4 million, or 11.1%, compared to the same period in 2021. The increase during the three months ended June 30, 2022 was primarily due to increases in service charges on deposit accounts; insurance commissions and fees; and other charges, commissions and fees. The increase during the six months ended June 30, 2022 was primarily due to increases in service charges on deposit accounts; other non-interest income; and other charges, commissions and fees. The increases in service charges on deposit accounts during the three and six months ended June 30, 2022 were primarily related to increases in overdraft charges on consumer and commercial accounts and commercial service charges. The increases in overdraft charges during the three and six months ended June 30, 2022 were impacted by increases in the volumes of fee assessed overdrafts relative to the same periods in 2021. Commercial service charges during the three and six months ended June 30, 2022 were primarily impacted by increases in the volumes of billable services compared to the same periods in 2021. The increase in insurance commissions and fees during the three months ended June 30, 2022, was the result of increases in commission income and contingent income, which is further discussed below in relation to Frost Insurance Agency. The increases in other charges, commissions and fees during the three and six months ended June 30, 2022 were primarily related to increases in merchant services rebates/bonuses, among other things, and, additionally for the six months ended June 30, 2022, increases in letter of credit fees and funds transfer service charges. The increase in other non-interest income during the six months ended June 30, 2022 was primarily due to an increase in sundry and other miscellaneous income, which was impacted by certain card related incentives/rebates, the recovery of prior write-offs, and the recognition of a contract fee. Other non-interest income during the six months ended June 30, 2022 was also impacted by increases in public finance underwriting fees and income from customer foreign exchange transactions, due to increases in transaction volumes. These items were partly offset by decreases in gains on the sale of foreclosed and other assets and income from customer derivative and securities trading transactions, among other things. See the analysis of these categories of non-interest income included in the section captioned “Non-Interest Income” included elsewhere in this discussion.
Non-interest expense for three months ended June 30, 2022 increased $27.9 million, or 15.3%, while non-interest expense for the six months ended June 30, 2022 increased $55.3 million, or 15.3%, compared to the same respective periods in 2021. The increases during the three and six months ended June 30, 2022 were primarily due to increases in salaries and wages and other non-interest expense and, to a lesser extent, increases in employee benefit expense; technology, furniture and equipment expense and net occupancy expense.
The increases in salaries and wages during the three and six months ended June 30, 2022, were primarily related to increases in salaries, due to annual merit and market increases as well as the implementation of a $20 per hour minimum wage in December, 2021. Salaries and wages was also impacted by increases in the number of employees, increases in incentive compensation and, primarily during the six months ended June 30, 2022, a decrease in salary costs deferred in connection with loan originations as the first quarter of 2021 was impacted by the high volume of PPP loan originations. The increase in other non-interest expense during the three months ended June 30, 2022 was primarily related to increases in travel, meals and entertainment; professional services expense; sundry and other miscellaneous expenses; and advertising/promotions expense. Sundry and other miscellaneous expenses during the three months ended June 30, 2022 was impacted by the write-off of certain assets and certain settlements. The impact of the aforementioned items was partly offset by a decrease in donations expense, which was impacted by a $1.8 million contribution to the Frost Charitable Foundation in the second quarter of 2021, among other things. The
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increase in other non-interest expense during the six months ended June 30, 2022 was primarily related to increases in professional services expense; travel, meals and entertainment; advertising/promotions expense; and business development expense; among other things. Other non-interest expense during the six months ended June 30, 2022 was also impacted by a decrease in costs deferred as loan origination costs as the first quarter of 2021 was impacted by a large volume of PPP loan originations. The increases in employee benefits expense during the three and six months ended June 30, 2022 were primarily related to increases in payroll taxes, 401(k) plan expense and medical benefits expense, among other things, partly offset by increases in the net periodic benefits related to our defined benefit retirement plan. The increases in technology, furniture and equipment expense during the three and six months ended June 30, 2022 were primarily related to increases in cloud services expense, depreciation of furniture and equipment and service contracts expense, among other things, partly offset by decreases in software maintenance. The increases in net occupancy during the three and six months ended June 30, 2022 were primarily related to increases in repairs and maintenance/service contracts expense, depreciation on buildings and leasehold improvements and lease expense, among other things. The increases in the aforementioned components of net occupancy expense were impacted, in part, by our expansion within the Houston and Dallas market areas.
Frost Insurance Agency, which is included in the Banking operating segment, had gross commission revenues of $11.8 million and $28.5 million during the three and six months ended June 30, 2022, respectively, compared to $10.8 million and $28.2 million during the same respective periods in 2021. The increase during the three months ended June 30, 2022 was primarily related to increases in commission income and contingent income while the increase during the six months ended June 30, 2022 was primarily related an increase in commission income mostly offset by a decrease in contingent income. The increases in gross commission income during the three and six months ended June 30, 2022 were primarily related to increases in commercial and personal lines property and casualty commissions and benefit plan commissions, due to increases in business volumes and market rates, partly offset by decreases in life insurance commissions, due to decreased business volumes. The decrease in contingent income during the six months ended June 30, 2022 was primarily related to a decrease in performance related contingent payments due to low growth within the portfolio and a deterioration in the loss performance of insurance policies previously placed. The decrease in performance related contingent commissions during was partly offset by an increase in contingent commissions received from various benefit plan insurance companies. See the analysis of insurance commissions and fees included in the section captioned “Non-Interest Income” included elsewhere in this discussion.
Frost Wealth Advisors
Net income for the three and six months ended June 30, 2022 decreased $1.7 million, or 16.7%, and increased $543 thousand, or 3.0%, respectively, compared to the same periods in 2021. The decrease during the three months ended June 30, 2022 was primarily the result of a $3.1 million increase in non-interest expense partly offset by a $520 thousand increase in non-interest income, a $457 thousand decrease in income tax expense and a $450 thousand increase in net interest income. The increase during the six months June 30, 2022 ended was primarily the result of a $4.1 million increase in non-interest income and a $664 thousand increase in net interest income partly offset by a $4.1 million increase in non-interest expense.
Net interest income for the three and six months ended June 30, 2022 increased $450 thousand, or 88.6%, and increased $664 thousand, or 66.8%, respectively, compared to the same periods in 2021. The increases during the three and six months ended June 30, 2022 were primarily due to an increases in the average volume of funds provided by Frost Wealth Advisors and an increase in the average funds transfer prices allocated to such funds. See the analysis of net interest income included in the section captioned “Net Interest Income” included elsewhere in this discussion.
Non-interest income for the three and six months ended June 30, 2022 increased $520 thousand, or 1.2%, and increased $4.1 million, or 5.0%, respectively, compared to the same periods in 2021. The increase during the three months ended June 30, 2022 was primarily due to a increases in other charges, commissions and fees and other non-interest income partly offset by a decrease in trust and investment management fees. The increase during the six months ended June 30, 2022 was primarily due to increases in trust and investment management fees and other charges, commissions and fees. Trust and investment management fee income is the most significant income component for Frost Wealth Advisors. Investment management fees are the most significant component of trust and investment management fees, making up approximately 79.6% of total trust and investment management fees for the first six months of 2022.
The decrease in trust and investment management fees during the three months ended June 30, 2022 was primarily due to decreases in estate fees and investment management fees, among other things, mostly offset by an increase in oil and gas fees. The increase in trust and investment management fees during the six months ended June 30, 2022 was primarily due to increases in oil and gas fees, investment management fees and real estate fees partly offset by a decrease in estate fees. The increase in investment management fees during six months ended June 30, 2022 was primarily related to higher average equity valuations as well as an increase in the number of accounts. The decrease in investment management fees during three months ended June 30, 2022 was primarily related to the sharp decline in equity valuations during the second quarter of 2022. Oil and gas fees during the three and six months ended June 30, 2022 were impacted by increases in oil and gas prices. The fluctuations
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in estate fees and real estate fees during the comparable periods were primarily related to variations in transaction volumes. The increases in other charges, commissions and fees during the three and six months ended June 30, 2022 were primarily related to increases in income from the placement of money market accounts, among other things, partly offset by decreases in income from the sale of mutual funds, among other things. The increase in other non-interest income during the three months ended June 30, 2022 was primarily related to an increase in income from customer securities trading transactions. See the analysis of trust and investment management fees 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 six months ended June 30, 2022 increased $3.1 million, or 10.5%, and increased $4.1 million, or 6.9%, respectively, compared to the same periods in 2021. The increases during the three and six months ended June 30, 2022 were primarily due to increases in salaries and wages and other non-interest expense, and to a lesser extent, increases in employee benefits expense and technology, furniture and equipment expense. The increases in salaries and wages during the three and six months ended June 30, 2022 were primarily due to increases in incentive compensation and commission expense as well as increases in salaries due to annual merit and market increases. The increases in other non-interest expense during the three and six months ended June 30, 2022 were mostly related to increases in sundry and other miscellaneous expenses, which was primarily related to the write-off of certain assets; and travel, meals and entertainment; among other things. Other non-interest expense for the six months ended June 30, 2022 was also impacted by an increase in research and platform fees. These increases were partly offset by decreases in the corporate overhead expense allocation during the three and six months ended June 30, 2022 compared to the same periods in 2021. The increases in employee benefits during the three and six months ended June 30, 2022 were primarily related to increases in 401(k) plan expense and medical benefits expense. Employee benefits during the six months ended June 30, 2022 was also impacted by an increase in payroll taxes. The increases in technology, furniture and equipment expense during the three and six months ended June 30, 2022 were primarily related to increases in cloud services expenses.
Non-Banks
The Non-Banks operating segment had net losses of $3.2 million and $5.6 million during the three and six months ended June 30, 2022, respectively, compared to net losses of $2.9 million and $4.5 million during the same periods in 2021. The increase in the net loss during the three months ended June 30, 2022 was primarily due to a decrease in other non-interest income and an increase in net interest expense partly offset by an increase in net income tax benefit. The increase in the net loss during the six months ended June 30, 2022 was primarily due to a decrease in other non-interest income, an increase in non-interest expense, a decrease in net income tax benefit and an increase in net interest expense. The decreases in other non-interest income during the three and six months ended June 30, 2022 were primarily due to decreases in mineral interest income as the related mineral interest assets were donated to the Frost Charitable Foundation during the third quarter of 2021. The net income tax benefit during the six months ended June 30, 2022 was impacted by the aforementioned donation due to the elimination of certain related tax deductions. The increase in other non-interest expense during the six months ended June 30, 2022 was primarily due to increases in travel, meals and entertainment and professional service expense. The increases in net interest expense during the three and six months ended June 30, 2022 were primarily related to increases in the average rate paid on our long term borrowings partly offset by the impact of the redemption, during the fourth quarter of 2021, of $13.4 million of junior subordinated deferrable interest debentures issued to WNB Capital Trust I.
Income Taxes
During the three months ended June 30, 2022, we recognized income tax expense of $20.7 million, for an effective tax rate of 14.8%, compared to $15.1 million, for an effective tax rate of 11.3%, for the same period in 2021. During the six months ended June 30, 2022, we recognized income tax expense of $33.3 million, for an effective tax rate of 13.2%, compared to $23.0 million, for an effective tax rate of 8.9%, for the same period in 2021. The effective income tax rates differed from the U.S. statutory federal income tax rate of 21% during 2022 and 2021 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, among other things, and their relative proportion to total pre-tax net income. The increase in the effective tax rates during 2022 were primarily related to increases in projected pre-tax net income and, to a lesser extent, a decrease in discrete tax benefits associated with stock-based compensation.

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Average Balance Sheet
Average assets totaled $50.7 billion for the six months ended June 30, 2022 representing an increase of $6.6 billion, or 15.0%, compared to average assets for the same period in 2021. Earning assets increased $6.2 billion, or 15.1%, during the first six months of 2022 compared to the same period in 2021. The increase in earning assets was primarily related to a $5.6 billion increase in average taxable securities and a $1.8 billion increase in average interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) partly offset by a $932.7 million decrease in average loans. Average deposits increased $7.0 billion, or 19.0%, during the first six months of 2022 compared to the same period in 2021. Growth in average deposits was related to increased customer balances as well as new customer accounts. The increase included a $2.3 billion increase in non-interest bearing deposits and a $4.7 billion increase in interest-bearing deposit accounts. Average non-interest bearing deposits made up 41.4% and 43.1% of average total deposits during the first six months of 2022 and 2021, respectively.
Loans
Details of our loan portfolio are presented in Note 3 - Loans in the accompanying notes to consolidated financial statements included elsewhere in this report. Loans increased $399.6 million, or 2.4%, from $16.3 billion at December 31, 2021 to $16.7 billion at June 30, 2022. As further discussed below, during the second quarter of 2020, we began originating loans to qualified small businesses under the Paycheck Protection Program (“PPP”) administered by the SBA under the provisions of the CARES Act. Excluding PPP loans, total loans would have otherwise increased $736.6 million, or 4.6%, from $15.9 billion at December 31, 2021 to $16.6 billion at June 30, 2022. The majority of our loan portfolio is comprised of commercial and industrial loans, energy loans, and real estate loans. Real estate loans include both commercial and consumer balances. Selected details related to our loan portfolio segments are presented below. Refer to our 2021 Form 10-K for a more detailed discussion of our loan origination and risk management processes.
Commercial and Industrial. Commercial and industrial loans increased $174.3 million, or 3.2%, from $5.4 billion at December 31, 2021 to $5.5 billion at June 30, 2022. Our commercial and industrial loans are a diverse group of loans to small, medium and large businesses. The purpose of these loans varies from supporting seasonal working capital needs to term financing of equipment. While some short-term loans may be made on an unsecured basis, most are secured by the assets being financed with collateral margins that are consistent with our loan policy guidelines. The commercial and industrial loan portfolio also includes commercial leases and purchased shared national credits ("SNC"s).
Energy. Energy loans include loans to entities and individuals that are engaged in various energy-related activities including (i) the development and production of oil or natural gas, (ii) providing oil and gas field servicing, (iii) providing energy-related transportation services, (iv) providing equipment to support oil and gas drilling, (v) refining petrochemicals, or (vi) trading oil, gas and related commodities. Energy loans decreased $89.9 million, or 8.3%, from $1.1 billion at December 31, 2021 to $987.9 million at June 30, 2022. We have recently made efforts to reduce our exposure to energy loans. Nonetheless energy loans remain our largest industry concentration totaling 5.9% of total loans (also 5.9% excluding PPP loans) at June 30, 2022, down from 6.6% of total loans (6.8% excluding PPP loans) at December 31, 2021. The average loan size, the significance of the portfolio and the specialized nature of the energy industry requires a highly prescriptive underwriting policy. Exceptions to this policy are rarely granted. Due to the large borrowing requirements of this customer base, the energy loan portfolio includes participations and SNCs.
Purchased Shared National Credits. Purchased shared national credits are participations purchased from upstream financial organizations and tend to be larger in size than our originated portfolio. Our purchased SNC portfolio totaled $707.8 million at June 30, 2022, increasing $9.5 million, or 1.4%, from $698.4 million at December 31, 2021. At June 30, 2022, 30.1% of outstanding purchased SNCs were related to the construction industry while 25.8% were related to the energy industry, 13.7% were related to the financial services industry and 12.1% were related to the real estate management industry. The remaining purchased SNCs were diversified throughout various other industries, with no other single industry exceeding 10% of the total purchased SNC portfolio. Additionally, almost all of the outstanding balance of purchased SNCs was included in the energy and commercial and industrial portfolio, with the remainder included in the real estate categories. SNC participations are originated in the normal course of business to meet the needs of our customers. As a matter of policy, we generally only participate in SNCs for companies headquartered in or which have significant operations within our market areas. In addition, we must have direct access to the company’s management, an existing banking relationship or the expectation of broadening the relationship with other banking products and services within the following 12 to 24 months. SNCs are reviewed at least quarterly for credit quality and business development successes.

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Commercial Real Estate. Commercial real estate loans increased $479.5 million, or 6.3%, from $7.6 billion at December 31, 2021 to $8.1 billion at June 30, 2022. Commercial real estate loans represented 83.8% of total real estate loans at June 30, 2022 compared to 84.3% at December 31, 2021. The majority of our commercial real estate loan portfolio consists of commercial real estate mortgages, which includes both permanent and intermediate term loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Consequently, these loans must undergo the analysis and underwriting process of a commercial and industrial loan, as well as that of a real estate loan. At June 30, 2022, approximately 48.8% of the outstanding principal balance of our commercial real estate loans were secured by owner-occupied properties.
Consumer Real Estate and Other Consumer Loans. The consumer loan portfolio, including all consumer real estate and consumer installment loans, increased $150.2 million, or 10.6%, from $1.9 billion at December 31, 2021 to $2.1 billion at June 30, 2022. Combined, home equity loans and lines of credit made up 61.3% and 59.8% of the consumer real estate loan total at June 30, 2022 and December 31, 2021, respectively. We offer home equity loans up to 80% of the estimated value of the personal residence of the borrower, less the value of existing mortgages and home improvement loans. We have not generally originated 1-4 family mortgage loans since 2000; however, from time to time, we invested in such loans to meet the needs of our customers or for other regulatory compliance purposes. Nonetheless, we expect to begin regular production of 1-4 family mortgage loans for portfolio investment purposes in late 2022. Consumer and other loans increased $22.4 million, or 4.7%, from December 31, 2021. The consumer and other loan portfolio primarily consists of automobile loans, overdrafts, unsecured revolving credit products, personal loans secured by cash and cash equivalents and other similar types of credit facilities.
Paycheck Protection Program. We have originated loans to qualified small businesses under the PPP administered by the SBA under the provisions of the CARES Act. Loans covered by the PPP may be eligible for loan forgiveness for certain costs incurred related to payroll, group health care benefit costs and qualifying mortgage, rent and utility payments. The remaining loan balance after forgiveness of any amounts is still fully guaranteed by the SBA. Refer to the 2021 Form 10-K for additional details.
During the six months ended June 30, 2022, we recognized approximately $2.6 million 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. During the six months ended June 30, 2021, we recognized approximately $62.3 million in PPP loan related deferred net processing fees. As a result of the inclusion of these net fees in interest income, the average yields on PPP loans were 3.32% during the six months ended June 30, 2022, and 5.60% during the six months ended June 30, 2021 compared to the stated interest rate of 1.0% on these loans. PPP related deferred processing fees and deferred origination costs are not expected to significantly impact interest income on loans in future periods.
Accruing Past Due Loans. Accruing past due loans are presented in the following tables. Also see Note 3 - Loans in the accompanying notes to consolidated financial statements included elsewhere in this report.
Accruing Loans
30-89 Days Past Due		Accruing Loans
90 or More Days Past Due		Total Accruing
Past Due Loans
Total
Loans		AmountPercent of Loans in CategoryAmountPercent of Loans in CategoryAmountPercent of Loans in Category
June 30, 2022
Commercial and industrial$5,539,277 $12,369 0.22 %$3,280 0.06 %$15,649 0.28 %
Energy987,925 200 0.02 — — 200 0.02 
Paycheck Protection Program91,919 5,919 6.44 5,063 5.51 10,982 11.95 
Commercial real estate:
Buildings, land and other6,520,280 17,693 0.27 781 0.01 18,474 0.28 
Construction1,535,808 832 0.05 — — 832 0.05 
Consumer real estate1,561,035 6,921 0.44 903 0.06 7,824 0.50 
Consumer and other499,782 4,443 0.89 598 0.12 5,041 1.01 
Total$16,736,026 $48,377 0.29 $10,625 0.06 $59,002 0.35 
Excluding PPP loans$16,644,107 $42,458 0.26 $5,562 0.03 $48,020 0.29 
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Accruing Loans
30-89 Days Past Due		Accruing Loans
90 or More Days Past Due		Total Accruing
Past Due Loans
Total
Loans		AmountPercent of Loans in CategoryAmountPercent of Loans in CategoryAmountPercent of Loans in Category
December 31, 2021
Commercial and industrial$5,364,954 $29,491 0.55 %$7,802 0.15 %$37,293 0.70 %
Energy1,077,792 1,353 0.13 215 0.02 1,568 0.15 
Paycheck Protection Program428,882 4,979 1.16 18,766 4.38 23,745 5.54 
Commercial real estate:
Buildings, land and other6,272,339 37,033 0.59 8,687 0.14 45,720 0.73 
Construction1,304,271 188 0.01 — — 188 0.01 
Consumer real estate1,410,790 4,866 0.34 2,177 0.15 7,043 0.49 
Consumer and other477,369 4,185 0.88 1,076 0.23 5,261 1.11 
Total$16,336,397 $82,095 0.50 $38,723 0.24 $120,818 0.74 
Excluding PPP loans$15,907,515 $77,116 0.48 $19,957 0.13 $97,073 0.61 
Accruing past due loans at June 30, 2022 decreased $61.8 million compared to December 31, 2021. The decrease was primarily related to decreases in past due non-construction related commercial real estate loans (down $27.2 million), past due commercial and industrial loans (down $21.6 million) and past due PPP loans (down $12.8 million). PPP loans are fully guaranteed by the SBA and we expect to collect all amounts due related to these loans. Excluding PPP loans, accruing past due loans decreased $49.1 million.
Non-Accrual Loans. Non-accrual loans are presented in the table below. Also see in Note 3 - Loans in the accompanying notes to consolidated financial statements included elsewhere in this report.
June 30, 2022December 31, 2021
Non-Accrual LoansNon-Accrual Loans
Total
Loans		AmountPercent of Loans in CategoryTotal
Loans		AmountPercent of Loans in Category
Commercial and industrial$5,539,277 $11,170 0.20 %$5,364,954 $22,582 0.42 %
Energy987,925 11,114 1.12 1,077,792 14,433 1.34 
Paycheck Protection Program91,919 — — 428,882 — — 
Commercial real estate:
Buildings, land and other6,520,280 11,806 0.18 6,272,339 15,297 0.24 
Construction1,535,808 — — 1,304,271 948 0.07 
Consumer real estate1,561,035 1,035 0.07 1,410,790 440 0.03 
Consumer and other499,782 — — 477,369 13 — 
Total$16,736,026 $35,125 0.21 $16,336,397 $53,713 0.33 
Excluding PPP loans$16,644,107 $35,125 0.21 $15,907,515 $53,713 0.34 
Allowance for credit losses on loans$239,632 $248,666 
Ratio of allowance for credit losses on loans to non-accrual loans682.23 %462.95 %
Non-accrual loans at June 30, 2022 decreased $18.6 million from December 31, 2021 primarily due to decreases in non-accrual commercial and industrial loans and, to a lesser extent, commercial real estate and energy loans. The decreases were primarily related to principal payments, loans returning to accrual and charge offs.
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. There were no non-accrual commercial and industrial loans in excess of $5.0 million at June 30, 2022 or December 31, 2021. Non-accrual energy loans included one credit relationship in excess of $5.0 million totaling $7.6 million at June 30, 2022. This credit relationship was previously reported as non-accrual with an aggregate balance of $9.6 million at
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December 31, 2021. The decrease in the aggregate balance of this credit relationship was related to principal payments made by the borrower. 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 June 30, 2022 or December 31, 2021.
Allowance for Credit Losses
In the case of loans and securities, allowances for credit losses are contra-asset valuation accounts, calculated in accordance with Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”) Financial Instruments - Credit Losses, 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 credit losses is a liability account, calculated in accordance with ASC 326, reported as a component of accrued interest payable and other liabilities in our consolidated balance sheets. The amount of each allowance account represents management's best estimate of current expected credit losses (“CECL”) on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. While management utilizes its 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. See our 2021 Form 10-K for additional information regarding our accounting policies related to credit losses.
Allowance for Credit Losses - Loans. The table below provides, as of the dates indicated, an allocation of the allowance for loan losses by loan portfolio segment; however, allocation of a portion of the allowance to one segment does not preclude its availability to absorb losses in other segments.
Amount of Allowance AllocatedPercent of Loans in Each Category to Total LoansTotal
Loans		Ratio of Allowance Allocated to Loans in Each Category
June 30, 2022
Commercial and industrial$87,270 33.1 %$5,539,277 1.58 %
Energy16,267 5.9 987,925 1.65 
Paycheck Protection Program— 0.5 91,919 — 
Commercial real estate117,106 48.2 8,056,088 1.45 
Consumer real estate6,854 9.3 1,561,035 0.44 
Consumer and other12,135 3.0 499,782 2.43 
Total$239,632 100.0 %$16,736,026 1.43 
Excluding PPP loans$239,632 $16,644,107 1.44 %
December 31, 2021
Commercial and industrial$72,091 32.9 %$5,364,954 1.34 %
Energy17,217 6.6 1,077,792 1.60 
Paycheck Protection Program— 2.6 428,882 — 
Commercial real estate144,936 46.4 7,576,610 1.91 
Consumer real estate6,585 8.6 1,410,790 0.47 
Consumer and other7,837 2.9 477,369 1.64 
Total$248,666 100.0 %$16,336,397 1.52 
Excluding PPP loans$248,666 $15,907,515 1.56 
The allowance allocated to commercial and industrial loans totaled $87.3 million, or 1.58% of total commercial and industrial loans, at June 30, 2022 increasing $15.2 million, or 21.1%, compared to $72.1 million, or 1.34% of total commercial and industrial loans, at December 31, 2021. Modeled expected credit losses increased $1.8 million while qualitative factor (“Q-Factor”) and other qualitative adjustments related to commercial and industrial loans increased $20.5 million. Specific allocations for commercial and industrial loans that were evaluated for expected credit losses on an individual basis decreased $7.2 million from $10.5 million at December 31, 2021 to $3.4 million at June 30, 2022. The decrease in specific allocations for commercial and industrial loans was related to principal payments received and the recognition of charge-offs.
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The allowance allocated to energy loans totaled $16.3 million, or 1.65% of total energy loans, at June 30, 2022 decreasing $950 thousand, or 5.5%, compared to $17.2 million, or 1.60% of total energy loans, at December 31, 2021. Modeled expected credit losses related to energy loans decreased $257 thousand while Q-Factor and other qualitative adjustments related to energy loans decreased $1.4 million. Specific allocations for energy loans that were evaluated for expected credit losses on an individual basis totaled $6.2 million at June 30, 2022 increasing $692 thousand compared to $5.5 million on December 31, 2021.
The allowance allocated to commercial real estate loans totaled $117.1 million, or 1.45% of total commercial real estate loans, at June 30, 2022 decreasing $27.8 million, or 19.2%, compared to $144.9 million, or 1.91% of total commercial real estate loans, at December 31, 2021. Modeled expected credit losses related to commercial real estate loans increased $3.4 million while Q-Factor and other qualitative adjustments related to commercial real estate loans decreased $32.3 million. Specific allocations for commercial real estate loans that were evaluated for expected credit losses on an individual basis increased from $400 thousand at December 31, 2021 to $1.5 million at June 30, 2022.
The allowance allocated to consumer real estate loans totaled $6.9 million, or 0.44% of total consumer real estate loans, at June 30, 2022 increasing $269 thousand, or 4.1%, compared to $6.6 million, or 0.47% of total consumer real estate loans, at December 31, 2021. Modeled expected credit losses related to consumer real estate loans increased $155 thousand while Q-Factor and other qualitative adjustments related to consumer real estate loans increased $68 thousand.
The allowance allocated to consumer loans totaled $12.1 million, or 2.43% of total consumer loans, at June 30, 2022 increasing $4.3 million, or 54.8%, compared to $7.8 million, or 1.64% of total consumer loans, at December 31, 2021. Modeled expected credit losses related to consumer loans increased $3.2 million, which was impacted by increasingly negative trends related to overdraft charge-offs. Q-Factor and other qualitative adjustments increased $1.1 million primarily due to an increase in the consumer overlay, which is further discussed below.
As more fully described in our 2021 Form 10-K, 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 June 30, 2022, we utilized the Moody’s Analytics June 2022 Consensus Scenario (the “June 2022 Consensus Scenario”) to forecast the macroeconomic variables used in our models. The June 2022 Consensus Scenario was based on the review of a variety of surveys of baseline forecasts of the U.S. economy. The June 2022 Consensus Scenario projections included, among other things, (i) U.S. Nominal Gross Domestic Product annualized quarterly growth rate of 6.80% in the second half of 2022 followed by average annualized quarterly growth rates of 4.10% in 2023 and 4.30% through the end of the forecast period in the second quarter of 2024; (ii) average U.S. unemployment rate of 3.57% in the second half of 2022 and remaining fairly flat through the end of the forecast period where it is projected to be 3.58% in the second quarter of 2024; (iii) average Texas unemployment rate of 4.11% in the second half of 2022 and improving to 3.57% by the end of the forecast in the second quarter of 2024; (iv) projected average 10 year Treasury rate of 2.95% in the second half of 2022, and remaining fairly flat through the end of the forecast period in the second quarter of 2024 where it is projected to be 2.91%.
In estimating expected credit losses as of December 31, 2021, we utilized the Moody’s Analytics December 2021 Consensus Scenario (the “December 2021 Consensus Scenario”) to forecast the macroeconomic variables used in our models. The December 2021 Consensus Scenario was based on the review of a variety of surveys of baseline forecasts of the U.S. economy. The December 2021 Consensus Scenario projections included, among other things, (i) U.S. Nominal Gross Domestic Product annualized quarterly growth rate of 6.4% in the first quarter of 2022, followed by annualized quarterly growth rates in the range of 3.8% to 5.4% during the remainder of 2022 and an average annualized growth rate of 4.8% through the end of the forecast period in the fourth quarter of 2023; (ii) U.S. unemployment rate of 4.3% in the first quarter of 2022 improving to 3.7% by the end of the forecast period in the fourth quarter of 2023 with Texas unemployment rates slightly higher at those dates; and (iii) projected average 10 year Treasury rate of 1.59% in the first quarter of 2022, increasing to average projected rates of 1.75% during the remainder of 2022 and 2.10% in 2023.
The overall loan portfolio, excluding PPP loans which are fully guaranteed by the SBA, as of June 30, 2022 increased $736.6 million, or 4.6%, compared to December 31, 2021. This increase included a $479.5 million, or 6.3%, increase in commercial real estate loans, a $174.3 million, or 3.2%, increase in commercial and industrial loans, a $150.2 million, or 10.6%, increase in consumer real estate loans and a $22.4 million, or 4.7%, increase in consumer and other loans partly offset by an $89.9 million, or 8.3%, decrease in energy loans.
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The weighted average risk grade for commercial and industrial loans increased to 6.38 at June 30, 2022 compared to 6.22 at December 31, 2021. This increase was primarily due to an increase in the weighted-average risk grade of pass-grade commercial and industrial loans to 6.23 at June 30, 2022 from 6.01 at December 31, 2021. Commercial and industrial loans graded “watch” and “special mention” (risk grades 9 and 10) decreased $25.6 million during the first six months of 2022 while classified commercial and industrial loans decreased $13.0 million. Classified loans consist of loans having a risk grade of 11, 12 or 13. The weighted-average risk grade for energy loans decreased to 5.82 at June 30, 2022 from 6.06 at December 31, 2021. The decrease in the weighted average risk grade was partly related to a $23.3 million decrease in energy loans graded “watch” and “special mention” (risk grades 9 and 10). Additionally, pass grade energy loans decreased $67.2 million and the weighted-average risk grade of pass grade energy loans decreased from 5.78 at December 31, 2021 to 5.57 at June 30, 2022. The weighted average risk grade for commercial real estate loans decreased to 7.09 at June 30, 2022 from 7.19 at December 31, 2021. Pass grade commercial real estate loans increased $612.0 million while the weighted-average risk grade of such loans decreased from 6.92 at December 31, 2021 to 6.89 June 30, 2022. Commercial real estate loans graded as “watch” and “special mention” decreased $99.5 million and classified commercial real estate loans decreased $33.0 million.
As noted above, our credit loss models utilized the economic forecasts in the Moody's June 2022 Consensus Scenario for our estimated expected credit losses as of June 30, 2022 and the Moody's December 2021 Consensus Scenario for our estimate of expected credit losses as of December 31, 2021. We qualitatively adjusted the model results based on these scenarios for various risk factors that are not considered within our modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools. These qualitative factor, or Q-Factor, adjustments are discussed below.
Q-Factor adjustments are based upon management's 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 June 30, 2022, modeled expected credit losses were adjusted upwards by a weighted-average Q-Factor adjustment of approximately 2.5%, resulting in a $2.0 million total adjustment, compared to 2.3% at December 31, 2021, which resulted in a $1.8 million total adjustment. The weighted-average Q-Factor adjustment at June 30, 2022 was based on a limited negative expected impact on our commercial and industrial and commercial real estate loan portfolios related to changes in loan portfolio concentrations; a limited negative expected impact on all of our loan portfolios related to changes in the volumes and severity of loan delinquencies, changes in risk grades and adverse classifications; a limited negative expected impact on our commercial and consumer real estate portfolios related to the potential deterioration of collateral values (no expected impact related to our commercial and industrial and consumer portfolios); a negative expected impact associated with national, regional and local economic and business conditions and developments that affect the collectability of loans; a severely negative expected impact from other risk factors associated with our commercial real estate construction and land loan portfolios, particularly the risks related to expected extensions; and no impact to any of our loan portfolios related to changes lending policies procedures and underwriting standards (except for our consumer and other portfolio, which was limited negative); and loan portfolio attributes, among other things.
We have also provided additional qualitative adjustments, or management overlays, as of June 30, 2022 as management believes there are still significant risks impacting certain categories of our loan portfolio. Q-Factor and other qualitative adjustments as of June 30, 2022 are detailed in the table below.
Q-Factor AdjustmentModel OverlaysOffice Building OverlaysDown-Side Scenario OverlayCredit Concentration OverlaysConsumer OverlayTotal
Commercial and industrial$975 $— $— $28,931 $5,228 $— $35,134 
Energy123 — — — 3,866 — 3,989 
Commercial real estate:
Owner occupied293 28,196 — — 1,399 — 29,888 
Non-owner occupied53 11,266 31,561 — 661 — 43,541 
Construction436 13,485 7,260 — 922 — 22,103 
Consumer real estate133 — — — — — 133 
Consumer and other26 — — — — 2,500 2,526 
Total$2,039 $52,947 $38,821 $28,931 $12,076 $2,500 $137,314 
Model overlays are qualitative adjustments to address the effect of unusually large positive changes in certain economic variables used by our commercial real estate credit loss models. These adjustments are determined based upon minimum reserve ratios for our commercial real estate - owner occupied, commercial real estate - non-owner occupied and commercial real estate - construction loan portfolios.
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Office building overlays are qualitative adjustments to address longer-term concerns over the utilization of commercial office space which could impact the long-term performance of some types of office properties within our commercial real estate loan portfolio. These adjustments are determined based upon minimum reserve ratios for loans within our commercial real estate - non-owner occupied and commercial real estate - construction loan portfolios that have risk grades of 8 or worse.
The down-side scenario overlay is a qualitative adjustment for our commercial and industrial loan portfolio to address the significant risk of economic recession as a result of inflation; labor shortages; disruption in financial markets and global supply chains; further oil price volatility; and the current or anticipated impact of military conflict, including the current war between Russia and Ukraine, terrorism or other geopolitical events. Factors such as these are outside of our control but nonetheless affect customer income levels and could alter anticipated customer behavior, including borrowing, repayment, investment and deposit practices. To determine this qualitative adjustment, we use an alternative, more pessimistic economic scenario to forecast the macroeconomic variables used in our models. As of June 30, 2022, we used the Moody’s Analytics June 2022 S3 Alternative Scenario Downside - 90th Percentile (the “June 2022 S3 Scenario”). In modeling expected credit losses using this scenario, we also assume each loan within our modeled loan pools is downgraded by one risk grade level. The qualitative adjustment is based upon the amount by which the alternative scenario modeling results exceed those of the primary scenario used in estimating credit loss expense, adjusted based upon management's assessment of the probability that this more pessimistic economic scenario will occur.
Credit concentration overlays are qualitative adjustments based upon statistical analysis to address relationship exposure concentrations within our loan portfolio. Variations in loan portfolio concentrations over time cause expected credit losses within our existing portfolio to differ from historical loss experience. Given that the allowance for credit losses on loans reflects expected credit losses within our loan portfolio and the fact that these expected credit losses are uncertain as to nature, timing and amount, management believes that segments with higher concentration risk are more likely to experience a high loss event. Due to the fact that a significant portion of our loan portfolio is concentrated in large credit relationships and because of large, concentrated credit losses in recent years, management made the qualitative adjustments detailed in the table above to address the risk associated with such a relationship deteriorating to a loss event.
The consumer overlay is a qualitative adjustment for our consumer and other loan portfolio to address the risk associated with the level of unsecured loans within this portfolio and other risk factors. Unsecured consumer loans have an elevated risk of loss in times of economic stress as these loans lack a secondary source of repayment in the form of hard collateral. This adjustment was determined by analyzing our consumer loan charge-off trends as well as those of the general banking industry. Management deemed it appropriate to consider an additional overlay to the modeled forecasted losses for the unsecured consumer portfolio.
As of December 31, 2021, we provided qualitative adjustments, as detailed in the table below. Further information regarding these qualitative adjustments is provided in our 2021 Form 10-K.
Q-Factor AdjustmentModel OverlaysOffice Building OverlaysSmall Business OverlayCOVID-19 Related OverlaysCredit Concentration OverlaysConsumer OverlayTotal
Commercial and industrial$939 $— $— $3,956 $4,715 $4,999 $— $14,609 
Energy127 — — — — 5,247 — 5,374 
Commercial real estate:
Owner occupied198 31,806 — — 7,397 1,320 — 40,721 
Non-owner occupied45 7,762 27,860 — 30,940 731 — 67,338 
Construction383 11,212 5,544 — 2,151 511 — 19,801 
Consumer real estate65 — — — — — — 65 
Consumer and other8 — — — — — 1,432 1,440 
Total$1,765 $50,780 $33,404 $3,956 $45,203 $12,808 $1,432 $149,348 

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Additional information related to credit loss expense and net (charge-offs) recoveries is presented in the tables below. Also see Note 3 - Loans in the accompanying notes to consolidated financial statements included elsewhere in this report.
Credit Loss Expense (Benefit)Net
(Charge-Offs)
Recoveries		Average
Loans 		Ratio of Annualized Net (Charge-Offs)
Recoveries to Average Loans
Three months ended:
June 30, 2022
Commercial and industrial$942 $(698)$5,531,663 (0.05)%
Energy427 418 1,040,893 0.16 
Paycheck Protection Program— — 143,989 — 
Commercial real estate(12,232)384 7,964,298 0.02 
Consumer real estate583 (88)1,495,799 (0.02)
Consumer and other5,884 (2,823)497,847 (2.27)
Total$(4,396)$(2,807)$16,674,489 (0.07)
Excluding PPP loans$(4,396)$(2,807)$16,530,500 (0.07)
June 30, 2021
Commercial and industrial$(5,901)$280 $4,705,857 0.02 %
Energy(5,527)65 1,024,691 0.03 
Paycheck Protection Program— — 2,648,345 — 
Commercial real estate3,654 (101)7,069,124 (0.01)
Consumer real estate611 (93)1,335,763 (0.03)
Consumer and other2,784 (1,742)462,609 (1.51)
Total$(4,379)$(1,591)$17,246,389 (0.04)
Excluding PPP loans$(4,379)$(1,591)$14,598,044 (0.04)
Six months ended:
June 30, 2022
Commercial and industrial$18,503 $(3,324)$5,491,632 (0.12)%
Energy(1,617)667 1,045,338 0.13 
Paycheck Protection Program— — 222,773 — 
Commercial real estate(27,841)11 7,826,540 — 
Consumer real estate557 (288)1,459,142 (0.04)
Consumer and other10,466 (6,168)485,844 (2.56)
Total$68 $(9,102)$16,531,269 (0.11)
Excluding PPP loans$68 $(9,102)$16,308,496 (0.11)
June 30, 2021
Commercial and industrial$(7,866)$(706)$4,764,241 (0.03)%
Energy(11,328)(215)1,093,080 (0.04)
Paycheck Protection Program— — 2,739,210 — 
Commercial real estate12,576 525 7,068,403 0.01 
Consumer real estate(2,111)339 1,332,196 0.05 
Consumer and other4,350 (3,453)466,814 (1.49)
Total$(4,379)$(3,510)$17,463,944 (0.04)
Excluding PPP loans$(4,379)$(3,510)$14,724,734 (0.05)
We recorded a net credit loss expense related to loans totaling $68 thousand for the six months ended June 30, 2022 while no net credit loss expense or benefit was recognized during the same period in 2021. Net credit loss expense/benefit for each portfolio segment reflects the amount needed to adjust the allowance for credit losses allocated to that segment to the level of expected credit losses determined under our allowance methodology after net charge-offs have been recognized. The net credit loss expense related to loans during the first six months of 2022 primarily reflects increases in expected credit losses associated with commercial and industrial loans, primarily related to the down-side scenario overlay discussed above, and consumer and other loans, primarily related to an increase in modeled losses, as well as the level of net charge-offs associated with these loan portfolio segments. The impact of these items was partly offset by a decrease in expected credit losses associated with commercial real estate loans, primarily related to a decrease in expected credit losses related to certain pandemic impacted industries and a reduction in the minimum reserve ratio for our commercial real estate - owner occupied portfolio. The ratio of the allowance for credit losses on loans to total loans was 1.43% (1.44% excluding PPP loans) at June 30, 2022 compared to
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1.52% (1.56% excluding PPP loans) at December 31, 2021. Management believes the recorded amount of the allowance for credit losses on loans is appropriate based upon management’s best estimate of current expected credit losses within the existing portfolio of loans. Should any of the factors considered by management in making this estimate change, our estimate of current expect credit losses could also change, which could affect the level of future credit loss expense related to loans.
Allowance for Credit Losses - Off-Balance-Sheet Credit Exposures. The allowance for credit losses on off-balance-sheet credit exposures totaled approximately $50.2 million and $50.3 million at June 30, 2022 and December 31, 2021, respectively. The level of the allowance for credit losses on off-balance-sheet credit exposures depends upon the volume of outstanding commitments, underlying risk grades, the expected utilization of available funds and forecasted economic conditions impacting our loan portfolio. Our policies and methodology used to estimate the allowance for credit losses on off-balance-sheet credit exposures are further described in our 2021 Form 10-K. We recognized a net credit loss benefit related to off-balance-sheet credit exposures totaling $68 thousand during the six months ended June 30, 2022 compared to a net credit loss expense of $4.4 million during the same period in 2021.
Capital and Liquidity
Capital. Shareholders’ equity totaled $3.3 billion and $4.4 billion at June 30, 2022 and December 31, 2021, respectively. The decrease was primarily related to the accumulated other comprehensive income/loss component of shareholders’ equity which decreased to a net, after-tax, unrealized loss of $874.2 million at June 30, 2022 from a net, after-tax unrealized gain of $347.3 million at December 31, 2021. The change was primarily due to a $1.2 billion net, after-tax, decrease in the fair value of securities available for sale. Other uses of capital during the six months ended June 30, 2022 included $100.3 million of dividends paid on preferred and common stock and $996 thousand of treasury stock purchases. Sources of capital during the six months ended June 30, 2022 included net income of $218.2 million, $6.5 million in proceeds from stock option exercises and $5.5 million related to stock-based compensation.
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 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 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 and 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 $0.75 per common share during each of the first and second quarters of 2022 and a quarterly dividend of $0.72 per common share during each of the first and second quarters of 2021. These dividend amounts equate to a common stock dividend payout ratio of 45.1% and 40.1% during the first six months of 2022 and 2021, 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.
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 January 26, 2022 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. No shares have been repurchased under this plan or under a prior plan during the reported periods. 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 2021 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 June 30, 2022, we had approximately $12.7 billion held in an interest-bearing account at the Federal Reserve. We also have the ability to borrow funds as a member of the Federal Home Loan Bank (“FHLB”). As of June 30, 2022, based upon available, pledgeable collateral, our total borrowing capacity with the FHLB was approximately $3.2 billion.
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Furthermore, at June 30, 2022, we had approximately $14.1 billion in securities that were unencumbered by a pledge and could be used to support additional borrowings through repurchase agreements or the Federal Reserve discount window, as needed.
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 June 30, 2022, Cullen/Frost had liquid assets, including cash and resell agreements, totaling $432.8 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.
62
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The disclosures set forth in this item are qualified by the section captioned “Forward-Looking Statements and Factors that Could Affect Future Results” included in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report and other cautionary statements set forth elsewhere in this report.
Refer to the discussion of market risks included in Item 7A. Quantitative and Qualitative Disclosures About Market Risk in the 2021 Form 10-K. There has been no significant change in the types of market risks we face since December 31, 2021.
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 June 30, 2022, 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 2.9% and 6.1%, respectively, relative to the flat-rate case over the next 12 months, while 100 and 175 basis point ratable decreases in interest rates would result in a negative variances in net interest income of 2.7% and 8.3%, respectively, relative to the flat-rate case over the next 12 months. For modeling purposes, as of December 31, 2021, 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 2.8% and 7.1%, 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 3.0% relative to the flat-rate case over the next 12 months. The likelihood of a decrease in interest rates beyond 175 basis points as of June 30, 2022 and 25 basis points as of December 31, 2021 was considered remote given prevailing interest rate levels.
We do not currently pay interest on a significant portion of our commercial demand deposits. 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. Our June 30, 2022 model simulations do not assume any payment of interest on commercial demand deposits (those not already receiving an earnings credit) while our modeling simulations as of December 31, 2021 assumed a slightly aggressive 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 first quarter of 2022. This pricing structure on commercial demand deposits assumed 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. As of June 30, 2022, management believes, based on our experience during the last interest rate cycle, that it is less likely we will pay interest on these deposits as rates increase.
The model simulations as of June 30, 2022 indicate that our projected balance sheet is slightly less asset sensitive in comparison to our balance sheet as of December 31, 2021. The decreased asset sensitivity was partly due to a decrease 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 combined with an increase in the relative proportion of fixed-rate taxable securities 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.
As of June 30, 2022, the effects of a 200 basis point increase and a 100 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.
63
Part II. Other Information
Item 1. Legal Proceedings
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.
Item 1A. Risk Factors
There has been no material change in the risk factors disclosed under Item 1A. of our 2021 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to purchases we made or were made on our behalf or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of our common stock during the three months ended June 30, 2022. Dollar amounts in thousands.
PeriodTotal 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
April 1, 2022 to April 30, 2022— $— — $100,000 
May 1, 2022 to May 31, 2022— — — 100,000 
June 1, 2022 to June 30, 2022— — — 100,000 
Total— — 
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
64
Table of Contents
Item 6. Exhibits
(a) Exhibits
Exhibit
Number		Description
10.1(1)
10.2(1)
10.3(1)
10.4(1)
10.5(1)
10.6(1)
10.7(1)
10.8(1)
31.1
31.2
32.1(2)
32.2(2)
101.INS(3)
Inline XBRL Instance Document
101.SCHInline XBRL Taxonomy Extension Schema Document
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document
101.LABInlineXBRL Taxonomy Extension Label Linkbase Document
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document
104(4)
Cover Page Interactive Data File
    
(1)Management contract or compensatory plan or arrangement.
(2)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.
(3)The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.
(4)Formatted as Inline XBRL and contained within the Inline XBRL Instance Document in Exhibit 101.

65
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Cullen/Frost Bankers, Inc.
(Registrant)
Date:July 28, 2022By:/s/ Jerry Salinas
Jerry Salinas
Group Executive Vice President
and Chief Financial Officer
(Duly Authorized Officer, Principal Financial
Officer and Principal Accounting Officer)
66

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