CULLEN/FROST BANKERS, INC. Forward-Looking Statements and Factors that Could Affect Future Results
Certain statements contained in this Annual Report on Form 10-K 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"), notwithstanding that such statements are not specifically identified as such. In addition, certain statements may be contained in our future filings with theSEC , 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: •The effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of theFederal Reserve Board . •Inflation, interest rate, securities market and monetary fluctuations. •Local, regional, national and international economic conditions and the impact they may have on us and our customers and our assessment of that impact. •Changes in the financial performance and/or condition of our borrowers. •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 credit loss reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements. •Changes in our liquidity position. •Impairment of our goodwill or other intangible assets. •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. •Greater than expected costs or difficulties related to the integration of new products and lines of business. •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. •Changes in the reliability of our vendors, internal control systems or information systems. •Our ability to increase market share and control expenses. •Our ability to attract and retain qualified employees. •Changes in our organization, compensation and benefit plans. •The soundness of other financial institutions. •Volatility and disruption in national and international financial and commodity markets. •Changes in the competitive environment in our markets and among banking organizations and other financial service providers. •Government intervention in theU.S. financial system. •Political instability. •Acts of God or of war or terrorism. •The potential impact of climate change. •The impact of pandemics, epidemics or any other health-related crisis. 36 -------------------------------------------------------------------------------- Table of Contents •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. •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 effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as thePublic Company Accounting Oversight Board , theFinancial Accounting Standards Board and other accounting standard setters. •Our success at managing the risks involved in the foregoing items.
In addition, financial markets and global supply chains may continue to be
adversely affected by the current or anticipated impact of military conflict,
including the current Russian invasion of
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.
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 inthe United States and to general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted inthe 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. As discussed in Note 1 - Summary of Significant Accounting Policies, our policies related to allowances for credit losses changed onJanuary 1, 2020 in connection with the adoption of a new accounting standard update as codified in Accounting Standards Codification ("ASC") Topic 326 ("ASC 326") Financial Instruments - Credit Losses. In the case of loans, the allowance for credit losses is a contra-asset valuation account, calculated in accordance with ASC 326, that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. In the case of off-balance-sheet credit exposures, the allowance for credit losses is a liability account, calculated in accordance with ASC 326, reported as a component of accrued interest payable and other liabilities in our consolidated balance sheets. The amount of each allowance account represents management's best estimate of current expected credit losses on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. While management utilizes its best judgment and information available, the ultimate adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets. See the section captioned "Allowance for Credit Losses" elsewhere in this discussion as well as Note 1 - Summary of Significant Accounting Policies and Note 3 - Loans in the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data elsewhere in this report for further details of the risk factors considered by management in estimating the necessary level of the allowance for credit losses. 37
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Overview
The following discussion and analysis presents the more significant factors that affected our financial condition as ofDecember 31, 2022 and 2021 and results of operations for each of the years then ended. Refer to Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K filed with theSEC onFebruary 4, 2021 (the
" 2021 Form 10-K " ) for a discussion and analysis of the more significant factors that affected periods prior to 2021.
Certain reclassifications have been made to make prior periods comparable. This discussion and analysis should be read in conjunction with our consolidated financial statements, notes thereto and other financial information appearing elsewhere in this report. From time to time, we have acquired various small businesses through our insurance subsidiary. None of these acquisitions had a significant impact on our financial statements. We account for acquisitions using the acquisition method, and as such, the results of operations of acquired companies are included from the date of acquisition. 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, thus making tax-exempt yields comparable to taxable asset yields. Taxable equivalent adjustments were based upon a 21% income tax rate.
Dollar amounts in tables are stated in thousands, except for per share amounts.
Results of Operations
Net income available to common shareholders totaled
Selected income statement data, returns on average assets and average equity and dividends per share for the comparable periods were as follows:
2022 2021 2020
Taxable-equivalent net interest income $ 1,386,981 $ 1,077,315 $ 1,070,937
Taxable-equivalent adjustment 95,698 92,448 94,936
Net interest income 1,291,283 984,867 976,001
Credit loss expense 3,000 63 241,230
Non-interest income 404,818 386,728 465,454
Non-interest expense 1,024,274 881,994 848,904
Income before income taxes 668,827 489,538 351,321
Income tax expense 89,677 46,459 20,170
Net income 579,150 443,079 331,151
Preferred stock dividends 6,675 7,157 2,016
Redemption of preferred stock - - 5,514
Net income available to common shareholders $ 572,475 $ 435,922 $ 323,621
Earnings per common share - basic $ 8.84 $ 6.79 $ 5.11
Earnings per common share - diluted 8.81 6.76 5.10
Dividends per common share 3.24 2.94 2.85
Return on average assets 1.11 % 0.95 % 0.85 %
Return on average common equity 16.86 10.35 8.11
Average shareholders' equity to average assets 6.87 9.48 10.64
Net income available to common shareholders increased $136.6 million for 2022
compared to 2021. The increase was primarily the result of a $306.4 million
increase in net interest income and a $18.1 million increase in non-interest
income partly offset by a $142.3 million increase in non-interest expense and a
$43.2 million increase in income tax expense.
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 76.1% of total revenue during 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. TheFederal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. Our loan portfolio is significantly affected by changes in the prime interest rate. As ofDecember 31, 2022 , approximately 42.7% 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 27.7%) or the London Interbank Offered Rate ("LIBOR") (approximately 8.2%). We discontinued originating LIBOR-based loans effectiveDecember 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 byBloomberg Index Services ("BSBY"). As ofDecember 31, 2022 , approximately, 21.4% of our loans were tied to one of these three 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 end of first quarter of 2023. Select average market rates for the periods indicated are presented in the table below. 2022 2021 2020 Federal funds target rate upper bound 1.87 % 0.25 % 0.54 % Effective federal funds rate 1.69 0.08 0.37 Interest on reserve balances 1.76 0.13 0.39 Prime 4.86 3.25 3.54 1-Month LIBOR 1.91 0.10 0.52 3-Month LIBOR 2.39 0.16 0.65 AMERIBOR Term-30(1) 1.79 0.11 0.54 AMERIBOR Term-90(1) 2.33 0.17 0.68 1-Month Term SOFR(2) 1.86 0.04 0.35 3-Month Term SOFR(2) 2.18 0.05 0.34
Bloomberg 1-Month Short-Term Bank Yield Index 1.81 0.07 0.50 Bloomberg 3-Month Short-Term Bank Yield Index 2.29 0.13 0.59
____________________
(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
As ofDecember 31, 2022 , the target range for the federal funds rate was 4.25% to 4.50%. InDecember 2022 , theFederal Reserve released projections whereby the midpoint of the projected appropriate target range for the federal funds rate would rise to 5.1% by the end of 2023 and subsequently decrease to 4.1% by the end of 2024. While there can be no such assurance that any increases or decreases in the federal funds rate will occur, these projections imply up to a 75 basis point increase in the federal funds rate during 2023, followed by a 100 basis point decrease in 2024. The target range for the federal funds rate was increased 25 basis points to 4.50% to 4.75% effectiveFebruary 2, 2023 . 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 7A. 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. 39
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The following table presents 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 table also sets 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.
2022 2021 2020
Interest Interest Interest
Average Income/ Yield Average Income/ Yield Average Income/ Yield
Balance Expense /Cost Balance Expense /Cost Balance Expense /Cost
Assets:
Interest-bearing deposits $ 12,783,536 $ 216,367 1.69 % $ 13,530,312 $ 17,878 0.13 % $ 5,302,616 $ 12,893 0.24 %
Federal funds sold 37,171 948 2.55 14,836 31 0.21 78,817 723 0.92
Resell agreements 17,079 592 3.47 6,611 16 0.24 20,923 172 0.82
Securities:
Taxable 10,719,066 249,797 2.16 4,606,562 89,550 1.97 4,234,318 93,569 2.27
Tax-exempt 7,997,778 327,559 4.08 8,268,416 314,600 4.06 8,447,036 323,928 4.08
Total securities 18,716,844 577,356 2.95 12,874,978 404,150 3.29 12,681,354 417,497 3.46
Loans, net of unearned discount 16,738,780 776,156 4.64 16,769,631 679,142 4.05 17,164,453 684,686 3.99
Total earning assets and average rate earned 48,293,410 1,571,419 3.20 43,196,368 1,101,217 2.58 35,248,163 1,115,971 3.22
Cash and due from banks 646,510 564,564 527,875
Allowance for credit losses (242,059) (258,668) (232,596)
Premises and equipment, net 1,061,937 1,038,034 1,043,789
Accrued interest receivable and other assets 1,753,340 1,442,682 1,373,969
Total assets $ 51,513,138 $ 45,982,980 $ 37,961,200
Liabilities:
Non-interest-bearing demand deposits $ 18,202,669 $ 16,670,807 $ 13,563,696
Interest-bearing deposits:
Savings and interest checking 12,160,482 12,055 0.10 10,682,149 1,365 0.01 8,283,665 2,467 0.03
Money market deposit accounts 12,727,533 114,797 0.90 9,990,626 9,462 0.09 8,457,263 15,417 0.18
Time accounts 1,480,088 13,624 0.92 1,129,041 3,693 0.33 1,133,648 14,134 1.25
Total interest-bearing deposits 26,368,103 140,476 0.53 21,801,816 14,520 0.07 17,874,576 32,018 0.18
Total deposits 44,570,772 0.32 38,472,623 0.04 31,438,272 0.10
Federal funds purchased 35,461 690 1.95 32,177 32 0.10 33,135 100 0.30
Repurchase agreements 2,335,326 34,443 1.47 2,115,276 2,209 0.10 1,436,833 4,382 0.30
Junior subordinated deferrable interest
debentures 123,042 4,172 3.39 133,744 2,484 1.86 136,330 3,560 2.61
Subordinated notes 99,262 4,657 4.69 99,105 4,657 4.70 98,948 4,656 4.71
Federal Home Loan Bank advances - - - - - - 109,290 318 0.29
Total interest-bearing liabilities and average
rate paid 28,961,194 184,438 0.64 24,182,118 23,902 0.10 19,689,112 45,034 0.23
Accrued interest payable and other liabilities 807,820 771,392 669,755
Total liabilities 47,971,683 41,624,317 33,922,563
Shareholders' equity 3,541,455 4,358,663 4,038,637
Total liabilities and shareholders' equity $ 51,513,138 $ 45,982,980 $ 37,961,200
Net interest income $ 1,386,981 $ 1,077,315 $ 1,070,937
Net interest spread 2.56 % 2.48 % 2.99 %
Net interest income to total average earning
assets 2.82 % 2.53 % 3.09 %
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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. The comparison between 2021 and 2020 includes an additional change factor that shows the effect of the difference in the number of days (due toleap year in 2020) in each period for assets and liabilities that accrue interest based upon the actual number of days in the period, as further discussed below. 2022 vs. 2021 2021 vs. 2020 Increase (Decrease) Due to Increase (Decrease) Change in Due to Change in Rate Volume Total Rate Volume Days Total
Interest-bearing deposits
$ 198,489 $ (7,856) $ 12,876 $ (35) $ 4,985 Federal funds sold 808 109 917 (336) (354) (2) (692) Resell agreements 516 60 576 (79) (77) - (156) Securities: Taxable 9,418 150,829 160,247 (13,040) 9,021 - (4,019) Tax-exempt 1,607 11,352 12,959 (1,618) (7,710) - (9,328) Loans, net of unearned discounts 98,271 (1,257) 97,014 11,000 (14,673) (1,871)
(5,544)
Total earning assets 310,133 160,069 470,202 (11,929) (917) (1,908)
(14,754)
Savings and interest checking 10,528 162 10,690 (1,767) 672 (7)
(1,102)
Money market deposit accounts 102,224 3,111 105,335 (8,389) 2,476 (42) (5,955) Time accounts 8,460 1,471 9,931 (10,344) (58) (39) (10,441) Federal funds purchased 655 3 658 (65) (3) - (68) Repurchase agreements 31,991 243 32,234 (3,646) 1,485 (12) (2,173) Junior subordinated deferrable interest debentures 1,901 (213) 1,688 (1,010) (66) - (1,076) Subordinated notes (8) 8 - (8) 9 - 1 Federal Home Loan Bank advances - - - - (318) -
(318)
Total interest-bearing liabilities 155,751 4,785 160,536 (25,229) 4,197 (100) (21,132) Net change$ 154,382 $ 155,284 $ 309,666 $ 13,300 $ (5,114) $ (1,808) $ 6,378 Taxable-equivalent net interest income for 2022 increased$309.7 million , or 28.7%, compared to 2021. The increase in taxable-equivalent net interest income during 2022 was primarily related to an increase in the average yield on interest-bearing deposits (primarily amounts held in an interest-bearing account at theFederal Reserve ); an increase in the average volume of, and to a much lesser extent, an increase in the yield on taxable securities; an increase in the average yield on loans; and an increase in the average volume of, and to a lesser extent, an increase in the average taxable-equivalent yield on tax-exempt securities. The impact of these items was partly offset by an increase in the average cost of interest-bearing deposit accounts (primarily money market deposit accounts) and an increase in the average cost of repurchase agreements, among other things. As a result of the aforementioned fluctuations, the taxable-equivalent net interest margin increased 29 basis points from 2.53% during 2021 to 2.82% during 2022. The average volume of interest-earning assets for 2022 increased$5.1 billion , or 11.8%, compared to 2021. The increase in the average volume of interest-earning assets during 2022 included a$6.1 billion increase in average taxable securities, a$22.3 million increase in average federal funds sold and a$10.5 million increase in average resell agreements partly offset by a$746.8 million decrease in average interest-bearing deposits (primarily amounts held by us in an interest-bearing account at theFederal Reserve ), a$270.6 million decrease in average tax-exempt securities, and a$30.9 million decrease in average loans (of which approximately$1.7 billion related to PPP loans, as further discussed below). The average yield on interest-earning assets increased 62 basis points from 2.58% during 2021 to 3.20% during 2022 while the average rate paid on interest-bearing liabilities increased 54 basis points from 0.10% in 2021 to 0.64% in 2022. The average taxable-equivalent yields on interest-earning assets and the average rate paid on interest-bearing liabilities were primarily impacted by the aforementioned changes in market interest rates and changes in the volume and relative mix of interest-earning assets and interest-bearing liabilities. 41
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The average taxable-equivalent yield on loans increased 59 basis points from 4.05% during 2021 to 4.64% during 2022. The average taxable-equivalent yield on loans during 2022 was positively impacted by recent increases in market interest rates. The average taxable-equivalent yield on loans during 2021 was positively impacted by a higher average proportion of higher-yielding PPP loans to total loans compared to 2022. The average volume of loans decreased$30.9 million , or 0.2%, in 2022 compared to 2021. The average volume of loans during 2022 was impacted by decrease in the average volume of PPP loans. Excluding PPP loans, average loans would have increased$1.7 billion , or 11.3%, during 2022 compared to 2021. Loans made up approximately 34.7% of average interest-earning assets during 2022 compared to 38.8% during 2021. During 2022 and 2021, we recognized$2.6 million and$97.3 million , respectively, in PPP loan related deferred processing fees (net of amortization of related deferred origination costs) as a yield adjustment and this amount is included in interest income on loans. As a result of the inclusion of these net fees in interest income, the average yields on PPP loans were 2.84% and 6.26% during 2022 and 2021, respectively, compared to the stated interest rate of 1.0% on these loans. The average taxable-equivalent yield on securities was 2.95% during 2022, decreasing 34 basis points compared to 3.29% during 2021 and was negatively impacted by a decrease in the relative proportion of higher-yielding tax-exempt securities to total securities. The average yield on taxable securities was 2.16% during 2022 compared to 1.97% during 2021, increasing 19 basis points, while the average yield on tax exempt securities was 4.08% during 2022 compared to 4.06% during 2021, increasing 2 basis points. Tax exempt securities made up approximately 42.7% of total average securities during 2022, compared to 64.2% during 2021. The average volume of total securities increased$5.8 billion , or 45.4%, during 2022 compared to 2021. Securities made up approximately 38.7% of average interest-earning assets in 2022 compared to 29.8% in 2021. The increase during 2022 was primarily related to the investment of available funds (primarily from growth in customer deposits and reinvestment of amounts held in an interest-bearing account at theFederal Reserve ) into taxable securities. Average interest-bearing deposits (primarily amounts held by us in an interest-bearing account at theFederal Reserve ), during 2022 decreased$746.8 million , or 5.5%, compared to 2021. Interest-bearing deposits made up approximately 26.5% of average interest-earning assets during 2022 compared to approximately 31.3% in 2021. The decrease during 2022 was primarily related to the reinvestment of amounts held in an interest-bearing account at theFederal Reserve into taxable securities. The average yield on interest-bearing deposits was 1.69% during 2022 and 0.13% during 2021. The average yields on interest-bearing deposits during 2022 was impacted by higher interest rates paid on reserves held at theFederal Reserve , compared to 2021. Average federal funds sold and resell agreements during 2022 increased$22.3 million , or 150.5%, and$10.5 million , or 158.3%, respectively, compared to 2021. Federal funds sold and resell agreements were not a significant component of interest-earning assets during the comparable periods. The average yields on federal funds sold and resell agreements were 2.55% and 3.47%, respectively, during 2022 compared to 0.21% and 0.24%, respectively, during 2021. The average yields on federal funds sold and resell agreements were positively impacted by higher average market interest rates during 2022 compared to 2021. The average rate paid on interest-bearing liabilities was 0.64% during 2022, increasing 54 basis points from 0.10% during 2021. Average deposits increased$6.1 billion , or 15.9%, in 2022 compared to 2021. Average interest-bearing deposits increased$4.6 billion in 2022 compared to 2021, while average non-interest-bearing deposits increased$1.5 billion in 2022 compared to 2021. The ratio of average interest-bearing deposits to total average deposits was 59.2% in 2022 compared to 56.7% 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 rates paid on interest-bearing deposits and total deposits were 0.53% and 0.32%, respectively, in 2022 compared to 0.07% and 0.04%, respectively, 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 taxable-equivalent 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 2.56% in 2022 compared to 2.48% 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 7A. Quantitative and Qualitative Disclosures About Market Risk elsewhere in this report. 42
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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 15 - Derivative Financial Instruments in the accompanying notes to consolidated financial statements elsewhere in this report. Information regarding the impact of fluctuations in interest rates on our derivative financial instruments is set forth in Item 7A. Quantitative and Qualitative Disclosures About Market Risk elsewhere in this report.
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 exposure after net charge-offs have been deducted to bring the allowance 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.
2022 2021 2020
Credit loss expense related to:
Loans $ (5,279) $ (6,097) $ 237,010 Off-balance-sheet credit exposures 8,279 6,162 4,275 Securities held to maturity
- (2) (55)
Total $ 3,000 $ 63 $ 241,230 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 2022 increased$18.1 million , or 4.7%, compared to 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 fee income for 2022 increased$5.7 million , or 3.8%, compared to 2021. Investment management fees are the most significant component of trust and investment management fees, making up approximately 77.1% and 82.3% of total trust and investment management fees in 2022 and 2021, respectively. The increase in trust and investment management fees during 2022 was primarily due to increases in oil and gas fees (up$6.1 million ), real estate fees (up$2.0 million ) and estate fees (up$976 thousand ) partly offset by a decrease in investment management fees (down$3.4 million ). Oil and gas fees during 2022 were impacted by increases in oil and gas prices. The increases in real estate fees and estate fees were primarily related to increased transaction volumes and transaction fees. 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 decrease in investment management fees during 2022 was primarily related to lower average equity valuations, in part related to the sharp decline in equity valuations during 2022. AtDecember 31, 2022 , trust assets, including both managed assets and custody assets, were primarily composed of equity securities (40.2% of trust assets), fixed income securities (33.8% of trust assets), alternative investments (8.7% of assets) and cash equivalents (10.2% of trust assets). The estimated fair value of trust assets was$43.6 billion (including managed assets of$21.4 billion and custody assets of$22.2 billion ) atDecember 31, 2022 compared to$43.3 billion (including managed assets of$19.1 billion and custody assets of$24.2 billion ) atDecember 31, 2021 . Service Charges on Deposit Accounts. Service charges on deposit accounts for 2022 increased$8.6 million , or 10.3%, compared to 2021. The increase was primarily related to increases in overdraft charges on consumer and commercial accounts (up$5.3 million and$2.3 million , respectively) and consumer service charges (up$1.0 million ). Overdraft charges totaled$38.3 million ($29.2 million consumer and$9.1 million commercial) during 2022 compared to$30.7 million ($23.9 million consumer and$6.8 million commercial) during 2021. The increase in overdraft charges during 2022 was impacted by increases in the volume of fee assessed overdrafts relative to 2021, in part due to growth in the number of accounts. The increase in consumer service charges during 2022 was partly related to increases in overall deposit accounts and volumes. 43
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InApril 2021 , we implemented a new overdraft grace feature for certain consumer demand deposit accounts whereby no fees would be assessed on overdrafts of$100 or less, subject to certain qualifying conditions such as a minimum direct deposit. This new feature reduced overdraft charges on consumer accounts by approximately$3.2 million during 2021. InJune 2022 , we expanded the overdraft grace feature first implemented inApril 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 2022 increased$1.7 million , or 3.2%, compared to 2021. The increase was the result of an increase in commission income (up$2.7 million ) partly offset by a decrease in contingent income (down$1.0 million ). The increase in commission income was primarily related to increases in commercial and, to a lesser extent, personal lines property and casualty commissions. These increases were related to increased business volumes and increased market rates. The increases in property and casualty commissions were partly offset by a decreases in life insurance commissions and benefit plan commissions. These decreases were primarily due to decreased business volumes. The decrease in benefit plan commissions was partly offset by the impact of an increase in market rates. Contingent income totaled$3.5 million in 2022 and$4.5 million in 2021. Contingent income primarily consists of amounts received from various property and casualty insurance carriers related to the loss performance of insurance policies previously placed. These performance related contingent payments are seasonal in nature and are mostly received during the first quarter of each year. This performance related contingent income totaled$1.9 million in 2022 and$3.2 million in 2021. 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 inTexas 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$1.6 million in 2022 and$1.3 million in 2021. 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 check card usage, point of sale income from PIN-based debit card transactions and ATM service fees. Interchange and card transaction fees are reported net of related network costs. Net revenues from interchange and card transaction fees for 2022 increased$770 thousand , or 4.4%, compared to 2021 primarily due to increased transaction volumes as well as the impact of new card products partly offset by an increase in network costs. A comparison of gross and net interchange and card transaction fees for the reported periods is presented in the table below. 2022 2021
2020
Income from debit card transactions$ 32,457 $ 29,122 $ 23,763 ATM service fees 3,313 3,298 3,342 Gross interchange and debit card transaction fees 35,770 32,420 27,105 Network costs 17,539
14,959 13,635
Net interchange and debit card transaction fees
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 of21 cents per transaction and 5 basis points multiplied by the value of the transaction. An upward adjustment of no more than1 cent to an issuer's debit card interchange fee is allowed if the card issuer develops and implements policies and procedures reasonably designed to achieve certain fraud-prevention standards. TheFederal 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. 44
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Other Charges, Commissions and Fees. Other charges, commissions and fees for 2022 increased$4.8 million , or 12.9%, compared to 2021. The increase was primarily related to increases in income from the placement of money market accounts (up$4.0 million ), merchant services rebates/bonuses (up$1.3 million ) and letter of credit fees (up$1.1 million ), among other things, partly offset by a decrease in income from the sale of mutual funds (down$1.7 million ), among other things.Net Gain /Loss on Securities Transactions. There were no sales of securities during 2022. During 2021, we sold certain available-for-sale securities with amortized costs totaling$2.0 billion and realized a net gain of$69 thousand . These sales were primarily related to securities purchased during 2021 and subsequently sold in connection with our tax planning strategies related to theTexas franchise tax. The gross proceeds from the sales of these securities outside ofTexas are included in total revenues/receipts from all sources reported forTexas franchise tax purposes, which results in a reduction in the overall percentage of revenues/receipts apportioned toTexas and subjected to taxation under theTexas franchise tax. Other Non-Interest Income. Other non-interest income for 2022 decreased$3.3 million , or 6.8%, compared to 2021. The decrease was primarily related to a decrease in gains on the sale/exchange of assets (down$11.7 million ) and, to a lesser extent, a decrease in income from customer derivative and securities trading transactions (down$2.3 million ), among other things. These items were partly offset by increases in sundry and other miscellaneous income (up$9.2 million ), public finance underwriting fees (up$1.7 million ) and income from customer foreign exchange transactions (up$1.4 million ), among other things. Gains on the sale/exchange of assets in 2021 included$9.7 million related to an exchange of a branch facility and$1.8 million related to the sale of certain parking lots in downtownSan Antonio . The decrease in income from customer derivative transactions was primarily due to a decrease in transaction volume. Sundry income during 2022 included$6.3 million in card related incentives/rebates,$5.1 million related to a partnership interest and$1.4 million related to the recovery of prior write-offs, among other things, while sundry and other miscellaneous income during 2021 included$3.4 million in card related incentives/rebates and$519 thousand in recoveries of prior write-offs, among other things. The increases in public finance underwriting fees and income from customer foreign exchange transactions were primarily related to increases in transaction volumes.
Non-Interest Expense
Total non-interest expense for 2022 increased$142.3 million , or 16.1%, compared to 2021. Changes in the various components of non-interest expense are discussed below. Salaries and Wages. Salaries and wages increased$96.6 million , or 24.4%, in 2022 compared to 2021. The increase in salaries and wages was 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. We are also experiencing a competitive labor market which has resulted in and could continue to result in an increase in our staffing costs. Salaries and wages were also impacted by an increase in the number of employees, increases in incentive and stock-based compensation and commissions and 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 the number of employees was partly related to our investments in organic expansion in theHouston andDallas markets as well as preparations for our mortgage loan product offering. Employee Benefits. Employee benefits expense for 2022 increased$6.6 million , or 8.0%, compared to 2021. The increase was primarily related to increases in payroll taxes, medical benefits expense, 401(k) plan expense and other employee benefits, among other things, partly offset by an increase in the net periodic benefits related to our defined benefit retirement plan. Employee benefits expense was impacted by the aforementioned higher salary costs and increase in the number of employees. 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 additional expense related to these plans in future years, which would be dependent on the return earned on plan assets, the level of interest rates and employee turnover. See Note 12 - Defined Benefit Plans for additional information related to our net periodic pension benefit/cost. Net Occupancy. Net occupancy expense for 2022 increased$5.2 million , or 4.8%, compared to 2021. The increase was primarily related to increases in repairs and maintenance/service contracts expense (up$2.0 million ), lease expense (up$1.8 million ), depreciation on buildings and leasehold improvements (together up$1.3 million ) and insurance expense (up$609 thousand ), among other things, partly offset by a decrease in property taxes (down 45
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$1.6 million ). The increases in the aforementioned components of net occupancy expense were driven, in part, by our expansion within theHouston andDallas market areas. Technology, Furniture and Equipment. Technology, furniture and equipment expense for 2022 increased$8.0 million , or 7.1%, compared to 2021. The increase was primarily related to increases in cloud services expense (up$3.9 million ), service contracts expense (up$1.4 million ), software maintenance (up$1.3 million ) and depreciation of furniture and equipment (up$989 thousand ), among other things.Deposit Insurance . Deposit insurance expense totaled$15.6 million in 2022 compared to$12.2 million in 2021. The increase was primarily related to an increase in total assets. InOctober 2022 , theFederal Deposit Insurance Corporation adopted a final rule to increase the initial base deposit insurance assessment rate schedules uniformly by 2 basis points beginning with the first quarterly assessment period of 2023. Other Non-Interest Expense. Other non-interest expense for 2022 increased$22.8 million , or 13.3%, compared to 2021. The increase included increases in professional services expense (up$6.2 million ); advertising/promotions expense (up$5.5 million ); travel, meals and entertainment (up$5.4 million ); fraud losses (up$5.0 million ); business development expense (up$1.3 million ); sundry and other miscellaneous expense (up$1.1 million ); and stationery, printing and supplies expense (up$1.0 million ), among other things. Other non-interest expense during 2022 was also impacted by a decrease in costs deferred as loan origination costs (down$1.3 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 a decrease in donations expense (down$9.0 million ), which was impacted by$8.8 million in contributions to theFrost Charitable Foundation during 2021, among other things. Sundry and other miscellaneous expense in 2022 included accruals totaling$5.9 million , which included$4.0 million related to a license negotiation and$1.9 million related to other matters. Sundry and other miscellaneous expense in 2021 included$4.7 million related to the write-off of certain assets.
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 business and the methodologies used to measure financial performance is described in Note 18 - Operating Segments in the accompanying notes to consolidated financial statements elsewhere in this report. Net income (loss) by operating segment is presented below:
Banking
Net income for 2022 increased$136.5 million , or 32.9%, compared to 2021. The increase was primarily the result of a$305.6 million increase in net interest income and a$10.2 million increase in non-interest income partly offset by a$132.7 million increase in non-interest expense, a$43.6 million increase in income tax expense and a$2.9 million increase in credit loss expense. Net interest income for 2022 increased$305.6 million , or 30.9%, compared to 2021. The increase was primarily related to an increase in the average yield on interest-bearing deposits (primarily amounts held in an interest-bearing account at theFederal Reserve ); an increase in the average volume of, and to a lesser extent, an increase in the yield on taxable securities; an increase in the average yield on loans; and an increase in the average volume of, and to a lesser extent, an increase in the average taxable-equivalent yield on tax-exempt securities. The impact of these items was partly offset by an increase in the average cost of interest-bearing deposit accounts (primarily money market deposit accounts) and an increase in the average cost of repurchase agreements, among other things. See the analysis of net interest income included in the section captioned "Net Interest Income" elsewhere in this discussion. Credit loss expense for 2022 totaled$3.0 million compared to$54 thousand in 2021. 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 2022 increased$10.2 million , or 4.6%, compared to 2021. The increase was primarily related to increases in service charges on deposit accounts; other charges commission and fees; and insurance commissions and fees partly offset by a decrease in other non-interest income. The increase in service charges on deposit accounts was primarily related to increases in overdraft charges on consumer and commercial accounts and consumer service charges. The increase in overdraft charges during 2022 was impacted by increases in the volume 46
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of fee assessed overdrafts relative to 2021, in part due to growth in the number of accounts. The increase in consumer service charges during 2022 was partly related to increases in overall deposit accounts and volumes. The increase in other charges commission and fees was primarily related to increases in merchant services rebates/bonuses and letter of credit fees, among other things. The increase in insurance commissions and fees was the result of an increase in commission income partly offset by a decrease in contingent income which is further discussed below in relation toFrost Insurance Agency . The decrease in other non-interest income was primarily related to a decrease gains on the sale/exchange of assets and, to a lesser extent, a decrease in income from customer derivative and securities trading transactions, among other things. These items were partly offset by increases in sundry and other miscellaneous income; public finance underwriting fees; and income from customer foreign exchange transactions, among other things. Gains on the sale/exchange of assets in 2021 included$9.7 million related to an exchange of a branch facility and$1.8 million related to the sale of certain parking lots in downtownSan Antonio . Sundry and other miscellaneous income during 2022 included$6.3 million in card related incentives/rebates,$5.1 million related to a partnership interest,$1.4 million related to the recovery of prior write-offs and$458 thousand related to a contract fee, among other things, while sundry and other miscellaneous income during 2021 included$3.4 million in card related incentives/rebates and$519 thousand in recoveries of prior write-offs, among other things. The fluctuations in income from public finance underwriting fees; customer derivative and securities trading transactions and customer foreign exchange transactions were primarily related to fluctuations in transaction volumes. See the analysis of these categories of non-interest income included in the section captioned "Non-Interest Income" included elsewhere in this discussion. Non-interest expense for 2022 increased$132.7 million , or 17.6%, compared to 2021. The increase was primarily due to increases in salaries and wages; other non-interest expense; technology, furniture and equipment expense; employee benefit expense; net occupancy expense and deposit insurance expense. The increase in salaries and wages was primarily related to an increase in 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 were also impacted by an increase in the number of employees, increases in incentive and stock-based compensation and commissions and 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 was primarily due to increases in professional services expense; advertising/promotions expense; travel, meals and entertainment; fraud losses; business development expense; sundry and other miscellaneous expense; and stationery, printing and supplies expense, among other things. Other non-interest expense during 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 impact of the aforementioned items was partly offset by a decrease in donations expense, which was impacted by$8.8 million in contributions to theFrost Charitable Foundation during 2021, among other things. The increase in technology, furniture and equipment expense was primarily related to increases in cloud services expense, service contracts expense, software maintenance and depreciation of furniture and equipment, among other things. The increase in employee benefit expense was primarily related to increases in payroll taxes, medical benefits expense, 401(k) plan expense and other employee benefits, among other things, partly offset by an increase in the net periodic benefits related to our defined benefit retirement plan. The increase in net occupancy expense was increases in repairs and maintenance/service contracts expense, lease expense, depreciation on buildings and leasehold improvements and insurance expense, among other things, partly offset by a decrease in property taxes. The increases in the aforementioned components of net occupancy expense were impacted, in part, by our expansion within theHouston andDallas market areas. The increase in deposit insurance was primarily related to an increase in total assets. See the analysis of these categories of non-interest expense included in the section captioned "Non-Interest Expense" included elsewhere in this discussion.
Income tax expense for 2022 increased
Frost Insurance Agency , which is included in the Banking operating segment, had gross commission revenues of$54.2 million during 2022 compared to$52.5 million during 2021. The increase in gross commission revenues was the result of an increase in commission income partly offset by a decrease in contingent income. The increase in gross commission income was primarily related to increases in commercial and, to a lesser extent, personal lines property and casualty commissions, due to increases in business volumes and market rates. The increases in property and casualty commissions were partly offset by decreases in life insurance commissions and benefit plan commissions, primarily due to decreased business volume. The decrease in contingent income was primarily related to a decrease in performance related contingent payments due to low growth within the portfolio and a deterioration 47
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in the loss performance of insurance policies previously placed. This decrease 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 2022 increased$1.5 million , or 4.1%, compared to 2021. The increase was primarily due to an$8.4 million increase in non-interest income and a$2.5 million increase in net interest income partly offset by a$9.0 million increase in non-interest expense and a$401 thousand increase in income tax expense. Net interest income for 2022 increased$2.5 million , or 117.3%, compared to 2021. This increase was primarily due to an increase in the average volume of funds provided byFrost Wealth Advisors and an increase in the average funds transfer price 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 2022 increased$8.4 million , or 5.0%, compared to 2021. The increase was primarily related to increases in trust and investment management fees; other charges, commissions and fees; and other non-interest income. Trust and investment management fee income is the most significant income component forFrost Wealth Advisors . Investment management fees are the most significant component of trust and investment management fees, making up approximately 77.1% and 82.3% of total trust and investment management fees for 2022 and 2021, respectively. The increase in trust and investment management fees was primarily due to increases in oil and gas fees, real estate fees and estate fees partly offset by a decrease in investment management fees. Oil and gas fees during 2022 were impacted by increases in oil and gas prices. The increases in real estate fees and estate fees were primarily related to increased transaction volumes and transaction fees. The decrease in investment management fees during 2022 was primarily related to lower average equity valuations, in part related to the sharp decline in equity valuations during 2022. The increase in other charges, commissions and fees was primarily related to an increase in income from the placement of money market accounts, among other things, partly offset by a decrease in income from the sale of mutual funds, among other things. The increase in other non-interest income was primarily related to an increase in income from customer securities trading transactions partly offset by a decrease in sundry and other miscellaneous income. 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 2022 increased$9.0 million , or 7.3%, compared to 2021. The increase was primarily due to increases in salaries and wages and other non-interest expense, and to a lesser extent, increase in employee benefit expense and technology, furniture and equipment expense. The increase in salaries and wages was primarily due to increases in salaries, due to annual merit and market increases, as well as increases in commissions and incentive compensation. The increase in other non-interest expense was primarily due to an increase in sundry and other miscellaneous expense, which was primarily due to the write-off of certain assets; research and platform fees; and travel, meals and entertainment; among other things. The increase in employee benefits was primarily due to increases in 401(k) plan expense, medical expense and payroll taxes. The increase in technology, furniture and equipment expense was primarily due to an increase in cloud service expense.
Non-Banks
The Non-Banks operating segment had a net loss of$11.0 million for 2022 compared to a net loss of$9.0 million in 2021. The increased net loss was primarily due to an increase in net interest expense, a decrease in other non-interest income and an increase in other non-interest expense partly offset by an increase in income tax benefit. The increase in net interest expense was primarily related to an increase 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. The decrease in other non-interest income was primarily due to a decrease in mineral interest income as the related mineral interest assets were donated to theFrost Charitable Foundation during the third quarter of 2021. The increase in other non-interest expense was primarily due to an increase in travel, meals and entertainment expense, among other things. 48
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Income Taxes
We recognized income tax expense of$89.7 million , for an effective tax rate of 13.4%, in 2022 compared to$46.5 million , for an effective tax rate of 9.5%, in 2021. The effective income tax rates differed from theU.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 rate during 2022 was primarily related to an increase in pre-tax net income, and, to a lesser extent, a decrease in discrete tax benefits associated with stock-based compensation. See Note 13 - Income Taxes in the accompanying notes to consolidated financial statements elsewhere in this report.
Sources and Uses of Funds
The following table illustrates, during the years presented, the mix of our funding sources and the assets in which those funds are invested as a percentage of our average total assets for the period indicated. Average assets totaled$51.5 billion in 2022 compared to$46.0 billion in 2021. 2022 2021 2020 Sources of Funds: Deposits: Non-interest-bearing 35.3 % 36.2 % 35.7 % Interest-bearing 51.2 47.4 47.1 Federal funds purchased 0.1 0.1 0.1 Repurchase agreements 4.5 4.6 3.8 Long-term debt and other borrowings 0.4 0.5 0.9 Other non-interest-bearing liabilities 1.6 1.7 1.8 Equity capital 6.9 9.5 10.6 Total 100.0 % 100.0 % 100.0 % Uses of Funds: Loans 32.5 % 36.5 % 45.2 % Securities 36.3 28.0 33.4 Interest-bearing deposits 24.8 29.4 14.0 Federal funds sold 0.1 - 0.2 Resell agreements - - 0.1 Other non-interest-earning assets 6.3 6.1 7.1 Total 100.0 % 100.0 % 100.0 % Deposits continue to be our primary source of funding. Average deposits increased$6.1 billion , or 15.9%, in 2022 compared to 2021. Non-interest-bearing deposits remain a significant source of funding, which has been a key factor in maintaining our relatively low cost of funds. Average non-interest-bearing deposits totaled 40.8% of total average deposits in 2022 compared to 43.3% in 2021. We primarily invest funds in loans, securities and interest-bearing deposits (primarily amounts held by us in an interest-bearing account at theFederal Reserve ). Average loans decreased$30.9 million , or 0.2%, (increased$1.7 billion , or 11.3% excluding PPP loans) in 2022 compared to 2021 while average securities increased$5.8 billion , or 45.4%, in 2022 compared to 2021. Average interest-bearing deposits (primarily amounts held by us in an interest-bearing account at theFederal Reserve ) decreased$746.8 million , or 5.5%, in 2022 compared to 2021, primarily related to the reinvestment of a portion of these funds into taxable securities.
Loans
Overview. Details of our loan portfolio are presented in Note 3 - Loans in the accompanying notes to consolidated financial statements included elsewhere in this report. Year-end total loans increased$818.6 million , or 5.0%, during 2022 compared to 2021 ($1.2 billion , or 7.6% excluding PPP loans). The majority of our loan portfolio is comprised of commercial and industrial loans, energy loans and real estate loans. Commercial and industrial loans made up 33.1% and 32.9% (33.1% and 33.7% excluding PPP loans) of total loans atDecember 31, 2022 and 2021 while energy loans made up 5.4% and 6.6% (5.4% and 6.8% excluding PPP loans) of total loans at bothDecember 31, 2022 and 2021 and real estate loans made up 58.4% and 55.0% (58.6% and 56.5% excluding PPP loans) of total loans atDecember 31, 2022 and 2021. Energy loans include commercial and industrial loans, leases and real estate 49
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loans to borrowers in the energy industry. Real estate loans include both commercial and consumer balances.
Loan Origination/Risk Management. We have certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions. We have begun to explore the credit and reputational risks associated with climate change and their potential impact on the foregoing and are also closely monitoring regulatory developments on climate risk. This includes, among other things, researching and developing a formalized approach to considering climate change related risks in our underwriting processes. This approach will be impacted, in part, by the accessibility and reliability of both customer climate risk data and climate risk data in general. One of the objectives of these efforts is to enable us to better understand the climate change related risks associated with our customers' business activities and to be able to monitor their response to those risks and their ultimate impact on our customers. Commercial and industrial loans are underwritten after evaluating and understanding the borrower's ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower's management possesses sound ethics and solid business acumen, our management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Our energy loan portfolio includes loans for production, energy services and other energy loans, which includes private clients, transportation and equipment providers, manufacturers, refiners and traders. The origination process for energy loans is similar to that of commercial and industrial loans. Because, however, of the average loan size, the significance of the portfolio and the specialized nature of the energy industry, our energy lending requires a highly prescriptive underwriting policy. Production loans are secured by proven, developed and producing reserves. Loan proceeds for these types of loans are typically used for the development and drilling of additional wells, the acquisition of additional production, and/or the acquisition of additional properties to be developed and drilled. Our customers in this sector are generally large, independent, private owner-producers or large corporate producers. These borrowers typically have large capital requirements for drilling and acquisitions, and as such, loans in this portfolio are generally greater than$10 million . Production loans are collateralized by the oil and gas interests of the borrower. Collateral values are determined by the risk-adjusted and limited discounted future net revenue of the reserves. Our valuations take into consideration geographic and reservoir differentials as well as cost structures associated with each borrower. Collateral value is calculated at least semi-annually using third-party engineer-prepared reserve studies. These reserve studies are conducted using a discount factor and base case assumptions for the current and future value of oil and gas. To qualify as collateral, typically reserves must be proven, developed and producing. For certain borrowers, collateral may include up to 20% proven, non-producing reserves. Loan commitments are limited to 65% of estimated reserve value. Cash flows must be sufficient to amortize the loan commitment within 120% of the half-life of the underlying reserves. Loan commitments generally must also be 100% covered by the risk-adjusted and limited discounted future net revenue of the reserves when stressed at 75% of our base case price assumptions. In addition, the ratio of the borrower's debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") should generally not exceed 350%. We generally require production borrowers to maintain an active hedging program to manage risk and to have at least 50% of their production hedged for two years. Oil and gas service, transportation, and equipment providers are economically aligned due to their reliance on drilling and active oil and gas development. Income for these borrowers is highly dependent on the level of drilling activity and rig utilization, both of which are driven by the current and future outlook for the price of oil and gas. We mitigate the credit risk in this sector through conservative concentration limits and guidelines on the profile of eligible borrowers. Guidelines require that the companies have extensive experience through several industry cycles, and that they be supported by financially competent and committed guarantors who provide a significant secondary source of repayment. Borrowers in this sector are typically privately-owned, middle-market companies with annual 50
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sales of less than$100 million . The services provided by companies in this sector are highly diversified, and include down-hole testing and maintenance, providing and threading drilling pipe, hydraulic fracturing services or equipment, seismic testing and equipment and other direct or indirect providers to the oil and gas production sector. We also have a small portfolio of loans to energy trading companies that serve as intermediaries that buy and sell oil, gas, other petrochemicals, and ethanol. These companies are not dependent on drilling or development. As a general policy, we do not lend to energy traders; however, we have made an exception to this policy for certain customers based upon their underlying business models which minimize risk as commodities are bought only to fill existing orders (back-to-back trading). As such, the commodity price risk and sale risk are eliminated. PPP loans, which were originated in 2020 and early 2021, are 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. Terms of the PPP loans include the following (i) maximum amount limited to the lesser of$10 million or an amount calculated using a payroll-based formula, (ii) maximum loan term of five years, (iii) interest rate of 1.00%, (iv) no collateral or personal guarantees are required, (v) no payments are required until the date on which the forgiveness amount relating to the loan is remitted to the lender and (vi) loan forgiveness up to the full principal amount of the loan and any accrued interest, subject to certain requirements including that no more than 40% of the loan forgiveness amount may be attributable to non-payroll costs. In return for processing and booking a PPP loan, the SBA paid lenders a processing fee tiered by the size of the loan (5% for loans of not more than$350 thousand ; 3% for loans of more than$350 thousand and less than$2 million ; and 1% for loans of at least$2 million ). Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing our commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce our exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, we avoid financing single-purpose projects unless other underwriting factors are present to help mitigate risk. We also utilize third-party experts to provide insight and guidance about economic conditions and trends affecting market areas we serve. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. AtDecember 31, 2022 , approximately 49.6% of the outstanding principal balance of our commercial real estate loans were secured by owner-occupied properties. With respect to loans to developers and builders that are secured by non-owner occupied properties that we may originate from time to time, we generally require the borrower to have had an existing relationship with us and have a proven record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from us until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing. We originate consumer loans utilizing a credit scoring analysis to supplement the underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, loan-to-value limitations, collection remedies, the number of such loans a borrower can have at one time and documentation requirements. 51
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We maintain an independent loan review department that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management and the appropriate committees of our board of directors. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as our policies and procedures. Commercial and Industrial. Commercial and industrial loans increased$309.8 million , or 5.8%, during 2022 compared to 2021. 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 the commercial lease and purchased shared national credits. 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$152.1 million , or 14.1%, during 2022 compared to 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 purchased shared national credits. Paycheck Protection Program. PPP loans include loans to businesses and other entities that would otherwise be reported as commercial and industrial loans and, to a lesser extent, energy loans, originated under the guidelines discussed above. We funded approximately$1.4 billion and$3.3 billion of SBA-approved PPP loans during 2021 and 2020, respectively. During 2022 and 2021, we recognized approximately$2.6 million and$97.3 million in PPP loan related deferred processing fees (net of amortization of related deferred origination costs), respectively, as yield adjustments and these amounts are included in interest income on loans. As a result of the inclusion of these net fees in interest income, the average yields on PPP loans were 2.84% during 2022 and 6.26% during 2021, compared to the stated interest rate of 1.0% on these loans. Industry Concentrations. As ofDecember 31, 2022 and 2021, there were no concentrations of loans related to any single industry, as segregated by Standard Industrial Classification code ("SIC code"), in excess of 10% of total loans. The SIC code system is a federally designed standard industrial numbering system used by us to categorize loans by the borrower's type of business. The following table summarizes the industry concentrations of our loan portfolio, as segregated by SIC code, stated as a percentage of year-end total loans as ofDecember 31, 2022 and 2021. 2022 2021 Industry Concentrations Energy 5.4 % 6.6 % Automobile dealers 5.4 4.1 Public finance 4.6 4.9 Medical services 3.9 3.7 Building materials and contractors 3.8 3.7 General and specific trade contractors 3.6 3.2 Manufacturing, other 3.4 2.8 Investor 2.8 2.7 Services 2.3 2.4 Religion 1.8 2.0 Paycheck Protection Program 0.2 2.6 All other 62.8 61.3 Total loans 100.0 % 100.0 % 52
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Large Credit Relationships. The market areas served by us include three of the top ten most populated cities inthe United States . These market areas are also home to a significant number of Fortune 500 companies. As a result, we originate and maintain large credit relationships with numerous commercial customers in the ordinary course of business. We consider large credit relationships to be those with commitments equal to or in excess of$50.0 million , excluding treasury management lines exposure, prior to any portion being sold. Large relationships also include loan participations purchased if the credit relationship with the agent is equal to or in excess of$50.0 million . In addition to our normal policies and procedures related to the origination of large credits, one of our Regional Credit Committees must approve all new credit facilities and renewals of such credit facilities with exposures between$20.0 million and$30.0 million . Our Central Credit Committee must approve all new credit facilities which are part of large credit relationships and renewals of such credit facilities with exposures that exceed$30.0 million . The Regional and Central Credit Committees meet regularly to review large credit relationship activity and discuss the current pipeline, among other things. The following table provides additional information on our large credit relationships with committed amounts in excess of$50.0 million as of year-end. 2022 2021 Number of Period-End Balances Number of Period-End Balances Relationships Committed Outstanding Relationships Committed Outstanding Amount outstanding 103$ 9,710,866 $ 5,030,717 87$ 7,578,271 $ 4,300,304 Average 94,280 48,842 87,107 49,429 Purchased Shared National Credits ("SNCs"). Purchased SNCs are participations purchased from upstream financial organizations and tend to be larger in size than our originated portfolio. Our purchased SNC portfolio totaled$790.5 million atDecember 31, 2022 increasing$92.1 million , or 13.2%, from$698.4 million atDecember 31, 2021 . AtDecember 31, 2022 , 32.8% of outstanding purchased SNCs were related to the construction industry, 22.7% were related to the energy industry, 11.9% were related to the financial services industry and 11.4% 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 portfolios, 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. The following table provides additional information about certain credits within our purchased SNCs portfolio with committed amounts in excess of$50.0 million as of year-end. 2022 2021 Number of Period-End Balances Number of Period-End Balances Relationships Committed Outstanding Relationships Committed Outstanding Amount outstanding 13$ 855,331 $ 354,097 10$ 630,575 $ 224,939 Average 65,795 27,238 63,058 22,494 Real Estate Loans. Real estate loans increased$1.0 billion , or 11.6%, during 2022 compared to 2021. Real estate loans include both commercial and consumer balances. Commercial real estate loans totaled$8.2 billion , or 81.6% of total real estate loans, atDecember 31, 2022 and$7.6 billion , or 84.3% of total real estate loans, atDecember 31, 2021 . The majority of this portfolio consists of commercial real estate mortgages, which includes both permanent and intermediate term loans. Loans secured by owner-occupied properties make up a significant portion of our commercial real estate portfolio. 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. 53
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The following tables summarize our commercial real estate loan portfolio, including commercial real estate loans reported as a component of our energy loan portfolio segment, as segregated by (i) the type of property securing the credit and (ii) the geographic region in which the loans were originated. Property type concentrations are stated as a percentage of year-end total commercial real estate loans as ofDecember 31, 2022 and 2021: 2022 2021 Property type: Office building 22.4 % 24.0 % Office/warehouse 19.1 18.4 Retail 11.2 10.2 Multifamily 6.5 6.6 Dealerships 6.3 5.1 Medical offices and services 4.2 3.7 1-4 family construction 4.1 3.7 Non-farm/non-residential 3.9 4.8 Hotel 3.3 3.8 Religious 3.0 3.3 Raw land 2.4 2.2 Land in development 2.1 1.6 Land developed 2.0 1.6 Restaurant 1.9 2.0 Strip centers 1.5 2.3 All other 6.1 6.7
Total commercial real estate loans 100.0 % 100.0 %
2022 2021
Geographic region:
San Antonio 25.7 % 26.6 %
Houston 24.9 23.5
Dallas 16.0 15.6
Fort Worth 14.4 16.4
Austin 12.4 11.0
Rio Grande Valley 3.0 3.1
Permian Basin 1.9 1.8
Corpus Christi 1.7 2.0
Total commercial real estate loans 100.0 % 100.0 %
Consumer Loans. The consumer loan portfolio at
2022 2021
Consumer real estate:
Home equity lines of credit $ 691,841 $ 519,098
Home equity loans 449,507 324,157
Home improvement 577,377 428,069
Other 124,814 139,466
Total consumer real estate 1,843,539 1,410,790
Consumer and other 492,726 477,369
Total consumer loans $ 2,336,265 $ 1,888,159
Consumer real estate loans at December 31, 2022 increased $432.7 million , or
30.7%, from December 31, 2021 . Combined, home equity loans and lines of credit
made up 61.9% and 59.8% of the consumer real estate loan total at December 31,
2022 and 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
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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 2023. The consumer and other loan portfolio atDecember 31, 2022 increased$15.4 million , or 3.2%, fromDecember 31, 2021 . This portfolio primarily consists of automobile loans, unsecured revolving credit products, personal loans secured by cash and cash equivalents, and other similar types of credit facilities. Foreign Loans. We makeU.S. dollar-denominated loans and commitments to borrowers inMexico . The outstanding balance of these loans and the unfunded amounts available under these commitments were not significant atDecember 31, 2022 or 2021. Maturities and Sensitivities of Loans to Changes in Interest Rates. The following table presents the maturity distribution of our loan portfolio atDecember 31, 2022 . The table also presents the portion of loans that have fixed interest rates or variable interest rates that fluctuate over the life of the loans in accordance with changes in an interest rate index. Due in After One, After Five but One Year but Within Within Fifteen After or Less Five Years Years Fifteen Years Total Commercial and industrial$ 2,066,713 $ 2,548,938 $ 921,961 $ 137,186 $ 5,674,798 Energy 424,917 464,368 35,841 603 925,729 Paycheck Protection Program 3,707 31,145 - - 34,852 Commercial real estate Buildings, land and other 867,013 2,745,770 2,936,721 156,574 6,706,078 Construction 341,466 735,979 355,595 44,207 1,477,247 Consumer Real Estate 8,839 17,755 609,145 1,207,800 1,843,539 Consumer and Other 246,590 228,177 17,959 - 492,726 Total$ 3,959,245 $ 6,772,132 $ 4,877,222 $ 1,546,370 $ 17,154,969 Loans with fixed interest rates: Commercial and industrial$ 285,755 $ 1,032,431 $ 624,191 $ 109,795 $ 2,052,172 Energy 17,944 51,884 35,585 603 106,016 Paycheck Protection Program 3,707 31,145 - - 34,852 Commercial real estate: Buildings, land and other 147,080 1,252,698 2,257,057 49,318 3,706,153 Construction 1,065 52,910 138,924 679 193,578 Consumer Real Estate 8,023 16,043 536,339 591,066 1,151,471 Consumer and Other 22,517 42,402 13,630 - 78,549 Total$ 486,091 $ 2,479,513 $ 3,605,726 $ 751,461 $ 7,322,791 Loans with floating interest rates: Commercial and industrial$ 1,780,958 $ 1,516,507 $ 297,770 $ 27,391 $ 3,622,626 Energy 406,973 412,484 256 - 819,713 Paycheck Protection Program - - - - - Commercial real estate: Buildings, land and other 719,933 1,493,072 679,664 107,256 2,999,925 Construction 340,401 683,069 216,671 43,528 1,283,669 Consumer Real Estate 816 1,712 72,806 616,734 692,068 Consumer and Other 224,073 185,775 4,329 - 414,177 Total$ 3,473,154 $ 4,292,619 $ 1,271,496 $ 794,909 $ 9,832,178 We generally structure commercial loans with shorter-term maturities in order to match our funding sources and to enable us to effectively manage the loan portfolio by providing the flexibility to respond to liquidity needs, changes in interest rates and changes in underwriting standards and loan structures, among other things. Due to the shorter-term nature of such loans, from time to time in the ordinary course of business and without any contractual obligation on our part, we will renew/extend maturing lines of credit or refinance existing loans at their maturity dates. Some loans may renew multiple times in a given year as a result of general customer practice and need. These renewals, extensions and refinancings are made in the ordinary course of business for customers that meet our normal level of credit standards. Such borrowers typically request renewals to support their on-going working capital needs to finance their operations. Such borrowers are not experiencing financial difficulties and generally 55
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could obtain similar financing from another financial institution. In connection with each renewal, extension or refinancing, we may require a principal reduction, adjust the rate of interest and/or modify the structure and other terms to reflect the current market pricing/structuring for such loans or to maintain competitiveness with other financial institutions. In such cases, we do not generally grant concessions, and, except for those reported in Note 3 - Loans, any such renewals, extensions or refinancings that occurred during the reported periods were not deemed to be troubled debt restructurings pursuant to applicable accounting guidance. Loans exceeding$1.0 million undergo a complete underwriting process at each renewal.
Accruing Past Due Loans. Accruing past due loans are presented in the following table. Also see Note 3 - Loans in the accompanying notes to consolidated financial statements included elsewhere in this report.
Accruing Loans
Accruing Loans 90 or More Days Total Accruing
30-89 Days Past Due Past Due Past Due Loans
Percent of Percent of Percent of
Total Loans in Loans in Loans in
Loans Amount Category Amount Category Amount Category
December 31, 2022
Commercial and industrial $ 5,674,798 $ 30,769 0.54 % $ 5,560 0.10 % $ 36,329 0.64 %
Energy 925,729 1,472 0.16 - - 1,472 0.16
Paycheck Protection Program 34,852 5,321 15.27 13,867 39.79 19,188 55.06
Commercial real estate:
Buildings, land and other 6,706,078 23,561 0.35 5,664 0.08 29,225 0.43
Construction 1,477,247 - - - - - -
Consumer real estate 1,843,539 7,856 0.43 2,398 0.13 10,254 0.56
Consumer and other 492,726 5,155 1.05 311 0.06 5,466 1.11
Total $ 17,154,969 $ 74,134 0.43 $ 27,800 0.16 $ 101,934 0.59
Excluding PPP loans $ 17,120,117 $ 68,813 0.40 $ 13,933 0.08 $ 82,746 0.48
December 31, 2021
Commercial and industrial $ 5,364,954 $ 29,491 0.55 % $ 7,802 0.15 % $ 37,293 0.70 %
Energy 1,077,792 1,353 0.13 215 0.02 1,568 0.15
Paycheck Protection Program 428,882 4,979 1.16 18,766 4.38 23,745 5.54
Commercial real estate:
Buildings, land and other 6,272,339 37,033 0.59 8,687 0.14 45,720 0.73
Construction 1,304,271 188 0.01 - - 188 0.01
Consumer real estate 1,410,790 4,866
0.34 2,177 0.15 7,043 0.49
Consumer and other 477,369 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 December 31, 2022 decreased $18.9 million compared to
December 31, 2021 . The decrease was primarily due to decreases in past due
non-construction related commercial real estate loans (down $16.5 million ), past
due PPP loans (down $4.6 million ) and past due commercial and industrial loans
(down $1.0 million ) partly offset by an increase in past due consumer real
estate loans (up $3.2 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 $14.3 million .
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Non-Accrual Loans. Non-accrual loans are presented in the tables below. Also see
Note 3 - Loans in the accompanying notes to consolidated financial statements
included elsewhere in this report.
December 31, 2022 December 31, 2021
Non-Accrual Loans Non-Accrual Loans
Total Percent of Loans Total Percent of Loans
Loans Amount in Category Loans Amount in Category
Commercial and industrial $ 5,674,798 $ 18,130 0.32 % $ 5,364,954 $ 22,582 0.42 %
Energy 925,729 15,224 1.64 1,077,792 14,433 1.34
Paycheck Protection Program 34,852 - - 428,882 - -
Commercial real estate:
Buildings, land and other 6,706,078 3,552 0.05 6,272,339 15,297 0.24
Construction 1,477,247 - - 1,304,271 948 0.07
Consumer real estate 1,843,539 927 0.05 1,410,790 440 0.03
Consumer and other 492,726 - - 477,369 13 -
Total $ 17,154,969 $ 37,833 0.22 $ 16,336,397 $ 53,713 0.33
Excluding PPP loans $ 17,120,117 $ 37,833 0.22 $ 15,907,515 $ 53,713 0.34
Allowance for credit losses on
loans $ 227,621 $ 248,666
Ratio of allowance for credit
losses on loans to non-accrual
loans 601.65 % 462.95 %
Non-accrual loans at December 31, 2022 decreased $15.9 million from December 31,
2021 primarily due to decreases in non-accrual commercial real estate loans and
commercial and industrial loans. The decreases were primarily related to
principal payments, loans returning to accrual status 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 December 31, 2022 or
December 31, 2021 . Non-accrual energy loans included two credit relationship in
excess of $5 million totaling $11.1 million at December 31, 2022 . One of these
relationships was previously reported as non-accrual with an aggregate balance
of $9.6 million at December 31, 2021 . The aggregate balance of this credit
relationship decreased $3.6 million in 2022 as a result of 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 December 31, 2022 or
December 31, 2021 .
Allowance For Credit Losses
As discussed in Note 1 - Summary of Significant Accounting Policies in the
accompanying notes to consolidated financial statements, our policies and
procedures related to accounting for credit losses changed on January 1, 2020 in
connection with the adoption of a new accounting standard update as codified in
Accounting Standards Codification ("ASC") Topic 326 ("ASC 326") Financial
Instruments - Credit Losses. In the case of 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
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available, the ultimate adequacy of our allowance accounts is dependent upon a
variety of factors beyond our control, including the performance of our
portfolios, the economy, changes in interest rates and the view of the
regulatory authorities toward classification of assets. For additional
information regarding our accounting policies related to credit losses, refer to
Note 1 - Summary of Significant Accounting Policies and Note 3 - Loans in the
accompanying notes to consolidated financial statements.
Allowance for Credit Losses - Loans. The table below provides an allocation of
the year-end allowance for credit losses on loans 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 Percent of Loans in Ratio of Allowance
Allowance Each Category to Total Allocated to Loans
Allocated Total Loans Loans in Each Category
December 31, 2022
Commercial and industrial $ 104,237 33.1 % $ 5,674,798 1.84 %
Energy 18,062 5.4 925,729 1.95
Paycheck Protection Program - 0.2 34,852 -
Commercial real estate 90,301 47.7 8,183,325 1.10
Consumer real estate 8,004 10.7 1,843,539 0.43
Consumer and other 7,017 2.9 492,726 1.42
Total $ 227,621 100.0 % $ 17,154,969 1.33
Excluding PPP loans $ 227,621 $ 17,120,117 1.33
December 31, 2021
Commercial and industrial $ 72,091 32.9 % $ 5,364,954 1.34 %
Energy 17,217 6.6 1,077,792 1.60
Paycheck Protection Program - 2.6 428,882 -
Commercial real estate 144,936 46.4 7,576,610 1.91
Consumer real estate 6,585 8.6 1,410,790 0.47
Consumer and other 7,837 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 $104.2
million , or 1.84% of total commercial and industrial loans, at December 31, 2022
increasing $32.1 million , or 44.6%, compared to $72.1 million , or 1.34% of total
commercial and industrial loans at December 31, 2021 . Modeled expected credit
losses increased $15.0 million while qualitative factor ("Q-Factor") and other
qualitative adjustments related to commercial and industrial loans increased
$21.6 million . Specific allocations for commercial and industrial loans that
were evaluated for expected credit losses on an individual basis decreased $4.5
million , or 42.3%, from $10.5 million at December 31, 2021 to $6.1 million at
December 31, 2022 . The decrease in specific allocations for commercial and
industrial loans was primarily related to principal payments received and the
recognition of charge-offs.
The allowance allocated to energy loans totaled $18.1 million , or 1.95% of total
energy loans, at December 31, 2022 decreasing $845 thousand , or 4.9%, compared
to $17.2 million , or 1.60% of total energy loans at December 31, 2021 . Modeled
expected credit losses related to energy loans increased $2.2 million while
Q-Factor and other qualitative adjustments related to energy loans decreased
$226 thousand . Specific allocations for energy loans that were evaluated for
expected credit losses on an individual basis totaled $4.4 million at
December 31, 2022 decreasing $1.1 million , or 20.0%, compared to $5.5 million at
December 31, 2021 .
The allowance allocated to commercial real estate loans totaled $90.3 million ,
or 1.10% of total commercial real estate loans, at December 31, 2022 decreasing
$54.6 million , or 37.7%, 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 $10.3 million while
Q-Factor and other qualitative adjustments related to commercial real estate
loans decreased $66.3 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 $1.7 million at
December 31, 2022 .
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The allowance allocated to consumer real estate loans totaled$8.0 million , or 0.43% of total consumer real estate loans, atDecember 31, 2022 increasing$1.4 million , or 21.5%, compared to$6.6 million , or 0.47% of total consumer real estate loans atDecember 31, 2021 primarily due to modeled expected credit losses which increased$1.4 million . The allowance allocated to consumer loans totaled$7.0 million , or 1.42% of total consumer loans, atDecember 31, 2022 decreasing$820 thousand , or 10.5%, compared to$7.8 million , or 1.64% of total consumer loans atDecember 31, 2021 . Modeled expected credit losses related to consumer loans decreased$1.4 million while Q-Factor and other qualitative adjustments related to consumer loans increased$594 thousand . As more fully described in Note 3 - Loans in the accompanying consolidated financial statements, we measure expected credit losses over the life of each loan utilizing a combination of models which measure probability of default and loss given default, among other things. The measurement of expected credit losses is impacted by loan/borrower attributes and certain macroeconomic variables. Models are adjusted to reflect the 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 ofDecember 31, 2022 , we utilized the Moody's AnalyticsDecember 2022 Baseline Scenario (the "December 2022 Baseline Scenario") to forecast the macroeconomic variables used in our models. TheDecember 2022 Baseline Scenario was based on the review of a variety of surveys of baseline forecasts of theU.S. economy. TheDecember 2022 Baseline Scenario projections included, among other things, (i)U.S. Nominal Gross Domestic Product annualized quarterly growth rate of 2.65% in the first quarter of 2023, followed by annualized quarterly growth rates in the range of 3.62% to 4.50% during the remainder of 2023 and an average annualized growth rate of 4.79% through the end of the forecast period in the fourth quarter of 2024; (ii)U.S. unemployment rate of 3.80% in the first quarter of 2023 and an average quarterlyU.S. unemployment rate of 4.06% through the end of the forecast period in the fourth quarter of 2024; (iii)Texas unemployment rate of 4.10% in the first quarter of 2023 and an average quarterlyTexas unemployment rate of 4.04% through the end of the forecast period in the fourth quarter of 2024; (iv) projected average 10 yearTreasury rate of 4.03% in the first quarter of 2023 and average projected rates of 4.25% during the remainder of 2023 and 3.96% in 2024; and (v) average oil price of$93 per barrel in the first quarter of 2023 decreasing to$67 per barrel by the end of the forecast period in the fourth quarter of 2024. In estimating expected credit losses as ofDecember 31, 2021 , we utilized the Moody's AnalyticsDecember 2021 Consensus Scenario (the "December 2021 Consensus Scenario") to forecast the macroeconomic variables used in our models. TheDecember 2021 Consensus Scenario was based on the review of a variety of surveys of baseline forecasts of theU.S. economy. TheDecember 2021 Consensus Scenario projections included, among other things, (i)U.S. Nominal Gross Domestic Product annualized quarterly growth rate of 6.40% in the first quarter of 2022, followed by annualized quarterly growth rates in the range of 3.83% to 5.35% during the remainder of 2022 and an average annualized growth rate of 4.76% through the end of the forecast period in the fourth quarter of 2023; (ii)U.S. unemployment rate of 4.33% in the first quarter of 2022 improving to 3.69% by the end of the forecast period in the fourth quarter of 2023 withTexas unemployment rates slightly higher at those dates; (iii) projected average 10 yearTreasury 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; and (iv) average oil price in the range of approximately$62 to$66 per barrel through the end of the forecast period in the fourth quarter of 2023. The overall loan portfolio, excluding PPP loans which are fully guaranteed by the SBA, as ofDecember 31, 2022 increased$1.2 billion , or 7.6%, compared toDecember 31, 2021 . This increase included a$606.7 million , or 8.0%, increase in commercial real estate loans, a$309.8 million , or 5.8%, increase in commercial and industrial loans and a$432.7 million , or 30.7%, increase in consumer real estate loans and a$15.4 million , or 3.2%, increase in consumer and other loans partly offset by a$152.1 million , or 14.1%, decrease in energy loans. The weighted average risk grade for commercial and industrial loans increased to 6.39 atDecember 31, 2022 compared to 6.22 atDecember 31, 2021 . Commercial and industrial loans graded "watch" and "special mention" (risk grades 9 and 10) decreased$63.2 million during 2022 while classified commercial and industrial loans increased$993 thousand . Classified loans consist of loans having a risk grade of 11, 12 or 13. The weighted-average risk grade for energy loans decreased to 5.67 atDecember 31, 2022 from 6.06 atDecember 31, 2021 . The decrease in the weighted average risk grade was impacted by a decrease in the weighted-average risk grade of pass grade energy loans from 5.78 atDecember 31, 2021 to 5.44 atDecember 31, 2022 . Additionally, energy loans graded "watch" and "special mention" (risk grades 9 and 10) decreased$26.6 million while classified energy loans decreased$4.2 million . The weighted average risk grade for commercial real estate loans decreased from 7.19 atDecember 31, 2021 to 7.10 at 59
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As noted above our credit loss models utilized the economic forecasts in the Moody's Baseline Scenario forDecember 2022 for our estimated expected credit losses as ofDecember 31, 2022 and the Moody's Consensus Scenario forDecember 2021 for our estimate of expected credit losses as ofDecember 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 Q-Factor and other qualitative adjustments are discussed below. Q-Factor adjustments are based upon management judgment and current assessment as to the impact of risks related to changes in lending policies and procedures; economic and business conditions; loan portfolio attributes and credit concentrations; and external factors, among other things, that are not already captured within the modeling inputs, assumptions and other processes. Management assesses the potential impact of such items within a range of severely negative impact to positive impact and adjusts the modeled expected credit loss by an aggregate adjustment percentage based upon the assessment. As a result of this assessment as ofDecember 31, 2022 , modeled expected credit losses were adjusted upwards by a weighted-average Q-Factor adjustment of approximately 2.2%, resulting in a$2.3 million total adjustment, up from approximately 2.3% atDecember 31, 2021 , which resulted in a$1.8 million total adjustment. The weighted-average Q-Factor adjustment atDecember 31, 2022 was based on a limited negative expected impact on our non-owner occupied and construction commercial real estate loan portfolios related to changes in loan portfolio concentrations (no expected impact related to our commercial and industrial portfolio); 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 limited negative impact to our commercial real estate construction and non-owner occupied loan portfolios, as well as a negative impact to our consumer loan portfolio related to changes in lending policies, procedures, underwriting standards and loan portfolio attributes, among other things. The weighted-average Q-Factor adjustment atDecember 31, 2021 was based on a limited negative expected impact on our commercial loan portfolios related to changes in lending policies procedures and underwriting standards and changes in loan portfolio concentrations; 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 changes in loan portfolio attributes, changes in risk grades, changes in the volumes and severity of loan delinquencies and adverse classifications and potential deterioration of collateral values. We have also provided additional qualitative adjustments, or management overlays, as ofDecember 31, 2022 as management believes there are still significant risks impacting certain categories of our loan portfolio. Q-Factor and other qualitative adjustments as ofDecember 31, 2022 are detailed in the table below. Office Down-Side Credit Q-Factor Model Building Scenario Concentration Consumer Adjustment Overlays Overlays Overlay Overlays Overlay Total Commercial and industrial$ 929 $ - $ -$ 29,632 $ 5,676 $ -$ 36,237 Energy 128 - - - 5,020 - 5,148 Commercial real estate: Owner occupied 318 19,708 - - 1,718 - 21,744 Non-owner occupied 95 10,472 16,557 - 487 - 27,611 Construction 660 7,905 3,122 - 530 - 12,217 Consumer real estate 157 - - - - - 157 Consumer and other 34 - - - - 2,000 2,034 Total$ 2,321 $ 38,085 $ 19,679 $ 29,632 $ 13,431$ 2,000 $ 105,148 60
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Model overlays are qualitative adjustments to address the effect of risks not captured within 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. 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 and collateral valuations 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; rising interest rates; 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 betweenRussia andUkraine , 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 ofDecember 31, 2022 , we used the Moody's AnalyticsNovember 2022 S3 Alternative Scenario Downside - 90th Percentile (the "November 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. 61
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As of
Office Small COVID-19 Credit
Q-Factor Model Building Business Related Concentration Consumer
Adjustment Overlays Overlays Overlay Overlays Overlays Overlay TotalCommercial and industrial$ 939 $ - $ -$ 3,956 $ 4,715 $ 4,999 $ -$ 14,609 Energy 127 - - - - 5,247 - 5,374 Commercial real estate: Owner occupied 198 31,806 - - 7,397 1,320 - 40,721 Non-owner occupied 45 7,762 27,860 - 30,940 731 - 67,338 Construction 383 11,212 5,544 - 2,151 511 - 19,801 Consumer real estate 65 - - - - - - 65 Consumer and other 8 - - - - - 1,432 1,440 Total$ 1,765 $ 50,780 $ 33,404 $ 3,956 $ 45,203 $ 12,808$ 1,432 $ 149,348 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. Ratio of Annualized Net Credit Loss Net (Charge-Offs) Expense (Charge-Offs) Average Recoveries to Average (Benefit) Recoveries Loans Loans 2022 Commercial and industrial$ 34,479 $ (2,333) $ 5,526,484 (0.04) % Energy (313) 1,158 992,051 0.12 Paycheck Protection Program - - 139,126 - Commercial real estate (54,775) 140 8,004,345 - Consumer real estate 1,813 (394) 1,584,435 (0.02) Consumer and other 13,517 (14,337) 492,339 (2.91) Total$ (5,279) $ (15,766) $ 16,738,780 (0.09) Excluding PPP loans$ (5,279) $ (15,766) $ 16,599,654 (0.09) 2021 Commercial and industrial$ (2,160) $ 408$ 4,854,465 0.01 % Energy (19,207) (3,129) 1,049,540 (0.30) Paycheck Protection Program - - 1,851,765 - Commercial real estate 8,101 1,943 7,189,325 0.03 Consumer real estate (3,061) 1,720 1,350,554 0.13 Consumer and other 10,230 (9,356) 473,982 (1.97) Total$ (6,097) $ (8,414) $ 16,769,631 (0.05) Excluding PPP loans$ (6,097) $ (8,414) $ 14,917,866 (0.06) 2020 Commercial and industrial$ 15,156 $ (14,169) $ 5,068,730 (0.28) % Energy 85,889 (73,265) 1,459,450 (5.02) Paycheck Protection Program - - 2,158,477 - Commercial real estate 124,427 (7,053) 6,705,206 (0.11) Consumer real estate 1,906 (485) 1,260,556 (0.04) Consumer and other 9,632 (8,463) 512,034 (1.65) Total$ 237,010 $ (103,435) $ 17,164,453 (0.60) Excluding PPP loans$ 237,010 $ (103,435) $ 15,005,976 (0.69) 62
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We recorded a net credit loss benefit related to loans totaling$5.3 million in 2022 and$6.1 million in 2021 and a net credit loss expense related to loans totaling$237.0 million in 2020. 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 benefit related to loans during 2022 primarily reflects 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 impact of this decrease was partly offset by an increase in expected credit losses associated with commercial and industrial loans, primarily related to the down-side scenario overlay discussed above, and increases in modeled losses for our commercial and industrial, energy, commercial real estate and consumer real estate portfolios. The net credit loss benefit related to loans during 2021 primarily reflects improvements in forecasted economic conditions and oil price trends relative to the prevailing conditions in 2020 as well as a decrease in net charge-offs. Credit loss expense related to loans during 2020 reflected the uncertain future impacts associated with the COVID-19 pandemic and the significant volatility in oil prices as well as the level of net charge-offs, the expected deterioration in credit quality and other changes within the loan portfolio. The ratio of the allowance for credit losses on loans to total loans was 1.33% (also 1.33% excluding PPP loans) atDecember 31, 2022 compared to 1.52% (1.56% excluding PPP loans) atDecember 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$58.6 million and$50.3 million atDecember 31, 2022 andDecember 31, 2020 , 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. Credit loss expense related to off-balance-sheet credit exposures totaled$8.3 million during 2022 compared to$6.2 million during 2021 and$4.3 million during 2020. The increase in credit loss expense during the comparable periods primarily reflects increases in overall off-balance-sheet credit exposures. Credit loss expense for off-balance-sheet credit exposures in 2021 was also partly impacted by the down-grade of a large credit commitment within our SNC portfolio. Further information regarding our policies and methodology used to estimate the allowance for credit losses on off-balance-sheet credit exposures is presented in Note 8 - Off-Balance-Sheet Arrangements, Commitments, Guarantees and Contingencies in the accompanying notes to consolidated financial statements. 63
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Securities
The following tables summarize the maturity distribution schedule with corresponding weighted-average yields of securities held to maturity and securities available for sale as ofDecember 31, 2022 . Weighted-average yields have been computed on a fully taxable-equivalent basis using a tax rate of 21%. 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 theFederal Reserve Bank and theFederal Home Loan Bank , which have no maturity date. These securities have been included in the total column only. Held-to-maturity securities are presented at amortized cost before any allowance for credit losses. Within 1 Year 1-5 Years 5-10 Years After 10 Years Total Weighted Weighted Weighted Weighted Weighted Average Average Average Average Average Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Held to maturity: Residential mortgage- backed securities $ - - % $ - - %$ 514,059 2.28 %$ 12,063 2.60 %$ 526,122 2.28 % States and political subdivisions 123,591 3.55 24,339 4.67 8,297 2.92 1,955,392 4.70 2,111,619 4.63 Other - - 1,500 1.97 - - - - 1,500 1.97 Total$ 123,591 3.55$ 25,839 4.51$ 522,356 2.29$ 1,967,455 4.69$ 2,639,241 4.16 Available for sale:U.S. Treasury $ 240,361 1.01 %$ 3,424,023 2.17 %$ 1,244,812 1.52 %$ 142,391 2.15 %$ 5,051,587 1.95 % Residential mortgage- backed securities 8 2.49 7,527 3.24 15,892 4.51 6,352,809 2.90 6,376,236 2.90 States and political subdivisions 261,888 4.32 1,470,098 3.78 918,563 3.35 4,122,806 3.44 6,773,355 3.53 Other - - - - - - - - 42,427 - Total$ 502,257 2.70$ 4,901,648 2.64$ 2,179,267 2.26$ 10,618,006 3.09$ 18,243,605 2.86 All mortgage-backed securities included in the above tables were issued byU.S. government agencies and corporations. AtDecember 31, 2022 , all of the securities in our municipal bond portfolio were issued by theState of Texas or political subdivisions or agencies within theState of Texas , of which approximately 75.6% are either guaranteed by theTexas Permanent School Fund , which has a "triple-A" insurer financial strength rating, or secured byU.S. Treasury securities via defeasance of the debt by the issuers.
The average taxable-equivalent yield on the securities portfolio based on a 21% tax rate was 2.95% in 2022 compared to 3.29% in 2021. Tax-exempt municipal securities totaled 42.7% of average securities in 2022 compared to 64.2% in 2021. The average yield on taxable securities was 2.16% in 2022 compared to 1.97% in 2021, while the average taxable-equivalent yield on tax-exempt securities was 4.08% in 2022 compared to 4.06% in 2021. See the section captioned "Net Interest Income" elsewhere in this discussion.
Deposits
The table below presents the daily average balances of deposits by type and weighted-average rates paid thereon during the years presented:
2022 2021 2020
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
Non-interest-bearing demand deposits $ 18,202,669 $ 16,670,807 $ 13,563,696
Interest-bearing deposits:
Savings and interest checking 12,160,482 0.10 % 10,682,149 0.01 % 8,283,665 0.03 %
Money market accounts 12,727,533 0.90 9,990,626 0.09 8,457,263 0.18
Time accounts 1,480,088 0.92 1,129,041 0.33 1,133,648 1.25
Total interest-bearing deposits 26,368,103 0.53 21,801,816 0.07 17,874,576 0.18
Total deposits $ 44,570,772 0.32 $ 38,472,623 0.04 $ 31,438,272 0.10
Average deposits increased $6.1 billion , or 15.9%, in 2022 compared to 2021. The
most significant volume growth during 2022 compared to 2021 was in money market
deposits; non-interest bearing deposits; and savings and interest checking
deposits. The ratio of average interest-bearing deposits to total average
deposits was 59.2% in 2022
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compared to 56.7% in 2021. The average rates paid on interest-bearing deposits
and total deposits were 0.53% and 0.32%, respectively, during 2022 compared to
0.07% and 0.04%, respectively, during 2021. The average rate paid on
interest-bearing 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 increases in market interest rates.
Geographic Concentrations. The following table summarizes our average total
deposit portfolio, as segregated by the geographic region from which the deposit
accounts were originated. Certain accounts, such as correspondent bank deposits
and deposits allocated to certain statewide operational units, are recorded at
the statewide level.
Percent Percent Percent
2022 of Total 2021 of Total 2020 of Total
San Antonio $ 13,402,978 30.1 % $ 11,140,600 29.0 % $ 9,147,078 29.1 %
Houston 8,317,538 18.7 7,360,930 19.1 5,715,514 18.2
Fort Worth 7,498,616 16.8 6,650,164 17.3 5,615,584 17.9
Austin 5,752,901 12.9 4,931,275 12.8 3,882,661 12.3
Dallas 3,678,111 8.3 3,181,252 8.3 2,553,571 8.1
Corpus Christi 2,152,544 4.8 1,965,158 5.1 1,655,395 5.3
Permian Basin 2,043,713 4.6 1,694,366
4.4 1,518,781 4.8
895,653 2.8
Statewide 525,994 1.1 493,451 1.3 454,035 1.5
Total $ 44,570,772 100.0 % $ 38,472,623 100.0 % $ 31,438,272 100.0 %
Foreign Deposits. Mexico has historically been considered a part of the natural
trade territory of our banking offices. Accordingly, U.S. dollar-denominated
foreign deposits from sources within Mexico have traditionally been a
significant source of funding. Average deposits from foreign sources, primarily
Mexico , totaled $1.1 billion in 2022 and $933.3 million in 2021.
Brokered Deposits. From time to time, we have obtained interest-bearing deposits through brokered transactions including participation in the Certificate of Deposit Account Registry Service ("CDARS"). Brokered deposits were not significant during the reported periods.
Capital and Liquidity
Capital. Shareholders' equity totaled$3.1 billion atDecember 31, 2022 and$4.4 billion atDecember 31, 2021 . In addition to net income of$579.2 million , other sources of capital during 2022 included$16.7 million in proceeds from stock option exercises and$18.3 million related to stock-based compensation. Uses of capital during 2022 included an other comprehensive loss, net of tax, of$1.7 billion ,$216.5 million of dividends paid on preferred and common stock and$4.4 million of treasury stock purchases.
The accumulated other comprehensive income/loss component of shareholders'
equity totaled a net, after-tax, unrealized loss of
Under the Basel III Capital Rules, we 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 related to securities available for sale, effective cash flow hedges and defined benefit post-retirement benefit plans do not increase or reduce regulatory capital and are not included in the calculation of risk-based capital and leverage ratios. In connection with the adoption of ASC 326 onJanuary 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 9 - Capital and Regulatory Matters in the accompanying notes to consolidated financial statements elsewhere in this report. We paid quarterly dividends of$0.75 ,$0.75 ,$0.87 and$0.87 per common share during the first, second, third and fourth quarters of 2022, respectively, and quarterly dividends of$0.72 ,$0.72 ,$0.75 and$0.75 per common share during the first, second, third and fourth quarters of 2021, respectively. This equates to a dividend payout ratio 65
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of 36.6% in 2022 and 43.3% in 2021. The amount of dividend, if any, we may pay may be limited as more fully discussed in Note 9 - Capital and Regulatory Matters in the accompanying notes to consolidated financial statements elsewhere in this report. Preferred Stock. OnMarch 16, 2020 , we redeemed all 6,000,000 shares of our 5.375% Non-Cumulative Perpetual Preferred Stock, Series A, ("Series A Preferred Stock") at a redemption price of$25 per share, or an aggregate redemption of$150.0 million . OnNovember 19, 2020 we issued 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). Additional details about our preferred stock are included in Note 9 - Capital and Regulatory Matters in the accompanying notes to consolidated financial statements 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. OnJanuary 25, 2023 , our board of directors authorized a$100.0 million stock repurchase plan, 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 were repurchased under a stock repurchase plan during 2022 or 2021. Under a prior stock repurchase plan, we repurchased 177,834 shares at a total cost of$13.7 million during 2020. Liquidity. Liquidity measures the ability to meet current and future cash flow needs as they become due. The liquidity of a financial institution reflects its ability to meet loan requests, to accommodate possible outflows in deposits and to take advantage of interest rate market opportunities. The ability of a financial institution to meet its current financial obligations is a function of its balance sheet structure, its ability to liquidate assets and its access to alternative sources of funds. The objective of our liquidity management is to manage cash flow and liquidity reserves so that they are adequate to fund our operations and to meet obligations and other commitments on a timely basis and at a reasonable cost. We seek to achieve this objective and ensure that funding needs are met by maintaining an appropriate level of liquid funds through asset/liability management, which includes managing the mix and time to maturity of financial assets and financial liabilities on our balance sheet. Our liquidity position is enhanced by our ability to raise additional funds as needed in the wholesale markets. Asset liquidity is provided by liquid assets which are readily marketable or pledgeable or which will mature in the near future. Liquid assets include cash, interest-bearing deposits in banks, securities available for sale, maturities and cash flow from securities held to maturity, and federal funds sold and resell agreements. Liability liquidity is provided by access to funding sources which include core deposits and correspondent banks in our natural trade area that maintain accounts with and sell federal funds toFrost Bank , as well as federal funds purchased and repurchase agreements from upstream banks and deposits obtained through financial intermediaries. 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. As ofDecember 31, 2022 , we had approximately$11.1 billion held in an interest-bearing account at theFederal Reserve . We also have the ability to borrow funds as a member of theFederal Home Loan Bank ("FHLB"). As ofDecember 31, 2022 , based upon available, pledgeable collateral, our total borrowing capacity with the FHLB was approximately$3.4 billion . Furthermore, atDecember 31, 2022 , we had approximately$12.7 billion in securities that were unencumbered by a pledge and could be used to support additional borrowings through repurchase agreements or theFederal Reserve discount window, as needed. As ofDecember 31, 2022 , management is not aware of any events that are reasonably likely to have a material adverse effect on our liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity that would have a material adverse effect on us. In the ordinary course of business we have entered into contractual obligations and have made other commitments to make future payments. Refer to the accompanying notes to consolidated financial statements elsewhere in this report for the expected timing of such payments as ofDecember 31, 2022 . These include payments related to 66
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(i) long-term borrowings (Note 7 - Borrowed Funds), (ii) operating leases (Note 4 - Premises and Equipment and Lease Commitments), (iii) time deposits with stated maturity dates (Note 6 - Deposits) and (iv) commitments to extend credit and standby letters of credit (Note 8 - Off-Balance-Sheet Arrangements, Commitments, Guarantees and Contingencies). Since Cullen/Frost is a holding company and does not conduct operations, its primary sources of liquidity are dividends upstreamed fromFrost Bank and borrowings from outside sources. Banking regulations may limit the amount of dividends that may be paid byFrost Bank . See Note 9 - Capital and Regulatory Matters in the accompanying notes to consolidated financial statements elsewhere in this report regarding such dividends. AtDecember 31, 2022 , Cullen/Frost had liquid assets, including cash and resell agreements, totaling$311.9 million .
Regulatory and Economic Policies
Our business and earnings are affected by general and local economic conditions and by the monetary and fiscal policies ofthe United States government, its agencies and various other governmental regulatory authorities, among other things. TheFederal Reserve Board regulates the supply of money in order to influence general economic conditions. Among the instruments of monetary policy historically available to theFederal Reserve Board are (i) conducting open market operations inUnited States government obligations, (ii) changing the discount rate on financial institution borrowings, (iii) imposing or changing reserve requirements against financial institution deposits, and (iv) restricting certain borrowings and imposing or changing reserve requirements against certain borrowings by financial institutions and their affiliates. These methods are used in varying degrees and combinations to affect directly the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. For that reason alone, the policies of theFederal Reserve Board have a material effect on our earnings. Governmental policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future; however, we cannot accurately predict the nature, timing or extent of any effect such policies may have on our future business and earnings.
Accounting Standards Updates
See Note 20 - Accounting Standards Updates in the accompanying notes to consolidated financial statements elsewhere in this report for details of recently issued accounting pronouncements and their expected impact on our financial statements.
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