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United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended: September 30, 2022
Or
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ________________ to ________________
Commission file number: 001-13221
Cullen/Frost Bankers, Inc.
(Exact name of registrant as specified in its charter)
Texas74-1751768
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
111 W. Houston Street,San Antonio,Texas78205
(Address of principal executive offices)(Zip code)
(210)220-4011
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on
which registered
Common Stock, $.01 Par ValueCFRNew York Stock Exchange
Depositary Shares, each representing a 1/40th interest in a share of 4.450% Non-Cumulative Perpetual Preferred Stock, Series BCFR.PrBNew York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒
As of October 24, 2022 there were 64,298,720 shares of the registrant’s Common Stock, $.01 par value, outstanding.


Cullen/Frost Bankers, Inc.
Quarterly Report on Form 10-Q
September 30, 2022
Table of Contents
 Page
Item 1.
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
2
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Cullen/Frost Bankers, Inc.
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
September 30,
2022		December 31,
2021
Assets:
Cash and due from banks$665,123 $555,778 
Interest-bearing deposits12,863,775 15,985,244 
Federal funds sold91,650 34,075 
Resell agreements12,150 7,903 
Total cash and cash equivalents13,632,698 16,583,000 
Securities held to maturity, net of allowance for credit losses of $158 at September 30, 2022 and $158 at December 31, 2021
2,174,084 1,749,179 
Securities available for sale, at estimated fair value17,399,107 13,924,628 
Trading account securities25,008 25,162 
Loans, net of unearned discounts16,950,629 16,336,397 
Less: Allowance for credit losses on loans(234,315)(248,666)
Net loans16,716,314 16,087,731 
Premises and equipment, net1,068,749 1,050,331 
Goodwill654,952 654,952 
Other intangible assets, net486 866 
Cash surrender value of life insurance policies190,368 190,139 
Accrued interest receivable and other assets1,083,803 612,502 
Total assets$52,945,569 $50,878,490 
Liabilities:
Deposits:
Non-interest-bearing demand deposits$18,565,820 $18,423,018 
Interest-bearing deposits27,994,366 24,272,678 
Total deposits46,560,186 42,695,696 
Federal funds purchased26,200 25,925 
Repurchase agreements2,082,739 2,740,799 
Junior subordinated deferrable interest debentures, net of unamortized issuance costs123,055 123,011 
Subordinated notes, net of unamortized issuance costs99,295 99,178 
Accrued interest payable and other liabilities1,241,622 754,326 
Total liabilities50,133,097 46,438,935 
Shareholders’ Equity:
Preferred stock, par value $0.01 per share; 10,000,000 shares authorized; 150,000 Series B shares ($1,000 liquidation preference) issued at September 30, 2022 and December 31, 2021
145,452 145,452 
Common stock, par value $0.01 per share; 210,000,000 shares authorized; 64,236,306 shares issued at September 30, 2022 and December 31, 2021
642 642 
Additional paid-in capital1,018,624 1,009,921 
Retained earnings3,179,964 2,956,966 
Accumulated other comprehensive income (loss), net of tax(1,528,925)347,318 
Treasury stock, at cost; 24,917 shares at September 30, 2022 and 250,070 shares at December 31, 2021
(3,285)(20,744)
Total shareholders’ equity2,812,472 4,439,555 
Total liabilities and shareholders’ equity$52,945,569 $50,878,490 
See Notes to Consolidated Financial Statements.

3
Cullen/Frost Bankers, Inc.
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
Three Months Ended
September 30,		Nine Months Ended
September 30,
2022202120222021
Interest income:
Loans, including fees$205,932 $168,779 $522,588 $518,957 
Securities:
Taxable68,311 20,736 167,734 61,366 
Tax-exempt59,450 56,882 173,394 169,656 
Interest-bearing deposits74,257 5,830 106,971 11,877 
Federal funds sold316 2 428 13 
Resell agreements64 6 78 11 
Total interest income408,330 252,235 971,193 761,880 
Interest expense:
Deposits42,682 3,677 62,187 10,693 
Federal funds purchased249 9 336 24 
Repurchase agreements7,529 632 9,837 1,597 
Junior subordinated deferrable interest debentures1,159 631 2,515 1,915 
Subordinated notes1,164 1,164 3,492 3,492 
Total interest expense52,783 6,113 78,367 17,721 
Net interest income355,547 246,122 892,826 744,159 
Credit loss expense— — — 63 
Net interest income after credit loss expense355,547 246,122 892,826 744,096 
Non-interest income:
Trust and investment management fees38,552 37,381 114,984 110,569 
Service charges on deposit accounts22,960 21,216 69,570 61,058 
Insurance commissions and fees13,152 11,748 41,536 39,834 
Interchange and card transaction fees4,614 4,490 13,751 13,224 
Other charges, commissions and fees11,095 9,785 30,609 26,729 
Net gain (loss) on securities transactions— — — — 
Other9,448 8,569 28,688 26,258 
Total non-interest income99,821 93,189 299,138 277,672 
Non-interest expense:
Salaries and wages127,189 99,463 355,399 289,956 
Employee benefits21,680 21,576 66,633 62,840 
Net occupancy28,133 27,208 83,923 79,909 
Technology, furniture and equipment30,781 28,494 89,859 84,508 
Deposit insurance4,279 3,088 11,636 8,893 
Intangible amortization103 157 380 544 
Other45,733 38,017 135,147 116,749 
Total non-interest expense257,898 218,003 742,977 643,399 
Income before income taxes197,470 121,308 448,987 378,369 
Income taxes27,710 13,333 61,011 36,311 
Net income169,760 107,975 387,976 342,058 
Preferred stock dividends1,668 1,668 5,006 5,488 
Net income available to common shareholders$168,092 $106,307 $382,970 $336,570 
Earnings per common share:
Basic$2.60 $1.66 $5.92 $5.25 
Diluted2.59 1.65 5.90 5.22 
See Notes to Consolidated Financial Statements.
4
Cullen/Frost Bankers, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(Dollars in thousands)
Three Months Ended
September 30,		Nine Months Ended
September 30,
2022202120222021
Net income$169,760 $107,975 $387,976 $342,058 
Other comprehensive income (loss), before tax:
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period(829,324)(80,668)(2,376,642)(209,779)
Change in net unrealized gain on securities transferred to held to maturity(174)(237)(572)(741)
Reclassification adjustment for net (gains) losses included in net income— — — — 
Total securities available for sale and transferred securities(829,498)(80,905)(2,377,214)(210,520)
Defined-benefit post-retirement benefit plans:
Reclassification adjustment for net amortization of actuarial gain/loss included in net income as a component of net periodic cost (benefit)741 1,529 2,223 4,587 
Total defined-benefit post-retirement benefit plans741 1,529 2,223 4,587 
Other comprehensive income (loss), before tax(828,757)(79,376)(2,374,991)(205,933)
Deferred tax expense (benefit)
(174,038)(16,669)(498,748)(43,246)
Other comprehensive income (loss), net of tax(654,719)(62,707)(1,876,243)(162,687)
Comprehensive income (loss)$(484,959)$45,268 $(1,488,267)$179,371 
See Notes to Consolidated Financial Statements.
5
Cullen/Frost Bankers, Inc.
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands, except per share amounts)
Preferred
Stock		Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax		Treasury
Stock		Total
Three months ended:
September 30, 2022
Balance at beginning of period$145,452 $642 $1,015,451 $3,070,109 $(874,206)$(10,473)$3,346,975 
Net income— — — 169,760 — — 169,760 
Other comprehensive income (loss), net of tax— — — — (654,719)— (654,719)
Stock option exercises/stock unit conversions (88,350 shares)
— — — (1,918)— 7,188 5,270 
Stock-based compensation expense recognized in earnings— — 3,173 — — 3,173 
Cash dividends – Series B preferred stock (approximately $11.13 per share which is equivalent to approximately $0.28 per depositary share)
— — — (1,668)— — (1,668)
Cash dividends – common stock ($0.87 per share)
— — — (56,319)— — (56,319)
Balance at end of period$145,452 $642 $1,018,624 $3,179,964 $(1,528,925)$(3,285)$2,812,472 
September 30, 2021
Balance at beginning of period$145,452 $642 $1,002,939 $2,862,966 $412,990 $(51,172)$4,373,817 
Net income— — — 107,975 — — 107,975 
Other comprehensive income (loss), net of tax— — — — (62,707)— (62,707)
Stock option exercises/stock unit conversions (21,968 shares)
— — — (1,085)— 2,213 1,128 
Stock-based compensation expense recognized in earnings— — 1,985 — — — 1,985 
Purchase of treasury stock (478 shares)
— — — — — (54)(54)
Cash dividends – Series B preferred stock (approximately $11.13 per share which is equivalent to approximately $0.28 per depositary share)
— — — (1,668)— — (1,668)
Cash dividends – common stock ($0.75 per share)
— — — (48,114)— — (48,114)
Balance at end of period$145,452 $642 $1,004,924 $2,920,074 $350,283 $(49,013)$4,372,362 
See accompanying Notes to Consolidated Financial Statements

6
Cullen/Frost Bankers, Inc.
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands, except per share amounts)
Preferred
Stock		Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax		Treasury
Stock		Total
Nine months ended:
September 30, 2022
Balance at beginning of period$145,452 $642 $1,009,921 $2,956,966 $347,318 $(20,744)$4,439,555 
Net income— — — 387,976 — — 387,976 
Other comprehensive income (loss), net of tax— — — — (1,876,243)— (1,876,243)
Stock option exercises/stock unit conversions (232,612 shares)
— — — (6,695)— 18,455 11,760 
Stock-based compensation expense recognized in earnings— — 8,703 — — — 8,703 
Purchase of treasury stock (7,459 shares)
— — — — — (996)(996)
Cash dividends – Series B preferred stock (approximately $33.38 per share which is equivalent to approximately $0.83 per depositary share)
— — — (5,006)— — (5,006)
Cash dividends – common stock ($2.37 per share)
— — — (153,277)— — (153,277)
Balance at end of period$145,452 $642 $1,018,624 $3,179,964 $(1,528,925)$(3,285)$2,812,472 
September 30, 2021
Balance at beginning of period$145,452 $642 $997,168 $2,750,723 $512,970 $(113,939)$4,293,016 
Net income— — — 342,058 — — 342,058 
Other comprehensive income (loss), net of tax— — — — (162,687)— (162,687)
Stock option exercises/stock unit conversions (650,044 shares)
— — — (26,652)— 64,462 37,810 
Stock-based compensation expense recognized in earnings— — 7,756 — — — 7,756 
Purchase of treasury stock (12,103 shares)
— — — — — (1,342)(1,342)
Treasury stock issued to the 401(k) stock purchase plan (18,555 shares)
— — — (57)— 1,806 1,749 
Cash dividends – Series B preferred stock (approximately $36.59 per share which is equivalent to approximately $0.91 per depositary share)
— — — (5,488)— — (5,488)
Cash dividends – common stock ($2.19 per share)
— — — (140,510)— — (140,510)
Balance at end of period$145,452 $642 $1,004,924 $2,920,074 $350,283 $(49,013)$4,372,362 
See accompanying Notes to Consolidated Financial Statements


7
Cullen/Frost Bankers, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Nine Months Ended
September 30,
20222021
Operating Activities:
Net income$387,976 $342,058 
Adjustments to reconcile net income to net cash from operating activities:
Credit loss expense— 63 
Deferred tax expense (benefit)(3,378)4,672 
Accretion of loan discounts(10,572)(9,879)
Securities premium amortization (discount accretion), net76,328 90,017 
Net (gain) loss on securities transactions— — 
Depreciation and amortization53,303 51,550 
Net (gain) loss on sale/write-down of assets/foreclosed assets109 (1,885)
Stock-based compensation8,703 7,756 
Net tax benefit from stock-based compensation2,894 4,505 
Earnings on life insurance policies(1,561)(1,901)
Net change in:
Trading account securities154 (421)
Lease right-of-use assets18,151 17,566 
Accrued interest receivable and other assets(63,382)(65,849)
Accrued interest payable and other liabilities71,187 114,361 
Net cash from operating activities539,912 552,613 
Investing Activities:
Securities held to maturity:
Purchases(878,434)— 
Maturities, calls and principal repayments557,901 171,969 
Securities available for sale:
Purchases(6,702,519)(4,105,085)
Sales— — 
Maturities, calls and principal repayments1,140,939 3,125,786 
Proceeds from sale of loans2,365 — 
Net change in loans(617,981)1,649,429 
Benefits received on life insurance policies1,332 1,944 
Proceeds from sales of premises and equipment47 7,033 
Purchases of premises and equipment(55,635)(37,088)
Proceeds from sales of repossessed properties2,585 809 
Net cash from investing activities(6,549,400)814,797 
Financing Activities:
Net change in deposits3,864,490 4,597,006 
Net change in short-term borrowings(657,785)110,232 
Proceeds from stock option exercises11,760 37,810 
Purchase of treasury stock(996)(1,342)
Cash dividends paid on preferred stock(5,006)(5,488)
Cash dividends paid on common stock(153,277)(140,510)
Net cash from financing activities3,059,186 4,597,708 
Net change in cash and cash equivalents(2,950,302)5,965,118 
Cash and cash equivalents at beginning of period16,583,000 10,288,853 
Cash and cash equivalents at end of period$13,632,698 $16,253,971 

See Notes to Consolidated Financial Statements.
8
Notes to Consolidated Financial Statements
(Table amounts in thousands, except for share and per share amounts)
Note 1 - Significant Accounting Policies
Nature of Operations. Cullen/Frost Bankers, Inc. (“Cullen/Frost”) is a financial holding company and a bank holding company headquartered in San Antonio, Texas that provides, through its subsidiaries, a broad array of products and services throughout numerous Texas markets. The terms “Cullen/Frost,” “the Corporation,” “we,” “us” and “our” mean Cullen/Frost Bankers, Inc. and its subsidiaries, when appropriate. In addition to general commercial and consumer banking, other products and services offered include trust and investment management, insurance, brokerage, mutual funds, leasing, treasury management, capital markets advisory and item processing.
Basis of Presentation. The consolidated financial statements in this Quarterly Report on Form 10-Q include the accounts of Cullen/Frost and all other entities in which Cullen/Frost has a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and financial reporting policies we follow conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry.
The consolidated financial statements in this Quarterly Report on Form 10-Q have not been audited by an independent registered public accounting firm, but in the opinion of management, reflect all adjustments necessary for a fair presentation of our financial position and results of operations. All such adjustments were of a normal and recurring nature. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2021, included in our Annual Report on Form 10-K filed with the SEC on February 4, 2022 (the “2021 Form 10-K”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for loan losses and the fair values of financial instruments and the status of contingencies are particularly subject to change.
Cash Flow Reporting. Additional cash flow information was as follows:
Nine Months Ended
September 30,
20222021
Cash paid for interest$71,848 $23,722 
Cash paid for income taxes78,500 28,043 
Significant non-cash transactions:
Unsettled securities transactions470,813 600,874 
Loans foreclosed and transferred to other real estate owned and foreclosed assets— 3,464 
Right-of-use lease assets obtained in exchange for lessee operating lease liabilities23,959 4,045 
Treasury stock issued to 401(k) stock purchase plan— 1,749 
Accounting Changes, Reclassifications and Restatements. Certain items in prior financial statements have been reclassified to conform to the current presentation.
9
Note 2 - Securities
Securities - Held to Maturity. A summary of the amortized cost, fair value and allowance for credit losses related to securities held to maturity as of September 30, 2022 and December 31, 2021 is presented below.
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Estimated
Fair Value		Allowance
for Credit
Losses		Net
Carrying
Amount
September 30, 2022
Residential mortgage-backed securities
$526,397 $— $68,024 $458,373 $— $526,397 
States and political subdivisions
1,646,345 90 188,964 1,457,471 (158)1,646,187 
Other1,500 — 57 1,443 — 1,500 
Total$2,174,242 $90 $257,045 $1,917,287 $(158)$2,174,084 
December 31, 2021
Residential mortgage-backed securities
$527,264 $18,766 $— $546,030 $— $527,264 
States and political subdivisions
1,220,573 41,141 101 1,261,613 (158)1,220,415 
Other1,500 — — 1,500 — 1,500 
Total$1,749,337 $59,907 $101 $1,809,143 $(158)$1,749,179 
All mortgage-backed securities included in the above table were issued by U.S. government agencies and corporations. The carrying value of held-to-maturity securities pledged to secure public funds, trust deposits, repurchase agreements and for other purposes, as required or permitted by law was $271.6 million and $642.3 million at September 30, 2022 and December 31, 2021, respectively. Accrued interest receivable on held-to-maturity securities totaled $11.5 million and $18.4 million at September 30, 2022 and December 31, 2021, respectively and is included in accrued interest receivable and other assets in the accompanying consolidated balance sheets.
From time to time, we have reclassified certain securities from available for sale to held to maturity. The net unamortized, unrealized gain remaining on transferred securities included in accumulated other comprehensive income in the accompanying balance sheet totaled $2.0 million ($1.6 million, net of tax) at September 30, 2022 and $2.5 million ($2.0 million, net of tax) at December 31, 2021. This amount will be amortized out of accumulated other comprehensive income over the remaining life of the underlying securities as an adjustment of the yield on those securities.
The following table summarizes Moody's and/or Standard & Poor's bond ratings for our portfolio of held-to-maturity securities issued by States and political subdivisions and other securities as of September 30, 2022 and December 31, 2021:
States and Political Subdivisions
Not Guaranteed or Pre-RefundedGuaranteed by the Texas PSFPre-RefundedTotalOther
Securities
September 30, 2022
Aaa/AAA$220,180 $1,116,482 $121,042 $1,457,704 $— 
Aa/AA188,641 — — 188,641 — 
Not rated— — — — 1,500 
Total$408,821 $1,116,482 $121,042 $1,646,345 $1,500 
December 31, 2021
Aaa/AAA$92,379 $460,648 $563,251 $1,116,278 $— 
Aa/AA
104,295 — — 104,295 — 
Not rated— — — — 1,500 
Total$196,674 $460,648 $563,251 $1,220,573 $1,500 
10
The following table details activity in the allowance for credit losses on held-to-maturity securities during the three and nine months ended September 30, 2022 and 2021.
Three Months Ended
September 30,		Nine Months Ended
September 30,
2022202120222021
Beginning balance$158 $158 $158 $160 
Credit loss expense (benefit)— — — (2)
Ending balance$158 $158 $158 $158 
Securities - Available for Sale. A summary of the amortized cost, fair value and allowance for credit losses related to securities available for sale as of September 30, 2022 and December 31, 2021 is presented below.
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Allowance
for Credit
Losses		Estimated
Fair Value
September 30, 2022
U.S. Treasury$5,447,478 $— $424,861 $— $5,022,617 
Residential mortgage-backed securities
6,685,418 1,293 987,902 — 5,698,809 
States and political subdivisions
7,121,730 1,395 487,827 — 6,635,298 
Other42,383 — — — 42,383 
Total$19,297,009 $2,688 $1,900,590 $— $17,399,107 
December 31, 2021
U.S. Treasury$2,165,702 $23,333 $9,602 $— $2,179,433 
Residential mortgage-backed securities
4,059,692 31,662 25,089 — 4,066,265 
States and political subdivisions
7,178,135 463,810 5,374 — 7,636,571 
Other42,359 — — — 42,359 
Total$13,445,888 $518,805 $40,065 $— $13,924,628 
All mortgage-backed securities included in the above table were issued by U.S. government agencies and corporations. At September 30, 2022, all of the securities in our available for sale municipal bond portfolio were issued by the State of Texas or political subdivisions or agencies within the State of Texas, of which approximately 75.1% are either guaranteed by the PSF or have been pre-refunded. Securities with limited marketability, such as stock in the Federal Reserve Bank and the Federal Home Loan Bank, are carried at cost and are reported as other available for sale securities in the table above. The carrying value of available-for-sale securities pledged to secure public funds, trust deposits, repurchase agreements and for other purposes, as required or permitted by law was $4.9 billion and $5.8 billion at September 30, 2022 and December 31, 2021, respectively. Accrued interest receivable on available-for-sale securities totaled $99.7 million and $120.5 million at September 30, 2022 and December 31, 2021, respectively, and is included in accrued interest receivable and other assets in the accompanying consolidated balance sheets.
The table below summarizes, as of September 30, 2022, securities available for sale in an unrealized loss position for which an allowance for credit losses has not been recorded, aggregated by type of security and length of time in a continuous unrealized loss position.
Less than 12 MonthsMore than 12 MonthsTotal
Estimated
Fair Value		Unrealized
Losses		Estimated
Fair Value		Unrealized
Losses		Estimated
Fair Value		Unrealized
Losses
U.S. Treasury$4,429,609 $323,346 $593,008 $101,515 $5,022,617 $424,861 
Residential mortgage-backed securities4,280,074 713,685 1,032,311 274,217 5,312,385 987,902 
States and political subdivisions5,943,551 412,938 194,456 74,889 6,138,007 487,827 
Total$14,653,234 $1,449,969 $1,819,775 $450,621 $16,473,009 $1,900,590 
As of September 30, 2022, no allowance for credit losses has been recognized on available for sale securities in an unrealized loss position as management does not believe any of the securities are impaired due to reasons of credit quality. This is based upon our analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors related to our available for sale securities and in consideration of our historical credit loss experience and internal forecasts. The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the securities. Furthermore, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost. The
11
unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline.
Contractual Maturities. The following table summarizes the maturity distribution schedule of securities held to maturity and securities available for sale as of September 30, 2022. Mortgage-backed securities are included in maturity categories based on their stated maturity date. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Other securities classified as available for sale include stock in the Federal Reserve Bank and the Federal Home Loan Bank, which have no maturity date. These securities have been included in the total column only.
Within 1 Year1 - 5 Years5 - 10 YearsAfter 10 YearsTotal
Held To Maturity
Amortized Cost
Residential mortgage-backed securities$— $— $514,321 $12,076 $526,397 
States and political subdivisions121,042 29,534 9,880 1,485,889 1,646,345 
Other— 1,500 — — 1,500 
Total$121,042 $31,034 $524,201 $1,497,965 $2,174,242 
Estimated Fair Value
Residential mortgage-backed securities$— $— $448,514 $9,859 $458,373 
States and political subdivisions120,786 29,362 9,850 1,297,473 1,457,471 
Other— 1,443 — — 1,443 
Total$120,786 $30,805 $458,364 $1,307,332 $1,917,287 
Available For Sale
Amortized Cost
U. S. Treasury$— $3,821,606 $1,433,912 $191,960 $5,447,478 
Residential mortgage-backed securities28 9,355 17,253 6,658,782 6,685,418 
States and political subdivisions250,317 1,470,384 944,279 4,456,750 7,121,730 
Other— — — — 42,383 
Total$250,345 $5,301,345 $2,395,444 $11,307,492 $19,297,009 
Estimated Fair Value
U. S. Treasury$— $3,648,015 $1,232,969 $141,633 $5,022,617 
Residential mortgage-backed securities27 9,130 17,167 5,672,485 5,698,809 
States and political subdivisions250,875 1,462,732 894,174 4,027,517 6,635,298 
Other— — — — 42,383 
Total$250,902 $5,119,877 $2,144,310 $9,841,635 $17,399,107 
Sales of Securities. No held to maturity or available for sale securities were sold during the three or nine months ended September 30, 2022 or 2021.
Premiums and Discounts. Premium amortization and discount accretion included in interest income on securities was as follows:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2022202120222021
Premium amortization$(27,165)$(30,240)$(84,278)$(92,016)
Discount accretion4,062 657 7,950 1,999 
Net (premium amortization) discount accretion$(23,103)$(29,583)$(76,328)$(90,017)
Trading Account Securities. Trading account securities, at estimated fair value, were as follows:
September 30,
2022		December 31,
2021
U.S. Treasury$25,008 $24,237 
States and political subdivisions— 925 
Total$25,008 $25,162 
12
Net gains and losses on trading account securities were as follows:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2022202120222021
Net gain on sales transactions$1,110 $314 $2,462 $716 
Net mark-to-market gains (losses)9 (2)(235)(71)
Net gain (loss) on trading account securities$1,119 $312 $2,227 $645 
Note 3 - Loans
Loans were as follows:
September 30,
2022		December 31,
2021
Commercial and industrial$5,531,820 $5,364,954 
Energy:
Production701,975 878,436 
Service127,065 105,901 
Other89,085 93,455 
Total energy918,125 1,077,792 
Paycheck Protection Program51,048 428,882 
Commercial real estate:
Commercial mortgages6,149,504 5,867,062 
Construction1,557,415 1,304,271 
Land524,423 405,277 
Total commercial real estate8,231,342 7,576,610 
Consumer real estate:
Home equity loans401,234 324,157 
Home equity lines of credit661,618 519,098 
Other652,884 567,535 
Total consumer real estate1,715,736 1,410,790 
Total real estate9,947,078 8,987,400 
Consumer and other502,558 477,369 
Total loans$16,950,629 $16,336,397 
Concentrations of Credit. Most of our lending activity occurs within the State of Texas, including the four largest metropolitan areas of Austin, Dallas/Ft. Worth, Houston and San Antonio, as well as other markets. The majority of our loan portfolio consists of commercial and industrial and commercial real estate loans. As of September 30, 2022, there were no concentrations of loans related to any single industry in excess of 10% of total loans. The largest industry concentration was related to the energy industry, which totaled 5.4% of total loans (also 5.4% excluding PPP loans). Unfunded commitments to extend credit and standby letters of credit issued to customers in the energy industry totaled $1.1 billion and $117.0 million, respectively, as of September 30, 2022.
Foreign Loans. We have U.S. dollar denominated loans and commitments to borrowers in Mexico. The outstanding balance of these loans and the unfunded amounts available under these commitments were not significant at September 30, 2022 or December 31, 2021.
Related Party Loans. In the ordinary course of business, we have granted loans to certain directors, executive officers and their affiliates (collectively referred to as “related parties”). Such loans totaled $356.4 million at September 30, 2022 and $350.5 million at December 31, 2021.
Accrued Interest Receivable. Accrued interest receivable on loans totaled $48.7 million and $40.0 million at September 30, 2022 and December 31, 2021, respectively and is included in accrued interest receivable and other assets in the accompany consolidated balance sheets.
13
Non-Accrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions.
Non-accrual loans, segregated by class of loans, were as follows:
September 30, 2022December 31, 2021
Total Non-AccrualNon-Accrual with No Credit Loss AllowanceTotal Non-AccrualNon-Accrual with No Credit Loss Allowance
Commercial and industrial$7,267 $4,425 $22,582 $4,701 
Energy16,134 7,277 14,433 8,533 
Paycheck Protection Program— — — — 
Commercial real estate:
Buildings, land and other5,489 2,497 15,297 13,817 
Construction— — 948 — 
Consumer real estate1,014 712 440 138 
Consumer and other— — 13 13 
Total$29,904 $14,911 $53,713 $27,202 
The following table presents non-accrual loans as of September 30, 2022 by class and year of origination.
20222021202020192018PriorRevolving LoansRevolving Loans Converted to TermTotal
Commercial and industrial$— $85 $1,065 $3,245 $1,439 $234 $467 $732 $7,267 
Energy5,154 — 72 1,394 15 — 7,746 1,753 16,134 
Paycheck Protection Program — — — — — — — — — 
Commercial real estate:
Buildings, land and other1,083 2,408 — 223 275 1,500 — — 5,489 
Construction— — — — — — — — — 
Consumer real estate— — — — — 363 — 651 1,014 
Consumer and other— — — — — — — — — 
Total$6,237 $2,493 $1,137 $4,862 $1,729 $2,097 $8,213 $3,136 $29,904 
Had non-accrual loans performed in accordance with their original contract terms, we would have recognized additional interest income, net of tax, of approximately $372 thousand and $1.2 million for the three and nine months ended September 30, 2022, respectively, and approximately $474 thousand and $1.4 million for the three and nine months ended September 30, 2021, respectively.
An age analysis of past due loans (including both accruing and non-accruing loans), segregated by class of loans, as of September 30, 2022 was as follows:
Loans
30-89 Days
Past Due		Loans
90 or More
Days
Past Due		Total
Past Due
Loans		Current
Loans		Total
Loans		Accruing
Loans 90 or
More Days
Past Due
Commercial and industrial$26,481 $4,629 $31,110 $5,500,710 $5,531,820 $2,443 
Energy2,211 7,745 9,956 908,169 918,125 — 
Paycheck Protection Program13,841 7,879 21,720 29,328 51,048 7,879 
Commercial real estate:
Buildings, land and other20,434 2,341 22,775 6,651,152 6,673,927 1,731 
Construction1,238 — 1,238 1,556,177 1,557,415 — 
Consumer real estate7,169 2,110 9,279 1,706,457 1,715,736 1,803 
Consumer and other5,611 491 6,102 496,456 502,558 491 
Total$76,985 $25,195 $102,180 $16,848,449 $16,950,629 $14,347 
14
Troubled Debt Restructurings. Troubled debt restructurings during the nine months ended September 30, 2022 and 2021 are set forth in the following table.
Nine Months Ended
September 30, 2022		Nine Months Ended
September 30, 2021
Balance at
Restructure		Balance at
Period-End		Balance at
Restructure		Balance at
Period-End
Commercial and industrial$— $— $1,312 $1,237 
Energy— — 3,817 3,566 
Commercial real estate:
Buildings, land and other1,155 1,083 1,888 1,875 
$1,155 $1,083 $7,017 $6,678 
Loan modifications are typically related to extending amortization periods, converting loans to interest only for a limited period of time, deferral of interest payments, waiver of certain covenants, consolidating notes and/or reducing collateral or interest rates. The modifications during the reported periods did not significantly impact our determination of the allowance for credit losses on loans.
Information as of or for the nine months ended September 30, 2022 and 2021 related to loans restructured during the preceding twelve months is set forth in the following table.
September 30, 2022September 30, 2021
Restructured loans past due in excess of 90 days at period-end:
Number of loans— 1 
Dollar amount of loans$— $306 
Restructured loans on non-accrual status at period end1,083 5,072 
Charge-offs of restructured loans:
Recognized in connection with restructuring— — 
Recognized on previously restructured loans723 1,433 
Proceeds from sale of restructured loans1,070 — 
Credit Quality Indicators. As part of the on-going monitoring of the credit quality of our loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted-average risk grade of commercial loans, (ii) the level of classified commercial loans, (iii) the delinquency status of consumer loans, (iv) non-performing loans (see details above) and (v) the general economic conditions in the State of Texas.
We utilize a risk grading matrix to assign a risk grade to each of our commercial loans. Loans are graded on a scale of 1 to 14. A description of the general characteristics of the 14 risk grades is set forth in our 2021 Form 10-K. We monitor portfolio credit quality by the weighted-average risk grade of each class of commercial loan. Individual relationship managers, under the oversight of credit administration, review updated financial information for all pass grade loans to reassess the risk grade on at least an annual basis. When a loan has a risk grade of 9, it is still considered a pass grade loan; however, it is considered to be on management’s “watch list,” where a significant risk-modifying action is anticipated in the near term. When a loan has a risk grade of 10 or higher, a special assets officer monitors the loan on an on-going basis.

15
The following tables present weighted-average risk grades for all commercial loans, by class and year of origination/renewal as of September 30, 2022. Paycheck Protection Program (“PPP”) loans are excluded as such loans are fully guaranteed by the Small Business Administration (“SBA”).
20222021202020192018PriorRevolving LoansRevolving Loans Converted to TermTotalW/A Risk Grade
Commercial and industrial
Risk grades 1-8$1,214,942 $706,035 $529,894 $242,581 $136,161 $199,629 $2,180,437 $47,088 $5,256,767 6.25 
Risk grade 934,065 28,895 6,211 6,909 12,436 9,923 94,984 11,133 204,556 9.00 
Risk grade 102,131 636 814 4,513 1,518 143 21,207 2,207 33,169 10.00 
Risk grade 1135 3,984 6,444 4,332 1,391 1,942 8,188 3,745 30,061 11.00 
Risk grade 12— 85 837 2,975 1,419 234 467 436 6,453 12.00 
Risk grade 13— — 228 270 20 — — 296 814 13.00 
$1,251,173 $739,635 $544,428 $261,580 $152,945 $211,871 $2,305,283 $64,905 $5,531,820 6.41 
W/A risk grade6.44 7.05 6.04 6.66 6.92 5.73 6.25 7.57 6.41 
Energy
Risk grades 1-8$319,910 $105,110 $5,238 $5,674 $2,346 $4,146 $386,836 $45,123 $874,383 5.61 
Risk grade 91,722 147 245 659 829 — 10,016 35 13,653 9.00 
Risk grade 10— — — 456 226 — — 47 729 10.00 
Risk grade 118,714 186 173 3,183 819 151 — — 13,226 11.00 
Risk grade 124,104 — 72 1,394 15 — 4,571 303 10,459 12.00 
Risk grade 131,050 — — — — — 3,175 1,450 5,675 13.00 
$335,500 $105,443 $5,728 $11,366 $4,235 $4,297 $404,598 $46,958 $918,125 5.86 
W/A risk grade6.22 5.64 7.67 8.81 8.52 6.70 5.40 6.46 5.86 
Commercial real estate:
Buildings, land, other
Risk grades 1-8$1,434,936 $1,556,836 $936,889 $731,589 $361,215 $868,933 $101,817 $105,168 $6,097,383 6.91 
Risk grade 951,425 20,259 109,106 79,833 24,749 54,595 4,558 2,134 346,659 9.00 
Risk grade 1033,233 14,484 11,364 42,672 29,990 6,012 — — 137,755 10.00 
Risk grade 1112,808 14,684 4,520 6,393 6,401 38,266 2,993 576 86,641 11.00 
Risk grade 12613 2,082 — 223 275 1,500 — — 4,693 12.00 
Risk grade 13470 326 — — — — — — 796 13.00 
$1,533,485 $1,608,671 $1,061,879 $860,710 $422,630 $969,306 $109,368 $107,878 $6,673,927 7.14 
W/A risk grade7.11 7.19 7.27 7.20 7.35 6.90 7.26 6.45 7.14 
Construction
Risk grades 1-8$464,837 $568,694 $162,262 $35,986 $490 $1,762 $243,723 $4,414 $1,482,168 6.85 
Risk grade 911,270 2,253 2,100 — — — 17,382 — 33,005 9.00 
Risk grade 1028,851 75 — — — — — — 28,926 10.00 
Risk grade 11— — — 13,316 — — — — 13,316 11.00 
Risk grade 12— — — — — — — — — 12.00 
Risk grade 13— — — — — — — — — 13.00 
$504,958 $571,022 $164,362 $49,302 $490 $1,762 $261,105 $4,414 $1,557,415 6.99 
W/A risk grade7.11 7.21 6.55 8.08 6.00 6.76 6.36 5.01 6.99 
Total commercial real estate$2,038,443 $2,179,693 $1,226,241 $910,012 $423,120 $971,068 $370,473 $112,292 $8,231,342 7.11 
W/A risk grade7.11 7.20 7.17 7.24 7.35 6.90 6.63 6.39 7.11 
In the table above, certain loans are reported as 2022 originations and have risk grades of 11 or higher. These loans were, for the most part, first originated in various years prior to 2022 but were renewed in the current year.
16
The following tables present weighted average risk grades for all commercial loans by class as of December 31, 2021. Refer to our 2021 Form 10-K for details of these loans by year of origination/renewal.
Commercial and IndustrialEnergyCommercial Real Estate - Buildings, Land and OtherCommercial Real Estate - ConstructionTotal Commercial Real Estate
W/A Risk GradeLoansW/A Risk GradeLoansW/A Risk GradeLoansW/A Risk GradeLoansW/A Risk GradeLoans
Risk grades 1-86.01 $5,063,847 5.78 $1,008,370 6.91 $5,574,922 6.99 $1,262,200 6.92 $6,837,122 
Risk grade 99.00 187,870 9.00 36,622 9.00 321,533 9.00 41,123 9.00 362,656 
Risk grade 1010.00 59,137 10.00 1,773 10.00 269,447 10.00 — 10.00 269,447 
Risk grade 1111.00 31,518 11.00 16,594 11.00 91,140 11.00 — 11.00 91,140 
Risk grade 1212.00 12,535 12.00 8,953 12.00 15,097 12.00 748 12.00 15,845 
Risk grade 1313.00 10,047 13.00 5,480 13.00 200 13.00 200 13.00 400 
Total6.22 $5,364,954 6.06 $1,077,792 7.22 $6,272,339 7.06 $1,304,271 7.19 $7,576,610 
Information about the payment status of consumer loans, segregated by portfolio segment and year of origination, as of September 30, 2022 was as follows:
20222021202020192018PriorRevolving LoansRevolving Loans Converted to TermTotal
Consumer real estate:
Past due 30-89 days$90 $726 $689 $503 $405 $1,605 $1,549 $1,602 $7,169 
Past due 90 or more days— — 64 341 151 1,116 208 230 2,110 
Total past due90 726 753 844 556 2,721 1,757 1,832 9,279 
Current loans283,431 317,862 201,281 74,855 41,146 129,830 649,300 8,752 1,706,457 
Total$283,521 $318,588 $202,034 $75,699 $41,702 $132,551 $651,057 $10,584 $1,715,736 
Consumer and other:
Past due 30-89 days$1,985 $245 $935 $51 $6 $43 $218 $2,128 $5,611 
Past due 90 or more days435 — — 16 — — 1 39 491 
Total past due2,420 245 935 67 6 43 219 2,167 6,102 
Current loans46,561 24,877 7,985 3,428 1,499 1,732 388,104 22,270 496,456 
Total$48,981 $25,122 $8,920 $3,495 $1,505 $1,775 $388,323 $24,437 $502,558 
Revolving loans that converted to term during the three and nine months ended September 30, 2022 and 2021 were as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Commercial and industrial$2,368 $12,009 $22,579 $39,551 
Energy1,582 52,055 1,806 57,871 
Commercial real estate:
Buildings, land and other— 6,012 10,759 37,093 
Construction— — 4,414 — 
Consumer real estate700 330 2,223 1,172 
Consumer and other1,963 1,523 7,691 7,017 
Total$6,613 $71,929 $49,472 $142,704 
In assessing the general economic conditions in the State of Texas, management monitors and tracks the Texas Leading Index (“TLI”), which is produced by the Federal Reserve Bank of Dallas. The TLI, the components of which are more fully described in our 2021 Form 10-K, totaled 130.3 at September 30, 2022 and 135.9 at December 31, 2021. A lower TLI value implies less favorable economic conditions.

17
Allowance For Credit Losses - Loans. The allowance for credit losses on loans is a contra-asset valuation account, calculated in accordance with ASC 326, that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. The amount of the allowance represents management's best estimate of current expected credit losses on loans considering available information, from internal and external sources, relevant to assessing collectibility over the loans' contractual terms, adjusted for expected prepayments when appropriate. Credit loss expense related to loans reflects the totality of actions taken on all loans for a particular period including any necessary increases or decreases in the allowance related to changes in credit loss expectations associated with specific loans or pools of loans. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate appropriateness of the allowance is dependent upon a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications. Our allowance methodology is more fully described in our 2021 Form 10-K.
The following table presents details of the allowance for credit losses on loans segregated by loan portfolio segment as of September 30, 2022 and December 31, 2021. No allowance for credit losses has been recognized for PPP loans as such loans are fully guaranteed by the SBA.
September 30, 2022Commercial
and
Industrial		EnergyCommercial
Real Estate		Consumer
Real Estate		Consumer
and Other		Total
Modeled expected credit losses$57,625 $8,657 $24,404 $7,797 $5,459 $103,942 
Q-Factor and other qualitative adjustments39,931 4,519 74,307 156 2,533 121,446 
Specific allocations1,274 5,675 1,896 82 — 8,927 
Total$98,830 $18,851 $100,607 $8,035 $7,992 $234,315 
December 31, 2021
Modeled expected credit losses$46,946 $6,363 $16,676 $6,484 $6,397 $82,866 
Q-Factor and other qualitative adjustments14,609 5,374 127,860 65 1,440 149,348 
Specific allocations
10,536 5,480 400 36 — 16,452 
Total$72,091 $17,217 $144,936 $6,585 $7,837 $248,666 
The following table details activity in the allowance for credit losses on loans by portfolio segment for the three and nine months ended September 30, 2022 and 2021. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. No allowance for credit losses has been recognized for PPP loans as such loans are fully guaranteed by the SBA.
Commercial
and
Industrial		EnergyCommercial
Real Estate		Consumer
Real Estate		Consumer
and Other		Total
Three months ended:
September 30, 2022
Beginning balance$87,270 $16,267 $117,106 $6,854 $12,135 $239,632 
Credit loss expense (benefit)10,844 2,491 (16,522)940 (216)(2,463)
Charge-offs(572)— — (68)(6,549)(7,189)
Recoveries1,288 93 23 309 2,622 4,335 
Net (charge-offs) recoveries716 93 23 241 (3,927)(2,854)
Ending balance$98,830 $18,851 $100,607 $8,035 $7,992 $234,315 
September 30, 2021
Beginning balance$65,271 $28,010 $147,993 $6,154 $7,860 $255,288 
Credit loss expense (benefit)(1,020)(7,720)4,007 (982)2,692 (3,023)
Charge-offs(1,611)— — — (5,073)(6,684)
Recoveries1,126 159 54 857 2,373 4,569 
Net (charge-offs) recoveries(485)159 54 857 (2,700)(2,115)
Ending balance$63,766 $20,449 $152,054 $6,029 $7,852 $250,150 
18
Commercial
and
Industrial		EnergyCommercial
Real Estate		Consumer
Real Estate		Consumer
and Other		Total
Nine months ended:
September 30, 2022
Beginning balance$72,091 $17,217 $144,936 $6,585 $7,837 $248,666 
Credit loss expense (benefit)29,347 874 (44,363)1,497 10,250 (2,395)
Charge-offs(5,918)(371)(702)(430)(17,642)(25,063)
Recoveries3,310 1,131 736 383 7,547 13,107 
Net (charge-offs) recoveries(2,608)760 34 (47)(10,095)(11,956)
Ending balance$98,830 $18,851 $100,607 $8,035 $7,992 $234,315 
September 30, 2021
Beginning balance$73,843 $39,553 $134,892 $7,926 $6,963 $263,177 
Credit loss expense (benefit)(8,886)(19,048)16,583 (3,093)7,042 (7,402)
Charge-offs(4,485)(1,433)(137)(672)(13,015)(19,742)
Recoveries3,294 1,377 716 1,868 6,862 14,117 
Net (charge-offs) recoveries(1,191)(56)579 1,196 (6,153)(5,625)
Ending balance$63,766 $20,449 $152,054 $6,029 $7,852 $250,150 
The following table presents loans that were evaluated for expected credit losses on an individual basis and the related specific allocations, by loan portfolio segment, as of September 30, 2022 and December 31, 2021.
September 30, 2022December 31, 2021
Loan
Balance		Specific AllocationsLoan
Balance		Specific Allocations
Commercial and industrial$8,655 $1,274 $24,523 $10,536 
Energy15,947 5,675 16,393 5,480 
Paycheck Protection Program— — — — 
Commercial real estate:
Buildings, land and other19,790 1,896 24,670 200 
Construction— — 948 200 
Consumer real estate934 82 303 36 
Consumer and other— — — — 
Total$45,326 $8,927 $66,837 $16,452 
Note 4 - Goodwill and Other Intangible Assets
Goodwill and other intangible assets are presented in the table below.
September 30,
2022		December 31,
2021
Goodwill$654,952 $654,952 
Other intangible assets:
Core deposits$395 $718 
Customer relationships91 148 
$486 $866 
The estimated aggregate future amortization expense for intangible assets remaining as of September 30, 2022 is as follows:
Remainder of 2022$101 
2023282 
202487 
202511 
20265 
$486 
19
Note 5 - Deposits
Deposits were as follows:
September 30,
2022		December 31,
2021
Non-interest-bearing demand deposits$18,565,820 $18,423,018 
Interest-bearing deposits:
Savings and interest checking12,399,351 11,930,959 
Money market accounts13,939,882 11,228,815 
Time accounts1,655,133 1,112,904 
Total interest-bearing deposits27,994,366 24,272,678 
Total deposits$46,560,186 $42,695,696 
The following table presents additional information about our deposits:
September 30,
2022		December 31,
2021
Deposits from foreign sources (primarily Mexico)$1,069,964 $993,479 
Non-interest-bearing public funds deposits688,227 1,235,026 
Interest-bearing public funds deposits746,671 810,863 
Total deposits not covered by deposit insurance26,614,691 24,125,359 
Time deposits not covered by deposit insurance407,758 238,608 
Note 6 - Off-Balance-Sheet Arrangements, Commitments, Guarantees and Contingencies
Financial Instruments with Off-Balance-Sheet Risk. In the normal course of business, we enter into various transactions, which, in accordance with generally accepted accounting principles are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. As more fully discussed in our 2021 Form 10-K, these transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. We minimize our exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.
Financial instruments with off-balance-sheet risk were as follows:
September 30,
2022		December 31,
2021
Commitments to extend credit$11,439,755 $10,420,142 
Standby letters of credit383,720 238,690 
Deferred standby letter of credit fees2,144 2,072 
Allowance For Credit Losses - Off-Balance-Sheet Credit Exposures. The allowance for credit losses on off-balance-sheet credit exposures is a liability account, calculated in accordance with ASC 326, representing expected credit losses over the contractual period for which we are exposed to credit risk resulting from a contractual obligation to extend credit. No allowance is recognized if we have the unconditional right to cancel the obligation. Off-balance-sheet credit exposures primarily consist of amounts available under outstanding lines of credit and letters of credit detailed in the table above. The amount of the allowance represents management's best estimate of expected credit losses on commitments expected to be funded over the contractual life of the commitment. Our allowance methodology is more fully described in our 2021 Form 10-K.
The following table details activity in the allowance for credit losses on off-balance-sheet credit exposures.
Three Months Ended
September 30,		Nine Months Ended
September 30,
2022202120222021
Beginning balance$50,246 $48,596 $50,314 $44,152 
Credit loss expense (benefit)2,463 3,023 2,395 7,467 
Ending balance$52,709 $51,619 $52,709 $51,619 
20
Lease Commitments. We lease certain office facilities and office equipment under operating leases. The components of total lease expense were as follows:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2022202120222021
Amortization of lease right-of-use assets$8,389 $8,172 $24,703 $24,584 
Short-term lease expense536 384 1,639 1,118 
Non-lease components (including taxes, insurance, common maintenance, etc.)3,092 2,864 8,860 8,205 
Total$12,017 $11,420 $35,202 $33,907 
Right-of-use lease assets totaled $287.2 million at September 30, 2022 and $281.4 million at December 31, 2021 and are reported as a component of premises and equipment on our accompanying consolidated balance sheets. The related lease liabilities totaled $319.9 million at September 30, 2022 and $313.4 million at December 31, 2021 and are reported as a component of accrued interest payable and other liabilities in the accompanying consolidated balance sheets. Lease payments under operating leases that were applied to our operating lease liability totaled $8.2 million and $24.6 million during the three and nine months ended September 30, 2022, respectively, and $7.9 million and $24.0 million during the three and nine months ended September 30, 2021, respectively. There has been no significant change in our expected future minimum lease payments since December 31, 2021. See the 2021 Form 10-K for information regarding these commitments.
Litigation. We are subject to various claims and legal actions that have arisen in the course of conducting business. Management does not expect the ultimate disposition of these matters to have a material adverse impact on our financial statements.
Note 7 - Capital and Regulatory Matters
Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.
Cullen/Frost’s and Frost Bank’s Common Equity Tier 1 capital (“CET1”) includes common stock and related paid-in capital, net of treasury stock, and retained earnings. In connection with the adoption of the Basel III Capital Rules, we elected to opt-out of the requirement to include most components of accumulated other comprehensive income in CET1. We also elected to exclude the effects of credit loss accounting under CECL from CET1 for a five-year transitional period, as further discussed in our 2021 Form 10-K. This CECL transitional adjustment totaled $46.2 million and $61.6 million at September 30, 2022 and December 31, 2021, respectively. CET1 is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities. Frost Bank's CET1 is also reduced by its equity investment in its financial subsidiary, Frost Insurance Agency (“FIA”).
Tier 1 capital includes CET1 and additional Tier 1 capital. For Cullen/Frost, additional Tier 1 capital included $145.5 million of 4.450% non-cumulative perpetual preferred stock at September 30, 2022 and December 31, 2021, the details of which are further discussed below. Frost Bank did not have any additional Tier 1 capital beyond Common Equity Tier 1 at September 30, 2022 or December 31, 2021. Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital for both Cullen/Frost and Frost Bank includes a permissible portion of the allowances for credit losses on securities, loans and off-balance-sheet credit exposures. Tier 2 capital for Cullen/Frost also includes the permissible portion of qualified subordinated debt (which decreases 20.0% per year during the final five years of the term of the notes) totaling $80.0 million at September 30, 2022 and $100.0 million at December 31, 2021 and trust preferred securities totaling $120.0 million at both September 30, 2022 and December 31, 2021.
21
The following table presents actual and required capital ratios as of September 30, 2022 and December 31, 2021 for Cullen/Frost and Frost Bank under the Basel III Capital Rules. Capital levels required to be considered well-capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. See the 2021 Form 10-K for a more detailed discussion of the Basel III Capital Rules.
ActualMinimum Capital Required Plus Capital Conservation Buffer
Required to be
Considered Well-
Capitalized (1)
Capital
Amount		RatioCapital
Amount		RatioCapital
Amount		Ratio
September 30, 2022
Common Equity Tier 1 to Risk-Weighted Assets
Cullen/Frost$3,606,527 12.74 %$1,981,042 7.00 %N/AN/A
Frost Bank3,595,393 12.71 1,979,976 7.00 1,838,550 6.50 %
Tier 1 Capital to Risk-Weighted Assets
Cullen/Frost3,751,979 13.26 2,405,550 8.50 1,698,036 6.00 
Frost Bank3,595,393 12.71 2,404,257 8.50 2,262,830 8.00 
Total Capital to Risk-Weighted Assets
Cullen/Frost4,187,120 14.80 2,971,562 10.50 2,830,059 10.00 
Frost Bank3,830,534 13.54 2,969,965 10.50 2,828,538 10.00 
Leverage Ratio
Cullen/Frost3,751,979 7.09 2,117,091 4.00 N/AN/A
Frost Bank3,595,393 6.79 2,117,519 4.00 2,646,898 5.00 
December 31, 2021
Common Equity Tier 1 to Risk-Weighted Assets
Cullen/Frost$3,371,043 13.13 %$1,796,549 7.00 %N/AN/A
Frost Bank3,261,532 12.72 1,795,221 7.00 1,666,991 6.50 %
Tier 1 Capital to Risk-Weighted Assets
Cullen/Frost3,516,495 13.70 2,181,523 8.50 1,539,899 6.00 
Frost Bank3,261,532 12.72 2,179,911 8.50 2,051,681 8.00 
Total Capital to Risk-Weighted Assets
Cullen/Frost3,966,244 15.45 2,694,823 10.50 2,566,498 10.00 
Frost Bank3,491,281 13.61 2,692,831 10.50 2,564,601 10.00 
Leverage Ratio
Cullen/Frost3,516,495 7.34 1,917,533 4.00 N/AN/A
Frost Bank3,261,532 6.80 1,917,679 4.00 2,397,099 5.00 
____________________
(1)“Well-capitalized” minimum Common Equity Tier 1 to Risk-Weighted Assets and Leverage Ratio are not formally defined under applicable banking regulations for bank holding companies.
As of September 30, 2022, capital levels at Cullen/Frost and Frost Bank exceed all capital adequacy requirements under the Basel III Capital Rules. Based on the ratios presented above, capital levels as of September 30, 2022 at Cullen/Frost and Frost Bank exceed the minimum levels necessary to be considered “well-capitalized.”
Cullen/Frost and Frost Bank are subject to the regulatory capital requirements administered by the Federal Reserve Board and, for Frost Bank, the Federal Deposit Insurance Corporation (“FDIC”). Regulatory authorities can initiate certain mandatory actions if Cullen/Frost or Frost Bank fail to meet the minimum capital requirements, which could have a direct material effect on our financial statements. Management believes, as of September 30, 2022, that Cullen/Frost and Frost Bank meet all capital adequacy requirements to which they are subject.
Preferred Stock. Outstanding preferred stock includes 150,000 shares, or $150.0 million in aggregate liquidation preference, of our 4.450% Non-Cumulative Perpetual Preferred Stock, Series B, par value $0.01 and liquidation preference $1,000 per share (“Series B Preferred Stock”). Each share of Series B Preferred Stock issued and outstanding is represented by 40 depositary shares, each representing a 1/40th ownership interest in a share of the Series B Preferred Stock (equivalent to a liquidation preference of $25 per share). The Series B Preferred Stock qualifies as Tier 1 capital for the purposes of the regulatory capital calculations. The net proceeds from the issuance and sale of the Series B Preferred Stock, after deducting $4.5 million of issuance costs including the underwriting discount and professional service fees, among other things, were approximately $145.5 million. Refer to our 2021 Form 10-K for additional details related to our Series B Preferred Stock.

22
Stock Repurchase Plans. From time to time, our board of directors has authorized stock repurchase plans. In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders. Shares purchased under such plans also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards. On January 26, 2022, our board of directors authorized a $100.0 million stock repurchase program, allowing us to repurchase shares of our common stock over a one-year period from time to time at various prices in the open market or through private transactions. No shares have been repurchased under this plan or the prior plan during the reported periods. Under the Basel III Capital Rules, Cullen/Frost may not repurchase or redeem any of its preferred stock or subordinated notes and, in some cases, its common stock without the prior approval of the Federal Reserve Board.
Dividend Restrictions. In the ordinary course of business, Cullen/Frost is dependent upon dividends from Frost Bank to provide funds for the payment of dividends to shareholders and to provide for other cash requirements, including to repurchase its common stock. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of Frost Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years. Under the foregoing dividend restrictions and while maintaining its “well-capitalized” status, at September 30, 2022, Frost Bank could pay aggregate dividends of up to $619.6 million to Cullen/Frost without prior regulatory approval.
Under the terms of the junior subordinated deferrable interest debentures that Cullen/Frost has issued to Cullen/Frost Capital Trust II, Cullen/Frost has the right at any time during the term of the debentures to defer the payment of interest at any time or from time to time for an extension period not exceeding 20 consecutive quarterly periods with respect to each extension period. In the event that we have elected to defer interest on the debentures, we may not, with certain exceptions, declare or pay any dividends or distributions on our capital stock or purchase or acquire any of our capital stock.
Note 8 - Derivative Financial Instruments
The fair value of derivative positions outstanding is included in accrued interest receivable and other assets and accrued interest payable and other liabilities in the accompanying consolidated balance sheets and in the net change in each of these financial statement line items in the accompanying consolidated statements of cash flows.
Interest Rate Derivatives. We utilize interest rate swaps, caps, swaptions and floors to mitigate exposure to interest rate risk and to facilitate the needs of our customers. Our objectives for utilizing these derivative instruments are described in our 2021 Form 10-K.
The notional amounts and estimated fair values of interest rate derivative contracts are presented in the following table. The fair values of interest rate derivative contracts are estimated utilizing internal valuation methods with observable market data inputs, or as determined by the Chicago Mercantile Exchange (“CME”) for centrally cleared derivative contracts. CME rules legally characterize variation margin payments for centrally cleared derivatives as settlements of the derivatives' exposure rather than collateral. As a result, the variation margin payment and the related derivative instruments are considered a single unit of account for accounting and financial reporting purposes. Variation margin, as determined by the CME, is settled daily. As a result, derivative contracts that clear through the CME have an estimated fair value of zero as of September 30, 2022 and December 31, 2021.
September 30, 2022December 31, 2021
Notional
Amount		Estimated
Fair Value		Notional
Amount		Estimated
Fair Value
Derivatives designated as hedges of fair value:
Financial institution counterparties:
Loan/lease interest rate swaps – assets$1,679 $25 $— $— 
Loan/lease interest rate swaps – liabilities— — 2,426 (34)
Non-hedging interest rate derivatives:
Financial institution counterparties:
Loan/lease interest rate swaps – assets1,229,040 61,992 247,592 1,207 
Loan/lease interest rate swaps – liabilities126,112 (1,088)928,756 (19,142)
Loan/lease interest rate caps – assets243,840 15,777 270,431 3,239 
Customer counterparties:
Loan/lease interest rate swaps – assets67,780 1,104 928,756 39,864 
Loan/lease interest rate swaps – liabilities1,185,815 (82,228)247,592 (2,846)
Loan/lease interest rate caps – liabilities243,840 (15,777)270,431 (3,239)
23
The weighted-average rates paid and received for interest rate swaps outstanding at September 30, 2022 were as follows:
Weighted-Average
Interest
Rate
Paid		Interest
Rate
Received
Interest rate swaps:
Fair value hedge loan/lease interest rate swaps1.58 %2.56 %
Non-hedging interest rate swaps – financial institution counterparties3.74 4.23 
Non-hedging interest rate swaps – customer counterparties4.21 3.73 
The weighted-average strike rate for outstanding interest rate caps was 3.29% at September 30, 2022.
Commodity Derivatives. We enter into commodity swaps and option contracts that are not designated as hedging instruments primarily to accommodate the business needs of our customers. Upon the origination of a commodity swap or option contract with a customer, we simultaneously enter into an offsetting contract with a third party financial institution to mitigate the exposure to fluctuations in commodity prices.
The notional amounts and estimated fair values of non-hedging commodity swap and option derivative positions outstanding are presented in the following table. We obtain dealer quotations and use internal valuation methods with observable market data inputs to value our commodity derivative positions.
September 30, 2022December 31, 2021
Notional
Units		Notional
Amount		Estimated
Fair Value		Notional
Amount		Estimated
Fair Value
Financial institution counterparties:
Oil – assetsBarrels4,467 $45,381 4,809 $14,721 
Oil – liabilitiesBarrels6,987 (55,645)7,032 (73,594)
Natural gas – assetsMMBTUs13,406 4,033 15,947 4,143 
Natural gas – liabilitiesMMBTUs20,489 (40,049)29,446 (21,249)
Customer counterparties:
Oil – assetsBarrels7,006 56,366 7,046 74,437 
Oil – liabilitiesBarrels4,448 (44,674)4,796 (14,294)
Natural gas – assetsMMBTUs20,489 40,153 29,446 21,456 
Natural gas – liabilitiesMMBTUs13,406 (4,017)15,947 (4,124)
Foreign Currency Derivatives. We enter into foreign currency forward and option contracts that are not designated as hedging instruments primarily to accommodate the business needs of our customers. Upon the origination of a foreign currency denominated transaction with a customer, we simultaneously enter into an offsetting contract with a third party financial institution to negate the exposure to fluctuations in foreign currency exchange rates. We also utilize foreign currency forward contracts and options that are not designated as hedging instruments to mitigate the economic effect of fluctuations in foreign currency exchange rates on foreign currency holdings and certain short-term, non-U.S. dollar denominated loans. The notional amounts and fair values of open foreign currency forward and option contracts were as follows:
 September 30, 2022December 31, 2021
Notional
Currency		Notional
Amount		Estimated
Fair Value		Notional
Amount		Estimated
Fair Value
Financial institution counterparties:
Forward and option contracts – assetsEUR2,925 $1 1,900 $29 
Forward and option contracts – assetsCAD— — 658 — 
Forward and option contracts – liabilitiesEUR2,925 (251)— — 
Customer counterparties:
Forward and option contracts – assetsEUR2,925 251 — — 
Forward and option contracts – assetsCAD— — 658 4 
Forward and option contracts – liabilitiesEUR2,925 (1)1,900 (55)
24
Gains, Losses and Derivative Cash Flows. For fair value hedges, the changes in the fair value of both the derivative hedging instrument and the hedged item are included in other non-interest income or other non-interest expense. The extent that such changes in fair value do not offset represents hedge ineffectiveness. Net cash flows from interest rate swaps on commercial loans/leases designated as hedging instruments in effective hedges of fair value are included in interest income on loans. For non-hedging derivative instruments, gains and losses due to changes in fair value and all cash flows are included in other non-interest income and other non-interest expense.
Amounts included in the consolidated statements of income related to interest rate derivatives designated as hedges of fair value were as follows:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2022202120222021
Commercial loan/lease interest rate swaps:
Amount of gain (loss) included in interest income on loans$2 $(21)$(16)$(74)
Amount of (gain) loss included in other non-interest expense1 3 6 8 
As stated above, we enter into non-hedge related derivative positions primarily to accommodate the business needs of our customers. Upon the origination of a derivative contract with a customer, we simultaneously enter into an offsetting derivative contract with a third party financial institution. We recognize immediate income based upon the difference in the bid/ask spread of the underlying transactions with our customers and the third party. Because we act only as an intermediary for our customer, subsequent changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact our results of operations.
Amounts included in the consolidated statements of income related to non-hedge related derivative instruments are presented in the table below.
Three Months Ended
September 30,		Nine Months Ended
September 30,
2022202120222021
Non-hedging interest rate derivatives:
Other non-interest income$140 $946 $1,171 $2,674 
Other non-interest expense— — — (1)
Non-hedging commodity derivatives:
Other non-interest income485 1,143 2,063 3,266 
Non-hedging foreign currency derivatives:
Other non-interest income— 4 63 34 
Counterparty Credit Risk. Our credit exposure relating to interest rate swaps, commodity swaps/options and foreign currency forward and option contracts with bank customers was approximately $58.4 million at September 30, 2022. This credit exposure is partly mitigated as transactions with customers are generally secured by the collateral, if any, securing the underlying transaction being hedged. Our credit exposure, net of collateral pledged, relating to interest rate swaps, commodity swaps/options and foreign currency forward/option contracts with upstream financial institution counterparties was approximately $20.2 million at September 30, 2022. This amount was primarily related to initial margin payments to the CME and excess collateral we posted to counterparties. Excess collateral is generally cleared on the next business day. Collateral levels for upstream financial institution counterparties are monitored and adjusted as necessary. See Note 9 – Balance Sheet Offsetting and Repurchase Agreements for additional information regarding our credit exposure with upstream financial institution counterparties. At September 30, 2022, the aggregate fair value of securities we posted as collateral related to derivative contracts totaled $10.9 million. We also had $12.9 million in cash collateral related to derivative contracts on deposit with other financial institution counterparties at September 30, 2022.
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Note 9 - Balance Sheet Offsetting and Repurchase Agreements
Balance Sheet Offsetting. Certain financial instruments, including resell and repurchase agreements and derivatives, may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements or similar agreements. Our derivative transactions with upstream financial institution counterparties are generally executed under International Swaps and Derivative Association (“ISDA”) master agreements which include “right of set-off” provisions. In such cases there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle such amounts on a net basis. Nonetheless, we do not generally offset such financial instruments for financial reporting purposes.
Information about financial instruments that are eligible for offset in the consolidated balance sheet as of September 30, 2022 is presented in the following tables.
Gross Amount
Recognized		Gross Amount
Offset		Net Amount
Recognized
September 30, 2022
Financial assets:
Derivatives:
Loan/lease interest rate swaps and caps$77,794 $— $77,794 
Commodity swaps and options49,414 — 49,414 
Foreign currency forward contracts1 — 1 
Total derivatives127,209 — 127,209 
Resell agreements12,150 — 12,150 
Total$139,359 $— $139,359 
Financial liabilities:
Derivatives:
Loan/lease interest rate swaps and caps$1,088 $— $1,088 
Commodity swaps and options95,694 — 95,694 
Foreign currency forward contracts251 — 251 
Total derivatives97,033 — 97,033 
Repurchase agreements2,082,739 — 2,082,739 
Total$2,179,772 $— $2,179,772 
Gross Amounts Not Offset
Net Amount
Recognized		Financial
Instruments		CollateralNet
Amount
September 30, 2022
Financial assets:
Derivatives:
Counterparty A$47 $(47)$— $— 
Counterparty B44,271 (35,853)(6,063)2,355 
Counterparty C407 (251)— 156 
Other counterparties82,484 (53,163)(27,740)1,581 
Total derivatives127,209 (89,314)(33,803)4,092 
Resell agreements12,150 — (12,150)— 
Total$139,359 $(89,314)$(45,953)$4,092 
Financial liabilities:
Derivatives:
Counterparty A$1,081 $(47)$(1,031)$3 
Counterparty B35,853 (35,853)— — 
Counterparty C251 (251)— — 
Other counterparties59,848 (53,163)(6,685)— 
Total derivatives97,033 (89,314)(7,716)3 
Repurchase agreements2,082,739 — (2,082,739)— 
Total$2,179,772 $(89,314)$(2,090,455)$3 
26
Information about financial instruments that are eligible for offset in the consolidated balance sheet as of December 31, 2021 is presented in the following tables.
Gross Amount
Recognized		Gross Amount
Offset		Net Amount
Recognized
December 31, 2021
Financial assets:
Derivatives:
Loan/lease interest rate swaps and caps$4,446 $— $4,446 
Commodity swaps and options18,864 — 18,864 
Total derivatives23,339 — 23,339 
Resell agreements7,903 — 7,903 
Total$31,242 $— $31,242 
Financial liabilities:
Derivatives:
Loan/lease interest rate swaps and caps$19,176 $— $19,176 
Commodity swaps and options94,843 — 94,843 
Total derivatives114,019 — 114,019 
Repurchase agreements2,740,799 — 2,740,799 
Total$2,854,818 $— $2,854,818 
Gross Amounts Not Offset
Net Amount
Recognized		Financial
Instruments		CollateralNet
Amount
December 31, 2021
Financial assets:
Derivatives:
Counterparty A$6 $(6)$— $— 
Counterparty B7,655 (7,655)— — 
Other counterparties15,678 (15,678)— — 
Total derivatives23,339 (23,339)— — 
Resell agreements7,903 — (7,903)— 
Total$31,242 $(23,339)$(7,903)$— 
Financial liabilities:
Derivatives:
Counterparty A$3,870 $(6)$(3,864)$— 
Counterparty B28,130 (7,655)(20,475)— 
Counterparty C9 — (9)— 
Other counterparties82,010 (15,678)(66,225)107 
Total derivatives114,019 (23,339)(90,573)107 
Repurchase agreements2,740,799 — (2,740,799)— 
Total$2,854,818 $(23,339)$(2,831,372)$107 
27
Repurchase Agreements. We utilize securities sold under agreements to repurchase to facilitate the needs of our customers and to facilitate secured short-term funding needs. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. We monitor collateral levels on a continuous basis. We may be required to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents.
The remaining contractual maturity of repurchase agreements in the consolidated balance sheets as of September 30, 2022 and December 31, 2021 is presented in the following tables.
Remaining Contractual Maturity of the Agreements
Overnight and ContinuousUp to 30 Days30-90 DaysGreater than 90 DaysTotal
September 30, 2022
Repurchase agreements:
U.S. Treasury$1,348,705 $— $— $— $1,348,705 
Residential mortgage-backed securities734,034 — — — 734,034 
Total borrowings$2,082,739 $— $— $— $2,082,739 
Gross amount of recognized liabilities for repurchase agreements$2,082,739 
Amounts related to agreements not included in offsetting disclosures above$— 
December 31, 2021
Repurchase agreements:
U.S. Treasury$1,342,591 $— $— $— $1,342,591 
Residential mortgage-backed securities1,398,208 — — — 1,398,208 
Total borrowings$2,740,799 $— $— $— $2,740,799 
Gross amount of recognized liabilities for repurchase agreements$2,740,799 
Amounts related to agreements not included in offsetting disclosures above$— 

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Note 10 - Stock-Based Compensation
A combined summary of activity in our active stock plans is presented in the table below. Performance stock units outstanding are presented assuming attainment of the maximum payout rate as set forth by the performance criteria. As of September 30, 2022, there were 789,290 shares remaining available for grant for future stock-based compensation awards.
Deferred
Stock Units
Outstanding		Non-Vested
Stock Units
Outstanding		Performance
Stock Units
Outstanding		Stock Options
Outstanding
Number
of Units		Weighted-
Average
Fair Value
at Grant		Number
of Units		Weighted-
Average
Fair Value
at Grant		Number
of Units		Weighted-
Average
Fair Value
at Grant		Number
of Shares		Weighted-
Average
Exercise
Price
Balance, January 1, 202256,301 $79.21 449,337 $93.05 202,460 $84.71 877,681 $69.02 
Authorized— — — — — — — — 
Granted5,382 133.67 4,676 130.30 — — — — 
Exercised/vested(16,022)74.89 — — (25,180)87.18 (191,410)61.44 
Forfeited/expired— — (5,603)93.69 (16,058)87.18 — — 
Balance, September 30, 202245,661 87.15 448,410 93.43 161,222 84.08 686,271 71.14 
Shares issued in connection with stock compensation awards are issued from available treasury shares. If no treasury shares are available, new shares are issued from available authorized shares. Shares issued in connection with stock compensation awards along with other related information were as follows:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2022202120222021
New shares issued from available authorized shares— — — — 
Shares issued from available treasury stock88,350 21,968 232,612 650,044 
Proceeds from stock option exercises$5,270 $1,128 $11,760 $37,810 
Stock-based compensation expense is recognized ratably over the requisite service period for all awards. For most stock option awards, the service period generally matches the vesting period. For stock options granted to certain executive officers and for non-vested stock units granted to all participants, the service period does not extend past the date the participant reaches 65 years of age. Deferred stock units granted to non-employee directors generally have immediate vesting and the related expense is fully recognized on the date of grant. For performance stock units, the service period generally matches the three-year performance period specified by the award, however, the service period does not extend past the date the participant reaches 65 years of age. Expense recognized each period is dependent upon our estimate of the number of shares that will ultimately be issued.
Stock-based compensation expense or benefit and the related income tax benefit is presented in the following table. The service period for performance stock units granted each year begins on January 1 of the following year.
Three Months Ended
September 30,		Nine Months Ended
September 30,
2022202120222021
Non-vested stock units$2,174 $1,559 $6,823 $5,210 
Deferred stock units— — 720 700 
Performance stock units999 426 1,160 1,846 
Total$3,173 $1,985 $8,703 $7,756 
Income tax benefit$440 $281 $1,760 $1,162 
Unrecognized stock-based compensation expense at September 30, 2022 is presented in the table below. Unrecognized stock-based compensation expense related to performance stock units is presented assuming attainment of the maximum payout rate as set forth by the performance criteria.
Non-vested stock units$11,704 
Performance stock units7,257 
Total$18,961 
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Note 11 - Earnings Per Common Share
Earnings per common share is computed using the two-class method as more fully described in our 2021 Form 10-K. The following table presents a reconciliation of net income available to common shareholders, net earnings allocated to common stock and the number of shares used in the calculation of basic and diluted earnings per common share.
Three Months Ended
September 30,		Nine Months Ended
September 30,
2022202120222021
Net income$169,760 $107,975 $387,976 $342,058 
Less: Preferred stock dividends1,668 1,668 5,006 5,488 
Net income available to common shareholders168,092 106,307 382,970 336,570 
Less: Earnings allocated to participating securities1,503 932 3,414 3,228 
Net earnings allocated to common stock$166,589 $105,375 $379,556 $333,342 
Distributed earnings allocated to common stock$55,820 $47,740 $151,963 $139,224 
Undistributed earnings allocated to common stock110,769 57,635 227,593 194,118 
Net earnings allocated to common stock$166,589 $105,375 $379,556 $333,342 
Weighted-average shares outstanding for basic earnings per common share64,157,662 63,652,020 64,107,621 63,522,884 
Dilutive effect of stock compensation343,750 444,636 369,268 489,219 
Weighted-average shares outstanding for diluted earnings per common share64,501,412 64,096,656 64,476,889 64,012,103 
Note 12 - Defined Benefit Plans
The components of the combined net periodic expense (benefit) for our defined benefit pension plans are presented in the table below.
Three Months Ended
September 30,		Nine Months Ended
September 30,
2022202120222021
Expected return on plan assets, net of expenses$(3,492)$(3,210)$(10,475)$(9,630)
Interest cost on projected benefit obligation1,005 835 3,013 2,506 
Net amortization and deferral741 1,529 2,223 4,587 
Net periodic expense (benefit)$(1,746)$(846)$(5,239)$(2,537)
Our non-qualified defined benefit pension plan is not funded. No contributions to the qualified defined benefit pension plan were made during the nine months ended September 30, 2022. We do not expect to make any contributions to the qualified defined benefit plan during the remainder of 2022.
Note 13 - Income Taxes
Income tax expense was as follows:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2022202120222021
Current income tax expense (benefit)$28,684 $13,849 $64,389 $31,639 
Deferred income tax expense (benefit)(974)(516)(3,378)4,672 
Income tax expense, as reported$27,710 $13,333 $61,011 $36,311 
Effective tax rate14.0 %11.0 %13.6 %9.6 %
We had a net deferred tax asset totaling $420.9 million at September 30, 2022 and a net deferred tax liability totaling $81.2 million at December 31, 2021. No valuation allowance for deferred tax assets was recorded at September 30, 2022 as management believes it is more likely than not that all of the deferred tax assets will be realized against deferred tax liabilities and projected future taxable income.
30
The effective income tax rates differed from the U.S. statutory federal income tax rates of 21% during the comparable periods primarily due to the effect of tax-exempt income from loans, securities and life insurance policies and the income tax effects associated with stock-based compensation. There were no unrecognized tax benefits during any of the reported periods. Interest and/or penalties related to income taxes are reported as a component of income tax expense. Such amounts were not significant during the reported periods.
We file income tax returns in the U.S. federal jurisdiction. We are no longer subject to U.S. federal income tax examinations by tax authorities for years before 2018.
Note 14 - Other Comprehensive Income (Loss)
The before and after tax amounts allocated to each component of other comprehensive income (loss) are presented in the following table. Reclassification adjustments related to securities available for sale are included in net gain (loss) on securities transactions in the accompanying consolidated statements of income. Reclassification adjustments related to defined-benefit post-retirement benefit plans are included in the computation of net periodic pension expense (see Note 12 – Defined Benefit Plans).
Three Months Ended
September 30, 2022		Three Months Ended
September 30, 2021
Before Tax
Amount		Tax  Expense,
(Benefit)		Net of  Tax
Amount		Before Tax
Amount		Tax  Expense,
(Benefit)		Net of  Tax
Amount
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period$(829,324)$(174,158)$(655,166)$(80,668)$(16,941)$(63,727)
Change in net unrealized gain on securities transferred to held to maturity(174)(36)(138)(237)(49)(188)
Reclassification adjustment for net (gains) losses included in net income— — — — — — 
Total securities available for sale and transferred securities(829,498)(174,194)(655,304)(80,905)(16,990)(63,915)
Defined-benefit post-retirement benefit plans:
Reclassification adjustment for net amortization of actuarial gain/loss included in net income as a component of net periodic cost (benefit)741 156 585 1,529 321 1,208 
Total defined-benefit post-retirement benefit plans741 156 585 1,529 321 1,208 
Total other comprehensive income (loss)$(828,757)$(174,038)$(654,719)$(79,376)$(16,669)$(62,707)
Nine Months Ended
September 30, 2022		Nine Months Ended
September 30, 2021
Before Tax
Amount		Tax  Expense,
(Benefit)		Net of  Tax
Amount		Before Tax
Amount		Tax  Expense,
(Benefit)		Net of  Tax
Amount
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period$(2,376,642)$(499,095)$(1,877,547)$(209,779)$(44,054)$(165,725)
Change in net unrealized gain on securities transferred to held to maturity(572)(120)(452)(741)(155)(586)
Reclassification adjustment for net (gains) losses included in net income— — — — — — 
Total securities available for sale and transferred securities(2,377,214)(499,215)(1,877,999)(210,520)(44,209)(166,311)
Defined-benefit post-retirement benefit plans:
Reclassification adjustment for net amortization of actuarial gain/loss included in net income as a component of net periodic expense (benefit)2,223 467 1,756 4,587 963 3,624 
Total defined-benefit post-retirement benefit plans2,223 467 1,756 4,587 963 3,624 
Total other comprehensive income (loss)$(2,374,991)$(498,748)$(1,876,243)$(205,933)$(43,246)$(162,687)
31
Activity in accumulated other comprehensive income (loss), net of tax, was as follows:
Securities
Available
For Sale		Defined
Benefit
Plans		Accumulated
Other
Comprehensive
Income
Balance January 1, 2022$380,209 $(32,891)$347,318 
Other comprehensive income (loss) before reclassifications
(1,877,999)— (1,877,999)
Reclassification of amounts included in net income
— 1,756 1,756 
Net other comprehensive income (loss) during period(1,877,999)1,756 (1,876,243)
Balance at September 30, 2022$(1,497,790)$(31,135)$(1,528,925)
Balance January 1, 2021$563,801 $(50,831)$512,970 
Other comprehensive income (loss) before reclassifications
(166,311)— (166,311)
Reclassification of amounts included in net income
— 3,624 3,624 
Net other comprehensive income (loss) during period(166,311)3,624 (162,687)
Balance at September 30, 2021$397,490 $(47,207)$350,283 

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Note 15 – Operating Segments
We are managed under a matrix organizational structure whereby our two primary operating segments, Banking and Frost Wealth Advisors, overlap a regional reporting structure. See our 2021 Form 10-K for additional information regarding our operating segments. Summarized operating results by segment were as follows:
BankingFrost  Wealth
Advisors		Non-BanksConsolidated
Three months ended:
September 30, 2022
Net interest income (expense)$356,513 $1,357 $(2,323)$355,547 
Credit loss expense(1)1 — — 
Non-interest income55,994 44,263 (436)99,821 
Non-interest expense223,193 33,530 1,175 257,898 
Income (loss) before income taxes189,315 12,089 (3,934)197,470 
Income tax expense (benefit)26,520 2,539 (1,349)27,710 
Net income (loss)162,795 9,550 (2,585)169,760 
Preferred stock dividends— — 1,668 1,668 
Net income (loss) available to common shareholders$162,795 $9,550 $(4,253)$168,092 
Revenues from (expenses to) external customers$412,507 $45,620 $(2,759)$455,368 
September 30, 2021
Net interest income (expense)$247,381 $536 $(1,795)$246,122 
Credit loss expense (benefit)(6)6 — — 
Non-interest income51,279 42,369 (459)93,189 
Non-interest expense185,891 31,086 1,026 218,003 
Income (loss) before income taxes112,775 11,813 (3,280)121,308 
Income tax expense (benefit)12,029 2,481 (1,177)13,333 
Net income (loss)100,746 9,332 (2,103)107,975 
Preferred stock dividends— — 1,668 1,668 
Net income (loss) available to common shareholders$100,746 $9,332 $(3,771)$106,307 
Revenues from (expenses to) external customers$298,660 $42,905 $(2,254)$339,311 
Nine months ended:
September 30, 2022
Net interest income (expense)$895,818 $3,015 $(6,007)$892,826 
Credit loss expense (benefit)(1)1 — — 
Non-interest income170,097 130,546 (1,505)299,138 
Non-interest expense640,775 97,598 4,604 742,977 
Income (loss) before income taxes425,141 35,962 (12,116)448,987 
Income tax expense (benefit)57,355 7,552 (3,896)61,011 
Net income (loss)367,786 28,410 (8,220)387,976 
Preferred stock dividends— — 5,006 5,006 
Net income (loss) available to common shareholders$367,786 $28,410 $(13,226)$382,970 
Revenues from (expenses to) external customers$1,065,915 $133,561 $(7,512)$1,191,964 
September 30, 2021
Net interest income (expense)$748,036 $1,530 $(5,407)$744,159 
Credit loss expense57 6 — 63 
Non-interest income154,003 124,512 (843)277,672 
Non-interest expense548,151 91,037 4,211 643,399 
Income (loss) before income taxes353,831 34,999 (10,461)378,369 
Income tax expense (benefit)32,811 7,350 (3,850)36,311 
Net income (loss)321,020 27,649 (6,611)342,058 
Preferred stock dividends— — 5,488 5,488 
Net income (loss) available to common shareholders$321,020 $27,649 $(12,099)$336,570 
Revenues from (expenses to) external customers$902,039 $126,042 $(6,250)$1,021,831 

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Note 16 – Fair Value Measurements
The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, we utilize valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 820 establishes a three-level fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. See our 2021 Form 10-K for additional information regarding the fair value hierarchy and a description of our valuation techniques.
Financial Assets and Financial Liabilities. The tables below summarize financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021, segregated by the level of the valuation inputs within the fair value hierarchy of ASC Topic 820 utilized to measure fair value.
Level 1 InputsLevel 2 InputsLevel 3 InputsTotal Fair Value
September 30, 2022
Securities available for sale:
U.S. Treasury$5,022,617 $— $— $5,022,617 
Residential mortgage-backed securities— 5,698,809 — 5,698,809 
States and political subdivisions— 6,635,298 — 6,635,298 
Other— 42,383 — 42,383 
Trading account securities:
U.S. Treasury25,008 — — 25,008 
Derivative assets:
Interest rate swaps, caps and floors— 78,898 — 78,898 
Commodity swaps and options— 145,933 — 145,933 
Foreign currency forward contracts252 — — 252 
Derivative liabilities:
Interest rate swaps, caps and floors— 99,093 — 99,093 
Commodity swaps and options— 144,385 — 144,385 
Foreign currency forward contracts252 — — 252 
December 31, 2021
Securities available for sale:
U.S. Treasury$2,179,433 $— $— $2,179,433 
Residential mortgage-backed securities— 4,066,265 — 4,066,265 
States and political subdivisions— 7,636,571 — 7,636,571 
Other— 42,359 — 42,359 
Trading account securities:
U.S. Treasury24,237 — — 24,237 
States and political subdivisions— 925 — 925 
Derivative assets:
Interest rate swaps, caps and floors— 44,310 — 44,310 
Commodity swaps and options— 114,757 — 114,757 
Foreign currency forward contracts33 — — 33 
Derivative liabilities:
Interest rate swaps, caps and floors— 25,261 — 25,261 
Commodity swaps and options— 113,261 — 113,261 
Foreign currency forward contracts55 — — 55 

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Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. Financial assets measured at fair value on a non-recurring basis during the reported periods include certain collateral dependent loans reported at the fair value of the underlying collateral if repayment is expected solely from the collateral.
The following table presents collateral dependent loans that were remeasured and reported at fair value through a specific allocation of the allowance for credit losses on loans based upon the fair value of the underlying collateral during the reported periods.
Nine Months Ended
September 30, 2022		Nine Months Ended
September 30, 2021
Level 2Level 3Level 2Level 3
Carrying value before allocations$7,999 $2,087 $3,329 $15,274 
Specific (allocations) reversals of prior allocations(1,742)4,881 (336)(4,791)
Fair value$6,257 $6,968 $2,993 $10,483 
Non-Financial Assets and Non-Financial Liabilities. We do not have any non-financial assets or non-financial liabilities measured at fair value on a recurring basis. From time to time, non-financial assets measured at fair value on a non-recurring basis may include certain foreclosed assets which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for loan losses and certain foreclosed assets which, subsequent to their initial recognition, were remeasured at fair value through a write-down included in other non-interest expense. There were no such fair value measurements during the reported periods.
Financial Instruments Reported at Amortized Cost. The estimated fair values of financial instruments that are reported at amortized cost in our consolidated balance sheets, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, were as follows:
September 30, 2022December 31, 2021
Carrying
Amount		Estimated
Fair Value		Carrying
Amount		Estimated
Fair Value
Financial assets:
Level 2 inputs:
Cash and cash equivalents$13,632,698 $13,632,698 $16,583,000 $16,583,000 
Securities held to maturity2,174,084 1,917,287 1,749,179 1,809,143 
Cash surrender value of life insurance policies190,368 190,368 190,139 190,139 
Accrued interest receivable169,540 169,540 179,111 179,111 
Level 3 inputs:
Loans, net16,716,314 16,163,170 16,087,731 16,079,454 
Financial liabilities:
Level 2 inputs:
Deposits46,560,186 46,538,352 42,695,696 41,343,426 
Federal funds purchased26,200 26,200 25,925 25,925 
Repurchase agreements2,082,739 2,082,739 2,740,799 2,740,799 
Junior subordinated deferrable interest debentures123,055 123,712 123,011 123,712 
Subordinated notes99,295 96,926 99,178 111,430 
Accrued interest payable9,545 9,545 3,026 3,026 
Under ASC Topic 825, entities may choose to measure eligible financial instruments at fair value at specified election dates. The fair value measurement option (i) may be applied instrument by instrument, with certain exceptions, (ii) is generally irrevocable and (iii) is applied only to entire instruments and not to portions of instruments. Unrealized gains and losses on items for which the fair value measurement option has been elected must be reported in earnings at each subsequent reporting date. During the reported periods, we had no financial instruments measured at fair value under the fair value measurement option.

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Note 17 - Accounting Standards Updates
Information about certain recently issued accounting standards updates is presented below. Also refer to Note 20 - Accounting Standards Updates in our 2021 Form 10-K for additional information related to previously issued accounting standards updates.
ASU 2022-01, “Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method.” Under prior guidance, entities can apply the last-of-layer hedging method to hedge the exposure of a closed portfolio of prepayable financial assets to fair value changes due to changes in interest rates for a portion of the portfolio that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows. ASU 2022-01 expands the last-of-layer method, which permits only one hedge layer, to allow multiple hedged layers of a single closed portfolio. To reflect that expansion, the last-of-layer method is renamed the portfolio layer method. ASU 2022-01 also (i) expands the scope of the portfolio layer method to include non-prepayable financial assets, (ii) specifies eligible hedging instruments in a single-layer hedge, (iii) provides additional guidance on the accounting for and disclosure of hedge basis adjustments under the portfolio layer method and (iv) specifies how hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio. ASU 2022-01 will be effective for us on January 1, 2023 though early adoption is permitted. The adoption of ASU 2022-01 is not expected to have a significant impact on our financial statements.
ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings in Accounting Standards Codification (“ASC”) Subtopic 310-40, Receivables - Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, ASU 2022-02 requires entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC Subtopic 3126-20, Financial Instruments - Credit Losses - Measured at Amortized Cost. ASU 2022-02 will be effective for us on January 1, 2023 though early adoption is permitted. The adoption of ASU 2022-02 is not expected to have a significant impact on our financial statements.
ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. ASU 2022-03 also clarifies that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction and requires certain new disclosures for equity securities subject to contractual sale restrictions. ASU 2022-03 will be effective for us on January 1, 2024 though early adoption is permitted. The adoption of ASU 2022-03 is not expected to have a significant impact on our financial statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial Review
Cullen/Frost Bankers, Inc.
The following discussion should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2021, and the other information included in the 2021 Form 10-K. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results for the year ending December 31, 2022 or any future period.
Dollar amounts in tables are stated in thousands, except for per share amounts.
Forward-Looking Statements and Factors that Could Affect Future Results
Certain statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). These may include statements regarding the potential effects of the COVID-19 pandemic on our business, financial condition, liquidity and results of operations, notwithstanding that such statements are not specifically identified as such. In addition, certain statements may be contained in our future filings with the SEC, in press releases, and in oral and written statements made by us or with our approval that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of Cullen/Frost or its management or Board of Directors, including those relating to products, services or operations; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “continue”, “remain”, “will”, “should”, “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:
•The effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board.
•Inflation, interest rate, securities market and monetary fluctuations.
•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 the U.S. financial system.
•Political instability.
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•Acts of God or of war or terrorism.
•The potential impact of climate change.
•The impact of the COVID-19 pandemic and any other pandemic, epidemic or health-related crisis.
•The costs and effects of legal and regulatory developments, the resolution of legal proceedings or regulatory or other governmental inquiries, the results of regulatory examinations or reviews and the ability to obtain required regulatory approvals.
•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 the Public Company Accounting Oversight Board, the Financial 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 Ukraine, terrorism or other geopolitical events.
Further, statements about the potential effects of the COVID-19 pandemic on our business, financial condition, liquidity and results of operations may constitute forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our customers, clients, third parties and us.
Forward-looking statements speak only as of the date on which such statements are made. We do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events.
COVID-19 Effects and Actions
Our business has been, and continues to be, impacted by the effects of the COVID-19 pandemic. There remains many uncertainties related to COVID-19 including, among other things, the ongoing impact to our customers, employees and vendors; the impact to the financial services and banking industry; and the impact to the economy as a whole as well as the effect of actions taken, or that may yet be taken, or inaction by governmental authorities to mitigate both the economic and health-related effects of COVID-19. Refer to our 2021 Form 10-K for further information regarding (i) the impact of the COVID-19 pandemic on our operations and our results thereof, as well as the impact on our financial position and (ii) legislative and regulatory actions taken related to the COVID-19 pandemic, particularly as they relate to the banking and financial services industry.
Application of Critical Accounting Policies and Accounting Estimates
We follow accounting and reporting policies that conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While we base estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.
We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial statements.
Accounting policies related to the allowance for credit losses on financial instruments including loans and off-balance-sheet credit exposures are considered to be critical as these policies involve considerable subjective judgment and estimation by management. In the case of loans, the allowance for credit losses is a contra-asset valuation account, calculated in accordance with Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”) Financial Instruments - Credit Losses, that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. In the case of off-balance-sheet credit exposures, the allowance for credit losses is a liability account, calculated in accordance with ASC 326, reported as a component of accrued interest payable and other liabilities in our consolidated balance sheets. The amount of each allowance account represents management's best estimate of current expected credit losses on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term
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of the instrument. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. While management utilizes its best judgment and information available, the ultimate adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets. Refer to the 2021 Form 10-K for additional information regarding critical accounting policies.
Overview
A discussion of our results of operations is presented below. Certain reclassifications have been made to make prior periods comparable. Taxable-equivalent adjustments are the result of increasing income from tax-free loans and investments by an amount equal to the taxes that would be paid if the income were fully taxable based on a 21% federal tax rate, thus making tax-exempt yields comparable to taxable asset yields.
Results of Operations
Net income available to common shareholders totaled $168.1 million, or $2.59 per diluted common share, and $383.0 million, or $5.90 per diluted common share for the three and nine months ended September 30, 2022 compared to $106.3 million, or $1.65 per diluted common share, and $336.6 million, or $5.22 per diluted common share for the three and nine months ended September 30, 2021.
Selected data for the comparable periods was as follows:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2022202120222021
Taxable-equivalent net interest income$379,518 $269,321 $963,089 $813,266 
Taxable-equivalent adjustment23,971 23,199 70,263 69,107 
Net interest income355,547 246,122 892,826 744,159 
Credit loss expense— — — 63 
Net interest income after credit loss expense355,547 246,122 892,826 744,096 
Non-interest income99,821 93,189 299,138 277,672 
Non-interest expense257,898 218,003 742,977 643,399 
Income before income taxes197,470 121,308 448,987 378,369 
Income taxes27,710 13,333 61,011 36,311 
Net income169,760 107,975 387,976 342,058 
Preferred stock dividends1,668 1,668 5,006 5,488 
Net income available to common shareholders$168,092 $106,307 $382,970 $336,570 
Earnings per common share – basic$2.60 $1.66 $5.92 $5.25 
Earnings per common share – diluted2.59 1.65 5.90 5.22 
Dividends per common share0.87 0.75 2.37 2.19 
Return on average assets1.27 %0.90 %1.00 %1.00 %
Return on average common equity20.13 9.87 14.19 10.72 
Average shareholders’ equity to average assets6.60 9.44 7.32 9.65 
Net income available to common shareholders increased $61.8 million, or 58.1%, for the three months ended September 30, 2022 and increased $46.4 million, or 13.8%, for the nine months ended September 30, 2022 compared to the same periods in 2021. The increase during the three months ended September 30, 2022 was primarily the result of a $109.4 million increase in net interest income and a $6.6 million increase in non-interest income partly offset by a $39.9 million increase in non-interest expense and a $14.4 million increase in income tax expense. The increase during the nine months ended September 30, 2022 was primarily the result of a $148.7 million increase in net interest income and a $21.5 million increase in non-interest income partly offset by a $99.6 million increase in non-interest expense and a $24.7 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 74.9% of total revenue during the first nine months of 2022. Net interest margin is the ratio of taxable-equivalent net interest income to average earning assets for the period. The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net interest income and net interest margin.
The Federal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. As of September 30, 2022, approximately 42.2% 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 28.4%) or the London Interbank Offered Rate (“LIBOR”) (approximately 13.7%). We discontinued originating LIBOR-based loans effective December 31, 2021 and have begun to negotiate loans using our preferred replacement index, the American Interbank Offered Rate (“AMERIBOR”), a benchmark developed by the American Financial Exchange, the Secured Overnight Financing Rate (“SOFR”) or a benchmark developed by Bloomberg Index Services (“BSBY”). As of September 30, 2022, approximately 15.7% of loans were tied to one of these indexes. For our currently outstanding LIBOR-based loans, the timing and manner in which each customer’s contract transitions from LIBOR to another rate will vary on a case-by-case basis. Our goal is to complete all transitions by the first quarter of 2023.
Select average market rates for the periods indicated are presented in the table below.
Three Months Ended
September 30,		Nine Months Ended
September 30,
2022202120222021
Federal funds target rate upper bound2.37 %0.25 %1.21 %0.25 %
Effective federal funds rate2.18 0.09 1.03 0.08 
Interest on reserve balances2.25 0.15 1.10 0.12 
Prime5.37 3.25 4.21 3.25 
1-Month LIBOR2.47 0.09 1.24 0.10 
3-Month LIBOR3.00 0.13 1.68 0.16 
AMERIBOR Term-30(1)
2.29 0.10 1.13 0.11 
AMERIBOR Term-90(1)
2.89 0.13 1.62 0.16 
1-Month Term SOFR(2)
2.43 0.05 1.18 0.04 
3-Month Term SOFR(2)
2.82 0.05 1.49 0.04 
Bloomberg 1-Month Short-Term Bank Yield Index2.35 0.06 1.14 0.08 
Bloomberg 3-Month Short-Term Bank Yield Index2.89 0.10 1.60 0.13 
____________________
(1)AMERIBOR Term-30 and AMERIBOR Term-90 are published by the American Financial Exchange.
(2)1-Month Term SOFR and 3-Month Term SOFR market data are the property of Chicago Mercantile Exchange, Inc. or its licensors as applicable. All rights reserved, or otherwise licensed by Chicago Mercantile Exchange, Inc.
In September 2022, the Federal Reserve released projections whereby the midpoint of the projected appropriate target range for the federal funds rate would rise to 4.4% by the end of 2022 and to 4.6% by the end of 2023. While there can be no such assurance that any increases in the federal funds rate will occur, these projections imply up to a 125 basis point increase in the federal funds rate during the remainder of 2022, followed by an additional 25 basis point increase in 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 3. Quantitative and Qualitative Disclosures About Market Risk elsewhere in this report for information about our sensitivity to interest rates. Further analysis of the components of our net interest margin is presented below.
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The following tables present an analysis of net interest income and net interest spread for the periods indicated, including average outstanding balances for each major category of interest-earning assets and interest-bearing liabilities, the interest earned or paid on such amounts, and the average rate earned or paid on such assets or liabilities, respectively. The tables also set forth the net interest margin on average total interest-earning assets for the same periods. For these computations: (i) average balances are presented on a daily average basis, (ii) information is shown on a taxable-equivalent basis assuming a 21% tax rate, (iii) average loans include loans on non-accrual status, and (iv) average securities include unrealized gains and losses on securities available for sale, while yields are based on average amortized cost.
Quarter To DateQuarter To Date
September 30, 2022September 30, 2021
Average
Balance		Interest
Income/
Expense		Yield/
Cost		Average
Balance		Interest
Income/
Expense		Yield/
Cost
Assets:
Interest-bearing deposits$12,776,193 $74,257 2.27 %$15,278,296 $5,830 0.15 %
Federal funds sold50,656 316 2.44 1,676 2 0.48 
Resell agreements10,471 64 2.39 7,907 6 0.29 
Securities:
Taxable11,486,105 68,311 2.20 4,147,511 20,736 2.03 
Tax-exempt7,915,790 81,831 4.09 8,355,422 78,968 4.04 
Total securities19,401,895 150,142 2.94 12,502,933 99,704 3.35 
Loans, net of unearned discounts16,822,933 207,522 4.89 16,189,334 169,892 4.16 
Total Earning Assets and Average Rate Earned49,062,148 432,301 3.43 43,980,146 275,434 2.53 
Cash and due from banks633,905 569,715 
Allowance for credit losses on loans and securities(238,623)(255,214)
Premises and equipment, net1,061,315 1,029,242 
Accrued interest and other assets1,864,046 1,450,373 
Total Assets$52,382,791 $46,774,262 
Liabilities:
Non-interest-bearing demand deposits18,511,055 16,998,730 
Interest-bearing deposits:
Savings and interest checking12,235,537 2,159 0.07 10,909,851 322 0.01 
Money market deposit accounts13,465,863 36,568 1.08 10,085,955 2,663 0.10 
Time accounts1,590,561 3,955 0.99 1,121,266 692 0.24 
Total interest-bearing deposits27,291,961 42,682 0.62 22,117,072 3,677 0.07 
Total deposits45,803,016 0.37 39,115,802 0.04 
Federal funds purchased41,718 249 2.33 27,002 9 0.13 
Repurchase agreements1,959,630 7,529 1.50 2,188,171 632 0.11 
Junior subordinated deferrable interest debentures123,049 1,159 3.77 136,395 631 1.85 
Subordinated notes99,281 1,164 4.69 99,125 1,164 4.70 
Total Interest-Bearing Funds and Average Rate Paid
29,515,639 52,783 0.71 24,567,765 6,113 0.10 
Accrued interest and other liabilities897,094 790,289 
Total Liabilities48,923,788 42,356,784 
Shareholders’ Equity3,459,003 4,417,478 
Total Liabilities and Shareholders’ Equity
$52,382,791 $46,774,262 
Net interest income$379,518 $269,321 
Net interest spread2.72 %2.43 %
Net interest income to total average earning assets
3.01 %2.47 %
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Year To DateYear To Date
September 30, 2022September 30, 2021
Average
Balance		Interest
Income/
Expense		Yield/
Cost		Average
Balance		Interest
Income/
Expense		Yield/
Cost
Assets:
Interest-bearing deposits$13,190,883 $106,971 1.07 %$12,849,827 $11,877 0.12 %
Federal funds sold32,042 428 1.76 9,331 13 0.18 
Resell agreements6,461 78 1.59 6,169 11 0.24 
Securities:
Taxable10,280,574 167,734 2.06 4,111,574 61,366 2.03 
Tax-exempt7,960,457 239,730 4.05 8,237,397 235,344 4.07 
Total securities18,241,031 407,464 2.90 12,348,971 296,710 3.37 
Loans, net of unearned discounts16,629,559 526,515 4.23 17,034,405 522,376 4.10 
Total Earning Assets and Average Rate Earned48,099,976 1,041,456 2.86 42,248,703 830,987 2.67 
Cash and due from banks643,654 543,514 
Allowance for credit losses on loans and securities(244,763)(261,568)
Premises and equipment, net1,053,887 1,038,467 
Accrued interest and other assets1,723,257 1,434,859 
Total Assets$51,276,011 $45,003,975 
Liabilities:
Non-interest-bearing demand deposits18,277,657 16,261,999 
Interest-bearing deposits:
Savings and interest checking12,176,393 3,775 0.04 10,506,015 1,057 0.01 
Money market deposit accounts12,650,089 51,334 0.54 9,710,072 6,538 0.09 
Time accounts1,403,238 7,078 0.67 1,134,065 3,098 0.37 
Total interest-bearing deposits26,229,720 62,187 0.32 21,350,152 10,693 0.07 
Total deposits44,507,377 0.19 37,612,151 0.04 
Federal funds purchased35,053 336 1.26 33,937 24 0.09 
Repurchase agreements1,917,622 9,837 0.68 2,030,266 1,597 0.10 
Junior subordinated deferrable interest debentures123,035 2,515 2.70 136,380 1,915 1.87 
Subordinated notes99,242 3,492 4.69 99,085 3,492 4.70 
Total Interest-Bearing Funds and Average Rate Paid
28,404,672 78,367 0.37 23,649,820 17,721 0.10 
Accrued interest and other liabilities840,489 747,473 
Total Liabilities47,522,818 40,659,292 
Shareholders’ Equity3,753,193 4,344,683 
Total Liabilities and Shareholders’ Equity
$51,276,011 $45,003,975 
Net interest income$963,089 $813,266 
Net interest spread2.49 %2.57 %
Net interest income to total average earning assets
2.64 %2.61 %
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The following table presents the changes in taxable-equivalent net interest income and identifies the changes due to differences in the average volume of earning assets and interest-bearing liabilities and the changes due to changes in the average interest rate on those assets and liabilities. The changes in net interest income due to changes in both average volume and average interest rate have been allocated to the average volume change or the average interest rate change in proportion to the absolute amounts of the change in each.
Three Months Ended
September 30, 2022 vs. September 30, 2021
Increase (Decrease) Due to Change in
RateVolumeTotal
Interest-bearing deposits$69,498 $(1,071)$68,427 
Federal funds sold37 277 314 
Resell agreements55 3 58 
Securities:
Taxable1,875 45,700 47,575 
Tax-exempt988 1,875 2,863 
Loans, net of unearned discounts30,768 6,862 37,630 
Total earning assets103,221 53,646 156,867 
Savings and interest checking1,801 36 1,837 
Money market deposit accounts32,784 1,121 33,905 
Time accounts2,877 386 3,263 
Federal funds purchased232 8 240 
Repurchase agreements6,965 (68)6,897 
Junior subordinated deferrable interest debentures596 (68)528 
Subordinated notes(2)2 — 
Total interest-bearing liabilities45,253 1,417 46,670 
Net change$57,968 $52,229 $110,197 
Nine Months Ended
September 30, 2022 vs. September 30, 2021
Increase (Decrease) Due to Change in
RateVolumeTotal
Interest-bearing deposits$94,776 $318 $95,094 
Federal funds sold324 91 415 
Resell agreements66 1 67 
Securities:
Taxable920 105,448 106,368 
Tax-exempt(1,188)5,574 4,386 
Loans, net of unearned discounts16,597 (12,458)4,139 
Total earning assets111,495 98,974 210,469 
Savings and interest checking2,581 137 2,718 
Money market deposit accounts42,238 2,558 44,796 
Time accounts3,079 901 3,980 
Federal funds purchased311 1 312 
Repurchase agreements8,329 (89)8,240 
Junior subordinated deferrable interest debentures798 (198)600 
Subordinated notes(6)6 — 
Total interest-bearing liabilities57,330 3,316 60,646 
Net change$54,165 $95,658 $149,823 
Taxable-equivalent net interest income for the three months ended September 30, 2022 increased $110.2 million, or 40.9%, while taxable-equivalent net interest income for the nine months ended September 30, 2022 increased $149.8 million, or 18.4%, compared to the same periods in 2021. The increase in taxable-equivalent net interest income during the three months ended September 30, 2022 was primarily related to an increase in the average yield on interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve); an increase in the average volume of taxable securities; increases in the average yield on and, to a lesser extent, the average volume of loans; and increases in the average volume of and the average taxable-equivalent yield on tax-exempt securities. The impact of these items was partly offset by increases in the average cost
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of interest-bearing deposit accounts (primarily money market deposit accounts) and an increase in the average cost of repurchase agreements, among other things.
The increase in taxable-equivalent net interest income during the nine months ended September 30, 2022 was primarily related to an increase in the average volume of taxable securities; an increase in the average yield on interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve); an increase in the average yield on loans; and an increase in the average volume of tax-exempt securities. The impact of these items was partly offset by increases in the average cost and the average volume of interest-bearing deposit accounts (primarily money market deposit accounts), an increase in the average cost of repurchase agreements and a decrease in the average volume of loans.
As a result of the aforementioned fluctuations, the taxable-equivalent net interest margin increased 54 basis points from 2.47% during the three months ended September 30, 2021 to 3.01% during the three months ended September 30, 2022 while the taxable-equivalent net interest margin increased 3 basis points from 2.61% during the nine months ended September 30, 2021 to 2.64% during the nine months ended September 30, 2022.
The average volume of interest-earning assets for the three months ended September 30, 2022 increased $5.1 billion while the average volume of interest-earning assets for the nine months ended September 30, 2022 increased $5.9 billion compared to the same periods in 2021. The increase in the average volume of interest-earning assets during the three months ended September 30, 2022 primarily related to a $7.3 billion increase in average taxable securities and a $633.6 million increase in average loans (which was impacted by a $1.3 billion decrease in average PPP loans, as further discussed below), partly offset by a $2.5 billion decrease in average interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) and a $439.6 million decrease in average tax-exempt securities. The increase in the average volume of interest-earning assets during the nine months ended September 30, 2022 primarily related to a $6.2 billion increase in average taxable securities and a $341.1 million increase in average interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) partly offset by a $404.8 million decrease in average loans (which was primarily impacted by a $2.1 billion decrease in average PPP loans, as further discussed below) and a $276.9 million decrease in average tax-exempt securities.
The average taxable-equivalent yield on interest-earning assets increased 90 basis points from 2.53% during the three months ended September 30, 2021 to 3.43% during the three months ended September 30, 2022 while the average taxable-equivalent yield on interest-earning assets increased 19 basis points from 2.67% during the nine months ended September 30, 2021 to 2.86% during the nine months ended September 30, 2022. The average taxable-equivalent yield on interest-earning assets during 2022 was impacted by the aforementioned changes in market interest rates and changes in the volume and relative mix of interest-earning assets.
The average taxable-equivalent yield on loans increased 73 basis points from 4.16% during the three months ended September 30, 2021 to 4.89% during the three months ended September 30, 2022 while the average taxable-equivalent yield on loans increased 13 basis points from 4.10% during the nine months ended September 30, 2021 to 4.23% during the nine months ended September 30, 2022. The average taxable-equivalent yields on loans during three and nine months ended September 30, 2022 were positively impacted by recent increases in market interest rates. The average taxable-equivalent yield on loans during the three and nine months ended September 30, 2021 was positively impacted by a higher average proportion of higher-yielding PPP loans to total loans compared to the three and nine months ended September 30, 2022. The average volume of loans for the three months ended September 30, 2022 increased $633.6 million, or 3.9%, while the average volume of loans for the nine months ended September 30, 2022 decreased $404.8 million, or 2.4%, compared to the same periods in 2021. The average volumes of loans during the three and nine months ended September 30, 2022 were impacted by decreases in the average volumes of PPP loans. Excluding PPP loans, average loans would have increased $1.9 billion, or 13.0%, and $1.7 billion, or 11.5%, during the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. Loans made up approximately 34.3% and 34.6% of average interest-earning assets during the three and nine months ended September 30, 2022, respectively, compared to 36.8% and 40.3% during the same respective periods in 2021.
During the nine months ended September 30, 2022, we recognized approximately $2.6 million in PPP loan related deferred processing fees (net of amortization of related deferred origination costs) as a yield adjustment and this amount is included in interest income on loans. Such amounts were not significant during the three months ended September 30, 2022. During the three and nine months ended September 30, 2021, we recognized approximately $26.5 million and $88.9 million, respectively, in PPP loan related deferred processing fees (net of amortization of related deferred origination costs). As a result of the inclusion of these net fees in interest income, the average yields on PPP loans was 1.00% and 3.00% during the three and nine months ended September 30, 2022, and 8.72% and 6.23% during the three and nine months ended September 30, 2021, compared to the stated interest rate of 1.0% on these loans.
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The average taxable-equivalent yield on securities was 2.94% and 2.90% during the three and nine months ended September 30, 2022, respectively, decreasing 41 basis points from 3.35% during the three months ended September 30, 2021 and decreasing 47 basis points from 3.37% during the nine months ended September 30, 2021. The average yield on taxable securities was 2.20% during the three months ended September 30, 2022 increasing 17 basis points from 2.03% during the same period in 2021 while the average yield on taxable securities was 2.06% during the nine months ended September 30, 2022 increasing 3 basis points from 2.03% during the same period in 2021. The average taxable-equivalent yield on tax-exempt securities was 4.09% during the three months ended September 30, 2022 increasing 5 basis points from 4.04% during the same period in 2021 while the average taxable-equivalent yield on tax-exempt securities was 4.05% during the nine months ended September 30, 2022, decreasing 2 basis points from 4.07% during the same period in 2021.
Tax exempt securities made up approximately 40.8% and 43.6% of total average securities during the three and nine months ended September 30, 2022, respectively, compared to 66.8% and 66.7% during the same periods in 2021. The average volume of total securities during the three months ended September 30, 2022 increased $6.9 billion, or 55.2%, compared to the same period in 2021 while the average volume of total securities during the nine months ended September 30, 2022 increased $5.9 billion, or 47.7%, compared to the same period in 2021. Securities made up approximately 39.5% of average interest-earning assets during the three months ended September 30, 2022 compared to 28.4% during the same period in 2021 while securities made up approximately 37.9% of average interest-earning assets during the nine months ended September 30, 2022 compared to 29.2% during the same period in 2021. The increases during the three and nine months ended September 30, 2022 were 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 the Federal Reserve) into taxable securities.
Average interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) for the three months ended September 30, 2022 decreased $2.5 billion, or 16.4%, compared to the same period in 2021 while average interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) for the nine months ended September 30, 2022 increased $341.1 million, or 2.7%, compared to the same period in 2021. Interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) made up approximately 26.1% of average interest-earning assets during the three months ended September 30, 2022 compared to 34.7% during the same period in 2021 while interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) made up approximately 27.4% of average interest-earning assets during the nine months ended September 30, 2022 compared to 30.4% during the same period of 2021. The decreases during the three and nine months ended September 30, 2022 were primarily related to the reinvestment of amounts held in an interest-bearing account at the Federal Reserve into taxable securities. The average yield on interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) was 2.27% and 1.07% during the three and nine months ended September 30, 2022, respectively, compared to 0.15% and 0.12% during the same respective periods in 2021. The average yields on interest-bearing deposits during the three and nine months ended September 30, 2022 were impacted by higher interest rates paid on reserves held at the Federal Reserve, compared to the same respective periods in 2021.
The average rate paid on interest-bearing liabilities was 0.71% during the three months ended September 30, 2022, increasing 61 basis points from 0.10% during the same period in 2021 while the average rate paid on interest-bearing liabilities was 0.37% during the nine months ended September 30, 2022 increasing 27 basis points from 0.10% during the same period in 2021. Average deposits increased $6.7 billion, or 17.1%, during the three months ended September 30, 2022 compared to the same period in 2021 and included a $5.2 billion increase in average interest-bearing deposits and a $1.5 billion increase in average non-interest bearing deposits. Average deposits increased $6.9 billion, or 18.3%, during the nine months ended September 30, 2022 compared to the same period in 2021 and included a $4.9 billion increase in average interest-bearing deposits and a $2.0 billion increase in average non-interest bearing deposits. The ratio of average interest-bearing deposits to total average deposits was 59.6% and 58.9% during the three and nine months ended September 30, 2022 compared to 56.5% and 56.8% during the same respective periods in 2021. The average cost of deposits is primarily impacted by changes in market interest rates as well as changes in the volume and relative mix of interest-bearing deposits. The average cost of interest-bearing deposits and total deposits was 0.62% and 0.37%, respectively, during the three months ended September 30, 2022 compared to 0.07% and 0.04%, respectively, during the same period in 2021. The average cost of interest-bearing deposits and total deposits was 0.32% and 0.19%, respectively, during the nine months ended September 30, 2022 compared to 0.07% and 0.04%, respectively, during the same period in 2021. The average cost of deposits during 2022 was impacted by an increase in the interest rates we pay on most of our interest-bearing deposit products as a result of the aforementioned increase in market interest rates.
Our net interest spread, which represents the difference between the average rate earned on earning assets and the average rate paid on interest-bearing liabilities, was 2.72% and 2.49% during the three and nine months ended September 30, 2022 compared to 2.43% and 2.57% during the same respective periods in 2021. The net interest spread, as well as the net interest margin, will be impacted by future changes in short-term and long-term interest rate levels, as well as the impact from the competitive environment. A discussion of the effects of changing interest rates on net interest income is set forth in Item 3. Quantitative and Qualitative Disclosures About Market Risk included elsewhere in this report.
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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 8 - Derivative Financial Instruments in the accompanying notes to consolidated financial statements included elsewhere in this report. Information regarding the impact of fluctuations in interest rates on our derivative financial instruments is set forth in Item 3. Quantitative and Qualitative Disclosures About Market Risk included elsewhere in this report.
Credit Loss Expense
Credit loss expense is determined by management as the amount to be added to the allowance for credit loss accounts for various types of financial instruments including loans, securities and off-balance-sheet credit exposures after net charge-offs have been deducted to bring the allowances to a level which, in management’s best estimate, is necessary to absorb expected credit losses over the lives of the respective financial instruments. The components of credit loss expense were as follows:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2022202120222021
Credit loss expense (benefit) related to:
Loans$(2,463)$(3,023)$(2,395)$(7,402)
Off-balance-sheet credit exposures2,463 3,023 2,395 7,467 
Securities held to maturity— — — (2)
Total$— $— $— $63 
See the section captioned “Allowance for Credit Losses” elsewhere in this discussion for further analysis of credit loss expense related to loans and off-balance-sheet credit exposures.
Non-Interest Income
Total non-interest income for the three and nine months ended September 30, 2022 increased $6.6 million, or 7.1%, and increased $21.5 million, or 7.7%, respectively, compared to the same periods in 2021. Changes in the various components of non-interest income are discussed in more detail below.
Trust and Investment Management Fees. Trust and investment management fees for the three and nine months ended September 30, 2022 increased $1.2 million, or 3.1%, and $4.4 million, or 4.0%, respectively, compared to the same periods in 2021. Investment management fees are the most significant component of trust and investment management fees, making up approximately 78.0% and 82.4% of total trust and investment management fees for the first nine months of 2022 and 2021, respectively. The increase in trust and investment management fees during the three months ended September 30, 2022 was primarily due to increases in oil and gas fees (up $2.9 million), real estate fees (up $467 thousand) and estate fees (up $314 thousand) partly offset by a decrease in investment management fees (down $2.5 million).
The increase in trust and investment management fees during the nine months ended September 30, 2022 was primarily due to increases in oil and gas fees (up $5.5 million) and real estate fees (up $1.0 million) partly offset by decreases in investment management fees (down $1.5 million) and estate fees (down $574 thousand). Oil and gas fees during the three and nine months ended September 30, 2022 were impacted by increases in oil and gas prices. The fluctuations in estate fees and real estate fees during the comparable periods were primarily related to variations in transaction volumes. 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 decreases in investment management fees during three and nine months ended September 30, 2022 were primarily related to lower average equity valuations, in part related to the sharp decline in equity valuations during the second and third quarters of 2022.
At September 30, 2022, trust assets, including both managed assets and custody assets, were primarily composed of equity securities (41.7% of assets), fixed income securities (33.8% of assets), alternative investments (7.5% of assets) and cash equivalents (9.6% of assets). The estimated fair value of these assets was $40.1 billion (including managed assets of $19.3 billion and custody assets of $20.8 billion) at September 30, 2022, compared to $43.3 billion (including managed assets of $19.1 billion and custody assets of $24.2 billion) at December 31, 2021 and $41.2 billion (including managed assets of $18.2 billion and custody assets of $22.9 billion) at September 30, 2021.
Service Charges on Deposit Accounts. Service charges on deposit accounts for the three and nine months ended September 30, 2022 increased $1.7 million, or 8.2%, and $8.5 million, or 13.9%, respectively, compared to the same periods in 2021. The increase during the three months ended September 30, 2022 was primarily related to increases in overdraft charges on consumer and commercial accounts (up $1.3 million and $568 thousand, respectively) and consumer service charges (up $260 thousand) partly offset by a decrease in commercial service charges (down $400 thousand). The increase during the nine
46
months ended September 30, 2022 was primarily related to increases in overdraft charges on consumer and commercial accounts (up $4.1 million and $1.7 million, respectively), commercial service charges (up $2.1 million) and consumer service charges (up $702 thousand).
Overdraft charges totaled $9.7 million ($7.2 million consumer and $2.4 million commercial) during the three months ended September 30, 2022 compared to $7.8 million ($5.9 million consumer and $1.9 million commercial) during the same period in 2021. Overdraft charges totaled $27.9 million ($21.4 million consumer and $6.5 million commercial) during the nine months ended September 30, 2022 compared to $22.2 million ($17.3 million consumer and $4.9 million commercial) during the same period in 2021. The increases in overdraft charges during the three and nine months ended September 30, 2022 were impacted by increases in the volumes of fee assessed overdrafts relative to the same periods in 2021, in part due to growth in the number of accounts. The decrease in commercial service charges during the three months ended September 30, 2022 primarily resulted from a higher average earnings credit rate applied to deposits maintained by treasury management customers. Because average market interest rates were higher during 2022 compared to 2021, deposit balances were more valuable and yielded a higher average earnings credit rate. As a result, customers paid for less of their services through fees rather than with earnings credits applied to their deposit balances. The increase in commercial service charges during the nine months ended September 30, 2022 was primarily related to an increase in the volume of billable services compared to the same period in 2021, partly offset by the impact of a higher average earnings credit rate. The increases in consumer service charges during the three and nine months ended September 30, 2022 were partly related to increases in overall deposit accounts and volumes.
In June 2022, we expanded the overdraft grace feature first implemented in April 2021. This feature, which was previously only available to certain consumer demand deposit accounts, is now available to all of our consumer demand deposit accounts, regardless of direct deposit status. With this feature, no fees will be assessed on overdrafts of $100 or less. Additionally, we also eliminated fees on non-sufficient and returned items for all consumer deposit accounts. We expect these changes will impact revenue by as much as $3.5 million on an annual basis.
Insurance Commissions and Fees. Insurance commissions and fees for the three and nine months ended September 30, 2022 increased $1.4 million, or 12.0%, and $1.7 million, or 4.3%, respectively, compared to the same periods in 2021. The increase during the three months ended September 30, 2022 was primarily the result of an increase in commission income (up $1.4 million). The increase during the nine months ended September 30, 2022 was the result of an increase in commission income (up $2.7 million) partly offset by a decrease in contingent income (down $964 thousand).
The increases in commission income during the three and nine months ended September 30, 2022 were primarily related to increases in commercial and personal lines property and casualty commissions. These increases were related to increased business volumes and increased market rates.
Contingent income totaled $278 thousand and $3.3 million during the three and nine months ended September 30, 2022, respectively, compared to $241 thousand and $4.3 million during the same periods in 2021. Contingent income primarily consists of amounts received from various property and casualty insurance carriers related to portfolio growth and the loss performance of insurance policies previously placed. These performance related contingent payments are seasonal in nature and are mostly received during the first quarter of each year. This performance related contingent income totaled $1.9 million and $3.2 million during the nine months ended September 30, 2022 and 2021, respectively. The decrease in performance related contingent income during 2022 was related to low growth within the portfolio and a deterioration in the loss performance of insurance policies previously placed. This deterioration was impacted by a severe weather event in Texas during the first quarter of 2021 that resulted in a significant increase in property and casualty claims and losses. Contingent income also includes amounts received from various benefit plan insurance companies related to the volume of business generated and/or the subsequent retention of such business. This benefit plan related contingent income totaled $232 thousand and $1.4 million during the three and nine months ended September 30, 2022, respectively, compared to $201 thousand and $1.1 million during the same respective periods 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 debit and credit card usage, point of sale income from PIN-based card transactions and ATM service fees. Interchange and card transaction fees are reported net of related network costs.

47
Net interchange and card transaction fees for the three and nine months ended September 30, 2022 increased $124 thousand, or 2.8%, and $527 thousand, or 4.0%, respectively, compared to the same periods in 2021 primarily due to increases in transaction volumes as well as the impact of new card products partly offset by an increase in network costs. A comparison of gross and net interchange and card transaction fees for the reported periods is presented in the table below.
Three Months Ended
September 30,		Nine Months Ended
September 30,
2022202120222021
Income from card transactions$8,292 $7,721 $24,081 $21,666 
ATM service fees871 841 2,502 2,492 
Gross interchange and card transaction fees9,163 8,562 26,583 24,158 
Network costs4,549 4,072 12,832 10,934 
Net interchange and card transaction fees$4,614 $4,490 $13,751 $13,224 
Federal Reserve rules applicable to financial institutions that have assets of $10 billion or more provide that the maximum permissible interchange fee for an electronic debit transaction is the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction. An upward adjustment of no more than 1 cent to an issuer's debit card interchange fee is allowed if the card issuer develops and implements policies and procedures reasonably designed to achieve certain fraud-prevention standards. The Federal Reserve also has rules governing routing and exclusivity that require issuers to offer two unaffiliated networks for routing transactions on each debit or prepaid product.
Other Charges, Commissions and Fees. Other charges, commissions and fees for the three months ended September 30, 2022 increased $1.3 million, or 13.4%, compared to the same period in 2021. The increase was primarily related to increases in income from the placement of money market accounts (up $1.6 million) and merchant services rebates/bonuses (up $417 thousand), among other things, partly offset by a decrease in income from the sale of mutual funds (down $983 thousand), among other things. Other charges, commissions and fees for the nine months ended September 30, 2022 increased $3.9 million, or 14.5%, compared to the same period in 2021. The increase was primarily related to increases in income from the placement of money market accounts (up $2.6 million), merchant services rebates/bonuses (up $1.3 million), letter of credit fees (up $681 thousand) and funds transfer service charges (up $446 thousand), among other things, partly offset by a decrease in income from the sale of mutual funds (down $1.1 million), among other things.
Other Non-Interest Income. Other non-interest income for the three months ended September 30, 2022 increased $879 thousand, or 10.3%, compared to the same period in 2021. The increase was primarily related to increases in sundry and other miscellaneous income (up $927 thousand), public finance underwriting fees (up $629 thousand) and income from customer foreign exchange transactions (up $364 thousand), among other things, partly offset by a decrease in income from customer derivative and securities trading transactions (down $660 thousand), among other things. Sundry income during the three months ended September 30, 2022 included $1.2 million in card related incentives/rebates, 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.
Other non-interest income for the nine months ended September 30, 2022 increased $2.4 million, or 9.3%, compared to the same period in 2021. The increase was primarily related to increases in sundry and other miscellaneous income (up $3.2 million), public finance underwriting fees (up $2.3 million) and income from customer foreign exchange transactions (up $1.3 million) partly offset by decreases in gains on the sale of foreclosed and other assets (down $2.0 million), income from customer derivative and securities trading transactions (down $1.1 million) and mineral interest income (down $574 thousand), among other things. Sundry income during the nine months ended September 30, 2022 included $2.2 million in card related incentives/rebates, $1.2 million related to the recovery of prior write-offs and $458 thousand related to a contract fee. The increases in public finance underwriting fees and income from customer foreign exchange transactions were primarily related to increases in transaction volumes. Gains on the sale of assets during 2021 included $1.8 million related to the sale of certain parking lots in downtown San Antonio during the second quarter. The decrease in income from customer derivative transactions was primarily due to a decrease in transaction volume. The decrease in mineral interest income was related to the donation of certain mineral interests in 2021.

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Non-Interest Expense
Total non-interest expense for the three and nine months ended September 30, 2022 increased $39.9 million, or 18.3%, and increased $99.6 million, or 15.5%, respectively, compared to the same periods in 2021. Changes in the various components of non-interest expense are discussed below.
Salaries and Wages. Salaries and wages for the three and nine months ended September 30, 2022 increased $27.7 million, or 27.9%, and $65.4 million, or 22.6%, respectively, compared to the same periods in 2021. The increases in salaries and wages were primarily related to increases in salaries, due to annual merit and market increases as well as the implementation of a $20 per hour minimum wage in December, 2021. Salaries and wages were also impacted by increases in the number of employees, increases in incentive and stock-based compensation and, primarily during the nine months ended September 30, 2022, a decrease in salary costs deferred in connection with loan originations as the first quarter of 2021 was impacted by the high volume of PPP loan originations. The increases in the number of employees were partly related to our investments in organic expansion in the Houston and Dallas markets as well as preparations for our mortgage loan product offering. We are experiencing a competitive labor market which has resulted in and could continue to result in an increase in our staffing costs.
Employee Benefits. Employee benefits expense for the three and nine months ended September 30, 2022 increased $104 thousand, or 0.5%, and $3.8 million, or 6.0%, respectively, compared to the same periods in 2021. The increase during the three months ended September 30, 2022 was primarily related to increases in payroll taxes, medical benefits expense and other employee benefits, among other things, partly offset by a decrease in 401(k) plan expense, primarily due to a discretionary profit sharing accrual during the third quarter of 2021, and an increase in the net periodic benefit related to our defined benefit retirement plan. The increase during the nine months ended September 30, 2022 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.
Our defined benefit retirement and restoration plans were frozen in 2001 which has helped to reduce the volatility in retirement plan expense. We nonetheless still have funding obligations related to these plans and could recognize expense related to these plans in future years, which would be dependent on the return earned on plan assets, the level of interest rates and employee turnover. See Note 12 - Defined Benefit Plans for additional information related to our net periodic pension benefit/cost.
Net Occupancy. Net occupancy expense for the three and nine months ended September 30, 2022 increased $925 thousand, or 3.4%, and $4.0 million, or 5.0%, respectively, compared to the same periods in 2021. The increase during the three months ended September 30, 2022 was primarily related to increases in lease expense (up $545 thousand) and depreciation on buildings and leasehold improvements (together up $313 thousand), among other things. The increase during the nine months ended September 30, 2022 was primarily related to increases in repairs and maintenance/service contracts expense (up $1.6 million), lease expense (up $1.1 million), depreciation on buildings and leasehold improvements (together up $976 thousand) and insurance expense (up $477 thousand), among other things. The increases in the aforementioned components of net occupancy expense were impacted, in part, by our expansion within the Houston and Dallas market areas.
Technology, Furniture and Equipment. Technology, furniture and equipment expense for the three and nine months ended September 30, 2022 increased $2.3 million, or 8.0%, and $5.4 million, or 6.3%, respectively, compared to the same periods in 2021. The increases during the three and nine months ended September 30, 2022 were primarily related to increases in cloud services expense (up $999 thousand and $2.9 million, respectively), depreciation of furniture and equipment (up $189 thousand and $1.1 million, respectively), service contracts expense (up $240 thousand and $823 thousand, respectively) and software maintenance (up $846 thousand and $289 thousand, respectively), among other things.
Deposit Insurance. Deposit insurance expense totaled $4.3 million and $11.6 million for the three and nine months ended September 30, 2022, respectively, compared to $3.1 million and $8.9 million for the three and nine months ended September 30, 2021. The increases were primarily related to an increase in total assets. In October 2022, the Federal 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 the three and nine months ended September 30, 2022 increased $7.7 million, or 20.3%, and $18.4 million, or 15.8%, respectively, compared to the same periods in 2021. The increase during the three months ended September 30, 2022 included increases in advertising/promotions expense (up $2.0 million); professional services expense (up $1.3 million); travel, meals and entertainment (up $1.2 million); and sundry and other miscellaneous expenses (up $1.2 million), among other things.
The increase during the nine months ended September 30, 2022 included increases in advertising/promotions expense (up $4.8 million); professional services expense (up $4.3 million); travel, meals and entertainment (up $4.2 million); sundry and
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other miscellaneous expenses (up $1.4 million) and business development expense (up $1.1 million), among other things. Other non-interest expense during the nine months ended September 30, 2022 was also impacted by a decrease in costs deferred as loan origination costs (down $1.2 million) as the first quarter of 2021 was impacted by a large volume of PPP loan originations. The impact of the aforementioned items was partly offset by a decrease in donations expense (down $3.4 million), which was impacted by $3.3 million in contributions to the Frost Charitable Foundation during the first and second quarters of 2021, among other things. Sundry and other miscellaneous expense for the three and nine months ended September 30, 2022 included a $1.6 million accrual related to a probable loss.
Results of Segment Operations
We are managed under a matrix organizational structure whereby our two primary operating segments, Banking and Frost Wealth Advisors, overlap a regional reporting structure. A third operating segment, Non-Banks, is for the most part the parent holding company, as well as certain other insignificant non-bank subsidiaries of the parent that, for the most part, have little or no activity. A description of each segment, the methodologies used to measure segment financial performance and summarized operating results by segment are described in Note 15 - Operating Segments in the accompanying notes to consolidated financial statements included elsewhere in this report. Segment operating results are discussed in more detail below.
Banking
Net income for the three and nine months ended September 30, 2022 increased $62.0 million, or 61.6%, and $46.8 million, or 14.6%, respectively, compared to the same periods in 2021. The increase during the three months ended September 30, 2022 was primarily the result of a $109.1 million increase in net interest income and a $4.7 million increase in non-interest income partly offset by a $37.3 million increase in non-interest expense and a $14.5 million increase in income tax expense. The increase during the nine months ended September 30, 2022 was primarily the result of by a $147.8 million increase in net interest income and a $16.1 million increase in non-interest income partly offset by a $92.6 million increase in non-interest expense and a $24.5 million increase in income tax expense.
Net interest income for the three and nine months ended September 30, 2022 increased $109.1 million, or 44.1%, and $147.8 million, or 19.8%, respectively, compared to the same periods in 2021. The increase during the three months ended September 30, 2022 was primarily related to an increase in the average yield on interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve); an increase in the average volume of taxable securities; increases in the average yield on and, to a lesser extent, the average volume of loans; and increases in the average volume of and the average taxable-equivalent yield on tax-exempt securities. The impact of these items was partly offset by increases 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. The increase during the nine months ended September 30, 2022 was primarily related to an increase in the average volume of taxable securities; an increase in the average yield on interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve); an increase in the average yield on loans; and an increase in the average volume of tax-exempt securities. The impact of these items was partly offset by increases in the average cost and the average volume of interest-bearing deposit accounts (primarily money market deposit accounts), an increase in the average cost of repurchase agreements and a decrease in the average volume of loans. See the analysis of net interest income included in the section captioned “Net Interest Income” included elsewhere in this discussion.
Credit loss expense/benefit was not significant for the Banking segment during the reported periods. See the sections captioned “Credit Loss Expense” and “Allowance for Credit Losses” elsewhere in this discussion for further analysis of credit loss expense related to loans and off-balance-sheet commitments.
Non-interest income for the three months ended September 30, 2022 increased $4.7 million, or 9.2%, while non-interest income for the nine months ended September 30, 2022 increased $16.1 million, or 10.5%, compared to the same respective periods in 2021. The increases during the three and nine months ended September 30, 2022 were primarily due to increases in service charges on deposit accounts; insurance commissions and fees; other charges, commissions and fees; and other non-interest income. The increase in service charges on deposit accounts during the three months ended September 30, 2022 was primarily related to increases in overdraft charges on consumer and commercial accounts and consumer service charges partly offset by a decrease in commercial service charges. The increase in service charges on deposit accounts during the nine months ended September 30, 2022 was primarily related to increases in overdraft charges on consumer and commercial accounts, commercial service charges and consumer service charges. The increases in overdraft charges during the three and nine months ended September 30, 2022 were impacted by increases in the volumes of fee assessed overdrafts relative to the same periods in 2021. The increases in consumer service charges during the three and nine months ended September 30, 2022 were partly related to increases in overall deposit accounts and volumes. The decrease in commercial service charges during the three months ended September 30, 2022 primarily resulted from a higher average earnings credit rate applied to deposits maintained by treasury management customers. The increase in commercial service charges during the nine months ended September 30,
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2022 was primarily related to an increase in the volumes of billable services compared to the same period in 2021, partly offset by the impact of a higher average earnings credit rate. The increases in insurance commissions and fees during the three and nine months ended September 30, 2022 were primarily related to increases in commission income, while the increase during the nine months ended September 30, 2022 was partly offset by a decrease in contingent income. Insurance commissions and fees are further discussed below in relation to Frost Insurance Agency. The increases in other charges, commissions and fees during the three and nine months ended September 30, 2022 were primarily related to increases in merchant services rebates/bonuses, among other things, and, additionally for the nine months ended September 30, 2022, increases in letter of credit fees and funds transfer service charges. The increases in other non-interest income during the three and nine months ended September 30, 2022 were primarily due to increases in sundry and other miscellaneous income; public finance underwriting fees; and income from customer foreign exchange transactions. The increases from these items were partly offset by decreases in income from customer derivative and securities trading transactions, among other things, and, for the nine months ended September 30, 2022, a decrease in gains on the sale of foreclosed and other assets. Sundry and other miscellaneous income during the three and nine months ended September 30, 2022 was impacted by certain card related incentives/rebates. During the nine months ended September 30, 2022, sundry and other miscellaneous income was also impacted by the recovery of prior write-offs and the recognition of a contract fee. 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 three months ended September 30, 2022 increased $37.3 million, or 20.1%, while non-interest expense for the nine months ended September 30, 2022 increased $92.6 million, or 16.9%, compared to the same respective periods in 2021. The increases during the three and nine months ended September 30, 2022 were primarily due to increases in salaries and wages and other non-interest expense and, to a lesser extent, increases in technology, furniture and equipment expense, net occupancy expense and deposit insurance. Non-interest expense for the nine months ended September 30, 2022 was also negatively impacted by an increase in employee benefit expense. The increases in salaries and wages during the three and nine months ended September 30, 2022, were primarily related to increases in salaries, due to annual merit and market increases as well as the implementation of a $20 per hour minimum wage in December, 2021. Salaries and wages were also impacted by increases in the number of employees, increases in incentive and stock based compensation and, primarily during the nine months ended September 30, 2022, a decrease in salary costs deferred in connection with loan originations as the first quarter of 2021 was impacted by the high volume of PPP loan originations. The increases in other non-interest expense during the three and nine months ended September 30, 2022 were primarily related to increases in advertising/promotions expense; professional services expense; travel, meals and entertainment; and sundry and other miscellaneous expenses. Sundry and other miscellaneous expenses for the three and nine months ended September 30, 2022 were impacted by an accrual related to a probable loss. Other non-interest expense during the nine months ended September 30, 2022 was also impacted by a decrease in costs deferred as loan origination costs as the first quarter of 2021 was impacted by a large volume of PPP loan originations. The increases in the aforementioned items during the nine months ended September 30, 2022 were partly offset by a decrease in donations expense, among other things. Donations expense during 2021 was impacted by $3.3 million in contributions to the Frost Charitable Foundation in the first and second quarters. The increases in technology, furniture and equipment expense during the three and nine months ended September 30, 2022 were primarily related to increases in cloud services expense, depreciation of furniture and equipment, service contracts expense and software maintenance, among other things. The increases in net occupancy during the three and nine months ended September 30, 2022 were primarily related to increases in depreciation on buildings and leasehold improvements and lease expense, among other things, and, for the nine months ended September 30, 2022, increases in repairs and maintenance/service contracts expense and insurance expense. The increases in the aforementioned components of net occupancy expense were impacted, in part, by our expansion within the Houston and Dallas market areas. The increases in deposit insurance during the three and nine months ended September 30, 2022 were primarily related to an increase in total assets. The increase in employee benefits expense during the nine months ended September 30, 2022 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. See the analysis of these categories of non-interest expense included in the section captioned “Non-Interest Expense” included elsewhere in this discussion.
Frost Insurance Agency, which is included in the Banking operating segment, had gross commission revenues of $13.2 million and $41.6 million during the three and nine months ended September 30, 2022, respectively, compared to $11.7 million and $39.9 million during the same respective periods in 2021. The increase during the three months ended September 30, 2022 was primarily related to increases in commission income while the increase during the nine months ended September 30, 2022 was primarily related an increase in commission income partly offset by a decrease in contingent income. The increases in gross commission income during the three and nine months ended September 30, 2022 were primarily related to increases in commercial and personal lines property and casualty commissions, due to increases in business volumes and market rates. The decrease in contingent income during the nine months ended September 30, 2022 was primarily related to a decrease in
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performance related contingent payments due to low growth within the portfolio and a deterioration in the loss performance of insurance policies previously placed. The decrease in performance related contingent commissions during the nine months ended September 30, 2022 was partly offset by an increase in contingent commissions received from various benefit plan insurance companies. See the analysis of insurance commissions and fees included in the section captioned “Non-Interest Income” included elsewhere in this discussion.
Frost Wealth Advisors
Net income for the three and nine months ended September 30, 2022 increased $218 thousand, or 2.3%, and increased $761 thousand, or 2.8%, respectively, compared to the same periods in 2021. The increase during the three months ended September 30, 2022 was primarily the result of a $1.9 million increase in non-interest income and a $821 thousand increase in net interest income partly offset by a $2.4 million increase in non-interest expense. The increase during the nine months ended September 30, 2022 was primarily the result of a $6.0 million increase in non-interest income and a $1.5 million increase in net interest income partly offset by a $6.6 million increase in non-interest expense.
Net interest income for the three and nine months ended September 30, 2022 increased $821 thousand, or 153.2%, and $1.5 million, or 97.1%, respectively, compared to the same periods in 2021. The increases during the three and nine months ended September 30, 2022 were primarily due to increases in the average volume of funds provided by Frost Wealth Advisors and an increase in the average funds transfer prices allocated to such funds. See the analysis of net interest income included in the section captioned “Net Interest Income” included elsewhere in this discussion.
Non-interest income for the three and nine months ended September 30, 2022 increased $1.9 million, or 4.5%, and $6.0 million, or 4.8%, respectively, compared to the same periods in 2021. The increases during the three and nine months ended September 30, 2022 were primarily due 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 for Frost Wealth Advisors. Investment management fees are the most significant component of trust and investment management fees, making up approximately 78.0% of total trust and investment management fees for the first nine months of 2022. The increases in trust and investment management fees during the three and nine months ended September 30, 2022 were primarily due to increases in oil and gas fees and real estate fees partly offset by decreases in investment management fees. Trust and investment management fees for the three months ended September 30, 2022 were also positively impacted by an increase in estate fees compared to the same period in 2021 while trust and investment management fees for the nine months ended September 30, 2022 were also negatively impacted by a decrease in estate fees compared to the same period in 2021. Oil and gas fees during the three and nine months ended September 30, 2022 were impacted by increases in oil and gas prices. The decreases in investment management fees during three and nine months ended September 30, 2022 were primarily related to lower average equity valuations, in part related to the sharp decline in equity valuations during the second and third quarters of 2022. The fluctuations in estate fees and real estate fees during the comparable periods were primarily related to variations in transaction volumes. The increases in other charges, commissions and fees during the three and nine months ended September 30, 2022 were primarily related to increases in income from the placement of money market accounts, among other things, partly offset by decreases in income from the sale of mutual funds, among other things. The increases in other non-interest income during the three and nine months ended September 30, 2022 were primarily related to increases in income from customer securities trading transactions partly offset by decreases 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 the three and nine months ended September 30, 2022 increased $2.4 million, or 7.9%, and $6.6 million, or 7.2%, respectively, compared to the same periods in 2021. The increases during the three and nine months ended September 30, 2022 were primarily due to increases in salaries and wages and other non-interest expense, and to a lesser extent, increases in employee benefits expense and technology, furniture and equipment expense.
The increases in salaries and wages during the three and nine months ended September 30, 2022 were primarily due to increases in salaries, due to annual merit and market increases, as well as increases in commission expense and incentive and stock compensation expense. The increases in other non-interest expense during the three and nine months ended September 30, 2022 were mostly related to increases in sundry and other miscellaneous expenses, which was primarily related to the write-off of certain assets; and travel, meals and entertainment; among other things. Other non-interest expense for the nine months ended September 30, 2022 was also negatively impacted by an increase in research and platform fees. The increases in employee benefits during the three and nine months ended September 30, 2022 were primarily related to increases in 401(k) plan expense, medical benefits expense and payroll taxes. The increases in technology, furniture and equipment expense during the three and nine months ended September 30, 2022 were primarily related to increases in cloud services expense.

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Non-Banks
The Non-Banks operating segment had net losses of $2.6 million and $8.2 million during the three and nine months ended September 30, 2022, respectively, compared to net losses of $2.1 million and $6.6 million during the same periods in 2021. The increase in the net loss during the three months ended September 30, 2022 was primarily due to an increase in net interest expense. The increase in the net loss during the nine months ended September 30, 2022 was primarily due to a decrease in other non-interest income combined with an increase in net interest expense. The increases in net interest expense during the three and nine months ended September 30, 2022 were primarily related to increases in the average rate paid on our long-term borrowings partly offset by the impact of the redemption, during the fourth quarter of 2021, of $13.4 million of junior subordinated deferrable interest debentures issued to WNB Capital Trust I. The decrease in other non-interest income during the nine months ended September 30, 2022 was primarily due to a decrease in mineral interest income as the related mineral interest assets were donated to the Frost Charitable Foundation during the third quarter of 2021.
Income Taxes
During the three months ended September 30, 2022, we recognized income tax expense of $27.7 million, for an effective tax rate of 14.0%, compared to $13.3 million, for an effective tax rate of 11.0%, for the same period in 2021. During the nine months ended September 30, 2022, we recognized income tax expense of $61.0 million, for an effective tax rate of 13.6%, compared to $36.3 million, for an effective tax rate of 9.6%, for the same period in 2021. The effective income tax rates differed from the U.S. statutory federal income tax rate of 21% during 2022 and 2021 primarily due to the effect of tax-exempt income from loans, securities and life insurance policies and the income tax effects associated with stock-based compensation, among other things, and their relative proportion to total pre-tax net income. The increases in the effective tax rates during 2022 were primarily related to increases in projected pre-tax net income and, to a lesser extent during the nine months ended September 30, 2022, a decrease in discrete tax benefits associated with stock-based compensation.
Average Balance Sheet
Average assets totaled $51.3 billion for the nine months ended September 30, 2022 representing an increase of $6.3 billion, or 13.9%, compared to average assets for the same period in 2021. Earning assets increased $5.9 billion, or 13.8%, during the first nine months of 2022 compared to the same period in 2021. The increase in earning assets was primarily related to a $6.2 billion increase in average taxable securities and a $341.1 million increase in average interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) partly offset by a $404.8 million decrease in average loans. Average deposits increased $6.9 billion, or 18.3%, during the first nine months of 2022 compared to the same period in 2021. Growth in average deposits was related to increased customer balances as well as new customer accounts. The increase included a $2.0 billion increase in non-interest bearing deposits and a $4.9 billion increase in interest-bearing deposit accounts. Average non-interest bearing deposits made up 41.1% and 43.2% of average total deposits during the first nine months of 2022 and 2021, respectively.
Loans
Details of our loan portfolio are presented in Note 3 - Loans in the accompanying notes to consolidated financial statements included elsewhere in this report. Loans increased $614.2 million, or 3.8%, from $16.3 billion at December 31, 2021 to $17.0 billion at September 30, 2022. As further discussed below, during the second quarter of 2020, we began originating loans to qualified small businesses under the Paycheck Protection Program (“PPP”) administered by the SBA under the provisions of the CARES Act. Excluding PPP loans, total loans would have otherwise increased $992.1 million, or 6.2%, from $15.9 billion at December 31, 2021 to $16.9 billion at September 30, 2022. The majority of our loan portfolio is comprised of commercial and industrial loans, energy loans, and real estate loans. Real estate loans include both commercial and consumer balances. Selected details related to our loan portfolio segments are presented below. Refer to our 2021 Form 10-K for a more detailed discussion of our loan origination and risk management processes.
Commercial and Industrial. Commercial and industrial loans increased $166.9 million, or 3.1%, from $5.4 billion at December 31, 2021 to $5.5 billion at September 30, 2022. Our commercial and industrial loans are a diverse group of loans to small, medium and large businesses. The purpose of these loans varies from supporting seasonal working capital needs to term financing of equipment. While some short-term loans may be made on an unsecured basis, most are secured by the assets being financed with collateral margins that are consistent with our loan policy guidelines. The commercial and industrial loan portfolio also includes commercial leases and purchased shared national credits ("SNC"s).
Energy. Energy loans include loans to entities and individuals that are engaged in various energy-related activities including (i) the development and production of oil or natural gas, (ii) providing oil and gas field servicing, (iii) providing energy-related transportation services, (iv) providing equipment to support oil and gas drilling, (v) refining petrochemicals, or (vi) trading oil, gas and related commodities. Energy loans decreased $159.7 million, or 14.8%, from $1.1 billion at December 31, 2021 to
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$918.1 million at September 30, 2022. We have recently made efforts to reduce our exposure to energy loans. Nonetheless energy loans remain our largest industry concentration totaling 5.4% of total loans (also 5.4% excluding PPP loans) at September 30, 2022, down from 6.6% of total loans (6.8% excluding PPP loans) at December 31, 2021. The average loan size, the significance of the portfolio and the specialized nature of the energy industry requires a highly prescriptive underwriting policy. Exceptions to this policy are rarely granted. Due to the large borrowing requirements of this customer base, the energy loan portfolio includes participations and SNCs.
Purchased Shared National Credits. Purchased shared national credits are participations purchased from upstream financial organizations and tend to be larger in size than our originated portfolio. Our purchased SNC portfolio totaled $710.3 million at September 30, 2022, increasing $11.9 million, or 1.7%, from $698.4 million at December 31, 2021. At September 30, 2022, 29.6% of outstanding purchased SNCs were related to the construction industry while 23.4% were related to the energy industry, 15.5% were related to the financial services industry and 11.7% were related to the real estate management industry. The remaining purchased SNCs were diversified throughout various other industries, with no other single industry exceeding 10% of the total purchased SNC portfolio. Additionally, almost all of the outstanding balance of purchased SNCs was included in the energy and commercial and industrial portfolio, with the remainder included in the real estate categories. SNC participations are originated in the normal course of business to meet the needs of our customers. As a matter of policy, we generally only participate in SNCs for companies headquartered in or which have significant operations within our market areas. In addition, we must have direct access to the company’s management, an existing banking relationship or the expectation of broadening the relationship with other banking products and services within the following 12 to 24 months. SNCs are reviewed at least quarterly for credit quality and business development successes.
Commercial Real Estate. Commercial real estate loans increased $654.7 million, or 8.6%, from $7.6 billion at December 31, 2021 to $8.2 billion at September 30, 2022. Commercial real estate loans represented 82.8% of total real estate loans at September 30, 2022 compared to 84.3% at December 31, 2021. The majority of our commercial real estate loan portfolio consists of commercial real estate mortgages, which includes both permanent and intermediate term loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Consequently, these loans must undergo the analysis and underwriting process of a commercial and industrial loan, as well as that of a real estate loan. At September 30, 2022, approximately 49.5% of the outstanding principal balance of our commercial real estate loans were secured by owner-occupied properties.
Consumer Real Estate and Other Consumer Loans. The consumer real estate loan portfolio increased $304.9 million, or 21.6%, from $1.4 billion at December 31, 2021 to $1.7 billion at September 30, 2022. Combined, home equity loans and lines of credit made up 61.9% and 59.8% of the consumer real estate loan total at September 30, 2022 and December 31, 2021, respectively. We offer home equity loans up to 80% of the estimated value of the personal residence of the borrower, less the value of existing mortgages and home improvement loans. We have not generally originated 1-4 family mortgage loans since 2000; however, from time to time, we invested in such loans to meet the needs of our customers or for other regulatory compliance purposes. Nonetheless, we expect to begin regular production of 1-4 family mortgage loans for portfolio investment purposes in the first half of 2023. Consumer and other loans increased $25.2 million, or 5.3%, from December 31, 2021. The consumer and other loan portfolio primarily consists of automobile loans, overdrafts, unsecured revolving credit products, personal loans secured by cash and cash equivalents and other similar types of credit facilities.
Paycheck Protection Program. We have originated loans to qualified small businesses under the PPP administered by the SBA under the provisions of the CARES Act. Loans covered by the PPP may be eligible for loan forgiveness for certain costs incurred related to payroll, group health care benefit costs and qualifying mortgage, rent and utility payments. The remaining loan balance after forgiveness of any amounts is still fully guaranteed by the SBA. Refer to the 2021 Form 10-K for additional details.
During the nine months ended September 30, 2022, we recognized approximately $2.6 million in PPP loan related deferred processing fees (net of amortization of related deferred origination costs) as a yield adjustment and this amount is included in interest income on loans. During the nine months ended September 30, 2021, we recognized approximately $88.9 million in PPP loan related deferred net processing fees. As a result of the inclusion of these net fees in interest income, the average yields on PPP loans were 3.00% during the nine months ended September 30, 2022, and 6.23% during the nine months ended September 30, 2021 compared to the stated interest rate of 1.0% on these loans. PPP related deferred processing fees and deferred origination costs are not expected to significantly impact interest income on loans in future periods.
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Accruing Past Due Loans. Accruing past due loans are presented in the following tables. Also see Note 3 - Loans in the accompanying notes to consolidated financial statements included elsewhere in this report.
Accruing Loans
30-89 Days Past Due		Accruing Loans
90 or More Days Past Due		Total Accruing
Past Due Loans
Total
Loans		AmountPercent of Loans in CategoryAmountPercent of Loans in CategoryAmountPercent of Loans in Category
September 30, 2022
Commercial and industrial$5,531,820 $26,229 0.47 %$2,443 0.04 %$28,672 0.51 %
Energy918,125 2,211 0.24 — — 2,211 0.24 
Paycheck Protection Program51,048 13,841 27.11 7,879 15.43 21,720 42.54 
Commercial real estate:
Buildings, land and other6,673,927 19,572 0.29 1,731 0.03 21,303 0.32 
Construction1,557,415 1,238 0.08 — — 1,238 0.08 
Consumer real estate1,715,736 6,537 0.38 1,803 0.11 8,340 0.49 
Consumer and other502,558 5,611 1.12 491 0.10 6,102 1.22 
Total$16,950,629 $75,239 0.44 $14,347 0.08 $89,586 0.52 
Excluding PPP loans$16,899,581 $61,398 0.36 $6,468 0.04 $67,866 0.40 
December 31, 2021
Commercial and industrial$5,364,954 $29,491 0.55 %$7,802 0.15 %$37,293 0.70 %
Energy1,077,792 1,353 0.13 215 0.02 1,568 0.15 
Paycheck Protection Program428,882 4,979 1.16 18,766 4.38 23,745 5.54 
Commercial real estate:
Buildings, land and other6,272,339 37,033 0.59 8,687 0.14 45,720 0.73 
Construction1,304,271 188 0.01 — — 188 0.01 
Consumer real estate1,410,790 4,866 0.34 2,177 0.15 7,043 0.49 
Consumer and other477,369 4,185 0.88 1,076 0.23 5,261 1.11 
Total$16,336,397 $82,095 0.50 $38,723 0.24 $120,818 0.74 
Excluding PPP loans$15,907,515 $77,116 0.48 $19,957 0.13 $97,073 0.61 
Accruing past due loans at September 30, 2022 decreased $31.2 million compared to December 31, 2021. The decrease was primarily related to decreases in past due non-construction related commercial real estate loans (down $24.4 million), past due commercial and industrial loans (down $8.6 million) and past due PPP loans (down $2.0 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 $29.2 million.
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Non-Accrual Loans. Non-accrual loans are presented in the table below. Also see in Note 3 - Loans in the accompanying notes to consolidated financial statements included elsewhere in this report.
September 30, 2022December 31, 2021
Non-Accrual LoansNon-Accrual Loans
Total
Loans		AmountPercent of Loans in CategoryTotal
Loans		AmountPercent of Loans in Category
Commercial and industrial$5,531,820 $7,267 0.13 %$5,364,954 $22,582 0.42 %
Energy918,125 16,134 1.76 1,077,792 14,433 1.34 
Paycheck Protection Program51,048 — — 428,882 — — 
Commercial real estate:
Buildings, land and other6,673,927 5,489 0.08 6,272,339 15,297 0.24 
Construction1,557,415 — — 1,304,271 948 0.07 
Consumer real estate1,715,736 1,014 0.06 1,410,790 440 0.03 
Consumer and other502,558 — — 477,369 13 — 
Total$16,950,629 $29,904 0.18 $16,336,397 $53,713 0.33 
Excluding PPP loans$16,899,581 $29,904 0.18 $15,907,515 $53,713 0.34 
Allowance for credit losses on loans$234,315 $248,666 
Ratio of allowance for credit losses on loans to non-accrual loans783.56 %462.95 %
Non-accrual loans at September 30, 2022 decreased $23.8 million from December 31, 2021 primarily due to decreases in non-accrual commercial and industrial loans and commercial real estate partially offset by an increase in non-accrual energy loans. The decreases were primarily related to principal payments, loans returning to accrual and charge offs.
Generally, loans are placed on non-accrual status if principal or interest payments become 90 days past due and/or management deems the collectibility of the principal and/or interest to be in question, as well as when required by regulatory requirements. Once interest accruals are discontinued, accrued but uncollected interest is charged to current year operations. Subsequent receipts on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Classification of a loan as non-accrual does not preclude the ultimate collection of loan principal or interest. There were no non-accrual commercial and industrial loans in excess of $5.0 million at September 30, 2022 or December 31, 2021. Non-accrual energy loans included two credit relationships in excess of $5.0 million totaling $11.8 million at September 30, 2022. One of these credit relationships, which totaled $6.7 million at September 30, 2022, was previously reported as non-accrual with an aggregate balance of $9.6 million at December 31, 2021. The decrease in the aggregate balance of this credit relationship was related to principal payments made by the borrower. Non-accrual real estate loans primarily consist of land development, 1-4 family residential construction credit relationships and loans secured by office buildings and religious facilities. There were no non-accrual commercial real estate loans in excess of $5.0 million at September 30, 2022 or December 31, 2021.
Allowance for Credit Losses
In the case of loans and securities, allowances for credit losses are contra-asset valuation accounts, calculated in accordance with Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”) Financial Instruments - Credit Losses, that are deducted from the amortized cost basis of these assets to present the net amount expected to be collected. In the case of off-balance-sheet credit exposures, the allowance for credit losses is a liability account, calculated in accordance with ASC 326, reported as a component of accrued interest payable and other liabilities in our consolidated balance sheets. The amount of each allowance account represents management's best estimate of current expected credit losses (“CECL”) on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. While management utilizes its best judgment and information available, the ultimate adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets. See our 2021 Form 10-K for additional information regarding our accounting policies related to credit losses.
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Allowance for Credit Losses - Loans. The table below provides, as of the dates indicated, an allocation of the allowance for loan losses by loan portfolio segment; however, allocation of a portion of the allowance to one segment does not preclude its availability to absorb losses in other segments.
Amount of Allowance AllocatedPercent of Loans in Each Category to Total LoansTotal
Loans		Ratio of Allowance Allocated to Loans in Each Category
September 30, 2022
Commercial and industrial$98,830 32.6 %$5,531,820 1.79 %
Energy18,851 5.4 918,125 2.05 
Paycheck Protection Program— 0.3 51,048 — 
Commercial real estate100,607 48.6 8,231,342 1.22 
Consumer real estate8,035 10.1 1,715,736 0.47 
Consumer and other7,992 3.0 502,558 1.59 
Total$234,315 100.0 %$16,950,629 1.38 
Excluding PPP loans$234,315 $16,899,581 1.39 %
December 31, 2021
Commercial and industrial$72,091 32.9 %$5,364,954 1.34 %
Energy17,217 6.6 1,077,792 1.60 
Paycheck Protection Program— 2.6 428,882 — 
Commercial real estate144,936 46.4 7,576,610 1.91 
Consumer real estate6,585 8.6 1,410,790 0.47 
Consumer and other7,837 2.9 477,369 1.64 
Total$248,666 100.0 %$16,336,397 1.52 
Excluding PPP loans$248,666 $15,907,515 1.56 
The allowance allocated to commercial and industrial loans totaled $98.8 million, or 1.79% of total commercial and industrial loans, at September 30, 2022 increasing $26.7 million, or 37.1%, compared to $72.1 million, or 1.34% of total commercial and industrial loans, at December 31, 2021. Modeled expected credit losses increased $10.7 million while qualitative factor (“Q-Factor”) and other qualitative adjustments related to commercial and industrial loans increased $25.3 million. Specific allocations for commercial and industrial loans that were evaluated for expected credit losses on an individual basis decreased $9.3 million from $10.5 million at December 31, 2021 to $1.3 million at September 30, 2022. The decrease in specific allocations for commercial and industrial loans was related to principal payments received and the recognition of charge-offs.
The allowance allocated to energy loans totaled $18.9 million, or 2.05% of total energy loans, at September 30, 2022 increasing $1.6 million, or 9.5%, compared to $17.2 million, or 1.60% of total energy loans, at December 31, 2021. Modeled expected credit losses related to energy loans increased $2.3 million while Q-Factor and other qualitative adjustments related to energy loans decreased $855 thousand. Specific allocations for energy loans that were evaluated for expected credit losses on an individual basis totaled $5.7 million at September 30, 2022 increasing $195 thousand compared to $5.5 million on December 31, 2021.
The allowance allocated to commercial real estate loans totaled $100.6 million, or 1.22% of total commercial real estate loans, at September 30, 2022 decreasing $44.3 million, or 30.6%, 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 $7.7 million while Q-Factor and other qualitative adjustments related to commercial real estate loans decreased $53.6 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 $1.9 million at September 30, 2022.
The allowance allocated to consumer real estate loans totaled $8.0 million, or 0.47% of total consumer real estate loans, at September 30, 2022 increasing $1.5 million, or 22.0%, compared to $6.6 million, or 0.47% of total consumer real estate loans, at December 31, 2021. Modeled expected credit losses related to consumer real estate loans increased $1.3 million while Q-Factor and other qualitative adjustments related to consumer real estate loans increased $91 thousand.
The allowance allocated to consumer loans totaled $8.0 million, or 1.59% of total consumer loans, at September 30, 2022 increasing $155 thousand, or 2.0%, compared to $7.8 million, or 1.64% of total consumer loans, at December 31, 2021. Modeled expected credit losses related to consumer loans decreased $938 thousand while Q-Factor and other qualitative
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adjustments increased $1.1 million, which was primarily due to an increase in the consumer overlay, which is further discussed below.
As more fully described in our 2021 Form 10-K, we measure expected credit losses over the life of each loan utilizing a combination of models which measure probability of default and loss given default, among other things. The measurement of expected credit losses is impacted by loan/borrower attributes and certain macroeconomic variables. Models are adjusted to reflect current impact of certain macroeconomic variables as well as their expected changes over a reasonable and supportable forecast period.
In estimating expected credit losses as of September 30, 2022, we utilized the Moody’s Analytics September 2022 Baseline Scenario (the “September 2022 Baseline Scenario”) to forecast the macroeconomic variables used in our models. The September 2022 Baseline Scenario was based on the review of a variety of surveys of baseline forecasts of the U.S. economy. The September 2022 Baseline Scenario projections included, among other things, (i) U.S. Nominal Gross Domestic Product annualized quarterly growth rate of 4.2% in the fourth quarter of 2022 followed by average annualized quarterly growth rates of 4.7% in 2023 and 4.9% through the end of the forecast period in the third quarter of 2024; (ii) average U.S. unemployment rate of 3.7% in the fourth quarter of 2022 followed by average annualized quarterly rates of 3.9% in 2023 and 4.0% through the end of the forecast period in the third quarter of 2024; (iii) average Texas unemployment rate of 4.2% in the fourth quarter of 2022 followed by average annualized quarterly rates of 4.1% in 2023 and 3.9% through the end of the forecast period in the third quarter of 2024; (iv) projected average 10 year Treasury rate of 3.1% in the fourth quarter of 2022, and increasing to 3.5% by the end of the forecast period in the third quarter of 2024.
In estimating expected credit losses as of December 31, 2021, we utilized the Moody’s Analytics December 2021 Consensus Scenario (the “December 2021 Consensus Scenario”) to forecast the macroeconomic variables used in our models. The December 2021 Consensus Scenario was based on the review of a variety of surveys of baseline forecasts of the U.S. economy. The December 2021 Consensus Scenario projections included, among other things, (i) U.S. Nominal Gross Domestic Product annualized quarterly growth rate of 6.4% in the first quarter of 2022, followed by annualized quarterly growth rates in the range of 3.8% to 5.4% during the remainder of 2022 and an average annualized growth rate of 4.8% through the end of the forecast period in the fourth quarter of 2023; (ii) U.S. unemployment rate of 4.3% in the first quarter of 2022 improving to 3.7% by the end of the forecast period in the fourth quarter of 2023 with Texas unemployment rates slightly higher at those dates; and (iii) projected average 10 year Treasury rate of 1.59% in the first quarter of 2022, increasing to average projected rates of 1.75% during the remainder of 2022 and 2.10% in 2023.
The overall loan portfolio, excluding PPP loans which are fully guaranteed by the SBA, as of September 30, 2022 increased $992.1 million, or 6.2%, compared to December 31, 2021. This increase included a $654.7 million, or 8.6%, increase in commercial real estate loans; a $304.9 million, or 21.6%, increase in consumer real estate loans; a $166.9 million, or 3.1%, increase in commercial and industrial loans; and a $25.2 million, or 5.3%, increase in consumer and other loans partly offset by a $159.7 million, or 14.8%, decrease in energy loans.
The weighted average risk grade for commercial and industrial loans increased to 6.41 at September 30, 2022 compared to 6.22 at December 31, 2021. This increase was primarily due to an increase in the weighted-average risk grade of pass-grade commercial and industrial loans to 6.25 at September 30, 2022 from 6.01 at December 31, 2021. Commercial and industrial loans graded “watch” and “special mention” (risk grades 9 and 10) decreased $9.3 million during the first nine months of 2022 while classified commercial and industrial loans decreased $16.8 million. Classified loans consist of loans having a risk grade of 11, 12 or 13. The weighted-average risk grade for energy loans decreased to 5.86 at September 30, 2022 from 6.06 at December 31, 2021. The decrease in the weighted average risk grade was partly related to a $24.0 million decrease in energy loans graded “watch” and “special mention” (risk grades 9 and 10). Additionally, pass grade energy loans decreased $134.0 million and the weighted-average risk grade of pass grade energy loans decreased from 5.78 at December 31, 2021 to 5.61 at September 30, 2022. The weighted average risk grade for commercial real estate loans decreased to 7.11 at September 30, 2022 from 7.19 at December 31, 2021. Pass grade commercial real estate loans increased $742.4 million while the weighted-average risk grade of such loans decreased from 6.92 at December 31, 2021 to 6.90 September 30, 2022. Commercial real estate loans graded as “watch” and “special mention” decreased $85.8 million and classified commercial real estate loans decreased $1.9 million.
As noted above, our credit loss models utilized the economic forecasts in the Moody's September 2022 Baseline Scenario for our estimated expected credit losses as of September 30, 2022 and the Moody's December 2021 Consensus Scenario for our estimate of expected credit losses as of December 31, 2021. We qualitatively adjusted the model results based on these scenarios for various risk factors that are not considered within our modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools. These qualitative factor, or Q-Factor, adjustments are discussed below.
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Q-Factor adjustments are based upon management's judgment and current assessment as to the impact of risks related to changes in lending policies and procedures; economic and business conditions; loan portfolio attributes and credit concentrations; and external factors, among other things, that are not already captured within the modeling inputs, assumptions and other processes. Management assesses the potential impact of such items within a range of severely negative impact to positive impact and adjusts the modeled expected credit loss by an aggregate adjustment percentage based upon the assessment. As a result of this assessment as of September 30, 2022, modeled expected credit losses were adjusted upwards by a weighted-average Q-Factor adjustment of approximately 2.6%, resulting in a $2.6 million total adjustment, compared to 2.3% at December 31, 2021, which resulted in a $1.8 million total adjustment. The weighted-average Q-Factor adjustment at September 30, 2022 was based on a limited negative expected impact on our commercial and industrial and commercial real estate loan portfolios related to changes in loan portfolio concentrations; a limited negative expected impact on all of our loan portfolios related to changes in the volumes and severity of loan delinquencies, changes in risk grades and adverse classifications; a limited negative expected impact on our commercial and consumer real estate portfolios related to the potential deterioration of collateral values (no expected impact related to our commercial and industrial and consumer portfolios); a negative expected impact associated with national, regional and local economic and business conditions and developments that affect the collectability of loans; a severely negative expected impact from other risk factors associated with our commercial real estate construction and land loan portfolios, particularly the risks related to expected extensions; and limited negative impact to our commercial real estate construction, non-owner occupied and 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.
We have also provided additional qualitative adjustments, or management overlays, as of September 30, 2022 as management believes there are still significant risks impacting certain categories of our loan portfolio. Q-Factor and other qualitative adjustments as of September 30, 2022 are detailed in the table below.
Q-Factor AdjustmentModel OverlaysOffice Building OverlaysDown-Side Scenario OverlayCredit Concentration OverlaysConsumer OverlayTotal
Commercial and industrial$1,152 $— $— $33,344 $5,435 $— $39,931 
Energy173 — — — 4,346 — 4,519 
Commercial real estate:
Owner occupied445 18,992 — — 1,635 — 21,072 
Non-owner occupied80 10,672 23,590 — 586 — 34,928 
Construction587 11,202 5,710 — 808 — 18,307 
Consumer real estate156 — — — — — 156 
Consumer and other33 — — — — 2,500 2,533 
Total$2,626 $40,866 $29,300 $33,344 $12,810 $2,500 $121,446 
Model overlays are qualitative adjustments to address the effect of unusually large positive changes in certain economic variables used by our commercial real estate credit loss models. These adjustments are determined based upon minimum reserve ratios for our commercial real estate - owner occupied, commercial real estate - non-owner occupied and commercial real estate - construction loan portfolios.
Office building overlays are qualitative adjustments to address longer-term concerns over the utilization of commercial office space which could impact the long-term performance of some types of office properties within our commercial real estate loan portfolio. These adjustments are determined based upon minimum reserve ratios for loans within our commercial real estate - non-owner occupied and commercial real estate - construction loan portfolios that have risk grades of 8 or worse.
The down-side scenario overlay is a qualitative adjustment for our commercial and industrial loan portfolio to address the significant risk of economic recession as a result of inflation; 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 between Russia and Ukraine, terrorism or other geopolitical events. Factors such as these are outside of our control but nonetheless affect customer income levels and could alter anticipated customer behavior, including borrowing, repayment, investment and deposit practices. To determine this qualitative adjustment, we use an alternative, more pessimistic economic scenario to forecast the macroeconomic variables used in our models. As of September 30, 2022, we used the Moody’s Analytics August 2022 S3 Alternative Scenario Downside - 90th Percentile (the “August 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.
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Credit concentration overlays are qualitative adjustments based upon statistical analysis to address relationship exposure concentrations within our loan portfolio. Variations in loan portfolio concentrations over time cause expected credit losses within our existing portfolio to differ from historical loss experience. Given that the allowance for credit losses on loans reflects expected credit losses within our loan portfolio and the fact that these expected credit losses are uncertain as to nature, timing and amount, management believes that segments with higher concentration risk are more likely to experience a high loss event. Due to the fact that a significant portion of our loan portfolio is concentrated in large credit relationships and because of large, concentrated credit losses in recent years, management made the qualitative adjustments detailed in the table above to address the risk associated with such a relationship deteriorating to a loss event.
The consumer overlay is a qualitative adjustment for our consumer and other loan portfolio to address the risk associated with the level of unsecured loans within this portfolio and other risk factors. Unsecured consumer loans have an elevated risk of loss in times of economic stress as these loans lack a secondary source of repayment in the form of hard collateral. This adjustment was determined by analyzing our consumer loan charge-off trends as well as those of the general banking industry. Management deemed it appropriate to consider an additional overlay to the modeled forecasted losses for the unsecured consumer portfolio.
As of December 31, 2021, we provided qualitative adjustments, as detailed in the table below. Further information regarding these qualitative adjustments is provided in our 2021 Form 10-K.
Q-Factor AdjustmentModel OverlaysOffice Building OverlaysSmall Business OverlayCOVID-19 Related OverlaysCredit Concentration OverlaysConsumer OverlayTotal
Commercial and industrial$939 $— $— $3,956 $4,715 $4,999 $— $14,609 
Energy127 — — — — 5,247 — 5,374 
Commercial real estate:
Owner occupied198 31,806 — — 7,397 1,320 — 40,721 
Non-owner occupied45 7,762 27,860 — 30,940 731 — 67,338 
Construction383 11,212 5,544 — 2,151 511 — 19,801 
Consumer real estate65 — — — — — — 65 
Consumer and other8 — — — — — 1,432 1,440 
Total$1,765 $50,780 $33,404 $3,956 $45,203 $12,808 $1,432 $149,348 

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Additional information related to credit loss expense and net (charge-offs) recoveries is presented in the tables below. Also see Note 3 - Loans in the accompanying notes to consolidated financial statements included elsewhere in this report.
Credit Loss Expense (Benefit)Net
(Charge-Offs)
Recoveries		Average
Loans 		Ratio of Annualized Net (Charge-Offs)
Recoveries to Average Loans
Three months ended:
September 30, 2022
Commercial and industrial$10,844 $716 $5,501,675 0.05 %
Energy2,491 93 971,418 0.04 
Paycheck Protection Program— — 70,896 — 
Commercial real estate(16,522)23 8,147,431 — 
Consumer real estate940 241 1,630,568 0.06 
Consumer and other(216)(3,927)500,945 (3.11)
Total$(2,463)$(2,854)$16,822,933 (0.07)
Excluding PPP loans$(2,463)$(2,854)$16,752,037 (0.07)
September 30, 2021
Commercial and industrial$(1,020)$(485)$4,823,302 (0.04)%
Energy(7,720)159 968,044 0.07 
Paycheck Protection Program— — 1,364,945 — 
Commercial real estate4,007 54 7,194,723 — 
Consumer real estate(982)857 1,353,830 0.25 
Consumer and other2,692 (2,700)484,490 (2.21)
Total$(3,023)$(2,115)$16,189,334 (0.05)
Excluding PPP loans$(3,023)$(2,115)$14,824,389 (0.06)
Nine months ended:
September 30, 2022
Commercial and industrial$29,347 $(2,608)$5,495,705 (0.06)%
Energy874 760 1,021,927 0.10 
Paycheck Protection Program— — 171,591 — 
Commercial real estate(44,363)34 7,932,491 — 
Consumer real estate1,497 (47)1,516,912 — 
Consumer and other10,250 (10,095)490,933 (2.75)
Total$(2,395)$(11,956)$16,629,559 (0.10)
Excluding PPP loans$(2,395)$(11,956)$16,457,968 (0.10)
September 30, 2021
Commercial and industrial$(8,886)$(1,191)$4,778,049 (0.03)%
Energy(19,048)(56)1,051,471 (0.01)
Paycheck Protection Program— — 2,276,087 — 
Commercial real estate16,583 579 7,116,541 0.01 
Consumer real estate(3,093)1,196 1,339,487 0.12 
Consumer and other7,042 (6,153)472,770 (1.74)
Total$(7,402)$(5,625)$17,034,405 (0.04)
Excluding PPP loans$(7,402)$(5,625)$14,758,318 (0.05)
We recorded a net credit loss benefit related to loans totaling $2.4 million for the nine months ended September 30, 2022 while we recorded a net credit loss benefit totaling $7.4 million during the same period in 2021. Net credit loss expense/benefit for each portfolio segment reflects the amount needed to adjust the allowance for credit losses allocated to that segment to the level of expected credit losses determined under our allowance methodology after net charge-offs have been recognized.
The net credit loss benefit related to loans during the first nine months of 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 ratio of the
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allowance for credit losses on loans to total loans was 1.38% (1.39% excluding PPP loans) at September 30, 2022 compared to 1.52% (1.56% excluding PPP loans) at December 31, 2021. Management believes the recorded amount of the allowance for credit losses on loans is appropriate based upon management’s best estimate of current expected credit losses within the existing portfolio of loans. Should any of the factors considered by management in making this estimate change, our estimate of current expected credit losses could also change, which could affect the level of future credit loss expense related to loans.
Allowance for Credit Losses - Off-Balance-Sheet Credit Exposures. The allowance for credit losses on off-balance-sheet credit exposures totaled approximately $52.7 million and $50.3 million at September 30, 2022 and December 31, 2021, respectively. The level of the allowance for credit losses on off-balance-sheet credit exposures depends upon the volume of outstanding commitments, underlying risk grades, the expected utilization of available funds and forecasted economic conditions impacting our loan portfolio. Our policies and methodology used to estimate the allowance for credit losses on off-balance-sheet credit exposures are further described in our 2021 Form 10-K. We recognized a net credit loss expense related to off-balance-sheet credit exposures totaling $2.4 million during the nine months ended September 30, 2022 compared to a net credit loss expense of $7.5 million during the same period in 2021.
Capital and Liquidity
Capital. Shareholders’ equity totaled $2.8 billion and $4.4 billion at September 30, 2022 and December 31, 2021, respectively. The decrease was primarily related to the accumulated other comprehensive income/loss component of shareholders’ equity which decreased to a net, after-tax, unrealized loss of $1.5 billion at September 30, 2022 from a net, after-tax unrealized gain of $347.3 million at December 31, 2021. The change was primarily due to a $1.9 billion net, after-tax, decrease in the fair value of securities available for sale. Other uses of capital during the nine months ended September 30, 2022 included $158.3 million of dividends paid on preferred and common stock and $996 thousand of treasury stock purchases. Sources of capital during the nine months ended September 30, 2022 included net income of $388.0 million, $11.8 million in proceeds from stock option exercises and $8.7 million related to stock-based compensation.
Under the Basel III Capital Rules, we have elected to opt-out of the requirement to include most components of accumulated other comprehensive income in regulatory capital. Accordingly, amounts reported as accumulated other comprehensive income/loss do not increase or reduce regulatory capital and are not included in the calculation of our regulatory capital ratios. In connection with the adoption of ASC 326 on January 1, 2020, we also elected to exclude, for a transitional period, the effects of credit loss accounting under CECL in the calculation of our regulatory capital and regulatory capital ratios. Regulatory agencies for banks and bank holding companies utilize capital guidelines designed to measure capital and take into consideration the risk inherent in both on-balance-sheet and off-balance-sheet items. See Note 7 - Capital and Regulatory Matters in the accompanying notes to consolidated financial statements included elsewhere in this report.
We paid a quarterly dividend of $0.75, $0.75 and $0.87 per common share during the first, second and third quarters of 2022, respectively, and a quarterly dividend of $0.72, $0.72 and $0.75 per common share during the first, second and third quarters of 2021, respectively. These dividend amounts equate to a common stock dividend payout ratio of 40.0% and 41.7% during the first nine months of 2022 and 2021, respectively. Our ability to declare or pay dividends on, or purchase, redeem or otherwise acquire, shares of our capital stock may be impacted by certain restrictions described in Note 7 - Capital and Regulatory Matters in the accompanying notes to consolidated financial statements included elsewhere in this report.
Stock Repurchase Plans. From time to time, our board of directors has authorized stock repurchase plans. In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders. Shares purchased under such plans also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards. On January 26, 2022 our board of directors authorized a $100.0 million stock repurchase program, allowing us to repurchase shares of our common stock over a one-year period from time to time at various prices in the open market or through private transactions. No shares have been repurchased under this plan or under a prior plan during the reported periods. See Note 7 - Capital and Regulatory Matters in the accompanying notes to consolidated financial statements and Part II, Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds, each included elsewhere in this report.
In August 2022, the Inflation Reduction Act of 2022 (the “IRA”) was enacted. Among other things, the IRA imposes a new 1% excise tax on the fair market value of stock repurchased after December 31, 2022 by publicly traded U.S. corporations. With certain exceptions, the value of stock repurchased is determined net of stock issued in the year, including pursuant to compensatory arrangements.

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Liquidity. As more fully discussed in our 2021 Form 10-K, our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. Liquidity risk management is an important element in our asset/liability management process. We regularly model liquidity stress scenarios to assess potential liquidity outflows or funding problems resulting from economic disruptions, volatility in the financial markets, unexpected credit events or other significant occurrences deemed problematic by management. These scenarios are incorporated into our contingency funding plan, which provides the basis for the identification of our liquidity needs. Our principal source of funding has been our customer deposits, supplemented by our short-term and long-term borrowings as well as maturities of securities and loan amortization. As of September 30, 2022, we had approximately $12.8 billion held in an interest-bearing account at the Federal Reserve. We also have the ability to borrow funds as a member of the Federal Home Loan Bank (“FHLB”). As of September 30, 2022, based upon available, pledgeable collateral, our total borrowing capacity with the FHLB was approximately $3.4 billion. Furthermore, at September 30, 2022, we had approximately $14.4 billion in securities that were unencumbered by a pledge and could be used to support additional borrowings through repurchase agreements or the Federal Reserve discount window, as needed.
Since Cullen/Frost is a holding company and does not conduct operations, its primary sources of liquidity are dividends upstreamed from Frost Bank and borrowings from outside sources. Banking regulations may limit the amount of dividends that may be paid by Frost Bank. See Note 7 - Capital and Regulatory Matters in the accompanying notes to consolidated financial statements included elsewhere in this report regarding such dividends. At September 30, 2022, Cullen/Frost had liquid assets, including cash and resell agreements, totaling $381.5 million.
Accounting Standards Updates
See Note 17 - Accounting Standards Updates in the accompanying notes to consolidated financial statements included elsewhere in this report for details of recently issued accounting pronouncements and their expected impact on our financial statements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The disclosures set forth in this item are qualified by the section captioned “Forward-Looking Statements and Factors that Could Affect Future Results” included in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report and other cautionary statements set forth elsewhere in this report.
Refer to the discussion of market risks included in Item 7A. Quantitative and Qualitative Disclosures About Market Risk in the 2021 Form 10-K. There has been no significant change in the types of market risks we face since December 31, 2021.
We utilize an earnings simulation model as the primary quantitative tool in measuring the amount of interest rate risk associated with changing market rates. The model quantifies the effects of various interest rate scenarios on projected net interest income and net income over the next 12 months. The model measures the impact on net interest income relative to a flat-rate case scenario of hypothetical fluctuations in interest rates over the next 12 months. These simulations incorporate assumptions regarding balance sheet growth and mix, pricing and the repricing and maturity characteristics of the existing and projected balance sheet. The impact of interest rate derivatives, such as interest rate swaps, caps and floors, is also included in the model. Other interest rate-related risks such as prepayment, basis and option risk are also considered.
For modeling purposes, as of September 30, 2022, the model simulations projected that 100 and 200 basis point ratable increases in interest rates would result in positive variances in net interest income of 1.0% and 3.0%, respectively, relative to the flat-rate case over the next 12 months, while 100 and 200 basis point ratable decreases in interest rates would result in a negative variances in net interest income of 1.6% and 5.6%, respectively, relative to the flat-rate case over the next 12 months. For modeling purposes, as of December 31, 2021, the model simulations projected that 100 and 200 basis point ratable increases in interest rates would result in positive variances in net interest income of 2.8% and 7.1%, respectively, relative to the flat-rate case over the next 12 months, while a 25 basis point ratable decrease in interest rates would result in a negative variance in net interest income of 3.0% relative to the flat-rate case over the next 12 months. The likelihood of a decrease in interest rates beyond 25 basis points as of December 31, 2021 was considered remote given prevailing interest rate levels.
We do not currently pay interest on a significant portion of our commercial demand deposits. Any interest rate that would ultimately be paid on these commercial demand deposits would likely depend upon a variety of factors, some of which are beyond our control. Our September 30, 2022 model simulations do not assume any payment of interest on commercial demand deposits (those not already receiving an earnings credit) while our modeling simulations as of December 31, 2021 assumed we would make interest payments on commercial demand deposits (those not already receiving an earnings credit) with such payments assumed to begin in the first quarter of 2022. This pricing structure on commercial demand deposits assumed a deposit pricing beta of 25%. The pricing beta is a measure of how much deposit rates reprice, up or down, given a defined change in market rates. As of September 30, 2022, management believes, based on our experience during the last interest rate cycle, that it is less likely we will pay interest on these deposits as rates increase.
The model simulations as of September 30, 2022 indicate that our projected balance sheet is less asset sensitive in comparison to our balance sheet as of December 31, 2021. The decreased asset sensitivity was partly due to a decrease in the relative proportion of interest-bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) and federal funds sold to projected average interest-earning assets combined with an increase in the relative proportion of fixed-rate taxable securities to projected average interest-earning assets. Interest-bearing deposits and federal funds sold are more immediately impacted by changes in interest rates in comparison to our other categories of earning assets.
As of September 30, 2022, the effects of a 200 basis point increase and a 200 basis point decrease in interest rates on our derivative holdings would not result in a significant variance in our net interest income.
The effects of hypothetical fluctuations in interest rates on our securities classified as “trading” under ASC Topic 320, “Investments—Debt and Equity Securities,” are not significant, and, as such, separate quantitative disclosure is not presented.
Item 4. Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out by management, with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report. No change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the last fiscal quarter that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Part II. Other Information
Item 1. Legal Proceedings
We are subject to various claims and legal actions that have arisen in the course of conducting business. Management does not expect the ultimate disposition of these matters to have a material adverse impact on our financial statements.
Item 1A. Risk Factors
There has been no material change in the risk factors disclosed under Item 1A. of our 2021 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to purchases we made or were made on our behalf or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of our common stock during the three months ended September 30, 2022. Dollar amounts in thousands.
PeriodTotal Number of
Shares Purchased		Average Price
Paid Per Share		Total Number of
Shares Purchased
as Part of Publicly
Announced Plan		Maximum
Number of Shares
(or Approximate
Dollar Value)
That May Yet Be
Purchased Under
the Plan at the
End of the Period
July 1, 2022 to July 31, 2022— $— — $100,000 
August 1, 2022 to August 31, 2022— — — 100,000 
September 1, 2022 to September 30, 2022— — — 100,000 
Total— — 
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
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Item 6. Exhibits
(a) Exhibits
Exhibit
Number		Description
31.1
31.2
32.1(1)
32.2(1)
101.INS(2)
Inline XBRL Instance Document
101.SCHInline XBRL Taxonomy Extension Schema Document
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document
101.LABInlineXBRL Taxonomy Extension Label Linkbase Document
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document
104(3)
Cover Page Interactive Data File
    
(1)This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
(2)The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.
(3)Formatted as Inline XBRL and contained within the Inline XBRL Instance Document in Exhibit 101.

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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Cullen/Frost Bankers, Inc.
(Registrant)
Date:October 27, 2022By:/s/ Jerry Salinas
Jerry Salinas
Group Executive Vice President
and Chief Financial Officer
(Duly Authorized Officer, Principal Financial
Officer and Principal Accounting Officer)
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