CULLEN/FROST BANKERS, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)

Forward-Looking Statements and Factors that Could Affect Future Results
Certain statements contained in this Annual Report on Form 10-K that are not
statements of historical fact constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"),
including statements regarding the potential effects of the ongoing COVID-19
pandemic on our business, financial condition, liquidity and results of
operations, notwithstanding that such statements are not specifically identified
as such. In addition, certain statements may be contained in our future filings
with the SEC, in press releases, and in oral and written statements made by us
or with our approval that are not statements of historical fact and constitute
forward-looking statements within the meaning of the Act. Examples of
forward-looking statements include, but are not limited to: (i) projections of
revenues, expenses, income or loss, earnings or loss per share, the payment or
nonpayment of dividends, capital structure and other financial items;
(ii) statements of plans, objectives and expectations of Cullen/Frost or its
management or Board of Directors, including those relating to products, services
or operations; (iii) statements of future economic performance; and
(iv) statements of assumptions underlying such statements. Words such as
"believes", "anticipates", "expects", "intends", "targeted", "continue",
"remain", "will", "should", "may" and other similar expressions are intended to
identify forward-looking statements but are not the exclusive means of
identifying such statements.
Forward-looking statements involve risks and uncertainties that may cause actual
results to differ materially from those in such statements. Factors that could
cause actual results to differ from those discussed in the forward-looking
statements include, but are not limited to:
•Local, regional, national and international economic conditions and the impact
they may have on us and our customers and our assessment of that impact.
•Volatility and disruption in national and international financial and commodity
markets.
•Government intervention in the U.S. financial system.
•Changes in the mix of loan geographies, sectors and types or the level of
non-performing assets and charge-offs.
•Changes in estimates of future reserve requirements based upon the periodic
review thereof under relevant regulatory and accounting requirements.
•The effects of and changes in trade and monetary and fiscal policies and laws,
including the interest rate policies of the Federal Reserve Board.
•Inflation, interest rate, securities market and monetary fluctuations.
•The effect of changes in laws and regulations (including laws and regulations
concerning taxes, banking, securities and insurance) and their application with
which we and our subsidiaries must comply.
•The soundness of other financial institutions.
•Political instability.
•Impairment of our goodwill or other intangible assets.
•Acts of God or of war or terrorism.
•The potential impact of climate change.
•The timely development and acceptance of new products and services and
perceived overall value of these products and services by users.
•Changes in consumer spending, borrowings and savings habits.
•Changes in the financial performance and/or condition of our borrowers.
•Technological changes.
•The cost and effects of cyber incidents or other failures, interruptions or
security breaches of our systems or those of our customers or third-party
providers.
•Acquisitions and integration of acquired businesses.
•Our ability to increase market share and control expenses.
•Our ability to attract and retain qualified employees.
•Changes in the competitive environment in our markets and among banking
organizations and other financial service providers.
•The effect of changes in accounting policies and practices, as may be adopted
by the regulatory agencies, as well as the Public Company Accounting Oversight
Board, the Financial Accounting Standards Board and other accounting standard
setters.
•Changes in the reliability of our vendors, internal control systems or
information systems.
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•Changes in our liquidity position.
•Changes in our organization, compensation and benefit plans.
•The impact of the ongoing COVID-19 pandemic and any other pandemic, epidemic or
health-related crisis.
•The costs and effects of legal and regulatory developments, the resolution of
legal proceedings or regulatory or other governmental inquiries, the results of
regulatory examinations or reviews and the ability to obtain required regulatory
approvals.
•Greater than expected costs or difficulties related to the integration of new
products and lines of business.
•Our success at managing the risks involved in the foregoing items.
Further, statements about the potential effects of the ongoing COVID-19 pandemic
on our business, financial condition, liquidity and results of operations may
constitute forward-looking statements and are subject to the risk that the
actual effects may differ, possibly materially, from what is reflected in those
forward-looking statements due to factors and future developments that are
uncertain, unpredictable and in many cases beyond our control, including the
scope and duration of the pandemic, actions taken by governmental authorities in
response to the pandemic, and the direct and indirect impact of the pandemic on
our customers, clients, third parties and us.
Forward-looking statements speak only as of the date on which such statements
are made. We do not undertake any obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made, or to reflect the occurrence of unanticipated events.
COVID-19 Effects, Actions and Recent Developments
Overview. During 2020 and to a lesser extent in 2021, our business has been, and
continues to be, impacted by the ongoing outbreak of COVID-19. In March 2020,
COVID-19 was declared a pandemic by the World Health Organization and a national
emergency by the President of the United States. Efforts to limit the spread of
COVID-19 have included quarantines/shelter-in-place orders, the closure or
limiting capacity of businesses, travel restrictions, supply chain limitations
and prohibitions on public gatherings, among other things, throughout many parts
of the United States and, in particular, the markets in which we operate. As the
current pandemic is ongoing and dynamic in nature, there are many uncertainties
related to COVID-19 including, among other things, its severity; the duration of
the outbreak; the impact to our customers, employees and vendors; the impact to
the financial services and banking industry; and the impact to the economy as a
whole as well as the effect of actions taken, or that may yet be taken, or
inaction by governmental authorities to contain the outbreak or to mitigate its
impact (both economic and health-related). COVID-19 has negatively affected, and
is expected to continue to negatively affect, our business, financial position
and operating results. In light of the uncertainties and continuing developments
discussed herein, the ultimate adverse impact of COVID-19 cannot be reliably
estimated at this time, but it has been and is expected to continue to be
material. The longer-term potential impact on our business could depend to a
large extent on future developments and actions taken by authorities and other
entities to contain COVID-19 and its economic impact. Furthermore, the
sustainability of the economic recovery observed in 2021 remains unclear and
significant volatility could continue for a prolonged period as the potential
exists for additional variants of COVID-19, including the recent Omicron
variant, to impede the global economic recovery and exacerbate geographic
differences in the spread of, and response to, COVID-19.
Impact on our Operations. In 2020, the State of Texas and many other
jurisdictions declared health emergencies. The resulting closures and/or limited
operations of non-essential businesses and related economic disruption impacted
our operations as well as the operations of our customers. Financial services
were identified as a Critical Infrastructure Sector by the Department of
Homeland Security. Accordingly, our business remained open and we implemented
our Business Continuity and Health Emergency Response plans to address the
issues arising as a result of COVID-19 and to facilitate the continued delivery
of essential services while maintaining a high level of safety for our customers
as well as our employees. Nonetheless, as the COVID-19 pandemic continues to be
on-going, there continues to be uncertainties related to its magnitude, duration
and persistent effects. This is particularly the case with the emergence,
contagiousness and threat of new and different strains of the virus as well as
the availability, acceptance and effectiveness of vaccines. As such, the
COVID-19 pandemic could still, among other things, greatly affect our routine
and essential operations due to staff absenteeism, particularly among key
personnel; result in limited access to or closures of our branch facilities and
other physical offices; exacerbate operational, technical or security-related
risks arising from a remote workforce; and result in adverse government or
regulatory agency orders. Additionally, we are experiencing an increasingly
competitive labor market due to an on-going labor shortage which has impacted
and could continue to impact our ability to staff open positions and/or retain
existing employees and has resulted in and could continue to result in an
increase in our staffing costs. The business and operations of our third-party
service providers, many of whom perform critical services for our business,
could also
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be significantly impacted by many of these same issues, which in turn could
impact us. As a result, we continue to be unable to fully assess or predict the
extent of the effects of COVID-19 on our operations as the ultimate impact will
depend on factors that are currently unknown and/or beyond our control.
Impact on our Financial Position and Results of Operations. Our financial
position and results of operations are particularly susceptible to the ability
of our loan customers to meet loan obligations, the availability of our
workforce, the availability of our vendors and the decline in the value of
assets held by us. While its effects continue to be on-going, during 2020 and to
a lesser extent in 2021, the COVID-19 pandemic resulted in a significant
decrease in commercial activity throughout the State of Texas as well as
nationally. This decrease in commercial activity caused and, in light of new and
different strains of the virus, may yet further cause our customers (including
affected businesses and individuals), vendors and counterparties to be unable to
meet existing payment or other obligations to us. The national public health
crisis arising from the COVID-19 pandemic (and public expectations about it),
combined with other factors, including, but not limited to, inflation, labor
shortages, supply chain disruption and further oil price volatility, could,
despite improvements in 2021, again destabilize the financial markets and
geographies in which we operate. The resulting economic pressure on consumers
and uncertainty regarding the sustainability of any economic improvements could
further impact the creditworthiness of potential and current borrowers. Borrower
loan defaults that adversely affect our earnings correlate with deteriorating
economic conditions, which, in turn, are likely to impact our borrowers'
creditworthiness and our ability to make loans. See further information related
to the risk exposure of our loan portfolio under the sections captioned "Loans"
and "Allowance for Credit Losses" elsewhere in this discussion.
In addition, the economic pressures and uncertainties arising from the COVID-19
pandemic have resulted in and may continue to result in specific changes in
consumer and business spending and borrowing and saving habits, affecting the
demand for loans and other products and services we offer. Consumers affected by
COVID-19 may continue to demonstrate changed behavior even after the crisis is
over. For example, consumers may decrease discretionary spending on a permanent
or long-term basis and certain industries may take longer to recover
(particularly those that rely on travel or large gatherings) as consumers may be
hesitant to return to full social interaction. We lend to customers operating in
such industries including energy, hotels/lodging, restaurants, entertainment and
commercial real estate, among others, that have been significantly impacted by
COVID-19 and we are continuing to monitor these customers closely. Additionally,
the temporary closures of bank branches in 2020 and the safety precautions
implemented at re-opened branches could result in consumers becoming more
comfortable with technology and devaluing face-to-face interaction. Our business
is relationship driven and such changes could necessitate changes to our
business practices to accommodate changing consumer behaviors.
Legislative and Regulatory Actions. Actions taken by the federal government and
the Federal Reserve and other bank regulatory agencies to mitigate the economic
effects of COVID-19 have impacted our financial position and results of
operations. These actions are further discussed below.
During 2020, in an effort to provide monetary stimulus to counteract the
economic disruption caused by COVID-19, the Federal Reserve:
•Expanded reverse repo operations, adding liquidity to the banking system.
•Restarted quantitative easing.
•Lowered the interest rate at the discount window by 1.5% to 0.25%.
•Reduced reserve requirement ratios to zero percent.
•Encouraged banks to use their capital and liquidity buffers to lend.
•Introduced and expanded several new temporary programs to help preserve market
liquidity.
In 2020, the U.S. government enacted certain fiscal stimulus measures in several
phases to counteract the economic disruption caused by the COVID-19. The Phase 1
legislation, the Coronavirus Preparedness and Response Supplemental
Appropriations Act, was enacted on March 6, 2020 and, among other things,
authorized funding for research and development of vaccines and allocated money
to state and local governments to aid containment and response measures. The
Phase 2 legislation, the Families First Coronavirus Response Act, was enacted on
March 18, 2020 and provided for paid sick/medical leave, established no-cost
coverage for coronavirus testing, expanded unemployment benefits, expanded food
assistance, and provided additional funding to states for the ongoing economic
consequences of the pandemic, among other provisions. The Phase 3 legislation,
the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), was
enacted on March 27, 2020. Among other provisions, the CARES Act (i) authorized
the Secretary of the Treasury to make loans, loan guarantees and other
investments,
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up to $500 billion, for assistance to eligible businesses, States and
municipalities with limited, targeted relief for passenger air carriers, cargo
air carriers, and businesses critical to maintaining national security,
(ii) created a $349 billion loan program called the Paycheck Protection Program
(the "PPP") for loans to small businesses for, among other things, payroll,
group health care benefit costs and qualifying mortgage, rent and utility
payments, (iii) provided certain credits against the 2020 personal income tax
for eligible individuals and their dependents, (iv) expanded eligibility for
unemployment insurance and provides eligible recipients with an additional $600
per week on top of the unemployment amount determined by each State and
(v) expanded tele-health services in Medicare. The Phase 3.5 legislation, the
Paycheck Protection Program and Healthcare Enhancement Act of 2020 (the "PPPHE
Act"), was enacted on April 24, 2020. Among other things, the PPPHE Act provided
an additional $310 billion of funding for the PPP. The Paycheck Protection
Program Flexibility Act of 2020" (the "PPPF Act") was enacted in June 2020 to
modify certain provisions of the PPP including, among other things, establishing
a minimum maturity of five years for all loans made after the enactment of the
PPPF Act and permitted an extension of the maturity of existing loans to five
years if the borrower and lender agree.
In December 2020, the Bipartisan-Bicameral Omnibus COVID Relief Deal, included
as a component of appropriations legislation, was enacted to provide economic
stimulus to individuals and businesses in further response to the economic
distress caused by the COVID-19 pandemic. Among other things, the legislation
(i) authorized payments of $600 for individuals making up to $75,000 per year,
(ii) extended the timeframe for enhanced unemployment benefits and
(iii) authorized approximately $325 billion for small business relief, including
approximately $284 billion for a second round of PPP loans and a new simplified
forgiveness procedure for PPP loans of $150,000 or less.
During the first quarter of 2021, President Biden signed a number of executive
orders relating to stimulus and relief measures. These orders included, among
other things, (i) an extension, through March 31, 2021, of the moratorium on
evictions and foreclosures, (ii) an extension, through September 30, 2021, of
the deferral of federal student loan payments and interest and (iii) an
extension, through June 30, 2021, of certain mortgage forbearance programs and
guidelines.
On March 11 2021, the American Rescue Plan Act of 2021 (the "ARP Act") was
enacted, implementing a $1.9 trillion package of stimulus and relief proposals.
Among other things, the ARP Act provided (i) additional funding for the PPP
program and an expansion of the program for the benefit of certain nonprofits,
(ii) funding for the Small Business Administration ("SBA") to make targeted
grants for restaurants and similar establishments, (iii) direct cash payments of
up to $1,400 to individuals, subject to income provisions, (iv) an increase in
the maximum annual Child Tax Credit, subject to income limitation provisions,
(v) $300 a week in expanded unemployment insurance lasting through September 6,
2021 and made $10,200 in unemployment benefits tax free for households, subject
to income limitation provisions, (vi) tax relief making any student loan
forgiveness incurred between December 31, 2020, and January 1, 2026 non-taxable
income, and (vii) funding to support state and local governments; K-12 schools
and higher education; the Centers for Disease Control; public transit; rental
assistance; child care; and airline industry workers.
On March 27, 2021, the COVID-19 Bankruptcy Relief Extension Act of 2021 was
enacted, extending the bankruptcy relief provisions enacted in the CARES Act of
2020 bill until March 27, 2022. These provisions provide financially distressed
small businesses and individuals greater access to bankruptcy relief. We are
continuing to monitor the potential development of additional legislation and
further actions taken by the U.S. government.
The above mentioned significant fiscal stimulus and monetary policy actions of
the U.S. government and Federal Reserve have been contributing factors to an
inflationary surge during most of 2021. As a result, in December 2021, the
Federal Reserve released projections related to the target range for the federal
funds rate that imply, while there can be no such assurance that any increases
in the federal funds rate will occur, three 25 basis point increases in the
federal funds rate in 2022, followed by three in 2023 and two in 2024 as further
discussed in the section captioned "Net Interest Income" elsewhere in this
discussion.
Banks and bank holding companies have been particularly impacted by the COVID-19
pandemic as a result of disruption and volatility in the global capital markets.
We are closely monitoring the potential for new laws and regulations impacting
lending and funding practices as well as capital and liquidity standards. Such
changes could require us to maintain significantly more capital, with common
equity as a more predominant component, or manage the composition of our assets
and liabilities to comply with formulaic liquidity requirements.
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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. As discussed in Note 1 - Summary of
Significant Accounting Policies, our policies related to allowances for credit
losses changed on January 1, 2020 in connection with the adoption of a new
accounting standard update as codified in Accounting Standards Codification
("ASC") Topic 326 ("ASC 326") Financial Instruments - Credit Losses. In the case
of loans, the allowance for credit losses is a contra-asset valuation account,
calculated in accordance with ASC 326, that is deducted from the amortized cost
basis of loans to present the net amount expected to be collected.
In the case of off-balance-sheet credit exposures, the allowance for credit
losses is a liability account, calculated in accordance with ASC 326, reported
as a component of accrued interest payable and other liabilities in our
consolidated balance sheets. The amount of each allowance account represents
management's best estimate of current expected credit losses on these financial
instruments considering available information, from internal and external
sources, relevant to assessing exposure to credit loss over the contractual term
of the instrument. Relevant available information includes historical credit
loss experience, current conditions and reasonable and supportable forecasts.
While historical credit loss experience provides the basis for the estimation of
expected credit losses, adjustments to historical loss information may be made
for differences in current portfolio-specific risk characteristics,
environmental conditions or other relevant factors. While management utilizes
its best judgment and information available, the ultimate adequacy of our
allowance accounts is dependent upon a variety of factors beyond our control,
including the performance of our portfolios, the economy, changes in interest
rates and the view of the regulatory authorities toward classification of
assets. See the section captioned "Allowance for Credit Losses" elsewhere in
this discussion as well as Note 1 - Summary of Significant Accounting Policies
and Note 3 - Loans in the notes to consolidated financial statements included in
Item 8. Financial Statements and Supplementary Data elsewhere in this report for
further details of the risk factors considered by management in estimating the
necessary level of the allowance for credit losses.
Overview
The following discussion and analysis presents the more significant factors that
affected our financial condition as of December 31, 2021 and 2020 and results of
operations for each of the years then ended. Refer to Management's Discussion
and Analysis of Financial Condition and Results of Operations included in our
Annual Report on Form 10-K filed with the SEC on February 5, 2021 (the
"  20    20     Form 10-K  ") for a discussion and analysis of the more
significant factors that affected periods prior to 2020.
Certain reclassifications have been made to make prior periods comparable. This
discussion and analysis should be read in conjunction with our consolidated
financial statements, notes thereto and other financial information appearing
elsewhere in this report. From time to time, we have acquired various small
businesses through our insurance subsidiary. None of these acquisitions had a
significant impact on our financial statements. We account for acquisitions
using the acquisition method, and as such, the results of operations of acquired
companies are included from the date of acquisition.
Taxable-equivalent adjustments are the result of increasing income from tax-free
loans and investments by an amount equal to the taxes that would be paid if the
income were fully taxable, thus making tax-exempt yields comparable to taxable
asset yields. Taxable equivalent adjustments were based upon a 21% income tax
rate.
Dollar amounts in tables are stated in thousands, except for per share amounts.
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Results of Operations
Net income available to common shareholders totaled $435.9 million, or
$6.76 diluted per common share, in 2021 compared to $323.6 million, or
$5.10 diluted per common share, in 2020 and $435.5 million, or $6.84 diluted per
common share, in 2019.
Selected income statement data, returns on average assets and average equity and
dividends per share for the comparable periods were as follows:
                                                            2021                 2020                 2019
Taxable-equivalent net interest income                 $ 1,077,315          $ 1,070,937          $ 1,100,586
Taxable-equivalent adjustment                               92,448               94,936               96,581
Net interest income                                        984,867              976,001            1,004,005
Credit loss expense                                             63              241,230               33,759
Non-interest income                                        386,728              465,454              363,902
Non-interest expense                                       881,994              848,904              834,679
Income before income taxes                                 489,538              351,321              499,469
Income tax expense                                          46,459               20,170               55,870
Net income                                                 443,079              331,151              443,599
Preferred stock dividends                                    7,157                2,016                8,063
Redemption of preferred stock                                    -                5,514                    -
Net income available to common shareholders            $   435,922          $   323,621          $   435,536
Earnings per common share - basic                      $      6.79          $      5.11          $      6.89
Earnings per common share - diluted                           6.76                 5.10                 6.84
Dividends per common share                                    2.94                 2.85                 2.80
Return on average assets                                      0.95  %              0.85  %              1.36  %
Return on average common equity                              10.35                 8.11                12.24
Average shareholders' equity to average assets                9.48                10.64                11.54


Net income available to common shareholders increased $112.3 million for 2021
compared to 2020. The increase was primarily the result of a $241.2 million
decrease in credit loss expense and an $8.9 million increase in net interest
income partly offset by a $78.7 million decrease in non-interest income, a $33.1
million increase in non-interest expense and a $26.3 million increase in income
tax expense. Credit loss expense during 2020 was impacted by both our adoption
of a new credit loss accounting standard and the adverse events impacting our
loan portfolio, including those arising from the COVID-19 pandemic and the
significant volatility in oil prices. Non-interest income during 2020 was
impacted by a $109.0 million net gain on securities transactions during the
first quarter. Net income available to common shareholders during 2020 was also
impacted by the reclassification of $5.5 million of issuance costs associated
with our Series A preferred stock to retained earnings upon redemption of the
Series A preferred stock.
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 71.8% of total revenue
during 2021. Net interest margin is the ratio of taxable-equivalent net interest
income to average earning assets for the period. The level of interest rates and
the volume and mix of earning assets and interest-bearing liabilities impact net
interest income and net interest margin.
The Federal Reserve influences the general market rates of interest, including
the deposit and loan rates offered by many financial institutions. Our loan
portfolio is significantly affected by changes in the prime interest rate. The
prime rate began 2019 at 5.50% and decreased 50 basis points during the third
quarter of 2019 (25 basis points in each of August and September) and 25 basis
points in October 2019 to end the year at 4.75%. During 2020, the prime rate
decreased 150 basis points in March to 3.25% where it remained through
December 31, 2021. Our loan portfolio is also significantly impacted, by changes
in the London Interbank Offered Rate ("LIBOR"). At December 31, 2021, the
one-month and three-month U.S. dollar LIBOR rates were 0.10% and 0.21%,
respectively, while at December 31, 2020, the one-month and three-month U.S.
dollar LIBOR rates were 0.14% and 0.24% respectively, and at December 31, 2019,
the one-month and three-month U.S. dollar LIBOR rates were 1.76% and 1.90%
respectively. We discontinued originating LIBOR-based loans effective
December 31, 2021 and will 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 ("BSBY"), a benchmark developed by Bloomberg Index Services. For our
currently outstanding LIBOR-based loans, the timing and manner in which each
customer's contract transitions to AMERIBOR, SOFR or BSBY will vary on a
case-by-case basis. We expect to complete all transitions by the first quarter
of 2023.
The target range for the federal funds rate, which is the cost of immediately
available overnight funds, began 2019 at 2.25% to 2.50% and decreased 50 basis
points during the third quarter of 2019 (25 basis points in each of August and
September) and 25 basis points in October 2019 to end the year at 1.50% to
1.75%. During 2020, the target range for the federal funds rate decreased
150 basis points in March to zero to 0.25% where it remained through
December 31, 2021. The decrease in the target range for the federal funds rate
in March 2020 was largely an emergency measure by the Federal Reserve aimed at
blunting the economic impact of COVID-19. In December 2021, the Federal Reserve
released projections whereby the midpoint of the projected appropriate target
range for the federal funds rate would rise to 0.9% by the end of 2022, to 1.6%
by the end of 2023 and to 2.1% by the end of 2024. While there can be no such
assurance that any increases in the federal funds rate will occur, these
projections imply three 25 basis point increases in the federal funds rate in
2022, followed by three in 2023 and two in 2024.
We are primarily funded by core deposits, with non-interest-bearing demand
deposits historically being a significant source of funds. This lower-cost
funding base is expected to have a positive impact on our net interest income
and net interest margin in a rising interest rate environment. See Item 7A.
Quantitative and Qualitative Disclosures About Market Risk elsewhere in this
report for information about our sensitivity to interest rates. Further analysis
of the components of our net interest margin is presented below.

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The following table presents an analysis of net interest income and net interest
spread for the periods indicated, including average outstanding balances for
each major category of interest-earning assets and interest-bearing liabilities,
the interest earned or paid on such amounts, and the average rate earned or paid
on such assets or liabilities, respectively. The table also sets forth the net
interest margin on average total interest-earning assets for the same periods.
For these computations: (i) average balances are presented on a daily average
basis, (ii) information is shown on a taxable-equivalent basis assuming a 21%
tax rate, (iii) average loans include loans on non-accrual status, and
(iv) average securities include unrealized gains and losses on securities
available for sale, while yields are based on average amortized cost.
                                                                         2021                                                         2020                                                         2019
                                                                         Interest                                                     Interest                                                     Interest
                                                    Average              Income/              Yield              Average              Income/              Yield              Average              Income/              Yield
                                                    Balance              Expense              /Cost              Balance              Expense              /Cost              Balance              Expense              /Cost
Assets:
Interest-bearing deposits                       $ 13,530,312          $    17,878              0.13  %       $  5,302,616          $    12,893              0.24  %       $  1,616,896          $    35,590              2.20  %
Federal funds sold                                    14,836                   31              0.21                78,817                  723              0.92               233,716                5,260              2.25
Resell agreements                                      6,611                   16              0.24                20,923                  172              0.82                11,897                  264              2.22
Securities:
Taxable                                            4,606,562               89,550              1.97             4,234,318               93,569              2.27             5,048,552              117,082              2.33
Tax-exempt                                         8,268,416              314,600              4.06             8,447,036              323,928              4.08             8,248,812              325,058              4.06
Total securities                                  12,874,978              404,150              3.29            12,681,354              417,497              3.46            13,297,364              442,140              3.40
Loans, net of unearned discount                   16,769,631              679,142              4.05            17,164,453              684,686              3.99            14,440,549              747,112              5.17
Total earning assets and average rate earned      43,196,368            1,101,217              2.58            35,248,163            1,115,971              3.22            29,600,422            1,230,366              4.20
Cash and due from banks                              564,564                                                      527,875                                                      503,929
Allowance for credit losses                         (258,668)                                                    (232,596)                                                    (135,928)
Premises and equipment, net                        1,038,034                                                    1,043,789                                                      876,442
Accrued interest receivable and other assets       1,442,682                                                    1,373,969                                                    1,240,986
Total assets                                    $ 45,982,980                                                 $ 37,961,200                                                 $ 32,085,851

Liabilities:
Non-interest-bearing demand deposits              16,670,807                                                   13,563,696                                                   10,358,416
Interest-bearing deposits:
Savings and interest checking                     10,682,149                1,365              0.01             8,283,665                2,467              0.03             7,243,016               10,574              0.15
Money market deposit accounts                      9,990,626                9,462              0.09             8,457,263               15,417              0.18             7,806,175               72,626              0.93
Time accounts                                      1,129,041                3,693              0.33             1,133,648               14,134              1.25             1,005,670               16,542              1.64
Total interest-bearing deposits                   21,801,816               14,520              0.07            17,874,576               32,018              0.18            16,054,861               99,742              0.62
Total deposits                                    38,472,623                                   0.04            31,438,272                               0.10                26,413,277                                   0.38
Federal funds purchased                               32,177                   32              0.10                33,135                  100              0.30                16,732                  347              2.07
Repurchase agreements                              2,115,276                2,209              0.10             1,436,833                4,382              0.30             1,266,649               19,328              1.53
Junior subordinated deferrable interest
debentures                                           133,744                2,484              1.86               136,330                3,560              2.61               136,272                5,706              4.19
Subordinated notes                                    99,105                4,657              4.70                98,948                4,656              4.71                98,792                4,657              4.71
Federal Home Loan Bank advances                            -                    -                 -               109,290                  318              0.29                     -                    -                 -
Total interest-bearing liabilities and average
rate paid                                         24,182,118               23,902              0.10            19,689,112               45,034              0.23            17,573,306              129,780              0.74
Accrued interest payable and other liabilities       771,392                                                      669,755                                                      452,090
Total liabilities                                 41,624,317                                                   33,922,563                                                   28,383,812
Shareholders' equity                               4,358,663                                                    4,038,637                                                    3,702,039
Total liabilities and shareholders' equity      $ 45,982,980                                                 $ 37,961,200                                                 $ 32,085,851
Net interest income                                                   $ 1,077,315                                                  $ 1,070,937                                                  $ 1,100,586
Net interest spread                                                                            2.48  %                                                      2.99  %                                                      3.46  %
Net interest income to total average earning
assets                                                                                         2.53  %                                                      3.09  %                                                      3.75  %



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The following table presents the changes in taxable-equivalent net interest
income and identifies the changes due to differences in the average volume of
earning assets and interest-bearing liabilities and the changes due to changes
in the average interest rate on those assets and liabilities. The changes in net
interest income due to changes in both average volume and average interest rate
have been allocated to the average volume change or the average interest rate
change in proportion to the absolute amounts of the change in each. The
comparisons between years includes an additional change factor that shows the
effect of the difference in the number of days (due to leap year in 2020) in
each period for assets and liabilities that accrue interest based upon the
actual number of days in the period, as further discussed below.
                                                            2021 vs. 2020                                                               2020 vs. 2019
                                                                                                                            Increase (Decrease)
                                        Increase (Decrease) Due to Change in                                                 Due to Change in
                                      Rate               Volume             Days              Total              Rate               Volume             Days             Total
Interest-bearing deposits       $      (7,856)         $ 12,876          $    (35)         $  4,985          $  (51,971)         $  29,239          $    35          $ (22,697)
Federal funds sold                       (336)             (354)               (2)             (692)             (2,140)            (2,399)               2             (4,537)
Resell agreements                         (79)              (77)                -              (156)               (223)               131                -                (92)
Securities:
Taxable                               (13,040)            9,021                 -            (4,019)             (2,951)           (20,562)               -            (23,513)
Tax-exempt                             (1,618)           (7,710)                -            (9,328)              1,486             (2,616)               -             (1,130)
Loans, net of unearned
discounts                              11,000           (14,673)           (1,871)           (5,544)           (189,507)           125,210            1,871            (62,426)
Total earning assets                  (11,929)             (917)           (1,908)          (14,754)           (245,306)           129,003            1,908           (114,395)
Savings and interest checking          (1,767)              672                (7)           (1,102)             (9,444)             1,330                7             (8,107)
Money market deposit accounts          (8,389)            2,476               (42)           (5,955)            (62,866)             5,615               42            (57,209)
Time accounts                         (10,344)              (58)              (39)          (10,441)             (4,352)             1,905               39             (2,408)
Federal funds purchased                   (65)               (3)                -               (68)               (432)               185                -               (247)
Repurchase agreements                  (3,646)            1,485               (12)           (2,173)            (17,265)             2,307               12            (14,946)
Junior subordinated deferrable
interest debentures                    (1,010)              (66)                -            (1,076)             (2,148)                 2                -             (2,146)
Subordinated notes                         (8)                9                 -                 1                   -                 (1)               -                 (1)
Federal Home Loan Bank advances             -              (318)                -              (318)                  -                318                                 318
Total interest-bearing
liabilities                           (25,229)            4,197              (100)          (21,132)            (96,507)            11,661              100            (84,746)
Net change                      $      13,300          $ (5,114)         $ (1,808)         $  6,378          $ (148,799)         $ 117,342          $ 1,808          $ (29,649)


Taxable-equivalent net interest income for 2021 increased $6.4 million, or 0.6%,
compared to 2020. Taxable-equivalent net interest income for 2021 included 365
days compared to 366 days for 2020 as a result of the leap year. The additional
day added approximately $1.8 million to taxable-equivalent net interest income
during 2020. Excluding the impact of the additional day results in an effective
increase in taxable-equivalent net interest income of approximately $8.2 million
during 2021. The taxable-equivalent net interest margin decreased 56 basis
points from 3.09% during 2020 to 2.53% during 2021.
The increase in taxable-equivalent net interest income during 2021 was primarily
related to decreases in the average costs of interest-bearing deposit
liabilities and other borrowed funds combined with increases in the average
volumes of interest-bearing deposits (primarily amounts held by us in an
interest-bearing account at the Federal Reserve) and taxable securities and an
increase in the average taxable-equivalent yield on loans. The positive impact
of these items was partly offset by decreases in the average volumes of loans
and tax-exempt securities and increases in the average volumes of
interest-bearing deposit liabilities and repurchase agreements combined with
decreases in the average yields on taxable and tax-exempt securities and
interest-bearing deposits (primarily amounts held by us in an interest-bearing
account at the Federal Reserve). The decrease in taxable-equivalent net interest
margin during 2021 was primarily related to an increase in the relative
proportion of average interest-bearing deposits (primarily amounts held by us in
an interest-bearing account at the Federal Reserve) to average total
interest-earning assets combined with the aforementioned decreases in market
interest rates. Interest-bearing deposits made up approximately 31.3% of average
interest-earning assets during 2021 compared to approximately 15.0% in 2020.
The average volume of interest-earning assets for 2021 increased $7.9 billion,
or 22.5%, compared to 2020. The increase in the average volume of
interest-earning assets during 2021 included a $8.2 billion increase in average
interest-bearing deposits (primarily amounts held by us in an interest-bearing
account at the Federal Reserve) and a $372.2 million increase in average taxable
securities partly offset by a $394.8 million decrease in average loans (of
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which approximately $306.7 million related to PPP loans, as further discussed
below), a $178.6 million decrease in average tax-exempt securities, a $64.0
million decrease in average federal funds sold and a $14.3 million decrease in
average resell agreements.
The average yield on interest-earning assets decreased 64 basis points from
3.22% during 2020 to 2.58% during 2021 while the average rate paid on
interest-bearing liabilities decreased 13 basis points from 0.23% in 2020 to
0.10% in 2021. The average taxable-equivalent yields on interest-earning assets
and the average rate paid on interest-bearing liabilities were primarily
impacted by the aforementioned changes in market interest rates and changes in
the volume and relative mix of interest-earning assets and interest-bearing
liabilities.
The average taxable-equivalent yield on loans increased 6 basis points from
3.99% during 2020 to 4.05% during 2021. The average taxable-equivalent yield on
loans during 2021 was positively impacted by higher average yields on PPP loans
but negatively impacted by lower average market interest rates compared to 2020.
The average volume of loans decreased $394.8 million, or 2.3%, in 2021 compared
to 2020. The decrease in average loans was primarily due to an increase in the
average volume of PPP loans forgiven by the SBA during 2021 compared to 2020.
Loans made up approximately 38.8% of average interest-earning assets during 2021
compared to 48.7% during 2020.
In April 2020, we began originating loans to qualified small businesses under
the PPP administered by the SBA under the provisions of the CARES Act. In 2020,
we funded $3.3 billion of PPP loans of which approximately $3.2 billion were
funded during the second quarter of 2020. As of December 31, 2021, approximately
$3.2 billion of these 2020 originated PPP loans have been forgiven by the SBA or
repaid by the customer. During 2021, we funded an additional $1.4 billion of PPP
loans, most of which was during the first quarter. As of December 31, 2021,
approximately $1.0 billion of these 2021 originated PPP loans have been forgiven
by the SBA or repaid by the customer. During 2021 and 2020, we recognized $97.3
million and $59.5 million, respectively, in PPP loan related deferred processing
fees (net of amortization of related deferred origination costs) as a yield
adjustment and this amount is included in interest income on loans. As a result
of the inclusion of these net fees in interest income, the average yields on PPP
loans were 6.26% and 3.78% during 2021 and 2020, respectively, compared to the
stated interest rate of 1.0% on these loans. The increase in the average yield
on PPP Loans was impacted by a decrease in the average expected lives of the PPP
loans funded in 2021 compared to 2020. Furthermore, the average fee percentage
for 2021 originations was higher due to a smaller average loan size relative to
2020. In return for processing and booking a PPP loan, the SBA paid lenders a
processing fee tiered by the size of the loan (5% for loans of not more than
$350 thousand; 3% for loans of more than $350 thousand and less than $2 million;
and 1% for loans of at least $2 million). For PPP loans funded through
December 31, 2021, we expect to recognize additional PPP loan related deferred
processing fees (net of deferred origination costs) totaling approximately $2.8
million as a yield adjustment over the remaining expected lives of these loans.
We expect to recognize all of this amount in 2022.
The average taxable-equivalent yield on securities was 3.29% during 2021,
decreasing 17 basis points compared to 3.46% during 2020 and was negatively
impacted by a decrease in the relative proportion of higher-yielding tax-exempt
securities to total securities. The average yield on taxable securities was
1.97% during 2021 compared to 2.27% during 2020, decreasing 30 basis points,
while the average yield on tax exempt securities was 4.06% during 2021 compared
to 4.08% during 2020, decreasing 2 basis points. Tax exempt securities made up
approximately 64.2% of total average securities during 2021, compared to 66.6%
during 2020. The average volume of total securities increased $193.6 million, or
1.5%, during 2021 compared to 2020. Securities made up approximately 29.8% of
average interest-earning assets in 2021 compared to 36.0% in 2020. The decrease
was primarily related to an increase in the relative proportion of
interest-earning assets invested in interest-bearing deposits (primarily amounts
held by us in an interest-bearing account at the Federal Reserve).
Average interest-bearing deposits (primarily amounts held by us in an
interest-bearing account at the Federal Reserve), during 2021 increased $8.2
billion, or 155.2%, compared to 2020. Interest-bearing deposits made up
approximately 31.3% of average interest-earning assets during 2021 compared to
approximately 15.0% in 2020. The increase in the average volume of
interest-bearing deposits (primarily amounts held by us in an interest-bearing
account at the Federal Reserve) during 2021 was primarily due to an increase in
the average volume of customer deposits and, to a lesser extent, repurchase
agreements. The average yield on interest-bearing deposits was 0.13% during 2021
and 0.24% during 2020. The average yields on interest-bearing deposits during
2021 and 2020 were negatively impacted by a decrease in the interest rate paid
on excess reserves held at the Federal Reserve to 0.10% during March 2020,
although this rate ultimately increased 5 basis points to 0.15% in June 2021.
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Average federal funds sold and resell agreements during 2021 decreased $64.0
million, or 81.2%, and $14.3 million, or 68.4%, respectively compared to 2020.
Federal funds sold and resell agreements were not a significant component of
interest-earning assets during the comparable periods. The average yields on
federal funds sold and resell agreements were 0.21% and 0.24%, respectively,
during 2021 compared to 0.92% and 0.82%, respectively, during 2020. The average
yields on federal funds sold and resell agreements were negatively impacted by
lower average market interest rates during 2021 compared to 2020.
The average rate paid on interest-bearing liabilities was 0.10% during 2021,
decreasing 13 basis points from 0.23% during 2020. Average deposits increased
$7.0 billion, or 22.4%, in 2021 compared to 2020. Average interest-bearing
deposits increased $3.9 billion in 2021 compared to 2020, while average
non-interest-bearing deposits increased $3.1 billion in 2021 compared to 2020.
The ratio of average interest-bearing deposits to total average deposits was
56.7% in 2021 compared to 56.9% in 2020. 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 rate paid on
interest-bearing deposits and total deposits was 0.07% and 0.04% in 2021
compared to 0.18% and 0.10% in 2020. The average cost of deposits during 2021
and 2020 was impacted by decreases in the interest rates we pay on most of our
interest-bearing deposit products as a result of the aforementioned decreases in
market interest rates.
In April 2020, we borrowed an aggregate $1.3 billion from the Federal Home Loan
Bank ("FHLB") to provide additional liquidity in light of economic uncertainty
and our significant PPP lending volume. These advances were subsequently
paid-off in May 2020 as we determined additional liquidity resources were not
necessary.
Our taxable-equivalent net interest spread, which represents the difference
between the average rate earned on earning assets and the average rate paid on
interest-bearing liabilities, was 2.48% in 2021 compared to 2.99% in 2020. The
net interest spread, as well as the net interest margin, will be impacted by
future changes in short-term and long-term interest rate levels, as well as the
impact from the competitive environment. A discussion of the effects of changing
interest rates on net interest income is set forth in Item 7A. Quantitative and
Qualitative Disclosures About Market Risk elsewhere in this report.
Our hedging policies permit the use of various derivative financial instruments,
including interest rate swaps, swaptions, caps and floors, to manage exposure to
changes in interest rates. Details of our derivatives and hedging activities are
set forth in Note 15 - Derivative Financial Instruments in the accompanying
notes to consolidated financial statements elsewhere in this report. Information
regarding the impact of fluctuations in interest rates on our derivative
financial instruments is set forth in Item 7A. Quantitative and Qualitative
Disclosures About Market Risk elsewhere in this report.
Credit Loss Expense
Credit loss expense is determined by management as the amount to be added to the
allowance for credit loss accounts for various types of financial instruments
including loans, securities and off-balance-sheet credit exposure after net
charge-offs have been deducted to bring the allowance to a level which, in
management's best estimate, is necessary to absorb expected credit losses over
the lives of the respective financial instruments.
The components of credit loss expense were as follows.
                                        2021          2020           2019
Credit loss expense related to:
Loans                                $ (6,097)     $ 237,010      $ 33,759
Off-balance-sheet credit exposures      6,162          4,275             -
Securities held to maturity                (2)           (55)            -
Total                                $     63      $ 241,230      $ 33,759


Credit loss expense in 2019 was calculated under the prior incurred loss
accounting methodology. Furthermore, credit loss expense related to
off-balance-sheet credit exposures was reported as a component of other
non-interest expense prior to 2020. Such amounts have been reclassified to
credit loss expense to make prior periods comparable to the current
presentation. 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.
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Non-Interest Income
Total non-interest income for 2021 decreased $78.7 million, or 16.9%, compared
to 2020. Excluding $69 thousand and $109.0 million in net gains on securities
transactions during 2021 and 2020, respectively, total non-interest income
increased $30.2 million, or 8.5%, during 2021. Changes in the various components
of non-interest income are discussed in more detail below.
Trust and Investment Management Fees. Trust and investment management fee income
for 2021 increased $19.7 million, or 15.3%, compared to 2020. Investment
management fees are the most significant component of trust and investment
management fees, making up approximately 82.3% and 83.6% of total trust and
investment management fees in 2021 and 2020, respectively. The increase in trust
and investment management fees during 2021 was primarily due to increases in
investment management fees (up $14.6 million, or 13.5%), oil and gas fees (up
$3.1 million), estate fees (up $1.5 million) and custody fees (up
$580 thousand). Investment management fees and other custodial account 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 increases in
investment management fees and custody fees during 2021 were primarily related
to higher average equity valuations as well as increases in the number of
accounts. Oil and gas fees during 2021 were impacted by increases in oil and gas
prices. The increase in estate fees was primarily related to an increase in the
aggregate value of estates settled.
At December 31, 2021, trust assets, including both managed assets and custody
assets, were primarily composed of equity securities (46.9% of trust assets),
fixed income securities (31.1% of trust assets), alternative investments (6.6%
of assets) and cash equivalents (9.9% of trust assets). The estimated fair value
of trust assets was $43.3 billion (including managed assets of $19.1 billion and
custody assets of $24.2 billion) at December 31, 2021 compared to $38.6 billion
(including managed assets of $16.9 billion and custody assets of $21.7 billion)
at December 31, 2020.
Service Charges on Deposit Accounts. Service charges on deposit accounts for
2021 increased $2.4 million, or 3.0%, compared to 2020. The increase was
primarily related to an increase in commercial service charges (up $3.7 million)
partly offset by a decrease in overdraft charges on consumer accounts (down $1.8
million). Commercial service charges during 2021 were impacted by an increase in
the volume of billable services relative to 2020. Overdraft/insufficient funds
charges totaled $30.7 million ($23.9 million consumer and $6.8 million
commercial) during 2021 compared to $32.3 million ($25.8 million consumer and
$6.5 million commercial) during 2020. The decreases in consumer
overdraft/insufficient funds charges during 2021 was primarily related to a
decrease in the volume of fee assessed overdrafts relative to 2020. Furthermore,
in April 2021, we implemented a new overdraft grace feature for certain consumer
demand deposit accounts whereby no fees will be assessed on overdrafts of $100
or less, subject to certain qualifying conditions such as a minimum direct
deposit. This new feature reduced overdraft charges on consumer accounts by
approximately $3.2 million during 2021. The impact on future quarters will
depend on future overdraft volumes.
Insurance Commissions and Fees. Insurance commissions and fees for 2021
increased $1.2 million, or 2.5%, compared to 2020. The increase was related to
increases in contingent income (up $829 thousand) and commission income (up
$406 thousand). Contingent income totaled $4.5 million in 2021 and $3.7 million
in 2020. Contingent income primarily consists of amounts received from various
property and casualty insurance carriers related to the loss performance of
insurance policies previously placed. These performance related contingent
payments are seasonal in nature and are mostly received during the first quarter
of each year. This performance related contingent income totaled $3.2 million in
2021 and $2.5 million in 2020. The increase in performance related contingent
income during 2021 was related to growth within the portfolio combined with
improvement in the loss performance of insurance policies previously placed.
During the first quarter of 2021, a severe weather event in Texas resulted in a
significant increase in property and casualty claims and losses. This
deterioration in loss performance is expected to impact the determination of
performance related contingent payments we receive in 2022; however, such impact
is not determinable at this time. Contingent income also includes amounts
received from various benefit plan insurance companies related to the volume of
business generated and/or the subsequent retention of such business. This
benefit plan related contingent income totaled $1.3 million in 2021 and $1.2
million in 2020.
The increase in commission income was primarily related to increases in
commercial lines property and casualty commissions and life insurance
commissions partly offset by a decrease in benefit plan commissions. The
increase in commercial lines property and casualty commissions were related to
increased market rates while the increase in life insurance commissions and
decrease in benefit plan commissions were related to fluctuations in business
volumes.

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Interchange and Card Transaction Fees. Interchange fees, or "swipe" fees, are
charges that merchants pay to us and other card-issuing banks for processing
electronic payment transactions. Interchange and card transaction fees consist
of income from check card usage, point of sale income from PIN-based debit card
transactions and ATM service fees. Interchange and card transaction fees are
reported net of related network costs.
Net revenues from interchange and card transaction fees for 2021 increased $4.0
million, or 29.6%, compared to 2020 primarily due to increased transaction
volumes as well as the impact of new card products partly offset by an increase
in network costs. Transaction volumes during 2020 were impacted by the onset of
the COVID-19 pandemic. A comparison of gross and net interchange and card
transaction fees for the reported periods is presented in the table below.
                                                         2021          2020 

2019

Income from debit card transactions                   $ 29,122      $ 23,763      $ 23,665
ATM service fees                                         3,298         3,342         4,131
Gross interchange and debit card transaction fees       32,420        27,105        27,796
Network costs                                           14,959        

13,635 12,923 Net interchange and debit card transaction fees $17,461 $13,470 $14,873



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
2021 increased $2.0 million, or 5.8%, compared to 2020. The increase was
primarily related to increases in income from the sale of mutual funds (up
$3.0 million), merchant services rebates (up $978 thousand), funds transfer
service charges (up $761 thousand) and income from the sale of annuities (up
$571 thousand). These items were partly offset by a decrease in income from the
placement of money market accounts (down $1.7 million), which was impacted by
lower average market rates, and a decrease in fees on unused commitments (down
$1.7 million), among other things.
Net Gain/Loss on Securities Transactions. During 2021, we sold certain
available-for-sale securities with amortized costs totaling $2.0 billion and
realized a net gain of $69 thousand. These sales were primarily related to
securities purchased during 2021 and subsequently sold in connection with our
tax planning strategies related to the Texas franchise tax. The gross proceeds
from the sales of these securities outside of Texas are included in total
revenues/receipts from all sources reported for Texas franchise tax purposes,
which results in a reduction in the overall percentage of revenues/receipts
apportioned to Texas and subjected to taxation under the Texas franchise tax.
During 2020, we sold certain available-for-sale securities with amortized costs
totaling $1.0 billion and realized a net gain of $109.0 million. These sales
included $483.1 million of residential mortgage-backed securities on which we
realized a net gain of $1.9 million. The proceeds from these sales were
reinvested into other residential mortgage-backed securities that had lower
pre-payment rates. The sales also included $519.1 million of 30-year U.S
Treasury securities on which we realized a net gain of $107.1 million. These
U.S. Treasury securities were purchased during the fourth quarter of 2019 to
hedge, in effect, against falling interest rates. Prior to their sale, these
securities had significant unrealized holding gains as a result of decreases in
market interest rates during the first quarter of 2020. We elected to sell these
securities to provide liquidity and realize the gains.
Other Non-Interest Income. Other non-interest income for 2021 increased $816
thousand, or 1.7%, compared to 2020. The increase in other non-interest income
during 2021 was primarily related to an increase in gains on the sale/exchange
of assets (up $11.0 million) and increases in income from customer derivative
and foreign exchange transactions (up $2.9 million and $1.2 million,
respectively). These items were partly offset by decreases in sundry and other
miscellaneous income (down $4.6 million), public finance underwriting fees (down
$2.9 million) and earnings on the cash surrender value of life insurance (down
$1.3 million). Additionally, other non-interest income during 2020 included
approximately $6.0 million in gains realized on the sale of certain non-hedge
related, short-term put options on U.S. Treasury securities with an aggregate
notional amount of $500 million. The put options were not exercised and expired
in March 2020.
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Gains on the sale/exchange of assets in 2021 included $9.7 million related to an
exchange of a branch facility and $1.8 million related to the sale of certain
parking lots in downtown San Antonio while gains on the sale/exchange of assets
in 2020 included $758 thousand related to the sale of a branch facility. The
increases in income from customer derivative and trading activities and income
from customer foreign currency transactions were primarily related to increases
in business volumes. Sundry and other miscellaneous income during 2021 included
$3.4 million in card related incentives/rebates and $519 thousand in recoveries
of prior write-offs, among other things, while sundry and other miscellaneous
income during 2020 included $5.3 million in card related incentives/rebates,
$2.8 million in recoveries of prior write-offs and $512 thousand related to
settlements, among other things. The decrease in public finance underwriting
fees was primarily due to a decrease in business volume. The decrease in
earnings on the cash surrender value of life insurance was due to lower yields
on the investments within the bank-owned life insurance portfolio.
Non-Interest Expense
Total non-interest expense for 2021 increased $33.1 million, or 3.9%, compared
to 2020. Changes in the various components of non-interest expense are discussed
below.
Salaries and Wages. Salaries and wages increased $8.2 million, or 2.1%, in 2021
compared to 2020. The increase was primarily related to an increase in incentive
compensation and, to a lesser extent, a decrease in salary costs deferred in
connection with loan originations and an increase in commissions. The impact of
these items was partly offset by a decrease in salaries, due to a decrease in
the number of employees, and a decrease in stock-based compensation. Salaries
and wages for 2020 also included $5.2 million related to severance costs.
Employee Benefits. Employee benefits expense for 2021 increased $6.4 million, or
8.4%, compared to 2020. The increase was primarily related to an increase in
certain discretionary benefit plan expenses and, to a lesser extent, increases
in medical benefits expense and payroll taxes partly offset by decreases in
expenses related to our defined benefit retirement and restoration plans, among
other things.
Our defined benefit retirement and restoration plans were frozen in 2001 which
has helped to reduce the volatility in retirement plan expense. We nonetheless
still have funding obligations related to these plans and could recognize
additional expense related to these plans in future years, which would be
dependent on the return earned on plan assets, the level of interest rates and
employee turnover. See Note 12 - Defined Benefit Plans for additional
information related to our net periodic pension benefit/cost.
Net Occupancy. Net occupancy expense for 2021 increased $4.4 million, or 4.3%,
compared to 2020. The increase was primarily related to increases in
depreciation on leasehold improvements (up $1.9 million), repairs and
maintenance/service contracts expense (up $1.8 million) and building
depreciation (up $675 thousand), among other things, partly offset by a decrease
in lease expense (down $581 thousand), among other things. The increases in the
aforementioned components of net occupancy expense during the comparable periods
were impacted, in part, by our expansion within the Houston market area.
Technology, Furniture and Equipment. Technology, furniture and equipment expense
for 2021 increased $7.5 million, or 7.1%, compared to 2020. The increase was
primarily related to increases in cloud services expense (up $5.9 million) and
depreciation of furniture and equipment (up $2.5 million) partly offset by a
decrease in software maintenance (down $1.1 million).
Deposit Insurance. Deposit insurance expense totaled $12.2 million in 2021
compared to $10.5 million in 2020. The increase was primarily related to an
increase in total assets partly offset by a decrease in the assessment rate.
Other Non-Interest Expense. Other non-interest expense for 2021 increased $5.1
million, or 3.1%, compared to 2020. The increase included increases in donations
expense (up $8.0 million); sundry and other miscellaneous expenses (up
$6.4 million); and fraud losses (up $1.9 million), among other things. Donations
expense during 2021 was impacted by $8.8 million in contributions to the Frost
Charitable Foundation. Sundry and other miscellaneous expense in 2021 included
$4.7 million related to the write-off of certain assets while sundry and other
miscellaneous expense in 2020 included $958 thousand related to the closure of
certain branch locations in our Houston market area and $454 thousand related to
the write-off of certain other assets. The aforementioned items were partly
offset by decreases in outside computer service expense (down $4.3 million);
professional services expense (down $2.5 million); travel, meals and
entertainment expense (down $2.2 million); amortization of deferred costs
associated with loan commitments (down $1.1 million); and losses on the
sale/write-down of foreclosed and other assets (down $1.1 million); among other
things.
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Results of Segment Operations
We are managed under a matrix organizational structure whereby our two primary
operating segments, Banking and Frost Wealth Advisors, overlap a regional
reporting structure. A third operating segment, Non-Banks, is for the most part
the parent holding company, as well as certain other insignificant non-bank
subsidiaries of the parent that, for the most part, have little or no activity.
A description of each business and the methodologies used to measure financial
performance is described in Note 18 - Operating Segments in the accompanying
notes to consolidated financial statements elsewhere in this report. Net income
(loss) by operating segment is presented below:
Banking
Net income for 2021 increased $92.8 million, or 28.8%, compared to 2020. The
increase was primarily the result of a $241.2 million decrease in credit loss
expense, an $8.4 million increase in net interest income partly offset by a
$100.5 million decrease in non-interest income, a $35.2 million increase in
non-interest expense and a $21.1 million increase in income tax expense.
Net interest income for 2021 increased $8.4 million, or 0.9%, compared to 2020.
The increase was primarily related to decreases in the average costs of
interest-bearing deposit liabilities and other borrowed funds combined with
increases in the average volumes of interest-bearing deposits (primarily amounts
held by us in an interest-bearing account at the Federal Reserve) and taxable
securities and an increase in the average taxable-equivalent yield on loans. The
positive impact of these items was partly offset by decreases in the average
volumes of loans and tax-exempt securities and increases in the average volumes
of interest-bearing deposit liabilities and repurchase agreements combined with
decreases in the average yields on taxable and tax-exempt securities and
interest-bearing deposits (primarily amounts held by us in an interest-bearing
account at the Federal Reserve). Net interest income during 2020 was also
positively impacted by the additional day as a result of the leap year. See the
analysis of net interest income included in the section captioned "Net Interest
Income" elsewhere in this discussion.
Credit loss expense for 2021 totaled $54 thousand compared to $241.2 million in
2020. Credit loss expense in 2020 was impacted by our adoption of a new credit
loss accounting standard and the expected credit losses resulting from a
deterioration in forecasted economic conditions and the current and uncertain
future impacts associated with the COVID-19 pandemic and recent volatility in
oil prices. 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 2021 decreased $100.5 million, or 31.3%, compared to
2020. Excluding $69 thousand and $109.0 million in net gains on securities
transactions in 2021 and 2020, respectively, total non-interest income for the
Banking segment increased $8.4 million, or 4.0%, during 2021. This increase was
primarily related to increases in interchange and card transaction fees, service
charges on deposit accounts and insurance commissions and fees. The increase in
interchange and card transaction fees was due to increased transaction volumes
as well as the impact of new card products partly offset by increases in network
costs. The increase in service charges on deposit accounts was primarily related
to an increase in commercial service charges partly offset by a decrease in
overdraft charges on consumer accounts. The increase in insurance commissions
and fees was the result of increases in contingent income and commission income,
which is further discussed below in relation to Frost Insurance Agency. 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 2021 increased $35.2 million, or 4.9%, compared to
2020. The increase was primarily due to increases in salaries and wages; other
non-interest expense; employee benefit expense; technology, furniture and
equipment expense; net occupancy expense and deposit insurance expense. The
increase in salaries and wages was primarily related to an increase in incentive
compensation and, to a lesser extent, a decrease in salary costs deferred in
connection with loan originations and an increase in commissions. The impact of
these items was partly offset by a decrease in salaries, due to a decrease in
the number of employees, and a decrease in stock-based compensation. The
increase in other non-interest expense was primarily due to increases in
donations; sundry and other miscellaneous expenses; and fraud losses, among
other things, partly offset by decreases in outside computer service expense;
professional services expense; travel, meals and entertainment expense;
amortization of deferred costs associated with loan commitments; and losses on
the sale/write-down of foreclosed and other assets; among other things. The
increase in employee benefits expense was primarily related to an increase in
certain discretionary benefit plan expenses and, to a lesser extent, increases
in medical benefits expense and payroll taxes partly offset by decreases in
expenses related to our defined benefit retirement and restoration plans, among
other things. The
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increase in technology, furniture and equipment expense was primarily related to
increases in cloud services expense and depreciation of furniture and equipment
partly offset by a decrease in software maintenance. The increase in net
occupancy expense was primarily related to increases in depreciation on
leasehold improvements, repairs and maintenance/service contracts expense and
building depreciation, among other things, partly offset by a decrease in lease
expense, among other things. The increase in deposit insurance expense was
primarily related to an increase in total assets partly offset by a decrease in
the assessment rate. See the analysis of these categories of non-interest
expense included in the section captioned "Non-Interest Expense" included
elsewhere in this discussion.
Income tax expense for 2021 increased $21.1 million, or 103.9%, compared to
2020. See the section captioned "Income Taxes" elsewhere in this discussion.
Frost Insurance Agency, which is included in the Banking operating segment, had
gross commission revenues of $52.5 million during 2021 compared to $51.1 million
during 2020. The increase in gross commission revenues was the result of
increases in contingent income and commission income. The increase in contingent
income was related to growth within the portfolio combined with improvement in
the loss performance of insurance policies previously placed. The increase in
commission income was primarily related to increases in commercial lines
property and casualty commissions, related to increased market rates, and an
increase in life insurance commissions, related to fluctuations in business
volumes, partly offset by a decrease in benefit plan commissions, related to
fluctuations in business volumes. 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 2021 increased $17.5 million, or 90.9%, compared to 2020. The
increase was primarily due to a $22.2 million increase in non-interest income
and a $658 thousand decrease in non-interest expense partly offset by a $4.7
million increase in income tax expense and a $647 thousand decrease in net
interest income.
Net interest income for 2021 decreased $647 thousand, or 23.3%, compared to
2020. This decrease was primarily due to a decrease in the average funds
transfer price allocated to the funds provided by Frost Wealth Advisors. The
decrease in the average funds transfer price was primarily due to a decrease in
market interest rates. See the analysis of net interest income included in the
section captioned "Net Interest Income" included elsewhere in this discussion.
Non-interest income for 2021 increased $22.2 million, or 15.3%, compared to
2020. The increase was primarily related to an increase in trust and investment
management fees and, to a lesser extent, an increase in other charges,
commissions and fees. Trust and investment management fee income is the most
significant income component for Frost Wealth Advisors. Investment management
fees are the most significant component of trust and investment management fees,
making up approximately 82.3% and 83.6% of total trust and investment management
fees for 2021 and 2020, respectively. The increase in trust and investment
management fees was primarily due to increases in investment management fees,
oil and gas fees, estate fees and custody fees. The increases in investment
management fees and custody fees were primarily related to higher average equity
valuations as well as increases in the number of accounts. Oil and gas fees
during 2021 were impacted by an increases in oil and gas prices. The increase in
estate fees was primarily related to an increase in the aggregate value of
estates settled. The increase in other charges, commissions and fees was
primarily related to increases in income from the sale of mutual funds and
income from the sale of annuities partly offset by a decrease in income from the
placement of money market accounts, which was impacted by lower average market
rates. 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 2021 decreased $658 thousand, or 0.5%, compared to
2020. The decrease was primarily due to decreases in other non-interest expense
and net occupancy expense partly offset by an increase in technology, furniture
and equipment expense. The decrease in other non-interest expense was primarily
related to decreases in outside computer service expense; travel, meals and
entertainment expense; and professional service expense; among other things;
partly offset by increases in subscriptions expense and platform fees expense.
The decrease in net occupancy expense was primarily related to a decrease in
lease expense. The increase in technology, furniture and equipment expense was
primarily related to an increase in cloud services expense.

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Non-Banks
The Non-Banks operating segment had a net loss of $9.0 million for 2021 compared
to a net loss of $10.6 million in 2020. The decreased net loss was primarily due
to decreases in other non-interest expense and net interest expense. The
decrease in other non-interest expense was primarily due to decreases in
professional services expense and travel, meals and entertainment expense. The
decrease in net interest expense was primarily related to a decrease in the
average rates paid on our long-term borrowings. Net interest expense was also
positively impacted by the redemption, during the fourth quarter of 2021, of
$13.4 million of junior subordinated deferrable interest debentures issued to
WNB Capital Trust I.
Income Taxes
We recognized income tax expense of $46.5 million, for an effective tax rate of
9.5%, in 2021 compared to $20.2 million, for an effective tax rate of 5.7%, in
2020. The effective income tax rates differed from the U.S. statutory federal
income tax rate of 21% during 2021 and 2020 primarily due to the effect of
tax-exempt income from loans, securities and life insurance policies and the
income tax effects associated with stock-based compensation, among other things,
and their relative proportion to total pre-tax net income. The increase in the
effective tax rate during 2021 was primarily related to an increase in pre-tax
net income, partly off-set by the impact of higher discrete tax benefits
associated with stock-based compensation. The effective tax rate during 2020 was
also impacted by a one-time, discrete tax benefit associated with an asset
contribution to a charitable trust. See Note 13 - Income Taxes in the
accompanying notes to consolidated financial statements elsewhere in this
report.
Sources and Uses of Funds
The following table illustrates, during the years presented, the mix of our
funding sources and the assets in which those funds are invested as a percentage
of our average total assets for the period indicated. Average assets totaled
$46.0 billion in 2021 compared to $38.0 billion in 2020.
                                           2021         2020         2019
Sources of Funds:
Deposits:
Non-interest-bearing                       36.2  %      35.7  %      32.3  %
Interest-bearing                           47.4         47.1         50.1
Federal funds purchased                     0.1          0.1          0.1
Repurchase agreements                       4.6          3.8          3.9
Long-term debt and other borrowings         0.5          0.9          0.7
Other non-interest-bearing liabilities      1.7          1.8          1.4
Equity capital                              9.5         10.6         11.5
Total                                     100.0  %     100.0  %     100.0  %
Uses of Funds:
Loans                                      36.5  %      45.2  %      45.0  %
Securities                                 28.0         33.4         41.4
Interest-bearing deposits                  29.4         14.0          5.0
Federal funds sold                            -          0.2          0.7
Resell agreements                             -          0.1          0.1
Other non-interest-earning assets           6.1          7.1          7.8
Total                                     100.0  %     100.0  %     100.0  %


Deposits continue to be our primary source of funding. Average deposits
increased $7.0 billion, or 22.4%, in 2021 compared to 2020. Non-interest-bearing
deposits remain a significant source of funding, which has been a key factor in
maintaining our relatively low cost of funds. Average non-interest-bearing
deposits totaled 43.3% of total average deposits in 2021 compared to 43.1% in
2020. Though federal prohibitions on the payment of interest on demand deposits
were repealed in 2011, we have not experienced any significant additional costs
as a result. Should the market dictate, we may increase the interest rates we
pay on some or all of our various interest-bearing deposit products. This could
lead to a decrease in the relative proportion of non-interest-bearing deposits
to total deposits.

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We primarily invest funds in loans, securities and interest-bearing deposits
(primarily amounts held by us in an interest-bearing account at the Federal
Reserve). Average loans decreased $394.8 million, or 2.3%, ($88.1 million, or
0.6% excluding PPP loans) in 2021 compared to 2020 while average securities
increased $193.6 million, or 1.5%, in 2021 compared to 2020. Average
interest-bearing deposits (primarily amounts held by us in an interest-bearing
account at the Federal Reserve) increased $8.2 billion, or 155.2%, in 2021
compared to 2020, primarily as a result of deposit growth.
Loans
Overview. Details of our loan portfolio are presented in Note 3 - Loans in the
accompanying notes to consolidated financial statements included elsewhere in
this report. Year-end total loans decreased $1.1 billion, or 6.5%, during 2021
compared to 2020. As further discussed below, during the second quarter of 2020,
we began originating loans to qualified small businesses under the PPP
administered by the SBA under the provisions of the CARES Act. Excluding PPP
loans, total loans would have otherwise increased $860.1 million, or 5.7%, from
December 31, 2020. The majority of our loan portfolio is comprised of commercial
and industrial loans, energy loans and real estate loans. Commercial and
industrial loans made up 32.9% and 28.4% (33.7% and 32.9% excluding PPP loans)
of total loans at December 31, 2021 and 2020 while energy loans made up 6.6% and
7.1% (6.8% and 8.2% excluding PPP loans) of total loans at both December 31,
2021 and 2020 and real estate loans made up 55.0% and 47.7% (56.5% and 55.5%
excluding PPP loans) of total loans at December 31, 2021 and 2020. Energy loans
include commercial and industrial loans, leases and real estate loans to
borrowers in the energy industry. Real estate loans include both commercial and
consumer balances. It is possible that the on-going effects of COVID-19 could
continue to impact demand for our loan products.
Loan Origination/Risk Management. We have certain lending policies and
procedures in place that are designed to maximize loan income within an
acceptable level of risk. Management reviews and approves these policies and
procedures on a regular basis. A reporting system supplements the review process
by providing management with frequent reports related to loan production, loan
quality, concentrations of credit, loan delinquencies and non-performing and
potential problem loans. Diversification in the loan portfolio is a means of
managing risk associated with fluctuations in economic conditions. We have begun
to explore the credit and reputational risks associated with climate change and
their potential impact on the foregoing and are also closely monitoring
regulatory developments on climate risk. This includes, among other things,
researching and developing a formalized approach to considering climate change
related risks in our underwriting processes. This approach will be impacted, in
part, by the accessibility and reliability of both customer climate risk data
and climate risk data in general. One of the objectives of these efforts is to
enable us to better understand the climate change related risks associated with
our customers' business activities and to be able to monitor their response to
those risks and their ultimate impact on our customers.
Commercial and industrial loans are underwritten after evaluating and
understanding the borrower's ability to operate profitably and prudently expand
its business. Underwriting standards are designed to promote relationship
banking rather than transactional banking. Once it is determined that the
borrower's management possesses sound ethics and solid business acumen, our
management examines current and projected cash flows to determine the ability of
the borrower to repay their obligations as agreed. Commercial and industrial
loans are primarily made based on the identified cash flows of the borrower and
secondarily on the underlying collateral provided by the borrower. The cash
flows of borrowers, however, may not be as expected and the collateral securing
these loans may fluctuate in value. Most commercial and industrial loans are
secured by the assets being financed or other business assets such as accounts
receivable or inventory and may incorporate a personal guarantee; however, some
short-term loans may be made on an unsecured basis. In the case of loans secured
by accounts receivable, the availability of funds for the repayment of these
loans may be substantially dependent on the ability of the borrower to collect
amounts due from its customers.
Our energy loan portfolio includes loans for production, energy services and
other energy loans, which includes private clients, transportation and equipment
providers, manufacturers, refiners and traders. The origination process for
energy loans is similar to that of commercial and industrial loans. Because,
however, of the average loan size, the significance of the portfolio and the
specialized nature of the energy industry, our energy lending requires a highly
prescriptive underwriting policy. Production loans are secured by proven,
developed and producing reserves. Loan proceeds for these types of loans are
typically used for the development and drilling of additional wells, the
acquisition of additional production, and/or the acquisition of additional
properties to be developed and drilled. Our customers in this sector are
generally large, independent, private owner-producers or large corporate
producers. These borrowers typically have large capital requirements for
drilling and acquisitions, and as such, loans in this portfolio are generally
greater than $10 million. Production loans are collateralized by the oil and gas
interests of the
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borrower. Collateral values are determined by the risk-adjusted and limited
discounted future net revenue of the reserves. Our valuations take into
consideration geographic and reservoir differentials as well as cost structures
associated with each borrower. Collateral value is calculated at least
semi-annually using third-party engineer-prepared reserve studies. These reserve
studies are conducted using a discount factor and base case assumptions for the
current and future value of oil and gas. To qualify as collateral, typically
reserves must be proven, developed and producing. For certain borrowers,
collateral may include up to 20% proven, non-producing reserves. Loan
commitments are limited to 65% of estimated reserve value. Cash flows must be
sufficient to amortize the loan commitment within 120% of the half-life of the
underlying reserves. Loan commitments generally must also be 100% covered by the
risk-adjusted and limited discounted future net revenue of the reserves when
stressed at 75% of our base case price assumptions. In addition, the ratio of
the borrower's debt to earnings before interest, taxes, depreciation and
amortization ("EBITDA") should generally not exceed 350%. We generally require
production borrowers to maintain an active hedging program to manage risk and to
have at least 50% of their production hedged for two years.
Oil and gas service, transportation, and equipment providers are economically
aligned due to their reliance on drilling and active oil and gas development.
Income for these borrowers is highly dependent on the level of drilling activity
and rig utilization, both of which are driven by the current and future outlook
for the price of oil and gas. We mitigate the credit risk in this sector through
conservative concentration limits and guidelines on the profile of eligible
borrowers. Guidelines require that the companies have extensive experience
through several industry cycles, and that they be supported by financially
competent and committed guarantors who provide a significant secondary source of
repayment. Borrowers in this sector are typically privately-owned, middle-market
companies with annual sales of less than $100 million. The services provided by
companies in this sector are highly diversified, and include down-hole testing
and maintenance, providing and threading drilling pipe, hydraulic fracturing
services or equipment, seismic testing and equipment and other direct or
indirect providers to the oil and gas production sector.
Our private client portfolio primarily consists of loans to wealthy individuals
and their related oil and gas exploration and production entities, where the oil
and gas producing reserves are not considered to be the primary source of
repayment. These borrowers and guarantors typically have significant sources of
wealth including significant liquid assets and/or cash flow from other
investments which can fully repay the loans. The credit structures of these
loans are generally similar to those of energy production loans, described
above, with respect to the valuation of the reserves taken as collateral and the
repayment structures.
Although no balances were outstanding at December 31, 2021 and 2020, in prior
years we have had a small portfolio of loans to refiners where our credit
involvement with these customers was through purchases of shared national credit
syndications. These borrowers refine crude oil into gasoline, diesel, jet fuel,
asphalt and other petrochemicals and are not dependent on drilling or
development. All of the borrowers in this portfolio are very large public
companies that are important employers in several of our major markets. These
borrowers, for the most part, have been long-term customers and we have a strong
relationship with these companies and their executive management. There is no
new customer origination process for this segment and any outstanding balances
are expected to only reflect the needs of these existing relationships.
We also have a small portfolio of loans to energy trading companies that serve
as intermediaries that buy and sell oil, gas, other petrochemicals, and ethanol.
These companies are not dependent on drilling or development. As a general
policy, we do not lend to energy traders; however, we have made an exception to
this policy for certain customers based upon their underlying business models
which minimize risk as commodities are bought only to fill existing orders
(back-to-back trading). As such, the commodity price risk and sale risk are
eliminated.
PPP loans, which we began originating in April 2020, are loans to qualified
small businesses under the PPP administered by the SBA under the provisions of
the CARES Act. Loans covered by the PPP may be eligible for loan forgiveness for
certain costs incurred related to payroll, group health care benefit costs and
qualifying mortgage, rent and utility payments. The remaining loan balance after
forgiveness of any amounts is still fully guaranteed by the SBA. Terms of the
PPP loans include the following (i) maximum amount limited to the lesser of
$10 million or an amount calculated using a payroll-based formula, (ii) maximum
loan term of five years, (iii) interest rate of 1.00%, (iv) no collateral or
personal guarantees are required, (v) no payments are required until the date on
which the forgiveness amount relating to the loan is remitted to the lender and
(vi) loan forgiveness up to the full principal amount of the loan and any
accrued interest, subject to certain requirements including that no more than
40% of the loan forgiveness amount may be attributable to non-payroll costs. In
return for processing and booking a PPP loan, the SBA paid lenders a processing
fee tiered by the size of the loan (5% for loans of not more
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than $350 thousand; 3% for loans of more than $350 thousand and less than
$2 million; and 1% for loans of at least $2 million).
Commercial real estate loans are subject to underwriting standards and processes
similar to commercial and industrial loans, in addition to those of real estate
loans. These loans are viewed primarily as cash flow loans and secondarily as
loans secured by real estate. Commercial real estate lending typically involves
higher loan principal amounts and the repayment of these loans is generally
largely dependent on the successful operation of the property securing the loan
or the business conducted on the property securing the loan. Commercial real
estate loans may be more adversely affected by conditions in the real estate
markets or in the general economy. The properties securing our commercial real
estate portfolio are diverse in terms of type and geographic location. This
diversity helps reduce our exposure to adverse economic events that affect any
single market or industry. Management monitors and evaluates commercial real
estate loans based on collateral, geography and risk grade criteria. As a
general rule, we avoid financing single-purpose projects unless other
underwriting factors are present to help mitigate risk. We also utilize
third-party experts to provide insight and guidance about economic conditions
and trends affecting market areas we serve. In addition, management tracks the
level of owner-occupied commercial real estate loans versus non-owner occupied
loans. At December 31, 2021, approximately 48.4% of the outstanding principal
balance of our commercial real estate loans were secured by owner-occupied
properties.
With respect to loans to developers and builders that are secured by non-owner
occupied properties that we may originate from time to time, we generally
require the borrower to have had an existing relationship with us and have a
proven record of success. Construction loans are underwritten utilizing
feasibility studies, independent appraisal reviews, sensitivity analysis of
absorption and lease rates and financial analysis of the developers and property
owners. Construction loans are generally based upon estimates of costs and value
associated with the completed project. These estimates may be inaccurate.
Construction loans often involve the disbursement of substantial funds with
repayment substantially dependent on the success of the ultimate project.
Sources of repayment for these types of loans may be pre-committed permanent
loans from approved long-term lenders, sales of developed property or an interim
loan commitment from us until permanent financing is obtained. These loans are
closely monitored by on-site inspections and are considered to have higher risks
than other real estate loans due to their ultimate repayment being sensitive to
interest rate changes, governmental regulation of real property, general
economic conditions and the availability of long-term financing.
We originate consumer loans utilizing a credit scoring analysis to supplement
the underwriting process. To monitor and manage consumer loan risk, policies and
procedures are developed and modified, as needed, jointly by line and staff
personnel. This activity, coupled with relatively small loan amounts that are
spread across many individual borrowers, minimizes risk. Additionally, trend and
outlook reports are reviewed by management on a regular basis. Underwriting
standards for home equity loans are heavily influenced by statutory
requirements, which include, but are not limited to, loan-to-value limitations,
collection remedies, the number of such loans a borrower can have at one time
and documentation requirements.
We maintain an independent loan review department that reviews and validates the
credit risk program on a periodic basis. Results of these reviews are presented
to management and the appropriate committees of our board of directors. The loan
review process complements and reinforces the risk identification and assessment
decisions made by lenders and credit personnel, as well as our policies and
procedures.
Commercial and Industrial. Commercial and industrial loans increased $409.6
million, or 8.3%, during 2021 compared to 2020. Our commercial and industrial
loans are a diverse group of loans to small, medium and large businesses. The
purpose of these loans varies from supporting seasonal working capital needs to
term financing of equipment. While some short-term loans may be made on an
unsecured basis, most are secured by the assets being financed with collateral
margins that are consistent with our loan policy guidelines. The commercial and
industrial loan portfolio also includes the commercial lease and purchased
shared national credits.
Energy. Energy loans include loans to entities and individuals that are engaged
in various energy-related activities including (i) the development and
production of oil or natural gas, (ii) providing oil and gas field servicing,
(iii) providing energy-related transportation services (iv) providing equipment
to support oil and gas drilling (v) refining petrochemicals, or (vi) trading
oil, gas and related commodities. Energy loans decreased $157.4 million, or
12.7%, during 2021 compared to 2020. The average loan size, the significance of
the portfolio and the specialized nature of the energy industry requires a
highly prescriptive underwriting policy. Exceptions to this policy are rarely
granted. Due to the large borrowing requirements of this customer base, the
energy loan portfolio includes participations and purchased shared national
credits.
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Paycheck Protection Program. PPP loans include loans to businesses and other
entities that would otherwise be reported as commercial and industrial loans
and, to a lesser extent, energy loans, originated under the guidelines discussed
above. We funded approximately $1.4 billion and $3.3 billion of SBA-approved PPP
loans during 2021 and 2020, respectively. During 2021 and 2020, we recognized
approximately $97.3 million and $59.5 million in PPP loan related deferred
processing fees (net of amortization of related deferred origination costs),
respectively, as yield adjustments and these amounts are included in interest
income on loans. As a result of the inclusion of these net fees in interest
income, the average yields on PPP loans were 6.26% during 2021 and 3.78% during
2020, compared to the stated interest rate of 1.0% on these loans. We expect to
recognize additional PPP loan related deferred processing fees (net of deferred
origination costs) totaling approximately $2.8 million as a yield adjustment
during 2022.
Industry Concentrations. As of December 31, 2021 and 2020, there were no
concentrations of loans related to any single industry, as segregated by
Standard Industrial Classification code ("SIC code"), in excess of 10% of total
loans. The largest industry concentrations at such dates were related to the
energy industry, which totaled 6.6% of total loans, or 6.8% excluding PPP loans,
as of December 31, 2021 and 7.1% of total loans, or 8.2% excluding PPP loans, as
of December 31, 2020. The SIC code system is a federally designed standard
industrial numbering system used by us to categorize loans by the borrower's
type of business. The following table summarizes the industry concentrations of
our loan portfolio, as segregated by SIC code, stated as a percentage of
year-end total loans as of December 31, 2021 and 2020.
                                                                   2021 Excluding PPP                                  2020 Excluding PPP
                                                2021                     Loans                      2020                     Loans
Industry Concentrations
Energy                                               6.6  %                     6.8  %                   7.1  %                     8.2  %
Public finance                                       4.9                        5.0                      4.7                        5.4
Automobile dealers                                   4.1                        4.2                      3.1                        3.6
Medical services                                     3.7                        3.8                      3.1                        3.6
Building materials and contractors                   3.7                        3.8                      2.8                        3.3
General and specific trade contractors               3.2                        3.2                      2.4                        2.8
Manufacturing, other                                 2.8                        2.8                      2.2                        2.6
Investor                                             2.7                        2.8                      2.2                        2.6
Services                                             2.4                        2.5                      1.9                        2.3
Religion                                             2.0                        2.0                      1.8                        2.1
Financial services, consumer credit                  1.8                        1.8                      1.8                        2.1
Paycheck Protection Program                          2.6                          -                     13.9                          -
All other                                           59.5                       61.3                     53.0                       61.4
Total loans                                        100.0  %                   100.0  %                 100.0  %                   100.0  %


Large Credit Relationships. The market areas served by us include three of the
top ten most populated cities in the United States. These market areas are also
home to a significant number of Fortune 500 companies. As a result, we originate
and maintain large credit relationships with numerous commercial customers in
the ordinary course of business. We consider large credit relationships to be
those with commitments equal to or in excess of $10.0 million, excluding
treasury management lines exposure, prior to any portion being sold. Large
relationships also include loan participations purchased if the credit
relationship with the agent is equal to or in excess of $10.0 million. In
addition to our normal policies and procedures related to the origination of
large credits, one of our Regional Credit Committees must approve all new credit
facilities which are part of large credit relationships and renewals of such
credit facilities with exposures between $20.0 million and $30.0 million. Our
Central Credit Committee must approve all new credit facilities which are part
of large credit relationships and renewals of such credit facilities with
exposures that exceed $30.0 million. The Regional and Central Credit Committees
meet regularly to review large credit relationship activity and discuss the
current pipeline, among other things.

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Table of Contents The following table provides additional information about our material credit relationships outstanding at year end.

                                                                2021                                                                  2020
                                        Number of                     Period-End Balances                     Number of                     Period-End Balances
                                      Relationships              Committed           Outstanding            Relationships              Committed           Outstanding
Committed amount:
$20.0 million and greater                           266       $ 13,004,712          $ 7,271,704                           268       $ 12,651,125          $ 7,125,484
$10.0 million to $19.9 million                      194          2,634,147            1,668,999                           189          2,661,548            1,626,951
Average amount:
$20.0 million and greater                                           48,890               27,337                                           47,206               26,588
$10.0 million to $19.9 million                                      13,578                8,603                                           14,082        

8,608



Purchased Shared National Credits ("SNCs"). Purchased SNCs are participations
purchased from upstream financial organizations and tend to be larger in size
than our originated portfolio. Our purchased SNC portfolio totaled $698.4
million at December 31, 2021 decreasing $89.7 million, or 11.4%, from $788.1
million at December 31, 2020. At December 31, 2021, 27.2% of outstanding
purchased SNCs were related to the construction industry, 23.2% of outstanding
purchased SNCs were related to the energy industry, 14.0% were related to the
real estate management industry and 13.4% of outstanding purchased SNCs were
related to the financial services industry. The remaining purchased SNCs were
diversified throughout various other industries, with no other single industry
exceeding 10% of the total purchased SNC portfolio. Additionally, almost all of
the outstanding balance of purchased SNCs was included in the energy and
commercial and industrial portfolios, with the remainder included in the real
estate categories. SNC participations are originated in the normal course of
business to meet the needs of our customers. As a matter of policy, we generally
only participate in SNCs for companies headquartered in or which have
significant operations within our market areas. In addition, we must have direct
access to the company's management, an existing banking relationship or the
expectation of broadening the relationship with other banking products and
services within the following 12 to 24 months. SNCs are reviewed at least
quarterly for credit quality and business development successes.
The following table provides additional information about certain credits within
our purchased SNCs portfolio as of year-end.
                                                                2021                                                                  2020
                                        Number of                     Period-End Balances                     Number of                     Period-End Balances
                                      Relationships             Committed            Outstanding            Relationships             Committed            Outstanding
Committed amount:
$20.0 million and greater                            38       $ 1,474,229          $    599,477                            36       $ 1,394,555          $    620,441
$10.0 million to $19.9 million                       14           194,247                93,427                            22           301,581               145,488
Average amount:
$20.0 million and greater                                          38,796                15,776                                          38,738                17,234
$10.0 million to $19.9 million                                     13,875                 6,673                                          13,708         

6,613



Real Estate Loans. Real estate loans increased $636.2 million, or 7.6%, during
2021 compared to 2020. Real estate loans include both commercial and consumer
balances. Commercial real estate loans totaled $7.6 billion, or 84.3% of total
real estate loans, at December 31, 2021 and $7.0 billion, or 84.1% of total real
estate loans, at December 31, 2020. The majority of this portfolio consists of
commercial real estate mortgages, which includes both permanent and intermediate
term loans. Loans secured by owner-occupied properties make up a significant
portion of our commercial real estate portfolio. These loans are viewed
primarily as cash flow loans and secondarily as loans secured by real estate.
Consequently, these loans must undergo the analysis and underwriting process of
a commercial and industrial loan, as well as that of a real estate loan.
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The following tables summarize our commercial real estate loan portfolio,
including commercial real estate loans reported as a component of our energy
loan portfolio segment, as segregated by (i) the type of property securing the
credit and (ii) the geographic region in which the loans were originated.
Property type concentrations are stated as a percentage of year-end total
commercial real estate loans as of December 31, 2021 and 2020:
                                        2021         2020
Property type:
Office building                         24.0  %      25.0  %
Office/warehouse                        18.4         16.6
Retail                                  10.2          8.9
Multifamily                              6.6          8.6
Dealerships                              5.1          5.4
Non-farm/non-residential                 4.8          5.2
Hotel                                    3.8          3.7
Medical offices and services             3.7          4.5
1-4 family construction                  3.7          2.8
Religious                                3.3          3.2
Strip centers                            2.3          3.3
Restaurant                               2.0          2.0
1-4 family                               1.9          1.7
Mini storage                             1.4          1.5
All other                                8.8          7.6

Total commercial real estate loans 100.0% 100.0%


                                                        2021         2020
               Geographic region:
               San Antonio                              26.6  %      27.6  %
               Houston                                  23.5         23.3
               Fort Worth                               16.4         17.4
               Dallas                                   15.6         15.2
               Austin                                   11.0          9.3
               Rio Grande Valley                         3.1          3.3
               Corpus Christi                            2.0          1.6
               Permian Basin                             1.8          2.3
               Total commercial real estate loans      100.0  %     100.0  %


Consumer Loans. The consumer loan portfolio at December 31, 2021 increased $51.7
million, or 2.8%, from December 31, 2020. As the following table illustrates,
the consumer loan portfolio has two distinct segments, including consumer real
estate and consumer and other.
                                  2021             2020
Consumer real estate:
Home equity loans             $   324,157      $   329,390
Home equity lines of credit       519,098          452,854
Other                             567,535          548,530
Total consumer real estate      1,410,790        1,330,774
Consumer and other                477,369          505,680
Total consumer loans          $ 1,888,159      $ 1,836,454


Consumer real estate loans at December 31, 2021 increased $80.0 million, or
6.0%, from December 31, 2020. Combined, home equity loans and lines of credit
made up 59.8% and 58.8% of the consumer real estate loan total at December 31,
2021 and 2020, 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 second half of 2022. The
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consumer and other loan portfolio at December 31, 2021 decreased $28.3 million,
or 5.6%, from December 31, 2020. This portfolio primarily consists of automobile
loans, unsecured revolving credit products, personal loans secured by cash and
cash equivalents, and other similar types of credit facilities.
Foreign Loans. We make 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 December 31,
2021 or 2020.
Maturities and Sensitivities of Loans to Changes in Interest Rates. The
following table presents the maturity distribution of our loan portfolio at
December 31, 2021. The table also presents the portion of loans that have fixed
interest rates or variable interest rates that fluctuate over the life of the
loans in accordance with changes in an interest rate index.
                                    Due in             After One,          After Five but
                                   One Year            but Within          Within Fifteen               After
                                   or Less             Five Years               Years               Fifteen Years              Total
Commercial and industrial       $ 2,034,433          $ 2,313,542          $      874,801          $      142,178          $  5,364,954
Energy                              529,184              520,348                  27,644                     616             1,077,792
Paycheck Protection Program          65,783              363,099                       -                       -               428,882
Commercial real estate
Buildings, land and other           853,657            2,608,397               2,642,266                 168,019             6,272,339
Construction                        404,810              650,066                 175,987                  73,408             1,304,271
Consumer Real Estate                  8,652               19,774                 550,337                 832,027             1,410,790
Consumer and Other                  275,173              190,628                  11,568                       -               477,369
Total                           $ 4,171,692          $ 6,665,854          $    4,282,603          $    1,216,248          $ 16,336,397
Loans with fixed interest
rates:
Commercial and industrial       $   258,103          $   948,376          $      579,787          $      101,224          $  1,887,490
Energy                               12,346               60,176                  26,347                     616                99,485
Paycheck Protection Program          65,783              363,099                       -                       -               428,882
Commercial real estate:
Buildings, land and other           148,108            1,141,474               2,002,748                  58,146             3,350,476
Construction                          1,034               52,785                 140,987                       -               194,806
Consumer Real Estate                  8,651               17,907                 475,482                 389,651               891,691
Consumer and Other                   18,295               33,681                   7,818                       -                59,794
Total                           $   512,320          $ 2,617,498          $    3,233,169          $      549,637          $  6,912,624
Loans with floating interest
rates:
Commercial and industrial       $ 1,776,330          $ 1,365,166          $      295,014          $       40,954          $  3,477,464
Energy                              516,838              460,172                   1,297                       -               978,307
Paycheck Protection Program               -                    -                       -                       -                     -
Commercial real estate:
Buildings, land and other           705,549            1,466,923                 639,518                 109,873             2,921,863
Construction                        403,776              597,281                  35,000                  73,408             1,109,465
Consumer Real Estate                      1                1,867                  74,855                 442,376               519,099
Consumer and Other                  256,878              156,947                   3,750                       -               417,575
Total                           $ 3,659,372          $ 4,048,356          $    1,049,434          $      666,611          $  9,423,773


We generally structure commercial loans with shorter-term maturities in order to
match our funding sources and to enable us to effectively manage the loan
portfolio by providing the flexibility to respond to liquidity needs, changes in
interest rates and changes in underwriting standards and loan structures, among
other things. Due to the shorter-term nature of such loans, from time to time in
the ordinary course of business and without any contractual obligation on our
part, we will renew/extend maturing lines of credit or refinance existing loans
at their maturity dates. Some loans may renew multiple times in a given year as
a result of general customer practice and need. These renewals, extensions and
refinancings are made in the ordinary course of business for customers that meet
our normal level of credit standards. Such borrowers typically request renewals
to support their on-going working capital needs to finance their operations.
Such borrowers are not experiencing financial difficulties and generally could
obtain similar financing from another financial institution. In connection with
each renewal, extension or refinancing, we may require a principal reduction,
adjust the rate of interest and/or modify the structure and other
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terms to reflect the current market pricing/structuring for such loans or to
maintain competitiveness with other financial institutions. In such cases, we do
not generally grant concessions, and, except for those reported in Note 3 -
Loans, any such renewals, extensions or refinancings that occurred during the
reported periods were not deemed to be troubled debt restructurings pursuant to
applicable accounting guidance. Loans exceeding $1.0 million undergo a complete
underwriting process at each renewal.
Accruing Past Due Loans. Accruing past due loans are presented in the following
table. Also see Note 3 - Loans in the accompanying notes to consolidated
financial statements included elsewhere in this report.
                                                                                                            Accruing Loans
                                                                Accruing Loans                              90 or More Days                               Total Accruing
                                                              30-89 Days Past Due                              Past Due                                   Past Due Loans
                                                                            Percent of                                    Percent of                                    Percent of
                                     Total                                   Loans in                                      Loans in                                      Loans in
                                     Loans               Amount              Category                Amount                Category                Amount                Category
December 31, 2021
Commercial and industrial       $  5,364,954          $   29,491                  0.55  %       $        7,802                  0.15  %       $       37,293                  0.70  %
Energy                             1,077,792               1,353                  0.13                     215                  0.02                   1,568                  0.15
Paycheck Protection Program          428,882               4,979                  1.16                  18,766                  4.38                  23,745                  5.54
Commercial real estate:
Buildings, land and other          6,272,339              37,033                  0.59                   8,687                  0.14                  45,720                  0.73
Construction                       1,304,271                 188                  0.01                       -                     -                     188                  0.01
Consumer real estate               1,410,790               4,866           
      0.34                   2,177                  0.15                   7,043                  0.49
Consumer and other                   477,369               4,185                  0.88                   1,076                  0.23                   5,261                  1.11
Total                           $ 16,336,397          $   82,095                  0.50          $       38,723                  0.24          $      120,818                  0.74
Excluding PPP loans             $ 15,907,515          $   77,116                  0.48          $       19,957                  0.13          $       97,073                  0.61
December 31, 2020
Commercial and industrial       $  4,955,341          $   45,126                  0.91  %       $        5,615                  0.11  %       $       50,741                  1.02  %
Energy                             1,235,198              10,037                  0.81                   3,696                  0.30                  13,733                  1.11
Paycheck Protection Program        2,433,849                   -                     -                       -                     -                       -                     -
Commercial real estate:
Buildings, land and other          5,796,653              18,959                  0.33                   1,275                  0.02                  20,234                  0.35
Construction                       1,223,814                 856                  0.07                       -                     -                     856                  0.07
Consumer real estate               1,330,774               8,084                  0.61                   2,469                  0.19                  10,553                  0.80
Consumer and other                   505,680               5,537                  1.09                   1,233                  0.24                   6,770                  1.33
Total                           $ 17,481,309          $   88,599                  0.51          $       14,288                  0.08          $      102,887                  0.59
Excluding PPP loans             $ 15,047,460          $   88,599                  0.59          $       14,288                  0.09          $      102,887                  0.68


Accruing past due loans at December 31, 2021 increased $17.9 million compared to
December 31, 2020. The increase was primarily due to increases in past due
non-construction related commercial real estate loans (up $25.5 million) and
past due PPP loans (up $23.7 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 $5.8 million as the aforementioned
increase in past due non-construction related commercial real estate loans was
entirely offset by decreases in past due commercial and industrial loans (down
$13.4 million) and past due energy loans (down $12.2 million) and, to a lesser
extent, decreases in past due consumer real estate loans (down $3.5 million),
past due consumer and other loans (down $1.5 million) and past due construction
loans (down $668 thousand).
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  Table of Conten    t    s
Non-Accrual Loans. Non-accrual loans are presented in the tables below. Also see
Note 3 - Loans in the accompanying notes to consolidated financial statements
included elsewhere in this report.
                                                        December 31, 2021                                                     December 31, 2020
                                                                   Non-Accrual Loans                                                     Non-Accrual Loans
                                      Total                                     Percent of Loans            Total                                     Percent of Loans
                                      Loans                  Amount               in Category               Loans                  Amount               in Category
Commercial and industrial        $  5,364,954          $        22,582                   0.42  %       $  4,955,341          $        19,849                   0.40  %
Energy                              1,077,792                   14,433                   1.34             1,235,198                   23,168                   1.88
Paycheck Protection Program           428,882                        -                      -             2,433,849                        -                      -
Commercial real estate:
Buildings, land and other           6,272,339                   15,297                   0.24             5,796,653                   15,737                   0.27
Construction                        1,304,271                      948                   0.07             1,223,814                    1,684                   0.14
Consumer real estate                1,410,790                      440                   0.03             1,330,774                      993                   0.07
Consumer and other                    477,369                       13                      -               505,680                       18                      -
Total                            $ 16,336,397          $        53,713                   0.33          $ 17,481,309          $        61,449                   0.35
Excluding PPP loans              $ 15,907,515          $        53,713                   0.34          $ 15,047,460          $        61,449                   0.41
Allowance for credit losses on
loans                                                  $       248,666                                                       $       263,177
Ratio of allowance for credit
losses on loans to non-accrual
loans                                                           462.95  %                                                             428.29  %


Non-accrual loans at December 31, 2021 decreased $7.7 million from December 31,
2020 primarily due to a decrease in non-accrual energy loans. The decrease was
primarily related to principal payments and, to a lesser extent, loans returning
to accrual status and charge-offs, partly offset by new loans placed on
non-accrual status during 2021.
Generally, loans are placed on non-accrual status if principal or interest
payments become 90 days past due and/or management deems the collectibility of
the principal and/or interest to be in question, as well as when required by
regulatory requirements. Once interest accruals are discontinued, accrued but
uncollected interest is charged to current year operations. Subsequent receipts
on non-accrual loans are recorded as a reduction of principal, and interest
income is recorded only after principal recovery is reasonably assured.
Classification of a loan as non-accrual does not preclude the ultimate
collection of loan principal or interest. There were no non-accrual commercial
and industrial loans in excess of $5.0 million at December 31, 2021. Non-accrual
commercial and industrial loans included one credit relationship in excess of
$5.0 million with an aggregate balance of $9.0 million at December 31, 2020. We
recognized a charge-off totaling $861 thousand related to this relationship
during 2021 while the remainder of the decrease was related to principal
payments made by the borrower. Non-accrual energy loans included one credit
relationship in excess of $5 million totaling $9.6 million at December 31, 2021.
This credit relationship was previously reported as non-accrual with an
aggregate balance of $20.1 million at December 31, 2020. 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 December 31, 2021 or
December 31, 2020.
The COVID-19 pandemic has contributed to an increased risk of delinquencies,
defaults and foreclosures. As a result of the COVID-19 pandemic, a significant
number and amount of our loans experienced ratings downgrades, credit
deterioration and defaults. We have a significant amount of loans in certain
industries that have been particularly impacted. These include energy,
hotels/lodging, restaurants, entertainment and commercial real estate, among
others. See additional information about the effects of and risks associated
with the COVID-19 pandemic in the section captioned "Recent Developments Related
to COVID-19" elsewhere in this discussion and Part I. Item 1A. Risk Factors
elsewhere in this report.
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Contents


Allowance For Credit Losses
As discussed in Note 1 - Summary of Significant Accounting Policies in the
accompanying notes to consolidated financial statements, our policies and
procedures related to accounting for credit losses changed on January 1, 2020 in
connection with the adoption of a new accounting standard update as codified in
Accounting Standards Codification ("ASC") Topic 326 ("ASC 326") Financial
Instruments - Credit Losses. In the case of off-balance-sheet credit exposures,
the allowance for credit losses is a liability account, calculated in accordance
with ASC 326, reported as a component of accrued interest payable and other
liabilities in our consolidated balance sheets. The amount of each allowance
account represents management's best estimate of current expected credit losses
("CECL") on these financial instruments considering available information, from
internal and external sources, relevant to assessing exposure to credit loss
over the contractual term of the instrument. Relevant available information
includes historical credit loss experience, current conditions and reasonable
and supportable forecasts. While historical credit loss experience provides the
basis for the estimation of expected credit losses, adjustments to historical
loss information may be made for differences in current portfolio-specific risk
characteristics, environmental conditions or other relevant factors. While
management utilizes its best judgment and information available, the ultimate
adequacy of our allowance accounts is dependent upon a variety of factors beyond
our control, including the performance of our portfolios, the economy, changes
in interest rates and the view of the regulatory authorities toward
classification of assets. For additional information regarding our accounting
policies related to credit losses, refer to Note 1 - Summary of Significant
Accounting Policies and Note 3 - Loans in the accompanying notes to consolidated
financial statements.
Allowance for Credit Losses - Loans. The table below provides an allocation of
the year-end allowance for credit losses on loans by loan portfolio segment;
however, allocation of a portion of the allowance to one segment does not
preclude its availability to absorb losses in other segments.
                                              Amount of           Percent of Loans in                                 Ratio of Allowance
                                              Allowance            Each Category to                 Total             Allocated to Loans
                                              Allocated               Total Loans                   Loans              in Each Category
December 31, 2021
Commercial and industrial                  $      72,091                      32.9  %          $  5,364,954                       1.34  %
Energy                                            17,217                       6.6                1,077,792                       1.60
Paycheck Protection Program                            -                       2.6                  428,882                          -
Commercial real estate                           144,936                      46.4                7,576,610                       1.91
Consumer real estate                               6,585                       8.6                1,410,790                       0.47
Consumer and other                                 7,837                       2.9                  477,369                       1.64
Total                                      $     248,666                     100.0  %          $ 16,336,397                       1.52
Excluding PPP loans                        $     248,666                                       $ 15,907,515                       1.56
December 31, 2020
Commercial and industrial                  $      73,843                      28.4  %          $  4,955,341                       1.49  %
Energy                                            39,553                       7.1                1,235,198                       3.20
Paycheck Protection Program                            -                      13.9                2,433,849                          -
Commercial real estate                           134,892                      40.1                7,020,467                       1.92
Consumer real estate                               7,926                       7.6                1,330,774                       0.60
Consumer and other                                 6,963                       2.9                  505,680                       1.38
Total                                      $     263,177                     100.0  %          $ 17,481,309                       1.51
Excluding PPP loans                        $     263,177                                       $ 15,047,460                       1.75


The allowance allocated to commercial and industrial loans totaled $72.1
million, or 1.34% of total commercial and industrial loans, at December 31, 2021
decreasing $1.8 million, or 2.4%, compared to $73.8 million, or 1.49% of total
commercial and industrial loans at December 31, 2020. Modeled expected credit
losses decreased $18.7 million while qualitative factor ("Q-Factor") and other
qualitative adjustments related to commercial and industrial loans increased
$11.7 million. Specific allocations for commercial and industrial loans that
were evaluated for expected credit losses on an individual basis increased $5.2
million, or 98.0%, from $5.3 million at December 31, 2020 to $10.5 million at
December 31, 2021. The increase in specific allocations for commercial and
industrial loans
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  Table of Conten    t    s
was primarily related to several newly downgraded credit relationships with
specific allocations totaling $9.2 million partly offset by reductions in
allocations for certain other loans due to principal payments received and the
recognition of charge-offs.
The allowance allocated to energy loans totaled $17.2 million, or 1.60% of total
energy loans, at December 31, 2021 decreasing $22.3 million, or 56.5%, compared
to $39.6 million, or 3.20% of total energy loans at December 31, 2020. Modeled
expected credit losses related to energy loans decreased $2.5 million while
Q-Factor and other qualitative adjustments related to energy loans decreased
$15.8 million. Specific allocations for energy loans that were evaluated for
expected credit losses on an individual basis totaled $5.5 million at
December 31, 2021 decreasing $3.9 million, or 41.9%, compared to $9.4 million at
December 31, 2020. The decrease in specific allocations for energy loans was
primarily related to principal payments received and, to a lesser extent, the
recognition of charge-offs.
The allowance allocated to commercial real estate loans totaled $144.9 million,
or 1.91% of total commercial real estate loans, at December 31, 2021 increasing
$10.0 million, or 7.4%, compared to $134.9 million, or 1.92% of total commercial
real estate loans at December 31, 2020. Modeled expected credit losses related
to commercial real estate loans decreased $108.5 million while Q-Factor and
other qualitative adjustments related to commercial real estate loans increased
$118.6 million. Specific allocations for commercial real estate loans that were
evaluated for expected credit losses on an individual basis decreased from $513
thousand at December 31, 2020 to $400 thousand at December 31, 2021.
The allowance allocated to consumer real estate loans totaled $6.6 million, or
0.47% of total consumer real estate loans, at December 31, 2021 decreasing $1.3
million, or 16.9%, compared to $7.9 million, or 0.60% of total consumer real
estate loans at December 31, 2020 primarily due to modeled expected credit
losses which decreased $1.4 million.
The allowance allocated to consumer loans totaled $7.8 million, or 1.64% of
total consumer loans, at December 31, 2021 increasing $874 thousand, or 12.6%,
compared to $7.0 million, or 1.38% of total consumer loans at December 31, 2020.
Modeled expected credit losses related to consumer loans decreased $548 thousand
while Q-Factor and other qualitative adjustments related to consumer loans
increased $1.4 million.
As more fully described in Note 3 - Loans in the accompanying consolidated
financial statements, we measure expected credit losses over the life of each
loan utilizing a combination of models which measure probability of default and
loss given default, among other things. The measurement of expected credit
losses is impacted by loan/borrower attributes and certain macroeconomic
variables. Models are adjusted to reflect the current impact of certain
macroeconomic variables as well as their expected changes over a reasonable and
supportable forecast period.
In estimating expected credit losses as 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. Gross Domestic Product
("GDP") 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.
Furthermore, the December 2021 Consensus Scenario projects an average oil price
in the range of approximately $62 to $66 per barrel through the end of the
forecast period in the fourth quarter of 2023.
In estimating expected credit losses as of December 31, 2020, we utilized the
Moody's Analytics December 2020 BL Baseline Scenario (the "December BL
Scenario") to forecast the macroeconomic variables used in our models. The
December BL Scenario was based on the review of a variety of surveys of baseline
forecasts of the U.S. economy. The December BL Scenario projections included,
among other things, (i) U.S. Gross Domestic Product ("GDP") annualized quarterly
growth rate of 4.6% for the fourth quarter of 2020 followed by projected
annualized quarterly growth rates in the range of approximately 3.0% to 8.0%
during 2021 and 6.0% to 7.5% through the end of the forecast period in the
fourth quarter of 2022; (ii) a U.S. unemployment rate of 6.7% in the fourth
quarter of 2020
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and an average projected rate of 7.0% in 2021 and 6.0% in 2022, with the fourth
quarter of 2022 projected to be 5.4% (Texas unemployment rates were projected to
be slightly less for those periods); and (iii) an average 10 year Treasury rate
of 0.79% in the fourth quarter of 2020, increasing to an average projected rate
of 1.05% in 2021 and 2.04% in 2022. The December BL Scenario also projected
average oil prices of $40 per barrel in the fourth quarter of 2020, $45 per
barrel on average for the year in 2021 and $55 per barrel on average for the
year in 2022, with the fourth quarter of 2022 projected to be $59 per barrel.
The overall loan portfolio, excluding PPP loans which are fully guaranteed by
the SBA, as of December 31, 2021 increased $860.1 million, or 5.7%, compared to
December 31, 2020. This increase included a $556.1 million, or 7.9%, increase in
commercial real estate loans, a $409.6 million, or 8.3%, increase in commercial
and industrial loans and a $80.0 million, or 6.0%, increase in consumer real
estate loans partly offset by a $157.4 million, or 12.7%, decrease in energy
loans and a $28.3 million, or 5.6%, decrease in consumer and other loans. The
weighted average risk grade for commercial and industrial loans decreased to
6.22 at December 31, 2021 compared to 6.45 at December 31, 2020. Commercial and
industrial loans graded "watch" and "special mention" (risk grades 9 and 10)
decreased $135.2 million during 2021 while classified commercial and industrial
loans decreased $12.9 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 6.06 at December 31, 2021 from 6.85 at December 31, 2020. The
decrease in the weighted average risk grade was primarily related to a $141.6
million decrease in energy loans graded "watch" and "special mention" (risk
grades 9 and 10) and a $56.1 million decrease in classified energy loans. Pass
grade energy loans increased $40.2 million while the weighted-average risk grade
of pass grade energy loans decreased slightly from 5.99 at December 31, 2020 to
5.78 at December 31, 2021. The weighted average risk grade for commercial real
estate loans decreased from 7.32 at December 31, 2020 to 7.19 at December 31,
2021. Pass grade commercial real estate loans increased $679.2 million while
commercial real estate loans graded as "watch" and "special mention" decreased
$62.8 million and classified commercial real estate loans decreased $60.3
million.
As noted above our credit loss models utilized the economic forecasts in the
Moody's Consensus Scenario for December 2021 for our estimated expected credit
losses as of December 31, 2021 and the Moody's Baseline Scenario for December
2020 for our estimate of expected credit losses as of December 31, 2020. We
qualitatively adjusted the model results based on these scenarios for various
risk factors that are not considered within our modeling processes but are
nonetheless relevant in assessing the expected credit losses within our loan
pools. These Q-Factor and other qualitative adjustments are discussed below.
Q-Factor adjustments are based upon management judgment and current assessment
as to the impact of risks related to changes in lending policies and procedures;
economic and business conditions; loan portfolio attributes and credit
concentrations; and external factors, among other things, that are not already
captured within the modeling inputs, assumptions and other processes. Management
assesses the potential impact of such items within a range of severely negative
impact to positive impact and adjusts the modeled expected credit loss by an
aggregate adjustment percentage based upon the assessment. As a result of this
assessment as of December 31, 2021, modeled expected credit losses were adjusted
upwards by a weighted-average Q-Factor adjustment of approximately 2.3%, up from
approximately 1.2% at December 31, 2020. The weighted-average Q-Factor
adjustment at December 31, 2021 was based on a limited negative expected impact
on our commercial loan portfolios related to changes in lending policies
procedures and underwriting standards and changes in loan portfolio
concentrations; a negative expected impact associated with national, regional
and local economic and business conditions and developments that affect the
collectability of loans; a severely negative expected impact from other risk
factors associated with our commercial real estate construction and land loan
portfolios, particularly the risks related to expected extensions; and no impact
to changes in loan portfolio attributes, changes in risk grades, changes in the
volumes and severity of loan delinquencies and adverse classifications and
potential deterioration of collateral values. The weighted-average Q-Factor
adjustment at December 31, 2020 was based on a positive expected impact related
to changes in lending policies, procedures and underwriting standards; a limited
negative expected impact associated with changes in loan portfolio attributes
and concentrations, changes in risk grades, changes in the volumes and severity
of loan delinquencies and adverse classifications and potential deterioration of
collateral values; and a severely negative expected impact from other risk
factors associated with our commercial real estate construction and land loan
portfolios, particularly the risks related to expected extensions.
In the first quarter of 2020, unprecedented economic conditions due to the
COVID-19 pandemic and oil and gas price volatility resulted in significant
spikes in the unemployment rate and the level of unemployment claims as well as
severe declines in the level of the U.S. and Texas GDPs, among other things. In
some cases, our expected credit loss models consider these economic variables on
a three- to four-quarter lag basis. As of December 31, 2021, the
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significant spikes in several of these variables are no longer impacting our
model results; however, as the economy has entered recovery, the models are now
being impacted by exceptionally positive changes in certain variables which has
resulted in lower estimates of expected credit losses. Notwithstanding the
foregoing, management believes there are still significant headwinds impacting
the recovery of the U.S. and Texas economies and certain categories of our loan
portfolio. As a result, we have provided additional qualitative adjustments for
certain categories of loans, as further described below.
As of December 31, 2020, we provided an additional qualitative adjustment for
energy production loans. This adjustment was estimated based on borrowing base
determinations for our energy production loans using current engineering
valuations. We also performed an analysis of our customers' secondary sources of
capital. As a result of the estimated borrowing base deficiencies for the
identified credits, we provided an additional qualitative adjustment of
approximately $21.1 million for energy production loans at December 31, 2020.
Using a similar methodology, we determined that a similar qualitative adjustment
was not necessary as of December 31, 2021 as there were no longer any
significant borrowing base deficiencies within the energy production portfolio
as a result of higher market prices for oil and gas and lower line balances on
production loans. Nonetheless, as of December 31, 2021, we provided an
additional qualitative adjustment for energy loans totaling $5.2 million to
address the risk associated with relationship exposure concentrations within the
energy loan portfolio, as further discussed below.
Our Commercial Real Estate Oversight Council, in its oversight and assessment of
the credit quality of our commercial real estate loan portfolios, believes these
portfolios continue to have an elevated level of risk notwithstanding recent
economic stimulus efforts by federal and state governments. As of December 31,
2021, we provided additional qualitative adjustments totaling $127.2 million for
various categories of our commercial real estate loan portfolio. This amount
includes $67.3 million for non-owner-occupied commercial real estate loans,
$40.5 million for owner-occupied commercial real estate loans and $19.4 million
for commercial real estate construction loans. These additional qualitative
adjustments are largely related to the on-going effects of the COVID-19
pandemic, as further discussed below, and to compensate for the effect of
unusually large positive changes in certain economic variables used by our
credit loss models. The COVID-19 pandemic has also been a catalyst for the
evolution of various remote work options which could impact the long-term
performance of some types of office properties within our commercial real estate
portfolio. Furthermore, management believes that there are still significant
headwinds impacting the recovery of the U.S. and Texas economies and certain
categories of our loan portfolio. These additional qualitative adjustments also
include $2.6 million to address the risk associated with relationship exposure
concentrations within our commercial real estate loan portfolio, as further
discussed below.
The COVID-19 pandemic has resulted in a significant decrease in commercial
activity throughout the State of Texas as well as nationally. Efforts to limit
the spread of COVID-19 led to the closure of non-essential businesses, travel
restrictions, supply chain disruptions and prohibitions on public gatherings,
among other things, throughout many parts of the United States and, in
particular, the markets in which we operate. Nonetheless, by late 2020, the
markets in which we operate had substantially reopened. We lend to customers
operating in certain industries (detailed in the table below) that have been,
and are expected to continue to be, more significantly impacted by the effects
of the COVID-19 pandemic. We are continuing to monitor customers in these
industries closely. In assessing these portfolios for an additional qualitative
adjustment, we performed a comprehensive review of the financial condition and
overall outlook of the borrowers within these portfolios. Based on this
analysis, we determined that there continues to be an elevated level of risk
associated with these industries. As a result, we provided an additional
qualitative adjustment related to the effects of the COVID-19 pandemic totaling
$45.2 million as of December 31, 2021, of which $40.5 million was allocated to
commercial real estate loans and $4.7 million was allocated to commercial and
industrial loans. These amounts are included in the totals detailed above. As of
December 31, 2020, we provided a similar additional qualitative adjustment
totaling $47.1 million, which, for the most part, was allocated to commercial
real estate loans.
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These industries that management believes are particularly impacted by the
effects of the COVID-19 pandemic are presented in the following table as of
December 31, 2021 and 2020 and include amounts reported as both commercial and
industrial loans and commercial real estate loans while PPP loans are excluded.
                                                                    Percentage of Total                               Allocated Allowance
                                                Outstanding         Loans, Excluding PPP          Allocated           as a Percentage of
                                                  Balance                  Loans                  Allowance           Outstanding Balance
December 31, 2021
Hotels/lodging                                $    295,088                       1.86  %       $     26,443                        8.96  %
Restaurants                                        285,786                       1.80                12,601                        4.41
Entertainment                                      104,019                       0.65                 9,101                        8.75
Total                                         $    684,893                       4.31  %       $     48,145                        7.03  %
December 31, 2020
Retail/strip centers                          $    916,633                       6.09  %       $     21,049                        2.30  %
Hotels/lodging                                     268,825                       1.79                24,546                        9.13
Restaurants                                        277,054                       1.84                20,617                        7.44
Entertainment                                      126,266                       0.84                 6,151                        4.87
Total                                         $  1,588,778                      10.56  %       $     72,363                        4.55  %


As of December 31, 2021, we provided an additional qualitative adjustment for
our commercial and industrial loan portfolio totaling $13.7 million, of which
$4.7 million was included in the $45.2 million additional qualitative adjustment
for COVID-19 impacted industries discussed above. The adjustment also included
$5.0 million to address the risk associated with relationship exposure
concentrations within our commercial and industrial loan portfolio, as further
discussed below. Lastly, the adjustment included $4.0 million to address the
risk associated with the long-term sustainability of borrowers within our small
business commercial and industrial loan portfolio. The majority of these
borrowers have been bolstered by PPP funding from the SBA which has helped them
to sustain their operations amid on-going pandemic-related shutdowns and other
restrictions. Nonetheless, management believes there is an elevated level of
risk associated with the long-term viability of many of these businesses when
this government supplemented funding runs out. Furthermore, on March 27, 2021,
the COVID-19 Bankruptcy Relief Extension Act of 2021 was enacted, extending the
bankruptcy relief provisions enacted in the CARES Act of 2020 until March 27,
2022. These provisions provide financially distressed small businesses and
individuals greater access to bankruptcy relief. In that regard, we also
provided an additional qualitative adjustment for our consumer and other loan
portfolio totaling $1.4 million in light of the level of unsecured loans within
this portfolio and other risk factors.
As of December 31, 2021, we allocated $12.8 million to address the risk
associated with relationship exposure concentrations within our loan portfolio.
Of this amount, $5.2 million was allocated to energy loans, $5.0 million was
allocated to commercial and industrial loans and $2.6 million was allocated to
commercial real estate loans. Management has observed through industry research
that the degree to which expected credit losses fluctuate is directly related to
the degree to which a loan portfolio is concentrated or diversified. A highly
concentrated loan portfolio is more likely to exhibit concentrated losses
compared to a well diversified loan portfolio where segments are exposed to
relatively uncorrelated factors. The 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
aforementioned qualitative adjustments, which were based upon statistical
analysis, to address the risk associated with the such a relationship
deteriorating to a loss event.

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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.
                                                                                                          Ratio of Annualized Net
                                       Credit Loss                 Net                                         (Charge-Offs)
                                         Expense              (Charge-Offs)             Average            Recoveries to Average
                                        (Benefit)              Recoveries                Loans                     Loans
2021
Commercial and industrial            $      (2,160)         $          408          $  4,854,465                           0.01  %
Energy                                     (19,207)                 (3,129)            1,049,540                          (0.30)
Paycheck Protection Program                      -                       -             1,851,765                              -
Commercial real estate                       8,101                   1,943             7,189,325                           0.03
Consumer real estate                        (3,061)                  1,720             1,350,554                           0.13
Consumer and other                          10,230                  (9,356)              473,982                          (1.97)
Total                                $      (6,097)         $       (8,414)         $ 16,769,631                          (0.05)
Excluding PPP loans                  $      (6,097)         $       (8,414)         $ 14,917,866                          (0.06)
2020
Commercial and industrial            $      15,156          $      (14,169)         $  5,068,730                          (0.28) %
Energy                                      85,889                 (73,265)            1,459,450                          (5.02)
Paycheck Protection Program                      -                       -             2,158,477                              -
Commercial real estate                     124,427                  (7,053)            6,705,206                          (0.11)
Consumer real estate                         1,906                    (485)            1,260,556                          (0.04)
Consumer and other                           9,632                  (8,463)              512,034                          (1.65)
Total                                $     237,010          $     (103,435)         $ 17,164,453                          (0.60)
Excluding PPP loans                  $     237,010          $     (103,435)         $ 15,005,976                          (0.69)
2019
Commercial and industrial            $      13,144          $      (10,131)         $  5,227,627                          (0.19) %
Energy                                      14,388                  (6,058)            1,556,005                          (0.39)
Paycheck Protection Program                      -                       -                     -                              -
Commercial real estate                      (6,934)                   (806)            5,969,354                          (0.01)
Consumer real estate                           467                  (2,457)            1,154,723                          (0.21)
Consumer and other                          12,694                 (14,272)              532,840                          (2.68)
Total                                $      33,759          $      (33,724)         $ 14,440,549                          (0.23)
Excluding PPP loans                  $      33,759          $      (33,724)         $ 14,440,549                          (0.23)


We recorded a net credit loss benefit related to loans totaling $6.1 million for
2021 compared to a net credit loss expense related to loans totaling $237.0
million in 2020 and $33.8 million in 2019. The net credit loss benefit related
to loans during 2021 primarily reflects improvements in forecasted economic
conditions and oil price trends relative to the prevailing conditions in 2020 as
well as a decrease in net charge-offs. Credit loss expense related to loans
during 2020 reflected the uncertain future impacts associated with the COVID-19
pandemic and the significant volatility in oil prices as well as the level of
net charge-offs, the expected deterioration in credit quality and other changes
within the loan portfolio. Credit loss expense during 2019 was calculated under
our prior incurred loss methodology and primarily reflected the level of net
charge-offs and specific valuation allowances as well as the impact of the
overall growth in the loan portfolio since previous year-end. The ratio of the
allowance for credit losses on loans to total loans was 1.52% (1.56% excluding
PPP loans) at December 31, 2021 compared to 1.51% (1.75% excluding PPP loans) at
December 31, 2020 and 0.90% at December 31, 2019. Management believes the
recorded amount of the allowance for credit losses on loans is appropriate based
upon management's best estimate of current expected credit losses within the
existing portfolio of loans. Should any of the factors considered by management
in making this estimate change, our estimate of current expect credit losses
could also change, which could affect the level of future credit loss expense
related to loans.

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Allowance for Credit Losses - Off-Balance-Sheet Credit Exposures. The allowance
for credit losses on off-balance-sheet credit exposures totaled $50.3 million
and $44.2 million at December 31, 2021 and December 31, 2020, respectively. The
level of the allowance for credit losses on off-balance-sheet credit exposures
depends upon the volume of outstanding commitments, underlying risk grades, the
expected utilization of available funds and forecasted economic conditions
impacting our loan portfolio. Credit loss expense related to off-balance-sheet
credit exposures totaled $6.2 million during 2021 compared to $4.3 million
during 2020. The increase in credit loss expense primarily reflects an increase
in overall off-balance-sheet credit exposures and the uncertain future impacts
associated with COVID-19. Credit loss expense for off-balancee-sheet credit
exposures in 2021 was also partly impacted by the down-grade of a large credit
commitment within our SNC portfolio. No credit loss expense related to
off-balance-sheet credit exposures was recognized during 2019 under our prior
incurred loss methodology. Further information regarding our policies and
methodology used to estimate the allowance for credit losses on
off-balance-sheet credit exposures is presented in Note 8 - Off-Balance-Sheet
Arrangements, Commitments, Guarantees and Contingencies in the accompanying
notes to consolidated financial statements.
Securities
The following tables summarize the maturity distribution schedule with
corresponding weighted-average yields of securities held to maturity and
securities available for sale as of December 31, 2021. Weighted-average yields
have been computed on a fully taxable-equivalent basis using a tax rate of 21%.
Mortgage-backed securities are included in maturity categories based on their
stated maturity date. Expected maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations. Other
securities classified as available for sale include stock in 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. Held-to-maturity
securities are presented at amortized cost before any allowance for credit
losses.
                                             Within 1 Year                                    1-5 Years                                    5-10 Years                                    After 10 Years                                      Total
                                                        Weighted                                      Weighted                                      Weighted                                         Weighted                                       Weighted
                                                        Average                                       Average                                       Average                                          Average                                        Average
                                    Amount               Yield                     Amount              Yield                     Amount              Yield                      Amount                Yield                     Amount               Yield
Held to maturity:

Residential mortgage- backed
securities                     $          37                     1.68  %       $         -                        -  %       $   515,100                     2.28  %       $       12,127                     2.51  %       $    527,264                     2.28  %
States and political
subdivisions                         464,112                     3.31              180,373                     3.43               73,808                     3.23                 502,280                     3.57             1,220,573                     3.43
Other                                  1,500                     1.92                    -                        -                    -                        -                       -                        -                 1,500                     1.92
Total                          $     465,649                     3.31          $   180,373                     3.43          $   588,908                     2.40          $      514,407                     3.54          $  1,749,337                     3.08
Available for sale:
U.S. Treasury                  $           -                        -  %       $ 1,038,734                     1.42  %       $   942,113                     1.42  %       $      198,586                     2.15  %       $  2,179,433                     1.48  %
Residential mortgage- backed
securities                                64                     2.06               15,954                     3.22               19,624                     1.53               4,030,623                     1.98             4,066,265                     1.98
States and political
subdivisions                          87,493                     4.32            1,715,065                     3.94              858,485                     3.42               4,975,528                     3.48             7,636,571                     3.59
Other                                      -                        -                    -                        -                    -                        -                       -                        -                42,359                        -
Total                          $      87,557                     4.32          $ 2,769,753                     2.96          $ 1,820,222                     2.33          $    9,204,737                     2.77          $ 13,924,628                     2.75


All mortgage-backed securities included in the above tables were issued by U.S.
government agencies and corporations. At December 31, 2021, all of the
securities in our municipal bond portfolio were issued by the State of Texas or
political subdivisions or agencies within the State of Texas, of which
approximately 77.9% are either guaranteed by the Texas Permanent School Fund,
which has a "triple-A" insurer financial strength rating, or secured by U.S.
Treasury securities via defeasance of the debt by the issuers.
The average taxable-equivalent yield on the securities portfolio based on a 21%
tax rate was 3.29% in 2021 compared to 3.46% in 2020. Tax-exempt municipal
securities totaled 64.2% of average securities in 2021 compared to 66.6% in
2020. The average yield on taxable securities was 1.97% in 2021 compared to
2.27% in 2020, while the average taxable-equivalent yield on tax-exempt
securities was 4.06% in 2021 compared to 4.08% in 2020. See the section
captioned "Net Interest Income" elsewhere in this discussion.
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Deposits
The table below presents the daily average balances of deposits by type and
weighted-average rates paid thereon during the years presented:
                                                                 2021                                         2020                                         2019
                                                    Average               Average                Average               Average                Average               Average
                                                    Balance              Rate Paid               Balance              Rate Paid               Balance              Rate Paid
Non-interest-bearing demand deposits            $ 16,670,807                                 $ 13,563,696                                 $ 10,358,416
Interest-bearing deposits:
Savings and interest checking                     10,682,149                   0.01  %          8,283,665                   0.03  %          7,243,016                   0.15  %
Money market accounts                              9,990,626                   0.09             8,457,263                   0.18             7,806,175                   0.93
Time accounts                                      1,129,041                   0.33             1,133,648                   1.25             1,005,670                   1.64
Total interest-bearing deposits                   21,801,816                   0.07            17,874,576                   0.18            16,054,861                   0.62
Total deposits                                  $ 38,472,623                   0.04          $ 31,438,272                   0.10          $ 26,413,277                   0.38


Average deposits increased $7.0 billion, or 22.4%, in 2021 compared to 2020. The
most significant volume growth during 2021 compared to 2020 was in non-interest
bearing deposits; savings and interest checking; and money market deposits. The
ratio of average interest-bearing deposits to total average deposits was 56.7%
in 2021 compared to 56.9% in 2020. The average cost of interest-bearing deposits
and total deposits was 0.07% and 0.04% during 2021 compared to 0.18% and 0.10%
during 2020. The decrease in the average cost of interest-bearing deposits in
2021 as compared to 2020 was related to lower average interest rates paid on
most of our interest-bearing deposit products as a result of lower average
market interest rates.
Geographic Concentrations. The following table summarizes our average total
deposit portfolio, as segregated by the geographic region from which the deposit
accounts were originated. Certain accounts, such as correspondent bank deposits
and deposits allocated to certain statewide operational units, are recorded at
the statewide level.
                                        Percent                         Percent                         Percent
                          2021          of Total          2020          of Total          2019          of Total
San Antonio          $ 11,140,600         29.0  %    $  9,147,078         29.1  %    $  7,869,417         29.8  %
Houston                 7,360,930         19.1          5,715,514         18.2          4,467,132         16.9
Fort Worth              6,650,164         17.3          5,615,584         17.9          4,699,142         17.8
Austin                  4,931,275         12.8          3,882,661         12.3          3,285,637         12.5
Dallas                  3,181,252          8.3          2,553,571          8.1          2,160,684          8.2
Corpus Christi          1,965,158          5.1          1,655,395          5.3          1,473,967          5.6
Permian Basin           1,694,366          4.4          1,518,781          4.8          1,326,517          5.0
Rio Grande Valley       1,055,427          2.7            895,653          2.8            747,713          2.8
Statewide                 493,451          1.3            454,035          1.5            383,068          1.4
Total                $ 38,472,623        100.0  %    $ 31,438,272        100.0  %    $ 26,413,277        100.0  %


Foreign Deposits. Mexico has historically been considered a part of the natural
trade territory of our banking offices. Accordingly, U.S. dollar-denominated
foreign deposits from sources within Mexico have traditionally been a
significant source of funding. Average deposits from foreign sources, primarily
Mexico, totaled $933.3 million in 2021 and $824.9 million in 2020.
Brokered Deposits. From time to time, we have obtained interest-bearing deposits
through brokered transactions including participation in the Certificate of
Deposit Account Registry Service ("CDARS"). Brokered deposits were not
significant during the reported periods.
Capital and Liquidity
Capital. Shareholders' equity totaled $4.4 billion at December 31, 2021 and $4.3
billion at December 31, 2020. In addition to net income of $443.1 million, other
sources of capital during 2021 included $54.4 million in proceeds from stock
option exercises and $12.8 million related to stock-based compensation.
Additionally, we issued $1.7 million of common stock held in treasury to our
401(k) plan in connection with matching contributions. Uses of capital during
2021 included $195.9 million of dividends paid on preferred and common stock, an
other comprehensive loss, net of tax, of $165.7 million and $3.9 million of
treasury stock purchases.
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The accumulated other comprehensive income/loss component of shareholders'
equity totaled a net, after-tax, unrealized gain of $347.3 million at
December 31, 2021 compared to a net, after-tax, unrealized gain $513.0 million
at December 31, 2020. The decrease was primarily due to a $183.6 million net,
after-tax, decrease in the net unrealized gain on securities available for sale
and securities transferred to held to maturity, partly offset by $17.9 million
related to a decrease in the net actuarial loss and reclassification adjustments
related to our defined-benefit post retirement benefit plans.
Under the Basel III Capital Rules, we elected to opt-out of the requirement to
include most components of accumulated other comprehensive income in regulatory
capital. Accordingly, amounts reported as accumulated other comprehensive
income/loss related to securities available for sale, effective cash flow hedges
and defined benefit post-retirement benefit plans do not increase or reduce
regulatory capital and are not included in the calculation of risk-based capital
and leverage ratios. In connection with the adoption of ASC 326 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 9 - Capital and Regulatory Matters in the accompanying notes to
consolidated financial statements elsewhere in this report.
We paid quarterly dividends of $0.72, $0.72, $0.75 and $0.75 per common share
during the first, second, third and fourth quarters of 2021, respectively, and
quarterly dividends of $0.71, $0.71, $0.71 and $0.72 per common share during the
first, second, third and fourth quarters of 2020, respectively. This equates to
a dividend payout ratio of 43.3% in 2021 and 55.8% in 2020. The amount of
dividend, if any, we may pay may be limited as more fully discussed in
Note 9 - Capital and Regulatory Matters in the accompanying notes to
consolidated financial statements elsewhere in this report.
Preferred Stock. On March 16, 2020, we redeemed all 6,000,000 shares of our
5.375% Non-Cumulative Perpetual Preferred Stock, Series A, ("Series A Preferred
Stock") at a redemption price of $25 per share, or an aggregate redemption of
$150.0 million. On November 19, 2020 we issued 150,000 shares, or $150.0 million
in aggregate liquidation preference, of our 4.450% Non-Cumulative Perpetual
Preferred Stock, Series B, par value $0.01 and liquidation preference $1,000 per
share ("Series B Preferred Stock"). Each share of Series B Preferred Stock
issued and outstanding is represented by 40 depositary shares, each representing
a 1/40th ownership interest in a share of the Series B Preferred Stock
(equivalent to a liquidation preference of $25 per share). Additional details
about our preferred stock are included in Note 9 - Capital and Regulatory
Matters in the accompanying notes to consolidated financial statements elsewhere
in this report.
Stock Repurchase Plans. From time to time, our board of directors has authorized
stock repurchase plans. In general, stock repurchase plans allow us to
proactively manage our capital position and return excess capital to
shareholders. Shares purchased under such plans also provide us with shares of
common stock necessary to satisfy obligations related to stock compensation
awards. On January 26, 2022, our board of directors authorized a $100.0 million
stock repurchase plan, allowing us to repurchase shares of our common stock over
a one-year period from time to time at various prices in the open market or
through private transactions. Under prior stock repurchase plans, we
repurchased, 177,834 shares at a total cost of $13.7 million during 2020 and
699,031 shares at a total cost of $67.2 million during 2019. No shares were
repurchased under a stock repurchase plan during 2021. See Part II,
Item 5 - Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities, elsewhere in this report.
Liquidity. Liquidity measures the ability to meet current and future cash flow
needs as they become due. The liquidity of a financial institution reflects its
ability to meet loan requests, to accommodate possible outflows in deposits and
to take advantage of interest rate market opportunities. The ability of a
financial institution to meet its current financial obligations is a function of
its balance sheet structure, its ability to liquidate assets and its access to
alternative sources of funds. The objective of our liquidity management is to
manage cash flow and liquidity reserves so that they are adequate to fund our
operations and to meet obligations and other commitments on a timely basis and
at a reasonable cost. We seek to achieve this objective and ensure that funding
needs are met by maintaining an appropriate level of liquid funds through
asset/liability management, which includes managing the mix and time to maturity
of financial assets and financial liabilities on our balance sheet. Our
liquidity position is enhanced by our ability to raise additional funds as
needed in the wholesale markets.

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Asset liquidity is provided by liquid assets which are readily marketable or
pledgeable or which will mature in the near future. Liquid assets include cash,
interest-bearing deposits in banks, securities available for sale, maturities
and cash flow from securities held to maturity, and federal funds sold and
resell agreements. Liability liquidity is provided by access to funding sources
which include core deposits and correspondent banks in our natural trade area
that maintain accounts with and sell federal funds to Frost Bank, as well as
federal funds purchased and repurchase agreements from upstream banks and
deposits obtained through financial intermediaries.
Our liquidity position is continuously monitored and adjustments are made to the
balance between sources and uses of funds as deemed appropriate. Liquidity risk
management is an important element in our asset/liability management process. We
regularly model liquidity stress scenarios to assess potential liquidity
outflows or funding problems resulting from economic disruptions, volatility in
the financial markets, unexpected credit events or other significant occurrences
deemed problematic by management. These scenarios are incorporated into our
contingency funding plan, which provides the basis for the identification of our
liquidity needs. As of December 31, 2021, we had approximately $15.9 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 December 31, 2021, based upon available, pledgeable collateral, our total
borrowing capacity with the FHLB was approximately $3.1 billion. Furthermore, at
December 31, 2021, we had approximately $9.3 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.
As of December 31, 2021, management is not aware of any events that are
reasonably likely to have a material adverse effect on our liquidity, capital
resources or operations. In addition, management is not aware of any regulatory
recommendations regarding liquidity that would have a material adverse effect on
us.
In the ordinary course of business we have entered into contractual obligations
and have made other commitments to make future payments. Refer to the
accompanying notes to consolidated financial statements elsewhere in this report
for the expected timing of such payments as of December 31, 2021. These include
payments related to (i) long-term borrowings (Note 7 - Borrowed Funds),
(ii) operating leases (Note 4 - Premises and Equipment and Lease Commitments),
(iii) time deposits with stated maturity dates (Note 6 - Deposits) and
(iv) commitments to extend credit and standby letters of credit (Note 8 -
Off-Balance-Sheet Arrangements, Commitments, Guarantees and Contingencies).
Since Cullen/Frost is a holding company and does not conduct operations, its
primary sources of liquidity are dividends upstreamed 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 9 - Capital and Regulatory
Matters in the accompanying notes to consolidated financial statements elsewhere
in this report regarding such dividends. At December 31, 2021, Cullen/Frost had
liquid assets, including cash and resell agreements, totaling $471.9 million.
Regulatory and Economic Policies
Our business and earnings are affected by general and local economic conditions
and by the monetary and fiscal policies of the United States government, its
agencies and various other governmental regulatory authorities, among other
things. The Federal Reserve Board regulates the supply of money in order to
influence general economic conditions. Among the instruments of monetary policy
historically available to the Federal Reserve Board are (i) conducting open
market operations in United States government obligations, (ii) changing the
discount rate on financial institution borrowings, (iii) imposing or changing
reserve requirements against financial institution deposits, and
(iv) restricting certain borrowings and imposing or changing reserve
requirements against certain borrowings by financial institutions and their
affiliates. These methods are used in varying degrees and combinations to affect
directly the availability of bank loans and deposits, as well as the interest
rates charged on loans and paid on deposits. For that reason alone, the policies
of the Federal Reserve Board have a material effect on our earnings.
Governmental policies have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do so in the
future; however, we cannot accurately predict the nature, timing or extent of
any effect such policies may have on our future business and earnings.
Accounting Standards Updates
See Note 20 - Accounting Standards Updates in the accompanying notes to
consolidated financial statements elsewhere in this report for details of
recently issued accounting pronouncements and their expected impact on our
financial statements.

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