Loans

Loans were as follows:



	March 31, 2016		Percentage of Total		December 31, 2015		Percentage of Total
Commercial and industrial	$	4,184,960	36.3	%	$	4,120,522	35.9	%
Energy:
Production	1,175,149		10.2		1,249,678		10.9
Service	251,147		2.2		272,934		2.4
Other	230,064		2.0		235,583		2.0
Total energy	1,656,360		14.4		1,758,195		15.3
Commercial real estate:
Commercial mortgages	3,351,533		29.0		3,285,041		28.6
Construction	752,916		6.5		720,695		6.3
Land	282,354		2.5		286,991		2.5
Total commercial real estate	4,386,803		38.0		4,292,727		37.4
Consumer real estate:
Home equity loans	341,327		3.0		340,528		3.0
Home equity lines of credit	236,290		2.0		233,525		2.0
Other	302,611		2.6		306,696		2.6
Total consumer real estate	880,228		7.6		880,749		7.6
Total real estate	5,267,031		45.6		5,173,476		45.0
Consumer and other	433,684		3.7		434,338		3.8
Total loans	$	11,542,035	100.0	%	$	11,486,531	100.0	%

Concentrations of Credit. Most of our lending activity occurs within the State of Texas, including the four largest metropolitan areas of Austin, Dallas/Ft. Worth, Houston and San Antonio, as well as other markets. The majority of our loan portfolio consists of commercial and industrial and commercial real estate loans. As of March 31, 2016, there were no concentrations of loans related to any single industry in excess of 10% of total loans other than energy loans, which totaled 14.4% of total loans. Unfunded commitments to extend credit and standby letters of credit issued to customers in the energy industry totaled $1.3 billion and $61.1 million, respectively, as of March 31, 2016.

Foreign Loans. We have U.S. dollar denominated loans and commitments to borrowers in Mexico. The outstanding balance of these loans and the unfunded amounts available under these commitments were not significant at March 31, 2016 or December 31, 2015.

Non-Accrual and Past Due Loans. Non-accrual loans, segregated by class of loans, were as follows:



	March 31, 2016		December 31, 2015
Commercial and industrial	$	26,922	$	25,111
Energy	114,124		21,180
Commercial real estate:
Buildings, land and other	33,449		34,519
Construction	970		569
Consumer real estate	1,770		1,862
Consumer and other	220		226
Total	$	177,455	$	83,467

As of March 31, 2016, non-accrual loans reported in the table above included $61.3 million related to loans that were restructured as “troubled debt restructurings” during 2016. See the section captioned “Troubled Debt Restructurings” elsewhere in this note. Had non-accrual loans performed in accordance with their original contract terms, we would have recognized additional interest income, net of tax, of approximately $844 thousand for the three months ended March 31, 2016, compared to $397 thousand for three months ended March 31, 2015.

An age analysis of past due loans (including both accruing and non-accruing loans), segregated by class of loans, as of March 31, 2016 was as follows:



	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Commercial and industrial	$	26,818	$	23,617	$	50,435	$	4,134,525	$	4,184,960	$	4,909
Energy	12,616		15,499		28,115		1,628,245		1,656,360		1,262
Commercial real estate:
Buildings, land and other	15,129		26,135		41,264		3,592,623		3,633,887		805
Construction	1,300		995		2,295		750,621		752,916		669
Consumer real estate	5,276		1,380		6,656		873,572		880,228		1,269
Consumer and other	5,203		399		5,602		428,082		433,684		338
Total	$	66,342	$	68,025	$	134,367	$	11,407,668	$	11,542,035	$	9,252

Impaired Loans. Impaired loans are set forth in the following table. No interest income was recognized on impaired loans subsequent to their classification as impaired.



	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
March 31, 2016
Commercial and industrial	$	27,980	$	20,367	$	4,390	$	24,757	$	2,852
Energy	122,242		27,612		86,479		114,091		27,450
Commercial real estate:
Buildings, land and other	36,348		31,545		—		31,545		—
Construction	1,218		970		—		970		—
Consumer real estate	740		457		—		457		—
Consumer and other	—		—		—		—		—
Total	$	188,528	$	80,951	$	90,869	$	171,820	$	30,302
December 31, 2015
Commercial and industrial	$	26,067	$	18,776	$	4,084	$	22,860	$	2,378
Energy	25,240		8,689		12,450		21,139		2,000
Commercial real estate:
Buildings, land and other	37,126		32,425		—		32,425		—
Construction	793		569		—		569		—
Consumer real estate	755		485		—		485		—
Consumer and other	—		—		—		—		—
Total	$	89,981	$	60,944	$	16,534	$	77,478	$	4,378

The average recorded investment in impaired loans was as follows:



	Three Months Ended March 31,
	2016		2015
Commercial and industrial	$	23,809	$	31,428
Energy	67,615		636
Commercial real estate:
Buildings, land and other	31,985		16,313
Construction	770		2,767
Consumer real estate	471		582
Consumer and other	—		—
Total	$	124,650	$	51,726

Troubled Debt Restructurings. Troubled debt restructurings during the three months ended March 31, 2016 and March 31, 2015 are set forth in the following table.



	Three Months Ended March 31, 2016				Three Months Ended March 31, 2015
	Balance at Restructure		Balance at Period-End		Balance at Restructure		Balance at Period-End
Commercial and industrial	$	19	$	17	$	709	$	613
Energy	62,546		61,095		—		—
Commercial real estate:
Construction	243		235		—		—
	$	62,808	$	61,347	$	709	$	613

The modifications during the three months ended March 31, 2016 primarily related to extending amortization periods, deferral of interest payments and the waiver of certain covenants, while the modifications during the three months ended March 31, 2015 primarily related to extending amortization periods and a temporary reduction in payments. As of March 31, 2016, there was one loan restructured during the last year totaling $17 thousand that was in excess of 90 days past due. The modifications during the reported periods did not significantly impact our determination of the allowance for loan losses.

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

We utilize a risk grading matrix to assign a risk grade to each of our commercial loans. Loans are graded on a scale of 1 to 14. A description of the general characteristics of the 14 risk grades is set forth in our 2015 Form 10-K. In monitoring credit quality trends in the context of assessing the appropriate level of the allowance for loan losses, we monitor portfolio credit quality by the weighted-average risk grade of each class of commercial loan. Individual relationship managers review updated financial information for all pass grade loans to recalculate the risk grade on at least an annual basis. When a loan has a calculated risk grade of 9, it is still considered a pass grade loan; however, it is considered to be on management’s “watch list,” where a significant risk-modifying action is anticipated in the near term. When a loan has a calculated risk grade of 10 or higher, a special assets officer monitors the loan on an on-going basis. The following tables present weighted average risk grades for all commercial loans by class.



	March 31, 2016			December 31, 2015
	Weighted Average Risk Grade	Loans		Weighted Average Risk Grade	Loans
Commercial and industrial:
Risk grades 1-8	5.92	$	3,888,217	5.88	$	3,869,203
Risk grade 9	9.00	121,570		9.00	100,670
Risk grade 10	10.00	84,614		10.00	76,030
Risk grade 11	11.00	63,637		11.00	49,508
Risk grade 12	12.00	23,994		12.00	22,644
Risk grade 13	13.00	2,928		13.00	2,467
Total	6.21	$	4,184,960	6.13	$	4,120,522
Energy
Risk grades 1-8	6.16	$	846,191	6.12	$	1,385,749
Risk grade 9	9.00	216,140		9.00	212,250
Risk grade 10	10.00	276,693		10.00	62,163
Risk grade 11	11.00	203,213		11.00	76,853
Risk grade 12	12.00	85,919		12.00	19,180
Risk grade 13	13.00	28,204		13.00	2,000
Total	8.18	$	1,656,360	6.89	$	1,758,195



(continued)	March 31, 2016			December 31, 2015
	Weighted Average Risk Grade	Loans		Weighted Average Risk Grade	Loans
Commercial real estate:
Buildings, land and other
Risk grades 1-8	6.60	$	3,324,030	6.58	$	3,280,435
Risk grade 9	9.00	133,790		9.00	140,900
Risk grade 10	10.00	79,584		10.00	72,577
Risk grade 11	11.00	63,034		11.00	43,601
Risk grade 12	12.00	33,449		12.00	34,519
Risk grade 13	13.00	—		13.00	—
Total	6.89	$	3,633,887	6.85	$	3,572,032
Construction
Risk grades 1-8	7.05	$	739,863	6.91	$	696,229
Risk grade 9	9.00	10,759		9.00	13,074
Risk grade 10	10.00	1,271		10.00	2,757
Risk grade 11	11.00	53		11.00	8,066
Risk grade 12	12.00	970		12.00	569
Risk grade 13	13.00	—		13.00	—
Total	7.09	$	752,916	7.01	$	720,695

Net (charge-offs)/recoveries, segregated by class of loans, were as follows:



	Three Months Ended March 31,
	2016			2015
Commercial and industrial	$	(1,132	)	$	(852	)
Energy	(1,011		)	2
Commercial real estate:
Buildings, land and other	61			(307		)
Construction	7			1
Consumer real estate	99			(28		)
Consumer and other	(503		)	(812		)
Total	$	(2,479	)	$	(1,996	)

In assessing the general economic conditions in the State of Texas, management monitors and tracks the Texas Leading Index (“TLI”), which is produced by the Federal Reserve Bank of Dallas. The TLI, the components of which are more fully described in our 2015 Form 10-K, totaled 120.6 at February 29, 2016 (most recent date available) and 123.0 at December 31, 2015. A higher TLI value implies more favorable economic conditions.

Allowance for Loan Losses. The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of inherent losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. Our allowance for loan loss methodology, which is more fully described in our 2015 Form 10-K and below for changes made during the first quarter of 2016, follows the accounting guidance set forth in U.S. generally accepted accounting principles and the Interagency Policy Statement on the Allowance for Loan and Lease Losses, which was jointly issued by U.S. bank regulatory agencies. The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss and recovery experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off.

During the first quarter of 2016, we changed the way we estimate valuation allowances for consumer and other loans, particularly overdrafts. Prior to 2016, we used a single, combined historical loss allocation factor for all consumer and other loans, which included overdrafts. In 2016, we began using two separate historical loss allocation factors for consumer and other loans, one historical loss allocation factor for consumer and other loans, excluding overdrafts, and a separate historical loss allocation factor for overdrafts. While the effect of this change resulted in a decrease in the estimated valuation allowances needed for consumer and other loans, the impact of the change was not significant to our overall allocation of the allowance for loan losses.

The following table presents details of the allowance for loan losses allocated to each portfolio segment as of March 31, 2016 and December 31, 2015 and detailed on the basis of the impairment evaluation methodology we used:



	Commercial and Industrial		Energy		Commercial Real Estate		Consumer Real Estate		Consumer and Other			Total
March 31, 2016
Historical valuation allowances	$	28,755	$	43,633	$	15,352	$	2,097	$	4,387		$	94,224
Specific valuation allowances	2,852		27,450		—		—		—			30,302
General valuation allowances	5,790		3,673		4,047		1,230		(426		)	14,314
Macroeconomic valuation allowances	7,687		10,217		4,188		459		489			23,040
Total	45,084		84,973		23,587		3,786		4,450			161,880
Allocated to loans:
Individually evaluated	$	2,852	$	27,450	$	—	$	—	$	—		$	30,302
Collectively evaluated	42,232		57,523		23,587		3,786		4,450			131,578
Total	$	45,084	$	84,973	$	23,587	$	3,786	$	4,450		$	161,880
December 31, 2015
Historical valuation allowances	$	25,428	$	21,195	$	15,544	$	2,109	$	12,813		$	77,089
Specific valuation allowances	2,378		2,000		—		—		—			4,378
General valuation allowances	7,339		5,525		4,619		2,052		(6,932		)	12,603
Macroeconomic valuation allowances	7,848		25,976		4,150		498		3,317			41,789
Total	42,993		54,696		24,313		4,659		9,198			135,859
Allocated to loans:
Individually evaluated	$	2,378	$	2,000	$	—	$	—	$	—		$	4,378
Collectively evaluated	40,615		52,696		24,313		4,659		9,198			131,481
Total	$	42,993	$	54,696	$	24,313	$	4,659	$	9,198		$	135,859

Our recorded investment in loans as of March 31, 2016 and December 31, 2015 related to each balance in the allowance for loan losses by portfolio segment and detailed on the basis of the impairment methodology we used was as follows:



	Commercial and Industrial		Energy		Commercial Real Estate		Consumer Real Estate		Consumer and Other		Total
March 31, 2016
Individually evaluated	$	24,757	$	114,091	$	32,515	$	457	$	—	$	171,820
Collectively evaluated	4,160,203		1,542,269		4,354,288		879,771		433,684		11,370,215
Total	$	4,184,960	$	1,656,360	$	4,386,803	$	880,228	$	433,684	$	11,542,035
December 31, 2015
Individually evaluated	$	22,860	$	21,139	$	32,994	$	485	$	—	$	77,478
Collectively evaluated	4,097,662		1,737,056		4,259,733		880,264		434,338		11,409,053
Total	$	4,120,522	$	1,758,195	$	4,292,727	$	880,749	$	434,338	$	11,486,531

The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2016 and 2015. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.



	Commercial and Industrial			Energy			Commercial Real Estate			Consumer Real Estate			Consumer and Other			Total
Three months ended:
March 31, 2016
Beginning balance	$	42,993		$	54,696		$	24,313		$	4,659		$	9,198		$	135,859
Provision for loan losses	3,223			31,288			(794		)	(972		)	(4,245		)	28,500
Charge-offs	(1,861		)	(1,011		)	(28		)	(154		)	(2,724		)	(5,778		)
Recoveries	729			—			96			253			2,221			3,299
Net charge-offs	(1,132		)	(1,011		)	68			99			(503		)	(2,479		)
Ending balance	$	45,084		$	84,973		$	23,587		$	3,786		$	4,450		$	161,880
March 31, 2015
Beginning balance	$	44,273		$	14,919		$	27,163		$	5,178		$	8,009		$	99,542
Provision for loan losses	346			6,025			248			(243		)	1,786			8,162
Charge-offs	(2,132		)	—			(478		)	(80		)	(2,805		)	(5,495		)
Recoveries	1,280			2			172			52			1,993			3,499
Net charge-offs	(852		)	2			(306		)	(28		)	(812		)	(1,996		)
Ending balance	$	43,767		$	20,946		$	27,105		$	4,907		$	8,983		$	105,708