Loans

Loans were as follows:



	June 30, 2016		Percentage of Total		December 31, 2015		Percentage of Total
Commercial and industrial	$	4,253,822	36.7	%	$	4,120,522	35.9	%
Energy:
Production	1,059,524		9.1		1,249,678		10.9
Service	226,637		2.0		272,934		2.4
Other	217,447		1.9		235,583		2.0
Total energy	1,503,608		13.0		1,758,195		15.3
Commercial real estate:
Commercial mortgages	3,380,524		29.2		3,285,041		28.6
Construction	804,341		6.9		720,695		6.3
Land	290,752		2.5		286,991		2.5
Total commercial real estate	4,475,617		38.6		4,292,727		37.4
Consumer real estate:
Home equity loans	340,196		3.0		340,528		3.0
Home equity lines of credit	248,812		2.1		233,525		2.0
Other	312,142		2.7		306,696		2.6
Total consumer real estate	901,150		7.8		880,749		7.6
Total real estate	5,376,767		46.4		5,173,476		45.0
Consumer and other	449,985		3.9		434,338		3.8
Total loans	$	11,584,182	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 June 30, 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 13.0% of total loans. Unfunded commitments to extend credit and standby letters of credit issued to customers in the energy industry totaled $1.1 billion and $60.8 million, respectively, as of June 30, 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 June 30, 2016 or December 31, 2015.

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



	June 30, 2016		December 31, 2015
Commercial and industrial	$	27,955	$	25,111
Energy	42,755		21,180
Commercial real estate:
Buildings, land and other	11,469		34,519
Construction	551		569
Consumer real estate	2,132		1,862
Consumer and other	268		226
Total	$	85,130	$	83,467

As of June 30, 2016, non-accrual loans reported in the table above included $21.0 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 $936 thousand and $1.8 million for the three and six months ended June 30, 2016, compared to $364 thousand and $760 thousand for three and six months ended June 30, 2015.

An age analysis of past due loans (including both accruing and non-accruing loans), segregated by class of loans, as of June 30, 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	$	33,273	$	31,096	$	64,369	$	4,189,453	$	4,253,822	$	12,802
Energy	24,335		17,332		41,667		1,461,941		1,503,608		11,393
Commercial real estate:
Buildings, land and other	22,458		8,124		30,582		3,640,694		3,671,276		3,731
Construction	2,074		326		2,400		801,941		804,341		—
Consumer real estate	3,168		1,996		5,164		895,986		901,150		1,573
Consumer and other	4,739		912		5,651		444,334		449,985		853
Total	$	90,047	$	59,786	$	149,833	$	11,434,349	$	11,584,182	$	30,352

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
June 30, 2016
Commercial and industrial	$	32,079	$	18,723	$	6,251	$	24,974	$	4,727
Energy	51,030		34,217		8,410		42,627		2,500
Commercial real estate:
Buildings, land and other	14,131		7,840		1,680		9,520		875
Construction	326		326		—		326		—
Consumer real estate	725		428		—		428		—
Consumer and other	103		54		—		54		—
Total	$	98,394	$	61,588	$	16,341	$	77,929	$	8,102
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 June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Commercial and industrial	$	24,866	$	29,680	$	24,197	$	30,406
Energy	78,359		636		59,286		636
Commercial real estate:
Buildings, land and other	20,533		14,028		24,497		15,254
Construction	648		1,497		622		1,929
Consumer real estate	443		859		457		771
Consumer and other	27		—		18		—
Total	$	124,876	$	46,700	$	109,077	$	48,996

Troubled Debt Restructurings. Troubled debt restructurings during the six months ended June 30, 2016 and June 30, 2015 are set forth in the following table.



	Six Months Ended June 30, 2016				Six Months Ended June 30, 2015
	Balance at Restructure		Balance at Period-End		Balance at Restructure		Balance at Period-End
Commercial and industrial	$	510	$	505	$	709	$	584
Energy	62,546		20,795		—		—
Commercial real estate:
Buildings, land and other	1,456		1,456		—		—
Construction	243		224		—		—
	$	64,755	$	22,980	$	709	$	584

The modifications during the six months ended June 30, 2016 primarily related to extending amortization periods, converting loans to interest only for a period of time, deferral of interest payments and the waiver of certain covenants, while the modifications during the six months ended June 30, 2015 primarily related to extending amortization periods and a temporary reduction in payments. The modifications during the reported periods did not significantly impact our determination of the allowance for loan losses. During the second quarter of 2016, we recognized a charge-off of $9.5 million related to a loan restructured during the first quarter of 2016. The loan was subsequently sold with proceeds from the sale totaling $30.5 million.

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 reassess the risk grade on at least an annual basis. When a loan has a risk grade of 9, it is still considered a pass grade loan; however, it is considered to be on management’s “watch list,” where a significant risk-modifying action is anticipated in the near term. When a loan has a risk grade of 10 or higher, a special assets officer monitors the loan on an on-going basis. The following tables present weighted average risk grades for all commercial loans by class.



	June 30, 2016			December 31, 2015
	Weighted Average Risk Grade	Loans		Weighted Average Risk Grade	Loans
Commercial and industrial:
Risk grades 1-8	5.95	$	3,953,406	5.88	$	3,869,203
Risk grade 9	9.00	98,610		9.00	100,670
Risk grade 10	10.00	88,370		10.00	76,030
Risk grade 11	11.00	85,456		11.00	49,508
Risk grade 12	12.00	23,041		12.00	22,644
Risk grade 13	13.00	4,939		13.00	2,467
Total	6.25	$	4,253,822	6.13	$	4,120,522
Energy
Risk grades 1-8	6.19	$	812,591	6.12	$	1,385,749
Risk grade 9	9.00	124,776		9.00	212,250
Risk grade 10	10.00	295,723		10.00	62,163
Risk grade 11	11.00	227,763		11.00	76,853
Risk grade 12	12.00	40,255		12.00	19,180
Risk grade 13	13.00	2,500		13.00	2,000
Total	8.07	$	1,503,608	6.89	$	1,758,195



(continued)	June 30, 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	6.62	$	3,375,360	6.58	$	3,280,435
Risk grade 9	9.00	122,532		9.00	140,900
Risk grade 10	10.00	77,356		10.00	72,577
Risk grade 11	11.00	84,559		11.00	43,601
Risk grade 12	12.00	10,594		12.00	34,519
Risk grade 13	13.00	875		13.00	—
Total	6.89	$	3,671,276	6.85	$	3,572,032
Construction
Risk grades 1-8	7.05	$	794,323	6.91	$	696,229
Risk grade 9	9.00	7,818		9.00	13,074
Risk grade 10	10.00	1,598		10.00	2,757
Risk grade 11	11.00	51		11.00	8,066
Risk grade 12	12.00	551		12.00	569
Risk grade 13	13.00	—		13.00	—
Total	7.08	$	804,341	7.01	$	720,695

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



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Commercial and industrial	$	(3,966	)	$	(1,683	)	$	(5,098	)	$	(2,535	)
Energy	(16,747		)	1			(17,758		)	3
Commercial real estate:
Buildings, land and other	481			279			542			(28		)
Construction	2			15			9			16
Consumer real estate	74			81			173			53
Consumer and other	(1,199		)	(667		)	(1,702		)	(1,479		)
Total	$	(21,355	)	$	(1,974	)	$	(23,834	)	$	(3,970	)

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 122.9 at May 31, 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 June 30, 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
June 30, 2016
Historical valuation allowances	$	30,005	$	42,179	$	15,886	$	2,160	$	4,468		$	94,698
Specific valuation allowances	4,727		2,500		875		—		—			8,102
General valuation allowances	5,147		3,762		3,215		1,284		(234		)	13,174
Macroeconomic valuation allowances	7,699		17,898		7,087		491		565			33,740
Total	$	47,578	$	66,339	$	27,063	$	3,935	$	4,799		$	149,714
Allocated to loans:
Individually evaluated	$	4,727	$	2,500	$	875	$	—	$	—		$	8,102
Collectively evaluated	42,851		63,839		26,188		3,935		4,799			141,612
Total	$	47,578	$	66,339	$	27,063	$	3,935	$	4,799		$	149,714
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 June 30, 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
June 30, 2016
Individually evaluated	$	24,974	$	42,627	$	9,846	$	428	$	54	$	77,929
Collectively evaluated	4,228,848		1,460,981		4,465,771		900,722		449,931		11,506,253
Total	$	4,253,822	$	1,503,608	$	4,475,617	$	901,150	$	449,985	$	11,584,182
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 and six months ended June 30, 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:
June 30, 2016
Beginning balance	$	45,084		$	84,973		$	23,587		$	3,786		$	4,450		$	161,880
Provision for loan losses	6,460			(1,887		)	2,993			75			1,548			9,189
Charge-offs	(4,857		)	(16,749		)	(19		)	(23		)	(3,252		)	(24,900		)
Recoveries	891			2			502			97			2,053			3,545
Net charge-offs	(3,966		)	(16,747		)	483			74			(1,199		)	(21,355		)
Ending balance	$	47,578		$	66,339		$	27,063		$	3,935		$	4,799		$	149,714
June 30, 2015
Beginning balance	$	43,767		$	20,946		$	27,105		$	4,907		$	8,983		$	105,708
Provision for loan losses	341			5,353			(2,464		)	(286		)	(71		)	2,873
Charge-offs	(2,374		)	—			—			(21		)	(2,692		)	(5,087		)
Recoveries	691			1			294			102			2,025			3,113
Net charge-offs	(1,683		)	1			294			81			(667		)	(1,974		)
Ending balance	$	42,425		$	26,300		$	24,935		$	4,702		$	8,245		$	106,607

Six months ended:
June 30, 2016
Beginning balance	$	42,993		$	54,696		$	24,313		$	4,659		$	9,198		$	135,859
Provision for loan losses	9,683			29,401			2,199			(897		)	(2,697		)	37,689
Charge-offs	(6,718		)	(17,760		)	(47		)	(177		)	(5,976		)	(30,678		)
Recoveries	1,620			2			598			350			4,274			6,844
Net charge-offs	(5,098		)	(17,758		)	551			173			(1,702		)	(23,834		)
Ending balance	$	47,578		$	66,339		$	27,063		$	3,935		$	4,799		$	149,714
June 30, 2015
Beginning balance	$	44,273		$	14,919		$	27,163		$	5,178		$	8,009		$	99,542
Provision for loan losses	687			11,378			(2,216		)	(529		)	1,715			11,035
Charge-offs	(4,506		)	—			(478		)	(101		)	(5,497		)	(10,582		)
Recoveries	1,971			3			466			154			4,018			6,612
Net charge-offs	(2,535		)	3			(12		)	53			(1,479		)	(3,970		)
Ending balance	$	42,425		$	26,300		$	24,935		$	4,702		$	8,245		$	106,607