Loans

Loans were as follows:



	September 30, 2016		Percentage of Total		December 31, 2015		Percentage of Total
Commercial and industrial	$	4,164,914	36.0	%	$	4,120,522	35.9	%
Energy:
Production	962,943		8.3		1,249,678		10.9
Service	215,014		1.9		272,934		2.4
Other	206,950		1.8		235,583		2.0
Total energy	1,384,907		12.0		1,758,195		15.3
Commercial real estate:
Commercial mortgages	3,426,886		29.5		3,285,041		28.6
Construction	911,783		7.9		720,695		6.3
Land	300,233		2.6		286,991		2.5
Total commercial real estate	4,638,902		40.0		4,292,727		37.4
Consumer real estate:
Home equity loans	346,420		3.0		340,528		3.0
Home equity lines of credit	261,794		2.2		233,525		2.0
Other	321,043		2.8		306,696		2.6
Total consumer real estate	929,257		8.0		880,749		7.6
Total real estate	5,568,159		48.0		5,173,476		45.0
Consumer and other	463,430		4.0		434,338		3.8
Total loans	$	11,581,410	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 September 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 12.0% 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 $58.7 million, respectively, as of September 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 September 30, 2016 or December 31, 2015.

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



	September 30, 2016		December 31, 2015
Commercial and industrial	$	32,010	$	25,111
Energy	51,397		21,180
Commercial real estate:
Buildings, land and other	10,058		34,519
Construction	547		569
Consumer real estate	2,488		1,862
Consumer and other	333		226
Total	$	96,833	$	83,467

As of September 30, 2016, non-accrual loans reported in the table above included $32.2 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 $647 thousand and $2.4 million for the three and nine months ended September 30, 2016, compared to $352 thousand and $1.1 million for three and nine months ended September 30, 2015.

An age analysis of past due loans (including both accruing and non-accruing loans), segregated by class of loans, as of September 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	$	8,751	$	24,481	$	33,232	$	4,131,682	$	4,164,914	$	7,590
Energy	19,489		8,068		27,557		1,357,350		1,384,907		5,294
Commercial real estate:
Buildings, land and other	22,273		9,447		31,720		3,695,399		3,727,119		5,863
Construction	2,593		326		2,919		908,864		911,783		—
Consumer real estate	5,924		1,667		7,591		921,666		929,257		993
Consumer and other	4,309		1,263		5,572		457,858		463,430		1,122
Total	$	63,339	$	45,252	$	108,591	$	11,472,819	$	11,581,410	$	20,862

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
September 30, 2016
Commercial and industrial	$	38,174	$	23,709	$	5,159	$	28,868	$	4,410
Energy	54,251		43,080		8,298		51,378		2,500
Commercial real estate:
Buildings, land and other	13,007		6,686		1,601		8,287		875
Construction	326		326		—		326		—
Consumer real estate	971		662		—		662		—
Consumer and other	42		41		—		41		—
Total	$	106,771	$	74,504	$	15,058	$	89,562	$	7,785
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 September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Commercial and industrial	$	26,921	$	25,487	$	25,365	$	28,457
Energy	47,003		6,883		57,309		3,760
Commercial real estate:
Buildings, land and other	8,904		13,003		20,444		14,658
Construction	326		249		548		1,507
Consumer real estate	545		836		508		709
Consumer and other	48		—		24		—
Total	$	83,747	$	46,458	$	104,198	$	49,091

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



	Nine Months Ended September 30, 2016				Nine Months Ended September 30, 2015
	Balance at Restructure		Balance at Period-End		Balance at Restructure		Balance at Period-End
Commercial and industrial	$	510	$	505	$	709	$	554
Energy	73,977		31,918		—		—
Commercial real estate:
Buildings, land and other	1,455		1,455		—		—
Construction	243		221		—		—
	$	76,185	$	34,099	$	709	$	554

The modifications during the nine months ended September 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 nine months ended September 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. We also recognized a charge-off of $4.0 million in connection with the restructuring of a loan during the second quarter of 2016.

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.



	September 30, 2016			December 31, 2015
	Weighted Average Risk Grade	Loans		Weighted Average Risk Grade	Loans
Commercial and industrial:
Risk grades 1-8	5.95	$	3,822,692	5.88	$	3,869,203
Risk grade 9	9.00	105,510		9.00	100,670
Risk grade 10	10.00	128,029		10.00	76,030
Risk grade 11	11.00	77,022		11.00	49,508
Risk grade 12	12.00	27,241		12.00	22,644
Risk grade 13	13.00	4,420		13.00	2,467
Total	6.30	$	4,164,914	6.13	$	4,120,522
Energy
Risk grades 1-8	6.18	$	748,765	6.12	$	1,385,749
Risk grade 9	9.00	80,628		9.00	212,250
Risk grade 10	10.00	255,960		10.00	62,163
Risk grade 11	11.00	248,157		11.00	76,853
Risk grade 12	12.00	48,897		12.00	19,180
Risk grade 13	13.00	2,500		13.00	2,000
Total	8.13	$	1,384,907	6.89	$	1,758,195



(continued)	September 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	6.64	$	3,402,173	6.58	$	3,280,435
Risk grade 9	9.00	124,088		9.00	140,900
Risk grade 10	10.00	110,896		10.00	72,577
Risk grade 11	11.00	79,904		11.00	43,601
Risk grade 12	12.00	9,183		12.00	34,519
Risk grade 13	13.00	875		13.00	—
Total	6.93	$	3,727,119	6.85	$	3,572,032
Construction
Risk grades 1-8	7.05	$	899,971	6.91	$	696,229
Risk grade 9	9.00	10,167		9.00	13,074
Risk grade 10	10.00	1,098		10.00	2,757
Risk grade 11	11.00	—		11.00	8,066
Risk grade 12	12.00	547		12.00	569
Risk grade 13	13.00	—		13.00	—
Total	7.08	$	911,783	7.01	$	720,695

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Commercial and industrial	$	(3,079	)	$	(2,115	)	$	(8,177	)	$	(4,650	)
Energy	(865		)	—			(18,623		)	3
Commercial real estate:
Buildings, land and other	259			187			801			174
Construction	9			15			18			16
Consumer real estate	(195		)	(222		)	(22		)	(169		)
Consumer and other	(1,115		)	(909		)	(2,817		)	(2,388		)
Total	$	(4,986	)	$	(3,044	)	$	(28,820	)	$	(7,014	)

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 122.7 at August 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 September 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
September 30, 2016
Historical valuation allowances	$	31,026	$	39,689	$	16,403	$	2,237	$	4,541		$	93,896
Specific valuation allowances	4,410		2,500		875		—		—			7,785
General valuation allowances	5,957		3,164		4,488		1,450		(55		)	15,004
Macroeconomic valuation allowances	7,738		16,890		7,451		480		529			33,088
Total	$	49,131	$	62,243	$	29,217	$	4,167	$	5,015		$	149,773
Allocated to loans:
Individually evaluated	$	4,410	$	2,500	$	875	$	—	$	—		$	7,785
Collectively evaluated	44,721		59,743		28,342		4,167		5,015			141,988
Total	$	49,131	$	62,243	$	29,217	$	4,167	$	5,015		$	149,773
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 September 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
September 30, 2016
Individually evaluated	$	28,868	$	51,378	$	8,613	$	662	$	41	$	89,562
Collectively evaluated	4,136,046		1,333,529		4,630,289		928,595		463,389		11,491,848
Total	$	4,164,914	$	1,384,907	$	4,638,902	$	929,257	$	463,430	$	11,581,410
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 nine months ended September 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:
September 30, 2016
Beginning balance	$	47,578		$	66,339		$	27,063		$	3,935		$	4,799		$	149,714
Provision for loan losses	4,632			(3,231		)	1,886			427			1,331			5,045
Charge-offs	(4,036		)	(884		)	(9		)	(287		)	(3,300		)	(8,516		)
Recoveries	957			19			277			92			2,185			3,530
Net charge-offs	(3,079		)	(865		)	268			(195		)	(1,115		)	(4,986		)
Ending balance	$	49,131		$	62,243		$	29,217		$	4,167		$	5,015		$	149,773
September 30, 2015
Beginning balance	$	42,425		$	26,300		$	24,935		$	4,702		$	8,245		$	106,607
Provision for loan losses	2,909			1,284			746			324			1,547			6,810
Charge-offs	(4,074		)	—			(107		)	(423		)	(3,000		)	(7,604		)
Recoveries	1,959			—			309			201			2,091			4,560
Net charge-offs	(2,115		)	—			202			(222		)	(909		)	(3,044		)
Ending balance	$	43,219		$	27,584		$	25,883		$	4,804		$	8,883		$	110,373

Nine months ended:
September 30, 2016
Beginning balance	$	42,993		$	54,696		$	24,313		$	4,659		$	9,198		$	135,859
Provision for loan losses	14,315			26,170			4,085			(470		)	(1,366		)	42,734
Charge-offs	(10,754		)	(18,644		)	(56		)	(464		)	(9,276		)	(39,194		)
Recoveries	2,577			21			875			442			6,459			10,374
Net charge-offs	(8,177		)	(18,623		)	819			(22		)	(2,817		)	(28,820		)
Ending balance	$	49,131		$	62,243		$	29,217		$	4,167		$	5,015		$	149,773
September 30, 2015
Beginning balance	$	44,273		$	14,919		$	27,163		$	5,178		$	8,009		$	99,542
Provision for loan losses	3,596			12,662			(1,470		)	(205		)	3,262			17,845
Charge-offs	(8,580		)	—			(585		)	(524		)	(8,497		)	(18,186		)
Recoveries	3,930			3			775			355			6,109			11,172
Net charge-offs	(4,650		)	3			190			(169		)	(2,388		)	(7,014		)
Ending balance	$	43,219		$	27,584		$	25,883		$	4,804		$	8,883		$	110,373