Loans

Loans were as follows:



	March 31, 2017		Percentage of Total		December 31, 2016		Percentage of Total
Commercial and industrial	$	4,402,276	36.2	%	$	4,344,000	36.3	%
Energy:
Production	982,266		8.0		971,767		8.1
Service	204,797		1.7		221,213		1.8
Other	175,493		1.5		193,081		1.7
Total energy	1,362,556		11.2		1,386,061		11.6
Commercial real estate:
Commercial mortgages	3,602,100		29.6		3,481,157		29.1
Construction	1,063,894		8.7		1,043,261		8.7
Land	322,790		2.6		311,030		2.6
Total commercial real estate	4,988,784		40.9		4,835,448		40.4
Consumer real estate:
Home equity loans	346,632		2.8		345,130		2.9
Home equity lines of credit	269,813		2.2		264,862		2.2
Other	332,531		2.7		326,793		2.7
Total consumer real estate	948,976		7.7		936,785		7.8
Total real estate	5,937,760		48.6		5,772,233		48.2
Consumer and other	483,053		4.0		473,098		3.9
Total loans	$	12,185,645	100.0	%	$	11,975,392	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, 2017, there were no concentrations of loans related to any single industry in excess of 10% of total loans other than energy loans, which totaled 11.2% of total loans. Unfunded commitments to extend credit and standby letters of credit issued to customers in the energy industry totaled $1.2 billion and $38.4 million, respectively, as of March 31, 2017.

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, 2017 or December 31, 2016.

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



	March 31, 2017		December 31, 2016
Commercial and industrial	$	26,531	$	31,475
Energy	78,747		57,571
Commercial real estate:
Buildings, land and other	7,608		8,550
Construction	—		—
Consumer real estate	2,987		2,130
Consumer and other	303		425
Total	$	116,176	$	100,151

As of March 31, 2017, non-accrual loans reported in the table above included $11.2 million related to loans that were restructured as “troubled debt restructurings” during 2017. 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 $851 thousand for the three months ended March 31, 2017, compared to $844 thousand for three months ended March 31, 2016.

An age analysis of past due loans (including both accruing and non-accruing loans), segregated by class of loans, as of March 31, 2017 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	$	20,566	$	23,787	$	44,353	$	4,357,923	$	4,402,276	$	3,014
Energy	2,941		29,467		32,408		1,330,148		1,362,556		628
Commercial real estate:
Buildings, land and other	6,243		5,214		11,457		3,913,433		3,924,890		1,834
Construction	2,115		113		2,228		1,061,666		1,063,894		113
Consumer real estate	5,145		2,230		7,375		941,601		948,976		695
Consumer and other	4,598		668		5,266		477,787		483,053		530
Total	$	41,608	$	61,479	$	103,087	$	12,082,558	$	12,185,645	$	6,814

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, 2017
Commercial and industrial	$	35,005	$	18,113	$	5,763	$	23,876	$	2,751
Energy	84,912		53,313		25,326		78,639		850
Commercial real estate:
Buildings, land and other	11,635		6,453		—		6,453		—
Construction	—		—		—		—		—
Consumer real estate	1,881		1,548		—		1,548		—
Consumer and other	75		23		—		23		—
Total	$	133,508	$	79,450	$	31,089	$	110,539	$	3,601
December 31, 2016
Commercial and industrial	$	40,288	$	19,862	$	9,047	$	28,909	$	5,436
Energy	60,522		27,759		29,804		57,563		3,750
Commercial real estate:
Buildings, land and other	11,369		6,866		—		6,866		—
Construction	—		—		—		—		—
Consumer real estate	977		655		—		655		—
Consumer and other	32		30		—		30		—
Total	$	113,188	$	55,172	$	38,851	$	94,023	$	9,186

The average recorded investment in impaired loans was as follows:



	Three Months Ended March 31,
	2017		2016
Commercial and industrial	$	26,393	$	23,809
Energy	68,101		67,615
Commercial real estate:
Buildings, land and other	6,660		31,985
Construction	—		770
Consumer real estate	1,102		471
Consumer and other	27		—
Total	$	102,283	$	124,650

Troubled Debt Restructurings. Troubled debt restructurings during the three months ended March 31, 2017 and March 31, 2016 are set forth in the following table.



	Three Months Ended March 31, 2017				Three Months Ended March 31, 2016
	Balance at Restructure		Balance at Period-End		Balance at Restructure		Balance at Period-End
Commercial and industrial	$	—	$	—	$	19	$	17
Energy	11,262		11,212		62,546		61,095
Commercial real estate:
Construction	—		—		243		235
	$	11,262	$	11,212	$	62,808	$	61,347

Loan modifications are typically related to extending amortization periods, converting loans to interest only for a limited period of time, deferral of interest payments, waiver of certain covenants, consolidating notes and/or reducing collateral or interest rates. The modifications during the reported periods did not significantly impact our determination of the allowance for loan losses. As of March 31, 2017, there was one loan restructured during the last year totaling $747 thousand that was in excess of 90 days past due. During the first quarter of 2017, we recognized a charge-off of $2.0 million related to a loan restructured during the third 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 2016 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.



	March 31, 2017			December 31, 2016
	Weighted Average Risk Grade	Loans		Weighted Average Risk Grade	Loans
Commercial and industrial:
Risk grades 1-8	6.00	$	3,981,338	6.01	$	3,989,722
Risk grade 9	9.00	194,639		9.00	106,988
Risk grade 10	10.00	87,107		10.00	115,420
Risk grade 11	11.00	112,511		11.00	100,245
Risk grade 12	12.00	23,681		12.00	25,939
Risk grade 13	13.00	3,000		13.00	5,686
Total	6.38	$	4,402,276	6.35	$	4,344,000
Energy
Risk grades 1-8	6.33	$	876,206	6.34	$	854,688
Risk grade 9	9.00	55,136		9.00	78,524
Risk grade 10	10.00	152,360		10.00	150,872
Risk grade 11	11.00	199,479		11.00	244,406
Risk grade 12	12.00	78,525		12.00	53,821
Risk grade 13	13.00	850		13.00	3,750
Total	7.86	$	1,362,556	7.95	$	1,386,061
Commercial real estate:
Buildings, land and other
Risk grades 1-8	6.69	$	3,605,460	6.67	$	3,463,064
Risk grade 9	9.00	107,441		9.00	109,110
Risk grade 10	10.00	132,850		10.00	145,067
Risk grade 11	11.00	71,531		11.00	66,396
Risk grade 12	12.00	7,608		12.00	8,550
Risk grade 13	13.00	—		13.00	—
Total	6.96	$	3,924,890	6.95	$	3,792,187
Construction
Risk grades 1-8	7.06	$	1,037,166	6.97	$	1,023,194
Risk grade 9	9.00	21,193		9.00	15,829
Risk grade 10	10.00	446		10.00	2,889
Risk grade 11	11.00	5,089		11.00	1,349
Risk grade 12	12.00	—		12.00	—
Risk grade 13	13.00	—		13.00	—
Total	7.12	$	1,063,894	7.01	$	1,043,261

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



	Three Months Ended March 31,
	2017			2016
Commercial and industrial	$	(2,729	)	$	(1,132	)
Energy	(4,225		)	(1,011		)
Commercial real estate:
Buildings, land and other	42			61
Construction	3			7
Consumer real estate	96			99
Consumer and other	(1,128		)	(503		)
Total	$	(7,941	)	$	(2,479	)

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 2016 Form 10-K, totaled 123.4 at February 28, 2017 (most recent date available) and 123.1 at December 31, 2016. 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 2016 Form 10-K, 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.

The following table presents details of the allowance for loan losses allocated to each portfolio segment as of March 31, 2017 and December 31, 2016 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, 2017
Historical valuation allowances	$	26,216	$	38,666	$	17,932	$	2,329	$	5,297		$	90,440
Specific valuation allowances	2,751		850		—		—		—			3,601
General valuation allowances	8,072		5,255		6,333		1,939		19			21,618
Macroeconomic valuation allowances	8,544		17,022		9,744		555		1,532			37,397
Total	$	45,583	$	61,793	$	34,009	$	4,823	$	6,848		$	153,056
Allocated to loans:
Individually evaluated	$	2,751	$	850	$	—	$	—	$	—		$	3,601
Collectively evaluated	42,832		60,943		34,009		4,823		6,848			149,455
Total	$	45,583	$	61,793	$	34,009	$	4,823	$	6,848		$	153,056
December 31, 2016
Historical valuation allowances	$	33,251	$	34,626	$	16,976	$	2,225	$	4,585		$	91,663
Specific valuation allowances	5,436		3,750		—		—		—			9,186
General valuation allowances	6,708		3,769		5,004		1,506		(144		)	16,843
Macroeconomic valuation allowances	7,520		18,508		8,233		507		585			35,353
Total	$	52,915	$	60,653	$	30,213	$	4,238	$	5,026		$	153,045
Allocated to loans:
Individually evaluated	$	5,436	$	3,750	$	—	$	—	$	—		$	9,186
Collectively evaluated	47,479		56,903		30,213		4,238		5,026			143,859
Total	$	52,915	$	60,653	$	30,213	$	4,238	$	5,026		$	153,045

Our recorded investment in loans as of March 31, 2017 and December 31, 2016 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, 2017
Individually evaluated	$	23,876	$	78,639	$	6,453	$	1,548	$	23	$	110,539
Collectively evaluated	4,378,400		1,283,917		4,982,331		947,428		483,030		12,075,106
Total	$	4,402,276	$	1,362,556	$	4,988,784	$	948,976	$	483,053	$	12,185,645
December 31, 2016
Individually evaluated	$	28,909	$	57,563	$	6,866	$	655	$	30	$	94,023
Collectively evaluated	4,315,091		1,328,498		4,828,582		936,130		473,068		11,881,369
Total	$	4,344,000	$	1,386,061	$	4,835,448	$	936,785	$	473,098	$	11,975,392

The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2017 and 2016. 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, 2017
Beginning balance	$	52,915		$	60,653		$	30,213		$	4,238		$	5,026		$	153,045
Provision for loan losses	(4,603		)	5,365			3,751			489			2,950			7,952
Charge-offs	(3,527		)	(4,278		)	—			(11		)	(3,548		)	(11,364		)
Recoveries	798			53			45			107			2,420			3,423
Net charge-offs	(2,729		)	(4,225		)	45			96			(1,128		)	(7,941		)
Ending balance	$	45,583		$	61,793		$	34,009		$	4,823		$	6,848		$	153,056
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