Loans

Loans were as follows:



	September 30, 2017		Percentage of Total		December 31, 2016		Percentage of Total
Commercial and industrial	$	4,677,923	36.8	%	$	4,344,000	36.3	%
Energy:
Production	1,094,927		8.6		971,767		8.1
Service	159,893		1.3		221,213		1.8
Other	132,240		1.0		193,081		1.7
Total energy	1,387,060		10.9		1,386,061		11.6
Commercial real estate:
Commercial mortgages	3,714,172		29.2		3,481,157		29.1
Construction	1,082,229		8.5		1,043,261		8.7
Land	307,701		2.4		311,030		2.6
Total commercial real estate	5,104,102		40.1		4,835,448		40.4
Consumer real estate:
Home equity loans	357,542		2.8		345,130		2.9
Home equity lines of credit	288,981		2.3		264,862		2.2
Other	367,948		2.9		326,793		2.7
Total consumer real estate	1,014,471		8.0		936,785		7.8
Total real estate	6,118,573		48.1		5,772,233		48.2
Consumer and other	522,748		4.2		473,098		3.9
Total loans	$	12,706,304	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 September 30, 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 10.9% 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 $40.9 million, respectively, as of September 30, 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 September 30, 2017 or December 31, 2016.

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



	September 30, 2017		December 31, 2016
Commercial and industrial	$	37,239	$	31,475
Energy	96,717		57,571
Commercial real estate:
Buildings, land and other	6,773		8,550
Construction	—		—
Consumer real estate	2,167		2,130
Consumer and other	208		425
Total	$	143,104	$	100,151

As of September 30, 2017, non-accrual loans reported in the table above included $54.1 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 $783 thousand and $2.4 million for the three and nine months ended September 30, 2017, compared to $647 thousand and $2.4 million for three and nine months ended September 30, 2016.

An age analysis of past due loans (including both accruing and non-accruing loans), segregated by class of loans, as of September 30, 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	$	26,415	$	30,740	$	57,155	$	4,620,768	$	4,677,923	$	20,614
Energy	12,585		46,097		58,682		1,328,378		1,387,060		634
Commercial real estate:
Buildings, land and other	9,065		4,065		13,130		4,008,743		4,021,873		2,229
Construction	—		2,331		2,331		1,079,898		1,082,229		2,331
Consumer real estate	7,671		2,107		9,778		1,004,693		1,014,471		835
Consumer and other	9,754		486		10,240		512,508		522,748		478
Total	$	65,490	$	85,826	$	151,316	$	12,554,988	$	12,706,304	$	27,121

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, 2017
Commercial and industrial	$	48,751	$	31,065	$	3,937	$	35,002	$	1,665
Energy	107,883		34,834		61,805		96,639		13,267
Commercial real estate:
Buildings, land and other	9,976		5,627		—		5,627		—
Construction	—		—		—		—		—
Consumer real estate	1,214		1,214		—		1,214		—
Consumer and other	—		—		—		—		—
Total	$	167,824	$	72,740	$	65,742	$	138,482	$	14,932



	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
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 September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Commercial and industrial	$	26,910	$	26,921	$	26,651	$	25,365
Energy	76,008		47,003		72,055		57,309
Commercial real estate:
Buildings, land and other	5,553		8,904		6,106		20,444
Construction	—		326		—		548
Consumer real estate	1,209		545		1,155		508
Consumer and other	—		48		13		24
Total	$	109,680	$	83,747	$	105,980	$	104,198

Troubled Debt Restructurings. Troubled debt restructurings during the nine months ended September 30, 2017 and September 30, 2016 are set forth in the following table.



	Nine Months Ended September 30, 2017				Nine Months Ended September 30, 2016
	Balance at Restructure		Balance at Period-End		Balance at Restructure		Balance at Period-End
Commercial and industrial	$	4,026	$	3,875	$	510	$	505
Energy	56,097		55,023		73,977		31,918
Commercial real estate:
Buildings, land and other	—		—		1,455		1,455
Construction	—		—		243		221
	$	60,123	$	58,898	$	76,185	$	34,099

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 September 30, 2017, there was one loan totaling $43.1 million that was restructured during the third quarter of 2017 that was in excess of 90 days past due, however, the underlying terms of the modification allow for the deferral of payments. During the nine months ended September 30, 2017, we recognized charge-offs totaling $10.0 million related to loans restructured during the third and fourth quarters of 2016. During the nine months ended September 30, 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 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.



	September 30, 2017			December 31, 2016
	Weighted Average Risk Grade	Loans		Weighted Average Risk Grade	Loans
Commercial and industrial:
Risk grades 1-8	6.01	$	4,236,670	6.01	$	3,989,722
Risk grade 9	9.00	201,635		9.00	106,988
Risk grade 10	10.00	89,126		10.00	115,420
Risk grade 11	11.00	113,253		11.00	100,245
Risk grade 12	12.00	35,574		12.00	25,939
Risk grade 13	13.00	1,665		13.00	5,686
Total	6.38	$	4,677,923	6.35	$	4,344,000
Energy
Risk grades 1-8	6.19	$	1,082,349	6.34	$	854,688
Risk grade 9	9.00	46,285		9.00	78,524
Risk grade 10	10.00	67,694		10.00	150,872
Risk grade 11	11.00	94,015		11.00	244,406
Risk grade 12	12.00	83,450		12.00	53,821
Risk grade 13	13.00	13,267		13.00	3,750
Total	7.21	$	1,387,060	7.95	$	1,386,061
Commercial real estate:
Buildings, land and other
Risk grades 1-8	6.69	$	3,720,068	6.67	$	3,463,064
Risk grade 9	9.00	115,196		9.00	109,110
Risk grade 10	10.00	110,647		10.00	145,067
Risk grade 11	11.00	69,189		11.00	66,396
Risk grade 12	12.00	6,773		12.00	8,550
Risk grade 13	13.00	—		13.00	—
Total	6.93	$	4,021,873	6.95	$	3,792,187
Construction
Risk grades 1-8	7.14	$	1,058,847	6.97	$	1,023,194
Risk grade 9	9.00	18,106		9.00	15,829
Risk grade 10	10.00	3,768		10.00	2,889
Risk grade 11	11.00	1,508		11.00	1,349
Risk grade 12	12.00	—		12.00	—
Risk grade 13	13.00	—		13.00	—
Total	7.19	$	1,082,229	7.01	$	1,043,261

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Commercial and industrial	$	(4,565	)	$	(3,079	)	$	(12,155	)	$	(8,177	)
Energy	451			(865		)	(10,010		)	(18,623		)
Commercial real estate:
Buildings, land and other	266			259			768			801
Construction	2			9			8			18
Consumer real estate	(629		)	(195		)	(422		)	(22		)
Consumer and other	(1,760		)	(1,115		)	(4,289		)	(2,817		)
Total	$	(6,235	)	$	(4,986	)	$	(26,100	)	$	(28,820	)

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 124.6 at August 31, 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 September 30, 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
September 30, 2017
Historical valuation allowances	$	27,190	$	21,900	$	18,304	$	2,443	$	5,491		$	75,328
Specific valuation allowances	1,665		13,267		—		—		—			14,932
General valuation allowances	7,397		4,677		4,841		2,040		163			19,118
Macroeconomic valuation allowances	12,185		12,069		14,930		2,392		3,349			44,925
Total	$	48,437	$	51,913	$	38,075	$	6,875	$	9,003		$	154,303
Allocated to loans:
Individually evaluated	$	1,665	$	13,267	$	—	$	—	$	—		$	14,932
Collectively evaluated	46,772		38,646		38,075		6,875		9,003			139,371
Total	$	48,437	$	51,913	$	38,075	$	6,875	$	9,003		$	154,303
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 September 30, 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
September 30, 2017
Individually evaluated	$	35,002	$	96,639	$	5,627	$	1,214	$	—	$	138,482
Collectively evaluated	4,642,921		1,290,421		5,098,475		1,013,257		522,748		12,567,822
Total	$	4,677,923	$	1,387,060	$	5,104,102	$	1,014,471	$	522,748	$	12,706,304
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 and nine months ended September 30, 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:
September 30, 2017
Beginning balance	$	48,906		$	54,277		$	33,002		$	5,535		$	7,838		$	149,558
Provision for loan losses	4,096			(2,815		)	4,805			1,969			2,925			10,980
Charge-offs	(5,468		)	—			—			(766		)	(4,120		)	(10,354		)
Recoveries	903			451			268			137			2,360			4,119
Net charge-offs	(4,565		)	451			268			(629		)	(1,760		)	(6,235		)
Ending balance	$	48,437		$	51,913		$	38,075		$	6,875		$	9,003		$	154,303
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

Nine months ended:
September 30, 2017
Beginning balance	$	52,915		$	60,653		$	30,213		$	4,238		$	5,026		$	153,045
Provision for loan losses	7,677			1,270			7,086			3,059			8,266			27,358
Charge-offs	(14,574		)	(10,595		)	(14		)	(779		)	(11,291		)	(37,253		)
Recoveries	2,419			585			790			357			7,002			11,153
Net charge-offs	(12,155		)	(10,010		)	776			(422		)	(4,289		)	(26,100		)
Ending balance	$	48,437		$	51,913		$	38,075		$	6,875		$	9,003		$	154,303
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