Loans

Year-end loans, including leases net of unearned discounts, consisted of the following:



	2017		2016
Commercial and industrial	$	4,792,388	$	4,344,000
Energy:
Production	1,182,326		971,767
Service	171,795		221,213
Other	144,972		193,081
Total energy	1,499,093		1,386,061
Commercial real estate:
Commercial mortgages	3,887,742		3,481,157
Construction	1,066,696		1,043,261
Land	331,986		311,030
Total commercial real estate	5,286,424		4,835,448
Consumer real estate:
Home equity loans	355,342		345,130
Home equity lines of credit	291,950		264,862
Other	376,002		326,793
Total consumer real estate	1,023,294		936,785
Total real estate	6,309,718		5,772,233
Consumer and other	544,466		473,098
Total loans	$	13,145,665	$	11,975,392

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 December 31, 2017 and 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 11.4% and 11.6% of total loans, respectively. Unfunded commitments to extend credit and standby letters of credit issued to customers in the energy industry totaled $1.1 billion and $46.7 million, respectively, as of December 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 December 31, 2017 or 2016.

Overdrafts. Deposit account overdrafts reported as loans totaled $7.3 million and $6.3 million at December 31, 2017 and 2016.

Related Party Loans. In the ordinary course of business, we have granted loans to certain directors, executive officers and their affiliates (collectively referred to as “related parties”). Activity in related party loans during 2017 is presented in the following table. Other changes were primarily related to changes in related-party status.



Balance outstanding at December 31, 2016	$	142,771
Principal additions	270,684
Principal reductions	(271,325		)
Other changes	24,273
Balance outstanding at December 31, 2017	$	166,403

Non-Accrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. In determining whether or not a borrower may be unable to meet payment obligations for each class of loans, we consider the borrower’s debt service capacity through the analysis of current financial information, if available, and/or current information with regards to our collateral position. Regulatory provisions would typically require the placement of a loan on non-accrual status if (i) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection or (ii) full payment of principal and interest is not expected. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income on non-accrual loans is recognized only to the extent that cash payments are received in excess of principal due. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period (at least six months) of repayment performance by the borrower.

Year-end non-accrual loans, segregated by class of loans, were as follows:



	2017		2016
Commercial and industrial	$	46,186	$	31,475
Energy	94,302		57,571
Commercial real estate:
Buildings, land and other	7,589		8,550
Construction	—		—
Consumer real estate	2,109		2,130
Consumer and other	128		425
Total	$	150,314	$	100,151

As of December 31, 2017 and 2016, non-accrual loans reported in the table above included $53.6 million and $44.9 million related to loans that were restructured as “troubled debt restructurings” during 2017 and 2016, respectively. 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 $3.7 million in 2017, $3.1 million in 2016 and $1.6 million in 2015.

An age analysis of past due loans (including both accruing and non-accruing loans), segregated by class of loans, as of December 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	$	41,169	$	12,418	$	53,587	$	4,738,801	$	4,792,388	$	5,589
Energy	22,100		49,214		71,314		1,427,779		1,499,093		100
Commercial real estate:
Buildings, land and other	29,714		4,482		34,196		4,185,532		4,219,728		2,615
Construction	2,191		2,331		4,522		1,062,174		1,066,696		2,331
Consumer real estate	7,707		4,427		12,134		1,011,160		1,023,294		3,138
Consumer and other	4,791		665		5,456		539,010		544,466		659
Total	$	107,672	$	73,537	$	181,209	$	12,964,456	$	13,145,665	$	14,432

Impaired Loans. Loans are considered impaired when, based on current information and events, it is probable we will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectibility of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Regulatory guidelines require us to reevaluate the fair value of collateral supporting impaired collateral dependent loans on at least an annual basis. While our policy is to comply with the regulatory guidelines, our general practice is to reevaluate the fair value of collateral supporting impaired collateral dependent loans on a quarterly basis. Thus, appraisals are generally not considered to be outdated, and we typically do not make any adjustments to the appraised values. The fair value of collateral supporting impaired collateral dependent loans is evaluated by our internal appraisal services using a methodology that is consistent with the Uniform Standards of Professional Appraisal Practice. The fair value of collateral supporting impaired collateral dependent construction loans is based on an “as is” valuation.

Year-end 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		Average Recorded Investment
2017
Commercial and industrial	$	60,781	$	28,038	$	15,722	$	43,760	$	7,553	$	30,073
Energy	99,606		33,080		61,162		94,242		13,267		76,492
Commercial real estate:
Buildings, land and other	10,795		6,394		—		6,394		—		6,164
Construction	—		—		—		—		—		—
Consumer real estate	1,214		1,214		—		1,214		—		1,167
Consumer and other	—		—		—		—		—		11
Total	$	172,396	$	68,726	$	76,884	$	145,610	$	20,820	$	113,907
2016
Commercial and industrial	$	40,288	$	19,862	$	9,047	$	28,909	$	5,436	$	26,074
Energy	60,522		27,759		29,804		57,563		3,750		57,360
Commercial real estate:
Buildings, land and other	11,369		6,866		—		6,866		—		17,729
Construction	—		—		—		—		—		438
Consumer real estate	977		655		—		655		—		537
Consumer and other	32		30		—		30		—		25
Total	$	113,188	$	55,172	$	38,851	$	94,023	$	9,186	$	102,163
2015
Commercial and industrial	$	26,067	$	18,776	$	4,084	$	22,860	$	2,378	$	27,338
Energy	25,240		8,689		12,450		21,139		2,000		7,235
Commercial real estate:
Buildings, land and other	37,126		32,425		—		32,425		—		18,211
Construction	793		569		—		569		—		1,320
Consumer real estate	755		485		—		485		—		664
Consumer and other	—		—		—		—		—		—
Total	$	89,981	$	60,944	$	16,534	$	77,478	$	4,378	$	54,768

Troubled Debt Restructurings. The restructuring of a loan is considered a “troubled debt restructuring” if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules, reductions in collateral and other actions intended to minimize potential losses. Troubled debt restructurings that occurred during 2017, 2016 and 2015 are set forth in the following table.



	2017				2016				2015
	Balance at Restructure		Balance at Year-end		Balance at Restructure		Balance at Year-end		Balance at Restructure		Balance at Year-end
Commercial and industrial	$	4,026	$	3,766	$	2,148	$	1,022	$	709	$	536
Energy	56,096		54,330		87,572		43,841		—		—
Commercial real estate:
Buildings, land and other	—		—		1,455		—		—		—
Construction	388		388		243		—		—		—
	$	60,510	$	58,484	$	91,418	$	44,863	$	709	$	536

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. Additional information related to restructured loans was as follows:



	2017		2016		2015
Restructured loans past due in excess of 90 days at period-end:
Number of loans	1		2		1
Dollar amount of loans	$	43,137	$	3,230	$	259
Restructured loans on non-accrual status at period end	53,622		44,863		536
Charge-offs of restructured loans:
Recognized in connection with restructuring	—		4,115		88
Recognized on previously restructured loans	9,951		9,490		—
Proceeds from sale of restructured loans	—		30,470		—

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 as follows:


•	Grades 1, 2 and 3 - These grades include loans to very high credit quality borrowers of investment or near investment grade. These borrowers are generally publicly traded (grades 1 and 2), have significant capital strength, moderate leverage, stable earnings and growth, and readily available financing alternatives. Smaller entities, regardless of strength, would generally not fit in these grades.


•	Grades 4 and 5 - These grades include loans to borrowers of solid credit quality with moderate risk. Borrowers in these grades are differentiated from higher grades on the basis of size (capital and/or revenue), leverage, asset quality and the stability of the industry or market area.

•

Grades 6, 7 and 8 - These grades include “pass grade” loans to borrowers of acceptable credit quality and risk. Such borrowers are differentiated from Grades 4 and 5 in terms of size, secondary sources of repayment or they are of lesser stature in other key credit metrics in that they may be over-leveraged, under capitalized, inconsistent in performance or in an industry or an economic area that is known to have a higher level of risk, volatility, or susceptibility to weaknesses in the economy.


•	Grade 9 - This grade includes loans on management’s “watch list” and is intended to be utilized on a temporary basis for pass grade borrowers where a significant risk-modifying action is anticipated in the near term.


•	Grade 10 - This grade is for “Other Assets Especially Mentioned” in accordance with regulatory guidelines. This grade is intended to be temporary and includes loans to borrowers whose credit quality has clearly deteriorated and are at risk of further decline unless active measures are taken to correct the situation.

•

Grade 11 - This grade includes “Substandard” loans, in accordance with regulatory guidelines, for which the accrual of interest has not been stopped. By definition under regulatory guidelines, a “Substandard” loan has defined weaknesses which make payment default or principal exposure likely, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business.


•	Grade 12 - This grade includes “Substandard” loans, in accordance with regulatory guidelines, for which the accrual of interest has been stopped. This grade includes loans where interest is more than 120 days past due and not fully secured and loans where a specific valuation allowance may be necessary, but generally does not exceed 30% of the principal balance.


•	Grade 13 - This grade includes “Doubtful” loans in accordance with regulatory guidelines. Such loans are placed on non-accrual status and may be dependent upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. Additionally, these loans generally have a specific valuation allowance in excess of 30% of the principal balance.

•

Grade 14 - This grade includes “Loss” loans in accordance with regulatory guidelines. Such loans are to be charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. “Loss” is not intended to imply that the loan or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of debt.

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.



	December 31, 2017			December 31, 2016
	Weighted Average Risk Grade	Loans		Weighted Average Risk Grade	Loans
Commercial and industrial
Risk grades 1-8	6.06	$	4,378,839	6.01	$	3,989,722
Risk grade 9	9.00	170,285		9.00	106,988
Risk grade 10	10.00	99,260		10.00	115,420
Risk grade 11	11.00	97,818		11.00	100,245
Risk grade 12	12.00	38,633		12.00	25,939
Risk grade 13	13.00	7,553		13.00	5,686
Total	6.41	$	4,792,388	6.35	$	4,344,000
Energy
Risk grades 1-8	6.01	$	1,199,207	6.34	$	854,688
Risk grade 9	9.00	50,427		9.00	78,524
Risk grade 10	10.00	64,282		10.00	150,872
Risk grade 11	11.00	90,875		11.00	244,406
Risk grade 12	12.00	81,035		12.00	53,821
Risk grade 13	13.00	13,267		13.00	3,750
Total	6.97	$	1,499,093	7.95	$	1,386,061
Commercial real estate:
Buildings, land and other
Risk grades 1-8	6.75	$	3,868,659	6.67	$	3,463,064
Risk grade 9	9.00	151,487		9.00	109,110
Risk grade 10	10.00	129,391		10.00	145,067
Risk grade 11	11.00	62,602		11.00	66,396
Risk grade 12	12.00	7,589		12.00	8,550
Risk grade 13	13.00	—		13.00	—
Total	7.00	$	4,219,728	6.95	$	3,792,187
Construction
Risk grades 1-8	7.11	$	1,019,635	6.97	$	1,023,194
Risk grade 9	9.00	18,042		9.00	15,829
Risk grade 10	10.00	23,393		10.00	2,889
Risk grade 11	11.00	5,626		11.00	1,349
Risk grade 12	12.00	—		12.00	—
Risk grade 13	13.00	—		13.00	—
Total	7.23	$	1,066,696	7.01	$	1,043,261

We have established maximum loan to value standards to be applied during the origination process of commercial and consumer real estate loans. We do not subsequently monitor loan-to-value ratios (either individually or on a weighted-average basis) for loans that are subsequently considered to be of a pass grade (grades 9 or better) and/or current with respect to principal and interest payments. As stated above, when an individual commercial real estate loan has a calculated risk grade of 10 or higher, a special assets officer analyzes the loan to determine whether the loan is impaired. At that time, we reassess the loan to value position in the loan. If the loan is determined to be collateral dependent, specific allocations of the allowance for loan losses are made for the amount of any collateral deficiency. If a collateral deficiency is ultimately deemed to be uncollectible, the amount is charged-off. These loans and related assessments of collateral position are monitored on an individual, case-by-case basis. We do not monitor loan-to-value ratios on a weighted-average portfolio-basis for commercial real estate loans having a calculated risk grade of 10 or higher as excess collateral from one borrower cannot be used to offset a collateral deficit for another borrower. When an individual consumer real estate loan becomes past due by more than 10 days, the assigned relationship manager will begin collection efforts. We only reassess the loan to value position in a consumer real estate loan if, during the course of the collections process, it is determined that the loan has become collateral dependent, and any collateral deficiency is recognized as a charge-off to the allowance for loan losses. Accordingly, we do not monitor loan-to-value ratios on a weighted-average basis for collateral dependent consumer real estate loans.

Generally, a commercial loan, or a portion thereof, is charged-off immediately when it is determined, through the analysis of any available current financial information with regards to the borrower, that the borrower is incapable of servicing unsecured debt, there is little or no prospect for near term improvement and no realistic strengthening action of significance is pending or, in the case of secured debt, when it is determined, through analysis of current information with regards to our collateral position, that amounts due from the borrower are in excess of the calculated current fair value of the collateral. Notwithstanding the foregoing, generally, commercial loans that become past due 180 cumulative days are charged-off. Generally, a consumer loan, or a portion thereof, is charged-off in accordance with regulatory guidelines which provide that such loans be charged-off when we become aware of the loss, such as from a triggering event that may include new information about a borrower’s intent/ability to repay the loan, bankruptcy, fraud or death, among other things, but in any event the charge-off must be taken within specified delinquency time frames. Such delinquency time frames state that closed-end retail loans (loans with pre-defined maturity dates, such as real estate mortgages, home equity loans and consumer installment loans) that become past due 120 cumulative days and open-end retail loans (loans that roll-over at the end of each term, such as home equity lines of credit) that become past due 180 cumulative days should be classified as a loss and charged-off.

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



	2017			2016			2015
Commercial and industrial	$	(17,453	)	$	(12,259	)	$	(6,535	)
Energy	(10,009		)	(18,588		)	(5,997		)
Commercial real estate:
Buildings, land and other	735			813			314
Construction	11			23			18
Consumer real estate	(506		)	(257		)	(91		)
Consumer and other	(5,919		)	(4,219		)	(3,237		)
Total	$	(33,141	)	$	(34,487	)	$	(15,528	)

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 is a single summary statistic that is designed to signal the likelihood of the Texas economy’s transition from expansion to recession and vice versa. Management believes this index provides a reliable indication of the direction of overall credit quality. The TLI is a composite of the following eight leading indicators: (i) Texas Value of the Dollar, (ii) U.S. Leading Index, (iii) real oil prices (iv) well permits, (v) initial claims for unemployment insurance, (vi) Texas Stock Index, (vii) Help-Wanted Index and (viii) average weekly hours worked in manufacturing. The TLI totaled 128.7 at December 31, 2017 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 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. In that regard, our allowance for loan losses includes allowance allocations calculated in accordance with ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.” Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. Our process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. The provision for loan losses also reflects the totality of actions taken on all loans for a particular period. In other words, the amount of the provision reflects not only the necessary increases in the allowance for loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools.

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. While management utilizes its best judgment and information available, the ultimate determination of the appropriate level of the allowance is dependent upon a variety of factors beyond our control, including, among other things, the performance of our loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications. We monitor whether or not the allowance for loan loss allocation model, as a whole, calculates an appropriate level of allowance for loan losses that moves in direct correlation to the general macroeconomic and loan portfolio conditions we experience over time.

Our allowance for loan losses consists of: (i) specific valuation allowances determined in accordance with ASC Topic 310 based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with ASC Topic 450 based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; (iii) general valuation allowances determined in accordance with ASC Topic 450 based on various risk factors that are internal to us; and (iv) macroeconomic valuation allowances determined in accordance with ASC Topic 450 based on general economic conditions and other risk factors that are external to us.

The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of problem loans. Loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the obligor’s ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. This analysis is performed at the relationship manager level for all commercial loans. When a loan has a calculated grade of 10 or higher, a special assets officer analyzes the loan to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the allowance for loan losses to the loan. Specific valuation allowances are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things.

Historical valuation allowances are calculated based on the historical gross loss experience of specific types of loans and the internal risk grade of such loans. We calculate historical gross loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical gross loss ratios are periodically (no less than annually) updated based on actual charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical gross loss ratio and the total dollar amount of the loans in the pool. Our pools of similar loans include similarly risk-graded groups of commercial and industrial loans, energy loans, commercial real estate loans, consumer real estate loans, consumer and other loans and 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.

General valuation allowances include allocations for groups of similar loans with similar risk characteristics that exceed certain concentration limits established by management and/or our board of directors. Concentration risk limits have been established, among other things, for certain industry concentrations, large balance and highly leveraged credit relationships that exceed specified risk grades and loans originated with policy exceptions that exceed specified risk grades. Additionally, general valuation allowances are provided for loans that did not undergo a separate, independent concurrence review during the underwriting process (generally those loans under $1.0 million at origination). Our allowance methodology for general valuation allowances also includes a reduction factor for recoveries of prior charge-offs to compensate for the fact that historical loss allocations are based upon gross charge-offs rather than net. The adjustment for recoveries is based on the lower of annualized, year-to-date gross recoveries or the total gross recoveries by loan portfolio segment for the preceding four quarters, adjusted, when necessary, for expected future trends in recoveries.

The components of the macroeconomic valuation allowance include (i) reserves allocated as a result of applying an environmental risk adjustment factor to the base historical loss allocation, (ii) reserves allocated for loans to borrowers in distressed industries and (iii) reserves allocated based upon current economic trends and other quantitative and qualitative factors that could impact our loan portfolio segments. The aggregate sum of these components for each portfolio segment reflects management's assessment of current and expected economic conditions and other external factors that impact the inherent credit quality of loans in that portfolio segment.

The environmental adjustment factor is based upon a more qualitative analysis of risk and is calculated through a survey of senior officers who are involved in credit making decisions at a corporate-wide and/or regional level. On a quarterly basis, survey participants rate the degree of various risks utilizing a numeric scale that translates to varying grades of high, moderate or low levels of risk. The results are then input into a risk-weighting matrix to determine an appropriate environmental risk adjustment factor. The various risks that may be considered in the determination of the environmental adjustment factor include, among other things, (i) the experience, ability and effectiveness of the bank’s lending management and staff; (ii) the effectiveness of our loan policies, procedures and internal controls; (iii) changes in asset quality; (iv) the impact of legislative and governmental influences affecting industry sectors; (v) the effectiveness of the internal loan review function; (vi) the impact of competition on loan structuring and pricing; and (vii) the impact of rising interest rates on portfolio risk. In periods where the surveyed risks are perceived to be higher, the risk-weighting matrix will generally result in a higher environmental adjustment factor, which, in turn will result in higher levels of general valuation allowance allocations. The opposite holds true in periods where the surveyed risks are perceived to be lower.

Macroeconomic valuation allowances also include amounts allocated for loans to borrowers in distressed industries within our commercial loan portfolio segments. To determine the amount of the allocation for our commercial and industrial and commercial real estate loan portfolio segments, management calculates the weighted-average risk grade for all loans to borrowers in distressed industries by loan portfolio segment. A multiple is then applied to the amount by which the weighted-average risk grade for loans to borrowers in distressed industries exceeds the weighted-average risk grade for all pass-grade loans within the loan portfolio segment to derive an allocation factor for loans to borrowers in distressed industries. The amount of the allocation for each loan portfolio segment is the product of this allocation factor and the outstanding balance of pass-grade loans within the identified distressed industries that have a risk grade of 6 or higher. Management identifies potential distressed industries by analyzing industry trends related to delinquencies, classifications and charge-offs. At December 31, 2017 and 2016, certain segments of contractors were considered to be a distressed industry based on elevated levels of delinquencies, classifications and charge-offs relative to other industries within our commercial loan portfolios. Furthermore, we determined, through a review of borrower financial information that, as a whole, contractors have experienced, among other things, decreased revenues, reduced backlog of work, compressed margins and little, if any, net income.

The aforementioned methodology for allocating reserves for distressed industries within commercial and industrial and commercial real estate loan portfolio segments does not translate to our energy loan portfolio segment as the segment is made up of a single industry. For energy loans, management analyzes current economic trends, commodity prices and various other quantitative and qualitative factors that impact the inherent credit quality of our energy loan portfolio segment. If, based upon this analysis, management concludes that the prevailing conditions could have an adverse impact on the credit quality of our energy loan portfolio, management performs a sensitivity stress test on individual loans within our energy loan portfolio. The sensitivity stress test includes a commodity price shock to 75% of the commodity price deck. We also assess the financial strength of individual borrowers, the quality of collateral, the relative experience of the individual borrowers and their ability to withstand an economic downturn. The sensitivity stress test allows us to identify potential credit issues during periods of economic uncertainty. Reserve allocations resulting from the sensitivity stress test are calculated by hypothetically increasing the risk grades for affected borrowers and applying our allowance methodology to determine the incremental reserves that would be required.

Macroeconomic valuation allowances may also include additional reserves allocated based upon management's assessment of current and expected economic conditions, trends and other quantitative and qualitative factors that could impact the credit quality of our loan portfolio segments. Additional reserves are allocated when, based upon this assessment, management believes that there are inherent credit risks for a given portfolio segment that have not yet materialized through the migration of loan risk grades and, therefore, have not yet impacted our historical or general valuation allowances.

The following table presents details of the allowance for loan losses, segregated by loan portfolio segment.



	Commercial and Industrial		Energy		Commercial Real Estate		Consumer Real Estate		Consumer and Other			Total
December 31, 2017
Historical valuation allowances	$	26,401	$	22,073	$	18,931	$	2,473	$	5,603		$	75,481
Specific valuation allowances	7,553		13,267		—		—		—			20,820
General valuation allowances	9,112		7,964		4,165		2,133		(91		)	23,283
Macroeconomic valuation allowances	16,548		8,224		7,852		1,051		2,105			35,780
Total	$	59,614	$	51,528	$	30,948	$	5,657	$	7,617		$	155,364
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

We monitor whether or not the allowance for loan loss allocation model, as a whole, calculates an appropriate level of allowance for loan losses that moves in direct correlation to the general macroeconomic and loan portfolio conditions we experience over time. In assessing the general macroeconomic trends/conditions, we analyze trends in the components of the TLI, as well as any available information related to regional, national and international economic conditions and events and the impact such conditions and events may have on us and our customers. With regard to assessing loan portfolio conditions, we analyze trends in weighted-average portfolio risk-grades, classified and non-performing loans and charge-off activity. In periods where general macroeconomic and loan portfolio conditions are in a deteriorating trend or remain at deteriorated levels, based on historical trends, we would expect to see the allowance for loan loss allocation model, as a whole, calculate higher levels of required allowances than in periods where general macroeconomic and loan portfolio conditions are in an improving trend or remain at an elevated level, based on historical trends.

The Corporation’s recorded investment in loans related to each balance in the allowance for loan losses by portfolio segment and detailed on the basis of the impairment methodology used by the Corporation was as follows:



	Commercial and Industrial		Energy		Commercial Real Estate		Consumer Real Estate		Consumer and Other		Total
December 31, 2017
Individually evaluated	$	43,760	$	94,242	$	6,394	$	1,214	$	—	$	145,610
Collectively evaluated	4,748,628		1,404,851		5,280,030		1,022,080		544,466		13,000,055
Total	$	4,792,388	$	1,499,093	$	5,286,424	$	1,023,294	$	544,466	$	13,145,665
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 2017, 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
2017
Beginning balance	$	52,915		$	60,653		$	30,213		$	4,238		$	5,026		$	153,045
Provision for loan losses	24,152			884			(11		)	1,925			8,510			35,460
Charge-offs	(20,619		)	(10,595		)	(86		)	(925		)	(15,579		)	(47,804		)
Recoveries	3,166			586			832			419			9,660			14,663
Net charge-offs	(17,453		)	(10,009		)	746			(506		)	(5,919		)	(33,141		)
Ending balance	$	59,614		$	51,528		$	30,948		$	5,657		$	7,617		$	155,364
Allocated to loans:
Individually evaluated for impairment	$	7,553		$	13,267		$	—		$	—		$	—		$	20,820
Collectively evaluated for impairment	52,061			38,261			30,948			5,657			7,617			134,544
Ending balance	$	59,614		$	51,528		$	30,948		$	5,657		$	7,617		$	155,364
2016
Beginning balance	$	42,993		$	54,696		$	24,313		$	4,659		$	9,198		$	135,859
Provision for loan losses	22,181			24,545			5,064			(164		)	47			51,673
Charge-offs	(15,910		)	(18,644		)	(82		)	(814		)	(12,878		)	(48,328		)
Recoveries	3,651			56			918			557			8,659			13,841
Net charge-offs	(12,259		)	(18,588		)	836			(257		)	(4,219		)	(34,487		)
Ending balance	$	52,915		$	60,653		$	30,213		$	4,238		$	5,026		$	153,045
Allocated to loans:
Individually evaluated for impairment	$	5,436		$	3,750		$	—		$	—		$	—		$	9,186
Collectively evaluated for impairment	47,479			56,903			30,213			4,238			5,026			143,859
Ending balance	$	52,915		$	60,653		$	30,213		$	4,238		$	5,026		$	153,045
2015
Beginning balance	$	44,273		$	14,919		$	27,163		$	5,178		$	8,009		$	99,542
Provision for loan losses	5,255			45,774			(3,182		)	(428		)	4,426			51,845
Charge-offs	(11,092		)	(6,000		)	(657		)	(577		)	(11,246		)	(29,572		)
Recoveries	4,557			3			989			486			8,009			14,044
Net charge-offs	(6,535		)	(5,997		)	332			(91		)	(3,237		)	(15,528		)
Ending balance	$	42,993		$	54,696		$	24,313		$	4,659		$	9,198		$	135,859
Allocated to loans:
Individually evaluated for impairment	$	2,378		$	2,000		$	—		$	—		$	—		$	4,378
Collectively evaluated for impairment	40,615			52,696			24,313			4,659			9,198			131,481
Ending balance	$	42,993		$	54,696		$	24,313		$	4,659		$	9,198		$	135,859