Loans

Loans were as follows:



	March 31, 2018		Percentage of Total		December 31, 2017		Percentage of Total
Commercial and industrial	$	4,876,523	36.5	%	$	4,792,388	36.4	%
Energy:
Production	1,125,321		8.4		1,182,326		9.0
Service	192,115		1.4		171,795		1.3
Other	129,552		0.9		144,972		1.1
Total energy	1,446,988		10.7		1,499,093		11.4
Commercial real estate:
Commercial mortgages	4,060,946		30.4		3,887,742		29.6
Construction	1,076,785		8.1		1,066,696		8.1
Land	317,189		2.4		331,986		2.5
Total commercial real estate	5,454,920		40.9		5,286,424		40.2
Consumer real estate:
Home equity loans	355,715		2.7		355,342		2.7
Home equity lines of credit	295,677		2.2		291,950		2.2
Other	388,271		2.9		376,002		2.9
Total consumer real estate	1,039,663		7.8		1,023,294		7.8
Total real estate	6,494,583		48.7		6,309,718		48.0
Consumer and other	545,935		4.1		544,466		4.2
Total loans	$	13,364,029	100.0	%	$	13,145,665	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, 2018, there were no concentrations of loans related to any single industry in excess of 10% of total loans other than energy loans, which totaled 10.7% 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 $44.8 million, respectively, as of March 31, 2018.

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, 2018 or December 31, 2017.

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”). Such loans totaled $180.7 million at March 31, 2018 and $166.4 million at December 31, 2017

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



	March 31, 2018		December 31, 2017
Commercial and industrial	$	17,314	$	46,186
Energy	93,097		94,302
Commercial real estate:
Buildings, land and other	10,858		7,589
Construction	—		—
Consumer real estate	1,878		2,109
Consumer and other	5		128
Total	$	123,152	$	150,314

As of March 31, 2018, non-accrual loans reported in the table above included $2.2 million related to loans that were restructured as “troubled debt restructurings” during 2018. 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 $1.5 million for the three months ended March 31, 2018, compared to $851 thousand for three months ended March 31, 2017.

An age analysis of past due loans (including both accruing and non-accruing loans), segregated by class of loans, as of March 31, 2018 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	$	25,701	$	23,946	$	49,647	$	4,826,876	$	4,876,523	$	10,357
Energy	24,404		4,207		28,611		1,418,377		1,446,988		3,137
Commercial real estate:
Buildings, land and other	36,130		5,470		41,600		4,336,535		4,378,135		3,889
Construction	9,497		—		9,497		1,067,288		1,076,785		—
Consumer real estate	8,225		3,164		11,389		1,028,274		1,039,663		1,680
Consumer and other	7,486		218		7,704		538,231		545,935		213
Total	$	111,443	$	37,005	$	148,448	$	13,215,581	$	13,364,029	$	19,276

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, 2018
Commercial and industrial	$	38,136	$	1,802	$	13,430	$	15,232	$	7,930
Energy	123,351		41,569		63,502		105,071		14,772
Commercial real estate:
Buildings, land and other	13,078		7,577		2,047		9,624		708
Construction	—		—		—		—		—
Consumer real estate	1,427		1,427		—		1,427		—
Consumer and other	—		—		—		—		—
Total	$	175,992	$	52,375	$	78,979	$	131,354	$	23,410
December 31, 2017
Commercial and industrial	$	60,781	$	28,038	$	15,722	$	43,760	$	7,553
Energy	99,606		33,080		61,162		94,242		13,267
Commercial real estate:
Buildings, land and other	10,795		6,394		—		6,394		—
Construction	—		—		—		—		—
Consumer real estate	1,214		1,214		—		1,214		—
Consumer and other	—		—		—		—		—
Total	$	172,396	$	68,726	$	76,884	$	145,610	$	20,820

The average recorded investment in impaired loans was as follows:



	Three Months Ended March 31,
	2018		2017
Commercial and industrial	$	29,496	$	26,393
Energy	99,657		68,101
Commercial real estate:
Buildings, land and other	8,009		6,660
Construction	—		—
Consumer real estate	1,321		1,102
Consumer and other	—		27
Total	$	138,483	$	102,283

Troubled Debt Restructurings. Troubled debt restructurings during the three months ended March 31, 2018 and March 31, 2017 are set forth in the following table.



	Three Months Ended March 31, 2018				Three Months Ended March 31, 2017
	Balance at Restructure		Balance at Period-End		Balance at Restructure		Balance at Period-End
Commercial and industrial	$	2,203	$	2,171	$	—	$	—
Energy	13,708		12,058		11,262		11,212
	$	15,911	$	14,229	$	11,262	$	11,212

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:



	March 31, 2018		March 31, 2017
Restructured loans past due in excess of 90 days at period-end:
Number of loans	—		1
Dollar amount of loans	$	—	$	747
Restructured loans on non-accrual status at period end	2,171		11,212
Charge-offs of restructured loans:
Recognized in connection with restructuring	—		—
Recognized on previously restructured loans	1,650		2,000

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 2017 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, 2018			December 31, 2017
	Weighted Average Risk Grade	Loans		Weighted Average Risk Grade	Loans
Commercial and industrial:
Risk grades 1-8	6.05	$	4,505,491	6.06	$	4,378,839
Risk grade 9	9.00	151,084		9.00	170,285
Risk grade 10	10.00	121,457		10.00	99,260
Risk grade 11	11.00	81,148		11.00	97,818
Risk grade 12	12.00	9,412		12.00	38,633
Risk grade 13	13.00	7,931		13.00	7,553
Total	6.35	$	4,876,523	6.41	$	4,792,388
Energy
Risk grades 1-8	6.12	$	1,173,702	6.01	$	1,199,207
Risk grade 9	9.00	50,364		9.00	50,427
Risk grade 10	10.00	37,670		10.00	64,282
Risk grade 11	11.00	92,155		11.00	90,875
Risk grade 12	12.00	78,325		12.00	81,035
Risk grade 13	13.00	14,772		13.00	13,267
Total	7.02	$	1,446,988	6.97	$	1,499,093
Commercial real estate:
Buildings, land and other
Risk grades 1-8	6.77	$	4,051,952	6.75	$	3,868,659
Risk grade 9	9.00	124,048		9.00	151,487
Risk grade 10	10.00	120,399		10.00	129,391
Risk grade 11	11.00	70,878		11.00	62,602
Risk grade 12	12.00	10,150		12.00	7,589
Risk grade 13	13.00	708		13.00	—
Total	7.00	$	4,378,135	7.00	$	4,219,728
Construction
Risk grades 1-8	7.16	$	1,040,071	7.11	$	1,019,635
Risk grade 9	9.00	15,541		9.00	18,042
Risk grade 10	10.00	17,361		10.00	23,393
Risk grade 11	11.00	3,812		11.00	5,626
Risk grade 12	12.00	—		12.00	—
Risk grade 13	13.00	—		13.00	—
Total	7.25	$	1,076,785	7.23	$	1,066,696

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



	Three Months Ended March 31,
	2018			2017
Commercial and industrial	$	(7,675	)	$	(2,729	)
Energy	(2,849		)	(4,225		)
Commercial real estate:
Buildings, land and other	81			42
Construction	2			3
Consumer real estate	(526		)	96
Consumer and other	(1,457		)	(1,128		)
Total	$	(12,424	)	$	(7,941	)

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 2017 Form 10-K, totaled 131.5 at February 28, 2018 (most recent date available) and 129.6 at December 31, 2017. 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 2017 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, 2018 and December 31, 2017 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, 2018
Historical valuation allowances	$	26,658	$	12,266	$	19,870	$	2,470	$	6,729		$	67,993
Specific valuation allowances	7,930		14,772		708		—		—			23,410
General valuation allowances	8,053		8,015		4,025		1,601		(95		)	21,599
Macroeconomic valuation allowances	15,092		3,986		13,871		2,278		1,656			36,883
Total	$	57,733	$	39,039	$	38,474	$	6,349	$	8,290		$	149,885
Allocated to loans:
Individually evaluated	$	7,930	$	14,772	$	708	$	—	$	—		$	23,410
Collectively evaluated	49,803		24,267		37,766		6,349		8,290			126,475
Total	$	57,733	$	39,039	$	38,474	$	6,349	$	8,290		$	149,885
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
Allocated to loans:
Individually evaluated	$	7,553	$	13,267	$	—	$	—	$	—		$	20,820
Collectively evaluated	52,061		38,261		30,948		5,657		7,617			134,544
Total	$	59,614	$	51,528	$	30,948	$	5,657	$	7,617		$	155,364

Our recorded investment in loans as of March 31, 2018 and December 31, 2017 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, 2018
Individually evaluated	$	15,232	$	105,071	$	9,624	$	1,427	$	—	$	131,354
Collectively evaluated	4,861,291		1,341,917		5,445,296		1,038,236		545,935		13,232,675
Total	$	4,876,523	$	1,446,988	$	5,454,920	$	1,039,663	$	545,935	$	13,364,029
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

The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2018 and 2017. 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, 2018
Beginning balance	$	59,614		$	51,528		$	30,948		$	5,657		$	7,617		$	155,364
Provision for loan losses	5,794			(9,640		)	7,443			1,218			2,130			6,945
Charge-offs	(9,252		)	(2,850		)	(5		)	(719		)	(3,972		)	(16,798		)
Recoveries	1,577			1			88			193			2,515			4,374
Net charge-offs	(7,675		)	(2,849		)	83			(526		)	(1,457		)	(12,424		)
Ending balance	$	57,733		$	39,039		$	38,474		$	6,349		$	8,290		$	149,885
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