Loans

Loans were as follows:



	September 30, 2018		Percentage of Total		December 31, 2017		Percentage of Total
Commercial and industrial	$	5,029,754	36.4	%	$	4,792,388	36.4	%
Energy:
Production	1,220,771		8.8		1,182,326		9.0
Service	164,889		1.2		171,795		1.3
Other	133,708		1.0		144,972		1.1
Total energy	1,519,368		11.0		1,499,093		11.4
Commercial real estate:
Commercial mortgages	4,078,787		29.5		3,887,742		29.6
Construction	1,208,870		8.7		1,066,696		8.1
Land	315,384		2.3		331,986		2.5
Total commercial real estate	5,603,041		40.5		5,286,424		40.2
Consumer real estate:
Home equity loans	352,292		2.5		355,342		2.7
Home equity lines of credit	326,876		2.4		291,950		2.2
Other	419,965		3.1		376,002		2.9
Total consumer real estate	1,099,133		8.0		1,023,294		7.8
Total real estate	6,702,174		48.5		6,309,718		48.0
Consumer and other	563,542		4.1		544,466		4.2
Total loans	$	13,814,838	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 September 30, 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 11.0% 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 $46.7 million, respectively, as of September 30, 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 September 30, 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 $238.6 million at September 30, 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:



	September 30, 2018		December 31, 2017
Commercial and industrial	$	12,278	$	46,186
Energy	51,802		94,302
Commercial real estate:
Buildings, land and other	15,913		7,589
Construction	—		—
Consumer real estate	971		2,109
Consumer and other	1,637		128
Total	$	82,601	$	150,314

Had non-accrual loans performed in accordance with their original contract terms, we would have recognized additional interest income, net of tax, of approximately $1.3 million and $4.2 million for the three and nine months ended September 30, 2018, compared to $783 thousand and $2.4 million for the three and nine months ended September 30, 2017.

An age analysis of past due loans (including both accruing and non-accruing loans), segregated by class of loans, as of September 30, 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	$	33,985	$	10,250	$	44,235	$	4,985,519	$	5,029,754	$	3,963
Energy	3,251		2,221		5,472		1,513,896		1,519,368		818
Commercial real estate:
Buildings, land and other	21,596		2,980		24,576		4,369,595		4,394,171		2,606
Construction	784		1,042		1,826		1,207,044		1,208,870		1,042
Consumer real estate	7,743		1,773		9,516		1,089,617		1,099,133		1,432
Consumer and other	6,098		1,766		7,864		555,678		563,542		1,724
Total	$	73,457	$	20,032	$	93,489	$	13,721,349	$	13,814,838	$	11,585

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, 2018
Commercial and industrial	$	19,857	$	3,153	$	6,574	$	9,727	$	4,622
Energy	68,087		7,942		43,614		51,556		12,672
Commercial real estate:
Buildings, land and other	15,961		2,309		12,876		15,185		2,599
Construction	—		—		—		—		—
Consumer real estate	293		293		—		293		—
Consumer and other	1,595		—		1,595		1,595		1,595
Total	$	105,793	$	13,697	$	64,659	$	78,356	$	21,488
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 September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Commercial and industrial	$	13,447	$	26,910	$	21,025	$	26,651
Energy	78,772		76,008		82,640		72,055
Commercial real estate:
Buildings, land and other	14,306		5,553		12,328		6,106
Construction	—		—		—		—
Consumer real estate	671		1,209		807		1,155
Consumer and other	1,073		—		805		13
Total	$	108,269	$	109,680	$	117,605	$	105,980

Troubled Debt Restructurings. Troubled debt restructurings during the nine months ended September 30, 2018 and September 30, 2017 are set forth in the following table.



	Nine Months Ended September 30, 2018				Nine Months Ended September 30, 2017
	Balance at Restructure		Balance at Period-End		Balance at Restructure		Balance at Period-End
Commercial and industrial	$	2,203	$	—	$	4,026	$	3,875
Energy	13,708		—		56,097		55,023
	$	15,911	$	—	$	60,123	$	58,898

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 as of or for the nine months ended September 30, 2018 and September 30, 2017 is set forth in the following table.



	September 30, 2018		September 30, 2017
Restructured loans past due in excess of 90 days at period-end:
Number of loans	—		1
Dollar amount of loans	$	—	$	43,137
Restructured loans on non-accrual status at period end	—		54,082
Charge-offs of restructured loans:
Recognized in connection with restructuring	—		—
Recognized on previously restructured loans	4,650		9,951
Proceeds from sale of restructured loans	15,750		—

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.



	September 30, 2018			December 31, 2017
	Weighted Average Risk Grade	Loans		Weighted Average Risk Grade	Loans
Commercial and industrial:
Risk grades 1-8	6.10	$	4,755,739	6.06	$	4,378,839
Risk grade 9	9.00	123,199		9.00	170,285
Risk grade 10	10.00	67,645		10.00	99,260
Risk grade 11	11.00	70,893		11.00	97,818
Risk grade 12	12.00	7,656		12.00	38,633
Risk grade 13	13.00	4,622		13.00	7,553
Total	6.31	$	5,029,754	6.41	$	4,792,388
Energy
Risk grades 1-8	5.81	$	1,367,235	6.01	$	1,199,207
Risk grade 9	9.00	13,352		9.00	50,427
Risk grade 10	10.00	42,862		10.00	64,282
Risk grade 11	11.00	44,116		11.00	90,875
Risk grade 12	12.00	39,131		12.00	81,035
Risk grade 13	13.00	12,672		13.00	13,267
Total	6.32	$	1,519,368	6.97	$	1,499,093
Commercial real estate:
Buildings, land and other
Risk grades 1-8	6.77	$	4,091,571	6.75	$	3,868,659
Risk grade 9	9.00	135,521		9.00	151,487
Risk grade 10	10.00	60,169		10.00	129,391
Risk grade 11	11.00	90,997		11.00	62,602
Risk grade 12	12.00	13,314		12.00	7,589
Risk grade 13	13.00	2,599		13.00	—
Total	6.99	$	4,394,171	7.00	$	4,219,728
Construction
Risk grades 1-8	7.10	$	1,129,492	7.11	$	1,019,635
Risk grade 9	9.00	51,058		9.00	18,042
Risk grade 10	10.00	26,035		10.00	23,393
Risk grade 11	11.00	2,285		11.00	5,626
Risk grade 12	12.00	—		12.00	—
Risk grade 13	13.00	—		13.00	—
Total	7.25	$	1,208,870	7.23	$	1,066,696

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Commercial and industrial	$	(7,807	)	$	(4,565	)	$	(19,030	)	$	(12,155	)
Energy	(5,347		)	451			(10,272		)	(10,010		)
Commercial real estate:
Buildings, land and other	33			266			(288		)	768
Construction	3			2			11			8
Consumer real estate	(388		)	(629		)	(1,078		)	(422		)
Consumer and other	(1,792		)	(1,760		)	(4,975		)	(4,289		)
Total	$	(15,298	)	$	(6,235	)	$	(35,632	)	$	(26,100	)

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 129.4 at September 30, 2018 and 129.3 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 September 30, 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
September 30, 2018
Historical valuation allowances	$	25,582	$	9,654	$	20,441	$	2,641	$	6,815		$	65,133
Specific valuation allowances	4,622		12,672		2,599		—		1,595			21,488
General valuation allowances	9,361		5,849		4,187		1,620		(114		)	20,903
Macroeconomic valuation allowances	11,426		3,270		11,977		1,933		1,448			30,054
Total	$	50,991	$	31,445	$	39,204	$	6,194	$	9,744		$	137,578
Allocated to loans:
Individually evaluated	$	4,622	$	12,672	$	2,599	$	—	$	1,595		$	21,488
Collectively evaluated	46,369		18,773		36,605		6,194		8,149			116,090
Total	$	50,991	$	31,445	$	39,204	$	6,194	$	9,744		$	137,578
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 September 30, 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
September 30, 2018
Individually evaluated	$	9,727	$	51,556	$	15,185	$	293	$	1,595	$	78,356
Collectively evaluated	5,020,027		1,467,812		5,587,856		1,098,840		561,947		13,736,482
Total	$	5,029,754	$	1,519,368	$	5,603,041	$	1,099,133	$	563,542	$	13,814,838
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 and nine months ended September 30, 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:
September 30, 2018
Beginning balance	$	57,713		$	37,313		$	38,918		$	6,336		$	9,946		$	150,226
Provision for loan losses	1,085			(521		)	250			246			1,590			2,650
Charge-offs	(8,491		)	(5,400		)	—			(431		)	(4,274		)	(18,596		)
Recoveries	684			53			36			43			2,482			3,298
Net charge-offs	(7,807		)	(5,347		)	36			(388		)	(1,792		)	(15,298		)
Ending balance	$	50,991		$	31,445		$	39,204		$	6,194		$	9,744		$	137,578
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

Nine months ended:
September 30, 2018
Beginning balance	$	59,614		$	51,528		$	30,948		$	5,657		$	7,617		$	155,364
Provision for loan losses	10,407			(9,811		)	8,533			1,615			7,102			17,846
Charge-offs	(21,896		)	(10,939		)	(619		)	(1,632		)	(12,240		)	(47,326		)
Recoveries	2,866			667			342			554			7,265			11,694
Net charge-offs	(19,030		)	(10,272		)	(277		)	(1,078		)	(4,975		)	(35,632		)
Ending balance	$	50,991		$	31,445		$	39,204		$	6,194		$	9,744		$	137,578
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