Loans

6 Months Ended

Jun. 30, 2021

Loans were as follows:


	June 30, 2021		Percentage of Total		December 31, 2020		Percentage of Total
Commercial and industrial	$	4,755,345	28.7	%	$	4,955,341	28.4	%
Energy:
Production	812,862		4.9		976,473		5.6
Service	89,153		0.6		116,825		0.7
Other	121,187		0.7		141,900		0.8
Total energy	1,023,202		6.2		1,235,198		7.1
Paycheck Protection Program	1,926,824		11.6		2,433,849		13.9
Commercial real estate:
Commercial mortgages	5,577,069		33.6		5,478,806		31.3
Construction	1,166,309		7.0		1,223,814		7.0
Land	312,668		1.9		317,847		1.8
Total commercial real estate	7,056,046		42.5		7,020,467		40.1
Consumer real estate:
Home equity loans	313,891		1.9		329,390		1.9
Home equity lines of credit	479,099		2.9		452,854		2.6
Other	558,988		3.3		548,530		3.1
Total consumer real estate	1,351,978		8.1		1,330,774		7.6
Total real estate	8,408,024		50.6		8,351,241		47.7
Consumer and other	482,931		2.9		505,680		2.9
Total loans	$	16,596,326	100.0	%	$	17,481,309	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 June 30, 2021, there were no concentrations of loans related to any single industry in excess of 10% of total loans. The largest industry concentration was related to the energy industry, which totaled 6.2% of total loans, or 7.0% excluding PPP loans. Unfunded commitments to extend credit and standby letters of credit issued to customers in the energy industry totaled $930.8 million and $60.3 million, respectively, as of June 30, 2021.

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 June 30, 2021 or December 31, 2020.

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 $289.7 million at June 30, 2021 and $353.1 million at December 31, 2020.

Accrued Interest Receivable. Accrued interest receivable on loans totaled $44.6 million and $48.7 million at June 30, 2021 and December 31, 2020, respectively and is included in accrued interest receivable and other assets in the accompany consolidated balance sheets.

COVID-19 Loan Deferments. Certain borrowers are currently unable to meet their contractual payment obligations because of the adverse effects of COVID-19. To help mitigate these effects, loan customers may apply for a deferral of payments, or portions thereof, for up to 90 days. After 90 days, customers may apply for an additional deferral, and a small proportion of our customers have requested such an additional deferral. In the absence of other intervening factors, such short-term modifications made on a good faith basis are not categorized as troubled debt restructurings, nor are loans granted payment deferrals related to COVID-19 reported as past due or placed on non-accrual status (provided the loans were not past due or on non-accrual status prior to the deferral). As of June 30, 2021, the amount of loans remaining in COVID-19 related deferment was not significant.

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.

Non-accrual loans, segregated by class of loans, were as follows:


	June 30, 2021				December 31, 2020
	Total Non-Accrual		Non-Accrual with No Credit Loss Allowance		Total Non-Accrual		Non-Accrual with No Credit Loss Allowance
Commercial and industrial	$	16,169	$	4,185	$	19,849	$	4,479
Energy	25,783		7,701		23,168		639
Paycheck Protection Program	—		—		—		—
Commercial real estate:
Buildings, land and other	13,180		9,633		15,737		14,116
Construction	1,667		673		1,684		1,684
Consumer real estate	451		148		993		993
Consumer and other	—		—		18		—
Total	$	57,250	$	22,340	$	61,449	$	21,911

The following table presents non-accrual loans as of June 30, 2021 by class and year of origination.


	2021		2020		2019		2018		2017		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Commercial and industrial	$	—	$	8,905	$	2,303	$	941	$	1,035	$	79	$	328	$	2,578	$	16,169
Energy	—		523		6,855		1,658		—		335		13,945		2,467		25,783
Paycheck Protection Program	—		—		—		—		—		—		—		—		—
Commercial real estate:
Buildings, land and other	1,546		1,895		2,922		842		2,093		3,882		—		—		13,180
Construction	—		1,667		—		—		—		—		—		—		1,667
Consumer real estate	—		—		—		—		—		410		—		41		451
Consumer and other	—		—		—		—		—		—		—		—		—
Total	$	1,546	$	12,990	$	12,080	$	3,441	$	3,128	$	4,706	$	14,273	$	5,086	$	57,250

Had non-accrual loans performed in accordance with their original contract terms, we would have recognized additional interest income, net of tax, of approximately $427 thousand and $881 thousand for the three and six months ended June 30, 2021, and approximately $570 thousand and $1.6 million for the three and six months ended June 30, 2020.

An age analysis of past due loans (including both accruing and non-accruing loans), segregated by class of loans, as of June 30, 2021 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	$	20,612	$	11,272	$	31,884	$	4,723,461	$	4,755,345	$	9,282
Energy	1,717		14,468		16,185		1,007,017		1,023,202		1,017
Paycheck Protection Program	—		—		—		1,926,824		1,926,824		—
Commercial real estate:
Buildings, land and other	31,764		27,550		59,314		5,830,423		5,889,737		18,135
Construction	2,548		—		2,548		1,163,761		1,166,309		—
Consumer real estate	7,569		2,169		9,738		1,342,240		1,351,978		1,791
Consumer and other	3,055		288		3,343		479,588		482,931		288
Total	$	67,265	$	55,747	$	123,012	$	16,473,314	$	16,596,326	$	30,513

Troubled Debt Restructurings. Troubled debt restructurings during the six months ended June 30, 2021 and 2020 are set forth in the following table.


	Six Months Ended June 30, 2021				Six Months Ended June 30, 2020
	Balance at Restructure		Balance at Period-End		Balance at Restructure		Balance at Period-End
Commercial and industrial	$	—	$	—	$	3,660	$	3,652
Energy	3,817		3,817		—		—
Commercial real estate:
Buildings, land and other	582		579		6,606		6,606
Construction	—		—		1,192		1,192

Consumer and other	—		—		1,104		1,104
	$	4,399	$	4,396	$	12,562	$	12,554

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 credit losses on loans.

Additional information related to restructured loans as of or for the six months ended June 30, 2021 and 2020 is set forth in the following table.


	June 30, 2021		June 30, 2020
Restructured loans past due in excess of 90 days at period-end:
Number of loans	1		—
Dollar amount of loans	$	1,322	$	—
Restructured loans on non-accrual status at period end	4,090		7,631
Charge-offs of restructured loans:
Recognized in connection with restructuring	—		—
Recognized on previously restructured loans	—		—

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 (iv) 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 2020 Form 10-K. We monitor portfolio credit quality by the weighted-average risk grade of each class of commercial loan. Individual relationship managers, under the oversight of credit administration, 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 and year of origination/renewal as of June 30, 2021. Paycheck Protection Program (“PPP”) loans are excluded as such loans are fully guaranteed by the Small Business Administration (“SBA”).


	2021		2020		2019		2018		2017		Prior		Revolving Loans		Revolving Loans Converted to Term		Total		W/A Risk Grade
Commercial and industrial
Risk grades 1-8	$	704,030	$	757,923	$	458,789	$	231,663	$	178,242	$	177,200	$	1,796,022	$	69,507	$	4,373,376	6.04
Risk grade 9	11,275		49,069		36,452		32,061		15,796		12,166		75,803		7,433		240,055		9.00
Risk grade 10	26,973		8,903		1,861		6,903		2,138		157		18,781		3,018		68,734		10.00
Risk grade 11	566		9,716		11,697		5,006		3,016		788		16,790		9,432		57,011		11.00
Risk grade 12	—		6,325		1,759		941		560		79		328		2,351		12,343		12.00
Risk grade 13	—		2,580		544		—		475		—		—		227		3,826		13.00
	$	742,844	$	834,516	$	511,102	$	276,574	$	200,227	$	190,390	$	1,907,724	$	91,968	$	4,755,345	6.32
W/A risk grade	5.80		6.42		6.89		7.16		6.26		5.92		6.19		7.36		6.32
Energy
Risk grades 1-8	$	368,434	$	11,610	$	13,300	$	8,067	$	6,623	$	4,734	$	430,760	$	15,935	$	859,463	6.03
Risk grade 9	34,516		806		2,041		986		—		—		22,953		5,057		66,359		9.00
Risk grade 10	1,267		127		767		1,057		—		742		1,493		3,612		9,065		10.00
Risk grade 11	11,540		1,022		18,249		1,163		—		601		26,307		3,650		62,532		11.00
Risk grade 12	—		42		5,165		235		—		335		6,093		103		11,973		12.00
Risk grade 13	—		481		1,690		1,423		—		—		7,852		2,364		13,810		13.00
	$	415,757	$	14,088	$	41,212	$	12,931	$	6,623	$	6,412	$	495,458	$	30,721	$	1,023,202	6.73
W/A risk grade	6.31		8.09		9.85		8.63		7.40		7.95		6.58		8.80		6.73
Commercial real estate:
Buildings, land, other
Risk grades 1-8	$	707,609	$	1,258,571	$	920,940	$	625,954	$	548,979	$	923,486	$	51,468	$	70,536	$	5,107,543	6.90
Risk grade 9	22,692		155,019		68,831		48,895		38,034		33,759		4,235		2,444		373,909		9.00
Risk grade 10	5,642		19,719		25,328		59,859		65,261		72,057		—		5,187		253,053		10.00
Risk grade 11	897		20,635		13,461		11,885		32,984		53,242		3,000		5,948		142,052		11.00
Risk grade 12	1,346		1,895		2,622		842		2,093		3,632		—		—		12,430		12.00
Risk grade 13	200		—		300		—		—		250		—		—		750		13.00
	$	738,386	$	1,455,839	$	1,031,482	$	747,435	$	687,351	$	1,086,426	$	58,703	$	84,115	$	5,889,737	7.28
W/A risk grade	7.20		7.27		7.28		7.47		7.39		7.13		7.20		7.31		7.28
Construction
Risk grades 1-8	$	295,583	$	262,942	$	364,655	$	48,269	$	—	$	2,646	$	140,472	$	—	$	1,114,567	7.08
Risk grade 9	3,279		30,231		2,472		—		542		—		13,551		—		50,075		9.00
Risk grade 10	—		—		—		—		—		—		—		—		—		10.00
Risk grade 11	—		—		—		—		—		—		—		—		—		11.00
Risk grade 12	—		1,467		—		—		—		—		—		—		1,467		12.00
Risk grade 13	—		200		—		—		—		—		—		—		200		13.00
	$	298,862	$	294,840	$	367,127	$	48,269	$	542	$	2,646	$	154,023	$	—	$	1,166,309	7.17
W/A risk grade	7.05		6.99		7.35		7.73		9.00		6.78		7.14		—		7.17
Total commercial real estate	$	1,037,248	$	1,750,679	$	1,398,609	$	795,704	$	687,893	$	1,089,072	$	212,726	$	84,115	$	7,056,046	7.26
W/A risk grade	7.16		7.23		7.30		7.48		7.39		7.13		7.16		7.31		7.26

In the table above, certain loans are reported as 2021 originations and have risk grades of 11 or higher. These loans were, for the most part, first originated in various years prior to 2021 but were renewed in the current year.

The following tables present weighted average risk grades for all commercial loans by class as of December 31, 2020. Refer to our 2020 Form 10-K for details of these loans by year of origination/renewal.


	Commercial and Industrial			Energy			Commercial Real Estate - Buildings, Land and Other			Commercial Real Estate - Construction			Total Commercial Real Estate
	W/A Risk Grade	Loans		W/A Risk Grade	Loans		W/A Risk Grade	Loans		W/A Risk Grade	Loans		W/A Risk Grade	Loans
Risk grades 1-8	6.13	$	4,506,121	5.99	$	968,144	6.97	$	5,047,873	6.99	$	1,110,025	6.98	$	6,157,898
Risk grade 9	9.00	256,198		9.00	133,547		9.00	325,227		9.00	72,287		9.00	397,514
Risk grade 10	10.00	125,977		10.00	46,427		10.00	258,454		10.00	38,962		10.00	297,416
Risk grade 11	11.00	47,196		11.00	63,912		11.00	149,362		11.00	856		11.00	150,218
Risk grade 12	12.00	14,528		12.00	13,741		12.00	15,224		12.00	1,684		12.00	16,908
Risk grade 13	13.00	5,321		13.00	9,427		13.00	513		13.00	—		13.00	513
Total	6.45	$	4,955,341	6.85	$	1,235,198	7.34	$	5,796,653	7.22	$	1,223,814	7.32	$	7,020,467

Information about the payment status of consumer loans, segregated by portfolio segment and year of origination, as of June 30, 2021 was as follows:


	2021		2020		2019		2018		2017		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Consumer real estate:
Past due 30-89 days	$	295	$	369	$	541	$	813	$	395	$	1,044	$	244	$	3,868	$	7,569
Past due 90 or more days	—		—		112		78		108		885		986		—		2,169
Total past due	295		369		653		891		503		1,929		1,230		3,868		9,738
Current loans	147,268		312,290		126,153		70,390		62,546		149,585		463,201		10,807		1,342,240
Total	$	147,563	$	312,659	$	126,806	$	71,281	$	63,049	$	151,514	$	464,431	$	14,675	$	1,351,978
Consumer and other:
Past due 30-89 days	$	1,301	$	54	$	101	$	73	$	18	$	11	$	442	$	1,055	$	3,055
Past due 90 or more days	149		2		—		104		—		—		—		33		288
Total past due	1,450		56		101		177		18		11		442		1,088		3,343
Current loans	28,641		26,179		15,337		3,945		2,114		1,635		373,923		27,814		479,588
Total	$	30,091	$	26,235	$	15,438	$	4,122	$	2,132	$	1,646	$	374,365	$	28,902	$	482,931

Revolving loans that converted to term during the three and six months ended June 30, 2021 and 2020 were as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Commercial and industrial	$	22,111	$	9,405	$	31,561	$	18,975
Energy	294		26,839		6,177		42,186
Commercial real estate:
Buildings, land and other	8,195		—		31,321		7,551
Construction	—		—		—		—
Consumer real estate	205		905		977		1,955
Consumer and other	1,961		10,371		5,696		10,371
Total	$	32,766	$	47,520	$	75,732	$	81,038

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 2020 Form 10-K, totaled 131.5 at June 30, 2021 and 118.4 at December 31, 2020. A higher TLI value implies more favorable economic conditions.

Allowance For Credit Losses - Loans. The allowance for credit losses on loans is a contra-asset valuation account, calculated in accordance with ASC 326, that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. The amount of the allowance represents management's best estimate of current expected credit losses on loans considering available information, from internal and external sources, relevant to assessing collectibility over the loans' contractual terms, adjusted for expected prepayments when appropriate. Credit loss expense related to loans reflects the totality of actions taken on all loans for a particular period including any necessary increases or decreases in the allowance related to changes in credit loss expectations associated with specific loans or pools of loans. 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 appropriateness of the allowance is dependent upon a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications. Our allowance methodology is more fully described in our 2020 Form 10-K.

The following table presents details of the allowance for credit losses on loans segregated by loan portfolio segment as of June 30, 2021 and December 31, 2020. No allowance for credit losses has been recognized for PPP loans as such loans are fully guaranteed by the SBA.


June 30, 2021	Commercial and Industrial		Energy		Commercial Real Estate		Consumer Real Estate		Consumer and Other		Total
Modeled expected credit losses	$	47,269	$	7,754	$	17,659	$	6,057	$	6,589	$	85,328
Q-Factor and other qualitative adjustments	13,509		6,446		129,384		61		1,271		150,671
Specific allocations	4,493		13,810		950		36		—		19,289
Total	$	65,271	$	28,010	$	147,993	$	6,154	$	7,860	$	255,288
December 31, 2020
Modeled expected credit losses	$	65,645	$	8,910	$	125,126	$	7,926	$	6,945	$	214,552
Q-Factor and other qualitative adjustments	2,877		21,216		9,253		—		—		33,346
Specific allocations	5,321		9,427		513		—		18		15,279
Total	$	73,843	$	39,553	$	134,892	$	7,926	$	6,963	$	263,177

The following table details activity in the allowance for credit losses on loans by portfolio segment for the three and six months ended June 30, 2021 and 2020. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories. No allowance for credit losses has been recognized for PPP loans as such loans are fully guaranteed by the SBA.


	Commercial and Industrial		Energy		Commercial Real Estate		Consumer Real Estate		Consumer and Other		Total
Three months ended:
June 30, 2021
Beginning balance	$	70,892	$	33,472	$	144,440	$	5,636	$	6,818	$	261,258
Credit loss expense (benefit)	(5,901)		(5,527)		3,654		611		2,784		(4,379)
Charge-offs	(685)		—		(137)		(388)		(3,882)		(5,092)
Recoveries	965		65		36		295		2,140		3,501
Net charge-offs	280		65		(101)		(93)		(1,742)		(1,591)
Ending balance	$	65,271	$	28,010	$	147,993	$	6,154	$	7,860	$	255,288
June 30, 2020
Beginning balance	$	92,152	$	103,201	$	52,319	$	8,170	$	8,039	$	263,881

Credit loss expense (benefit)	7,334		(27,342)		44,587		352		2,297		27,228
Charge-offs	(1,841)		(35,042)		(3,511)		(135)		(4,178)		(44,707)
Recoveries	891		—		30		611		2,127		3,659
Net charge-offs	(950)		(35,042)		(3,481)		476		(2,051)		(41,048)
Ending balance	$	98,536	$	40,817	$	93,425	$	8,998	$	8,285	$	250,061


	Commercial and Industrial		Energy		Commercial Real Estate		Consumer Real Estate		Consumer and Other		Total
Six months ended:
June 30, 2021
Beginning balance	$	73,843	$	39,553	$	134,892	$	7,926	$	6,963	$	263,177
Credit loss expense (benefit)	(7,866)		(11,328)		12,576		(2,111)		4,350		(4,379)
Charge-offs	(2,874)		(1,433)		(137)		(672)		(7,942)		(13,058)
Recoveries	2,168		1,218		662		1,011		4,489		9,548
Net (charge-offs) recoveries	(706)		(215)		525		339		(3,453)		(3,510)
Ending balance	$	65,271	$	28,010	$	147,993	$	6,154	$	7,860	$	255,288
June 30, 2020
Beginning balance	$	51,593	$	37,382	$	31,037	$	4,113	$	8,042	$	132,167
Impact of adopting ASC 326	21,263		(10,453)		(13,519)		2,392		(2,248)		(2,565)
Credit loss expense (benefit)	29,284		82,664		79,348		1,922		6,935		200,153
Charge-offs	(6,210)		(68,842)		(3,584)		(420)		(9,183)		(88,239)
Recoveries	2,606		66		143		991		4,739		8,545
Net (charge-offs) recoveries	(3,604)		(68,776)		(3,441)		571		(4,444)		(79,694)
Ending balance	$	98,536	$	40,817	$	93,425	$	8,998	$	8,285	$	250,061

The following table presents loans that were evaluated for expected credit losses on an individual basis and the related specific allocations, by loan portfolio segment as of June 30, 2021 and December 31, 2020.


	June 30, 2021				December 31, 2020
	Loan Balance		Specific Allocations		Loan Balance		Specific Allocations
Commercial and industrial	$	20,062	$	4,493	$	21,287	$	5,321
Energy	28,228		13,810		22,888		9,427
Paycheck Protection Program	—		—		—		—
Commercial real estate:
Buildings, land and other	31,105		750		34,057		513
Construction	1,667		200		1,684		—
Consumer real estate	302		36		561		—
Consumer and other	—		—		18		18
Total	$	81,364	$	19,289	$	80,495	$	15,279