Loans

9 Months Ended

Sep. 30, 2021

Loans were as follows:


	September 30, 2021		Percentage of Total		December 31, 2020		Percentage of Total
Commercial and industrial	$	4,929,656	31.1	%	$	4,955,341	28.4	%
Energy:
Production	774,753		4.9		976,473		5.6
Service	107,585		0.7		116,825		0.7
Other	95,873		0.6		141,900		0.8
Total energy	978,211		6.2		1,235,198		7.1
Paycheck Protection Program	827,820		5.2		2,433,849		13.9
Commercial real estate:
Commercial mortgages	5,648,541		35.7		5,478,806		31.3
Construction	1,266,633		8.0		1,223,814		7.0
Land	335,849		2.1		317,847		1.8
Total commercial real estate	7,251,023		45.8		7,020,467		40.1
Consumer real estate:
Home equity loans	320,597		2.0		329,390		1.9
Home equity lines of credit	478,978		3.0		452,854		2.6
Other	563,464		3.6		548,530		3.1
Total consumer real estate	1,363,039		8.6		1,330,774		7.6
Total real estate	8,614,062		54.4		8,351,241		47.7
Consumer and other	482,921		3.1		505,680		2.9
Total loans	$	15,832,670	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 September 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 6.5% excluding PPP loans. Unfunded commitments to extend credit and standby letters of credit issued to customers in the energy industry totaled $1.0 billion and $63.7 million, respectively, as of September 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 September 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 $318.8 million at September 30, 2021 and $353.1 million at December 31, 2020.

Accrued Interest Receivable. Accrued interest receivable on loans totaled $39.0 million and $48.7 million at September 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 have been unable to meet their contractual payment obligations because of the adverse effects of COVID-19. To help mitigate these effects, loan customers were able to apply for a deferral of payments, or portions thereof, for up to 90 days. After 90 days, customers were able to apply for an additional deferral, and a small proportion of our customers requested such an additional deferral. In the absence of other intervening factors, such short-term modifications made on a good faith basis have not been categorized as troubled debt restructurings, nor have loans granted payment deferrals related to COVID-19 been 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 September 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:


	September 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	$	19,349	$	11,611	$	19,849	$	4,479
Energy	23,347		7,224		23,168		639
Paycheck Protection Program	—		—		—		—
Commercial real estate:
Buildings, land and other	12,247		8,770		15,737		14,116
Construction	1,632		664		1,684		1,684
Consumer real estate	480		178		993		993
Consumer and other	—		—		18		—
Total	$	57,055	$	28,447	$	61,449	$	21,911

The following table presents non-accrual loans as of September 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	$	315	$	7,922	$	4,211	$	676	$	882	$	370	$	2,067	$	2,906	$	19,349
Energy	—		477		6,467		1,513		—		323		12,170		2,397		23,347
Paycheck Protection Program	—		—		—		—		—		—		—		—		—
Commercial real estate:
Buildings, land and other	2,096		1,723		2,811		824		2,051		2,742		—		—		12,247
Construction	—		1,632		—		—		—		—		—		—		1,632
Consumer real estate	—		—		—		—		—		443		—		37		480
Consumer and other	—		—		—		—		—		—		—		—		—
Total	$	2,411	$	11,754	$	13,489	$	3,013	$	2,933	$	3,878	$	14,237	$	5,340	$	57,055

Had non-accrual loans performed in accordance with their original contract terms, we would have recognized additional interest income, net of tax, of approximately $474 thousand and $1.4 million for the three and nine months ended September 30, 2021, and approximately $670 thousand and $2.3 million for the three and nine months ended September 30, 2020.

An age analysis of past due loans (including both accruing and non-accruing loans), segregated by class of loans, as of September 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	$	42,705	$	8,634	$	51,339	$	4,878,317	$	4,929,656	$	7,522
Energy	1,237		13,233		14,470		963,741		978,211		965
Paycheck Protection Program	—		—		—		827,820		827,820		—
Commercial real estate:
Buildings, land and other	20,910		19,190		40,100		5,944,290		5,984,390		12,224
Construction	—		—		—		1,266,633		1,266,633		—
Consumer real estate	4,148		2,101		6,249		1,356,790		1,363,039		1,985
Consumer and other	3,678		1,029		4,707		478,214		482,921		1,029
Total	$	72,678	$	44,187	$	116,865	$	15,715,805	$	15,832,670	$	23,725

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


	Nine Months Ended September 30, 2021				Nine Months Ended September 30, 2020
	Balance at Restructure		Balance at Period-End		Balance at Restructure		Balance at Period-End
Commercial and industrial	$	1,312	$	1,237	$	3,660	$	1,415
Energy	3,817		3,566		—		—
Commercial real estate:
Buildings, land and other	1,888		1,875		6,606		6,585
Construction	—		—		1,192		1,181

Consumer and other	—		—		1,104		104
	$	7,017	$	6,678	$	12,562	$	9,285

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 nine months ended September 30, 2021 and 2020 is set forth in the following table.


	September 30, 2021		September 30, 2020
Restructured loans past due in excess of 90 days at period-end:
Number of loans	1		2
Dollar amount of loans	$	306	$	3,682
Restructured loans on non-accrual status at period end	5,072		5,353
Charge-offs of restructured loans:
Recognized in connection with restructuring	—		—
Recognized on previously restructured loans	1,433		2,188

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 September 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	$	1,009,752	$	730,976	$	405,216	$	201,578	$	160,431	$	149,611	$	1,875,496	$	65,603	$	4,598,663	6.04
Risk grade 9	9,569		35,274		30,953		26,216		12,258		18,329		70,412		5,272		208,283		9.00
Risk grade 10	28,117		6,546		1,871		4,653		1,358		112		12,954		1,652		57,263		10.00
Risk grade 11	1,326		8,603		9,644		4,160		3,098		279		7,189		11,799		46,098		11.00
Risk grade 12	135		7,922		3,263		676		411		370		962		1,974		15,713		12.00
Risk grade 13	180		—		948		—		471		—		1,105		932		3,636		13.00
	$	1,049,079	$	789,321	$	451,895	$	237,283	$	178,027	$	168,701	$	1,968,118	$	87,232	$	4,929,656	6.29
W/A risk grade	5.97		6.35		6.91		7.04		6.20		5.94		6.17		7.60		6.29
Energy
Risk grades 1-8	$	350,757	$	10,562	$	10,339	$	7,060	$	3,958	$	4,518	$	392,527	$	68,437	$	848,158	5.94
Risk grade 9	32,434		712		1,831		270		—		737		10,136		2,574		48,694		9.00
Risk grade 10	—		115		703		668		—		—		860		478		2,824		10.00
Risk grade 11	11,517		1,168		17,711		1,607		—		573		19,133		3,479		55,188		11.00
Risk grade 12	—		34		4,777		90		—		323		4,641		99		9,964		12.00
Risk grade 13	—		443		1,690		1,423		—		—		7,529		2,298		13,383		13.00
	$	394,708	$	13,034	$	37,051	$	11,118	$	3,958	$	6,151	$	434,826	$	77,365	$	978,211	6.55
W/A risk grade	6.37		8.13		9.98		8.77		7.19		7.84		6.26		6.76		6.55
Commercial real estate:
Buildings, land, other
Risk grades 1-8	$	1,153,181	$	1,146,764	$	862,629	$	578,768	$	517,822	$	842,409	$	44,525	$	75,360	$	5,221,458	6.90
Risk grade 9	13,873		143,504		70,218		48,372		29,691		34,746		4,669		6,858		351,931		9.00
Risk grade 10	14,376		16,956		69,882		51,903		65,363		55,732		—		—		274,212		10.00
Risk grade 11	3,995		19,766		11,351		7,615		32,698		40,245		3,000		5,872		124,542		11.00
Risk grade 12	1,896		1,723		2,511		824		2,051		2,492		—		—		11,497		12.00
Risk grade 13	200		—		300		—		—		250		—		—		750		13.00
	$	1,187,521	$	1,328,713	$	1,016,891	$	687,482	$	647,625	$	975,874	$	52,194	$	88,090	$	5,984,390	7.27
W/A risk grade	7.21		7.27		7.40		7.37		7.38		7.04		7.30		7.15		7.27
Construction
Risk grades 1-8	$	429,990	$	284,149	$	299,927	$	20,457	$	—	$	2,593	$	144,950	$	—	$	1,182,066	7.03
Risk grade 9	37,113		32,002		—		—		513		—		13,307		—		82,935		9.00
Risk grade 10	—		—		—		—		—		—		—		—		—		10.00
Risk grade 11	—		—		—		—		—		—		—		—		—		11.00
Risk grade 12	—		1,432		—		—		—		—		—		—		1,432		12.00
Risk grade 13	—		200		—		—		—		—		—		—		200		13.00
	$	467,103	$	317,783	$	299,927	$	20,457	$	513	$	2,593	$	158,257	$	—	$	1,266,633	7.16
W/A risk grade	7.13		6.87		7.46		7.45		9.00		6.79		7.24		—		7.16
Total commercial real estate	$	1,654,624	$	1,646,496	$	1,316,818	$	707,939	$	648,138	$	978,467	$	210,451	$	88,090	$	7,251,023	7.25
W/A risk grade	7.19		7.19		7.41		7.38		7.38		7.04		7.26		7.15		7.25

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 September 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	$	396	$	34	$	277	$	370	$	326	$	1,187	$	174	$	1,384	$	4,148
Past due 90 or more days	—		—		110		11		226		645		967		142		2,101
Total past due	396		34		387		381		552		1,832		1,141		1,526		6,249
Current loans	235,725		283,853		111,449		62,416		54,827		132,108		464,440		11,972		1,356,790
Total	$	236,121	$	283,887	$	111,836	$	62,797	$	55,379	$	133,940	$	465,581	$	13,498	$	1,363,039
Consumer and other:
Past due 30-89 days	$	1,527	$	283	$	182	$	89	$	63	$	18	$	481	$	1,035	$	3,678
Past due 90 or more days	576		10		—		90		—		—		—		353		1,029
Total past due	2,103		293		182		179		63		18		481		1,388		4,707
Current loans	39,156		20,924		10,442		3,268		1,844		1,391		374,993		26,196		478,214
Total	$	41,259	$	21,217	$	10,624	$	3,447	$	1,907	$	1,409	$	375,474	$	27,584	$	482,921

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Commercial and industrial	$	12,009	$	10,224	$	39,551	$	25,340
Energy	52,055		7,144		57,871		38,642
Commercial real estate:
Buildings, land and other	6,012		637		37,093		8,094
Construction	—		—		—		—
Consumer real estate	330		421		1,172		2,132
Consumer and other	1,523		5,494		7,017		15,338
Total	$	71,929	$	23,920	$	142,704	$	89,546

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 130.4 at August 31, 2021 (most recent date available) and 118.1 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 September 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.


September 30, 2021	Commercial and Industrial		Energy		Commercial Real Estate		Consumer Real Estate		Consumer and Other		Total
Modeled expected credit losses	$	45,395	$	6,962	$	17,033	$	5,934	$	6,412	$	81,736
Q-Factor and other qualitative adjustments	14,081		104		134,071		59		1,440		149,755
Specific allocations	4,290		13,383		950		36		—		18,659
Total	$	63,766	$	20,449	$	152,054	$	6,029	$	7,852	$	250,150
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 nine months ended September 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:
September 30, 2021
Beginning balance	$	65,271	$	28,010	$	147,993	$	6,154	$	7,860	$	255,288
Credit loss expense (benefit)	(1,020)		(7,720)		4,007		(982)		2,692		(3,023)
Charge-offs	(1,611)		—		—		—		(5,073)		(6,684)
Recoveries	1,126		159		54		857		2,373		4,569
Net charge-offs	(485)		159		54		857		(2,700)		(2,115)
Ending balance	$	63,766	$	20,449	$	152,054	$	6,029	$	7,852	$	250,150
September 30, 2020
Beginning balance	$	98,536	$	40,817	$	93,425	$	8,998	$	8,285	$	250,061

Credit loss expense (benefit)	(18,547)		13,814		25,368		1,794		1,161		23,590
Charge-offs	(8,605)		—		(242)		(1,088)		(4,219)		(14,154)
Recoveries	1,121		—		42		573		2,242		3,978
Net charge-offs	(7,484)		—		(200)		(515)		(1,977)		(10,176)
Ending balance	$	72,505	$	54,631	$	118,593	$	10,277	$	7,469	$	263,475


	Commercial and Industrial		Energy		Commercial Real Estate		Consumer Real Estate		Consumer and Other		Total
Nine months ended:
September 30, 2021
Beginning balance	$	73,843	$	39,553	$	134,892	$	7,926	$	6,963	$	263,177
Credit loss expense (benefit)	(8,886)		(19,048)		16,583		(3,093)		7,042		(7,402)
Charge-offs	(4,485)		(1,433)		(137)		(672)		(13,015)		(19,742)
Recoveries	3,294		1,377		716		1,868		6,862		14,117
Net (charge-offs) recoveries	(1,191)		(56)		579		1,196		(6,153)		(5,625)
Ending balance	$	63,766	$	20,449	$	152,054	$	6,029	$	7,852	$	250,150
September 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)	10,737		96,478		104,716		3,716		8,096		223,743
Charge-offs	(14,815)		(68,842)		(3,826)		(1,508)		(13,402)		(102,393)
Recoveries	3,727		66		185		1,564		6,981		12,523
Net (charge-offs) recoveries	(11,088)		(68,776)		(3,641)		56		(6,421)		(89,870)
Ending balance	$	72,505	$	54,631	$	118,593	$	10,277	$	7,469	$	263,475

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 September 30, 2021 and December 31, 2020.


	September 30, 2021				December 31, 2020
	Loan Balance		Specific Allocations		Loan Balance		Specific Allocations
Commercial and industrial	$	22,717	$	4,290	$	21,287	$	5,321
Energy	25,671		13,383		22,888		9,427
Paycheck Protection Program	—		—		—		—
Commercial real estate:
Buildings, land and other	28,619		750		34,057		513
Construction	1,632		200		1,684		—
Consumer real estate	302		36		561		—
Consumer and other	—		—		18		18
Total	$	78,941	$	18,659	$	80,495	$	15,279