Loans

12 Months Ended

Dec. 31, 2021

Receivables [Abstract]

Loans

Loans

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

	2021		2020
Commercial and industrial	$	5,364,954	$	4,955,341
Energy:
Production	878,436		976,473
Service	105,901		116,825
Other	93,455		141,900
Total energy	1,077,792		1,235,198
Paycheck Protection Program	428,882		2,433,849
Commercial real estate:
Commercial mortgages	5,867,062		5,478,806
Construction	1,304,271		1,223,814
Land	405,277		317,847
Total commercial real estate	7,576,610		7,020,467
Consumer real estate:
Home equity loans	324,157		329,390
Home equity lines of credit	519,098		452,854
Other	567,535		548,530
Total consumer real estate	1,410,790		1,330,774
Total real estate	8,987,400		8,351,241
Consumer and other	477,369		505,680
Total loans	$	16,336,397	$	17,481,309

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, 2021 and 2020, there were no concentrations of loans related to any single industry in excess of 10% of total loans. At such dates, the largest industry concentration was related to the energy industry, which totaled 6.6% of total loans, or 6.8% excluding PPP Loans at December 31, 2021 and 7.1% of total loans, or 8.2% excluding PPP Loans at December 31, 2020. Unfunded commitments to extend credit and standby letters of credit issued to customers in the energy industry totaled $891.4 million and $68.9 million, respectively, as of December 31, 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 December 31, 2021 or 2020.

Overdrafts. Deposit account overdrafts reported as loans totaled $7.8 million and $5.6 million at December 31, 2021 and 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”). Activity in related party loans during 2021 is presented in the following table. Other changes were primarily related to changes in related-party status.

Balance outstanding at December 31, 2020	$	353,105
Principal additions	262,761
Principal payments	(196,634)
Other changes	(68,694)
Balance outstanding at December 31, 2021	$	350,538

Accrued Interest Receivable. Accrued interest receivable on loans totaled $40.0 million and $48.7 million at December 31, 2021 and 2020, respectively and is included in accrued interest receivable and other assets in the accompany consolidated balance sheets.

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:

	December 31, 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	$	22,582	$	4,701	$	19,849	$	4,479
Energy	14,433		8,533		23,168		639
Paycheck Protection Program	—		—		—		—
Commercial real estate:
Buildings, land and other	15,297		13,817		15,737		14,116
Construction	948		—		1,684		1,684
Consumer real estate	440		138		993		993
Consumer and other	13		13		18		—
Total	$	53,713	$	27,202	$	61,449	$	21,911

The following tables present non-accrual loans as of December 31, 2021 and December 31, 2020 by class and year of origination.

	December 31, 2021
	2021		2020		2019		2018		2017		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Commercial and industrial	$	636	$	3,856	$	5,047	$	1,820	$	765	$	353	$	4,635	$	5,470	$	22,582
Energy	—		—		5,358		1,325		—		—		6,931		819		14,433
Paycheck Protection Program	—		—		—		—		—		—		—		—		—
Commercial real estate:
Buildings, land and other	6,038		307		3,446		814		2,030		2,662		—		—		15,297
Construction	—		948		—		—		—		—		—		—		948
Consumer real estate	—		—		—		—		—		408		—		32		440
Consumer and other	13		—		—		—		—		—		—		—		13
Total	$	6,687	$	5,111	$	13,851	$	3,959	$	2,795	$	3,423	$	11,566	$	6,321	$	53,713

	December 31, 2020
	2020		2019		2018		2017		2016		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Commercial and industrial	$	9,479	$	3,351	$	1,846	$	1,489	$	105	$	29	$	839	$	2,711	$	19,849
Energy	2,421		6,772		2,144		—		—		359		11,193		279		23,168
Paycheck Protection Program	—		—		—		—		—		—		—		—		—
Commercial real estate:
Buildings, land and other	2,914		5,031		999		2,019		1,933		2,736		105		—		15,737
Construction	1,684		—		—		—		—		—		—		—		1,684
Consumer real estate	—		—		—		211		—		408		259		115		993
Consumer and other	—		—		—		—		—		—		18		—		18
Total	$	16,498	$	15,154	$	4,989	$	3,719	$	2,038	$	3,532	$	12,414	$	3,105	$	61,449

In the tables above, loans reported as 2021 originations as of December 31, 2021 and loans reported as 2020 originations as of December 31, 2020 were, for the most part, first originated in various years prior to 2021 and 2020, respectively, but were renewed in the respective year. Had non-accrual loans performed in accordance with their original contract terms, we would have recognized additional interest income, net of tax, of approximately $1.8 million in 2021, $2.9 million in 2020 and $3.9 million in 2019.

An age analysis of past due loans (including both accruing and non-accruing loans), segregated by class of loans, as of December 31, 2021 is presented in the following table. Despite their past due status, Paycheck Protection Plan loans are fully guaranteed by the SBA.

	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	$	34,096	$	12,364	$	46,460	$	5,318,494	$	5,364,954	$	7,802
Energy	1,451		7,867		9,318		1,068,474		1,077,792		215
Paycheck Protection Program	4,979		18,766		23,745		405,137		428,882		18,766
Commercial real estate:
Buildings, land and other	37,899		14,136		52,035		6,220,304		6,272,339		8,687
Construction	188		—		188		1,304,083		1,304,271		—
Consumer real estate	4,877		2,513		7,390		1,403,400		1,410,790		2,177
Consumer and other	4,185		1,076		5,261		472,108		477,369		1,076
Total	$	87,675	$	56,722	$	144,397	$	16,192,000	$	16,336,397	$	38,723

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 2021, 2020 and 2019 are set forth in the following table.

	2021				2020				2019
	Balance at Restructure		Balance at Year-end		Balance at Restructure		Balance at Year-end		Balance at Restructure		Balance at Year-end
Commercial and industrial	$	1,312	$	1,162	$	3,661	$	192	$	3,845	$	2,161
Energy	3,817		721		2,432		2,421		—		—
Commercial real estate:
Buildings, land and other	1,888		1,862		9,310		4,922		9,457		9,393
Construction	—		—		1,017		1,017		—		—
Consumer real estate	—		—		—		—		124		120
Consumer and other	—		—		1,104		—		—		—
	$	7,017	$	3,745	$	17,524	$	8,552	$	13,426	$	11,674

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 was as follows:

	2021		2020		2019
Restructured loans past due in excess of 90 days at period-end:
Number of loans	2		1		4
Dollar amount of loans	$	1,027	$	2,008	$	3,340
Restructured loans on non-accrual status at period end	3,439		8,552		5,576
Charge-offs of restructured loans:
Recognized in connection with restructuring	—		337		—
Recognized on previously restructured loans	4,278		3,894		1,500

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 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 credit losses on loans, 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 December 31, 2021 and 2020. Paycheck Protection Program (“PPP”) loans are excluded as such loans are fully guaranteed by the Small Business Administration (“SBA”).

	December 31, 2021
	2021		2020		2019		2018		2017		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Commercial and industrial
Risk grades 1-8	$	1,567,883	$	657,529	$	350,563	$	179,209	$	146,064	$	131,201	$	1,987,061	$	44,337	$	5,063,847
Risk grade 9	32,866		21,094		24,683		26,327		612		11,419		65,131		5,738		187,870
Risk grade 10	27,961		6,273		4,047		4,357		1,021		98		14,091		1,289		59,137
Risk grade 11	1,178		4,572		8,068		2,450		2,460		221		4,714		7,855		31,518
Risk grade 12	456		2,495		3,828		1,756		347		353		613		2,687		12,535
Risk grade 13	180		1,361		1,219		64		418		—		4,022		2,783		10,047
	$	1,630,524	$	693,324	$	392,408	$	214,163	$	150,922	$	143,292	$	2,075,632	$	64,689	$	5,364,954
W/A risk grade	5.91		6.30		6.89		7.06		5.91		5.80		6.21		8.04		6.22
Energy
Risk grades 1-8	$	445,489	$	8,075	$	9,259	$	6,441	$	3,110	$	4,368	$	464,454	$	67,174	$	1,008,370
Risk grade 9	19,274		611		1,775		187		—		724		11,635		2,416		36,622
Risk grade 10	—		101		631		511		—		—		—		530		1,773
Risk grade 11	10,260		752		3,968		1,016		—		546		—		52		16,594
Risk grade 12	—		—		3,888		246		—		—		4,000		819		8,953
Risk grade 13	—		—		1,470		1,079		—		—		2,931		—		5,480
	$	475,023	$	9,539	$	20,991	$	9,480	$	3,110	$	5,638	$	483,020	$	70,991	$	1,077,792
W/A risk grade	6.21		7.81		9.34		8.60		7.12		7.63		5.61		6.46		6.06
Commercial real estate:
Buildings, land, other
Risk grades 1-8	$	1,707,550	$	1,096,274	$	874,130	$	533,362	$	492,492	$	713,268	$	52,150	$	105,696	$	5,574,922
Risk grade 9	16,302		145,340		52,427		43,806		27,188		27,767		4,445		4,258		321,533
Risk grade 10	28,209		13,813		69,643		46,250		64,950		46,582		—		—		269,447
Risk grade 11	3,455		1,321		8,720		7,788		26,107		34,970		3,000		5,779		91,140
Risk grade 12	5,838		307		3,446		814		2,030		2,662		—		—		15,097
Risk grade 13	200		—		—		—		—		—		—		—		200
	$	1,761,554	$	1,257,055	$	1,008,366	$	632,020	$	612,767	$	825,249	$	59,595	$	115,733	$	6,272,339
W/A risk grade	7.19		7.18		7.35		7.39		7.34		7.01		7.06		7.02		7.22
Construction
Risk grades 1-8	$	657,471	$	262,176	$	178,226	$	2,339	$	38	$	1,930	$	160,020	$	—	$	1,262,200
Risk grade 9	35,721		4,956		—		—		446		—		—		—		41,123
Risk grade 10	—		—		—		—		—		—		—		—		—
Risk grade 11	—		—		—		—		—		—		—		—		—
Risk grade 12	—		748		—		—		—		—		—		—		748
Risk grade 13	—		200		—		—		—		—		—		—		200
	$	693,192	$	268,080	$	178,226	$	2,339	$	484	$	1,930	$	160,020	$	—	$	1,304,271
W/A risk grade	7.17		6.56		7.60		7.51		8.92		6.73		6.79		—		7.06
Total commercial real estate	$	2,454,746	$	1,525,135	$	1,186,592	$	634,359	$	613,251	$	827,179	$	219,615	$	115,733	$	7,576,610
W/A risk grade	7.18		7.07		7.39		7.39		7.34		7.00		6.86		7.02		7.19

	December 31, 2020
	2020		2019		2018		2017		2016		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Commercial and industrial
Risk grades 1-8	$	1,300,844	$	552,885	$	290,088	$	226,232	$	107,063	$	113,458	$	1,852,341	$	63,210	$	4,506,121
Risk grade 9	50,785		37,865		33,961		20,851		12,348		5,510		85,756		9,122		256,198
Risk grade 10	31,333		7,361		11,379		6,749		710		113		65,180		3,152		125,977
Risk grade 11	4,700		7,002		6,551		3,416		1,426		140		15,005		8,956		47,196
Risk grade 12	6,899		2,399		1,195		1,005		105		29		480		2,416		14,528
Risk grade 13	2,580		952		651		484		—		—		359		295		5,321
	$	1,397,141	$	608,464	$	343,825	$	258,737	$	121,652	$	119,250	$	2,019,121	$	87,151	$	4,955,341
W/A risk grade	6.19		6.88		7.22		6.39		6.32		5.84		6.38		7.51		6.45
Energy
Risk grades 1-8	$	403,156	$	18,911	$	9,759	$	8,083	$	1,415	$	4,326	$	494,946	$	27,548	$	968,144
Risk grade 9	105,772		2,272		1,743		—		—		—		18,194		5,566		133,547
Risk grade 10	703		4,049		1,339		—		759		—		37,637		1,940		46,427
Risk grade 11	12,218		16,849		1,325		—		—		661		30,124		2,735		63,912
Risk grade 12	1,101		4,580		654		—		—		359		6,768		279		13,741
Risk grade 13	1,320		2,192		1,490		—		—		—		4,425		—		9,427
	$	524,270	$	48,853	$	16,310	$	8,083	$	2,174	$	5,346	$	592,094	$	38,068	$	1,235,198
W/A risk grade	6.86		9.57		8.68		7.40		7.85		8.06		6.45		8.20		6.85
Commercial real estate:
Buildings, land, other
Risk grades 1-8	$	1,544,558	$	947,102	$	749,879	$	605,152	$	432,941	$	661,301	$	56,600	$	50,340	$	5,047,873
Risk grade 9	45,527		81,224		75,893		45,485		26,745		37,728		10,521		2,104		325,227
Risk grade 10	14,183		36,414		45,014		71,814		25,343		60,225		200		5,261		258,454
Risk grade 11	22,633		16,302		11,916		39,727		8,655		42,904		6,977		248		149,362
Risk grade 12	2,714		5,031		999		2,019		1,683		2,736		42		—		15,224
Risk grade 13	200		—		—		—		250		—		63		—		513
	$	1,629,815	$	1,086,073	$	883,701	$	764,197	$	495,617	$	804,894	$	74,403	$	57,953	$	5,796,653
W/A risk grade	7.13		7.36		7.54		7.55		7.54		7.20		7.54		7.12		7.34
Construction
Risk grades 1-8	$	374,661	$	436,077	$	168,517	$	67	$	1,144	$	1,758	$	127,801	$	—	$	1,110,025
Risk grade 9	37,430		16,567		—		2,848		—		—		14,311		1,131		72,287
Risk grade 10	5,846		—		27,653		—		—		—		5,463		—		38,962
Risk grade 11	856		—		—		—		—		—		—		—		856
Risk grade 12	1,684		—		—		—		—		—		—		—		1,684
Risk grade 13	—		—		—		—		—		—		—		—		—
	$	420,477	$	452,644	$	196,170	$	2,915	$	1,144	$	1,758	$	147,575	$	1,131	$	1,223,814
W/A risk grade	6.82		7.18		8.08		8.95		7.30		6.44		7.29		9.00		7.22
Total commercial real estate	$	2,050,292	$	1,538,717	$	1,079,871	$	767,112	$	496,761	$	806,652	$	221,978	$	59,084	$	7,020,467
W/A risk grade	7.06		7.31		7.64		7.56		7.54		7.20		7.37		7.15		7.32

At December 31, 2021 and 2020, the weighted-average risk grades for “pass grade” (risk grades 1-8) loans were 6.01 and 6.13, respectively, for commercial and industrial; 5.78 and 5.99, respectively, for energy; 6.91 and 6.97, respectively, for commercial real estate - buildings, land and other; and 6.99 and 6.99, respectively, for commercial real estate - construction. Furthermore, in the tables above, there are loans reported as 2021 originations as of December 31, 2021 and 2020 originations as of December 31, 2020 that have risk grades of 11 or higher. These loans were, for the most part, first originated in various years prior to 2021 and 2020, respectively, but were renewed in the respective year.

Information about the payment status of consumer loans, segregated by portfolio segment and year of origination, as of December 31, 2021 and December 31, 2020 was as follows:

	December 31, 2021
	2021		2020		2019		2018		2017		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Consumer real estate:
Past due 30-89 days	$	280	$	204	$	406	$	489	$	296	$	1,344	$	126	$	1,732	$	4,877
Past due 90 or more days	—		—		—		154		355		828		991		185		2,513
Total past due	280		204		406		643		651		2,172		1,117		1,917		7,390
Current loans	319,042		251,160		95,900		55,893		48,841		116,423		505,333		10,808		1,403,400
Total	$	319,322	$	251,364	$	96,306	$	56,536	$	49,492	$	118,595	$	506,450	$	12,725	$	1,410,790
Consumer and other:
Past due 30-89 days	$	1,600	$	91	$	120	$	38	$	51	$	17	$	325	$	1,943	$	4,185
Past due 90 or more days	548		—		45		—		—		—		34		449		1,076
Total past due	2,148		91		165		38		51		17		359		2,392		5,261
Current loans	46,708		17,843		6,215		2,684		1,708		1,158		371,866		23,926		472,108
Total	$	48,856	$	17,934	$	6,380	$	2,722	$	1,759	$	1,175	$	372,225	$	26,318	$	477,369

	December 31, 2020
	2020		2019		2018		2017		2016		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Consumer real estate:
Past due 30-89 days	$	225	$	1,038	$	1,556	$	553	$	628	$	2,907	$	652	$	531	$	8,090
Past due 90 or more days	15		139		109		706		25		1,287		615		151		3,047
Total past due	240		1,177		1,665		1,259		653		4,194		1,267		682		11,137
Current loans	336,441		166,323		94,374		80,625		66,241		124,590		434,939		16,104		1,319,637
Total	$	336,681	$	167,500	$	96,039	$	81,884	$	66,894	$	128,784	$	436,206	$	16,786	$	1,330,774
Consumer and other:
Past due 30-89 days	$	1,750	$	300	$	453	$	52	$	17	$	—	$	2,238	$	727	$	5,537
Past due 90 or more days	71		10		118		—		—		—		1,031		21		1,251
Total past due	1,821		310		571		52		17		—		3,269		748		6,788
Current loans	45,286		27,813		5,397		2,799		1,705		572		386,791		28,529		498,892
Total	$	47,107	$	28,123	$	5,968	$	2,851	$	1,722	$	572	$	390,060	$	29,277	$	505,680

Revolving loans that converted to term during 2021 and 2020 were as follows:

	2021		2020
Commercial and industrial	$	40,099	$	47,562
Energy	54,996		33,150
Commercial real estate:
Buildings, land and other	68,337		10,505
Construction	—		1,131
Consumer real estate	1,156		2,264
Consumer and other	8,367		16,395
Total	$	172,955	$	111,007

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 134.7 at December 31, 2021 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. The contractual term excludes expected extensions, renewals and modifications unless (i) management has a reasonable expectation that a trouble debt restructuring will be executed with an individual borrower or (ii) such extension or renewal options are not unconditionally cancellable by us and, in such cases, the borrower is likely to meet applicable conditions and likely to request extension or renewal. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. The allowance for credit losses is measured on a collective basis for portfolios of loans when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Expected credit losses for collateral dependent loans, including loans where the borrower is experiencing financial difficulty but foreclosure is not probable, are based on the fair value of the collateral at the reporting date, adjusted for selling costs as 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.

In calculating the allowance for credit losses, most loans are segmented into pools based upon similar characteristics and risk profiles. Common characteristics and risk profiles include the type/purpose of loan, underlying collateral, geographical similarity and historical/expected credit loss patterns. In developing these loan pools for the purposes of modeling expected credit losses, we also analyzed the degree of correlation in how loans within each portfolio respond when subjected to varying economic conditions and scenarios as well as other portfolio stress factors. For modeling purposes, our loan pools include (i) commercial and industrial and energy - non-revolving, (ii) commercial and industrial and energy - revolving, (iii) commercial real estate - owner occupied, (iv) commercial real estate - non-owner occupied, (v) commercial real estate - construction/land development, (vi) consumer real estate and (vii) consumer and other. We periodically reassess each pool to ensure the loans within the pool continue to share similar characteristics and risk profiles and to determine whether further segmentation is necessary.

For each loan pool, we measure expected credit losses over the life of each loan utilizing a combination of models which measure (i) probability of default (“PD”), which is the likelihood that loan will stop performing/default, (ii) probability of attrition (“PA”), which is the likelihood that a loan will pay-off prior to maturity, (iii) loss given default (“LGD”), which is the expected loss rate for loans in default and (iv) exposure at default (“EAD”), which is the estimated outstanding principal balance of the loans upon default, including the expected funding of unfunded commitments outstanding as of the measurement date. For certain commercial loan portfolios, the PD is calculated using a transition matrix to determine the likelihood of a customer’s risk grade migrating from one specified range of risk grades to a different specified range. Expected credit losses are calculated as the product of PD (adjusted for attrition), LGD and EAD. This methodology builds on default probabilities already incorporated into our risk grading process by utilizing pool-specific historical loss rates to calculate expected credit losses. These pool-specific historical loss rates may be adjusted for current macroeconomic assumptions, as further discussed below, and other factors such as differences in underwriting standards, portfolio mix, or when historical asset terms do not reflect the contractual terms of the financial assets being evaluated as of the measurement date. Each time we measure expected

credit losses, we assess the relevancy of historical loss information and consider any necessary adjustments to address any differences in asset-specific characteristics. Due to their short-term nature, expected credit losses for overdrafts included in consumer and other loans are based solely upon a weighting of recent historical charge-offs over a period of three years.

The measurement of expected credit losses is impacted by loan/borrower attributes and certain macroeconomic variables. Significant loan/borrower attributes utilized in our modeling processes include, among other things, (i) origination date, (ii) maturity date, (iii) payment type, (iv) collateral type and amount, (v) current risk grade, (vi) current unpaid balance and commitment utilization rate, (vii) payment status/delinquency history and (viii) expected recoveries of previously charged-off amounts. Significant macroeconomic variables utilized in our modeling processes include, among other things, (i) Gross State Product for Texas and U.S. Gross Domestic Product, (ii) selected market interest rates including U.S. Treasury rates, bank prime rate, 30-year fixed mortgage rate, BBB corporate bond rate, among others, (iii) unemployment rates, (iv) commercial and residential property prices in Texas and the U.S. as a whole, (v) West Texas Intermediate crude oil price and (vi) total stock market index.

PD and PA were estimated by analyzing internally-sourced data related to historical performance of each loan pool over a complete economic cycle. PD and PA are adjusted to reflect the current impact of certain macroeconomic variables as well as their expected changes over a reasonable and supportable forecast period. We have determined that we are reasonably able to forecast the macroeconomic variables used in our modeling processes with an acceptable degree of confidence for a total of two years with the last twelve months of the forecast period encompassing a reversion process whereby the forecasted macroeconomic variables are reverted to their historical mean utilizing a rational, systematic basis. The macroeconomic variables utilized as inputs in our modeling processes were subjected to a variety of analysis procedures and were selected primarily based on statistical relevancy and correlation to our historical credit losses. By reverting these modeling inputs to their historical mean and considering loan/borrower specific attributes, our models are intended to yield a measurement of expected credit losses that reflects our average historical loss rates for periods subsequent to the twelve-month reversion period. The LGD is based on historical recovery averages for each loan pool, adjusted to reflect the current impact of certain macroeconomic variables as well as their expected changes over a two-year forecast period, with the final twelve months of the forecast period encompassing a reversion process, which management considers to be both reasonable and supportable. This same forecast/reversion period is used for all macroeconomic variables used in all of our models. EAD is estimated using a linear regression model that estimates the average percentage of the loan balance that remains at the time of a default event.

Management qualitatively adjusts model results for risk factors that are not considered within our modeling processes but are nonetheless relevant in assessing the expected credit losses within our loan pools. These qualitative factor (“Q-Factor”) and other qualitative adjustments may increase or decrease management's estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk. The various risks that may be considered in making Q-Factor and other qualitative adjustments include, among other things, the impact of (i) changes in lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries, (ii) actual and expected changes in international, national, regional, and local economic and business conditions and developments that affect the collectibility of the loan pools, (iii) changes in the nature and volume of the loan pools and in the terms of the underlying loans, (iv) changes in the experience, ability, and depth of our lending management and staff, (v) changes in volume and severity of past due financial assets, the volume of non-accrual assets, and the volume and severity of adversely classified or graded assets, (vi) changes in the quality of our credit review function, (vii) changes in the value of the underlying collateral for loans that are non-collateral dependent, (viii) the existence, growth, and effect of any concentrations of credit and (ix) other factors such as the regulatory, legal and technological environments; competition; and events such as natural disasters or health pandemics.

In some cases, management may determine that an individual loan exhibits unique risk characteristics which differentiate the loan from other loans within our loan pools. In such cases, the loans are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. Specific allocations of the allowance for credit losses 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. A loan is considered to be collateral dependent when, based upon management's assessment, the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In such cases, expected credit losses are based on the fair value of the collateral at

the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. We reevaluate the fair value of collateral supporting collateral dependent loans on a quarterly basis. The fair value of real estate collateral supporting 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 collateral dependent construction loans is based on an “as is” valuation.

The following table presents details of the allowance for credit losses on loans segregated by loan portfolio segment as of December 31, 2021 and 2020, calculated in accordance with the CECL methodology described above. 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
December 31, 2021
Modeled expected credit losses	$	46,946	$	6,363	$	16,676	$	6,484	$	6,397	$	82,866
Q-Factor and other qualitative adjustments	14,609		5,374		127,860		65		1,440		149,348
Specific allocations	10,536		5,480		400		36		—		16,452
Total	$	72,091	$	17,217	$	144,936	$	6,585	$	7,837	$	248,666
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 2021, 2020 and 2019. 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
2021
Beginning balance	$	73,843	$	39,553	$	134,892	$	7,926	$	6,963	$	263,177
Credit loss (expense) benefit	(2,160)		(19,207)		8,101		(3,061)		10,230		(6,097)
Charge-offs	(5,513)		(5,331)		(399)		(829)		(18,614)		(30,686)
Recoveries	5,921		2,202		2,342		2,549		9,258		22,272
Net (charge-offs) recoveries	408		(3,129)		1,943		1,720		(9,356)		(8,414)
Ending balance	$	72,091	$	17,217	$	144,936	$	6,585	$	7,837	$	248,666
2020
Beginning balance	$	51,593	$	37,382	$	31,037	$	4,113	$	8,042	$	132,167
Impacting of adopting ASC 326	21,263		(10,453)		(13,519)		2,392		(2,248)		(2,565)
Credit loss (expense) benefit	15,156		85,889		124,427		1,906		9,632		237,010
Charge-offs	(18,908)		(76,107)		(7,499)		(2,186)		(17,830)		(122,530)
Recoveries	4,739		2,842		446		1,701		9,367		19,095
Net (charge-offs) recoveries	(14,169)		(73,265)		(7,053)		(485)		(8,463)		(103,435)
Ending balance	$	73,843	$	39,553	$	134,892	$	7,926	$	6,963	$	263,177
2019
Beginning balance	$	48,580	$	29,052	$	38,777	$	6,103	$	9,620	$	132,132
Credit loss (expense) benefit	13,144		14,388		(6,934)		467		12,694		33,759
Charge-offs	(14,117)		(7,500)		(1,025)		(3,665)		(24,725)		(51,032)
Recoveries	3,986		1,442		219		1,208		10,453		17,308
Net (charge-offs) recoveries	(10,131)		(6,058)		(806)		(2,457)		(14,272)		(33,724)
Ending balance	$	51,593	$	37,382	$	31,037	$	4,113	$	8,042	$	132,167

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.

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 December 31, 2021 and December 31, 2020.

	December 31, 2021				December 31, 2020
	Loan Balance		Specific Allocations		Loan Balance		Specific Allocations
Commercial and industrial	$	24,523	$	10,536	$	21,287	$	5,321
Energy	16,393		5,480		22,888		9,427
Paycheck Protection Program	—		—		—		—
Commercial real estate:
Buildings, land and other	24,670		200		34,057		513
Construction	948		200		1,684		—
Consumer real estate	303		36		561		—
Consumer and other	—		—		18		18
Total	$	66,837	$	16,452	$	80,495	$	15,279