Loans

3 Months Ended

Mar. 31, 2023

Receivables [Abstract]

Loans

Loans

Loans were as follows:

	March 31, 2023		December 31, 2022
Commercial and industrial	$	5,668,697	$	5,674,798
Energy:
Production	779,657		696,570
Service	166,605		133,542
Other	120,126		95,617
Total energy	1,066,388		925,729
Paycheck Protection Program	28,497		34,852
Commercial real estate:
Commercial mortgages	6,247,370		6,168,910
Construction	1,482,458		1,477,247
Land	542,468		537,168
Total commercial real estate	8,272,296		8,183,325
Consumer real estate:
Home equity lines of credit	719,054		691,841
Home equity loans	502,083		449,507
Home improvement loans	626,810		577,377
Other	138,912		124,814
Total consumer real estate	1,986,859		1,843,539
Total real estate	10,259,155		10,026,864
Consumer and other	463,283		492,726
Total loans	$	17,486,020	$	17,154,969

Concentrations of Credit. Most of our lending activity occurs within the State of Texas, including the four largest metropolitan areas of Austin, Dallas/Ft. Worth, Houston and San Antonio, as well as other markets. The majority of our loan portfolio consists of commercial and industrial and commercial real estate loans. As of March 31, 2023, 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 6.1% of total loans. Unfunded commitments to extend credit and standby letters of credit issued to customers in the energy industry totaled $1.0 billion and $99.1 million, respectively, as of March 31, 2023.

Foreign Loans. We have U.S. dollar denominated loans and commitments to borrowers in Mexico. The outstanding balance of these loans and the unfunded amounts available under these commitments were not significant at March 31, 2023 or December 31, 2022.

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 $394.2 million at March 31, 2023 and $391.3 million at December 31, 2022.

Accrued Interest Receivable. Accrued interest receivable on loans totaled $69.6 million and $68.7 million at March 31, 2023 and December 31, 2022, respectively, and is included in accrued interest receivable and other assets in the accompanying 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.

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

	March 31, 2023				December 31, 2022
	Total Non-Accrual		Non-Accrual with No Credit Loss Allowance		Total Non-Accrual		Non-Accrual with No Credit Loss Allowance
Commercial and industrial	$	10,494	$	4,962	$	18,130	$	8,514
Energy	22,349		14,515		15,224		7,139
Commercial real estate:
Buildings, land and other	4,604		4,110		3,552		1,991
Construction	—		—		—		—
Consumer real estate	963		963		927		927
Consumer and other	—		—		—		—
Total	$	38,410	$	24,550	$	37,833	$	18,571

The following table presents non-accrual loans as of March 31, 2023 by class and year of origination.

	2023		2022		2021		2020		2019		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Commercial and industrial	$	—	$	139	$	1,026	$	815	$	3,121	$	1,247	$	690	$	3,456	$	10,494
Energy	7,812		4,161		—		72		1,371		8		7,219		1,706		22,349
Commercial real estate:
Buildings, land and other	—		2,543		303		—		211		1,547		—		—		4,604
Construction	—		—		—		—		—		—		—		—		—
Consumer real estate	—		—		258		32		—		101		—		572		963
Consumer and other	—		—		—		—		—		—		—		—		—
Total	$	7,812	$	6,843	$	1,587	$	919	$	4,703	$	2,903	$	7,909	$	5,734	$	38,410

In the table above, energy loans reported as 2023 originations as of March 31, 2023 were first originated in years prior to 2023 but were renewed in the current 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 $600 thousand for the three months ended March 31, 2023, and approximately $407 thousand for the three months ended March 31, 2022.

An age analysis of past due loans (including both accruing and non-accruing loans), segregated by class of loans, as of March 31, 2023 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	$	28,697	$	7,320	$	36,017	$	5,632,680	$	5,668,697	$	1,876
Energy	3,916		7,833		11,749		1,054,639		1,066,388		—
Paycheck Protection Program	484		5,748		6,232		22,265		28,497		5,748
Commercial real estate:
Buildings, land and other	39,054		1,071		40,125		6,749,713		6,789,838		112
Construction	1,647		118		1,765		1,480,693		1,482,458		118
Consumer real estate	14,401		2,317		16,718		1,970,141		1,986,859		2,013
Consumer and other	4,430		98		4,528		458,755		463,283		98
Total	$	92,629	$	24,505	$	117,134	$	17,368,886	$	17,486,020	$	9,965

Modifications to Borrowers Experiencing Financial Difficulty. From time to time, we may modify certain loans to borrowers who are experiencing financial difficulty. In some cases, these modifications may result in new loans. Loan modifications to borrowers experiencing financial difficulty may be in the form of a principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, or a term extension or a combination thereof, among other things. There were no modifications of loans to borrowers who were experiencing financial difficulty during the three months ended March 31, 2023 or March 31, 2022.

Information as of or for the three months ended March 31, 2023 and March 31, 2022 related to loans modified (by type of modification) in the preceding twelve months, respectively, whereby the borrower was experiencing financial difficulty at the time of modification is set forth in the following table.

	March 31, 2023				March 31, 2022
	Payment Delay		Combination: Payment Delay and Term Extension		Payment Delay		Combination: Payment Delay and Term Extension
Past due in excess of 90 days or on non-accrual status at period-end:
Commercial real estate:
Buildings, land and other	$	—	$	—	$	306	$	266
	$	—	$	—	$	306	$	266
Charge-offs during the period:
Energy	$	—	$	—	$	371	$	—
Commercial real estate:
Buildings, land and other	—		—		—		352
	$	—	$	—	$	371	$	352

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 (v) 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 2022 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 table presents weighted-average risk grades for all commercial loans, by class and year of origination/renewal, as of March 31, 2023. Paycheck Protection Program (“PPP”) loans are excluded as such loans are fully guaranteed by the Small Business Administration (“SBA”).

	2023		2022		2021		2020		2019		Prior		Revolving Loans		Revolving Loans Converted to Term		Total		W/A Risk Grade
Commercial and industrial
Risk grades 1-8	$	824,021	$	1,023,049	$	584,919	$	438,100	$	206,973	$	284,568	$	2,033,889	$	49,564	$	5,445,083	6.25
Risk grade 9	3,907		12,818		33,802		3,483		3,206		11,015		65,547		5,938		139,716		9.00
Risk grade 10	—		1,253		666		446		4,305		1,081		12,520		852		21,123		10.00
Risk grade 11	182		2,286		4,395		5,661		2,450		2,138		21,199		13,970		52,281		11.00
Risk grade 12	—		139		826		763		2,851		1,247		242		1,215		7,283		12.00
Risk grade 13	—		—		200		52		270		—		448		2,241		3,211		13.00
	$	828,110	$	1,039,545	$	624,808	$	448,505	$	220,055	$	300,049	$	2,133,845	$	73,780	$	5,668,697	6.39
W/A risk grade	6.13		6.67		7.10		5.94		6.46		6.05		6.22		7.91		6.39

	2023		2022		2021		2020		2019		Prior		Revolving Loans		Revolving Loans Converted to Term		Total		W/A Risk Grade
Energy
Risk grades 1-8	$	317,804	$	79,796	$	92,367	$	4,588	$	2,734	$	8,395	$	454,453	$	41,477	$	1,001,614	5.71
Risk grade 9	—		4,797		1,513		85		501		664		30,108		26		37,694		9.00
Risk grade 10	—		—		—		—		388		201		—		720		1,309		10.00
Risk grade 11	—		—		131		142		3,106		43		—		—		3,422		11.00
Risk grade 12	7,812		3,499		—		72		1,371		8		4,248		526		17,536		12.00
Risk grade 13	—		662		—		—		—		—		2,971		1,180		4,813		13.00
	$	325,616	$	88,754	$	94,011	$	4,887	$	8,100	$	9,311	$	491,780	$	43,929	$	1,066,388	5.99
W/A risk grade	6.14		7.13		5.66		7.65		9.73		6.85		5.65		5.98		5.99
Commercial real estate:
Buildings, land, other
Risk grades 1-8	$	437,014	$	1,677,855	$	1,437,065	$	919,210	$	612,177	$	1,094,299	$	149,384	$	104,209	$	6,431,213	6.96
Risk grade 9	386		54,811		27,557		18,737		50,933		30,140		2,162		2,178		186,904		9.00
Risk grade 10	—		23,228		6,122		3,683		8,888		7,257		—		—		49,178		10.00
Risk grade 11	10,574		7,804		10,970		27,000		4,678		53,477		2,993		443		117,939		11.00
Risk grade 12	—		2,417		303		—		211		1,547		—		—		4,478		12.00
Risk grade 13	—		126		—		—		—		—		—		—		126		13.00
	$	447,974	$	1,766,241	$	1,482,017	$	968,630	$	676,887	$	1,186,720	$	154,539	$	106,830	$	6,789,838	7.11
W/A risk grade	7.15		7.07		7.21		7.18		7.04		7.06		7.14		6.46		7.11
Construction
Risk grades 1-8	$	209,154	$	524,611	$	389,715	$	76,004	$	961	$	1,970	$	165,201	$	854	$	1,368,470	7.18
Risk grade 9	4,511		13,834		—		25,522		—		—		15,675		—		59,542		9.00
Risk grade 10	918		—		68		—		—		—		—		—		986		10.00
Risk grade 11	—		15,489		37,971		—		—		—		—		—		53,460		11.00
Risk grade 12	—		—		—		—		—		—		—		—		—		12.00
Risk grade 13	—		—		—		—		—		—		—		—		—		13.00
	$	214,583	$	553,934	$	427,754	$	101,526	$	961	$	1,970	$	180,876	$	854	$	1,482,458	7.39
W/A risk grade	7.50		7.30		7.61		6.49		7.07		6.66		7.52		5.86		7.39
Total commercial real estate	$	662,557	$	2,320,175	$	1,909,771	$	1,070,156	$	677,848	$	1,188,690	$	335,415	$	107,684	$	8,272,296	7.16
W/A risk grade	7.26		7.12		7.30		7.12		7.04		7.06		7.34		6.46		7.16

In the table above, certain loans are reported as 2023 originations and have risk grades of 11 or higher. These loans were, for the most part, first originated in various years prior to 2023 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, 2022. Refer to our 2022 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	6.24	$	5,435,917	5.44	$	887,182	6.94	$	6,340,028	7.04	$	1,430,012	6.96	$	7,770,040
Risk grade 9	9.00	146,192		9.00	11,112		9.00	189,928		9.00	34,952		9.00	224,880
Risk grade 10	10.00	37,596		10.00	642		10.00	91,020		10.00	931		10.00	91,951
Risk grade 11	11.00	36,963		11.00	11,569		11.00	81,550		11.00	11,352		11.00	92,902
Risk grade 12	12.00	12,521		12.00	10,840		12.00	2,957		12.00	—		12.00	2,957
Risk grade 13	13.00	5,609		13.00	4,384		13.00	595		13.00	—		13.00	595
Total	6.39	$	5,674,798	5.67	$	925,729	7.09	$	6,706,078	7.12	$	1,477,247	7.10	$	8,183,325

Information about the payment status of consumer loans, segregated by portfolio segment and year of origination, as of March 31, 2023 was as follows:

	2023		2022		2021		2020		2019		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Consumer real estate:
Past due 30-89 days	$	—	$	89	$	1,324	$	460	$	2,906	$	2,300	$	2,897	$	4,425	$	14,401
Past due 90 or more days	—		95		429		66		—		1,017		710		—		2,317
Total past due	—		184		1,753		526		2,906		3,317		3,607		4,425		16,718
Current loans	108,565		428,252		308,606		189,511		66,032		157,889		703,042		8,244		1,970,141
Total	$	108,565	$	428,436	$	310,359	$	190,037	$	68,938	$	161,206	$	706,649	$	12,669	$	1,986,859
Consumer and other:
Past due 30-89 days	$	1,828	$	375	$	76	$	87	$	34	$	57	$	1,901	$	72	$	4,430
Past due 90 or more days	—		55		—		—		—		—		43		—		98
Total past due	1,828		430		76		87		34		57		1,944		72		4,528
Current loans	30,334		45,568		17,082		5,430		2,378		2,163		332,833		22,967		458,755
Total	$	32,162	$	45,998	$	17,158	$	5,517	$	2,412	$	2,220	$	334,777	$	23,039	$	463,283

Revolving loans that converted to term during the three months ended March 31, 2023 and 2022 were as follows:

	Three Months Ended March 31,
	2023		2022
Commercial and industrial	$	15,490	$	5,763
Energy	3,435		—
Commercial real estate:
Buildings, land and other	—		47
Construction	—		3,666
Consumer real estate	707		858
Consumer and other	6,342		4,222
Total	$	25,974	$	14,556

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 2022 Form 10-K, totaled 130.7 at March 31, 2023 and 130.0 at December 31, 2022. 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 2022 Form 10-K.

During the first quarter of 2023, we recalibrated and updated all of our commercial loan models, with the exception of the models related to commercial real estate - non-owner occupied loans, as well as our consumer real estate loan models. While the fundamental modeling methodologies remain unchanged, the updates included (i) separating the energy loan pool from the commercial and industrial pool as a result of differences in loss characteristics observed in recent history and (ii) changing the modeling approach related to loan renewals whereby each renewal is treated as a separate loan which impacted loan life assumptions. For modeling purposes, our loan pools now include (i) commercial and industrial non-revolving, (ii) commercial and industrial revolving, (iii) energy, (iv) commercial real estate - owner occupied, (v) commercial real estate - non-owner occupied, (vi) commercial real estate - construction/land development, (vii) consumer real estate and (viii) consumer and other. The overall approximate impact of the model updates was a $45.0 million decrease in modeled expected credit losses on loans

though the impact of this decrease was largely offset with qualitative adjustments. The decrease in modeled expected credit losses on loans was largely driven by lower measurements for probability of default (“PD”) and loss given default (“LGD”) based on the historical data series (2008 through 2018) used for the recalibration. This period was one of relatively low losses and included higher levels of government stimulus. The lower PD and LGD measurements were also impacted by shorter loan life assumptions due to the aforementioned change in the modeling approach related to loan renewals.

The following table presents details of the allowance for credit losses on loans segregated by loan portfolio segment as of March 31, 2023 and December 31, 2022. No allowance for credit losses has been recognized for PPP loans as such loans are fully guaranteed by the SBA.

March 31, 2023	Commercial and Industrial		Energy		Commercial Real Estate		Consumer Real Estate		Consumer and Other		Total
Modeled expected credit losses	$	42,449	$	5,034	$	14,739	$	9,380	$	4,413	$	76,015
Q-Factor and other qualitative adjustments	32,805		9,343		100,828		328		4,044		147,348
Specific allocations	3,211		4,814		126		—		—		8,151
Total	$	78,465	$	19,191	$	115,693	$	9,708	$	8,457	$	231,514
December 31, 2022
Modeled expected credit losses	$	61,918	$	8,531	$	27,013	$	7,847	$	4,983	$	110,292
Q-Factor and other qualitative adjustments	36,237		5,148		61,572		157		2,034		105,148
Specific allocations	6,082		4,383		1,716		—		—		12,181
Total	$	104,237	$	18,062	$	90,301	$	8,004	$	7,017	$	227,621

The following table details activity in the allowance for credit losses on loans by portfolio segment for the three months ended March 31, 2023 and 2022. 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:
March 31, 2023
Beginning balance	$	104,237	$	18,062	$	90,301	$	8,004	$	7,017	$	227,621
Credit loss expense (benefit)	(20,684)		966		25,361		1,283		5,749		12,675
Charge-offs	(6,180)		—		—		(250)		(6,942)		(13,372)
Recoveries	1,092		163		31		671		2,633		4,590
Net (charge-offs) recoveries	(5,088)		163		31		421		(4,309)		(8,782)
Ending balance	$	78,465	$	19,191	$	115,693	$	9,708	$	8,457	$	231,514
March 31, 2022
Beginning balance	$	72,091	$	17,217	$	144,936	$	6,585	$	7,837	$	248,666
Credit loss expense (benefit)	17,561		(2,044)		(15,609)		(26)		4,582		4,464
Charge-offs	(3,455)		(371)		(702)		(231)		(5,771)		(10,530)
Recoveries	829		620		329		31		2,426		4,235
Net (charge-offs) recoveries	(2,626)		249		(373)		(200)		(3,345)		(6,295)
Ending balance	$	87,026	$	15,422	$	128,954	$	6,359	$	9,074	$	246,835

The following table presents year-to-date gross charge-offs by year of origination as of March 31, 2023.

	2023		2022		2021		2020		2019		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Commercial and industrial	$	—	$	69	$	167	$	54	$	25	$	—	$	3,134	$	2,731	$	6,180
Energy	—		—		—		—		—		—		—		—		—
Commercial real estate:
Buildings, land and other	—		—		—		—		—		—		—		—		—
Construction	—		—		—		—		—		—		—		—		—
Consumer real estate	—		—		—		—		—		—		250		—		250
Consumer and other	1,974		4,300		35		12		—		12		398		211		6,942
Total	$	1,974	$	4,369	$	202	$	66	$	25	$	12	$	3,782	$	2,942	$	13,372

In the table above, all consumer and other loan charge-offs reported as 2023 originations and $4.2 million of the total reported as 2022 originations were related to deposit overdrafts.

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 March 31, 2023 and December 31, 2022.

	March 31, 2023				December 31, 2022
	Loan Balance		Specific Allocations		Loan Balance		Specific Allocations
Commercial and industrial	$	8,895	$	3,211	$	18,980	$	6,082
Energy	22,195		4,814		15,058		4,383
Paycheck Protection Program	—		—		—		—
Commercial real estate:
Buildings, land and other	3,779		126		17,711		1,716
Construction	—		—		—		—
Consumer real estate	818		—		827		—
Consumer and other	—		—		—		—
Total	$	35,687	$	8,151	$	52,576	$	12,181