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Loans
 12 Months Ended
Dec. 31, 2023
Receivables [Abstract]  
Loans Loans
Year-end loans, including leases net of unearned discounts, consisted of the following:
20232022
Commercial and industrial$5,959,133 $5,674,798 
Energy:
Production681,568 696,570 
Service192,654 133,542 
Other61,043 95,617 
Total energy935,265 925,729 
Paycheck Protection Program (“PPP”)
9,521 34,852 
Commercial real estate:
Commercial mortgages6,746,709 6,168,910 
Construction1,680,724 1,477,247 
Land555,211 537,168 
Total commercial real estate8,982,644 8,183,325 
Consumer real estate:
Home equity lines of credit792,876 691,841 
Home equity loans694,966 449,507 
Home improvement loans765,887 577,377 
Other206,997 124,814 
Total consumer real estate2,460,726 1,843,539 
Total real estate11,443,370 10,026,864 
Consumer and other476,962 492,726 
Total loans$18,824,251 $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 December 31, 2023, the largest industry concentrations were related to the automobile dealerships industry, which totaled 5.9% of total loans and the energy industry, which totaled 5.0% of total loans. Unfunded commitments to extend credit and standby letters of credit issued to customers in the automobile dealership industry totaled $522.8 million and $19.3 million, respectively, as of December 31, 2023, while unfunded commitments to extend credit and standby letters of
credit issued to customers in the energy industry totaled $1.1 billion and $86.9 million, respectively, as of December 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 December 31, 2023 or 2022.
Overdrafts. Deposit account overdrafts reported as loans totaled $13.4 million and $10.3 million at December 31, 2023 and 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”). Activity in related party loans during 2023 is presented in the following table. Other changes were primarily related to changes in related-party status.
Balance outstanding at December 31, 2022$391,255 
Principal additions322,183 
Principal payments(299,338)
Other changes2,007 
Balance outstanding at December 31, 2023$416,107 
Accrued Interest Receivable. Accrued interest receivable on loans totaled $90.8 million and $68.7 million at December 31, 2023 and 2022, 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, 2023December 31, 2022
Total Non-AccrualNon-Accrual with No Credit Loss AllowanceTotal Non-AccrualNon-Accrual with No Credit Loss Allowance
Commercial and industrial$19,545 $5,391 $18,130 $8,514 
Energy11,500 7,398 15,224 7,139 
Commercial real estate:
Buildings, land and other22,420 4,983 3,552 1,991 
Construction— — — — 
Consumer real estate7,442 5,160 927 927 
Consumer and other— — — — 
Total$60,907 $22,932 $37,833 $18,571 
The following tables present non-accrual loans as of December 31, 2023 and December 31, 2022 by class and year of origination.
December 31, 2023
20232022202120202019PriorRevolving LoansRevolving Loans Converted to TermTotal
Commercial and industrial$— $359 $1,635 $985 $1,257 $1,006 $9 $14,294 $19,545 
Energy5,875 — — 56 1,321 — 4,102 146 11,500 
Commercial real estate:
Buildings, land and other20,099 — 150 — 1,451 720 — — 22,420 
Construction— — — — — — — — — 
Consumer real estate— — — 38 2,281 483 1,600 3,040 7,442 
Consumer and other— — — — — — — — — 
Total$25,974 $359 $1,785 $1,079 $6,310 $2,209 $5,711 $17,480 $60,907 
December 31, 2022
20222021202020192018PriorRevolving LoansRevolving Loans Converted to TermTotal
Commercial and industrial$— $1,252 $1,089 $3,242 $1,197 $191 $2,973 $8,186 $18,130 
Energy4,657 — 72 1,386 10 — 7,631 1,468 15,224 
Commercial real estate:
Buildings, land and other1,644 — — 217 266 1,425 — — 3,552 
Construction— — — — — — — — — 
Consumer real estate— 258 — — — 84 — 585 927 
Consumer and other— — — — — — — — — 
Total$6,301 $1,510 $1,161 $4,845 $1,473 $1,700 $10,604 $10,239 $37,833 
In the tables above, loans reported as 2023 originations as of December 31, 2023 and loans reported as 2022 originations as of December 31, 2022 were, for the most part, first originated in various years prior to 2023 and 2022, 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 $4.0 million in 2023, $1.7 million in 2022 and $1.8 million in 2021.
An age analysis of past due loans (including both accruing and non-accruing loans), segregated by class of loans, as of December 31, 2023 is presented in the following table. Despite their past due status, PPP loans are fully guaranteed by the Small Business Administration (“SBA”).
Loans
30-89 Days
Past Due		Loans
90 or More
Days
Past Due		Total Past
Due Loans		Current
Loans		Total LoansAccruing
Loans 90 or
More Days
Past Due
Commercial and industrial$27,551 $21,705 $49,256 $5,909,877 $5,959,133 $5,503 
Energy6,387 6,771 13,158 922,107 935,265 1,146 
Paycheck Protection Program61 1,954 2,015 7,506 9,521 1,954 
Commercial real estate:
Buildings, land and other20,224 1,610 21,834 7,280,086 7,301,920 92 
Construction4,878 3,498 8,376 1,672,348 1,680,724 3,498 
Consumer real estate12,504 7,716 20,220 2,440,506 2,460,726 2,589 
Consumer and other6,495 251 6,746 470,216 476,962 251 
Total$78,100 $43,505 $121,605 $18,702,646 $18,824,251 $15,033 
Modifications to Borrowers Experiencing Financial Difficulty. From time to time, we may modify certain loans to borrowers who are experiencing financial difficulty. In some cases, these modifications may result in new loans. Loan modifications to borrowers experiencing financial difficulty may be in the form of a principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, a term extension, or a combination thereof, among other things. The period-end balance of loan modifications, segregated by type of modification, to borrowers experiencing financial difficulty during 2023 and 2022 are set forth in the table below, regardless of whether such modifications resulted in a new loan. There were no commitments to lend additional funds to these borrowers at December 31, 2023.
Payment
Delay		Percent of
Total Class
of Loans		Combination: Payment Delay and Term ExtensionPercent of
Total Class
of Loans		Combination: Interest Rate Reduction and Term ExtensionPercent of
Total Class
of Loans
December 31, 2023
Commercial and industrial$— — %$13,813 0.2 %$— — %
Commercial real estate:
Buildings, land, and other— — 19,438 0.3 2,092 — 
$— — $33,251 0.2 $2,092 — 
December 31, 2022
Commercial real estate:
Buildings, land, and other$1,051 — $— — $— — 
$1,051 — $— — $— — 
During 2023, we modified the interest rate on one loan from a variable rate of prime plus a spread of 1.75% (10.25% as of the modification date) to a fixed rate of 6.74% in addition to extending the term of the loan. The financial effects of the other loan modifications made to borrowers experiencing financial difficulty during 2023 were not significant. The loan modifications reported in the table above did not significantly impact our determination of the allowance for credit losses on loans during 2023.
Information as of or for the years ended December 31, 2023, 2022, or 2021 related to loans modified (by type of modification) in the preceding twelve months, respectively, whereby the borrower was experiencing financial difficulty at the time of modification is set forth in the following table.
Payment
Delay		Combination: Payment Delay and Term ExtensionCombination: Interest Rate Reduction and Term Extension
2023
Past due in excess of 90 days or on non-accrual status at period-end:
Commercial and industrial$— $13,813 $— 
Commercial real estate:
Buildings, land, and other— 19,438 — 
$— $33,251 $— 
2022
Past due in excess of 90 days or on non-accrual status at period-end:
Commercial real estate:
Buildings, land, and other$1,051 $— $— 
$1,051 $— $— 
Charge-offs during the period:
Commercial real estate:
Buildings, land, and other$371 $352 $— 
$371 $352 $— 
Proceeds from sales:
Commercial real estate:
Buildings, land, and other$— $1,070 $— 
$— $1,070 $— 
2021
Past due in excess of 90 days or on non-accrual status at period-end:
Commercial and industrial$1,162 $— $— 
Energy721 — — 
Commercial real estate:
Buildings, land, and other306 1,556 — 
$2,189 $1,556 $— 
Charge-offs during the period:
Energy$4,278 $— $— 
$4,278 $— $— 
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, 2023 and 2022. PPP loans are excluded as such loans are fully guaranteed by the SBA.
December 31, 2023
20232022202120202019PriorRevolving LoansRevolving Loans Converted to TermTotal
Commercial and industrial
Risk grades 1-8$1,489,026 $706,210 $450,806 $349,744 $172,656 $206,643 $2,083,490 $41,254 $5,499,829 
Risk grade 957,625 42,618 12,258 4,952 1,641 10,383 70,142 5,625 205,244 
Risk grade 1063,205 2,222 1,307 911 4,005 581 35,977 1,046 109,254 
Risk grade 119,450 16,837 25,932 7,854 2,530 1,153 58,134 3,371 125,261 
Risk grade 12— 359 1,635 950 1,257 1,006 1 11,894 17,102 
Risk grade 13— — — 35 — — 8 2,400 2,443 
$1,619,306 $768,246 $491,938 $364,446 $182,089 $219,766 $2,247,752 $65,590 $5,959,133 
W/A risk grade6.53 7.05 7.26 5.87 6.01 6.04 6.50 8.48 6.60 
Energy
Risk grades 1-8$270,710 $54,185 $73,532 $3,673 $1,819 $4,047 $451,897 $9,886 $869,749 
Risk grade 91,137 7,315 1,041 — 456 — 17,680 14 27,643 
Risk grade 10— — 33 — 291 494 — — 818 
Risk grade 11— — 25 106 2,989 — 21,650 785 25,555 
Risk grade 125,875 — — 56 1,321 — 1,402 146 8,800 
Risk grade 13— — — — — — 2,700 — 2,700 
$277,722 $61,500 $74,631 $3,835 $6,876 $4,541 $495,329 $10,831 $935,265 
W/A risk grade6.19 7.07 6.00 6.99 10.02 7.07 5.75 7.33 6.05 
Commercial real estate:
Buildings, land, other
Risk grades 1-8$1,601,175 $1,667,750 $1,186,559 $747,289 $503,303 $874,942 $214,874 $99,466 $6,895,358 
Risk grade 912,173 68,007 28,870 13,250 16,272 23,214 11,143 541 173,470 
Risk grade 107,671 29,278 17,364 34,672 747 3,153 3,716 — 96,601 
Risk grade 114,105 20,589 20,119 16,363 793 51,739 — 363 114,071 
Risk grade 1217,449 — 150 — 1,451 720 — — 19,770 
Risk grade 132,650 — — — — — — — 2,650 
$1,645,223 $1,785,624 $1,253,062 $811,574 $522,566 $953,768 $229,733 $100,370 $7,301,920 
W/A risk grade7.23 7.18 7.29 7.22 6.90 7.16 7.49 6.77 7.20 
Construction
Risk grades 1-8$538,072 $537,705 $264,770 $28,063 $296 $1,613 $155,567 $— $1,526,086 
Risk grade 93,414 35,565 79,871 — — — 8,252 — 127,102 
Risk grade 1013,322 — — — — — 3,713 — 17,035 
Risk grade 115,912 3,104 — — — — 1,485 — 10,501 
Risk grade 12— — — — — — — — — 
Risk grade 13— — — — — — — — — 
$560,720 $576,374 $344,641 $28,063 $296 $1,613 $169,017 $— $1,680,724 
W/A risk grade7.44 7.44 7.93 2.55 7.22 6.78 7.34 — 7.45 
Total commercial real estate$2,205,943 $2,361,998 $1,597,703 $839,637 $522,862 $955,381 $398,750 $100,370 $8,982,644 
W/A risk grade7.28 7.24 7.43 7.07 6.90 7.15 7.43 6.77 7.24 
December 31, 2022
20222021202020192018PriorRevolving LoansRevolving Loans Converted to TermTotal
Commercial and industrial
Risk grades 1-8$1,667,274 $618,756 $485,908 $226,835 $123,768 $192,791 $2,068,891 $51,694 $5,435,917 
Risk grade 931,275 34,950 3,651 5,400 11,006 1,014 54,856 4,040 146,192 
Risk grade 102,294 724 845 4,713 1,341 114 23,880 3,685 37,596 
Risk grade 112,342 1,357 6,720 1,807 1,229 1,644 19,582 2,282 36,963 
Risk grade 12— 1,052 866 2,972 1,177 191 673 5,590 12,521 
Risk grade 13— 200 223 270 20 — 2,300 2,596 5,609 
$1,703,185 $657,039 $498,213 $241,997 $138,541 $195,754 $2,170,182 $69,887 $5,674,798 
W/A risk grade6.37 7.05 6.01 6.59 6.87 5.55 6.26 7.68 6.39 
Energy
Risk grades 1-8$338,050 $99,089 $4,917 $3,138 $2,020 $2,850 $393,957 $43,161 $887,182 
Risk grade 91,561 1,611 166 562 748 — 6,434 30 11,112 
Risk grade 10— — — 428 214 — — — 642 
Risk grade 117,956 162 157 3,145 86 63 — — 11,569 
Risk grade 123,995 — 72 1,386 10 — 4,571 806 10,840 
Risk grade 13662 — — — — — 3,060 662 4,384 
$352,224 $100,862 $5,312 $8,659 $3,078 $2,913 $408,022 $44,659 $925,729 
W/A risk grade6.09 5.65 7.65 9.64 8.02 6.59 5.18 5.69 5.67 
Commercial real estate:
Buildings, land, other
Risk grades 1-8$1,811,069 $1,484,811 $956,567 $708,942 $360,154 $800,944 $111,778 $105,763 $6,340,028 
Risk grade 952,288 13,139 36,264 22,086 17,699 45,590 652 2,210 189,928 
Risk grade 1026,688 11,150 3,735 9,008 29,683 5,221 5,535 — 91,020 
Risk grade 1110,199 19,073 12,631 4,778 2,525 28,841 2,993 510 81,550 
Risk grade 121,049 — — 217 266 1,425 — — 2,957 
Risk grade 13595 — — — — — — — 595 
$1,901,888 $1,528,173 $1,009,197 $745,031 $410,327 $882,021 $120,958 $108,483 $6,706,078 
W/A risk grade7.01 7.26 7.14 7.01 7.33 6.94 7.38 6.43 7.09 
Construction
Risk grades 1-8$640,948 $489,391 $128,788 $2,236 $486 $1,726 $163,293 $3,144 $1,430,012 
Risk grade 912,865 2,100 2,100 — — — 17,887 — 34,952 
Risk grade 10859 72 — — — — — — 931 
Risk grade 1111,352 — — — — — — — 11,352 
Risk grade 12— — — — — — — — — 
Risk grade 13— — — — — — — — — 
$666,024 $491,563 $130,888 $2,236 $486 $1,726 $181,180 $3,144 $1,477,247 
W/A risk grade7.29 7.03 6.43 7.04 6.00 6.76 7.23 5.03 7.12 
Total commercial real estate$2,567,912 $2,019,736 $1,140,085 $747,267 $410,813 $883,747 $302,138 $111,627 $8,183,325 
W/A risk grade7.08 7.20 7.06 7.01 7.33 6.94 7.29 6.39 7.10 
At December 31, 2023 and 2022, the weighted-average risk grades for “pass grade” (risk grades 1-8) loans were 6.32 and 6.24, respectively, for commercial and industrial; 5.73 and 5.44, respectively, for energy; 7.03 and 6.94, respectively, for commercial real estate - buildings, land and other; and 7.27 and 7.04, respectively, for commercial real estate - construction. Furthermore, in the tables above, there are loans reported as 2023 originations as of December 31, 2023 and 2022 originations as of December 31, 2022 that have risk grades of 11 or higher. These loans were, for the most part, first originated in various years prior to 2023 and 2022, 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, 2023 and December 31, 2022 was as follows:
December 31, 2023
20232022202120202019PriorRevolving LoansRevolving Loans Converted to TermTotal
Consumer real estate:
Past due 30-89 days$874 $2,066 $1,318 $959 $537 $2,641 $3,570 $539 $12,504 
Past due 90 or more days— 512 626 38 — 887 2,566 3,087 7,716 
Total past due874 2,578 1,944 997 537 3,528 6,136 3,626 20,220 
Current loans579,505 432,719 281,820 170,225 58,744 134,319 775,465 7,709 2,440,506 
Total$580,379 $435,297 $283,764 $171,222 $59,281 $137,847 $781,601 $11,335 $2,460,726 
Consumer and other:
Past due 30-89 days$3,014 $488 $148 $66 $28 $40 $2,553 $158 $6,495 
Past due 90 or more days153 — 27 — 20 — 51 — 251 
Total past due3,167 488 175 66 48 40 2,604 158 6,746 
Current loans67,272 28,885 6,290 3,581 1,199 1,230 339,789 21,970 470,216 
Total$70,439 $29,373 $6,465 $3,647 $1,247 $1,270 $342,393 $22,128 $476,962 
December 31, 2022
20222021202020192018PriorRevolving LoansRevolving Loans Converted to TermTotal
Consumer real estate:
Past due 30-89 days$793 $1,125 $645 $936 $503 $2,087 $565 $1,202 $7,856 
Past due 90 or more days95 258 28 — 129 919 347 914 2,690 
Total past due888 1,383 673 936 632 3,006 912 2,116 10,546 
Current loans403,587 313,222 194,900 70,723 38,904 122,585 678,418 10,654 1,832,993 
Total$404,475 $314,605 $195,573 $71,659 $39,536 $125,591 $679,330 $12,770 $1,843,539 
Consumer and other:
Past due 30-89 days$2,673 $511 $128 $51 $4 $31 $314 $1,443 $5,155 
Past due 90 or more days77 2 — 13 — — 25 194 311 
Total past due2,750 513 128 64 4 31 339 1,637 5,466 
Current loans59,886 20,887 6,475 2,897 1,271 1,632 372,117 22,095 487,260 
Total$62,636 $21,400 $6,603 $2,961 $1,275 $1,663 $372,456 $23,732 $492,726 
Revolving loans that converted to term during 2023 and 2022 were as follows:
20232022
Commercial and industrial$28,713 $34,247 
Energy6,409 3,295 
Commercial real estate:
Buildings, land and other4,780 12,174 
Construction— 3,144 
Consumer real estate2,467 5,381 
Consumer and other7,482 9,200 
Total$49,851 $67,441 
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 126.8 at December 31, 2023 and 130.4 at December 31, 2022. A lower TLI value implies less 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 loan to an individual borrower that is experiencing financial difficulty will be modified 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 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. Prior to 2023, energy loans were included within the commercial and industrial loan pools. See discussion of the 2023 model updates below. 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.
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. The overall approximate impact of the model updates during the first quarter was a $45.0 million decrease in modeled expected credit losses on loans though the impact of this decrease was largely offset with discretionary qualitative adjustments. The decrease in modeled expected credit losses on loans was largely driven by lower measurements for PD and 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 December 31, 2023 and 2022, 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		EnergyCommercial
Real Estate		Consumer
Real Estate		Consumer
and Other		Total
December 31, 2023
Modeled expected credit losses$50,959 $7,838 $15,443 $12,364 $5,969 $92,573 
Q-Factor and other qualitative adjustments20,612 7,276 112,505 433 4,071 144,897 
Specific allocations2,435 2,700 2,650 741 — 8,526 
Total$74,006 $17,814 $130,598 $13,538 $10,040 $245,996 
December 31, 2022
Modeled expected credit losses$61,918 $8,531 $27,013 $7,847 $4,983 $110,292 
Q-Factor and other qualitative adjustments36,237 5,148 61,572 157 2,034 105,148 
Specific allocations6,082 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 2023, 2022 and 2021. 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		EnergyCommercial
Real Estate		Consumer
Real Estate		Consumer
and Other		Total
2023
Beginning balance$104,237 $18,062 $90,301 $8,004 $7,017 $227,621 
Credit loss expense (benefit)(16,709)(1,067)40,889 6,736 23,012 52,861 
Charge-offs(18,315)(518)(955)(2,883)(31,260)(53,931)
Recoveries4,793 1,337 363 1,681 11,271 19,445 
Net (charge-offs) recoveries(13,522)819 (592)(1,202)(19,989)(34,486)
Ending balance$74,006 $17,814 $130,598 $13,538 $10,040 $245,996 
2022
Beginning balance$72,091 $17,217 $144,936 $6,585 $7,837 $248,666 
Credit loss expense (benefit)34,479 (313)(54,775)1,813 13,517 (5,279)
Charge-offs(6,575)(371)(702)(912)(24,388)(32,948)
Recoveries4,242 1,529 842 518 10,051 17,182 
Net (charge-offs) recoveries(2,333)1,158 140 (394)(14,337)(15,766)
Ending balance$104,237 $18,062 $90,301 $8,004 $7,017 $227,621 
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)
Recoveries5,921 2,202 2,342 2,549 9,258 22,272 
Net (charge-offs) recoveries408 (3,129)1,943 1,720 (9,356)(8,414)
Ending balance$72,091 $17,217 $144,936 $6,585 $7,837 $248,666 
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 year-to-date gross charge-offs by year of origination as of December 31, 2023.
20232022202120202019PriorRevolving LoansRevolving Loans Converted to TermTotal
Commercial and industrial$124 $1,704 $754 $157 $183 $38 $9,511 $5,844 $18,315 
Energy— — — — — — — 518 518 
Commercial real estate:
Buildings, land and other— 6 146 — — 64 — — 216 
Construction739 — — — — — — — 739 
Consumer real estate118 281 348 — — 329 1,807 — 2,883 
Consumer and other23,321 4,546 74 13 1 29 2,766 510 31,260 
Total$24,302 $6,537 $1,322 $170 $184 $460 $14,084 $6,872 $53,931 
In the table above, $23.1 million of the 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 December 31, 2023 and December 31, 2022.
December 31, 2023December 31, 2022
Loan
Balance		Specific AllocationsLoan
Balance		Specific Allocations
Commercial and industrial$18,670 $2,435 $18,980 $6,082 
Energy11,353 2,700 15,058 4,383 
Paycheck Protection Program— — — — 
Commercial real estate:
Buildings, land and other21,373 2,650 17,711 1,716 
Construction— — — — 
Consumer real estate7,235 741 827 — 
Consumer and other— — — — 
Total$58,631 $8,526 $52,576 $12,181