Loans

Loans were as follows:



	March 31, 2015			Percentage of Total		December 31, 2014			Percentage of Total
Commercial and industrial:
Commercial	$	5,582,282		49.8	%	$	5,429,206		49.4	%
Leases	326,253			2.9		338,537			3.1
Total commercial and industrial	5,908,535			52.7		5,767,743			52.5
Commercial real estate:
Commercial mortgages	3,095,830			27.6		3,080,202			28.0
Construction	685,629			6.1		629,988			5.7
Land	292,966			2.6		291,907			2.7
Total commercial real estate	4,074,425			36.3		4,002,097			36.4
Consumer real estate:
Home equity loans	338,732			3.0		342,725			3.1
Home equity lines of credit	222,967			2.0		220,128			2.0
Other	290,704			2.6		286,198			2.6
Total consumer real estate	852,403			7.6		849,051			7.7
Total real estate	4,926,828			43.9		4,851,148			44.1
Consumer and other:
Consumer installment	395,879			3.5		385,479			3.5
Other	7,239			0.1		8,122			0.1
Total consumer and other	403,118			3.6		393,601			3.6
Unearned discounts	(23,668		)	(0.2	)	(24,957		)	(0.2	)
Total loans	$	11,214,813		100.0	%	$	10,987,535		100.0	%

Loan Origination/Risk Management. We have certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, our management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing our commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce our exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, we avoid financing single-purpose projects unless other underwriting factors are present to help mitigate risk. We also utilize third-party experts to provide insight and guidance about economic conditions and trends affecting market areas we serve. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At March 31, 2015, approximately 54.0% of the outstanding principal balance of our commercial real estate loans were secured by owner-occupied properties.

With respect to loans to developers and builders that are secured by non-owner occupied properties that we may originate from time to time, we generally require the borrower to have had an existing relationship with us and have a proven record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from us until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

We originate consumer loans utilizing a computer-based credit scoring analysis to supplement the underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage of 80%, collection remedies, the number of such loans a borrower can have at one time and documentation requirements.

We maintain an independent loan review department that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as our policies and procedures.

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, 2015, there were no concentrations of loans related to any single industry in excess of 10% of total loans other than energy loans, which totaled 16.2% of total loans.

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, 2015 or December 31, 2014.

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.

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



	March 31, 2015		December 31, 2014
Commercial and industrial:
Energy	$	636	$	636
Other commercial	32,965		34,108
Commercial real estate:
Buildings, land and other	17,145		19,639
Construction	2,740		2,792
Consumer real estate	2,347		2,212
Consumer and other	481		538
Total	$	56,314	$	59,925

As of March 31, 2015, non-accrual loans reported in the table above included $613 thousand related to loans that were restructured as “troubled debt restructurings” during 2015. See the section captioned “Troubled Debt Restructurings” elsewhere in this note. Had non-accrual loans performed in accordance with their original contract terms, we would have recognized additional interest income, net of tax, of approximately $397 thousand for the three months ended March 31, 2015, compared to $358 thousand for three months ended March 31, 2014.

An age analysis of past due loans (including both accruing and non-accruing loans), segregated by class of loans, as of March 31, 2015 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:
Energy	$	1,000	$	4,538	$	5,538	$	1,813,511		$	1,819,049		$	3,902
Other commercial	23,685		25,431		49,116		4,040,370			4,089,486			6,078
Commercial real estate:
Buildings, land and other	13,405		7,005		20,410		3,368,386			3,388,796			1,278
Construction	1,371		50		1,421		684,208			685,629			50
Consumer real estate	5,670		1,961		7,631		844,772			852,403			1,662
Consumer and other	4,096		721		4,817		398,301			403,118			669
Unearned discounts	—		—		—		(23,668		)	(23,668		)	—
Total	$	49,227	$	39,706	$	88,933	$	11,125,880		$	11,214,813		$	13,639

Impaired Loans. Loans are considered impaired when, based on current information and events, it is probable we will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectibility of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Regulatory guidelines require us to reevaluate the fair value of collateral supporting impaired collateral dependent loans on at least an annual basis. While our policy is to comply with the regulatory guidelines, our general practice is to reevaluate the fair value of collateral supporting impaired collateral dependent loans on a quarterly basis. Thus, appraisals are never considered to be outdated, and we do not need to make any adjustments to the appraised values. The fair value of collateral supporting impaired 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 impaired collateral dependent construction loans is based on an “as is” valuation.

Impaired loans are set forth in the following table. No interest income was recognized on impaired loans subsequent to their classification as impaired.



	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
March 31, 2015
Commercial and industrial:
Energy	$	705	$	636	$	—	$	636	$	—
Other commercial	42,262		28,275		2,720		30,995		1,404
Commercial real estate:
Buildings, land and other	20,257		14,723		197		14,920		71
Construction	3,004		2,740		—		2,740		—
Consumer real estate	789		568		—		568		—
Consumer and other	—		—		—		—		—
Total	$	67,017	$	46,942	$	2,917	$	49,859	$	1,475
December 31, 2014
Commercial and industrial:
Energy	$	706	$	636	$	—	$	636	$	—
Other commercial	42,212		29,007		2,853		31,860		1,613
Commercial real estate:
Buildings, land and other	22,919		17,441		265		17,706		67
Construction	3,007		2,793		—		2,793		—
Consumer real estate	812		596		—		596		—
Consumer and other	—		—		—		—		—
Total	$	69,656	$	50,473	$	3,118	$	53,591	$	1,680

The average recorded investment in impaired loans was as follows:



	Three Months Ended March 31,
	2015		2014
Commercial and industrial:
Energy	$	636	$	529
Other commercial	31,428		20,866
Commercial real estate:
Buildings, land and other	16,313		22,798
Construction	2,767		156
Consumer real estate	582		732
Consumer and other	—		271
Total	$	51,726	$	45,352

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 during the three months ended March 31, 2015 and March 31, 2014 are set forth in the following table.



	Three Months Ended March 31, 2015				Three Months Ended March 31, 2014
	Balance at Restructure		Balance at Period-End		Balance at Restructure		Balance at Period-End
Commercial and industrial:
Energy	$	—	$	—	$	—	$	—
Other commercial	709		613		819		793
	$	709	$	613	$	819	$	793

The modifications during the reported periods primarily related to extending amortization periods, converting the loans to interest only for a limited period of time, consolidating notes and/or reducing collateral or interest rates. The modifications did not significantly impact our determination of the allowance for loan losses. As of March 31, 2015, there were no loans restructured during the last year that were in excess of 90 days past due. During the three months ended March 31, 2015, we charged-off $88 thousand in connection with the restructuring of a commercial and industrial loan. Approximately $314 thousand of commercial and industrial loans restructured during the three months ended March 31, 2015 was related to a loan relationship previously restructured during 2014. During the three months ended March 31, 2014, we foreclosed upon certain commercial real estate loans that were restructured during 2013. We recognized $500 thousand of other real estate owned and no charge-offs in connection with these foreclosures. The aforementioned charge-offs and foreclosures did not significantly impact our determination of the allowance for loan losses.

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 (see details above), (iv) net charge-offs, (v) 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 loan losses, we monitor portfolio credit quality by the weighted-average risk grade of each class of commercial loan. Individual relationship managers review updated financial information for all pass grade loans to recalculate the risk grade on at least an annual basis. When a loan has a calculated 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 calculated 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.



	March 31, 2015			December 31, 2014
	Weighted Average Risk Grade	Loans		Weighted Average Risk Grade	Loans
Commercial and industrial:
Energy
Risk grades 1-8	5.88	$	1,734,701	5.37	$	1,740,455
Risk grade 9	9.00	24,922		9.00	27,313
Risk grade 10	10.00	36,632		10.00	161
Risk grade 11	11.00	22,158		11.00	5,380
Risk grade 12	12.00	636		12.00	636
Risk grade 13	13.00	—		13.00	—
Total energy	6.07	$	1,819,049	5.45	$	1,773,945
Other commercial
Risk grades 1-8	5.97	$	3,848,801	5.93	$	3,785,171
Risk grade 9	9.00	73,842		9.00	65,166
Risk grade 10	10.00	87,050		10.00	54,519
Risk grade 11	11.00	46,828		11.00	55,034
Risk grade 12	12.00	30,980		12.00	31,683
Risk grade 13	13.00	1,985		13.00	2,225
Total other commercial	6.22	$	4,089,486	6.16	$	3,993,798
Commercial real estate:
Buildings, land and other
Risk grades 1-8	6.57	$	3,135,623	6.53	$	3,148,339
Risk grade 9	9.00	104,344		9.00	72,906
Risk grade 10	10.00	90,872		10.00	87,889
Risk grade 11	11.00	40,812		11.00	43,336
Risk grade 12	12.00	17,074		12.00	19,501
Risk grade 13	13.00	71		13.00	138
Total commercial real estate	6.82	$	3,388,796	6.76	$	3,372,109
Construction
Risk grades 1-8	6.98	$	639,505	6.91	$	617,805
Risk grade 9	9.00	41,422		9.00	8,003
Risk grade 10	10.00	1,900		10.00	1,323
Risk grade 11	11.00	62		11.00	64
Risk grade 12	12.00	2,740		12.00	2,793
Risk grade 13	13.00	—		13.00	—
Total construction	7.13	$	685,629	6.97	$	629,988

We have established maximum loan to value standards to be applied during the origination process of commercial and consumer real estate loans. We do not subsequently monitor loan-to-value ratios (either individually or on a weighted-average basis) for loans that are subsequently considered to be of a pass grade (grades 9 or better) and/or current with respect to principal and interest payments. As stated above, when an individual commercial real estate loan has a calculated risk grade of 10 or higher, a special assets officer analyzes the loan to determine whether the loan is impaired. At that time, we reassess the loan to value position in the loan. If the loan is determined to be collateral dependent, specific allocations of the allowance for loan losses are made for the amount of any collateral deficiency. If a collateral deficiency is ultimately deemed to be uncollectible, the amount is charged-off. These loans and related assessments of collateral position are monitored on an individual, case-by-case basis. We do not monitor loan-to-value ratios on a weighted-average basis for commercial real estate loans having a calculated risk grade of 10 or higher. Nonetheless, there were three commercial real estate loans having a calculated risk grade of 10 or higher in excess of $5 million as of March 31, 2015, which totaled $33.2 million and had a weighted-average loan-to-value ratio of approximately 64.2%. When an individual consumer real estate loan becomes past due by more than 10 days, the assigned relationship manager will begin collection efforts. We only reassess the loan to value position in a consumer real estate loan if, during the course of the collections process, it is determined that the loan has become collateral dependent, and any collateral deficiency is recognized as a charge-off to the allowance for loan losses. Accordingly, we do not monitor loan-to-value ratios on a weighted-average basis for collateral dependent consumer real estate loans.

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.

Net (charge-offs)/recoveries, segregated by class of loans, were as follows:



	Three Months Ended March 31,
	2015			2014
Commercial and industrial:
Energy	$	2		$	(13	)
Other commercial	(852		)	(1,683		)
Commercial real estate:
Buildings, land and other	(307		)	(1,618		)
Construction	1			40
Consumer real estate	(28		)	23
Consumer and other	(812		)	(631		)
Total	$	(1,996	)	$	(3,882	)

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 126.9 at February 28, 2015 (most recent date available) and 129.4 at December 31, 2014. A higher TLI value implies more favorable economic conditions.

Allowance for Loan Losses. The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. Our allowance for loan loss methodology follows the accounting guidance set forth in U.S. generally accepted accounting principles and the Interagency Policy Statement on the Allowance for Loan and Lease Losses, which was jointly issued by U.S. bank regulatory agencies. In that regard, our allowance for loan losses includes allowance allocations calculated in accordance with ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.” Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. Our process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. The provision for loan losses also reflects the totality of actions taken on all loans for a particular period. In other words, the amount of the provision reflects not only the necessary increases in the allowance for loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools.

The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss and recovery experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. 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 determination of the appropriate level of the allowance is dependent upon a variety of factors beyond our control, including, among other things, the performance of our loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications. We monitor whether or not the allowance for loan loss allocation model, as a whole, calculates an appropriate level of allowance for loan losses that moves in direct correlation to the general macroeconomic and loan portfolio conditions we experience over time.

Our allowance for loan losses consists of three elements: (i) specific valuation allowances determined in accordance with ASC Topic 310 based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with ASC Topic 450 based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) general valuation allowances determined in accordance with ASC Topic 450 based on general economic conditions and other risk factors both internal and external to us.

The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of problem loans. Loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the obligor’s ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. This analysis is performed at the relationship manager level for all commercial loans. When a loan has a calculated grade of 10 or higher, a special assets officer analyzes the loan to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the allowance for loan losses to the loan. Specific valuation allowances 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.

Historical valuation allowances are calculated based on the historical gross loss experience of specific types of loans and the internal risk grade of such loans at the time they were charged-off. We calculate historical gross loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical gross loss ratios are periodically (no less than annually) updated based on actual charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical gross loss ratio and the total dollar amount of the loans in the pool. Our pools of similar loans include similarly risk-graded groups of commercial and industrial loans, commercial real estate loans, consumer real estate loans and consumer and other loans.

The components of the general valuation allowance include (i) the additional reserves allocated as a result of applying an environmental risk adjustment factor to the base historical loss allocation, (ii) the additional reserves allocated for loans to borrowers in distressed industries and (iii) the additional reserves allocated for groups of similar loans with risk characteristics that exceed certain concentration limits established by management.

The environmental adjustment factor is based upon a more qualitative analysis of risk and is calculated through a survey of senior officers who are involved in credit making decisions at a corporate-wide and/or regional level. On a quarterly basis, survey participants rate the degree of various risks utilizing a numeric scale that translates to varying grades of high, moderate or low levels of risk. The results are then input into a risk-weighting matrix to determine an appropriate environmental risk adjustment factor. The various risks that may be considered in the determination of the environmental adjustment factor include, among other things, (i) the experience, ability and effectiveness of the bank’s lending management and staff; (ii) the effectiveness of our loan policies, procedures and internal controls; (iii) changes in asset quality; (iv) the impact of legislative and governmental influences affecting industry sectors; (v) the effectiveness of the internal loan review function; (vi) the impact of competition on loan structuring and pricing; and (vii) the impact of rising interest rates on portfolio risk. In periods where the surveyed risks are perceived to be higher, the risk-weighting matrix will generally result in a higher environmental adjustment factor, which, in turn will result in higher levels of general valuation allowance allocations. The opposite holds true in periods where the surveyed risks are perceived to be lower.

General valuation allowances also include amounts allocated for loans to borrowers in distressed industries. To determine the amount of the allocation for each loan portfolio segment, management calculates the weighted-average risk grade for all loans to borrowers in distressed industries by loan portfolio segment. A multiple is then applied to the amount by which the weighted-average risk grade for loans to borrowers in distressed industries exceeds the weighted-average risk grade for all pass-grade loans within the loan portfolio segment to derive an allocation factor for loans to borrowers in distressed industries. The amount of the allocation for each loan portfolio segment is the product of this allocation factor and the outstanding balance of pass-grade loans within the identified distressed industries that have a risk grade of 6 or higher. Management identifies potential distressed industries by analyzing industry trends related to delinquencies, classifications and charge-offs. At March 31, 2015 and December 31, 2014, certain segments of contractors were considered to be a distressed industry based on elevated levels of delinquencies, classifications and charge-offs relative to other industries within our loan portfolio. Furthermore, we determined, through a review of borrower financial information that, as a whole, contractors have experienced, among other things, decreased revenues, reduced backlog of work, compressed margins and little, if any, net income.

General valuation allowances also include allocations for groups of loans with similar risk characteristics that exceed certain concentration limits established by management and/or our board of directors. Concentration risk limits have been established, among other things, for certain industry concentrations, large balance and highly leveraged credit relationships that exceed specified risk grades, and loans originated with policy, credit and/or collateral exceptions that exceed specified risk grades. Additionally, general valuation allowances are provided for loans that did not undergo a separate, independent concurrence review during the underwriting process (generally those loans under $1.0 million at origination). Our allowance methodology for general valuation allowances also includes a reduction factor for recoveries of prior charge-offs to compensate for the fact that historical loss allocations are based upon gross charge-offs rather than net. The adjustment for recoveries is based on the lower of annualized, year-to-date gross recoveries or the total gross recoveries for the preceding four quarters, adjusted, when necessary, for expected future trends in recoveries. General valuation allowances are also allocated for general macroeconomic risk related to current economic trends and other quantitative and qualitative factors that could impact our loan portfolio segments.

The following table presents details of the allowance for loan losses, segregated by loan portfolio segment.



	Commercial and Industrial			Commercial Real Estate			Consumer Real Estate			Consumer and Other			Unallocated		Total
March 31, 2015
Historical valuation allowances	$	35,339		$	14,620		$	2,046		$	11,900		$	—	$	63,905
Specific valuation allowances	1,404			71			—			—			—		1,475
General valuation allowances:
Environmental risk adjustment	7,263			3,546			478			3,060			—		14,347
Distressed industries	2,762			234			—			—			—		2,996
Excessive industry concentrations	5,903			530			—			—			—		6,433
Large relationship concentrations	2,690			1,855			—			—			—		4,545
Highly-leveraged credit relationships	5,395			1,707			—			—			—		7,102
Policy exceptions	2,116			886			—			—			—		3,002
Credit and collateral exceptions	2,168			908			—			—			—		3,076
Loans not reviewed by concurrence	2,043			2,261			2,364			1,178			—		7,846
Adjustment for recoveries	(5,199		)	(698		)	(211		)	(7,576		)	—		(13,684		)
General macroeconomic risk	2,829			1,185			230			421			—		4,665
Total	$	64,713		$	27,105		$	4,907		$	8,983		$	—	$	105,708
December 31, 2014
Historical valuation allowances	$	32,421		$	14,684		$	2,017		$	10,482		$	—	$	59,604
Specific valuation allowances	1,613			67			—			—			—		1,680
General valuation allowances:
Environmental risk adjustment	6,773			3,547			474			2,683			—		13,477
Distressed industries	3,090			3			—			—			—		3,093
Excessive industry concentrations	2,114			378			—			—			—		2,492
Large relationship concentrations	2,248			1,559			—			—			—		3,807
Highly-leveraged credit relationships	3,958			1,347			—			—			—		5,305
Policy exceptions	1,907			875			—			—			—		2,782
Credit and collateral exceptions	1,483			681			—			—			—		2,164
Loans not reviewed by concurrence	2,110			2,284			2,336			1,176			—		7,906
Adjustment for recoveries	(6,234		)	(1,800		)	(364		)	(7,439		)	—		(15,837		)
General macroeconomic risk	7,709			3,538			715			1,107			—		13,069
Total	$	59,192		$	27,163		$	5,178		$	8,009		$	—	$	99,542

We monitor whether or not the allowance for loan loss allocation model, as a whole, calculates an appropriate level of allowance for loan losses that moves in direct correlation to the general macroeconomic and loan portfolio conditions we experience over time. In assessing the general macroeconomic trends/conditions, we analyze trends in the components of the TLI, as well as any available information related to regional, national and international economic conditions and events and the impact such conditions and events may have on us and our customers. With regard to assessing loan portfolio conditions, we analyze trends in weighted-average portfolio risk-grades, classified and non-performing loans and charge-off activity. In periods where general macroeconomic and loan portfolio conditions are in a deteriorating trend or remain at deteriorated levels, based on historical trends, we would expect to see the allowance for loan loss allocation model, as a whole, calculate higher levels of required allowances than in periods where general macroeconomic and loan portfolio conditions are in an improving trend or remain at an elevated level, based on historical trends.

The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2015 and 2014. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.



	Commercial and Industrial			Commercial Real Estate			Consumer Real Estate			Consumer and Other			Unallocated		Total
Three months ended:
March 31, 2015
Beginning balance	$	59,192		$	27,163		$	5,178		$	8,009		$	—	$	99,542
Provision for loan losses	6,371			248			(243		)	1,786			—		8,162
Charge-offs	(2,132		)	(478		)	(80		)	(2,805		)	—		(5,495		)
Recoveries	1,282			172			52			1,993			—		3,499
Net charge-offs	(850		)	(306		)	(28		)	(812		)	—		(1,996		)
Ending balance	$	64,713		$	27,105		$	4,907		$	8,983		$	—	$	105,708

March 31, 2014
Beginning balance	$	52,790		$	22,590		$	5,230		$	5,010		$	6,818	$	92,438
Provision for loan losses	5,960			8			(720		)	1,312			40		6,600
Charge-offs	(2,367		)	(1,791		)	(21		)	(2,487		)	—		(6,666		)
Recoveries	671			213			44			1,856			—		2,784
Net charge-offs	(1,696		)	(1,578		)	23			(631		)	—		(3,882		)
Ending balance	$	57,054		$	21,020		$	4,533		$	5,691		$	6,858	$	95,156

The following table details the amount of the allowance for loan losses allocated to each portfolio segment as of March 31, 2015, December 31, 2014 and March 31, 2014, detailed on the basis of the impairment methodology we used:



	Commercial and Industrial		Commercial Real Estate		Consumer Real Estate		Consumer and Other		Unallocated		Total
March 31, 2015
Loans individually evaluated for impairment	$	1,404	$	71	$	—	$	—	$	—	$	1,475
Loans collectively evaluated for impairment	63,309		27,034		4,907		8,983		—		104,233
Balance at March 31, 2015	$	64,713	$	27,105	$	4,907	$	8,983	$	—	$	105,708
December 31, 2014
Loans individually evaluated for impairment	$	1,613	$	67	$	—	$	—	$	—	$	1,680
Loans collectively evaluated for impairment	57,579		27,096		5,178		8,009		—		97,862
Balance at December 31, 2014	$	59,192	$	27,163	$	5,178	$	8,009	$	—	$	99,542
March 31, 2014
Loans individually evaluated for impairment	$	2,731	$	776	$	—	$	—	$	—	$	3,507
Loans collectively evaluated for impairment	54,323		20,244		4,533		5,691		6,858		91,649
Balance at March 31, 2014	$	57,054	$	21,020	$	4,533	$	5,691	$	6,858	$	95,156

Our recorded investment in loans as of March 31, 2015, December 31, 2014 and March 31, 2014 related to each balance in the allowance for loan losses by portfolio segment and detailed on the basis of the impairment methodology we used was as follows:



	Commercial and Industrial		Commercial Real Estate		Consumer Real Estate		Consumer and Other		Unearned Discounts			Total
March 31, 2015
Loans individually evaluated for impairment	$	31,631	$	17,660	$	568	$	—	$	—		$	49,859
Loans collectively evaluated for impairment	5,876,904		4,056,765		851,835		403,118		(23,668		)	11,164,954
Ending balance	$	5,908,535	$	4,074,425	$	852,403	$	403,118	$	(23,668	)	$	11,214,813
December 31, 2014
Loans individually evaluated for impairment	$	32,496	$	20,499	$	596	$	—	$	—		$	53,591
Loans collectively evaluated for impairment	5,735,247		3,981,598		848,455		393,601		(24,957		)	10,933,944
Ending balance	$	5,767,743	$	4,002,097	$	849,051	$	393,601	$	(24,957	)	$	10,987,535
March 31, 2014
Loans individually evaluated for impairment	$	19,917	$	21,340	$	718	$	264	$	—		$	42,239
Loans collectively evaluated for impairment	5,086,809		3,474,799		818,279		352,056		(23,537		)	9,708,406
Ending balance	$	5,106,726	$	3,496,139	$	818,997	$	352,320	$	(23,537	)	$	9,750,645