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Allowance for Probable Loan Losses (Policies)

9 Months Ended

Sep. 30, 2011

Allowance for Probable Loan Losses

Allowance for loan loss

The allowance for probable loan losses consists of the aggregate loan loss allowances of the subsidiaries that hold loans. The allowances are established through charges to operations in the form of provisions for probable loan losses. Loan losses or recoveries are charged or credited directly to the allowances. The allowance for probable loan losses of each subsidiary is maintained at a level considered appropriate by management, based on estimated probable losses in the loan portfolio. The allowance for probable loan losses is derived from the following elements: (i) allowances established on specific loans, which are based on a review of the individual characteristics of each loan, including the customer’s ability to repay the loan, the underlying collateral values, and the industry the customer operates in (ii) allowances based on actual historical loss experience for similar types of loans in the Company’s loan portfolio and (iii) allowances based on general economic conditions, changes in the mix of loans, Company resources, border risk and credit quality indicators, among other things. All segments of the loan portfolio continue to be impacted by the prolonged economic downturn. Loans secured by real estate could be impacted negatively by the continued economic environment and resulting decrease in collateral values. Consumer loans may be impacted by continued and prolonged unemployment rates.

The Company’s management continually reviews the allowance for loan loss of the subsidiaries using the amounts determined from the allowances established on specific loans, allowance established on quantitative historical percentages, allowance based on qualitative data, and the loans charged off and recoveries to establish an appropriate amount to maintain in the Company’s allowance for loan loss. If the basis of the Company’s assumptions change, the allowance for loan loss would either decrease or increase and the Company would increase or decrease the provision for loan loss charged to operations accordingly. While the calculation of the allowance for probable loan losses utilizes management’s best judgment and all information available, the adequacy of the allowance is dependent on a variety of factors beyond the Company’s control, including, among other things, the performance of the entire loan portfolio, the economy, changes in interest rates and the view of regulatory authorities towards loan classifications.

The specific loan loss provision is determined using the following methods. Credit quality committee meetings are held on a weekly basis to proactively monitor the loan portfolio. The committee includes key personnel and the servicing loan officer. The committee reviews loan past due reports to determine if a loan has any potential problem and if a loan should be placed on the Company’s internal classified report. Additionally, the Company’s credit department reviews the majority of the Company’s loans regardless of whether they are past due and segregates any loans with potential problems for further review. The credit department will discuss the potential problem loans with the servicing loan officers to determine any relevant issues that were not discovered in the evaluation. Also, any analysis on loans that is provided through examinations by regulatory authorities is considered in the review process. After the above analysis is completed, the Company will determine if a loan should be placed on an internal classified report because of issues related to the analysis of the credit, credit documents, collateral and/or payment history. On a quarterly basis, an asset quality meeting is held to review the internal classified loan listings and progress reports on the loans included on the list.

A summary of the transactions in the allowance for probable loan losses by loan class is as follows:

		September 30, 2011
		Domestic																		Foreign
		Commercial			Commercial real estate: other construction & land development			Commercial real estate: farmland & commercial			Commercial real estate: multifamily			Residential: first lien			Residential: junior lien			Consumer			Foreign			Total
		(Dollars in Thousands)
Balance at December 31,		$	22,046		$	26,695		$	16,340		$	53		$	10,059		$	2,611		$	6,241		$	437		$	84,482
Losses charge to allowance		(11,873		)	(1,458		)	(1,955		)	—			(701		)	(979		)	(750		)	(13		)	(17,729		)
Recoveries credited to allowance		2,982			133			235			—			5			279			181			5			3,820
Net losses charged to allowance		(8,891		)	(1,325		)	(1,720		)	—			(696		)	(700		)	(569		)	(8		)	(13,909		)

Provision (credit) charged to operations		6,425			(7,088		)	9,324			996			(3,564		)	4,215			(3,554		)	1,079			7,833

Balance at September 30,		$	19,580		$	18,282		$	23,944		$	1,049		$	5,799		$	6,126		$	2,118		$	1,508		$	78,406

		September 30,
		2010
		(Dollars in Thousands)

Balance at December 31,		$	95,393

Losses charged to allowance		(29,036		)
Recoveries credited to allowance		998
Net losses charged to allowance		(28,038		)

Provision charged to operations		15,495

Balance at September 30,		$	82,850

The allowance for probable loan losses is a reserve established through a provision for probable loan losses charged to expense, which represents management’s best estimate of probable loan losses when evaluating loans (i) individually or (ii) collectively. The Company’s provision for probable loan losses decreased from the nine months ended September 30, 2010 to September 30, 2011 mainly due to a decrease in the Company’s charge-off experience over the last year and a decrease in the loan portfolio. While the Texas and Oklahoma economies are performing better and appear to be recovering faster than other parts of the country, Texas and Oklahoma are not completely immune to the problems associated with the U.S. economy.

The table below provides additional information on the balance of loans individually or collectively evaluated for impairment and their related allowance, by loan class as of September 30, 2011 and December 31, 2010:

		September 30, 2011
		Loans individually evaluated for impairment						Loans collectively evaluated for impairment
		(Dollars in Thousands)
		Recorded Investment			Allowance			Recorded Investment			Allowance

Domestic
Commercial		$	23,673		$	8,049		$	746,430		$	11,531
Commercial real estate: other construction & land development		61,286			3,000			1,194,082			15,282
Commercial real estate: farmland & commercial		47,301			7,923			1,656,066			16,021
Commercial real estate: multifamily		431			—			116,978			1,049
Residential: first lien		2,181			94			520,158			5,705
Residential: junior lien		1,722			—			404,824			6,126
Consumer		1,299			—			99,995			2,118
Foreign		—			—			245,774			1,508

Total		$	137,893		$	19,066		$	4,984,307		$	59,340

		December 31, 2010
		Loans individually evaluated for impairment						Loans collectively evaluated for impairment
		(Dollars in Thousands)
		Recorded Investment			Allowance			Recorded Investment			Allowance

Domestic
Commercial		$	23,426		$	8,138		$	807,098		$	13,908
Commercial real estate: other construction & land development		77,207			592			1,396,264			26,103
Commercial real estate: farmland & commercial		21,844			3,441			1,666,719			12,899
Commercial real estate: multifamily		473			—			96,318			53
Residential: first lien		2,015			—			531,440			10,059
Residential: junior lien		199			—			415,328			2,611
Consumer		29			—			126,018			6,241
Foreign		7			—			245,618			437

Total		$	125,200		$	12,171		$	5,284,803		$	72,311

The table below provides additional information on loans accounted for on a non-accrual basis by loan class at September 30, 2011 and December 31, 2010:

		September 30, 2011			December 31, 2010
		(Dollars in Thousands)

Domestic
Commercial		$	22,880		$	22,614
Commercial real estate: other construction & land development		55,194			77,207
Commercial real estate: farmland & commercial		26,129			5,486
Commercial real estate: multifamily		431			473
Residential: first lien		1,856			2,015
Residential: junior lien		76			199
Consumer		52			29
Foreign		—			7

Total non-accrual loans		$	106,618		$	108,030

Impaired loans are those loans where it is probable that all amounts due according to contractual terms of the loan agreement will not be collected. The Company has identified these loans through its normal loan review procedures. Impaired loans are measured based on (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of the collateral if the loan is collateral dependent. Substantially all of the Company’s impaired loans are measured at the fair value of the collateral. In limited cases, the Company may use other methods to determine the level of impairment of a loan if such loan is not collateral dependent.

The following tables detail key information regarding the Company’s impaired loans by loan class at September 30, 2011 and December 31, 2010:

		September 30, 2011
		Recorded Investment			Unpaid Principal Balance			Related Allowance			Average Recorded Investment			Interest Recognized
		(Dollars in Thousands)

Loans with Related Allowance
Domestic
Commercial		$	23,018		$	23,061		$	8,049		$	23,084		$	30
Commercial real estate: other construction & land development		35,250			35,272			3,000			35,248			—
Commercial real estate: farmland & commercial		29,915			29,929			7,923			24,160			607
Residential: first lien		389			389			94			389			—
Total impaired loans with related allowance		$	88,572		$	88,651		$	19,066		$	82,881		$	637

		September 30, 2011
		Recorded Investment			Unpaid Principal Balance			Average Recorded Investment			Interest Recognized
		(Dollars in Thousands)

Loans with No Related Allowance
Domestic
Commercial		$	655		$	665		$	662		$	—
Commercial real estate: other construction & land development		26,036			26,036			27,680			58
Commercial real estate: farmland & commercial		17,386			17,832			17,145			48
Commercial real estate: multifamily		431			431			447			—
Residential: first lien		1,792			1,847			1,629			14
Residential: junior lien		1,722			1,729			1,708			86
Consumer		1,299			1,301			1,624			—
Total impaired loans with no related allowance		$	49,321		$	49,841		$	50,895		$	206

		December 31, 2010
		Recorded Investment			Unpaid Principal Balance			Related Allowance			Average Recorded Investment			Interest Recognized
		(Dollars in Thousands)

Loans with Related Allowance
Domestic
Commercial		$	23,062		$	23,071		$	8,138		$	23,096		$	42
Commercial real estate: other construction & land development		10,603			10,645			592			10,622			—
Commercial real estate: farmland & commercial		17,841			17,878			3,441			18,475			860
Total impaired loans with related allowance		$	51,506		$	51,594		$	12,171		$	52,193		$	902

		December 31, 2010
		Recorded Investment			Unpaid Principal Balance			Average Recorded Investment			Interest Recognized
		(Dollars in Thousands)

Loans with No Related Allowance
Domestic
Commercial		$	364		$	980		$	993		$	30
Commercial real estate: other construction & land development		66,604			66,755			68,608			2
Commercial real estate: farmland & commercial		4,003			5,606			5,594			—
Commercial real estate: multifamily		473			473			500			—
Residential: first lien		2,015			2,143			2,297			—
Residential: junior lien		199			226			228			—
Consumer		29			46			49			—
Foreign		7			7			19			—
Total impaired loans with no related allowance		$	73,694		$	76,236		$	78,288		$	32

The impaired loans included in the tables above were primarily comprised of collateral dependent commercial loans, which have not been fully charged off. A portion of the impaired loans have adequate collateral and credit enhancements not requiring a related allowance for loan loss. The level of impaired loans is reflective of the economic weakness that has been created by the financial crisis and the subsequent economic downturn. Management is confident the Company’s loss exposure regarding these credits will be significantly reduced due to the Company’s long-standing practices that emphasize secured lending with strong collateral positions and guarantor support. Management is likewise confident the allowance for probable loan losses is adequate. The Company has no direct exposure to sub-prime loans in its loan portfolio, but the sub-prime crisis has affected the credit markets on a national level, and as a result, the Company has experienced an increasing amount of impaired loans; however, management’s decision to place loans in this category does not necessarily mean that the Company will experience significant losses from these loans or significant increases in impaired loans from these levels.

Management of the Company recognizes the risks associated with these impaired loans. However, management’s decision to place loans in this category does not necessarily mean that losses will occur. In the current environment, troubled loan management can be protracted because of the legal and process problems that delay the collection of an otherwise collectable loan. Additionally, management believes that the collateral related to these impaired loans and/or the secondary support from guarantors mitigates the potential for losses from impaired loans. It is also important to note that even though the economic conditions in Texas and Oklahoma are weakened, we believe these markets are improving and better positioned to recover than many other areas of the country.

The subsidiaries charge off that portion of any loan which management considers to represent a loss as well as that portion of any other loan which is classified as a “loss” by bank examiners. Commercial and industrial or real estate loans are generally considered by management to represent a loss, in whole or part, when an exposure beyond any collateral coverage is apparent and when no further collection of the loss portion is anticipated based on the borrower’s financial condition and general economic conditions in the borrower’s industry. Generally, unsecured consumer loans are charged-off when 90 days past due.

While management of the Company considers that it is generally able to identify borrowers with financial problems reasonably early and to monitor credit extended to such borrowers carefully, there is no precise method of predicting loan losses. The determination that a loan is likely to be uncollectible and that it should be wholly or partially charged-off as a loss is an exercise of judgment. Similarly, the determination of the adequacy of the allowance for probable loan losses can be made only on a subjective basis. It is the judgment of the Company’s management that the allowance for probable loan losses at September 30, 2011 was adequate to absorb probable losses from loans in the portfolio at that date.

The following table presents information regarding the aging of past due loans by loan class at September 30, 2011 and December 31, 2010:

		September 30, 2011
		30 — 59 Days			60 — 89 Days			90 Days or Greater			90 Days or greater & still accruing			Total Past due			Current			Total Portfolio
		(Dollars in Thousands)
Domestic
Commercial		$	4,021		$	817		$	2,163		$	1,429		$	7,001		$	763,102		$	770,103
Commercial real estate: other construction & land development		11,286			741			46,319			5,315			58,346			1,197,022			1,255,368
Commercial real estate: farmland & commercial		6,111			4,069			17,679			1,329			27,859			1,675,508			1,703,367
Commercial real estate: multifamily		—			—			431			—			431			116,978			117,409
Residential: first lien		5,679			7,861			6,883			5,469			20,423			501,916			522,339
Residential: junior lien		798			390			553			486			1,741			404,805			406,546
Consumer		2,150			630			936			889			3,716			97,578			101,294
Foreign		1,813			556			77			77			2,446			243,328			245,774
Total past due loans		$	31,858		$	15,064		$	75,041		$	14,994		$	121,963		$	5,000,237		$	5,122,200

		December 31, 2010
		30 — 59 Days			60 — 89 Days			90 Days or Greater			90 Days or greater & still accruing			Total Past due			Current			Total Portfolio
		(Dollars in Thousands)
Domestic
Commercial		$	3,734		$	861		$	23,239		$	1,029		$	27,834		$	802,690		$	830,524
Commercial real estate: other construction & land development		2,685			2,896			50,618			11,507			56,199			1,417,272			1,473,471
Commercial real estate: farmland & commercial		3,077			817			6,600			1,585			10,494			1,678,069			1,688,563
Commercial real estate: multifamily		73			185			473			—			731			96,060			96,791
Residential: first lien		4,884			3,436			5,136			3,472			13,456			519,999			533,455
Residential: junior lien		703			272			457			277			1,432			414,095			415,527
Consumer		1,518			587			1,505			1,477			3,610			122,437			126,047
Foreign		196			380			501			501			1,077			244,548			245,625
Total past due loans		$	16,870		$	9,434		$	88,529		$	19,848		$	114,833		$	5,295,170		$	5,410,003

The Company’s internal classified report is segregated into the following categories: (i) “Special Review Credits,” (ii) “Watch List - Pass Credits,” or (iii) “Watch List - Substandard Credits.” The loans placed in the “Special Review Credits” category reflect the Company’s opinion that the loans reflect potential weakness which require monitoring on a more frequent basis. The “Special Review Credits” are reviewed and discussed on a regular basis with the credit department and the lending staff to determine if a change in category is warranted. The loans placed in the “Watch List - Pass Credits” category reflect the Company’s opinion that the credit contains weaknesses which represent a greater degree of risk, which warrant “extra attention.” The “Watch List — Pass Credits” are reviewed and discussed on a regular basis with the credit department and the lending staff to determine if a change in category is warranted. The loans placed in the “Watch List — Substandard Credits” classification are considered to be potentially inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral. These credit obligations, even if apparently protected by collateral value, have shown defined weaknesses related to adverse financial, managerial, economic, market or political conditions which may jeopardize repayment of principal and interest. Furthermore, there is the possibility that some future loss could be sustained by the Company if such weaknesses are not corrected. For loans that are classified as impaired, management evaluates these credits under Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan,” now included as part of ASC Topic 310-10, “Receivables,” criteria and, if deemed necessary, a specific reserve is allocated to the credit. The specific reserve allocated under ASC 310-10, is based on (i) the present value of expected future cash flows discounted at the loan’s effective interest rate; (ii) the loan’s observable market price; or (iii) the fair value of the collateral if the loan is collateral dependent. Substantially all of the Company’s loans evaluated as impaired under ASC 310-10 are measured using the fair value of collateral method. In limited cases, the Company may use other methods to determine the specific reserve of a loan under ASC 310-10 if such loan is not collateral dependent.

The allowance based on historical loss experience on the Company’s remaining loan portfolio, which includes the “Special Review Credits,” “Watch List - Pass Credits,” and “Watch List - Substandard Credits” is determined by segregating the remaining loan portfolio into certain categories such as commercial loans, installment loans, international loans, loan concentrations and overdrafts. Installment loans are then further segregated by number of days past due. A historical loss percentage, adjusted for (i) management’s evaluation of changes in lending policies and procedures, (ii) current economic conditions in the market area served by the Company, (iii) other risk factors, (iv) the effectiveness of the internal loan review function, (v) changes in loan portfolios, and (vi) the composition and concentration of credit volume is applied to each category. Each category is then added together to determine the allowance allocated under ASC Topic 450-20.