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Allowance for Probable Loan Losses

6 Months Ended

Jun. 30, 2012

Note 4 - Allowance for Probable Loan Losses

The allowance for probable loan losses primarily consists of the aggregate loan loss allowances of the bank subsidiaries. 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 bank 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 in which the customer operates, (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 losses of the bank subsidiaries using the amounts determined from the allowances established on specific loans, the allowance established on quantitative historical loss percentages, and the allowance based on qualitative data to establish an appropriate amount to maintain in the Company’s allowance for loan losses. Should any of the factors considered by management in evaluating the adequacy of the allowance for probable loan losses change, the Company’s estimate of probable loan losses could also change, which could affect the level of future provisions for probable loan losses. 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. On a weekly basis, loan past due reports are reviewed by the servicing loan officer to determine if a loan has any potential problems 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, an analysis of 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.

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

	Quarter ended June 30, 2012
	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 March 31,	$	24,577		$	19,766		$	21,810		$	849		$	4, 379		$	4,505		$	1,602		$	1,293		$	78,781
Losses charge to allowance	(3,064		)	(7,500		)	(4,482		)	—			(30		)	(399		)	(189		)	(5		)	(15,669		)
Recoveries credited to allowance	758			207			100			—			1			61			32			—			1,159
Net losses charged to allowance	(2,306		)	(7,293		)	(4,382		)	—			(29		)	(338		)	(157		)	(5		)	(14,510		)

(Credit) provision charged to operations	2,417			769			3,123			(46		)	(363		)	243			31			(67		)	6,107

Balance at June 30,	$	24,688		$	13,242		$	20,551		$	803		$	3,987		$	4,410		$	1,476		$	1,221		$	70,378

	Quarter ended June 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 March 31,	$	21,793		$	31,471		$	18,562		$	231	$	4,441		$	4,273		$	4,058		$	568		$	85,397
Losses charge to allowance	(3,865		)	(277		)	(645		)	—		(638		)	(331		)	(261		)	(4		)	(6,021		)
Recoveries credited to allowance	771			71			60			—		2			67			50			1			1,022
Net losses charged to allowance	(3,094		)	(206		)	(585		)	—		(636		)	(264		)	(211		)	(3		)	(4,999		)

(Credit) provision charged to operations	1,928			(11,189		)	3,351			623		2,305			1,524			(1,469		)	1,010			(1,917		)

Balance at June 30,	$	20,627		$	20,076		$	21,328		$	854	$	6,110		$	5,533		$	2,378		$	1,575		$	78,481

	Six Months Ended June 30, 2012
	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,	$	26,617		$	19,940		$	24,227		$	1,003		$	4,562		$	4,760		$	1,724		$	1,359		$	84,192
Losses charge to allowance	(6,488		)	(7,571		)	(12,476		)	—			(66		)	(711		)	(436		)	(5		)	(27,753		)
Recoveries credited to allowance	2,002			212			131			—			3			106			93			—			2,547
Net losses charged to allowance	(4,486		)	(7,359		)	(12,345		)	—			(63		)	(605		)	(343		)	(5		)	(25,206		)

(Credit) provision charged to operations	2,557			661			8,669			(200		)	(512		)	255			95			(133		)	11,392

Balance at June 30,	$	24,688		$	13,242		$	20,551		$	803		$	3,987		$	4,410		$	1,476		$	1,221		$	70,378

	Six Months Ended June 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	(6,819		)	(1,218		)	(645		)	—		(659		)	(566		)	(570		)	(13		)	(10,490		)
Recoveries credited to allowance	1,671			74			194			—		4			264			118			1			2,326
Net losses charged to allowance	(5,148		)	(1,144		)	(451		)	—		(655		)	(302		)	(452		)	(12		)	(8,164		)

(Credit) provision charged to operations	3,729			(5,475		)	5,439			801		(3,294		)	3,224			(3,411		)	1,150			2,163

Balance at June 30,	$	20,627		$	20,076		$	21,328		$	854	$	6,110		$	5,533		$	2,378		$	1,575		$	78,481

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 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 June 30, 2012 and December 31, 2011:

	June 30, 2012
	Loans individually evaluated for impairment				Loans collectively evaluated for impairment
	(Dollars in Thousands)
	Recorded Investment		Allowance		Recorded Investment		Allowance

Domestic
Commercial	$	28,053	$	15,098	$	780,188	$	9,590
Commercial real estate: other construction & land development	25,716		568		1,184,775		12,674
Commercial real estate: farmland & commercial	18,328		2,942		1,604,725		17,609
Commercial real estate: multifamily	382		—		101,594		803
Residential: first lien	2,752		23		459,751		3,964
Residential: junior lien	1,910		—		377,899		4,410
Consumer	1,079		—		82,120		1,476
Foreign	45		—		209,005		1,221

Total	$	78,265	$	18,631	$	4,800,057	$	51,747

	December 31, 2011
	Loans individually evaluated for impairment				Loans collectively evaluated for impairment
	(Dollars in Thousands)
	Recorded Investment		Allowance		Recorded Investment		Allowance

Domestic
Commercial	$	27,603	$	14,402	$	746,213	$	12,215
Commercial real estate: other construction & land development	60,428		3,073		1,212,961		16,867
Commercial real estate: farmland & commercial	42,231		9,754		1,622,456		14,473
Commercial real estate: multifamily	411		—		121,188		1,003
Residential: first lien	2,290		23		493,432		4,539
Residential: junior lien	1,962		—		398,186		4,760
Consumer	1,334		—		92,775		1,724
Foreign	46		—		229,959		1,359

Total	$	136,305	$	27,252	$	4,917,170	$	56,940

The table below provides additional information on loans accounted for on a non-accrual basis by loan class at June 30, 2012 and December 31, 2011:

	June 30, 2012		December 31, 2011
	(Dollars in Thousands)

Domestic
Commercial	$	27,187	$	26,819
Commercial real estate: other construction & land development	25,716		54,336
Commercial real estate: farmland & commercial	16,065		34,910
Commercial real estate: multifamily	382		411
Residential: first lien	1,728		1,848
Residential: junior lien	214		135
Consumer	66		46
Foreign	—		—

Total non-accrual loans	$	71,358	$	118,505

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 June 30, 2012 and December 31, 2011:

	June 30, 2012
							Quarter to Date				Year to Date
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Recognized		Average Recorded Investment		Interest Recognized
	(Dollars in Thousands)

Loans with Related Allowance
Domestic
Commercial	$	24,256	$	24,256	$	15,098	$	24,271	$	—	$	24,417	$	10
Commercial real estate: other construction & land development	3,671		3,671		568		27,377		—		33,384		—
Commercial real estate: farmland & commercial	8,817		11,954		2,942		12,553		23		13,539		46
Residential: first lien	201		201		23		202		—		203		—
Total impaired loans with related allowance	$	36,945	$	40,082	$	18,631	$	64,403	$	23	$	71,543	$	56

	June 30, 2012
					Quarter to Date				Year to Date
	Recorded Investment		Unpaid Principal Balance		Average Recorded Investment		Interest Recognized		Average Recorded Investment		Interest Recognized
	(Dollars in Thousands)

Loans with No Related Allowance
Domestic
Commercial	$	3,797	$	3,908	$	3,798	$	1	$	3,808	$	1
Commercial real estate: other construction & land development	22,045		22,110		29,816		41		31,627		99
Commercial real estate: farmland & commercial	9,511		9,854		11,545		—		11,996		8
Commercial real estate: multifamily	382		382		387		—		394		—
Residential: first lien	2,551		2,588		2,681		11		2,596		16
Residential: junior lien	1,910		1,987		2,113		27		2,119		54
Consumer	1,080		1,081		1,178		—		1,323		—
Foreign	45		45		45		1		45		1
Total impaired loans with no related allowance	$	41,321	$	41,955	$	51,563	$	81	$	53,908	$	179

	December 31, 2011
							Year to Date
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Recognized
	(Dollars in Thousands)

Loans with Related Allowance
Domestic
Commercial	$	24,108	$	24,108	$	14,402	$	24,145	$	41
Commercial real estate: other construction & land development	34,417		34,432		3,073		34,709		—
Commercial real estate: farmland & commercial	28,636		28,671		9,754		28,883		817
Residential: first lien	208		208		23		214		—
Total impaired loans with related allowance	$	87,369	$	87,419	$	27,252	$	87,951	$	858

	December 31, 2011
					Year to Date
	Recorded Investment		Unpaid Principal Balance		Average Recorded Investment		Interest Recognized
	(Dollars in Thousands)

Loans with No Related Allowance
Domestic
Commercial	$	3,495	$	3,932	$	3,942	$	20
Commercial real estate: other construction & land development	26,011		26,112		27,722		128
Commercial real estate: farmland & commercial	13,595		15,394		16,271		102
Commercial real estate: multifamily	411		411		439		—
Residential: first lien	2,082		2,220		2,230		27
Residential: junior lien	1,962		1,970		1,980		118
Consumer	1,334		1,338		1,729		—
Foreign	46		46		46		4
Total impaired loans with no related allowance	$	48,936	$	51,423	$	54,359	$	399

The following tables detail key information regarding the Company’s average recorded investment in impaired loans and interest recognized on impaired loans by loan class at June 30, 2011:

	June 30, 2011
	Quarter to Date				Year to Date
	Average Recorded Investment		Interest Recognized		Average Recorded Investment		Interest Recognized
	(Dollars in thousands)
Loans with Related Allowance
Domestic
Commercial	$	22,944	$	10	$	22,948	$	20
Commercial real estate: other construction & land development	27,815		140		32,873		328
Commercial real estate: farmland & commercial	22,267		207		22,231		413
Residential: first lien	519		—		1,338		—
Total impaired loans with related allowance	$	73,545	$	357	$	79,390	$	761

	June 30, 2011
	Quarter to Date				Year to Date
	Average Recorded Investment		Interest Recognized		Average Recorded Investment		Interest Recognized
	(Dollars in Thousands)

Loans with No Related Allowance
Domestic
Commercial	$	439	$	4	$	458	$	9
Commercial real estate: other construction & land development	24,637		24		28,473		56
Commercial real estate: farmland & commercial	5,501		—		4,783		—
Commercial real estate: multifamily	445		—		454		—
Residential: first lien	1,944		3		2,000		3
Residential: junior lien	1,531		48		1,535		48
Consumer	1,228		—		1,372		—
Foreign	2		––		3		––
Total impaired loans with no related allowance	$	35,727	$	79	$	39,078	$	116

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’s decision to place a loan in this category does not mean that losses will occur. In the current environment, troubled loan management can be protracted because of legal and process problems that delay the collection of an otherwise collectible loan. From time to time, the bank subsidiaries foreclose on property by transferring title of the property used as collateral for a loan as a means of paying off the debt when all other means of repayment are extinguished. For the six months ended June 30, 2012, the level of impaired other construction and land development loans and commercial real estate and farmland loans was significantly impacted primarily by the transfer of loans to other assets through the foreclosure process when compared to balances at December 31, 2011. 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 reserve 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. 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. Loans accounted for as “troubled debt restructuring,” which are included in impaired loans, were not significant.

The bank 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 June 30, 2012 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 June 30, 2012 and December 31, 2011:

	June 30, 2012
	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	$	4,739	$	1,364	$	5,511	$	350	$	11,614	$	796,627	$	808,241
Commercial real estate: other construction & land development	8,933		41		24,901		1,032		33,875		1,176,616		1,210,491
Commercial real estate: farmland & commercial	3,687		1,350		6,371		935		11,408		1,611,645		1,623,053
Commercial real estate: multifamily	186		—		382		—		568		101,408		101,976
Residential: first lien	4,930		2,216		11,445		10,117		18,591		443,912		462,503
Residential: junior lien	680		211		419		273		1,310		378,499		379,809
Consumer	1,288		504		985		919		2,777		80,422		83,199
Foreign	1,989		241		54		54		2,284		206,766		209,050
Total past due loans	$	26,432	$	5,927	$	50,068	$	13,680	$	82,427	$	4,795,895	$	4,878,322

	December 31, 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	$	5,180	$	1,369	$	1,842	$	1,490	$	8,391	$	765,425	$	773,816
Commercial real estate: other construction & land development	23,426		4,360		49,887		979		77,673		1,195,716		1,273,389
Commercial real estate: farmland & commercial	9,467		10,269		7,879		1,231		27,615		1,637,072		1,664,687
Commercial real estate: multifamily	450		—		411		—		861		120,738		121,599
Residential: first lien	6,207		2,757		10,295		9,382		19,259		476,463		495,722
Residential: junior lien	1,433		378		368		320		2,179		397,969		400,148
Consumer	1,643		408		912		866		2,963		91,146		94,109
Foreign	666		53		20		20		739		229,266		230,005
Total past due loans	$	48,472	$	19,594	$	71,614	$	14,288	$	139,680	$	4,913,795	$	5,053,475

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 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 450-20.

A summary of the loan portfolio by credit quality indicator by loan class at June 30, 2012 and December 31, 2011 is as follows:

	June 30, 2012
	Pass		Special Review		Watch List - Pass		Watch List - Substandard		Watch List - Impaired
	(Dollars in Thousands)

Domestic
Commercial	$	691,662	$	5,460	$	5,522	$	77,544	$	28,053
Commercial real estate: other construction & land development	1,131,653		14,641		5,411		33,070		25,716
Commercial real estate: farmland & commercial	1,453,930		84,131		44,381		22,283		18,328
Commercial real estate: multifamily	101,538		—		—		56		382
Residential: first lien	452,856		366		33		6,496		2,752
Residential: junior lien	376,000		79		320		1,500		1,910
Consumer	82,083		—		37		—		1,079
Foreign	208,960		—		45		—		45
Total	$	4,498,682	$	104,677	$	55,749	$	140,949	$	78,265

	December 31, 2011
	Pass		Special Review		Watch List - Pass		Watch List - Substandard		Watch List - Impaired
	(Dollars in Thousands)

Domestic
Commercial	$	655,154	$	5,279	$	6,361	$	79,419	$	27,603
Commercial real estate: other construction & land development	1,058,843		76,722		11,083		66,313		60,428
Commercial real estate: farmland & commercial	1,449,822		83,581		40,510		48,543		42,231
Commercial real estate: multifamily	121,188		—		—		—		411
Residential: first lien	490,924		132		974		1,402		2,290
Residential: junior lien	397,861		—		319		6		1,962
Consumer	92,714		—		41		20		1,334
Foreign	229,898		—		61		—		46
Total	$	4,496,404	$	165,714	$	59,349	$	195,703	$	136,305