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Allowance for Probable Loan Losses

9 Months Ended

Sep. 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 impaired 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 September 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 June 30,	$	24,688		$	13,242		$	20,551		$	803		$	3,987		$	4,410		$	1,476		$	1,221		$	70,378
Losses charge to allowance	(3,521		)	(3		)	(1		)	—			(63		)	(282		)	(159		)	(7		)	(4,036		)
Recoveries credited to allowance	821			13			32			—			4			62			58			—			990
Net losses charged to allowance	(2,700		)	10			31			—			(59		)	(220		)	(101		)	(7		)	(3,046		)

Provision (credit) charged to operations	3,312			44			1,138			(27		)	272			626			31			(47		)	5,349

Balance at September 30,	$	25,300		$	13,296		$	21,720		$	776		$	4,200		$	4,816		$	1,406		$	1,167		$	72,681

	Quarter ended 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 June 30,	$	20,627		$	20,076		$	21,328		$	854	$	6,110		$	5,533		$	2,378		$	1,575		$	78,481
Losses charge to allowance	(5,054		)	(240		)	(1,310		)	—		(42		)	(413		)	(180		)	—			(7,239		)
Recoveries credited to allowance	1,311			59			41			—		1			15			63			4			1,494
Net losses charged to allowance	(3,743		)	(181		)	(1,269		)	—		(41		)	(398		)	(117		)	4			(5,745		)

Provision (credit) charged to operations	2,696			(1,613		)	3,885			195		(270		)	991			(143		)	(71		)	5,670

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

	Nine Months Ended September 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	(10,009		)	(7,574		)	(12,477		)	—			(129		)	(993		)	(595		)	(12		)	(31,789		)
Recoveries credited to allowance	2,823			225			163			—			7			168			151			—			3,537
Net losses charged to allowance	(7,186		)	(7,349		)	(12,314		)	—			(122		)	(825		)	(444		)	(12		)	(28,252		)

Provision (credit) charged to operations	5,869			705			9,807			(227		)	(240		)	881			126			(180		)	16,741

Balance at September 30,	$	25,300		$	13,296		$	21,720		$	776		$	4,200		$	4,816		$	1,406		$	1,167		$	72,681

	Nine Months Ended 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

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 September 30, 2012 and December 31, 2011:

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

Domestic
Commercial	$	23,516	$	13,966	$	793,200	$	11,334
Commercial real estate: other construction & land development	33,949		568		1,158,324		12,728
Commercial real estate: farmland & commercial	20,882		3,234		1,650,049		18,486
Commercial real estate: multifamily	368		—		97,165		776
Residential: first lien	3,487		23		447,821		4,177
Residential: junior lien	1,857		—		379,974		4,816
Consumer	1,273		—		78,181		1,406
Foreign	92		—		192,890		1,167

Total	$	85,424	$	17,791	$	4,797,604	$	54,890

	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 September 30, 2012 and December 31, 2011:

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

Domestic
Commercial	$	22,662	$	26,819
Commercial real estate: other construction & land development	31,698		54,336
Commercial real estate: farmland & commercial	18,619		34,910
Commercial real estate: multifamily	368		411
Residential: first lien	1,796		1,848
Residential: junior lien	235		135
Consumer	42		46
Foreign	47		—

Total non-accrual loans	$	75,467	$	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 September 30, 2012 and December 31, 2011:

	September 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	$	22,704	$	22,704	$	13,966	$	22,729	$	10	$	22,517	$	29
Commercial real estate: other construction & land development	3,671		3,671		568		3,671		—		23,479		—
Commercial real estate: farmland & commercial	6,284		9,439		3,234		7,117		23		11,518		69
Residential: first lien	197		276		23		198		—		202		—
Total impaired loans with related allowance	$	32,856	$	36,090	$	17,791	$	33,715	$	33	$	57,716	$	98

	September 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	$	812	$	956	$	840	$	1	$	538	$	3
Commercial real estate: other construction & land development	30,278		30,417		26,689		23		27,632		122
Commercial real estate: farmland & commercial	14,598		15,315		14,069		—		14,850		8
Commercial real estate: multifamily	368		368		374		—		388		—
Residential: first lien	3,290		3,402		2,957		15		2,485		31
Residential: junior lien	1,857		1,950		1,836		25		1,958		79
Consumer	1,273		1,276		1,271		—		1,149		—
Foreign	92		92		92		—		61		1
Total impaired loans with no related allowance	$	52,568	$	53,776	$	48,128	$	64	$	49,061	$	244

	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 September 30, 2011:

	September 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	$	23,007	$	10	$	23,036	$	30
Commercial real estate: other construction & land development	34,258		—		31,132		—
Commercial real estate: farmland & commercial	24,833		194		22,759		607
Residential: first lien	389		—		1,205		—
Total impaired loans with related allowance	$	82,487	$	204	$	78,132	$	637

	September 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	$	572	$	—	$	459	$	—
Commercial real estate: other construction & land development	21,153		58		25,972		58
Commercial real estate: farmland & commercial	11,686		48		7,487		48
Commercial real estate: multifamily	432		—		447		—
Residential: first lien	1,470		10		1,720		15
Residential: junior lien	1,725		34		1,749		86
Consumer	1,288		—		1,192		—
Foreign	—		—		2		—
Total impaired loans with no related allowance	$	38,326	$	150	$	39,028	$	207

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 nine months ended September 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 September 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 September 30, 2012 and December 31, 2011:

	September 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	$	6,497	$	6,764	$	24,902	$	24,239	$	38,163	$	778,553	$	816,716
Commercial real estate: other construction & land development	3,855		25,458		18,716		864		48,029		1,144,244		1,192,273
Commercial real estate: farmland & commercial	3,288		2,298		8,486		537		14,072		1,656,859		1,670,931
Commercial real estate: multifamily	161		—		504		137		665		96,868		97,533
Residential: first lien	3,754		2,272		10,892		9,470		16,918		434,390		451,308
Residential: junior lien	1,007		354		442		223		1,803		380,028		381,831
Consumer	1,926		348		809		793		3,083		76,371		79,454
Foreign	2,194		931		151		104		3,276		189,706		192,982
Total past due loans	$	22,682	$	38,425	$	64,902	$	36,367	$	126,009	$	4,757,019	$	4,883,028

	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 September 30, 2012 and December 31, 2011 is as follows:

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

Domestic
Commercial	$	698,626	$	5,154	$	4,956	$	84,464	$	23,516
Commercial real estate: other construction & land development	1,116,692		14,810		6,711		20,111		33,949
Commercial real estate: farmland & commercial	1,500,498		87,246		41,935		20,370		20,882
Commercial real estate: multifamily	97,111		—		—		54		368
Residential: first lien	440,959		526		—		6,336		3,487
Residential: junior lien	378,087		78		309		1,500		1,857
Consumer	78,146		—		35		—		1,273
Foreign	192,852		—		38		—		92
Total	$	4,502,971	$	107,814	$	53,984	$	132,835	$	85,424

	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