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 impaired 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 loan loss provision is determined using the following methods. On a weekly basis, loan past due reports are reviewed by the credit quality committee 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 for proper internal classification purposes 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, 2014
	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,	$	27,923		$	13,475		$	18,934		$	819		$	3,524		$	3,968		$	748		$	1,017		$	70,408
Losses charge to allowance	(2,379		)	(399		)	(170		)	—			(103		)	(7		)	(222		)	(47		)	(3,327		)
Recoveries credited to allowance	620			21			35			—			1			67			67			—			811
Net (losses) gains charged to allowance	(1,759		)	(378		)	(135		)	—			(102		)	60			(155		)	(47		)	(2,516		)

Provision (credit) charged to operations	1,842			(91		)	739			(33		)	299			708			113			68			3,645

Balance at June 30,	$	28,006		$	13,006		$	19,538		$	786		$	3,721		$	4,736		$	706		$	1,038		$	71,537

	Quarter Ended June 30, 2013
	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,	$	20,926		$	11,053		$	20,651		$	609	$	3,868		$	4,011		$	820		$	1,030	$	62,968
Losses charge to allowance	(2,663		)	(120		)	(1		)	—		(27		)	(140		)	(105		)	—		(3,056		)
Recoveries credited to allowance	557			13			128			—		4			30			60			5		797
Net (losses) gains charged to allowance	(2,106		)	(107		)	127			—		(23		)	(110		)	(45		)	5		(2,259		)

Provision (credit) charged to operations	1,856			678			1,605			14		10			146			22			11		4,342

Balance at June 30,	$	20,676		$	11,624		$	22,383		$	623	$	3,855		$	4,047		$	797		$	1,046	$	65,051

	Six Months Ended June 30, 2014
	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,	$	22,433		$	12,541		$	24,467		$	776	$	3,812		$	4,249		$	750		$	1,133		$	70,161
Losses charge to allowance	(4,860		)	(399		)	(170		)	—		(130		)	(153		)	(409		)	(50		)	(6,171		)
Recoveries credited to allowance	1,416			52			58			—		5			100			147			46			1,824
Net losses charged to allowance	(3,444		)	(347		)	(112		)	—		(125		)	(53		)	(262		)	(4		)	(4,347		)

Provision (credit) charged to operations	9,017			812			(4,817		)	10		34			540			218			(91		)	5,723

Balance at June 30,	$	28,006		$	13,006		$	19,538		$	786	$	3,721		$	4,736		$	706		$	1,038		$	71,537

	Six Months Ended June 30, 2013
	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,	$	11,632		$	12,720		$	21,880		$	694		$	4,390		$	4,448		$	1,289		$	1,140		$	58,193
Losses charge to allowance	(5,326		)	(248		)	(61		)	—			(199		)	(395		)	(316		)	(20		)	(6,565		)
Recoveries credited to allowance	1,251			26			141			—			9			124			106			5			1,662
Net (losses) gains charged to allowance	(4,075		)	(222		)	80			—			(190		)	(271		)	(210		)	(15		)	(4,903		)

Provision (credit) charged to operations	13,119			(874		)	423			(71		)	(345		)	(130		)	(282		)	(79		)	11,761

Balance at June 30,	$	20,676		$	11,624		$	22,383		$	623		$	3,855		$	4,047		$	797		$	1,046		$	65,051

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, 2014 and December 31, 2013:

	June 30, 2014
	Loans individually evaluated for impairment				Loans collectively evaluated for impairment
	(Dollars in Thousands)
	Recorded Investment		Allowance		Recorded Investment		Allowance

Domestic
Commercial	$	38,072	$	16,368	$	1,114,058	$	11,638
Commercial real estate: other construction & land development	11,520		1,119		1,312,687		11,887
Commercial real estate: farmland & commercial	14,464		2,441		1,729,852		17,097
Commercial real estate: multifamily	266		—		103,715		786
Residential: first lien	5,689		—		407,915		3,721
Residential: junior lien	3,110		—		444,153		4,736
Consumer	1,363		—		61,522		706
Foreign	424		—		188,705		1,038

Total	$	74,908	$	19,928	$	5,362,607	$	51,609

	December 31, 2013
	Loans individually evaluated for impairment				Loans collectively evaluated for impairment
	(Dollars in Thousands)
	Recorded Investment		Allowance		Recorded Investment		Allowance

Domestic
Commercial	$	34,183	$	12,234	$	1,008,459	$	10,199
Commercial real estate: other construction & land development	13,976		852		1,194,532		11,689
Commercial real estate: farmland & commercial	16,038		2,916		1,734,001		21,551
Commercial real estate: multifamily	295		—		101,803		776
Residential: first lien	6,153		—		432,309		3,812
Residential: junior lien	3,206		—		406,024		4,249
Consumer	1,606		—		64,808		750
Foreign	436		—		181,406		1,133

Total	$	75,893	$	16,002	$	5,123,342	$	54,159

The table below provides additional information on loans accounted for on a non-accrual basis by loan class at June 30, 2014 and December 31, 2013:

	June 30, 2014		December 31, 2013
	(Dollars in Thousands)

Domestic
Commercial	$	38,011	$	34,110
Commercial real estate: other construction & land development	9,267		11,726
Commercial real estate: farmland & commercial	12,200		13,775
Commercial real estate: multifamily	266		295
Residential: first lien	698		1,266
Residential: junior lien	1,554		1,576
Consumer	39		75

Total non-accrual loans	$	62,035	$	62,823

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, 2014 and December 31, 2013:

	June 30, 2014
							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	$	17,686	$	17,685	$	16,368	$	17,685	$	—	$	17,486	$	—
Commercial real estate: other construction & land development	6,895		6,904		1,119		6,896		—		6,897		—
Commercial real estate: farmland & commercial	5,943		6,262		2,441		6,374		23		6,499		46
Total impaired loans with related allowance	$	30,524	$	30,851	$	19,928	$	30,955	$	23	$	30,882	$	46

	June 30, 2014
					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	$	20,386	$	20,436	$	20,347	$	1	$	18,704	$	2
Commercial real estate: other construction & land development	4,625		4,676		5,226		19		6,014		37
Commercial real estate: farmland & commercial	8,521		9,896		8,854		—		8,755		—
Commercial real estate: multifamily	266		266		270		—		278		—
Residential: first lien	5,689		5,810		6,057		64		6,172		127
Residential: junior lien	3,110		3,130		3,114		24		3,124		47
Consumer	1,363		1,365		1,369		1		1,406		2
Foreign	424		424		426		5		429		9
Total impaired loans with no related allowance	$	44,384	$	46,003	$	45,663	$	114	$	44,882	$	224

	December 31, 2013
			Unpaid				Year to Date
	Recorded		Principal		Related		Average Recorded		Interest
	Investment		Balance		Allowance		Investment		Recognized
	(Dollars in Thousands)

Loans with Related Allowance
Domestic
Commercial	$	17,178	$	17,177	$	12,234	$	18,019	$	38
Commercial real estate: other construction & land development	6,818		6,825		852		6,058		—
Commercial real estate: farmland & commercial	7,259		10,697		2,916		7,167		92
Total impaired loans with related allowance	$	31,255	$	34,699	$	16,002	$	31,244	$	130

	December 31, 2013
					Year to Date
	Recorded Investment		Unpaid Principal Balance		Average Recorded Investment		Interest Recognized
	(Dollars in Thousands)

Loans with No Related Allowance
Domestic
Commercial	$	17,005	$	17,023	$	16,778	$	2
Commercial real estate: other construction & land development	7,158		7,187		18,164		74
Commercial real estate: farmland & commercial	8,779		9,949		7,313		—
Commercial real estate: multifamily	295		295		322		—
Residential: first lien	6,153		6,258		4,860		179
Residential: junior lien	3,206		3,226		2,347		99
Consumer	1,606		1,612		1,380		1
Foreign	436		436		452		19
Total impaired loans with no related allowance	$	44,638	$	45,986	$	51,616	$	374

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, 2013:

	June 30, 2013
	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	$	18,174	$	10	$	18,184	$	21
Commercial real estate: other construction & land development	3,969		—		4,820		—
Commercial real estate: farmland & commercial	6,879		23		6,666		46
Total impaired loans with related allowance	$	29,022	$	33	$	29,670	$	67


	June 30, 2013
	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	$	17,309	$	—	$	16,475	$	—
Commercial real estate: other construction & land development	20,217		18		20,451		37
Commercial real estate: farmland & commercial	6,579		—		5,793		—
Commercial real estate: multifamily	329		—		337		—
Residential: first lien	4,605		39		4,222		72
Residential: junior lien	1,713		24		1,722		49
Consumer	1,236		—		1,241		—
Foreign	455		5		456		9
Total impaired loans with no related allowance	$	52,443	$	86	$	50,697	$	167

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 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. 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 continuing to improve and continue to be in a position to recover better than many other areas of the country. Loans accounted for as “troubled debt restructuring,” which are included in impaired loans, were not significant and totaled $21,974,000 and $20,358,000 as of June 30, 2014 and December 31, 2013, respectively.

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, 2014 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, 2014 and December 31, 2013:

	June 30, 2014
	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	$	14,276	$	852	$	42,266	$	8,038	$	57,394	$	1,094,736	$	1,152,130
Commercial real estate: other construction & land development	1,212		870		8,229		6		10,311		1,313,896		1,324,207
Commercial real estate: farmland & commercial	10,949		4,628		9,383		1,370		24,960		1,719,356		1,744,316
Commercial real estate: multifamily	581		—		266		—		847		103,134		103,981
Residential: first lien	4,425		2,625		2,589		2,026		9,639		403,965		413,604
Residential: junior lien	896		232		2,222		696		3,350		443,913		447,263
Consumer	941		457		827		789		2,225		60,660		62,885
Foreign	3,326		55		158		158		3,539		185,590		189,129
Total past due loans	$	36,606	$	9,719	$	65,940	$	13,083	$	112,265	$	5,325,250	$	5,437,515

	December 31, 2013
	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	$	4,240	$	538	$	36,066	$	2,051	$	40,844	$	1,001,798	$	1,042,642
Commercial real estate: other construction & land development	1,042		—		9,942		62		10,984		1,197,524		1,208,508
Commercial real estate: farmland & commercial	6,216		520		6,990		417		13,726		1,736,313		1,750,039
Commercial real estate: multifamily	39		142		295		—		476		101,622		102,098
Residential: first lien	4,758		3,046		4,541		3,518		12,345		426,117		438,462
Residential: junior lien	606		198		1,900		368		2,704		406,526		409,230
Consumer	1,523		469		803		781		2,795		63,619		66,414
Foreign	1,467		417		—		—		1,884		179,958		181,842
Total past due loans	$	19,891	$	5,330	$	60,537	$	7,197	$	85,758	$	5,113,477	$	5,199,235

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 in accordance with the provisions of ASC 310-10, “Receivables,” 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, 2014 and December 31, 2013 is as follows:

			June 30, 2014
	Pass		Special Review		Watch List - Pass		Watch List - Substandard		Watch List - Impaired
	(Dollars in Thousands)

Domestic
Commercial	$	1,058,402	$	1,017	$	2,270	$	52,369	$	38,072
Commercial real estate: other construction & land development	1,257,444		344		10,835		44,064		11,520
Commercial real estate: farmland & commercial	1,627,979		9,264		20,646		71,963		14,464
Commercial real estate: multifamily	102,887		—		—		828		266
Residential: first lien	407,780		114		—		21		5,689
Residential: junior lien	443,702		—		—		451		3,110
Consumer	61,522		—		—		—		1,363
Foreign	188,399		—		—		306		424
Total	$	5,148,115	$	10,739	$	33,751	$	170,002	$	74,908

			December 31, 2013
	Pass		Special Review		Watch List - Pass		Watch List - Substandard		Watch List - Impaired
	(Dollars in Thousands)

Domestic
Commercial	$	955,522	$	2,270	$	4,389	$	46,278	$	34,183
Commercial real estate: other construction & land development	1,167,295		14,247		9,318		3,672		13,976
Commercial real estate: farmland & commercial	1,635,179		56,438		21,912		20,472		16,038
Commercial real estate: multifamily	100,948		—		—		855		295
Residential: first lien	432,067		122		—		120		6,153
Residential: junior lien	405,731		—		—		293		3,206
Consumer	64,808		—		—		—		1,606
Foreign	180,837		—		—		569		436
Total	$	4,942,387	$	73,077	$	35,619	$	72,259	$	75,893

The increase in the watch-list substandard category can be attributed primarily to a loan relationship that deteriorated in the first six months of 2014. The majority of the relationship had previously been included in the special review category at December 31, 2013.