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 September 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 June 30,	$	28,006		$	13,006		$	19,538		$	786		$	3,721		$	4,736		$	706		$	1,038		$	71,537
Losses charge to allowance	(2,920		)	(43		)	(38		)	—			(131		)	(242		)	(146		)	—			(3,520		)
Recoveries credited to allowance	740			14			42			—			11			40			47			—			894
Net (losses) gains charged to allowance	(2,180		)	(29		)	4			—			(120		)	(202		)	(99		)	—			(2,626		)

Provision (credit) charged to operations	2,454			852			(701		)	(41		)	27			164			79			(18		)	2,816

Balance at September 30,	$	28,280		$	13,829		$	18,841		$	745		$	3,628		$	4,698		$	686		$	1,020		$	71,727

	Quarter Ended September 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 June 30,	$	20,676		$	11,624		$	22,383	$	623	$	3,855		$	4,047		$	797		$	1,046		$	65,051
Losses charge to allowance	(3,540		)	(2		)	—		—		(22		)	(149		)	(130		)	(2		)	(3,845		)
Recoveries credited to allowance	658			10			9		—		45			80			21			—			823
Net (losses) gains charged to allowance	(2,882		)	8			9		—		23			(69		)	(109		)	(2		)	(3,022		)

Provision (credit) charged to operations	3,370			(10		)	1,549		112		186			404			124			65			5,800

Balance at September 30,	$	21,164		$	11,622		$	23,941	$	735	$	4,064		$	4,382		$	812		$	1,109		$	67,829

	Nine Months Ended September 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	(7,780		)	(442		)	(208		)	—			(261		)	(395		)	(555		)	(50		)	(9,691		)
Recoveries credited to allowance	2,156			66			100			—			16			140			194			46			2,718
Net losses charged to allowance	(5,624		)	(376		)	(108		)	—			(245		)	(255		)	(361		)	(4		)	(6,973		)

Provision (credit) charged to operations	11,471			1,664			(5,518		)	(31		)	61			704			297			(109		)	8,539

Balance at September 30,	$	28,280		$	13,829		$	18,841		$	745		$	3,628		$	4,698		$	686		$	1,020		$	71,727

	Nine Months Ended September 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	(8,866		)	(250		)	(61		)	—		(221		)	(544		)	(446		)	(22		)	(10,410		)
Recoveries credited to allowance	1,909			36			150			—		54			204			127			5			2,485
Net (losses) gains charged to allowance	(6,957		)	(214		)	89			—		(167		)	(340		)	(319		)	(17		)	(7,925		)

Provision (credit) charged to operations	16,489			(884		)	1,972			41		(159		)	274			(158		)	(14		)	17,561

Balance at September 30,	$	21,164		$	11,622		$	23,941		$	735	$	4,064		$	4,382		$	812		$	1,109		$	67,829

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, 2014 and December 31, 2013:

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

Domestic
Commercial	$	40,195	$	16,302	$	1,219,188	$	11,978
Commercial real estate: other construction & land development	11,535		2,022		1,402,377		11,807
Commercial real estate: farmland & commercial	15,771		2,984		1,729,809		15,857
Commercial real estate: multifamily	251		—		100,468		745
Residential: first lien	5,457		—		412,101		3,628
Residential: junior lien	2,933		—		467,243		4,698
Consumer	1,408		—		60,585		686
Foreign	417		—		190,840		1,020

Total	$	77,967	$	21,308	$	5,582,611	$	50,419

	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 September 30, 2014 and December 31, 2013:

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

Domestic
Commercial	$	40,140	$	34,110
Commercial real estate: other construction & land development	9,281		11,726
Commercial real estate: farmland & commercial	13,508		13,775
Commercial real estate: multifamily	251		295
Residential: first lien	516		1,266
Residential: junior lien	1,549		1,576
Consumer	39		75

Total non-accrual loans	$	65,284	$	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 September 30, 2014 and December 31, 2013:

	September 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	$	17,659	$	17,685	$	16,302	$	17,677	$	—	$	17,550	$	—
Commercial real estate: other construction & land development	7,344		7,386		2,022		7,329		—		7,326		—
Commercial real estate: farmland & commercial	7,427		7,789		2,984		7,519		23		6,839		69
Total impaired loans with related allowance	$	32,430	$	32,860	$	21,308	$	32,525	$	23	$	31,715	$	69

	September 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	$	22,536	$	22,606	$	21,265	$	1	$	19,557	$	3
Commercial real estate: other construction & land development	4,191		4,262		4,192		19		5,121		56
Commercial real estate: farmland & commercial	8,344		9,664		8,418		—		8,643		—
Commercial real estate: multifamily	251		251		256		—		270		—
Residential: first lien	5,457		5,507		5,648		64		6,028		191
Residential: junior lien	2,933		2,954		2,992		22		3,080		69
Consumer	1,408		1,410		1,408		1		1,407		3
Foreign	417		417		420		5		426		14
Total impaired loans with no related allowance	$	45,537	$	47,071	$	44,599	$	112	$	44,532	$	336

	December 31, 2013
			Unpaid				Year to Date
	Recorded Investment		Principal Balance		Related Allowance		Average Recorded Investment		Interest 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 September 30, 2013:

	September 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	$	17,884	$	9	$	17,898	$	29
Commercial real estate: other construction & land development	6,821		—		5,804		—
Commercial real estate: farmland & commercial	7,771		23		7,034		69
Total impaired loans with related allowance	$	32,476	$	32	$	30,736	$	98

	September 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	$	17,238	$	—	$	16,915	$	—
Commercial real estate: other construction & land development	22,414		17		20,788		53
Commercial real estate: farmland & commercial	8,775		—		6,787		—
Commercial real estate: multifamily	316		—		330		—
Residential: first lien	4,878		45		4,441		117
Residential: junior lien	2,731		25		2,059		74
Consumer	1,458		—		1,313		—
Foreign	457		5		456		14
Total impaired loans with no related allowance	$	58,267	$	92	$	53,089	$	258

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.

The following table details loans accounted for as “troubled debt restructuring,” segregated by loan class. Loans accounted for as troubled debt restructuring are included in impaired loans.

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

Domestic
Commercial	$	2,512	$	150
Commercial real estate: other construction & land development	2,255		8,860
Commercial real estate: farmland & commercial	4,556		2,863
Residential: first lien	4,941		4,887
Residential: junior lien	1,384		1,631
Consumer	1,368		1,531
Foreign	417		436

Total trouble debt restructuring	$	17,433	$	20,358

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, 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 September 30, 2014 and December 31, 2013:

	September 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	$	7,780	$	3,183	$	46,840	$	11,510	$	57,803	$	1,201,580	$	1,259,383
Commercial real estate: other construction & land development	2,591		16		8,454		204		11,061		1,402,851		1,413,912
Commercial real estate: farmland & commercial	14,466		878		8,475		892		23,819		1,721,761		1,745,580
Commercial real estate: multifamily	878		—		251		—		1,129		99,590		100,719
Residential: first lien	7,451		1,680		3,409		3,016		12,540		405,018		417,558
Residential: junior lien	844		164		2,033		508		3,041		467,135		470,176
Consumer	986		202		653		621		1,841		60,152		61,993
Foreign	1,392		559		170		170		2,121		189,136		191,257
Total past due loans	$	36,388	$	6,682	$	70,285	$	16,921	$	113,355	$	5,547,223	$	5,660,578

	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 September 30, 2014 and December 31, 2013 is as follows:

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

Domestic
Commercial	$	1,165,427	$	992	$	1,759	$	51,010	$	40,195
Commercial real estate: other construction & land development	1,347,079		340		10,561		44,397		11,535
Commercial real estate: farmland & commercial	1,630,133		8,114		20,690		70,872		15,771
Commercial real estate: multifamily	99,649		—		—		819		251
Residential: first lien	411,888		112		—		101		5,457
Residential: junior lien	466,798		—		—		445		2,933
Consumer	60,452		—		—		133		1,408
Foreign	190,840		—		—		—		417
Total	$	5,372,266	$	9,558	$	33,010	$	167,777	$	77,967

	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 further deteriorated in the first nine months of 2014. The majority of the relationship had previously been included in the special review category at December 31, 2013.