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:

	Three Months Ended September 30, 2015
	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,	$	18,902		$	13,524		$	17,885	$	685	$	3,434		$	4,308		$	625		$	1,175	$	60,538
Losses charge to allowance	(4,921		)	(10		)	—		—		(45		)	(60		)	(131		)	—		(5,167		)
Recoveries credited to allowance	770			98			7		—		4			155			21			2		1,057

Net (losses) recoveries charged to allowance	(4,151		)	88			7		—		(41		)	95			(110		)	2		(4,110		)

Provision charged to operations	5,774			654			1,733		120		287			130			127			7		8,832


Balance at September 30,	$	20,525		$	14,266		$	19,625	$	805	$	3,680		$	4,533		$	642		$	1,184	$	65,260

	Three 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 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) recoveries charged to allowance	(2,180		)	(29		)	4			—			(120		)	(202		)	(99		)	—			(2,626		)

Provision 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

	Nine Months Ended September 30, 2015
	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,	$	22,352		$	12,955		$	18,683		$	846		$	3,589		$	4,683		$	660		$	1,060	$	64,828
Losses charge to allowance	(20,303		)	(695		)	(356		)	—			(136		)	(162		)	(544		)	—		(22,196		)
Recoveries credited to allowance	2,100			137			820			—			28			406			151			10		3,652

Net (losses) recoveries charged to allowance	(18,203		)	(558		)	464			—			(108		)	244			(393		)	10		(18,544		)

Provision charged to operations	16,376			1,869			478			(41		)	199			(394		)	375			114		18,976


Balance at September 30,	$	20,525		$	14,266		$	19,625		$	805		$	3,680		$	4,533		$	642		$	1,184	$	65,260

	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 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

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 increase in losses charged to the allowance for probable loan losses for the nine months ended September 30, 2015 can be attributed to a charge down of a loan relationship that is mainly secured by multiple pieces of transportation equipment, the value of which fluctuates due to market factors and the amount and use of the equipment. The loan was classified as a Watch-List Impaired loan at December 31, 2014 and was included in the balance of loans individually evaluated for impairment with a specific reserve at December 31, 2014.

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, 2015 and December 31, 2014:

	September 30, 2015
	(Dollars in Thousands)
	Loans Individually Evaluated for Impairment				Loans Collectively Evaluated for Impairment
	Recorded Investment		Allowance		Recorded Investment		Allowance

Domestic
Commercial	$	31,265	$	1,174	$	981,126	$	19,351
Commercial real estate: other construction & land development	6,349		100		1,648,900		14,166
Commercial real estate: farmland & commercial	9,642		482		1,943,066		19,143
Commercial real estate: multifamily	812		—		107,470		805
Residential: first lien	5,294		—		403,982		3,680
Residential: junior lien	1,028		—		538,396		4,533
Consumer	1,243		—		57,043		642
Foreign	749		—		186,607		1,184


Total	$	56,382	$	1,756	$	5,866,590	$	63,504

	December 31, 2014
	(Dollars in Thousands)
	Loans individually evaluated for impairment				Loans collectively evaluated for impairment
	Recorded Investment		Allowance		Recorded Investment		Allowance

Domestic
Commercial	$	40,175	$	9,112	$	1,049,311	$	13,240
Commercial real estate: other construction & land development	10,876		1,890		1,404,101		11,065
Commercial real estate: farmland & commercial	14,166		1,219		1,887,233		17,464
Commercial real estate: multifamily	835		—		115,864		846
Residential: first lien	5,840		—		416,186		3,589
Residential: junior lien	2,895		—		485,405		4,683
Consumer	1,384		—		59,753		660
Foreign	—		—		185,221		1,060


Total	$	76,171	$	12,221	$	5,603,074	$	52,607

During the second quarter of 2015, the Company charged down a portion of an impaired loan relationship that is mainly secured by multiple pieces of transportation equipment, the value of which fluctuates due to market factors. The Company also foreclosed upon two other real-estate secured commercial impaired loans. The transactions and their impact to the Company’s loan portfolio, including the allowance for probable loan losses, non-accrual loans and impaired loans with a related allowance for September 30, 2015 compared to December 31, 2014 are illustrated in the various associated tables on the following pages.

The table below provides additional information on loans accounted for on a non-accrual basis by loan class at September 30, 2015 and December 31, 2014:

	September 30, 2015		December 31, 2014
	(Dollars in Thousands)

Domestic
Commercial	$	31,213	$	40,121
Commercial real estate: other construction & land development	3,797		8,621
Commercial real estate: farmland & commercial	7,379		11,903
Commercial real estate: multifamily	792		835
Residential: first lien	322		527
Residential: junior lien	16		1,523
Consumer	36		29
Foreign	356		—


Total non-accrual loans	$	43,911	$	63,559

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, 2015 and December 31, 2014:

	September 30, 2015
							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	$	10,288	$	21,840	$	1,174	$	11,247	$	—	$	15,634	$	—
Commercial real estate: other construction & land development	169		169		100		170		—		1,136		—
Commercial real estate: farmland & commercial	3,513		3,726		482		3,517		23		4,046		69

Total impaired loans with related allowance	$	13,970	$	25,735	$	1,756	$	14,934	$	23	$	20,816	$	69

	September 30, 2015
					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	$	20,977	$	21,909	$	21,291	$	1	$	20,623	$	3
Commercial real estate: other construction & land development	6,180		6,206		6,045		20		6,561		57
Commercial real estate: farmland & commercial	6,129		7,263		6,203		—		7,253		—
Commercial real estate: multifamily	812		812		819		—		832		1
Residential: first lien	5,294		5,353		5,315		65		5,375		188
Residential: junior lien	1,028		1,050		1,075		15		1,255		54
Consumer	1,243		1,244		1,263		1		1,201		2
Foreign	749		749		632		4		480		13

Total impaired loans with no related allowance	$	42,412	$	44,586	$	42,643	$	106	$	43,580	$	318

	December 31, 2014
	Recorded Investment			Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Recognized
	(Dollars in Thousands)

Loans with Related Allowance
Domestic
Commercial		$	19,944	$	20,026	$	9,112	$	19,313	$	—
Commercial real estate: other construction & land development		6,714		6,949		1,890		7,183		—
Commercial real estate: farmland & commercial		5,107		5,257		1,219		6,790		92

Total impaired loans with related allowance		$	31,765	$	32,232	$	12,221	$	33,286	$	92

	December 31, 2014
	Recorded Investment		Unpaid Principal Balance		Average Recorded Investment		Interest Recognized
	(Dollars in Thousands)

Loans with No Related Allowance
Domestic
Commercial	$	20,231	$	20,260	$	18,563	$	4
Commercial real estate: other construction & land development	4,162		4,270		4,882		74
Commercial real estate: farmland & commercial	9,059		10,562		8,664		—
Commercial real estate: multifamily	835		835		363		—
Residential: first lien	5,840		6,034		6,293		273
Residential: junior lien	2,895		2,915		3,035		90
Consumer	1,384		1,386		1,402		3
Foreign	—		—		—		—

Total impaired loans with no related allowance	$	44,406	$	46,262	$	43,202	$	444

The following tables detail key information regarding the Company’s average recorded investment in and interest recognized on impaired loans by loan class at September 30, 2014:

	September 30, 2014
	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	$	17,677	$	—	$	17,550	$	—
Commercial real estate: other construction & land development	7,329		—		7,326		—
Commercial real estate: farmland & commercial	7,519		23		6,839		69

Total impaired loans with related allowance	$	32,525	$	23	$	31,715	$	69

	September 30, 2014
	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	$	21,265	$	1	$	19,557	$	3
Commercial real estate: other construction & land development	4,192		19		5,121		56
Commercial real estate: farmland & commercial	8,418		—		8,643		—
Commercial real estate: multifamily	256		—		270		—
Residential: first lien	5,648		64		6,028		191
Residential: junior lien	2,992		22		3,080		69
Consumer	1,408		1		1,407		3
Foreign	420		5		426		14

Total impaired loans with no related allowance	$	44,599	$	112	$	44,532	$	336

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.

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, 2015		December 31, 2014
	(Dollars in Thousands)
Domestic
Commercial	$	2,420	$	2,500
Commercial real estate: other construction & land development	2,553		2,254
Commercial real estate: farmland & commercial	2,853		2,861
Commercial real estate: multifamily	21		—
Residential: first lien	4,972		5,313
Residential: junior lien	1,012		1,371
Consumer	1,208		1,354
Foreign	393		—


Total troubled debt restructuring	$	15,432	$	15,653

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, 2015 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, 2015 and December 31, 2014:

	September 30, 2015
	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	$	7,460	$	1,318	$	24,206	$	653	$	32,984	$	979,407	$	1,012,391
Commercial real estate: other construction & land development	2,847		1,930		7,292		3,791		12,069		1,643,180		1,655,249
Commercial real estate: farmland & commercial	2,862		1,783		3,180		1,653		7,825		1,944,883		1,952,708
Commercial real estate: multifamily	49		135		812		21		996		107,286		108,282
Residential: first lien	3,926		1,897		5,908		5,628		11,731		397,545		409,276
Residential: junior lien	814		388		370		370		1,572		537,852		539,424
Consumer	855		201		422		389		1,478		56,808		58,286
Foreign	1,310		230		938		582		2,478		184,878		187,356

Total	$	20,123	$	7,882	$	43,128	$	13,087	$	71,133	$	5,851,839	$	5,922,972

	December 31, 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	$	4,103	$	2,665	$	40,665	$	2,890	$	47,433	$	1,042,053	$	1,089,486
Commercial real estate: other construction & land development	596		10		8,707		439		9,313		1,405,664		1,414,977
Commercial real estate: farmland & commercial	2,905		7,131		10,724		1,711		20,760		1,880,639		1,901,399
Commercial real estate: multifamily	351		—		856		21		1,207		115,492		116,699
Residential: first lien	5,895		1,864		4,267		3,901		12,026		410,000		422,026
Residential: junior lien	899		231		1,931		431		3,061		485,239		488,300
Consumer	896		216		507		482		1,619		59,518		61,137
Foreign	1,616		98		113		113		1,827		183,394		185,221

Total past due loans	$	17,261	$	12,215	$	67,770	$	9,988	$	97,246	$	5,581,999	$	5,679,245

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 requires 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, 2015 and December 31, 2014 is as follows:

			September 30, 2015
	Pass		Special Review		Watch List - Pass		Watch List - Substandard		Watch List - Impaired
	(Dollars in Thousands)

Domestic
Commercial	$	867,908	$	—	$	22,793	$	90,425	$	31,265
Commercial real estate: other construction & land development	1,586,892		327		12,278		49,403		6,349
Commercial real estate: farmland & commercial	1,800,442		5,397		37,293		99,934		9,642
Commercial real estate: multifamily	107,335		—		—		135		812
Residential: first lien	400,468		—		—		3,514		5,294
Residential: junior lien	538,140		—		—		256		1,028
Consumer	57,033		—		—		10		1,243
Foreign	186,607		—		—		—		749

Total	$	5,544,825	$	5,724	$	72,364	$	243,677	$	56,382

			December 31, 2014
	Pass		Special Review		Watch List - Pass		Watch List - Substandard		Watch List - Impaired
	(Dollars in Thousands)

Domestic
Commercial	$	961,490	$	38,382	$	3,793	$	45,646	$	40,175
Commercial real estate: other construction & land development	1,353,971		1,005		10,428		38,697		10,876
Commercial real estate: farmland & commercial	1,754,741		11,674		23,453		97,365		14,166
Commercial real estate: multifamily	115,729		—		—		135		835
Residential: first lien	412,668		3,500		—		18		5,840
Residential: junior lien	484,968		—		—		437		2,895
Consumer	59,622		—		—		131		1,384
Foreign	185,221		—		—		—		—

Total	$	5,328,410	$	54,561	$	37,674	$	182,429	$	76,171

The decrease in Special Review credits for September 30, 2015 compared to December 31, 2014 can be attributed to the re-classification of a commercial loan relationship secured mainly by all assets, including contract rights of the borrower, to the Watch-List Substandard category. The decrease in Watch-List Impaired loans at September 30, 2015 compared to December 31, 2014 can be attributed to the charge down of a loan relationship that is mainly secured by multiple pieces of transportation equipment, the value of which fluctuates due to market factors, and the foreclosure of two other real estate secured commercial impaired loans. The increase in Watch-List Pass loans at September 30, 2015 compared to December 31, 2014 can be attributed to the a commercial loan relationship that is mainly secured by all assets, including contract rights, and oil and gas leases and a commercial loan relationship secured by a retail shopping center.