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 recovery. 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 reasonably 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 determines 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 March 31, 2016
	Domestic														Foreign
			Commercial
			Real Estate:
			Other		Commercial
			Construction &		Real Estate:		Commercial
			Land		Farmland &		Real Estate:		Residential:		Residential:
	Commercial		Development		Commercial		Multifamily		First Lien		Junior Lien		Consumer		Foreign		Total
	(Dollars in Thousands)

Balance at December 31,	$	21,431	$	13,920	$	19,769	$	1,248	$	3,509	$	5,321	$	638	$	1,152	$	66,988
Losses charge to allowance		(19,071)		—		(47)		(180)		(7)		(169)		(101)		—		(19,575)
Recoveries credited to allowance		5,143		4		11		—		3		38		37		1		5,237
Net (losses) recoveries charged to allowance		(13,928)		4		(36)		(180)		(4)		(131)		(64)		1		(14,338)

Provision (credit) charged to operations		18,280		(3,054)		(2,759)		(158)		(1,136)		(1,770)		(44)		(225)		9,134

Balance at March 31,	$	25,783	$	10,870	$	16,974	$	910	$	2,369	$	3,420	$	530	$	928	$	61,784


	Three Months Ended March 31, 2015
	Domestic														Foreign
			Commercial
			Real Estate:
			Other		Commercial
			Construction &		Real Estate:		Commercial
			Land		Farmland &		Real Estate:		Residential:		Residential:
	Commercial		Development		Commercial		Multifamily		First Lien		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		(2,309)		—		(17)		—		(90)		(97)		(174)		—		(2,687)
Recoveries credited to allowance		796		1		806		—		14		106		6		4		1,733
Net (losses) recoveries charged to allowance		(1,513)		1		789		—		(76)		9		(168)		4		(954)

Provision (credit) charged to operations		2,680		1,413		(1,496)		(6)		60		(431)		152		5		2,377

Balance at March 31,	$	23,519	$	14,369	$	17,976	$	840	$	3,573	$	4,261	$	644	$	1,069	$	66,251

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 individually or collectively. The increase in losses charged to the allowance for probable loan losses for the three months ended March 31, 2016 can be attributed to further deterioration in a previously identified and charged down relationship primarily secured by multiple pieces of transportation equipment. In March 2016, litigation against the management of the borrower was filed in the State of Nevada, resulting in a going concern issue with the operations of the borrower and the future use of the transportation equipment pledged as collateral on the relationship. As a result, management, in accordance with its credit review procedures, re-evaluated the collateral values on the equipment in light of the new circumstances and reduced the collateral values accordingly, resulting in a further charge-down of the relationship of approximately $16.8 million, which is included in the losses charged to the allowance in the commercial category in the table detailing March 31, 2016 activity. The impact of the charge-down is also reflected in the various tables in this footnote including impaired loans, non-accrual loans and the credit quality indicator summary. The relationship was classified as Watch-List Impaired at December 31, 2015.

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 March 31, 2016 and December 31, 2015:


	March 31, 2016
	Loans Individually				Loans Collectively
	Evaluated for				Evaluated for
	Impairment				Impairment
	Recorded				Recorded
	Investment		Allowance		Investment		Allowance
	(Dollars in Thousands)
Domestic
Commercial	$	14,858	$	2,347	$	931,317	$	23,436
Commercial real estate: other construction & land development		5,965		116		1,702,187		10,754
Commercial real estate: farmland & commercial		13,640		1,260		1,917,218		15,714
Commercial real estate: multifamily		164		—		148,407		910
Residential: first lien		6,358		—		405,982		2,369
Residential: junior lien		1,032		—		555,840		3,420
Consumer		1,210		—		54,715		530
Foreign		745		—		175,936		928

Total	$	43,972	$	3,723	$	5,891,602	$	58,061


	December 31, 2015
	Loans Individually				Loans Collectively
	Evaluated for				Evaluated for
	Impairment				Impairment
	Recorded				Recorded
	Investment		Allowance		Investment		Allowance
	(Dollars in Thousands)
Domestic
Commercial	$	30,946	$	1,704	$	935,905	$	19,727
Commercial real estate: other construction & land development		6,221		100		1,643,606		13,820
Commercial real estate: farmland & commercial		13,806		202		1,981,643		19,567
Commercial real estate: multifamily		777		200		138,671		1,048
Residential: first lien		5,699		—		404,545		3,509
Residential: junior lien		950		—		551,388		5,321
Consumer		1,297		—		56,447		638
Foreign		752		—		178,261		1,152

Total	$	60,448	$	2,206	$	5,890,466	$	64,782

The table below provides additional information on loans accounted for on a non-accrual basis by loan class at March 31, 2016 and December 31, 2015:


	March 31, 2016		December 31, 2015
	(Dollars in Thousands)
Domestic
Commercial	$	14,808	$	30,894
Commercial real estate: other construction & land development		3,413		3,668
Commercial real estate: farmland & commercial		11,383		11,543
Commercial real estate: multifamily		164		777
Residential: first lien		649		383
Residential: junior lien		44		21
Consumer		36		34
Foreign		365		365
Total non-accrual loans	$	30,862	$	47,685

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 (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 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 March 31, 2016 and December 31, 2015:


	March 31, 2016
			Unpaid				Average
	Recorded		Principal		Related		Recorded		Interest
	Investment		Balance		Allowance		Investment		Recognized
	(Dollars in Thousands)
Loans with Related Allowance
Domestic
Commercial	$	4,018	$	4,158	$	2,347	$	4,017	$	—
Commercial real estate: other construction & land development		165		169		116		165		—
Commercial real estate: farmland & commercial		6,116		6,205		1,260		6,120		26
Total impaired loans with related allowance	$	10,299	$	10,532	$	3,723	$	10,302	$	26


	March 31, 2016
			Unpaid		Average
	Recorded		Principal		Recorded		Interest
	Investment		Balance		Investment		Recognized
	(Dollars in Thousands)
Loans with No Related Allowance
Domestic
Commercial	$	10,840	$	37,845	$	21,051	$	1
Commercial real estate: other construction & land development		5,800		5,801		6,296		25
Commercial real estate: farmland & commercial		7,524		8,730		7,590		—
Commercial real estate: multifamily		164		164		168		—
Residential: first lien		6,358		6,433		6,340		71
Residential: junior lien		1,032		1,055		1,036		15
Consumer		1,210		1,210		1,210		—
Foreign		745		745		747		4
Total impaired loans with no related allowance	$	33,673	$	61,983	$	44,438	$	116


	December 31, 2015
			Unpaid				Average
	Recorded		Principal		Related		Recorded		Interest
	Investment		Balance		Allowance		Investment		Recognized
	(Dollars in Thousands)
Loans with Related Allowance
Domestic
Commercial	$	4,016	$	4,156	$	1,704	$	3,758	$	—
Commercial real estate: other construction & land development		167		169		100		893		—
Commercial real estate: farmland & commercial		4,003		4,309		202		4,444		92
Commercial real estate: multifamily		599		599		200		599		—
Total impaired loans with related allowance	$	8,785	$	9,233	$	2,206	$	9,694	$	92


	December 31, 2015
			Unpaid		Average
	Recorded		Principal		Recorded		Interest
	Investment		Balance		Investment		Recognized
	(Dollars in Thousands)
Loans with No Related Allowance
Domestic
Commercial	$	26,930	$	38,845	$	30,847	$	4
Commercial real estate: other construction & land development		6,054		6,204		6,455		85
Commercial real estate: farmland & commercial		9,803		10,717		7,258		—
Commercial real estate: multifamily		178		178		205		—
Residential: first lien		5,699		5,822		5,853		264
Residential: junior lien		950		972		1,182		68
Consumer		1,297		1,298		1,227		3
Foreign		752		752		548		17
Total impaired loans with no related allowance	$	51,663	$	64,788	$	53,575	$	441

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, the subsequent economic downturn and prolonged recovery. 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.


	March 31, 2016		December 31, 2015
		(Dollars in Thousands)
Domestic
Commercial	$	2,419	$	2,419
Commercial real estate: other construction & land development		2,553		2,553
Commercial real estate: farmland & commercial		2,847		2,853
Residential: first lien		5,709		5,316
Residential: junior lien		988		929
Consumer		1,174		1,263
Foreign		380		386

Total troubled debt restructuring	$	16,070	$	15,719

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 believes 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 March 31, 2016 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 March 31, 2016 and December 31, 2015:


	March 31, 2016
							90 Days or		Total
	30 - 59		60 - 89		90 Days or		greater &		Past				Total
	Days		Days		Greater		still accruing		Due		Current		Portfolio
	(Dollars in Thousands)
Domestic
Commercial	$	16,109	$	2,069	$	10,356	$	392	$	28,534	$	917,641	$	946,175
Commercial real estate: other construction & land development		3,590		273		3,172		125		7,035		1,701,117		1,708,152
Commercial real estate: farmland & commercial		4,399		1,021		8,745		1,642		14,165		1,916,693		1,930,858
Commercial real estate: multifamily		47		—		606		442		653		147,918		148,571
Residential: first lien		3,599		1,598		4,740		4,513		9,937		402,403		412,340
Residential: junior lien		499		462		645		613		1,606		555,266		556,872
Consumer		704		256		444		409		1,404		54,521		55,925
Foreign		909		67		787		422		1,763		174,918		176,681
Total past due loans	$	29,856	$	5,746	$	29,495	$	8,558	$	65,097	$	5,870,477	$	5,935,574


	December 31, 2015
							90 Days or		Total
	30 - 59		60 - 89		90 Days or		greater &		Past				Total
	Days		Days		Greater		still accruing		Due		Current		Portfolio
		(Dollars in Thousands)
Domestic
Commercial	$	3,361	$	940	$	28,615	$	2,566	$	32,916	$	933,936	$	966,852
Commercial real estate: other construction & land development		193		293		3,502		—		3,988		1,645,839		1,649,827
Commercial real estate: farmland & commercial		2,684		1,328		8,292		3,373		12,304		1,983,144		1,995,448
Commercial real estate: multifamily		49		442		826		49		1,317		138,131		139,448
Residential: first lien		5,299		1,545		4,295		4,093		11,139		399,105		410,244
Residential: junior lien		713		413		646		640		1,772		550,566		552,338
Consumer		646		175		487		453		1,308		56,436		57,744
Foreign		2,639		83		807		442		3,529		175,484		179,013
Total past due loans	$	15,584	$	5,219	$	47,470	$	11,616	$	68,273	$	5,882,641	$	5,950,914

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 management’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 March 31, 2016 and December 31, 2015 is as follows:


			March 31, 2016
			Special		Watch		Watch List—		Watch List—
	Pass		Review		List—Pass		Substandard		Impaired
			(Dollars in Thousands)
Domestic
Commercial	$	770,631	$	—	$	90,096	$	70,590	$	14,858
Commercial real estate: other construction & land development		1,641,268		—		14,665		46,254		5,965
Commercial real estate: farmland & commercial		1,786,473		1,036		39,516		90,193		13,640
Commercial real estate: multifamily		147,841		—		—		566		164
Residential: first lien		401,705		—		4,216		61		6,358
Residential: junior lien		555,595		—		245		—		1,032
Consumer		54,715		—		—		—		1,210
Foreign		175,936		—		—		—		745
Total	$	5,534,164	$	1,036	$	148,738	$	207,664	$	43,972


			December 31, 2015
			Special		Watch		Watch List—		Watch List—
	Pass		Review		List—Pass		Substandard		Impaired
			(Dollars in Thousands)
Domestic
Commercial	$	771,999	$	42,152	$	31,539	$	90,215	$	30,946
Commercial real estate: other construction & land development		1,582,683		1,164		13,765		45,994		6,221
Commercial real estate: farmland & commercial		1,849,587		2,283		37,765		92,008		13,806
Commercial real estate: multifamily		138,546		—		—		125		777
Residential: first lien		401,053		—		—		3,492		5,699
Residential: junior lien		551,138		—		—		250		950
Consumer		56,440		—		—		7		1,297
Foreign		178,261		—		—		—		752
Total	$	5,529,707	$	45,599	$	83,069	$	232,091	$	60,448

The decrease in Special Review credits for March 31, 2016 compared to December 31, 2015 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 Pass category. The decrease in Watch-List Impaired loans at March 31, 2016 compared to December 31, 2015 can be attributed to the charge-down of the loan relationship that is mainly secured by multiple pieces of transportation equipment previously discussed. Also impacting the Watch-List Pass category at March 31, 2016 is the reclassification of a relationship secured by all assets, equipment, and accounts receivable from Watch-List Substandard to Watch-List Pass category.