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 March 31, 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, 2013	$	22,433		$	12,541	$	24,467		$	776	$	3,812		$	4,249		$	750		$	1,133		$	70,161
Losses charge to allowance	(2,481		)	—		—			—		(27		)	(146		)	(187		)	(3		)	(2,844		)
Recoveries credited to allowance	796			31		23			—		4			33			80			46			1,013
Net losses charged to allowance	(1,685		)	31		23			—		(23		)	(113		)	(107		)	43			(1,831		)

Provision charged to operations	7,175			903		(5,556		)	43		(265		)	(168		)	105			(159		)	2,078

Balance at March 31, 2014	$	27,923		$	13,475	$	18,934		$	819	$	3,524		$	3,968		$	748		$	1,017		$	70,408

	Three Months Ended March 31, 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, 2012	$	11,632		$	12,720		$	21,880		$	694		$	4,390		$	4,448		$	1,289		$	1,140		$	58,193
Losses charge to allowance	(2,663		)	(128		)	(60		)	—			(172		)	(255		)	(211		)	(20		)	(3,509		)
Recoveries credited to allowance	694			13			13			—			5			94			46			—			865
Net losses charged to allowance	(1,969		)	(115		)	(47		)	—			(167		)	(161		)	(165		)	(20		)	(2,644		)

Provision charged to operations	11,263			(1,552		)	(1,182		)	(85		)	(355		)	(276		)	(304		)	(90		)	7,419

Balance at March 31, 2013	$	20,926		$	11,053		$	20,651		$	609		$	3,868		$	4,011		$	820		$	1,030		$	62,968

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 March 31, 2014 and December 31, 2013:

	March 31, 2014
	Loans individually evaluated for impairment				Loans collectively evaluated for impairment
	Recorded Investment		Allowance		Recorded Investment		Allowance
	(Dollars in Thousands)
Domestic
Commercial	$	35,539	$	17,424	$	1,059,024	$	10,499
Commercial real estate: other construction & land development	13,558		852		1,265,445		12,623
Commercial real estate: farmland & commercial	15,607		2,666		1,706,316		16,268
Commercial real estate: multifamily	280		—		107,826		819
Residential: first lien	6,273		—		414,736		3,524
Residential: junior lien	3,123		—		416,033		3,968
Consumer	1,453		—		61,977		748
Foreign	430		—		178,880		1,017

Total	$	76,263	$	20,942	$	5,210,237	$	49,466

	December 31, 2013
	Loans individually evaluated for impairment				Loans collectively evaluated for impairment
	Recorded Investment		Allowance		Recorded Investment		Allowance
	(Dollars in Thousands)
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 March 31, 2014 and December 31, 2013:

	March 31, 2014		December 31, 2013
	(Dollars in Thousands)

Domestic
Commercial	$	35,476	$	34,110
Commercial real estate: other construction & land development	11,307		11,726
Commercial real estate: farmland & commercial	13,344		13,775
Commercial real estate: multifamily	280		295
Residential: first lien	1,259		1,266
Residential: junior lien	1,555		1,576
Consumer	45		75

Total non-accrual loans	$	63,266	$	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 March 31, 2014 and December 31, 2013:

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

Loans with Related Allowance
Domestic
Commercial	$	17,684	$	17,674	$	17,424	$	17,287	$	—
Commercial real estate: other construction & land development	6,898		6,906		852		6,898		—
Commercial real estate: farmland & commercial	6,615		6,963		2,666		6,624		23
Total impaired loans with related allowance	$	31,197	$	31,553	$	20,942	$	30,809	$	23

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

Loans with No Related Allowance
Domestic
Commercial	$	17,855	$	17,876	$	17,060	$	1
Commercial real estate: other construction & land development	6,660		6,704		6,801		18
Commercial real estate: farmland & commercial	8,992		10,310		8,656		—
Commercial real estate: multifamily	280		280		285		—
Residential: first lien	6,273		6,337		6,287		63
Residential: junior lien	3,123		3,142		3,133		24
Consumer	1,453		1,460		1,444		1
Foreign	430		430		432		5
Total impaired loans with no related allowance	$	45,066	$	46,539	$	44,098	$	112

	December 31, 2013
	Recorded Investment		Unpaid 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
	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

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 $19,148,000 and $20,358,000 as of March 31, 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 March 31, 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 March 31, 2014 and December 31, 2013:

	March 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	$	4,622	$	1,477	$	35,819	$	2,225	$	41,918	$	1,052,645	$	1,094,563
Commercial real estate: other construction & land development	642		309		10,537		68		11,488		1,267,515		1,279,003
Commercial real estate: farmland & commercial	4,988		2,861		7,327		1,099		15,176		1,706,747		1,721,923
Commercial real estate: multifamily	343		217		280		—		840		107,266		108,106
Residential: first lien	5,211		1,005		2,613		1,588		8,829		412,180		421,009
Residential: junior lien	855		96		1,708		183		2,659		416,497		419,156
Consumer	1,119		489		884		842		2,492		60,938		63,430
Foreign	2,016		10		329		329		2,355		176,955		179,310
Total past due loans	$	19,796	$	6,464	$	59,497	$	6,334	$	85,757	$	5,200,743	$	5,286,500

	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 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, 2014 and December 31, 2013 is as follows:

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

Domestic
Commercial	$	1,001,514	$	7,213	$	4,887	$	45,410	$	35,539
Commercial real estate: other construction & land development	1,242,189		6,296		8,577		8,383		13,558
Commercial real estate: farmland & commercial	1,608,212		61,709		22,371		14,024		15,607
Commercial real estate: multifamily	106,984		—		—		842		280
Residential: first lien	414,523		118		—		95		6,273
Residential: junior lien	415,575		—		—		458		3,123
Consumer	61,977		—		—		—		1,453
Foreign	178,542		—		—		338		430
Total	$	5,029,516	$	75,336	$	35,835	$	69,550	$	76,263

			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