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, 2018
	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,	$	27,905	$	11,675	$	16,663	$	1,109	$	2,950	$	6,103	$	440	$	842	$	67,687
Losses charged to allowance		(2,715)		(1)		—		—		(14)		(30)		(117)		—		(2,877)
Recoveries credited to allowance		583		2		18		—		1		66		12		—		682
Net (losses) recoveries charged to allowance		(2,132)		1		18		—		(13)		36		(105)		—		(2,195)

Provision charged to operations		(5,082)		122		8,122		(162)		69		(1,450)		102		(59)		1,662

Balance at March 31,	$	20,691	$	11,798	$	24,803	$	947	$	3,006	$	4,689	$	437	$	783	$	67,154


	Three Months Ended March 31, 2017
	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,	$	25,649	$	13,889	$	16,731	$	806	$	2,455	$	3,716	$	531	$	884	$	64,661
Losses charged to allowance		(2,735)		—		—		—		(31)		(105)		(121)		—		(2,992)
Recoveries credited to allowance		699		1		58		—		5		24		16		14		817
Net (losses) recoveries charged to allowance		(2,036)		1		58		—		(26)		(81)		(105)		14		(2,175)

Provision charged to operations		2,240		(101)		(68)		12		(38)		(449)		78		26		1,700

Balance at March 31,	$	25,853	$	13,789	$	16,721	$	818	$	2,391	$	3,186	$	504	$	924	$	64,186

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 decreases in provision for probable loan losses charged to expense for the three months ended March 31, 2018 and March 31, 2017 can be attributed to a decrease in the historical loss experience in the commercial category of the calculation. As discussed in prior periods, charge-offs increased from historical levels due to the deterioration of one relationship that is secured by multiple pieces of transportation equipment beginning in the fourth quarter of 2014. The Company uses a three year historical charge-off experience in the calculation, therefore, as those charge-offs are eliminated from the calculation, the allowance for probable loan losses is impacted. The impact of the decrease in the historical charge-off experience in the calculation is being offset by a specific reserve placed in the first quarter of 2018 on a relationship that is secured by a water park. The relationship was impaired and classified as Watch-List Substandard at December 31, 2017 and remained impaired and classified as Watch-List Substandard at March 31, 2018.

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, 2018 and December 31, 2017:


	March 31, 2018
	Loans Individually				Loans Collectively
	Evaluated For				Evaluated For
	Impairment				Impairment
	Recorded				Recorded
	Investment		Allowance		Investment		Allowance
	(Dollars in Thousands)
Domestic
Commercial	$	18,384	$	471	$	1,104,712	$	20,220
Commercial real estate: other construction & land development		2,415		116		1,723,214		11,682
Commercial real estate: farmland & commercial		36,570		8,323		2,055,269		16,480
Commercial real estate: multifamily		470		—		178,846		947
Residential: first lien		6,747		—		420,932		3,006
Residential: junior lien		704		—		700,551		4,689
Consumer		1,205		—		45,573		437
Foreign		338		—		157,173		783

Total	$	66,833	$	8,910	$	6,386,270	$	58,244


	December 31, 2017
	Loans Individually				Loans Collectively
	Evaluated For				Evaluated For
	Impairment				Impairment
	Recorded				Recorded
	Investment		Allowance		Investment		Allowance
	(Dollars in Thousands)
Domestic
Commercial	$	17,947	$	300	$	1,068,520	$	27,605
Commercial real estate: other construction & land development		2,455		116		1,681,095		11,559
Commercial real estate: farmland & commercial		33,123		18		2,010,162		16,645
Commercial real estate: multifamily		476		—		192,440		1,109
Residential: first lien		6,852		—		425,925		2,950
Residential: junior lien		723		—		700,025		6,103
Consumer		1,281		—		48,262		440
Foreign		347		—		158,539		842

Total	$	63,204	$	434	$	6,284,968	$	67,253

The table below provides additional information on loans accounted for on a non-accrual basis by loan class at March 31, 2018 and December 31, 2017:


	March 31, 2018		December 31, 2017
	(Dollars in Thousands)
Domestic
Commercial	$	18,347	$	17,909
Commercial real estate: other construction & land development		2,415		2,455
Commercial real estate: farmland & commercial		36,570		33,123
Commercial real estate: multifamily		470		476
Residential: first lien		773		712
Residential: junior lien		3		11
Consumer		48		44
Foreign		—		—
Total non-accrual loans	$	58,626	$	54,730

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, 2018 and December 31, 2017:


	March 31, 2018
			Unpaid				Average
	Recorded		Principal		Related		Recorded		Interest
	Investment		Balance		Allowance		Investment		Recognized
	(Dollars in Thousands)
Loans with Related Allowance
Domestic
Commercial	$	1,708	$	1,992	$	471	$	1,717	$	—
Commercial real estate: other construction & land development		144		169		116		144		—
Commercial real estate: farmland & commercial		15,100		15,260		8,323		15,103		—
Total impaired loans with related allowance	$	16,952	$	17,421	$	8,910	$	16,964	$	—


	March 31, 2018
			Unpaid		Average
	Recorded		Principal		Recorded		Interest
	Investment		Balance		Investment		Recognized
	(Dollars in Thousands)
Loans with No Related Allowance
Domestic
Commercial	$	16,675	$	44,200	$	16,820	$	1
Commercial real estate: other construction & land development		2,271		2,451		2,284		—
Commercial real estate: farmland & commercial		21,471		22,107		21,488		—
Commercial real estate: multifamily		470		501		471		—
Residential: first lien		6,747		6,868		6,960		77
Residential: junior lien		704		715		708		10
Consumer		1,205		1,208		1,208		1
Foreign		338		338		341		4
Total impaired loans with no related allowance	$	49,881	$	78,388	$	50,280	$	93


	December 31, 2017
			Unpaid				Average
	Recorded		Principal		Related		Recorded		Interest
	Investment		Balance		Allowance		Investment		Recognized
	(Dollars in Thousands)
Loans with Related Allowance
Domestic
Commercial real estate: other construction & land development	$	1,300	$	1,577	$	300		1,346		—
Commercial real estate: farmland & commercial		145		169		116		150		—
Commercial real estate: multifamily		449		590		18		489		—
Total impaired loans with related allowance	$	1,894	$	2,336	$	434	$	1,985	$	—


	December 31, 2017
			Unpaid		Average
	Recorded		Principal		Recorded		Interest
	Investment		Balance		Investment		Recognized
	(Dollars in Thousands)
Loans with No Related Allowance
Domestic
Commercial	$	16,646	$	44,095	$	19,615	$	3
Commercial real estate: other construction & land development		2,310		2,455		3,493		—
Commercial real estate: farmland & commercial		32,675		33,275		38,536		—
Commercial real estate: multifamily		476		505		511		—
Residential: first lien		6,852		6,968		7,249		324
Residential: junior lien		723		736		970		45
Consumer		1,281		1,283		1,293		3
Foreign		347		347		750		16
Total impaired loans with no related allowance	$	61,310	$	89,664	$	72,417	$	391

The following table details key information regarding the Company’s impaired loans by loan class at March 31, 2017:



	March 31, 2017
	Average
	Recorded		Interest
	Investment		Recognized
	(Dollars in Thousands)
Loans with Related Allowance
Domestic
Commercial	$	1,165	$	—
Commercial real estate: other construction & land development		1,299		—
Commercial real estate: farmland & commercial		1,820		—
Commercial real estate: first lien		62		—
Total impaired loans with related allowance	$	4,346	$	—


	March 31, 2017
	Quarter to Date
	Average
	Recorded		Interest
	Investment		Recognized
	(Dollars in Thousands)
Loans with No Related Allowance
Domestic
Commercial	$	20,789	$	1
Commercial real estate: other construction & land development		2,683		—
Commercial real estate: farmland & commercial		6,751		28
Commercial real estate: multifamily		539		—
Residential: first lien		6,558		79
Residential: junior lien		972		12
Consumer		1,246		—
Foreign		748		4
Total impaired loans with no related allowance	$	40,286	$	124

A portion of the impaired loans have adequate collateral and credit enhancements not requiring a related allowance for loan loss. Management recognizes the risks associated with these impaired loans, however, management is confident the Company’s loss exposure regarding these credits will be significantly reduced due to the Company’s long-standing practices that encompass the following principles: (i) the financial strength of the borrower, including strong earnings, a high net worth, significant liquidity and an acceptable debt to worth ratio, (ii) managerial and business competence, (iii) the ability to repay, (iv) for a new business, projected cash flows, (v) loan to value, (vi) in the case of a secondary guarantor, a guarantor financial statement, and (viii) financial and/or other character references. 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.

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, 2018		December 31, 2017
		(Dollars in Thousands)
Domestic
Commercial	$	6,742	$	6,910
Commercial real estate: farmland & commercial		1,389		—
Residential: first lien		5,974		6,140
Residential: junior lien		701		712
Consumer		1,157		1,237
Foreign		338		347

Total troubled debt restructuring	$	16,301	$	15,346

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, 2018 was adequate to absorb probable losses from loans in the portfolio at that date.

The following tables present information regarding the aging of past due loans by loan class at March 31, 2018 and December 31, 2017:


	March 31, 2018
							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	$	2,492	$	894	$	18,571	$	962	$	21,957	$	1,101,139	$	1,123,096
Commercial real estate: other construction & land development		964		5,034		1,025		211		7,023		1,718,606		1,725,629
Commercial real estate: farmland & commercial		4,415		2,525		30,410		646		37,350		2,054,489		2,091,839
Commercial real estate: multifamily		175		—		507		37		682		178,634		179,316
Residential: first lien		2,466		1,097		5,120		4,917		8,683		418,996		427,679
Residential: junior lien		1,184		202		797		793		2,183		699,072		701,255
Consumer		767		65		69		47		901		45,877		46,778
Foreign		2,825		315		574		574		3,714		153,797		157,511
Total past due loans	$	15,288	$	10,132	$	57,073	$	8,187	$	82,493	$	6,370,610	$	6,453,103


	December 31, 2017
							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	$	3,790	$	398	$	18,308	$	537	$	22,496	$	1,063,971	$	1,086,467
Commercial real estate: other construction & land development		354		308		820		6		1,482		1,682,068		1,683,550
Commercial real estate: farmland & commercial		3,925		518		31,133		954		35,576		2,007,709		2,043,285
Commercial real estate: multifamily		84		—		476		—		560		192,356		192,916
Residential: first lien		4,295		2,458		4,095		3,861		10,848		421,929		432,777
Residential: junior lien		1,310		580		1,110		1,099		3,000		697,748		700,748
Consumer		868		98		160		133		1,126		48,417		49,543
Foreign		1,229		69		667		667		1,965		156,921		158,886
Total past due loans	$	15,855	$	4,429	$	56,769	$	7,257	$	77,053	$	6,271,119	$	6,348,172

The Company’s internal classified report is segregated into the following categories: (i) “Special Review Credits,” (ii) “Watch List-Pass Credits,” and (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, 2018 and December 31, 2017 is as follows:


			March 31, 2018
			Special		Watch		Watch List—		Watch List—
	Pass		Review		List—Pass		Substandard		Impaired
			(Dollars in Thousands)
Domestic
Commercial	$	970,585	$	—	$	1,299	$	132,828	$	18,384
Commercial real estate: other construction & land development		1,658,783		3,532		667		60,232		2,415
Commercial real estate: farmland & commercial		1,851,726		61,413		45,022		97,108		36,570
Commercial real estate: multifamily		177,894		—		952		—		470
Residential: first lien		420,060		38		127		707		6,747
Residential: junior lien		699,567		984		—		—		704
Consumer		45,573		—		—		—		1,205
Foreign		157,173		—		—		—		338
Total	$	5,981,361	$	65,967	$	48,067	$	290,875	$	66,833


			December 31, 2017
			Special		Watch		Watch List—		Watch List—
	Pass		Review		List—Pass		Substandard		Impaired
			(Dollars in Thousands)
Domestic
Commercial	$	905,707	$	—	$	3,170	$	159,643	$	17,947
Commercial real estate: other construction & land development		1,616,604		1,288		672		62,531		2,455
Commercial real estate: farmland & commercial		1,863,763		5,134		41,820		99,445		33,123
Commercial real estate: multifamily		192,440		—		—		—		476
Residential: first lien		425,811		40		—		74		6,852
Residential: junior lien		699,875		150		—		—		723
Consumer		48,262		—		—		—		1,281
Foreign		158,539		—		—		—		347
Total	$	5,911,001	$	6,612	$	45,662	$	321,693	$	63,204

The increase in Special Review credits at March 31, 2018 compared to December 31, 2017 can be attributed to the reclassification of one relationship secured by real estate used for day care facilities from Pass. The decrease in Watch-List Substandard credits at March 31, 2018 compared to December 31, 2017 can be primarily attributed to the payoff of a loan relationship secured by barges used in the transportation of petroleum products.