Loans are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan losses. Interest on loans is calculated by using the simple interest method on daily balances of the principal amounts outstanding. The Company defers and amortizes net loan origination fees and costs as an adjustment to yield. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes the collectibility of the principal is unlikely.

The allowance is an amount management believes will be adequate to absorb estimated inherent losses on existing loans that are deemed uncollectible based upon management's review and evaluation of the loan portfolio. The allowance for loan losses is comprised of three elements: (i) specific reserves determined in accordance with current authoritative accounting guidance based on probable losses on specific classified loans; (ii) general reserve determined in accordance with current authoritative accounting guidance that consider historical loss rates; and (iii) qualitative reserves determined in accordance with current authoritative accounting guidance based upon general economic conditions and other qualitative risk factors both internal and external to the Company. The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Management's periodic evaluation of the adequacy of the allowance is based on general economic conditions, the financial condition of borrowers, the value and liquidity of collateral, delinquency, prior loan loss experience, and the results of periodic reviews of the portfolio. For purposes of determining our general reserve, the loan portfolio, less cash secured loans, government guaranteed loans and classified loans, is multiplied by the Company's historical loss rate. Our methodology is constructed so that specific allocations are increased in accordance with deterioration in credit quality and a corresponding increase in risk of loss. In addition, we adjust our allowance for qualitative factors such as current local economic conditions and trends, including unemployment, changes in lending staff, policies and procedures, changes in credit concentrations, changes in the trends and severity of problem loans and changes in trends in volume and terms of loans. This additional allocation based on qualitative factors serves to compensate for additional areas of uncertainty inherent in our portfolio that are not reflected in our historic loss factors. Accrual of interest is discontinued on a loan and payments applied to principal when management believes, after considering economic and business conditions and collection efforts, the borrower's financial condition is such that collection of interest is doubtful. Generally all loans past due greater than 90 days, based on contractual terms, are placed on non-accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Consumer loans are generally charged-off when a loan becomes past due 90 days. For other loans in the portfolio, facts and circumstances are evaluated in making charge-off decisions.

Loans are considered impaired when, based on current information and events, it is probable we will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. If a loan is impaired, a specific valuation allowance is allocated, if necessary. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

The Company's policy requires measurement of the allowance for an impaired collateral dependent loan based on the fair value of the collateral. Other loan impairments are measured based on the present value of expected future cash flows or the loan's observable market price. At June 30, 2011 and December 31, 2010, all significant impaired loans have been determined to be collateral dependent and the allowance for loss has been measured utilizing the estimated fair value of the collateral.

The Company originates mortgage loans primarily for sale in the secondary market. Accordingly, these loans are classified as held for sale and are carried at the lower of cost or fair value. The mortgage loan sales contracts contain indemnification clauses should the loans default, generally in the first sixty to ninety days or if documentation is determined not to be in compliance with regulations. The Company's historic losses as a result of these indemnities have been insignificant.

Loans acquired, including loans acquired in a business combination, that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all amounts contractually owed are initially recorded at fair value with no valuation allowance. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, is recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, are not recognized as a yield adjustment. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows are recognized as impairment. Valuation allowances on these impaired loans reflect only losses incurred after the acquisition.

The Company has certain lending policies and procedures in place that are designed to maximize loan income with an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis and makes changes as appropriate. Management receives frequent reports related to loan originations, quality, concentrations, delinquencies, non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions, both by type of loan and geography.

Commercial loans are underwritten after evaluating and understanding the borrower's ability to operate profitably and effectively. Underwriting standards are designed to determine whether the borrower possesses sound business ethics and practices and to evaluate current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory and include personal guarantees.

Agricultural loans are subject to underwriting standards and processes similar to commercial loans. These agricultural loans are based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. Most agricultural loans are secured by the agriculture related assets being financed, such as farm land, cattle or equipment and include personal guarantees.

Real estate loans are also subject to underwriting standards and processes similar to commercial and agricultural loans. These loans are underwritten primarily based on projected cash flows and, secondarily, as loans secured by real estate. The repayment of real estate loans is generally largely dependent on the successful operation of the property securing the loans or the business conducted on the property securing the loan. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company's real estate portfolio are generally diverse in terms of type and geographic location. This diversity helps reduce the exposure to adverse economic events that affect any single market or industry. Generally real estate loans are owner occupied which further reduces the Company's risk.

The Company utilizes methodical credit standards and analysis to supplement its policies and procedures in underwriting consumer loans. The Company's loan policy addresses types of consumer loans that may be originated and the collateral, if secured, that must be perfected. The relatively smaller individual dollar amounts of consumer loans that are spread over numerous individual borrowers also minimizes the Company's risk.

Included in real estate-mortgage loans above are $4.3 million, $6.0 million and $13.2 million, respectively, in loans held for sale at June 30, 2011 and 2010 and December 31, 2010 in which the carrying amounts approximate fair value.

The Company's recorded investment in impaired loans and the related valuation allowance are as follows (in thousands):

The average recorded investment in impaired loans for the quarter and six-months ended June 30, 2011 and the year ended December 31, 2010 was approximately $19,918,000, $20,559,000 and $17,242,000, respectively. The Company had approximately $27,383,000 and $25,950,000 in nonaccrual, past due 90 days still accruing and restructured loans and foreclosed assets at June 30, 2011 and December 31, 2010, respectively. Non accrual loans totaled $18.6 million and $15.4 million, respectively, of this amount and consisted of (in thousands):

The Company's impaired loans and related allowance as of June 30, 2011 and December 31, 2010 are summarized in the following table (in thousands). No interest income was recognized on impaired loans subsequent to their classification as impaired.


June 30, 2011	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment

Commercial	$	1,679	$	26	$	1,394	$	1,419	$	688	$	1,513
Agricultural		481		12		394		407		190		829
Real Estate		19,314		3,597		12,965		16,563		2,227		17,974
Consumer		263		64		147		210		65		243


Total	$	21,737	$	3,699	$	14,900	$	18,599	$	3,170	$	20,559


December 31, 2010	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Commercial	$	1,625	$	434	$	969	$	1,403	$	471	$	1,622
Agricultural		3,048		405		2,625		3,030		695		3,922
Real Estate		12,518		1,224		9,451		10,675		1,881		11,276
Consumer		449		81		256		337		105		422


Total	$	17,640	$	2,144	$	13,301	$	15,445	$	3,152	$	17,242

Interest payments received on impaired loans are recorded as interest income unless collections of the remaining recorded investment are doubtful, at which time payments received are recorded as reductions of principal. The Company recognized interest income on impaired loans of approximately $425,000 during the year ended December 31, 2010. If interest on impaired loans had been recognized on a full accrual basis during the year ended December 31, 2010, such income would have approximated $1,479,000. Such amounts for the quarter and six-months ended June 30, 2011 were not significant.

From a credit risk standpoint, the Company classifies its loans in one of four categories: (i) pass, (ii) special mention, (iii) substandard or (iv) doubtful. Loans classified as loss are charged-off.

The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. The Company reviews the ratings on credits monthly. Ratings are adjusted to reflect the degree of risk and loss that is felt to be inherent in each credit as of each monthly reporting period. Our methodology is structured so that specific allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).

Credits rated special mention show clear signs of financial weaknesses or deterioration in credit worthiness, however, such concerns are not so pronounced that the Company generally expects to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits rated more harshly.

Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to strengthen the Company's position, and/or to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed.

Credits rated doubtful are those in which full collection of principal appears highly questionable, and which some degree of loss is anticipated, even thought the ultimate amount of loss may not yet be certain and/or other factors exist which could affect collection of debt. Based upon available information, positive action by the Company is required to avert or minimize loss. Credits rated doubtful are generally also placed on nonaccrual.

Updates to internally assigned classifications are made monthly and/or upon significant developments.

At June 30, 2011 and December 31, 2010, the following summarizes the Company's internal ratings of its loans (in thousands):


June 30, 2011	Pass		Special Mention		Substandard		Doubtful		Total
Commercial	$	417,357	$	9,185	$	12,834	$	101	$	439,477
Agricultural		57,080		961		3,026		16		61,083
Real Estate		952,275		17,088		47,358		74		1,016,795
Consumer		200,967		333		747		13		202,060

Total	$	1,627,679	$	27,567	$	63,965	$	204	$	1,719,415


December 31, 2010	Pass		Special Mention		Substandard		Doubtful		Total
Commercial	$	414,436	$	11,505	$	16,346	$	90	$	442,377
Agricultural		72,124		1,094		9,144		18		82,380
Real Estate		912,691		15,721		47,036		77		975,525
Consumer		188,325		197		1,510		32		190,064

Total	$	1,587,576	$	28,517	$	74,036	$	217	$	1,690,346

At June 30, 2011 and December 31, 2010, the Company's past due loans are as follows (in thousands):


June 30, 2011	15-59 Days Past Due*		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Total Current		Total Loans		Total 90 Days Past Due Still Accruing
Commercial	$	2,911	$	46	$	504	$	3,461	$	436,016	$	439,477	$	—
Agricultural		116		12		—		128		60,955		61,083		—
Real Estate		10,658		2,180		2,013		14,851		1,001,944		1,016,795		—
Consumer		915		17		6		938		201,122		202,060		6

Total	$	14,600	$	2,255	$	2,523	$	19,378	$	1,700,037	$	1,719,415	$	6


December 31, 2010	15-59 Days Past Due*		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Total Current		Total Loans		Total 90 Days Past Due Still Accruing
Commercial	$	2,138	$	241	$	713	$	3,092	$	439,285	$	442,377	$	20
Agricultural		371		—		—		371		82,009		82,380		—
Real Estate		6,638		1,569		3,792		11,999		963,526		975,525		2,169
Consumer		1,048		180		25		1,253		188,811		190,064		7

Total	$	10,195	$	1,990	$	4,530	$	16,715	$	1,673,631	$	1,690,346	$	2,196

*	The Company monitors commercial, agricultural and real estate loans after such loans are 15 days past due. Consumer loans are monitored after such loans are 30 days past due.

The allowance for loan losses as of June 30, 2011 and 2010 and December 31, 2010, is presented below. Management has evaluated the adequacy of the allowance for loan losses by estimating the probable losses in various categories of the loan portfolio, which are identified below (in thousands):

The following table details the allowance for loan loss at June 30, 2011 and December 31, 2010 by portfolio segment (in thousands). Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

Changes in the allowance for loan losses for the three months ended June 30, 2011 are summarized as follows (in thousands):


	Commercial			Agricultural		Real Estate			Consumer			Total
Beginning balance	$	8,652		$	1,151	$	20,962		$	1,736		$	32,501
Provision for loan losses		(78	)		614		1,276			112			1,924
Recoveries		39			1		245			92			377
Charge-offs		(46	)		—		(1,089	)		(261	)		(1,396	)


Ending balance	$	8,567		$	1,766	$	21,394		$	1,679		$	33,406

Changes in the allowance for loan losses for the six months ended June 30, 2011 are summarized as follows (in thousands):


	Commercial			Agricultural			Real Estate			Consumer			Total
Beginning balance	$	7,745		$	2,299		$	19,101		$	1,961		$	31,106
Provision for loan losses		796			(564	)		3,805			14			4,051
Recoveries		73			31			352			199			655
Charge-offs		(47	)		—			(1,864	)		(495	)		(2,406	)


Ending balance	$	8,567		$	1,766		$	21,394		$	1,679		$	33,406

The Company's recorded investment in loans as of June 30, 2011 and December 31, 2010 related to the balance in the allowance for loan losses on the basis of the Company's impairment methodology was as follows (in thousands):

Certain of our subsidiary banks have established lines of credit with the Federal Home Loan Bank of Dallas to provide liquidity and meet pledging requirements for those customers eligible to have securities pledged to secure certain uninsured deposits. At June 30, 2011, approximately $678.6 million in loans held by these subsidiaries were subject to blanket liens as security for these lines of credit.