3.	LOANS AND ALLOWANCE FOR LOAN LOSSES:

Major classifications of loans are as follows (in thousands):


	December 31,
	2012		2011

Commercial	$	509,609	$	454,087

Agricultural		68,306		68,122

Real estate		1,226,823		1,041,396

Consumer		272,428		212,310


Total loans held for investment	$	2,077,166	$	1,775,915

Certain amounts above for December 31, 2011 have been reclassified from prior presentation to be consistent with December 31, 2012 presentation.

Loans held for sale totaled $11,457,000 and $10,629,000 at December 31, 2012 and 2011, respectively, in which the carrying amounts approximate fair value.

The Company’s non-accrual loans, loan still accruing and past due 90 days or more restructured loans are as follows (in thousands):


	December 31,
	2012		2011

Non-accrual loans	$	21,800	$	19,975

Loans still accruing and past due 90 days or more		97		96

Restructured loans *		—		—


Total	$	21,897	$	20,071

*	Restructured loans whose interest collection, after considering economic and business conditions and collection efforts, are doubtful are included in non-accrual loans.

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


December 31, 2012				December 31, 2011
Recorded Investment		Valuation Allowance		Recorded Investment		Valuation Allowance

$	21,800	$	6,010	$	19,975	$	5,953

The average recorded investment in impaired loans for the years ended December 31, 2012, 2011, and 2010 was approximately $24,025,000, $22,348,000, and $17,242,000 respectively. The Company had approximately $25,462,000, and $29,535,000 in nonaccrual, past due 90 days still accruing, restructured loans and foreclosed assets at December 31, 2012 and 2011, respectively. Non-accrual loans totaled $21,800,000 and $19,975,000, respectively, of this amount and consisted of (in thousands):


	December 31,
	2012		2011

Commercial	$	2,251	$	3,450
Agricultural		372		145
Real Estate		18,698		16,193
Consumer		479		187


Total	$	21,800	$	19,975

No additional funds are committed to be advanced in connection with impaired loans.

The Company’s impaired loans and related allowance as of December 31, 2012 and 2011 is summarized in the following table (in thousands). No interest income was recognized on impaired loans subsequent to their classification as impaired.


December 31, 2012	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Commercial	$	2,677	$	20	$	2,231	$	2,251	$	1,350	$	2,966
Agricultural		381		—		372		372		131		437
Real Estate		22,569		2,049		16,649		18,698		4,356		20,164
Consumer		543		115		364		479		173		458


Total	$	26,170	$	2,184	$	19,616	$	21,800	$	6,010	$	24,025


December 31, 2011	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment
Commercial	$	3,856	$	—	$	3,450	$	3,450	$	2,092	$	3,801
Agricultural		199		3		142		145		79		246
Real Estate		19,305		1,786		14,407		16,193		3,708		18,068
Consumer		227		29		158		187		74		233


Total	$	23,587	$	1,818	$	18,157	$	19,975	$	5,953	$	22,348

The Company recognized interest income on impaired loans of approximately $384,000, $1,137,000 and $425,000 during the years ended December 31, 2012, 2011, and 2010, respectively.

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 our credits as part of our on-going monitoring of the credit quality of our loan portfolio. 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 reserves 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.

Credit 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.

At December 31, 2012 and 2011, the following summarizes the Company’s internal ratings of its loans (in thousands):


December 31, 2012	Pass		Special Mention		Substandard		Doubtful		Total

Commercial	$	498,188	$	2,193	$	9,198	$	30	$	509,609
Agricultural		64,397		342		3,559		8		68,306
Real Estate		1,176,330		14,680		35,673		140		1,226,823
Consumer		271,114		382		911		21		272,428

Total	$	2,010,029	$	17,597	$	49,341	$	199	$	2,077,166


December 31, 2011	Pass		Special Mention		Substandard		Doubtful		Total

Commercial	$	432,110	$	9,227	$	12,748	$	2	$	454,087
Agricultural		65,007		347		2,755		13		68,122
Real Estate		980,308		20,922		40,068		98		1,041,396
Consumer		211,177		302		820		11		212,310

Total	$	1,688,602	$	30,798	$	56,391	$	124	$	1,775,915

At December 31, 2012 and 2011, the Company’s past due loans are as follows (in thousands):


December 31, 2012	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	$	1,708	$	470	$	247	$	2,425	$	507,184	$	509,609	$	—
Agricultural		467		95		—		562		67,744		68,306		—
Real Estate		10,141		2,711		1,237		14,089		1,212,734		1,226,823		34
Consumer		1,660		287		163		2,110		270,318		272,428		63

Total	$	13,976	$	3,563	$	1,647	$	19,186	$	2,057,980	$	2,077,166	$	97


December 31, 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	$	1,574	$	430	$	—	$	2,004	$	452,083	$	454,087	$	—
Agricultural		300		60		—		360		67,762		68,122		—
Real Estate		10,215		547		988		11,750		1,029,646		1,041,396		62
Consumer		1,396		128		47		1,571		210,739		212,310		34

Total	$	13,485	$	1,165	$	1,035	$	15,685	$	1,760,230	$	1,775,915	$	96

*	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 December 31, 2012 and 2011, is presented below (in thousands). Management has evaluated the appropriateness of the allowance for loan losses by estimating the losses in various categories of the loan portfolio which are identified below:


	2012		2011
Allowance for loan losses provided for:
Loans specifically evaluated as impaired	$	6,010	$	5,953
Remaining portfolio		28,829		28,362


Total allowance for loan losses	$	34,839	$	34,315

The following table details the allowance for loan loss at December 31, 2012 and 2011 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.


December 31, 2012	Commercial		Agricultural		Real Estate		Consumer		Total

Loans individually evaluated for impairment	$	3,253	$	388	$	8,380	$	308	$	12,329
Loan collectively evaluated for impairment		4,090		1,153		15,683		1,584		22,510

Total	$	7,343	$	1,541	$	24,063	$	1,892	$	34,839


December 31, 2011	Commercial		Agricultural		Real Estate		Consumer		Total

Loans individually evaluated for impairment	$	4,647	$	758	$	8,310	$	282	$	13,997
Loan collectively evaluated for impairment		5,017		724		13,223		1,354		20,318

Total	$	9,664	$	1,482	$	21,533	$	1,636	$	34,315

Changes in the allowance for loan losses for the years ended December 31, 2012 and 2011 are summarized as follows (in thousands):


December 31, 2012	Commercial			Agricultural			Real Estate			Consumer			Total

Beginning balance	$	9,664		$	1,482		$	21,533		$	1,636		$	34,315
Provision (credit) for loan losses		(2,103	)		58			4,842			687			3,484
Recoveries		281			54			639			421			1,395
Charge-offs		(499	)		(53	)		(2,951	)		(852	)		(4,355	)

Ending balance	$	7,343		$	1,541		$	24,063		$	1,892		$	34,839


December 31, 2011	Commercial			Agricultural			Real Estate			Consumer			Total

Beginning balance	$	7,745		$	2,299		$	19,101		$	1,961		$	31,106
Provision (credit) for loan losses		1,949			(755	)		5,240			192			6,626
Recoveries		610			33			874			390			1,907
Charge-offs		(640	)		(95	)		(3,682	)		(907	)		(5,324	)

Ending balance	$	9,664		$	1,482		$	21,533		$	1,636		$	34,315

The Company’s recorded investment in loans as of December 31, 2012 and 2011 related to the balance in the allowance for loan losses on the basis of the Company’s impairment methodology was as follows (in thousands):


December 31, 2012	Commercial		Agricultural		Real Estate		Consumer		Total

Loans individually evaluated for impairment	$	11,421	$	3,909	$	50,493	$	1,314	$	67,137
Loan collectively evaluated for impairment		498,188		64,397		1,176,330		271,114		2,010,029

Total	$	509,609	$	68,306	$	1,226,823	$	272,428	$	2,077,166


December 31, 2011	Commercial		Agricultural		Real Estate		Consumer		Total

Loans individually evaluated for impairment	$	21,977	$	3,115	$	61,088	$	1,133	$	87,313
Loan collectively evaluated for impairment		432,110		65,007		980,308		211,177		1,688,602

Total	$	454,087	$	68,122	$	1,041,396	$	212,310	$	1,775,915

The Company’s loans that were modified in the years ended December 31, 2012 and 2011, and considered a troubled debt restructuring are as follows (dollars in thousands):


	Year ended December 31, 2012						Year ended December 31, 2011
	Number		Pre-Modification Recorded Investment		Post- Modification Recorded Investment		Number		Pre-Modification Recorded Investment		Post- Modification Recorded Investment
Commercial		18	$	1,180	$	1,180		8	$	2,467	$	2,467
Agricultural		5		354		354		4		2,566		2,566
Real Estate		34		12,304		12,304		9		2,292		2,292
Consumer		2		20		20		—		—		—

Total		59	$	13,858	$	13,858		21	$	7,325	$	7,325

The balances below provide information as to how the loans were modified as troubled debt restructured loans during the year ended December 31, 2012 and 2011 (in thousands):


	Year ended December 31, 2012						Year ended December 31, 2011
	Adjusted Interest Rate		Extended Maturity		Combined Rate and Maturity		Adjusted Interest Rate		Extended Maturity		Combined Rate and Maturity
Commercial	$	509	$	298	$	373	$	2,350	$	118	$	—
Agricultural		243		15		95		—		2,566		—
Real Estate		935		2,893		8,477		492		1,468		331
Consumer		—		19		1		—		—		—

Total	$	1,687	$	3,225	$	8,946	$	2,842	$	4,152	$	331

There were eight loans modified as a troubled debt restructured loan within the previous 12 months and for which there was a payment default during the year ended December 31, 2012. A default for purposes of this disclosure is a troubled debt restructured loan in which the borrower is 90 days past due or results in the foreclosure and repossession of the applicable collateral. There were no such defaults for the year ended December 31, 2011. The loans are as follows (dollars in thousands):


	Year ended December 31, 2012
	Number		Balance
Commercial		1	$	30
Agriculture		—		—
Real Estate		6		1,509
Consumer		1		19

Total		8	$	1,558

As of December 31, 2012, the Company has no commitments to lend additional funds to loan customers whose terms have been modified in troubled debt restructurings.

An analysis of the changes in loans to officers, directors, principal shareholders, or associates of such persons for the year ended December 31, 2012 (determined as of each respective year-end) follows (in thousands):


	Beginning Balance		Additional Loans		Payments		Ending Balance

Year ended December 31, 2012	$	42,548	$	81,196	$	80,226	$	43,518

In the opinion of management, those loans are on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the time for comparable transactions with unaffiliated persons.

We have established a line 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 December 31, 2012, approximately $223,678,000 in loans held by our bank subsidiary were subject to blanket liens as security for letters of credit issued under these lines of credit. At December 31, 2012, $87,700,000 letters of credit issued by the Federal Home Loan Bank of Dallas were outstanding under these lines of credit. These letters of credit were pledged as collateral for public funds held by our bank.