Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2013

Receivables [Abstract]

Loans and Allowance for Loan Losses

Note 4 –Loans and Allowance for Loan Losses

Loans held for investment 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 collectability of the principal is unlikely.

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 and reviews 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 geographic location.

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 primarily 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.

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

The allowance is an amount management believes is appropriate to absorb probable losses that have been incurred on existing loans as of the balance sheet date 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 considers 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 appropriateness 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 on a particular loan. In addition, we adjust our allowance for qualitative factors such as current local economic conditions and trends, including, without limitations, 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.

Although we believe we use the best information available to make loan loss allowance determinations, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making our initial determinations. A further downturn in the economy and employment could result in increased levels of non-performing assets and charge-offs, increased loan provisions and reductions in income. Additionally, bank regulatory agencies periodically review our allowance for loan losses and could require additions to the loan loss allowance based on their judgment of information available to them at the time of their examination.

Accrual of interest is discontinued on a loan and payments are 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. Except consumer loans, 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, management determines that 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 uncollectable.

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 March 31, 2013 and 2012, and December 31, 2012, 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.

From time to time, the Company modifies its loan agreement with a borrower. A modified loan is considered a troubled debt restructuring when two conditions are met: (i) the borrower is experiencing financial difficulty and (ii) concessions are made by the Company that would not otherwise be considered for a borrower with similar credit risk characteristics. Modifications to loan terms may include a lower interest rate, a reduction of principal, or a longer term to maturity. To date, these troubled debt restructurings have been such that, after considering economic and business conditions and collection efforts, the collection of interest is doubtful and therefore the loan has been placed on non-accrual. Each of these loans is evaluated for impairment and a specific reserve is recorded based on probable losses, taking into consideration the related collateral and modified loan terms and cash flow. As of March 31, 2013 and 2012, and December 31, 2012, all of the Company’s troubled debt restructured loans are included in the non-accrual totals.

The Company originates certain mortgage loans 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 on an aggregate basis. Loans held for sale totaled $10,122,000, $5,695,000 and $11,457,000, at March 31, 2013 and 2012 and December 31, 2012, respectively, in which the carrying amounts approximate fair value. The mortgage loan sales contracts contain indemnification clauses should the loans default, generally in the first three to six months, 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.

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

	March 31,				December 31, 2012
	2013		2012
Commercial	$	513,422	$	433,351	$	509,609
Agricultural		55,247		57,977		68,306
Real estate		1,275,564		1,083,244		1,226,823
Consumer		283,782		218,600		272,428
Total loans held for investment	$	2,128,015	$	1,793,172	$	2,077,166

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

	March 31,				December 31, 2012
	2013		2012
Non-accrual loans	$	22,509	$	20,963	$	21,800
Loans still accruing and past due 90 days or more		24		53		97
Restructured loans*		—		—		—
Total	$	22,533	$	21,016	$	21,897

* Restructured loans whose interest collection, after considering economic and business conditions and collection efforts, is 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):

March 31, 2013		March 31, 2012		December 31, 2012
Recorded Investment	Valuation Allowance	Recorded Investment	Valuation Allowance	Recorded Investment	Valuation Allowance
$ 22,509	$5,793	$20,963	$5,357	$21,800	$6,010

The average recorded investment in impaired loans for the three months ended March 31, 2013 and 2012 and the year ended December 31, 2012 was approximately $23,163,000, $21,957,000 and $24,025,000, respectively. The Company had $25,718,000, $28,868,000 and $25,462,000 in non-accrual, past due 90 days still accruing and restructured loans and foreclosed assets at March 31, 2013 and 2012, and December 31, 2012, respectively. Non-accrual loans totaled $22,509,000, $20,963,000 and $21,800,000, respectively, and consisted of the following amounts by type (in thousands):

	March 31,				December 31, 2012
	2013		2012
Commercial	$	1,133	$	3,665	$	2,251
Agricultural		473		923		372
Real estate		20,502		16,026		18,698
Consumer		401		349		479
Total	$	22,509	$	20,963	$	21,800

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

The Company’s impaired loans and related allowance as of March 31, 2013 and 2012, and December 31, 2012, are summarized in the following table (in thousands). No interest income was recognized on impaired loans subsequent to their classification as impaired.

March 31, 2013	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Three-month Average Recorded Investment
Commercial	$	1,555	$	25	$	1,108	$	1,133	$	555	$	1,232
Agricultural		489		25		448		473		169		483
Real Estate		24,937		1,956		18,546		20,502		4,901		21,028
Consumer		466		77		324		401		168		420
Total	$	27,447	$	2,083	$	20,426	$	22,509	$	5,793	$	23,163

March 31, 2012	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Three-month Average Recorded Investment
Commercial	$	4,218	$	24	$	3,641	$	3,665	$	1,990	$	3,817
Agricultural		948		—		923		923		170		922
Real Estate		20,058		3,470		12,556		16,026		3,082		16,838
Consumer		414		55		294		349		115		380
Total	$	25,638	$	3,549	$	17,414	$	20,963	$	5,357	$	21,957

December 31, 2012	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Year-to-Date 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

The Company recognized interest income on impaired loans prior to being recognized as impaired of approximately $384,000 during the year ended December 31, 2012. Such amounts for the three-month period ended March 31, 2013 and 2012 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 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 are 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 though 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 non-accrual.

At March 31, 2013 and December 31, 2012, the following summarizes the Company’s internal ratings of its loans held for investment (in thousands):

March 31, 2013	Pass		Special Mention		Substandard		Doubtful		Total
Commercial	$	501,859	$	2,083	$	9,449	$	31	$	513,422
Agricultural		51,321		337		3,582		7		55,247
Real Estate		1,222,112		15,015		38,281		156		1,275,564
Consumer		282,545		349		870		18		283,782
Total	$	2,057,837	$	17,784	$	52,182	$	212	$	2,128,015

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

At March 31, 2013 and December 31, 2012, the Company’s past due loans are as follows (in thousands):

March 31, 2013	15-59 Days Past Due*		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		90 Days Past Due Still Accruing
Commercial	$	4,146	$	307	$	283	$	4,736	$	508,686	$	513,422	$	3
Agricultural		641		16		—		657		54,590		55,247		—
Real Estate		14,962		1,653		1,907		18,522		1,257,042		1,275,564		—
Consumer		1,629		227		144		2,000		281,782		283,782		21
Total	$	21,378	$	2,203	$	2,334	$	25,915	$	2,102,100	$	2,128,015	$	24

December 31, 2012	15-59 Days Past Due*		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans		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

* 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 March 31, 2013 and 2012, and December 31, 2012, 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):

	March 31,				December 31, 2012
	2013		2012
Allowance for loan losses provided for:
Loans specifically evaluated as impaired	$	5,793	$	5,357	$	6,010
Remaining portfolio		28,879		29,172		28,829
Total allowance for loan losses	$	34,672	$	34,529	$	34,839

The following table details the allowance for loan losses at March 31, 2013 and December 31, 2012 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.

March 31, 2013	Commercial		Agricultural		Real Estate		Consumer		Total
Loans individually evaluated for impairment	$	2,542	$	388	$	8,983	$	315	$	12,228
Loans collectively evaluated for impairment		3,962		1,078		15,878		1,526		22,444
Total	$	6,504	$	1,466	$	24,861	$	1,841	$	34,672

December 31, 2012	Commercial		Agricultural		Real Estate		Consumer		Total
Loans individually evaluated for impairment	$	3,253	$	388	$	8,380	$	308	$	12,329
Loans 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

Changes in the allowance for loan losses for the three months ended March 31, 2013 and 2012 are summarized as follows (in thousands):

Three months ended March 31, 2013	Commercial			Agricultural			Real Estate			Consumer			Total
Beginning balance	$	7,343		$	1,541		$	24,063		$	1,892		$	34,839
Provision for loan losses		(672	)		(86	)		1,120			39			401
Recoveries		121			11			28			95			255
Charge-offs		(288	)		—			(350	)		(185	)		(823	)
Ending balance	$	6,504		$	1,466		$	24,861		$	1,841		$	34,672

Three months ended March 31, 2012	Commercial			Agricultural			Real Estate			Consumer			Total
Beginning balance	$	9,664		$	1,482		$	21,533		$	1,636		$	34,315
Provision for loan losses		94			(119	)		1,161			160			1,296
Recoveries		103			12			113			95			323
Charge-offs		(249	)		(22	)		(972	)		(162	)		(1,405	)
Ending balance	$	9,612		$	1,353		$	21,835		$	1,729		$	34,529

The Company’s recorded investment in loans as of March 31, 2013 and December 31, 2012 related to the balance in the allowance for loan losses on the basis of the Company’s impairment methodology was as follows (in thousands):

March 31, 2013	Commercial		Agricultural		Real Estate		Consumer		Total
Loans individually evaluated for impairment	$	11,563	$	3,926	$	53,452	$	1,237	$	70,178
Loans collectively evaluated for impairment		501,859		51,321		1,222,112		282,545		2,057,837
Total	$	513,422	$	55,247	$	1,275,564	$	283,782	$	2,128,015

December 31, 2012	Commercial		Agricultural		Real Estate		Consumer		Total
Loans individually evaluated for impairment	$	11,421	$	3,909	$	50,493	$	1,314	$	67,137
Loans 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

The Company’s loans that were modified in the three months ended March 31, 2013 and 2012 and considered a troubled debt restructuring are as follows (dollars in thousands):

	Three months ended March 31, 2013						Three months ended March 31, 2012
			Pre-Modification		Post- Modification				Pre-Modification		Post- Modification
			Recorded		Recorded				Recorded		Recorded
	Number		Investment		Investment		Number		Investment		Investment
Commercial		2	$	120	$	120		4	$	127	$	127
Agricultural		1		24		24		2		108		108
Real Estate		4		796		796		13		3,803		3,803
Consumer		—		—		—		—		—		—
Total		7	$	940	$	940		19	$	4,038	$	4,038

The balances below provide information as to how the loans were modified as troubled debt restructured loans during the three months ended March 31, 2013 and 2012 (in thousands):

	Three months ended March 31, 2013						Three months ended March 31, 2012
	Adjusted Interest Rate		Extended Maturity		Combined Rate and Maturity		Adjusted Interest Rate		Extended Maturity		Combined Rate and Maturity
Commercial	$	—	$	120	$	—	$	17	$	62	$	48
Agricultural		—		24		—		—		13		95
Real Estate		272		350		174		—		—		3,803
Consumer		—		—		—		—		—		—
Total	$	272	$	494	$	174	$	17	$	75	$	3,946

During the three months ended March 31, 2013, 11 loans totaling $1,167,000 that had been modified as a troubled debt restructured loan within the previous 12 months defaulted on the modified loan. 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 three months ended March 31, 2012. The loans are as follows (dollars in thousands):

	Three months ended March 31, 2013
	Number		Balance
Commercial		5	$	217
Agriculture		—		—
Real Estate		5		931
Consumer		1		19
Total		11	$	1,167

As of March 31, 2013, the Company has no commitments to lend additional funds to loan customers whose terms have been modified in troubled debt restructurings.

Our subsidiary bank has 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 March 31, 2013, approximately $1,118,519,000 in loans held by the bank were subject to blanket liens as security for these lines of credit. At March 31, 2013, $68,600,000 in letters of credit issued by the Federal Home Loan Bank of Dallas were outstanding under these lines of credit. The letters of credit were pledged as collateral for public funds held by our bank.