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 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 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 specific 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:

	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,	$	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,	$	20,926		$	11,053		$	20,651		$	609		$	3,868		$	4,011		$	820		$	1,030		$	62,968

	2012
	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,	$	26,617		$	19,940		$	24,227		$	1,003		$	4,562		$	4,760		$	1,724		$	1,359		$	84,192
Losses charge to allowance	(3,424		)	(71		)	(7,994		)	—			(36		)	(312		)	(247		)	—			(12,084		)
Recoveries credited to allowance	1,244			5			31			—			2			45			61			—			1,388
Net losses charged to allowance	(2,180		)	(66		)	(7.963		)	—			(34		)	(267		)	(186		)	—			(10,696		)

Provision charged to operations	140			(108		)	5,546			(154		)	(149		)	12			64			(66		)	5,285

Balance at March 31,	$	24,577		$	19,766		$	21,810		$	849		$	4, 379		$	4,505		$	1,602		$	1,293		$	78,781

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 allowance for probable loan losses increased 8.2% to $62,968,000 at March 31, 2013 from $58,193,000 at December 31,2012. The change is primarily driven by the addition of a specific reserve of approximately $10,000,0000 on a previously identified impaired commercial loan that further deteriorated during the three months ended March 31,2013, partially offset by a decrease in the general reserve due to the stability of general economic factors evaluated by management.

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, 2013 and December 31, 2012:

	March 31, 2013
	Loans individually evaluated for impairment				Loans collectively evaluated for impairment
	Recorded Investment		Allowance		Recorded Investment		Allowance
	(Dollars in Thousands)
Domestic
Commercial	$	33,108	$	11,544	$	835,849	$	9,382
Commercial real estate: other construction & land development	26,172		823		1,059,334		10,230
Commercial real estate: farmland & commercial	11,900		2,644		1,697,537		18,007
Commercial real estate: multifamily	338		—		78,516		609
Residential: first lien	4,546		—		445,845		3,868
Residential: junior lien	1,702		—		376,995		4,011
Consumer	1,245		—		68,785		820
Foreign	462		—		184,175		1,030

Total	$	79,473	$	15,011	$	4,747,036	$	47,957

	December 31, 2012
	Loans individually evaluated for impairment				Loans collectively evaluated for impairment
	Recorded Investment		Allowance		Recorded Investment		Allowance
	(Dollars in Thousands)
Domestic
Commercial	$	32,768	$	1,477	$	736,342	$	10,155
Commercial real estate: other construction & land development	28,660		539		1,119,009		12,181
Commercial real estate: farmland & commercial	13,945		2,730		1,659,377		19,150
Commercial real estate: multifamily	353		—		82,595		694
Residential: first lien	3,656		—		453,075		4,390
Residential: junior lien	1,850		—		379,886		4,448
Consumer	1,326		—		73,188		1,289
Foreign	447		—		188,527		1,140

Total	$	83,005	$	4,746	$	4,691,999	$	53,447

The table below provides additional information on loans accounted for on a non-accrual basis by loan class at March 31, 2013 and December 31, 2012:

	March 31, 2013		December 31, 2012
	(Dollars in Thousands)

Domestic
Commercial	$	32,292	$	31,929
Commercial real estate: other construction & land development	23,922		26,410
Commercial real estate: farmland & commercial	9,636		11,681
Commercial real estate: multifamily	338		353
Residential: first lien	1,702		1,175
Residential: junior lien	126		175
Consumer	42		45
Foreign	21		—

Total non-accrual loans	$	68,079	$	71,768

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, 2013 and December 31, 2012:

	March 31, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Recognized
	(Dollars in Thousands)

Loans with Related Allowance
Domestic
Commercial	$	18,668	$	18,702	$	11,544	$	18,688	$	9
Commercial real estate: other construction & land development	5,516		5,605		823		5,478		—
Commercial real estate: farmland & commercial	6,438		9,717		2,644		6,452		23
Total impaired loans with related allowance	$	30,622	$	34,024	$	15,011	$	30,618	$	32

	March 31, 2013
	Recorded Investment		Unpaid Principal Balance		Average Recorded Investment		Interest Recognized
	(Dollars in Thousands)

Loans with No Related Allowance
Domestic
Commercial	$	14,440	$	14,487	$	15,147	$	1
Commercial real estate: other construction & land development	20,656		20,743		20,878		18
Commercial real estate: farmland & commercial	5,462		6,232		5,006		—
Commercial real estate: multifamily	338		338		345		—
Residential: first lien	4,546		4,595		3,840		33
Residential: junior lien	1,702		1,720		1,732		24
Consumer	1,245		1,250		1,246		—
Foreign	462		463		457		5
Total impaired loans with no related allowance	$	48,851	$	49,828	$	48,651	$	81

	December 31, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Recognized
	(Dollars in Thousands)

Loans with Related Allowance
Domestic
Commercial	$	1,633	$	1,679	$	1,477	$	21,126	$	39
Commercial real estate: other construction & land development	3,671		3,671		539		6,608		—
Commercial real estate: farmland & commercial	6,678		9,923		2,730		7,342		92
Total impaired loans with related allowance	$	11,982	$	15,273	$	4,746	$	35,076	$	131

	December 31, 2012
	Recorded Investment		Unpaid Principal Balance		Average Recorded Investment		Interest Recognized
	(Dollars in Thousands)

Loans with No Related Allowance
Domestic
Commercial	$	31,135	$	31,170	$	2,996	$	4
Commercial real estate: other construction & land development	24,989		25,160		39,449		141
Commercial real estate: farmland & commercial	7,267		9,340		16,536		8
Commercial real estate: multifamily	353		353		381		—
Residential: first lien	3,656		3,984		2,876		60
Residential: junior lien	1,850		1,944		1,939		104
Consumer	1,326		1,330		1,193		—
Foreign	447		447		166		6
Total impaired loans with no related allowance	$	71,023	$	73,728	$	65,536	$	323

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 improving and better positioned to recover 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 $19,232,000 and $24,300,000 as of March 31, 2013 and December 31, 2012, 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, 2013 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, 2013 and December 31, 2012:

	March 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	$	4,024	$	25,758	$	4,457	$	3,762	$	34,239	$	834,718	$	868,957
Commercial real estate: other construction & land development	556		14,352		30,668		7,910		45,576		1,039,930		1,085,506
Commercial real estate: farmland & commercial	6,067		2,039		7,767		4,491		15,873		1,693,564		1,709,437
Commercial real estate: multifamily	862		—		412		73		1,274		77,580		78,854
Residential: first lien	4,093		1,232		8,648		7,836		13,973		436,418		450,391
Residential: junior lien	641		112		434		372		1,187		377,510		378,697
Consumer	1,702		299		658		627		2,659		67,371		70,030
Foreign	956		49		556		535		1,561		183,076		184,637
Total past due loans	$	18,901	$	43,841	$	53,600	$	25,606	$	116,342	$	4,710,167	$	4,826,509

	December 31, 2012
	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	$	4,393	$	471	$	3,386	$	2,689	$	8,250	$	760,860	$	769,110
Commercial real estate: other construction & land development	1,107		2,300		24,225		497		27,632		1,120,037		1,147,669
Commercial real estate: farmland & commercial	3,127		21,272		2,310		929		26,709		1,646,613		1,673,322
Commercial real estate: multifamily	685		—		353		—		1,038		81,910		82,948
Residential: first lien	4,305		2,510		10,645		9,657		17,460		439,271		456,731
Residential: junior lien	2,035		410		259		115		2,704		379,032		381,736
Consumer	1,598		404		915		882		2,917		71,597		74,514
Foreign	2,257		1,005		264		264		3,526		185,448		188,974
Total past due loans	$	19,507	$	28,372	$	42,357	$	15,033	$	90,236	$	4,684,768	$	4,775,004

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, 2013 and December 31, 2012 is as follows:

			March 31, 2013
	Pass		Special Review		Watch List - Pass		Watch List - Substandard		Watch List - Impaired
			(Dollars in Thousands)

Domestic
Commercial	$	775,851	$	3,986	$	15,888	$	40,124	$	33,108
Commercial real estate: other construction & land development	992,504		34,790		2,901		29,139		26,172
Commercial real estate: farmland & commercial	1,555,921		86,445		32,798		22,373		11,900
Commercial real estate: multifamily	78,465		—		51		—		338
Residential: first lien	439,754		517		—		5,574		4,546
Residential: junior lien	375,111		77		—		1,807		1,702
Consumer	68,785		—		—		—		1,245
Foreign	183,814		—		—		361		462
Total	$	4,470,205	$	125,815	$	51,638	$	99,378	$	79,473

			December 31, 2012
	Pass		Special Review		Watch List - Pass		Watch List - Substandard		Watch List - Impaired
			(Dollars in Thousands)

Domestic
Commercial	$	675,263	$	4,278	$	16,535	$	40,266	$	32,768
Commercial real estate: other construction & land development	1,038,749		55,079		2,614		22,567		28,660
Commercial real estate: farmland & commercial	1,486,572		109,144		46,316		17,345		13,945
Commercial real estate: multifamily	82,542		—		53		—		353
Residential: first lien	446,218		519		—		6,338		3,656
Residential: junior lien	378,000		77		309		1,500		1,850
Consumer	73,188		—		—		—		1,326
Foreign	188,499		—		28		—		447
Total	$	4,369,031	$	169,097	$	65,855	$	88,016	$	83,005