The following consolidated selected financial data is derived from the Corporation's audited financial statements as of and for the five years ended December 31, 2014. The following consolidated financial data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related notes in this report.

	AS OF OR FOR THE YEARS ENDED DECEMBER 31,

	2014		2013		2012		2011		2010
	(Dollars in Thousands, Except Per Share Data)
STATEMENT OF CONDITION
Assets	$	12,196,520	$	12,079,477	$	11,882,673	$	11,739,649	$	11,943,469
Investment securities available-for-sale		4,931,963		5,304,579		5,525,015		5,213,915		5,086,457
Net loans		5,614,417		5,129,074		4,716,811		4,969,283		5,325,521
Deposits		8,438,625		8,243,425		8,287,213		7,946,092		7,599,558
Other borrowed funds		1,073,944		1,223,950		749,027		494,161		1,026,780
Junior subordinated deferrable interest debentures		175,416		190,726		190,726		190,726		201,117
Shareholders' equity		1,580,658		1,424,408		1,435,708		1,600,165		1,459,217
INCOME STATEMENT
Interest income	$	393,599	$	363,217	$	375,639	$	418,124	$	458,769
Interest expense		46,543		54,632		74,499		94,298		114,036

Net interest income		347,056		308,585		301,140		323,826		344,733
Provision for probable loan losses		14,423		22,968		27,959		17,318		22,812
Non-interest income		178,348		189,605		200,591		201,493		218,784
Non-interest expense		281,043		292,632		315,372		316,774		339,725

Income before income taxes		229,938		182,590		158,400		191,227		200,980
Income taxes		76,787		56,239		50,565		64,078		70,957

Net income		153,151		126,351		107,835		127,149		130,023
Preferred stock dividends and discount accretion		—		—		14,362		13,280		13,126

Net income available to common shareholders	$	153,151	$	126,351	$	93,473	$	113,869	$	116,897



Per common share:
Basic	$	2.29	$	1.88	$	1.39	$	1.69	$	1.72
Diluted	$	2.28	$	1.88	$	1.39	$	1.69	$	1.72

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's discussion and analysis represents an explanation of significant changes in the financial position and results of operations of International Bancshares Corporation and its subsidiaries (the "Company" or the "Corporation") on a consolidated basis for the three-year period ended December 31, 2014. The following discussion should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2014, and the Selected Financial Data and Consolidated Financial Statements included elsewhere herein.

Certain matters discussed in this report, excluding historical information, include forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by these sections. Although the Company believes such forward-looking statements are based on reasonable assumptions, no assurance can be given that every objective will be reached. The words "estimate," "expect," "intend," "believe" and "project," as well as other words or expressions of a similar meaning are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this report. Such statements are based on current expectations, are inherently uncertain, are subject to risks and should be viewed with caution. Actual results and experience may differ materially from the forward-looking statements as a result of many factors.

Risk factors that could cause actual results to differ materially from any results that are projected, forecasted, estimated or budgeted by the Company in forward-looking statements include, among others, the following possibilities:

Forward-looking statements speak only as of the date on which such statements are made. It is not possible to foresee or identify all such factors. The Company makes no commitment to update any forward-looking statement, or to disclose any facts, events or circumstances after the date hereof that may affect the accuracy of any forward-looking statement, unless required by law.

The Company, which is headquartered in Laredo, Texas, with 211 facilities and 324 ATMs, provides banking services for commercial, consumer and international customers of South, Central and Southeast Texas and the State of Oklahoma. The Company is one of the largest independent commercial bank holding companies headquartered in Texas. The Company, through its bank subsidiaries, is in the business of gathering funds from various sources and investing those funds in order to earn a return. The Company either directly or through a bank subsidiary owns two insurance agencies, a liquidating subsidiary, and a fifty percent interest in an investment banking unit that owns a broker/dealer. The Company's primary earnings come from the spread between the interest earned on interest-bearing assets and the interest paid on interest-bearing liabilities. In addition, the Company generates income from fees on products offered to commercial, consumer and international customers.

A primary goal of the Company is to grow net interest income and non-interest income while adequately managing credit risk, interest rate risk and expenses. Effective management of capital is a critical objective of the Company. A key measure of the performance of a banking institution is the return on average common equity ("ROE"). The Company's ROE for the year ended December 31, 2014 was 10.24% as compared to 8.95% for the year ended December 31, 2013.

The Company is very active in facilitating trade along the United States border with Mexico. The Company does a large amount of business with customers domiciled in Mexico. Deposits from persons and entities domiciled in Mexico comprise a large and stable portion of the deposit base of the Company's bank subsidiaries. The loan policies of the Company's bank subsidiaries generally require that loans to borrowers domiciled in foreign countries be primarily secured by assets located in the United States or have credit enhancements, in the form of guarantees, from significant United States corporations. The Company also serves the growing Hispanic population through the Company's facilities located throughout South, Central and Southeast Texas and the State of Oklahoma.

Expense control is an essential element in the Company's long-term profitability. As a result, the Company monitors the efficiency ratio, which is a measure of non-interest expense to net interest income plus non-interest income closely. As the Company adjusts to regulatory changes related to the Dodd-Frank Act, the Company's efficiency ratio may suffer because the additional regulatory compliance costs are

expected to increase non-interest expense. The Company monitors this ratio over time to assess the Company's efficiency relative to its peers. The Company uses this measure as one factor in determining if the Company is accomplishing its long-term goals of providing superior returns to the Company's shareholders.

	December 31, 2014		December 31, 2013

	(Dollars in Thousands)
Assets	$	12,196,520	$	12,079,477	1.0	%
Net loans		5,614,417		5,129,074	9.5
Deposits		8,438,625		8,243,425	2.4
Other borrowed funds		1,073,944		1,223,950	(12.3	)
Junior subordinated deferrable interest debentures		175,416		190,726	(8.0	)
Shareholders' equity		1,580,658		1,424,408	11.0

	Year Ended December 31, 2014		Year Ended December 31, 2013				Year Ended December 31, 2012

	(Dollars in Thousands)
Interest income	$	393,599	$	363,217	8.4	%	$	375,639	(3.3	)%
Interest expense		46,543		54,632	(14.8	)		74,499	(26.7	)
Net interest income		347,056		308,585	12.5			301,140	2.5
Provision for probable loan losses		14,423		22,968	(37.2	)		27,959	(17.9	)
Non-interest income		178,348		189,605	(5.9	)		200,591	(5.5	)
Non-interest expense		281,043		292,632	(4.0	)		315,372	(7.2	)
Net income		153,151		126,351	21.2			107,835	17.2
Net income available to common shareholders		153,151		126,351	21.2			93,473	35.2
Per common share:
Basic	$	2.29	$	1.88	21.8	%	$	1.39	35.3	%
Diluted		2.28		1.88	21.8			1.39	35.3

Net income for the year ended December 31, 2014 increased by 21.2% as compared to the same period in 2013. Net income for the year ended December 31, 2014 was positively impacted by an increase in the Company's net interest margin, as well as a 37.2% decrease in the provision for probable loan losses for the twelve months ended December 31, 2014. The increase in the net interest margin can be primarily attributed to increased levels of interest income arising from the repositioning of the investment portfolio the Company undertook in 2013, an increase in loans outstanding and a decrease in interest expense on time deposits and securities sold under repurchase agreements. The decrease in interest expense on securities sold under repurchase agreements arises from the early termination of some of the long-term repurchase agreements by the lead bank subsidiary. The decrease in the provision for probable loan losses is primarily driven by the addition of a specific reserve of approximately $10.0 million during the nine-months ended September 30, 2013 on a loan relationship collateralized by multiple pieces of

transportation equipment. Net income available to common shareholders for the year ended December 31, 2013 increased by 35.2% as compared to the same period in 2012. Net income available to common shareholders for the year ended December 31, 2013 was positively affected by the repayment of the TARP funds in the fourth quarter of 2012, which eliminated the continued payment of dividends on the Senior Preferred Stock that had been held by the U.S. Treasury, as well as the sale of available for sale securities totaling $6.2 million, net of tax. The securities sales were a result of the Company re-positioning a portion of the investment portfolio. Net income for the same period was negatively impacted by a charge of $8.0 million, net of tax, as a result of the Company's lead bank subsidiary's early termination of a portion of its long-term repurchase agreements in order to help manage its long-term funding costs. Net income for the year ended December 31, 2013 was positively impacted by improving net interest margins as a result of lower rates paid on securities sold under repurchase agreements and time deposits. Net income for the years ended December 31, 2013 and 2012 was negatively impacted by slow loan demand, although it is improving and yields in the bond markets. Net income also continues to be negatively affected by the burden of increasing compliance costs arising from the Dodd-Frank Act and heightened regulatory oversight. Net income for the year ended December 31, 2012 was negatively impacted by lower levels of revenue on interchange fee income and overdraft programs due to regulatory changes, as well as the burden of increasing compliance costs arising from the Dodd-Frank Act and heightened regulatory oversight. Net income for the year ended December 31, 2012 was positively impacted by the sale of available-for-sale investments securities totaling $25 million, net of tax. The securities sales were a result of the Company re-positioning a portion of the investment portfolio. Net income for the year ended December 31, 2012 was negatively impacted by a one-time charge of $20.5 million, net of tax, recorded in the third quarter as a result of the Company's lead bank subsidiary's early termination of a portion of its long-term repurchase agreements in order to help manage its long-term funding costs.

Net interest income is the spread between income on interest-earning assets, such as loans and securities, and the interest expense on liabilities used to fund those assets, such as deposits, repurchase agreements and funds borrowed. Net interest income is the Company's largest source of revenue. Net

interest income is affected by both changes in the level of interest rates and changes in the amount and composition of interest-earning assets and interest-bearing liabilities.

	For the years ended December 31,

	2014 Average Rate/Cost			2013 Average Rate/Cost			2012 Average Rate/Cost
Assets
Interest earning assets:
Loan, net of unearned discounts:
Domestic		5.19	%		5.35	%		5.51	%
Foreign		3.36			3.44			3.82
Investment securities:
Taxable		2.08			1.73			1.95
Tax-exempt		4.57			5.54			5.55
Other		.29			.25			.25

Total interest-earning assets		3.70	%		3.52	%		3.68	%
Liabilities
Interest bearing liabilities:
Savings and interest bearing demand deposits		.12	%		.13	%		.19	%
Time deposits:
Domestic		.49			.60			.79
Foreign		.44			.51			.67
Securities sold under repurchase agreements		2.75			2.80			2.95
Other borrowings		.19			.19			.24
Junior subordinated deferrable interest debentures		2.35			2.45			3.46

Total interest bearing liabilities		.60	%		.71	%		.93	%

The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net income and net interest margin. The yield on average interest-earning assets increased 5.1% from 3.52% in 2013 to 3.70% in 2014, and the rates paid on average interest-bearing liabilities decreased 15.5% from .71% in 2013 to .60% in 2014. The yield on average interest-earning assets decreased 4.3% from 3.68% in 2012 to 3.52% in 2013, and the rates paid on average interest-bearing liabilities decreased 23.7% from .93% in 2012 to .71% in 2013. The majority of the Company's taxable investment securities are invested in mortgage backed securities and during rapid increases or reduction in interest rates, the yield on these securities do not re-price as quickly as the loans.

The following table analyzes the changes in net interest income during 2014, 2013 and 2012 and the relative effect of changes in interest rates and volumes for each major classification of interest-earning

assets and interest-bearing liabilities. Non-accrual loans have been included in assets for the purpose of this analysis, which reduces the resulting yields:

	2014 compared to 2013 Net increase (decrease) due to									2013 compared to 2012 Net increase (decrease) due to

	Volume(1)			Rate(1)			Total			Volume(1)			Rate(1)			Total
	(Dollars in Thousands)									(Dollars in Thousands)
Interest earned on:
Loans, net of unearned discounts:
Domestic	$	27,291		$	(8,721	)	$	18,570		$	3,927		$	(7,859	)	$	(3,932	)
Foreign		102			(153	)		(51	)		(960	)		(669	)		(1,629	)
Investment securities:
Taxable		(4,171	)		17,068			12,897			3,395			(11,082	)		(7,687	)
Tax-exempt		1,402			(2,512	)		(1,110	)		1,217			(3	)		1,214
Other		51			25			76			(387	)		(1	)		(388	)

Total interest income	$	24,675		$	5,707		$	30,382		$	7,192		$	(19,614	)	$	(12,422	)

Interest incurred on:
Savings and interest bearing demand deposits	$	136		$	(301	)	$	(165	)	$	137		$	(1,663	)	$	(1,526	)
Time deposits:
Domestic		(645	)		(1,491	)		(2,136	)		(1,644	)		(2,737	)		(4,381	)
Foreign		(428	)		(847	)		(1,275	)		(2,019	)		(2,129	)		(4,148	)
Securities sold under repurchase agreements		(4,128	)		(427	)		(4,555	)		(6,948	)		(1,526	)		(8,474	)
Other borrowings		462			(19	)		443			1,003			(411	)		592
Junior subordinated deferrable interest debentures		(224	)		(177	)		(401	)		—			(1,930	)		(1,930	)

Total interest expense	$	(4,827	)	$	(3,262	)	$	(8,089	)	$	(9,471	)	$	(10,396	)	$	(19,867	)

Net interest income	$	29,502		$	8,969		$	38,471		$	16,663		$	(9,218	)	$	7,445

As part of the strategy to manage interest rate risk, the Company strives to manage both assets and liabilities so that interest sensitivities match. One method of calculating interest rate sensitivity is through gap analysis. A gap is the difference between the amount of interest rate sensitive assets and interest rate sensitive liabilities that re-price or mature in a given time period. Positive gaps occur when interest rate sensitive assets exceed interest rate sensitive liabilities, and negative gaps occur when interest rate sensitive liabilities exceed interest rate sensitive assets. A positive gap position in a period of rising interest rates should have a positive effect on net interest income as assets will re-price faster than liabilities. Conversely, net interest income should contract somewhat in a period of falling interest rates. Management can quickly change the Company's interest rate position at any given point in time as market conditions dictate. Additionally, interest rate changes do not affect all categories of assets and liabilities equally or at the same time. Analytical techniques employed by the Company to supplement gap analysis include simulation analysis to quantify interest rate risk exposure. The gap analysis prepared by management is reviewed by the Investment Committee of the Company twice a year. The Investment Committee is comprised of certain senior managers of the various Company bank subsidiaries along with consultants. Management currently believes that the Company is properly positioned for interest rate changes; however, if management determines at any time that the Company is not properly positioned, it will strive to adjust the interest rate sensitive assets and liabilities in order to manage the effect of interest rate changes.

The Company has established guidelines for acceptable volatility of projected net interest income on the income simulation analysis and the guidelines are reviewed at least annually. As of December 31, 2014, in rising rate scenarios of 150, 300 and 400 basis points, the guidelines established by management require that the net interest income not vary by more than plus or minus 15%, 15% and 20%, respectively. At December 31, 2014, the income simulations show that a rate shift of 150, 300 and 400 basis points in interest rates up will vary projected net interest income for the coming 12 month period by (2.90)%, (2.56)% and (1.90)%, respectively. The basis point shift in interest rates is a hypothetical rate scenario used to calibrate risk, and does not necessarily represent management's current view of future market developments. The Company believes that it is properly positioned for a potential interest rate increase or decrease.

The following table presents information concerning the aggregate amount of non-accrual, past due and restructured domestic loans; certain loans may be classified in one or more categories:

The allowance for probable loan losses decreased 7.6% to $64,828,000 at December 31, 2014 from $70,161,000 at December 31, 2013. The allowance was 1.1% of total loans, net of unearned income at December 31, 2014 and 1.3% at December 31, 2013. The decrease in the allowance at December 31, 2014 compared to the same period in 2013 is due to a charge down in an impaired commercial relationship that is mainly secured by multiple pieces of transportation equipment, the value of which fluctuates due to the market factors and the amount of use of the equipment. The provision for probable loan losses charged to expense decreased $8,545,000 to $14,423,000 for the year ended December 31, 2014 from $22,968,000 for the same period in 2013 partially due to a specific reserve added in 2013 for the relationship that is mainly secured by multiple pieces of transportation equipment. The impaired commercial relationship further deteriorated during 2013. The Company's provision for probable loan losses decreased for the year ended December 31, 2013 compared to the year ended December 31, 2012, mainly due to four commercial real estate relationships charged off in 2012 when the Company determined that further collection of the loan was not anticipated based on the borrowers' financial condition.

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. See Note 1 to the Consolidated Financial Statements.

	December 31, 2014		December 31, 2013

	(Dollars in Thousands)
Domestic
Commercial	$	2,500	$	150
Commercial real estate: other construction & land development		2,254		8,860
Commercial real estate: farmland & commercial		2,861		2,863
Residential: first lien		5,313		4,887
Residential: junior lien		1,371		1,631
Consumer		1,354		1,531
Foreign		—		436

Total troubled debt restructuring	$	15,653	$	20,358

The following table presents information concerning the aggregate amount of non-accrual and past due foreign loans extended to persons or entities in foreign countries. Certain loans may be classified in one or more category:

The gross income that would have been recorded during 2014, 2013 and 2012 on non-accrual loans in accordance with their original contract terms was $4,013,000, $4,088,000 and $2,549,000 on domestic loans and $0, $0, and $0 on foreign loans, respectively. The amount of interest income on such loans that was recognized in 2014, 2013 and 2012 was $29,000, $0, and $0 on domestic loans and $0, $0, and $0 for foreign loans, respectively.

Generally, loans are placed on non-accrual status if principal or interest payments become 90 days past due and/or management deem the collectability of the principal and/or interest to be in question, as well as when required by applicable regulatory guidelines. Interest income on non-accrual loans is recognized only to the extent payments are received or when, in management's opinion, the creditor's financial condition warrants reestablishment of interest accruals. Under special circumstances, a loan may be more than 90 days delinquent as to interest or principal and not be placed on non-accrual status. This situation generally results when a bank subsidiary has a borrower who is experiencing financial difficulties, but not to the extent that requires a restructuring of indebtedness. The majority of this category is composed of loans that are considered to be adequately secured and/or for which there has been a recent history of payments. When a loan is placed on non-accrual status, any interest accrued, not paid is reversed and charged to operations against interest income.

Loan commitments, consisting of unused commitments to lend, letters of credit, credit card lines and other approved loans, that have not been funded, were $1,793,875,000 and $1,906,602,000 at December 31, 2014 and 2013, respectively. See Note 19 to the Consolidated Financial Statements.

The following table summarizes loan balances at the end of each year and average loans outstanding during the year; changes in the allowance for probable loan losses arising from loans charged-off and

recoveries on loans previously charged-off by loan category; and additions to the allowance which have been charged to expense:

	2014			2013			2012			2011			2010

	(Dollars in Thousands)
Loans, net of unearned discounts, outstanding at December 31	$	5,679,245		$	5,199,235		$	4,775,004		$	5,053,475		$	5,410,003



Average loans outstanding during the year (Note 1)	$	5,491,841		$	4,978,833		$	4,932,728		$	5,261,601		$	5,542,230



Balance of allowance at January 1	$	70,161		$	58,193		$	84,192		$	84,482		$	95,393
Provision charged to expense		14,423			22,968			27,959			17,318			22,812
Loans charged off:
Domestic:
Commercial, financial and agricultural		(21,003	)		(12,342	)		(48,445	)		(18,085	)		(7,702	)
Real estate—mortgage		(1,012	)		(1,252	)		(1,417	)		(2,109	)		(2,973	)
Real estate—construction		(680	)		(278	)		(7,617	)		(1,467	)		(22,186	)
Consumer		(719	)		(561	)		(756	)		(1,067	)		(2,152	)
Foreign		(51	)		(22	)		(111	)		(171	)		(227	)

Total loans charged off:		(23,465	)		(14,455	)		(58,346	)		(22,899	)		(35,240	)

Recoveries credited to allowance:
Domestic:
Commercial, financial and agricultural		3,086			2,842			3,767			4,422			626
Real estate—mortgage		291			359			208			328			517
Real estate—construction		72			87			229			171			16
Consumer		210			162			184			211			256
Foreign		50			5			—			159			102

Total recoveries		3,709			3,455			4,388			5,291			1,517

Net loans charged off		(19,756	)		(11,000	)		(53,958	)		(17,608	)		(33,723	)

Balance of allowance at December 31	$	64,828		$	70,161		$	58,193		$	84,192		$	84,482



Ratio of net loans charged-off during the year to average loans outstanding during the year (Note 1)		.36	%		.22	%		1.09	%		.33	%		.61	%



Ratio of allowance to loans, net of unearned discounts, outstanding at December 31		1.14	%		1.35	%		1.22	%		1.67	%		1.56	%

The allowance for probable loan losses has been allocated based on the amount management has deemed to be reasonably necessary to provide for the probable losses incurred within the following categories of loans at the dates indicated and the percentage of loans to total loans in each category:

	At December 31,

	2014					2013					2012					2011					2010
	Allowance		Percent of total			Allowance		Percent of total			Allowance		Percent of total			Allowance		Percent of total			Allowance		Percent of total
	(Dollars in Thousands)
Commercial, Financial and Agricultural	$	41,881		54.7	%	$	47,676		55.7	%	$	34,206		52.8	%	$	51,847		50.6	%	$	38,439		48.5	%
Real estate—Mortgage		8,272		16.0			8,061		16.3			8,838		17.6			9,322		17.7			12,670		17.5
Real estate—Construction		12,955		24.9			12,541		23.2			12,720		24.0			19,940		25.2			26,695		27.2
Consumer		660		1.1			750		1.3			1,289		1.6			1,724		1.9			6,241		2.3
Foreign		1,060		3.3			1,133		3.5			1,140		4.0			1,359		4.6			437		4.5

	$	64,828		100.0	%	$	70,161		100.0	%	$	58,193		100.0	%	$	84,192		100.0	%	$	84,482		100.0	%

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.

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, financial and agricultural or real estate loans are generally considered by management to represent a loss, in whole or part, (i) when an exposure beyond any collateral coverage is apparent, (ii) when no further collection of the portion of the loan so exposed is anticipated based on actual results, (iii) when the credit enhancements, if any, are not adequate, and (iv) when the borrower's financial condition would indicate so. Generally, unsecured consumer loans are charged off when 90 days past due. The increase in charge-offs for the year ended December 31, 2014 is due to the charge down of a relationship that is primarily secured by multiple pieces of transportation equipment. The increase in charge-offs for the year ended December 31, 2012 compared to the year ended December 31, 2011 was largely due to the charge-off of a $22 million deficiency note on a large credit, which deficiency note was secured with a pool of assets of family trusts of the original creditors. Due to the complexities and delays in liquidating the pool of assets securing the note, the Company made the decision to charge off the loan.

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 within the existing portfolio of loans. The Company's allowance for probable loan loss methodology is based on guidance provided in Securities and Exchange Commission Staff Accounting Bulletin No. 102, "Selected Loan Loss Allowance Methodology and Documentation Issues" and includes allowance allocations calculated in accordance with ASC 310, "Receivables" and ASC 450, "Contingencies." The reserve allocated by categories shows an overall decrease of $5.3 million from December 31, 2013 to December 31, 2014 and a $12.0 million increase from December 31, 2012 to December 31, 2013. The decrease for the year ended December 31, 2014 compared to the year ended December 31, 2013 is partially due to a charge down in a relationship that is mainly secured by multiple pieces of transportation equipment, the value of which fluctuates due to market factors and the amount of use of the equipment. A specific reserve on the relationship of $12.0 million was recognized in 2013 and created the increase in the reserve for probable loan losses for December 31, 2013 compared to December 31, 2012. The reserve allocated to all categories of loans decreased approximately $26.0 million from 2011 to 2012. The decrease in the reserve is mainly due to the continued workout of the impaired loans previously identified by the Company. Please refer to Note 4—Allowance for Probable Loan Losses in the accompanying Notes to the consolidated Financial Statements.

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 December 31, 2014 was adequate to absorb probable losses from loans in the portfolio at that date. See Critical Accounting Policies on page 25. 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.

	Year Ended December 31, 2014		Year Ended December 31, 2013				Year Ended December 31, 2012

	(Dollars in Thousands)
Service charges on deposit accounts	$	88,586	$	97,087	(8.8	)%	$	93,128	4.3	%
Other service charges, commissions and fees
Banking		44,435		41,075	8.2			38,523	6.6
Non-banking		7,463		7,116	4.9			6,998	1.7
Investment securities transactions, net		1,283		9,601	(86.6	)		38,446	(75.0	)
Other investments, net		22,023		22,383	(1.6	)		13,339	67.8
Other income		14,558		12,343	17.9			10,157	21.5

Total non-interest income	$	178,348	$	189,605	5.9	%	$	200,591	(5.5	)%

Total non-interest income increased 5.9% for the year ended December 31, 2014 compared to the same period of 2013. Total non-interest income decreased 5.5% for the year ended December 31, 2013 when compared to the same period of 2012. The increase in other income for the year ended December 31, 2014, can be primarily attributed to the sale of property originally held by a bank subsidiary resulting in a net gain of $2.9 million, and the discount recorded in connection with the buyback of the $15.3 million of outstanding capital securities issued by statutory business trusts formed by the Company in the amount of $1.8 million. Investment securities transactions for the year ended December 31, 2014 decreased by $8.3 million compared to same period of 2013. The decrease can be primarily attributed a net loss on securities sold during the third quarter of 2014. The securities were sold to re-position the Company's balance sheet. Investment securities transactions decreased for the year ended December 31, 2013 compared to the same period of 2012 due to securities sales that occurred in 2012 as a result of the Company re-positioning a portion of the investment portfolio. Other investments income for the year ended December 31, 2013 was positively impacted by the sale of assets in a partnership where the holding company held an equity position, resulting in income of $5.5 million. Service charges on deposit accounts for the year ended December 31, 2014 were negatively impacted by a decrease in volume of overdraft charges on deposit accounts.

	Year Ended December 31, 2014		Year Ended December 31, 2013				Year Ended December 31, 2012

	(Dollars in Thousands)
Employee compensation and benefits	$	121,511	$	119,845	1.4	%	$	118,041	1.5	%
Occupancy		32,530		31,766	2.4			34,608	(8.2	)
Depreciation of bank premises and equipment		24,013		26,017	(7.7	)		26,756	(2.8	)
Professional fees		10,925		13,146	(16.9	)		14,369	(8.5	)
Deposit insurance assessments		6,082		6,737	(9.7	)		7,709	(12.6	)
Net expense, other real estate owned		2,358		6,896	(65.8	)		8,929	(22.8	)
Amortization of identified intangible assets		2,389		4,633	(48.4	)		4,651	(.4	)
Advertising		7,742		7,034	10.1			7,017	.2
Early termination fee—securities sold under repurchase agreements		11,000		12,303	(10.6	)		31,550	(61.0	)
Impairment charges (Total other-than-temporary impairment charges, $(366) less loss of $1,183, $(431) less loss of $1,805, and $(916) less gain of $(123), included in other comprehensive loss)		817		1,374	(40.5	)		1,039	32.2
Other		61,676		62,881	(1.9	)		60,703	3.6

Total non-interest expense	$	281,043	$	292,632	(4.0	)%	$	315,372	(7.2	)%

Non-interest expense for the year ended December 31, 2014 decreased by 4.0% compared to the same period of 2013. Non-interest expense for the year ended December 31, 2013 decreased by 7.2% compared to the same period 2012. Non-interest expense for the twelve months ended December 31, 2014, 2013 and 2012 was negatively impacted by charges of $11.0 million, $12.3 million and $31.6 million, respectively, recorded by the Company's lead bank subsidiary related to the termination of a portion of its long-term repurchase agreements outstanding in order to help manage its long-term funding costs. Net expense, other real estate owned decreased by 65.8% for the twelve months ended December 31, 2014 compared to the same period of 2013. The decrease can be attributed to decreased carrying costs as properties have been liquidated through sales.

The principal component of earnings is net interest income, which is affected by changes in the level of interest rates. Changes in rates of inflation affect interest rates. It is difficult to precisely measure the impact of inflation on net interest income because it is not possible to accurately differentiate between increases in net interest income resulting from inflation and increases resulting from increased business activity. Inflation also raises costs of operations, primarily those of employment and services.

The following table sets forth the carrying value of investment securities as of December 31, 2014, 2013 and 2012:

	December 31,

	2014		2013		2012
	(Dollars in Thousands)
Residential mortgage-backed securities
Available for sale	$	4,600,372	$	5,027,701	$	5,265,204
Obligations of states and political subdivisions
Available for sale		282,276		248,410		238,675
Equity securities
Available for sale		29,315		28,468		21,136
Other securities
Available for sale		20,000		—		—
Held to maturity		2,400		2,400		2,400

Total	$	4,934,363	$	5,306,979	$	5,527,415

The following tables set forth the contractual maturities of investment securities, based on amortized cost, at December 31, 2014 and the average yields of such securities, except for the totals, which reflect the weighted average yields. Actual maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.

	Available for Sale Maturing

	Within one year					After one but within five years					After five but within ten years					After ten years
	Adjusted					Adjusted					Adjusted					Adjusted
	Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield
	(Dollars in Thousands)
Residential mortgage-backed securities	$	96		5.50	%	$	23,717		4.89	%		578,285		2.52	%	$	3,995,492		2.67	%
Obligations of states and political subdivisions		—		—			—		—			734		5.99	%		268,028		5.32	%
Equity securities		325		—			—		—			—		—			27,750		2.34	%
Other securities		—		—			—		—			—		—			20,000		5.00	%

Total	$	96		5.50	%	$	23,717		4.89	%	$	579,019		2.52	%	$	4,311,270		2.84	%

Mortgage-backed securities are securities primarily issued by the Federal Home Loan Mortgage Corporation ("Freddie Mac"), Federal National Mortgage Association ("Fannie Mae"), and the

Government National Mortgage Association ("Ginnie Mae"). Investments in mortgage-backed securities issued by Ginnie Mae are fully guaranteed by the U.S. Government. Investments in mortgage-backed securities issued by Freddie Mac and Fannie Mae are not fully guaranteed by the U.S. Government, however, the Company believes that the quality of the bonds is similar to other AAA rated bonds with limited credit risk, particularly given the placement of Fannie Mae and Freddie Mac into conservatorship by the federal government in 2008 and because securities issued by others that are collateralized by residential mortgage-backed securities issued by Fannie Mae or Freddie Mac are rated consistently as AAA rated securities.

The amounts of loans outstanding, by classification, at December 31, 2014, 2013, 2012, 2011 and 2010 are shown in the following table:

	December 31,

	2014		2013		2012		2011		2010
	(Dollars in Thousands)
Commercial, financial and agricultural	$	3,107,584	$	2,894,779	$	2,525,380	$	2,560,102	$	2,615,878
Real estate—mortgage		910,326		847,692		838,467		895,870		948,982
Real estate—construction		1,414,977		1,208,508		1,147,669		1,273,389		1,473,471
Consumer		61,137		66,414		74,514		94,109		126,047
Foreign		185,221		181,842		188,974		230,005		245,625

Loans, net of unearned discount	$	5,679,245	$	5,199,235	$	4,775,004	$	5,053,475	$	5,410,003

The following table shows the amounts of loans (excluding real estate mortgages and consumer loans) outstanding as of December 31, 2014, which based on remaining scheduled repayments of principal are due in the years indicated. Also, the amounts due after one year are classified according to the sensitivity to changes in interest rates:

	Maturing

	Within one year		After one but within five years		After five years		Total
	(Dollars in Thousands)
Commercial, financial and agricultural	$	823,299	$	1,875,870	$	408,415	$	3,107,584
Real estate—construction		676,020		677,149		61,808		1,414,977
Foreign		123,364		45,752		16,105		185,221

Total	$	1,622,683	$	2,598,771	$	486,328	$	4,707,782

On December 31, 2014, the Company had $185,221,000 (1.52% of total assets) in loans outstanding to borrowers domiciled in foreign countries, which included primarily borrowers domiciled in Mexico. The loan policies of the Company's bank subsidiaries generally require that loans to borrowers domiciled in foreign countries be primarily secured by assets located in the United States or have credit enhancements, in the form of guarantees, from significant United States corporations. The composition of such loans and the related amounts of allocated allowance for probable loan losses as of December 31, 2014 and 2013 is presented below.

	For the year ended December 31,

	2014				2013
	Amount of Loans		Related Allowance for Probable Losses		Amount of Loans		Related Allowance for Probable Losses
	(Dollars in Thousands)
Secured by certificates of deposit in United States banks	$	123,950	$	502	$	122,314	$	506
Secured by United States real estate		27,643		276		27,817		319
Secured by other United States collateral (securities, gold, silver, etc.)		17,045		127		1,003		12
Unsecured		5,710		52		1,163		6
Other (principally Mexico real estate)		10,873		103		29,545		290

	$	185,221	$	1,060	$	181,842	$	1,133

The transactions for the years ended December 31, 2014, 2013 and 2012, in that portion of the allowance for probable loan losses related to foreign debt were as follows:

	2014			2013			2012

	(Dollars in Thousands)
Balance at January 1,	$	1,133		$	1,140		$	1,359
Charge-offs		(51	)		(22	)		(111	)
Recoveries		50			5			—

Net charge-offs		(1	)		(17	)		(111	)

(Credit) charge to expense		(72	)		10			(108	)

Balance at December 31	$	1,060		$	1,133		$	1,140

	2014 Average Balance		2013 Average Balance

	(Dollars in Thousands)
Deposits:
Demand—non-interest bearing
Domestic	$	2,332,435	$	2,097,318
Foreign		520,752		497,409

Total demand non-interest bearing		2,853,187		2,594,727

Savings and interest bearing demand
Domestic		2,444,765		2,358,990
Foreign		538,263		520,125

Total savings and interest bearing demand		2,983,028		2,879,115

Time certificates of deposit
$100,000 or more:
Domestic		850,538		899,847
Foreign		909,271		968,962
Less than $100,000:
Domestic		507,581		565,403
Foreign		312,710		337,610

Total time, certificates of deposit		2,580,100		2,771,822

Total deposits	$	8,416,315	$	8,245,664

	2014		2013		2012

	(Dollars in Thousands)
Interest expense:
Savings and interest bearing demand
Domestic	$	2,998	$	3,182	$	4,487
Foreign		599		580		801

Total savings and interest bearing demand		3,597		3,762		5,288

Time, certificates of deposit
$100,000 or more
Domestic		4,615		5,761		8,263
Foreign		4,529		5,590		9,148
Less than $100,000
Domestic		2,074		3,065		4,945
Foreign		815		1,028		1,617

Total time, certificates of deposit		12,033		15,444		23,973

Total interest expense on deposits	$	15,630	$	19,206	$	29,261

Scheduled maturities of time deposits in amounts of $100,000 or more at December 31, 2014, were as follows:

The Company offers a variety of deposit accounts having a wide range of interest rates and terms. The Company relies primarily on its high quality customer service, sales programs, customer referrals and advertising to attract and retain these deposits. Deposits provide the primary source of funding for the Company's lending and investment activities, and the interest paid for deposits must be managed carefully to control the level of interest expense. Deposits at December 31, 2014 were $8,438,625,000, an increase of 2.4% from $8,243,425,000 at December 31, 2013. The increase in deposits is the result of the increased availability of deposits in the banking market. Even though the Company increased its deposits, the Company is still experiencing a substantial amount of competition for deposits at higher than market rates. As a result, the Company has attempted to maintain certain deposit relationships but has allowed certain deposits to leave as the result of aggressive pricing.

Certain key ratios for the Company for the years ended December 31, 2014, 2013 and 2012 follows (Note 1):

	Years ended December 31,

	2014			2013			2012
Percentage of net income to:
Average shareholders' equity		10.24	%		8.95	%		7.17	%
Average total assets		1.26			1.07			.91
Percentage of average shareholders' equity to average total assets		12.32			11.93			12.68
Percentage of cash dividends per share to net income per share		22.57			22.87			28.78

The maintenance of adequate liquidity provides the Company's bank subsidiaries with the ability to meet potential depositor withdrawals, provide for customer credit needs, maintain adequate statutory reserve levels and take full advantage of high-yield investment opportunities as they arise. Liquidity is afforded by access to financial markets and by holding appropriate amounts of liquid assets. The Company's bank subsidiaries derive their liquidity largely from deposits of individuals and business entities. Deposits from persons and entities domiciled in Mexico comprise a stable portion of the deposit base of the Company's bank subsidiaries. Deposits from persons and entities domiciled in Mexico comprise a stable portion of the deposit base of the Company's bank subsidiaries. Historically, the Mexico based deposits of the Company's bank subsidiaries have been a stable source of funding. Such deposits comprised approximately 27%, 28%, and 28% of the Company's bank subsidiaries' total deposits at each of the years ended December 31, 2014, 2013 and 2012, respectively. Other important funding sources for the

Company's bank subsidiaries during 2014 and 2013 were borrowings from the FHLB, securities sold under repurchase agreements and large certificates of deposit, requiring management to closely monitor its asset/liability mix in terms of both rate sensitivity and maturity distribution. The borrowings from FHLB are primarily short term in nature and are renewed at maturity. The Company's bank subsidiaries have had a long-standing relationship with the FHLB and keep open unused lines of credit in order to fund liquidity needs. In the event that the FHLB bank indebtedness is not renewed, the repayment of the outstanding indebtedness would more than likely be repaid through proceeds generated from the sales of unpledged available for sale securities. The Company maintains a sizable, high quality investment portfolio to provide significant liquidity. These securities can be sold or sold under agreements to repurchase, to provide immediate liquidity. As in the past, the Company will continue to monitor the volatility and cost of funds in an attempt to match maturities of rate-sensitive assets and liabilities and respond accordingly to anticipated fluctuations in interest rates over reasonable periods of time.

The Company's fund management policy has as its primary focus the measurement and management of the banks' earnings at risk in the face of rising or falling interest rate forecasts. The earliest and most simplistic concept of earnings at risk measurement is the gap report, which is used to generate a rough estimate of the vulnerability of net interest income to changes in market rates as implied by the relative re-pricings of assets and liabilities. The gap report calculates the difference between the amounts of assets and liabilities re-pricing across a series of intervals in time, with emphasis typically placed on the one-year period. This difference, or gap, is usually expressed as a percentage of total assets.

If an excess of liabilities over assets matures or re-prices within the one-year period, the statement of condition is said to be negatively gapped. This condition is sometimes interpreted to suggest that an institution is liability-sensitive, indicating that earnings would suffer from rising rates and benefit from falling rates. If a surplus of assets over liabilities occurs in the one-year time frame, the statement of condition is said to be positively gapped, suggesting a condition of asset sensitivity in which earnings would benefit from rising rates and suffer from falling rates.

The gap report thus consists of an inventory of dollar amounts of assets and liabilities that have the potential to mature or re-price within a particular period. The flaw in drawing conclusions about interest rate risk from the gap report is that it takes no account of the probability that potential maturities or re-pricings of interest-rate-sensitive accounts will occur, or at what relative magnitudes. Because simplicity, rather than utility, is the only virtue of gap analysis, financial institutions increasingly have either abandoned gap analysis or accorded it a distinctly secondary role in managing their interest-rate risk exposure.

The net interest rate sensitivity at December 31, 2014, is illustrated in the following table. This information reflects the balances of assets and liabilities whose rates are subject to change. As indicated in the table on the following page, the Company is liability-sensitive during the early time periods and is asset-sensitive in the longer periods. The table shows the sensitivity of the statement of condition at one point in time and is not necessarily indicative of the position at future dates.

	Rate/Maturity

December 31, 2014	3 Months or Less			Over 3 Months to 1 Year			Over 1 Year to 5 Years		Over 5 Years		Total
	(Dollars in Thousands)
Rate sensitive assets
Investment securities	$	428,319		$	666,905		$	3,556,863	$	282,276	$	4,934,363
Loans, net of non-accruals		4,234,208			258,970			354,315		768,193		5,615,686

Total earning assets	$	4,662,527		$	925,875		$	3,911,178	$	1,050,469	$	10,550,049

Cumulative earning assets	$	4,662,527		$	5,588,402		$	9,499,580	$	10,550, 049



Rate sensitive liabilities
Time deposits	$	1,002,375		$	1,174,891		$	305,366	$	60	$	2,482,692
Other interest bearing deposits		3,025,680			—			—		—		3,025,680
Securities sold under repurchase agreements		343,799			3,518			511,033		—		858,350
Other borrowed funds		1,067,700			—			—		6,244		1,073,944
Junior subordinated deferrable interest debentures		175,416			—			—		—		175,416

Total interest bearing liabilities	$	5,614,970		$	1,178,409		$	816,399	$	6,304	$	7,616,082

Cumulative sensitive liabilities	$	5,614,970		$	6,793,379		$	7,609,778	$	7,616,082



Repricing gap	$	(952,443	)	$	(252,534	)	$	3,094,779	$	1,044,165	$	2,933,967
Cumulative repricing gap		(952,443	)		(1,204,977	)		1,889,802		2,933,967
Ratio of interest-sensitive assets to liabilities		.83			.79			4.79		166.18		1.38
Ratio of cumulative, interest-sensitive assets to liabilities		.83			.82			1.25		1.38

The detailed inventory of statement of condition items contained in gap reports is the starting point of income simulation analysis. Income simulation analysis also focuses on the variability of net interest income and net income, but without the limitations of gap analysis. In particular, the fundamental, but often unstated, assumption of the gap approach that every statement of condition item that can re-price will do so to the full extent of any movement in market interest rates is taken into consideration in income simulation analysis.

Accordingly, income simulation analysis captures not only the potential of assets and liabilities to mature or re-price, but also the probability that they will do so. Moreover, income simulation analysis focuses on the relative sensitivities of these balance sheet items and projects their behavior over an extended period of time in a motion picture rather than snapshot fashion. Finally, income simulation analysis permits management to assess the probable effects on balance sheet items not only of changes in market interest rates, but also of proposed strategies for responding to such changes. The Company and many other institutions rely primarily upon income simulation analysis in measuring and managing exposure to interest rate risk.

December 31, 2014, the income simulations show that a rate shift of 150, 300 and 400 basis points in interest rates up will vary projected net interest income for the coming 12 month period by (2.90)%, (2.56)% and (1.90)%, respectively. The basis point shift in interest rates is a hypothetical rate scenario used to calibrate risk, and does not necessarily represent management's current view of future market developments. The Company believes that it is properly positioned for a potential interest rate increase or decrease.

All the measurements of risk described above are made based upon the Company's business mix and interest rate exposures at the particular point in time. The exposure changes continuously as a result of the Company's ongoing business and its risk management initiatives. While management believes these measures provide a meaningful representation of the Company's interest rate sensitivity, they do not necessarily take into account all business developments that have an effect on net income, such as changes in credit quality or the size and composition of the statement of condition.

Principal sources of liquidity and funding for the Company are dividends from subsidiaries and borrowed funds, with such funds being used to finance the Company's cash flow requirements. The Company closely monitors the dividend restrictions and availability from the bank subsidiaries as disclosed in Note 20 to the Consolidated Financial Statements. At December 31, 2014, the aggregate amount legally available to be distributed to the Company from bank subsidiaries as dividends was approximately $702,750,000, assuming that each bank subsidiary continues to be classified as "well-capitalized" under the applicable regulations in effect at December 31, 2014. The restricted capital (capital and surplus) of the bank subsidiaries was approximately $921,541,000 as of December 31, 2014. The undivided profits of the bank subsidiaries were approximately $1,033,318,000 as of December 31, 2014. Additionally, as a result of the Company's participation in the TARP Capital Purchase Program, the Company was restricted in the payment of dividends and was not allowed, without the Treasury Department's consent, to declare or pay any dividend on the Company Common Stock other than a regular semi-annual cash dividend of not more than $.33 per share, as adjusted for any stock dividend or stock split. The restriction ceased to exist on December 23, 2011 and the Company exited the TARP program when it finalized the repayment of all the TARP funds on November 28, 2012.

At December 31, 2014, the Company has outstanding $1,073,944,000 in other borrowed funds and $175,416,000 in junior subordinated deferrable interest debentures. In addition to borrowed funds and dividends, the Company has a number of other available alternatives to finance the growth of its existing banks as well as future growth and expansion.

The Company maintains an adequate level of capital as a margin of safety for its depositors and shareholders. At December 31, 2014, shareholders' equity was $1,580,658,000 compared to $1,424,408,000 at December 31, 2013, an increase of $156,250,000, or 11.0%. Shareholders' equity increased primarily due to other comprehensive income and the retention of earnings, offset by the payment of cash dividends to shareholders and repurchases of the Company's common stock in the form of treasury stock. The accumulated other comprehensive income is not included in the calculation of regulatory capital ratios.

During 1990, the Federal Reserve Board ("FRB") adopted a minimum leverage ratio of 3% for the most highly rated bank holding companies and at least 4% to 5% for all other bank holding companies. The Company's leverage ratio (defined as shareholders' equity plus eligible trust preferred securities issued and outstanding less goodwill and certain other intangibles divided by average quarterly assets) was 12.33% at December 31, 2014 and 11.61% at December 31, 2013. The core deposit intangibles and goodwill of $283,329,000 as of December 31, 2014, are deducted from the sum of core capital elements when determining the capital ratios of the Company.

The FRB has adopted risk-based capital guidelines which assign risk weightings to assets and off-balance sheet items. The guidelines also define and set minimum capital requirements (risk-based

capital ratios). Under the final 1992 rules, all banks are required to have Tier 1 capital of at least 4.0% of risk-weighted assets and total capital of 8.0% of risk-weighted assets. Tier 1 capital consists principally of shareholders' equity plus trust preferred securities issued and outstanding less goodwill and certain other intangibles, while total capital consists of Tier 1 capital, certain debt instruments and a portion of the reserve for loan losses. In order to be deemed well-capitalized pursuant to the regulations, an institution must have a total risk-weighted capital ratio of 10%, a Tier 1 risk-weighted ratio of 6% and a Tier 1 leverage ratio of 5%. The Company had risk-weighted Tier 1 capital ratios of 19.34% and 19.33% and risk weighted total capital ratios of 20.24% and 20.36% as of December 31, 2014 and 2013, respectively, which are well above the minimum regulatory requirements and exceed the well-capitalized ratios (see Note 20 to Notes to Consolidated Financial Statements).

In July 2013, the FDIC and other regulatory bodies issued final rules consisting of minimum requirements that increase both the quantity and quality of capital held by banking organizations. The final rules are a result of the implementation of the BASEL III capital reforms and various Dodd-Frank Act related capital provisions and impact all U.S. banking organizations with more than $500 million in assets. Consistent with the Basel international framework, the new rule includes a new minimum ratio of common equity tier 1 to risk-weighted assets of 4.5 percent and a common equity tier 1 capital conservation buffer of 2.5 percent of risk-weighted assets. The rule also raised the minimum ratio of tier 1 capital to risk-weighted assets from 4 percent to 6 percent and includes a minimum leverage ratio of 4 percent for all banking organizations. Regarding the quality of capital, the new rule emphasizes common equity tier 1 capital and implements strict eligibility criteria for regulatory capital instruments. The new rule also improves the methodology for calculating risk-weighted assets to enhance risk sensitivity. The new rule is subject to a four year phase in period for mandatory compliance and the Company is required to begin to phase in the new rules beginning on January 1, 2015. Management believes that after the phase in of the new capital standards, the Company and its bank subsidiaries will remain classified as "well-capitalized."

The Company has formed eight statutory business trusts under the laws of the State of Delaware, for the purpose of issuing trust preferred securities. The eight statutory business trusts formed by the Company (the "Trusts") have each issued Capital and Common Securities and invested the proceeds thereof in an equivalent amount of junior subordinated debentures (the "Debentures") issued by the Company. As of December 31, 2014 and December 31, 2013, the principal amount of debentures outstanding totaled $175,416,000 and $190,726,000, respectively. On February 11, 2014, the Company bought back all of the Capital and Common Securities of IB Capital Trust VII from the holder of the securities for a price that reflected an approximate six percent discount from the redemption price of the securities and thereby retired the $10,310,000 of related Junior Subordinated Deferrable Interest Debentures related to IB Capital Trust VII. On December 24, 2014, the Company bought back a portion of the capital securities of IB Capital Trust XI from the holder of the securities for a price that reflected an approximate 23.6% discount from the redemption price of the securities and thereby retired $5,000,000 of the total $32,990,000 of related Capital Senior Subordinated Deferrable Interest Debentures related to IB Capital Trust XI, resulting in Senior Subordinated Deferrable Interest Debentures on IB Capital Trust XI of $27,990,000 as of December 31, 2014.

The Debentures are subordinated and junior in right of payment to all present and future senior indebtedness (as defined in the respective indentures) of the Company, and are pari passu with one another. The interest rate payable on, and the payment terms of the Debentures are the same as the distribution rate and payment terms of the respective issues of Capital and Common Securities issued by the Trusts. The Company has fully and unconditionally guaranteed the obligations of each of the Trusts with respect to the Capital and Common Securities. The Company has the right, unless an Event of Default (as defined in the Indentures) has occurred and is continuing, to defer payment of interest on the Debentures for up to twenty consecutive quarterly periods on Trusts VI, VIII, IX, X, XI and XII. If interest payments on any of the Debentures are deferred, distributions on both the Capital and Common Securities related to that Debenture would also be deferred. The redemption prior to maturity of any of the Debentures may require the prior approval of the Federal Reserve and/or other regulatory bodies.

For financial reporting purposes, the Trusts are treated as investments of the Company and not consolidated in the consolidated financial statements. Although the Capital Securities issued by each of the Trusts are not included as a component of shareholders' equity on the consolidated statement of condition, the Capital Securities are treated as capital for regulatory purposes. Specifically, under applicable regulatory guidelines, the Capital Securities issued by the Trusts qualify as Tier 1 capital up to a maximum of 25% of Tier 1 capital on an aggregate basis. Any amount that exceeds the 25% threshold would qualify as Tier 2 capital. At December 31, 2014 and December 31, 2013, the total $175,416,000 and $190,726,000, respectively of the Capital Securities outstanding qualified as Tier 1 capital.

The following table illustrates key information about each of the Debentures and their interest rates at December 31, 2014:

	Junior Subordinated Deferrable Interest Debentures		Repricing Frequency			Interest Rate Index	Maturity Date	Optional Redemption Date(1)

	(in thousands)
Trust VI	$	25,774	Quarterly	3.68	%	LIBOR + 3.45	November 2032	February 2008
Trust VIII		25,774	Quarterly	3.28	%	LIBOR + 3.05	October 2033	October 2008
Trust IX		41,238	Quarterly	1.86	%	LIBOR + 1.62	October 2036	October 2011
Trust X		34,021	Quarterly	1.88	%	LIBOR + 1.65	February 2037	February 2012
Trust XI		27,990	Quarterly	1.86	%	LIBOR + 1.62	July 2037	July 2012
Trust XII		20,619	Quarterly	1.69	%	LIBOR + 1.45	September 2037	September 2012

	$	175,416

The following table presents contractual cash obligations of the Company (other than deposit liabilities) as of December 31, 2014:

	Payments due by Period

	(Dollars in Thousands)
Contractual Cash Obligations	Total		Less than One Year		One to Three Years		Three to Five Years		After Five Years
Securities sold under repurchase agreements	$	858,350	$	247,317	$	311,033	$	300,000	$	—
Federal Home Loan Bank borrowings		1,073,944		1,067,849		314		337		5,444
Junior subordinated deferrable interest debentures		175,416		—		—		—		175,416
Operating leases		8,037		3,504		3,622		789		122

Total Contractual Cash Obligations	$	2,115,747	$	1,318,670	$	314,969	$	301,126	$	180,982

The following table presents contractual commercial commitments of the Company (other than deposit liabilities) as of December 31, 2014:

	Amount of Commitment Expiration Per Period

	(Dollars in Thousands)
Commercial Commitments	Total		Less than One Year		One to Three Years		Three to Five Years		After Five Years
Financial and Performance Standby Letters of Credit	$	103,793	$	98,847	$	4,941	$	5	$	—
Commercial Letters of Credit		10,879		10,879		—		—		—
Credit Card Lines		16,687		16,687		—		—		—
Other Commercial Commitments		1,662,516		902,346		510,800		162,723		86,647

Total Commercial Commitments	$	1,793,875	$	1,028,759	$	515,741	$	162,728	$	86,647

Due to the nature of the Company's commercial commitments, including unfunded loan commitments and lines of credit, the amounts presented above do not necessarily reflect the amounts the Company anticipates funding in the periods presented above.

The Company has established various accounting policies which govern the application of accounting principles in the preparation of the Company's consolidated financial statements. The significant accounting policies are described in the Notes to the Consolidated Financial Statements. Certain accounting policies involve significant subjective judgments and assumptions by management which have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies.

The Company considers its Allowance for Probable Loan Losses as a policy critical to the sound operations of the bank subsidiaries. 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 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. See also discussion regarding the allowance for probable loan losses and provision for probable loan losses included in the results of operations and "Provision and Allowance for Probable Loan Losses" included in Notes 1 and 4 of the Notes to Consolidated Financial Statements.

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 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.

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. 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.

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 loss. 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.

See Note 1—Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements for details of recently issued and recently adopted accounting standards and their impact on the Company's consolidated financial statements.

The Company had issued and outstanding 66,405,410 shares of $1.00 par value Common Stock held by approximately 2,191 holders of record at February 20, 2015. The book value of the Common Stock at December 31, 2014 was $24.76 per share compared with $22.24 per share at December 31, 2013. Since December 23, 2008, the Company had outstanding 216,000 shares of Series A cumulative perpetual preferred stock (the "Senior Preferred Stock"), issued to the US Treasury under the Company's participation in the Troubled Asset Relief Program Capital Purchase Program (the "TARP Capital Purchase Program"). The Company redeemed all of the Senior Preferred Stock in 2012. In conjunction with the purchase of the Senior Preferred Stock, the US Treasury received a warrant (the "Warrant") to purchase 1,326,238 shares of the Company's common stock (the "Warrant Shares") at $24.43 per share, which would represent an aggregate common stock investment in the Company on exercise of the warrant in full equal to 15% of the Senior Preferred Stock investment. The term of the Warrant is ten years and was immediately exercisable. The Warrant is included as a component of Tier 1 capital. On June 12, 2013, the U. S. Treasury sold the Warrant to a third party. As of February 20, 2015, the Warrant is still outstanding, but expires on December 23, 2018 with no value if not exercised before that date. Adjustments to the $24.43 per share Exercise Price of the Warrant will be made if the Company pays cash dividends in excess of 33 cents per semi-annual period or makes certain other shareholder distributions before the Warrant expires on December 23, 2018.

The Common Stock is traded on the NASDAQ National Market under the symbol "IBOC." The following table sets forth the approximate high and low bid prices in the Company's Common Stock during 2014 and 2013, as quoted on the NASDAQ National Market for each of the quarters in the two year period ended December 31, 2014. Some of the quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The closing sales price of the Company's Common Stock was $24.65 per share at February 20, 2015.

The Company paid cash dividends to the common shareholders of $.25 per share on April 18, 2014 to all holders of record on April 1, 2014 and $.27 per share on October 15, 2014 to all shareholders of record on September 30, 2014. The Company paid cash dividends to the common shareholders of $.20 per share on April 20, 2013 to all holders of record on April 1, 2013 and $.23 per share on October 15, 2013 to all holders of record on September 30, 2013, respectively.

The Company's principal source of funds to pay cash dividends on its Common Stock is cash dividends from its bank subsidiaries. For a discussion of the limitations, please see Note 20 of Notes to Consolidated Financial Statements.

In April 2009, following receipt of the Treasury Department's consent, the Board of Directors re-established a formal stock repurchase program that authorized the repurchase of up to $40 million of

common stock within the following twelve months and on March 7, 2014, the Board of Directors extended the repurchase program and again authorized the repurchase of up to $40 million of common stock during the twelve month period commencing on April 9, 2014, which repurchase cap the Board is inclined to increase over time. Stock repurchases may be made from time to time, on the open market or through private transactions. Shares repurchased in this program will be held in treasury for reissue for various corporate purposes, including employee stock option plans. During the fourth quarter of 2014, the Company's Board of Directors adopted a Rule 10b5-1 plan and intends to adopt additional Rule 10b5-1 trading plans that will allow the Company to purchase its shares of common stock during certain trading blackout periods when the Company ordinarily would not be in the market due to trading restrictions in its internal trading policy. During the term of a 10b5-1 Plan, purchases of common stock are automatic to the extent the conditions of the 10b5-1 Plan's trading instructions are met. Shares repurchased in this program will be held in treasury for reissue for various corporate purposes, including employee stock option plans. As of February 20, 2015, a total of 8,684,680 shares had been repurchased under all programs at a cost of $257,704,000. The Company is not obligated to repurchase shares under its stock repurchase program or to enter into additional Rule 10b5-1 plans. The timing, actual number and value of shares purchased will depend on many factors, including the Company's cash flow and the liquidity and price performance of its shares of common stock.

Except for repurchases in connection with the administration of an employee benefit plan in the ordinary course of business and consistent with past practices, common stock repurchases are only conducted under publicly announced repurchase programs approved by the Board of Directors. The following table includes information about common stock share repurchases for the quarter ended December 31, 2014.

		Average Price Paid Per Share			Approximate Dollar Value of Shares Available for Repurchase(1)

October 1—October 31, 2014	153,359	$	24.36	153,359	$	30,302,000
November 1—November 30, 2014	4,000		26.05	4,000		30,198,000
December 1—December 31, 2014	137,400		24.50	137,400		26,832,000

Total	294,759	$	24.45	294,759

The following table sets forth information as of December 31, 2014, with respect to the Company's equity compensation plans:

Plan Category		(B) Weighted average exercise price of outstanding options, warrants and rights

Equity Compensation plans approved by security holders	993,889	$	18.94	204,750

Total	993,889	$	18.94	204,750

We have audited the accompanying consolidated statements of condition of International Bancshares Corporation and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of International Bancshares Corporation and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), International Bancshares Corporation and subsidiaries' internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992, and our report dated February 27, 2015 expressed an unqualified opinion on the effectiveness of International Bancshares Corporation and subsidiaries' internal control over financial reporting.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Condition

December 31, 2014 and 2013

(Dollars in Thousands, Except Per Share Amounts)

	2014			2013

Assets
Cash and cash equivalents	$	255,146		$	274,785
Investment securities:
Held to maturity (Market value of $2,400 on December 31, 2014 and $2,400 on December 31, 2013)		2,400			2,400
Available for sale (Amortized cost of $4,914,428 on December 31, 2014 and $5,372,594 on December 31, 2013)		4,931,963			5,304,579

Total investment securities		4,934,363			5,306,979
Loans		5,679,245			5,199,235
Less allowance for probable loan losses		(64,828	)		(70,161	)

Net loans		5,614,417			5,129,074
Bank premises and equipment, net		526,423			504,842
Accrued interest receivable		31,461			30,654
Other investments		420,670			388,563
Identified intangible assets, net		797			3,186
Goodwill		282,532			282,532
Other assets		130,711			158,862

Total assets	$	12,196,520		$	12,079,477

	2014			2013

Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Demand—non-interest bearing	$	2,930,253		$	2,666,510
Savings and interest bearing demand		3,025,680			2,925,612
Time		2,482,692			2,651,303

Total deposits		8,438,625			8,243,425
Securities sold under repurchase agreements		858,350			957,381
Other borrowed funds		1,073,944			1,223,950
Junior subordinated deferrable interest debentures		175,416			190,726
Other liabilities		69,527			39,587

Total liabilities		10,615,862			10,655,069

Shareholders' equity:
Common shares of $1.00 par value. Authorized 275,000,000 shares; issued 95,783,977 shares on December 31, 2014 and 95,743,592 shares on December 31, 2013		95,784			95,744
Surplus		165,520			163,947
Retained earnings		1,585,389			1,467,000
Accumulated other comprehensive income (loss) (including $(4,881) on December 31, 2014 and $(5,646) on December 31, 2013 of comprehensive loss related to other-than-temporary impairment for non-credit related issues)		11,397			(43,774	)

		1,858,090			1,682,917
Less cost of shares in treasury, 29,324,567 shares on December 31, 2014 and 28,537,180 on December 31, 2013		(277,432	)		(258,509	)

Total shareholders' equity		1,580,658			1,424,408

Total liabilities and shareholders' equity	$	12,196,520		$	12,079,477

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income

Years ended December 31, 2014, 2013 and 2012

(Dollars in Thousands, Except Per Share Amounts)

	2014		2013		2012

Interest income:
Loans, including fees	$	281,546	$	263,027	$	268,588
Investment securities:
Taxable		100,095		87,198		94,885
Tax-exempt		11,767		12,877		11,663
Other interest income		191		115		503

Total interest income		393,599		363,217		375,639

Interest expense:
Savings and interest bearing demand deposits		3,597		3,762		5,288
Time deposits		12,033		15,444		23,973
Securities sold under repurchase agreements		24,616		29,171		37,645
Other borrowings		2,033		1,590		998
Junior subordinated deferrable interest debentures		4,264		4,665		6,595

Total interest expense		46,543		54,632		74,499

Net interest income		347,056		308,585		301,140
Provision for probable loan losses		14,423		22,968		27,959

Net interest income after provision for probable loan losses		332,633		285,617		273,181

Non-interest income:
Service charges on deposit accounts		88,586		97,087		93,128
Other service charges, commissions and fees
Banking		44,435		41,075		38,523
Non-banking		7,463		7,116		6,998
Investment securities transactions, net		1,283		9,601		38,446
Other investments, net		22,023		22,383		13,339
Other income		14,558		12,343		10,157

Total non-interest income		178,348		189,605		200,591

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income (Continued)

Years ended December 31, 2014, 2013 and 2012

(Dollars in Thousands, Except Per Share Amounts)

	2014		2013		2012

Non-interest expense:
Employee compensation and benefits	$	121,511	$	119,845	$	118,041
Occupancy		32,530		31,766		34,608
Depreciation of bank premises and equipment		24,013		26,017		26,756
Professional fees		10,925		13,146		14,369
Deposit insurance assessments		6,082		6,737		7,709
Net expense, other real estate owned		2,358		6,896		8,929
Amortization of identified intangible assets		2,389		4,633		4,651
Advertising		7,742		7,034		7,017
Early termination fee—securities sold under repurchase agreements		11,000		12,303		31,550
Impairment charges (Total other-than-temporary impairment charges, $(366) less loss of $1,183, $(431) less loss of $1,805, and $(916) less gain of $(123), included in other comprehensive loss)		817		1,374		1,039
Other		61,676		62,881		60,703

Total non-interest expense		281,043		292,632		315,372

Income before income taxes		229,938		182,590		158,400
Provision for income taxes		76,787		56,239		50,565

Net income	$	153,151	$	126,351	$	107,835
Preferred stock dividends and discount accretion		—		—		14,362

Net income available to common shareholders	$	153,151	$	126,351	$	93,473

	December 31,

	2014		2013		2012		2011		2010
	(Dollars in Thousands)
Loans accounted for on a non-accrual basis	$	63,559	$	62,823	$	71,768	$	118,505	$	108,023
Accruing loans contractually past due ninety days or more as to interest or principal payments		9,988		7,197		14,769		14,268		19,347

	Interest sensitivity

	Fixed Rate		Variable Rate
	(Dollars in Thousands)
Due after one but within five years	$	228,637	$	2,370,134
Due after five years		62,464		423,864

Total	$	291,101	$	2,793,998


Due within 3 months or less	$	631,083
Due after 3 months and within 6 months		409,400
Due after 6 months and within 12 months		443,860
Due after 12 months		215,795

	$	1,700,138

		High		Low

2014:	First quarter	$	26.56	$	21.16
	Second quarter		27.04		22.24
	Third quarter		28.00		23.63
	Fourth quarter		28.49		23.20

		High		Low

2013:	First quarter	$	21.00	$	18.26
	Second quarter		22.93		17.95
	Third quarter		25.85		20.85
	Fourth quarter		27.20		21.34

	Held to Maturity Maturing

	Within one year					After one but within five years					After five but within ten years					After ten years
	Adjusted					Adjusted					Adjusted					Adjusted
	Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield
	(Dollars in Thousands)
Other securities	$	825		1.66	%	$	1,575		1.16	%	$	—		—	%	$	—		—	%

Total	$	825		1.66	%	$	1,575		1.16	%	$	—		—	%	$	—		—	%

			INDEXED RETURNS December 31,

	Base Period 2009		INDEXED RETURNS December 31,
Company / Index	Base Period 2009		2010		2011		2012		2013		2014
International Bancshares Corporation		100		107.91		101.24		101.89		151.49		155.73
S&P 500 Index		100		115.06		117.49		136.30		180.44		205.14
S&P 500 Banks		100		119.84		106.99		132.92		180.40		208.39