UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-09439

INTERNATIONAL BANCSHARES CORPORATION

(Exact name of registrant as specified in its charter)

Texas		74-2157138
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

1200 San Bernardo Avenue, Laredo, Texas 78042-1359

(Address of principal executive offices)

(Zip Code)

(956) 722-7611

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x		Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date

Class		Shares Issued and Outstanding
Common Stock, $1.00 par value		67,249,800 shares outstanding at May 2, 2012

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Condition (Unaudited)

(Dollars in Thousands)

	March 31,			December 31,
	2012			2011
Assets

Cash and cash equivalents	$	551,044		$	261,885

Investment securities:
Held-to-maturity (Market value of $3,325 on March 31, 2012 and $2,450 on December 31, 2011)	3,325			2,450
Available-for-sale (Amortized cost of $4,978,091 on March 31, 2012 and $5,082,095 on December 31, 2011)	5,097,484			5,213,915

Total investment securities	5,100,809			5,216,365

Loans	4,935,482			5,053,475
Less allowance for probable loan losses	(78,781		)	(84,192		)

Net loans	4,856,701			4,969,283

Bank premises and equipment, net	455,145			453,050
Accrued interest receivable	29,650			32,002
Other investments	346,013			351,209
Identified intangible assets, net	11,087			12,190
Goodwill	282,532			282,532
Other assets	178,680			161,133

Total assets	$	11,811,661		$	11,739,649

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Condition, continued (Unaudited)

(Dollars in Thousands)

	March 31,			December 31,
	2012			2011
Liabilities and Shareholders’ Equity

Liabilities:

Deposits:
Demand — non-interest bearing	$	2,063,600		$	1,927,018
Savings and interest bearing demand	2,923,207			2,707,693
Time	3,331,008			3,311,381

Total deposits	8,317,815			7,946,092

Securities sold under repurchase agreements	1,362,434			1,348,629
Other borrowed funds	198,128			494,161
Junior subordinated deferrable interest debentures	190,726			190,726
Other liabilities	135,267			159,876

Total liabilities	10,204,370			10,139,484

Commitments, Contingent Liabilities and Other Tax Matters (Note 10)

Shareholders’ equity:

Series A Cumulative perpetual preferred shares, $.01 par value, $1,000 per share liquidation value. Authorized 25,000,000 shares; issued 216,000 shares on March 31, 2012, net of discount of $4,809 and issued 216,000 shares on December 31, 2011, net of discount of $5,452	211,191			210,548
Common shares of $1.00 par value. Authorized 275,000,000 shares; issued 95,720,587 shares on March 31, 2012 and 95,719,652 shares on December 31, 2011	95,721			95,720
Surplus	162,907			162,767
Retained earnings	1,317,857			1,302,964
Accumulated other comprehensive income (including $(7,834) and $(6,889) of comprehensive loss related to other-than- temporary impairment for non-credit related issues)	76,966			84,959
	1,864,642			1,856,958

Less cost of shares in treasury, 28,471,180 shares on March 31, 2012 and 28,441,714 December 31, 2011	(257,351		)	(256,793		)

Total shareholders’ equity	1,607,291			1,600,165

Total liabilities and shareholders’ equity	$	11,811,661		$	11,739,649

See accompanying notes to consolidated financial statements.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

(Dollars in Thousands, except per share data)

	Three Months Ended March 31,
	2012		2011

Interest income:
Loans, including fees	$	68,323	$	74,680
Investment securities:
Taxable	24,512		30,255
Tax-exempt	2,861		2,128
Other interest income	86		75

Total interest income	95,782		107,138

Interest expense:
Savings deposits	1,623		2,262
Time deposits	6,485		8,770
Securities sold under repurchase agreements	10,302		10,586
Other borrowings	208		650
Junior subordinated interest deferrable debentures	2,047		3,037

Total interest expense	20,665		25,305

Net interest income	75,117		81,833

Provision for probable loan losses	5,285		4,080

Net interest income after provision for probable loan losses	69,832		77,753

Non-interest income:
Service charges on deposit accounts	22,753		24,782
Other service charges, commissions and fees
Banking	10,064		13,026
Non-banking	1,251		1,492
Investment securities transactions, net	1,172		1,416
Other investments, net	5,134		5,356
Other income	2,803		2,294

Total non-interest income	$	43,177	$	48,366

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income, continued (Unaudited)

(Dollars in Thousands, except per share data)

	Three Months Ended March 31,
	2012		2011

Non-interest expense:
Employee compensation and benefits	$	29,401	$	32,035
Occupancy	8,734		8,601
Depreciation of bank premises and equipment	6,927		8,327
Professional fees	3,370		3,886
Deposit insurance assessments	1,567		2,457
Net expense, other real estate owned	1,181		1,114
Amortization of identified intangible assets	1,137		1,303
Advertising	1,827		1,787
Impairment charges (Total other-than-temporary impairment charges, $1,649 net of $1,464, and $1,309, net of $1,060, included in other comprehensive income)	186		249
Other	13,813		15,706

Total non-interest expense	68,143		75,465

Income before income taxes	44,866		50,654

Provision for income taxes	13,179		17,133

Net income	$	31,687	$	33,521

Preferred stock dividends	3,343		3,305

Net income available to common shareholders	$	28,344	$	30,216

Basic earnings per common share:

Weighted average number of shares outstanding:	67,271,146		67,701,315
Net income	$	.42	$	.45

Fully diluted earnings per common share:

Weighted average number of shares outstanding:	67,355,427		67,779,608
Net income	$	.42	$	.45

See accompanying notes to consolidated financial statements.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

	Three Months Ended March 31,
	2012			2011
Operating activities:

Net income	$	31,687		$	33,521

Adjustments to reconcile net income to net cash provided by operating activities:
Provision for probable loan losses	5,285			4,080
Specific reserve, other real estate owned	427			294
Accretion of time deposit discounts	—			(4		)
Depreciation of bank premises and equipment	6,927			8,327
Loss (gain) on sale of bank premises and equipment	30			(305		)
Gain on sale of other real estate owned	(232		)	(182		)
Accretion of investment securities discounts	(755		)	(433		)
Amortization of investment securities premiums	6,435			6,140
Investment securities transactions, net	(1,172		)	(1,416		)
Impairment charges on available-for-sale investment securities	186			249
Amortization of junior subordinated debenture discounts	—			9
Amortization of identified intangible assets	1,137			1,303
Stock based compensation expense	131			102
Earnings from affiliates and other investments	(5,050		)	(4,951		)
Deferred tax expense (benefit)	1,091			(1,435		)
Decrease in accrued interest receivable	2,352			2,610
Net (increase) decrease in other assets	(113		)	5,544
Net increase in other liabilities	11,629			6,175

Net cash provided by operating activities	59,995			59,628

Investing activities:

Proceeds from maturities of securities	200			—
Proceeds from sales and calls of available for sale securities	17,331			352,679
Purchases of available for sale securities	(272,091		)	(601,849		)
Principal collected on mortgage-backed securities	306,652			302,045
Net decrease (increase) in loans	78,532			(6,089		)
Purchases of other investments	(150		)	(717		)
Distributions of other investments	10,396			14,944
Purchases of bank premises and equipment	(9,566		)	(4,226		)
Proceeds from sales of other real estate owned	11,099			3,423
Proceeds from sale of bank premises and equipment	514			1,050

Net cash provided by investing activities	142,917			61,260

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows, continued (Unaudited)

(Dollars in Thousands)

	Three Months Ended March 31,
	2012			2011

Financing activities:

Net increase in non-interest bearing demand deposits	$	136,582		$	161,374
Net increase in savings and interest bearing demand deposits	215,514			92,987
Net increase in time deposits	19,627			1,349
Net increase (decrease) in securities sold under repurchase agreements	13,805			(14,129		)
Net decrease in other borrowed funds	(296,033		)	(254,821		)
Purchases of treasury stock	(558		)	—
Proceeds from stock transactions	10			108
Payments of dividends on preferred stock	(2,700		)	(2,700		)

Net cash provided by (used in) financing activities	86,247			(15,832		)

Increase in cash and cash equivalents	289,159			105,056

Cash and cash equivalents at beginning of period	261,885			197,814

Cash and cash equivalents at end of period	$	551,044		$	302,870

Supplemental cash flow information:
Interest paid	$	21,493		$	26,290
Income taxes paid	50			5,380
Non-cash investing and financing activities:
Accrued dividends, preferred shares	$	1,350		$	1,350
Dividends declared, not yet paid	13,450			12,863
Net transfer from loans to other real estate owned	28,765			2,921
Purchases of available-for-sale securities not yet settled	26,195			384,841

See accompanying notes to consolidated financial statements.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 - Basis of Presentation

The accounting and reporting policies of International Bancshares Corporation (“Corporation”) and Subsidiaries (the Corporation and Subsidiaries collectively referred to herein as the “Company”) conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries, International Bank of Commerce, Laredo (“IBC”), Commerce Bank, International Bank of Commerce, Zapata, International Bank of Commerce, Brownsville and the Corporation’s wholly-owned non-bank subsidiaries, IBC Subsidiary Corporation, IBC Life Insurance Company, IBC Trading Company, IBC Capital Corporation and Premier Tierra Holdings, Inc. All significant inter-company balances and transactions have been eliminated in consolidation. The consolidated financial statements are unaudited, but include all adjustments, which, in the opinion of management, are necessary for a fair presentation of the results of the periods presented. All such adjustments were of a normal and recurring nature. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto in the Company’s latest Annual Report on Form 10-K. The consolidated statement of condition at December 31, 2011 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Certain reclassifications have been made to make prior periods comparable.

The Company operates as one segment. The operating information used by the Company’s chief executive officer for purposes of assessing performance and making operating decisions about the Company is the consolidated statements presented in this report. The Company has four active operating subsidiaries, namely, the bank subsidiaries, otherwise known as International Bank of Commerce, Laredo, Commerce Bank, International Bank of Commerce, Zapata and International Bank of Commerce, Brownsville. The Company applies the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), FASB ASC 280, “Segment Reporting”, in determining its reportable segments and related disclosures.

The Company has evaluated all events or transactions that occurred through the date the Company issued these financial statements. During this period, the Company did not have any material recognizable or non-recognizable subsequent events.

Note 2 — Fair Value Measurements

ASC Topic 820,”Fair Value Measurements and Disclosures” (“ASC 820”) defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820 applies to all financial instruments that are being measured and reported on a fair value basis. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; it also establishes a fair value hierarchy that prioritizes the inputs used in valuation methodologies into the following three levels:

· Level 1 Inputs — Unadjusted quoted prices in active markets for identical assets or liabilities.

· Level 2 Inputs — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

· Level 3 Inputs — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or other valuation techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy is set forth below.

The following table represents assets and liabilities reported on the consolidated balance sheets at their fair value as of March 31, 2012 by level within the fair value measurement hierarchy:

			Fair Value Measurements at Reporting Date Using
			(in thousands)
	Assets/Liabilities Measured at Fair Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	March 31, 2012		(Level 1)		(Level 2)		(Level 3)

Measured on a recurring basis:
Assets:

U.S. Government agency obligations	$	24,030	$	—	$	24,030	$	—
Residential mortgage-backed securities	4,838,008		—		4,800,987		37,021
States and political subdivisions	215,372		—		215,372		—
Other	20,074		20,074		—		—

The following table represents assets and liabilities reported on the consolidated balance sheets at their fair value as of December 31, 2011 by level within the fair value measurement hierarchy:

			Fair Value Measurements at Reporting Date Using
			(in thousands)
	Assets/Liabilities Measured at Fair Value December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Measured on a recurring basis:
Assets:

Residential mortgage-backed securities	$	4,969,263	$	—	$	4,929,658	$	39,605
States and political subdivisions	224,761		—		224,761		—
Other	19,891		19,891		—		—

Investment securities available-for-sale are classified within level 2 and level 3 of the valuation hierarchy, with the exception of certain equity investments that are classified within level 1. For investments classified as level 2 in the fair value hierarchy, the Company obtains fair value measurements for investment securities from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Investment securities classified as level 3 are non-agency mortgage-backed securities. The non-agency mortgage-backed securities held by the Company are traded in inactive markets and markets that have experienced significant decreases in volume and level of activity, as evidenced by few recent transactions, a significant decline or absence of new issuances, price quotations that are not based on comparable securities transactions and wide bid-ask spreads among other factors. As a result of the inability to use quoted market prices to determine fair value for these securities, the Company determined that fair value, as determined by level 3 inputs in the fair value hierarchy, is more appropriate for financial reporting and more consistent with the expected performance of the investments. For the investments classified within level 3 of the fair value hierarchy, the Company used a discounted cash flow model to determine fair value. Inputs in the model included both historical performance and expected future performance based on information currently available.

Assumptions used in the discounted cash flow model for the quarter ended March 31, 2012, were applied separately to those portions of the bonds where the underlying residential mortgage loans had performed under original contract terms for at least the prior 24 months and those where the underlying residential mortgages had not met the original contractual obligation for the same period. Unobservable inputs included in the model are estimates on future principal prepayment rates, and default and loss severity rates. For the portion of the bonds where the underlying residential mortgage had met the original contract terms for at least 24 months, the Company used the following estimates in the model: (i) a voluntary prepayment rate of 7%, (ii) a 1% default rate, (iii) a loss severity rate of 25%, and (iv) a discount rate of 13%. The assumptions used in the model for the rest of the bonds included the following estimates: (i) a voluntary prepayment rate of 2%, (ii) a default rate of 9%, (iii) a loss severity rate that starts at 60% for the first year then declines by 5% for the following five years and remains at 25% thereafter, and (iv) a discount rate of 13%. The estimates used in the model to determine fair value are based on observable historical data of the underlying collateral. The model anticipates that the housing market will gradually improve and that the underlying collateral will eventually all perform in accordance with the original contract terms on the bonds. Should the number of loans in the underlying collateral that default and go into foreclosure or the severity of the losses in the underlying collateral significantly change, the results of the model would be impacted. The Company will continue to evaluate the actual historical performance of the underlying collateral and will modify the assumptions used in the model as necessary. As actual historical information has become more widely available to investors, the Company determined that this approach to the model was appropriate and therefore, modified the model that had been used in prior periods. The change did not significantly impact the results of the model.

Assumptions used in the model for the year ended December 31, 2011, included estimates on future principal prepayment rates, default and loss severity rates. The Company estimates that future principal prepayment rates will range from 4 — 5% and used a 13% discount rate. Default rates used in the model were 10 — 11% for the first year and 7% thereafter, and loss severity rates started at 60% for the first year and are decreased by 10% for the following three years, then remain at 20% thereafter.

The following table presents a reconciliation of activity for such mortgage-backed securities on a net basis (Dollars in thousands):

Balance at December 31, 2011	$	39,605
Principal paydowns	(934		)
Total unrealized gains (losses) included in:
Other comprehensive income	(1,464		)
Impairment realized	(186		)

Balance at March 31, 2012	$	37,021

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis. The instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

The following table represents financial instruments measured at fair value on a non-recurring basis as of March 31, 2012 by level within the fair value measurement hierarchy:

			Fair Value Measurements at Reporting Date Using
			(in thousands)
	Assets/Liabilities Measured at Fair Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Provision During
	March 31, 2012		(Level 1)		(Level 2)		(Level 3)		Period

Measured on a non-recurring basis:
Assets:
Impaired loans	$	41,208	$	—	$	—	$	41,208	$	5,736
Other real estate owned	6,282		—		—		6,282		427

The following table represents financial instruments measured at fair value on a non-recurring basis as of December 31, 2011 by level within the fair value measurement hierarchy:

			Fair Value Measurements at Reporting Date Using
			(in thousands)
	Assets/Liabilities Measured at Fair Value December 31,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Provision During the
	2011		(Level 1)		(Level 2)		(Level 3)		Period

Measured on a non-recurring basis:
Assets:
Impaired loans	$	81,723	$	—	$	—	$	81,723	$	15,457
Other real estate owned	34,631		—		—		34,631		9,509

The Company’s assets measured at fair value on a non-recurring basis are limited to impaired loans and other real estate owned. Impaired loans are classified within level 3 of the valuation hierarchy. The fair value of impaired loans is derived in accordance with FASB ASC 310, “Receivables”. The fair value of impaired loans is based on the fair value of the collateral, as determined through an external appraisal process, discounted based on internal criteria. Impaired loans are primarily comprised of collateral-dependent commercial loans. Impaired loans are remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for probable loan losses based upon the fair value of the underlying collateral.

Other real estate owned is comprised of real estate acquired by foreclosure and deeds in lieu of foreclosure. Other real estate owned is carried at the lower of the recorded investment in the property or its fair value less estimated costs to sell such property (as determined by independent appraisal) within level 3 of the fair value hierarchy. Prior to foreclosure, the value of the underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for probable loan losses, if necessary. The fair value is reviewed periodically and subsequent write downs are made accordingly through a change to operations. Other real estate owned is included in other assets on the consolidated financial statements. For the three months ended March 31, 2012 and the twelve months ended December 31, 2011, the Company recorded $7,996,000 and $1,100,000 in charges to the allowance for probable loan losses in connection with loans transferred to other real estate owned. For the three months ended March 31, 2012 and twelve months ended December 31, 2011, the Company recorded $427,000 and $9,509,000 in write downs in fair value in connection with other real estate owned.

The fair value estimates, methods, and assumptions for the Company’s financial instruments at March 31, 2012 and December 31, 2011 are outlined below.

Cash and Due From Banks

For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Investment Securities Held-to-Maturity

The carrying amounts of investments held-to-maturity approximate fair value.

Investment Securities

For investment securities, which include U.S. Treasury securities, obligations of other U.S. obtained government agencies, obligations of states and political subdivisions and mortgage pass through and related securities, fair values are obtained from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. See disclosures of fair value of investment securities in Note 6.

Loans

Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, real estate and consumer loans as outlined by regulatory reporting guidelines. Each category is segmented into fixed and variable interest rate terms and by performing and non-performing categories.

For variable rate performing loans, the carrying amount approximates the fair value. For fixed rate performing loans, except residential mortgage loans, the fair value is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. For performing residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources or the primary origination market. Fixed rate performing loans are within Level 3 of the fair value hierarchy. At March 31, 2012, and December 31, 2011, the carrying amount of fixed rate performing loans was $1,237,058,000 and $1,173,548,000 respectively, and the estimated fair value was $1,194,431,000 and $1,200,837,000, respectively.

Accrued Interest

The carrying amounts of accrued interest approximate fair value.

Deposits

The fair value of deposits with no stated maturity, such as non-interest bearing demand deposit accounts, savings accounts and interest bearing demand deposit accounts, was equal to the amount payable on demand as of March 31, 2012 and December 31, 2011. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is based on currently offered rates. Time deposits are within Level 3 of the fair value hierarchy. At March 31, 2012 and December 31, 2011, the carrying amount of time deposits was $3,331,008,000 and $3,311,381,000, respectively, and the estimated fair value was $3,342,704,000 and $3,323,680,000, respectively.

Note 3— Loans

A summary of net loans, by loan type at March 31, 2012 and December 31, 2011 is as follows:

	March 31,		December 31,
	2012		2011
	(Dollars in Thousands)

Commercial, financial and agricultural	$	2,496,601	$	2,560,102
Real estate — mortgage	864,187		895,870
Real estate — construction	1,269,146		1,273,389
Consumer	87,660		94,109
Foreign	217,888		230,005

Total loans	$	4,935,482	$	5,053,475

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 servicing loan officer 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 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:

	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			64		5,285

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

	2011
	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,	$	22,046		$	26,695		$	16,340	$	53	$	10,059		$	2,611		$	6,241		$	437		$	84,482
Losses charge to allowance	(327		)	(941		)	—		—		(21		)	(235		)	(2,936		)	(9		)	(4,469		)
Recoveries credited to allowance	121			3			134		—		2			197			847			—			1,304
Net losses charged to allowance	(206		)	(938		)	134		—		(19		)	(38		)	(2,089		)	(9		)	(3,165		)

Provision charged to operations	1,801			5,714			2,088		178		(5,599		)	1,700			(1,942		)	140			4,080

Balance at March 31,	$	23,641		$	31,471		$	18,562	$	231	$	4,441		$	4,273		$	2,210		$	568		$	85,397

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 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, 2012 and December 31, 2011:

	March 31, 2012
	Loans individually evaluated for impairment				Loans collectively evaluated for impairment
	(Dollars in Thousands)
	Recorded Investment		Allowance		Recorded Investment		Allowance

Domestic
Commercial	$	26,809	$	14,372	$	772,826	$	10,205
Commercial real estate: other construction & land development	70,500		7,641		1,198,646		12,125
Commercial real estate: farmland & commercial	26,564		5,902		1,569,157		15,908
Commercial real estate: multifamily	397		—		100,848		849
Residential: first lien	2,230		23		474,469		4,356
Residential: junior lien	2,003		—		385,485		4,505
Consumer	1,127		—		86,533		1,602
Foreign	46		—		217,842		1,293

Total	$	129,676	$	27,938	$	4,805,806	$	50,843

	December 31, 2011
	Loans individually evaluated for impairment				Loans collectively evaluated for impairment
	(Dollars in Thousands)
	Recorded Investment		Allowance		Recorded Investment		Allowance

Domestic
Commercial	$	27,603	$	14,402	$	746,213	$	12,215
Commercial real estate: other construction & land development	60,428		3,073		1,212,961		16,867
Commercial real estate: farmland & commercial	42,231		9,754		1,622,456		14,473
Commercial real estate: multifamily	411		—		121,188		1,003
Residential: first lien	2,290		23		493,432		4,539
Residential: junior lien	1,962		—		398,186		4,760
Consumer	1,334		—		92,775		1,724
Foreign	46		—		229,959		1,359

Total	$	136,305	$	27,252	$	4,917,170	$	56,940

The table below provides additional information on loans accounted for on a non-accrual basis by loan class at March 31, 2012 and December 31, 2011:

	March 31, 2012		December 31, 2011
	(Dollars in Thousands)

Domestic
Commercial	$	25,931	$	26,819
Commercial real estate: other construction & land development	64,408		54,336
Commercial real estate: farmland & commercial	24,301		34,910
Commercial real estate: multifamily	397		411
Residential: first lien	1,722		1,848
Residential: junior lien	155		135
Consumer	42		46
Foreign	—		—

Total non-accrual loans	$	116,956	$	118,505

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, 2012 and December 31, 2011:

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

Loans with Related Allowance
Domestic
Commercial	$	23,373	$	23,373	$	14,372	$	23,688	$	10
Commercial real estate: other construction & land development	34,488		34,505		7,641		34,694		—
Commercial real estate: farmland & commercial	13,467		13,526		5,902		13,516		—
Residential: first lien	204		204		23		205		—
Total impaired loans with related allowance	$	71,532	$	71,608	$	27,938	$	72,103	$	10

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

Loans with No Related Allowance
Domestic
Commercial	$	3,436	$	3,605	$	3,453	$	—
Commercial real estate: other construction & land development	36,012		36,084		35,760		58
Commercial real estate: farmland & commercial	13,097		13,690		13,137		31
Commercial real estate: multifamily	397		397		402		—
Residential: first lien	2,026		2,062		1,886		5
Residential: junior lien	2,003		2,013		1,997		27
Consumer	1,127		1,129		1,334		—
Foreign	46		46		46		—
Total impaired loans with no related allowance	$	58,144	$	59,026	$	58,015	$	121

	December 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Recognized
	(Dollars in Thousands)

Loans with Related Allowance
Domestic
Commercial	$	24,108	$	24,108	$	14,402	$	24,145	$	41
Commercial real estate: other construction & land development	34,417		34,432		3,073		34,709		—
Commercial real estate: farmland & commercial	28,636		28,671		9,754		28,883		817
Residential: first lien	208		208		23		214		—
Total impaired loans with related allowance	$	87,369	$	87,419	$	27,252	$	87,951	$	858

	December 31, 2011
	Recorded Investment		Unpaid Principal Balance		Average Recorded Investment		Interest Recognized
	(Dollars in Thousands)

Loans with No Related Allowance
Domestic
Commercial	$	3,495	$	3,932	$	3,942	$	20
Commercial real estate: other construction & land development	26,011		26,112		27,722		128
Commercial real estate: farmland & commercial	13,595		15,394		16,271		102
Commercial real estate: multifamily	411		411		439		—
Residential: first lien	2,082		2,220		2,230		27
Residential: junior lien	1,962		1,970		1,980		118
Consumer	1,334		1,338		1,729		—
Foreign	46		46		46		4
Total impaired loans with no related allowance	$	48,936	$	51,423	$	54,359	$	399

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.

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, 2012 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, 2012 and December 31, 2011:

	March 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	$	4,715	$	2,737	$	1,478	$	1,383	$	8,930	$	790,705	$	799,635
Commercial real estate: other construction & land development	4,215		19,397		62,279		391		85,891		1,183,255		1,269,146
Commercial real estate: farmland & commercial	8,613		8,416		15,537		3,698		32,566		1,563,155		1,595,721
Commercial real estate: multifamily	370		—		397		—		767		100,478		101,245
Residential: first lien	5,319		3,662		10,367		9,256		19,348		457,351		476,699
Residential: junior lien	865		104		421		332		1,390		386,098		387,488
Consumer	1,339		526		762		719		2,627		85,033		87,660
Foreign	1,896		93		2		2		1,991		215,897		217,888
Total past due loans	$	27,332	$	34,935	$	91,243	$	15,781	$	153,510	$	4,781,972	$	4,935,482

	December 31, 2011
	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	$	5,180	$	1,369	$	1,842	$	1,490	$	8,391	$	765,425	$	773,816
Commercial real estate: other construction & land development	23,426		4,360		49,887		979		77,673		1,195,716		1,273,389
Commercial real estate: farmland & commercial	9,467		10,269		7,879		1,231		27,615		1,637,072		1,664,687
Commercial real estate: multifamily	450		—		411		—		861		120,738		121,599
Residential: first lien	6,207		2,757		10,295		9,382		19,259		476,463		495,722
Residential: junior lien	1,433		378		368		320		2,179		397,969		400,148
Consumer	1,643		408		912		866		2,963		91,146		94,109
Foreign	666		53		20		20		739		229,266		230,005
Total past due loans	$	48,472	$	19,594	$	71,614	$	14,288	$	139,680	$	4,913,795	$	5,053,475

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 under Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan,” now included as part of ASC 310-10, “Receivables,” criteria 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, 2012 and December 31, 2011 is as follows:

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

Domestic
Commercial	$	686,900	$	5,488	$	6,140	$	74,298	$	26,809
Commercial real estate: other construction & land development	1,076,334		75,585		14,857		31,870		70,500
Commercial real estate: farmland & commercial	1,421,917

	Three Months Ended March 31,
	2012			2011

Net income	$	31,687		$	33,521

Other comprehensive income, net of tax:

Net unrealized holding (losses) gains on securities available for sale arising during period (tax effects of $(3,959) and $2,013)	(7,352		)	3,736
Reclassification adjustment for gains on securities available for sale included in net income (tax effects of $(410) and $(496))	(762		)	(920		)
Reclassification adjustment for impairment charges on available for sale securities included in net income (tax effects of $65 and $87)	121			162
	(7,993		)	2,978
Comprehensive income	$	23,694		$	36,499