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 June 30, 2013

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		67,197,575 shares outstanding at July 31, 2013

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Condition (Unaudited)

(Dollars in Thousands)

	June 30,			December 31,
	2013			2012
Assets

Cash and due from banks	$	238,924		$	283,100

Investment securities:
Held-to-maturity (Market value of $2,400 on June 30, 2013 and $2,400 on December 31, 2012)	2,400			2,400
Available-for-sale (Amortized cost of $5,213,646 on June 30, 2013 and $5,423,189 on December 31, 2012)	5,189,977			5,525,015

Total investment securities	5,192,377			5,527,415

Loans	4,911,949			4,775,004
Less allowance for probable loan losses	(65,051		)	(58,193		)

Net loans	4,846,898			4,716,811

Bank premises and equipment, net	484,345			481,287
Accrued interest receivable	30,711			31,034
Other investments	366,476			372,739
Identified intangible assets, net	5,524			7,819
Goodwill	282,532			282,532
Other assets	149,126			179,936

Total assets	$	11,596,913		$	11,882,673

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Condition, continued (Unaudited)

(Dollars in Thousands)

	June 30,			December 31,
	2013			2012
Liabilities and Shareholders’ Equity

Liabilities:

Deposits:
Demand — non-interest bearing	$	2,613,721		$	2,465,750
Savings and interest bearing demand	2,833,768			2,867,151
Time	2,746,235			2,954,312

Total deposits	8,193,724			8,287,213

Securities sold under repurchase agreements	1,025,071			1,129,679
Other borrowed funds	752,458			749,027
Junior subordinated deferrable interest debentures	190,726			190,726
Other liabilities	37,640			90,320

Total liabilities	10,199,619			10,446,965

Commitments and Contingent Liabilities (Note 10)

Shareholders’ equity:

Common shares of $1.00 par value. Authorized 275,000,000 shares; issued 95,730,472 shares on June 30, 2013 and 95,724,517 shares on December 31, 2012	95,730			95,725
Surplus	163,567			163,287
Retained earnings	1,411,687			1,369,543
Accumulated other comprehensive (loss) income (including $(6,352) and $(6,811) of comprehensive loss related to other- than-temporary impairment for non-credit related issues)	(15,181		)	65,662
	1,655,803			1,694,217

Less cost of shares in treasury, 28,537,180 shares on June 30, 2013 and 28,537,180 December 31, 2012	(258,509		)	(258,509		)

Total shareholders’ equity	1,397,294			1,435,708

Total liabilities and shareholders’ equity	$	11,596,913		$	11,882,673

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 June 30,				Six Months Ended June 30,
	2013		2012		2013		2012

Interest income:
Loans, including fees	$	64,617	$	67,413	$	128,151	$	135,736
Investment securities:
Taxable	18,601		23,228		39,120		47,740
Tax-exempt	3,085		2,849		6,121		5,710
Other interest income	21		193		42		279

Total interest income	86,324		93,683		173,434		189,465

Interest expense:
Savings deposits	956		1,479		1,967		3,102
Time deposits	3,978		6,255		8,423		12,740
Securities sold under repurchase agreements	7,312		10,267		14,880		20,569
Other borrowings	289		138		579		346
Junior subordinated interest deferrable debentures	1,165		1,901		2,329		3,948

Total interest expense	13,700		20,040		28,178		40,705

Net interest income	72,624		73,643		145,256		148,760

Provision for probable loan losses	4,342		6,107		11,761		11,392

Net interest income after provision for probable loan losses	68,282		67,536		133,495		137,368

Non-interest income:
Service charges on deposit accounts	23,507		23,100		47,337		45,853
Other service charges, commissions and fees
Banking	10,052		9,424		20,035		19,488
Non-banking	1,515		1,682		2,576		2,933
Investment securities transactions, net	—		1,420		9,601		2,592
Other investments, net	8,635		2,647		15,632		7,781
Other income	2,996		2,546		4,776		5,349

Total non-interest income	46,705		40,819		99,957		83,996

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income, continued (Unaudited)

(Dollars in Thousands, except per share data)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2013		2012		2013		2012

Non-interest expense:
Employee compensation and benefits	$	30,764	$	30,210	$	60,975	$	59,611
Occupancy	7,180		8,107		14,992		16,841
Depreciation of bank premises and equipment	6,619		6,790		13,244		13,717
Professional fees	3,952		4,171		7,675		7,541
Deposit insurance assessments	1,762		1,490		3,378		3,057
Net expense, other real estate owned	1,575		1,385		3,364		2,566
Amortization of identified intangible assets	1,158		1,163		2,295		2,300
Advertising	2,023		1,970		3,869		3,797
Early termination fee — securities sold under repurchase agreements	2,418		—		12,303		—
Impairment charges (Total other-than-temporary impairment losses, $(953), net of $(1,370), $(301), net of $(523), $15, net of $(712), and $1,349, net of $941, included in other comprehensive income)	417		222		727		408
Other	15,846		16,583		31,753		30,396

Total non-interest expense	73,714		72,091		154,575		140,234

Income before income taxes	41,273		36,264		78,877		81,130

Provision for income taxes	13,760		11,714		23,295		24,893

Net income	27,513		24,550		55,582		56,237

Preferred stock dividends	—		3,355		—		6,698

Net income available to common shareholders	$	27,513	$	21,195	$	55,582	$	49,539

Basic earnings per common share:

Weighted average number of shares outstanding:	67,190,792		67,244,005		67,189,196		67,257,456
Net income	$	.41	$	.32	$	.83	$	.74

Fully diluted earnings per common share:

Weighted average number of shares outstanding:	67,292,053		67,323,912		67,286,026		67,339,550
Net income	$	.41	$	.31	$	.83	$	.74

See accompanying notes to consolidated financial statements.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in Thousands)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012

Net income	$	27,513		$	24,550		$	55,582		$	56,237

Other comprehensive (loss) income, net of tax

Net unrealized holding (losses) gains on securities available for sale arising during period (tax effects of $(35,282), $4,354, $(40,425) and $395)	(65,523		)	8,086			(75,075		)	734
Reclassification adjustment for gains on securities available for sale included in net income (tax effects of $0, $(497), $(3,360)and $(907))	—			(923		)	(6,241		)	(1,685		)
Reclassification adjustment for impairment charges on available for sale securities included in net income (tax effects of $146, $78, $254 and $143)	271			144			473			265
	(65,252		)	7,307			(80,843		)	(686		)

Comprehensive (loss) income	$	(37,739	)	$	31,857		$	(25,261	)	$	55,551

See accompanying notes to consolidated financial statements.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

	Six Months Ended
	June 30,
	2013			2012
Operating activities:

Net income	$	55,582		$	56,237

Adjustments to reconcile net income to net cash provided by operating activities:
Provision for probable loan losses	11,761			11,392
Specific reserve, other real estate owned	478			741
Depreciation of bank premises and equipment	13,244			13,717
Gain on sale of bank premises and equipment	(516		)	(319		)
Gain on sale of other real estate owned	(188		)	(395		)
Accretion of investment securities discounts	(1,812		)	(1,521		)
Amortization of investment securities premiums	24,256			13,339
Investment securities transactions, net	(9,601		)	(2,592		)
Impairment charges on available-for-sale investment securities	727			408
Amortization of identified intangible assets	2,295			2,300
Stock based compensation expense	221			253
Earnings from affiliates and other investments	(13,209		)	(7,348		)
Deferred tax (benefit) expense	(3,274		)	2,869
Decrease in accrued interest receivable	323			712
Net decrease (increase) in other assets	17,281			(123		)
Net (decrease) increase in other liabilities	(4,754		)	5,138

Net cash provided by operating activities	92,814			94,808

Investing activities:

Proceeds from maturities of held-to-maturity securities	—			1,100
Proceeds from sales and calls of available for sale securities	178,124			72,383
Purchases of available for sale securities	(731,384		)	(792,642		)
Principal collected on mortgage-backed securities	749,233			643,667
Net (increase) decrease in loans	(141,191		)	94,229
Purchases of other investments	(637		)	(1,860		)
Distributions received on other investments	20,109			23,006
Purchases of bank premises and equipment	(16,321		)	(17,282		)
Proceeds from sales of other real estate owned	12,582			15,066
Proceeds from sale of bank premises and equipment	535			2,501

Net cash provided by investing activities	71,050			40,168

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows, continued (Unaudited)

(Dollars in Thousands)

	Six Months Ended
	June 30,
	2013			2012

Financing activities:

Net increase in non-interest bearing demand deposits	$	147,971		$	108,245
Net decrease in savings and interest bearing demand deposits	(33,383		)	(2,828		)
Net (decrease) increase in time deposits	(208,077		)	108,114
Net decrease in securities sold under repurchase agreements	(104,608		)	(18,631		)
Net increase (decrease) in other borrowed funds	3,431			(352,066		)
Purchase of treasury stock	—			(971		)
Proceeds from stock transactions	64			33
Payments of dividends on common stock	(13,438		)	(13,450		)
Payments of dividends on preferred stock	—			(5,400		)

Net cash used in financing activities	(208,040		)	(176,954		)

Decrease in cash and cash equivalents	(44,176		)	(41,978		)

Cash and cash equivalents at beginning of period	283,100			261,885

Cash and cash equivalents at end of period	$	238,924		$	219,907

Supplemental cash flow information:
Interest paid	$	29,910		$	42,268
Income taxes paid	35,171			14,719
Non-cash investing and financing activities:
Accrued dividends, preferred shares	—			1,350
Net transfer from loans to other real estate owned	(657		)	57,605
Purchases of available-for-sale securities not yet settled	—			2,427

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, 2012 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 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 on a recurring basis as of June 30, 2013 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
	June 30, 2013			(Level 1)		(Level 2)		(Level 3)

Measured on a recurring basis:
Assets:
Available for sale securities
Residential mortgage-backed securities	$	4,920,978		$	—	$	4,890,537	$	30,441
States and political subdivisions	248,626			—		248,626		—
Other	20,373			20,373		—		—
Total	$	5,189,977		$	20,373	$	5,139,163	$	30,441

The following table represents assets and liabilities reported on the consolidated balance sheets at their fair value on a recurring basis as of December 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
	December 31, 2012		(Level 1)		(Level 2)		(Level 3)

Measured on a recurring basis:
Assets:
Available for sale securities
Residential mortgage-backed securities	$	5,265,204	$	—	$	5,232,344	$	32,860
States and political subdivisions	238,675		—		238,675		—
Other	21,136		21,136		—		—
Total	$	5,525,015	$	21,136	$	5,471,019	$	32,860

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.

The following table represents assets measured at fair value on a non-recurring basis as of and for the period ended June 30, 2013 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		Net Provision During
	June 30, 2013		(Level 1)		(Level 2)		(Level 3)		Period

Measured on a non-recurring basis:
Assets:
Impaired loans	$	26,658	$	—	$	—	$	26,658	$	11,094
Other real estate owned	12,036		—		—		12,036		478

The following table represents assets measured at fair value on a non-recurring basis as of and for the year ended December 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 December 31,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Net Provision During
	2012		(Level 1)		(Level 2)		(Level 3)		Period

Measured on a non-recurring basis:
Assets:
Impaired loans	$	11,981	$	—	$	—	$	11,981	$	295
Other real estate owned	18,749		—		—		18,749		—

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”. Impaired loans are primarily comprised of collateral-dependent commercial loans. The fair value of impaired loans is based on the fair value of the collateral, as determined through an appraisal process. The basis for the Company’s appraisal and appraisal review process is based on regulatory guidelines and strives to comply with all regulatory appraisal laws, regulations and the Uniform Standards of Professional Appraisal Practice. Understanding that as the primary sources of loan repayments decline, the secondary repayment source comes into play and correctly evaluating the fair value of that secondary source, the collateral, becomes even more important. New or updated appraisals may be obtained as warranted after evaluation of any material deterioration in the performance of the project, the conditions for the geographic area where the property is located, the property type, differences between the current property conditions and the conditions assumed in prior appraisals or evaluations, or changes in project specifications. All appraisals and evaluations are “as is” (the property’s highest and best use) valuations based on the current conditions of the property/project at that point in time. The determination of the fair value of the collateral is based on the net realizable value, which is the appraised value less any closing costs, when applicable. 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. As of June 30, 2013, the Company had $77,596,000 of impaired commercial collateral

dependent loans, of which $49,127,000 had an appraisal or evaluation performed within the last twelve months. As of December 31, 2012, the Company had $73,646,000 of impaired commercial collateral dependent loans, of which $48,856,000 had an appraisal or evaluation performed within the last twelve months.

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 charge to operations. Other real estate owned is included in other assets on the consolidated financial statements. For the six months ended June 30, 2013 and the twelve months ended December 31, 2012, respectively, the Company recorded $188,000 and $10,450,000 in charges to the allowance for probable loan losses in connection with loans transferred to other real estate owned. For the six months ended June 30, 2013 and twelve months ended December 31, 2012, respectively, the Company recorded $478,000 and $0 in adjustments to fair value in connection with other real estate owned.

The fair value estimates, methods, and assumptions for the Company’s financial instruments at June 30, 2013 and December 31, 2012 are outlined below.

Cash and Due From Banks and Federal Funds Sold

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

Time Deposits with Banks

The carrying amounts of time deposits with banks approximate 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. government agencies, obligations of states and political subdivisions and mortgage pass through and related securities, fair values are 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 June 30, 2013, and December 31, 2012, the carrying amount of fixed rate performing loans was $1,195,825,000 and $1,189,585,000 respectively, and the estimated fair value was $1,142,132,000 and $1,126,228,000, 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 June 30, 2013 and December 31, 2012. 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 June 30, 2013 and December 31, 2012, the carrying amount of time deposits was $2,746,235,000 and $2,954,312,000, respectively, and the estimated fair value was $2,754,137,000 and $2,962,190,000, respectively.

Securities Sold Under Repurchase Agreements

Securities sold under repurchase agreements include both short and long-term maturities. Due to the contractual terms of the short-term instruments, the carrying amounts approximated fair value at June 30, 2013 and December 31, 2012. The fair value of the long-term instruments is based on established market spreads using option adjusted spread methodology. Long-term repurchase agreements are within level 3 of the fair value hierarchy. At June 30, 2013 and December 31, 2012, respectively, the carrying amount of long-term repurchase agreements was $710,000,000 and $800,000,000 and the estimated fair value was $800,888,000 and $932,007,000, respectively.

Junior Subordinated Deferrable Interest Debentures

The Company currently has floating rate junior subordinated deferrable interest debentures outstanding. Due to the contractual terms of the floating rate junior subordinated deferrable interest debentures, the carrying amounts approximated fair value at June 30, 2013 and December 31, 2012.

Other Borrowed Funds

The company currently has short and long-term borrowings issued from the Federal Home Loan Bank (“FHLB”). Due to the contractual terms of the short-term borrowings, the carrying amounts approximated fair value at June 30, 2013 and December 31, 2012. The fair value of the long-term borrowings is based on established market spreads for similar types of borrowings. The long-term borrowings are included in Level 2 of the fair value hierarchy. At June 30, 2013 and December 31, 2012, the carrying amount of the long-term FHLB borrowings was $6,458,000, and $6,527,000, respectively, and the estimated fair value was $6,551,000 and $7,073,000, respectively.

Commitments to Extend Credit and Letters of Credit

Commitments to extend credit and fund letters of credit are principally at current interest rates, and, therefore, the carrying amount approximates fair value.

Limitations

Fair value estimates are made at a point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on-and off-statement of condition financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include the bank premises and equipment and core deposit value. In addition, the tax ramifications related to the effect of fair value estimates have not been considered in the above estimates.

Note 3— Loans

A summary of loans, by loan type at June 30, 2013 and December 31, 2012 is as follows:

	June 30,		December 31,
	2013		2012
	(Dollars in Thousands)

Commercial, financial and agricultural	$	2,688,995	$	2,525,380
Real estate — mortgage	827,513		838,467
Real estate — construction	1,142,868		1,147,669
Consumer	68,077		74,514
Foreign	184,496		188,974

Total loans	$	4,911,949	$	4,775,004

Note 4 - Allowance for Probable Loan Losses

The allowance for probable loan losses primarily consists of the aggregate loan loss allowances of the bank subsidiaries. The allowances are established through charges to operations in the form of provisions for probable loan losses. Loan losses or recoveries are charged or credited directly to the allowances. The allowance for probable loan losses of each bank subsidiary is maintained at a level considered appropriate by management, based on estimated probable losses in the loan portfolio. The allowance for probable loan losses is derived from the following elements: (i) allowances established on specific loans, which are based on a review of the individual characteristics of each loan, including the customer’s ability to repay the loan, the underlying collateral values, and the industry in which the customer operates, (ii) allowances based on actual historical loss experience for similar types of loans in the Company’s loan portfolio, and (iii) allowances based on general economic conditions, changes in the mix of loans, company resources, border risk and credit quality indicators, among other things. All segments of the loan portfolio continue to be impacted by the prolonged economic downturn. Loans secured by real estate could be impacted negatively by the continued economic environment and resulting decrease in collateral values. Consumer loans may be impacted by continued and prolonged unemployment rates.

The Company’s management continually reviews the allowance for loan losses of the bank subsidiaries using the amounts determined from the allowances established on specific loans, the allowance established on quantitative historical loss percentages, and the allowance based on qualitative data to establish an appropriate amount to maintain in the Company’s allowance for loan losses. Should any of the factors considered by management in evaluating the adequacy of the allowance for probable loan losses change, the Company’s estimate of probable loan losses could also change, which could affect the level of future provisions for probable loan losses. While the calculation of the allowance for probable loan losses utilizes management’s best judgment and all information available, the adequacy of the allowance is dependent on a variety of factors beyond the Company’s control, including, among other things, the performance of the entire loan portfolio, the economy, changes in interest rates and the view of regulatory authorities towards loan classifications.

The specific loan loss provision is determined using the following methods. On a weekly basis, loan past due reports are reviewed by the credit quality committee to determine if a loan has any potential problems and if a loan should be placed on the Company’s internal classified report. Additionally, the Company’s credit department reviews the majority of the Company’s loans for proper internal classification purposes regardless of whether they are past due and segregates any loans with potential problems for further review. The credit department will discuss the potential problem loans with the servicing loan officers to determine any relevant issues that were not discovered in the evaluation. Also, an analysis of loans that is provided through examinations by regulatory authorities is considered in the review process. After the above analysis is completed, the Company will determine if a loan should be placed on an internal classified report because of issues related to the analysis of the credit, credit documents, collateral and/or payment history.

A summary of the transactions in the allowance for probable loan losses by loan class is as follows:

	Quarter ended June 30, 2013
	Domestic																				Foreign
	Commercial			Commercial real estate: other construction & land development			Commercial real estate: farmland & commercial			Commercial real estate: multifamily		Residential: first lien			Residential: junior lien			Consumer			Foreign		Total
	(Dollars in Thousands)

Balance at March 31,	$	20,926		$	11,053		$	20,651		$	609	$	3,868		$	4,011		$	820		$	1,030	$	62,968
Losses charge to allowance	(2,663		)	(120		)	(1		)	—		(27		)	(140		)	(105		)	—		(3,056		)
Recoveries credited to allowance	557			13			128			—		4			30			60			5		797
Net losses charged to allowance	(2,106		)	(107		)	127			—		(23		)	(110		)	(45		)	5		(2,259		)

Provision (credit) charged to operations	1,856			678			1,605			14		10			146			22			11		4,342

Balance at June 30,	$	20,676		$	11,624		$	22,383		$	623	$	3,855		$	4,047		$	797		$	1,046	$	65,051

	Quarter ended June 30, 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 March 31,	$	24,577		$	19,766		$	21,810		$	849		$	4, 379		$	4,505		$	1,602		$	1,293		$	78,781
Losses charge to allowance	(3,064		)	(7,500		)	(4,482		)	—			(30		)	(399		)	(189		)	(5		)	(15,669		)
Recoveries credited to allowance	758			207			100			—			1			61			32			—			1,159
Net losses charged to allowance	(2,306		)	(7,293		)	(4,382		)	—			(29		)	(338		)	(157		)	(5		)	(14,510		)

Provision (credit) charged to operations	2,417			769			3,123			(46		)	(363		)	243			31			(67		)	6,107

Balance at June 30,	$	24,688		$	13,242		$	20,551		$	803		$	3,987		$	4,410		$	1,476		$	1,221		$	70,378

	Six Months Ended June 30, 2013
	Domestic																					Foreign
	Commercial			Commercial real estate: other construction & land development			Commercial real estate: farmland & commercial			Commercial real estate: multifamily			Residential: first lien			Residential: junior lien			Consumer			Foreign			Total
	(Dollars in Thousands)

Balance at December 31,	$	11,632		$	12,720		$	21,880		$	694		$	4,390		$	4,448		$	1,289		$	1,140		$	58,193
Losses charge to allowance	(5,326		)	(248		)	(61		)	—			(199		)	(395		)	(316		)	(20		)	(6,565		)
Recoveries credited to allowance	1,251			26			141			—			9			124			106			5			1,662
Net losses charged to allowance	(4,075		)	(222		)	80			—			(190		)	(271		)	(210		)	(15		)	(4,903		)

Provision (credit) charged to operations	13,119			(874		)	423			(71		)	(345		)	(130		)	(282		)	(79		)	11,761

Balance at June 30,	$	20,676		$	11,624		$	22,383		$	623		$	3,855		$	4,047		$	797		$	1,046		$	65,051

	Six Months Ended June 30, 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	(6,488		)	(7,571		)	(12,476		)	—			(66		)	(711		)	(436		)	(5		)	(27,753		)
Recoveries credited to allowance	2,002			212			131			—			3			106			93			—			2,547
Net losses charged to allowance	(4,486		)	(7,359		)	(12,345		)	—			(63		)	(605		)	(343		)	(5		)	(25,206		)

Provision (credit) charged to operations	2,557			661			8,669			(200		)	(512		)	255			95			(133		)	11,392

Balance at June 30,	$	24,688		$	13,242		$	20,551		$	803		$	3,987		$	4,410		$	1,476		$	1,221		$	70,378

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 June 30, 2013 and December 31, 2012:

	June 30, 2013
	Loans individually evaluated for impairment				Loans collectively evaluated for impairment
	(Dollars in Thousands)
	Recorded Investment		Allowance		Recorded Investment		Allowance

Domestic
Commercial	$	35,120	$	10,961	$	841,878	$	9,715
Commercial real estate: other construction & land development	26,490		766		1,116,378		10,858
Commercial real estate: farmland & commercial	16,598		3,446		1,713,462		18,937
Commercial real estate: multifamily	324		—		81,613		623
Residential: first lien	4,367		—		441,481		3,855
Residential: junior lien	1,711		—		379,954		4,047
Consumer	1,239		—		66,838		797
Foreign	449		—		184,047		1,046

Total	$	86,298	$	15,173	$	4,825,651	$	49,878

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

Domestic
Commercial	$	32,768	$	1,477	$	736,342	$	10,155
Commercial real estate: other construction & land development	28,660		539		1,119,009		12,181
Commercial real estate: farmland & commercial	13,945		2,730		1,659,377		19,150
Commercial real estate: multifamily	353		—		82,595		694
Residential: first lien	3,656		—		453,075		4,390
Residential: junior lien	1,850		—		379,886		4,448
Consumer	1,326		—		73,188		1,289
Foreign	447		—		188,527		1,140

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

The table below provides additional information on loans accounted for on a non-accrual basis by loan class at June 30, 2013 and December 31, 2012:

	June 30, 2013		December 31, 2012
	(Dollars in Thousands)

Domestic
Commercial	$	34,384	$	31,929
Commercial real estate: other construction & land development	24,240		26,410
Commercial real estate: farmland & commercial	14,335		11,681
Commercial real estate: multifamily	324		353
Residential: first lien	1,178		1,175
Residential: junior lien	64		175
Consumer	49		45
Foreign	13		—

Total non-accrual loans	$	74,587	$	71,768

Impaired loans are those loans where it is probable that all amounts due according to contractual terms of the loan agreement will not be collected. The Company has identified these loans through its normal loan review procedures. Impaired loans are measured based on (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of the collateral if the loan is collateral dependent. Substantially all of the Company’s impaired loans are measured at the fair value of the collateral. In limited cases the Company may use other methods to determine the level of impairment of a loan if such loan is not collateral dependent.

The following tables detail key information regarding the Company’s impaired loans by loan class at June 30, 2013 and December 31, 2011:

	June 30, 2013
							Quarter to Date				Year to Date
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Recognized		Average Recorded Investment		Interest Recognized
	(Dollars in Thousands)

Loans with Related Allowance
Domestic
Commercial	$	18,170	$	18,170	$	10,961	$	18,174	$	10	$	18,184	$	21
Commercial real estate: other construction & land development	3,968		3,971		766		3,969		—		4,820		—
Commercial real estate: farmland & commercial	7,812		11,144		3,446		6,879		23		6,666		46
Total impaired loans with related allowance	$	29,950	$	33,285	$	15,173	$	29,022	$	33	$	29,670	$	67

Balance at December 31, 2012	$	32,860
Principal paydowns	(2,404		)
Total unrealized gains (losses) included in:
Other comprehensive loss	712
Impairment realized in earnings	(727		)

Balance at June 30, 2013	$	30,441