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, 2014

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		66,892,248 shares outstanding at August 5, 2014

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,
	2014			2013
Assets

Cash and cash equivalents	$	451,695		$	274,785

Investment securities:
Held-to-maturity (Market value of $2,400 on June 30, 2014 and $2,400 on December 31, 2013)	2,400			2,400
Available-for-sale (Amortized cost of $5,209,023 on June 30, 2014 and $5,372,594 on December 31, 2013)	5,225,043			5,304,579

Total investment securities	5,227,443			5,306,979

Loans	5,437,515			5,199,235
Less allowance for probable loan losses	(71,537		)	(70,161		)

Net loans	5,365,978			5,129,074

Bank premises and equipment, net	518,710			504,842
Accrued interest receivable	31,086			30,654
Other investments	409,910			388,563
Identified intangible assets, net	1,057			3,186
Goodwill	282,532			282,532
Other assets	148,056			158,862

Total assets	$	12,436,467		$	12,079,477

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Condition, continued (Unaudited)

(Dollars in Thousands)

	June 30,			December 31,
	2014			2013
Liabilities and Shareholders’ Equity

Liabilities:

Deposits:
Demand — non-interest bearing	$	2,881,581		$	2,666,510
Savings and interest bearing demand	2,958,745			2,925,612
Time	2,582,313			2,651,303

Total deposits	8,422,639			8,243,425

Securities sold under repurchase agreements	870,065			957,381
Other borrowed funds	1,358,817			1,223,950
Junior subordinated deferrable interest debentures	180,416			190,726
Other liabilities	68,415			39,587

Total liabilities	10,900,352			10,655,069

Shareholders’ equity:

Common shares of $1.00 par value. Authorized 275,000,000 shares; issued 95,766,067 shares on June 30, 2014 and 95,743,592 shares on December 31, 2013	95,766			95,744
Surplus	164,681			163,947
Retained earnings	1,531,624			1,467,000
Accumulated other comprehensive income (loss) (including $(5,397) and $(5,646) of comprehensive loss related to other-than-temporary impairment for non-credit related issues)	10,415			(43,774		)
	1,802,486			1,682,917

Less cost of shares in treasury, 28,878,612 shares on June 30, 2014 and 28,537,180 December 31, 2013	(266,371		)	(258,509		)

Total shareholders’ equity	1,536,115			1,424,408

Total liabilities and shareholders’ equity	$	12,436,467		$	12,079,477

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,
	2014			2013		2014		2013

Interest income:
Loans, including fees	$	70,036		$	64,617	$	137,908	$	128,151
Investment securities:
Taxable	26,545			18,601		52,724		39,120
Tax-exempt	2,728			3,085		6,251		6,121
Other interest income	31			21		94		42

Total interest income	99,340			86,324		196,977		173,434

Interest expense:
Savings deposits	915			956		1,786		1,967
Time deposits	3,019			3,978		6,139		8,423
Securities sold under repurchase agreements	6,088			7,312		12,324		14,880
Other borrowings	564			289		1,120		579
Junior subordinated interest deferrable debentures	1,048			1,165		2,138		2,329

Total interest expense	11,634			13,700		23,507		28,178

Net interest income	87,706			72,624		173,470		145,256

Provision for probable loan losses	3,645			4,342		5,723		11,761

Net interest income after provision for probable loan losses	84,061			68,282		167,747		133,495

Non-interest income:
Service charges on deposit accounts	22,450			23,507		44,512		47,337
Other service charges, commissions and fees
Banking	12,090			10,052		22,911		20,035
Non-banking	1,161			1,515		3,060		2,576
Investment securities transactions, net	(379		)	—		7,729		9,601
Other investments, net	2,309			8,635		11,367		15,632
Other income	3,822			2,996		10,062		4,776

Total non-interest income	$	41,453		$	46,705	$	99,641	$	99,957

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income, continued (Unaudited)

(Dollars in Thousands, except per share data)

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013

Non-interest expense:
Employee compensation and benefits	$	29,989	$	30,764	$	60,234	$	60,975
Occupancy	7,856		7,180		14,864		14,992
Depreciation of bank premises and equipment	6,054		6,619		12,146		13,244
Professional fees	3,315		3,952		6,927		7,675
Deposit insurance assessments	1,558		1,762		2,997		3,378
Net expense, other real estate owned	830		1,575		1,759		3,364
Amortization of identified intangible assets	1,148		1,158		2,129		2,295
Advertising	1,955		2,023		3,785		3,869
Early termination fee — securities sold under repurchase agreements	—		2,418		11,000		12,303
Impairment charges (Total other-than-temporary impairment losses, $(74), net of $(263), $(953), net of $(1,370), $(107), net of $(386), and $15, net of $(712), included in other comprehensive income)	189		417		279		727
Other	15,736		15,846		30,208		31,753

Total non-interest expense	68,630		73,714		146,328		154,575

Income before income taxes	56,884		41,273		121,060		78,877

Provision for income taxes	19,165		13,760		39,695		23,295

Net income	$	37,719	$	27,513	$	81,365	$	55,582

Basic earnings per common share:

Weighted average number of shares outstanding:	66,925,664		67,190,792		67,027,750		67,189,196
Net income	$	.56	$	.41	$	1.21	$	.83

Fully diluted earnings per common share:

Weighted average number of shares outstanding:	67,071,370		67,292,053		67,171,257		67,286,026
Net income	$	.56	$	.41	$	1.21	$	.83

See accompanying notes to consolidated financial statements.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in Thousands)

	Three Months Ended June 30,					Six Months Ended June 30,
	2014		2013			2014			2013

Net income	$	37,719	$	27,513		$	81,365		$	55,582

Other comprehensive income (loss), net of tax

Net unrealized holding gains (losses) on securities available for sale arising during period (tax effects of $18,168, $(35,282), $31,786 and $(40,425))	33,742		(65,523		)	59,032			(75,075		)
Reclassification adjustment for losses (gains) on securities available for sale included in net income (tax effects of $133, $0, $(2,705)and $(3,360))	246		—			(5,024		)	(6,241		)
Reclassification adjustment for impairment charges on available for sale securities included in net income (tax effects of $66, $146, $98 and $254)	123		271			181			473
	34,111		(65,252		)	54,189			(80,843		)

Comprehensive income (loss)	$	71,830	$	(37,739	)	$	135,554		$	(25,261	)

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,
	2014			2013
Operating activities:

Net income	$	81,365		$	55,582

Adjustments to reconcile net income to net cash provided by operating activities:
Provision for probable loan losses	5,723			11,761
Specific reserve, other real estate owned	238			478
Depreciation of bank premises and equipment	12,146			13,244
Gain on sale of bank premises and equipment	(3,957		)	(516		)
Gain on sale of other real estate owned	(298		)	(188		)
Accretion of investment securities discounts	(1,714		)	(1,812		)
Amortization of investment securities premiums	13,549			24,256
Investment securities transactions, net	(7,729		)	(9,601		)
Impairment charges on available-for-sale investment securities	279			727
Amortization of identified intangible assets	2,129			2,295
Stock based compensation expense	465			221
Earnings from affiliates and other investments	(5,086		)	(13,209		)
Deferred tax benefit	(2,083		)	(3,274		)
(Increase) decrease in accrued interest receivable	(432		)	323
Net (increase) decrease in other assets	(8,136		)	17,281
Net decrease in other liabilities	(4,198		)	(4,754		)

Net cash provided by operating activities	82,261			92,814

Investing activities:

Proceeds from sales and calls of available for sale securities	368,296			178,124
Purchases of available for sale securities	(574,029		)	(731,384		)
Principal collected on mortgage-backed securities	367,999			749,233
Net increase in loans	(244,308		)	(141,191		)
Purchases of other investments	(5,602		)	(637		)
Distributions received on other investments	5,288			20,109
Purchases of bank premises and equipment	(28,846		)	(16,321		)
Proceeds from sales of other real estate owned	6,919			12,582
Proceeds from sale of bank premises and equipment	6,789			535

Net cash (used in) provided by investing activities	(97,494		)	71,050

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows, continued (Unaudited)

(Dollars in Thousands)

	Six Months Ended June 30,
	2014			2013

Financing activities:

Net increase in non-interest bearing demand deposits	$	215,071		$	147,971
Net increase (decrease) in savings and interest bearing demand deposits	33,133			(33,383		)
Net decrease in time deposits	(68,990		)	(208,077		)
Net decrease in securities sold under repurchase agreements	(87,316		)	(104,608		)
Net increase in other borrowed funds	134,867			3,431
Purchase of treasury stock	(7,862		)	—
Repayment of long-term debt	(10,310		)	—
Proceeds from stock transactions	291			64
Payments of dividends on common stock	(16,741		)	(13,438		)

Net cash provided by (used in) financing activities	192,143			(208,040		)

Decrease in cash and cash equivalents	176,910			(44,176		)

Cash and cash equivalents at beginning of period	274,785			283,100

Cash and cash equivalents at end of period	$	451,695		$	238,924

Supplemental cash flow information:
Interest paid	$	24,365		$	29,910
Income taxes paid	53,288			35,171
Non-cash investing and financing activities:
Net transfer from loans to other real estate owned	(1,681		)	(657		)

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, 2013 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. Operating results for the six months ended June 30, 2014 are not necessarily indicative of the results for the year ending December 31, 2014, or any future period.

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 provision of ASC Topic 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 financial instruments reported on the consolidated balance sheets at their fair value on a recurring basis as of June 30, 2014 by level within the fair value measurement hierarchy:

			Fair Value Measurements at Reporting Date Using
			(Dollars 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, 2014		(Level 1)		(Level 2)		(Level 3)

Measured on a recurring basis:
Assets:
Available for sale securities
Residential mortgage-backed securities	$	4,927,862	$	—	$	4,901,866	$	25,996
States and political subdivisions	268,095		—		268,095		—
Other	29,086		29,086		—		—
Total	$	5,225,043	$	29,086	$	5,169,961	$	25,996

The following table represents financial instruments reported on the consolidated balance sheets at their fair value on a recurring basis as of December 31, 2013 by level within the fair value measurement hierarchy:

			Fair Value Measurements at Reporting Date Using
			(Dollars 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, 2013		(Level 1)		(Level 2)		(Level 3)

Measured on a recurring basis:
Assets:
Available for sale securities
Residential mortgage-backed securities	$	5,027,701	$	—	$	4,999,849	$	27,852
States and political subdivisions	248,410		—		248,410		—
Other	28,468		28,468		—		—
Total	$	5,304,579	$	28,468	$	5,248,259	$	27,852

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 financial instruments measured at fair value on a non-recurring basis as of and for the period ended June 30, 2014 by level within the fair value measurement hierarchy:

			Fair Value Measurements at Reporting Date Using
			(Dollars 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 Six Month
	June 30, 2014		(Level 1)		(Level 2)		(Level 3)		Period

Measured on a non-recurring basis:
Assets:
Impaired loans	$	24,223	$	—	$	—	$	24,223	$	4,363
Other real estate owned	6,352		—		—		6,352		238

The following table represents financial instruments measured at fair value on a non-recurring basis as of and for the year ended December 31, 2013 by level within the fair value measurement hierarchy:

			Fair Value Measurements at Reporting Date Using
			(Dollars 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 Twelve Month
	2013		(Level 1)		(Level 2)		(Level 3)		Period

Measured on a non-recurring basis:
Assets:
Impaired loans	$	28,391	$	—	$	—	$	28,391	$	13,229
Other real estate owned	16,329		—		—		16,329		1,204

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 either an appraisal or evaluation 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. As part of the weekly credit quality meetings and the determination of the loan loss provision, obsolete appraisals are identified. Appraisals are considered for each type of impaired collateral dependent loan and new or updated appraisals may be obtained as warranted after evaluation of any material deterioration in the performance of the project or changes in project specifications, the economic conditions for the geographic area where the property is located, a change in the use of the property, differences between the current property conditions and the conditions assumed in prior appraisals or evaluations, or, if it’s an income producing property, changes in the cash flow on the property. 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, 2014, the Company had $64,092,000 of impaired commercial collateral dependent loans, of which $29,544,000 had an appraisal or evaluation performed within the immediately preceding twelve months. As of December 31, 2013, the Company had $64,585,000 of impaired commercial collateral dependent loans, of which $50,346,000 had an appraisal or evaluation performed within the immediately preceding 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, 2014 and the twelve months ended December 31, 2013, respectively the Company recorded $174,000 and $402,000 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, 2014 and twelve months ended December 31, 2013, respectively, the Company recorded $238,000 and $1,204,000 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, 2014 and December 31, 2013 are outlined below.

Cash and Cash Equivalents

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, 2014, and December 31, 2013, the carrying amount of fixed rate performing loans was $1,289,469,000 and $1,243,252,000 respectively, and the estimated fair value was $1,237,981,000 and $1,196,916,000, 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, 2014 and December 31, 2013. 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, 2014 and December 31, 2013, the carrying amount of time deposits was $2,582,313,000 and $2,651,303,000, respectively, and the estimated fair value was $2,580,859,000 and $2,648,452,000, 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, 2014 and December 31, 2013. 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, 2014 and December 31, 2013, respectively, the carrying amount of long-term repurchase agreements was $610,000,000 and $710,000,000 and the estimated fair value was $673,150,200 and $792,215,500, 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, 2014 and December 31, 2013.

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, 2014 and December 31, 2013. 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, 2014 and December 31, 2013, the carrying amount of the long-term FHLB borrowings was $6,316,000, and $8,951,000, respectively, and the estimated fair value was $6,589,000 and $8,950,000, 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, 2014 and December 31, 2013 is as follows:

	June 30,		December 31,
	2014		2013
	(Dollars in Thousands)

Commercial, financial and agricultural	$	3,000,427	$	2,894,779
Real estate — mortgage	860,867		847,692
Real estate — construction	1,324,207		1,208,508
Consumer	62,885		66,414
Foreign	189,129		181,842

Total loans	$	5,437,515	$	5,199,235

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 impaired loans, which are based on a review of the individual characteristics of each loan, including the customer’s ability to repay the loan, the underlying collateral values, and the industry in which the customer operates, (ii) allowances based on actual historical loss experience for similar types of loans in the Company’s loan portfolio, and (iii) allowances based on general economic conditions, changes in the mix of loans, company resources, border risk and credit quality indicators, among other things. 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 impaired 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 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, 2014
	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,	$	27,923		$	13,475		$	18,934		$	819		$	3,524		$	3,968		$	748		$	1,017		$	70,408
Losses charge to allowance	(2,379		)	(399		)	(170		)	—			(103		)	(7		)	(222		)	(47		)	(3,327		)
Recoveries credited to allowance	620			21			35			—			1			67			67			—			811
Net (losses) gains charged to allowance	(1,759		)	(378		)	(135		)	—			(102		)	60			(155		)	(47		)	(2,516		)

Provision (credit) charged to operations	1,842			(91		)	739			(33		)	299			708			113			68			3,645

Balance at June 30,	$	28,006		$	13,006		$	19,538		$	786		$	3,721		$	4,736		$	706		$	1,038		$	71,537

	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) gains 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

	Six Months Ended June 30, 2014
	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,	$	22,433		$	12,541		$	24,467		$	776	$	3,812		$	4,249		$	750		$	1,133		$	70,161
Losses charge to allowance	(4,860		)	(399		)	(170		)	—		(130		)	(153		)	(409		)	(50		)	(6,171		)
Recoveries credited to allowance	1,416			52			58			—		5			100			147			46			1,824
Net losses charged to allowance	(3,444		)	(347		)	(112		)	—		(125		)	(53		)	(262		)	(4		)	(4,347		)

Provision (credit) charged to operations	9,017			812			(4,817		)	10		34			540			218			(91		)	5,723

Balance at June 30,	$	28,006		$	13,006		$	19,538		$	786	$	3,721		$	4,736		$	706		$	1,038		$	71,537

	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) gains 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

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, 2014 and December 31, 2013:

	June 30, 2014
	Loans individually evaluated for impairment				Loans collectively evaluated for impairment
	(Dollars in Thousands)
	Recorded Investment		Allowance		Recorded Investment		Allowance

Domestic
Commercial	$	38,072	$	16,368	$	1,114,058	$	11,638
Commercial real estate: other construction & land development	11,520		1,119		1,312,687		11,887
Commercial real estate: farmland & commercial	14,464		2,441		1,729,852		17,097
Commercial real estate: multifamily	266		—		103,715		786
Residential: first lien	5,689		—		407,915		3,721
Residential: junior lien	3,110		—		444,153		4,736
Consumer	1,363		—		61,522		706
Foreign	424		—		188,705		1,038

Total	$	74,908	$	19,928	$	5,362,607	$	51,609

	December 31, 2013
	Loans individually evaluated for impairment				Loans collectively evaluated for impairment
	(Dollars in Thousands)
	Recorded Investment		Allowance		Recorded Investment		Allowance

Domestic
Commercial	$	34,183	$	12,234	$	1,008,459	$	10,199
Commercial real estate: other construction & land development	13,976		852		1,194,532		11,689
Commercial real estate: farmland & commercial	16,038		2,916		1,734,001		21,551
Commercial real estate: multifamily	295		—		101,803		776
Residential: first lien	6,153		—		432,309		3,812
Residential: junior lien	3,206		—		406,024		4,249
Consumer	1,606		—		64,808		750
Foreign	436		—		181,406		1,133

Total	$	75,893	$	16,002	$	5,123,342	$	54,159

The table below provides additional information on loans accounted for on a non-accrual basis by loan class at June 30, 2014 and December 31, 2013:

	June 30, 2014		December 31, 2013
	(Dollars in Thousands)

Domestic
Commercial	$	38,011	$	34,110
Commercial real estate: other construction & land development	9,267		11,726
Commercial real estate: farmland & commercial	12,200		13,775
Commercial real estate: multifamily	266		295
Residential: first lien	698		1,266
Residential: junior lien	1,554		1,576
Consumer	39		75

Total non-accrual loans	$	62,035	$	62,823

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, 2014 and December 31, 2013:

	June 30, 2014
							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	$	17,686	$	17,685	$	16,368	$	17,685	$	—	$	17,486	$	—
Commercial real estate: other construction & land development	6,895		6,904		1,119		6,896		—		6,897		—
Commercial real estate: farmland & commercial	5,943		6,262		2,441		6,374		23		6,499		46
Total impaired loans with related allowance	$	30,524	$	30,851	$	19,928	$	30,955	$	23	$	30,882	$	46

	June 30, 2014
					Quarter to Date				Year to Date
	Recorded Investment		Unpaid Principal Balance		Average Recorded Investment		Interest Recognized		Average Recorded Investment		Interest Recognized
	(Dollars in Thousands)

Loans with No Related Allowance
Domestic
Commercial	$	20,386	$	20,436	$	20,347	$	1	$	18,704	$	2
Commercial real estate: other construction & land development	4,625		4,676		5,226		19		6,014		37
Commercial real estate: farmland & commercial	8,521		9,896		8,854		—

Balance at December 31, 2013	$	27,852
Principal paydowns	(1,962		)
Total unrealized gains (losses) included in:
Other comprehensive income	386
Impairment realized in earnings	(279		)

Balance at June 30, 2014	$	25,996