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, 2015

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		66,470,663 shares outstanding at July 31, 2015

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,
	2015			2014
Assets

Cash and cash equivalents	$	260,392		$	255,146

Investment securities:
Held-to-maturity (Market value of $2,400 on June 30, 2015 and $2,400 on December 31, 2014)	2,400			2,400
Available-for-sale (Amortized cost of $4,660,311 on June 30, 2015 and $4,894,428 on December 31, 2014)	4,673,472			4,911,963

Total investment securities	4,675,872			4,914,363

Loans	5,774,462			5,679,245
Less allowance for probable loan losses	(60,538		)	(64,828		)

Net loans	5,713,924			5,614,417

Bank premises and equipment, net	525,100			526,423
Accrued interest receivable	31,342			31,461
Other investments	457,518			440,670
Identified intangible assets, net	517			797
Goodwill	282,532			282,532
Other assets	126,932			130,711

Total assets	$	12,074,129		$	12,196,520

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Condition, continued (Unaudited)

(Dollars in Thousands)

	June 30,			December 31,
	2015			2014
Liabilities and Shareholders’ Equity

Liabilities:

Deposits:
Demand — non-interest bearing	$	3,005,214		$	2,930,253
Savings and interest bearing demand	3,015,339			3,025,680
Time	2,443,281			2,482,692

Total deposits	8,463,834			8,438,625

Securities sold under repurchase agreements	907,211			858,350
Other borrowed funds	820,325			1,073,944
Junior subordinated deferrable interest debentures	175,416			175,416
Other liabilities	79,096			69,527

Total liabilities	10,445,882			10,615,862

Shareholders’ equity:

Common shares of $1.00 par value. Authorized 275,000,000 shares; issued 95,824,737 shares on June 30, 2015 and 95,783,977 shares on December 31, 2014	95,825			95,784
Surplus	166,706			165,520
Retained earnings	1,635,868			1,585,389
Accumulated other comprehensive income (including $(4,476) on June 30, 2015 and $(4,881) on December 31, 2014 of comprehensive loss related to other-than-temporary impairment for non-credit related issues)	8,525			11,397
	1,906,924			1,858,090

Less cost of shares in treasury, 29,378,567 shares on June 30, 2015 and 29,324,567 December 31, 2014	(278,677		)	(277,432		)

Total shareholders’ equity	1,628,247			1,580,658

Total liabilities and shareholders’ equity	$	12,074,129		$	12,196,520

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,
	2015			2014			2015			2014

Interest income:
Loans, including fees	$	72,927		$	70,036		$	145,370		$	137,908
Investment securities:
Taxable	23,257			26,545			47,140			52,724
Tax-exempt	2,749			2,728			5,522			6,251
Other interest income	42			31			78			94

Total interest income	98,975			99,340			198,110			196,977

Interest expense:
Savings deposits	901			915			1,778			1,786
Time deposits	2,833			3,019			5,707			6,139
Securities sold under repurchase agreements	6,062			6,088			12,056			12,324
Other borrowings	369			564			844			1,120
Junior subordinated interest deferrable debentures	1,045			1,048			2,069			2,138

Total interest expense	11,210			11,634			22,454			23,507

Net interest income	87,765			87,706			175,656			173,470

Provision for probable loan losses	7,767			3,645			10,144			5,723

Net interest income after provision for probable loan losses	79,998			84,061			165,512			167,747

Non-interest income:
Service charges on deposit accounts	19,850			22,450			39,042			44,512
Other service charges, commissions and fees
Banking	13,075			12,090			23,528			22,911
Non-banking	1,856			1,161			2,966			3,060
Investment securities transactions, net	(427		)	(379		)	(428		)	7,729
Other investments, net	3,462			2,309			7,717			11,367
Other income	2,328			3,822			4,153			10,062

Total non-interest income	$	40,144		$	41,453		$	76,978		$	99,641

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,
	2015		2014		2015		2014

Non-interest expense:
Employee compensation and benefits	$	29,650	$	29,989	$	61,402	$	60,234
Occupancy	6,681		7,856		12,860		14,864
Depreciation of bank premises and equipment	6,332		6,054		12,558		12,146
Professional fees	4,020		3,315		7,267		6,927
Deposit insurance assessments	1,440		1,558		2,930		2,997
Net expense, other real estate owned	928		830		2,396		1,759
Amortization of identified intangible assets	161		1,148		280		2,129
Advertising	2,023		1,955		4,030		3,785
Early termination fee — securities sold under repurchase agreements	—		—		—		11,000
Impairment charges (Total other-than-temporary impairment losses, $(54), net of $(278), $(74), net of $(263), $(176), net of $(627), and $(107), net of $(386), included in other comprehensive income)	224		189		451		279
Other	16,812		15,736		31,720		30,208

Total non-interest expense	68,271		68,630		135,894		146,328

Income before income taxes	51,871		56,884		106,596		121,060

Provision for income taxes	17,996		19,165		36,859		39,695

Net income	$	33,875	$	37,719	$	69,737	$	81,365

Basic earnings per common share:

Weighted average number of shares outstanding:	66,424,723		66,925,664		66,420,511		67,027,750
Net income	$	.51	$	.56	$	1.05	$	1.21

Fully diluted earnings per common share:

Weighted average number of shares outstanding:	66,684,136		67,071,370		66,619,788		67,171,257
Net income	$	.51	$	.56	$	1.05	$	1.21

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,
	2015			2014		2015			2014

Net income	$	33,875		$	37,719	$	69,737		$	81,365

Other comprehensive income (loss), net of tax

Net unrealized holding (losses) gains on securities available for sale arising during period (tax effects of $(13,311), $18,168, $(1,555) and $31,786)	(24,720		)	33,742		(2,887		)	59,032
Reclassification adjustment for (losses) gains on securities available for sale included in net income (tax effects of $(149), $133, $((150)and $(2,705))	(278		)	246		(278		)	(5,024		)
Reclassification adjustment for impairment charges on available for sale securities included in net income (tax effects of $78, $66, $158 and $98)	146			123		293			181
	(24,852		)	34,111		(2,872		)	54,189

Comprehensive income	$	9,023		$	71,830	$	66,865		$	135,554

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,
	2015			2014
Operating activities:

Net income	$	69,737		$	81,365

Adjustments to reconcile net income to net cash provided by operating activities:
Provision for probable loan losses	10,144			5,723
Specific reserve, other real estate owned	118			238
Depreciation of bank premises and equipment	12,558			12,146
Gain on sale of bank premises and equipment	(143		)	(3,957		)
Gain on sale of other real estate owned	(205		)	(298		)
Accretion of investment securities discounts	(886		)	(1,714		)
Amortization of investment securities premiums	14,074			13,549
Investment securities transactions, net	428			(7,729		)
Impairment charges on available-for-sale investment securities	451			279
Amortization of identified intangible assets	280			2,129
Stock based compensation expense	583			465
Earnings from affiliates and other investments	(6,527		)	(5,086		)
Deferred tax expense (benefit)	118			(2,083		)
Decrease (increase) in accrued interest receivable	119			(432		)
Net increase in other assets	(972		)	(8,136		)
Net increase (decrease) in other liabilities	511			(4,198		)

Net cash provided by operating activities	100,388			82,261

Investing activities:

Proceeds from maturities of securities	1,075			—
Proceeds from sales and calls of available for sale securities	30,282			368,296
Purchases of available for sale securities	(241,570		)	(574,029		)
Principal collected on mortgage-backed securities	432,542			367,999
Net increase in loans	(115,735		)	(244,308		)
Purchases of other investments	(12,491		)	(5,602		)
Distributions received on other investments	10,332			5,288
Purchases of bank premises and equipment	(11,983		)	(28,846		)
Proceeds from sales of other real estate owned	10,922			6,919
Proceeds from sale of bank premises and equipment	891			6,789

Net cash provided by (used in) investing activities	104,265			(97,494		)

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows, continued (Unaudited)

(Dollars in Thousands)

	Six Months Ended June 30,
	2015			2014

Financing activities:

Net increase in non-interest bearing demand deposits	$	74,961		$	215,071
Net (decrease) increase in savings and interest bearing demand deposits	(10,341		)	33,133
Net decrease in time deposits	(39,411		)	(68,990		)
Net increase (decrease) in securities sold under repurchase agreements	48,861			(87,316		)
Net (decrease) increase in other borrowed funds	(253,619		)	134,867
Purchase of treasury stock	(1,245		)	(7,862		)
Repayment of long-term debt	—			(10,310		)
Proceeds from stock transactions	645			291
Payments of dividends on common stock	(19,258		)	(16,741		)

Net cash (used in) provided by financing activities	(199,407		)	192,143

Increase in cash and cash equivalents	5,246			176,910

Cash and cash equivalents at beginning of period	255,146			274,785

Cash and cash equivalents at end of period	$	260,392		$	451,695

Supplemental cash flow information:
Interest paid	$	22,606		$	24,365
Income taxes paid	37,840			53,288
Non-cash investing and financing activities:
Net transfer from loans to other real estate owned	(6,084		)	(1,681		)
Available for sale investment securities not yet settled	2,279			—

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, Premier Tierra Holdings, Inc. and IBC Charitable and Community Development Corporation, and IBC Capital Corporation. 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, 2014 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 three and six months ended June 30, 2015 are not necessarily indicative of the results for the year ending December 31, 2015 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 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 on a recurring basis as of June 30, 2015 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, 2015		(Level 1)		(Level 2)		(Level 3)

Measured on a recurring basis:
Assets:
Available for sale securities
Residential mortgage-backed securities	$	4,365,066	$	—	$	4,342,370	$	22,696
States and political subdivisions	279,296		—		279,296		—
Other	29,110		29,110		—		—
	$	4,673,472	$	29,110	$	4,621,666	$	22,696

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, 2014 by level within the fair value measurement hierarchy:

			Fair Value Measurements at Reporting Date Using
			(Dollars in Thousands)
			Quoted Prices
	Assets/Liabilities Measured at Fair Value December 31,		in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2014		(Level 1)		(Level 2)		(Level 3)

Measured on a recurring basis:
Assets:
Available for sale securities
Residential mortgage-backed securities	$	4,600,372	$	—	$	4,576,309	$	24,063
States and political subdivisions	282,276		—		282,276		—
Other	29,315		29,315		—		—
	$	4,911,963	$	29,315	$	4,858,585	$	24,063

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 as of June 30, 2015 and December 31, 2014 were applied separately to those portions of the bond where the underlying residential mortgage loans had been performing under original contract terms for at least the prior 24 months and those where the underlying residential mortgages had not been meeting 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 that portion of the bond where the underlying residential mortgage had been meeting 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 bond included the following estimates: (i) a voluntary prepayment rate of 2 %, (ii) a default rate of 4.5%, (iii) a loss severity rate that started at 60% for the first year (2012) then declines by 5% for the following five years (2013, 2014, 2015, 2016 and 2017) and remains at 25% thereafter (2018 and beyond), 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 bond. 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.

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

Balance at December 31, 2014	$	24,063
Principal paydowns	(1,543		)
Total unrealized losses included in:
Other comprehensive income	627
Impairment realized	(451		)

Balance at June 30, 2015	$	22,696

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 and for the period ended June 30, 2015 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 (Credit) Provision During
	June 30, 2015		(Level 1)		(Level 2)		(Level 3)		Period

Measured on a non-recurring basis:
Assets:
Impaired loans	$	16,547	$	—	$	—	$	16,547	$	(7,948	)
Other real estate owned	1,888		—		—		1,888		118

The following table represents financial instruments measured at fair value on a non-recurring basis as of and for the period ended December 31, 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 December 31,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Net (Credit) Provision During the
	2014		(Level 1)		(Level 2)		(Level 3)		Period

Measured on a non-recurring basis:
Assets:
Impaired loans	$	29,501	$	—	$	—	$	29,501	$	(1,557	)
Other real estate owned	6,112		—		—		6,112		597

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. 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. Re-measurement of the impaired loan to fair value is done through a specific valuation allowance included in the allowance for probable loan losses. 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. 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. As of June 30, 2015, the Company had $49,689,000 of impaired commercial collateral dependent loans, of which $37,460 000 had an appraisal performed within the immediately preceding twelve months, and of which $2,983,000 had an evaluation performed within the immediately preceding twelve months. As of December 31, 2014, the Company had $65,551,000 of impaired commercial collateral dependent loans, of which $52,092,000 had an appraisal performed within the immediately preceding twelve months and of which $5,307,000 had an evaluation performed within the immediately preceding twelve months.

The determination to either seek an appraisal or to perform an evaluation begins in weekly credit quality meetings, where the committee analyzes the existing collateral values of the impaired loans and where obsolete appraisals are identified. In order to determine whether the Company would obtain a new appraisal or perform an internal evaluation to determine the fair value of the collateral, the credit committee reviews the existing appraisal to determine if the collateral value is reasonable in view of the current use of the collateral and the economic environment related to the collateral. If the analysis of the existing appraisal does not find that the collateral value is reasonable under the current circumstances, the Company would obtain a new appraisal on the collateral or perform an internal evaluation of the collateral. The ultimate decision to get a new appraisal rests with the independent credit administration group. A new appraisal is not required if an internal evaluation, as performed by in-house experts, is able to appropriately update the original appraisal assumptions to reflect current market conditions and provide an estimate of the collateral’s market value for impairment analysis. The internal evaluations must be in writing and contain sufficient information detailing the analysis, assumptions and conclusions and they must support performing an evaluation in lieu of ordering a new appraisal.

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, 2015 and the twelve months ended December 31, 2014, respectively the Company recorded $937,000 and $367,000 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, 2015 and the twelve months ended December 31, 2014, respectively, the Company recorded $118,000 and $597,000 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, 2015 and December 31, 2014 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, 2015, and December 31, 2014, the carrying amount of fixed rate performing loans was $1,360,880,000 and $1,352,147,000 respectively, and the estimated fair value was $1,293,326,000 and $1,285,648,000, 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, 2015 and December 31, 2014. 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, 2015 and December 31, 2014, the carrying amount of time deposits was $2,443,281,000 and $2,482,692,000, respectively, and the estimated fair value was $2,441,495,000 and $2,480,390,000, 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, 2015 and December 31, 2014. 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, 2015 and December 31, 2014, the carrying amount of long-term repurchase agreements was $610,000,000 and the estimated fair value was $563,796,100 and $558,097,100, 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, 2015 and December 31, 2014.

Other Borrowed Funds

The Company currently has short-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, 2015 and December 31, 2014. The Company had one long-term borrowing outstanding at December 31, 2014, which was paid off in the second quarter of 2015. The fair value of long-term borrowings is based on established market spreads for similar types of borrowings. The long-term borrowings were included in Level 2 of the fair value hierarchy. At December 31, 2014, the carrying amount of the long-term FHLB borrowings was $6,244,000 and the estimated fair value was $6,645,000, 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, 2015 and December 31, 2014 is as follows:

	June 30,		December 31,
	2015		2014
	(Dollars in Thousands)

Commercial, financial and agricultural	$	3,042,236	$	3,107,584
Real estate — mortgage	928,230		910,326
Real estate — construction	1,556,880		1,414,977
Consumer	57,966		61,137
Foreign	189,150		185,221

Total loans	$	5,774,462	$	5,679,245

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:

	Three Months Ended June 30, 2015
	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,	$	23,519		$	14,369		$	17,976		$	840		$	3,573		$	4,261		$	644		$	1,069	$	66,251
Losses charge to allowance	(13,073		)	(685		)	(339		)	—			(1		)	(5		)	(239		)	—		(14,342		)
Recoveries credited to allowance	534			38			7			—			10			145			124			4		862
Net (losses) recoveries charged to allowance	(12,539		)	(647		)	(332		)	—			9			140			(115		)	4		(13,480		)

Provision charged to operations	7,922			(198		)	241			(155		)	(148		)	(93		)	96			102		7,767

Balance at June 30,	$	18,902		$	13,524		$	17,885		$	685		$	3,434		$	4,308		$	625		$	1,175	$	60,538

	Three 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 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) recoveries charged to allowance	(1,759		)	(378		)	(135		)	—			(102		)	60			(155		)	(47		)	(2,516		)

Provision 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

	Six Months Ended June 30, 2015
	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,	$	22,352		$	12,955		$	18,683		$	846		$	3,589		$	4,683		$	660		$	1,060	$	64,828
Losses charge to allowance	(15,382		)	(685		)	(356		)	—			(91		)	(102		)	(413		)	—		(17,029		)
Recoveries credited to allowance	1,330			39			813			—			24			251			130			8		2,595
Net (losses) recoveries charged to allowance	(14,052		)	(646		)	457			—			(67		)	149			(283		)	8		(14,434		)

Provision charged to operations	10,602			1,215			(1,255		)	(161		)	(88		)	(524		)	248			107		10,144

Balance at June 30,	$	18,902		$	13,524		$	17,885		$	685		$	3,434		$	4,308		$	625		$	1,175	$	60,538

	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 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

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 increase in losses charged to the allowance for probable loan losses for the three and six months ended June 30, 2015 can be attributed to a charge down of an impaired loan relationship that is mainly secured by multiple pieces of transportation equipment, the value of which fluctuates due to market factors and the amount and use of the equipment. The loan was classified as a Watch-List impaired loan at December 31, 2014 and was included in the balance of loans individually evaluated for impairment with a specific reserve at December 31, 2014.

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, 2015 and December 31, 2014:

	June 30, 2015
	(Dollars in Thousands)
	Loans individually evaluated for impairment				Loans collectively evaluated for impairment
	Recorded Investment		Allowance		Recorded Investment		Allowance

Domestic
Commercial	$	33,198	$	1,200	$	997,370	$	17,702
Commercial real estate: other construction & land development	6,688		1,142		1,550,192		12,382
Commercial real estate: farmland & commercial	9,629		505		1,908,036		17,380
Commercial real estate: multifamily	827		—		93,176		685
Residential: first lien	5,372		—		409,091		3,434
Residential: junior lien	1,260		—		512,507		4,308
Consumer	1,158		—		56,808		625
Foreign	399		—		188,751		1,175

Total	$	58,531	$	2,847	$	5,715,931	$	57,691

	December 31, 2014
	(Dollars in Thousands)
	Loans individually evaluated for impairment				Loans collectively evaluated for impairment
	Recorded Investment		Allowance		Recorded Investment		Allowance

Domestic
Commercial	$	40,175	$	9,112	$	1,049,311	$	13,240
Commercial real estate: other construction & land development	10,876		1,890		1,404,101		11,065
Commercial real estate: farmland & commercial	14,166		1,219		1,887,233		17,464
Commercial real estate: multifamily	835		—		115,864		846
Residential: first lien	5,840		—		416,186		3,589
Residential: junior lien	2,895		—		485,405		4,683
Consumer	1,384		—		59,753		660
Foreign	—		—		185,221		1,060

Total	$	76,171	$	12,221	$	5,603,074	$	52,607

During the second quarter of 2015, the Company charged down a portion of an impaired loan relationship that is mainly secured by multiple pieces of transportation equipment, the value of which fluctuates due to market factors. The Company also foreclosed upon two other real-estate secured commercial impaired loans. The transactions and their impact to the Company’s loan portfolio, including the allowance for probable loan losses, non-accrual loans and impaired loans with a related allowance for June 30, 2015 compared to December 31, 2014 are illustrated in the various associated tables on the following pages.

The table below provides additional information on loans accounted for on a non-accrual basis by loan class at June 30, 2015 and December 31, 2014:

	June 30, 2015		December 31, 2014
	(Dollars in Thousands)

Domestic
Commercial	$	33,145	$	40,121
Commercial real estate: other construction & land development	4,434		8,621
Commercial real estate: farmland & commercial	7,366		11,903
Commercial real estate: multifamily	806		835
Residential: first lien	422		527
Residential: junior lien	19		1,523
Consumer	35		29

Total non-accrual loans	$	46,227	$	63,559

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, 2015 and December 31, 2014:

	June 30, 2015
							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	$	11,780	$	21,862	$	1,200	$	15,121	$	—	$	17,828	$	—
Commercial real estate: other construction & land development	3,502		3,502		1,142		3,652		—		4,988		—
Commercial real estate: farmland & commercial	3,529		3,730		505		3,533		23		4,310		46
Total impaired loans with related allowance	$	18,811	$	29,094	$	2,847	$	22,306	$	23	$	27,126	$	46

	June 30, 2015
					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	$	21,418	$	22,303	$	20,752	$	1	$	20,288	$	2
Commercial real estate: other construction & land development	3,186		3,499		3,291		19		3,451		37
Commercial real estate: farmland & commercial	6,100		7,191		6,688		—		7,778		—
Commercial real estate: multifamily	827		827		832		—		839		1
Residential: first lien	5,372		5,430		5,289		61		5,329		123
Residential: junior lien	1,260		1,281		1,317		19		1,346		39
Consumer	1,158		1,158		1,153		1		1,171		1
Foreign	399		399		401		4		404		9
Total impaired loans with no related allowance	$	39,720	$	42,088	$	39,723	$	105	$	40,606	$	212

December 31, 2014