Edgar Filing: INTERNATIONAL BANCSHARES CORP

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 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		66,967,298 shares outstanding at April 29, 2014

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Condition (Unaudited)

(Dollars in Thousands)

	March 31,			December 31,
	2014			2013
Assets

Cash and cash equivalents	$	351,287		$	274,785

Investment securities:
Held-to-maturity (Market value of $2,400 on March 31, 2014 and $2,400 on December 31, 2013)	2,400			2,400
Available-for-sale (Amortized cost of $5,259,440 on March 31, 2014 and $5,372,594 on December 31, 2013)	5,222,557			5,304,579

Total investment securities	5,224,957			5,306,979

Loans	5,286,500			5,199,235
Less allowance for probable loan losses	(70,408		)	(70,161		)

Net loans	5,216,092			5,129,074

Bank premises and equipment, net	510,583			504,842
Accrued interest receivable	28,309			30,654
Other investments	382,072			388,563
Identified intangible assets, net	2,205			3,186
Goodwill	282,532			282,532
Other assets	146,148			158,862

Total assets	$	12,144,185		$	12,079,477

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Condition, continued (Unaudited)

(Dollars in Thousands)

	March 31,			December 31,
	2014			2013
Liabilities and Shareholders’ Equity

Liabilities:

Deposits:
Demand — non-interest bearing	$	2,829,995		$	2,666,510
Savings and interest bearing demand	2,966,062			2,925,612
Time	2,640,186			2,651,303

Total deposits	8,436,243			8,243,425

Securities sold under repurchase agreements	837,170			957,381
Other borrowed funds	1,148,403			1,223,950
Junior subordinated deferrable interest debentures	180,416			190,726
Other liabilities	76,037			39,587

Total liabilities	10,678,269			10,655,069

Shareholders’ equity:

Common shares of $1.00 par value. Authorized 275,000,000 shares; issued 95,751,991 shares on March 31, 2014 and 95,743,592 shares on December 31, 2013	95,752			95,744
Surplus	164,220			163,947
Retained earnings	1,493,904			1,467,000
Accumulated other comprehensive loss (including $(5,567) and $(5,646) of comprehensive loss related to other-than-temporary impairment for non-credit related issues)	(23,696		)	(43,774		)
	1,730,180			1,682,917

Less cost of shares in treasury, 28,787,389 shares on March 31, 2014 and 28,537,180 December 31, 2013	(264,264		)	(258,509		)

Total shareholders’ equity	1,465,916			1,424,408

Total liabilities and shareholders’ equity	$	12,144,185		$	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 March 31,
	2014		2013

Interest income:
Loans, including fees	$	67,872	$	63,534
Investment securities:
Taxable	26,179		20,519
Tax-exempt	3,523		3,036
Other interest income	63		21

Total interest income	97,637		87,110

Interest expense:
Savings deposits	871		1,011
Time deposits	3,120		4,445
Securities sold under repurchase agreements	6,236		7,568
Other borrowings	556		290
Junior subordinated interest deferrable debentures	1,090		1,164

Total interest expense	11,873		14,478

Net interest income	85,764		72,632

Provision for probable loan losses	2,078		7,419

Net interest income after provision for probable loan losses	83,686		65,213

Non-interest income:
Service charges on deposit accounts	22,062		23,830
Other service charges, commissions and fees
Banking	10,820		9,983
Non-banking	1,899		1,061
Investment securities transactions, net	8,108		9,601
Other investments, net	9,058		6,997
Other income	6,239		1,780

Total non-interest income	$	58,186	$	53,252

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income, continued (Unaudited)

(Dollars in Thousands, except per share data)

	Three Months Ended March 31,
	2014		2013

Non-interest expense:
Employee compensation and benefits	$	30,245	$	30,211
Occupancy	7,008		7,812
Depreciation of bank premises and equipment	6,092		6,625
Professional fees	3,612		3,723
Deposit insurance assessments	1,439		1,616
Net expense, other real estate owned	929		1,789
Amortization of identified intangible assets	981		1,137
Advertising	1,830		1,846
Early termination fee — securities sold under repurchase agreements	11,000		9,885
Impairment charges (Total other-than-temporary impairment charges, $32 net of $(122), and $968, net of $658, included in other comprehensive loss)	90		310
Other	14,470		15,907

Total non-interest expense	77,696		80,861

Income before income taxes	64,176		37,604

Provision for income taxes	20,530		9,535

Net income	$	43,646	$	28,069

Basic earnings per common share:

Weighted average number of shares outstanding:	67,130,971		67,187,583
Net income	$	.65	$	.42

Fully diluted earnings per common share:

Weighted average number of shares outstanding:	67,272,299		67,279,981
Net income	$	.65	$	.42

See accompanying notes to consolidated financial statements.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in Thousands)

	Three Months Ended March 31,
	2014			2013

Net income	$	43,646		$	28,069

Other comprehensive income, net of tax:

Net unrealized holding gains (losses) on securities available for sale arising during period (tax effects of $13,616 and $(5,143))	25,289			(9,552		)
Reclassification adjustment for gains on securities available for sale included in net income (tax effects of $(2,838) and $(3,360))	(5,270		)	(6,241		)
Reclassification adjustment for impairment charges on available for sale securities included in net income (tax effects of $31 and $108)	59			202
	20,078			(15,591		)

Comprehensive income	$	63,724		$	12,478

See accompanying notes to consolidated financial statements.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

	Three Months Ended March 31,
	2014			2013
Operating activities:

Net income	$	43,646		$	28,069

Adjustments to reconcile net income to net cash provided by operating activities:
Provision for probable loan losses	2,078			7,419
Specific reserve, other real estate owned	138			(70		)
Depreciation of bank premises and equipment	6,092			6,625
Gain on sale of bank premises and equipment	(2,956		)	(21		)
Gain on sale of other real estate owned	(233		)	(39		)
Accretion of investment securities discounts	(1,274		)	(894		)
Amortization of investment securities premiums	6,765			11,204
Investment securities transactions, net	(8,108		)	(9,601		)
Impairment charges on available-for-sale investment securities	90			310
Amortization of identified intangible assets	981			1,137
Stock based compensation expense	161			114
Earnings from affiliates and other investments	(3,109		)	(4,702		)
Deferred tax benefit	(1,666		)	(2,098		)
Decrease in accrued interest receivable	2,345			2,650
Net (increase) decrease in other assets	(365		)	8,926
Net increase in other liabilities	16,630			4,404

Net cash provided by operating activities	61,215			53,433

Investing activities:

Proceeds from sales and calls of available for sale securities	258,277			178,124
Purchases of available for sale securities	(310,921		)	(217,214		)
Principal collected on mortgage-backed securities	171,405			396,105
Net increase in loans	(88,610		)	(59,937		)
Purchases of other investments	(681		)	(512		)
Distributions from other investments	10,281			9,878
Purchases of bank premises and equipment	(14,436		)	(6,166		)
Proceeds from sales of other real estate owned	5,559			4,410
Proceeds from sale of bank premises and equipment	3,298			21

Net cash provided by investing activities	34,172			304,709

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows, continued (Unaudited)

(Dollars in Thousands)

	Three Months Ended March 31,
	2014			2013

Financing activities:

Net increase in non-interest bearing demand deposits	$	163,485		$	146,577
Net increase in savings and interest bearing demand deposits	40,450			1,413
Net decrease in time deposits	(11,117		)	(118,660		)
Net decrease in securities sold under repurchase agreements	(120,211		)	(74,092		)
Net decrease in other borrowed funds	(75,547		)	(361,534		)
Redemption of long-term debt	(10,310		)	—
Purchases of treasury stock	(5,755		)	—
Proceeds from stock transactions	120			13

Net cash used in financing activities	(18,885		)	(406,283		)

Increase (decrease) in cash and cash equivalents	76,502			(48,141		)

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

Cash and cash equivalents at end of period	$	351,287		$	234,959

Supplemental cash flow information:
Interest paid	$	12,594		$	15,590
Income taxes paid	5,652			5,000

Non-cash investing and financing activities:
Dividends declared, not yet paid	$	16,741		$	13,439
Net transfer from loans to other real estate owned	486			5,788
Purchases of available-for-sale securities not yet settled	3,079			37,545

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.

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

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

Note 2 — Fair Value Measurements

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

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

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

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

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

The following table represents assets and liabilities reported on the consolidated balance sheets at their fair value as of March 31, 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
	March 31, 2014		(Level 1)		(Level 2)		(Level 3)

Measured on a recurring basis:
Assets:
Available for sale securities
Residential mortgage-backed securities	$	4,932,505	$	—	$	4,905,549	$	26,956
States and political subdivisions	261,125		—		261,125		—
Other	28,927		28,927		—		—
	$	5,222,557	$	28,927	$	5,166,674	$	26,956

The following table represents assets and liabilities reported on the consolidated balance sheets at their fair value 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 December 31, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Measured on a recurring basis:
Assets:
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		—		—
	$	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.

Assumptions used in the discounted cash flow model as of March 31, 2014 and December 31, 2013, 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, 2013	$	27,852
Principal paydowns	(928		)
Total unrealized gains included in:
Other comprehensive loss	122
Impairment realized	(90		)

Balance at March 31, 2014	$	26,956

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

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

Measured on a non-recurring basis:
Assets:
Impaired loans	$	21,419	$	—	$	—	$	21,419	$	5,208
Other real estate owned	5,152		—		—		5,152		138

The following table represents financial instruments measured at fair value on a non-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 December 31, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Net Provision During Twelve Month 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 March 31, 2014, the Company had $65,436,000 of impaired commercial collateral dependent loans, of which $43,571,000 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 three months ended March 31, 2014 and the twelve months ended December 31, 2013, respectively the Company recorded $37,000 and $402,000 in charges to the allowance for probable loan losses in connection with loans transferred to other real estate owned. For the three months ended March 31, 2014 and twelve months ended December 31, 2013, respectively, the Company recorded $138,000 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 March 31, 2014 and December 31, 2013 are outlined below.

Cash and Due From Banks and Federal Funds Sold

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

Time Deposits with Banks

The carrying amounts of time deposits with banks approximate fair value.

Investment Securities Held-to-Maturity

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

Investment Securities

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

Loans

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

For variable rate performing loans, the carrying amount approximates the fair value. For fixed rate performing loans, except residential mortgage loans, the fair value is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. For performing residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources or the primary origination market. Fixed rate performing loans are within Level 3 of the fair value hierarchy. At March 31, 2014, and December 31, 2013, the carrying amount of fixed rate performing loans was $1,254,640,000 and $1,243,252,000 respectively, and the estimated fair value was $1,206,449,000 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 March 31, 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 March 31, 2014 and December 31, 2013, the carrying amount of time deposits was $2,640,186,000 and $2,651,303,000, respectively, and the estimated fair value was $2,638,519,000 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 March 31, 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 March 31, 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 $674,938,000 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 March 31, 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 March 31, 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 March 31, 2014 and December 31, 2013, the carrying amount of the long-term FHLB borrowings was $8,903,000, and $8,951,000, respectively, and the estimated fair value was $8,911,000 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 March 31, 2014 and December 31, 2013 is as follows:

	March 31,		December 31,
	2014		2013
	(Dollars in Thousands)

Commercial, financial and agricultural	$	2,924,592	$	2,894,779
Real estate — mortgage	840,165		847,692
Real estate — construction	1,279,003		1,208,508
Consumer	63,430		66,414
Foreign	179,310		181,842

Total loans	$	5,286,500	$	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:

	Three Months Ended March 31, 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, 2013	$	22,433		$	12,541	$	24,467		$	776	$	3,812		$	4,249		$	750		$	1,133		$	70,161
Losses charge to allowance	(2,481		)	—		—			—		(27		)	(146		)	(187		)	(3		)	(2,844		)
Recoveries credited to allowance	796			31		23			—		4			33			80			46			1,013
Net losses charged to allowance	(1,685		)	31		23			—		(23		)	(113		)	(107		)	43			(1,831		)

Provision charged to operations	7,175			903		(5,556		)	43		(265		)	(168		)	105			(159		)	2,078

Balance at March 31, 2014	$	27,923		$	13,475	$	18,934		$	819	$	3,524		$	3,968		$	748		$	1,017		$	70,408

	Three Months Ended March 31, 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, 2012	$	11,632		$	12,720		$	21,880		$	694		$	4,390		$	4,448		$	1,289		$	1,140		$	58,193
Losses charge to allowance	(2,663		)	(128		)	(60		)	—			(172		)	(255		)	(211		)	(20		)	(3,509		)
Recoveries credited to allowance	694			13			13			—			5			94			46			—			865
Net losses charged to allowance	(1,969		)	(115		)	(47		)	—			(167		)	(161		)	(165		)	(20		)	(2,644		)

Provision charged to operations	11,263			(1,552		)	(1,182		)	(85		)	(355		)	(276		)	(304		)	(90		)	7,419

Balance at March 31, 2013	$	20,926		$	11,053		$	20,651		$	609		$	3,868		$	4,011		$	820		$	1,030		$	62,968

The allowance for probable loan losses is a reserve established through a provision for probable loan losses charged to expense, which represents management’s best estimate of probable loan losses when evaluating loans (i) individually or (ii) collectively.

The table below provides additional information on the balance of loans individually or collectively evaluated for impairment and their related allowance, by loan class as of March 31, 2014 and December 31, 2013:

	March 31, 2014
	Loans individually evaluated for impairment				Loans collectively evaluated for impairment
	Recorded Investment		Allowance		Recorded Investment		Allowance
	(Dollars in Thousands)
Domestic
Commercial	$	35,539	$	17,424	$	1,059,024	$	10,499
Commercial real estate: other construction & land development	13,558		852		1,265,445		12,623
Commercial real estate: farmland & commercial	15,607		2,666		1,706,316		16,268
Commercial real estate: multifamily	280		—		107,826		819
Residential: first lien	6,273		—		414,736		3,524
Residential: junior lien	3,123		—		416,033		3,968
Consumer	1,453		—		61,977		748
Foreign	430		—		178,880		1,017

Total	$	76,263	$	20,942	$	5,210,237	$	49,466

	December 31, 2013
	Loans individually evaluated for impairment				Loans collectively evaluated for impairment
	Recorded Investment		Allowance		Recorded Investment		Allowance
	(Dollars in Thousands)
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 March 31, 2014 and December 31, 2013:

	March 31, 2014		December 31, 2013
	(Dollars in Thousands)

Domestic
Commercial	$	35,476	$	34,110
Commercial real estate: other construction & land development	11,307		11,726
Commercial real estate: farmland & commercial	13,344		13,775
Commercial real estate: multifamily	280		295
Residential: first lien	1,259		1,266
Residential: junior lien	1,555		1,576
Consumer	45		75

Total non-accrual loans	$	63,266	$	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 March 31, 2014 and December 31, 2013:

	March 31, 2014
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Recognized
	(Dollars in Thousands)

Loans with Related Allowance
Domestic
Commercial	$	17,684	$	17,674	$	17,424	$	17,287	$	—
Commercial real estate: other construction & land development	6,898		6,906		852		6,898		—
Commercial real estate: farmland & commercial	6,615		6,963		2,666		6,624		23
Total impaired loans with related allowance	$	31,197	$	31,553	$	20,942	$	30,809	$	23

	March 31, 2014
	Recorded Investment		Unpaid Principal Balance		Average Recorded Investment		Interest Recognized
	(Dollars in Thousands)

Loans with No Related Allowance
Domestic
Commercial	$	17,855	$	17,876	$	17,060	$	1
Commercial real estate: other construction & land development	6,660		6,704		6,801		18
Commercial real estate: farmland & commercial	8,992		10,310		8,656		—
Commercial real estate: multifamily	280		280		285		—
Residential: first lien	6,273		6,337		6,287		63
Residential: junior lien	3,123		3,142		3,133		24
Consumer	1,453		1,460		1,444		1
Foreign	430		430		432		5
Total impaired loans with no related allowance	$	45,066	$	46,539	$	44,098	$	112

	December 31, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Recognized
	(Dollars in Thousands)

Loans with Related Allowance
Domestic
Commercial	$	17,178	$	17,177	$	12,234	$	18,019	$	38
Commercial real estate: other construction & land development	6,818		6,825		852		6,058		—
Commercial real estate: farmland & commercial	7,259		10,697		2,916		7,167		92
Total impaired loans with related allowance	$	31,255	$	34,699	$	16,002	$	31,244	$	130

	December 31, 2013
	Recorded Investment		Unpaid Principal Balance		Average Recorded Investment		Interest Recognized
	(Dollars in Thousands)

Loans with No Related Allowance
Domestic
Commercial	$	17,005	$	17,023	$	16,778	$	2
Commercial real estate: other construction & land development	7,158		7,187		18,164		74
Commercial real estate: farmland & commercial	8,779		9,949		7,313		—
Commercial real estate: multifamily	295		295		322		—
Residential: first lien	6,153		6,258		4,860		179
Residential: junior lien	3,206		3,226		2,347		99
Consumer	1,606		1,612		1,380		1
Foreign	436		436		452		19
Total impaired loans with no related allowance	$	44,638	$	45,986	$	51,616	$	374

A portion of the impaired loans have adequate collateral and credit enhancements not requiring a related allowance for loan loss. The level of impaired loans is reflective of the economic weakness that has been created by the financial crisis and the subsequent economic downturn. Management is confident the Company’s loss exposure regarding these credits will be significantly reduced due to the Company’s long-standing practices that emphasize secured lending with strong collateral positions and guarantor support. Management is likewise confident the reserve for probable loan losses is adequate. The Company has no direct exposure to sub-prime loans in its loan portfolio, but the sub-prime crisis has affected the credit markets on a national level, and as a result, the Company has experienced an increasing amount of impaired loans; however, management’s decision to place loans in this category does not necessarily mean that the Company will experience significant losses from these loans or significant increases in impaired loans from these levels.

Management of the Company recognizes the risks associated with these impaired loans. However, management’s decision to place loans in this category does not necessarily mean that losses will occur. In the current environment, troubled loan management can be protracted because of the legal and process problems that delay the collection of an otherwise collectable loan. Additionally, management believes that the collateral related to these impaired loans and/or the secondary support from guarantors mitigates the potential for losses from impaired loans. It is also important to note that even though the economic conditions in Texas and Oklahoma are weakened, we believe these markets are continuing to improve and continue to be in a position to recover better than many other areas of the country. Loans accounted for as “troubled debt restructuring,” which are included in impaired loans, were not significant and totaled $19,148,000 and $20,358,000 as of March 31, 2014 and December 31, 2013, respectively.

The bank subsidiaries charge off that portion of any loan which management considers to represent a loss as well as that portion of any other loan which is classified as a “loss” by bank examiners. Commercial and industrial or real estate loans are generally considered by management to represent a loss, in whole or part, when an exposure beyond any collateral coverage is apparent and when no further collection of the loss portion is anticipated based on the borrower’s financial condition and general economic conditions in the borrower’s industry. Generally, unsecured consumer loans are charged-off when 90 days past due.

While management of the Company considers that it is generally able to identify borrowers with financial problems reasonably early and to monitor credit extended to such borrowers carefully, there is no precise method of predicting loan losses. The determination that a loan is likely to be uncollectible and that it should be wholly or partially charged-off as a loss is an exercise of judgment. Similarly, the determination of the adequacy of the allowance for probable loan losses can be made only on a subjective basis. It is the judgment of the Company’s management that the allowance for probable loan losses at March 31, 2014 was adequate to absorb probable losses from loans in the portfolio at that date.

The following table presents information regarding the aging of past due loans by loan class at March 31, 2014 and December 31, 2013:

	March 31, 2014
	30 – 59 Days		60 – 89 Days		90 Days or Greater		90 Days or greater & still accruing		Total Past due		Current		Total Portfolio
	(Dollars in Thousands)
Domestic
Commercial	$	4,622	$	1,477	$	35,819	$	2,225	$	41,918	$	1,052,645	$	1,094,563
Commercial real estate: other construction & land development	642		309		10,537		68		11,488		1,267,515		1,279,003
Commercial real estate: farmland & commercial	4,988		2,861		7,327		1,099		15,176		1,706,747		1,721,923
Commercial real estate: multifamily	343		217		280		—		840		107,266		108,106
Residential: first lien	5,211		1,005		2,613		1,588		8,829		412,180		421,009
Residential: junior lien	855		96		1,708		183		2,659		416,497		419,156
Consumer	1,119		489		884		842		2,492		60,938		63,430
Foreign	2,016		10		329		329		2,355		176,955		179,310
Total past due loans	$	19,796	$	6,464	$	59,497	$	6,334	$	85,757	$	5,200,743	$	5,286,500

	December 31, 2013
	30 – 59 Days		60 – 89 Days		90 Days or Greater		90 Days or greater & still accruing		Total Past due		Current		Total Portfolio
	(Dollars in Thousands)
Domestic
Commercial	$	4,240	$	538	$	36,066	$	2,051	$	40,844	$	1,001,798	$	1,042,642
Commercial real estate: other construction & land development	1,042		—		9,942		62		10,984		1,197,524		1,208,508
Commercial real estate: farmland & commercial	6,216		520		6,990		417		13,726		1,736,313		1,750,039
Commercial real estate: multifamily	39		142		295		—		476		101,622		102,098
Residential: first lien	4,758		3,046		4,541		3,518		12,345		426,117		438,462
Residential: junior lien	606		198		1,900		368		2,704		406,526		409,230
Consumer	1,523		469		803		781		2,795		63,619		66,414
Foreign	1,467		417		—		—		1,884		179,958		181,842
Total past due loans	$	19,891	$	5,330	$	60,537	$	7,197	$	85,758	$	5,113,477	$	5,199,235

The Company’s internal classified report is segregated into the following categories: (i) “Special Review Credits,” (ii) “Watch List - Pass Credits,” or (iii) “Watch List - Substandard Credits.” The loans placed in the “Special Review Credits” category reflect the Company’s opinion that the loans reflect potential weakness which require monitoring on a more frequent basis. The “Special Review Credits” are reviewed and discussed on a regular basis with the credit department and the lending staff to determine if a change in category is warranted. The loans placed in the “Watch List - Pass Credits” category reflect the Company’s opinion that the credit contains weaknesses which represent a greater degree of risk, which warrant “extra attention.” The “Watch List — Pass Credits” are reviewed and discussed on a regular basis with the credit department and the lending staff to determine if a change in category is warranted. The loans placed in the “Watch List — Substandard Credits” classification are considered to be potentially inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral. These credit obligations, even if apparently protected by collateral value, have shown defined weaknesses related to adverse financial, managerial, economic, market or political conditions which may jeopardize repayment of principal and interest. Furthermore, there is the possibility that some future loss could be sustained by the Company if such weaknesses are not corrected. For loans that are classified as impaired, management evaluates these credits ASC 310-10, “Receivables,” and, if deemed necessary, a specific reserve is allocated to the credit. The specific reserve allocated under ASC 310-10, is based on (i) the present value of expected future cash flows discounted at the loan’s effective interest rate; (ii) the loan’s observable market price; or (iii) the fair value of the collateral if the loan is collateral dependent. Substantially all of the Company’s loans evaluated as impaired under ASC 310-10 are measured using the fair value of collateral method. In limited cases, the Company may use other methods to determine the specific reserve of a loan under ASC 310-10 if such loan is not collateral dependent.

The allowance based on historical loss experience on the Company’s remaining loan portfolio, which includes the “Special Review Credits,” “Watch List - Pass Credits,” and “Watch List - Substandard Credits” is determined by segregating the remaining loan portfolio into certain categories such as commercial loans, installment loans, international loans, loan concentrations and overdrafts. Installment loans are then further segregated by number of days past due. A historical loss percentage, adjusted for (i) management’s evaluation of changes in lending policies and procedures, (ii) current economic conditions in the market area served by the Company, (iii) other risk factors, (iv) the effectiveness of the internal loan review function, (v) changes in loan portfolios, and (vi) the composition and concentration of credit volume is applied to each category. Each category is then added together to determine the allowance allocated under ASC 450-20.

A summary of the loan portfolio by credit quality indicator by loan class at March 31, 2014 and December 31, 2013 is as follows:

			March 31, 2014
	Pass		Special Review		Watch List - Pass		Watch List - Substandard		Watch List - Impaired
			(Dollars in Thousands)

Domestic
Commercial	$	1,001,514	$	7,213	$	4,887	$	45,410	$	35,539
Commercial real estate: other construction & land development	1,242,189		6,296		8,577		8,383		13,558
Commercial real estate: farmland & commercial	1,608,212		61,709		22,371		14,024		15,607
Commercial real estate: multifamily	106,984		—		—		842		280
Residential: first lien	414,523		118		—		95		6,273
Residential: junior lien	415,575		—		—		458		3,123
Consumer	61,977		—		—		—		1,453
Foreign	178,542		—		—		338		430
Total	$	5,029,516	$	75,336	$	35,835	$	69,550	$	76,263

			December 31, 2013
	Pass		Special Review		Watch List - Pass		Watch List - Substandard		Watch List - Impaired
			(Dollars in Thousands)

Domestic
Commercial	$	955,522	$	2,270	$	4,389	$	46,278	$	34,183
Commercial real estate: other construction & land development	1,167,295		14,247		9,318		3,672		13,976
Commercial real estate: farmland & commercial	1,635,179		56,438		21,912		20,472		16,038
Commercial real estate: multifamily	100,948		—		—		855		295
Residential: first lien	432,067		122		—		120		6,153
Residential: junior lien	405,731		—		—		293		3,206
Consumer	64,808		—		—		—		1,606
Foreign	180,837		—		—		569		436
Total	$	4,942,387	$	73,077	$	35,619	$	72,259	$	75,893

Note 5 — Stock Options

On April 5, 2012, the Board of Directors adopted the 2012 International Bancshares Corporation Stock Option Plan (the “2012 Plan”). There are 800,000 shares available for stock option grants under the 2012 Plan. Under the 2012 Plan, both qualified incentive stock options (“ISOs”) and non-qualified stock options (“NQSOs”) may be granted. Options granted may be exercisable for a period of up to 10 years from the date of grant, excluding ISOs granted to 10% shareholders, which may be exercisable for a period of up to only five years. As of March 31, 2014, 199,250 shares were available for future grants under the 2012 Plan.

A summary of option activity under the stock option plan for the three months ended March 31, 2014 is as follows:

	Number of options	Weighted average exercise price		Weighted average remaining contractual term (years)	Aggregate intrinsic value ($)
					(Dollars in Thousands)

Options outstanding at December 31, 2013	515,143	$	15.98
Plus: Options granted	549,750	21.42
Less:
Options exercised	8,399	14.23
Options expired	—	—
Options forfeited	500	10.40
Options outstanding at March 31, 2014	1,055,994	18.83		6.00	6,711

Options fully vested and exercisable at March 31, 2014	222,942	18.43		2.42	1,593

Stock-based compensation expense included in the consolidated statements of income for the three months ended March 31, 2014 and March 31, 2013 was approximately $161,000 and $114,000, respectively. As of March 31, 2014, there was approximately $4,831,000 of total unrecognized stock-based compensation cost related to non-vested options granted under the Company plans that will be recognized over a weighted average period of 2.6 years.

Note 6 - Investment Securities

The Company classifies debt and equity securities into one of three categories: held-to maturity, available-for-sale, or trading. Such securities are reassessed for appropriate classification at each reporting date. Securities classified as “held-to-maturity” are carried at amortized cost for financial statement reporting, while securities classified as “available-for-sale” and “trading” are carried at their fair value. Unrealized holding gains and losses are included in net income for those securities classified as “trading”, while unrealized holding gains and losses related to those securities classified as “available-for-sale” are excluded from net income and reported net of tax as other comprehensive income (loss) and accumulated other comprehensive income (loss) until realized, or in the case of losses, when deemed other than temporary.

The amortized cost and estimated fair value by type of investment security at March 31, 2014 are as follows:

	Held to Maturity
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Carrying Value
	(Dollars in Thousands)
Other securities	$	2,400	$	—	$	—	$	2,400	$	2,400
Total investment securities	$	2,400	$	—	$	—	$	2,400	$	2,400

	Available for Sale
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Carrying Value (1)
	(Dollars in Thousands)
Residential mortgage-backed securities	$	4,976,280	$	52,022	$	(95,797	)	$	4,932,505	$	4,932,505
Obligations of states and political subdivisions	255,085		12,780		(6,740		)	261,125		261,125
Equity securities	28,075		1,243		(391		)	28,927		28,927
Total investment securities	$	5,259,440	$	66,045	$	(102,928	)	$	5,222,557	$	5,222,557

(1) Included in the carrying value of residential mortgage-backed securities are $ 1,639,116,000 of mortgage-backed securities issued by Ginnie Mae, $3,266,433,000, of mortgage-backed securities issued by Fannie Mae and Freddie Mac and $26,956,000 issued by non-government entities

The amortized cost and estimated fair value by type of investment security at December 31, 2013 are as follows:

	Held to Maturity
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Carrying Value
	(Dollars in Thousands)
Other securities	$	2,400	$	—	$	—	$	2,400	$	2,400
Total investment securities	$	2,400	$	—	$	—	$	2,400	$	2,400

	Available for Sale
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Carrying Value (1)
	(Dollars in Thousands)
Residential mortgage-backed securities	$	5,096,165	$	56,110	$	(124,574	)	$	5,027,701	$	5,027,701
Obligations of states and political subdivisions	248,354		8,063		(8,007		)	248,410		248,410
Equity securities	28,075		931		(538		)	28,468		28,468
Total investment securities	$	5,372,594	$	65,104	$	(133,119	)	$	5,304,579	$	5,304,579

(1) Included in the carrying value of residential mortgage-backed securities are $1,799,807 of mortgage-backed securities issued by Ginnie Mae, $3,200,042 of mortgage-backed securities issued by Fannie Mae and Freddie Mac and $27,852 issued by non-government entities

The amortized cost and estimated fair value of investment securities at March 31, 2014, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.

	Held to Maturity				Available for Sale
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(Dollars in Thousands)
Due in one year or less	$	1,200	$	1,200	$	—	$	—
Due after one year through five years	1,200		1,200		—		—
Due after five years through ten years	—		—		712		777
Due after ten years	—		—		254,373		260,348
Residential mortgage-backed securities	—		—		4,976,280		4,932,505
Equity securities	—		—		28,075		28,927
Total investment securities	$	2,400	$	2,400	$	5,259,440	$	5,222,557

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

The amortized cost and fair value of available for sale investment securities pledged to qualify for fiduciary powers, to secure public monies as required by law, repurchase agreements and short-term fixed borrowings was $2,643,050,000 and $2,640,974,000, respectively, at March 31, 2014.

Proceeds from the sale of securities available-for-sale were $258,277,000 for the three months ended March 31, 2014, which included $257,621,000 of mortgage-backed securities. Gross gains of $8,108,000 and gross losses of $0 were realized on the sales for the three months ended March 31, 2014. Proceeds from the sale of securities available-for-sale were $178,124,000 for the three months ended March 31, 2013, which included $177,623,000 of mortgage-backed securities. Gross gains of $9,601,000 and gross losses of $0 were realized on the sales for the three months ended March 31, 2013.

Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2014, were as follows:

	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in Thousands)
Available for sale:
Residential mortgage-backed securities	$	1,028,459	$	(22,666	)	$	1,747,859	$	(73,131	)	$	2,776,318	$	(95,797	)
Obligations of states and political subdivisions	35,096		(1,166		)	22,377		(5,574		)	57,473		(6,740		)
Other equity securities	14,816		(184		)	4,042		(207		)	18,858		(391		)
	$	1,078,371	$	(24,016	)	$	1,774,278	$	(78,912	)	$	2,852,649	$	(102,928	)

	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in Thousands)
Available for sale:
Residential mortgage-backed securities	$	2,459,565	$	(98,022	)	$	420,262	$	(26,552	)	$	2,879,827	$	(124,574	)
Obligations of states and political subdivisions	55,327		(3,025		)	14,292		(4,982		)	69,619		(8,007		)
Equity securities	19,462		(538		)	—		—			19,462		(538		)
	$	2,534,354	$	(101,585	)	$	434,554	$	(31,534	)	$	2,968,908	$	(133,119	)

The unrealized losses on investments in residential mortgage-backed securities are primarily caused by changes in market interest rates. Residential mortgage-backed securities are primarily securities issued by Freddie Mac, Fannie Mae and Ginnie Mae. The contractual cash obligations of the securities issued by Ginnie Mae are fully guaranteed by the U.S. Government. The contractual cash obligations of the securities issued by Freddie Mac and Fannie Mae are not fully guaranteed by the U.S. Government; however, the Company believes that the quality of the bonds is similar to other AAA rated bonds with limited credit risk, particularly given the placement of Fannie Mae and Freddie Mac into conservatorship by the federal government in early September 2008 and because securities issued by others that are collateralized by residential mortgage-backed securities issued by Fannie Mae and Freddie Mac are rated consistently as AAA rated securities. The decrease in fair value on residential mortgage-backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae is due to market interest rates. The Company has no intent to sell and will more than likely not be required to sell before a market price recovery or maturity of the securities; therefore, it is the conclusion of the Company that the investments in residential mortgage-backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae are not considered other-than-temporarily impaired. In addition, the Company has a small investment in non-agency residential mortgage-backed securities that have strong credit backgrounds and include additional credit enhancements to protect the Company from losses arising from high foreclosure rates. These securities have additional market volatility beyond economically induced interest rate events. It is the conclusion of the Company that the investments in non-agency residential mortgage-backed securities are other-than-temporarily impaired due to both credit and other than credit issues. Impairment charges of $90,000 ($58,500, after tax) and $310,000 ($201,500, after tax) were recorded for the quarters ended March 31, 2014 and 2013, respectively. The impairment charge represents the credit related impairment on the securities.

The unrealized losses on investments in other securities are caused by fluctuations in market interest rates. The underlying cash obligations of the securities are guaranteed by the entity underwriting the debt instrument. It is the belief of the Company that the entity issuing the debt will honor its interest payment schedule, as well as the full debt at maturity. The securities are purchased by the Company for their economic value. The decrease in fair value is primarily due to market interest rates and not other factors, and because the Company has no intent to sell and will more than likely not be required to sell before a market price recovery or maturity of the securities, it is the conclusion of the Company that the investments are not considered other-than-temporarily impaired.

The following table presents a reconciliation of credit-related impairment charges on available-for-sale investments recognized in earnings for the three months ended March 31, 2014 and 2013, respectively (Dollars in Thousands):

Balance at December 31, 2013	$	11,806
Impairment charges recognized in earnings during period	90
Balance at March 31, 2014	$	11,896

Balance at December 31, 2012	$	10,432
Impairment charges recognized in earnings during period	310
Balance at March 31, 2013	$	10,742

Note 7 — Other Borrowed Funds

Other borrowed funds include Federal Home Loan Bank borrowings, which are short-term and long-term borrowings issued by the FHLB of Dallas at the market price offered at the time of funding. These borrowings are secured by residential mortgage-backed investment securities and a portion of the Company’s loan portfolio. At March 31, 2014, other borrowed funds totaled $1,148,403,000, a decrease of 6.2% from $1,223,950,000 at December 31, 2013. The decrease in other borrowed funds can be attributed to the use of funds generated from the sale of mortgage-backed securities to facilitate a re-positioning of the Company’s investment portfolio.

Note 8 — Junior Subordinated Interest Deferrable Debentures

The Company has formed seven statutory business trusts under the laws of the State of Delaware, for the purpose of issuing trust preferred securities. The seven statutory business trusts formed by the Company (the “Trusts”) have each issued Capital and Common Securities and invested the proceeds thereof in an equivalent amount of junior subordinated debentures (the “Debentures”) issued by the Company. As of March 31, 2014 and December 31, 2013, the principal amount of debentures outstanding totaled $180,416,000 and $190,726,000, respectively. On February 11, 2014, the Company bought back the capital securities of IB Capital Trust VII from the holder of the securities for a price that reflected an approximate 6 percent discount from the redemption price of the securities and thereby retired the $10,310,000 of related Junior Subordinated Deferrable Interest Debentures related to IB Capital Trust VII.

The Debentures are subordinated and junior in right of payment to all present and future senior indebtedness (as defined in the respective indentures) of the Company, and are pari passu with one another. The interest rate payable on, and the payment terms of the Debentures are the same as the distribution rate and payment terms of the respective issues of Capital and Common Securities issued by the Trusts. The Company has fully and unconditionally guaranteed the obligations of each of the Trusts with respect to the Capital and Common Securities. The Company has the right, unless an Event of Default (as defined in the Indentures) has occurred and is continuing, to defer payment of interest on the Debentures for up to twenty consecutive quarterly periods on Trusts VI, VIII, IX, X, XI and XII. If interest payments on any of the Debentures are deferred, distributions on both the Capital and Common Securities related to that Debenture would also be deferred. The redemption prior to maturity of any of the Debentures may require the prior approval of the Federal Reserve and/or other regulatory bodies. In February 2014, the Company redeemed all of the outstanding Capital and Common Securities issued by Trust VII.

For financial reporting purposes, the Trusts are treated as investments of the Company and not consolidated in the consolidated financial statements. Although the Capital Securities issued by each of the Trusts are not included as a component of shareholders’ equity on the consolidated statement of condition, the Capital Securities are treated as capital for regulatory purposes. Specifically, under applicable regulatory guidelines, the Capital Securities issued by the Trusts qualify as Tier 1 capital up to a maximum of 25% of Tier 1 capital on an aggregate basis. Any amount that exceeds the 25% threshold would qualify as Tier 2 capital. At March 31, 2014 and December 31, 2013, the total $180,416,000 and $190,726,000, respectively, of the Capital Securities outstanding qualified as Tier 1 capital.

The following table illustrates key information about each of the Capital and Common Securities and their interest rate at March 31, 2014:

Junior
Subordinated
Deferrable
Interest
Debentures

Repricing
Frequency

Interest Rate

Interest Rate
Index

Maturity Date

Optional
Redemption
Date(1)

(Dollars in Thousands)

Trust VI

25,774

Quarterly

3.69

LIBOR + 3.45

November 2032

February 2008

Trust VIII

25,774

Quarterly

3.29

LIBOR + 3.05

October 2033

October 2008

Trust IX

41,238

Quarterly

1.87

LIBOR + 1.62

October 2036

October 2011

Trust X

34,021

Quarterly

1.89

LIBOR + 1.65

February 2037

February 2012

Trust XI

32,990

Quarterly

1.87

LIBOR + 1.62

July 2037

July 2012

Trust XII

20,619

Quarterly

1.69

LIBOR + 1.45

September 2037

September 2012

180,416

(1) The Capital Securities may be redeemed in whole or in part on any interest payment date after the Optional Redemption Date.

Note 9 — Common Stock and Dividends

The Company had outstanding 216,000 shares of Series A cumulative perpetual preferred stock (the “Senior Preferred Stock”), issued to the US Treasury under the Company’s participation in the Troubled Asset Relief Program Capital Purchase Program (the “TARP Capital Purchase Program”). The Company redeemed all of the Senior Preferred Stock in 2012. In conjunction with the purchase of the Senior Preferred Stock, the US Treasury received a warrant (the “Warrant”) to purchase 1,326,238 shares of the Company’s common stock (the “Warrant Shares”) at $24.43 per share, which would represent an aggregate common stock investment in the Company on exercise of the warrant in full equal to 15% of the Senior Preferred Stock investment. The term of the Warrant is ten years and was immediately exercisable. The Warrant is included as a component of Tier 1 capital. On June 12, 2013, the U.S. Treasury sold the Warrant to a third party. As of March 31, 2014, the Warrant is still outstanding, but expires on December 23, 2018 with no value if not exercised before that date.

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

In April 2009, following receipt of the Treasury Department’s consent, the Board of Directors re-established a formal stock repurchase program that authorized the repurchase of up to $40 million of common stock within the following twelve months and on March 7, 2014, the Board of Directors extended the repurchase program and again authorized the repurchase of up to $40 million of common stock during the twelve month period commencing on April 9, 2014, which repurchase cap the Board is inclined to increase over time. Stock repurchases may be made from time to time, on the open market or through private transactions. Shares repurchased in this program will be held in treasury for reissue for various corporate purposes, including employee stock option plans. As of April 29, 2014, a total of 8,093,502 shares had been repurchased under all programs at a cost of $264,264,000.

Note 10 - Commitments and Contingent Liabilities

The Company is involved in various legal proceedings that are in various stages of litigation. Some of these actions allege “lender liability” claims on a variety of theories and claim substantial actual and punitive damages. The Company has determined, based on discussions with its counsel that any material loss in such actions, individually or in the aggregate, is remote or the damages sought, even if fully recovered, would not be considered material to the consolidated financial position or results of operations of the Company. However, many of these matters are in various stages of proceedings and further developments could cause management to revise its assessment of these matters.

Note 11 — Capital Ratios

The Company had a Tier 1 capital to average total asset (leverage) ratio of 11.72% and 11.61%, risk-weighted Tier 1 capital ratio of 19.22% and 19.33% and risk-weighted total capital ratio of 20.24% and 20.36% at March 31, 2014 and December 31, 2013, respectively. The identified intangibles and goodwill of $284,737,000 as of March 31, 2014, recorded in connection with the acquisitions made by the Company, are deducted from the sum of core capital elements when determining the capital ratios of the Company. Under applicable regulatory guidelines, the Capital Securities issued by the Trusts qualify as Tier 1 capital up to a maximum of 25% of tier 1 capital on an aggregate basis. Any amount that exceeds the 25% threshold qualifies as Tier 2 capital. As of March 31, 2014, the total of $180,416,000 of the Capital Securities outstanding qualified as Tier 1 capital. The Company actively monitors the regulatory capital ratios to ensure that the Company’s bank subsidiaries are well capitalized under the regulatory framework.

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the year-ended December 31, 2013, included in the Company’s 2013 Form 10-K. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results for the year ending December 31, 2014, or any future period.

Special Cautionary Notice Regarding Forward Looking Information

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

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

· Local, regional, national and international economic business conditions and the impact they may have on the Company, the Company’s customers, and such customers’ ability to transact profitable business with the Company, including the ability of its borrowers to repay their loans according to their terms or a change in the value of the related collateral.

· Volatility and disruption in national and international financial markets.

· Government intervention in the U.S. financial system.

· The Company relies, in part, on external financing to fund the Company’s operations from the FHLB, the Fed and other sources and the unavailability of such funding sources in the future could adversely impact the Company’s growth strategy, prospects and performance.

· Changes in consumer spending, borrowings and savings habits.

· Changes in interest rates and market prices, which could reduce the Company’s net interest margins, asset valuations and expense expectations, including, without limitation, the repeal of federal prohibitions on the payment of interest on demand deposits.

· Changes in the capital markets utilized by the Company and its subsidiaries, including changes in the interest rate environment that may reduce margins.

· Changes in state and/or federal laws and regulations to which the Company and its subsidiaries, as well as their customers, competitors and potential competitors, are subject, including, without limitation, the impact of the Consumer Financial Protection Bureau as a new regulator of financial institutions, changes in the accounting, tax and regulatory treatment of trust preferred securities, as well as changes in banking, tax, securities, insurance, employment, environmental and immigration laws and regulations and the risk of litigation that may follow.

· Changes in U.S. — Mexico trade, including, without limitation, reductions in border crossings and commerce resulting from the Homeland Security Programs called “US-VISIT,” which is derived from Section 110 of the Illegal Immigration Reform and Immigrant Responsibility Act of 1996.

· The reduction of deposits from nonresident alien individuals due to the new IRS rules requiring U.S. financial institutions to report to the IRS deposit interest payments made to nonresident alien individuals.

· The loss of senior management or operating personnel.

· Increased competition from both within and outside the banking industry.

· The timing, impact and other uncertainties of the Company’s potential future acquisitions including the Company’s ability to identify suitable potential future acquisition candidates, the success or failure in the integration of their operations and the Company’s ability to maintain its current branch network and to enter new markets successfully and capitalize on growth opportunities.

· Changes in the Company’s ability to pay dividends on its Common Stock.

· Additions to the Company’s loan loss allowance as a result of changes in local, national or international conditions which adversely affect the Company’s customers, including, without limitation, lower real estate values or environmental liability risks associated with foreclosed properties.

· Greater than expected costs or difficulties related to the development and integration of new products and lines of business.

· Increased labor costs and effects related to health care reform and other laws, regulations and legal developments impacting labor costs.

· Impairment of carrying value of goodwill could negatively impact our earnings and capital.

· Changes in the soundness of other financial institutions with which the Company interacts.

· Political instability in the United States or Mexico.

· Technological changes or system failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.

· Acts of war or terrorism.

· Natural disasters.

· Reduced earnings resulting from the write down of the carrying value of securities held in our securities available-for-sale portfolio following a determination that the securities are other-than-temporarily impaired.

· The effect of changes in accounting policies and practices as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standards setters.

· The costs and effects of regulatory developments, including the resolution of regulatory or other governmental inquiries and the results of regulatory examinations or reviews.

· The effect of final rules amending Regulation E that prohibit financial institutions from charging consumer fees for paying overdrafts on ATM and one-time debit card transactions, unless the consumer consents or opts-in to the overdraft service for those types of transactions, as well as the effect of any other regulatory or legal developments that limit overdraft services.

· The reduction of income and possible increase in required capital levels related to the adoption of new legislation, including, without limitation, the Dodd-Frank Regulatory Reform Act (the “Dodd-Frank Act”) and the implementing rules and regulations, including the Federal Reserve’s rule that establishes debit card interchange fee standards and prohibits network exclusivity arrangements and routing restrictions that is negatively affecting interchange revenue from debit card transactions as well as revenue from consumer services.

· The possible increase in required capital levels related to the implementation of capital and liquidity rules of the federal banking agencies that address or are impacted by the Basel III capital and liquidity standards.

· The enhanced due diligence burden imposed on banks related to the banks’ inability to rely on credit ratings under Dodd-Frank which may result in a limitation on the types of securities certain banks will be able to purchase as a result of the due diligence burden.

· The Company’s success at managing the risks involved in the foregoing items, or a failure or circumvention of the Company’s internal controls and risk management, policies and procedures.

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

Overview

The Company, which is headquartered in Laredo, Texas, with 216 facilities and more than 320 ATMs, provides banking services for commercial, consumer and international customers of South, Central and Southeast Texas and the State of Oklahoma. The Company is one of the largest independent commercial bank holding companies headquartered in Texas. The Company, through its bank subsidiaries, is in the business of gathering funds from various sources and investing those funds in order to earn a return. The Company either directly or through a bank subsidiary owns two insurance agencies, a

liquidating subsidiary, a broker/dealer and a fifty percent interest in an investment banking unit that owns a broker/dealer. The Company’s primary earnings come from the spread between the interest earned on interest-bearing assets and the interest paid on interest-bearing liabilities. In addition, the Company generates income from fees on products offered to commercial, consumer and international customers.

The Company is very active in facilitating trade along the United States border with Mexico. The Company does a large amount of business with customers domiciled in Mexico. Deposits from persons and entities domiciled in Mexico comprise a large and stable portion of the deposit base of the Company’s bank subsidiaries. The Company also serves the growing Hispanic population through the Company’s facilities located throughout South, Central and Southeast Texas and the State of Oklahoma.

Expense control is an essential element in the Company’s long-term profitability. As a result, the Company monitors the efficiency ratio, which is a measure of non-interest expense to net interest income plus non-interest income closely. As the Company adjusts to regulatory changes related to Dodd-Frank, the Company’s efficiency ratio may suffer because the additional regulatory compliance costs are expected to increase non-interest expense. The Company monitors this ratio over time to assess the Company’s efficiency relative to its peers. The Company uses this measure as one factor in determining if the Company is accomplishing its long-term goals of providing superior returns to the Company’s shareholders.

Results of Operations

Summary

Consolidated Statements of Condition Information

	March 31, 2014		December 31, 2013		Percent Increase (Decrease)
	(Dollars in Thousands)

Assets	$	12,144,185	$	12,079,477	.5	%
Net loans	5,216,092		5,129,074		1.7
Deposits	8,436,243		8,243,425		2.3
Other borrowed funds	1,148,403		1,223,950		(6.2	)
Junior subordinated deferrable interest debentures	180,416		190,726		(5.4	)
Shareholders’ equity	1,465,916		1,424,408		2.9	%

Consolidated Statements of Income Information

	Quarter Ended March 31, 2014		Quarter Ended March 31, 2013		Percent Increase (Decrease)
	(Dollars in Thousands)

Interest income	$	97,637	$	87,110	12.1	%
Interest expense	11,873		14,478		(18.1	)
Net interest income	85,764		72,632		18.1
Provision for probable loan losses	2,078		7,419		(72.0	)
Non-interest income	58,186		53,252		9.3
Non-interest expense	77,696		80,861		(3.9	)
Net income	43,646		28,069		55.5

Per common share:
Basic	$	.65	$	.42	54.8	%
Diluted	$	.65	.42		54.8

Net Income

Net income for the first quarter of 2014 increased by 55.5% as compared to the same period in 2013. Net income for the first quarter of 2014 was positively affected by an increase in the Company’s net interest margin. The increase in the net interest margin can be primarily attributed to increased levels of interest income arising from the re-positioning of the investment portfolio the Company undertook in 2013, an increase in loans outstanding, and a decrease in interest expense on securities sold under repurchase agreements arising from the early termination of some of the long-term repurchase agreements by the lead bank subsidiary.

Net Interest Income

	Quarter Ended March 31, 2014		Quarter Ended March 31, 2013		Percent Increase (Decrease)
	(Dollars in Thousands)

Interest income:
Loans, including fees	$	67,872	$	63,534	6.8	%
Investment securities:
Taxable	26,179		20,519		27.6
Tax-exempt	3,523		3,036		16.0
Other interest income	63		21		200.0

Total interest income	97,637		87,110		12.1

Interest expense:
Savings deposits	871		1,011		(13.8	)
Time deposits	3,120		4,445		(29.8	)
Securities sold under repurchase agreements	6,236		7,568		(17.6	)
Other borrowings	556		290		91.7
Junior subordinated interest deferrable debentures	1,090		1,164		(6.4	)

Total interest expense	11,873		14,478		(18.0	)

Net interest income	$	85,764	$	72,632	18.1	%

Net interest income is the spread between income on interest earning assets, such as loans and securities, and the interest expense on liabilities used to fund those assets, such as deposits, repurchase agreements and funds borrowed. As part of its strategy to manage interest rate risk, the Company strives to manage both assets and liabilities so that interest sensitivities match. One method of calculating interest rate sensitivity is through gap analysis. A gap is the difference between the amount of interest rate sensitive assets and interest rate sensitive liabilities that re-price or mature in a given time period. Positive gaps occur when interest rate sensitive assets exceed interest rate sensitive liabilities, and negative gaps occur when interest rate sensitive liabilities exceed interest rate sensitive assets. A positive gap position in a period of rising interest rates should have a positive effect on net interest income as assets will re-price faster than liabilities. Conversely, net interest income should contract somewhat in a period of falling interest rates. Management can quickly change the Company’s interest rate position at any given point in time as market conditions dictate. Additionally, interest rate changes do not affect all categories of assets and liabilities equally or at the same time. Analytical techniques employed by the Company to supplement gap analysis include simulation analysis to quantify interest rate risk exposure. The gap analysis prepared by management is reviewed by the Investment Committee of the Company twice a year (see table on page 37 for the March 31, 2014 gap analysis). Management currently believes that the Company is properly positioned for interest rate changes; however if management determines at any time that the Company is not properly positioned, it will strive to adjust the interest rate sensitive assets and liabilities in order to manage the effect of interest rate changes.

Non-Interest Income

	Quarter Ended March 31, 2014		Quarter Ended March 31, 2013		Percent Increase (Decrease)
	(Dollars in Thousands)

Service charges on deposit accounts	$	22,062	$	23,830	(7.4	)%
Other service charges, commissions and fees
Banking	10,820		9,983		8.4
Non-banking	1,899		1,061		79.0
Investment securities transactions, net	8,108		9,601		(15.6	)
Other investments, net	9,058		6,997		29.5
Other income	6,239		1,780		250.5

Total non-interest income	$	58,186	$	53,252	9.3	%

Total non-interest income increased 9.3% for the quarter ended March 31, 2014 compared the same quarter of 2013. The increase in other investment income can be attributed to two one-time transactions that occurred in the first quarter of 2014, namely, the sale of an equity investment by a merchant banking company in which the Company holds a 50% interest and insurance proceeds from a policy the lead bank subsidiary had purchased to cover the cost of employee compensation and benefit programs. The increase in other income for the quarter ended March 31, 2014 can be primarily attributed to the sale of property originally held by the bank subsidiaries resulting in a net gain of approximately $2,900,000, and the discount recorded in connection with the buyback of $10.3 million of the outstanding capital securities issued by one of the statutory business trusts formed by the Company in the amount of approximately $600,000.

Non-Interest Expense

	Quarter Ended March 31, 2014		Quarter Ended March 31, 2013		Percent Increase (Decrease)
	(Dollars in Thousands)

Employee compensation and benefits	$	30,245	$	30,211	.1	%
Occupancy	7,008		7,812		(10.3	)
Depreciation of bank premises and equipment	6,092		6,625		(8.0	)
Professional fees	3,612		3,723		(3.0	)
Deposit insurance assessments	1,439		1,616		(11.0	)
Net expense, other real estate owned	929		1,789		(48.1	)
Amortization of identified intangible assets	981		1,137		(13.7	)
Advertising	1,830		1,846		(.9	)
Early termination fee — securities sold under repurchase agreements	11,000		9,885		11.3
Impairment charges (Total other-than-temporary impairment charges, $32, net of $(122) and $968, net of $658 included in other comprehensive loss)	90		310		(71.0	)
Other	14,470		15,907		(9.0	)

Total non-interest expense	$	77,696	$	80,861	(3.9	)%

Non-interest expense decreased 3.9% for the quarter ended March 31, 2014 compared to the same period of 2013. Included in total non-interest expense for the quarters ended March 31, 2014 and 2013, are charges of $11.0 million and $9.9 million, respectively, recorded by the Company’s lead bank subsidiary. The lead bank subsidiary terminated a portion of its long-term repurchase agreements outstanding in order to help manage its long-term funding costs.

Financial Condition

Allowance for Probable Loan Losses

The allowance for probable loan losses increased .4% to $70,408,000 at March 31, 2014 from $70,161,000 at December 31, 2013. The provision for probable loan losses charged to expense decreased 72.0% to $2,078,000 for the three months ended March 31, 2014 from $7,419,000 for the same period in 2013. The decrease can be primarily attributed to a decrease in the historical charge off experience used in the calculation of the allowance for probable loan losses. The historical charge offs have gradually decreased over the last few years as loans have continued to be worked out. The allowance for probable loan losses was 1.3% of total loans at March 31, 2014 and December 31, 2013, respectively.

Investment Securities

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

Loans

Net loans increased 1.7% to $5,216,092,000 at March 31, 2014, from $5,129,074,000 at December 31, 2013. The increase in loans can be attributed to improved opportunities for loan growth.

Deposits

Deposits increased by 2.3% to $8,436,243,000 at March 31, 2014, from $8,243,425,000 at December 31, 2013. The increase in deposits is the result of the increased availability of deposits in the banking market. Even though the Company increased its deposits, the Company is still experiencing a substantial amount of competition for deposits at higher than market rates. As a result, the Company has attempted to maintain certain deposit relationships but has allowed certain deposits to leave as the result of aggressive pricing.

Foreign Operations

On March 31, 2014, the Company had $12,144,185,000 of consolidated assets, of which approximately $179,310,000, or 1.5%, was related to loans outstanding to borrowers domiciled in foreign countries, compared to $181,842,000, or 1.5%, at December 31, 2013. Of the $179,310,000, 90.2% is directly or indirectly secured by U.S. assets, certificates of deposits and real estate; 9.1% is secured by foreign real estate; and .7% is unsecured.

Critical Accounting Policies

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

The Company considers its Allowance for Probable Loan Losses as a policy critical to the sound operations of the bank subsidiaries. The allowance for probable loan losses primarily consists of the aggregate loan loss allowances of the

bank subsidiaries. The allowances are established through charges to operations in the form of provisions for probable loan losses. Loan losses or recoveries are charged or credited directly to the allowances. The allowance for probable loan losses of each bank subsidiary is maintained at a level considered appropriate by management, based on estimated probable losses in the loan portfolio. The allowance is derived from the following elements: (i) allowances established on specific impaired loans, which are based on a review of the individual characteristics of each loan, including the customer’s ability to repay the loan, the underlying collateral values, and the industry in which the customer operates, (ii) allowances based on actual historical loss experience for similar types of loans in the Company’s loan portfolio, and (iii) allowances based on general economic conditions, changes in the mix of loans, Company resources, border risk and credit quality indicators, among other things. See also discussion regarding the allowance for probable loan losses and provision for probable loan losses included in the results of operations and “Provision and Allowance for Probable Loan Losses” included in Notes 1 and 4 of the notes to Consolidated Financial Statements in the Company’s latest Annual Report on Form 10-K for further information regarding the Company’s provision and allowance for probable loan losses policy.

Liquidity and Capital Resources

The maintenance of adequate liquidity provides the Company’s bank subsidiaries with the ability to meet potential depositor withdrawals, provide for customer credit needs, maintain adequate statutory reserve levels and take full advantage of high-yield investment opportunities as they arise. Liquidity is afforded by access to financial markets and by holding appropriate amounts of liquid assets. The Company’s bank subsidiaries derive their liquidity largely from deposits of individuals and business entities. Deposits from persons and entities domiciled in Mexico comprise a stable portion of the deposit base of the Company’s bank subsidiaries. Other important funding sources for the Company’s bank subsidiaries during 2014 and 2013 were borrowings from FHLB, securities sold under repurchase agreements and large certificates of deposit, requiring management to closely monitor its asset/liability mix in terms of both rate sensitivity and maturity distribution. Primary liquidity of the Company and its subsidiaries has been maintained by means of increased investment in shorter-term securities, certificates of deposit and repurchase agreements. As in the past, the Company will continue to monitor the volatility and cost of funds in an attempt to match maturities of rate-sensitive assets and liabilities and respond accordingly to anticipated fluctuations in interest rates over reasonable periods of time.

The Company maintains an adequate level of capital as a margin of safety for its depositors and shareholders. At March 31, 2014, shareholders’ equity was $1,465,916,000 compared to $1,424,408,000 at December 31, 2013, an increase of $41,508,000, or 2.9%. The increase is primarily due a decrease in other comprehensive loss and the payment of cash dividends to shareholders, offset by the retention of earnings.

The Company had a leverage ratio of 11.72% and 11.61%, risk-weighted Tier 1 capital ratio of 19.22% and 19.33% and risk-weighted total capital ratio of 20.24% and 20.36% at March 31, 2014 and December 31, 2013, respectively. The identified intangibles and goodwill of $284,737,000 as of March 31, 2014, recorded in connection with the Company’s acquisitions, are deducted from the sum of core capital elements when determining the capital ratios of the Company.

As in the past, the Company will continue to monitor the volatility and cost of funds in an attempt to match maturities of rate-sensitive assets and liabilities, and respond accordingly to anticipate fluctuations in interest rates by adjusting the balance between sources and uses of funds as deemed appropriate. The net-interest rate sensitivity as of March 31, 2014 is illustrated in the table entitled “Interest Rate Sensitivity.” This information reflects the balances of assets and liabilities for which rates are subject to change. A mix of assets and liabilities that are roughly equal in volume and re-pricing characteristics represents a matched interest rate sensitivity position. Any excess of assets or liabilities results in an interest rate sensitivity gap.

The Company undertakes an interest rate sensitivity analysis to monitor the potential risk on future earnings resulting from the impact of possible future changes in interest rates on currently existing net asset or net liability positions. However, this type of analysis is as of a point-in-time position, when in fact that position can quickly change as market conditions, customer needs, and management strategies change. Thus, interest rate changes do not affect all categories of asset and liabilities equally or at the same time. As indicated in the table, the Company is liability sensitive during the early time periods and asset sensitive in the longer periods. The Company’s Asset and Liability Committee semi-annually reviews the consolidated position along with simulation and duration models, and makes adjustments as needed to control the Company’s interest rate risk position. The Company uses modeling of future events as a primary tool for monitoring interest rate risk.

Interest Rate Sensitivity

(Dollars in Thousands)

	Rate/Maturity
March 31, 2014	3 Months or Less			Over 3 Months to 1 Year			Over 1 Year to 5 Years		Over 5 Years		Total

Rate sensitive assets

Investment securities	$	306,288		$	1,140,263		$	3,517,281	$	261,125	$	5,224,957
Loans, net of non-accruals	3,987,358			204,089			331,889		699,898		5,223,234

Total earning assets	$	4,293,646		$	1,344,352		$	3,849,170	$	961,023	$	10,448,191

Cumulative earning assets	$	4,293,646		$	5,637,998		$	9,487,168	$	10,448,191	$	10,448,191

Rate sensitive liabilities

Time deposits	$	1,075,723		$	1,249,519		$	314,876	$	68	$	2,640,186
Other interest bearing deposits	2,966,062			—			—		—		2,966,062
Securities sold under repurchase agreements	319,245			6,909			511,016		—		837,170
Other borrowed funds	1,139,500			—			—		8,903		1,148,403
Junior subordinated deferrable interest debentures	180,416			—			—		—		180,416

Total interest bearing liabilities	$	5,680,946		$	1,256,428		$	825,892	$	8,971	$	7,772,237

Cumulative sensitive liabilities	$	5,680,946		$	6,937,374		$	7,763,266	$	7,772,237

Repricing gap	(1,387,300		)	87,924			3,023,278		952,052		2,675,954
Cumulative repricing gap	(1,387,300		)	(1,299,376		)	1,723,902		2,675,954
Ratio of interest-sensitive assets to liabilities	.76			1.07			4.66		107.13		1.34
Ratio of cumulative, interest- sensitive assets to liabilities	.76			.81			1.22		1.34

Item 3. Quantitative and Qualitative Disclosures about Market Risk

During the first three months of 2014, there were no material changes in market risk exposures that affected the quantitative and qualitative disclosures regarding market risk presented under the caption “Liquidity and Capital Resources” located on pages 18 through 24 of the Company’s 2013 Annual Report as filed as an exhibit to the Company’s Form 10-K for the year ended December 31, 2013.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within specified time periods. As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s principal executive officer and principal financial officer evaluated, with the participation of the Company’s management, the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act rules 13a-15(e) and 15d-15(e)). Based on the evaluation, which disclosed no material weaknesses, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

1A. Risk Factors

There were no material changes in the risk factors as previously disclosed in Item 1A to Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

From time to time, the Company’s Board of Directors has authorized stock repurchase plans. In April 2009, the Board of Directors established a formal stock repurchase program that authorized the repurchase of up to $40 million of common stock within the following twelve months and on March 7, 2014, the Board of Directors extended the repurchase program and again authorized the repurchase of up to $40 million of common stock during the twelve month period commencing on April 9, 2014, which repurchase cap the Board is inclined to increase over time. Stock repurchases may be made from time to time, on the open market or through private transactions. During the first quarter, the Company’s Board of Directors adopted a Rule 10b5-1 plan and intends to adopt additional Rule 10b5-1 trading plans that will allow the Company to purchase its shares of common stock during certain trading blackout periods when the Company ordinarily would not be in the market due to trading restrictions in its internal trading policy. During the term of a 10b5-1 Plan, purchases of common stock are automatic to the extent the conditions of the 10b5-1 Plan’s trading instructions are met. Shares repurchased in this program will be held in treasury for reissue for various corporate purposes, including employee stock option plans. As of April 28, 2014, a total of 8,093,502 shares had been repurchased under all repurchase programs at a cost of $264,264,000. The Company is not obligated to repurchase shares under its stock purchase program or to enter into additional Rule 10b5-1 plans. The timing, actual number and value of shares purchased will depend on many factors, including the Company’s cash flow and the liquidity and price performance of its shares of common stock.

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

	Total Number of Shares Purchased	Average Price Paid Per Share		Shares Purchased as Part of a Publicly- Announced Program	Approximate Dollar Value of Shares Available for Repurchase (1)
January 1 — January 31, 2014	—	—		—	$	40,000,000
February 1 — February 28, 2014	—	—		—	40,000,000
March 1 — March 31, 2014	250,209	$	23.00	250,209	34,245,193
	250,209	$	23.00	250,209

(1) The repurchase program was extended on March 7, 2014 and allows for the repurchase of up to an additional $40,000,000 of treasury stock through April 9, 2015.

Item 6. Exhibits

The following exhibits are filed as a part of this Report:

31(a) —Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31(b) —Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32(a) —Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32(b) —Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101++ — Interactive Data File

++ Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statement of Earnings for the three months ended March 31, 2014 and 2013, (ii) the Condensed Consolidated Balance Sheet as of March 31, 2014 and December 31, 2013, and (iii) the Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2014 and 2013. Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under these sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		INTERNATIONAL BANCSHARES CORPORATION


Date:	May 5, 2014	/s/ Dennis E. Nixon
		Dennis E. Nixon
		President


Date:	May 5, 2014	/s/ Imelda Navarro
		Imelda Navarro
		Treasurer