The following consolidated selected financial data is derived from the Corporation's audited financial statements as of and for the five years ended December 31, 2013. The following consolidated financial data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related notes in this report.

	AS OF OR FOR THE YEARS ENDED DECEMBER 31,

	2013		2012		2011		2010		2009
	(Dollars in Thousands, Except Per Share Data)
STATEMENT OF CONDITION
Assets	$	12,079,477	$	11,882,673	$	11,739,649	$	11,943,469	$	11,762,543
Investment securities available-for-sale		5,304,579		5,525,015		5,213,915		5,086,457		4,644,083
Net loans		5,129,074		4,716,811		4,969,283		5,325,521		5,571,869
Deposits		8,243,425		8,287,213		7,946,092		7,599,558		7,178,007
Other borrowed funds		1,223,950		749,027		494,161		1,026,780		1,347,625
Junior subordinated deferrable interest debentures		190,726		190,726		190,726		201,117		201,082
Shareholders' equity		1,424,408		1,435,708		1,600,165		1,459,217		1,407,470
INCOME STATEMENT
Interest income	$	363,217	$	375,639	$	418,124	$	458,769	$	527,377
Interest expense		54,632		74,499		94,298		114,036		139,796


Net interest income		308,585		301,140		323,826		344,733		387,581
Provision for probable loan losses		22,968		27,959		17,318		22,812		58,833
Non-interest income		189,605		200,591		201,493		218,784		201,013
Non-interest expense		292,632		315,372		316,774		339,725		309,031


Income before income taxes		182,590		158,400		191,227		200,980		220,730
Income taxes		56,239		50,565		64,078		70,957		77,988


Net income		126,351		107,835		127,149		130,023		142,742
Preferred stock dividends and discount accretion		—		14,362		13,280		13,126		12,984


Net income available to common shareholders	$	126,351	$	93,473	$	113,869	$	116,897	$	129,758




Per common share:
Basic	$	1.88	$	1.39	$	1.69	$	1.72	$	1.90
Diluted	$	1.88	$	1.39	$	1.69	$	1.72	$	1.90

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's discussion and analysis represents an explanation of significant changes in the financial position and results of operations of International Bancshares Corporation and its subsidiaries (the "Company" or the "Corporation") on a consolidated basis for the three-year period ended December 31, 2013. The following discussion should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2013, and the Selected Financial Data and Consolidated Financial Statements included elsewhere herein.

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:

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.

The Company, which is headquartered in Laredo, Texas, with 211 facilities and 321 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, 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.

A primary goal of the Company is to grow net interest income and non-interest income while adequately managing credit risk, interest rate risk and expenses. Effective management of capital is a critical objective of the Company. A key measure of the performance of a banking institution is the return on average common equity ("ROE"). The Company's ROE for the year ended December 31, 2013 was 8.95% as compared to 7.17% for the year ended December 31, 2012.

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 loan policies of the Company's bank subsidiaries generally require that loans to borrowers domiciled in foreign countries be primarily secured by assets located in the United States or have credit enhancements, in the form of guarantees, from significant United States corporations. 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 the Dodd-Frank Act, 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. On September 22, 2011, the Company announced the approval of a restructuring plan that resulted in the closing of fifty-five (55) in store branches by December 31, 2011. The branch closures were a result of reduced levels of revenue resulting from regulatory changes related to interchange fee income. The branches were closed in order to align the Company's expenses with reduced levels of revenue, protecting the Company's financial strength while preserving IBC's free products program.

	Year Ended December 31, 2013		Year Ended December 31, 2012				Year Ended December 31, 2011

	(Dollars in Thousands)
Interest income	$	363,217	$	375,639	(3.3	)%	$	418,124	(10.2	)%
Interest expense		54,632		74,499	(26.7	)		94,298	(21.0	)
Net interest income		308,585		301,140	2.5			323,826	(7.0	)
Provision for probable loan losses		22,968		27,959	(17.9	)		17,318	61.4
Non-interest income		189,605		200,591	(5.5	)		201,493	(.4	)
Non-interest expense		292,632		315,372	(7.2	)		316,774	(.4	)
Net income		126,351		107,835	17.2			127,149	(15.2	)
Net income available to common shareholders		126,351		93,473	35.2			113,869	(17.9	)
Per common share:
Basic	$	1.88	$	1.39	35.3	%	$	1.69	(17.8	)%
Diluted		1.88		1.39	35.3			1.69	(17.8	)

Net income available to common shareholders for the year ended December 31, 2013 increased by 35.2% as compared to the same period in 2012. Net income available to common shareholders for the year ended December 31, 2013 was positively affected by the repayment of the TARP funds in the fourth quarter of 2012, which eliminated the continued payment of dividends on the Senior Preferred Stock that had been held by the U.S. Treasury, as well as the sale of available for sale securities totaling $6.2 million, net of tax. The securities sales were a result of the Company re-positioning a portion of the investment portfolio. Net income for the same period was negatively impacted by a charge of $8.0 million, net of tax, as a result of the Company's lead bank subsidiary's early termination of a portion of its long-term

repurchase agreements in order to help manage its long-term funding costs. Net income for the year ended December 31, 2013 was positively impacted by improving net interest margins as a result of lower rates paid on securities sold under repurchase agreements and time deposits. Net income for the years ended December 31, 2013 and 2012 was negatively impacted by slow loan demand, although it is improving, and yields in the bond markets. Net income also continues to be negatively affected by the burden of increasing compliance costs arising from the Dodd-Frank Act and heightened regulatory oversight. Net income for the year ended December 31, 2012 was negatively impacted by lower levels of revenue on interchange fee income and overdraft programs due to regulatory changes, as well as the burden of increasing compliance costs arising from the Dodd-Frank Act and heightened regulatory oversight. Net income for the year ended December 31, 2012 was positively impacted by the sale of available-for-sale investments securities totaling $25 million, net of tax. The securities sales were a result of the Company re-positioning a portion of the investment portfolio. Net income for the year ended December 31, 2012 was negatively impacted by a one-time charge of $20.5 million, net of tax, recorded in the third quarter as a result of the Company's lead bank subsidiary's early termination of a portion of its long-term repurchase agreements in order to help manage its long-term funding costs.

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. Net interest income is the Company's largest source of revenue. Net interest income is affected by both changes in the level of interest rates and changes in the amount and composition of interest-earning assets and interest-bearing liabilities.

	For the years ended December 31,

	2013 Average Rate/Cost			2012 Average Rate/Cost			2011 Average Rate/Cost
Assets
Interest earning assets:
Loan, net of unearned discounts:
Domestic		5.35	%		5.51	%		5.63	%
Foreign		3.44			3.82			4.13
Investment securities:
Taxable		1.73			1.95			2.40
Tax-exempt		5.54			5.55			5.29
Other		.25			.25			1.55


Total interest-earning assets		3.52	%		3.68	%		4.06	%
Liabilities
Interest bearing liabilities:
Savings and interest bearing demand deposits		.13	%		.19	%		.30	%
Time deposits:
Domestic		.60			.79			1.03
Foreign		.51			.67			.84
Securities sold under repurchase agreements		2.80			2.95			2.99
Other borrowings		.19			.24			.22
Junior subordinated deferrable interest debentures		2.45			3.46			5.66


Total interest bearing liabilities		.71	%		.93	%		1.13	%

The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net income and net interest margin. The yield on average interest-earning assets decreased 4.3%

from 3.68% in 2012 to 3.52% in 2013, and the rates paid on average interest-bearing liabilities decreased 23.7% from .93% in 2012 to .71% in 2013. The yield on average interest-earning assets decreased 9.4% from 4.06% in 2011 to 3.68% in 2012, and the rates paid on average interest-bearing liabilities decreased 17.7% from 1.13% in 2011 to .93% in 2012. The majority of the Company's taxable investment securities are invested in mortgage backed securities and during rapid increases or reduction in interest rates, the yield on these securities do not re-price as quickly as the loans.

The following table analyzes the changes in net interest income during 2013, 2012 and 2011 and the relative effect of changes in interest rates and volumes for each major classification of interest-earning assets and interest-bearing liabilities. Non-accrual loans have been included in assets for the purpose of this analysis, which reduces the resulting yields:

	2013 compared to 2012 Net increase (decrease) due to									2012 compared to 2011 Net increase (decrease) due to

	Volume(1)			Rate(1)			Total			Volume(1)			Rate(1)			Total
	(Dollars in Thousands)									(Dollars in Thousands)
Interest earned on:
Loans, net of unearned discounts:
Domestic	$	3,927		$	(7,859	)	$	(3,932	)	$	(15,564	)	$	(4,571	)	$	(20,135	)
Foreign		(960	)		(669	)		(1,629	)		(391	)		(1,162	)		(1,553	)
Investment securities:
Taxable		3,395			(11,082	)		(7,687	)		20,976			(42,432	)		(21,456	)
Tax-exempt		1,217			(3	)		1,214			2,346			505			2,851
Other		(387	)		(1	)		(388	)		471			(823	)		(352	)


Total interest income	$	7,192		$	(19,614	)	$	(12,422	)	$	7,838		$	(48,483	)	$	(40,645	)


Interest incurred on:
Savings and interest bearing demand deposits	$	137		$	(1,663	)	$	(1,526	)	$	928		$	(2,528	)	$	(1,600	)
Time deposits:
Domestic		(1,644	)		(2,737	)		(4,381	)		(1,077	)		(7,411	)		(8,488	)
Foreign		(2,019	)		(2,129	)		(4,148	)		(332	)		(6,591	)		(6,923	)
Securities sold under repurchase agreements		(6,948	)		(1,526	)		(8,474	)		(1,912	)		(41	)		(1,953	)
Other borrowings		1,003			(411	)		592			162			192			354
Junior subordinated deferrable interest debentures		—			(1,930	)		(1,930	)		(337	)		(791	)		(1,128	)


Total interest expense	$	(9,471	)	$	(10,396	)	$	(19,867	)	$	(2,568	)	$	(17,170	)	$	(19,738	)


Net interest income	$	16,663		$	(9,218	)	$	7,445		$	10,406		$	(31,313	)	$	(20,907	)

As part of the 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. The Investment Committee is comprised of certain senior managers of the various Company bank subsidiaries along with consultants. 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.

The Company has established guidelines for acceptable volatility of projected net interest income on the income simulation analysis and the guidelines are reviewed at least annually. As of December 31, 2013, in rising rate scenarios of 150, 300 and 400 basis points, the guidelines established by management require that the net interest income not vary by more than plus or minus 15%, 15% and 20%, respectively. At December 31, 2013, the income simulations show that a rate shift of 150, 300 and 400 basis points in interest rates up will vary projected net interest income for the coming 12 month period by (2.01)%, (1.98)% and (1.46)%, respectively. The basis point shift in interest rates is a hypothetical rate scenario used to calibrate risk, and does not necessarily represent management's current view of future market developments. The Company believes that it is properly positioned for a potential interest rate increase or decrease.

The following table presents information concerning the aggregate amount of non-accrual, past due and restructured domestic loans; certain loans may be classified in one or more categories:

The allowance for probable loan losses increased 20.6% to $70,161,000 at December 31, 2013 from $58,193,000 at December 31, 2012. The allowance was 1.3% of total loans, net of unearned income at December 31, 2013 and 1.2% at December 31, 2012. The provision for probable loan losses charged to expense decreased $4,991,000 to $22,968,000 for the year ended December 31, 2013 from $27,959,000 for the same period in 2012 primarily due to the continued workout of impaired loans previously identified by the Company. The Company's provision for probable loan losses decreased for the year ended December 31, 2013 compared to the year ended December 31, 2012, mainly due to four commercial real estate relationships charged off in 2012 when the Company determined that further collection of the loan was not anticipated based on the borrowers' financial condition. The Company's provision for probable loan losses decreased for the year ended December 31, 2010 compared to the year ended December 31, 2009 mainly due to the decrease in the required reserves for impaired loans analyzed on an individual basis. The impaired loans have been measured based on the fair value of collateral. The majority of these loans show a fair value greater than the carrying value. Although the Texas and Oklahoma economies are performing better and appear to be recovering faster than other parts of the country, the long term weak economic environment may continue to reveal new problems within these markets. Loans accounted for as "troubled debt restructuring," which are included in impaired loans, were not significant and totaled $20,358,000 and $29,395,000 as of December 31, 2013 and December 31, 2012, respectively. See Note 1 to the Consolidated Financial Statements.

The following table presents information concerning the aggregate amount of non-accrual and past due foreign loans extended to persons or entities in foreign countries. Certain loans may be classified in one or more category:

The gross income that would have been recorded during 2013, 2012 and 2011 on non-accrual loans in accordance with their original contract terms was $4,088,000, $2,549,000 and $4,114,000 on domestic loans and $0, $0, and $0 on foreign loans, respectively. The amount of interest income on such loans that was recognized in 2013, 2012 and 2011 was $0, $0, and $31,000 on domestic loans and $0, $0, and $0 for foreign loans, respectively.

Generally, loans are placed on non-accrual status if principal or interest payments become 90 days past due and/or management deem the collectability of the principal and/or interest to be in question, as well as when required by applicable regulatory guidelines. Interest income on non-accrual loans is recognized only to the extent payments are received or when, in management's opinion, the creditor's financial condition warrants reestablishment of interest accruals. Under special circumstances, a loan may be more than 90 days delinquent as to interest or principal and not be placed on non-accrual status. This situation generally results when a bank subsidiary has a borrower who is experiencing financial difficulties, but not to the extent that requires a restructuring of indebtedness. The majority of this category is composed of loans that are considered to be adequately secured and/or for which there has been a recent history of payments. When a loan is placed on non-accrual status, any interest accrued, not paid is reversed and charged to operations against interest income.

Loan commitments, consisting of unused commitments to lend, letters of credit, credit card lines and other approved loans, that have not been funded, were $1,906,602,000 and $1,650,410,000 at December 31, 2013 and 2012, respectively. See Note 19 to the Consolidated Financial Statements.

The following table summarizes loan balances at the end of each year and average loans outstanding during the year; changes in the allowance for probable loan losses arising from loans charged-off and

recoveries on loans previously charged-off by loan category; and additions to the allowance which have been charged to expense:

	2013			2012			2011			2010			2009

	(Dollars in Thousands)
Loans, net of unearned discounts, outstanding at December 31	$	5,199,235		$	4,775,004		$	5,053,475		$	5,410,003		$	5,667,262




Average loans outstanding during the year (Note 1)	$	4,978,833		$	4,932,728		$	5,261,601		$	5,542,230		$	5,748,789




Balance of allowance at January 1	$	58,193		$	84,192		$	84,482		$	95,393		$	73,461
Provision charged to expense		22,968			27,959			17,318			22,812			58,833
Loans charged off:
Domestic:
Commercial, financial and agricultural		(12,342	)		(48,445	)		(18,085	)		(7,702	)		(14,565	)
Real estate—mortgage		(1,252	)		(1,417	)		(2,109	)		(2,973	)		(2,500	)
Real estate—construction		(278	)		(7,617	)		(1,467	)		(22,186	)		(17,953	)
Consumer		(561	)		(756	)		(1,067	)		(2,152	)		(2,690	)
Foreign		(22	)		(111	)		(171	)		(227	)		(831	)


Total loans charged off:		(14,455	)		(58,346	)		(22,899	)		(35,240	)		(38,539	)


Recoveries credited to allowance:
Domestic:
Commercial, financial and agricultural		2,842			3,767			4,422			626			519
Real estate—mortgage		359			208			328			517			128
Real estate—construction		87			229			171			16			19
Consumer		162			184			211			256			937
Foreign		5			—			159			102			35


Total recoveries		3,455			4,388			5,291			1,517			1,638


Net loans charged off		(11,000	)		(53,958	)		(17,608	)		(33,723	)		(36,901	)


Balance of allowance at December 31	$	70,161		$	58,193		$	84,192		$	84,482		$	95,393




Ratio of net loans charged-off during the year to average loans outstanding during the year (Note 1)		.22	%		1.09	%		.33	%		.61	%		.64	%




Ratio of allowance to loans, net of unearned discounts, outstanding at December 31		1.35	%		1.22	%		1.67	%		1.56	%		1.68	%

The allowance for probable loan losses has been allocated based on the amount management has deemed to be reasonably necessary to provide for the probable losses incurred within the following categories of loans at the dates indicated and the percentage of loans to total loans in each category:

	At December 31,

	2013					2012					2011					2010					2009
	Allowance		Percent of total			Allowance		Percent of total			Allowance		Percent of total			Allowance		Percent of total			Allowance		Percent of total
	(Dollars in Thousands)
Commercial, Financial and Agricultural		47,676		55.7	%	$	34,206		52.8	%	$	51,847		50.6	%	$	38,439		48.5	%	$	47,676		47.8	%
Real estate—Mortgage		8,061		16.3			8,838		17.6			9,322		17.7			12,670		17.5			16,825		16.8
Real estate—Construction		12,541		23.2			12,720		24.0			19,940		25.2			26,695		27.2			27,918		27.9
Consumer		750		1.3			1,289		1.6			1,724		1.9			6,241		2.3			2,581		2.6
Foreign		1,133		3.5			1,140		4.0			1,359		4.6			437		4.5			393		4.9


	$	70,161		100.0	%	$	58,193		100.0	%	$	84,192		100.0	%	$	84,482		100.0	%	$	95,393		100.0	%

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, financial and agricultural or real estate loans are generally considered by management to represent a loss, in whole or part, (i) when an exposure beyond any collateral coverage is apparent, (ii) when no further collection of the portion of the loan so exposed is anticipated based on actual results, (iii) when the credit enhancements, if any, are not adequate, and (iv) when the borrower's financial condition would indicate so. Generally, unsecured consumer loans are charged off when 90 days past due. The increase in charge-offs for the year ended December 31, 2012 compared to the year ended December 31, 2011 was largely due to the charge-off of a $22 million deficiency note on a large credit, which deficiency note was secured with a pool of assets of family trusts of the original creditors. Due to the complexities and delays in liquidating the pool of assets securing the note, the Company made the decision to charge off the loan.

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 within the existing portfolio of loans. The Company's allowance for probable loan loss methodology is based on guidance provided in Securities and Exchange Commission Staff Accounting Bulletin No. 102, "Selected Loan Loss Allowance Methodology and Documentation Issues" and includes allowance allocations calculated in accordance with ASC 310, "Receivables" and ASC 450, "Contingencies." The reserve allocated to all categories increased by approximately $12.0 million from 2012 to 2013. The increase can be attributed to a specific reserve of $12.0 million on a previously identified impaired commercial loan that further deteriorated during 2013. The reserve allocated to all categories of loans decreased approximately $26.0 million from 2011 to 2012. The decrease in the reserve is mainly due to the continued workout of the impaired loans previously identified by the Company. The reserve allocated to all categories decreased $10.9 million from 2009 to 2010. The decrease in the reserve from 2009 to 2010 is mainly due to a decrease in the required reserves for impaired loans analyzed on an individual basis. The impaired loans have been measured based on the fair value of collateral. The majority of these loans show a fair value, after considering selling costs, greater than the carrying value. Please refer to Note 4—Allowance for Probable Loan Losses in the accompanying Notes to the consolidated Financial Statements.

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 December 31, 2013 was adequate to absorb probable losses from loans in the portfolio at that date. See Critical Accounting Policies on page 24. 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.

	Year Ended December 31, 2013		Year Ended December 31, 2012				Year Ended December 31, 2011

	(Dollars in Thousands)
Service charges on deposit accounts	$	97,087	$	93,128	4.3	%	$	97,968	(4.9	)%
Other service charges, commissions and fees
Banking		41,075		38,523	6.6			50,686	(24.0	)
Non-banking		7,116		6,998	1.7			7,304	(4.2	)
Investment securities transactions, net		9,601		38,446	(75.0	)		17,285	122.4
Other investments, net		22,383		13,339	67.8			16,041	(16.8	)
Other income		12,343		10,157	21.5			12,209	(16.8	)


Total non-interest income	$	189,605	$	200,591	(5.5	)%	$	201,493	(.4	)%

Total non-interest income decreased 5.5% for the year ended December 31, 2013 when compared to the same period of 2012. Investment securities transactions decreased for the year ended December 31, 2013 compared to the same period of 2012 due to securities sales that occurred in 2012 as a result of the Company re-positioning a portion of the investment portfolio. Other investments income for the year ended December 31, 2013 was positively impacted by the sale of assets in a partnership where the holding company held an equity position, resulting in income of $5.5 million. Banking service charges, commissions and fees decreased 24% for the twelve months ended December 31, 2012 compared to the same period of 2011 primarily due to the impact of regulatory changes related to interchange fee income and overdraft programs.

	Year Ended December 31, 2013		Year Ended December 31, 2012				Year Ended December 31, 2011

	(Dollars in Thousands)
Employee compensation and benefits	$	119,845	$	118,041	1.5	%	$	126,004	(6.3	)%
Occupancy		31,766		34,608	(8.2	)		38,722	(10.6	)
Depreciation of bank premises and equipment		26,017		26,756	(2.8	)		34,935	(23.4	)
Professional fees		13,146		14,369	(8.5	)		12,998	10.5
Deposit insurance assessments		6,737		7,709	(12.6	)		9,047	(14.8	)
Net expense, other real estate owned		6,896		8,929	(22.8	)		14,817	(39.7	)
Amortization of identified intangible assets		4,633		4,651	(.4	)		5,293	(12.1	)
Advertising		7,034		7,017	.2			5,807	20.8
Early termination fee—securities sold under repurchase agreements		12,303		31,550	(61.0	)		—	100.0
Impairment charges (Total other-than-temporary impairment charges, $(431) less loss of $1,805, $(916) less gain of $(123), and $(1,003) less loss of $26, included in other comprehensive (loss) income)		1,374		1,039	32.2			977	6.3
Other		62,881		60,703	3.6			68,174	(11.0	)


Total non-interest expense	$	292,632	$	315,372	(7.2	)%	$	316,774	(.4	)%

Non-interest expense for the year ended December 31, 2013 decreased by 7.2% compared to the same period of 2012. Non-interest expense for the twelve months ended December 31, 2013 and 2012 was negatively impacted by charges of $12.3 million and $31.6 million, respectively, recorded by the Company's lead bank subsidiary. The lead bank subsidiary terminated portions of its long-term repurchase agreements outstanding in order to help manage its long-term funding costs. Non-interest expense for 2011 was negatively impacted by a valuation allowance taken for a foreclosed real estate project, included in "net expense, other real estate owned," in the table above. After evaluation of the carrying value of the foreclosed real estate, the Company determined that the property required a valuation allowance. The Company recorded other-than-temporary impairment charges of $1.4 million, $1 million, and $977 thousand on non-agency mortgage-backed securities, representing the credit related impairment on the securities in during 2013, 2012 and 2011, respectively. During the fourth quarter of 2011, the Company also recognized charges of $5.36 million, before tax, related to the closing of fifty-five (55) in-store branches by December 31, 2011. The charges are included in "Depreciation of bank premises and equipment" and "Other" in the table above.

The principal component of earnings is net interest income, which is affected by changes in the level of interest rates. Changes in rates of inflation affect interest rates. It is difficult to precisely measure the impact of inflation on net interest income because it is not possible to accurately differentiate between

increases in net interest income resulting from inflation and increases resulting from increased business activity. Inflation also raises costs of operations, primarily those of employment and services.

The following table sets forth the carrying value of investment securities as of December 31, 2013, 2012 and 2011:

	December 31,

	2013		2012		2011
	(Dollars in Thousands)
Residential mortgage-backed securities
Available for sale	$	5,027,701	$	5,265,204	$	4,969,263
Obligations of states and political subdivisions
Available for sale		248,410		238,675		224,761
Equity securities
Available for sale		28,468		21,136		19,891
Other securities
Held to maturity		2,400		2,400		2,450


Total	$	5,306,979	$	5,527,415	$	5,216,365

The following tables set forth the contractual maturities of investment securities, based on amortized cost, at December 31, 2013 and the average yields of such securities, except for the totals, which reflect the weighted average yields. Actual maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.

	Available for Sale Maturing

	Within one year					After one but within five years					After five but within ten years					After ten years
	Adjusted					Adjusted					Adjusted					Adjusted
	Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield
	(Dollars in Thousands)
Residential mortgage-backed securities	$	22		8.0	%	$	19,887		5.03	%	$	638,363		2.63	%	$	4,437,893		2.71	%
Obligations of states and political subdivisions		—		—			—		—			704		6.24			247,650		5.45
Equity securities		325		—			—		—			—		—			27,750		2.07
Other securities		—		—			—		—			—		—			—		—


Total	$	347		.50	%	$	19,887		5.03	%	$	639,067		2.64	%	$	4,713,293		2.85	%

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 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 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 amounts of loans outstanding, by classification, at December 31, 2013, 2012, 2011, 2010 and 2009 are shown in the following table:

	December 31,

	2013		2012		2011		2010		2009
	(Dollars in Thousands)
Commercial, financial and agricultural	$	2,894,779	$	2,525,380	$	2,560,102	$	2,615,878	$	2,703,379
Real estate—mortgage		847,692		838,467		895,870		948,982		954,010
Real estate—construction		1,208,508		1,147,669		1,273,389		1,473,471		1,583,057
Consumer		66,414		74,514		94,109		126,047		146,331
Foreign		181,842		188,974		230,005		245,625		280,485


Loans, net of unearned discount	$	5,199,235	$	4,775,004	$	5,053,475	$	5,410,003	$	5,667,262

The following table shows the amounts of loans (excluding real estate mortgages and consumer loans) outstanding as of December 31, 2013, which based on remaining scheduled repayments of principal are due in the years indicated. Also, the amounts due after one year are classified according to the sensitivity to changes in interest rates:

On December 31, 2013, the Company had $181,842,000 (1.5% of total assets) in loans outstanding to borrowers domiciled in foreign countries, which included primarily borrowers domiciled in Mexico. The loan policies of the Company's bank subsidiaries generally require that loans to borrowers domiciled in foreign countries be primarily secured by assets located in the United States or have credit enhancements, in the form of guarantees, from significant United States corporations. The composition of such loans and the related amounts of allocated allowance for probable loan losses as of December 31, 2013 and 2012 is presented below.

	For the year ended December 31,

	2013				2012
	Amount of Loans		Related Allowance for Probable Losses		Amount of Loans		Related Allowance for Probable Losses
	(Dollars in Thousands)
Secured by certificates of deposit in United States banks	$	122,314	$	506	$	131,775	$	551
Secured by United States real estate		27,817		319		24,005		236
Secured by other United States collateral (securities, gold, silver, etc.)		1,003		12		1,352		18
Unsecured		1,163		6		654		6
Other (principally Mexico real estate)		29,545		290		31,188		329


	$	181,842	$	1,133	$	188,974	$	1,140

The transactions for the years ended December 31, 2013, 2012 and 2011, in that portion of the allowance for probable loan losses related to foreign debt were as follows:

	2013 Average Balance		2012 Average Balance

	(Dollars in Thousands)
Deposits:
Demand—non-interest bearing
Domestic	$	2,097,318	$	1,832,870
Foreign		497,409		239,669


Total demand non-interest bearing		2,594,727		2,072,539


Savings and interest bearing demand
Domestic		2,358,990		2,289,706
Foreign		520,125		516,951


Total savings and interest bearing demand		2,879,115		2,806,657


Time certificates of deposit
$100,000 or more:
Domestic		899,847		1,037,528
Foreign		968,962		1,234,984
Less than $100,000:
Domestic		565,403		636,062
Foreign		337,610		373,235


Total time, certificates of deposit		2,771,822		3,281,809


Total deposits	$	8,245,664	$	8,161,005

	2013		2012		2011

	(Dollars in Thousands)
Interest expense:
Savings and interest bearing demand
Domestic	$	3,182	$	4,487	$	6,549
Foreign		580		801		1,234


Total savings and interest bearing demand		3,762		5,288		7,783


Time, certificates of deposit
$100,000 or more
Domestic		5,761		8,263		10,299
Foreign		5,590		9,148		11,512
Less than $100,000
Domestic		3,065		4,945		7,468
Foreign		1,028		1,617		2,277


Total time, certificates of deposit		15,444		23,973		31,556


Total interest expense on deposits	$	19,206	$	29,261	$	39,339

Scheduled maturities of time deposits in amounts of $100,000 or more at December 31, 2013, were as follows:

The Company offers a variety of deposit accounts having a wide range of interest rates and terms. The Company relies primarily on its high quality customer service, sales programs, customer referrals and advertising to attract and retain these deposits. Deposits provide the primary source of funding for the Company's lending and investment activities, and the interest paid for deposits must be managed carefully to control the level of interest expense. Deposits at December 31, 2013 were $8,243,425,000, a decrease of .5% from $8,287,213,000 at December 31, 2012.

Certain key ratios for the Company for the years ended December 31, 2013, 2012 and 2011 follows (Note 1):

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. Historically, the Mexico based deposits of the Company's bank subsidiaries have been a stable source of funding. Such deposits comprised approximately 28%, 28%, and 29% of the Company's bank subsidiaries' total deposits at each of the years ended December 31, 2013, 2012 and 2011, respectively. Other important funding sources for the Company's bank subsidiaries have been borrowings from the Federal Home Loan Bank ("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 anticipate fluctuations in interest rates over reasonable periods of time.

The Company's fund management policy has as its primary focus the measurement and management of the banks' earnings at risk in the face of rising or falling interest rate forecasts. The earliest and most simplistic concept of earnings at risk measurement is the gap report, which is used to generate a rough estimate of the vulnerability of net interest income to changes in market rates as implied by the relative re-pricings of assets and liabilities. The gap report calculates the difference between the amounts of assets and liabilities re-pricing across a series of intervals in time, with emphasis typically placed on the one-year period. This difference, or gap, is usually expressed as a percentage of total assets.

If an excess of liabilities over assets matures or re-prices within the one-year period, the statement of condition is said to be negatively gapped. This condition is sometimes interpreted to suggest that an institution is liability-sensitive, indicating that earnings would suffer from rising rates and benefit from falling rates. If a surplus of assets over liabilities occurs in the one-year time frame, the statement of condition is said to be positively gapped, suggesting a condition of asset sensitivity in which earnings would benefit from rising rates and suffer from falling rates.

The gap report thus consists of an inventory of dollar amounts of assets and liabilities that have the potential to mature or re-price within a particular period. The flaw in drawing conclusions about interest rate risk from the gap report is that it takes no account of the probability that potential maturities or re-pricings of interest-rate-sensitive accounts will occur, or at what relative magnitudes. Because simplicity, rather than utility, is the only virtue of gap analysis, financial institutions increasingly have either abandoned gap analysis or accorded it a distinctly secondary role in managing their interest-rate risk exposure.

The net interest rate sensitivity at December 31, 2013, is illustrated in the following table. This information reflects the balances of assets and liabilities whose rates are subject to change. As indicated in the table on the following page, the Company is liability-sensitive during the early time periods and is asset-sensitive in the longer periods. The table shows the sensitivity of the statement of condition at one point in time and is not necessarily indicative of the position at future dates.

	Rate/Maturity

December 31, 2013	3 Months or Less			Over 3 Months to 1 Year			Over 1 Year to 5 Years		Over 5 Years		Total
	(Dollars in Thousands)
Rate sensitive assets
Investment securities	$	552,691		$	1,158,451		$	3,347,427	$	248,410	$	5,306,979
Loans, net of non-accruals		3,900,925			243,071			300,286		692,130		5,136,412


Total earning assets	$	4,453,616		$	1,401,522		$	3,647,713	$	940,540	$	10,443,391


Cumulative earning assets	$	4,453,616		$	5,855,138		$	9,502,851	$	10,443,391




Rate sensitive liabilities
Time deposits	$	1,066,670		$	1,301,276		$	283,301	$	56	$	2,651,303
Other interest bearing deposits		2,925,612			—			—		—		2,925,612
Securities sold under repurchase agreements		331,860			14,505			611,016		—		957,381
Other borrowed funds		1,215,000			—			—		8,950		1,223,950
Junior subordinated deferrable interest debentures		190,726			—			—		—		190,726


Total interest bearing liabilities	$	5,729,868		$	1,315,781		$	894,317	$	9,006	$	7,948,972


Cumulative sensitive liabilities	$	5,729,868		$	7,045,649		$	7,939,966	$	7,948,972




Repricing gap	$	(1,276,252	)	$	85,741		$	2,753,396	$	931,534	$	2,494,419
Cumulative repricing gap		(1,276,252	)		(1,190,511	)		1,562,885		2,494,419
Ratio of interest-sensitive assets to liabilities		.78			1.07			4.08		104.43		1.31
Ratio of cumulative, interest- sensitive assets to liabilities		.78			.83			1.20		1.31

The detailed inventory of statement of condition items contained in gap reports is the starting point of income simulation analysis. Income simulation analysis also focuses on the variability of net interest income and net income, but without the limitations of gap analysis. In particular, the fundamental, but often unstated, assumption of the gap approach that every statement of condition item that can re-price will do so to the full extent of any movement in market interest rates is taken into consideration in income simulation analysis.

Accordingly, income simulation analysis captures not only the potential of assets and liabilities to mature or re-price, but also the probability that they will do so. Moreover, income simulation analysis focuses on the relative sensitivities of these balance sheet items and projects their behavior over an extended period of time in a motion picture rather than snapshot fashion. Finally, income simulation analysis permits management to assess the probable effects on balance sheet items not only of changes in market interest rates, but also of proposed strategies for responding to such changes. The Company and many other institutions rely primarily upon income simulation analysis in measuring and managing exposure to interest rate risk.

December 31, 2013, the income simulations show that a rate shift of 150, 300 and 400 basis points in interest rates up will vary projected net interest income for the coming 12 month period by (2.01)%, (1.98)% and (1.46)%, respectively. The basis point shift in interest rates is a hypothetical rate scenario used to calibrate risk, and does not necessarily represent management's current view of future market developments. The Company believes that it is properly positioned for a potential interest rate increase or decrease.

All the measurements of risk described above are made based upon the Company's business mix and interest rate exposures at the particular point in time. The exposure changes continuously as a result of the Company's ongoing business and its risk management initiatives. While management believes these measures provide a meaningful representation of the Company's interest rate sensitivity, they do not necessarily take into account all business developments that have an effect on net income, such as changes in credit quality or the size and composition of the statement of condition.

Principal sources of liquidity and funding for the Company are dividends from subsidiaries and borrowed funds, with such funds being used to finance the Company's cash flow requirements. The Company closely monitors the dividend restrictions and availability from the bank subsidiaries as disclosed in Note 20 to the Consolidated Financial Statements. At December 31, 2013, the aggregate amount legally available to be distributed to the Company from bank subsidiaries as dividends was approximately $584,000,000, assuming that each bank subsidiary continues to be classified as "well-capitalized" under the applicable regulations. The restricted capital (capital and surplus) of the bank subsidiaries was approximately $927,033,000 as of December 31, 2013. The undivided profits of the bank subsidiaries were approximately $920,060,000 as of December 31, 2013. Additionally, as a result of the Company's participation in the TARP Capital Purchase Program, the Company was restricted in the payment of dividends and was not allowed without the Treasury Department's consent, to declare or pay any dividend on the Company Common Stock other than a regular semi-annual cash dividend of not more than $.33 per share, as adjusted for any stock dividend or stock split. The restriction ceased to exist on December 23, 2011 and the Company exited the TARP program when it finalized the repayment of all the TARP funds on November 28, 2012.

At December 31, 2013, the Company has outstanding $1,223,950,000 in other borrowed funds and $190,726,000 in junior subordinated deferrable interest debentures. In addition to borrowed funds and dividends, the Company has a number of other available alternatives to finance the growth of its existing banks as well as future growth and expansion.

The Company maintains an adequate level of capital as a margin of safety for its depositors and shareholders. At December 31, 2013, shareholders' equity was $1,424,408,000 compared to $1,435,708,000 at December 31, 2012, a decrease of $11,300,000 or .8%. Shareholders' equity decreased due to the payment of cash dividends to shareholders and accumulated other comprehensive loss. The accumulated other comprehensive loss is not included in the calculation of regulatory capital ratios.

During 1990, the Federal Reserve Board ("FRB") adopted a minimum leverage ratio of 3% for the most highly rated bank holding companies and at least 4% to 5% for all other bank holding companies. The Company's leverage ratio (defined as shareholders' equity plus eligible trust preferred securities issued and outstanding less goodwill and certain other intangibles divided by average quarterly assets) was 11.61% at December 31, 2013 and 10.86% at December 31, 2012. The core deposit intangibles and goodwill of $285,718,000 as of December 31, 2013, are deducted from the sum of core capital elements when determining the capital ratios of the Company.

The FRB has adopted risk-based capital guidelines which assign risk weightings to assets and off-balance sheet items. The guidelines also define and set minimum capital requirements (risk-based capital ratios). Under the final 1992 rules, all banks are required to have Tier 1 capital of at least 4.0% of

risk-weighted assets and total capital of 8.0% of risk-weighted assets. Tier 1 capital consists principally of shareholders' equity plus trust preferred securities issued and outstanding less goodwill and certain other intangibles, while total capital consists of Tier 1 capital, certain debt instruments and a portion of the reserve for loan losses. In order to be deemed well-capitalized pursuant to the regulations, an institution must have a total risk-weighted capital ratio of 10%, a Tier 1 risk-weighted ratio of 6% and a Tier 1 leverage ratio of 5%. The Company had risk-weighted Tier 1 capital ratios of 19.33% and 19.65% and risk weighted total capital ratios of 20.36% and 20.60% as of December 31, 2013 and 2012, respectively, which are well above the minimum regulatory requirements and exceed the well-capitalized ratios (see Note 20 to Notes to Consolidated Financial Statements).

The Company has formed eight statutory business trusts under the laws of the State of Delaware, for the purpose of issuing trust preferred securities. The eight 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 December 31, 2013 and December 31, 2012, the principal amount of debentures outstanding totaled $190,726,000. As a result of the participation in the TARP Capital Purchase Program, the Company was not permitted, without the consent of the Treasury Department, to redeem any of the Debentures. This restriction ceased to exist on December 23, 2011. The Company completed the repayment of the TARP funds on November 28, 2012. One half of the Trust I securities were redeemed on June 8, 2011 and the remaining one half of the Trust I securities were redeemed on July 1, 2011, with the consent of the Treasury Department.

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, VII, 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.

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 December 31, 2013 and December 31, 2012, the total $190,726,000 of the Capital Securities outstanding qualified as Tier 1 capital.

The following table illustrates key information about each of the Debentures and their interest rates at December 31, 2013:

	Junior Subordinated Deferrable Interest Debentures		Repricing Frequency			Interest Rate Index	Maturity Date	Optional Redemption Date(1)

	(in thousands)
Trust VI	$	25,774	Quarterly	3.69	%	LIBOR + 3.45	November 2032	February 2008
Trust VII		10,310	Quarterly	3.49	%	LIBOR + 3.25	April 2033	April 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


	$	190,726

The following table presents contractual cash obligations of the Company (other than deposit liabilities) as of December 31, 2013:

	Payments due by Period

	(Dollars in Thousands)
Contractual Cash Obligations	Total		Less than One Year		One to Three Years		Three to Five Years		After Five Years
Securities sold under repurchase agreements	$	957,381	$	246,365	$	11,016	$	700,000	$	—
Federal Home Loan Bank borrowings		1,223,950		1,215,193		407		436		7,914
Junior subordinated deferrable interest debentures		190,726		—		—		—		190,726
Operating leases		10,787		4,330		4,908		1,322		227


Total Contractual Cash Obligations	$	2,382,844	$	1,465,888	$	16,331	$	701,758	$	198,867

The following table presents contractual commercial commitments of the Company (other than deposit liabilities) as of December 31, 2013:

	Amount of Commitment Expiration Per Period

	(Dollars in Thousands)
Commercial Commitments	Total		Less than One Year		One to Three Years		Three to Five Years		After Five Years
Financial and Performance Standby Letters of Credit	$	108,683	$	87,384	$	21,289	$	10	$	—
Commercial Letters of Credit		21,434		21,434		—		—		—
Credit Card Lines		61,120		61,120		—		—		—
Other Commercial Commitments		1,715,365		948,473		536,149		137,536		93,207


Total Commercial Commitments	$	1,906,602	$	1,118,411	$	557,438	$	137,546	$	93,207

Due to the nature of the Company's commercial commitments, including unfunded loan commitments and lines of credit, the amounts presented above do not necessarily reflect the amounts the Company anticipates funding in the periods presented above.

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.

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.

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. 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.

The Company's management continually reviews the allowance for loan losses of the bank subsidiaries using the amounts determined from the allowances established on specific loans, the allowance established on quantitative historical loss percentages, and the allowance based on qualitative data, to establish an appropriate amount to maintain in the Company's allowance for loan loss. 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.

See Note 1—Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements for details of recently issued and recently adopted accounting standards and their impact on the Company's consolidated financial statements.

The Company had issued and outstanding 67,208,261 shares of $1.00 par value Common Stock held by approximately 2,251 holders of record at February 19, 2014. The book value of the Common Stock at December 31, 2013 was $22.24 per share compared with $22.24 per share at December 31, 2012. On November 28, 2012, the Company completed the repurchase of all the 216,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share, having a liquidation preference of $1,000 per share that it had issued to the Treasury Department under TARP. The Company repaid all of the $216 million of TARP funds during the second half of 2012. Under the TARP program, the Company also issued to the Treasury Department a warrant to purchase 1,326,238 shares of the Company's common stock at a price per share of $24.43 and with a term of ten years (the "Warrant"). On June 12, 2013, the U.S. Treasury sold the Warrant to a third party. As of February 19, 2014, the Warrant is still outstanding.

The Common Stock is traded on the NASDAQ National Market under the symbol "IBOC." The following table sets forth the approximate high and low bid prices in the Company's Common Stock during 2013 and 2012, as quoted on the NASDAQ National Market for each of the quarters in the two year period ended December 31, 2013. Some of the quotations reflect inter-dealer prices, without retail mark-up,

mark-down or commission and may not necessarily represent actual transactions. The closing sales price of the Company's Common Stock was $21.42 per share at February 19, 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, or $28,894,000 in the aggregate during 2013. The Company paid cash dividends to the common shareholders of $.20 per share on April 20, 2012 to all holders of record on April 2, 2013 and $.20 per share on October 15, 2012 to all holders of record on September 28, 2012, or $26,894,000 in the aggregate during 2012.

Additionally, as a result of the Company's previous participation in the TARP Capital Purchase Program until November 28, 2012, the Company was restricted in the payment of dividends and was not allowed, without the Treasury Department's consent, to declare or pay any dividend on the Company Common Stock other than a regular semi-annual cash dividend of not more than $.33 per share, as adjusted for any stock dividend or stock split. The restrictions ceased to exist on December 23, 2011. While the IBC Board is inclined to continue to declare regular semi-annual cash dividends, there can be no assurance as to future dividends because they are dependent upon the Company's future earnings, capital requirements, financial condition, acquisition opportunities and general business conditions at the time.

In addition, the Company has not issued common stock dividends during the last five-year period ending December 31, 2013.

The Company's principal source of funds to pay cash dividends on its Common Stock is cash dividends from its bank subsidiaries. For a discussion of the limitations, please see Note 20 of Notes to Consolidated Financial Statements.

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 February 28, 2013, 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, 2013, 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 February 19, 2014, a total of 7,843,293 shares had been repurchased under all programs at a cost of $237,536,000.

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 December 31, 2013.

The following table sets forth information as of December 31, 2013, with respect to the Company's equity compensation plans:

We have audited the accompanying consolidated statements of condition of International Bancshares Corporation and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of International Bancshares Corporation and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), International Bancshares Corporation and subsidiaries' internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992, and our report dated February 24, 2014 expressed an unqualified opinion on the effectiveness of International Bancshares Corporation and subsidiaries' internal control over financial reporting.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Condition

December 31, 2013 and 2012

(Dollars in Thousands, Except Per Share Amounts)

	2013			2012

Assets
Cash and due from banks	$	274,785		$	283,100
Investment securities:
Held to maturity (Market value of $2,400 on December 31, 2013 and $2,400 on December 31, 2012)		2,400			2,400
Available for sale (Amortized cost of $5,372,594 on December 31, 2013 and $5,423,189 on December 31, 2012)		5,304,579			5,525,015


Total investment securities		5,306,979			5,527,415
Loans		5,199,235			4,775,004
Less allowance for probable loan losses		(70,161	)		(58,193	)


Net loans		5,129,074			4,716,811
Bank premises and equipment, net		504,842			481,287
Accrued interest receivable		30,654			31,034
Other investments		388,563			372,739
Identified intangible assets, net		3,186			7,819
Goodwill		282,532			282,532
Other assets		158,862			179,936


Total assets	$	12,079,477		$	11,882,673

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Condition (Continued)

December 31, 2013 and 2012

(Dollars in Thousands, Except Per Share Amounts)

	2013			2012

Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Demand—non-interest bearing	$	2,666,510		$	2,465,750
Savings and interest bearing demand		2,925,612			2,867,151
Time		2,651,303			2,954,312


Total deposits		8,243,425			8,287,213
Securities sold under repurchase agreements		957,381			1,129,679
Other borrowed funds		1,223,950			749,027
Junior subordinated deferrable interest debentures		190,726			190,726
Other liabilities		39,587			90,320


Total liabilities		10,655,069			10,446,965


Shareholders' equity:
Common shares of $1.00 par value. Authorized 275,000,000 shares; issued 95,743,592 shares on December 31, 2013 and 95,724,517 shares on December 31, 2012		95,744			95,725
Surplus		163,947			163,287
Retained earnings		1,467,000			1,369,543
Accumulated other comprehensive (loss) income (including $(5,646) on December 31, 2013 and $(6,811) on December 31, 2012 of comprehensive loss related to other-than-temporary impairment for non-credit related issues)		(43,774	)		65,662


		1,682,917			1,694,217
Less cost of shares in treasury, 28,537,180 shares on December 31, 2013 and December 31, 2012		(258,509	)		(258,509	)


Total shareholders' equity		1,424,408			1,435,708


Total liabilities and shareholders' equity	$	12,079,477		$	11,882,673

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income

Years ended December 31, 2013, 2012 and 2011

(Dollars in Thousands, Except Per Share Amounts)

	2013		2012		2011

Interest income:
Loans, including fees	$	263,027	$	268,588	$	292,514
Investment securities:
Taxable		87,198		94,885		113,650
Tax-exempt		12,877		11,663		10,091
Other interest income		115		503		1,869


Total interest income		363,217		375,639		418,124


Interest expense:
Savings and interest bearing demand deposits		3,762		5,288		7,783
Time deposits		15,444		23,973		31,556
Securities sold under repurchase agreements		29,171		37,645		42,263
Other borrowings		1,590		998		1,623
Junior subordinated deferrable interest debentures		4,665		6,595		11,073


Total interest expense		54,632		74,499		94,298


Net interest income		308,585		301,140		323,826
Provision for probable loan losses		22,968		27,959		17,318


Net interest income after provision for probable loan losses		285,617		273,181		306,508


Non-interest income:
Service charges on deposit accounts		97,087		93,128		97,968
Other service charges, commissions and fees
Banking		41,075		38,523		50,686
Non-banking		7,116		6,998		7,304
Investment securities transactions, net		9,601		38,446		17,285
Other investments, net		22,383		13,339		16,041
Other income		12,343		10,157		12,209


Total non-interest income		189,605		200,591		201,493

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income (Continued)

Years ended December 31, 2013, 2012 and 2011

(Dollars in Thousands, Except Per Share Amounts)

	2013		2012		2011

Non-interest expense:
Employee compensation and benefits	$	119,845	$	118,041	$	126,004
Occupancy		31,766		34,608		38,722
Depreciation of bank premises and equipment		26,017		26,756		34,935
Professional fees		13,146		14,369		12,998
Deposit insurance assessments		6,737		7,709		9,047
Net expense, other real estate owned		6,896		8,929		14,817
Amortization of identified intangible assets		4,633		4,651		5,293
Advertising		7,034		7,017		5,807
Early termination fee—securities sold under repurchase agreements		12,303		31,550		—
Impairment charges (Total other-than-temporary impairment charges, $(431) less loss of $1,805, $(916) less gain of $(123), and $(1,003) less loss of $26, included in other comprehensive (loss) income)		1,374		1,039		977
Other		62,881		60,703		68,174


Total non-interest expense		292,632		315,372		316,774


Income before income taxes		182,590		158,400		191,227
Provision for income taxes		56,239		50,565		64,078


Net income	$	126,351	$	107,835	$	127,149
Preferred stock dividends and discount accretion		—		14,362		13,280


Net income available to common shareholders	$	126,351	$	93,473	$	113,869




Basic earnings per common share:
Weighted average number of shares outstanding		67,195,180		67,236,681		67,506,554
Net income	$	1.88	$	1.39	$	1.69




Fully diluted earnings per common share:
Weighted average number of shares outstanding		67,314,859		67,313,963		67,569,468
Net income	$	1.88	$	1.39	$	1.69

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

Years ended December 31, 2013, 2012, and 2011

(Dollars in Thousands)

	2013			2012			2011

Net income	$	126,351		$	107,835		$	127,149
Other comprehensive income, net of tax:
Net unrealized holding (losses) gains on securities available for sale arising during period (net of tax effects of $(56,048), $2,701, and $35,960)		(104,088	)		5,018			66,782
Reclassification adjustment for gains on securities available for sale included in net income (net of tax effects of $(3,360), $(13,456), and $(6,050))		(6,241	)		(24,990	)		(11,235	)
Reclassification adjustment for impairment charges on available for sale securities included in net income (net of tax effects of $481, $364, and $342)		893			675			635


		(109,436	)		(19,297	)		56,182


Comprehensive income	$	16,915		$	88,538		$	183,331

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Shareholders' Equity

Years ended December 31, 2013, 2012 and 2011

(in Thousands, except share and per share amounts)

	Preferred Stock				Common Stock		Surplus		Retained Earnings			Other Comprehensive Income (Loss)			Treasury Stock			Total

Balance at December 31, 2010	$	208,068		95,711	$	95,711	$	162,276	$	1,214,743		$	28,777		$	(250,358	)	$	1,459,217
Net Income		—		—		—		—		127,149			—			—			127,149
Dividends:
Cash ($.38 per share)		—		—		—		—		(25,648	)		—			—			(25,648	)
Preferred stock (5%) including discount accretion		2,480		—		—		—		(13,280	)		—			—			(10,800	)
Purchase of treasury (425,655 shares)		—		—		—		—		—			—			(6,435	)		(6,435	)
Exercise of stock options		—		9		9		104		—			—			—			113
Stock compensation expense recognized in earnings		—		—		—		387		—			—			—			387
Other comprehensive income, net of tax:
Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustment		—		—		—		—		—			56,182			—			56,182


Balance at December 31, 2011		210,548		95,720		95,720		162,767		1,302,964			84,959			(256,793	)		1,600,165
Net Income		—		—		—		—		107,835			—			—			107,835
Dividends:
Cash ($.40 per share)		—		—		—		—		(26,894	)		—			—			(26,894	)
Preferred stock (5%) including discount accretion		5,452		—		—		—		(14,362	)		—			—			(8,910	)
Redemption of Series A Preferred Shares (216,000 shares)		(216,000	)	—		—		—		—			—			—			(216,000	)
Purchase of treasury stock (95,466 shares)		—		—		—		—		—			—			(1,716	)		(1,716	)
Exercise of stock options		—		5		5		46		—			—			—			51
Stock compensation expense recognized in earnings		—		—		—		474		—			—			—			474
Other comprehensive income, net of tax:
Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustment		—		—		—		—		—			(19,297	)		—			(19,297	)


Balance at December 31, 2012		—		95,725		95,725		163,287		1,369,543			65,662			(258,509	)		1,435,708
Net Income		—		—		—		—		126,351			—			—			126,351
Dividends:
Cash ($.43 per share)		—		—		—		—		(28,894	)		—			—			(28,894	)
Exercise of stock options		—		19		19		246		—			—			—			265
Stock compensation expense recognized in earnings		—		—		—		414		—			—			—			414
Other comprehensive loss, net of tax:
Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustments		—		—		—		—		—			(109,436	)		—			(109,436	)


Balance at December 31, 2013		—		95,744	$	95,744	$	163,947	$	1,467,000		$	(43,774	)	$	(258,509	)	$	1,424,408

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended December 31, 2013, 2012 and 2011

(Dollars in Thousands)

	2013			2012			2011

Operating activities:
Net income	$	126,351		$	107,835		$	127,149
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for probable loan losses		22,968			27,959			17,318
Specific reserve, other real estate owned		1,204			1,776			9,806
Accretion of time deposit discounts		—			—			(11	)
Depreciation of bank premises and equipment		26,017			26,756			34,935
Gain on sale of bank premises and equipment		(2,089	)		(538	)		(361	)
(Gain) loss on sale of other real estate owned		(460	)		488			(738	)
Accretion of investment securities discounts		(4,025	)		(3,195	)		(2,081	)
Amortization of investment securities premiums		44,245			30,501			18,362
Investment securities transactions, net		(9,601	)		(38,446	)		(17,285	)
Impairment charges on available for sale securities		1,374			1,039			977
Accretion of junior subordinated debenture discounts		—			—			9
Amortization of identified intangible assets		4,633			4,651			5,293
Stock based compensation expense		414			474			387
Earnings from affiliates and other investments		(18,806	)		(9,892	)		(11,633	)
Deferred tax (benefit) expense		(1,819	)		7,923			(2,299	)
Decrease in accrued interest receivable		380			968			3,658
Decrease (increase) in other assets		20,612			(5,392	)		2,303
(Decrease) increase in other liabilities		(2,272	)		7,106			(4,966	)


Net cash provided by operating activities		209,126			160,013			180,823


Investing activities:
Proceeds from maturities of securities		1,200			1,125			1,425
Proceeds from sales and calls of available for sale securities		178,123			1,382,231			1,102,849
Purchases of available for sale securities		(1,384,254	)		(3,081,034	)		(2,231,330	)
Principal collected on mortgage backed securities		1,223,532			1,294,197			999,419
Net (increase) decrease in loans		(444,919	)		170,072			306,915
Purchases of other investments		(2,475	)		(4,228	)		(11,941	)
Distributions (contributions) from other investments		5,457			(7,410	)		33,320
Purchases of bank premises and equipment		(50,016	)		(62,030	)		(20,393	)
Proceeds from sales of bank premises and equipment		2,533			7,575			1,719
Proceeds from sales of other real estate owned		23,170			38,766			25,324
Purchase of identified intangible asset		—			(280	)		(174	)


Net cash (used in) provided by investing activities		(447,649	)		(261,016	)		207,133

	2013			2012			2011

Financing activities:
Net increase in non-interest bearing demand deposits	$	200,760		$	538,732		$	287,942
Net increase in savings and interest bearing demand deposits		58,461			159,458			184,851
Net decrease in time deposits		(303,009	)		(357,069	)		(126,248	)
Net decrease in securities sold under repurchase agreements		(172,298	)		(218,950	)		(84,641	)
Other borrowed funds, net		474,923			254,866			(532,619	)
Repayment of long-term debt		—			—			(10,400	)
Purchase of treasury stock		—			(1,716	)		(6,435	)
Redemption of Series A preferred shares		—			(216,000	)		—
Proceeds from stock transactions		265			51			113
Payments of cash dividends—common		(28,894	)		(26,894	)		(25,648	)
Payments of cash dividends—preferred		—			(10,260	)		(10,800	)


Net cash provided by (used in) financing activities		230,208			122,218			(323,885	)


(Decrease) increase in cash and cash equivalents		(8,315	)		21,215			64,071
Cash and cash equivalents at beginning of year		283,100			261,885			197,814


Cash and cash equivalents at end of year	$	274,785		$	283,100		$	261,885




Supplemental cash flow information:
Interest paid	$	56,818		$	77,431		$	97,699
Income taxes paid		60,532			36,303			60,922
Non-cash investing and financing activities:
Purchases of available-for-sale securities not yet settled		—			—			72,538
Net transfers from loans to other real estate owned		9,688			54,441			32,005
Accrued dividends, preferred shares		—			—			1,350

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 following is a description of the more significant of those policies.

The consolidated financial statements include the accounts of the Corporation and its wholly-owned bank subsidiaries, International Bank of Commerce, Laredo ("IBC"), Commerce Bank, International Bank of Commerce, Zapata, International Bank of Commerce, Brownsville, and the Corporation's wholly-owned non-bank subsidiaries, IBC Subsidiary Corporation, IBC Life Insurance Company, IBC Trading Company, Premier Tierra Holdings, Inc. and IBC Capital Corporation. All significant inter-company balances and transactions have been eliminated in consolidation.

The Company, through its subsidiaries, is primarily engaged in the business of banking, including the acceptance of checking and savings deposits and the making of commercial, real estate, personal, home improvement, automobile and other installment and term loans. The primary markets of the Company are South, Central, and Southeast Texas and the state of Oklahoma. Each bank subsidiary is very active in facilitating international trade along the United States border with Mexico and elsewhere. Although the Company's loan portfolio is diversified, the ability of the Company's debtors to honor their contracts is primarily dependent upon the economic conditions in the Company's trade area. In addition, the investment portfolio is directly impacted by fluctuations in market interest rates. The Company and its bank subsidiaries are subject to the regulations of certain Federal agencies as well as the Texas Department of Banking and undergo periodic examinations by those regulatory authorities. Such agencies may require certain standards or impose certain limitations based on their judgments or changes in law and regulations.

The Company owns two insurance-related subsidiaries, IBC Life Insurance Company and IBC Insurance Agency, Inc., a wholly owned subsidiary of IBC, the bank subsidiary. Neither of the insurance-related subsidiaries conducts underwriting activities. The IBC Life Insurance Company is in the business of reinsuring credit life and credit accident and health insurance. The business is assumed from an unaffiliated insurer and the only business written is generated by the bank subsidiaries of the Company. The risk assumed on each of the policies is not significant to the consolidated financial statements.

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the statement of condition and income and expenses for the periods. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes in the near-term relate to the determination of the allowance for probable loan losses.

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.

The Company classifies debt and equity securities into one of these categories: held-to-maturity, available-for-sale, or trading. Such classifications are reassessed for appropriate classification at each reporting date. Securities that are intended and expected to be held until maturity are classified as "held-to-maturity" and are carried at amortized cost for financial statement reporting. Securities that are not positively expected to be held until maturity, but are intended to be held for an indefinite period of time are classified as "available-for-sale" or "trading" and 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 and in shareholders' equity as accumulated other comprehensive income until realized. The Company did not maintain any trading securities during the three year period ended December 31, 2013.

Mortgage-backed securities held at December 31, 2013 and 2012 represent participating interests in pools of long-term first mortgage loans originated and serviced by the issuers of the securities. Mortgage-backed securities are either issued or guaranteed by the U.S. Government or its agencies including the Federal Home Loan Mortgage Corporation ("Freddie Mac"), the Federal National Mortgage Association ("Fannie Mae"), the Government National Mortgage Association ("Ginnie Mae") or other non-government entities. 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 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. Market interest rate fluctuations can affect the prepayment speed of principal and the yield on the security.

Premiums and discounts are amortized using the level yield or "interest method" over the terms of the securities. Declines in the fair value of held-to-maturity and available-for sale-securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In determining whether other-than-temporary impairment exists, management considers many factors, including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent of the Company to hold and the determination of whether the Company will more likely than not be required to sell the security prior to a recovery in fair value. If the Company determines that (1) it intends to sell the security or (2) it is more likely than not that it will be required to sell the security before it's anticipated recovery, the other-than-temporary impairment that is recognized in earnings is equal to the difference between the fair value of the security and the Company's amortized cost in the security. If the Company determines that it (1) does not intend to sell the security and (2) it will not be more likely than not required to sell the security before it's anticipated recovery, the other-than-temporary impairment is segregated into its two components (1) the amount of impairment related to credit loss and (2) the amount of impairment related to other factors. The difference between the present value of the cash flows expected to be collected and the amortized cost is the credit loss recognized through earnings and an adjustment to the cost basis of the security. The amount of impairment related to other factors is included in other comprehensive income (loss). Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

The allowance for probable loan losses is maintained at a level considered adequate by management to provide for probable loan losses. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. The provision for probable loan losses is the amount, which, in the judgment of management, is necessary to establish the allowance for probable loan losses at a level that is adequate to absorb known and inherent risks in the loan portfolio.

Management believes that the allowance for probable loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's bank subsidiaries' allowances for probable loan losses. Such agencies may require the Company's bank subsidiaries to make additions or reductions to their U.S. generally accepted accounting principles ("GAAP") allowances based on their judgments of information available to them at the time of their examination.

Loans are reported at the principal balance outstanding, net of unearned discounts. Interest income on loans is reported on an accrual basis. Loan fees and costs associated with originating the loans are amortized over the life of the loan using the interest method. The Company originates mortgage loans that may subsequently be sold to an unaffiliated third party. The loans are not securitized and if sold, are sold without recourse. Loans held for sale are carried at cost and the principal amount outstanding is not significant to the consolidated financial statements.

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. 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 non-accrual loan policy of the Company's bank subsidiaries is to discontinue the accrual of interest on loans when management determines that it is probable that future interest accruals will be un-collectible. As it relates to consumer loans, management charges off those loans when the loan is

contractually 90 days past due. Under special circumstances, a consumer or non-consumer loan may be more than 90 days delinquent as to interest or principal and not be placed on non-accrual status. This situation generally results when a bank subsidiary has a borrower who is experiencing financial difficulties, but not to the extent that requires a restructuring of indebtedness. The majority of this category is composed of loans that are considered to be adequately secured and/or for which there are expected future payments. When a loan is placed on non-accrual status, any interest accrued, not paid is reversed and charged to operations against interest income. As it relates to non-consumer loans that are not 90 days past due, management will evaluate each of these loans to determine if placing the loan on non-accrual status is warranted. Interest income on non-accrual loans is recognized only to the extent payments are received or when, in management's opinion, the debtor's financial condition warrants reestablishment of interest accruals.

Other real estate owned is comprised of real estate acquired by foreclosure and deeds in lieu of foreclosure. Other real estate 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). 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. Any subsequent write-downs are charged against other non-interest expense. Other real estate owned totaled $85,879,000 and $100,106,000 at December 31, 2013 and 2012, respectively. Other real estate owned is included in other assets.

Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on straight-line and accelerated methods over the estimated useful lives of the assets. Repairs and maintenance are charged to operations as incurred and expenditures for renewals and betterments are capitalized.

Other investments include equity investments in non-financial companies, bank owned life insurance, as well as equity securities with no readily determinable fair market value. Equity investments are accounted for using the equity method of accounting. Equity securities with no readily determinable fair value are accounted for using the cost method.

Deferred income tax assets and liabilities are determined using the asset and liability method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. The Company files a consolidated federal income tax return with its subsidiaries.

Recognition of deferred tax assets is based on management's assessment that the benefit related to certain temporary differences, tax operating loss carry forwards, and tax credits are more likely than not to

be realized. A valuation allowance is recorded for the amount of the deferred tax items for which it is more likely than not that the tax benefits will not be realized.

The Company evaluates uncertain tax positions at the end of each reporting period. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefit recognized in the financial statements from any such a position is measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of December 31, 2013 and 2012, respectively, after evaluating all uncertain tax positions, the Company has recorded no liability for unrecognized tax benefits at the end of the reporting period. The Company would recognize any interest accrued on unrecognized tax benefits as other interest expense and penalties as other non-interest expense. During the years ended December 31, 2013, 2012 and 2011, the Company recognized no interest expense or penalties related to uncertain tax positions.

The Company files consolidated tax returns in the U.S. Federal jurisdiction and various state jurisdictions. The Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years before 2010.

Compensation expense for stock awards is based on the market price of the stock on the measurement date, which is generally the date of grant, and is recognized ratably over the service period of the award. The fair value of stock options granted was estimated, using the Black-Sholes-Merton option-pricing model. This model was developed for use in estimating the fair value of publicly traded options that have no vesting restrictions and are fully transferable. Additionally, the model requires the input of highly subjective assumptions. Because the Company's employee stock options have characteristics significantly different from those of publicly traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the Black-Scholes-Merton option-pricing model does not necessarily provide a reliable single measure of the fair value of the Company's stock options.

Basic Earnings Per Share ("EPS") is calculated by dividing net income by the weighted average number of common shares outstanding. The computation of diluted EPS assumes the issuance of common shares for all dilutive potential common shares outstanding during the reporting period. The dilutive effect of stock options is considered in earnings per share calculations, if dilutive, using the treasury stock method.

Goodwill represents the excess of costs over fair value of assets of businesses acquired. Goodwill is tested for impairment at least annually or on an interim basis if an event triggering impairment may have occurred. As of October 1, 2013, after completing goodwill testing, the Company has determined that no goodwill impairment exists.

Identified intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or

exchanged either on its own or in combination with a related contract, asset, or liability. The Company's identified intangible assets relate to core deposits and contract rights. As of December 31, 2013, the Company has determined that no impairment of identified intangibles exists. Identified intangible assets with definite useful lives are amortized on an accelerated basis over their estimated life. See Note 6—Goodwill and Other Intangible Assets.

Long-lived assets, such as property, plant and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying value of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying value of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying value of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the statement of condition and reported at the lower of the carrying value or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the statement of condition.

For purposes of the consolidated statements of cash flows, the Company considers all short-term investments with a maturity at date of purchase of three months or less to be cash equivalents. Also, the Company reports transactions related to deposits and loans to customers on a net basis.

The Company accounts for transfers and servicing of financial assets and extinguishments of liabilities based on the application of a financial-components approach that focuses on control. After a transfer of financial assets, the Company recognizes the financial and servicing assets it controls and liabilities it has incurred, derecognizes financial assets when control has been surrendered and derecognizes liabilities when extinguished. The Company has retained mortgage servicing rights in connection with the sale of mortgage loans. Because the Company may not initially identify loans as originated for resale, all loans are initially treated as held for investment. The value of the mortgage servicing rights are reviewed periodically for impairment and are amortized in proportion to, and over the period of estimated net servicing income or net servicing losses. The value of the mortgage servicing rights is not significant to the consolidated statements of condition.

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 financial 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.

Comprehensive income (loss) consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale.

Certain amounts in the prior year's presentations have been reclassified to conform to the current presentation. These reclassifications had no effect on previously reported net income or shareholders' equity.

In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-02 to ASC 220, "Comprehensive Income." The update amends existing literature to require an entity to provide information about the amounts reclassified out of other comprehensive income by component, and it also requires enhanced disclosure and cross reference on items reclassified out of accumulated other comprehensive income during the reporting period. The update is effective for reporting periods beginning after December 15, 2012. The adoption of the update to existing standards did not have a significant impact to the Company's consolidated financial statements.

In July 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-11 to ASC 740, "Income Taxes." The update amends existing literature to eliminate diversity in practice in the presentation of unrecognized tax benefits in instances where a net operating loss carryforward, a similar tax loss or a tax credit carryforward also exist. The update clarifies how the unrecognized tax benefit should be presented in those situations where other tax losses or tax credit carryforwards exist. The update does not change the currently required disclosures for unrecognized tax benefits under current ASC 740 guidance. The update is effective for fiscal years and interim periods within those years beginning after December 15, 2013. The adoption of the update to existing standards is not expected to have a significant impact to the Company's consolidated financial statements.

In January 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-04 to ASC 310-40, "Receivables—Troubled Debt Restructurings by Creditors." The update amends existing literature to eliminate diversity in practice by clarifying and defining when an in substance repossession or foreclosure occurs. The terms "in substance a repossession or foreclosure" and "physical possession" are not currently defined in the accounting literature, resulting in diversity in practice when a creditor derecognizes a loan receivable and recognizes the real estate property collateralizing the loan receivable as an asset. Additionally, the update requires interim and annual disclosures of both the amount of foreclosed residential real estate property and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. The update is effective for annual periods and the interim periods within those annual periods beginning after December 15, 2014. The adoption of the update to existing standards is not expected to have a significant impact to the Company's consolidated financial statements.

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

The amortized cost and estimated fair value of investment securities at December 31, 2013, 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	$	125	$	125	$	—	$	—
Due after one year through five years		2,275		2,275		—		—
Due after five years through ten years		—		—		704		749
Due after ten years		—		—		247,650		247,662
Residential mortgage-backed securities		—		—		5,096,165		5,027,701
Equity securities		—		—		28,075		28,468


Total investment securities	$	2,400	$	2,400	$	5,372,594	$	5,304,579

The amortized cost and estimated fair value by type of investment security at December 31, 2012 are as follows:

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 and 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 $2,250,755,000 and $2,264,525,000, respectively, at December 31, 2013.

Proceeds from the sale and call of securities available-for-sale were $178,123,000, $1,382,231,000 and $1,102,849,000 during 2013, 2012 and 2011, respectively, which amounts included $177,623,000, $1,338,723,000 and $1,095,815,000 of mortgage-backed securities. Gross gains of $9,601,000, $38,447,000 and $17,318,000 and gross losses of $0, $1,000 and $33,000 were realized on the sales in 2013, 2012 and 2011, respectively.

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 December 31, 2013 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	$	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	)

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 loss position, at December 31, 2012 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	$	738,492	$	(5,476	)	$	32,860	$	(10,557	)	$	771,352	$	(16,033	)
Obligations of states and political subdivisions		5,117		(114	)		10,437		(1,677	)		15,554		(1,791	)
Equity securities		—		—			56		(20	)		56		(20	)


	$	743,609	$	(5,590	)	$	43,353	$	(12,254	)	$	786,962	$	(17,844	)

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. An impairment charge of $1,374,000 ($893,100, after tax), was recorded in 2013 on the non-agency residential mortgage backed securities. Impairment charges of $1,039,000 ($675,000, after tax) and $977,000 ($635,000, after tax) were recorded in 2012 and 2011, respectively on the non-agency residential mortgage backed securities. The impairment charges represent 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 twelve months ended December 31, 2013 (in Thousands):

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.

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.

While the Texas and Oklahoma economies are performing better than other parts of the country, Texas and Oklahoma are not completely immune to the problems associated with the U.S. economy. The increase in income and capital gains taxes on certain individuals, the increase in payroll taxes, and the unprecedented debt and deficit of the United States not yet resolved, adds uncertainty to the possibility of robust economic growth and may create a slowdown in the economy. Thus, the risk of loss associated with all segments of the loan portfolio in these markets continues to be impacted by the prolonged economic weakness. The downturn in the economy and other risk factors are minimized by the underwriting standards of the bank subsidiaries. The general underwriting standards encompass the following principles: (i) the financial strength of the borrower including strong earnings, a high net worth, significant liquidity and an acceptable debt to worth ratio, (ii) managerial and business competence, (iii) the ability to repay, (iv) for a new business, projected cash flows, (v) loan to value, (vi) in the case of a secondary guarantor, a guarantor financial statement, and (vii) financial and/or other character references. Although the underwriting standards reduce the risk of loss, unique risk factors exist in each type of loan that the bank subsidiaries invest.

Commercial and industrial loans are mostly secured by the collateral pledged by the borrower that are directly related to the business activities of the company such as accounts receivable and inventory. The ability of the borrower to collect accounts receivable, and to turn inventory into sales are risk factors in the repayment of the loan.

Construction and land development loans can carry risk of repayment when projects incur cost overruns, have an increase in the price of building materials, encounter zoning and environmental issues, or encounter other factors that may affect the completion of a project on time and on budget. Additionally, repayment risk may be negatively impacted when the market experiences a deterioration in the value of real estate. Risks specifically related to 1-4 family development loans also include the practice by the mortgage industry of more restrictive underwriting standards, which inhibits the buyer from obtaining long term financing and excessive housing and lot inventory in the market.

Commercial real estate loans demonstrate a risk of repayment when market values deteriorate, the business experiences turnover in key management, the business has an inability to attract or keep occupancy levels stable, or when the market experiences an exit of a specific business industry that is significant to the local economy, such as a manufacturing plant.

First and second lien residential 1-4 family mortgage and consumer loan repayments may be affected by unemployment or underemployment and deteriorating market values of real estate.

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

	December 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,	$	11,632		$	12,720		$	21,880		$	694		$	4,390		$	4,448		$	1,289		$	1,140		$	58,193
Losses charge to allowance		(11,737	)		(278	)		(600	)		(5	)		(632	)		(620	)		(561	)		(22	)		(14,455	)
Recoveries credited to allowance		2,690			87			152			—			61			298			162			5			3,455


Net losses charged to allowance		(9,047	)		(191	)		(448	)		(5	)		(571	)		(322	)		(399	)		(17	)		(11,000	)
Provision (credit) charged to operations		19,848			12			3,035			87			(7	)		123			(140	)		10			22,968


Balance at December 31,	$	22,433		$	12,541		$	24,467		$	776		$	3,812		$	4,249		$	750		$	1,133		$	70,161

	December 31, 2012

	Domestic																					Foreign
	Commercial			Commercial real estate: other construction & land development			Commercial real estate: farmland & commercial			Commercial real estate: multifamily			Residential: first lien			Residential: junior lien			Consumer			Foreign			Total
	(Dollars in Thousands)
Balance at December 31,	$	26,617		$	19,940		$	24,227		$	1,003		$	4,562		$	4,760		$	1,724		$	1,359		$	84,192
Losses charge to allowance		(34,721	)		(7,617	)		(13,724	)		—			(227	)		(1,190	)		(756	)		(111	)		(58,346	)
Recoveries credited to allowance		3,547			229			220			—			13			195			184			—			4,388


Net losses charged to allowance		(31,174	)		(7,388	)		(13,504	)		—			(214	)		(995	)		(572	)		(111	)		(53,958	)
Provision (credit) charged to operations		16,189			168			11,157			(309	)		42			683			137			(108	)		27,959


Balance at December 31,	$	11,632		$	12,720		$	21,880		$	694		$	4,390		$	4,448		$	1,289		$	1,140		$	58,193

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 Company's allowance for probable loan losses increased for the year ended December 31, 2013 mainly due to the addition of a specific reserve of approximately $12,000,000 on a previously identified impaired commercial loan that further deteriorated during 2013. The Company's net charge off experience decreased from December 31, 2013 compared to December 31, 2012 mainly due to four commercial real estate relationships charged off in 2012. The relationships were charged off as a result of the Company's assessment that no further collection of the loan was probable based on the borrowers' financial condition.

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

	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

	December 31, 2012

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


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

Loans accounted for on a non-accrual basis at December 31, 2013, 2012 and 2011 amounted to $62,823,000, $71,768,000 and $118,505,000, respectively. The effect of such non-accrual loans reduced interest income by $4,088,000, $2,549,000 and $4,114,000 for the years ended December 31, 2013, 2012 and 2011, respectively. Amounts received on non-accruals are applied, for financial accounting purposes, first to principal and then to interest after all principal has been collected. Accruing loans contractually past

due 90 days or more as to principal or interest payments at December 31, 2013, 2012 and 2011 amounted to $7,197,000, $15,033,000 and $14,288,000, respectively.

The table below provides additional information on loans accounted for on a non-accrual basis by loan class:

	December 31,

	2013		2012
	(Dollars in Thousands)
Domestic
Commercial	$	34,110	$	31,929
Commercial real estate: other construction & land development		11,726		26,410
Commercial real estate: farmland & commercial		13,775		11,681
Commercial real estate: multifamily		295		353
Residential: first lien		1,266		1,175
Residential: junior lien		1,576		175
Consumer		75		45


Total non-accrual loans	$	62,823	$	71,768

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

The following tables detail key information regarding the Company's impaired loans by loan class for the year ended December 31, 2013:

	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

The following tables detail key information regarding the Company's impaired loans by loan class for the year ended December 31, 2012:

	December 31, 2012

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Recognized
	(Dollars in Thousands)
Loans with Related Allowance
Domestic
Commercial	$	1,633	$	1,679	$	1,477	$	21,126	$	39
Commercial real estate: other construction & land development		3,671		3,671		539		6,608		—
Commercial real estate: farmland & commercial		6,678		9,923		2,730		7,342		92


Total impaired loans with related allowance	$	11,982	$	15,273	$	4,746	$	35,076	$	131

	December 31, 2012

	Recorded Investment		Unpaid Principal Balance		Average Recorded Investment		Interest Recognized
	(Dollars in Thousands)
Loans with No Related Allowance
Domestic
Commercial	$	31,135	$	31,170	$	2,996	$	4
Commercial real estate: other construction & land development		24,989		25,160		39,449		141
Commercial real estate: farmland & commercial		7,267		9,340		16,536		8
Commercial real estate: multifamily		353		353		381		—
Residential: first lien		3,656		3,984		2,876		60
Residential: junior lien		1,850		1,944		1,939		104
Consumer		1,326		1,330		1,193		—
Foreign		447		447		166		6


Total impaired loans with no related allowance	$	71,023	$	73,728	$	65,536	$	323

Impaired loans with no related allowance decreased for December 31, 2013 when compared to December 31, 2012 due to a few previously identified impaired loans being paid off, recording large principal paydowns, or foreclosed upon and included in other real estate owned during 2013.

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

Management of the Company recognizes the risks associated with these impaired loans. However, management's decision to place loans in this category does not necessarily mean that losses will occur. In the current environment, troubled loan management can be protracted because of the legal and process problems that delay the collection of an otherwise collectable loan. Additionally, management believes that the collateral related to these impaired loans and/or the secondary support from guarantors mitigates the potential for losses from impaired loans. It is also important to note that even though the economic conditions in Texas and Oklahoma are weakened, we believe these markets are improving and better positioned to recover than many other areas of the country. Loans accounted for as "troubled debt restructuring," which are included in impaired loans, were not significant and totaled $20,358,000 and $29,395,000 as of December 31, 2013 and December 31, 2012, respectively.

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 December 31, 2013 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:

	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

	December 31, 2012

	30 - 59 Days		60 - 89 Days		90 Days or Greater		90 Days or greater & still accruing		Total Past due		Current		Total Portfolio
	(Dollars in Thousands)
Domestic
Commercial	$	4,393	$	471	$	3,386	$	2,689	$	8,250	$	760,860	$	769,110
Commercial real estate: other construction & land development		1,107		2,300		24,225		497		27,632		1,120,037		1,147,669
Commercial real estate: farmland & commercial		3,127		21,272		2,310		929		26,709		1,646,613		1,673,322
Commercial real estate: multifamily		685		—		353		—		1,038		81,910		82,948
Residential: first lien		4,305		2,510		10,645		9,657		17,460		439,271		456,731
Residential: junior lien		2,035		410		259		115		2,704		379,032		381,736
Consumer		1,598		404		915		882		2,917		71,597		74,514
Foreign		2,257		1,005		264		264		3,526		185,448		188,974


Total past due loans	$	19,507	$	28,372	$	42,357	$	15,033	$	90,236	$	4,684,768	$	4,775,004

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.

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 is as follows:

			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

			December 31, 2012

	Pass		Special Review		Watch List—Pass		Watch List— Substandard		Watch List— Impaired
			(Dollars in Thousands)
Domestic
Commercial	$	675,263	$	4,278	$	16,535	$	40,266	$	32,768
Commercial real estate: other construction & land development		1,038,749		55,079		2,614		22,567		28,660
Commercial real estate: farmland & commercial		1,486,572		109,144		46,316		17,345		13,945
Commercial real estate: multifamily		82,542		—		53		—		353
Residential: first lien		446,218		519		—		6,338		3,656
Residential: junior lien		378,000		77		309		1,500		1,850
Consumer		73,188		—		—		—		1,326
Foreign		188,499		—		28		—		447


Total	$	4,369,031	$	169,097	$	65,855	$	88,016	$	83,005

A summary of bank premises and equipment, by asset classification, at December 31, 2013 and 2012 were as follows:

	Estimated useful lives	2013			2012

		(Dollars in Thousands)
Bank buildings and improvements	5 – 40 years	$	470,386		$	433,942
Furniture, equipment and vehicles	1 – 20 years		260,932			258,222
Land			128,805			128,695
Real estate held for future expansion:
Land, building, furniture, fixture and equipment	7 – 27 years		511			562
Less: accumulated depreciation			(355,792	)		(340,134	)


Bank premises and equipment, net		$	504,842		$	481,287

The majority of the Company's identified intangibles are in the form of amortizable core deposit premium, with the exception of $809,000, which represents identified intangibles in the acquisition of the rights to the insurance agency contracts of InsCorp, Inc., acquired in 2008. Information on the Company's identified intangible assets follows:

	Carrying Amount		Accumulated Amortization		Net

	(Dollars in Thousands)
December 31, 2013:
Core deposit premium	$	58,675	$	56,298	$	2,377
Identified intangible (contract rights)		2,022		1,213		809


Total identified intangibles	$	60,697	$	57,511	$	3,186




December 31, 2012:
Core deposit premium	$	58,675	$	51,974	$	6,701
Identified intangible (contract rights)		2,022		904		1,118


Total identified intangibles	$	60,697	$	52,878	$	7,819

Amortization expense of intangible assets for the years ended December 31, 2013, 2012 and 2011, was $4,633,000, $4,651,000 and $5,293,000, respectively. Estimated amortization expense for each of the five succeeding fiscal years, and thereafter, is as follows:

There were no changes in the carrying amount of goodwill for the years ended December 31, 2013 and 2012.

Deposits as of December 31, 2013 and 2012 and related interest expense for the years ended December 31, 2013, 2012 and 2011 were as follows:

	2013		2012

	(Dollars in Thousands)
Deposits:
Demand—non-interest bearing
Domestic	$	2,175,694	$	2,002,920
Foreign		490,816		462,830


Total demand non-interest bearing		2,666,510		2,465,750


Savings and interest bearing demand
Domestic		2,364,905		2,350,872
Foreign		560,707		516,279


Total savings and interest bearing demand		2,925,612		2,867,151


Time, certificates of deposit $100,000 or more
Domestic		856,700		973,824
Foreign		938,940		1,025,089
Less than $100,000
Domestic		531,503		601,766
Foreign		324,160		353,633


Total time, certificates of deposit		2,651,303		2,954,312


Total deposits	$	8,243,425	$	8,287,213

	2013		2012		2011

	(Dollars in Thousands)
Interest expense:
Savings and interest bearing demand
Domestic		3,182	$	4,487	$	6,549
Foreign		580		801		1,234


Total savings and interest bearing demand		3,762		5,288		7,783


Time, certificates of deposit $100,000 or more
Domestic		5,761		8,263		10,299
Foreign		5,590		9,148		11,512
Less than $100,000
Domestic		3,065		4,945		7,468
Foreign		1,028		1,617		2,277


Total time, certificates of deposit		15,444		23,973		31,556


Total interest expense on deposits	$	19,206	$	29,261	$	39,339

Scheduled maturities of time deposits in amounts of $100,000 or more at December 31, 2013, were as follows:

The Company's bank subsidiaries have entered into repurchase agreements with an investment banking firm and individual customers of the bank subsidiaries. The purchasers have agreed to resell to the bank subsidiaries identical securities upon the maturities of the agreements. Securities sold under repurchase agreements were mortgage-backed book entry securities and averaged $1,041,186,000 and $1,276,831,000 during 2013 and 2012, respectively, and the maximum amount outstanding at any month end during 2013 and 2012 was $1,119,531,000 and $1,412,744,000, respectively.

Further information related to repurchase agreements at December 31, 2013 and 2012 is set forth in the following table:

	Collateral Securities				Repurchase Borrowing

	Book Value of Securities Sold		Fair Value of Securities Sold		Balance of Liability		Weighted Average Interest Rate
	(Dollars in Thousands)
December 31, 2013 term:
Overnight agreements	$	332,042	$	341,238	$	209,899		.17	%
1 to 29 days		27,954		28,288		18,666		.40
30 to 90 days		8,106		8,263		3,295		.43
Over 90 days		945,535		940,209		725,521		3.78


Total	$	1,313,637	$	1,317,998	$	957,381		2.91	%




December 31, 2012 term:
Overnight agreements	$	340,711	$	350,933	$	263,992		.28	%
1 to 29 days		10,378		10,910		6,992		1.10
30 to 90 days		33,619		35,097		22,078		1.05
Over 90 days		1,033,957		1,062,897		836,617		3.73


Total	$	1,418,665	$	1,459,837	$	1,129,679		2.85	%

The book value and fair value of securities sold includes the entire book value and fair value of securities partially or fully pledged under repurchase agreements.

Other borrowed funds include Federal Home Loan Bank borrowings, which are short and long-term fixed borrowings issued by the Federal Home Loan Bank of Dallas at the market price offered at the time of funding. These borrowings are secured by mortgage-backed investment securities and a portion of the Company's loan portfolio. The increase in other borrowed funds is a result of purchases of available-for-sale securities.

Further information regarding the Company's other borrowed funds at December 31, 2013 and 2012 is set forth in the following table:

	December 31,

	2013			2012
	(Dollars in Thousands)
Federal Home Loan Bank advances—short-term
Balance at year end	$	1,215,000		$	742,500
Rate on balance outstanding at year end		.17	%		.15	%
Average daily balance	$	833,868		$	412,919
Average rate		.16	%		.19	%
Maximum amount outstanding at any month end	$	1,280,500		$	1,005,500
Federal Home Loan Bank advances—long-term(1)
Balance at year end	$	8,950		$	6,527
Rate on balance outstanding at year end		3.53	%		3.51	%
Average daily balance	$	7,289		$	6,590
Average rate		3.53	%		3.51	%
Maximum amount outstanding at any month end	$	8,993		$	6,650

The Company has formed eight statutory business trusts under the laws of the State of Delaware, for the purpose of issuing trust preferred securities. The eight 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 December 31, 2013 and December 31, 2012, the principal amount of debentures outstanding totaled $190,726,000. As a result of the Company's participation in the TARP Capital Purchase Program, the Company was not permitted, without the consent of the Treasury Department, to redeem any of the Debentures. This restriction ceased to exist on December 23, 2011 and the Company exited the TARP Capital Purchase Program on November 28, 2012. One half of the Trust I securities were redeemed on June 8, 2011 and the remaining one half of the Trust I securities were redeemed on July 1, 2011 with the consent of the Treasury Department.

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.

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 December 31, 2013 and 2012, the total $190,726,000 of the Capital Securities outstanding qualified as Tier 1 capital.

The following table illustrates key information about each of the Debentures and their interest rates at December 31, 2013:

	Junior Subordinated Deferrable Interest Debentures		Repricing Frequency				Maturity Date	Optional Redemption Date(1)

	(in thousands)
Trust VI	$	25,774	Quarterly	3.69	%	LIBOR + 3.45	November 2032	February 2008
Trust VII		10,310	Quarterly	3.49	%	LIBOR + 3.25	April 2033	April 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


	$	190,726

Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding. The computation of diluted EPS assumes the issuance of common shares for all dilutive

potential common shares outstanding during the reporting period. The calculation of the basic EPS and the diluted EPS for the years ended December 31, 2013, 2012, and 2011 is set forth in the following table:

	Net Income (Numerator)			Per Share Amount

	(Dollars in Thousands, Except Per Share Amounts)
December 31, 2013:
Basic EPS
Net income available to common shareholders	$	126,351	67,195,180	$	1.88
Potential dilutive common shares		—	119,679


Diluted EPS	$	126,351	67,314,859	$	1.88




December 31, 2012:
Basic EPS
Net income available to common shareholders	$	93,473	67,236,681	$	1.39
Potential dilutive common shares		—	77,282


Diluted EPS	$	93,473	67,313,963	$	1.39




December 31, 2011:
Basic EPS
Net income available to common shareholders	$	113,869	67,506,554	$	1.69
Potential dilutive common shares		—	62,914


Diluted EPS	$	113,869	67,569,468	$	1.69

The Company has a deferred profit sharing plan for full-time employees with a minimum of one year of continuous employment. The Company's annual contribution to the plan is based on a percentage, as determined by the Board of Directors, of income before income taxes, as defined, for the year. Allocation of the contribution among officers and employees' accounts is based on length of service and amount of salary earned. Profit sharing costs of $3,500,000, $3,400,000 and $3,900,000 were charged to income for the years ended December 31, 2013, 2012, and 2011, respectively.

The Company provides international banking services for its customers through its bank subsidiaries. Neither the Company nor its bank subsidiaries have facilities located outside the United States. International operations are distinguished from domestic operations based upon the domicile of the customer.

Because the resources employed by the Company are common to both international and domestic operations, it is not practical to determine net income generated exclusively from international activities.

A summary of assets attributable to international operations at December 31, 2013 and 2012 are as follows:

At December 31, 2013, the Company had $130,116,000 in outstanding standby and commercial letters of credit to facilitate trade activities. The letters of credit are issued primarily in conjunction with credit facilities, which are available to various Mexican banks doing business with the Company.

Revenues directly attributable to international operations were $6,085,000, $7,714,000 and $9,870,000 for the years ended December 31, 2013, 2012 and 2011, respectively.

The Company files a consolidated U.S. Federal and State income tax return. The current and deferred portions of net income tax expense included in the consolidated statements of income are presented below for the years ended December 31:

	2013			2012			2011

	(Dollars in Thousands)
Current
U.S.	$	59,583		$	40,375		$	61,279
State		(1,530	)		2,234			5,083
Foreign		3			33			15


Total current taxes		58,056			42,642			66,377


Deferred
U.S.		(1,692	)		7,928			(2,296	)
State		(125	)		(5	)		(3	)


Total deferred taxes		(1,817	)		7,923			(2,299	)


Total income taxes	$	56,239		$	50,565		$	64,078

Total income tax expense differs from the amount computed by applying the U.S. Federal income tax rate of 35% for 2013, 2012 and 2011 to income before income taxes. The reasons for the differences for the years ended December 31 are as follows:

	2013			2012			2011

	(Dollars in Thousands)
Computed expected tax expense	$	64,183		$	55,634		$	66,941
Change in taxes resulting from:
Tax-exempt interest income		(4,828	)		(4,381	)		(3,682	)
State tax, net of federal income taxes and tax credit		(110	)		1,446			3,302
Tax refunds		(966	)		—			—
Other investment income		(2,656	)		(2,691	)		(3,083	)
Other		616			557			600


Actual tax expense	$	56,239		$	50,565		$	64,078

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2013 and 2012 are reflected below:

	2013			2012

	(Dollars in Thousands)
Deferred tax assets:
Loans receivable, principally due to the allowance for probable loan losses	$	25,365		$	24,323
Other real estate owned		3,878			3,919
Impairment charges on available-for-sale securities		5,327			3,611
Accrued expenses		399			137
Net unrealized gains on available for sale investment securities		24,235			—
Other		4,816			5,549


Total deferred tax assets		64,020			37,539


Deferred tax liabilities:
Bank premises and equipment, principally due to differences on depreciation		(20,729	)		(21,529	)
Net unrealized gains on available for sale investment securities		—			(36,156	)
Identified intangible assets and goodwill		(18,051	)		(18,133	)
Other		(11,476	)		(10,182	)


Total deferred tax liabilities		(50,256	)		(86,000	)


Net deferred tax asset (liability)	$	13,764		$	(48,461	)

The net deferred tax asset (liability) of $13,764,000 at December 31, 2013 and $(48,461,000) at December 31, 2012 is included in other assets or liabilities, respectively in the consolidated statements of condition.

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 December 31, 2013,749,000 shares were available for future grants under the 2012 Plan.

The fair value of each option award granted under the plan is estimated on the date of grant using a Black-Scholes-Merton option valuation model that uses the assumptions noted in the following table. Expected volatility is based on the historical volatility of the price of the Company's stock. The Company uses historical data to estimate the expected dividend yield and employee termination rates within the valuation model. The expected term of options is derived from historical exercise behavior. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

A summary of option activity under the stock option plans for the twelve months ended December 31, 2013 is as follows:

		Weighted average exercise price			Aggregate intrinsic value ($)

					(in Thousands)
Options outstanding at December 31, 2012	794,877	$	19.03
Plus: Options granted	8,500		21.33
Less:
Options exercised	19,075		13.83
Options expired	235,607		26.51
Options forfeited	33,552		16.94


Options outstanding at December 31, 2013	515,143		15.98	4.16		5,375




Options fully vested and exercisable at December 31, 2013	228,001		18.37	2.67		1,851

Stock-based compensation expense included in the consolidated statements of income for the years ended December 31, 2013, 2012 and 2011 was approximately $414,000, $474,000 and $387,000, respectively. As of December 31, 2013, there was approximately $808,000 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 1.78 years.

Other information pertaining to option activity during the twelve month period ending December 31, 2013, 2012 and 2011 is as follows:

As a participant in the Troubled Asset Relief Program Capital Purchase Program (the "CPP") until November 28, 2012, the Company was subject to certain compensation restrictions, which included a prohibition on the payment or accrual of any bonuses (including equity-based incentive compensation) to certain officers and employees except for awards of CPP-compliant long-term restricted stock and stock units.

On December 18, 2009, the Company's board of directors (the "Board") adopted the 2009 International Bancshares Corporation Long-Term Restricted Stock Unit Plan (the "Plan") to give the Company additional flexibility in the compensation of its officers, employees, consultants and advisors in compliance with all applicable laws and restrictions.

The Plan authorizes the Company to issue Restricted Stock Units ("RSUs") to officers, employees, consultants and advisors of the Company and its subsidiaries. The Plan provides that RSUs shall be issued by a committee of the Board appointed by the Board from time to time consisting of at least two (2) members of the Board, each of whom is both a non-employee director and an outside director. On December 18, 2009, the Board adopted resolutions creating the Long-Term Restricted Stock Unit Plan Committee to administer the Plan. RSUs issued under the Plan are not equity and are payable only in cash. The Plan provides for both the issuance of CPP-compliant long-term RSUs as well as RSUs that are not CPP-compliant.

Dennis E. Nixon, the Company's President, Chairman of the Board and a director of the Company, was awarded CPP-compliant RSU's granted as of December 19, 2012, December 16, 2011, December 15, 2010 and December 18, 2009 of $425,000, $400,000, $400,000 and $250,000 for his performance in 2012, 2011, 2010 and 2009, respectively. In order to meet the requirements of a CPP-compliant RSU, Mr. Nixon's RSUs do not exceed one-third of his total annual compensation in the respective year. Mr. Nixon's 2009 and 2010 RSU's vested and were paid in December 2012 in the respective cash amounts of $262,842 and $358,782. The 2011 RSU vested and was paid in December 2013 in the cash amount of $591,344. The 2012 RSU remains outstanding and will vest in December 2014.

The Company leases portions of its banking premises and equipment under operating leases. Total rental expense for the years ended December 31, 2013, 2012 and 2011 were $7,300,000, $8,300,000 and $12,200,000, respectively. Future minimum lease payments due under non-cancellable operating leases at December 31, 2013 were as follows:

It is expected that certain leases will be renewed, as these leases expire. Aggregate future minimum rentals to be received under non-cancellable sub-leases greater than one year at December 31, 2013 were $66,500,000.

Cash of approximately $96,087,000 and $84,070,000 at December 31, 2013 and 2012, respectively, was maintained to satisfy regulatory reserve requirements.

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 statements of condition and related statements of income, comprehensive income, shareholders' equity and cash flows 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.

In the ordinary course of business, the subsidiaries of the Company make loans to directors and executive officers of the Corporation, including their affiliates, families and companies in which they are principal owners. In the opinion of management, these loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risk of collectability or present other unfavorable features. The aggregate amounts receivable from such related parties amounted to approximately $51,554,000 and $51,102,000 at December 31, 2013 and 2012, respectively.

(19) Financial Instruments with Off-Statement of Condition Risk and Concentrations of Credit Risk

In the normal course of business, the bank subsidiaries are party to financial instruments with off-statement of condition risk to meet the financing needs of their customers. These financial instruments

(19) Financial Instruments with Off-Statement of Condition Risk and Concentrations of Credit Risk (Continued)

include commitments to their customers. These financial instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated statement of condition. The contract amounts of these instruments reflect the extent of involvement the bank subsidiaries have in particular classes of financial instruments. At December 31, 2013, the following financial amounts of instruments, whose contract amounts represent credit risks, were outstanding:

The Company enters into a standby letter of credit to guarantee performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved is represented by the contractual amounts of those instruments. Under the standby letters of credit, the Company is required to make payments to the beneficiary of the letters of credit upon request by the beneficiary so long as all performance criteria have been met. At December 31, 2013, the maximum potential amount of future payments is $108,683,000. At December 31, 2013, the fair value of these guarantees is not significant. Unsecured letters of credit totaled $42,503,000 and $28,383,000 at December 31, 2013 and 2012, respectively.

The Company enters into commercial letters of credit on behalf of its customers which authorize a third party to draw drafts on the Company up to a stipulated amount and with specific terms and conditions. A commercial letter of credit is a conditional commitment on the part of the Company to provide payment on drafts drawn in accordance with the terms of the commercial letter of credit.

The bank subsidiaries' exposure to credit loss in the event of nonperformance by the other party to the above financial instruments is represented by the contractual amounts of the instruments. The bank subsidiaries use the same credit policies in making commitments and conditional obligations as they do for on-statement of condition instruments. The bank subsidiaries control the credit risk of these transactions through credit approvals, limits and monitoring procedures. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates normally less than one year or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The bank subsidiaries evaluate each customer's credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the subsidiary banks upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies, but may include residential and commercial real estate, bank certificates of deposit, accounts receivable and inventory.

The bank subsidiaries make commercial, real estate and consumer loans to customers principally located in South, Central and Southeast Texas and the State of Oklahoma. Although the loan portfolio is diversified, a substantial portion of its debtors' ability to honor their contracts is dependent upon the economic conditions in these areas, especially in the real estate and commercial business sectors.

On December 23, 3008, as part of the Troubled Asset Relief Program Capital Purchase Program (the "TARP Capital Purchase Program") of the United States Department of the Treasury ("Treasury"), the Company issued to the Treasury, in exchange for aggregate consideration of $216 million, (i) 216,000 shares of the Company's fixed-rate cumulative perpetual preferred stock, Series A, par value $.01 per share (the "Senior Preferred Stock"), having a liquidation preference of $1,000 per share and (ii) a warrant to purchase 1,326,238 shares of the Company's common stock at a price per share of $24.43 and with a term of ten years (the "Warrant"). The Senior Preferred Stock paid a coupon rate of 5% of the first five years and 9% per year thereafter.

On November 28, 2012, the Company completed the repurchase of all of the 216,000 shares of the Senior Preferred Stock held by Treasury. The Company commenced the $216 million repayment during the third quarter of 2012 and completed the final payment in the fourth quarter of 2012. The Company paid a total of $41,520,139 in preferred stock dividends to the U.S. Treasury from December of 2008 to November 28, 2012. On June 12, 2013, the U.S. Treasury sold the Warrant to a third party. As of February 19, 2014, the Warrant is still outstanding.

Bank regulatory agencies limit the amount of dividends, which the bank subsidiaries can pay the Corporation, through IBC Subsidiary Corporation, without obtaining prior approval from such agencies. At December 31, 2013, the subsidiary banks could pay dividends of up to $584,000,000 to the Corporation without prior regulatory approval and without adversely affecting their "well-capitalized" status. In addition to legal requirements, regulatory authorities also consider the adequacy of the bank subsidiaries' total capital in relation to their deposits and other factors. These capital adequacy considerations also limit amounts available for payment of dividends. The Company historically has not allowed any subsidiary bank to pay dividends in such a manner as to impair its capital adequacy.

The Company and the bank subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-statement of condition items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table on the following page) of Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. Management believes, as of December 31, 2013, that the Company and each of the bank subsidiaries met all capital adequacy requirements to which they are subject.

As of December 31, 2013, the most recent notification from the Federal Deposit Insurance Corporation categorized all the bank subsidiaries as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as "well-capitalized," the Company and the bank subsidiaries must maintain minimum Total risk-based, Tier 1 risk based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the categorization of the Company or any of the bank subsidiaries as well-capitalized.

The Company's and the bank subsidiaries' actual capital amounts and ratios for 2013 are presented in the following table:

	Actual					For Capital Adequacy Purposes					To Be Well-Capitalized Under Prompt Corrective Action Provisions

	Amount		Ratio			Amount		Ratio			Amount		Ratio
						(greater than or equal to)		(greater than or equal to)			(greater than or equal to)		(greater than or equal to)
	(Dollars in Thousands)
As of December 31, 2013:
Total Capital (to Risk Weighted Assets):
Consolidated	$	1,442,837		20.36	%	$	566,870		8.00	%		N/A		N/A
International Bank of Commerce, Laredo		1,035,189		16.96			488,303		8.00		$	610,378		10.00	%
International Bank of Commerce, Brownsville		143,879		27.63			41,652		8.00			52,065		10.00
International Bank of Commerce, Zapata		57,675		32.65			14,130		8.00			17,663		10.00
Commerce Bank		64,585		36.45			14,175		8.00			17,719		10.00
Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	1,369,657		19.33	%	$	283,435		4.00	%		N/A		N/A
International Bank of Commerce, Laredo		969,731		15.89			244,151		4.00		$	366,227		6.00	%
International Bank of Commerce, Brownsville		138,467		26.60			20,826		4.00			31,239		6.00
International Bank of Commerce, Zapata		56,459		31.96			7,065		4.00			10,598		6.00
Commerce Bank		63,491		35.83			7,087		4.00			10,631		6.00
Tier 1 Capital (to Average Assets):
Consolidated	$	1,369,657		11.61	%	$	472,044		4.00	%	$	N/A		N/A
International Bank of Commerce, Laredo		969,731		10.09			384,497		4.00			480,622		5.00	%
International Bank of Commerce, Brownsville		138,467		13.33			41,553		4.00			51,942		5.00
International Bank of Commerce, Zapata		56,459		10.64			21,219		4.00			26,523		5.00
Commerce Bank		63,491		11.88			21,372		4.00			26,715		5.00

The Company's and the bank subsidiaries' actual capital amounts and ratios for 2012 are also presented in the following table:

	Actual					For Capital Adequacy Purposes					To Be Well-Capitalized Under Prompt Corrective Action Provisions

	Amount		Ratio			Amount		Ratio			Amount		Ratio
						(greater than or equal to)		(greater than or equal to)			(greater than or equal to)		(greater than or equal to)
	(Dollars in Thousands)
As of December 31, 2012:
Total Capital (to Risk Weighted Assets):
Consolidated	$	1,328,089		20.60	%	$	515,695		8.00	%		N/A		N/A
International Bank of Commerce, Laredo		945,384		17.19			440,038		8.00		$	550,048		10.00	%
International Bank of Commerce, Brownsville		128,788		27.36			37,659		8.00			47,074		10.00
International Bank of Commerce, Zapata		54,542		33.14			13,166		8.00			16,458		10.00
Commerce Bank		60,982		34.52			14,131		8.00			17,664		10.00
Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	1,266,799		19.65	%	$	257,848		4.00	%		N/A		N/A
International Bank of Commerce, Laredo		892,888		16.23			220,019		4.00		$	330,029		6.00	%
International Bank of Commerce, Brownsville		123,361		26.21			18,830		4.00			28,245		6.00
International Bank of Commerce, Zapata		52,967		32.18			6,583		4.00			9,875		6.00
Commerce Bank		59,200		33.52			7,065		4.00			10,598		6.00
Tier 1 Capital (to Average Assets):
Consolidated	$	1,266,799		10.86	%	$	466,624		4.00	%	$	N/A		N/A
International Bank of Commerce, Laredo		892,888		9.26			385,621		4.00			482,026		5.00	%
International Bank of Commerce, Brownsville		123,361		13.79			35,787		4.00			44,734		5.00
International Bank of Commerce, Zapata		52,967		10.64			19,918		4.00			24,897		5.00
Commerce Bank		59,200		11.27			21,004		4.00			26,255		5.00

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:

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 statements of condition at their fair value as of December 31, 2013 by level within the fair value measurement hierarchy.

			Fair Value Measurements at Reporting Date Using

			(in thousands)
	Assets/Liabilities Measured at Fair Value December 31, 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

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

			Fair Value Measurements at Reporting Date Using

			(in thousands)
	Assets/Liabilities Measured at Fair Value December 31, 2012		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	$	5,265,204	$	—	$	5,232,344	$	32,860
States and political subdivisions		238,675		—		238,675		—
Other		21,136		21,136		—		—


	$	5,525,015	$	21,136	$	5,471,019	$	32,860

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

Assumptions used in the discounted cash flow model as of December 31, 2013 and December 31, 2012 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):

Certain assets and liabilities are measured at fair value on a nonrecurring basis. They 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 assets measured at fair value on a non-recurring basis as of and for the period ended December 31, 2013 by level within the fair value measurement hierarchy:

The following table represents assets measured at fair value on a non-recurring basis as of and for the year ended December 31, 2012 by level within the fair value measurement hierarchy:

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 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. As of December 31, 2012, the Company had $73,646,000 of impaired commercial collateral dependent loans, of which $48,856,000 had an appraisal or evaluation performed within the 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 twelve months ended December 31, 2013 and the twelve months ended December 31, 2012, respectively the Company recorded $402,000 and $10,450,000 in charges to the allowance for probable loan losses in connection with loans transferred to other real estate owned. For the twelve months ended December 31, 2013 and twelve months ended December 31, 2012, respectively, the Company recorded $1,204,000 and $0 in adjustments to fair value in connection with other real estate owned.

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

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

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 2.

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 December 31, 2013, and December 31, 2012, the carrying amount of fixed rate performing loans was $1,243,252,000 and $1,189,585,000, respectively, and the estimated fair value was $1,196,916,000 and $1,126,228,000, respectively.

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 December 31, 2013 and December 31, 2012. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is based on currently offered rates. Time deposits are within Level 3 of the fair value hierarchy. At December 31, 2013 and December 31, 2012, the carrying amount of time deposits was $2,651,303,000 and $2,954,312,000, respectively, and the estimated fair value was $2,649,452,000 and $2,962,190,000, respectively.

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 December 31, 2013 and December 31, 2012. The fair value of the long-term instruments is based on established market spreads using option adjusted spreads methodology. Long-term repurchase agreements are within level 3 of the fair value hierarchy. At December 31, 2013 and December 31, 2012, the carrying amount of long-term repurchase agreements was $710,000,000 and $800,000,000 respectively, and the estimated fair value was $792,215,500 and $932,007,000, respectively.

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 December 31, 2013 and December 31, 2012.

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 December 31, 2013 and December 31, 2012. The fair value of the long-term borrowings is based on established market spreads for similar types of borrowings. The long-term borrowings are included in Level 2 of the fair value hierarchy. At December 31, 2013 and December 31, 2012, the carrying amount of the long-term FHLB borrowings was $8,950,000 and $6,527,000, respectively, and the estimated fair value was $8,950,000 and $7,073,000, respectively.

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

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.

(22) International Bancshares Corporation (Parent Company Only) Financial Information

	2013			2012

ASSETS
Cash	$	8,106		$	1,539
Other investments		62,381			63,044
Notes receivable		313			409
Investment in subsidiaries		1,556,932			1,573,679
Other assets		197			617


Total assets	$	1,627,929		$	1,639,288




LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Junior subordinated deferrable interest debentures	$	190,726		$	190,726
Due to IBC Trading		21			21
Other liabilities		12,774			12,833


Total liabilities		203,521			203,580


Shareholders' equity:
Common shares		95,744			95,725
Surplus		163,947			163,287
Retained earnings		1,467,000			1,369,543
Accumulated other comprehensive (loss) income		(43,774	)		65,662


		1,682,917			1,694,217
Less cost of shares in treasury		(258,509	)		(258,509	)


Total shareholders' equity		1,424,408			1,435,708


Total liabilities and shareholders' equity	$	1,627,929		$	1,639,288

(23) International Bancshares Corporation (Parent Company Only) Financial Information

	2013		2012			2011

Income:
Dividends from subsidiaries	$	30,000	$	229,250		$	54,800
Interest income on notes receivable		18		27			19
Interest income on other investments		12,301		6,759			7,517
Other interest income		—		18			69
Other		26		686			41


Total income		42,345		236,740			62,446
Expenses:
Interest expense (Debentures)		4,665		6,595			11,073
Other		1,889		3,867			6,543


Total expenses		6,554		10,462			17,616


Income before federal income taxes and equity in undistributed net income of subsidiaries		35,791		226,278			44,830
Income tax expense (benefit)		2,529		(738	)		(3,513	)


Income before equity in undistributed net income of subsidiaries		33,262		227,016			48,343
Equity in undistributed (distributed) net income of subsidiaries		93,089		(119,181	)		78,806


Net income		126,351		107,835			127,149


Preferred stock dividends and discount accretion		—		14,362			13,280


Net income available to common shareholders	$	126,351	$	93,473		$	113,869

(24) International Bancshares Corporation (Parent Company Only) Financial Information

Statements of Cash Flows
(Parent Company Only)

Years ended December 31, 2013, 2012 and 2011
(Dollars in Thousands)

	2013			2012			2011

Operating activities:
Net income	$	126,351		$	107,835		$	127,149
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of junior subordinated interest deferrable debentures		—			—			9
Investment securities transactions, net		—			—			2
Impairment charges on available for sale securities		754			—			—
Stock compensation expense		414			474			387
(Decrease) increase in other liabilities		(969	)		6,711			(3,234	)
Equity in (undistributed) distributed net income of subsidiaries		(93,089	)		119,181			(78,806	)


Net cash provided by operating activities		33,461			234,201			45,507


Investing activities:
Principal collected on mortgage-backed securities		1,207			1,985			1,355
Net decrease (increase) in notes receivable		96			86			(245	)
Decrease (increase) in other assets and other investments		432			6,418			(4,193	)


Net cash provided by (used in) investing activities		1,735			8,489			(3,083	)


Financing activities:
Repayment of trust preferred securities		—			—			(10,400	)
Redemption of preferred shares		—			(216,000	)		—
Proceeds from stock transactions		265			51			113
Payments of cash dividends—common		(28,894	)		(26,894	)		(25,648	)
Payments of cash dividends—preferred		—			(10,260	)		(10,800	)
Purchase of treasury stock		—			(1,716	)		(6,435	)


Net cash used in financing activities		(28,629	)		(254,819	)		(53,170	)


Increase (decrease) in cash		6,567			(12,129	)		(10,746	)
Cash at beginning of year		1,539			13,668			24,414


Cash at end of year	$	8,106		$	1,539		$	13,668

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Condensed Quarterly Income Statements
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)

	Fourth Quarter		Third Quarter		Second Quarter		First Quarter

2013
Interest income	$	98,133	$	91,650	$	86,324	$	87,110
Interest expense		13,447		13,007		13,700		14,478


Net interest income		84,686		78,643		72,624		72,632
Provision for probable loan losses		5,407		5,800		4,342		7,419
Non-interest income		45,167		44,481		46,705		53,252
Non-interest expense		67,830		70,227		73,714		80,861


Income before income taxes		56,616		47,097		41,273		37,604
Income taxes		17,673		15,271		13,760		9,535


Net income available to common shareholders	$	38,943	$	31,826	$	27,513	$	28,069




Per common share:
Basic
Net income	$	.58	$	.47	$	.41	$	.42




Diluted
Net income	$	.58	$	.47	$	.41	$	.42

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Condensed Quarterly Income Statements
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)

	Fourth Quarter		Third Quarter		Second Quarter		First Quarter

2012
Interest income	$	92,399	$	93,775	$	93,683	$	95,782
Interest expense		16,374		17,420		20,040		20,665


Net interest income		76,025		76,355		73,643		75,117
Provision for probable loan losses		11,218		5,349		6,107		5,285
Non-interest income		42,588		74,007		40,819		43,177
Non-interest expense		68,694		106,444		72,091		68,143


Income before income taxes		38,701		38,569		36,264		44,866
Income taxes		12,981		12,691		11,714		13,179


Net income		25,720		25,878		24,550		31,687


Preferred stock dividends and discount accretion		3,819		3,845		3,355		3,343


Net income available to common shareholders	$	21,901	$	22,033	$	21,195	$	28,344




Per common share:
Basic
Net income	$	.32	$	.33	$	.32	$	.42




Diluted
Net income	$	.32	$	.33	$	.31	$	.42

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Condensed Average Statements of Condition
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)

The following table sets forth a comparative summary of average interest earning assets and average interest bearing liabilities and related interest yields for the years ended December 31, 2013, 2012, and 2011:

	2013								2012								2011

	Average Balance			Interest		Average Rate/Cost			Average Balance			Interest		Average Rate/Cost			Average Balance			Interest		Average Rate/Cost
	(Dollars in Thousands)
Assets
Interest earning assets:
Loan, net of unearned discounts:
Domestic	$	4,802,120		$	256,942		5.35	%	$	4,730,903		$	260,874		5.51	%	$	5,022,584		$	282,644		5.63	%
Foreign		176,713			6,085		3.44			201,825			7,714		3.82			239,017			9,870		4.13
Investment securities:
Taxable		5,051,736			87,198		1.73			4,877,210			94,885		1.95			4,731,408			113,650		2.40
Tax-exempt		232,266			12,877		5.54			210,320			11,663		5.55			190,933			10,091		5.29
Other		45,578			115		.25			200,109			503		.25			120,777			1,869		1.55


Total interest-earning assets		10,308,413			363,217		3.52	%		10,220,367			375,639		3.68	%		10,304,719			418,124		4.06	%
Non-interest earning assets:
Cash and due from banks		270,619								410,726								319,466
Bank premises and equipment, net		470,183								441,981								456,840
Other assets		844,360								861,145								751,654
Less allowance for probable loan losses		(66,001	)							(77,103	)							(83,919	)


Total	$	11,827,574							$	11,857,116							$	11,748,760




Liabilities and Shareholders' Equity
Interest bearing liabilities:
Savings and interest bearing demand deposits	$	2,879,115		$	3,762		.13	%	$	2,806,657			5,288		.19	%	$	2,625,958		$	7,783		.30	%
Time deposits:
Domestic		1,465,250			8,826		.60			1,673,590			13,208		.79			1,730,016			17,767		1.03
Foreign		1,306,572			6,618		.51			1,608,219			10,765		.67			1,646,619			13,789		.84
Securities sold under repurchase agreements		1,041,192			29,171		2.80			1,276,841			37,645		2.95			1,415,775			42,263		2.99
Other borrowings		841,158			1,590		.19			419,509			998		.24			740,281			1,623		.22
Junior subordinated interest deferrable debentures		190,726			4,665		2.45			190,726			6,595		3.46			195,540			11,073		5.66


Total interest bearing liabilities		7,724,013			54,632		.71	%		7,975,542			74,499		.93	%		8,354,189			94,298		1.13	%
Non-interest bearing liabilities:
Demand Deposits		2,594,727								2,072,539								1,817,781
Other liabilities		97,237								305,214								117,295
Shareholders' equity		1,411,597								1,503,821								1,459,495


Total	$	11,827,574							$	11,857,116							$	11,748,760




Net interest income				$	308,585							$	301,140							$	323,826




Net yield on interest earning assets							2.99	%							2.95	%							3.14	%


OFFICERS		DIRECTORS
DENNIS E. NIXON		DENNIS E. NIXON
Chairman of the Board and President		President, International Bank of Commerce
R. DAVID GUERRA		IRVING GREENBLUM
Vice President		International Investments/Real Estate
EDWARD J. FARIAS		R. DAVID GUERRA
Vice President		President
		International Bank of Commerce
IMELDA NAVARRO		Branch in McAllen, TX
Treasurer
		DOUG HOWLAND
WILLIAM J. CUELLAR		Owner
Auditor		Construction & Construction Materials Company
		Investments
MARISA V. SANTOS
Secretary		IMELDA NAVARRO
		Senior Executive Vice President
HILDA V. TORRES		International Bank of Commerce
Assistant Secretary
		PEGGY NEWMAN
		Investments
		LARRY NORTON
		President
		Norton Stores, Inc.
		LEONARDO SALINAS
		Investments
		ANTONIO R. SANCHEZ, JR.
		Chairman of the Board
		Sanchez Oil & Gas Corporation
		Investments

	Maturing

	Within one year		After one but within five years		After five years		Total
	(Dollars in Thousands)
Commercial, financial and agricultural	$	780,975	$	1,837,848	$	275,956	$	2,894,779
Real estate—construction		530,378		638,562		39,568		1,208,508
Foreign		124,578		41,200		16,064		181,842


Total	$	1,435,931	$	2,517,610	$	331,588	$	4,285,131

	Interest sensitivity

	Fixed Rate		Variable Rate
	(Dollars in Thousands)
Due after one but within five years	$	210,378	$	2,307,232
Due after five years		64,160		267,428


Total	$	274,538	$	2,574,660


Due within 3 months or less	$	673,126
Due after 3 months and within 6 months		441,749
Due after 6 months and within 12 months		494,928
Due after 12 months		185,837


	$	1,795,640

	Years ended December 31,

	2013			2012			2011
Percentage of net income to:
Average shareholders' equity		8.95	%		7.17	%		8.71	%
Average total assets		1.07			.91			1.08
Percentage of average shareholders' equity to average total assets		11.93			12.68			12.42
Percentage of cash dividends per share to net income per share		22.87			28.78			22.49

		High		Low

2013:	First quarter	$	21.00	$	18.26
	Second quarter		22.93		17.95
	Third quarter		25.85		20.85
	Fourth quarter		27.20		21.34

	Held to Maturity Maturing

	Within one year					After one but within five years					After five but within ten years					After ten years
	Adjusted					Adjusted					Adjusted					Adjusted
	Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield
	(Dollars in Thousands)
Other securities	$	125		1.43	%	$	2,275		1.36	%	$	—		—	%	$	—			%


Total	$	125		1.43	%	$	2,275		1.36	%	$	—		—	%	$	—		—	%

	2013			2012			2011

	(Dollars in Thousands)
Balance at January 1,	$	1,140		$	1,359		$	437
Charge-offs		(22	)		(111	)		(171	)
Recoveries		5			—			159


Net charge-offs		(17	)		(111	)		(12	)
Charge (credit) to expense		10			(108	)		934


Balance at December 31	$	1,133		$	1,140		$	1,359

		High		Low

2012:	First quarter	$	21.89	$	18.32
	Second quarter		21.49		17.57
	Third quarter		20.40		17.45
	Fourth quarter		19.47		16.92

		Average Price Paid Per Share			Approximate Dollar Value of Shares Available for Repurchase(1)

October 1—October 31, 2013	—		—	—	$	40,000,000
November 1—November 30, 2013	—		—	—		40,000,000
December 1—December 31, 2013	—		—	—		40,000,000


Total	—	$	—	—

Plan Category		(B) Weighted average exercise price of outstanding options, warrants and rights

Equity Compensation plans approved by security holders	515,143	$	15.98	749,000


Total	515,143	$	15.98	749,000

			INDEXED RETURNS December 31,

	Base Period 2008		INDEXED RETURNS December 31,
Company / Index	Base Period 2008		2009		2010		2011		2012		2013
International Bancshares Corporation		100		88.72		95.73		89.82		90.39		134.40
S&P 500 Index		100		126.46		145.51		148.59		172.37		228.19
S&P 500 Banks		100		93.41		111.94		99.94		124.16		168.52

	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


Balance at December 31, 2012	$	10,432
Impairment charges recognized during period		1,374


Balance at December 31, 2013	$	11,806


Balance at December 31, 2011	$	9,393
Impairment charges recognized during period		1,039


Balance at December 31, 2012	$	10,432


Balance at December 31, 2010	$	8,416
Impairment charges recognized during period		977


Balance at December 31, 2011	$	9,393

	Total

	(in thousands)
2014	$	2,389
2015		452
2016		295
2017		25
2018		25
Thereafter		—


Total	$	3,186

	Total

	(in thousands)
2014	$	2,370,338
2015		187,430
2016		63,018
2017		28,521
2018		1,940
Thereafter		56


Total	$	2,651,303

	2013			2012

	(Dollars in Thousands)
Loans:
Commercial	$	142,145		$	148,770
Others		39,697			40,204


		181,842			188,974
Less allowance for probable loan losses		(1,133	)		(1,140	)


Net loans	$	180,709		$	187,834




Accrued interest receivable	$	617		$	902



Expected Life (Years)	7.63		7.63
Dividend yield	2.33	%	2.33	%
Interest rate	2.86	%	1.58	%
Volatility	47.28	%	47.30	%


Commitments to extend credit	$	1,715,365,000
Credit card lines		61,120,000
Standby letters of credit		108,683,000
Commercial letters of credit		21,434,000


Balance at December 31, 2012	$	32,860
Principal paydowns		(5,440	)
Total unrealized gains (losses) included in:
Other comprehensive income		1,806
Impairment realized in earnings		(1,374	)


Balance at December 31, 2013	$	27,852

			Fair Value Measurements at Reporting Date Using

			(in thousands)
	Assets/Liabilities Measured at Fair Value Year ended December 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Net Provision During Period
Measured on a non-recurring basis:
Assets:
Impaired loans	$	11,981	$	—	$	—	$	11,981	$	295
Other real estate owned		18,749		—		—		18,749		—