2
0
1
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21MAR200523282374
INTERNATIONAL BANCSHARES CORPORATION
ALL BANKS MEMBER FDIC
MEMBER BANKS:
International Bank Of Commerce
1200 San Bernardo Avenue
(956) 722-7611
Laredo
7002 San Bernardo Ave.
(956) 728-0060
1002 Matamoros
(956) 726-6622
1300 Guadalupe
(956) 726-6601
2418 Jacaman Rd.
(956) 764-6161
5300 San Dario Ste. 440D
(956) 728-0063
5300 San Dario Ste. 202
(956) 790-6500
9710 Mines Road
(956) 728-0092
4501 San Bernardo
(956) 722-0485
7909 McPherson Ave.
(956) 728-0064
2442 San Isidro Pkwy
(956) 726-6611
2415 S. Zapata Hwy.
(956) 728-0061
5610 San Bernardo
(956) 726-6688
2320 Bob Bullock Lp 20
(956) 728-0062
4401 Highway 83 South
(956) 794-8140
1600 Water Street, Suite B520
(956) 722-7611
Administration Center
2418 Jacaman Rd. (Rear)
(956) 722-7611
San Antonio
130 East Travis
(210) 518-2500
5029 Broadway
(210) 518-2523
6630 Callaghan
(210) 369-2960
2201 NW Military Dr.
(210) 366-0617
12400 Hwy. 281 North
(210) 369-2900
16339 Huebner Rd.
(210) 369-2974
8650 Fredericksburg Rd.
(210) 930-9811
2310 SW Military Drive, Suite 216
(210) 518-2558
1500 NE Lp. 410
(210) 281-2400
18750 Stone Oak Pkwy
(210) 496-6111
5300 Walzem Rd.
(210) 564-2300
11831 Bandera Rd.
(210) 369-2980
3119 SE Military Drive
(210) 354-6980
327 SW Loop 410
(210) 930-9825
938 SW Military Dr.
(210) 930-9815
11002 Culebra
(210) 930-9850
Service Center
2416 Cee Gee
(210) 821-4700
8770 Tesoro
(210) 821-4700
Luling
200 S. Pecan St.
(830) 875-2445
Marble Falls
2401 Hwy. 281 North
(830) 693-4301
San Marcos
1081 Wonder World
(512) 353-1011
Shertz
3800 Hwy 3009
(210) 354-6982
McAllen
One S. Broadway
(956) 686-0263
7124 N. 23rd.
(956) 630-9310
301 S. 10th St.
(956) 688-3610
3600 N.10th. St.
(956) 688-3690
2200 S. 10th St. (La Plaza East)
(956) 688-3670
802 S. Jackson Road
(956) 630-9360
2200 S. 10th St. (La Plaza West)
(956) 688-3660
2225 Nolana
(956) 688-3600
1200 E. Jackson
(956) 688-3685
2800 Nolana
(956) 688-3620
2900 W. Exp 83
(956) 630-9350
Alamo
1421 West Frontage Rd.
(956) 688-3645
Alton
215 West Martin Ave.
(956) 630-9319
Edinburg
400 S. Closner
(956) 688-3640
4101 S. McColl
(956) 630-9337
1724 W. University Dr. Ste. B
(956) 688-3680
2205 W. University Dr.
(956) 630-9340
Mission
900 N. Bryan Rd.
(956) 688-3630
200 E. Griffin Pkwy
(956) 632-3512
2410 E. Expressway 83
(956) 688-3625
121 S. Shary Rd.
(956) 630-9365
Pharr
401 South Cage
(956) 688-3635
1007 North I Rd.
(956) 688-3655
Weslaco
606 S. Texas Blvd.
(956) 688-3605
1310 N. Texas
(956) 937-9500
Hidalgo
1023 S. Bridge
(956) 688-3665
San Juan
108 E. FM 495
(956) 630-9320
Palmhurst
215 E. Mile 3 Rd.
(956) 688-3675
Penitas
1705 Expressway 83
(956) 630-9347
Corpus Christi
221 S. Shoreline
(361) 888-4000
6130 S. Staples
(361) 991-4000
4622 Everhart
(361) 903-7265
14066 Northwest Blvd.
(361) 903-7285
Flour Bluff
1317 Waldron Road
(361) 886-9950
Sinton
301 West Sinton
(361) 364-1230
Rockport
2701 Hwy. 35 N.
(361) 729-0500
Aransas Pass
2501 W. Wheeler Ave.
(361) 729-0500
Portland
1800 US Hwy 181
(361) 886-9910
Port Lavaca
311 N. Virginia St.
(361) 552-9771
Bay City
1916 7th Street
(979) 245-5781
Victoria
6411 N. Navarro
(361) 575-8394
Houston
5615 Kirby Dr.
(713) 526-1211
8203 S. Kirkwood
(713) 285-2165
1001 McKinney Ste. 150
(713) 285-2140
3200 Woodridge, Ste. 1350
(713) 285-2266
3939 Montrose
(713) 285-2195
5085 Westheimer Ste. 4640
(713) 285-2296
1545 Eldridge Parkway
(713) 285-2042
Richmond
5250 FM 1460
(832) 595-0920
Sugarland
10570 State Hwy 6
(713) 285-2199
Katy
544 West Grand Parkway
(713) 285-2037
Lake Jackson
212 That Way
(979) 297-2466
Angleton
130 W. Mulberry
(979) 849-7711
Freeport
1208 N. Brazosport Blvd.
(979) 233-2677
Dickinson
2301 West FM 646
(713) 285-2021
Eagle Pass
2395 E. Main Street
(830) 773-2313
2538 E. Main Street
(830) 773-2313
439 Main Street
(830) 773-2313
2305 Del Rio Blvd.
(830) 773-2313
455 S. Bibb Ave. Ste. 502
(830) 773-2313
2135 East Main Street
(830) 773-2313
Del Rio
2410 Dodson St.
(830) 775-4265
1507 Veterans Blvd
(830) 775-4265
2205 Veterans Blvd, Suite E9
(830) 775-4265
Uvalde
3100 E. Hwy. 90
(830) 278-8045
2065 E. Main St.
(830) 278-8045
Austin
500 West 5th St.
(512) 397-4506
10405 FM 2222
(512) 397-4584
2817 E. Cesar Chavez
(512) 320-9650
12625 North IH 35 Bldg. D
(512) 397-4570
11400 Burnett Road Bldg. 46
(512) 397-4595
9900 South IH 35 Bldg. Y
(512) 397-4530
4025 S. FM 620
(512) 320-9575
First Equity
9606 N. Mopac Expressway
Ste 100
(512) 346-8892
Bastrop
701 W. Hwy 71
(512) 308-9412
Cedar Park
301 W. Whitestone Blvd
(512) 397-4552
Round Rock
1850 Gattis School Rd.
(512) 320-9530
Leander
1695 US Hwy 183
(512) 320-9540
Dallas
3800 Maple Ave.
(469) 357-3805
Oklahoma
Ardmore
2302 12th Ave.
(580) 223-0345
International Bank Of Commerce
1200 San Bernardo Avenue
(956) 722-7611
Broken Arrow
6412 S. Elm Pl.
(918) 497-2492
8112 Garnett Rd.
(918) 497-2840
Chickasha
628 Grand Ave.
(405) 775-8052
Claremore
1050 N. Lynn Riggs Blvd.
(918) 497-2456
Clinton
1002 W. Frisco Ave.
(580) 323-0730
Duncan
1006 Main
(580) 255-8187
2311 N. Hwy 81
(580) 255-9055
Edmond
1812 SE 15th St.
(405) 775-8061
421 S. Santa Fe Ave.
(405) 775-8055
Tulsa
2808 E. 101st St.
(918) 497-2810
1951 S. Yale Ave.
(918) 497-2452
4202 S. Garnett
(918) 497-2880
2250 E. 73rd St
(918) 497-2400
11 E. 5th St.
(918) 497-2449
8202 E. 71st St
(918) 497-2454
5302 E. Skelly Dr.
(918) 497-2453
Chandler
3108 E. First St.
(405) 258-2351
Oklahoma City
3817 NW Expressway
(405) 841-2100
100 W. Park Ave.
(405) 775-8093
5701 N. May Ave.
(405) 775-8056
2120 Saunders
(956) 724-1616
10500 S. Pennsylvania Ave
(405) 775-8058
2301 N. Portland Ave.
(405) 775-8068
12241 N. May Ave.
(405) 775-8059
4902 N. Western Ave.
(405) 775-8054
14001 N. McArthur Blvd
(405) 775-1710
Lawton
2101 W. Gore
(580) 355-0253
6425 NW Cache Rd.
(580) 250-4311
Miami
2520 N. Main
(918) 542-4411
Midwest City
2200 S. Douglas Blvd.
(405) 775-8057
Moore
513 NE 12th
(405) 775-8066
901 SW 19th
(405) 775-1720
Commerce Bank
5800 San Dario
Laredo, Texas 78041
(956) 724-1616
2302 Blaine St.
(956) 724-1616
Pauls Valley
700 W. Grant Ave.
(405) 238-7318
Purcell
430 W. Lincoln St.
(405) 775-8094
Sand Springs
3402 State Hwy. 97
(918) 497-2459
Sapulpa
911 E. Taft St.
(918) 497-2458
Shawnee
2512 N. Harrison Ave.
(405) 775-8067
Sulphur
2009 W. Broadway Ave.
(580) 622-3118
Weatherford
109 E. Franklin Ave.
(580) 772-7441
Stillwater
1900 N. Perkins
(405) 372-0889
Owasso
9350 N. Garnett
(918) 497-2835
Elk City
1504 W. 3rd St.
(580) 225-7200
Norman
1461 24th Ave.
(405) 841-4744
Lindsey
209 E. Cherokee
(405) 756-4494
Muskogee
3143 Azalea Park Drive
(918) 682-2300
Bixby
11886 S. Memorial
(918) 497-2855
Bethany
7723 NW 23rd St.
(405) 775-8063
Grove
100 E. 3rd St.
(918)786-4438
Guthrie
120 N. Division St.
(405) 775-8064
1200 Welby Court
(956) 724-1616
International Bank of Commerce, Brownsville
1600 Ruben Torres Blvd
Brownsville, TX 78522-1831
(956) 547-1000
1623 Central Blvd.
(956) 547-1323
4520 E. 14th St.
(956) 547-1300
2370 N. Expressway
(956) 547-1380
630 E. Elizabeth St.
(956) 547-1350
79 E. Alton Gloor Blvd
(956) 547-1360
3600 W. Alton Gloor Blvd.
(956) 547-1390
South Padre Island
911 Padre Blvd.
(956) 547-1471
Port Isabel
1401 W. Hwy. 100
(956) 943-2108
Harlingen
501 S. Dixieland Rd.
(956) 428-6902
321 S. 77th Sunshine Strip
(956) 428-6454
1801 W. Lincoln
(956)428-4559
International Bank of Commerce, Zapata
908 N. US Highway 83
Zapata, TX 78076
(956) 765-8361
Roma
1702 Grant St.
(956) 849-1047
Alice
2001 E. Main St.
(361) 661-1211
Rio Grande City
4015 E. Hwy. 83
(956) 487-5531
4534 E. Hwy. 83
(956) 488-6367
4031 E. Hwy 83
(956) 487-5535
Hebbronville
401 N. Smith Ave.
(361) 527-2645
Kingsville
1320 General Cavazos Blvd
(361) 516-1040
Beeville
802 E. Houston St.
(361) 358-8700
Freer
405 S. Norton
(361) 661-1211
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
(Consolidated)
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, 2017. 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.
SELECTED FINANCIAL DATA
2017
AS OF OR FOR THE YEARS ENDED DECEMBER 31,
2015
(Dollars in Thousands, Except Per Share Data)
2016
2014
2013
STATEMENT OF CONDITION
Assets . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities available-for-
sale . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loans . . . . . . . . . . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowed funds . . . . . . . . . . . .
Junior subordinated deferrable
interest debentures . . . . . . . . . . . . . . .
Shareholders’ equity. . . . . . . . . . . . . .
INCOME STATEMENT
Interest income . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . .
Provision for probable loan losses . .
Non-interest income . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . .
Income before income taxes . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . .
Net income available to common
shareholders . . . . . . . . . . . . . . . . . . . .
Per common share:
$ 12,184,698
$ 11,804,041 $ 11,772,869 $ 12,196,520
$ 12,079,477
4,154,470
6,280,485
8,544,892
1,195,225
4,177,349
5,900,027
8,610,089
733,375
4,199,372
5,883,926
8,536,253
505,750
4,911,963
5,614,417
8,438,625
1,073,944
5,304,579
5,129,074
8,243,425
1,223,950
160,416
1,838,980
160,416
1,724,667
161,416
1,665,503
175,416
1,580,658
190,726
1,424,408
$
$
415,136
38,931
376,205
11,221
150,406
293,748
221,642
64,206
157,436
$
387,914 $
43,129
344,785
19,859
161,702
289,625
197,003
63,071
133,932
396,754 $
44,317
352,437
24,405
155,734
276,924
206,842
70,116
136,726
393,599
46,543
347,056
14,423
178,348
281,043
229,938
76,787
153,151
363,217
54,632
308,585
22,968
189,605
292,632
182,590
56,239
126,351
$
157,436
$
133,932 $
136,726 $
153,151
$
126,351
Basic . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . .
$
$
2.38
2.36
$
$
2.03 $
2.02 $
2.06 $
2.05 $
2.29
2.28
$
$
1.88
1.88
1
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, 2017. The following discussion
should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017,
and the Selected Financial Data and Consolidated Financial Statements included elsewhere herein.
Special Cautionary Notice Regarding Forward Looking Information
Certain matters discussed in this report, excluding historical information, include forward-looking statements,
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, and are subject to the safe harbor created by these sections. Although the Company believes
such forward-looking statements are based on reasonable assumptions, no assurance can be given that every objective will
be reached. The words “estimate,” “expect,” “intend,” “believe” and “project,” as well as other words or expressions of a
similar meaning are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on
forward-looking statements, which speak only as of the date of this report. Such statements are based on current
expectations, are inherently uncertain, are subject to risks and should be viewed with caution. Actual results and experience
may differ materially from the forward-looking statements as a result of many factors.
Risk factors that could cause actual results to differ materially from any results that are projected, forecasted,
estimated or budgeted by the Company in forward-looking statements include, among others, the following possibilities:
• Local, regional, national and international economic business conditions and the impact they may have on
the Company, the Company’s customers, and such customers’ ability to transact profitable business with the
Company, including the ability of its borrowers to repay their loans according to their terms or a change in
the value of the related collateral.
• Volatility and disruption in national and international financial markets.
• Government intervention in the U.S. financial system.
• The Company relies, in part, on external financing to fund the Company’s operations from the FHLB, the
Fed and other sources, and the unavailability of such funding sources in the future could adversely impact
the Company’s growth strategy, prospects and performance.
• Changes in consumer spending, borrowing and saving habits.
• Changes in interest rates and market prices, which could reduce the Company’s net interest margins, asset
valuations and expense expectations, including, without limitation, the repeal of federal prohibitions on the
payment of interest on demand deposits.
• Changes in the capital markets utilized by the Company and its subsidiaries, including changes in the interest
rate environment that may reduce margins.
• Changes in state and/or federal laws and regulations to which the Company and its subsidiaries, as well as
their customers, competitors and potential competitors, are subject, including, without limitation, the impact
of the Consumer Financial Protection Bureau (“CFPB”) as a regulator of financial institutions, changes in
the accounting, tax and regulatory treatment of trust preferred securities, as well as changes in banking, tax,
securities, insurance, employment, environmental and immigration laws and regulations and the risk of
litigation that may follow.
• Changes in our liquidity position.
• Changes in U.S.—Mexico trade, including, without limitation, reductions in border crossings and commerce
resulting from the Homeland Security Programs called “US-VISIT,” which is derived from Section 110 of
the Illegal Immigration Reform and Immigrant Responsibility Act of 1996, renegotiation and potential
2
changes to the North American Free Trade Agreement (“NAFTA”), or the possible imposition of tariffs on
imported goods.
The reduction of deposits from nonresident alien individuals due to the new IRS rules requiring U.S. financial
institutions to report to the IRS deposit interest payments made to nonresident alien individuals.
The loss of senior management or operating personnel.
Increased competition from both within and outside the banking industry.
The timing, impact and other uncertainties of the Company’s potential future acquisitions, including the
Company’s ability to identify suitable potential future acquisition candidates, the success or failure in the
integration of their operations and the Company’s ability to maintain its current branch network and to enter
new markets successfully and capitalize on growth opportunities.
Changes in the Company’s ability to pay dividends on its Common Stock.
Changes in estimates of future reserve requirements based upon periodic review thereof under relevant
regulatory and accounting requirements.
•
•
•
•
•
•
• Additions to the Company’s loan loss allowance as a result of changes in local, national or international
conditions which adversely affect the Company’s customers, including, without limitation, lower real estate
values, lower oil prices or environmental liability risks associated with foreclosed properties.
• Greater than expected costs or difficulties related to the development and integration of new products and
•
•
•
•
•
lines of business, including those regulated by the CFPB.
Increased labor costs and effects related to health care reform and other laws, regulations and legal
developments impacting labor costs.
Impairment of carrying value of goodwill could negatively impact our earnings and capital.
Changes in the soundness of other financial institutions with which the Company interacts.
Political instability in the United States or Mexico.
Technological changes or system failures or breaches of our network security, as well as other cyber security
risks, could subject us to increased operating costs, litigation and other liabilities.
• Acts of war or terrorism.
• Natural disasters.
•
•
•
•
•
Reduced earnings resulting from the write down of the carrying value of securities held in our securities
available-for-sale portfolio following a determination that the securities are other-than-temporarily impaired.
The effect of changes in accounting policies and practices as may be adopted by the regulatory agencies, as
well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and
other accounting standards setters.
The costs and effects of regulatory developments, including the resolution of legal proceedings or regulatory
or other governmental inquiries and the results of regulatory examinations or reviews and the ability to obtain
required regulatory approvals.
The effect of final rules amending Regulation E that prohibit financial institutions from charging consumer
fees for paying overdrafts on ATM and one-time debit card transactions, unless the consumer consents or
opts-in to the overdraft service for those types of transactions, as well as the effect of any other regulatory or
legal developments that limit overdraft services.
The reduction of income and possible increase in required capital levels related to the adoption of legislation,
including, without limitation, the Dodd-Frank Regulatory Reform Act (the “Dodd-Frank Act”) and the
implementing rules and regulations, including the Federal Reserve’s rule that establishes debit card
interchange fee standards and prohibits network exclusivity arrangements and routing restrictions that is
negatively affecting interchange revenue from debit card transactions as well as revenue from consumer
services.
3
•
•
•
The increase in required capital levels related to the implementation of capital and liquidity rules of the
federal banking agencies that address or are impacted by the Basel III capital and liquidity standards.
The enhanced due diligence burden imposed on banks related to the banks’ inability to rely on credit ratings
under Dodd-Frank, which may result in a limitation on the types of securities certain banks will be able to
purchase as a result of the due diligence burden.
The Company’s success at managing the risks involved in the foregoing items, or a failure or circumvention
of the Company’s internal controls and risk management, policies and procedures.
Forward-looking statements speak only as of the date on which such statements are made. It is not possible to
foresee or identify all such factors. The Company makes no commitment to update any forward-looking statement, or to
disclose any facts, events or circumstances after the date hereof that may affect the accuracy of any forward-looking
statement, unless required by law.
Overview
The Company, which is headquartered in Laredo, Texas, with 192 facilities and 294 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 one insurance agency, 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. The sales team of each of the Company’s bank subsidiaries aim to match the right
mix of products and services to each customer to best serve the customer’s needs. That process entails spending time with
customers to assess those needs and servicing the sales arising from those discussions on a long term basis. The bank
subsidiaries have various compensation plans, including incentive based compensation, for fairly compensating
employees. The bank subsidiaries also have a robust process in place to review sales that support the incentive based
compensation plan to monitor the quality of the sales and identify any significant irregularities, a process that has been in
place for many years.
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, 2017 was 8.62% as compared to 7.70% for the year ended
December 31, 2016.
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, including congressional efforts to
revamp or reform it, 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.
4
Results of Operations
Summary
Consolidated Statements of Condition Information
December 31, 2017 December 31, 2016
(Dollars in Thousands)
Percent Increase
(Decrease)
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under repurchase agreements . . . . . . . . . . . . . . . . .
Other borrowed funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated deferrable interest debentures . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,184,698
6,280,485
8,544,892
353,805
1,195,225
160,416
1,838,980
$
11,804,041
5,900,027
8,610,089
504,985
733,375
160,416
1,724,667
3.2 %
6.4
(0.8)
(29.9)
63.0
—
6.6
Consolidated Statements of Income Information
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Percent
Increase
(Decrease)
2017 vs. 2016
(Dollars in Thousands, Except Per Share Data)
Year Ended
December 31,
2015
Percent
Increase
(Decrease)
2016 vs. 2015
Interest income . . . . . . . . . . . . . . . . . . . . . . . $
Interest expense . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . .
Provision for probable loan losses . . . . . . . .
Non-interest income . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Per common share:
415,136 $
38,931
376,205
11,221
150,406
293,748
157,436
387,914
43,129
344,785
19,859
161,702
289,625
133,932
7.0 % $
(9.7)
9.1
(43.5)
(7.0)
1.4
17.5
396,754
44,317
352,437
24,405
155,734
276,924
136,726
(2.2)%
(2.7)
(2.2)
(18.6)
3.8
4.6
(2.0)
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.38 $
2.36
2.03
2.02
17.2 % $
16.8
2.06
2.05
(1.5)%
(1.5)
Net Income
Net income for the year ended December 31, 2017 increased by 17.5% compared to the same period in 2016. Net
income for the year ended December 31, 2017 was positively impacted by an increase in net interest income. Net interest
income increased as interest income on loans increased due to a higher volume of loans and an increase in the overall yield
of the loan portfolio. Interest expense declined primarily due to the effects of the early termination of the long-term
repurchase agreements by the lead bank subsidiary in prior years. Net income for the year ended December 31, 2017 was
also positively impacted by a decrease in the provision for probable loan losses compared to 2016 and a tax refund received
in the second quarter of 2017. The provision for probable loan losses decreased as a result of a decrease in the historical
loss experience in the commercial category of the allowance for probable loan loss calculation. As discussed in prior
periods, charge-offs had increased due to the deterioration of one relationship that is secured by multiple pieces of
transportation equipment beginning in the fourth quarter of 2014. The Company uses a three year historical charge-off
experience in the calculation, therefore, as those charge-offs begin to be eliminated from the calculation, the allowance for
probable loan losses will be impacted. Net income was also positively impacted by a tax refund of $4.9 million received
in the second quarter as a result of an amended tax return for the 2012 tax year. In September 2014, the Company amended
its 2012 federal income tax return as a result of a tax opinion obtained regarding a judgment against the Company paid in
2012 after litigation related to tax matters in the Company’s 2004 acquisition of Local Financial Corporation (“LFIN”).
Litigation against the Company was initiated by the former controlling shareholders of LFIN with respect to such tax
matters. On March 5, 2010, a judgment against the Company was entered on a jury verdict in the U.S. District Court for
5
the Western District of Oklahoma. The Company subsequently appealed the decision and on January 5, 2012, the United
States Court of Appeals Tenth Circuit affirmed the judgment and it became final and unappealable and the Company
recorded the majority of the payment of the judgment as a non-deductible expense in the Company’s 2012 federal income
tax return. The Company engaged legal counsel to review the deductibility of the judgment and, upon receiving the tax
opinion, amended the 2012 tax return to report the payment as a deductible expense. The Internal Revenue Service
examined the amended return and at the conclusion of the exam, allowed a certain portion of the judgment to be deducted
as a necessary and ordinary business expense. Net income for the year ended December 31, 2017 was negatively impacted
by a charge of $5.8 million, $3.7 million after tax, taken by the lead bank subsidiary in connection with the termination of
its long-term repurchase agreements outstanding in order to help manage its long-term funding costs, recorded in the first
quarter of 2017. Net income for the year ended December 31, 2016 decreased by 2.0% compared to the same period in
2015 and was negatively impacted by a small decrease in the net interest margin as a result of a decrease in interest income
on available-for-sale securities, and an increase in non-interest expense. The decrease in interest income on available-for-
sale securities is due to a decrease in the average outstanding balance of such investments. The decrease in the balance is
being driven primarily by the lack of available investments in the market that fit the Company’s investment profile and
investment goals. The increase in non-interest income can be attributed to an increase in income from other investments,
which is being positively impacted by the sale of an investment by the merchant banking entities in which the Company
holds an equity interest, the Company’s share of revenue on a non-financial equity investment it holds accounted for under
the equity method of accounting, and insurance proceeds from a policy the lead bank subsidiary had purchased to cover
the cost of employee compensation and benefit programs, resulting in income of approximately $5.0 million, after tax.
The increase in non-interest expense can be attributed primarily to a charge of $7.0 million, $4.6 million after tax, to
unwind a portion of a subsidiary bank’s long-term repurchase agreements in order to improve the net interest margin in
the long term. Also contributing to the increase is an increase of $3.9 million, $2.5 million after tax, in software and
software maintenance costs arising from additional investments made by the Company in its network infrastructure.
Net Interest Income
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
6
interest rates and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. Tax-
exempt yields have not been adjusted to a tax-equivalent basis.
For the years ended December 31,
2016
Average
Rate/Cost
2017
Average
Rate/Cost
2015
Average
Rate/Cost
Assets
Interest earning assets:
Loan, net of unearned discounts:
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.27 %
3.29
2.08
4.10
0.74
3.97 %
5.06 %
3.28
1.97
4.08
0.24
3.75 %
5.14 %
3.35
2.00
4.11
0.14
3.73 %
Liabilities
Interest bearing liabilities:
Savings and interest bearing demand deposits . . . . . . . . . . . . . . .
Time deposits:
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under repurchase agreements . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated deferrable interest debentures . . . . . . . . . . .
Total interest bearing liabilities . . . . . . . . . . . . . . . . . . . . . . . .
0.19 %
0.15 %
0.12 %
0.46
0.44
1.64
1.23
3.36
0.57 %
0.46
0.41
2.75
0.49
2.85
0.62 %
0.50
0.42
2.72
0.19
2.40
0.60 %
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 increased 5.9% from 3.75% in 2016 to 3.97%
in 2017, and the rates paid on average interest-bearing liabilities decreased 8.1% from 0.62% in 2016 to 0.57% in 2017.
The yield on average interest-earning assets increased 0.5% from 3.73% in 2015 to 3.75% in 2016, and the rates paid on
average interest-bearing liabilities increased 3.3% from .60% in 2015 to .62% in 2016. 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 2017, 2016 and 2015 and the relative
effect of changes in interest rates and volumes for each major classification of interest-earning assets and interest-bearing
7
liabilities. Non-accrual loans have been included in assets for the purpose of this analysis, which reduces the resulting
yields:
2017 compared to 2016
Net increase (decrease) due to
Rate(1)
Total
(Dollars in Thousands)
Volume(1)
2016 compared to 2015
Net increase (decrease) due to
Rate(1)
Total
(Dollars in Thousands)
Volume(1)
Interest earned on:
Loans, net of unearned discounts:
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,373 $ 12,622 $ 24,995 $ 6,111 $ (4,966) $
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(325)
(307)
(118)
(490)
18
1,145
(608)
Investment securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . $ 9,511 $ 17,711 $ 27,222 $ (2,466) $ (6,374) $ (8,840)
2,814
(700)
420
(8,475)
(963)
61
(1,287)
(88)
85
(7,188)
(875)
(24)
4,588
64
419
(1,774)
(764)
1
Interest incurred on:
Savings and interest bearing demand deposits . . . . $
Time deposits:
207 $ 1,439 $
1,646 $
64 $
905 $
969
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under repurchase agreements . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated deferrable interest
(433)
(108)
(9,815)
1,275
61
253
(4,444)
6,575
(372)
145
(14,259)
7,850
(544)
(136)
(3,083)
(432)
(502)
(88)
182
1,945
(1,046)
(224)
(2,901)
1,513
debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
501
3,173 $ (1,188)
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,409 $ 13,011 $ 31,420 $ 1,895 $ (9,547) $ (7,652)
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . $ (8,898) $ 4,700 $ (4,198) $ (4,361) $
(230)
792
(24)
816
731
(1) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
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 members of the board of directors, 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, 2017, in rising rate scenarios of
+100, +200, +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%, 15%, and 20%, respectively and in a decreasing rate scenario of -100
basis points, that the net interest income not vary by more than plus or minus 15%. At December 31, 2017, the income
simulations show that a rate shift of -100, +100, +200, +300 and +400 basis points in interest rates up will vary projected
net interest income for the coming 12 month period by -3.21%, +4.23%, +8.26%, +12.22% and +15.96%, respectively.
8
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.
Allowance for Probable Loan Loss
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:
Loans accounted for on a non-accrual basis . . . . . $
Accruing loans contractually past due ninety days
or more as to interest or principal payments . . . . .
2017
2016
54,730 $
36,858 $
December 31,
2015
(Dollars in Thousands)
47,320 $
2014
2013
63,559 $
62,823
6,590
5,215
11,174
9,988
7,197
The allowance for probable loan losses increased 4.7% to $67,687,000 at December 31, 2017 from $64,661,000
at December 31, 2016. The allowance was 1.07% of total loans, net of unearned income at December 31, 2017 and 1.08%
at December 31, 2016. The provision for probable loan losses charged to expense decreased $8,638,000 to $11,221,000
for the year ended December 31, 2017 from $19,859,000 for the same period in 2016. The decrease in the provision for
probable loan losses charged to expense for the year ended December 31, 2017 can be attributed to a decrease in the
historical charge-off experience in the commercial category of the allowance for probable loan loss calculation. As
discussed in prior periods, charge-offs had increased due to the deterioration of one relationship that is secured by multiple
pieces of transportation equipment beginning in the fourth quarter of 2014. The Company uses a three year historical
charge-off experience in the calculation, therefore, as those charge-offs begin to be eliminated from the calculation, the
allowance for probable loan losses will be impacted. The decrease in the provision for probable loan losses charged to
expense for the year ended December 31, 2016 can be attributed to two large recoveries on loans that had been charged
off in prior years of approximately $10.4 million. The recoveries positively impacted the balance in the allowance for
probable loan losses and resulted in a decrease to provision expense. The increase in the provision for probable loan losses
charged to expense for the year ended December 31, 2015 can be attributed to an increase in the portion of the allowance
for probable loan losses calculated based on actual historical loss experience in the commercial loan category of the
Company’s loan portfolio. The decrease in the allowance at December 31, 2014 compared to the same period in 2013 is
due to a charge down in an impaired commercial relationship that is mainly secured by multiple pieces of transportation
equipment, the value of which fluctuates due to market factors and the amount of use of the equipment. The provision for
probable loan losses charged to expense decreased for the year ended December 31, 2014 compared to the same period in
2013 partially due to a specific reserve added in 2013 for the relationship that is mainly secured by multiple pieces of
transportation equipment.
9
The following table details loans accounted for as “troubled debt restructuring,” segregated by loan class. Loans
accounted for as troubled debt restructuring are included in impaired loans. See Note 1 to the Consolidated Financial
Statements.
December 31,
2017
December 31,
2016
(Dollars in Thousands)
Domestic
Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate: farmland & commercial . . . . . . . . . . . . . . . . . . . . . .
Residential: first lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential: junior lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total troubled debt restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
6,910
—
6,140
712
1,237
347
15,346
$
$
10,710
3,086
6,181
812
1,269
360
22,418
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:
Loans accounted for on a non-accrual basis . . . . $
Accruing loans contractually past due ninety days
or more as to interest or principal payments . . . .
2017
2016
— $
387 $
December 31,
2015
(Dollars in Thousands)
365 $
2014
2013
— $
667
11
442
—
—
—
The gross income that would have been recorded during 2017, 2016 and 2015 on non-accrual loans in accordance
with their original contract terms was approximately $977,000, $2,438,000 and $3,279,000 on domestic loans and
approximately $0, $23,800, and $19,000 on foreign loans, respectively. The amount of interest income on such loans that
was recognized in 2017, 2016 and 2015 was approximately $4,000, $0, and $844,000 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 deems the collectibility 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 approximately $2,915,326,000 and $2,262,717,000 at December 31, 2017
and 2016, respectively. See Note 19 to the Consolidated Financial Statements.
10
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:
Loans, net of unearned discounts,
outstanding at December 31 . . . . . . .
Average loans outstanding during
the year (1) . . . . . . . . . . . . . . . . . . . . .
Balance of allowance at January 1 .
Provision charged to expense. . . . . .
Loans charged off:
Domestic:
Commercial, financial and
agricultural . . . . . . . . . . . . . . . . .
Real estate—mortgage . . . . . . .
Real estate—construction . . . . .
Consumer . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . .
Total loans charged off: . . . . . . . . . .
Recoveries credited to allowance:
Domestic:
Commercial, financial and
agricultural . . . . . . . . . . . . . . . . .
Real estate—mortgage . . . . . . .
Real estate—construction . . . . .
Consumer . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . .
Total recoveries . . . . . . . . . . . . . . . .
Net loans charged off . . . . . . . . . . . .
Balance of allowance at
December 31 . . . . . . . . . . . . . . . . . . .
Ratio of net loans charged-off
during the year to average loans
outstanding during the year (1) . . . . .
Ratio of allowance to loans, net of
unearned discounts, outstanding at
December 31 . . . . . . . . . . . . . . . . . . .
2017
2016
2015
2014
2013
(Dollars in Thousands)
$ 6,348,172 $ 5,964,688 $ 5,950,914 $ 5,679,245 $ 5,199,235
$ 6,183,864 $ 5,949,048 $ 5,844,842 $ 5,491,841 $ 4,978,833
58,193
$
22,968
70,161
14,423
64,828
24,405
66,988
19,859
64,661
11,221
$
$
$
$
(12,134)
(441)
(213)
(309)
(1)
(13,098)
4,547
269
21
45
21
4,903
(8,195)
(35,029)
(401)
(16)
(414)
(41)
(35,901)
7,229
299
6,099
69
19
13,715
(22,186)
(25,294)
(432)
(695)
(704)
—
(27,125)
4,098
461
141
170
10
4,880
(22,245)
(21,003)
(1,012)
(680)
(719)
(51)
(23,465)
3,086
291
72
210
50
3,709
(19,756)
(12,342)
(1,252)
(278)
(561)
(22)
(14,455)
2,842
359
87
162
5
3,455
(11,000)
$
67,687 $
64,661 $
66,988 $
64,828 $
70,161
0.13 %
0.37 %
0.38 %
0.36 %
0.22 %
1.07 %
1.08 %
1.13 %
1.14 %
1.35 %
(1) The average balances for purposes of the above table are calculated on the basis of daily balances.
11
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:
2017
2016
Allowance
Percent
of total
Allowance
Percent
of total
At December 31,
2015
2014
2013
Percent
Allowance of total
(Dollars in Thousands)
Allowance
Percent
of total
Allowance
Percent
of total
$ 35,885
52.3 % $ 32,928
50.2 % $ 35,379
52.1 % $ 41,881
54.7 % $ 47,676
55.7 %
12,242
17.9
11,355
17.3
10,979
16.2
8,272
16.0
8,061
16.3
18,183
535
842
$ 67,687
26.5
0.8
2.5
18,887
607
884
100.0 % $ 64,661
28.8
0.9
2.8
12,955
660
1,060
100.0 % $ 66,988 100.0 % $ 64,828
18,818
659
1,152
27.7
1.0
3.0
24.9
1.1
3.3
12,541
750
1,133
100.0 % $ 70,161
23.2
1.3
3.5
100.0 %
Commercial,
Financial and
Agricultural . . . . .
Real estate—
Mortgage . . . . . . .
Real estate—
Construction . . . .
Consumer . . . . . .
Foreign . . . . . . . .
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.
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 decrease in charge-offs for the year ended December 31, 2017 can be attributed to the increases experienced in
2016. As discussed in prior periods, charge-offs had increased due to the deterioration of one relationship that is secured
by multiple pieces of transportation equipment beginning in the fourth quarter of 2014 and increased charge-offs for the
twelve months ended December 31, 2016 and December 31, 2015. In March 2016, litigation against the management of
the borrower was filed in the State of Nevada, resulting in a going concern issue with the borrower’s operations and the
future use of the transportation equipment pledged as collateral on the relationship. As a result, management, in accordance
with its credit review procedures, re-evaluated the collateral values on the equipment in light of the new circumstances
and reduced the collateral values accordingly, resulting in a further charge-down of the relationship of approximately
$19.4 million, which is included in the losses charged to the allowance in the commercial category in the table detailing
the activity for the twelve months ended December 31, 2016. The same relationship had been previously charged down
in the years ended December 31, 2015 and 2014. Two large recoveries on loans charged off in prior years are included in
the recoveries credited to the allowance in the table detailing activity for the year ended December 31, 2016. The
recoveries occurred in the first and third quarters of 2016 in the amounts of $4.4 million and $6 million, respectively, and
are included in the Commercial and Commercial Real Estate: Other Construction and Land Development categories. The
increase in charge-offs for the years ended December 31, 2015 and 2014 in the Commercial category can be attributed to
a charge down of a relationship that is primarily secured by multiple pieces of transportation equipment. The relationship
was charged down by $13.5 million and $8.5 million for the years ended December 31, 2015 and December 31, 2014,
respectively.
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 loans individually evaluated for impairment at December 31, 2017
can be primarily attributed to a relationship secured by a water park that is impaired at December 31, 2017. The reserve
12
allocated to loans individually evaluated for impairment at December 31, 2016 can be primarily attributed to the charge-
down of the above discussed relationship secured by multiple pieces of transportation equipment. The reserve allocated
to loans individually evaluated for impairment at December 31, 2015 decreased approximately $10.0 million, primarily as
a result of a charge down in the above described relationship secured by multiple pieces of transportation equipment. The
reserve allocated to loans collectively evaluated for impairment at December 31, 2015 increased approximately
$12.0 million and can be attributed to an increase in the actual historical charge-off experience in the commercial loan
category of the calculation. The reserve allocated by categories shows an overall decrease of $5.3 million from
December 31, 2013 to December 31, 2014. The decrease for the year ended December 31, 2014 compared to the year
ended December 31, 2013 is partially due to a charge down in the above-described relationship secured by multiple pieces
of transportation equipment. Please refer to Note 4—Allowance for Probable Loan Losses in the accompanying Notes to
the consolidated Financial Statements.
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, 2017 was adequate to absorb probable losses from loans in the portfolio at that
date. See Critical Accounting Policies on page 25. 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.
Non-Interest Income
Service charges on deposit accounts . . . . . . . . . $
Other service charges, commissions and fees
72,868 $
73,581
Year Ended Year Ended
December 31, December 31,
2017
2016
Percent
Increase
(Decrease)
2017 vs. 2016
(Dollars in Thousands)
(1.0) % $
Year Ended
December 31,
2015
Percent
Increase
(Decrease)
2016 vs. 2015
78,825
(6.7)%
Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-banking . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities transactions, net . . . . . . . .
Other investments, net. . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46,267
7,006
(2,626)
23,827
13,647
Total non-interest income . . . . . . . . . . . . . . . $ 150,406 $ 161,702
44,964
7,345
(4,774)
18,918
11,085
(2.8)
4.8
81.8
(20.6)
(18.8)
44,971
7,223
(3,682)
16,969
11,428
(7.0) % $ 155,734
2.9
(3.0)
(28.7)
40.4
19.4
3.8 %
Total non-interest income for the year ended December 31, 2017 decreased by 7.0% compared to the same period
of 2016. The decrease in total non-interest income for the year ended December 31, 2017 can be attributed to an increase
in losses recognized on the sales of certain available-for-sale investment securities in 2017 to re-position a portion of the
Company’s investment portfolio and to certain non-recurring items recorded in 2016. Total non-interest income for the
year ended December 31, 2016 increased by 3.8% compared to the same period of 2015. The increase in non-interest
income for the year ended Dcember 31, 2016 compared to the same period of 2015 can be attributed to an increase in
income from other investments, which is being positively impacted by the sale of an investment by the merchant banking
entities in which the Company holds an equity interest, the Company’s share of revenue on a non-financial equity
investment it holds accounted for under the equity method of accounting, and insurance proceeds from a policy the lead
bank subsidiary had purchased to cover the cost of employee compensation and benefit programs, resulting in income of
approximately $7.8 million. Non-interest income was negatively impacted by a decrease in service charges on deposits
for the year ended December 31, 2016 compared to the same period of 2015 and can be attributed to a decrease in the
volume of overdraft charges on deposit accounts.
13
Non-Interest Expense
Employee compensation and benefits . . . . . . . . .
Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation of bank premises and equipment . .
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposit insurance assessments . . . . . . . . . . . . . . .
Net expense, other real estate owned . . . . . . . . . .
Amortization of identified intangible assets . . . .
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Early termination fee—securities sold under
repurchase agreements . . . . . . . . . . . . . . . . . . . . .
Software and software maintenance . . . . . . . . . . .
Impairment charges (Total other-than-
temporary impairment charges, $0 net of $0,
$793 net of $1,147, and $371, net of $1,325,
included in other comprehensive loss) . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended
Year Ended
December 31, December 31,
2017
2016
Percent
Increase
(Decrease)
2017 vs. 2016
(Dollars in Thousands)
Year Ended
December 31,
2015
Percent
Increase
(Decrease)
2016 vs. 2015
$ 132,750 $ 128,661
26,583
24,738
13,672
5,777
5,688
128
7,814
28,439
25,281
13,650
3,294
965
25
7,854
3.2 % $ 125,135
28,019
7.0
25,009
2.2
12,278
(0.2)
5,938
(43.0)
5,695
(83.0)
644
(80.5)
7,585
0.5
2.8 %
(5.1)
(1.1)
11.4
(2.7)
(0.1)
(80.1)
3.0
5,765
19,189
7,042
15,087
(18.1)
27.2
3,510
11,225
100.6
34.4
354
54,081
Total non-interest expense . . . . . . . . . . . . . . . . $ 293,748 $ 289,625
—
56,536
954
(100.0)
4.5
50,932
1.4 % $ 276,924
(62.9)
6.2
4.6 %
Non-interest expense for the year ended December 31, 2017 increased 1.4% compared to the same period of
2016. Non-interest expense for 2017 was positively impacted by a decrease in deposit insurance assessments arising from
a decrease in the assessment rate set by the FDIC of $2.4 million and a decrease in the net cost of operations on other real
estate owned as the size of the portfolio has decreased from prior periods. Non-interest expense for the period was
negatively impacted by increased technology costs related to certain network infrastructure modifications of $4.1 million
for the year ended December 31, 2017 compared to the same period of 2016. Non-interest expense increased 4.6% for the
year ended December 31, 2016 compared to the same period of 2015. Non-interest expense for the twelve months ended
December 31, 2017, 2016 and 2015 was negatively impacted by charges of $5.8 million, $7.0 million, and $3.5 million,
respectively, recorded by the Company’s lead bank subsidiary related to the termination of a portion of its long-term
repurchase agreements outstanding in order to help manage its long-term funding costs. Non-interest expense for the year
ended December 31, 2016 was negatively impacted by an increase of $3.9 million in software and software maintenance
costs arising from additional investments made by the Company in its network infrastructure.
Effects of Inflation
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.
14
Financial Condition
Investment Securities
The following table sets forth the carrying value of investment securities as of December 31, 2017, 2016 and
2015:
December 31,
2017
2016
2015
(Dollars in Thousands)
Residential mortgage-backed securities
Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,891,233 $ 3,894,470 $ 3,893,211
Obligations of states and political subdivisions
Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
232,951
254,972
277,704
Equity securities
Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27,886
27,907
28,457
Other securities
Held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,400
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,154,470 $ 4,179,749 $ 4,201,772
2,400
2,400
The following tables set forth the contractual maturities of investment securities, based on amortized cost, at
December 31, 2017 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.
Within one
year
Adjusted
After one but
within five years
Adjusted
After five but
within ten years
Adjusted
Available for Sale Maturing
After ten years
Adjusted
Cost
Yield
Cost
Yield
Cost
Yield
Cost
Yield
(Dollars in Thousands)
Residential mortgage-backed
securities . . . . . . . . . . . . . . . . . . $
Obligations of states and
political subdivisions . . . . . . . .
—
Equity securities . . . . . . . . . . . . 28,075 2.24
223,157 4.62 %
— %
Total . . . . . . . . . . . . . . . . . . . $ 28,840 2.31 % $ 8,357 4.44 % $ 1,190,637 2.80 % $ 2,968,429 2.86 %
—
—
— —
1,939 4.75 %
—
—
—
—
765 4.97 % $ 8,357 4.44 %
1,188,698 2.80 % $ 2,745,272 2.71 %
Within one
year
Adjusted
After one but
within five years
Adjusted
After five but
within ten years
Adjusted
Held to Maturity Maturing
After ten years
Adjusted
Cost
Yield
Cost
Yield
Cost
Yield
Cost
Yield
(Dollars in Thousands)
Other securities . . . . . . . . . . . . . $ 2,275 1.79 % $
Total . . . . . . . . . . . . . . . . . . . . . . $ 2,275 1.79 % $
125 2.59 % $
125 2.59 % $
— — % $
— — % $
— — %
— — %
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
15
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.
Loans
The amounts of loans outstanding, by classification, at December 31, 2017, 2016, 2015, 2014 and 2013 are shown
in the following table:
December 31,
2017
2016
2015
2014
2013
(Dollars in Thousands)
Commercial, financial and agricultural . . .
Real estate—mortgage . . . . . . . . . . . . . . . .
Real estate—construction . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, net of unearned discount . . . . . .
$ 3,322,668 $ 2,993,203 $ 3,101,748 $ 3,107,584 $ 2,894,779
847,692
1,208,508
66,414
181,842
$ 5,199,235
910,326
1,414,977
61,137
185,221
$ 5,679,245
962,582
1,649,827
57,744
179,013
$ 5,950,914
1,133,525
1,683,550
49,543
158,886
$ 6,348,172
1,032,222
1,716,875
55,168
167,220
$ 5,964,688
The following table shows the amounts of loans (excluding real estate mortgages and consumer loans) outstanding
as of December 31, 2017, 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:
Within one
year
Maturing
After one but
After five
within five
years
years
(Dollars in Thousands)
Total
Commercial, financial and agricultural . . . . . . . . . . . . . .
Real estate—construction . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,057,717 $ 1,906,691 $
644,902
113,179
946,370
29,230
$ 1,815,798 $ 2,882,291 $
358,260 $ 3,322,668
1,683,550
92,278
16,477
158,886
467,015 $ 5,165,104
Due after one but within five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Due after five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
International Operations
Interest sensitivity
Fixed Rate
Variable Rate
(Dollars in Thousands)
176,695 $
88,736
265,431 $
2,705,596
378,279
3,083,875
On December 31, 2017, the Company had $158,886,000 (1.3% 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
16
corporations. The composition of such loans and the related amounts of allocated allowance for probable loan losses as of
December 31, 2017 and 2016 is presented below.
Secured by certificates of deposit in United States banks .
Secured by United States real estate . . . . . . . . . . . . . . . . . .
Secured by other United States collateral (securities,
gold, silver, etc.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unsecured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (principally Mexico real estate) . . . . . . . . . . . . . . . . .
For the year ended December 31,
2017
Related
Allowance for
Probable Losses
Amount of
Loans
(Dollars in Thousands)
2016
Related
Allowance for
Probable Losses
Amount of
Loans
$ 103,104 $
35,211
330 $ 110,036 $
334
30,561
14,414
1,561
4,596
$ 158,886
$
68
32
78
842
16,985
848
8,790
$ 167,220
$
351
218
103
19
193
884
The transactions for the years ended December 31, 2017, 2016 and 2015, in that portion of the allowance for
probable loan losses related to foreign debt were as follows:
2017
2016
(Dollars in Thousands)
2015
884 $ 1,152 $ 1,060
—
(41)
10
19
10
(22)
82
(246)
$ 1,152
884
(1)
21
20
(62)
842
$
Balance at January 1, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge (credit) to expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
17
Deposits
Deposits:
Demand—non-interest bearing
2017
Average Balance
2016
Average Balance
(Dollars in Thousands)
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total demand non-interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings and interest bearing demand
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total savings and interest bearing demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time certificates of deposit
$
2,572,636 $
658,072
3,230,708
2,612,981
617,482
3,230,463
2,504,360
644,230
3,148,590
2,504,369
585,986
3,090,355
$100,000 or more:
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
702,417
833,444
760,014
843,145
Less than $100,000:
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total time, certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
371,782
263,796
2,171,439
8,632,610 $
409,142
280,170
2,292,471
8,531,416
$
2017
2016
2015
(Dollars in Thousands)
Interest expense:
Savings and interest bearing demand
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total savings and interest bearing demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time, certificates of deposit
$
$
5,453
755
6,208
$
3,922
640
4,562
3,026
567
3,593
$100,000 or more
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,644
4,105
3,881
3,929
4,693
4,116
Less than $100,000
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total time, certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense on deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,312
675
9,736
$ 15,944
1,447
706
9,963
$ 14,525
1,680
744
11,233
$ 14,826
Scheduled maturities of time deposits in amounts of $100,000 or more at December 31, 2017, were as follows:
Due within 3 months or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Due after 3 months and within 6 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after 6 months and within 12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after 12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
557,206
348,695
404,776
135,210
$ 1,445,887
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,
18
2017 were $8,544,892,000, a decrease of 0.8% from $8,610,089,000 at December 31, 2016. Although deposits at
December 31, 2017 remained relatively consistent with 2016 levels, the Company has experienced growth in deposits over
the last few years. The Company is still experiencing a substantial amount of competition for deposits at higher than
market rates. As a result, the Company has attempted to maintain certain deposit relationships, but has allowed certain
deposits to leave as the result of aggressive pricing by competitors.
Other Borrowed Funds
Other borrowed funds include FHLB borrowings which are short-term and long-term borrowings issued by the
FHLB of Dallas at the market price offered at the time of funding. These borrowings are secured by residential mortgage-
backed investment securities and a portion of the Company’s loan portfolio. At December 31, 2017, other borrowed funds
totaled $1,195,225,000, an increase of 63.0% from $733,375,000 at December 31, 2016. The increase in borrowings can
be attributed to cash needs to fund daily operations, purchases of available-for-sale securities and the termination of a
portion of the lead bank subsidary’s long-term outstanding repurchase agreements.
Return on Equity and Assets
Certain key ratios for the Company for the years ended December 31, 2017, 2016 and 2015 follows (1):
Percentage of net income to:
Average shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Percentage of average shareholders’ equity to average total assets . . . . . . . . . . . .
Percentage of cash dividends per share to net income per share . . . . . . . . . . . . . .
8.62 %
1.31
15.19
27.70
7.70 %
1.12
14.60
29.56
8.44 %
1.13
13.35
28.12
(1) The average balances for purposes of the above table are calculated on the basis of daily balances.
Years ended
December 31,
2016
2015
2017
Liquidity and Capital Resources
Liquidity
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. Such deposits comprised approximately 27%, 28%, and 27% of the Company’s bank
subsidiaries’ total deposits at each of the years ended December 31, 2017, 2016 and 2015, respectively. Other important
funding sources for the Company’s bank subsidiaries during 2017 and 2016 were borrowings from the 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. The Company’s bank subsidiaries have had a
long-standing relationship with the FHLB and keep open, unused, lines of credit in order to fund liquidity needs. In the
event that the FHLB indebtedness is not renewed, the repayment of the outstanding indebtedness would more than likely
be repaid through proceeds generated from the sales of unpledged available-for-sale securities. The Company maintains a
sizable, high quality investment portfolio to provide significant liquidity. These securities can be sold or sold under
agreements to repurchase, to provide immediate liquidity. As in the past, the Company will continue to monitor the
volatility and cost of funds in an attempt to match maturities of rate-sensitive assets and liabilities and respond accordingly
to anticipated fluctuations in interest rates over reasonable periods of time.
19
Asset/Liability Management
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, 2017, 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 below, 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.
20
INTEREST RATE SENSITIVITY
(Dollars in Thousands)
December 31, 2017
Rate sensitive assets
Investment securities . . . . . . . . . . . . . . . . .
Loans, net of non-accruals . . . . . . . . . . . .
3 Months
or Less
Over 3
Months to
1 Year
Rate/Maturity
Over 1
Year to 5
Years
(Dollars in Thousands)
Over 5
Years
Total
$
354,943
4,816,134
$
712,342
212,144
$ 2,852,996
263,919
$
234,189
1,001,245
$ 4,154,470
6,293,442
Total earning assets . . . . . . . . . . . . . . . . . .
$ 5,171,077
$
924,486
$ 3,116,915
$ 1,235,434
$ 10,447,912
Cumulative earning assets . . . . . . . . . . . .
$ 5,171,077
$ 6,095,563
$ 9,212,478
$ 10,447,912
Rate sensitive liabilities
Time deposits . . . . . . . . . . . . . . . . . . . . . . .
Other interest bearing deposits . . . . . . . . .
Securities sold under repurchase
agreements . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowed funds . . . . . . . . . . . . . . . .
Junior subordinated deferrable interest
debentures . . . . . . . . . . . . . . . . . . . . . . . . .
$
863,461
3,245,131
$
996,047
—
$
196,910
—
$
88
—
$ 2,056,506
3,245,131
342,824
945,225
10,981
—
160,416
—
—
—
—
—
250,000
353,805
1,195,225
—
160,416
Total interest bearing liabilities . . . . . . . .
$ 5,557,057
$ 1,007,028
$
196,910
$
250,088
$ 7,011,083
Cumulative sensitive liabilities. . . . . . . . .
$ 5,557,057
$ 6,564,085
$ 6,760,995
$ 7,011,083
Repricing gap . . . . . . . . . . . . . . . . . . . . . . .
Cumulative repricing gap . . . . . . . . . . . . .
Ratio of interest-sensitive assets to
liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ratio of cumulative, interest-sensitive
assets to liabilities . . . . . . . . . . . . . . . . . . .
$ (385,980) $
(385,980)
(82,542) $ 2,920,005 $
(468,522)
2,451,483
985,346 $ 3,436,829
3,436,829
0.93
0.93
0.92
0.93
15.83
1.36
4.94
1.49
1.49
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.
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, 2017, in rising rate scenarios of
+100, +200, +300 and +400 basis points, the guidelines established by management require that the net interest income
21
not vary by more than plus or minus 15%, 15%, 15%, and 20%, respectively and in a decreasing rate scenario of -100
basis points, that the net interest income not vary by more than plus or minus 15%. At December 31, 2017, the income
simulations show that a rate shift of -100, +100, +200, +300 and +400 basis points in interest rates up will vary projected
net interest income for the coming 12 month period by -3.21%, +4.23%, +8.26%, +12.22% and +15.96%, 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, 2017, the aggregate amount legally available to be distributed to the Company from bank subsidiaries as
dividends was approximately $731,850,000, assuming that each bank subsidiary continues to be classified as “well-
capitalized” under the applicable regulations in effect at December 31, 2017. The restricted capital (capital and surplus) of
the bank subsidiaries was approximately $784,357,000 as of December 31, 2017. The undivided profits of the bank
subsidiaries were approximately $1,878,736,000 as of December 31, 2017.
At December 31, 2017, the Company has outstanding $1,195,000,000 in other borrowed funds and $160,416,000
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.
Capital
The Company maintains an adequate level of capital as a margin of safety for its depositors and shareholders. At
December 31, 2017, shareholders’ equity was $1,838,980,000 compared to $1,724,667,000 at December 31, 2016, an
increase of $114,313,000, or 6.6%. Shareholders’ equity increased primarily due to the retention of earnings, offset by the
payment of cash dividends to shareholders and repurchases of the Company’s common stock in the form of treasury stock.
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 14.62% at December 31, 2017 and 13.91% at December 31,
2016. The core deposit intangibles and goodwill of $282,532,000 as of December 31, 2017, 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 8% and a Tier 1 leverage
ratio of 5%. The Company had risk-weighted Tier 1 capital ratios of 18.73% and 18.68% and risk weighted total capital
ratios of 19.51% and 19.47% as of December 31, 2017 and 2016, respectively, which are well above the minimum
regulatory requirements and exceed the well-capitalized ratios (see Note 20 to Notes to Consolidated Financial
Statements).
22
In July 2013, the Federal Deposit Insurance Corporation (“FDIC”) and other regulatory bodies established a new,
comprehensive capital framework for U.S. banking organizations, consisting of minimum requirements that increase both
the quantity and quality of capital held by banking organizations. The final rules are a result of the implementation of the
BASEL III capital reforms and various Dodd-Frank Act related capital provisions. Consistent with the Basel international
framework, the rules include a new minimum ratio of Common Equity Tier 1 (“CET1”) to risk-weighted assets of 4.5%
and a CET1 capital conservation buffer of 2.5% of risk-weighted assets. The capital conservation buffer began phasing-
in on January 1, 2016 at .625% and increases each year until January 1, 2019, when the Company will be required to have
a 2.5% capital conservation buffer, effectively resulting in a minimum ratio of CET1 capital to risk-weighted assets of at
least 7% upon full implementation. The rules also raised the minimum ratio of Tier 1 capital to risk-weighted assets from
4% to 6% and include a minimum leverage ratio of 4% for all banking organizations. Regarding the quality of capital, the
new rules emphasize CET1 capital and implements strict eligibility criteria for regulatory capital instruments. The new
rules also improve the methodology for calculating risk-weighted assets to enhance risk sensitivity. The new rules are
subject to a four year phase in period for mandatory compliance and the Company was required to begin to phase in the
new rules beginning on January 1, 2015. Management believes, as of December 31, 2017, that the Company and each of
the bank subsidiaries will meet all capital adequacy requirements once the capital conservation is fully phased-in.
On November 21, 2017, the Office of the Comptroller of the Currency (“OCC”), the FRB and the FDIC finalized
a proposed rule that extends the current treatment under the regulatory capital rules for certain regulatory capital deductions
and risk weights and certain minority interest requirements, as they apply to banking organizations that are not subject to
the advanced approaches capital rules. Effective January 1, 2018, the rule also pauses the full transition to the Basel III
treatment of mortgage servicing assets, certain deferred tax assets, investments in the capital of unconsolidated financial
institutions and minority interests. The agencies are also considering whether to make adjustments to the capital rules in
response to CECL (the FASB Standard relating to current expected credit loss) and its potential impact on regulatory
capital.
On December 7, 2017, the Basel Committee on Banking Supervision unveiled the latest round of its regulatory
capital framework, commonly called “Basel IV.” The framework makes changes to the capital framework first introduced
as “Basel III” in 2010. The committee targeted 2022-2027 as the timeframe for implementation by regulators in individual
countries, including the U.S. federal bank regulatory agencies (after notice and comment).
Junior Subordinated Deferrable Interest Debentures
The Company has formed six statutory business trusts under the laws of the State of Delaware, for the purpose
of issuing trust preferred securities. The 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, 2017 and December 31, 2016, the principal
amount of debentures outstanding totaled $160,416,000. On July 29, 2015, the Company bought back a portion of the
Capital Securities of IB Capital Trusts X and XI from the holder of the securities for a price that reflected an approximate
24.5% discount from the redemption prices of the securities. The Company thereby retired $13,000,000 of the total
$34,021,000 of related Junior Subordinated Deferrable Interest Debentures related to IB Capital Trust X and $1,000,000
of the total $27,990,000 of related Junior Subordinated Deferrable Interest Debentures related to IB Capital Trust XI. On
November 1, 2016, the Company bought back a portion of the Capital Securities of IB Capital Trust XI from the holder
of the securities for a price that reflected an approximate 24% discount from the redemption price of the securities. The
Company thereby retired $1,000,000 of the total $26,990,000 of related Junior Subordinated Deferrable Interest
Debentures related to IB Capital Trust XI. The discounts recorded in connection with the repurchases of the outstanding
Capital Securities are included in other income on the consolidated financial statements.
The Debentures are subordinated and junior in right of payment to all present and future senior indebtedness (as
defined in the respective indentures) of the Company, and are pari passu with one another. The interest rate payable on,
and the payment terms of the Debentures are the same as the distribution rate and payment terms of the respective issues
of Capital and Common Securities issued by the Trusts. The Company has fully and unconditionally guaranteed the
obligations of each of the Trusts with respect to the Capital and Common Securities. The Company has the right, unless
an Event of Default (as defined in the Indentures) has occurred and is continuing, to defer payment of interest on the
Debentures for up to twenty consecutive quarterly periods on Trusts VI, VIII, IX, X, XI and XII. If interest payments on
23
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, 2017 and December 31, 2016, the total $160,416,000 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, 2017:
Junior
Subordinated
Deferrable
Interest
Debentures
(in Thousands)
Repricing
Frequency
Interest Rate
Interest Rate
Index
Maturity Date
Optional
Redemption Date(1)
Trust VI . . . . . . . . . . . . . $
Trust VIII . . . . . . . . . . . .
Trust IX . . . . . . . . . . . . .
Trust X . . . . . . . . . . . . . .
Trust XI . . . . . . . . . . . . .
Trust XII . . . . . . . . . . . .
$
25,774 Quarterly
25,774 Quarterly
41,238 Quarterly
21,021 Quarterly
25,990 Quarterly
20,619 Quarterly
160,416
4.87 % LIBOR + 3.45 November 2032
October 2033
4.41 % LIBOR + 3.05
October 2036
2.96 % LIBOR + 1.62
February 2037
3.03 % LIBOR + 1.65
2.96 % LIBOR + 1.62
July 2037
2.93 % LIBOR + 1.45 September 2037
February 2008
October 2008
October 2011
February 2012
July 2012
September 2012
(1) The Capital Securities may be redeemed in whole or in part on any interest payment date after the Optional Redemption Date.
24
Contractual Obligations and Commercial Commitments
The following table presents contractual cash obligations of the Company (other than deposit liabilities) as of
December 31, 2017:
Contractual Cash Obligations
Securities sold under repurchase agreements . $ 353,805 $ 342,824 $
Federal Home Loan Bank borrowings . . . . . . . 1,195,225
945,225
Junior subordinated deferrable interest
debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Operating leases . . . . . . . . . . . . . . . . . . . . . . . .
3,563
Total Contractual Cash Obligations . . . . . . $ 1,722,183 $ 1,291,612 $
160,416
12,737
Total
— $
—
—
250,000
—
6,463
17,444 $
160,416
—
2,531
180
2,531 $ 410,596
Less than
One Year
Three to
Five Years
After Five
Years
Payments due by Period
(Dollars in Thousands)
One to Three
Years
10,981 $
—
The following table presents contractual commercial commitments of the Company (other than deposit liabilities)
as of December 31, 2017:
Amount of Commitment Expiration Per Period
(Dollars in Thousands)
One to Three
Years
Three to Five
Years
Less than
One Year
After Five
Years
Commercial Commitments
Financial and Performance Standby Letters
of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
72,487 $
4,145
Commercial Letters of Credit . . . . . . . . . . . . . . .
Credit Card Lines . . . . . . . . . . . . . . . . . . . . . . . .
20,643
Other Commercial Commitments . . . . . . . . . . . 2,795,136 1,429,380
—
—
—
137,591
Total Commercial Commitments . . . . . . . . . $ 2,915,326 $ 1,526,655 $ 643,173 $ 607,907 $ 137,591
22,915 $
—
—
620,258
— $
—
—
607,907
95,402 $
4,145
20,643
Total
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.
Critical Accounting Policies
The Company has established various accounting policies which govern the application of accounting principles
in the preparation of the Company’s consolidated financial statements. The significant accounting policies are described
in the Notes to the Consolidated Financial Statements. Certain accounting policies involve significant subjective judgments
and assumptions by management which have a material impact on the carrying value of certain assets and liabilities;
management considers such accounting policies to be critical accounting policies.
The Company considers its allowance for probable loan losses as a policy critical to the sound operations of the
bank subsidiaries. The allowance for probable loan losses primarily consists of the aggregate loan loss allowances of the
bank subsidiaries. The allowances are established through charges to operations in the form of provisions for probable
loan losses. Loan losses or recoveries are charged or credited directly to the allowances. The allowance for probable loan
losses of each bank subsidiary is maintained at a level considered appropriate by management, based on estimated probable
losses in the loan portfolio. The allowance is derived from the following elements: (i) allowances established on specific
impaired loans, which are based on a review of the individual characteristics of each loan, including the customer’s ability
to repay the loan, the underlying collateral values, and the industry in which the customer operates, (ii) allowances based
on actual historical loss experience for similar types of loans in the Company’s loan portfolio, and (iii) allowances based
on general economic conditions, changes in the mix of loans, company resources, border risk and credit quality indicators,
among other things. See also discussion regarding the allowance for probable loan losses and provision for probable loan
losses included in the results of operations and “Provision and Allowance for Probable Loan Losses” included in Notes 1
and 4 of the Notes to Consolidated Financial Statements.
25
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.
The Company’s internal classified report is segregated into the following categories: (i) “Special Review
Credits,” (ii) “Watch List—Pass Credits,” or (iii) “Watch List—Substandard Credits.” The loans placed in the “Special
Review Credits” category reflect the Company’s opinion that the loans reflect potential weakness which require monitoring
on a more frequent basis. The “Special Review Credits” are reviewed and discussed on a regular basis with the credit
department and the lending staff to determine if a change in category is warranted. The loans placed in the “Watch List—
Pass Credits” category reflect the Company’s opinion that the credit contains weaknesses which represent a greater degree
of risk, which warrant “extra attention.” The “Watch List—Pass Credits” are reviewed and discussed on a regular basis
with the credit department and the lending staff to determine if a change in category is warranted. The loans placed in the
“Watch List—Substandard Credits” classification are considered to be potentially inadequately protected by the current
sound worth and debt service capacity of the borrower or of any pledged collateral. These credit obligations, even if
apparently protected by collateral value, have shown defined weaknesses related to adverse financial, managerial,
economic, market or political conditions which may jeopardize repayment of principal and interest. Furthermore, there is
the possibility that some future loss could be sustained by the Company if such weaknesses are not corrected. For loans
that are classified as impaired, management evaluates these credits ASC 310-10, “Receivables,” and, if deemed necessary,
a specific reserve is allocated to the credit. The specific reserve allocated under ASC 310-10, is based on (i) the present
value of expected future cash flows discounted at the loan’s effective interest rate; (ii) the loan’s observable market price;
or (iii) the fair value of the collateral if the loan is collateral dependent. Substantially all of the Company’s loans evaluated
as impaired under ASC 310-10 are measured using the fair value of collateral method. In limited cases, the Company may
use other methods to determine the specific reserve of a loan under ASC 310-10 if such loan is not collateral dependent.
The allowance based on historical loss experience on the Company’s remaining loan portfolio, which includes
the “Special Review Credits,” “Watch List—Pass Credits,” and “Watch List—Substandard Credits” is determined by
segregating the remaining loan portfolio into certain categories such as commercial loans, installment loans, international
loans, loan concentrations and overdrafts. 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.
Recent Accounting Standards Issued
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.
26
Preferred Stock, Common Stock and Dividends
The Company had issued and outstanding 66,097,271 shares of $1.00 par value Common Stock held by
approximately 1,993 holders of record at February 23, 2018. The book value of the Common Stock at December 31, 2017
was $29.28 per share compared with $27.53 per share at December 31, 2016. In connection with the Company’s
participation in the Troubled Asset Relief Program Capital Purchase Program in 2008, the US Treasury received a warrant
(the “Warrant”) to purchase 1,326,238 shares of the Company’s common stock (the “Warrant Shares”) at $24.43 per share.
The term of the Warrant is ten years and was immediately exercisable. The Warrant is included as a component of Tier 1
capital. On June 12, 2013, the U. S. Treasury sold the Warrant to a third party. As of February 23, 2018, the Warrant is
still outstanding, but expires on December 23, 2018. Adjustments to the $24.43 per share Exercise Price of the Warrant
will be made if the Company pays cash dividends in excess of 33 cents per semi-annual period or makes certain other
shareholder distributions before the Warrant expires on December 23, 2018.
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 2017 and 2016, as quoted on
the NASDAQ National Market for each of the quarters in the two year period ended December 31, 2017. 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 $40.65 per share at February 23, 2018.
2017: . . . . . . . . . . . . . . . . . . . . . . . . . . . First quarter
$
Second quarter
Third quarter
Fourth quarter
2016: . . . . . . . . . . . . . . . . . . . . . . . . . . . First quarter
$
Second quarter
Third quarter
Fourth quarter
High
41.83 $
38.75
41.05
42.90
Low
33.40
32.50
33.85
37.55
High
25.79 $
28.44
30.44
42.25
Low
21.05
22.96
24.82
29.31
The Company paid cash dividends to the common shareholders of $.33 per share on April 17, 2017 and October
16, 2017 to all holders of record on April 3, 2017 and September 29, 2017, respectively. The Company paid dividends to
the common shareholders of $.29 per share on April 18, 2016 to all holders of record on April 1, 2016. The Company
paid cash dividends to the common shareholders of $.31 per share on October 17, 2016 to all holders of record on
September 30, 2016.
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.
Stock Repurchase Program
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 April 3, 2017, 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, 2017, 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. During the fourth quarter of 2017, the Company’s Board of
Directors adopted a Rule 10b5-1 plan and intends to adopt additional Rule 10b5-1 trading plans that will allow the
Company to purchase its shares of common stock during certain trading blackout periods when the Company ordinarily
would not be in the market due to trading restrictions in its internal trading policy. During the term of a 10b5-1 Plan,
purchases of common stock are automatic to the extent the conditions of the 10b5-1 Plan’s trading instructions are met.
Shares repurchased in this program will be held in treasury for reissue for various corporate purposes, including employee
27
stock option plans. As of February 23, 2018, a total of 9,245,658 shares had been repurchased under all programs at a cost
of $271,289,000. The Company is not obligated to repurchase shares under its stock repurchase program or to enter into
additional Rule 10b5-1 plans. The timing, actual number and value of shares purchased will depend on many factors,
including the Company’s cash flow and the liquidity and price performance of its shares of common stock.
Except for repurchases in connection with the administration of an employee benefit plan in the ordinary course
of business and consistent with past practices, common stock repurchases are only conducted under publicly announced
repurchase programs approved by the Board of Directors. The following table includes information about common stock
share repurchases for the quarter ended December 31, 2017.
Total Number of
Shares
Total Number
of Shares
Purchased
Purchased as
Approximate
Average
Price Paid
Per
Share
Part of a
Publicly-
Announced
Program
Dollar Value of
Shares Available
for
Repurchase(1)
October 1 – October 31, 2017 . . . . . . . . . . . . . . . . . . . . . . .
November 1 – November 30, 2017 . . . . . . . . . . . . . . . . . . .
December 1 – December 31, 2017 . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $
—
1,375
1,375
—
—
39.85
$ 38.90
— $ 39,966,000
39,966,000
—
39,911,000
1,375
1,375
(1) The repurchase program was extended on April 3, 2017 and allows for the repurchase of up to an additional $40,000,000 of treasury stock through
April 9, 2018.
Equity Compensation Plan Information
The following table sets forth information as of December 31, 2017, with respect to the Company’s equity
compensation plans:
Plan Category
Equity Compensation plans approved by security
holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(A)
(B)
Number of securities to Weighted average
exercise price of
be issued upon exercise
outstanding options,
of outstanding options,
warrants and rights
warrants and rights
(C)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column A)
668,166
668,166
$
$
20.41
20.41
216,400 `
216,400
28
Stock Performance
COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN
COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN
$300
$250
$200
$150
$100
$50
$0
2012
2013
2014
2015
2016
2017
International Bancshares Corporation
S&P MidCap 400 Index
S&P 400 Regional Banks
Total Return To Shareholders
(Includes reinvestment of dividends)
Company / Index
International Bancshares
Corporation . . . . . . . . . . . . . . . . . . . . . .
S&P 500 Index . . . . . . . . . . . . . . . . . . . .
S&P 500 Banks . . . . . . . . . . . . . . . . . . .
Base
Period
2012
2013
2014
INDEXED RETURNS
December 31,
2015
2016
2017
100
100
100
148.68
133.50
145.54
152.84
146.54
147.28
151.39
143.35
156.95
245.70
173.08
208.77
243.29
201.20
219.63
29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors
of International Bancshares Corporation:
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of condition of International Bancshares Corporation
and its subsidiaries (the Company) as of December 31, 2017 and 2016, 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,
2017, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion,
the financial statements present fairly, in all material respects, the financial position of the Company as of December 31,
2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December
31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on
criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission in 2013, and our report dated February 28, 2018 expressed an unqualified opinion on the
effectiveness of the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.
We have served as the Company's auditor since 2007.
Dallas, Texas
February 28, 2018
30
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Condition
December 31, 2017 and 2016
(Dollars in Thousands, Except Per Share Amounts)
December 31,
2017
December 31,
2016
265,357 $
269,198
2,400
2,400
Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Investment securities:
Held to maturity (Market value of $2,400 on December 31, 2017 and $2,400 on
December 31, 2016) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available for sale (Amortized cost of $4,196,263 on December 31, 2017 and
$4,218,841 on December 31, 2016) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less allowance for probable loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Identified intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,177,349
4,179,749
5,964,688
(64,661)
5,900,027
527,583
32,172
517,162
25
282,532
95,593
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,184,698 $ 11,804,041
4,152,070
4,154,470
6,348,172
(67,687)
6,280,485
514,454
34,456
571,415
—
282,532
81,529
See accompanying notes to consolidated financial statements.
31
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Condition Continued
December 31, 2017 and 2016
(Dollars in Thousands, Except Per Share Amounts)
December 31,
2017
December 31,
2016
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Demand—non-interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,243,255 $ 3,158,051
Savings and interest bearing demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,203,728
2,248,310
Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,610,089
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
504,985
Securities sold under repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
733,375
Other borrowed funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
160,416
Junior subordinated deferrable interest debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70,509
10,079,374
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,245,131
2,056,506
8,544,892
353,805
1,195,225
160,416
91,380
10,345,718
Shareholders’ equity:
Common shares of $1.00 par value. Authorized 275,000,000 shares; issued
96,019,028 shares on December 31, 2017 and 95,910,143 shares on
December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss (including $0 on December 31, 2017
and $(3,287) on December 31, 2016 of comprehensive loss related to other-than-
temporary impairment for non-credit related issues) . . . . . . . . . . . . . . . . . . . . . . . . .
96,019
171,816
1,891,805
95,910
169,567
1,777,963
(28,397)
2,131,243
(26,697)
2,016,743
Less cost of shares in treasury, 29,939,545 shares on December 31, 2017 and
(292,076)
29,934,675 on December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,724,667
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,184,698 $ 11,804,041
(292,263)
1,838,980
See accompanying notes to consolidated financial statements.
32
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 2017, 2016 and 2015
(Dollars in Thousands, Except Per Share Amounts)
Interest income:
Loans, including fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
2016
2015
$ 322,508 $ 297,820 $ 297,283
82,347
9,656
625
415,136
79,533
10,356
205
387,914
88,008
11,319
144
396,754
Interest expense:
Savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated deferrable interest debentures . . . . . . . . . . . . . . . . . . .
6,208
9,736
6,617
10,978
5,392
4,562
9,963
20,876
3,128
4,600
3,593
11,233
23,777
1,615
4,099
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38,931
43,129
44,317
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
376,205
344,785
352,437
Provision for probable loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,221
19,859
24,405
Net interest income after provision for probable loan losses . . . . . . . . . .
364,984
324,926
328,032
Non-interest income:
Service charges on deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
72,868
73,581
78,825
Other service charges, commissions and fees
Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities transactions, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44,964
7,345
(4,774)
18,918
11,085
46,267
7,006
(2,626)
23,827
13,647
44,971
7,223
(3,682)
16,969
11,428
Total non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
150,406
161,702
155,734
See accompanying notes to consolidated financial statements.
33
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income, continued
Years ended December 31, 2017, 2016 and 2015
(Dollars in Thousands, Except Per Share Amounts)
Non-interest expense:
Employee compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation of bank premises and equipment . . . . . . . . . . . . . . . . . . .
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposit insurance assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net expense, other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of identified intangible assets . . . . . . . . . . . . . . . . . . . . . .
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Early termination fee—securities sold under repurchase agreements .
Software and software maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment charges (Total other-than-temporary impairment
charges, $0 net of $0, $793 net of $1,147, and $371 net of $1,325
included in other comprehensive loss) . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
2016
2015
132,750 $
28,439
25,281
13,650
3,294
965
25
7,854
5,765
19,189
128,661 $
26,583
24,738
13,672
5,777
5,688
128
7,814
7,042
15,087
125,135
28,019
25,009
12,278
5,938
5,695
644
7,585
3,510
11,225
—
56,536
354
54,081
954
50,932
Total non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
293,748
289,625
276,924
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
221,642
197,003
206,842
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64,206
63,071
70,116
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
157,436 $
133,932 $
136,726
Basic earnings per common share:
Weighted average number of shares outstanding . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
66,046,155
65,967,989
2.38 $
2.03 $
66,411,193
2.06
Fully diluted earnings per common share:
Weighted average number of shares outstanding . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
66,778,436
66,313,490
2.36 $
2.02 $
66,636,353
2.05
See accompanying notes to consolidated financial statements.
34
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years ended December 31, 2017, 2016, and 2015
(Dollars in Thousands)
2017
2016
2015
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 157,436 $ 133,932 $ 136,726
Other comprehensive income, net of tax:
Net unrealized holding losses on securities available for sale arising
during period (net of tax effects of $(2,586), $(16,585), and $(6,593)) . . . .
Reclassification adjustment for losses on securities available for sale
included in net income (net of tax effects of $1,671, $919, and $1,289) . . .
Reclassification adjustment for impairment charges on available for
sale securities included in net income (net of tax effects of $0, $124,
and $334) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,803)
(30,801)
(12,243)
3,103
1,707
2,393
—
(1,700)
230
(28,864)
620
(9,230)
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 155,736 $ 105,068 $ 127,496
See accompanying notes to consolidated financial statements.
35
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
Years ended December 31, 2017, 2016 and 2015
(in Thousands, except per share amounts)
Balance at December 31, 2014 . . . $
Net Income . . . . . . . . . . . . . .
Dividends:
Cash ($.58 per share) . . . . .
Purchase of treasury (261,079
shares) . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . .
Stock compensation expense
recognized in earnings . . . . . . . . .
Other comprehensive (loss),
net of tax:
Net change in unrealized
gains and losses on available
for sale securities, net of
reclassification adjustment .
Balance at December 31, 2015 . . .
Net Income . . . . . . . . . . . . . .
Dividends:
Cash ($.60 per share) . . . . .
Purchase of treasury (349,029
shares) . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . .
Stock compensation expense
recognized in earnings . . . . . . . . .
Other comprehensive (loss),
net of tax:
Net change in unrealized
gains and losses on available
for sale securities, net of
reclassification adjustments .
Balance at December 31, 2016 . . .
Net Income . . . . . . . . . . . . . .
Dividends:
Cash ($.66 per share) . . . . .
Purchase of treasury (4,870
shares) . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . .
Stock compensation expense
recognized in earnings . . . . . . . . .
Other comprehensive income,
net of tax:
Net change in unrealized
gains and losses on available
for sale securities, net of
reclassification adjustments .
Balance at December 31, 2017 . . .
Preferred
Stock
Number
of
Shares
95,784
—
Common
Stock
95,784 165,520 1,585,389
—
Retained
Earnings
Surplus
136,726
—
Other
Comprehensive Treasury
Income (Loss)
Stock
Total
—
—
—
—
—
—
—
(38,515)
—
—
82
—
—
—
82
—
1,288
—
1,172
—
—
—
11,397 (277,432) $ 1,580,658
136,726
—
—
—
—
—
—
—
(38,515)
(6,678)
—
(6,678)
1,370
—
1,172
—
(9,230)
2,167 (284,110)
—
—
(9,230)
1,665,503
133,932
—
—
—
—
95,866
—
—
—
95,866 167,980 1,683,600
—
133,932
—
—
—
—
—
—
—
—
—
(39,569)
—
—
(39,569)
—
44
—
44
—
505
—
—
1,082
—
—
—
—
—
(7,966)
—
(7,966)
549
—
—
1,082
—
—
—
—
95,910 $
—
—
—
95,910 $ 169,567 $ 1,777,963 $
—
157,436
—
—
(28,864)
(28,864)
(26,697) $ (292,076) $ 1,724,667
157,436
—
—
—
—
—
—
—
—
—
—
(43,594)
—
—
(43,594)
—
109
—
109
—
1,346
—
—
903
—
—
—
—
—
(187)
—
(187)
1,455
—
—
903
—
—
—
96,019 $
—
—
96,019 $ 171,816 $ 1,891,805 $
—
(1,700)
(1,700)
(28,397) $ (292,263) $ 1,838,980
—
See accompanying notes to consolidated financial statements.
36
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2017, 2016 and 2015
(Dollars in Thousands)
Operating activities:
2017
2016
2015
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
157,436 $
133,932 $ 136,726
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for probable loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specific reserve, other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation of bank premises and equipment . . . . . . . . . . . . . . . . . . . .
(Gain) loss on sale of bank premises and equipment . . . . . . . . . . . . . . .
(Gain) loss on sale of other real estate owned . . . . . . . . . . . . . . . . . . . . .
Accretion of investment securities discounts . . . . . . . . . . . . . . . . . . . . . .
Amortization of investment securities premiums . . . . . . . . . . . . . . . . . .
Investment securities transactions, net . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment charges on available for sale securities . . . . . . . . . . . . . . . .
Amortization of identified intangible assets . . . . . . . . . . . . . . . . . . . . . .
Stock based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from affiliates and other investments . . . . . . . . . . . . . . . . . . . .
Deferred tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease)in other liabilities . . . . . . . . . . . . . . . . . . . . . . . .
11,221
710
25,281
(38)
(703)
(393)
24,040
4,774
—
25
903
(13,198)
4,570
(2,284)
(16,117)
592
19,859
2,351
24,738
(450)
86
(539)
26,873
2,626
354
128
1,082
(14,315)
7,306
(600)
7,494
(7,705)
24,405
1,023
25,009
14
(57)
(1,704)
28,000
3,682
954
644
1,172
(12,176)
(332)
(111)
2,967
(6,567)
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . .
196,819
203,220
203,649
Investing activities:
Proceeds from maturities of securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales and calls of available for sale securities . . . . . . . . .
Purchases of available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . .
Principal collected on mortgage backed securities . . . . . . . . . . . . . . . . .
Net increase in loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions from other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of bank premises and equipment . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of bank premises and equipment . . . . . . . . . . . . . .
Proceeds from sales of other real estate owned . . . . . . . . . . . . . . . . . . . .
—
396,066
(1,182,006)
780,097
(394,267)
(26,193)
20,344
(14,315)
2,201
14,266
1,200
352,743
(1,325,657)
919,594
(38,523)
(49,013)
23,276
(38,856)
3,701
13,772
1,075
164,163
(352,513)
854,736
(297,689)
(16,355)
18,293
(19,831)
4,515
16,831
Net cash (used in) provided by investing activities . . . . . . . . . . . . . . .
(403,807)
(137,763)
373,225
See accompanying notes to consolidated financial statements.
37
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Years ended December 31, 2017, 2016 and 2015
(Dollars in Thousands)
Financing activities:
2017
2016
2015
Net increase in non-interest bearing demand deposits . . . . . . . . . . . . . . . . . .
Net increase (decrease) in savings and interest bearing demand deposits . .
Net decrease in time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease in securities sold under repurchase agreements . . . . . . . . . . . .
Net increase (decrease) in other borrowed funds . . . . . . . . . . . . . . . . . . . . .
Redemption of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from stock transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of cash dividends - common . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
85,204 $
41,403
(191,804)
(151,180)
461,850
—
(187)
1,455
(43,594)
8,433 $ 219,365
(5,458)
(116,279)
(30,578)
(568,194)
(14,000)
(6,678)
1,370
(38,515)
183,506
(118,103)
(322,787)
227,625
(1,000)
(7,966)
549
(39,569)
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . .
203,147
(69,312)
(558,967)
(Decrease ) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . .
(3,841)
(3,855)
17,907
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . .
269,198
273,053
255,146
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 265,357 $ 269,198 $ 273,053
Supplemental cash flow information:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
38,995 $
66,983
44,069 $
49,925
44,560
65,234
Non-cash investing and financing activities:
Net transfers from loans to other real estate owned . . . . . . . . . . . . . . . . . . . .
2,588
2,563
3,775
See accompanying notes to consolidated financial statements.
38
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
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 U.S. generally accepted
accounting principles (“GAAP”) and to general practices within the banking industry. The following is a description of
the more significant of those policies.
Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Corporation and its wholly-owned bank
subsidiaries, International Bank of Commerce, Laredo (“IBC”), International Bank of Commerce, Oklahoma City,
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 (which
was terminated in September 2016), IBC Trading Company, Premier Tierra Holdings, Inc., IBC Charitable and
Community Development Corporation, 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 the Oklahoma
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 one insurance-related subsidiary, IBC Insurance Agency, Inc., a wholly owned subsidiary of
IBC, the bank subsidiary. The insurance-related subsidiary does not conduct underwriting activities.
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.
Subsequent Events
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.
Investment Securities
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
39
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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 (loss) until realized. The Company did not maintain any trading securities during the three year
period ended December 31, 2017.
Mortgage-backed securities held at December 31, 2017 and 2016 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 (i) the length of time and the extent to which the fair value has been
less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) 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 (i) it intends to sell the security or (ii) 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 of the security.
If the Company determines that it (i) does not intend to sell the security and (ii) 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 (i) the amount of impairment related to credit loss and (ii) 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.
Provision and Allowance for Probable Loan Losses
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 GAAP allowances based on their judgments of information available
to them at the time of their examination.
40
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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.
Loans
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 accreted or 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
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.
Troubled Debt Restructured Loans
Troubled debt restructured loans (“TDR”) are those loans where, for reasons related to a borrower’s difficulty to
repay a loan, the company grants a concession to the borrower that the company would not normally consider in the normal
course of business. The original terms of the loan are modified or restructured. The terms that may be modified include a
reduction in the original stated interest rate, an extension of the original maturity of the loan, a renewal of the loan at an
interest rate below current market rates, a reduction in the principal amount of debt outstanding, a reduction in accrued
interest or deferral of interest payments. A loan classified as a TDR is classified as an impaired loan and included in the
impaired loan totals. A TDR loan may be returned to accrual status when the loan is brought current, has performed in
accordance with the restructured terms for a reasonable period of time, is at the current market rate, and the ultimate
collectability of the outstanding principal and interest is no longer questionable, however, although those loans may be
placed back on accrual status, they will continue to be classified as impaired. Consistent with regulatory guidance, a TDR
loan that is subsequently modified, but has shown sustained performance and classification as a TDR, will be removed
from TDR status provided that the modified terms were market-based at the time of modification.
Non-Accrual Loans
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
41
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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
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 through a valuation allowance. Other real estate
owned totaled approximately $30,519,000 and $42,204,000 at December 31, 2017 and 2016, respectively. Other real estate
owned is included in other assets.
Bank Premises and Equipment
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
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.
Income Taxes
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, 2017 and 2016, 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, 2017, 2016 and 2015, the Company
recognized no interest expense or penalties related to uncertain tax positions.
42
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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 2014.
Stock Options
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.
Net Income Per Share
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 and Identified Intangible Assets
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,
2017, 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, 2017, 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.
Impairment of Long-Lived 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.
43
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Consolidated Statements of Cash Flows
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.
Accounting for Transfers and Servicing of Financial Assets
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.
Segments of an Enterprise and Related Information
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 five active operating subsidiaries, namely, the bank subsidiaries,
otherwise known as International Bank of Commerce, Laredo, International Bank of Commerce, Oklahoma City,
Commerce Bank, International Bank of Commerce, Zapata and International Bank of Commerce, Brownsville. The
Company applies the provisions of ASC Topic 280, “Segment Reporting,” in determining its reportable segments and
related disclosures.
Comprehensive Income (Loss)
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.
Advertising
Advertising costs are expensed as incurred.
Reclassifications
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.
New Accounting Standards
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 to ASC 606, “Revenue from Contracts
with Customers.” The update sets a common standard that defines revenue and the principles for recognizing revenue.
The update outlines when an entity should recognize revenue, among other matters. At its core, the update states that an
entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled to in exchange for those goods or services. The update also
44
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
outlines the steps that entities should take to determine and record the current revenue number including: (i) identify the
contract(s) with a customer, (ii) identify the performance obligations in the contract(s), (iii) determine the transaction price,
(iv) allocate the transaction price to the performance obligations in the contract(s), and (v) recognize revenue when (or as)
the entity satisfies the identified performance obligations in the contract(s). The update was originally effective for annual
periods beginning after December 31, 2016 and the interim periods within that reporting period. In August 2015, the
FASB issued Accounting Standards Update No. 2015-14 which deferred the effective date of ASU 2014-09 by one year
to annual and interim periods beginning after December 15, 2017. The Company’s revenue is primarily comprised of net
interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of the update. The
Company has evaluated the impact of the update to certain other non-interest revenue streams, including, service charges,
insurance agency commissions and sales of other real estate, among others and has determined that the adoption of the
update will not have a significant impact on the Company’s consolidated financial statements.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01 to ASC 825-10, “Financial
Instruments – Overall.” The update amends existing standards regarding certain aspects of recognition and measurement
of financial assets and financial liabilities. The amendments in the update establish the following guidance: (i) requires
equity investments, except those accounted for under the equity method of accounting or those that result in consolidation
of the investee, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the
impairment assessment of equity securities without readily determinable fair values by requiring a qualitative assessment,
(iii) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities
that are not public business entities, (iv) eliminates the requirement for public business entities to disclose the methods
and significant assumptions used to estimate fair value that is required to be disclosed for financial instruments measured
at amortized cost on the balance sheet, (v) requires public business entities to use the exit price notion when measuring
fair value for disclosure purposes, (vi) requires an entity to present separately, in other comprehensive income, the portion
of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the
entity has elected to measure the liability at fair value in accordance with the fair value option, (vii) requires separate
presentation of financial assets and liabilities by measurement category and form of financial assets on the balance sheet
or in the accompanying notes to the financial statements, and (viii) clarifies that an entity should evaluate the need to a
valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other
deferred tax assets. The update is effective for interim and annual periods beginning after December 15, 2017. The
adoption of the update is will not have a significant impact to the Company’s consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 to ASC 820, “Leases.” The
update amends existing standards for accounting for leases by lessees, with accounting for leases by lessors remaining
mainly unchanged from current guidance. The update requires that lessees recognize a lease liability and a right of use
asset for all leases (with the exception of short-term leases) at the commencement date of the lease and disclose key
information about leasing arrangements. The update is to be applied on a modified retrospective basis for leases existing
at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements.
The update is effective for interim and annual periods beginning after December 15, 2018. In January 2018, the FASB
issued a proposal that provides an additional transition method that would allow entities to not apply the guidance in the
update in the comparative periods presented in the consolidated financial statements, but instead recognize a cumulative-
effect adjustment to the opening balance of retained earnings in the period of adoption. The Company is evaluating the
potential impact to the Company’s consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09 to ASC 718, “Compensation – Stock
Compensation.” The update amends existing standards for accounting for share-based payment transactions, including
the income tax effects, the classification of awards on the balance sheet and the classification on the statement of cash
flows. The update is effective for annual and interim periods after December 15, 2016. The adoption of the update did
not have a significant impact to the Company’s consolidated financial statements.
45
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
In June 2016, the FASB issued Accounting Standards Update No. 2016-13 to ASC 326, “Financial Instruments
– Credit Losses.” The update amends existing standards for accounting for credit losses for financial assets. The update
requires that the expected credit losses on the financial instruments held as of the end of the period being reported be
measured based on historical experience, current conditions, and reasonable and supportable forecasts. The update also
expands the required disclosures related to significant estimates and judgements used in estimating credit losses, as well
as the credit quality and underwriting standards of an organization’s financial assets. The update also amends the
accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration
and effective for interim and annual periods beginning after December 15, 2019. The change in accounting method
represents a significant difference to current accounting practice over the accounting for credit losses on financial assets.
The Company has formed a task force including key members of the teams that work with the current calculation of the
allowance for probable loan losses and members representing the corporate accounting and risk management areas. The
task force will be working with a plan to develop and implement the changes to current practice with support from third-
party vendors. The Company cannot estimate at this time the impact of ASC 326.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04 to ASC 350, “Intangibles –
Goodwill and Other.” The update amends existing guidance in evaluating goodwill for impairment. The update requires
that an entity perform its annual or interim goodwill test by comparing the fair value of a reporting unit with its carrying
amount, with any impairment charges being recognized as the difference between the fair value and carrying value. The
update is intended to standardize the impairment test for all business entities and also reduce the complexity and cost of
evaluating goodwill for impairment. The update is effective for any annual or interim goodwill impairment tests in fiscal
years beginning after December 15, 2019. The adoption of the update is not expected to have a significant impact to the
Company’s consolidated financial statements.
In March 2017, the FASB issued Accounting Standards Update No. 2017-08 to ASC 310, “Receivables –
Nonrefundable Fees and Other Costs.” The update amends existing guidance on the amortization period for certain
callable debt securities held at a premium. The update shortens the amortization period of the premium to the earliest call
date. The update is effective for fiscal years beginning after December 15, 2018. The update is to be applied on a modified
retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of
adoption. The adoption of the update is not expected to have a significant impact to the Company’s consolidated financial
statements.
In February 2018, the FASB issued Accounting Standards Update No. 2018-02 to ASC 220, “Income Statement –
Reporting Comprehensive Income.” The update amends current guidance surrounding the reclassification of certain tax
effects from accumulated other comprehensive income. The update is being issued as a result of the 2017 Tax Cuts and
Jobs Act and the related impact to comprehensive income as a result of the application of current guidance with respect to
changes in tax rates. Under current guidance, entities must re-evaluate the carrying value of deferred tax assets and
liabilities and adjust them for the tax effect of the rate change and record that change through earnings. The result is that
the tax effects for items that normally would only be recognized in comprehensive income will be recognized through
earnings and results in stranded tax effects in accumulated other comprehensive income (loss) for the impact of the rate
change. The update will allow a reclassification from accumulated other comprehensive income (loss) to retained earnings
for the stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act. The update is effective for all entities for fiscal
years beginning after December 31, 2018. The adoption of the update is not expected to have a significant impact to the
Company’s consolidated financial statements
46
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(2) Investment Securities
The amortized cost and estimated fair value by type of investment security at December 31, 2017 are as follows:
Held to Maturity
Gross
Gross
Amortized
unrealized
unrealized
cost
gains
losses
Estimated
fair value
Carrying
value
(Dollars in Thousands)
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . $
Total investment securities . . . . . . . . . . . . . . . . $
2,400 $
2,400 $
— $
— $
— $
— $
2,400 $
2,400 $
2,400
2,400
Available for Sale
Gross
Gross
Amortized
unrealized
unrealized
cost
gains
losses
Estimated
fair value
Carrying
value(1)
(Dollars in Thousands)
Residential mortgage-backed securities . . . . . $ 3,943,092 $ 14,110 $ (65,969) $ 3,891,233 $ 3,891,233
Obligations of states and political
232,951
subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . .
27,886
Total investment securities . . . . . . . . . . . . . . . $ 4,196,263 $ 22,274 $ (66,467) $ 4,152,070 $ 4,152,070
232,951
27,886
225,096
28,075
7,871
293
(16)
(482)
(1)
Included in the carrying value of residential mortgage- backed securities are $654,063 of mortgage-backed securities issued by Ginnie Mae and
$3,237,170 of mortgage-backed securities issued by Fannie Mae and Freddie Mac
The amortized cost and estimated fair value of investment securities at December 31, 2017 , 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,275 $ 2,275 $
Due after one year through five years . . . . . . . . . . . . . . . . . . . . . . .
—
1,967
Due after five years through ten years . . . . . . . . . . . . . . . . . . . . . . .
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
230,984
Residential mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . .
3,891,233
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27,886
Total investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,400 $ 2,400 $ 4,196,263 $ 4,152,070
— $
—
1,939
223,157
3,943,092
28,075
125
—
—
—
—
125
—
—
—
—
47
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The amortized cost and estimated fair value by type of investment security at December 31, 2016 are as follows:
Held to Maturity
Gross
Gross
Amortized
unrealized
unrealized
cost
gains
losses
Estimated
fair value
Carrying
value
(Dollars in Thousands)
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . $
Total investment securities . . . . . . . . . . . . . . . . $
2,400 $
2,400 $
— $
— $
— $
— $
2,400 $
2,400 $
2,400
2,400
Available for Sale
Gross
Gross
Amortized
unrealized
unrealized
cost
gains
losses
Estimated
fair
value
Carrying
value(1)
(Dollars in Thousands)
Residential mortgage-backed securities . . . . . $ 3,946,144 $ 18,246 $ (69,920) $ 3,894,470 $ 3,894,470
Obligations of states and political
254,972
subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . .
27,907
Total investment securities . . . . . . . . . . . . . . . $ 4,218,841 $ 29,343 $ (70,835) $ 4,177,349 $ 4,177,349
254,972
27,907
244,622
28,075
10,783
314
(433)
(482)
(1)
Included in the carrying value of residential mortgage- backed securities are $850,033 of mortgage-backed securities issued by Ginnie Mae,
$3,026,832 of mortgage-backed securities issued by Fannie Mae and Freddie Mac and $17,605 issued by non-government entities
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
$1,428,387,000 and $1,403,084,000, respectively, at December 31, 2017.
Proceeds from the sale and call of securities available-for-sale were $396,066,000, $352,743,000 and
$164,163,000 during 2017, 2016 and 2015, respectively, which amounts included $377,756,000, $338,138,000 and
$128,444,000 of mortgage-backed securities. Gross gains of $1,186,000, $586,000 and $2,450,000, and gross losses of
$5,960,000, $3,212,000 and $6,132,000 were realized on the sales in 2017, 2016 and 2015, respectively.
48
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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, 2017 were as follows:
Less than 12 months
12 months or more
Total
Available for sale:
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(Dollars in Thousands)
Fair Value
Unrealized
Losses
Residential mortgage-backed securities . . . . . . . . . . . . . $ 1,061,577 $ (13,157) $ 2,029,455 $ (52,812) $ 3,091,032 $ (65,969)
(16)
Obligations of states and political subdivisions . . . . . . . .
(482)
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,078,610 $ (13,417) $ 2,037,996 $ (53,050) $ 3,116,606 $ (66,467)
5,534
11,499
6,056
19,518
522
8,019
(7)
(231)
(9)
(251)
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,
2016 were as follows:
Less than 12 months
12 months or more
Total
Available for sale:
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(Dollars in Thousands)
Fair Value
Unrealized
Losses
Residential mortgage-backed securities . . . . . . . . . . . . . $ 2,513,872 $ (52,245) $ 396,695 $ (17,675) $ 2,910,567 $ (69,920)
(433)
Obligations of states and political subdivisions . . . . . . . .
(482)
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,559,042 $ (52,862) $ 402,147 $ (17,973) $ 2,961,189 $ (70,835)
31,104
14,066
31,104
19,518
—
5,452
(433)
(184)
—
(298)
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 more likely than 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 had a small investment in non-agency residential
mortgage-backed securities that had additional market volatility beyond economically induced interest rate events, which
were sold in the first quarter of 2017. The Company concluded that the investments in non-agency residential mortgage-
backed securities were other-than-temporarily impaired due to both credit and other than credit issues. No impairment
charges were recorded in 2017. Impairment charges of $354,000 ($230,100, after tax) and $954,000 ($620,1000, after
tax) were recorded in 2016 and 2015, 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 likely than not be
49
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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, 2017 (in Thousands):
Balance at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,931
(13,931)
—
Sale of other-than-temporarily impaired available-for-sale securities during period . . . . . . . . . . . . . . . . . .
Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
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, 2016 (in Thousands):
Balance at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,577
354
Balance at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,931
Impairment charges recognized during period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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, 2015 (in Thousands):
Balance at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,623
954
Balance at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,577
Impairment charges recognized during period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3) Loans
A summary of loans, by loan type at December 31, 2017 and 2016 is as follows:
December 31,
December 31,
2017
2016
(Dollars in Thousands)
Commercial, financial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Real estate - mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3,322,668 $
1,133,525
1,683,550
49,543
158,886
6,348,172 $
2,993,203
1,032,222
1,716,875
55,168
167,220
5,964,688
(4) Allowance for Probable Loan Losses
The allowance for probable loan losses primarily consists of the aggregate loan loss allowances of the bank
subsidiaries. The allowances are established through charges to operations in the form of provisions for probable loan
losses. Loan losses or recoveries are charged or credited directly to the allowances. The allowance for probable loan losses
of each bank subsidiary is maintained at a level considered appropriate by management, based on estimated probable losses
in the loan portfolio. The allowance for probable loan losses is derived from the following elements: (i) allowances
established on specific impaired loans, which are based on a review of the individual characteristics of each loan, including
the customer’s ability to repay the loan, the underlying collateral values, and the industry in which the customer operates,
(ii) allowances based on actual historical loss experience for similar types of loans in the Company’s loan portfolio, and
50
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(iii) allowances based on general economic conditions, changes in the mix of loans, company resources, border risk and
credit quality indicators, among other things.
The Company’s management continually reviews the allowance for loan losses of the bank subsidiaries using the
amounts determined from the allowances established on specific impaired loans, the allowance established on quantitative
historical loss percentages, and the allowance based on qualitative data to establish an appropriate amount to maintain in
the Company’s allowance for loan losses. Should any of the factors considered by management in evaluating the adequacy
of the allowance for probable loan losses change, the Company’s estimate of probable loan losses could also change, which
could affect the level of future provisions for probable loan losses. While the calculation of the allowance for probable
loan losses utilizes management’s best judgment and all information available, the adequacy of the allowance is dependent
on a variety of factors beyond the Company’s control, including, among other things, the performance of the entire loan
portfolio, the economy, changes in interest rates and the view of regulatory authorities towards loan classifications.
The loan loss provision is determined using the following methods. On a weekly basis, loan past due reports are
reviewed by the credit quality committee to determine if a loan has any potential problems and if a loan should be placed
on the Company’s internal classified report. Additionally, the Company’s credit department reviews the majority of the
Company’s loans for proper internal classification purposes regardless of whether they are past due and segregates any
loans with potential problems for further review. The credit department will discuss the potential problem loans with the
servicing loan officers to determine any relevant issues that were not discovered in the evaluation. Also, an analysis of
loans that is provided through examinations by regulatory authorities is considered in the review process. After the above
analysis is completed, the Company will determine if a loan should be placed on an internal classified report because of
issues related to the analysis of the credit, credit documents, collateral and/or payment history.
World and U.S. economic conditions have continued to improve; however, there remains some uncertainty
created by continued issues with negative demographic trends, weak labor participation rates, enormous government debt,
excessive regulations, and unfunded entitlement programs that could create a financial crisis. The impact to the world and
U.S. economy from these issues is being magnified by a lack of appropriate government action to find solutions to the
problems. In the Company’s market area, the challenges are further magnified by the uncertainty around the renegotiation
of the North American Free Trade Agreement (“NAFTA”), and whether such negotiations will advance NAFTA or repeal
it. Economic 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 in which the bank subsidiaries invest.
Commercial and industrial loans are mostly secured by the collateral pledged by the borrower that is 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
51
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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, 2017
Domestic
Foreign
Commercial
real estate:
other
Commercial
construction & real estate: Commercial
Commercial
land
farmland &
development commercial multifamily
real estate: Residential: Residential:
first lien
junior lien Consumer Foreign
Balance at December 31, . . . . . . . . $
Losses charge to allowance . . . .
Recoveries credited to
allowance . . . . . . . . . . . . . . . .
Net losses charged to allowance .
Provision (credit) charged to
operations . . . . . . . . . . . . . . . . . .
Balance at December 31, . . . . . . . . $
25,649 $
(12,094)
13,889 $
(213)
16,731 $
(40)
806 $
—
2,455 $
(101)
3,716 $
(340)
(Dollars in Thousands)
4,020
(8,074)
21
(192)
527
487
—
—
11
(90)
258
(82)
531 $ 884 $
(309)
45
(264)
(1)
21
20
Total
64,661
(13,098)
4,903
(8,195)
10,330
27,905 $
(2,022)
11,675 $
(555)
16,663 $
303
1,109 $
585
2,950 $
2,469
6,103 $
173
440 $
(62)
842 $
11,221
67,687
December 31, 2016
Domestic
Foreign
Commercial
real estate:
other
Commercial
construction & real estate: Commercial
Commercial development commercial multifamily
junior lien Consumer Foreign
Total
land
farmland &
real estate: Residential: Residential:
first lien
Balance at December 31, . . . . . . . . $
Losses charge to allowance . . . .
Recoveries credited to
allowance . . . . . . . . . . . . . . . .
Net losses charged to allowance .
Provision (credit) charged to
operations . . . . . . . . . . . . . . . . . .
Balance at December 31, . . . . . . . . $
(Dollars in Thousands)
21,431 $
(32,959)
13,920 $
(16)
19,769 $
(1,890)
1,248 $
(180)
7,110
(25,849)
6,099
6,083
119
(1,771)
—
(180)
3,509 $
(70)
21
(49)
5,321 $
(331)
638 $ 1,152 $ 66,988
(35,901)
(41)
(414)
278
(53)
69
(345)
19
(22)
13,715
(22,186)
30,067
25,649 $
(6,114)
13,889 $
(1,267)
16,731 $
(262)
806 $
(1,005)
2,455 $
(1,552)
3,716 $
238
531 $
(246)
19,859
884 $ 64,661
Balance at December 31, . . . . . . . . $
Losses charge to allowance . . . .
Recoveries credited to
allowance . . . . . . . . . . . . . . . .
Net losses charged to allowance .
Provision (credit) charged to
operations . . . . . . . . . . . . . . . . . .
Balance at December 31, . . . . . . . . $
December 31, 2015
Domestic
Foreign
Commercial
real estate:
other
Commercial
construction & real estate: Commercial
Commercial development
land
farmland & real estate: Residential: Residential:
commercial multifamily
junior lien
first lien
Consumer Foreign
22,352 $
(24,802)
12,955 $
(695)
18,683 $
(492)
846 $
—
3,589 $
(157)
4,683 $
(275)
(Dollars in Thousands)
3,135
(21,667)
141
(554)
963
471
—
—
30
(127)
431
156
660 $ 1,060 $
(704)
170
(534)
—
10
10
Total
64,828
(27,125)
4,880
(22,245)
20,746
21,431 $
1,519
13,920 $
615
19,769 $
402
1,248 $
47
3,509 $
482
5,321 $
512
638 $ 1,152 $
82
24,405
66,988
52
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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 decrease in the provision for probable loan losses charged to expense for the year
ended December 31, 2017 can be attributed to a decrease in the historical loss experience in the commercial category of
the calculation. As discussed in prior periods, charge-offs increased from historical levels due to the deterioration of one
relationship that is secured by multiple pieces of transportation equipment beginning in the fourth quarter of 2014. The
Company uses a three year historical charge-off experience in the calculation, therefore, as those charge-offs are eliminated
from the calculation, the allowance for probable loan losses is impacted. On August 26, 2017, Hurricane Harvey made
landfall in Rockport, Texas, as a category four storm and followed the Gulf Coast of Texas north to the Houston metro
area and finally the State of Louisiana. The Texas Gulf Coast is an area where the Company serves many consumer and
commercial customers. The Company has reviewed the exposure to losses of property arising from the impact of Hurricane
Harvey and has determined that the impact is not significant to warrant a specific reserve; however, it is still evaluating
the impact, therefore the Company’s allowance for probable loan losses at December 31, 2017 includes factors in the
qualitative ratios used in the calculation to incorporate the potential impact of losses arising from the impact of Hurricane
Harvey on certain portions of the loan portfolio. The increase in losses charged to the allowance for probable loan losses
for the year ended December 31, 2016 can be attributed to further deterioration in the previously identified and charged
down relationship primarily secured by multiple pieces of transportation equipment. In March 2016, litigation against the
management of the borrower was filed in the State of Nevada, resulting in a going concern issue with the borrower’s
operations and the future use of the transportation equipment pledged as collateral on the relationship. As a result,
management, in accordance with its credit review procedures, re-evaluated the collateral values on the equipment in light
of the new circumstances and reduced the collateral values accordingly, resulting in a further charge-down of the
relationship of approximately $19.4 million, which is included in the losses charged to the allowance in the commercial
category in the table detailing the year ended December 31, 2016 activity. The impact of the charge-down is also reflected
in the various tables in this Note including impaired loans, non-accrual loans and the credit quality indicator summary.
Two large recoveries on loans charged off in prior years are included in the recoveries credited to the allowance in the
table detailing activity for the year ended December 31, 2016. The recoveries occurred in the first and third quarters of
2016 in the amounts of $4.4 million and $6 million, respectively and are included in the Commercial and Commercial
Real Estate: Other Construction and Land Development categories. The increase in charge-offs for the years ended
December 31, 2015 in the Commercial category can be attributed to a charge down of the previously discussed relationship
that is primarily secured by multiple pieces of transportation equipment. The relationship was charged down by
$13.5 million for the year ended December 31, 2015.
53
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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, 2017
Loans Individually
Evaluated For
Impairment
Loans Collectively
Evaluated For
Impairment
Recorded
Investment
Allowance
Recorded
Investment
Allowance
(Dollars in Thousands)
Domestic
Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,947 $
Commercial real estate: other construction & land
development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate: farmland & commercial . . . . . . . . . .
Commercial real estate: multifamily . . . . . . . . . . . . . . . . . . . . .
Residential: first lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential: junior lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,455
33,123
476
6,852
723
1,281
347
300 $ 1,068,520 $ 27,605
116
18
—
—
—
—
—
1,681,095
2,010,162
192,440
425,925
700,025
48,262
158,539
11,559
16,645
1,109
2,950
6,103
440
842
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 63,204 $
434 $ 6,284,968 $ 67,253
December 31, 2016
Loans Individually
Evaluated For
Impairment
Loans Collectively
Evaluated For
Impairment
Recorded
Investment
Allowance
Recorded
Investment
Allowance
(Dollars in Thousands)
Domestic
Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,412 $
Commercial real estate: other construction & land
development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate: farmland & commercial . . . . . . . . . .
Commercial real estate: multifamily . . . . . . . . . . . . . . . . . . . . .
Residential: first lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential: junior lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,776
10,810
552
6,836
978
1,295
746
— $
887,255 $ 25,649
371
546
—
44
—
—
—
1,712,099
1,932,260
139,914
415,068
609,340
53,873
166,474
13,518
16,185
806
2,411
3,716
531
884
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48,405 $
961 $ 5,916,283 $ 63,700
Loans accounted for on a non-accrual basis at December 31, 2017, 2016 and 2015 amounted to $54,730,000,
$37,245,000 and $47,685,000, respectively. The effect of such non-accrual loans reduced interest income by
approximately $977,000, $2,461,000 and $3,298,000 for the years ended December 31, 2017, 2016 and 2015, 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, 2017, 2016 and 2015 amounted to approximately $7,257,000, $5,226,000 and $11,616,000,
respectively.
54
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The table below provides additional information on loans accounted for on a non-accrual basis by loan class:
December 31, 2017 December 31, 2016
(Dollars in Thousands)
Domestic
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 non-accrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
17,909 $
2,455
33,123
476
712
11
44
—
54,730 $
22,369
4,776
8,314
552
655
166
26
387
37,245
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 (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 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, 2017:
December 31, 2017
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
(Dollars in Thousands)
Average
Recorded
Investment
Interest
Recognized
Loans with Related Allowance
Domestic
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial real estate: other construction & land development . . . . . . . . . .
Commercial real estate: farmland & commercial . . . . . . . . . . . . . . . . . . . . .
Total impaired loans with related allowance . . . . . . . . . . . . . . . . . . . . . . . $
1,300 $
145
449
1,894 $
1,577 $
169
590
2,336 $
300 $
116
18
434 $
1,346 $
150
489
1,985 $
—
—
—
—
Loans with No Related Allowance
Domestic
Recorded
Investment
December 31, 2017
Unpaid
Principal
Balance
Average
Recorded
Investment
(Dollars in Thousands)
Interest
Recognized
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,646 $ 44,095 $ 19,615 $
Commercial real estate: other construction & land development . . . . . . . . . . . . . . . . . . . .
Commercial real estate: farmland & commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate: multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential: first lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential: junior lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,310
32,675
476
6,852
723
1,281
347
2,455
33,275
505
6,968
736
1,283
347
3,493
38,536
511
7,249
970
1,293
750
Total impaired loans with no related allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 61,310 $ 89,664 $ 72,417 $
55
3
—
—
—
324
45
3
16
391
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The following tables detail key information regarding the Company’s impaired loans by loan class for the year
ended December 31, 2016:
December 31, 2016
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Recognized
(Dollars in Thousands)
Loans with Related Allowance
Domestic
Commercial real estate: other construction & land development . . . . . . . . . . $
Commercial real estate: farmland & commercial . . . . . . . . . . . . . . . . . . . . .
Commercial real estate: multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total impaired loans with related allowance . . . . . . . . . . . . . . . . . . . . . . . $
1,958 $
2,808
62
4,828 $
1,971 $
3,948
62
5,981 $
371
546
44
961 $
2,512
3,247
62
9,579 $
—
—
—
—
Loans with No Related Allowance
Domestic
Recorded
Investment
December 31, 2016
Unpaid
Principal
Balance
Average
Recorded
Investment
(Dollars in Thousands)
Interest
Recognized
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,412 $ 50,737 $ 19,354 $
Commercial real estate: other construction & land development . . . . . . . . . . . . . . . . . . . .
Commercial real estate: farmland & commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate: multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential: first lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential: junior lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,419
9,054
562
6,847
1,017
1,295
746
2,818
8,002
552
6,774
978
1,295
746
2,336
8,523
401
6,860
1,011
1,214
751
Total impaired loans with no related allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,577 $ 74,677 $ 40,450 $
3
67
110
—
298
52
1
16
547
A portion of the impaired loans have adequate collateral and credit enhancements not requiring a related
allowance for loan loss. 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.
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 collectible 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.
56
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The following table details loans accounted for as “troubled debt restructuring,” segregated by loan class. Loans
accounted for as troubled debt restructuring are included in impaired loans.
December 31, 2017 December 31, 2016
(Dollars in Thousands)
Domestic
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial real estate: farmland & commercial . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential: first lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential: junior lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,910 $
—
6,140
712
1,237
347
10,710
3,086
6,181
812
1,269
360
Total troubled debt restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
15,346 $
22,418
The bank subsidiaries charge off that portion of any loan which management considers to represent a loss, as well
as that portion of any other loan which is classified as a “loss” by bank examiners. Commercial and industrial or real estate
loans are generally considered by management to represent a loss, in whole or part, when an exposure beyond any collateral
coverage is apparent and when no further collection of the loss portion is anticipated based on the borrower’s financial
condition and general economic conditions in the borrower’s industry. Generally, unsecured consumer loans are charged-
off when 90 days past due.
While management of the Company considers that it is generally able to identify borrowers with financial
problems reasonably early and to monitor credit extended to such borrowers carefully, there is no precise method of
predicting loan losses. The determination that a loan is likely to be uncollectible and that it should be wholly or partially
charged-off as a loss is an exercise of judgment. Similarly, the determination of the adequacy of the allowance for probable
loan losses can be made only on a subjective basis. It is the judgment of the Company’s management that the allowance
for probable loan losses at December 31, 2017 and December 31, 2016, 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:
Domestic
30 - 59
Days
60 - 89
Days
December 31, 2017
90 Days or
90 Days or greater &
Greater
Total
Past
still accruing Due
(Dollars in Thousands)
Current
Portfolio
Total
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,790 $
Commercial real estate: other construction &
land development . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate: farmland &
commercial . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate: multifamily . . . . . . . . .
Residential: first lien . . . . . . . . . . . . . . . . . . . .
Residential: junior lien . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,925
84
4,295
1,310
868
1,229
354
518
—
2,458
580
98
69
398 $ 18,308 $
537 $ 22,496 $ 1,063,971 $ 1,086,467
308
820
6
1,482
1,682,068
1,683,550
31,133
476
4,095
1,110
160
667
954
—
3,861
1,099
133
667
2,043,285
192,916
432,777
700,748
49,543
158,886
7,257 $ 77,053 $ 6,271,119 $ 6,348,172
2,007,709
192,356
421,929
697,748
48,417
156,921
35,576
560
10,848
3,000
1,126
1,965
Total past due loans . . . . . . . . . . . . . . . . . . . $ 15,855 $ 4,429 $ 56,769 $
57
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Domestic
30 - 59
Days
60 - 89
Days
December 31, 2016
90 Days or
90 Days or greater &
Greater
Total
Past
still accruing Due
(Dollars in Thousands)
Current
Portfolio
Total
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,081 $
Commercial real estate: other construction &
land development . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate: farmland &
commercial . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate: multifamily . . . . . . . . .
Residential: first lien . . . . . . . . . . . . . . . . . . . .
Residential: junior lien . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,454
44
5,615
762
910
931
1,502
3,054
—
1,350
178
95
425
829 $ 21,123 $
392 $ 26,033 $
883,634 $
909,667
396
4,456
9
6,354
1,710,521
1,716,875
6,150
552
4,143
540
413
397
289
—
3,756
382
387
11
1,943,070
140,466
421,904
610,318
55,168
167,220
5,226 $ 61,400 $ 5,903,288 $ 5,964,688
1,930,412
139,870
410,796
608,838
53,750
165,467
12,658
596
11,108
1,480
1,418
1,753
Total past due loans . . . . . . . . . . . . . . . . . . . $ 17,299 $ 6,327 $ 37,774 $
The increase in the commercial real estate: farmland and commercial in the 90 days and greater category at
December 31, 2017 compared to December 31, 2016 can be attributed to a relationship that is secured by a water park that
is currently classified as Impaired. 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 in accordance with the
provision of. ASC 310-10, “Receivables,” and, if deemed necessary, a specific reserve is allocated to the credit. The
specific reserve allocated under ASC 310-10, is based on (i) the present value of expected future cash flows discounted at
the loan’s effective interest rate; (ii) the loan’s observable market price; or (iii) the fair value of the collateral if the loan is
collateral dependent. Substantially all of the Company’s loans evaluated as impaired under ASC 310-10 are measured
using the fair value of collateral method. In limited cases, the Company may use other methods to determine the specific
reserve of a loan under ASC 310-10 if such loan is not collateral dependent.
The allowance based on historical loss experience on the Company’s remaining loan portfolio, which includes
the “Special Review Credits,” “Watch List—Pass Credits,” and “Watch List—Substandard Credits” is determined by
segregating the remaining loan portfolio into certain categories such as commercial loans, installment loans, international
loans, loan concentrations and overdrafts. Installment loans are then further segregated by number of days past due. A
historical loss percentage, adjusted for (i) management’s evaluation of changes in lending policies and procedures,
(ii) current economic conditions in the market area served by the Company, (iii) other risk factors, (iv) the effectiveness
of the internal loan review function, (v) changes in loan portfolios, and (vi) the composition and concentration of credit
volume is applied to each category. Each category is then added together to determine the allowance allocated under ASC
450-20.
58
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
A summary of the loan portfolio by credit quality indicator by loan class is as follows:
December 31, 2017
Domestic
(Dollars in Thousands)
Pass
Special
Review
Watch
List—Pass Substandard
Watch List— Watch List—
Impaired
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,616,604
1,863,763
192,440
425,811
699,875
48,262
158,539
1,288
5,134
—
40
150
—
—
905,707 $
— $
3,170 $
672
41,820
—
—
—
—
—
159,643 $
62,531
99,445
—
74
—
—
—
321,693 $
17,947
2,455
33,123
476
6,852
723
1,281
347
63,204
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,911,001 $
6,612 $ 45,662 $
Domestic
(Dollars in Thousands)
Pass
Special
Review
Watch
List—Pass Substandard
Watch List— Watch List—
Impaired
December 31, 2016
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,648,633
1,792,542
139,914
413,638
609,190
53,873
166,474
1,986
7,983
—
814
150
—
—
720,350 $ 90,746 $
1,121 $
—
59,872
—
—
—
—
—
75,038 $
61,480
71,863
—
616
—
—
—
208,997 $
22,412
4,776
10,810
552
6,836
978
1,295
746
48,405
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,544,614 $ 101,679 $ 60,993 $
The decrease in Special review credits for December 31, 2017 compared to December 31, 2016 can be attributed
to the reclassification of a relationship secured by barges used in the transportation of petroleum products from Special
Review to Watch List - Substandard and by the reclassification of a relationship secured by equipment used in oil and gas
production from Special Review to the Pass category. The decrease in the Watch List – Pass credits for December 31,
2017 compared to December 31, 2016 can be attributed to a relationship secured by real estate from Watch List – Pass to
the Pass category. The increase in Watch List – Substandard credits at December 31, 2017 compared to December 31,
2016 can be primarily attributed to the relationship mentioned above, in addition to the reclassification of three additional
relationships from Pass to Watch List – Substandard. One such relationship is in the oil and gas production business, one
is in the water park business and is secured by a water park, and one is secured by construction equipment. Additionally,
there was an increase in the outstanding balance on a relationship primarily secured by transportation equipment, which
was already classified as Watch List-Substandard at December 31, 2016.
59
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(5) Bank Premises and Equipment
A summary of bank premises and equipment, by asset classification, at December 31, 2017 and 2016 were as
follows:
Bank buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture, equipment and vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate held for future expansion:
Land, building, furniture, fixture and equipment . . . . . . . . . . . . .
Less: accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . .
(6) Goodwill and Other Intangible Assets
Estimated
useful lives
2017
2016
(Dollars in Thousands)
5
1
- 40 years $ 550,094 $ 542,063
- 20 years
280,586
125,213
289,743
123,087
7
- 27 years
—
—
(448,470)
(420,279)
$ 514,454 $ 527,583
The majority of the Company’s identified intangibles are in the form of amortizable core deposit premium. A
small portion of the fully amortized identified intangibles represent 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
(Dollars in Thousands)
Net
December 31, 2017:
Core deposit premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Identified intangible (contract rights) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total identified intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
58,675 $
2,022
60,697 $
58,675 $
2,022
60,697 $
December 31, 2016:
Core deposit premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Identified intangible (contract rights) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total identified intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
58,675 $
2,022
60,697 $
58,650 $
2,022
60,672 $
—
—
—
25
—
25
Amortization expense of intangible assets for the years ended December 31, 2017, 2016 and 2015, was $25,000,
$128,000 and $644,000, respectively.
There were no changes in the carrying amount of goodwill for the years ended December 31, 2017 and 2016.
60
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(7) Deposits
Deposits as of December 31, 2017 and 2016 and related interest expense for the years ended December 31, 2017,
2016 and 2015 were as follows:
2016
2017
(Dollars in Thousands)
Deposits:
Demand - non-interest bearing
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,609,932 $ 2,509,544
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
648,507
Total demand non-interest bearing . . . . . . . . . . . . . . . . . . . . . .
3,158,051
Savings and interest bearing demand
633,323
3,243,255
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total savings and interest bearing demand . . . . . . . . . . . . . . .
Time, certificates of deposit $100,000 or more
2,615,143
629,988
3,245,131
2,589,675
614,053
3,203,728
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
637,006
808,881
748,104
838,161
Less than $100,000
389,682
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
272,363
Total time, certificates of deposit . . . . . . . . . . . . . . . . . . . . . . .
2,248,310
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,544,892 $ 8,610,089
354,998
255,621
2,056,506
Interest expense:
Savings and interest bearing demand
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total savings and interest bearing demand . . . . . . . .
Time, certificates of deposit $100,000 or more
2017
2016
(Dollars in Thousands)
2015
5,453 $
755
6,208
3,922 $
640
4,562
3,026
567
3,593
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,644
4,105
3,881
3,929
4,693
4,116
Less than $100,000
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total time, certificates of deposit . . . . . . . . . . . . . . . .
Total interest expense on deposits . . . . . . . . . . . . . . . . . . $
1,680
1,447
1,312
744
706
675
11,233
9,963
9,736
15,944 $ 14,525 $ 14,826
61
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Scheduled maturities of time deposits as of December 31, 2017 were as follows:
Total
(in Thousands)
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,859,507
139,276
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41,572
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,303
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,760
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
88
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,056,506
Scheduled maturities of time deposits in amounts of $100,000 or more at December 31, 2017, were as follows:
Due within 3 months or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Due after 3 months and within 6 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after 6 months and within 12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after 12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
(in Thousands)
557,206
348,695
404,776
135,210
$ 1,445,887
Time deposits that meet or exceed the FDIC insurance limit of $250,000 at December 31, 2017 and December
31, 2016 were $894,000 and $1,005,000, in thousands, respectively.
(8) Securities Sold Under Repurchase Agreements
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
securities and averaged $402,396,000 and $759,458,000 during 2017 and 2016, respectively, and the maximum amount
outstanding at any month end during 2017 and 2016 was $514,616,000 and $819,155,000 respectively.
62
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Further information related to repurchase agreements at December 31, 2017 and 2016 is set forth in the following
table:
Collateral Securities
Repurchase Borrowing
Book Value of
Securities Sold Securities Sold
Fair Value of
Balance of
Liability
(Dollars in Thousands)
Weighted Average
Interest Rate
December 31, 2017 term:
Overnight agreements . . . . . . . . . . . . . . . . . . . . . . . $
1 to 29 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30 to 90 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 90 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
340,054 $
—
109,300
11,327
460,681 $
334,506 $ 242,824
—
—
100,000
107,238
11,168
10,981
452,912 $ 353,805
December 31, 2016 term:
Overnight agreements . . . . . . . . . . . . . . . . . . . . . . . $
1 to 29 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30 to 90 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 90 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
295,282 $
10,250
2,315
382,304
690,151 $
292,286 $ 190,915
9,863
10,148
2,300
2,317
375,060
301,907
679,811 $ 504,985
0.25 %
—
3.99
0.74
1.32 %
0.15 %
0.50
0.33
4.01
2.46 %
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.
(9) Other Borrowed Funds
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, 2017 and 2016 is set forth
in the following table:
Federal Home Loan Bank advances—short-term
December 31,
2017
2016
(Dollars in Thousands)
Balance at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Rate on balance outstanding at year end . . . . . . . . . . . . . .
Average daily balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Average rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum amount outstanding at any month end . . . . . . . $ 1,043,250
$
1.44 %
$
1.23 %
$
945,225
839,858
Federal Home Loan Bank advances—long-term(1)
Balance at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Rate on balance outstanding at year end . . . . . . . . . . . . . .
Average daily balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Average rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum amount outstanding at any month end . . . . . . . $
250,000
51,644
$
1.26 %
$
1.26 %
$
250,000
583,375
0.66 %
483,379
0.47 %
600,875
150,000
0.58 %
150,000
0.58 %
150,000
(1) Long-term advances outstanding at December 31, 2017 mature in the following increments: $100,000,000 in November 2027 and $150,000,000 in
December 2027 and are callable by the FHLB on a quarterly basis. Long-Term advances outstanding at December 31, 2016 matured in January 2017.
63
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(10) Junior Subordinated Deferrable Interest Debentures
The Company has formed six statutory business trusts under the laws of the State of Delaware, for the purpose of issuing trust
preferred securities. The 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, 2017 and December 31, 2016, the principal amount of debentures outstanding totaled $160,416,000.
On July 29, 2015, the Company bought back a portion of the Capital Securities of IB Capital Trusts X and XI from the holder of the
securities for a price that reflected an approximate 24.5% discount from the redemption prices of the securities. The Company thereby
retired $13,000,000 of the total $34,021,000 of related Junior Subordinated Deferrable Interest Debentures related to IB Capital Trust
X and $1,000,000 of the total $27,990,000 of related Junior Subordinated Deferrable Interest Debentures related to IB Capital Trust XI.
On November 1, 2016, the Company bought back a portion of the Capital Securities of IB Capital Trust XI from the holder of the
securities for a price that reflected an approximate 24% discount from the redemption price of the securities. The Company thereby
retired $1,000,000 of the total $26,990,000 of related Junior Subordinated Deferrable Interest Debentures related to IB Capital Trust XI.
The discounts recorded in connection with the repurchases of the outstanding Capital Securities are included in other income on the
consolidated financial statements.
The Debentures are subordinated and junior in right of payment to all present and future senior indebtedness (as defined in
the respective indentures) of the Company, and are pari passu with one another. The interest rate payable on, and the payment terms of
the Debentures are the same as the distribution rate and payment terms of the respective issues of Capital and Common Securities issued
by the Trusts. The Company has fully and unconditionally guaranteed the obligations of each of the Trusts with respect to the Capital
and Common Securities. The Company has the right, unless an Event of Default (as defined in the Indentures) has occurred and is
continuing, to defer payment of interest on the Debentures for up to twenty consecutive quarterly periods on Trusts VI, VIII, IX, X, XI
and XII. If interest payments on any of the Debentures are deferred, distributions on both the Capital and Common Securities related to
that Debenture would also be deferred. The redemption prior to maturity of any of the Debentures may require the prior approval of the
Federal Reserve and/or other regulatory bodies.
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, 2017
and December 31, 2016, the total $160,416,000 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, 2017:
Junior
Subordinated
Deferrable
Interest
Debentures
Repricing
Frequency
Interest
Rate
Interest
Rate Index(1)
Maturity Date
Optional
Redemption Date(1)
Trust VI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Trust VIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust IX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust XI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust XII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Dollars in Thousands)
25,774
25,774
41,238
21,021
25,990
20,619
Quarterly
Quarterly
Quarterly
Quarterly
Quarterly
Quarterly
4.87 % LIBOR + 3.45 November 2032
October 2033
4.41 % LIBOR + 3.05
October 2036
2.96 % LIBOR + 1.62
February 2037
3.03 % LIBOR + 1.65
July 2037
2.96 % LIBOR + 1.62
September 2037
2.93 % LIBOR + 1.45
February 2008
October 2008
October 2011
February 2012
July 2012
September 2012
$
160,416
(1) The Capital Securities may be redeemed in whole or in part on any interest payment date after the Optional Redemption Date.
(11) Earnings per Share (“EPS”)
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
64
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
outstanding during the reporting period. The calculation of the basic EPS and the diluted EPS for the years ended
December 31, 2017, 2016, and 2015 is set forth in the following table:
Net Income
(Numerator)
Shares
(Denominator)
(Dollars in Thousands,
Except Per Share Amounts)
Per Share
Amount
December 31, 2017:
Basic EPS
Net income available to common
shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . $
Potential dilutive common shares and
warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31, 2016:
Basic EPS
Net income available to common
shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . $
Potential dilutive common shares and
warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31, 2015:
Basic EPS
Net income available to common
shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . $
Potential dilutive common shares . . . . . . . . .
Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
157,436 66,046,155 $
2.38
—
732,281
157,436 66,778,436 $
2.36
133,932 65,967,989 $
2.03
—
345,501
66,313,490 $
133,932
136,726 66,411,193 $
—
136,726
225,160
66,636,353 $
2.02
2.06
2.05
(12) Employees’ Profit Sharing Plan
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 $3,750,000
$3,650,000 and $3,525,000 were charged to income for the years ended December 31, 2017, 2016, and 2015, respectively.
(13) International Operations
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.
65
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
A summary of assets attributable to international operations at December 31, 2017 and 2016 are as follows:
Loans:
2017
2016
(Dollars in Thousands)
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 113,019 $ 124,079
43,141
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
167,220
(884)
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 158,044 $ 166,336
603
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Less allowance for probable loan losses . . . . . . . . . . . . . . . . . . . . . .
45,867
158,886
(842)
671 $
At December 31, 2017, the Company had $99,547,000 in outstanding standby and commercial letters of credit to
facilitate trade activities.
Revenues directly attributable to international operations were approximately $5,248,000, $5,495,000 and
$6,113,000 for the years ended December 31, 2017, 2016 and 2015, respectively.
(14) Income Taxes
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:
Current
2017
2016
2015
(Dollars in Thousands)
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,974 $ 52,403 $ 65,196
5,258
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(6)
70,448
Total current taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,362
—
55,765
2,662
—
59,636
Deferred
(261)
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(71)
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(332)
Total deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 64,206 $ 63,071 $ 70,116
4,620
(50)
4,570
7,279
27
7,306
66
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Total income tax expense differs from the amount computed by applying the U.S. Federal income tax rate of 35%
for 2017, 2016 and 2015 to income before income taxes. The reasons for the differences for the years ended December 31
are as follows:
Computed expected tax expense . . . . . . . . . . . . . . . . . . . $ 77,643 $ 69,253 $ 72,389
Change in taxes resulting from:
2017
2016
2015
(Dollars in Thousands)
Tax-exempt interest income . . . . . . . . . . . . . . . . . . . .
State tax, net of federal income taxes, tax credit
and refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resolution of IRS exam . . . . . . . . . . . . . . . . . . . . . . . .
Other investment income . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax adjustment due to federal tax rate
change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,701)
(3,940)
(3,910)
1,697
(4,985)
(3,198)
3,287
—
(3,694)
3,371
—
(3,540)
—
1,806
Actual tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 64,206 $ 63,071 $ 70,116
—
(1,835)
(3,168)
918
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred
tax liabilities at December 31, 2017 and 2016 are reflected below:
Deferred tax assets:
Loans receivable, principally due to the allowance for probable loan losses. . . . . . . . . . . . . $ 14,546 $ 24,315
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,652
Impairment charges on available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,086
137
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,791
Net unrealized losses on available for sale investment securities . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,917
55,898
Total deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,053
844
81
9,680
4,434
31,638
Deferred tax liabilities:
2017
2016
(Dollars in Thousands)
Bank premises and equipment, principally due to differences on depreciation . . . . . . . . . . .
Identified intangible assets and goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(19,837)
(21,386)
(16,300)
(57,523)
Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (5,193) $ (1,625)
(10,940)
(13,417)
(12,474)
(36,831)
The net deferred tax liability of $5,193,000 at December 31, 2017 and $1,625,000 at December 31, 2016 is
included in other liabilities in the consolidated statements of condition.
In September 2014, the Company amended its 2012 federal income tax return as a result of a tax opinion obtained
regarding a judgment against the Company paid in 2012 afer litigation related to tax matters in the Company’s 2004
acquidition of Local Financial Corporation (“LFIN”). Litigation against the Company was initiated by the former
controlling shareholders of LFIN with respect to such tax matters. On March 5, 2010, a judgment against the Company
was entered on a jury verdict in the U.S. District Court for the Western District of Oklahoma. The Company subsequently
appealed the decision and on January 5, 2012, the United States Court of Appeals Tenth Circuit affirmed the judgment
and it became final and unappealable and the Company recorded the majority of the payment of the judgment as a non-
deductible expense in the Company’s 2012 federal income tax return. The Company engaged legal counsel to review the
67
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
deductibility of the judgment and, upon receiving the tax opinion, amended the 2012 tax return to report the payment as a
deductible expense. The Internal Revenue Service examined the amended return and at the conclusion of the exam,
allowed a certain portion of the judgment to be deducted as a necessary and ordinary business expense, resulting in a tax
refund of $4.9 million.
On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law. The Tax Act materially
changes U.S. corporate income tax rates, among other things. The Company was in a net deferred tax liability position at
the time the Tax Act was enacted and subsequently revalued the carrying value of the net deferred liability and its
components to the new 21% effective tax rate. The change in the tax rate resulted in a net benefit to the Company of
$3,168,000 and is included as a reduction to income tax expense in the consolidated income statement.
(15) Stock Options
On April 5, 2012, the Board of Directors adopted the 2012 International Bancshares Corporation Stock Option
Plan (the “2012 Plan”). There are 800,000 shares available for stock option grants under the 2012 Plan. Under the 2012
Plan, both qualified incentive stock options (“ISOs”) and non-qualified stock options (“NQSOs”) may be granted. Options
granted may be exercisable for a period of up to 10 years from the date of grant, excluding ISOs granted to 10%
shareholders, which may be exercisable for a period of up to only five years. As of December 31, 2017, 216,400 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.
Expected Life (Years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
— %
— %
— %
2017 (1)
2016
7.61
2.50 %
1.50 %
41.32 %
(1) No stock options were granted during the twelve months ended December 31, 2017.
68
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
A summary of option activity under the stock option plans for the twelve months ended December 31, 2017 is as
follows:
Weighted
average
exercise
price
Number of
options
Weighted
average
remaining
contractual
term (years)
Aggregate
intrinsic
value ($)
(in Thousands)
Options outstanding at December 31, 2016 . . . . . . . . . . . . . . . . . . . . 800,502 $
Plus: Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less:
—
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108,885
Options expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,188
Options forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,263
Options outstanding at December 31, 2017 . . . . . . . . . . . . . . . . . . . . 668,166
19.43
—
13.34
10.40
20.62
20.41
5.54
$
12,887
Options fully vested and exercisable at December 31, 2017 . . . . . . 283,472 $
18.62
4.46
$
5,975
Stock-based compensation expense included in the consolidated statements of income for the years ended
December 31, 2017, 2016 and 2015 was approximately $903,000, $1,082,000 and $1,172,000, respectively. As of
December 31, 2017, there was approximately $1,418,000 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 1.4 years.
Other information pertaining to option activity during the twelve month period ending December 31, 2017, 2016
and 2015 is as follows:
Twelve Months Ended December 31,
2017(1)
2016
2015
Weighted average grant date fair value of stock
options granted . . . . . . . . . . . . . . . . . . . . . . . .
Total fair value of stock options vested . . . . . . .
Total intrinsic value of stock options exercised
— $
$
9.42
$ 1,182,000 $ 1,015,000 $ 872,000
792,000 $ 781,000
$ 2,595,000 $
8.74 $
(1) No stock options were granted during the twelve months ended December 31, 2017.
(16) Long Term Restricted Stock Units
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
69
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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. No grants have been made under the Plan since December 2012 and there are currently no outstanding
grants under the Plan.
(17) Commitments, Contingent Liabilities and Other Matters
The Company leases portions of its banking premises and equipment under operating leases. Total rental expense
for the years ended December 31, 2017, 2016 and 2015 were approximately $5,258,000, $5,870,000 and $6,200,000,
respectively. Future minimum lease payments due under non-cancellable operating leases at December 31, 2017 were as
follows:
Fiscal year ending:
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total
(in thousands)
3,563
3,376
3,087
2,037
494
180
12,737
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, 2017 were $92,416,000.
Cash of approximately $116,129,000 and $111,353,000 at December 31, 2017 and 2016, respectively, was
maintained to satisfy regulatory reserve requirements.
The Company is involved in various legal proceedings that are in various stages of litigation. 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.
(18) Transactions with Related Parties
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 $27,626,000 and $26,547,000 at December 31, 2017 and 2016, respectively.
70
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(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 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, 2017, the following
financial amounts of instruments, whose contract amounts represent credit risks, were outstanding:
Commitments to extend credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,795,137,000
20,643,000
Credit card lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
95,402,000
Commercial letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,145,000
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, 2017, the maximum potential amount of future payments is approximately
$95,402,000. At December 31, 2017, the fair value of these guarantees is not significant. Unsecured letters of credit totaled
approximately $35,409,000 and $40,738,000 at December 31, 2017 and 2016, 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.
(20) Capital Requirements
On December 23, 2008, as part of the Troubled Asset Relief Program Capital Purchase Program of the United States
Department of the Treasury (“Treasury”), the Company issued to the Treasury 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”).
71
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
On June 12, 2013, the U.S. Treasury sold the Warrant to a third party. As of February 20, 2016, the Warrant is
still outstanding. Adjustments to the $24.43 per share Exercise Price of the Warrant will be made if the Company pays
cash dividends in excess of 33 cents per semi-annual period or makes certain other shareholder distributions before the
Warrants expires on December 23, 2018.
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, 2017, the
subsidiary banks could pay dividends of up to $731,850,000 to the Corporation without prior regulatory approval and
without adversely affecting their “well-capitalized” status under regulatory capital rules in effect at December 31, 2017.
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.
Current 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, 2017, that the Company
and each of the bank subsidiaries met all capital adequacy requirements to which they are subject.
In July 2013, the Federal Deposit Insurance Corporation (“FDIC”) and other regulatory bodies established a new,
comprehensive capital framework for U.S. banking organizations, consisting of minimum requirements that increase both
the quantity and quality of capital held by banking organizations. The final rules are a result of the implementation of the
BASEL III capital reforms and various Dodd-Frank Act related capital provisions. Consistent with the Basel international
framework, the rules include a new minimum ratio of Common Equity Tier 1 (“CET1”) to risk-weighted assets of 4.5%
and a CET1 capital conservation buffer of 2.5% of risk-weighted assets. The capital conservation buffer began phasing-
in on January 1, 2016 at .625% and increases each year until January 1, 2019, when the Company will be required to have
a 2.5% capital conservation buffer, effectively resulting in a minimum ratio of CET1 capital to risk-weighted assets of at
least 7% upon full implementation. The rules also raised the minimum ratio of Tier 1 capital to risk-weighted assets from
4% to 6% and include a minimum leverage ratio of 4% for all banking organizations. Regarding the quality of capital, the
new rules emphasize CET1 capital and implements strict eligibility criteria for regulatory capital instruments. The new
rules also improve the methodology for calculating risk-weighted assets to enhance risk sensitivity. The new rules are
subject to a four year phase in period for mandatory compliance and the Company was required to begin to phase in the
new rules beginning on January 1, 2015. Management believes, as of December 31, 2017, that the Company and each of
the bank subsidiaries will meet all capital adequacy requirements once the capital conservation is fully phased-in.
On November 21, 2017, the OCC, the Federal Reserve and the FDIC finalized a proposed rule that extends the
current treatment under the regulatory capital rules for certain regulatory capital deductions and risk weights and certain
minority interest requirements, as they apply to banking organizations that are not subject to the advanced approaches
capital rules. Effective January 1, 2018, the rule also pauses the full transition to the Basel III treatment of mortgage
servicing assets, certain deferred tax assets, investments in the capital of unconsolidated financial institutions and minority
72
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
interests. The agencies are also considering whether to make adjustments to the capital rules in response to CECL (the
FASB Standard relating to current expected credit loss) and its potential impact on regulatory capital.
On December 7, 2017, the Basel Committee on Banking Supervision unveiled the latest round of its regulatory
capital framework, commonly called “Basel IV.” The framework makes changes to the capital framework first introduced
as “Basel III” in 2010. The committee targeted 2022-2027 as the timeframe for implementation by regulators in individual
countries, including the U.S. federal bank regulatory agencies (after notice and comment).
The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress.
Banking institutions with a ratio of CET1 capital to risk-weighted assets above the minimum but below the conservation
buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.
As of December 31, 2017, capital levels at the Company exceed all capital adequacy requirements under the
Basel III Capital Rules as currently applicable to the Company. Based on the ratios presented below, capital levels as of
December 31, 2017 at the Company exceed the minimum levels necessary to be considered “well capitalized.”
As of December 31, 2017, 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.
73
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The Company’s and the bank subsidiaries’ actual capital amounts and ratios for 2017 under current guidelines
are presented in the following table:
Actual
For Capital Adequacy
Purposes
Phase In Schedule
To Be Well-Capitalized
Under Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(greater than (greater than (greater than (greater than
or equal to)
or equal to)
or equal to)
or equal to)
(Dollars in Thousands)
As of December 31, 2017:
Common Equity Tier 1 (to Risk Weighted Assets):
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,584,665 17.11 % $
International Bank of Commerce, Laredo . . . . . . . .
International Bank of Commerce, Oklahoma . . . . .
International Bank of Commerce, Brownsville . . . .
International Bank of Commerce, Zapata . . . . . . . .
Commerce Bank . . . . . . . . . . . . . . . . . . . . . . . . . .
1,119,173 17.10
169,279 13.41
165,034 25.94
66,406 30.58
79,330 33.22
Total Capital (to Risk Weighted Assets):
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,807,107 19.51 % $
International Bank of Commerce, Laredo . . . . . . . .
International Bank of Commerce, Oklahoma . . . . .
International Bank of Commerce, Brownsville . . . .
International Bank of Commerce, Zapata . . . . . . . .
Commerce Bank . . . . . . . . . . . . . . . . . . . . . . . . . .
1,173,068 17.93
178,057 14.11
170,613 26.82
68,718 31.64
81,278 34.03
Tier 1 Capital (to Risk Weighted Assets):
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,734,595 18.73 % $
International Bank of Commerce, Laredo . . . . . . . .
International Bank of Commerce, Oklahoma . . . . .
International Bank of Commerce, Brownsville . . . .
International Bank of Commerce, Zapata . . . . . . . .
Commerce Bank . . . . . . . . . . . . . . . . . . . . . . . . . .
1,119,173 17.10
169,279 13.41
165,034 25.94
66,406 30.58
79,330 33.22
Tier 1 Capital (to Average Assets):
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,734,595 14.62 % $
International Bank of Commerce, Laredo . . . . . . . .
International Bank of Commerce, Oklahoma . . . . .
International Bank of Commerce, Brownsville . . . .
International Bank of Commerce, Zapata . . . . . . . .
Commerce Bank . . . . . . . . . . . . . . . . . . . . . . . . . .
1,119,173 13.44
169,279 11.31
165,034 17.17
66,406 14.20
79,330 14.56
532,579
376,245
72,586
36,583
12,487
13,733
856,757
605,263
116,769
58,851
20,088
22,092
671,512
474,395
91,521
46,127
15,745
17,316
474,675
333,166
59,854
38,440
18,701
21,789
$
5.750 %
5.750
5.750
5.750
5.750
5.750
$
9.250 %
9.250
9.250
9.250
9.250
9.250
7.250 %
$
7.250
7.250
7.250
7.250
7.250
4.00 % $
4.00
4.00
4.00
4.00
4.00
N/A
425,320
82,054
41,355
14,116
15,524
N/A
654,339
126,237
63,623
21,717
23,884
N/A
523,471
100,989
50,899
17,374
19,107
N/A
416,458
74,818
48,050
23,376
27,236
N/A
6.50 %
6.50
6.50
6.50
6.50
N/A
10.00 %
10.00
10.00
10.00
10.00
N/A
8.00 %
8.00
8.00
8.00
8.00
N/A
5.00 %
5.00
5.00
5.00
5.00
74
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The Company’s and the bank subsidiaries’ actual capital amounts and ratios for 2016 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 (greater than (greater than (greater than
or equal to)
or equal to)
or equal to)
or equal to)
(Dollars in Thousands)
As of December 31, 2016:
Common Equity Tier 1 (to Risk Weighted Assets):
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,468,662 16.95 % $
International Bank of Commerce, Laredo . . . . . . . .
International Bank of Commerce, Brownsville . . . .
International Bank of Commerce, Zapata . . . . . . . .
Commerce Bank . . . . . . . . . . . . . . . . . . . . . . . . . .
1,201,527 16.63
158,533 25.61
65,989 34.09
73,765 31.84
444,190
370,342
31,720
9,922
11,872
Total Capital (to Risk Weighted Assets):
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,687,501 19.47 % $
International Bank of Commerce, Laredo . . . . . . . .
International Bank of Commerce, Brownsville . . . .
International Bank of Commerce, Zapata . . . . . . . .
Commerce Bank . . . . . . . . . . . . . . . . . . . . . . . . . .
1,260,886 17.45
163,937 26.49
67,464 34.85
76,093 32.85
747,540
623,258
53,382
16,698
19,980
Tier 1 Capital (to Risk Weighted Assets):
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,618,935 18.68 % $
International Bank of Commerce, Laredo . . . . . . . .
International Bank of Commerce, Brownsville . . . .
International Bank of Commerce, Zapata . . . . . . . .
Commerce Bank . . . . . . . . . . . . . . . . . . . . . . . . . .
1,201,527 16.63
158,533 25.61
65,989 34.09
73,765 31.84
574,197
478,734
41,004
12,826
15,347
Tier 1 Capital (to Average Assets):
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,618,935 13.91 % $
International Bank of Commerce, Laredo . . . . . . . .
International Bank of Commerce, Brownsville . . . .
International Bank of Commerce, Zapata . . . . . . . .
Commerce Bank . . . . . . . . . . . . . . . . . . . . . . . . . .
1,201,527 12.50
158,533 16.91
65,989 13.87
73,765 13.05
465,438
384,342
37,509
19,029
22,607
(21) Fair Value
$
5.125 %
5.125
5.125
5.125
5.125
N/A
469,701
40,230
12,584
15,058
$
8.625 %
8.625
8.625
8.625
8.625
N/A
722,618
61,892
19,360
23,166
6.625 %
6.625
$
6.625
6.625
6.625
N/A
578,094
49,514
15,488
18,532
4.00 % $
4.00
4.00
4.00
4.00
N/A
480,427
46,886
23,786
28,259
N/A
6.50 %
6.50
6.50
6.50
N/A
10.00 %
10.00
10.00
10.00
N/A
8.00 %
8.00
8.00
8.00
N/A
5.00 %
5.00
5.00
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:
• Level 1 Inputs—Unadjusted quoted prices in active markets for identical assets or liabilities.
• Level 2 Inputs—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or
liabilities, quoted prices in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the assets or liabilities.
• Level 3 Inputs—Unobservable inputs that are supported by little or no market activity and that are significant
to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose
value is determined using pricing models, discounted cash flow methodologies, or other valuation techniques,
as well as instruments for which the determination of fair value requires significant management judgment
or estimation.
75
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
A description of the valuation methodologies used for instruments measured at fair value, as well as the general
classification of such instruments pursuant to the valuation hierarchy is set forth below.
The following table represents financial instruments reported on the consolidated statements of condition at their
fair value as of December 31, 2017 by level within the fair value measurement hierarchy.
Fair Value Measurements at
Reporting Date Using
(in Thousands)
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Assets/Liabilities
Measured at
Fair Value
December 31, 2017
Significant
Other
Significant
Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
Measured on a recurring basis:
Assets:
Available for sale securities
Residential mortgage-backed securities . . . . . . . . . . . . . . $
States and political subdivisions . . . . . . . . . . . . . . . . . . . .
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,891,233 $
232,951
27,886
— $ 3,891,233 $
—
27,886
232,951
—
$
4,152,070 $ 27,886 $ 4,124,184 $
—
—
—
—
The following table represents financial instruments reported on the consolidated balance sheets at their fair value
as of December 31, 2016 by level within the fair value measurement hierarchy.
Fair Value Measurements at
Reporting Date Using
(in Thousands)
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Assets/Liabilities
Measured at
Fair Value
December 31, 2016
Significant
Unobservable
Inputs
(Level 3)
Measured on a recurring basis:
Assets:
Available for sale securities
Residential mortgage - backed securities . . . . . . . . . . . . . $
States and political subdivisions . . . . . . . . . . . . . . . . . . . .
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,894,470 $
254,972
27,907
— $ 3,876,865 $
—
27,907
254,972
—
$
4,177,349 $ 27,907 $ 4,131,837 $
17,605
—
—
17,605
For the year ended December 31, 2017, investment securities available-for-sale are classified within level 2 of
the valuation hierarchy, with the exception of certain equity investments that are classified within level 1. For the year
ended December 31, 2016, the Company had certain securities classified within level 3 of the fair value hierarchy. Those
investments were sold in the first quarter of 2017. 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
76
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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, 2016 for investment securities classified
within level 3 of the fair value hierarchy, 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 four years (2013,
2014, 2015, and 2016), and (iv) a discount rate of 13%. The estimates used in the model to determine fair value were based
on observable historical data of the underlying collateral.
The following table presents a reconciliation of activity for such mortgage-backed securities on a net basis
(Dollars in Thousands):
Balance at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,605
(798)
(21,904)
5,097
—
Principal paydowns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales of available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification of unrealized gains (losses) included in other comprehensive loss due to sale . . . . . . . .
Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Certain financial instruments 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).
77
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The following table represents financial instruments measured at fair value on a non-recurring basis as of and for
the period ended December 31, 2017 by level within the fair value measurement hierarchy:
Fair Value Measurements at Reporting
Date Using
(in thousands)
Quoted
Assets/Liabilities Prices in
Active
Measured at
Markets for
Fair Value
Identical
Year ended
Assets
(Level 1)
December 31,
2017
Significant
Other
Significant
Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
Net Provision
(Credit)
During
Period
Measured on a non-recurring basis:
Assets:
Impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other real estate owned . . . . . . . . . . . . . . . . . . . . .
11,210 $
2,000
— $
—
— $
—
11,210 $
2,000
2,138
710
The following table represents financial instruments measured at fair value on a non-recurring basis as of and for
the year ended December 31, 2016 by level within the fair value measurement hierarchy:
Fair Value Measurements at Reporting
Date Using
(in thousands)
Quoted
Assets/Liabilities Prices in
Active
Measured at
Markets
Fair Value
for Identical
Year ended
Assets
(Level 1)
December 31,
2016
Significant
Other
Net (Credit)
Significant
Observable Unobservable Provision
Inputs
(Level 3)
Inputs
(Level 2)
During
Period
Measured on a non-recurring basis:
Assets:
Impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other real estate owned . . . . . . . . . . . . . . . . . . . . . .
38,794 $
9,445
— $
—
— $
—
38,794 $ 19,699
2,351
9,445
The Company’s assets measured at fair value on a non-recurring basis are limited to impaired loans and other
real estate owned. Impaired loans are classified within level 3 of the valuation hierarchy. The fair value of impaired loans
is derived in accordance with FASB ASC 310, “Receivables”. Impaired loans are primarily comprised of collateral-
dependent commercial loans. Understanding that as the primary sources of loan repayments decline, the secondary
repayment source comes into play and correctly evaluating the fair value of that secondary source, the collateral, becomes
even more important. Re-measurement of the impaired loan to fair value is done through a specific valuation allowance
included in the allowance for probable loan losses. The fair value of impaired loans is based on the fair value of the
collateral, as determined through either an appraisal or evaluation process. The basis for the Company’s appraisal and
appraisal review process is based on regulatory guidelines and strives to comply with all regulatory appraisal laws,
regulations and the Uniform Standards of Professional Appraisal Practice. All appraisals and evaluations are “as is” (the
property’s highest and best use) valuations based on the current conditions of the property/project at that point in time.
The determination of the fair value of the collateral is based on the net realizable value, which is the appraised value less
any closing costs, when applicable. As of December 31, 2017, the Company had approximately $53,267,000 of impaired
commercial collateral dependent loans, of which approximately $18,585,000 had an appraisal performed within the
immediately preceding twelve months and of which approximately $0 had an evaluation performed within the immediately
preceding twelve months. As of December 31, 2016, the Company had approximately $38,108,000 of impaired
commercial collateral dependent loans, of which approximately $26,162,000 had an appraisal performed within the
78
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
immediately preceding twelve months and of which approximately $6,836,000 had an evaluation performed within the
immediately preceding twelve months.
The determination to either seek an appraisal or to perform an evaluation begins in weekly credit quality meetings,
where the committee analyzes the existing collateral values of the impaired loans and where obsolete appraisals are
identified. In order to determine whether the Company would obtain a new appraisal or perform an internal evaluation to
determine the fair value of the collateral, the credit committee reviews the existing appraisal to determine if the collateral
value is reasonable in view of the current use of the collateral and the economic environment related to the collateral. If
the analysis of the existing appraisal does not find that the collateral value is reasonable under the current circumstances,
the Company would obtain a new appraisal on the collateral or perform an internal evaluation of the collateral. The
ultimate decision to get a new appraisal rests with the independent credit administration group. A new appraisal is not
required if an internal evaluation, as performed by in-house experts, is able to appropriately update the original appraisal
assumptions to reflect current market conditions and provide an estimate of the collateral’s market value for impairment
analysis. The internal evaluations must be in writing and contain sufficient information detailing the analysis, assumptions
and conclusions and they must support performing an evaluation in lieu of ordering a new appraisal.
Other real estate owned is comprised of real estate acquired by foreclosure and deeds in lieu of foreclosure. Other
real estate owned is carried at the lower of the recorded investment in the property or its fair value less estimated costs to
sell such property (as determined by independent appraisal) within level 3 of the fair value hierarchy. Prior to foreclosure,
the value of the underlying loan is written down to the fair value of the real estate to be acquired by a charge to the
allowance for probable loan losses, if necessary. The fair value is reviewed periodically and subsequent write downs are
made accordingly through a charge to operations. Other real estate owned is included in other assets on the consolidated
financial statements. For the twelve months ended December 31, 2017, December 31, 2016 and December 31, 2015,
respectively the Company recorded approximately $30,000, $381,000 and $696,000 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, 2017, December 31, 2016 and December 31, 2015, respectively, the Company recorded approximately
$710,000, $2,351,000 and $1,023,000 in adjustments to fair value in connection with other real estate owned.
The fair value estimates, methods, and assumptions for the Company’s financial instruments at December 31,
2017 and December 31, 2016 are outlined below.
Cash and Cash Equivalents
For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
Investment securities held-to-maturity
The carrying amounts of investments held-to-maturity approximate fair value.
Investment Securities
For investment securities, which include U.S. Treasury securities, obligations of other U.S. government agencies,
obligations of states and political subdivisions and mortgage pass through and related securities, fair values are from an
independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market
spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment
speeds, credit information and the bond’s terms and conditions, among other things. See disclosures of fair value of
investment securities in Note 2.
79
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Loans
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by
type such as commercial, real estate and consumer loans as outlined by regulatory reporting guidelines. Each category is
segmented into fixed and variable interest rate terms and by performing and non-performing categories.
For variable rate performing loans, the carrying amount approximates the fair value. For fixed rate performing
loans, except residential mortgage loans, the fair value is calculated by discounting scheduled cash flows through the
estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan.
For performing residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusted for
prepayment estimates using discount rates based on secondary market sources or the primary origination market. Fixed
rate performing loans are within Level 3 of the fair value hierarchy. At December 31, 2017, and December 31, 2016, the
carrying amount of fixed rate performing loans was $1,505,531,000 and $1,411,272,000, respectively, and the estimated
fair value was $1,454,434,000 and $1,375,807,000, respectively.
Accrued Interest
The carrying amounts of accrued interest approximate fair value.
Deposits
The fair value of deposits with no stated maturity, such as non-interest bearing demand deposit accounts, savings
accounts and interest bearing demand deposit accounts, was equal to the amount payable on demand as of December 31,
2017 and December 31, 2016. 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, 2017 and December 31, 2016, the carrying amount of time deposits was $2,056,506,000 and
$2,248,310,000, respectively, and the estimated fair value was $2,058,621,000 and $2,247,648,000, respectively.
Securities Sold Under Repurchase Agreements
Securities sold under repurchase agreements include both short and long-term maturities. Due to the contractual
terms of the short-term instruments, the carrying amounts approximated fair value at December 31, 2017 and
December 31, 2016. The fair value of the long-term instruments is based on established market spread using option
adjusted spreads methodology. Long-term repurchase agreements are within level 3 of the fair value hierarchy. At
December 31, 2017 and December 31, 2016, respectively, the carrying amount of long-term repurchase agreements was
$100,000,000 and $300,000,000 and the estimated fair value was $99,504,000 and $289,324,000, respectively.
Junior Subordinated Deferrable Interest Debentures
The company currently has floating rate junior subordinated deferrable interest debentures outstanding. Due to
the contractual terms of the floating rate junior subordinated deferrable interest debentures, the carrying amounts
approximated fair value at December 31, 2017 and December 31, 2016.
Other Borrowed Funds
The company currently has short and long-term borrowings issued from the Federal Home Loan Bank (“FHLB”).
Due to the contractual terms of the short-term borrowings, the carrying amounts approximated fair value at December 31,
2017 and December 31, 2016. The long-term borrowings outstanding at December 31, 2017 are fixed-rate borrowings and
the fair value is based on established market spreads for similar types of borrowings. The fixed-rate long-term borrowings
80
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
are included in Level 2 of the fair value hierarchy. At December 31, 2017, the carrying amount of the fixed-rate long-
term FHLB borrowings was $250,000,000 and the estimated fair value was $249,728,000.
Commitments to Extend Credit and Letters of Credit
Commitments to extend credit and fund letters of credit are principally at current interest rates and therefore the
carrying amount approximates fair value.
Limitations
Fair value estimates are made at a point in time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one
time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion
of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-and off-statement of condition financial instruments without
attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include
the bank premises and equipment and core deposit value. In addition, the tax ramifications related to the effect of fair value
estimates have not been considered in the above estimates.
81
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(22) International Bancshares Corporation (Parent Company Only) Financial Information
Statements of Condition
(Parent Company Only)
December 31, 2017 and 2016
(Dollars in Thousands)
ASSETS
2017
2016
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,555
94,908
1,787,120
1,098
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,012,659 $ 1,901,681
18,398 $
92,620
1,878,521
23,120
Liabilities:
LIABILITIES AND SHAREHOLDERS’ EQUITY
Junior subordinated deferrable interest debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Due to IBC Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
160,416 $
21
13,242
173,679
160,416
21
16,577
177,014
Shareholders’ equity:
Common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
95,910
169,567
1,777,963
(26,697)
2,016,743
(292,076)
Less cost of shares in treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,724,667
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,012,659 $ 1,901,681
96,019
171,816
1,891,805
(28,397)
2,131,243
(292,263)
1,838,980
82
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(23) International Bancshares Corporation (Parent Company Only) Financial Information
Statements of Income
(Parent Company Only)
Years ended December 31, 2017, 2016 and 2015
(Dollars in Thousands)
Income:
Dividends from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest income on notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income on other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64,600 $
—
8,100
26
72,726
84,432 $
2
8,958
255
93,647
51,575
7
5,738
3,442
60,762
Expenses:
2017
2016
2015
Interest expense (Debentures) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before federal income taxes and equity in undistributed net
income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before equity in undistributed net income of subsidiaries . . . . . .
Equity in undistributed net income of subsidiaries . . . . . . . . . . . . . . . . . . . . . .
53,626
386
53,240
83,486
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 157,436 $ 133,932 $ 136,726
5,392
5,648
11,040
4,600
3,637
8,237
4,099
3,037
7,136
61,686
(2,076)
63,762
93,674
85,410
311
85,099
48,833
83
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(24) International Bancshares Corporation (Parent Company Only) Financial Information
Statements of Cash Flows
(Parent Company Only)
Years ended December 31, 2017, 2016 and 2015
(Dollars in Thousands)
2017
2016
2015
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 157,436 $ 133,932 $ 136,726
Adjustments to reconcile net income to net cash provided by operating
activities:
Investment securities transactions, net . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment charges on available for sale securities . . . . . . . . . . . . . . . . .
Stock compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Decrease) increase in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed net income of subsidiaries . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities:
Principal collected on mortgage-backed securities . . . . . . . . . . . . . . . . . . .
Net decrease in notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in other assets and other investments . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(23)
—
903
(3,453)
(93,674)
61,189
6,328
—
(25,348)
(19,020)
—
112
1,082
3,901
(48,833)
90,194
1,105
99
(27,834)
(26,630)
—
385
1,172
(1,998)
(83,486)
52,799
474
105
(1,830)
(1,251)
Financing activities:
Redemption of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from stock transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of cash dividends - common . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Decrease) increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
1,455
(43,594)
(187)
(42,326)
(157)
18,555
18,398 $
(1,000)
549
(39,569)
(7,966)
(47,986)
15,578
2,977
18,555 $
(14,000)
1,370
(38,515)
(6,678)
(57,823)
(6,275)
9,252
2,977
84
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Condensed Quarterly Income Statements
(Dollars in Thousands, Except Per Share Amounts)
2017
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 108,036 $ 106,945 $ 103,174 $
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for probable loan losses . . . . . . . . . . . . . . . . . . . . . .
Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,895
97,141
2,125
37,362
72,698
8,797
94,377
805
33,963
73,713
9,993
96,952
6,591
41,366
71,711
96,981
9,246
87,735
1,700
37,715
75,626
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
59,680
60,016
53,822
48,124
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,445
20,388
13,253
16,120
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
45,235 $
39,628 $
40,569 $
32,004
Per common share:
Basic
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.69 $
0.60 $
0.61 $
0.48
Diluted
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.68 $
0.59 $
0.61 $
0.48
85
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Condensed Quarterly Income Statements
(Dollars in Thousands, Except Per Share Amounts)
2016
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 96,337 $ 96,624 $ 97,896 $ 97,057
10,817
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
86,240
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,134
Provision for probable loan losses . . . . . . . . . . . . . . . . . . . . . . . . . .
40,931
Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
67,918
Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,175
85,449
(1,347)
40,530
76,667
10,113
86,224
4,975
43,630
73,056
11,024
86,872
7,097
36,611
71,984
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
51,823
50,659
44,402
50,119
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,350
14,872
14,714
17,135
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,473 $ 35,787 $ 29,688 $ 32,984
Per common share:
Basic
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.54 $
0.54 $
0.45 $
0.50
Diluted
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.53 $
0.54 $
0.45 $
0.50
86
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Condensed Average Statements of Condition
(Dollars in Thousands)
(Unaudited)
Distribution of Assets, Liabilities and Shareholders’ Equity
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, 2017, 2016, and 2015. Tax-exempt
income has not been adjusted to a tax-equivalent basis:
Average
Balance
2017
Interest
2016
Average
Rate/Cost
Average
Balance
Interest
(Dollars in Thousands)
Average
Rate/Cost
Average
Balance
2015
Interest
Average
Rate/Cost
Assets
Interest earning assets:
Loan, net of unearned discounts:
Domestic . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . .
$
6,026,180 $
157,684
317,320
5,188
5.27 % $
3.29
5,781,466
167,582
$
292,325
5,495
5.06 % $
3.28
5,662,616
182,226
$
291,180
6,103
Investment securities:
Taxable . . . . . . . . . . . . . . . . .
Tax-exempt . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . .
Total interest-earning assets . . .
3,954,632
235,253
84,752
10,458,501
82,347
9,656
625
415,136
4,044,843
2.08
253,990
4.10
0.74
84,275
3.97 % 10,332,156
79,533
10,356
205
387,914
4,404,569
1.97
275,267
4.08
0.24
100,816
3.75 % 10,625,494
88,008
11,319
144
396,754
Non-interest earning assets:
Cash and cash equivalents . . . . . . .
Bank premises and equipment, net . .
Other assets . . . . . . . . . . . . . . . .
Less allowance for probable loan
losses . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . .
Liabilities and Shareholders’ Equity
179,134
494,327
957,270
(68,312)
$ 12,020,920
154,334
488,110
1,006,286
(66,021)
$ 11,914,865
166,460
499,233
951,728
(65,857)
$ 12,177,058
Interest bearing liabilities:
Savings and interest bearing
demand deposits . . . . . . . . . . . . .
Time deposits:
Domestic . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . .
Securities sold under repurchase
agreements . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . .
Junior subordinated interest
deferrable debentures . . . . . . . . . .
Total interest bearing liabilities . .
$
3,230,463 $
6,208
0.19 % $
3,090,355
$
4,562
0.15 % $
3,036,542
$
3,593
1,074,199
1,097,240
402,396
891,611
160,416
6,856,325
4,956
4,780
6,617
10,978
5,392
38,931
0.46
0.44
1.64
1.23
1,169,156
1,123,315
759,458
633,380
3.36
0.57 %
161,249
6,936,913
5,328
4,635
20,876
3,128
4,600
43,129
0.46
0.41
2.75
0.49
1,278,148
1,155,698
872,611
864,535
2.85
0.62 %
170,843
7,378,377
6,374
4,859
23,777
1,615
4,099
44,317
Non-interest bearing liabilities:
Demand Deposits . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . .
3,230,708
107,952
1,825,935
$ 12,020,920
3,148,590
90,308
1,739,054
$ 11,914,865
3,059,527
82,571
1,620,583
$ 12,141,058
5.14 %
3.35
2.00
4.11
0.14
3.73 %
0.12 %
0.50
0.42
2.72
0.19
2.40
0.60 %
Net interest income . . .
Net yield on interest
earning assets . . . . . . . .
$
376,205
$
344,785
$
352,437
3.34 %
3.34 %
3.32 %
87
INTERNATIONAL BANCSHARES CORPORATION
OFFICERS AND DIRECTORS
OFFICERS
DIRECTORS
DENNIS E. NIXON
Chairman of the Board and President
JULIE L. TARVIN
Vice President
JUDITH I. WAWROSKI
Treasurer
WILLIAM J. CUELLAR
Auditor
MARISA V. SANTOS
Secretary
HILDA V. TORRES
Assistant Secretary
DENNIS E. NIXON
Chairman of the Board
International Bank of Commerce
JAVIER DE ANDA
Senior Vice President
B.P. Newman Investment Company
IRVING GREENBLUM
International Investments/Real Estate
DOUG HOWLAND
Investments
PEGGY NEWMAN
Investments
LARRY NORTON
President
Norton Stores, Inc.
ROBERTO R. RESENDEZ
Owner
Cattle Ranching and Real Estate Investment Company
ANTONIO R. SANCHEZ, JR.
Chairman of the Board
Sanchez Oil & Gas Corporation
Investments
88
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