2
01
8
21MAR200523282374
INTERNATIONAL BANCSHARES CORPORATION
ALL BANKS MEMBER FDIC
MEMBER BANKS:
International Bank Of Commerce
1200 San Bernardo Avenue
Laredo, Texas 78040
(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) 794-8180
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 Dr.
(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) 968-5551
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, Ste. W
(713) 285-2195
5085 Westheimer Dr. Ste. 4640,
Galleria II, Level 3
(713) 285-2224
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 FM 646 West
(713) 285-2021
Eagle Pass
2395 E. Main Street
(830) 773-2313
2538 E. Main Street
(830) 773-2313
439 E. 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
Round Rock
1850 Gattis School Rd.
(512) 320-9530
Leander
1695 US Hwy 183
(512) 320-9540
Uvalde
3100 E. Hwy. 90
(830) 278-8045
2065 E. Main St.
(830) 278-8045
First Equity
9606 N. Mopac Expressway
Ste 100
(512) 346-8892
Bastrop
701 W. Hwy 71
(512) 308-9412
Austin
500 West 5th St., Ste. 100
(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
4036 FM 620 S.
(512) 320-9575
Cedar Park
301 W. Whitestone Blvd
(512) 397-4552
Commerce Bank
5800 San Dario
Laredo, Texas 78041
(956) 724-1616
2302 Blaine St.
(956) 724-1616
2120 Saunders
(956) 724-1616
1200 Welby Court
(956) 724-1616
International Bank of Commerce, Brownsville
1600 Ruben Torres Blvd
Brownsville, TX 78526-1831
(956) 547-1000
1623 Central Blvd.
(956) 547-1321
4520 E. 14th St.
(956) 547-1300
2370 N. Expressway
(956) 547-1380
630 E. Elizabeth St.
(956) 547-1000
79 E. Alton Gloor Blvd
(956) 547-1361
3600 W. Alton Gloor Blvd.
(956) 547-1390
South Padre Island
911 Padre Blvd.
(956) 761-6156
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) 487-5531
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 Bank of Commerce, Oklahoma
3817 NW Expressway
Oklahoma City, Ok
(405) 775-8051
Oklahoma
Ardmore
2302 12th Ave.
(580) 223-0345
Broken Arrow
6412 S. Elm Pl.
(918) 497-2488
8112 Garnett Rd.
(918) 497-2842
Chickasha
628 W. Grand Ave.
(405) 841-2282
Claremore
1050 N. Lynn Riggs Blvd.
(918) 497-2456
Clinton
1002 W. Frisco Ave.
(580) 323-0730
2311 N. Hwy 81
(580) 255-9055
Edmond
1812 SE 15th St.
(405) 841-2360
421 S. Santa Fe Ave.
(405) 775-8059
Dallas
3800 Maple Ave. Ste. 100
(469) 357-3805
1951 S. Yale Ave.
(918) 497-2478
4202 S. Garnett
(918) 497-2885
2250 E. 73rd St
(918) 497-2405
11 E. 5th St.
(918) 497-2462
8202 E. 71st St
(918) 497-2454
5302 E. Skelly Dr.
(918) 497-2472
Chandler
3108 E. 1st St.
(405) 841-7103
Oklahoma City
100 W. Park Ave.
(405) 841-4777
5701 N. May Ave.
(405) 775-8056
10500 S. Pennsylvania Ave
(405) 775-8058
2301 N. Portland Ave.
(405) 841-2116
12241 N. May Ave.
(405) 775-8059
4902 N. Western Ave.
(405) 775-8054
14001 N. McArthur Blvd
(405) 775-1704
Lawton
2101 W. Gore
(580) 250-4125
6425 NW Cache Rd.
(580) 250-4317
Miami
2520 N. Main
(918) 542-4411
Midwest City
2200 S. Douglas Blvd.
(405) 775-8057
Sapulpa
911 E. Taft St.
(918) 497-2465
Shawnee
2512 N. Harrison Ave.
(405) 841-2309
Sulphur
2009 W. Broadway Ave.
(580) 622-3172
Weatherford
109 E. Franklin Ave.
(580) 772-7441
Bethany
7723 NW 23rd St.
(405) 775-8063
Grove
100 E. 3rd St.
(918)786-4438
Guthrie
120 N. Division St.
(405) 775-8064
Moore
513 NE 12th St.
(405) 841-2308
901 SW 19th
(405) 841-2320
Pauls Valley
700 W. Grant Ave.
(405) 238-7318
Purcell
430 W. Lincoln St.
(405) 841-2287
Sand Springs
3402 State Hwy. 97
(918) 497-2466
Stillwater
1900 N. Perkins RD.
(405) 372-0889
Owasso
9350 N. Garnett
(918) 497-2833
Elk City
1504 W. 3rd St.
(580) 225-7200
Norman
1461 24th Ave.
(405) 775-8069
Lindsay
209 E. Cherokee
(405) 756-4494
Bixby
11886 S. Memorial
(918) 497-2857
As used in this report, the words “Company,” “we,” “us” and “our” refer to International Bancshares
Corporation, a Texas corporation, its five wholly-owned subsidiary banks (“Subsidiary Banks”), and other subsidiaries.
The information that follows may contain forward-looking statements, which are qualified as indicated under “Cautionary
Notice Regarding Forward-Looking Statements” in Item 7 (Management’s Discussion and Analysis of Financial
Condition and Results of Operations) of this report. Our website address is www.ibc.com.
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
(Consolidated)
The following consolidated selected financial data is derived from our audited financial statements as of and for
the five years ended December 31, 2018. 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
2018
AS OF OR FOR THE YEARS ENDED DECEMBER 31,
2016
(Dollars in Thousands, Except Per Share Data)
2015
2017
2014
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
$ 11,871,952 $ 12,184,698
$ 11,804,041 $ 11,772,869
$ 12,196,520
3,411,350
6,499,905
8,696,545
705,665
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
160,416
1,939,582
160,416
1,838,980
160,416
1,724,667
161,416
1,665,503
175,416
1,580,658
$
$
465,822 $
52,668
413,154
6,112
165,042
299,501
272,583
56,652
215,931
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
shareholders . . . . . . . . . . . . . . . . . . .
$
215,931 $
157,436
$
133,932 $
136,726
$
153,151
Per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . .
$
$
3.27 $
3.24 $
2.38
2.36
$
$
2.03 $
2.02 $
2.06
2.05
$
$
2.29
2.28
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 our financial position
and results of our operations on a consolidated basis for the three-year period ended December 31, 2018. The following
discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018,
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 we believe 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 we project, forecast, estimate
or budget 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
us, our customers, and such customers’ ability to transact profitable business with us, including the ability of
our 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 unavailability of funding from the FHLB, the Fed or other sources in the future could adversely impact
our growth strategy, prospects and performance.
• Changes in consumer spending, borrowing and saving habits.
• Changes in interest rates and market prices, including, changes in federal regulations on the payment of
interest on demand deposits.
• Changes in the capital markets we utilize, including changes in the interest rate environment that may reduce
margins.
• Changes in state and/or federal laws and regulations, including, 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 U.S.—Mexico trade, including, reductions in border crossings and commerce, renegotiation and
potential changes to the North American Free Trade Agreement, set to be replaced by the 2018
United States-Mexico-Canada Agreement or the possible imposition of tariffs on imported goods.
• The reduction of deposits from nonresident alien individuals due to the IRS rules requiring U.S. financial
institutions to report deposit interest payments made to such individuals.
• The loss of senior management or operating personnel.
• The timing, impact and other uncertainties of the potential future acquisitions, as well as our ability to
maintain our current branch network and enter new markets to capitalize on growth opportunities.
• Changes in estimates of future reserve requirements based upon periodic review thereof under relevant
regulatory and accounting requirements.
• Additions to our loan loss allowance as a result of changes in local, national or international conditions which
adversely affect our customers.
• Greater than expected costs or difficulties related to the development and integration of new products and
lines of business.
2
•
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 we interact.
• 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 portfolios.
• The effect of changes in accounting policies and practices by the Public Company Accounting Oversight
Board, the Financial Accounting Standards Board and other accounting standards setters.
• The costs and effects of regulatory developments or regulatory or other governmental inquiries and the results
of regulatory examinations or reviews and obtaining 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, 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 and the implementing rules and regulations, including those that establish debit card interchange
fee standards and prohibit network exclusivity arrangements and routing restrictions.
• 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.
• Our failure or circumvention of our 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. We make 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
We are headquartered in Laredo, Texas, with 189 facilities and 287 ATMs, provides banking services for
commercial, consumer and international customers of north, south, central and southeast Texas and the State of Oklahoma.
We are one of the largest independent commercial bank holding companies headquartered in Texas. We, through our
Subsidiary Banks, are in the business of gathering funds from various sources and investing those funds in order to earn a
return. We, either directly or through a Subsidiary Bank, own one insurance agency, a liquidating subsidiary, a fifty percent
interest in an investment banking unit that owns a broker/dealer, a controlling interst in four merchant banking entities,
and a majority ownership in a real-estate development partnership. Our primary earnings come from the spread between
the interest earned on interest-bearing assets and the interest paid on interest-bearing liabilities. In addition, we generate
income from fees on products offered to commercial, consumer and international customers. The sales team of each of
our Subsidiary Banks aims 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. Our Subsidiary Banks have various compensation plans, including incentive based
compensation, for fairly compensating employees. Our Subsidiary Banks 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.
One of our primary goals 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 one of our critical objectives. A key measure
3
of the performance of a banking institution is the return on average common equity (“ROE”). Our ROE for the year ended
December 31, 2018 was 11.22% as compared to 8.62% for the year ended December 31, 2017.
We are very active in facilitating trade along the United States border with Mexico. We do 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 our Subsidiary Banks. The loan policies of our Subsidiary Banks 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. We also serve the growing
Hispanic population through our facilities located throughout north, south, central and southeast Texas and the State of
Oklahoma.
Expense control is an essential element in our long-term profitability. As a result, we monitor the efficiency ratio,
which is a measure of non-interest expense to net interest income plus non-interest income closely. As we adjust to
regulatory changes related to the Dodd-Frank Act, including congressional efforts to revamp or reform it, our efficiency
ratio may suffer because the additional regulatory compliance costs are expected to increase non-interest expense. We
monitor this ratio over time to assess our efficiency relative to our peers. We use this measure as one factor in determining
if we are accomplishing our long-term goals of providing superior returns to our shareholders.
Results of Operations
Summary
Consolidated Statements of Condition Information
December 31, 2018 December 31, 2017 Percent Increase (Decrease)
(Dollars in Thousands)
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under repurchase agreements . . . . . . . . .
Other borrowed funds . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated deferrable interest debentures . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,871,952 $
12,184,698
6,499,905
8,696,545
229,989
705,665
160,416
1,939,582
6,280,485
8,544,892
353,805
1,195,225
160,416
1,838,980
Consolidated Statements of Income Information
Year Ended
December 31,
2018
Year Ended
December 31,
2017
Percent
Increase
(Decrease)
2018 vs. 2017
(Dollars in Thousands, Except Per Share Data)
Year Ended
December 31,
2016
(2.6)%
3.5
1.8
(35.0)
(41.0)
—
5.5
Percent
Increase
(Decrease)
2017 vs. 2016
Interest income . . . . . . . . . . . . . . . . . . . . . . . $
Interest expense . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . .
Provision for probable loan losses . . . . . . . .
Non-interest income . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Per common share:
465,822 $
52,668
413,154
6,112
165,042
299,501
215,931
415,136
38,931
376,205
11,221
150,406
293,748
157,436
12.2 % $
35.3
9.8
(45.5)
9.7
2.0
37.2
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
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.27 $
3.24
2.38
2.36
37.4 % $
37.3
2.03
2.02
17.2 %
16.8
4
Net Income
Net income for the year ended December 31, 2018 increased by 37.2% compared to the same period of 2017.
Net income for the years ended December 31, 2018 and December 31, 2017 was positively affected by a decrease in the
provision for probable loan losses from the prior year 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 was secured by multiple pieces of transportation equipment
beginning in the fourth quarter of 2014. We use a three-year historical charge-off experience in the calculation, therefore,
as those charge-offs begin to be eliminated, the allowance for probable loan losses will be impacted. As fluctuations occur
in historical loss factors, management evaluates the need to adjust the qualitative factors used in the calculation to properly
reflect probable loan losses. Net income for the year ended December 31, 2018 was also positively impacted by an increase
in net interest income due to a higher volume of loans and an increase in the overall yield on the loan portfolio. Interest
expense increased for the year ended December 31, 2018 compared to the same period of 2017 and can be attributed
primarily to an increase in the cost of borrowings and an increase in the interest paid on savings and time deposit accounts,
which have increased because of Federal Reserve Board actions to raise interest rates. Net income for 2018 was also
positively impacted by a decrease in the effective tax rate arising from the Tax Cut and Jobs Act signed into law on
December 22, 2017, resulting in a decrease in income tax expense of approximately $38.6 million due to the decrease in
the corporate tax rate from 35% to 21%. 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 on the loan portfolio. Interest expense declined primarily due to the effects of the early
termination of the long-term repurchase agreements by the lead Subsidiary Bank in prior years. Net income for the year
ended December 31, 2017 was also positively impacted by a tax refund received in the second quarter of 2017 in the
amount of $4.9 million as a result of an amended tax return for the 2012 tax year. In September 2014, we amended our
2012 federal income tax return as a result of a tax opinion obtained regarding a judgment against us paid in 2012 after
litigation related to tax matters in our 2004 acquisition of Local Financial Corporation (“LFIN”). Litigation was initiated
against us by the former controlling shareholders of LFIN with respect to such tax matters. On March 5, 2010, a judgment
was entered against us on a jury verdict in the U.S. District Court for the Western District of Oklahoma. We 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 we recorded the majority of the payment of the judgment as a non-deductible
expense in our 2012 federal income tax return. We engaged legal counsel to review the deductibility of the judgment and,
upon receiving a 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 Subsidiary Bank 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 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 our largest source of revenue. Net interest income is affected by both changes in the level of interest
5
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.
2018
Average
Rate/Cost
For the years ended December 31,
2017
Average
Rate/Cost
2016
Average
Rate/Cost
Assets
Interest earning assets:
Loan, net of unearned discounts:
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.86 %
3.78
5.27 %
3.29
Investment securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.24
4.05
1.07
4.49 %
2.08
4.10
0.74
3.97 %
5.06 %
3.28
1.97
4.08
0.24
3.75 %
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.39 %
0.19 %
0.15 %
0.67
0.64
0.77
1.88
4.36
0.79 %
0.46
0.44
1.64
1.23
3.36
0.57 %
0.46
0.41
2.75
0.49
2.85
0.62 %
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 13.1% from 3.97% in 2017 to 4.49%
in 2018, and the rates paid on average interest-bearing liabilities increased 38.6% from 0.57% in 2017 to 0.79% in 2018.
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 .62% in 2016 to .57% in 2017. The majority of our 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.
6
The following table analyzes the changes in net interest income during 2018, 2017 and 2016 and the relative
effect of changes in interest rates and volumes for each major classification of interest-earning assets and interest-bearing
liabilities. Non-accrual loans have been included in assets for the purpose of this analysis, which reduces the resulting
yields:
2018 compared to 2017
Net increase (decrease) due to
2017 compared to 2016
Net increase (decrease) due to
Volume(1) Rate(1)
Total
Volume(1) Rate(1)
Total
(Dollars in Thousands)
(Dollars in Thousands)
Interest earned on:
Loans, net of unearned discounts:
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,837 $ 37,604 $ 52,441 $ 12,373 $ 12,622 $ 24,995
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(307)
(325)
(483)
707
224
18
Investment securities:
2,814
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . .
(700)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
420
Total interest income . . . . . . . . . . . . . . . . . . . $ 6,385 $ 44,301 $ 50,686 $ 9,511 $ 17,711 $ 27,222
(1,774)
(764)
1
(6,642)
(1,407)
80
(863)
(1,515)
399
4,588
64
419
5,779
(108)
319
Interest incurred on:
Savings and interest bearing demand
deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
82 $ 6,474 $
6,556 $
207 $
1,439 $
1,646
Time deposits:
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(590)
(184)
1,964
2,170
1,374
1,986
(433)
(108)
61
253
(372)
145
Securities sold under repurchase
agreements . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated deferrable interest
(1,439)
395
(2,763)
6,031
(4,202)
6,426
(9,815)
1,275
(4,444)
6,575
(14,259)
7,850
debentures . . . . . . . . . . . . . . . . . . . . . . . . . .
792
4,700 $ (4,198)
Net interest income . . . . . . . . . . . . . . . . . . . . . . . $ 8,121 $ 28,828 $ 36,949 $ 18,409 $ 13,011 $ 31,420
Total interest expense . . . . . . . . . . . . . . . . . . . $ (1,736) $ 15,473 $ 13,737 $ (8,898) $
1,597
1,597
816
(24)
—
(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 our strategy to manage interest rate risk, we strive 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 our 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 we employ to
supplement gap analysis include simulation analysis to quantify interest rate risk exposure. The gap analysis prepared by
management is reviewed by our Investment Committee twice a year. The Investment Committee is comprised of certain
members of the board of directors, senior managers of the various Subsidiary Banks along with consultants. Management
currently believes that we are properly positioned for interest rate changes; however, if management determines at any
time that we are not properly positioned, we will strive to adjust the interest rate sensitive assets and liabilities in order to
manage the effect of interest rate changes.
We have 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, 2018, 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 or -175 basis
7
points, that the net interest income not vary by more than plus or minus 15%. At December 31, 2018, the income
simulations show that a rate shift of -175, -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 -5.55%, -3.24%, +3.96%, +7.70%, +11.39% and
+14.93%, 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. We believe that we are 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:
2018
2017
December 31,
2016
(Dollars in Thousands)
2015
2014
Loans accounted for on a non-accrual basis . . . . . . . . $ 15,791 $ 54,730 $ 36,858 $ 47,320 $ 63,559
Accruing loans contractually past due ninety days
or more as to interest or principal payments . . . . . . .
39,935
6,590
5,215
11,174
9,988
Domestic loans accounted for on a non-accrual basis decreased at December 31, 2018 by 71% compared to the
same period of 2017. The decrease can be attributed to the foreclosure of a relationship primarily secured by a water park
and the foreclosure of the collateral on a relationship secured by multiple pieces of transportation equipment. Domestic
loans contractually past due ninety days and still accruing increase at December 31, 2018 compared to the same period of
2017 and can be attributed to a relationship that is secured by multiple pieces of real property on which car dealerships are
operated. The relationship remained on accrual since we had a court approved debtor in possession plan that provided that
the sponsors of the plan wold assume full responsibility for the plan, including accrued and unpaid interest.
The allowance for probable loan losses decreased 9.3% to $61,384,000 at December 31, 2018 from $67,687,000
at December 31, 2017. The allowance was .94% of total loans, net of unearned income at December 31, 2018 and 1.07%
at December 31, 2017. The provision for probable loan losses charged to expense decreased $5,109,000 to $6,112,000 for
the year ended December 31, 2018 from $11,221,000 for the same period in 2017. The decrease in the provision for
probable loan losses charged to expense for the year ended December 31, 2018 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 was secured by
multiple pieces of transportation equipment beginning in the fourth quarter of 2014. We use 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. As fluctuations occur in historical loss factors, management evaluates the need
to adjust the qualitative factors used in the calculation to properly reflect probable loan losses. 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 our loan portfolio.
8
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,
December 31,
2017
2018
(Dollars in Thousands)
Domestic
Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial real estate: farmland & commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential: first lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential: junior lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total troubled debt restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
35 $
—
5,947
730
1,153
293
8,158 $
6,910
—
6,140
712
1,237
347
15,346
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 . . . . . . .
739
667
11
442
—
—
2018
2017
2015
2014
December 31,
2016
(Dollars in Thousands)
387 $
— $
365 $
The gross income that would have been recorded during 2018, 2017 and 2016 on non-accrual loans in accordance
with their original contract terms was approximately $1,119,000, $977,000 and $2,438,000 on domestic loans and
approximately $0, $0, and $23,800 on foreign loans, respectively. The amount of interest income on such loans that was
recognized in 2018, 2017 and 2016 was approximately $4,000, $4,000, and $0 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 Subsidiary Bank 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 $3,076,184,000 and $2,915,326,000 at December 31, 2018
and 2017, respectively. See Note 19 to the Consolidated Financial Statements.
9
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 . . . . . . . . $ 6,561,289
$ 6,348,172
$ 5,964,688
$ 5,950,914
$ 5,679,245
2018
2017
2016
(Dollars in Thousands)
2015
2014
Average loans outstanding during the
year (Note 1) . . . . . . . . . . . . . . . . . . . . . $ 6,450,947
67,687
6,112
Balance of allowance at January 1 . . . . . $
Provision charged to expense . . . . . . . . .
Loans charged-off:
$ 6,183,864
64,661
$
11,221
$ 5,949,048
66,988
$
19,859
$ 5,844,842
64,828
$
24,405
$ 5,491,841
70,161
$
14,423
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 (Note 1) . . . . . . . . . . . .
Ratio of allowance to loans, net of
unearned discounts, outstanding at
December 31 . . . . . . . . . . . . . . . . . . . . .
(14,290)
(469)
(1)
(362)
(3)
(15,125)
2,227
405
25
43
10
2,710
(12,415)
61,384
(12,134)
(441)
(213)
(309)
(1)
(13,098)
(35,029)
(401)
(16)
(414)
(41)
(35,901)
(25,294)
(432)
(695)
(704)
—
(27,125)
(21,003)
(1,012)
(680)
(719)
(51)
(23,465)
4,547
269
21
45
21
4,903
(8,195)
67,687
7,229
299
6,099
69
19
13,715
(22,186)
64,661
4,098
461
141
170
10
4,880
(22,245)
66,988
$
3,086
291
72
210
50
3,709
(19,756)
64,828
$
$
$
0.19 %
0.13 %
0.37 %
0.38 %
0.36 %
0.94 %
1.07 %
1.08 %
1.13 %
1.14 %
(1) The average balances for purposes of the above table are calculated on the basis of daily balances.
10
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:
2018
2017
At December 31,
2016
2015
2014
Percent
Percent
Allowance of total Allowance of total Allowance of total Allowance of total Allowance of total
(Dollars in Thousands)
Percent
Percent
Percent
Commercial,
Financial and
Agricultural . . . . . $ 31,197
Real estate—
50.4 % $ 35,885
52.3 % $ 32,928
50.2 % $ 35,379
52.1 % $ 41,881
54.7 %
Mortgage . . . . . . .
11,073
17.9
12,242
17.9
11,355
17.3
10,979
16.2
8,272
16.0
Real estate—
Construction . . . .
Consumer . . . . . . . .
Foreign . . . . . . . . . .
17,806
437
871
$ 61,384
28.7
0.7
2.3
18,183
535
842
100.0 % $ 67,687
26.5
0.8
2.5
18,887
607
884
100.0 % $ 64,661
28.8
0.9
2.8
18,818
659
1,152
100.0 % $ 66,988
27.7
1.0
3.0
12,955
660
1,060
100.0 % $ 64,828
24.9
1.1
3.3
100.0 %
The allowance for probable loan losses primarily consists of the aggregate loan loss allowances of the Subsidiary
Banks. The allowances are established through charges to operations in the form of provisions for probable loan losses.
The Subsidiary Banks 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 so indicate. Generally, unsecured consumer loans are charged-off when 90 days past
due. As discussed in prior periods, charge-offs had increased due to the deterioration of one relationship that was 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 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. Our 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.” Please refer to Note 4—Allowance for Probable Loan Losses in the accompanying Notes to the
consolidated Financial Statements.
While our management 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
11
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. Our management believes that the allowance for probable loan losses at December 31, 2018
was adequate to absorb probable losses from loans in the portfolio at that date. See Critical Accounting Policies on page 24.
Should any of the factors considered by management in evaluating the adequacy of the allowance for probable loan losses
change, our 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
72,433 $
72,868
Year Ended Year Ended
December 31, December 31,
2018
2017
Percent
Increase
(Decrease)
2018 vs. 2017
(Dollars in Thousands)
(0.6)% $
Year Ended
December 31,
2016
Percent
Increase
(Decrease)
2017 vs. 2016
73,581
(1.0)%
Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-banking . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities transactions, net . . . . . . . .
Other investments, net. . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44,964
7,345
(4,774)
18,918
11,085
Total non-interest income . . . . . . . . . . . . . . . $ 165,042 $ 150,406
46,685
7,801
(141)
19,897
18,367
3.8
6.2
(97.0)
5.2
65.7
46,267
7,006
(2,626)
23,827
13,647
9.7 % $ 161,702
(2.8)
4.8
81.8
(20.6)
(18.8)
(7.0)%
Total non-interest income for the year ended December 31, 2018 increased by 9.7% compared to the same period
of 2017. Other income for the year ended December 31, 2018 was positively impacted by our share of income from a real
estate development partnership in which we hold a majority interest. 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 our investment portfolio and to certain infrequent items
recorded in 2016.
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, $0 net of $0,
and $793 net of $1,147, included in other
comprehensive loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
138,532 $
29,097
25,873
12,601
3,742
4,413
—
7,695
—
17,516
—
60,032
Total non-interest expense . . . . . . . . . . . . . . . . . . . . . . $
299,501 $
Year Ended Year Ended
December 31,
December 31,
2017
2018
Year Ended
December 31,
2016
Percent
Increase
(Decrease)
2017 vs. 2016
Percent
Increase
(Decrease)
2018 vs. 2017
(Dollars in Thousands)
4.4 % $
2.3
2.3
(7.7)
13.6
357.3
(100.0)
(2.0)
132,750
28,439
25,281
13,650
3,294
965
25
7,854
5,765
19,189
(100.0)
(8.7)
128,661
26,583
24,738
13,672
5,777
5,688
128
7,814
7,042
15,087
3.2 %
7.0
2.2
(0.2)
(43.0)
(83.0)
(80.5)
0.5
(18.1)
27.2
—
56,536
293,748
—
6.2
2.0 % $
354
54,081
289,625
(100.0)
4.5
1.4 %
Non-interest expense for the year ended December 31, 2018 increased by 2.0% compared to the same period of
2017. Non-interest expense for the year ended December 31, 2018 was negatively impacted by an increase in the cost of
12
operations on other real estate owned and due to an increase in the specific reserve on a property as part of the re-evaluation
of the carrying value of said property. 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.
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.
Financial Condition
Investment Securities
The following table sets forth the carrying value of investment securities as of December 31, 2018, 2017 and
2016:
Residential mortgage-backed securities
Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,223,010 $ 3,891,233 $ 3,894,470
Obligations of states and political subdivisions
Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities with readily determinable fair values . . . . . . . . . . . . . . .
Other securities
188,340
5,937
232,951
27,886
254,972
27,907
2018
December 31,
2017
(Dollars in Thousands)
2016
Held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,400
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,418,487 $ 4,154,470 $ 4,179,749
1,200
2,400
The following tables set forth the contractual maturities of investment securities, based on amortized cost, at
December 31, 2018 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
within ten years
Adjusted
After ten years
Adjusted
Available for Sale Maturing
After five but
Residential mortgage-backed securities . . . . . . . . . . . . . . $
Obligations of states and political subdivisions . . . . . . . . .
Equity securities with readily determinable fair values . . .
432 4.88 % $ 64,398 2.19 % 1,116,248 2.75 % $ 2,114,288 2.85 %
185,299 4.61 %
—
— %
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,369 2.49 % $ 64,398 4.44 % $ 1,116,748 2.80 % $ 2,299,587 2.86 %
500 5.00 %
—
—
5,937 2.32
—
—
— —
—
—
Cost
Yield Cost
Yield
Cost
Yield
Cost
Yield
(Dollars in Thousands)
13
Held to Maturity Maturing
Within one
year
Adjusted
After one but
within five years
Adjusted
After five but
within ten years
Adjusted
After ten years
Adjusted
Cost
Yield Cost
Yield
Cost
Yield
Cost
Yield
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
—
— % $
— % $
1,200
1,200
(Dollars in Thousands)
2.71 % $
2.71 % $
— — % $
— — % $
— — %
— — %
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, we believe 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.
Loans
The amounts of loans outstanding, by classification, at December 31, 2018, 2017, 2016, 2015 and 2014 are shown
in the following table:
2018
2017
December 31,
2016
(Dollars in Thousands)
2015
2014
Commercial, financial and agricultural . . . $ 3,305,124 $ 3,322,668 $ 2,993,203 $ 3,101,748 $ 3,107,584
Real estate—mortgage . . . . . . . . . . . . . . . .
910,326
Real estate—construction . . . . . . . . . . . . . .
1,414,977
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . .
61,137
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
185,221
Loans, net of unearned discount . . . . . . $ 6,561,289 $ 6,348,172 $ 5,964,688 $ 5,950,914 $ 5,679,245
1,173,101
1,886,231
46,316
150,517
962,582
1,649,827
57,744
179,013
1,032,222
1,716,875
55,168
167,220
1,133,525
1,683,550
49,543
158,886
The following table shows the amounts of loans (excluding real estate mortgages and consumer loans) outstanding
as of December 31, 2018, 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
within five
After five
years
years
(Dollars in Thousands)
Total
Commercial, financial and agricultural . . . . . . . . . . . . . . . . . . $ 1,109,834 $ 1,753,392 $ 441,898 $ 3,305,124
Real estate—construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,886,231
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
150,517
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,873,964 $ 2,927,584 $ 540,324 $ 5,341,872
1,131,432
42,760
675,385
88,745
79,414
19,012
Due after one but within five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Due after five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Dollars in Thousands)
94,542 $ 2,833,042
388,077
152,247
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 246,789 $ 3,221,119
Interest sensitivity
Fixed Rate
Variable Rate
14
International Operations
On December 31, 2018, we had $150,517,000 (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 our Subsidiary Banks
generally require that loans to borrowers domiciled in foreign countries be primarily secured by assets located in the United
States or have credit enhancements in the form of guarantees, from significant United States corporations. The composition
of such loans and the related amounts of allocated allowance for probable loan losses as of December 31, 2018 and 2017
is presented below.
For the year ended December 31,
2018
Amount of
Loans
Related
Allowance for
Probable Losses
Amount of
Loans
(Dollars in Thousands)
2017
Related
Allowance for
Probable Losses
Secured by certificates of deposit in United States banks . . . . $
Secured by United States real estate . . . . . . . . . . . . . . . . . . . . .
Secured by other United States collateral (securities, gold,
94,138 $
30,961
424 $ 103,104 $
257
35,211
silver, etc.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unsecured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (principally Mexico real estate) . . . . . . . . . . . . . . . . . . . .
14,848
528
10,042
$ 150,517 $
112
6
72
14,414
1,561
4,596
871 $ 158,886 $
330
334
68
32
78
842
The transactions for the years ended December 31, 2018, 2017 and 2016, in that portion of the allowance for
probable loan losses related to foreign debt were as follows:
2018
2017
(Dollars in Thousands)
884 $
(1)
21
20
(62)
842 $
842 $
(3)
10
7
22
871 $
2016
1,152
(41)
19
(22)
(246)
884
Balance at January 1, . . . . . . . . . . . . . . . . . . . . $
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . .
Net recoveries (charge-offs) . . . . . . . . . . . .
Charge (credit) to expense . . . . . . . . . . . . . .
Balance at December 31 . . . . . . . . . . . . . . . . . . $
15
Deposits
Deposits:
Demand—non-interest bearing
2018
2017
Average Balance 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
2,695,811 $
670,229
3,366,040
2,572,636
658,072
3,230,708
2,595,963
677,392
3,273,355
2,612,981
617,482
3,230,463
$100,000 or more:
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
608,171
802,030
702,417
833,444
Less than $100,000:
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total time, certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
338,060
253,060
2,001,321
8,640,716 $
371,782
263,796
2,171,439
8,632,610
2018
2017
(Dollars in Thousands)
2016
Interest expense:
Savings and interest bearing demand
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total savings and interest bearing demand . . . . . . . . . . . . . . . . . . . . . . . . . .
Time, certificates of deposit
11,029 $
1,735
12,764
5,453 $
755
6,208
3,922
640
4,562
$100,000 or more
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,741
5,798
3,644
4,105
3,881
3,929
Less than $100,000
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total time, certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense on deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,589
968
13,096
25,860 $
1,312
675
9,736
15,944 $
1,447
706
9,963
14,525
Scheduled maturities of time deposits in amounts of $100,000 or more at December 31, 2018, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
500,836
337,349
433,628
126,568
$ 1,398,381
We offer a variety of deposit accounts having a wide range of interest rates and terms. We rely primarily on our
high quality customer service, sales programs, customer referrals and advertising to attract and retain these deposits.
Deposits provide the primary source of funding for our 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, 2018 were $8,696,545,000,
an increase of 1.8% from $8,544,892,000 at December 31, 2017. Although deposits at December 31, 2018 increased from
16
December 31, 2017 and we have experienced growth in deposits over the last few years, we are still experiencing a
substantial amount of competition for deposits at higher than market rates. As a result, we have attempted to maintain
certain deposit relationships, but have 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 and the FHLB of Topeka at the market price offered at the time of funding. These borrowings are secured
by residential mortgage-backed investment securities and a portion of our loan portfolio. At December 31, 2018, other
borrowed funds totaled $705,655,000, an increase of 41.0% from $1,195,225,000 at December 31, 2017. The decrease in
borrowings can be attributed to an increase in cash arising from principal pay downs on available-for-sale debt securities
and deposits.
Return on Equity and Assets
Certain key ratios for the years ended December 31, 2018, 2017 and 2016 follow (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 . . . . . . . . . . . .
11.22 %
1.79
15.96
22.79
8.62 %
1.31
15.19
27.70
7.70 %
1.12
14.60
29.56
(1) The average balances for purposes of the above table are calculated on the basis of daily balances.
Years ended
December 31,
2017
2016
2018
Liquidity and Capital Resources
Liquidity
The maintenance of adequate liquidity provides our Subsidiary Banks 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. Our Subsidiary Banks derive their liquidity largely from deposits of individuals and
business entities. Other important funding sources for our Subsidiary Banks during 2018 and 2017 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. Our Subsidiary Banks 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. We maintain 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, we 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.
Asset/Liability Management
Our funds management policy has as its primary focus the measurement and management of the Subsidiary
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.
17
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, 2018, 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, we are
asset sensitive through the majority of the time periods illustrated. 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.
INTEREST RATE SENSITIVITY
(Dollars in Thousands)
December 31, 2018
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
Rate sensitive assets
Investment securities . . . . . . . . . . . . . . . . . . . . . $
Loans, net of non-accruals . . . . . . . . . . . . . . . .
247,899 $
5,076,044
524,591 $ 2,457,658 $
200,923
159,290
188,339 $ 3,418,487
6,545,498
1,109,241
Total earning assets . . . . . . . . . . . . . . . . . . . . . . $ 5,323,943 $
725,514 $ 2,616,948 $ 1,297,580 $ 9,963,985
Cumulative earning assets . . . . . . . . . . . . . . . . $ 5,323,943 $ 6,049,457 $ 8,666,405 $ 9,963,985
Rate sensitive liabilities
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other interest bearing deposits . . . . . . . . . . . . .
Securities sold under repurchase agreements .
Other borrowed funds . . . . . . . . . . . . . . . . . . . .
Junior subordinated deferrable interest
783,978 $ 1,002,798 $
3,268,237
218,852
268,975
—
11,137
—
186,583 $
—
—
—
109 $ 1,973,468
3,268,237
—
229,989
—
705,665
436,690
debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . .
160,416
—
—
—
160,416
Total interest bearing liabilities . . . . . . . . . . . . $ 4,700,458 $ 1,013,935 $
186,583 $
436,799 $ 6,337,775
Cumulative sensitive liabilities. . . . . . . . . . . . . $ 4,700,458 $ 5,714,393 $ 5,900,976 $ 6,337,775
Repricing gap . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cumulative repricing gap . . . . . . . . . . . . . . . . .
Ratio of interest-sensitive assets to liabilities .
Ratio of cumulative, interest-sensitive
623,485 $ (288,421) $ 2,430,365 $
623,485
1.13
2,765,429
14.03
335,064
0.72
3,626,210
2.97
860,781 $ 3,626,210
1.57
assets to liabilities . . . . . . . . . . . . . . . . . . . . . .
1.13
1.06
1.47
1.57
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
18
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. We and many other institutions rely primarily upon income simulation analysis in measuring and managing
exposure to interest rate risk.
We have 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, 2018, 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 or -175 basis
points, that the net interest income not vary by more than plus or minus 15%. At December 31, 2018, the income
simulations show that a rate shift of -175, -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 -5.55%, -3.24%, +3.96%, +7.70%, +11.39% and
+14.93%, 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. We believe that we are properly
positioned for a potential interest rate increase or decrease.
All the measurements of risk described above are made based upon our business mix and interest rate exposures
at the particular point in time. The exposure changes continuously as a result of our ongoing business and our risk
management initiatives. While management believes these measures provide a meaningful representation of our 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.
Our principal sources of liquidity and funding dividends from subsidiaries and borrowed funds, with such funds
being used to finance our cash flow requirements. We closely monitor the dividend restrictions and availability from our
Subsidiary Banks as disclosed in Note 20 to the Consolidated Financial Statements. At December 31, 2018, the aggregate
amount legally available to be distributed to us from our Subsidiary Banks as dividends was approximately $768,900,000,
assuming that each Subsidiary Bank continues to be classified as “well-capitalized” under the applicable regulations in
effect at December 31, 2018. The restricted capital (capital and surplus) of our Subsidiary Banks was approximately
$784,416,000 as of December 31, 2018. The undivided profits of our Subsidiary Banks were approximately
$1,223,017,000 as of December 31, 2018.
At December 31, 2018, we had outstanding $705,655,000 in other borrowed funds and $160,416,000 in junior
subordinated deferrable interest debentures. In addition to borrowed funds and dividends, we have a number of other
available alternatives to finance the growth of our Subsidiary Banks as well as future growth and expansion.
Capital
We maintain an adequate level of capital as a margin of safety for our depositors and shareholders. At
December 31, 2018, shareholders’ equity was $1,939,582,000 compared to $1,838,980,000 at December 31, 2017, an
increase of $100,602,000, or 5.5%. Shareholders’ equity increased primarily due to the retention of earnings, offset by the
payment of cash dividends to shareholders and repurchases of our 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. Our 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 15.87% at December 31, 2018 and 14.62% at December 31, 2017.
19
The core deposit intangibles and goodwill of $282,532,000 as of December 31, 2018, are deducted from the sum of core
capital elements when determining our capital ratios.
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%. We had risk-weighted Tier 1 capital ratios of 19.06% and 18.73% and risk weighted total capital ratios of
19.74% and 19.51% as of December 31, 2018 and 2017, respectively, which are well above the minimum regulatory
requirements and exceed the well-capitalized ratios (see Note 20 to Notes to Consolidated Financial Statements).
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 increased each year until January 1, 2019, when we were 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 we were required to begin to phase in the new rules beginning on
January 1, 2015. Management believes, as of December 31, 2018, that we and each of our Subsidiary Banks 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).
In December 2018, the federal banking regulators issued a final rule that would provide an optional three-year
phase-in period for the day-one regulatory capital effects of the adoption of Accounting Standards Update
(“ASU”) 2016-13 to ASC 326, “Financial Instruments – Credit Losses,” as amended, on January 1, 2020.
Junior Subordinated Deferrable Interest Debentures
We have formed six statutory business trusts under the laws of the State of Delaware, for the purpose of issuing
trust preferred securities. These statutory business trusts (the “Trusts”) have each issued Capital and Common Securities
and invested the proceeds thereof in an equivalent amount of junior subordinated debentures (the “Debentures”) that we
20
issued. As of December 31, 2018 and December 31, 2017, the principal amount of debentures outstanding totaled
$160,416,000.
The Debentures are subordinated and junior in right of payment to all of our present and future senior indebtedness
(as defined in the respective indentures), 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. We have fully and unconditionally guaranteed the obligations of each of the
Trusts with respect to the Capital and Common Securities. We have 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 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, 2018 and December 31, 2017, 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, 2018:
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
6.07 % LIBOR + 3.45 November 2032 February 2008
October 2008
5.49 % LIBOR + 3.05 October 2033
4.02 % LIBOR + 1.62 October 2036
October 2011
4.19 % LIBOR + 1.65 February 2037 February 2012
4.02 % LIBOR + 1.62
July 2012
4.19 % LIBOR + 1.45 September 2037 September 2012
July 2037
(1) The Capital Securities may be redeemed in whole or in part on any interest payment date after the Optional Redemption Date.
Contractual Obligations and Commercial Commitments
The following table presents contractual cash obligations (other than deposit liabilities) as of December 31, 2018:
Payments due by Period
(Dollars in Thousands)
Contractual Cash Obligations
Securities sold under repurchase agreements . . . $
Federal Home Loan Bank borrowings . . . . . . . . .
Junior subordinated deferrable interest
Less than
One Year
Total
229,989 $
705,665
229,989
268,975
One to Three Three to
After Five
Years
Five Years Years
—
—
—
436,690
—
—
debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Contractual Cash Obligations . . . . . . . . . . . $ 1,106,097 $
160,416
10,027
—
3,443
502,407 $
—
5,518
5,518 $
160,416
—
791
275
791 $ 597,381
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The following table presents contractual commercial commitments (other than deposit liabilities) as of
December 31, 2018:
Commercial Commitments
Financial and Performance Standby Letters of
Amount of Commitment Expiration Per Period
(Dollars in Thousands)
Total
Less than
One Year
One to Three Three to Five After Five
Years
Years
Years
Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial Letters of Credit . . . . . . . . . . . . . . . .
Credit Card Lines . . . . . . . . . . . . . . . . . . . . . . . . .
Other Commercial Commitments . . . . . . . . . . . .
—
—
—
441,260
Total Commercial Commitments . . . . . . . . . . $ 3,076,184 $ 1,199,483 $ 977,777 $ 457,664 $ 441,260
111,228 $
8,073
21,114
2,935,769
83,037
8,073
21,114
1,087,259
—
—
—
457,664
28,191
—
—
949,586
Due to the nature of our commercial commitments, including unfunded loan commitments and lines of credit, the
amounts presented above do not necessarily reflect the amounts we anticipate funding in the periods presented above.
Critical Accounting Policies
We have established various accounting policies which govern the application of accounting principles in the
preparation of our 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.
We consider our allowance for probable loan losses as a policy critical to the sound operations of our Subsidiary
Banks. The allowance for probable loan losses primarily consists of the aggregate loan loss allowances of our Subsidiary
Banks. 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 Subsidiary Bank 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 our loan portfolio, and (iii) allowances based on general economic
conditions, changes in the mix of loans, company resources, border risk and credit quality indicators, among other things.
See also discussion regarding the allowance for probable loan losses and provision for probable loan losses included in
the results of operations and “Provision and Allowance for Probable Loan Losses” included in Notes 1 and 4 of the Notes
to Consolidated Financial Statements.
The loan loss provision is determined using the following methods. On a weekly basis, loan past due reports are
reviewed by the credit quality committee to determine if a loan has any potential problems and if a loan should be placed
on our internal classified report. Additionally, our credit department reviews the majority of our 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, we 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.
Our 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 our 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
our opinion that the credit contains weaknesses which represent a greater degree of risk, which warrant “extra attention.”
22
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 we may sustain some future
loss 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 our loans evaluated as impaired under ASC 310-10 are measured using the fair value of
collateral method. In limited cases, we 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 our 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 we serve, (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.
Our management continually reviews the allowance for loan losses of our Subsidiary Banks 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 our allowance for
probable loan loss. Should any of the factors considered by management in evaluating the adequacy of the allowance for
probable loan losses change, our 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 our
consolidated financial statements.
Preferred Stock, Common Stock and Dividends
We have issued and outstanding 65,617,505 shares of $1.00 par value common stock held by approximately
1,928 holders of record at February 25, 2019. The book value of the common stock at December 31, 2018 was $31.33 per
share compared with $29.28 per share at December 31, 2017. In connection with our 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 our common stock (the “Warrant Shares”) at $24.43 per share. The term of the Warrant is ten years
and was immediately exercisable. The Warrant was included as a component of Tier 1 capital. On June 12, 2013, the U. S.
Treasury sold the Warrant to a third party. On September 19, 2018, we entered into an agreement to repurchase the Warrant
from the third party at an aggregate purchase price of $29,005,000, which transaction was consummated in the third quarter
of 2018. The repurchase of the outstanding Warrant eliminates any restrictions on certain shareholder distributions or
payment of cash dividends in excess of $0.33 per semi-annual period that would have impacted the exercise price of the
Warrant while it remained outstanding.
Our 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 our common stock during 2018 and 2017, as quoted on the NASDAQ
National Market for each of the quarters in the two year period ended December 31, 2018. Some of the quotations reflect
23
inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual
transactions. The closing sales price of our common stock was $40.45 per share at February 25, 2019.
2018: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . First quarter
$
Second quarter
Third quarter
Fourth quarter
2017: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . First quarter
$
Second quarter
Third quarter
Fourth quarter
High
Low
42.45 $
45.00
47.95
45.86
37.80
36.65
42.45
32.56
High
Low
41.83 $
38.75
41.05
42.90
33.40
32.50
33.85
37.55
On April 16 and October 16, 2018, we paid cash dividends of $0.33 and $0.42 per share to recordholders of our
common stock on April 2 and October 9, 2018, respectively. We paid cash dividends to the common shareholders of
$.33 per share on April 17 and October 16, 2017 to all holders of record on April 3 and September 29, 2017, respectively.
Our principal source of funds to pay cash dividends on our common stock is cash dividends from our Subsidiary
Banks. 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 March 5, 2018, 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, 2018, 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 2018, our Board of Directors
adopted a Rule 10b5-1 plan and intends to adopt additional Rule 10b5-1 trading plans that will allow us to purchase shares
of our common stock during certain trading blackout periods when we ordinarily would not be in the market due to trading
restrictions in our internal trading policy. During the term of a 10b5-1 Plan, purchases of common stock are automatic to
the extent the conditions of the 10b5-1 Plan’s trading instructions are met. Shares repurchased in this program will be held
in treasury for reissue for various corporate purposes, including employee stock option plans. As of February 25, 2019, a
total of 9,800,256 shares had been repurchased under all programs at a cost of $290,332,000. We are 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 our cash flow and the liquidity and price
performance of our 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
24
repurchase programs approved by the Board of Directors. The following table includes information about common stock
share repurchases for the quarter ended December 31, 2018.
Total Number of
Shares
October 1 – October 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . .
November 1 – November 30, 2018 . . . . . . . . . . . . . . . . . . . . . . .
December 1 – December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
— $
—
—
553,300
34.31
553,300 $ 34.31
Total Number Price Paid
Average
Part of a
Publicly-
Purchased as
of Shares
Purchased
Per
Share
Announced
Approximate
Dollar Value of
Shares Available
for
Program
Repurchase(1)
— $ 39,943,000
39,943,000
—
553,300
20,957,000
553,300
(1) The repurchase program was extended on March 15, 2018 and allows for the repurchase of up to an additional $40,000,000 of treasury stock
through April 9, 2019.
Equity Compensation Plan Information
The following table sets forth information as of December 31, 2018, with respect to our equity compensation
plans:
(C)
Plan Category
Equity Compensation plans approved by security
(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
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column A)
holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
788,977 $
788,977 $
25.91
25.91
10,700
10,700
25
Stock Performance
COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN
$200
$150
$100
$50
$0
2013
2014
2015
2016
2017
2018
International Bancshares Corporation
S&P MidCap 400 Index
S&P 400 Regional Banks
Total Return To Shareholders
(Includes reinvestment of dividends)
INDEXED RETURNS
December 31,
2016
165.25
129.65
143.44
2015
101.82
107.38
107.84
2017
163.63
150.71
150.90
2018
144.54
134.01
118.61
Company / Index
International Bancshares Corporation . . . . .
S&P 500 Index . . . . . . . . . . . . . . . . . . . . . . . . . .
S&P 500 Banks . . . . . . . . . . . . . . . . . . . . . . . . .
Base
Period
2013
100
100
100
2014
102.80
109.77
101.19
26
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, 2018 and 2017, 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, 2018, 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, 2018 and 2017, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2018, 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, 2018,
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 27, 2019
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.
Austin, Texas
February 27, 2019
27
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Condition
December 31, 2018 and 2017
(Dollars in Thousands, Except Per Share Amounts)
Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Investment securities:
Held to maturity debt securities (Market value of $1,200 on December 31, 2018
316,797 $
265,357
and $2,400 on December 31, 2017) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,200
2,400
Available for sale debt securities (Amortized cost of $3,481,165 on December 31,
December 31, December 31,
2018
2017
2018 and $4,196,263 on December 31, 2017) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities with readily determinable fair values . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less allowance for probable loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash surrender value of bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,124,184
27,886
4,154,470
6,348,172
(67,687)
6,280,485
514,454
34,456
293,990
277,425
282,532
81,529
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,871,952 $ 12,184,698
3,411,350
5,937
3,418,487
6,561,289
(61,384)
6,499,905
506,899
36,803
337,507
282,646
282,532
190,376
See accompanying notes to consolidated financial statements.
28
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Condition Continued
December 31, 2018 and 2017
(Dollars in Thousands, Except Per Share Amounts)
December 31, December 31,
2018
2017
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Demand—non-interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,454,840 $ 3,243,255
Savings and interest bearing demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,245,131
2,056,506
Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,544,892
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
353,805
1,195,225
Other borrowed funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
160,416
Junior subordinated deferrable interest debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
91,380
10,345,718
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,268,237
1,973,468
8,696,545
229,989
705,665
160,416
139,755
9,932,370
Shareholders’ equity:
Common shares of $1.00 par value. Authorized 275,000,000 shares; issued
96,104,029 shares on December 31, 2018 and 96,019,028 shares on
December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
96,104
145,283
2,064,134
(54,634)
2,250,887
96,019
171,816
1,891,805
(28,397)
2,131,243
Less cost of shares in treasury, 30,494,143 shares on December 31, 2018 and
29,939,545 on December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(292,263)
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,838,980
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,871,952 $ 12,184,698
(311,305)
1,939,582
See accompanying notes to consolidated financial statements.
29
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 2018, 2017 and 2016
(Dollars in Thousands, Except Per Share Amounts)
Interest income:
Loans, including fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
2016
$ 375,173 $ 322,508 $ 297,820
81,484
8,141
1,024
465,822
82,347
9,656
625
415,136
79,533
10,356
205
387,914
Interest expense:
Savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated deferrable interest debentures . . . . . . . . . . . . . . . . . . .
12,764
13,096
2,415
17,404
6,989
6,208
9,736
6,617
10,978
5,392
4,562
9,963
20,876
3,128
4,600
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
52,668
38,931
43,129
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
413,154
376,205
344,785
Provision for probable loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,112
11,221
19,859
Net interest income after provision for probable loan losses . . . . . . . . . .
407,042
364,984
324,926
Non-interest income:
Service charges on deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
72,433
72,868
73,581
Other service charges, commissions and fees
Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities transactions, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46,685
7,801
(141)
19,897
18,367
44,964
7,345
(4,774)
18,918
11,085
46,267
7,006
(2,626)
23,827
13,647
Total non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
165,042
150,406
161,702
See accompanying notes to consolidated financial statements.
30
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income, continued
Years ended December 31, 2018, 2017 and 2016
(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, $0 net of $0, and $793 net of $1,147
included in other comprehensive loss) . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
2016
138,532 $
29,097
25,873
12,601
3,742
4,413
—
7,695
—
17,516
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
—
60,032
—
56,536
354
54,081
Total non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
299,501
293,748
289,625
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
272,583
221,642
197,003
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56,652
64,206
63,071
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
215,931 $
157,436 $
133,932
Basic earnings per common share:
Weighted average number of shares outstanding . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
66,106,580
66,046,155
3.27 $
2.38 $
65,967,989
2.03
Fully diluted earnings per common share:
Weighted average number of shares outstanding . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
66,633,820
66,778,436
3.24 $
2.36 $
66,313,490
2.02
See accompanying notes to consolidated financial statements.
31
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years ended December 31, 2018, 2017, and 2016
(Dollars in Thousands)
2018
2017
2016
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 215,931 $ 157,436 $ 133,932
Other comprehensive income (loss), net of tax:
Net unrealized holding losses on securities available for sale arising
during period (net of tax effects of $(7,004), $(2,586), and $(16,585)) .
(26,348)
(4,803)
(30,801)
Reclassification adjustment for losses on securities available for sale
included in net income (net of tax effects of $30, $1,671, and $919) . . .
111
3,103
1,707
Reclassification adjustment for impairment charges on available
for sale securities included in net income (net of tax effects of $0,
$0, and $124) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(26,237)
—
(1,700)
230
(28,864)
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 189,694 $ 155,736 $ 105,068
See accompanying notes to consolidated financial statements.
32
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
Years ended December 31, 2018, 2017 and 2016
(in Thousands, except per share amounts)
Preferred
Stock
Number
of
Common
Shares Stock
Surplus
Other
Retained
Earnings
Comprehensive Treasury
Income (Loss)
Stock
Total
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
— 95,866 95,866 167,980 1,683,600
133,932
—
—
—
—
2,167 (284,110) $ 1,665,503
133,932
—
—
—
—
—
—
—
44
—
—
44
—
—
505
(39,569)
—
—
—
—
—
—
(7,966)
—
(39,569)
(7,966)
549
in earnings . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
1,082
—
—
—
1,082
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, 2016 . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . .
Dividends:
Cash ($.66 per share) . . . . . . . . . . . .
Purchase of treasury (4,870 shares) . . .
Exercise of stock options . . . . . . . . . . . . . .
Stock compensation expense recognized
in earnings . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive (loss), net of tax:
Net change in unrealized gains and
losses on available for sale
securities, net of reclassification
adjustments . . . . . . . . . . . . . . . . . .
Balance at December 31, 2017 . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . .
Dividends:
Cash ($.75 per share) . . . . . . . . . . . .
Purchase of treasury (554,598 shares) .
Exercise of stock options . . . . . . . . . . . . . .
Stock compensation expense recognized
in earnings . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of outstanding warrant . . . . . .
Cumulative adjustment for adoption of
—
—
— 95,910 95,910 169,567 1,777,963
157,436
—
—
—
—
—
—
—
(28,864)
—
(26,697) (292,076)
—
—
(28,864)
1,724,667
157,436
—
—
—
—
—
109
—
—
109
—
—
1,346
(43,594)
—
—
—
—
—
—
(187)
—
(43,594)
(187)
1,455
—
—
—
903
—
—
—
903
—
—
— 96,019 $ 96,019 $ 171,816 $ 1,891,805 $
—
215,931
—
—
—
—
—
—
(1,700)
(1,700)
(28,397) $ (292,263) $ 1,838,980
215,931
—
—
—
—
—
—
—
—
—
—
85
—
—
—
—
85
—
—
1,437
(49,599)
—
—
—
—
—
—
(19,042)
—
(49,599)
(19,042)
1,522
—
—
1,035
(29,005)
—
—
—
—
—
—
1,035
(29,005)
new accounting standards . . . . . . . . . . . .
—
—
—
—
5,997
(5,997)
—
—
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, 2018 . . . . . . . . . .
—
— 96,104 $ 96,104 $ 145,283 $ 2,064,134 $
—
—
—
—
(20,240)
(20,240)
(54,634) $ (311,305) $ 1,939,582
—
See accompanying notes to consolidated financial statements.
33
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2018, 2017 and 2016
(Dollars in Thousands)
Operating activities:
2018
2017
2016
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 215,931 $
157,436 $
133,932
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 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on equity securities with readily determinable fair
values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrese) in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .
6,112
3,071
25,873
(1,456)
(1,465)
(271)
20,087
141
388
—
—
1,035
(15,484)
5,143
(2,347)
(51,827)
24,916
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)
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . .
229,847
196,819
203,220
Investing activities:
Proceeds from maturities of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales and calls of available for sale securities . . . . . . . . . .
Proceeds from sales of equity securities with readily determinable fair
values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . .
2,275
38,175
—
396,066
1,200
352,743
21,607
(47,346)
675,304
(258,142)
(43,418)
3,668
(21,395)
4,533
4,179
—
(1,182,006)
780,097
(394,267)
(26,193)
20,344
(14,315)
2,201
14,266
—
(1,325,657)
919,594
(38,523)
(49,013)
23,276
(38,856)
3,701
13,772
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . .
379,440
(403,807)
(137,763)
See accompanying notes to consolidated financial statements.
34
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Years ended December 31, 2018, 2017 and 2016
(Dollars in Thousands)
Financing activities:
2018
2017
2016
Net increase in non-interest bearing demand deposits . . . . . . . . . . . . . . . . . $ 211,585 $
Net increase in savings and interest bearing demand deposits . . . . . . . . . .
Net decrease in time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease in securities sold under repurchase agreements . . . . . . . . . . .
Net (decrease) increase in other borrowed funds . . . . . . . . . . . . . . . . . . . . .
Redemption of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of outstanding common stock warrant . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from stock transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of cash dividends - common . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,106
(83,038)
(123,816)
(489,560)
—
(29,005)
(19,042)
1,522
(49,599)
85,204 $
41,403
(191,804)
(151,180)
461,850
—
—
(187)
1,455
(43,594)
8,433
183,506
(118,103)
(322,787)
227,625
(1,000)
—
(7,966)
549
(39,569)
Net cash (used in) provided by financing activities. . . . . . . . . . . . . . . . . .
(557,847)
203,147
(69,312)
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . .
51,440
(3,841)
(3,855)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . .
265,357
269,198
273,053
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 316,797 $ 265,357 $ 269,198
Supplemental cash flow information:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50,623 $
40,565
38,995 $
66,983
44,069
49,925
Non-cash investing and financing activities:
Net transfers from loans to other real estate owned . . . . . . . . . . . . . . . . . . .
32,610
2,588
2,563
See accompanying notes to consolidated financial statements.
35
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Our accounting and reporting policies 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
Our consolidated financial statements include the accounts of the International Bancshares Corporation, its
wholly-owned Subsidiary Banks and its wholly-owned non-bank subsidiaries, IBC Subsidiary Corporation, 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.
We, through our Subsidiary Banks, are 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. Our primary markets are north, south, central, and southeast Texas and the state of
Oklahoma. Each of our Subsidiary Banks is very active in facilitating international trade along the United States border
with Mexico and elsewhere. Although our loan portfolio is diversified, the ability of our debtors to honor their contracts
is primarily dependent upon the economic conditions in our trade area. In addition, the investment portfolio is directly
impacted by fluctuations in market interest rates. We 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.
We own one insurance-related subsidiary, IBC Insurance Agency, Inc., a wholly owned subsidiary of our
Subsidiary Bank, International Bank of Commerce, Laredo. 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
We have evaluated all events or transactions that occurred through the date we issued these financial statements.
During this period, we did not have any material recognizable or non-recognizable subsequent events.
Investment Securities
We classify debt securities into one of these categories: held-to-maturity, available-for-sale, or trading. Such
classifications are reassessed for appropriate classification at each reporting date. Securities that are intended and expected
to be held until maturity are classified as “held-to-maturity” and are carried at amortized cost for financial statement
reporting. Securities that are not positively expected to be held until maturity, but are intended to be held for an indefinite
period of time are classified as “available-for-sale” or “trading” and are carried at their fair value. Unrealized holding gains
and losses are included in net income for those securities classified as “trading”, while unrealized holding gains and losses
related to those securities classified as “available-for-sale” are excluded from net income and reported net of tax as other
comprehensive income and in shareholders’ equity as accumulated other comprehensive income (loss) until realized. We
did not maintain any trading securities during the three-year period ended December 31, 2018.
36
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Mortgage-backed securities held at December 31, 2018 and 2017 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, we believe 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) our intent to hold and our
determination of whether we will more likely than not be required to sell the security prior to a recovery in fair value. If
we determine that (i) we intend to sell the security or (ii) it is more likely than not that we 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 our amortized cost of the security. If we determine that we (i) do
not intend to sell the security and (ii) we 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.
Equity Securities
Prior to January 1, 2018, equity securities with readily determinable fair values were included in available-for-sale
securities, with the unrealized gain or loss recorded as a component of other comprehensive income (loss). Pursuant to
the adoption of ASU 2016-02, equity securities with readily determinable fair values are a separate component of our
balance sheet, with unrealized gains and losses recognized in net income. Equity securities with readily determinable fair
values at December 31, 2018 and December 31, 2017 consist primarily of Community Reinvestment Act funds.
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
our Subsidiary Banks’ allowances for probable loan losses. Such agencies may require our Subsidiary Banks to make
37
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
additions or reductions to their GAAP allowances based on their judgments of information available to them at the time
of their examination.
The Subsidiary Banks 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. We originate 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 our impaired loans are measured at the fair value of the collateral. In
limited cases, we 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, we grant a concession to the borrower that we 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 our Subsidiary Banks 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 Subsidiary Bank has a borrower who is experiencing financial
38
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
difficulties, but not to the extent that requires a restructuring of indebtedness. The majority of this category is composed
of loans that are considered to be adequately secured and/or for which there are expected future payments. When a loan is
placed on non-accrual status, any interest accrued, not paid is reversed and charged to operations against interest income.
As it relates to non-consumer loans that are not 90 days past due, management will evaluate each of these loans to
determine if placing the loan on non-accrual status is warranted. Interest income on non-accrual loans is recognized only
to the extent payments are received or when, in management’s opinion, the debtor’s financial condition warrants
reestablishment of interest accruals.
Other Real Estate Owned and Reposessed Assets
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 $57,344,000 and $30,519,000 at December 31, 2018 and 2017, respectively. Other real estate
owned is included in other assets. Reposessed assets consist primarily of non-real estate assets acquired by foreclosure.
Prior to foreclosure, the value of the underlying loan is written down to the fair value of the asset to be repossessed by a
charge to the allowance for probable loan losses, if necessary. Reposessed assets are included in other assets on the
consolidated financial statements and totaled approximately $6,454,000 and $303,000 at December 31, 2018 and 2017,
respectively.
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, 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.
Cash Surrender Value of Bank Owned Life Insurance
Cash surrender value of bank owned life insurance includes investments in cash value insurance policies to assist
with financing employee compensation and benefit programs. The cash value of the underlying policies accumulates on
a tax-free basis and is received through death proceeds, which are also tax-free. The earnings on the policies are derived
from the investment portfolio returns of the individual insurance carriers for general account policies and on the returns
on investments segregated in our name for separate account policies.
Revenue Recognition
On January 1, 2018, we adopted the provisions of ASU 2014-09 to ASC 606, “Revenue from Contracts with
Customers.” Since our revenue is primarily comprised of net interest income on financial assets and liabilities, which
were excluded from the scope of the update, the remaining non-interest revenue streams were identified and then analyzed
under the provisions of the update, to: (i) indentify the contract, (ii) identify the performance obligation, (iii) determine
the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when
the performance obligation was satisfied. Our non-interest revenue contracts with customers are primarily short term and
39
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
our performance obligation is satisfied at a single point in time, typically within a single period. No changes to our existing
methods for recognizing revenue were made as a result of the update.
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. We
file a consolidated federal income tax return with our 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.
We evaluate uncertain tax positions at the end of each reporting period. We 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, 2018 and 2017, respectively, after evaluating all uncertain tax positions, we
have recorded no liability for unrecognized tax benefits at the end of the reporting period. We 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, 2018, 2017 and 2016, we recognized no interest expense or penalties related to uncertain tax
positions.
We file consolidated tax returns in the U.S. Federal jurisdiction and various state jurisdictions. We are no longer
subject to U.S. federal or state income tax examinations by tax authorities for years before 2015.
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 our 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 our 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.
40
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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,
2018, after completing goodwill testing, we have 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. Our identified intangible assets relate to core deposits and contract
rights. As of December 31, 2018, we have 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.
Consolidated Statements of Cash Flows
For purposes of the consolidated statements of cash flows, we consider all short-term investments with a maturity
at date of purchase of three months or less to be cash equivalents. Also, we report transactions related to deposits and loans
to customers on a net basis.
Accounting for Transfers and Servicing of Financial Assets
We account 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, we recognize
the financial and servicing assets we control and liabilities we have incurred, derecognize financial assets when control
has been surrendered and derecognize liabilities when extinguished. We have retained mortgage servicing rights in
connection with the sale of mortgage loans. Because we 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
We operate as one segment. The operating information used by our chief executive officer for purposes of
assessing performance and making operating decisions is the consolidated financial statements presented in this report.
We have five active operating subsidiaries, namely, the Subsidiary Banks. We apply the provisions of ASC Topic 280,
“Segment Reporting,” in determining our reportable segments and related disclosures.
41
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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
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. On January 1, 2018, we adopted the provisions of
ASU 2014-09 to ASC 606. Our revenue is primarily comprised of net interest income on financial assets and financial
liabilities, which is explicitly excluded from the scope of ASC 606. We have evaluated the impact of the accounting
standards update on certain other non-interest revenue streams that the provisions of the update apply to and has determined
that the adoption of the new provisions to ASC 606 did not have a significant impact to our consolidated financial
statements or operations.
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
42
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
deferred tax assets. The update is effective for interim and annual periods beginning after December 15, 2017. On
January 1, 2018, we adopted the provisions of ASU 2016-01 The main effect resulting from the adoption of the new
standards is that beginning on January 1, 2018, equity securities with readily determinable fair values are now reported in
a single line item on the face of our consolidated statement of condition under the caption, “Equity securities with readily
determinable fair values.” Additionally, the changes in fair value of the equity securities is now recognized in net income
and is included in other non-interest expense on the face of our consolidated income statement. Prior to January 1, 2018,
the equity securities were classified as available-for-sale and stated at fair value with unrealized gains and losses included
in accumulated comprehensive income, net of tax and had a net unrealized loss of $189,000. Other equity securities without
readily determinable fair values are recorded at cost less any impairment, if any, and included in other investments in our
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 adoption of the update is not
expected to have a significant impact to our consolidated financial statements.
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. We have 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. We 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 our
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
43
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of
adoption. The adoption of the update did not have a significant impact to our 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. We adopted the provisions of ASU 2018-02 to ASC 220 in the second quarter
of 2018. We recorded a one-time reclassification of $5,997,000 between accumulated comprehensive income (loss) and
retained earnings as a result of the adoption of the accounting standards update.
In August 2018, the FASB issued Accounting Standards Update No. 2018-13 to ASC 820, “Fair Value
Measurement.” The update amends the existing guidance surrounding the disclosure of certain fair value measurements.
The update removes certain disclosures that are no longer considered cost beneficial, modifies and, in some instances
clarifies, the specific requirements of certain disclosures and adds disclosure requirements that are identified relevant. The
update is effective for fiscal years beginning after December 15, 2019. The adoption of the update is not expected to have
a significant impact on our consolidated financial statements.
(2) Investment Securities
The amortized cost and estimated fair value by type of investment security at December 31, 2018 are as follows:
Gross
Held to Maturity
Gross
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total investment securities . . . . . . . . . . . . . . . . . . $
1,200 $
1,200 $
Amortized
unrealized
unrealized
cost
gains
Estimated
fair value
Carrying
value
losses
(Dollars in Thousands)
— $
— $
— $
— $
1,200 $
1,200 $
1,200
1,200
Available for Sale Debt Securities
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Estimated
fair value
Carrying
value(1)
(Dollars in Thousands)
Residential mortgage-backed securities . . . . . . . . $ 3,295,366 $ 6,813 $ (79,169) $ 3,223,010 $ 3,223,010
Obligations of states and political subdivisions .
188,340
185,799
Total investment securities . . . . . . . . . . . . . . . . . . $ 3,481,165 $ 9,459 $ (79,274) $ 3,411,350 $ 3,411,350
188,340
2,646
(105)
(1)
Included in the carrying value of residential mortgage- backed securities are $501,293 of mortgage-backed securities issued by Ginnie Mae and
$2,721,717 of mortgage-backed securities issued by Fannie Mae and Freddie Mac
44
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The amortized cost and estimated fair value of investment securities at December 31, 2018, 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 Estimated Amortized
Cost
fair value
Cost
Estimated
fair value
—
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Due after one year through five years . . . . . . . . . . . . . . . . . . . . . . . .
—
Due after five years through ten years . . . . . . . . . . . . . . . . . . . . . . . .
502
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
187,838
Residential mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . .
3,223,010
Total investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,200 $ 1,200 $ 3,481,165 $ 3,411,350
— $
—
500
185,299
3,295,366
1,200
—
—
—
1,200
—
—
—
— $
(Dollars in Thousands)
— $
The amortized cost and estimated fair value by type of investment security at December 31, 2017 are as follows:
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total investment securities . . . . . . . . . . . . . . . . . . . . $
2,400 $ — $
— $
2,400 $
— $
— $
2,400 $
2,400 $
2,400
2,400
Held to Maturity
Amortized
Gross
unrealized unrealized
Gross
cost
gains
losses
Estimated
fair value
Carrying
value
(Dollars in Thousands)
Amortized
cost
Gross
unrealized
gains
Available for Sale
Gross
Estimated
unrealized
losses
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 subdivisions . . .
232,951
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27,886
Total investment securities . . . . . . . . . . . . . . . . . . . . $ 4,196,263 $ 22,274 $ (66,467) $ 4,152,070 $ 4,152,070
225,096
28,075
232,951
27,886
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,
$3,237,1700 of mortgage-backed securities issued by Fannie Mae and Freddie Mac
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, we believe 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
$1,112,852,000 and $1,086,360,000, respectively, at December 31, 2018.
Proceeds from the sale and call of securities available-for-sale were $59,782,000, $396,066,000 and $352,743,000
during 2018, 2017 and 2016, respectively, which amounts included $0, $377,756,000 and $338,138,000 of
45
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
mortgage-backed securities. Gross gains of $3,000, $1,186,000 and $586,000, and gross losses of $144,000, $5,960,000
and $3,212,000 were realized on the sales in 2018, 2017 and 2016, respectively.
Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by
investment category and length of time that individual securities have been in a continuous unrealized loss position, at
December 31, 2018 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 . . . . . . . . . . . . $ 208,384 $
Obligations of states and political subdivisions . . . . . . .
12,756
$ 221,140
$
(2,124) $ 2,537,181 $ (77,045) $ 2,745,565 $ (79,169)
(105)
(2,223) $ 2,537,693 $ (77,051) $ 2,758,833 $ (79,274)
13,268
512
(99)
(6)
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,
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)
6,056
19,518
5,534
11,499
522
8,019
(9)
(251)
(7)
(231)
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, we believe 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. We have 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 our conclusion 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, we 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. We 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) were recorded in 2016 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. We believe
that the entity issuing the debt will honor its interest payment schedule, as well as the full debt at maturity. We purchased
the securities for their economic value. The decrease in fair value is primarily due to market interest rates and not other
46
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
factors, and because we have no intent to sell and will more likely than not be required to sell before a market price
recovery or maturity of the securities, it is our conclusion 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Sale of other-than-temporarily impaired available-for-sale securities during period . . . . . . . . . . .
Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
13,931
(13,931)
—
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Impairment charges recognized during period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
13,577
354
13,931
Equity securities with readily determinable fair values consist primarily of Community Reinvestment Act funds.
At December 31, 2018 and December 31, 2017, the balance in equity securities with readily determinable fair values
recorded at fair value were $5,937,000 and $27,886,000, respectively. Prior to January 1, 2018, the equity securities were
included in available-for-sale securities, with the related unrealized gain or loss recorded as a component of other
comprehensive income (loss). The following is a summary of unrealized and realized gains and losses recognized in net
income on equity securities during the twelve months ended December 31, 2018:
Year Ended
December 31,
(Dollars in Thousands)
2018
Net losses recognized during the period on equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Less: Net gains and (losses) recognized during the period on equity securities sold
during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(388)
—
Unrealized losses recognized during the reporting period on equity securities still held at the
reporting date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(388)
(3) Loans
A summary of loans, by loan type at December 31, 2018 and 2017 is as follows:
Commercial, financial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,305,124 $ 3,322,668
Real estate - mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,133,525
1,683,550
Real estate - construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
49,543
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
158,886
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,561,289 $ 6,348,172
1,173,101
1,886,231
46,316
150,517
December 31,
December 31,
2018
2017
(Dollars in Thousands)
47
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(4) Allowance for Probable Loan Losses
The allowance for probable loan losses primarily consists of the aggregate loan loss allowances of the Subsidiary
Banks. 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 Subsidiary Bank 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 our 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.
Our management continually reviews the allowance for loan losses of the Subsidiary Banks 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 our
allowance for probable loan losses. Should any of the factors considered by management in evaluating the adequacy of
the allowance for probable loan losses change, our 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 our 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 our internal classified report. Additionally, our credit department reviews the majority of our 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, we 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. Economic risk factors are minimized by the underwriting standards of the Subsidiary Banks. 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 Subsidiary Banks
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.
48
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Construction and land development loans can carry risk of repayment when projects incur cost overruns, have an
increase in the price of building materials, encounter zoning and environmental issues, or encounter other factors that may
affect the completion of a project on time and on budget. Additionally, repayment risk may be negatively impacted when
the market experiences a deterioration in the value of real estate. Risks specifically related to 1-4 family development loans
also include the practice by the mortgage industry of more restrictive underwriting standards, which inhibits the buyer
from obtaining long term financing and excessive housing and lot inventory in the market.
Commercial real estate loans demonstrate a risk of repayment when market values deteriorate, the business
experiences turnover in key management, the business has an inability to attract or keep occupancy levels stable, or when
the market experiences an exit of a specific business industry that is significant to the local economy, such as a
manufacturing plant.
First and second lien residential 1-4 family mortgage and consumer loan repayments may be affected by
unemployment or underemployment and deteriorating market values of real estate.
A summary of the changes in the allowance for probable loan losses by loan class is as follows:
December 31, 2018
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
Total
Balance at December 31, . . . . . . . $
Losses charge to allowance . . .
Recoveries credited to
27,905 $
(14,220)
11,675 $
(1)
16,663 $
(70)
1,109 $
—
2,950 $
(122)
6,103 $
(347)
440 $ 842 $
(362)
(3)
67,687
(15,125)
(Dollars in Thousands)
allowance . . . . . . . . . . . . .
1,981
Net losses charged to
allowance . . . . . . . . . . . . .
(12,239)
Provision (credit) charged to
25
24
246
176
—
—
36
(86)
369
43
10
2,710
22
(319)
7
(12,415)
operations . . . . . . . . . . . . . . . .
Balance at December 31, . . . . . . . $
(3,070)
12,596 $
3,424
15,123 $
2,514
19,353 $
699
1,808 $
603
3,467 $
1,594
7,719 $
326
447 $
22
871 $
6,112
61,384
December 31, 2017
Domestic
Foreign
Commercial
real estate:
other
Commercial
construction & real estate:
Commercial
Commercial development
land
farmland & real estate:
commercial multifamily
Residential: Residential:
first lien
junior lien
Consumer Foreign
Total
Balance at December 31, . . . . . . . $
Losses charge to allowance . . .
Recoveries credited to
25,649 $
(12,094)
13,889 $
(213)
16,731 $
(40)
806 $
—
2,455 $
(101)
3,716 $
(340)
(Dollars in Thousands)
allowance . . . . . . . . . . . . .
4,020
Net losses charged to
allowance . . . . . . . . . . . . .
(8,074)
21
(192)
527
487
—
—
11
(90)
258
45
(82)
(264)
Provision (credit) charged to
531 $ 884 $
(309)
(1)
21
20
64,661
(13,098)
4,903
(8,195)
operations . . . . . . . . . . . . . . . .
Balance at December 31, . . . . . . . $
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
49
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2016
Domestic
Foreign
Commercial
real estate:
other
Commercial
construction & real estate:
Commercial
Commercial development
land
farmland & real estate:
commercial multifamily
Residential: Residential:
first lien
junior lien
Consumer Foreign
Total
Balance at December 31, . . . . . . . $
Losses charge to allowance . . .
Recoveries credited to
21,431 $
(32,959)
13,920 $
(16)
19,769 $
(1,890)
1,248 $
(180)
3,509 $
(70)
5,321 $
(331)
638 $ 1,152 $
(414)
(41)
66,988
(35,901)
(Dollars in Thousands)
allowance . . . . . . . . . . . . .
7,110
6,099
119
—
Net losses charged to
allowance . . . . . . . . . . . . .
(25,849)
6,083
(1,771)
(180)
21
(49)
278
69
19
13,715
(53)
(345)
(22)
(22,186)
Provision (credit) charged to
operations . . . . . . . . . . . . . . . .
Balance at December 31, . . . . . . . $
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)
884 $
19,859
64,661
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 years
ended December 31, 2018 and 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 was secured by multiple pieces of transportation equipment beginning in the
fourth quarter of 2014. We use 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. As fluctuations occur
in historical loss factors, management evaluates the need to adjust the qualitative factors used in the calculation to properly
reflect probable loan losses. 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.
50
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, 2018
Loans Individually
Evaluated For
Impairment
Loans Collectively
Evaluated For
Impairment
Recorded
Investment Allowance
Recorded
Investment
(Dollars in Thousands)
Allowance
Domestic
Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,179 $
Commercial real estate: other construction & land development . .
Commercial real estate: farmland & commercial . . . . . . . . . . . . . .
Commercial real estate: multifamily . . . . . . . . . . . . . . . . . . . . . . . . .
Residential: first lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential: junior lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,092
3,509
507
6,244
901
1,175
293
656 $ 1,119,790 $ 11,940
15,007
116
19,353
—
1,808
—
—
3,467
7,719
—
447
—
871
—
1,884,139
1,946,389
225,750
439,556
726,400
45,141
150,224
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,900 $
772 $ 6,537,389 $ 60,612
December 31, 2017
Loans Individually
Evaluated For
Impairment
Loans Collectively
Evaluated For
Impairment
Recorded
Investment Allowance
Recorded
Investment
(Dollars in Thousands)
Allowance
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
11,559
116
16,645
18
1,109
—
—
2,950
6,103
—
440
—
842
—
1,681,095
2,010,162
192,440
425,925
700,025
48,262
158,539
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 63,204 $
434 $ 6,284,968 $ 67,253
The decrease in loans individually evaluated for impairment at December 31, 2018 compared to December 31,
2017, can be attributed to the foreclosure on a relationship primarily secured by a water park and the foreclosure of the
collateral on a relationship secured by multiple pieces of transportation equipment. The foreclosure of the collateral
securing the two relationships is also impacting the balances reported as impaired loans in the following tables. Loans
accounted for on a non-accrual basis at December 31, 2018, 2017 and 2016 amounted to $15,791,000, $54,730,000 and
$37,245,000, respectively. The effect of such non-accrual loans reduced interest income by approximately $1,119,000,
$977,000 and $2,461,000 for the years ended December 31, 2018, 2017 and 2016, 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,
2018, 2017 and 2016 amounted to approximately $40,674,000, $7,257,000 and $5,226,000, respectively and can be
attributed to a relationship that is secured by multiple pieces of real property on which car dealerships are operated.
51
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, 2018 December 31, 2017
(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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-accrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
9,143 $
2,092
3,509
507
347
171
22
15,791 $
17,909
2,455
33,123
476
712
11
44
54,730
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. We have identified these loans through our 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 our impaired loans are measured at the fair value of the collateral. In limited cases, we 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 our impaired loans by loan class for the year ended
December 31, 2018:
December 31, 2018
Unpaid
Recorded
Principal
Investment Balance
Average
Related
Recorded
Allowance Investment Recognized
Interest
(Dollars in Thousands)
Loans with Related Allowance
Domestic
Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,563 $ 2,161 $
Commercial real estate: other construction & land
656 $ 1,741 $
—
development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total impaired loans with related allowance . . . . . . . . . . . $ 1,698 $ 2,330 $
169
135
116
772 $ 1,882 $
141
—
—
52
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Recorded
Investment
December 31, 2018
Unpaid
Principal
Balance
Average
Recorded
Investment
(Dollars in Thousands)
Interest
Recognized
Loans with No Related Allowance
Domestic
Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,616 $ 7,730 $ 16,194 $
Commercial real estate: other construction & land development . .
Commercial real estate: farmland & commercial . . . . . . . . . . . . . .
Commercial real estate: multifamily . . . . . . . . . . . . . . . . . . . . . . . . .
Residential: first lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential: junior lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,151
36,632
565
7,136
976
1,211
327
2,205
4,031
538
6,386
911
1,190
293
1,957
3,509
507
6,244
901
1,175
293
Total impaired loans with no related allowance . . . . . . . . . . . . . . $ 22,202 $ 23,284 $ 65,192 $
3
—
—
—
305
44
2
14
368
The following tables detail key information regarding our impaired loans by loan class for the year ended
December 31, 2017:
December 31, 2017
Unpaid
Recorded
Principal
Investment Balance
Average
Related
Recorded
Allowance Investment Recognized
Interest
(Dollars in Thousands)
Loans with Related Allowance
Domestic
Commercial real estate: other construction & land
development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,300 $ 1,577 $
Commercial real estate: farmland & commercial . . . . . . .
Commercial real estate: multifamily . . . . . . . . . . . . . . . . . .
145
449
169
590
Total impaired loans with related allowance . . . . . . . . . . $ 1,894 $ 2,336 $
300
116
18
434 $ 1,985 $
1,346
150
489
—
—
—
—
December 31, 2017
Unpaid
Recorded
Principal
Investment Balance
Average
Recorded
Investment Recognized
Interest
(Dollars in Thousands)
Loans with No Related Allowance
Domestic
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,493
38,536
511
7,249
970
1,293
750
2,455
33,275
505
6,968
736
1,283
347
2,310
32,675
476
6,852
723
1,281
347
Total impaired loans with no related allowance . . . . . . . . . . . . . . . $ 61,310 $ 89,664 $ 72,417 $
3
—
—
—
324
45
3
16
391
A portion of the impaired loans have adequate collateral and credit enhancements not requiring a related
allowance for loan loss. Management is confident our loss exposure regarding these credits will be significantly reduced
53
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
due to our 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 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.
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, 2018 December 31, 2017
(Dollars in Thousands)
Domestic
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial real estate: farmland & commercial . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential: first lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential: junior lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35 $
—
5,947
730
1,153
293
6,910
—
6,140
712
1,237
347
Total troubled debt restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
8,158 $
15,346
The Subsidiary Banks 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 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 our management that the allowance for probable loan losses at
December 31, 2018 and December 31, 2017, was adequate to absorb probable losses from loans in the portfolio at that
date.
54
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The following table presents information regarding the aging of past due loans by loan class:
30 - 59
Days
60 - 89
Days
December 31, 2018
90 Days or
90 Days or greater &
Greater
Total
Past
still accruing Due
(Dollars in Thousands)
Current
Portfolio
Total
Domestic
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,651 $ 1,089 $ 19,851 $
Commercial real estate: other construction &
land development . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate: farmland & commercial . .
Commercial real estate: multifamily . . . . . . . . . . . .
Residential: first lien . . . . . . . . . . . . . . . . . . . . . . .
Residential: junior lien . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
727
2,928
927
3,998
1,155
486
1,106
1,707
784
—
1,677
618
19
117
922
27,239
578
3,362
1,108
45
739
Total past due loans . . . . . . . . . . . . . . . . . . . . . . $ 15,978 $ 6,011 $ 53,844 $
10,890 $ 25,591 $ 1,103,378 $ 1,128,969
16
24,910
71
3,079
937
32
739
1,886,231
1,949,898
226,257
445,800
727,301
46,316
150,517
40,674 $ 75,833 $ 6,485,456 $ 6,561,289
1,882,875
1,918,947
224,752
436,763
724,420
45,766
148,555
3,356
30,951
1,505
9,037
2,881
550
1,962
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
Domestic
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,790 $
Commercial real estate: other construction &
398 $ 18,308 $
537 $ 22,496 $ 1,063,971 $ 1,086,467
land development . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate: farmland & commercial .
Commercial real estate: multifamily . . . . . . . . . . .
Residential: first lien . . . . . . . . . . . . . . . . . . . . . .
Residential: junior lien . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
354
3,925
84
4,295
1,310
868
1,229
308
518
—
2,458
580
98
69
820
31,133
476
4,095
1,110
160
667
Total past due loans . . . . . . . . . . . . . . . . . . . . . $ 15,855 $ 4,429 $ 56,769 $
6
954
—
3,861
1,099
133
667
1,683,550
2,043,285
192,916
432,777
700,748
49,543
158,886
7,257 $ 77,053 $ 6,271,119 $ 6,348,172
1,682,068
2,007,709
192,356
421,929
697,748
48,417
156,921
1,482
35,576
560
10,848
3,000
1,126
1,965
The increase in the commercial real estate: farmland and commercial in the 90 days and greater category at
December 31, 2018 compared to December 31, 2017 can be attributed to a relationship that is secured by multiple pieces
of real property on which car dealerships are operated. The relationship remained on accrual since we had a court approved
debtor in possession plan that provided that the sponsors of the plan would assume full responsibility for the plan, including
accrued and unpaid interest. Our 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 our 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 our 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 we could sustain some
future loss 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
55
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
value of the collateral if the loan is collateral dependent. Substantially all of our loans evaluated as impaired under
ASC 310-10 are measured using the fair value of collateral method. In limited cases, we 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 our 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, (iii) other risk factors, (iv) the effectiveness of the internal loan review function,
(v) changes in loan portfolios, and (vi) the composition and concentration of credit volume is applied to each category.
Each category is then added together to determine the allowance allocated under ASC 450-20.
A summary of the loan portfolio by credit quality indicator by loan class is as follows:
Domestic
Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial real estate: other construction &
December 31, 2018
Pass
Special
Review
Watch
List—Pass
Watch List— Watch List—
Substandard
Impaired
(Dollars in Thousands)
998,625 $
441 $ 44,544 $
76,180 $
9,179
land development . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate: farmland & commercial . .
Commercial real estate: multifamily . . . . . . . . . . . . .
Residential: first lien . . . . . . . . . . . . . . . . . . . . . . . . .
Residential: junior lien . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,817,098
1,726,711
224,823
438,773
725,538
45,141
150,224
1,648
62,046
—
—
—
—
—
9,055
38,373
—
142
862
—
—
56,338
119,259
927
641
—
—
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,126,933 $ 64,135 $ 92,976 $ 253,345 $
2,092
3,509
507
6,244
901
1,175
293
23,900
December 31, 2017
Pass
Special
Review
Watch
List—Pass Substandard
Watch List— Watch List—
Impaired
Domestic
Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial real estate: other construction &
(Dollars in Thousands)
905,707 $
— $ 3,170 $ 159,643 $
17,947
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
—
—
672
41,820
—
—
—
—
—
62,531
99,445
—
74
—
—
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,911,001 $ 6,612 $ 45,662 $ 321,693 $
2,455
33,123
476
6,852
723
1,281
347
63,204
The increase in special review credits in the commercial real estate: farmland and commercial for December 31,
2018 compared to December 31, 2017 can be attributed to a relationship secured by children’s learning centers reclassified
from the Pass category. The increase in Watch-List Pass commercial credits can be attributed to the reclassification of a
relationship in the oil and gas production business from Watch-List Substandard. The decrease in Watch-List Substandard
56
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
for December 31, 2018 can be attributed to the payoff of a relationship secured by barges used in the transportation of
petroleum products, the reclassification of a relationship secured by accounts receivable to Pass and the previously
mentioned reclassification of the relationship in the oil and gas production business to Watch-List Pass. The increase in
Watch-List Substandard commercial credits for December 31, 2018 can be attributed to a relationship secured by real
property on which car dealerships are operated from the Pass category. The decrease in Watch-List Impaired credits in
the commercial real estate: farmland and commercial at December 31, 2018 can be attributed to the foreclosure of a loan
relationship primarily secured by a water park.
(5) Bank Premises and Equipment
A summary of bank premises and equipment, by asset classification, at December 31, 2018 and 2017 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
5
1
-
-
40 years $
20 years
2018
2017
(Dollars in Thousands)
563,302 $
292,958
118,806
550,094
289,743
123,087
7
-
27 years
—
(468,167)
506,899
$
—
(448,470)
514,454
$
The majority of our 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 our identified intangible assets follows:
Carrying
Amount
Accumulated
Amortization
(Dollars in Thousands)
Net
December 31, 2018:
Core deposit premium . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Identified intangible (contract rights) . . . . . . . . . . . . . . . .
Total identified intangibles . . . . . . . . . . . . . . . . . . . . . . . .
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
$
$
$
$
58,675
2,022
60,697
58,675
2,022
60,697
$
$
$
$
—
—
—
—
—
—
Amortization expense of intangible assets for the years ended December 31, 2018, 2017 and 2016, was $0, $0
and $25,000, respectively.
There were no changes in the carrying amount of goodwill for the years ended December 31, 2018 and 2017.
57
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(7) Deposits
Deposits as of December 31, 2018 and 2017 and related interest expense for the years ended December 31, 2018,
2017 and 2016 were as follows:
2018
2017
(Dollars in Thousands)
Deposits:
Demand - non-interest bearing
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total demand non-interest bearing . . . . . . . . . . . . . . .
Savings and interest bearing demand
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total savings and interest bearing demand . . . . . . . .
Time, certificates of deposit $100,000 or more
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less than $100,000
2,758,768 $
696,072
3,454,840
2,609,932
633,323
3,243,255
2,531,854
736,383
3,268,237
590,895
807,486
2,615,143
629,988
3,245,131
637,006
808,881
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total time, certificates of deposit . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
323,377
251,710
1,973,468
8,696,545 $
354,998
255,621
2,056,506
8,544,892
Interest expense:
Savings and interest bearing demand
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total savings and interest bearing demand . .
Time, certificates of deposit $100,000 or
more
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less than $100,000
2018
2017
(Dollars in Thousands)
2016
11,029 $
1,735
12,764
5,453 $
755
6,208
3,922
640
4,562
4,741
5,798
3,644
4,105
3,881
3,929
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total time, certificates of deposit . . . . . . . . . .
Total interest expense on deposits . . . . . . . . . . . . $
1,589
968
13,096
25,860 $
1,312
675
9,736
15,944 $
1,447
706
9,963
14,525
58
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Scheduled maturities of time deposits as of December 31, 2018 were as follows:
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,786,776
138,105
31,665
15,717
1,096
109
1,973,468
Total
(in thousands)
Scheduled maturities of time deposits in amounts of $100,000 or more at December 31, 2018, 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)
500,836
337,349
433,628
126,568
1,398,381
$
Time deposits that meet or exceed the FDIC insurance limit of $250,000 at December 31, 2018 and December 31,
2017 were $869,000 and $894,000, in thousands, respectively.
(8) Securities Sold Under Repurchase Agreements
Our Subsidiary Banks have entered into repurchase agreements with an investment banking firm and individual
customers of the Subsidiary Banks. The purchasers have agreed to resell to the Subsidiary Banks identical securities upon
the maturities of the agreements. Securities sold under repurchase agreements were mortgage-backed securities and
averaged $314,876,000 and $402,396,000 during 2018 and 2017, respectively, and the maximum amount outstanding at
any month end during 2018 and 2017 was $370,495,000 and $514,616,000 respectively.
59
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Further information related to repurchase agreements at December 31, 2018 and 2017 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, 2018 term:
Overnight agreements . . . . . . . . . . . . . . . . . . . . . . . $
1 to 29 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30 to 90 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 90 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
357,642 $
—
—
11,444
369,086 $
349,081 $ 218,852
—
—
—
—
11,096
11,137
360,177 $ 229,989
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
0.85 %
—
—
1.27
0.87 %
0.25 %
—
3.99
0.74
1.32 %
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 and the Federal Home Loan Bank of Topeka at the market
price offered at the time of funding. These borrowings are secured by mortgage-backed investment securities and a portion
of our loan portfolio.
Further information regarding our other borrowed funds at December 31, 2018 and 2017 is set forth in the
following table:
Federal Home Loan Bank advances—short-term
December 31,
2018
2017
(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 . . . . . . . . $ 1,007,100
$
2.70 %
$
1.97 %
268,975
621,357
945,225
1.44 %
839,858
1.23 %
$ 1,043,250
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 . . . . . . . . $
436,690
302,373
$
1.73 %
$
1.71 %
$
250,000
1.26 %
51,644
1.26 %
250,000
436,700
(1) Long-term advances at December 31, 2018 consisted of both amortizing and non-amortizing advances. The non-amortizing advances mature in
the following increments: $75,000,000 in July 2028, $100,000,000 in March 2033 and $250,000,000 in August 2033 and are callable by the FHLB
60
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
on an annual basis. Two amortizing advances are outstanding at December 31, 2018 in the amounts of $3,200,000 and $8,490,000 and mature in
December 2033 and November 2033, respectively. The amortization on the amortizing long-term advances totals approximately $179,000 per year
for each of the next five years. 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.
(10) Junior Subordinated Deferrable Interest Debentures
We have formed six statutory business trusts under the laws of the State of Delaware for the purpose of issuing
trust preferred securities. These statutory business trusts (the “Trusts”) have each issued Capital and Common Securities
and invested the proceeds thereof in an equivalent amount of junior subordinated debentures (the “Debentures”) we issued.
As of December 31, 2018 and December 31, 2017, the principal amount of debentures outstanding totaled $160,416,000.
The Debentures are subordinated and junior in right of payment to all our present and future senior indebtedness
(as defined in the respective indentures) 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. We have fully and unconditionally guaranteed the obligations of each of the
Trusts with respect to the Capital and Common Securities. We have 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 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, 2018 and December 31, 2017, 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, 2018:
Junior
Subordinated
Deferrable
Interest
Debentures
Repricing
Frequency
Interest
Rate
Interest
Rate Index(1)
Maturity Date
Redemption Date(1)
Optional
(Dollars in Thousands)
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
February 2008
6.07 % LIBOR + 3.45 November 2032
October 2008
October 2033
5.49 % LIBOR + 3.05
October 2011
October 2036
4.02 % LIBOR + 1.62
February 2012
February 2037
4.19 % LIBOR + 1.65
4.02 % LIBOR + 1.62
July 2012
July 2037
4.19 % LIBOR + 1.45 September 2037 September 2012
(1) The Capital Securities may be redeemed in whole or in part on any interest payment date after the Optional Redemption Date.
61
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(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
outstanding during the reporting period. The calculation of the basic EPS and the diluted EPS for the years ended
December 31, 2018, 2017, and 2016 is set forth in the following table:
Net Income
(Numerator)
Shares
(Denominator)
(Dollars in Thousands,
Except Per Share Amounts)
Per Share
Amount
December 31, 2018:
Basic EPS
Net income available to common
shareholders . . . . . . . . . . . . . . . . . . . . . . . . . $
215,931
66,106,580 $
3.27
Potential dilutive common shares and
warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31, 2017:
Basic EPS
Net income available to common
—
215,931
527,240
66,633,820 $
3.24
shareholders . . . . . . . . . . . . . . . . . . . . . . . . . $
157,436
66,046,155 $
2.38
Potential dilutive common shares and
warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31, 2016:
Basic EPS
Net income available to common
—
157,436
732,281
66,778,436 $
2.36
shareholders . . . . . . . . . . . . . . . . . . . . . . . . . $
Potential dilutive common shares . . . . . . . . .
Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
133,932
—
133,932
65,967,989 $
345,501
66,313,490 $
2.03
2.02
(12) Employees’ Profit Sharing Plan
We have a deferred profit sharing plan for full-time employees with a minimum of one year of continuous
employment. Our annual contribution to the plan is based on a percentage, as determined by our 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 $3,850,000 $3,750,000 and
$3,650,000 were charged to income for the years ended December 31, 2018, 2017, and 2016, respectively.
(13) International Operations
We provide international banking services for our customers through our Subsidiary Banks. Neither we nor our
Subsidiary Banks have facilities located outside the United States. International operations are distinguished from domestic
operations based upon the domicile of the customer.
Because the resources we employ are common to both international and domestic operations, it is not practical to
determine net income generated exclusively from international activities.
62
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
A summary of assets attributable to international operations at December 31, 2018 and 2017 are as follows:
Loans:
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less allowance for probable loan losses . . . . . . . . . . . . . . . . . .
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
2017
(Dollars in Thousands)
101,955 $
48,562
150,517
(871)
149,646 $
811 $
113,019
45,867
158,886
(842)
158,044
671
At December 31, 2018, we had $119,302,000 in outstanding standby and commercial letters of credit to facilitate
trade activities.
Revenues directly attributable to international operations were approximately $5,412,000, $5,248,000 and
$5,495,000 for the years ended December 31, 2018, 2017 and 2016, respectively.
(14) Income Taxes
We file 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:
2018
2017
(Dollars in Thousands)
2016
Current
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current taxes . . . . . . . . . . . . . . . . . . . . .
48,144 $
3,370
(5)
51,509
56,974 $
2,662
—
59,636
Deferred
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred taxes . . . . . . . . . . . . . . . . . . . .
Total income taxes . . . . . . . . . . . . . . . . . . . . . $
5,130
13
5,143
56,652 $
4,620
(50)
4,570
64,206 $
52,403
3,362
—
55,765
7,279
27
7,306
63,071
63
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 21%
for 2018 and 35% for 2017 and 2016 to income before income taxes. The reasons for the differences for the years ended
December 31 are as follows:
Computed expected tax expense . . . . . . . . . . . . . $
Change in taxes resulting from:
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
2018
2017
(Dollars in Thousands)
77,643 $
2016
69,253
57,831 $
(3,101)
(4,701)
(3,940)
2,673
—
(1,561)
1,697
(4,985)
(3,198)
3,287
—
(3,694)
rate change . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,618)
(3,168)
—
Net investment expense, low income
housing investments . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual tax expense . . . . . . . . . . . . . . . . . . . . . $
2,518
(90)
56,652 $
387
531
64,206 $
—
(1,835)
63,071
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred
tax liabilities at December 31, 2018 and 2017 are reflected below:
2018
2017
(Dollars in Thousands)
Deferred tax assets:
Loans receivable, principally due to the allowance for probable loan losses. . . . . . . . . $
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment charges on available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized losses on available for sale investment securities . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,257 $
2,459
1,054
81
15,182
5,076
36,109
14,546
2,053
844
81
9,680
4,434
31,638
Deferred tax liabilities:
Bank premises and equipment, principally due to differences on depreciation . . . . . . .
Identified intangible assets and goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(12,596)
(13,490)
(14,787)
(40,873)
(4,764) $
(10,940)
(13,417)
(12,474)
(36,831)
(5,193)
The net deferred tax liability of $4,764,000 at December 31, 2018 and $5,193,000 at December 31, 2017 is
included in other liabilities in the consolidated statements of condition.
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. We were 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 us of $4,786,000 and was included
as a reduction to income tax expense in the consolidated income statement.
64
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(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, 2018, 10,700 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 our stock. We use 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.00
1.73 %
2.68 %
31.65 %
—
— %
— %
— %
2018
2017
(1) No stock options were granted during the twelve months ended December 31, 2017.
A summary of option activity under the stock option plans for the twelve months ended December 31, 2018 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, 2017 . . . . . . . . . . . . . . . . . . . . 668,166 $
Plus: Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234,700
Less:
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
84,701
—
29,188
Options outstanding at December 31, 2018 . . . . . . . . . . . . . . . . . . . . 788,977
20.41
38.27
17.89
—
22.73
25.91
6.07
$
7,587
Options fully vested and exercisable at December 31, 2018 . . . . . . 310,108 $
19.93
4.21
$
4,486
Stock-based compensation expense included in the consolidated statements of income for the years ended
December 31, 2018, 2017 and 2016 was approximately $1,035,000, $903,000 and $1,082,000, respectively. As of
December 31, 2018, there was approximately $2,798,000 of total unrecognized stock-based compensation cost related to
non-vested options granted under our plans that will be recognized over a weighted average period of 2.1 years.
65
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Other information pertaining to option activity during the twelve month period ending December 31, 2018, 2017
and 2016 is as follows:
Weighted average grant date fair value of stock
Twelve Months Ended December 31,
2016
2017
2018
options granted . . . . . . . . . . . . . . . . . . . . . . . . . . $
8.74
Total fair value of stock options vested . . . . . . . . . $ 1,077,000 $ 1,182,000 $ 1,015,000
Total intrinsic value of stock options exercised . . $ 2,045,000 $ 2,595,000 $
792,000
11.78 $
— $
(1) No stock options were granted during the twelve months ended December 31, 2017.
(16) Long Term Restricted Stock Units
As a former participant in the Troubled Asset Relief Program Capital Purchase Program (the “CPP”) we were
subject to certain compensation restrictions, including a prohibition on the payment or accrual of any bonuses to certain
officers and employees except for awards of CPP-compliant long- term restricted stock and stock units.
On December 18, 2009, our board of directors (the “Board”) adopted the 2009 International Bancshares
Corporation Long-Term Restricted Stock Unit Plan (the “Plan”) to give us additional flexibility in the compensation of
our officers, employees, consultants and advisors in compliance with all applicable laws and restrictions.
The Plan authorizes us to issue Restricted Stock Units (“RSUs”) to our officers, employees, consultants and
advisors. On December 18, 2009, pursuant to the Plan, 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
We lease portions of our banking premises and equipment under operating leases. Total rental expense for the
years ended December 31, 2018, 2017 and 2016 were approximately $5,257,000, $5,258,000 and $5,870,000, respectively.
Future minimum lease payments due under non-cancellable operating leases at December 31, 2018 were as follows:
Fiscal year ending:
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Total
(in thousands)
3,443
3,246
2,272
579
212
275
10,027
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, 2018 were $82,690,000.
66
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Cash of approximately $115,721,000 and $116,129,000 at December 31, 2018 and 2017, respectively, was
maintained to satisfy regulatory reserve requirements.
We are involved in various legal proceedings that are in various stages of litigation. We have determined, based
on discussions with our 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 our consolidated statements of condition and
related statements of income, comprehensive income, shareholders’ equity and cash flows. 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 Subsidiary Banks make loans to our directors and executive officers,
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 $33,042,000
and $27,626,000 at December 31, 2018 and 2017, respectively.
(19) Financial Instruments with Off-Statement of Condition Risk and Concentrations of Credit Risk
In the normal course of business, the Subsidiary Banks 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 Subsidiary Banks have in particular classes of financial instruments. At December 31, 2018, the following
financial amounts of instruments, whose contract amounts represent credit risks, were outstanding:
Commitments to extend credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Credit card lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,935,768,000
21,114,000
111,229,000
8,073,000
We enter 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, we are 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, 2018, the maximum potential amount of future payments is approximately $111,229,000. At December 31,
2018, the fair value of these guarantees is not significant. Unsecured letters of credit totaled approximately $42,729,000
and $35,409,000 at December 31, 2018 and 2017, respectively.
We enter into commercial letters of credit on behalf of our customers which authorize a third party to draw drafts
upon us up to a stipulated amount and with specific terms and conditions. A commercial letter of credit is a conditional
commitment on our part to provide payment on drafts drawn in accordance with the terms of the commercial letter of
credit.
The Subsidiary Banks’ 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 Subsidiary Banks use the same
credit policies in making commitments and conditional obligations as they do for on-statement of condition instruments.
The Subsidiary Banks control the credit risk of these transactions through credit approvals, limits and monitoring
67
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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
Subsidiary Banks 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 Subsidiary Banks 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”), we issued to the Treasury a warrant to purchase 1,326,238 shares of our
common stock at a price per share of $24.43 and with a term of ten years (the “Warrant”).
On June 12, 2013, the U.S. Treasury sold the Warrant to a third party. On September 19, 2018, we entered into
an agreement to repurchase the Warrant from the third party at an aggregate purchase price of $29,005,000, which
transaction was consummated in the third quarter of 2018. The repurchase of the outstanding Warrant eliminates any
restrictions on certain shareholder distributions or payment of cash dividends in excess of $0.33 per semi-annual period
that would have impacted the exercise price of the Warrant while it remained outstanding.
Bank regulatory agencies limit the amount of dividends, which the Subsidiary Banks can pay, without obtaining
prior approval from such agencies. At December 31, 2018, the Subsidiary Banks could pay dividends of up to
$768,900,000 without prior regulatory approval and without adversely affecting their “well-capitalized” status under
regulatory capital rules in effect at December 31, 2018. In addition to legal requirements, regulatory authorities also
consider the adequacy of the Subsidiary Banks’ total capital in relation to their deposits and other factors. These capital
adequacy considerations also limit amounts available for payment of dividends. We historically have not allowed any
Subsidiary Bank to pay dividends in such a manner as to impair its capital adequacy.
We and the Subsidiary Banks 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 our consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet
specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-statement of condition
items as calculated under regulatory accounting practices. Our 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 us 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, 2018, that we met all capital
adequacy requirements to which we 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
68
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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 increased each year until January 1, 2019, when we were 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 rules were subject to a
four-year phase in period for mandatory compliance and we were required to begin to phase in the new rules beginning on
January 1, 2015. Management believes, as of December 31, 2018, that we 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
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, 2018, our capital levels exceed all capital adequacy requirements under the Basel III Capital
Rules as currently applicable to us. Based on the ratios presented below, capital levels as of December 31, 2018 exceed
the minimum levels necessary to be considered “well capitalized.”
On May 24, 2018, the EGRRCPA was enacted and, among other things, it includes a simplified capital rule
change which effectively exempts banks with assets of less than $10 billion that exceed the “community bank leverage
ratio,” from all risk-based capital requirements, including Basel III and its predecessors. The federal banking agencies
must establish the “community bank leverage ratio” (a ratio of tangible equity to average consolidated assets) between 8%
and 10% before community banks can begin to take advantage of this regulatory relief provision. Some of the Subsidiary
Banks, with assets of less than $10 billion, may qualify for this exemption. Additionally, under the EGRRCPA, qualified
bank holding companies with assets of up to $3 billion (currently $1 billion) will be eligible for the Federal Reserve’s
Small Bank Holding Company Policy Statement, which eases limitations on the issuance of debt by holding companies.
On August 28, 2018, the Federal Reserve issued an interim final rule expanding the applicability of its Small Bank Holding
Company Policy Statement. While holding companies that meet the conditions of the policy statement are excluded from
consolidated capital requirements, their depository institutions continue to be subject to minimum capital requirements.
Finally, for banks that continue to be subject to the risk-based capital rules of Basel III (e.g., 150%), certain commercial
real estate loans that were formally classified as high volatility commercial real estate 31 (“HVCRE”) will not be subject
to heightened risk weights if they meet certain criteria. Also, while acquisition, development, and construction (“ADC”)
loans will generally be subject to heightened risk weights, certain exceptions will apply. On September 18, 2018, the
federal banking agencies issued a proposed rule modifying the agencies’ capital rules for HVCRE.
69
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
As of December 31, 2018, the most recent notification from the Federal Deposit Insurance Corporation
categorized all the Subsidiary Banks as well-capitalized under the regulatory framework for prompt corrective action. To
be categorized as “well-capitalized,” we 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 our categorization as well-capitalized.
In December 2018, the federal bank regulators issued a final rule that would provide an optional three-year phase-
in period for the day-one regulatory capital effects of the adoption of ASU 2016-13 to ASC 326 “Financial
Instruments – Credit Losses,” as amended, on January 1, 2020.
Our actual capital amounts and ratios for 2018 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, 2018:
Common Equity Tier 1 (to Risk Weighted Assets):
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,711,682 17.55 % $
International Bank of Commerce, Laredo . . . . . . . .
International Bank of Commerce, Oklahoma . . . . .
International Bank of Commerce, Brownsville . . . .
International Bank of Commerce, Zapata . . . . . . . .
Commerce Bank . . . . . . . . . . . . . . . . . . . . . . . . . .
1,201,462 17.24
188,997 13.95
177,456 24.73
70,984 30.77
89,305 32.95
Total Capital (to Risk Weighted Assets):
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,925,905 19.74 % $
International Bank of Commerce, Laredo . . . . . . . .
International Bank of Commerce, Oklahoma . . . . .
International Bank of Commerce, Brownsville . . . .
International Bank of Commerce, Zapata . . . . . . . .
Commerce Bank . . . . . . . . . . . . . . . . . . . . . . . . . .
1,248,107 17.91
198,293 14.64
183,554 25.58
73,726 31.96
90,894 33.54
Tier 1 Capital (to Risk Weighted Assets):
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,859,536 19.06 % $
International Bank of Commerce, Laredo . . . . . . . .
International Bank of Commerce, Oklahoma . . . . .
International Bank of Commerce, Brownsville . . . .
International Bank of Commerce, Zapata . . . . . . . .
Commerce Bank . . . . . . . . . . . . . . . . . . . . . . . . . .
1,201,462 17.24
188,997 13.95
177,456 24.73
70,984 30.77
89,305 32.95
Tier 1 Capital (to Average Assets):
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,859,536 15.87 % $
International Bank of Commerce, Laredo . . . . . . . .
International Bank of Commerce, Oklahoma . . . . .
International Bank of Commerce, Brownsville . . . .
International Bank of Commerce, Zapata . . . . . . . .
Commerce Bank . . . . . . . . . . . . . . . . . . . . . . . . . .
1,201,462 14.45
188,997 12.53
177,456 17.25
70,984 16.22
89,305 15.53
621,850
444,207
86,344
45,741
14,707
17,276
963,258
688,086
133,749
70,854
22,782
26,761
768,168
548,727
106,660
56,503
18,168
21,341
468,593
332,507
60,344
41,144
17,507
23,000
$
6.375 %
6.375
6.375
6.375
6.375
6.375
$
9.875 %
9.875
9.875
9.875
9.875
9.875
7.875 %
7.875
$
7.875
7.875
7.875
7.875
4.00 % $
4.00
4.00
4.00
4.00
4.00
N/A
452,917
88,037
46,638
14,996
17,615
N/A
696,796
135,442
71,750
23,070
27,100
N/A
557,437
108,354
57,400
18,456
21,680
N/A
415,634
75,430
51,430
21,884
28,750
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
70
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Our actual capital amounts and ratios for 2017 are also presented in the following table:
Actual
For Capital Adequacy
Purposes
Amount
Ratio
Amount
Ratio
To Be Well-Capitalized
Under Prompt Corrective
Action Provisions
Ratio
Amount
(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 . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 Capital (to Risk Weighted Assets): . . . . . . . . . .
1,173,068 17.93
178,057 14.11
170,613 26.82
68,718 31.64
81,278 34.03
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
(21) Fair Value
$
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
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.
71
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, 2018 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, 2018
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Measured on a recurring basis:
Assets:
Available for sale debt securities
Residential mortgage-backed securities . . . . . . . . . . . . . . $
States and political subdivisions . . . . . . . . . . . . . . . . . . . .
Equity securities with readily determinable fair values . . . .
$
3,223,010 $
188,340
5,937
3,417,287 $
— $ 3,223,010 $
—
5,937
5,937 $ 3,411,350 $
188,340
—
—
—
—
—
The following table represents financial instruments reported on the consolidated balance sheets 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)
Significant
Other
Observable
Inputs
(Level 2)
Assets/Liabilities
Measured at
Fair Value
December 31, 2017
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 with readily determinable fair values . . . .
3,891,233 $
232,951
27,886
— $ 3,891,233 $
—
27,886
232,951
—
$
4,152,070 $ 27,886 $ 4,124,184 $
—
—
—
—
For the years ended December 31, 2018 and December 31, 2017, debt investment securities available-for-sale are
classified within Level 2 of the valuation hierarchy. Equity securities with readily determinable fair values are classified
within Level 1. For debt securities classified as Level 2 in the fair value hierarchy, we obtain fair value measurements
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.
72
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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).
The following table represents financial instruments measured at fair value on a non-recurring basis as of and for
the period ended December 31, 2018 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,
2018
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 . . . . . . . . . . . . . . . . . . . . .
1,563 $
38,871
— $
—
— $
—
1,563 $
38,871
356
3,071
The following table represents financial instruments measured at fair value on a non-recurring basis as of and for
the year ended December 31, 2017 by level within the fair value measurement hierarchy:
Fair Value Measurements at Reporting
Date Using
(in thousands)
Assets/Liabilities
Measured at
Fair Value
Year ended
Quoted
Prices in
Active
Markets
for Identical Observable
Significant
Other
Significant
Net (Credit)
Unobservable Provision
Measured on a non-recurring basis:
Assets:
Impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other real estate owned . . . . . . . . . . . . . . . . . . . . .
11,210 $
2,000
— $
—
— $
—
11,210 $
2,000
2,138
710
December 31,
2017
Assets
(Level 1)
Inputs
(Level 2)
Inputs
(Level 3)
During
Period
Our 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 our 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, 2018, we had approximately $14,306,000 of impaired commercial collateral dependent
loans, of which approximately $10,911,000 had an appraisal performed within the immediately preceding twelve months
73
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
and of which approximately $0 had an evaluation performed within the immediately preceding twelve months. As of
December 31, 2017, we 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.
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 we 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, we 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, 2018, December 31, 2017 and December 31, 2016,
respectively we recorded approximately $170,000, $30,000 and $381,000 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, 2018,
December 31, 2017 and December 31, 2016, respectively, we recorded approximately $3,071,000, $710,000 and
$2,351,000 in adjustments to fair value in connection with other real estate owned.
The fair value estimates, methods, and assumptions for our financial instruments at December 31, 2018 and
December 31, 2017 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 debt 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.
74
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, 2018 and December 31, 2017, the
carrying amount of fixed rate performing loans was $1,515,437,000 and $1,505,531,000, respectively, and the estimated
fair value was $1,469,231,000 and $1,454,434,000, 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,
2018 and December 31, 2017. 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, 2018 and December 31, 2017, the carrying amount of time deposits was $1,973,468,000 and
$2,056,506,000, respectively, and the estimated fair value was $1,976,156,000 and $2,058,621,000, 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, 2018 and
December 31, 2017. The fair value of the long-term instruments is based on established market spread using option
adjusted spread methodology. Long-term repurchase agreements are within Level 3 of the fair value hierarchy. The only
remaining long-term repurchase agreement outstanding matured in the first quarter of 2018 and was not renewed. At
December 31, 2017 the carrying amount of long-term repurchase agreements was $100,000,000 and the estimated fair
value was $99,504,000.
Junior Subordinated Deferrable Interest Debentures
We currently have 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, 2018 and December 31, 2017.
Other Borrowed Funds
We currently have 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, 2018
and December 31, 2017. The long-term borrowings outstanding at December 31, 2018 and 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
75
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
long-term borrowings are included in Level 2 of the fair value hierarchy. At December 31, 2018, and December 31, 2017
the carrying amount of the fixed-rate long-term FHLB borrowings was $436,690,000 and $250,000,000, respectively and
the estimated fair value was $436,238,000 and $249,728,000 respectively.
Commitments to Extend Credit and Letters of Credit
Commitments to extend credit and fund letters of credit are principally at current interest rates and therefore the
carrying amount approximates fair value.
Limitations
Fair value estimates are made at a point in time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one
time of our entire holdings of a particular financial instrument. Because no market exists for a significant portion of our
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.
76
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, 2018 and 2017
(Dollars in Thousands)
ASSETS
2018
2017
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,065 $
105,377
1,987,293
—
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,111,735 $
18,398
92,620
1,878,521
23,120
2,012,659
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Junior subordinated deferrable interest debentures . . . . . . . . . . . . . . . . . . . . . . . . . $
Due to IBC Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
160,416 $
21
11,716
172,153
160,416
21
13,242
173,679
Shareholders’ equity:
Common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . .
Less cost of shares in treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
96,104
145,283
2,064,134
(54,634)
2,250,887
(311,305)
1,939,582
2,111,735 $
96,019
171,816
1,891,805
(28,397)
2,131,243
(292,263)
1,838,980
2,012,659
77
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, 2018, 2017 and 2016
(Dollars in Thousands)
2018
2017
2016
Income:
Dividends from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest income on notes receivable . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income on other investments . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
105,000 $
—
8,208
1,988
115,196
64,600 $
—
8,100
26
72,726
Expenses:
Interest expense (Debentures) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before federal income taxes and equity in
6,989
2,930
9,919
undistributed net income of subsidiaries . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
105,277
481
Income before equity in undistributed net income of
5,392
5,648
11,040
61,686
(2,076)
84,432
2
8,958
255
93,647
4,600
3,637
8,237
85,410
311
subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed net income of subsidiaries . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
104,796
111,135
215,931 $
63,762
93,674
157,436 $
85,099
48,833
133,932
78
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, 2018, 2017 and 2016
(Dollars in Thousands)
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to net cash provided by
215,931 $
157,436 $
133,932
2018
2017
2016
—
(23)
—
operating activities:
Investment securities transactions, net . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on equity securities with readily determinable
fair values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities:
330
—
1,035
(1,479)
(111,135)
104,682
—
—
(7,891)
(7,891)
—
—
903
(3,453)
(93,674)
61,189
6,328
—
(25,348)
(19,020)
Redemption of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from stock transactions . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of cash dividends - common . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of outstanding common stock warrant . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
1,522
(49,599)
(29,005)
(19,042)
(96,124)
667
18,398
19,065 $
—
1,455
(43,594)
—
(187)
(42,326)
(157)
18,555
18,398 $
79
—
112
1,082
3,901
(48,833)
90,194
1,105
99
(27,834)
(26,630)
(1,000)
549
(39,569)
—
(7,966)
(47,986)
15,578
2,977
18,555
INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Condensed Quarterly Income Statements
(Dollars in Thousands, Except Per Share Amounts)
2018
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for probable loan losses . . . . . . . . . . . . . . . . .
Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
120,975
14,240
106,735
2,900
41,261
71,924
118,374
13,500
104,874
4,280
42,503
78,067
115,066
12,793
102,273
(2,730)
42,303
80,601
111,407
12,135
99,272
1,662
38,975
68,909
Income before income taxes. . . . . . . . . . . . . . . . . . . . . .
73,172
65,030
66,705
67,676
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,643
13,935
13,818
14,256
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
58,529 $
51,095 $
52,887 $
53,420
Per common share:
Basic
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.89 $
0.77 $
0.80 $
0.81
Diluted
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.88 $
0.77 $
0.79 $
0.80
80
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for probable loan losses . . . . . . . . . . . . . . . . .
Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
108,036 $
10,895
97,141
2,125
37,362
72,698
106,945 $
9,993
96,952
6,591
41,366
71,711
103,174 $
8,797
94,377
805
33,963
73,713
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
81
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, 2018, 2017, and 2016. Tax-exempt income
has not been adjusted to a tax-equivalent basis:
Assets
Interest earning assets:
Loan, net of unearned discounts:
Average
Balance
Interest
Average
Rate/Cost
Average
Balance
Interest
(Dollars in Thousands)
Average
Rate/Cost
2018
2017
Average
Balance
2016
Interest
Average
Rate/Cost
Domestic . . . . . . . . . . . . . . . . . . . . . . . . $ 6,307,948
142,999
Foreign . . . . . . . . . . . . . . . . . . . . . . . . .
369,761
5,412
5.86 % $
3.78
6,026,180 $ 317,320
5,188
157,684
5.27 % $
3.29
5,781,466 $ 292,325
5,495
167,582
Investment securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest-earning assets . . . . . . . . . . .
3,635,675
200,978
95,559
10,383,159
81,484
8,141
1,024
465,822
3,954,632
2.24
235,253
4.05
1.07
84,752
4.49 % 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
5.06 %
3.28
1.97
4.08
0.24
3.75 %
Non-interest earning assets:
Cash and cash equivalents . . . . . . . . . . . . . . .
Bank premises and equipment, net . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . .
Less allowance for probable loan losses . . . . . .
178,873
485,978
1,073,534
(67,031)
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,054,513
Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Savings and interest bearing demand deposits . . . $ 3,273,355
Time deposits:
179,134
494,327
957,270
(68,312)
$ 12,020,920
154,334
488,110
1,006,286
(66,021)
$ 11,914,865
12,764
0.39 % $
3,230,463 $
6,208
0.19 % $
3,090,355 $
4,562
0.15 %
Domestic . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under repurchase agreements . . .
Other borrowings . . . . . . . . . . . . . . . . . . . .
Junior subordinated interest deferrable
946,231
1,055,090
314,876
923,729
6,330
6,766
2,415
17,404
0.67
0.64
0.77
1.88
1,074,199
1,097,240
402,396
891,611
debentures . . . . . . . . . . . . . . . . . . . . . . .
Total interest bearing liabilities . . . . . . . . . .
160,416
6,673,697
6,989
52,668
4.36
0.79 %
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
2.85
0.62 %
Non-interest bearing liabilities:
Demand Deposits . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . .
3,366,040
90,876
1,923,900
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,054,513
3,230,708
107,952
1,825,935
$ 12,020,920
3,148,590
90,308
1,739,054
$ 11,914,865
Net interest income . . . . . . . . . . .
Net yield on interest earning assets . . .
$ 413,154
$ 376,205
$ 344,785
3.98 %
3.34 %
3.34 %
82
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
Investments
ROBERTO R. RESENDEZ
Ranching and Investments
ANTONIO R. SANCHEZ, JR.
Chairman of the Board
Sanchez Oil & Gas Corporation
Investments
83
2
01
8