International Bancshares Corp.
Annual Report 2019

Plain-text annual report

A N N U A L 2 0 P O R T R 1 E 9 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) 281-2430 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) 285-2163 1001 McKinney Ste. 150 (713) 285-2139 3200 Woodridge, Ste. 1350 (713) 285-2255 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 (713) 285-2177 Sugarland 10570 State Hwy 6 (713) 285-2285 Katy 544 West Grand Parkway (713) 285-2034 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) 285-2015 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) 773-4930 2135 East Main Street (830) 773-4826 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 Cedar Park 301 W. Whitestone Blvd (512) 397-4552 Austin 500 West 5th St., Ste. 100 (512) 397-4506 10405 FM 2222 (512) 397-4584 11400 Burnet Road Bldg. 46 (512) 397-4595 2817 E. Cesar Chavez (512) 320-9650 12625 North IH 35 Bldg. D (512) 397-4570 9900 South IH 35 Bldg. Y (512) 397-4530 4036 FM 620 S. (512) 320-9575 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 Ardmore 2302 12th Ave. (580) 223-0345 Broken Arrow 6412 S. Elm Pl. (918) 497-2488 8112 Garnett Rd. (918) 497-2840 Chickasha 628 W. Grand Ave. (405) 841-2282 Claremore 1050 N. Lynn Riggs Blvd. (918) 497-2464 Clinton 1002 W. Frisco Ave. (580) 323-0730 Edmond 1812 SE 15th St. (405) 775-8061 421 S. Santa Fe Ave. (405) 841-2130 Duncan 3903 N. Hwy 81 (580) 255-9055 Tulsa 1951 S. Yale Ave. (918) 497-2452 4202 S. Garnett (918) 497-2883 2250 E. 73rd St (918) 497-2405 11 E. 5th St. (918) 497-2462 8202 E. 71st St (918) 497-2241 5302 E. Skelly Dr. (918) 497-2472 Chandler 3108 E. 1st St. (405) 841-7103 Oklahoma City 100 W. Park Ave. (405) 841-2288 5701 N. May Ave. (405) 841-2241 10500 S. Pennsylvania Ave (405) 841-2266 2301 N. Portland Ave. (405) 841-2116 12241 N. May Ave. (405) 841-2341 4902 N. Western Ave. (405) 841-2286 14001 N. McArthur Blvd (405) 775-1710 Lawton 2101 W. Gore (580) 250-4311 6425 NW Cache Rd. (580) 355-0253 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) 775-8067 Sulphur 2009 W. Broadway Ave. (580) 622-3172 Weatherford 109 E. Franklin Ave. (580) 772-7441 Bethany 7723 NW 23rd St. (405) 841-2367 Grove 100 E. 3rd St. (918)786-4438 Guthrie 120 N. Division St. (405) 841-2304 Moore 513 NE 12th St. (405) 841-2308 901 SW 19th (405) 775-1720 Pauls Valley 700 W. Grant Ave. (405) 238-7318 Purcell 430 W. Lincoln St. (405) 775-8094 Sand Springs 3402 State Hwy. 97 (918) 497-2466 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) 841-4744 Lindsay 209 E. Cherokee (405) 756-4494 Bixby 11886 S. Memorial (918) 497-2855 Dallas 3800 Maple Ave. Ste. 100 (469) 357-3805 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, 2019. 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 2019 AS OF OR FOR THE YEARS ENDED DECEMBER 31, 2017 (Dollars in Thousands, Except Per Share Data) 2016 2018 2015 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 $ 12,112,894 $ 11,871,952 $ 12,184,698 $ 11,804,041 $ 11,772,869 3,378,923 6,834,668 8,826,034 626,511 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 8,536,253 505,750 134,642 2,118,053 160,416 1,939,582 160,416 1,838,980 160,416 1,724,667 161,416 1,665,503 $ $ 492,401 $ 58,629 433,772 18,843 154,826 309,801 259,954 54,850 205,104 465,822 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 shareholders . . . . . . . . . . . . . . . . . . . $ 205,104 $ 215,931 $ 157,436 $ 133,932 $ 136,726 Per common share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . $ $ 3.13 $ 3.12 $ 3.27 3.24 $ $ 2.38 $ 2.36 $ 2.03 $ 2.02 $ 2.06 2.05 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, 2019. The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019, 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, integration and implementation of the recently enacted United State-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. 2 • 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. 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 188 facilities and 284 ATMs, providing 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 interest 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 3  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 of the performance of a banking institution is the return on average common equity (“ROE”). Our ROE for the year ended December 31, 2019 was 9.97% as compared to 11.22% for the year ended December 31, 2018. 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 and 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, 2019 December 31, 2018 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,112,894 $ 11,871,952 6,834,668 8,826,034 236,536 626,511 134,642 2,118,053 6,499,905 8,696,545 229,989 705,665 160,416 1,939,582 2.0 % 5.2 1.5 2.8 (11.2) (16.1) 9.2 4 Consolidated Statements of Income Information Year Ended December 31, 2019 Year Ended December 31, 2018 Percent Increase (Decrease) 2019 vs. 2018 (Dollars in Thousands, Except Per Share Data) Year Ended December 31, 2017 Percent Increase (Decrease) 2018 vs. 2017 Interest income . . . . . . . . . . . . . . . . . . . . . . . $ Interest expense . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . Provision for probable loan losses . . . . . . . . Non-interest income . . . . . . . . . . . . . . . . . . . Non-interest expense . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . Per common share: 492,401 $ 58,629 433,772 18,843 154,826 309,801 205,104 465,822 52,668 413,154 6,112 165,042 299,501 215,931 5.7 % $ 11.3 5.0 208.3 (6.2) 3.4 (5.0) 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 Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.13 $ 3.12 3.27 3.24 (4.3) % $ (3.7) 2.38 2.36 37.4 % 37.3 Net Income Net income for the year ended December 31, 2019 decreased by 5% compared to the same period of 2018. Net interest income continues to be positively affected by an increase in net interest income due to a higher volume of loans and an increase in the overall yield on the portfolio. Interest expense increased for the year ended December 31, 2019 and can be primarily attributed 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 the Federal Reserve Board actions to increase interest rates in 2019. Net income for the year ended December 31, 2019 was negatively impacted by an increase in the provision for probable loan losses due to a charge-off of $7.5 million, net of tax, on a relationship that was secured by real property on which car dealerships are operated. Net income for the year ended December 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 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 began to be eliminated, the allowance for probable loan losses was 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 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. For the years ended December 31, 2019 Average Rate/Cost 2018 Average Rate/Cost 2017 Average Rate/Cost Assets Interest earning assets: Loan, net of unearned discounts: Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.07 % 4.15 5.80 % 3.78 Investment securities: Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.23 3.85 1.29 4.77 % 2.24 4.05 1.07 4.46 % 5.27 % 3.29 2.08 4.10 0.74 3.97 % 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 . . . . . . . . . . . . . . . . . . . . . . . . 0.50 % 0.39 % 0.19 % 1.09 1.02 0.91 1.98 4.43 0.93 % 0.67 0.64 0.77 1.88 4.36 0.79 % 0.46 0.44 1.64 1.23 3.36 0.57 % 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 7.0% from 4.46% in 2018 to 4.77% in 2019, and the rates paid on average interest-bearing liabilities increased 17.7% from 0.79% in 2018 to 0.93% in 2019. The yield on average interest-earning assets increased 12.3% from 3.97% in 2017 to 4.46% in 2018, and the rates paid on average interest-bearing liabilities increased 38.6% from .57% in 2017 to .79% in 2018. 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 2019, 2018 and 2017 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: 2019 compared to 2018 Net increase (decrease) due to 2018 compared to 2017 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,056 $ 18,349 $ 38,405 $ 14,837 $ 37,604 $ 52,441 Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224 (441) (483) 474 707 33 Investment securities: (863) Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . (1,515) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 399 Total interest income . . . . . . . . . . . . . . . . . . $ 7,986 $ 18,593 $ 26,579 $ 6,385 $ 44,301 $ 50,686 (8,778) (3,005) 154 (6,642) (1,407) 80 (8,999) (3,256) 396 5,779 (108) 319 (221) (251) 242 Interest incurred on: Savings and interest bearing demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59 $ 3,556 $ 3,615 $ 82 $ 6,474 $ 6,556 Time deposits: Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . (185) 87 3,891 4,081 3,706 4,168 (590) (184) 1,964 2,170 1,374 1,986 Securities sold under repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . Other borrowings . . . . . . . . . . . . . . . . . . . . . Junior subordinated deferrable interest (364) (5,590) 381 599 17 (4,991) (1,439) 395 (2,763) 6,031 (4,202) 6,426 debentures . . . . . . . . . . . . . . . . . . . . . . . . . (554) 1,597 5,961 $ (1,736) $ 15,473 $ 13,737 Net interest income . . . . . . . . . . . . . . . . . . . . . . $ 14,640 $ 5,978 $ 20,618 $ 8,121 $ 28,828 $ 36,949 Total interest expense . . . . . . . . . . . . . . . . . . $ (6,654) $ 12,615 $ 1,597 (661) 107 — (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 and senior managers of the various Subsidiary Banks. 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, 2019, 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 -150 basis points, that the net interest income not vary by more than plus or minus 15%. At December 31, 2019, the income 7 simulations show that a rate shift of -150, -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 -4.46%, -3.07%, +4.87%, +8.89%, +12.78% and +16.48%, 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: Loans accounted for on a non-accrual basis . . . . . $ Accruing loans contractually past due ninety 4,886 $ 2019 2018 December 31, 2017 (Dollars in Thousands) 54,730 $ 15,791 $ 2016 2015 36,858 $ 47,320 days or more as to interest or principal payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,694 39,935 6,590 5,215 11,174 Domestic loans accounted for on a non-accrual basis decreased at December 31, 2019 by 68% compared to the same period of 2018. The decrease can be attributed to one commercial loan relationship secured by equipment and accounts receivable that is no longer on non-accrual. Domestic loans contractually past due ninety days and still accruing increased at December 31, 2019 compared to the same period of 2018 and can be attributed to a relationship that is secured by real property on which education centers are operated. The allowance for probable loan losses decreased 1.8% to $60,278,000 at December 31, 2019 from $61,384,000 at December 31, 2018. The allowance was .87% of total loans, net of unearned income at December 31, 2019 and .94% at December 31, 2018. The provision for probable loan losses charged to expense increased $12,731,000 to $18,843,000 for the year ended December 31, 2019 from $6,112,000 for the same period in 2018. The increase can be primarily attributed to the charge-off of a relationship that is secured by multiple pieces of real property on which car dealerships are operated. The relationship began deteriorating in the fourth quarter of 2018, triggered by significant fraud by a high level insider of the car dealership resulting in the dealerships unexpectedly filing for bankruptcy and creating an exposure for potential loss since the operations of the dealership were the source of repayment from the borrower. The relationship further deteriorated in the first quarter of 2019 after the sponsor of the court approved debtor in possession plan discontinued its role in the process and thus did not fulfill its obligation to assume full responsibility of the accrued and unpaid interest. Although the relationship is secured by real property (the dealerships’ real estate), the real property has specialized use, contributing to the potential exposure for probable loss. During the first quarter of 2019, in light of the circumstances and management’s evaluation of the relationship, the decision was made to place the relationship on impaired, non-accrual status and place a specific reserve on the relationship in the amount of $9.5 million. During the second quarter of 2019, management continued to evaluate the relationship and decided to foreclose on the underlying real estate collateral, resulting in a charge-off of approximately $9.5 million. 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 began to be eliminated from the calculation, the allowance for probable loan losses was 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. 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, 2019 December 31, 2018 (Dollars in Thousands) Domestic Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential: first lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential: junior lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total troubled debt restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 32 5,608 692 1,192 264 7,788 $ $ 35 5,947 730 1,153 293 8,158 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 — $ 2019 2018 December 31, 2017 (Dollars in Thousands) — $ — $ 2016 2015 387 $ 365 more as to interest or principal payments . . . . . . . . . . . 11 739 667 11 442 The gross income that would have been recorded during 2019, 2018 and 2017 on non-accrual loans in accordance with their original contract terms was approximately $340,000, $1,119,000 and $977,000 on domestic loans and approximately $0, $0, and $0 on foreign loans, respectively. The amount of interest income on such loans that was recognized in 2019, 2018 and 2017 was approximately $4,000, $4,000, and $4,000 on domestic loans and $0, $0, and $0 for foreign loans, respectively. Generally, loans are placed on non-accrual status if principal or interest payments become 90 days past due and/or management deems the collectability of the principal and/or interest to be in question, as well as when required by applicable regulatory guidelines. Interest income on non-accrual loans is recognized only to the extent payments are received or when, in management’s opinion, the creditor’s financial condition warrants reestablishment of interest accruals. Under special circumstances, a loan may be more than 90 days delinquent as to interest or principal and not be placed on non-accrual status. This situation generally results when a 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 $2,758,132,000 and $3,076,184,000 at December 31, 2019 and 2018, 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 . . . . . . . $ 6,894,946 $ 6,561,289 $ 6,348,172 $ 5,964,688 $ 5,950,914 2019 2018 2017 2016 2015 (Dollars in Thousands) Average loans outstanding during the year (Note 1) . . . . . . . . . . . . . . . . . . . . $ 6,852,121 61,384 18,843 Balance of allowance at January 1 . . . . $ Provision charged to expense . . . . . . . . Loans charged-off: $ 6,517,978 67,687 $ 6,112 $ 6,183,864 64,661 $ 11,221 $ 5,949,048 66,988 $ 19,859 $ 5,844,842 64,828 $ 24,405 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 . . . . . . . . . . . . . . . . . . . . (21,765) (636) (39) (487) (1) (22,928) (14,290) (469) (1) (362) (3) (15,125) (12,134) (441) (213) (309) (1) (13,098) (35,029) (401) (16) (414) (41) (35,901) (25,294) (432) (695) (704) — (27,125) 2,514 312 113 40 — 2,979 (19,949) 60,278 2,227 405 25 43 10 2,710 (12,415) 61,384 $ 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 $ $ 0.29 % 0.19 % 0.13 % 0.37 % 0.38 % 0.87 % 0.94 % 1.07 % 1.08 % 1.13 % (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: 2019 2018 Percent Allowance of total Percent Allowance of total At December 31, 2017 2016 2015 Percent Allowance of total (Dollars in Thousands) Percent Allowance of total Percent Allowance of total Commercial, Financial and Agricultural . . . $ 29,753 Real estate— 49.1 % $ 31,197 50.4 % $ 35,885 52.3 % $ 32,928 50.2 % $ 35,379 52.1 % Mortgage . . . . . 10,039 16.5 11,073 17.9 12,242 17.9 11,355 17.3 10,979 16.2 Real estate— Construction . . . Consumer . . . . . . Foreign . . . . . . . . 19,242 421 823 $ 60,278 31.7 0.7 2.0 17,806 437 871 100.0 % $ 61,384 28.7 0.7 2.3 18,887 607 884 100.0 % $ 67,687 100.0 % $ 64,661 18,183 535 842 26.5 0.8 2.5 28.8 0.9 2.8 18,818 659 1,152 100.0 % $ 66,988 27.7 1.0 3.0 100.0 % 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 year ended December 31, 2015 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 for the year ended December 31, 2015. 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, 2019 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 72,502 $ 72,433 Year Ended Year Ended December 31, December 31, 2019 2018 Percent Increase (Decrease) 2019 vs. 2018 (Dollars in Thousands) 0.1 % $ Year Ended December 31, 2017 Percent Increase (Decrease) 2018 vs. 2017 72,868 (0.6)% Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-banking . . . . . . . . . . . . . . . . . . . . . . . . . . Investment securities transactions, net . . . . . . . . Other investments, net. . . . . . . . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,685 7,801 (141) 19,897 18,367 Total non-interest income . . . . . . . . . . . . . . . $ 154,826 $ 165,042 50,996 7,832 (12) 5,985 17,523 44,964 9.2 7,345 0.4 (4,774) (91.5) 18,918 (69.9) (4.6) 11,085 (6.2)% $ 150,406 3.8 6.2 (97.0) 5.2 65.7 9.7 % Total non-interest income for the year ended December 31, 2019 decreased by 6.2% compared to the same period of 2018. The decrease can be primarily attributed to a decrease in non-interest income from other investments due to the impairment of an equity investment of $3.7 million, net of tax as a result of a re-evaluation of the carrying value and losses on various equity investments in which we hold an ownership. Non-interest income for the 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. Non-Interest Expense Year Ended Year Ended December 31, December 31, 2018 2019 Percent Increase (Decrease) 2019 vs. 2018 (Dollars in Thousands) Year Ended December 31, 2017 Percent Increase (Decrease) 2018 vs. 2017 Employee compensation and benefits . . . . . . . . . $ 145,929 $ 138,532 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 29,097 25,873 12,601 3,742 4,413 — 7,695 28,635 28,270 17,661 1,416 6,377 — 7,748 repurchase agreements . . . . . . . . . . . . . . . . . . . . Software and software maintenance . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 17,516 60,032 Total non-interest expense . . . . . . . . . . . . . . . . $ 309,801 $ 299,501 — 19,850 53,915 5.3 % $ 132,750 (1.6) 9.3 40.2 (62.2) 44.5 — 0.7 28,439 25,281 13,650 3,294 965 25 7,854 — 13.3 (10.2) 5,765 19,189 56,536 3.4 % $ 293,748 4.4 % 2.3 2.3 (7.7) 13.6 357.3 (100.0) (2.0) (100.0) (8.7) 6.2 2.0 % Non-interest expense for the year ended December 31, 2019 increased by 3.4% compared to the same period of 2018. Non-interest expense was impacted by an increase in costs of our compensation and benefit plans as a result of our continued review of those plans and necessary increases to remain competitive and compensate our staff based on their 12 performance, as well as an increase in depreciation expense as we continue to invest in our network infrastructure, equipment and facilities. Professional fees increased in 2019 compared to the same period of 2018 primarily due to ongoing costs related to strategic projects across our entities to enhance efficiencies and workflow. 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 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. 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, 2019, 2018 and 2017: Residential mortgage-backed securities Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,285,548 $ 3,223,010 $ 3,891,233 Obligations of states and political subdivisions Available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities with readily determinable fair values . . . . . . . . . . . Other securities 93,375 6,095 188,340 5,937 232,951 27,886 December 31, 2019 2018 2017 (Dollars in Thousands) Held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,400 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,387,418 $ 3,418,487 $ 4,154,470 2,400 1,200 The following tables set forth the contractual maturities of investment securities, based on amortized cost, at December 31, 2019 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 Available for Sale Maturing 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 (Dollars in Thousands) Residential mortgage- backed securities . . . . . . . . . . $ 135 5.25 % $ 41,920 2.13 % 925,396 2.72 % $ 2,318,172 2.96 % Obligations of states and political subdivisions . . . . . . — — — — 2,241 4.96 % 88,206 4.29 % Equity securities with readily determinable fair values . . . . 6,095 Total . . . . . . . . . . . . . . . . . . $ 6,230 2.29 2.35 % $ 41,920 — — — % — 2.13 % $ 927,637 2.72 % $ 2,406,378 3.00 % — — 13 Held to Maturity Maturing Within one year Adjusted Cost Yield After one but within five years Adjusted Cost Yield After five but within ten years Adjusted After ten years Adjusted Cost Yield Cost Yield (Dollars in Thousands) Other securities . . . . . . . . . . . $ 1,075 Total . . . . . . . . . . . . . . . . . . . . $ 1,075 2.58 % $ 1,325 2.58 % $ 1,325 3.10 % $ — — % $ — — % 3.10 % $ — — % — % $ — 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, 2019, 2018, 2017, 2016 and 2015 are shown in the following table: 2019 2018 December 31, 2017 (Dollars in Thousands) 2016 2015 Commercial, financial and agricultural . . . $ 3,379,837 $ 3,305,124 $ 3,322,668 $ 2,993,203 $ 3,101,748 Real estate—mortgage . . . . . . . . . . . . . . . . 962,582 Real estate—construction . . . . . . . . . . . . . . 1,649,827 Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,744 Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179,013 Loans, net of unearned discount . . . . . . $ 6,894,946 $ 6,561,289 $ 6,348,172 $ 5,964,688 $ 5,950,914 1,133,525 1,683,550 49,543 158,886 1,173,101 1,886,231 46,316 150,517 1,032,222 1,716,875 55,168 167,220 1,140,377 2,185,883 47,800 141,049 The following table shows the amounts of loans (excluding real estate mortgages and consumer loans) outstanding as of December 31, 2019, 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 years After five years Total (Dollars in Thousands) 418,746 $ 3,379,837 2,185,883 141,049 5,706,769 149,147 19,590 587,483 $ Commercial, financial and agricultural . . $ Real estate—construction . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 942,450 $ 740,287 89,486 1,772,223 $ 2,018,641 $ 1,296,449 31,973 3,347,063 $ 14 Due after one but within five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Due after five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ International Operations Interest sensitivity Fixed Rate Variable Rate (Dollars in Thousands) 65,595 $ 201,226 266,821 $ 3,281,468 386,257 3,667,725 On December 31, 2019, we had $141,049,000 (1.2% 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, 2019 and 2018 is presented below. For the year ended December 31, 2019 Related Amount of Loans Allowance for Probable Losses Amount of Loans (Dollars in Thousands) 2018 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, silver, etc.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unsecured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other (principally Mexico real estate) . . . . . . . . . . . . . $ 89,734 $ 33,008 386 $ 291 94,138 $ 30,961 10,483 155 7,669 141,049 $ 92 2 52 823 $ 14,848 528 10,042 150,517 $ 424 257 112 6 72 871 The transactions for the years ended December 31, 2019, 2018 and 2017, in that portion of the allowance for probable loan losses related to foreign debt were as follows: 2019 2018 (Dollars in Thousands) 842 $ (3) 10 7 22 871 $ 871 $ (1) — (1) (47) 823 $ 2017 884 (1) 21 20 (62) 842 Balance at January 1, . . . . . . . . . . . . . . . . . . . . $ Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . Charge (credit) to expense . . . . . . . . . . . . . . Balance at December 31 . . . . . . . . . . . . . . . . . . $ 15 Deposits Deposits: Demand—non-interest bearing 2019 Average Balance 2018 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 $100,000 or more: $ $ 2,800,219 717,236 3,517,455 2,511,166 777,210 3,288,376 Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 605,867 820,301 Less than $100,000: Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total time, certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 312,678 248,352 1,987,198 8,793,029 $ 2,695,811 670,229 3,366,040 2,595,963 677,392 3,273,355 608,171 802,030 338,060 253,060 2,001,321 8,640,716 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 Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total time, certificates of deposit . . . . . . . . . . . . . . . . Total interest expense on deposits . . . . . . . . . . . . . . . . . . $ 2019 2018 2017 (Dollars in Thousands) 13,462 $ 2,917 16,379 11,029 $ 1,735 12,764 7,804 9,407 2,232 1,527 20,970 37,349 $ 4,741 5,798 1,589 968 13,096 25,860 $ 5,453 755 6,208 3,644 4,105 1,312 675 9,736 15,944 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 536,400 351,059 465,735 109,842 1,463,036 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, 2019 were $8,826,034,000, 16 an increase of 1.5% from $8,696,545,000 at December 31, 2018. Although deposits at December 31, 2019 increased from December 31, 2018 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 placed a focus on maintaining certain deposit relationships, given 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, 2019, other borrowed funds totaled $626,511,000, a decrease of 11.2% from $705,655,000 at December 31, 2018. 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, 2019, 2018 and 2017 follow (1): Years ended December 31, 2018 2017 2019 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 . . . . . . . 9.97 % 1.71 17.17 33.38 11.22 % 1.79 15.96 22.79 8.62 % 1.31 15.19 27.70 (1) The average balances for purposes of the above table are calculated on the basis of daily balances. 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 2019 and 2018 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 17  income to changes in market rates as implied by the relative re-pricings of assets and liabilities. The gap report calculates the difference between the amounts of assets and liabilities re-pricing across a series of intervals in time, with emphasis typically placed on the one-year period. This difference, or gap, is usually expressed as a percentage of total assets. If an excess of liabilities over assets matures or re-prices within the one-year period, the statement of condition is said to be negatively gapped. This condition is sometimes interpreted to suggest that an institution is liability-sensitive, indicating that earnings would suffer from rising rates and benefit from falling rates. If a surplus of assets over liabilities occurs in the one-year time frame, the statement of condition is said to be positively gapped, suggesting a condition of asset sensitivity in which earnings would benefit from rising rates and suffer from falling rates. The gap report thus consists of an inventory of dollar amounts of assets and liabilities that have the potential to mature or re-price within a particular period. The flaw in drawing conclusions about interest rate risk from the gap report is that it takes no account of the probability that potential maturities or re-pricings of interest-rate-sensitive accounts will occur, or at what relative magnitudes. Because simplicity, rather than utility, is the only virtue of gap analysis, financial institutions increasingly have either abandoned gap analysis or accorded it a distinctly secondary role in managing their interest-rate risk exposure. The net interest rate sensitivity at December 31, 2019, 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. 18 INTEREST RATE SENSITIVITY (Dollars in Thousands) December 31, 2019 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 . . . . . . . . . . . . 312,398 $ 5,453,809 695,977 $ 2,285,668 $ 180,790 124,259 93,375 $ 3,387,418 6,890,060 1,131,202 Total earning assets . . . . . . . . . . . . . . . . . . $ 5,766,207 $ 876,767 $ 2,409,927 $ 1,224,577 $ 10,277,478 Cumulative earning assets . . . . . . . . . . . . $ 5,766,207 $ 6,642,974 $ 9,052,901 $ 10,277,478 Rate sensitive liabilities Time deposits . . . . . . . . . . . . . . . . . . . . . . . $ Other interest bearing deposits . . . . . . . . . Securities sold under repurchase 803,061 $ 1,044,965 $ 3,267,829 — 164,246 $ — 28 $ 2,012,300 3,267,829 — agreements . . . . . . . . . . . . . . . . . . . . . . . Other borrowed funds . . . . . . . . . . . . . . . . Junior subordinated deferrable interest 225,243 190,000 11,293 — debentures . . . . . . . . . . . . . . . . . . . . . . . . 134,642 — — — — — 436,511 236,536 626,511 — 134,642 Total interest bearing liabilities . . . . . . . . $ 4,620,775 $ 1,056,258 $ 164,246 $ 436,539 $ 6,277,818 Cumulative sensitive liabilities. . . . . . . . . $ 4,620,775 $ 5,677,033 $ 5,841,279 $ 6,277,818 Repricing gap . . . . . . . . . . . . . . . . . . . . . . . $ 1,145,432 $ (179,491) $ 2,245,681 $ Cumulative repricing gap . . . . . . . . . . . . . Ratio of interest-sensitive assets to 1,145,432 3,211,622 965,941 788,038 $ 3,999,660 3,999,660 liabilities . . . . . . . . . . . . . . . . . . . . . . . . . Ratio of cumulative, interest-sensitive assets to liabilities . . . . . . . . . . . . . . . . . . 1.25 1.25 0.83 14.67 1.17 1.55 2.81 1.64 1.64 The detailed inventory of statement of condition items contained in gap reports is the starting point of income simulation analysis. Income simulation analysis also focuses on the variability of net interest income and net income, but without the limitations of gap analysis. In particular, the fundamental, but often unstated, assumption of the gap approach that every statement of condition item that can re-price will do so to the full extent of any movement in market interest rates is taken into consideration in income simulation analysis. Accordingly, income simulation analysis captures not only the potential of assets and liabilities to mature or re-price, but also the probability that they will do so. Moreover, income simulation analysis focuses on the relative sensitivities of these balance sheet items and projects their behavior over an extended period of time in a motion picture rather than snapshot fashion. Finally, income simulation analysis permits management to assess the probable effects on balance sheet items not only of changes in market interest rates, but also of proposed strategies for responding to such changes. 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, 2019, 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 19  by more than plus or minus 15%, 15%, 15%, and 20%, respectively and in a decreasing rate scenario of -100 or -150 basis points, that the net interest income not vary by more than plus or minus 15%. At December 31, 2019, the income simulations show that a rate shift of -150, -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 -4.46%, -3.07%, +4.87%, +8.89%, +12.78% and +16.48%, 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, 2019, the aggregate amount legally available to be distributed to us from our Subsidiary Banks as dividends was approximately $891,500,000, assuming that each Subsidiary Bank continues to be classified as “well-capitalized” under the applicable regulations in effect at December 31, 2019. The restricted capital (capital and surplus) of our Subsidiary Banks was approximately $1,217,735,000 as of December 31, 2019. The undivided profits of our Subsidiary Banks were approximately $1,312,852,000 as of December 31, 2019. At December 31, 2019, we had outstanding $626,511,000 in other borrowed funds and $134,642,000 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, 2019, shareholders’ equity was $2,118,053,000 compared to $1,939,582,000 at December 31, 2018, an increase of $178,471,000, or 9.2%. 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 income (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 16.65% at December 31, 2019 and 15.87% at December 31, 2018. The core deposit intangibles and goodwill of $282,532,000 as of December 31, 2019, 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 19.80% and 19.06% and risk weighted total capital ratios of 20.46% and 19.74% as of December 31, 2019 and 2018, respectively, which are well above the minimum regulatory requirements and exceed the well-capitalized ratios (see Note 20 to Notes to Consolidated Financial Statements). 20 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 rules emphasize CET1 capital and implements strict eligibility criteria for regulatory capital instruments. The rules also improve the methodology for calculating risk-weighted assets to enhance risk sensitivity. Management believes, as of December 31, 2019, that we and each of our Subsidiary Banks met all capital adequacy requirements of the fully phased-in the capital conservation buffer. 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. On December 7, 2017, the Basel Committee on Banking Supervision unveiled the latest round of its regulatory capital framework, commonly called “Basel IV.” The framework makes changes to the capital framework first introduced as “Basel III” in 2010. The committee targeted 2022-2027 as the timeframe for implementation by regulators in individual countries, including the U.S. federal bank regulatory agencies (after notice and comment). Junior Subordinated Deferrable Interest Debentures We have formed five 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 issued. As of December 31, 2019 and December 31, 2018, the principal amount of debentures outstanding totaled $134,642,000 and $160,416,000, respectively. 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 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, 2019 and December 31, 2018, the total $134,642,000 and $160,416,000 of the Capital Securities outstanding qualified as Tier 1 capital, respectively. 21 The following table illustrates key information about each of the Debentures and their interest rates at December 31, 2019: Junior Subordinated Deferrable Interest Debentures (in thousands) Repricing Frequency Interest Rate Interest Rate Index Maturity Date Optional Redemption Date(1) Trust VIII . . . . . . . . . . . Trust IX . . . . . . . . . . . . Trust X . . . . . . . . . . . . . Trust XI . . . . . . . . . . . . Trust XII . . . . . . . . . . . $ 25,774 Quarterly 41,238 Quarterly 21,021 Quarterly 25,990 Quarterly 20,619 Quarterly 134,642 October 2033 5.04 % LIBOR + 3.05 October 2036 3.72 % LIBOR + 1.62 February 2037 3.56 % LIBOR + 1.65 3.72 % LIBOR + 1.62 July 2037 3.36 % LIBOR + 1.45 September 2037 October 2008 October 2011 February 2012 July 2012 September 2012 (1) The Capital Securities may be redeemed in whole or in part on any interest payment date after the Optional Redemption Date. Contractual Obligations and Commercial Commitments The following table presents contractual cash obligations (other than deposit liabilities) as of December 31, 2019: Payments due by Period (Dollars in Thousands) Contractual Cash Obligations Securities sold under repurchase agreements . . . $ Federal Home Loan Bank borrowings . . . . . . . . . Junior subordinated deferrable interest Total 236,536 $ 626,511 Less than One Year One to Three Three to Five Years Years After Five Years 236,536 $ 190,000 — $ — — $ — — 436,511 debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . Total Contractual Cash Obligations . . . . . . . . $ 1,004,916 $ 134,642 7,227 — 3,658 430,194 $ — 3,255 3,255 $ 134,642 — 196 118 196 $ 571,271 The following table presents contractual commercial commitments (other than deposit liabilities) as of December 31, 2019: Amount of Commitment Expiration Per Period (Dollars in Thousands) Commercial Commitments Financial and Performance Standby Letters of 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 . . . . . . . . . . . . — — — 265,569 Total Commercial Commitments . . . . . . . . . . $ 2,758,132 $ 1,328,673 $ 718,333 $ 445,557 $ 265,569 124,054 $ 489 11,098 2,622,491 94,819 $ 489 11,098 1,222,267 25 $ — — 445,532 29,210 — — 689,123 $ 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 22 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.” 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 23  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 65,207,831 shares of $1.00 par value common stock held by approximately 1,886 holders of record at February 24, 2020. The book value of the common stock at December 31, 2019 was $33.37 per share compared with $31.33 per share at December 31, 2018. 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 was 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 eliminated 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 2019 and 2018, as quoted on the NASDAQ National Market for each of the quarters in the two-year period ended December 31, 2019. Some of the quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The closing sales price of our common stock was $38.85 per share at February 24, 2020. 2019: . . . . . . . . . . First quarter Second quarter Third quarter Fourth quarter 2018: . . . . . . . . . . First quarter Second quarter Third quarter Fourth quarter $ $ High Low $ $ 41.41 42.16 40.51 44.00 42.45 45.00 47.95 45.86 High 33.66 35.76 32.04 36.57 37.80 36.65 42.45 32.56 Low We paid cash dividends of $.50 and $0.55 per share on April 15 and October 15, 2019 to record holders of our common stock on April 1 and September 30, 2019, respectively. We paid cash dividends of $0.33 and $0.42 per share on April 16 and October 16, 2018 to record holders of our common stock on April 2 and October 9, 2018, 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. 24 Stock Repurchase Program In April 2009, 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 12 months. Annually since then, including on March 11, 2019, the Board of Directors extended the repurchase program but in March 2019 authorized an increase to the repurchase program of up to $50 million of common stock during the 12 month period commencing on April 9, 2019. 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 2019, 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 24, 2020, a total of 10,321,174 shares had been repurchased under all programs at a cost of $308,177,000. We are not obligated to repurchase shares under our 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 repurchase programs approved by the Board of Directors. The following table includes information about common stock share repurchases for the quarter ended December 31, 2019. Total Number of Shares Purchased as Total Number Price Paid Average Part of a Publicly- of Shares Purchased Per Share Announced Program Approximate Dollar Value of Shares Available for Repurchase(1) October 1 – October 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . November 1 – November 30, 2019 . . . . . . . . . . . . . . . . . . . . . . December 1 – December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 344 $ 37.44 — — 43.60 343 687 $ 40.52 — $ 32,224,000 32,224,000 — 32,224,000 — — (1) The repurchase program was extended on March 11, 2019 and allows for the repurchase of up to an additional $50,000,000 of treasury stock through April 9, 2020. 25 Equity Compensation Plan Information The following table sets forth information as of December 31, 2019, with respect to our equity compensation plans: (A) (B) Number of securities to Weighted average exercise price of be issued upon exercise of outstanding options, outstanding options, warrants and rights warrants and rights (C) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column A) Plan Category Equity Compensation plans approved by security holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 658,588 $ 658,588 $ 27.55 27.55 28,651 28,651 26 Stock Performance COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN $200 $150 $100 $50 $0 2014 2015 2016 2017 2018 2019 International Bancshares Corporation S&P MidCap 400 Index S&P 400 Regional Banks Total Return To Shareholders (Includes reinvestment of dividends) Base Period 2014 2015 2016 INDEXED RETURNS December 31, 2017 2018 2019 Company / Index International Bancshares Corporation . . . . . . . . . . . . . . . . . . . . . S&P 400 Index . . . . . . . . . . . . . . . . . . . . S&P 400 Banks . . . . . . . . . . . . . . . . . . . 100 100 100 101.82 107.38 107.84 165.25 129.65 143.44 163.63 150.71 150.90 144.54 134.01 118.61 180.85 154.07 146.06 27 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, 2019 and 2018, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, 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, 2019, 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, 2020 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. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Probable Loan Losses As described in Note 4 of the consolidated financial statements, the company established an allowance for probable loan losses totaling $60,278,000 as of December 31, 2019, derived from the following elements: (1) allowances established on specific impaired loans, which are based on a review of the individual characteristics of each loan, 28  including the customer’s ability to repay the loan, the underlying collateral values, and the industry in which the customer operates; (2) allowances based on actual historical loss experience for similar types of loans in the loan portfolio; and (3) allowances based on qualitative factors such as general economic conditions, changes in the mix of loans, company resources, border risk and credit quality indicators, among other things (collectively, “the qualitative factors”). The qualitative factors considered in the allowance for probable loan losses require a significant amount of judgment by management and involves a high degree of estimation. We identified the allowances derived from qualitative factors as a critical audit matter. Auditing management’s estimate of the allowances derived from qualitative factors required a high degree of auditor judgement due to the nature of the qualitative factors and the subjectivity in judgments applied by management in forming them. Our audit procedures related to auditing the Company’s allowances derived from qualitative factors included the following, among others: • We obtained an understanding of the relevant controls related to the allowance for probable loan losses, including allowances derived from qualitative factors, and tested such controls for design and operating effectiveness, including controls relating to management’s review of the qualitative factors and approval of the allowance calculation. • We evaluated the reasonableness of management’s methods and assumptions used to determine allowances derived from qualitative factors by (1) evaluating management’s identification and measurement of qualitative factors; (2) testing the completeness and accuracy of data and information used in estimating the components of the qualitative factors; (3) evaluating the reasonableness of the change to the general reserve as a result of the qualitative factors; and (4) reviewing subsequent events and considering their impact on judgments as of the consolidated balance sheet date. �SM V� LLP We have served as the Company's auditor since 2007. Austin, Texas February 27, 2020 29 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Condition December 31, 2019 and 2018 (Dollars in Thousands, Except Per Share Amounts) Assets Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Investment securities: Held to maturity debt securities (Market value of $2,400 on 256,820 $ 316,797 December 31, 2019 and 1,200 on December 31, 2018) . . . . . . . . . . . . . . . . . . . . . 2,400 1,200 Available for sale debt securities (Amortized cost of $3,376,070 on December 31, 2019 December 31, 2018 December 31, 2019 and $3,481,165 on December 31, 2018) . . . . . . . . . . . . . . . . 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 life insurance policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,112,894 $ 11,871,952 3,378,923 6,095 3,387,418 6,894,946 (60,278) 6,834,668 506,595 36,620 318,427 289,693 282,532 200,121 See accompanying notes to consolidated financial statements. 30 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Condition Continued December 31, 2019 and 2018 (Dollars in Thousands, Except Per Share Amounts) December 31, 2019 December 31, 2018 Liabilities and Shareholders’ Equity Liabilities: Deposits: Demand—non-interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Savings and interest-bearing demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities sold under repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other borrowed funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Junior subordinated deferrable interest debentures . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,545,905 $ 3,267,829 2,012,300 8,826,034 236,536 626,511 134,642 171,118 9,994,841 3,454,840 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 96,214,967 shares on December 31, 2019 and 96,104,029 shares on December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . 96,215 148,075 2,200,568 2,345 2,447,203 96,104 145,283 2,064,134 (54,634) 2,250,887 Less cost of shares in treasury, 31,015,061 shares on December 31, 2019 and 30,494,143 on December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (329,150) 2,118,053 12,112,894 $ (311,305) 1,939,582 11,871,952 See accompanying notes to consolidated financial statements. 31 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Income Years ended December 31, 2019, 2018 and 2017 (Dollars in Thousands, Except Per Share Amounts) Interest income: Loans, including fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Investment securities: 413,611 $ 375,173 $ 322,508 Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,485 4,885 1,420 492,401 81,484 8,141 1,024 465,822 82,347 9,656 625 415,136 2019 2018 2017 Interest expense: Savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities sold under repurchase agreements . . . . . . . . . . . . . . . . . . . . . . Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Junior subordinated deferrable interest debentures . . . . . . . . . . . . . . . . . 16,379 20,970 2,432 12,413 6,435 12,764 13,096 2,415 17,404 6,989 6,208 9,736 6,617 10,978 5,392 Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,629 52,668 38,931 Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 433,772 413,154 376,205 Provision for probable loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,843 6,112 11,221 Net interest income after provision for probable loan losses . . . . . . . . 414,929 407,042 364,984 Non-interest income: Service charges on deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,502 72,433 72,868 Other service charges, commissions and fees Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment securities transactions, net . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,996 7,832 (12) 5,985 17,523 46,685 7,801 (141) 19,897 18,367 44,964 7,345 (4,774) 18,918 11,085 Total non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154,826 165,042 150,406 See accompanying notes to consolidated financial statements. 32 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Income, continued Years ended December 31, 2019, 2018 and 2017 (Dollars in Thousands, Except Per Share Amounts) 2019 2018 2017 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145,929 $ 28,635 28,270 17,661 1,416 6,377 — 7,748 — 19,850 53,915 138,532 $ 29,097 25,873 12,601 3,742 4,413 — 7,695 — 17,516 60,032 132,750 28,439 25,281 13,650 3,294 965 25 7,854 5,765 19,189 56,536 Total non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309,801 299,501 293,748 Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259,954 272,583 221,642 Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,850 56,652 64,206 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 205,104 $ 215,931 $ 157,436 Basic earnings per common share: Weighted average number of shares outstanding . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,476,606 66,106,580 3.13 $ 3.27 $ 66,046,155 2.38 Fully diluted earnings per common share: Weighted average number of shares outstanding . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,685,684 66,633,820 3.12 $ 3.24 $ 66,778,436 2.36 See accompanying notes to consolidated financial statements. 33 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Comprehensive Income Years ended December 31, 2019, 2018, and 2017 (Dollars in Thousands) 2019 2018 2017 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 205,104 $ 215,931 $ 157,436 Other comprehensive income, net of tax: Net unrealized holding gains (losses) on securities available for sale arising during period (net of tax effects of $15,144, $(7,004), and $(2,586)) . . . . . . . 56,970 (26,348) (4,803) Reclassification adjustment for losses on securities available for sale included in net income (net of tax effects of $3, $30 and $1,671) . . . . . . . . . . 9 56,979 111 (26,237) 3,103 (1,700) Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 262,083 $ 189,694 $ 155,736 See accompanying notes to consolidated financial statements. 34 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Shareholders’ Equity Years ended December 31, 2019, 2018 and 2017 (in Thousands, except per share amounts) Preferred Stock Number of Shares Common Stock Surplus Other Retained Earnings Comprehensive Treasury Income (Loss) Stock — 95,910 $ 95,910 $ 169,567 $ 1,777,963 $ — 157,436 — — — — — — — — — 109 — — — — 96,019 — — — — — — — — — 85 — — — (43,594) — — 109 — 1,346 — 903 — — $ 96,019 $ 171,816 $ 1,891,805 $ — 215,931 — — — (49,599) — — 85 — — 1,437 1,035 — (29,005) — — — — — — — — — — — 5,997 (5,997) (26,697) $ (292,076) $ — — — — — — — (187) — — (1,700) — (28,397) $ (292,263) $ — — (19,042) — — — — — — (17,845) — — — — — — — — — — — — Total 1,724,667 157,436 (43,594) (187) 1,455 903 (1,700) 1,838,980 215,931 (49,599) (19,042) 1,522 1,035 (29,005) — (20,240) 1,939,582 205,104 (68,670) (17,845) 1,923 — 980 — — — 96,104 $ 96,104 $ 145,283 $ 2,064,134 $ — 205,104 — — — — — — (20,240) (54,634) $ (311,305) $ — — (68,670) — — — — — — 111 — — — 111 — 1,812 — 980 — — — Balance at December 31, 2016 . . Net Income . . . . . . . . . . . . . Dividends: Cash ($.66 per share) . . . . Purchase of treasury (4,870 shares) . . . . . . . . . . . . . . . Exercise of stock options . . . . . . Stock compensation expense recognized in earnings . . . . . . Other comprehensive (loss), net of tax: Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustment . . . . . . . . . . Balance at December 31, 2017 . . Net Income . . . . . . . . . . . . . Dividends: Cash ($.75 per share) . . . . Purchase of treasury (520,918 shares) . . . . . . . . Exercise of stock options . . . . . . Stock compensation expense recognized in earnings . . . . . . Repurchase of outstanding warrant . . . . . . . . . . . . . . . . . Cumulative adjustment for adoption of new accounting standards . . . . . . . . . . . . . . . . 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, 2018 . . Net Income . . . . . . . . . . . . . Dividends: Cash ($1.05 per share) . . . Purchase of treasury (468,918 shares) . . . . . . . . Exercise of stock options . . . . . . Stock compensation expense recognized in earnings . . . . . . Other comprehensive income, net of tax: Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustments . . . . . . . . . . Balance at December 31, 2019 . . — — — — — — 56,979 — 96,215 $ 96,215 $ 148,075 $ 2,200,568 $ 2,345 $ (329,150) $ 56,979 2,118,053 See accompanying notes to consolidated financial statements. 35 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2019, 2018 and 2017 (Dollars in Thousands) Operating activities: 2019 2018 2017 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 205,104 $ 215,931 $ 157,436 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 on sale of other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . Accretion of investment securities discounts . . . . . . . . . . . . . . . . . . . . . . . Amortization of investment securities premiums . . . . . . . . . . . . . . . . . . . Investment securities transactions, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized (gain) loss on equity securities with readily determinable fair values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of identified intangible assets . . . . . . . . . . . . . . . . . . . . . . . Stock based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings from affiliates and other investments . . . . . . . . . . . . . . . . . . . . . Deferred tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Decrease (increase) in accrued interest receivable . . . . . . . . . . . . . . . . . . Decrease (increase) in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,843 322 28,270 (237) (1,470) (428) 20,549 12 (158) — 980 (3,914) 3,309 183 8,043 32,157 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 Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . 311,565 229,847 196,819 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 . . . . . . . . . . . . . . . . . . . . . — 94,585 2,275 38,175 — 396,066 — (893,301) 882,479 (375,621) (52,795) 44,919 (29,590) 1,861 9,405 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 Net cash (used in) provided by investing activities . . . . . . . . . . . . . . . . (318,058) 379,440 (403,807) See accompanying notes to consolidated financial statements. 36 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (Continued) Years ended December 31, 2018, 2017 and 2016 (Dollars in Thousands) Financing activities: 2019 2018 2017 $ Net increase in non-interest-bearing demand deposits . . . . . . . . . . . . . . . . . Net (decrease) increase in savings and interest-bearing demand deposits . . Net increase (decrease) in time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase (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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (408) 38,832 6,547 (79,154) (25,774) — (17,845) 1,923 (68,670) 23,106 (83,038) (123,816) (489,560) — (29,005) (19,042) 1,522 (49,599) 91,065 $ 211,585 $ 85,204 41,403 (191,804) (151,180) 461,850 — — (187) 1,455 (43,594) Net cash (used in) provided by financing activities. . . . . . . . . . . . . . . . . . . (53,484) (557,847) 203,147 (Decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . (59,977) 51,440 (3,841) Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . 316,797 265,357 269,198 Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 256,820 $ 316,797 $ 265,357 Supplemental cash flow information: Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,728 $ 44,089 50,623 $ 40,565 38,995 66,983 Non-cash investing and financing activities: Net transfers from loans to other real estate owned . . . . . . . . . . . . . . . . . . . . Establishment of lease liability and right-of-use asset . . . . . . . . . . . . . . . . . . 22,015 6,171 32,610 — 2,588 — See accompanying notes to consolidated financial statements. 37 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 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, 2019. Mortgage-backed securities held at December 31, 2019 and 2018 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 38 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (“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, 2019 and December 31, 2018 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 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 39 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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 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. 40 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Other Real Estate Owned and Repossessed 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 $71,103,000 and $57,344,000 at December 31, 2019 and 2018, respectively. Other real estate owned is included in other assets. Repossessed 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. Repossessed assets are included in other assets on the consolidated financial statements and totaled approximately $7,137,000 and $6,454,000 at December 31, 2019 and 2018, 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. We primarily own all the property we occupy, with the exception of certain branches operating in grocery store or retail shopping centers and certain ATM locations, which are all under operating leases as classified under guidance prior to the issuance of ASU 2016-02, “Leases.” We adopted the guidance in ASU 2016-02 on January 1, 2019 and recorded a right of use asset and a lease liability of approximately $6.4 million. The right of use asset and lease liability are included in other assets and other liabilities, respectively, in our consolidated financial statements. 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) identify 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 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. 41 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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, 2019 and 2018, 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, 2019, 2018 and 2017, 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 2016. 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. 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, 2019, 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, 2019, we have determined that no impairment of identified intangibles exists. Identified 42 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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. 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. 43 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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 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 44 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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. On January 1, 2019, we adopted the provisions of ASU 2016-02, “Leases.” As part of our business model, we primarily own all property we occupy, with the exception of certain branches operating in grocery stores or shopping centers and certain ATM locations that were classified as operating leases under previous guidance. The adoption of the standard did not have a significant impact on our consolidated financial statements. As of the date of adoption, we recorded a right of use asset and a lease liability of approximately $6.4 million. The right of use asset and lease liability are included in other assets and other liabilities, respectively, on our consolidated statement of condition. Amortization of the right of use asset for the twelve months ended December 31, 2019 was approximately $1,019,000 and is included as a part of occupancy expense in our consolidated income statement. 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. The impact of the adoption of the standard is to be recorded as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The accounting standard was effective for us on January 1, 2020. The task force formed last year, which includes key members of the teams that work with the current calculation of the allowance for probable loan losses with members representing the corporate accounting and risk management areas has continued to work with the implementation of the update. Implementation activities and decisions have been reached around key data needed for the new calculation including portfolio segmentation. Validation of our primary model/tool is substantially completed and ongoing activities around forecasting models and documentation of the process are substantially complete. We have completed a parallel run of the calculation against our current methodology. Based on the current portfolio, including its current composition, characteristics and credit quality, as well as the current economic conditions and forecasts, we believe that the adoption of the update will increase our allowance for probable loan losses between approximately 2 and 6%. 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 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 45 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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. In December 2019, the FASB issued Accounting Standards Update No. 2019-12 to ASC 740, “Income Taxes.” The update amends existing guidance with the intention of simplifying the accounting for income taxes. Specifically, the update removes some exceptions in existing guidance around intraperiod tax allocations, recognition of deferred tax liabilities for certain changes in investments in foreign subsidiaries and to the general methodology for calculating taxes on interim periods when year to date losses exceed the anticipated loss for the year. Additionally, the update clarifies and provides more guidance with respect to the classification of franchise or similar taxes, requirements to evaluate when a step up in the tax basis of goodwill should be considered, eliminates the requirement that a consolidated entity allocate a portion of current and deferred tax expense to a legal entity that is not subject to tax, requires that an entity reflect the effect of changes in tax laws and tax rates in the effective tax rate computed in the interim period that includes the enactment date and makes minor changes for taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method. The update is effective for fiscal years beginning after December 15, 2020. 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, 2019 are as follows: Held to Maturity Gross Gross Amortized unrealized unrealized cost gains losses Estimated fair value Carrying value (Dollars in Thousands) Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . $ Total investment securities . . . . . . . . . . . . . . . . . $ 2,400 $ 2,400 $ — $ — $ — $ — $ 2,400 $ 2,400 $ 2,400 2,400 Available for Sale Debt Securities Amortized cost Gross unrealized gains Gross unrealized losses Estimated fair value Carrying value(1) (Dollars in Thousands) Residential mortgage-backed securities . . . . . . . . $ 3,285,623 $ 16,534 $ (16,609) $ 3,285,548 $ 3,285,548 Obligations of states and political subdivisions . 93,375 90,447 Total investment securities . . . . . . . . . . . . . . . . . . $ 3,376,070 $ 19,467 $ (16,614) $ 3,378,923 $ 3,378,923 93,375 2,933 (5) (1) Included in the carrying value of residential mortgage- backed securities are $571,247 of mortgage-backed securities issued by Ginnie Mae and $2,714,301 of mortgage-backed securities issued by Fannie Mae and Freddie Mac 46 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) The amortized cost and estimated fair value of investment securities at December 31, 2019, 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 (Dollars in Thousands) — Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,075 $ 1,075 $ Due after one year through five years . . . . . . . . . . . . . . . . . . . . . . . . — Due after five years through ten years . . . . . . . . . . . . . . . . . . . . . . . . 2,249 Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91,126 Residential mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . 3,285,548 Total investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,400 $ 2,400 $ 3,376,070 $ 3,378,923 — $ — 2,241 88,206 3,285,623 1,325 — — — 1,325 — — — 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 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, $2,721,717 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 $856,135,000 and $855,141,000, respectively, at December 31, 2019. Proceeds from the sale and call of securities available-for-sale were $94,585,000, $59,782,000 and $396,066,000 during 2019, 2018 and 2017, respectively, which amounts included $0, $0 and $377,756,000 of mortgage-backed securities. Gross gains of $3,000, $3,000 and $1,186,000, and gross losses of $15,000, $144,000 and $5,960,000 were realized on the sales in 2019, 2018 and 2017, respectively. 47 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2019 were as follows: Less than 12 months 12 months or more Total Unrealized Fair Value Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (Dollars in Thousands) Available for sale: Residential mortgage-backed securities . . . . . . . . . . . . . $ 523,031 $ Obligations of states and political subdivisions . . . . . . . . 766 $ 523,797 $ (2,269) $ 1,448,109 $ (14,340) $ 1,971,140 $ (16,609) (5) (2,274) $ 1,448,109 $ (14,340) $ 1,971,906 $ (16,614) 766 — — (5) 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, 2018 were as follows: Less than 12 months 12 months or more Total Unrealized Fair Value Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (Dollars in Thousands) Available for sale: 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) 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. 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 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. Equity securities with readily determinable fair values consist primarily of Community Reinvestment Act funds. At December 31, 2019 and December 31, 2018, the balance in equity securities with readily determinable fair values recorded at fair value were $6,095,000 and $5,937,000, 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 48 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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, 2019 and December 31, 2018: Net gains recognized during the period on equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . $ Less: Net gains and (losses) recognized during the period on equity securities sold during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gains recognized during the reporting period on equity securities still held at the reporting date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 158 — 158 Year Ended December 31, 2019 (Dollars in Thousands) Year Ended December 31, 2018 (Dollars in Thousands) 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized losses recognized during the reporting period on equity securities still held at the reporting date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (388) — (388) (3) Loans A summary of loans, by loan type at December 31, 2019 and 2018 is as follows: December 31, December 31, 2019 2018 (Dollars in Thousands) Commercial, financial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,379,837 $ 3,305,124 Real estate - mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,173,101 1,886,231 Real estate - construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,316 Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,517 Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,894,946 $ 6,561,289 1,140,377 2,185,883 47,800 141,049 (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 49 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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. 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. 50 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) A summary of the changes in the allowance for probable loan losses by loan class is as follows: December 31, 2019 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 12,596 $ (14,412) 15,123 $ (39) 19,353 $ (7,353) 1,808 $ — 3,467 $ (201) 7,719 $ (435) 447 $ 871 $ (487) (1) 61,384 (22,928) (Dollars in Thousands) allowance . . . . . . . . . . . . . 2,196 113 318 Net losses charged to allowance . . . . . . . . . . . . . (12,216) 74 (7,035) — — 26 286 40 — 2,979 (175) (149) (447) (1) (19,949) Provision (credit) charged to operations . . . . . . . . . . . . . . . . Balance at December 31, . . . . . . . $ 10,765 11,145 $ 2,955 18,152 $ 4,215 16,533 $ (22) 1,786 $ 470 3,762 $ (35) 7,535 $ 542 542 $ (47) 823 $ 18,843 60,278 December 31, 2018 Domestic Commercial real estate: other Commercial construction & real estate: Commercial Foreign Commercial development commercial multifamily junior lien Consumer Foreign Total land farmland & real estate: Residential: Residential: first lien Balance at December 31, . . . . . . . $ Losses charge to allowance . . . Recoveries credited to 27,905 $ (14,220) 11,675 $ (1) 16,663 $ (70) 1,109 $ — 2,950 $ (122) 6,103 $ (347) 440 $ (362) 842 $ 67,687 (15,125) (3) (Dollars in Thousands) allowance . . . . . . . . . . . . . 1,981 Net losses charged to allowance . . . . . . . . . . . . . (12,239) 25 24 246 176 — — 36 (86) 369 43 10 2,710 22 (319) 7 (12,415) Provision (credit) charged to 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 6,112 871 $ 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, . . . . . . . $ 25,649 $ 13,889 $ 16,731 $ 806 $ 2,455 $ 3,716 $ 531 $ 884 $ 64,661 (Dollars in Thousands) Losses charge to allowance . . . . . . . . . . . . . (12,094) Recoveries credited to allowance . . . . . . . . . . . . . 4,020 Net losses charged to allowance . . . . . . . . . . . . . (8,074) Provision (credit) charged to (213) 21 (192) (40) 527 487 — — — (101) (340) (309) (1) (13,098) 11 (90) 258 45 (82) (264) 21 20 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 The allowance for probable loan losses is a reserve established through a provision for probable loan losses charged to expense, which represents management’s best estimate of probable loan losses when evaluating loans (i) individually or (ii) collectively. The increase in provision for probable loan losses charged to expense and charge-offs charged to the allowance for probable loan losses for the year ended December 31, 2019 can be primarily attributed to a relationship that is secured by multiple pieces of real property on which car dealerships are operated. The relationship began deteriorating in the fourth quarter of 2018, triggered by significant fraud by a high level insider of the car dealership resulting in the dealerships unexpectedly filing for bankruptcy and creating an exposure for potential loss since the operations of the dealerships were the source of repayment from the borrower. The relationship further deteriorated in the first quarter of 2019 after the sponsor of the court approved debtor in possession plan discontinued its role in the process and thus did not fulfill its obligation to assume full responsibility of the accrued and unpaid interest. Although the 51 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) relationship is secured by real property (the dealerships’ real estate), the real property has specialized use, contributing to the potential exposure for probable loss. During the first quarter of 2019, in light of the circumstances and management’s evaluation of the relationship, the decision was made to place the relationship on impaired, non-accrual status and place a specific reserve on the relationship in the amount of $9.5 million. During the second quarter of 2019, management continued to evaluate the relationship and decided to foreclose on the underlying real estate collateral, resulting in a charge- off of approximately $9.5 million, reflected in the tables above as part of the Commercial and Commercial Real Estate: Farmland and Commercial categories. 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 were eliminated from the calculation, the allowance for probable loan losses was 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 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, 2019 Loans Individually Evaluated For Impairment Loans Collectively Evaluated For Impairment Recorded Investment Allowance Recorded Investment (Dollars in Thousands) Allowance Domestic Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,935 $ Commercial real estate: other construction & land development . . Commercial real estate: farmland & commercial . . . . . . . . . . . . . . Commercial real estate: multifamily . . . . . . . . . . . . . . . . . . . . . . . . . Residential: first lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential: junior lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 938 1,208 165 6,278 692 1,195 264 249 $ 1,290,725 $ 10,895 18,037 116 16,533 — 1,786 — — 3,762 7,535 — 542 — — 823 2,184,945 1,895,539 190,265 427,623 705,784 46,605 140,785 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,675 $ 365 $ 6,882,271 $ 59,913 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 52 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Loans accounted for on a non-accrual basis at December 31, 2019, 2018 and 2017 amounted to $4,886,000, $15,791,000 and $54,730,000, respectively. The decrease in non-accrual commercial loans at December 31, 2019 compared to the same period of 2018 can be attributed to a relationship secured by equipment and accounts receivable that has been upgraded to Watch-List Substandard. The effect of such non-accrual loans reduced interest income by approximately $340,000, $1,119,000 and $977,000 for the years ended December 31, 2019, 2018 and 2017, 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, 2019, 2018 and 2017 amounted to approximately $59,705,000, $40,674,000 and $7,257,000, respectively and can be attributed to a relationship that is secured by multiple pieces of real property on which car dealerships are operated. The table below provides additional information on loans accounted for on a non-accrual basis by loan class: December 31, 2019 December 31, 2018 (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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,901 $ 938 1,208 165 670 — 4 4,886 $ 9,143 2,092 3,509 507 347 171 22 15,791 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, 2019: December 31, 2019 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Recognized (Dollars in Thousands) Loans with Related Allowance Domestic Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Commercial real estate: other construction & land development . . . . . . . Total impaired loans with related allowance . . . . . . . . . . . . . . . . . . . . $ 510 $ 126 636 $ 516 $ 169 685 $ 249 $ 116 365 $ 514 $ 131 645 $ — — — 53 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Recorded Investment December 31, 2019 Unpaid Principal Balance Average Recorded Investment (Dollars in Thousands) Interest Recognized Loans with No Related Allowance Domestic Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Commercial real estate: other construction & land development . . . . . . . . . . . . . . Commercial real estate: farmland & commercial . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate: multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential: first lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential: junior lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total impaired loans with no related allowance . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,425 $ 812 1,208 165 6,278 692 1,195 264 12,039 $ 1,516 $ 1,133 1,841 168 6,445 692 1,196 264 13,255 $ 18,794 $ 1,737 22,357 651 6,988 1,023 1,117 278 52,945 $ 2 — — — 309 42 — 12 365 The following tables detail key information regarding our impaired loans by loan class for the year ended December 31, 2018: December 31, 2018 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Recognized (Dollars in Thousands) Loans with Related Allowance Domestic Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Commercial real estate: other construction & land development . . . . . . . . Total impaired loans with related allowance . . . . . . . . . . . . . . . . . . . . . $ 1,563 $ 135 1,698 $ 2,161 $ 169 2,330 $ 656 $ 116 772 $ 1,741 $ 141 1,882 $ — — — Recorded Investment December 31, 2018 Unpaid Principal Balance Average Recorded Investment (Dollars in Thousands) Interest Recognized Loans with No Related Allowance Domestic Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Commercial real estate: other construction & land development . . . . . . . . . . . . . . Commercial real estate: farmland & commercial . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate: multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential: first lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential: junior lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total impaired loans with no related allowance . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,616 $ 1,957 3,509 507 6,244 901 1,175 293 22,202 $ 7,730 $ 2,205 4,031 538 6,386 911 1,190 293 23,284 $ 16,194 $ 2,151 36,632 565 7,136 976 1,211 327 65,192 $ 3 — — — 305 44 2 14 368 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 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. 54 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) The following table details loans accounted for as “troubled debt restructuring,” segregated by loan class. Loans accounted for as troubled debt restructuring are included in impaired loans. Domestic Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Residential: first lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential: junior lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 $ 5,608 692 1,192 264 35 5,947 730 1,153 293 Total troubled debt restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,788 $ 8,158 December 31, 2019 December 31, 2018 (Dollars in Thousands) 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, 2019 and December 31, 2018, was adequate to absorb probable losses from loans in the portfolio at that date. The following table presents information regarding the aging of past due loans by loan class: 30 - 59 Days 60 - 89 Days December 31, 2019 90 Days or 90 Days or greater & Greater Total Past still accruing Due (Dollars in Thousands) Current Total Portfolio Domestic Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,134 $ Commercial real estate: other construction & 626 $ 1,292 $ 421 $ 5,052 $ 1,287,608 $ 1,292,660 land development . . . . . . . . . . . . . . . . . . . . . 509 55 — — 564 2,185,319 2,185,883 54,878 — 3,107 1,200 88 11 1,896,747 190,430 433,901 706,476 47,800 141,049 59,705 $ 84,450 $ 6,810,496 $ 6,894,946 1,831,730 189,952 425,342 703,687 47,170 139,688 65,017 478 8,559 2,789 630 1,361 Commercial real estate: farmland & commercial . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate: multifamily . . . . . . . . . Residential: first lien . . . . . . . . . . . . . . . . . . . . Residential: junior lien . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,058 313 3,229 1,112 467 1,347 2,031 — 1,670 477 75 3 54,928 165 3,660 1,200 88 11 Total past due loans . . . . . . . . . . . . . . . . . . . $ 18,169 $ 4,937 $ 61,344 $ 55 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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 Total Portfolio Domestic Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,651 $ 1,089 $ 19,851 $ Commercial real estate: other construction & 10,890 $ 25,591 $ 1,103,378 $ 1,128,969 land development . . . . . . . . . . . . . . . . . . . . . . 727 1,707 922 16 3,356 1,882,875 1,886,231 Commercial real estate: farmland & commercial . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate: multifamily . . . . . . . . . . Residential: first lien . . . . . . . . . . . . . . . . . . . . . Residential: junior lien . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,928 927 3,998 1,155 486 1,106 784 — 1,677 618 19 117 27,239 578 3,362 1,108 45 739 Total past due loans . . . . . . . . . . . . . . . . . . . . $ 15,978 $ 6,011 $ 53,844 $ 24,910 71 3,079 937 32 739 1,949,898 226,257 445,800 727,301 46,316 150,517 40,674 $ 75,833 $ 6,485,456 $ 6,561,289 1,918,947 224,752 436,763 724,420 45,766 148,555 30,951 1,505 9,037 2,881 550 1,962 The decrease in commercial loans past due 90 days or greater at December 31, 2019 compared to December 31, 2018 can be primarily attributed to a relationship secured by equipment and accounts receivable that was brought current and the charge-off of the previously discussed relationship secured by real property on which car dealerships are operated and the foreclosure of the underlying real estate assets securing the relationship. The increase in commercial real estate: farmland and commercial loans past due 90 days or greater at December 31, 2019 compared to December 31, 2018 can be primarily attributed to a loan relationship secured by real property on which a private education centers are operated. 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 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: 56 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019 Pass Special Review Watch List—Pass Substandard Watch List— Watch List— Impaired Domestic Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,228,110 $ Commercial real estate: other construction & land development . . . . Commercial real estate: farmland & commercial . . . . . . . . . . . . . . . Commercial real estate: multifamily . . . . . . . . . . . . . . . . . . . . . . . . . Residential: first lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential: junior lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,090,370 1,710,446 190,265 426,546 704,958 46,605 140,785 569 $ 39 $ 18,721 13,184 — 253 826 — — 41,949 20,183 — 144 — — — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,538,085 $ 33,553 $ 62,315 $ 62,007 $ 33,905 151,726 — 680 — — — 248,318 $ 1,935 938 1,208 165 6,278 692 1,195 264 12,675 (Dollars in Thousands) December 31, 2018 Pass Special Review Watch List—Pass Substandard Watch List— Watch List— Impaired Domestic (Dollars in Thousands) Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Commercial real estate: other construction & land development . . . . Commercial real estate: farmland & commercial . . . . . . . . . . . . . . . Commercial real estate: multifamily . . . . . . . . . . . . . . . . . . . . . . . . . Residential: first lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential: junior lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,817,098 1,726,711 224,823 438,773 725,538 45,141 150,224 1,648 62,046 — — — — — 9,055 38,373 — 142 862 — — 998,625 $ 441 $ 44,544 $ Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,126,933 $ 64,135 $ 92,976 $ 76,180 $ 56,338 119,259 927 641 — — — 253,345 $ 9,179 2,092 3,509 507 6,244 901 1,175 293 23,900 The decrease in Special Review credits in the commercial real estate: farmland and commercial category of the portfolio at December 31, 2019 compared to December 31, 2018 can be primarily attributed to a relationship secured by real estate on which children’s learning centers are operated that was downgraded to Watch-List Substandard. The increase in Special Review credits in the commercial real estate: other construction and land development category can be primarily attributed to two relationships that were downgraded to Special Review from the Pass categories. Both are relationships secured by real estate on which commercial buildings are being constructed. The decrease in Watch-List Pass credits in the commercial category can be primarily attributed to the reclassification of a relationship in the oil and gas production business to the Pass category. The increase in Watch-List Pass credits in the commercial real estate: other construction and land development category can be primarily attributed to a reclassification of a relationship secured by real estate on which commercial buildings are being constructed from the Watch-List Substandard classification offset by a downgrade of a relationship also secured by real estate on which commercial buildings are being constructed from Pass to Watch-List Pass. The decrease in Watch-List Pass commercial real estate: farmland and commercial credits at December 31, 2019 compared to December 31, 2018 can be primarily attributed to the payoff of a relationship secured by real estate on which boat storage slips were operated and the upgrade of a relationship secured by a retail center from Watch-List Pass to Pass. The decrease in Watch-List Substandard credits in the commercial category at December 31, 2019 compared to December 31, 2018 can be primarily attributed to the previously mentioned relationship secured by real estate on which car dealerships were operated was foreclosed upon and the pay-off of a relationship secured by equipment. The decrease in Watch-List Substandard commercial real estate: farmland and commercial credits at December 31, 2019 compared to December 31, 2018 can be primarily attributed to the upgrade of the previously mentioned relationship secured by real estate on which commercial buildings are being constructed to Watch-List-Pass. The increase in Watch-List Substandard commercial real estate: farmland and commercial credits at December 31, 2019 compared to December 31, 2018 can be primarily attributed to the downgrade of the previously mentioned relationship secured by real estate on which children’s education centers are operated from Special Review. 57 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (5) Bank Premises and Equipment A summary of bank premises and equipment, by asset classification, at December 31, 2019 and 2018 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 2019 2018 (Dollars in Thousands) 573,257 $ 313,880 118,099 563,302 292,958 118,806 7 - 27 years — (498,641) 506,595 — (468,167) 506,899 $ $ 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 Net (Dollars in Thousands) December 31, 2019: Core deposit premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . Identified intangible (contract rights) . . . . . . . . . . . . . . . . Total identified intangibles . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2018: 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 was $0, $0 and $25 for the years ended December 31, 2019, 2018 and 2017. There were no changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2018. 58 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (7) Deposits Deposits as of December 31, 2019 and 2018 and related interest expense for the years ended December 31, 2019, 2018 and 2017 were as follows: 2019 2018 (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 2,815,835 $ 730,070 3,545,905 2,758,768 696,072 3,454,840 2,477,668 790,161 3,267,829 636,005 827,031 2,531,854 736,383 3,268,237 590,895 807,486 Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total time, certificates of deposit . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 302,620 246,644 2,012,300 8,826,034 $ 323,377 251,710 1,973,468 8,696,545 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 2019 2018 2017 (Dollars in Thousands) 13,462 $ 2,917 16,379 11,029 $ 1,735 12,764 5,453 755 6,208 7,804 9,407 4,741 5,798 3,644 4,105 Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total time, certificates of deposit . . . . . . . . . . Total interest expense on deposits . . . . . . . . . . . . $ 2,232 1,527 20,970 37,349 $ 1,589 968 13,096 25,860 $ 1,312 675 9,736 15,944 59 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Scheduled maturities of time deposits as of December 31, 2019 were as follows: 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ Total (in thousands) 1,848,026 111,775 38,415 13,112 944 28 2,012,300 Scheduled maturities of time deposits in amounts of $100,000 or more at December 31, 2019, 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) 536,400 351,059 465,735 109,842 1,463,036 Time deposits that meet or exceed the FDIC insurance limit of $250,000 at December 31, 2019 and December 31, 2018 were $929,860 and $869,000, 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 $267,439,000 and $314,876,000 during 2019 and 2018, respectively, and the maximum amount outstanding at any month end during 2019 and 2018 was $299,827,000 and $370,495,000 respectively. 60 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Further information related to repurchase agreements at December 31, 2019 and 2018 is set forth in the following table: Collateral Securities Book Value of Fair Value of Securities Sold Securities Sold Repurchase Borrowing Balance of Liability Weighted Average Interest Rate December 31, 2019 term: Overnight agreements . . . . . . . . . . . . . . . . . . . . . . . $ 1 to 29 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 to 90 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Over 90 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 317,107 $ — — 11,564 328,671 $ 318,397 $ 225,243 — — — — 11,293 11,529 329,926 $ 236,536 (Dollars in Thousands) 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 0.87 % — — 1.28 0.89 % 0.85 % — — 1.27 0.87 % 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, 2019 and 2018 is set forth in the following table: December 31, 2019 2018 (Dollars in Thousands) Federal Home Loan Bank advances—short-term Balance at year end . . . . . . . . . . . . . . . . . . . . . . . . . . $ Rate on balance outstanding at year end . . . . . . . . . Average daily balance . . . . . . . . . . . . . . . . . . . . . . . . $ Average rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maximum amount outstanding at any month end . . $ 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 . . $ 190,000 190,431 $ 1.48 % $ 2.60 % $ 371,775 436,511 $ 1.73 % $ 1.71 % $ 436,675 436,593 268,975 2.70 % 621,357 1.97 % 1,007,100 436,690 1.73 % 302,373 1.71 % 436,700 (1) Long-term advances at December 31, 2019 and 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 on a quarterly basis. Two amortizing advances are outstanding at December 31, 2019 in the amounts of $3,146,000 and $8,365,000 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. 61 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (10) Junior Subordinated Deferrable Interest Debentures We have formed five 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, 2019 and December 31, 2018, the principal amount of debentures outstanding totaled $134,642,000 and $160,416,000, respectively. 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 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, 2019 and December 31, 2018, the total $134,642,000 and $160,416,000, respectively, 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, 2019: Junior Subordinated Deferrable Interest Debentures Repricing Frequency Interest Rate Interest Rate Index(1) Maturity Date Optional Redemption Date(1) Trust VIII . . . . . . . . . . . . . . Trust IX . . . . . . . . . . . . . . . Trust X . . . . . . . . . . . . . . . . Trust XI . . . . . . . . . . . . . . . Trust XII . . . . . . . . . . . . . . . (Dollars in Thousands) $ 25,774 Quarterly 41,238 Quarterly 21,021 Quarterly 25,990 Quarterly 20,619 Quarterly $ 134,642 5.04 % LIBOR + 3.72 % LIBOR + 3.56 % LIBOR + 3.72 % LIBOR + 3.36 % LIBOR + October 2033 3.05 October 2036 1.62 February 2037 1.65 1.62 July 2037 1.45 September 2037 October 2008 October 2011 February 2012 July 2012 September 2012 (1) The Capital Securities may be redeemed in whole or in part on any interest payment date after the Optional Redemption Date. (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 62 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) outstanding during the reporting period. The calculation of the basic EPS and the diluted EPS for the years ended December 31, 2019, 2018, and 2017 is set forth in the following table: Net Income (Numerator) Shares (Denominator) (Dollars in Thousands, Except Per Share Amounts) Per Share Amount December 31, 2019: Basic EPS Net income available to common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . $ 205,104 65,476,606 $ 3.13 Potential dilutive common shares and warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ December 31, 2018: Basic EPS Net income available to common — 205,104 209,078 65,685,684 $ 3.12 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 . . . . . . . . . . . . . . . . . . . . . . . . . $ Potential dilutive common shares . . . . . . . . . Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 157,436 — 157,436 66,046,155 $ 732,281 66,778,436 $ 2.38 2.36 (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 $4,200,000, $3,850,000 and $3,750,000 were charged to income for the years ended December 31, 2019, 2018, and 2017, 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. 63 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) A summary of assets attributable to international operations at December 31, 2019 and 2018 are as follows: Loans: Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less allowance for probable loan losses . . . . . . . . . . Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Accrued interest receivable . . . . . . . . . . . . . . . . . . . . $ 2019 2018 (Dollars in Thousands) 88,979 $ 52,070 141,049 (823) 140,226 $ 743 $ 101,955 48,562 150,517 (871) 149,646 811 At December 31, 2019, we had $124,543,000 in outstanding standby and commercial letters of credit to facilitate trade activities. Revenues directly attributable to international operations were approximately $5,445,000, $5,412,000 and $5,248,000 for the years ended December 31, 2019, 2018 and 2017, 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: 2019 2018 2017 (Dollars in Thousands) Current U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current taxes . . . . . . . . . . . . . . . . . . . . 48,559 $ 2,944 38 51,541 48,144 $ 3,370 (5) 51,509 Deferred U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred taxes . . . . . . . . . . . . . . . . . . . Total income taxes . . . . . . . . . . . . . . . . . . . . $ 2,979 330 3,309 54,850 $ 5,130 13 5,143 56,652 $ 56,974 2,662 — 59,636 4,620 (50) 4,570 64,206 64 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 2019 and 2018 and 35% for 2017 to income before income taxes. The reasons for the differences for the years ended December 31 are as follows: 2019 2018 2017 (Dollars in Thousands) Computed expected tax expense . . . . . . . . . . . . . . . . . . . . . $ 55,086 $ 57,831 $ 77,643 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 rate (2,550) (3,101) (4,701) 2,587 — (1,480) 2,673 — (1,561) 1,697 (4,985) (3,198) change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net investment in low income housing investments . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,168) 387 531 Actual tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,850 $ 56,652 $ 64,206 (1,618) 2,518 (90) — 623 584 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2019 and 2018 are reflected below: 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities: Bank premises and equipment, principally due to differences on depreciation . . . Net unrealized gains on available for sale investment securities . . . . . . . . . . . . . . Identified intangible assets and goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2019 2018 (Dollars in Thousands) 12,050 $ 2,501 1,054 98 — 6,019 21,722 (12,478) (508) (13,649) (18,849) (45,484) (23,762) $ 12,257 2,459 1,054 81 15,182 5,076 36,109 (12,596) — (13,490) (14,787) (40,873) (4,764) The net deferred tax liability of $23,762,000 at December 31, 2019 and $4,764,000 at December 31, 2018 is included in other liabilities in the consolidated statements of condition. 65 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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. (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, 2019, 28,651 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 2018 7.00 2.93 % 1.97 % 26.97 % 7.00 1.73 % 2.68 % 31.65 % A summary of option activity under the stock option plans for the twelve months ended December 31, 2019 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, 2018 . . . . . . . . . . . . . . . . . . . . 788,977 $ Plus: Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: 16,500 Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,938 Options expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Options forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,951 Options outstanding at December 31, 2019 . . . . . . . . . . . . . . . . . . . . 658,588 25.91 35.34 17.29 — 26.74 27.55 5.76 $ 10,219 Options fully vested and exercisable at December 31, 2019 . . . . . . 319,085 $ 22.14 4.38 $ 6,680 Stock-based compensation expense included in the consolidated statements of income for the years ended December 31, 2019, 2018 and 2017 was approximately $980,000, $1,035,000 and $903,000, respectively. As of December 31, 2019, there was approximately $1,922,000 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 1.9 years. 66 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Other information pertaining to option activity during the twelve months ended December 31, 2019, 2018 and 2017 is as follows: Weighted average grant date fair value of Twelve Months Ended December 31, 2019 2018 2017 stock options granted . . . . . . . . . . . . . . . . . . . . $ — Total fair value of stock options vested . . . . . . . $ 1,333,000 $ 1,077,000 $ 1,182,000 Total intrinsic value of stock options 11.78 $ 7.38 $ exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,373,000 $ 2,045,000 $ 2,595,000 (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. The plan was terminated on August 6, 2019. (17) Commitments, Contingent Liabilities and Other Matters Cash of approximately $125,764,000 and $115,721,000 at December 31, 2019 and 2018, 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 $37,605,000 and $33,042,000 at December 31, 2019 and 2018, respectively. 67 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (19) Financial Instruments with Off-Statement of Condition Risk and Concentrations of Credit Risk In the normal course of business, the 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, 2019, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,622,491,000 11,098,000 124,054,000 489,000 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, 2019, the maximum potential amount of future payments is approximately $124,054,000. At December 31, 2019, the fair value of these guarantees is not significant. Unsecured letters of credit totaled approximately $49,965,000 and $42,729,000 at December 31, 2019 and 2018, 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 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 68 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) transaction was consummated in the third quarter of 2018. The repurchase of the outstanding Warrant eliminated 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, 2019, the Subsidiary Banks could pay dividends of up to $891,500,000 without prior regulatory approval and without adversely affecting their “well-capitalized” status under regulatory capital rules in effect at December 31, 2019. 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, 2019, 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 BASEL III capital reforms and various Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd Frank”) 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 rules emphasize CET1 capital and implements strict eligibility criteria for regulatory capital instruments. The 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. We believe that as of December 31, 2019, we meet all fully phased-in capital adequacy requirements. 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 paused 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). 69 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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, 2019, 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, 2019 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. As of December 31, 2019, 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. 70 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Our actual capital amounts and ratios for 2019 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, 2019: Common Equity Tier 1 (to Risk Weighted Assets): Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,833,174 18.58 % $ International Bank of Commerce, Laredo . . . . . . . . International Bank of Commerce, Oklahoma . . . . . International Bank of Commerce, Brownsville . . . . International Bank of Commerce, Zapata . . . . . . . . Commerce Bank . . . . . . . . . . . . . . . . . . . . . . . . . . 1,268,078 18.23 201,202 16.91 185,112 22.70 72,402 36.46 91,239 34.83 690,746 486,950 83,303 57,084 13,902 18,336 Total Capital (to Risk Weighted Assets): Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,018,488 20.46 % $ 1,036,118 730,425 International Bank of Commerce, Laredo . . . . . . . . 124,955 International Bank of Commerce, Oklahoma . . . . . 85,626 International Bank of Commerce, Brownsville . . . . 20,853 International Bank of Commerce, Zapata . . . . . . . . 27,504 Commerce Bank . . . . . . . . . . . . . . . . . . . . . . . . . . 1,315,453 18.91 206,807 17.38 192,417 23.60 74,737 37.63 93,396 35.65 Tier 1 Capital (to Risk Weighted Assets): Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,953,711 19.80 % $ International Bank of Commerce, Laredo . . . . . . . . International Bank of Commerce, Oklahoma . . . . . International Bank of Commerce, Brownsville . . . . International Bank of Commerce, Zapata . . . . . . . . Commerce Bank . . . . . . . . . . . . . . . . . . . . . . . . . . 1,268,078 18.23 201,202 16.91 185,112 22.70 72,402 36.46 91,239 34.83 Tier 1 Capital (to Average Assets): Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,953,711 16.65 % $ International Bank of Commerce, Laredo . . . . . . . . International Bank of Commerce, Oklahoma . . . . . International Bank of Commerce, Brownsville . . . . International Bank of Commerce, Zapata . . . . . . . . Commerce Bank . . . . . . . . . . . . . . . . . . . . . . . . . . 1,268,078 15.21 201,202 14.79 185,112 17.41 72,402 19.08 91,239 18.18 838,762 591,296 101,154 69,316 16,881 22,265 469,267 333,576 54,406 42,529 15,179 20,073 $ 7.000 % 7.000 7.000 7.000 7.000 7.000 $ 10.500 % 10.500 10.500 10.500 10.500 10.500 8.500 % 8.500 $ 8.500 8.500 8.500 8.500 4.00 % $ 4.00 4.00 4.00 4.00 4.00 N/A 452,168 77,353 53,006 12,909 17,026 N/A 695,643 119,004 81,548 19,860 26,195 N/A 556,514 95,203 65,239 15,888 20,956 N/A 416,970 68,007 53,161 18,974 25,091 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 71 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Our actual capital amounts and ratios for 2018 are also presented in the following table: Actual For Capital Adequacy Purposes Amount Ratio Amount Ratio (greater than (greater than or equal to) or equal to) (Dollars in Thousands) To Be Well-Capitalized Under Prompt Corrective Action Provisions Amount (greater than or equal to) Ratio (greater than or equal to) 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 (21) Fair Value $ 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 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, 72 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) as well as instruments for which the determination of fair value requires significant management judgment or estimation. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy is set forth below. The following table represents financial instruments reported on the consolidated statements of condition at their fair value as of December 31, 2019 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, 2019 Significant Other Significant Observable Unobservable Inputs (Level 2) Inputs (Level 3) Measured on a recurring basis: Assets: Available for sale debt securities Residential mortgage-backed securities . . . . . . . . . . . . . . $ States and political subdivisions . . . . . . . . . . . . . . . . . . . . Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,285,548 $ 93,375 6,095 3,385,018 $ — $ 3,285,548 $ — 6,095 6,095 $ 3,378,923 $ 93,375 — — — — — The following table represents financial instruments reported on the consolidated balance sheets 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) Significant Other Observable Inputs (Level 2) Assets/Liabilities Measured at Fair Value December 31, 2018 Significant Unobservable Inputs (Level 3) Measured on a recurring basis: Assets: Available for sale securities Residential mortgage - backed securities . . . . . . . . . . . . . $ States and political subdivisions . . . . . . . . . . . . . . . . . . . . Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,223,010 $ 188,340 5,937 3,417,287 $ — $ 3,223,010 $ — 5,937 5,937 $ 3,411,350 $ 188,340 — — — — — For the years ended December 31, 2019 and December 31, 2018, 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. 73 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, 2019 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 Assets (Level 1) Period ended December 31, 2019 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 . . . . . . . . . . . . . . . . . . . . . . Equity investments without readily determinable fair values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 826 $ 21,614 — $ — — $ — 826 $ 21,614 43 322 28,166 — — 28,166 4,775 The following table represents financial instruments measured at fair value on a non-recurring basis as of and for the year 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 Fair Value Net (Credit) for Identical Observable Unobservable Provision Year ended Significant Other Significant Measured on a non-recurring basis: Assets: Impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Other real estate owned . . . . . . . . . . . . . . . . . . . . . . 1,563 $ 38,871 — $ — — $ — 1,563 $ 38,871 356 3,071 December 31, 2018 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, 2019, we had approximately $2,955,000 of impaired commercial collateral dependent loans, of which approximately $1,426,000 had an appraisal performed within the immediately preceding twelve months and of which approximately $847,000 had an evaluation performed within the immediately preceding twelve months. As 74 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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 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, 2019, December 31, 2018 and December 31, 2017, respectively we recorded approximately $9,611,000, $170,000 and $30,000 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, 2019, December 31, 2018 and December 31, 2017, respectively, we recorded approximately $322,000, $3,071,000 and $710,000 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, 2019 and December 31, 2018 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. 75 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, 2019 and December 31, 2018, the carrying amount of fixed rate performing loans was $1,503,811,000 and $1,515,437,000, respectively, and the estimated fair value was $1,481,239,000 and $1,469,231,000, 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, 2019 and December 31, 2018. 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, 2019 and December 31, 2018, the carrying amount of time deposits was $2,012,300,000 and $1,973,468,000, respectively, and the estimated fair value was $2,011,950,000 and $1,976,156,000, 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, 2019 and December 31, 2018. 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. 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, 2019 and December 31, 2018. 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, 2019 and December 31, 2018. The long-term borrowings outstanding at December 31, 2019 and December 31, 2018 are fixed- rate borrowings and the fair value is based on established market spreads for similar types of borrowings. The fixed-rate long-term borrowings are included in Level 2 of the fair value hierarchy. At December 31, 2019, and December 31, 2018 the carrying amount of the fixed-rate long-term FHLB borrowings was $436,511,000 and $436,690,000, respectively and the estimated fair value was $465,017,000 and $436,238,000 respectively. 76 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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. 77 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, 2019 and 2018 (Dollars in Thousands) ASSETS Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities: Junior subordinated deferrable interest debentures . . . . . . . . . . . . . . Due to IBC Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ Shareholders’ equity: Common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . Less cost of shares in treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . $ 2019 2018 24,290 106,284 12,100 2,120,391 3,365 264 2,266,694 134,642 21 13,978 148,641 96,215 148,075 2,200,568 2,345 2,447,203 (329,150) 2,118,053 2,266,694 $ $ $ $ 19,065 105,377 — 1,987,293 — — 2,111,735 160,416 21 11,716 172,153 96,104 145,283 2,064,134 (54,634) 2,250,887 (311,305) 1,939,582 2,111,735 78 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, 2019, 2018 and 2017 (Dollars in Thousands) 2019 2018 2017 Income: Dividends from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . $ Interest income on notes receivable . . . . . . . . . . . . . . . . . . . Interest income on other investments . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127,750 $ 922 (514) 18 128,176 105,000 $ — 8,208 1,988 115,196 64,600 — 8,100 26 72,726 5,392 5,648 11,040 61,686 (2,076) 6,435 2,749 9,184 6,989 2,930 9,919 118,992 (1,878) 105,277 481 120,870 84,234 205,104 $ 104,796 111,135 215,931 $ 63,762 93,674 157,436 Expenses: Interest expense (Debentures) . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before federal income taxes and equity in undistributed net income of subsidiaries . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before equity in undistributed net income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity in undistributed net income of subsidiaries . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 79 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, 2019, 2018 and 2017 (Dollars in Thousands) Operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Adjustments to reconcile net income to net cash provided by operating activities: Investment securities transactions, net . . . . . . . . . . . . . . . . Unrealized (gain) loss on equity securities with readily determinable fair values . . . . . . . . . . . . . . . . . . . . . . . . . . Stock compensation expense . . . . . . . . . . . . . . . . . . . . . . . Decrease 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 increase in notes receivable . . . . . . . . . . . . . . . . . . . . . . Decrease (increase) in other assets and other investments . Net cash used in investing activities . . . . . . . . . . . . . . . . . . . Financing activities: 2019 2018 2017 205,104 $ 215,931 $ 157,436 — — (23) (16) 980 (58) (84,234) 121,776 — (12,100) 5,915 (6,185) 330 1,035 (1,479) (111,135) 104,682 — — (7,891) (7,891) 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (25,774) 1,923 (68,670) — (17,845) (110,366) 5,225 19,065 24,290 $ — 1,522 (49,599) (29,005) (19,042) (96,124) 667 18,398 19,065 $ 80 — 903 (3,453) (93,674) 61,189 6,328 — (25,348) (19,020) — 1,455 (43,594) — (187) (42,326) (157) 18,555 18,398 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Condensed Quarterly Income Statements (Dollars in Thousands, Except Per Share Amounts) 2019 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . 117,359 $ 13,996 103,363 3,480 41,584 76,171 124,119 $ 14,901 109,218 5,278 42,697 81,066 126,860 $ 15,078 111,782 2,665 34,416 79,613 124,063 14,654 109,409 7,420 36,129 72,951 Income before income taxes. . . . . . . . . . . . . . . . . . . . . . 65,296 65,571 63,920 65,167 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,562 14,127 13,900 13,261 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 51,734 $ 51,444 $ 50,020 $ 51,906 Per common share: Basic Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.79 $ 0.79 $ 0.76 $ 0.79 Diluted Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.78 $ 0.79 $ 0.76 $ 0.79 81 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 82 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, 2019, 2018, and 2017. Tax-exempt income has not been adjusted to a tax-equivalent basis: 2019 2018 2017 Average Balance Interest Average Rate/Cost Assets Interest earning assets: Loan, net of unearned discounts: Average Balance Interest (Dollars in Thousands) Average Rate/Cost Average Balance Interest Average Rate/Cost Domestic . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . $ 6,720,765 $ 131,356 408,166 5,445 6.07 % $ 4.15 6,374,979 142,999 $ 369,761 5,412 5.80 % $ 3.78 6,026,180 157,684 $ 317,320 5,188 Investment securities: Taxable . . . . . . . . . . . . . . . . . . . . . . Tax-exempt . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . Total interest-earning assets . . . . . . . . 3,244,021 126,792 109,965 10,332,899 72,485 4,885 1,420 492,401 3,635,675 2.23 200,978 3.85 1.29 95,559 4.77 % 10,450,190 81,484 8,141 1,024 465,822 3,954,632 2.24 235,253 4.05 1.07 84,752 4.46 % 10,458,501 82,347 9,656 625 415,136 Non-interest earning assets: Cash and cash equivalents . . . . . . . . . . . . Bank premises and equipment, net . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . Less allowance for probable loan losses . . . Total . . . . . . . . . . . . . . . . . . . . . . 168,224 478,159 1,120,706 (63,328) $ 12,036,660 Liabilities and Shareholders’ Equity Interest bearing liabilities: Savings and interest bearing demand 178,873 485,978 1,073,534 (67,031) $ 12,121,544 179,134 494,327 957,270 (68,312) $ 12,020,920 deposits . . . . . . . . . . . . . . . . . . . . . $ 3,288,376 $ 16,379 0.50 % $ 3,273,355 $ 12,764 0.39 % $ 3,230,463 $ 6,208 Time deposits: Domestic . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . 918,545 1,068,653 10,036 10,934 Securities sold under repurchase agreements . . . . . . . . . . . . . . . . . . . Other borrowings . . . . . . . . . . . . . . . . . Junior subordinated interest deferrable debentures . . . . . . . . . . . . . . . . . . . . Total interest bearing liabilities . . . . . . . 267,439 627,024 2,432 12,413 1.09 1.02 0.91 1.98 946,231 1,055,090 314,876 923,729 145,234 6,315,271 6,435 58,629 4.43 0.93 % 160,416 6,673,697 6,330 6,766 2,415 17,404 6,989 52,668 0.67 0.64 0.77 1.88 1,074,199 1,097,240 402,396 891,611 4.36 0.79 % 160,416 6,856,325 4,956 4,780 6,617 10,978 5,392 38,931 5.27 % 3.29 2.08 4.10 0.74 3.97 % 0.19 % 0.46 0.44 1.64 1.23 3.36 0.57 % Non-interest bearing liabilities: Demand Deposits . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . Shareholders’ equity . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . 3,517,455 147,604 2,056,330 $ 12,036,660 3,366,040 157,907 1,923,900 $ 12,121,544 3,230,708 107,952 1,825,935 $ 12,020,920 Net interest income . . . . . . . . Net yield on interest earning assets . . . . . . . . . . . . . . . . . $ 433,772 $ 413,154 $ 376,205 4.20 % 3.60 % 3.34 % 83 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 RUDOLPH M. MILES Investments LARRY NORTON Investments ROBERTO R. RESENDEZ Owner Cattle Ranching and Investments ANTONIO R. SANCHEZ, JR. Chairman of the Board Sanchez Oil & Gas Corporation Investments 84 (This page has been left blank intentionally) (This page has been left blank intentionally) 

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