International Bancshares Corp.
Annual Report 2023

Plain-text annual report

A N N U A L R 2 0 2 P O R T E 3 ★★ 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 Loop 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 Service Center 2416 Cee Gee (210) 821-4700 8770 Tesoro (210) 821-4700 San Antonio 130 East Travis (210) 518-2520 5029 Broadway (210) 518-2523 6630 Callaghan (210) 639-2960 2201 NW Military Dr. (210) 366-0617 12400 Hwy. 281 North (210) 369-2900 16339 Huebner Rd. (210) 369-2974 8650 Fredericksburg (210) 930-9811 1500 NE Lp. 410 (210) 281-2400 18750 Stone Oak Pkwy (210) 496-6111 5300 Walzem Road (210) 564-2300 11831 Bandera Road (210) 369-2980 3119 SE Military Drive (210) 354-6980 327 SW Loop 410 (210) 930-9825 938 SE Military Drive (210) 930-9815 11002 Culebra (210) 930-9850 Marble Falls 2401 Hwy. 281 North (830) 693-4301 San Marcos 1081 Wonder World Dr. (512) 353-1011 8203 S. Kirkwood (713) 285-2162 1001 McKinney Ste. 150 (713) 285-2140 3200 Woodridge, Ste. 1350 (713) 285-2255 3939 Montrose, Ste. W (713) 285-2166 1545 Eldridge Parkway (713) 285-2042 Sugarland 10570 State Hwy 6 (713) 285-2199 Katy 544 West Grand Parkway (713) 285-2037 Eagle Pass 2395 E. Main Street (830) 773-2313 2538 E. Main Street (830) 773-2313 439 E. Main Street (830) 773-2313 2305 Del Rio Blvd. (830) 773-2313 455 S. Bibb Ave. Ste. 502 (830) 773-2313 2135 East Main Street (830) 773-4826 Del Rio 2410 Dodson St. (830) 775-4265 1507 Veterans Blvd (830) 775-4265 2205 Veterans Blvd, Suite E9 (830) 775-4265 Luling 200 S. Pecan St. (830) 875-2445 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 North (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 Commerce Bank 5800 San Dario Laredo, Texas 78041 (956) 724-1616 200 Veterans Blvd (830) 775-4265 Austin 500 West 5th St. (512) 397-4506 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 4025 S. FM 620 (512) 320-9575 Round Rock 1850 Gattis School Rd. (512) 397-4521 First Equity 9606 N. Mopac Expressway Ste 100 (512) 346-8892 Cedar Park 301 W. Whitestone Blvd (512) 397-4552 2120 Saunders (956) 724-1616 1200 Welby Court (956) 724-1616 International Bank of Commerce, Zapata 908 N. US Highway 83 Zapata, TX 78076 (956) 765-8361 Roma 1702 E. 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 International Bank of Commerce, Brownsville 1600 Ruben Torres Blvd Brownsville, TX 78526-1831 (956) 547-1000 Brownsville 1623 Central Blvd. (956) 547-1000 4520A E. 14th St. (956) 547-1300 79 E. Alton Gloor Blvd (956) 547-1361 2370 N. Expressway (956) 547-1380 630 E. Elizabeth St. (956) 547-1353 3600 W. Alton Gloor Blvd. (956) 547-1390 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 820 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 West Expressway 83 (956) 630-9350 South Padre Island 911 Padre Blvd. (956) 761-6156 Port Isabel 1401 W. Hwy. 100 (956) 943-2108 Alamo 1421 West Frontage Rd. (956) 688-3645 Alton 215 West Main 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 Penitas 1705 Expressway 83 (956) 630-9347 Harlingen 501 S. Dixieland Rd. (956) 428-6902 321 S. 77th Sunshine Strip (956) 428-6454 1801 W. Lincoln (956) 547-1432 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 International Bank of Commerce, Oklahoma 3817 NW Expressway, Suite 100 Oklahoma City, Ok (405) 775-8001 Ardmore 2302 12th Ave. (580) 223-0345 Broken Arrow 6412 S. Elm Pl. (918) 497-2492 8112 Garnett Rd. (918) 497-2840 Chickasha 628 W. Grand Ave. (405) 775-8052 Claremore 1050 N. Lynn Riggs Blvd. (918) 497-2456 Edmond 1812 E 15th St. (405) 775-8061 421 S. Santa Fe Ave. (405) 775-8055 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) 497-2400 1 E. 5th St. (918) 497-2499 8202 E. 71st St (918) 497-2454 5302 E. Skelly Dr. (918) 497-2453 Chandler 3108 E. 1st St. (405) 258-2351 Oklahoma City 100 W. Park Ave. (405) 775-8093 10500 S. Pennsylvania Ave (405) 775-8058 2301 N. Portland Ave. (405) 841-2116 12241 N. May Ave. (405) 775-8059 4902 N. Western Ave. (405) 775-8054 14001 N. McArthur Blvd (405) 775-1710 Lawton 2101 W. Gore (580) 355-0253 6425 NW Cache Rd. (580) 250-4311 Miami 2520 N. Main (918) 542-4411 Midwest City 2200 S. Douglas Blvd. (405) 775-8057 Sapulpa 911 E. Taft St. (918) 497-2458 Shawnee 2513 N. Harrison Ave. (405) 775-8067 Sulphur 2009 W. Broadway Ave. (580) 622-3118 Bethany 7723 NW 23rd St. (405) 775-8063 Guthrie 120 N. Division St. (405) 775-8064 Moore 901 SW 19th (405) 775-1720 Pauls Valley 700 W. Grant Ave. (405) 238-7318 Purcell 430 W. Lincoln St. (405) 775-8094 Dallas, TX 3800 Maple Ave. Ste. 100 (469) 357-3805 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 Sand Springs 3402 State Hwy. 97 (918) 497-2459 Stillwater 1900 N. Perkins Rd. (405) 372-0889 Owasso 9350 N. Garnett (918) 497-2835 Norman 1461 24th Ave. (405) 775-8069 Lindsay 209 E. Cherokee (405) 756-4494 Bixby 11886 S. Memorial (918) 497-2855 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 its other subsidiaries. The information that follows may contain forward-looking statements, which involve various risks and uncertainties, including those identified in Item 1A (Risk Factors) of our Annual Report on Form 10-K for the year ended December 31, 2023, and are qualified as indicated under “Cautionary Notice Regarding Forward-Looking Information” 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, 2023. 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 STATEMENT OF CONDITION Assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,066,189 Investment securities available- 2023 AS OF OR FOR THE YEARS ENDED DECEMBER 31, 2021 (Dollars in Thousands, Except Per Share Data) 2020 2022 2019 $ 15,501,476 $ 16,046,236 $ 14,029,467 $ 12,112,894 for-sale . . . . . . . . . . . . . . . . . . . . . . . Net loans . . . . . . . . . . . . . . . . . . . . . . . Deposits . . . . . . . . . . . . . . . . . . . . . . . . Other borrowed funds . . . . . . . . . . . . Junior subordinated deferrable interest debentures . . . . . . . . . . . . . . Shareholders’ equity. . . . . . . . . . . . . . INCOME STATEMENT 4,822,341 7,901,892 11,824,554 10,745 4,417,796 7,304,631 12,660,007 10,944 4,213,920 7,098,777 12,617,877 436,138 3,080,768 7,432,695 10,721,860 436,327 3,378,923 6,834,668 8,826,034 626,511 108,868 2,447,774 134,642 2,044,759 134,642 2,308,481 134,642 2,177,998 134,642 2,118,053 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 800,162 136,661 663,501 34,576 169,941 275,354 523,512 111,744 411,768 shareholders . . . . . . . . . . . . . . . . . . . $ 411,768 Per common share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . $ Diluted . . . . . . . . . . . . . . . . . . . . . . . $ 6.63 6.62 $ $ $ $ 525,781 38,156 487,625 21,651 187,134 270,469 382,639 82,407 300,232 300,232 4.79 4.78 $ $ $ $ 398,103 26,831 371,272 7,955 222,326 263,316 322,327 68,405 253,922 $ 427,008 $ 39,119 387,889 45,379 150,579 281,331 211,758 44,439 167,319 492,401 58,629 433,772 18,843 154,826 309,801 259,954 54,850 205,104 253,922 $ 167,319 $ 205,104 4.01 4.00 $ $ 2.63 $ 2.62 $ 3.13 3.12 1 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management’s Discussion and Analysis of Financial Condition and Results of Operations 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, 2023. The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2023, 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 those 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 our ability to retain or access deposits due to changes in public confidence in the banking system and the potential threat of bank-run contagion fueled by, among other factors, economic instability, inflationary pressures, the public’s increased exposure to social media, and the rapid speed at which communication and coordination via social media can occur. • 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 United States-Mexico-Canada Agreement and the possible imposition of tariffs on imported goods. • Political instability in the United States or Mexico. • General instability of economic and political conditions in the United States, including inflationary pressures, increased interest rates, economic slowdown or recession, and escalating geopolitical tensions. 2 • The reduction of deposits from nonresident alien individuals due to the Internal Revenue Service rules requiring U.S. financial institutions to report deposit interest payments made to such individuals. • The loss of senior management or operating personnel. • The timing, impact, and other uncertainties of the potential future acquisitions, as well as our ability to maintain our current branch network and enter new markets to capitalize on growth opportunities. • Changes in estimates of future reserve requirements based upon periodic review thereof under relevant regulatory and accounting requirements. • Additions to our allowance for credit loss 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 cybersecurity risks, could subject us to increased operating costs, litigation, and other liabilities. • Acts of war or terrorism. • Natural disasters or other adverse external events such as pandemics or epidemics. • 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 (“PCAOB”), the Financial Accounting Standards Board (“FASB”) 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 any supervisory and enforcement efforts by the CFPB related to its unfair, deceptive, or abusive acts or practices (“UDAAP”) authority concerning fees charged by financial institutions and Regulation E, which prohibits 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. • Monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board (“FRB”). • The reduction of income and possible increase in required capital levels related to the adoption of legislation 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 the Dodd-Frank Act. • 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. 3 Overview We are headquartered in Laredo, Texas, with 166 facilities and 256 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 interest 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 their needs and servicing the sales arising from those discussions on a long-term basis. Our Subsidiary Banks have various compensation plans, including incentive- based compensation, for fairly compensating employees. Our Subsidiary Banks also have a robust process in place to review sales that support the incentive-based compensation plan to monitor the quality of the sales and identify any significant irregularities, a process that has been in place for many years. One of our primary goals is to grow net interest income and non-interest income while adequately managing credit risk, interest rate risk and expenses. Effective management of capital is one of our critical objectives. A key measure of the performance of a banking institution is the return on average common equity (“ROE”). Our ROE for the year ended December 31, 2023 was 15.41% as compared to 12.52% for the year ended December 31, 2022. We are highly active in facilitating trade along the United States border with Mexico. We do a significant 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. 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 of our long-term profitability. It has been a constant focus of ours for many years and is especially critical during periods of economic uncertainty. As a result, we have achieved a decrease of approximately 11.1% or $34.4 million, before tax, in non-interest expense over the four-year period ended December 31, 2023, primarily driven by decreases in our employee compensation and benefit plan expenses, professional fees, and other general operating expenses with the ultimate goal of ensuring that we align our workforce and operating expenses with our revenue streams. Future economic conditions remain uncertain and the impact of those conditions on our business also remains uncertain. Our business depends on the willingness and ability of our customers to conduct banking and other financial transactions. Our revenue streams, including service charges on deposits and banking and non-banking service charges and fees (ATM and interchange income), have been impacted and may continue to be impacted in the future if economic conditions do not improve. Expense control has been a long-time focus and essential element to our long-term profitability. We have kept that focus in mind as we continue to look at operations, create efficiencies, and institute cost-control protocols at all levels. We will continue to closely monitor our efficiency ratio, a measure of non-interest expense to net interest income plus non-interest income and our overhead burden ratio, a ratio of our operating expenses against total assets. We use these measures in determining if we are accomplishing our long-term goals of controlling our costs in order to provide superior returns to our shareholders. 4 Results of Operations Summary Consolidated Statements of Condition Information December 31, 2023 December 31, 2022 Percent Increase (Decrease) Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Net loans . . . . . . . . . . . . . . . . . . . . . . . . . Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . Securities sold under repurchase agreements . . . . . . . . . . . . . . . . . . . . . . Other borrowed funds . . . . . . . . . . . . . . . Junior subordinated deferrable interest debentures . . . . . . . . . . . . . . . . . . . . . . . Shareholders’ equity . . . . . . . . . . . . . . . . $ 15,066,189 7,901,892 11,824,554 (Dollars in Thousands) 15,501,476 7,304,631 12,660,007 530,416 10,745 108,868 2,447,774 431,191 10,944 134,642 2,044,759 Consolidated Statements of Income Information Year Ended December 31, 2023 Percent Increase (Decrease) Year Ended December 31, 2022 Year Ended December 31, 2021 (Dollars in Thousands, Except Per Share Data) 2023 vs. 2022 (2.8)% 8.2 (6.6) 23.0 (1.8) (19.1) 19.7 Percent Increase (Decrease) 2022 vs. 2021 Interest income . . . . . . . . . . . . . . . . $ Interest expense . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . Provision for probable loan losses . . Non-interest income . . . . . . . . . . . . Non-interest expense . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . Per common share: Basic . . . . . . . . . . . . . . . . . . . . . . $ Diluted . . . . . . . . . . . . . . . . . . . . . Net Income $ 800,162 136,661 663,501 34,576 169,941 275,354 411,768 525,781 38,156 487,625 21,651 187,134 270,469 300,232 52.2 % $ 258.2 36.1 59.7 (9.2) 1.8 37.1 398,103 26,831 371,272 7,955 222,326 263,316 253,922 $ 6.63 6.62 4.79 4.78 38.4 % $ 38.5 4.01 4.00 32.1 % 42.2 31.3 172.2 (15.8) 2.7 18.2 19.5 % 19.5 Net income for the year ended December 31, 2023 increased by 37.1% compared to the same period of 2022. Net income for the year ended December 31, 2023 was positively impacted by an increase in net interest income, which is primarily attributable to an increase in the size of our investment portfolio, the interest earned on funds held at the Federal Reserve Bank, and an increase in loan interest income, of which the latter two have increased consistently with FRB actions to raise interest rates in 2022 and 2023. Net income for the period has also been impacted by increases in interest expense, primarily driven by an increase in interest paid on deposits. We closely monitor rates paid on deposits to remain competitive in the current economic environment and retain deposits. The increase in those revenue streams coupled with the cost control initiatives to streamline operations and increase efficiency in recent years have been the primary drivers in achieving these results. Net income for the year ended December 31, 2022 compared to the same period of 2021 was also positively impacted by the same factors that impacted the twelve months ended December 31, 2023. Non-interest income for the year ended December 31, 2022 was also positively impacted by gains on the sale of some properties from our branch network as we continue to monitor and evaluate our retail branch footprint and align with customer activity. 5 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 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, 2022 Average Rate/Cost 2023 Average Rate/Cost 2021 Average Rate/Cost Assets Interest earning assets: Loan, net of unearned discounts: Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.13 % 5.57 5.69 % 3.49 Investment securities: Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.56 3.86 4.80 5.77 % 1.66 3.60 1.63 3.62 % 4.85 % 3.31 0.95 3.38 0.13 2.94 % 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.34 % 0.27 % 0.10 % 2.35 2.37 3.15 2.61 7.01 1.86 % 0.64 0.40 0.52 1.75 3.74 0.49 % 0.71 0.37 0.15 1.75 2.07 0.36 % 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 59.4% from 3.62% in 2022 to 5.77% in 2023, and the rates paid on average interest-bearing liabilities increased 279.6% from 0.49% in 2022 to 1.86% in 2023. The yield on average interest-earning assets increased 23.1% from 2.94% in 2021 to 3.62% in 2022, and the rates paid on average interest-bearing liabilities increased 36.1% from 0.36% in 2021 to 0.49% in 2022. 6 The following table analyzes the changes in net interest income during 2023, 2022, and 2021 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: Volume(1) 2023 compared to 2022 Net increase (decrease) due to Rate(1) (Dollars in Thousands) Total 2022 compared to 2021 Net increase (decrease) due to Rate(1) (Dollars in Thousands) Total Volume(1) Interest earned on: Loans, net of unearned discounts: Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,220 321 183,260 $ 214,480 $ (16,540) $ 58,771 $ 42,231 731 3,391 3,070 243 488 Investment securities: Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total interest income . . . . . . . . . . . . . . . . . . Interest incurred on: Savings and interest bearing demand 10,926 3,297 (31,924) 40,657 1,058 43,001 $ 13,840 $ 260,541 $ 274,381 $ (6,285) $ 133,963 $ 127,678 57,163 3,718 (4,371) 32,272 155 42,522 46,237 421 27,553 8,385 903 479 deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (489) 48,140 $ 47,651 $ 353 $ 8,223 $ 8,576 Time deposits: Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities sold under repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . Other borrowings . . . . . . . . . . . . . . . . . . . . . Junior subordinated deferrable interest debentures . . . . . . . . . . . . . . . . . . . . . . . . . Total interest expense . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . . (226) 499 (40) (6,591) 16,860 24,868 12,305 93 16,634 25,367 12,265 (6,498) (404) 205 (677) 378 (1,081) 583 98 (865) 1,776 (8) 1,874 (873) (703) 2,246 2,246 3,789 $ (7,550) $ 106,055 $ 98,505 $ (613) $ 11,938 $ 11,325 $ 21,390 $ 154,486 $ 175,876 $ (5,672) $ 122,025 $ 116,353 3,086 — (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. The increase in net interest income for the years ended December 31, 2023 and December 31, 2022 is primarily attributable to an increase in the size of our investment portfolio, the interest earned on funds held at the Federal Reserve Bank, and an increase in loan interest income, of which the latter two have increased in line with FRB actions to raise interest rates in 2022 and 2023. 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. Our 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 at least 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. 7 Allowance for Credit Losses The ACL increased 24.7% to $157,069,000 at December 31, 2023 from $125,972,000 at December 31, 2022. The provision for credit losses charged to expense increased $12,925,000 to $34,576,000 for the year ended December 31, 2023 from $21,651,000 for the same period in 2022. The following table summarizes loan balances at the end of each year and average loans outstanding during the year and the following ratios: nonaccrual loans to total loans, nonaccrual loans to the ACL, charge-offs to average loans, by loan type, and total charge-off to average total loans: Allowance for credit losses to total loans outstanding . . . . . . . . . . . . . . Allowance for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans, net of unearned discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nonaccrual loans to total loans outstanding . . . . . . . . . . . . . . . . . . . . . . Nonaccrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans, net of unearned discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for credit losses to nonaccrual loans . . . . . . . . . . . . . . . . . . . Allowance for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nonaccrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net charge-offs during the period to average loans outstanding: Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net charge-offs during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average amount outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate: other construction and land development . . . Net charge-offs during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average amount outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate: farmland and commercial . . . . . . . . . . . . . . . . Net charge-offs during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average amount outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate: multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net charge-offs during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average amount outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential: first lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . Net charge-offs during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average amount outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential: junior lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net charge-offs during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average amount outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net charge-offs during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average amount outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net charge-offs during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average amount outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net charge-offs during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average amount outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 2021 2022 (Dollars in Thousands) 1.70 % 110,374 $ $ 7,209,151 $ 125,972 $ 7,430,603 1.53 % 1.95 % 157,069 $ $ 8,058,961 0.59 % $ 47,170 $ 8,058,961 0.70 % $ 1,921 $ 7,209,151 $ 51,648 $ 7,430,603 0.03 % 332.98 % 157,069 47,170 243.90 % $ $ $ 125,972 51,648 $ 5,745.65 % 110,374 1,921 $ $ 0.64 % $ 9,664 $ 1,498,990 0.61 % $ 8,083 $ 1,669,233 $ 9,050 $ 1,472,338 0.48 % $ $ 2,143,245 $ $ 2,604,677 — % — $ — % — $ — % — $ 318,307 0.01 % 43 492,305 0.07 % 298 423,690 0.42 % 179 42,917 — % — $ 149,478 0.13 % $ 10,184 $ 7,673,609 — % — % 2 $ 2 $ 1,700,220 $ 1,802,210 0.01 % — % $ 364 16 $ 2,573,151 $ 2,541,380 — % — 401,551 0.09 % 373 433,262 — % 25 501,451 — % $ — $ $ 252,685 0.04 % $ 160 $ $ $ 448,816 0.01 % $ $ 28 $ $ 420,062 0.55 % $ 223 $ 40,399 — % $ — $ $ 138,262 0.13 % $ 9,024 $ 7,442,282 $ 9,479 $ 7,116,152 $ $ — % 1 123,524 0.44 % 176 39,890 0.12 % $ $ $ $ $ $ $ $ $ $ (1) The average balances for purposes of the above table are calculated on the basis of daily balances. 8 The ACL has been allocated based on the amount management has deemed to be reasonably necessary to provide for the credit losses incurred within the following categories of loans at the dates indicated and the percentage of loans to total loans in each category: 2023 Allowance Percent of total 2021 Allowance Percent of total 35,550 20.2 % $ 20.2 % $ 23,178 20.8 % At December 31, 2022 Allowance Percent of total (Dollars in Thousands) 26,728 Commercial . . . . . . . . . . . . . . . . . $ Commercial real estate: other construction and land development . . . . . . . . . . . . . . . Commercial real estate: 55,291 farmland & commercial . . . . . . 42,703 Commercial real estate: multifamily . . . . . . . . . . . . . . . . Residential : first lien . . . . . . . . . Residential: junior lien . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . 5,088 5,812 11,024 318 1,283 $ 157,069 26.0 34.7 44,684 36,474 26.7 34.6 35,390 35,654 4.7 5.9 5.7 0.6 2.2 3,794 4,759 8,284 281 968 100.0 % $ 125,972 4.1 5.7 5.9 0.6 2.2 3,291 4,073 7,754 272 762 100.0 % $ 110,374 23.1 37.6 4.0 5.6 6.4 0.6 1.9 100.0 % The ACL primarily consists of the aggregate ACL’s of the Subsidiary Banks. The ACL’s are established through charges to operations in the form of provisions for credit 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. The ACL is a reserve established through a provision for credit losses charged to expense, which represents management’s best estimate of credit losses within the existing portfolio of loans based on our internal ACL calculation. 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 credit 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 ACL can be made only on a subjective basis. Our management believes that the ACL at December 31, 2023 was adequate to absorb expected losses from loans and other financial instruments in the portfolio at that date. See Critical Accounting Policies on page 19. 9 Non-Interest Income Year Ended December 31, 2023 Year Ended December 31, 2022 Percent Increase (Decrease) 2023 vs. 2022 (Dollars in Thousands) Year Ended December 31, 2021 Percent Increase (Decrease) 2022 vs. 2021 Service charges on deposit accounts . . . . . . . . . . . . . . . . . . . $ 73,933 $ 72,781 1.6 % $ 66,205 9.9 % Other service charges, commissions and fees Banking . . . . . . . . . . . . . . . . . . Non-banking . . . . . . . . . . . . . . Investment securities transactions, net . . . . . . . . . . . . Other investments, net. . . . . . . . . Other income . . . . . . . . . . . . . . . . Total non-interest income . . . $ 57,923 9,546 (3) 9,601 18,941 169,941 $ 55,253 8,568 — 17,538 32,994 187,134 4.8 11.4 (100.0) (45.3) (42.6) (9.2)% $ 54,280 8,007 (16) 68,807 25,043 222,326 1.8 7.0 (100.0) (74.5) 31.7 (15.8)% Total non-interest income for the year ended December 31, 2023 decreased by 9.2% compared to the same period of 2022. The decrease is primarily attributed to losses recorded on merchant banking investments. Total non-interest income for the year ended December 31, 2022 decreased by 15.8% compared to 2021. Non-interest income was positively impacted due to an increase in service charges on deposit accounts as customer activity continues to increase from previously depressed levels resulting from the COVID-19 pandemic. Other income was positively impacted by gains on the sale of some properties from our branch network as we continue to monitor and evaluate our retail branch footprint and align with customer activity. The decrease in other investment income for the year ended December 31, 2022 compared to the same period of 2021 was primarily attributable to the sale of an equity interest in a merchant banking investment held by one of our non-bank subsidiaries in the second quarter of 2021. Non-Interest Expense Year Ended December 31, 2023 Year Ended December 31, 2022 Percent Increase (Decrease) 2023 vs. 2022 (Dollars in Thousands) Year Ended December 31, 2021 Percent Increase (Decrease) 2022 vs. 2021 127,722 25,654 5.3 % $ 0.7 123,480 26,176 3.4 % (2.0) Employee compensation and benefits . . . . . . . . . . . . . . . . . . . $ 134,441 $ Occupancy . . . . . . . . . . . . . . . . . . Depreciation of bank premises and equipment . . . . . . . . . . . . . Professional fees . . . . . . . . . . . . . Deposit insurance assessments . . Net expense, other real estate owned . . . . . . . . . . . . . . . . . . . . Advertising . . . . . . . . . . . . . . . . . Software and software maintenance . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . Total non-interest expense . . . $ 25,832 21,944 14,000 6,285 (3,983) 5,010 21,821 11,292 6,987 122 4,588 0.6 24.0 (10.0) (3,364.8) 9.2 25,028 7,890 4,389 5,073 4,037 20,046 51,779 275,354 $ 15,271 57,012 270,469 31.3 (9.2) 1.8 % $ 17,794 49,449 263,316 (12.8) 43.1 59.2 (97.6) 13.6 (14.2) 15.3 2.7 % Non-interest expense for the year ended December 31, 2023 increased by 1.8% compared to the same period of 2022. The increase in non-interest expense is primarily attributed to an increase in our employee compensation and 10 benefits cost as we continue to review and adjust our compensation and benefits programs to recognize performance and retain our workforce and an increase in software and software maintenance costs. Non-interest expense was positively impacted by a net gain recognized on the operations and sales of certain of our other real estate owned. Non-interest expense for the year ended December 31, 2022 increased by 2.7% compared to the same period of 2021. The increase is primarily attributable to an increase in our employee compensation and benefits costs. We continue to monitor and manage our controllable non-interest expenses through a variety of measures with the ultimate goal of ensuring we align non- interest expenses with our operations and revenue streams. 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 tables set forth the average yield, by contractual maturities of debt investment securities, at December 31, 2023, except for the totals, which reflect the weighted average yields. Actual maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties. Available for Sale Maturing Within one year Adjusted Yield After one but within five years Adjusted Yield After five but within ten years Adjusted Yield After ten years Adjusted Yield (Dollars in Thousands) Residential mortgage-backed securities . . Obligations of states and political subdivisions . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.85 % — 3.85 % 2.65 % — 2.65 % 2.41 % 4.13 2.43 % 2.88 % 4.14 2.92 % Held to Maturity Maturing Within one year Adjusted Yield After one but within five years Adjusted Yield After five but within ten years Adjusted Yield (Dollars in Thousands) After ten years Adjusted Yield Other securities . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.07 % 2.07 % 4.49 % 4.49 % — % — % — % — % Residential mortgage-backed securities are securities primarily issued by the Federal Home Loan Mortgage Corporation (“Freddie Mac”), Federal National Mortgage Association (“Fannie Mae”), and the Government National Mortgage Association (“Ginnie Mae”). Investments in residential mortgage-backed securities issued by Ginnie Mae are fully guaranteed by the U.S. government. Investments in residential mortgage-backed securities issued by Freddie Mac and Fannie Mae are not fully guaranteed by the U.S. government; however, 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. 11 Loans The following table shows the amounts of loans outstanding as of December 31, 2023, 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 After one but within five years Maturing After five but within fifteen years (Dollars in Thousands) $ 201,776 After fifteen years Total — $ 1,628,230 Commercial . . . . . . . . . . . . . . . . . . . . . . . $ 669,593 $ Commercial real estate: other 756,861 $ construction & land development . . . . 906,367 1,021,585 163,245 425 2,091,622 Commercial real estate: farmland & commercial . . . . . . . . . . . . . . . . . . . . . . Commercial real estate: multifamily . . . Residential: first lien . . . . . . . . . . . . . . . Residential: junior lien . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . 527,255 194,845 18,878 22,433 27,392 92,272 Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,459,035 2,118,232 177,797 114,678 14,146 17,482 43,619 $ 4,264,400 $ 147,958 7,230 55,759 327,348 212 6,228 909,756 $ 108 967 288,717 96,942 35 38,576 425,770 2,793,553 380,839 478,032 460,869 45,121 180,695 $ 8,058,961 Amount due after one year: 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ International Operations Interest sensitivity Fixed Rate Variable Rate (Dollars in Thousands) 204,909 $ 4,803 164,031 1,929 193,411 431,323 17,723 14,632 1,032,761 $ 753,728 1,180,452 2,102,267 184,065 265,743 7,113 6 73,791 4,567,165 On December 31, 2023, we had $180,695,000 (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 12 States or have credit enhancements in the form of guarantees from significant United States corporations. The composition of such loans as of December 31, 2023 and 2022 is presented below. Secured by certificates of deposit in United States banks . . . . . . . . . . . . . . . . . . Secured by United States real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Secured by other United States collateral (securities, gold, silver, etc.) . . . . . . . Unsecured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other (principally Mexico real estate) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . For the year ended December 31, 2023 Amount of Loans 2022 Amount of Loans (Dollars in Thousands) 95,570 $ 51,215 7,806 17,185 8,919 180,695 $ 90,887 36,048 6,125 21,108 5,807 159,975 $ $ Deposits The following table illustrates the average amounts of deposits for the twelve months ended December 31, 2023 and December 31, 2022. Included in the table is our estimate of the amount of total uninsured deposits as of December 31, 2023 and December 31, 2022. 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 Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total time, certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . Uninsured Deposits: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 2022 Average Balance Average Balance (Dollars in Thousands) $ $ $ $ 4,316,548 983,317 5,299,865 3,269,907 1,217,285 4,487,192 4,831,516 1,141,946 5,973,462 3,510,099 1,156,949 4,667,048 985,189 1,262,762 2,247,951 12,035,008 $ 1,020,388 1,139,209 2,159,597 12,800,107 3,998,626 $ 4,718,606 13 Scheduled maturities of time deposits in amounts of $250,000 or more at December 31, 2023 and an estimate of uninsured time deposits, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 576,507 345,608 238,869 41,186 1,202,170 Portion of time deposits that are uninsured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 749,169 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, 2023 were $11,824,554,000, a decrease of 6.6% from $12,660,007,000 at December 31, 2022. Deposits decreased as a result of increased general activities by customers, increased competition for deposits by the federal government, and aggressive competitors’ pricing. We have closely monitored the rates paid on deposits by competitors and have made changes to our pricing accordingly in order to remain competitive in an effort to retain deposits. Because of our significant levels of liquidity, we actively monitor deposit accounts, and in some cases determine that it is our best interest to allow some deposits to runoff because the rates being offered by our competitors are beyond levels we are willing to pay at this point in time. Those actions are carefully considered by our executive leadership team in order to manage our deposit base and the cost of our deposits. Our five separately chartered Subsidiary Banks within our holding company structure also allows us to work with customers to maximize their FDIC deposit insurance levels. Other Borrowed Funds Other borrowed funds include FHLB borrowings which are long-term borrowings issued by the FHLB of Dallas or 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, 2023, other borrowed funds totaled $10,745,000, a decrease of 1.8% from $10,944,000 at December 31, 2022. Return on Equity and Assets Certain key ratios for the years ended December 31, 2023, 2022, and 2021 follow (1): Years ended December 31, 2022 2021 2023 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 . . . . . . . . . 15.41 % 2.64 17.13 19.00 12.52 % 1.83 14.63 24.84 11.28 % 1.68 14.88 28.70 (1) The average balances for purposes of the above table are calculated on the basis of daily balances. 14 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 2023 and 2022 were 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. Our Subsidiary Banks also have an active account and significant collateral pledged to the Federal Reserve Bank’s Discount Window, which can also be relied upon to fund liquidity needs. We maintain a sizable, high quality investment portfolio to provide significant liquidity. These securities can be sold or sold under agreements to repurchase, to provide immediate liquidity. As in the past, we will continue to monitor the volatility and cost of funds in an attempt to match maturities of rate-sensitive assets and liabilities and respond accordingly to anticipated fluctuations in interest rates over reasonable periods of time. Asset/Liability Management Our funds management policy has as its primary focus the measurement and management of the Subsidiary Banks’ earnings at risk in the face of rising or falling interest rate forecasts. The earliest and most simplistic concept of earnings at risk measurement is the gap report, which is used to generate a rough estimate of the vulnerability of net interest income to changes in market rates as implied by the relative re-pricings of assets and liabilities. The gap report calculates the difference between the amounts of assets and liabilities re-pricing across a series of intervals in time, with emphasis typically placed on the one-year period. This difference, or gap, is usually expressed as a percentage of total assets. 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, 2023, 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 all 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. 15 INTEREST RATE SENSITIVITY (Dollars in Thousands) December 31, 2023 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 . . . . . . . . . . . . . . . . . . . $ 217,326 6,678,670 Loans, net of non-accruals . . . . . . . . . . . . . . $ 545,965 195,740 $ 3,905,625 383,329 $ 162,242 $ 4,831,158 8,011,791 754,052 Total earning assets . . . . . . . . . . . . . . . . . . . . $ 6,895,996 $ 741,705 $ 4,288,954 $ 916,294 $ 12,842,949 Cumulative earning assets . . . . . . . . . . . . . . $ 6,895,996 $ 7,637,701 $ 11,926,655 $ 12,842,949 Rate sensitive liabilities Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,120,951 Other interest bearing deposits . . . . . . . . . . . 4,368,532 Securities sold under repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . Other borrowed funds . . . . . . . . . . . . . . . . . . Junior subordinated deferrable interest 529,346 — debentures . . . . . . . . . . . . . . . . . . . . . . . . . . 108,868 $ 1,180,964 — $ 123,259 $ — 3 $ 2,425,177 4,368,532 — 1,070 — — — — — — 10,745 530,416 10,745 — 108,868 Total interest bearing liabilities . . . . . . . . . . $ 6,127,697 $ 1,182,034 $ 123,259 $ 10,748 $ 7,443,738 Cumulative sensitive liabilities. . . . . . . . . . . $ 6,127,697 $ 7,309,731 $ 7,432,990 $ 7,443,738 Repricing gap . . . . . . . . . . . . . . . . . . . . . . . . . $ 768,299 768,299 Cumulative repricing gap . . . . . . . . . . . . . . . Ratio of interest-sensitive assets to liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . Ratio of cumulative, interest-sensitive assets to liabilities . . . . . . . . . . . . . . . . . . . . 1.13 1.13 $ (440,329) $ 4,165,695 4,493,665 327,970 905,546 $ 5,399,211 $ 5,399,211 0.63 1.04 34.80 1.60 85.25 1.73 1.73 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, 2023, in decreasing rate scenarios of -100, 16 -200, -300 and -400 basis points and 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 minus 30%, 30%, 30%, and 40%, respectively, for the first 12-month period projected. At December 31, 2023, the most recent income simulations show that a rate shift of -100, -200, -300, -400, +100, +200, +300 and +400 basis points in interest rates up will vary projected net interest income for the coming 12-month period by -7.78%, -14.54%, -20.92%, -26.70% +6.48%, +13.14%, +19.80% and +26.51%, 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 of the Notes to Consolidated Financial Statements. At December 31, 2023, the aggregate amount legally available to be distributed to us from our Subsidiary Banks as dividends was approximately $1,229,500,000, assuming that each Subsidiary Bank continues to be classified as “well capitalized” under the applicable regulations in effect at December 31, 2023. The restricted capital (capital and surplus) of our Subsidiary Banks was approximately $1,377,321,000 as of December 31, 2023. The undivided profits of our Subsidiary Banks were approximately $1,710,438,000 as of December 31, 2023. At December 31, 2023, we had outstanding $10,745,000 in other borrowed funds and $108,868,000 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, 2023, shareholders’ equity was $2,447,774,000 compared to $2,044,759,000 at December 31, 2022, an increase of $403,015,000, or 19.7%. Shareholders’ equity increased primarily due to an increase in retained earnings and a decrease in accumulated other comprehensive loss as a result of market interest conditions and the impact of those conditions on the value of our investment portfolio. The accumulated other comprehensive loss is not included in the calculation of regulatory capital ratios. Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amount and classifications are also subject to qualitative judgements by regulators about components, risk-weighting and other factors. 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). All banks are required to have Tier 1 capital of at least 4 % of risk-weighted assets and total capital of 8% 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 22.39% and 21.04% and risk-weighted total capital ratios of 23.65% and 22.22% as of December 31, 2023 and 2022, respectively, which are well above the minimum regulatory requirements and exceed the well-capitalized ratios (see Note 19 of our Notes to Consolidated Financial Statements). 17 In July 2013, the 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 related capital provisions of the Dodd-Frank Act. Consistent with the Basel international framework, the rules include a minimum ratio of Common Equity Tier 1 (“CET1”) capital to risk-weighted assets of 4.5% and a CET1 capital conservation buffer of 2.5% of risk-weighted assets, effectively resulting in a minimum ratio of CET1 capital to risk-weighted assets of at least 7% upon full implementation. The 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. 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. We believe that as of December 31, 2023, we meet all fully phased-in capital adequacy requirements. In November 2017, the OCC, the FRB and the FDIC finalized a proposed rule that extends the current treatment under the regulatory capital rules for certain regulatory capital deductions and risk weights and certain minority-interest requirements, as they apply to banking organizations that are not subject to the advanced approaches capital rules. Effective January 1, 2018, the rule also pauses the full transition to the Basel III treatment of mortgage servicing assets, certain deferred tax assets, investments in the capital of unconsolidated financial institutions and minority interests. The agencies are also considering whether to make adjustments to the capital rules in response to CECL (the FASB Standard relating to current expected credit loss) and its potential impact on regulatory capital. Pursuant to rules issued by the federal bank regulatory agencies in February 2019 and March 2020, banking organizations were given options to phase in the adoption of CECL over a three-year transition period through December 31, 2022 or over a five-year transition period through December 31, 2024. Rather than electing to make one of the phase-in options, we immediately recognized the capital impact upon adopting the CECL accounting standards on January 1, 2020, which resulted in an increase in our allowance for probable loan losses and a one-time cumulative-effect adjustment to retained earnings upon adoption. In December 2017, the Basel Committee on Banking Supervision unveiled its final set of standards and reforms to the Basel III regulatory capital framework, commonly called “Basel III Endgame” or “Basel IV.” The Basel IV standards make changes to the capital framework first introduced as “Basel III” in 2010 and aim to reduce excessive variability in banks’ calculations of risk-weighted assets and risk-weighted capital ratios. Implementation of Basel IV began on January 1, 2023 and will continue over a five-year transition period by regulators in individual countries, including the U.S. federal bank regulatory agencies (after notice and comment). Junior Subordinated Deferrable Interest Debentures We currently have four 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”) each issued capital and common securities (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, 2023 and December 31, 2022, the principal amount of debentures outstanding totaled $108,868,000 and $134,642,000, 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 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. 18 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, 2023 and December 31, 2022, the total $108,868,000 and $134,642,000, 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, 2023: Junior Subordinated Deferrable Interest Debentures (in thousands) Repricing Frequency Interest Rate Interest Rate Index(1) Maturity Date Redemption Date(2) Optional Trust IX . . . . . . . . Trust X . . . . . . . . . Trust XI . . . . . . . . Trust XII . . . . . . . $ 41,238 Quarterly 21,021 Quarterly 25,990 Quarterly 20,619 Quarterly 108,868 7.28 % SOFR + 1.62 October 2036 7.29 % SOFR + 1.65 February 2037 July 2037 7.28 % SOFR + 1.62 7.09 % SOFR + 1.45 September 2037 October 2011 February 2012 July 2012 September 2012 (1) On July 1, 2023, the interest rate index on the Capital and Common Securities transitioned from U.S.-dollar London Interbank Offered Rate (“LIBOR”) to the Three-Month CME Term Secured Overnight Financing Rate (“SOFR”) with a 26 basis point spread adjustment (2) The Capital Securities may be redeemed in whole or in part on any interest payment date after the Optional Redemption Date. Critical Accounting Policies We have established various accounting policies which govern the application of accounting principles in the preparation of our consolidated financial statements. The significant accounting policies are described in the Notes to the Consolidated Financial Statements. Certain accounting policies involve significant subjective judgments and assumptions by management which have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. We consider our estimated ACL as a policy critical to the sound operations of our Subsidiary Banks. The ACL is deducted from the amortized cost of an instrument to present the net amount expected to be collected on the financial asset. Our ACL primarily consists of the aggregate ACL estimates of our Subsidiary Banks. The estimates are established through charges to operations in the form of charges to provisions for credit loss expense. Loan losses or recoveries are charged or credited directly to the ACL. The ACL of each Subsidiary Bank is maintained at a level considered appropriate by management, based on estimated current expected credit losses in the current loan portfolio, including information about past events, current conditions, and reasonable and supportable forecasts. The estimation of the ACL is based on a loss-rate methodology that measures lifetime losses on loan pools that have similar risk characteristics. Loans that do not have similar risk characteristics are evaluated on an individual basis. The segmentation of the loan portfolio into pools requires a balancing process between capturing similar risk characteristics and containing sufficient loss history to provide meaningful results. Our segmentation starts at the general loan category with further sub-segmentation based on collateral types that may be of meaningful size and/or may contain sufficient differences in risk characteristics based on management’s judgement that would warrant further segmentation. The general loan categories along with primary risk characteristics used in our calculation are as follows: 19 Commercial and industrial loans. This category includes loans extended to a diverse array of businesses for working capital or equipment purchases. These loans are mostly secured by the collateral pledged by the borrower that is directly related to the business activities of the company such as equipment, accounts receivable and inventory. The borrower’s abilities to generate revenues from equipment purchases, collect accounts receivable, and to turn inventory into sales are risk factors in the repayment of the loan. A small portion of this loan category is related to loans secured by oil and gas production and loans secured by aircraft. Construction and land development loans. This category includes the development of land from unimproved land to lot development for both residential and commercial use and vertical construction across residential and commercial real estate classes. These loans carry risk of repayment when projects incur cost overruns, have an increase in the price of construction materials, encounter zoning, entitlement, 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 mortgage rate risk and the practice by the mortgage industry of more restrictive underwriting standards, which inhibits the buyer from obtaining long term financing creating excessive housing and lot inventory in the market. Commercial real estate loans. This category includes loans secured by farmland, multifamily properties, owner- occupied commercial properties, and non-owner-occupied commercial properties. Owner-occupied commercial properties include warehouses often along the border for import/export operations, office space where the borrower is the primary tenant, restaurants and other single-tenant retail spaces. Non-owner-occupied commercial properties include hotels, retail centers, office and professional buildings, and leased warehouses. These loans carry 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 the market experiences an exit of a specific business type that is significant to the local economy, such as a manufacturing plant. 1-4 family mortgages. This category includes both first and second lien mortgages for the purpose of home purchases or refinancing of existing mortgage loans. A small portion of this loan category is related to home equity lines of credits, lots purchases, and home construction. Loan repayments may be affected by unemployment or underemployment and deteriorating market values of real estate. Consumer loans. This category includes deposit secured, vehicle secured, and unsecured loans, including overdrafts, made to individuals. Repayment is primarily affected by unemployment or underemployment. The loan pools are further broken down using a risk-based segmentation based on internal classifications for commercial loans and past due status for consumer mortgage loans. Non-mortgage consumer loans are evaluated as one segment. On a weekly basis, commercial 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 Watch List 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 Watch List report because of issues related to the analysis of the credit, credit documents, collateral, and/or payment history. Our internal Watch List report is segregated into the following categories: (i) Pass, (ii) Economic Monitoring, (iii) Special Review, (iv) Watch List—Pass, or (v) Watch List—Substandard, and (vi) Watch List—Doubtful. The loans placed in the Special Review category and lower rated credits reflect our opinion that the loans reflect potential weakness which require monitoring on a more frequent basis. Credits in those categories are reviewed and discussed on a regular basis, no less frequently than quarterly, 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 category and lower rated credits reflect our opinion that the credit contains weaknesses which represent a greater degree of risk, which warrant “extra attention.” Credits in this category 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 category are considered to be potentially 20 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. The loans placed in the Watch List—Doubtful category have shown defined weaknesses and it is likely, based on current information and events, that we will be unable to collect all principal and/or interest amounts contractually due. Watch List—Doubtful loans are placed on non-accrual when they are moved to that category. For the purposes of the ACL, in order to maintain segments with sufficient history for meaningful results, the credits in the Pass and Economic Monitoring categories are aggregated, the credits in the Special Review and Watch List— Pass credits are aggregated, and the credits in the Watch List—Substandard category remain in their own segment. For loans that are classified as Watch List—Doubtful, management evaluates these credits in accordance with ASC 310-10, “Receivables,” and, if deemed necessary, a specific reserve is allocated to the loan. 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 net realizable value of the fair value of the collateral if the loan is collateral dependent. Substantially all of our loans evaluated as Watch List—Doubtful under ASC 310-10 are measured using the fair value of collateral method. In rare 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. Within each collectively evaluated pool, the robustness of the lifetime historical loss-rate is evaluated and, if needed, is supplemented with peer loss rates through a model risk adjustment. Certain qualitative loss factors are then evaluated to incorporate management’s two-year reasonable and supportable forecast period followed by a reversion to the pool’s average lifetime loss-rate. Those qualitative loss factors are: (i) trends in portfolio volume and composition, (ii) volume and trends in classified loans, delinquencies, non-accruals and troubled loan modifications, (iii) concentration risk, (iv) trends in underlying collateral value, (v) changes in policies, procedures, and strategies, and (vi) economic conditions. Qualitative factors also include potential losses stemming from operational risk factors arising from fraud, natural disasters, pandemics, geopolitical events and large loans. The large loan operational risk factor was added beginning in the second quarter of 2023. Because of the magnitude of large loans, they pose a higher risk of default. Recognizing this risk and establishing an operational risk factor to capture that risk, is prudent action in the current economic environment. Large loans are usually part of a larger relationship with collateral that is pledged across the relationship. Defaulting on a larger loan may therefore jeopardize an entire collateral relationship. The current economic environment has created challenges for borrowers to service their debt. Increasing cap rates, elevated office vacancies, an upward trend in apartment vacancies and significant increases in interest rates are all contributing to the elevated risk in large loans. Should any of the factors considered by management in evaluating the adequacy of the ACL change, our estimate could also change, which could affect the level of future credit loss expense. We have elected to not measure an ACL for accrued interest receivable given our timely approach in identifying and writing off uncollectible accrued interest. An ACL for off-balance sheet exposure is derived from a projected usage rate of any unfunded commitment multiplied by the historical loss rate, plus model risk adjustment, if any, of the on- balance sheet loan pools. Our management continually reviews the ACL of the Subsidiary Banks using the amounts determined from the estimates established on specific doubtful loans, the estimate established on quantitative historical loss percentages, and the estimate based on qualitative current conditions and reasonable and supportable two-year forecasted data. Our methodology reverts to the average lifetime loss-rate beyond the forecast period when we can no longer develop reasonable and supportable forecasts. Should any of the factors considered by management in evaluating the adequacy of the estimate for current expected credit losses change, our estimate of current expected credit losses could also change, which could affect the level of future credit loss expense. While the calculation of our ACL utilizes management’s best judgment and all information reasonably available, the adequacy of the ACL is dependent on a variety of factors beyond our control, including, among other things, the performance of the entire loan portfolio, the economy, government actions, changes in interest rates and the view of regulatory authorities towards loan classifications. 21 Recent Accounting Standards Issued See Note 1—Summary of Significant Accounting Policies in our accompanying Notes to Consolidated Financial Statements for details of recently issued and recently adopted accounting standards and their impact on our consolidated financial statements. Common Stock and Dividends We have issued and outstanding 62,168,232 shares of $1.00 par value common stock held by approximately 1,763 holders of record at February 20, 2024. The book value of the common stock at December 31, 2023 was $41.96 per share compared with $34.93 per share at December 31, 2022. 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 2023 and 2022, as quoted on the NASDAQ National Market for each of the quarters in the two-year period ended December 31, 2023. 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 $51.24 per share at February 20, 2024. 2023: . . . . . . . . . . . . . . . . . . First quarter Second quarter Third quarter Fourth quarter 2022: . . . . . . . . . . . . . . . . . . First quarter Second quarter Third quarter Fourth quarter $ $ High Low $ $ 49.50 48.94 50.00 54.72 High 45.99 44.02 46.03 53.71 40.80 39.10 41.96 42.25 Low 38.92 38.00 38.58 42.58 We paid cash dividends of $.63 per share on February 28, and August 23, 2023, respectively, to record holders of our common stock on February 15, and August 11, 2023, respectively. We paid cash dividends of $.60 per share on February 28, and August 29, 2022, respectively, to record holders of our common stock on February 15, and August 16, 2022, 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 19 of our Notes to Consolidated Financial Statements. 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 February 21, 2023, the Board of Directors extended and increased the repurchase program to purchase up to $124 million of common stock during the 12-month period commencing on March 15, 2023. On February 20, 2024, our Board of Directors authorized the renewal and increase of the repurchase program to purchase up to $150 million of common stock during the 12-month period commencing on March 15, 2024 upon the expiration of our current repurchase program on that date. Shares of common stock may be purchased from time to time on the open market or through privately negotiated transactions. Shares purchased in this program will be held in treasury for reissue for various corporate purposes, including employee compensation plans. During the fourth quarter of 2023, the Board of Directors adopted a Rule 10b-18 trading plan and a Rule 10b5-1 trading plan and intends to adopt additional Rule 10b-18 and Rule 10b5-1 trading plans, which will allow us to purchase shares of our common stock during certain open and blackout periods when we ordinarily would not be in the market due to trading restrictions in our insider trading policy. During the terms of both a Rule 10b-18 and a Rule 10b5-1 trading plan, purchases of common stock are automatic to the extent the conditions of the plan’s trading instructions are met. Shares purchased under these trading plans will be held in treasury for reissue for various corporate 22 purposes, including employee stock compensation plans. As of February 20, 2024, a total of 13,706,581 shares had been repurchased under all programs at a cost of $414,926,000. We are not obligated to purchase shares under our stock repurchase program outside of the Rule 10b-18 and Rule 10b5-1 trading plans. 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, 2023. Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of a Publicly- Announced Program October 1 – October 31, 2023 . . . . . . . . . . November 1 – November 30, 2023 . . . . . . December 1 – December 31, 2023 . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — $ 518 1,987 2,505 $ — 45.03 50.81 49.62 — — — — Approximate Dollar Value of Shares Available for Repurchase(1) $ 119,558,000 119,535,000 119,434,000 (1) The repurchase program was increased and extended on February 21, 2023 and allows for the repurchase of up to an additional $124,000,000 of treasury stock through March 15, 2024. Equity Compensation Plan Information The following table sets forth information as of December 31, 2023, with respect to our equity compensation plans: (A) Number of securities to be issued upon exercise of outstanding options, warrants and rights (B) Weighted average exercise price of outstanding options, warrants and rights (C) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column A) 383,865 383,865 $ $ 30.65 30.65 — — Plan Category Equity Compensation plans approved by security holders . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . 23 COMPARISON OF CUMULATIVE FIVE-YEAR TOTAL RETURN Stock Performance COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN $200 $150 $100 $50 2018 2019 2020 2021 2022 2023 International Bancshares Corporation S&P MidCap 400 Index S&P 400 Regional Banks Total Return To Shareholders (Includes reinvestment of dividends) Base Period 2018 2019 2020 INDEXED RETURNS December 31, 2021 2022 2023 Company / Index International Bancshares Corporation . . . . . . . . . . . . . . . . . . . . . S&P 400 Index . . . . . . . . . . . . . . . . . . . . S&P 400 Banks . . . . . . . . . . . . . . . . . . . 100 100 100 128.67 126.20 124.61 116.44 143.44 113.89 135.66 178.95 161.36 150.50 155.58 154.69 183.56 181.15 153.23 24 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of International Bancshares Corporation and its subsidiaries 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, 2023 and 2022, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, 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, 2023, 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 26, 2024 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 audit 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. 25 Allowance for Credit Losses As described in Note 4 of the consolidated financial statements, the Company established an allowance for credit losses totaling $157,069,000 as of December 31, 2023. The allowance for credit losses is derived from 1) a loss-rate methodology that measures lifetime losses on loan pools that have similar risk characteristics; and 2) estimated losses on individually evaluated loans that do not have similar risk characteristics. The segmentation of the loan portfolio into pools requires a balancing process between capturing similar risk characteristics and sufficient loss history to provide relevant results. Loan pools are further broken down using a risk-based segmentation based on internal classifications of credit quality. Within each loan pool, the lifetime historical loss-rate is evaluated and, if needed, is supplemented with peer loss rates through a model risk adjustment. Certain qualitative factors are applied at the loan pool level to incorporate management’s two-year forecast period followed by a reversion to the pool’s average lifetime loss-rate. Those qualitative factors include: (i) trends in portfolio volume and composition, (ii) volume and trends in classified loans, delinquencies, non-accruals and troubled loan modifications (TLM’s), (iii) concentration risk, (iv) trends in underlying collateral value, (v) changes in policies, procedures, and strategies, (vi) economic conditions, and (vii) operational and other risk factors to capture potential losses arising from fraud, natural disasters, pandemics, geopolitical events and large loans. We identified the qualitative factor component of the allowance for credit losses as a critical audit matter. Auditing management’s estimate of the qualitative factors required a high degree of auditor judgment due to the nature of the adjustments and the subjectivity in judgments applied by management in forming them. Our audit procedures related to the Company’s qualitative factors included, the following, among others: · We obtained an understanding of the relevant controls related to the allowance for credit losses, including the qualitative factors, and tested such controls for design and operating effectiveness, including controls related to management’s review of the qualitative factors and approval of the allowance for credit losses calculation. · We evaluated the appropriateness and consistency of management’s methods and assumptions used to determine qualitative factors by (1) evaluating management’s identification and quantification of qualitative factors; (2) testing the completeness and accuracy of data and information used in calculating the components of the qualitative factors; (3) evaluating the reasonableness, directional consistency, and magnitude of the quantification of the qualitative factors; and (4) reviewing subsequent events and considering their impact on judgments applied in forming the qualitative factor component of the allowance for credit losses as of the consolidated balance sheet date. We have served as the Company’s auditor since 2007. Austin, Texas February 26, 2024 26 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Condition December 31, 2023 and 2022 (Dollars in Thousands, Except Per Share Amounts) Assets Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment securities: Held to maturity debt securities (Market value of $3,400 on December 31, 2023 December 31, December 31, 2023 2022 $ 651,058 $ 2,087,724 and $3,400 on December 31, 2022) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,400 3,400 Available for sale debt securities (Amortized cost of $5,330,814 on December 31, 2023 and $5,018,996 on December 31, 2022). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities with readily determinable fair values. . . . . . . . . . . . . . . . . . . . . . . . . . Total investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less allowance for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash surrender value of life insurance policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,822,341 5,417 4,831,158 8,058,961 (157,069) 7,901,892 437,094 65,302 343,452 303,486 282,532 250,215 4,417,796 5,358 4,426,554 7,430,603 (125,972) 7,304,631 431,612 45,787 358,910 300,589 282,532 263,137 $ 15,066,189 $ 15,501,476 See accompanying notes to consolidated financial statements. 27 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Condition Continued December 31, 2023 and 2022 (Dollars in Thousands, Except Per Share Amounts) December 31, December 31, 2023 2022 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,030,845 $ 5,846,055 4,745,768 4,368,532 2,068,184 2,425,177 12,660,007 11,824,554 431,191 530,416 10,944 10,745 134,642 108,868 143,832 219,933 13,456,717 12,618,415 Shareholders’ equity: Common shares of $1.00 par value. Authorized 275,000,000 shares; issued 96,466,900 shares on December 31, 2023 and 96,420,456 shares on December 31, 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,467 155,511 3,029,088 (397,889) 2,883,177 96,420 154,061 2,695,567 (470,497) 2,475,551 Less cost of shares in treasury, 34,391,184 shares on December 31, 2023 and 34,278,617 on December 31, 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (430,792) (435,403) 2,447,774 2,044,759 $ 15,066,189 $ 15,501,476 See accompanying notes to consolidated financial statements. 28 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Income Years ended December 31, 2023, 2022 and 2021 (Dollars in Thousands, Except Per Share Amounts) Interest income: Loans, including fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment securities: Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense: Savings deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities sold under repurchase agreements . . . . . . . . . . . . . . . . . . . . . Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Junior subordinated deferrable interest debentures . . . . . . . . . . . . . . . . 2023 2022 2021 $ 620,048 $ 402,177 $ 359,215 132,151 6,259 41,704 800,162 60,337 53,158 14,760 283 8,123 74,988 2,541 46,075 525,781 12,686 11,157 2,495 6,781 5,037 34,331 1,483 3,074 398,103 4,110 11,655 621 7,654 2,791 Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136,661 38,156 26,831 Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 663,501 487,625 371,272 Credit loss expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,576 21,651 7,955 Net interest income after provision for credit losses . . . . . . . . . . . . . . 628,925 465,974 363,317 Non-interest income: Service charges on deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,933 72,781 66,205 Other service charges, commissions and fees Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment securities transactions, net . . . . . . . . . . . . . . . . . . . . . . . . . . Other investments income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,923 9,546 (3) 9,601 18,941 55,253 8,568 — 17,538 32,994 54,280 8,007 (16) 68,807 25,043 Total non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 169,941 $ 187,134 $ 222,326 See accompanying notes to consolidated financial statements. 29 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Income, continued Years ended December 31, 2023, 2022 and 2021 (Dollars in Thousands, Except Per Share Amounts) 2023 2022 2021 Non-interest expense: Employee compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation of bank premises and equipment . . . . . . . . . . . . . . . . . . . Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposit insurance assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net operations, other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Software and software maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 134,441 25,832 21,944 14,000 6,285 (3,983) 5,010 20,046 51,779 127,722 $ 25,654 21,821 11,292 6,987 122 4,588 15,271 57,012 123,480 26,176 25,028 7,890 4,389 5,073 4,037 17,794 49,449 Total non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275,354 270,469 263,316 Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 523,512 382,639 322,327 Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 111,744 82,407 68,405 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 411,768 $ 300,232 $ 253,922 Basic earnings per common share: Weighted average number of shares outstanding. . . . . . . . . . . . . . . . . . Net income per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,082,827 6.63 $ 62,658,414 $ 4.79 $ 63,352,737 4.01 Fully diluted earnings per common share: Weighted average number of shares outstanding. . . . . . . . . . . . . . . . . . Net income per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,221,601 6.62 $ 62,810,234 $ 4.78 $ 63,486,366 4.00 See accompanying notes to consolidated financial statements. 30 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Comprehensive Income Years ended December 31, 2023, 2022 and 2021 (Dollars in Thousands) Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive loss, net of tax: Net change in unrealized holding losses on securities available for sale arising during period (net of tax effects of $19,300, $(116,568), and $(14,040)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassification adjustment for losses on securities available for sale included in net income (net of tax effects of $1, $0, and $3) . . . . . . 2023 2022 2021 $ 411,768 $ 300,232 $ 253,922 72,606 (438,517) (52,818) 2 72,608 — (438,517) 13 (52,805) Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . $ 484,376 $ (138,285) $ 201,117 See accompanying notes to consolidated financial statements. 31 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Shareholders’ Equity Years ended December 31, 2023, 2022 and 2021 (in Thousands, except per share amounts) Balance at December 31, 2020 . . . . . . . . . $ Net Income . . . . . . . . . . . . . . . . . . . . Dividends: Cash ($1.15 per share) . . . . . . . . . . Purchase of treasury (17,984 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, 2021 . . . . . . . . . Net Income . . . . . . . . . . . . . . . . . . . . Dividends: Cash ($1.20 per share) . . . . . . . . . . Purchase of treasury (1,299,344 shares) . . . . . . . . . . . . . . . . . . . . . . Exercise of stock options . . . . . . . . . . . . . Stock compensation expense recognized in earnings . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive loss, net of tax: Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustments . . . . . . . . . . . . . . . . . Balance at December 31, 2022 . . . . . . . . . Net Income . . . . . . . . . . . . . . . . . . . . Dividends: Cash ($1.26 per share) . . . . . . . . . . Purchase of treasury (112,567 shares) Exercise of stock options . . . . . . . . . . . . . Stock compensation expense recognized in earnings . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive loss, net of tax: Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustments Balance at December 31, 2023 . . . . . . . . . Preferred Stock Shares Stock $ 96,241 — — 96,241 — — Number of Common Other Retained Comprehensive Treasury Surplus Earnings Income (Loss) $ 149,334 — $ 2,289,626 253,922 $ Stock 20,825 $ (378,028) $2,177,998 253,922 Total — — — — — — — — 110 — — — 110 — — — 2,304 506 (72,838) — — — — — — — — (716) — (72,838) (716) 2,414 — 506 — — — 96,351 — — — $ 96,351 — — $ 152,144 — — $ 2,470,710 300,232 $ — — — — — — 69 — — — 69 — — (75,375) — 1,468 449 — — — — — — 96,420 — — — $ 96,420 — — $ 154,061 — — $ 2,695,567 411,768 $ (52,805) (52,805) (31,980) $ (378,744) $2,308,481 300,232 — — — — — — — — (75,375) (52,048) — (52,048) 1,537 — 449 (438,517) (438,517) (470,497) $ (430,792) $2,044,759 411,768 — — — — — — — — — 47 — — — 47 — — — 1,120 330 (78,247) — — — — — — — — (4,611) — (78,247) (4,611) 1,167 — 330 — — — 96,467 — $ 96,467 — $ 155,511 — $ 3,029,088 $ 72,608 72,608 (397,889) $ (435,403) $2,447,774 — See accompanying notes to consolidated financial statements. 32 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2023, 2022 and 2021 (Dollars in Thousands) Operating activities: 2023 2022 2021 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 411,768 $ 300,232 $ 253,922 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from settlements of claims . . . . . . . . . . . . . . . . . . . . . . . . . . Stock based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings from affiliates and other investments . . . . . . . . . . . . . . . . . . Deferred tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Increase) decrease in accrued interest receivable. . . . . . . . . . . . . . . . (Increase) decrease in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 34,576 2,538 21,944 (198) (7,370) (1,913) 6,901 3 (59) — 330 (983) 22,950 (19,515) (7,297) 10,757 21,651 1,627 21,821 (3,110) (2,096) (1,785) 13,907 — 721 — 449 (15,894) 10,619 (15,194) 12,975 42,018 7,955 2,655 25,028 601 (170) (702) 36,380 16 123 2,870 506 (68,034) 3,542 7,288 25,220 (5,519) Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . 474,432 387,941 291,681 Investing activities: Proceeds from maturities of securities . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sales and calls of available for sale securities. . . . . . . Purchases of available for sale securities . . . . . . . . . . . . . . . . . . . . . . . Principal collected on mortgage backed securities . . . . . . . . . . . . . . . Net (increase) decrease 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 . . . . . . . . . . . . . . . . . . 51,167 2,045 (1,079,215) 629,194 (632,976) (31,256) 12,175 (27,497) 269 8,888 2,200 800 (1,455,249) 756,092 (228,340) (79,669) 8,886 (19,213) 13,496 8,969 1,200 5,890 (2,856,135) 1,612,679 309,575 (61,783) 63,356 (10,390) 11,446 8,273 Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . (1,067,206) (992,028) (915,889) See accompanying notes to consolidated financial statements. 33 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (Continued) Years ended December 31, 2023, 2022 and 2021 (Dollars in Thousands) 2023 2022 2021 Financing activities: Net (decrease) 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 in other borrowed funds . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . Redemption of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from stock transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments of cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (815,210) $ 155,220 (377,236) 356,993 (120,619) (8,481) 99,225 (199) (425,194) — (52,048) 1,537 (75,375) 7,529 $ 1,122,712 738,043 35,262 11,524 (189) — (716) 2,414 (72,838) (25,774) (4,611) 1,167 (78,247) Net cash (used in) provided by financing activities. . . . . . . . . . . . . . . . . . (843,892) (517,431) 1,836,212 (Decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . (1,436,666) (1,121,518) 1,212,004 Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . 2,087,724 3,209,242 1,997,238 Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 651,058 $ 2,087,724 $ 3,209,242 Supplemental cash flow information: Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. Non-cash investing and financing activities: Purchases of available-for-sale securities not yet settled. . . . . . . . . . . . . . . Net transfers from loans to other real estate owned. . . . . . . . . . . . . . . . . . . Net transfers from bank premises and equipment to other assets . . . . . . . . $ $ 117,936 $ 69,799 36,355 $ 22,118 29,007 47,394 — $ 600 — 80,000 $ 835 2,476 — 16,388 — See accompanying notes to consolidated financial statements. 34 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, IBC Capital Corporation and Diamond Beach Holdings, LLC. 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 highly 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 credit losses (“ACL”). 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 (loss) and in shareholders’ equity as accumulated other comprehensive income (loss) until realized. Unrealized gains and losses related to equity securities with readily determinable fair values are included in net income. Available-for-sale and held-to-maturity debt securities in an unrealized loss position are evaluated for the underlying cause of the loss. In the event that the deterioration in value is attributable to credit related reasons, then the amount of credit- related impairment would be recorded as a charge to our ACL with subsequent changes in the amount of impairment, up or down, also recorded through our ACL. The exception to this process will occur if we intend to sell an impaired available- 35 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) for-sale debt security or if we will more likely than not be required to sell a credit impaired available-for-sale debt security prior to the value recovering to the security’s amortized cost. In those situations, the entire credit-related impairment amount would be required to be recognized in earnings. We have evaluated the debt securities classified as available-for- sale and held-to-maturity at December 31, 2023 and have determined that no debt securities in an unrealized loss position are arising from credit related reasons and have therefore not recorded any allowances for debt securities in our ACL for the periods. We did not maintain any trading securities during the three-year period ended December 31, 2023. Mortgage-backed securities held at December 31, 2023 and 2022 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 Freddie Mac, Fannie Mae, 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 Equity securities with readily determinable fair values at December 31, 2023 and December 31, 2022 consist primarily of Community Reinvestment Act funds. Unrealized gains and losses on the equity securities are recognized in net income. Provision and Allowance for Credit Losses Our ACL is based on an expected credit loss model that recognizes credit losses over the life of a financial asset. Expected credit losses capture historical information, current conditions, and reasonable and supportable forecasts of future conditions. The ACL is deducted from the amortized cost of an instrument to present the net amount expected to be collected on the financial asset. Our ACL primarily consists of the aggregate ACL estimates of our Subsidiary Banks. The estimates are established through charges to operations in the form of charges to provisions for credit loss expense. Loan losses or recoveries are charged or credited directly to the ACL. The ACL of each Subsidiary Bank is maintained at a level considered appropriate by management, based on estimated current expected credit losses in the current loan portfolio, including information about past events, current conditions, and reasonable and supportable forecasts. Our management continually reviews the ACL of the Subsidiary Banks using the amounts determined from the estimates established on specific doubtful loans, the estimate established on quantitative historical loss percentages, and 36 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) the estimate based on qualitative current conditions and reasonable and supportable two-year forecasted data. Our methodology reverts to the average lifetime loss-rate beyond the forecast period when we can no longer develop reasonable and supportable forecasts. Should any of the factors considered by management in evaluating the adequacy of the estimate for current expected credit losses change, our estimate of current expected credit losses could also change, which could affect the level of future credit loss expense. While the calculation of our ACL utilizes management’s best judgment and all information reasonably available, the adequacy of the ACL is dependent on a variety of factors beyond our control, including, among other things, the performance of the entire loan portfolio, the economy, government actions, changes in interest rates, and the view of regulatory authorities towards loan classifications. We believe that the allowance for probable loan losses is adequate. The Subsidiary Banks charge-off that portion of any loan which management considers to represent a loss as well as that portion of any other loan which is classified as a “loss” by bank examiners. Commercial, financial, and agricultural or real estate loans are generally considered by management to represent a loss, in whole or part, (i) when an exposure beyond any collateral coverage is apparent, (ii) when no further collection of the portion of the loan so exposed is anticipated based on actual results, (iii) when the credit enhancements, if any, are not adequate, and (iv) when the borrower’s financial condition would indicate so. Generally, unsecured consumer loans are charged-off when 90 days past due. Loans Loans are reported at the principal balance outstanding, net of unearned discounts. Interest income on loans is reported on an accrual basis. Loan fees and costs associated with originating the loans are accreted or amortized over the life of the loan using the interest method. We originate mortgage loans that may subsequently be sold to an unaffiliated third party. The loans are not securitized and if sold, are sold without recourse. Loans held for sale are carried at cost and the principal amount outstanding is not significant to the consolidated financial statements. Doubtful Loans Doubtful loans are those loans where it is probable that all amounts due according to contractual terms of the loan agreement will not be collected. Doubtful 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 our doubtful 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. 37 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Troubled Loan Modifications We adopted the provisions of Accounting Standards Update No. 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) on January 1, 2023. ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings (“TDR”) in existing guidance and enhances disclosure requirements for certain loan refinancings and restructurings when a borrower is experiencing financial difficulty. We occasionally provide modifications to borrowers experiencing financial difficulties. Modifications may include certain concessions that we evaluate under ASU 2022-02 to determine the need for disclosure. Concessions to borrowers experiencing financial difficulties that would require disclosure include principal forgiveness, term extension, an other- than-insignificant payment delay, an interest rate reduction or a combination of these concessions, collectively referred to as troubled loan modifications. In accordance with the provisions of ASU 2022-02, we ceased recognition of TDR loans after adopting ASU 2022-02 on January 1, 2023. Prior to the adoption of ASU 2022-02, TDR loans were those loans where, for reasons related to a borrower’s difficulty to repay a loan, we granted a concession to the borrower that we would not have normally considered in the normal course of business. Short term-deferrals were not considered a TDR. The terms that may have been modified included 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 a doubtful loan and included in the doubtful 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 doubtful. 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. 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 ACL, if necessary. Any subsequent write-downs are charged against other non-interest expense through a valuation allowance. Other real estate owned totaled approximately $26,728,000 and $30,144,000 at December 31, 2023 and 2022, 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 ACL, if necessary. Repossessed assets are included in other assets on the consolidated financial statements and totaled approximately $236,000 and $4,637,000 at December 31, 2023 and 2022, respectively. 38 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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 (Topic 842).” 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. Revenue Recognition Our revenue is primarily comprised of net interest income on financial assets and liabilities, which are excluded from the scope of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” 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 accounting standards update. Income Taxes Deferred income tax assets and liabilities are determined using the asset and liability method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. We file a consolidated federal income tax return with our subsidiaries. Recognition of deferred tax assets is based on management’s assessment that the benefit related to certain temporary differences, tax operating loss carry forwards, and tax credits are more likely than not to be realized. A valuation allowance is recorded for the amount of the deferred tax items for which it is more likely than not that the tax benefits will not be realized. We evaluate uncertain tax positions at the end of each reporting period. We may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefit recognized in the financial statements from any such a position is measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of December 31, 2023 and 2022, 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, 2023, 2022, and 2021, 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 2020. 39 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Stock Options and Stock Appreciation Rights Compensation expense for stock-based 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 and stock appreciation rights granted was estimated using a Black-Scholes-Merton pricing model. These models were developed for use in estimating the fair value of publicly traded options and stock appreciation rights that have no vesting restrictions and are fully transferable. Additionally, these models require the input of highly subjective assumptions. Because our employee stock options and stock appreciation rights have characteristics significantly different from those of publicly traded options and appreciation rights, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the Black-Scholes-Merton pricing models do not necessarily provide a reliable single measure of the fair value of our stock options and stock appreciation rights. 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, 2023, 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, 2023, we have determined that no impairment of identified intangibles exists. Identified intangible assets with definite useful lives are amortized on an accelerated basis over their estimated life. See Note 6— Goodwill and Other Intangible Assets. Impairment of Long-Lived Assets Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying value of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying value of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying value of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the statement of condition and reported at the lower of the carrying value or fair value less costs to sell and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the statement of condition. Consolidated Statements of Cash Flows For purposes of the consolidated statements of cash flows, we consider all short-term investments with a maturity at date of purchase of three months or less to be cash equivalents. Also, we report transactions related to deposits and loans to customers on a net basis. 40 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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. New Accounting Standards 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 did not have a significant impact on our consolidated financial statements. In March 2022, the FASB issued Accounting Standards Update No. 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”). ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings in existing guidance and enhances disclosure requirements for certain loan refinancings and restructurings when a borrower is experiencing financial difficulty. Additionally, ASU 2022-02 requires entities to disclose current period gross write-offs by year of origination for financing receivables and net 41 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) investments in leases. We adopted the provisions of ASU 2022-02 on January 1, 2023 and it did not have a significant impact on our consolidated financial statements. In March 2023, the FASB issued Accounting Standards Update No. 2023-02, Investments in Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. ASU 2023-02 modifies existing guidance to allow for use of the proportional amortization method for all tax equity investments, regardless of the tax credit program from which the income tax credits are received if certain conditions are met. ASU 2023-02 also requires specific disclosures of all investments that generate income tax credits and other income tax benefits from a tax credit program for which an entity has elected to apply the proportional amortization method in annual and interim periods. The provisions of ASU 2023-02 are effective for fiscal years beginning after December 15, 2023 and we do not anticipate that the adoption of ASU 2023-02 will have a significant impact on our consolidated financial statements. In October 2023, the FASB issued Accounting Standards Update No. 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. ASU 2023-06 modifies the disclosure and presentation requirements of various topics to align disclosures with SEC Release No. 33-10532, Disclosure Update and Simplification, which was issued in August 2018. ASU 2023-06 also provides clarifications or technical corrections of certain current disclosure requirements. The provisions of ASU 2023-06 are effective on the date in which the SEC removal of the related disclosure from Regulation S-X or Regulation S-K, with early adoption prohibited. The adoption of ASU 2023-06 is not expected to have a significant impact on our consolidated financial statements. In November 2023, the FASB issued Accounting Standards Update No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. ASU 2023-07 expands segment disclosure requirements for public entities, primarily through enhanced disclosures about significant segment expenses and other segment items on an annual and interim basis. ASU 2023-07 also requires full segment disclosures, currently only required in annual periods, to be included in interim periods as well. ASU 2023-078 is effective for fiscal years beginning after December 15, 2024. The adoption of ASU 2023-07 is not expected to have a significant impact on our consolidated financial statements. In December 2023, the FASB issued Accounting Standards Update No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, an Amendment. ASU 2023-09 is intended to enhance transparency and decisions usefulness of income tax disclosures. ASU 2023-09 requires that public entities disclose specific categories in the annual rate reconciliation and provides additional guidance for reconciling items that meet a quantitative threshold. Explanation of individual reconciling items is also required. ASU 2023-09 also requires certain disclosures regarding income taxes paid, including disaggregation of taxes paid (net of refunds) by federal, state and foreign taxes, including disaggregation by individual jurisdictions in which taxes paid (net of refunds), exceed a quantitative threshold. The provisions of ASU 2023-09 are effective for annual periods beginning after December 15, 2024. The adoption of ASU 2023-09 is not expected to have a significant impact on our consolidated financial statements. (2) Investment Securities, Equity Securities with Readily Determinable Fair Values and Other Investments Available-for-sale and held-to-maturity debt securities in an unrealized loss position are evaluated for the underlying cause of the loss. In the event that the deterioration in value is attributable to credit related reasons, then the amount of credit-related impairment would be recorded as a charge to our ACL with subsequent changes in the amount of impairment, up or down, also recorded through our ACL. The exception to this process will occur if we intend to sell an impaired available-for-sale debt security or if we will more likely than not be required to sell a credit impaired available- for-sale debt security prior to the value recovering to the security’s amortized cost. In those situations, the entire credit- related impairment amount would be required to be recognized in earnings. We have evaluated the debt securities classified as available-for-sale and held-to-maturity at December 31, 2023 and December 31, 2022, and have determined that no debt securities in an unrealized loss position are arising from credit related reasons, and have therefore not recorded any 42 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) allowances for debt securities in our ACL for the period. Unrealized gains and losses related to equity securities with readily determinable fair values are included in net income. The amortized cost and estimated fair value by type of investment security at December 31, 2023 are as follows: Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Total investment securities . . . . . . . . . . . . . . . . . . . . $ 3,400 $ 3,400 $ Amortized cost Amortized cost Residential mortgage-backed securities . . . . . . . . . . $ 5,169,813 $ Obligations of states and political subdivisions . . . Total investment securities . . . . . . . . . . . . . . . . . . . . $ 5,330,814 $ 161,001 Gross unrealized gains Held to Maturity Gross unrealized losses (Dollars in Thousands) — $ — $ — $ — $ Estimated fair value Carrying value 3,400 $ 3,400 $ 3,400 3,400 Gross unrealized gains Available for Sale Debt Securities Gross unrealized losses (Dollars in Thousands) Estimated fair value Carrying value(1) 9,541 $ (519,255) $ 4,660,099 $ 4,660,099 1,602 162,242 11,143 $ (519,616) $ 4,822,341 $ 4,822,341 162,242 (361) (1) Included in the carrying value of residential mortgage- backed securities are $959,421 of mortgage-backed securities issued by Ginnie Mae and $3,700,678 of mortgage-backed securities issued by Fannie Mae and Freddie Mac The amortized cost and estimated fair value of investment securities at December 31, 2023, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties. Held to Maturity Available for Sale Amortized Cost Estimated Amortized fair value Cost Estimated fair value (Dollars in Thousands) Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due after one year through five years . . . . . . . . . . . . . . . . . . . . . . . . Due after five years through ten years . . . . . . . . . . . . . . . . . . . . . . . . Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . Total investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,075 $ 2,075 $ 1,325 — — — $ 3,400 1,325 — $ — 440 — — 160,561 — 5,169,813 — — 440 161,802 4,660,099 $ 5,330,814 $ 4,822,341 $ 3,400 The amortized cost and estimated fair value by type of investment security at December 31, 2022 are as follows: Amortized cost Gross unrealized gains Held to Maturity Gross unrealized losses (Dollars in Thousands) Estimated fair value Carrying value Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total investment securities . . . . . . . . . . . . . . . . . . . $ $ 3,400 3,400 $ $ — $ — $ — $ — $ 3,400 $ 3,400 $ 3,400 3,400 43 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Amortized cost U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . Residential mortgage-backed securities . . . . . . . . . Obligations of states and political subdivisions . . Total investment securities . . . . . . . . . . . . . . . . . . . $ 49,752 4,805,735 163,509 $ 5,018,996 $ $ Gross unrealized gains Available for Sale Gross unrealized losses (Dollars in Thousands) Estimated fair value Carrying value(1) — $ (359) $ 49,393 $ 49,393 4,209,212 159,191 $ (605,272) $ 4,417,796 $ 4,417,796 (599,668) 4,209,212 159,191 (5,245) 3,145 927 4,072 (1) Included in the carrying value of residential mortgage- backed securities are $681,121 of mortgage-backed securities issued by Ginnie Mae, $3,528,091 of mortgage-backed securities issued by Fannie Mae and Freddie Mac Residential mortgage-backed securities are securities issued by Freddie Mac, Fannie Mae, Ginnie Mae or non-government entities. Investments in residential mortgage-backed securities issued by Ginnie Mae are fully guaranteed by the U.S. government. Investments in mortgage-backed securities issued by Freddie Mac and Fannie Mae are not fully guaranteed by the U.S. government; however, we believe that the quality of the bonds is similar to other AAA rated bonds with limited credit risk, particularly given the placement of Fannie Mae and Freddie Mac into conservatorship by the federal government in early September 2008 and because securities issued by others that are collateralized by residential mortgage-backed securities issued by Fannie Mae and Freddie Mac are rated consistently as AAA rated securities. The amortized cost and fair value of available for sale investment securities pledged to qualify for fiduciary powers, to secure public monies as required by law, repurchase agreements and short-term fixed borrowings was $1,836,634,000 and $1,598,853,000, respectively, at December 31, 2023. Proceeds from the sale and call of securities available-for-sale were $2,045,000, $800,000, and $5,890,000 during 2023, 2022 and 2021, respectively, which amounts included $0, $0 and $0 of mortgage-backed securities. Gross gains of $0, $0 and $0, and gross losses of $3,000, $0 and $16,000 were realized on the sales and calls in 2023, 2022 and 2021, respectively. Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2023 were as follows: Available for sale: Residential mortgage-backed securities . . . . . . . . . . . . Obligations of states and political subdivisions . . . . . . . Less than 12 months 12 months or more Total Fair Value Unrealized Losses Unrealized Fair Value Losses (Dollars in Thousands) Fair Value Unrealized Losses $ $ 577,448 651 578,099 $ $ (8,267) $ 3,456,349 64,373 (8,268) $ 3,520,722 (1) $ (510,988) $ 4,033,797 65,024 $ (511,348) $ 4,098,821 (360) $ (519,255) (361) $ (519,616) 44 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 loss position, at December 31, 2022 were as follows: Less than 12 months 12 months or more Total Fair Value Unrealized Losses Unrealized Fair Value Losses (Dollars in Thousands) Fair Value Unrealized Losses Available for sale: U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . Residential mortgage-backed securities . . . . . . . . . . . . Obligations of states and political subdivisions . . . . . . . $ 49,394 1,357,905 118,772 $ 1,526,071 $ (359) $ — $ (87,815) (5,245) 2,566,975 — $ (93,419) $ 2,566,975 — $ 49,394 3,924,880 118,772 $ (511,853) $ 4,093,046 (511,853) — $ (359) (599,668) (5,245) $ (605,272) The unrealized losses on investments in residential mortgage-backed securities are primarily caused by changes in 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. Equity securities with readily determinable fair values consist primarily of Community Reinvestment Act funds. At December 31, 2023 and December 31, 2022, the balance in equity securities with readily determinable fair values recorded at fair value were $5,417,000 and $5,358,000, respectively. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities for the twelve months ended December 31, 2023, 2022, and 2021: 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59 — 59 Year Ended December 31, 2023 (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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (721) — (721) Year Ended December 31, 2022 (Dollars in Thousands) 45 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Year Ended December 31, 2021 (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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (123) — (123) Other investments include equity and merchant banking investments held by our subsidiary banks and non- banking entities. We hold ownership interests in limited partnerships for the purpose of investing in low-income housing tax credit (“LIHTC”) projects. The partnerships may acquire, construct, or rehabilitate housing for low- and moderate- income individuals. We realize a return primarily from federal tax credits and other federal tax deductions associated with the underlying projects. We are a limited partner in the partnerships, and not required to consolidate the entities in our consolidated financial statements. Investments in LIHTC projects totaled $200,245,000 at December 31, 2023 and $214,549,000 at December 31, 2022 and are included in other investments on the consolidated financial statements. Unfunded commitments to LIHTC projects totaled $34,126,000 at December 31, 2023 and $41,191,000 at December 31, 2022 and are included in other liabilities on the consolidated financial statements. (3) Loans A summary of loans, by loan type at December 31, 2023 and 2022 is as follows: December 31, December 31, 2023 2022 (Dollars in Thousands) Commercial, financial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate - construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,802,622 $ 4,373,373 865,994 1,989,669 41,592 159,975 $ 8,058,961 $ 7,430,603 938,901 2,091,622 45,121 180,695 (4) Allowance for Credit Losses We adopted the provisions of ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments on January 1, 2020 on a modified retrospective basis. Results and information regarding our ACL included in this Note are calculated and presented in accordance with that accounting standards update. Results and information prior to January 1, 2020 were calculated and presented in accordance with previously applicable U.S. GAAP. ASU 2016-13 replaces the long-standing incurred-loss model with a current expected credit loss model (“CECL”) that recognizes credit losses over the life of a financial asset. Using the CECL methodology, expected credit losses capture historical information, current conditions, and reasonable and supportable forecasts of future conditions. The ACL is deducted from the amortized cost of an instrument to present the net amount expected to be collected on the financial asset. Our ACL primarily consists of the aggregate ACL estimates of our Subsidiary Banks. The estimates are established through charges to operations in the form of charges to provisions for credit loss expense. Loan losses or recoveries are charged or credited directly to the ACL. The ACL of each Subsidiary Bank is maintained at a level considered appropriate by management, based on estimated current expected credit losses in the current loan portfolio, including information about past events, current conditions, and reasonable and supportable forecasts. 46 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) The estimation of the ACL is based on a loss-rate methodology that measures lifetime losses on loan pools that have similar risk characteristics. Loans that do not have similar risk characteristics are evaluated on an individual basis. The segmentation of the loan portfolio into pools requires a balancing process between capturing similar risk characteristics and containing sufficient loss history to provide meaningful results. Our segmentation starts at the general loan category with further sub-segmentation based on collateral types that may be of meaningful size and/or may contain sufficient differences in risk characteristics based on management’s judgement that would warrant further segmentation. The general loan categories along with primary risk characteristics used in our calculation are as follows: Commercial and industrial loans. This category includes loans extended to a diverse array of businesses for working capital or equipment purchases. These loans are mostly secured by the collateral pledged by the borrower that is directly related to the business activities of the company such as equipment, accounts receivable, and inventory. The borrower’s abilities to generate revenues from equipment purchases, collect accounts receivable, and to turn inventory into sales are risk factors in the repayment of the loan. A small portion of this loan category is related to loans secured by oil and gas production and loans secured by aircraft. Construction and land development loans. This category includes the development of land from unimproved land to lot development for both residential and commercial use and vertical construction across residential and commercial real estate classes. These loans carry risk of repayment when projects incur cost overruns, have an increase in the price of construction materials, encounter zoning, entitlement 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 mortgage rate risk and the practice by the mortgage industry of more restrictive underwriting standards, which inhibits the buyer from obtaining long term financing creating excessive housing and lot inventory in the market. Commercial real estate loans. This category includes loans secured by farmland, multifamily properties, owner- occupied commercial properties, and non-owner-occupied commercial properties. Owner-occupied commercial properties include warehouses often along the border for import/export operations, office space where the borrower is the primary tenant, restaurants and other single-tenant retail spaces. Non-owner-occupied commercial properties include hotels, retail centers, office and professional buildings, and leased warehouses. These loans carry 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 the market experiences an exit of a specific business type that is significant to the local economy, such as a manufacturing plant. 1-4 family mortgages. This category includes both first and second lien mortgages for the purpose of home purchases or refinancing of existing mortgage loans. A small portion of this loan category is related to home equity lines of credits, lots purchases, and home construction. Loan repayments may be affected by unemployment or underemployment and deteriorating market values of real estate. Consumer loans. This category includes deposit secured, vehicle secured, and unsecured loans, including overdrafts, made to individuals. Repayment is primarily affected by unemployment or underemployment. The loan pools are further broken down using a risk-based segmentation based on internal classifications for commercial loans and past due status for consumer mortgage loans. Non-mortgage consumer loans are evaluated as one segment. On a weekly basis, commercial 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 Watch List 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 Watch List report because of issues related to the analysis of the credit, credit documents, collateral, and/or payment history. 47 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Our internal Watch List report is segregated into the following categories: (i) Pass, (ii) Economic Monitoring, (iii) Special Review, (iv) Watch List—Pass, or (v) Watch List—Substandard, and (vi) Watch List—Doubtful. The loans placed in the Special Review category and lower rated credits reflect our opinion that the loans reflect potential weakness which require monitoring on a more frequent basis. Credits in those categories are reviewed and discussed on a regular basis, no less frequently than quarterly, 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 category and lower rated credits reflect our opinion that the credit contains weaknesses which represent a greater degree of risk, which warrant “extra attention.” Credits in this category 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 category 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. The loans placed in the Watch List—Doubtful category have shown defined weaknesses and it is likely, based on current information and events, that we will be unable to collect all principal and/or interest amounts contractually due. Watch List—Doubtful loans are placed on non-accrual when they are moved to that category. For the purposes of the ACL, in order to maintain segments with sufficient history for meaningful results, the credits in the Pass and Economic Monitoring categories are aggregated, the credits in the Special Review and Watch List— Pass credits are aggregated, and the credits in the Watch List—Substandard category remain in their own segment. For loans that are classified as Watch List—Doubtful, management evaluates these credits in accordance with ASC 310-10, “Receivables,” and, if deemed necessary, a specific reserve is allocated to the loan. 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 net realizable value of the fair value of the collateral if the loan is collateral dependent. Substantially all of our loans evaluated as Watch List—Doubtful under ASC 310-10 are measured using the fair value of collateral method. In rare 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. Within each collectively evaluated pool, the robustness of the lifetime historical loss-rate is evaluated and, if needed, is supplemented with peer loss rates through a model risk adjustment. Certain qualitative loss factors are then evaluated to incorporate management’s two-year reasonable and supportable forecast period followed by a reversion to the pool’s average lifetime loss-rate. Those qualitative loss factors are: (i) trends in portfolio volume and composition, (ii) volume and trends in classified loans, delinquencies, non-accruals and troubled loan modifications, (iii) concentration risk, (iv) trends in underlying collateral value, (v) changes in policies, procedures, and strategies, and (vi) economic conditions. Qualitative factors also include potential losses stemming from operational risk factors arising from fraud, natural disasters, pandemics, geopolitical events and large loans. The large loan operational risk factor was added beginning in the second quarter of 2023. Because of the magnitude of large loans, they pose a higher risk of default. Recognizing this risk and establishing an operational risk factor to capture that risk, is prudent action in the current economic environment. Large loans are usually part of a larger relationship with collateral that is pledged across the relationship. Defaulting on a larger loan may therefore jeopardize an entire collateral relationship. The current economic environment has created challenges for borrowers to service their debt. Increasing cap rates, elevated office vacancies, an upward trend in apartment vacancies and significant increases in interest rates are all contributing to the elevated risk in large loans. Should any of the factors considered by management in evaluating the adequacy of the ACL change, our estimate could also change, which could affect the level of future credit loss expense. We have elected to not measure an ACL for accrued interest receivable given our timely approach in identifying and writing off uncollectible accrued interest. An ACL for off-balance sheet exposure is derived from a projected usage rate of any unfunded commitment multiplied by the historical loss rate, plus model risk adjustment, if any, of the on- balance sheet loan pools. Our management continually reviews the ACL of the Subsidiary Banks using the amounts determined from the estimates established on specific doubtful loans, the estimate established on quantitative historical loss percentages, and the estimate based on qualitative current conditions and reasonable and supportable two-year forecasted data. Our methodology reverts to the average lifetime loss-rate beyond the forecast period when we can no longer develop reasonable 48 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) and supportable forecasts. Should any of the factors considered by management in evaluating the adequacy of the estimate for current expected credit losses change, our estimate of current expected credit losses could also change, which could affect the level of future credit loss expense. While the calculation of our ACL utilizes management’s best judgment and all information reasonably available, the adequacy of the ACL is dependent on a variety of factors beyond our control, including, among other things, the performance of the entire loan portfolio, the economy, government actions, changes in interest rates, and the view of regulatory authorities towards loan classifications. A summary of the changes in the allowance for probable loan losses by loan class is as follows: December 31, 2023 Domestic Foreign Commercial real estate: other Commercial construction & real estate: Commercial Commercial development land farmland & real estate: Residential: Residential: commercial multifamily first lien junior lien Consumer Foreign Total Balance at December 31, 2022 . . . . . $ Losses charged to allowance . . . . Recoveries credited to 26,728 $ (9,664) 44,684 $ — 36,474 $ — (Dollars in Thousands) 3,794 $ — 4,759 $ (43) 8,284 $ (298) 281 $ (179) 968 $ 125,972 (10,184) — allowance . . . . . . . . . . . . . . . Net losses charged to allowance . . 5,433 (4,231) 837 837 143 143 — — 16 (27) 260 (38) 16 (163) — — 6,705 (3,479) Provision (credit) charged to operations . . . . . . . . . . . . . . . . . . Balance at December 31, 2023 . . . . . $ 13,053 35,550 $ 9,770 55,291 $ 6,086 42,703 $ 1,294 5,088 $ 1,080 5,812 $ 2,778 11,024 $ 200 318 $ 315 34,576 1,283 $ 157,069 December 31, 2022 Domestic Foreign Commercial real estate: other Commercial construction & real estate: Commercial Commercial development land farmland & real estate: Residential: Residential: commercial multifamily first lien junior lien Consumer Foreign Total Balance at December 31, 2021 . . . . . $ Losses charged to allowance . . . . Recoveries credited to allowance . Net losses charged to allowance . 23,178 $ (9,050) 2,894 (6,156) 35,390 $ (2) 123 121 35,654 $ (16) 27 11 Provision (credit) charged to (Dollars in Thousands) 3,291 $ — — — 4,073 $ (160) 240 80 7,754 $ (28) 104 76 272 $ (223) 38 (185) 762 $ 110,374 (9,479) 3,426 (6,053) — — — operations . . . . . . . . . . . . . . . . . . Balance at December 31, 2022 . . . . . $ 9,706 26,728 $ 9,173 44,684 $ 809 36,474 $ 503 3,794 $ 606 4,759 $ 454 8,284 $ 194 281 $ 206 21,651 968 $ 125,972 December 31, 2021 Domestic Foreign Commercial real estate: other Commercial construction & real estate: Commercial Commercial development land farmland & real estate: Residential: Residential: commercial multifamily junior lien first lien Consumer Foreign Total Balance at December 31, 2020 . . . . . $ Losses charged to allowance . . . . Recoveries credited to allowance . Net losses charged to allowance . 21,908 $ (8,083) 1,943 (6,140) 37,612 $ (2) — (2) 30,000 $ (364) 171 (193) Provision (credit) charged to (Dollars in Thousands) 3,874 $ (373) 60 (313) 5,051 $ — — — 9,570 $ (25) 164 139 291 $ (176) 46 (130) 753 $ 109,059 (9,024) 2,384 (6,640) (1) — (1) operations . . . . . . . . . . . . . . . . . . Balance at December 31, 2021 . . . . . $ 7,410 23,178 $ (2,220) 35,390 $ 5,847 35,654 $ (1,760) 3,291 $ 512 4,073 $ (1,955) 7,754 $ 111 272 $ 10 7,955 762 $ 110,374 The allowance for credit losses is a reserve established through a provision for credit losses charged to expense, which represents management’s best estimate of probable loan losses when evaluating loans (i) individually or (ii) collectively. The credit loss charged to expense has increased for the twelve months ended December 31, 2023 compared to the same periods of 2022 and 2021 in order to provide some protection from potential losses in our loan portfolio given 49 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) the high level of uncertainty in the economy and a potential economic recession on the horizon. We have increased the severity of some of the qualitative loss factors in certain pools of the portfolio to encompass the economic uncertainty, resulting in an increase in the required ACL. The pool specific qualitative loss factors management deemed appropriate for the ACL calculation at December 31, 2022 remained constant in the December 31, 2023 calculation, with the exception of the large loan factor that was added to the ACL calculation in the second quarter of 2023. 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, 2023 Loans Individually Evaluated For Impairment Loans Collectively Evaluated For Impairment Recorded Investment Allowance Recorded Investment (Dollars in Thousands) 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,872 $ 7,971 $ 1,597,358 $ 27,579 50,971 42,703 5,088 5,812 11,024 318 1,283 2,075,921 2,793,254 380,743 477,940 460,868 45,121 180,695 4,320 — — — — — — 15,701 299 96 93 — — — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 47,061 $ 12,291 $ 8,011,900 $ 144,778 December 31, 2022 Loans Individually Evaluated For Impairment Loans Collectively Evaluated For Impairment Recorded Investment Allowance Recorded Investment (Dollars in Thousands) 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,747 $ 2,375 $ 1,468,006 $ 24,353 44,614 36,474 3,794 4,759 8,284 281 968 1,969,186 2,568,025 306,384 425,647 439,958 41,592 159,975 20,483 94 117 77 312 — — 70 — — — — — — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 51,830 $ 2,445 $ 7,378,773 $ 123,527 Loans accounted for on a non-accrual basis at December 31, 2023, 2022 and 2021 amounted to $47,170,000, $51,648,000, and $1,921,000, respectively. The increase in non-accrual loans at December 31, 2022 is primarily attributable to two loans that were placed on non-accrual at the end of the fourth quarter of 2022. One relationship is secured by equipment used in the oil and gas industry and one is secured by real estate. The effect of such non-accrual loans reduced interest income by approximately $6,614,000, $116,000, and $169,000 for the years ended December 31, 2023, 2022, and 2021, 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, 2023, 2022, and 2021 amounted to approximately $5,597,000, $6,132,000, and $8,642,000, respectively. 50 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) The table below provides additional information on loans accounted for on a non-accrual basis by loan class: Domestic Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . Commercial real estate: other construction & land development . . . . . . . . . . . . . Commercial real estate: farmland & commercial . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate: multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential: first lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-accrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . $ $ 30,872 $ 15,701 299 96 202 47,170 $ 30,747 20,483 94 117 207 51,648 December 31, 2023 December 31, 2022 (Dollars in Thousands) Doubtful 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. Doubtful 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 doubtful 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. We adopted the provisions of Accounting Standards Update 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) on January 1, 2023. ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings in existing guidance and enhances disclosure requirements for certain loan refinancings and restructurings when a borrower is experiencing financial difficulty. Additionally, ASU 2022-02 requires entities to disclose current period gross write-offs by year of origination for financing receivables and net investments in leases. The adoption of ASU 2022-02 did not have a significant impact on our consolidated financial statements. We occasionally provide modifications to borrowers experiencing financial difficulties. Modifications may include certain concessions that we must evaluate under ASU 2022-02 to determine the need for disclosure. Concessions to borrowers experiencing financial difficulties that would require disclosure include principal forgiveness, term extension, an other-than-insignificant payment delay, an interest rate reduction or a combination of these concessions. For the twelve months ended December 31, 2023, we did not provide any material modifications under these circumstances to any borrower experiencing financial difficulty that would require disclosure. Under guidance in effect prior to January 1, 2023, the following table details loans accounted for as “troubled debt restructuring,” segregated by loan class. Loans accounted for as troubled debt restructuring are included in impaired loans. December 31, 2022 (Dollars in Thousands) Domestic Residential: first lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Residential: junior lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total troubled debt restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,642 714 802 55 3,213 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. 51 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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 ACL (formerly allowance for probable loan losses) can be made only on a subjective basis. It is the judgment of our management that the ACL at December 31, 2023 and December 31, 2022, was adequate to absorb expected 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 90 Days or Greater December 31, 2023 90 Days or greater & still accruing Total Past Due (Dollars in Thousands) Current Total Portfolio Domestic Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,387 Commercial real estate: other construction & land development . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate: farmland & commercial . . Commercial real estate: multifamily . . . . . . . . . . . Residential: first lien . . . . . . . . . . . . . . . . . . . . . . Residential: junior lien . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,460 1,424 369 1,812 1,273 263 1,884 Total past due loans . . . . . . . . . . . . . . . . . . . . . $ 12,872 $ 1,583 $ 30,238 $ 539 $ 34,208 $ 1,594,022 $ 1,628,230 — 371 330 1,439 613 11 848 $ 5,195 $ 10,245 93 — 2,545 1,701 27 889 45,738 $ — 4 — 2,437 1,701 27 889 5,597 13,705 1,888 699 5,796 3,587 301 3,621 2,077,917 2,791,665 380,140 472,236 457,282 44,820 177,074 $ 63,805 $ 7,995,156 2,091,622 2,793,553 380,839 478,032 460,869 45,121 180,695 $ 8,058,961 30 - 59 Days 60 - 89 Days 90 Days or Greater December 31, 2022 Total 90 Days or Past greater & still accruing Due (Dollars in Thousands) Current Total Portfolio Domestic Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,732 Commercial real estate: other construction & land development . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate: farmland & commercial . . Commercial real estate: multifamily . . . . . . . . . . . Residential: first lien . . . . . . . . . . . . . . . . . . . . . . Residential: junior lien . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,130 1,744 — 2,023 925 281 717 Total past due loans . . . . . . . . . . . . . . . . . . . . . $ 8,552 $ 258 $ 1,014 $ 59 $ 3,004 $ 1,495,750 $ 1,498,754 — 117 — 1,068 771 14 23 $ 2,251 $ — — — 4,189 1,717 7 288 7,215 $ — — — 4,061 1,717 7 288 6,132 1,130 1,861 — 7,280 3,413 302 1,028 1,988,539 2,566,257 306,501 418,444 436,857 41,290 158,947 $ 18,018 $ 7,412,585 1,989,669 2,568,118 306,501 425,724 440,270 41,592 159,975 $ 7,430,603 The increase in Commercial loans past due 90 days or greater at December 31, 2023 can be primarily attributed to a loan secured by equipment and other assets used in the oil and gas industry and oil and gas production that is on non-accrual. The increase in Commercial Real Estate: Other Construction & Land Development loans past due 90 days or greater can be primarily attributed to a loan secured by commercial property that is on non-accrual. 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 52 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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. A summary of the loan portfolio by credit quality indicator by loan class is as follows: 2023 2022 2021 2020 2019 Prior Total (Dollars in Thousands) Balance at December 31, 2023 Domestic Commercial Pass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 791,233 7,613 Special Review . . . . . . . . . . . . . . . . . . . . . . . . . . Watch List - Pass . . . . . . . . . . . . . . . . . . . . . . . . . 11,865 Watch List - Substandard . . . . . . . . . . . . . . . . . . . 1,180 27 Watch List - Doubtful . . . . . . . . . . . . . . . . . . . . . Total Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . $ 811,918 Commercial Current-period gross writeoffs . . . . . . . . . . . . . . . . $ Commercial real estate: other construction & land 7,053 development Pass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 938,739 Watch List - Substandard . . . . . . . . . . . . . . . . . . . 25,230 Watch List - Doubtful . . . . . . . . . . . . . . . . . . . . . 2,726 Total Commercial real estate: other construction & $ $ $ $ $ $ $ $ 272,919 1,800 — 92 30,810 305,621 2,187 674,037 — 12,975 364,271 164 — 28 35 364,498 $ 50,602 — — — — $ 50,602 $ 21,468 $ 74,119 — — 4 — $ 21,468 $ 74,123 — — — — $ 1,574,612 9,577 11,865 1,304 30,872 $ 1,628,230 155 $ 264 $ 2 $ 3 $ 9,664 324,238 — — $ 96,400 — — $ 14,058 $ — — 3,219 — — $ 2,050,691 25,230 15,701 land development . . . . . . . . . . . . . . . . . . . . . . . . $ 966,695 $ 687,012 $ 324,238 $ 96,400 $ 14,058 $ 3,219 $ 2,091,622 Commercial real estate: other construction & land development Commercial real estate: farmland & commercial Pass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 888,878 5,205 Special Review . . . . . . . . . . . . . . . . . . . . . . . . . . Watch List - Pass . . . . . . . . . . . . . . . . . . . . . . . . . 16,654 129,644 Watch List - Substandard . . . . . . . . . . . . . . . . . . . Watch List - Doubtful . . . . . . . . . . . . . . . . . . . . . 211 $ 628,653 — 87 2,201 88 $ 415,458 3,357 233 — — $ 267,705 — — 2,304 — $ 184,164 $ 248,626 — — 1 — — — 84 — $ 2,633,484 8,562 16,974 134,234 299 Total Commercial real estate: farmland & commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,040,592 $ 631,029 $ 419,048 $ 270,009 $ 184,248 $ 248,627 $ 2,793,553 Commercial real estate: farmland & commercial Commercial real estate: multifamily Pass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 123,523 Watch List - Doubtful . . . . . . . . . . . . . . . . . . . . . — Total Commercial real estate: multifamily . . . . . . . . $ 123,523 Commercial real estate: multifamily Residential: first lien Pass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 180,127 Watch List - Substandard . . . . . . . . . . . . . . . . . . . — Watch List - Doubtful . . . . . . . . . . . . . . . . . . . . . — Total Residential: first lien . . . . . . . . . . . . . . . . . . . $ 180,127 Residential: first lien Current-period gross writeoffs . . . . . . . . . . . . . . . . $ Residential: junior lien Pass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Total Residential: junior lien . . . . . . . . . . . . . . . . . . $ Residential: junior lien Current-period gross writeoffs . . . . . . . . . . . . . . . . $ Consumer Pass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Total Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Consumer Current-period gross writeoffs . . . . . . . . . . . . . . . . $ Foreign $ $ $ $ 94,551 96 94,647 83,568 — 93 83,661 $ $ $ $ 42,081 — 42,081 $ 73,652 — $ 73,652 $ 10,743 $ 36,193 — $ 10,743 $ 36,193 — 68,082 327 — 68,409 $ 39,935 — — $ 39,935 $ 27,499 $ 78,306 95 — $ 27,499 $ 78,401 — — — $ — $ — $ — $ — $ 43 88,628 88,628 $ $ 76,845 76,845 $ $ 96,411 96,411 $ 76,490 $ 76,490 $ 34,870 $ 87,625 $ 34,870 $ 87,625 — $ — $ — $ — $ — $ 298 $ $ $ $ $ $ $ $ $ $ 380,743 96 380,839 477,517 422 93 478,032 43 460,869 460,869 298 45,121 45,121 36,639 36,639 54 $ $ $ 5,366 5,366 115 $ $ $ 1,043 1,043 9 $ $ $ 237 237 $ $ 157 $ 157 $ 1,679 1,679 — $ 1 $ — $ 179 Pass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 116,104 Total Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 116,104 Total Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,364,226 43,842 $ $ 43,842 $ 1,928,023 12,317 $ $ 12,317 $ 1,328,045 2,016 $ $ 2,016 $ 609,341 2,797 $ 2,797 $ 3,619 $ $ 3,619 $ 295,840 $ 533,486 180,695 $ $ 180,695 $ 8,058,961 53 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 2022 2021 2020 2019 (Dollars in Thousands) 2018 Prior Total Balance at December 31, 2022 Domestic Commercial Pass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 736,462 377 Special Review . . . . . . . . . . . . . . . . . . . . . . . . . . . Watch List - Substandard . . . . . . . . . . . . . . . . . . . . 161 Watch List - Doubtful . . . . . . . . . . . . . . . . . . . . . . 29,789 Total Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 766,789 Commercial Commercial real estate: other construction & land development Pass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 913,675 Special Review . . . . . . . . . . . . . . . . . . . . . . . . . . . — Watch List - Doubtful . . . . . . . . . . . . . . . . . . . . . . 19,982 Total Commercial real estate: other construction & land development . . . . . . . . . . . . . . . . . . . . . . . . . $ 933,657 Commercial real estate: farmland & commercial Pass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 811,117 2,855 Special Review . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,060 Watch List - Pass . . . . . . . . . . . . . . . . . . . . . . . . . . Watch List - Substandard . . . . . . . . . . . . . . . . . . . . 2,275 Watch List - Doubtful . . . . . . . . . . . . . . . . . . . . . . 94 Total Commercial real estate: farmland & commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 833,401 Commercial real estate: multifamily Pass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 127,680 117 Watch List - Doubtful . . . . . . . . . . . . . . . . . . . . . . 127,797 Total Commercial real estate: multifamily . . . . . . . . . $ Residential: first lien Pass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 138,771 — Watch List - Substandard . . . . . . . . . . . . . . . . . . . . Watch List - Doubtful . . . . . . . . . . . . . . . . . . . . . . 77 Total Residential: first lien . . . . . . . . . . . . . . . . . . . . $ 138,848 Residential: junior lien $ $ $ $ $ $ $ $ $ $ 524,879 213 149 — 525,241 $ 96,401 — 143 954 $ 97,498 $ 35,917 — — — $ 35,917 $ 43,792 $ 29,464 — — 4 $ 43,841 $ 29,468 — 49 — $ 1,466,915 590 502 30,747 $ 1,498,754 666,347 — 407 $ 173,824 — 94 $ 174,897 209 — $ 35,069 $ — — 5,165 — — $ 1,968,977 209 20,483 666,754 $ 173,918 $ 175,106 $ 35,069 $ 5,165 $ 1,989,669 584,134 — 247 — — $ 456,200 842 — 54,152 — $ 232,537 — — 96 — $ 325,214 $ 81,295 — — — — — — — — $ 2,490,497 3,697 17,307 56,523 94 584,381 $ 511,194 $ 232,633 $ 325,214 $ 81,295 $ 2,568,118 87,469 — 87,469 $ 59,035 — $ 59,035 $ 12,026 — $ 12,026 $ $ 5,490 $ 14,684 — 5,490 $ 14,684 — 82,466 360 — 82,826 $ 49,591 — — $ 49,591 $ 40,985 — — $ 40,985 $ 33,814 $ 79,660 — — $ 33,814 $ 79,660 — — $ $ $ $ $ $ $ $ 306,384 117 306,501 425,287 360 77 425,724 439,958 312 440,270 41,592 41,592 Pass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Watch List- Doubtful . . . . . . . . . . . . . . . . . . . . . . . Total Residential: junior lien . . . . . . . . . . . . . . . . . . . $ Consumer 92,256 — 92,256 $ 108,815 312 $ 109,127 $ 91,130 — $ 91,130 $ 41,273 — $ 41,273 $ 21,975 $ 84,509 — $ 21,975 $ 84,509 — Pass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Total Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,962 31,962 $ $ 6,603 6,603 $ $ 897 897 $ $ 489 489 $ $ 28 $ 28 $ 1,613 1,613 Foreign Pass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 124,265 Total Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 124,265 Total Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,048,975 19,082 $ $ 19,082 $ 2,081,483 5,362 $ $ 5,362 $ 988,625 4,848 $ $ 4,848 $ 543,277 3,417 $ 3,417 $ 3,001 $ $ 3,001 $ 468,848 $ 299,395 159,975 $ $ 159,975 $ 7,430,603 The increase in Watch-List Pass Commercial loans at December 31, 2023 compared to December 31, 2022 can be primarily attributable to a relationship secured by commercial vehicles, which was downgraded from Pass. The increase in Commercial Real Estate: Construction and Development loans at December 31, 2023 compared to December 31, 2022 can be primarily attributable to the downgrade of two relationships secured by land for future development and land for hotel development from Pass. The increase in Commercial Real Estate: Farmland and Commercial loans at December 31, 2023 can be attributed to the downgrade of two relationships. One relationship is secured by a retail shopping center and one is secured by a hotel. 54 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, 2023 and 2022 were as follows: Bank buildings and improvements . . . . . . . . . . . . . . . . . . . . . Furniture, equipment and vehicles . . . . . . . . . . . . . . . . . . . . . Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . Bank premises and equipment, net . . . . . . . . . . . . . . . . . (6) Goodwill and Other Intangible Assets Estimated useful lives 5 - 1 - 39 years 20 years $ $ 2023 2022 (Dollars in Thousands) 582,075 $ 325,855 108,551 (579,387) 437,094 $ 571,665 307,990 108,622 (556,665) 431,612 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: December 31, 2023: Core deposit premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . Identified intangible (contract rights) . . . . . . . . . . . . . . . . Total identified intangibles . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2022: Core deposit premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . Identified intangible (contract rights) . . . . . . . . . . . . . . . . Total identified intangibles . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ Carrying Amount Accumulated Amortization (Dollars in Thousands) Net 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 $0 for the years ended December 31, 2023, 2022, and 2021. There were no changes in the carrying amount of goodwill for the years ended December 31, 2023 and 2022. 55 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (7) Deposits Deposits as of December 31, 2023 and 2022 and related interest expense for the years ended December 31, 2023, 2022, and 2021 were as follows: 2023 2022 (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 $ 4,126,635 $ 4,744,299 1,101,756 5,846,055 904,210 5,030,845 3,161,411 1,207,121 4,368,532 3,448,717 1,297,051 4,745,768 763,419 1,103,710 652,073 892,619 Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total time, certificates of deposit . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289,565 268,483 2,425,177 276,660 246,832 2,068,184 $ 11,824,554 $ 12,660,007 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 . . . . . . . . . . . $ $ 2023 2022 (Dollars in Thousands) 2021 $ 42,148 18,189 60,337 9,196 $ 3,490 12,686 3,268 842 4,110 18,597 25,471 4,592 4,498 53,158 113,495 $ 5,528 3,867 1,027 735 11,157 23,843 $ 6,652 3,452 984 567 11,655 15,765 56 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Scheduled maturities of time deposits as of December 31, 2023 were as follows: (in thousands) 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,301,914 85,385 2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,102 2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,200 2027 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 573 2028 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,425,177 Total Scheduled maturities of time deposits in amounts of $100,000 or more at December 31, 2023, 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) 859,734 517,994 409,193 80,208 $ 1,867,129 Time deposits that meet or exceed the FDIC insurance limit of $250,000 at December 31, 2023 and December 31, 2022 were $749,169,000 and $585,456,000, respectively. (8) Securities Sold Under Repurchase Agreements Our Subsidiary Banks have entered into repurchase agreements with 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 $469,152,000 and $476,877,000 during 2023 and 2022, respectively, and the maximum amount outstanding at any month end during 2023 and 2022 was $544,418,000 and $513,368,000, respectively. 57 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Further information related to repurchase agreements at December 31, 2023 and 2022 is set forth in the following table: Collateral Securities Repurchase Borrowing Book Value of Securities Sold Fair Value of Securities Sold Balance of Liability (Dollars in Thousands) Weighted Average Interest Rate December 31, 2023 term: Overnight agreements . . . . . . . . . . . . . . . . . . . . . . . 1 to 29 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 to 90 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Over 90 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2022 term: Overnight agreements . . . . . . . . . . . . . . . . . . . . . . . 1 to 29 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 to 90 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Over 90 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ 667,647 24,842 — 1,623 694,112 664,491 — — 20,852 685,343 $ $ $ $ 587,673 20,454 — 1,574 609,701 559,637 — — 16,968 576,605 $ 518,650 10,696 — 1,070 $ 530,416 $ 419,703 — — 11,488 $ 431,191 3.76 % 4.50 — 4.00 3.78 % 1.61 % — — 1.32 1.60 % 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 may be 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, 2023 and 2022 is set forth in the following table: December 31, 2023 2022 (Dollars in Thousands) 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 . . $ $ $ 10,745 $ 2.61 % $ 2.61 % $ 10,928 10,837 10,944 2.61 % 386,924 1.75 % 436,122 (1) Long-term advances at December 31, 2023 and December 31, 2022 consisted of amortizing and non-amortizing advances. The non-amortizing advances totaling $425,000,000 were called by the Federal Home Loan bank in the fourth quarter of 2022. Two amortizing advances are outstanding at December 31, 2023 in the amounts of $2,914,000 and $7,831,000 and mature in December 2033 and November 2033, respectively. The amortization on the amortizing long-term advances totals approximately $204,000, $210,000, $215,000, $221,000 and $227,000 for the years ending December 31, 2024, 2025, 2026, 2027 and December 31, 2028, respectively. (10) Junior Subordinated Deferrable Interest Debentures We currently have four 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”) each issued capital and common securities (“Capital 58 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) and Common Securities”) and invested the proceeds thereof in an equivalent amount of junior subordinated debentures (the “Debentures”) we issued. As of December 31, 2023 and December 31, 2022, the principal amount of debentures outstanding totaled $108,868,000 and $134,642,000, 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 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, 2023 and December 31, 2022, the total $108,868,000 and $134,642,000, 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, 2023: Junior Subordinated Deferrable Interest Debentures (Dollars in Thousands) Repricing Frequency Interest Rate Interest Rate Index(1) Maturity Date Optional Redemption Date(2) Trust IX . . . . . . . . . . . $ Trust X . . . . . . . . . . . . Trust XI . . . . . . . . . . . Trust XII . . . . . . . . . . $ 41,238 Quarterly 21,021 Quarterly 25,990 Quarterly 20,619 Quarterly 108,868 7.28 % SOFR+ 1.62 7.29 % SOFR+ 1.65 7.28 % SOFR+ 1.62 7.09 % SOFR+ 1.45 October 2036 October 2011 February 2037 February 2012 July 2012 September 2037 September 2012 July 2037 (1) On July 1, 2023, the interest rate index on the Capital and Common Securities transitioned from U.S.-dollar London Interbank Offered Rate (“LIBOR”) to the Three-Month CME Term Secured Overnight Financing rate (“SOFR”) with a 26-basis point spread adjustment. (2) 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 59 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, 2023, 2022, and 2021 is set forth in the following table: Net Income (Numerator) Shares (Denominator) (Dollars in Thousands, Except Per Share Amounts) Per Share Amount December 31, 2023: Basic EPS Net income available to common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . Potential dilutive common shares . . . . . . . . . Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2022: Basic EPS Net income available to common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . Potential dilutive common shares . . . . . . . . . Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2021: Basic EPS Net income available to common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . Potential dilutive common shares . . . . . . . . . Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ $ $ 411,768 — 411,768 62,082,827 $ 138,774 62,221,601 $ 300,232 — 300,232 62,658,414 $ 151,820 62,810,234 $ 253,922 — 253,922 63,352,737 $ 133,629 63,486,366 $ 6.63 6.62 4.79 4.78 4.01 4.00 (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 $4,011,000, $4,300,000, and $3,550,000 were charged to income for the years ended December 31, 2023, 2022, and 2021, 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. 60 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) A summary of assets attributable to international operations at December 31, 2023 and 2022 are as follows: Loans: Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less allowance for probable loan losses. . . . . . . . . . . . . . . . . . Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 2022 (Dollars in Thousands) $ $ $ 106,241 $ 74,454 180,695 (1,283) 179,412 $ 876 $ 103,748 56,227 159,975 (968) 159,007 515 At December 31, 2023 and December 31, 2022, we had $147,551,000 and $131,254,000, respectively, in outstanding standby and commercial letters of credit to facilitate trade activities. Revenues directly attributable to international operations were approximately $8,212,000, $4,821,000, and $4,090,000 for the years ended December 31, 2023, 2022 and 2021, 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: Current U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current taxes . . . . . . . . . . . . . . . . . . . . . Deferred U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred taxes . . . . . . . . . . . . . . . . . . . . Total income taxes . . . . . . . . . . . . . . . . . . . . . 2023 2022 (Dollars in Thousands) 2021 $ $ 82,657 6,137 88,794 23,001 (51) 22,950 111,744 $ $ 66,670 $ 5,118 71,788 59,591 5,272 64,863 10,555 64 10,619 82,407 $ 3,794 (252) 3,542 68,405 Total income tax expense differs from the amount computed by applying the U.S. Federal income tax rate of 21% for 2023, 2022, and 2021 to income before income taxes. The reasons for the differences for the years ended December 31 are as follows: Computed expected tax expense . . . . . . . . . . . . . Change in taxes resulting from: Tax-exempt interest income . . . . . . . . . . . . . . State tax, net of federal income taxes, tax credit and refunds . . . . . . . . . . . . . . . . . . . . . Other investment income . . . . . . . . . . . . . . . . . Net investment in low income housing investments . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actual tax expense . . . . . . . . . . . . . . . . . . . . . 2023 $ 110,065 2022 (Dollars in Thousands) 80,893 $ $ 2021 68,011 (3,663) (2,433) (2,970) 4,808 (2,761) 4,094 (1,391) 3,966 (1,753) 1,974 1,321 111,744 $ $ 1,906 (662) 82,407 $ 203 948 68,405 61 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2023 and 2022 are reflected below: Deferred tax assets: Loans receivable, principally due to the allowance for probable loan losses. . . . . Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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. . . Impairment charges on available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . Identified intangible assets and goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Partnership investment pass through . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 2022 (Dollars in Thousands) $ $ 32,136 $ 1,649 581 110,584 1,352 146,302 (14,879) (19) (14,151) (58,376) (3,321) (90,746) 55,556 $ 25,982 1,194 186 130,586 2,308 160,256 (13,615) (19) (14,125) (30,319) (3,555) (61,633) 98,623 The net deferred tax asset of $55,556,000 and $98,623,000 at December 31, 2023 and December 31, 2022, respectively, is included in other assets in the consolidated statements of condition. (15) Stock Options and Stock Appreciation Rights On April 5, 2012, the Board of Directors adopted the 2012 International Bancshares Corporation Stock Option Plan (the “2012 Plan”). There were 800,000 shares of common stock available for stock option grants under the 2012 Plan, which were qualified incentive stock options (“ISOs”) or non-qualified stock options. 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. On April 4, 2022, the 2012 Plan expired and was not renewed. The fair value of each option award granted under the plan was 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 was based on the historical volatility of the price of our stock. We used historical data to estimate the expected dividend yield and employee termination rates within the valuation model. The expected term of options was derived from historical exercise behavior. The risk-free rate for periods within the contractual life of the option was based on the U.S. Treasury yield curve in effect at the time of grant. Expected Life (Years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 7.00 3.08 % 1.94 % 37.78 % 62 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) A summary of option activity under the stock option plans for the twelve months ended December 31, 2023 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, 2022 . . . . . . . . . . . . . . . . . . . . . Plus: Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options outstanding at December 31, 2023 . . . . . . . . . . . . . . . . . . . . . 461,822 — $ 29.67 — (46,444) — (31,513) 383,865 25.12 — 24.52 30.65 3.42 $ 9,088 Options fully vested and exercisable at December 31, 2023 . . . . . . . 232,143 $ 27.80 1.96 $ 6,157 Stock-based compensation expense included in the consolidated statements of income for the years ended December 31, 2023, 2022, and 2021 was approximately $330,000, $449,000, and $506,000, respectively. As of December 31, 2023, there was approximately $507,000 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 1.3 years. Other information pertaining to option activity during the twelve months ended December 31, 2023, 2022, and 2021 is as follows: Twelve Months Ended December 31, 2022 2021 2023 $ $ 514,000 $ 1,060,000 11.24 $ 10.20 — $ $ 514,000 $ 1,308,000 $ 1,670,000 $ 2,536,000 Weighted average grant date fair value of stock options granted . . . . . . . . . . . . . . . . . . . . . . . . . . Total fair value of stock options vested. . . . . . . . Total intrinsic value of stock options exercised . . 63 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) On April 18, 2022, the Board of Directors adopted the 2022 International Bancshares Stock Appreciation Rights Plan (the “SAR Plan”). There are 750,000 shares of underlying common stock that may be used for stock appreciation right (“SAR”) grants under the plan, however, no actual shares will be granted. Upon exercise, the SAR will be settled in cash. SARs granted may be exercisable for a period of up to 10 years from the date of grant and may vest over an eight- year period. As of December 31, 2023, a total of 465,250 SARS had been issued under the SAR Plan. A summary of activity under the SAR Plan for the twelve months ended December 31, 2023 is as follows: Weighted average stock appreciation exercise Number of rights price Weighted average remaining contractual term (years) Aggregate intrinsic value ($) (in Thousands) Stock appreciation rights outstanding at December 31, 2022 . . . . Plus: Stock appreciation rights granted Less: Stock appreciation rights exercised . . . . . . . . . . . . . . . . . . . . . . . Stock appreciation rights expired . . . . . . . . . . . . . . . . . . . . . . . . Stock appreciation rights forfeited . . . . . . . . . . . . . . . . . . . . . . . Stock appreciation rights outstanding at December 31, 2023 . . . . 489,250 $ 39.35 — — (24,000) 465,250 — — 39.33 39.35 Stock appreciation rights fully vested and exercisable at December 31, 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — $ — 8.50 6,964 The fair value of the liability for payments due to stock appreciation rights holders at December 31, 2023 and December 31, 2022 is approximately $1,464,000 and $546,000, respectively, as calculated using a Black-Scholes-Merton model, and is included in other liabilities on the consolidated statements of condition. The expense recorded in connection with all grants under the SAR Plan totaled $918,000 and $546,000, respectively, for the twelve months ended December 31, 2023 and December 31, 2022. As of December 31, 2023, there was approximately $5,090,000 in unrecognized liability related to non-vested SARs granted under the plan that will be recognized over a weighted average period of 8.5 years. (16) Commitments, Contingent Liabilities and Other Matters On March 15, 2020, the FRB announced that it had reduced regulatory reserve requirements to zero percent effective on March 26, 2020; therefore no cash is required to be 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. (17) 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 $13,335,000 and $28,708,000 at December 31, 2023 and 2022, respectively. 64 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (18) 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, 2023, the following financial amounts of instruments, whose contract amounts represent credit risks, were outstanding (in thousands): Commitments to extend credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,340,280 14,181 Credit card lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 147,190 Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 361 Commercial letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 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, 2023, the maximum potential amount of future payments is approximately $147,190,000. At December 31, 2023, the fair value of these guarantees is not significant. Unsecured letters of credit totaled approximately $23,677,000 and $40,249,000 at December 31, 2023 and 2022, 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. (19) Capital Requirements Bank regulatory agencies limit the amount of dividends, which the Subsidiary Banks can pay, without obtaining prior approval from such agencies. At December 31, 2023, the Subsidiary Banks could pay dividends of up to $1,229,500,000 without prior regulatory approval and without adversely affecting their “well-capitalized” status under regulatory capital rules in effect at December 31, 2023. 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 65 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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, 2023, that we met all capital adequacy requirements to which we are subject. In July 2013, the 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 related capital provisions of the Dodd-Frank Act. Consistent with the Basel international framework, the rules include a new minimum ratio of Common Equity Tier 1 (“CET1”) capital to risk-weighted assets of 4.5% and a CET1 capital conservation buffer of 2.5% of risk-weighted assets, effectively resulting in a minimum ratio of CET1 capital to risk- weighted assets of at least 7% upon full implementation. The 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. 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, 2023, we meet all fully phased-in capital adequacy requirements. In November 2017, the 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 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. Pursuant to rules issued by the federal bank regulatory agencies in February 2019 and March 2020, banking organizations were given options to phase in the adoption of CECL over a three-year transition period through December 31, 2022 or over a five-year transition period through December 31, 2024. Rather than electing to make one of the phase-in options, we immediately recognized the capital impact upon adopting CECL accounting standards on January 1, 2020, which resulted in an increase in our allowance for probable loan losses and a one-time cumulative-effect adjustment to retained earnings upon adoption. In December 2017, the Basel Committee on Banking Supervision unveiled its final set of standards and reforms to its Basel III regulatory capital framework, commonly called “Basel III Endgame” or “Basel IV.” The Basel IV framework makes changes to the capital framework first introduced as “Basel III” in 2010 and aim to reduce excessive variability in banks’ calculations of risk-weighted capital ratios. Implementation of Basel IV began on January 1, 2023 and will continue over a five-year transition period by regulators in individual countries, including the U.S. federal bank regulatory agencies (after notice and comment). As of December 31, 2023, our capital levels continue to exceed all capital adequacy requirements under the Basel III Capital Rules as currently applicable to us. 66 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) On May 24, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (“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 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, 2023, the most recent notification from the FDIC 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. 67 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Our actual capital amounts and ratios for 2023 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, 2023: Common Equity Tier 1 (to Risk Weighted Assets): Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,563,130 1,444,775 International Bank of Commerce, Laredo . . . . . . . . 477,390 International Bank of Commerce, Brownsville . . . . 232,965 International Bank of Commerce, Oklahoma . . . . . 97,334 Commerce Bank . . . . . . . . . . . . . . . . . . . . . . . . . . 64,110 International Bank of Commerce, Zapata . . . . . . . . 21.72 % $ 18.54 24.41 20.72 36.57 31.18 825,968 545,611 136,883 78,718 18,628 14,394 Total Capital (to Risk Weighted Assets): Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,790,171 1,542,462 International Bank of Commerce, Laredo . . . . . . . . 500,268 International Bank of Commerce, Brownsville . . . . 247,031 International Bank of Commerce, Oklahoma . . . . . 100,660 Commerce Bank . . . . . . . . . . . . . . . . . . . . . . . . . . 66,680 International Bank of Commerce, Zapata . . . . . . . . 23.65 % $ 1,238,952 818,416 19.79 205,325 25.58 118,076 21.97 27,943 37.82 21,591 32.43 Tier 1 Capital (to Risk Weighted Assets): Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,642,492 1,444,775 International Bank of Commerce, Laredo . . . . . . . . 477,390 International Bank of Commerce, Brownsville . . . . 232,965 International Bank of Commerce, Oklahoma . . . . . 97,334 Commerce Bank . . . . . . . . . . . . . . . . . . . . . . . . . . 64,110 International Bank of Commerce, Zapata . . . . . . . . 22.39 % $ 1,002,961 662,527 18.54 166,215 24.41 95,586 20.72 22,620 36.57 17,478 31.18 Tier 1 Capital (to Average Assets): Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,642,492 1,444,775 International Bank of Commerce, Laredo . . . . . . . . 477,390 International Bank of Commerce, Brownsville . . . . 232,965 International Bank of Commerce, Oklahoma . . . . . 97,334 Commerce Bank . . . . . . . . . . . . . . . . . . . . . . . . . . 64,110 International Bank of Commerce, Zapata . . . . . . . . 17.46 % $ 16.40 11.79 14.72 14.50 13.26 605,262 352,412 161,919 63,294 26,858 19,338 $ 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 506,639 127,106 73,095 17,298 13,366 N/A 779,444 195,547 112,454 26,612 20,563 N/A 623,555 156,438 89,963 21,290 16,450 N/A 440,515 202,398 79,117 33,572 24,172 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 68 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) Our actual capital amounts and ratios for 2022 are also presented in the following table: Actual For Capital Adequacy Purposes Amount Ratio Amount Ratio To Be Well-Capitalized Under Prompt Corrective Action Provisions Ratio Amount (greater than (greater than (greater than (greater than or equal to) or equal to) or equal to) or equal to) (Dollars in Thousands) As of December 31, 2022: Common Equity Tier 1 (to Risk Weighted Assets): Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,232,723 1,310,616 International Bank of Commerce, Laredo . . . . . . . . 363,093 International Bank of Commerce, Oklahoma . . . . . 232,689 International Bank of Commerce, Brownsville . . . . 98,087 International Bank of Commerce, Zapata . . . . . . . . 71,418 Commerce Bank . . . . . . . . . . . . . . . . . . . . . . . . . . 20.21 % $ 18.07 20.86 21.17 42.26 37.70 773,398 507,625 121,855 76,941 16,248 13,261 Total Capital (to Risk Weighted Assets): Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,455,468 1,401,298 International Bank of Commerce, Laredo . . . . . . . . 383,804 International Bank of Commerce, Oklahoma . . . . . 243,739 International Bank of Commerce, Brownsville . . . . 100,798 International Bank of Commerce, Zapata . . . . . . . . Commerce Bank . . . . . . . . . . . . . . . . . . . . . . . . . . 73,420 Tier 1 Capital (to Risk Weighted Assets): . . . . . . . . . . Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,324,903 1,310,616 International Bank of Commerce, Laredo . . . . . . . . 363,093 International Bank of Commerce, Oklahoma . . . . . 232,689 International Bank of Commerce, Brownsville . . . . 98,087 International Bank of Commerce, Zapata . . . . . . . . 71,418 Commerce Bank . . . . . . . . . . . . . . . . . . . . . . . . . . Tier 1 Capital (to Average Assets): Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,324,903 1,310,616 International Bank of Commerce, Laredo . . . . . . . . 363,093 International Bank of Commerce, Oklahoma . . . . . 232,689 International Bank of Commerce, Brownsville . . . . 98,087 International Bank of Commerce, Zapata . . . . . . . . 71,418 Commerce Bank . . . . . . . . . . . . . . . . . . . . . . . . . . 22.22 % $ 1,160,096 761,438 19.32 182,782 22.05 115,412 22.18 24,372 43.43 19,892 38.76 21.04 % $ 18.07 20.86 21.17 42.26 37.70 14.59 % $ 13.09 8.95 13.48 14.39 15.00 939,126 616,402 147,966 93,429 19,730 16,103 637,578 400,489 162,246 69,028 27,270 19,048 (20) Fair Value $ 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 471,366 113,151 71,445 15,088 12,314 N/A 725,179 174,078 109,916 23,212 18,945 N/A 580,143 139,262 87,933 18,569 15,156 N/A 500,611 202,808 86,286 34,088 23,811 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, 69 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, 2023 by level within the fair value measurement hierarchy. Fair Value Measurements at Reporting Date Using (in Thousands) Quoted Prices in Active Assets/Liabilities Markets for Identical Assets (Level 1) Measured at Fair Value December 31, 2023 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 4,660,099 162,242 5,417 4,827,758 $ $ — $ 4,660,099 $ — 5,417 5,417 $ 4,822,341 $ 162,242 — — — — — The following table represents financial instruments reported on the consolidated balance sheets at their fair value as of December 31, 2022 by level within the fair value measurement hierarchy. Fair Value Measurements at Reporting Date Using (in Thousands) Quoted Prices in Active Assets/Liabilities Markets for Significant Other Measured at Fair Value December 31, 2022 Identical Assets (Level 1) Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Measured on a recurring basis: Assets: Available for sale securities U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential mortgage-backed securities . . . . . . . . . . . . . . States and political subdivisions . . . . . . . . . . . . . . . . . . . . Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 49,393 4,209,212 159,191 5,358 4,423,154 $ $ 49,393 $ — $ — — 5,358 5,358 $ 4,417,796 $ 4,209,212 159,191 — — — — — — For the years ended December 31, 2023 and December 31, 2022, 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. 70 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, 2023 by level within the fair value measurement hierarchy: Fair Value Measurements at Reporting Date Using (in thousands) Assets/Liabilities Measured at Fair Value Period ended December 31, 2023 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Net Provision During Period Measured on a non-recurring basis: Assets: Watch-List doubtful loans . . . . . . . . . . . . . . . Other real estate owned . . . . . . . . . . . . . . . . . . $ 46,124 307 $ — $ — — $ — 46,124 $ 307 10,221 2,538 The following table represents financial instruments measured at fair value on a non-recurring basis as of and for the year ended December 31, 2022 by level within the fair value measurement hierarchy: Fair Value Measurements at Reporting Date Using (in thousands) Assets/Liabilities Measured at Fair Value Year ended December 31, 2022 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Net Provision During Period Measured on a non-recurring basis: Assets: Watch-List doubtful loans . . . . . . . . . . . . . . . $ Other real estate owned . . . . . . . . . . . . . . . . . . 30,743 5,653 $ — $ — — $ — 30,743 $ 5,653 2,346 1,627 Our assets measured at fair value on a non-recurring basis are limited to loans classified as Watch List – Doubtful and other real estate owned. The fair value of Watch-List Doubtful loans is derived in accordance with FASB ASC 310, “Receivables”. They are primarily comprised of collateral-dependent commercial loans. As the primary sources of loan repayments decline, the secondary repayment source, the collateral, takes on greater significance. Correctly evaluating the fair value becomes even more important. Re-measurement of the loan to fair value is done through a specific valuation allowance included in the ACL. The fair value of the loan 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, 2023, we had approximately $46,491,000 of doubtful commercial collateral dependent loans, of which approximately $1,272,000 had an appraisal performed within the immediately preceding twelve months and of which approximately $35,061,000 had an evaluation performed within the immediately preceding twelve months. As of December 31, 2022, we had approximately $51,326,000 of doubtful commercial collateral dependent loans, of which approximately $0 had an 71 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) appraisal performed within the immediately preceding twelve months and of which approximately $51,326,000 had an evaluation performed within the immediately preceding twelve months. The determination to either seek an appraisal or to perform an evaluation begins in weekly credit quality meetings, where the committee analyzes the existing collateral values of the doubtful 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 ACL (formerly 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, 2023, 2022, and 2021, we recorded approximately $0, $2,000, and $2,000, respectively, in charges to the ACL in connection with loans transferred to other real estate owned. For the twelve months ended December 31, 2023, 2022, and 2021, we recorded approximately $2,538,000, $1,627,000, and $2,655,000, respectively, 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, 2023 and December 31, 2022 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 may 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 – Investment Securities, Equity Securities with Readily Determinable Fair Values and Other Investments. 72 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, 2023 and December 31, 2022, the carrying amount of fixed rate performing loans was $1,199,347,000 and $1,203,381,000, respectively, and the estimated fair value was $1,073,892,000 and $1,100,848,000, 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, 2023 and December 31, 2022. 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, 2023 and December 31, 2022, the carrying amount of time deposits was $2,425,177,000 and $2,068,184,000, respectively, and the estimated fair value was $2,428,681,000 and $2,076,231,000, respectively. Securities Sold Under Repurchase Agreements Securities sold under repurchase agreements are short-term maturities. Due to the contractual terms of the instruments, the carrying amounts approximated fair value at December 31, 2023 and December 31, 2022. 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, 2023 and December 31, 2022. Other Borrowed Funds We currently have long-term borrowings issued from the Federal Home Loan Bank (“FHLB”). The long-term borrowings outstanding at December 31, 2023 and December 31, 2022 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, 2023 and December 31, 2022 the carrying amount of the fixed-rate long-term FHLB borrowings was $10,745,000 and $10,944,000, respectively, and the estimated fair value was $10,745,000 and $10,944,000, respectively. Commitments to Extend Credit and Letters of Credit Commitments to extend credit and fund letters of credit are principally at current interest rates and therefore the carrying amount approximates fair value. 73 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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. 74 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (21) International Bancshares Corporation (Parent Company Only) Financial Information Statements of Condition (Parent Company Only) December 31, 2023 and 2022 (Dollars in Thousands) 2023 2022 ASSETS Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities: $ 105,184 $ 111,382 62,150 2,281,952 3,365 8,617 89,263 114,901 42,519 1,933,269 3,365 7,181 $ 2,572,650 $ 2,190,498 Junior subordinated deferrable interest debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due to IBC Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 108,868 $ 21 15,987 124,876 134,642 21 11,076 145,739 Shareholders’ equity: Common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less cost of shares in treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,420 96,467 154,061 155,511 2,695,567 3,029,088 (470,497) (397,889) 2,475,551 2,883,177 (430,792) (435,403) 2,447,774 2,044,759 $ 2,572,650 $ 2,190,498 75 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (22) International Bancshares Corporation (Parent Company Only) Financial Information Statements of Income (Parent Company Only) Years ended December 31, 2023, 2022 and 2021 (Dollars in Thousands) Income: Dividends from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income on notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Loss) income on other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expenses: Interest expense (Debentures) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for credit loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before federal income taxes and equity in undistributed net income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . Income before equity in undistributed net income of subsidiaries . . . Equity in undistributed net income of subsidiaries . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 2022 2021 $ 179,000 5,769 (6,150) 4 178,623 222,175 $ 2,394 8,662 857 234,088 8,122 500 252 8,874 5,037 437 2,291 7,765 80,882 1,139 9,662 58 91,741 2,792 — 2,272 5,064 169,749 (1,365) 171,114 240,654 411,768 226,323 504 225,819 74,413 300,232 $ 86,677 1,358 85,319 168,603 253,922 $ $ $ 76 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (23) International Bancshares Corporation (Parent Company Only) Financial Information Statements of Cash Flows (Parent Company Only) Years ended December 31, 2023, 2022 and 2021 (Dollars in Thousands) 2023 2022 2021 $ 411,768 $ 300,232 $ 253,922 500 437 — (14) 330 4,911 (240,654) 176,841 (20,170) (33,285) (53,455) (25,774) 1,167 (78,247) (4,611) (107,465) 15,921 89,263 105,184 36 449 1,743 (74,413) 228,484 (32,556) (43,343) (75,899) — 1,537 (75,375) (52,048) (125,886) 26,699 62,564 89,263 $ $ (51) 506 (8,084) (168,603) 77,690 1,549 (11,787) (10,238) — 2,414 (72,838) (716) (71,140) (3,688) 66,252 62,564 Operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized (gain) loss on equity securities with readily determinable fair values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . Equity in undistributed net income of subsidiaries . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . Investing activities: Net (increase) decrease in notes receivable . . . . . . . . . . . . . . . . . . . . . . Increase in other assets and other investments . . . . . . . . . . . . . . . . . . . . Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing activities: Redemption of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from stock transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments of cash dividends - common . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 77 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Condensed Quarterly Income Statements (Dollars in Thousands, Except Per Share Amounts) (Unaudited) 2023 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 209,714 45,181 164,533 6,697 46,492 68,591 204,175 36,847 167,328 10,476 45,385 71,200 198,124 31,669 166,455 8,816 37,702 67,534 188,149 22,964 165,185 8,587 40,362 68,029 Income before income taxes. . . . . . . . . . . . . . . . . . . . . . . . . 135,737 131,037 127,807 128,931 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,361 27,773 27,322 27,288 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 106,376 $ 103,264 $ 100,485 $ 101,643 Per common share: Basic Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.71 $ 1.66 $ 1.62 $ 1.64 Diluted Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.71 $ 1.66 $ 1.62 $ 1.63 78 INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Condensed Quarterly Income Statements (Dollars in Thousands, Except Per Share Amounts) (Unaudited) 2022 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 174,678 15,217 159,461 7,910 45,778 62,422 145,087 9,870 135,217 8,525 54,602 75,173 109,584 6,683 102,901 3,735 43,242 68,756 96,432 6,386 90,046 1,481 43,512 64,118 Income before income taxes. . . . . . . . . . . . . . . . . . . . . . . . . 134,907 106,121 73,652 67,959 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,495 22,765 15,681 14,466 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 105,412 $ 83,356 $ 57,971 $ 53,493 Per common share: Basic Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.69 $ 1.34 $ 0.92 $ 0.84 Diluted Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.68 $ 1.34 $ 0.92 $ 0.84 79 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, 2023, 2022, and 2021. Tax-exempt income has not been adjusted to a tax-equivalent basis: Average Balance 2023 Interest Average Rate/Cost Average Balance 2022 Interest Average Rate/Cost Average Balance 2021 Interest Average Rate/Cost (Dollars in Thousands) Assets Interest earning assets: Loan, net of unearned discounts: Domestic . . . . . . . . . . . . . . . . . . $ Foreign . . . . . . . . . . . . . . . . . . . 7,526,132 147,477 611,836 8,212 8.13 % $ 5.57 6,977,890 138,262 Investment securities: Taxable . . . . . . . . . . . . . . . . . . . Tax-exempt . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . Total interest-earning assets . . . . . 5,167,485 162,300 869,497 13,872,891 132,151 6,259 41,704 800,162 2.56 3.86 4.80 5.77 % 4,510,293 70,636 2,831,040 14,528,121 397,356 4,821 74,988 2,541 46,075 525,781 5.69 % $ 3.49 7,318,756 123,524 355,125 4,090 1.66 3.60 1.63 3.62 % 3,624,903 43,906 2,449,193 13,560,282 34,331 1,483 3,074 398,103 4.85 % 3.31 0.95 3.38 0.13 2.94 % Non-interest earning assets: Cash and cash equivalents . . . . . . . . . Bank premises and equipment, net . . . . Other assets . . . . . . . . . . . . . . . . . . Less allowance for probable loan losses . Total . . . . . . . . . . . . . . . . . . . $ 141,365 412,678 1,350,722 (141,016) 15,636,640 Liabilities and Shareholders’ Equity Interest bearing liabilities: Savings and interest bearing demand 365,194 415,883 1,203,790 (116,188) $ 16,396,800 204,747 442,281 1,021,644 (111,791) 15,117,163 $ deposits . . . . . . . . . . . . . . . . . . $ 4,487,192 60,337 1.34 % $ 4,667,048 12,686 0.27 % $ 4,297,561 4,110 0.10 % Time deposits: Domestic . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . 985,189 1,262,762 Securities sold under repurchase agreements . . . . . . . . . . . . . . . . Other borrowings . . . . . . . . . . . . . . Junior subordinated interest deferrable debentures . . . . . . . . . . . . . . . . . Total interest bearing liabilities . . . . 23,189 29,969 14,760 283 2.35 2.37 3.15 2.61 1,020,388 1,139,209 476,877 386,924 469,152 10,839 115,859 7,330,993 8,123 136,661 7.01 1.86 % 134,642 7,825,088 6,555 4,602 2,495 6,781 5,037 38,156 0.64 0.40 0.52 1.75 1,077,371 1,083,866 411,661 436,226 7,636 4,019 621 7,654 0.71 0.37 0.15 1.75 3.74 0.49 % 134,642 7,441,327 2,791 26,831 2.07 0.36 % Non-interest bearing liabilities: Demand Deposits . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . Shareholders’ equity . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . $ 5,299,865 333,309 2,672,483 15,636,650 5,973,462 200,013 2,398,237 $ 16,396,800 5,355,105 70,601 2,250,130 15,117,163 $ Net interest income . . . . . Net yield on interest earning assets . . . . . . . . . . . . . . $ 663,501 $ 487,625 $ 371,272 4.78 % 3.36 % 2.74 % 80 INTERNATIONAL BANCSHARES CORPORATION OFFICERS AND DIRECTORS OFFICERS DIRECTORS DENNIS E. NIXON Chairman of the Board and President JUDITH I. WAWROSKI Chief Accounting Officer and Treasurer DALIA F. MARTINEZ Vice President MIRTA SALCEDO 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 DOUG HOWLAND Investments RUDOLPH M. MILES Investments LARRY NORTON Investments ROBERTO R. RESENDEZ Investments ANTONIO R. SANCHEZ, JR. Chairman of the Board Sanchez Oil & Gas Corporation Investments DIANA G. ZUNIGA President and Owner Investors Alliance, Inc. A N N U A L R E P O R T 2 0 2 2 ★★ 

Continue reading text version or see original annual report in PDF format above