International Bancshares 10K 2020 Annual report | IBOC Filing

Exhibit 13

As used in this report, the words “Company,” “we,” “us,” and “our” refer to International Bancshares Corporation, a Texas corporation, its five wholly-owned subsidiary banks (“Subsidiary Banks”), and other subsidiaries. The information that follows may contain forward-looking statements, which are qualified as indicated under “Cautionary Notice Regarding Forward-Looking Statements” in Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of this report. Our website address is www.ibc.com.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

(Consolidated)

The following consolidated selected financial data is derived from our audited financial statements as of and for the five years ended December 31, 2020. 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


	AS OF OR FOR THE YEARS ENDED DECEMBER 31,
	2020		2019		2018		2017		2016

	(Dollars in Thousands, Except Per Share Data)
STATEMENT OF CONDITION
Assets	$	14,029,467	$	12,112,894	$	11,871,952	$	12,184,698	$	11,804,041
Investment securities available-for-sale		3,080,768		3,378,923		3,411,350		4,154,470		4,177,349
Net loans		7,432,695		6,834,668		6,499,905		6,280,485		5,900,027
Deposits		10,721,860		8,826,034		8,696,545		8,544,892		8,610,089
Other borrowed funds		436,327		626,511		705,665		1,195,225		733,375
Junior subordinated deferrable interest debentures		134,642		134,642		160,416		160,416		160,416
Shareholders’ equity		2,177,998		2,118,053		1,939,582		1,838,980		1,724,667
INCOME STATEMENT
Interest income	$	427,008	$	492,401	$	465,822	$	415,136	$	387,914
Interest expense		39,119		58,629		52,668		38,931		43,129
Net interest income		387,889		433,772		413,154		376,205		344,785
Provision for probable loan losses		45,379		18,843		6,112		11,221		19,859
Non-interest income		150,579		154,826		165,042		150,406		161,702
Non-interest expense		281,331		309,801		299,501		293,748		289,625
Income before income taxes		211,757		259,954		272,583		221,642		197,003
Income taxes		44,439		54,850		56,652		64,206		63,071
Net income		167,319		205,104		215,931		157,436		133,932
Net income available to common shareholders	$	167,319	$	205,104	$	215,931	$	157,436	$	133,932
Per common share:
Basic	$	2.63	$	3.13	$	3.27	$	2.38	$	2.03
Diluted	$	2.62	$	3.12	$	3.24	$	2.36	$	2.02

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis represents an explanation of significant changes in our financial position and results of our operations on a consolidated basis for the three-year period ended December 31, 2020. The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020, and the Selected Financial Data and Consolidated Financial Statements included elsewhere herein.

Special Cautionary Notice Regarding Forward Looking Information

Certain matters discussed in this report, excluding historical information, include forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by these sections. Although we believe such forward-looking statements are based on reasonable assumptions, no assurance can be given that every objective will be reached. The words “estimate,” “expect,” “intend,” “believe” and “project,” as well as other words or expressions of a similar meaning, are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this report. Such statements are based on current expectations, are inherently uncertain, are subject to risks and should be viewed with caution. Actual results and experience may differ materially from the forward-looking statements as a result of many factors.

Risk factors that could cause actual results to differ materially from any results that we project, forecast, estimate or budget in forward-looking statements include, among others, the following possibilities:

●

Local, regional, national and international economic business conditions and the impact they may have on us, our customers, and such customers’ ability to transact profitable business with us, including the ability of our borrowers to repay their loans according to their terms or a change in the value of the related collateral.

●

Volatility and disruption in national and international financial markets.

●

Government intervention in the U.S. financial system.

●

The unavailability of funding from the FHLB, the Fed or other sources in the future could adversely impact our growth strategy, prospects and performance.

●

Changes in consumer spending, borrowing and saving habits.

●

Changes in interest rates and market prices, including, changes in federal regulations on the payment of interest on demand deposits.

●

Changes in the capital markets we utilize, including changes in the interest rate environment that may reduce margins.

●

Changes in state and/or federal laws and regulations, including, the impact of the Consumer Financial Protection Bureau (“CFPB”) as a regulator of financial institutions, changes in the accounting, tax and regulatory treatment of trust preferred securities, as well as changes in banking, tax, securities, insurance, employment, environmental and immigration laws and regulations and the risk of litigation that may follow.

●

Changes in U.S.—Mexico trade, including, reductions in border crossings and commerce, integration and implementation of the United States-Mexico-Canada Agreement and the possible imposition of tariffs on imported goods.

●

The reduction of deposits from nonresident alien individuals due to the IRS rules requiring U.S. financial institutions to report deposit interest payments made to such individuals.

●

The loss of senior management or operating personnel.

●

The timing, impact and other uncertainties of the potential future acquisitions, as well as our ability to maintain our current branch network and enter new markets to capitalize on growth opportunities.

●

Changes in estimates of future reserve requirements based upon periodic review thereof under relevant regulatory and accounting requirements.

●

Additions to our 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 cyber security risks, could subject us to increased operating costs, litigation and other liabilities.

●

Acts of war or terrorism.

●

Natural disasters.

●

Reduced earnings resulting from the write down of the carrying value of securities held in our securities available-for-sale portfolios.

●

The effect of changes in accounting policies and practices by the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standards setters.

●

The costs and effects of regulatory developments or regulatory or other governmental inquiries and the results of regulatory examinations or reviews and obtaining regulatory approvals.

●

The effect of final rules amending Regulation E that prohibit financial institutions from charging consumer fees for paying overdrafts on ATM and one-time debit card transactions, as well as the effect of any other regulatory or legal developments that limit overdraft services.

●

The reduction of income and possible increase in required capital levels related to the adoption of legislation, including and the implementing rules and regulations, including those that establish debit card interchange fee standards and prohibit network exclusivity arrangements and routing restrictions.

●

The increase in required capital levels related to the implementation of capital and liquidity rules of the federal banking agencies that address or are impacted by the Basel III capital and liquidity standards.

●

The enhanced due diligence burden imposed on banks related to the banks’ inability to rely on credit ratings under Dodd-Frank.

●

Our failure or circumvention of our internal controls and risk management, policies and procedures.

●

Potential direct and indirect impacts, risks, and uncertainties associated with the novel Coronavirus Disease 2019 (“COVID-19”) or similar global pandemics.

Forward-looking statements speak only as of the date on which such statements are made. It is not possible to foresee or identify all such factors. We make no commitment to update any forward-looking statement, or to disclose any facts, events or circumstances after the date hereof that may affect the accuracy of any forward-looking statement, unless required by law.

Overview

We are headquartered in Laredo, Texas, with 187 facilities and 282 ATMs, providing banking services for commercial, consumer and international customers of north, south, central and southeast Texas and the State of Oklahoma. We are one of the largest independent commercial bank holding companies headquartered in Texas. We, through our Subsidiary Banks, are in the business of gathering funds from various sources and investing those funds in order to earn a return. We, either directly or through a Subsidiary Bank, own one insurance agency, a liquidating subsidiary, a fifty percent interest in an investment banking unit that owns a broker/dealer, a controlling interest in four merchant banking entities, and a majority ownership in a real-estate development partnership. Our primary earnings come from the spread between the interest earned on interest-bearing assets and the interest paid on interest-bearing liabilities. In addition, we generate

income from fees on products offered to commercial, consumer and international customers. The sales team of each of our Subsidiary Banks aims to match the right mix of products and services to each customer to best serve the customer’s needs. That process entails spending time with customers to assess those needs and servicing the sales arising from those 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, 2020 was 7.86% as compared to 9.97% for the year ended December 31, 2019.

We are very active in facilitating trade along the United States border with Mexico. We do a large amount of business with customers domiciled in Mexico and deposits from persons and entities domiciled in Mexico comprise a large and stable portion of the deposit base of our Subsidiary Banks. We also serve the growing Hispanic population through our facilities located throughout north, south, central and southeast Texas and the State of Oklahoma.

In March 2020, the World Health Organization recognized the outbreak of COVID-19 as a pandemic. The spread of COVID-19 and resulting global health crisis has created extreme negative consequences and disruption in global financial markets and has curtailed activity in the governmental, commercial and consumer sectors. Government responses at all levels have included ordering non-essential businesses be closed, mandating that individuals not working in essential businesses restrict their movement, requiring the observance of social distancing and sheltering in place, and, in many communities, cancelling what remained of the school year. The consequences of these actions, and the responses by individuals and businesses affected, has resulted in rapid decreases in consumer and commercial activity, rapid increases in unemployment, disruption in global supply chains, market downturns and volatility, drastic changes in consumer behavior, new legislation in response to the emergency and decreases in interest rates.

We have continued to work with our customers to assist them through these difficult times and we are capitalizing on our strong capital position and strong liquidity to ensure that we are correctly positioned and have the financial strength to navigate the crisis to protect our Company, our employees, our customers and our shareholders. In order to protect the health of our employees and customers, while still filling the needs in the communities we serve as an essential business, we have taken steps to ensure proper safety protocols are in place, including enforcing local ordinances, discontinuing significant travel, ensuring social distancing, increasing disinfecting of facilities, establishing a human resources hotline to address employee concerns and establishing a task force to ensure we are making good decisions. For our customers, we are also working with them on a case-by-case basis on temporary deferrals of interest and/or principal payments on loans and responding to other individual needs of those customers in distress.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act includes the Paycheck Protection Program (“PPP”), originally a nearly $350 billion program designed to aid small businesses through federally guaranteed loans distributed through banks. These loans were originally intended to support eight weeks of payroll and certain other costs to help those businesses remain viable and allow their employees to pay their bills. Subsequently, on April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act (“CARES Part II”) was signed into law. CARES Part II provided an additional funding of $320 billion for the PPP program. Then, on June 5, 2020, the Paycheck Protection Program Flexibility Act (“PPPFA”) was signed into law. The PPPFA, among other things, extended the period of time that businesses could spend PPP loan proceeds on payroll and other eligible costs from eight weeks to the earlier of 24 weeks or December 31, 2020. On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the “Economic Aid Act”) was enacted, which among other things, reauthorized lending under the PPP to first-time borrowers and for second draws by certain borrowers who have previously received PPP loans. The Economic Aid Act made available an additional $147 billion for PPP loans requested by March 31, 2021. We have been active participants in helping our customers obtain PPP loans under all the PPP programs, and as of February 22, 2021, have approximately 3,500 loans with an approximate value of $395,872,000 outstanding.

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 and create efficiencies and institute cost-control protocols at all levels. We will continue to 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, closely. 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.

Results of Operations

Summary

Consolidated Statements of Condition Information



	December 31, 2020		December 31, 2019		Percent Increase (Decrease)

	(Dollars in Thousands)
Assets	$	14,029,467	$	12,112,894	15.8	%
Net loans		7,432,695		6,834,668	8.7
Deposits		10,721,860		8,826,034	21.5
Securities sold under repurchase agreements		428,148		236,536	81.0
Other borrowed funds		436,327		626,511	(30.4)
Junior subordinated deferrable interest debentures		134,642		134,642	—
Shareholders’ equity		2,177,998		2,118,053	2.8

Consolidated Statements of Income Information


					Percent				Percent
	Year Ended		Year Ended		Increase		Year Ended		Increase
	December 31,		December 31,		(Decrease)		December 31,		(Decrease)
	2020		2019		2020 vs. 2019		2018		2019 vs. 2018

	(Dollars in Thousands, Except Per Share Data)
Interest income	$	427,008	$	492,401	(13.3)	%	$	465,822	5.7	%
Interest expense		39,119		58,629	(33.3)			52,668	11.3
Net interest income		387,889		433,772	(10.6)			413,154	5.0
Provision for probable loan losses		45,379		18,843	140.8			6,112	208.3
Non-interest income		150,579		154,826	(2.7)			165,042	(6.2)
Non-interest expense		281,331		309,801	(9.2)			299,501	3.4
Net income		167,319		205,104	(18.4)			215,931	(5.0)
Per common share:
Basic	$	2.63	$	3.13	(16.0)	%	$	3.27	(4.3)	%
Diluted		2.62		3.12	(16.0)			3.24	(3.7)

Net Income

Net income for the year ended December 31, 2020 decreased by 18.4% compared to the same period of 2019. Net income for the year ended December 31, 2020 was primarily impacted by an increase in the provision for credit losses due to the economic changes that occurred in 2020 as a result of COVID-19 and the impact of those changes on our Allowance for Credit Losses (“ACL”) calculation for the period. We adopted the provisions of Accounting Standards Update No. 2016-13, “Financial Instruments – Credit Losses: (“ASU 2016-13”) on January 1, 2020, resulting in a transition from the long-standing incurred loss model to an expected credit loss model, which 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 impact of the adoption resulted in a charge to capital of $8.3 million, net of tax. The provision for credit losses for the year ended December 31, 2020 was approximately $35.8 million, after tax, an increase of 140.8% compared to the same period of 2019. Net interest income for the year ended December 31, 2020 was also negatively impacted by the Federal Reserve Board (“FRB”) action to decrease interest rates in March 2020. Net income for the year ended December 31, 2019 decreased by 5% compared to the same period of 2018. Net interest income was positively affected by an increase in net interest income due to a higher volume of loans and an increase in the overall yield on the portfolio. Interest expense increased for the year ended December 31, 2019 and can be primarily attributed to an increase in the cost of borrowings, and an increase in the interest paid on savings and time deposit accounts, which increased because of the FRB actions to increase interest rates in 2019. Net income for the year ended December 31, 2019 was negatively impacted by an increase in the provision for credit losses due to a charge-off of $7.5 million, net of tax, on a relationship that was secured by real property on which car dealerships are operated.

Net 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,
	2020		2019		2018
	Average		Average		Average
	Rate/Cost		Rate/Cost		Rate/Cost
Assets
Interest earning assets:
Loan, net of unearned discounts:
Domestic	5.12	%	6.07	%	5.80	%
Foreign	3.73		4.15		3.78
Investment securities:
Taxable	1.43		2.23		2.24
Tax-exempt	3.61		3.85		4.05
Other	0.12		1.29		1.07
Total interest-earning assets	3.72	%	4.77	%	4.46	%
Liabilities
Interest bearing liabilities:
Savings and interest bearing demand deposits	0.18	%	0.50	%	0.39	%
Time deposits:
Domestic	1.06		1.09		0.67
Foreign	0.81		1.02		0.64
Securities sold under repurchase agreements	0.28		0.91		0.77
Other borrowings	1.60		1.98		1.88
Junior subordinated deferrable interest debentures	2.85		4.43		4.36
Total interest bearing liabilities	0.59	%	0.93	%	0.79	%

The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net income and net interest margin. The yield on average interest-earning assets decreased 22.0% from 4.77% in 2019 to 3.72% in 2020, and the rates paid on average interest-bearing liabilities decreased 36.6% from 0.93% in 2019 to 0.59% in 2020. The yield on average interest-earning assets increased 7.0% from 4.46% in 2018 to 4.77% in 2019, and the rates paid on average interest-bearing liabilities increased 17.7% from .79% in 2018 to .93% in 2019. The majority of our taxable investment securities are invested in mortgage backed securities and, during rapid increases or reduction in interest rates, the yield on these securities do not re-price as quickly as the loans.

The following table analyzes the changes in net interest income during 2020, 2019 and 2018 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:


	2020 compared to 2019						2019 compared to 2018
	Net increase (decrease) due to						Net increase (decrease) due to
	Volume⁽¹⁾		Rate⁽¹⁾		Total		Volume⁽¹⁾		Rate⁽¹⁾		Total

	(Dollars in Thousands)						(Dollars in Thousands)
Interest earned on:
Loans, net of unearned discounts:
Domestic	$	34,585		(69,848)	$	(35,263)	$	20,056	$	18,349	$	38,405
Foreign		(254)		(515)		(769)		(441)		474		33
Investment securities:
Taxable		(692)		(25,698)		(26,390)		(8,778)		(221)		(8,999)
Tax-exempt		(2,285)		(166)		(2,451)		(3,005)		(251)		(3,256)
Other		8,495		(9,015)		(520)		154		242		396
Total interest income	$	39,849	$	(105,242)	$	(65,393)	$	7,986	$	18,593	$	26,579
Interest incurred on:
Savings and interest bearing demand deposits	$	1,287		(11,308)	$	(10,021)	$	59	$	3,556	$	3,615
Time deposits:
Domestic		955		(383)		572		(185)		3,891		3,706
Foreign		33		(2,345)		(2,312)		87		4,081		4,168
Securities sold under repurchase agreements		626		(2,132)		(1,506)		(364)		381		17
Other borrowings		(1,549)		(2,091)		(3,640)		(5,590)		599		(4,991)
Junior subordinated deferrable interest debentures		(453)		(2,150)		(2,603)		(661)		107		(554)
Total interest expense	$	899	$	(20,409)	$	(19,510)	$	(6,654)	$	12,615	$	5,961
Net interest income	$	38,950	$	(84,833)	$	(45,883)	$	14,640	$	5,978	$	20,618

(1) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

As part of our strategy to manage interest rate risk, we strive to manage both assets and liabilities so that interest sensitivities match. One method of calculating interest rate sensitivity is through gap analysis. A gap is the difference between the amount of interest rate sensitive assets and interest rate sensitive liabilities that re-price or mature in a given time period. Positive gaps occur when interest rate sensitive assets exceed interest rate sensitive liabilities, and negative gaps occur when interest rate sensitive liabilities exceed interest rate sensitive assets. A positive gap position in a period of rising interest rates should have a positive effect on net interest income as assets will re-price faster than liabilities. Conversely, net interest income should contract somewhat in a period of falling interest rates. 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.

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, 2020, 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. Given the current low interest rate environment, no downward rate shifts were modeled in our income simulations. At December 31, 2020, the income simulations show that a rate shift of +100, +200, +300 and +400 basis points in interest rates up will vary projected net interest income for the coming 12-month period by +11.59%, +24.98%, +37.86%, and +50.41%, respectively. The basis point shift in interest rates is a hypothetical rate scenario used to calibrate risk and does not necessarily represent management’s current view of future market developments. We believe that we are properly positioned for a potential interest rate increase or decrease.

Allowance for Credit Losses

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


	December 31,
	2020		2019		2018		2017		2016

	(Dollars in Thousands)
Loans accounted for on a non-accrual basis	$	19,822	$	4,886	$	15,791	$	54,730	$	36,858
Accruing loans contractually past due ninety days or more as to interest or principal payments		7,670		59,694		39,935		6,590		5,215

Domestic loans accounted for on a non-accrual basis increased at December 31, 2020 by 305.7% compared to the same period of 2019. The increase can be primarily attributed to one relationship secured by commercial property. Domestic loans contractually past due ninety days and still accruing decreased by 87.2% at December 31, 2020 compared to the same period of 2019 and can be attributed to a relationship that is secured by real property on which education centers are operated.

The ACL increased 80.9% to $109,059,000 at December 31, 2020 from $60,278,000 at December 31, 2019. The ACL was 1.45% of total loans, net of unearned income at December 31, 2020 and .87% at December 31, 2019. The provision for credit losses charged to expense increased $26,536,000 to $45,379,000 for the year ended December 31, 2020 from $18,843,000 for the same period in 2019. The increase in the ACL can be primarily attributed to the deteriorating economic conditions occurring in those periods as a result of COVID-19 and the impact of those conditions on certain segments of our calculation. We adopted the provisions of ASU 2016-13 on January 1, 2020, resulting in a transition from the long-standing incurred loss model to an expected credit loss model, which recognizes credit losses over the life of a financial asset.

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 doubtful loans (formerly “impaired loans”). See Note 1 to the Consolidated Financial Statements.


	December 31,		December 31,
	2020		2019

	(Dollars in Thousands)
Domestic
Commercial	$	—	$	32
Residential: first lien		4,078		5,608
Residential: junior lien		521		692
Consumer		989		1,192
Foreign		233		264
Total troubled debt restructuring	$	5,821	$	7,788

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


	December 31,
	2020		2019		2018		2017		2016

	(Dollars in Thousands)
Loans accounted for on a non-accrual basis	$	—	$	—	$	—	$	—	$	387
Accruing loans contractually past due ninety days or more as to interest or principal payments		568		11		739		667		11

The gross income that would have been recorded during 2020, 2019 and 2018 on non-accrual loans in accordance with their original contract terms was approximately $694,000, $340,000 and $1,119,000 on domestic loans and approximately $0, $0, and $0 on foreign loans, respectively. The amount of interest income on such loans that was recognized in 2020, 2019 and 2018 was approximately $0, $4,000, and $4,000 on domestic loans and $0, $0, and $0 for foreign loans, respectively.

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

Loan commitments, consisting of unused commitments to lend, letters of credit, credit card lines and other approved loans, that have not been funded, were approximately $2,486,311,000 and $2,758,132,000 at December 31, 2020 and 2019, respectively. See Note 19 to the Consolidated Financial Statements.

The following table summarizes loan balances at the end of each year and average loans outstanding during the year; changes in the ACL arising from loans charged-off and recoveries on loans previously charged-off by loan category; and additions to the allowance for credit loss which have been charged to expense:


	2020			2019			2018			2017			2016

	(Dollars in Thousands)
Loans, net of unearned discounts, outstanding at December 31	$	7,541,754		$	6,894,946		$	6,561,289		$	6,348,172		$	5,964,688
Average loans outstanding during the year (Note 1)	$	7,415,464		$	6,852,121		$	6,517,978		$	6,183,864		$	5,949,048
Balance of allowance at January 1	$	60,278		$	61,384		$	67,687		$	64,661		$	66,988
Adoption of ASU 2016-13		10,347			—			—			—			—
Provision charged to expense		45,379			18,843			6,112			11,221			19,859
Loans charged off:
Domestic:
Commercial, financial and agricultural		(8,991)			(21,765)			(14,290)			(12,134)			(35,029)
Real estate—mortgage		(284)			(636)			(469)			(441)			(401)
Real estate—construction		(19)			(39)			(1)			(213)			(16)
Consumer		(280)			(487)			(362)			(309)			(414)
Foreign		—			(1)			(3)			(1)			(41)
Total loans charged off:		(9,574)			(22,928)			(15,125)			(13,098)			(35,901)
Recoveries credited to allowance:
Domestic:
Commercial, financial and agricultural		2,308			2,514			2,227			4,547			7,229
Real estate—mortgage		207			312			405			269			299
Real estate—construction		35			113			25			21			6,099
Consumer		69			40			43			45			69
Foreign		10			—			10			21			19
Total recoveries		2,629			2,979			2,710			4,903			13,715
Net loans charged off		(6,945)			(19,949)			(12,415)			(8,195)			(22,186)
Balance of allowance at December 31	$	109,059		$	60,278		$	61,384		$	67,687		$	64,661
Ratio of net loans charged-off during the year to average loans outstanding during the year (Note 1)		0.09	%		0.29	%		0.19	%		0.13	%		0.37	%
Ratio of allowance to loans, net of unearned discounts, outstanding at December 31		1.45	%		0.87	%		0.94	%		1.07	%		1.08	%

(1) The average balances for purposes of the above table are calculated on the basis of daily balances.

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:


	At December 31,
	2020				2019				2018				2017				2016
			Percent				Percent				Percent				Percent				Percent
	Allowance		of total		Allowance		of total		Allowance		of total		Allowance		of total		Allowance		of total

	(Dollars in Thousands)
Commercial, Financial and Agricultural	$	66,075	59.9	%	$	29,753	49.1	%	$	31,197	50.4	%	$	35,885	52.3	%	$	32,928	50.2	%
Real estate—Mortgage		14,618	13.3			10,039	16.5			11,073	17.9			12,242	17.9			11,355	17.3
Real estate—Construction		27,019	24.5			19,242	31.7			17,806	28.7			18,183	26.5			18,887	28.8
Consumer		594	0.5			421	0.7			437	0.7			535	0.8			607	0.9
Foreign		753	1.8			823	2.0			871	2.3			842	2.5			884	2.8
	$	109,059	100.0	%	$	60,278	100.0	%	$	61,384	100.0	%	$	67,687	100.0	%	$	64,661	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 increase in charge-offs charged to the ACL for the year ended December 31, 2019 can be primarily attributed to a relationship that is secured by multiple pieces of real property on which car dealerships are operated. The relationship began deteriorating in the fourth quarter of 2018, triggered by significant fraud by a high-level insider of the car dealership resulting in the dealerships unexpectedly filing for bankruptcy and creating an exposure for potential loss since the operations of the dealerships were the source of repayment from the borrower. The relationship further deteriorated in the first quarter of 2019 after the court approved debtor in possession plan sponsor discontinued its role in the process and thus did not fulfill its obligation to assume full responsibility of the accrued and unpaid interest. Although the relationship is secured by real property (the dealerships’ real estate), the real property has specialized use, contributing to the potential exposure for probable loss. During the first quarter of 2019, in light of the circumstances and management’s evaluation of the relationship, the decision was made to classify the relationship as doubtful (formerly “impaired” prior to the adoption of ASU 2016-13), non-accrual status and place a specific reserve on the relationship in the amount of $9.5 million. During the second quarter of 2019, management continued to evaluate the relationship and decided to foreclose on the underlying real estate collateral, resulting in a charge-off of approximately $9.5 million, reflected in the tables above as part of the Commercial and commercial real estate: farmland and commercial categories. As discussed in prior periods, charge-offs for the twelve-months ended December 31, 2016 had increased due to the deterioration of one relationship that was secured by multiple pieces of transportation equipment beginning in the fourth quarter of 2014. In March 2016, litigation against the management of the borrower was filed in the State of Nevada, resulting in a going concern issue with the borrower’s operations and the future use of the transportation equipment pledged as collateral on the relationship. As a result, management, in accordance with its credit review procedures, re-evaluated the collateral values on the equipment in light of the new circumstances and reduced the collateral values accordingly, resulting in a further charge-down of the relationship of approximately $19.4 million, which is included in the losses charged to the allowance in the commercial category in the table detailing the activity for the twelve months ended December 31, 2016. Two recoveries on loans charged-off in prior years are included in the recoveries credited to the allowance in the table detailing activity for the year ended December 31, 2016. The recoveries occurred in the first and third quarters of 2016 in the amounts of $4.4 million and $6 million, respectively, and are included in the Commercial and commercial real estate: other construction and land development categories.

The 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, 2020 was adequate to absorb probable losses from loans and other financial instruments in the portfolio at that date. See Critical Accounting Policies on page 22.

Non-Interest Income


					Percent				Percent
	Year Ended		Year Ended		Increase		Year Ended		Increase
	December 31,		December 31,		(Decrease)		December 31,		(Decrease)
	2020		2019		2020 vs. 2019		2018		2019 vs. 2018

	(Dollars in Thousands)
Service charges on deposit accounts	$	61,983	$	72,502	(14.5)	%	$	72,433	0.1	%
Other service charges, commissions and fees
Banking		48,986		50,996	(3.9)			46,685	9.2
Non-banking		7,822		7,832	(0.1)			7,801	0.4
Investment securities transactions, net		(5)		(12)	(58.3)			(141)	(91.5)
Other investments, net		4,920		5,985	(17.8)			19,897	(69.9)
Other income		26,873		17,523	53.4			18,367	(4.6)
Total non-interest income	$	150,579	$	154,826	(2.7)	%	$	165,042	(6.2)	%

Total non-interest income for the year ended December 31, 2020 decreased by 2.7% compared to the same period of 2019. Income from service charges on deposit accounts for the year ended December 31, 2020 were negatively impacted due to a decrease in customer activity as a result of the current economic environment and the continued impact of the COVID-19 pandemic on day-to-day activities. Non-interest income for the year ended December 31, 2019 decreased by 6.2% compared to the same period of 2018. The decrease can be primarily attributed to a decrease in non-interest income from other investments due to the impairment of an equity investment of $3.7 million, net of tax as a result of a re-evaluation of the carrying value and losses on various equity investments in which we hold an ownership.

Non-Interest Expense


					Percent				Percent
	Year Ended		Year Ended		Increase		Year Ended		Increase
	December 31,		December 31,		(Decrease)		December 31,		(Decrease)
	2020		2019		2020 vs. 2019		2018		2019 vs. 2018

	(Dollars in Thousands)
Employee compensation and benefits	$	130,039	$	145,929	(10.9)	%	$	138,532	5.3	%
Occupancy		24,909		28,635	(13.0)			29,097	(1.6)
Depreciation of bank premises and equipment		28,318		28,270	0.2			25,873	9.3
Professional fees		12,546		17,661	(29.0)			12,601	40.2
Deposit insurance assessments		1,870		1,416	32.1			3,742	(62.2)
Net expense, other real estate owned		9,808		6,377	53.8			4,413	44.5
Advertising		4,284		7,748	(44.7)			7,695	0.7
Software and software maintenance		19,238		19,850	(3.1)			17,516	13.3
Other		50,319		53,915	53.4			60,032	(10.2)
Total non-interest expense	$	281,331	$	309,801	(9.2)	%	$	299,501	3.4	%

Non-interest expense for the year ended December 31, 2020 decreased by 9.2% compared to the same period of 2019. The decrease is primarily due to our employee compensation and benefit reductions, and is primarily being driven by efforts to right-size and closely manage our workforce commensurate with decreased activities in our branches arising

from the COVID-19 pandemic, while ensuring that we are able to continue to serve our customers. Non-interest expense for the year ended December 31, 2019 increased by 3.4% compared to the same period of 2018. Non-interest expense was impacted by an increase in costs of our compensation and benefit plans as a result of our continued review of those plans and necessary increases to remain competitive and compensate our staff based on their performance, as well as an increase in depreciation expense as we continue to invest in our network infrastructure, equipment and facilities. Professional fees increased in 2019 compared to the same period of 2018 primarily due to ongoing costs related to strategic projects across our entities to enhance efficiencies and workflow.

Effects of Inflation

The principal component of earnings is net interest income, which is affected by changes in the level of interest rates. Changes in rates of inflation affect interest rates. It is difficult to precisely measure the impact of inflation on net interest income because it is not possible to accurately differentiate between increases in net interest income resulting from inflation and increases resulting from increased business activity. Inflation also raises costs of operations, primarily those of employment and services.

Financial Condition

Investment Securities

The following table sets forth the carrying value of investment securities as of December 31, 2020, 2019 and 2018:


	December 31,
	2020		2019		2018

	(Dollars in Thousands)
Residential mortgage-backed securities
Available for sale	$	3,029,954	$	3,223,010	$	3,891,233
Obligations of states and political subdivisions
Available for sale		50,814		188,340		232,951
Equity securities with readily determinable fair values		6,202		5,937		27,886
Other securities
Held to maturity		3,400		1,200		2,400
Total	$	3,090,370	$	3,418,487	$	4,154,470

The following tables set forth the contractual maturities of investment securities, based on amortized cost, at December 31, 2020 and the average yields of such securities, except for the totals, which reflect the weighted average yields. Actual maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.


	Available for Sale Maturing
	Within one				After one but				After five but
	year				within five years				within ten years				After ten years
	Adjusted				Adjusted				Adjusted				Adjusted
	Cost		Yield		Cost		Yield		Cost		Yield		Cost		Yield

	(Dollars in Thousands)
Residential mortgage-backed securities	$	—	—	%	$	82,378	3.43	%		620,518	2.59	%	$	2,303,696	2.33	%
Obligations of states and political subdivisions		—	—			—	—			355	4.75	%		47,342	4.02	%
Equity securities with readily determinable fair values		6,202	1.54			—	—			—	—			—	—	%
Total	$	6,202	1.54	%	$	82,378	3.43	%	$	620,873	2.59	%	$	2,351,038	2.36	%


	Held to Maturity Maturing
	Within one				After one but				After five but
	year				within five years				within ten years				After ten years
	Adjusted				Adjusted				Adjusted				Adjusted
	Cost		Yield		Cost		Yield		Cost		Yield		Cost		Yield
	(Dollars in Thousands)
Other securities	$	1,200	3.13	%	$	2,200	1.66	%	$	—	—	%	$	—	—	%
Total	$	1,200	3.13	%	$	2,200	1.66	%	$	—	—	%	$	—	—	%

Mortgage-backed securities are securities primarily issued by the Federal Home Loan Mortgage Corporation (“Freddie Mac”), Federal National Mortgage Association (“Fannie Mae”), and the Government National Mortgage Association (“Ginnie Mae”). Investments in mortgage-backed securities issued by Ginnie Mae are fully guaranteed by the U.S. government. Investments in mortgage-backed securities issued by Freddie Mac and Fannie Mae are not fully guaranteed by the U.S. government; however, we believe that the quality of the bonds is similar to other AAA rated bonds with limited credit risk, particularly given the placement of Fannie Mae and Freddie Mac into conservatorship by the federal government in 2008 and because securities issued by others that are collateralized by residential mortgage-backed securities issued by Fannie Mae or Freddie Mac are rated consistently as AAA rated securities.

Loans

The amounts of loans outstanding, by classification, at December 31, 2020, 2019, 2018, 2017 and 2016 are shown in the following table:


	December 31,
	2020		2019		2018		2017		2016
	(Dollars in Thousands)
Commercial, financial and agricultural	$	4,516,288	$	3,379,837	$	3,305,124	$	3,322,668	$	2,993,203
Real estate—mortgage		999,144		1,140,377		1,173,101		1,133,525		1,032,222
Real estate—construction		1,846,757		2,185,883		1,886,231		1,683,550		1,716,875
Consumer		40,595		47,800		46,316		49,543		55,168
Foreign		138,970		141,049		150,517		158,886		167,220
Loans, net of unearned discount	$	7,541,754	$	6,894,946	$	6,561,289	$	6,348,172	$	5,964,688

The following table shows the amounts of loans (excluding real estate mortgages and consumer loans) outstanding as of December 31, 2020, 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:


	Maturing
			After one but
	Within one		within five		After five
	year		years		years		Total

	(Dollars in Thousands)
Commercial, financial and agricultural	$	1,361,312	$	2,763,396	$	391,580	$	4,516,288
Real estate—construction		660,265		995,676		190,816		1,846,757
Foreign		84,245		33,519		21,206		138,970
Total	$	2,105,822	$	3,792,591	$	603,602	$	6,502,015


	Interest sensitivity
	Fixed Rate		Variable Rate

	(Dollars in Thousands)
Due after one but within five years	$	539,854	$	3,252,737
Due after five years		187,211		416,391
Total	$	727,065	$	3,669,128

International Operations

On December 31, 2020, we had $138,970,000 (1.0% of total assets) in loans outstanding to borrowers domiciled in foreign countries, which included primarily borrowers domiciled in Mexico. The loan policies of our Subsidiary Banks generally require that loans to borrowers domiciled in foreign countries be primarily secured by assets located in the United States or have credit enhancements in the form of guarantees from significant United States corporations. The composition of such loans and the related amounts of allocated ACL as of December 31, 2020 and 2019 is presented below.


	For the year ended December 31,
	2020				2019
			Related				��	Related
	Amount of		Allowance for		Amount of			Allowance for
	Loans		Credit Losses		Loans			Credit Losses

	(Dollars in Thousands)
Secured by certificates of deposit in United States banks	$	85,085	$	45	$	89,734		$	386
Secured by United States real estate		33,135		427		33,008			291
Secured by other United States collateral (securities, gold, silver, etc.)		7,888		85		10,483			92
Unsecured		8,008		117		155			2
Other (principally Mexico real estate)		4,854		79		7,669			52
	$	138,970	$	753	$	141,049		$	823

The transactions for the years ended December 31, 2020, 2019 and 2018, in that portion of the ACL related to foreign debt were as follows:


	2020		2019		2018

	(Dollars in Thousands)
Balance at January 1,	$	823	$	871	$	842
Adoption of ASU 2016-13		(410)		—		—
Charge-offs		—		(1)		(3)
Recoveries		10		—		10
Net charge-offs		10		(1)		7
Charge (credit) to expense		330		(47)		22
Balance at December 31	$	753	$	823	$	871

Deposits


	2020		2019
	Average Balance		Average Balance

	(Dollars in Thousands)
Deposits:
Demand—non-interest bearing
Domestic	$	3,396,406	$	2,800,219
Foreign		815,582		717,236
Total demand non-interest bearing		4,211,988		3,517,455
Savings and interest bearing demand
Domestic		2,696,298		2,511,166
Foreign		840,716		777,210
Total savings and interest bearing demand		3,537,014		3,288,376
Time certificates of deposit
$100,000 or more:
Domestic		706,937		605,867
Foreign		823,509		820,301
Less than $100,000:
Domestic		296,284		312,678
Foreign		245,398		248,352
Total time, certificates of deposit		2,072,128		1,987,198
Total deposits	$	9,821,130	$	8,793,029


	2020		2019		2018

	(Dollars in Thousands)
Interest expense:
Savings and interest bearing demand
Domestic	$	5,098	$	13,462	$	11,029
Foreign		1,260		2,917		1,735
Total savings and interest bearing demand		6,358		16,379		12,764
Time, certificates of deposit
$100,000 or more
Domestic		8,827		7,804		4,741
Foreign		7,536		9,407		5,798
Less than $100,000
Domestic		1,781		2,232		1,589
Foreign		1,086		1,527		968
Total time, certificates of deposit		19,230		20,970		13,096
Total interest expense on deposits	$	25,588	$	37,349	$	25,860

Scheduled maturities of time deposits in amounts of $100,000 or more at December 31, 2020, were as follows:


Due within 3 months or less	$	606,807
Due after 3 months and within 6 months		385,859
Due after 6 months and within 12 months		498,626
Due after 12 months		129,792
	$	1,621,084

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, 2020 were $10,721,860,000,

an increase of 21.5% from $8,826,034,000 at December 31, 2019. Deposits during the current economic environment have increased as customers have received proceeds from CARES Act programs, such as stimulus payments and PPP loan proceeds, and presumably decided to save and preserve cash instead of spending during these uncertain times.

Other Borrowed Funds

Other borrowed funds include FHLB borrowings which may be short-term and long-term borrowings issued by the FHLB of Dallas and the FHLB of Topeka at the market price offered at the time of funding. These borrowings are secured by residential mortgage-backed investment securities and a portion of our loan portfolio. At December 31, 2020, other borrowed funds totaled $436,327,000, a decrease of 30.4% from $626,511,000 at December 31, 2019. The decrease in borrowings can be attributed to an increase in cash arising from principal pay downs on available-for-sale debt securities and deposits.

Return on Equity and Assets

Certain key ratios for the years ended December 31, 2020, 2019 and 2018 follow ⁽¹⁾:


	Years ended
	December 31,
	2020		2019		2018
Percentage of net income to:
Average shareholders’ equity	7.86	%	9.97	%	11.22	%
Average total assets	1.27		1.71		1.79
Percentage of average shareholders’ equity to average total assets	16.20		17.17		15.96
Percentage of cash dividends per share to net income per share	41.60		33.38		22.79

⁽¹⁾ The average balances for purposes of the above table are calculated on the basis of daily balances.

Liquidity and Capital Resources

Liquidity

The maintenance of adequate liquidity provides our Subsidiary Banks with the ability to meet potential depositor withdrawals, provide for customer credit needs, maintain adequate statutory reserve levels and take full advantage of high-yield investment opportunities as they arise. Liquidity is afforded by access to financial markets and by holding appropriate amounts of liquid assets. Our Subsidiary Banks derive their liquidity largely from deposits of individuals and business entities. Other important funding sources for our Subsidiary Banks during 2020 and 2019 were borrowings from the FHLB, securities sold under repurchase agreements and large certificates of deposit, requiring management to closely monitor its asset/liability mix in terms of both rate sensitivity and maturity distribution. Our Subsidiary Banks have had a long-standing relationship with the FHLB and keep open, unused, lines of credit in order to fund liquidity needs. In the event that the FHLB indebtedness is not renewed, the repayment of the outstanding indebtedness would more than likely be repaid through proceeds generated from the sales of unpledged available-for-sale securities. We maintain a sizable, high quality investment portfolio to provide significant liquidity. These securities can be sold or sold under agreements to repurchase, to provide immediate liquidity. As in the past, we will continue to monitor the volatility and cost of funds in an attempt to match maturities of rate-sensitive assets and liabilities and respond accordingly to anticipated fluctuations in interest rates over reasonable periods of time.

Asset/Liability Management

Our funds management policy has as its primary focus the measurement and management of the Subsidiary Banks’ earnings at risk in the face of rising or falling interest rate forecasts. The earliest and most simplistic concept of earnings at risk measurement is the gap report, which is used to generate a rough estimate of the vulnerability of net interest income to changes in market rates as implied by the relative re-pricings of assets and liabilities. The gap report calculates

the difference between the amounts of assets and liabilities re-pricing across a series of intervals in time, with emphasis typically placed on the one-year period. This difference, or gap, is usually expressed as a percentage of total assets.

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, 2020, 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.

INTEREST RATE SENSITIVITY

(Dollars in Thousands)


	Rate/Maturity
			Over 3		Over 1
	3 Months		Months to		Year to 5		Over 5
December 31, 2020	or Less		1 Year		Years		Years		Total

	(Dollars in Thousands)
Rate sensitive assets
Investment securities	$	535,351	$	1,409,880	$	1,094,325	$	50,814	$	3,090,370
Loans, net of non-accruals		5,750,102		205,924		591,315		974,591		7,521,932

Total earning assets	$	6,285,453	$	1,615,804	$	1,685,640	$	1,025,405	$	10,612,302

Cumulative earning assets	$	6,285,453	$	7,901,257	$	9,586,897	$	10,612,302

Rate sensitive liabilities

Time deposits	$	865,945	$	1,105,488	$	182,055	$	53	$	2,153,541
Other interest bearing deposits		3,852,505		—		—		—		3,852,505
Securities sold under repurchase agreements		416,757		11,391		—		—		428,148
Other borrowed funds		—		—		—		436,327		436,327
Junior subordinated deferrable interest debentures		134,642		—		—		—		134,642

Total interest bearing liabilities	$	5,269,849	$	1,116,879	$	182,055	$	436,380	$	7,005,163

Cumulative sensitive liabilities	$	5,269,849	$	6,386,728	$	6,568,783	$	7,005,163

Repricing gap	$	1,015,604	$	498,925	$	1,503,585	$	589,025	$	3,607,139
Cumulative repricing gap		1,015,604		1,514,529		3,018,114		3,607,139
Ratio of interest-sensitive assets to liabilities		1.19		1.45		9.26		2.35		1.51
Ratio of cumulative, interest-sensitive assets to liabilities		1.19		1.24		1.46		1.51

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.

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

Our principal sources of liquidity and funding dividends from subsidiaries and borrowed funds, with such funds being used to finance our cash flow requirements. We closely monitor the dividend restrictions and availability from our Subsidiary Banks as disclosed in Note 20 to the Consolidated Financial Statements. At December 31, 2020, the aggregate amount legally available to be distributed to us from our Subsidiary Banks as dividends was approximately $948,000,000, assuming that each Subsidiary Bank continues to be classified as “well-capitalized” under the applicable regulations in effect at December 31, 2020. The restricted capital (capital and surplus) of our Subsidiary Banks was approximately $1,200,185,000 as of December 31, 2020. The undivided profits of our Subsidiary Banks were approximately $1,351,802,000 as of December 31, 2020.

At December 31, 2020, we had outstanding $436,327,000 in other borrowed funds and $134,642,000 in junior subordinated deferrable interest debentures. In addition to borrowed funds and dividends, we have a number of other available alternatives to finance the growth of our Subsidiary Banks as well as future growth and expansion.

Capital

We maintain an adequate level of capital as a margin of safety for our depositors and shareholders. At December 31, 2020, shareholders’ equity was $2,177,998,000 compared to $2,118,053,000 at December 31, 2019, an increase of $59,945,000, or 2.8%. Shareholders’ equity increased primarily due to the retention of earnings, offset by the payment of cash dividends to shareholders and repurchases of our common stock in the form of treasury stock. The accumulated other comprehensive income is not included in the calculation of regulatory capital ratios.

During 1990, the FRB adopted a minimum leverage ratio of 3% for the most highly rated bank holding companies and at least 4% to 5% for all other bank holding companies. Our leverage ratio (defined as shareholders’ equity plus eligible trust preferred securities issued and outstanding less goodwill and certain other intangibles divided by average quarterly assets) was 14.92% at December 31, 2020 and 16.65% at December 31, 2019. The core deposit intangibles and goodwill of $282,532,000 as of December 31, 2020, are deducted from the sum of core capital elements when determining our capital ratios.

The FRB has adopted risk-based capital guidelines which assign risk weightings to assets and off-balance sheet items. The guidelines also define and set minimum capital requirements (risk-based capital ratios). Under the final 1992 rules, all banks are required to have Tier 1 capital of at least 4.0% of risk-weighted assets and total capital of 8.0% of risk-weighted assets. Tier 1 capital consists principally of shareholders’ equity plus trust preferred securities issued and outstanding less goodwill and certain other intangibles, while total capital consists of Tier 1 capital, certain debt instruments and a portion of the reserve for loan losses. In order to be deemed well-capitalized pursuant to the regulations, an institution must have a total risk-weighted capital ratio of 10%, a Tier 1 risk-weighted ratio of 8% and a Tier 1 leverage ratio of 5%. We had risk-weighted Tier 1 capital ratios of 20.25% and 19.80% and risk weighted total capital ratios of 21.40% and 20.46% as of December 31, 2020 and 2019, respectively, which are well above the minimum regulatory requirements and exceed the well-capitalized ratios (see Note 20 to Notes to Consolidated Financial Statements).

In July 2013, the Federal Deposit Insurance Corporation (“FDIC”) and other regulatory bodies established a new, comprehensive capital framework for U.S. banking organizations, consisting of minimum requirements that increase both

the quantity and quality of capital held by banking organizations. The final rules are a result of the implementation of the BASEL III capital reforms and various Dodd-Frank related capital provisions. Consistent with the Basel international framework, the rules include a minimum ratio of Common Equity Tier 1 (“CET1”) to risk-weighted assets of 4.5% and a CET1 capital conservation buffer of 2.5% of risk-weighted assets. The capital conservation buffer began phasing-in on January 1, 2016 at .625% and increased each year until January 1, 2019, when we were required to have a 2.5% capital conservation buffer, effectively resulting in a minimum ratio of CET1 capital to risk-weighted assets of at least 7% upon full implementation. The rules also raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and include a minimum leverage ratio of 4% for all banking organizations. Regarding the quality of capital, the rules emphasize CET1 capital and implements strict eligibility criteria for regulatory capital instruments. The rules also improve the methodology for calculating risk-weighted assets to enhance risk sensitivity. The rules were subject to a four-year phase in period for mandatory compliance and we were required to begin to phase in the rules beginning on January 1, 2015. We believe that as of December 31, 2020, we meet all fully phased-in capital adequacy requirements.

On November 21, 2017, the OCC, the Federal Reserve and the FDIC finalized a proposed rule that extends the current treatment under the regulatory capital rules for certain regulatory capital deductions and risk weights and certain minority interest requirements, as they apply to banking organizations that are not subject to the advanced approaches capital rules. Effective January 1, 2018, the rule also pauses the full transition to the Basel III treatment of mortgage servicing assets, certain deferred tax assets, investments in the capital of unconsolidated financial institutions and minority interests. The agencies are also considering whether to make adjustments to the capital rules in response to CECL (the FASB Standard relating to current expected credit loss) and its potential impact on regulatory capital.

On December 7, 2017, the Basel Committee on Banking Supervision unveiled the latest round of its regulatory capital framework, commonly called “Basel IV.” The framework makes changes to the capital framework first introduced as “Basel III” in 2010. The committee targeted 2022-2027 as the timeframe for implementation by regulators in individual countries, including the U.S. federal bank regulatory agencies (after notice and comment).

Junior Subordinated Deferrable Interest Debentures

We have formed five statutory business trusts under the laws of the State of Delaware, for the purpose of issuing trust preferred securities. These statutory business trusts (the “Trusts”) have each issued Capital and Common Securities and invested the proceeds thereof in an equivalent amount of junior subordinated debentures (the “Debentures”) that we issued. As of December 31, 2020 and December 31, 2019, the principal amount of debentures outstanding totaled $134,642,000.

The Debentures are subordinated and junior in right of payment to all of our present and future senior indebtedness (as defined in the respective indentures), and are pari passu with one another. The interest rate payable on, and the payment terms of the Debentures are the same as the distribution rate and payment terms of the respective issues of Capital and Common Securities issued by the Trusts. We have fully and unconditionally guaranteed the obligations of each of the Trusts with respect to the Capital and Common Securities. We have the right, unless an Event of Default (as defined in the Indentures) has occurred and is continuing, to defer payment of interest on the Debentures for up to twenty consecutive quarterly periods on Trusts VIII, IX, X, XI and XII. If interest payments on any of the Debentures are deferred, distributions on both the Capital and Common Securities related to that Debenture would also be deferred. The redemption prior to maturity of any of the Debentures may require the prior approval of the Federal Reserve and/or other regulatory bodies.

For financial reporting purposes, the Trusts are treated as investments and not consolidated in the consolidated financial statements. Although the Capital Securities issued by each of the Trusts are not included as a component of shareholders’ equity on the consolidated statement of condition, the Capital Securities are treated as capital for regulatory purposes. Specifically, under applicable regulatory guidelines, the Capital Securities issued by the Trusts qualify as Tier 1 capital up to a maximum of 25% of Tier 1 capital on an aggregate basis. Any amount that exceeds the 25% threshold would qualify as Tier 2 capital. At December 31, 2020 and December 31, 2019, the total $134,642,000 of the Capital Securities outstanding qualified as Tier 1 capital.

The following table illustrates key information about each of the Debentures and their interest rates at December 31, 2020:

Junior

Subordinated

Deferrable

Interest

Repricing

Interest Rate

Optional

Debentures

Frequency

Interest Rate

Index

Maturity Date

Redemption Date(1)

(in thousands)

Trust VIII

25,774

Quarterly

3.29

LIBOR + 3.05

October 2033

October 2008

Trust IX

41,238

Quarterly

1.85

LIBOR + 1.62

October 2036

October 2011

Trust X

21,021

Quarterly

1.86

LIBOR + 1.65

February 2037

February 2012

Trust XI

25,990

Quarterly

1.85

LIBOR + 1.62

July 2037

July 2012

Trust XII

20,619

Quarterly

1.68

LIBOR + 1.45

September 2037

September 2012

134,642

(1)	The Capital Securities may be redeemed in whole or in part on any interest payment date after the Optional Redemption Date.

Contractual Obligations and Commercial Commitments

The following table presents contractual cash obligations (other than deposit liabilities) as of December 31, 2020:


	Payments due by Period
	(Dollars in Thousands)
			Less than		One to Three		Three to		After Five
Contractual Cash Obligations	Total		One Year		Years		Five Years		Years
Securities sold under repurchase agreements	$	428,148	$	416,757	$	11,391	$	—	$	—
Federal Home Loan Bank borrowings		436,327		—		—		—		436,327
Junior subordinated deferrable interest debentures		134,642		—		—		—		134,642
Operating leases		9,473		3,381		3,241		1,207		1,644
Total Contractual Cash Obligations	$	1,008,590	$	420,138	$	14,632	$	1,207	$	572,613

The following table presents contractual commercial commitments (other than deposit liabilities) as of December 31, 2020:


	Amount of Commitment Expiration Per Period
	(Dollars in Thousands)
			Less than		One to Three		Three to Five		After Five
Commercial Commitments	Total		One Year		Years		Years		Years
Financial and Performance Standby Letters of Credit	$	118,381	$	96,246	$	22,135	$	—	$	—
Commercial Letters of Credit		341		341		—		—		—
Credit Card Lines		13,579		13,579		—		—		—
Other Commercial Commitments		2,354,010		1,119,300		667,911		434,935		131,864
Total Commercial Commitments	$	2,486,311	$	1,229,466	$	690,046	$	434,935	$	131,864

Due to the nature of our commercial commitments, including unfunded loan commitments and lines of credit, the amounts presented above do not necessarily reflect the amounts we anticipate funding in the periods presented above.

Critical Accounting Policies

We have established various accounting policies which govern the application of accounting principles in the preparation of our consolidated financial statements. The significant accounting policies are described in the Notes to the Consolidated Financial Statements. Certain accounting policies involve significant subjective judgments and assumptions

by management which have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies.

We consider our estimated ACL as a policy critical to the sound operations of our Subsidiary Banks. We adopted the provisions of Accounting Standards Update No. 2016-13 to ASC 326, “Financial Instruments – Credit Losses,” on January 1, 2020. ASU 2016-13 replaces the long-standing incurred loss model with 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.

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 & 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. 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 when 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 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) 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 TDR’s, (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 and geopolitical events. 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.

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.

Recent Accounting Standards Issued

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

Preferred Stock, Common Stock and Dividends

We have issued and outstanding 63,298,608 shares of $1.00 par value common stock held by approximately 1,877 holders of record at February 22, 2021. The book value of the common stock at December 31, 2020 was $36.14 per share compared with $33.37 per share at December 31, 2019.

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 2020 and 2019, as quoted on the NASDAQ National Market for each of the quarters in the two-year period ended December 31, 2020. 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 $43.50 per share at February 22, 2021.


		High		Low
2020:	First quarter	$	43.60	$	43.11
	Second quarter		35.22		23.35
	Third quarter		35.60		25.21
	Fourth quarter		38.73		25.44


		High		Low
2019:	First quarter	$	41.41	$	33.66
	Second quarter		42.16		35.76
	Third quarter		40.51		32.04
	Fourth quarter		44.00		36.57

We paid cash dividends of $0.55 per share on April 3 and October 5, 2020 to record holders of our common stock on April 1 and September 21, 2020. We paid cash dividends of $.50 and $0.55 per share on April 15 and October 15, 2019 to record holders of our common stock on April 1 and September 30, 2019, respectively.

Our principal source of funds to pay cash dividends on our common stock is cash dividends from our Subsidiary Banks. For a discussion of the limitations, please see Note 20 of Notes to Consolidated Financial Statements.

Stock Repurchase Program

In April 2009, the Board of Directors re-established a formal stock repurchase program that authorized the repurchase of up to $40 million of common stock within the following 12 months. Annually since then, including on March 12, 2020, the Board of Directors extended the repurchase program and for the second year authorized an increase to purchase up to $50 million of common stock during the 12 month period commencing on March 16, 2020 (previous annual stock repurchase programs began on April 9). Shares of common stock may be purchased from time to time on the open market or through privately negotiated transactions. Shares purchased under this program will be held in treasury for reissue for various corporate purposes, including employee compensation plans. During the fourth quarter of 2020, the Board of Directors adopted a Rule 10b5-1 trading plan, and intends to adopt additional Rule 10b5-1 trading plans, that will allow us to purchase shares of our common stock during certain trading blackout periods when we ordinarily would not be in the market due to trading restrictions in our insider trading policy. During the term of 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 the Rule 10b5-1 trading plan will be held in treasury for reissue for various corporate purposes, including employee stock compensation plans. As of February 22, 2021, a total of 12,267,531 shares had been repurchased under all programs at a cost of $357,059,000. We are not obligated to purchase shares under our stock repurchase program outside of its Rule 10b5-1 trading plan.

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, 2020.


				Total Number of
				Shares
				Purchased as	Approximate
		Average		Part of a	Dollar Value of
	Total Number	Price Paid		Publicly-	Shares Available
	of Shares	Per		Announced	for
	Purchased	Share		Program	Repurchase⁽¹⁾
October 1 – October 31, 2020	—	$	—	—	$	20,311,000
November 1 – November 30, 2020	—		—	—		20,311,000
December 1 – December 31, 2020	—		—	—		20,311,000
Total	—	$	—	—

(1)	The repurchase program was extended and increased on March 12, 2020 and allows for the repurchase of up to an additional $50,000,000 of treasury stock through March 16, 2021.

Equity Compensation Plan Information

The following table sets forth information as of December 31, 2020, with respect to our equity compensation plans:


				(C)
				Number of securities
				remaining available for
	(A)	(B)		future issuance under
	Number of securities to	Weighted average		equity compensation
	be issued upon exercise	exercise price of		plans (excluding
	of outstanding options,	outstanding options,		securities reflected in
Plan Category	warrants and rights	warrants and rights		column A)
Equity Compensation plans approved by security holders	651,127	$	27.24	10,102	`
Total	651,127	$	27.24	10,102

Stock Performance

COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN

Total Return To Shareholders

(Includes reinvestment of dividends)


	Base	INDEXED RETURNS
	Period	December 31,
Company / Index	2015	2016	2017	2018	2019	2020
International Bancshares Corporation	100	165.25	163.63	144.54	180.85	165.13
S&P 400 Index	100	129.65	150.71	134.01	154.07	179.00
S&P 400 Banks	100	143.44	150.90	118.61	146.06	125.28

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors

of International Bancshares Corporation:

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of condition of International Bancshares Corporation and its subsidiaries (the Company) as of December 31, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, 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, 2020, 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 25, 2021 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses

As described in Note 4 of the consolidated financial statements, the Company established an allowance for credit losses totaling $109,059,000 as of December 31, 2020. The allowance for credit losses is derived from 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 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 debt restructurings (TDR’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, and geopolitical events.

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.

/s/ RSM US LLP

We have served as the Company's auditor since 2007.

Austin, Texas

February 25, 2021

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Condition

December 31, 2020 and 2019

(Dollars in Thousands, Except Per Share Amounts)


	December 31,		December 31,
	2020		2019
Assets
Cash and cash equivalents	$	1,997,238	$	256,820
Investment securities:
Held to maturity debt securities (Market value of $3,400 on December 31, 2020 and $2,400 on December 31, 2019)		3,400		2,400
Available for sale debt securities (Amortized cost of $3,054,289 on December 31, 2020 and $3,376,070 on December 31, 2019)		3,080,768		3,378,923
Equity securities with readily determinable fair values		6,202		6,095
Total investment securities		3,090,370		3,387,418
Loans		7,541,754		6,894,946
Less allowance for credit losses		(109,059)		(60,278)
Net loans		7,432,695		6,834,668
Bank premises and equipment, net		479,878		506,595
Accrued interest receivable		37,881		36,620
Other investments		254,413		318,427
Cash surrender value of life insurance policies		292,381		289,693
Goodwill		282,532		282,532
Other assets		162,079		200,121
Total assets	$	14,029,467	$	12,112,894

See accompanying notes to consolidated financial statements.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Condition Continued

December 31, 2020 and 2019

(Dollars in Thousands, Except Per Share Amounts)


	December 31,		December 31,
	2020		2019
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Demand—non-interest bearing	$	4,715,814	$	3,545,905
Savings and interest bearing demand		3,852,505		3,267,829
Time		2,153,541		2,012,300
Total deposits		10,721,860		8,826,034
Securities sold under repurchase agreements		428,148		236,536
Other borrowed funds		436,327		626,511
Junior subordinated deferrable interest debentures		134,642		134,642
Other liabilities		130,492		171,118
Total liabilities		11,851,469		9,994,841
Shareholders’ equity:
Common shares of $1.00 par value. Authorized 275,000,000 shares; issued 96,240,977 shares on December 31, 2020 and 96,214,967 shares on December 31, 2019		96,241		96,215
Surplus		149,334		148,075
Retained earnings		2,289,626		2,200,568
Accumulated other comprehensive income		20,825		2,345
		2,556,026		2,447,203
Less cost of shares in treasury, 32,961,289 shares on December 31, 2020 and 31,015,061 on December 31, 2019		(378,028)		(329,150)
Total shareholders’ equity		2,177,998		2,118,053
Total liabilities and shareholders’ equity	$	14,029,467	$	12,112,894

See accompanying notes to consolidated financial statements.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income

Years ended December 31, 2020, 2019 and 2018

(Dollars in Thousands, Except Per Share Amounts)




	2020		2019		2018
Interest income:
Loans, including fees	$	377,579	$	413,611	$	375,173
Investment securities:
Taxable		46,095		72,485		81,484
Tax-exempt		2,434		4,885		8,141
Other interest income		900		1,420		1,024
Total interest income		427,008		492,401		465,822

Interest expense:
Savings deposits		6,358		16,379		12,764
Time deposits		19,230		20,970		13,096
Securities sold under repurchase agreements		926		2,432		2,415
Other borrowings		8,773		12,413		17,404
Junior subordinated deferrable interest debentures		3,832		6,435		6,989

Total interest expense		39,119		58,629		52,668

Net interest income		387,889		433,772		413,154

Provision for credit losses		45,379		18,843		6,112

Net interest income after provision for credit losses		342,510		414,929		407,042

Non-interest income:
Service charges on deposit accounts		61,983		72,502		72,433
Other service charges, commissions and fees
Banking		48,986		50,996		46,685
Non-banking		7,822		7,832		7,801
Investment securities transactions, net		(5)		(12)		(141)
Other investments, net		4,920		5,985		19,897
Other income		26,873		17,523		18,367

Total non-interest income		150,579		154,826		165,042

See accompanying notes to consolidated financial statements.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income, continued

Years ended December 31, 2020, 2019 and 2018

(Dollars in Thousands, Except Per Share Amounts)




	2020		2019		2018
Non-interest expense:
Employee compensation and benefits	$	130,039	$	145,929	$	138,532
Occupancy		24,909		28,635		29,097
Depreciation of bank premises and equipment		28,318		28,270		25,873
Professional fees		12,546		17,661		12,601
Deposit insurance assessments		1,870		1,416		3,742
Net expense, other real estate owned		9,808		6,377		4,413
Advertising		4,284		7,748		7,695
Software and software maintenance		19,238		19,850		17,516
Other		50,319		53,915		60,032

Total non-interest expense		281,331		309,801		299,501

Income before income taxes		211,758		259,954		272,583

Provision for income taxes		44,439		54,850		56,652

Net income	$	167,319	$	205,104	$	215,931

Basic earnings per common share:

Weighted average number of shares outstanding		63,725,819		65,476,606		66,106,580
Net income	$	2.63	$	3.13	$	3.27

Fully diluted earnings per common share:

Weighted average number of shares outstanding		63,853,135		65,685,684		66,633,820
Net income	$	2.62	$	3.12	$	3.24

See accompanying notes to consolidated financial statements.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

Years ended December 31, 2020, 2019, and 2018

(Dollars in Thousands)




	2020		2019		2018

Net income	$	167,319	$	205,104	$	215,931
Other comprehensive income, net of tax:

Net unrealized holding gains (losses) on securities available for sale arising during period (net of tax effects of $4,911, $15,144, and $(7,004))		18,476		56,970		(26,348)
Reclassification adjustment for losses on securities available for sale included in net income (net of tax effects of $1, $3 and $30)		4		9		111
		18,480		56,979		(26,237)

Comprehensive income	$	185,799	$	262,083	$	189,694

See accompanying notes to consolidated financial statements.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

Years ended December 31, 2020, 2019 and 2018

(in Thousands, except per share amounts)


			Number							Other
	Preferred		of	Common				Retained		Comprehensive		Treasury
	Stock		Shares	Stock		Surplus		Earnings		Income (Loss)		Stock		Total
Balance at December 31, 2017	$	—	96,019		96,019		171,816		1,891,805		(28,397)		(292,263)	$	1,838,980
Net Income		—	—		—		—		215,931		—		—		215,931
Dividends:
Cash ($.75 per share)		—	—		—		—		(49,599)		—		—		(49,599)
Purchase of treasury (520,918 shares)		—	—		—		—		—		—		(19,042)		(19,042)
Exercise of stock options		—	85		85		1,437		—		—		—		1,522
Stock compensation expense recognized in earnings		—	—		—		1,035		—		—		—		1,035
Repurchase of outstanding warrant		—	—		—		(29,005)		—		—		—		(29,005)
Cumulative adjustment for adoption of new accounting standards		—	—		—		—		5,997		(5,997)		—		—
Other comprehensive (loss), net of tax:
Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustment		—	—		—		—		—		(20,240)		—		(20,240)
Balance at December 31, 2018		—	96,104		96,104		145,283		2,064,134		(54,634)		(311,305)		1,939,582
Net Income		—	—		—		—		205,104		—		—		205,104
Dividends:
Cash ($1.05 per share)		—	—		—		—		(68,670)		—		—		(68,670)
Purchase of treasury (468,918 shares)		—	—		—		—		—		—		(17,845)		(17,845)
Exercise of stock options		—	111		111		1,812		—		—		—		1,923
Stock compensation expense recognized in earnings		—	—		—		980		—		—		—		980
Other comprehensive (loss), net of tax:
Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustments		—	—		—		—		—		56,979		—		56,979
Balance at December 31, 2019		—	96,215	$	96,215	$	148,075	$	2,200,568	$	2,345	$	(329,150)	$	2,118,053
Net Income		—	—		—		—		167,319		—		—		167,319
Dividends:
Cash ($1.10 per share)		—	—		—		—		(69,928)		—		—		(69,928)
Purchase of treasury (1,946,228 shares)		—	—		—		—		—		—		(48,878)		(48,878)
Exercise of stock options		—	26		26		516		—		—		—		542
Stock compensation expense recognized in earnings		—	—		—		743		—		—		—		743
Cumulative adjustment for adoption of new accounting standards		—	—		—		—		(8,333)		—		—		(8,333)
Other comprehensive income, net of tax:
Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustments		—	—		—		—		—		18,480		—		18,480
Balance at December 31, 2020		—	96,241	$	96,241	$	149,334	$	2,289,626	$	20,825	$	(378,028)	$	2,177,998

See accompanying notes to consolidated financial statements.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended December 31, 2020, 2019 and 2018

(Dollars in Thousands)




	2020		2019		2018
Operating activities:

Net income	$	167,319	$	205,104	$	215,931

Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit loss		45,379		18,843		6,112
Specific reserve, other real estate owned		1,539		322		3,071
Depreciation of bank premises and equipment		28,318		28,270		25,873
Gain on sale of bank premises and equipment		(40)		(237)		(1,456)
Gain on sale of other real estate owned		(892)		(1,470)		(1,465)
Accretion of investment securities discounts		(500)		(428)		(271)
Amortization of investment securities premiums		39,039		20,549		20,087
Investment securities transactions, net		5		12		141
Unrealized gain (loss) on equity securities with readily determinable fair values		(107)		(158)		388
Stock based compensation expense		743		980		1,035
Losses (earnings) from affiliates and other investments		74		(3,914)		(15,484)
Deferred income taxes		(3,122)		3,309		5,143
(Increase) decrease in accrued interest receivable		(1,261)		183		(2,347)
Decrease (increase) in other assets		42,571		8,043		(51,827)
(Decrease) increase in other liabilities		(13,932)		32,157		24,916

Net cash provided by operating activities		305,133		311,565		229,847

Investing activities:

Proceeds from maturities of securities		1,075		—		2,275
Proceeds from sales and calls of available for sale securities		42,350		94,585		38,175
Proceeds from sales of equity securities with readily determinable fair values		—		—		21,607
Purchases of available for sale securities		(1,819,814)		(893,301)		(47,346)
Principal collected on mortgage backed securities		2,058,626		882,479		675,304
Net increase in loans		(647,213)		(375,621)		(258,142)
Purchases of other investments		(44,447)		(52,795)		(43,418)
Distributions from other investments		64,860		44,919		3,668
Purchases of bank premises and equipment		(6,725)		(29,590)		(21,395)
Proceeds from sales of bank premises and equipment		904		1,861		4,533
Proceeds from sales of other real estate owned		6,679		9,405		4,179

Net cash (used in) provided by investing activities		(343,705)		(318,058)		379,440

See accompanying notes to consolidated financial statements.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Continued)

Years ended December 31, 2020, 2019 and 2018

(Dollars in Thousands)




	2020		2019		2018
Financing activities:

Net increase in non-interest bearing demand deposits	$	1,169,909	$	91,065	$	211,585
Net increase (decrease) in savings and interest bearing demand deposits		584,676		(408)		23,106
Net increase (decrease) in time deposits		141,241		38,832		(83,038)
Net increase (decrease) in securities sold under repurchase agreements		191,612		6,547		(123,816)
Net decrease in other borrowed funds		(190,184)		(79,154)		(489,560)
Redemption of long-term debt		—		(25,774)		—
Repurchase of outstanding common stock warrant		—		—		(29,005)
Purchase of treasury stock		(48,878)		(17,845)		(19,042)
Proceeds from stock transactions		542		1,923		1,522
Payments of cash dividends		(69,928)		(68,670)		(49,599)

Net cash provided by (used in) financing activities		1,778,990		(53,484)		(557,847)

Increase (decrease) in cash and cash equivalents		1,740,418		(59,977)		51,440

Cash and cash equivalents at beginning of period		256,820		316,797		265,357

Cash and cash equivalents at end of period	$	1,997,238	$	256,820	$	316,797

Supplemental cash flow information:
Interest paid	$	41,975	$	56,728	$	50,623
Income taxes paid		34,826		44,089		40,565
Non-cash investing and financing activities:
Net transfers from loans to other real estate owned		4,526		22,015		32,610
Establishment of lease liability and right-of-use asset		—		6,171		—
Net transfers from bank premises and equipment to other assets		4,260		—		—

See accompanying notes to consolidated financial statements.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(1) Summary of Significant Accounting Policies

Our accounting and reporting policies conform to U.S. generally accepted accounting principles (“GAAP”) and to general practices within the banking industry. The following is a description of the more significant of those policies.

Consolidation and Basis of Presentation

Our consolidated financial statements include the accounts of the International Bancshares Corporation, its wholly-owned Subsidiary Banks and its wholly-owned non-bank subsidiaries, IBC Trading Company, Premier Tierra Holdings, Inc., IBC Charitable and Community Development Corporation, and IBC Capital Corporation. All significant inter-company balances and transactions have been eliminated in consolidation.

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

We own 1 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 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 and in shareholders’ equity as accumulated other comprehensive income (loss) until realized. In accordance with ASU 2016-13, which we adopted on January 1, 2020, available-for-sale and held-to-maturity debt securities in an unrealized loss position must be 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

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

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, 2020 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 period. Unrealized gains and losses related to equity securities with readily determinable fair values are included in net income. We did not maintain any trading securities during the three-year period ended December 31, 2020.

Mortgage-backed securities held at December 31, 2020 and 2019 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 2 components (i) the amount of impairment related to credit loss and (ii) the amount of impairment related to other factors. The difference between the present value of the cash flows expected to be collected and the amortized cost is the credit loss recognized through earnings and an adjustment to the cost basis of the security. The amount of impairment related to other factors is included in other comprehensive income (loss). Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Equity Securities

Prior to January 1, 2018, equity securities with readily determinable fair values were included in available-for-sale securities, with the unrealized gain or loss recorded as a component of other comprehensive income (loss). Pursuant to the adoption of ASU 2016-02, equity securities with readily determinable fair values are a separate component of our balance sheet, with unrealized gains and losses recognized in net income. Equity securities with readily determinable fair values at December 31, 2020 and December 31, 2019 consist primarily of Community Reinvestment Act funds.

Provision and Allowance for Credit Losses

We adopted the provisions of Accounting Standards Update No. 2016-13 to ASC 326, “Financial Instruments – Credit Losses,” on January 1, 2020. ASU 2016-13 replaces the long-standing incurred loss model with 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,

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

based on estimated current expected credit losses in the current loan portfolio, including information about past events, current conditions and reasonable and supportable forecasts.

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 (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of the collateral if the loan is collateral dependent. Substantially all our 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.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Troubled Debt Restructured Loans

Troubled debt restructured loans (“TDR”) are those loans where, for reasons related to a borrower’s difficulty to repay a loan, we grant a concession to the borrower that we would not normally consider in the normal course of business. In accordance with interagency guidance issued in March 2020, certain short-term deferrals are not considered troubled debt restructurings. The original terms of the loan are modified or restructured. The terms that may be modified include a reduction in the original stated interest rate, an extension of the original maturity of the loan, a renewal of the loan at an interest rate below current market rates, a reduction in the principal amount of debt outstanding, a reduction in accrued interest or deferral of interest payments. A loan classified as a TDR is classified as 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 $60,487,300 and $71,103,000 at December 31, 2020 and 2019, 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 $5,779,000 and $7,137,000 at December 31, 2020 and 2019, respectively.

Bank Premises and Equipment

Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on straight-line and accelerated methods over the estimated useful lives of the assets. Repairs and maintenance are charged to operations as incurred and expenditures for renewals and betterments are capitalized. We primarily own all the property we occupy, with the exception of certain branches operating in grocery store or retail shopping centers and certain ATM locations, which are all under operating leases as classified under guidance prior to the issuance of ASU 2016-02, “Leases.” We adopted the guidance in ASU 2016-02 on January 1, 2019 and recorded a right of use asset and a lease liability of approximately $6.4 million. The right of use asset and lease liability are included in other assets and other liabilities, respectively, in our consolidated financial statements.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

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

Since our revenue is primarily comprised of net interest income on financial assets and liabilities, which were excluded from the scope of the update, the remaining non-interest revenue streams were identified and then analyzed under the provisions of the update, to: (i) identify the contract, (ii) identify the performance obligation, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when the performance obligation was satisfied. Our non-interest revenue contracts with customers are primarily short term and our performance obligation is satisfied at a single point in time, typically within a single period. No changes to our existing methods for recognizing revenue were made as a result of the update.

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 50 percent likelihood of being realized upon ultimate settlement. As of December 31, 2020 and 2019, respectively, after evaluating all uncertain tax positions, we have recorded 0 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, 2020, 2019 and 2018, we recognized 0 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 2017.

Stock Options

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

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

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, 2020, after completing goodwill testing, we have determined that 0 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, 2020, we have determined that 0 impairment of identified intangibles exists. Identified intangible assets with definite useful lives are amortized on an accelerated basis over their estimated life. See Note 6—Goodwill and Other Intangible Assets.

Impairment of Long-Lived Assets

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

Consolidated Statements of Cash Flows

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

Accounting for Transfers and Servicing of Financial Assets

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

Segments of an Enterprise and Related Information

We operate as 1 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.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

We have 5 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 February 2016, the FASB issued Accounting Standards Update No. 2016-02 to ASC 820, “Leases.” The update amends existing standards for accounting for leases by lessees, with accounting for leases by lessors remaining mainly unchanged from current guidance. The update requires that lessees recognize a lease liability and a right of use asset for all leases (with the exception of short-term leases) at the commencement date of the lease and disclose key information about leasing arrangements. The update is to be applied on a modified retrospective basis for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements. The update is effective for interim and annual periods beginning after December 15, 2018. In January 2018, the FASB issued a proposal that provides an additional transition method that would allow entities to not apply the guidance in the update in the comparative periods presented in the consolidated financial statements, but instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. On January 1, 2019, we adopted the provisions of ASU 2016-02, “Leases.” As part of our business model, we primarily own all property we occupy, with the exception of certain branches operating in grocery stores or shopping centers and certain ATM locations that were classified as operating leases under previous guidance. The adoption of the standard did not have a significant impact on our consolidated financial statements. As of the date of adoption, we recorded a right of use asset and a lease liability of approximately $6.4 million. The right of use asset and lease liability are included in other assets and other liabilities, respectively, on our consolidated statement of condition. Amortization of the right of use asset for the twelve months ended December 31, 2020 and December 31, 2019 was approximately $1,357,000 and $1,019,000, respectively, and is included as a part of occupancy expense in our consolidated income statement.

In June 2016, the FASB issued Accounting Standards Update No. 2016-13 to ASC 326, “Financial Instruments – Credit Losses.” The update amends existing standards for accounting for credit losses for financial assets. The update requires that the expected credit losses on the financial instruments held as of the end of the period being reported be measured based on historical experience, current conditions, and reasonable and supportable forecasts. The update also expands the required disclosures related to significant estimates and judgements used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s financial assets. The update also amended the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The impact of the adoption of the standard is to be recorded as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The accounting standard was effective for us on January 1, 2020. The task force formed last year, which includes key members of the teams that work with the calculation of the allowance for probable loan losses plus members representing the corporate accounting and risk management areas, has worked with the implementation of the update and validation to complete our model/tool. Based on the composition of the portfolio at December 31, 2019 and after finalizing the methodology, the adoption of the update increased our allowance for probable loan losses (referred to as the ACL under ASU 2016-13), by approximately 17.2%, resulting in a cumulative-effect adjustment to retained earnings of approximately $8.3 million, net of tax. Please refer to

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Note 4 – Allowance for Credit Losses and the Critical Accounting Policies discussion in Management’s Discussion and Analysis.

In January 2017, the FASB issued Accounting Standards Update No. 2017-04 to ASC 350, “Intangibles – Goodwill and Other.” The update amends existing guidance in evaluating goodwill for impairment. The update requires that an entity perform its annual or interim goodwill test by comparing the fair value of a reporting unit with its carrying amount, with any impairment charges being recognized as the difference between the fair value and carrying value. The update is intended to standardize the impairment test for all business entities and also reduce the complexity and cost of evaluating goodwill for impairment. The update is effective for any annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The adoption of the update is not expected to have a significant impact to our consolidated financial statements.

In March 2017, the FASB issued Accounting Standards Update No. 2017-08 to ASC 310, “Receivables – Nonrefundable Fees and Other Costs.” The update amends existing guidance on the amortization period for certain callable debt securities held at a premium. The update shortens the amortization period of the premium to the earliest call date. The update is effective for fiscal years beginning after December 15, 2018. The update is to be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The adoption of the update did not have a significant impact to our consolidated financial statements.

In February 2018, the FASB issued Accounting Standards Update No. 2018-02 to ASC 220, “Income Statement – Reporting Comprehensive Income.” The update amends current guidance surrounding the reclassification of certain tax effects from accumulated other comprehensive income. The update is being issued as a result of the 2017 Tax Cuts and Jobs Act and the related impact to comprehensive income as a result of the application of current guidance with respect to changes in tax rates. Under current guidance, entities must re-evaluate the carrying value of deferred tax assets and liabilities and adjust them for the tax effect of the rate change and record that change through earnings. The result is that the tax effects for items that normally would only be recognized in comprehensive income will be recognized through earnings and results in stranded tax effects in accumulated other comprehensive income (loss) for the impact of the rate change. The update will allow a reclassification from accumulated other comprehensive income (loss) to retained earnings for the stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act. The update is effective for all entities for fiscal years beginning after December 31, 2018. We adopted the provisions of ASU 2018-02 to ASC 220 in the second quarter of 2018. We recorded a one-time reclassification of $5,997,000 between accumulated comprehensive income (loss) and retained earnings as a result of the adoption of the accounting standards update.

In August 2018, the FASB issued Accounting Standards Update No. 2018-13 to ASC 820, “Fair Value Measurement.” The update amends the existing guidance surrounding the disclosure of certain fair value measurements. The update removes certain disclosures that are no longer considered cost beneficial, modifies and, in some instances clarifies, the specific requirements of certain disclosures and adds disclosure requirements that are identified relevant. The update is effective for fiscal years beginning after December 15, 2019. The adoption of the update is not expected to have a significant impact on our consolidated financial statements.

In December 2019, the FASB issued Accounting Standards Update No. 2019-12, to ASC 740, “Income Taxes.” The update amends existing guidance with the intention of simplifying the accounting for income taxes. Specifically, the update removes some exceptions in existing guidance around intraperiod tax allocations, recognition of deferred tax liabilities for certain changes in investments in foreign subsidiaries and to the general methodology for calculating taxes on interim periods when year to date losses exceed the anticipated loss for the year. Additionally, the update clarifies and provides more guidance with respect to the classification of franchise or similar taxes, requirements to evaluate when a step up in the tax basis of goodwill should be considered, eliminates the requirement that a consolidated entity allocate a portion of current and deferred tax expense to a legal entity that is not subject to tax, requires that an entity reflect the effect of changes in tax laws and tax rates in the effective tax rate computed in the interim period that includes the enactment date and makes minor changes for taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method. The update is effective for fiscal years beginning after December 15, 2020. The adoption of the update is not expected to have a significant impact on our consolidated financial statements.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

In March 2020, the FASB issued Accounting Standards Update No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The update provides optional guidance for a limited period of time to ease the potential burden in accounting for and recognizing the effects of reference rate reform on financial reporting. The practical expedients and exceptions in the update apply only to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The update does not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022 that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The update was effective as of the date of issuance and can be applied through December 31, 2022. We have not adopted the provisions of the update and to not anticipate that the adoption of the update will have a significant impact on our consolidated financial statements.

In January 20201, the FASB issued Accounting Standards Update No. 2021-01, “Reference Rate Reform (Topic 848): Scope.” The update clarifies the applicability of the practical expedients and exceptions issued in ASU 2020-04 to derivative instruments that use an interest rate for margining, discounting or contract price alignment that is modified as a result of reference rate reform. The update is intended to capture the incremental consequences of the scope clarification and tailor the existing guidance to derivative instruments affected by the discounting transition. The update was effective as of the date of issuance and can be applied through December 31, 2022. We have not adopted the provisions of the update and to not anticipate that the adoption of the update will have a significant impact on our consolidated financial statements.

(2) Investment Securities

In accordance with ASU 2016-13, which we adopted on January 1, 2020, available-for-sale and held-to-maturity debt securities in an unrealized loss position must be 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, 2020 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 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, 2020 are as follows:


	Held to Maturity
			Gross		Gross
	Amortized		unrealized		unrealized		Estimated		Carrying
	cost		gains		losses		fair value		value

	(Dollars in Thousands)
Other securities	$	3,400	$	—	$	—	$	3,400	$	3,400
Total investment securities	$	3,400	$	—	$	—	$	3,400	$	3,400


	Available for Sale Debt Securities
			Gross		Gross
	Amortized		unrealized		unrealized		Estimated		Carrying
	cost		gains		losses		fair value		value⁽¹⁾

	(Dollars in Thousands)
Residential mortgage-backed securities	$	3,006,592	$	32,701	$	(9,339)	$	3,029,954	$	3,029,954
Obligations of states and political subdivisions		47,697		3,131		(14)		50,814		50,814
Total investment securities	$	3,054,289	$	35,832	$	(9,353)	$	3,080,768	$	3,080,768

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(1)	Included in the carrying value of residential mortgage- backed securities are $371,407 of mortgage-backed securities issued by Ginnie Mae and $2,658,547 of mortgage-backed securities issued by Fannie Mae and Freddie Mac

The amortized cost and estimated fair value of investment securities at December 31, 2020, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.


	Held to Maturity				Available for Sale
	Amortized		Estimated		Amortized		Estimated
	Cost		fair value		Cost		fair value

	(Dollars in Thousands)
Due in one year or less	$	1,200	$	1,200	$	—	$	—
Due after one year through five years		2,200		2,200		—		—
Due after five years through ten years		—		—		355		356
Due after ten years		—		—		47,342		50,458
Residential mortgage-backed securities		—		—		3,006,592		3,029,954
Total investment securities	$	3,400	$	3,400	$	3,054,289	$	3,080,768

The amortized cost and estimated fair value by type of investment security at December 31, 2019 are as follows:


	Held to Maturity
			Gross		Gross
	Amortized		unrealized		unrealized		Estimated		Carrying
	cost		gains		losses		fair value		value

	(Dollars in Thousands)
Other securities	$	2,400	$	—	$	—	$	2,400	$	2,400
Total investment securities	$	2,400	$	—	$	—	$	2,400	$	2,400


	Available for Sale
			Gross		Gross		Estimated
	Amortized		unrealized		unrealized		fair		Carrying
	cost		gains		losses		value		value⁽¹⁾

	(Dollars in Thousands)
Residential mortgage-backed securities	$	3,285,623	$	16,534	$	(16,609)	$	3,285,548	$	3,285,548
Obligations of states and political subdivisions		90,447		2,933		(5)		93,375		93,375
Total investment securities	$	3,376,070	$	19,467	$	(16,614)	$	3,378,923	$	3,378,923

(1)	Included in the carrying value of residential mortgage- backed securities are $571,247 of mortgage-backed securities issued by Ginnie Mae, $2,714,301 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 $1,220,400,000 and $1,224,268,000, respectively, at December 31, 2020.

Proceeds from the sale and call of securities available-for-sale were $42,350,000, $94,585,000 and $59,782,000 during 2020, 2019 and 2018, respectively, which amounts included $0, $0 and $0 of mortgage-backed securities. Gross

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

gains of $1,000, $3,000 and $3,000, and gross losses of $6,000, $15,000 and $144,000 were realized on the sales and calls in 2020, 2019 and 2018, 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, 2020 were as follows:


	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

	(Dollars in Thousands)
Available for sale:
Residential mortgage-backed securities	$	1,462,232	$	(9,339)	$	—	$	—	$	1,462,232	$	(9,339)
Obligations of states and political subdivisions		—		—		757		(14)		757		(14)
	$	1,462,232	$	(9,339)	$	757	$	(14)	$	1,462,989	$	(9,353)

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, 2019 were as follows:


	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

	(Dollars in Thousands)
Available for sale:
Residential mortgage-backed securities	$	523,031	$	(2,269)	$	1,448,109	$	(14,340)	$	1,971,140	$	(16,609)
Obligations of states and political subdivisions		766		(5)		—		—		766		(5)
	$	523,797	$	(2,274)	$	1,448,109	$	(14,340)	$	1,971,906	$	(16,614)

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, 2020 and December 31, 2019, the balance in equity securities with readily determinable fair values recorded at fair value were $6,202,000 and $6,095,000, respectively. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the twelve months ended December 31, 2020, December 31, 2019 and December 31, 2018:


	Year Ended
	December 31, 2020
	(Dollars in Thousands)

Net gains recognized during the period on equity securities	$	107
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	$	107

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)


	Year Ended
	December 31, 2019
	(Dollars in Thousands)

Net gains recognized during the period on equity securities	$	158
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	$	158


	Year Ended
	December 31, 2018
	(Dollars in Thousands)

Net losses recognized during the period on equity securities	$	(388)
Less: Net gains and (losses) recognized during the period on equity securities sold during the period		—

Unrealized losses recognized during the reporting period on equity securities still held at the reporting date	$	(388)

(3) Loans

A summary of loans, by loan type at December 31, 2020 and 2019 is as follows:


	December 31,		December 31,
	2020		2019

	(Dollars in Thousands)
Commercial, financial and agricultural	$	4,516,288	$	3,379,837
Real estate - mortgage		999,144		1,140,377
Real estate - construction		1,846,757		2,185,883
Consumer		40,595		47,800
Foreign		138,970		141,049
Total loans	$	7,541,754	$	6,894,946

(4) Allowance for Credit Losses

We adopted the provisions of ASU 2016-13 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 are calculated and presented in accordance with previously applicable U.S. GAAP.

ASU 2016-13 replaces the long-standing incurred loss model with 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.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

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.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

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


	December 31, 2020
	Domestic														Foreign
			Commercial
			real estate:
			other		Commercial
			construction &		real estate:		Commercial
			land		farmland &		real estate:		Residential:		Residential:
	Commercial		development		commercial		multifamily		first lien		junior lien		Consumer		Foreign		Total

	(Dollars in Thousands)
Balance at December 31,	$	11,145	$	18,152	$	16,533	$	1,786	$	3,762	$	7,535	$	542	$	823	$	60,278
Adoption of ASU 2016-13		4,247		13,391		(4,292)		(355)		(1,580)		(429)		(225)		(410)		10,347
Losses charge to allowance		(8,936)		(19)		(55)		—		(160)		(124)		(280)		—		(9,574)
Recoveries credited to allowance		2,191		35		117		—		21		186		69		10		2,629
Net losses charged to allowance		(6,745)		16		62		—		(139)		62		(211)		10		(6,945)
Provision (credit) charged to operations		13,261		6,053		17,697		3,620		1,831		2,402		185		330		45,379
Balance at December 31,	$	21,908	$	37,612	$	30,000	$	5,051	$	3,874	$	9,570	$	291	$	753	$	109,059


	December 31, 2019
	Domestic														Foreign
			Commercial
			real estate:
			other		Commercial
			construction &		real estate:		Commercial
			land		farmland &		real estate:		Residential:		Residential:
	Commercial		development		commercial		multifamily		first lien		junior lien		Consumer		Foreign		Total

	(Dollars in Thousands)
Balance at December 31,	$	12,596	$	15,123	$	19,353	$	1,808	$	3,467	$	7,719	$	447	$	871	$	61,384
Losses charge to allowance		(14,412)		(39)		(7,353)		—		(201)		(435)		(487)		(1)		(22,928)
Recoveries credited to allowance		2,196		113		318		—		26		286		40		—		2,979
Net losses charged to allowance		(12,216)		74		(7,035)		—		(175)		(149)		(447)		(1)		(19,949)
Provision (credit) charged to operations		10,765		2,955		4,215		(22)		470		(35)		542		(47)		18,843
Balance at December 31,	$	11,145	$	18,152	$	16,533	$	1,786	$	3,762	$	7,535	$	542	$	823	$	60,278


	December 31, 2018
	Domestic														Foreign
			Commercial
			real estate:
			other		Commercial
			construction &		real estate:		Commercial
			land		farmland &		real estate:		Residential:		Residential:						��
	Commercial		development		commercial		multifamily		first lien		junior lien		Consumer		Foreign			Total

	(Dollars in Thousands)
Balance at December 31,	$	27,905	$	11,675	$	16,663	$	1,109	$	2,950	$	6,103	$	440	$	842		$	67,687
Losses charge to allowance		(14,220)		(1)		(70)		—		(122)		(347)		(362)		(3)			(15,125)
Recoveries credited to allowance		1,981		25		246		—		36		369		43		10			2,710
Net losses charged to allowance		(12,239)		24		176		—		(86)		22		(319)		7			(12,415)
Provision (credit) charged to operations		(3,070)		3,424		2,514		699		603		1,594		326		22			6,112
Balance at December 31,	$	12,596	$	15,123	$	19,353	$	1,808	$	3,467	$	7,719	$	447	$	871		$	61,384

The allowance for credit and probable loan losses is a reserve established through a provision for probable loan losses charged to expense, which represents management’s best estimate of probable loan losses when evaluating loans (i) individually or (ii) collectively. The increase in credit loss expense for the year ended December 31, 2020 can be primarily attributed to the deteriorating economic conditions occurring in those periods as a result of COVID-19 and the impact of those conditions on certain segments of our ACL calculation for those periods. We adopted the provisions of ASU 2016-13 on January 1, 2020, resulting in a transition from the long-standing incurred loss model to an expected credit loss model. The increase in provision for probable loan losses charged to expense and charge-offs charged to the allowance for probable loan losses for the year ended December 31, 2019 can be primarily attributed to a relationship that is secured by multiple pieces of real property on which car dealerships are operated. The relationship began deteriorating in the fourth quarter of 2018, triggered by significant fraud by a high level insider of the car dealership resulting in the dealerships

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

unexpectedly filing for bankruptcy and creating an exposure for potential loss since the operations of the dealerships were the source of repayment from the borrower. The relationship further deteriorated in the first quarter of 2019 after the sponsor of the court approved debtor in possession plan discontinued its role in the process and thus did not fulfill its obligation to assume full responsibility of the accrued and unpaid interest. Although the relationship is secured by real property (the dealerships’ real estate), the real property has specialized use, contributing to the potential exposure for probable loss. During the first quarter of 2019, in light of the circumstances and management’s evaluation of the relationship, the decision was made to place the relationship on impaired, non-accrual status and place a specific reserve on the relationship in the amount of $9.5 million. During the second quarter of 2019, management continued to evaluate the relationship and decided to foreclose on the underlying real estate collateral, resulting in a charge-off of approximately $9.5 million, reflected in the tables above as part of the Commercial and commercial real estate: farmland and commercial categories. The decrease in the provision for probable loan losses charged to expense for the years ended December 31, 2018 can be attributed to a decrease in the historical loss experience in the commercial category of the calculation. As discussed in prior periods, charge-offs increased from historical levels due to the deterioration of one relationship that was secured by multiple pieces of transportation equipment beginning in the fourth quarter of 2014. We use a three-year historical charge-off experience in the calculation, therefore, as those charge-offs were eliminated from the calculation, the allowance for probable loan losses (now ACL) was impacted. As fluctuations occur in historical loss factors, management evaluates the need to adjust the qualitative factors used in the calculation to properly reflect probable loan losses.

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


	December 31, 2020
	Loans Individually				Loans Collectively
	Evaluated For				Evaluated For
	Impairment				Impairment
	Recorded				Recorded
	Investment		Allowance		Investment		Allowance

	(Dollars in Thousands)
Domestic
Commercial	$	1,189	$	209	$	1,784,747	$	21,699
Commercial real estate: other construction & land development		17,496		70		1,829,261		37,542
Commercial real estate: farmland & commercial		439		—		2,288,869		30,000
Commercial real estate: multifamily		134		—		440,910		5,051
Residential: first lien		151		—		404,968		3,874
Residential: junior lien		38		—		593,987		9,570
Consumer		—		—		40,595		291
Foreign		—		—		138,970		753

Total	$	19,447	$	279	$	7,522,307	$	108,780

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)


	December 31, 2019
	Loans Individually				Loans Collectively
	Evaluated For				Evaluated For
	Impairment				Impairment
	Recorded				Recorded
	Investment		Allowance		Investment		Allowance

	(Dollars in Thousands)
Domestic
Commercial	$	1,935	$	249	$	1,290,725	$	10,895
Commercial real estate: other construction & land development		938		116		2,184,945		18,037
Commercial real estate: farmland & commercial		1,208		—		1,895,539		16,533
Commercial real estate: multifamily		165		—		190,265		1,786
Residential: first lien		6,278		—		427,623		3,762
Residential: junior lien		692		—		705,784		7,535
Consumer		1,195		—		46,605		542
Foreign		264		—		140,785		823

Total	$	12,675	$	365	$	6,882,271	$	59,913

Loans accounted for on a non-accrual basis at December 31, 2020, 2019 and 2018 amounted to $19,822,000, $4,886,000 and $15,791,000, respectively. The increase in non-accrual commercial loans at December 31, 2020 compared to the same period of 2019 can be attributed to a relationship secured by commercial property. The decrease in non-accrual commercial loans at December 31, 2019 compared to the same period of 2018 can be attributed to a relationship secured by equipment and accounts receivable that has been upgraded to Watch-List Substandard. The effect of such non-accrual loans reduced interest income by approximately $694,000, $340,000 and $1,119,000 for the years ended December 31, 2020, 2019 and 2018, 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, 2020, 2019 and 2018 amounted to approximately $8,238,000, $59,705,000 and $40,674,000, respectively. The increase at December 31, 2019 can be attributed to a relationship that is secured by multiple pieces of real property on which car dealerships are operated.

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


	December 31, 2020		December 31, 2019

	(Dollars in Thousands)
Domestic
Commercial	$	1,189	$	1,901
Commercial real estate: other construction & land development		17,496		938
Commercial real estate: farmland & commercial		439		1,208
Commercial real estate: multifamily		134		165
Residential: first lien		526		670
Residential: junior lien		38		—
Consumer		—		4
Total non-accrual loans	$	19,822	$	4,886

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.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

The following tables detail key information regarding our doubtful loans (formerly “impaired loans” prior to the adoption of ASU 2016-13) by loan class at December 31, 2019, in accordance with ASC 310 prior to the adoption of ASU 2016-13:


	December 31, 2019
			Unpaid				Average
	Recorded		Principal		Related		Recorded		Interest
	Investment		Balance		Allowance		Investment		Recognized

	(Dollars in Thousands)
Loans with Related Allowance
Domestic
Commercial	$	510	$	516	$	249	$	514	$	—
Commercial real estate: other construction & land development		126		169		116		131		—
Total impaired loans with related allowance	$	636	$	685	$	365	$	645	$	—


	December 31, 2019
			Unpaid		Average
	Recorded		Principal		Recorded		Interest
	Investment		Balance		Investment		Recognized

	(Dollars in Thousands)
Loans with No Related Allowance
Domestic
Commercial	$	1,425	$	1,516	$	18,794	$	2
Commercial real estate: other construction & land development		812		1,133		1,737		—
Commercial real estate: farmland & commercial		1,208		1,841		22,357		—
Commercial real estate: multifamily		165		168		651		—
Residential: first lien		6,278		6,445		6,988		309
Residential: junior lien		692		692		1,023		42
Consumer		1,195		1,196		1,117		—
Foreign		264		264		278		12
Total impaired loans with no related allowance	$	12,039	$	13,255	$	52,945	$	365

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, 2020		December 31, 2019

		(Dollars in Thousands)
Domestic
Commercial	$	—	$	32
Residential: first lien		4,078		5,608
Residential: junior lien		521		692
Consumer		989		1,192
Foreign		233		264
Total troubled debt restructuring	$	5,821	$	7,788

We are actively working with our customers affected by the current economic crisis arising from COVID-19. We have been offering and are prepared to continue to offer assistance in accordance with current regulatory guidance. That includes continuously reaching out to our customers and, in some cases, offering short-term payment deferral plans. In accordance with the Coronavirus Aid, Relief and Economic Security (“CARES”) Act or interagency regulatory guidance, these short-term deferrals are not considered troubled debt restructurings. As of February 22, 2021, approximately $1,011,570,000 in loans with some degree of payment deferrals were in our system. Approximately 78% of the loans originally put into some sort of deferral program have resumed regular payments. The end of the deferral period on loans that are in some sort of payment deferral program will be throughout the first and second quarters of 2021 and we anticipate that approximately 13% of the loans still in a payment deferral program will request some degree of additional relief. The loans that may be requesting additional relief will include some customers in the industries that have been significantly impacted by the COVID-19 pandemic, including the hospitality sector, the oil and gas industry and retail developments.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

The CARES Act was signed into law on March 27, 2020. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act includes the Paycheck Protection Program (“PPP”), originally a nearly $350 billion program designed to aid small businesses through federally guaranteed loans distributed through banks. These loans were originally intended to support eight weeks of payroll and certain other costs to help those businesses remain viable and allow their employees to pay their bills. Subsequently, on April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act (“CARES Part II”) was signed into law. CARES Part II provided an additional funding of $320 billion for the PPP program. Then, on June 5, 2020, the Paycheck Protection Program Flexibility Act (“PPPFA”) was signed into law. The PPPFA, among other things, extended the period of time that businesses could spend PPP loan proceeds on payroll and other eligible costs from eight weeks to the earlier of 24 weeks or December 31, 2020. On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the “Economic Aid Act”) was enacted, which among other things, reauthorized lending under the PPP to first-time borrowers and for second draws by certain borrowers who have previously received PPP loans. The Economic Aid Act made available an additional $147 billion for PPP loans requested by March 31, 2021. We have been active participants in helping our customers obtain PPP loans under all the PPP programs and as of February 22, 2021 have approximately 3,500 loans with an approximate value of $395,872,000 outstanding. The PPP loans are fully guaranteed by the U.S. government through the SBA.

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, 2020 and December 31, 2019, was adequate to absorb probable losses from loans in the portfolio at that date.

The following table presents information regarding the aging of past due loans by loan class:


	December 31, 2020
							90 Days or		Total
	30 - 59		60 - 89		90 Days or		greater &		Past				Total
	Days		Days		Greater		still accruing		Due		Current		Portfolio

	(Dollars in Thousands)
Domestic
Commercial	$	1,931	$	1,109	$	563	$	318	$	3,603	$	1,782,333	$	1,785,936
Commercial real estate: other construction & land development		1,059		854		16,587		—		18,500		1,828,257		1,846,757
Commercial real estate: farmland & commercial		2,435		219		186		186		2,840		2,286,468		2,289,308
Commercial real estate: multifamily		126		—		—		—		126		440,918		441,044
Residential: first lien		2,399		926		6,165		5,890		9,490		395,629		405,119
Residential: junior lien		561		247		1,197		1,197		2,005		592,020		594,025
Consumer		318		71		79		79		468		40,127		40,595
Foreign		478		180		568		568		1,226		137,744		138,970
Total past due loans	$	9,307	$	3,606	$	25,345	$	8,238	$	38,258	$	7,503,496	$	7,541,754

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)


	December 31, 2019
							90 Days or		Total
	30 - 59		60 - 89		90 Days or		greater &		Past				Total
	Days		Days		Greater		still accruing		Due		Current		Portfolio

		(Dollars in Thousands)
Domestic
Commercial	$	3,134	$	626	$	1,292	$	421	$	5,052	$	1,287,608	$	1,292,660
Commercial real estate: other construction & land development		509		55		—		—		564		2,185,319		2,185,883
Commercial real estate: farmland & commercial		8,058		2,031		54,928		54,878		65,017		1,831,730		1,896,747
Commercial real estate: multifamily		313		—		165		—		478		189,952		190,430
Residential: first lien		3,229		1,670		3,660		3,107		8,559		425,342		433,901
Residential: junior lien		1,112		477		1,200		1,200		2,789		703,687		706,476
Consumer		467		75		88		88		630		47,170		47,800
Foreign		1,347		3		11		11		1,361		139,688		141,049
Total past due loans	$	18,169	$	4,937	$	61,344	$	59,705	$	84,450	$	6,810,496	$	6,894,946

The decrease in commercial real estate: other construction & land development loans past due 90 days or greater at December 31, 2020 compared to December 31, 2019 can be primarily attributed to a relationship secured by real estate on which children’s learning centers are operated. Our internal classified report is segregated into the following categories: (i) “Special Review Credits,” (ii) “Watch List—Pass Credits,” or (iii) “Watch List—Substandard Credits.” The loans placed in the “Special Review Credits” category reflect our opinion that the loans reflect potential weakness which require monitoring on a more frequent basis. The “Special Review Credits” are reviewed and discussed on a regular basis with the credit department and the lending staff to determine if a change in category is warranted. The loans placed in the “Watch List—Pass Credits” category reflect our opinion that the credit contains weaknesses which represent a greater degree of risk, which warrant “extra attention.” The “Watch List—Pass Credits” are reviewed and discussed on a regular basis with the credit department and the lending staff to determine if a change in category is warranted. The loans placed in the “Watch List—Substandard Credits” classification are considered to be potentially inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral. These credit obligations, even if apparently protected by collateral value, have shown defined weaknesses related to adverse financial, managerial, economic, market or political conditions which may jeopardize repayment of principal and interest. Furthermore, there is the possibility that we could sustain some future loss if such weaknesses are not corrected.

A summary of the loan portfolio by credit quality indicator by loan class is as follows:

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)



		2020	2019		2018		2017		2016		Prior		Total

	(Dollars in Thousands)
Balance at December 31, 2020
Domestic
Commercial
Pass	$	1,168,671	$	240,869	$	145,670	$	85,434	$	13,901	$	10,000	$	1,664,545
Special Review		75,638		—		—		—		—		—		75,638
Watch List - Pass		39,886		11		—		3		—		17		39,917
Watch List - Substandard		3,360		683		289		—		315		—		4,647
Watch List - Doubtful		777		161		92		159		—		—		1,189
Total Commercial	$	1,288,332	$	241,724	$	146,051	$	85,596	$	14,216	$	10,017	$	1,785,936
Commercial real estate: other construction & land development
Pass	$	773,165	$	576,707	$	320,308	$	78,174	$	10,534	$	3,343	$	1,762,231
Special Review		20,828		21,650		—		—		—		—		42,478
Watch List - Pass		23,101		1,451		—		—		—		—		24,552
Watch List - Doubtful		16,702		794		—		—		—		—		17,496
Total Commercial real estate: other construction & land development	$	833,796	$	600,602	$	320,308	$	78,174	$	10,534	$	3,343	$	1,846,757
Commercial real estate: farmland & commercial
Pass	$	884,070	$	373,993	$	386,268	$	189,639	$	202,500	$	116,729	$	2,153,199
Special Review		3,041		—		4,758		177		3,218		—		11,194
Watch List - Pass		61,637		942		277		80		—		—		62,936
Watch List - Substandard		53,809		4,986		—		2,269		475		1		61,540
Watch List - Doubtful		—		202		—		—		—		237		439
Total Commercial real estate: farmland & commercial	$	1,002,557	$	380,123	$	391,303	$	192,165	$	206,193	$	116,967	$	2,289,308
Commercial real estate: multifamily
Pass	$	74,577	$	208,356	$	82,818	$	64,110	$	6,801	$	4,248	$	440,910
Watch List - Doubtful		134		—		—		—		—		—		134
Total Commercial real estate: multifamily	$	74,711	$	208,356	$	82,818	$	64,110	$	6,801	$	4,248	$	441,044
Residential: first lien
Pass	$	81,004	$	62,165	$	72,299	$	54,593	$	29,250	$	105,463	$	404,774
Watch List - Pass		—		14		131		—		—		—		145
Watch List - Substandard		—		—		—		—		49		—		49
Watch List - Doubtful		86		—		—		—		—		65		151
Total Residential: first lien	$	81,090	$	62,179	$	72,430	$	54,593	$	29,299	$	105,528	$	405,119
Residential: junior lien
Pass	$	196,308	$	108,276	$	61,636	$	75,056	$	56,705	$	94,454	$	592,435
Special Review		740		—		—		812		—		—		1,552
Watch List- Doubtful		—		—		38		—		—		—		38
Total Residential: junior lien	$	197,048	$	108,276	$	61,674	$	75,868	$	56,705	$	94,454	$	594,025
Consumer
Pass	$	30,910	$	7,159	$	875	$	225	$	55	$	1,371	$	40,595
Total Consumer	$	30,910	$	7,159	$	875	$	225	$	55	$	1,371	$	40,595
Foreign
Pass	$	93,236	$	19,092	$	11,572	$	6,192	$	3,533	$	5,345	$	138,970
Total Foreign	$	93,236	$	19,092	$	11,572	$	6,192	$	3,533	$	5,345	$	138,970
Total Loans	$	3,601,680	$	1,627,511	$	1,087,031	$	556,923	$	327,336	$	341,273	$	7,541,754

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)


			December 31, 2019
			Special		Watch		Watch List—		Watch List—
	Pass		Review		List—Pass		Substandard		Impaired

			(Dollars in Thousands)
Domestic
Commercial	$	1,228,110	$	569	$	39	$	62,007	$	1,935
Commercial real estate: other construction & land development		2,090,370		18,721		41,949		33,905		938
Commercial real estate: farmland & commercial		1,710,446		13,184		20,183		151,726		1,208
Commercial real estate: multifamily		190,265		—		—		—		165
Residential: first lien		426,546		253		144		680		6,278
Residential: junior lien		704,958		826		—		—		692
Consumer		46,605		—		—		—		1,195
Foreign		140,785		—		—		—		264
Total	$	6,538,085	$	33,553	$	62,315	$	248,318	$	12,675

The increase in Special Review credits in the commercial loan category of the portfolio at December 31, 2020 compared to December 31, 2019 can be attributed to a relationship secured by oil and gas properties moved from Pass. The increase in Special Review commercial real estate: other construction and land development loan category of the portfolio for the same period can be attributed to a relationship secured by real estate planned for lot development.

The increase in Watch-List Pass credits in the commercial loan category of the portfolio at December 31, 2020 compared to December 31, 2019 can be attributed to 2 relationships moved from the Pass category. NaN is secured by oil and gas properties and 1 is secured by accounts receivable and inventory. The decrease in Watch-List Pass credits in the commercial real estate: other construction and land development category of the portfolio for the same period can be attributed to one relationship moved to Special Review that is secured by real estate planned for lot development, one relationship placed on non-accrual that is secured by commercial property and one relationship downgraded from Pass that is secured by commercial real estate. The increase in commercial real estate: farmland and commercial category of the portfolio for the period can be attributed to two relationships secured by commercial real estate moved from the Pass category.

The decrease in Watch-List Substandard credits in the commercial loan category of the portfolio at December 31, 2020 compared to December 31, 2019 can be attributed to a relationship secured by aircraft that was moved to the Pass category. The decrease in Watch-List Substandard credits in the commercial real estate: other construction and land development category of the portfolio for the same period can be attributed to a relationship secured by real estate development lots moved to the Pass category. The decrease Watch-List Substandard credits in the commercial real estate: farmland and commercial category of the portfolio for the period can be attributed to a relationship secured by real estate on which a golf resort is operated moved to Pass.

The increase in Watch-List Doubtful credits in the commercial real estate: other construction and land development category of the portfolio at December 31, 2020 compared to the same period of 2019 can be attributed to a relationship secured by commercial property that was placed on non-accrual and moved from Watch-List Pass.

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, 2020 and 2019 were as follows:


	Estimated
	useful lives				2020		2019

					(Dollars in Thousands)
Bank buildings and improvements	5	-	39	years	$	577,656	$	573,257
Furniture, equipment and vehicles	1	-	20	years		311,313		313,880
Land						117,848		118,099
Less: accumulated depreciation						(526,939)		(498,641)
Bank premises and equipment, net					$	479,878	$	506,595

(6) Goodwill and Other Intangible Assets

The majority of our identified intangibles are in the form of amortizable core deposit premium. A small portion of the fully amortized identified intangibles represent identified intangibles in the acquisition of the rights to the insurance agency contracts of InsCorp, Inc., acquired in 2008. Information on our identified intangible assets follows:


	Carrying		Accumulated
	Amount		Amortization		Net

	(Dollars in Thousands)
December 31, 2020:
Core deposit premium	$	58,675	$	58,675	$	—
Identified intangible (contract rights)		2,022		2,022		—
Total identified intangibles	$	60,697	$	60,697	$	—
December 31, 2019:
Core deposit premium	$	58,675	$	58,675	$	—
Identified intangible (contract rights)		2,022		2,022		—
Total identified intangibles	$	60,697	$	60,697	$	—

Amortization expense of intangible assets was $0, $0 and $0 for the years ended December 31, 2020, 2019 and 2018.

There were 0 changes in the carrying amount of goodwill for the years ended December 31, 2020 and 2019.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(7) Deposits

Deposits as of December 31, 2020 and 2019 and related interest expense for the years ended December 31, 2020, 2019 and 2018 were as follows:


	2020		2019

	(Dollars in Thousands)
Deposits:
Demand - non-interest bearing
Domestic	$	3,781,277	$	2,815,835
Foreign		934,537		730,070
Total demand non-interest bearing		4,715,814		3,545,905
Savings and interest bearing demand
Domestic		2,919,314		2,477,668
Foreign		933,191		790,161
Total savings and interest bearing demand		3,852,505		3,267,829
Time, certificates of deposit $100,000 or more
Domestic		797,692		636,005
Foreign		822,387		827,031
Less than $100,000
Domestic		291,473		302,620
Foreign		241,989		246,644
Total time, certificates of deposit		2,153,541		2,012,300
Total deposits	$	10,721,860	$	8,826,034


	2020		2019		2018

	(Dollars in Thousands)
Interest expense:
Savings and interest bearing demand
Domestic	$	5,098	$	13,462	$	11,029
Foreign		1,260		2,917		1,735
Total savings and interest bearing demand		6,358		16,379		12,764
Time, certificates of deposit $100,000 or more
Domestic		8,827		7,804		4,741
Foreign		7,536		9,407		5,798
Less than $100,000
Domestic		1,781		2,232		1,589
Foreign		1,086		1,527		968
Total time, certificates of deposit		19,230		20,970		13,096
Total interest expense on deposits	$	25,588	$	37,349	$	25,860

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Scheduled maturities of time deposits as of December 31, 2020 were as follows:


	Total
	(in thousands)
2021	$	1,971,433
2022		141,388
2023		28,781
2024		11,205
2025		681
Thereafter		53
Total	$	2,153,541

Scheduled maturities of time deposits in amounts of $100,000 or more at December 31, 2020, were as follows:


	Total
	(in thousands)
Due within 3 months or less	$	606,807
Due after 3 months and within 6 months		385,859
Due after 6 months and within 12 months		498,626
Due after 12 months		129,792
	$	1,621,084

Time deposits that meet or exceed the FDIC insurance limit of $250,000 at December 31, 2020 and December 31, 2019 were $1,085,404 and $929,860, in thousands, 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 $335,392,000 and $267,439,000 during 2020 and 2019, respectively, and the maximum amount outstanding at any month end during 2020 and 2019 was $428,148,000 and $299,827,000 respectively.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Further information related to repurchase agreements at December 31, 2020 and 2019 is set forth in the following table:


	Collateral Securities				Repurchase Borrowing
	Book Value of		Fair Value of		Balance of		Weighted Average
	Securities Sold		Securities Sold		Liability		Interest Rate

	(Dollars in Thousands)
December 31, 2020 term:
Overnight agreements	$	506,020	$	507,164	$	416,757	0.13	%
1 to 29 days		—		—		—	—
30 to 90 days		—		—		—	—
Over 90 days		11,684		11,641		11,391	0.43
Total	$	517,704	$	518,805	$	428,148	0.14	%
December 31, 2019 term:
Overnight agreements	$	317,107	$	318,397	$	225,243	0.87	%
1 to 29 days		—		—		—	—
30 to 90 days		—		—		—	—
Over 90 days		11,564		11,529		11,293	1.28
Total	$	328,671	$	329,926	$	236,536	0.89	%

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, 2020 and 2019 is set forth in the following table:


	December 31,
	2020			2019

	(Dollars in Thousands)
Federal Home Loan Bank advances—short-term
Balance at year end	$	—		$	190,000
Rate on balance outstanding at year end		—	%		1.48	%
Average daily balance	$	110,776		$	190,431
Average rate		1.19	%		2.60	%
Maximum amount outstanding at any month end	$	292,000		$	371,775
Federal Home Loan Bank advances—long-term⁽¹⁾
Balance at year end	$	436,327		$	436,511
Rate on balance outstanding at year end		1.73	%		1.73	%
Average daily balance	$	436,411		$	436,593
Average rate		1.71	%		1.71	%
Maximum amount outstanding at any month end	$	436,495		$	436,675

(1)

Long-term advances at December 31, 2020 and December 31, 2019 consisted of both amortizing and non-amortizing advances. The non-amortizing advances mature in the following increments: $75,000,000 in July 2028, $100,000,000 in March 2033 and $250,000,000 in August 2033 and are callable by the FHLB on a quarterly basis. NaN amortizing advances are outstanding at December 31, 2020 in the amounts of $3,091,000 and $8,236,000 and mature in December 2033 and November 2033, respectively. The amortization on the amortizing long-term advances totals approximately $189,000, $194,000, $199,000, $204,000 and $210,000 for the years ending December 31, 2021, December 31,

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

2022, December 31, 2023, December 31, 2024 and December 31, 2025, respectively.

(10) Junior Subordinated Deferrable Interest Debentures

We have formed 5 statutory business trusts under the laws of the State of Delaware for the purpose of issuing trust preferred securities. These statutory business trusts (the “Trusts”) have each issued Capital and Common Securities and invested the proceeds thereof in an equivalent amount of junior subordinated debentures (the “Debentures”) we issued. As of December 31, 2020 and December 31, 2019, the principal amount of debentures outstanding totaled $134,642,000.

The Debentures are subordinated and junior in right of payment to all our present and future senior indebtedness (as defined in the respective indentures) and are pari passu with one another. The interest rate payable on, and the payment terms of the Debentures are the same as the distribution rate and payment terms of the respective issues of Capital and Common Securities issued by the Trusts. We have fully and unconditionally guaranteed the obligations of each of the Trusts with respect to the Capital and Common Securities. We have the right, unless an Event of Default (as defined in the Indentures) has occurred and is continuing, to defer payment of interest on the Debentures for up to 20 consecutive quarterly periods on Trusts VIII, IX, X, XI and XII. If interest payments on any of the Debentures are deferred, distributions on both the Capital and Common Securities related to that Debenture would also be deferred. The redemption prior to maturity of any of the Debentures may require the prior approval of the Federal Reserve and/or other regulatory bodies.

The following table illustrates key information about each of the Debentures and their interest rates at December 31, 2020:

Junior

Subordinated

Deferrable

Interest

Repricing

Interest

Optional

Debentures

Frequency

Rate

Rate Index(1)

Maturity Date

Redemption Date⁽¹⁾

(Dollars in Thousands)

Trust VIII

25,774

Quarterly

3.29

LIBOR

3.05

October 2033

October 2008

Trust IX

41,238

Quarterly

1.85

LIBOR

1.62

October 2036

October 2011

Trust X

21,021

Quarterly

1.86

LIBOR

1.65

February 2037

February 2012

Trust XI

25,990

Quarterly

1.85

LIBOR

1.62

July 2037

July 2012

Trust XII

20,619

Quarterly

1.68

LIBOR

1.45

September 2037

September 2012

134,642

(1)	The Capital Securities may be redeemed in whole or in part on any interest payment date after the Optional Redemption Date.

(11) Earnings per Share (“EPS”)

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

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, 2020, 2019, and 2018 is set forth in the following table:


	Net Income		Shares	Per Share
	(Numerator)		(Denominator)	Amount

	(Dollars in Thousands,
	Except Per Share Amounts)
December 31, 2020:
Basic EPS
Net income available to common shareholders	$	167,319	63,725,819	$	2.63
Potential dilutive common shares and warrants		—	127,316
Diluted EPS	$	167,319	63,853,135	$	2.62
December 31, 2019:
Basic EPS
Net income available to common shareholders	$	205,104	65,476,606	$	3.13
Potential dilutive common shares and warrants		—	209,078
Diluted EPS	$	205,104	65,685,684	$	3.12
December 31, 2018:
Basic EPS
Net income available to common shareholders	$	215,931	66,106,580	$	3.27
Potential dilutive common shares		—	527,240
Diluted EPS	$	215,931	66,633,820	$	3.24

(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 $4,000,000, $4,200,000 and $3,850,000 were charged to income for the years ended December 31, 2020, 2019, and 2018, 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.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

A summary of assets attributable to international operations at December 31, 2020 and 2019 are as follows:


	2020		2019

	(Dollars in Thousands)
Loans:
Commercial	$	90,177	$	88,979
Others		48,793		52,070
		138,970		141,049
Less allowance for probable loan losses		(753)		(823)
Net loans	$	138,217	$	140,226
Accrued interest receivable	$	605	$	743

At December 31, 2020, we had $118,722,000 in outstanding standby and commercial letters of credit to facilitate trade activities.

Revenues directly attributable to international operations were approximately $4,676,000, $5,445,000 and $5,412,000 for the years ended December 31, 2020, 2019 and 2018, 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:


	2020		2019		2018

	(Dollars in Thousands)
Current
U.S.	$	43,794	$	48,559	$	48,144
State		3,709		2,944		3,370
Foreign		58		38		(5)
Total current taxes		47,561		51,541		51,509
Deferred
U.S.		(2,733)		2,979		5,130
State		(389)		330		13
Total deferred taxes		(3,122)		3,309		5,143
Total income taxes	$	44,439	$	54,850	$	56,652

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Total income tax expense differs from the amount computed by applying the U.S. Federal income tax rate of 21%for 2020, 2019 and 2018 to income before income taxes. The reasons for the differences for the years ended December 31 are as follows:


	2020		2019		2018

	(Dollars in Thousands)
Computed expected tax expense	$	45,218	$	55,086	$	57,831
Change in taxes resulting from:
Tax-exempt interest income		(2,709)		(2,550)		(3,101)
State tax, net of federal income taxes, tax credit and refunds		2,622		2,587		2,673
Resolution of IRS exam				—		—
Other investment income		(2,205)		(1,480)		(1,561)
Deferred tax adjustment due to federal tax rate change				—		(1,618)
Net investment in low income housing investments		1,990		623		2,518
Other		(477)		584		(90)
Actual tax expense	$	44,439	$	54,850	$	56,652

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2020 and 2019 are reflected below:


	2020		2019

	(Dollars in Thousands)
Deferred tax assets:
Loans receivable, principally due to the allowance for probable loan losses	$	21,921	$	12,050
Other real estate owned		1,183		2,501
Impairment charges on available-for-sale securities		—		1,054
Accrued expenses		81		98
Other		5,649		6,019
Total deferred tax assets		28,834		21,722
Deferred tax liabilities:
Bank premises and equipment, principally due to differences on depreciation		(12,350)		(12,478)
Net unrealized gains on available for sale investment securities		(5,679)		(508)
Impairment charges on available-for-sale securities		(19)		—
Identified intangible assets and goodwill		(13,807)		(13,649)
Other		(20,551)		(18,849)
Total deferred tax liabilities		(52,406)		(45,484)
Net deferred tax liability	$	(23,572)	$	(23,762)

The net deferred tax liability of $23,572,000 at December 31, 2020 and $23,762,000 at December 31, 2019 is included in other liabilities in the consolidated statements of condition.

(15) Stock Options

On April 5, 2012, the Board of Directors adopted the 2012 International Bancshares Corporation Stock Option Plan (the “2012 Plan”). There are 800,000 shares available for stock option grants under the 2012 Plan. Under the 2012 Plan, both qualified incentive stock options (“ISOs”) and non-qualified stock options (“NQSOs”) may be granted. Options granted may be exercisable for a period of up to 10 years from the date of grant, excluding ISOs granted to 10% shareholders, which may be exercisable for a period of up to only five years. As of December 31, 2020, 10,102 shares were available for future grants under the 2012 Plan.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

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


	2020		2019
Expected Life (Years)	7.00		7.00
Dividend yield	6.04	%	2.93	%
Interest rate	0.74	%	1.97	%
Volatility	29.04	%	26.97	%

A summary of option activity under the stock option plans for the twelve months ended December 31, 2020 is as follows:


				Weighted
		Weighted		average
		average		remaining	Aggregate
	Number of	exercise		contractual	intrinsic
	options	price		term (years)	value ($)
					(in Thousands)
Options outstanding at December 31, 2019	658,588	$	27.55
Plus: Options granted	35,000		18.79
Less:
Options exercised	26,010		20.87
Options expired	—		—
Options forfeited	16,451		31.94
Options outstanding at December 31, 2020	651,127		27.24	5.05	$	6,817

Options fully vested and exercisable at December 31, 2020	409,782	$	22.98	3.61	$	5,953

Stock-based compensation expense included in the consolidated statements of income for the years ended December 31, 2020, 2019 and 2018 was approximately $743,000, $980,000 and $1,035,000, respectively. As of December 31, 2020, there was approximately $1,254,000 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 1.7 years.

Other information pertaining to option activity during the twelve months ended December 31, 2020, 2019 and 2018 is as follows:


	Twelve Months Ended December 31,
	2020		2019		2018
Weighted average grant date fair value of stock options granted	$	2.46	$	7.38	$	11.78
Total fair value of stock options vested	$	1,218,000	$	1,333,000	$	1,077,000
Total intrinsic value of stock options exercised	$	356,000	$	2,373,000	$	2,045,000

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(16) Long Term Restricted Stock Units

As a former participant in the Troubled Asset Relief Program Capital Purchase Program (the “CPP”) we were subject to certain compensation restrictions, including a prohibition on the payment or accrual of any bonuses to certain officers and employees except for awards of CPP-compliant long- term restricted stock and stock units.

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

The Plan authorizes us to issue Restricted Stock Units (“RSUs”) to our officers, employees, consultants and advisors. On December 18, 2009, pursuant to the Plan, the Board adopted resolutions creating the Long-Term Restricted Stock Unit Plan Committee to administer the Plan. RSUs issued under the Plan are not equity and are payable only in cash. The Plan provides for both the issuance of CPP-compliant long-term RSUs as well as RSUs that are not CPP-compliant. NaN grants have been made under the Plan since December 2012 and there are currently 0 outstanding grants under the Plan. The plan was terminated on August 6, 2019.

(17) 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. Cash of approximately $125,764,000 December 31, 2019 was maintained to satisfy regulatory reserve requirements.

We are involved in various legal proceedings that are in various stages of litigation. We have determined, based on discussions with our counsel that any material loss in such actions, individually or in the aggregate, is remote or the damages sought, even if fully recovered, would not be considered material to our consolidated statements of condition and related statements of income, comprehensive income, shareholders’ equity and cash flows. However, many of these matters are in various stages of proceedings and further developments could cause management to revise its assessment of these matters.

(18) Transactions with Related Parties

In the ordinary course of business, the Subsidiary Banks make loans to our directors and executive officers, including their affiliates, families and companies in which they are principal owners. In the opinion of management, these loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risk of collectability or present other unfavorable features. The aggregate amounts receivable from such related parties amounted to approximately $30,398,000 and $37,605,000 at December 31, 2020 and 2019, respectively.

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

In the normal course of business, the Subsidiary Banks are party to financial instruments with off-statement of condition risk to meet the financing needs of their customers. These financial instruments include commitments to their customers. These financial instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated statement of condition. The contract amounts of these instruments reflect the extent of involvement the Subsidiary Banks have in particular classes of financial instruments. At December 31, 2020, the following financial amounts of instruments, whose contract amounts represent credit risks, were outstanding:


Commitments to extend credit	$	2,354,010,000
Credit card lines		13,579,000
Standby letters of credit		118,381,000
Commercial letters of credit		341,000

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

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, 2020, the maximum potential amount of future payments is approximately $118,381,000. At December 31, 2020, the fair value of these guarantees is not significant. Unsecured letters of credit totaled approximately $39,487,000 and $49,965,000 at December 31, 2020 and 2019, respectively.

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

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

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

(20) Capital Requirements

Bank regulatory agencies limit the amount of dividends, which the Subsidiary Banks can pay, without obtaining prior approval from such agencies. At December 31, 2020, the Subsidiary Banks could pay dividends of up to $948,000,000 without prior regulatory approval and without adversely affecting their “well-capitalized” status under regulatory capital rules in effect at December 31, 2020. In addition to legal requirements, regulatory authorities also consider the adequacy of the Subsidiary Banks’ total capital in relation to their deposits and other factors. These capital adequacy considerations also limit amounts available for payment of dividends. We historically have not allowed any Subsidiary Bank to pay dividends in such a manner as to impair its capital adequacy.

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

Current quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth in the table on the following page) of Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. Management believes, as of December 31, 2020, that we met all capital adequacy requirements to which we are subject.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

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 Dodd-Frank related capital provisions. Consistent with the Basel international framework, the rules include a new minimum ratio of Common Equity Tier 1 (“CET1”) to risk-weighted assets of 4.5% and a CET1 capital conservation buffer of 2.5% of risk-weighted assets. The capital conservation buffer began phasing-in on January 1, 2016 at .625% and increased each year until January 1, 2019, when we were required to have a 2.5% capital conservation buffer, effectively resulting in a minimum ratio of CET1 capital to risk-weighted assets of at least 7% upon full implementation. The rules also raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and include a minimum leverage ratio of 4% for all banking organizations. Regarding the quality of capital, the rules emphasize CET1 capital and implements strict eligibility criteria for regulatory capital instruments. The rules also improve the methodology for calculating risk-weighted assets to enhance risk sensitivity. The rules were subject to a four-year phase-in period for mandatory compliance and we were required to begin to phase-in the new rules beginning on January 1, 2015. We believe that as of December 31, 2020, we meet all fully phased-in capital adequacy requirements.

On November 21, 2017, the OCC, the Federal Reserve and the FDIC finalized a proposed rule that extends the current treatment under the regulatory capital rules for certain regulatory capital deductions and risk weights and certain minority interest requirements, as they apply to banking organizations that are not subject to the advanced approaches capital rules. Effective January 1, 2018, the rule also paused the full transition to the Basel III treatment of mortgage servicing assets, certain deferred tax assets, investments in the capital of unconsolidated financial institutions and minority interests. The agencies are also considering whether to make adjustments to the capital rules in response to CECL (the FASB Standard relating to current expected credit loss) and its potential impact on regulatory capital.

The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 capital to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

As of December 31, 2019, our capital levels exceed all capital adequacy requirements under the Basel III Capital Rules as currently applicable to us. Based on the ratios presented below, capital levels as of December 31, 2020 exceed the minimum levels necessary to be considered “well-capitalized.”

On May 24, 2018, the EGRRCPA was enacted and, among other things, it includes a simplified capital rule change which effectively exempts banks with assets of less than $10 billion that exceed the “community bank leverage ratio,” from all risk-based capital requirements, including Basel III and its predecessors. The federal banking agencies must establish the “community bank leverage ratio” (a ratio of tangible equity to average consolidated assets) between 8% and 10% before community banks can begin to take advantage of this regulatory relief provision. Some of the Subsidiary Banks, with assets of less than $10 billion, may qualify for this exemption. Additionally, under the EGRRCPA, qualified bank holding companies with assets of up to $3 billion (currently $1 billion) will be eligible for the Federal Reserve’s Small Bank Holding Company Policy Statement, which eases limitations on the issuance of debt by holding companies. On August 28, 2018, the Federal Reserve issued an interim final rule expanding the applicability of its Small Bank Holding Company Policy Statement. While holding companies that meet the conditions of the policy statement are excluded from consolidated capital requirements, their depository institutions continue to be subject to minimum capital requirements. Finally, for banks that continue to be subject to the risk-based capital rules of Basel III (e.g., 150%), certain commercial real estate loans that were formally classified as high volatility commercial real estate 31 (“HVCRE”) will not be subject to heightened risk weights if they meet certain criteria. Also, while acquisition, development, and construction (“ADC”) loans will generally be subject to heightened risk weights, certain exceptions will apply. On September 18, 2018, the federal banking agencies issued a proposed rule modifying the agencies’ capital rules for HVCRE.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

As of December 31, 2020, 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.

In December 2018, the federal bank regulators issued a final rule that would provide an optional three-year phase-in period for the day-one regulatory capital effects of the adoption of ASU 2016-13 to ASC 326 “Financial Instruments – Credit Losses,” as amended, on January 1, 2020.

Our actual capital amounts and ratios for 2020 under current guidelines are presented in the following table:



					For Capital Adequacy				To Be Well-Capitalized
					Purposes				Under Prompt Corrective
	Actual				Phase In Schedule				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, 2020:
Common Equity Tier 1 (to Risk Weighted Assets):
Consolidated	$	1,874,641	19.05	%	$	688,678	7.000	%		N/A	N/A
International Bank of Commerce, Laredo		1,295,437	18.19			498,492	7.000		$	462,885	6.50	%
International Bank of Commerce, Oklahoma		207,339	17.45			83,150	7.000			77,211	6.50
International Bank of Commerce, Brownsville		189,575	22.18			59,843	7.000			55,569	6.50
International Bank of Commerce, Zapata		71,369	34.51			14,476	7.000			13,442	6.50
Commerce Bank		93,426	35.64			18,347	7.000			17,037	6.50
Total Capital (to Risk Weighted Assets):
Consolidated	$	2,105,360	21.40	%	$	1,033,017	10.500	%		N/A	N/A
International Bank of Commerce, Laredo		1,380,685	19.39			747,737	10.500		$	712,131	10.00	%
International Bank of Commerce, Oklahoma		218,657	18.41			124,725	10.500			118,786	10.00
International Bank of Commerce, Brownsville		200,269	23.43			89,765	10.500			85,490	10.00
International Bank of Commerce, Zapata		73,510	35.55			21,714	10.500			20,680	10.00
Commerce Bank		96,240	36.72			27,521	10.500			26,210	10.00
Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	1,992,403	20.25	%	$	836,252	8.500	%		N/A	N/A
International Bank of Commerce, Laredo		1,295,437	18.19			605,311	8.500		$	569,705	8.00	%
International Bank of Commerce, Oklahoma		207,339	17.45			100,968	8.500			95,029	8.00
International Bank of Commerce, Brownsville		189,575	22.18			72,667	8.500			68,392	8.00
International Bank of Commerce, Zapata		71,369	34.51			17,578	8.500			16,544	8.00
Commerce Bank		93,426	35.64			22,279	8.500			20,968	8.00
Tier 1 Capital (to Average Assets):
Consolidated	$	1,992,403	14.92	%	$	534,228	4.00	%	$	N/A	N/A
International Bank of Commerce, Laredo		1,295,437	13.11			395,289	4.00			494,112	5.00	%
International Bank of Commerce, Oklahoma		207,339	12.98			63,879	4.00			79,848	5.00
International Bank of Commerce, Brownsville		189,575	14.55			52,101	4.00			65,127	5.00
International Bank of Commerce, Zapata		71,369	16.52			17,277	4.00			21,596	5.00
Commerce Bank		93,426	16.69			22,394	4.00			27,993	5.00

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

Our actual capital amounts and ratios for 2019 are also presented in the following table:


										To Be Well-Capitalized
					For Capital Adequacy					Under Prompt Corrective
	Actual				Purposes					Action Provisions
	Amount		Ratio		Amount		Ratio			Amount	Ratio
					(greater than		(greater than		(greater than		(greater than
					or equal to)		or equal to)		or equal to)		or equal to)
	(Dollars in Thousands)
As of December 31, 2019:
Common Equity Tier 1 (to Risk Weighted Assets):
Consolidated	$	1,833,174	18.58	%	$	690,746	7.000	%		N/A	N/A
International Bank of Commerce, Laredo		1,268,078	18.23			486,950	7.000		$	452,168	6.50	%
International Bank of Commerce, Oklahoma		201,202	16.91			83,303	7.000			77,353	6.50
International Bank of Commerce, Brownsville		185,112	22.70			57,084	7.000			53,006	6.50
International Bank of Commerce, Zapata		72,402	36.46			13,902	7.000			12,909	6.50
Commerce Bank		91,239	34.83			18,336	7.000			17,026	6.50
Total Capital (to Risk Weighted Assets):
Consolidated	$	2,018,488	20.46	%	$	1,036,118	10.500	%		N/A	N/A	%
International Bank of Commerce, Laredo		1,315,453	18.91			730,425	10.500		$	695,643	10.00
International Bank of Commerce, Oklahoma		206,807	17.38			124,955	10.500			119,004	10.00
International Bank of Commerce, Brownsville		192,417	23.60			85,626	10.500			81,548	10.00
International Bank of Commerce, Zapata		74,737	37.63			20,853	10.500			19,860	10.00
Commerce Bank		93,396	35.65			27,504	10.500			26,195	10.00
Tier 1 Capital (to Risk Weighted Assets):												%
Consolidated	$	1,953,711	19.80	%	$	838,762	8.500	%		N/A	N/A
International Bank of Commerce, Laredo		1,268,078	18.23			591,296	8.500		$	556,514	8.00
International Bank of Commerce, Oklahoma		201,202	16.91			101,154	8.500			95,203	8.00
International Bank of Commerce, Brownsville		185,112	22.70			69,316	8.500			65,239	8.00
International Bank of Commerce, Zapata		72,402	36.46			16,881	8.500			15,888	8.00
Commerce Bank		91,239	34.83			22,265	8.500			20,956	8.00	%
Tier 1 Capital (to Average Assets):
Consolidated	$	1,953,711	16.65	%	$	469,267	4.00	%	$	N/A	N/A
International Bank of Commerce, Laredo		1,268,078	15.21			333,576	4.00			416,970	5.00
International Bank of Commerce, Oklahoma		201,202	14.79			54,406	4.00			68,007	5.00
International Bank of Commerce, Brownsville		185,112	17.41			42,529	4.00			53,161	5.00
International Bank of Commerce, Zapata		72,402	19.08			15,179	4.00			18,974	5.00
Commerce Bank		91,239	18.18			20,073	4.00			25,091	5.00

(21) Fair Value

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,

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, 2020 by level within the fair value measurement hierarchy.


			Fair Value Measurements at
			Reporting Date Using
			(in Thousands)
			Quoted
			Prices in
			Active		Significant
	Assets/Liabilities		Markets for		Other		Significant
	Measured at		Identical		Observable		Unobservable
	Fair Value		Assets		Inputs		Inputs
	December 31, 2020		(Level 1)		(Level 2)		(Level 3)
Measured on a recurring basis:
Assets:
Available for sale debt securities
Residential mortgage-backed securities	$	3,029,954	$	—	$	3,029,954	$	—
States and political subdivisions		50,814		—		50,814		—
Equity Securities		6,202		6,202		—		—
	$	3,086,970	$	6,202	$	3,080,768	$	—

The following table represents financial instruments reported on the consolidated balance sheets at their fair value as of December 31, 2019 by level within the fair value measurement hierarchy.


			Fair Value Measurements at
			Reporting Date Using
			(in Thousands)
			Quoted
			Prices in
			Active		Significant
	Assets/Liabilities		Markets for		Other		Significant
	Measured at		Identical		Observable		Unobservable
	Fair Value		Assets		Inputs		Inputs
	December 31, 2019		(Level 1)		(Level 2)		(Level 3)
Measured on a recurring basis:
Assets:
Available for sale securities
Residential mortgage - backed securities	$	3,285,548	$	—	$	3,285,548	$	—
States and political subdivisions		93,375		—		93,375		—
Equity Securities		6,095		6,095		—		—
	$	3,385,018	$	6,095	$	3,378,923	$	—

For the years ended December 31, 2020 and December 31, 2019, 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.

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, 2020 by level within the fair value measurement hierarchy:

Fair Value Measurements at Reporting

Date Using

(in thousands)

Quoted

Assets/Liabilities

Prices in

Measured at

Active

Significant

Fair Value

Markets for

Other

Significant

Net Provision

Period ended

Identical

Observable

Unobservable

(Credit)

December 31,

Assets

Inputs

During

2020

(Level 1)

(Level 2)

(Level 3)

Period

Measured on a non-recurring basis:

Assets:

Watch-List doubtful loans

393

—

393

(86)

Other real estate owned

6,241

—

6,241

1,539

The following table represents financial instruments measured at fair value on a non-recurring basis as of and for the year ended December 31, 2019 by level within the fair value measurement hierarchy:

Fair Value Measurements at Reporting

Date Using

(in thousands)

Quoted

Assets/Liabilities

Prices in

Measured at

Active

Significant

Fair Value

Markets

Other

Significant

Net (Credit)

Year ended

for Identical

Observable

Unobservable

Provision

December 31,

Assets

Inputs

During

2019

(Level 1)

(Level 2)

(Level 3)

Period

Measured on a non-recurring basis:

Assets:

Impaired loans

826

—

826

Other real estate owned

21,614

—

21,614

322

Equity investment without a readily determinable fair value

28,166

—

28,166

4,775

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. At December 31, 2019, assets measured at fair value on a non-recurring basis also included an equity investment without a readily determinable fair value. 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, 2020, we had approximately $18,361,000 of doubtful commercial collateral dependent loans, of which approximately $16,587,000 had an appraisal performed within the immediately preceding twelve months and of which approximately $1,283,000 had an evaluation performed within the immediately preceding twelve months. As of December 31, 2019, we had approximately $2,955,000 of doubtful commercial collateral dependent loans, of which

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

approximately $1,426,000 had an appraisal performed within the immediately preceding twelve months and of which approximately $847,000 had an evaluation performed within the immediately preceding twelve months.

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, 2020, 2019 and 2018, we recorded approximately $22,000, $9,611,000 and $170,000, respectively, in charges to the ACL in connection with loans transferred to other real estate owned. For the twelve months ended December 31, 2020, 2019 and 2018, we recorded approximately $1,539,000, $322,000 and $3,071,000, 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, 2020 and December 31, 2019 are outlined below.

Cash and Cash Equivalents

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

Investment securities held-to-maturity

The carrying amounts of investments held-to-maturity approximate fair value.

Investment Securities

For debt investment securities, which include U.S. Treasury securities, obligations of other U.S. government agencies, obligations of states and political subdivisions and mortgage pass through and related securities, fair values are from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. See disclosures of fair value of investment securities in Note 2.

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.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

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, 2020 and December 31, 2019, the carrying amount of fixed rate performing loans was $1,812,413,000 and $1,503,811,000, respectively, and the estimated fair value was $1,747,257,000 and $1,481,239,000, 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, 2020 and December 31, 2019. 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, 2020 and December 31, 2019, the carrying amount of time deposits was $2,153,541,000 and $2,012,300,000, respectively, and the estimated fair value was $2,148,976,000 and $2,011,950,000, 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, 2020 and December 31, 2019.

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, 2020 and December 31, 2019.

Other Borrowed Funds

We currently have long-term borrowings issued from the Federal Home Loan Bank (“FHLB”). At December 31, 2019, we also held some also short-term borrowings. Due to the contractual terms of the short-term borrowings, the carrying amounts approximated fair value at December 31, 2019. The long-term borrowings outstanding at December 31, 2020 and December 31, 2019 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, 2020, and December 31, 2019 the carrying amount of the fixed-rate long-term FHLB borrowings was $436,372,000 and $436,511,000, respectively and the estimated fair value was $480,475,000 and $465,017,000 respectively.

Commitments to Extend Credit and Letters of Credit

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

Limitations

Fair value estimates are made at a point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time of our entire holdings of a particular financial instrument. Because no market exists for a significant portion of our

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

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.

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

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

Statements of Condition

(Parent Company Only)

December 31, 2020 and 2019

(Dollars in Thousands)


	2020		2019
ASSETS
Cash	$	66,252	$	24,290
Other investments		77,661		106,284
Net loans		11,950		12,100
Investment in subsidiaries		2,167,516		2,120,391
Goodwill		3,365		3,365
Other assets		—		264
Total assets	$	2,326,744	$	2,266,694
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Junior subordinated deferrable interest debentures	$	134,642	$	134,642
Due to IBC Trading		21		21
Other liabilities		14,083		13,978
Total liabilities		148,746		148,641
Shareholders’ equity:
Common shares		96,241		96,215
Surplus		149,334		148,075
Retained earnings		2,289,626		2,200,568
Accumulated other comprehensive income (loss)		20,825		2,345
		2,556,026		2,447,203
Less cost of shares in treasury		(378,028)		(329,150)
Total shareholders’ equity		2,177,998		2,118,053
Total liabilities and shareholders’ equity	$	2,326,744	$	2,266,694

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

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

Statements of Income

(Parent Company Only)

Years ended December 31, 2020, 2019 and 2018

(Dollars in Thousands)


	2020		2019		2018
Income:
Dividends from subsidiaries	$	130,950	$	127,750	$	105,000
Interest income on notes receivable		357		922		—
Interest income on other investments		(1,126)		(514)		8,208
Other		5		18		1,988
Total income		130,186		128,176		115,196
Expenses:
Interest expense (Debentures)		3,832		6,435		6,989
Provision for credit loss		27		—		—
Other		1,988		2,749		2,930
Total expenses		5,847		9,184		9,919
Income before federal income taxes and equity in undistributed net income of subsidiaries		124,339		118,992		105,277
Income tax expense		(1,339)		(1,878)		481
Income before equity in undistributed net income of subsidiaries		125,678		120,870		104,796
Equity in undistributed net income of subsidiaries		41,641		84,234		111,135
Net income	$	167,319	$	205,104	$	215,931

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

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

Statements of Cash Flows

(Parent Company Only)

Years ended December 31, 2020, 2019 and 2018

(Dollars in Thousands)


	2020		2019		2018
Operating activities:
Net income	$	167,319	$	205,104	$	215,931
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit loss		27		—		—
Unrealized loss (gain) on equity securities with readily determinable fair values		22		(16)		330
Stock compensation expense		743		980		1,035
Increase (decrease) in other liabilities		2,467		(58)		(1,479)
Equity in undistributed net income of subsidiaries		(41,641)		(84,234)		(111,135)
Net cash provided by operating activities		128,937		121,776		104,682
Investing activities:
Net increase in notes receivable		—		(12,100)		—
(Decrease) increase in other assets and other investments		31,289		5,915		(7,891)
Net cash provided by (used in) investing activities		31,289		(6,185)		(7,891)
Financing activities:
Redemption of long-term debt		—		(25,774)		—
Proceeds from stock transactions		542		1,923		1,522
Payments of cash dividends - common		(69,928)		(68,670)		(49,599)
Repurchase of outstanding common stock warrant		—		—		(29,005)
Purchase of treasury stock		(48,878)		(17,845)		(19,042)
Net cash used in financing activities		(118,264)		(110,366)		(96,124)
Increase in cash		41,962		5,225		667
Cash at beginning of year		24,290		19,065		18,398
Cash at end of year	$	66,252	$	24,290	$	19,065

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Condensed Quarterly Income Statements

(Dollars in Thousands, Except Per Share Amounts)


	Fourth		Third		Second		First
	Quarter		Quarter		Quarter		Quarter
2020

Interest income	$	96,763		99,983		113,650		116,612
Interest expense		7,384		8,170		9,796		13,769
Net interest income		89,379		91,813		103,854		102,843
Provision for probable loan losses		8,784		8,770		10,989		16,836
Non-interest income		41,736		40,117		33,596		35,130
Non-interest expense		60,388		70,053		73,908		76,982

Income before income taxes		61,943		53,107		52,553		44,155

Income taxes		13,713		10,365		11,044		9,317

Net income	$	48,230	$	42,742	$	41,509	$	34,838

Per common share:
Basic

Net income	$	0.76	$	0.67	$	0.66	$	0.54

Diluted

Net income	$	0.76	$	0.67	$	0.66	$	0.53

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Condensed Quarterly Income Statements

(Dollars in Thousands, Except Per Share Amounts)


		Fourth		Third		Second		First
		Quarter		Quarter		Quarter		Quarter
2019

Interest income	$	117,359		124,119		126,860		124,063
Interest expense		13,996		14,901		15,078		14,654
Net interest income		103,363		109,218		111,782		109,409
Provision for probable loan losses		3,480		5,278		2,665		7,420
Non-interest income		41,584		42,697		34,416		36,129
Non-interest expense		76,171		81,066		79,613		72,951

Income before income taxes		65,296		65,571		63,920		65,167

Income taxes		13,562		14,127		13,900		13,261

Net income	$	51,734	$	51,444	$	50,020	$	51,906

Per common share:
Basic

Net income	$	0.79	$	0.79	$	0.76	$	0.79

Diluted

Net income	$	0.78	$	0.79	$	0.76	$	0.79

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, 2020, 2019, and 2018. Tax-exempt income has not been adjusted to a tax-equivalent basis:


	2020						2019						2018
	Average				Average		Average				Average		Average				Average
	Balance		Interest		Rate/Cost		Balance		Interest		Rate/Cost		Balance		Interest		Rate/Cost

	(Dollars in Thousands)
Assets
Interest earning assets:
Loan, net of unearned discounts:
Domestic	$	7,290,230		372,903	5.12	%	$	6,720,765		408,166	6.07	%	$	6,374,979	$	369,761	5.80	%
Foreign		125,234		4,676	3.73			131,356		5,445	4.15			142,999		5,412	3.78
Investment securities:
Taxable		3,213,039		46,095	1.43			3,244,021		72,485	2.23			3,635,675		81,484	2.24
Tax-exempt		67,487		2,434	3.61			126,792		4,885	3.85			200,978		8,141	4.05
Other		767,837		900	0.12			109,965		1,420	1.29			95,559		1,024	1.07
Total interest-earning assets		11,463,827		427,008	3.72	%		10,332,899		492,401	4.77	%		10,450,190		465,822	4.46	%
Non-interest earning assets:
Cash and cash equivalents		174,557						168,224						178,873
Bank premises and equipment, net		465,267						478,159						485,978
Other assets		1,118,561						1,120,706						1,073,534
Less allowance for probable loan losses		(89,558)						(63,328)						(67,031)
Total	$	13,132,654					$	12,036,660					$	12,121,544
Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Savings and interest bearing demand deposits	$	3,537,014		6,358	0.18	%	$	3,288,376		16,379	0.50	%	$	3,273,355	$	12,764	0.39	%
Time deposits:
Domestic		1,003,221		10,608	1.06			918,545		10,036	1.09			946,231		6,330	0.67
Foreign		1,068,907		8,622	0.81			1,068,653		10,934	1.02			1,055,090		6,766	0.64
Securities sold under repurchase agreements		335,392		926	0.28			267,439		2,432	0.91			314,876		2,415	0.77
Other borrowings		547,283		8,773	1.60			627,024		12,413	1.98			923,729		17,404	1.88
Junior subordinated interest deferrable debentures		134,642		3,832	2.85			145,234		6,435	4.43			160,416		6,989	4.36
Total interest bearing liabilities		6,626,459		39,119	0.59	%		6,315,271		58,629	0.93	%		6,673,697		52,668	0.79	%
Non-interest bearing liabilities:
Demand Deposits		4,211,988						3,517,455						3,366,040
Other liabilities		166,213						147,604						157,907
Shareholders’ equity		2,127,994						2,056,330						1,923,900
Total	$	13,132,654					$	12,036,660					$	12,121,544
Net interest income			$	387,889					$	433,772					$	413,154
Net yield on interest earning assets					3.38	%					4.15	%					3.60	%

INTERNATIONAL BANCSHARES CORPORATION

OFFICERS AND DIRECTORS


OFFICERS	DIRECTORS

DENNIS E. NIXON	DENNIS E. NIXON
Chairman of the Board and President	Chairman of the Board
	International Bank of Commerce
JULIE L. TARVIN
Vice President	JAVIER DE ANDA
	Senior Vice President
JUDITH I. WAWROSKI	B.P. Newman Investment Company
Treasurer
	IRVING GREENBLUM
WILLIAM J. CUELLAR	International Investments/Real Estate
Auditor
	DOUG HOWLAND
MARISA V. SANTOS	Investments
Secretary
	RUDOLPH M. MILES
HILDA V. TORRES	Investments
Assistant Secretary
	LARRY NORTON
	Investments

	ROBERTO R. RESENDEZ
	Owner
	Cattle Ranching and Investments

	ANTONIO R. SANCHEZ, JR.
	Chairman of the Board
	Sanchez Oil & Gas Corporation
	Investments

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. junior Avg

International Bancshares (IBOC) 10-K2020 FY Annual report

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