UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

OR

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to           

Commission file number 000-09439

INTERNATIONAL BANCSHARES CORPORATION

(Exact name of registrant as specified in its charter)

Texas	74-2157138
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

1200 San Bernardo Avenue, Laredo, Texas 78042-1359

(Address of principal executive offices)

(Zip Code)

(956) 722-7611

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐

Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company, in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒	Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)	Smaller reporting company ☐
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date

Class	Shares Issued and Outstanding
Common Stock, $1.00 par value	66,074,545 shares outstanding at November 3, 2017

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Condition (Unaudited)

(Dollars in Thousands)

	September 30,		December 31,
	2017		2016
Assets
Cash and cash equivalents	$	290,575	$	269,198
Investment securities:
Held to maturity (Market value of $2,400 on September 30, 2017 and $2,400 on December 31, 2016)		2,400		2,400
Available-for-sale (Amortized cost of $4,290,577 on September 30, 2017 and $4,218,841 on December 31, 2016)		4,280,188		4,177,349
Total investment securities		4,282,588		4,179,749
Loans		6,202,264		5,964,688
Less allowance for probable loan losses		(67,852)		(64,661)
Net loans		6,134,412		5,900,027
Bank premises and equipment, net		516,786		527,583
Accrued interest receivable		32,278		32,172
Other investments		555,067		517,162
Identified intangible assets, net		—		25
Goodwill		282,532		282,532
Other assets		79,413		95,593
Total assets	$	12,173,651	$	11,804,041

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Condition, continued (Unaudited)

(Dollars in Thousands)

	September 30,		December 31,
	2017		2016
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Demand—non-interest bearing	$	3,244,829	$	3,158,051
Savings and interest bearing demand		3,253,382		3,203,728
Time		2,115,330		2,248,310
Total deposits		8,613,541		8,610,089
Securities sold under repurchase agreements		378,033		504,985
Other borrowed funds		1,067,500		733,375
Junior subordinated deferrable interest debentures		160,416		160,416
Other liabilities		138,977		70,509
Total liabilities		10,358,467		10,079,374
Shareholders’ equity:
Common shares of $1.00 par value. Authorized 275,000,000 shares; issued 96,003,077 shares on September 30, 2017 and 95,910,143 shares on December 31, 2016		96,003		95,910
Surplus		171,358		169,567
Retained earnings		1,846,570		1,777,963
Accumulated other comprehensive loss (including $0 on September 30, 2017 and $(3,287) on December 31, 2016 of comprehensive loss related to other-than-temporary impairment for non-credit related issues)		(6,539)		(26,697)
		2,107,392		2,016,743
Less cost of shares in treasury, 29,938,170 shares on September 30, 2017 and 29,934,675 on December 31, 2016		(292,208)		(292,076)
Total shareholders’ equity		1,815,184		1,724,667
Total liabilities and shareholders’ equity	$	12,173,651	$	11,804,041

See accompanying notes to consolidated financial statements.

2

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

(Dollars in Thousands, except per share data)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
Interest income:
Loans, including fees	$	83,394	$	74,388	$	238,261	$	223,245
Investment securities:
Taxable		21,003		19,630		60,998		60,346
Tax-exempt		2,409		2,561		7,357		7,835
Other interest income		139		45		484		151
Total interest income		106,945		96,624		307,100		291,577
Interest expense:
Savings deposits		1,599		1,173		4,241		3,333
Time deposits		2,426		2,551		7,203		7,519
Securities sold under repurchase agreements		1,177		5,480		5,391		16,591
Other borrowings		3,396		812		7,234		2,196
Junior subordinated deferrable interest debentures		1,395		1,159		3,967		3,377
Total interest expense		9,993		11,175		28,036		33,016
Net interest income		96,952		85,449		279,064		258,561
Provision for probable loan losses		6,591		(1,347)		9,096		14,884
Net interest income after provision for probable loan losses		90,361		86,796		269,968		243,677
Non-interest income:
Service charges on deposit accounts		18,706		19,035		54,494		54,999
Other service charges, commissions and fees
Banking		13,095		13,722		34,505		35,056
Non-banking		1,853		1,803		5,052		4,794
Investment securities transactions, net		—		(1,345)		(1,612)		(1,705)
Other investments, net		4,938		4,082		12,036		14,699
Other income		2,774		3,233		8,569		10,229
Total non-interest income	$	41,366	$	40,530	$	113,044	$	118,072

3

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income, continued (Unaudited)

(Dollars in Thousands, except per share data)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
Non-interest expense:
Employee compensation and benefits	$	33,787	$	33,908	$	99,256	$	95,846
Occupancy		6,416		6,153		18,824		18,225
Depreciation of bank premises and equipment		6,407		6,175		18,936		18,563
Professional fees		3,577		3,661		11,143		10,400
Deposit insurance assessments		1,007		1,332		2,310		4,333
Net expense, other real estate owned		(407)		2,320		989		4,575
Amortization of identified intangible assets		—		32		25		96
Advertising		2,064		1,921		6,448		6,345
Early termination fee—securities sold under repurchase agreements		—		1,799		5,765		1,799
Software and software maintenance		4,302		3,687		12,155		10,721
Impairment charges (Total other-than-temporary impairment charges, $0 net of $0, $(300) net of $(367), $0 net of $0, and $(332) net of $(523) included in other comprehensive loss)		—		90		—		281
Other		14,558		15,589		45,199		45,385
Total non-interest expense		71,711		76,667		221,050		216,569
Income before income taxes		60,016		50,659		161,962		145,180
Provision for income taxes		20,388		14,872		49,761		46,721
Net income	$	39,628	$	35,787	$	112,201	$	98,459
Basic earnings per common share:
Weighted average number of shares outstanding		66,060,829		65,948,815		66,036,501		65,968,975
Net income	$	0.60	$	0.54	$	1.70	$	1.49
Fully diluted earnings per common share:
Weighted average number of shares outstanding		66,745,350		66,291,556		66,736,250		66,189,507
Net income	$	0.59	$	0.54	$	1.68	$	1.49

See accompanying notes to consolidated financial statements

4

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in Thousands)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
Net income	$	39,628	$	35,787	$	112,201	$	98,459
Other comprehensive income, net of tax:
Net unrealized holding gains (losses) on securities available-for-sale arising during period (net of tax effects of $198, $(5,371), $10,290, and $15,334)		368		(9,975)		19,110		28,477
Reclassification adjustment for losses on securities available-for-sale included in net income (net of tax effects of $0, $471, $564, and $597)		—		874		1,048		1,108
Reclassification adjustment for impairment charges on available-for-sale securities included in net income (net of tax effects of $0, $31, $0, and $98)		—		59		—		183
		368		(9,042)		20,158		29,768
Comprehensive income	$	39,996	$	26,745	$	132,359	$	128,227

See accompanying notes to consolidated financial statements.

5

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

	Nine Months Ended
	September 30,
	2017		2016
Operating activities:
Net income	$	112,201	$	98,459
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for probable loan losses		9,096		14,884
Specific reserve, other real estate owned		330		2,116
Depreciation of bank premises and equipment		18,936		18,563
Gain on sale of bank premises and equipment		(30)		(226)
(Gain) loss on sale of other real estate owned		(267)		42
Accretion of investment securities discounts		(307)		(406)
Amortization of investment securities premiums		18,068		19,142
Investment securities transactions, net		1,612		1,705
Impairment charges on available for sale securities		—		281
Amortization of identified intangible assets		25		96
Stock based compensation expense		699		822
Earnings from affiliates and other investments		(9,538)		(9,134)
Deferred tax (benefit) expense		(26)		6,752
(Increase) decrease in accrued interest receivable		(106)		2,616
Decrease in other assets		6,516		2,023
Net increase (decrease)in other liabilities		17,314		(1,028)
Net cash provided by operating activities		174,523		156,707
Investing activities:
Proceeds from sales and calls of available for sale securities		279,419		326,037
Purchases of available for sale securities		(944,241)		(1,190,066)
Principal collected on mortgage backed securities		573,713		661,261
Net (increase) decrease in loans		(245,019)		43,857
Purchases of other investments		(10,282)		(45,622)
Distributions from other investments		349		18,368
Purchases of bank premises and equipment		(10,303)		(12,580)
Proceeds from sales of bank premises and equipment		2,194		310
Proceeds from sales of other real estate owned		11,139		7,956
Net cash used in investing activities	$	(343,031)	$	(190,479)

6

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows, continued (Unaudited)

(Dollars in Thousands)

	Nine Months Ended
	September 30,
	2017		2016
Financing activities:
Net increase in non-interest bearing demand deposits	$	86,778	$	59,525
Net increase  in savings and interest bearing demand deposits		49,654		62,415
Net decrease in time deposits		(132,980)		(111,878)
Net decrease in securities sold under repurchase agreements		(126,952)		(94,873)
Net increase in other borrowed funds		334,125		121,250
Purchase of treasury stock		(132)		(7,959)
Proceeds from stock transactions		1,185		259
Payments of cash dividends - common		(21,793)		(19,123)
Net cash provided by financing activities		189,885		9,616
Increase (decrease) in cash and cash equivalents		21,377		(24,156)
Cash and cash equivalents at beginning of period		269,198		273,053
Cash and cash equivalents at end of period	$	290,575	$	248,897
Supplemental cash flow information:
Interest paid	$	9,735	$	33,345
Income taxes paid		54,442		41,489
Non-cash investing and financing activities:
Net transfers from loans to other real estate owned		1,538		1,983
Dividends declared, not yet paid on common stock	$	21,801	$	20,446

See accompanying notes to consolidated financial statements.

7

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 — Basis of Presentation

The accounting and reporting policies of International Bancshares Corporation (the “Corporation”) and Subsidiaries (the Corporation and Subsidiaries collectively referred to herein as the “Company”) conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry.  The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries, International Bank of Commerce, Laredo (“IBC”), Commerce Bank, International Bank of Commerce, Zapata, International Bank of Commerce, Brownsville, International Bank of Commerce, Oklahoma and the Corporation’s wholly-owned non-bank subsidiaries, IBC Subsidiary Corporation, IBC Trading Company, Premier Tierra Holdings, Inc., IBC Charitable and Community Development Corporation, and IBC Capital Corporation.  All significant inter-company balances and transactions have been eliminated in consolidation.  The consolidated financial statements are unaudited, but include all adjustments, which, in the opinion of management, are necessary for a fair presentation of the results of the periods presented.  All such adjustments were of a normal and recurring nature.  These financial statements should be read in conjunction with the financial statements and the notes thereto in the Company’s latest Annual Report on Form 10-K.  The consolidated statement of condition at December 31, 2016 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  Certain reclassifications have been made to make prior periods comparable. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results for the year ending December 31, 2017 or any future period.

The Company operates as one segment.  The operating information used by the Company’s chief executive officer for purposes of assessing performance and making operating decisions about the Company is the consolidated statements presented in this report.  The Company has five active operating subsidiaries, namely, the bank subsidiaries, known as International Bank of Commerce, Laredo, Commerce Bank, International Bank of Commerce, Zapata,  International Bank of Commerce, Brownsville and International Bank of Commerce, Oklahoma. The Company applies the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), FASB ASC 280, “Segment Reporting,” in determining its reportable segments and related disclosures.

The Company has evaluated all events or transactions that occurred through the date the Company issued these financial statements. During this period, the Company did not have any material recognizable or non-recognizable subsequent events.

Note 2 — Fair Value Measurements

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 inputs, 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

8

instruments whose value is determined using pricing models, discounted cash flow methodologies, or other valuation techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

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 assets and liabilities reported on the consolidated balance sheets at their fair value on a recurring basis as of September 30, 2017 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
	September 30, 2017		(Level 1)		(Level 2)		(Level 3)
Measured on a recurring basis:
Assets:
Available-for-sale securities
Residential mortgage-backed securities	$	4,011,566	$	—	$	4,011,566	$	—
States and political subdivisions		240,546		—		240,546		—
Equity Securities		28,076		28,076		—		—
	$	4,280,188	$	28,076	$	4,252,112	$	—

The following table represents assets and liabilities reported on the consolidated balance sheets at their fair value on a recurring basis as of December 31, 2016 by level within the fair value measurement hierarchy:

			Fair Value Measurements at
			Reporting Date Using
			(in Thousands)
			Quoted
			Prices in
			Active		Significant
	Assets/Liabilities		Markets for		Other		Significant
	Measured at		Identical		Observable		Unobservable
	Fair Value		Assets		Inputs		Inputs
	December 31, 2016		(Level 1)		(Level 2)		(Level 3)
Measured on a recurring basis:
Assets:
Available-for-sale securities
Residential mortgage - backed securities	$	3,894,470	$	—	$	3,876,865	$	17,605
States and political subdivisions		254,972		—		254,972		—
Equity Securities		27,907		27,907		—		—
	$	4,177,349	$	27,907	$	4,131,837	$	17,605

Investment securities available-for-sale are classified within Level 2 and Level 3 of the valuation hierarchy, with the exception of certain equity investments that are classified within Level 1.  For investments classified as Level 2 in the fair value hierarchy, the Company obtains fair value measurements for investment securities from an independent pricing service.  The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.  For the year ended December 31, 2016, investment securities classified as Level 3 are non-agency mortgage-backed securities.  The non-agency mortgage-backed securities that were held by the Company are traded in inactive markets and markets that have experienced significant decreases in volume and level of activity, as evidenced by few recent transactions, a significant decline or

9

absence of new issuances, price quotations that are not based on comparable securities transactions and wide bid-ask spreads among other factors.  As a result of the inability to use quoted market prices to determine fair value for these securities, the Company determined that fair value, as determined by Level 3 inputs in the fair value hierarchy, was more appropriate for financial reporting and more consistent with the expected performance of the investments.  For the investments classified within Level 3 of the fair value hierarchy, the Company used a discounted cash flow model to determine fair value.  Inputs in the model included both historical performance and expected future performance based on information currently available.  The non-agency mortgage-backed securities were sold in the first quarter of 2017.

The following table presents a reconciliation of activity for such mortgage-backed securities on a net basis (Dollars in Thousands):

Balance at December 31, 2016	$	17,605
Principal paydowns		(798)
Sales of available-for-sale securities		(21,904)
Reclassification of unrealized gains (losses) included in other comprehensive loss due to sale		5,097
Balance at September 30, 2017	$	—

Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis.  The instruments 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 September 30, 2017 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
	Year ended		Identical		Observable		Unobservable		(Credit)
	September 30,		Assets		Inputs		Inputs		During
	2017		(Level 1)		(Level 2)		(Level 3)		Period
Measured on a non-recurring basis:
Assets:
Impaired loans	$	12,452	$	—	$	—	$	12,452	$	1,681
Other real estate owned		238		—		—