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 March 31, 2019

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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:	Trading Symbol	Name of each exchange on which registered:
Common Stock, $1.00 par value	IBOC	NASDAQ

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 every Interactive Data File required to be submitted 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 ☐	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	65,647,503 shares outstanding at May 6, 2019

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Condition (Unaudited)

(Dollars in Thousands)

	March 31,		December 31,
	2019		2018
Assets
Cash and cash equivalents	$	349,164	$	316,797
Investment securities:
Held to maturity debt securities (Market value of $2,400 on March 31, 2019 and $1,200 on December 31, 2018)		2,400		1,200
Available for sale debt securities (Amortized cost of $3,447,719 on March 31, 2019 and $3,481,165 on December 31, 2018)		3,410,088		3,411,350
Equity securities with readily determinable fair values		6,075		5,937
Total investment securities		3,418,563		3,418,487
Loans		6,707,343		6,561,289
Less allowance for probable loan losses		(67,030)		(61,384)
Net loans		6,640,313		6,499,905
Bank premises and equipment, net		504,581		506,899
Accrued interest receivable		37,406		36,803
Other investments		303,950		337,507
Cash surrender value of life insurance policies		284,327		282,646
Goodwill		282,532		282,532
Other assets		206,867		190,376
Total assets	$	12,027,703	$	11,871,952

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Condition, continued (Unaudited)

(Dollars in Thousands)

	March 31,		December 31,
	2019		2018
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Demand—non-interest bearing	$	3,558,719	$	3,454,840
Savings and interest bearing demand		3,346,749		3,268,237
Time		1,990,462		1,973,468
Total deposits		8,895,930		8,696,545
Securities sold under repurchase agreements		278,630		229,989
Other borrowed funds		510,895		705,665
Junior subordinated deferrable interest debentures		160,416		160,416
Other liabilities		197,128		139,755
Total liabilities		10,042,999		9,932,370
Shareholders’ equity:
Common shares of $1.00 par value. Authorized 275,000,000 shares; issued 96,137,257 shares on March 31, 2019 and 96,104,029 shares on December 31, 2018		96,137		96,104
Surplus		146,113		145,283
Retained earnings		2,083,218		2,064,134
Accumulated other comprehensive loss		(29,405)		(54,634)
		2,296,063		2,250,887
Less cost of shares in treasury, 30,495,448 shares on March 31, 2019 and 30,494,143 on December 31, 2018		(311,359)		(311,305)
Total shareholders’ equity		1,984,704		1,939,582
Total liabilities and shareholders’ equity	$	12,027,703	$	11,871,952

See accompanying notes to consolidated financial statements.

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INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

(Dollars in Thousands, except per share data)

	Three Months Ended
	March 31,
	2019		2018
Interest income:
Loans, including fees	$	102,805	$	87,833
Investment securities:
Taxable		19,300		21,214
Tax-exempt		1,649		2,195
Other interest income		309		165
Total interest income		124,063		111,407
Interest expense:
Savings deposits		4,243		2,228
Time deposits		4,378		2,669
Securities sold under repurchase agreements		589		1,023
Other borrowings		3,494		4,689
Junior subordinated deferrable interest debentures		1,950		1,526
Total interest expense		14,654		12,135
Net interest income		109,409		99,272
Provision for probable loan losses		7,420		1,662
Net interest income after provision for probable loan losses		101,989		97,610
Non-interest income:
Service charges on deposit accounts		17,260		17,712
Other service charges, commissions and fees
Banking		10,876		11,122
Non-banking		1,509		1,360
Investment securities transactions, net		(4)		—
Other investments, net		3,948		4,726
Other income		2,540		4,055
Total non-interest income	$	36,129	$	38,975

3

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income, continued (Unaudited)

(Dollars in Thousands, except per share data)

	Three Months Ended
	March 31,
	2019		2018
Non-interest expense:
Employee compensation and benefits	$	36,409	$	34,618
Occupancy		6,377		6,075
Depreciation of bank premises and equipment		6,981		6,273
Professional fees		3,592		2,572
Deposit insurance assessments		783		1,000
Net expense, other real estate owned		995		(271)
Advertising		2,082		1,839
Software and software maintenance		4,497		4,072
Other		11,235		12,731
Total non-interest expense		72,951		68,909
Income before income taxes		65,167		67,676
Provision for income taxes		13,261		14,256
Net income	$	51,906	$	53,420
Basic earnings per common share:
Weighted average number of shares outstanding		65,617,977		66,092,379
Net income	$	0.79	$	0.81
Fully diluted earnings per common share:
Weighted average number of shares outstanding		65,831,162		66,863,895
Net income	$	0.79	$	.80

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
	March 31,
	2019		2018
Net income	$	51,906	$	53,420
Other comprehensive income, net of tax:
Net unrealized holding gains (losses) on securities available for sale arising during period (net of tax effects of $6,706, and $(9,427))		25,226		(39,953)
Reclassification adjustment for losses on securities available for sale included in net income (net of tax effects of $1, and $0)		3		—
		25,229		(39,953)
Comprehensive income	$	77,135	$	13,467

See accompanying notes to consolidated financial statements.

5

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

Quarters ended March 31, 2019 and 2018

(in Thousands, except per share amounts)

	Number							Other
	of	Common				Retained		Comprehensive		Treasury
	Shares	Stock		Surplus		Earnings		Income (Loss)		Stock		Total
Balance at December 31, 2018	96,104	$	96,104	$	145,283	$	2,064,134	$	(54,634)	$	(311,305)	$	1,939,582
Net Income	—		—		—		51,906		—		—		51,906
Dividends:
Payable ($.50 per share)	—		—		—		(32,822)		—		—		(32,822)
Purchase of treasury (1,305 shares)	—		—		—		—		—		(54)		(54)
Exercise of stock options	33		33		565		—		—		—		598
Stock compensation expense recognized in earnings	—		—		265		—		—		—		265
Other comprehensive income, net of tax:
Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustments	—		—		—		—		25,229		—		25,229
Balance at March 31, 2019	96,137	$	96,137	$	146,113	$	2,083,218	$	(29,405)	$	(311,359)	$	1,984,704

	Number							Other
	of	Common				Retained		Comprehensive		Treasury
	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	—		—		—		53,420		—		—		53,420
Dividends:
Payable ($.33 per share)	—		—		—		(21,814)		—		—		(21,814)
Purchase of treasury (0 shares)	—		—		—		—		—		—		—
Exercise of stock options	25		25		415		—		—		—		440
Stock compensation expense recognized in earnings	—		—		185		—		—		—		185
Other comprehensive income, net of tax:
Net change in unrealized gains and losses on available for sale securities, net of reclassification adjustments	—		—		—		—		(39,953)		—		(39,953)
Balance at March 31, 2018	96,044	$	96,044	$	172,416	$	1,923,411	$	(68,350)	$	(292,263)	$	1,831,258

See accompanying notes to consolidated financial statements.

6

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

	Three Months Ended
	March 31,
	2019		2018
Operating activities:
Net income	$	51,906	$	53,420
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for probable loan losses		7,420		1,662
Specific reserve, other real estate owned		8		71
Depreciation of bank premises and equipment		6,981		6,273
Gain on sale of bank premises and equipment		(43)		(8)
Gain on sale of other real estate owned		(469)		(2)
Accretion of investment securities discounts		(55)		(75)
Amortization of investment securities premiums		4,024		5,700
Investment securities transactions, net		4		—
Unrealized (gain) loss on equity securities with readily determinable fair values		(138)		774
Stock based compensation expense		265		185
Earnings from affiliates and other investments		(3,444)		(4,303)
Deferred tax (benefit) expense		(1,435)		269
(Increase) decrease in accrued interest receivable		(603)		1,683
Increase in other assets		(20,685)		(42,473)
Increase in other liabilities		23,962		30,001
Net cash provided by operating activities		67,698		53,177
Investing activities:
Proceeds from maturities of securities		—		1,075
Proceeds from sales and calls of available for sale securities		41,420		18,145
Purchases of available for sale securities		(145,966)		(1,075)
Principal collected on mortgage backed securities		132,820		188,893
Net increase in loans		(147,124)		(107,206)
Purchases of other investments		(13,045)		(17,963)
Distributions from other investments		46,677		5,367
Purchases of bank premises and equipment		(6,130)		(3,519)
Proceeds from sales of bank premises and equipment		1,510		12
Proceeds from sales of other real estate owned		707		376
Net cash (used in) provided by investing activities	$	(89,131)	$	84,105

7

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows, continued (Unaudited)

(Dollars in Thousands)

	Three Months Ended
	March 31,
	2019		2018
Financing activities:
Net increase in non-interest bearing demand deposits	$	103,879	$	196,102
Net increase in savings and interest bearing demand deposits		78,512		148,635
Net increase (decrease) in time deposits		16,994		(34,717)
Net increase (decrease) in securities sold under repurchase agreements		48,641		(94,852)
Net decrease in other borrowed funds		(194,770)		(363,625)
Purchase of treasury stock		(54)		—
Proceeds from stock transactions		598		440
Net cash provided by (used in) financing activities		53,800		(148,017)
Increase (decrease) in cash and cash equivalents		32,367		(10,735)
Cash and cash equivalents at beginning of period		316,797		265,357
Cash and cash equivalents at end of period	$	349,164	$	254,622
Supplemental cash flow information:
Interest paid	$	13,982	$	12,052
Income taxes paid		—		—
Non-cash investing and financing activities:
Net transfers from loans to other real estate owned	$	704	$	80
Dividends declared, not yet paid on common stock		32,822		21,814
Establishment of lease liability and right-of-use asset		6,171		—

See accompanying notes to consolidated financial statements.

8

INTERNATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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, 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 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of this report.  Our website address is www.ibc.com.

Note 1 — Basis of Presentation

Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry.  Our consolidated financial statements include the accounts of International Bancshares Corporation, and our wholly-owned bank subsidiaries, International Bank of Commerce, Laredo (“IBC”), Commerce Bank, International Bank of Commerce, Zapata, International Bank of Commerce, Brownsville, International Bank of Commerce, Oklahoma (the “Subsidiary Banks”) and our wholly-owned non-bank subsidiaries,  IBC Trading Company, Premier Tierra Holdings, Inc., IBC Charitable and Community Development Corporation, and IBC Capital Corporation.  Effective January 1, 2019, we dissolved one of our non-bank subsidiaries, IBC Subsidiary Corporation, a  second-tier bank holding company incorporated in the State of Delaware.  All significant inter-company balances and transactions have been eliminated in consolidation.  Our 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 our latest Annual Report on Form 10-K.  Our consolidated statement of condition at December 31, 2018 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 (“US GAAP”) for complete financial statements.  Certain reclassifications have been made to make prior periods comparable. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results for the year ending December 31, 2019 or any future period.

We operate as one segment.  The operating information used by our chief executive officer for purposes of assessing performance and making operating decisions is the consolidated statements presented in this report.  We have five active operating subsidiaries, the Subsidiary Banks.  We apply the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), FASB ASC 280, “Segment Reporting,” in determining our reportable segments and related disclosures.

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.

On January 1, 2019, we adopted the provisions of ASU 2016-02, “Leases.”  ASU 2016-02 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.  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.  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 and 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

9

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 three months ended March 31, 2019 was approximately $214,000 and is included as a part of occupancy expense in our consolidated income statement.

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 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 March 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
	March 31, 2019		(Level 1)		(Level 2)		(Level 3)
Measured on a recurring basis:
Assets:
Available for sale debt securities
Residential mortgage-backed securities	$	3,263,030	$	—	$	3,263,030	$	—
States and political subdivisions		147,058		—		147,058		—
Equity Securities		6,075		6,075		—		—
	$	3,416,163	$	6,075	$	3,410,088	$	—

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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, 2018 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, 2018		(Level 1)		(Level 2)		(Level 3)
Measured on a recurring basis:
Assets:
Available for sale securities
Residential mortgage - backed securities	$	3,223,010	$	—	$	3,223,010	$	—
States and political subdivisions		188,340		—		188,340		—
Equity Securities		5,937		5,937		—		—
	$	3,417,287	$	5,937	$	3,411,350	$	—

Available-for-sale debt securities are classified within Level 2 of the valuation hierarchy.  Equity securities with readily determinable fair values are classified within Level 1.  For debt investments 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.

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 March 31, 2019 by level within the fair value measurement hierarchy: