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. The Company makes 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.www.ibc.com.

Item 1.  Business

General

The Company isWe are a registered multibank financial holding company with its principal corporate offices in Laredo, Texas. Asproviding a diversified range of December 31, 2016, four bank subsidiaries provide commercial and retail banking services throughin our main banking and branch facilities located in communities in South, Centralnorth, south, central and Southeastsoutheast Texas and the State of Oklahoma. The Company

was originally incorporated under the General Corporation Law of the State of Delaware in 1979. Effective June 7, 1995, the Company’s state of incorporation was changed from Delaware to Texas. The Company wasWe were organized for the purpose of operatingand we operate as a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the “BHCA”),(BHCA).  As a bank holding company, we may own one or more banks and as such, ismay engage in activities closely related to banking.  In this regard, we are subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “FRB”)(FRB). As a registered bank holding company, the Company may own one or more banksIn addition, all of our wholly-owned banking subsidiaries are members of and may engage directly, or through subsidiary corporations, in those activities closely relatedsubject to banking which are specifically permitted under the BHCA andregulation by the FRB. Effective March 13, 2000, the Company became certified as a financial holding company. As a financial holding company, the Company may engageFederal Deposit Insurance Corporation (FDIC).  Our principal corporate offices are located in a broad list of financial and non‑financial activities. The Company’sLaredo, Texas.

Our principal assets at December 31, 20162018, consisted of all the outstanding capital stock of four Texas state banking associations (the “Banks” or “bank subsidiaries”). All of the Company’s bank subsidiaries are members of the Federal Deposit Insurance Corporation (the “FDIC”).

The bank subsidiaries are in the business of gathering funds from various sources and investing these funds in order to earn a return. Funds gathering primarily takes the form of accepting demand and time deposits from individuals, partnerships, corporations and public entities. Investments are principally made in loans to various individuals and entities, as well as in debt securities of the U.S. government and various other entities whose payments are guaranteed by the U.S. government. Historically, the bank subsidiaries have primarily focused on providing commercial banking services to small and medium sized businesses located in their trade areas and international banking services. In recent years, the bank subsidiaries have also emphasized consumer and retail banking, including mortgage lending, as well as branches situated in retail locations and shopping malls; however, during the fourth quarter of 2011 the Company closed fifty‑five in‑store branches as a result of reduced levels of revenue resulting from regulatory changes limiting interchange fee income. The branches were closed in order to align the Company’s expenses with the reduced levels of revenue.

The Company’s philosophy focuses on customer service as represented by its motto, “We Do More.” The Banks maintain a strong commitment to their local communities by, among other things, appointing selected members of the communities in which the Banks’ branches are located to local advisory boards (the “local boards”). The local boards direct the operations of the branches, with the supervision of the lead Bank’s board of directors, and assist in introducing prospective customers to the Banks, as well as developing or modifying products and services to meet customer needs. The Banks function largely on a decentralized basis and the Company believes that such decentralized structure enhances the commitment of the Banks to the communities in which their branches are located. In contrast to many of their principal competitors, the credit decisions of the Banks are made locally and promptly. The Company believes that the knowledge and expertise afforded by the local boards are key components to sound credit decisions. Expense control is an essential element in the Company’s profitability. The Company has centralized virtually all of the Banks’ back office support and investment functions in order to achieve consistency and cost efficiencies in the delivery of products and services.

On July 28, 1980, the Company acquired all of the outstanding shares of its predecessor, International Bank of Commerce (“IBC”), which is today the flagship bank of the Company, representing the majority of the Company’s banking assets. IBC was chartered under the banking laws of Texas in 1966 and has its principal place of business at 1200 San Bernardo Avenue, Laredo, Webb County, Texas. It is a wholly‑owned subsidiary of the Company. Since the acquisition of the flagship bank in 1980, the Company has formed four banks: (i) Commerce Bank, a Texas state banking association which commenced operations in 1982, located in Laredo, Texas (“Commerce Bank”); (ii) International Bank of Commerce, Brownsville, a Texas state banking association which commenced operations in 1984, located in Brownsville, Texas (“IBC‑Brownsville”); (iii) International Bank of Commerce, Zapata, a Texas state banking association which commenced operations in 1984, located in Zapata, Texas (“IBC‑Zapata”) and (iv) International Bank of Commerce, Oklahoma City, Oklahoma, anone Oklahoma state banking corporation (“IBC-Oklahoma”).  as follows:

IBC-Oklahoma was formed as of January 1, 2017, as part of an internal corporate reorganization, whereby IBC assigned and transferred certain assets and liabilities located in Oklahoma and Dallas, Texas to IBC-Oklahoma, and IBC-Oklahoma accepted and assumed such assets and liabilities.  AllIBC-Oklahoma.  These five subsidiary banks are wholly owned subsidiary banks of IBCcollectively referred to in this report as our “Subsidiary Banks.”

Our philosophy focuses on customer service as represented by the motto, “We Do More.” Our Subsidiary Corporation, itselfBanks maintain a wholly owned subsidiary of International Bancshares Corporation.

Historically,strong commitment to their local communities by, among other things, appointing selected community members to local advisory boards (local boards). These local advisory boards help to direct the Company has acquired various financial institutions and banking assets in its trade area. The community‑focusoperations of the subsidiary banks andbranches, under the involvementsupervision of the Subsidiary Bank’s board of directors.  These local boards resultedalso assist in the Company becoming aware of acquisition possibilities in the ordinary course of its business. The Company’s decisiondeveloping or modifying our products and services to pursue an acquisition is based on a multitude of factors, including the abilitymeet local customer needs, as well as introducing prospective customers to efficiently assimilate the operationsour many products and assets of the acquiredservices.

We also own five direct non-banking subsidiaries:

day.  No material portion of theour business of the Company may be deemed seasonal, and the deposit and loan base of the Company’s bank subsidiaries is diverse in nature. There has been no material effect upon the Company’s capital expenditures, earnings or competitive position as a result of Federal, State or local environmental regulation.seasonal.

As of December 31, 2016, the Company2018, we and its subsidiariesour Subsidiary Banks employed approximately 2,8612,816 persons full‑full time and 355574 persons part‑part time.  We provide extensive training to our employees in an effort to ensure that our customers receive superior customer service.  None of our employees are represented by any collective bargaining unit or are parties to a collective bargaining agreement.  We believe that our relations with our employees are good.

Competition

The Company isWe are one of the largest independent Texasfinancial bank holding companies. Thecompanies in the State of Texas.  Our primary market area of the Company is South, Central and Southeast Texas, an area bordered on the east by the Galveston area, to the northwest by Round Rock, toDallas, the southwest by Del Rio and to the southeast by Brownsville, as well asBrownsville.  Our primary market area also includes the State of Oklahoma. From time to time, the Company has increased its market share in its primary market area through strategic acquisitions. The Company, through its bank subsidiaries, competesWe compete for deposits and loans with other commercial banks, savings and loan associations, and credit unions andin our primary market area.  We have increased our market share in our primary market area in the past through strategic acquisitions. 

We also compete against non‑bank entities, which non‑bank entities serve as an alternative to traditional financial institutions and are considered to be formidable competitors.institutions. The percentage of bank‑bank related services being provided by non‑bank entities has increased dramatically during the last several years.

The Company and its bank subsidiariesWe do a large amount of business for customers domiciled in Mexico, with an emphasis in Northern Mexico. Deposits from persons and entities domiciled in Mexico comprise a large and stable portion of the deposit base of the Company’s bank subsidiaries. SuchSubsidiary Banks. These deposits comprised approximately 28%29%, 27% and 27%28% of the bank subsidiaries’Subsidiary Banks total deposits for the three years ended December 31, 2018, 2017 and 2016, 2015 and 2014, respectively.

The Dodd-Frank Act

THE DODD-FRANK ACT. On July 21, 2010, sweeping financial regulatory reform legislation entitled the “Dodd‑Frank Wall Street Reform and Consumer Protection Act” (the “Dodd‑(Dodd‑Frank Act”)Act) was signed into law. The Dodd‑Frank Act implementsrepresents a significant overhaul of many aspects of the regulation of the financial services industry, addressing, among other things, systemic risk, capital adequacy, deposit insurance assessments, consumer financial protection, interchange fees, derivatives, lending limits, mortgage lending practices, registration of investment advisors and changes among the bank regulatory agencies.  These far‑reaching changes across the financial regulatory landscape includinginclude provisions that, among other things, have or will:

government obligations, insurance company activities, and organizing and offering hedge funds or private equity funds. The final rules also clarify that certain activities are not prohibited, including acting as agent, broker or custodian. The compliance requirements under the final rules vary based on the size of the banking entity and the scope of activities conducted. On December 18, 2014, the Federal Reserve delayed implementation until July 2017 of the requirement for banks to unwind investments in private equity funds, hedge funds and specialty security projects. On April 6, 2015, the FRB (SR15-6) and the other federal bank regulatory agencies issued “Interagency Frequently Asked Questions (FAQs) on the Regulatory Capital.”  The FAQ topics include the definition of capital, high-volatility commercial real estate (“HVCRE”) exposures, real estate and off-balance sheet exposures, equity exposures to investment funds, qualifying central counterparty, and credit valuation adjustment.  On November 6, 2015, the FRB (SR15-13) and the other federal bank regulatory agencies issued “Deduction Methodology for Investments in Covered Funds,” to clarify the interaction between the agencies’ regulatory capital rule and the Volcker Rule with respect to the appropriate capital treatment for investments in certain private equity funds and hedge funds (“covered funds”).  In particular, the guidance clarifies supervisory expectations on how a banking organization’s regulatory capital deductions of investments in covered funds made pursuant to section 13 of the Bank Holding Company Act (also referred to as the Volcker Rule), and implementing regulations relate to deductions of these investments pursuant to the regulatory capital rule.  Additionally, Congress has taken steps to pass legislation granting a two (2) year delay to the Volcker Rule’s swaps push‑out rule that eliminates federal subsidies for trading in certain derivatives, including collateralized loan obligations or securitized bundles of business loans. The Company does not currently anticipate that the Volcker Rule will have a material effect on the operations of the Company and its subsidiaries, as the Company does not engage in the businesses prohibited by the Volcker Rule.

Many aspectsprovisions of the Dodd‑FrankDodd-Frank Act arebecame effective upon enactment, while others were subject to further study, SEC rulemaking and discretion afforded to federal regulators.  Some provisions have only recently taken effect or will take effect over several years,in the future making it difficult to anticipate the overall financial impact on the Company, itsus, our customers or the financial industry more generally.in general. Provisions in the legislation that affect deposit insurance assessments, payment of interest on demand deposits and interchange fees are likely to increase the costs associated with deposits, as well as place limitations on certain revenues those deposits may generate. Provisions in the legislation that require revisions to theour capital requirements of the Company could require the Companyus to seek other sources of capital in the future. Some of the rules that have been adopted or proposed to comply with the Dodd‑Frank

Emergency Economic Stabilization Act are discussed further below.

EMERGENCY ECONOMIC STABILIZATION ACT.  On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 or (“EESA”)(EESA), which, among other measures, authorized the Secretary of the Treasury to establish the Troubled Asset Relief Program (“TARP”)(TARP). Under TARP, the Treasury created a capital purchase program (“CPP”)(CPP), pursuant to which it provided access to capital that serves as Tier 1 capital to financial institutions through a standardized program to acquire preferred stock (accompanied by warrants) from eligible financial institutions. On December 23, 2008, the CompanySubsequently, we sold $216 million of Series A Preferred Stock to the Treasury under the CPP (the “Series A Preferred Stock”) and a warrant (Warrant) to purchase 1,326,238 shares of Company Common Stockour class of common stock at a price per share of $24.43 and with a termper share that expired on December 23, 2018.

ownership of shares of a company the activities of whichbanks, except where the FRB has specifically determined the ownership to be so closely related to banking, managing or controlling banks as to be a proper incident thereto.

The BHCA and the Change in Bank Control Act of 1978 require that depending on the circumstances, either FRB approval must be obtained or notice must be furnished to the FRB and not disapproved prior to any person or company acquiring “control” of a bank holding company, such as the Company, subject to certain exceptionsexception for certain transactions. Control is conclusively presumed to exist if an individual or companyany person acquires 25% or more of any class ofthe voting securities of thea bank holding company. Controlcompany; control is rebuttably presumed to exist if a person acquiresrebuttable presumption between 10% and 25% ownership.  Ownership by affiliated persons, or more but less than 25% of any class of voting securities where the bank holding company, such as the Company, has registered Securities under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”).persons acting in concert, is typically aggregated for these purposes.

As a bank holding company, the Company iswe are required to obtain approval prior to merging or consolidating with any other bank holding company, acquiring all or substantially all of the assets of any bank, or acquiring ownership or control of shares of a bank or bank holding company if, after the acquisition, the Companywe would directly or indirectly own or control 5% or more of the voting shares of such bank or bank holding company.  In approving acquisitions or the addition of activities, one of the issues the FRB considers is whether the acquisition or the additional activities can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh such possible adverse effects as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices.

THEThe USA PATRIOT ACT.  Act

Combating money laundering and terrorist financing is a major focus of financial institution regulatory policy. The USA PATRIOTUniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (PATRIOT Act), substantially expanded the responsibilities of U.S. financial institutions with respect to countering money laundering and terrorist activities. The implementing regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Also, the USA PATRIOT Act requires the bank regulatory agencies to consider the record of a bank or bank holding company in combating money laundering activities in their evaluation of bank and bank holding company merger or acquisition transactions. The Company hasAnti-money laundering regulations are continually evolving, including recent new requirements effective May 11, 2018 requiring U.S. financial institutions to ascertain and document the beneficial owners of legal entity customers opening new accounts.

We have a program in place to monitor and enforce itsour policies on money laundering, corruption and bribery, as well as itsour policies on prohibiting the use of Company assets to finance or otherwise aid alleged terrorist groups. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all the relevant laws or regulations, could have serious legal and reputational consequences for the institution.

NONRESIDENT ALIEN DEPOSITS.  

transactions after their occurrence. Failure to comply with the OFAC sanctions could have serious legal and reputational consequences.

GRAMM‑LEACH‑BLILEY.  Gramm Leach Bliley

The Gramm‑Leach‑Bliley Act of 1999 (“GLBA”)GLBA eliminates the barriers to affiliations among banks, securities firms, insurance companies and other financial service providers. The GLBA provides for a new type of financial holding company structure under which affiliations among these entities may occur. Under the GLBA, a financial holding company may engage in a broad list of financial activities and any non‑financial activity that the FRB determines is complementary to a financial activity and poses no substantial risk to the safety and soundness of depository institutions or the financial system. In addition, the GLBA permitted certain non‑banking financial and financially related activities to be conducted by financial subsidiaries of banks.

Under the GLBA, a bank holding company may become certified as a financial holding company by filing a declaration with the FRB, together with a certification that each of its subsidiary banks is well capitalized, is well managed, and has at least a satisfactory rating under the Community Reinvestment Act of 1977 (“CRA”)(CRA). The Company hasWe elected and were approved by the FRB to become a financial holding company under the GLBA in 2000 and the election was made effective by the FRB as of March 13, 2000. During the second quarter of 2000, IBC established an insurance agency subsidiary whichand acquired two insurance agencies. As part of the Local Financial Corporation (“LFIN”) acquisition in 2004, the Company acquired a securities firm registered

The investments that may be made under the Exchange Act, IBC Investments, Inc. A financialGLBA are substantially broader in scope than the investment activities otherwise permissible for bank holding company that has a securities affiliate registered under the Act or a qualified insurance affiliate may make permissible merchantcompanies and are referred to as “merchant banking investments. As of December 31, 2016, the Company has made 39 merchant banking investments.

investments” in “portfolio companies.” The FRB and the Secretary of the Treasury have regulations governing the scope of permissible merchant banking investments.  The investments that may be made under this authority are substantially broader in scope than the investment activities otherwise permissible for bank holding companies; and are referred to as “merchant banking investments” in “portfolio companies.” Before making a merchant banking investment, a financial holding company must either be or have a registered securities affiliate registered under the Exchange Actfirm or a qualified insurance affiliate. The merchant banking investments may be made by the financial holding company or any of its subsidiaries, other than a depository institution or a subsidiary of a depository institution. The regulations place restrictions on the ability of a financial holding company to become involved in the routine management or operation of any of its portfolio companies.company. The regulation also generally limits the ownership period of merchant banking investments to no more than ten years.

or chief law enforcement officer may enforce any applicable law against a national bank (as opposed to a non‑preempted state law), and to seek relief if, and as, authorized by that law. Since Texas state chartered banks have parity with national banks as to their powers (discussed further herein), the preemption rule has significance for the Company’s bank subsidiaries.

FINANCIAL PRIVACY.  Financial Privacy

In accordance with the GLBA, the federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non‑publicnonpublic information about consumers to non‑affiliatednonaffiliated third parties. Pursuant to thethese rules, financial institutions must provide disclosure of privacy policies to consumers and in some instances allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. party in some instances.

Additional regulations were adopted to implement the provisions of the Fair Access to Credit Transactions Act (“FACTA”)(FACTA), which requires certain disclosures and consents to share certain information among bank affiliates. These privacy provisions affect how customer information is transmitted through diversified financial companies and conveyed to outside vendors. These privacy provisions also have the effect of increasing the length of the waiting period, after privacy disclosures are provided to new customers, before information can be shared among different affiliated companies for the purpose of cross‑selling products and services between those affiliated companies.  On December 4, 2015, the Fixing America’s Surface Transportation Act (the “FAST Act”)(FAST Act) was signed into law.  Part of the FAST Act amended the GLBA by providing financial institutions with an exception to the general requirement that those institutions deliver annual privacy notices. 

NASDAQ LISTING STANDARDS.  The Company is tradedListing Standards

Shares of our common stock are listed and trade on the NASDAQ Stock Market. The CompanyMarket under the symbol “IBOC”. As such, we must comply with the quantitative and qualitative listing standards of the NASDAQ Stock Market. In addition to other matters, the listing standards address disclosure requirements and standards relating to board independence and other corporate governance matters.

INTERSTATE BANKING.  Interstate Banking

The Riegle‑Neal Interstate Banking and Branching Efficiency Act of 1994 (“Interstate(Interstate Banking Act”)Act), rewrote federal law governing the interstate expansion of banks in the United States. Under the Interstate Banking Act, adequately capitalized, well managed bank holding companies with FRB approval may acquire banks located in any state in the United States, provided that the target bank meets the minimum age (up to a maximum of five years, which is the maximum Texas has adopted) established by the host state.state (maximum of five years in Texas). Under the Interstate Banking Act, an anti‑concentration limit will bar interstate acquisitions that would give a bank

the Subsidiary Banks to pay dividends is also restricted under Texas and Oklahoma law.  A Texas bank generally may not pay a dividend reducing its capital and surplus without the prior approval of the Texas Banking Commissioner.  An Oklahoma bank generally may not pay a dividend reducing its capital and surplus without the prior approval of the Oklahoma Department of Banking.  The FDIC has the right to prohibit the payment of dividends by a bank where the payment is deemed to be an unsafe and unsound banking practice.

CROSS‑GUARANTEE PROVISIONS.  The Financial Institutions Reform RecoveryAt December 31, 2018, there was an aggregate of approximately $768,900,000 available for the payment of dividends to our holding company by our Subsidiary Banks under the capital rules applicable as of December 31, 2018, assuming that each of such banks continues to be classified as “well capitalized.”  Further, we could expend the entire $768,900,000 and Enforcement Actcontinue to be classified as “well capitalized” under the capital rules applicable as of 1989 (“FIRREA”) contains a “cross‑guarantee” provision which generally makes commonly controlled insured depository institutions liable to the FDIC for any losses incurred in connection with the failureDecember 31, 2018.

Source of a commonly controlled depository institution.Strength Doctrine

SOURCE OF STRENGTH DOCTRINE.  FRB policy has historically required bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. The Dodd‑Frank Act codifies this policy as a statutory requirement, and the federal financial regulatory agencies are expected to issue a joint notice of proposed rulemaking implementing this statutory requirement in the near future.requirement. Under this requirement, the Company iswe are expected to commit resources to support its subsidiary banks,our Subsidiary Banks, including at times when the Companywe may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary

of any further change in its deposit insurance premium rate, should such a change occur, as such changes are dependent upon a variety of factors, some of which are beyond the Company’s control.guidelines.

In October 2015,A surcharge was proposed by the FDIC proposed to impose a surchargein 2016 on the quarterly assessments of insured depository institutions with total consolidated assets of $10 billion or more.  This would result in increased costs for IBC and other bank subsidiaries of the Company.  Because of the uncertainty as to the outcome of the FDIC’s proposals, we cannot provide any assurance as to the ultimate impact of any surcharges on the amount of deposit insurance expense reported in future periods.  On March 15, 2016, the FDIC issued its final rule which imposes on banks with at least $10 billion in assets, aThe surcharge ofis 4.5 cents per $100 of their assessment base, after making certain adjustments.base.�� The FDIC expects the reserve ratio will likely reach 1.35 percent (1.35%) after approximately two years of payments of the surcharges.  

The final rule became effective on July 1, 2016.  If the reserve ratio reached 1.15 percent (1.15%) before that date, surcharges began July 1, 2016.  If the reserve ratio did not reach 1.15 percent (1.15%) by that date, surcharges would begin the first quarter after the reserve ratio reaches 1.15 percent (1.15%).

Our FDIC deposit insurance expense for the Company totaled $3,742,000, $3,294,000 and $5,777,000 $5,938,000in 2018, 2017 and $6,082,000 in 2016, 2015 and 2014, respectively.

On February 26, 2016, theThe FDIC proposed potential new requirements, which became effective in 2017, for insured depository institutions with at least 2 million deposit accounts (currently, 37 mega and regional banks,) (“Covered Institutions”).  The FDIC proposedto impose new recordkeeping standards and deposit insurance calculation requirements for these Covered Institutions.institutions.  The FDIC requested comment on whether and how these institutions should bealso are required to enhance recordkeeping by maintaining substantially more accurateensure that their information technology (IT) systems are capable of calculating the amount of insured money for most depositors within 24 hours of a failure.

In March 2005, the FRB issued a final rule that would continue to allow the inclusion of trust preferred securities in Tier 1 capital, but with stricter quantitative limits. Under the final rule, after a five‑year transition period ending March 31, 2009, the aggregate amount of trust preferred securities and certain other capital elements would be limited to 25% of Tier 1 capital elements, net of goodwill, less any associated deferred tax liability. The amount of trust preferred securities and certain other elements in excess of the limit could be included in Supplementary Capital or Tier 2 capital, subject to restrictions. Tier 2 capital includes among other things, perpetual preferred stock, qualifying mandatory convertible debt securities, qualifying subordinated debt, and allowances for probable loan and lease losses, subject to limitations. Bank holding companies with significant international operations will be expected to limit trust preferred securities to 15% of Tier 1 capital elements, net of goodwill; however, they may include qualifying mandatory convertible preferred securities up to the 25% limit. On March 16, 2009, the FRB extended for two years the transition period. Substantially all of the trust preferred securities issued by the Company qualified as Tier 1 capital after the transition period ended on March 31, 2011. The Collins Amendment to the Dodd‑Frank Act further restricts the use of trust preferred securities by excluding them from the regulatory capital of bank holding companies more broadly. However, for institutions with consolidated assets of less than $15 billion on December 31, 2009, such as the Company, the Collins Amendment will not apply to securities issued before May 19, 2010 and all the Company’s trust preferred securities were issued before such date.

Effective December 19, 1992, the federal bank regulatory agencies have adopted regulations which mandate a five‑tier scheme of capital requirements and corresponding supervisory actions to implement the prompt corrective action provisions of FDICIA. The regulations include requirements for the capital categories that will serve as benchmarks for mandatory supervisory actions. Under the regulations, the highest of the five categories would be a well- capitalized institution with a total risk‑based capital ratio of 10%, a Tier 1 risk‑based capital ratio of 6% and a Tier 1 leverage ratio of 5%. An institution would be prohibited from declaring any dividends, making any other capital distribution or paying a management fee if the capital ratios drop below the levels for an adequately capitalized institution, which are 8%, 4% and 4%, respectively. The corresponding provisions of FDICIAthe Federal Deposit Insurance Improvement Act (FDICIA) mandate corrective actions are taken if a bank is undercapitalized. Based on the Company’s and each of the bank subsidiaries’our capital ratios as of December 31, 2016, the Company2018, our holding company and each of the bank subsidiariesSubsidiary Banks were classified as “well capitalized” under the applicable regulations. The new Basel III capital rules also revise the “prompt corrective action” regulations as discussed below under “Basel III Prompt Corrective Action.”

The risk‑based standards that apply to bank holding companies and banks incorporate market and interest rate risk components. Applicable banking institutions are required to adjust their risk‑based capital ratio to reflect market risk. Under the market risk capital guidelines, capital is allocated to support the amount of market risk related to a financial institution’s ongoing trading activities. Financial institutions are allowed to issue qualifying unsecured subordinated debt (Tier 3 capital) to meet a part of their market risks. The Company doesWe do not have any Tier 3 capital and did not need Tier 3 capital to offset market risks. In January 2010, the federal bank regulators issued a final risk‑based capital rule related to new accounting standards that make substantive changes in how banking organizations account for more items, including securitized assets that previously had been taken off banks’ balance sheets. The Dodd‑Frank directsAct directed the banking agencies to issue capital requirements for banking institutions that are countercyclical. These will require a higher level of capital to be maintained in times of economic expansion and a lower level of capital during times of economic contraction.

The federal regulatory authorities’ risk‑based capital guidelines are based upon the 1988 capital accord of the Basel Committee on Banking Supervision (the “BIS”). The BIS is a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines for use by each country’s supervisors in determining the supervisory policies they apply. In June 2004, the BIS released a new capital accord to replace the 1988 capital accord with an update in November 2005 (“BIS II”). BIS II set capital requirements for operational risk, and refined the existing capital requirements for credit risk and market risk exposures. The United States federal banking agencies developed proposed revisions to their existing capital adequacy regulations and standards based on BIS II. A definitive final rule for implementing BIS II in the United States that applies only to internationally active banking organizations, or “core banks”—defined as those with consolidated total assets of $250 billion or more or consolidated on‑balance sheet foreign exposures of $10 billion or more became effective as of April 1, 2008. Other U.S. banking organizations may elect to adopt the requirements of this rule (if they meet applicable qualification requirements), but they will not be required to apply them. The rule also allows a banking organization’s primary federal supervisor to determine that the application of the rule would not be appropriate in light of the bank’s asset size, level of complexity, risk profile, or scope of operations. The Company is not required to comply with BIS II at this time.

TheOur phase‑in period for mandatory compliance with the final Basel III rule was January 1, 2014 for most advanced approach banking organizations, and January 1, 2015 for all other covered banking organizations, including the Company.2015.  A key provision of the new Basel III rules permits all non‑advanced approaches institutions, like the Company,permitted us to make a one‑time irrevocable election to determine how most items reported in Accumulated Other Comprehensive Income (“AOCI”)AOCI will be handled for regulatory capital purposes. The irrevocable election was made with the filing of the March 31, 2015 Call Report and consisted of an institution choosing to either opt‑out or not opt‑out of the requirement to include most components of AOCI in Common Equity Tier 1 capital. For institutions that opt‑opt out, most AOCI items will not be included in the calculation of Common Equity Tier 1 capital. Forcapital; institutions that do not opt‑opt out will have most AOCI items will be included in the calculation of Common Equity Tier 1 capital, which affects the institution’s legal lending limit calculation. If a top‑top tier banking organization makes the AOCI opt‑opt out election, all consolidated banking subsidiary organizations under it must make the same election. The CompanyWe made the AOCI opt‑opt out election.election in 2015.

capitalized, capitalized;” (ii) “adequately capitalized,capitalized;” (iii) “undercapitalized,“undercapitalized;” (iv) “significantly undercapitalized,undercapitalized;” and (v) “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital measures which reflect changes under the Basel III capital rules that became effective on January 1, 2015, are the total capital ratio, the CET1 capital ratio, (a new ratio requirement under the Basel III capital rules), the Tier 1 capital ratio and the leverage ratio.

A bank will be (i) “well capitalized” if the institution has a total risk‑based capital ratio of 10.0% or greater, a CET1 capital ratio of 6.5% or greater, a Tier 1 risk‑based capital ratio of 8.0% or greater (6.0% prior to January 1, 2015), and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by an such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if the institution has a total risk‑based capital ratio of 8.0% or greater, a CET1 capital ratio of 4.5% or greater, a Tier 1 risk‑based capital ratio of 6.0% or greater (4.0% prior to January 1, 2015), and a leverage ratio of 4.0% or greater and is not “well capitalized”, (iii) “undercapitalized” if the institution has a total risk‑based capital ratio that is less than 8.0%, a CET1 capital ratio less than 4.5%, a Tier 1 risk‑based capital ratio of less than 6.0% (4.0% prior to January 1, 2015) or a leverage ratio of less than 4.0%, (iv) “significantly undercapitalized” if the institution has a total risk‑based capital ratio of less than 6.0%, a CET1 capital ratio less than 3%, a Tier 1 risk‑based capital ratio of less than 4.0% (3.0% prior to January 1, 2015) or a leverage ratio of less than 3.0%, and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. considered:

An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.

The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit a capital restoration plan. The agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The bank holding company must also provide appropriate assurances of performance. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5.0% of the depository institution’s total assets at the time it became undercapitalized, and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.”

The appropriate federal banking agency may, under certain circumstances, reclassify a well capitalized insured depository institution as adequately capitalized. The FDIA provides that an institution may be reclassified if the appropriate federal banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice.

banking organizations with more than $250 billion in total assets or subsidiary depository institutions of internationally active banking organizations with $10 billion or more in total consolidated assets. Also on October 30, 2013,The FRB issued a separate proposed rule was issued byat the Federal Reservesame time to apply a modified version of the LCR to certain depository institution holding companies with assets greater than $50 billion. On September 3, 2014, the bank regulators issued theThe final version of the LCR. The final rule defines banks with between $50 billion and $250 billion in assets as “modified LCR companies” and theycompanies,” which will be subjected to less rigorous requirements regarding the high‑quality liquid assets calculations.

In July 2018, following the enactment of the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (“EGRRCPA”), the Federal Reserve Board stated that it would no longer require bank holding companies with less than $100 billion in total consolidated assets to comply with the modified version of the LCR.  In October 2018, the federal banking regulators further proposed to revise their liquidity requirements so that banking organizations that are not globally systemic important banks and have less than $250 billion in total consolidated assets and less than $75 billion in each of off-balance sheet exposures, nonbank assets, cross-jurisdictional activity and short-term wholesale funding would not be subject to any LCR or net stable funding ratio requirements.

FASB CECL ACCOUNTING STANDARD.  Accounting Standard

In June 2016, the Financial Accounting Standards Board (“FASB”)(FASB) issued Accounting Standards Update No. 2016-13 to ASC 326, “Financial Instruments – Credit Losses.Losses,” (CECL).  The accounting standards update amends existing standards for credit losses on financial assets.  The change in accounting standard requires that the expected credit losses on financial instruments held as of the end of the period be measured based on historical loss experience, current conditions and reasonable and supportable forecasts.  The accounting standard update also amends the accounting for credit losses on available-for-sale debt securities and financial assets purchased with credit deterioration.  The accounting standard change will be effective for the Company on January 1, 2020.us for interim and annual periods beginning after December 15, 2019.  The change in accounting standards could result in an increase inmethod represents a significant difference to current accounting practice over the Company’s reserveaccounting for probable loancredit losses and require the Companyon financial assets.  We are not able to book loan losses more quickly; however, the Company is still evaluatingestimate the impact of the change.accounting change at this time. 

STATE ENFORCEMENT POWERS.  State Enforcement Powers

The Banking CommissionerCommissioners of Texas and Oklahoma may determine to close a Texas or Oklahoma state bank, respectively, when hesuch Commissioner finds that the interests of depositors and creditors of a state bank are jeopardized through its insolvency or imminent insolvency and that it is in the best interest of such depositors and creditors that the bank be closed. The Texas Department of Banking and Oklahoma State Banking Department also hashave broad enforcement powers over the bank subsidiaries,Subsidiary Banks, as applicable, including the power to impose orders, remove officers and directors, impose fines and appoint supervisors and conservators.

DEPOSITOR PREFERENCE.  

and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers. The BankSubsidiary Banks must comply with the applicable provisions of these consumer protection laws and regulations as part of their ongoing customer relations. The Dodd‑Frank Act provides for comprehensive new rules regulating mortgage activities and createscreated the new CFPB with direct supervisory authority over banks with assets of $10 billion or more and certain nonbank entities. Authority to implement almost all federal consumer financial protection laws and regulations was transferred to the CFPB on July 21, 2011.

The CFPB has broad authority, among other matters, to declare acts or practices to be “unfair, deceptive, or abusive,” and to develop and require new consumer disclosures, and to restrict the use of certain arbitration clauses.disclosures. While the CFPB does not currently have direct supervisory authority over any of the Company’s subsidiary banksour Subsidiary Banks because they each fall below the $10 billion assets threshold, the CFPB’s broad authority to issue, interpret, and enforce almost all federal consumer protection laws, and its issuance of applicable disclosure forms, will significantly impact each of the Company’s subsidiary bank’sSubsidiary Banks’ consumer compliance programs. On January 20, 2012, the CFPB issued a final rule that imposes new disclosure requirements for foreign remittance transfer transactions, including disclosures giving the consumer thirty minutes after payment is made to cancel the transaction, and providing new consumer protections, including error resolution rights. The 2012 final rule’s February 7, 2013 effective date was delayed as the CFPB proposed modifying the rule. On May 22, 2013, the CFPB issued final rule amendments which addressed three specific issues and the amendments were effective in October 2013. First, the 2013 final rule modified the 2012 final rule to make optional, in certain circumstances, the requirement to disclose fees imposed by a designated recipient’s institution. Second, the 2013 final rule also made optional the requirement to disclose taxes collected by a person other than the remittance transfer provider. In place of these two former requirements, the 2013 final rule required disclaimers to be added to the rule’s disclosures indicating that the recipient may receive less than the disclosed total due to the fees and taxes for which disclosure is now optional. Finally, the 2013 final rule revised the error resolution provisions that apply when a remittance transfer is not delivered to a designated recipient because the sender provided incorrect or insufficient information, and, in particular, when a sender provides an incorrect account number or recipient institution identifier that results in the transferred funds being deposited in the wrong account. Banking regulators take into account compliance with consumer protection laws when considering approval of a proposed transaction.

On July 22, 2016, theThe CFPB proposed major small dollar loan consumer protection regulations in 2016, including payday loans, vehicle title loans and certain high-cost installment loans.  Two categories of loans are covered.  The first category includescovered; loans with a term of 45 days or lessless; or loans with multiple advances if each advance is required to be repaid within 45 days.  The second category includes loans with terms greater than 45 days, provided that they have an all-in annual percentage rate higher than 36 percent;percent, and either are repaid directly from the consumer’s account or income or are secured by the consumer’s vehicle.  The proposed rules focus on practices involving consumer’s ability to repay their loans and other practices related to withdrawing payments from consumers’ accounts.  Several types of consumer credit would be excluded, including:  loans

protection of sensitive customer information. On June 29, 2011, theThe FDIC and the other FFIEC agencies supplemented the 2005 Guidance by specifying the FDIC’s supervisory expectations regarding customer authentication, layered security, and other controls in an increasingly hostile online environment. The FDIC indicatesindicated that layered security controls should include processes to detect and respond to suspicious or anomalous activity and, for business accounts, administrative controls. In September 2011, the Texas Bankers Electronic Crimes Task Force, formed by the Texas Banking Commissioner and the U.S. Secret Service formed the Bankers Electronic Crimes Task Force and issued guidance entitled “Best Practices: Reducing the Risks of Corporate Account Takeovers.” In accordance with FDIC FIL‑2011, thisThis guidance sets forth nineteen best practices to reduce the risk of corporate account takeover thefts. The Company’s subsidiary banksOur Subsidiary Banks are required to comply with these guidelines and best practices. In 2014, in adherence to a presidential executive order, the

The National Institute of Standards and Technology (“NIST”)(NIST) released a preliminary Framework for Approving Critical Infrastructure Cybersecurity.Cybersecurity in 2014. Our Subsidiary Banks will beare expected to incorporate the NIST Cybersecurity Framework into their security frameworks, which are also governed by FFIEC guidelines.  On October 26,In 2016, the federal banking agencies proposed enhanced cyber risk management standards for large interconnected entities and their service providers.  The proposal establishes enhanced standards to increase the operational resilience of these entities and reduce the impact on the financial system in case of a cyber event experienced by one of these entities.  The standards address cyber risk governance, cyber risk management, internal dependency management, external dependency management, incident response, cyber resilience and situational awareness.  The enhanced standards would be implemented in a tiered manner, imposing more stringent standards on the systems of those entities that are critical to the functioning of the financial sector.  

AFFILIATE TRANSACTIONS.  The Company, IBCIncreasingly, state regulators are implementing additional privacy and the other bank subsidiariescybersecurity standards and regulations.  Recently, several states adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements for such programs, including data encryption requirements.  Many states have also recently implemented or modified their data breach notification and data privacy requirements.  We expect this trend to continue, and are continually monitoring developments in Texas and Oklahoma.

transactions, unless the consumer consents or opts‑in to the overdraft service for those types of transactions. In November 2010, the FDIC issued final overdraft protection guidance, effective July 1, 2011, which focuses on automated overdraft programs and encourages banks to offer less costly alternatives. Additionally, the FDIC requires banks to monitor programs for excessive or chronic customer use and to undertake meaningful and effective follow‑up action thereafter, institute appropriate daily limits on customer costs, consider eliminating overdraft fees for transactions that overdraw an account by a de minimis amount, ensure that transactions are not processed in a manner designed to maximize the costs to consumers, and ensure that boards of directors provide appropriate oversight of overdraft protection programs.

COMMERCIAL REAL ESTATE LENDING.  

On March 25, 2016, the CFPB requested comments on an interim final rule to expand the small creditors that are eligible under Regulation Z:  to originate balloon-payment qualified mortgages; and for an exemption from the requirements to establish an escrow account for higher-priced mortgages.  The affected rules are the January 2013 Escrows Final Rule, the 2013 Home Ownership and Equity Protection Act Final Rule, the January 2013 and May 2013 ability to repay Final Rule.  The interim final rule became effective on March 31, 2016.

On March 3, 2016, the CFPB established an application process under which a person may request to have an area designated as rural for the purposes of Federal consumer financial laws.  Previously, the CFPB designated rural areas for the purposes of certain Federal consumer financial laws relating to mortgage lending.  The CFPB began to accept applications on March 31, 2016.

On October 19,In 2016, the CFPB amended certain mortgage rules issued in 2013.  This final rule clarifies, revises, or amends provisions regarding force-placed insurance notices, policies and procedures, early intervention, and loss mitigation requirements under Regulation X’s servicing provisions; and prompt crediting and periodic statement requirements under Regulation Z’s servicing provisions.  The final rule also addresses compliance when a consumer is in bankruptcy and makes technical corrections to several other provisions.   Concurrently, the CFPB issued an interpretive rule relating to compliance with certain mortgage servicing rules. 

InAlso in October 2016, the CFPB also issued a final rule amending the mortgage servicing rules.rules, most of which became effective on October 19, 2017, but the remainder of which becomes effective on April 19, 2018.  The CFPB issued this interpretive rule under the Fair Debt Collection Practices Act (“FDCPA”)(FDCPA) to clarify the interaction of the FDCPA and mortgage servicing rules.  This interpretive rule constitutes an advisory opinion under FDCPA section 813(e) and provides a safe harbor from liability for actions done or omitted in good faith in conformity with the opinion.  The CFPB’s final rules also addresses insufficiency of hazard insurance which may lead to new requirements for lender-placed insurance, and early intervention with delinquent buyers will be governed by new contract obligations.    

On November 30, 2016, the CFPB, FRB, and OCC finalized amendments to the official interpretations that implement special appraisal requirements for “higher-risk mortgages” or “higher-priced mortgages.”  Under the interpretations when there is no annual percentage increase in the Consumer Price Index, the OCC, FRB and CFPB will not adjust the exemption threshold from the prior year. 

DIVIDENDS.On July 7, 2017, the CFPB modified the federal mortgage disclosure requirements under the Real Estate Settlement Procedures Act and the Truth in Lending Act that are implemented in Regulation Z. This rule creates tolerances for the total of payments and provides guidance on sharing the integrated disclosures with various parties involved in the mortgage origination process.

On October 4, 2017, the CFPB issued an interim final rule and a proposed rule to provide mortgage servicers more flexibility and certainty around requirements to communicate with certain borrowers under the CFPB’s 2016 mortgage servicing amendments. The abilityinterim final rule gives servicers more flexibility regarding when to communicate about foreclosure prevention options with borrowers who have requested a cease in communication under federal debt collection law. The interim final rule became effective on Oct. 19, 2017, the same date that the related 2016 rule provisions become effective. The proposed rule has been finalized and is effective on April 19, 2018. It will impose mortgage servicing requirements which are complex and require significant changes to existing procedures and disclosures. All servicers must ensure they have comprehensive practices for responding to potential successors in interest and for confirming and communicating with them. Additionally, servicers will need to determine which of the CompanyCFPB’s three options to pay dividends is largely dependent onadopt for communicating with confirmed successors in interest, in a manner that ensures clarity and does not indicate an obligation to repay a mortgage. The CFPB also removed the amountblanket exemption from the periodic statement requirement for borrowers in bankruptcy, making it necessary to provide modified periodic statements – which will require significant system configurations and testing to ensure the new requirements are met.

soundness of such organizations by encouraging excessive risk‑risk taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk‑taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

The Federal ReserveFRB will review, as part of the regular, risk‑risk focused examination process, the incentive compensation arrangements of banking organizations, such as the Company.organizations. These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk‑management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

The Dodd‑Frank Act requires the federal banking agencies and the Securities and Exchange CommissionSEC to jointly prescribe regulations or guidelines that require financial institutions with $1 billion or more in assets to disclose to the appropriate federal regulator, the structure of all incentive‑based compensation arrangements sufficient to determine whether the compensation structure provides an executive officer, employee, director, or principal shareholder with excessive compensation, fees, or benefits, or could lead to material financial loss to the financial institutions. On February 7, 2011, the FDIC issued a notice of proposed rulemaking that would prohibit bank incentive‑based compensation arrangements that encourage inappropriate risk taking, are deemed excessive, or may lead to material losses. The proposal would apply to financial institutions with more than $1 billion in assets, like the Company.assets.  The rule also includes heightened standards for financial institutions with $50 billion or more in total consolidated assets that requires at least 50 percent of incentive‑incentive based payments for designated executives to be deferred for a minimum of three years. The interagency rule must be approved by all of the five federal members of the FFIEC, the SEC and the Federal Housing Finance Agency before comments on the rule are sought. Comments on the proposed interagency rule were due to the agencies by May 31, 2011. A definitive final rule has not been issued.

Effective April 1, 2011, Regulation Z was amended in 2011 to restrict incentive compensation programs with regard to residential mortgage programs. Such limitations affect mortgage brokers as well as loan officers in the subsidiary banks.

On January 20, 2017, the White House issued a memorandumDodd‑Frank Act, or other federal legislation relating to all executive departments and agency heads imposing “…a temporary moratorium on new agency regulationsfinancial institutions.  Similarly, it is possible that are not compelled by Congress or public safety.”  Agencies are prohibited from sending any new regulations to the Officelegislatures of the Federal Register (“OFR”) until a new agency head reviews and approvesState of Texas or the regulation.  Regulations already submittedState of Oklahoma would amend applicable state laws relating to the OFR but not yet published in the Federal Register must be withdrawn, and regulations already published in the Federal Register but not yet in effect must have their effective date postponed for 60 days.  “Guidance documents,”us or agency policies and interpretations of statutory or regulatory issues, are also subject to the regulatory freeze.  The memorandum identifies regulations subject to statutory or judicial deadlines, and regulations that “affect critical health, safety, financial or national security matters,” as determined by the Office of Management and Budget (“OMB”) Director as exceptions.  It is not clear, though, whether the announced freeze on federal regulations applies, and certain “independent regulatory agency,” such as the CFPB, the OCC, the FRB, the FDIC, and the SEC may be excluded from that moratorium.our Subsidiary Banks. 

Item 1A.  Risk Factors

Risk Factors

An investment in the Company’s common stock involves risks.  The following is subject to risks inherent to the Company’s business. Described below area description of the material risks and uncertainties that management believes may affect the Company. You should carefully consider the risks and uncertainties the Company describes belowbelieves affect its business and the other informationan investment in this Annual Report or incorporated by reference before deciding to invest in, or retain, shares of the Company’sits common stock. These are not the only risks and uncertainties that the Company faces. Additional risks and uncertainties that the Company does not know about or that the Company currently believes are immaterial, or that the Company has not predicted, may also harm the Company’s business operations or adversely affect the Company.  If any of thesethe risks or uncertainties actually occurs, the Company’s business,described below were to occur, our financial condition, operating results or liquidityof operations and cash flows could be materially harmed. This report is qualified in its entirety by these risk factors.and adversely affected.  If this were to happen, the value of the common stock could decline significantly and all or part of an investment could be lost.

Risks Related to the Company’sOur Business

Losses from loan defaults may exceed the allowance the Company establishes for that purpose, which could have an adverse effect on the Company’s business.

There are inherent risks associated with the Company’s lending activities. Losses from loan defaults may exceed the allowance the Company establishes for that purpose. Like all financial institutions, the Company maintains anOur allowance for probable loan losses to provide for losses inherent in the loan portfolio. The allowance for probable loan losses reflects management’s best estimate of loan losses in the loan portfolio at the relevant balance sheet date. The level of the allowance reflects management’s continuing evaluation of the specific credit risks, the Company’s historical loan loss experience, current loan portfolio quality, composition and growth of the loan portfolio, and economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. may be insufficient.

The determination of an appropriate level of loan loss allowance is an inherently difficult process and is based on numerous assumptions.  In addition, bank regulatory agencies periodically reviewThis allowance represents management’s best estimate of probable losses that may exist within our existing loan portfolio.  The determination of the Company’s allowance for loan losses and may require an increase inappropriate level of the provision for probable loan losses or the recognition of further loan charge‑offs, based on judgments different than those of management. As a result, the Company’s allowance for loan losses may not be adequate to cover actual losses, and future provisions for loan losses may adversely affect the Company’s earnings. The Company believes its allowance for probable loan losses inherently involves a high degree of subjectivity and requires management to make significant estimates and assumptions regarding current credit risks and future trends, all of which may undergo material changes.  In addition, if future charge-offs exceed the allowance for probable loan losses, we may need to increase the allowance for probable loan losses.  Any increases in the allowance for probable loan losses will result in a decrease in net income and capital and may have a material adverse effect on our financial condition and results of operations.

Furthermore, we are unable to estimate the impact of the adoption of ASU 2016-13, as amended, on January 1, 2020.  The accounting standards update is adequate atchanging accounting practice from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio.  ASU  2016-13 will also necessitate that we establish an allowance for expected credit losses for certain debt securities and other financial assets.  We expect that the impact of adoption will be significantly influenced by the composition, characteristics and quality of our loan and securities

The Company’s subsidiary banks face strong competitiondifferent competitors in theirour market areas, which may limit their asset growth and profitability.

The Company’s primary market areas are South, Central and Southeast Texas, including Austin and Houston, and the State of Oklahoma. The banking business in these areas is extremely competitive, and the level of competition facing the Company may increase further, which may limit the growth and profitability of the Company. Each of the Company’s subsidiary banks experience competition in both lending and attracting funds from other banks, savings institutions, credit unions and non‑bank financial institutions located within its market area, many of which are significantly larger institutions. Non‑bankand may have more financial resources.  These competitors competing for depositsinclude national, regional and deposit type accounts include mortgage bankers and brokers,community banks within the various markets we serve.  We also face competition from many other types of financial institutions, including credit unions, finance companies, credit unions, securitiesbrokerage firms, money market funds, life insurance companies, factoring companies and mutual funds. For loans, the Company encounters competition from other banks, savings associations, finance companies, mortgage bankers and brokers, insurance companies, small loan and credit card companies, credit unions, pension trusts, and securities firms.financial intermediaries.  Many of the Company’sour competitors have fewer regulatory constraints and may have lower cost structures. Additionally, duestructures, which may allow them to their size, many competitors may be able to achieve economies of scale and, as a result, may offer better pricing on a broader range of products and services as well as better pricing for those products and services than the Company offers.services.  Also, technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative methods.  The process of eliminating banks as intermediaries could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits.income.  The loss of revenue streams and the reduction of lower cost deposits as a source of funds could have a material adverse effect on the Company’sour financial condition and results of operations.

The Company relies,External funding which we rely on, in part, to provide liquidity may not be available to us on external financingfavorable terms or at all.

Liquidity is the ability to fund the Company’s operations and the unavailability of such funds in the future could adversely impact the Company’s growth strategy and prospects.

The Company reliesmeet cash flow needs on a timely basis at a reasonable cost.  We rely on deposits, repurchase agreements, advances from the Federal Home Loan Bank (“FHLB”)(FHLB) of Dallas, the FHLB of Topeka and other borrowings to fund its operations. The unavailabilitymeet our liquidity demands.  If we were unable to access any of such funds in the futurethese funding sources when needed, we might be unable to meet customers’ needs, which could adversely impact our financial condition, results of operations, cash flows and liquidity, and level of regulatory-qualifying capital.  Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the Company’s growth strategy,financial markets or negative views and expectations about the prospects and performance. The subsidiary banks have also historically relied on certificates of deposit. Whilefor the Company has reduced its reliance on certificates of deposit and has been successful in promoting its transaction and non‑transaction deposit products (demand deposit accounts, money market, savings and checking), jumbo deposits nevertheless constituted a large portion of total deposits at December 31, 2016. Jumbo deposits tend to be a more volatile source of funding. Although management has historically been able to replace such deposits on maturity if desired, no assurance can be given that the Company would be able to replace such funds at any given point in time. The IRS rule that extends the reporting requirements for interest on deposits to nonresident alien individuals that applies to interest payments made on or after January 1, 2013, may result in deposit withdrawals by nonresident alien individuals who were not previously subject to the reporting requirements, including residents of Mexico.financial services industry.

The Company’s business isOur earnings are subject to interest rate riskrisk.

Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and variationspolicies of various governmental and regulatory agencies and, in particular, the FRB.  Changes in monetary policy, interest rates, maythe yield curve, or market risk spreads, a prolonged inverted yield curve or instability in domestic or foreign financial markets could negatively affect the Company’s financial performance.

The Company is unable to predict fluctuations of market interest rates, which are affected by many factors, including:

Changes ininfluence the interest rate environment may reducewe receive on loans and securities, as well as the Company’s profits. The Company expects that the bank subsidiaries will continue to realize income from the differential or “spread” betweenamount of interest we pay on deposits and borrowings.  If the interest earned on loans, securities and other interest‑earning assets, and the interestrates paid on deposits borrowings and other interest‑bearing liabilities. Netborrowings increase at a faster rate than the interest spreads are affected by the difference between the maturitiesrates received on loans and repricing characteristics of interest‑earning assetsother investments, our net interest income, and interest‑bearing liabilities.therefore earnings, could be adversely affected.  Earnings could also be adversely affected if the net interest spreads are reduced. Changesrates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.  Any substantial, unexpected or prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations.

We may be adversely impacted by the transition from LIBOR as a reference rate

In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate (“LIBOR”).  This means that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021.  Consequently, it is not currently possible to predict whether and to what extent banks will continue to provide submissions for the calculation of LIBOR. 

damage or failure that causes an interruption in our operations could have an adverse effect on our customers. In addition, we must be able to protect the computer systems and network infrastructure utilized by us against physical damage, security breaches and service disruption caused by the Internet or other users. Cyber‑security attacks, computer break‑ins and other disruptions would jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us. While the Company conducts its own data processing, it iswe are reliant on certain external vendors to provide products and services necessary to maintain day‑to‑our day operations of the Company.to day operations. As a financial institution we are also subject to and examined for compliance with an array of data protection laws, regulations and guidance, as well as our own internal privacy and information security policies and programs. If our information systems or infrastructure experience a significant disruption or breach, it could lead to unauthorized access to personal or confidential information of our customers in our possession and unauthorized access to our proprietary information, methodologies and business secrets. Any failure, interruption, or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems.  In addition, if our partners, vendors, or other market participants experience a disruption or breach, it could lead to unauthorized transactions on Companyour or Companyour customer accounts, or unauthorized access to personal or confidential information maintained by those entities.  A disruptionThe occurrence of any failures, interruptions or breach such assecurity breaches of these information systems could damage our reputation, result in significant legal, financial and non‑financial exposure, regulatory intervention, remediation costs, damage to our reputation anda loss of confidence in the securitycustomer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our systems, productsfinancial condition and services that could adversely affect our business.results of operations.

The Company may desire or need to raise additionalAdditional capital or funding to increase liquidity levels in the future, and such capital may not be available when needed or at all and the ability of the Company to increase liquidity levels may be limited.all.

The Company may desire or need to raise additional capital or increase liquidity levels in the future to provide it with sufficient capital resources and liquidity to meet its commitments and business needs, particularly if its asset quality or earnings were to deteriorate significantly. The Company’sOur ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of itsour control, and the Company’sour financial performance.  The Company cannot assureWe have historically had access to a number of alternative sources of liquidity, but if there is an increase in volatility in the credit and liquidity markets similar to 2008, there is no assurance that such capitalwe will be availableable to obtain such liquidity on acceptable terms that are favorable to us, or at all.  If the Company needswe were unable to raise capital in the future, it may have to do so when many other financial institutions are also seeking to raise capital and would have to compete with those institutions for investor. The impactaccess any of the regulatory liquidity proposal may result in a shortfall of high‑quality liquid assets. An inability to raise additional capital on acceptable termsthese funding sources when needed, or the unavailabilitywe might be unable to meet customers’ needs, which could adversely impact our financial condition, results of high‑quality liquid assets could have a materially adverse effect on the Company’s business.operations, cash flows and liquidity, and level of regulatory-qualifying capital.

There are restrictions on the Company’s ability to both receive and pay dividends.

Holders of the Company’s common stock only receive dividends as the Company’s Board of Directors may declare out of legally available funds.  Although the Company has historically declared cash dividends on its common stock, it is not required to do so and there can be no assurance that the Company will pay dividends in the future.

The Company is a financialOur holding company engaged in the businessrelies on dividends from our Subsidiary Banks for most of managing, controlling and operating its subsidiaries, including its subsidiary banks.  The Companyour revenue.

Our holding company receives substantially all of itsour revenue from dividends from its subsidiaries.our Subsidiary Banks.  These dividends are the principal source of funds to pay dividends on the Company’sour common stock.stock to shareholders of our holding company, as well as interest and principal on our holding company’s debt.  Various federal andand/or state laws and regulations limit the amount of dividends that the Company’s subsidiariesour Subsidiary Banks may pay to the Company.  The inabilityour holding company.  Our Subsidiary Banks’ ability to receivepay dividends from the Company’s subsidiaries could have a material adverse effect on the Company’s business,to us is subject to, among other thing, their earnings, financial condition and resultsneed for funds, as well as federal and state governmental policies and regulations applicable to our holding company and Subsidiary Banks which limit the amount that may be paid as dividends without prior regulatory approval, including a statutory requirement that our holding company serve as a source of operations.financial strength for our Subsidiary Banks.  Although our holding company has historically declared semi-annual cash dividends on our common stock, we are not required to do so and may reduce or cease to pay common stock dividends in the future.  If we reduce or cease to pay common stock dividends, the market price of our common stock could be adversely affected.

Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact the Company’sour business.

Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on the Company’sour ability to conduct business. In addition, suchThese events could affect the stability of the Company’sour deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and cause the Companyus to incur additional expenses. Although management haswe have established disaster recovery policies and procedures, the occurrence of any sucha severe weather event, natural disaster or other external event in or near the futuremarkets we serve could have a material adverse effect on the Company’sour business.

credit rating, or its perceived creditworthiness, could adversely affect the financial markets and economic conditions in the United States and worldwide. Many of our investment securities are issued by U.S. government agencies and U.S. government sponsored entities (“GSEs”). The rating downgrade could affect the stability of residential mortgage‑backed securities issued or guaranteed by GSEs. These factors could affect the liquidity or valuation of our current portfolio of residential mortgage‑backed securities issued or guaranteed by GSEs, and could result in our counterparties requiring additional collateral for our borrowings and could increase our borrowing costs. Because of the unprecedented nature of any negative credit rating actions with respect to U.S. government obligations, the ultimate impact on global markets and our business, financial condition and liquidity are unpredictable and may not be immediately apparent; however, any adverse impact related to the downgrade of the U.S. sovereign credit rating could have a material adverse effect on the Company’s liquidity, financial condition and results of operations. Additionally, concerns about the European Union’s sovereign debt crisis have also caused uncertainty for financial markets globally. Such risks could indirectly affect the Company by affecting the Company’s customers with European businesses or assets denominated in the euro or companies in the Company’s market with European businesses or affiliates.

The Company’sOur accounting estimates and risk management processes rely on analytical and forecasting tools and models.

The processes the Company useswe use to estimate its probable loan losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on the Company’sour financial condition and results of operations, depends upon the use of analytical tools and forecasting models. These tools and models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the tools or models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. Any such failure in the Company’sour analytical or forecasting tools or models could have a material adverse effect on the Company’sour business, financial condition and results of operations.

The Company

The Company dependsWe depend on the accuracy and completeness of information about customers and counterparties as well as the soundness of other financial institutions with which the Company interacts.institutions.

In deciding whether to extend credit or enter into other transactions, the Companywe may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information. The Company mayWe also rely on representations of those customers, counterparties, financial institutions or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial information or problems with the soundness of other financial institutions with which the Company interactswe interact could have a material adverse impact on the Company’sour business and in turn, the Company’sour financial condition and results of operations.

If the Company doeswe do not adjust to rapid changes in the financial services industry, itsour financial performance may suffer.

The Company’sOur ability to deliver strong financial performance and returns on investment to shareholders will depend in part on itsour ability to expand the scope of available financial services to meet the needs and demands of itsour customers and itsour ability to stay abreast of technological innovations and evaluate those technologies that will enable itus to compete on a cost‑effective basis.

In addition to the challenge of competing against othertraditional banks, in attracting and retaining customers for traditional banking services, the Company’sour competitors also include securities dealers, brokers, mortgage bankers, investment advisors, specialty finance and insurance companies who seek to offer one‑stop financial services that may include services that banks have not been able or allowed to offer to their customers in the past. The increasinglycontinued competitive environment in our industry is primarily a result of changes in regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial service providers. Such changesChanges in the financial industry may result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on the Company’sour financial condition and results of operations.

Further, the costs of new technology, including personnel, can be high in both absolute and relative terms. There can be no assurance, given the fast pace of change and innovation, that the Company’sour technology either purchased or developed internally, will meet or continue to meet theour operational needs of the Company and the needs of our customers.

The recent repeal of federal prohibitions on payment of interest on demand deposits could increase the Company’s interest expense.

All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of the Dodd‑Frank Act. As a result, beginning on July 21, 2011, financial institutions were allowed to commence offering interest on demand deposits to compete for clients and the Company does have such a program. The Company’s interest expense may increase and its net interest margin may decrease if it begins paying interest on a significant amount of demand deposits in order to attract additional customers or maintain current customers, which could have an adverse effect on the Company’s business, financial condition and results of operations.

The Dodd‑Frank Regulatory Reform Act and other regulatory developments could negatively impact the revenue streams of the Company related to interchange fees and consumer services and result in a contraction of retail banking of the Company.

The Dodd‑Frank Reform Act authorizes the Federal Reserve to regulate interchange fees paid to banks on debit card transactions to ensure that theyWe are reasonable and proportional to the cost of processing individual transactions, and prohibits debit card networks and issuers from requiring transactions to be processed on a single payment network. The impact of the FDIC Overdraft Payment Supervisory Guidance could jeopardize the profitability of a number of retail sites of the Company and could result in a reduction of revenue from the Company’s overdraft courtesy services. The Reform Act created the CFPB. While banks with less than $10 billion in assets, such as each of the subsidiary banks of the Company, are exempt from the primary examination, and enforcement powers of the CFPB, the new agency’s rulemaking will affect all banks. The impact of the CFPB is uncertain at this time, but the initiatives of the CFPB could negatively

impact revenue streams of the Company related to consumer services. The reduction of revenue from retail banking services coupled with the repeal of the federal prohibition on the payment of interest on demand deposits, could result in a contraction of retail banking of the Company.

The Company is subject to claims and litigation pertaining to intellectual property.

Banking and other financial services companies, such as the Company,including us and our Subsidiary Banks, rely on technology companies to provide information technology products and services necessary to support the Company’sour day‑to‑day operations. Technology companies frequently enter into litigation based on allegations of patent infringement or other violations of

stock.

The holders of our junior subordinated debentures have rights that are senior to those of our shareholders.

As of December 31, 2016,2018, we had approximately $160 million in junior subordinated debentures outstanding that were issued topurchased by our statutory trusts. The trusts purchased the junior subordinated debentures from us using the proceeds from the sale of trust preferred securities to third party investors. The junior subordinated debentures are senior to our shares of common stock.  Payments of the principal and interest on the trust preferred securities are conditionally guaranteed by us to the extent not paid or made by each trust, provided the trust has funds available for such obligations.

The junior subordinated debentures are senior to our shares of common stock and the Senior Preferred Stock. As a result, wetrust.  We must make payments on the junior subordinated debentures (and the related trust preferred securities) before any dividends can be paid on our common stock or preferred stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the debentures must be satisfied before any distributions can be made to our shareholders. If certain conditions are met,stock. While we have the right to defer interest payments on the junior subordinated debentures (and the related trust preferred securities) at any time or from time to time for a period not to exceed up to 20 consecutive quarters in a deferral period, during which time no dividends may be paid to holders of our common stock or preferred stock.

The exercise of warrants in connection with our participation induring any such deferral, which could cause the CPP could negatively impact the market price for our common stock.

In connection with our sale of Senior Preferred Stock to the Treasury Department under the Capital Purchase Program, the Company also issued to the Treasury Department a warrant to purchase 1,326,238 shares of our common stock (the “Warrants”). While the Company exited the TARP program when it repurchased all of the remaining Senior Preferred Stock on November 28, 2012, the Warrants remain outstanding and were sold by the U.S. Treasury to a third party on June 12, 2013. The dilutive impact of the Warrants may have a negative effect on the markettrading price of our common stock. The Warrant expires on December 23, 2018.stock to decline.  

Item 1B.  Unresolved Staff Comments

N/A

Item 2.  Properties

TheOur principal offices of the Company and IBC are located at 1200 San Bernardo Avenue, Laredo, Texas and 2418 Jacaman Road, Laredo, Texas in buildings ownedwe own and completely occupied by the Company and IBCoccupy and containing approximately 147,000 square feet. The bank subsidiaries of IBCSubsidiary Banks have main banking and branch facilities. All the facilities are customary to the banking industry. The bank subsidiariesSubsidiary Banks own most of their banking facilities and the remainder are leased. The facilities are located in the regions of Laredo, San Antonio, Austin, Dallas, Houston, Zapata, Eagle Pass, the Rio Grande Valley of Texas, the Coastal Bend area of Texas, and throughout the State of Oklahoma.

As

Item 4.  Mine Safety Disclosures

None

Item 4A.  Executive Officers of the Registrant

Certain information is set forth in the following table concerning the executive officers of the Company, each of whom has been elected to serve until the 20162018 Annual Meeting of Shareholders and until his or her successor is duly elected and qualified.

The condensed quarterly income statements located on pages 81 and 82 and 83 of Registrant’s 2016our 2018 Annual Report are incorporated herein by reference.

Item 9.  Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.  Controls and Procedures

As of the end of the period covered by this Annual Report on Form 10‑K, an evaluation was carried out by theour management of International Bancshares Corporation, (the “Company”) with the participation of itsour Chief Executive Officer and Chief FinancialAccounting Officer, of the effectiveness of the Company’sour disclosure controls and procedures (as defined in Rule 13a‑15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief FinancialAccounting Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.  Additionally, there were no changes in the Company’sour internal control over financial reporting that occurred during the quarter ended December 31, 20162018 that have materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

TheOur management of the Company is responsible for establishing and maintaining adequate internal controls over financial reporting, as defined under Rules 13a‑15(f) and 15d‑15(f) of the Securities Exchange Act of 1934. The Company’sOur internal control over financial reporting is a process designed under the supervision of the Company’sour Chief Executive Officer and Chief FinancialAccounting Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’sour financial statements for external purposes in accordance with generally accepted accounting principles.

As of December 31, 2016,2018, management assessed the effectiveness of the design and operation of the Company’sour internal controls over financial reporting based on the criteria for effective internal control over financial reporting established in “Internal Control—Integrated Framework,” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in 2013. Based on the assessment, management determined that the Companywe maintained effective internal control over financial reporting as of December 31, 2016,2018, based on those criteria.

RSM US LLP, the independent registered public accounting firm that audited the 2016our 2018 consolidated financial statements of the Company included in this Annual Report on Form 10‑K, has audited the effectiveness of the Company’sour internal controlcontrols over financial reporting as of December 31, 2016.2018.  Their report, which expresses an unqualified opinion, on the effectiveness of the Company’sour internal controlcontrols over financial reporting as of December 31, 20162018 is included in this Item under the heading “Report of Independent Registered Public Accounting Firm.”

Exhibit Index